Informal businesses should be counted as full participants in entrepreneurial ecosystems rather than excluded from them, according to a systematic review published in the International Journal of Entrepreneurship and Small Business. The review argues that policymakers and researchers who treat informal enterprises as a separate category miss how deeply they are woven into the same supply chains, customer bases and local economies as registered firms.
The review synthesizes existing research on informal entrepreneurship, a segment that accounts for a large share of economic activity in developing countries and a persistent presence in developed ones. The International Labour Organization has estimated that more than 60 percent of the world's employed population works in the informal economy, a figure that rises above 80 percent in parts of South Asia and sub-Saharan Africa.
The core argument is that informality is not a temporary stage that businesses pass through on the way to formal registration. Many operators choose to stay informal because registration costs, taxes and regulatory requirements outweigh the benefits they would receive, the review found. Treating them as outside the ecosystem, the authors contend, leads to policies that ignore how these businesses actually operate and compete.
That distinction matters for how governments design support programs. If informal firms are viewed as part of the same ecosystem as formal ones, then training, credit and market-access programs can be built to reach them where they are. If they are treated as a separate problem to be fixed through enforcement, the review suggests, those programs miss the businesses that need them most.
The review also points to the role informal businesses play in job creation. In economies where formal sector employment is limited, informal enterprises absorb workers who would otherwise be unemployed, and they often serve as a training ground where owners build skills before deciding whether to register.
Prior research cited in the review has documented similar patterns in the United States, where informal work arrangements have grown alongside the gig economy. The Bureau of Labor Statistics has reported that a substantial share of American workers hold contingent or alternative work arrangements, many of which operate outside standard employer-employee frameworks.
The review's authors argue that entrepreneurial ecosystem research has largely been built on studies of formal, high-growth startups in wealthy countries, leaving a gap in understanding of how most businesses worldwide actually function. Closing that gap, they write, would require researchers to collect data on informal firms directly rather than inferring their behavior from formal-sector models.
For policymakers, the practical implication is that formalization should be framed as one option among several rather than the only measure of success. The review suggests that reducing the cost and complexity of registration may do more to bring informal businesses into the formal economy than penalties for staying outside it.
