Informality, innovation, and firm performance : evidence from World Bank Enterprise Survey in India, 2013-2014

This paper re-examines the relationship between informality, innovation and frm performance by analysing frm data from the World Bank Enterprise Survey of India, 2013-2014. We examine whether a frm's informality, defned by its unregistered status at the time of beginning operations and longer years of being informal, is related to innovation and frm performance while controlling for various frm characteristics and contextual factors. Employing Probit model for innovation outcomes and Tobit model for frm performance and controlling for frm-specifc and contextual factors, we fnd that frms beginning as informal and remaining unregistered for prolonged periods are more likely to introduce new products and processes, leading to superior performance compared to formal counterparts. These fndings indicate that weak enforcement of registration laws and the advantages of delayed formalization-such as reduced compliance costs and lower regulatory risks-can incentivize informality. This research underscores the need for industrial and innovation policies that lower entry barriers for informal frms while enhancing the perceived benefts of formality, to foster innovation and inclusive economic growth.