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Global Development Institute

Does access to formal finance matter for stimulating entrepreneurship in developing countries? Evidence from non-farm entrepreneurial activities in Nigeria.

Olabimtan Adebowale and David Lawson

Abstract 

The role of finance in stimulating entrepreneurship in developing countries is well documented. However, the specific impact of finance on part-time entrepreneurship is less well known. Drawing on the entrepreneurship discourse that self-employment is not a sufficient measure of entrepreneurship in developing countries, this study extends the finance–poverty debate by investigating the impact of finance on households’ part-time and self-employed entrepreneurship choices. It also examines the role of external finance in enterprise growth, with a focus on the ‘missing lower-end’ of the industrial scale. Using Nigeria Living Standard Measurement Study (LSMS) surveys, our analysis suggests heterogeneity in the effects of finance on households’ non-farm entrepreneurial choices, with part-time entrepreneurs more likely to be financially constrained. The empirical evidence shows that self-employed entrepreneurs are seemingly not financially constrained. This is, however, not to say that self-employed entrepreneurs are not financially constrained; it may just be that they are concentrated in the informal sector or less capital-intensive sectors of the economy. The results also show that, contrary to findings in previous studies, external finance does not strongly explain household enterprise growth. The results are robust to the use of an alternative econometric approach on identical models and specifications. The policy implication is that improving access to formal financial services may not, on its own, be sufficient to drive the structural transformation process without the integration of the informal financial sector into the mainstream financial system.

Keywords 

Access to finance, entrepreneurship, enterprise growth, external finance, part-time entrepreneurship, self-employed entrepreneurship

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