Informality and Dynamism of Microbusinesses in Africa: Possible Causalities

This paper attempts to gain greater clarity about an issue which has considerable bearing on economic policy in Africa yet remains poorly diagnosed: the relation between informality and dynamism among low-income micro enterprises. We begin with the premise that micro entrepreneurs are driven by non-pecuniary motives, to varying degree, and adopt informal ways of doing business when informal motivations are strong. Building on this premise, we construct a regression model in which the dynamism of microenterprises is explained by the informality of entrepreneurs' motivations and of his/her ways of doing business as well as interactions among these two informality variables. We apply the model to microentrepreneurs in Ghana, Kenya and Nigeria, with data derived from a survey conducted for this research. The regression results show that the relation between informality and dynamism is intricate. Two of the four informal business practices tested - small business size and limited bookkeeping - negatively affect business growth while the other two have no significant influence either way. On the other hand, informal motivations - represented by a composite index of non-pecuniary motivations - have a positive effect on business growth although the effect is not directly observable. When an enterprise is operated in an informal setting by an entrepreneur with strong informal motivations, the synergy between the setting and the motivation works to increase the chance of business growth. The resilience of microenterprises too is linked positively to informality although interactions between motivation and business practice tend to reduce business growth in this case. Informal motivations and informal business practices are interwoven, an insight that could help in developing policy that could strengthen informal enterprises on the continent.