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 started-up 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.
Highlights
Over the past decade or so, the discipline of entrepreneurship has witnessed the emergence of a burgeoning sub-field that examines informal sector entrepreneurship.The present study contributes to this strand of literature by evaluating whether firms that started-up their operations without registration and currently continue to operate informally have higher firm growth relative to firms that registered from the very beginning of their operations
Overwhelming majority of cases we found that they have very modest desired growth objectives suggesting that small firms in post-conflict economy are not growth-oriented
This analysis of entrepreneurs in Kosovo reveals that nearly half (47.7%) operate unregistered and that operating unregistered is positively and significantly associated with a higher likelihood of achieving their desired growth objectives
Summary
Over the past decade or so, the discipline of entrepreneurship has witnessed the emergence of a burgeoning sub-field that examines informal sector entrepreneurship (see Pejic Bach et al, 2018; Sauka et al, 2016; Webb et al, 2014).The present study contributes to this strand of literature by evaluating whether firms that started-up their operations without registration and currently continue to operate informally have higher firm growth relative to firms that registered from the very beginning of their operations.
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