Darbi, W.P., Hall, C.M. & Knott, P.

(2016) The Informal Sector: A Review and Agenda for

Management Research, International Journal of Management Reviews, DOI: 10.1111/ijmr.12131
(submitted manuscript version)

The informal sector: a review and agenda for management research

Abstract

Despite its connotations of non-compliance, illegality, social exploitation and marginality, the
informal sector is a substantial contributor to economic life in developing countries and,
increasingly, in more technologically-advanced activities. Its prevalence in developed
economies has also become more widely recognised. In light of its significance, this paper
reviews research on the informal sector from a management and organisation scholarship
perspective, rather than from an entrepreneurship view, as has been the focus until now. It
sets out the atypical management practices that are inherent in the sector, explores the under-
researched relationship between formal and informal firms, and highlights definitional,
conceptual and other limitations in extant research. As a step in resolving these issues, we
present a conceptual model of formality and informality in a three-dimensional framework
that highlights an organisational infrastructure dimension, a view of firms operating along a
continuum, and a multi-level analytical context. Building on this, we detail opportunities for
enhanced appreciation of in situ management and organisational practices in the informal
sector and outline tools for pursuing a management and organisation scholarship agenda.
Overall, we argue that management scholarship has great potential to improve understanding
of the informal sector, and that the informal sector provides opportunities to advance
management theory, research and practice.

Introduction

The informal sector is a key contributor to the provision of essential products and services,
and employment generation (Chen 2006). Informal sector businesses may also be essential to
the competitiveness of formal firms and regional economies through their involvement in
supply chains and strategic networks (Blunch et al. 2001; Jones et al. 2006). These trends are

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integral to contemporary neoliberal capitalism and globalisation, as large multinational
enterprises strategise to save costs and maximize return on investments via the use of cheaper
inputs and flexible production arrangements, often brokered by smaller informal businesses
and agents (Piore and Sabel 1984; Portes et al. 1989; Jones et al. 2006; Kar and Marjit 2009).

Early theorisation described the informal sector as a transient economic phenomenon of less
developed economies that was destined to disappear when development ‘catches up’ with
those economies (Lewis 1958; Tokman 1978). The informal sector was variously labelled as:
‘underground’, ‘black’, ‘hidden’, ‘irregular’, ‘second’, and ‘criminal’ (Gërxhani 2004; Henry
and Sills 2006). Unlike the formal sector, the informal sector is not properly registered,
recorded or enumerated, with businesses operating ‘off-the-books’ and failing to pay taxes or
obey labour and employment laws (Gërxhani 2004; Chen 2006). Atypical resources and
management practices are also regarded as defining characteristics of businesses operating in
the informal sector (Blunch et al. 2001; Godfrey 2011).

However, despite how the informal sector is usually framed, the sector has increased in size
from about 37% of gross domestic product (GDP) in the 1990s to approximately 50% by
2010 in developing economies (Charmes 2012). In these economies, the informal sector
employs about 40% to 80% of the working population (ILO, 2004). The sector has a growing
and disguised character in developed economies (Blunch et al. 2001; Chen 2006, 2012) and
accounted for an average of about 16% of GDP of developed countries in 2012 (Schneider
2012). In advanced economies, the importance of the informal sector as an employment
alternative is often highlighted during economic and financial crises when labour and
businesses move between the informal and formal sectors (Biggs et al. 2015; Horn 2009;
Schneider 2012).

Informal sector activities now include more technologically-advanced manufacturing and

service operations (Jones et al. 2004, 2006; Siqueira and Bruton 2010; Adom and Williams
2012; Lee and Hung 2014), unlike unsophisticated operations such as street-vending,
hawking and shoe-shining identified in earlier studies (ILO 1972; Hart 1973), and which
arguably dominate academic and public perception of the sector. This has led to a renewed
interest in informal sector studies (e.g. Leonard 1998; Schneider 2000, 2011, 2012; Williams
2004, 2005, 2007a). Despite its contributions, and heightened scholarly interest, management

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scholarship on the sector remains incommensurate with its importance (Bruton et al. 2012;
Webb et al. 2014).

While a body of conceptual and empirical research on management and organisation

perspectives on the informal sector is yet to amass for a more ‘conventional’ review (Short
2009; Jones and Gatrell 2014), this paper, similar to Wright and Boswell (2012) on macro
and micro human resource management, explores the intersections of previously independent
research locales, with the aim of bridging perspectives and advancing management and
organisational scholarship. To establish a base of relevant material to examine for this
narrative review an initial systematic review was conducted through recognised bibliometric
databases including Scopus and Web of Science (WoS). These databases include journals,
and recent conference proceedings although books and book chapters are limited. For
example, according to Orduña-Malea et al. (2015), the percentages of documents by type,
collected in WoS for the period 1900 to 2014, indicates that “Journal document type”
(composed by articles, abstracts, editorial material and letters) represents 75% of all
documents, Proceedings 21%, and “Book and Book chapters” only 1%. A snowball method
was then used to follow-up on references cited in relevant WoS/Scopus listed publications.
This then enabled potentially relevant books, book chapters, as well as peer or expert
reviewed government and research reports to be identified and assessed. Items were included
according to our judgement of relevance and quality based on reading the work, prioritising
those that meet Adams et al (2016, p.4) Tier 1 criteria for source expertise and outlet control.
Such an approach is in keeping with Adams et al’s (2016) suggested guidelines for working
with the grey literature in systematic reviews for management and organizational studies. As
they observed, the “benefits of grey literature are in its use not only to extend the range of
evidence, but to fill gaps in the academic literature” (Adams et al., 2016, p. 7). In addition, an
analysis was conducted of paper presentations at key international conferences, e.g. British
Academy of Management, Strategic Management Society, to help inform the review.

This paper therefore explicates the substantial research opportunities the informal sector
phenomenon provides for management and organisation theory, research, and practice that
have been predominantly developed and observed in formal settings, and vice versa. Integral
to this, we outline the contributions that other fields that have extensively studied the
informal sector may make to a management and organisation perspective. We further draw on
previous management and organisation–focused reviews particularly those of McGahan

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(2012), Bruton et al. (2012) and Godfrey (2011) whilst exploring further avenues for
developing and extending these important previous works.

Toward this end, the review examines distinctive management and organising practices in the
informal sector in light of normative management and organisational concepts, theories and
practices. An important impetus for informal sector studies is how an understanding of the
informal sector also helps our understanding of the formal sector. The literature supports the
existence of important relationships between the two sectors, however the nature,
management, exact ‘on-goings’ and outcomes of these relationships are not well understood.
This offers several avenues for management scholarship, which we review later in the paper.
Through a synthesis of the literature and provision of a conceptual model, we argue that
bringing management and organisation concepts into sharper focus may help address some of
the challenges of blurred boundaries between formal and informal firms that legal compliance
conceptualisations have been unable to overcome (McGahan 2012). A discussion on the
research and theoretical development implications of the review for various sub-disciplines in
management and organisation is then presented.

Atypical management and organisational practices in the informal sector

Our review highlights what extant literature tells us about the distinctive management and
organisational perspectives that characterise the informal sector. We have structured the
review according to major discipline areas within management and organisational
scholarship.

