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Who is Afraid of Informal Competition? The Role of Finance for Firms in Developing and Emerging Economies

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  • Julia Friesen

    (KfW - Kreditanstalt für Wiederaufbau)

  • Konstantin M. Wacker

    (University of Groningen)

Abstract

This paper investigates which firms experience the most intense informal competition and highlights the role of access to finance in this context. We use data from the World Bank Enterprise Surveys covering 42,000 firms in 114 countries and take discrete responses on the perceived severity of business obstacles such as informal competition and financial constraints as key variables in our empirical analysis. We find that financially constrained firms face significantly more intense competition by the informal sector and that this effect is economically large. Other influential variables are highly overregulated labor markets, corruption, and firm size. A wide range of robustness checks substantiate these findings.

Suggested Citation

  • Julia Friesen & Konstantin M. Wacker, 2019. "Who is Afraid of Informal Competition? The Role of Finance for Firms in Developing and Emerging Economies," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 31(4), pages 1126-1146, September.
    • Handle: RePEc:pal:eurjdr:v:31:y:2019:i:4:d:10.1057_s41287-019-00204-8
    DOI: 10.1057/s41287-019-00204-8
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    2. S. Selsah Pasal & Arslan Chaudhary, . "Assessing the impact of foreign ownership on firm performance by size: evidence from firms in developed and developing countries," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    3. Otrachshenko, Vladimir & Hartwell, Christopher A. & Popova, Olga, 2023. "Energy efficiency, market competition, and quality certification: Lessons from Central Asia," Energy Policy, Elsevier, vol. 177(C).
    4. Zhao, Nan & Liu, Xiaojie & Zhang, Zizhe, 2022. "Does competition from the informal sector affect firms’ energy intensity? Evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 130-142.
    5. Mohammad Amin, 2023. "Does competition from informal firms hurt job creation by formal manufacturing SMEs in developing and emerging countries? Evidence using firm-level survey data," Small Business Economics, Springer, vol. 60(4), pages 1659-1681, April.
    6. Zaineb Hlioui & Mohamed Gabsi & Abdelwahed Omri, 2022. "Informal Competition Effect on SMEs’ Innovation: Do Credit Constraints Matter? Evidence from Eastern European Countries," Sustainability, MDPI, vol. 14(21), pages 1-23, October.

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    More about this item

    Keywords

    C25; D21; O17;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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