This paper investigates the effect of the competition stemmed from informal firms on formal
firms’ productivity in Egypt. Using the World Bank’s Enterprise Surveys, we update the twostep
methodology of Guiso et al. (2004) to build a regional indicator of informal competition
intensity. Our estimation reports a positive effect of this indicator on formal firms’ productivity
that remains valid to the instrumental variable approach and to multiple robustness check. This
result is subject to factors accounting for the characteristics of the firm and is segmented by
formal firms’ size. We also identify informal firms’ cost advantage as the main channel through
which this effect occurs. Our results call on the importance of tax reforms and effective
regulation to be implemented in Egypt.