Motivating Factors of Informal Trade in Intermediate Cities of Ecuador: Application of the Factorial Model

This research aims to identify the motivating factors that influence the development of informal trade by merchants in the Republic of Ecuador. For this, the inductive method, at causal-statistical level, is applied; making use of a questionnaire as an information collection tool, with a sample of 310 informal merchants from a population of 3,600 located in the city of Riobamba. Factor analysis and linear regression are used. Results show that informal activity is related to unemployment, independence and necessity; being that informal trade depends on age, marital status, ethnicity, area, economic income, location, need, and lack of knowledge about public spaces and taxation regulations.


Introduction
Research on informal activity, such as the International Labour Organization (ILO), OIT (2002OIT ( , 2014OIT ( , 2016OIT ( , 2019, ILO (2012ILO ( , 2014, World Bank (2013, 2019) and others, show that "informal workers routinely face higher risks of poverty than workers of the formal economy and that informal economy work, poverty, and vulnerability are highly related" quoted in Quispe et al. (2018, p. 4). Thus, informality is understood as "a phenomenon that some years ago was considered a particular feature of some economies, especially in backward economies, which existence overflowed the archetype of how modern economies should work" (Sandoval, 2014, p. 11). Data show that unemployment rate according to the ILO, reaches 9.9% in Latin America for 2017, in the case of Ecuador 4.3% (OIT, 2018, p. 7). Thus, employability indicators in Ecuador show that the activity in the informal sector reaches 47.5%, unlike the formal sector, reaching 46%; these and other indicators are displayed in Figure 1.

Figure 1. Employability indicators in Ecuador
Source: Own elaboration based on (ENEMDU, INEC, 2018) Likewise, the data show that trade is a formal activity with a high participation in the labour market, as seen in Table 1, where for example in 2016, it represents 32.3%, followed by communal, social and personal service activities, representing 22.1% (OIT, 2018). However, this formal activity has been facing a series of economic and social problems, since the informal trade sector has increased in different countries, mainly in Ecuador, especially around local markets in cities. According to data collected in this research, it is seen that-in no more than two years-around 200 more people started activities as merchants in close-by areas to markets, without neglecting the presence of sale-points in different streets of the cities, mainly offering agricultural and clothing products.  (2016), Martínez et al. (2019), and also the identification of causes and their relationship with tax evasion Quispe et al. (2018), Teja and Lopez (2013) among other studies on informality. However, there are few studies on informal trade in Ecuador, mainly for the city of Riobamba, such as De Souza and Bustos (2017), Moreira and Pilco (2016), and Quispe et al. (2018).
Thus, the study becomes relevant, since, from the theoretical point of view, it considers informal economy as an informal activity linked to informal trade, understanding that informal trade "is not governed by the goods/services transaction regulations and laws. Informal commerce, done in streets and public spaces, on the basis of merchandise, usually at low cost and very dynamic in terms of offer, has become the central activity where thousands of people act" (Castillo-Garcia, 2014, p. 4). Likewise, "informal activities reduce the tax base, thereby preventing sustainable financing of public goods and social protection ... a high dimension of the informal sector tends to negatively affect the evolution of the economic activity" (Hernandez & De la Roca, 2006, p. 65). This means that informal trade does not only affect informal trade income, but also tax evasion; understanding that tax evasion is an illegal action, that is, violation of the tax law (its letter and spirit). Therefore, tax evasion has a series of legal consequences for evaders, since it implies the transgression of the current tax legislation. To achieve this purpose, among other things, taxpayers make a false statement or simply hide tax information on their declarations and amount of the tax to be paid to the tax authority, as mentioned (Yañez, 2015).
Evasion occurs when an individual, a taxpayer, after having carried out operations involving the accusation and payment of a tax, refrains from complying with it. "This is in violation of the law, since the obligation exists, it has been given, and the individual does not comply with it" (Ochoa, 2014), so also, it is the "unlawful conduct for the concealment of all or part of the taxable transaction, done by the taxpayer to avoid paying the tax debt, being bound by the law (Rua, 2016). Therefore, tax evasion results into income decreasing, fiscal deficit and private investment reduction. In Ecuador, there are collection gaps based on comparative analyses of total tax due and generated taxes, calculated from national accounts, being evasion from natural persons the widest gap; information connected to tax culture level and evasion controls done by the Tax Administration of Ecuador (Ordóñez, 2010).
Based on above-mentioned facts, the research aims to identify the motivating factors that influence the development of informal trade by merchants in the Republic of Ecuador. Although different studies analysed the factors that motivate informality, this study, based on the identification of factors that motivate informal commerce in the city of Riobamba, seeks to determine whether there are differences between motivating factors identified in metropolitan cities and those in an intermediate city.
In this context, hypotheses to be addressed are: H1 = reasons traders have to start an informal activity is connected to unemployment, independence and necessity; H2 = age, marital status, ethnicity, area, economic income, location, need, lack of knowledge about regulations for public spaces use, and taxes, are motivational factors that influence informal trade; H3 = the type and form of informal trade activity does not depend on age, marital status, ethnicity, area, economic income, location, need, lack of knowledge about regulations for public spaces use, and taxes; H4 = informal trade activity depends on demographic, geographical, economic, availability, social, regulatory and commercialization factors, but not the type, or the form; H5 = there are no significant differences with the motivational factors identified in metropolitan cities compared to an intermediate city.

