Cross-country variations in the participation of small businesses in the informal economy

2016 ◽  
Vol 23 (1) ◽  
pp. 3-24 ◽  
Author(s):  
Colin C Williams ◽  
Ioana Alexandra Horodnic
Keyword(s):  
Informal Economy ◽  
Small Businesses ◽  
Informal Institutions ◽  
The European Union ◽  
Formal Institutions ◽  
Content Type ◽  
Face To Face ◽  
Cross Country ◽  
Laws And Regulations ◽  
Civic Morality

Purpose – The purpose of this paper is to advance a new explanation for cross-country variations in the participation of small businesses in the informal economy. Drawing upon institutional theory, it proposes that the greater the asymmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality), the greater is the propensity of small businesses to participate in the informal economy. To analyse this, the extent to which small businesses evade payroll taxes by paying employees an undeclared (envelope) wage in addition to their official declared salary is analysed. Design/methodology/approach – To evaluate this, data are reported from a 2013 Eurobarometer survey involving 5,174 face-to-face interviews with employees in small businesses across the 28 member states of the European Union (EU-28). Findings – The finding is that small businesses display a greater propensity to engage in this informal wage practice in countries where there is a higher degree of asymmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality). A multi-level logistic regression analysis reveals these to be countries which have lower qualities of governance, lower levels of taxation and intervention in the labour market and less effective social transfer systems. Research limitations/implications – The major limitation of this study is that it has only examined whether employees in small businesses receive informal wages. Future cross-country surveys should analyse a wider range of ways in which small businesses participate in the informal economy such as under-reporting turnover. Originality/value – This is the first known analysis of cross-country variations in the participation of small businesses in the informal economy.

scholarly journals Explaining the Undeclared Economy in Bulgaria: an Institutional Asymmetry Perspective

2015 ◽  
Vol 9 (2) ◽  
pp. 33-45 ◽  
Author(s):  
Colin C. Williams ◽  
Josip Franic ◽  
Rositsa Dzhekova
Keyword(s):  
Social Contract ◽  
Informal Institutions ◽  
Formal Institutions ◽  
East Europe ◽  
Face To Face ◽  
South East Europe ◽  
The Social ◽  
Formal And Informal Institutions ◽  
Values And Beliefs ◽  
Civic Morality

Abstract This paper proposes a way of explaining the undeclared economy that represents participation in undeclared work as a violation of the social contract between the state and its citizens, and as arising when the informal institutions comprising the norms, values and beliefs of citizens (civic morality) do not align with the codified laws and regulations of a society’s formal institutions (state morality). Drawing upon evidence from 1,018 face-to-face interviews conducted in Bulgaria during 2013, the finding is that the greater is the asymmetry between formal and informal institutions (i.e., citizens’ civic morality and state morality), the greater is the likelihood of participation in the undeclared economy, and vice versa. The outcome is that tackling the undeclared economy requires a focus upon reducing this lack of alignment of formal and informal institutions. How this can be achieved in Bulgaria in particular and South-East Europe and beyond more generally, is then discussed.

scholarly journals Evaluating policy approaches for tackling informal entrepreneurship

2019 ◽  
Vol 26 (4) ◽  
pp. 595-611 ◽  
Author(s):  
Ioana Alexandra Horodnic ◽  
Colin C. Williams
Keyword(s):  
Informal Economy ◽  
Small Businesses ◽  
Social Actor ◽  
Actor Model ◽  
Tax Morale ◽  
Content Type ◽  
Face To Face ◽  
Economic Actor ◽  
Informal Entrepreneurship ◽  
Eastern European Countries

Purpose When tackling the informal economy, an emergent literature has called for the conventional rational economic actor approach (which uses deterrents to ensure that the costs of undeclared work outweigh the benefits) to be replaced or complemented by a social actor approach which focusses upon improving tax morale. The purpose of this paper is to explore the effectiveness of these two policy approaches in reducing informal sector entrepreneurship. Design/methodology/approach To evaluate this, data are reported from a 2015 representative survey involving 1,384 face-to-face interviews with owners or managers of small businesses in three South-Eastern European countries, namely, Croatia, Bulgaria and FYR Macedonia. Findings The findings provide support for the “social actor” approach and display that small businesses have a greater propensity to perceive competitors as operating informally when the level of tax morale is lower. Meanwhile, no support for the deterrence measures of the “rational economic actor” model is reported. Research limitations/implications The major limitation of the study is that the paper is not able to display the reasons for the low level of tax morale and horizontal trust. Therefore, further in-depth qualitative research is necessary to explain whether and how the low levels of trust are determined by the failures of various formal institutions. Originality/value This is the first known study on small businesses which analyses simultaneously two distinct policy approaches that aim to reduce participation in informal entrepreneurship.

