Across many developing countries, some entrepreneurs decide not to register their enterprise at the time of founding. Research suggests that they do so to evade taxes and avoid regulatory costs. What entrepreneurs may not realise is that enterprises that do not register at founding subsequently perform worse than enterprises that do register.

These non-registered enterprises save administrative costs but lose legitimacy. At stake is the ability to enter contracts with resource providers and gain the trust of key stakeholders such as customers, employees and lenders. The legitimacy and trust make enterprises that register at founding more likely to perform better.

But we note that the effects of business registration differ widely across countries. In a recent study published in the Journal of International Business Studies, my co-author Devanshee Shukla (PhD candidate in Strategy at INSEAD) and I analysed enterprise-level data of over 134,000 firms across 143 countries from the World Bank Enterprise Surveys.

Our analyses revealed that 34 percent of countries showed a positive association between registration at founding and subsequent sales, 2 percent showed a negative association, and 64 percent showed no association. When we examined employment instead of sales, we found approximately similar patterns: almost 20 percent of countries showed a positive association between registration at founding and employment level, 5 percent showed a negative association, and 75 percent showed no association.

Why do some countries offer a much stronger positive effect of registration at founding? We found two factors: the country’s regulatory burden and market openness. These influence the relative costs and benefits of registration at the time of the founding.

First, it is crucial to consider the role of the country’s regulatory burden. If entrepreneurs have to spend substantial time dealing with business regulations, there is limited upside to registering the venture at its founding. They could use scarce resources to expand their business instead.

Second, it is also key to consider the country’s market openness. The openness affects the business venture’s access to trade, investment and capital flows. In restrictive markets, the net benefits of registration at founding may not outweigh the advantages of non-registration at the founding. In contrast, when the markets are open, business ventures that register at founding can gain support from the public and private resource providers, laying a strong foundation for further growth.

In general, while the association between registration at founding and subsequent firm performance is positive on average, this positive effect could be reduced by the country’s regulatory burden and amplified by an open market. When entrepreneurs in developing countries across Asia and Africa do not register their business at the time of the founding, policymakers have to grapple with administrative and lost tax issues. In encouraging these entrepreneurs to register, governments can also consider reducing or simplifying the registration process. Increasing market openness will also help businesses get more access to funding and resources. Registration at founding would hold more appeal then, with the benefits to be reaped by all.

The article is an edited version of the first one published in SCMP.