Abstract

This study examines the role of Small and Medium Enterprises (SMEs) in facilitating the formalization of Nigeria's informal sector and its impact on inclusive economic growth. The research specifically assesses how SMEs enhance tax compliance, improve regulatory adherence, and connect informal businesses to formal value chains, while identifying key constraints limiting their effectiveness. The study employed a cross-sectional survey design, administering structured questionnaires to 400 SME owners across multiple sectors, with 396 valid responses obtained for analysis. Data collection focused on SMEs' operational characteristics, engagement with informal businesses, and perceived barriers to formalization. The analytical approach combined descriptive statistics with logistic regression to examine relationships between SME characteristics and formalization outcomes. The findings revealed that SMEs significantly contribute to formalization by providing market linkages (reported by 68% of respondents), improving access to financial services (61%), and enhancing regulatory awareness (57%). However, major constraints according to the respondents include high operational costs (cited by 79% of respondents), inadequate infrastructure (72%), complex regulations (65%), and skills shortages (58%). Regression results show that policy support (p<0.01), regulatory simplicity (p<0.01), and tax incentives (p<0.001) significantly predict successful SME-led formalization. The study recommends streamlining business registration, introducing tax incentives for SME-informal sector linkages, and upgrading industrial cluster infrastructure. These measures would enhance SMEs' formalization role while addressing operational constraints.