Are Formal And Informal Small Firms Really Different?

Abstract

Although informal establishments dominate the small firm-segment in Kenyan manufacturing, there are also formal companies with distinct characteristics. Informal firms are younger, less capital-intensive, almost never run by Asians, pay less skilled wages and no taxes, have poor access to credit and have less educated managers. They invest more often and are less efficient than Asian-managed formal firms, but more efficient than those managed by Africans. This suggests that formality status, independent of size, matter. Also important is how ethnicity affects these differences and the graduation of firms from the informal to the formal sectors.