Does Competition from Informal Firms Impact R&D by Formal SMEs? Evidence Using Firm-Level Survey Data
The informal sector is an important source of livelihoods and jobs for a vast majority of people in developing countries. However, there is concern that it may undermine growth and development of the formal sector. For instance, the growth literatu...
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/undefined/206131638282617591/Does-Competition-from-Informal-Firms-Impact-R-D-by-Formal-SMEs-Evidence-Using-Firm-Level-Survey-Data http://hdl.handle.net/10986/36644 |
| Summary: | The informal sector is an important
source of livelihoods and jobs for a vast majority of people
in developing countries. However, there is concern that it
may undermine growth and development of the formal sector.
For instance, the growth literature indicates that research
and development activity and innovation are a key driver of
long-term growth. How does the competition that formal
sector firms face from informal sector firms affect research
and development activity by the formal firms The present
paper attempts to answer this question using firm-level
survey data for small and medium-size enterprises in a large
cross-section of mostly developing countries. The results
show that higher informal competition leads to greater a
likelihood of spending on research and development by formal
firms. For the most conservative baseline specification, a
one standard deviation increase in informal competition
leads to an increase of 5.2 percentage points in the
likelihood of spending on research and development by formal
firms. This is a large increase given that less than 18
percent of the firms in the sample engage in research and
development activity. Further, consistent with the
“parasite” view of informality, the positive impact of
informal competition on research and development activity is
magnified when the business environment is less conducive to
operating in the formal sector compared with informal sector
due to factors such as higher corruption, weaker rule of
law, more burdensome business regulations, and a higher tax
rate on profits. As expected, there is no impact of informal
competition on research and development activity among large
firms. The main findings are robust to several controls,
alternative specifications, and endogeneity checks. |
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