To advance understanding of the entrepreneurship process in developing economies, this article evaluates whether registered enterprises that initially avoid the cost of registration, and focus their resources on overcoming other liabilities of newness, lay a stronger foundation for subsequent growth. Analyzing World Bank Enterprise Survey data across 127 countries, and controlling for other firm performance determinants, registered enterprises that started up unregistered and spent longer operating unregistered are revealed to have significantly higher subsequent annual sales, employment, and productivity growth rates compared with those that registered from the outset. The theoretical and policy implications are then discussed.
Get full access to this article
View all access options for this article.
References
1.
AcemogluD. & RobinsonJ. (2012). Why nations fail: The origins of power. New York: Crown Publishers.
2.
AcsZ., DesaiS., StenholmP., & WuebkerR. (2013). Institutions and the rate of formal and informal entrepreneurship across countries. Frontiers of Entrepreneurship Research, 35(15), 1–24.
3.
AllinghamM. & SandmoA. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(2), 323–338.
4.
AmaralP.S. & QuintinE. (2006). A competitive model of the informal sector. Journal of Monetary Economics, 53, 1541–1553.
5.
AutioE. & FuK. (2015). Economic and political institutions and entry into formal and informal entrepreneurship. Asia Pacific Journal of Management, 32(1), 67–94.
6.
BaghdasaryanD. & la CourL. (2013). Competition, ownership and productivity: A panel analysis of Czech firms. Journal of Economics and Business, 69, 86–100.
7.
BarberaF. & MooresK. (2013). Firm ownership and productivity: A study of family and non–family SMEs. Small Business Economics, 40, 953–976.
8.
BarronD.N., WestE., & HannanM.T. (1994). A time to grow and a time to die: Growth and mortality of credit unions in New York City, 1914–1990. American Journal of Sociology, 100(2), 381–421.
BenjaminN.C. & MbayeA. (2012). The informal sector, productivity, and enforcement in West Africa: A firm–level analysis. Review of Development Economics, 16(4), 472–492.
11.
BitektineA. (2011). Toward a theory of social judgments of organizations: The case of legitimacy, reputations, and status. Academy of Management Review, 36(1), 151–179.
12.
BlackS.E. & LynchL.M. (1996). Human–capital investments and productivity. The American Economic Review, 25, 263–267.
13.
BraithwaiteV. (2009). Defiance in taxation and governance: Resisting and dismissing authority in a democracy. Cheltenham, UK: Edward Elgar.
14.
BraithwaiteV. & ReinhartM. (2000). The taxpayers’ charter: Does the Australian tax office comply and who benefits. Centre for Tax System Integrity Working Paper no.1. Canberra: Australian National University.
15.
CebollaH. (2013). Introducción al análisis multinivel, Vol. 49. Madrid: Centro de Investigaciones Sociológicas.
16.
ChoiY.R. & ShepherdD.A. (2005). Stakeholder perceptions of age and other dimensions of newness. Journal of Management, 31(4), 573–596.
17.
CollinsL.M., SchaferJ.L., & KamC.M. (2001). A comparison of inclusive and restrictive strategies in modern missing data procedures. Psychological Methods, 6(4), 330–351.
18.
DauL.A. & Cuervo–CazurraA. (2014). To formalize or not to formalize: Entrepreneurship and pro–market institutions. Journal of Business Venturing, 29, 668–686.
19.
De CastroJ.O., KhavulS., & BrutonG.D. (2014). Shades of grey: How do informal firms navigate between macro and meso institutional environments?Strategic Entrepreneurship Journal, 8, 75–94.
20.
DelmarF. & ShaneS. (2004). Legitimating first: Organizing activities and the survival of new ventures. Journal of Business Venturing, 19(3), 385–410.
21.
De MelS., McKenzieD., & WoodruffC. (2012). The demand for, and consequences of formalization among informal firms in Sri Lanka. Policy Research Working Paper 5991. Washington DC: World Bank.
