Effect of Cost of Doing Business on the Formalization of Businesses in Kenya
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Date
2023
Authors
Gathumbi, Lilian Wangari
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The informal sector has been growing at a higher pace than the formal one in the last three decades. A large informal sector is undesirable because it does not pay tax, it faces a lower cost of business which leads to unfair competition and is not protected by the legal framework provided by the state. Over the years, the government of Kenya and policymakers have come up with measures to encourage the growth of the formal sector such as making business registration cheaper, easier, and more attractive; rationalizing business licenses, and creating a good business environment. These measures have been intended to increase the growth of the formal sector, which is more productive and provides more decent jobs. However, despite these efforts, the growth of the formal sector has been slow compared to the informal. According to various Kenya Economic survey reports, the sector has been increasing over the years with over 80 percent of all the new businesses formed being in the informal sector. The goal of this study was therefore to find out the cost of doing business on the growth of the formal and informal sector in Kenya. The objectives were to: find out the sectoral distribution of the formal and informal enterprises in Kenya, to investigate the effect of the high cost of electricity, licenses, and taxes on the cost of doing business on the growth of the formal and informal sector in Kenya. The study utilized the secondary cross-sectional household survey data gathered by the Kenya National Bureau of Statistics in 2016. Descriptive analysis was used to find out the sectoral and sub-sectoral distributions of firms while the second objective was answered using a logit model. The sectoral and sub sectoral distribution found that majority of the businesses were in the wholesale, retail and motor vehicle repair. Furthermore, it was found that the cost of credit and formality were negatively related, but positively related with the costs of electricity, rent, taxes and licenses. The conclusion was that high cost of business impacts the formalization of businesses in Kenya. The research recommends reduction of cost and improvement of business environment constraints that hinder business formalization. Since low education and business size contributed largely to businesses becoming informal, the government should enhance higher education opportunities for its citizens and provide training opportunities to small businesses to educate them on how to improve on their competitiveness.
Description
A Research Project Submitted to the Department of Applied Economics in Partial Fulfilment of the Requirements for the Award of the Master of Economics (Finance) Degree of Kenyatta University
Keywords
Cost of Doing Business, Formalization of Businesses, Kenya