Dissertation

i
The formalization of the informal
sector economy: Panacea or Chimera?
Akhona Bashe
12099750
A research project to the Gordon Institute of Business Science, University of
Pretoria, in partial fulfilment of the requirements for the degree of Master of
Business Administration.
26 September2012
Copyright © 2013, University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria.
©© UUnniivveerrssiittyy ooff PPrreettoorriiaa

ii
Abstract.
In 2011 author Robert Neuwirth identified the global informal sector economy as
having a combined Gross Domestic Product (GDP) that is equivalent to the second
largest economy in the world behind the United States of America (USA).
Studies have shown that the informal sector economy is prevalent in Africa and India
which are both considered to be emerging market economies with potential for
exponential growth. The GDP of a country is calculated using a total of a countries
production of goods and services; however production in the informal sector economy
is unaccounted for. The inclusion of their production could potentially boost the
economic growth of these emerging market economies.
This study aims to observe whether the informal sector economy should be formalized
or left as it is in its current state. Despite the ‘problem statement’ in the previous
paragraph, which appears to be in favour of formalization, there are advantages and
disadvantages for both formalizing the informal sector economy and leaving it in its
current state.The objective of this study is to come up with a sustainable strategy of
how to manage and administer the informal sector economy as in its current state it is
proving to be unsustainable.
A two phased approach was used to produce the findings which included interviews
with experts and interviews with entrepreneurs operating in the informal sector
economy.
These findings provided suitable recommendations to be made as to how to manage
and administer the informal sector economy.
.
Keywords: formalization, informal sector economy

iii
Declaration.
I declare that this research project is my own work. It is submitted in partial
fulfilment of the requirements for the degree of Master of Business
Administration at the Gordon Institute of Business Science, University of
Pretoria. It has not been submitted before for any degree or examination in any
other University. I further declare that I have obtained the necessary
authorisation and consent to carry out this research.
Akhona C Bashe 25 September 2012

iv
ACKNOWLEDGMENTS.
I would like to thank the following people for their support and contribution to this
research.
The Almighty Father: The source of my strength. When You are for me who can
be
against me. Thank You for Lord carrying me through this process.
Mummy and Daddy: Michael Mkuseli Bashe and Lynette Lily Bashe. You two
are
my rock and my foundation. The source and continuation of my existence. I
love you.
My Supervisor: Dr Alex Antonites: Thank you for you encouragement, support,
insights and comments.
Steve Marsden for giving me the idea of writing on the chosen topic.
Lusanda Nyangiwe and Khanya Bashe for their love and support.
The informal sector economy experts and entrepreneurs who made the
research possible.
And all who believed in me and supported me.
Success is the sum of small efforts, repeated day in and day out.
Robert Collier

v
Table of Contents.
1.1. Background to the research problem. .............................................................................. 1
1.2. Research motivation. ............................................................................................................. 4
2.1. Introduction........................................................................................................................ 6
2.2. The Informal Sector Economy......................................................................................... 6
2.2.2. The significant implications of the Informal Sector Economy.......................................... 9
2.4. Taxation................................................................................................................................ 14
2.4.1.2. The challenges of taxation in the Informal Sector Economy....................................... 18
2.5. The importance of finance in the Informal Sector Economy............................................... 18
2.6. Importance of skills development and education in business. .............................. 22
2.7. Importance of location in business. ............................................................................. 24
2.8. Formalization. ...................................................................................................................... 25
2.9. Conclusion......................................................................................................................... 28
3.1. Introduction. ........................................................................................................................ 29
3.2. Research Question. .............................................................................................................. 29
4.1. Introduction...................................................................................................................... 31
4.2. Research defined. ............................................................................................................ 31
4.3. Research Methodology defined........................................................................................... 32
4.4. Research Approach.......................................................................................................... 32
4.5. Research process. ............................................................................................................ 34
4.6. Phase one............................................................................................................................. 35
4.7. Phase two. ........................................................................................................................... 42
4.8. Research limitations. ...................................................................................................... 46
5.1. Introduction...................................................................................................................... 48
5.2. Results: Phase one. .......................................................................................................... 48
5.3. Results: Phase two. .............................................................................................................. 58
5.3.3. Research responses........................................................................................................... 58
5.4. Conclusion............................................................................................................................ 77
6.1. Introduction...................................................................................................................... 78
6.2 Discussion of the findings from phase one. ................................................................. 78
Research responses from phase two.......................................................................................... 92
6.4. Conclusion.......................................................................................................................... 112
7.1. Introduction. ...................................................................................................................... 113

vi
7.2. Research background and objectives. ............................................................................... 113
7.3. Main findings...................................................................................................................... 114
7.4. Recommendations. ............................................................................................................ 117
7.5. Research limitations........................................................................................................... 120
7.6. Implications for future research. ....................................................................................... 121
7.7. Concluding remarks. .......................................................................................................... 122
Appendix 1: Unstructured interview with experts. (Please see below).............................. 11
Appendix 2: Semi-structured interview with Informal Sector Economy entrepreneurs........... 11

1
Chapter 1.
Introduction of the Research
problem.
1.1. Background to the research problem.
Does the informal sector economy present a problem or does it present an
opportunity for all stakeholders affected by it (Bettcher, 2009)? Should it be formalized
or should it be left in its current state? Because the informal sector economy accounts
for approximately 50% of the Gross Domestic product (GDP) in various emerging
economies, it continues to remain a challenge for the relevant stakeholders with
particular reference to governments as to how it should be managed.
In an attempt to address the challenge as to how to manage the informal sector
economy it is tempting to assess how the advanced and developed economies manage
the economy. The assumption is that the state of their economy is a reflection
successful policy implemented to deal with such challenges, however methods of used
by developed economies cannot be blanketed to accommodate the dynamics in
emerging economies. This is because the structure and nature of the informal sector
economy is completely different to that of formal sector economy (Daniel, 2011). The
current barriers of entry which exist in the formal sector economy instituted by the
developed economies prohibit the informal sector economy from participating in the
‘mainstream economy’. These formal barriers include access to finance and credit,
social protection, limited access to infrastructure, technology, skills, education and
training (Kuchta-Helbling, 2000). Kuchta-Hebling (2000) is of the opinion that until
those barriers are removed, democratic governance and economic growth will
continue to be obstructed. Kuchta-Hebling is supported by Davies (2010) who states

2
that the barriers of entry are hindrances that keep the informal sector economy
separate from the formal sector economy.
1.1.2. Why the Informal Sector Economy Exists.
Bosma & Levie (2009) reported that entrepreneurship in developing countries is driven
by need as opposed to want (necessity rather than opportunity). Furthermore the
overwhelming number of informal sector economy enterprises which operate at a
survival level will continue to exist as long as high unemployment rates, poverty, lack
of government support, lack of education and formal sector economy barriers exist.
The informal sector economy provides an important alternative to unemployment in
Africa which is caused by a disproportional dependence of labour market entrants on
employment in the formal sector economy (Bosma & Levie, 2009). The formal sector
economy does not have the capacity to absorb the current labour force and the
continued weakening of the formal sector economy in Africa has resulted in a
reduction in its capacity to absorb new labour market entrants (Ligthelm, 2008).
Ligthelm (2008) supports Manning (1996) in the view that low labour market
absorption in the formal sector economy results in unemployment and therefore an
alternative means of income for survival. Therefore these are the primary influences
responsible for the exponential expansion of the informal economy.
1.1.3. Importance of the Informal Sector Economy.
Firstly, ccording to the United Nations Economic Commission for Africa (2006), the
increase in the informal sector economy in Africa is not sustainable. Furthermore it has
negative effects on Africa’s economic growth and developmental agenda. The informal
sector economy is part of a countries mere “survival” strategy for poor households
because it plays a passive role in development and acts as a temporary substitute for
social protection during the formal sector-led growth process (Devey, 2003).

3
Secondly, entrepreneurship in the informal sector economy is an important source of
economic activity with the potential to alleviate poverty, sustain the livelihoods of the
unemployed population of Africa and create job opportunities (Acs and Virgill, 2010). It
is therefore important to encourage entrepreneurship amongst the entrepreneurs in
the informal sector economy in Africa because the informal sector economy serves as
an important distribution channel of goods to the consumer (Bohme & Thiele, 2011).
Thirdly, businesses that operate within the informal sector globally account for a
combined annual GDP of ten trillion US dollars. If the informal sector economy were a
country; it would have the second-largest economy behind the United States of
America (USA) (Neuwirth, 2011).
Fourthly, the economic sector has the dynamic forces which produce innovation and
economic activity. These dynamic forces include the resourcefulness, the relationships
and the reason (knowledge) of the entrepreneurs. In Kenya, this informal spirit is
known as ‘Jua Kali’. Because informal enterprises operate at a grass root level, they
have a deep understanding of the local context and how it operates. Their small scale
allows for versatility and agility to continuously adjust their methods of production
according to the resources and materials available as well as the purchasing power of
their customers (Daniels 2011).
Although the informal sector economy has the potential to significantly contribute
towards its country’s GDP, it is prevented from doing so because it is structurally
disconnected from the ‘GDP economy’1
(Mbeki 2003). Due to the inefficient structures
existing in the informal sector economy, it is incapable of sustaining self-generated
growth and development. The inefficient structures refer to include uneducated
personnel, no access to resources and no access to infrastructure. If the informal
sector economy is to become sustainable and function optimally it is important for all
stake holders, including government, the private sector and informal sector
1
The GDP economy is a concept used to describe the entire economy. The research makes a distinction
between the formal sector and the informal sector economy. These two economies combined form the
GDP economy.

4
entrepreneurs to engage and develop sustainable solutions for the long term to
include the informal sector economy into the GDP economy (Acs and Virgill, 2010).
1.2. Research motivation.
1.2.1. Purpose of the research.
In the introduction we indicated that in its current state the size and nature of the
informal sector economy is not sustainable. The purpose of the research was to
answer the main research questions which are whether we should formalize the
economy, or leave it in its current state.
The purpose of this research is to develop sustainable solutions to address the
informal sector economy. Despite the advantages that the informal sector economy
provides for its entrepreneurs, the current state of the informal sector economy
represents a problem. The aim of the research is to explore the advantages and the
disadvantages of the informal sector economy, explore the advantages and the
disadvantages of formalization and ultimately decide whether formalization is a
sustainable solution to the informal sector economy or whether the current
advantages provided by the informal sector economy are sufficient enough to sustain
it in its current state.
Because the informal sector economy could potentially be a significant contributor to
the GDP economy in emerging economies one argument is that it could potentially
play a “critical role in the job creation of the country’s economy” (Chen, 2007, p. 1).
The informal sector economy has grown and transformed in unexpected industries and
locations globally facilitating economic growth. (Chen, 2007).
The alternative argument is that the informal sector economy is attractive because it
of its informality (Farrell, 2004). It would therefore lose its dynamic characteristics if it

5
complied with the “cumbersome procedures and regulations” associated with the
formal sector economy (Farrell, 2004, p. 27).
For the purposes of this research the ‘informal sector economy’ and ‘formalization’ will
be defined in Chapter two.
1.2.2. Research scope.
The research scope describes the extent of this research and will focus on the informal
sector economy and the concept of formalization. The research was conducted
through an exploratory study achieved through unstructured interviews experts in the
field of the informal sector economy. The experts interviewed comprised of a sample
of academics, representatives from both the public and the private sector economy.
Semi structured interviews were also conducted with a sample of informal sector
economy entrepreneurs as the respondents.

6
Chapter 2.
Literature Review.
2.1. Introduction.
In the previous chapter, the Informal sector economy and the concept of formalization
was introduced. The existence, nature and importance of the informal sector economy
was also discussed. The potential implications of formalizing the informal sector
economy were also introduced.
In this chapter, the concepts of an informal sector economy and formalization will be
defined using existing literature from previous research. The sustainability of an
enterprise is critical for its long term success. The objective of the study is to
determine whether formalization is the most sustainable strategy to manage
enterprises operating in the informal sector economy.
2.2. The Informal Sector Economy.
The informal sector is defined as activities are “not recorded or imperfectly reflected in
official national accounting systems” (Losby, Else and Kingslow, 2002 p. 2).
The idea and thought of the informal sector was initially presented by the International
Labor Organization (ILO) in the Kenya Mission Report which it presented in 1972. This
report defined the informal sector as a way of conducting business informally (ILO,
1972).
Informal sector activity is prompted by six characteristics including; firstly, an ease of
entry as there are low barriers to entry. Secondly, this sector is unregulated and
therefore the markets operating in it are highly competitive. Thirdly, there is a reliance
on indigenous resources, innovation and creativity of entrepreneurs as they have

7
either limited or no access to resources and are dependent on their resourcefulness
for their survival. Fourthly, there is a massive demand for informal establishments
including their products, convenience in location and well as job creation. Fifthly,
informal sector activity includes small scale operations from entrepreneurs whose
skills are acquired outside the formal sector and lastly informal activity is usually
labour intensive which is a result of limited resources and an inability to access capital
(Kuchta-Hebling, 2000).
Thirty years later the meaning and the concept of the informal sector has evolved. The
increased sophistication of the informal sector has enabled it to function as an
economy which “exists separately from the formal sector economy” (Callaghan, 2012,
p.5123). The informal sector economy is therefore defined as an all-inclusive market
system, based on the production of goods and services which can be both lawful and
unlawful however which are not included in the official national Gross Domestic
Product (GDP) (Singh, 2010).
2.2.1. The Informal Sector Economy: (Characteristics, size and capacity).
The concept of the informal sector is broad and it covers an extensive range of labor
market activities (Vahapassi, 2004) that combine three diverse groups of
entrepreneurs who all have different motives. The first group consists of
entrepreneurs who are unable to find employment opportunities in the labour market
and resort to entering the informal sector economy for “survival” (Pedro & Erwan,
2006 p. 1548). For them engaging in the informal sector is not an option rather it is a
necessity and if they had an opportunity for formal employment would more than
likely abandon their informal sector activity in favour for formal employment (Pedro &
Erwan, 2006).
The second group of entrepreneurs enter the informal sector economy to avoid the
legal implications associated with operating in the formal sector economy. They enjoy
the autonomy, flexibility and freedom offered by the informal sector economy

8
(Williams & Nadin 2010). One of the greatest incentives of not registering informal
sector enterprises is to escape tax regulation (Williams, 2007).
The only unlawful characteristic of the informal sector economy activity is that the
entrepreneurs who operate in it declare either partial amounts or no amounts of their
monetary transactions when they should be declared. Although this is technically
unlawful, it is still considered ‘legal trading’. Anything out of the scope of ‘legal trading’
,for example drug trafficking, falls outside the informal economy into the criminal
economy (Chen, 2007).
The third group of entrepreneurs include those who operate in the criminal economy
this activity is considered unlawful and illegal. It comprises of underground activity and
includes crime and corruption. These activities are not registered by statistical offices
(Pedro & Erwan, 2006). The third group of entrepreneurs will be excluded for the
purposes of the research.
The informal sector economy depends on small scale individual entrepreneurship
(Schneider & Klinglmair, 2005). The size of the informal sector economy varies from
the estimated 4-6% in the high-income (developed) economies to over 50% in the low-
income (emerging) economies (Adeyinka, 2006). In wealthy urban areas, 58% of early-
stage entrepreneurs participate in informal sector economy transactions compared
with the 84% in poor rural areas (Williams & Nadin, 2010).
The explanations behind the significant size of this economy include retrenchments
from private enterprises in the formal sector economy, unavailability of employment
(including governments inabilities to create employment), early retirement packages
given by the civil service and parastatal organizations, urban migration and illegal
immigration (Adeyinka, 2006). According to the South African Reserve Bank the reason
for the exponential growth and development of the informal sector economy were the
“elimination of influx control and the withdrawal of regulatory measures” by
government institutions which made it easier to enter and operate in the informal
sector economy (Ligthelm, 2006, p. 50).

9
In contrast to the formal sector economy, the informal sector economy is
underdeveloped and has a minimal contribution to the GDP economy despite a great
contribution potential. It also contains a large percentage of the South African
population meaning that it has massive socio-economic implications. For this reason it
requires urgent attention (Mbeki, 2003).
2.2.2. The significant implications of the Informal Sector Economy.
The importance of the informal sector economy activities in the GDP economy has
been recognized by researchers, the public sector and the private sector. The informal
sector provides ten jobs for every one job provided by formal sector employment;
however informal sector economy ‘employment’ is not sustainable or long term
(Adeyinka, 2006). The informal sector economy is estimated to account for about 75%
of the total employment in sub Saharan Africa. The main economic activity in the
informal economy is retail trade and most entrepreneurs manage stalls, kiosks or hawk
goods as part time or full time activity by males, females and children of both sexes in
urban and semi urban areas (Adeyinka, 2006). The informal sector economy has
become an “important element in the South African “Government’s development
policy and plans to fight poverty” (Ligthelm, 2010, p. 137).
The existence of the informal sector results in a fiscal problem and there is emerging
evidence that businesses operating in the informal sector are less efficient (de Paula &
Scheinkman, 2007). The explanations behind the lack of efficiency is a result of their
size, inability to scale, no access to resources, no access to infrastructure, no access to
finance, and no access to legal protection provided by the government. These
limitations structurally disconnect the informal sector economy from the formal
sector economy and the GDP economy. This detachment renders the informal sector
economy incapable of generating and sustaining its own growth and development
(Mbeki, 2003).

10
These consequences of the inefficiencies in the informal sector economy in low
income, emerging economies are generating incentives for the formalization of the
informal sector economy. This formalization is viewed as an important step to increase
aggregate productivity (de Paula & Scheinkman, 2007). Mbeki argues that it is crucial
to implement bold macroeconomic reforms to boost the competitiveness of the
informal sector economy as this this will enable that economy to grow. The economic
reforms cited by Mbeki refer to an introduction of formalization structures into the
informal sector economy. Stallings & Wilson (2000), argue that by formalizing the
informal sector economy, jobs will be created and South Africa will be opened up to
the world markets. South Africa has the advantage of modern infrastructure
supporting the efficient distribution of goods and services throughout the Southern
African region and this infrastructure must be exploited (Ligthelm, 2006).
The informal sector economy also consists of immigrant entrepreneurship which
introduces innovation, competitiveness and a positive output in terms of total factor
productivity into a market (Losby, Else & Kingslow 2002).
The function of the informal sector economy is both significant and debatable.
Although it creates jobs and reduces both unemployment and underemployment,
(Neuwirth, 2011), these very jobs are low in income terms and the job security is
limited. Although it strengthens and encourages entrepreneurial activity (Daniels
2011), it does so at the detriment of state regulations compliance, undermining both
tax and labour regulations. Although it is crucial in poverty relief (Acs and Virgill,
2010). in many cases informal sector jobs are not a sustainable wealth creator.
2.2.3. Linkages between the Formal and Informal Sector Economy.
(Valodia, 2008) argues that the informal sector economy is fundamentally connected
to the formal sector economy. Activities in the formal sector economy have a
significant impact on businesses in the informal sector economy. A considerable
amount of enterprises in the informal sector economy either have production or

11
distribution relationships with formal sector economy enterprises in terms of supply,
whether it is through products (finished goods) or services (transactions or sub-
contracting). Davies et al (2009) adds that the informal sector economy purchases raw
materials from the formal sector economy, adds value to the raw materials and sells
the finished product through the informal sector economy. Furthermore, many formal
sector economy enterprises hire wage workers under “informal employment
conditions therefore somewhere along the supply chain the informal sector economy
depends on the formal sector economy” (Chen, 2007, p. 2). Such supply chain linkages
include fees paid by informal sector economy entrepreneurs as rental for trading on
public property. The fees paid by informal sector economy entrepreneurs to operate
their enterprises indicate that they are willing to pay a fee to trade. This fee resembles
the fees paid by formal sector enterprises. (Chen, 2007).
Although most transactions within the informal sector economy may not exist within
the domain of the official statistics neither are these transactions known to the tax
authorities, they are still subject to the rules of the market representing another
linkage between the formal sector and the informal sector economy. These rules of the
market determine the demand and supply hence the price and quantities of the good
or service that the informal sector transactions adhere to (Daniels 2004).
Makaria (1997) argues that a healthy economy and society comprises of a variety of
activities and institutions which include diversity in the use of human skills, production
methods and organisation. These diverse activities have both tight and loose linkages,
offer flexible structures therefore providing equal opportunities to entrepreneurs in
both the informal sector economy and the formal sector economy (Makaria, 1997).
Potential These institutions should lessen rigidities between the two economies and
synergies should be optimised (Daniels, 2004), because the vibrancy and richness
offered by the informal sector economy cannot be combined with the rules and
regulations existing in the formal sector economy (Makaria, 1997).

12
2.2.4. South African government engagement in the Informal Sector Economy.
The South African government has implemented a new framework that recognizes key
areas for job creation. This framework is known as the New Growth Path and its
objectives are to provide solutions to unemployment, inequality and poverty (van
Aardt, Ligtelm and van Tonder 2011). The target set is to create five million jobs in the
next ten years and aims to reduce unemployment from 25% to 15%. Critically, this
employment target can only be achieved if the social partners and government work
together to address key structural challenges in the economy including the informal
sector economy (van Aardt et al., 2011). Government has implemented a second
strategy is to organize informal sector economy entrepreneurs into a “formal trading
environment” (Antonites, 2007, p. 337). Special markets have been constructed in
Yeoville, Hillbrow, Berea and at Metro Market. Additional markets are in the process of
development at Jack Mincer Square/Park Central Taxi Rank, Faraday, Westgate Station
and the city centre (Antonites, 2007).
2.3. Regulation of labour in the Informal Sector Economy.
Regulation is defined as the prospective uses of public resources and public authority
to improve the economic status of economic groups such as industries and labour
(Stigler, 1971). Tanzi (2005) defined regulation as the government’s processes and
procedures of enforcing the rules of the game. The government provides regulation to
stimulate and endorse social objectives, such as the protection of people, private and
public property, and economic objectives such as the production of goods and services
in the formal sector economy (Tanzi, 2005). Regulation eradicates the existence of
market failures ,such as the informal sector economy which is structurally disconnected
from the GDP economy, arising from informational asymmetries, economies of scale in
production, incomplete markets, and externalities (Loayza & Rigolini, 2011).

13
As communities develop economically and socially their links often weaken giving
room for exploitative behaviour (Loayza & Rigolini, 2011). This then creates a demand
for formal regulation to control the relationships within the labour market (Eamets &
Masso, 2005). Economic agents may not fully assume the social costs and benefits of
their self-fulfilling actions, and adequate market regulation is required to raise social
welfare (Loayza & Rigolini, 2011).
2.3.1. Government regulation in the Informal Sector Economy.
Approaches to labour market regulation are led by two opposing schools of thought
namely the institutionalist and distortionist views (Freeman, 1993). The
‘institutionalist’ view identifies job security arrangements, minimum wages, and
collective bargaining as providing the necessary social protection for workers for
encouraging productivity growth. This is achieved through training and the
development of industry-specific skills. Furthermore it provides a means of alleviating
the effects of a collapse in aggregate demand. The institutionalist view has been
implemented to facilitate the current labour markets in the formal sector economy in
South Africa. The ‘distortionist’ perspective resembles the informal sector economy
and emphasizes the benefit of abandoning regulation in favour of allowing the market
to determine the processes. The concern of the distortionist perspective is that
institutional forms of regulation obstruct adjustments to economic shocks and
discourages hiring for cost saving advantages (Betcherman, Dar, Luinstra and Ogawa,
2001).
The regulation of labour markets can affect the rate of job creation and
retrenchments; levels of employment and unemployment; productivity, wages, and
profits; and the degree of social protection and justice afforded to employees of the
formal sector economy which the entrepreneurs operating in the informal sector
economy in do not enjoy. The key issue for policy makers is to gain an insight and
understanding to the likely outcomes of different regulatory approaches if they are
implemented in the informal sector economy. Different modes of regulation have their
own strengths and weaknesses (Betcherman et al., 2001).