Methodology
The research, using the inductive method, is of a causal -statistical level. It uses the interview for information collection as well as the interview guide as information collection tool. The interview guide uses the informal ies.ccsenet.org International Vol. 13, No. 8; economy questionnaires applied by the INEC and adapted to informal trade cases. A sample of 310 merchants from a population of 3,600 is used. Information is collected from merchants who do not have permanent points of sale and who carry out their commercial activity around the 10 markets of the city of Riobamba in 2019 year. The data shows a Crombach's alpha index of 0.768. For data analysis, multivariate factorization and linear regression analysis is used.
Variables considered for the factorial model and linear regression are based on the different motivating factors that influence the development of informal trade in metropolitan and intermediate cities -identified by different authors, as those presented in Table 2.  Vol. 13, No. 8; factors through the reduction of such factors, as presented in Table 3, for later use of the regression model and verification of how these factors influence the informal trade activity of a merchant engaged in the commercialization of products or services.

Demographic Factors of The Informal Merchant
Research results show that people who engage in informal commerce are 74.8% female and 25.2% male. Between the ages from 27 to 64 in 81.94%, from 15 to 26 years in 14.52%, 65 and older in 3.55%, which means that women are the ones developing this informal activity, who end up considering it as a source of employment and income generation. Likewise, those engaged in informal commerce are married in 65.2% and single in 15.5%, divorced 8.1%, free union 7.7% and widowers in 3.5%. Families have an average number of four members. Most of them have primary level education (43.9%), secondary education (42.6%), and superior education (9.4%). Individuals who engage in this activity mainly come from urban areas (68.4%) and from the rural area (31.6%).

Economic Factors of the Informal Merchant
An informal merchant for the sale of products or services obtains different ranges of incomes, where, 82.6% is in the range of 1 to 500 US$; 11.6% from 501 to 1000 US$; 4.8% from 1001 US$ to 1500 US$; 0.6% from 1501 US$ to 2000 US$, and 0.3% more than 2000 US$; being the average of 1245 US$. This activity is done in different ways: personal initiative 75.5%, family 23.2%, and in partnership 1.3%., as shown in Figure 2 and Figure 3.

Commercialization Factors
The type of activity done by the informal merchant is varied, commercialization of produce 15.5%; purchase and sale of goods 83.2%, and services in 1.3%. Also, merchants commercialize their products in different ways, walking 21.6%; home delivery 1.9%; in vehicles 1.6%; in improvised sale-point in the public market 65.8%; in a permanent street sale-point 7.1%; in a home-shop and in a house-room for exclusive use 0.3%; in other house-rooms 0.3% and; others 1.3%; identifying that informal merchants market their products through improvised sale-points in markets, as shown in Table 3. Source: Own elaboration based on a survey conducted to informal merchants in the city of Riobamba, 2019.

Commercial Factors
Research results show that reasons for merchants to start an informal activity were mostly that they wanted to be independent (26.8%); necessity (24.8%); did not find a formal job (24.8%), as shown in Table 4. Source: Own elaboration based on a survey conducted to informal merchants in the city of Riobamba, 2019.
Likewise, data show that people start an informal commercial activity through the purchase and sale of goods is because: 1) they did not find a stable/formal job (83%); 2) necessity (81%); 3) independence (89%), as shown in Table 5.  Source: Own elaboration based on a survey conducted to informal merchants in the city of Riobamba, 2019.
This means informal trade in cities is mainly motivated by unemployment, independence and necessity; and commercialization of purchased goods, demonstrating this way hypothesis 1.

Application of Factor Analysis to Identify Motivating Factors
Kaiser Meye Olkin index -KMO = 0.666 indicates that the factorization model is relevant and Bartlelt's test shows that the model is adequate to explain the data. Matrix principal components results show that total factors used (26 factors) can be reduced to nine motivating factors that influence people to start an informal business activity. In addition, according to the variance matrix, nine reduced factors explain 63.77% of reasons. This reduction makes possible to identify the most important motivating factors of informal trade activity in the city of Riobamba.
For factorization, principal components and the extraction method were used: Varimax with Kaiser Normalization, 9 being factors extracted, as shown in Table 6.
These factors -according to the factor model -are related to: 1) Spatial factor, such as the place where informal trade activity takes place; 2) Regulatory, spatial and political regulation factor; 3) spatial regulation factor: 4) Economic factor, as the means to achieve a source of income; 5) Geographical factor, such as residence; 6) Marital status factor; 7) Educational and economic factor; 8) Ethnic factor; 9) Age factor. Source: Own elaboration based on a survey conducted to informal traders in the city of Riobamba, 2019.