scholarly journals Explaining and tackling envelope wages in the Baltic Sea region

2015 ◽  
Vol 10 (3) ◽  
pp. 295-312 ◽  
Author(s):  
Colin C Williams ◽  
Ioana Alexandra Horodnic
Keyword(s):  
Institutional Theory ◽  
Baltic Sea ◽  
Informal Institutions ◽  
Formal Institutions ◽  
The Baltic Sea ◽  
Content Type ◽  
Baltic Countries ◽  
Baltic Sea Region ◽  
The Baltic ◽  
Laws And Regulations

Purpose – The purpose of this paper is to advance a new way of explaining and tackling the illegitimate wage practice where employers pay their employees an undeclared (envelope) wage in addition to their formal salary. Drawing upon institutional theory, it is here proposed that envelope wages result from the lack of alignment of a society’s formal institutions (i.e. the codified laws and regulations) with its informal institutions (i.e. the socially shared unwritten understandings which reflect citizens’ norms, values and beliefs). Design/methodology/approach – To evaluate this, data are reported from a 2013 Eurobarometer survey involving 1,738 face-to-face interviews with formal employees in four Baltic countries, namely, Estonia, Latvia, Lithuania and Poland. Findings – The finding is that the greater is the asymmetry between the formal and informal institutions (i.e. the level of disagreement of citizens with the codified laws and regulations of formal institutions), the higher is the propensity to pay envelope wages. This is the case at both the individual- and country levels. Practical implications – To reduce the prevalence of envelope wages, the resultant argument is that the values of employers and employees need to be aligned with the formal institutions. This requires alterations not only in the informal institutions, using measures such as tax education, awareness raising campaigns and normative appeals, but also changes in formal institutions so as to improve trust in government by fostering greater procedural justice, procedural fairness and redistributive justice. Originality/value – This is the first paper to apply institutional theory to explaining and tackling envelope wages in the Baltic Sea region.

scholarly journals Formal institutions and the development of entrepreneurial activity – the contingent role of corruption in emerging economies

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Arezou Harraf ◽  
Hasan Ghura ◽  
Allam Hamdan ◽  
Xiaoqing Li
Keyword(s):  
Emerging Economies ◽  
Corporate Entrepreneurship ◽  
Informal Institutions ◽  
Entrepreneurial Activity ◽  
Future Research ◽  
Formal Institutions ◽  
Business World ◽  
Content Type ◽  
Formal And Informal Institutions ◽  
Control Of Corruption

PurposeThe paper aims to analyse the interplay between formal and informal institutions' and their impact on entrepreneurship rates in emerging economies.Design/methodology/approachThis study expands previous research in examining the moderating effect of control of corruption on the relationship between formal institutions and the development of the entrepreneurial activity. The study utilizes longitudinal analyses of a dataset from 41 emerging economies over 11 years (2006–2016).FindingsFindings provided robust support for the study's hypotheses. The results suggested lower levels of corruption positively moderate the effects of a country's number of procedures and education and training on the rates of entrepreneurial activity, while negatively moderating the effects of firm-level technology absorption on the rates of entrepreneurial activity.Research limitations/implicationsThe study has considered only one particular aspect of high-growth entrepreneurship, which is newly registered firms with limited liability. Although newly registered firms are recognized as one of the critical drivers of entrepreneurial activity. Future research should seek to examine other aspects of growth-oriented entrepreneurship such as activities involving a high level of innovation, corporate entrepreneurship or technology developments.Practical implicationsThis study advanced the existing theories in the field of entrepreneurship and institutional economics as it merged the two theories as a driving framework in the design of the study in the context of emerging economies.Social implicationsThe study tested a theoretical model by expanding the number of emerging economies in the study and found comparable findings that explain factors that may influence the likelihood of individuals entering entrepreneurship.Originality/valueThis article adds to the current literature as it highlights the importance of the interplay of formal and informal institutions in determining their impact on entrepreneurship rates in emerging economies. This is of particular importance to policy-makers, and the business world as the empirical results of this study show the benefits of control of corruption in boosting entrepreneurial rates in these economies, which strive for economic diversification in their developmental endeavours.

scholarly journals Beyond the formal/informal employment dualism: evaluating individual- and country-level variations in the commonality of quasi-formal employment

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Colin Williams ◽  
Besnik Krasniqi
Keyword(s):  
Social Protection ◽  
Informal Institutions ◽  
Vulnerable Groups ◽  
The European Union ◽  
Content Type ◽  
Individual Level ◽  
Country Level ◽  
The United Kingdom ◽  
Formal Employment ◽  
The Individual

