Informal competition and firm performance: Impacts on input‐ versus output performance

Abstract

Using data on more than 100 emerging nations, this paper considers the impact of informal competition on the performance of formal sector firms. Unique aspects include comparing the effects on input performance (via total factor productivity [TFP]) with those on output performance (via sales per worker). Grounding the empirical analysis in the theory of vertical integration into research, results show informal competition to undermine firms' performance. Furthermore, technology outsourcing, rather than in‐house innovation, appears to be effective in boosting performance for firms facing underground competition. Finally, the performance impact of informal competition is sensitive to the existing level of performance.