Good apples in spoiled barrels: A temporal model of firms’ formalization in fields characterized by widespread informality

Entrepreneurship scholars have devoted increasing attention to formalization (i.e., a firm's transition from informality to compliance with formal institutions). However, little is known about the actual process through which informal firms transition to pursue opportunities in a fully legally compliant way. This transition poses formidable challenges, especially in fields in which informality rather than formality is widespread. To understand how firms transition to full formality and manage the related institutional challenges in such contexts, we conduct a longitudinal, inductive case study of an informal firm, confiscated from the Mafia in Italy, and examine how it succeeded in operating formally in a field in which informality regulated transactions and was accepted across society. The findings suggest that formalizing in such contexts is a two-phase process that entails first extricating the enterprise from the influence of informal institutions and then cultivating formal institutions in the field to increase the firm's legitimacy. The study contributes to the literature on formalization, entrepreneurship, and institutional work by advancing the understanding of formalization as a dynamic and entrepreneurial endeavor that requires specific institutional work at different points in time to succeed.