Abstract
Recent years have seen a questioning of the negative representation of informal sector entrepreneurship and an emergent view that it may offer significant benefits. This paper advances this rethinking by evaluating the relationship between business registration and future firm performance. Until now, the assumption has been that starting-up unregistered is linked to weaker firm performance. Using World Bank Enterprise Survey data on 2494 formal enterprises in Turkey, and controlling for other determinants of firm performance as well as the endogeneity of the registration decision, the finding is that formal enterprises that started-up unregistered and spent longer unregistered have significantly higher subsequent annual sales and productivity growth rates compared with those registered from the outset. This is argued to be because in such weak institutional environments, the advantages of registering from the outset are outweighed by the benefits of deferring business registration and the low risks of detection and punishment. The resultant implication is that there is a need to shift away from the conventional eradication approach based on the negative depiction of informal entrepreneurship as poorly performing, and towards a more facilitating approach that improves the benefits of business registration and tackles the systemic formal institutional deficiencies that lead entrepreneurs to decide to delay the registration of their ventures.
Highlights
A small but burgeoning literature has begun to tentatively explore more positive representations of informal sector entrepreneurship, by which is here meant starting-up and/ or owning and managing a business venture which does not register with and/or declare some or all of their production and/or sales to the authorities for tax, benefit and/or labour law purposes when they should do so (Ketchen et al 2014; McKenzie and Sakho 2010; Siqueira et al 2014; Williams and Shahid 2015; Williams et al 2013, 2015)
From a policy perspective, the significant impact is to demonstrate the need for a shift away from the conventional eradication approach based on the negative depiction of informal entrepreneurship as poorly performing endeavour, and towards a more positive facilitating approach that improves the benefits resulting from business registration and tackles the systemic formal institutional deficiencies that lead entrepreneurs to start-up their ventures on an unregistered basis
To analyse their firm performance relative to those registered from the outset, and since we are working under a normality assumption for our subsequent econometric estimation of determinants of firm performance, we examined the distributional properties of the three performance indicators
Summary
A small but burgeoning literature has begun to tentatively explore more positive representations of informal sector entrepreneurship, by which is here meant starting-up and/ or owning and managing a business venture which does not register with and/or declare some or all of their production and/or sales to the authorities for tax, benefit and/or labour law purposes when they should do so (Ketchen et al 2014; McKenzie and Sakho 2010; Siqueira et al 2014; Williams and Shahid 2015; Williams et al 2013, 2015). The widespread a priori assumption that starting-up unregistered has a negative impact on firm performance is tentatively refuted by showing how sales and productivity growth rates are significantly higher in formal enterprises that started-up unregistered than those registered from the outset in Turkey. This significant positive association between being unregistered at start-up and firm performance provides validation for a more positive representation of informal entrepreneurship and tentatively displays that in weak institutional environments, the advantages of business registration are outweighed by the benefits of non-registration and low risks of detection and punishment. From a policy perspective, the significant impact is to demonstrate the need for a shift away from the conventional eradication approach based on the negative depiction of informal entrepreneurship as poorly performing endeavour, and towards a more positive facilitating approach that improves the benefits resulting from business registration and tackles the systemic formal institutional deficiencies that lead entrepreneurs to start-up their ventures on an unregistered basis
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