The link between entrepreneurship and informal investment: An international comparison

doi:10.1016/j.japwor.2020.101012

Japan and the World Economy

Volume 54, June 2020, 101012

https://doi.org/10.1016/j.japwor.2020.101012 Get rights and content

Highlights

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Using Global Entrepreneurship Monitor data, we examine what types of individuals invest in new businesses.
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Individuals who engage in entrepreneurial activity and have entrepreneurial networks are more likely to invest in new businesses.
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We present estimation results for the odds ratio of business ownership/management and informal investment in each country.
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The proportion of individuals who start businesses or engage in informal investment in Japan is lower than in other countries.
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The relationship between entrepreneurial propensity and informal investment suggests the presence of small-world phenomena in entrepreneurship in Japan.

Abstract

This study explores the link between entrepreneurship and informal investment. Using Global Entrepreneurship Monitor data, we examine what types of individuals invest in new businesses. The results reveal that individuals who engage in entrepreneurial activity are, on average, three times more likely to invest in new businesses than those who do not. We also find that individuals with entrepreneurial networks are more likely to invest in new businesses. Moreover, we present estimation results for the odds ratio of business ownership/management and informal investment, as well as of entrepreneurial networks and informal investment, in each country. We find that the link between entrepreneurship and informal investment differs across countries. Specifically, while the proportion of individuals who start businesses or engage in informal investment in Japan is lower than in other countries, the relationship between entrepreneurial propensity and informal investment in Japan is the greatest among 30 Organisation for Economic Co-operation and Development countries, suggesting the presence of small-world phenomena in entrepreneurship in Japan.

Introduction

Most, if not all, individuals require capital when starting businesses. However, those who are willing to start businesses often encounter financial difficulties in obtaining initial funding. Because of these difficulties, the role of informal investors―especially those who invest in new ventures, often called “angel investors” or “business angels”―is crucial for promoting entrepreneurship in countries and regions.¹ Indeed, governments in many countries identify business angels as key players in vibrant entrepreneurial ecosystems (OECD, 2011; Mason and Botelho, 2016). In entrepreneurial ecosystems, interactions between entrepreneurs and informal investors, including family members, friends, and business angels, play a pivotal role in promoting entrepreneurship. Owing to the importance of informal investment for new firm creation, clarifying the relationship between entrepreneurial propensity and informal investment is worthwhile to gain a better understanding of how to promote entrepreneurship. As such, developing measures that describe interactions among actors, including entrepreneurs and informal investors, is useful for promoting entrepreneurial ecosystems in countries and regions.

This study explores the link between entrepreneurship and informal investment. In the literature on small business and entrepreneurship, the Global Entrepreneurship Monitor (GEM) is well known as a research initiative that provides global data on entrepreneurship. Many scholars have examined entrepreneurship using GEM data (e.g., Van Stel et al., 2005; Wong et al., 2005; Langowitz and Minniti, 2007; Minniti, 2011).² In this study, we examine what types of individuals serve as informal investors and invest in new businesses, using data from the Adult Population Survey (APS) conducted by the GEM National Teams. We identify how the link between entrepreneurship and informal investment differs across countries.

The results of this study reveal that individuals who engage in entrepreneurial activity are, on average, three times more likely to invest in new businesses than those who do not. We also find that individuals with entrepreneurial networks are more likely to invest in new businesses. More interestingly, we present estimation results for the odds ratio of business ownership/management and informal investment, as well as of entrepreneurial networks and informal investment, in each country, which may, in part, reflect the extent of entrepreneurial ecosystems at the country level. By doing so, we find that the link between entrepreneurship and informal investment differs across countries. In particular, we focus on informal investment in Japan, which is well known to have a lower level of entrepreneurship than other developed countries (Honjo, 2015; Small and Medium Enterprise Agency, 2017). Further, while the debt-financing system is well established in Japan, private equity capital is recognized as underdeveloped.³ The results of this study reveal that the proportion of individuals in Japan invest in new businesses is lower than in the United States (US) and some European countries. While the proportion of individuals who start businesses or engage in informal investment in Japan is lower than in other countries, the relationship between entrepreneurial propensity and informal investment in Japan is the greatest among 30 Organisation for Economic Co-operation and Development (OECD) countries. These findings suggest the presence of small-world phenomena in entrepreneurship in Japan.

