McKinsey has a nice example from Brazil, but not only – Russia also has similar examples – where formal supermarkets have found that they can’t profitably acquire informal players, because of the unearned cost advantage. Although supermarkets could increase the productivity of the acquired businesses, their net margin goes to zero once tax obligations are paid:
They also show that in Turkey dairy processors enjoy informality-related cost savings of almost 20%, so these companies survive despite their low pro-ductivity. Informal software companies in India appropriate innovations and copyrights without paying for them. If software piracy rates fell to US levels, the industry’s productivity and profitability would soar by nearly 90%.