Academic journal article Academy of Entrepreneurship Journal

A Framework for Informal Economy Entry: Socio-Spatial, Necessity-Opportunity, and Structural-Based Factors

Academic journal article Academy of Entrepreneurship Journal

A Framework for Informal Economy Entry: Socio-Spatial, Necessity-Opportunity, and Structural-Based Factors

Article excerpt


The informal economy, commonly referred to as "undeclared," "unregistered" or "shadow" economy, is a prevalent feature of developed and developing economies (Portes, Castells, & Benton, 1989; Williams & Nadin, 2010b). Due to sustained high unemployment levels and the prolonged global economic recovery, individuals from diverse socioeconomic backgrounds are entering the informal economy. Economists state that informal economy activities are nearly nine percent of U.S. GNP, and more than 50 percent of GNP in many developing countries (Schneider, 2002; Weiler, Silverstein, Chalmers, & Lacey, 2003). Drawing from economics, sociology, and management disciplines the informal economy is defined as unregulated legitimate income generating activities through which actors recognize and exploit opportunities (Castell & Portes, 1989; Webb, Tihanyi, Ireland, & Sirmon, 2009). The informal economy includes individuals from all socioeconomic strata. Some groups participate out of necessity, while others exploit opportunity gaps emerging from formal and informal institutional incongruences (Slack, 2006; Webb et al., 2009; Williams, 2007a). An expanding informal economy adversely impacts the formal economy through decreased tax collections, understated income, ineffective monetary policies, overstated unemployment rates, and unexplained currency growth (Williams & Nadin, 2010b). A concerted effort is required from policymakers to minimize the impact on the macro-economy but public policymakers need clarity on the motives and contextual factors prompting informal economy entry modes.

To facilitate the improvement of public policy and to contribute to theory, a Multitheoretical Informal Economy Entry Selection framework (MTIEES) is developed which integrates: (1) contextual factors - socio-spatial variations', (2) entry typologies - necessity-based versus opportunity-driven', and (3) external structural factors - structuralist, neo-liberal, and post-structuralist. The MTIEES framework is created through the integration of literature on each of these three dimensions thereby attempts to close a gap in the literature. To accomplish our objective, the MTIEES framework addresses the following interrelated research questions:

1. Given socio-spatial variations, why do some individuals (e.g. Affluent, Middleincome, Poverty-stricken) in disparate geographic locations (e.g. Urban, Suburban, and Rural) choose to enter the informal economy?

2. What are differentiating characteristics of necessity-based versus opportunity driven informal entrepreneurs?

3. Which external structural factors (Structuralism, neo-liberalism, and PostStructuralism) best explain the informal economy entry of various individuals?

To proceed, background and current literature on the informal economy and entry motives is provided. We offer definitions for socio-spatial variations and examine the role socio and spatial variations play in the informal economy. Entry typologies and external structural factors are discussed to establish foundation for the MTIEES framework. Our framework is then created through the integration of literature on socio-spatial variations (e.g. socioeconomic status, locale) and entry typologies (necessity-based versus opportunity-driven). Propositions are offered and personal vignettes provided that demonstrate the effectiveness and limitations of the framework.


Background and recent contributions on the Informal Economy

Some studies have found that the majority of informal economy participants are employees working for others, in sweatshops or out of their homes in contract relationships to producers (Edgcombe & Thetford, 2004). But, many are also self-employed. The very nature of being a micro (or very small) enterprise lends itself to operating in the informal economy. These enterprises are largely invisible or, at best, operate at low levels of visibility. …

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