The effect on innovation of beginning informal: Empirical evidence from Kenya

We analyze firm-level data from a survey conducted in Kenya in 2013 referring to innovation activities in the 2010-12 period. We use the data to study the impact on a firm's innovation decisions of the firm beginning operations as an informal firm, specifically on technological innovativeness, which comprises the introduction of new products and processes, marketing innovativeness, organizational innovativeness, and on the importance of obstacles to technological innovation. We find past informality status to negatively affect technological innovativeness, with the effect persisting as we leave out relatively younger firms. We find that the difference lies especially on process innovations. Regarding obstacles to innovation, we find that beginning operations in the informal sector mostly affects a firm's perceptions on the need to innovate. We interpret this result as suggestive of the existence of severe informational disadvantages of firms that began informally and eventually transitioned to formality relative to firms that began in the formal sector.