Innovation in formal and informal firms in developing countries: Evidence from Côte d’Ivoire

Past papers dealing with innovation in developing countries generally focus on firms from formal economy. Limited empirical evidence is available on the determinants of innovation in informal firms, despite the importance of the informal economy in these countries. This paper aims to filling this gap in the literature by estimating a Probit model to analyze data from a survey of 400 informal firms and 160 formal firms from Côte d'Ivoire. A new analytical framework is proposed by considering three forms of innovation: technological innovation only, non-technological innovation only, and innovation both technologically and non-technologically. We find that the determinants of firms' decision to innovate differ from formal economy to informal economy, and from a form of innovation to another one. Access to bank loans appears to be a constraint to innovation in informal firms and not in formal firms while unskilled employees constrain innovation in both informal firms and formal firms. Investing in the acquisition of materials, tools, equipment and software related to innovation also impacts innovation in both formal and informal firms. Employees' involvement in decision-making within the firm explains innovation in informal firms and not in formal firms. We find an inverted-U relationship between years spent by the manager as the firm's executive and its probability to innovate.