22.
DemenetA., RazafindrakotoM., & RoubaudF. (2015). Do informal businesses gain from registration and how? Panel data evidence from Vietnam. World Development, 84, 326–341. doi: 10.1016/j.worlddev.2015.09.002.
De SotoH. (1989). The other path: The economic answer to terrorism. London: Harper and Row.
25.
DevasN. & KellyR. (2001). Regulation or revenue? An analysis of local business licenses, with a case study of the single business permit reform in Kenya. Public Administration and Development, 21, 381–191.
26.
DobrevS. & GotsopoulosA. (2010). Legitimacy vacuum, structural imprinting, and first mover disadvantage. Academy of Management Journal, 53, 1153–1174.
27.
FajnzylberP., MaloneyW.F., & Montes RojasG.V. (2009). Releasing constraints to growth or pushing on a string? Policies and performance of Mexican micro–firms. Journal of Development Studies, 45, 1027–1047.
28.
FajnzylberP., MaloneyW.F., & Montes RojasG.V. (2011). Does formality improve micro–firm performance? Quasi–exeprimental evidence from the Brazilian simples program. Journal of Development Economics, 94(2), 262–276.
29.
FarrellD. (2004). The hidden dangers of informal economy. McKinsey Quarterly, 3, 27–37.
30.
Garcia–BolivarO. (2006). Informal economy: Is it a problem, a solution or both? The perspective of the informal business. Berkeley, CA: Bepress Legal Series.
31.
GeertzC. (1963). Old societies and new states: The quest for modernity in Asia and Africa. Glencoe, Il: Free Press.
32.
GennaioloN., La PortaR., Lopez–de–SilanesF., & ShleiferA. (2013). Human capital and regional development. Quarterly Journal of Economics, 128(1), 105–164.
33.
GilbertA. (1998). The Latin American city. London: Latin American Bureau.
34.
GodfreyP.C. (2011). Towards a theory of the informal economy. Academy of Management Annals, 5, 231–277.
35.
GodfreyP.C. (2015). Introduction: Why the informal economy matters to management. In GodfreyP.C. (Ed.) Management, society, and the informal economy (pp. 1–20). London: Routledge.
36.
HelmkeG. & LevitskyS. (2004). Informal institutions and comparative politics: A research agenda. Perspectives on Politics, 2(4), 725–740.
37.
HendersonA.D. (1999). Firm strategy and age dependence: A contingent view of the liabilities of newness, adolescence and obsolescence. Administrative Science Quarterly, 44(2), 281–314.
38.
HsiehC.–T. & OlkenB. (2014). The missing “missing middle.” Journal of Economic Perspectives, 28(3), 89–108.
JaramilloM. (2009). Is there demand for formality among informal firms? Evidence from microfirms in downtown lima. German Development Institute Discussion Paper 12/2009. Bonn: German Development Institute.
43.
JobJ., StoutA., & SmithR. (2007). Culture change in three taxation administrations: From command and control to responsive regulation. Law and Policy, 29(1), 84–101.
44.
JüttingJ. & LaiglesiaJ. (2009). Employment, poverty reduction and development: What's new? In JüttingJ. and LaiglesiaJ. (Eds.), Is informal normal? Towards more and better jobs in developing countries (pp. 129–152). Paris: OECD.
45.
KetchenD.J., IrelandR.D., & WebbJ.W. (2014). Towards a research agenda for the informal economy: A survey of the Strategic Entrepreneurship Journal's editorial board. Strategic Entrepreneurship Journal, 8, 95–100.
46.
KirchlerE., HoelzlE., & WahlI. (2008). Enforced versus voluntary tax compliance: The “slippery slope” framework. Journal of Economic Psychology, 29, 210–225.
47.
KistruckG.M., WebbJ.W., SutterC.J., & BaileyA.V.G. (2015). The double–edged sword of legitimacy in base–of–the–pyramid markets. Journal of Business Venturing, 30(3), 436–451.
