Effect of corruption and crime on growth-oriented informal firms

Traditionally, informal firms have been perceived to be unproductive, lacking skills, and static by necessity, while low institutional quality has been shown to increase their prevalence. However, this research draws on institutional theory to explain the effect of corruption and crime on growth-oriented informal firms that emerge due to opportunities and make decisions voluntarily rather than out of necessity. We construct a logistic regression model using a unique representative dataset of informal firms from the 2019 Zambia Informal Sector Business Survey (ISBS). We find that growth-oriented informal firms pay bribes to remain unregistered (i.e., engage in corruption) and that crime decreases the number of these firms. Our research suggests that policymakers consider the particularities of growth-oriented informal firms when designing policies for entrepreneurs. Growth-oriented informal firms are more likely to consider formalization if they perceive the benefits of formality, and policymakers should be aware that crime could push these firms to subsistence or surveillance, thereby increasing inequality among all firms. Furthermore, researchers should explore the development process of these growth-oriented informal firms, managers in legal firms should consider collaborating with these firms, and the government should support such collaboration.