Journal of Business Venturing 30 (2015) 436–451

Contents lists available at ScienceDirect

Journal of Business Venturing

The double-edged sword of legitimacy in

base-of-the-pyramid markets☆
Geoffrey M. Kistruck a,⁎, Justin W. Webb b,1, Christopher J. Sutter c,2, Anastasia V.G. Bailey d,3
a
York University, Schulich School of Business, Department of Entrepreneurship, Toronto, ON M3J 1P3, Canada
b
Oklahoma State University, Spears School of Business, Department of Entrepreneurship, Stillwater, OK 74078, USA
c
Miami University, Farmer School of Business, Department of Entrepreneurship, Oxford, OH 45056, USA
d
The Ohio State University, Fisher College of Business, Department of Management & Human Resources, Columbus, OH 43210, USA

a r t i c l e i n f o a b s t r a c t

Article history: As compared to developed countries, a much higher proportion of entrepreneurs within base-of-
Received 1 February 2013 the-pyramid (BOP) markets operate unregistered businesses. Prior research has suggested that
Received in revised form 10 June 2014 the primary cause of such informal activity in these settings is the general failure of ‘weak’ institu-
Accepted 11 June 2014
tions to provide sufficient resources to warrant formalization. We attempt to extend such thinking
Available online 1 July 2014
by deconstructing the discrete and inter-related effects of formal business registration on the level
of resources obtained by entrepreneurs from financial, labor, and legal institutions within BOP
Field Editor Baker Ted
markets. Using a multi-method approach involving 299 entrepreneurs within Guatemala City,
our results suggest that being seen as a ‘legitimate’, registered business can actually lead to both
Keywords: increased resource provision and resource appropriation. More specifically, adhering to the
Base-of-the-pyramid markets
norms and rules prescribed by regulatory institutions within weak legal environments can convey
Legitimacy
Informal economy
positive signals of stability and profitability that both attract the desired attention from formal
Informal markets institutional actors, as well as unwanted attention from criminals.
Informal entrepreneurship © 2014 Published by Elsevier Inc.
Institutional voids
Weak institutions
Institutional heterogeneity
Crime
Illegitimate orders

1. Introduction

Base-of-the-pyramid (BOP) markets refer to impoverished regions of the world where the average individual survives on less than
$3000 per year in terms of purchasing power parity (Kistruck et al., 2013a; London et al., 2010). While traditionally ignored by man-
agement scholars, BOP markets represent a significant $5 trillion block of economic activity (Fitch and Sorensen, 2007) that is in large
part spurned by a sizable entrepreneurial sector (Bosma and Levie, 2009). It is estimated that on average 30-40% (based on GDP) of

☆ The authors would like to thank the Center for International Business Education and Research at The Ohio State University for their funding of this research. The
authors would also like to thank Garry Bruton, Julio de Castro, Ariel Sanmartin Mendez, and participants at a PDW conducted at the 2012 Academy of Management
Conference for their comments on earlier drafts of this paper.
⁎ Corresponding author. Tel: +1 416 736 2100; fax: +1 416 736 5689.
E-mail addresses: gkistruck@schulich.yorku.ca (G.M. Kistruck), justin.w.webb@okstate.edu (J.W. Webb), sutterc@miamioh.edu (C.J. Sutter),
bailey_833@fisher.osu.edu (A.V.G. Bailey).
1
Tel: +1 405 744 7864; fax: +1 979 7445180.
2
Tel: +1 513 529 4215; fax: +1 513 529 3288.
3
Tel: +1 614 2477197; fax: +1 614 292 7062.

http://dx.doi.org/10.1016/j.jbusvent.2014.06.004
0883-9026/© 2014 Published by Elsevier Inc.
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 437

such entrepreneurial activity within BOP markets is undertaken by unregistered businesses (Nichter and Goldmark, 2009; Schneider,
2002), a proportion that is significantly higher than the 5-15% estimated for developed contexts.
Prior research has suggested such a large percentage of entrepreneurs elect not to formally register their ventures in BOP markets
because the institutional environment in such settings is ‘weak’ (De Soto, 2000; North, 1990). An institutional environment is consid-
ered weak when it lacks the capability “to ensure effective markets or even undermines markets” (Meyer et al., 2009: 63). Thus, in-
stitutions within BOP markets, as a whole, have been considered incapable of providing significant resources and protection to
entrepreneurs who elect to formally register and follow their prescriptions (Clemens and Cook, 1999; North, 1990; Webb et al.,
2009). The general lack of institutional benefits, combined with the purportedly high costs of business registration, is thought to suf-
ficiently deter entrepreneurs within BOP markets from formalizing their ventures (Cross, 2000; Webb et al., 2013).
However, recent research has cautioned against painting the institutional environment of BOP markets as universally weak (Mair
et al., 2012). For example, although Nigeria ranks within the lowest level on the human development index and nearly 60% of its GDP
occurs within the informal economy, its financial institutions rank 13th out of 189 countries in the world for providing small busi-
nesses with access to credit. Similarly, while over 50% of the population in Bolivia lives below the poverty line, and nearly 70% of
its GDP is derived from unregistered activities, its education institutions rank among the top third worldwide.4
Such variance in the strength of individual institutions within BOP markets suggests a much more complex picture than previously
theorized, where institutional environments are composed of some relatively weaker institutions alongside other relatively stronger
institutions. Does adhering to regulatory prescriptions yield any benefits from relatively ‘stronger’ institutions within BOP markets as
institutional theory would suggest? And how, if at all, are the costs and benefits of formalization intertwined within institutional
environments where both ‘strong’ and ‘weak’ institutions co-exist?
We attempted to inform such research questions by undertaking a mixed-method study of entrepreneurs in Guatemala. Our initial
research efforts involved exploratory interviews with 52 entrepreneurs. The purpose of the interviews was to use an institutional the-
ory lens to better deconstruct the discrete and inter-related institutional effects associated with formal business registration within
BOP markets. Thus, in addition to examining the direct linkages between formalization and the distinct level of resources obtained
by entrepreneurs from financial, labor, and legal institutions, we also explored how the level of resources obtained from one particular
institution may be positively or negatively intertwined with those obtained from other institutions. Based upon these initial insights,
we subsequently developed a set of formal hypotheses, which were then tested using a survey of 247 formal and informal entrepre-
neurs similarly located within Guatemala.
Our results collectively suggest that while being deemed ‘legitimate’ by regulatory institutions through formal registration can in
fact provide an increase in the provision of resources from relatively strong institutions within BOP markets, it can also result in in-
creased resource appropriation from drug dealers, gangs, and other criminals when legal institutions are weak. More specifically, by
adopting the procedures and symbols necessary to display adherence to the rules and norms associated with operating a registered
business (i.e., displaying licenses and issuing receipts), entrepreneurs at the same time inadvertently signal to criminals that they
possess sufficient resources to warrant extortion and theft. Thus, in BOP markets where legal institutions often lack the resources
to provide adequate protection, the financial and human capital benefits provided by legitimization are largely offset by the increased
costs and risks associated with crime.
Our study seeks to contribute to existing theory by suggesting that legitimacy can act as a double-edged sword within certain
institutional environments. While prior research has viewed legitimacy as having a largely positive effect for both small and large or-
ganizations (Certo, 2003; Navis and Glynn, 2011; Suchman, 1995), our findings suggest this prediction is at least somewhat context
dependent. Our findings also highlight the importance of taking a deconstructed view of institutional environments within BOP
markets. Whereas developed markets are largely considered to have consistently strong formal institutions (Bruton et al., 2010), in-
stitutions within BOP markets are often at various stages of development (Kistruck et al., 2011; London et al., 2014). Understanding
the breadth of benefits and costs associated with legitimation in such settings seemingly requires a finer-grained perspective of the
institutional environment.
In terms of practical implications, our deconstruction of the effects of legitimization within BOP markets suggests that there may in
fact be sufficient resources provided to entrepreneurs by certain formal institutions to warrant investment in business registration.
Therefore, it may not necessarily be that entrepreneurs fail to legitimate because they perceive the direct costs of registration and
taxation as exceeding the benefits provided by financial and labor institutions; rather, the practices required to access and maintain re-
sources from such institutions inadvertently serve as signals of profitability and stability to criminals. Thus, policy makers would do well
to reconsider their prescribed practices as it relates to publicizing regulatory adherence in the absence of effective legal enforcement.

