Why do more entrepreneurs operate in the informal economy in some countries than others?

What is it about?

The aim of this paper is to evaluate four competing theoretical perspectives that explain cross-national variations in the level of informal sector entrepreneurship. Scholarship has until now argued that informal entrepreneurship is a result of either: economic under-development and a lack of modernization of governance (modernization theory); high taxes and state over-interference (neo-liberal theory); inadequate state intervention to protect workers from poverty (political economy theory) or the asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory).

Featured Image

Photo by Annie Spratt on Unsplash

Photo by Annie Spratt on Unsplash

Why is it important?

Reporting the World Bank Enterprise Survey (WBES) on the varying prevalence of informal entrepreneurship across 142 countries, the finding is that neo-liberal theory is refuted but the tenets of the modernization, political economy and institutional theories are confirmed. Informal entrepreneurship is found to be significantly higher when there is economic under-development, a lack of modernization of governance, inadequate state intervention to protect workers from poverty and greater asymmetry between the formal and informal institutions. The paper concludes by discussing the theoretical and policy implications of these findings.

Perspectives