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Does Informal Competition Reduce Firm-Provided Worker Training among Formal Manufacturing SMEs in Sub-Saharan Africa?
This paper investigates the impact of informal competition-defined as competition faced by formal firms from informal enterprises-on the firm-provided worker training among formal manufacturing small and medium-sized enterprises. Using a representative dataset of small and medium-sized manufacturing firms in 23 Sub-Saharan African countries, a sizable negative impact is found. A one-standard-deviation increase in informal competition reduces the probability that a firm offers training to its workers by 8.7 to 12.9 percentage points, relative to the sample mean of firms that offer training of approximately 25 percent. Comparable declines are observed in the share of workers receiving training. To address potential endogeneity, the paper employs several complementary strategies. First, an instrumental-variables strategy leverages variation in the number of children aged 0-4 and 5-9 years per working-age woman to generate exogenous shifts in informal competition. Second, heterogeneity is examined through tests derived from the “legalist” view of informality, which predicts bigger adverse effects of informal competition in environments characterized by a weaker rule of law and more stringent business regulations. Third, information about firms in other world regions is used to construct out-of-sample predictions of informal competition at the sector level. The findings suggest that informal competition is a substantial constraint on the training investments of formal firms, underscoring the need for policy responses that mitigate its adverse consequences.
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