48.
KistruckG.M., WebbJ.W., SutterC.J., & IrelandR.D. (2011). Microfranchising in base–of–the–pyramid markets: Institutional challenges and adaptations to the franchise model. Entrepreneurship Theory and Practice, 35, 503–531.
49.
KlapperL., AmitR., GuillenM.F., & QuesdadaJ.–M. (2007). Entrepreneurship and firm formation across countries. Policy Research Working Paper series 4313. Washington DC: World Bank.
50.
KoglerC., MuelbacherS., & KirchlerE. (2015). Testing the “slpppery slope framework” among self–employed taxpayers. Economics of Governance, 16(2), 125–142. doi: 10.1007/s10101-015-0158-9
51.
La PortaR. & ShleiferA. (2008). The unofficial economy and economic development. Brookings Papers on Economic Activity, 47(1), 123–135.
52.
La PortaR. & ShleiferA. (2014). Informality and development. Journal of Economic Perspectives, 28(3), 109–126.
53.
Le MensG., HannanM.T., & PólosL. (2011). Founding conditions, learning, and organizational life changes: Age dependence revisited. Administrative Science Quarterly, 56, 95–126.
54.
LevitskyS. & MurilloM.V. (2009). Variation in institutional strength. Annual Review of Political Science, 12(1), 115–133.
55.
LewisA. (1959). The theory of economic growth. London: Allen and Unwin.
56.
LondonT., EsperH., Grogan–KaylorA., & KistruckG.M. (2014). Connceting poverty to purchase in informal markets. Strategic Entrepreneurship Journal, 8, 37–55.
57.
LyonF. (2000). Trust, networks and norms: The creation of social capital in agricultural economies in Ghana. World Development, 28(4), 663–681.
58.
MairJ., MartiI., & VentrescaM. (2012). Building inclusive markets in rural Bangladesh: How intermediaries work institutional voids. Academy of Management Journal, 55, 819–850.
59.
MaloneyW.F. (2004). Informality revisited. World Development, 32(7), 1159–1178.
60.
MansuryM.A. & LoveJ.H. (2008). Innovation, productivity and growth in US business services: A firm–level analysis. Technovation, 28(1–2), 52–62.
61.
MarcoullierD. & YoungL. (1995). The black hole of graft: The predatory state and the informal economy. American Economic Review, 85(3), 630–646.
62.
MathiasB.D., LuxS., CrookT.R., AutryC., & ZaretzkiR. (2014). Competing against the unknown: The impact of enabling and constraining institutions on the informal economy. Journal of Business Ethics, 127(2), 251–264.
63.
McCullochN., SchulzeG., & VossJ. (2010). What determines firms’ decisions to formalize? Discussion Paper Series, No. 13. Frieburg: University of Frieburg Department of International Economic Policy.
64.
McKenzieD. & SakhoY.S. (2010). Does it pay firms to register for taxes? The impact of formality on firm profitability. Journal of Development Economics, 91(1), 15–24.
65.
McKenzieD. & WoodruffC. (2006). Do entry costs provide an empirical basis for poverty traps? Evidence from microenterprises. Economic Development and Cultural Change, 55(1), 3–42.
66.
MoockP., MusgroveP., & StelcnerM. (1990). Education and earnings in Peru's informal nonfarm family enterprises. LSMS Working Paper No.64. Washington, DC: World Bank.
67.
MuehlbacherS., KirchlerE., & SchwarzenbergerH. (2011). Voluntary versus enforced tax compliance: Empirical evidence for the “slippery slope” framework. European Journal of Law and Economics, 32(1), 89–97.
68.
MurphyK. (2005). Regulating more effectively: The relationship between procedural justice, legitimacy and tax non–compliance. Journal of Law and Society, 32(4), 562–589.
69.
