Informal Entrepreneurship: An Integrative Review and Future Research Agenda

Abstract

Informal entrepreneurship (IE) has received increased recognition because of its theoretical distinctiveness and practical relevance. However, the burgeoning literature on IE is difficult to navigate, due to its rapid growth across different disciplines. Through an integrative review, we introduce a novel typology of informal entrepreneurs that captures their heterogeneity across various contexts. We point out a dynamic perspective of IE, consisting of three pathways—the reactive formalizing, the proactive formalizing, and the informalizing pathways—along which informal entrepreneurs move, acquiring or foregoing regulative legitimacy. Our review extends the theory on IE, outlines promising research avenues, and suggests relevant practical implications.

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Entrepreneurship Theory and
Practice
2022, Vol. 0(0) 1–39
© The Author(s) 2022
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DOI: 10.1177/10422587221115365
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Informal Entrepreneurship: An
Integrative Review and Future
Research Agenda
Esther Salvi
1
, Frank-Martin Belz
1
, and Sophie Bacq
2

Abstract
Informal entrepreneurship (IE) has received increased recognition because of its theoretical
distinctiveness and practical relevance. However, the burgeoning literature on IE is difficult to
navigate, due to its rapid growth across different disciplines. Through an integrative review, we
introduce a novel typology of informal entrepreneurs that captures their heterogeneity across
various contexts. We point out a dynamic perspective of IE, consisting of three pathways—the
reactive formalizing, the proactive formalizing, and the informalizing pathways—along which informal
entrepreneurs move, acquiring or foregoing regulative legitimacy. Our review extends the theory
on IE, outlines promising research avenues, and suggests relevant practical implications.
Keywords
informal entrepreneurship, informal entrepreneur, formalizing, informalizing, integrative review
Informal entrepreneurship (hereafter IE) is a globally widespread phenomenon (Autio & Fu, 2015;
Dau & Cuervo-Cazurra, 2014;Omri, 2020;Thai & Turkina, 2014). It refers to those “entre-
preneurial activities that are illegal yet remain legitimate to large groups in a society”(Webb et al.,
2020, p. 511). Such entrepreneurial activities are undertaken by individual informal entrepreneurs
who identify and exploit opportunities (Bygrave & Hofer, 1992;Ireland & Webb, 2007;Shane,
2003) in a socially accepted manner, while not complying with all of the legal requirements
associated with the provision of goods and services in a given country (e.g., unregistered activities,
off-the-book business transactions).
The latest Global Entrepreneurship Monitor (GEM) report indicates that IE is a highly
prevalent and important phenomenon worldwide (Bosma et al., 2021). It represents about 60% of
total entrepreneurial activities in developed and transition economies, and above 90% in de-
veloping economies (Autio & Fu, 2015). IE may lead to negative macro-level consequences, such
1
Chair of Corporate Sustainability, TUM School of Management, Technical University of Munich, Freising, Germany
2
Institute for Entrepreneurship & Competitive Enterprise Faculty Fellow, Kelley School of Business, Indiana University,
Bloomington, IN, USA
Corresponding Author:
Esther Salvi, Chair of Corporate Sustainability, TUM School of Management, Technical University of Munich, Alte
Akademie 14, Freising 85354, Germany.
Email: esther.salvi@tum.de

as tax revenue loss and unfair competition toward formal firms (Webb et al., 2013). Nevertheless,
it is regarded as a viable form of employment in developing and transition economies (Lee &
Hung, 2014;Maloney, 2004), and as a source of innovation in more developed economies (Choi &
Perez, 2007). Due to its global prevalence and high importance, IE has received increasing
scholarly attention over the last two decades (Bruton et al., 2012;Darbi et al., 2018).
Management and entrepreneurship scholars’growing interest in IE is attested by the increasing
number of publications on IE in leading journals (e.g., Godfrey, 2011;Siqueira et al., 2016;Thai &
Turkina, 2014;Thapa Karki et al., 2020;Webb et al., 2009). Three recent literature reviews have
started highlighting various aspects of IE, from bibliometric analysis (Santos & Ferreira, 2017), to
links to broader management research (Darbi et al., 2018), to the value of formalization for women
entrepreneurs in developing economies (Xheneti et al., 2019b).
However, the heterogeneity and multidisciplinary nature of the literature on IE makes it
difficult to navigate, and IE research opportunities and gaps remain unclear (Godfrey, 2011;
McGahan, 2012;Webb et al., 2013). To connect disparate themes, such as the occurrence (e.g.,
Khavul et al., 2009;Kistruck et al., 2015;Siqueira et al., 2016), the antecedents (e.g., Blake et al.,
2015;Bruhn, 2013;Thai & Turkina, 2014), and the outcomes of IE (e.g., Choi & Perez, 2007;
Klein, 2017;Lee & Hung, 2014), we conduct an integrative review (Elsbach & van Knippenberg,
2020;Torraco, 2016). We aim to address the following research questions: What are the different
types of informal entrepreneurs and how do they vary across contexts? What are the main
entrepreneurial activities they undertake? Why do they do so and with what consequences?
To provide answers to these questions and to channel the progress of knowledge, we organize,
synthesize, and critically analyze research on IE. Then, we cross-pollinate it with insights from
various disciplines, such as management, economics, sociology, and political science, which
represent the most widely adopted perspectives in this area (Bruton et al., 2012;Godfrey, 2011). Our
theoretical contributions are threefold. First, we provide a novel typology highlighting the het-
erogeneity of informal entrepreneurs across economies. Second, we extend the theory on IE by
introducing a new dynamic perspective that explains how informal entrepreneurs move along the
continuum ofinformality to either increase or decrease regulative legitimacy for their entrepreneurial
activities. In doing so, we bring synthetizing coherence to the IE literature by “reinterpreting existing
work to show underlying consensus”(Locke & Golden-Biddle, 1997, p. 1034). Third, we draw on
our novel typology and new dynamic perspective of IE to establish a forward-looking research
agenda (Bacq et al., 2021;Breslin & Gatrell, 2020) for the field of IE. This research agenda leverages
interesting insights, gaps, and anomalies from past work (Nadkarni et al., 2018;Shepherd &
Wiklund, 2020) to outline promising avenues for research and practice.
Integrative Review
To conduct our integrative review (Elsbach & Knippenberg, 2020;Patriotta, 2020;Post et al.,
2020;Torraco, 2005,2016), we followed a transparent procedure, which consists of two main
phases: data collection and data analysis. For the sake of rigor and replicability (Tranfield et al.,
2003), we describe each phase in detail.
Data Collection
In the first phase, we searched for articles published on IE in five databases (Business Source
Premier, Econlit, Scopus, SocIndex, and Thomson Reuters Web of Science). To capture the
breadth and depth of IE research, we used the following search terms: (“informal”OR “un-
derground”OR “shadow”OR “illegal”OR “off-the-books”OR “hidden”OR “unregistered”OR
“undocumented”OR “unreported”) and at least one entrepreneurship search term:
2Entrepreneurship Theory and Practice 0(0)