2. Theoretical framework – institutions and legitimacy

Institutions refer to the relatively stable systems of prescriptions that define what is acceptable within society and provide the
incentives and constraints to encourage compliance (Clemens and Cook, 1999; North, 1990; Suchman, 1995). Herein, we focus on
formal institutions. Formal institutions are expected to serve two primary roles: (1) to provide structure to economic activity by
defining and enforcing economic, political, and legal prescriptions (North, 1990; Suchman, 1995), and (2) to provide general public

4
The preceding statistics were compiled from several World Bank studies including the 2013 “Doing Business” survey, the 2013 “Human Development Index”, and
the 2010 “Size of the Informal Economy” report.
438 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451

services, such as utilities, transportation infrastructure, educational systems, and to some extent, basic needs of food and shelter
(Ireland et al., 2008).5
Organizations, at least at a very basic level, can choose to either resist or conform to institutional prescriptions (Oliver, 1991;
Suchman, 1995). Examples of conformance may include adopting a particular organizational structure which reflects industry
norms (Tolbert and Zucker, 1983), or acquiring environmental or process certifications which can serve as independently-
conferred assurances that the organization is in compliance with best practices (Bansal and Roth, 2000). Organizations also calculate
the relative benefits of each strategic response prior to electing how to actively manage external pressures (Covaleski and Dirksmith,
1988; Oliver, 1991).
Organizations that elect to conform to institutional prescriptions are deemed ‘legitimate’ by those same institutions (Zimmerman
and Zeitz, 2002). Legitimacy is defined as a ‘condition reflecting cultural alignment, normative support, or consonance with relevant
rules or laws’ (Scott, 1995). Importantly, legitimacy can serve as a conduit for the provision of financial capital, labor, and other direct
support on the part of institutional actors (Hillman and Dalziel, 2003), where institutional actors are the entities that comprise the
supporting infrastructure of formal institutions (Hargraves and Van de Ven, 2006). In comparison, organizations operating outside
of institutional prescriptions can not only be restricted from accessing resources, but may also face potential fines or even termination
of their ventures (DiMaggio and Powell, 1983).
Being perceived as ‘legitimate’ by formal institutions is thought to be important for organizational survival in general (Dowling and
Pfeffer, 1975; Pfeffer, 1981; Zimmerman and Zeitz, 2002). However, legitimacy is thought to be especially important to entrepreneur-
ial firms who are more reliant upon external resources for survival and growth as compared to larger firms which are able to draw
upon internal cash flows (Ashforth and Gibbs, 1990; Elsbach and Kramer, 2003; Navis and Glynn, 2011; Starr and MacMillan,
1990). Entrepreneurial firms are also particularly susceptible to a ‘liability of newness’ (i.e., the lack of established routines and rela-
tionships, the absence of a market reputation, etc.) which they must seek to overcome by signaling stability, quality, or prestige (Certo,
2003; Delmar and Shane, 2004; Stinchcombe, 1965). Therefore, entrepreneurs who demonstrate adherence to existing rules and
norms are thought to create an impression of trustworthiness and continuity in the minds of institutional actors (Ashforth and
Gibbs, 1990; DiMaggio and Powell, 1983; Pfeffer, 1981), which ultimately leads to increased resource availability for ventures.
In support of such theoretical assertions, empirical studies have consistently found legitimacy to positively impact the provision of
external resources to entrepreneurial firms (Deeds et al., 2004; Human and Provan, 2000; MacMillan et al., 1985). However, much of
the prior work examining this theoretical linkage has been undertaken within developed-country contexts which are typically
characterized by uniformly strong formal institutions (Bruton et al., 2010; North, 1990). In reality, the majority of countries through-
out the world represent institutional environments that are much more varied in terms of relative strength.

3. Institutions and informality in BOP markets

It is estimated that as many as four billion people may make up what is considered to be the “base of the economic pyramid”
(Prahalad and Hart, 2002). While pockets of BOP markets exist throughout the world, they tend to be mostly concentrated within
Africa, Latin America, and South-East Asia (Kistruck and Beamish, 2010). Although poor as individuals, collectively they represent
an extremely large, yet understudied, block of economic activity. While BOP markets have been gaining scholarly attention through-
out the past decade, researchers continue to have a limited understanding of how institutions influence entrepreneurial activity with-
in these contexts (Bruton et al., 2012).
Stark differences are thought to exist between the formal institutions of BOP markets and developed markets. While formal insti-
tutions within more developed contexts are typically well-resourced and uniformly strong, such institutions within BOP markets are
generally considered underdeveloped, and consequently labeled as ‘weak’ (Kistruck et al., 2013b). For example, as compared to de-
veloped markets where public communication systems and utilities (i.e., internet, electricity, water) are widely accessible to all busi-
nesses, such systems can be largely unavailable to entrepreneurs within rural regions of BOP markets, and undependable within urban
centers (Webb et al., 2010). Similarly, whereas entrepreneurs can expect protection of personal property by a strong police force and
fair court system within developed markets, such processes within BOP markets can often be corrupt and/or highly inefficient
(Arnould and Mohr, 2005; Perry et al., 2007). It is also important to note that weak institutions within BOP markets may be due to
an absence of well-defined rules or structures for guiding societal behavior, as well as institutional actors lacking the resources or abil-
ity to enforce existing institutional prescriptions.
A form of legitimacy commonly studied in BOP markets is formal business registration (De Soto, 1989; Nichter and Goldmark,
2009). Entrepreneurs who operate formally registered businesses within BOP markets are perceived by institutions to be more
‘legitimate’ than those who operate unregistered informal businesses (De Soto, 2000; Godfrey, 2011; North, 1990; Webb et al.,
2009). Informal businesses can be thought of as, “businesses that are unregistered but derive income from the production of legal
goods and services” (Nichter and Goldmark, 2009: 1455). Furthermore, informal business undertake business activities that occur
outside of formal institutional prescriptions and are considered to exist within the informal economy (Portes and Haller, 2005;
Webb et al., 2009). While unregistered or informal entrepreneurs do possess some degree of legitimacy at the societal level that allows
for their continued existence (Cross, 2000), business registration serves as a potent signal to institutions within BOP markets that the
entrepreneur is willing to adhere to the established rules and norms of the formal economy (Webb et al., 2014).

5
For a more complete description of the range of formal institutions which feature prominently within BOP markets, please see Webb et al., 2010, pg. 560.
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 439

As compared to developed markets, the proportion of informal to formal businesses within BOP markets is significantly higher
(Rakowski, 1994; Schneider, 2002). Thus far, research has suggested that the relatively larger size of the informal economy in BOP
markets can be primarily attributed to the higher costs and comparatively lower benefits provided by formal institutions within
such settings. From a cost perspective, scholars have noted that the time and effort required to formally register a business within
BOP markets can often significantly exceed that of more developed markets (De Soto, 1989; Grosh and Somolekae, 1996). The taxation
rates and costs of complying with ongoing laws and regulations for registered businesses can be overly cumbersome within BOP mar-
kets (Apressyan, 1997; Stiglitz, 2002). In addition, the institutional benefits of operating a registered business within BOP markets are
thought to be much less than in developed markets (Maloney, 2004). For example, the access provided to government-sponsored
training programs that may accompany formalization is often of little value as such systems are often extremely under-resourced
and nepotistic (McPherson and Liedholm, 1996).
While contributing a great deal to our understanding of the factors that influence decisions regarding formalization, prior research
has tended to discuss the institutional costs and benefits of business registration in aggregate terms. In other words, formal institu-
tions within BOP markets have been universally labeled as ‘weak’, with the implication being that the benefits provided by all insti-
tutions fail to exceed the costs. However, scholars have more recently cautioned against the labeling of all institutions within BOP
markets as uniformly ‘weak’ (Mair et al., 2012). While there may indeed exist some BOP markets in which all institutions (i.e. financial,
labor, legal) are nascent, most possess institutions that vary considerably in strength commensurate with idiosyncratic development
efforts (Dhanani and Islam, 2002; Granville and Leonard, 2010). For example, within a given BOP market, the financial institutions
may be fairly strong while the legal institutions may be extremely weak. The implications of such institutional complexity for
decisions regarding (in)formality specifically, and institutional theory more broadly, remain unknown.
Additionally, studies have increasingly demonstrated that the prescriptions of any given institution can be significantly
intertwined with those of other institutions (Bartjargal et al., 2012). Such interrelated effects may be positive for organizations in
that being deemed legitimate by one institution may help to establish legitimacy with other corresponding institutions; or negative
in instances of conflicting institutional prescriptions (Ostrom, 2005). Within BOP markets where variance in institutional strength is
prominent, and institutions often lack intentional coordination between one another (Roever, 2006), the potential for negative or
unintentional effects may be heightened (Mair et al., 2012). Thus, further deconstructing the costs and benefits of legitimacy within
BOP markets may help to garner additional theoretical and practical insights.

