Do formal and informal protection methods affect firms' productivity and financial performance?

The main objective of this paper is to investigate the direct relationship between formal and informal protection methods and firms' productivity and financial performance. This study used Chilean firms' level data. The principal findings are that micro, small and medium-sized enterprises (MSMEs) with informal protection methods positively influence productivity and financial performance. Moreover, the results show that formal and informal protection methods are interconnected. Their joint effect accelerates firms' productivity and makes financial performance stronger as compared to using a single protection method. This outcome is robust across SMEs and large firms. Thus, this finding suggests that using a combination of formal and informal protection method benefits firms' productivity and financial performance. The managerial implications of this study suggest that business managers/owners could use multiple protection methods (a mix of formal and informal) to increase their firms' productivity and profitability. In addition, to support innovation in Chilean firms, economic policies must encourage innovation in small businesses through subsidies (tax credits) and R&D grants, as well as awareness of the use of protection methods.