(“entrepreneur*”OR “enterpris*”OR “ventur*”OR “business*”OR “activit*”OR “firm*”). We
focused on academic articles published in English up to the end of 2020, without including a start
date. This search in the five databases yielded a total number of 6096 articles. After the database
search, we ran a first screening to exclude all duplicates and non-academic sources. This reduced
the number of articles to 5518.
To narrow down our selection further and to set the conceptual boundaries for our analysis,
we drew on the definition of IE as those “entrepreneurial activities that are illegal yet remain
legitimate to large groups in a society”(Webb et al., 2020,p.511).Therefore,weranafirst
title and abstract analysis to exclude all the academic articles that focused on activities that
did not meet this definition, that is, non-entrepreneurial activities, legal entrepreneurial
activities, and illegitimate entrepreneurial activities. This led to a total number of 1155
academic articles.
Then, we analyzed the bodies of text more in-depth and removed all articles that, despite
referring to IE in the title or in the abstract, did not focus on IE in the core of the article but referred
mainly to other activities, such as informal employment or illegal forms of behavior in large
corporations. We also excluded all the articles referring to IE in the abstract but focusing mainly on
the informal economy, which includes IE but is much broader, since it also embraces other
activities. These include unpaid domestic work, unpaid community, voluntary work, and un-
declared work (Williams & Nadin, 2012b). The content analysis yielded a final number of 352
peer-reviewed journal articles, which we included in our integrative review.
Data Analysis
In the second phase, we analyzed the 352 articles inductively, following a bottom-up approach to
allow the data to speak for itself (Strauss & Corbin, 1990) and to let novelties, anomalies, and gaps
emerge (Breslin & Gatrell, 2020;Shepherd & Wiklund, 2020). The inductive coding approach we
used to analyze the journal articles on IE is analog to the grounded theory approach employed for the
analysis of interview data in qualitative research (Gioia et al., 2013). Specifically, our inductive
approach follows the guidelines by Tranfield et al. (2003) and is similar to the one adopted in other
review articles. These tend to be “inductive or grounded in approach, with theoretical frameworks and
research agendas emerging from the papers examined as part of the review”(Post et al., 2020,p.362).
The three authors formed the coding team. The first and the second author coded 20% of the
articles independently for the identification of first-order codes. In 90% of the cases, the inde-
pendent coding process led to analogous results. In the remaining 10% of the cases, there were
coding discrepancies, due to differing interpretations of the same text (Campbell et al., 2013). In
these cases, both authors discussed and re-iterated the coding process until reaching 100% in-
tercoder agreement (Campbell et al., 2013). This enabled the first author to identify the remaining
first-order codes through a highly reliable and accurate coding procedure. In total, the coding
process led to 150 first-order codes, which gradually developed into second-order themes (Gioia
et al., 2013). Then, the entire coding team went through several rounds of iteration and discussion
about the meaning of each second-order theme, how it emerged, and which first-order codes it
entailed. This ensured that each article was assigned to the themes that better reflected its key
contributions, aim, and scope (Breslin & Gatrell, 2020), while redundant themes were removed.
This process led to a total of 13 second-order-themes, which we further clustered into four
aggregated categories (Gioia et al., 2013)(Figure 1).
The first category relates to the empirical phenomenon of IE and refers to the universe of
informal entrepreneurs at the individual level, whom we grouped into four types: the informal
poor, the informal affluent, the semi-formal poor, and the semi-formal affluent. The second and
third categories relate to the reactive and proactive formalizing pathway, along which informal
Salvi et al. 3

and semi-formal entrepreneurs move to acquire regulative legitimacy. The fourth category
relates to the informalizing pathway, along which informal and semi-formal entrepreneurs
move, foregoing regulative legitimacy. Before explaining each category in-depth, we map the
field of IE by providing a descriptive overview of the articles included in our review.
Figure 1. Data structure.
4Entrepreneurship Theory and Practice 0(0)

Mapping the Field
The first study relating IE was published in 1987 by Lesieur and Sheley in the journal “Social
Problems”and considers IE as a form of deviant economic behavior. The study refers to informal
entrepreneurs running illegal appended businesses of line gambling in New York. These types of
businesses were illegal and yet legitimate, that is, they were socially accepted. Formally banned by
the government, a widespread subculture fostered them and continues to do so to date.
In the 1990s, a number of scholars started to describe other phenomena, which could be
ascribed to IE (e.g., Hartog & Zorlu, 1999;Hisrich & Grachev, 1993;House et al., 1993;Tsang,
1994). As such, IE in communist states took the shape of any private business being banned by the
centrally planned economic system, and yet being socially accepted by the population subjected to
a climate of resource scarcity (Hisrich & Grachev, 1993;Tsang, 1994). In developing economies,
IE was seen as a solution to high poverty and unemployment rates (Espinal & Grasmuck, 1997;
House et al., 1993;Kesteloot & Meert, 1999). IE in developed economies tended to the so-called
“under-class”(Hartog & Zorlu, 1999;Leonard, 1998).
Overall, we identify two phases related to the trend of academic publications on IE (Figure 2).
The first phase goes from 1987 to 2008 and includes 61 articles (17% of the total sample). The
second phase starts in 2009 with the publication of two seminal articles by Webb et al. (2009) and
Godfrey (2011), which created a spike of scholarly interest for IE; it includes 291 articles (83% of
the total sample) from 2009 to 2020.
The first phase is characterized by more descriptive articles on IE. The second phase of
publications on IE reflects the increasing dissemination of statistical data on informal entre-
preneurial activities (Santos & Ferreira, 2017). Moreover, it witnesses the increasing recognition
of IE as a relevant phenomenon that can be investigated from a multidisciplinary perspective
(Darbi et al., 2018;Ketchen et al., 2014;McGahan, 2012). The 352 peer-reviewed academic
articles on IE published until 2020 span the disciplines of entrepreneurship (44%), economics
(18%), management (12%), development studies (9%), sociology (8%), geography (4%), political
science (3%), and other disciplines (2%). Most articles on IE (36 out of 352, or 10%) are published
in the Journal of Developmental Entrepreneurship. The other articles on IE are dispersed across a
number of journals, including leading entrepreneurship journals like Entrepreneurship Theory
Figure 2. Number of journal articles on IE, 1987–2020.
Salvi et al. 5

and Practice (e.g., Siqueira et al., 2016;Webb et al., 2020;Welter et al., 2017;Williams et al.,
2017) and the Journal of Business Venturing (e.g., Aidis & van Praag, 2007;Dau & Cuervo-
Cazurra, 2014;Hisrich & Grachev, 1993;Kistruck et al., 2015;Sutter et al., 2017;Thai & Turkina,
2014).
Currently, the field of research on IE is at an intermediate stage and includes mainly empirical
articles exploring relationships among constructs (Edmondson & McManus, 2007). Indeed, this
review includes 304 empirical articles (86%) as compared to 48 conceptual articles (14%)
(Figure 3).
Most empirical articles employ quantitative methods and draw mostly on secondary data,
which are made increasingly accessible by the World Bank, the Global Entrepreneurship Monitor,
and the International Labor Organization. The majority of them (52%) focus on developing
economies, which are characterized by the highest rates of IE (Acs et al., 2008;Autio & Fu, 2015;
Dau & Cuervo-Cazurra, 2014). 20% focus on developed economies, where informality is
common, especially at an early stage of the entrepreneurial process (Williams et al., 2017).
Another 17% of the articles focus on transition economies, such as USSR, China, and East
European economies (e.g., Aidis & van Praag, 2007;Lee & Hung, 2014). Finally, 11% of the
articles draw cross-region comparisons to explain the antecedents and the outcomes of IE (e.g.,
Thai & Turkina, 2014;Williams & Kedir, 2018).
These insights indicate that IE has attracted increasing scholarly attention across the globe and
different economies. Yet to reach a more mature stage, characterized by empirical articles testing
relationships among established constructs (Edmondson & McManus, 2007), the field needs
synthetizing coherence (Locke & Golden-Biddle, 1997). To fully comprehend the universe of
informal entrepreneurs and how they vary across contexts, in the next section we shed light on
those individuals who engage in “entrepreneurial activities that are illegal yet remain legitimate to
large groups in a society”(Webb et al., 2020,p.511).
The Universe of Informal Entrepreneurs: A Typology
When one thinks of informal entrepreneurs, it is common to visualize small producers or
street vendors in developing economies, following the clich´
e that informal entrepreneurs are
poor and engage in low performing, labor-intensive, entrepreneurial activities hidden from
governmental authorities. However, the articles included in our integrative review reveal a
much more nuanced picture. Taken together, they portray a largely heterogeneous body of
informal entrepreneurs, which we summarize into a novel, comprehensive typology, tran-
scending the usual clich´
e. The 2 × 2 matrix in Figure 4 provides an overview of this
Figure 3. Conceptual and empirical articles on IE, 1987–2020.
6Entrepreneurship Theory and Practice 0(0)

heterogeneity, characterized along two dimensions: the levels of informality of entrepre-
neurial activities undertaken by a given informal entrepreneur, and the socioeconomic status
of a given informal entrepreneur, defined as their social standing in society in terms of
income, education, andoccupation(Bradley & Corwyn, 2002;Reynolds, 1991). Not-
withstanding the number of dimensions used in previous studies to describe informal en-
trepreneurs (e.g., Carneiro-da-Cunha & Rossetto, 2015;Gibbs et al., 2014;Williams &
Nadin, 2012a;Williams et al., 2012;Williams & Nadin, 2013a;Williams & Nadin, 2013b;
Williams & Nadin, 2014), these two dimensions emerged from our inductive coding process
as the two most important and comprehensive ones to characterize the heterogeneity of
informal entrepreneurs across economies. We introduce them below, emphasizing their
relevance.
Informality
This dimension refers to the extent to which informal entrepreneurs engage in illegal and yet
legitimate entrepreneurial activities (Webb et al., 2020), while not complying with formal rules
Figure 4. The universe of informal entrepreneurs: Typology and Examples.
a,b
a
The black and blue arrows indicate the reactive formalizing and the informalizing pathways, respectively, and were
identified for entrepreneurs with both low and high socioeconomic status (left and right side of the 2 × 2 matrix in this
Panel). In contrast, the red arrow indicates the proactive formalizing pathway, which was identified only in the case of
entrepreneurs with high socioeconomic status (right side of the 2 × 2 matrix in this Panel).
b
The number of articles referring to each type is reported in parenthesis. 17 articles could not be classified due to missing
information.
Salvi et al. 7

