How Business Opportunities Constrain Young Technology-Based Firms from Growing into Medium-Sized Firms

This paper analyses how the novelty of business opportunities at start-up constrains young technology-based firms from attaining substantial growth and becoming medium-sized. Data from 262 young Swedish technologybased firms are used to estimate a logit regression model relating different types of opportunities to the probability of becoming medium-sized. The results show that firms which seek to exploit opportunities based on new market knowledge are less likely to attain substantial growth than firms that seek to exploit opportunities based on existing market knowledge. The former class of firms can nevertheless increase the probability of such growth by actively seeking external financing.     

Geography,knowledge spillovers and small firms’ exports: an empirical examination for The Netherlands

This study examines the impact of external and internal scale economies on the decision to start exporting and the level of exports of innovating firms. Based on new trade theory, increasing returns to scale—both internal and external scale economies—are considered an important source of comparative and competitive advantage. The empirical analysis of (small) innovating firms in The Netherlands leads to two main findings. First, firms that are located in technical Marshallian clusters seem less inclined to become exporters. Availability of technical knowledge alone does not help to reduce entry costs that come with the decision to export and/or marketing and sales costs in order to achieve a higher export performance. Second, firms that experience difficulties in appropriating innovation rents due to labour poaching also seem to be less inclined to become exporters. The explanation for this second finding is the importance of outgoing knowledge spillovers, which is particularly relevant for small, product innovating firms. This reduces their probability to export. However, if firms export, the knowledge leaking argument is not valid for the export performance of the firm.     

Networking and growth of young technology-intensive ventures in China

More often than not, new ventures lack established products, known technologies, longstanding customer relations, experienced managerial teams, sufficient capital, and strong reputations. Almost by definition, small, new firms lack the resources of many larger, established firms. The task of an infant firm, and a measure of its success, is to make a transition from being resource weak to being resource strong.How can resources that are critical for profitable growth be acquired for the resource weak new venture? Researchers have found that entrepreneurs can gain access to valuable resources and they can seek to achieve competitive advantage through “networking activities.” Forming and utilizing available relationships with external organizations can allow entrepreneurs to build credibility, gain advice, financing, and customer access, build a positive image and obtain resources at below-market prices, and obtain channel access, information, and innovations. Business relationships with other organizations allow an entrepreneur to achieve desired business results through “asset parsimony.”A favorable view toward networking for new ventures leaves a number of unanswered questions, however. Relevant research questions might include, who should the entrepreneur seek as a business partner? Are all inter-organizational relationships equal, or are some types more valuable to new ventures than other relationships? Do firms relying on high levels of networking activities actually outperform firms that less actively seek resources through external organizational relationships?The present study provides a specific understanding of the concept of networking for entrepreneurs. We propose that networking can be understood in terms of “range,” the number of external relationships to obtain resources, and of “intensity,” the frequency of contact of and amount of resource obtained from these relationships. This research project evaluates the range and intensity of networking among high-growth and low-growth entrepreneurial ventures.Extensive interviewing with managers of six young technology-oriented firms in the People's Republic of China (PRC) affirmed the importance of entrepreneurial networking. Managers in the three high-growth firms reported greater range and intensity of business networking than did managers of three low-growth firms, matched by industry and age. Moreover, the relationship between networking activities and growth transcended the stage of firm development.Where networking range and intensity are deemed important in the growth process, new venture success may call for entrepreneurs to reach out deliberately to external organizations to capture needed resources. To a certain extent, such networking activities run counter to important entrepreneurial motivations of independence and autonomy. The concept of networking, and the results of this study, imply that entrepreneurs need to combine the spirit of independence with the reality of resource dependence, and they need to balance personal autonomy with strategic business relationships.This study also contributes to the understanding of entrepreneurship in our increasingly global economy, particularly in the PRC. Business relationships between the United States and the PRC have been expanding rapidly in the last decade. Many foreign businesses seek license agreements, joint venture partners, equity participation, or channel relationships with young ventures in that country. Do the same rules of networking apply in the PRC as the literature suggests apply in the United States? New ventures in this study were found to engage in processes of networking activities consistent with those in the West. Although networking activities may have different cultural roots, firm success appeared influenced by the same principles of networking.     

