From informal to formal: an exploration of firm-level sectoral change in El Salvador

Abstract

Purpose Enterprises in developed and developing world environments often begin life in the informal sector operating outside the purview of government oversight. Sectoral firm change, however, from the informal to the formal sector is not well studied. The purpose of this paper is to answer the following research question: “What firm-level markers help explain the movement of firms from the informal to the formal sector?” Design/methodology/approach Data from 719 urban formal enterprises included in the 2016 El Salvador Enterprise Survey undertaken by the World Bank forms the basis of the empirical analyses. The survey questionnaire comprehensively encompasses business practices and performance and the overall business environment. Findings Multivariate results reveal location, firm maturity, problems with land acquisition, a line of credit or active business loan, extortion by street gangs and practices of informal competitors increase the odds of informal firms becoming formal enterprises. Lessening the odds of once informal firms moving to the formal sector include the lack of access to public utilities, visitation by tax officials, formation as a corporation, bank accounts, number of employees and time spent focused upon government regulations. Originality/value Contextualized within the national setting of El Salvador, the integration of informal enterprises into the formal economy and related public policy implications of informal firm regularization are discussed.

Against the Odds: Small Business Strategies for Managing Extortion in San Salvador

“…Moreover, 74% report informal employment conditions, against 12% in medium and large enterprises. Other research shows that most MSEs are only a survival strategy; few grow or are bought up by larger businesses (Banegas & Winkler 2020;Pisani 2019).…”

Firm registration among White- and Latino-owned employer enterprises

“…Regardless of location, the general trajectory of enterprise development is toward formality (Pisani, 2019), simplified in this article to informal or formal firms. While this is so, higher prevailing levels of informality are more tightly associated with emerging economies as compared to developed economies (Medina & Schneider, 2018).…”

Challenges to Formality from Formal Firms Behaving Informally: Evidence from Central America

“…Pisani and Patrick (2002)argue that facilitating informality in the region may lead to greater economic growth and perhaps better prospects for informal firms to outgrow the informal sector and contribute even more to a robust formal sector. Pisani (2019b) explores the more conventional route of once informal enterprises becoming formal businesses in urban El Salvador. Primary determinants toward formality in this case include a very central location in the capital, competitive obstacles imposed by informal competitors, and gang violence revealing safer business terrain in the formal sector.…”

“…Fewer studies still, spotlight the consumption of informal products (Pisani & Pisani, 2018, Pisani, 2013. Almost absent from the literature are works that consider the incorporation of informal practices into formal competitive tactics (see Pisani, 2019b, 2015, Vallanti and Gianfreda, 2021. As this research stream is exploratory, the following research question is the focus of the paper: "What impact, if any, does competition from formal enterprises behaving, in part, informally have on formal firms within a largely informal regional economic environment?…”