Hidden Entrepreneurs: Informal Practices within the Formal Economy

• Author: Rashid Al‐Mataani,Thomas Wainwright,Pelin Demirel
• Published date: 01 December 2017
• DOI: http://doi.org/10.1111/emre.12115
• Date: 01 December 2017

Hidden Entrepreneurs: Informal Practices

within the Formal Economy

RASHID AL-MATAANI,

1,2

THOMAS WAINWRIGHT

3

and PELIN DEMIREL

1

1

Southampton Business School, University of Southampton, Southampton, UK

2

College of Applied Sciences, Ibri, Oman

3

School of Management, Royal Holloway University of London, Egham, UK

The focus of this study is ‘hidden entrepreneurs’who bridgeformal and informal economies. While theirbusiness

activities arelegal, the governance and ownershipstructures of their organizations areillegal. This qualitative study

draws upon institutional theory to illuminate the emergence of international hidden entrepreneurs in Oman as an

unintended response to institutional configurations, and to examine its perceived effects on the domestic

entrepreneurial ecosystem. Hidden practices, shaped by the dynamics of institutional environments, are perceived

negatively by policy makers and domestic entrepreneurs, but offer potential contributions for entrepreneurial

development. In-depth interviews with entrepreneurs and stakeholders reveal how hidden practices are shaped by

the dynamics of regulatory and socialinstitutions. Loopholes, or flawed institutional configurations, and prevailing

sociocultural factors drive the emergence of hidden practices. The study contributes to informal entrepreneurship

literature and policy making through highlighting the relevance of international entrepreneurs in enabling

entrepreneurial ecosystem development.

Keywords: hidden entrepreneurs; informal economy; institutional environment; developing economy; Oman;

qualitative

Introduction

Policy makers often introduce new regulations with the

aim of developing stronger small and medium-sized

enterprise (SME) sectors that can contribute to economic

growth (Dennis, 2011; Williams, 2013). Despite the

positive intentions to reshape institutional environments,

unforeseen outcomes from insufficient regulation design

can undermine these SME development policies and lead

to the emergence of informal business activities and a

hidden enterprise culture (Williams and Nadin, 2012).

We extend the work of Williams and his colleagues

(e.g., Williams, 2008; Williams and Nadin, 2012;

Williams and Round, 2007; Williams, 2010) on hidden

enterprise culture, and introduce the notion of ‘hidden

entrepreneurs’, to examine the specifi c case of

international individuals active in Omani business

ventures. While their business activities are legal, the

governance and legal structures of their ventures are

illegal as they use local Omani nationals as a front to

circumvent laws that prohibit non-Omanis from owning

domestic ventures within the Sultanate.

1

Williams

(2008) has indicated that most small enterprises engage

in the informal as well as the formal economy despite

government attempts to undermine the informal activities.

The motivation of these individuals is to increase

profitability by circumventing tax capture and regulatory

compliance in some venturing activities. In the example

of Oman, hidden entrepreneurs emerged as a response to

government efforts to ban foreign entrepreneurs, to

enforce labor regulations, reduce competition for

domestic incumbents and minimize the transfer of

revenues overseas. As such, we argue hidden

entrepreneurs straddle formal and informal economies.

Empirical studies on the institutional environment in

various countries show that institutions, including

regulatory and social institutions, can influence the

behavior of entrepreneurs when pursuing

entrepreneurship (e.g., Aidis et al., 2008; Williams and

Vorley, 2014; Williams and Shahid, 2016; Williams and

Franic, 2016). The extant literature has emphasized the

presence of institutional loopholes, which can be viewed

Correspondence: Rashid Al-Mataani, College of Applied Sciences, Ibri,

P.O. Box 14, P.C. 516, Oman. E-mail R.almataani.ibr@cas.edu.om

1

The issue of ‘hidden entrepreneurs’hasalsobeenraisedinSaudiArabia

(Al-Shaya,2015).

European Management Review, Vol. 14, 361–376, (2017)

DOI: 10.1111/emre.12115

©2017 European Academy of Management

as unintended institutional configurations that enable the

informal economy to flourish (e.g., Schneider, 2002;

Webb et al., 2013). However, little is known about how

internationalhidden entrepreneurs exploitthese loopholes

to develop collaborative relationships with domestic

entrepreneurs.

