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How Micro Funding and ICT can Boost Entrepreneurship in Europe

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Presented at SNEE conference in Mölle, Sweden …

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.

Published in: Business, Economy & Finance

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  • 1. How Micro Funding and ICTcan Boost Entrepreneurship inEuropePontus Engstrom, University of AgderMölle 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 adeveloping world context, into a developed region perspective.• Contributes to entrepreneurship theory• Contributes to the research on microfinance, as entrepreneurship theory helpsdescribe why microfinance alone is not the panacea to poverty alleviation• Important policy implications for politicians seeking to promoteentrepreneurship, competitiveness and employment in Europe2
  • 3. “DN Debatt” may 19, 20133
  • 4. Schumpeter (1934)The Theory of Economic Development• A dynamic framework where demand and supply interact ina circular flow, striving to a balance in equilibrium• At the center of this action is the entrepreneur who looksand seeks for changes to reach an improved economicstate.• Through innovation, the entrepreneur mixes the availableresources, such as markets, products, productionmethods, etc., into new combinations.• “entrepreneurs are a special type” (p. 84) whichmay explain why much research is concerned withthe description of who the entrepreneur is.4
  • 5. Shane & Venkataraman (2000)The Promise of Entrepreneurship as a Field of ResearchSeeking answer to why, when and how entrepreneurialopportunities:• 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 abusiness 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: “meremanagers and entrepreneurs” (.83). Being entrepreneurial is “not a professionand as a rule not a lasting condition” (p. 78). A static non-evolving smallbusiness is not a form of entrepreneurship, but instead may be a betterexample of self-employment. Entrepreneurship involves the creation ofsomething new, through combinations of other things6Definition: New businesses, or the creation of newbusiness within existing firms.Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 7. Existence of entrepreneurial opportunitiesDefinition: “new goods, services, raw materials, andorganizing methods can be introduced and sold at greaterthan their cost of production” (p. 220). Schumpeter (1934)referred to this as the entrepreneurial profit, or “surplus overcosts” (p. 128).Proposition 1: A subsidized cost of capital leads to moreentrepreneurial opportunities.7Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 8. 8Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + ++ P1Subsidizedcost of capital
  • 9. Discovery of entrepreneurial opportuniesDefinition: Although an opportunity for entrepreneurialprofitmight exist, an individual can earn this profit only if he or sherecognizes that the opportunity exists and has value. Ofimportance is 1) Experience and 2) Cognitive capabilitiesMicro funding has no impact on this construct.9Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 10. Decision to exploit the entrepreneurialopportunityDefinition: A potential entrepreneur must decide to exploitthe opportunity. Depends on two factors:1) Nature of the entrepreneurial opportunity2) Nature of the individual10Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 11. 11Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Nature of theindividual+ P1Nature of theopportunitySubsidizedcost of capital
  • 12. Nature of the entrepreneurial opportunityDefinition: The expected value of the entrepreneurial profit is large enoughto compensate for the opportunity cost of other alternatives (including theloss of leisure), the lack of liquidity of the investment of time andmoney, and a premium for bearing uncertainty.Proposition 2. The relationship between the nature of the opportunity andthe decision to exploit is moderated positively by the access to microfunding.Proposition 3: Government initiate funding supports the growth of the risk-capital industry which positively moderates the relation between the natureof the opportunity and the decision to exploit an entrepreneurial opportunityProposition 4: Peer-to-peer lending (crowdfunding) moderates therelationship positively between funding and the nature of theentrepreneurial opportunity.12Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 13. 13
  • 14. 14Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Nature of theindividualICT(Crowdfunding)+++P4P2P1Nature of theopportunityFundingSubsidizedcost of capital+P3GovernmentInvolvement
  • 15. Nature of the individual• Definition: Schumpeter (1934) emphasized that entrepreneurs are a“special type” (p.81), suggesting that their conduct was not present inevery person. Yunus challenges this belief. Shane & Venkataraman(2000, p. 223) highlights characteristics of the individual, affectingthe 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 optimism15Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 16. Nature of the individualIndividual differences in perception (of risk)Proposition 5. The form of financing affects the relationship between the nature ofthe entrepreneur and the decision to exploit and entrepreneurial opportunity.16
  • 17. 17Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +Nature of theindividualICT(Crowdfunding)+++P4P2P1Nature of theopportunityFundingSubsidizedcost of capital+P3GovernmentInvolvementForm offunding+P5
  • 18. 18