Informal Business Practices: Some Early Evidence

Abstract

The paper introduces a new management theory, “Informal Business Practices” (IBP), focusing on micro-level business practices that are informal, illegal, unregulated, or unethical. Evidence for IBP is found in general literature on taxes, shadow economies, corporate governance, accounting, and human resource management. It also references the World Bank’s ‘doing business’ indicators and enterprise surveys, further confirmed by a small survey among retired managers in emerging markets. This led to formulating an economic theory of IBP focused on minimizing business costs and a behavioral theory linking IBP to business attitudes and behaviors.

In 2022, a field study in Uganda used over 80 Likert variables for a survey among 18 SMEs to determine the economic drivers of formality and establish the “formality gap” with full regulatory and legal compliance. Insights were verified through semi-structured interviews with business managers/owners, providing further evidence for the economic and behavioral theories of IBP. The paper concludes that this preliminary result justifies more extensive research into the concept of IBP.