Why do Informal Sector Competitors Hinder Formal Entrepreneurs More in Some Countries?

Colin C Williams


Objective: The objective of this paper is to evaluate the different explanations provided by competing theories for informal sector competitors being viewed as hindering formal entrepreneurs more in some countries than others.

Theoretical background: These theories variously explain such cross-country variations as determined by: economic under-development (modernization theory); government over-interference and high taxes (neo-liberal theory); too little government intervention (political economy theory), or the asymmetry between the laws and regulations of formal institutions and entrepreneurs’ views on the acceptability of participating in the informal economy (institutional theory).

Methods: To evaluate these theories, the chosen method focus on World Bank Enterprise Survey data on 31 Latin American and Caribbean countries using binary probit regression analysis.

Main results: The findings show significant cross-country differences, ranging from 58.1 per cent of entrepreneurs viewing informal sector competition as a major constraint in Bolivia to 11.1 percent in Dominica. The binary probit regression analysis confirms the modernization and institutional theories, only partially confirms political economy theory, but refutes neo-liberal theory.

Theoretical contribution: The paper concludes by discussing the implications for theory and the policy initiatives required to reduce informal sector competition.


Entrepreneurship; Informal economy; Economic development; Development economics; Latin America and the Caribbean

Texto completo:

PDF PDF (English)


Acs, Z., Desai, S., Stenholm, P., & Wuebker, R. (2013). Institutions and the rate of formal and informal entrepreneurship across countries. Frontiers of Entrepreneurship Research, 33(15), 1-15.

Adom, K., & Williams, C.C. (2014). Evaluating the explanations for the informal economy in third world cities: some evidence from Koforidua in the eastern region of Ghana. International Entrepreneurship and Management Journal, 10(2), 427-445.

Afreh, B, Rodgers, P., Vershinina, N., & Williams, C.C. (2019). Varieties of Context and Informal Entrepreneurship: the mundane and lively entrepreneurial practice among migrant youths in rural Ghana. International Journal of Entrepreneurial Behaviour and Research, 25(5), 996-1013. https://doi.org/10.1108/IJEBR-02-2018-0109

Aliyev, H. (2015). Post-Soviet informality: towards theory-building. International Journal of Sociology and Social Policy, 35(3-4), 182-198.

Allingham, M., & Sandmo, A. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics, 1(3-4), 323-38.

Autio, E., & Fu, K. (2015). Economic and political institutions and entry into formal and informal entrepreneurship. Asia-Pacific Journal of Management, 32(1), 67–94.

Baumol, W.J., & Blinder, A.S. (2008). Macroeconomics: principles and policy. Cincinnati, OH: South-Western Publishing.

Castells, M., & Portes, A. (1989). World underneath: the origins, dynamics and effects of the in-formal economy. In A. Portes, M. Castells, & L.A. Benton (Eds.) The Informal Economy: studies in advanced and less developing countries (pp. 1-19). Baltimore, John Hopkins University Press.

Coletto, D., & Bisschop, L. (2017). Waste pickers in the informal economy of the Global South: included or excluded? International Journal of Sociology and Social Policy, 37(5/6), 280-294.

Dana, L-P. (2001). A US entrepreneur in Moscow. Entrepreneurship & Innovation, 2(1), 51–58.

Dana, L-P. (2010). When Economies Change Hands: A Survey of Entrepreneurship in the Emerging Markets of Europe from the Balkans to the Baltic States. Oxford: Routledge.

Dana, L-P. (2013). Informal economy, entrepreneurship and policy implications. In M.T.T. Thai, & Turkina, E. (Eds.). Entrepreneurship in the Informal Economy: Models, Approaches and Prospects for Economic Development (pp. 260-268). London: Routledge.

Dau, L.A., & Cuervo-Cazurra, A. (2014). To formalize or not to formalize: entrepreneurship and pro-market institutions. Journal of Business Venturing, 29(5), 668-686.