Organisation and human resource management

A characteristic of most informal sector businesses is that they may not be capable of using
normative management tools and concepts effectively, because of possible deficiencies in
organisational and knowledge structures and resources (Godfrey 2011; Bruton et al. 2012).
Institutional norms may further act as disincentives for the use of formal planning tools and
concepts in those organisational fields (Puffer and McCarthy 2011). With some exceptions,
education levels in the informal sector are typically low (Morris et al. 1996; Debrah 2007;
Devey et al. 2008) with a majority of participants having, if at all, only basic education

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(Blunch et al. 2001). A significant and positive correlation has been found between higher
education and formal jobs, meaning people with lower levels of education were more likely
to participate in the informal sector (Marcelli et al. 1999; Nelson 1999; Gallaway and
Bernasek 2002). However, highly-educated participants have been found in some developing
countries (Lubell 1991; Siqueira and Bruton 2010; Adom and Williams 2012).

It has also been observed that skills and human capital development from informal providers
is rare (Lubell 1993; Blunch et al. 2001; Fajana 2008). On-the-job training of employees
tends to take the form of informal apprenticeships. Amongst other things, labour laws and
standards are often side-stepped by informal employers, leading to long periods of casual
work with poor wages which are often lower than the national minimum. Informal employers
also fail to pay social security contributions and fringe benefits, a situation aggravated by the
absence of written contracts and labour unions (Fajana 2008; Chen 2012).

Characteristically, record keeping practices in informal businesses are generally poor.

Businesses often keep separate sets of records (Dyer and Mortensen, 2005), assuming they
choose to keep records at all. A lot of cash transactions, and, to a lesser extent, barter
transactions (Gaughan and Ferman 1987; Meagher 1990) have been reported in the informal
sector relative to cheque and ‘on account’ transactions. These practices reflect the general
lack of formal documentation, which subsequently acts as an obstacle to securing capital
from formal institutions such as commercial banks (Siqueira and Bruton 2010). Informal
businesses therefore often resort to informal sources of credit with arrangements based on
trust (Quasem et al. 1998; Bruton et al. 2011), or to microfinance enterprises with less
stringent terms and conditions in order to acquire stock (Adams and Fitchett 1992; Buckley
1997). Evidence also shows that owners of informal businesses in most instances rely on
equity from personal savings and credit from family and friends for start-up capital – in 84%
and 82% of cases in New Dehli and Bangkok respectively (Lubell 1991, 1993).

The lack of identifiable business assets, especially in developing countries (Webb et al. 2014)
is yet another feature of the informal sector. Interestingly, even physically located
participants tend to lack ownership, title or proper leases to the properties they operate from
(Tokman 1990; Sethuraman 1997; Godfrey 2011). Invariably, businesses in the informal
sector fail to attract highly-skilled human resources and therefore lack the capacity and
context for planning and executing formal management models.

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Marketing management

Preference for short term planning horizons in the informal sector is also apparent in the
marketing of goods and services. Marketing in micro and small businesses is often
characterised by informal and unplanned activity that relies on the intuition and energy of the
owner (Blankson and Stokes 2002). Carson (1993) argues that small firms hardly find market
orientation and planning useful, since they seem not to appreciate its impact on performance.
According to Harris and Watkins (1998) ignorance, lack of differentiation, lack of resources,
satisfaction with the status quo, as well as short-term thinking explains this finding best.
Distribution channels are mostly localised and promotion kept invisible as much as possible,
in order to avoid state regulators (Losby et al. 2002). This observation however might not be
the case universally, as the choice to be modestly sized could equally be for other reasons,
such as capability deficiency or lifestyle choice (Hall and Rusher 2005).

Invariably, less costly and less sophisticated marketing strategies like word-of-mouth,
personal selling, direct marketing, cultural marketing and relationship marketing targeted at
price-sensitive customers have been popular in the informal sector (Varcin 2000; Losby et al.
2002). For instance, price negotiations between buyer and seller are a common feature, unlike
in the formal sector where prices are normally specified and indicated by the seller (Dana
2011). A satisfactory negotiated transaction potentially means a long-term social and
economic relationship that is not solely customer-orientated as is typical of normative
relationship marketing (Webster 1992; Evans and Laskin 1994; Zineldin 1998). These
insights notwithstanding, several important marketing management principles are yet to
receive empirical attention in the informal sector.

Strategic management

Studies suggest that informal sector participants do take a conventional strategic view on
their businesses to the extent that they make sense of business goals, growth, opportunities
and strategies (Morris et al. 1996; Hiemstra et al. 2006). For instance, Jones et al. (2006)
found varying degrees of competitive and market positioning strategies amongst informal
businesses in the catering and clothing sectors in the UK.

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Despite this, in many respects informal businesses deal with strategic management
imperatives in unconventional ways. Aside from economic and social considerations, ethnic
and religious factors have been found to influence management decisions (Bromley and
Birkbeck, 1984; Varcin 2000; Godfrey, 2011). Whilst not creating the impression of a lack of
drive and ambition (e.g. Morris et al. 1996), informal businesses may prefer to remain as
small establishments because of inherent advantages of low visibility and ease of relocation,
displacement, folding-up and re-opening (Sassen-Koob 1984; Portes and Sassen-Koob 1987).
Informal businesses also tend to operate in industries or sub-sectors of industries, such as
retail or services, that are characterised by small-scale; low levels of skills, technology and
capital requirements; simple or no division of labour; labour intensity and little differentiation
in the ownership of factors of production (Tokman 1990; Morris et al. 1996; Blunch et al.
2001; Losby et al. 2002; Gërxhani 2004). Participation in construction, production,
manufacturing, transport and wholesaling is less prevalent relative to retailing, but varies
across regions and countries (Morris et al. 1996; Blunch et al. 2001). They also tend to be in
non-precision, repair and assembly-type activities (Losby et al. 2002).

Due to low capital requirements, lack of economies of scale requirements, and

undifferentiated commodity-like and unregulated markets, barriers to entry into the informal
sector are low (Porter 1985). However, a number of curbing strategies have been identified,
some of which cannot be easily explained by rational economic models of competition
because of factors like size, culture, and institutional considerations that inform competition
decisions (Varcin 2000; Godfrey, 2011). Studies in Turkey and Mexico have shown that
unlike maximum profit-seeking traders who strategise like ‘small capitalists’, not all market
traders act to maximise individual profits because they feel the need to moderate competition
in order to enhance lasting social relationships amongst competitors (Beals 1975; Varcin
2000). Similar findings come from informal bed and breakfast operators in New Zealand who
engage in the accommodation sector to fulfil social and lifestyle needs and/or to supplement
income from formal business operations (Hall and Rusher 2005).

Collaboration, which is a common feature in the informal sector, is often leveraged to achieve
collective rather than individual goals. For instance, Varcin (2000) found that market traders
in Ankara, Turkey achieved a number of group competitive advantages. They erected barriers
to entry against non-members, gaining economies of scale by combining capital and other
productive resources, or specialising and fixing prices through collusion. These kinds of

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informal strategic networks built on trust, and involving implicit and ‘open-ended’ contracts,
are found to be a better way to enhance resource flows, in some instances, than legally
binding, short-term opportunistic relationships, and bureaucratic governance mechanisms
which have higher transaction costs (Powell 1990; Larson 1992; Dyer and Singh 1998).

