Migration, business formation, and the informal economy in urban Mexico

Although the informal economy has grown rapidly in several developing nations, and migration and informality may be related to similar types of credit constraints and market failures, previous research has not systematically attempted to identify if migrant households are more likely to start informal and formal businesses alike and if this association varies across local contexts. We examine the relationship between prior US migration and the creation of both formal and informal businesses in urban Mexico using several criteria to indirectly assess sector location. We use data from 56 communities from the Mexican Migration Project to estimate multilevel survival and nonmultilevel competing risk models predicting the likelihood of informal, formal, and no business formation. The recent return migration of the household head is strongly associated with informal business creation, particularly in economically dynamic areas. On the other hand, migrants are only marginally more likely to start formal businesses in highly economically dynamic sending areas.

► Migration experience is strongly associated with informal business creation.
► Migration particularly contributes to formal ventures in economically dynamic places.
► Migration may contribute to formal business formation, but only in highly dynamic areas.
► Informal businesses were more dependent on community level contextual factors.
► Formal businesses were more dependent on capital and socioeconomic status.