Does formal working capital for informal enterprises impact performance? The role of digital adoption

Purpose Increasing firm formalization involves deeper understanding of the informal business ecosystem, which lacks rigorous empirical exploration in absence of robust data. This paper examines the relationship of formal working capital finance and digital adoption impacting firm performance of informal businesses in a prominent emerging economy. Design/methodology/approach We use World Bank's Informal Sector Enterprise Survey 2022 dataset containing 10,672 Indian informal enterprises. Regression analysis is used to estimate the impact of formal and informal working capital finance through various digital adoption measures on firm performance parameters measured through regular month sales and labour productivity. For robustness check, the analysis is repeated using performance data for the last calendar month. Findings We find corroborating evidence of formal working capital finance positively and significantly impacting regular month sales and labour productivity. Digital payments are also found to positively impact sales, both directly and when interacting with working capital finance variables. Informal finance, being an inefficient source of capital, is found to constrict labour productivity which interacted negatively with information and communication technologies (ICT) adoption. Further, owner characteristics like education, ownership premise and gender play active role in businesses conduct amongst the informal businesses. Corruption is found to favourably impact sales amongst informal enterprises while it has mixed impact on labour productivity. The use of sales and labour productivity measures pertaining to the last calendar month yields consistent results. Practical implications Informality is found to dominate when it comes to accessing external working capital finance, thus hindering firm productivity and opportunities to scale. Digitalization could help with access to formal working capital finance through online transaction-driven lending models, thereby contributing to firm growth. The findings provide policy insights for improving digital payments and related infrastructure and encouraging its utilization amongst informal businesses. These measures are expected to ease access to formal finance and augment firm formalization. Originality/value Informal businesses have nuanced and cautious approach towards formalization both in terms of formal working capital finance and digitalization. The study addresses the knowledge gap on digital and formal financial adoption amongst informal businesses by employing a credible country-level dataset. This is one of the first studies to the best of our knowledge wherein the channels of external working capital finance and ICT tools are bifurcated, and their adoption is linked to business performance of informal firms in India.