Formalization and technical efficiency in household businesses: The moderating role of the provincial business environment

This study investigates the relationship between formalization and the technical efficiency of individual household businesses in Vietnam with particular attention to the moderating role of the provincial business environment. Using micro-level data from the Vietnam Individual Household Business Survey matched with the Provincial Competitiveness Index, the study estimates technicalefficiency through stochastic frontier analysis and applies quantile regression to capture distributional heterogeneity. The results show that formalization does not uniformly improve technical efficiency. Its direct effect is negative at some middle quantiles while the interaction between formalization and the provincial business environment is positive and statistically significant. This suggests thatthe benefits of formalization depend strongly on local institutional quality. In provinces with better governance, greater transparency, and stronger business support, formalized household businesses are more likely to improve efficiency. The findings highlight the importance of promoting formalization together with improvements in provincial economic governance.