Similar to many other low-income economies, much of the economic activity in Mozambique takes place unregistered. In 2018, the World Bank estimated that 80% of the Mozambiquan labour force is employed in the informal economy. Having long researched the dynamics of the informal economy in Africa, Rotterdam School of Management professor Caroline Witte was part of the first round of Djampa’s Train the Trainer, where she shared the following insights of her academic work, inspired by the fruitful discussions with the participants:  

Entrepreneurs are more likely to operate in the informal economy when cumbersome government regulations and poorly protected property rights regimes prevent them from doing otherwise. In the Mozambiquan context, the World Bank (2020) estimates that entrepreneurs need to complete up to 10 different procedures to register their enterprise and that the cost of doing so can easily exceed the country’s average yearly income.

During the train the trainer session, the participants were quick to highlight the difficulties in the registration process in Mozambique. While completing registration can be demanding for entrepreneurs, operating informally also comes with several challenges. Without formal registration, entrepreneurs operate illegally and thus open themselves up for prosecution and high levels of corruption. In addition, informal entrepreneurs have limited access to important resources, such as bank loans and high-skilled labour.

Many of the participants in the Train the Trainer session recognised the difficulties associated with informal operations. One of them mentioned how informal entrepreneurs are not protected by formal legal institutions. In light of these challenges, the United Nations, emphasises the formalisation of enterprises as part of the 8^th Sustainable Development Goal on good jobs and economic growth.

Sustainable Development Goal 8.3: “Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services.” (UN, 2016: 92)

In my own research (2022), I find that African enterprises that formalise at a later point in time are more likely to grow internationally than enterprises that register at the time of their establishment. One explanation for this is that with less ‘red tape’ compared to enterprises that register at the time of their establishment, those that started informally can more freely improve product quality and enhance business models.

In the end, it will depend on the specific situation whether and when enterprise formalisation is beneficial for the entrepreneur. Entrepreneurs can add value to society, irrespective of whether they completed the registration process. However, if enterprises want to scale-up and increase their market share, formalisation becomes unavoidable.

This raises the question: ‘What’s the role of entrepreneurship education and incubation in the process of formalisation?’. Should an incubator like Djampa push entrepreneurs to register? Probably not. The decision to formalise is ultimately up to the individual entrepreneur that knows the ins and outs of their business model. Instead, incubators can support entrepreneurs in the formalisation process by providing guidance and information.

Reach out to us via education@ece.nl for more info about the project.

References

Larsen, M. M., & Witte, C. (2022). Informal Legacy and Exporting Among Sub-Saharan African Firms. Organization Science, Forthcoming.