Determinants of Informal Competition among Firms in Ethiopia

Abstract

The study investigated the intensity of informal competition among firms in Ethiopia, using primary data sources from the 2015 World Bank Enterprise Surveys for Ethiopia (Ethiopia: Enterprise Survey 2015). The estimated linear probability model (LPM) revealed that the probability prevalence (intensity) of informal competition among firms in Ethiopia is about 38.5%. It indicated that informality is a key problem in Ethiopia. The study also found that the prevalence of the highest corruption, the burden of the tax rate, and credit access constraints were found to be positively and significantly affecting the informal competition of firms in Ethiopia. On the contrary, firm size is negatively and significantly affecting the informal competition of firms. Correspondingly, the study revealed that regular inspection and communication of tax officials with firms could not contribute to reducing the intensity of informality, even if most studies indicated that an increase in government enforcement of the tax code leads to reduced informality. As many studies indicated, the experience of top managers contributes a lot to reducing informality in an establishment; however, this study exhibited that it does not save firms from informality in Ethiopia. In a nutshell, more research should be conducted as to why tax inspections and the experience of top managers could not save firms from informality in Ethiopia.