Firm Formalization Strategy: The Interaction of Entrepreneurs and Government Officials in the Enforcement of Regulation

Ashenafi Biru, Pia Arenius (), Garry Bruton and David Gilbert
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Ashenafi Biru: RMIT University - Royal Melbourne Institute of Technology University
Pia Arenius: EM - EMLyon Business School
Garry Bruton: TCU - Texas Christian University, JLU - Jilin University
David Gilbert: Monash university

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Abstract: This research investigates how entrepreneurs in an early-stage market economy decide their level of compliance with formal rules and finds the manner in which they interact with government officials to operate on a continuum of formality. Focusing on the nonmarket strategy approaches entrepreneurs employ to establish relationships with government officials, we build a model that shows how entrepreneurs adopt strategies aligned with their firm's level of formality, spanning low to high formality practices. We draw on qualitative interview data from entrepreneurs who exhibit varying levels of compliance with state-provided rules and guidelines. We inductively theorize that deciding the firms' level of formality involves strategic interaction approaches with government officials responsible for rule enforcement. Our findings highlight that the interaction strategies entrepreneurs use hinge on the political capital they possess, eliciting the desired response from government officials, and dissuading the officials from enforcing formal rules or imposing sanctions for informality. We offer theoretical and policy implications for future work on the nuances of firm formality and the interaction between entrepreneurs and government officials.

Keywords: business-government interaction; early-stage market economy; firm formalization; nonmarket strategy; regulatory enforcement (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-iue, nep-reg and nep-sbm
Note: View the original document on HAL open archive server: https://hal.science/hal-04493248v1
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Published in Journal of Management, 2025, 51 (4), 1586-1618 p. ⟨10.1177/01492063231224332⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04493248

DOI: 10.1177/01492063231224332

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