Business Environment Distortions, Informal Competition, and Firm Stagnation in Peru

Abstract

This paper examines how business environment distortions and informal competition contribute to the persistence of low-scale formal firms in Peru. Using data from the 2015 National Enterprise Survey, the analysis estimates an ordered probit model with instrumental variables to assess these effects. Results show that limited access to working-capital credit and competition from informal businesses increase the probability of being a micro enterprise by 18 and 16 percentage points (pp), respectively. Likewise, complex tax regulations increase this probability by 10 pp, while inadequate infrastructure and institutional weaknesses raise it by 8 pp. However, simultaneous improvements in credit access, tax simplification, and institutional and infrastructure quality could reduce the share of micro enterprises by 39 pp while increasing the shares of small and medium/large enterprises by 27 and 12 pp, respectively.