Acquisition of Additional Equity Capital by Small Firms – Findings from the National Survey of Small Business Finances

While the importance of venture capital to the growth of small firms has been widely discussed during the past decade, little is known about the acquisition of additional equity capital, especially internal equity capital, by the majority of small firms in the U.S. This paper utilizes the information collected in the Federal Reserve Board’s 1993 and 1998 Small Business Finance Surveys to investigate the acquisition of additional equity capital by small firms. While the importance of public issue markets and venture capital investment in promoting the growth of small dynamic firms cannot be denied, the importance of external equity capital seems to be overstated. Only a very small number of small firms acquired additional external equity capital. It is the internal equity capital, not external, equity, that is one of the major financing sources for most small firms. We found that younger, lower quality firms were more likely to acquire additional internal equity capital than other firms. There appeared to be a “pecking order” of borrowing from internal sources to traditional lenders to non-traditional lenders. In addition, internal equity capital and debt acquired from traditional and non-traditional lenders appeared to be complementary financial resources.     

Do Firms Get the Financing They Want? Measuring Credit Rationing Experienced by Small Businesses in the U.S.

This paper measures the extent to which small businesses in the United States in the late 1980s were able to access the external credit finance they desired. We argue that a comprehensive definition of credit rationing must account for both (a) creditworthy firms that apply for and are denied financing, and (b) creditworthy firms that decide not to apply for desired external financing, given expectations about how long it may take to obtain financing and the evolution of investment opportunities.Data from a national survey of small businesses shows that only 2.14 percent of firms did not obtain the funding for which they applied in 1987–88. Another 2.17 percent may have faced some short-run constraints on investment: they were initially denied by lenders but received the credit for which they applied by the end of the sample period. Finally, an additional 4.22 percent of firms are estimated to have been discouraged from applying because of expected denial.Constrained firms are smaller, younger, and more likely to be owned by their founders than those firms that successfully applied for external finance. The total number of credit constrained firms seems quite small, particularly because we cannot distinguish empirically between creditworthy and noncreditworthy firms. Thus the extent of true credit rationing appears quite limited.     

The internationalization of new and small firms: A resource-based view

This paper seeks to enhance understanding of the internationalization of small- and medium-sized enterprises (SMEs). The study focuses upon the following issues: Can the characteristics of principal founders, businesses, and the external environment at one point in time be used to `explain' at a later date whether a firm is still an exporter or a nonexporter, whether exporting firms are larger in size than nonexporting firms, whether exporting firms report superior performance than nonexporting firms, and whether exporting firms are more likely to survive than nonexporting firms? To address these questions, this study draws upon a sample of 621 manufacturing, construction, and services businesses located in twelve contrasting environments in Great Britain surveyed first in 1990/91 and then re-interviewed in 1997.A resource-based view is reviewed to identify the range of factors encouraging some owner-managed SMEs to enter export markets. Four categories of human and financial capital are examined: general human capital resources, the principal founder's management know-how, the principal founder's specific industry know-how, and a principal founder's ability to obtain financial resources that can act as a buffer against random shocks. Variables relating to resource availability in the external environment were also collected and considered control variables. Previous studies have highlighted substantial industry differences in the propensity for businesses to enter export markets as well as to survive. The principal industrial activity of each business in 1990/91 was, therefore, considered a control variable.Variables collected during the 1990/91 survey were selected to explain variations in the propensity to export reported by surviving independent firms in 1997. After elimination of missing values, the working sample was reduced to 116 independent firms for this study (86 nonexporters and 30 exporters in 1997). In addition, the 21 variables were selected to explain variations in business size in 1997, profit performance relative to competitors reported in 1997, changes in employment over the 1990/91 to 1997 period, and business survival over the 1990/91 to 1997 period (213 survivors and 395 nonsurvivors).Multivariate statistical analysis confirmed that previous experience of selling goods or services abroad is a key influence encouraging firms to export. Businesses with older principal founders, with more resources, denser information and contact networks, and considerable management know-how are significantly more likely to be exporters. Further, businesses with principal founders that had considerable industry-specific knowledge are markedly more likely to be exporters. Businesses principally engaged in the service sectors and those located in urban areas are significantly less likely to be exporters.A key finding of this study is that the explanatory variables significantly associated with the propensity to export sales abroad are not the same as those significantly associated with selected size and performance measures. The resource-based explanatory variables selected fail to significantly detect employment-growing firms over the 1990/91 to 1997 period. They also fail to significantly distinguish surviving independent firms from nonsurviving firms.Results from this study will provide policy-makers and practitioners with additional insights into the key resource-based factors associated with the decision by new and small independent firms to export sales abroad. Practitioners and policy-makers can focus upon the characteristics of principal founders, businesses, and the external environment to predict the subsequent propensity of an independent firm to be an exporter. Policy-makers and practitioners who want more new and small firms to export outside their local areas may prefer to target their resources and assistance to the relatively smaller proportion of firms that have the business and principal founder profiles that are significantly associated with a firm being an exporter.     

