Necessity vs. Opportunity Entrepreneurs in the Informal sector (Short Note)

Mohammad Amin, Enterprise Analysis Unit, FPDEA, World Bank

Abstract

Some informal businesses are started to take advantage of business opportunities (opportunity firms) while others are started because the owner cannot find a satisfactory job (necessity firms). Comparing opportunity vs. necessity informal firms, this note finds that opportunity firms are more efficient and larger. They are also more likely to use external finance, and suffer less from infrastructure bottlenecks such as power outages. The key point in all these differences is that they apply to the manufacturing sector alone. With the exception of having more educated managers and more businesses located outside than inside household premises, opportunity firms in the service sector are not too different from the necessity firms in the same sector. In short, the motivation for starting a business matters for informal manufacturing but not much for service firms.