Differences between firms from the formal sector and the informal sector in terms of growth

Abstract

Purpose Small businesses growth has become an important area of study in the field of entrepreneurship. This paper aims to extend the inquiry by investigating whether there is a significant difference in growth between firms from the formal sector and the informal sector in the least developing countries (LDCs), particularly Tanzania. Design/methodology/approach A survey strategy as well as non-probability sampling are used. The sampling included 50 formal and 61 informal small businesses from the furniture industry. Data collected were evaluated using chi square and compounded annual growth rate (CAGR) techniques. Findings The results indicate that firms from the formal sector do not grow faster than firms from the informal sector. on the contrary, our tests reveal that firms from the informal sector predominantly grow faster than firms from the formal sector. Research limitations/implications The study was conducted in Tanzania which is just one of the 48 LDCs in the world. Second, the literature that is used predominantly applies to developed countries. Third, the field work dependent on the respondent’s perception. Finally, change of measurement scale from five to three is ought to have contributed to mixed findings. Practical implications The overall implications are that external factors like inadequate regulatory tax systems may affect growth of formal small businesses and thus influence market opportunities for informal small businesses. Further, internal factors like inefficiencies of workers from formal enterprises may affect growth and therefore create more opportunities for informal enterprises. Originality/value Exploring differences between firms from the formal sector and the informal sector, and the way five scales were aggregated into three scales in the methodology.