Moderating effects of investor experience on the signaling value of private equity placements

We contend that young start-up firms requiring external capital are able to differentiate themselves from competitors through their choices of investors and financing mechanisms. Private placements of equity convey efficient signals to markets for several reasons. They are (short-term) irreversible, occur after a more rigorous analysis than public offerings provide, contain governance mechanisms, and are generally observable by outsiders. The disclosure that investors possess a superior reputation for evaluative ability conveys an additional, endorsing signal of the firm's prospects. This proves especially valuable for younger firms, less capitalized firms, and firms that have more recently received private equity from an experienced investor. Using an event history analysis on a sample of 329 publicly held biotechnology firms, we find firms that are perceived to be more uncertain and that disclose the presence of more prominent investors are better able to attract subsequent financing.     

Capital structure decision making: A model for family business

Most theoretical and empirical studies of capital structure focus on public corporations. Only a limited number of studies on capital structure have been conducted on small-to-medium size enterprises (SMEs), and this deficiency is particularly evident in investigations into factors that influence funding decisions of family business owners.Theory indicates that there is a complex array of factors that influence SME owner-managers' financing decisions. Recent family business literature suggests that these processes are influenced by firm owners' attitudes toward the utility of debt as a form of funding as moderated by external environmental conditions (e.g., financial and market considerations).A number of other factors have been shown to influence financing decisions including culture; entrepreneurial characteristics; entrepreneurs' prior experiences in capital structure; business goals; business life-cycle issues; preferred ownership structures; views regarding control, debt–equity ratios, and short- vs. long-term debt; age and size of the firm; sources of funding for growth; attitudes toward debt financing; issues relating to independence and control; and perceived risk and attitudes toward personal risk.Although these factors have been identified, until now there does not appear to have been any attempts to develop empirically-based models that show relationships between these factors and family business owners' financing decisions. Utilizing theories derived from divergent disciplines, this study develops an empirically tested structural equation model of financing antecedents of family businesses. Participants of our study involved a random sample of 5000 business owners who were mailed a 250-item Australian Family and Private Business questionnaire developed specifically for this investigation.Notably, our findings reveal that firm size, family control, business planning, and business objectives are significantly associated with debt. Small family businesses and owners who do not have formal planning processes in place tend to rely on family loans as a source of finance. However, family businesses in the service industry (e.g., retailers and wholesalers) are less likely to use family loans as are those owners who are planning to achieve growth through new products or process development. Use of capital and retained profits is likely for family businesses planning to achieve growth through an increase in sales but less is likely for family businesses in the manufacturing sector and lifestyle firms. In addition, debt and family loans are negatively related to capital and retained profits. Equity is a consideration for owners of large businesses, young firms, and owners who plan to achieve growth through increasing profit margins. However, equity is less likely to be a consideration for older family business owners and owners who have a preference for retaining family control.Our findings suggest that the interplay between multiple social, family, and financial factors is complex. In addition, our findings indicate the importance of utilizing theories that also help to explain behavioral factors (e.g., owners' needs to be in control) that affect financial structure decision-making processes. Practitioners and researchers should consider the dynamic interplay among business characteristics (e.g., size or industry), behavioral aspects of business financing (e.g., business objectives), and financial factors (e.g., gearing levels) when working with and researching family enterprises.     

Does banking consolidation worsen firms’ access to credit? Evidence from the German economy

This paper deals with the question whether the ongoing process of banking consolidation, which can be observed all over the world, worsens SMEs’ access to credit. We focus in our empirical study on SMEs in Germany, a country where SMEs are the backbone of the economy. A negative trend in the provision with bank credit may thus adversely affect growth and employment. Based on a comprehensive dataset on German firms and banks we find—contrary to public fear—that the ongoing banking consolidation in Germany does not have a significant negative impact on the financing of German firms during the observation period from 1996 to 2002.     