4. Methodology – preliminary interviews

We began our study by conducting preliminary interviews with 52 entrepreneurs operating within Guatemala City, Guatemala.
We selected Guatemala as our research site for several reasons. First, Guatemala ranks as one of the poorest nations within the
Western Hemisphere with over 50% of its citizens living below the poverty line (United Nations, 2011), placing it firmly within the
BOP category. Second, after nearly 40 years of civil war which ended in 1996, Guatemala is in the process of rebuilding its network
of institutions, which has led to a great deal of variance in terms of their relative level of ‘strength’. Finally, despite having the second
highest rate of new business formation of all 54 countries surveyed in the 2009 GEM report (Bosma and Levie, 2009), over half of the
microenterprises within Guatemala remain within the informal economy (Perry et al., 2007). This composition allowed us to directly
compare the ability of informal versus formal entrepreneurs to garner resource support.
To identify potential interviewees for our study, we partnered with the microfinance division of a Guatemalan bank (we use the
pseudonym ‘Microlend’ to maintain confidentiality). Microlend has approximately 3,000 microfinance clients in total within rural and
urban Guatemala, although the majority of the entrepreneurs' businesses they fund are located within Guatemala City. Partnering
with an established local organization was necessary in order to efficiently locate a high number of both formal and informal
microenterprises, as well as to effectively solicit responses from entrepreneurs who are highly mistrustful of communicating with
unfamiliar people or organizations. A contact at one of the co-authors' academic institutions facilitated the connection to Microlend.
Using an institutional theory lens, an open-ended interview guide was created to gain a broad understanding of the implications of
formal business registration in BOP markets as it relates to resource provision (McCracken, 1988). Although the interview guide was
used to help initiate the conversation and act as a signpost, more tangential avenues of interest were also actively pursued when ini-
tiated by the interviewee (Gephart, 2004; Rubin and Rubin, 2005). Thus, different interviewees were often asked different questions,
and diversity within responses was sought in later interviews as opposed to the reinforcement of previous themes to reflect the ex-
ploratory rather than confirmatory nature of the interviews. The average duration of the interviews was approximately 20 minutes,
although they ranged from only several minutes to 45 minutes. While one of the co-authors is fluent in Spanish, local translators were
used by the other co-authors to conduct the interviews as necessary.
Given their criticality and relevance as discussed in extant research on institutions in BOP markets, three different individual insti-
tutions were emphasized in the interviews: financial, labor, and legal institutions. In simple terms, financial institutions refer to the
entities through which entrepreneurs can access capital and the system of rules upon which these entities operate (i.e., rules defining
interest rates, loan size, collateral, etc.). These entities can include myriad actors, from banks to microlenders to venture capitalists to
informal lenders (e.g., George and Prabhu, 2000; Guirkinger, 2008; Mead and Liedholm, 1998). Labor institutions refer to the pool of
labor, skilled and unskilled, available to entrepreneurs, and the norms regarding compensation, working conditions, and other
employment expectations (Elson, 1999; Reardon, 1997; Wood, 1997). The quality of labor institutions is a function of educational
institutions, types and quantity of employment options available, and other factors. Finally, legal institutions refer to the monitoring
and enforcement apparatuses that ensure security, resolve disputes, and otherwise ensure compliance with the law (North, 1989;
Pistor and Wellons, 1999), thereby attempting to provide a safe and secure environment for transacting.
440 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451

4.1. Preliminary insights

Our interviews suggested that there were in fact a number of significant institutional benefits to being seen as legitimate for
entrepreneurs operating within BOP markets. With regards to financial institutions specifically, entrepreneurs indicated that being
formally registered provided access to larger amounts of financial capital and at more competitive rates:

The first thing [the formal bank] asks for is my business license. If I don't have it, they raise the interest rate. A lot of banks will
still give credit without a license. But the problem is that instead of 20,000 quetzales, they give you 5,000. There are informal
loans, but the problem is the interest rates you pay; they are higher than the bank. – Shop store owner

The [formal banks] ask for so much and you have to have all of your paperwork together and if you don't, there isn't
any credit for you. They ask for your receipts and you have to be registered with the SAT,6 so it's easier if you are a formal
business – Restaurant owner

Additionally, with regard to labor institutions, interviewees indicated that formally-registered businesses may be better able to
attract more skilled employees. Such businesses were viewed as more stable than unregistered businesses in terms of their ability
to meet future payroll demands and other demands of more desirable employees:
You've got to put yourself in [the employee's] shoes. What if you went to a company and you wanted to know if it were formal
and so you started to investigate. The important thing is that they pay you. So if it's registered, they've got their accounting up to
date, they'll keep good track of your hours, you can earn your government required bonus. So it's better to work for a formal
business – Internet shop owner

However, with regard to legal institutions, our interviews suggested that formal business registration failed to provide any real
benefits. In fact, interviewees suggested that being viewed as a ‘legitimate’ business within BOP markets can actually result in greater
resource appropriation. While being a formally registered business does increases the attractiveness of a business to formal institution-
al actors, at the same time it can increase the attractiveness of the business as a target for members of the criminal sector. Procedural
norms instituted on the part of the entrepreneurs in order to adhere to the requirements of being a legitimate business can simulta-
neously capture the desired attention of formal institutions as well as the unwanted attention of gangs and other criminals.
From a regulatory standpoint, formal business registration within Guatemala requires the inclusion of the entrepreneur's business
information in a public directory. As the chief loan officer of Microlend described, while this can have a positive impact in terms of
assisting entrepreneurs with obtaining higher loan amounts from financial institutions or access to government programs, it can
also have very dangerous ancillary consequences:
Formal businesses are more vulnerable. The businesses that are registered regularly end up on a directory, whether it be the
registry of property, or the registry of merchandise, or the tax registry. They enter their name, their address, and their telephone
number. So there is vulnerability for this information. There are businesses that sell these databases, and when criminals have
this information, it's easier to contact the business and extort them.

