1 ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1, 2009, pp 000000

Entrepreneurship and the informal

sector
Some lessons from India
Anjula Gurtoo and Colin C. Williams
Abstract: This paper critically evaluates the popular structuralist
representation of informal workers as marginalized populations who work
as dependent employees out of economic necessity and as a last resort.
Reporting on an empirical survey of 1,518 informal workers in India, it
reveals not only that a large proportion work on their own account as
informal entrepreneurs, but also that not all do such work purely out of
economic necessity and in the absence of alternative means of livelihood.
The paper concludes by calling for a wider recognition of the opportunity-
driven entrepreneurial endeavour of many working in the informal sector.
Keywords: informal economy; shadow sector; underground economy;
self-employment; entrepreneurship and economic development; India
Dr Anjula Gurtoo is Assistant Professor in the Indian Institute of Science, Bangalore 560 012, India.
E-mail: anjula@mgmt.iisc.ernet.in. Colin C. Williams is Professor of Public Policy at the School of
Management, University of Sheffield, 9 Mappin Street, Sheffield S1 4DT, UK.
E-mail: c.c.williams@sheffield.ac.uk.
It is now widely accepted that the informal sector is a
persistent and even growing feature of the contemporary
global economy. When explaining who engages in this
informal sector and the nature of their work, a common
tendency has been to portray the informal sector as
providing income-earning opportunities for the poor and
informal work as low-quality waged work (Chaudhari
and Banerjee, 2007; ILO, 2002a; Nelson and Bruijn,
2005). Such work is depicted as degrading, dependent
employment of a highly casual and unstable nature in
which workers toil for long hours in poor conditions
with little, if any, legal and social protection (Chen et al,
2002; ILO, 2002a; Kapoor, 2007). The aim of this paper
is to evaluate critically this dominant structuralist
reading that informal work is low-quality waged work
conducted in subordinated economic units serving the
competitiveness of larger firms and that informal
workers are marginalized populations who do such work
out of economic necessity in the absence of alternative
means of livelihood.
To achieve this, first, a brief review is provided of the
literature on informal work and informal workers. This
will reveal that although this structuralist reading of the
informal sector has begun to be transcended when
representing its nature in some Western and post-
socialist nations, it remains a resilient perspective when
portraying informal work and informal workers in Third
(majority) World countries. Second, and in order to
begin to challenge this reading of informal work and
workers in the majority (Third) World, the methodology
underpinning a nationwide survey conducted in 2006/07
in India is introduced, and third, the survey findings are
reported. Finding not only that a large proportion of
informal workers work on their own account as informal
entrepreneurs, but also that not all work is conducted
purely out of economic necessity and as a last resort, the
2
Entrepreneurship and the informal sector
ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
final section will call for wider investigation of the
opportunity-driven entrepreneurial endeavour of many
working in the informal sector through further studies
elsewhere in the Third World.
Before commencing, however, a definition of the
informal sector is required. Reviewing the literature,
three contrasting definitions can be identified, namely
enterprise-, jobs- and activity-based definitions
(Williams and Round, 2008). Although all define the
informal sector in terms of what is absent from or
insufficient about it relative to the formal economy,
enterprise-based definitions denote what is insufficient
or absent from informal enterprises compared with
formal enterprises, jobs-based definitions denote what is
insufficient or absent in informal relative to formal jobs,
and activity-based definitions denote what is insufficient
or absent from informal compared with formal
economic activities.
Enterprise- and jobs-based definitions have until now
dominated studies of Third (majority) World countries,
and both have been used at various times by the
International Labour Organization (ILO) to seek an
international standard definition (for example,
Hussmanns, 2005; ILO, 2002a,b,c, 2007). In recent
years, however, activity-based definitions have become
more prominent, with the most frequently adopted being
the definition published in 2002 by the Organisation for
Economic Cooperation and Development (OECD), the
International Monetary Fund (IMF), ILO and the
Interstate Statistical Committee of the Commonwealth
of Independent States (CIS STAT) as a supplement to
the System of National Accounts (SNA) 1993. This
defines the informal sector as,
all legal production activities that are deliberately
concealed from public authorities for the following
kinds of reasons: to avoid payment of income, value
added or other taxes; to avoid payment of social
security contributions; to avoid having to meet
certain legal standards such as minimum wages,
maximum hours, safety or health standards, etc. . .
