The study provides policyrecommendations to increase the productivity of micro andsmall firms in Bolivia and to provide incentives for firmsto formalize based on a fresh understanding of firmsbehavior regarding formality, productivity, andprofitability. The study draws upon a new qualitativeanalysis based on focus group interviews and a newquantitative survey of 640 firms in six industries. Thesurvey enables to control for a rich set of measures ofowner ability and business motivations that can affect bothprofits and the decision to formalize. The findings showthat tax registration leads to significantly higher profitsfor the mid-size firms in the sample, but to lower profitsfor both the smaller and larger firms, in contrast to thestandard view that formality increases profits. Thequalitative analysis based on focus groups reveals thataccess to capital seems to be the main constraint toproductivity for all micro and small firms. However, thesurvey indicates that while registering at the municipallevel improves firms' access to finance, getting a taxnumber does not. In the short term, policy recommendationsshould focus on increasing the benefits of formalizationthrough training, access to credit and markets, and otherforms of business support. The second priority in the shortterm is to increase information on how to formalize and itsbenefits. Measures to boost the productivity of micro andsmall firms in general will both help overall economicgrowth, employment, and, indirectly, formalization.
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