Towards a Theory of Legitimacy in the Informal Economy: The Case of Cable and Wireless

Abstract

The informal economy is a pervasive and resilient phenomenon in both developing and developed countries. Management research analysis the informal economy under an institutional incongruence perspective. That is, activities in the informal economy, albeit illegal, are legitimate to large groups in society. Bridging the institutional incongruence perspective and organizational institutionalism, legitimacy is not only crucial for firm to survive and prosper in both formal and informal economy, but also defines the boundaries between informal and criminal economy. Notwithstanding its importance, legitimacy in the informal economy has received scant attention by management researchers. With the ambition of reducing the paucity of knowledge on this important research topic, the thesis explores how entrepreneurs in the informal economy legitimize their activities. It does so by using an in-depth single case study centred in a cluster of informal entrepreneurs in Accra. The findings are twofold. Entrepreneurs whisper their appropriateness across their networks. However, when faced by legitimacy challenges they aggregate into a formal organization that not only responds to the legitimacy challenges, but also legitimize informal entrepreneurs’ activities in moral and cognitive terms. A byproduct of the legitimizing actions of the formal organization is an emerging formalization process. The findings are the result of an iterative abductive process to the research, leading to several theoretical and practical implications. The main theoretical contribution is the formulation of a parsimonious and empirically grounded theoretical framework for analysing the legitimacy dynamics in the informal economy. The main practical implication lies on highlighting the role of the formal organization as the gateway towards formalization.