Formal Sector Firms Research Articles

MULTICULTURAL EMPLOYEES’ PERCEPTIONS OF DIVERSITY IN SOUTH AFRICA

Purpose: This research explored the in-depth meaning of how multicultural employees perceive diversity in South African formal sector firms. In doing so, it extracted the lived experiences of multicultural employees about the cultural differences perceived within the country. South Africa is characterised by cultural and linguistic heterogeneity and a relatively large formal sector economy by African standards. Methodology: For this cross-sectional study, data were gathered through a homogeneous purposive sampling of nine participants and conducting semi-structured interviews. This small sample size allows for a thorough investigation into each participant's lived experience to gather qualitative data. The specific phenomenological method used in this study is a novel interpretative phenomenological analysis (IPA), which seeks to extract data and discern meaning in the participants' narratives. Results: The findings were interpreted through the lens of social identity theory within an interpretative philosophical paradigm. These interpretations were leveraged to extract a central narrative that is grouped thematically. The main finding was identifying several factors that contribute to the spanning of cultural boundaries in South African formal sector firms. Practical Implications: The study identified how participants make meaning of their experiences within the formal sector of South Africa and how their interpretations shape their behaviour and attitudes. Originality/Value: The findings indicate that a significant amount of intra-country cultural diversity is perceived in the South African formal sector workplace, which can cause friction and reinforce cultural stereotypes.

Productivity and wage gaps between informal and formal firms in India: Trends and determinants

ABSTRACT This study examines the productivity and wage gaps between informal and formal sector firms in India. Using a comprehensive dataset covering a 15-year period, we explore the influence of access to finance, infrastructure, and labor regulations on these gaps. Employing standard Oaxaca decomposition method, we analyze the role of these factors in explaining the informal–formal gaps in wages and productivity. Our results reveal significant and expanding gaps in both productivity and wages between informal and formal firms. Decomposition analysis suggests firm characteristics and infrastructure as primary factors widening the gaps, while access to finance and flexible labor regulations help narrow them. The findings point to the importance of targeted interventions needed to augment the growth and development of the informal manufacturing sector. Policies that enhance access to finance, improve infrastructure, and promote favorable labor markets can contribute to narrowing the gaps.

What Sustains Informality? A Study of the Interactions between Formal and Informal Sector Firms

This paper considers two vertical links between informal and formal sector firms and studies their implications. First, we model a situation where final products produced by the formal and informal sector firms are differentiated in terms of quality and consumption demand for the informal sector firm is related to the distribution of income. Less well-off consumers generate demand for the low-priced, low quality good produced by the informal sector. Our paper studies the implications of this link for the size of the informal sector. Second, we analyse a situation where, instead of competing with the formal sector firm, the informal sector firm produces an intermediate good for the other firm.

Determinants of manufacturing firms’ Research and Development investments: evidence from Kenya

PurposeThis study investigates effects of firm-level, sector-level and business environment factors on manufacturing firms’ Research and Development (R&D) investment decisions in Kenya.Design/methodology/approachPanel Probit regression model is employed to analyse effects of the explanatory variables on manufacturing firms R&D investment decisions.FindingsAccess to external finance, lower informal sector competition, exports market participation, larger firm size and firms in high technology subsectors increase probabilities of undertaking R&D investment decisions.Research limitations/implicationsThe findings underscore the need to consider institutional framework, aimed at easing business environment constraints related to access to finance, export promotion and competition from informal sector enterprises. Future research should consider cross-country analysis within the Sub-Saharan African (SSA) region to understand implications of institutional contexts that prove to be a challenge to address in a study based within a single country.Practical implicationsPolicymakers need to consider addressing business environment constraints that impede R&D investments by private sector enterprises in developing countries. Formal private sector firms should design R&D investment strategies and lobby for policy interventions targeted at business environment constraints.Originality/valueThis study considers effects of variables underexplored in existing literature, notably competition from informal sector firms, R&D-intensity technological classification and an objective measure of access to finance. The study also utilises a panel survey data, which was underexplored in prior studies within SSA economies.

Push from the shadows: Does the shadow economy facilitate market exit of firms?

This paper examines whether the presence of the shadow or underground economy facilitates the exit of firms from the markets they operate in. The shadow economy can induce exits when underground firms are formidable low‐cost competitors, but the shadow economy can delay or cancel exits when underground suppliers enable formal sector firms to lower costs and become more competitive. Using data across US states and using two alternative dimensions of exits, the results show that the presence of the underground sector makes market exit less likely. Another contribution of the paper lies in consideration of political explanations for firms' exit.

