The informal sector and economic growth of South Africa and Nigeria: A comparative systematic review

Etim, Ernest; Daramola, Olawande Article The informal sector and economic growth of South Africa and Nigeria: A comparative systematic review Journal of Open Innovation: Technology, Market, and Complexity Provided in Cooperation with: Society of Open Innovation: Technology, Market, and Complexity (SOItmC) Suggested Citation: Etim, Ernest; Daramola, Olawande (2020) : The informal sector and economic growth of South Africa and Nigeria: A comparative systematic review, Journal of Open Innovation: Technology, Market, and Complexity, ISSN 2199-8531, MDPI, Basel, Vol. 6, Iss. 4, pp. 1-26, https://doi.org/10.3390/joitmc6040134 This Version is available at: https://hdl.handle.net/10419/241520 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Open Innovation: Technology, Market, and Complexity Review The Informal Sector and Economic Growth of South Africa and Nigeria: A Comparative Systematic Review Ernest Etim and Olawande Daramola * Department of Information Technology, Cape Peninsula University of Technology, P.O. Box 652, South Africa; [email protected] *Correspondence: [email protected] Received: 17 August 2020; Accepted: 10 October 2020; Published: 6 November 2020   Abstract: The informal sector is an integral part of several sub-Saharan African (SSA) countries and plays a key role in the economic growth of these countries. This article used a comparative systematic review to explore the factors that act as drivers to informality in South Africa (SA) and Nigeria, the challenges that impede the growth dynamics of the informal sector, the dominant subsectors, and policy initiatives targeting informal sector providers. A systematic search of Google Scholar, Scopus, ResearchGate was performed together with secondary data collated from grey literature. Using Boolean string search protocols facilitated the elucidation of research questions (RQs) raised in this study. An inclusion and exclusion criteria became necessary for rigour, comprehensiveness and limitation of publication bias. The data collated from thirty-one (31) primary studies (17 for SA and 14 for Nigeria) revealed that unemployment, income disparity among citizens, excessive tax burdens, excessive bureaucratic hurdles from government, inflationary tendencies, poor corruption control, GDP per capita, and lack of social protection survival tendencies all act as drivers to the informal sector in SA and Nigeria. Several challenges are given for both economies and policy incentives that might help sustain and improve the informal sector in these two countries. Keywords: informal economy; systematic review; economic growth; economic development; open innovation; South Africa; Nigeria 1. Introduction Globally, two billion people take part in informal employment, with the accompanying risks and vulnerabilities [ 1 ]. This translates into 60% of the global labour force and 90% of all small- and medium-scale enterprises [ 2 ]. This poses policy challenges to governments especially in the Global South, where documentation shows that most individuals depend indirectly or directly on the informal sector for survival [ 3 ]. Presently, formal employment as is generally known in the developed and developing countries has been transformed by globalisation and shifts in economic incentives and policies. Larger portions of manufacturing, as well as the service industry, are being outsourced from organised and regulatory factories to non-centralised, flexible, production units. Unregulated and non-unionised contractual informal employments are put in place between non-formal workers and most corporations as a means of reducing operational costs and increasing profitability of these companies [ 4 , 5 ]. According to [ 5 ], a new trend in employment revolves around part-time/part-year employment, flexible/fixed-term employment contracts, employment arrangement achieved through temporary agencies or contract firms, casual employment, contract labour, and services outsourced to home workers with flexible working schedules. Unfortunately, all these forms of employment directly or indirectly feed into the growth dynamics of informality in the economy. Inherently this makes J. Open Innov. Technol. Mark. Complex. 2020,6, 134; doi:10.3390/joitmc6040134 www.mdpi.com/journal/joitmc J. Open Innov. Technol. Mark. Complex. 2020,6, 134 2 of 26 the informal sector more complex, substantially increasing the job creation process in the informal sector. However, all these jobs are survival, and are sometimes precarious or are intended to provide an outlet for temporary employment until job prospecting improves in the formal sector [6]. Generally, the informal sector (consisting of unpaid workers in family enterprises, casual wage employment, home-based worker or service providers, street vending) are the means of survival for poor people in slums [ 7 ], and people exposed to natural disasters or acute urbanisation from rural settings. This is also prevalent when there are slower growth and cycles of a downturn in the economy, resulting in fall of the national GDP. Consequently, the widening output gap leads to inequality in income distribution [ 8 ]. The inadequacies of national/local governments and the formal sector to cater to the sudden surge in migration mean that people become economically active in the informal sector out of necessity and for survival. Under circumstances of high underemployment, unemployment, low capital inflows, lack of social protection/or social benefits, low human capital development, informal employment becomes a viable option. Employers in informal manufacturing might recruit skilled workers to run smaller informal businesses offering higher wages [ 9 – 13 ], but on the whole, informal employment continues to be the only viable option open to these workers. The importance of the informal sector (viz., grey/shadow economy) acting as “conduits of employment” for the provision of products/goods and services has been acknowledged by several authors [ 1 , 7 , 10 , 14 ]. The International Monetary Fund [ 15 , 16 ] opines that within sub-Saharan Africa (SSA) informal employment and the informal sector contribute about 20% (South Africa, Lesotho, Namibia) to 60% (Nigeria, Tanzania, Benin) to the national GDP. Despite this disparity in size, the informal sectors in South Africa and Nigeria are mediums where unemployed persons (mostly women and youths) in both countries try to earn a living, albeit at the survivalist level [ 17 – 19 ]. The Association of Chartered Certified Accountants (ACCA) [ 20 ] contends that factors such as economic, business processes, socio-demographic and socio-environmental, governance, science and technology all drive the informal economy. According to [ 21 ], the informal economy is estimated to be worth USD 10 trillion, employing about 1.8 billion people globally. In the view of [ 22 ], the policies designed for the informal sector by governments, and economists are most times inappropriate. It is sustained by underdevelopment stemming from low physical and human capital [ 22 ], but it is a sector that is complex and difficult to measure [ 23 ]. This complexity means that the contributions are difficult to measure and estimate, and the figures obtained cannot be relied upon to reveal the true picture. Generally, the informal sector provides employment with below-average wages for survival, and informal workers and informal micro-entrepreneurs operate at the survivalist level. The notion that it is just a temporary outlet for future opportunities in the formal sector no longer holds for most workers in developing countries become stock in this type of employment for most of their productive adult lives. Data obtained from [ 20 ] reveals the projection of the size of the informal sector in Nigeria and South Africa from 2011 to 2025, and the factors that will determine the size of the informal sector in the two countries (Tables 1and 2). Table 1. Forecast of the size of the informal economies (per % GDP) in Nigeria and South Africa [20]. Year 2011 2016 2017 2020 2025 Period Average (2011–2025) Nigeria 50.73 48.37 47.70 46.99 46.11 47.93 South Africa 23.49 21.29 23.33 23.71 24.19 23.59 Global 23.10 22.66 22.50 22.11 21.39 22.35 J. Open Innov. Technol. Mark. Complex. 