14
By operating outside the legal and regulatory frameworks, the informal sector
economy enjoys the benefit of avoiding onerous regulation an example of such is
taxation; however by operating outside the legal and regulatory frameworks they do
so at the expense of social protection in the form of labour regulation and services that
the government provides for the formal sector economy (Betcherman et al., 2001).
Furthermore informal sector economy entrepreneurs withstand the punitive realities
of market economies including an uneven market power (bargaining position),
efficiency and equity discrimination (no access to resources including capital),
insufficient information due to lack of education and infrastructure and an inadequate
insurance against risk (Betcherman et al., 2001).
According to Ordonez (2010), the informal sector economy is closely linked to
“resource misallocation as a result of governments inability to enforce effective tax
and regulation policies” (p. 38) on all enterprises. This results in a small tax base for the
government. The small tax base consisting of highly productive firms carry high tax
burdens which have a negative effect on aggregate productivity. The negative
implications are that the taxes relocate resources into less productive establishments
(Ordonez, 2010). The market effect of the informal sector economy is a problem and it
has a negative effect on the formal sector economy as well (Ordonez, 2010).
2.4. Taxation.
Taxation is defined as any charge upon an entities purchase of inputs, its transfer or
ownership of assets, its earnings, or it’s right to do business (Oakland & Testa, 1996).
The result of this charge would be a reduction in the entities bottom line. According to
this definition, business taxes can be seen to yield a flow of revenue to state and local
governments (Fisher, 2002).
The South African Revenue Service (SARS) argues that taxation is necessary to provide
the national government with the funds for public sector expenditure and benefit. This
includes the provision of social and economic services to citizens in the public as well

15
as the private sector (SARS, 2012). In its current position in it crucial that SARS
increases its revenue by broadening its taxation base to enable government structures
to perform their duties effectively (Ho, Wong and Tong, 2012). This may require an
exploration of taxation opportunities in the informal sector economy, provided that
the increase in revenue adds value (improved service delivery) to the entrepreneurs
operating in the informal sector economy (Ho et al., 2012).
Enterprises have to pay a fee in order to benefit from the services that governments
have to offer (Diamond & Mirrless, 1971). Not only does taxation endorse fairness
through the recovery of the costs of such services, it also improves economic efficiency
by stimulating the prices of goods and services to emulate their full costs of
production. Such prices allow people to make suitable choices among consumer goods
therefore increasing welfare (Oakland & Testa, 1996)
Governments objective should be to reduce the tax gap, which is the difference
between the tax collected by the government and the tax due to the government.
“Theories of optimal production in an economy have usually assumed that an efficient
tax system can allow the government to achieve any desired redistribution of
property” (Diamond, Mirrless, 1971 p. 8).
Dessy & Pallage (2003) disagree and argue that in countries where 60% of the labour
force comprises of entrepreneurs operating in the informal sector economy findings
reveal that the sector should be left in its current state. Therefore any attempts to
formalize the informal sector economy by taxing the enterprises should be abandoned
(Dessy & Pallage, 2003). Attempts to ban the informal sector economy through
financial regulation are challenges only few governments ,especially authorities
governing emerging market economies would survive. This is because the overall GDP
economy is heavily dependent on the informal sector economy economy (Dessy &
Pallage, 2003).
A suitable tax design for economic markets with a large informal sector economy
remains a huge challenge for government (Emran & Stiglitz, 2005). The substantial size

16
of the informal sector economy in emerging market economies suggest that a broad-
based tax such as the value-added tax (VAT) may be ineffective as it increases the costs
of production (Boadway & Sato, 2008). A “linear policy” is not the solution to the
informal sector economy (Dessy & Pallage, 2003, p. 8).
2.4.1. Tax evasion.
Feige (1989), defines tax evasion as total unrecorded income which includes all
unlawful incomes generated through trading in forbidden economic activity, income
produced in non-price market (bartered) economic activity which is considered to be
lawful according to the state and any economic activity considered lawful by the state
however for various reasons escapes taxation authority (Feige, 1989). Studies show
that tax evasion and unregistered labour are predominant features in the informal
sector economy.
Feige, (1989) describes the informal sector economy a highly entrepreneurial sector
that proficiently escapes responsibilities including taxation and government. The
informal sector economy has also been labelled as a destabilizer of a countries socio
economic model by denying government of its lawful revenues and illegally
reallocating income from the honest to the dishonest citizen (Feige, 1989). Rogerson
(2007) argues that the informal sector economy does not receive the same services
rendered to the formal sector economy and taxation is the price paid to buy the
benefits in the form of services rendered by the government (Diamond & Mirrless,
1971). The World Bank (2012) disagrees with Feige (1989), stating that, by not paying
taxes the informal sector economy is not necessarily evading tax, it is preserving its
income and therefore it’s activity is classified as coping and/or or survival activity and
not illegal business.

17
2.4.1.1. Hard To Tax HTT system.
Russia and Ukraine have established a basic taxation system called Hard To Tax (HTT)
aimed at informal establishments (Feige, 1989). The purpose of the HTT system is to
reduce the compliance burdens which arise from complex taxation systems. The HTT
system may also encourage the growth of small businesses whilst providing these tax
payers with basic education to enhance their taxation knowledge in the hope that they
will eventually graduate to become members of the regular business taxpaying
population.
As previously stated the objectives of this special tax regime are to discourage the
growth of the informal economy and to increase the revenues from this sector to
ultimately equalize the tax burden between the formal and informal sectors (Feige,
1989). The opposing forces of the formal and informal sector economies do not allow
for a “one-size-fits-all” solution. The HTT regime does however adequately incorporate
the activities in the informal sector.
Burkina Faso is an emerging market economy with a significantly large informal sector
economy has recently implemented a different tax bracket directed towards the
informal sector economy in an attempt to collect income from this sector and it has
been endorsed by the World Bank (Ihrig & Moe, 2001).

18
2.4.1.2. The challenges of taxation in the Informal Sector Economy.
Emerging market economies are characterised by weak tax administration and
inefficient implementation techniques causing considerable obstacles in adopting
and/or adding a new taxation system. This is because the implementation of a new tax
system requires both information and special skills to administer effectively. It is
important not only focus on the size of the informal sector in determining between tax
regimes, but also to consider the effects of allowing the government to devote huge
resources into tax administration. However to optimize taxation policies each tax
should be applied for transactions for which it was best suited (Peñalosa & Turnovsky,
2005). Furthermore, in developed economies taxation should be focussed on capital
income however in developing economies taxation should be focussed on labour
income (Peñalosa & Turnovsky, 2005).
2.5. The importance of finance in the Informal Sector Economy.
Academics, scholars and government policies have all agreed that the provision of
credit to the entrepreneurs operating in the informal sector economy is an essential
tool for raising capital and subsequently improving their incomes through investing in
productive resources and infrastructure (Atieno, 2001).
Aryeety (2002) argues that despite the implementation of extensive macroeconomic
reforms directed at the informal sector economy for the economic growth and
development of many African countries, they still continue to struggle. Informal sector
economy enterprises struggle because they have no access to financial resources.
When they experience low income levels an inability to re-investment in working
(operational) capital threatens their sustainability and ability to survive (Atieno, 2001).
It is important to realize that credit provision is not a one size fits all solution and that
the terms and conditions a credit facility has established for businesses in the formal
sector economy business may not be applicable to enterprises in the informal sector

19
economy (Atieno, 2001). Formal sector financing is an imperfect substitute for the
informal sector economy.).
The current challenges faced by entrepreneurs of the informal sector economy include
exploitation by loan sharks and other illegitimate market operators. Because desperate
informal sector economy entrepreneurs lack access to conventional sources of credit,
they become exploited (Tsai, 2004). The challenges facing government are the
opposing and incompatible strategies of large scale macro-financing (industrialization
and urbanization) and small scale micro-financing (agricultural). Government does not
have the capacity to administer both types of financing and the current government
policies support macro financing at the expense of micro financing. Government
attempts to merge the two strategies result in savings being redistributed from rural to
urban areas which limits the supply of rural credit (Tsai, 2004).
2.5.1. Micro Financing: Is that the solution.
In Ghana and Tanzania, the banking sector only accounts for approximately about 5.5%
of the entire national population therefore excluding the majority of the population
who live below the poverty line and engage in the informal sector economy (Basu,
Blavy and Yulek, 2004).
Microfinance Institutions (MFI’s) have been established in these countries to meet the
increasing demands of the informal sector economy. MFI’s have been defined as
financial institutions established for the benefit of small enterprises, the informal
sector, the poor, and households who have been barred access to formal sector
establishments (Basu et al., 2004). Micro-finance is defined as the provision of financial
services including savings, credit and insurance to the poor especially to women who
normally do not have easy access to formal financial institutions (Sanyang & Huang,
2008).

20
There is sufficient evidence in sub-Saharan Africa to believe that the poor, particularly
those in the rural sector, value both deposit and credit facilities (Basu et al., 2004). It is
therefore unwise to assume that the informal sector economy is un-bankable and un-
creditworthy (Atieno, 2001). This statement is supported by the existence and the
growth of cooperative banking, combined savings and credit facilities. There is
generally a strong relationship between formal and informal MFI’s in some cases
institutions in the formal sector economy making use of savings from traditional MFI’s
operating in the informal sector economy. In some cases, the former have also become
bankers to the latter (Basu et al., 2004). It is therefore wise to capitalize on the
entrepreneurial acumen of the informal sector economy (Atieno, 2001).
In Africa long before the establishment of formal institutions, society relied on group-
based savings (Basu et al., 2004). The obligation to repay borrowed capital rested on
peer pressure and joint liability as opposed to the collateral used by the institutions in
the formal sector economy to guarantee capital repayment. MFI’s rely on short
maturity for repayment, high frequency of payments, and, at times, a compulsory
security deposit to encourage timely loan repayments (Basu et al., 2004). In 1983, the
Grameen Bank was launched in Bangladesh India as a micro lending operation directed
at female who operate at a grassroots level (Rahman, 1999). The Grameen Bank is an
institution aimed to alleviating poverty by providing credit to poor households
(Morduch, 1999). The success of the Grameen Bank model has been through the
provision of subsidies.
Governments support through effective financing policies is fundamental in the
promotion of micro financing in Africa. Government’s role includes ensuring that the
essential laws, regulations, and institutions for the licensing, regulation, and effective
administration of the sector are in place. The importance of government intervention
stems from a strong correlation between the effectiveness of government policy with
regard to micro financing and the success of micro financing in individual African
countries (Atieno, 2001).

21
Kenya has initiated a programme aimed at funding credit to small scale enterprises
(Daniels, Mead and Musinga, 1995). However a survey conducted of small and
microenterprises in Kenya declared that 32.7% of the entrepreneurs surveyed
identified a lack of capital as their principal constraint and that 10% had ever received
credit (Daniels et al., 1995). Although causality cannot be inferred a priori from the
relationship between credit and enterprise growth, it does illustrate the importance of
credit in enterprise development. The failure of financial institutions in the formal
sector economy to meet the credit needs of enterprises in the informal sector has
emphasized the importance of a financial system for informal sector enterprise
development (Atieno, 2001).
Micro financing is not without its limitations as government objectives generally differ
from the needs of informal sector enterprises (Tsai, 2004). The government has failed
to recognize the importance of grassroots segmentation which affects the distribution
and the provision of services to the informal sector economy enterprises. Microfinance
facilities comprise of a combination of social, political, and economic incentives that
are dependent on the specific socio economic environment in which they operate
however microfinance programs are not designed and structured to the socio
economic needs of informal sector enterprises instead are designed towards a
guarantee of cost recovery for the institution. (Tsai, 2004).
Sanyang (2008) argues that formal sector economy institutions have an abundance of
financial resources and should engage with government as potential stakeholders in
the provision of finance to the informal sector economy. Private sector enterprises
should subsequently diversify their loan portfolios and expand their capacity to
provide credit to the informal sector economy. Formal institutions must therefore
abandon their existing policy of focussing on default problems and loan administration
costs and link their operations with credit seeking entrepreneurs in the informal sector
economy to increase their customer base. Credit providers operating in the informal
sector economy have insurance mechanisms designed to guarantee capital repayment,
however they lack adequate financial resources to enable them to expand their
coverage. It is therefore necessary to provide a policy environment that affords the

22
necessary incentives for the growth of enterprises in the informal sector economy
(Sanyang, 2008).
2.6. Importance of skills development and education in business.
Entrepreneurs are not affected by levels of formal education however there is a
positive correlation between entrepreneurship performance and levels of education
(Van der Sluis, & Van Praag, 2008). Entrepreneurs should therefore invest in education
to equip them in running successful enterprises.
(Kirby, 2004) argues that the traditional education system continues to fail in
developing the skills and attributes required by entrepreneurs to run successful
businesses suggesting that the emphasis needs to be shifted from educating "about"
entrepreneurship to educating "for" it. Furthermore, entrepreneurship skill should not
be viewed as either new venture creation or small business management but rather as
creativity and change. This argument agrees with Daniels (2011) interpretation of the
informal sector economy introduced in chapter one, in that its structure allows for
versatility, agility to continuously adjust their methods of production according to the
resources and materials available as well as to the purchasing power of their
customers. When entrepreneurship skill is viewed as a process of creativity and change
it proposes that educational institutions should amend the current process of learning
to enable students to develop their right brain entrepreneurial capabilities as well as
their left brain analytical skills. Business schools need to weaken the thought processes
so as to encourage and stimulate the entrepreneurial imagination (Chia, 1996).
According to Birch (2004), entrepreneurship cannot be taught however it can be
encouraged through apprenticeship. Business schools teach on how to be operational
and ‘good servants’ and barely touches on strategy, risk appetite and the correct
motivations for being an entrepreneur (Aronsson, 2004). Birch (2004) is of the opinion
that selling, working with people, and creating a product or service cannot be learnt in
the classroom especially if it is being taught by lecturers who have never themselves

23
started a business. The best faculty of learning is one’s own business. “Budding
entrepreneurs can be influenced when they are affiliated with a culture of
entrepreneurship” (Aronsson, 2004, p. 290).
An opposing view argues that education provides students with the necessary
motivation, knowledge, and skills essential for launching a successful enterprise (Lee,
Chang and Bae Lim, 2005), however a countries unique cultural context plays a
significant role in the extent of entrepreneurship. High school students residing in the
United States of America (USA) are more likely to follow a career in entrepreneurship
as they are raised and continue to grow up with a close affiliation to entrepreneurship.
American entrepreneurs are great cultivators of entrepreneurial spirit which has
significantly contributed to the economic growth of the USA by creating and
successfully managing numerous enterprises as opposed to Korea a country lacking
entrepreneurship as a result of a non-existent culture of entrepreneurship (Lee., et al
2005). The findings of a study conducted to observe the effects of entrepreneurship
education on American and Korean students reveal that Korean students were able to
procure similar entrepreneurship skills, abilities and qualities after embarking on
entrepreneurship education (Lee., et al 2005). These findings suggest that
entrepreneurship skills can be learnt (Lee., et al 2005). Ibicioglu, Baysal and Sait Ozkul
(2005) support the findings that entrepreneurship skills can be learnt and add that
entrepreneurship is a fundamental strategy in improving a countries competitiveness,
influence and innovation. It is therefore crucial to use entrepreneurship education as a
catalyst towards economic growth and development.
It is fundamental that aspiring entrepreneurs learn the value of theory regarding
entrepreneurship however theory does have it’s limitations. Coupled with theory
aspiring entrepreneurs can and will also learn by doing (Fiet, 2000).

24
2.7. Importance of location in business.
The former CEO of Nokia Mr J Nieminen once stated “When an Inventor in Silicon
Valley opens his garage door to show off his latest idea; he has 50% of the world
market in front of him. When an inventor in Finland opens his garage door, he faces
three feet of snow” (Nieminen , 1984).
Findings from existing literature suggest that the location of an enterprise contributes
to its competitiveness (Krueger, 2006). Porter identifies the geographic location of an
enterprise as a key element determining its productivity despite the recent challenges
of the “death of distance’’ hypothesis (Cairncross, 2001, p. 41). The death of distance
hypothesis states that the changes in technology, the internet and wireless
connections, disqualify distance as an excuse not to conduct business (Cairncross,
2001). The death of distance hypothesis is not applicable to the informal sector
economy as the informal sector economy is not equipped with the appropriate
infrastructure that enables the hypothesis to hold. The informal sector economy does
not have access to basic internet.
Other factors that determine the location of informal sector economy enterprises
include access to the suppliers and customers and the social and economic costs of
operating in a location (Kettles, 2006). The location of an enterprise has a direct effect
on the total economic activity of an enterprise (Krueger, 2006).
According to Antonites (2007), the South African government has identified special
economic trading zones to organize the informal sector economy into a “formal
trading environment” (p. 337). Such specialised locations could potentially provide the
appropriate infrastructure, access to markets together with other facilities that could
to enhance competitiveness of the informal sector economy (Dhingra, Sinha and Singh,
2009). The special trading zones resemble the Special Economic Zones (SEZ)

25
established in India. These SEZ’s have emerged as popular strategies, adopted by
various other emerging market economies, to increase their trade competitiveness.
The consistent and growing competition amongst the enterprises operating in SEZ’s
has pressured these enterprises to consistently innovate and discover find new
methods and “strategies to remain competitive and to survive” (p. 2). Furthermore,
SEZ’s have provided efficiency in business transaction through advanced infrastructure
and other facilities to enhance trade competitiveness of the country (Dhingra et al.,
2009). Additional benefits include an availability of infrastructure, access to a market
with heavy pedestrian traffic, tax concessions, government and institutional support
and a close proximity to suppliers.
2.8. Formalization.
Although there is a massive informal sector economy in South Africa, the formal sector
economy still dominates in output and according to the Human Sciences Research
Council (HSRC, 2012), output and employment are growing more at a faster pace in the
formal sector economy that the informal sector economy.
The formal sector economy is defined as “an institutional framework of economic
activity” (Castells & Portes, 1989, p. 13). It is regulated by the institutions of society in
a legal and social environment. Chen (2007) defines the formal sector economy as a
system comprising of regulated economic units, protected workers and a formal
regulatory environment comprising of government policies, laws, and regulations.
The formalization will be defined using the registration process of a formal sector
company in South Africa. There are two types of companies incorporated under the
Act these are non-profit companies (NPC) and profit companies. Table A will give a
definition of the two types of companies under THE COMPANIES ACT, NO. 71 OF 2008
and a description of each (CIPC, 2012). THE COMPANIES ACT, NO. 71 OF 2008 will be
defined and discussed below.

26
Table A.
Non Profit Company: Profit Company:
Definition:
NPC’s are companies that are
established for public benefit
including cultural, social, communal
activities or group interests. One
key differentiator between NPC’s
and companies for profit are that
the income (including profit) and
property generated by the NPC is
not distributable to its
incorporators, members, directors,
officers or persons related to any of
them. For the purposes of the
research no informal sector
economy enterprise registers
without an intention of generating a
profit.
Profit companies are
companies that are
established with a profit
motive. Profit companies
may distribute profits to its
incorporators, members,
directors, officers or
persons related to any of
them.
Categories: None Private Companies
Public Companies
Personal Liability
Companies
State Owned
Companies
(CIPC, 2012)
Private Companies (Pty) Ltd: are companies with a limited transferability of shares.
They are also prohibited to offer securities to the public (CIPC, 2012).
Public Companies (Ltd): are companies with an unlimited transferability of shares.
They are allowed to offer securities to the public. The freedom to trade their shares in
public means that public companies have to adhere to more rigorous rules and
regulation to protect the public shareholders from any potential risk (CIPC, 2012).

27
Personal Liability Companies (Inc): are companies where the directors and past
directors are jointly and severally liable together with the company for any debts and
liabilities arising during their periods of office. Unlike Private and Public Companies,
the directors of Personal Liability Companies do not enjoy protection from the debts
owed by the company and they (directors) become personally liable for the debts of
the company (CIPC, 2012).
State-Owned Companies (SOC Ltd): is either a company defined as firstly, a “state-
owned enterprise”, previously known as a parastatal (www.dpe.gov.za, 2012). An
example of a state owned enterprise is Eskom, South African Airways and Transnet
(www.dpe.gov.za, 2012). Secondly, a company owned by a municipality would classify
as a State-Owned Company. State Owned Companies adhere to the regulations of a
public company as they are funded by the government (tax payers money) (CIPC,
2012).
Co-operatives: are distinct forms of an enterprise that provide services and/or
products exclusively to its members. Profits, known as surpluses in a co-operative, and
they are divided among members. Co-operatives are an example of group based
savings (Basu et al., 2004). An example of a ‘co-operative’ operating in the informal
sector economy is a stokvel. A stokvel is a “savings or investment society to which
members regularly contribute an agreed amount. The individual members of the
stokvel receive a lump- sum payment either in turn, or in times of need” (Aitchison,
2003 p. 28).
One of the fundamentals of the formal sector economy is that enterprises have to
adhere to stringent rules and regulations set by THE COMPANIES ACT, NO. 71 OF 2008.
THE COMPANIES ACT, NO. 71 OF 2008 is a piece of legislation and/or constitutions of
rules which regulate companies formed in South Africa (Smith, 1999).The regulation of
companies in the formal sector economy are in the companies act and the
Government Gazette.

28
Instead of focusing on formalizing the informal sector economy an inquiry leading to a
better knowledge and understanding of the living conditions and the difficulties
experienced in both the formal sector economy and the informal sector economy
should be made (Frota, 2007). These five fundamental questions should be considered
which will determine whether formalization is the ultimate solution. (Frota, 2007)
1.) How should the formalization process be approached?
2.) Who should be targeted?
3.) Should there be a preference on certain types of economic activity because they
are a ‘‘safer’’ and/or more consistent?
4.) What measures are needed to be evaluated?
5.) Are the formalization process changes beneficial and, if so, to whom?
2.9. Conclusion.
All the stakeholders identified (public sector, private sector and informal sector
economy entrepreneurs) should engage in identifying solutions to enhance the long
term sustainability of the informal sector economy.
This chapter reviewed literature supporting the definition of the informal sector
economy and formalization respectively. It also reviewed the characteristics of the
informal sector economy, the relationship that the informal sector economy has with
the formal sector economy, possible strategies to increase the capacity and therefore
the sustainability of the informal sector economy, the current environmental
conditions in which the informal sector operates in. The implications of formalizing the
informal sector economy or leaving the informal sector economy in its current state
were also reviewed.
The next chapter will identify the research questions identified for the purposes of this
study.

29
Chapter 3.
Research Questions.
3.1. Introduction.
In the previous chapter, the definition of formalization and the informal sector were
defined for further understanding. The informal sector economy constitutes a
significant potential contributor into the gross domestic product of the national
economy and provides means for survival from the population that is marginalized
from the formal sector economy. It is crucial to increase the role of the informal sector
economy as a contributor to the GDP economy whether it is through partial or full
integration the informal sector economy to the GDP economy.
Formalization is the introduction of an institutional framework of economic activity
with regulation implications. The informal sector economy is all-inclusive market,
based on the production of goods and services which can be both lawful and unlawful
however are not included in the official national Gross Domestic Product.
It was revealed from previous research that attempts to formalize and create a
structure to the informal sector economy are being implemented.
3.2. Research Question.
3.2.1. Main Research Questions.
3.2.1.1. Should the formal sector economy be formalised?
3.2.2.2. Should the informal sector economy be left as is in its current state?
To answer this research question, information on the existing conditions of the
informal sector economy and the sentiments of the entrepreneurs operating in it was
required. This information was acquired through two phases consisting of a panel of

30
experts and phase two consisting of informal sector entrepreneurs who were both
interviewed.

