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Large numbers of shadow economy entrepreneurs in developing countries, according to new report

2014-05-27
(Press-News.org) There are large numbers of entrepreneurs in developing countries who aren't registering their businesses with official authorities, hampering economic growth, according to new research.

Shadow entrepreneurs are individuals who manage a business that sells legitimate goods and services but they do not register it. This means that they do not pay tax, operating in a shadow economy where business activities are performed outside the reach of government authorities. The shadow economy results in loss of tax revenue, unfair competition to registered businesses and also poor productivity – factors which hinder economic development. As these businesses are not registered it takes them beyond the reach of the law and makes shadow economy entrepreneurs vulnerable to corrupt government officials.

In a study of 68 countries, Professor Erkko Autio and Dr Kun Fu from Imperial College Business School estimated that business activities conducted by informal entrepreneurs can make up more than 80 per cent of the total economic activity in developing countries. Types of businesses include unlicensed taxicab services, roadside food stalls and small landscaping operations.

This is the first time that the number of entrepreneurs operating in the shadow economy has been estimated.

The researchers found that Indonesia has the highest rate of shadow economy entrepreneurs, with a ratio of over 130 shadow economy businesses to every business that is legally registered. After Indonesia the highest rates of shadow economy entrepreneurs are found in India, the Philippines, Pakistan, Egypt and Ghana.

In contrast, the UK exhibits the lowest rate of shadow entrepreneurship among the 68 countries surveyed, with a ratio of only one shadow economy entrepreneur to some 30 legally registered businesses.

The researchers also found that the quality of economic and political institutions has a substantial effect on entrepreneurs registering their businesses around the world.

Professor Erkko Autio, co-author of the report, at Imperial College Business School, said:

"Understanding shadow economy entrepreneurship is incredibly important for developing countries because it is a key factor affecting economic development. We found that government policies could play a big role in helping shadow economy entrepreneurs transition to the formal economy. This is important because shadow economy entrepreneurs are less likely to innovate, accumulate capital and invest in the economy, which hampers economic growth."

The researchers suggest that shadow entrepreneurs are highly sensitive to the quality of political and economic institutions. Where proper economic and political frameworks are in place, individuals are more likely to become 'formal' entrepreneurs and register their business, because doing so enables them to take advantage of laws and regulations that protect their company, such as trademarking legislation.

The researchers suggest if India improved the quality of its democratic institutions to match that of Malaysia, it could boost its rate of formal economy entrepreneurs by up to 50 per cent, while cutting the rate of entrepreneurs working in the shadow economy by up to a third. This means that the government could benefit from additional revenue such as taxes.

To create their league table, the researchers combined data from the Global Entrepreneurship Monitor (GEM) and the World Bank.

INFORMATION: Contact: Maxine Myers
Media and Communications Officer- Imperial College Business School
Tel: +44 (0)20 7594 6127
Email: maxine.myers@imperial.ac.uk
Out of hours duty press officer: +44(0)7803 886

Notes to editors:

Download a copy of the report:

http://link.springer.com/article/10.1007/s10490-014-9381-0

Download the league table showing the ratio of informal to formal entrepreneurship occurring in 68 countries

https://icseclzt.cc.ic.ac.uk/pickup.php?claimID=CaaVMWFh4Ws3eWUH&claimPasscode=C5Sv8XZQTMzN6tBq&emailAddr=maxine.myers%40imperial.ac.uk

Claim ID: CaaVMWFh4Ws3eWUH
Claim Passcode: C5Sv8XZQTMzN6tBq

2. About Imperial College London

Consistently rated amongst the world's best universities, Imperial College London is a science-based institution with a reputation for excellence in teaching and research that attracts 14,000 students and 6,000 staff of the highest international quality. Innovative research at the College explores the interface between science, medicine, engineering and business, delivering practical solutions that improve quality of life and the environment - underpinned by a dynamic enterprise culture.

Since its foundation in 1907, Imperial's contributions to society have included the discovery of penicillin, the development of holography and the foundations of fibre optics. This commitment to the application of research for the benefit of all continues today, with current focuses including interdisciplinary collaborations to improve global health, tackle climate change, develop sustainable sources of energy and address security challenges.

In 2007, Imperial College London and Imperial College Healthcare NHS Trust formed the UK's first Academic Health Science Centre. This unique partnership aims to improve the quality of life of patients and populations by taking new discoveries and translating them into new therapies as quickly as possible.

3. About Imperial College Business School

Established in 2003, Imperial College Business School is one of the world's fastest growing business schools with a reputation for excellence in teaching, research and translation.

The Business School is a constituent faculty of Imperial College London, and fully integrated with the College's cutting-edge work in science, engineering and medicine. It offers MBA, EMBA, MSc and PhD executive education programmes.

In 2013 Imperial College Business School announced that it will found the Brevan Howard School of Finance, a new research centre for financial market behaviour, with a £20.1 million donation from Brevan Howard.

Website: http://www.imperial.ac.uk Imperial-PR mailing list Sign up to Imperial Twitter at: http://twitter.com/imperialcollege and http://twitter.com/imperialspark Sign up for Imperial RSS feeds at: http://www3.imperial.ac.uk/imperialnews/RSS_14150300.xml

More news and events online at: http://www.imperial.ac.uk/news


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[Press-News.org] Large numbers of shadow economy entrepreneurs in developing countries, according to new report