Management Buy-outs and Venture Capital

Management Buy-outs and Venture Capital

Into the Next Millennium

Edited by Mike Wright and Ken Robbie

This book presents up-to-date evidence on the issues facing financiers and intermediaries involved in venture capital and management buy-outs. It provides a comprehensive review of existing literature and an analysis of international trends in market development as well as a global comparison of the major issues.

Chapter 6: Relationship participation: the case of banks and smaller businesses1

Martin Binks and Christine Ennew

Subjects: economics and finance, industrial organisation

Extract

Page 139 6.  Relationship participation: the case of banks and smaller businesses1 Martin Binks and Christine Ennew 1  Introduction Until recently, much of the research relating to the financing of entrepreneurial activity has focused on issues relating to equity funding in general and the role of the  venture capital industry in particular, as will be apparent from other chapters in this volume. While venture capital is clearly important, particularly in some of the high­ risk/high­return areas of activity, the majority of businesses continue to rely heavily on the banking sector for external finance. This is particularly so in the case of  smaller businesses, and while not all smaller businesses are entrepreneurial a significant amount of entrepreneurial activity is manifest among these organisations. For the  beneficial potential of entrepreneurial activity to be realised, it is important that such businesses are not constrained by imperfections in either output markets (Mayes  and Moir, 1989) or input markets (Binks and Vale, 1990). On the input side, access to finance in general and credit rationing in particular are often identified as factors  constraining the development of the more entrepreneurial smaller business; indeed in a recent survey of smaller businesses in England, both micro and small businesses  identified finance as the major barrier to future growth (ICAEW, 1996). Problems with respect to the provision of external finance typically arise as a consequence of information asymmetries which impact on the lending decision. The  relative costs and benefits of information collection means that it is unlikely that...

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