Entrepreneurial Finance and Innovation: Informal Debt as an Empirical Case

Research Summary Drawing on entrepreneurial finance theory, we examine the trade‐offs among different sources of capital for entrepreneurial firms in emerging economies and their impact on innovation. In emerging economies, one of the unique aspects of firm financing is the presence of informal capi...

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Bibliographic Details
Published in:Strategic entrepreneurship journal 2016-09, Vol.10 (3), p.257-273
Main Authors: Wu, Jie, Si, Steven, Wu, Xiaobo
Format: Article
Language:English
Subjects:
Capital formation
Emerging markets
Entrepreneurial finance
Entrepreneurs
informal debt
innovation
Innovations
institutional development
Studies
Tradeoff analysis
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Summary:Research Summary Drawing on entrepreneurial finance theory, we examine the trade‐offs among different sources of capital for entrepreneurial firms in emerging economies and their impact on innovation. In emerging economies, one of the unique aspects of firm financing is the presence of informal capital, as many formal sources of capital for new entrepreneurs have more constrained access than is the case in mature economies. We suspect that informal debt has an important effect on innovation, and this effect is contingent on the accessibility of formal debt and institutional development. The hypotheses are tested using survey data from 3,235 entrepreneurs in an emerging economy, China. Managerial Summary This study demonstrates an inverted U‐shaped relationship between the level of informal debt and entrepreneurial ventures’ innovation performance. The value of informal debt for promoting innovation was found to be weaker for firms having little or no access to often less expensive institutional finance, whereas a better‐developed institutional environment strengthens the effects of informal debt. Copyright © 2016 Strategic Management Society.
ISSN:1932-4391
1932-443X
DOI:10.1002/sej.1214