Publication: Does Competition from Informal Firms Encourage the Formal Firms to Obtain Quality Certificates?
Loading...
Date
2025-01-09
ISSN
Published
2025-01-09
Author(s)
Editor(s)
Abstract
This study investigates the impact of competition from informal or unregistered firms on the likelihood of formal manufacturing small and medium-size enterprises obtaining internationally recognized quality certificates. The sample includes 16 countries in Latin America and the Caribbean, one of the regions with the highest levels of informality in the world. The study uncovers a positive impact, with a one standard deviation increase in informal competition leading to an increase in the probability of having a quality certificate by 2.9 to 3.6 percentage points across the different specifications. This effect is large, given that only 10.4 percent of small and medium-size enterprises have a quality certificate. These findings are consistent with the “legalist” model of informality, whereby the positive impact of informal competition on the likelihood of having a quality certificate is significantly larger in countries where the business environment is less favorable to operating in the formal versus informal sector due to factors such as the weaker rule of law and greater regulatory burden on formal firms. The paper provides several layers of checks against omitted variable bias, reverse causality, and measurement errors. The findings also show that, as expected, there is no statistically significant impact of informal competition on the likelihood of having a quality certificate among large manufacturing firms.
Link to Data Set
Citation
“Amin, Mohammad; Nogueira, Caroline. 2025. Does Competition from Informal Firms Encourage the Formal Firms to Obtain Quality Certificates?. Policy Research Working Paper; 11023. © World Bank. http://hdl.handle.net/10986/42652 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data(World Bank, Washington, DC, 2021-01)The informal sector is an important source of livelihoods and jobs for a vast majority of people in developing countries. However, there is concern that the informal sector may undermine job creation in the formal sector. According to the “parasite” view of informality, informal firms can compete against formal firms, and often "unfairly" so as they do not have to comply with costly regulations and pay taxes. This "unfair" advantage makes it difficult for formal firms to compete against informal firms, implying a significant loss of formal sector jobs. Using firm-level survey data for manufacturing small and medium-size enterprises in 109 mostly developing countries, this study estimates the impact of competition from informal firms on the growth rate of employment among formal sector small and medium-size enterprises. The results show that the growth rate of employment declines significantly as competition from informal firms rises. According to the baseline specification, for each one standard deviation increase in informal competition, the employment growth rate declines by 1 percentage point. Consistent with the parasite view of informality, the negative impact on job growth is much larger when the business environment is less conducive to operating formally versus informally due to factors such high corruption, weak rule of law, more burdensome regulations, and high profit tax rate. Several checks are provided against endogeneity concerns.Publication Does Competition from Informal Firms Impact R&D by Formal SMEs? Evidence Using Firm-Level Survey Data(World Bank, Washington, DC, 2021-11)The informal sector is an important source of livelihoods and jobs for a vast majority of people in developing countries. However, there is concern that it may undermine growth and development of the formal sector. For instance, the growth literature indicates that research and development activity and innovation are a key driver of long-term growth. How does the competition that formal sector firms face from informal sector firms affect research and development activity by the formal firms The present paper attempts to answer this question using firm-level survey data for small and medium-size enterprises in a large cross-section of mostly developing countries. The results show that higher informal competition leads to greater a likelihood of spending on research and development by formal firms. For the most conservative baseline specification, a one standard deviation increase in informal competition leads to an increase of 5.2 percentage points in the likelihood of spending on research and development by formal firms. This is a large increase given that less than 18 percent of the firms in the sample engage in research and development activity. Further, consistent with the “parasite” view of informality, the positive impact of informal competition on research and development activity is magnified when the business environment is less conducive to operating in the formal sector compared with informal sector due to factors such as higher corruption, weaker rule of law, more burdensome business regulations, and a higher tax rate on profits. As expected, there is no impact of informal competition on research and development activity among large firms. The main findings are robust to several controls, alternative specifications, and endogeneity checks.Publication Who Fears Competition from Informal Firms? Evidence from Latin America(World Bank, Washington, DC, 2007-08)This paper investigates who is most affected by informal competition and how regulation and enforcement affect the extent and nature of this competition. Using newly-collected enterprise data for 6,466 manufacturing formal firms across 14 countries in Latin America, the authors show that formal firms affected by head-to-head competition with informal firms largely resemble them. They are small credit constrained, underutilize their productive capacity, serve smaller customers, and are in markets with low entry costs. In countries where the government is effective and business regulations onerous, formal firms in industries characterized by low costs to entry feel the sting of informal competition more than in other business environments. Finally, the analysis finds that in an economy with relatively onerous tax regulations and a government that poorly enforces its tax code, the percentage of firms adversely affected by informal competition will be reduced from 38.8 to 37.7 percent when the government increases enforcement to cover all firms.Publication The Gender Labor Productivity Gap across Informal Firms(World Bank, Washington, DC, 2022-04)This study uncovers a gender labor productivity