31
Chapter 4.
Research Methodology.
4.1. Introduction.
In the previous chapter, the research question that was tested in the research was
presented. The main research questions focus on whether the informal sector
economy should be formalized therefore adhering to the same structures and
regulations operating in the formal sector economy or whether the informal sector
economy should be left in its current state
The research questions were answered using a two phase approach.
This chapter will provide an explanation of the methodology used to test the question
presented in chapter three.
4.2. Research defined.
Research extends beyond the technicalities of gathering information. It is rooted in
answering unanswered questions presented in chapter three and/or creating that
which does not currently exist (Goddard, 2004). In this study, research became a
process of discovery and allowing entry into territories beyond the restrictions of the
known, for the researcher and previous studies. Research is an “art of scientific
investigation” (Kothari, 1985, p. 2). Because inquisitiveness is the mother of all
knowledge, the method which man employs for obtaining the knowledge of the
unknown is called research. (Kothari, 1985).
Research is a scientific activity in that it is highly systematic, technical and procedural.
Research involves defining and redefining literature ,which was achieved in chapter
two, formulating research questions ,achieved in chapter three, collecting, organizing
and evaluating data ,achieved in chapters four and five, making deductions ,achieved

32
in chapter six, and finally reaching conclusions ,achieved in chapter seven (Kothari,
1985, p. 2).
4.3. Research Methodology defined.
‘Research Methodology’ may be understood as a science as it is a study of how the
research is conducted scientifically. The Research Methodology used in this research
studied and presented the process adopted by the researcher in pursuit of studying
the research question along with the logic behind the process (Berg, 2004). In the
Research Methodology phase the researcher was consistently analyzing and exploring
the research question until a solution and conclusion was reached. (Industrial Research
Institute, 2010).
The Research Methodology used by the researcher was also dependent on the “nature
of the problem” (Noor, 2008, p. 1602). The Research Methodology used for the
purpose of this study will be discussed and justified in detail in this chapter. For a
complete and inclusive experience of the Research Methodology it was critical for the
researcher to know the appropriate research methods and methodology
comprehensively. The knowledge assisted the researcher in the research design and
the research methodology required for this study. It was therefore crucial to
constantly evaluate the basis of decisions made before implementation (Berg, 2004).
4.4. Research Approach.
The research question was addressed using an exploratory qualitative study method.
Qualitative is described as a “descriptive non numerical method of collecting and
interpreting information” (White, 2002, p. 49). Denzin & Lincoln (2005) define
qualitative research as research that implies an emphasis on processes and meanings
that are not rigorously examined and measured in terms of quantity, amount, intensity
or frequency. There are instances particularly in the social sciences where researchers

33
are interested in insight, discovery and interpretation rather than hypothesis testing
(Newman & Benz, 1998). Therefore the researcher was not concerned about numbers
or patterns with regards to data collection, rather the insight, discovery and
understanding that was prioritized (Denzin & Lincoln, 2005). Qualitative research has a
multi method focus in that it requires an interpretive and naturalistic approach to its
subject matter. This means that qualitative researchers study things in their natural
settings, attempting to make sense of, or interpret phenomena in terms of the
meanings people bring to them (Newman & Benz, 1998). Informal sector economy
entrepreneurs were interviewed in their respective places of work allowing the
researcher to witness their natural setting and therefore develop a theory that will
explain what was experienced.
Because qualitative research investigates how people live and manage their daily lives
no two situations are the same and every phenomenon is unique. Qualitative designs
have one subject, one case or one unit is the focus of investigation over a period of
time (Schmidt, 2004, p. 253). Patton (2002) stated that in qualitative research no set
rules for the sample size exist because the degree of validity, meaningfulness and
insight is dependent to a greater extent on the richness of the information gathered as
opposed to the size. A small sample is therefore preferred in an attempt to preserve
the richness when it comes to description. This harvests a higher internal validity
however the external validity may be limited (Saunders, Lewis and Thornhill, 2009).
Exploratory research is a technique used to approach and carry out a social study
therefore reporting on what has been learnt. It extends beyond merely listing the
“pros and cons associated with a set of over exhausted and oversimplified either or
choice, qualitative research or quantitative, inductive or deductive, descriptive or
predictive” (Stebbins, 2001, p. 2).

34
Exploratory research is used to decide whether or not a phenomenon exists (Welman
& Kruger, 2003). For the purposes of this research the informal sector economy has
been defined and it has been established that it does exist. Exploratory research was
used to gain an understanding of the informal sector economy phenomenon and for
the researcher to familiarize themselves with this phenomenon. The researcher also
investigated the nature of the informal sector economy in order to “gain insight and
understanding” (Malhorta, 2010, p. 104), as to why it exists. For the purposes of this
study the exploratory research used complimented the research methodology
(qualitative) chosen because they both focused on gaining an insight and an
understanding to the research problem.
4.5. Research process.
The research was divided into two phases in order to answer the research question.
The aim of phase one is to receive critical professional academic opinions from experts
with extensive knowledge on the informal sector economy. This meant gaining a
critical understanding of the impact of the informal sector economy and the
consequences that it has on the formal sector economy. Furthermore to understand
the synergies of possibly engaging the informal sector economy with formal sector
economy. Phase one also presented a discussion of possible strategies to administer
the informal sector economy. Furthermore it assisted the researcher in identifying
questions that can be incorporated into the questionnaire for phase two the sample
interviewed.
Phase two comprises of the findings from the personal interviews held with
entrepreneurs operating in the informal sector economy. The purpose of phase two
was to gain insight and understanding with regards to the motives behind informal
sector economy activity. Phase two also established whether the informal sector
economy should be formalized and regulated therefore functioning like enterprises in
the formal sector economy or to leave the informal sector in its current state.

35
4.6. Phase one.
4.6.1. Purpose.
According to Welman and Kruger (2003), the purpose of research is to:
4.6.1.1 Describe: How things are and that is defining the nature of the object that is
being studied. For the purposes of this research this involved describing the
nature and the conditions in which the informal sector economy exists.
4.6.1.2 Why things are the way that they are and to also explore the relationships
between things. For the purposes of this research a thorough explanation why
the informal sector economy exists.
4.6.1.3 Predict: To use the information gained to predict phenomena and the future of
the informal sector economy within the region studied. For the purposes of
research it was to identify the best strategic routes that should be taken to deal
with the informal sector economy. These strategic routes (to formalize the
informal sector economy or to retain the current informal sector economy
structure) will also help identify the actions that should be taken to find a
solution to the phenomena. These strategic routes are identified in chapter five
which will be presented in chapter six and discussed in chapter seven.
The purpose of conducting the expert interviews in phase one was to gain an insight
and an understanding of the informal sector economy, to discuss possible strategies in
administering the informal sector economy and to assist the researcher in identifying
questions that can be incorporated into the questionnaire for phase two the sample
interviewed (White, 2002, p. 30).

36
4.6.2. Population.
The population for phase one includes all experts and specialists including the public
sector, the private sector, labour specialists and academics with extensive knowledge
and insight in the informal sector economy.
4.6.3. Sample size.
Because it is not possible to interview every member of the research population the
research needs to be confined to a limited number of channels through the use of a
sample. It is crucial that the sample (sampling units of experts chosen) is representative
of the entire population (sampling frame of every expert with extensive insight in the
informal sector economy). Samples are useful because they save money and time
(White, 2002, p. 60). The experts were identified taking into consideration that
identifying a sample when using qualitative research excludes random sampling.
The five experts chosen were specialists with extensive knowledge on the informal
sector economy. These experts ranged from academics, government officials and
private sector employees.
The method of sampling used for the expert interviews was Non-random/ Non
Probability sampling also known as purposive sampling (White, 2002). The researcher
needed to sample with a “definite purpose and the approach was subjective” (p. 63),
this is also known as judgmental sampling. The researcher identified the sample they
understood to deliver the greatest insights and quality information to satisfy the
research objectives (White, 2002).
The names of the respondents were pre-determined by the researcher using their
professional credentials and their knowledge of and involvement with the informal
sector economy.

37
4.6.4. Unit of analysis.
In phase one the unit of analysis was the viewpoint, knowledge and the understanding
of the experts in the field of the informal sector economy.
4.4.5. Data gathering.
The research made use of primary data to collect the information. Primary data is
defined as first-hand information allowing the researcher to discover more about the
informal sector economy, the observable phenomena (Driscoll, 2011). One of the
advantages of using primary data for collection was to specifically to address the
problem in question which is how the informal sector economy should be managed
(Malhorta, 2010). Using the scientific method, the researcher developed research
questions in chapter three and collected measureable, observable and replicable data.
The primary research allowed the researcher to gain “virgin knowledge” (Driscoll,
2011, p. 153) acquired using unstructured interviews which will be presented and
analysed in chapters five and six respectively.
Primary research was also useful as the researcher was studying a local problem that is
significant in South Africa and Africa By making use of primary data, the researcher
was able to discover how larger socio economics issue played out at the local level
(Driscoll, 2011). These socio economic issues will be presented and analysed in
chapters five and six.
Phase one of the research process consisted of five expert interviews conducted using
unstructured interviews.
Unstructured interviews are most useful when the researcher’s objective is to gain an
in depth understanding of a particular phenomenon, the informal sector economy
within a particular social, economic or cultural context (Lofland, Snow and Anderson,
2006). The unstructured interview technique also complimented the qualitative
research design and exploratory data analysis technique and primary data collection as

38
they all placed an emphasis on gaining insight and understanding of the informal
sector economy.
To conduct a successful unstructured interview, it was critical that the researcher had
a clear idea of the aspects that she wished to explore which was to understand the
“dynamics” (Saunders et al., 2009, p. 321) of the informal sector economy and to make
a recommendation of whether it should be formalized or whether it should remain in
its current informal state. Because the respondents were unrestricted and had the
freedom to discuss (freely) the events, behaviour and beliefs in relation to the informal
sector economy it was essential that the characteristics the researcher wanted to
explore were clear (Malhorta, 2010).
The greatest challenge experienced by the researcher concerning unstructured
interviews was that the researcher’s control over the conversation had to be kept at a
minimum (Malhorta, 2010). The researcher did however guide the conversation in an
attempt to relate to the experiences and perspectives that were relevant to the
problems of interest to the researcher and the research questions.
Unstructured interviews are extremely valuable for studies attempting to find patterns
(Lofland et al., 2006). The research objective was to find patterns that would assist in
explaining the current informal sector economy phenomenon and in the future
generate models on how to formalise the informal sector should that be the
recommendation made in chapter seven.
Out of ten interview requests, only five interviewees were able to participate.
Appendix 1 exhibits the interview guideline that was used for phase one. This
interview guideline was prepared based on findings from the literature review in
chapter two.
The interviews were conducted on a one on one basis. The researcher presented the
respondents with a non-disclosure document which was signed by both parties. The

39
researcher supplemented the written conditions stipulated in the non-disclosure
document with a verbal explanation of the interview process.
The purpose and the objective of the research were explained. The researcher assured
the respondent that his/her identity was and would remain anonymous and that any
notes taken or recordings made of the interview were confidential. The researcher also
explained to the respondent that his/her participation in the research was voluntary
and that they had the freedom to withdraw at any time.
The researcher explained what was expected from the respondents including the
amount of time that was required for the interview which was between 60 minutes –
90 minutes. The researcher made reference to the interview guideline to conduct the
interview. Although the interview guideline was useful, the interviews were
interactive, and the questions were formulated based one the individual responses of
the respondents. The researcher adhered to the questions in the interview guidelines
however at times had to restructure certain questions based on the responses of the
respondents and the willingness by the respondents to answer certain questions. The
researcher was also able to ask additional questions that she knew would be of value
for the research process.
The participants had an opportunity to express themselves and respond in their own
words, as opposed to limiting the options of respondents by forcing them to choose
from fixed responses which is the technique used by quantitative methods (Saunders
et al., 2009). The researcher needed to capture verbal and non-verbal communication
such as facial expressions and attitudes by the respondents and required maximum
attentiveness during the interview process (Saunders et al., 2009).
The researcher’s objective of interviewing informal sector economy experts from
different functional backgrounds was to obtain a different perspective on the topic and
to limit functional bias. The researcher observed that the responses and/or opinions
from experts interviewed from the same functional backgrounds were extremely
similar.

40
The interviews were approximately 75 minutes each. The researcher did not
experience any difficulty in finding experts to interview three out of the five
interviewed were sourced from ‘Linked In’ a professional social network, one was a
direct referral from the researcher’s supervisor and last respondent was a contact of
the researcher. The researcher initially sought ten experts to interview, and managed
to all ‘secure’ ten interviews however five of the ten interviews were last minute
cancellations which was one of the greatest challenges experienced by the researcher
in the research process.
The following process of data collection was used by the researcher following each and
every interview (Thomas, 2006).
1. To conduct the interview.
2. To transcribe the broad, extensive and varied raw data into a brief but
comprehensive summary. These first two steps provided a foundation for
qualitative analysis.
3. To establish clear linkages between the research objectives stipulated in the
beginning of the research process and the summary findings derived from the
raw data using the notes taken from the findings and to ensure that these
associations are both transparent ,for the purposes of being validated to others,
and defensible (justifiable given the objectives of this research) The researcher
was attentive to any insightful and analytical aspects to be potentially used in
future interviews and in analysis of the findings.
4. The transcripts were read and analysed on several occasions to identify themes
(categories). On several occasions new themes emerged which were
incorporated into the interview guide for the remaining experts to be
interviewed and the questionnaire for the informal sector entrepreneurs in
phase two.
5. A coding frame was established and the transcripts coded by the researcher.
The coding was used to develop the categories, which were then conceptualised
into broad themes. These themes were developed by studying the transcripts

41
repeatedly and considering possible meanings and how these fitted with
developing themes.
6. Transcription took approximately three hours per interview.
4.6.6. Data analysis.
Once the data collection was complete the data was evaluated in a process called data
analysis. Data analysis is defined as the detection and the tasks of defining, classifying,
theorizing, explaining, exploring and planning. The data was evaluated according to the
research questions being addressed (Ritchie & Spenser, 2002). Data is analysed to
isolate the information connected to the components of the research problem. It
therefore provides input in “developing the recommendations on how to solve the
research problem” (Saunders et al., 2009, p. 42).
The data was analysed using a general inductive approach. The inductive approach is
defined as a systematic procedure for analysing qualitative data in which the analysis is
likely to be guided by specific evaluation objectives (Thomas, 2006). The purpose of
using the inductive approach was to allow research findings to emerge from the
frequent, patterned, dominant, and the significant themes inherent in raw data
collected by the researcher, without the limitations imposed by structured
methodologies (Thomas, 2006). The data analysis was accomplished using
categorization and unitization (Lincoln & Guba, 1985).
Unitization is defined as a process whereby raw data is systematically transformed and
grouped into units allowing a detailed description of significant and relevant content
characteristics (Lincoln & Guba, 1985). Once the data has been unitized, these units
become comparable to other units and units with similar characteristics are then
grouped together into categories in a process called categorization (Lincoln & Guba,
1985). Categories can then be compared to other categories to establish relationships
among them.

42
The data was analysed through content, narrative and comparative analysis. Content
analysis systematically analyses the data collected from the interviews through the
identification of themes (Welman & Kruger, 2001). Content analysis also provides new
insights and coded data. Narrative analysis preserves the richness of the data allowing
patterns to emerge (Saunders et al., 2009). Comparative analysis enables the
comparison of the units of analysis across all the interviews conducted (Welman &
Kruger, 2001).
The data analysis for all the interviews took approximately fifteen hours in total.
4.7. Phase two.
4.7.1. Purpose.
The aim of phase two was to refine and analyse the findings from the expert interviews
held in phase one and to capture the findings from the personal interviews held with
entrepreneurs operating in the informal sector economy in phase two. The purpose of
phase two was to gain insight and understanding with regards to the motives behind
informal sector economy activity. Phase two also established whether the informal
sector economy should be formalized or left as is.
4.7.2. Population.
The population for phase two all informal sector economy entrepreneurs operating in
South Africa and Africa.
4.7.3. Sample size.
The sample size comprised of fifty informal sector economy entrepreneurs
(respondents) from five different locations in both the Gauteng province and North
West province in South Africa. Cluster sampling was be used to determine the
geographical locations where the research took place and random sampling was used
to determine the possible potential respondents.

43
4.7.4. Unit of analysis.
These respondents were interviewed using semi structured questions
4.7.5. Data gathering.
The data gathering process was achieved using primary data discussed in 4.6.5 above.
The respondents were interviewed using semi-structured Interviews. Semi-structured
interviews are defined as a “wide ranging category” (Saunders et al., 2009, p. 601) of
interview where the interviewer initiates pre-determined interview themes however
allows for flexibility in the order in which the questions are asked. Semi-structured
interviews also allow the researcher to new questions that are within the paradigm of
the research situation (Saunders et al., 2009).
The objective of a semi structured interview is to recognize and to appreciate the
respondent's viewpoint in the informal sector economy as opposed to oversimplifying
and making generalisations about behaviour (David & Sutton, 2004). The semi-
structured interview made use of “open-ended questions” and the interviews were
“conversational” (Saunders et al., 2009, p. 321). Semi-structured interviews offer
ample flexibility to interview different respondents in a different way while still
covering the same areas of data collection (Noor, 2008).
Questions were asked when the interviewer was comfortable with the
appropriateness of the question. Some of the questions were prepared and others
arose during the course of the interview. Because the researcher was trying to uncover
new phenomenon it was not possible that the researcher was always fully prepared of
the outcome of the interview (David & Sutton, 2004). During the interview process,
new themes arose, one such theme was the importance of location which was not
previously considered by the researcher and therefore the researcher was not
prepared for the respondent’s response. To satisfy the objectives of the research the
researcher was obliged to explore the subject further. The semi-structured interviews
allowed for a comparative analysis as the flexibility in its structure tolerated

44
spontaneity in which the interviewer could have asked for clarification or elaboration
(Welman & Kruger, 2001).
The interviews were recorded to ensure accuracy when interpreting the data and to
avoid losing data as it is not possible to make handwritten notes and capture all that
was said in the interview (Schmidt, 2004).
The researcher covered five different locations in the Gauteng province and the North
West province in South Africa. The researcher then moved through as many
entrepreneurs in a specific location using a cluster sampling technique. Within the
cluster the researcher used random sampling to choose potential respondents divided
according to gender, age and industry. The researcher aim was to cover as a spectrum
of geographic location, activity and demographics as possible given the research
limitations.
The purpose and the objective of the research were explained. The researcher assured
the respondent that his/her identity was and would remain anonymous and that any
notes taken or recordings made of the interview were confidential. The researcher also
explained to the respondent that his/her participation in the research was voluntary
and that they had the freedom to withdraw at any time. The interviews were
approximately 20 minutes long.
4.7.5.1. Research instrument.
A questionnaire served as the research instrument to obtain the relevant data to
answer the research problem under investigation. The questionnaires were designed
with the aim of enabling them to produce accurate, relevant and reliable information.
Careful consideration was given to the questions asked, how they were asked, the
order in which they were asked and finally the general layout of the questionnaire.
A suitable length of the questionnaire was recommended because the longer the
questionnaire the less involved and more tired the respondent becomes (Bradburn,

45
Sudman and Wansink, 2004), this then affects the quality of the data. The length of the
questionnaire was therefore kept at a minimum achieved by including thirteen grid
questions which only required a tick of a pre-determined option in the questionnaire
box. This therefore shortened the response time as the researcher was sensitive to the
respondent’s time; the researcher was also concerned about the quality of the
answers given by the respondent.
Questionnaires were piloted and evaluated before the actual research was conducted
(Bradburn et al., 2004). The researcher conducted the questionnaire under academic
supervision, submitted the questionnaire to a panel of academic experts for ethical
clearance. Once the questionnaire was approved and certified non offensive by the
committee. The questionnaire was piloted on 3 security guards and 3 domestic
assistants all working at Rand President apartments as well as 3 informal sector
entrepreneurs operating outside ‘Christ Embassy’ church in Randburg before it was
distributed to its desired sample.
The piloting of the questionnaire enabled the researcher to reword the questions
therefore omitting offensive questions. A well-designed, structured and organized
questionnaire allowed the data to be collected the same way from a large number of
people enabling the researcher to systematically analyse the data (Bradburn et al.,
2004).
The process of data collection was used by the researcher following each and every
interview was identical to the process presented in phase one. (Thomas 2006)
Transcribing the data took approximately 90 minutes per interview.
4.5.6. Data analysis.
The data analysis followed the identical procedure as phase one of unitization and
categorization. (Lincoln & Guba, 1985) The data was analysed through content,
narrative and comparative analysis. (Welman & Kruger, 2001).

46
4.8. Research limitations.
Research limitations causing concerns were the credibility of the research which
included bias, reliability and validity (Malhorta, 2010). The interviewer needed to
ensure that their personal views did not creep into the interview (Saunders et al.,
2009, p. 321), which is why it was critical that the researcher followed the discussion
guide for phase one and the questionnaire for phase two.
It was essential that the researcher paid attention to any potential bias which is
described as, allowing a “particular influence” to have more importance than it really
“warrants” (Harper, 1991, p. 67). The research conducted made use of purposive
sampling and a special sample was required to satisfy the research objectives,
therefore the researcher risked the potential of being biased in choosing the sample.
Bias could have potentially “crept in” (Schmidt, 2004, P. 253) because the theory
“emerges” from the data (Lincoln & Guba, 1985, p. 41) and is not imposed on the data
theory is also not independent of the person interpreting the data. Data does not
develop theory people do (Schmidt, 2004, p. 253).
4.8.1. Sampling frame bias.
Sampling Frame Bias is caused by a poor, out of date and an inaccurate sampling
frame. This could be geographically related such as interviewing people in the same
geographic location, same age, and same sex therefore “narrowing the sample frame”
as entrepreneurs with “similar characteristics” are interviewed (White, 2002, p. 67).
The researcher mitigated against this potential bias by interviewing entrepreneurs
from different locations, different ages, different sexes to diversify the sample frame
and therefore capture different insights.
4.8.2. Researcher bias.
Researcher Bias is caused by complete and sincere honesty. A researcher might
introduce bias by making questions too narrow therefore restricting the opportunity

47
for the respondent to express themselves fully the researcher may ask questions that
are too broad therefore affecting the quality of the answers and making them too
general and unfocussed. The questionnaire may have introduced researcher bias as
thirteen questions in the questionnaire were narrowed to a maximum of five pre-
determined answers.
4.8.3. Non responsive bias.
Non responsive bias arises when the researcher has “no idea how respondents would
have answered a specific question because they did not respond” (White, 2002, p. 67).
The researcher experienced a moderate amount of non-responsive bias; firstly from
fundamental potential respondents who did not agree to an interview and secondly
from the respondents who did agree to an interview, however cancelled and those
respondents who were interviewed, however were reluctant to answer some
questions particularly those relating to income or nationality.
4.8.4. Research Methodology.
The research methodology chosen by the researcher requires the researcher to
become part of the research therefore making it difficult for the researcher to be
objective.

48
Chapter 5
Results
5.1. Introduction.
The previous chapter explained the methodology used to test the research question
asked in chapter three. This chapter will present the findings from phase one and two
of the study. The purpose of phase one was to gain an insight of the informal sector
economy through the expert’s opinion and to help formulate the right questions for
phase two. The questions were therefore asked for the purposes of gaining an insight
whether the informal sector should be formalized or left as it is in its current state.
5.2. Results: Phase one.
5.2.1. Introduction: Phase one.
The purpose of phase one was to receive critical professional academic opinions from
persons with extensive knowledge on the informal sector economy. Firstly, this meant
to gain a critical understanding of the impact of the informal sector economy and the
consequences that it has on the formal sector economy. Secondly, to understand the
synergies of possibly engaging the informal sector economy with formal sector
economy. Thirdly, to initiate discussion as to what strategies should be implemented
to ensure the long term sustainability of the informal sector economy and how this
sector economy could potentially contribute towards the GDP economy. Phase one
also directly developed question for phase two that were more precise and detailed as
opposed to broad.

