Understanding Informal Businesses: Perceived Price Position, Business Practices and Firm Performance

Abstract

The informal sector plays a critical role in the economy of many developing countries. The sector contributes significantly to both employment and GDP. However, very little is known about why they remain informal, particularly because of the challenges they face related to profitability and resilience. Using comprehensive informal sector data from Ghana, the study first examines whether informal businesses perceived price position (PPP) impacts their profitability and resilience. The study further explores whether the mechanism is through better or worse business practices (such as stock control, financial planning, marketing, and costing). There are theoretical reasons to expect PPP to positively or negatively impact business practices. By employing a Two-Stage Least Squares (2SLS) regression model, the study examines how PPP influences business practices and consequently, how business practices impact the profitability and resilience of informal businesses. The findings show that firms that perceive their prices to be the same as their formal competitors, as well as firms with no defined price position, have poorer business practices. In contrast, firms that perceive their prices to be lower than those of their formal competitors have better business practices. Moreover, firms that perceive their prices as higher than those of their formal competitors have even better business practices than firms that perceive their prices as lower. The study also finds heterogeneous impacts of business practices on the profitability and resilience of firms in the informal sector. Specifically, stock control emerged as a key driver of profitability, whereas financial planning was found to be essential for resilience. This suggests that profitability is more immediately influenced by operational efficiencies, such as stock management, whereas resilience is influenced by longer-term strategies such as financial planning. These findings provide policymakers with practical guidance for strengthening the informal sector. Specifically, the results point to the need for interventions that improve stock management practices to boost profitability and promote financial planning support to build resilience. Policies that expand access to affordable inventory tools, provide financial management literacy support, and offer tailored capacity-building initiatives can directly enhance the performance of informal firms. A potential barrier to any designed intervention will be literacy and technology gap. Interventions should be designed taking into account language and general literacy problems. Overall, policymakers can foster a more sustainable and competitive informal sector that contributes meaningfully to employment generation and long-term economic development