This article is part of a trilogy I have dedicated to the Informal Economy (hereafter “IE”). And the theme is very opportune as it was recently launched, sixteen years later, the 2nd Informal Sector Survey 2021-2022, in Mozambique.
The following definition of Innovation will be instrumental to this analysis: “…is the introduction [into informal market(s)] of a new or significantly improved good or service, with respect to its characteristics or intended uses, or the implementation of new or significantly improved production, distribution, marketing, or organizational methods or processes”. Let us see, in 11 points, the main characteristics of Innovation in the Informal Economy (hereinafter “IEI”).
1- Place of origin: the “IE” is not born in R&D laboratories, but in the streets, in markets and peri-urban neighborhoods, in small workshops without any decent working conditions, and without supporting infrastructures.
2- Initiative: the “IEI” is not a collective initiative, but is born from the individual genius of the informal micro-entrepreneur.
3- Clientele: the “IEI” does not result from market studies, or focus group exercises, but from the enormous relational proximity of the informal micro-entrepreneur with his/her clientele, the base of the pyramid (BOP), the 2.7 billion people who live with less than USD $2.50 per day.
4- Addressed needs and incentive to innovate: the “I” does not aim at technological advances, but at solving the greatest aspiration of those at the bottom of the pyramid, which is to progress socially, so that they can access the next level, the “Middle Class” and be part of the African Lions.
5- Sources of innovation generation/appropriation: the “IIE” is not based on research, invention or co-creation, but due to the lack of i) knowledge, ii) advice, iii) equipment, iv) financial resources and v) support from the scientific and technological system, the informal micro-entrepreneur appropriates new or significantly improved production, distribution, marketing or organizational processes through copying, imitation and adaptation. This is also known as Commoditized Innovation, Adaptive Innovation, BOP Innovation, Frugal Innovation or JUGAAD.
6- Element of Novelty and/or Significant Improvement: “IIE” does not translate into the creation of new or significantly improved products, processes, distribution, marketing, or organization. It is in the ability of the micro-entrepreneur to adapt products/services to the local environment (v.g. preferences; tastes; culture; local tradition) that its added value lies. And this creative capacity comes from practical knowledge (on-the-job training), and from the informal sharing of “secrets of the trade” within the family (the organizational unit par excellence of the “IE”), or in the association where the micro-entrepreneur is inserted.
7- Local content: the “IE” does not import from abroad i) know-how, ii) raw materials, iii) technology. But very familiar with the preferences of its clientele, because of the close proximity, the micro-entrepreneur uses, improvises, adopts & adapts indigenous/local resources (e.g. products, equipment and raw materials in use state) to introduce new or significantly [adapted] goods or services.
In this context, and in reaction to this characteristic of “IIE”, one can understand why large multinational companies adapt their products in order to sell them in informal markets (“BOP as a Business Opportunity”).
8- Intellectual property: given the peculiar characteristics of the “IIE” already pointed out; the diminutive value of the innovations generated; the complexity and cost associated with the protection process; and the “horror” of the informal micro-entrepreneur to everything that is bureaucracy, the “IEI” is not protected by i) patents, ii) utility models, iii) copyright, iv) industrial design, v) trademark, or other forms of guarantee of receiving, for a certain period, a reward for the intellectual creation.
9- Speed of response to the market: Before, and because it is based essentially on copying, imitation and/or adaptation, the “EI” micro-entrepreneur, to ensure the reward for his creation, tries to be the first in placing his innovations on the market and benefit from the FMA First-Mover
Advantage. And, in this context, it is worth noting the extreme speed of the “EII” cycle, when compared to the innovation cycle in the formal economy.
10- Differentiation and scale: as a consequence of not being able to protect, for example, the brand, from the perspective of the clientele it becomes more difficult for them to differentiate the good products/services from the bad ones. And as copying is the norm in the “EI”, the products and services are true commodities, enabling the micro-entrepreneur to obtain only marginal returns from innovation, thus making it impossible to accumulate capital to invest i) in equipment, ii) in hiring qualified human resources, iii) in improving health and safety conditions, as well as, iv) achieve economies of scale. As a result, without being able to increase their productivity and asset base, they will be unable to access bank credit to finance their activity.
11- Public policies: the “IIE” does not benefit from a support ecosystem (universities, research laboratories), nor from public policies of promotion based on financial and fiscal incentives, training, and technical assistance. Rather, developing countries, such as Mozambique, have progressively adopted a position that began by being i) repressive/suppressive of “IEI” practices, much under pressure from the big brands, damaged by the copying of their products/services; which migrated to a next stage of ii) attempt at regulation and discipline (in areas such as hygiene and safety, taxation, social protection, consumer protection); iii) to a later stage of attempt at formalization. All without success, as has happened in countries with a high level of informal economy.
The Informal Economy is a source of innovation generation for products, services, production processes, distribution, marketing and organizational innovation. The great proximity of the micro-entrepreneur with his/her BOP clientele (Base of the pyramid) allows him/her, together with his/her individual genius, extreme agility and sense of opportunity – and despite the countless obstacles – to copy, imitate, adapt solutions that raise the aspirations of all to belong to the Middle Class.
The absence of protection mechanisms for innovative creations in “IE” does not allow its authors the necessary differentiation and scale. But the commoditization of the “EI” is not an inevitability: the progressive intervention of the States assuming, less and less, repressive attitudes towards the informal economy, in favor of concrete actions towards the creation of an enabling environment, facilitates the recognition and creation of value in this way. Along with the promotion of greater linkages between formal economy enterprises and “EI” micro-entrepreneurs will help make economies as a whole more productive and more sustainable.