(OECD, 2002, p 139).
The difference between informal and formal economic
activities, therefore, is that the income from these
activities is not declared to the authorities for tax, social
security and/or labour law purposes. If an economic
activity possesses additional differences, it is not
generally defined as part of the informal sector. For
example, if the product and/or service is also illegal (for
example, in drug-trafficking), it is separately defined as
a criminal activity, while if it is unpaid, it is defined as
unpaid community work if a household member
engages in unpaid work for a member of a household
other than his or her own, or self-provisioning if a
household member engages in unpaid work for him- or
herself or another member of his or her household.
Entrepreneurship and the informal sector
Two separate sets of literature are potentially interested
in the relationship between entrepreneurship and the
informal sector. On the one hand, there is the large and
growing literature on entrepreneurship and on the other
hand, the equally voluminous and burgeoning literature
on the informal sector.
First reviewing the entrepreneurship literature, it
rapidly becomes apparent that little has been written on
the engagement of entrepreneurs in informal work. For
the major part, and as Williams (2006, 2008) and Jones
and Spicer (2005) explain, this is doubtless because the
subject of entrepreneurship has been dominated by a
wholesome, virtuous and positive portrayal of the
entrepreneur as an economic hero, or even a super-hero
(Burns, 2001; Cannon, 1991). The result is that types of
entrepreneurship failing to conform to this ideal have
been either placed outside the boundaries of
entrepreneurship, ignored, depicted as temporary or
transient, or asserted to have little or nothing to do with
mainstream entrepreneurship. Hence scant attention has
been paid to informal entrepreneurs in the
entrepreneurship literature. Recently, however, this has
begun to change as it has been increasingly recognized
that it is important to understand the lived practices of
entrepreneurs better (Small Business Council, 2004;
Williams, 2006, 2007a,b,c, 2008). This small emergent
literature on entrepreneurship and the informal sector,
however, is not the major source of knowledge on
informal entrepreneurship.
In the large and rapidly growing literature on the
informal sector, and in stark contrast to the literature on
entrepreneurship, investigating the relationship between
entrepreneurship and the informal sector has moved ever
more centre stage. Conventionally, the study of the
informal sector was dominated by the structuralist
school of thought, which depicts the informal sector as
absorbing surplus labour by providing income-earning
opportunities for the poor (Chaudhari and Banerjee,
2007; Nelson and Bruijn, 2005). From the perspective of
this school of thought, informal work takes place in
subordinated economic units that serve the competitive-
ness of larger firms, and informal workers engage in this
low-paid waged work out of economic necessity and in
the absence of alternative means of livelihood (Chen et
al, 2002; ILO, 2002a,b,c; Kapoor, 2007).
Over the past decade or so, however, this depiction
has largely been transcended. It is now recognized that a
large proportion of jobs are in the informal sector in
Entrepreneurship and the informal sector
3 ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
most countries and global regions: 48% of non-
agricultural employment in North Africa, 51% in Latin
America, 65% in Asia and 72% in Sub-Saharan Africa
(ILO, 2002b). Contrary to the structuralist depiction of
informal work as waged employment, however, it has
been revealed that a large proportion is conducted on a
self-employed basis: 70% in Sub-Saharan Africa, 62%
in North Africa, 60% in Latin America and 59% in Asia
(ILO, 2002b). Rather than viewing informal workers as
low-paid waged employees working under sweatshop
conditions, therefore, such workers have been widely
re-conceptualized as entrepreneurs displaying
entrepreneurial attributes, traits and qualities.
