Department of Strategy and Innovation

The Firm in the Informal Economy

A defining feature of most developing economies is the vast presence of informal economies where unregistered and unregulated organizational entities operate without the support or protection of established formal institutions. Not only are these firms important drivers of economic growth, but they also provide an important safety net for people living in desperate poverty. However, the lack of formal institutional support and protection calls into question how these firms operate. This project seeks to understand the means and consequences of how informal firms in industry clusters in Sub-Saharan Africa structure their organisations. As such, it seeks a new agenda on how we understand the behavior of informal economy actors.

The societal presence and impact of the informal economy are inescapable. Around the world and especially in areas of widespread poverty, unregistered and unregulated organizational entities operate in the part of the economy that either fails to adhere to the established institutional rules or are denied their protection (Chen, 2005). Reports from the International Labor Organization find that 48% of the labor force works in the informal economy in North Africa, 72% in Sub-Saharan Africa, 51% in Latin America, and 65% in Asia. Studies from the International Monetary Fund find that the informal economy account for 10-20% of the GDP in developed countries and as much as 60% in developing countries. In this project, we focus on the organizational structure of the firms in the informal economy. In this respect, the informal economy is defined in the economic activities conducted by firms operating outside the reach of different levels and mechanisms of official governance (Guha-Khasnobis, Kanbur and Ostrom, 2006). The state-of-the-art research on firms in the informal economy has mostly been limited to anecdotal evidence and macro data in which the firm has largely been treated as a vague entity without a clearly defined form or function (AcostaGonzález et al., 2014; McCann and Bahl, 2016). Yet, the systematic study of these firms is important for several reasons. They are engaged in widespread legit economic activities ranging from petty services to complex transnational trading networks. Moreover, as a dominant form of economic organization, they provide a substantial safety for up to half of the labor force in the poorest economies. However, while informal firms enjoy certain tangible advantages vis-à-vis their formal counterparts such as cheap labor and agility, reports have also clearly indicated that they face massive disadvantages from the lack of formal institutional support and substantially lower levels of productivity and human capital (La Porta and Schleifer, 2008).

The informal economy constitutes the lion's share of many developing countries' economies. Thus, the knowledge generated through this project will carry important implications for official development policies directed toward private sector development. For example, the International Labor Organization's 'Decent Work' campaign has a dedicated focus on the working conditions of people in the informal economy. In its 'Migration, Mobility and Employment' strategy, the Africa-EU Partnership actively seeks to convert businesses from the informal to formal sectors. Therefore, the knowledge disseminating from this project can actively be applied in local and international policy formulation and implementation directed towards improving the working conditions for workers in the informal economy.

Carlsbergfondet has supported this project with a grant of close to 4.5 M DKK under the heading The Carlsberg Foundation’s Distinguished Associate Professor Fellowships.

Please direct any questions to Marcus Møller Larsen, Associate Professor at CBS and project lead of The Firm in the Informal Economy. 

The page was last edited by: Department of Strategy and Innovation // 05/29/2019