A formal business, in its entrance for example, has their business license and their public health license that are documents that
have to be placed on the wall. Schools have to have the number of their resolution. All of this makes it so the delinquent knows –
Owner of a small school

All formal businesses are also required to issue receipts, and certain types of business that formalize, such as restaurants and
schools, are required to demonstrate their formal status by displaying some sort of plaque. Such public codification, while necessary
to maintain legitimacy in the eyes of certain government institutions, also serves as identifiers to criminals. As such, there are system-
atic differences between formal and informal ventures imposed by regulatory institutions. Yet, questions remain as to what would
make the formal ventures systematically more attractive to criminals? As one entrepreneur described:
When a business is registered, it is obligated to pay taxes and give receipts. So they have to comply with an administrative and
tax regime. For someone who wants to extort, they can go and ask, ‘do you give receipts or not give receipts?’ and then they
know if it's yes or no, and they know if formal or informal. If they give receipts, it means that they have to charge a bit more
for the merchandise, and are going to make good profits. So the gangs know this and they are more vulnerable. – Cell phone
repair shop owner

Therefore, the practices and symbols associated with attaining legitimacy in the eyes of formal institutions can simultaneously
signal to criminals that the businesses are sufficiently profitable to pay the associated upfront fees and ongoing taxes associated
with being formally registered. While such signals can have extremely negative repercussions, they are the same signals that are

6
SAT stands for “Superintendencia de Administracion Tibutaria, which is essentially the government tax collection agency within Guatemala.
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 441

important to receive support from financial institutions or potential employees seeking to work with the entrepreneurs to further
grow their businesses. Similarly, publicly visible signals are also important to attract a sufficient volume of customers to recoup the
additional costs of formal business registration:
If you are registered, you have to have publicity. You have to let people know about your business. Imagine if you have your
business and you're registered and you have to pay taxes. If you don't do publicity, you won't be able to sell. The formal
businesses have to show off their merchandise, so it's easier for a criminal to see how much the person is making in sales
and how high their profits are.- Loan officer

In the face of both positive and negative pressures associated with formal business registration, some entrepreneurs we
interviewed had tried a number of ways to mitigate the increased coercion from the criminal sector. For instance, at least one entre-
preneur had attempted to hire private security to replace the ineffective public enforcement mechanisms. But undertaking such com-
bative tactics often becomes more costly from an operating perspective, and also frequently produces the opposite of the intended
effect:
If a formal store puts in a security guard, it's because they've been extorted or assaulted. And that just makes it worse, because it
means that they are doing well enough to afford a security guard. The criminals then just kill the security guard and go after the
family. – Shoe retailer

Other entrepreneurs had attempted to alter the manner in which they conducted their business, such as changing their physical
location or adjusting their hours of business:
There are people that tried to extort us. They were people that were in jail, but they got our telephone number. The phone
started ringing and we were talking to this person, and there was also a person in the market that kept track of when we
got there. As soon as we opened, the phone would start to ring. One person gave the person in jail the information. This didn't
just happen to me, but to about 50 others here in the market. We tried changing our hours and we came at noon, but as soon as
we got there the phone would start to ring. The person wanted money, but he wouldn't say how much. He knew where my kids
go to school and the way that they came home from school. – Hair and beauty products retailer

I had a warehouse and would travel to all of Central America to buy things and bring them to Guatemala to sell. The criminals
began to watch me very carefully. They told me, ‘We need this amount of money, and if not we'll kill your daughter. We know
where she studies. We know where your wife works.’ I had to change phones. I also had to change the location of my business
and my warehouse. Now I go out as a walking salesman and only offers to those I have received a reference. My warehouse is
now in my house in order to hide. It's like camouflage. – Clothing retailer

Thus, collectively our preliminary interviews suggested that attaining legitimacy in the eyes of regulatory institutions can be a
double-edged sword in BOP markets. While formal business registration was perceived to “open doors” to financial and labor institu-
tions, and to provide more favorable access to capital and skilled labor as a result, adhering to regulatory prescriptions significantly
increased the threat of resource appropriation by gangs, cartels, and professional thieves. This represents a type of circular tension
in which entrepreneurs in BOP markets may pursue formal business registration as a means for potential growth, but ultimately
struggle to survive given the resulting coercion posed by the criminal sector. Based upon these initial findings, we turn now to the
development of more formal hypotheses and ultimately testing such theoretical assertions empirically to discern the veracity of
our preliminary insights.

5. Development of hypotheses

5.1. Formalization, financial institutions, and access to financial capital

In BOP markets, even small amounts of financial capital are considered crucial to supporting microenterprise growth by enabling en-
trepreneurs to acquire other pertinent resources (Mead and Liedholm, 1998). While scholars exploring the strength of financial institu-
tions within BOP markets have previously focused upon the limited venture capital and equity financing options available to
entrepreneurs (e.g., George and Prabhu, 2000), thousands of formal microlenders have arisen over the past decade that specifically
cater to entrepreneurs within such impoverished settings (Khavul, 2010). Thus, financial institutions within many BOP environments
are often at least moderately ‘strong’ as a result of a dramatic increase in the privatization of infrastructure investments (Banerjee
et al., 2006).
All things considered equal, we anticipate that formally registered businesses, having taken the steps to acquire at least the essential
elements of legitimacy in the eyes of regulatory institutions, would in turn be more likely to receive higher amounts of growth capital
from moderately strong financial institutions as compared to unregistered businesses. Formal business registration within BOP markets
serves as a signal of continuity and trustworthiness to financial institutions that lowers their perception of risk (Ashforth and Gibbs, 1990;
Pfeffer, 1981). Comparatively, informal entrepreneurs present a significantly heightened risk as a result of their illegality. By lacking the
fundamental elements of legitimacy as defined by the regulatory institutions, businesses operating without formal registration risk
442 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451

potential fines or termination of their ventures (Garcia-Rincon, 2007). Such outcomes have the potential to severely disrupt the informal
entrepreneurs' ability to repay loans, which would adversely affect the lenders. As such, in making lending decisions, financial institutions
are likely to favor the trust and continuity offered by formally registered businesses. Accordingly, we hypothesize:

Hypothesis 1. Formal business registration is associated with increased access to financial capital in BOP markets.

5.2. Formalization, labor institutions, and access to human capital

On average, BOP markets possess lower levels of education and human capital relative to that found in developed countries. As
such, a significantly higher portion of the labor market remains uneducated and unskilled (Calero et al., 2009). However, as with fi-
nancial institutions, educational institutions continue to strengthen in many BOP markets. And again similar to financial institutions,
such strengthening is primarily due to a marked increase in private investments on the part of nongovernmental organizations that
have been granted permission from federal and local governments to build and operate schools (Parry, 1997). The result has been at
least a moderate increase in the number of formally-educated individuals that are able to act as skilled employees for select
businesses.
Scholars have previously noted that informal entrepreneurs are often precluded from key factor and product markets that require
legal documentation (Sleuwaegen and Goedhuys, 2002). We similarly expect that entrepreneurs operating unregistered businesses
face disadvantages in accessing and retaining high-quality human capital (i.e., knowledgeable and skilled employees) as compared
to formally registered businesses. The lack of formal registration represents an absence of fundamental legitimacy as defined by
regulatory institutions, and a heightened risk of termination as a result. Thus, formal businesses are more likely to offer greater job
security and financially attractive employment options for individuals that are fortunate enough to receive higher education and skills
training. Furthermore, labor laws restrict how employees can be terminated and define minimum wages, and formal businesses are
more likely to abide by such laws as compared to informal businesses (Perry et al., 2007; Portes, 1994).
Additionally, firms that are not formally registered are unable to gain access to government training programs (McPherson and
Liedholm, 1996). Such programs can be a key source of knowledge for microenterprises seeking to increase efficiency or pursue
growth opportunities at little to no cost. Unregistered firms are similarly unable to tap into either public information services provided
by government agencies, or private information services provided by professional associations who often require formal business
registration to gain access (Sleuwaegen and Goedhuys, 2002). This results in an overall diminished ability for informal entrepreneurs
to overcome shortcomings in knowledge and skills in a cost-efficient manner as compared to formal entrepreneurs. Accordingly, we
hypothesize:

Hypothesis 2. Formal business registration is associated with increased access to human capital in BOP markets.