This more entrepreneurial re-reading of the informal
sector first emerged in a majority (Third) World context
(Cross, 2000; Cross and Morales, 2007; De Soto, 1989,
2001; ILO, 2002a; Rakowski, 1994). As the ILO (2002a,
p 54) asserts, the informal sector represents an
incubator for business potential and . . . transitional base
for accessibility and graduation to the formal economy
and informal entrepreneurs display real business
acumen, creativity, dynamism and innovation. In recent
years, however, this depiction of the informal sector as a
hidden enterprise culture has also begun to take hold in
Western economies and post-socialist societies (Evans et
al, 2006; Katungi et al, 2006; Lazaridis and
Koumandraki, 2003; Llanes and Barbour, 2007; Renooy
et al, 2004; Round and Williams, 2008; Round et al,
2008; Snyder, 2004; Williams 2004, 2006). Until now,
however, most informal entrepreneurs have been widely
believed to be necessity-driven. However, this assigning
of necessity motives to informal workers in general and
informal entrepreneurs in particular, has been based on
assumption, not evidence.
Informal entrepreneurs motives
Over the past few decades, various conceptual frame-
works have been used in the entrepreneurship literature
to explain engagement in entrepreneurial endeavour.
Recently, however, one particular classificatory scheme
has become dominant. Building on the work of
Bgenhold (1987) who distinguishes between
entrepreneurs motivated by economic need and those
driven by a desire for self-realization, the common
tendency has been to distinguish between necessity
entrepreneurs pushed into entrepreneurship and
opportunity entrepreneurs pulled into this endeavour
out of choice for example, to exploit some business
opportunity (Aidis et al, 2006; Harding et al, 2006;
Maritz, 2004; Minniti et al, 2006; Perunovi, 2005;
Reynolds et al, 2002; Smallbone and Welter, 2004). This
structure/agency dichotomy between reluctant
entrepreneurs who had never considered starting a
business until they were pushed into this endeavour as a
survival strategy in the absence of alternatives, and
willing entrepreneurs pulled into entrepreneurship out
of choice for example, due to the desire for
independence or to own a business, has moved ever
more centre stage. One major reason for this is that this
necessity/opportunity dichotomy has been adopted by
the Global Entrepreneurship Monitor (GEM) survey,
which in 2005 covered 35 countries and is now perhaps
the principal global data source on entrepreneurship
(Minniti et al, 2006).
Although this necessity/opportunity dichotomy has
been popular when depicting the motives of legitimate
or formal entrepreneurs, when it comes to informal
entrepreneurs motives, fewer studies have been
conducted. Instead, and as Travers (2002, p 2) puts it,
most research on the informal economy gives short
shrift to the motivations of people to do this work. It is
usually said that people do the work to earn extra money
and left at that. Informal entrepreneurs, therefore, have
been widely assumed to be necessity-driven, pushed into
this realm by their inability to find employment in the
formal economy and pursuing such work as a survival
strategy (for example, Castells and Portes, 1989; Gallin,
2001; ILO, 2002). From street-sellers in the Dominican
Republic (for example, Itzigsohn, 2000) and Somalia
(Little, 2003), through informal garment businesses in
India (for example, Das, 2003; Unai and Rani, 2003)
and the Philippines (Doane et al, 2003), to home-based
micro-enterprises in Mexico (Staudt, 1998) and
Martinique (Browne, 2004), the consensus has been that
this sphere is entered out of necessity as a survival
strategy (for example, Itzigsohn, 2000; Otero, 1994;
Rakowski, 1994).
In recent years, however, a few studies in both the
advanced Western economies and the post-socialist
transition economies have begun to unravel the motives
of informal entrepreneurs. The outcome is that the
representation of informal entrepreneurs as necessity-
driven has started to be challenged (Gerxhani, 2004;
Snyder, 2004; Williams, 2007a,b,c, 2008). As Gerxhani
(2004, p 274) asserts in relation to Western nations,
informal entrepreneurs:
choose to participate in the informal economy
because they find more autonomy, flexibility and
freedom in this sector than in the formal one. In other
words, participants have the freedom of operating
their own business; they have flexibility in
determining hours or days of operation; they can use
and develop their creativity.
Until now, however, this more agency-oriented depiction
of informal entrepreneurs motives has been argued
solely in relation to Western and post-socialist econo-
4
Entrepreneurship and the informal sector
ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
mies. In a majority (Third) World context, with the
notable exceptions of studies by Cross and Morales
(2007), De Soto (1989) and Maloney (2004) in Latin
America, informal entrepreneurs have been widely and
continuously portrayed as necessity-driven. Below,
therefore, we report on one of the first surveys to
evaluate critically this assumption of the necessity-
driven nature of informal entrepreneurship in a Third
World context.
