Economics & Development

This study investigates the impact of competition from informal or unregistered firms on the likelihood of formal manufacturing small and medium-size enterprises obtaining internationally recognized quality certificates. The sample includes 16 countries in Latin America and the Caribbean, one of the regions with the highest levels of informality in the world. The study uncovers a positive impact, with a one standard deviation increase in informal competition leading to an increase in the probability of having a quality certificate by 2.9 to 3.6 percentage points across the different specifications. This effect is large, given that only 10.4 percent of small and medium-size enterprises have a quality certificate. These findings are consistent with the “legalist” model of informality, whereby the positive impact of informal competition on the likelihood of having a quality certificate is significantly larger in countries where the business environment is less favorable to operating in the formal versus informal sector due to factors such as the weaker rule of law and greater regulatory burden on formal firms. The paper provides several layers of checks against omitted variable bias, reverse causality, and measurement errors. The findings also show that, as expected, there is no statistically significant impact of informal competition on the likelihood of having a quality certificate among large manufacturing firms.

This paper empirically examines how standards and technical regulations affect export margins in three African countries at the firm level. The approach involves combining detailed customs transaction data at the firm-product level with bilateral information on non-tariff measures within a gravity model of trade framework. The findings show standards and technical regulations have no impact on the extensive margin of firm-level trade. However, they do diminish trade at the intensive margin in both the agriculture and manufacturing sectors. Small firms are more affected at the intensive margin compared to medium and large firms, and similarly, final goods are more affected compared to inter-mediate goods. Moreover, in the manufacturing sector, firms with initially higher product quality experience a reversal of the trade-reducing effect of standards and technical regulations, whereas in the agriculture sector, this effect is less pronounced for their counterparts. The results also suggest that African exporting firms face equivalent impacts in both regional and global markets.