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.
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