Informal Sector Entrepreneurship Research Articles

Investigation of the Youth Informal Entrepreneurship Landscape in South Africa

Introduction: The South African economy is characterised by high and continuously rising youth unemployment levels and rates. While countervailing interventions have been attempted in the formal sector, support for youth employment and informal sector entrepreneurship has received limited attention from policymakers. Purpose: This is a rare study that examined South African youth entrepreneurship by analysing all five available waves of the seriously under-utilised Survey of Employers and Self-Employed (SESE) data, focusing on youth entrepreneurial activities. Methodology: Youth (15–34 years) and adult (at least 35 years old) informal entrepreneurs were distinguished, before deriving descriptive statistics on business activities, with a specific focus on site of operation, management, employment and net profit use in youth-owned enterprises. Findings: Youth informal entrepreneurs were typically African own-account workers without matric (senior certificate), and operated in the wholesale and retail industry. They had decent access to electricity and piped water on the business site, but did not have e-mail or internet facilities. More than 80% did not keep any business records, while only 60% operated their businesses for the full 12 months. Nearly 90% had launched their informal businesses less than five years ago, primarily because they were unemployed. The majority needed assistance mostly in the areas of marketing, provision of an alternate site and better access to raw materials. Lastly, the majority of them spent the net profit to purchase household items instead of re-investing in the businesses. Originality/value: The empirical findings help the government to embark on new policy changes to better promote youth informal entrepreneurship growth.

Entrepreneurial Persistence of the Underprivileged through Informal Sector During the Pandemic

We consider how new firm creation responded to the pandemic. While the pandemic led to overall decrease in entrepreneurial activity, underprivileged social groups continued to engage in entrepreneurship, and particularly in informal sector entrepreneurship. Furthermore, marginalised but closely knitted social groups, like the indigenous population, seem in a good position to engage in informal entrepreneurship at a time of urgent need. We test these intuitions utilising individual Global Entrepreneurship Monitor data from Chile that include evaluation of the government policy response. Among others, we find that crisis brought a reversal of patterns of correlation between prior income and propensity to engage in entrepreneurship.

POLICY APPROACHES TOWARD INFORMAL SECTOR ENTREPRENEURSHIP: AN OVERVIEW

This paper reviews the policy options and measures available for tackling informal sector entrepreneurship. Four possible policy options are critically reviewed: doing nothing, eradicating informal entrepreneurship; eradicating formal entrepreneurship and formalizing informal entrepreneurship. Concluding that the latter is the most feasible option, policy measures for formalizing informal entrepreneurship are then reviewed. On the one hand, the range of policy measures that can be used by enforcement authorities (tax authorities, labor inspectorates and social security institutions) responsible for tackling informal entrepreneurship are evaluated. On the other hand, and to tackle the broader structural determinants of informal entrepreneurship, macro-level reforms are identified by evaluating critically the validity of the purported determinants proposed in the modernization, political economy, neo-liberal and neo-institutionalist theories. The outcome is an understanding of the full range of policy initiatives required by governments seeking to formalize informal sector entrepreneurship.

BEYOND THE MARGINALIZATION THESIS: AN EVALUATION OF THE PREVALENCE, CHARACTER AND MOTIVES OF INFORMAL SECTOR ENTREPRENEURS IN KOSOVO

The conventional depiction of the prevalence, character and motives of informal sector entrepreneurs, here termed the ‘marginalization thesis,’ has been that informal entrepreneurs are a small, insignificant minority of all entrepreneurs, are more likely than formal entrepreneurs to belong to marginalized groups and are more likely to be necessity-driven entrepreneurs. To evaluate critically this marginalization thesis, evidence is here reported from a 2017 survey of entrepreneurs in Kosovo. This reveals that 42.5 percent of entrepreneurs are informal entrepreneurs, that only some characteristics of marginalized populations are more prominent among informal than formal entrepreneurs (e.g., low educational level, deprived households) but others are not significantly associated (e.g., gender, age, ethnicity), and that although informal entrepreneurs are more likely than formal entrepreneurs to be necessity-driven, only fourteen percent of informal entrepreneurs are purely necessity-driven. The outcome is a call to recognize the prevalence of informal sector entrepreneurship, the heterogeneous groups engaged in informal entrepreneurship and the existence of opportunity-drivers among informal entrepreneurs. The theoretical and policy implications are then discussed.

