Crowdfunding Finance and Entrepreneurial Ventures

ABSTRACT

In countries where access to formal financial institutions is limited, a likely consequence is a lack of start‐up capital, which constrains otherwise promising ventures. In this paper, we ask (1) whether recent technological improvements in the financial industry, mainly crowdfunding finance, assist individuals facing financial constraints to enhance/embark on entrepreneurial ventures. To address this endogenous question, we hypothesize that distrust in formal banking institutions by individuals engaged in entrepreneurial ventures and the advancements in Information and Communication Technology (ICT) infrastructure plausibly drive the demand for an alternative financing model––that is, crowdfunding. Using distrust and ICT to instrument crowdfunding, we find a significant positive association with entrepreneurship. Next, we ask (2) whether crowdfunding complements or substitutes access to formal banking services, and what their joint effect is on entrepreneurship. Interestingly, the findings reveal an inverse relationship between crowdfunding and limited access to banking services, indicating a substitution effect. Even more, their joint effect underscores an alternative financing path positively associated with entrepreneurship. Finally, we reflect on the contributions and practical implications of these findings aligned with alternative finance, financial inclusion and private sector development in the context of developing countries.