2020,6, 134 3 of 26 Table 2. Top three factors that determine the size of the informal sector by countries [20]. Country Factor 1 Factor 2 Factor 3 Nigeria Corruption control GDP per capita Bureaucratic quality South Africa Unemployment Bureaucratic quality Law and order Global Bureaucratic quality Corruption control GDP per capita The importance of this paper is in providing an analytical perspective on the contributions of the informal sector to the economic growth of South Africa and Nigeria. The rationale for this approach is that few authors have paid attention to the importance of the informal economy to the overall economic growth of the two largest economies in SSA. South Africa has a nominal GDP of USD 351.431 billion, and Nigeria has a GDP of USD 448.121 billion [ 24 ]. Although several authors in South Africa and Nigeria have studied the relationship between the informal sector and economic growth in their countries, so far, a comparative perspective that highlights the conceptual similarities and differences of the informal sector of South Africa and Nigeria is lacking in the literature. Thus, a sufficient basis to foster a deeper understanding of the state of the informality and its impact on economic growth in two largest economies in Africa is still lacking. Equally, the motivation for adopting a systematic literature review (SLR) was to address normative questions through the use of concise and comprehensive overview of existing records and state of knowledge [ 25 , 26 ] on the informal sector in SA and Nigeria. Additionally, SLR (1) is known to be transparent, rigorous, focused, and accessible, while enhancing clarity and providing the foundation for evidence leading to informed decision-making for practitioners, researchers, consumers and stakeholders [ 27 – 29 ]; (2) helps to highlight research gaps in the informal sector in both economies; and (3) will ensure the diversity of knowledge obtained from synthesis of the existing literature [ 30 ], which can be systematically managed to inform policy and practice [ 27 , 30 ]. Thus, as a contribution , this paper provides a basis for a deeper understanding of the issues of informality and economic growth that pertains to South Africa and Nigeria from a comparative perspective, which is hitherto unaddressed in the existing literature. The rest of this paper is arranged as follows: Section 2presents an overview of the informal sector and its distinguishing characteristics compared to the formal sector. Section 3presents the methodology that was applied for the study, the research questions (RQs) that were investigated as the basis for a systematic literature review. The findings of the study are presented in Section 4, while the discussion of the findings is presented in Section 5. The limitations of the review are presented in Section 6, while the paper is concluded in Section 7. 2. Overview of the Informal Sector The informal sector (also described as the shadow economy or grey economy) represents economic activities by individual operators and economic units (in law or practice) having no formal contractual arrangements. The informal sector does not include illicit/illegal business operations according to the 17th International Conference of Labour Statistics (ICLS) cited in [ 3 ]. These economic activities operate outside accepted norms of society in that they are not regulated or registered with the government, and are hence non-taxable. Furthermore, Ref. [ 3 ] posits that employees in the informal sector typically operate at the lowest level of organisation and on a small/tiny scale. Labour relations, when existent, are based on personal and social relationships instead of contractual arrangements with legal protection. Table 3explains the disparity between the informal and formal sector. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 4 of 26 Table 3. Differences between the informal and formal economies [31,32]. Informal Sector Formal Sector Entry requirements are minuscule/easy Difficult entry requirements Dependent on local/indigenous resources Frequently relies on overseas resources Ownership—family enterprises Ownership is through a corporation Business operation is a small scale Enterprise operation is a large scale Operation is labour intensive, using locally adapted technologies Operation is capital intensive depending on imported technologies Un-skilled employees acquired outside the formal school system Formally acquired skills, often through the use of expatriate services Generally competitive and unregulated markets Markets are protected by the use of high tariffs, or trading licences. Moreover, [ 31 ], cited in the Global Development Research Centre (GDRC), highlighted four cardinal policy pillars, two as internal variables (capacity building and organisational management) and two as external variables (support services and mainstreaming the sector) that should be part of what is pursued by governments in developing economies. Secondly, GDRC uses four constructs (employment, enterprise, habitat and credit) as distinguishing characteristics that are pertinent to the informal sector (Table 4). Specifically, Ref. [ 32 ] defines the informal sector as covering a wide spectrum of unorganised economic activities/units in commerce, agriculture/agro-allied industries, construction, mining, manufacturing, transportation and services. This sector globally accounts for 60% of the adult working labour force in urban centres of developing countries. Table 4. Characterisation of the informal sector [32,33]. S/N Distinguishing Characteristics Comments 1Employment (important features of people in the informal sector) No official protection and recognition Non-coverage by legislation and security system Predominantly single own-accounts/self-employment work Non-trade unions organisation Low income and wages Lack of fringe benefits—paid sick and holidays. 2Enterprise (activities in the informal sector) Unregulated and very competitive markets Small-scale operation/family ownership Entry requirements minuscule Local resources reliant Adaptive technology and labour intensive Lack of access to institutional support, protection or credit 3Habitat (land and housing) Use of public space and private land Use of unauthorised structures and buildings Absence of restrictive standards and regulations Dependent on family labour for the construction of a trading post. Absence of mortgage/subsidised financing 4Credit Not regulated and unsubsidised Small in size and readily accessible. Low administrative and operational cost No collateral required Flexible interest rates and repayment tailored to individual needs. 