The global phenomenon of shadow entrepreneurship has seen a significant rise in different sectors such as education through certificates, finance through easy loans, the betting economy through online games, and healthcare through e-pharmacies. Shadow entrepreneurs are essentially those individuals who manage businesses that sell legitimate services and goods but do not register their businesses with appropriate authorities. This unregistered status keeps them out of the tax net and allows them to operate in the elusive shadow economy.
Types of Shadow Businesses
Shadow enterprises come in various forms. These include unlicensed taxicab services, small-scale landscaping services, and roadside food stalls among others. It is important to note that these are businesses providing legal goods or services but without the required governmental permissions and registrations. As per a study conducted by the Imperial College Business School across 68 countries, India stands second, following Indonesia, in terms of the highest number of shadow entrepreneurs.
Causes behind the Rise of Shadow Entrepreneurs
There are several reasons that have germinated this trend of shadow entrepreneurship. High tax rates coupled with inadequate enforcement lead to tax avoidance and discourage investments in formal businesses. Thus, entrepreneurial activities are propelled towards the informal sector. The recent Covid-19 crisis has further boosted shadow entrepreneurship offering technology-mediated services that traditional service providers might have been unable to deliver due to lockdown constraints. Technological advancements have also facilitated shadow entrepreneurship.
Benefits of Shadow Entrepreneurship
While it operates outside formal structures, shadow entrepreneurship does bring certain benefits. It leads to an increase in employment as most jobs in the informal sector fall under shadow entrepreneurship. It helps reduce poverty and alleviates pressure on agriculture by generating non-agricultural jobs. Additionally, it provides diversified options for consumers.
Challenges Faced by Shadow Entrepreneurs
However, shadow entrepreneurship also poses a few challenges. It potentially decreases competitiveness as small shadow firms are likely to be absorbed by larger firms. First movers in this space with deep pockets could push up valuations irrationally. Some of these businesses may indulge in dubious and illegal activities, causing economic loss due to their non-registration with the government. As they operate beyond the reach of law, they might be susceptible to corruption. In general, informal entrepreneurs invest less intensively in their businesses, indicating a positive correlation between formality and asset size.
Suggestions towards Formalisation
The formalisation of the economy can encourage individuals to register their businesses, allowing them to utilise laws and regulations that protect their companies. The quality of services should be strongly monitored with non-compliance made punishable with strict consequences. Shadow firms complying with regulations should be encouraged to join the mainstream mode of service delivery. Better coordination is required between governmental authorities, for instance, the Ministry of Corporate Affairs should work in synergy with departments of healthcare, education, or finance, in regulating shadow entrepreneurship.
