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Geography of Development: Informal Sector and Economic Development

Informal Sector Defined

Economies the world over are characterised by the concept of economic dualism. The dualism constitutes formal and informal business models or concepts. The informal sectors refer to all forms of business activities which fall without the precincts of all business activity regulated and governed by the state. Bromley Ray (1990, pp. 17-21) notes that, “The term has also been employed in reference to the general income classes of business activity in an economy paradigm in which incomes as well as the means through which they are generated are not governed by the institutions of society and are not recognised in the legal and social frameworks where in related business and income generating activities are regulated”. The formal sector component of the dualism enlists the manufacturing (national and foreign firms), commercial services, the public administration.

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What is notable at this point is that the services sub-sector generates more job opportunities than the manufacturing sector which mainly constitutes national and foreign. The informal sector enlists a broad spectrum of economic activities in all sectors from primary through secondary to tertiary categories. The informal entities can be small-scale, labour intensive and normally run on limited investment capital. Informal sector businesses are also characterised by self-employment concepts as well as the use of family labour marked with long hours of work and little security.

In other terms the informal sector entails all those forms of economic or business activity that neither taxed nor moderated by a government and is not incorporated in that state’s Gross Domestic National Product (GNP) in direct contrast to the formal sector. Bromley, Ray (1990, pp 63) states, “The informal sector has been closely associated with the economies of developing countries in which around 60% of the employee base are involved. In this category the sum total of the labour force amounts to about 40% of the Gross Domestic Product (GDP)” Economies the world over entail the informal sector regardless of whether the economies can be categorised as developed, developing of underdeveloped.

Informal economic activity is a multi-dimensional form of activity which incorporates various aspects and tenets of economic and societal as well as social theory. Hernando de Soto (1989, pp 43-45) notes that by its very form informal business or economic activity is very difficult to observe and examine. It is equally difficult to measure and define the structure of the informal sector. This is the reason why there has been no single perspective giving a holistic and comprehensive definition of the terms authoritatively.

The Informal Sector and economic development in developing countries

Developing Countries

The other key phrase in this paper is ‘developing countries’. In light of contemporary factors such as globalization and technological advancement, Countries of the world have come to be categorized according to their economic capacities, new growth and development pace. This has resulted in the developed, developing and emerging markets country categorizations. Peter H. Andy (2001, pp17) states, “A developing country is a country with an economy which consists of an undeveloped or developing industrial sector”. The scholar further points out that a developing economy will also be marked by an inconsistently varying Human Development Index (HDI) score and per capita income although there are indications that the economy is progressing.

According to insights presented by Bromley Ray (1978, pp 33) usually all countries which are neither a developed country nor a failed state are classified as developing countries. However this may not be true for all countries as some developing countries are far more developed than some developed countries.

The terms ‘developed country’, or ‘advanced country’, have been adopted to categorize countries with developed economies wherein the tertiary and quaternary sectors of industry dominate. Countries not fitting this definition may be referred to as developing countries. Magnitudes of economic development usually impact significantly positively into high income per capita and a high Human Development Index (HDI). Countries with high gross domestic product (GDP) per capita are classified into the developed countries category.

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Informal sectors have become the backbones of economies of the developing counties

Whilst statistics on the informal categories of economy are naturally unreliable owing to the nature of the subject, these come in handy to provide general overviews on various aspects of the sectors especially its attributes and trends closely tied to the economic development of that country. “In Africa informal employment is reported to make up over 48%of non-agricultural jobs in North Africa, 51% in Latin America and 65% in Asia. For Sub-Saharan Africa the sector is said to account for 72% of non-agricultural employment.” (Bromley Ray 1978) The scholar further states that on the other hand it is worth noting that for the developed countries the estimates are pegged at about 15%.

Self-employment is a growing concept especially in developing countries as it forms the biggest proportions of informal work. In most cases the informal labour sector’ labour force is almost exclusively dominated by women which is having a significant bearing on the implementation of policy and regulation. In developing countries the informal business thrust is not only the privilege of the urban, but the research has indicated that increasingly the middle class populace in urban areas of developing countries are some of biggest beneficiaries of business and economic activity that fall outside of the formal sector.

