Transitions Out of Informality Among Entrepreneurs in Sub-Saharan Africa

Abstract

Prior research has linked firm registration among entrepreneurs to faster growth and larger eco- nomic benefits from entrepreneurship, such as higher employment and revenue generation. Yet, despite these benefits, many entrepreneurs remain informal (unregistered) for extended periods of time. Why do entrepreneurs remain informal and what predicts the probability and timing of their exit out of informality through registration? I examine these questions in the dynamic con- text of firms founded informally throughout the region of Sub-Saharan Africa, across countries with varying founding conditions. Contrary to existing accounts, which emphasize economic drivers into registration and cross-national differences in transactions costs and formal institu- tions, I theorize and test the role of social and organizational drivers, such as entrepreneurs’ intentions and prevailing organizing norms and social distrust in the environments where they founded their organizations. I find that individual differences explain about 80 percent of the variance in the length of informality spells, with the remaining 20 percent attributable to re- gional differences. These findings have important implication for impediments to formalization among entrepreneurs in emerging economies.