PurposeTo transcend the view of employment as either formal or informal, this paper evaluates the prevalence of quasi-formal employment where formal employers pay formal employees an unreported (“envelope”) wage in addition to their formal reported salary. To explain the individual-level variations in quasi-formal employment, the “marginalisation” thesis is evaluated that this practice is more prevalent among vulnerable groups and to explain the country-level variations, and a neo-institutionalist theory is evaluated that it is more prevalent where formal institutional failures lead to an asymmetry between the formal laws and regulations and the unwritten socially shared rules of informal institutions.Design/methodology/approachTo evaluate the individual- and country-level variations in the prevalence of quasi-formal employment, a multi-level logistic regression is provided of data from special 2019 Eurobarometer survey 92.1 involving 11,793 interviews with employees across 28 European countries (the 27 member states of the European Union and the United Kingdom).FindingsOf the 3.5% of employees (1 in 28) who receive under-reported salaries, the marginalisation thesis is supported that it is largely vulnerable population groups. So too is the neo-institutionalist explanation that quasi-formal employment is more common in countries where the non-alignment of formal and informal institutions is greater, with the formal institutional failings producing this identified as lower levels of economic development, less modernised state bureaucracies and lower levels of taxation and social protection.Practical implicationsThe policy implication is that tackling quasi-formal employment requires not only enforcement authorities to improve the risk of detection of this illegal wage practice but also governments to change wider macro-level structural conditions. These are outlined.Originality/valueContemporary new evidence is provided of the prevalence of quasi-formal employment along with how this illegal wage practice can be explained and tackled.

scholarly journals An Institutional Theory of Tax Non- Compliance in Bulgaria: a Tax Morale Approach

2020 ◽  
pp. 33-49 ◽  
Keyword(s):  
Institutional Theory ◽  
Firm Size ◽  
Representative Sample ◽  
Political Instability ◽  
Informal Institutions ◽  
Formal Institutions ◽  
Tax Morale ◽  
Economic Decision ◽  
Face To Face ◽  
Nationally Representative

To explain tax non-compliance, the dominant approach has been to view noncompliance as a rational economic decision taken when the benefits outweigh the costs. However, many remain compliant even when non-compliance is the rational economic decision. The outcome has been the emergence of a new tax morale approach. Grounded in institutional theory, this asserts that formal institutional failings lead to an asymmetry between the laws and regulations of a society’s formal institutions and the beliefs of the population that constitute its informal institutions. The greater is this asymmetry (measured by the level of tax morale), the greater is the prevalence of tax non-compliance. Until now, studies have analysed the tax morale of citizens. This paper evaluates the tax morale of entrepreneurs and identifies the formal institutional failings that lead to lower tax morale among entrepreneurs. Reporting 456 face-to-face interviews with a nationally representative sample of entrepreneurs in Bulgaria, it is revealed not only that the tax morale of entrepreneurs varies by sector and firm size, but also that the formal institutional failings significantly associated with low tax morale include a perceived lack of tax fairness, corruption and political instability. The implications for theory and policy are then discussed.

Financing needs of micro-enterprises along their evolution

2020 ◽  
Vol 36 (2) ◽  
pp. 263-284
Author(s):  
Ruslan Prijadi ◽  
Permata Wulandari ◽  
Putri Mega Desiana ◽  
Fajar Ayu Pinagara ◽  
Maya Novita
Keyword(s):  
Small Businesses ◽  
Development Stage ◽  
Business Owners ◽  
Capital City ◽  
Small Enterprises ◽  
Formal Institutions ◽  
Content Type ◽  
Structural Problems ◽  
Micro And Small Enterprises ◽  
Micro Enterprises

Purpose The purpose of this paper aims to investigate micro enterprises financing in Indonesia and examines how this financing differs, depending on the enterprise’s development stage. This research also identifies some structural problems related to micro-financing and provides workable solutions. Design/methodology/approach This research uses the entrepreneurial network model of Schutjens and Stam (2003) to examine how Indonesian micro and small enterprises (MSEs) evolve even before they become regular small businesses. Content analysis is used on 10 micro-enterprises from Jakarta, the capital city of Indonesia and its surroundings. Financing issues at each stage of enterprise development are identified and deeply examined. Findings This research not only confirms the significant financing problems micro-enterprises face but also clarifies that these problems are unique to each stage of the MSEs’ development. One insight is that most micro-enterprises do not use funding from formal institutions. That is, business owners rely more on funding from non-formal institutions. This is because these enterprises’ managers generally cannot prepare loans application and/or they are lack of knowledge/training on financing matters. They hesitate to borrow from formal financial institutions, as the rates are high but the processing time is longer than those of the loan sharks. Originality/value This research contributes to the field of entrepreneurial finance by identifying the structural problems inherent in micro-finance and providing workable solutions for overcoming these problems.

