Escolar Documentos
Profissional Documentos
Cultura Documentos
DOI 10.1007/s10551-013-2030-6
Received: 7 September 2012 / Accepted: 19 December 2013 / Published online: 4 January 2014
Springer Science+Business Media Dordrecht 2014
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Informal Activity
253
and exploit opportunities. However, defined using institutional economics terminology, informal activity simply
violates formal institutions while largely adhering to most
informal institutions. In the latter case, though similar to
destructive entrepreneurship in terms of illegality, informal
activity diverges from destructiveness in that it often
enjoys broad social support.
Herein, we adopt a synthesized view of the informal
institutional phenomena. Specifically, although informal
activity may provide entrepreneurs economic returns and
customers desired products and services, it also often
serves to undermine and potentially crowd-out regular,
productive entrepreneurship (Estrin et al. 2012). In line
with prior studies (e.g., Minniti 2008), we suggest that
formal activities are for the most part equivalent to productive entrepreneurship, and that governments have an
interest in mitigating the extent to which informal activity
comprises any given economy through institutions. Yet, we
also suggest that in addition to draining human and natural
resources away from socially desirable formal activities,
informal activities also detract from formal activity by
providing economic returns to those not playing by the
game. This causes entrepreneurs engaged in formal activities to question why they do the right thing, thus
undermining institutional effectiveness (North 1990).
Entrepreneurship in Different Institutional
Environments
Scholars have typically focused on how institutions maximize productive entrepreneurship (i.e., formal activity)
(Eggertson 1990; North 1990). Viewing entrepreneurs as
rational actors, policy makers utilize both incentives and
punishments to encourage entrepreneurs to choose those
economic activities that are the most beneficial to society.
Technology innovation, building infrastructure, developing
new resources, and efficient use of resources are all
examples of economic activities that raise living standards
(Teece 2010; Yam et al. 2011). Many socially desirable
forms of economic activity require considerable investment
and time to develop specialized resources, capabilities, and
knowledge. However, entrepreneurs tend to pursue economic activities that promise the greatest returns in the
shortest time with the least effort. To resolve this dilemma,
policy makers have tended to limit or ban entrepreneurs
from pursuing unproductive entrepreneurship. Entrepreneurs pursuing these banned unproductive forms of entrepreneurship face the loss of capital, time, and potentially
freedom. Theory suggests that entrepreneurs take these
costs into account when deciding which economic
activities to pursue (Apressyan 1997; Webb et al. 2009).
This makes the hard work of socially beneficial entrepreneurship seem more attractive than the punishment that can
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Property Rights
Property rights are defined as the extent to which individual
action is relied upon to utilize and allocate resources in a
country (Agrawal and Ostrom 2001). The more control
individual entrepreneurs have over the resources in a given
society, the greater the level of individual control. Individual control can range from complete individual control
(pure private ownership) to complete state (public) or
communal (socialist) control (Demsetz 1967). In most
societies, individual control typically lies somewhere
between these extremes.
Property rights, or regimes of appropriability, specify
the level of individual control in a society (Alchian 1965;
Alchian and Demsetz 1972; Demsetz 1988). Property
rights enable entrepreneurs to engage in productive entrepreneurship by providing control of, and the rewards from,
their resources and capabilities (Foss and Foss 2008). In
societies with state or communal property control, mainly
unproductive forms of entrepreneurship are available to
individual entrepreneurs. Individual control over property
allows actors to develop more complex and specified products and services, and the ability of actors to appropriate
rents provides the incentive to do so (Barzel 1994; Burgelman and Grove 2007; Foss and Foss 2008). The extent to
which well-enforced private property rights exist affects
entrepreneurial activity type, level, and range. High property control levels encourage entrepreneurs to engage in
return-maximizing activities given their basket of resources
and capabilities. Alternatively, as individual property
control is increasingly constrained, informal activity
becomes more viable, and correspondingly, informal
activity can present greater challenges for entrepreneurs.
We submit that strong individual property rights are
negatively related to informal activity in a society. Strong
individual property rights protect entrepreneurs resources
and capabilities from opportunism and misappropriation
from other actors (Dollinger et al. 2010; Foss and Foss
Informal Activity
2008). Entrepreneurs should face greater levels of opportunism without state protection and subsequently, greater
transaction costs (Williamson 1985, 1995). The powers of
the state protect the resources of entrepreneurs who engage
in socially desired forms of economic activity, keeping
transaction costs low (Brouthers 2002; Meyer 2001).
