កម្ពុជាក្នុងឋានៈជាប្រទេសចំណូលមធ្យម – អន្ទាក់ ឬកាលានុវត្តភាព៖ ការបង្កើតសក្តានុពលសហគ្រិនភាព និងផលិតភាពតាមរយៈការចុះបញ្ជីក្នុងប្រព័ន្ធផ្លូវការ (ភាគ I)

Key Messages

• This blog discusses a very influential idea—associated with the work of Hernando de Soto—that informality represents a constraint on firm-level growth.
• The policy implications are that governments should strive to help firms formalise to enable them to better access credit, formal sector customers, protection from government and policy sanctions, and to employ better educated and more productive formal sector workers.
• In the De Soto view, formalisation will ‘unleash entrepreneurship’ and help drive Cambodia towards productivity-led economic growth.
• This blog argues that formalisation will benefit already dynamic informal firms but that formalisation itself will not create entrepreneurial dynamism.
• This blog offers some policy recommendations to alleviate the costs on firms of formalising.
• This discussion will be continued across two further blogs in this three-part series on formalisation in Cambodia.

Introduction

It is difficult to locate and measure the size of the informal economy, much of it constitutes subsistence agricultural production consumed in the household, or is conducted by mobile and itinerant self-employed people collecting waste for recycling, selling snacks, or cleaning houses. Such firms or workers may not pay taxes, have a bank account, or have a dedicated business premises. Across 185 countries, in 2014 the informal sector accounted for 30—40 percent of total economic activity and an even higher share of employment in the poorest quartile of countries. Using the 2022 Economic Census,  the UNDP concluded that 88.3 percent workers in Cambodia and 87.6 percent of establishments were informal. CDRI research by An and Chhorn noted that only about 3 percent of microenterprises were formally registered with the Ministry of Commerce, compared with 75 percent of large firms.

This blog discusses a very influential idea—associated with the work of Hernando de Soto—that informality represents a constraint on firm-level growth. The policy implications are that governments should strive to support firms escaping informality to help ‘unleash entrepreneurship’ through reduced risk and better access to credit. This blog argues that studies showing that formalisation will have a significant positive impact are flawed and that the economic benefits will be much more limited. Formalisation will benefit already dynamic informal firms, but that formalisation itself will not create entrepreneurial dynamism. The blog also offers some relevant policy conclusions. This discussion will be continued across two further blogs in this three-part series on formalisation in Cambodia.

The Regulatory Burden to Formalising

Cambodia has a problem, not with start-ups but with formalisation. CDRI research, using data from the 2022 Economic Census, shows that the total number of firms in Cambodia increased from 505,134 in 2011 to 753,670 in 2022. The data show that the vast majority of firms start in the informal sector and stay there. The World Bank Entrepreneurship Database shows that (Table 1) only 5,138 formally registered firms entered in Cambodia in 2024, which includes informal firms becoming formal and newly established formal firms. This is compared to nearly 90,000 in Thailand and around 140,000 in Vietnam (or around 840,000 in the developed UK). As a ratio of the working population, this number was much lower in Cambodia (0.45) than in these comparable countries.

Table 1: Business Entry 2024

Country	Total Number of Newly Registered Corporations in 2024	Number of Newly Registered Corporations in 2024 per 1,000 working-age (15–64) population
Cambodia	5,138	0.45
UK	841,138	19.19
Malaysia	59,611	2.28
Laos	7,941	1.57
Thailand	87,596	1.75
Vietnam	136,757	2.00

Source: World Bank Entrepreneurship Database 2024

In Cambodia, the Ministry of Commerce (MOC) requires that firms register unless they have an annual turnover of less than USD62,500. Various other forms of registration, licensing and permissions are granted by other ministries, including the Ministries of Labour and Vocational Training (MLVT); Culture, Education, Industry, Mines and Energy, Health, Agriculture, and Land Management. All firms liable for taxation are also required to register with the General Department of Taxation (GDT). Micro-enterprises are not required to register with the MoC, pay commercial income tax (CIT) or charge and collect VAT from customers. Micro-enterprises are required to register with the MLVT and the National Social Security Fund (NSSF) and also abide by various legal requirements; in both cases, compliance rates are not high.

