Formal-Informal Supply Chain Linkages and Firm Productivity in Sub-Saharan Africa

Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in reducing poverty and inequality by generating the majority of jobs, income, and pathways to better employment opportunities. However, informal enterprises are often characterized by low productivity and significant decent work deficits. In Sub-Saharan Africa, where a large share of the workforce is engaged in informal enterprises, transitioning to formality is essential for enhancing productivity, fostering economic growth, and ensuring decent work for all. A critical pathway for informal firms to formalize is through production and worker linkages with formal firms. Using a sample of 13,626 informal firms from three Sub-Saharan African countries, this study examines the performance effects of informal firms with formal linkages and explores the mediating role of human capital. We find that formal backward linkages—where informal firms source inputs from formal firms—are significantly more common than other types of formal-informal linkages. Employing heteroskedasticity-based identification, our findings reveal that the productivity gains from these linkages are not automatic - higher human capital is essential for firms to benefit from knowledge and technology transfers. This highlights the critical role of absorptive capacity in enabling informal firms to leverage knowledge and technology transferred through formal backward linkages, thereby emphasizing the importance of targeted capacity-building interventions in fostering inclusive economic growth.