Informal competition : firms’ productivity and policy reforms in Egypt

Abstract EN

This paper investigates the effect of the competition stemmed from informal firms on formal firms’ productivity in Egypt.

Using the World Bank’s Enterprise Surveys, we update the twostep methodology of Guiso et al.

(2004) to build a regional indicator of informal competition intensity.

Our estimation reports a positive effect of this indicator on formal firms’ productivity that remains valid to the instrumental variable approach and to multiple robustness check.

This result is subject to factors accounting for the characteristics of the firm and is segmented by formal firms’ size.

We also identify informal firms’ cost advantage as the main channel through which this effect occurs.

Our results call on the importance of tax reforms and effective regulation to be implemented in Egypt.