According to the 2020 World Bank Doing Business Survey, starting a business in Cambodia required nine steps, took 99 days and cost 53.4 percent of income per capita, meaning that Cambodia ranked 187th  out of 190 countries in the ease of doing business. UNDP evidence shows that 84 percent of MSMEs that were not registered with the NSSF cited the complicated and time-consuming registration process and 34 percent the cost of compliance as a reason for remaining informal.

Why Formalisation Can Unleash Entrepreneurship

Famously, Hernando De Soto (2000) sees informal firms as an untapped reservoir of entrepreneurial energy, held back by government regulations. Informal firms, he argued, cannot attract investors by selling shares, nor secure low-interest formal sector credit to invest in new machinery because they do not have a legal address; they cannot reduce risk by declaring limited liability or by obtaining insurance coverage. Informal firms live in constant fear of extortion from corrupt officials. De Soto and his research team opened a small garment factory workshop on the outskirts of Lima, Peru, with a goal of creating a new/ legal business. Spending six hours a day on the process, they only managed to register a formal business 289 days later. The workshop was geared to employ one person, and the registration process cost USD1,231, or thirty-one times the monthly minimum wage.

The World Bank was spurred on by this work of Do Soto and attempted to measure the burden of regulations and other factors in the Doing Business (later B-Ready) indices.

In their December 2024 Economic Update, the World Bank argued in favour of continuing to reduce the regulatory burden of firm registration in Cambodia, increasing the number of business registration centres in small towns and rural areas, and fully digitising the business registration process.

The Actual Impact of Removing Barriers to Formalisation

This section reviews some of the many studies of business formalisation and shows that they find positive and sometimes large impacts on business indicators related to production, profits, employment, and productivity. These studies are subject to a significant methodological problem, which means that there is little reason to think that formalisation will unleash widespread entrepreneurship in Cambodia.

Production: A 2023 study of 8,350 informal firms across two economic surveys in Cambodia (2011 and 2014) found that the 216 firms that transitioned to formal status across these years increased their sales by 161 percent and their value added by 151 percent.  At first sight, these findings appear to contradict the argument that formalisation has only limited economic benefits. However, the percentage increase in sales and value added only describes the difference observed among firms that had transitioned to formal status. They do not necessarily represent the causal effect of formalisation itself. Formalised firms may already differ compared to informal ones in terms of entrepreneurial dynamism or managerial abilities. The main point is not whether formalised firms perform better, but how much of this improvement can be attributed to formalisation itself.

This positive finding for Cambodia is broadly consistent with research elsewhere. In Brazil, firms that formalised between 1997 and 2003 saw 5 percent higher revenue and 45 percent higher profits. In Vietnam, a survey showed that firms that became formal between 2007 and 2009 saw a 16 percent increase in profits compared to firms that remained informal; another survey in Vietnam showed that formalisation was associated with a 40 percent increase in the scale of production, and a panel dataset constructed from five small and medium enterprises (SME) surveys in Vietnam, conducted between 2005 and 2011, shows that formalisation increased profit and value added respectively by 11.0 percent and 8.9 percent.

Labour and Employment: A 2023 study of Cambodia using data from 2011 to 2014 found that formalisation increases both total wage payments and the number of regularly employed workers (by 8.3 workers per firm), but doesn’t increase employment of family workers. In Brazil, formalisation led to an extra 0.5 employees per firm, while in Vietnam there was no increase in the number of employees but a shift from casual to formal and contracted labour in one study and an increase in another study of one-third of a worker per firm.

Productivity: The Economic Census 2022 data allowed An and Chhorn (2025) to show that controlling for other factors, labour productivity was 12.5 percent higher in firms registered with the MOC than non-registered firms. Another 2023 study shows that formalisation in Cambodia had no impact on labour productivity.

Methodology: There is a significant problem with interpreting these results. Firms that choose to formalise are very different from those that remain informal. Studies of Vietnam or Benin that control for owner characteristics (ability, background, motivation) show that formalisation has little effect on profits. In Vietnam, becoming formal does not alter the dynamics of the business. Firms that have better managers, more productive workers, better business ideas, and more profitable market niches formalise more frequently. It is entrepreneurial dynamism that causes firms to formalise—formalisation has little independent influence on firm success. This idea will be discussed further in the third blog in this series on formalisation in Cambodia.

