Underground economic activities are a means for many Filipinos to support themselves and their families amid financial hardship. These individuals often depend on unregistered livelihood practices that operate outside formal systems, allowing them to generate income while avoiding regulatory constraints and institutional requirements. These activities are referred to by various terms such as underground, unofficial, irregular, parallel, second, subterranean, hidden, invisible, unrecorded, shadow economy, moonlighting, or underground economy, as noted by Frey and Schneider, (2000). An instance of underground economic activity is a plumber who repairs a damaged water pipe for a client, receives payment in cash, and fails to report his income, according to Schneider and Enste, (2002).

There were about 10.5 million underground economic sector operators identified in the 2008 Underground Sector Survey (2008 ISS) of the Philippines conducted by the Philippine Statistic Authority or PSA (2009). Although underground, these sectors still play a significant role in the economic development of the country since others depend on such activities to earn income for daily survival. The major driving forces of the increasing number of people engaged in underground economic activity are the challenges they experienced, such as high registration costs and the complexity of business registration (Kavaarpuo & Yeboah, 2023). Many underground operators experience a lack of support from the local municipality (Recio, 2018; Chowdhury et al., 2024). 

While these businesses operate outside the formal sector, their existence is shaped by the institutional environment that governs economic activities. The extent to which businesses conform to or deviate from established structures determines their legitimacy, survival, and potential for growth. Rules and regulations influence business formalization, but when these become restrictive rather than enabling, the underground economy struggles to transition into microenterprises. Understanding these dynamics provides insight into the barriers and opportunities that exist within the underground economy. These major obstacles encountered made the operators remain in the underground sector. These challenges required attention from the government to assist the underground economy that would generate income beyond survival and in the long run would transform the underground sector into a formal one and be part of the Micro, Small, and Medium Enterprises in the country. With this, the researcher conducted a profiling of the underground economy and recommended industry assistance to understand the challenges encountered and the needs of underground economy operators towards microenterprise establishments.  

This study adopted a mixed method explanatory sequential design, as outlined by Creswell and Clark, (2018). This design is particularly suited to studies that seek to explore complex social phenomena by first gathering quantitative data and then using qualitative data to explain or elaborate on the quantitative results.

In the first phase, which is the quantitative phase, a survey was conducted among underground economy operators across the top 10 barangays in Roxas City. This phase aimed to establish baseline data on their business operations, including the challenges faced and the needs in both the production and distribution sectors. The quantitative data provided a broad statistical overview, serving as an initial instrument to identify key areas requiring further exploration.

In the second phase, which focused on qualitative data collection, one-on-one unstructured interviews were conducted with six randomly selected underground economy operators, who had previously participated in the survey. However, four of the operators declined to take part in the interviews. As a result, only two operators, one from the production sector and the other from the distribution sector, agreed to be interviewed. These underground economy operators were chosen based on having the highest number of years in business operation among the survey respondents, providing valuable experiential insight. The qualitative phase followed a case study approach, aiming to capture the in-depth experiences of the two selected operators. The unstructured nature of these interviews allowed participants to freely discuss their challenges and needs without the constraints of a predetermined framework. To analyze the qualitative data, deductive thematic analysis was employed, allowing the researcher to identify patterns and themes that supported or expanded upon the quantitative findings. This approach facilitated a deeper understanding of the issues identified in the quantitative phase, providing contextual depth to the statistical trends observed and enriching the overall analysis.

The explanatory sequential design was deemed appropriate for this study as it allowed for an initial quantitative exploration to map the landscape of the underground economy, followed by qualitative insights that clarified and enriched the understanding of the quantitative findings. The integration of survey data and qualitative case narratives enabled the researcher to form a comprehensive view of the sector. This comprehensive approach enabled the development of potential interventions that are tailored to the realities faced by underground economic operators in Roxas City. By integrating both quantitative and qualitative data, the study aimed to construct a well-rounded, evidence-based perspective on the sectors challenges and needs.

