financing constraints and entrepreneurship.pdfVIP

Financing Constraints and Entrepreneurship William R. Kerr Ramana Nanda Working Paper 10-013 Copyright © 2009 by William R. Kerr and Ramana Nanda Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Financing Constraints and Entrepreneurship William R. Kerr and Ramana Nanda 1. Introduction Surveys of current and potential entrepreneurs suggest that obtaining adequate access to capital is one of the biggest hurdles to starting and growing a new business. Given the important role that entrepreneurship is believed to play in the process of creative destruction – and hence economic growth – it is not surprising that attempts to alleviate financing constraints for would-be entrepreneurs is an important goal for policy makers across the world. For example, the U.S. Small Business Administration funded or assisted in the funding of about 200,000 loans in Fiscal Year 2007, at an administrative cost of about $1,000 per loan (SBA 2008). Financial assistance for entrepreneurs is also high on the agenda in the European Union and OECD, where member states are urged to promote the availability of risk capital financing for entrepreneurs (OECD 2004). The underlying premise behind these policies is that there are important frictions in the credit markets precluding high-quality entrepreneurs with good ideas (i.e., positive net present value projects) from entering product markets because they are unable to access adequate capital to start a new business. Much of the academic literature has the