International business and international management

Informal businesses are significant in many areas of cross-border trade. Cross-border

informal trading is often viewed as a threat to economic and political security by the state as
well as a loss of taxes and revenue (Alusala 2010; Bruns et al. 2011; Cantens et al. 2015; Han
et al. 2015; Pisani and Richardson 2012). Nevertheless, in many locations it is often regarded
as essential for economic wellbeing (Harshe 2005; Fadahunsi and Rosa 2002; Sikder and
Sarker 2005; Singh 2007; Titeca 2012; Titeca and De Herdt 2010) or, because of the
extensive nature of borders that are not able to be effectively policed, institutional and policy
accommodations need to be made (Little et al. 2015). The practice of selling remitted goods
as part of an informal international business operation is also an important aspect of
remittance economies (Connell and Brown 2004). Cross-border informal trade can be a
significant component of the supply chain for domestic informal businesses (Peberdy 2000).
The economic significance of international informal trade may be substantial. For example,
Taneja (2004) estimated that of the $2 billion informal trade between India and Pakistan,
almost half is traded through third countries such as Dubai, CIS and Afghanistan, while the
remainder is cross-border informal trade. One of the reasons for informal trade lies in
longstanding cultural and economic ties on which modern and post-colonial borders have
been applied (Leopold 2009). Although the focus may often be on trade in illegal goods and
services, substantial differences in official and market exchange rates may encourage
informal cross-border trade along with trade restrictions and other institutional and economic
asymmetries (Babson 2001; Benjamin et al. 2015; Bruns et al. 2011; Han et al. 2015).
Assmuth (2013) also suggests that many borderland markets and other forms of near-border
or cross-border informal trade are often dominated by female traders (see also Muzvidziwa
2001; Njikam and Tchouassi 2011; Ntseane 2004).

Despite the undoubted significance of informal cross-border trade for developing and
transition economies, the role of the informal sector and informal business practice has been
little touched on in the international business literature. For example, Griffith et al’s (2008)

8
discussion of emerging themes in international business research acknowledges the timeliness
of exploring the effectiveness of contract-based versus informal cross-border business
partnerships, but otherwise does not mention informal business and management. Despite its
importance to those with interest in economic geographies of borderlands and development
(Rogerson and Mushawemhuka 2015), as well as to cross-border economic flows, it is
apparent that the informal sector is not yet a significant part of the international business and
management research agenda

Operations and supply chain management

Within supply chains that include informal sector businesses, larger formal businesses
typically subcontract to smaller businesses and workers in the informal sector, which then
find themselves in a subordinate role. In these relationships, the informal businesses and
workers are expected to deliver low-cost supplies, inputs and services with speed and
flexibility so that the competitiveness of the formal firm is enhanced (Chen 2006; Williams et
al. 2012). Evidence suggests that strategic networks that exist between formal firms and
informal businesses can be invisible in many cases (Chen 2006). Through informal supply
chains, informal workers and businesses serve as suppliers of raw materials and inputs in
vendor-merchant-retailer-wholesaler relationships that end up with a formal firm (Gowan
1997; Holt and Littlewood 2014).

Similar observations have been made in the case of informal businesses and participants who
act as sole distributors or agents of finished products of formal firms (Portes and Sassen-
Koob 1987; Portes 1994). Informal businesses in some cases produce exportable intermediate
goods in subcontracting arrangements with formal firms, who only add value to the finished
goods by attaching a brand name (Kar and Marjit 2009). These formal-informal business
relationships in some instances assume global dimensions and involve large transnational
manufacturing corporations whose value chains include formal national firm contractors,
small informal business subcontractors and homeworkers lower down the chain (Sassen-
Koob 1989; Losby et al. 2002).

The relationships between principal contractors, informal subcontractors, and labourers may
allow formal firms to ‘buy’ from more efficient and specialised suppliers, whilst maintaining
a smaller number of regular and permanent staff on their payroll (Stepick 1989; Raijman

9
2001). Formal firms may use informal relationships to manage risk at the expense of informal
businesses. For instance, formal firms may try and avoid bad publicity with respect to labour
practices by ‘buying’ from small informal businesses (Jones et al. 2006), or defer non-wage
related costs to informal businesses (Brusco 1982). Costs associated with rejected goods and
delayed payments may also be borne by informal businesses (Chen 2006). Whilst the
existence of relationships between informal and formal businesses is well known, what is less
clear however is the fine-grained exchanges and happenings within such relationships that a
management and organisation scholarship could shed light on.

Entrepreneurship and innovation

Informal sector studies have been popular in the entrepreneurship literature (see Williams and
Nadin 2010 for a review). In an attempt to chart a course for informal sector research in
management and organisation studies, Webb et al. (2013) proposed an entrepreneurship
process-laden framework. Drawing on institutional, motivation-related and resource
allocation theories, this framework treated the informal sector as solely opportunity-driven.
However, this position somewhat limits ‘context’ (defined broadly), given extant literature on
drivers and activities in the informal sector.

A significant proportion of the informal sector in advanced economies has been attributed to
entrepreneurial activities of international migrants. With limited work opportunities, the
informal sector is virtually the only route to self-employment and ethnic entrepreneurship
amongst most immigrants in developed countries (Raijman and Tienda 2000; Rath and
Kloosterman 2000; Jones et al. 2006; Piperopoulos 2010; Sepulveda et al. 2011; Harney
2012). Low levels of education and capital, language barriers, lack of host country-specific
work experience, and ethnic discrimination often constitute ‘block mobility’ (Piperopoulos
2010) that disadvantages immigrants who wish to work in the formal labour market (Stepick,
1989; Castells and Portes 1989; Raijman and Tienda 2000; Kloosterman and Rath 2001; Hall
and Rath 2007). Informal ethnic businesses can serve as arenas for acquiring skills, training,
and other forms of capital for new immigrant arrivals (Portes and Sassen-Koob 1987;
Raijman and Tienda 2000; Tienda and Raijman 2000; Hall and Rath 2007). In some cases,
non-compliance to prevailing laws and regulations is the only way out of the often low-entry
barrier and competitive markets of ethnic suppliers, such as restaurants and retail
(Kloosterman et al. 1999; Rath and Kloosterman 2000).

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Like Webb and colleagues (2009, 2013), these studies take more or less an entrepreneurship
focus. Thus, implicit assumptions in the current discourse on the informal sector portray
informal businesses as entrepreneurial (Williams 2007b, 2007c; Minard 2009; Bureau and
Fendt 2011; Adom and Williams Adom 2012; Williams et al. 2012; Webb et al. 2014;
Ketchen et al. 2014). For instance, Williams and Nadin (2010) assumes by establishing and
running an informal business, owners automatically become entrepreneurs. However, Watson
(2013) distinguishes entrepreneurial actors and actions from administrative managers and
administrative management respectively. Other dissenting views in the informal sector
literature also argue that many activities taking place in the informal sector are not
necessarily entrepreneurial (Morris et al. 1996).

Review summary: an under-explored sector

The review suggests that although management and organisation-related informal sector
activities are atypical, pointing to potential avenues for new insights, the informal sector
setting remains underexplored. Some specific future research themes identified are a
management and organisation oriented definition, conceptualisation, and theorisation; in-
depth knowledge on the ‘on-goings’ of relationships between formal and informal businesses;
and a deeper appreciation of in situ management and organisational practices in the informal
sector and their implications for the formal sector. Furthermore, the review reveals that
opportunities exist for management scholarship to chart a research agenda drawing on core
theories, distinct from the predominant entrepreneurship focus. Table 1 identifies and
discusses avenues for management and organisational studies, particularly suggesting tools:
concepts, theories and methods. The theories include those identified as pivotal to future
informal sector research in a recent study (Ketchen et al. 2014).

<INSERT TABLE 1 ABOUT HERE>

Insights from social practice theories (e.g. Giddens 1984; Bourdieu 1990; Archer 1995;
Schatzki 2001) may provide sound bases for management scholars to better understand the
structural and contextual issues of the informal sector. These theories enable us to explore
how informal sector businesses manage and organise their businesses based on home-grown
informal arrangements and practices. Management scholars may then trace the origins of

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atypical capability bundles to social and economic trajectories, in addition to decision-making
heuristics that inform how they are configured without the benefit of guiding normative
management tools and frameworks taught in business schools.

