Academic journal article Academy of Entrepreneurship Journal

Informal Institutions and Informal Entrepreneurial Activity: New Panel Data Evidence from Latin American Countries

Academic journal article Academy of Entrepreneurship Journal

Informal Institutions and Informal Entrepreneurial Activity: New Panel Data Evidence from Latin American Countries

Article excerpt

INTRODUCTION

In recent years, and most notably after the publication of the seminal paper by Webb et al. (2009), scholars in the field of entrepreneurship have begun to pay closer attention to informal entrepreneurship and the importance of informal rules as one relevant explanation for its wide prevalence, predominantly in developing countries. According to Webb et al. (2009) societies are constituted of groups that normally differ regarding what is socially acceptable, and these differences are due to the norms, values, and beliefs which prevail in each society (Dowling and Pfeffer, 1975; Scott, 2013). These asymmetries can lead to generating a gap between what some groups in society understand as legal and what others consider as legitimate (Webb et al., 2009). According to Webb et al (2013, p.3) "The informal economy is concerned with economic activities that are outside of formal institutional boundaries (i.e., illegal) yet fall within informal institutional boundaries (i.e., legitimate)." This means that while formal rules such as tax, labor or environmental regulation penalize informality, other informal rules such as social acceptance of the informal economy by large groups of the society legitimize their presence and facilitate their development.

The definition proposed by Webb et al. (2009, 2013) has been very enlightening, mainly by the emphasis given to the informal rules. According to the authors of this study, informal rules make it possible for informal entrepreneurs to operate within the economy despite developing on the fringes of the law. Likewise, the informal activities are usually developed in small networks, where participants can make use of informal rules such as trust, and in this way try to compensate for the lack of rules and formal markets (Castells and Portes, 1989). For example, informal entrepreneurs can leverage identity-based groups that, in part, act as a substitute for formal institutions (Wilson and Portes, 1980). In other words, informal entrepreneurs can replace or compensate the market rules by operating through networks in the informal economy. In these networks the informal entrepreneurs find investors, suppliers, and customers; furthermore, social norms as trust, solidarity, reciprocity, and reputation can act as an acceptable substitute for formal rules (Alesina and La Ferrara, 2000; Glaeser et al., 2000; Greif, 1993; Stiglitz, 2000; among others).

On the other hand, empirical research in the field of entrepreneurship has focused on the relationship between formal institutions and informal entrepreneurial activity. However, less has been said about the relationship with informal institutions (D'Hernocourt and Meon, 2012). The paper attempts to incorporate and empirically test some of the ideas developed in recent years by academics of entrepreneurship (Webb et al., 2009; Welter and Smallbone, 2011; De Castro et al., 2014; Webb et al., 2014; Williams and Vorley, 2014). These scholars argue that the greater the incongruence between formal and informal institutions, the more entrepreneurs will operate in the informal sector (Williams and Shahid, 2016). Although informal entrepreneurs are not aligned with formal rules, they are justified by informal rules that give social acceptability to their activity (Webb et al., 2009). To achieve this objective, we will use institutional theory (North, 1990; Web et al., 2009, 2013) as conceptual framework and a panel data for 18 Latin America countries in the period from 2004 to 2015. The proxy used to informal entrepreneurial activity is the percentage of the adult population identified as own-account workers or street peddlers.

The article is organized as follows. Section 2 discusses theory and hypothesis development. Section 3 describes the variables and econometric method used in the empirical analysis. In Section 4 the statistical analysis is developed. Finally, the empirical results are presented.

THEORY AND HYPOTHESIS DEVELOPMENT

Helmke and Levitsky (2004, p. …

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