Capital, Digitalization, and Formality: Chilean Micro-Enterprises During COVID-19

Small businesses, particularly micro-entrepreneurships, are a vital economic engine in many developing nations, providing essential income and employment. This study analyzes the post-shock trajectory of Chilean micro-enterprises through the lens of the digitalization–formality trade-off during and after the pandemic. During the crisis, micro-enterprises relied on a short-run substitution mechanism: those with greater capital and intensive Internet use saw a notable increase in sales, demonstrating that digital channels were effectively substituting for the growth benefits typically conferred by formal status. Interestingly, formal business registration or permits did not directly translate into higher sales during this period. Looking at the medium-run pattern, the initial surge in necessity-driven businesses was followed by renewed incentives for opportunity-seeking entrepreneurs as the economy recovered. However, the crisis created a lasting disincentive: both men and women were less likely to formalize their businesses after the pandemic, indicating that the high cost or low benefit of formality persisted, further entrenching the reliance on informal, digitally enabled operations.