Strategies and Resilience of Firms Facing Competition From the Informal Sector

Media Wahyudi Askar and Isnawati Hidayah

This study highlights the varying effectiveness of different strategies used by formal firms to compete with informal businesses. International certification has the most significant impact on sales growth, although it may impose direct negative effects such as increased costs and administrative burdens. Certification helps formal firms build consumer trust and gain access to broader markets, countering the disadvantages posed by unregulated competitors. Access to finance is also found to be crucial in maintaining competitiveness, while corruption and strict labor regulations serve as major obstacles to growth. Competition with informal firms can even pressure formal enterprises to adopt unethical practices, such as underreporting earnings or evading taxes, in an effort to stay competitive.

Furthermore, firms’ strategic responses to informal competition vary depending on industry type and firm size. In the manufacturing sector, international certification enhances global competitiveness and product quality but reduces total employment and labor costs due to increased automation. In contrast, in the service sector, certification limits workforce growth but has little effect on sales or costs. For service firms, outsourcing emerges as a key growth strategy, enabling expansion through subcontracting and partnerships. Firm size also shapes strategic outcomes: small firms often struggle with the financial and operational demands of certification, while medium-sized firms benefit from it through labor expansion and process innovation that drives sales growth. The findings carry important policy implications, emphasizing the need to improve access to finance, streamline tax and trade regulations, and provide targeted support, such as innovation incentives and certification programs for smaller firms to enhance their competitiveness against the informal sector.

Reference:

Askar, M. W., & Hidayah, I. (2025). Strategies and resilience of firms facing competition from the informal sector. Asian Development Bank.

Link:

https://www.adb.org/publications/strengthening-the-ecosystem-of-vibrant-msm-es-for-resilient-growth-in-asia-and-the-pacific