Explaining variations in the commonality of informal sector competition across Latin American and the Caribbean countries

To advance understanding of the relationship between entrepreneurship and the informal sector, the aim of this paper is to evaluate and explain variations in the extent to which formal enterprises witness competition from unregistered or informal enterprises across Latin American and Caribbean countries. Reporting World Bank Enterprise Survey (WBES) data on 31 Latin American and Caribbean countries, this reveals that two-thirds (65.5 percent) of formal enterprises witness competition from informal sector enterprise. To explain the cross-country variations, four competing theories are evaluated, which variously view the prevalence of the informal sector to be determined by either: economic under-development (modernization theory); high taxes and state over-interference (neo-liberal theory); too little state intervention (political economy theory), or an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). A probit regression analysis confirms the modernization, political economy and institutional theories, but not the neo-liberal theory. Beyond economic under-development, therefore, it is too little state intervention and whether the laws and regulations developed by governments are in symmetry with the norms, values and beliefs of entrepreneurs. The paper concludes by discussing the theoretical and policy implications of these findings.