Transitioning entrepreneurs from informal to formal markets

Informal markets encompass economic activity that occurs outside of formal regulations and is rather guided by informal norms, values, and understandings. A growing stream of research explores the transition of entrepreneurs from informal to formal markets. Past research appears to portray the transition to formality as a strategic choice made by entrepreneurs and to center on regulatory concerns, such as acquiring licenses, registering the business, and paying taxes. Such an approach to studying formalization, however, may not adequately account for the influence of informal institutions on such a transition, and ignores the facilitating role often played by institutional intermediaries, a type of institutional entrepreneur. Thus, the purpose of this study is to explore a more comprehensive view of formalization in which an institutional intermediary seeks to help small producers transition from selling their goods in informal markets (where formal regulations and infrastructures do not exist or are severely underdeveloped) to formal markets (where developed formal regulations and infrastructures have engendered stronger competition and heightened quality and efficiency standards). More specifically, we examined the process by which an NGO attempted to transition approximately 1,800 dairy farmers in rural Nicaragua from informal to formal markets. Our results suggest that the success of formalization efforts by institutional intermediaries hinges on a series of inter-related tactics aimed at providing “institutional scaffolding” to encourage and facilitate informal entrepreneurs' participation in formal markets.