Does Starting Up Informal Affect the Adoption of Foreign Technology in the Emerging Economies?
Abstract
Informality has become a prevailing feature of most emerging economies. Informality cost has become a major concern for many scholars. We assess the impact of initial informal status on the adoption of foreign technology by formal sector firms. The main hypothesis tested is that firms that started up informally are less likely to adopt foreign technology even after becoming formal. We use firm-level data from the World Bank Enterprise Survey for a large cross-section of emerging economies during the period 2006-2020. Our findings show that the beginning informal has a negative and persistent effect on adopting foreign technology even after formalization. Moreover, we find some moderating factors that reduce the persistence of informality costs. We find that exporting activities, firm productivity, skill intensity, and foreign ownership are important moderating factors that can alleviate the negative impact of beginning informal on the adoption of foreign technology. Our findings are robust to a range of firm and country characteristics, alternative econometric specifications, and checks for endogeneity issues.