Initial informality as an obstacle to intellectual capital acquisitions Empirical evidence from Latin America Rodrigo Costamagna and Sandra Idrovo Carlier INALDE, Universidad de la Sabana, Chía, Colombia, and Pedro Mendi Department of Business, University of Navarra, Pamplona, Spain Abstract Purpose – Most developing countries are characterized by large informal sectors. A substantial proportion of firms in these countries began operations in the informal sector, eventually becoming formal. The purpose of this paper is to study whether, after formalization, firms that began operations in the informal sector are more or less likely to use intellectual capital in the form of disembodied technology licensing than firms that began operations in the formal sector. The moderating roles of being a downstream firm, age and the country’s per capita income are also analyzed. Design/methodology/approach – The effect of initial informality on the probability of licensing is estimated using firm-level data from the World Bank’s Enterprise Survey, conducted in several Latin American countries in 2006–2017. Findings – Formal firms that began informally are less likely to use licensed technology, suggesting the existence of long-run effects of informality. The effect of initial informality is more negative among downstream firms. Research limitations/implications – The analysis uses cross-sectional data. Unobservable firm fixed effects could be controlled for using longitudinal data. Practical implications – Initial informality affecting the innovation strategies of firms should be considered when designing policies that incentivize formality. Social implications – If, in light of the results of this analysis, policies are designed which foster a better allocation of resources, there will be a tangible impact in the lives of many people in developing countries. Originality/value – This is the first paper that analyzes the relationship between initial informality status and technology licensing, a relevant channel for the international diffusion of technology. Keywords Informality, Latin America, Competition, Licensing Paper type Research paper 1. Introduction While most scholars, policy makers and businesses leaders agree on the existence of a positive impact of innovation and technological upgrades on productivity and growth, firms in Latin American countries (LAC) still perform poorly in terms of innovation investments. The reasons and determinants remain largely unidentified, and may involve factors that are external to the firm, such as market and institutional conditions, and other internal factors such as organization or management quality. In this paper, we focus on a particular internal characteristic of the firm, namely having begun operations in the informal sector, and how that feature acts a as a barrier to the use of disembodied foreign technology. This is a relevant question given the prominent role that licensing plays in the international diffusion of technology (Arora et al., 2004; Gambardella et al., 2007), which ultimately has an impact on total factor productivity and growth (Mendi, 2007). For this reason, technology licensing Journal of Intellectual Capital Vol. 20 No. 4, 2019 pp. 472-487 © Emerald Publishing Limited 1469-1930 DOI 10.1108/JIC-12-2018-0218 Received 14 December 2018 Revised 11 March 2019 Accepted 23 May 2019 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/1469-1930.htm The authors thank the conference participants at BALAS-2017 for their helpful suggestions. Mendi gratefully acknowledges financial support from Ministerio de Economía y Competitividad (ECO2014-55236-R) and Fundación Ramón Areces. The data that support the findings of this study are available on the World Bank’s Enterprise Surveys website: www.enterprisesurveys.org/portal/login. aspx. All errors are our own. 472 JIC 20,4