Financial Barriers to Talented Entrepreneurial Entry
Credit market imperfections prevent highly skilled but low-capital individuals from securing startup financing. This barrier shields poorly managed incumbent firms from market competition and slows aggregate economic productivity growth.
Picture this
Think of a master chef who cannot open a restaurant because banks will not lend money without land as collateral; as a result, bad local diners face zero competition and never have to improve their food quality.
What the evidence says
Financing obstacles prevent talented entrepreneurs with low capital from establishing competing enterprises, which, combined with delegation limits on large firms, severely restricts market reallocation from inefficient to efficient managers.
- Who
- Cross-country observational analysis of small and medium enterprises in developing markets.
- How
- Economic theoretical modeling synthesized with empirical cross-country enterprise credit evaluation.
What to do
Establish cash-flow-based and competency-evaluated credit programs for emerging entrepreneurs to bypass physical collateral requirements.
From the source
"...financing obstacles are likely to limit the extent to which individuals with better managerial talent, but low capital, can start and grow enterprises to compete with badly managed firms. Coupled with the inability of better managed firms to delegate and thus to grow beyond a certain size, this lack of competition from new entrants who are short of financing will keep productivity low..."
533 firm management AEA2010.pdf
Tagged
Nearby findings
- Microenterprise Capital Grant Induced Debt DisplacementFinance & microfinance
- Differential Binding Constraints Across Financial Product MarketsFinance & microfinance
- Size-Dependent Credit Constraints and High Marginal Returns to CapitalFinance & microfinance
- Microenterprise High Marginal Returns to CapitalFinance & microfinance