and regulations. Most of the academic literature on IE, published during the first phase up to 2008
(Figure 2), refers to informality as a dichotomy between formal and informal entrepreneurial
activities, based on firm registration (e.g., Arimah, 2001;Coate et al., 2006;House et al., 1993;
Sepulveda & Syrett, 2007;Hillmann, 1999). Godfrey (2011) was one of the first scholars to
explore the complex, multifaceted nature of informality. He suggested going beyond firm reg-
istration to consider all laws and regulations skirted by informal entrepreneurs when engaging in
informal entrepreneurial activities (e.g., firm registration, tax payment, environmental regulations,
employment, and health and safety regulations). By arguing that informality is a multidimensional
phenomenon, Godfrey (2011) changed the way we think and talk about IE and, relatedly, formal
entrepreneurship. Building on his work, we do not refer to formal entrepreneurial activities
exclusively as those that are registered and to informal entrepreneurial activities as those that are
not. Beyond firm registration, fully formal entrepreneurial activities are expected to comply with
all national, regional, and local laws and regulations (Godfrey, 2011). Therefore, in a given
country, the actual number of fully formal entrepreneurial activities undertaken is much smaller
than the number of legally registered entrepreneurial activities. This is due to the fact that many
legally registered units fail to comply with laws and regulations, even in developed economies
(Godfrey, 2011). Based on this line of argument, a number of empirical studies has started to
investigate the shades of gray that span fully formal and fully informal entrepreneurial activities
(e.g., Bruton et al., 2012;Castro et al., 2014;Darbi et al., 2018;Williams et al., 2016).
Our integrative review indicates four key dimensions related to the informality of entrepre-
neurial activities, including: firm registration (e.g., Nichter & Goldmark, 2009,Siqueira et al.,
2016), tax payment (e.g., Mickiewicz et al., 2019;Vallanti & Gianfreda, 2020), employee
registration (e.g., Benjamin & Nisim, 2015;Ram et al., 2007), and compliance with health, safety,
and environmental regulations (e.g., R˘
adan-Gorska, 2013;Rosa & Trabalzi, 2016). While firm
registration is a binary variable, the others are all ordinal variables (full/partial/no tax payment,
full/partial/no employee registration, full/partial/no compliance with health, safety, and envi-
ronmental regulations). Following Shahid et al. (2020), we consider the level of informality of the
entrepreneurial activities as “high”if they show full or partial informality in three or four di-
mensions (e.g., no firm registration, partial/no tax payments, partial/no employee registration). In
turn, the level of informality is considered “low”if the activities show full or partial informality in
only one or two dimensions (e.g., firm registration and full tax payment, but partial employee
registration and no compliance with health, safety, and environmental regulations).
Socioeconomic Status
The second dimension refers to the social standing of a given informal entrepreneur in terms of
income, education, and occupation (Bradley & Corwyn, 2002;Reynolds, 1991). The coding and the
analysis of our articles suggest that the socioeconomic status is an important variable to consider
when studying informal entrepreneurial activities (e.g., Castro et al., 2014;Williams & Round,
2007;Williams & Round, 2010;Williams & Nadin, 2010;Williams et al., 2016). Our evidence
shows that informal entrepreneurs are often polarized at both ends of the income spectrum, i.e., poor
and affluent (Gibbs et al., 2014). For instance, Williams and Round (2010) find that the informal
nature of the entrepreneurial activities varies, depending on the socioeconomic status of the en-
trepreneur. While poor entrepreneurs do not register their firm and mostly operate off the books as a
survival tactic, affluent entrepreneurs usually register their firm but participate in some off-the-book
transactions to evade taxes. Following past research (Manstead, 2018), we operationalize the
socioeconomic status of the entrepreneurs in terms of income: if the income level is below the
average in the respective country, the socioeconomic status is “low”; if the income level is above the
average income in the respective country, the socioeconomic status is “high.”
8Entrepreneurship Theory and Practice 0(0)

Four Types of Informal Entrepreneurs
Drawing on these two dimensions, we identify four different types of informal entrepreneurs, who
are globally widespread. They include the informal poor, the informal affluent, the semi-formal
poor, and the semi-formal affluent. Next, we characterize and illustrate each type by examples
drawn from developing, transition, and developed economies.
Type I: “Informal Poor”is characterized by a high level of informality and low socioeconomic
status (117 articles). Examples of this type include: rural poor entrepreneurs in Ghana who do not
register their enterprises, do not pay taxes, and do not declare their employees (Slade Shantz et al.,
2018); informal cross-border traders in Eastern Europe borderlands who engage in IE as a coping
strategy to achieve economic “survival”, while also presenting full or partial informality across all
informality dimensions (Welter et al., 2018); and French moms living below the poverty line and
engaging in digital subsistence entrepreneurial activities on Facebook without complying with any
formal rules or regulations (Delacroix et al., 2019).
Type II: “Informal Affluent”is characterized by a high level of informality and high socio-
economic status (74 articles). Examples of this type include: informal micro tea-stall entrepreneurs
in Bangladesh having high income stability and yet engaging in fully informal entrepreneurial
activities (Khan et al., 2013); above average income dealers from the largest electronics mar-
ketplace in the world producing “shan-zhai”
1
mobile phones in China, despite the governmental
prohibition against private businesses (Lee & Hung, 2014); and the American computer pro-
grammer Shawn Fanning, who established Napster as a fully informal, successful, growth-
oriented, and innovative software-based business while attending college (Webb et al., 2009).
Type III: “Semi-Formal Poor”is characterized by a low level of informality and low so-
cioeconomic status (60 articles). Illustrative examples can be drawn from poor street sellers in
Sub-Saharan Africa engaging in “semi-formal”entrepreneurial activities, that is, paying for local
business permits (equivalent to firm registration in this context), paying taxes, and partially
complying with environmental regulations but not registering employees (Knox et al., 2019);
Romanian touristic pension owners who hardly make a living through IE and apply for only a
portion of the mandatory authorizations to run a guesthouse, such as firm registration, partial tax
payment, and partial compliance with health and environmental regulations, while engaging
family members in the entrepreneurial activities without proper contracts (R˘
adan-Gorska, 2013);
and minority entrepreneurs from abject spaces in the UK registering their businesses but re-
maining informal along a minority of informality dimensions, such as hiring ethnic workers off the
books without any insurance cover or formal labor rights (Ram et al., 2017).
Type IV: “Semi-Formal Affluent”is characterized by a low level of informality and high
socioeconomic status (84 articles). Some examples relate to entrepreneurs of above average
income level in the Nigerian movie context of Nollywood, who follow all of the formal rules and
regulations, despite selectively defying the rules of the Nigerian Copyright Act (Uzo & Mair,
2014); Latvian founders of enterprises with average positive turnover, evading taxes, due to their
low level of trust in the newly formed government and institutions following the end of the
communist regime (Mickiewicz et al., 2019); and Italian Buffalo Mozzarella producers running
profitable legally registered enterprises, paying taxes, and having a formal bureaucratic structure,
but deliberately not respecting animal welfare and labor law as a strategy to increase their profit
and escape harassment from criminal organizations (Rosa & Trabalzi, 2016).
This typology reveals that IE goes far beyond the usual clich´
e of poor individuals engaging in
completely hidden, low-performing entrepreneurial activities and enables us to move toward a more
nuanced understanding of the phenomenon. The four types are widespread across developing,
transition, and developed economies, and they provide a comprehensive overview of the hetero-
geneity of IE from a static perspective. But beyond this, our analysis also reveals that the informal
Salvi et al. 9