Davis, M. (2006). Planet of Slums. London: Verso.

De Castro, J.O., Khavul, S., & Bruton, G.D. (2014). Shades of grey: how do informal firms navigate between macro and meso institutional environments? Strategic Entrepreneurship Journal, 8(1), 75-94.

De Soto, H. (1989). The Other Path: the economic answer to terrorism. London, Harper and Row.

De Soto, H. (2001). The Mystery of Capital: why capitalism triumphs in the West and fails everywhere else. London, Black Swan.

Denzau, A.T. & North, D. (1994). Shared mental models: ideologies and institutions. Kyklos, 47(1), 3-31.

Dibben, P., & Williams, C.C. (2012). Varieties of capitalism and employment relations: informally dominated market economies. Industrial Relations: a Review of Economy & Society, 51(S1), 563-582.

Dibben, P., Wood, G., & Williams, C.C. (2015). Towards and against formalization: regulation and change in informal work in Mozambique. International Labour Review, 154(3), 373-392.

Ferreira, J.M., Fernandes, C.I., & Kraus, S. (2019). Entrepreneurship research: mapping intellectual structures and research trends. Review of Management Science, 13(1), 181–205.

Galiani, S., & Weinschelbaum, F. (2012). Modeling informality formally: households and firms. Economic Inquiry, 50(3), 821–838.

Geertz, C. (1963). Old Societies and New States: The quest for modernity in Asia and Africa. New York, NY: Free Press of Glencoe.

Gilbert, A. (1998). The Latin American City. London: Latin American Bureau.

Godfrey, P.C. (2011). Toward a theory of the informal economy. Academy of Management Annals, 5(1), 231-277.

Godfrey, P.C. (2015). Introduction: why the informal economy matters to management. In P.C. Godfrey (Ed.). Management, Society, and the Informal Economy (pp. 1-20). London: Routledge.

Godfrey, P.C. & Dyer, G. (2015). Subsistence entrepreneurs and formal institutions: semi-formal governance among Ghanaian entrepreneurs. In P.C. Godfrey (Ed.). Management, Society, and the Informal Economy (pp. 142-160). London: Routledge.

Helmke, G., & Levitsky, S. (2004). Informal institutions and comparative politics: a research agenda. Perspectives on Politics, 2(6), 725-740.

Hodosi, A. (2015). Perceptions of irregular immigrants’ participation in undeclared work in the United Kingdom from a social trust perspective. International Journal of Sociology and Social Policy, 35(5/6), 375-389.

Horodnic, I. (2018). Tax morale and institutional theory: a systematic review. International Journal of Sociology and Social Policy, 38(9/10), 868–886.

Horodnic, I., & Williams, C.C. (2016). An evaluation of the shadow economy in Baltic States: a tax morale perspective. International Journal of Entrepreneurship and Small Business, 28(2/3), 339-358.

Horodnic, I., & Williams, C.C. (2019). Evaluating policy approaches for tackling informal entrepreneurship. Journal of Small Business and Enterprise Development, 26(4), 595–611.

Horodnic, I., & Williams, C.C. (2020). Tackling undeclared work in the European Union: beyond the rational economic actor approach. Policy Studies, https://doi.org/10.1080/01442872.2019.1649384

ILO (2011). Statistical update on employment in the informal economy. Geneva: International Labour Organisation.

ILO (2012). Statistical update on employment in the informal economy. Geneva: International Labour Organisation.

Johnson, J.E.V., & Powell, P.L. (1994). Decision making, risk and gender: are managers different? British Journal of Management, 5(2), 123–138.

Khan, E.A., & Quaddus, M. (2015). Examining the influence of business environment on socioeconomic performance of informal microenterprises: content analysis and partial least square approach. International Journal of Sociology and Social Policy, 35(3/4), 273-288.

Kanbur, R. (2015). Informality: causes, consequences and policy responses. London: Discussion paper No. 10509, Centre for Economic Policy Research (CEPR).