How do female entrepreneurs perform? Evidence from three developing regions

Using the World Bank Enterprise Survey data, we analyze performance gaps between male- and female-owned companies in three regions—Eastern Europe and Central Asia (ECA), Latin America (LA), and Sub-Saharan Africa (SSA). Among our findings are significant gender gaps between male- and female-owned companies in terms of firm size, but much smaller gaps in terms of firm efficiency and growth (except in LA). Part of the reason women run smaller firms is that they tend to concentrate in sectors in which firms are smaller and less efficient (in ECA and SSA). By contrast, we find no evidence of gender discrimination in access to formal finance in any of the three regions, although in ECA women are less likely than men to seek formal finance. Finally, while female entrepreneurs receive smaller loans than their male counterparts, the returns from each dollar they receive is no lower in terms of overall sales revenue.     

Family Control,International Accounting Standards,and Access to Foreign Banks: Evidence from International Entrepreneurial Firms

This article aims to understand if a change in accounting standards offers new avenues for helping entrepreneurial firms, especially those family‐controlled ones, to obtain debt financing from foreign banks. We find that amid the global wave of adopting International Accounting Standards (IAS), family‐controlled firms tend not to voluntarily switch from local generally accepted accounting principles to IAS. After self‐selection issues are taken into account, furthermore, entrepreneurial firms adopting IAS experience less difficulty accessing loans from international banks. However, IAS adoption differentially influences private firms, family owned versus nonfamily controlled, in terms of their access to debt capital.     

Entrepreneurial orientation,commitment to the Internet and export performance in small and medium sized exporting firms

This paper investigates links between entrepreneurial orientation, commitment to the Internet and export performance in small and medium sized firms. The central argument is that entrepreneurs are more likely to use the Internet to develop export market opportunities, and to have better export performance than less entrepreneurial firms. In testing this proposition, a measure of ‘commitment to the Internet’ was developed and used in a mail survey of UK exporters. The results show that firms with high entrepreneurial orientation are more committed to the Internet and have better export performance than firms with low entrepreneurial orientation.     

Investment–cash flow sensitivities,credit rationing and financing constraints in small and medium-sized firms

The controversy on whether investment–cash flow sensitivity is a good indicator of financing constraints is still unsolved. We apply a comprehensive approach by cross-validating our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing constraints on a sample of mainly small and medium-sized firms. Our qualitative information shows that (self-declared) credit rationing is (weakly) related to both traditional a priori factors—such as firm size, age and location—and lenders’ rational decisions taken on the basis of their credit risk models. We use the qualitative information on firms which were denied (additional) credit to provide evidence relevant to the investment–cash flow sensitivity debate. The evidence shows that self-declared credit rationing significantly discriminates between firms which possess or not such sensitivity, while a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment–cash flow sensitivity), supporting the more recent empirical evidence in this direction.     

Market entry into new export markets: When are firms more likely to imitate their competitors’ market presence?

We investigate the extent to which competitors’ presence in a given export market has an impact on a firm's decision to enter such a market and, more precisely, under what conditions imitation is more likely to take place. We show that firms with greater export knowledge are more likely to enter those countries where their competitors are already present. Furthermore, experiential knowledge seems necessary to absorb valuable information provided by the presence of competitors in those markets. Thus, imitation should not be regarded as the option best suited for firms with reduced expertize that follow blindly their competitors into new markets. Through a panel analysis of Brazilian exporters during the 2001–11 period, our study contributes to research on market entry decisions, especially stressing the critical role of prior relevant knowledge in facilitating imitation among players.     

Evaluating the Contribution of Exporting to UK Productivity Growth: Some Microeconomic Evidence

This study assesses the contribution of exporting activities to aggregate productivity growth in the UK for all market‐based sectors for the period 1996–2004, using a weighted FAME dataset. Based on decompositions of productivity growth, our findings suggest that, overall, exporting firms experience faster productivity growth than non‐exporting firms and therefore contribute more to national productivity growth. In addition, aggregate productivity for exporters benefits from a large contribution from ‘continuing’ firms improving their productivity, as well as exporters that have been taken‐over/merged or started‐up as new firms. In contrast, most of the TFP improvement for non‐exporters is attributable to lower productivity firms exiting, rather than from internal improvements or the productivity‐enhancing impact of new firms.     

