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This article identifies the underlying mechanism explaining why firms starting unregistered (initial informality) are less innovative. We argue that resource allocation patterns developed during a firm's early stage are likely to persist. Firms with initial informality are less likely to invest in R&D and employee training compared to firms starting registered. This explains their low innovativeness. Using data from the World Bank Enterprise Survey, we analyze firms from 30 countries in Sub-Saharan Africa. Our empirical evidence shows that R&D investment and employee training mediate the negative relationship between initial informality and innovation. This finding has significant policy and managerial implications. While transitioning from informal to formal firm status, it is essential to put in place policy instruments encouraging investment in R&D and employee training. Nascent entrepreneurs should take into consideration the lasting impacts of initial informality on firm development when making decisions. [ABSTRACT FROM AUTHOR]

Building on the resource-based view and social network theory, we examine the relationship between informality and firm performance. Based on an empirical investigation covering 121 countries over the 2006-2018 period we show that firms that started unregistered perform better than firms that started registered. We also show that the relationship between time spent unregistered and firm performance is curvilinear, taking and inverted-U shape, and that firms operating in countries marked by poorly functioning formal institutions benefit longer from staying unregistered. Our findings have important implications both for managers and for policy makers. [ABSTRACT FROM AUTHOR]