Informal entrepreneurs and formalisation: insights from a role identity transition lens

Dr Manto Gotsi from the Department of Management is exploring the barriers to entrepreneurship in developing economies. She explains her findings from research into the formalisation of waste pickers in Cali, Colombia.Entrepreneurship in Colombia

Entrepreneurial development is viewed as an engine for economic growth in developing economies. However, these same economies are faced with high numbers of informal entrepreneurs: choosing entrepreneurship out of necessity rather than opportunity, these individuals operate on a small scale, are low-skilled and often marginalised.

In many developing economies, informal entrepreneurship, that is, monetary transactions not declared to the state for tax benefit and/or labour law purposes, but which are legal in all other respects, accounts for up to 60% of GDP. Informal entrepreneurs are viewed as unfair competition to formalised entrepreneurs, with the risk of stifling economic growth. These workers also face a lack of protection and are at risk of exploitation, since they are operating outside of the law.

However, despite growing efforts to influence formalisation, informal entrepreneurs are exceptionally persistent. Alongside my colleagues Dr Maria Granados and Dr Ainurul Rosli, I wanted to find out why this is the case.

This missing micro focus

Prior to our research, studies on formalisation have focused predominantly on institutions; aiming to stimulate entrepreneurs to formalise through direct controls on their actions, alongside education and appeals to raise awareness of the benefits for the individual.

Formalisation has typically been conceived of as a destination rather than a journey (Burton, Sørensen and Dobrev, 2016). We took an alternative view, understanding the process as a continuum, whereby an informal entrepreneur undergoes a role identity transition.

For this transition to take place, an individual must adopt new skills, attitudes, behaviour and patterns of interpersonal interactions, while maintaining some sense of self-continuity. They may require external resource and validation from their peers in order to legitimize their position. A successful role identity transition will result in internalization of this new identity; an alternative outcome is role abandonment.

Our research

Our research took us to Cali, Colombia, where informal waste pickers have been carrying out recycling activities for over one hundred years. For the past thirty, they’ve been relying on the Navarro landfill; collecting recyclable materials to transport and sell to intermediary informal warehouses. When Navarro was closed due to environmental concerns, a new law prohibited waste pickers from working in sanitary landfills and from recuperating recyclables from trash bags and transporting them in non-motorized vehicles. Following an intervention from CIVISOL Foundation, the Colombian Constitutional Court recognized the marginalized status of these waste pickers and granted them formal entrepreneur status.

Surprisingly, despite this change in the law, by no means all waste pickers became and stayed formal entrepreneurs. Some became paid workers instead of entrepreneurs, while others chose to continue as renegades outside of the system. There was also evidence of individuals moving back and forth between these options, with many entry and exit points on the road to formal entrepreneurship.

Through our interviews with waste pickers in Cali, we found that those who had successfully transitioned to formal entrepreneurs in what we see as a ‘virtuous cycle’ had in common a high sense of calling that enabled them to adopt the formal entrepreneurial identity. In addition, they were comparatively less concerned about receiving validation from their peers and wider society.

Those who became renegade waste pickers also did not feel a strong need for external recognition, however they didn’t feel the same calling, so didn’t adopt the formal entrepreneur identity. Similarly, although those who became paid workers had access to information and resources, they couldn’t see themselves in the role of formal entrepreneur.

How to encourage virtuous cycles

Our research tells us that granting formal status to marginalized workers is necessary, but not sufficient for sustained formalisation. It is essential to take into consideration the norms, values, beliefs and struggles of informal entrepreneurs, and encourage role identity development through information initiatives and social network support. People who felt a calling and could visualise themselves in the role were more likely to remain in formalised status.

In order to create more external support, there should also be campaigns to motivate local government, local business communities and broader civil society to recognize and support the formalisation journey.

All this needs to take place before, during and after role transition to ensure more people stay in formalised roles.

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