Researchers have indicated that the informal center has a crucial role and contribution in the processes of urbanisation. Melvil Dewey (2003,pp, 102) notes that, “By virtue of connecting multiple economic activities as well as urban spaces the informal category of the economic fabric functions as a mode for urban transformation.” The realities indicate that there is need for new conceptual models and frameworks in the domains of urban and urbanisation theories which will be sufficient for the implementation and interpretation for the urban informality in the cities across the globe.

The economic development and Informal business involvement with Transnational Companies (TNCs) (A case Scenario)

Various TNCs ply global markets in contemporary business landscapes. McDonalds is TNCs which specializes in fast food production and retail. According to Amin A.T. MNurul (2008, pp 231) the company has been contracted By South African Road Construction companies to provide food stuffs for the workers right through the roads infrastructure refurbishment programme in preparation for the 2010 FIFA World Cup. “Due to the huge span of the work that McDonalds has been contracted for, the Company sub-contracted dozens of local informal business operating in the sectors rebated to fast food production and retail.” (Amin A.T. MNurul 2008, pp 21) Owing to the subcontracting arrangement, some enterprises in informal enterprise will benefit but more so the workers who are engaged by these informal business establishments considering that the country has grim unemployment rates.

The collaboration of TNCs and local informal business establishment as demonstrated in the case of McDonalds illustrates the role that the corporate sector can play to enhance the role of the informal sector in the developing countries. This is a particularly s in the consideration of the advantage that local firms have when it comes to the understanding of the local market’s culture dynamics.

Culture and marketing for TNCs

Marketing like any thing invented by human beings, use for and on humans by human beings, is not conceived nor implemented in a vacuum. Marketing is invented and implemented within the broader context of environs that embody various factors and elements like the community’s (market) geographical location, time setting and more importantly the market culture. The crucial importance of the relationship between culture and marketing can not be gainsaid. Marketing entails in its core, the championing of an organisation’s set goals and objectives through feasible, effective, efficient and culturally relevant means of promoting an organisation’s products and services to the target market. There is overwhelming evidence across academic and other professional researches on marketing strategies and models which substantiate the fact that any marketing drives, approaches and endeavors that overlooks a people’s culture are definitely set to fail. This underscores the relations exemplified buy the case of McDonalds’s and local informal business establishments who understand the needs of the market better as they are in familiar with the culture of the target clientele bases.

Hernando de Soto (1989, pp 45) aptly express that appreciation of the principles of culture as well as the individual cultural variances and resemblances of target locales enables marketers to realize that one universal message—whether spoken or seen, can never be thought to reach a global audience.

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There is no one global culture that constitutes people with similar values and norms. Even within the h confines of one country this concept of one global culture is non-existent. Disparities in learning and thinking prototypes have an impact on the way people receive and process information, as illustrated in their natural reactions to marketing communications. Recipients of messages are different in the way they perceive and regard concepts of time, space, money, relations, influences, danger, and even the protocols of gender roles. It is essential to note that when trying to model communications with cultural variances in mind, it is just as important to recognize the cultural similarities.

The preceding insights and perspectives lay an ideal conceptual and ideological framework for a comprehensible assessment and exploration of the influence of culture in marketing – more specifically, of the merits that informal local firms bring to the marketing effectiveness TNCs hence contributing indirectly to business success at large.

Economic factors that entail elements such as interest rates, tax changes, exchange rates, inflation GDP growth have a bearing on the functions and effectiveness of TNCs. Changes in these elements have pervasive effects on business organisations and such elements have to be factored in the strategy formulation and implementation. TNCs many of which are categorised as monopolies can arguably be said to rule the world from an economic perspective. Scott W.R. (1994, pp 101) notes that in many business regulation frameworks with inherent loopholes, TNCs monopolise markets and may have significant influence in regulatory policy formulation and implantation as many states would want to play to the gallery in keeping investor friendly political and economic polices”. This way TNCs can be said to wield subduing economic prowess serve for cases in mature commercial domains where regulatory frameworks are genuinely independent of any sort unconventional influences. A case point is illustrated by instances where TNCs threaten to pull out due to the negative of high interest rates on the business climate. The central government may decide to lower the interest rate.