Kirchgässner, G. (2010). Tax Morale, Tax Evasion and the Shadow Economy. St Gallen: Discussion Paper no 2010-17, Department of Economics, University of St. Gallen, St. Gallen, Switzerland.

Kistruck, G.M., Webb, J.W., Sutter, C.J., & Bailey, A.V.G. (2015). The double-edged sword of legitimacy in base-of-the-pyramid markets. Journal of Business Venturing, 30(3), 436-451.

La Porta, R., & Shleifer, A. (2008). The Unofficial Economy and Economic Development. Brookings Papers on Economic Activity, 47(1), 123-135.

La Porta, R. & Shleifer, A. (2014). Informality and Development. Journal of Economic Perspectives, 28(3), 109-126.

Lewis, A. (1959). The Theory of Economic Growth. London: Allen and Unwin.

London, T., Esper, H., Grogan-Kaylor, G., & Kistruck, G.M. (2014). Connecting poverty to purchase in informal markets. Strategic Entrepreneurship Journal, 8(1), 37-55.

Maloney, W.F. (2004). Informality revisited. World Development, 32(7), 1159-1178.

Mathias, B.D., Lux, S., Crook, T.R., Autry, C., & Zaretzki, R. (2014). Competing against the unknown: the impact of enabling and constraining institutions on the informal economy. Journal of Business Ethics, 127(2), 251-264.

Molero, J.C., & Pujol, F. (2012). Walking inside the potential tax evader’s mind: tax morale does matter. Journal of Business Ethics, 105(2), 151-162.

Mróz, B. (2012). Entrepreneurship in the shadow: faces and variations of Poland’s informal economy. International Journal of Economic Policy in Emerging Economies, 5(3), 197-211.

Murphy, K. (2005). Regulating more effectively: the relationship between procedural justice, legitimacy and tax non-compliance. Journal of Law and Society, 32(4), 562-589.

North, D.C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

Ostapenko, N., & Williams, C.C. (2016). Determinants of entrepreneurs’ views on the acceptability of tax evasion and the informal economy in Slovakia and Ukraine: an institutional asymmetry approach. International Journal of Entrepreneurship and Small Business, 28(2/3), 42-61.

Perry, G.E., & Maloney, W.F. (2007). Overview - informality: exit and exclusion. In G.E. Perry, W.F. Maloney, O.S. Arias, P. Fajnzylber, A.D. Mason, & J. Saavedra-Chanduvi (Eds.). Informality: exit and exclusion (pp. 1-20). Washington DC: World Bank.

Ram, M., Edwards, P., Jones, T., & Villaries-Varela, M. (2017). From the informal economy to the meaning of informality: developing theory on firms and their workers. International Journal of Sociology and Social Policy, 37(7/8), 361-373.

Siqueira, A.C., Webb, J., & Bruton, G. (2016). Informal entrepreneurship and industry conditions. Entrepreneurship Theory and Practice, 40(1), 177-200.

Slavnic, Z. (2010). Political economy of informalisation. European Societies, 12(1), 3-23.

Small Business Council (2004). Small business in the informal economy: making the transition to the formal economy. London: Small Business Council.

Sutter, C., Webb, J.W., Kistruck, G., Ketchen, D.J., & Ireland, R.D. (2017). Transitioning entrepreneurs from informal to formal markets. Journal of Business Venturing, 32(4), 420-442.

Thai, M.T.T., & Turkina, E. (2014). Macro-level determinants of formal entrepreneurship versus informal entrepreneurship. Journal of Business Venturing, 29(4), 490-510.

Ullah, S., Williams, C.C. & Wassim, B. (2019). The impacts of informality on enterprise innovation, survival and performance: some evidence from Pakistan. Journal of Developmental Entrepreneurship, 24(3), 1-19.