49
5.2.2. Sample characteristics.
The sample consisted of two public sector representatives, two private sector
representatives and one university academic with extensive knowledge in the informal
sector economy. It was important to obtain a sample with a diversified functional
background as it gave an overarching and consolidated opinion on the informal sector
economy in South Africa
5.2.3. Informal Sector Economy defined.
A consolidated definition of the informal sector economy given by the experts was
‘comprising of economic activities taking place without a ‘corporate model’ therefore
implying that there are no systems and policies in place governing and regulating the
informal sector economy. The results of the lacking systems and policies are that there
are no lines of accountability and informal sector economy entrepreneurs are ‘doing
their own thing’ and are unaccounted for.’
5.2.4. Should the Informal Sector Economy be formalized?
Experts had mixed responses regarding the formalization of the informal sector
economy. Some experts strongly believed in formalizing the informal sector economy
as it is thought to broaden the scope of accountability. When entrepreneurs are aware
that they are being held accountable to a structure it creates discipline, enthusiasm
and a sense of belonging. Informal sector economy entrepreneurs who are mindful of
the fact that they are not being held accountable display a minimal effort combined
with reluctance to extend the extra mile in terms on productivity leading to a
fundamental question that was raised. This question was how to encourage informal
sector economy entrepreneurs to account when there are no structures in place. For
that reason regulation improves efficiency through accountability as accountability
enhances knowledge seeking and knowledge seeking encourages efficiency.

50
Other experts although acknowledging that formalization was an ideal situation,
authorities and institutions must be realistic about formalization by taking into account
the current economic conditions. The formalization of the informal sector economy
may require for the informal sector economy to be cascaded into different levels. It is
also crucial to ‘prepare’ the formal economy by creating an environment and or
conditions that are conducive to the growth and sustainability of the informal sector
economy. Without an environment that is responsive towards the growth and
sustainability of the informal sector economy, entry of informal enterprises into the
formal sector economy may be extremely costly and detrimental to the informal
enterprise.
There is therefore no benefit in illuminating the informal sector as it is a conduit for
the percentage of the population who are excluded from the mainstream economy.
One expert stated that the concept of formalizing the informal sector economy is
tautology because it would no longer exist as the informal sector economy if it was
formalized.
5.2.5. The current state of the Formal Sector Economy.
Firstly, there are barriers of entry into the formal sector economy prohibiting
entrepreneurs from operating in the formal sector economy. The current state of the
formal sector economy is that there not only is a lack of access to resources, there is
also a lack of resources in the formal sector economy which further restrict the entry
of informal sector economy entrepreneurs into the formal sector economy raising a
critical question. The question raised was whether there was any merit in formalizing
the informal sector economy when resources are already limited. The ‘resources’
referred to were natural resources, a market and an access to that market and
infrastructure. Secondly, institutions in South Africa are weak. The expert explained
that crime and tax evasion are examples of ‘high level’ activity operating in the

51
informal sector economy; however informal sector economy activity continues to be
associated with poverty. The expert argued that it was not only poor people who
engaged in ‘informal sector economy crime’ and therefore it is wrong to assume that
the informal sector economy is only reserved for ‘poor people.’ The informal sector
economy is an attractive sector and will continue to exist especially if the institutions
continue to remain weak.
The experts interviewed unanimously agreed on allowing a natural transition of
informal sector economy enterprises into the formal sector economy. One expert used
the phrase; “graduating when ready into the formal sector economy”
An example of an enterprise that made the transition from the informal sector
economy to the formal sector economy was ‘Mozito’s’. Mozito’s is a diner in
Braamfontein, Johannesburg. The diner was birthed out of the informal sector
economy and experienced phenomenal growth ‘coercing’ the entrepreneur to
formalize his initially informal establishment. This formalization was a natural
progression and it was not enforced by authorities and institutions. Most of the
experts were of the opinion that all informal sector economy enterprises should be
given the opportunity to grow and only graduate into the formal sector economy when
they proved to be ready and sustainable.
The ideal solution is not to eliminate the informal sector economy all together by
introducing formal structures; the ideal solution should rather provide channels which
link the informal sector economy to the formal sector by allowing the more promising
enterprises operating in the informal sector economy to progress, transition and
graduate into formal sector economy enterprises. An effective method would be to
provide incentives or alternatively make the transition more attractive from the
informal sector economy to the formal sector economy. Although tangible incentives
were not disclosed the role of government in facilitating the successful transition of

52
informal sector economy enterprises into formal sector economy enterprises was
discussed. Other experts disagreed with waiting for a transition and insisted on
immediate formalization.
5.2.6. The role of the government in the Informal Sector Economy.
All the experts agreed that the government plays a significant role in managing the
informal sector economy and that the government is currently faced with structural
challenges in the informal sector economy. Some experts supported the notion of
imposing formalization to informal sector economy enterprises and the others
supported the notion that the government should play a role that regulates the
relationships between the formal and the informal sector economy especially. One
expert emphasized that the government’s role also includes the regulation of the
market structures in the formal sector economy. The current oligopoly structures in
the formal sector economy are not only extremely powerful, they also set the rules
and regulations which dictate the terms and conditions to the informal sector
economies. The terms and conditions set by the oligopolies make it not only
impossible for other formal sector potentials to enter the formal market; they make it
especially difficult for informal sector economy enterprises to enter the market.
Informal sector economy entrepreneurs also have very little bargaining power and
they require government intervention for assistance.
In addition the government could assist by creating a market for the informal sector
economy because the informal sector economy competes with a more powerful
formal sector economy for market share. By creating a market for the informal sector
economy the government indirectly subsequently creates a market for the formal
sector economy. The leverage arises as the informal sector entrepreneurs source their
goods from private sector retailers operating in the formal sector economy and sell
them in the informal sector economy. This results in a ‘win/win situation for both
sectors.

53
One expert argued that the city of Johannesburg is currently establishing proper
demarcation area’s for informal sector economy entrepreneurs. “It is governments
objective for informal sector economy enterprises to operate in an organized
environment where government has an influence over them in terms of regulation,
however does not require formal registration”.
5.2.7. Role of political segregation in creating an informal sector economy.
Historically, formal sector employment was reserved for the white minority which
comprised of 19.3% of the entire population. Although a small percentage of “Bantu’s”
( a term used to describe persons in the black population) had formal sector
employment the majority of the population became unemployed. The Bantu’s
represented 68.3% of the South African population. The remaining 12.4% comprised of
the “Colored” and “Asian” populations.
The unemployed majority of the South African population resorted to the informal
sector economy for financial and socio economic survival. The historical implications of
the South African society are prevalent today as an overwhelming almost absolute
majority of informal sector economy entrepreneurs, (and the entire informal sector
entrepreneurs interviewed) were from previously disadvantaged backgrounds.
Political segregation marginalized the majority of the population into the homelands
and townships and it is in these areas that informal sector economy activity is most
prevalent therefore giving birth to the ‘marginalized economy’. The perpetual effects
of denying the black majority the right to education still has a negative effect on their
literacy levels. Their lack of education has denied them the opportunity to find formal
sector economy employment and has therefore increased their dependency on the
informal sector economy.

54
Economic integration mechanisms need to be created to ensure an impartial
interaction of all members of the formal sector and informal sector economy. The
manner in which the informal sector economy will be included in the mainstream
economy should accommodate the conditions faced by those in the informal sector
economy.
The government cannot reverse the effects of political segregation in South Africa;
however the government is in a position to implement policies and to give non-
financial support especially with regards to promoting education as a priority.
All experts interviewed were in agreement that political segregation had negative
economic implications for the country therefore giving birth to the terrible, challenging
and unjust conditions informal sector entrepreneurs operate in.
5.2.8. How the Informal Sector Economy should be administered.
There were multiple and conflicting views on how the informal sector economy should
be administered. One view is of the opinion that entrepreneurs not only survive, they
thrive from informal sector economy activity primarily because it is informal. The
informal sector economy should therefore not be eliminated in its entirety by imposing
formal structures; instead transitions into the formal sector economy should be
facilitated by government. Government’s priority should be on educating informal
sector economy entrepreneurs. One of the findings in phase two revealed that in 2010
government invested in all informal sector economy entrepreneurs operating in
Randburg taxi rank, by sending them to study towards a ‘Computer Business
Management’ certificate at the University of Witwatersrand.
All the experts agreed that focus should be placed on how to cultivate the potential of
the informal sector economy enterprises, that they should be nurtured thus enabled to
participate meaningfully in the economy. Meaningful participation was defined as
more than just compliance to legal processes. Meaningful participation is achieved

55
through access to finance, ease of business registration, tax exemptions and other
approaches to make the formal sector attractive.
One expert stated that the National Youth Development Agency (NYDA) had
implemented numerous programmes to assist entrepreneur’s operating in the
informal sector economy transition into the formal sector economy. One such
programme is ‘The Micro-Financing Programme’. This programme consists of loans
between R1 000 and R100 000 granted to informal sector entrepreneurs. These loans
are to be repaid and work similarly to the loans from a formal sector economy
financing institution. The expert emphasized the advantages of granting these loans,
that they hone accountability and also offers practices and disciplines required by
formal sector economy financial institutions; however the disadvantages are that
borrowers lack credit discipline and fail to repay loans.
The experts suggested a concept of ‘mild regulation’ to administer the informal sector
economy. This approach assists the entrepreneurs in the informal sector economy to
recognize the benefits of formalization. This ‘mild regulation’ is a concept of self-
regulation where the informal sector economy organizes itself within and under the
conditions of its environment outside the formal regulatory systems. This concept of
self-regulation could be monitored and supported by the government and the private
sector to stimulate economic activity.
Another viewpoint was to assess and explore how other countries treat the regulation
of the informal sector economy.
The expert representing the public sector stated that the South African government
realizes that typically if an informal sector economy enterprise remains in the informal
sector economy, eventually its growth will reach a ceiling and the business will
eventually reach a stage of stagnancy. The government also realizes that supporting
the informal sector economy indirectly influences sustainability and expansion. The

56
domino effect begins with government support which encourages sustainability and
sustainability encourages expansion.
Although government has a responsibility to support the informal sector economy,
they do not accept that it is their responsibility to create employment, rather to their
responsibility is to create environments that are conducive to job creation. If
government forces formalization it will result in a dismal failure.
5.2.9. Labor conditions.
Because informal sector economy entrepreneurs have no ‘formal’ labor representation
they have very little bargaining power and are coerced into accepting terrible,
challenging and unfair conditions to operate in. Despite the challenges that labor
conditions in the informal sector present for both entrepreneurs and government
before the labor conditions of entrepreneurs in the informal sector economy are
addressed economic conditions that are conducive for the informal sector economy
must be prioritized. Once the best approach to include the informal sector economy
entrepreneurs in the main stream economy has been implemented, conditions that
governing labor conditions in the informal sector will be formulated and implemented.
This was the view of one expert.
Organized unions are for employees, informal sector economy entrepreneurs are
business owners therefore a union would not be appropriate for them, this was the
opinion of most experts. To increase their bargaining power entrepreneurs could
organize themselves through the formation of associations and forums.
Because representation implies that entrepreneurs would be organized and regulated,
it holds a striking similarity to formal sector economy entrepreneurs. The dynamic
nature of the informal sector economy is that it has a high turnover and a low lifespan.
This is not conducive to a permanent structure such as an organized union. There

57
vibrant and unstable nature of the informal sector economy will not respond well to
structure and order. The informal sector economy must therefore be appreciated for
its core dynamism. Informal sector economy enterprises are labor intensive and formal
sector economy enterprises are capital intensive therefore when small businesses
thrive there is economic growth. We cannot depend on larger companies to create
jobs as their productivity is largely from technology and capital.
5.2.10. What the experts would ask the entrepreneurs operating in Informal Sector
Economy.
5.2.10.1. “As an entrepreneur that does this (informal sector economy activity) for
a living, what can the government do to encourage entrepreneurs in the informal
sector economy to migrate from the informal sector economy into the formal
sector economy.”
5.2.10.2. “Informal sector entrepreneurs lack discipline which is surprising for
persons operating in a sector where their income is not consistent and operate in it
to survive. Within that paradigm why does the informal sector economy not
adhere to the business practice of treating their businesses as a separate legal
entity and drawing a salary instead of consuming their entire profits? The
entrepreneurs in the informal have very good ideas and that they are working
towards making them a reality. Discipline will enable them (informal sector
entrepreneur entrepreneurs) to build sustainable enterprises and not survivalist
hand to mouth enterprises.
5.2.10.3. “South Africans possess a culture of handouts yet they are not receiving
monetary assistance from the government. What appropriate and meaningful
support do informal sector economy entrepreneurs need, what obstacles are they
facing? Government needs to engage with these entrepreneurs in order to create a
meaningful support package.”

58
Phase one formulated the right kind of questions to ask the informal sector economy
entrepreneurs in phase two and revealed which areas to focus on and the direction to
take as far as the informal sector economy is concerned. Phase one will be used as a
guideline in phase two.
5.3. Results: Phase two.
5.3.1. Introduction.
Phase two comprises of the findings from the personal interviews held with
entrepreneurs operating in the informal sector economy. The purpose of phase two
was to gain insight and understanding with regards to the motives behind informal
sector economy activity. Phase two will also establish whether the informal sector
economy should be formalized or left as it is in its current state.
5.3.2. Sample characteristics.
The sample consisted of fifty entrepreneurs operating in the informal sector economy.
The researcher given her limitations interviewed entrepreneurs from five different
locations in the Gauteng province and North West province in South Africa. The
sample was diversified as much as possible via age, gender, geographic location and
retail sector the entrepreneurs were operating in It was important to obtain a sample
with a diversified functional background as it gave an overarching and consolidated
opinion on the informal sector economy in South Africa

59
5.3.3. Research responses.
Table A presents the different locations that the interviews were conducted.
Geographic location Number of respondents Percentage
%
Randburg 7 13.8
Johannesburg Central
Business District Pritchard
street
10 19.6
Pretoria CBD 10 19.6
Brits 10 19.6
Diepsloot 4 7.8
Soweto 10 19.6
Total 51 100%
The objective of conducting interviews on multiple locations was to get an inclusive
and consolidated view of the operating in the informal sector economy. Interviewing
on multiple locations also revealed the importance of location in any entrepreneurship
activity.
When asked why he operated in Diepsloot a 35 year old Indian male entrepreneur
responded “Location, location, location is important. The average and uneducated Joe
wishes he operated in Johannesburg Central Business District (CBD), however
operating in the CBD comes at a premium. Yes there is heavier pedestrian traffic and
the entrepreneur is guaranteed more customers however the rent in double if not
triple the prices we pay here in Diepsloot, furthermore there is more competition. The
beauty is in the maths. My expected income may be marginally lower than it would
have been if I was operating in Johannesburg, however my expenses are exponentially
lower”

60
Table B presents the numbers of the two genders interviewed.
Total Percentage%
Male 39 76.5
Female 12 23.5
Total 51 100%
There is a disproportionate number of the numbers of male and females interviewed,
this will be accounted for in chapter six. The objective of separating the different
genders in this analysis was to find patterns on their reasons for operating in the
The researcher observed linkages between the different genders and the retail activity
that they engaged in respectively.
One average there was no disparities between the different genders and reason for
entry into the informal sector economy.
A 41 year old male, black entrepreneur justified his entry into the informal sector
economy by stating; “I was retrenched and I lost my job, with my job I lost my dignity
because I was unable to provide for my family. With this business I have regained my
dignity and even more because this business is mine. I am making less money than I
was making in my previous job but this business belongs to me, I built it with my own
hands and now I am not dependent on anyone but me for my daily bread”
A 54 year old black female entrepreneur justified her entry into the informal sector
economy by stating; “I live for my family and I have to provide for them, I experienced
a financial drought. For a while nature was against me and my survival but I was forced
to go against nature and find a way to survive. This is my means to survive. My family
depends on it”

61
Table C presents the ratio between South African and non-South African
entrepreneurs operating in the informal sector economy.
Total Percentage %
South African 31 61.8
Non South African 20 38.2
Total 51 100%
The objective of separating South African’s and non-Africans was to get a perspective
of the number of non-South African informal sector economy entrepreneurs were
operating in South Africa.
When asked why he was operating in the informal sector economy in South Africa a 31
year old male Kenyan entrepreneur responded; “I was displaced from my country
during the 2002 political uprising, there was no opportunity in Kenya and the only
opportunity was to starve to death and many people chose that option. I chose to live
but I could not live at home, so I came to South Africa” He also added; “Although I
would love to go home, I appreciate the strong rand. The economic value of one rand
far exceeds that of its Kenyan counterpart one shilling and it gives me and my family
(who is in Kenya) a higher purchasing power. When I send three hundred rand home
my family is comfortable, it is better than three hundred shillings”
When questioned about his success as an informal sector economy entrepreneur
operating in South Africa he responded; “The advantage of being an immigrant in
South Africa is that the tourist (this gentleman ran his enterprise in Hartebeespoort
which has a significant tourist penetration) appreciates what is different and the art
that I sell is from Kenya and it is different so I am more successful than the South
African entrepreneur because he is boring and the tourists have seen what he has to
offer. When the new BMW comes out the people will buy the new BMW because it is
exciting and different. They no longer care about the old BMW, I am the new BMW, he
(the South African entrepreneur) is the old BMW. People love Kenyan art and I am

62
running a business fuelled by people’s passion. I am proud of making money to send
back home. It gives me dignity”
Table D presents the ages of the entrepreneurs interviewed.
Age in years Number of respondents Percentage %
0 < 20 0 0
20 < 30 18 35.3
30 < 40 18 35.3
40 < 50 7 13.7
50 < 60 5 9.8
60 < 70 3 5.9
Total 51 100%
The objective of this table was to capture the age that was most prevalent with
informal sector economy activity.
The researcher observed that there were no respondents under the age of 20 years
old. The researcher also observed that 70.6% of entrepreneurs operating in the
informal sector economy were classified as the youth. (Between the ages of 20 – 35)
When asked about her outlook on operating in the informal sector economy a 23 year
old, black, South African female entrepreneur stated; “What is a black diamond, I
thought I knew because I thought that I was a black diamond. I am young, black and
educated but diamonds do not sit on the side of the road in these conditions selling
Russians (pork sausages) to make a living. I went to school and I passed, I went to
university and I finished my degree but this government has failed in providing me
with a job.

63
Table E presents the races in which the Informal Sector Economy entrepreneurs fell
into.
Race Number of responses Percentage %
Black: 49 94.1
White: 0 0
Colored: 0 0
Asian: (Indian) 3 5.9
Other: 0 0
Total 51 100%
The objective of this table was to disclose the races that entrepreneurs operating in
the informal sector economy fell into. There were limitations that may have had an
impact on the findings of this research which will be discussed in chapter six.
When a 27 year old male, black entrepreneur was asked on whether he was surprised
at the racial composition of the entrepreneurs operating in the informal sector he
responded;
“The only time I have ever seen a white man is in an expensive car or on the television
shaking hands with a rich black man trying to convince everybody that he (the white
man) is really distributing his wealth to benefit the entire black population” Apartheid
really established the white man as the custodian of wealth in South Africa. Even
though the government is trying to reverse the effects of apartheid on the black
population the money is being shared by those people who were at the right place at
the right time, so yes there are a few black people who are being made rich by BEE
policies but it is a minority of the majority. So yes I am not surprised that many people
operating in the informal sector economy here in Diepsloot are black.”

64
Table F presents the level of education of Informal Sector Economy entrepreneurs.
Level of education Number of respondents Percentage %
No Schooling 0 0
Primary School 10 19.6
High School 28 54.9
College 3 5.9
University 9 17.6
Other 1 2
Total 51 100%
The objective of this table was to disclose the level of education of the entrepreneurs
operating in the informal sector economy.
The majority of the sample either completed high school, or left school during high
school.
Out of the twenty eight entrepreneurs in the ‘high school’ category only five
completed matric (Grade twelve). Two South African women left school during high
school because they fell pregnant. One lady from Botswana left during high school
because of cultural reasons. (Arranged marriage) The rest of the sample left school
because they either could not afford to go to university (75%), they had no desire to
study further (25%) or they had to find a job in order to start providing for their
families (86%). (Most entrepreneurs who quoted the first two reasons also quoted the
third reason as a reason for not completing their studies either at a secondary or
tertiary level)
Out of the nine entrepreneurs in the ‘university’ category only two South Africans
completed university. They are operating in the informal sector economy because they
are unable to find a job in the formal sector economy. The one entrepreneur, a 41 year
old, black, South African male who was previously working for a construction company
was retrenched. The other entrepreneur was previously quoted, a 23 year old black,
South African female. In reference to her education she stated; “I took out a loan

65
because I was confident that once I graduated from university, I would find a job and
pay the loan back. Although I cannot find a job, I still have to pay my loan back”.
The three entrepreneurs in the ‘college’ category were informal sector economy
entrepreneurs who completed a certificate in Business Management and Information
Systems at the University of Witwatersrand (WITS) financed by the South African
government.
The one entrepreneur in the ‘other’ category was a 28 year old, black Congolese male
who obtained a Master’s degree in Financial Economics and is currently studying
Strategy through PSG Konsult. He sold shoes in Prichard Street Johannesburg CBD to
finance his studies. When asked whether he had a fear of being overqualified and the
rationale of studying even further despite his low paying job he responded; “I make
more money selling shoes on the side of the road in the informal sector economy than
I would make in a corporate office in South Africa. In South Africa, educated foreigners
are discriminated against and underpaid. Here (referring to his business) I command
my own prices. as employees mistreat and discriminate against foreigners. He was
simply studying in South Africa to go back home and get a better job. And there was
money in South Africa to finance his studies.
One entrepreneur in the ‘high school’ category was a 22 year old black Malawian male
entrepreneur who was forced to leave school in grade 10 as a result of his parents
passing. This incident left him with no resources to complete high school. Shortly after
his parents passing, he started a fruit and vegetable retail store in the informal sector
economy in Malawi as his lack of education and his age denied him the opportunity to
find a job in the formal sector economy. His first entrepreneurial venture was
unsuccessful; he was subsequently called to South Africa by his ‘brother’. (close family
friend) He says “I was enticed by the perception that there is better income earning
opportunity in South Africa. I am lucky I don’t have any responsibility back at home,
although I only make enough money to survive, I am saving a little money to go back

66
and finish high school”. In South Africa he ran an enterprise identical to the enterprise
that he ran in Malawi.
Table G presents the entrepreneurs desire to complete their education.
Desire to ‘complete’
your education
Number of responses Percentage %
Yes 40 78.4
No 11 21.6
Total 51 100%
The objectives of this table were to show the number of informal sector economy
entrepreneurs who had a desire to complete their education.
The researcher clarified to the respondents that what was meant by ‘completing’ ones
education was whether the respondents felt as if they had reached the end of their
education journey and not whether they had completed secondary education or
tertiary education. The researcher explained that one person may feel as if they
completed their education journey in High School and therefore has no desire to go
back to school. However someone else who may have an undergraduate degree may
feel as if they have not completed their education journey and therefore continue with
a post graduate qualification.
Although many entrepreneurs felt that they had not completed their education
journey, they were not prepared to go back to school.