5.3. Formalization, legal institutions, and challenges related to crime

As compared to financial and educational institutions, governments are less likely to privatize activities related to public order
(i. e., legal institutions) due to a desire to maintain control, resulting in a greater internal financial burden to build sufficient infrastruc-
ture (Acemoglu and Robinson, 2012). Thus, within many BOP markets, legal institutions remain relatively weak as compared to other
formal institutions (de Soto, 2000). In such contexts, one concern is that formally registered entrepreneurs may incur limited benefits
due to weaker legal institutions. Equally important, however, is that there may be an increased risk of resource appropriation on the
part of criminals whose own strength and power increases in the absence of strong legal institutions.
While crime exists in all societies (van Dijk, 1994), the threat of crime is especially prevalent for entrepreneurs within BOP
markets. Crime occurs within BOP markets due to multiple reasons, including a lack of institutional controls (Gottfredson, 2009),
the high levels of socioeconomic deprivation in these impoverished contexts (Ksenia, 2008; van Dijk and Zvekic, 1993), strain created
by the uneven distribution of resources among individuals within society (Merton, 1968), and perceptions of incompetence of
institutional leadership (Rosenfeld and Messner, 1997). In other words, the lack of legal institutions to construct adequate controls
presents opportunities for motivated individuals to rectify their deprived situations via criminal activities.
On the one hand, logic might suggest that informal entrepreneurs are at greater risk to crime because criminals know informal en-
trepreneurs, who lack legitimacy, would be unable to draw upon enforcement agents to seek recourse because doing so would surface
questions of their own informality (Cross, 2000). However, given the comparatively weak legal institutions that typically constitute
BOP markets, and the insights provided from entrepreneurs within our preliminary interviews, we expect that such formal recourse
is not readily available to either informal or formally-registered firms. Rather, formally-registered businesses will be at greater risk of
crime than unregistered businesses as being viewed as ‘legitimate’ within BOP markets can serve as a signal to criminals that such
enterprises have relatively more wealth than their informal counterparts. Furthermore, by avoiding the upfront costs and ongoing
investments needed to comply with other regulatory requirements, informal entrepreneurs can more efficiently shift how, where,
and when they conduct their business activities (Dean et al., 1998; Siqueira et al., forthcoming), thus making it more difficult for
criminals to target them.
Therefore, formal business registration within BOP markets where legal institutions are weak represents a significant cost rather than
benefit. Specifically, registration increases the formal entrepreneur's attractiveness vis-à-vis informal entrepreneurs by suggesting that
the formal entrepreneurs might be a more likely source of ongoing revenues for the criminals by way of extortion or other means. As
criminals act rationally to increase their own illegal gains (Ben-Shahar and Harel, 1996; van Dijk, 1994), they are likely to focus their
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 443

efforts more on registered entrepreneurs given the potential to acquire greater wealth or “yield” from their criminal efforts (Hough,
1987). Therefore, while formally registered businesses may ultimately undertake a host of actions that in part attempt to prevent an in-
crease in the incidents of crime (i.e. security systems, change business hours, etc.), we expect that they will experience a greater level of
challenges as compared to informal entrepreneurs.7 The end result is that formally registered businesses will feel more threatened than
informal businesses and will perceive crime to be a greater challenge to their continued existence and growth. As such, we hypothesize:

Hypothesis 3. Formal business registration is associated with increased challenges related to crime in BOP markets.

However, crime can take a number of different forms, such as theft, vandalism, sex- and violence-related crimes (i.e., assault, bat-
tery, extortion, murder, rape, lewd conduct, etc.), corruption/bribery, drug distribution, and fraud. Given the nascent state of research
on the effects of crime on business, we further hypothesize the extent to which registered businesses are threatened by different
forms of criminal activity within BOP markets – specifically extortion, theft and vandalism. Given discussions with local individuals
within our preliminary interviews, these activities were recognized as fairly common types of crime within BOP markets.

5.4. Challenges related to extortion, theft, and vandalism

Extortion refers to the illegal application of force, intimidation, or some other form of threat to appropriate money from another
individual (Hindriks et al., 1999). Similarly, theft refers to the illegal removal of property from another individual's ownership with
the intent to deprive the individual of the property's value (c.f., Greenberg, 1997). Extortion and theft are undertaken by individuals
as means to secure control of resources that they do not currently own. Both extortion and theft represent common criminal activity in
BOP markets as gangs can control significant parts of major metropolitan areas.8
Vandalism refers to the intentional damage or destruction to another individual's property (Moser, 1992). Scholars have set forth
various motives for vandalism, including desire to backlash against the system and exact revenge, a conflicting ideology, boredom
and/or curiosity that leads to the accidental destruction of property as individuals experiment, an ill-advised creative outburst, and
frustration and rage targeted at specific symbols in society (Cohen, 1971, 1973; Goldstein, 1996; Horowitz and Tobaly, 2003).
These criminal activities occur when the motivation and opportunity align for criminals (Fischer and Janowski, 2000).
Extortion, theft, and vandalism (at least in some of its forms) are motivated by a need to rectify a perceived inequity in society
(DeMore et al., 1988; Fisher and Baron, 1982; Merton, 1968; Sauser, 2007). Perceived inequities can be exacerbated by (1) the density
of populations as crowding places individuals in constant interaction where inequities are repeatedly made salient, leading to a state
of agitation, and (2) the lack of social support that leads individuals to resolve their inequities through their own personal actions
(Brown and Devlin, 2003; Taylor, 1973). Perceived inequities are heightened in urban BOP markets as liberalization policies promoted
industrialization which, in turn, led to significant over-migration to urban areas (e.g., during the 1970s and 1980s in Latin America; de
Oliveira and Roberts, 1994). Existing labor markets have continued to be unable to absorb the significant excess labor, leading to stark
inequities in terms of those individuals in society who have jobs and stable income versus those individuals who do not.
Formal business registration represents a visible symbol highlighting those who have jobs and stable, more permanent income that
can be the target of other individuals' frustration and, hence, lead to extortion, theft, and vandalism. Moreover, formally registered busi-
nesses are commonly viewed as being wealthier than their informal counterparts. In comparison, by definition, informal entrepreneurs
technically operate illegally without formal business registration and are less likely to be seen as members of the economic elite as they
scramble too to meet their daily needs. Criminals may be more likely to relate with the plight of informal entrepreneurs, reducing the
propensity for criminals to vandalize their property. Given the risks associated with extortion, theft, and vandalism (e.g., being shot by
the owner seeking to protect their possessions; being caught and going to jail), criminals are likely to favor the higher potential rewards
of appropriating money from or vandalizing formally registered entrepreneurs. In other words, formal entrepreneurs present a source of
greater motivation and opportunity for extortion, theft, and vandalism. Therefore, we hypothesize:

Hypothesis 3a. Formal business registration is associated with increased challenges related to extortion in BOP markets.

Hypothesis 3b. Formal business registration is associated with increased challenges related to theft in BOP markets.

Hypothesis 3c. Formal business registration is associated with increased challenges related to vandalism in BOP markets.

6. Methodology – survey

6.1. Sample

To identify potential survey respondents, we again partnered with Microlend to secure access to both formal and informal entrepre-
neurs that would otherwise be highly reluctant to provide information to strangers or groups with whom they do not already possess an
existing relationship. Given our specific hypotheses involving the link between business formality and institutional costs/benefits, we

7
As uncovered in our interviews, some private investments in security can actually attract greater attention from criminals because these investments signal that the
entrepreneurs have additional wealth to make these investments, offering the criminals an even greater potential yield.
8
The severity and pervasiveness of extortion became exceptionally evident during one of our research trips to Guatemala. In a particularly salient instance, when
walking through a street market in Guatemala City, we walked upon a street vendor that had just been murdered. The following day, the daily newspaper stated that
the vendor had been extorted for the equivalent of $20 per month but had fallen behind by one month. The gangs wanted to make an example of this vendor to others in
the market. Highlighting the particular predicaments in BOP markets, the extorted monies are generally referred to as “war taxes.”
444 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451

sought to ensure that our sample reflected the variance of institutional environments present within Guatemala City. Through prelimi-
nary discussions with Microlend, as well as a review of existing archival data sources on Guatemala City, particular administrative zones
within the city were selected that represented a variance of institutional environments, particularly with regard to crime.
A preliminary survey instrument was constructed by the co-authors, subsequently translated into Spanish, and then face validated
by loan officers within Microlend (Cook and Campbell, 1979). A pretest of the survey instrument was then conducted with a small
number of entrepreneurs within Guatemala City and adjustments were subsequently undertaken to address any potential confusion
or language nuances (Blair and Presser, 1993). The surveys were subsequently conducted in-person by the co-authors within
Guatemala City. The specific process for surveying participants consisted of: (1) travelling to the center of the particular zone being
surveyed that day, (2) being introduced to the entrepreneur by the loan officer and asking for their willingness to participate, (3) leaving
a copy of the survey with willing participants and informing them we would return in approximately 1 hour to collect the survey, and
(4) returning to collect the survey and answering any potential clarifying questions they might have had with the survey items. In
total, 247 entrepreneurs agreed to participate within the study.

