Informal entrepreneurship theory

What is informal entrepreneurship?

Informal entrepreneurship happens outside of the formal economy. The formal economy is the part that is legal and legitimate. The legal economy is where companies and entrepreneurs pay taxes, abide by regulations, and attain licenses that are set out by governments or institutions.

Informal entrepreneurship is not about purely black market enterprises, like illegal gambling rings, outlaw biker gangs, or illegal fireworks factories. Informal entrepreneurship can involve everything from street vendors to domestic work within the home. In many societies, informal entrepreneurship is a major part of the economy, especially in developing countries.

Often informal entrepreneurship is so normalized in a society that it is considered legitimate in the minds of the majority, even if it might also be illegal (Webb et al., 2009).

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”

Thus, one way of conceiving of informal entrepreneurship is to think of it as entrepreneurship that is legitimate, but not legal. Webb et al. suggest that entrepreneurship that is both illegal and illegitimate is part of the renegade economy, not the informal economy.

According to Williams and Nadin (2010):

“legitimizing this hidden enterprise culture [informal entrepreneurship] could be an important means of promoting enterprise and economic development”.

All of this suggests recognizing informal entrepreneurship is a new avenue for economic development that is not just focused on innovation, high-growth business models, or technology venture, which receive the bulk of the attention.

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1 comment for this post
  1. Animesh Roy

    An important driving force for informal (legitimate but illegal) entrepreneurship that has been alluded to, but not discussed, within this entry is the potential lack of alignment between entrepreneurs and the law. Systemic failures, such as corruption and nepotism, can lead to a widespread disregard for rules and regulations. This is a likely reason as to why informal entrepreneurship is more prevalent and accepted in developing countries. Research conducted by Williams and Bezeredi has found a strong correlation between entrepreneurs’ willingness to abide by formal rules and their perceptions about the legitimacy of these rules created by governing bodies. Perceptions of legitimacy are influenced by the quality of public services, tax fairness, public sector corruption, and instability in the formal institutions.

    Developing countries therefore face a recurring problem; lack of government legitimacy results in a rise in the informal economy, which in turn costs the government through tax avoidance and lost revenue.

    Concepts drawn from:
    Williams, C.C., and Bezeredi, S. 2018. An institutional theory of informal entrepreneurship: Some lessons from Fyr Macedonia. Journal of Development Entrepreneurship. Vol. 23, Issue 3.

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