Key points

Close to 60 per cent of global employment and 80 per cent of enterprises are informal. This widespread informality presents significant challenges for workers’ rights, productivity, and the rule of law. It negatively impacts the development of sustainable enterprises and reduces public revenues and government capacity. More than 75 per cent of informal employment occurs in enterprises with fewer than 10 workers, typically found in the lower tiers of supply chains where governance is weak.

Micro, small, and medium enterprises (MSMEs) are often linked to large multinational enterprises (MNEs) that source goods and services globally. Under specific conditions, MNEs can provide market incentives and productive changes to drive decent work outcomes and support the transition to formality. Innovative corporate approaches, including changes to contracting, social protection extension, and skills transfer, have been documented as effective tools for this transition.

Introduction

Following the 2025 International Labour Conference, many innovative practices were identified to support formalisation. While governments are primarily responsible for creating an integrated policy framework, including simplified registration and social security coverage, the private sector plays a complementary role. This brief explores how supply chains can serve as entry points for the transition to formality. Increasing access to supply chains through MNEs can connect workers with domestic and export markets while providing services such as capacity building and improvements in job quality.

Informality in supply chains: challenges and opportunities

Supply chains are cornerstones of the global economy and can act as powerful engines for inclusive growth. By 2020, 70 per cent of international trade involved the participation of multiple countries in producing a single product. The informal economy comprises all productive activities by workers and economic units that are not covered or are insufficiently covered by formal arrangements in law or practice. A wide variety of enterprises operate in these chains, ranging from high-added-value MNEs to labour-intensive MSMEs in developing countries.

High heterogeneity exists among workers in supply chains, from highly skilled formal employees to millions of low-skilled informal workers. Up to two-thirds of informal workers are found in enterprises with fewer than five workers. These MSMEs often face systemic challenges, including limited access to finance and weak regulatory enforcement. MNEs can contribute by providing market incentives for suppliers to improve compliance with national labour and social security laws.

The role of MNEs as supply chain actors promoting decent work

Large enterprises like MNEs have significant market dominance; for example, in the mid-2000s, MNEs represented around 70 per cent of total supermarket sales across ten Latin American countries. When MNEs establish business linkages with MSMEs, they transfer knowledge, technology, and market access. Evidence suggests that workers employed by MNEs or their first-tier suppliers typically receive higher wages, better job security, and more training opportunities compared to those in informal units.

The Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (MNE Declaration) highlights that MNEs should contribute to formalisation efforts. While MNEs can promote technology transfer and skills investment, strong competition may sometimes push local suppliers toward informality. It is therefore vital that MNEs use their influence to encourage sustainable practices and avoid using sub-contracting arrangements to circumvent responsibilities.

Innovative approaches by MNEs promoting the transition to formality in their supply chains

In Thailand, two MNEs used digital traceability and e-logbooks to reduce illegal activities and improve working conditions in fisheries. This system encouraged formalisation by covering supplier compliance costs and developing corrective action plans. In the Democratic Republic of the Congo, a project formalised artisanal cobalt miners into cooperatives. This established direct links to buyers, eliminating exploitative brokers and increasing the income of female miners to 2.5 times more than those outside the project.

In Indonesia, the ILO and Fast Retailing (UNIQLO) partnered to strengthen social protection, leading to the creation of national unemployment insurance in 2021. In Argentina, Aguas Danone supported the integration of 5,000 informal waste pickers into 48 formally registered cooperatives. These workers gained access to pensions and maternity leave, with participating waste pickers earning three to five times more than those in the informal sector.

MNEs working together to drive formalisation of workers through compliance and better working conditions in the garment and footwear sector

The Better Work programme, a partnership between the ILO and IFC, operates in 11 countries covering 3.4 million workers. It uses data to identify non-compliance and drive improvements. In Indonesia, non-compliance regarding written work agreements fell from 74 per cent to 4 per cent over a decade. In Haiti, this figure dropped from 13 per cent to zero. Furthermore, in Jordan, non-compliance with employer social security contributions decreased from 33 per cent to 11 per cent since the programme’s launch.

Conclusions

MNE engagement in formalisation offers potential benefits, including improved safety, increased productivity, and wider community development. However, transition does not happen in isolation. It is shaped by national institutions and global trends. While access to export markets offers opportunities to upgrade MSMEs, mere participation in supply chains does not guaranteed formal jobs. Public policies remain essential to reduce barriers to formalisation and ensure that legal coverage is matched by effective enforcement and governance.