Explaining informal entrepreneurship in Croatia: a social actor approach

In recent years, a social actor approach has emerged to explain informal sector entrepreneurship. Grounded in institutional theory, this asserts that formal institutional failures lead entrepreneurs to view participation in the informal sector as acceptable, which results in the prevalence of informal entrepreneurship. The aim of this paper is to evaluate this social actor approach. Reporting the results of 521 face-to-face interviews with a nationally representative sample of entrepreneurs in Croatia, this finds a significant association between entrepreneurs participation in the informal economy and the non-alignment of their views with the formal rules, and that the formal institutional failings significantly associated with the acceptability of informal entrepreneurship include their perception of poor quality public services, a lack of tax fairness, corruption and political instability. The implications for theory and policy are then discussed.

TACKLING INFORMAL ENTREPRENEURSHIP IN EAST-CENTRAL EUROPE: FROM A DETERRENCE TO PREVENTATIVE APPROACH

The aim of this paper is to evaluate the effectiveness of two contrasting policy approaches in tackling informal sector entrepreneurship. The dominant deterrence approach theorizes entrepreneurs as rational economic actors who operate in the informal sector when the benefits of doing so outweigh the costs. The resultant policy focus is upon deterring participation by increasing the costs of operating in the informal sector through increased penalties and probability of being caught. Recently, a more preventative approach has emerged theorizing entrepreneurs as social actors operating in the informal sector when there is a lack of vertical trust (in government) and horizontal trust (in others). The consequent policy focus is upon improving entrepreneurs’ vertical trust (in the state) and horizontal trust (in each other). To evaluate these approaches, evidence is reported from a 2019 Eurobarometer survey in six East-Central European countries (Czechia, Estonia, Latvia, Lithuania, Poland and Slovakia). The finding is that participation in informal entrepreneurship is not significantly associated with the deterrent measures of raising the penalties and probability of being caught but is significantly associated with the preventative measures of improving vertical and horizontal trust. The implications for theory and policy are discussed.

ENTRY INTO AND EXIT FROM INFORMAL MICROENTERPRISE ENTREPRENEURSHIP IN A SOUTH AFRICAN MUNICIPALITY: A TALE OF RESILIENCE

Although research on entrepreneurship in the micro and small firms has been the subject of much scholarly attention, it has been mostly on the formal rather than informal economy. Drawing on the push and pull theory, this paper uses Principal Component Analysis to examine the motivations influencing entrepreneurs to venture into informal sector entrepreneurship in a specific South African municipal context. Against a background of addressing their constraints to growth, the prospects of formalization were considered, using logistic regression. The results, based on a sample of 160 entrepreneurs, show that even in the informal economy, pull factors are the uppermost motivations, apparently stronger than push factors, in influencing individuals to partake in microenterprise entrepreneurship. The logistic results indicate that even when some internal and external growth constraints are addressed, the likelihood of the entrepreneurs’ formalizing their business is not encouraging. Although alleviation of the growth hurdles may assist in enhancing entrepreneurial competence, it does not necessarily favor formalization, but enables a lock-in contentment effect to the informal sector. Against this inertia, implications for policy makers are presented.

Informal sector entrepreneurship, individual entrepreneurial orientation and the emergence of entrepreneurial leadership

ABSTRACT The informal economy plays an integral role in addressing the socio-economic issues facing many nations around the world. Informal sector entrepreneurship activities contribute 10–20% of the GDP in developed economies and up to 60% in developing economies. In South Africa, the informal sector accounts for 15–17% of total employment and about 5.2% of the country’s GDP. Yet, very little attention is given to how informal sector entrepreneurship shapes individual entrepreneurial orientation and the emergence of entrepreneurial leadership, and vice versa. The lack of attention to the notions of individual entrepreneurial orientation and the emergence of entrepreneurial leadership from the informal sector is worrisome given that a significant number of now successful entrepreneurs in African contexts began their business operations within the informal sector. This article presents a multilevel analysis of the emergence of entrepreneurial leadership in the informal sector of South Africa. We draw from “rags to riches” inspirational accounts and social identity theory to develop an integrative framework on the emergence of entrepreneurial leadership in the informal sector. Short case studies of successful entrepreneurial leaders who emerged from the informal sector are presented for illustrative purposes. This paper aims to provide valuable insights into one of the understudied but rapidly growing entrepreneurial contexts, informal sector entrepreneurship, and how this context shapes individual entrepreneurial orientation and the emergence of entrepreneurial leadership. This exposes a previously hidden territory for new insights and further studies on how to advance entrepreneurship development research and praxis.

