Unpacking the negative impact of initial informality on innovation: The mediating roles of investments in R&D and employee training

Abstract

This study examines how initial informality negatively affects firm innovation by identifying the underlying mechanisms. We argue that due to persisting resource allocation patterns developed during their informal years, firms with initial informality (i.e. firms started operation without registration) tend to allocate resources to transactions certain to deliver gains and essential to survival. Hence, these firms are less likely to engage in innovation-related investments, specifically research and development (R&D) and employee training. Using data from the World Bank Enterprise Survey, we analyze firms from 30 countries in Sub-Saharan Africa. The empirical evidence supports our hypotheses that investments in R&D and employee training mediate the negative relationship between initial informality and innovation. Theoretical as well as policy and managerial implications are discussed.