Vu, T.T. (2014). Institutional incongruence and the informal economy: an empirical analysis. Paper presented at the European Public Choice Society meeting, Cambridge. Available at: (last accessed 6 January 2017).

Webb, J.W., & Ireland, R.D. (2015). Laying the foundation for a theory of informal adjustments. In P.C. Godfrey (Ed.). Management, Society, and the Informal Economy (pp. 21-41). London: Routledge.

Webb, J.W., Bruton, G., Tihanyi, L., & Ireland, R.D. (2013). Research on entrepreneurship in the informal economy: Framing a research agenda. Journal of Business Venturing, 28(5), 598-614.

Webb, J.W., Tihanyi, L., Ireland, R.D., & Sirmon, D. (2009). You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492-510.

Webb, J.W., Ireland, R.D., & Ketchen, D.J. (2014). Towards a greater understanding of entrepreneurship and strategy in the informal economy. Strategic Entrepreneurship Journal, 8(1), 1-15.

Welter, F., Smallbone, D., & Pobol, A. (2015). Entrepreneurial activity in the informal economy: a missing piece of the jigsaw puzzle. Entrepreneurship and Regional Development, 27(5/6), 292-306.

Williams, C.C. (2008). Beyond necessity-driven versus opportunity-driven entrepreneurship: a study of informal entrepreneurs in England, Russia and Ukraine. International Journal of Entrepreneurship and Innovation, 9(3), 157–166.

Williams, C.C. (2014a). Confronting the shadow economy: evaluating tax compliance and behavior policies. Cheltenham: Edward Elgar.

Williams, C.C. (2014b). Out of the shadows: a classification of economies by the size and character of their informal sector. Work, Employment and Society, 28(5), 735–753.

Williams, C.C. (2014c). Explaining cross-national variations in the commonality of informal sector entrepreneurship: an exploratory analysis of 38 emerging economies. Journal of Small Business and Entrepreneurship, 27(2), 191-212.

Williams, C.C. (2014d). Tackling enterprises operating in the informal sector in developing and transition economies: a critical evaluation of the neo-liberal policy approach. Journal of Global Entrepreneurship Research, 4(1), 1-17.

Williams, C.C. (2015a). Explaining cross-national variations in the informalisation of employment: some lessons from Central and Eastern Europe. European Societies, 17(4), 492-512.

Williams, C.C. (2015b). Tackling informal employment in developing and transition economies: a critical evaluation of the neo-liberal approach. International Journal of Business and Globalisation, 14(3), 251–270.

Williams, C.C. (2015c). Explaining the informal economy: an exploratory evaluation of competing perspectives. Relations Industrielles/Industrial Relations, 70(4), 741-765.

Williams, C.C. (2015d). Out of the margins: classifying economies by the prevalence and character of employment in the informal economy. International Labor Review, 154(3), 331-352.

Williams, C.C. (2016). Tackling enterprise in the informal economy: an introductory overview. International Journal of Entrepreneurship and Small Business, 28(2/3), 139-153.

Williams, C.C. (2018). Entrepreneurship in the Informal Sector: an institutional perspective. London: Routledge.

Williams, C.C., & Gurtoo, A. (2017). The institutional environment of entrepreneurship in developing countries: an introductory overview. In C.C. Williams & A. Gurtoo (Eds.) Routledge Handbook of Entrepreneurship in Developing Economies (pp. 13-16). London: Routledge.

Williams, C.C., & Horodnic, I. (2015a). Evaluating the prevalence of the undeclared economy in Central and Eastern Europe: an institutional asymmetry perspective. European Journal of Industrial Relations, 21(4), 389-406.

Williams, C.C., & Horodnic, I. (2015b). Explaining and tackling the shadow economy in Estonia, Latvia and Lithuania: a tax morale approach. Journal of Baltic Economics, 15(2), 81-98.

Williams, C.C., & Horodnic, I. (2015c). Explaining the prevalence of the informal economy in the Baltics: an institutional asymmetry perspective. European Spatial Research and Policy, 22(2), 127-144.

