Initial informality as an obstacle to intellectual capital acquisitions

Abstract

PurposeMost developing countries are characterized by large informal sectors. A substantial proportion of firms in these countries began operations in the informal sector, eventually becoming formal. The purpose of this paper is to study whether, after formalization, firms that began operations in the informal sector are more or less likely to use intellectual capital in the form of disembodied technology licensing than firms that began operations in the formal sector. The moderating roles of being a downstream firm, age and the country’s per capita income are also analyzed.Design/methodology/approachThe effect of initial informality on the probability of licensing is estimated using firm-level data from the World Bank’s Enterprise Survey, conducted in several Latin American countries in 2006–2017.FindingsFormal firms that began informally are less likely to use licensed technology, suggesting the existence of long-run effects of informality. The effect of initial informality is more negative among downstream firms.Research limitations/implicationsThe analysis uses cross-sectional data. Unobservable firm fixed effects could be controlled for using longitudinal data.Practical implicationsInitial informality affecting the innovation strategies of firms should be considered when designing policies that incentivize formality.Social implicationsIf, in light of the results of this analysis, policies are designed which foster a better allocation of resources, there will be a tangible impact in the lives of many people in developing countries.Originality/valueThis is the first paper that analyzes the relationship between initial informality status and technology licensing, a relevant channel for the international diffusion of technology.