2.1. Drivers of the Informal Business Sector The characterisation of informal employment by the ICLS [ 34 ] includes the informal sector and all informal employees working for several economic units that are unregistered and undocumented by enterprise employers. For developing economies such as Nigeria, informal employment is characterised by several factors [ 35 , 36 ]. These range from lower educational levels with limited skills and lower literacy rate than formal workers. There are no vocational training or skill development processes, and informal workers spend longer working hours in productivity. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 5 of 26 However, some drivers of informality according to [ 20 ] include economic and business challenges, as well as socio-demographic, socio-environmental, governance, science and technology factors. These are explained as follows: • Economic drivers: this include high or rigid taxation regimes which are cumbersome to entrepreneurs. Additionally, a sudden downturn in the economy and fall in national GDP because of recession in the local economy helps to drive informality. • Business challenges: this include external competitive pressures that affect small survivalist businesses. Additionally, there might be strong market competition, as well as an increase in independent workers/contractors. • Socio-demographic and socio-environmental constraints: this include increases in unemployment, high poverty levels, limited access to education and training (including vocational and apprenticeship in the formal jobs), and high corruption in government. • Governance: this includes increases in regulation that impede the activities of informal sector providers on the street, and low investments from governments toward the informal sector. • Science and technology: this have the potential to either slow the growth or enhance the growth of the informal sector. Leveraging of technology can improve visibility, profitability and semi-formalisation of micro-enterprises. Unfortunately, the outgrowth of the “making economy” where workers make their own or re-design products for other consumers can lead to growth and expansion of informality. Thus, it could be argued that central to the issue of informality, the basic factors or constructs that influence the growth and resilience of the informal sector could be grouped as the strain on economic activities, ineffectual policies and regulations, taxation aversion, absence of sustainable business ecosystems, moral laxity/flaws and social tension within the society. These are summarised in Table 5. Table 5. Core informal economy parameters [20]. Core Factor Parameters Percentage Contribution Economic High and complex taxation regime 98% Recession/economic downturn in the local economy 91% Occurrence of a global recession 88% Absence of local market dynamics 54% Business factors Increasing pressure on locally active small business 76% Intense competitive market pressures 64% Increasing the number of independent workers 57% Socio-demographic Increasing unemployment rate 94% Rising poverty levels 92% Lack of education training or skills development 70% Growing/expanding population 61% Urbanisation 55% Socio-environmental factors A high rate of corruption among citizens 93% Lower social pressures and norms 81% Shifting generational norms 56% Absence of strong ethical standards and cultural acceptance 54% Governance A decline in government expenditure 55% Regulations which do not agree with citizens’ rights and aspirations 54% Science and technology 3D printing 57% Expanding internet connectivity 53% Leveraging of digital technology 50% J. Open Innov. Technol. Mark. Complex. 2020,6, 134 6 of 26 2.2. Related Work To date, in the literature, few authors have focussed on the relationship between the informal sector and economic growth. In [ 37 ], the impact of informality on economic growth and poverty in SSA countries was examined. The author identified the key roles of the informal sector as providing the link between consumers and subsectors of the formal economy and offering product and services that are not offered by the formal economy. It is also a major source of employment and poverty reduction. It was also observed that it has been difficult to measure the exact contribution of the informal sector to the national output of most countries because of the lack of adequate data. The study identified the need to formulate policies that will address the problems of unemployment, lawlessness, and tax evasion by informal sector operators. The need for SSA countries to expand the economic participation of marginalised people that work in the informal sector was also espoused. The study offered policy recommendations such as: (i) reducing barriers to entry and asset accumulation for small firms or raising wages and working conditions for vulnerable workers; (ii) the provision of title deeds offers poor people the right to use their properties in legally secured market transactions; (iii) promotion of informal-formal economy linkages; and (iv) providing social safety nets for people working in the informal economy since they are more vulnerable to economic shocks than those in the formal sector. Similarly, Ref. [ 38 ] opined that despite the massive size of the informal sector in sub-Saharan countries, SSA countries have failed continually to harness the great capacity of the informal sector for economic growth. This is because of a lack of proactive policies that can harness the economic activities of the informal sector to bring them under the purview of formal regulations by the government. The study offered policy recommendations, which include the need to bring large informal organisations under the formalised regulation net to make them taxable and to ensure that small informal micro-enterprises are encouraged towards formalisation. For Nigeria, in [ 39 ], the authors found that although the informal sector is a source of income for a large number of people in Nigeria, it is difficult to determine its exact contribution to economic growth and development in the short run. The authors used the Error Correction Model (ECM) to analyse data from 1985–2014 to arrive at this conclusion. The results show that the informal sector has a long-running and positive relationship with economic growth, but that this is statistically insignificant. The author suggested the need for improved fiscal and employment policies to engender economic growth and development. Additionally, Ref. [ 40 ] reported the impact of the informal sector on the economic growth of Nigeria between the period of 1980–2014. An endogenous growth model that incorporates variables such as official economy nominal GDP, informal economy nominal GDP, currency in circulation, demand deposit, the ratio of currency in circulation to demand deposit, narrow money, the informal economy as a percentage of official economy was used to determine the impact of the informal sector on Nigeria’s economic growth. It was discovered that despite the commendable impact of the informal sector on economic growth, this relationship is not linear. The authors suggested that government should integrate informal sector businesses into the formal sector, and regulate the sector because of its potential to increase fiscal revenue through tax collection. For South Africa, Ref. [ 41 ] employed a macro-economic perspective to analyse the relationship between the informal sector, economic growth, and the business cycle in South Africa. The study explored the relationship between informal sector and formal sector employment, and economic growth and outputs using data from 2002–2016. The findings of the study showed that the informal sector has played a limited role in employment creation in the period since 2002. Thus far, no previous study has considered the issue of the informal sector and economic growth from a comparative perspective, which is a theoretical gap that this paper attempts to address. 