6.2. Measures

6.2.1. Formal business registration

Formal business registration was measured as a dichotomous variable in which the survey respondent indicated whether their en-
terprise was formally registered with (1) being ‘no’ and (2) being ‘yes’. Registering a business within Guatemala takes approximately
37 days in total and requires a minimum of 5,000 Guatemalan quetzales to be deposited in a local bank which equates to approximate-
ly $625 USD (World Bank, 2009). In addition to these direct costs, entrepreneurs also incur associated costs related to conducting a
business name search, appointing a legal representative, and employing the services of a notary to submit the required documentation
to the Guatemalan government.

6.2.2. Access to financial capital

To measure access to financial capital, the survey respondents were asked to indicate whether the amount of financing available to
them in the past year (1) had decreased, (2) stayed the same, (3) increased a little, or (4) increased a lot. Thus, a four-point Likert scale
was used to determine the extent to which the entrepreneurs had been able to successfully obtain larger amounts of financial capital.
We draw upon four-point Likert scales to capture our variables given (1) concerns among scholars whether respondents in BOP mar-
kets can effectively distinguish the nuances of their responses and the introduction of other cultural biases when scales employ a
greater number of categories (Flaskerud, 1988; Lee et al., 2002; Meyskens and McKague, 2011), and (2) recognized reliability and
validity of scales with lesser categories at least in developed contexts (Matell and Jacoby, 1971).

6.2.3. Access to human capital

Entrepreneurs were asked to indicate how difficult it is to obtain the external knowledge and skills necessary for growing their
businesses. Specially, a four-point Likert scale was used in which the potential choices were (1) no problem, (2) a minor problem,
(3) a moderate problem, or (4) a major problem. The intent of the scale is thus to capture the overall level of difficulty in hiring skilled
employees, participating within government training programs, and other means through which to access skills and knowledge. The
responses were subsequently reverse-coded for the purpose of easing interpretation.

6.2.4. Challenges related to crime

Similarly, entrepreneurs were asked to indicate how serious of a challenge crime was to their business. Again, the potential choices
were (1) no problem, (2) a minor problem, (3) a moderate problem, or (4) a major problem. Given our interest in the effects of more
specific types of crime, we also asked respondents separately about challenges related to Extortion, Theft, and Vandalism. Each entre-
preneur was asked for their overall general opinion about the degree to which each type of crime was a problem for their business.

6.2.5. Control variables

A number of additional control variables were included within our study based upon our preliminary interviews and the particular
BOP context in which the study took place. First, we included a control for Gender as a dichotomous variable given that prior work has
suggested significant cultural and practical factors associated with female entrepreneurs in BOP markets that may affect their actions
and ability to access resources, operate, and grow (Buvinic, 1989). Prior research has also suggested that the education level of entre-
preneurs in BOP markets can have a significant impact on their level of growth (Kantis et al., 2004), especially within economies with a
large informal sector (Honig, 1998). We controlled for Education as a five-point scale in which (0) equals no formal education,
(1) equals up to a primary level of education, (2) equals up to a middle school level of education, (3) equals up to a high school
level of education, and (4) equals a university-level education. We also controlled for whether or not the entrepreneur had Started
another Business within the past year using a dichotomous variable to account for what could have been increased attention associated
with the launch or promotion of a new business that might have garnered significant increased attention from criminals for reasons
other than formal business registration.
Four controls at the organizational level were also included to account for potential overlaps in variance explained within the de-
pendent variables. A control was included for Age of Business as younger firms within Latin America may be viewed as less attractive
than older firms (Burki and Terrell, 1998; Parker, 1995). Another control was included for the Size of Business, which has also been
shown to have a significant impact on an organization's ability to access resources for growth (Mead and Liedholm, 1998). In
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 445

conjunction with our discussions with Microlend, it was decided to use the existing loan amount of the entrepreneur with Microlend
as a more accurate proxy for capturing differences in size rather than number of employees, given that many entrepreneurs had per-
haps one paid employee and confusion regarding whether unpaid family members constituted employees. We also controlled for
Business Sector using a categorical variable in which we asked the entrepreneurs to indicate if their business was primarily involved
in sales, production, or service to account for variance in the degree to which the entrepreneurs had to transact with others outside
their businesses to secure resources as well as exposure to crime. Finally, we controlled for Change in Profitability of the business over
the past year. Specifically, entrepreneurs were asked whether their profits (1) decreased, (2) stayed the same, (3) increased a little, or
(4) increased a lot. This was done in order to control for the alternative explanation that increased access to resources as well as criminal
attention was due to actual increases in wealth as opposed to the signal of wealth indicated through formal business registration.
Two controls at the environmental level were also included within our study. The first control related to the Zone of Business.
As mentioned previously, Guatemala City is divided into 26 separate administrative zones, and while such zones were used as
high-level markers for ensuring that variance in crime levels was obtained, because the analysis of our data is at the individual
level, it was important to control for other potential clustering effects. Using internal data Microlend had compiled from a diversity
of government sources, we classified zones into one of six categories based on the level of crime in each zone. These categories
were used in our models to cluster the standard errors. Finally, we controlled for the Level of Competition (1 = low; 4 = high) reported
by each of the survey respondents to account for the fact that higher levels of competition may significantly increase the co-related
challenges of obtaining financing, human capital, and other resources. Additionally, prior studies have suggested that the level of
competition can significantly affect the rate at which entrepreneurs innovate and grow (McCormick, 1999).

7. Analysis and results

Our data was analyzed with Stata 12 and we used ordinal probit models to test our hypotheses. Ordinal probit models were an
appropriate choice given the nature of our categorical dependent variables which have a specific rank order, but were not always
evenly distributed (Long and Freese, 2001; McKelvey and Zavonia, 1975). In addition, we used multiple imputation to deal with miss-
ing data from our control variables. Preliminary exploration of the data indicated that this data was Missing at Random (MAR), and we
therefore opted to use multiple imputation to deal with the missing data (Finch, 2010). A total of 10 multiple chained equation im-
putations were performed using the multiple imputation commands in Stata, and pooled estimates were used for model specification.
We did not impute data for our dependent variables or our main independent variable of interest (formal business registration),
so our final analyses included 221 observations. Finally, we used a robust variance estimator (“cluster”) in our models (Huber,
1967; White, 1980, 1982) based on the geographic zone where businesses operated to account for the potential correlation of the
error terms. This technique accounts for potential heteroskedasticity due to clustering in a geographic location.
Both descriptive statistics and a correlation matrix for the variables were calculated and are reported (Tables 1 and 2, respectively).
As Table 1 indicates, approximately half of the respondents in our study had formally registered their business while the other half
operated informally.
Model 1 was constructed to test the effect of formal business registration on access to financial capital. A test for overall model fit
indicates that the model is significant (F-value = 480.6) at the p b .001 level. As Table 3 illustrates, the relationship between formal
business registration and access to financial capital is positive and statistically significant (β = 0.33, p b .001), suggesting that firms
which are formally registered experience fewer challenges obtaining financial capital for growth relative to firms operating informal-
ly. Thus, Hypothesis 1 is statistically supported. It seems that formal business registration, as being deemed legitimate by regulatory
institutions, opens doors to financial institutions.
Model 2 tests the effect of formal business registration on entrepreneurs' access to human capital. A test for the model fit is signif-
icant (F-value = 123.13) at the p b .001 level. Our analysis also indicates that the relationship is positive (β = 0.24) and statistically

Table 1
Mean, standard deviation (SD), minimum and maximum.