67
Table H presents the length of time the Informal Sector Economy enterprises have
been in operation
Length of time in years Number of responses Percentage %
0 < 1 16 31.4
1 < 5 16 31.4
5 < 10 3 5.8
10 < 15 8 15.7
15 <20 6 11.8
20 < 2 3.9
Total 51 100%
The objectives of this table were to present the length (in years) of operation of
informal sector economy enterprises.
A 62.5% majority of the enterprises sampled were younger than five years and 31.4%
were younger than one year.
One 47 year old South African male entrepreneur who had been in business for
seventeen years stated; “The secret to my success and longevity in business was
meeting demand with supply and knowing what the customer wants. In the beginning
all I could afford was sanitary goods. I started with sanitary goods because there was a
demand for sanitary goods, as I started making money I realised that there was a
demand for cool drink so I expanded into the cool drink market and hot drinks in
winter so I went into that. I always invested my money proportional to demand and to
meet that demand with supply. Now I have branched into hiring out DVD’s now
because there is a demand from the market”
When asked whether she thought that her two week old business would be successful
a 23 year old female entrepreneur responded; “I don’t know. I have located myself in a
busy area and I have no competition. We sell Russians just outside Shoprite in
Diepsloot and people buy pap from Shoprite and Russians from us because we sell
Russians cheaper than Shoprite does. Some of our customers buy chips from KFC and
Russians from us. Because our product compliments the products sold at the mall

68
(Diepsloot Mall) and that they are sold at a cheaper price I do expect my business to be
around for a very long time”
Table I presents the number of entrepreneurs who were operating their first
enterprises or who had attempted previous enterprises that had failed.
Total Percentage %
Yes 26 51
No 25 49
Total 51 100%
The objectives of this table were to disclose the number of entrepreneurs who were in
their first attempt of business or whether they had attempted a business before.
The ratio between first businesses and more than first businesses was almost equal.
The researcher did not observe a pattern between the ages of the entrepreneurs and
their number of attempts at establishing enterprises.
Table J presents the weekly turnover of the Informal Sector Economy entrepreneurs.
Weekly turnover Number of respondents Percentage %
R0 < R100 0 0
R100 < R500 7 13.7
R500 < R1 000 7 13.7
R1 000 < R2 000 16 31.4
R2 000 < 3 5.9
Don’t know 13 25.5
Fluctuates 5 9.8
Total 51 100
The objectives of this table were to show the turnover generated by the informal
sector economy entrepreneurs.
The one entrepreneur who generated a monthly turnover greater than two thousand
rand was a 35 year old Indian (non-South African) male entrepreneur who operated an
electronic store in the informal sector economy. He sold televisions, radio’s DVD

69
players, earphones remote controls ex cetera ex cetera. His monthly turnover was in
excess of fifty thousand rand. When asked about the success of his enterprise he
responded “South African’s are lazy and have absolutely no business acumen, they also
have a sense of entitlement from the government with are three paralysers of success
in business”.
Table K presents the number of entrepreneurs who reinvested into their enterprises.
Reinvest Number of respondents Percentage %
Yes 16 31.4
No 35 68.6
Total 51 100%
The objective of this table was to give an indication of the number of entrepreneurs
who re-invested in their enterprises.
The researcher observed that initially 85 % of the entrepreneurs interpreted re-
investing as purchasing trading stock. Only eight (15%) entrepreneurs understood that
by re-investment the researcher meant the investing of current profits as additional
capital; into the business to facilitate expansion. Although the researcher clarified the
difference between purchasing stock and re-investing many still argued that
purchasing stock is re-investing into the business.
Two black male entrepreneurs aged 28 years old (non-South African) and 33 years old
(South African) drew salaries and re-invested the rest into their enterprises.
One 64 year old black South African male entrepreneur was reinvesting towards
another similar business closer to home as he was nearing retirement. His daughter
was going to inherit the current enterprise.
One 34 year old black South African female entrepreneur reinvested only when profits
were “permitting”.

70
Table L presents the initial method of finance chosen by the entrepreneurs start their
enterprises.
Method of initial
finance
Number of respondents Percentage %
Savings 34 66.6
Friends and Family 14 27.5
Loan 1 2
Other 2 3.9
Total 51 100%
The objective of this table was to show the method of finance chosen by the
entrepreneurs to fund their enterprises.
The findings show that 94.1 % entrepreneurs would not even consider a loan from any
financing institution. All 94.1% respondents “feared” the bank. One 47 year old black
South African male entrepreneur stated; “There are many species of sharks in the
world, the one I fear the most is the loan shark. I have been shackled to the restraints
of budgeting however experienced more freedom than a debtor imprisoned in the
intestines of a bank”
The two entrepreneurs in the ‘other’ category consisted of an employee who did not
know the method of finance used by his employer and a 35 year old black, South
African female entrepreneur who ran a hair salon. She started with a pair of scissors
that she stole from a shop operating in the formal sector economy and a comb.
The entrepreneur in the ‘loan’ category was from a 28 year old black male
entrepreneur from Cameroon. He received a loan from his home country to start his
shoe retail enterprise in South Africa. He had no access to finance in South Africa as
documents were not in place (Bank Statements)

71
The entrepreneur in the ‘savings’ category used savings to fund his business however
his savings were insufficient. He then received a credit advance from his supplier
A 29 year old black, non-South African female entrepreneur stated; “Some say that
being a foreigner means that it is difficult to get credit. This is true, even if all your
documents are in order, even opening an Edgars account or trying to obtain a cell
phone on contract is impossible”
Table M presents the amount of capital used to start a business.
Amount of money for
start-up
R0 < R100 4 7.8
R100 < R500 10 19.6
R500 < R1000 8 15.7
R1 000 < R2 000 7 13.7
R2 000 < 22 43.1
Total 51 100%
The objective of this table was to give an indication of the amount of money spent to
start an enterprise in the informal sector economy.
27% of capital was spent to start the enterprises was between two thousand rand and
three thousand five hundred rand. There were 15.7% of the 43.1% who invested more
than two thousand rand who invested significant amounts of capital into their
enterprises. One of the entrepreneurs was a 35 year old Indian male who invested one
hundred and thirty thousand rand. He bought an existing informal sector economy
enterprise. The other was also a male Indian entrepreneur who had invested two
hundred thousand rand into his business. They both invested the money from savings.
One entrepreneur quoted previously started her enterprise with R0.00 only a comb
and a pair of scissors.

72
Table N presents the number of entrepreneurs who paid for rent and storage.
Rent Storage Percentage %
Yes 23 23 45.1
No 28 28 54.9
Total 51 51 100%
The objective of this table was to disclose the number of entrepreneurs who paid for
rent and storage.
The equal number of entrepreneurs responding ‘yes’ to both rent and storage and ‘no’
was a pure coincidence There was no link between the entrepreneurs who paid rent
and those who paid storage. Some entrepreneurs pay rent without paying storage and
other entrepreneurs paid storage without paying rent. Some entrepreneurs paid for
both rent and storage and some enterprises paid for none.
Table O presents the amount of money in rands spent on paying rent and storage.
Rent Percentage
%
Storage Percentage %
R0.00 25 49 23 45.1
R1 < R100 10 19.6 7 13.7
R100 < R500 3 5.9 12 23.5
R500 < R1 000 5 9.8 9 17.7
R1 000 < 8 15.7 0 0
Total 51 100% 51 100
The objectives of this table were to disclose the amounts of money spent in rent and
storage.
One entrepreneur in the ‘R1 000 < “category paid ten thousand rand in rent because
he was situation in a prime location.
Two entrepreneurs in the ‘R0.00’ category own their businesses and therefore do not
pay rent.
One entrepreneur in the ‘R0.00’ category works from home and therefore does not
pay business rent.

73
Table P presents the number of Informal Sector Economy entrepreneurs with bank
accounts.
Bank account Number of respondents Percentage %
Yes 30 58.8
No 21 41.2
Total 51 100%
The objectives of this table were to give an indication of the entrepreneurs with bank
accounts.
Out of the 41.2% of entrepreneurs who did not have bank accounts 76.2% were
foreign immigrants in South Africa who were unable to open bank accounts because
they were in South Africa illegally. The remaining 13.8% had a fear of banking
institutions.
One 27 year old black, South African, male entrepreneur stated; “I am afraid of the
bank. I have heard stories of people depositing five hundred rand but they only have
access to four hundred and fifty rand and when they try and take out sixty rand the
bank takes two/ three rand in bank charges. I work hard for this money and I will not
share it with the bank”
Table Q presents the number of entrepreneurs who purchase their stock directly
from the Formal Sector Economy and those who manufacture their own stock.
Pre Purchase (Private Sector) 47 92.2
Manufacturing Home Made 4 7.8
Total 51 100%
The objective of this table was to reveal the number of entrepreneurs who purchased
their trading stock from private enterprises in the formal sector economy relied on the
formal sector economy for their business and those who did not.

74
Three out of the four entrepreneurs classified in the ‘manufacturing’ category
purchased their raw materials directly from the formal sector economy. One
entrepreneur who manufactured African sandals received his supply from the black
market (informal sector economy market) in Ghana.
Table R presents the number of entrepreneurs who were in favour of formalizing
their enterprise.
Formalization Number of respondents Percentage %
Yes 38 74.5
No 13 25.5
Total 51 100%
The objective of this table was to disclose the number of entrepreneurs who were
willing to formalize their enterprises.
The findings reveal that 74.5% informal sector economy had a desire to formalize their
enterprises. One 54 year old black, non-South African, female entrepreneur in the ‘yes’
category shared that; “Many of us (informal sector entrepreneurs) wish to formalise
their informal enterprises however we don’t know how to do it. Some consultants
from the Department of Trade and Industry (DTi) come and distribute pamphlets
which explain the registration process however we cannot read and cannot
understand what these pamphlets are saying. What we need is a consultant who will
sit with us and explain the registration process” She also added; “We also wish to
benefit from the advantages of formalization, yes we will have to pay tax but we
receive social protection from the police, have the options of receiving loans from the
banks and an environment conducive to favourable business conditions.”
Another entrepreneur in the ‘yes’ category was a 30 year old black, South African,
male entrepreneur who operated an internet café. He was fully employed as a Safety
Officer at Transnet however he was on leave at the time of the interview. He shared;
“My father gave me the idea to open the internet café in the informal sector economy

75
and I am generating a decent turnover but despite paying tax I do believe that my
turnover would increase if I formalized my business and operated in Randburg Mall”
One entrepreneur in the ‘no’ category was a 34 year old black, non-South African male
who said; “I know how to operate the informal sector economy, I do not know how to
operate in the formal sector economy. I enjoy the familiarity in the informal sector
economy and I have no desire to formalise my business.”
Table S presents the reasons entrepreneurs operate in the Informal Sector Economy.
Why are they in the
Informal Sector Economy
Survival 46 90.2
Business Opportunity 5 9.8
Total 51 100
The objective of this table was to account for the reasons entrepreneurs were
31.4% entrepreneurs in the ‘survival’ category held jobs in the formal sector economy
however their basic wage was insufficient for basic survival. Another 39.4%
entrepreneurs in the ‘survival’ category had formerly been retrenched from the formal
sector economy. The remaining 29.2% in the ‘survival’ category were unsuccessful in
finding employment in the formal sector economy.
One 27 year old black, South African, male entrepreneur stated “The disadvantage
about operating in the informal sector economy is that you (entrepreneurs) are forced
to offer services at really low rates for two reasons. Firstly, you (entrepreneurs) are
serving a very cost sensitive market and secondly your (entrepreneurs) business has
been successfully duplicated by another entrepreneur one hundred meters from your
(entrepreneurs) doorstep forcing you to become competitive and due to the structure
of the informal sector economy we (entrepreneurs) can only compete on price because

76
our market does not care about quality, they care about which entrepreneur will save
them money, even if it is fifty cents”
One 23 year old black South African female entrepreneur stated “In the informal
sector economy a monopoly cannot exist, if someone comes up with a clever concept
your business model will be duplicated no China man (Chinese entrepreneur) needed.
Table T gives an indication of the number of entrepreneurs who would abandon their
Informal Sector Economy activity if a job opportunity in the Formal Sector Economy
arose.
Job opportunity arises Number of respondents Percentage %
Give up Informal Sector
Economy
10 19.6%
Stay in the Informal Sector
Economy
41 80.4%
Total 51 100 %
The objectives of this table were to give an indication of the number of entrepreneurs
who would abandon the informal sector economy given the opportunity to work in the
formal sector economy.
Out of the 80.4 % entrepreneurs in the ‘Stay in the informal sector’ 70.6% chose this
category because although they would personally leave their informal sector economy
enterprise in favour for the formal sector economy, however they would hire someone
to keep their enterprise operational. The remaining 29.4% saw extensive opportunity
operating in the informal sector economy at a personal level and perceived themselves
as ‘true entrepreneurs’.
One 54 year old black, non-South African, female entrepreneur and a 33 year old black
South African male entrepreneur both stated that “I would have to assess the nature
and salary of the job opportunity first” The 33 year old entrepreneur elaborated his
previous statement; “I have been in the formal sector economy job market and it is not

77
all that glamorous, I am actually earning more in the informal sector economy. The
problem however is that the conditions that we (informal sector economy
entrepreneurs) operate in, sometimes I am tempted to leave but then I remember why
I left the formal sector economy”
A 35 year old black non-South African female entrepreneur stated that; “For me this
(operating in the informal sector economy) is temporary, if I can get a job, a real job
here (South Africa) and back at home (Mozambique) I will leave the informal sector
economy”
5.4. Conclusion.
The findings in phase two provided extensive insight from the entrepreneurs in the
informal sector economy and their perception of operating in this sector. The findings
in phase one presented high level insight on possible strategic solutions that should be
considered for the sustainability of the informal sector economy and how the informal
sector economy could potentially contribute to the GDP economy.
Both the findings in phase one and phase two will be discussed in chapter six. These
findings will be compared and contrasted from the literature provided in chapter two
ensuring that a complete and comprehensive strategic solution is derived on how to
manage the informal sector economy.

78
Chapter 6.
Discussion of Results.
6.1. Introduction.
The previous chapter presented the results that answered the research question
stated in chapter three. This chapter will discuss the findings presented in chapter five
in relation to the previous research conducted on this topic which was discussed in
chapter two. The study conducted a two phase approach. Phase one narrowed the
scope of the questions to be asked in phase two by refining the questions to be asked
to the entrepreneurs operating in the informal sector economy.
The findings in this chapter will be discussed and refined according to the literature
before a final decision will be made.
6.2 Discussion of the findings from phase one.
6.2.1. Informal Sector Economy defined.
The experts defined the informal sector economy as “comprising of economic activities
that take place without a ‘corporate model’ therefore implying that there are no
systems and policies in place which govern and regulate the informal sector economy.
In chapter two it was stated that the informal sector had no structure, policies,
procedures and legal implications referring to the ‘systems’ stated by the experts
(Williams & Nadin 2010).
The consequences of the lacking systems and policies are that there are no lines of
accountability therefore informal sector economy entrepreneurs are ‘doing their own
thing’ and their actions are unaccounted for. In this definition the expert introduced

79
the notion of accountability not previously explored in the research. Accountability is
defined as “Holding individuals and organizations responsible for performance and is
measured as objectively as possible” (Paul, 1991, p 2). The definition contains a
concept of a “higher power” that created the standards and assesses the performance
of the accountability object (Kearns, 1994 p. 186). Accountability is an important
concept in defining the informal sector economy as when informal sector economy
entrepreneurs are ‘doing their own thing’ not according to any standards and/or
expectation, there is no motivation to exert oneself in terms of effort and efficiency is
lost.
6.2.2. Should the Informal Sector Economy be formalized?
Experts had mixed responses regarding the formalization of the informal sector
economy. Some experts strongly believed in formalizing the informal sector economy
as it is thought to broaden the scope of accountability. The experts identified
discipline, enthusiasm and a sense of belonging as three key characteristics held by
entrepreneurs operating in the formal sector economy and is lacked by those in the
informal sector economy. From the findings in chapter two, the regulations existing
within the formal sector economy are inflexible and are not suitable to accommodate
the dynamic nature of the informal sector economy (Daniel, 2004).
The expert added those Informal sector economy entrepreneurs who are mindful of
the fact that they are not being held accountable display a minimal effort and a
reluctance to go the extra mile in terms on productivity, which is defined as the
relationship between input and output (Tangen, 2002, p. 1). Productivity consists of
four variables ensuring that output is greater than input. These variables are;
productivity, performance, profitability and efficiency (p. 3). Although productivity was
not defined in chapter two the concept of productivity agrees with the literature
provided by de Paula and Scheinkman (2007) who specified that there is emerging
evidence that businesses operating in the informal sector economy are less efficient
than those in the formal sector economy and that that formalization would increase

80
aggregate productivity and the inefficiencies which exist in the informal sector
economy.
A fundamental question of how to encourage informal sector economy entrepreneurs
to account when there are no structures and/or authorities to in place to be held
accountable to, was raised. Government regulation directed towards the formalization
of the informal sector economy needs to be implemented as regulation stimulates and
endorses social objectives, such as the protection of people, private and public
property, and economic objectives such as the production of goods and services in the
formal sector economy (Tanzi, 2005). The expert concluded that regulation improves
efficiency through accountability as accountability enhances knowledge seeking and
knowledge seeking encourages efficiency.
Other experts ,although acknowledging formalization as an ideal situation, insisted
that authorities and institutions should be realistic about formalization by taking into
account the current economic conditions. Instead of focusing on formalizing the
informal sector economy an inquiry leading to a better knowledge and understanding
of the living conditions and the difficulties experienced in both the formal sector
economy and the informal sector economy should be made (Frota, 2007). One expert
argued that government policies aim to ensure that informal sector economy
entrepreneurs are not in a situation worse off situation than their current situation
therefore it is not feasible formalize the informal sector economy in case the
entrepreneurs end up worse off than their current situation. It is therefore better to
create an environment facilitating formalization than imposing formalization directly.
The formalization of the informal sector economy may require for the informal sector
economy to be cascaded into different levels. Previous literature in chapter two
addressed and defined the ‘levels of the informal sector economy’ as lawful and
unlawful with survivalist entrepreneurs and opportunist entrepreneurs operating
under lawful and criminal entrepreneurs operating under unlawful (Pedro & Erwan,
2006). By cascading into different levels the expert was referring to separating the

81
different informal sector enterprises into “immature, premature and mature”
Immature informal sector economy enterprises are those which are not ready to enter
the formal sector economy and still require the ‘incubation’ offered in the informal
sector economy. The incubation refers to protection against the exposure to the
regulation and responsibility that comes with operating in the formal sector economy.
Premature informal sector economy enterprises were defined as enterprises operating
comfortably in the informal sector economy however were not adequately prepared
to operate in the formal sector economy. Mature informal sector economy enterprises
were defined as enterprises that were equipped to cross over into the formal sector
economy. The example given of an informal sector economy enterprise ‘graduating’
and transitioning into the formal sector economy was ‘Mozitos’ a now established
diner in Braamfontein, Johannesburg. Mozitos was birthed out of the informal sector
economy and experienced phenomenal growth which ‘coerced’ the enterprise to
formalize. This formalization process was a natural progression and it was not imposed
by authorities and institutions. All the experts were of the opinion that all informal
sector economy enterprises should be given the opportunity to graduate into the
formal sector economy. This notion was supported by Ligthelm (2010) who stated that
informal sector economy enterprises when ready should graduate into the formal
sector economy.
To facilitate the transition into the formal sector economy and/or to successfully
incentivize informal sector enterprises to cross over into the formal sector economy
one expert stated that it is also crucial to ‘prepare’ the informal enterprise by creating
an environment and or conditions that are conducive to the growth and sustainability
of the informal sector economy. Government needs to assess the dynamics of
operating in the informal sector economy as these dynamics could potentially be
barriers to operating in the formal sector economy. Once these dynamics have been
assessed and understood they should lead the government into steering the direction
that should be taken. This direction could potentially be formalization or it could be
leaving the informal sector economy as it is. The direction could also potentially be
focusing on informal sector economy enterprise transitioning into the formal sector

82
economy. They added that without an environment that is responsive towards the
growth and sustainability of the informal sector economy, entry of informal
enterprises into the formal sector economy may be extremely costly and detrimental
to the informal enterprise. The government is currently implementing a strategy is to
organize informal sector enterprises into “formal trading environments” (Antonites,
2007, p. 337).
One expert disagreed with the concept of formalizing the informal sector economy by
arguing that there is no benefit in “illuminating the informal sector economy as it is a
conduit” beneficial for the population which is excluded from the mainstream
economy. Therefore the question of formalizing the informal sector economy is
tautology because if the informal sector economy was formalized it would no longer
exist.
6.2.3. The current state of the Informal Sector Economy.
Firstly, there are barriers of entry into the formal sector economy prohibiting
entrepreneurs from operating in the formal sector economy. The current state of the
formal sector economy is that there not only is a lack of access to resources, there is
also a lack of resources in the formal sector economy which further restrict the entry
of informal sector economy entrepreneurs into the formal sector economy. An expert
therefore raised the critical question of whether there is any merit in formalizing the
informal sector economy when resources are already limited. The ‘resources’ referred
to were natural resources, market and infrastructure. Secondly the expert added that
institutions in South Africa are weak. Peñalosa & Turnovsky, (2005) stated that
emerging market economies are characterised by weak tax administration and
implementation causing considerable obstacles in adopting new taxation systems
designed specifically for the informal sector economy and concluded that it was a
matter of capacity. The expert added that although crime and tax evasion are
examples of high level activities operating within the informal sector economy, the
informal sector economy continues to be only associated with poverty. It is not only

83
poor people who engage in crime and therefore it is wrong to assume that the
informal sector economy is only reserved for ‘poor people.’ The informal sector
economy will continue to exist especially if institutions remain weak. It is therefore not
feasible to regulate the informal sector economy or to incorporate the informal sector
economy into the formal sector economy unless appropriate and fool proof
infrastructures have been implemented.
A majority of the experts argued that formalization of the informal sector economy will
not create jobs opposing findings by Chen (2007) who stated that structured and
formalization of the informal sector economy could potentially play a critical role in
the job creation of the economy.
Most experts identified the ideal solution as not to eliminate the informal sector
economy all together by introducing formal structures; rather to provide channels of
linking the informal sector economy to the formal sector as stipulated earlier The
transition into formal sector economy enterprises can be facilitated through incentives
making the transition from the informal sector economy to the formal sector economy
more attractive. Daniel (2004) suggested that the introduction of institutions to lessen
rigidities between the formal sector and informal sector economies which encourage
both sectors to leverage off each other’s synergies. Makaria (1997) argued that the
vibrancy and richness offered by the informal sector economy cannot be combined
with the rules and regulations existing in the formal sector economy. Makaria (1997)
supports a recommendation from one of the experts interviewed which was that the
registration of an informal enterprise is merely paper work and legal compliance this is
the simple definition of formalization and is not conducive to the structure of the
informal sector economy. The entrepreneurs operating in the informal sector economy
require support from the government and the private sector to function effectively
and sustainably. This support could arise from an informal sector friendly regulation
policy implemented by the government

84
6.2.4. The role of the government in the Informal Sector Economy.
The experts all agreed that the government plays a significant role in managing the
informal sector economy however they are currently faced with structural challenges
in the informal sector economy. Instead of imposing formalization policies to informal
sector economy enterprises, the government should play a role that regulates the
relationships between the formal and the informal sector economy especially because
it has been established that links between the informal sector and formal sector
economies do exist (Chen, 2007). An expert recommended that there should be
procurement, sub-contracting initiatives resembling those of Black Economic
Empowerment (BEE) type initiatives to create the necessary linkages between the
small and the big regulated by supporting institutions Chapter two introduced the New
Growth Path as government’s solution to unemployment, inequality and poverty (van
Aardt et al., 2011). Antonites (2007) stated that government has established special
trading markets in Johannesburg CBD with new markets outside Johannesburg
currently in development.
Government’s role also includes the regulation of the market structures in the formal
sector economy. The current oligopoly structures which dominate the formal sector
economy are not only extremely powerful, they also set the rules and regulations
which dictate the terms and conditions to the informal sector economies. These rules
and regulations benefit the oligopolies at the expense of the informal sector economy
enterprises and because the informal sector economy entrepreneurs have very little
bargaining power and are unable to challenge and contest these terms and conditions.
They therefore require the government to assist them. Furthermore the rules of the
market determine the demand and supply hence the price and quantities of the good
or service that the informal sector transactions adhere to (Daniels 2004). These market
rules and regulations are determined for the formal sector economy and are not
customised to accommodate the informal sector economy. This market failure
requires government’s urgent attention.

