Presented at SNEE conference in Mölle, Sweden
China and the US are leading when it comes to new business generation, while Europe lags behind. Small businesses play a key role within the economies of Europe and contribute towards employment increase. In many European states, high taxation create on the one hand a fair system for education and health care; but on the other hand results in fewer businesses being created. The equity the entrepreneur needs is simply taxed away. Governments in Europe may therefore consider boosting micro entrepreneurship through an equal funding opportunity. Despite the financial market deregulation, large populations in Europe lack access to banks, social networks and capital. 26 million people are currently unemployed in Europe, representing an opportunity for new enterprises, but also a higher burden on social welfare. The governments of Europe could promote entrepreneurship by committing more resources for funding micro entrepreneurs, such as micro loans or micro equity. However, to be successful, information and communications technology (ICT) plays an important role in the linking the micro funding with the micro entrepreneur, but also in terms of pooling more capital. This paper proposes a conceptual framework for improved entrepreneurship in Europe through micro funding facilitated by the use of ICT. Finally, it represents a counter-intuitive example applying best practices from the microfinance industry in the European markets.
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How Micro Funding and ICT can Boost Entrepreneurship in Europe
1. How Micro Funding and ICT
can Boost Entrepreneurship in
Europe
Pontus Engstrom, University of Agder
Mölle May 24 2013
2. So what?
• Europe lags China and the US in new business generation
• Largest 500 companies: increasingly filled with Chinese and US firms.
• 13% of population (18 & 64) are engaged in entrepreneurship in US and China
• 90% of firms in Europe are micro enterprises: contribute to employment
• 26,5 million people are unemployed in Europe (up 10mn since 2008)
• Connecting microfinance with entrepreneurship theory
• Taking the ideas of microfinance, subsidized cost of capital, applied in a
developing world context, into a developed region perspective.
• Contributes to entrepreneurship theory
• Contributes to the research on microfinance, as entrepreneurship theory helps
describe why microfinance alone is not the panacea to poverty alleviation
• Important policy implications for politicians seeking to promote
entrepreneurship, competitiveness and employment in Europe
2
4. Schumpeter (1934)
The Theory of Economic Development
• A dynamic framework where demand and supply interact in
a circular flow, striving to a balance in equilibrium
• At the center of this action is the entrepreneur who looks
and seeks for changes to reach an improved economic
state.
• Through innovation, the entrepreneur mixes the available
resources, such as markets, products, production
methods, etc., into new combinations.
• “entrepreneurs are a special type” (p. 84) which
may explain why much research is concerned with
the description of who the entrepreneur is.
4
5. Shane & Venkataraman (2000)
The Promise of Entrepreneurship as a Field of Research
Seeking answer to why, when and how entrepreneurial
opportunities:
• come to exist
• are discovered, and
• are exploited.
5
6. What is entrepreneurship?
• Entrepreneurship is not synonymous with managing a business
• In studies of microfinance, it is sometimes assumed that all people running a
business are entrepreneurs:
o Yunus melon ladies in 1974 who, are they entrepreneurs?
o What about street entrepreneurs in Bangalore?
o Are all clients of a microfinance institution entrepreneurs?
• Schumpeter (1934) distinguishes between two kinds of individuals: “mere
managers and entrepreneurs” (.83). Being entrepreneurial is “not a profession
and as a rule not a lasting condition” (p. 78). A static non-evolving small
business is not a form of entrepreneurship, but instead may be a better
example of self-employment. Entrepreneurship involves the creation of
something new, through combinations of other things
6
Definition: New businesses, or the creation of new
business within existing firms.
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
7. Existence of entrepreneurial opportunities
Definition: “new goods, services, raw materials, and
organizing methods can be introduced and sold at greater
than their cost of production” (p. 220). Schumpeter (1934)
referred to this as the entrepreneurial profit, or “surplus over
costs” (p. 128).
Proposition 1: A subsidized cost of capital leads to more
entrepreneurial opportunities.
7
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
9. Discovery of entrepreneurial opportunies
Definition: Although an opportunity for entrepreneurialprofit
might exist, an individual can earn this profit only if he or she
recognizes that the opportunity exists and has value. Of
importance is 1) Experience and 2) Cognitive capabilities
Micro funding has no impact on this construct.
9
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
10. Decision to exploit the entrepreneurial
opportunity
Definition: A potential entrepreneur must decide to exploit
the opportunity. Depends on two factors:
1) Nature of the entrepreneurial opportunity
2) Nature of the individual
10
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
11. 11
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Nature of the
individual
+ P1
Nature of the
opportunity
Subsidized
cost of capital
12. Nature of the entrepreneurial opportunity
Definition: The expected value of the entrepreneurial profit is large enough
to compensate for the opportunity cost of other alternatives (including the
loss of leisure), the lack of liquidity of the investment of time and
money, and a premium for bearing uncertainty.
Proposition 2. The relationship between the nature of the opportunity and
the decision to exploit is moderated positively by the access to micro
funding.
Proposition 3: Government initiate funding supports the growth of the risk-
capital industry which positively moderates the relation between the nature
of the opportunity and the decision to exploit an entrepreneurial opportunity
Proposition 4: Peer-to-peer lending (crowdfunding) moderates the
relationship positively between funding and the nature of the
entrepreneurial opportunity.
12
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
14. 14
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Nature of the
individual
ICT
(Crowdfunding)
+
+
+
P4
P2
P1
Nature of the
opportunity
Funding
Subsidized
cost of capital
+
P3
Government
Involvement
15. Nature of the individual
• Definition: Schumpeter (1934) emphasized that entrepreneurs are a
“special type” (p.81), suggesting that their conduct was not present in
every person. Yunus challenges this belief. Shane & Venkataraman
(2000, p. 223) highlights characteristics of the individual, affecting
the decision to exploit an entrepreneurial opportunity:
• The opportunity cost of an alternative strategy
• The costs for obtaining resources for exploiting the opportunity
• Individual differences in perception.
• Individual differences in optimism
15
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
16. Nature of the individual
Individual differences in perception (of risk)
Proposition 5. The form of financing affects the relationship between the nature of
the entrepreneur and the decision to exploit and entrepreneurial opportunity.
16
17. 17
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship+ + +
Nature of the
individual
ICT
(Crowdfunding)
+
+
+
P4
P2
P1
Nature of the
opportunity
Funding
Subsidized
cost of capital
+
P3
Government
Involvement
Form of
funding
+
P5