Evaluating competing theories of informal sector entrepreneurship

Abstract

To advance understanding of the reasons for informal sector entrepreneurship, this article evaluates the determinants of cross-country variations in the extent to which enterprises are unregistered when they start operating. Reporting the World Bank Enterprise Survey data on 67,515 enterprises across 142 countries, the finding is that one in five (19.9%) of the formal enterprises surveyed started-up unregistered, although this varies from all enterprises surveyed in some countries (e.g. Pakistan) to 1% 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 (modernization theory); too much state interference (neoliberal 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 modernization, political economy, and institutional theories but not neoliberal 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. The article concludes by discussing the theoretical and policy implications of these findings.