poor and informal affluent entrepreneurs’levels of informality may change over time. We thus adopt a
dynamic perspective to understand how informal entrepreneurs move along the continuum of in-
formality, why they do so, and with what consequences. This dynamic perspective proves crucial to
unpacking the emergence, persistence, or disappearance of informality, as well as gradual movements
along the continuum of informality. More specifically, informal entrepreneurs move along three
distinctive pathways: the reactive formalizing,theproactive formalizing, and the informalizing
pathways (respectively the black, red, and blue arrows in Figure 4). They do so while increasing or
decreasing the regulative legitimacy—that is, the alignment with the law—of their entrepreneurial
activities (Scott, 2014). We elaborate further on these three pathways in the next sections.
Formalizing and Informalizing Pathways: A Tale of Legitimacy
The most important actions undertaken by informal entrepreneurs revolve around legitimacy
(Alvarez et al., 2021;Webb et al., 2009), which is defined as “a generalized perception or as-
sumption that the actions of an entity are desirable, proper, or appropriate within some socially
constructed systems of norms, values, beliefs, and definitions”(Suchman, 1995, p. 574). Le-
gitimacy is a key resource (Zimmerman & Zeitz, 2002), and is gained through the consensus of the
collective, who judges what is appropriate in a specific social context (Fisher et al., 2017;
Kackovic & Wijnberg, 2020;¨
Uberbacher, 2014). Acknowledging the different kinds of legitimacy
(Bitektine & Haack, 2015;Scott, 2014;Zimmerman & Zeitz, 2002), we draw on Scott (2014) and
distinguish among regulative, normative, and cognitive legitimacy. Regulative legitimacy (or
legality) is gained through the alignment of an activity with the law. This alignment is instrumental
to avoid sanctions applied by legal authorities. Normative legitimacy is morally governed by
binding social expectations, which determine what is appropriate and desirable in a certain context
(e.g., industry, sector, market). This generates a sense of social obligation to conform to societal
norms and codes of behaviors. Finally, cognitive legitimacy is culturally supported by constitutive
schema and taken-for-granted cultural conceptions (Scott, 2014), which can be interpreted as
“collective identities”(Polletta & Jasper, 2001;Webb et al., 2009). Collective identities are “one
particular form of culture”(Polletta & Jasper, 2001, p. 298) and refer to “the common bond tying
individuals to a group”(Webb et al., 2009, p. 497). They provide frames perceived as established
and inherently correct ways of doing things, and leading to mimetic behaviors (DiMaggio &
Powell, 1983)“because other types of behaviors are inconceivable”(Scott, 2014, p. 68) with what
is learnt and taken for granted.
Moving along the continuum of informality implies making strategic or non-strategic decisions
in terms of regulative legitimacy, while also balancing normative and cognitive legitimacy. In
some cases, entrepreneurs make strategic decisions in terms of regulative legitimacy. For example,
they may decide to comply with an increasing number of laws and regulations. This would be
based on a strategic evaluation of the advantages that compliance might bring (Webb et al., 2009),
for instance, in terms of access to formal forms of capital (Hommes et al., 2014). In other cases,
informal entrepreneurs may make non-strategic decisions in terms of regulative legitimacy. These
decisions are the unintended consequence of other choices. For instance, entrepreneurs may
informalize their activities as a result of their choice to act against unfair governmental systems
that prohibit free market activities (Lee & Hung, 2014), or else as a result of their willingness to
attract less attention from criminals (Sutter et al., 2013). They may also formalize their activities in
an effort to fulfill social expectations (normative legitimacy) (Thapa Karki et al., 2020) or to adopt
taken-for-granted behaviors informed by their collective identity (cognitive legitimacy) (Klein,
2017). Non-strategic decisions in terms of regulative legitimacy may also result from contextual
contingency, for example, an enterprise is required to formalize after being confiscated from
criminal organizations (Cavotta & Dalpiaz, 2022).
10 Entrepreneurship Theory and Practice 0(0)

Our inductive coding revealed that informal entrepreneurs make strategic or non-strategic
decisions in terms of legitimacy along three distinctive pathways; namely, the reactive for-
malizing, the proactive formalizing, and the informalizing pathways (Figure 5). The formalizing
pathway consists of the phases, or sequence of events, in which both poor and affluent entre-
preneurs engage over time to decrease their level of informality, in an effort to acquire regulative
legitimacy (black and red arrows in Figure 4 and 5). We highlight two types of formalizing
pathways: the reactive formalizing pathway, and the proactive formalizing pathway, depending on
what triggers informal entrepreneurs to (try to) change their level of informality. By contrast, we
define the informalizing pathway as the phases, or sequence of events, in which informal poor and
affluent entrepreneurs engage over time to increase their level of informality, foregoing regulative
legitimacy (blue arrows in Figures 4 and 5).
Figure 5. A dynamic perspective of IE.
Salvi et al. 11

In sum, the reactive formalizing, the proactive formalizing, and the informalizing pathways
consist of distinctive phases (as sequences of events). Each phase is driven by different com-
binations of regulative, normative, and cognitive institutional factors (Scott, 2014).
2
First, reg-
ulative institutional factors represent formal laws and regulations (Scott, 2014) that provide
structure for formalization and informalization decisions, and create room for compliant and
defiant entrepreneurial behaviors (Fredstr ¨
om et al., 2021). Second, normative institutional factors
consist of social norms and codes of behavior, which generate social obligations (Scott, 2014).
These social obligations may align or misalign with formal laws and regulations, thereby
prompting entrepreneurs to align with or to resist them (e.g., Uzo & Mair, 2014). Third, cognitive
institutional factors “stress the centrality …of the shared conceptions, which constitute the nature
of social reality and create the frames through which meaning is made”(Scott, 2014, p. 67). In
other words, cognitive institutional factors represent the taken-for-granted and culturally shared
conceptions in a certain society, such as collective identities (Polletta & Jasper, 2001). For
example, “a collective identity can create a cognitive awareness of why the venture in the informal
economy exists”(Webb et al. 2009, p. 498).
As such, regulative, normative and cognitive institutional factors may drive entrepreneurs
along the different pathways. In the next sections, we present the phases, antecedents, and
outcomes of each pathway. In doing so, we highlight the main takeaways, research gaps, ir-
regularities, and anomalies in the academic literature (Nadkarni et al., 2018), which we then
discuss in the closing section.
Reactive Formalizing Pathway
The reactive formalizing pathway (black arrows in Figures 4 and 5; 117 articles) has been studied
widely (Benhassine et al., 2018;Kasinja & Tilley, 2018;Mukorera, 2019) and fostered by
policymakers in their efforts to increase tax compliance and to decrease negative externalities of
informality (Galiani et al., 2017;Williams, 2015). Informal and semi-formal entrepreneurs un-
dertake this pathway to acquire regulative legitimacy in reaction to existing institutional forces
(Dau & Cuervo-Cazurra, 2014) and contextual contingencies (Cavotta & Dalpiaz, 2022).
Some scholars (23 articles) have started to examine the reactive formalizing pathway by
highlighting the phases in which informal entrepreneurs engage when taking formalization
decisions regarding registration of an enterprise with the government, partial or full tax com-
pliance, and declaration of workers (Castro et al., 2014;Shahid et al., 2020;Thapa Karki et al.,
2020). Below, we illustrate three reactive formalizing phases emerging from the literature:
recognizing formalization opportunities, evaluating formalization advantages, and adhering to
formal institutions.
Reactive Formalizing Phases
Recognizing Formalization Opportunities. Informal entrepreneurs may recognize different types of
formalization opportunities, that is, sets of external circumstances or subjective ideas (Davidsson,
2017), which relate to registering entrepreneurial activities (Mukorera, 2019;Williams & Shahid,
2016), paying taxes (Adu & Amponsah, 2017;Berdiev & Saunoris, 2018), providing contracts for
undocumented employees (Jones et al., 2006;Vallanti & Gianfreda, 2020), or complying with
health, safety, and environmental standards (Rana & Chhatre, 2016;Schoneveld et al., 2019).
Informal entrepreneurs recognize formalization opportunities once they have become more alert
about formality requirements, e.g., when they are vigilant and watchful for information about
sanctions affecting informal business operations (Babbitt et al., 2015;Floridi et al., 2020), or else
about opportunities to access resources by formalizing their activities (Khan, 2018;Kurosaki,
12 Entrepreneurship Theory and Practice 0(0)

