Step by Step: The Pre-entry Process of Informal Entrepreneurs

Entrepreneurship rates are relatively high in the informal economy, yet informal entrepreneurs are generally considered illegitimate by formal institutional standards, underwhelming in performance, and imitative rather than innovative. To understand the antecedents of venture creation in the informal economy, we develop a theory that explains why some prospective entrepreneurs engage in a more extensive pre-entry search for information than others. We argue that prospective entrepreneurs’ human capital endowments are positively associated with the extent of search they engage in when assessing new business ideas and even more so when they are broadly embedded in informal institutional domains. However, social embeddedness can be seen as a double-edged sword because the depth of informal institutional embeddedness can erode the gains that would otherwise accrue from individuals’ human capital endowments. We test our hypotheses with unique survey data from a sizeable informal cluster in Ghana – a country where over 80% of the economic activity is estimated to be informal. We find broad support for our theory and contribute with important theoretical and empirical insights on the antecedents of new venture creation.