In order to pursue informal activity, entrepreneurs would
have to forego state protection of their resources and
capabilities. Higher levels of risk and transaction costs
make informal activity opportunities less economically
viable compared to productive entrepreneurship with state
protected individual property rights. Put differently, strong
individual property control incentivizes productive entrepreneurship while making informal activity less economically attractive. By rendering informal activity less
attractive, individual property control alters the competitive landscape by reducing, or perhaps even eliminating,
the competitive advantages derived from operating informally, thereby guiding more entrepreneurs toward formal
rather than informal activities. If fewer individuals pursue
informal activity, then the obstacles faced by entrepreneurs
from the informal economy are likely fewer. Thus, we
predict:
Hypothesis 1 Individual property regulation leads
entrepreneurs to view informal activity as less of a competitive obstacle.
Social Regulation and Cooperative Action
Enabling institutions also provide entrepreneurs the means
to self-govern during cooperative action (Williamson
1991). While property rights allow entrepreneurs to control
their resources and capabilities, cooperative action enables
entrepreneurs to transform those resources into economic
value (Demsetz 1988; Ketchen et al. 2007). We define
cooperative action as the extent all members of a society
are freely allowed to engage in economic activity. The
more cooperative action freedom in a given society, the
more entrepreneurs are able to effectively organize for
productive entrepreneurship.
Cooperative action enables productive entrepreneurship
by empowering all members of societyregardless of their
backgroundsto engage in economic activities. In societies where some members are limited or excluded from all
forms of economic activity for political, social, or religious
reasons, informal activity becomes the only viable means
of economic activity. The more members of society are
enabled to engage in productive entrepreneurship, the less
they are forced to engage in informal activities. For
example, recent research demonstrates that through social
inclusion and empowerment, policy makers in India can
continue to create a legal and political environment that
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256
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B. D. Mathias et al.
Informal Activity
Method
257
Sample
Measures
The World Bank conducts Enterprise Surveys (ES) that
provide data from key manufacturing and service sectors in
every region of the world. The ES use standardized survey
instruments and a uniform sampling methodology to minimize measurement error and to yield data that are comparable across countries. The ES target a particular set of
firmsmanufacturing and retail/wholesale establishments
with five or more full-time employees, located in major
Additional information on the design, implementation, and distribution of the survey is available at www.enterprisesurveys.com
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B. D. Mathias et al.
SD
1. Age
15.61
13.59
2.91
1.22
0.29
3. Gender
0.33
0.47
0.09
0.07
4. Tax rate
57.12
51.21
-0.01
-0.22
5. Country munificence
1,617
1,424
0.08
0.04
0.01
0.10
2.20
1.03
-0.06
-0.05
-0.01
-0.05
0.00
7. Economic regulation
3.53
0.39
0.13
0.06
0.08
-0.27
0.20
-0.06
8. Financial regulation
3.85
0.53
0.08
0.13
0.07
-0.25
-0.06
0.02
0.52
9. Cooperative action
3.45
0.39
0.14
0.18
0.18
-0.20
0.12
0.04
0.59
0.69
10
-0.04
3.23
0.38
0.08
0.07
0.11
-0.44
-0.03
0.08
0.70
0.67
0.61
1.64
1.42
0.07
-0.03
0.02
0.06
0.03
-0.14
0.12
0.08
0.70
0.02
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Informal Activity
259
Control Variables
Analytical Techniques
We included six control variables in our analysis. First is
firm size, measured as the natural log of the total number of
employees of the firm as provided by the respondent from
the World Bank ES. We included firm size because past
research has demonstrated that firm size is critical to
understanding informal activity (e.g., Feige 1990). In fact,
extant research has shown that not only can the number of
employees influence the decision to engage in informal
activity (Marcouiller et al. 1997; Rauch 1991), but it also
can impact entrepreneurs perceptions of informal activity
(Webb et al. 2009). Second is firm age, which is measured
as the number of years the firm has been in business. As
firms age and grow, they may find it increasingly difficult
to hide all their actions from formal authorities; however,
they might also possess the resources to bribe or coerce
officials. Thus, firm age and size are likely related to
informal perceptions. Third is gender, which captures
whether at least one of the owners of the firm is female.