NabarM. & YanK. (2013). Sector–level productivity, structural change and rebalancing in China. IMF Working Paper No. 240. Washington, DC: IMF.
70.
NorthD.C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.
71.
NwabuzorA. (2005). Corruption and development: New initiatives in economic openness and strengthened rule of law. Journal of Business Ethics, 59(1/2), 121–138.
72.
PalmadeV. (2005). Rising informality. Viewpoint Series note 298. Washington, DC: Private Sector Development, World Bank.
73.
PalmerR. (2007). Skills development, the enabling environment and informal micro–enterprise in Ghana. Edinburgh: University of Edinburgh.
74.
PerryG.E., MaloneyW.F., AriasO.S., FajnzylberR., MasonA.D., & Saavedra–ChanduviJ. (2007). Informality: Exit and exclusion. Washington, DC: World Bank.
75.
QianJ.U.N. & StrahanP.E. (2007). How laws and institutions shape financial contracts: The case of bank loans. Journal of Finance, 62, 2803–2834.
76.
RandJ. & TormN. (2012). The benefits of formalization: Evidence from Vietnamese manufacturing. Small Business Economics, 29, 1–13.
77.
RichardsonM. & SawyerA. (2001). A taxonomy of the tax compliance literature: Further findings, problems and prospects. Australian Tax Forum, 16(2), 137–320.
78.
Rivera–SantosM. & RufinC. (2010). Global village vs. small town: Understanding networks at the base of the pyramid. International Business Review, 19(2), 126–139.
79.
RubinD. (1987). Multiple imputation for nonresponse in surveys. New York: Wiley.
80.
SaeedA. & ShahA. (2011). Enhancing tax morale with marketing tactics: A review of the literature. African Journal of Business Management, 5, 13,659–13,665.
81.
SanderC. (2003). Less is more: Better compliance and increased revenues by streamlining business registration in Uganda: A contribution to WDR 2005 on investment climate, growth and poverty. London: Department for International Development.
82.
SchaferJ. & GrahamJ. (2002). Missing data: Our view of the state of the art. Psychological Methods, 7(2), 1–47.
83.
SchneiderF. & WilliamsC.C. (2013). The shadow economy. London: Institute of Economic Affairs.
84.
ScottC.R. & HaskeiM. (2015). Communication, visibility, and the informal economy: A framework for future research. In GodfreyP.C. (Ed.), Management, society, and the informal economy (pp. 42–59). London, Routledge.
85.
ScottW.R. (2008). Institutions and organizations: Ideas and interests. London: Sage.
86.
SineW.D. & DavidR.J. (2010). Institutions and entrepreneurship. In SineW.D. & DavidR.J. (Eds.) Institutions and entrepreneurship: Research in the sociology of work (pp. 1–26). Bingley, UK: Emerald.
87.
SiqueiraA.C.O., WebbJ.W., & BrutonG.D. (2016). Informal entrepreneurship and industry conditions. Entrepreneurship Theory and Practice, 40(1), 177–200.
88.
SkousenB.R. & MahoneyJ.T. (2015). Factors influencing the registration decision in the informal economy. In GodfreyP.C. (Ed.) Management, society, and the informal economy (pp. 95–112). London: Routledge.
89.
SnijdersT.A.B. & BoskerR.J. (2012). Multilevel analysis: An introduction to basic and advanced multilevel modeling. London: Sage.
90.
StinchcombeA.L. (1965). Social structure and organizations. In MarchJ.G. (Ed.), Handbook of organizations (pp.142–193). Chicago, IL: Rand McNally.
91.
SuchmanM.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610.
92.
ThaiM.T.T. & TurkinaE. (2014). Macro–level determinants of formal entrepreneurship versus informal entrepreneurship. Journal of Business Venturing, 29(4), 490–510.
93.
ThomasA.S. & MuellerS.I. (2000). A case for comparative entrepreneurship: Assessing the relevance of culture. Journal of International Business Studies, 31(2), 287–301.