High interest rates are normally viewed as investor-unfriendly since they imply that it will cost more to borrow money. From another angle a highly valued currency thwarts exporting endeavors owing to high foreign currency prices. High inflation destabilises the economy as it triggers wage demands pressures while on the other end a growing national income increases demand for products and services. Evidently the South African government has considered the role of the TNCs like McDonalds in the economy of the country and has thus severed attempts to raise interest rates also considering the developments of the informal sectors deriving from the operations of the TNCs.

Danny Miller and Peter Friesen (1980,pp 99) concur, “In wake of phenomenal technological breakthroughs business organisations will make it or break it depending on how they position themselves against the trends in technological developments. Technological factors also impact significantly on an organisation.” Technology advancements result in the creation of new products which will inturn lead to the creation of services that relate to the use and maintenance and repairs of the products. “From this front MNCs have been in forefront of using their huge financial resources to tap the merits of technological advancements and leverage their growth, sustainability and competitiveness strategies”. (Danny Miller and Peter Friesen 1980, pp 91)

The merits on this dimension is that the thrust of certain MNCs have necessitated the invention of better ways of doing things leading to more effectiveness, efficiency and customer satisfaction. Small or native firms usually operate in scant financial resources and thus lag behind in the dimension of business IT strategic revolution. The positive aspect to note here is that many MNCs are involved in business development (particularly for the IT dimension) of the Small Medium and Micro Enterprises (SMMEs) in their native and foreign business landscapes. Amin, A.T.M. Nurul (2008, pp 43) notes that, “This is particularly so with the McDonalds case which is involved in IT Business Development Strategy training f programmes for the informal business entities that the TNC has enjoined in premise of subcontracting.” Evidently this has been done in consideration of the important role that informal sector plays in the South African economy. The company’s IT stratagem is also poised to enhance the role of the informal sector which is actually the backbone of South Africa economy.

The concepts of sub-contracting outlined n the foregoing are akin to that which Richard Wright (2001, pp 9) enunciates about Transnational Corporations and the Global Divisions of Labor by Richard Wright is a brief overview of the history of Transnational Corporations (TNC’S) and their role in the New International Divisions of Labor (NIDL). Wright begins the paper by describing that there are four basic levels of production, ranging from very simplistic to very complex. The scholar has outlined on the evolution of the Transnational Corporations through time, starting in the early nineteen hundreds and leading up to contemporary conditions. Wright continues by analyzing The New and the Old International Division of Labor and forecast for the future are given underscoring that subcontracting has been one salient aspect of contemporary TNCs business and plays a vital role in enhancing the role of formal sectors in the economic development of host countries.

The legal factors dynamics form the regulatory framework within which business organisations operate. It is known that institutional authority as wells legal impositions have a direct bearing on the behavior of companies. Regulations promulgated around aspects of minimum wage, discrimination and labour legislation for instance have direct impact on the shape and behaviors of business organisations. The category can be explored in the assessment of its sub-categories. The sub categories here entail consumer laws, competition laws, labour laws, healthy and safety regulation, etc. These have significant impact on how Multinational companies operate and function. Business organisations do not exist in a vacuum. It may be stated that in this premise the conduct of TNCs can be monitored to ensure that their practices are in tandem with economic goals and laws of the host County. McDonalds is one of the companies that have been put under spotlight by the South African Council of TNCs. The move is a step into ensuring that there is no misappropriation of funds and price fixing and any forms of conduct that will diminish the gains of the host country.

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The nature and stature of the organisations is shaped largely by internal factors as well external factors. Internal factors entail organisational management strategy, organisational culture and ideology among a host of elements that constitute the organisation. External factors include the concrete and abstract environments in factors social, political, geographic, demographic and economic among many others. The wings of TNCs are thus clipped when it comes to the consideration of the impact of institutional authority which has a bearing on how the business function and operate as well s the it long term path way. This ensures a healthy leadership of corporate in those facets in which they lead while keeping all variables in check to maintain the crucial balance. The feasible positions on the subject are that which consider economics as managed capitalism, where-in the business play field is kept level and the politics do not subdue commerce and vice verse. This is the condition germane for the development of egalitarian and healthy societies that derive from the contributions of informal sector thriving in many developing countries.


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