EVALUATING THEORIZATIONS OF INFORMAL SECTOR ENTREPRENEURSHIP: SOME LESSONS FROM ZAMFARA, NIGERIA

The aim of this paper is to evaluate critically four competing theories that variously explain informal sector entrepreneurship as a traditional activity that has not yet been incorporated into the modern system (modernization theory), a form of production integral to contemporary capitalism conducted by marginalized population groups as a survival strategy (structuralist theory), a voluntarily chosen endeavor and popular reaction to excessive regulation by the state (neo[Formula: see text]liberal theory) or a voluntarily chosen practice conducted for social, redistributive, political resistance or identity reasons (post-structuralist theory). Reporting the results of face[Formula: see text]to[Formula: see text]face interviews with 215 informal entrepreneurs in Zamfara, a tropical region in Nigeria, the finding is that no one theory is universally valid. Instead, each theory is valid in relation to different groups of entrepreneur and only by combining all of them can a finer-grained and more nuanced explanation of the complex and heterogeneous character of informal sector entrepreneurship be achieved.

Evaluating policy approaches for tackling informal entrepreneurship

Purpose When tackling the informal economy, an emergent literature has called for the conventional rational economic actor approach (which uses deterrents to ensure that the costs of undeclared work outweigh the benefits) to be replaced or complemented by a social actor approach which focusses upon improving tax morale. The purpose of this paper is to explore the effectiveness of these two policy approaches in reducing informal sector entrepreneurship. Design/methodology/approach To evaluate this, data are reported from a 2015 representative survey involving 1,384 face-to-face interviews with owners or managers of small businesses in three South-Eastern European countries, namely, Croatia, Bulgaria and FYR Macedonia. Findings The findings provide support for the “social actor” approach and display that small businesses have a greater propensity to perceive competitors as operating informally when the level of tax morale is lower. Meanwhile, no support for the deterrence measures of the “rational economic actor” model is reported. Research limitations/implications The major limitation of the study is that the paper is not able to display the reasons for the low level of tax morale and horizontal trust. Therefore, further in-depth qualitative research is necessary to explain whether and how the low levels of trust are determined by the failures of various formal institutions. Originality/value This is the first known study on small businesses which analyses simultaneously two distinct policy approaches that aim to reduce participation in informal entrepreneurship.

EVALUATING INSTITUTIONAL THEORIES OF INFORMAL SECTOR ENTREPRENEURSHIP: SOME LESSONS FROM ALBANIA

This paper evaluates three waves of institutional theory that have variously explained participation in informal sector entrepreneurship. The first wave of institutional theory explains informal entrepreneurship as resulting from formal institutional failures. This second wave of theory explains it as resulting from an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions. Finally, a third wave of theory as resulting from a lack of both vertical and horizontal trust has explained informal entrepreneurship. To evaluate these waves of institutional theory, this study reports evidence from a 2015 survey of businesses in Albania. This finds that 30 percent of turnover of Albanian businesses is under-reported and that this percentage is higher in smaller firms. In terms of the institutional failures that explain participation in informal entrepreneurship, the regression analysis reveals a strong association between annual under-reporting of turnover and the red tape involved in dealing with the tax administration and the frequent visits of tax inspectors. Moreover, it shows both vertical and horizontal trust are strongly associated with participation in informal entrepreneurship. The paper concludes by discussing the theoretical and policy implications.

AN INSTITUTIONAL THEORY OF INFORMAL ENTREPRENEURSHIP: SOME LESSONS FROM FYR MACEDONIA

In recent years, a new institutionalist theory has emerged to explain the prevalence of informal sector entrepreneurship. This argues that formal institutional failures lead to the emergence of an asymmetry between the formal rules (laws and regulations) and the norms, values and beliefs of entrepreneurs regarding the acceptability of participating in the informal sector, which in turn leads to the prevalence of informal entrepreneurship. The aim of this paper is to evaluate this social actor approach by reporting evidence from 453 face-to-face interviews with a nationally representative sample of entrepreneurs in FYR Macedonia. This reveals not only a significant association between participation in the informal economy and the non-alignment of entrepreneurs’ views with the formal rules, but specific formal institutional failings that are significantly associated with the acceptability of informal entrepreneurship, namely poor quality public services, a lack of tax fairness, corruption and instability in the formal institutions. The theoretical and policy implications are then discussed.

