Explaining Variations in the Commonality of Informal Sector Competition Across Latin American and the Caribbean Countries

Abstract

To advance understanding of the relationship between entrepreneurship and the informal sector, the aim of this paper is to evaluate and explain variations in the extent to which formal enterprises witness competition from unregistered or informal enterprises across Latin American and Caribbean countries. Reporting World Bank Enterprise Survey (WBES) data on 31 Latin American and Caribbean countries, this reveals that two-thirds (65.5 percent) of formal enterprises witness competition from informal sector enterprise. To explain the cross-country variations, four competing theories are evaluated, which variously view the prevalence of the informal sector to be determined by either: economic under-development (modernization theory); high taxes and state over-interference (neo-liberal theory); too little state intervention (political economy theory), or an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). A probit regression analysis confirms the modernization, political economy and institutional theories, but not the neo-liberal theory. Beyond economic under-development, therefore, it is too little state intervention and whether the laws and regulations developed by governments are in symmetry with the norms, values and beliefs of entrepreneurs. The paper concludes by discussing the theoretical and policy implications of these findings.

Why do Firms Operate Informally? Insights from a Systematic Literature Review

“…The neoclassical theory establishes utility maximization based on objective probabilities, institutionalists examine the role of norms, sociologists emphasize the importance of demographic factors, and psychologists consider the intrinsic motivations of agents (Schneider & Enste, 2013). However, in stark contrast to traditional debates that adopt one or another theoretical perspective, recent research emphasizes the need for a comprehensive vision of the conceptual framework to fully understand the prevalence of the informal sector (Williams & Liu, 2019). Figure 1 presents a summary of the relation among the different theoretical and empirical approaches on the subject.…”

Evaluating the Impact of Informal Sector Competitors on the Performance of Formal Enterprises: Evidence From Bosnia and Herzegovina

“…This was widely perceived as a leftover from an earlier production regime that would disappear naturally and inevitably with economic development and growth (Lewis, 1959;Geertz, 1963;Gilbert, 1998). The recognition that the informal sector is a persistent and extensive phenomenon (Schneider and Williams, 2013;ILO, 2018;Williams, 2015a, b;Williams and Kosta, 2019;Williams and Liu, 2019) and that over half of all enterprises globally operate unregistered (Acs et al, 2013), has led to a growing interest in such entrepreneurship.…”

The transition toward the business formality of the Peruvian MSEs: How does the perception of entrepreneurs and the sector influence?

“…However, there are levels of informality defined by the characteristics of an informal company (Mbaye et al, 2020) or established according to the lack of compliance with the requirements to be considered formal (Shahid and Williams, 2020;Williams et al, 2016). Surprisingly, the literature has not paid attention to the study of levels of informality or formality when, the real thing is that formalization is a gradual process (Shahid and Williams, 2020;Williams and Liu, 2019;Williams et al, 2016). This research contributes to reducing this gap and focuses on the study of those companies that have started the formalization process and have not concluded it.…”