Differences in efficiency between Formal and Informal Micro Firms in Mexico

Abstract

The economic role of micro firms is still the subject of much discussion and debate. While these firms can be seen as potential growth drivers, as they are usually related to entrepreneurship, a relatively high share of micro firms can also be a sign of an underdeveloped productive system, which applies especially to developing countries, where micro firms represent the majority of business activity. Unlike other studies, this research separates formal and informal micro firms in order to test whether there are efficiency differences between them, and to explain these differences. One of the novelties of the study is the use of the Oaxaca-Blinder decomposition method, which enables an analysis of the differences between both groups of firms after controlling for their different allocation of factors. Micro firms in Mexico are taken as a case study, with the Encuesta Nacional de Micronegocios (ENAMIN, or the National Micro Firm Survey), for 2008, 2010 and 2011, used to carry out the analysis. The empirical evidence suggests that output differences can be explained by endowment characteristics, while efficiency differences are explained by endowment returns. The main variables to explain the gap between the groups are the owner’s level of education, the firm’s age, the owner’s motivations, and financing.