Financial Market Constraint And Home Business


Entrepreneurship is an activity that encourages job creation and innovation that can support economic growth. Inter-country data from the Global Entrepreneurship Monitor (GEM) shows that countries with a high level of entrepreneurship, thus the average economic growth rate will also be high. At the individual entrepreneur level, it tends to be more rapid to rise to a better level of welfare (Bradford, 2003).

This is one of the important aspects in entrepreneurship utilizing business opportunities which are often translated into the form of opening new businesses (Aldrich and Cliff, 2003). With this progress, the GEM survey measures entrepreneurship using 2 methods, namely the number of new company openings and the number of companies that are able to survive after being established.

Even though it has an important role, entrepreneurship must be prepared to face various challenges. The most serious challenge that must be faced is the problem of financial limitations. When viewed from the point of view of credit provision, for example, credit restrictions are caused by asymmetric information (Stiglitz and Weiz, 1981) and this problem is bigger for newly established businesses.

If you start a new business, you will need initial capital. If there are no obstacles in the financial market, the decision to open a business is not related to the individual’s financial situation. If access to financial markets is limited, only individuals with sufficient assets are able to start new businesses (Holtz-Eakin et al, 1992).

According to Caner and Saridakis et al, who argue that financial limitations can cause the growth of new companies to be less vulnerable so that they are unable to survive (low survival rate).

Financial Market Constraint

If you want to analyze the financial market constraint hypothesis, Evan and Leighton and Evan and Jovanovich. If you look at the second relationship between a newly opened business or self-empyoment with individual asset ownership. However, there is another study, namely from Hurst and Lusardi using the same strategy to analyze this hypothesis at the household level and the results show that the business opening and wealth of these entrepreneurs are positively associated both at the individual level and at the household level. Or it can be called the Financial Market Constraint, which is very suitable for individual and household entrepreneurs.

To test financial market constraints is still a polemic or is still a conspiracy. Cancer argues that a positive relationship between wealth or assets and the opening of new businesses in the rich can occur due to differences in tax rates between workers and entrepreneurs. And according to Cressy, the positive relationship between wealth and the opening of new businesses can be related because individuals are increasingly willing to take risks if their wealth increases, not because of financial market constraints.

Individuals who are less risk averse will prefer to open new businesses, while those who are more risk averse will prefer permanent jobs. As time goes by and wealth increases, individuals will be increasingly willing to take big risks and will choose to become entrepreneurs.

Buera shows that the relationship between assets and wealth of new ventures is not so monotonous, this relationship is positive for poor households (low assets) and the negative for rich households is that this rich individual does not open a new business which may be a bad entrepreneur.

The effect of assets on the opening of a household business can also be analyzed for different asset distributions using five asset quintiles. The first quin-tile comprises 20% of low-wealth households. So that the fifth quintile is households with higher asset holding.

From the results of buera analysis which supports that assets have a very negative effect on households with a lot of assets or wealth. However, there was not found a relationship between wealth between new business openings and the other four quintiles. Rich households will have higher entrepreneurial skills that are able to open new businesses and other people will choose their jobs.

An IFLS data can also help or allow us to analyze a financial market constraint on the opening of a new business directly. There are two types of questions in the IFLS survey that are used as a tool or to see the function of financial market constraints, namely “Do you know where to borrow money?” For the second one is “During the last 12 months, did you know where to borrow money? / Have you been successful in getting a loan? “. These two results show that knowing where to get a loan and the results of getting that loan can increase the probability of opening a new household business.

Financial Market Constraints according to or which have been explained by Evan and Leighton are not found in some countries. Countries that are still developing or are still weak will usually rely more on relationships with relatives to meet their business capital needs. However, developed countries always depend on the formal financial system.