2019). For example, informal entrepreneurs may recognize the opportunity to formalize once they
become aware that the enforcement of business registration laws is more widespread than before
(Nguyen et al., 2014), or once they realize that becoming legal may allow them to apply for
different sources of capital, such as bank loans and government financing programs (Hommes
et al., 2014).
Evaluating Formalization Advantages. Informal entrepreneurs evaluate formalization advantages by
pondering economic formalization costs and benefits, and then considering the consequences in
terms of social acceptability (Xheneti et al., 2019b).Castro et al. (2014) draw on rational choice
theory to explain how informal entrepreneurs in the Dominican Republic evaluate formalization
advantages and consider the economic and social costs of formalizing. In their study, Thapa Karki
et al. (2020) adopt a sensemaking perspective (Weick, 1995;Weick et al., 2005) to explain how
Nepalese informal women entrepreneurs evaluate formalization advantages, whereby the latter do
this by pondering possible gains and losses in terms of cognitive legitimacy (congruence with their
collective identity), normative legitimacy (incompatibility with socially prescribed norms, fit with
family expectations), and regulative legitimacy (legal benefits from formalization).
Adhering to Formal Institutions. After evaluating the advantages of formalization, informal en-
trepreneurs adhere to formal institutions either selectively or consistently. On the one hand,
informal entrepreneurs may take a number of strategic decisions regarding formalization, thereby
selecting an acceptable level of regulative legitimacy (Castro et al., 2014). Thus, they may adhere
to a carefully selected number of regulative frameworks. On the other hand, informal entre-
preneurs may adhere to all of the relevant laws and regulations consistently, for example, in order
to reach sector specific standards (Schoneveld et al., 2019) or to attract funding (Knox et al., 2019).
Antecedents to the Reactive Formalizing Pathway
The reactive formalizing pathway is driven by regulative, normative, and cognitive institutional
factors (Scott, 2014)(Figure 5; 56 articles).
Regulative Institutional Factors. Informal entrepreneurs are more likely to formalize reactively
whenever the law is seen to be enforced promptly and clearly. This could consist of tailored policy
interventions simplifying formalization requirements, or increasing awareness about taxation,
business registration, labor, and property rights (Williams & Nadin, 2014). A major body of
literature has focused on the effects of government policies that aim to transform IE into formal
entrepreneurship through formalization measures (e.g., Sepulveda & Syrett, 2007;Sheriff &
Muffatto, 2014). Examples of this process relate to informal entrepreneurs who recognize for-
malization opportunities as a consequence of business registration reforms in Mexico (Bruhn,
2013), or as a consequence of the transition from centrally planned to market-based economic
measures in post-Soviet countries (Aidis & van Praag, 2007;Hisrich & Grachev, 1993). A
country’s level of economic development and GDP may also drive informal entrepreneurs to
embark on the reactive formalizing pathway, since higher liquidity will lead to better implemented
and more effective economic laws and pro-market institutions (Dau & Cuervo-Cazurra, 2014;
Ketchen et al., 2014).
Normative Institutional Factors. The normative environment needs to evolve and adapt in order to
align with the regulative environment. This allows reactive formalization decisions to be socially
accepted (e.g., Castro et al., 2014). Nevertheless, the evolution of norms and codes of behaviors,
and their alignment with regulative institutions, is generally slow, which gives rise to the role of
Salvi et al. 13

intermediary organizations in speeding up the reactive formalizing pathway (Evans, 2007;Gurtoo,
2009;Sutter et al., 2017). In particular, formal for-profit platforms may act as orchestrators
(Kistruck & Shulist, 2021) and convert informal entrepreneurs into formal service providers,
assisted by institutional scaffolding (Sutter et al., 2017). Similarly, NGOs may redefine market
structures and local arrangements, creating more inclusive market solutions and formalization
opportunities for the informal poor (Mair et al., 2012).
Cognitive Institutional Factors. The cultural dis-identification from informality may lead to reactive
formalization decisions (Berdiev & Saunoris, 2018;Mickiewicz et al., 2019). Whenever this
happens (e.g., when tax morale increases), informal entrepreneurs become disentangled from their
informal collective identities (Webb et al., 2009), and, as a result, they tend to pursue the reactive
formalizing pathway. This may happen because of the actions of a formal entrepreneur acting as a
role model (Musara & Nieuwenhuizen, 2020), or increased access to information regarding the
benefits of paying taxes and complying with labor regulations (Williams & Nadin, 2012a).
Outcomes of the Reactive Formalizing Pathway
Below, we introduce the main conversations relating the outcomes of the reactive formalizing
pathway (38 articles).
Societal-Level Outcomes. The reactive formalizing pathway is perceived as a strategic policy-
making tool capable of producing positive externalities related to compliance (Webb et al., 2013;
Williams, 2015). More specifically, this pathway may lead to neutralize the loss of tax revenues
and thus increase the liquidity of governments, which is instrumental in developing infrastructure
and providing social services (Galiani et al., 2017); to reduce the amount of informal labor
engaged in by employees without proper employment contracts, social provision, or insurance
cover (Maloney, 2004); to reduce the number of informal entrepreneurs flouting environmental
regulations, using harmful fuels, or adopting environmentally dangerous trash disposal practices
(Imamoglu, 2018); and finally, to reduce the level of unfair competition between formal and
informal enterprises (Kosta & Williams, 2020).
Organizational-Level Outcomes. The reactive formalizing pathway is crucial to achieving advan-
tages in business enterprise performance (Demenet et al., 2016;Giombini et al., 2018;Williams &
Kedir, 2020) and growth (Kim & Kang, 2009;Sahai et al., 2020;Sasidharan & Rajesh, 2014). For
example, Aidis and van Praag (2007) employ a signaling lens (Spence, 1973) to explain how
informal entrepreneurial experience, gained prior to the transition to a market-based economy in
post-communist Lithuania, translates into greater business knowledge and business skills. This
contributes to the superior performance of business ventures after formalization. In general,
reactive formalizing signals the achievement of a higher level of regulative legitimacy, allowing a
greater mobilization of resources, especially in economies characterized by a strong governmental
trust (Assenova & Sorenson, 2017). Nevertheless, it would be too hasty to generalize about the
performance advantages related to reactive formalizing, as each reality needs careful investigation
and understanding. For example, reactive formalizing leads to greater performance advantages in
medium and large enterprises than in micro and small enterprises (Demenet et al., 2016).
Moreover, reactive formalizing, after operating informally for a period of time, leads to greater
performance advantages than registering the entrepreneurial activities from the outset (Williams
et al., 2017;Williams & Kosta, 2020). Finally, according to the way performance is oper-
ationalized, performance results may differ. For instance, reactive formalizing leads to greater
14 Entrepreneurship Theory and Practice 0(0)

sales and productivity, but to lower employment growth than remaining informal (Williams &
Kedir, 2020).
Individual-Level Outcomes. Reactive formalizing may drive entrepreneurial leadership (Musara &
Nieuwenhuizen, 2020) and enhance the utility of bridging social capital (Dolan & Rajak, 2016).
Nevertheless, the individual-level outcomes of this pathway remain underexplored, opening up
research opportunities. We will elaborate on these in our future research agenda.
Proactive Formalizing Pathway
In the reactive formalizing pathway, informal and semi-formal entrepreneurs undertake actions
aiming at acquiring regulative legitimacy in reaction to pre-existing institutions (e.g., enforcement
of business registration laws, changes in social norms, changes in terms of cultural conception of
informality). By contrast, informal and semi-formal entrepreneurs pursuing a proactive for-
malizing pathway (red arrows in Figures 4 and 5) play a more agentic role, as they aim to change
pre-existing regulative institutions or develop new institutions. This pathway is represented in the
literature comparatively less frequently (40 articles) and consists of the following phases
(Figure 5; 19 articles): introducing new informal entrepreneurial activities, reframing informality,
and riding the formalization wave. We describe each phase below.
Proactive Formalizing Phases
Introducing New Informal Entrepreneurial Activities. Individuals introduce illegal, yet (normatively
and cognitively) legitimate entrepreneurial activities whenever the overarching legal framework
prohibits them from doing so legally (Webb et al., 2009), or else whenever they become aware of
“grey institutional areas”(Heinzen, 2020;Zidonis, 2014). For example, a group of informal
entrepreneurs in California inaugurated commercial trading in medical cannabis, which at the time
was unlawful (Klein, 2017). Similarly, a group of vendors started producing and selling more
affordable “shan-zhai”mobile phone alternatives, despite a governmental prohibition in China
where the economy is centrally planned and only national champions were authorized to produce
and sell mobile phones (Lee & Hung, 2014). In these examples, informal entrepreneurs act as
pioneers and introduce new informal entrepreneurial activities, which have the potential to turn
into new, informal markets.
Reframing Informality. After introducing new, informal entrepreneurial activities, informal en-
trepreneurs may engage in the practice of reframing informality, as a way of building regulative
legitimacy. This practice is a form of institutional work (Lawrence et al., 2011), and can manifest
aggressively through the formulation and diffusion of discourses against unjust laws (Klein,
2017); although it can also manifest through peaceful actions, such as the promotion of relevant
slogans or the setting up of discussion forums (Lee & Hung, 2014). For example, the “shan-zhai”
mobile phones providers in China engaged in discourses that reframe informality and move away
from the negative image relating to sales of illegal mobile phones toward the heroic image of
“shan-zhai”mobile phones as iconic weapons to fight “the injustice of the government”(Lee &
Hung, 2014). Similarly, Airbnb gained popularity in California and New York, despite the law
prohibiting the short-term rental of private apartments, thanks to the articulation of discourses
around the intrinsically good and convenient nature of the digital home-sharing platform as
“a global travel community that offers magical end-to-end trips, including where you stay, what
you do, and the people you meet.”(Ravenelle, 2020, p. 4).
Salvi et al. 15