Explaining cross-country variations in the prevalence of informal sector competitors: lessons from the World Bank Enterprise Survey

To advance understanding of informal sector entrepreneurship, the aim of this paper is to evaluate and explain the cross-country variations in the prevalence of informal sector competitors. To do so, World Bank Enterprise Survey (WBES) data is reported from 142 countries. This reveals that 27% of formal enterprises view competition from the informal sector as a major constraint on their operations, although this varies from 72% of formal enterprises in Chad to no formal enterprises in El Salvador. To explain these cross-country variations, four competing theories are evaluated which variously view informal sector entrepreneurship and enterprise to be more prevalent when there is either: economic under-development (modernisation theory); high taxes and state over-interference (neo-liberal theory); too little state intervention (political economy theory), or an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). A multilevel probit regression analysis confirms the modernisation and institutional theories, but not the neo-liberal and political theories. Beyond economic under-development, therefore, it is not too much or too little state intervention that is associated with the prevalence of informal sector competition but rather, whether the laws and regulations developed by governments are in symmetry with the norms, values and beliefs of entrepreneurs. The paper concludes by discussing the theoretical and policy implications of these findings.

Evaluating competing theories of informal sector entrepreneurship

To advance understanding of the reasons for informal sector entrepreneurship, this article evaluates the determinants of cross-country variations in the extent to which enterprises are unregistered when they start operating. Reporting the World Bank Enterprise Survey data on 67,515 enterprises across 142 countries, the finding is that one in five (19.9%) of the formal enterprises surveyed started-up unregistered, although this varies from all enterprises surveyed in some countries (e.g. Pakistan) to 1% of surveyed enterprises in Slovakia. To explain these cross-country variations, four competing theories are evaluated which variously assert that nonregistration is determined by either: economic under-development and poorer quality governance (modernization theory); too much state interference (neoliberal theory); too little state intervention (political economy theory); or an incongruence between the laws and rules of formal institutions and the beliefs, values, and norms of informal institutions (institutional theory). A multilevel probit regression analysis confirms the modernization, political economy, and institutional theories but not neoliberal theory. Beyond economic under-development, therefore, nonregistration is associated with too little state intervention and the rules of formal institutions being incongruent with the socially shared beliefs of entrepreneurs. The article concludes by discussing the theoretical and policy implications of these findings.

EXPLAINING CROSS-NATIONAL VARIATIONS IN THE PREVALENCE OF INFORMAL SECTOR ENTREPRENEURSHIP: LESSONS FROM A SURVEY OF 142 COUNTRIES

The aim of this paper is to evaluate four competing theoretical perspectives that explain cross-national variations in the level of informal sector entrepreneurship. Scholarship has until now argued that informal entrepreneurship is a result of either: economic under-development and a lack of modernization of governance (modernization theory); high taxes and state over-interference (neo-liberal theory); inadequate state intervention to protect workers from poverty (political economy theory) or the asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). Reporting the World Bank Enterprise Survey (WBES) on the varying prevalence of informal entrepreneurship across 142 countries, the finding is that neo-liberal theory is refuted but the tenets of the modernization, political economy and institutional theories are confirmed. Informal entrepreneurship is found to be significantly higher when there is economic under-development, a lack of modernization of governance, inadequate state intervention to protect workers from poverty and greater asymmetry between the formal and informal institutions. The paper concludes by discussing the theoretical and policy implications of these findings.

China's Great Migration: How the Poor Built a Prosperous Nation by Bradley Gardner