Evaluating the informal sector in India
What is the magnitude of the informal economy in
India? Who engages in such work? Moreover, what type
of work do they conduct and why do they work in the
informal sector? Until now, most of the emphasis in the
literature has been on measuring the magnitude of the
informal sector. The National Sample Survey (1999
2000) conducted by the Indian government and several
additional surveys (Rodrik, 1997; Planning Commis-
sion, 2001; Chen et al, 2002; Dev, 2000; Marjit, 2003;
Chaudhari and Banerjee, 2007) all reveal that the
informal sector is both large and expanding. Indeed,
estimates reveal that some 93% of the Indian workforce
is employed in the informal sector (Economic Survey of
India, 200405; Kapoor, 2007). That is, out of the total
workforce of 397 million, just 28 million are employed
in the formal sector (National Sample Survey, 1999
2000).
Contrary to the widespread assumption that the
informal sector is a marginal or peripheral activity,
therefore, these Indian surveys reveal that it is the
formal economy that is the marginal realm and the
informal sector is the mainstream economy. Until now,
however, and despite numerous studies of its
magnitude, rather fewer have sought to understand the
informal sector in terms of the nature of the work
conducted, who conducts it and why they engage in
such work. Instead, the widespread assumption has been
that informal workers are excluded from the formal
labour market and that they work in this sphere out of
economic necessity and in the absence of alternative
options.
Methodology and research design
To evaluate critically this conventional structuralist
depiction of informal workers and informal work in
India, a survey was designed to find out who engages in
informal work and why they do so. This survey
composed of face-to-face interviews using a structured
questionnaire was carried out during 2006 and 2007.
Face-to-face interviews were used not only because of
the sensitive subject matter being investigated, but also
because of the low literacy levels amongst the survey
respondents, meaning that it was the only practical way
of collecting data.
The survey was designed to include interviews with a
wide range of own-account and waged workers,
technical, semi-skilled and unskilled workers, to ensure
equal representation of both genders, and to cover two
occupations that displayed at least some evidence of
unionization. In order to ensure a fair representation
throughout India, the sample was taken from across the
country and covered a range of location types from large
urban areas through small cites to rural areas. The only
constraint so far as collecting a representative national
sample was concerned was that we had to focus on
locations where one could find trustworthy data
collection agents, who were comfortable with speaking
English as well as the local language.
The sample design was stratified random sampling,
with convenience sampling at the location level. This
involved stratifying the sample into a number of non-
overlapping sub-populations, and then sample points
were selected from each stratum. At the outset, the
decision was taken to survey eight occupations, namely
carpenters, mechanics, cobblers, rickshaw drivers (hand-
driven and motorized), house helps or maids, vegetable
and fruit vendors or hawkers, helpers in small shops or
commercial establishments, and office helps or peons. In
total, 1,700 people working in such occupations were
interviewed over a period of seven months. At the
outset, it needs to be stated that this survey does not
provide a representative national survey of either the
Indian workforce or even informal sector workers.
Nevertheless, it does provide data on a cross-section of
various types of informal sector workers in this
developing nation, and is one of the first surveys to
evaluate the nature of informal work and informal
workers in India.
Findings
Contrary to the conventional structuralist depiction of
informal workers as largely waged workers, this study
reveals that this is not the case. A significant proportion
of the informal workforce in India is working on an
own-account basis. Our nationwide random sampling
survey reveals that 49% of informal workers are work-
ing on their own account, 30% as daily wage workers
and just 21% as waged employees (see Table 1). Given
that informal sector jobs account for some 93% of all
jobs in India (Economic Survey of India, 200405;
Kapoor, 2007), the strong implication is that own-
account workers form a large proportion of not just the
informal labour force but of the Indian labour force in
general. Indeed, this finding is reinforced by the 2004
Global Entrepreneurship Monitor, which revealed more
than 107 million people in India were actively seeking
Entrepreneurship and the informal sector
5 ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
Table 1. Monthly income levels from employment.
