A GAME WORTH THE CANDLE? META-ANALYSIS OF THE EFFECTS OF FORMALIZATION ON FIRM PERFORMANCE

Andrea Floridi, Binyam Afewerk Demena, Natascha Wagner*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

Under what circumstances does firm formalization yield net benefits for previously informal firms? We systematically assessed 22 primary studies in a meta-analysis of African, Asian and Latin American firms. The studies are published between 2011 and 2021 and provide 1,372 performance and business practice estimates: 40 percent of the estimates show significantly positive and 54 percent insignificant effects. The FAT-PET analysis suggests a small positive effect of formalization on firm performance. We also employ a multivariate analysis: The overall genuine effect is modest. There is a positive role for information and time for effects to materialize. Notably, more rigorous designs and recent studies tend to identify smaller and more dispersed effects. The modest effects cast doubt about the capacity of formalization policies to improve business performances suggesting that policies might better focus on prioritizing business productivity and managerial capability over formalization. Yet, we need further experimenting and fine-tuning of policy approaches to precisely identify what could make the candle of formalization worth the effort. The current evidence supports theories arguing that the rational cost-benefit argument is an overly simplistic representation of the decision to formalize and
that formalization is an uncertain decision affected by multiple and interrelated aspects.
Original languageEnglish
Article number2250026
Number of pages27
JournalJournal of Developmental Entrepreneurship
Volume27
Issue number4
DOIs
Publication statusPublished - Jan 2023

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© 2022 World Scientific Publishing Company.

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