Casting a Shadow: Productivity of Formal Firms and Informality

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Global Productivity: Trends, Drivers, and Policies

“…Firm productivity tends to be lower in poorly regulated markets: weaker enforcement of competition laws can allow a large inefficient firm to drive productive competitors out of the market by abusing its market power; higher barriers of entry can prevent creative destruction (Goldberg et al 2010). Private firms may be reluctant to undertake costly R&D when competitors, especially those in the informal sector, can infringe intellectual property rights (Amin and Islam 2015;Amin, Ohnsorge, and Okou 2019). The enforcement of property rights, and public-private partnerships to create technology extension centers in sectoral clusters, can increase firm participation in global value chains and raise productivity .…”

“…2016). Informality is pervasive in many economies, especially in Latin America and the Caribbean and Sub-Saharan Africa, and is associated with low productivity (Amin, Ohnsorge, and Okou 2019). Addressing informality may lead to improvements in productivity.…”

“…Informal enterprises are often small, inefficient, and relatively unproductive (La Porta and Shleifer 2014). Reallocating capital and workers from relatively unproductive informal enterprises to formal firms could boost aggregate productivity (Amin and Islam 2015;Amin, Ohnsorge, and Okou 2019;Ulyssea 2018). This reallocation could be achieved by limiting rent-seeking bureaucracy and improving the even-handedness of regulation and tax enforcement.…”

Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence using Firm-Level Survey Data

“…Mendi and Costamagna (2017) use data from Enterprise Surveys to estimate the impact of informal competition on formal sector firms' innovation. Amin and Okou (2020) also use Enterprise Surveys data and find that informal competition lowers labor productivity of the formal sector firms by 20-24 percent. To reiterate, none of these studies assess the impact of informal competition on formal firms' employment growth.…”

Role of Individual Characteristics and Policies in Driving Labor Informality in Vietnam

“…2 Informal workers in Vietnam typically have no access to sick leave or unemployment benefits, precarious access to health benefits, and limited savings. 3 Informality can also result in a misallocation of resources in the economy and constrain investment in human capital as informal workers typically have more limited training and career opportunities, thereby undermining economy-wide productivity and potential growth (Amin et al, 2019;Boly, 2018;de Soto, 1989;Gonzalez and Lamanna, 2007).…”