Income N Minimum Maximum Mean
Self-employed 311 1,500.00 50,000.00 7,068.32
Waged employee 131 2,000.00 10,000.00 2,559.17
Daily wagers 193 1,000.00 10,000.00 3,882.69
to establish a new business. Indeed, in the period 2000
02, an average of 15 out of every 100 Indians were
aiming to be entrepreneurs (GEM, 2003).
Neither is all informal work low-paid. Table 1
documents the existence of significant variations in
income levels across the different types of informal
work: namely, daily earners, waged employees in
organizations and the self-employed. While the average
monthly income was about Rs3,880 for daily wagers
and Rs2,560 for waged employees, the self-employed
earned Rs7,000 on average per month. As Table 2
demonstrates, these wages of the informal self-
employed are statistically significantly higher than the
wages paid to informal waged employees and daily
wagers.
This is not the only difference between these three
groups of informal sector workers. As Table 3 reveals,
the self-employed differ from the other two groups in at
least three important respects. First, and unlike the other
two groups (that is, daily waged workers and waged
employees), the self-employed did not note job
insecurity as an important concern. Second, they were
not looking for alternative employment; and finally, they
were happy to work in their current job/profession. The
strong implication, therefore, is that even if daily waged
workers and waged employees might be working in the
informal sector out of necessity and as a last resort, this
certainly does not appear to be the case for the informal
self-employed.
Table 4 further reinforces this notion that not all
informal workers are employed in this sector out of
necessity and because no other options are available to
them. It compares the results of responses with a range
of normative statements using a 5-point Likert scale
from strongly agreeing to strongly disagreeing.
Analysing whether the differences in motivation were
statistically significantly between these different groups
of workers, Table 4 reveals that the self-employed were
Table 2. Monthly income levels: test of significant
difference.
Income No T Sig
Self-employedwaged employees 130 1.83 0.041
Self-employeddaily wagers 192 1.75 0.037
Table 3. Motives and concerns for different employment
categories.
Indicators Daily Waged Self-
wager employee employed
Job is not sufficiently varied _ X
Worry about job security X
Sufficient energy to do the job
Find training for the job worthwhile X X
Happy to work in this profession _ X
Confident will get money on time X
Lack of alternative employment X
Confident earnings will keep up
with costs X X
# marked by at least 50% of the respondents; indicates no
clear trend.
Table 4. Test of significant difference between categories of
informal worker on select parameters.
Indicators Daily Waged Self- Sig
wager employee employed level
(mean) (mean) (mean)
Happy to work in this
profession 3.18 3.66 1.16 0.000
Lack of alternative
employment 1.56 1.78 2.53 0.000
Confident earnings will
keep up with costs 3.46 3.66 2.65 0.000
Community support among
people working in same
location 1.75 2.32 1.85 0.008
Higher social status 2.37 3.02 1.59 0.000
significantly happier than daily waged workers and
waged employees to work in their jobs and were
significantly less likely to be looking for alternative
means of livelihood beyond their current employment.
They were also more likely than the other groups of
workers to believe that their earnings from this informal
work would keep up with inflation. In addition, they
wanted their work to provide them with high social
standing. Indians are often said to live in a high context
culture (Hall, 1976) that values interpersonal relation-
ships and social recognition/acknowledgment impacts
(Hoecklin, 1995; Samovar and Porter, 1988). Formal
work in a structured setting is seen as socially superior
to informal sector work that is organized on informal
lines. This is reflected here in the informal
entrepreneurial desire for higher social recognition.
These results are important. They explicitly reveal
that informal workers in general and the informal self-
employed in particular do not engage in informal work
purely out of economic necessity and due to the absence
of alternative means of livelihood. In sum, these
empirical data raise doubts over whether the structuralist
depiction of informal work and informal workers
6
Entrepreneurship and the informal sector
ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
provides an accurate portrayal of the informal sector in
developing countries such as India when it depicts
informal sector workers as marginalized groups
engaged in such endeavour out of necessity and as a last
resort.