gap among informal firms in 14 developing economies. The results show that labor productivity is approximately 15.2 percent (or 0.165 log point) lower among women-owned than men-owned informal firms. Decomposition techniques reveal several factors that contribute to lower labor productivity of women-owned informal firms relative to men-owned informal firms. These include lower education, lower experience, lower capitalization, and less protection from crime among women owners than men owners of informal firms. However, the smaller size of the women-owned firms and their greater return from producing or selling under contract and from security payments narrows the productivity gap. The results provide several specific and general policy recommendations for improving the labor productivity of women-owned informal firms and closing the gap with male-owned informal firms. For one, a substantial amount of the productivity gap can be closed by providing more resources to women such as education, managerial experience, and physical capital. The study also provides some preliminary results on another important policy objective —the costs and benefits of formalization as perceived by women-owned versus men-owned informal firms.Publication The Labor Productivity Gap between Female and Male-Managed Firms in the Formal Private Sector(World Bank, Washington, DC, 2018-05)This study analyzes gender differences in labor productivity in the formal private sector, using data from 128 mostly developing economies. The results reveal a sizable unconditional gap, with labor productivity being approximately 11 percent lower among female- than male-managed firms. The analyses are based on female management, which is more strongly associated with labor productivity than female participation in ownership, which has been the focus of most previous studies. Decomposition techniques reveal several factors that contribute to lower labor productivity of female-managed firms relative to male-managed firms: fewer female- than male-managed firms protect themselves from crime and power outages, have their own websites, and are (co-) owned by foreigners. In addition, in the manufacturing sector, female-managed firms are less capitalized and have lower labor cost than male-managed firms.
Users also downloaded
Showing related downloaded files
Publication Europe and Central Asia Economic Update, Spring 2025: Accelerating Growth through Entrepreneurship, Technology Adoption, and Innovation(Washington, DC: World Bank, 2025-04-23)Business dynamism and economic growth in Europe and Central Asia have weakened since the late 2000s, with productivity growth driven largely by resource reallocation between firms and sectors rather than innovation. To move up the value chain, countries need to facilitate technology adoption, stronger domestic competition, and firm-level innovation to build a more dynamic private sector. Governments should move beyond broad support for small- and medium-sized enterprises and focus on enabling the most productive firms to expand and compete globally. Strengthening competition policies, reducing the presence of state-owned enterprises, and ensuring fair market access are crucial. Limited availability of long-term financing and risk capital hinders firm growth and innovation. Economic disruptions are a shock in the short term, but they provide an opportunity for implementing enterprise and structural reforms, all of which are essential for creating better-paying jobs and helping countries in the region to achieve high-income status.Publication The Markets and Competition Policy Assessment Toolkit(Washington, DC: World Bank, 2025-01-09)The markets and competition policy assessment toolkit (MCPAT) is a guide for understanding how policy can positively shape markets and address market failures that ultimately affect micro- and macroeconomic development issues. The MCPAT aims to support policymakers, competition authorities, and development finance institutions in realizing the advantages of competitive and well-functioning markets by setting the right conditions for firms to improve their economic performance and for markets to allocate resources efficiently. Competitive and well-functioning markets do not just benefit consumers, - they benefit entire economies as they promote productivity, innovation, efficiency, and consumer choice. The goal is not simply to increase the number of firms in a market or to restrict market power but to create an environment where competition can thrive, firms can innovate, and markets can function optimally. The structure of this toolkit follows the steps to conduct an MCPAT analysis in a specific sector or market. Part I provides an overview of key concepts that set the basis for conducting the MCPAT analysis and covers the first step of the MCPAT. Part II focuses on diagnosing market issues. Part III is about how to fix markets.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Commodity Markets Outlook, April 2025(Washington, DC: World Bank, 2025-04-29)Commodity prices are set to fall sharply this year, by about 12 percent overall, as weakening global economic growth weighs on demand. In 2026, commodity prices are projected to reach a six-year low. Oil prices are expected to exert substantial downward pressure on the aggregate commodity index in 2025, as a marked slowdown in global oil consumption coincides with expanding supply. The anticipated commodity price softening is broad-based, however, with more than half of the commodities in the forecast set to decrease this year, many by more than 10 percent. The latest shocks to hit commodity markets extend a so far tumultuous decade, marked by the highest level of commodity price volatility in at least half a century. Between 2020 and 2024, commodity price swings were frequent and sharp, with knock-on consequences for economic activity and inflation. In the next two years, commodity prices are expected to put downward pressure on global inflation. Risks to the commodity price projections are tilted to the downside. A sharper-than-expected slowdown in global growth—driven by worsening trade relations or a prolonged tightening of financial conditions—could further depress commodity demand, especially for industrial products. In addition, if OPEC+ fully unwinds its voluntary supply cuts, oil production will far exceed projected consumption. There are also important upside risks to commodity prices—for instance, if geopolitical tensions worsen, threatening oil and gas supplies, or if extreme weather events lead to agricultural and energy price spikes.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.