The aim of this paper is to evaluate the contrasting explanations for the cross-national variations in the commonality of informal sector entrepreneurship. These variously view such work as: a result of economic underdevelopment (modernization thesis); driven by high taxes, corruption and state interference which lead them to exit the formal economy (neoliberal thesis), or a product of inadequate state intervention to protect workers from poverty (political economy thesis). Analyzing International Labour Organization data on the proportion of the non-agricultural workforce engaged in informal sector entrepreneurship in 38 emerging economies, and data on the economic and social conditions deemed important in each explanation, a tentative call is made to reject the neoliberal explanation and to synthesize the modernization and political economy perspectives. The outcome is a new ‘neo-modernization’ explanation that associates greater levels of informal sector entrepreneurship with economic underdevelopment and inadequate state intervention to protect workers from poverty. The paper concludes by discussing the theoretical and policy implications.

Keywords: entrepreneurship; informal economy; shadow economy; tax evasion; economic development; developing economies; transition economies