Marcouiller et al. (1997) reveal that in some countries
women are more likely than men to be in the informal
sector, and thus, may have different perceptions of informal activity. The fourth control variable is country-specific
rather than firm-specific, the tax rate of the country. In line
with the previous studies (e.g., Dabla-Norris et al. 2008;
Schneider 2002), we controlled for tax rate because it
seems plausible that firms may elect to engage (or not
engage) in informal activities depending on the tax implications of their actions. Fifth is country munificence, which
measures per-capita income (PCI). Although the World
Bank ES draws primarily from more modest-income
countries, significant variation exists among the sample.
For example, Burundi is one of the poorest countries in the
world (PCI = $170), whereas, Mauritius is classified as an
upper middle income level country by the World Bank
(PCI = $7,750). These income discrepancies could likely
impact activities associated with entrepreneurship and the
informal economy (Stel et al. 2005). Finally, we included
fairness of court system, which measures individuals
perception of whether their governing court system is fair,
impartial, and uncorrupt. Due to their potential importance
to informal activity, we also included the level of domestic
and foreign competitiveness faced by the firm. However,
competitiveness data was only available in nine of our
countries of interest, and we found that these two variables
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B. D. Mathias et al.
Results
Table 2 presents the OLS regression results for our study.
Model 1 includes the six control variables included in the
study (i.e., firm age, firm size, gender, tax rate, country
munificence, and court system fairness). Each variable is
significant at the (p \ 0.05) level and firm age, firm size,
country tax rate, and court system fairness are significant at
the (p \ 0.001) level. The overall model is also significant
at the (p \ 0.001) level. These results, however, should be
viewed cautiously. In part, each variable likely maintains
statistical significance due to the large sample size; thus,
the practical significance of these variables, particularly,
gender and country munificence, in contributing to perceptions of informal activity should be considered. Perhaps, only those variables significant at the (p \ 0.001)
level represent characteristics of practical importance.
Model 2 tests the institutional environment-informal
activity relationships by including each of the four regulatory variables in addition to the six control variables. All
of the control variables are significant at least at the
(p \ 0.01) level and each of the regulatory environment
variables are significant at the (p \ 0.001) level. The
overall model is also significant (F = 81.7, p \ 0.001)
level. Hypothesis 1 contends that the property regulation
environment and perceptions of informal activity are negatively associated. Our results provide support for this
assertion (b = -0.34, p \ 0.001). Supporting Hypothesis
2, our results demonstrate that the social regulation environment is negatively associated with perceptions of
informal activity (b = -0.31, p \ 0.001). Hypothesis 3
suggests that the structural regulatory environment exhibits
Table 2 Regression analysis results: informal activity as obstacle
Model 1
Model 2
Control variables
Firm age
0.008***
0.006***
Firm size
-0.069***
-0.066***
Gender
0.063*
0.079**
Tax rate
0.001***
0.002***
Country munificence
0.000
0.000***
-0.192***
-0.165***
Predictor variables
Property rights
-0.338***
Cooperative action
-0.312***
Economic regulation
Financial regulation
0.665***
0.337***
Model R2
0.030
Adjusted R2
0.030
Model F
70.727***
123
0.056
0.056
81.715***
a positive relationship with perceptions of informal activity. Again, our results provide support (b = 0.67,
p \ 0.001). Finally, Hypothesis 4, which suggests that the
economic regulatory environment has a positive relationship with the perceptions of informal activity, is also
upheld (b = 0.34, p \ 0.001). Together, the results from
our regression analysis provide support for each of our four
hypotheses.
Discussion
The practice of informal activities, such as payments and
gift-giving to government officials, has a long history (Belk
1979), and the recent estimates suggest that such activities
comprise a substantial portion of economic activity across
the globe (Godfrey 2011; La Porta and Shleifer 2008;
Schneider 2002). Although most extant research focuses on
how institutions encourage productive entrepreneurship via
legitimate commerce (e.g., Bruton and Ahlstrom 2003; Xin
and Pearce 1996), we sought to investigate how institutions
affect less productive entrepreneurship (Steidlmeier 1999).
We developed several hypotheses describing how institutional environments shape informal activity, and then
offered supportive empirical evidence.
In doing so, we offer two clear theoretical contributions.
First, we answer the call for the theoretical advancement
of institutional theory by studying the informal economy
across different countries (Webb et al. 2009, p. 505506).
Specifically, we leverage institutional theory to help
improve our understanding of the informal economy.