Policy Recommendations

While this blog has noted that formalisation is unlikely to ‘unleash entrepreneurial dynamism’ in Cambodia, it has also noted that well-managed dynamic firms do seek to gain the benefits of formalisation. The path to formalisation should be improved to make this transition easier.

Make Online Registration Work for Micro-enterprises

SME and large enterprises in Cambodia can register online with the MOC, GDT and MVTL via the CamDX portal. As of 2019, the World Bank were optimistic that the launch of the CamDX web portal in 2020 could help boost formalisation.

A CDRI survey of 361 firms in 2023 found that while 90 percent of firms sampled had obtained a tax certificate, only 6.7 percent of firms used the online portal to apply for tax certificate. This concern with implementation is echoed by wider evidence. We can turn to the World Bank 2025 B-Ready Index, which “assesses the regulatory framework and public services directed at firms, and the efficiency with which regulatory framework and public services are combined in practice.” Table 2 shows a mixed set of results for Cambodia in relation to business entry. Cambodia scores highly in relation to regulations for business entry, poorly in relation to digital public services and information transparency, and very badly in relation to operational efficiency of business entry.

Table 2: World Bank B-Ready Business Entry 2025

Business Entry Indicator	Max Score	Malaysia	United States	Vietnam	Cambodia
Quality of Regulations for Business Entry	100	79.76	90.95	68.61	76.98
Digital Public Services and Transparency of Information for Business Entry	100	84.5	58.06	73.33	51.17
Operational Efficiency of Business Entry	100	93.02	76.34	87.92	38.73

Source: World Bank B-Ready 2025

Cambodia already offers firms multiple channels to register, including through the online ​CamDX portal and in-person at a one window service (OWS). The formal cost of registering through the online portal is less than USD140. In reality, registration was a more complex and time-consuming process, often involving extended administrative procedures, delays, and requests for facilitating payments to advance an application. A 2023 study estimated the cost of registration in reality was at least USD400, and the estimated time to complete the registration was at least one month. To reduce the application time and administration costs, firms often sought out the help of specialist middlemen to facilitate the registration process. These delays and costs can be seen in Table 2—the much lower score for Cambodia (38.73) in relation to the operational efficiency of business entry.

The CamDX portal allows enterprises to register as a small/medium/large taxpayer, to declare their formation to the MVTL and to complete all these processes through a single, digital portal. The portal does not work for a micro-enterprise that does not need all of these registrations. The CamDx portal should be modified to allow micro-enterprises to register online, for example by allowing owners to submit a national ID card in lieu of registrations and permits that are not required by micro-enterprises.

Informal micro and small enterprises face a very low regulatory and tax burden in Cambodia. Such firms are not required to pay the CIT or collect VAT from customers, and though they are required to submit tax returns to the GDT and pay salary tax on their employees, these requirements are not enforced. Becoming formal imposes new burdens, including registering with the MOC and GDT, paying CIT, keeping formal financial records and administering VAT, and filing monthly and annual tax returns. Cambodia can ease this progression by implementing a “monotax” regime for micro- enterprises. The UNDP have suggested that any micro enterprise with earnings or sales below a minimum threshold, operating in sectors like retail and food services (not law firms of doctors offices), with four or less employees could be required to make a single annual payment in lieu of all major taxes and license/ permit fees through the online portal (e.g. to the GDT or NSSF).

Conclusion

This blog discusses a very influential idea—associated with the work of Hernando de Soto—that informality represents a constraint on firm-level growth. The benefits of formality, according to this view, are that firms can better access credit, formal sector customers, protection from government and policy sanctions, and employ better educated and more productive formal sector workers. Together, these benefits mean that formalisation will ‘unleash entrepreneurship’. Contrary to this view, the evidence for Cambodia and developing countries more widely shows that formalisation will have positive but only limited economic benefits. This blog also shows that dynamic micro and small firms will seek to become formal and suggests policy reforms to ease this transition.

Look out for Middle-Income Cambodia – Trap or Opportunity: Using Carrots and Sticks to Promote Formalisation (Part II)

Authors
Prof. Dr Matthew McCartney, Chief Economist, CDRI
Mr Temugin Cattaneo, Researcher, Centre for Development Economics and Trade, CDRI