Who is Afraid of Informal Competition? The Role of Finance for Firms in Developing and Emerging Economies

This paper investigates which firms experience the most intense informal competition and highlights the role of access to finance in this context. We use data from the World Bank Enterprise Surveys covering 42,000 firms in 114 countries and take discrete responses on the perceived severity of business obstacles such as informal competition and financial constraints as key variables in our empirical analysis. We find that financially constrained firms face significantly more intense competition by the informal sector and that this effect is economically large. Other influential variables are highly overregulated labor markets, corruption, and firm size. A wide range of robustness checks substantiate these findings.