Handbook of Research on Innovation and Entrepreneurship
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Handbook of Research on Innovation and Entrepreneurship

Edited by David B. Audretsch, Oliver Falck, Stephan Heblich and Adam Lederer

Leading researchers use their outstanding expertise to investigate various aspects in the context of innovation and entrepreneurship such as growth, knowledge production and spillovers, technology transfer, the organization of the firm, industrial policy, financing, small firms and start-ups, and entrepreneurship education as well as the characteristics of the entrepreneur.
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Chapter 8: Financing Constraints and Entrepreneurship

William R. Kerr and Ramana Nanda


William R. Kerr and Ramana Nanda INTRODUCTION Surveys of current and potential entrepreneurs suggest that obtaining adequate access to capital is one of the biggest hurdles to starting and growing a new business. Given the important role that entrepreneurship is believed to play in the process of creative destruction – and hence economic growth – it is not surprising that attempts to alleviate financing constraints for would-be entrepreneurs is an important goal for policy makers across the world. For example, the US Small Business Administration funded or assisted in the funding of about 200 000 loans in fiscal year 2007, at an administrative cost of about $1000 per loan (SBA, 2008). Financial assistance for entrepreneurs is also high on the agenda in the European Union and the OECD, where member states are urged to promote the availability of risk capital financing for entrepreneurs (OECD, 2004). The underlying premise behind these policies is that there are important frictions in the credit markets precluding high-quality entrepreneurs with good ideas (i.e. positive net present value projects) from entering product markets because they are unable to access adequate capital to start a new business. Much of the academic literature has therefore focused on analyzing the nature of these frictions, the effect they have on access to finance, and the impact of reduced financing constraints on rates of entrepreneurship. This chapter reviews two major streams of work examining the relevance of financing constraints for entrepreneurship. The first research stream considers the impact of financial market development on...

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