Riding the Formalization Wave. Rather than adapting to restrictive laws and regulations, which
prohibit the dissemination of their practices, informal entrepreneurs create momentum for their
activities (Webb et al., 2009), e.g., by establishing increasing numbers of new marketplaces
(Dupuis, 2019), creating associations to smooth government’s attitude toward the informal ac-
tivities (Lee & Hung, 2014), or creating social movements designed to mobilize both resources
and allies (Klein, 2017). In doing this, informal entrepreneurs exert pressure on regulative bodies,
right up to the point of disruption. Thus, they achieve the objective of changing the nature of
institutions, in order to favor their activities, which in time are no longer considered unlawful by
the government. This is the case, for example, with the trade in medicinal cannabis in California,
which became legal after continuous pressure from informal traders (Klein, 2017). Airbnb and
Uber remain a gray area (Dupuis, 2019;Ravenelle, 2020), since legal frameworks for regulating
these activities are difficult to build (e.g., insurance cover and standards for Airbnb hosts and Uber
providers, who are not real employees).
Antecedents to the Proactive Formalizing Pathway
Just as the proactive formalizing pathway is discussed in the literature to a lesser extent, so are its
antecedents (13 articles). We nevertheless summarize the extant knowledge below.
Regulative Institutional Factors. In contrast to the reactive formalizing pathway, in the proactive
formalizing pathway, the regulative environment does not enable informal entrepreneurs to
recognize formalization opportunities directly; instead, it prompts informal entrepreneurs to
introduce new informal entrepreneurial activities as a way of overcoming formal institutional
voids (Webb et al., 2020) or formal barriers (Xheneti et al., 2013). Subsequently, informal en-
trepreneurs leverage these formal institutional voids and barriers to reframe informality positively.
For instance, when Airbnb and Uber were introduced, the regulative environment represented a
formal barrier because it did not recognize, and imposed high constraints on, such activities in the
sharing economy that took place outside labor and tax law. In this case, informal entrepreneurs,
spurred on by a regulative environment that was excessively restrictive, engaged in the insti-
tutional work of reframing informality, thereby creating momentum for their entrepreneurial
activities (Battilana et al., 2009).
Normative Institutional Factors. In the proactive formalizing pathway, background social norms
provide fertile ground for informal entrepreneurs’institutional efforts (e.g., Nguyen, 2004;
Smallbone & Welter, 2001). Drawing on such norms, informal entrepreneurs engage in their
institutional work of reframing informality positively, expanding their activities, and riding the
formalization wave. Social norms are essential because they grant increasing levels of social
acceptance to newly introduced informal entrepreneurial activities (Stanger, 2008). Whenever
social acceptance is high, the power of regulative bodies to sanction and ban the activities
concerned diminishes drastically, up to the point where legalization and subsequent formalization
are achieved.
Cognitive Institutional Factors. Informal entrepreneurs introduce new informal entrepreneurial
activities because they perceive informality positively (Am ´
esquita Cubillas et al., 2018;Hallam &
Zanella, 2017). This positive perception of informality can be either individual or collective, and
causes both individuals and groups to build an informal (collective) identity (Klein, 2017;Webb
et al., 2009). The informal (collective) identity represents the seedbed for the institutional work of
reframing informality, in order to appeal to broader society and to regulative bodies in subsequent
stages (Klein, 2017). For example, the informal collective identity of informal entrepreneurs in
16 Entrepreneurship Theory and Practice 0(0)

ethnic enclaves, who run unregistered entrepreneurial activities and employ undocumented
workers (Hillmann, 1999;Ojo et al., 2013), may induce them to emphasize their positive scope or
impact on society, in terms of job creation or poverty alleviation; leading to customer acquisition
and even government support (Rothengatter, 2005). Another example is related to the informal
collective identity of traders in medicinal cannabis, which is leveraged to increase their popularity
until regulative institutions are disrupted (Klein, 2017).
Outcomes of the Proactive Formalizing Pathway
The outcomes of the proactive formalizing pathway are also investigated to a limited extent (8
articles).
Societal-Level Outcomes. The main outcome of the proactive formalizing pathway is institutional
transformation. The conversation about the outcomes of IE along the formalizing pathway bridges
the literature on institutional entrepreneurship (Battilana et al., 2009;Pacheco et al., 2010;Su
et al., 2017). In fact, informal entrepreneurs along this pathway act as institutional agents, who
manipulate institutions purposefully (Maguire et al., 2004) and engage in institutional work
“eroding regulatory authority”(Zeller, 2009, p. 135). Informal entrepreneurs have the potential to
change laws and regulations in favor of new entrepreneurial activities emerging from the informal
economy (Zeller, 2009). Moreover, by reframing informality, they build increasing societal
approval, as witnessed by the case of Napster founder, Shawn Fanning, who acted as a “catalyst
for the normative reconceptualization of copyright in society”(Green, 2002, p. 799). Similarly, the
institutional work emphasizing the infrastructural benefits provided by the (formerly illegal)
Pavlenko construction enterprise in Russia led to a wider acceptance and even tolerance by the
government, despite the centralized economic system (Khlevniuk, 2019).
Organizational-Level Outcomes. Proactive formalizing leads to higher normative and regulative
legitimacy for IE over time. In particular, informal entrepreneurs expand the social acceptance of
their organizations in the normative environment (Choi & Perez, 2007;Lankov & Seok-Hyang,
2008;Lesieur & Sheley, 1987;Roth, 2014). Similarly, they actively acquire regulative legitimacy,
which allows them to eventually legalize their organizations, increase the number of customers,
and mobilize allies (Wetzel & Luciano, 2017).
Individual-Level Outcomes. The individual-level outcomes of this pathway are under-investigated.
Nevertheless, there are promising avenues for future research in this domain. We highlight them in
the future research agenda below.
Informalizing Pathway
The informalizing pathway relates to the journey that individual entrepreneurs undertake once
they increase the informality of their entrepreneurial activities, foregoing regulative legitimacy.
Inherently hidden in nature, this pathway is more difficult to track and is, unsurprisingly, less
acknowledged than the reactive formalizing pathway (81 articles). We identified three main phases
in the informalizing pathway (Figure 5; 17 articles): recognizing informalization opportunities,
evaluating informalization advantages, and defying formal institutions. These phases are similar to
the phases of the reactive formalizing pathway. But, by contrast, entrepreneurs who pursue the
informalizing pathway aim to achieve a higher (instead of lower) level of informality over time
(Figure 5).
Salvi et al. 17

