Why Informal Firms Formalize: A Strategic Decision-Making Perspective

We offer a behavioural framework to explain informal firms’ decision to formalize. We argue that aspirations for which firms skirt formal regulation to operate in the informal economy serve as reference points in interpreting and evaluating the prospect of formalization. We differentiate between the influences of firms expected performance relative to aspired performance and the influence of different form of aspiration being pursued (aspirations related to subsistence, exploitation, legacy, and resistance). In conclusion, we contribute to extant research emphasizing formalization as a quasi-rational calculation by recognizing how formalization can be seen as a complex decisions-making process surrounded by severe information incompleteness and uncertainty.