The studys respondents included 346 underground economy operators, randomly chosen from a total of 2,544 households in the top 10 barangays that received the lowest National Tax Allotment. The data on barangays with the lowest National Tax Allotment for 2022 was sourced from the Department of Budget and Managements website, while information on the number of households was obtained from the 2020 survey conducted by the Office of the Liga ng mga Barangay, Roxas City Chapter. The respondents were identified per barangay using convenience sampling. The two participants of the one-on-one unstructured interviews were randomly selected from the 346 underground economic operator respondents, one from the production sector and one from the distribution sector, who had participated in the survey. The study employed a stratified random sampling technique to ensure a representative distribution of respondents across the selected barangays. The total sample size was determined using Cochrans formula with a 0.05 margin of error, which is a widely accepted method for estimating an appropriate sample size for large populations. The data needed for the study were gathered with the use of a validated and reliability tested researcher-made survey questionnaire and an unstructured interview guide.

To analyze the gathered data, statistical tools such as frequency, percentage, and mean were applied as descriptive statistics. The researcher made sure that all sensitive data, such as respondents names and their addresses, were kept confidential. The rights of the research participants were observed at all times throughout the conduct of the study. They were made aware that they could refuse to answer the questionnaire, stop answering the questionnaire, or stop the interview at any point in time since their participation is voluntary. The research instrument was translated to the local dialect for their complete understanding. 

Before to commencing the data collection, the researcher secured informed consent from all participants. The consent form clearly outlined the studys objectives, the voluntary nature of participation, possible risks and benefits, and the confidentiality measures implemented. Participants were guaranteed that their responses would remain anonymous, with no personally identifiable information linked to the data. All collected information was intended solely for academic research purposes and would not be disclosed without explicit consent. Additionally, participants were notified that the studys findings would be reviewed by a panel of experts at the university and might be published in academic journals, presented at conferences, or featured in other relevant publications. 

The result revealed as to personal profile that the majority of the respondents who engaged in underground economic operations are between 32 to 45 years of age, most of them are female, married, and are dominantly high school graduates.

This suggests that a significant portion of the respondents are within the youth and adulthood categories, which are typically considered the working-age or economically active population. The result supported Kavaarpuo and Yeboah, (2023) who identified that females involved in the underground sector in Ghana predominantly fall within the 15-35 age bracket, classified as youth. This similarity reinforces the idea that the majority of the participants in the underground economy are young adults, often the most active demographic in terms of economic participation. Their engagement in underground sectors suggests that younger individuals are prevalent in the underground economy, highlighting the need for targeted interventions to transition this demographic into formal economic activities.

The result also indicates that individuals with families were more likely to be engaged in underground business. Sarreal, (2019) highlighted that marital or civil status played a significant role in influencing the decision to enter the underground sector, especially when necessity-driven. Many individuals turned to underground entrepreneurship as a strategy for household survival, aiming to generate additional income to support their families. These findings aligned with the indication that family responsibilities often drove people toward underground economic activities when formal employment opportunities were insufficient or inaccessible.

The result also showed that the majority of those who participated in underground trading did not have higher education. In the present study, operators without higher education chose to engage in the underground economy because it was relatively easy to enter, given its micro-scale nature and simple operations. Unlike formal businesses, which required extensive documentation, regulatory compliance, and financial investment, underground enterprises demanded minimal capital and could be managed with basic skills and limited academic backgrounds. Furthermore, the underground economy provided an immediate source of income, making it a practical option for those who struggled to find stable employment due to their educational limitations. This ease of entry and operation made the underground economy an attractive livelihood choice for individuals with lower educational attainment. It affirmed the statement of Legodi and Matshidiso, (2015) that the underground sector had low barriers and was easily accessible, requiring no formal education or experience, which made it easy for individuals with lower education levels to engage in underground businesses.

When it comes to their business profile most of the underground operators are engaged in distribution, the majority of the capitalization is below ₱50,000 and most of them operate without employees, operating less than one year, predominantly in wholesale and retail trade business activities with the sari-sari store as the popular business activities engaged by the underground operators.

