Investigating the intensity and drivers of formalization in urban informal businesses: evidence from Ethiopia

Many urban businesses are usually informal, although small and medium-sized enterprises (SMEs) are considered the engine of economic growth. This study aims to analyze urban informal business owners’ perception of business formalization and the factors that affect the intensity of formalization in urban informal sectors. Primary data were collected from 381 informal business owners using the stratified random sampling technique. Among the sample surveyed enterprises, 24.93% were still informal seekers, 24.67% had started registration, and 50.39% expressed a clear intention to formalize. A partial proportional odds model was used to analyze the data. The results of the econometric model reveal that monthly income, work experience, level of education, gender (male), access to training and awareness, age of respondent, business location, type of business activity, and infrastructure quality have statistically significant positive effects on the likelihood of formalization. Family size and married marital status have a significant negative effect on the likelihood of formalization. However, as the study is based on cross-sectional data, it cannot capture change in formalization over time, and some behavioral factors may remain unobserved. As formalization improves business stability, enhances the quality of life for the residents, and contribute to community well-being and social cohesion. The study has policy implications for government and development agencies to promote formalization through targeted intervention such as financial incentives, capacity-building programs, and infrastructure development.