Confronting Economic Theory with Empirical Practice
Chapter 8: Financial Capital
Introduction The observation of resource spending by governments for the sake of increasing the number of higher qualiﬁed entrepreneurs is explained not only by the social beneﬁt pertaining to entrepreneurial endeavour, but also by the perceived existence of undesirable impediments to the supply of entrepreneurs. A lack of capital is one of these factors and is the focus of this chapter. The objective of this chapter is to answer the questions: ‘To what extent is the performance of a small business founder’s entrepreneurial venture, once started, aﬀected by capital constraints at the time of inception?’, and, ‘What happens to performance when an entrepreneur has insuﬃcient capital to reach the optimal investment level or timing?’. Financial capital constraints might prevent entrepreneurs from creating buﬀers against random shocks, thereby aﬀecting the timing of investments negatively. Moreover, capital constraints might debar entrepreneurs from the pursuit of more capital-intensive strategies. Thus, what I am aiming at is measuring the eﬀect of initial capital constraints on venture performance. Merely measuring the correlation between capital constraints and performance would not be suﬃcient, since it would (wrongly) include spurious factors that aﬀect access to capital as well as performance directly, such as ability and motivation. The distinction between causal and spurious factors is crucial since policy implications diverge. In the ﬁrst case, supplying more capital to entrepreneurs who are hindered from following the optimal investment scheme would improve performance. In the second case, it will not,...
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