A promising agenda therefore is to examine how the informal sector phenomenon and
activities may draw on core management and organisational theories and concepts, aside
from current entrepreneurial conceptualisation. To move the management and organisation
scholarship agenda forward, researchers may have to take a broader perspective. An
important starting point is the development of an organising frame for formality and
informality in businesses; this could provide a nuanced management and organisation
framing of the phenomenon. We develop such an organising frame in the section that follows.

In addition, granted how pivotal atypical business logics, relationships, resource flows, and
‘sociality’ are in defining informal sector activities and practices, social capital theory may
provide management scholars tools to examine the pivotal role of social capital in all its
conceptualisations and facets (Bourdieu 1990; Putnam 2000; Adler and Kwon 2002; Lee
2009), in addition to their utilisation in context (e.g. Kloosterman et al. 1998; Maloney 2004).
We argue that this kind of inquiry will contribute immensely to building theory on the ‘social
economy’ that the sector has long been associated with (Lowenthal 1975; Ferman & Berndt,
1981).

Informal sector scholars have taken interest in defining and delineating informal businesses
from criminal and formal ones, however the search for improved management and
organisational conceptualisation has yet to take off. This is despite the obvious difficulties
with existing notions of formal and informal businesses. We argue that clearer
conceptualisation of a phenomenon holds the key to credible and influential research relating
to it, and is an important step in identifying clearer differences between formal, informal and
criminal businesses and shades in-between (Webb et al. 2009; Giudici et al. 2013). We now
turn our attention to teasing out and addressing these conceptual limitations.

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Synthesis and conceptual model

Definitional and conceptual limitations

Despite the considerable body of literature on the informal sector, from which we reviewed
the key contributions above, definition and conceptualisation related to management and
organisation is lacking. The informal sector has been defined in various ways (Bruton et al.
2012), and is fraught with terminologies from early studies by anthropologists, sociologists
and economists referring to ‘underground’, ‘black’, ‘hidden’, ‘irregular’, and ‘criminal’
activities (Smithies 1984; Portes and Sassen-Koob 1987; Feige 1989; Schneider 2000;
Gërxhani 2004; Henry and Sills 2006). The literature tends to use the terms sector and
economy interchangeably, and popularly defines the sector to include businesses that are
characterised by partial or non-compliance to business, tax and employment regulations but
which produce and sell legal goods and services (Hart 2006; Williams 2006; Godfrey 2011;
McGahan 2012). The notion of the informal economy also encompasses informal
employment arrangements by formal businesses, including precarious work that is often
characterised by low wages (often below minimum wage), uncertainty, and insecurity, lack of
protection and explicit contract, and lack of, or limited access to, union and working rights
(ILO 2012). These definitions, which are rooted in formal regulation compliance by firms,
present a paradox (McGahan, 2012) that management scholars could help resolve.

For instance, consider small informal shops selling legal products at unlicensed locations
(Cross 2000; Cross and Johnson 2000), pirated products that violate the intellectual property
laws, or controlled products such as alcohol (Portes et al.1989; Hart 2006). The informal
sector outcome resulting from these activities is different from a truly ‘underground or
criminal’ economy that involves the trading of an illegal product such as crack (Cross 2000).
Although the former cases may be considered as legitimate examples of informal economic
activity (Webb et al. 2009), there are clearly varying degrees of regulatory legitimacy
between them. All three activities, despite their economic value, are ‘strictly’ illegal (Cross
2000). Additionally, there are informal yet legal businesses that due to their smallness or
sales revenue are not required to formally register, pay taxes or adhere strictly to certain
labour or licensing regimes (Portes and Sassen-Koob 1987; Schneider 2000; Blunch et al.
2001; Holt and Littlewood 2014). In these cases, legality fails to define or explain how the

13
informal sector differs from the formal one, as the concept is beset with many different
typologies (Bromley 1978; Cross 2000; Blunch et al. 2001; Webb et al. 2013; Webb et al.
2014). We argue that a complementary management and organisation perspective could
contribute to a better understanding of the informal sector vis-à-vis the formal sector,
particularly if we conceptualise formality-informality as a related and more fine-grained
phenomenon.

For example, some scholars suggest the emergence, activities, and persistence of the
phenomenon is partly explained by factors such as history, colonialism and domination
(Frank 1966; Hart 1973; Bayat 1997; Demissie 2007; Jackson 2012; Magure 2015), as well
as globalisation (de Oliveira and Roberts 1994; Portes and Roberts 2005; Goto and Endo
2014). Whilst these alternative perspectives may be considered as macro-level forces, they
provide a multifaceted view of the phenomenon, and complement current entrepreneurial
theorising and contextualisation. For instance, history, colonialism, domination, and
globalisation could bring a different contextual flavour to bear on the mainstream
management scholarship perspective as we explore work in this area. Too often management
scholars treat context lightly, thus losing sight of its affordances (Seidl and Whittington,
2014).

A model of business (in)formality

Our review indicates that a considerable portion of the literature presents formal versus
informal businesses as a dichotomy; however, opportunities abound for the analysis of
formality and informality in businesses along a continuum. We explore these later in the
section, after setting out a model that characterises the spectrum of interest. Some
management practices and resources are typical of informal businesses (Vacin 2000; Blunch
et al. 2001; Godfrey 2011; Jackson 2012). This suggests a management and organisation
conceptualisation of informality complementary to the more popular legal and legitimacy-
based one (see Webb et al. 2009; Giudici et al. 2013). To date, such a dimension has received
inadequate attention. Nonetheless, these two broad dimensions may serve as proxies
individually and/or collectively for defining the boundaries of the phenomenon.
Organisational infrastructure such as the production and public reporting of regulatory and
other public documents; clear definition of strategy, mission and vision statements; existence
of generic organisational roles and governance structures; as well as extents of unionisation,

14
organised labour membership, and collective bargaining agreements may be conceptualised
as an organisational frame for defining criminal, formal and informal businesses. To gain
legitimacy, organisations are pressured by inter-organisational comparisons to structure in
particular ways, so as to achieve semblance either for the purposes of effectiveness or for
ceremonial reasons (Zucker, 1977). Such comparisons are done on the basis of status,
affiliations, and positioning relative to regulative and legal processes, amongst others
(Deephouse and Suchman 2008). For example, Fajana (2008) suggests a number of reasons
why informal business employers and employees are less likely to embrace and attract trade
unions compared to formal businesses.

Figure 1 thus builds on previous models and frameworks such as Godfrey’s (2011) 2x2
model whereby bureaucratic and non-bureaucratic governance is assumed to depict the
degree to which firms organise internally in order to meet external legal and regulatory
requirements. Godfrey’s model is one of the first to introduce a clear management and
organisation conceptualisation by defining how internal structure and hierarchies, role
definition, systems, and procedures to comply with statutory regulations and enforce
contracts, may portray (in)formality. By citing the case of Napster Godfrey (2011) also
illustrates the subtle line that may exist between formal and informal businesses based on
bureaucratic arrangements (see also Godfrey 2016).