94.
TonoyanV., StrohmeyerR., HabibM., & PerlitzM. (2010). Corruption and entrepreneurship: How formal and informal institutions shape small firm behaviour in transition and mature market economies. Entrepreneurship Theory and Practice, 34(5), 803–831.
95.
Van der SluisJ., Van PraagM., & VijverbergW. (2005). Entrepreneurship selection and performance: A meta–analysis of the impact of education in developing economies. The World Bank Economic Review, 19(2), 225–261.
96.
VijverbergW. (1995). Returns to schooling in non–farm self–employment: An econometric case study of Ghana. World Development, 23(7), 1215–1227.
97.
WahlI., KastlungerB., & KirchlerE. (2010). Trust in authorities and power to enforce tax compliance: An empirical analysis of the “slippery slope framework.” Law and Policy, 32, 383–406.
98.
WebbJ.W., BrutonG.D., TihanyiL., & IrelandR.D. (2013). Research on entrepreneurship in the informal economy: Framing a research agenda. Journal of Business Venturing, 28, 598–614.
99.
WebbJ.W. & IrelandR.D. (2015). Laying the foundation for a theory of informal adjustments. In GodfreyP.C. (Ed.) Management, society, and the informal economy (pp. 21–41). London: Routledge.
100.
WebbJ.W., IrelandR.D., & KetchenD.J. (2014). Towards a greater understanding of entrepreneurship and strategy in the informal economy. Strategic Entrepreneurship Journal, 8(1), 1–15.
101.
WebbJ.W., KistruckG.M., IrelandR.D., & KetchenD.J. (2010). The entrepreneurial process in bottom of the pyramid markets: The case of multinational corporation/nongovernment organization alliances. Entrepreneurship Theory and Practice, 43(3), 555–581.
102.
WebbJ.W., TihanyiL., IrelandR.D., & SirmonD.G. (2009). You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492–510.
103.
WelterF., SmallboneD., & PobolA. (2015). Entrepreneurial activity in the informal economy: A missing piece of the jigsaw puzzle. Entrepreneurship and Regional Development, 27(5–6), 292–306.
104.
WenzelM. (2004). An analysis of norm processes in tax compliance. Journal of Economic Psychology, 25(2), 213–228.
105.
WiklundJ., BakerT., & ShepherdD. (2010). The age–effect of financial indicators as buffers against the liability of newness. Journal of Business Venturing, 25(4), 423–437.
106.
WilliamsC.C. & Martinez–PerezA. (2014). Entrepreneurship in the informal economy: A product of too much or too little state intervention?International Journal of Entrepreneurship and Innovation, 15(4), 227–237.
107.
WilliamsC.C. & ShahidM. (2016). Informal entrepreneurship and institutional theory: Explaining the varying degrees of (in)formalisation of entrepreneurs in Pakistan. Entrepreneurship and Regional Development, 28(1–2), 1–25.
108.
WilliamsC.C., ShahidM.S., & MartinezA. (2016). Determinants of the level of informality of informal micro–enterprises: Some evidence from the city of Lahore, Pakistan. World Development, 84, 312–325. doi: 10.1016/j.worlddev.2015.09.003
109.
WilliamsN. & VorleyT. (2015). Institutional asymmetry: How formal and informal institutions affect entrepreneurship in Bulgaria. International Small Business Journal, 33(8), 840–861.
110.
Wunsch–VincentS., de BeerJ., & FuK. (2015). What we know and do not know about innovation in the informal economy. In Kraemer–MbulaE. & Wunsch–VincentS. (Eds.), The informal economy in developing nations: Hidden engine of innovation? New economic insights and policies (pp. 142–160). Cambridge: Cambridge University Press.
111.
ZimmermanM.A. & ZeitzG.J. (2002). Beyond survival: Achieving new venture growth by building legitimacy. Academy of Management Review, 27(3), 414–431.