85
The last recommendation made by the experts was for the government to assist the
informal sector economy by creating a market for the informal sector economy. The
informal sector economy currently competes with a more powerful formal sector
economy for market share. By creating a market for the informal sector economy the
government indirectly and subsequently creates a market for the formal sector
economy. The leverage arises as the informal sector entrepreneurs currently source
their goods from private sector retailers operating in the formal sector economy and
sell them in the informal sector economy. The informal sector economy becomes a
strategic distribution channel for formal sector enterprises resulting in a ‘win-win’
situation for both sectors.
6.2.5. Role of political segregation in creating an Informal Sector Economy.
The experts unanimously agreed that the informal sector economy in South Africa is
the economic consequence of colonization and political segregation. The informal
sector economy increased exponentially when the majority of the population was
excluded from formal sector opportunity reserving the countries abundant resources
and assets for the minority of the population. The majority were also denied education
opportunities which meant that they were ill prepared to effectively and efficiently
operate in the formal sector economy. They then resorted to the informal sector
economy.
The experts recommended an equal investment in economic reintegration as is being
spent of political and social reintegration. This means increasing capacity and efficiency
in the Department of Education which must spill over to government funded schools.
Students must not be without textbooks. Furthermore, regulations must be enforced
on public and private enterprises to provide bursaries, internships and employment
opportunities for the previously disadvantaged population. The government is in a
position to implement policies and to give non-financial support especially with
regards to promoting education as a priority.

86
6.2.8. How the Informal Sector Economy should be administered.
There were multiple and conflicting views on how the informal sector economy should
be administered. One expert was of the opinion that entrepreneurs not only survive,
they thrive from informal sector economy activity primarily because it is informal and
as a result they have learnt the dynamics of operating in the informal sector economy.
Farrell (2004) stated that it was the informal structure of this economy that made it
attractive. If the economic environment of the informal sector economy is changed
without changing the social (educational) dynamics of the economy entrepreneurs will
be displaced. Therefore the informal sector economy should not be eliminated in its
entirety by imposing formal structures.
Van der Sluis, & Van Praag (2008), stated that entrepreneurs are not affected by levels
of formal education however there is a positive correlation between entrepreneurship
performance and levels of education and therefore entrepreneurs should therefore
invest in education to equip them in running successful enterprises. To encourage a
movement from the formal sector economy to the formal sector economy is
government must invest in the education of informal sector economy entrepreneurs.
One of the findings in phase two revealed that in 2010 government sponsored all
informal sector economy entrepreneurs operating in Randburg taxi rank to study
towards a ‘Computer and Business Management’ certificate at the University of
Witwatersrand however this will be elaborated on later in phase two.
The experts also agreed that focus should be placed on how to cultivate the potential
of the informal sector economy enterprises, nurture them thus enabling them to
participate meaningfully in the economy. Meaningful participation into the economy
goes beyond mere compliance to legal processes. Meaningful participation could be
achieved through access to finance, ease of business registration, tax exemptions and
other approaches to make the formal sector attractive.
The National Youth Development Agency (NYDA) has implemented numerous
programmes to assist entrepreneur’s operating in the informal sector economy
transition into the formal sector economy. One such programme is ‘The Micro-

87
Financing Programme’ which consists of loans between R1 000 and R100 000 granted
to informal sector economy entrepreneurs. These loans are to be repaid and work
similarly to the loans from a formal sector economy financing institution. The expert
emphasized that the advantages of granting loans are that they hone accountability
and also offer practices and disciplines required by formal sector economy financial
institutions; however repayment of these loans is low. The low repayment stems from
the fact that debtors feel entitled to the loans as this capital is generated from tax
which is ultimately paid by ‘them’. Another challenge identified by the expert was that
80% of the black population in South Africa are black listed and are therefore non
fundable, the predicament of the NYDA is that should they refuse to fund the non-
fundable majority then there would be no relevance of the NYDA, therefore every case
has to be assessed individually. The NYDA’s target group is young entrepreneurs aged
between 14 and 35 years, however these ages do not agree with the findings in phase
two of this research which were that there were no entrepreneurs under the age of
20.
Basu et al (2004) stated that MFI’s, defined as financial institutions established for the
benefit of small enterprises, the informal sector, the poor, and households who have
been barred access to formal sector establishments, were established in countries to
meet the increasing demands of the informal sector economy. These benefits include
savings, credit and insurance to the poor especially to women who normally do not
have easy access to formal financial institutions (Sanyang & Huang, 2008).
Alternatively, other approaches recommended by the experts for administering the
informal sector economy are through a process of ‘mild regulation’. Mild regulation is
a process assisting the enterprises in the informal sector economy to recognize the
benefits of formalization. ‘Mild regulation’ is a concept of self-regulation occurring
should and when the informal sector economy organizes itself within and under the
conditions of its environment, outside the formal regulatory systems. This concept of
self-regulation could be monitored and supported by the government and the private
sector to stimulate economic activity. Another viewpoint by an expert involved

88
conducting an assessment and exploration of how other countries have successfully
regulated of the informal sector economy.
The South African government realizes that typically if an informal sector enterprise
remains in the informal sector economy, its growth will be prohibited and the business
will eventually reach a stage of stagnancy. (Acs and Virgill, 2010) defend this statement
as they stated that in many cases enterprises in the informal sector jobs are not a
sustainable wealth creators. The government also realizes that supporting the informal
sector economy indirectly influences sustainability and expansion. The domino effect
begins with government support (financial and {non-financial such as policies and
regulation}) which encourages sustainability and sustainability encourages expansion.
One expert also argued that as the economy improves the informal sector decreases
and therefore by supporting the informal sector economy the government is indirectly
eradicating it. These informal sector participants if supported will eventually graduate
to the formal sector creating a bigger pool of revenue for the government that the
government can use to support the existing informal sector. It is important to define
regulation and not to confuse regulation with registration. The government can still
regulate without being registered and one cannot regulate without providing facilities.
The government needs to provide infrastructure.
Although government has a responsibility to support the informal sector economy,
they do not accept that it is their responsibility to create employment; rather their
responsibility is to create environments that are conducive to job creation. If
government forces formalization it will result in a dismal failure.

89
6.2.9. Labor conditions.
Because informal sector economy entrepreneurs have no ‘formal’ labor representation
they have very little bargaining power and are forced to accept terrible, challenging
and unfair conditions to operate in. Despite the challenges that labor conditions in the
informal sector present for both entrepreneurs and government one expert argued
that before the rights of workers are attended to, conducive economic conditions and
environments must be established for them to operate in must be prioritized. And one
of government’s greatest challenges is the juggling of competing priorities. Once the
best approach to include the informal sector economy participants in the main stream
economy has been assumed of and implemented, conditions that govern labor
conditions in the informal sector will be formulated and implemented.
This expert argued that organized unions are for employees, informal sector economy
entrepreneurs are business owners therefore a union would not be appropriate for
them. To increase the bargaining power of informal sector entrepreneurs they
themselves should organize themselves through the formation of associations and
forums.

90
An expert argued that the dynamic nature of the informal sector economy means that
there is a high turnover and a low lifespan and therefore is not conducive to a
permanent structure such as an organized union. There vibrant and unstable nature of
the informal sector economy will not respond well to structure and ‘order’. The
informal sector economy must therefore be appreciated for its core dynamism. The
views of the experts resembled the ‘distortionist’ perspective of labour regulation
(Betcherman & Ogawa, 2001). The distortionist perspective emphasizes the benefit of
market processes and is concerned that institutional forms of regulation obstruct
adjustments to economic shocks and discourage hiring for cost saving advantages.
Informal sector economy enterprises are labor intensive and formal sector economy
enterprises are capital intensive therefore when small businesses thrive there is
economic growth. Informal sector economy enterprises cannot depend on formal
sector economy enterprise to create jobs as their (formal sector enterprises)
productivity is largely derived from technology and capital.
6.2.10. What the experts would ask the entrepreneurs operating in Informal Sector
Economy.
6.2.10.1. “As an entrepreneur that operates in the informal sector economy for a
living, what can the government do to encourage entrepreneurs in the informal sector
economy to migrate from the informal sector economy into the formal sector
economy?”
6.2.10.2. “Informal sector entrepreneurs lack discipline which is surprising for persons
operating in a sector where their income is not consistent and operate in it to survive.
Within that paradigm why does the informal sector economy not adhere to the
business practice of treating their businesses as a separate legal entity and drawing a
salary instead of consuming their entire profits? The expert added; “The entrepreneurs
in the informal have very good ideas and that they are working towards making them a

91
reality. Discipline will enable them (informal sector entrepreneur entrepreneurs) to
build sustainable enterprises and not survivalist hand to mouth enterprises”.
6.2.10.3. “South Africans possess a culture of handouts yet they are not receiving
monetary assistance from the government. What appropriate and meaningful support
do informal sector economy entrepreneurs need, what obstacles are they facing?
Government needs to engage with these entrepreneurs in order to create a
meaningful support package.” Instead of focusing on formalizing the informal sector
economy an inquiry leading to a better knowledge and understanding of the living
conditions and the difficulties experienced in both the formal sector economy and the
informal sector economy should be made (Frota, 2007).
Phase one presented a high level discussion of the results from Chapter five. The
results combined with the literature produced rich strategic solutions of how the
informal sector economy should be managed. The experts introduced a third potential
research question which was to create a hybrid of formalization of the informal sector
economy and leaving it in its current state. This hybrid would be to create formal
trading environments where they can benefit from the infrastructure; regulation and
social protection however do not lose their dynamic structure and versatility. There
structures are similar to the SEZ’s that were introduced in chapter two.
In the findings of the research in phase one and in phase two there were results that
agreed with the literature in chapter two and there were results that did not agree
with findings from chapter two. There were also new findings. A discussion of the
findings from phase two will be deliberated.

92
Research responses from phase two.
Table A presents the different locations that the interviews were conducted.
Geographic location Number of respondents Percentage
%
Randburg 7 13.8
Johannesburg Central
Business District Pritchard
street
10 19.6
Pretoria CBD 10 19.6
Brits 10 19.6
Diepsloot 4 7.8
Soweto 10 19.6
Total 51 100%
The objective of conducting interviews on multiple locations was to get an inclusive
and consolidated view of the operating in the informal sector economy. Krueger (2006)
stated that the location of enterprises contribute to their competitiveness. The
findings of this research agree with Krueger (2006) as many informal sector economy
street vendors stressed the importance of location in business. Interviewing on
multiple locations also revealed the importance of location in entrepreneurship
activity.
When asked why he operated in Diepsloot a 35 year old Indian male entrepreneur
responded “Location, location, location is important. The average and uneducated Joe
wishes he operated in Johannesburg Central Business District (CBD), however
operating in the CBD comes at a premium. Yes there is heavier pedestrian traffic and
the entrepreneur is guaranteed more customers however the rent in double if not
triple the prices we pay here in Diepsloot. This finding agreed with (Rolfe, Woodward,
Ligthelm and Guimaraes, 2010), that the preferred location (urban areas) charges
premiums of 50% non-preferred locations (rural areas) because there is a higher per
capita income and demand density in developed urban areas. The entrepreneurs
continued the beauty is in the maths. My expected income may be marginally lower
than it would have been if I was operating in Johannesburg, however my expenses are
exponentially lower”.

93
This research identified location as critical for the informal sector economy
entrepreneur as their businesses rely heavily on physical transactions, this because
they do not have the appropriate infrastructure to support electronic transactions.
Furthermore, their businesses are not specialized and are therefore easy to duplicate
and there is no loyalty to one specific entrepreneur as there are many entrepreneurs
doing the same thing.
Table B presents the numbers of the two genders interviewed.
Total Percentage
Male 39 76.5
Female 12 23.5
Total 51 100%
There is a disproportionate number of the numbers of male and females interviewed
because the researcher experienced that female entrepreneurs were reluctant to be
interviewed forming a significant research limitation for the researcher. Khan & Sinha
(2008) stated that within China, India, Brazil, and South Africa (CIBS) there is an
positive relationship between the informal sector economy and the large share of
females operating in it because of a lack of equity policies by the governments of
respective the countries. This research however through mere observation on all
locations where interviews were conducted witnessed that there were more males
operating in the informal sector economy than females
The researcher observed linkages between the different genders and the retail activity
that they engaged in respectively. Female informal sector entrepreneurs were
restricted to food retail, clothing retail and home-ware retail, male informal sector
entrepreneurs were more diversified in their activity.
One average there was no disparities between the different genders and reason for
entry into the informal sector economy; they entered the informal sector for the same
reasons which will be analyzed in detail.

94
A 41 year old male, black entrepreneur justified his entry into the informal sector
economy by stating; “I was retrenched and I lost my job, with my job I lost my dignity
because I was unable to provide for my family. With this business I have regained my
dignity and even more because this business is mine. I am making less money than I
was making in my previous job but this business belongs to me, I built it with my own
hands and now I am not dependent on anyone but me for my daily bread”
A 54 year old black female entrepreneur justified her entry into the informal sector
economy by stating; “I live for my family and I have to provide for them, I experienced
a financial drought. For a while nature was against me and my survival but I was forced
to go against nature and find a way to survive. This is my means to survive. My family
depends on it”
Table C presents the ratio between South African and non-South African
entrepreneurs operating in the Informal Sector Economy.
Total Percentage %
South African 31 61.8
Non South African 20 38.2
Total 51 100%
The objective of separating South African’s and non-Africans was to get a perspective
of the number of non-South African informal sector economy entrepreneurs were
operating in South Africa. Schneider F, Enste D (2000) stated that immigrants have a
direct relationship with the size of the informal sector economy. The larger the
number of immigrants in a country, the larger the size of the informal sector economy
in that country.
When asked why he was operating in the informal sector economy in South Africa a 31
year old male Kenyan entrepreneur responded; “I was displaced from my country
during the 2002 political uprising, there was no opportunity in Kenya and the only

95
opportunity was to starve to death and many people chose that option. I chose to live
but I could not live at home, so I came to South Africa” He also added; “Although I
would love to go home, I appreciate the strong rand. The economic value of one rand
far exceeds that of its Kenyan counterpart one shilling and it gives me and my family
(who is in Kenya) a higher purchasing power. When I send three hundred rand home
my family is comfortable, it is better than three hundred shillings”
When questioned about his success as an informal sector economy entrepreneur
operating in South Africa he responded; “The advantage of being an immigrant in
South Africa is that the tourist (this gentleman ran his enterprise in Hartebeespoort
which has a significant tourist penetration) appreciates what is different and the art
that I sell is from Kenya and it is different so I am more successful than the South
African entrepreneur because he is boring and the tourists have seen what he has to
offer. When the new BMW comes out the people will buy the new BMW because it is
exciting and different. They no longer care about the old BMW, I am the new BMW,
and he (the South African entrepreneur) is the old BMW. People love Kenyan art and I
am running a business fuelled by people’s passion. I am proud of making money to
send back home. It gives me dignity”
This research agrees with the notion that immigrant entrepreneurship introduces
innovation, competitiveness and a positive output in terms of total factor productivity
into a market (Losby, Else & Kingslow 2002). Unlike the South African population,
immigrants do not have expectations from the government and are willing to put in
extra effort to survive.

96
Table D presents the ages of the entrepreneurs interviewed.
Age in years Number of respondents Percentage %
0 < 20 0 0
20 < 30 18 35.3
30 < 40 18 35.3
40 < 50 7 13.7
50 < 60 5 9.8
60 < 70 3 5.9
Total 51 100%
The objective of this table was to capture the age that was most prevalent with
informal sector economy activity. (Marcouiller, de Castilla and Woodruff, 1995) stated
that the young and the old were more likely to engage in informal sector activity
leaving the prime aged to work in the formal sector economy. This research observed
that the majority of the sample ages were within the prime ages and 70.6% informal
sector economy entrepreneurs were between the ages of 20 years old and 40 years
old. The researcher observed that there were no respondents under the age of 20
years old.
When asked about her outlook on operating in the informal sector economy a 23 year
old, black, South African female entrepreneur stated; “What is a black diamond, I
thought I knew because I thought that I was a black diamond. I am young, black and
educated but diamonds do not sit on the side of the road in these conditions selling
Russians (pork sausages) to make a living. I went to school and I passed, I went to
university and I finished my degree the government has failed in providing me with a
job. This research agrees with the notion that the urban informal sector is dominated
by individuals in the 20 years old to 40 years old age range (Bikales, Khurelbaatar &
Schelzig, 2000).

97
Table E presents the races in which the Informal Sector Economy entrepreneurs fell
into.
Race Number of responses Percentage %
Black: 49 94.1
White: 0 0
Colored: 0 0
Asian: (Indian) 3 5.9
Other: 0 0
Total 51 100%
The objective of this table was to disclose the races that entrepreneurs operating in
the informal sector economy fell into. There were limitations that may have had an
impact on the findings of this research. A considerable amount of informal sector
activity happens in the townships. Out of the six locations the sample was extracted
from, two were black townships. The researcher did not conduct research in Colored
or Indian townships therefore having an effect on the findings. However the
researcher did derive a significant portion of the sample from four metropolitan
trading areas and the findings were that a majority of the traders were black by race.
When a 27 year old male, black entrepreneur was asked on whether he was surprised
at the racial composition of the entrepreneurs operating in the informal sector he
responded; “The only time I have ever seen a white man is in an expensive car or on
the television shaking hands with a rich black man trying to convince everybody that
he (the white man) is really distributing his wealth to benefit the entire black
population” Apartheid really established the white man as the custodian of wealth in
South Africa. Even though the government is trying to reverse the effects of apartheid
on the black population the money is being shared by those people who were at the
right place at the right time, so yes there are a few black people who are being made
rich by BEE policies but it is a minority of the majority. So yes I am not surprised that
many people operating in the informal sector economy here in Diepsloot are black.”
The research agrees with the economic implications of political segregation that was
discussed in phase one of the findings. When the majority of the black population was
socially and politically sidelined during apartheid the economic consequences were an

98
enlarged informal sector economy. Eighteen years following democracy the economic
effects of the segregation is still proving to be a challenging gap to condense.
Table F presents the level of education of Informal Sector Economy entrepreneurs.
Level of education Number of respondents Percentage %
No Schooling 0 0
Primary School 10 19.6
High School 28 54.9
College 3 5.9
University 9 17.6
Other 1 2
Total 51 100%
The objective of this table was to disclose the level of education of the entrepreneurs
74.5 % of the sample has no tertiary education and without specialist skills required by
the formal sector economy the demand for the low skill level entrepreneurship that
exists in the informal sector economy will remain high. This research agrees with the
findings from (Quinn & Rubb, 2006) who stated that there was a positive relationship
between an individual’s education and their employment, earnings, wages, and the
economic growth of a country. In addition Quinn & Rubb (2006) assert that the level of
education of an individual will affect their occupation because certain specialised jobs
require certain levels of tertiary education. One such example in South Africa is that
despite the high unemployment levels, there is still a massive shortage of doctors
(Wildschut, 2010). There is an insufficient amount of individuals studying this
specialized skill resulting in a shortage of doctors. The research agrees that the fact
that 74.5% of the sampled population are without tertiary education supports the
notion that there will therefore be a big demand in low level informal sector economy
entrepreneurship that does not require specialized skills that can only be acquired
through education.

99
A 47 year old South African black male entrepreneur operating in Randburg stated that
“Education justifies the premiums in salaries. The hardest and most uncomfortable
jobs are reserved for persons with no education. A lack of education just means that
you get exploited.” The 25.5% entrepreneurs who had either attended and not
completed or attended and completed their tertiary education comprise of
entrepreneurs who were unable to find jobs therefore supporting the notion that the
government does not have sufficient capacity to facilitate redistribution and one such
example is job creation for the majority of the population (Nattrass &Seekings, 2001).
In addition, if the entrepreneurs in the informal sector economy are all without formal
tertiary and specialized education, with specialized skills that only tertiary education
can provide, it is not possible for this sector economy to grow, progress and prosper.
Table G presents the entrepreneurs desire to complete their education.
Desire to ‘complete’
your education
Number of Responses Percentage %
Yes 40 78.4
No 11 21.6
Total 51 100%
The objectives of this table were to show the number of informal sector economy
entrepreneurs who had a desire to complete their education. Although many
entrepreneurs felt that they had not completed their education journey, they were not
prepared to go back to school.

100
Table H presents the length of time the Informal Sector Economy enterprises have
been in operation.
Length of time in years Number of responses Percentage %
0 < 1 16 31.4
1 < 5 16 31.4
5 < 10 3 5.8
10 < 15 8 15.7
15 <20 6 11.8
20 < 2 3.9
Total 51 100%
The objectives of this table were to present the length (in years) of operation of
informal sector economy enterprises.
Ligthelm (2005) estimated a 40 % survival rate for informal sector enterprises to last
over five years. A 62.5% majority of the enterprises sampled were younger than five
years and 31.4% were younger than one year. However 31.4% of informal sector
economy enterprises have been in existence for more than ten years and the research
does not agree with (Simons & Lake, 2006) who stated that enterprises in the informal
sector economy are temporary structures. Instead the findings are more in line with
findings from (Rolfe et al., 2010) which found that 39% informal sector economy
enterprises were in business for at least five years.
When asked whether she thought that her two week old business would be successful
a 23 year old female entrepreneur responded; “I don’t know. I have located myself in a
busy area and I have no competition. We sell Russians just outside Shoprite in
Diepsloot and people buy pap from Shoprite and Russians from us because we sell
Russians cheaper than Shoprite does. Some of our customers buy chips from KFC and
Russians from us. Because our product compliments the products sold at the mall
(Diepsloot Mall) and that they are sold at a cheaper price I do expect my business to be
around for a very long time” these findings contradict the findings by (Rolfe et al.,
2010) who stated that informal sector economy enterprises located near shopping
centres or malls have lower income and sales. The findings of this research argue that

101
the entrepreneur was leveraging off the synergies offered by enterprise in the formal
sector economy (Daniels, 2004). Although the 23 year old entrepreneur held a
Bachelor in Commerce qualification because she was still unable to find employment
expected to establish herself in the informal sector economy. She stated “I expect to
be around for a very long time.”
Table I presents the number of entrepreneurs who were operating their first
enterprises and those who had attempted previous enterprises that had failed.
Total Percentage %
Yes 26 51
No 25 49
Total 51 100%
The objectives of this table were to disclose the number of entrepreneurs who were in
their first attempt of business or whether they had attempted a business before.
The ratio between first businesses and more than first businesses was almost equal.
However the high percentage of the number of entrepreneurs who had established
ventures that had failed is evident of the importance for government to create an
economic policy that creates economically viable enterprises which do not require
government subsidies (Rolfe et al., 2010). This statement is agreement with the
general concession from the experts in phase one of the importance for government
to create environments that are conducive towards the growth and prosperity of
enterprises operating in the informal sector economy. The researcher did not observe
a pattern between the ages of the entrepreneurs and their number of attempts at
establishing enterprises.

