A Legacy from the Informal Economy: On the Relationship between Experimentation and Exporting among African SMEs

We explore whether firms that started their operations in the informal economy are more likely to start exporting than firms that started out as formally registered. The informal economy covers the actions of economic agents that fail to adhere to the established institutional rules or are denied their protection. We utilize this context to argue that informal firms have a unique opportunity to experiment with different products and markets prior to formal registration. This, we hypothesize, increases their propensity to export after formal registration. At the same time, we also hypothesize that the relationship between firms’ informal legacy and exporting propensity is weaker in countries where formal institutions are stronger. Using a comprehensive sample of 8,933 African SMEs, we find support for our hypotheses.