by Kim Marie Bischoff
Have you ever thought about starting your own business? If yes, have you thought about money that you need for the business? Have you maybe even thought that you lack access to enough money to start the business and have therefore not pursued it? If yes, this is a common phenomenon and many entrepreneurs experience the problem of a lack of capital. Indeed, research has consistently shown that limited access to capital, or so called capital constraints are a major barrier hindering the start of new businesses.
Now, imagine that you live in an environment where capital constraints are even more severe, which is the case in developing countries. How could you overcome this severe obstacle of capital constraints? The common thinking suggests that improving access to capital is the major solution for overcoming capital constraints in business creation. A striking example is the Nobel peace laureate Muhammad Yunus, who asserted that facilitating access to capital in developing countries is of major importance, even more important than providing training.
However, providing access to capital might look like a straightforward solution, but it is definitely not the only and perhaps not the best solution. Our study provides empirical evidence for a different point of view. In the spirit of Abhijit Banerjee, Esther Duflo and Michael Kremer, winners of the 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, we conducted two randomized controlled field experiments to highlight that entrepreneurship training is an effective means to cope with capital constraints when starting businesses. Specifically, our study demonstrated that entrepreneurship training reduces the negative effect of capital constraints on business creation. That is, participants of an entrepreneurship training program were more likely to engage in entrepreneurship and create a new business one year after the program compared to participants of a control group, even though both groups faced the same capital constraints.
The reason why entrepreneurship training reduces the negative effect of capital constraints is that it helps participants to develop financial mental models. Financial mental models are cognitive representations (a form of knowledge) about financial matters, for example about the role of return and investment rates, cash flow, or profit margins. Improving financial mental models can help people to interpret financial information correctly, understand their environment quickly, foresee financial problems well, and find solutions for such problems easily. This in turn enables people to act quickly and effectively in the start-up process, which helps them to reduce cost-intensive mistakes and wasting resources. Preventing the waste of resources and using the few (financial resources) efficiently is important when facing capital constraints. Financial mental models help entrepreneurs to efficiently deal with situations in which they have fewer resources to sustain themselves and the new businesses. Consequently, by supporting trainees in developing financial mental models, entrepreneurship training helps to successfully initiate and manage the start-up process even when capital is limited.
To sum up, the findings of our study suggest that entrepreneurship training promotes successful business creation, not by reducing capital constraints, but by reducing the negative impact of capital constraints. Training reduces the negative impact by fostering participants’ financial mental models. Therefore, we recommend that instead of solely focusing on facilitating access to capital, practitioners and policy makers shall promote the implementation of entrepreneurship training. This is particularly important in regions where people face severe capital constraints, such as in developing countries.
About the authors
Kim Marie Bischoﬀ is Professor of Business Psychology and Intercultural Management at the Hochschule Fresenius University of Applied Sciences. She works as Vice Dean for the Department of Economics & Media and as Academic Director for the Department onlineplus at Hochschule Fresenius in Berlin. Additionally, she represents the Bachelor’s program in Business Psychology as Dean of Studies. She studied psychology at Justus-Liebig-University Gießen and received her PhD from Leuphana University of Lueneburg on the subject of entrepreneurship training in developing countries. Her research focuses on the topics of psychology of entrepreneurship, specifically on entrepreneurship training, action-oriented training and business creation. She is also the founder and managing director of the nonprofit company move gGmbH Entrepreneurship Training Institute, which aims at providing an answer to adverse labor market conditions and limited employment opportunities worldwide.
Michael M. Gielnik is a Professor of HR Development at the Leuphana University of Lueneburg and serves as a Field Editor for the Journal of Business Venturing. He studied psychology at the University of Giessen and received his PhD from the Leuphana University of Lueneburg. He was a Visiting Senior Fellow at the National University of Singapore Business School. His research focuses on entrepreneurship from a psychological perspective, in particular entrepreneurship training and transfer. He has taken a special interest in entrepreneurship in developing countries.
Michael Frese has a joint appointment as Professor for Organizational Behavior at the Asia School of Business (in collaboration with MIT Sloan Management) (ASB) in Kuala Lumpur, Malaysia, and Professor for Psychology and Entrepreneurship at the Leuphana University Lueneburg, Germany. He studies the psychology of entrepreneurship, innovation, training entrepreneurs, personal initiative and proactivity, and learning from errors and experience; using action theory as a meta-theory.