The impact of innovation on formalization and job creation of informal SMEs in Cameroon: Evidence from the World Bank Enterprise Survey

Abstract

This study aims to examine the impact of innovation on the formalization and job creation of informal SMEs in Cameroon, using data from the World Bank Enterprise Survey 2016. The study found that while technological innovation increases the chances of formalizing a firm, product innovation reduces it. The jobs created are proportional to firm size and the nature of the firm’s innovations. The results highlight the need to design the adoption of technological innovations by informal SMEs and encourage the registration of the intellectual property of new products created by them. The study contributes to the understanding of the role of innovation in enabling informal SMEs to generate income and employment, which is essential for sustainable development in African countries. The study also suggests that innovation can be a driver of firm growth, but not necessarily formalization. Overall, the study emphasizes the need for policies that support the adoption and diffusion of innovations by informal SMEs in Cameroon.

Keywords:

• innovation
• informal SMEs
• job creation
• formalization
• Cameroon

JEL Classification:

• E26
• O17
• D92
• and L25

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The definition of SME employed here is that of Law No. 2015/010 of 16 July 2015, amending and supplementing certain provisions of Law No. 2010/001 of 13 April 2010 promoting Small and Medium Enterprises in Cameroon. This law provides in its Articles 3 (new) to 6 that "the SME is considered as an enterprise, whatever its sector of activity, which employs not more than one hundred (100) people and whose annual turnover excluding taxes does not exceed three (03) billion CFA francs".

2 $y_i=\{\begin{array}{c}1\mathrm{with}\mathrm{the}\mathrm{probability}{p}_i\\ 0\mathrm{with}\mathrm{probability}1-p_i\end{array}$

For a sample of size N, the likelihood function is given by: $L=\prod _{i=1}^N{P}_i^{y_i}(1-P_i{)}^{1-y_i}$$P_i$ is specified by the logistics distribution function evaluated at $X_i^{\mathrm{\prime }}\text{β}$. If $F\left(X_i^{\mathrm{\prime }}\text{β}\right)$ means the cumulative distribution function of $y_i$ then the likelihood function of the model becomes: $L=\prod _{i=1}^{N}F\left(X_i^{\mathrm{\prime }}\text{β}{)}^{y_i}\right(1-F\left(X_i^{\mathrm{\prime }}\text{β}\right){)}^{1-y_i}$Then the log-likelihood function is: $\ln L=l=\sum _{i=1}^N\left[y_i\ln \right(F\left(X_i^{\mathrm{\prime }}\text{β}\right))+(1-y_i\left)\ln \right(1-F(X_i^{\mathrm{\prime }}\text{β}\left)\right)]$Since the first-order conditions arising from the log-likelihood equation are non-linear and non-analytical, maximum likelihood estimates are obtained using recursive numerical optimization methods, such as the Newton-Raphson method.

3 In Cameroon, according to the new law on small and medium-sized enterprises promulgated in 2015, the Very Small Enterprise (VSE) is any enterprise that employs no more than five people and whose annual turnover before tax does not exceed 15 million CFA francs (Article 4). The Small Enterprise, abbreviated SE, is an enterprise that employs between six and twenty persons and whose annual turnover excluding taxes exceeds 15 million CFA francs and does not exceed 150 million CFA francs (Article 5 new). The Medium Enterprise, abbreviated ME, is an enterprise that employs between 21 and 100 persons and whose annual turnover excluding taxes exceeds 250 million CFA francs and does not exceed 03 billion CFA francs (Article 6 new).

4 The OR is a measure of association, which captures the relationship between the characteristic x_k of the firms or business owner and the occurrence of the event y_i=  1 (formalization of the company). If OR = 1, the 'event y_i and the x_k are independent. If OR > 1 (resp. OR < 1), the link between y_i and x_k is positive (respectively negative).

5 With the price of bandwidth estimated at 460 Mbp/month/USD internationally in Cameroon against 7 Mbp/month/USD for Egypt and Tunisia (Development Report 2017).

6 This survey considers as technological innovation any form of machine involved in the manufacturing processes such as robots, computers, telephones, Internet, etc. (Enterprise Survey Questionnaire definition, 2015).