Formality, innovation and entrepreneurial business performance in francophone Sub-Saharan Africa

Recent work in the economics of innovation in developing countries increasingly considers the formality of business as a determining factor of economic development. However, current knowledge on how formality determines both innovation and business performance remains mixed. This article examines this relationship by analyzing, on the one hand, the role of formality on innovation and, on the other hand, the moderating effect of formality on the relationship between innovation and the performance of business in francophone Sub-Saharan Africa.

Based on a sample of 1,369 Cameroonian and Senegalese small and medium-sized enterprises (SMEs) from the International Development Research Center (IDRC), the Crepon Duguet et Maraise (CDM) technique was used to reduce the endogeneity bias inherent in this type of analysis.

The results show that formal companies have a better capacity for innovation. In addition, formality positively moderates the relationship between innovation and the performance of businesses in the case of product and commercial innovations. On the other hand, it negatively moderates the relationship between innovation and the performance for process and organizational innovations.

These results show that the advantages of formalization widely relayed by national public institutions and international organizations can present a risk for business if the expected gains are not accompanied by innovations.

This paper contributes to research by taking into account the heterogeneity of firms because it is one of the first to study formality as a moderator in the relationship between innovation and firm performance in Sub-Saharan African economies.