The Impact of Formalization on Firm Productivity: An Application of the Fa ̈re-Primont Index

Abstract

The study uses panel data and a two-step GMM estimation to figure out how formalization of firms affects Vietnam's total factor productivity (TFP) and its decompositions. TFP is broken down into output-oriented technical efficiency (OTE), (ii) output-oriented scale efficiency (OSE), and (iii) residual mixed efficiency based on the Faure-Primont (FP) index (RME). So, the mechanism of the formalization process can be thought of in different ways to improve corporate performance. The results show that formalization played a important role in the rise of TFP, OSE, and RME of SMEs in Vietnam. The findings imply that it is important to improve the business environment and formalization, which in turn promote productivity.