The result suggests that a significant portion of underground sector businesses are relatively new and points to the brief and uncertain nature of the underground economy. Many underground operators use this period as a testing phase to assess the feasibility of their business ideas. The first year is often seen as a trial period or “test trade”, where entrepreneurs gauge their businesss potential for success before deciding whether to formalize their operations or continue operating underground (Williams, 2023). The predominance of neophyte businesses highlights that there are challenges faced by underground entrepreneurs and their inability to scale up, causing them to close within the first year. These constraints often impede growth and sustainability, pushing only underground operators to engage in underground economic activities to survive.  Such interventions are needed to help these budding businesses extend their operational longevity and potentially transition to the formal economy, contributing fully to local economic development.

The significant role of sari-sari stores in the Philippines has been extensively documented. A study by Yasmeen and Kunin, (2018) estimated that there were around one million sari-sari stores across the country, each catering to approximately 1,000 customers. These microenterprises play a crucial role in providing essential goods, particularly in areas where access to supermarkets is limited. The preference for wholesale and retail trade among under-ground economy operators aligns with the previously profiled data, which indicates that the majority of these businesses are engaged in distribution. This further supports Xiong and Zhang, (2014) assertion that retail businesses are popular among underground operators due to their ease of establishment.

Additionally, engaging in the food service industry requires minimal startup capital compared to other businesses, making it a viable option for those with limited financial resources. The ability to set up in high-traffic areas is the best option to sustain underground economy operations. The prominence of underground food enterprises is supported by Tinker, (2017) who highlights that street food vending and small food establishments are essential in urban economies, particularly in areas with high foot traffic. These businesses cater to students, workers, and low-income consumers who rely on affordable, ready-to-eat meals.

La Porta and Shleifer, (2014) noted, underground businesses can exist in capital-intensive sectors if they find niche markets that justify higher costs or if operators possess the necessary skills to offset expenses. Additionally, some entrepreneurs may rely on informal credit, second-hand equipment, or shared resources to reduce capital burdens, allowing them to remain competitive despite financial limitations.

The challenges encountered by the underground economy operators were “challenging” in terms of production and only encountered “moderately challenging” in terms of distribution. On the other hand, the needs of underground economy operators based on the result were both “needed” in production and distribution. Despite these challenges, proficiency in production-related skills remains relatively adequate among underground entrepreneurs, as many indivi-duals inherit or learn their craft through experience. This ensures that businesses can continue operating despite structural disadvantages, but without additional support in product development, financial literacy, and market access, most remain trapped in subsistence-level entrepreneurship rather than achieving long-term stability or growth.

The result implies that without targeted interventions, underground businesses will continue to face these challenges that prevent sustainable growth and formalization. Policymakers and development agencies must address these institutional gaps by streamlining registration processes, expanding access to financial resources, and providing tailored training programs. Strengthening government support mechanisms, such as encouragements for formalization and improved financial inclusion strategies, could help underground operators transition into the formal economy and contribute to a more inclusive and dynamic local economic landscape.

The findings of this study align with previous research emphasizing the financial and regulatory constraints hindering microenterprise formalization (Williams & Shahid, 2016). Similarly, Zylfijaj et al. (2020) stress that burdensome regulations, institutional distrust, and high perceived costs discourage underground operators from formalizing, Studies have highlighted that high registration fees make formalization inaccessible, especially for small-scale operators (Kavaarpuo & Yeboah, 2023). Their study aligns with the challenges identified in this research, where cost considerations in business registration received a high rating and were considered challenging to underground operators.

This study backs up Msuya, (2019) finding that operators in the underground economy encounter several obstacles when trying to acquire the skills necessary for product development. Respondents reported having trouble finding suitable training, being reluctant to devote time and money, and not fully appreciating the need of skill development. All of these problems make it more difficult for them to stay competitive and develop in a changing business climate. Furthermore, limited access to funding or financial support has been recognized as a critical barrier to underground economy operators, as most financial institutions require legal documents that the underground economy operators do not have, and these further hampers microenterprise growth (Nkonde & Utete, 2024).

In support of these findings Karlinger, (2014) noted that intensified market competition pressures underground operators to lower prices continually, which compresses profit margins and challenges their ability to sustain operations.

Many operators lack secure business locations, facing potential displacement or instability. This is particularly true for street vendors or those operating from temporary stalls. The lack of formal business permits can also lead to uncertainty about their ability to continue operating in a particular location Although the permanency of business location is experienced as moderately challenging, it is not as pressing a concern to others, especially those whose businesses are located in their homes.

