Natural Experiment in How People Decide Whether to Formalize Their Business Ventures

On the first day of her dissertation research in Kumasi, Ghana, Arielle Newman—now an assistant professor of entrepreneurship—stumbled across what she calls a “natural experiment” in how people decide whether to formalize their business ventures.

In 2015, the government had announced that the traditional Kumasi Central Market would be replaced with a new, indoor structure. Only formally registered entrepreneurs would be able to apply for a stall, representing a once-in-a-generation opportunity. Unregistered traders, many of whom had been selling for decades, would be moved to a less attractive informal market on the outskirts of town.

Then Newman found out about the Petty Traders Association (PTA), which had taken up the fight for fairer government policies. “I heard about their work and knew I wanted to highlight their story,” she says. In over 220 interviews with entrepreneurs and government officials, she sought to answer the question of what motivated individual traders to accept the government’s decision versus trying to influence its policy, either on their own or through the PTA.

Newman recently published her findings in Entrepreneurship Theory and Practice with co-author Jay Barney, Presidential Professor of Strategic Management and the Pierre Lassonde Chair of Social Entrepreneurship at the University of Utah’s David Eccles School of Business.

The article introduces the concept of entrepreneurial political activity. It expands existing theory on corporate political action, which developed in relatively mature economic and political systems and involves large, wealthy corporations. Entrepreneurial political activity, on the other hand, is performed by micro-entrepreneurs—representing simultaneously their firm and themselves—in developing economies and with limited resources. “They were risking, in some cases, their very freedoms, first to demonstrate and then to sue the government,” says Newman. “It’s a huge cost to consider.”

Indeed, previously the government had practiced political forbearance, generally allowing the informal economy to take place in an extralegal space without the rights or the costs of the regulated economy. Now it struck back at PTA leaders and members, for example through strategic raids.

Given these risks, the willingness of individual traders to become politically active depended on their trust in the PTA leadership to produce results and on the role business earnings played in their household’s overall income and survival. Culturally, men are under the most pressure to provide for their families, while women’s income is considered supplemental, so female traders were less involved and dropped out of the PTA more quickly. Growth-oriented traders—also typically men—seeking registration so they could develop their businesses through loans and foreign travel, were also more politically active.

“We found that those people who are truly desperate for an opportunity to provide for themselves and their kids were most likely to engage in entrepreneurial political activity,” Newman summarizes.

Newman, A. and Barney, J., Entrepreneurial Political Activity in the Informal Economy. Entrepreneurship Theory and Practice, forthcoming.