Towards the Transition of Informal Sectors to the Formal Economy

Abstract

Due to its growing importance and presence in the global economy researchers have attempted to demystify informal entrepreneurship, its motivations, processes, and outcomes. Recent scholarship, however, has focused on identifying how to transition informal actors into the formal sector. Nonetheless, extant literature is inconclusive in providing guidance on how informal entrepreneurs can best traverse a path to formality. To bridge previous gaps in the literature, we leverage the institutional entrepreneurship framework, the cultural entrepreneurship process, and the resource-based view to identify microprocesses entrepreneurs in the informal sector can employ to transition to formality and achieve legitimization. We postulate that informal economy sectors that are experiencing growth meet the enabling conditions to warrant an institutional change. By using stories and symbols in a consistent way, that emphasizes alignment with formal norms and beliefs, informal entities in transition can construct an identity that is legitimate and accepted by formal institutions. Importantly, in the face of their resource-constrained nature, we argue that digital technologies can potentiate informal entities’ successful transition to formality. Our paper offers several contributions to advancing informal entrepreneurship research by answering calls regarding the process for informal ventures to construct and achieve legitimacy. Moreover, we offer guidance to settle the institutional plurality dilemma that plagues an informal entity’s transition towards formality. Third, we recognize how digitalization transforms the nature and structure of entrepreneurial agency and actions in the context of the informal sector. Overall, we underline the specific microprocesses that precede the integration of digital technologies to foster institutional change and formalization of informal sectors.