Initial informality as an obstacle to intellectual capital acquisitions. Empirical evidence from Latin America
| DOI | https://doi.org/10.1108/JIC-12-2018-0218 |
| Pages | 472-487 |
| Date | 26 June 2019 |
| Published date | 26 June 2019 |
| Author | Rodrigo Costamagna,Sandra Idrovo Carlier,Pedro Mendi |
| Subject Matter | Hr & organizational behaviour,Behavioural accounting,Accounting/accountancy,Knowledge management |
Initial informality as an obstacle
to intellectual capital acquisitions
Empirical evidence from Latin America
Rodrigo Costamagna and Sandra Idrovo Carlier
INALDE, Universidad de la Sabana, Chía, Colombia, and
Pedro Mendi
Department of Business, University of Navarra, Pamplona, Spain
Abstract
Purpose –Most developing countries are characterized by large informal sectors. A substantial proportion
of firms in these countries began operations in the informal sector, eventually becoming formal. The purpose
of this paper is to study whether, after formalization, firms that began operations in the informal sector are
more or less likely to use intellectual capital in the form of disembodied technology licensing than firms that
began operations in the formal sector. The moderating roles of being a downstream firm, age and the
country’s per capita income are also analyzed.
Design/methodology/approach –The effectof initial informalityon the probability of licensingis estimated
using firm-leveldata from the World Bank’s EnterpriseSurvey, conducted in severalLatin American countries
in 2006–2017.
Findings –Formal firms that began informally are less likely to use licensed technology, suggesting the
existence of long-run effects of informality. The effect of initial informality is more negative among
downstream firms.
Research limitations/implications –The analysis uses cross-sectional data. Unobservable firm fixed
effects could be controlled for using longitudinal data.
Practical implications –Initial informality affecting the innovation strategies of firms should be
considered when designing policies that incentivize formality.
Social implications –If, in light of the results of this analysis, policies are designed which foster a better
allocation of resources, there will be a tangible impact in the lives of many people in developing countries.
Originality/value –This is the first paper that analyzes the relationship between initial informality status
and technology licensing, a relevant channel for the international diffusion of technology.
Keywords Informality, Latin America, Competition, Licensing
Paper type Research paper
1. Introduction
While most scholars, policy makers and businesses leaders agree on the existence of a
positive impact of innovation and technological upgrades on productivity and growth, firms
in Latin American countries (LAC) still perform poorly in terms of innovation investments.
The reasons and determinants remain largely unidentified, and may involve factors that are
external to the firm, such as market and institutional conditions, and other internal factors
such as organization or management quality. In this paper, we focus on a particular internal
characteristic of the firm, namely having begun operations in the informal sector, and how
that feature acts a as a barrier to the use of disembodied foreign technology. This is a
relevant question given the prominent role that licensing plays in the international diffusion
of technology (Arora et al., 2004; Gambardella et al., 2007), which ultimately has an impact
on total factor productivity and growth (Mendi, 2007). For this reason, technology licensing
Journal of Intellectual Capital
Vol. 20 No. 4, 2019
pp. 472-487
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-12-2018-0218
Received 14 December 2018
Revised 11 March 2019
Accepted 23 May 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
The authors thank the conference participants at BALAS-2017 for their helpful suggestions.
Mendi gratefully acknowledges financial support from Ministerio de Economía y Competitividad
(ECO2014-55236-R) and Fundación Ramón Areces. The data that support the findings of this study are
available on the World Bank’s Enterprise Surveys website: www.enterprisesurveys.org/portal/login.
aspx. All errors are our own.
472
JIC
20,4
has been the object of study in many previous contributions (Teece, 1986; Kamien, 1992;
Fosfuri, 2006; Kirchberger and Pohl, 2016; Mendi et al., 2016). Hence, from the perspective of
the receiving country, understanding which factors affect the process of technology
licensing is relevant in order to design economic policies properly, as well as business
strategies, and more so in a context of emerging economies, such as those in Latin America.
With this purpose in mind, we analyze firm-level data from the World Bank’s Enterprise
Survey, using observations from firms in Latin America, spanning the 2006–2017 period.
The questionnaire used in these waves of the Enterprise Survey include a number of
questions on innovation activities, and specifically one on whether the firm makes use of
technology licensed by a foreign-owned firm[1]. We study whether initial informality status
is indeed associated with a higher or lower propensity to purchase disembodied technology,
controlling for a number of firms characteristics and contextual factors. We find that initial
informality indeed decreases the probability of technology licensing in the context of LAC.
We also study whether three specific factors, namely being a downstream firm –that is,
selling directly to final consumers –, firm age and the level of development in the country
where the firm operates play a moderating role on the relationship between initial
informality status and licensing.
Informality largely characterizes the economies of developing countries (Webb et al.,
2009). Many countries around the world, particularly developing countries have large
shadow economies, representing 40–60 percent of the gross domestic product in the case of
some developing economies (Schneider and Enste, 2013). Although the impact of informality
in the economies and firms operating in the formal sector is sizable, there are relatively few
contributions to the literature that discuss the effect of informality on innovation. In this
line, Charmes et al. (2018) propose an agenda for measuring innovation in the informal sector
in Africa. We believe that it is possible to distinguish between two determinants of the
innovation activities of formal firms: first, the fact that informal firms compete with formal
firms in the product market; second, the fact that some formal firms began operations as
informal firms.
First, informal firms are likely to have a negative effect on the operations of formal firms,
thus reducing formal firms’incentives to invest (Mendi and Costamagna, 2017). In fact, the
OECD Global Forum on Competition (Organization for Economic Co-operation and
Development, 2009) concludes that informal firms, while being less efficient than formal
firms, do not comply with economic regulations and tax payments, allowing them to gain
market share from formal firms. This introduces a profit dissipation effect, which decreases
formal firms’incentives to invest in general and to purchase a license in particular. This
effect depends on several factors, especially the magnitude of the competitive pressure
exerted by a new player in the downstream market (Arora and Fosfuri, 2003). Hence, we
expect informality to be a strong determinant of technology transfer. The fact that
informality is a structural problem in LAC justifies the study of informality using an
institutional framework (Lau and Bruton, 2008), where institutions set the “rules of the
game”(Peng et al., 2009). The institution-based view has grown in response to the long-
standing criticisms of industry-based and resource-based lack of attention to contexts
(Peng, 2002). We take this view into account in our empirical analysis by controlling for the
intensity of competition from informal producers as a contextual factor determining formal
firms’decisions to acquire licensed technology.
Where the effect of initial informality on firm behavior is concerned, informal firms
have characteristics that are different than those of formal firms (Darbi et al., 2018).
For instance, La Porta and Shleifer (2008, 2014) find that sales per worker in formal firms
are larger than those of informal firms of comparable size, suggesting that formal and
informal sectors constitute two largely isolated parts in a dual economy. Funkhouser
(1996) also finds substantial differences in terms of education of the workforce between
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Initial
informality as
an obstacle
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