We extend the governance dimension and include a wider set of managing and organising
tools that firms employ, whilst also building on the legal-compliance and legitimacy
conceptualisation of previous works (Giudici et al. 2013; Webb et al. 2009). This model
includes a wider range of measures as an important step towards dissolution of the ‘formal-
informal’ boundaries, culminating in the identification of businesses along a ‘formal-
informal’ spectrum; we argue that this point of departure is fundamental to a management
perspective. For example, McGahan (2012) observed that some non-complying firms can be
highly structured as complying firms, requiring a more nuanced conceptualisation of the
phenomenon.
<INSERT FIGURE 1 ABOUT HERE>

Figure 1 thus conceptualises criminal, formal and informal businesses in a three-dimensional

model framed around organisational infrastructure, level of legal compliance in the
organisational processes and structures employed in their operations, and level of legal

15
compliance of the goods produced or sold. The model builds on, and encompasses previous
two-dimensional models, that were developed to differentiate criminal, formal and informal
businesses (see Webb et al. 2009; Godfrey 2011; Giudici et al. 2013). Eight forms of
business organisation represented by positions A to G on a three-dimensional space are
identified. There is convergence on businesses classified as criminal in previous models
(Webb et al. 2009; Giudici et al. 2013). They include here, any businesses (positions A, C, E,
and F) that are low on legal compliance of products irrespective of level of legal compliance
of processes and organisational infrastructure. This classification is inherently based on the
increasing consensus in the informal sector literature that businesses categorised as informal
do not deal in illegal products (e.g. Godfrey 2011; McGahan 2012; Webb et al. 2014).
Businesses located in this space are similar to those engaged in ‘renegade’ economic
activities (Giudici et al. 2013), and those that are illegal in their ‘ends’ depicted in Webb et
al. (2009). We emphasise ‘legal compliance to processes’ in our discussion to situate the
work in line with previous studies that have brought some closure to discussions on ‘legal
compliance to products’ classification.

Unlike previous models, we delineate four other classifications, which not only differentiate
formal and informal businesses, but also depict varying levels of informality within existing
business. It further takes cognisance of observations from informal sector studies, by
accounting for whole or partial stages of transition of businesses between formal and
informal sectors. By extension, businesses may occupy different positions at different times
contingent on how they respond to changing state laws and regulations (external), how
organisationally flexible (internal) they choose to be, or choices they make based on cost-
benefit analysis (internal and external) of formal and informal arrangements at any point in
time (Chen 2012).

Loosely-structured informal businesses (position B) will include those most studied in the
informal sector literature, especially by social science scholars (Godfrey 2011), and often
shown to engage in survival, unorganised, less sophisticated and technologically less
advanced activities (Hart 1973; Holt and Littlewood 2014). Highly-structured informal
businesses (position H) on the other hand may include businesses that are relatively better
organised and structured, are more technologically advanced, have better and formally
educated, trained, and experienced owners and managers. Some family businesses and formal
businesses that deliberately, selectively, or inadvertently slip down the legal compliance scale

16
over time (or intend to become informal with time) may end up in this largely under
researched position (see Uzo and Mair 2014 for an exception). These two separate categories
provide a finer-grained conceptualisation compared to previous models (Webb et al. 2009;
Godfrey 2011; Giudici et al. 2013), that classify businesses with these different sets of
characteristics into one generic group.

Position D is occupied by loosely-structured formal businesses. For example, an area yet to

receive much research attention is where an informal business intends to formalise by first
becoming fully compliant, but only establish bureaucratic structures incrementally – as it
seeks to continue enjoying advantages from informal internal arrangements. This
classification also depicts traces of post-bureaucratic (Grey and Garsten 2001; Moisander and
Stenfors 2009), legally-compliant formal businesses that have established (or are open to)
flexible informal internal arrangements atypical of formal normative organisational and
administrative principles and procedures (see Lazzarini et al. 2004; Poppo and Zenger, 2004).
Semi-formal relational economy organisations fit into this classification, but importantly our
model modestly extends Godfrey (2011), by heeding his call for means to decipher informal-
formal bundles of varied work arrangements and elements, from which most effective
organisational configurations may be chosen. Highly-structured formal businesses found in
position G, obviously are the most researched in management studies (Godfrey 2011), and
are also presented as the ‘ideal’ form of organisation (Meyer and Rowan 1977; Zucker 1977),
and thus point of reference, and source of comparison in informal sector studies.

Implications of the model

Teasing out the dimensions of informality in Figure 1 has several implications for the
boundaries of the phenomenon that lie outside the scope of our discussion above, yet have
important implications for ongoing research into the sector. Although Figure 1 represents a
largely organisational-level model on informal business, it incorporates the regulatory
institutional framework. Many different considerations at the macro (local and national) and
meso (community) institutional environments influence informal sector decisions and
activities. These influences work together to provide reasons, opportunities and support for
informal sector activities and practices. A multi-level perspective further demonstrates that
although informal participants may be embedded in the same institutions, and operate similar

17
types of business, financial success at the individual level determines the propensity to
partially or wholly comply with formal regulations (De Castro, Khavul, and Bruton 2014).

Again in Figure 1, we make reference to individual owner/managers’ formal education,

training and experience as a basis for delineating and categorising formal and informal
businesses. More so, McGahan (2012) argues that differences in the interpretation of the
requirements of regulations may also define individual differences in what is considered
formal and informal. Consequently, the organisation may be treated as the defining unit of
analysis of informality, as much as the individual or the institution. Management scholars
may be able to develop a theory of informality that accounts for the interaction amongst these
levels of analysis, for example taking account of how sense-making (Weick 1995) and social
identity theories help us understand how participants make sense of themselves, their
activities, business and social environments; and the relationships between them. Within
traditional institutional theory, an institutional work approach can contribute to the
examination of these relationships, especially those between institutions, agency, and actions
(Lawrence et al. 2011).

This line of inquiry could also bring an important perspective to bear on the longstanding
debates surrounding the formalisation of the informal sector (Hart 1973; Sepulveda and
Syrett 2007; Chen 2012). For management scholars, it holds promise for explicating the
micro instances of practice and processes that may underpin the de-institutionalisation of an
institution (Bruce et al. 2011).

Contrary to empirical evidence provided in this review as well as the tenets of the model
presented in Figure 1, informal businesses are usually portrayed as survival, handicapped,
backward, unproductive, and inferior to formal businesses (Hart 1973; La Porter and Shleifer
2008). However, informal businesses can demonstrate resilience and pervasiveness, and
enjoy relative advantages in some respects compared to their formal counterparts (Stepick
1989; Gowan 1997; Kar and Marjit 2009). Given these observations, a relevant research
agenda for management scholars is to inquire into the circumstances under which economic
and social value for the customer, owner and other stakeholders is maximised through
informal rather than formal production arrangements. Such a task must explore conditions
under which formality and informality substitute for each other, aside the often reported
complementary roles (Godfrey 2011). Figure 1 suggests that a wide range of capability

18
configurations via internal formal and informal arrangements may be available to an
organisation.

Some scholars argue that a thin line separates formal and informal economic activity since
these activities are closely interlinked (Hart 2006; Smith and Stenning 2006; McGahan
2012). Informal sector phenomena need to be understood and analysed in light of their
relationship with formal sector businesses and institutions. Network theory, for example,
treats organisations and their agents as embedded in social networks, requiring that
organisational relationships and phenomena are analysed in terms of the broader social and
economic space (Gulati 1998; Provan et al. 2007). It has been observed that informal
freelance activities are integral to the value chain of some formal sectors, such as software,
and our appreciation of such sectors is incomplete without recourse to this informal sector
participation (McGahan 2012). If we consider this in terms of Figure 1, to what extent do we
consider businesses in such sectors exclusively formal? Because critical aspects of their
operations have informal inputs, it is vital to recognise the differing levels of formality and
informality that may characterise businesses and their operations.

