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Informal Sector Comparison: Manufacturing vs Services

Mohammad Amin's picture

I have been comparing the differences between manufacturing and services firms in the informal or unregistered sector. There is a rich literature on how and why these firms differ, but it is based on firms in the formal or registered sector. It’s a moot point whether differences between manufacturing and service firms in the formal sector also hold for the informal sector. For example, differences in scale economies between service and manufacturing firms are known to be important for the formal sector, but this is not immediately obvious when comparing these firms in the informal sector.

Data on informal firms in Ivory Coast, Madagascar and Mauritius show that these firms are larger in terms of total sales and also generate more output per worker. They rely less on physical infrastructure and machines, but more on human capital of the manager. The latter is especially true in smaller cities and among male-owned and those that were started because the owner could not find a satisfactory job (see previous post).

Service firms also appear to be better integrated in the financial system, with access to finance being less of an obstacle. Challenges associated with registration, such as paying taxes, appear to be less important to service than manufacturing firms. The same holds for the benefits from registering, such as access to government programs and services.

Informalvsformal

Comments

Submitted by Andrew Stone on
1) What do you mean by the informal sector? Are these unregistered firms? Or are you speaking only of microenterprises? The 1992 study of Cote d'Ivoire found a "formality-informality continuum". "While informal status characterizes only rather small enterprises, informal behaviors are engaged in by enterprises of many sizes." [Cote d'Ivoire: Private Sector Dynamics and Constraints, WPS 1047] Has this changed? In MENA we find a general trend of increasing compliance with tax and labor rules with firm size, although average levels vary substantially by country. 2) When you say "these firms are larger" the question arises, larger than what? Do you mean service firms are larger than manufacturers? 3) What is your definition of "better integrated" with the financial system -- receiving more finance? As a percentage or in monetary value terms? Is it possible that service firms use the financial system more for working capital or trade credit, while manufacturers need lumpier chunks of investment capital? Can you distinguish from your data finance obtained personally by the entrepreneur and finance for the firm?

Submitted by Vijaya Ramachandran on
Very interesting observations. My coauthors and I also found that in some business environments in Africa, informal firms are just as productive as formal firms and have the same or almost the same access to public services. The paper is here: http://www.cgdev.org/content/publications/detail/1422458

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