Differences Between Firms from the Formal Sector and the Informal Sector in Terms of Growth: Empirical Evidence from Tanzania
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Date
2017
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Entrepreneurship in Emerging Economies
Abstract
Purpose – Small businesses growth has become an important area of study in the field of entrepreneurship. This paper aims to extend the inquiry by investigating whether there is a significant difference in growth between firms from the formal sector and the informal sector in the least developing countries (LDCs), particularly Tanzania.
Design/methodology/approach – A survey strategy, as well as non-probability sampling, are used. The sampling included 50 formal and 61 informal small businesses from the furniture industry. Data collected were evaluated using chi-square and compounded annual growth rate (CAGR) techniques.
Findings – The results indicate that firms from the formal sector do not grow faster than firms from the informal sector. on the contrary, our tests reveal that firms from the informal sector predominantly grow faster than firms from the formal sector.
Research limitations/implications – The study was conducted in Tanzania which is just one of the 48 LDCs in the world. Second, the literature that is used predominantly applies to developed countries. Third, the fieldwork is dependent on the respondent’s perception. Finally, change of measurement scale from five to three is ought to have contributed to mixed findings.
Practical implications – The overall implications are that external factors like inadequate regulatory tax systems may affect the growth of formal small businesses and thus influence market opportunities for informal small businesses. Further, internal factors like inefficiencies of workers from formal enterprises may affect growth and therefore create more opportunities for informal enterprises.
Originality/value – Exploring differences between firms from the formal sector and the informal sector and the way five scales were aggregated into three scales in the methodology.
Description
Keywords
Growth, Chi square test, Compounded annual growth rate, Formal and informal small businesses
Citation
Abdallah, Gorah. K. (2017). Differences between firms from the formal sector and the informal sector in terms of growth: Empirical evidence from Tanzania. Journal of Entrepreneurship in Emerging Economies.