102
Table J presents the weekly turnover of the Informal Sector Economy entrepreneurs.
Weekly turnover Number of respondents Percentage %
R0 < R100 0 0
R100 < R500 7 13.7
R500 < R1 000 7 13.7
R1 000 < R2 000 16 31.4
R2 000 < 3 5.9
Don’t know 13 25.5
Fluctuates 5 9.8
Total 51 100
The objectives of this table were to illustrate the turnover generated by the informal
sector economy entrepreneurs.
58.8% of the entrepreneurs generated a weekly turnover in terms of revenue and not
profit of less than two thousand rand a week. These findings agree with (Rolfe et al.,
2010) that in South Africa, the median income for informal retail micro-enterprise falls
below the minimum wage. 25.5% of the sample did not know their weekly turnover.
Table K presents the number of entrepreneurs who reinvested into their enterprises.
Reinvest Number of respondents Percentage %
Yes 16 31.4
No 35 68.6
Total 51 100%
The objective of this table was to give an indication of the number of entrepreneurs
who re-invested in their enterprises.
The researcher observed that initially 85 % of the entrepreneurs interpreted re-
investing as purchasing trading stock. Only eight (15%) entrepreneurs understood that
by re-investment the researcher meant the investing of current profits as additional
capital; into the business to facilitate expansion. Although the researcher clarified the

103
difference between purchasing stock and re-investing many entrepreneurs still argued
that purchasing stock was considered re-investing into the business. Their argument
was that based on the premise that they could take the money generated from
business activity and re-invest it in something else such as another enterprise, a
stokvel or a lottery ticket. They argued that they were not obliged to re-invest into the
business, instead they chose to re-invest in the business.
The findings of this research are in agreement with (Rolfe et al., 2010) that although
most informal sector economy enterprises are established for survival other
entrepreneurs enter into the informal sector economy to generate a “sustainable
livelihood” (p. 1). (Pedro & Erwan, 2006) also made this distinction. The entrepreneurs
who reinvest into their enterprises are those who wish to generate a sustainable
livelihood and the entrepreneurs who do not re-invest into their enterprise are purely
living hand to mouth and engage in the informal sector economy for survivalist
reasons.
Table L presents the initial method of finance chosen by the entrepreneurs start their
enterprises.
Method of initial
finance
Savings 34 66.6
Friends and Family 14 27.5
Loan 1 2
Other 2 3.9
Total 51 100%
The objective of this table was to illustrate the preferred method of finance chosen by
the entrepreneurs to fund their enterprises.
The findings show that 94.1 % entrepreneurs would not even consider a loan from any
financing institution. All 94.1% respondents “feared” the bank. One 47 year old black

104
South African male entrepreneur stated; “There are many species of sharks in the
world, the one I fear the most is the loan shark. I have been shackled to the restraints
of budgeting however experienced more freedom than a debtor imprisoned in the
intestines of a bank”
In phase one an expert stated that 80 of the black population was black listed and
therefore not fundable which could possibly explain why only 2% of the sample
population funded their enterprise using a loan. The findings of this research therefore
agree that informal sector economy enterprises have no access to financial resources
and that when they experience low income levels an inability to re-investment in
working (operational) capital may threaten their sustainability and ability to survive
(Atieno, 2001). This lack of access to finance could be a result of their status as black
listed or because structures and institutions that are tailored towards their needs do
not exists (Tsai, 2004).
Table M presents the amount of capital used to start a business.
Amount of money for
start-up
R0 < R100 4 7.8
R100 < R500 10 19.6
R500 < R1000 8 15.7
R1 000 < R2 000 7 13.7
R2 000 < 22 43.1
Total 51 100%
The objective of this table was to give an indication of the amount of money spent to
start an enterprise in the informal sector economy.
27% of capital was spent to start the enterprises was between two thousand rand and
three thousand five hundred rand. There were 15.7% of the 43.1% who invested more
than two thousand rand who invested significant amounts of capital into their
enterprises. One of the entrepreneurs was a 35 year old Indian male who invested one
hundred and thirty thousand rand. He bought an existing informal sector economy

105
enterprise. The other was also a male Indian entrepreneur who had invested two
hundred thousand rand into his business. They both invested the money from savings.
This finding was consistent with (Rolfe et al., 2010) Who stated that the best chance to
informal sector economy entrepreneurial success seems to be locations in urban areas,
with male ownership as males predominantly acquire greater start-up capital.
This research also concluded that the explanation behind 96% start-up capital in the
informal sector economy falling below ten thousand rand was because capital
generated in the informal sector economy was predominantly generated from savings.
One 64 year old male entrepreneur had been saving R500 a month for eight years so
he could generate R60 000 to build a shop in his home town in the North West
province. He still has two years of savings before he accumulates his desired amount.
In total it will have taken him ten years to generate R60 000 as opposed to an
entrepreneur operating in the formal sector economy who could have acquired that
capital in ‘10 minutes’ through a loan in a financial institution. This is evidence of the
massive inefficiency gap existing in the informal sector economy.
Table N presents the number of entrepreneurs who paid for rent and storage.
Rent Storage Percentage %
Yes 23 23 45.1
No 28 28 54.9
Total 51 51 100%
The objective of this table was to disclose the number of entrepreneurs who paid for
rent and storage.
The equal number of entrepreneurs responding ‘yes’ to both rent and storage and ‘no’
was a pure coincidence There was no link between the entrepreneurs who paid rent
and those who paid storage. Some entrepreneurs pay rent without paying storage and
other entrepreneurs paid storage without paying rent. Some entrepreneurs paid for
both rent and storage and some enterprises paid for none. This table illustrates the
linkages between the formal sector economy and the informal sector economy and
supports the literature by (Davies et al., 2009) stating that a considerable amount of

106
enterprises in the informal sector economy have either production or distribution
relationships with formal enterprises in terms of supply, whether it is through products
(finished goods) or services (transactions or sub-contracting).
Table O presents the amount of money (in rands) spent on paying rent and storage.
Rent Percentage
%
Storage Percentage %
R0.00 25 49 23 45.1
R1 < R100 10 19.6 7 13.7
R100 < R500 3 5.9 12 23.5
R500 < R1 000 5 9.8 9 17.7
R1 000 < 8 15.7 0 0
Total 51 100% 51 100
The objectives of this table were to disclose the amounts of money spent in rent and
storage.
One entrepreneur in the ‘R1 000 < “category paid ten thousand rand in rent because
he was at a prime location. This finding was in agreement with findings from (Rolfe et
al., 2010) that spaces located in urban areas can charge premiums of over 50%
stemming from the ”higher per capita income and demand density in developed urban
areas” (p. 18).
Table P presents the number of Informal Sector Economy entrepreneurs with bank
accounts.
Bank Account Number of Respondents Percentage %
Yes 30 58.8
No 21 41.2
Total 51 100%
The objectives of this table were to give an indication of the entrepreneurs with bank
accounts.

107
Out of the 41.2% of entrepreneurs who did not have bank accounts 76.2% were
foreign immigrants in South Africa who were unable to open bank accounts because
they were in South Africa illegally.
The remaining 13.8% had a fear of banking institutions.
One 27 year old black, South African, male entrepreneur stated; “I am afraid of the
bank. I have heard stories of people depositing five hundred rand but they only have
access to four hundred and fifty rand and when they try and take out sixty rand the
bank takes two/ three rand in bank charges. I work hard for this money and I will not
share it with the bank”
Table Q presents the number of entrepreneurs who purchase their stock directly
from the Formal Sector Economy and those who manufacture their own stock.
Pre Purchase (Private Sector) 47 92.2
Manufacture Home Made 4 7.8
Total 51 100%
The objective of this table was to reveal the number of entrepreneurs who relied on
the formal sector economy for their business and those who ‘did not’. These findings
correlate with earlier findings of the linkages that exist within the formal sector and
the informal sector economy (Valodia, 2008). These findings from the research agree
with (Daniels, 2004) that both sector economies must continue to leverage off each
other. Furthermore in phase one an expert stated that by supporting the informal
sector economy the government is indirectly supporting the formal sector economy.
Furthermore these findings agree with the expert from phase one in the fact that the
informal sector economy serves as an important distribution channel of formal sector
goods and services to markets that they are unable to access, i.e. (grass-root markets).

108
Table R presents the number of entrepreneurs who were in favour of the
formalization of their enterprises.
Formalization Number of respondents Percentage %
Yes 38 74.5
No 13 25.5
Total 51 100%
The objective of this table was to disclose the number of entrepreneurs who were pro
formalization.
The findings reveal that 74.5% informal sector economy had a desire to formalize their
enterprises. One 54 year old black, non-South African, female entrepreneur in the ‘yes’
category shared that; “Many of us (informal sector entrepreneurs) wish to formalise
their informal enterprises however we don’t know how to do it. Some consultants
from the Department of Trade and Industry (DTi) come and distribute pamphlets
which explain the registration process however we cannot read and cannot
understand what these pamphlets are saying. What we need is a consultant who will
sit with us and explain the registration process” She also added; “We also wish to
benefit from the advantages of formalization, yes we will have to pay tax but we
receive social protection from the police, have the options of receiving loans from the
banks and an environment conducive to favourable business conditions.”
The findings from Table R illustrate the literature from Tanzi (2005) who emphasized
the need for government intervention through regulation as a means of stimulating
and endorsing social objectives, such as the protection of people, private and public
property, and economic objectives such as the production of goods and services in the

109
Table S presents the reasons entrepreneurs operate in the Informal Sector Economy.
Why are they in the
informal sector economy
Survival 46 90.2
Business Opportunity 5 9.8
Total 51 100
The objective of this table was to account for the reasons entrepreneurs were
31.4% entrepreneurs in the ‘survival’ category held jobs in the formal sector economy
however their basic wage was insufficient for basic survival. Another 39.4%
entrepreneurs in the ‘survival’ category had formerly been retrenched from the formal
sector economy. The remaining 29.2% in the ‘survival’ category were unsuccessful in
finding employment in the formal sector economy. These findings agree with the
literature provided by Pedro & Erwan, (2006) which was that the first group of
entrepreneurs who trade in the informal sector economy because of necessity and an
inability to find employment in the formal sector economy. The inability of these
entrepreneurs to find employment in the formal sector economy justifies the view-
point that government does not have the capacity to create jobs. Professor Adrian
Saville (2012) stated that in South Africa, the government has not created a single job
since 1985.
One 27 year old black, South African, male entrepreneur stated “The disadvantage
about operating in the informal sector economy is that you (entrepreneurs) are forced
to offer services at really low rates for two reasons. Firstly, you (entrepreneurs) are
serving a very cost sensitive market and secondly your (entrepreneurs) business has
been successfully duplicated by another entrepreneur one hundred meters from your
(entrepreneurs) doorstep forcing you to become competitive and due to the structure

110
of the informal sector economy we (entrepreneurs) can only compete on price because
our market does not care about quality, they care about which entrepreneur will save
them even if it is fifty cents” One 23 year old black South African female entrepreneur
stated “In the informal sector economy a monopoly cannot exist, if someone comes up
with a clever concept your business model will be duplicated no China man (Chinese
entrepreneur) needed. Any sain and logical person only operates in this economy
because he has no other options of generating an income”. The responded concluded.
A further 9.8% of the entrepreneurs operating in the informal sector economy do so
because they see a business opportunity in it. One respondent had full time
employment in the formal sector economy working at Transnet, however he saw an
opportunity of generating additional income through the formal sector economy. He
operated an internet café in Randburg Taxi rank. This entrepreneur fell in the second
group of entrepreneurs identified by (Williams & Nadin, 2010). These entrepreneurs
enter the informal sector economy to avoid the legal implications associated with
operating in the formal sector economy. They enjoy the autonomy, flexibility and
freedom offered by the informal sector economy (Williams & Nadin 2010).
Table T gives an indication of the number of entrepreneurs who would abandon their
Informal Sector Economy activity if a job opportunity in the formal sector economy
arose.
Job opportunity arises Number of respondents Percentage %
Give up Informal Sector
Economy
10 19.6%
Stay in the Informal Sector
Economy
41 80.4%
Total 51 100 %
The objectives of this table were to give an indication of the number of entrepreneurs
who would abandon the informal sector economy given the opportunity to work in the
formal sector economy. Perdo & Erwan (2010) identified the entrepreneurs who would

111
be more than to likely abandon their informal sector activity in favour for formal
employment a entrepreneurs who entered the informal sector economy for survivalist
reasons.
Out of the 80.4 % entrepreneurs in the ‘Stay in the informal sector’ 70.6% chose this
category because although they would personally leave their informal sector economy
enterprise, they would hire someone to keep it operational. The remaining 29.4% saw
extensive opportunity operating in the informal sector economy at a personal level
and perceived themselves as ‘true entrepreneurs’.
One 54 year old black, non-South African, female entrepreneur and a 33 year old black
South African male entrepreneur both stated that “I would have to assess the nature
and salary of the job opportunity first” The 33 year old entrepreneur elaborated his
previous statement; “I have been in the formal sector economy job market and it is not
all that glamorous, I am actually earning more in the informal sector economy. The
problem however is the conditions that we (informal sector economy entrepreneurs)
operate in, sometimes I am tempted to leave but then I remember why I left the
formal sector economy”
A 35 year old black non-South African female entrepreneur stated that; “For me this
(operating in the informal sector economy) is temporary, if I can get a job, a real job
here (South Africa) and back at home (Mozambique) I will leave the informal sector
economy”
For them engaging in the informal sector is not an option rather it is a necessity and if
they had an opportunity for formal employment would more than likely abandon their
informal sector activity in favour for formal employment (Pedro & Erwan, 2006).

112
6.4. Conclusion.
The main research question of: should the informal sector economy be formalized or
left as it is in its current state? Is addressed and answered in this chapter. The experts
suggested building an environment that is conducive to mild regulation however will
not interfere with the dynamic nature of the informal sector economy. The
entrepreneurs generally favoured formalization as opposed to leaving the informal
sector economy as it is. That finding suggests that in its current state the informal
sector economy is unsustainable.

113
Chapter 7.
Conclusion.
7.1. Introduction.
The previous chapter discussed the findings of the research which supported some of
the findings from the literature in chapter two and some findings contradicted some
findings of the literature presented in the chapter though. This Chapter will re-
introduce the research problem and discuss the background and the objectives of the
study. A summary of the main findings will follow with recommendations to the
government and all stakeholders involved as to how to manage the informal sector
economy phenomenon. The limitations of the study will be highlighted and future
recommendations will be derived and discussed. This chapter will end with a
conclusion of the study.
7.2. Research background and objectives.
Emerging market economies consist of two economies namely the formal sector
economy and the informal sector economy. However when the GDP economy is
calculated, this is done on only the formal sector economy, omitting a large portion of
the potential contribution to the economy by the informal sector. Globally the
informal sector economy accounts for a combined annual GDP of ten trillion US dollars
(Neuwirth, 2011). Therefore there is an urgent need to prioritize the informal sector
economy because of its importance to the socio-economic stability of the country
(Tokman, 2007). The informal sector economy comprises of entrepreneurs who are
filling the gaps that the government is unable to fill, by providing means of survival as
well as importing distributive channels of formal sector goods and services to markets
that are inaccessible to them.

114
The objectives of this research have introduced three possible solutions. Firstly to
formalize the informal sector economy, secondly, to leave the informal sector
economy as it is in its current state and thirdly to neither formalize it nor leave it as is,
but rather to create an environment that is conducive to both types of the economy
where both economies can thrive and not for one to work against the other.
Government needs to facilitate methods of increasing the contribution of the informal
sector economy into the overall GDP economy, whether it is through full integration or
partial integration (Tokman, 2007).
The objective was answered in a two phase approach. The first phase provided a
critical understanding of the impact of the informal sector economy and the
consequences that it has on the formal sector economy. It also enabled a thorough
understanding of the synergies of possibly engaging the informal sector economy with
formal sector economy. Lastly, it initiated discussions as to what strategies to pursue
to ensure the long term sustainability of the informal sector economy. Phase one also
directly developed questions for phase two that were more precise and detailed as
opposed to broad. The second phase interviewed entrepreneurs and subsequently
captured the findings for the purpose of the research. The information gathered from
the literature in chapter two and interviews in both phases in chapters five and six,
respectively, have been consolidated to advise the government as to how to manage
the informal sector economy.
7.3. Main findings.
7.3.1. Role of government.
The government has an exceedingly important role to play in the regulation of the
informal sector economy through. The government has the authority to implement of
policies that promote the growth and the progression of this economy. The policies
implemented require balance and cannot favour the informal sector economy over the

115
formal sector economy. The policies must encourage and facilitate a leverage of
synergies between the two economies.
The government must recognize that the informal sector economy needs to benefit
from the social protection that regulation promotes however bearing in mind that it is
not possible for the informal sector economy to adhere to the same stringent policies
existing in the formal sector economy. One of the experts introduced a new concept of
‘mild regulation’, defining it as a process of assisting the enterprises in the informal
sector economy to recognize the benefits of formalization. Through self-regulation the
informal sector economy organizes itself within and under the conditions of its
environment, outside the formal regulatory systems. This concept of self-regulation
should be monitored and supported by the government and the private sector in order
to stimulate and optimize economic activity.
A consistent theme throughout the entire research has been the creation of conducive
economic environments achieved through meaningful participation in the ‘GDP
economy’. Meaningful participation extends beyond mere compliance to legal
processes. It is achieved through access to finance, ease of business registration, tax
exemptions and to other approaches that will make the formal sector attractive.
Meaningful participation can also be achieved by cascading the informal sector
economy into three different levels: “immature, premature and mature” depending
on the enterprises ability to withstand the regulatory environment of the formal
sector. Immature enterprises represent the one extreme of enterprises operating in
the informal sector economy in that are not adequately prepared to operate in the
formal sector. Mature enterprises represent the other extreme, which are equipped to
operate in the formal sector economy.
7.3.2. Role of education.
There has been mounting evidence from the literature in chapter two and the findings
in chapters five and six respectively that education plays a critical role in the success of
conducting an enterprise. In addition, if all of the entrepreneurs in the informal sector

116
economy are without formal, tertiary education, with specialized skills that only
tertiary education institutions can provide, it is not possible for this sector to advance
and contribute favourably to the GDP economy. High level modern innovations such
mobile technology, Facebook, Sony, Manufacturing Capacity all required specialized
skills provided by education. Without these high level skills, the informal sector
economy will remain ‘that economy’ that is only reserved for low level skilled
individuals without the capacity to advance to an innovative high level, productive,
efficient and performance based economy. This research agrees with the findings from
(Quinn & Rubb, 2006) who stated that there was a positive relationship between an
individual’s education and the economic growth of a country.
7.3.3. Interconnected nature of the Informal Sector Economy.
The most valuable insight acquired about the interconnected nature of the informal
sector economy is that the informal sector economy acts as an important and strategic
distribution channel for the formal sector economy. The formal sector economy opens
up the market for the formal sector economy by distributing products and services
produced in the formal sector economy into grassroots markets previously inaccessible
to the formal sector economy. The interconnected structure of the formal sector and
informal sector economy validates the fact that they cannot be viewed in isolation as
two distinct economies for two prevalent reasons. Firstly, the previous justification and
secondly, supply chain linkages including the fees paid by informal sector economy
entrepreneurs as rental for trading on public property (Chen, 2007).
7.3.4. Role of access to finance.
The findings of this research illustrated that, most informal sector economy
entrepreneurs only generate sufficient revenue for survival therefore assuming that
there is insufficient funding to re-invest into the enterprise and potentially to expand.
Atieno (2001) in the literature findings in chapter two argued that the conditions in the
informal sector economy, at times, do not allow entrepreneurs to generate sufficient

117
revenue to fund their working capital. Ligthelm (2005) predicted that only 40% of
informal sector economy enterprises make it over five years because of the restrictions
arising from a lack of access to finance. It is a universal theory that applies even in the
formal sector economy that the greatest reason why businesses fail is because of cash
flow shortages (Watson, Hogarth-Scott and Wilson, 1995).
7.3.5. Role of historical political segregation.
The economic implications of political segregation were a developmental insight. The
domino/perpetual effects of political segregation through the denial of education
make it all the more challenging to reverse the effects of political segregation.
Without, adequate education the previously disadvantaged is ill equipped to efficiently
manage the countries resources and they will continue to be side lined and
marginalized into the low level economy.
7.4. Recommendations.
7.4.1. Recommendations to the government.
Government, (through the Department of Trade and Industry and the Department of
Economic Development) must continue to invest heavily in initiatives such as the New
Growth Path (van Aardt et al., 2011) and formal trading environments (Antonites,
2007) in an attempt to integrate the informal sector economy into the GDP economy.
The government should not impose the stringent regulations ,stipulated in the
literature in chapter two, to the informal sector economy through a process of direct
formalization. The government should not leave the informal sector economy in its
current state either as the informal sector economy is stagnating in its current
environment. The government needs to introduce a framework of policies where
informal sector economy entrepreneurs benefit from social protection (Life insurance,
pension plans) offered in the formal sector economy. Government must also invest in
facilitating the establishment of institutions to provide finance to this sector economy

118
using different forms of collateral. The government is advised to use the model of the
Grameen Bank in Bangladesh. The Department of Education has an important role to
play however this role will be discussed in 7.4.2.
Government must also introduce the concept of mild regulation that was discussed
earlier, procurement policies similar BEE policies towards the private enterprises in the
formal sector economy to encourage engagement with the informal sector economy.
Government must construct an all-inclusive policy that is so dynamic and flexible that
it also represents the interests of the formal sector economy. The policy must focus on
leveraging off the synergies of the two economies.
Lastly the government must introduce regulations that eliminate the exploitative
behaviour of cartels as they have a detrimental effect on the prosperity of informal
sector economy enterprises.
7.4.2. Recommendations to the entrepreneurs in the Informal Sector Economy.
The entrepreneurs in the informal sector economy must organize themselves into
forums and associations to increase their bargaining power. They must then use this
bargaining power to negotiate with government (Department of Education) on
potentially increasing their education levels, skills and proficiency. The Department of
Education received 22% of the national (2010-2011) budget a total amount of R165
billion (http://www.info.gov.za/aboutsa/education, 2012).
The South African government has established Sectoral Education and Training
Authority institutions which provide skills and training development at no cost.
Entrepreneurs must use these channels provided by government and take an active
interest in enhancing their education levels and training. SETA.
Entrepreneurs must also use their bargaining power to negotiate for an access to
finance. They must also acquire a discipline of adhering to formal sector economy

119
business practices whilst in the informal sector economy. This will enhance their
accountability.
7.4.3. Recommendations to private enterprises in the Formal Sector Economy.
Private enterprises in the formal sector economy are advised to co-operate with
government’s policies of integrating the informal sector economy into the GDP
economy. Furthermore they must and use their expertise to advise the government on
how to create effective and efficient policies that would be benefit for both them and
the informal sector economy. The private sector should also and engage with the
informal sector economy in acknowledgement that their product is gaining access to
previously inaccessible markets. Private enterprises have a greater bargaining power
as well as access to resources, they are encouraged to share their resources with the
informal sector economy and avoid exploitative behaviour therefore work towards
leveraging off the synergies established between them and the informal sector
economy.
Furthermore, all private companies are obliged to contribute a percentage of their
profits to corporate social investments (CSI). Instead of investing in non-productive,
unsustainable and dependent charities that simply consume the funds without any
productive output, private sector enterprises should invest in the informal sector
economy to boost their productivity, output, growth and competitiveness. This
investment constitutes a form of redistribution of economic resources however
achieved through CSI as opposed to additional tax burdens as an attempt to
redistribute resources and to finance the development of the informal sector
economy. Private companies should prioritize contributing to informal sector
enterprises especially those who distribute their products. By supporting them they
would be indirectly marketing themselves and creating a brand awareness and
perception within a previously untapped market.

120
7.5. Research limitations.
The limitations of pursuing an exploratory study using qualitative research methods
are that because the researcher becomes a part of the research it is difficult for the
researcher to remain objective. They therefore place themselves at a risk of being
subjective. Qualitative research also prefers a small sample in an attempt to preserve
the richness in description and to preserve the quality of the information. This method
therefore harvests a higher internal validity however the external validity may be
limited.
The research made use of a judgement sample and the likelihood of the sample of
being representative is low as the choice of respondents is determined by the
researcher. The research also made use of cluster sampling, however due to
geographic constraints the sample chosen was not representative of the entire South
African population. The research consisted of no respondents from rural areas and
therefore the findings generated in chapter five (from the urban respondents) cannot
be generalized to suit the needs of entrepreneurs operating in the rural informal
sector economy as their needs may differ. Furthermore the research was only
conducted in two provinces in South Africa, Gauteng and the North West Province
respectively. In South Africa for example; Durban has a large population of ‘Indian’
informal sector economy entrepreneurs and Cape Town has a large population of
‘Coloured’ informal sector economy entrepreneurs. Because the findings in chapter
five identified that at times cultural and racial backgrounds played a significant role in
why entrepreneurs operated in the informal sector economy, the research potentially
lost out on unique and interesting findings by not interviewing those respondents.
Further limitations included an unwillingness of respondents to answer certain
questions, language barriers and time constraints. In qualitative research the

121
researcher needs time to understand, comprehend and to gain an insight on what was
being observed, however the long the interview affects the quality of answers given.
.
7.6. Implications for future research.
The limitations of this research created an opportunity to enhance the research
process for further research on this topic. Future research on this topic must be
conducted using a larger sample size, with particular focus on the rural informal sector
economy where a large scale of this activity takes place. By doing this, the future
research will achieve a sample that is more representative of the entire population in
South Africa. . Furthermore similar and unique studies should be conducted in all
countries with a large informal sector economy especially in Africa.
To increase the objectivity in the future research, it is suggested that is at least two
researchers with the same objectives conduct the study and analyse it using their two
different and unique perceptions.
Towards the end of the research, the researcher realised that there is potential for
private sector operating in the formal sector economy to play a significant role in the
sustainability of the informal sector economy and to possibly integrate of the informal
sector economy into the GDP economy of South Africa. The future research should
engage with the private sector economy to define their role in how to create
sustainable informal sector enterprises and how they can potentially contribute into
the GDP of South Africa.
Future research should focus on building a model identifying the role of the public
sector, the private sector and the informal sector economy entrepreneur in sustaining
the future of enterprises operating in the informal sector economy. This model can
start off from the recommendations stipulated in 7.4.3 of this research.