The perception of underground businesses within the community also moderately affects the underground economy operations. While some residents view them as disruptive or untrustworthy, some also support underground operators making it not as the highest concern compared to other factors, although this moderately challenged experience can lead to reduced patronage and difficulty in building a loyal customer base. The mixed perception of underground businesses within the community suggests that while they are not the most pressing challenge, negative views can still impact customer loyalty and patronage. Limited trust and concerns about legitimacy may hinder the ability of underground operators to establish a stable customer base, making it harder for them to grow and compete with formal businesses.

The challenges faced by underground economy operators in distribution stem from deep institutional barriers that reinforce informality and economic vulnerability. Limited government support and bureaucratic difficulties prevent these businesses from accessing essential resources, forcing them to rely on unstable supply chains and personal capital. Competition with formal enterprises further restricts their growth, while community skepticism affects customer loyalty. From an institutional perspective, these challenges reflect the exclusion of underground businesses from regulatory and economic frameworks, limiting their potential for sustainability. Addressing these barriers through policy reforms, financial support, and streamlined registration processes is crucial to integrating underground operators into microenterprise establishment.

The lack of government support remains a primary challenge for underground economy operators, preventing them from accessing essential resources and integrating into the formal sector. Legodi and Matshidiso, (2015) found that in South Africa, underground traders faced negative perceptions that led to a lack of recognition and assistance from government entities. This lack of institutional support discouraged operators from seeking formalization, aligning with the current findings that emphasize the necessity of targeted government programs to facilitate their transition. Similarly Recio, (2018) highlighted how the discretionary enforcement of policies by local governments creates inconsistencies in supporting underground operators, such as street vendors. Government authorities often provide selective assistance, mostly targeting those registered businesses, further worsening the difficulties faced by underground businesses. As Ramasimu and Nenzhelele, (2023) emphasized, this lack of support limits their competitiveness, visibility, and ability to grow, ultimately reducing their potential contribution to local economic development. This reflects the surveys findings, which identified local government support as one of the most significant barriers to underground business sustainability.

Another major challenge faced by underground businesses is the complexity of business registration, as many operators perceive the registration process as burdensome due to its lengthy and bureaucratic nature. Romero et al. (2024) documented similar challenges in Manila, where vulnerable groups such as women, migrants, and individuals with limited education struggle to navigate the complex procedures required for formalization. This reinforces the studys findings that most underground economy operators view registration as an obstacle rather than an opportunity for business growth. Ali et al. (2024) similarly noted that the process is often time-consuming, confusing, and lacks clear guidance, which discourages operators from formalizing their businesses. The fear of dealing with bureaucratic inefficiencies and the perceived lack of benefits only heighten this reluctance, validating the present results that link registration challenges with continued informality. Supporting this, Ohnsorge and Shu Yu, (2022) emphasized that pervasive underground businesses are linked to weaker economic outcomes, as businesses unable to formalize remain excluded from government support, financial systems, and market opportunities. Further validating these concerns, Benjamin and Ahmadou, (2012) argued that burdensome registration procedures discourage small enterprises from transitioning to the formal sector. Without policy reforms aimed at simplifying registration, these businesses remain locked out of critical economic frameworks.

Insights towards Microenterprise Establishment Strategies

The study sheds light on the intricate nature of the underground economy, showcasing a sector, rich in entrepreneurial potential but constrained by substantial institutional and operational challenges. Successfully transitioning these underground operators into sustainable microenterprises requires a comprehensive approach. The primary challenge is bridging the gap between the underground and formal economies while ensuring the continuity of these businesses, which demands a deep understanding of the distinct obstacles these underground operators encounter.

The study highlights that production challenges, driven by resource limitations and bureaucratic obstacles, are a major concern. Without targeted support, underground operators remain stuck in a cycle of survival rather than expansion. To mitigate this, policymakers may simplify registration procedures, enhance access to financial resources, and implement tailored training programs. For many micro-level operators, navigating complex formal registration systems can be overwhelming. Thus, introducing a streamlined, barangay-level registration process could be a viable solution. This approach would not only ease administrative burdens but also promote legitimacy, shifting community perceptions and encouraging formalization.