3. Methods This paper assesses the contributions of the informal economy to the economic growth of South Africa and Nigeria through a systematic review of papers that have been published in the literature. A systematic J. Open Innov. Technol. Mark. Complex. 2020,6, 134 7 of 26 literature review (SLR) provides a synopsis of primary studies or “secondary” research conducted in a manner that portrays an explicit, transparent methodology, and must be reproducible [ 42 , 43 ]. According to [ 44 ], a systematic literature review is a robust overview of the current literature, and its limitations, quality and embedded potential [ 44 ]. It must be able to answer the question(s) raised in the research, as well as highlighting gaps in the research and literature and indicating the pathway for future research [ 18 ]. The main advantages of SLR are transparency in data collection and synthesis of the data for results enabling a higher level of objectivity and reproducibility [30]. 3.1. Research Questions This Systematic Literature Review (SLR) adopted a qualitative method for the collation and documentation of secondary data with the following Research Questions (RQs): RQ 1: What are the pertinent factors that act as drivers of the informal sector in SA and Nigeria? RQ 2: What are the major challenges of the informal sector in SA and Nigeria? RQ 3: What are the policy incentive(s) of the governments in the two countries that target the informal sector? RQ 4: What are the dominant types of informal activities in Nigerian and South Africa? 3.2. Study Design The design of this systematic literature review (SLR) was structured to assess the contributions of the informal sector to the Gross Domestic Products (GDPs) of SA and Nigeria based on evidence gathered from the literature. A SLR comprises both a quantitative, bibliographical analysis, together with a more qualitative thematic approach [ 30 ]. The literature search adopted five procedural steps, which are outlined in Table 6. Equally, each procedural step is explained in sequel sections. Table 6. The systematic review process [45]. S/N Process 1 Research question(s) formulation as part of the review 2 Identify pertinent and relevant work together with the inclusion and exclusion criteria 3 Quality assessment/assurance of the studies 4 Summation of evidence (analyse and present results) 5 Interpretation of the findings 3.3. Research Questions Formulation as Part of the Review (Step 1) It is of importance that the question(s) formulated at the beginning of the search be designed to be clear, unambiguous and clearly structured, as this will determine both the direction and focus of the research [ 45 ]. According to [ 18 , 43 ], the research questions must be formulated to convey an intervention (I), participants (P) or outcome (O); or in the view of [ 46 ], a RQ should use the PICOTS (Population, Intervention, Comparator, Outcome, Timing, Setting) framework, registering the protocol with PROSPERO for initial review. According to [ 47 ], SLR can be defined as a “review of an existing body of literature that follows a transparent and reproducible methodology in searching, assessing its quality and synthesising it, with a high level of objectivity”. Thus, search processes were initiated to include clear explicit criteria for inclusion and/or exclusion of the studies from the review. While the emphasis was on bibliographic databases, we also included grey literature to maximise comprehensiveness and guide against publication bias [ 48 ]. During January and February 2020, a search was conducted on databases including Google Scholar, Scopus, ResearchGate, and WIEGO (Women in Informal Employment: Globalising and Organising) representing an action research policy network. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 8 of 26 3.3.1. Search Queries The search queries used common syntax components [keywords or “search string”] including use of parentheses as well as Frequent Boolean operators “OR”, “AND”, and “NOT” [ 49 ]. The keywordbased search strings that were to identify documents that relate to South Africa, and Nigeria were: (a) “Informal Sector” OR “Informal Economy” AND “Economic Growth” AND “in” AND “South Africa” For South Africa, applying the search string yielded 859 documents from Scopus; 3140 documents from Google Scholar; and 70 documents from ResearchGate. (b) “Informal Sector” OR “Informal Economy” AND “Economic Growth” AND “in” AND “Nigeria” For Nigeria, applying the search string produced 523 documents from Scopus, 2610 documents from Google Scholar, and 59 documents from ResearchGate (see Table 7). ResearchGate was used so that we could gain access to relevant articles made available for open access by their authors. Scopus and Google Scholar were selected due to their international prominence as standard indexes of research publications. Table 7. Search strings and results. S/N Search String Scopus Google Scholar ResearchGate South Africa 1“Informal Sector” OR “Informal Economy” AND “Economic Growth” AND “in” AND “South Africa” 859 3140 70 Nigeria 2“Informal Sector” OR “Informal Economy” AND “Economic Growth” AND “in” AND “Nigeria” 523 2610 59 3.3.2. Data Sources Modern-day research has become interdisciplinary, collaborative, and internationalised, such that leading institutions demand high-quality data to inform priorities and drive sound decision-making. It is, therefore, incumbent on researchers to glean information from rich and highly standardised data sources including: Scopus (https://www.scopus.com): Launched in 2004, Scopus indexing is part of Elsevier’s service, which is highly prized globally, emulating Reuters/Thompson Reuters Web of Science service including SCIE/SSCI journals. SCOPUS database covers 36,377 titles (22,794 active titles and 13,583 inactive titles), and about 94.4% of these are peer-reviewed journals in diverse disciplines covering life sciences, social sciences, physical sciences and health sciences. Book series, journals and trade journals are the three main types of source, producing quality assurance measure (h-index, CiteScore, SJR—(SCImago Journal Rank), and SNIP (Science Normalised Impact per paper) for each title. (a) ResearchGate (https://www.researchgate.net): a European social networking platform for scientists and researchers, for question asking/answering, and collaboration. Founded in 2008 by scientists, it has over 11 million users globally. A RG score is allocated to most published scientists. With over 100 million publications, it has become a secondary source for data acquisition. (b) Google Scholar (https://scholar.google.com): a free search engine using full text or metadata to index scholarly literature across several publishing format and disciplines. Google Scholar allows one to search articles, theses, books, abstracts, and court opinions from several sources (professional societies, academic publishers, online repositories, universities, and a host of websites). Google and GS’s Boolean searching default is AND: more so google search is not comprehensive for its searches and skims what is available on the Web within a particular context. