Formalization of manufacturing firms in Bangladesh

Shamsuzzoha and Makoto Tanaka

Review of Development Economics, 2021, vol. 25, issue 3, 1668-1694

Abstract: The manufacturing sectors of developing countries under industrialization are dominated by informal firms. This study investigates the issues of formalization in the manufacturing sector of Bangladesh. A typical classification of formality is a binary one (formal or not). However, formalization can also be continuous, ranging from very formal to less formal. Thus, this study defines the continuous formalization of firms based on principal component analysis in addition to the usual binary classification of formality. Specifically, we find that more formal firms are correlated with higher productivity using the continuous classification of formality. Furthermore, this study shows that formalization is significantly affected by factors such as the owner's human capital (experience and education), the age of the firm, and labor force size.

Date: 2021
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