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What policies encourage firms to become formal? The standard approach emphasizes reducing the costs of compliance with government regulation. This is unlikely to be sufficient. Instead we need to understand compliance as a function not only of firm-level costs and benefits but also in terms of the interaction between the firm and its competitors and between the firm and the state. This paper emphasizes the coordination and credibility issues involved in promoting formalization and discusses possible institutional solutions, among them business associations that make the benefits of membership dependent on compliance, information sharing arrangements among government agencies and improvements in the quality of public management.

Access to Finance --- Business associations --- E-Business --- Economic activities --- Emerging Markets --- Entrepreneurs --- Environment --- Environmental Economics and Policies --- Finance and Financial Sector Development --- Government intervention --- Information sharing --- Microfinance --- Private enterprise --- Private Sector Development --- Public policy --- Small businesses --- Small enterprise --- Union

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This policy note takes as its starting point the common view that there are benefits and costs to formal status and that formalization will occur only if entrepreneurs perceive it to be in their self-interest. No doubt part of the answer lies in reducing the costs and time required for compliance -- as the World Bank's Doing Business project has documented. But lowering barriers to entry is unlikely to be sufficient. Encouraging formalization requires us to understand the relationship between state and private business as a bargain. And it also challenges policy-makers and development practitioners to think not only about technical solutions but also about institutional mechanisms for improving relations between entrepreneurs and the state.

Compliance.

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Most people agree that a good investment climate is essential for growth and poverty reduction. Less clear is how to achieve it. Many reforms are complex, involving more than technical design and content. They are both political, facing opposition from organized and powerful groups-and institutionally demanding, cutting across different departments and levels of government. Reform thus requires paying as much attention to understanding the politics and institutional dimensions as to policy substance, which is the goal of this paper. Drawing from more than 25 case studies, it shows that there is no single recipe or "manual" for reform, given diverse contexts and serendipity in any reform effort. But three broad lessons emerge. The first is to recognize and seize opportunities for reform. Crisis and new governments are important catalysts, but so is the competition generated by trade integration and new benchmarking information. The second is to invest early in the politics of reform. Central to this process is using education and persuasion strategies to gain wider acceptance and neutralize opponents. Pilot programs can be valuable for demonstrating the benefits and feasibility of change. And the third is to pay greater attention to implementation and monitoring. This does not require full scale public management reforms. Reformers can draw on private sector change management techniques to revitalize public institutions responsible for implementation. Given the cross-cutting nature of reform, new oversight mechanisms may be needed to monitor and sustain reform. The paper concludes with an emerging checklist for reformers and identifies areas for future work.

Investments. --- Investments --- Economic policy --- Social policy --- Finance --- Business & Economics --- Investment & Speculation --- Securities. --- Blue sky laws --- Capitalization (Finance) --- Investment securities --- Portfolio --- Scrip --- Securities --- Securities law --- Underwriting --- Investing --- Investment management --- Law and legislation --- Investment banking --- Disinvestment --- Loans --- Saving and investment --- Speculation