Informal sector competition and firm productivity

ABSTRACT

We provide evidence on whether informal competition has a negative bearing on firm productivity in the formal sector. To do this we employ the World Bank’s Enterprise Survey (WBES) with detailed information for more than sixty thousand manufacturing and services formal firms from over 127 countries. We find a negative association between these two variables, which is further supported when using instrumental variables.

KEYWORDS:

• Productivity
• informality
• competition
• developing countries

JEL CLASSIFICATION:

• O17
• D22
• I25

Acknowledgments

I am very thankful for detailed comments, suggestions, and support from Alberto Chong at Georgia State University. Mariano Montoya provided excellent research assistance. The standard disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Although informality can operate through many channels and can be defined on different basis –compositional, legislative, tax-related– the concept is generally linked to any economic activity conducted by unregistered entities operating outside the government regulation. When discussing the implications of informal competition, we are considering this broad definition. We thank an anonymous referee for the observation.

² The respondent can choose between five possible answers to ‘In what degree are practices of competitors in the informal sector an obstacle to the current operations of this establishment?’ (i) no obstacle (ii) minor obstacle; (iii) moderate obstacle; (iv) major obstacle, (v) very severe obstacle.

³ When testing specifications with a subset of controls we find analogous results.

⁴ The appendix shows first stages (see Table A1).