Variable⁎ Mean SD Min Max

Gender of entrepreneur 1.44 0.49 1.00 2.00

Education of entrepreneur 1.69 1.12 0.00 4.00
Age of business (in months) 180.41 128.92 4.00 848.00
Started another business 0.22 0.33 0.00 1.00
Level of competition 2.09 1.15 1.00 4.00
Size of business 2.59 1.27 1.00 4.00
Change in profitability 2.02 0.85 1.00 4.00
Formal business registration 1.45 0.50 1.00 2.00
Access to financial capital 2.27 0.80 1.00 4.00
Access to human capital 2.65 0.75 1.00 4.00
Challenges related to crime 2.81 1.31 1.00 4.00
Challenges related to theft 2.63 1.25 1.00 4.00
Challenges related to vandalism 2.12 1.22 1.00 4.00
Challenges related to extortion 2.10 1.38 1.00 4.00
⁎ The variables ‘Business Sector’ and ‘Zone of Business’ are both categorical rather than continuous/dichotomous and thus are not reported.
 446
G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451
Table 2
Correlation table.

1 2 3 4 5 6 7 8 9 10 11 12 13

Gender of entrepreneur
Education of entrepreneur −0.003
Started another business −0.043 0.104
Age of business 0.131⁎ −0.276⁎⁎⁎ −0.065
Level of competition −0.032 0.030 0.203⁎⁎ −0.079
Size of business −0.136⁎ 0.036 −0.130⁎ 0.030 0.046
Change in profitability −0.054 0.121 † −0.067 −0.140⁎ −0.216⁎⁎⁎ −0.057
Formal business registration −0.039 0.127 † 0.012 −0.119† −0.023 0.199⁎⁎ 0.032
Access to human capital −0.021 0.068 −0.084 0.094 −0.236⁎⁎⁎ 0.045 0.103 0.122†
Access to financial capital −0.092 0.215⁎⁎ −0.001 −0.155⁎ −0.080 0.081 0.404⁎⁎⁎ 0.161⁎ 0.042
Challenges – crime 0.078 0.017 0.028 0.060 0.199⁎⁎ −0.059 −0.078⁎⁎ 0.130⁎ −0.141⁎ −0.116†
Challenges – theft 0.047 0.064 −0.014 0.033 0.173 −0.025 −0.147⁎ 0.112† −0.185 −0.148⁎ 0.503⁎⁎⁎
Challenges – vandalism 0.037 0.150⁎ −0.062 −0.001 0.163⁎ 0.048 −0.055 0.140⁎ −0.198⁎⁎ −0.106 0.370⁎⁎⁎ 0.637⁎⁎⁎
Challenges – extortion 0.012 0.135⁎ −0.090 0.055 0.096 −0.004 −0.007 0.113† −0.103 −0.023 0.458⁎⁎⁎ 0.491⁎⁎⁎ 0.503⁎⁎⁎
†
p b .10
⁎ p b .05
⁎⁎ p b .01
⁎⁎⁎ p b .001
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 447

Table 3
Effects of formal business registration on entrepreneurial resources/challenges.

Access to financial Access to human Challenges related Challenges related Challenges related Challenges related
capital capital to crime to extortion to theft to vandalism

Gender of entrepreneur −.069 −.323⁎⁎⁎ .104 .271⁎ .162 .155⁎

(.167) (.044) (.112) (.119) (.137) (.075)
Education of entrepreneur .150⁎ .080 .052 .195⁎ .092 .191⁎⁎
(.070) (.152) (.095) (.088) (.112) (.060)
Started another business .003 .224 .009 .450⁎⁎⁎ .164 .254
(.193) (.423) (.244) (.110) (.154) (.167)
Age of business −.000 .001 .001 .001 .000 .001
(.001) (.001) (.001) (.001) (.001) (.001)
Business sector −.148 .079 .101 .110 .063 .009
(.092) (.213) (.127) (.111) (.103) (.086)
Level of competition .000 −.232⁎⁎⁎ .207⁎⁎⁎ .147⁎⁎⁎ .175⁎⁎ .185⁎⁎⁎
(.074) (.066) (.052) (.035) (.065) (.033)
Size of business .074 .026 −.065 −.042 −.077 −.002
(.067) .047 (.078) .092 .052 (.069)
Change in profitability .565⁎⁎⁎ .109 −.114 −.044 −.206† −.077
(.115) (.160) (.140) (.120) (.108) (.140)
Formal business registration .327⁎⁎⁎ .243⁎⁎ .423⁎⁎⁎ .332† .312⁎ .366
(.092) .089 (.089) .190 .148 (.244)
F-value 480.55 123.13 195.62 47.95 46.09 82.95
Prob N F .000 .000 .000 .000 .000 .000

n = 221 (standard errors are in parentheses)

†
p b .10
⁎ p b .05
⁎⁎ p b .01
⁎⁎⁎ p b .001

significant (p b .01). Thus, Hypothesis 2, which states that formally registered businesses will experience fewer challenges in obtaining
human capital, received support.
Model 3 analyzes the relationship between formal business registration and challenges related to crime. A test for overall
model fit is significant at the p b .001 level (F = 195.62), and the specific relationship is both positive and statistically significant
(β = 0.42, p b .001), indicating that entrepreneurs who elect to operate legitimate formal businesses experienced greater challenges
related to crime than those which remained informal. Hypothesis 3 is thus supported. To dig more deeply into the different types of
crime that impact entrepreneurs within BOP markets, additional analyses on extortion, theft, and vandalism were conducted.
Hypothesis 3a, which states that being formally registered will be associated with higher extortion-related challenges, received
moderate statistical support (F = 47.95, β = 0.33, p b .10). So too did Hypothesis 3b, which supposed that formal business registration
would be positively associated with higher theft-related challenges (F = 46.19, β = 0.31, p b .05). Hypothesis 3c, stating that formally
registered businesses would experience higher vandalism-related challenges than their informal counterparts, however, just failed to
receive statistical support (F = 82.95, β = 0.37, p = .13). Thus the overall statistical results of our survey very much mirrored the
preliminary insights provided by our interviews with the exception of the relationship between formality and vandalism.

8. Discussion

Our results paint a somewhat different and more complex picture than current explanations for why such a large proportion of
entrepreneurs within BOP markets choose to remain informal. At a high level, our findings concur with the notion that entrepreneurs
within such settings elect not to formalize because they perceive the overall costs of doing so to exceed the benefits (Cross, 2000).
However, by deconstructing the set of institutions within the overall environment, and examining how their individual prescriptions
for maintaining legitimacy can produce both discrete and inter-related effects, we provide a better understanding of the tradeoffs
associated with being deemed ‘legitimate’ in BOP markets.
First, our study suggests that there are significant ancillary ‘costs’ associated with formal registration within BOP markets that
differ significantly from those highlighted within previous studies. In particular, the real and potential costs associated with crime
represent a salient yet understudied cost of legitimation within such settings.9 While undoubtedly, direct costs related to registration,
taxation, and complying with ongoing regulatory requirements remain factors in an entrepreneur's decision of whether or not to
formalize (Grosh and Somolekae, 1996; Stiglitz, 2002), the power and influence of the criminal sector within BOP markets is perhaps
an important part of the reason why many entrepreneurs elect to remain part of the informal economy in such settings (Hall et al.,
2012; Soares and Naritomi, 2010).
Second, our results suggest that there are indeed some institution-specific benefits (i.e., access to financial capital and human capital)
to be gained by entrepreneurs who elect to formally register their ventures within BOP markets. Thus, at least at a discrete level, there are

