Cambodia has a big opportunity to boost productivity by making it easier for high-performing informal businesses to register, according to a recent World Bank study.

The study, included in the bank’s Cambodia Economic Update for December, notes that unregistered businesses play an “oversized” role in the economy, accounting for about 40% of GDP.

That compares with an average of 25% in Bangladesh, the Philippines and Vietnam, which are all classified as lower middle-income countries like Cambodia.

Unfair competition

The widespread presence of informal businesses – defined as those not registered with the Ministry of Commerce – “is creating a strong perception of unfairness among formal firms”, the bank says.

For example, 63% of firms report competing with informal businesses that don’t pay taxes – almost double the average in Bangladesh, the Philippines and Vietnam.

And 42% of these registered firms complain that the informal sector is the single biggest obstacle to doing business.

The bank also notes that informal businesses are “much less productive” than registered firms, depressing overall enterprise productivity by about 50%.   

Focus on young firms 

On the other hand, the bank sees upside potential in the relatively high and rapidly growing proportion of young firms registered.

The ratio of firms less than five years old more than doubled from 10% in 2016 to 23% in 2023, compared with an average of 15% in Bangladesh, the Philippines and Vietnam. Moreover, more than 70% had above-median labour productivity compared to other formal firms.

Some of these productive young firms likely began in the informal sector, the bank says, noting that 23% of formal firms in Cambodia report having started as unregistered businesses.

This is above the global average and significantly higher than the 3% rate reported in neighbouring Vietnam.

“This data suggests that Cambodia has a big opportunity to continue boosting its aggregate firm productivity by further easing firm entry and facilitating the registration of at least some high-performing, informal businesses,” the bank says.

Productivity variations

However, it notes substantial productivity differences among “viable” informal businesses, which account for 59% of the total, and “survivalist” enterprises, which account for 41% and are non-viable.

For the highest performers, accounting for 15% of all informal enterprises, average productivity levels in the top quartile ( 25% ) are three times higher than the overall average and about nine times higher than the average of the bottom quartile.

These high performers are more productive than the average formal firm, indicating that many can compete with registered businesses.

Even informal businesses in the third quartile have average productivity levels about 70% of the median formal firm. “They are not far off being able to match them on productivity,” the bank says.

“It is these better-performing informal businesses ( the top half of the distribution, starting with the top quartile ) that are likely to be the best ‘candidates’ for formalization and should be the initial priority for registration drives.”

Encouraging informal businesses to register as firms has been a top priority since the government launched a digital registration platform last year. It was also one of three topics on the agenda at the first-ever joint sitting of the National Assembly and Senate in June.

The World Bank study suggests reducing the direct financial cost of registration as well as further business streamlining and digitalization, including greater use of “structured electronic data” as opposed to scans of Word documents.