Informalizing Phases
Recognizing Informalization Opportunities. Informalization opportunities are sets of external cir-
cumstances or subjective ideas (Davidsson, 2017), which relate to deregistering entrepreneurial
activities (Rosa & Trabalzi, 2016), evading taxes (Alm et al., 2019), hiring undocumented
employees (Vallanti & Gianfreda, 2020), or skirting health, safety, and environmental standards
(R˘
adan-Gorska, 2013). Entrepreneurs recognize informalization opportunities once they become
alert to them (e.g., Cannatelli et al., 2019;Snyder, 2004). These entrepreneurs are vigilant and
watchful for new opportunities, which could allow them to reduce their business costs (Vallanti &
Gianfreda, 2020), avoid getting trapped in the complexity of the law (R˘
adan-Gorska, 2013), and
avoid attracting attention from criminals (Rosa & Trabalzi, 2016). For instance, the presence of
organized crime in Italy leads mozzarella producers to be vigilant and recognize informalization
opportunities to escape criminal attention (Rosa & Trabalzi, 2016).
Evaluating Informalization Advantages. Informal entrepreneurs evaluate informalization advantages
by pondering economic formalization costs and benefits, for example, from a rational economic
choice perspective (Kus, 2014;Williams & Gurtoo, 2012). Nevertheless, they also consider the
consequences of informalizing in terms of the social acceptability of their activities and com-
patibility with their collective identity. For example, Thapa Karki et al. (2020) describe how
Nepalese women entrepreneurs, besides making an economic cost–benefit analysis of in-
formalizing, consider informalization advantages in line with their gender identity, life courses,
and family situations.
Defying Formal Institutions. After evaluating informalization advantages, informal entrepreneurs
defy regulative institutions (Jensen et al., 2019;Kamath & Ramanathan, 2015;Uzo & Mair,
2014), that is, they actively resist formal institutions instead of adhering to their requirements
(Oliver, 1991). For instance, Uzo and Mair (2014) describe how informal entrepreneurs in the
Nigerian movie context of Nollywood selectively defy the rules of the Nigerian Copyright Act.
While respecting the rules for movie distribution, they tend to skirt intellectual property rules,
which they regard as too strict and counter-productive. Instead of following the rules regarding IP
ownership, these informal entrepreneurs establish alternative practices, such as avoiding the use of
written scripts in favor of verbal agreements regarding the movie plot.
Antecedents to the Informalizing Pathway
In this section, we introduce the main regulative, normative, and cognitive institutional factors
(Figure 5; 24 articles) underlying informalization decisions.
Regulative Institutional Factors. Entrepreneurs may decide to informalize because of weakly en-
forced laws and regulations (Webb et al., 2020) that prevail in rural regions (Williams, 2011),
ethnic communities (Austin et al., 2017), or other types of marginalized communities
(Adriaenssens & Hendrickx, 2011). Informal entrepreneurs may also recognize informalization
opportunities as a consequence of regulative dynamism (Berdiev & Saunoris, 2019;Meagher,
2009) caused by political, economic, and social evolution or crises. For instance, after the civil war
in Nigeria (Meagher, 2009), the Biafran ethnic minority was persecuted by the Nigerian gov-
ernment and Biafran entrepreneurs informalized in order to stay in the market.
Normative Institutional Factors. Entrepreneurs informalize when they feel supported by the social
norms in favor of hidden entrepreneurial practices (Bame-Aldred et al., 2013;Bukowski et al.,
18 Entrepreneurship Theory and Practice 0(0)

2014), which value tax evasion positively and support employment options outside labor laws
(Williams, 2010). Such hidden entrepreneurial practices prompt individual entrepreneurs to defy
laws and regulations (Oliver, 1991), especially when hidden norms are the rule rather than the
exception (Rosa & Trabalzi, 2016). Thus, IE may be perceived as more advantageous than
adherence to national laws and regulations (Williams & Round, 2007). In some cases, hidden
entrepreneurial practices are reinforced and justified by the presence of bribes, corruption, and
harassment (Kistruck et al., 2015;R˘
adan-Gorska, 2013;Rosa & Trabalzi, 2016;Sutter et al.,
2013). These create a positive perception of hidden entrepreneurial activities as the best and most
desirable alternatives to escape extortions and crime.
Cognitive Institutional Factors. Being an informal entrepreneur is often seen as a way of life (Welter
et al., 2018), and a way of being recognized as a member of an informal entrepreneurial group with
a specific collective identity (Webb et al., 2009). This collective identity can create a positive
perception of informality (Webb et al., 2009), leading to the recognition of informalization
opportunities to transform one’s own life (Gibbs et al., 2014). For instance, Snyder (2004)
observes that informalizing can represent a strategy “to creatively avow a sense of self”(p. 236).
Outcomes of the Informalizing Pathway
Below, we describe the outcomes of the informalizing pathway (40 articles) at the societal,
organizational, and individual levels.
Societal-Level Outcomes. By contrast with the formalizing pathways, most of the extant literature
on IE emphasizes the negative outcomes of the informalizing pathway, such as negative ex-
ternalities due to non-compliance, which are linked to economic underdevelopment (Massón-
Guerra & Ort´
ın- ´
Angel, 2019;Williams, 2013), unfair competition toward formal firms (Distinguin
et al., 2016;Moreno-Monroy & Cruz, 2016), and the perpetuation of gender inequalities ( ´
Cori´
c,
2018;Xheneti et al., 2019b). However, informalizing may also lead to certain positive outcomes.
For instance, after the war in Nigeria, informalizing was the only alternative for persecuted Biafran
entrepreneurs to earn a livelihood (Meagher, 2009). Moreover, informalizing enabled Biafran
entrepreneurs to build cohesive, resistance structures from the bottom-up (Meagher, 2009). In-
formalizing has also led to positive economic outcomes in communist economies when private
businesses were unlawful but represented the only way of accessing scarce goods and services
(Tsang, 1994).
Organizational-Level Outcomes. Informalizing implies the foregoing of regulative legitimacy over
time (Lent et al., 2019). This pathway may constrain financial performance (Brown et al., 2013;
Engstr¨
om & McKelvie, 2017), entrepreneurial growth (Krasniqi & Williams, 2020;Sonobe et al.,
2011), and innovative capacity (Bu & Cuervo-Cazurra, 2020;Kabecha, 1999;Kurosaki, 2019;
Ullah et al., 2019) in the long run. In fact, informal enterprises are generally smaller in size, less
innovative, and characterized by lower productivity and higher capital intensity than formal
enterprises (Amin & Islam, 2015;Nichter & Goldmark, 2009). Nevertheless, informalizing offers
other benefits, such as higher normative legitimacy (Cannatelli et al., 2019), due to the adherence
to socially supported hidden practices (Williams, 2010). Furthermore, evading taxes during the
start-up phase may be a way of achieving higher liquidity under financial constraints, especially
when governments are not regarded as trustworthy (Alm et al., 2019). Informalizing may also
represent a strategic choice for overcoming limited access to credit, especially for women (Harriss-
White, 2010;Xheneti et al., 2019b), immigrants (Ram et al., 2008;Tengeh & Nkem, 2017), and
other marginalized societal groups (Atasü-Topcuo˘
glu, 2019;Leonard, 1998). For them, access to
Salvi et al. 19

formal forms of credit may be very limited, while informalizing may give them access to al-
ternative borrowing and repayment systems (Kamath & Ramanathan, 2015), as well as to informal
credit associations (Tengeh & Nkem, 2017). Women in patriarchal societies tend to informalize
their entrepreneurial activities, especially after marriage (Xheneti et al., 2019a). This happens
because informalizing allows them to take better care of the household (Guma, 2015), as well as
receive greater approval and financial support from their family members (Xheneti et al., 2019b).
Individual-Level Outcomes. Informalizing may have some positive outcomes at an individual level
(Harriss-White, 2010;Swanson & Bruni-Bossio, 2019). It may enable informal entrepreneurs to
create a better work–life balance and achieve some degree of financial autonomy (Espinal &
Grasmuck, 1997). As such, informalizing may constitute an important self-realization opportunity
for women (Delacroix et al., 2019;Mukherjee, 2016;Nmadu, 2011), despite gender-based roles
and expectations (Xheneti et al., 2019b).
Future Research Agenda
Above, we have introduced a novel typology of informal entrepreneurs and have proposed a new
dynamic perspective of IE. Building on this, we now draw a forward-looking research agenda for
IE (Bacq et al., 2021). We provide guidance for scholars researching different types of informal
entrepreneurs, the distinctive reactive formalizing, proactive formalizing, and informalizing
pathways, as well as the antecedents and the outcomes of those pathways at societal, organi-
zational, and individual levels.
Researching Different Types of Informal Entrepreneurs
Drawing on our novel, comprehensive typology of informal entrepreneurs (Figure 4), we call for
future studies that amount to theoretical advances on IE and examine the personal traits, personal
value orientations, and motivations of entrepreneurs belonging to each type posited. Such en-
trepreneurs might interact differently with their own in-groups (e.g., family and friends), as well as
with societal groups (e.g., community members, authorities, and other stakeholders) when for-
malizing and informalizing in different contexts and cultures.
For example, it is widely known that informal entrepreneurs draw on their social networks to
acquire resources and to make strategic formalization (e.g., Castro et al., 2014;Klein, 2017) and
informalization-related decisions (e.g., Uzo & Mair, 2014). These social networks provide a range
of human, social, physical, and financial resources (Jack & Anderson, 2002;Marti et al., 2013;
Welter et al., 2018). Nevertheless, they may also constrain entrepreneurial action, since they are
accompanied by far-reaching obligations and expectations (Light & Dana, 2013). Thus, we
encourage future research to investigate how different informal entrepreneurial types leverage
their social networks to both formalize and informalize.
Researching the Antecedents of Formalizing and Informalizing
While we know a lot about how regulative institutional factors influence formalizing and in-
formalizing pathways, we know less about the role of normative and cognitive institutional factors
(Nason & Bothello, 2022). Given that the nature of IE is intrinsically bounded to norms, shared
cultural understandings and collective identities (Achim et al., 2019;Cavotta & Dalpiaz, 2022;
Mickiewicz et al., 2019;Slade Shantz et al., 2018), it would be extremely important to shed light
on how these dimensions influence the different pathways. For example, future research could
build on founder identity research (Gruber & MacMillan, 2017;Powell & Baker, 2014,2017) and
20 Entrepreneurship Theory and Practice 0(0)