Application of Linear Regression to Identify the Degree of Influence of Motivating Factors in Informal Trade Activity
Likewise, the linear regression model was applied to verify the degree of influence of the motivating factors, identified using the factorial model, in the development of the informal trade activity. In this case, the linear regression model 1 is represented next: Y = b o +b 1 x 1 +b 2 x 2 +b 3 x 3 +... + b n x n +u Informal trade activity (Dependent variable) = b 0 +b 1 x Age + b 2 x Marital Status + b 3 x Ethnic Identification + b 4 x Zone + b 5 x Economic income + b 6 x Location + b 7 x necessity + b 8 x Ignorance of public use regulation + b 9 x Taxes (independent variables).
Results show that informal trade activity done by merchants through walking, home delivery, in own vehicles, in improvised sale-point, in a permanent street sale-point, in a home-shop, in a house-room, and others, depend on the factors related to: age, marital status, ethnicity, zone, economic income, location, necessity, ignorance of public spaces regulation, taxes (sig. 0.000) and these variables explain in 8.8% (R 2 =0.088) with a ratio between the variables at 29.7% (R = 0.297). However, the following is identified: Factors of model 1 do not influence (Sig. 0.160) on the type of activity developed by the informal trader/merchant, that is, on the commercialization of; 1) produce commercialization; 2) purchase and sale of goods; 3) services delivery. In the same way, the commercial activity carried out by informal merchants as a person, family or partnership does not depend on these 9 factors (Sig. 0.818); as shown in Figure 4. ies.ccsenet.org International Education Studies Vol. 13, No. 8;  Therefore, it can be stated that age, marital status, ethnicity, zone, economic income, location, necessity, ignorance of public spaces regulation, taxes are motivating factors that influence informal trade, confirming hypothesis 2; however, they do not influence the form or type of commercial activity (H3).

Motivating Factors That Significantly Influence Informal Trade Activity
However, in order to know the weight and contribution of demographic, geographical, economic, social, and commercialization factors to commercial activity rationale/explanation, the linear regression by conglomerated factors was applied. To begin, demographic and geographical factors were considered, to know about variables degree explanation for this factor, called model 1. After obtaining the first model result, to see if explanation degree of these factors increases or decreases, economic factor and availability variables were included, becoming model 2. Finally, social, regulatory and marketing factors were included into model 2, resulting into model 3. Likewise, to know the degree of contribution to the explanation, social, regulatory and commercialization factors were considered separately. Such models are presented in Table 7. Source: Own elaboration based on a survey conducted to informal merchants in the city of Riobamba, 2019.

Demographic and Geographical Factors
The results of model 1 application show that there is dependence on variable 1, but it is not the same for variables 2 and 3, as seen in Figure 5. Which means that demographic and geographical factors influence in 0.7% (R 2 = 0.079) to the informal trade activity, which is not the same for type (sig. 0.144) and the form (Sig. 0.322), as observed in Figure 5.

Economic and Availability Factors
However, this degree of explanation increases to 13.9% (R 2 = 0.139) and it is significant (Sig. 000) when adding economic and availability factor variables to how trade activity is conducted (model 2). On the other hand, there is no contribution of this factor to the type and form informal trade activity is done (see Figure 5).

Social, Regulatory and Commercialization Factors
In return, when factors of model 1 and 2 include the social, regulatory and commercialization factor (model 3), there is an increase to 19.9% in the explanation of how to develop informal trade, since there is a 44.7% relationship between variables and dependence (sig. 0.000). Likewise, it can be seen that the type of activity can be explained in 0.9% (R 2 = 0.090; Sig. 0.000) and in 12.1% (R 2 = 0.121; Sig. 0.024) on the form the informal trade activity is conducted by merchants around markets.
Finally, model 4 shows whether social, regulation, and commercialization factor variables contribute -separately -to model 1 and model 2. Results show that if only these variables are considered, separately, they do not contribute significantly in the explanation: 1) of the type and 2) the form of informal trade (sig.> = 0.05) (see Figure 5), being necessary to consider the demographic, geographical, availability, economic, social, regulatory and commercialization factor variables, since in this way, the most important variables become informal trade motivating factors.
On the other hand, when it comes to explaining the reasons for informal trade, it can be seen that social, regulatory and commercialization factors are important since they contribute 0.9% in the explanation, existing a dependency relationship (sig. 0.002). Demonstrating this way hypothesis 4 and 5.

Conclusions
Informal trade activity is not directly related to age, marital status, economic income and income level, but to the contribution of other factors: such as ethnicity, location, necessity, ignorance of public spaces regulation, and taxes; being these, motivating factors that significantly influence the informal trade activity done by merchants.
The type (commercialization of produce, purchase and sale of goods, service delivery) and the form (personal, family, partnership) in which informal trade is conducted does not depend on motivating factors, such as, age, marital status, ethnicity, zone, economic income, location, necessity, ignorance of public spaces regulation, and taxes. Unemployment, independence and necessity are factors that positively affect the start of an informal activity, such as trade.
Informal trade activity conducted by merchants/traders through walking, home delivery, in vehicles, improvised sale-point, permanent street sale-point, home-shop, house-room, and others, depend on demographic, geographical, economic, availability, social, regulatory, and commercialization factors, but not the type or form of trade.