Evaluating competing theories of informal sector entrepreneurship

What is it about?

To advance understanding of the reasons for informal sector entrepreneurship, this paper evaluates the determinants of cross-country variations in the extent to which enterprises are unregistered when they start operating. To do so, data is reported from the World Bank Enterprise Survey (WBES) on 67,515 enterprises across 142 countries.

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Why is it important?

The finding is that one in five (19.9 per cent) of the formal enterprises surveyed started-up unregistered, although this varies from all enterprises surveyed in some countries (e.g., Pakistan) to 1 per cent of surveyed enterprises in Slovakia. To explain these cross-country variations, four competing theories are evaluated which variously assert that nonregistration is determined by either: economic under-development and poorer quality governance (modernisation theory); too much state interference (neo-liberal theory); too little state intervention (political economy theory), or an incongruence between the laws and rules of formal institutions and the beliefs, values and norms of informal institutions (institutional theory). A multilevel probit regression analysis confirms the modernisation, political economy and institutional theories, but not neo-liberal theory. Beyond economic under-development, therefore, nonregistration is associated with too little state intervention and the rules of formal institutions being incongruent with the socially shared beliefs of entrepreneurs.

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