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 15 of 26 RQ 4: What are the dominant types of informal activities in Nigerian and South Africa? In South Africa, Refs. [ 58 , 59 ] reiterated that three-quarters of micro-enterprises are located in informal settlements and include spaza, shebeens, and liquor shops. Sub-sectors include haircare, takeaway food, religious services, street traders, mechanical repair services, greengrocers and recycling, education and healthcare services, while according to [ 60 ], informal subsectors include manufacturing (9.0%), construction (16.6%), community, social and personal services (16.4%), wholesale and retail trade (41.7%), financial services (7.2%), transport, storage, and communication (9.1%), and other (0.2%) as of the third quarter of 2014. In Nigeria, informal sectorial segmentation according to [ 70 ] includes small scale business, unregistered sole-proprietorship firms in rural/urban settlements. In rural centres, agriculture and allied industries, blacksmithing, weaving, and pottery are prevalent. In urban centres of Lagos, Abuja, Kaduna, Port Harcourt, and Enugu, informal businesses such as trading, small-scale manufacturing and repairs, including upholstery, furniture making, woodworks, metal works, bakery, masonry, and printing are prevalent. The dominant activities in South Africa and Nigeria informal sectors are presented in Table 14. Table 14. Sub-sectors of the informal sector in South Africa and Nigeria. S/N South Africa Nigeria 1 Street vendors, spaza shops, liquor, recycling, waste pickers, domestic workers, bead-making [61] Small-scale unregistered sole proprietorship businesses, joint-ownership businesses. Farming/allied industries, blacksmithing, weaving, pottery. In Larger cities—Lagos, Abuja, Kaduna, Kano, Enugu—trading, carpentry, masonry, cobbling, furniture making, confectionery, auto repair, electricians, metal works, printing [70] 2 Liquor and spaza shops, haircare, takeaway foods, religious services, street trading, mechanical repair services, green groceries, recycling, education and healthcare [58] Street traders, subsistent farmers, small-scale manufacturing, service providers—hairdressers, private taxi operators, carpenters, metal workers [66]. 3 Food vendors, retail, trade, construction, manufacturing, mining, services, transport, re-cycling, cobbling, house repairs and services, handicraft, spaza shops, shebeens [10,13,14,54,55] Credit vendors, petty traders, and unregistered economic units, components of the service sector, furniture making, re-cycling, woodwork, tailoring, carpentry, cobbling, masonry, and handicraft [19] 4.2. Interpretation of the Findings The findings from the investigation of specific RQs are discussed in the following subsections. 4.2.1. Pertinent Factors and Drivers of the Informal Sector (RQ1) The summary of findings from the primary study revealed that significant similarities exist in the drivers of the informal sector activities in South Africa and Nigeria (see Table 11). It was discovered that the effects of bad economic situations are mostly responsible for the proliferation of informal sector activities. For both South Africa and Nigeria, the relatively high unemployment rate and the legal requirements to become a formal business operator are major factors, because unemployed persons and those that cannot meet these requirements can only find solace in the informal sector. In South Africa, the slow rate of economic growth, the impact of high income disparity between the different racial groups, and unemployment rates have led to the high Gini Index/Gini Coefficient for the country [ 87 ]. Higher employment rate, status, and wages are more common among the whites, while lower employment rate, wages, and status, are more common among Black Africans. Moreover, Ref. [55] opines that 30.1% of South Africans are unemployed. However, according to [ 55 ], the informal sector supported 27% of all working people. Reports from [ 1 ] indicate that 34% of all South Africans work in the informal sector (21% of total employment is informal, 8% domestic households, 5% are formal). J. Open Innov. Technol. Mark. Complex. 2020,6, 134 16 of 26 Nigeria’s informal sector is expected to support the projected high unemployment rate of 33.5% in 2020. According to [72], the 3QLFS unemployment rate (2018) rose to 23.1%. Additionally, the labour regulations stipulate conditions for employment in South Africa which makes it difficult for foreigners who do not possess critical/scarce skills as gazetted in the list of critical skills by the South African government to find jobs in the formal sector. This leads many foreigners to take jobs in the informal sector. Similarly for Nigeria, based on the findings of [ 20 , 70 ], it can be deduced that harsh economic factors such as early retirement, inflationary tendencies, insufficient employment engagements with many people working less than 40 h per week, lack of social protection are key drivers of the proliferation of informal sector activities in Nigeria. However, for Nigeria, in contrast to South Africa, it was also reported that the disposition of individuals in terms of self-employment tendencies and survival tendencies is also a major factor that has promoted informal sector activities. Another factor is the nature of the regulatory environment in Nigeria which enables independence and freedom to undertake business activities with less restriction in many public and private places, and a weak tax monitoring system that allows tax evasion. These were also reported as factors that have given impetus to the proliferation of informal sector activities in Nigeria. 4.2.2. Major Challenges of the Informal Sector (RQ2) The findings from the primary studies show that the informal sector in South Africa and Nigeria are confronted by similar challenges, as shown in Table 12. The issues of lack of credit/low capitalisation, poor technology adoption, poor support infrastructure, poor government policy, and lack of social protection are common to the informal sector in both countries. However, the South African informal sector has particularly to cope with the effects of unfavourable zoning laws, which stipulate places where informal activities are allowed and disallowed. The Nigerian government appears to be less strict in this aspect. The intense market competition among informal sector operators is a challenge for Nigeria’s informal sector, as many people may be selling the same product or offering similar services, leading to intense competition. Market competition seems not to be as intense in the South African informal sector. However, informal businesses in South Africa have had to cope with the challenges of external competitive pressures such as the influence of imported goods compared to local goods, and the price and quality of similar products that are marketed by formal retailers. 4.2.3. Policy Incentives of the Government for the Informal Sector (RQ3) Findings from the studies show that the two countries have taken good steps to put in place appropriate policy incentives to aid the informal sector (see Table 13), and substantial similarities exist in terms of the goals and objectives of these policy incentives. In South Africa, the Department of Trade and Industry (DTI) through the Department of Small Business Development and the National Informal Business Upliftment Strategy, together with provincial and local strategies, are tasked with issues of the informal sector providers. In the case of Nigeria, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN/NBS), the Central Bank of Nigeria (CBN) and the Bank of Industry (BoI) are mandated to deal with micro and small businesses. The focus of the policy incentives has been on increasing formalisation of informal businesses, providing better working conditions and social protection for informal workers, ensuring better compliance with expectations. The focus on the policy incentives in Nigeria has been on encouraging informal business formalisation, encouraging micro-entrepreneurship, financial assistance and training to informal operators including women, artisans and traders, creation of formal jobs opportunities to cause the migration of informal operators. 