Who’s Hiding in the Shadows? Organized Crime and Informal Entrepreneurship in 39 Economies

Abstract

Informal entrepreneurship represents a common mode of business formation globally and entails starting and operating a business without registering it with legal authorities. Despite the size of the informal sector in many countries, the motivations for entrepreneurs to operate nonregistered ventures are not well understood. Although formal institutions play an important role, we argue that the decision to operate a nonregistered new venture is influenced by a pervasive informal institution around the world: the practice of extortion payments to organized crime. Because criminal organizations foster the development of norms and beliefs cementing extortion payments as an institution, we posit that entrepreneurs will use nonregistration as a buffer to avoid extortion costs preemptively. We further explicate that this choice is contingent upon founders’ access to resources and ventures’ product-market strategy, which shape visibility to organized crime and the ability to resist extortion and, thus, alter the need for nonregistration as a buffer against institutionalized extortion. Our analysis of over 8,000 new ventures operating in 39 economies largely supports these arguments. This study identifies a novel causal mechanism in the nomological network of informal entrepreneurship, namely, the prevalence of organized crime, and informs a multilevel theory of how entrepreneurs choose the type of organizational form for their ventures. Finally, it illuminates the importance of shadow institutions—illegal and not widely accepted practices—which may operate as unique but often overlooked types of institutions that shape entrepreneurial and organizational decisions.

Disentangling the role of the institutional environment in the ownership competence framework: A comment on Foss et al. (2021)

“…Coffee farmers living in Burundi or the owners of small businesses in Southern Italy have tried to adapt to the additional restrictions derived from the loss of the State's monopoly on the legitimate use of violence. In this sense, some entrepreneurs and firms try to cope with an uncertain institutional context (see also Mallon & Fainshmidt, 2020; Sutter, Webb, Kistruck, & Bailey, 2013). Figure 1 summarizes our contribution.…”

Jump to platform faster? Gender, institutional change, and pre-entrant entrepreneurial attempt

“…As such, we include social unrest events as opposed to other institutional change triggers in our theoretical framework. Social unrest has produced far-reaching social and economic ramifications (Biggs and Andrews, 2015), and has been shown to considerably affect strategies and business organization performance (Hiatt and Sine, 2014;Mallon and Fainshmidt, 2020). For example, research has shown that local protests toward new store proposals significantly shape the market expansion strategies of supermarkets such as Walmart (Rao et al, 2010) and Target (Yue et al, 2013).…”

“…Contextual effects: institutional change, IAT, and the social movements literature Although there are several types of institutions, such as educational or religious institutions, that can potentially affect women's pre-entrant entrepreneurial attempts, the extant entrepreneurship literature largely remains salient about the role of unrest in social institutions. From restaurant owners to high-tech capitalists, entrepreneurs exhibit high responsiveness to social unrest events by developing various coping strategies (Biggs and Andrews, 2015;Hiatt and Sine, 2014;Mallon and Fainshmidt, 2020). From this perspective, social unrest is salient and relevant in the entrepreneurship context.…”

“…Although prior studies have examined how entrepreneurs develop different strategies in response to social unrest events (e.g. Hiatt and Sine, 2014;Mallon and Fainshmidt, 2020), we still lack societal-level evidence in entrepreneurship research. Thus, we seek to understand why women's pre-entrant entrepreneurial attempts are either enabled or constrained by national cultural values, and how changes in urban social institutions resulting from social unrest could affect such a cultural impact.…”

“…However, a sizable portion of people, including potential entrepreneurs (e.g. Hiatt and Sine, 2014; Mallon and Fainshmidt, 2020), live in societies that experience extreme social disruption and turmoil. As such, the question of how changes in social institutions, such as the possibility of wealth accumulation and social status climbing, and cultural values in contemporary societies are related to entrepreneurial activities becomes more meaningful and worthy.…”