McGahan (2012, p. 15) argues that the fact that 90% of employment of New York City’s
construction sub-trades were via informal arrangements provides evidence of how future
market expansion in an industry was created through informal ‘institutions’. This research
focus is critical, as the debate for encouraging the existence of a parallel informal sector to
the formal sector continues to gain ground in some jurisdictions (Hart 2005). This aspect of
informality research could be more meaningful and serve a wider purpose if researchers treat
formality-informality more as a continuum, thereby examining the accommodation of
informal arrangements within a wide range of organisational forms as espoused in Figure 1.

Discussion and avenues for management research

From each of the literature streams in our review, study of the informal sector holds promise
of new insights into informal sector phenomena, and new insights relevant to mainstream,
formal business management. We set out below those that arise from our review and the
model in Figure 1, highlighting the applicability of theories and methodologies.

Organisation and human resource management

19
Existing studies on how informal businesses organise, manage, and learn from their
operations have been, in main, anecdotal. Informal businesses form networks amongst
themselves to achieve collective goals in ways that are somewhat different from formal
businesses (Godfrey 2011). Such informal contexts can also provide new perspectives on
governance and boundary decisions. Like organisations created based on ethnic, religious or
family ties (Gedajlovic and Carney 2010), informal businesses provide yet another type of
organisational form that might not be fully amenable to the comparative efficiency
assumptions of transaction cost economics (TCE) theory (Williamson 1975), as more
socialised, personalised, and less bureaucratic forms of authority and professional
management relationships and practices are a common feature. Informal businesses thus offer
potential for accounting for some of the social dimensions of TCE. Theories of
embeddedness adequately elaborate how social considerations may inform economic
decisions (Granovetter 1985). However, as yet, studies that systematically capture and
accurately account for socialised and unspecified-obligations, reciprocity, and idiosyncratic
resource flows (Gedajlovic and Carney 2010) in the transaction cost equation are almost non-
existent.

Moral, cultural and religious values are also critical to strategic sense-making and practices in
the informal sector to the extent that participants can demonstrate unwillingness to exploit
means of competitive advantage prescribed by rational economic models (Godfrey 2011,
2016). Minard (2009) observed how emphasis on work and returning personal financial
gains, nurtured a non-capital spirit of commerce in an informal sector. In another example,
compared to economic capital, social capital derived from strong family and community ties
is the force behind the establishment and growth of informal family businesses in East Africa
(Khavul et al. 2009) as well as continued commitment to place even following natural
disaster (Biggs et al. 2012). With these examples of non-economic motives of informal sector
behaviour, the informal sector offers an appropriate setting for future management research
on workplace spirituality, CSR and ethics, as well as purpose beyond profit dilemmas
(Kaptein and Wempe 2001; Pauchant 1995; Porter and Kramer 2011; Nilakant and Lips-
Wiersma 2012).

Employing organisational learning literature, we may uncover the capacity of formal

technology firms to harness and integrate the many different sets of informal sector-grown
information, knowledge, cues, and signals discussed above. Most of these may reside outside

20
formal organisation structures, and exist in informal and tacit forms, but hold the key to
improvements that may lead to future innovations. Such studies could be an important
extension of research on how informal individuals, organisations, and markets co-shape
innovations in technology. Taking these ideas further, we may explore how collaborative
innovation projects between formal and informal sector actors and organisations may
engender outcomes beyond the deliverables of the innovation project to include new and
innovative organisational forms, structures, processes, and transactions (McGahan 2012).

Marketing management

Opportunities also exist for informal sector research in marketing management. For example,
studies that explore how informal firms package, brand, communicate and provide
information on their products and services (that do not have endorsements from standards
authorities because of non-compliance), await future study. This area of research may also
uncover innovative means by which informal businesses promote their products and services
since more closed, personal, and relational modes would be expected to be preferred to
‘open’ modes of publicity. Extant studies have focussed on how informal businesses and their
agents build legitimacy (Bruton et al. 2012; Webb et al. 2009). A corollary study could
examine how formal firms that source inputs from informal businesses provide product and
service information, as well as meeting regulatory requirements.

Drawing on legitimacy theory (Suchman 1995), we can explore the reputational and branding
effects of engaging informal business partners, by examining the manner in which formal
businesses strive to achieve legitimacy in the eyes of other stakeholder groups, especially
consumers. Research of this kind is significant for a number of reasons including
consumerism and customer concerns for product information on health, safety, authenticity,
and traceability (Adams 2002; Lysonski et al. 2003; Iwanow et al. 2005; Dimaras and Skuras
2005); marketing of controversial products (Waller et al. 2005); and ethical and sustainable
consumption (Shaw et al. 2006; Jones et al. 2008).

Strategic management

Within the strategic management field, the resource-based view (RBV) is one key theory that
may be drawn upon to understand aspects of the informal sector phenomenon that existing

21
literature has not sufficiently covered. The RBV helps explain why informal businesses may
exclusively serve some markets, by pointing to capabilities and competitiveness of informal
businesses relative to formal businesses in those markets. Hart (1973) and Jones et al. (2006)
identified informal businesses that compete in niche markets based on competitive
advantages unavailable to formal firms. For example, as a result of non-compliance and non-
bureaucratic cost advantages, informal businesses have been associated with relatively low
priced and high quality goods and services (Smith 1987; Blunch et al. 2001). This line of
research provides avenues for empirically connecting existing legal-compliance
conceptualisation with the management and organisation definition proposed in Figure 1.

The RBV also has potential for informal sector research in its provision of tools for
delineating the types, sources, and basis of core competencies and competitive advantages of
informal business, as well as how they are sustained. Extant research describe resources and
capabilities employed in the informal sector as atypical (Blunch et al. 2001; Godfrey, 2011),
however, a fine-grained ‘profiling’ of these atypical resources and capabilities awaits future
research. An organisation’s infrastructure which impinges on formality and informality
(Figure 1), may promote one set of capabilities to the detriment of others, given the dictates
of laws, regulations, and customary practices that the organisation privileges over others
(McGahan 2012). From such research, management scholars could provide a more nuanced
micro perspective on the phenomenon and more so, an understanding of the limits of, and
thus, potential complements to typical formal sector resources and capabilities. McGahan
(2012) further notes that in responding to overtures from large formal firms in structural
relationships, both informal and formal firms co-evolve capabilities. Given this evidence, an
empirical investigation into how formal sector and informal sector capabilities diverge on one
hand, and when they develop together (converge) on the other is promising. A corollary study
drawing on absorptive capacity theory (Cohen and Levinthal 1990) may examine the nature
and extents of knowledge acquisition, sharing, assimilation, and usage in these relationships,
and how formality and informality arrangements and practices influence these processes and
outcomes.

Beyond the RBV, the informal sector provides a rich locale for investigating dynamic
capabilities and innovation potential of organisations. Dynamic capabilities theory elaborates
the capacity of an organisation to acquire develop or reconfigure its competences and
resources in tandem with environmental threats and opportunities (Teece and Pisano 1994;

22
Teece 2007). Informality characteristics, as well as atypical management practices of
informal businesses and participants, allow considerable latitude in freely pursuing a wide
range of business activities with minimal bureaucratic rule-following, regulatory, pluralism,
shareholder demand, specialisation, normative decision-making tools, economic logic, and
boundary restrictions (Blunch et al. 2001; Gërxhani 2004; Losby et al. 2002; Godfrey 2011).
In this respect, the informal sector may continually promote capability renewal in response to
the exploration of opportunities that can span current bundles of capabilities, as well as
perpetual ‘threats’ to their existence, since their activities in most part have been labelled
illegal and illegitimate (Webb et al. 2009). These exigencies require high levels of dynamism
if they are to survive and succeed. In this regard, management research may throw some light
on how each of the above limiting/supporting factors individually and collectively impact on
the development of dynamic capabilities in formal settings. A logical research endeavour is to
ascertain how informality may support the development of dynamic capabilities within
formal organisations, in essence, how formal businesses may leverage their capabilities by
accommodating informal arrangements within their organisations (Figure 1).