4.2.4. Types of Informal Sector Activities (RQ4) From Table 14, above, we observe that the sub-sector distribution of the informal sector between SA and Nigeria are similar except credit vendors and motorbike services which seem to be more J. Open Innov. Technol. Mark. Complex. 2020,6, 134 17 of 26 prevalent in Nigeria. Arguably, the spatial distributions of the informal sector are quite the opposite in South Africa and Nigeria. Comparatively, informal distribution is lowest in Gauteng and Western Cape, but highest in Limpopo, Mpumalanga, Eastern and Northern Cape. The highest concentration is found in cities—eThekwini, Cape Town, Gauteng and Tshwane. Average earnings for informal sector providers run from R1733 per month in 2013 against R5000 per month for formal employees. Nigeria’s informal sectors are mostly concentrated in larger metropolitan centres of Lagos, Ibadan, Kaduna, Kano, Abuja, Enugu, and Port Harcourt due to acute urbanisation. Lagos State alone, as the financial hub of Nigeria, with many informal sector economic units, generated a total output of USD 136 billion in 2017 [88]. 5. Discussion Based on the systematic literature review, we observed that several authors have considered issues of the South African and Nigeria informal sectors. However, so far, an attempt to draw conceptual differences and similarities between the informal sectors of South Africa and Nigeria has not been made. This type of comparative analysis is necessary to provide a framework for the holistic development of informal sectors in Africa for improved economic growth and socio-economic development. Our findings from this study show that some age-old structural problems such as unemployment and socio-economic inequality will continue to cause a proliferation of informal businesses in these countries. Several authors have suggested the need for a more committed response to the challenges that informal sector operators face daily, which hinders their profitability and livelihood. It has been advocated that addressing these issues will have a positive impact on economic growth and economic development [63,70,71]. For example, in Nigeria, by using the Error Correction MIMIC (EMIMIC) model [ 70 ], the size of the Nigerian informal economy since 1970 was estimated to vary between 53.6% and 77.2%, with an average of 64.6%, of GDP. According to [ 70 ], the informal sector, with a 65% contribution to Nigeria’s GDP, should be protected. This is because it offers parallel economic units and finance structures that operate mostly on unwritten rules, but providing credit services for informal businesses, and enabling significant wealth creation. While the population of South Africans in the informal employment is relatively small (about 6%) in comparison to other sub-Saharan African (SSA) countries, the Quarterly Labour Force Survey (QLFS) from 2008 to 2014 showed a contribution to GDP of between 16% and 18% [ 60 ]. Presently, its percentage of GDP is in the low 20 s [ 65 ]. Therefore, according to [59,60,63] , relevant government departments in South Africa such as the Department of Trade and Industry (DTI), and Small Business Development (SBD), should provide more policies in favour of the informal sector to enable them to become viable and sustainable. This will enable their transition from being survivalist micro-enterprises to viable business entities with increased earnings. A summary of the key findings of this study is presented in Table 15. Table 15. Summary of findings of the comparison of SA and Nigeria sectors. RQs Similarities Differences RQ1 High unemployment rate is a major driver of informality in both South Africa and Nigeria. In South Africa, the slow rate of economic growth, and the high-income disparity between the different racial groups is a major factor. With the groups with lower employment rate, and foreigners without critical skills taking solace in the informal sector. In Nigeria, the disposition of many persons to pursue self-employment has promoted informal sector activities. The regulatory environment in Nigeria enables independence and freedom to undertake business activities with less restriction in many public and private places which has encouraged the proliferation of informal sector businesses. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 18 of 26 Table 15. Cont. RQs Similarities Differences RQ2 The informal sector in South Africa and Nigeria are confronted with similar challenges. These include lack of finance, infrastructure constraints, low technology adoption, poor government policy and incentives, low market capitalisation. South Africa has strict zoning laws which regulate places where informal business activities can take place, which inhibits the proliferation of informal business activities. The zoning laws in Nigeria are more relaxed. RQ3 Both South Africa and Nigeria have increased formalisation of the informal sector as the main policy objective. However, currently, policy gaps exist that has limited the capacity to fully harness the potential of the informal economy of both countries. Aside from formalisation, policies have targeted promotion of micro-entrepreneurship, financial assistance and training, and the creation of formal job opportunities to encourage migration from the informal sector. Aside from formalisation, the policy focus has been on providing better working conditions and social protection for informal workers, ensuring better compliance with expectations. RQ4 The types of informal business activities in the informal sectors of South Africa and Nigeria are similar. Informal credit vendors are prevalent in Nigeria, which has enabled many informal businesses to harness business financing. In Nigeria, there is more concentration of informal business in the larger towns and cities due to increased urbanisation. In South Africa, informal business activities are more prevalent in the less developed townships and cities. The distribution and concentration of informal business are lowest in most developed cities/provinces such as Gauteng and Western Cape. In Nigeria, the greater concentrations of informal business are in the most developed cities, which thrives side by side with the formal economy. 5.1. Recommendation The recommendations offered in this section stem from two perspectives. These are the need for increased support for the informal sector by government, and the need for the adoption of open innovation in the informal sector for economic growth. These two perspectives are presented in the following sections. 