Determinants of Informal Competition faced by Formal Firms inPakistan: AnEmpirical Evaluation from 2013 World Bank Enterprise Survey

Abstract

There is no denying in the fact that informal sector of any economy offersemployment flexibility by absorbing a pool of labor force. However, the rapid progression of the informal sector in Pakistan andthe consequent increase in competition faced by the formal firms urge a need to understand the dynamics of informal competition.The current study is an attempt toidentifythecorefactors responsible for the incidence of informal competition faced by formal firms in Pakistan,along with an investigation of the determinantsof the severity of thiscompetition.The study investigates the variables of firm’s characteristics and regulatory measures in order to examine the incidence and severity of informal competition faced by formal firms employing World Bank Enterprise Survey 2013 (WBES).The study not only conducts frequency analysis of the variables but based on the nature of data;it uses thelogit and ordered logit techniques todetermine the significant variables.The results of the study show that out of totalof 1125 formal firms used inthe analysis, 583 firms (46.75%) reported facing informal competition. Among these firms facing informal competition, only 16.98% reported informal competition as no obstacle in terms of its severity, however, rests of the firms (almost 83 %) consider the severity of informal competition as an obstacle in one or the other form and consider informal competition as a threat to their businesses.The result of logit model shows thatcharacteristics of formal firms resembling more to the informal firms in terms of size and locality have more likelihood of facing the informal competition. However, indetermining the severityof informal competition through the ordered logit model, theregulatory variables such as taxation, licensing & permits and corruption are found to be more significant and relevant.These results call on to introduce regulatory reforms making the regulatory system less burdensome and better enforcement mechanism of those reforms. There’s a need to create ease for the existing formal firms to fulfill the regulatory requirements as well as encourage the informal firms to join the mainstream formal setup of economy. Furthermore, the current research can be extended by availing the latest datasettoexplore the dynamics of informal sector andthe resultant competitionfor the formal firms in an ever-changingbusiness environment.

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