Impact of informality on operational security in emerging markets

Firms in emerging markets have been pivotal to global economic growth; yet they face significant operational security risks. Previous research has overlooked a crucial factor common to many firms in emerging markets: initial informality, meaning operations begin without formal registration. This study addresses this gap by employing imprinting theory to assess whether initial informality and the duration of informal operations lead to security challenges in later stages. We investigate the underlying mechanisms by exploring whether initial informality results in deficiencies in developing formal management systems. Employing a global dataset from the World Bank Enterprise Survey (WBES), we use a logistic regression to examine the impact of initial informality on operational security. Our analysis provides evidence that initially unregistered firms are more susceptible to operational security vulnerabilities compared to their legally registered counterparts. The proportion of time spent operating informally relative to its total operational history exerts a comparable effect. Our findings indicate that quality certification, which reflect the development of formal management systems, mediate the relationship between informality and operational security. Furthermore, we find the impact of informality varies across different national culture dimensions of uncertainty avoidance (UAI) and long-term orientation (LTO). These insights are valuable for firms in emerging markets when formulating their initial business strategies and for multinational companies aiming to mitigate risks associated with entering these markets.