9
It is worth noting that, given the number of entrepreneurs operating within BOP markets greatly exceeds that in developed markets, the influence of crime on en-
trepreneurial decisions such as registration may be much more the norm rather than the exception.
448 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451

certain institutions that are able to provide sufficient resources to warrant the direct costs of adhering to their prescriptions. However,
our findings suggest that the same activities required to be deemed as legitimate by such institutions can inadvertently signal attractive-
ness for resource appropriation efforts on the part of criminals. Therefore, within institutional environments where both ‘strong’ and
‘weak’ institutions co-exist, a tension can exist between the provision and appropriation of resources resulting from legitimation.
Interestingly, while our empirical results deconstructing different types of crime provided support for a link between formal busi-
ness registration and increased risk of both extortion and theft, they failed to support a statistically significant relationship between
formalization and vandalism. As noted in our hypotheses, theft and extortion differ slightly from vandalism in terms of motivation:
theft and extortion involve direct action to secure control of resources controlled by others, while vandalism involves a more general
backlash against society. Thus, it is possible that the portrayal of wealth that accompanies formal business registration is more salient
to criminals directly seeking to acquire such wealth, than to delinquents generally seeking to rebel against societal inequities. It is also
possible that alternative motivations that drive vandalism (i.e., boredom, creative outbursts, etc.) are more prominent triggers within
BOP markets – triggers which may not be as directly related to the actions of any particular business. We hope that future research will
attempt to further disentangle the unique (or common) motivations behind different types of crime within BOP markets, to better
explain and predict their relationship to formalization and other business activities.
From an institutional theory standpoint, our study illustrates the specific challenges created by the uneven development of formal
institutions in BOP markets. We refer to the variance in intra-institutional strength within a society as institutional heterogeneity.
While recognized previously by other scholars (Dhanani and Islam, 2002; Granville and Leonard, 2010), we extend these ideas by
showing how such institutional heterogeneity can present specific types of challenges for entrepreneurs operating in these contexts.
Because of institutional heterogeneity in BOP markets, efforts by entrepreneurs to garner legitimacy in the eyes of some formal insti-
tutions can present unintended challenges due to other weaker formal institutions. Importantly, different BOP markets develop along
different paths depending on what specific priorities are emphasized by policymakers. The specific nature of institutional heteroge-
neity can then differ significantly across BOP market contexts. Future research into forms of institutional heterogeneity can provide
important insights into understanding more effective sequences of development, how to develop formal institutions in more reinforc-
ing versus undermining ways, and the role of private versus public investments in strengthening weak institutions.
Our study also contributes to work on institutional voids (Lou and Chung, 2012; Puffer and McCarthy, 2010). Institutional voids
have been described as a complete absence of supportive market institutions (Kistruck et al., 2013a; Mair and Marti, 2009; Webb
et al., 2010) and is a term that has become synonymous with extremely “weak” institutions. The weak institutions, in turn, are viewed
as a function of a lack of tax revenues, nascent stages of economic development, and limited public support in BOP markets. Our study
suggests another challenge to the strength of institutions – countervailing forces posed by strong illegitimate actors that disrupt the
flow of resources and daily activity within some BOP markets. Much in the way that sociologists view ‘institutional voids’ not simply as
empty spaces but rather as contested spaces (Barley, 2007; Campbell, 2004; Mair et al., 2012), so too do we see legal institutional voids
within BOP markets as power struggles. However, whereas prior work has viewed such contested spaces as a clash between legiti-
mate logics of society (i.e. community, religion, markets, politics, etc.), we perceive such spaces as power struggles in which the legit-
imate orders of society fight to co-exist with illegitimate orders (i.e. gangs, thieves, delinquents, etc.). We hope that by highlighting the
prevalence of such struggles within BOP markets where the majority of the world's population resides, that they will become a much
larger focus of future academic conversation.
To some extent, the organized gangs in BOP markets have wielded such power, and for such an extended period, that some
scholars have referred to their activities as institutionalized crime (Milhaupt and West, 2000; Voronin, 1997). Moreover, the orga-
nized gangs have idiosyncratic rules and routines for targeting specific actors, determining the wealth that can be extracted from
each actor, and punishment for those actors who do not act in ways defined as accepted by the gangs, among others. The magnitude
and breadth of power wielded by gangs leaves BOP markets in a precarious situation in terms of development. A World Development
report (2011) recently stated, “No low-income fragile or conflict-affected state has yet achieved a single Millenium Development goal.
There is hope, however. Countries that have managed to reduce violence have also produced some of the fastest gains.” This evidence
suggests that security provided by strong legal institutions is a key lynchpin of economic development for BOP markets that should be
a focus of policymakers in the early stages of development.
While, at least in part, the purpose of this particular study was to explore the direct effects of formal business registration on increased
challenges associated with crime, it is likely that micro-enterprises in BOP markets vary in their exposure to such challenges (Sutter et al.,
2013). In other words, the extent to which formalization actually leads to increases in extortion, theft, and other forms of crime is likely
contingent on the particular characteristics of the entrepreneur, characteristics of their business operations, and even characteristics of
their particular context. We conducted two basic post-hoc analyses with our control variables of ‘gender’ and ‘size’ to explore the
presence of a moderating influence. While our analyses did not indicate a significant moderating effect associated with gender, it
appears that the positive relationship between formal business registration and extortion was significantly dampened the larger the or-
ganization (F = 33.23, β = −0.24, p b .001). Thus, we strongly encourage further study of how certain entrepreneurial ventures that
choose to formalize within BOP markets may be more or less susceptible to the challenges associated with crime that we focus on herein.
From a practical standpoint, the high rates of entrepreneurial activity in BOP markets have not translated into positive economic
transformation (Easterly, 2006). A number of development agencies and think-tanks have prescribed the formal registration of business
and personal property as a sort of panacea for addressing this problem (i.e. de Soto, 2000). Even in BOP markets, there seem to be a num-
ber of positive outcomes to entrepreneurs who elect to formally register their businesses. However, where legal institutions are compar-
atively weak as compared to other institutions, the criminal sector can be prominent and increase costs related to managing personal and
business risk. While prior work has suggested that entrepreneurs operating within the informal economy fail to formally register their
businesses in an attempt to avoid registration costs and government taxes, at least part of their choice may be explained as a conscious
 G.M. Kistruck et al. / Journal of Business Venturing 30 (2015) 436–451 449

effort to hide from the criminal elements that pervade such societies. In such settings, allowing for more private than public verification of
formal institutional demands (i.e., having an auditor request to review business registration documents instead of requiring that the doc-
uments be placed visibly to all who enter the business) may increase the attractiveness for informal entrepreneurs considering the tran-
sition to the formal economy, and in turn, foster greater entrepreneurial growth at both the individual and aggregate level.
Of course our study is not without its limitations. While we believe Guatemala to be representative of BOP environments in gen-
eral, it has its own idiosyncratic set of ‘strong’ and ‘weak’ formal institutions. While other BOP markets may have somewhat unique
institutional configurations, the general privatization of financial and labor institutions and state-controlled legal institutions in many
BOP contexts suggests some level of generalizability. Nevertheless, we urge scholars to take caution in generalizing our results to other
BOP settings in which institutional configurations may differ. Additionally, our measure of formal business registration and our depen-
dent variables were collected at a single point in time. Our results should, therefore, be interpreted much more as correlations rather
than directional causations without further study. Our measure of human capital was also fairly vague and open to broad interpreta-
tion on the part of our respondents. And, our measures of crime refer to perceived threat or risk on the part of the entrepreneurs rather
than actual occurrences. Thus, differences between reality and perception may bias our results in either a positive or negative direc-
tion. Finally, we conceptualized institutional strength as both the existence of laws and their effective enforcement. In reality, BOP
markets face dynamic paths of development in terms of both policy and enforcement, and therefore, scholars should seek to gain a
finer-grained understanding of each of these factors separately.

9. Conclusion

Prior research has suggested that entrepreneurs within BOP markets elect not to formalize because the benefits of adhering to in-
stitutional prescriptions fail to exceed the costs (Cross, 2000). We extend such thinking by further deconstructing both the discrete
and inter-related effects of formal business registration within such settings. Our findings suggest that the institutional environments
within BOP markets, and the effects of legitimacy, are much more complex than previously theorized. We hope that the insights
provided herein will not only serve to trigger tangential areas of academic inquiry, but will also meaningfully advance the practical
conversation surrounding the underlying challenges of fostering entrepreneurial growth as a path towards more effective economic
development.

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