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Formalising the informal sector
Informality is an economic and social challenge in most countries, although it is often much less important in developed countries. Innovative enterprises may contribute to formalizing the informal sector in several ways. First, they are less likely to operate in the informal economy, as they have higher returns from operating in the official economy. Second, they may provide employment opportunities and innovations that encourage people and businesses to move from the informal sector to the formal sector. Yet there is a lack of evidence on the contribution of innovative entrepreneurship to addressing informality. Public policy can positively influence this contribution by supporting innovative entrepreneurs in general and, more specifically, those who may have the greatest impact on informality (e.g. social entrepreneurs). Policies supporting the formalization of businesses (e.g. reduction of the perceived cost from registration) may also be important complements.
- Informal own-account enterprises (i.e. , all, or those that are not registered under specific forms of national legislation);
- Enterprises of informal employers (i.e., all those with less than a specified level of employment and/or not registered and/or employees not registered [International Labour Organization, 1993]).
- Directly, as innovative entrepreneurs are more likely to operate in the formal economy than non-innovative entrepreneurs (Jütting and Laiglesia, 2009). Indeed, two characteristics of innovative entrepreneurs are incompatible with informality: innovative entrepreneurs are growth-oriented and generally need to take full advantage of external resources, partnering with public, financial and education institutions. Thus, increasing incentives for the creation and development of innovative enterprises may lead to reductions in the informal sector.
- Indirectly, by introducing employment opportunities and innovations that encourage people and businesses to move from the informal sector to the formal sector. Innovative entrepreneurship can provide employment opportunities for disadvantaged individuals who may otherwise work in the informal sector. It can also introduce innovative products and services that increase the incentives for businesses to formalize and create new business opportunities in the formal sector (Jütting and Laiglesia, 2009; Pauvnov, 2013). For instance, innovations that are made accessible to lower-income groups may encourage individuals who work in the informal sector to start innovation initiatives that would benefit from being in the formal sector (e.g. business opportunities based on the mobile banking service). Yet it seems quite unlikely that “subsistence” entrepreneurs in the informal economy will become transformational entrepreneurs (Schoar, 2010).
Evidence on contributions to addressing informality
- Increase the benefits from registration (e.g. by improving access of micro-enterprises to formal loans, by subsidizing the hiring process for small new ventures).
- Reduce the perceived costs of registration (e.g. by reducing the time and cost of registration, decreasing corporate taxes). Evidence shows that reducing corporate tax rates and simplifying the paperwork for registration and tax compliance help in reducing informality. One-stop shop services for registration and tax payments, offering business support services to newly registered entrepreneurs, have also been found to be highly effective. In 2011, in Brazil, a total of 1.9 million micro-entrepreneurs had formalized via the online portal one year after it was launched.
- Increase the availability of information about the benefits of going formal. Business associations and other representative groups can play a useful role in this communication effort. For example, to encourage people to register, SEBRAE (the Brazilian support service for micro and small enterprises) campaigns for and delivers capacity-building programmes.
- Fields, G.S. (2005), “A guide to multisector labour market models”, Social Protection Discussion Paper Series No. 0505, World Bank, Washington, D.C.
- Gatti, R. and M. Honorati, (2007), "Informality among formal firms: Firm-level, cross-country evidence on tax compliance and access to credit," CEPR Discussion Papers 6597, C.E.P.R. Discussion Papers.
- Koettl, J. and M. Weber (2012), “Does formal work pay? The role of labor taxation and social benefit design in the new EU member states”, IZA Discussion Paper, No. 6313, Bonn.
- International Labour Organization (ILO), Resolutions Concerning Statistics of Employment in the Informal Sector, Adopted by the 15th International Conference of Labour Statisticians, January 1993, paragraphs. 5, 8 and 9.
- Jütting, J. and J. de Laiglesia (2009), “Is informal normal?: Towards more and better jobs in developing countries”, Development Centre Studies, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264059245-en
- Lewis, W. A. (1954). “Economic development with unlimited supplies of labor,” Manchester School of Economic and Social Studies, Vol. 22, pp. 139-91.
- OECD (2012), “STI policy profiles: Facing new challenges”, OECD Science, Technology and Industry Outlook 2012, OECD Publishing, Paris. http://dx.doi.org/10.1787/sti_outlook-2012-en
- OECD (2012), Closing the Gender Gap, Act Now, OECD Publishing, Paris.
- OECD (2010), “Policy implications”, SMEs, Entrepreneurship and Innovation, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264080355-50-en
- OECD (2010), “Social entrepreneurship and social innovation”, SMEs, Entrepreneurship and Innovation, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264080355-50-en
- OECD (2008), OECD Glossary of Statistical Terms, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264055087-en
- Paunov, C. (2013), "Innovation and inclusive development: A discussion of the main policy issues", OECD Science, Technology and Industry Working Papers, No. 2013/01, OECD Publishing, Paris. http://dx.doi.org/10.1787/5k4dd1rvsnjj-en
- Schoar, A. (2010), “The divide between subsistence and transformational entrepreneurship”, in J. Lerner and S. Stern (eds.), Innovation Policy and the Economy, Vol. 10, NBER Book Series, University of Chicago Press.

What Countries are Doing
- Policy intervention on innovative entrepreneurship
- Policy rationales and objectives for innovative entrepreneurship
- Policy-making contexts for innovative entrepreneurship
- Supply-side policy instruments for innovative entrepreneurship
- Demand-side policy instruments for innovative entrepreneurship
- Connectivity policy instruments for innovative entrepreneurship
- Provision of knowledge services for businesses
- Models and contributions for innovative entrepreneurship
- Metrics and evaluation for innovative entrepreneurship
- Regulatory framework for innovative entrepreneurship
- Market environment for innovative entrepreneurship
- Access to labour for innovative entrepreneurship
- Firms' access to knowledge for innovative entrepreneurship
- Access to finance for innovative entrepreneurship
- Entrepreneurial capabilities and culture