endeavor to shed light on how individuals subjected to different normative and cognitive in-
stitutional factors build their informal identities and leverage them when engaging in the proactive
formalizing pathway, to create institutional transformation. Moreover, it would be important to
understand how the informal poor and the informal affluent draw on different cognitive and
normative dimensions (Scott, 2014), and how they do this beyond laws and regulations
(Fredstr¨
om et al., 2021) when engaging in the reactive formalizing pathway. For example, social
exchange theory (Cropanzano et al., 2017;Mitchell et al., 2012), which derives from anthropology
and social psychology, could help produce useful insights in this domain. In particular, it might
shed some light on how both informal, poor entrepreneurs, and affluent entrepreneurs engage in
social exchange interactions, and are motivated by norms of reciprocity (Kerr & Coviello, 2020;
Kong et al., 2014;Larson, 1992) and trust (Colquitt et al., 2012;Lioukas & Reuer, 2015;Pollack
et al., 2017) when making reactive formalization decisions. Finally, exposure to criminal practices
(Cavotta & Dalpiaz, 2022), which are both unlawful and socially unacceptable (Cannatelli et al.,
2019), plays a decisive role in formalizing and informalizing pathways (Kistruck et al., 2015;
Tonoyan et al., 2010). For instance, such practices may undermine the survival of formalizing
firms (Cavotta & Dalpiaz, 2022). Therefore, future studies could look at the intersection between
criminal and informal enterprise cultures in order to find out how informal entrepreneurs stra-
tegically assess the benefits of formalization and informalization and then either increase or
decrease the level of informality they employ.
Researching the Outcomes of Formalizing and Informalizing at Societal Level
Most of the literature tends to portray the reactive formalizing pathway as good for society
(Assenova & Sorenson, 2017;Svensson, 2019), in contrast to the informalizing pathway, which is
viewed as negative for society (Meagher, 2014;Rosa & Trabalzi, 2016).
Nevertheless, in some cases the informalizing pathway may also lead to positive outcomes. For
instance, defying unjust formal institutions through IE may be considered to be part of the solution
to certain economic and societal inequalities (Bruton et al., 2021;Xheneti et al., 2019b)). Thus, we
encourage future research to shed light on how reactive formalizing and informalizing pathways
contribute to either exacerbating or remedying societies’most critical inequalities. This research
direction may lead to important theoretic advances in knowledge at the intersection of entre-
preneurship and inequality (Amis et al., 2021;Bapuji et al., 2020).
Furthermore, we encourage future researchers to look at the dark side of the reactive for-
malizing pathway, as this could hinder the preservation of cultural heritage in traditional com-
munities (Achim et al., 2019;Shinde, 2010). For instance, informal entrepreneurial activities may
foster religious tourism, while preserving ancient cultural practices and rituals (Shinde, 2010).
Thus, their formalization may lead to negative consequences in these terms. We encourage future
researchers to explore how reactive formalizing may have adverse societal implications in some
cases and hope that they might seek to foster more holistic formalizing policies and trends,
especially in developing and transition economies where IE is deeply rooted in traditional cultural
practices (Achim et al., 2019;George et al., 2016;Kozyreva & Ledyaeva, 2014).
Finally, the outcomes of the proactive formalizing pathway at societal level are the most
overlooked of all. The informal affluents are the only type of informal entrepreneurs that move
along this path, and who act as institutional agents (Battilana et al., 2009) endeavoring to create
institutional transformations (Khlevniuk, 2019;Zeller, 2009). We know little about how they
create such transformations, and it remains unclear if the informal poor are also able to do so.
Future researchers should investigate how institutional transformations are brought about by
informal entrepreneurs in different contexts, as well as whether the informal poor, through
collective actions, are able to bring about similar transformations.
Salvi et al. 21

Researching the Outcomes of Formalizing and Informalizing at Organizational Level
Informal entrepreneurs who formalize proactively thereby acquire greater normative and regu-
lative legitimacy for their entrepreneurial activities (Choi & Perez, 2007;Wetzel & Luciano,
2017). Similarly, the reactive formalizing pathway leads to organizational advantages in terms of
regulative legitimacy, performance, innovation capacity, and growth (Bu & Cuervo-Cazurra,
2020;Siqueira et al., 2016). Nevertheless, pursuing these two formalizing pathways is far from an
obvious decision in those contexts characterized by high corruption, crime, and low levels of
confidence in the government (Cavotta & Dalpiaz, 2022;Sutter et al., 2013). Future studies could
focus specifically on how different boundary conditions lead to different formalization decisions,
as well as what outcomes they have in terms of regulative legitimacy, efficiency, and productivity.
Furthermore, the informalizing pathway leads to organizational advantages in the short run
(e.g., shelter from criminals, flexibility of hiring, and firing decisions) but disadvantages in terms
of performance, innovativeness, and growth in the long run (Ullah et al., 2019). Future research
could explore how entrepreneurs evaluate the main organizational outcomes and stakeholder
expectations when pondering formalization versus informalization decisions. This may lead to
important theoretical advances and recommendations for policymakers, including formalization in
their agendas.
Researching the Outcomes of Formalizing and Informalizing at Individual Level
Despite being less investigated than the outcomes at societal and organizational levels, outcomes
at an individual level, for example, in terms of well-being, autonomy, and self-realization, are
starting to attract attention in the literature. On the one hand, formalizing leads to acquisition of
leadership skills (Musara & Nieuwenhuizen, 2020) and bridging capital (Dolan & Rajak, 2016).
On the other hand, informalizing has relevant individual-level outcomes for women entrepreneurs,
in terms of positive family work–life balance, autonomy, and independence (Delacroix et al.,
2019;Espinal & Grasmuck, 1997;Xheneti et al., 2019b). Understanding how informalizing leads
to self-realization and well-being (Shir & Ryff, 2021) may help shed light on the cognitive
mechanisms underlying informalization decisions, especially for women, and to develop holistic
formalization programs including important dimensions, such as women well-being, self-
realization, and autonomy. Beyond this, future research could explore also the dark side of re-
active formalization as well as informalization decisions at an individual level, such as in terms of
human and social capital loss for the individual entrepreneur.
Moreover, future research could shed light on how individual entrepreneurs perceive them-
selves during and after engaging in the proactive formalizing pathway. For example, entrepre-
neurial identity and perception of self-realization may change over time for those informal
entrepreneurs who bring about institutional transformations. Thus, future research could draw on
identity theories (Radu-Lefebvre et al., 2021) to understand the cognitive consequences of the
proactive shift from an informal to a formal entrepreneurial identity.
Implications for Theory and Practice
Theoretical Contributions
Our integrative review makes three main contributions to the literature on IE. First, we introduce a
novel comprehensive typology that shows the prevalence of four different types of informal
entrepreneurs, based on their levels of informality and socioeconomic status, namely, the informal
poor, the informal affluent, the semi-formal poor, and the semi-formal affluent. As a result of our
22 Entrepreneurship Theory and Practice 0(0)

analysis, our typology shows that the four types are present in different economies around the
globe. Therefore, the mainstream entrepreneurship literature, by tending to focus exclusively on
formal entrepreneurship, risks neglecting a very important phenomenon. More specifically, the
study of formal entrepreneurship implies a very high level of formality, although the different
shades of informality characteristic of a large portion of entrepreneurial activities around the world
should not be ignored. Thus, if we aim to conduct entrepreneurship research which truly embraces
both diversity (Welter et al., 2017) and context (Baker & Welter, 2020), and which could also lead
to greater advances in theory and practice (McGahan, 2012), we should pay more attention to the
inherent heterogeneity of IE.
Second, moving from a static to a dynamic perspective of IE, we shed light on three unique
pathways pursued by the various types of informal entrepreneurs in order to reach either higher or
lower levels of informality, while at the same time acquiring or foregoing regulative legitimacy:
the reactive formalizing, the proactive formalizing, and the informalizing pathways.
Third, we bring synthesizing coherence (Locke & Golden-Biddle, 1997) to the field