War Flames and Hidden Fortunes: The Crucial Role of Informal Businesses in Conflict Zones
The world is rife with conflict. From the ongoing Israeli-Palestinian conflict to the war in Ukraine, the civil war in Myanmar, and instability across the Sahel region, armed conflicts cause widespread devastation. The Center for Preventive Action's Global Conflict Tracker highlights the sheer scale of these crises, underscoring the urgent need for effective strategies to mitigate their impact and support resilience. The February 2022 Russian invasion of Ukraine, for instance, resulted in tens of thousands of deaths and a massive refugee crisis. Similarly, recent coups in Mali and Niger have further destabilized the region, creating economic decline and uncertainty. While global efforts focus on development, stability, and economic progress, the reality is that conflict disrupts economies, fuels insecurity, and disproportionately affects the world's poorest, many of whom reside in conflict zones. These areas are marked by profound institutional uncertainty, forcing people to relocate or adapt to precarious circumstances.
Who Thrives Amidst the Explosions? The Unexpected Rise of Informal Businesses
Our research, published in the Journal of Business Venturing Insights, reveals a surprising dynamic within these volatile environments. While armed conflict undeniably devastates formal economies, it also unexpectedly enables the pursuit of informal businesses. We analyzed data from eight such economies over 16 years, employing rigorous statistical models to understand the underlying mechanisms. The rise of informal businesses in these conflict zones isn't simply about illicit activities; it's a complex adaptation to extraordinary circumstances impacting economic stability, social structures, and individual lives.
The Resilience of Informal Enterprises: Two Key Enabling Pathways
Our study reveals a strong positive correlation between intensified armed conflict and the expansion of informal businesses—businesses operating outside formal government registration but deeply integrated into the social fabric. Simultaneously, we found a significant negative correlation between foreign direct investment (FDI) and the growth of the informal sector. This indicates that when FDI declines due to conflict, the informal sector expands to compensate. Drawing on the external enablement framework, we explain this informal sector expansion as stemming from two key enabling pathways:
Regulatory Lenience and Informal Business Legitimation: Armed conflicts often divert government resources and attention towards security and emergency management. This results in a relative decrease in the enforcement of regulations governing business activities. This "regulatory leniency" creates space for informal businesses to flourish, operating outside formal institutional boundaries with reduced risk of penalties. The state's capacity to enforce regulations is reduced, allowing informal businesses a temporary reprieve from the burdens of formal registration and compliance.
Foreign Direct Investment (FDI) Withdrawal and Market Gaps: The intensification of armed conflict significantly reduces FDI, resulting in substantial market gaps and unmet demand for essential goods and services. Informal businesses, due to their agility and adaptability, swiftly address these gaps, fulfilling consumer needs through demand substitution and benefiting from the lack of formal competition. The withdrawal of foreign enterprises because of conflict creates opportunities for informal businesses. Resources such as human capital (unemployed workers), physical assets (abandoned facilities), and material resources become accessible to informal entrepreneurs. This scenario can inadvertently foster a conducive environment for local informal ventures.
Re-imagining Aid and Development in Conflict Zones
Our findings underscore the critical need to re-imagine aid and development programs in conflict zones, acknowledging and strategically engaging with the informal sector. This requires:
Investors: While FDI often shrinks during conflict, understanding the informal sector's resilience may open up alternative investment opportunities, requiring a strategic shift in risk assessment and mitigation.
Policymakers: Support policies that promote post-conflict recovery by including strategies to support—and potentially regulate—informal businesses. This might involve simplifying regulations, improving access to micro-financing, and providing skills development training.
International Organizations: Development efforts must incorporate the role of the informal sector in both immediate crisis response and long-term development. Understanding the dynamics of these informal businesses allows for more effective and targeted aid strategies.
Read the full paper here to find out more: https://www.sciencedirect.com/science/article/pii/S2352673425000010
Author Bios
Esther Salvi is a Postdoctoral Research Fellow at IMD, Switzerland. She conducts qualitative and quantitative research at the intersection of entrepreneurship, culture, and sustainable development. Her work spans the individual, organizational, regional, and national levels of analysis.
Diana M. Hechavarria is a Professor of Entrepreneurship at Babson College who researches nascent entrepreneurship. Her work examines the intricate dynamics people encounter during the early stages of launching new ventures, with a particular emphasis on gender and minority perspectives.
Daniela Gimenez-Jimenez is a Junior Professor of Entrepreneurship at TU Dortmund University. She holds a distinguished doctoral degree from Witten/Herdecke University and has gained research and teaching experience at institutions like Technical University of Munich, Bentley University, and Lehigh University. Her work focuses on entrepreneurship, gender and sustainable development.