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 plays a critical role in the economies of most countries and its role has increased recently due to economic conditions. Consequently, there is rising interest in informal economy, the differential motivations for participation, and entry modes. Scholars have considered various contextual and situational explanatory factors, but usually in isolation. To address this gap, three interrelated informal economy theories are examined culminating in the development of a contextual framework that suggests appropriate theory selection for informal economy entry decisions. This framework assists policymakers in developing appropriate economic and regulatory policies by ascertaining factors that motivate informal economy entry.

Keywords: Informal Economy, Informal Economy Theories, Socio-Spatial Variations, Informal Entrepreneurs, Externally-Stimulated Opportunities, Internally-Stimulated Opportunities, Necessity Entrepreneurship


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. …

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