Entrepreneurship in the Informal Economy of Latin America and the Caribbean: A conceptual model of the finance-performance nexus

Although the size of the informal economy is relatively large across Latin America and the Caribbean, it is not completely understood how deficiencies in the institutional environment may be related either to the propensity for entrepreneurship or the performance of entrepreneurs in the informal economy. Focusing on institutional heterogeneity, this paper characterizes external finance (i.e. local family-based equity, remittances, bank credit, business angel finance and venture capital) in terms of (1) the mix of finance, business consulting and contacts, (2) governance mechanisms (i.e. reputational capital versus formal contracts) and (3) fungibility (i.e. discretion to use funds borrowed or received for alternative purposes); and develop a number of propositions. The outcome is a finance-performance nexus that provides a basis for a theoretically grounded empirical investigation of the relationship between the financial aspects of the institutional environment and both the propensity for entrepreneurship and the performance of entrepreneurs in the informal economy.