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BARRIERS TO ENTRY AND RETURNS TO CAPITAL IN INFORMAL ACTIVITIES: EVIDENCE FROM SUB-SAHARAN AFRICA

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This paper investigates the patterns of capital entry barriers and capital returns in informal micro and small enterprises (MSEs) using a unique micro dataset for seven West African countries. Our findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated with most activities. We find very heterogeneous patterns of capital returns in informal MSEs. At very low levels of capital, marginal returns are extremely high—often exceeding 70 percent per month. Above a capital stock of 150 International Dollars, marginal returns are found to be relatively low at around 4–7 percent monthly. We provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSEs appear to be severely capital constrained.
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Keywords: D22; D24; O12; O17; entry barriers; informal enterprises; returns to capital

Document Type: Research Article

Affiliations: 1: International Institute of Social Studies, Erasmus University Rotterdam, The Hague, The Netherlands 2: German Institute of Global and Area Studies (GIGA), Hamburg, and University of Göttingen, Germany

Publication date: May 1, 2011

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