Informal Entrepreneurship
Informal Entrepreneurship: When Business is "Illegal" but Legitimate
Informal entrepreneurship refers to economic activity that occurs outside of the formal economy. It is characterized by the absence of legal and regulatory frameworks. From street vendors to unlicensed home-based artisans, these businesses operate in the "shadows" of the law.
While often dismissed as "underground" activity, the informal sector is a massive engine of livelihood for millions. To understand it, we must first distinguish it from the formal sector.
The Formal vs. Informal Divide
The Formal Economy is recognized and regulated by government institutions. Participants pay taxes, adhere to labor laws, and obtain necessary permits. This creates a level playing field and offers protections (like bankruptcy laws or police protection).
The Informal Economy lacks these protections. While this allows entrepreneurs to bypass significant administrative burdens and costs, it also creates barriers. Informal businesses often lack access to:
- Formal financing (bank loans).
- Legal contracts and enforcement.
- Government safety nets.
The Legitimacy Paradox: Illegal vs. Illegitimate
Why does the informal economy persist? Webb et al. (2009) argue that it comes down to the difference between Legality and Legitimacy.
According to Suchman (1995), legitimacy is:
“A generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”
In many societies, informal entrepreneurship is so normalized that it is considered legitimate (socially accepted) even though it is illegal (formally prohibited).
The Economies
Webb et al. use this distinction to categorize economic activity:
- Formal Economy: Legal and Legitimate (e.g., A registered corporation).
- Informal Economy: Illegal but Legitimate (e.g., An unregistered street fruit vendor). Society generally supports this.
- Renegade Economy: Illegal and Illegitimate (e.g., Drug trafficking). Society condemns this.
It is crucial to note that informal entrepreneurship is not "renegade" activity. It is productive work that simply happens to be unregistered.
Policy Implications: From Punishment to Support
Instead of punishing informal workers, Williams and Nadin (2010) suggest a different approach:
"Legitimizing this hidden enterprise culture could be an important means of promoting enterprise and economic development."
Recognizing informal entrepreneurship opens a new avenue for economic development. Rather than focusing solely on high-growth technology ventures, policymakers can unlock massive value by helping informal entrepreneurs transition into the formal ecosystem.
Video: Understanding the Informal Economy
References
Suchman, M. C. (1995). Managing Legitimacy: Strategic and Institutional Approaches. The Academy of Management Review, 20(3), 571-610. [Link]
Webb, J. W., Tihanyi, L., Ireland, R. D., & Sirmon, D. G. (2009). You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492-510. [Link]
Williams, C. C., & Nadin, S. (2010). Entrepreneurship and the informal economy: An overview. Journal of Developmental Entrepreneurship, 15(04), 361-378. [Link]
