Informal Economic Activities and Firm Performance in a Transition Economy: The Case of the Cashmere Industry in Mongolia

The cashmere industry is one of the most important foreign currency generators as well as the major income contributor in Mongolia. This study first finds a tendency that cashmere enterprises in Mongolia engage in the trading of raw cashmere rather than use raw cashmere in the production process given the shortage of raw cashmere, its high prices, and the low competitiveness of the final products (garments). This work also finds that there is a high extent of smuggling by enterprise people in the form of selling raw cashmere in black markets, and that a higher degree of smuggling leads to less output, sales. The results suggest the serious damages brought about by smuggling activities in Mongolia. This is in sharp contrast to the impact of formal trading because this does not harm firm profitability and sales growth although it affects production negatively. Finally, income tax rates have a negative and significant impact on profitability and no significant impact on output.