5.1.1. Increased Support for the Informal Sector In agreement with the observations of several other authors, we hereby present the following recommendations to buttress the need for more support for the informal sector in South Africa and Nigeria. Support for technology adoption : The problem of COVID-19 has emphasised the need for increased adoption of web/mobile technology for business operations by informal business owners. This will enable them to reach a larger market, and increase their profitability. The governments of South Africa and Nigeria can aid informal business by setting up e-marketplaces where informal business can be hosted and patronised. Such websites could be zero-rated in terms of data consumption, with electronic payment capability. This will help these governments to gather more information on informal businesses and motivate them to embrace semi-formalisation in a gradual way [77]. Increased infrastructural support : Additional infrastructural support that will enable informal businesses to thrive is required. This could be by providing constant electricity supply that is cheap/free in dedicated trade zones for informal businesses, free internet hotspots in several localities/communities where informal sector providers are concentrated, zero-rated websites where people can buy and sell informally, and many more. All of these will provide a basis to aid informal business operators for improved productivity which will inevitably contribute to the economic growth of South Africa and Nigeria. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 19 of 26 Enhanced social support for informal sector providers : Informal business must be able to access financial support from governments directly and through NGOs that can provide agency on behalf of government and funders. NGOs and social workers can help to bridge the gap between government, stakeholders, and the informal sector providers [ 63 ]. Access to soft loan facilities, and professional services support such as training that is directed at the skill acquisition in critical aspects such as bookkeeping, accounting, and business management are services that can be rendered through NGOs that can benefit informal businesses significantly. Supportive policies by the government : Informal economy has always been the backbone of most developing countries, contributing significantly to national GDPs. Today, the non-farm informal economy is a major significant economic force for employment and wage earnings [ 65 ], and therefore governments should explore impediments to greater productivity, irrespective of the type of work—agro-allied industries, non-farm household micro-enterprises, and the formal sector. Policies need to be holistic, and informed by facts, cost analysis, and data generated after careful analysis of prevalent problems experienced by these practitioners [ 63 ]. Initiatives and policies that are adopted must involve full participation of informal service providers. The focus of these policies should be to increase visibility, brand promotion, profitability, sustainability and eventual formalisation of the sector. 5.1.2. Open Innovation in the Informal Sector for Economic Growth Open Innovation is the purposive use of inflows and outflows of knowledge to, respectively, accelerate internal innovation and expand the markets for external use of innovation [ 89 ]. So far, the role of open innovation in the informal economy has not gained much attention in extant literature. In [ 90 ], the authors reported that informal cultural norms such as social trust or ties can improve open innovation outputs when explored by an informal economy as demonstrated by the Shenzhen mobile industry in China. The potential for open innovation in the informal economy was also substantiated by observed practices among informal sector auto parts fabricators in Kampala, Uganda as reported in [ 91 , 92 ]. These informal sector operators were found to engage in a high degree of knowledge sharing based on social trust, which is derived from ties such as apprenticeship, family ties and friendship. Similarly, it was observed that the association of traditional healers in South Africa, which operates informally, has found ways to make some forms of knowledge about their practices openly available for the benefit of members of the association to enhance general practice. However, certain forms of knowledge that are deemed sensitive and worth preserving in order to foster the specialisations of individuals are not shared openly [ 93 ]. These examples suggest that open innovation can indeed enhance the level of productivity, and service delivery in the informal sector is it is encouraged [ 91 ]. Thus, the following perspectives on open innovation could be explored by the governments of South Africa and Nigeria. Fostering of open innovation in the informal sector : According to [ 94 ], the process of implementing an open innovation paradigm includes unfreezing, moving, and institutionalising open innovation. So far, there is sufficient basis to believe that open innovation is inherently entrenched in many facets of informal sector businesses activities, which is built on social trust among the actors. The necessary next steps are how to move to formalise it, move it forward, and institutionalised. The governments and social development actors such as NGOs in South Africa and Nigeria will need to devise procedure and policies that will encourage systematic open knowledge transfer and innovation in the various sub-sectors of the informal economy in their countries to enhance the productivity and service quality in the informal economy. Open Social Innovation for Tackling the Challenges of the Informal Sector : Open social innovation is focused on implementing an open innovation paradigm that has the goal of solving a social problem [ 95 , 96 ]. The social hazards that are most prevalent in South Africa and Nigeria are associated with poverty, and joblessness, and other indicators of poor human development index (HDI). Many informal business operators belong to the lowest rung of society, which is most vulnerable J. Open Innov. Technol. Mark. Complex. 2020,6, 134 20 of 26 to these social hazards. Thus, tackling the problems of the informal sector from the perspective of open social innovation will trigger social changes that will have a practical impact on the socio-economic lifestyle of informal sector operators and vulnerable people in society. Inclusive Open Innovation : In [ 97 ], a quadruple-helix model conceptual framework for understanding open innovation micro- and macro-dynamics relevant to the context of any developing nation was proposed. The framework was designed to impact social, environmental, economic, cultural, policy, and knowledge sustainability. The informal sector, as the largest employer of labour in most developing countries, must be harnessed for inclusion as one of the beneficiaries of open innovation at the micro and macro levels. As observed in [ 91 ], the informal sector is quite receptive to open innovation because: (i) African micro and small businesses, including the informal sector, are open to innovation practices instead of exclusion, and do engage in it in diverse informal ways; (ii) These innovative practices are largely motivated by contextual factors such as social ties (friendship, family), need for survival, apprenticeship, and mutual common interest concerns; (iii) The innovation interactions rely mostly on offline and socially constructed trust and linkages; (iv) These innovation knowledge transfer practices are informal and semi-formal in nature, with little consideration of legalities, and intellectual property rights. These characteristics of African informal businesses offers a good template for the respective governments in South Africa and Nigeria to evolve an inclusive model of open innovation that will span the social, environmental, economic, cultural, policy, and knowledge sustainability aspects of their countries. A contextualised open innovation paradigm that is based on the conceptual framework that is proposed in [ 97 ] will enhance the productivity of the informal sector, promote semi-formalisation of informal business, and engender open innovation of the market for the benefit of SMEs, start-ups, and big businesses [ 98 ]. This will inevitably stimulate quantitative and qualitative economic growth for both South Africa and Nigeria. 