Indeed, the finding of this survey that not all informal
entrepreneurs in India are necessity-driven is
corroborated by the 2002 GEM survey of legitimate
entrepreneurship. Although this global survey noted a
higher incidence of necessity entrepreneurship in less
developed countries, it nevertheless found that in India
some 66% of respondents were opportunity
entrepreneurs and only 27% of respondents were
starting up businesses out of necessity. As 93% of all
jobs in India are in the informal sector, this survey
would therefore have covered many informal
entrepreneurs, even if this was not noted in the GEM
results. It thus reinforces the finding of our own survey
that many informal entrepreneurs in India appear to be
opportunity-driven and operating informally not out of
necessity, but due to the ease and comfort of operating
in this system.
Who, therefore, are these informal entrepreneurs,
many of whom seem to display a preference for working
in the informal sector? What type of work do they
conduct? Why do they work in the informal sector? And
what do they view as the advantages and disadvantages
of working in this sphere? Starting with the issue of the
type of work conducted by these informal entrepreneurs,
about 75% worked in retail jobs (for example, vending
of fruits, vegetables, tea, etc), and about 50% had been
educated to high school or graduate level. They were
relatively young, with an average age of 33 years.
Investigation of what encouraged these self-employed to
work in the informal sector, and what they identified as
the advantages of working in this sector, reveals that
62% asserted that it enabled them to establish their
fledgling enterprise at minimal cost, whilst a further
22% stated that it provided them with flexibility over
their work schedules, and another 21% asserted that they
had received community support among the people
living in the area and others in their industry/profession
to establish their enterprise on an informal basis. The
disadvantages of working in the informal sector,
meanwhile, were stated to be the irregular income (cited
by 30%) and the lack of social protection/benefits
(29%).
Conclusions
This paper has reported the results of one of the first
known surveys on the nature of informal work and the
motivations of informal workers in India. In much of the
recent literature on legitimate entrepreneurs motives, a
distinction has been drawn between reluctant
entrepreneurs pushed into entrepreneurship because all
other options for work are absent or unsatisfactory, and
willing entrepreneurs pulled into entrepreneurship
more out of choice (Harding et al, 2006; Maritz, 2004;
Minniti et al, 2006; Perunovi
/
c, 2005). Conventionally,
informal entrepreneurs in the Third (majority) World
have been widely depicted as necessity entrepreneurs
working in this sphere as a last resort. Although this has
recently been criticized in relation to advanced Western
economies and post-socialist societies (Evans et al,
2006; Katungi et al, 2006; Lazaridis and Koumandraki,
2003; Llanes and Barbour, 2007; Renooy et al, 2004;
Snyder, 2004; Williams 2004, 2006), until now, few
have evaluated this necessity-driven portrayal of
informal entrepreneurs critically in relation to the
majority (Third) World. In this paper, therefore, the
validity of this assumption has been critically evaluated
in relation to informal workers and entrepreneurs in
India. This has revealed that informal entrepreneurs in
particular and informal workers more generally do not
always work in the informal sector purely out of
economic necessity.
Whether it is also the case in other countries and
global regions that a large proportion of informal
workers work on their own account and not always out
of economic necessity or as a last resort, now needs to
be investigated. In the past, the strong and resilient
belief was that informal entrepreneurs were always
necessity-driven, and governments therefore rejected the
notion of harnessing those operating in the informal
sector so as to promote economic development and
growth. This paper, however, reveals that it is short-
sighted of governments to ignore this large hidden
enterprise culture as a source of entrepreneurship and
entrepreneurial endeavour. If this paper stimulates
further research to be conducted elsewhere in the Third
(majority) World and beyond regarding the nature of
informal work and informal workers, particularly in
relation to entrepreneurship in the informal sector and
whether informal entrepreneurs are always necessity-
driven, then it will have achieved its objective. What is
certain, however, is that informal entrepreneurs in the
majority world can no longer simply be assumed to be
necessity-driven and to be doing so as a last resort, and
therefore ignored.
Acknowledgments
We would like to express our gratitude to Paycheck-
India and the Wage Indicator Foundation in the
Netherlands for funding the survey reported in
this paper. The usual disclaimers, of course,
apply.
Entrepreneurship and the informal sector
7 ENTREPRENEURSHIP AND INNOVATION Vol 10, No 1
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