Williams, C.C., & Horodnic, I. (2015d). Tackling the informal economy in South East Europe: an institutional approach. Journal of South East European and Black Sea Studies, 15(4), 519-539.

Williams, C.C., & Horodnic, I. (2016). Beyond the marginalization thesis: evaluating participation in informal sector entrepreneurship. International Journal of Entrepreneurship and Small Business, 28(2/3), 234-254.

Williams, C.C., & Kedir, A. (2016). Business registration and firm performance: some lessons from India. Journal of Developmental Entrepreneurship, 21(3), 1-17. DOI: 10.1142/S1084946716500163

Williams, C.C., & Kedir, A. (2017a). Evaluating the impacts of starting-up unregistered on firm performance in Africa. Journal of Developmental Entrepreneurship, 22(2), 1-18. DOI: 10.1142/S1084946717500170

Williams, C.C., & Kedir, A. (2017b). Starting-up unregistered and firm performance in Turkey. International Entrepreneurship and Management Journal, 13(3), 797–817.

Williams, C.C., & Kedir, A. (2018). Explaining cross-national variations in the prevalence of informal sector entrepreneurship: lessons from a survey of 142 countries. Journal of Developmental Entrepreneurship, 23(1), 1-22.

Williams, C.C., & Martinez-Perez, A. (2014). Do small business start-ups test-trade in the informal economy? evidence from a UK small business survey. International Journal of Entrepreneurship and Small Business, 22(1), 1-16.

Williams, C.C., & Shahid, M. (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.

Williams, C.C., & Windebank, J. (2015). Evaluating competing theories of informal employment: some lessons from a 2013 European survey. International Journal of Business and Globalization, 15(1), 45-62.

Williams, C.C., & Youssef, Y. (2013). Evaluating the gender variations in informal sector entrepreneurship: some lessons from Brazil. Journal of Developmental Entrepreneurship, 18(1), 1-16.

Williams, C.C., & Youssef, Y. (2014). Classifying Latin American economies: a degree of informalisation approach. International Journal of Business Administration, 5(3), 73–85.

Williams, C.C., Shahid, M., & Martinez-Perez, A. (2016). Determinants of the level of informality of informal micro-enterprises: some evidence from the city of Lahore, Pakistan. World Development, 84, 312-325.

Williams, C.C., Martinez-Perez, A., & Kedir, A. (2017). Informal entrepreneurship in developing economies: the impacts of starting-up unregistered on firm performance. Entrepreneurship Theory and Practice, 41(5), 773-779.

Windebank, J., & Horodnic, I. (2017). Explaining participation in undeclared work in France: lessons for policy evaluation. International Journal of Sociology and Social Policy, 37(3-4), 203-217.

World Bank (2017). World development indicators, Washington DC: World Bank. Available at: http://data.worldbank.org/data-catalog/world-development-indicators (last accessed 10 January 2019).

Yu, X., & Bruton, G. (2015). Informal firms in China: what do we know and where does the research go. In P.C. Godfrey (Ed.). Management, society, and the informal economy (pp. 161-182). London: Routledge.

Zinkhan, G.M., & Karande, K.W. (1991). Cultural and gender differences in risk-taking behavior among American and Spanish decision makers. Journal of Social Psychology, 131(5), 741–742.

DOI: http://dx.doi.org/10.14211/regepe.v9i4.1981


  • Não há apontamentos.

Desenvolvido por:

Logomarca da Lepidus Tecnologia

Licença Creative Commons
Este obra está licenciado com uma Licença 
Creative Commons Atribuição-NãoComercial-CompartilhaIgual 4.0 Internacional

Rev. Empreendedorismo Gest. Pequenas Empres., São Paulo, SP, Brasil. e-ISSN: 2316-2058    

Prefixo do DOI: 10.14211  Classificação Qualis 2016: B1