122
7.7. Concluding remarks.
The Formalization of the Informal Sector economy, Panacea or Chimera?, No it is not
panacea; as the informal sector economy in its current state is not in a position to
adhere to the same registration and regulation policies endured by the private sector
economy. The structure of the informal sector economy is too dynamic to operate
under such stringent regulations. Neither is it chimera; as the informal sector
economy in its current state is unproductive and uncompetitive and needs an
economic makeover. The entrepreneurs in the informal sector economy remain under
the poverty line; there are too many socio economic problems with the current state
of the informal sector economy. The government needs to implement an all-inclusive
policy which benefits the formal sector and informal sector economy respectively
enabling them to both make an optimal contribution towards the output and GDP of
the country.

1
References.
Albrecht, J., Navarro, L., and Vroman, S. (2009). The Effects of Labour Market Policies
in an Economy with an Informal Sector. The Economic Journal, 119, 1105–1129.
Altman, M. (2008). Formal-Informal Economy Linkages. Working Paper 5263. Retrieved
from:
http://www.hsrc.ac.za/index.php?module=KTree&func=doc_request&source=research
output&docid=1398 Accessed on: 16/01/2012
Aronsson, M. (2004). Education Matters—But Does Entrepreneurship Education?
Academy of Management Learning and Education, Vol. 3, No. 3, 289–292.
Atieno, R. (2001). Formal and informal institutions’ lending policies and access to credit
by small-scale enterprises in Kenya: An empirical assessment. AERC Research Paper
111
African Economic Research Consortium publishers. ISBN 9966-944-52-4.
Basu, A., Blavy, R., and Yulek, M. (2004). Microfinance in Africa: Experience and
Lessons from Selected African Countries. IMF Working Paper 2004-2174 Vol. 4-174.
Retrieved from:
http://books.google.co.za/books?id=FTt8ChEXgt8C&dq=Basu,+A.,+Blavy,+R.,+and+Yul
ek,+M.+(2004).+Microfinance+in+Africa:+Experience+and+Lessons+from+Selected+Afr
ican+Countries&source=gbs_navlinks_s Accessed on: 19/09/2012
Berg, B. (2004). Qualitative Research Methods for the Social Sciences. Fifth Edition.
Pearsons.
Betcherman, G., Dar, A., Luinstra, A., and Ogawa M. (2001) Labor Adjustment, Non-
Standard Work, and Employment Programs: Korea in an OECD Context* Labor Market
Reforms in Korea: Policy Options for the Future
Bikales, B., Khurelbaatar, C., Schelzig, K. (2000). The Mongolian informal Sector; Survey
results and analysis. Development Alternatives Inc. ILO report Retrieved from:
http://www.unescap.org/stat/isie/reference-materials/Analysis-Country-
Documents/Informal-Sector-MNG.pdf Accessed on: 19/09/2012
Boadway, R., and Sato, M., (2009). Optimal Tax Design and Enforcement with an
Informal Sector. American Economic Journal: Economic Policy vol. 1(1), pages 1-27,

2
Bohme, M., and Thiele, R., (2011). Is the Informal sector Constrained from the demand
side? Evidence from Six West African capitals. Kiel Working Paper 1683,1-31. Retrieved
from:
http://www.ifw-members.ifw-kiel.de/publications/is-the-informal-sector-constrained-
from-the-demand-side-evidence-for-six-west-african-capitals/kap-1683.pdf Accessed
on: 23/08/2012
Bradburn, N., Sudman, S., and Wansink, B. (2004). Asking Questions: The Definitive
Guide to Questionnaire Design For Market. John Wiley and sons.
David, M., and Sutton, C.D. (2004). Social Research the Basics. SAGE Publications.
Bruhn, M. (2008). License to Sell: The Effect of Business Registration Reform on
Entrepreneurial Activity in Mexico Policy Research Working Paper 4538. Retrieved
from: http://www-
wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/02/28/000158349_200
80228163807/Rendered/PDF/wps4538.pdf. Accessed on: 14/09/2012
Callaghan, C. (2012). Potential developmental effects of experience in the Southern
African inner city street trading sector. African Journal of Business Management ,
6(14), 5122-5135.
Chen, M.A. (2007). Rethinking the Informal Economy: Linkages with the Formal
Economy
and the Formal Regulatory Environment. DESA Working Paper No. 46, 1-10. Retrieved
from:
http://www.un.org/esa/desa/papers/2007/wp46_2007.pdf Accessed on: 21/01/2012
Chia, R. (1996). Teaching paradigm shifting in management education: University
business schools and the entrepreneurial imagination. Journal of Management Studies,
33, (4) 1-doi.10.1111, 409-428
Daniels, L.D., Donald, C., Mead, D., and Musinga, M. (1995). Employment and income
in Micro and Small Scale enterprises in Kenya. Results of a 1995 survey. GEMINI
Technical Report No.92. Retrieved from:
http://www.edgegrowth.com/Portals/0/Documents/Seminal%20Docs/SMME%20dyna
mics%20in%20Africa%20and%20developing%20nations.pdf Accessed on 13/06/2012
Daniel, P., (2004). Urban challenges: The Formal and Informal Economies in Mega-
Cities Vol. 21 No. 6 p 501 – 511 Elsevier doi:10.1016/

3
Daniels, S., (2011). Africa’s Informal economy can boost Innovation. Analogue Digital.
Dessy, S., & Pallage, S., (2003). Taxes, inequality and the size of the informal sector,
Journal of Development Economics, 70(1), 225-233.
.Iwalewa, B. (2012) The Role of the Informal Sector in African Economy Talk Afrique
Banker, R. D., Potter, G., & Srinivasan, D. (2000). An empirical investigation of
an incentive plan that includes nonfinancial performance measures. The
Accounting Review, 75(1), 65–92.
David, M., and Sutton, C.D. (2004). Social Research the Basics. SAGE Publications.
de Paula, A., and Scheinkman, J. (2007). The Informal Sector. Penn Institute for
Economic Research Department of Economics University of Pennsylvania Retrieved
from: http://www.econ.upenn.edu/pier Accessed on 21/01/2012
Denzin, N., and Lincoln, Y. (2005).The Sage Handbook of Qualitative Research. Third
Edition , Sage Publishers.
Dessy, S., and Pallage, S. (2003) Taxes, Inequality and the Size of the Informal Sector,
Journal of development Economics, 70, 225 -233.
Diamond, P., and Mirrlees. J. (1971). Optimal Taxation and Public Production.
Production Efficiency. The American Economic Review, Vol. 61, No. 1, 8-27.
Driscoll, D. (2011). Introduction to Primary Research: Observations, Surveys, and
Interviews. Writing Spaces: Readings on Writing., (2), Parlor Press.
Eamets, R., and Masso, J. (2005). The Paradox of the Baltic States: Labour Market
Flexibility but Protected Workers? European Journal of Industrial Relations SAGE Vol.
11 Number 1, 71–90.
Emran, M.S., Stiglitz, J. (2005). On selective indirect tax reform in developing countries
Journal of Public Economics. Vol. 21 (6) 501– 511 doi:10.1016
,
Ernest Aryeetey, (1998) Informal Finance for Private Sector Development in Africa

4
AFDB working paper 41 retrieved from:
http://www.afdb.org/fileadmin/uploads/afdb/Documen ... 157616-EN-ERP-41.PDF.
Accessed on: 03/05/2012
Faulkner, D., and Loewald, C. (2008). Policy Change and Economic Growth: A Case
Study of South Africa. Commisiion on Growth and development: Working Paper 41
retrieved from www.growthcommission.org, Accessed on: 03/05/2012
Feige, E. (1989). The Underground Economies: Tax Evasion and Information Distortion
Cambridge University Press.
Fiet, J. (2000). The Theoretical side of teaching entrepreneurship: Journal of Business
Venturing 16, 1–24 Elsevier Science Inc.
Fisher, P. (2002). Tax Incentives and the Disappearing State Corporate Income Tax.
State Tax Notes, 23, (9), 767-774.
Frota, L., (2007). Securing decent work and living conditions in low-income urban
settlements by linking social protection and local development. A review of case
studies: Habitat International Elsevier Habitat International. doi:10.1016
Goddard, W., and Melville, S. (2004). Research Methodology: An Introduction. Juta and
Company Ltd.
Ho, D., Wong, B., Tong, K. (2012). Measures to Improve the Competitiveness of Hong
Kong Taxation System in the Aftermath of the Recent Crisis. International Journal of
Economics and Finance, 4(5), 241
Ibicioglu, H., Baysal, H., and Sait Ozkul, A. The Role of High education in
Entrepreneurship training in respect of Transition Economies. Albania Example
Ihrig, J., and Moe, K. S. (2004). Lurking in the Shadows: the informal sector and
government policy, Journal of Development Economics, 73(2), 541-557.
.
Kearns, K., (1994). The Strategic Management of Accountability in Non-profit
Organizations: An Analytical Framework: Public Administration Review, 54(2)

5
Keen, M., (2008). VAT, tariffs, and withholding: Border taxes and informality in
developing countries. Journal of Public Economics, vol. 92(10-11), 1892-1906.
Khan, H., Sinha, A., (2008). Gender and Informal Sector Analysis in India Economy Wide
Approaches. World Institute for Development Economic Research Research Paper
2008/65 retrieved from
Kirby, D. A. (2004). Entrepreneurship education: can business schools meet the
challenge. Education & Training, 46(8/9), 510-519.
Kothari, C.R.,1985, Research Methodology-Methods and Techniques, New Delhi, Wiley
Eastern Limited.
Koujianao Goldberg, P., Pavcnik, N. (2003). The Response of the Informal Sector to
Trade Liberalization. Journal of Development Economics 72 (2), 463-496.
Kuchta-Hebling, C, (2000). Barriers to participation The informal Sector in Emerging
democracies Background Paper:
Bercovitz, J., & Mitchell, W. (2007). When is more better? The impact of scale
and scope on long term business survival, while controlling for profitability.
Strategic Management Journal, 28, 61–79. doi: 10.1002/smj.568
Lee, S., Chang, D., and Bae Lim, S. (2005). Impact of entrepreneurship education: A
comparative study of the U.S. and Korea." International Entrepreneurship and
Management Journal 1: 27-43.
Lee, S.M., and Peterson, S.J. (2000), Culture, entrepreneurial orientation, and global
competitiveness. Journal of World Business, 35(4), 401-416.
Lev, L., Brewer, L., and Stephenson, G. (2004). “Tools for Rapid Market Assessments.”
Oregon State University Oregon Small Farms Technical Report No. 6.
Lincoln, Y.S., and Guba, E.G. (1985). Naturalistic Inquiry. CA: Sage Publications.
Lofland, J., Snow, D., Anderson, L., and Lofland, L.H. (2006). Analyzing Social Settings:
A Guide to Qualitative Observation and Analysis. Canada: Thomson Wadsworth.
Nattrass, N., and Seekings, J, (2001). Democracy and distribution in highly unequal
economies: the case of South Africa. The Journal of Modern African Studies, Vol. 39
(03), 471-498.

6
Newman, I., Benz. C., (1998). Qualitative-Quantitative Research Methodology:
Exploring the Interactive Continuum. Southern Illinois publishers.
Noor, K., Case Study: (2008) A Strategic Research Methodology. American Journal of
Applied Sciences vol. 5 (11) 1602 – 1604.
Koujianao Goldberg, P., Pavcnik, N. (2003). The Response of the Informal Sector to
Trade Liberalization. Journal of Development Economics 72 (2), 463-496.
Loayza, N.V., & Rigolini, J, (2011). "Informal Employment: Safety Net or Growth
Engine?," World Development, Elsevier, vol. 39(9), pages 1503-1515,
Losby, J., Else, J,, and Kingslow M. (2002). Informal Economy Literature review
Marcouiller, D., de Castilla, V., and Woodruff, C. (1995). Formal measures of the
informal sector wage gap in Mexico, El Salvador and Peru
Mather, C ., and Greenberg, S., (2003). Market Liberalisation in Post-Apartheid South
Africa: The Restructuring of Citrus Exports after 'Deregulation'Journal of Southern
African Studies
Morduch, J. (1999.) The role of subsidies in microfinance: evidence from the Grameen
Bank. Journal of Development Economics Vol. 60, (1)
Oakland, W., and Testa, W. (2000). The Benefit Principle as a Preferred Approach to
Taxing Business in the Midwest Economic Development Quarterly, . 154-164.
Orwa, B., (2007). Jua Kali Associations in Kenya: A Force for Development and Reform:
REFORM Case Study Center for International Private Enterprise
Williams, C. (2006). The Nature of Entrepreneurship in the Informal Sector: evidence
from England. Journal of Developmental Entrepreneurship Vol. 12 (2) 239-254
Paulson, A., Townsend, R., and Karaivanov, A. (2006). Distinguishing Limited Liability
from Moral Hazard in a Model of Entrepreneurship Journal of Political Economy, vol.
114 (1)

7
Pedro, S., Erwan, Q. (2006). A competitive model of the informal sector Journal of
Monetary Economics.
Peñalosa, C., Turnovsky, S., Second-best optimal taxation of capital and labor in a
developing economy. Journal of Public Economics, 89, 1045– 1074.
Piggott, J., and Whalley, J. (2001). VAT base broadening, self-supply, and the informal
sector. American Economic Review (91), 1084-94.
Rahman, A., (1999). Women and microcredit in rural Bangladesh: anthropological
study of the rhetoric and realities of Grameen Bank lending. Westview Press, Inc.
Rogerson, R, (2007). Taxation and Market Work, Is Scandinavia an outlier? National
Bureau of Economic research Economic Theory 32 (1), 59{85.
Sanyang, S., and Huang, W. (2008). Micro-Financing: Enhancing the Role of Women’s
Group for Poverty Alleviation in Rural Gambia World Journal of Agricultural Sciences
4(6), 665-673,
Schneider, F. (2008). Shadow economy Readings in Public Choice and Constitutional
Political Economy V, 511-532, DOI: 10.1007/978-0-387-75870-1_28
Schwartz, A. (2012). The Perpetual Corporation.The George Washington Review Vol. 80
(764).
Singh, N. (2010). The Dynamics and Status of India’s Economic Reforms, Oxford
University Press,
Steele, M. (2007). Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships
and Limited Liability Companies. 32 Del. J. Corp. L. 1
Stigler, G. (1971). The Theory of Economic Regulation: The Bell Journal of Economics
and Management Science Vol. 2, (1), 3-21.
Paul, S. (1991). Accountability in Public Services: Exit, Voice, and Capture, Issue 614
World Bank Publications
Patton, M. Q. (2002). Qualitative Research and Evaluation Methods. SAGE publishers.
Formatted: Font: Italic

8
Quinn, M., and Rubb, S. (2006). Mexico's labor market: The importance of education-
occupation matching on wages and productivity in developing countries Vol. 25, (2)
Ritchie, J., and Spenser, L. (2002). Qualitative Data Analysis for applied policy research
page 305 Miles, M, Huberman) The Qualitative Researcher's Companion. Sage
Publications
Rolfe, R., Woodward, D., Ligthel, A., and Guimaraes P. (2010). The Viability of Informal
Micro Enterprise in South Africa, Conference on ―Entrepreneurship in Africa,‖
Whitman School of Management, Syracuse University, Syracuse, New York,
Schneider, F., and Enste, D. (2000). Shadow Economies Around the World - Size,
Causes, and Consequences. IMF Publishers
Simons, R., Lake, Z. (2006). Options for generating indicators on the informal economy
using the labour force survey: ILO
Salant, P., and Dillman, D.A. (1994). How to Conduct Your Own Survey
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research Methods for Business
Students fifth edition. Pearson Education.
Schmidt, C. (2004). The Analysis of Semi Structured Interviews A Companion to
Qualitative Research A Companion to Qualitative Research SAGE Publishers.
Stebbins, R. (2001). Exploratory Research in the Social Sciences first edition Sage
Publications, Inc; 1 edition
Tacoli, C. (2004). The role of small and intermediate urban centres and Market towns
and the Value of regional Approaches to rural poverty Reduction. OECD DAC POVNET
Schneider Barthold W (2002) Africa’s Aborted industrialization Modernisation
Strategies Impede Industrial growth D+C Development and Cooperation
Tangen, S. (2002). Understanding the concept of productivity Proceedings of the 7th
Asia Pacific Industrial Engineering and Management Systems Conference
(APIEMS2002), Taipei

9
Tanzi, V. (2005). Transition and the changing role of government.(Transition:
Achievements and Challenges): An article from: Finance & Development International
Monetary fund
Thomas, D. (2006). A General Inductive Approach for Analyzing Qualitative Evaluation
Data American Journal of Evaluation, Vol. 27 (2), 237-246.
United Nations Economic Commission for Africa (2006) Economic Report on Africa:
Meeting the Challenges of Unemployment and Poverty in Africa United Nations
Publications
Tokman. V. (2007). Modernizing the informal sector DESA Working Paper No.42
Economic and Social Affairs
Terpker, S. (2003). “Managing small and medium-sized taxpayers in developing
countries,” Tax Notes International, 29, 13 January, 211-234.
Tsai, K. (2004). Imperfect Substitutes: The Local Political Economy of Informal Finance
and Microfinance in Rural China and India World Development Vol. 32, No. 9, pp.
1487–1507, Elsevier publishers
van Aardt C., Ligtelm, A., van Tonder, J., (2011). A broad review of the new Growth
Path Framework with a Specific emphasis on the Feasibility of it’s proposed targets.
Research Report no 413 UNISA Bureau of Market research
Van der Sluis, J., and Van Praag, M. (2008). Education and Entrepreneurship Selection
and performance: A review of Empirical Literature. Journal of Economic Surveys Vol.
22(5), 795–841.
Vahapassi, A. (2004). “Social protection and the informal sector: Challenges, obstacles
and possibilities,” Paper prepared for the ASEAN Social Security Association 14th Board
Meeting, Aug 19-22, Jogyakarta, Indonesia.
Watson,K., and Hogarth-Scott, S., and Wilson N (1995). Small business start-ups:
success factors and support implications International Journal of Entrepreneurial
Behaviour & Research, Vol. 4 Iss: 3, MCB UP Ltd
Wildschut, A, (2010). HSRC Review - Volume 8 - No. 4 –
Williams, C. (2007). The Nature of Entrepreneurship in the informal sector: Evidence
from England Journal of Developmental. Entrepreneurship. Vol. 239 (2007). DOI:
10.1142

10
Williams, C., and Nadin S, (2010). Entrepreneurship and the informal economy an
overview Journal of Developmental Entrepreneurship Vol. 15 (4 )361–370.

11
Appendices.
Appendix 1: Unstructured interview with experts. (Please see below)
Appendix 2: Semi-structured interview with Informal Sector Economy
entrepreneurs.
(Please see below)

12
Interview questions prepared as a research requirement for the purpose of
my MBA
Formalization of the Informal Sector Panacea or Chimera?
1.) Why Should we/ Should we not formalize the Informal sector?
2.) Do you as an expert in the SMME enabling environment believe in a careful
formalization of certain informal structures, do you believe that there will
always be an informal sector economy?
3.) Nothing functions effectively without regulation. However the entire purpose
of the informal sector (Therefore with regulation there would be no informal
sector) Is there perhaps a more diluted maybe form of regulation in the
informal sector economy please comment
4.) Talking about regulation and just to introduce this from a historical perspective,
the informal sector economy is also called the peripheral or the marginalized
economy. This is because of apartheid as you are aware that the formal sector
economy was only reserved for whites forcing the black people to enter into
the informal sector economy for survival. With a clear mandate from the
government to transition into a smooth democracy, do you now think this also
means to include this informal sector into the main stream the same way black
people are now included from a political and socio-economic perspective?
5.) To make the informal sector economy more inclusive and more democratic is
there an organization such as a ‘trade union’ that represents the laborers of the
informal sector economy. If there is no union, should there be one?
6.) If you had a question for a retail trader in the informal sector economy, let’s
assume that there is something that you wish to know that you currently do
not know, what would it be?

13
Questionnaire prepared as a research requirement for the
purpose of my MBA
DEMOGRAPHIC INFORMATION:
(Please Tick)
South African
Non South African
1.) Gender:
Male
Female
2.) What is your age?
_____________
3.) Which of these languages do you prefer to speak? (Please Tick)
isiZulu
isiXhosa
Afrikaans
Sepedi
Setswana
English
Sesotho
Xitsonga
Siswati
Tshivenda
isiNdebele

14
4.) What is your race?
Black
White
Coloured
Asian
Other
If other please specify:
5.) When did you leave school? (Highest education qualification)
No Schooling:
Primary School: (Please Specify grade/ standard you left)
High School: (Please Specify grade/ standard you left)
College:
University:
Other: (Please specify)
6.) Is this your first business?
Yes
No
6.1 If it is not your first business, what other businesses have you owned?
_____________________________________________________
7.) How long have you BEEN in this business?
________________________________
8.) Do you own the business
Yes
No: What is your position in the business
9.) If it is not your 1st
business why did you leave your 1st
business?
______________________________________________________________________
______________________________________________________________________
10.)How long did you stay at your 1st
business?

15
________________________________
11.)Which industry in the informal sector do you fall under?
__________________________________________
12.) How many people work in this business?
_______________________________
13.)How much money did you spend to start the business?
__________________________________________
14.)Where did you get the money from?
______________________________________________________________________
______________________________________________________________________
15.)How do you spend the money that you make everyday?
______________________________________________________________________
_____________________________________________________________________
16.)How much do you spend to put back in the business?
_________________________________________
17.)How much money do you make a week / weekly turnover?
_____________________________________________
18.)How much rent do you pay to sell here?
_______________________________
19.)Do you have a storage facility?

16
Yes
No
19.1 If you answered yes how much do you pay?
_________________________________
19.2 If you answered no how do you get your goods to the market place every day?
____________________________________________________________
____________________________________________________________
20.) Did you ever go to a bank or any other credit / loan facility to ask for capital?
Yes
No
20.1 Did they agree to give you a loan?
Yes
No
20.2 If not what were their reasons for not giving you the loan?
____________________________________________________________________
___________________________________________________________________
21.)Do you have a bank account?
Yes: (Which Bank)
No
22.)Where do you get your supply from?
_______________________________________________________________________

17
23.) Do you want to go back to school?
Yes
No
23.1 Please support your answer?
_______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________
24.) Do you believe that people who started their own businesses need to be trained and
educated?
Yes: Why?
No: Why?
25.) Would you Consider formalizing your business?
Yes
No
25.1 Please support your answer
______________________________________________________________________
____________________________________________________________________________

Dissertation

More Related Content

What's hot (16)

Viewers also liked (13)

Similar to Dissertation (20)

Dissertation