AbstractResearch SummaryWe analyze the impact of informal entrepreneurship on innovation in emerging markets. Building on agency and imprinting theories, we introduce the concept of informality costs, that is, the higher agency costs from adverse selection and moral hazard problems caused by a firm's informal creation. These informality costs become imprinted and affect internal agency relationships among employees and managers and external agency relationships with suppliers and distributors, constraining the firms' incentives and ability to innovate even after formalization. As a result, informally created firms engage more in imitative and less in innovative new product development. We further propose that changes in ownership and the innovation environment alter the persistence of informality costs. Specifically, foreign firm and business group ownership reduces the persistence of informality costs and results in more innovativeness, while state ownership heightens informality costs and leads to less innovativeness. Moreover, improvements in national innovation systems decrease informality costs, strengthening the innovativeness of informally created firms.Managerial SummaryWe study how the informal creation of new ventures in emerging economies affects their innovation after they become formal firms. We propose that informally created new ventures suffer from informality costs established as a result of being informal at the beginning of their lives that reduce their incentives and ability to innovate. As a result, these firms tend to introduce new products that are imitative rather than innovative. We also propose that changes in the firm's ownership and in the national innovation system alter the persistence of informality costs and their impact on innovation. First, informally created new ventures acquired by foreign firms or private business groups have reduced informality costs and innovate more, while those acquired by the state have enhanced informality costs and imitate more. Second, national innovation system improvements reduce informality costs and support innovativeness.