Reviewed by: China's Great Migration: How the Poor Built a Prosperous Nation by Bradley Gardner C. Cindy Fan (bio) Bradley Gardner. China's Great Migration: How the Poor Built a Prosperous Nation. Oakland, CA: Independent Institute, 2017. xii, 219 pp. Hardcover $27.95, isbn 978-1-598-13222-9. This book champions migrants, especially migrants in China. While Gardner's statement that "The value of an open labor market is one of the truisms of economics" (p. 165) is not exactly provocative, his notion that "China has embraced an idiosyncratic pro-migrant development policy" (p. 8) may surprise many, given a mainstream understanding, especially in the West, that China uses the draconian hukou policy to restrict migration. Moreover, his goal to show how China's experiences can help "policymakers elsewhere to consider solutions to some of the problems associated with large-scale migration and capture the substantial economic benefits" might be met with more than a few jaws dropped. What can the rest of the world possibly learn from China, when it is widely assumed that migrants there live in plight, like those in Foxconn factories who committed suicide? Refuting myths and challenging assumptions happen to be Gardner's strong suit. In the Introduction of the book, he tells us that China's success in lifting its population out of poverty is due to the "Great Migration." By his account, between 1978 and 2012, more than 260 million economic migrants moved from China's countryside to its cities, surpassing the total number of international migrants worldwide. Drawing from the growth accounting literature, which he admits is marked by considerable disagreements, he reports that rural–urban migration alone added US$1.1 billion to the Chinese economy over the twenty years between 1990 and 2010. The eight chapters that follow elaborate the case why migration should be embraced as a tool of development policy not only in China but in other parts of the world as well. Chapter 1, titled "Leaving the Countryside," is about how the Great Migration started. It details the early years of the Chinese Communist regime, focusing on land reforms, and the subsequent transition from an agricultural economy to an industrial economy, which also lowered barriers to migration. Gardner's narrative about historical changes is straightforward yet lively, filled with real-life stories. His explanation of hukou is among the best in the literature, due to its simplicity and its emphasis on what hukou means to real people. How the Chinese government adapted to the Great Migration is the subject of chapter 2, "Coming to the City." Here, Gardner highlights major changes that accelerated China's urban development, including the collapse of state-owned enterprises (SOEs), the 1994 fiscal reform, and increased liberalization of the labor market. He also shows convincingly the connections among conditions that explain the labor-heavy path of development, that is, China is capital poor, its intellectual property regulations are weak, but it [End Page 261] has plenty of flexible labor that could be mobilized to scale up production quickly. One of the two chapters on a specific city, chapter 3, is about the miracle story of how Wenzhou transformed itself from one of the poorest cities in China to where privatization first began and where millionaires were bred. The chapter tells an interesting story of how the Wenzhou people found a way out of poverty via informal-sector entrepreneurship in niches with low barriers to entry, high-volume demand, and extremely low margins. While Gardner attributes Wenzhou's success to migrants from the countryside and gives credit to diaspora and the local government's hands-off attitude, he also warns that Wenzhou needs to reinvent itself in order to remain successful. Chapter 4, titled "The Returns on the Great Migration," is concerned with the question "To what degree has the Great Migration been responsible for China's growth" (p. 70). Gardner estimates that by improving agricultural productivity and labor reallocation, migration has contributed 33 percent to China's gross domestic product growth. In addition, migration has advanced urbanization and labor market reforms, contributing to growth in industrial productivity, human capital, and capital investment. However, he also cautions that as China's...

Starting-up unregistered and firm performance in Turkey

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.

The influence of informal institutions on informal sector entrepreneurship: a study of Nigeria's hand-woven textile industry

This paper draws on the institutional theory framework to explore the prevalence of entrepreneurship in the informal economy in Nigeria. An interpretive approach was taken in analyzing open-ended interview data collected from 26 entrepreneurs in the hand-woven textile industry in the southwestern region of Nigeria. Our findings show that beyond regulatory burden or survivalist economic necessity, the enterprise culture in the Nigerian informal economy is determined by value-driven criteria of sociocultural and normative environment that constitute part of the cognitive process of entrepreneurial emergence in a typical institutional context.

Informal sector entrepreneurship for women in China and India: building networks, gaining recognition, and obtaining support

This paper focuses on informal sector entrepreneurship in China and India, and the challenges of developing and sustaining entrepreneurship programs in a sector not often recognized or supported by policymakers. I summarize potential benefits and barriers to organizing the informal sector. Next is a discussion of possible pathways to local/national organizing, examples of organizing strategies, barriers, and outcomes in both countries, and models of transnational networking. Here I review best practices from two organizations in India (the Self-Employed Women's Association and the Scrap Collectors Union) and two organizations in China (the Xi'an Domestic Workers Union and the Chinese Working Women Network). Although a small sample, the case studies illustrate the diversity inherent to organizational form, strategies for local and transnational networking, and pathway to benefit provision. To conclude, I discuss lessons learned, and suggest additional strategies for informal entrepreneurs to gain visibility and recognition.

Theorising Entrepreneurship in the Informal Sector in Urban Brazil: A Product of Exit or Exclusion?

This article evaluates critically the competing explanations for informal sector entrepreneurship that read such endeavours to result from either ‘exclusion’ from state benefits and the circuits of the modern economy or the voluntary ‘exit’ of workers from formal institutions. Reporting evidence from a 2003 survey in urban Brazil, it is revealed that similar proportions of informal sector entrepreneurs explain their participation to result from their involuntary exclusion and voluntary exit from the formal economy. The outcome is a call to shift from an either/or to a both/and approach when explaining informal sector entrepreneurship and for wider research on the relative weightings given to exit and exclusion in different contexts so as to develop a socio-spatially contingent explanation for participation in informal sector entrepreneurship across the globe.