Omani policy makers view hidden entrepreneurs as

undesirable because they undermine government plans

to diversify the economy and rebalance Omani interest

from public employment to entrepreneurship, to develop

a local entrepreneurship ecosystem. However, the

academic literature indicates that this informal activity

can be used as a launchpadto develop new entrepreneurial

capabilities and to test pot ential venture idea s ( Khavul

et al., 2009; Bennett, 2010; Williams and Schneider,

2016). While academic studies have examined the

potential of the informal economy for improving low

income areas (Maloney, 2004; Hudson et al., 2012;

Siqueira et al., 2016), they have overlooked the role of

international entrepreneurs in contributing to the

development of the formal and informal economies.

Hidden entrepreneurs require a local resident who is

willing to become an owner/manager and undertake a

passive or non-existing role in the governance and the

day to day activities of the enterprise (i.e., passive

entrepreneur).Local Omanis accept that their identity will

be used to conceal the role of the foreign entrepreneur, in

exchange for a fixed financial payment. In contrast, the

hidden entrepreneurs exercise full control and power over

the venture, despite it being illegal for them to do so, as

they are not listed in the ownership register.

2

This study aims to explore the emergence of hidden

entrepreneurs in Oman in response to recent regulations

that seek to prohibit the hidden activities of non-Omani

entrepreneurs, with the objective of protecting the

domestic entrepreneurs. In doing so, we examine the

perceived negative effects but also the overlooked

potential contributions of the collaborations that could

emerge from this informal economic activity. We address

the following research questions:

•Who are hidden entrepreneurs and how do they bridge

the formal and informal economies?

•What are the perceived effects of hidden entrepreneurs

on local entrepreneurs and the wider economy?

•How can international hidden entrepreneurs contribute

to the Omani entrepreneurial ecosystem?

This paper contributes to the informal entrepreneurship

literature by introducing the role of hidden entrepreneurs

who bridge the formal and informal economies. We also

highlight the perceived challenges as well as the

opportunities that arise from hidden practices. The

remainderof the paper is structured as follows:it discusses

relevant literature, outlines the methodology, and

examines the findings. The final section concludes with

policy implications, limitations and further avenues for

future research.

Literature review

Understanding hidden entrepreneurs

Informal economies represent a largeshare of the world’s

business activities. The informal economy accounts for

13.4% of the GDP in OECD countries, 37.6% % in

transition countries, and around 27% in the Middle East

and North Africa region, as estimated for between 1999

and 2007 (Schneider et al., 2010). From an employment

perspective, two-thirds (1.8 billion) of global employees

work in the informal sector (Jütting and Laiglesia 2009).

Despite the significance of informal economy especially

in developing countries ( Ilahiane and Sherry, 2008;

ILO, 2014), there is still little understanding of business

activities within the informal sector (McGahan, 2012;

Webb et al., 2014).

The extant literature has shown diverse examples of

informal business activities such as violation of

registration regulations, tax evasion, violation of labor

and environmentalregulations, and productionand selling

of counterfeit goods (Schneider, 2002; Williams and

Nadin, 2012; Webb et al., 2013, 2014). The growing

literature on the informal economy has sought to define

informal economic activities and differentiate them from

formal activities (e.g., Williams, 2008; Webb et al.,

2009; Thai and Turkina, 2014; Williams and Schneider,

2016). Researchers have argued that informal

entrepreneurship includes ‘any remunerated activities not

declared to the authorities for tax, social security and /or

labor law purposes when they should be declared’

(Williams and Schneider, 2016: 6). In this sense, hidden

entrepreneurs’practices can be considered a form of

informal entrepreneurship as their practices not only

violate ownership regulations, but also labor laws as

foreign entrepreneurs exploit their work permits to

become hidden entrepreneurs in the local economy.

Recent research has shown that enterprises do not

necessarily fit into one category (formal vs. informal), as

business activities can have different degrees of (in)

formalization as shown in studies of Ukraine (Williams

and Round, 2007), England (Williams, 2010), the

Dominican Republic (De Castro et al., 2014) and

Pakistan (Williams and Shahid, 2016; Williams et al.,

2016). This is similar to the case of hidden

entrepreneurship, where the business is officially

registered and produces legitimate goods and services,

2

Hidden entrepreneurs often stay inthe country using work permits underthe

sponsorship of the passive o wners/managers.

362 R. Al-Mataani et al.

©2017 European Academy of Management