Experiment First, Register Later: On the Relationship Between Firms’ Informal Legacy and Exporting

Around the world and especially in areas of widespread poverty, unregistered organizational entities start their operations in the part of the economy that either fails to adhere to the established institutional rules or is denied the protection of those rules. In this article, we explore the export propensity of firms that start their operations in the informal economy. We argue that firms operating informally have a unique opportunity to experiment with different products and markets prior to formal registration. This experimentation reduces subsequent uncertainty related to internationalization and, hence, increases the propensity of these firms to export after formal registration. We also argue that the relationship between informal legacy and export propensity is weaker in countries with stronger formal institutional trust. Using a comprehensive sample of 9,454 African firms, we find support for our hypotheses.