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Informality and Development
In developing countries, informal firms account for up to half of economic activity. They provide livelihood for billions of people. Yet their role in economic development remains controversial with some viewing informality as pent-up potential and others viewing informality as a parasitic organizational form that hinders economic growth. In this paper, we assess these perspectives. We argue that the evidence is most consistent with dual models, in which informality arises out of poverty and the informal and formal sectors are very different. It seems that informal firms have low productivity and produce low-quality products; and, consequently, they do not pose a threat to the formal firms. Economic growth comes from the formal sector, that is, from firms run by educated entrepreneurs and exhibiting much higher levels of productivity. The expansion of the formal sector leads to the decline of the informal sector in relative and eventually absolute terms. A few informal firms convert to formality, but more generally they disappear because they cannot compete with the much more-productive formal firms.
Journal Article
Informal entrepreneurship and cross-border trade between Zimbabwe and South Africa
Zimbabwe has witnessed the rapid expansion of informal cross-border trading (ICBT) with neighboring countries over the past two decades. Beginning in the mid-1990s when the country embarked on its Economic Structural Adjustment Programme (ESAP), a large number of people were forced into informal employment through worsening economic conditions and the decline in formal sector jobs.
Book
Wages and Informality in Developing Countries
We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.
Journal Article
Enforcing higher labor standards within developing country value chains
The 2013 collapse of the Rana Plaza building in Dhaka, Bangladesh, led external stakeholders to insist on higher labor standards in apparel global value chains (GVCs). Stakeholders now expect MNEs to take ‘full-chain’ responsibility. However, the increased monitoring and enforcement costs of a large network of suppliers have been non-trivial. MNEs instead implement a ‘cascading compliance’ approach, coupled with a partial re-internalization. Elevated costs are further exacerbated in developing countries where the informal and formal sectors are linked, and cost competitiveness greatly depends on this duality. Monitoring actors in the informal sector is difficult, and few informal actors can achieve compliance. GVCs have therefore reduced informal sector engagement by excluding non-compliant actors and investing in greater automation. By seeking to strictly enforce compliance, MNEs are attenuating some of the positive effects of MNE investment, particularly the prospects for employment creation (especially among women), and enterprise growth in the informal sector. I discuss how these observations might inform other cross-disciplinary work in development, ethics, and sociology. Finally, I note implications for IB theory from the disparities between the ownership, control, and responsibility boundaries of the firm.
Journal Article
Impact of informal institutions on the prevalence, strategy, and performance of family firms: A meta-analysis
Family-controlled firms (FCFs)’ prevalence, strategies, and performance differ across countries. We explain these differences through the lens of informal institutions, suggesting that different countries have different levels of appreciation for family business. To capture this effect, we introduce the construct of family business legitimacy (FBL) and an associated index (FBLI). We empirically measure FBLI scores for 83 countries spanning both developed and emerging economies. By combining meta-analytic and archival data, we show that FCFs prevail, follow unique strategies, and outperform non-FCFs in countries with high FBLI scores. As a new contingency variable, FBL advances the literature on the informal institutional embeddedness of organizations and family business.
Journal Article
Measuring the global shadow economy : the prevalence of informal work and labour
\"This book brings together two leading researchers in the field to provide a comprehensive overview of the shadow economy from a global perspective. Reviewing the advantages and disadvantages of different ways of measuring the informal sector, the authors evaluate its size and key determinants across the world. Williams and Schneider clearly establish the persistence and prevalence of the shadow economy, analysing the narrowness of existing policy approaches and explaining how these fail to address the key factors for its existence and may even exacerbate the problem. Proposing an alternative way forward, the authors argue that little headway will ever be made in reducing the shadow economy until there are changes not only to the character of formal institutions but also informal institutions (the values, beliefs and norms of citizens) through the introduction of macro-level structural changes. This timely, cutting-edge review of the global shadow economy and how it can be measured and tackled is an invaluable resource for postgraduate students, researchers and policy-makers, particularly those with a interest in tax evasion and informal labour.\"--Page 4 of cover.
Book
Informal institutions and the international strategy of MNEs: Effects of institutional effectiveness, convergence, and distance
Informal institutions influence all aspects of international business (IB), but they have received limited attention in the literature relative to formal institutions. This article extends prior IB work by examining the relationships between several key formal and informal institutional factors and the international strategy of MNEs. First, it examines the direct effects of formal and informal institutional effectiveness, convergence, and distance on MNE local adaptation, developing arguments and propositions for each relationship. Second, it focuses on the interactions of formal and informal institutional effectiveness and convergence to develop an eight-fold typology of market institutional configurations. This typology depicts the role that informal institutions take in a market depending on the interaction of these three institutional factors. Third, it builds on these interactions and the concept of institutional distance to develop a conceptual framework of market and MNE institutional diversity and dynamism. This framework captures the formal and informal institutional relationships within a home market, host market, parent firm, and foreign subsidiary, as well as the formal and informal institutional relationships across each of these entities over time. In so doing, this article helps advance research on informal institutions and IB, which can lead to considerable future work on the topic.
Journal Article