This paper investigates who is most affected by informal
competition and how regulation and enforcement
affect the extent and nature of this competition. Using
newly-collected enterprise data for 6,466 manufacturing
formal firms across 14 countries in Latin America, the
authors show that formal firms affected by head-to-head
competition with informal firms largely resemble them.
They are small credit constrained, underutilize their
productive capacity, serve smaller customers, and are in
markets with low entry costs. In countries where the
government is effective and business regulations onerous,
formal firms in industries characterized by low costs to
entry feel the sting of informal competition more than
in other business environments. Finally, the analysis
finds that in an economy with relatively onerous tax
regulations and a government that poorly enforces its
tax code, the percentage of firms adversely affected by
informal competition will be reduced from 38.8 to 37.7
percent when the government increases enforcement to
cover all firms.