Challenges to Formality from Formal Firms Behaving Informally: Evidence from Central America

This research explores the competitive environment for urban formal sector firms competing against peer formal sector firms behaving informally in Central America. Explored is the upper bound of the formal-informal continuum in a regional economic environment of persistent and widespread economic informality where formal firms may employ informal tactics to gain competitive advantage versus their formal competitors. The 2010 World Bank Enterprise Surveys form the basis for empirical analyses. The results suggest formal firms utilizing informal practices is widespread and is influenced by firm maturity, firm location, industry sector, firm legal status, firm organization, ownership composition, regulatory environment, international quality certification, web presence, entry into global markets, and firm size.

Digitizing Taxation and Premature Formalization in Developing Countries

ABSTRACTThe digitization of taxation systems can assist inclusion. However, it can also inadvertently lead to adverse outcomes for the poor in developing countries where many firms in the informal sector have low capabilities. Moreover, larger formal sector firms are often politically networked and in a position to engage in extractive informal transactions that digitization alone cannot restrict. Thus, while digitization creates tools for the enforcement of formal regulations, formalization can be unequal. This contribution focuses on digitized taxation as an application of a more general problem with digitization as a tool for formalization, referring to evidence from the rollout of the Goods and Services Tax (GST) in India. Using the analysis of political settlements, the authors distinguish between types of rule violations in developing economies. Networked higher‐capability firms engage in ‘informal’ transactions when they violate rules to extract rents. This is different from the informality of unregistered micro and small enterprises in the informal sector who often violate rules they cannot adhere to, and make informal payments to enforcers to continue operating. When digital technologies are used in these contexts, adverse outcomes for welfare and inclusion can follow from ‘premature formalization’. A more cautious and inclusive path to formalization is necessary to protect vulnerable groups.

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

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.

How productive is public investment? Evidence from formal and informal production in India

We use firm-level data on formal and informal production in India to examine the sectoral consequences of government investment in public infrastructure. Our results indicate that proximity to highway infrastructure, time since project completion, and firm size are important determinants of the sectoral effects of infrastructure on firm productivity. First, we show that while public capital is associated with a positive and significant output elasticity for formal sector firms, it has no systematic effect on informal firms. Next, using a major highway construction project in India, we show that proximity to a newly completed highway and the time since project completion are productivity-enhancing for formal firms, with these benefits distributed evenly across firm size in that sector. By contrast, similar benefits do not accrue to informal firms. Specifically, the presence of large firms in areas close to a newly completed highway crowds out the output of small informal firms, thereby mitigating the overall benefits of public investment for the informal sector.

Can Decentralisation Be a Force for Bad? New Evidence from Decentralising Environmental Clearances in India

We exploit India’s 2006 reform of Environmental Impact Assessment (EIA) regula- tions to assess whether decentralising environmental regulations improve firms’ pollution abatement behaviours and their impacts on firm performance. Using a nationally representative panel of registered manufacturing firms from 2002 to 2018, we exploit temporal and spatial variation using a difference-in-differences strategy to estimate impacts of decentralisation at the firm, industry-state, and district levels. We then explore heterogeneous effects of decentralisation by regulatory stringency, prior regulatory compliance, and construction of local regulatory authorities at the state level. For formal sector firms, we find decentralisation reduced incentives to install pollution control machineries, led to large and persistent reductions in investments and employment, but also reduced fuel intensity. We further examine spillover effects of decentralisation on unregistered firms in the informal sector, finding that districts more exposed to decentralisation saw faster informal sector employment and output growth. Overall, these results suggest India’s decentralisation of environmental clearance was not effective at improving firm pollution control and brought economic costs.

Women empowerment and insecurity: firm-level evidence

Women’s engagement in the formal economy is generally considered an important means to economic empowerment. In many developing countries, however, increasing female representation in politics, their greater engagement in paid work, and equality in educational attainment, are out of sync with the share of female workers in the formal sector's enterprises. This paper hypothesizes the role of insecurity in hampering empowerment that would otherwise accompany such developments. Exploiting the unique trio of a fragile security situation, a positive rate of macroeconomic expansion, and increasing female political representation in Pakistan, it finds a negative link between the ratio of permanent female workers and insecurity in a sample of 1600 formal sector firms. This link also finds support in a much larger sample of 71,000 firms from 71 different countries. The empirical analysis uses fractional logit regression to take care of the peculiar nature of the dependent variable; the issue of reverse causality is handled using instrumental variables.