International business and international management

In respect of these topics, we highlight institutional voids, indigenous practices and piracy
and imitation as promising areas for developing deeper informal sector understanding. In the
context of developing countries in particular, theories on institutional voids (Khanna et al.
2005) and base-of-the-pyramid (Prahalad 2005) are appropriate research tools. The manner in
which informal businesses overcome institutional voids prevalent in those settings remains
unclear. Perhaps a fundamental question to ask is: In what ways is the informal sector a
product of institutional voids? (Webb et al. 2014). For example, potential avenues include the
modalities by which innovative informal institutions and norms emerge in this sector
(London et al. 2014). Evidence suggests that the informal sector produces for base-of-the-
pyramid markets amongst others (Holt and Littlewood 2014; London et al. 2014). However,
the base-of-the-pyramid markets (London and Hart 2004; Prahalad 2005) remain under-
served by multinational enterprises, apparently due to factors including institutional voids
(Webb et al. 2014). Calling for an informal sector perspective on management research and
practice therefore implies that management scholarship will have to be undertaken in these
settings. According to McGahan (2012), firms intending to be market leaders may have to
factor boundary-spanning capabilities that incorporate informal sector activities in their

23
operations in developing countries especially with respect to cross-border trade. Aptly, and as
mentioned above, Figure 1 categorises formal businesses that are loosely structured such that
they can take advantage of informal arrangements and practices.

The informal sector setting also offers fertile grounds for the study of indigenous
management and organisation practices (Panda and Gupta 2007; Jackson 2012, 2013).
Studying indigenous and post-colonial management practices not only helps to understand
management practices in situ, but also provides opportunities for understanding implicit
assumptions of ‘Western’ views of management (Hall and Tucker 2004; Punnett and Shenkar
2004; Cappelli et al. 2010). Furthermore, the transferability of practices between indigenous
informal business behaviours and practices, and formal more ‘Western’ management
practices, is integral to contemporary globalisation, potentially enhancing the performance
and competitiveness of formal firms (Barnard 1938; Poppo and Zenger 2004; Godfrey 2011;
McGahan 2012).

There are assertions that piracy and imitation may hold value for the intellectual property
right owner as well as society, and that these benefits are conferred through network
externality, signalling, herding and bandwagon effects (De Castro et al. 2008; Neuwirth
2012). Others suggest piracy and imitation is an inherent informal sector activity that
engenders learning, knowledge creation, innovation and perfection amongst firms, including
those with intellectual property rights (Yu et al. 2006; Shenkar 2010; Chen 2014), while
drawing attention to the risks and costs of intellectual property protection systems. It is
further argued that the economic strides made by Japan and its giant technology companies,
and now the Asian Tigers and China, was initially imitation-driven, with significant input
from informal sector production (Sentance and Levine 1996).

Operations and supply chain management

There is rich potential to enhance our understanding of how informal sector firms work with
the formal sector using theories in this area, including industry network theories and resource
dependence theory. Studies that investigate individual and collective performance outcomes
of network relationships that formal and informal firms develop are limited. Research along
these lines may help uncover the ‘on-goings’ in relationships involving firms with different
institutional logics and biographies (Suddaby and Viale 2011; Vaara and Durand 2012).

24
Fundamental variations in logics may accompany businesses occupying different positions in
Figure 1 given that these positions are more or less defined by identities, agency (actions and
inactions), as well as regulatory institutions and structures. Commensurate with the ‘practice
turn’ in management and organisation studies (Schatzki et al. 2001; Samra-Fredericks et al.
2005), such studies may employ practice theories to shed light on performance of the
relationships, and how they are perceived and measured by firms and agents that have
dissimilar trajectories and social structures.

Furthermore, this line of research may provide insights into governance structures that
characterise the relationships, given that relational and contractual-based are dominant in
informal and formal settings respectively. Quintin (2008) found that the size of the informal
sector decreases as the degree to which financing contracts can be enforced in the formal
sector rises. This effort may shed light on the potential for another management and
organisation basis for delineating business (in)formality discussed in Figure 1. For instance,
McGahan (2012) notes that the value in exercising decision control and managerial rights in
accomplishing economic outcomes in the absence of property rights, may become apparent in
relationships between formal and informal organisations. Invariably, such studies could
uncover limits of the dominant ownership rights in governance decisions in formal firms, as
alternatives emerge and are foregrounded. Again, this strand of scholarship may reveal the
facilitators and barriers to collaboration amongst firms from different fields of practice
(Bourdieu 1990).

Resource dependence theory also appears relevant to understanding the relationships formal
firms and organisations forge with informal businesses (Pfeffer and Salancik, 1978; Canonico
et al. 2012; Beamish and Lupton 2016). Relative to relationships with formal business
partners, informal businesses offer the least-constraining device as exchange partners, which
maximises autonomy for a focal formal business, since the power imbalance tilts in the
formal firm’s favour (Casciaro and Piskorski 2005). However, by means of contractual
agreements and other formal arrangements, formal business exchange partners are better
placed to minimise environmental uncertainty for a focal firm. Yet informal businesses may
provide critical resources or capabilities (external constraints) that the focal formal firm may
not be able to reduce through alternative providers, or absorb through mergers, acquisitions,
or joint ventures because of their informality status (Davis and Cobb 2010). Future
management scholarship on the informal sector phenomenon may investigate more broadly,

25
the decision-making processes and considerations that inform formal firms’ relationships
with informal as opposed to formal suppliers of the same input, resource, or capability,
beyond received knowledge of low costs and flexibility in the literature.

Entrepreneurship and innovation

Despite the body of literature that already considers entrepreneurship-related phenomena in

the informal sector, we have identified additional research avenues that have yet to be
pursued. One such avenue is the activities of immigrant entrepreneurs. Some immigrants in
the informal sector provide foreign cuisines in niche markets of the European catering and
restaurant industry (Jones et al. 2006; Hall and Rath 2007). Immigrant entrepreneurs largely
serve markets that indigenous businesses do not; these market opportunities are provided by
co-ethnic consumers who support and patronise their offerings by way of solidarity, or in
order to satisfy ethnic and cultural-based tastes (Barrett et al. 2001; Kloosterman and Rath
2001; Piperopoulos 2010). It follows that a social exchange theory perspective (Cropanzano
and Mitchell 2005) drawing on the concepts of resource universalism/particularism and
resource concreteness/symbolism as well economic/socio-emotional outcomes (Foa and Foa
1980) amongst others is particularly suitable here. It could clarify the dynamics of the
negotiated exchanges with the minority informal sector, in lieu of the more dominant formal
sector business offerings and institutions in their host countries, in addition to how such
behaviours contribute to the pervasiveness of the phenomenon and how they may change
over time, especially given potential links to international trade.

Though defined as producing legal goods (Figure 1), informal businesses are often
synonymous with imitation, patent and copyrights breaches, as they often look out for leeway
in formal regulatory frameworks to exploit opportunities (Smith 1987; De Soto 1989; Webb
et al. 2009; Webb et al. 2013; Webb et al. 2014). However, innovation may not be a primary
intent in these exploits. Instead, innovation results from such risk-taking activities as they
engage in. Future researches that employ theories of innovation including in relation to the
dynamic capabilities of organisations are appropriate, more so with particular emphasis on
innovation that may arise as ‘unintended outcomes’. This could empirically map out direct
and indirect linkages between the informal sector phenomenon and innovation, especially in
developing economies where the phenomenon is prevalent. Evidence suggests that disruptive
and innovative technologies have originated from developing country-based informal

26
organisations (McGahan 2012). Again, McCann and Bahl (2016) demonstrate that new
product development and upgrades by formal firms, are directly influenced by informal
competition.