5.2. Policy Implications The policy implications for both South Africa and Nigerian economies can be viewed from perspectives of systems thinking. Through a systemic lens, the SA government’s main goal is to formalise the sector for increased accountability and productivity. The heterogeneity of the informal sector points to inconsistencies in policy toward these micro-businesses. Here specifically, DTI/SEDA has to scale up policies and incentives that target the informal sector providers. These must include financial inclusion, solutions to prevailing infrastructural challenges, social protection, medical aid coverage, management skill/human capital development and leveraging of technology. For these to be achieved, substantial investment has to be channelled to the informal sector. In Nigeria, formalisation can equally be achieved through wage relaxation for informal workers to migrate them to higher wage brackets. Fostering of micro-enterprises, human capital/management skills development, increased training for women, artisans and craftsmen have to be intensified. Relevant government agencies such as SMEDAN/BoI/CBN must be tasked with the sole purpose of funding of these sectors and assisting increased productivity and viability of these micro-enterprises. It is advisable to have effective public–private partnerships to accelerate and enhance reforms in the informal sector. Informal sector operators should also be encouraged through the provision of training, credit, and business development services to enhance the potential for enhanced growth and productivity. Additionally, in agreement with [ 38 ], both countries need to devise more policies that will facilitate the promotion of informal–formal economy linkages and provision of social safety nets for people working in the informal economy since they are more vulnerable to economic shocks than those in the formal sector. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 21 of 26 6. Limitation of the Systematic Review The authors explored Scopus, ResearchGate, and Google Scholar databases, WIEGO and internet-based publications as data collection sources. The findings of this paper were based on the analysis and synthesis of articles from these sources as interpreted by the research team, therefore elements of human error cannot be completely discounted. The focus was also mainly on papers published in the English language, considering that both South Africa and Nigeria are English-speaking countries. The cut-offyear of 2013 was used as the inclusion and exclusion criteria because variables (micro and macro) that account for economic growth affecting nominal GDP are constantly changing; thus, we felt that a seven-year window was reasonable. Additionally, 2013 was the year that the Nigerian economy was rebased to include activities in the informal sector [50–52]. 7. Conclusions In this paper, a comparative systematic review of the state of the informal sectors of South Africa and Nigeria has been presented. This was motivated by the need to analyse the conceptual similarities and differences that exist between the informal sectors of these two countries and evaluate their potential to contribute more to economic growth. Based on four research questions that were formulated, and by considering 31 primary studies, we were able to identify the similarity and differential patterns in the pertinent factors that drive informality in these two countries, the challenges of the informal sector, the policy incentives of the governments of South Africa and Nigeria for the informal sector, and the dominant types of informal sector activities. We also analysed the impact of the informal sector on the economic growth of South Africa, and Nigeria, and identified areas where improvements are required to strengthen the informal sectors of the two leading economies in SSA. Notably, we found that due to some age-long structural problems, unemployment and socio-economic inequality will continue to cause a proliferation of informal businesses in these countries. However, although this is not an ideal scenario, tangible steps can be taken to leverage the large number of persons working in the informal sector for economic growth and economic development through the provision of better technology support, infrastructural support, and social support for the informal sector to enhance it. We also advocated for the need for the adoption of the open innovation paradigm as way to advance the development of the informal sectors of South Africa and Nigeria. This will lead to increased productivity of informal business entrepreneurs, which will inevitably stimulate economic growth and socio-economic development in these two countries. The perception globally is that the informal economy contributes nominally to national GDPs. At the other end of the spectrum is the notion that informal economy acts as an inhibitor to the economic viability of most developing/emerging countries. This is true in instances where the governments concerned fail to understand the drivers to informality, which are reflections of the systemic structural problems in the economy [ 15 ]. Attempts that have been made to correlate the output gap to informality in terms of the relationship between GDP and size of the informal sector [ 41 , 99 ]. These reveal contradictory evidence on any correlational trend between GDP and informality. Thus, the growth of informality is not advantageous for economic growth if there are no sufficient policies to harness the informal economy by a country. Additionally, Ref. [ 100 ] posits that research and development expenditures that are usually classified as discretionary costs by the government can stimulate innovation, which can engender diversity of the economy, higher performance, productivity and economic efficiency. Investment in research, technology innovation, and education are vital keys that can help to harness the informal economy for economic growth in South Africa and Nigeria. This is in tandem with the three assumptions of the Romer model [ 101 ], which are (i) economic growth is a function of capital accumulation and progress in technology; (ii) market challenges drive private agencies to innovation and advance in technology; and (iii) knowledge of technology acts as a non-rival input. This will lead to enhanced economic growth which will create better opportunities for citizens limiting the proliferation of the informal economy [102]. J. Open Innov. Technol. Mark. Complex. 2020,6, 134 22 of 26 In the future, as an extension of this study, we shall consider the role of the informal sector on the socio-economic development of common people in South Africa and Nigeria. Author Contributions: Conceptualisation, methodology, and original draft preparation—E.E. Conceptualisation, Critical reading, revision of the initial manuscript, response to reviewers’ comments, and supervision—O.D. All authors have read and agreed to the published version of the manuscript. Funding: Cape Peninsula University of Technology provided some funding for the PhD Thesis. Acknowledgments: The authors acknowledge the support provided by Cape Peninsula University of Technology through the doctoral studies of Ernest S. ETIM. 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