To be or not to be registered? Explanatory factors behind formalizing non-farm household businesses in Vietnam

Abstract

This article sets out to investigate the reasons why some household businesses decide to register and become formal (while others do not) in order to shed light on the origins of informality. We use qualitative as well as quantitative data on household businesses (HB) derived from first-hand representative surveys implemented in Hanoi and Ho Chi Minh City. The study reveals that although most of the informal businesses operate ‘illegally’, this is more due to unclear registration legislation than the mark of a deliberate intention to evade the economic regulations. Among the different factors that influence the registration decisions, the reason for setting up the business appears to be a determining one: the more it is a real choice (businesses set up to be independent or to follow a family tradition) and the less a constraint (set up for lack of a job alternative), the more the HB is inclined to be registered. Furthermore, the analysis highlights that incentives do prove decisive insofar as the probability of having a formal business is greater among HB heads who consider that registration provides at least partial protection from corruption. Besides, access to information, the market and large business orders also drive the informal entrepreneurs to register. These results stress the need for clarification of the legal framework as well as incentive policies in order to address the issue of informality.

Keywords:

• informal sector
• Vietnam
• registration
• corruption
• incentives

JEL classification:

• J24
• O17
• N85

Notes

The authors conducted a research programme in Vietnam as members of the DIAL team (Development, Institutions and Globalisation) from the French Institut de Recherche pour le Développement (IRD) in collaboration with the General Statistics Office (GSO) from 2006 to 2011.

The HB&IS survey was conducted before the government's decision to expand Hanoi province, which was put into effect in August 2008. According to the 2009 Population Census, which included ‘greater Hanoi’, the population of the country's capital (6.5 million inhabitants) is now almost equal to HCMC (7.1 million).

On average, 1 USD = 16,000 VND in 2007.