Exploring decision-making biases among Iranian entrepreneurs: some novel insights

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Pouria Nouri
Keyword(s):  
Decision Making ◽  
Small Businesses ◽  
Illusion Of Control ◽  
Escalation Of Commitment ◽  
Content Type ◽  
Face To Face ◽  
Control Factors ◽  
Qualitative Thematic Analysis ◽  
The Law ◽  
Decision Making Biases

Purpose Decision-making biases play decisive roles not only in entrepreneurs’ decisions but also in the fate of entrepreneurial businesses. While the extant literature in this regard is relatively rich, it has predominantly focused on certain biases like overconfidence and overoptimism at the expense of other possibly influential biases, which could influence entrepreneurial decisions. Thus, to address this serious research gap, this paper aims to explore four of the less-researched biases of escalation of commitment, the illusion of control, confirmation and the belief in the law of small numbers in entrepreneurial decisions. Design/methodology/approach By taking a qualitative approach, the data for this study were collected through face-to-face interviews with 19 Iranian habitual (experienced) entrepreneurs running small businesses and analyzed by a qualitative thematic analysis. Findings According to the results, the environmental uncertainty, the reluctance to lose face and the experiences of previous failures contributed to the escalation of commitment, while disregard for external factors beyond one’s control caused the illusion of control, factors like prior successful businesses in the same sector, looking for resorts to manage uncertainty, along with the decision to exploit opportunities resulted in the confirmation bias, while the expenses of conducting sweeping pilot tests in the market and the reluctance to reveal a business secret to the competitors were the main contributors of the belief in the law of small numbers. Originality/value This study is a pioneer in scrutinizing four less-researched but important biases in entrepreneurs and, thus extending the line of research in this regard.

Choosing between the formal and informal economy: how do managers decide?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Amine Abi Aad ◽  
James G. Combs
Keyword(s):  
Informal Economy ◽  
Regulatory Focus ◽  
Social Ties ◽  
Research Question ◽  
Formal Institutions ◽  
Firm Level ◽  
Content Type ◽  
Top Managers ◽  
New Research ◽  
Managerial Choice

PurposeWe raise and address an unexamined research question: Why do managers place some business activities in the formal economy and others in the informal? This firm-level managerial choice is most visible in emerging economies and is important due to its performance implications.Design/methodology/approachWe theorize that managers use social ties with formal institutions (e.g. parliament, central bank) to protect against (1) being singled out for enforcement and (2) opportunistic business partners, and that these protections allow managers to conduct more activities in the informal economy. Based on regulatory focus theory, we also submit that managers with a promotion (prevention) focus mindset are more (less) prone to use their social ties with formal institutions to emphasize the informal economy. Hypotheses are tested using survey data from 362 Lebanese top managers.FindingsManagers' social ties with formal institutions relate positively to their propensity to use the informal economy, and managers with a promotion mindset are more willing and those with a prevention mindset are less willing to leverage their social ties with formal institutions to conduct activities in the informal economy.Originality/valueOur study raises an important new research question at the intersection of strategic and international management and offers an initial answer. Working within the informal economy requires informal social ties among informal actors, but for formally registered firms, entry into the informal economy requires informal ties with formal actors.

scholarly journals Explaining the Prevalence of the Informal Economy in the Baltics: an Institutional Asymmetry Perspective

2015 ◽  
Vol 22 (2) ◽  
pp. 127-145 ◽  
Author(s):  
Colin C. Williams ◽  
Ioana A. Horodnic
Keyword(s):  
Labour Market ◽  
Informal Economy ◽  
State Intervention ◽  
Formal Institutions ◽  
Institutional Perspective ◽  
Baltic Countries ◽  
Poverty And Inequality ◽  
Values And Beliefs ◽  
The Asymmetry ◽  
Civic Morality

Reporting a 2013 Eurobarometer survey of participation in the informal economy across eight Baltic countries, this paper tentatively explains the informal economy from an institutional perspective as associated with the asymmetry between the codified laws and regulations of the formal institutions (state morality) and the norms, values and beliefs of citizens (civic morality). Identifying that this non-alignment of civic morality with the formal rules is more acute when there is greater poverty and inequality, less effective redistribution and lower levels of state intervention in the labour market and welfare, the implications for theorising and tackling the informal economy are then discussed.

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