Does informality help entrepreneurs achieve firm growth? evidence from a post-conflict economy

Abstract

This article evaluates the impact of starting-up unregistered and operating informally on small firm growth in Kosovo, the country with the highest levels of informality in Western Balkans. The study uses mixed research methods as an inquiry to combining both qualitative and quantitative forms. Reporting data from 487 business owners extracted from a 2017 nationally representative survey of 8,533 households in Kosovo, 47.7 percent had startedup unregistered and were operating informally at the time of the survey. Using an instrumental variable (IV) estimation with a binary endogenous regressor to estimate the impact of informality (a treatment group) on small firm growth (control group), while controlling for other entrepreneur and firm determinants, a strong positive effect of the informality on firm growth is identified. Entrepreneurs operating informally had an 11.6 percentage points higher probability of achieving their firm growth objectives compared with entrepreneurs operating formally. Yet, the qualitative interviews revealed that growth objectives of small firms were limited, so the unregistered firms outperformed registered firms only under the modest growth objectives. Taking into account the limitations of the study, the implications for theory and policy are proposed to tackle the informality such as incentives of government small business support programs.

The impact of institutional quality on country-level variations in foreign equity shares in transition economies

“…2.1 Institutional theory Institutions refer to the "rules of the game", the constraints developed by a society within which people and firms structure their interactions (North, 1990). These constraints can shape predicted rewards and risks (Krasniqi and Desai, 2016), influence the incentives for value-adding behaviour (North, 1990), and therefore, affect the range of possible activities undertaken by entrepreneurs and companies (Krasniqi, 2012;Young et al, 2018;Krasniqi and Williams, 2020). Formal institutions, which represent codified frameworks and rules, include business regulations, entry regulations for foreign firms, intellectual property rights protections, tax regimes, licensing regulations, regulations specific to FDI and compliance with international regulations and standards for export.…”

Informal Entrepreneurship: An Integrative Review and Future Research Agenda

“…Informalizing implies the foregoing of regulative legitimacy over time (Lent et al, 2019). This pathway may constrain financial performance (Brown et al, 2013; Engström & McKelvie, 2017), entrepreneurial growth (Krasniqi & Williams, 2020; Sonobe et al, 2011), and innovative capacity (Bu & Cuervo-Cazurra, 2020; Kabecha, 1999; Kurosaki, 2019; Ullah et al, 2019) in the long run. In fact, informal enterprises are generally smaller in size, less innovative, and characterized by lower productivity and higher capital intensity than formal enterprises (Amin & Islam, 2015; Nichter & Goldmark, 2009).…”

Informality and Entrepreneurship in Developing Economy: Case for Entrepreneurial Financing

“…In contrast to the widely held notion of the lower economic performance of informal sectors, some scholars have argued that informality did contribute positively to economic growth and has become a destination for the development of a country rather than continues as a journey. For instance, there was a finding that a strong positive correlation exists between informality and firm growth, and the probability of informal entrepreneurs achieving their set objectives is higher than the formal entrepreneurs achieving theirs [14].…”

“…However, informal firms leverage on the social legitimacy confers on them by their stakeholders including government authority. Social legitimacy is governed by norms, values, conventions and beliefs that are prevalent in the environment and make informal firms and individual actors within the environment to be legitimate in dealings with their customers, suppliers and other stakeholders [7,14]. In most developing nations, the drives and quests for revenue mobilisation have made some relevant government authorities extend the hand of regulation to the informal sector in some spheres of informal trade activities.…”