Constraints on Liquidity for Start-ups: Entrepreneurial Motivation and the Effect of Government Funding Schemes

         
Author Name YASUDA Takehiko  (Consulting Fellow)
Creation Date/NO. April 2004 04-J-032
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Abstract

This paper analyzes factors determining the scale of business start-ups using data sets from Japan. It shows that age, education, parents' occupation (company manager), business experience, and assets owned at the time of start-up have a significant positive impact on the scale of start-up funding, while independent start-up has a significantly negative impact. Furthermore, entrepreneurs motivated by a desire to contribute to society, a desire to make use of assets, the influence of others and social status have more funds for start-up, whereas those motivated by a desire for individual discretion, dissatisfaction with current remuneration, a desire for life-long work, unemployment, and a desire for more freedom have fewer funds for start-up.

The study showed start-ups that make use of funding from public agencies are significantly larger than those that do not, particularly those that do not borrow from any financial institution. This suggests the possibility of constraints on liquidity at the time of start-up and that government funding assistance for start-ups would be effective in expanding the scale of such ventures.

The study also verified the impact of funding scale at the time of start-up on subsequent business performance. Even taking account of entrepreneur attributes and the industry being entered, the analysis showed that more funding at the time of start-up had a positive impact on a venture's performance measured by growth in employee numbers. From the perspective of increasing employment opportunities, this indicates the validity of policies that facilitate larger-scale funding for start-ups.