Within the overall context of how to support the private sector in fragile and conflict countries (FCS), the role of the informal economy requires a specific focus. The informal sector is likely to change and grow as a share of the economy under fragile and conflict circumstances. But the lower productivity of informal firms contributes to their offering lower quality and more precarious jobs, with lower pay. Thus, there exists a strong economic and social rationale for encouraging informal firms to adopt more of the behaviour of formal firms. Any such initiative, however, becomes more difficult in the circumstances of fragile or conflict-affected developing countries. This paper examines the literature on informality in fragile and conflict countries, as well as the approach of donor and development agencies in dealing with business environment issues in such settings, in the interest of improving that approach. Given the different degrees and dimensions of informality, it should be noted that the goal is to support firms who have the capacity to transition—formalize—while helping subsistence firms to grow or become more productive. Fragility and conflict both signal weak institutions and deep governance issues leading to a weak and unstable business environment. Among informal firms in general, but especially among those in conflict zones, business is very risky and default risk is high. Yet the development and protection of economic opportunity is the main source of resilience in fragile states. And without institutions that can enforce a formal set of business regulations and provide relevant services to enterprises in the formal economy, formalization of firms loses meaning. Focus on the need for effective governance to support and sustain the business climate leads directly to the critical role of local governments, including the need to strengthen fiscal decentralization where local services must substitute for central-level institutions overrun by violence and fragility. In fragile and conflict states, recovering economic activity, and in particular, a constructive environment for private sector activity will require collaborative outside assistance from DFI’s and NGOs over an extended period of time. This assistance must help compensate for weak or absent public institutions and steer through the local political economy in order to help establish essential institutions and services that can provide a stable environment for the private sector. Relevant literature, front line officers with donor and development agencies, and business environment improvements sought by informal firms in fragile and conflict states do not emphasize traditional approaches such as expanding institutional credit, direct jobs creation, or refinements of business rules, but rather emphasize the following elements: security, access to infrastructure and information, technology, social protection, governance.