Legal and Institutional Determinants of Factoring in SMEs: Empirical Analysis across 25 European Countries

Weak protection of the rights of financiers intensifies agency problems in SME financing, inhibiting the optimal provision of credit necessary to grow and innovate. We use a survey data set of 4,348 SMEs from 25 European countries to analyze whether the use of factoring as a form of SME financing is less dependent on low quality of laws and institutions. We do so analyzing whether the use of factoring by SMEs differs across countries due to differences in the legal protection of creditors. Our findings indicate that firms operating in countries with legal environments that weakly protect the rights of creditors, with political instability or high enforcement costs, are more likely to use factoring. Managers of riskier and opaque companies operating in such inefficient environments can use the results of this study to better understand that there are suitable options to complement bank financing. Managers who seek loans can use the results to diversify their financing structure through the use of factoring. Since factoring can be used as a complement to bank loans or as a substitute for bank financing, it is important that policy makers take our results into account when revising policies concerning access to external financing.     

Exporting and Economic Performance: Firm‐level Evidence of Spanish Manufacturing

In a previous paper, Delgado, Fariñas and Ruano (2002) report TFP differences between exporters and non‐exporters on the basis of a sample of Spanish manufacturing firms. In this paper, we extend the previous analysis in three directions using a similar data set. First, we investigate additional economic performance differences between exporters and non‐exporters. Second, we measure TFP differences estimating production functions that control for unobserved heterogeneity and simultaneity bias. Third, we explore the self‐selection and learning‐by‐exporting hypothesis as explanations for the greater performance of exporters. With respect to the results, we confirm that many indicators of economic performance such as productivity, size, wages and innovation are greater in exporting firms. Furthermore, TFP differences between exporters and non‐exporters estimated with parametric methods are remarkably similar to those estimated using index numbers. Finally, performance differences and transition patterns between the export market and the domestic market indicate higher performance for entering exporters with respect to non‐exporters at the moment of entry. We find evidence of selection in the entry and the exit side of the export market. One of the basic results that we obtain indicates that after controlling for self‐selection, the productivity growth of entering exporters does not significantly change with respect to non‐exporters. As the evidence we find indicates no systematic changes in performance between non‐exporters and exporters after entry takes place, we do not confirm the learning‐by‐exporting hypothesis.     

Trade Credits and Bank Credits in International Trade: Substitutes or Complements?

Trade credits are an important financing tool for internationally active firms. This is surprising, as trade credits are generally more expensive than bank credits and thus a costly substitute for bank financing. In this paper, we investigate the relation between trade credits and bank credits for exporting firms. We develop a theoretical model and show that trade credits convey a quality signal which reduces the risk of the transaction and may thus facilitate obtaining additional bank credits. Hence, exporters who are not able to obtain bank credits in the first place use trade credits and bank credits complementarily. Using panel data on large German manufacturing firms, we provide supportive evidence for our theoretical predictions. In general, trade credits and bank credits are substitutes. For financially constrained exporters, the overall substitution effect is attenuated which is consistent with a positive signalling effect.     

Early international entrepreneurship in China: Extent and determinants

We use data on 3,948 Chinese firms obtained from the World Bank’s Investment Climate Private Enterprise Survey to investigate early international entrepreneurship (international new ventures) in China. The extent of early international entrepreneurship in China is significant: 62% of the exporting firms start export operations within 3 years. Foreign shareholders within the firm and an entrepreneur with previous exporting experience are noted to significantly increase the probability that a firm internationalizes early. We find marked differences in the behaviour of indigenous and foreign-invested firms, and between direct and indirect exporters. For example, for an indigenous firm the more foreign experience its entrepreneur has, the less likely it is to start exporting early. As far as indirect exporting is concerned, business networks are significant determinants of the extent of such exporting, but delays the internationalization process of indigenous firms. The more firms in China export, the more time their managers need to spend on government regulations, although perhaps counter-intuitively, this was not found to discourage exporting. Overall, the findings suggest that exporting by indigenous Chinese firms is often due to challenging or adverse domestic conditions.     

Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy

In this paper we compare the role of internal finance on the growth of firms between a leading transition country, Slovenia and an established market economy, Belgium. We find that firms in Slovenia are more sensitive to internal financing constraints than their Belgian counterparts. Furthermore, we find that de novo firms and firms with long term debt are most constrained and that micro and SMES can face great difficulties in accessing external sources of finance. Foreign firms, however, are able to raise external finance and consequently their growth is less reliant on the availability of internal finance. Our findings appear to indicate that although Slovenian firms are no longer recipients of soft budget constraints, the financial environment is not yet fully functional.