Informal Firms in Mozambique : Status and Potential

In most countries in Africa, the informal sector is large and exhibits low levels of productivity compared to the formal economy: informal firms are typically small, inefficient, and run by entrepreneurs with low levels of education. This paper presents novel representative firm-level data collected on informal firms in the three largest cities of Mozambique, as well as data of formal enterprises. Compared to formal microenterprises, informal firms sell about 14 times less, make 17 times lower profits and are 2-3 times less productive. Almost two-thirds (61 percent) of these performance gaps can be explained by differences in firm characteristics: informal firms are smaller, use fewer business practices and use less capital and production inputs, while the rest of the gap is explained by differential returns. Despite this duality between formality and informality, there is nevertheless a small but significant group of informal enterprises (7.6 percent of informal firms, representing 10.6 percent of employment in the informal sector) that in their characteristics and productivity levels are similar to formal microenterprises. Policies should take this heterogeneity into account.