Corruption and formal-sector entrepreneurship in a middle-income country: spatial analysis of firm births in the Mexican states

We evaluate the impact of corruption on firm births in the formal sector in the 32 Mexican states. In addition to controlling for socioeconomic factors previously linked to entrepreneurship, we also evaluate the impact of corruption and corruption squared in each of the Mexican states with both spatial and non-spatial models. Our results show that corruption is positively correlated with the formation of new formal-sector firms, but corruption squared is negatively correlated with firm formation. We believe this implies that some corruption helps entrepreneurs navigate complex rules and bureaucracy but too much corruption hinders entrepreneurship. We find a strong spatial component to new firm formation.

Casting a shadow: Productivity of formal firms and informality

AbstractInformality is a salient feature of most developing economies. Two important concerns arise from informality. First, informal firms tend to be less productive than formal firms. Second, the competition from informal firms can weigh on the productivity of firms in the formal sector. These challenges can lower the aggregate productivity and thereby retard overall development in countries where the informal sector is pervasive. Our analysis provides robust evidence on both issues using firm‐level survey data for a large cross section of countries. We also examine the extent to which firm characteristics and business environment quality shape the productivity gap between formal and informal firms as well as the impact of informal competition on the productivity of formal sector firms. The results show that, on average, the labor productivity of informal firms is about one‐fourth that of formal firms. Moreover, competition from informal firms lowers the labor productivity of formal firms by 20%–24%. In line with the “parasite” view of informality, the negative impact of informal competition on the productivity of the formal sector firms is more pronounced when the business environment is less conducive to operating formally due to high corruption, burdensome regulations, and weak institutions.

Union ‘facilitation effect’ and access to non-wage benefits in the Ghanaian labour market

ABSTRACT Effective access to mandatory non-wage benefits is key to workers achieving decent working conditions. This paper investigates the effects of union presence on workers’ access to non-wage benefits in the Ghanaian labor market. The study draws its data from the 2012–2013 Ghana Living Standards Survey (GLSS 6) and specifies a multivariate model that simultaneously controls for endogeneity and potential sample-selection biases. We find that unions have a significant effect on facilitation among workers by improving awareness of and access to work benefits. Other factors that affect benefit entitlements in Ghana include the gender of a worker, urbanization, firm size, sector formality, public v.s. private sector jobs, type of occupation, and the presence of work contracts amongst others. Results presented here indicate that workers from formal-sector firms with union presence are more likely to have access to non-wage benefits. It is also found that despite the statutory nature of these non-wage benefits, non-compliance was common, predominantly in the informal sector but also in the formal sector. This is particularly the case with respect to maternity leave benefits and indicates a need for greater enforcement of these laws.

Does informality facilitate inflation stability?

Informality is a structural trait in emerging economies affecting the behavior of labor markets, financial access and economy-wide productivity. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions to analyze the transmission of shocks and of monetary policy. In the model, the informal sector provides a flexible margin of adjustment to the labor market at the cost of a lower productivity. In addition, only formal sector firms have access to financing, which is instrumental in their production process. In a quantitative version of the model calibrated to Mexican data, we find that informality: (i) dampens the impact of demand and financial shocks, as well as of technology shocks specific to the formal sector, on wages and inflation, but (ii) heightens the inflationary impact of aggregate technology shocks. The presence of an informal sector also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that informality mitigates inflation volatility for most type of shocks but makes monetary policy less effective.

INFORMAL SECTOR MISALLOCATION

A quantitative framework of firm dynamics is developed where the size of the informal sector is determined by financial constraints and the burden of taxation. Improving access to credit for formal sector firms increases aggregate total factor productivity and output while reducing the size of the informal sector. Introducing size-dependent taxes reduces the gains from financial development as they incentivize firms to produce at a relatively limited scale. The aggregate effects of eliminating formal sector registration costs are positive but modest relative to previous theoretical models and the gains generated by financial development, and consistent with empirical evidence based on micro-level data.

