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Transition from Informal to Formal Entrepreneurship: Drivers and Barriers
Subject area: Management and Commerce · Area of research: Entrepreneurship
DOI: https://doi.org/10.64388/IREV9I7-1713312
Abstract
In Nigeria, micro, small, and medium enterprises (MSMEs) should be formalized as it is important to grow economies, achieve financial inclusivity, and ensure regulatory compliance. This research paper examines the determinants of MSME formalization, which include access to finance, cost of regulation and compliance, entrepreneurial features, and institutional help. Structured questionnaires were used to collect data on 270 respondents (90% valid response rate) in the trading and service industries. The relationships between independent variables and formalization were analyzed by using descriptive and inferential statistics and regression analysis. The results show that the availability of finance has a positive effect on formalization, meaning that credit and customised financial products encourage MSMEs to have a formal registration. The regulatory and compliance costs have a good effort to lower the adoption formally with a great negative impact as there are bureaucratic and financial obstacles that deter formal adoption. Entrepreneurial traits like education and growth orientation are important sources of formalization propensity and institutional support and benefits awareness stimulates further registration. The results of all the hypotheses were accepted and showed a multifactorial model in which the financial aspects, regulatory factors, human capital and institutional factors have a combined effect in creating formalization decisions. The research provides practical recommendations to policy makers, financial institutions and the development partners. Some of the recommendations are increasing access to custom-made financing, easing regulatory processes, increasing the skills of entrepreneurship, and improving institutional services of support. By dealing with these determinants in concerted action, formalization rates can rise, MSME performance can be boosted, and the economic growth can be inclusive.
Keywords
MSMEs, Access to finance, Regulatory Burden, Entrepreneurial Characteristics, Institutional Support, Nigeria.
References
[1] Acs, Z. J., Estrin, S., Mickiewicz, T., & Szerb, L. (2018). Entrepreneurship, institutional economics, and economic growth: An ecosystem perspective. Small Business Economics, 51(2), 501–514.
[2] Adamu, A. A., Bukola, C., & Saadatu, S. (2025). Effect of business environment on performance of MSMEs in Federal Capital Territory, Nigeria. International Journal of Research and Innovation in Social Science.
[3] Díaz-Casero, J. C., Ferreira, J. J., Mogollón, R. H., & Raposo, M. L. (2022). Institutional constraints and entrepreneurial formalization in developing economies. Journal of Business Research, 142, 123–134. 4
[4] Loayza, N. V. (2020). Informality: Why is it so widespread and how can it be reduced? Research & Policy Briefs, World Bank Group, No. 20.
[5] Mohammed, M., Bin Bardai, B., & Abu Baker Adam, M. I. (2025). Access to finance and its implications for MSME growth in Nigeria. International Journal of Research and Innovation in Applied Science.
[6] Moyo, B. (2022). Factors affecting the probability of formalizing informal sector activities in SubSaharan Africa: Evidence from enterprise surveys. African Journal of Economic and Management Studies.
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[8] OECD. (2023). Formalising the informal economy: Policy approaches for inclusive growth. OECD Publishing.
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How to cite this paper
@article{1713312,
author = {Olabintan Olakunle, Ismaila Tope Jimoh, Shuaib Rashidat Omoshioke, Joel Mayowa mathew},
title = {Transition from Informal to Formal Entrepreneurship: Drivers and Barriers},
journal = {Iconic Research And Engineering Journals},
year = {2026},
volume = {9},
number = {7},
pages = {212-219},
issn = {2456-8880},
url = {https://www.irejournals.com/formatedpaper/1713312.pdf},
abstract = {In Nigeria, micro, small, and medium enterprises (MSMEs) should be formalized as it is important to grow economies, achieve financial inclusivity, and ensure regulatory compliance. This research paper examines the determinants of MSME formalization, which include access to finance, cost of regulation and compliance, entrepreneurial features, and institutional help. Structured questionnaires were used to collect data on 270 respondents (90% valid response rate) in the trading and service industries. The relationships between independent variables and formalization were analyzed by using descriptive and inferential statistics and regression analysis. The results show that the availability of finance has a positive effect on formalization, meaning that credit and customised financial products encourage MSMEs to have a formal registration. The regulatory and compliance costs have a good effort to lower the adoption formally with a great negative impact as there are bureaucratic and financial obstacles that deter formal adoption. Entrepreneurial traits like education and growth orientation are important sources of formalization propensity and institutional support and benefits awareness stimulates further registration. The results of all the hypotheses were accepted and showed a multifactorial model in which the financial aspects, regulatory factors, human capital and institutional factors have a combined effect in creating formalization decisions. The research provides practical recommendations to policy makers, financial institutions and the development partners. Some of the recommendations are increasing access to custom-made financing, easing regulatory processes, increasing the skills of entrepreneurship, and improving institutional services of support. By dealing with these determinants in concerted action, formalization rates can rise, MSME performance can be boosted, and the economic growth can be inclusive.},
keywords = {MSMEs, Access to finance, Regulatory Burden, Entrepreneurial Characteristics, Institutional Support, Nigeria.},
month = {January},
doi = {https://doi.org/10.64388/IREV9I7-1713312}
}