Entrepreneurial Engagement Choice and Credit Constraints: Empirical Analysis of Urban Informal Microentrepreneurship in Sri Lanka

Abstract

Microenterprise approach is increasingly acknowledged and policy based approach that recognizes micro entrepreneurs as the core of the informal sector, which needs to be assisted to start at entrepreneur level or to become growing, self-sustaining businesses to signify its contribution to economic growth and development in the global south. This study investigated the existence, effects of credit constraints and the determinants of entrepreneurial engagement choice taking a sample of 300 micro entrepreneurs who reside in underserved settlements in Sri Lanka. Accordingly, whether the entry choice is constrained by the availability of credit is empirically examined in a multivariate setting, applying discrete choice model on the conceptual basis of the theory of occupational choice. It was found a positive correlation between wealth and the probability of starting a business which implies that initial wealth determines the amount of capital required for business startups thus providing evidence of financial constraints. Initial wealth, education, tradition, trained or parent’s occupation and previous employment reported as important predictors on the probability of starting a business as a self employed or entrepreneur compared to subsistence activities. This study provides useful insights for policy makers to plan their activities to promote entrepreneurship in the urban informal sector in the country rather than formulating ad-hoc policies to provide fixed financial assistances on mis specified targets.