Made in Vietnam

PurposeThe purpose of this paper is to simultaneously test the association between three different sources of knowledge (internal, collaborative and regional) and innovation. This study aims to expand the insights by assessing these associations in the context of a rapidly developing and liberalizing economy; Vietnam. By conducting this study with Vietnamese data, the authors can assess whether the association between different sources of knowledge and innovation shows systematic differences to those in advanced economies.Design/methodology/approachIn this study, the authors utilize data from two main sources: The World Bank Enterprise Survey and the Innovation Capabilities Survey. These firm-level surveys comprise non-agricultural formal and private sector firms. For Vietnam, 300 manufacturing firms have been included in the sample. The authors use a series of binary logistic regression models to analyze the data.FindingsThe analyses reveal that internal R&D has a strong positive association with product innovation. In contrast to findings in Western economies, not all kinds of collaborative knowledge sources have a significant association with innovation. Only collaborative knowledge gained from inside the supply chain is positively related to product innovation. Unexpectedly, negative effects from using too much external knowledge were also found.Research limitations/implicationsDue to the cross-sectional nature of the data causality could not be inferred from the study. Moreover, a relatively large number of the measures were dichotomous due the large number of missing observations for more detailed measurements of the variables.Practical implicationsWhen developing their innovation strategy firms in developing countries should take into account that collaborating with partners useful, but only if they collaborate within the supply chain. As such, firms should increase their interaction with suppliers and customers and put their efforts on the development of customized solutions for them.Social implicationsThe Vietnamese Government could implement policies that help to enhance the quality of universities and research institutes. In most developed countries, universities and research institutes are vital sources of knowledge for innovation whereas they are not in Vietnam.Originality/valueThis paper contributes to the growing body of literature on firm-level innovation in developing countries. It identifies several core differences between the drivers of innovation in developed and developing contexts. Surprisingly, a feature that was expected to differ, the negative effect of over-search of external knowledge on innovation, was also found in Vietnam.

Small firms, structural change and labor productivity growth in Africa: Evidence from Tanzania

At roughly 4 percent per annum, labor productivity in Tanzania grew more rapidly between 2002 and 2012 than at any other time in recent history. Roughly 80 percent of this productivity growth is accounted for by structural change as employment shares in agriculture declined while employment shares in services and manufacturing rose. Although employment in the formal sector has increased, the bulk of employment growth is accounted for by firms in the informal sector; these informal firms contributed more than one percentage point to economywide labor productivity growth. However, 94% of this labor productivity growth came from a very small subset of informal firms that belong to the in-between sector – a term meant to capture the idea that some of the firms in the informal sector share characteristics with firms in formal sector. An argument is made for targeting these firms for financial and other business services as a means of generating sustained and inclusive labor productivity growth in Tanzania’s manufacturing and services sectors.

Union Organizing after the Collapse of Neoliberalism in Argentina: The Place of Community in the Revitalization of the Labor Movement (2005–2011)

Recent Argentine history showed that since 2003 the labor movement became increasingly relevant due to protests organized by unionized formal workers. Labor revitalization in a context of persistent informality raised the following question: Were there union organizing strategies that related formal workers to the broader working class community that included informal workers? This article answered the question through the analysis of union strategies from three formal sector firms located in one city of the Northern Gran Buenos Aires, Argentina, between 2005 and 2011. The evidence from this comparison showed that in two of the factories there were union strategies to reach the community. The existence of a grassroots democratic union in the shop floor appeared as a necessary condition for inclusive union strategies. The scale of those relations varied according to the geographical pattern of workers’ housing, which was the result of the company’s localization strategy.

The Spillover Effects of Public Investment: Implications for Formal and Informal Sector Firms in India

This paper uses firm-level data on formal and informal production in the manufacturing sector in India to examine the sectoral consequences of government investment in public infrastructure. The average output elasticity of the flow of public investment for an informal sector firm is three times smaller than its formal counterpart. For the accumulated stock of public capital, this difference increases to a factor of seven. However, the sectoral size distribution of firms matters for the effects associated with public investment: for the formal sector, there is very little variation in the output elasticity of public investment across the size distribution of firms. On the other hand, the output elasticity for informal sector firms is strictly increasing in firm size. Further, the relationship between public investment and capital intensity in production for formal sector firms is negative, especially for firms in the middle of the size distribution. By contrast, the corresponding relationship is strictly positive and increasing with firm size for the informal sector, indicating strong complementarities.