A body of knowledge exists that explores organisational learning in entrepreneurial and small
firms (Cope, 2005). Potential exists to build on this to ascertain the moderating influence of
informality on organisational learning, as the current literature projects formal and structured
facets of how individuals and their organisations create, learn, share, and disseminate
knowledge. In the absence of supporting formal organisational infrastructure, organisational
learning mechanisms may assume a more tacit, explicit problem-solving; learning-by-doing,
trial-and-error and discovery mode (Young & Sexton, 1997; Deakins & Freel, 1998; Cope &
Watts, 2000). Research in these directions is arguably best approached using longitudinal
ethnographic fieldwork that privileges close engagement with the day-to-day operations of
informal sector participants and their agents, resulting in rich data that permits a thick
description of their practices in situ over time.

Conclusion
This paper reviews the literature on the informal sector with a goal of identifying how
management research can enhance our understanding of informal sector phenomena. The
review shows how existing informal sector research has concentrated on legal compliant-
themed conceptualisation of the phenomenon, while losing sight of alternative and
complementary management and organisational conceptualisations. This is despite an
acknowledgement of the former’s limitations (McGahan 2012). Some advances have been
made however in differentiating criminal businesses from formal and informal businesses (La
Porta and Shleifer 2008; Webb et al. 2009; Godfrey 2011, 2016). Nevertheless to move the
agenda forward in this area it is necessary to explicate formal and informal businesses in their
many different shades. An important contribution of the review in this regard is the
development of a model (Figure 1), which encompasses and adds to previous attempts. We
believe the model provides greater conceptual clarity for management and organisation-
focused research on informal sector phenomena.

Furthermore, this review extends beyond entrepreneurship (Williams and Nadin 2010; Webb
et al. 2013) and draws attention to broader informal sector management and organisations

27
research agenda. The review also aims to trigger discussion around an implicit assumption
that informal sector activities are necessarily entrepreneurial (Williams and Nadin 2010;
Williams and Adom 2012; Webb et al. 2014). We thus point to areas of research and new
perspectives that may be brought to bear on this somewhat contestable notion. Subsequently
we highlight how future explanations and theorisations must lie at the intersection of
individual, organisational, and extra-organisational factors. Additionally, the review has
brought into sharper focus the need to enhance the state of knowledge about the ‘on-goings’
in the relationships between formal and informal sectors and businesses – as well as the
management research opportunities therein. Importantly, we expect such research to shed
more light on the embeddedness of informal firms in the value chains and networks of formal
firms.

We also have shown how the informal sector provides avenues for future management
research into purpose beyond profit and non-economic objectives. Amongst other things, the
review further draws attention to management and organisational practices of informal sector
businesses and participants, including indigenous and post-colonial practices, and how these
provide impetus for greater scrutiny of ‘Western’ management and organisation perspectives.
Analytically, we identify a wide spectrum of literature and theories that cut across various
aspects of managing and organising practices, resources, logics, institutions, networks,
identities, and dependencies for a management scholarship perspective.

Finally, the review clearly demonstrates that informal sector research opportunities remain
and need taking up, commensurate with its economic, social and, of course, organisational
and managerial importance (Bruton et al. 2012; Webb et al. 2014). An important first step
towards this goal is to move away from the negative ‘name calling’ that remains. We cannot
understand the informal economy if it continues to be framed as a “shady… dirty, lawless
world of violence and disrepute, one that tarnishes an otherwise pristine sphere where
everyone pays their taxes, obeys the laws, and turns to the government to solve disputes and
maintain order” (Venkatesh 2006, 7). Although considered by some as primarily a developing
country phenomenon, the significance of the sector in emerging and technologically
advanced markets only serves to reinforce that informal sector activities are a significant
global issue for management and organisational scholarship and investigation.

28
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Table 1 Some avenues and tools for future management research
Area of research
Definition/conceptualisation of
informal businesses
Multi-level perspectives on the
informal sector
Relationships between formal
and informal sectors
Delineating informal sector
management and organisation
research from entrepreneurship
research
Management and
Some research questions
How can business (in)formality
be conceptualised from a
management/organisational
perspective?
How can a multilevel analytical
approach provide context for
studying the phenomenon?
What goes on in formal and
informal sector business
relationships? What are the
practical challenges in managing
and governing these
relationships? Under what
circumstances is informal
production a better alternative to
formal production? How do
capabilities in formal and
informal sector converge/diverge
and how does informality
influence capability development
in formal sector? What is the
range of considerations that go
into choosing an informal partner
over a formal partner in
partnering decisions of formal
firms?
How do we chart a course for
informal sector management and
organisation research different
from entrepreneurship research?
How do informal sector
Some theories and literature
Governance theory; Legitimacy
theory; Institutional theory.
Institutional theory; Cultural theories;
Resource-based theory; Dynamic
capabilities theory; Network theory;
Social identity theory; Sense-making
theory.
Relational governance theory;
Resource-based theory; Resource
dependency theory; Social practice
theories; Social exchange theory;
Network theory; Dynamic capability
theory; Institutional theory,
Transaction cost economics theory;
Innovation theory; Organisational
learning theory.
Social practice theories; Network
theory, Organisational learning
theory, and Institutional theory.
Social practice theories; Legitimacy
41
Some methods
Qualitative ethnographic methods.
Mixed qualitative and quantitative
methods; Case studies; Large n
comparative surveys.
Qualitative methods; Case studies;
Large-scale comparative surveys.
Qualitative ethnographic methods;
Case study methods.
Longitudinal ethnographic methods;
Some expected contribution
In(formality) conceptual refinement;
Management/organisations-focused
informal sector research.
A context-specific understanding of
the antecedents, drivers, motivations,
strategies, and outcomes of informal
sector phenomenon and activities.
A vivid description of the practical
management dealings that formal
businesses have with their informal
counterparts and how each party
makes sense of their individual
performance and collective
performance, as well as learning
processes and outcomes.
Discover how informal sector
production spills over into formal
sector innovations, and how formal
firms learn to capture informal
information and knowledge that
underpins the spill overs.
A new substitution dimension to
formal and informal sector
relationship as the dominant view in
the extant literature relates to
complementarity.
A clear distinction between informal
sector entrepreneurship and informal
sector management and organisation
research drawing on core
management and organisation
theories
Putting normative management and
organisational practices in the
informal sector
businesses go about organising
and managing their businesses
without the benefit of normative
management tools and concepts?
What implications do these and
other indigenous management
practices in the informal sector
have for normative management
concepts and theories? What can
management scholarship learn
from the role of non-economic
motives and purpose beyond
profits from informal sector
participants and activities?
theory, Social capital theory, Sense- In-depth qualitative, Case-based organisation theories and concept to
making theory, Decision-making methods. ‘stress test’.
theory
Rethinking and extending normative
management and organisation
concepts and theories to
accommodate informal and
indigenous practices.
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Figure 1 A conceptual model of business (in)formality

High Legal Compliance (products)

Low B

Low Low A

C H D

E High Legal Compliance (processes)

High

Organisational G
Infrastructure F

Key

A: Loosely-structured criminal businesses

B: Loosely-structured informal businesses

C: Loosely-structured criminal businesses

D: Loosely-structured formal businesses

E: Highly-structured criminal businesses

F: Highly-structured criminal businesses

G: Highly-structured formal businesses

H: Highly-structured informal businesses

43