Distribution challenges further highlight the institutional barriers faced by underground operators. Limited government support, unstable supply chains, and competition with formal enterprises create a risky environment. To counter this, policy reforms, financial support, and streamlined registration processes are vital. Specifically, establishing supplier linkages in rural areas can improve access to raw materials, reducing costs and providing stable supplies. This can be facilitated through government-supported initiatives that connect underground entrepreneurs with reliable suppliers.

The respondents needs in terms of production and distribution point to the critical role of institutional support. The demand for government support programs, grants, and simplified business registration underscores the necessity of policy reforms that remove bureaucratic bottlenecks. A phased formalization strategy, incorporating mentorship and financial assistance, would enable operators to transition gradually while ensuring business sustainability. For instance, grant-based funding, rather than loans, would alleviate capital constraints that hinder business growth. Furthermore, streamlining registration through localized assistance and translated forms can encourage formalization, particularly in areas with language barriers.

A well-rounded microenterprise establishment strategy should incorporate accessible financial support, stable supply chains, and capacity-building initiatives. This involves creating supplier networks, offering free product development training through TESDA, or implementing customized mentorship programs like DTIs KMME. Additionally, affordable transport solutions and logistics partnerships should be provided. Recognizing the distinct needs of urban and rural operators is essential to designing effective interventions. In rural areas, enhancing logistics and raw material access is critical, whereas urban entrepreneurs may need greater assistance in navigating competitive markets.

The goal is to create an environment where these underground operators are not merely regulated but actively empowered to grow. Recognizing the unique challenges faced by micro-level operators, the government should consider a specialized barangay-level registration. This would allow them to operate legally with minimal administrative burden, fostering a sense of legitimacy and encouraging formalization. Crucially, these registered underground operators should be granted access to the same benefits as formally registered businesses, including financial assistance, training programs, and market linkages. This would serve as a powerful incentive for formalization and contribute to a more inclusive and dynamic local economy.

The majority of the underground operators in Roxas City, Capiz, Philippines, are within the youth and adulthood categories, which are generally recognized as the working-age or economically productive population. The female entrepreneurs dominate the underground business sector, particularly women who balance entrepreneurship with household responsibilities. Economic necessity is a major driving force behind their participation. With limited formal job opportunities, many women turn to underground businesses to supplement their household income. The underground economy appeals to individuals with lower educational attainment due to its minimal entry barriers, low capital requirements, and straightforward operations. The underground economy is predominantly driven by distribution businesses, due to their low capital requirements and ease of entry. Many businesses in the underground economy are run by self-employed individuals who prefer to manage their businesses independently to reduce costs and maintain flexibility. The underground economy is characterized by a high number of newly established businesses, with many operating for less than one year. The inability to scale up and sustain operations often leads to early closures. The underground economy operators primarily engage in wholesale and retail, food services, and other small-scale enterprises, driven by accessibility, necessity, and ease of establishment. The underground economy operators faced significant challenges in production, particularly in business registration costs, market competition, and production expenses. While some underground operators relied on inherited skills and experience, the lack of access to technology and formal training limited their ability to innovate and expand. 

Despite these barriers, underground businesses persisted due to their necessity-driven nature and strategic location within communities, allowing them to meet daily consumer demands. Underground economy operators also face significant distribution challenges due to institutional barriers, limited government support, and bureaucratic hurdles. Additionally, skill development in product innovation, packaging, and labeling is needed to improve market competitiveness, while access to modern equipment and shared production facilities enhanced productivity and profitability. Strengthening distribution channels through logistical support and affordable transport solutions is essential, particularly in rural barangays where supply chain inefficiencies increased costs. 

Additionally, access to wider markets is necessary to help underground operators move beyond localized competition. Addressing these issues lays the groundwork for strategies that promote a more inclusive and sustainable business environment, enabling micro-entrepreneurs to contribute to local economic growth.

The author expresses gratitude to everyone who helped make this study possible, especially the participants, Department of Trade and Industry, Capiz, and Capiz State University.

The author declares no conflict of interest.