The remainder of this paper is organized as follows. The next section discusses the research background of informal investment, including a literature review. Section 3 provides information about the data used and explains the method used to construct a measure for the extent of entrepreneurial ecosystems at the country level. Section 4 shows the estimation results and discusses entrepreneurship in Japan. Finally, Section 5 presents the conclusions, including limitations and implications.

Section snippets

Financing for business start-ups

Many scholars have emphasized the importance of start-up firms stemming from entrepreneurship, as these firms are expected to stimulate economic growth through job creation and innovation (e.g., Van Stel et al., 2005; Wong et al., 2005; Van Praag and Versloot, 2007; Acs and Audretsch, 2010). Entrepreneurs and other actors, such as investors and incubators, play a significant role in the growth of start-up firms in economies. Recently, there has been increasing interest in the literature

Data

We use data from the APS conducted by the GEM National Teams. GEM data have been used in the literature to survey entrepreneurship from the viewpoint of international comparison (e.g., Van Stel et al., 2005; Wong et al., 2005). We target those individuals aged 18–64 years old for the period from 2001 to 2013. Our sample is limited to individuals from 30 countries based on the OECD countries in 2001. Specifically, the sample includes Australia, Austria, Belgium, Canada, the Czech Republic,

Entrepreneurship–investment link

We estimate the odds ratio indicating the link between entrepreneurship and informal investment while controlling for individual personal attributes, such as age and gender, and using country dummies. Table 5 provides the estimation results for informal investment (INFINV), including the effects of entrepreneurial activity (OWNMGE and ENTRE). Table 5 presents the estimated odds ratio of entrepreneurial activity and informal investment. In addition to individual personal attributes, and country

Summary

It is conceivable that interactions between entrepreneurs and informal investors play a pivotal role in developing entrepreneurial ecosystems. This study explored the effects of entrepreneurial activity and networks on informal investment. Using GEM data, we examined what types of individuals invest in new businesses. The results revealed that individuals who engage in entrepreneurial activity are, on average, three times more likely to invest in new businesses than those who do not. We also

Acknowledgements

This study is conducted as a part of the Project “Creation and Development of High-tech Startups” undertaken at Research Institute of Economy, Trade and Industry (RIETI). The authors are grateful for helpful comments and suggestions by RIETI project members and Discussion Paper seminar participants at RIETI. The first author is a member of the Global Entrepreneurship Monitor National Team of Japan, and the authors gratefully thank Noriyuki Takahashi (Japan’s team leader) for his special effort.

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View full text

The link between entrepreneurship and informal investment: An international comparison

Highlights

Abstract

Introduction

Section snippets

Financing for business start-ups

Data

Entrepreneurship–investment link

Summary

Acknowledgements

Res. Policy

Int. Bus. Rev.

J. Bus. Ventur.

J. Bus. Ventur.

Jpn. World Econ.

Res. Policy

J. Bus. Ventur.

The lineages of the entrepreneurial ecosystem approach

Small Bus. Econ.

Entrepreneurship, institutional economics, and economic growth: an ecosystem perspective

Small Bus. Econ.

Small worlds, infinite possibilities? How social networks affect entrepreneurial team formation and search

Strateg. Entrep. J.

GEM research: achievements and challenges

Small Bus. Econ.

Growing firms and the credit constraint

Small Bus. Econ.

Executive forum: a study of informal investing in 29 nations composing the Global Entrepreneurship Monitor

Ventur. Cap.

Capital market imperfections, high-tech investment, and new equity financing

Econ. J.

Funding gaps? Access to bank loans by high-tech start-ups

Small Bus. Econ.

An estimated model of entrepreneurial choice under liquidity constraints

J. Polit. Econ.

Financing, regulatory costs and entrepreneurial propensity

Small Bus. Econ.

Entrepreneurial decisions and liquidity constraints

RAND J. Econ.

Do initial financial conditions determine the exit routes of start-up firms?

J. Evol. Econ.

The impact of initial financial state on firm duration across entry cohorts

J. Ind. Econ.

How to start an entrepreneurial revolution

Harv. Bus. Rev.