Far from Void: How Institutions Shape Growth in the Informal Economy

Abstract

Entrepreneurship scholars often lament the lack of economic growth in contexts of poverty and informality. We propose that this dismal assessment, as well as subsequent prescriptions to address it, flow from a narrow epistemological approach to informality based on absence, where the lack of (Western) market-supporting legal and regulatory institutions explain missing economic growth at the firm level. In contrast, we build a theoretical approach grounded in presence, proposing that a more comprehensive incorporation of existing institutions may reveal less visible, individual level types of entrepreneurial growth occurring in informal economies. To do so, we conceptualize informal economies as institutional interfaces built of “bits and pieces” from market and non-market institutions. We propose that the configuration of these interfaces influences the cultural toolkits of inhabitant entrepreneurs, which in turn shapes how they grow in an informal economy. Specifically, we link three dimensions of institutional complexity at the institutional interface (jurisdictional influence, fragmentation, and incompatibility) to three types of growth (direct, dispersed, and disguised) that vary in terms of visibility. Our theory animates understanding of diverse informal economies and the entrepreneurial activity that exists within them.

JEL Classification: O43, O55