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

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.

Jobs, Access to Credit, and Informality in MENA Countries

“…We rely on a cellaverage method wherein we instrument informal competition with the proportion of all other firms that are constrained by informality and operate within the same 2-digit sector and geographical area of each company (at a given time). This approach, widely used in the literature (see, among many others, Distinguin et al, 2016;Dollar et al, 2006;Fisman and Svensson, 2007;Amin and Soh, 2021;Amin, 2021), allows us to capture an environmental component of the informal competition faced by a company that is, however, unrelated to its specific characteristics, including fundamentals and past availability of banking funds. Notice that, by computing averages at the stratum level (intersection of industry and geographical area), we still document effects that go beyond sector and location fixed effects.…”

“…Ulyssea (2018) show that the coexistence and competition of informal firms with more productive (formal) companies lead to a misallocation of resources and potentially large losses in total factor productivity. Moreover, a number of studies have documented that informal competition has a negative effect on formal firms in terms of output (Rozo and Winkler, 2021), employment (Amin, 2021), productivity (Amin and Okou, 2020), quality of products (Banerji and Jain, 2007), and innovation (Avenyo et al, 2021). Lastly, Distinguin et al (2016) provide evidence that the presence of informal competition makes formal SMEs' more likely to be creditconstrained.…”

“…Yet, an obstacle to the virtuous role of the financial system is represented by the disconnectedness of private firms from the banking sector. This has been shown to be a distinguishing feature of MENA countries and a possible element contributing to the poor job creation of the private sector in the region (De Lima et al, 2016;Amin, 2021). Another important feature of MENA countries is informality.…”

Unlocking Sustainable Private Sector Growth in the Middle East and North Africa

“…This share is substantially higher than in ECA countries, where the percentage drops by almost one-third (22% in total). This feature can have severe implications for companies' overall competitiveness, as shown by a number of studies documenting the negative effect of informality on output (Rozo and Winkler, 2021), employment (Amin, 2021), productivity (Amin and Okou, 2020), innovation (Avenyo et al, 2021) and access to finance (Distinguin et al, 2016) of formal firms. This seems to be the case for firms in MEnA.…”

Finance, Informal Competition, and Expectations: A Firm-Level Analysis

“…Finance plays a critical role in a↵ecting firms' performance and has a positive impact on investment and employment. However, the connection between firms and banks is weak in most developing countries and it is a possible element contributing to the poor job creation of the private sector in such contexts (Bah and Fang, 2015;Betz et al, 2021;Amin, 2021). Most of the analyses on the determinants of firms' disconnectedness from the banking system have focused on the obstacles to the supply of credit (Ayyagari et al, 2021).…”