Businesses in the informal sector have often provided a safety net for people who cannot find employment elsewhere. They also thrive better than large-scale formal sector firms in some settings. This article describes the circumstances in which informal sector firms perform best. It suggests that there can be a complementarity between the formal and informal sectors through sub-contracting, such as between importing houses in advanced countries and informal sector firms in developing countries. Successful relations of this kind would require an encouraging economic environment provided by the government. A positive model for the role of the informal sector in developing countries is already seen in the 'flexible specialization' of small-scale firms in many industrialized countries.