Although considerable work has examined how institutions
affect formal activity, few efforts have explored their
impact on informal activity. This shift enables scholars and
policy makers alike to understand the unintended consequences of policies intended to encourage formal, productive entrepreneurship.
Second, we further institutionalize theory by exploring
how two basic institutional mechanisms (i.e., incentives
and disincentives) can align societies and entrepreneurs
interests, thus, enabling or constraining informal activity.
Specifically, our empirical investigation supports both of
our basic assertionsenabling institutions stymie, while
constraining institutions advance, informal activities.
Enabling institutions provide incentives for entrepreneurs
to engage in formal activity. That is, these institutions open
up additional opportunities for formal activity to more
individuals, which in turn, lowers engagement in informal
activity. Conversely, constraining institutions provide disincentives for entrepreneurs to engage in formal activity.
Although intended to limit informal activity, these actions
appear to reduce the number of formal opportunities
available to individuals and heighten the attractiveness of
Informal Activity
informal action, thereby increasing the challenges entrepreneurs face from informal activity. For example, our
results reveal that if a country increased their economic
regulations by one unit, on average, this yields a 16 %
increase in the perception of informal activity as an
obstacle. Stated differently, informal activity becomes a
much greater obstacle for entrepreneurs.
Thus, our results have clear implications for policy
makers and society. Our findings suggest that policy
makers should consider further implementing enabling
institutions, while reducing and/or removing constraining
institutions. Our insights show that developing and implementing effective enabling institutions can reduce the
extent to which entrepreneurs engage in illegal activities
and encourage entrepreneurs currently operating in the
informal economy to transition into the formal economy.
By empowering entrepreneurs through enabling institutions and removing restrictions imposed by constraining
institutions, policy makers may foster more formal, entrepreneurial opportunities, especially for those who may not
currently have access to such opportunities. For example,
implementing policies that grant women the ability to own
property and businesses (i.e., enabling institutions) might
not only motivate women operating in the informal economy to transition to the formal economy (Datta and Gailey
2012), but such policies also might encourage more women
to pursue a career in (formal) entrepreneurship. In turn, the
potential benefits these enabling institutions could have on
entrepreneurs (e.g., opening up new revenue streams to
female entrepreneurs) as well as the governments who
implement them (e.g., new sources of tax revenue through
increased formal activity) suggest broad benefits to local
communities and society at large.
To reduce corruption and informal activity, policy
makers should also emphasize making formal activities
more economically attractive, rather than solely on banning
bribery. For example, creating free trade zones reduces
both tariffs and customs approvals, limiting both the
opportunity and pressure for bribing government officials
involved in importing and exporting goods (Godfrey 2011;
Vogel 2006; Wright 2008). Such policies also offer lower
barriers and greater efficiency for entrepreneurs interested
in engaging in international trade. In other words, to promote formal activity and curb informal activity, policy
makers should look to carrots, and not necessarily to
sticks. Although our findings shed some light on how
policy makers can mitigate informal activity and encourage
formal activity, several research questions with important
implications for theory and policy remain.
First, future scholarship should identify what current
enabling and constraining institutions exist. We used representative measures of enabling and constraining institutions in our study; however, this was by no means a
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Surroca et al. 2013). Thus, when we compare our explanatory power to other studies, we believe our predictive
effects and overall explanatory power compare favorably
to several other published studies. Still, we acknowledge
that our model leaves much of the variance unexplained,
suggesting that there are several rich opportunities to build
on our findings.
Conclusion
Our findings and their implications serve to advance the
currently sparse theory related to the institutional environment and the informal economy. By leveraging data
from 59 countries, we demonstrate important linkages
between four facets of institutional environments and
competitors informal activity. More specifically, our
results indicate that property and social policies serve to
enable formal activity thereby reducing informal activity,
while structural and financial policies constrain formal
activity thereby increasing informal activity. These findings are important for scholars, entrepreneurs, and policy
makers, and are thus worthy of further discussion.
References
Limitations
Our paper is not without limitations. First, as with most
studies using secondary data, our research questions and
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informal activity measure was broad and fully encompassing, comprising a scale for informal activity as opposed to a
single-item measure would enhance the reliability of our
findings. Further, the ratings we used for institutional environments were also quite broad; more detailed ratings would
provide a more nuanced understanding of how specific
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Lux et al. 2011; Simha and Stachowicz-Stanusch 2013;
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