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Competing against ‘invisibles’: the effect of competition from informal firms on formal firms’ R&D

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Abstract

Competition from informal firms is an important issue that face most formal firms in develo** countries. It usually leads to market share losses in formal firms and weakens their self-financing capacity. Recently, a stream of literature has been developed concerning its impact on the outcomes and strategic choices of formal firms. This paper contributes to this literature by investigating the effect of the Competitive Pressure from the Informal Sector (CPIS) on the research and development (R&D) investment of formal firms using firm-level data from Côte d’Ivoire. It emerges that the CPIS incites formal firms to engage more in R&D when it constitutes a problem, but not a severe one, for them in conducting their activities, which implies a positive effect. However, this effect is lost when the problem is severe. We conclude by discussing policy implications.

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Data availability statement

The data and Stata Do-file that support the present study are available from the author upon request.

Change history

  • 09 November 2022

    The article was revised due to change in footnote 5 and 6 which were interchanged.

Notes

  1. La Porta and Shleifer (2008, 2014), Loayza (2016), Nguimkeu (2014) and Ulyssea (2018) are some recent references.

  2. See Elgin and Erturk (2019) and Schneider and Enste (2000) for a literature review on this issue. Some papers also investigated especially the determinants of informality. See, for instance, Dell’Anno (2016), Elbahnasawy et al. (2016), and Williams et al. (2016) for recent references. Note that Elgin and Erturk’s (2019) study appears to be particularly comprehensive as it discusses both the empirical and theoretical aspects of the measures, determinants and effects of informality, and reviews the recent literature.

  3. See Elgin and Erturk (2019) and Ulyssea (2018) for a recent discussion on these consequences.

  4. Mendi and Costamagna (2017) actually do not consider Côte d’Ivoire in their sample due to lack of data.

  5. The country’s economic growth rates are usually greater than 7% since 2012, which is generally uncommon in Africa. See the World Development Indicators database.

  6. We previously explained why Côte d’Ivoire is a good choice.

  7. CIRES: Ivorian Center for Economic and Social Researches.

  8. FCFA is the currency used in Côte d’Ivoire.

  9. The R&D index is contained in the report entitled ‘Global Innovation Index’, published yearly by the World Intellectual Property Organization (WIPO), Cornell University and INSEAD since 2007. It measures a country’s level of R&D. The R&D index ranges from 0 (poorest level) to 100 (strongest level), and is available for Côte d’Ivoire since 2011.

  10. The figures on the GDP composition by sector and information concerning the fields of activity that dominate in each sector are taken from the French Treasury’s report on the economic and financial situation of Côte d’Ivoire, published on July, 2021.

  11. These figures are from the Central Bank of West African States (BCEAO) and the Bank of France. Note that we did not have access to the information for 2020 and 2021.

  12. We thank an anonymous reviewer for inspiring the writing of this paragraph.

  13. Note, however, that this view contrasts with the Schumpeterian theory (Schumpeter, 1942) which suggests that monopoly is more favorable to R&D than competition. See Letina (2016), Schumpeter (1942), and Tirole (1988) for more details.

  14. Elgin and Erturk (2019) discuss the techniques used in recent studies for measuring this part.

  15. La Porta and Shleifer (2008) and Schneider and Enste (2000) are important references on this issue.

  16. There is some evidence on the relationship between the CPIS and innovation or related investments like R&D by formal firms obtained with the World Bank Enterprise Surveys database. See, for instance, Avenyo et al. (2021), Mendi and Costamagna (2017), and Heredia Pérez et al. (2018, 2019).

  17. We thank an anonymous reviewer for suggesting a number of relevant control variables.

  18. Note that we have tested this variable in the econometric regressions. It was automatically deleted due to collinearity.

  19. Of course, other indicators (return on sales, return on investment, return on capital employed, etc.) could also be considered as proxies for firm profitability. The choice of return on equity is based on data availability.

  20. We mentioned previously some reasons why a firm could exhibit a disproportionately high return on equity.

  21. Amin (2021), Mendi and Costamagna (2017), and Perry et al. (2007), among others, discuss the negative effects of the CPIS on the market shares and profits of formal firms. In particular, Perry et al. (2007) stress that ‘high levels’ of informality can have negative effects on formal firms’ incentives to innovate, which includes discouraging them from engaging in R&D activities, and that informality can negatively impact R&D investment by reducing market shares and profits. In another context, Amin (2021) shows that when informal competition is ‘high’, the employment growth rate is lower than when the level of informal competition is not high. In practice, the ‘high level’ of informality or informal competition (Amin, 2021; Perry et al., 2007) is very often perceived by firms as a severe CPIS. Hence, it can be thought that when the CPIS is severe, R&D investment activities are very likely to be negatively affected as a result of an important decrease in the market shares and profits. Ceteris paribus, a non-severe CPIS is unlikely to affect substantially formal firms’ market shares and profits, which implies no negative effect on R&D activities.

  22. The lack of collateral indeed increases the level of risk (Bradley et al., 2012).

  23. Note that taxation and regulation more generally are among the most studied determinants of informality in the literature (Elgin & Erturk, 2019).

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Acknowledgements

I gratefully acknowledge two anonymous reviewers for insightful and helpful comments and suggestions that substantially improved the quality of the paper. Many thanks also to Bédia F. Aka (late), Corinne Autant-Bernard, Eric Avenel, Farid Gasmi, Sophie Larribeau, Stéphane Lemarié, Nadine Massard, Edward Maunder, Pierre Mohnen, and Aké G.M. N’gbo, for valuable comments and suggestions on earlier versions of this study. Remaining errors are mine.

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  1. CREM, UMR CNRS 6211, Université de Rennes 1, 7 Place Hoche, 35065, Rennes Cedex, France

    Dorgyles C. M. Kouakou

  2. LAMPE, Université Alassane Ouattara, BP V 18, Bouaké 01, Côte d’Ivoire

    Dorgyles C. M. Kouakou

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Kouakou, D.C.M. Competing against ‘invisibles’: the effect of competition from informal firms on formal firms’ R&D. Eurasian Bus Rev 13, 87–117 (2023). https://doi.org/10.1007/s40821-022-00217-0

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