Internet penetration, financial access and new business formation: evidence from developing economies

Abstract

PurposeThis study examines whether Internet penetration has a complementary effect on the relationship between financial access and new business formation in 57 developing economies from 2006 to 2018.Design/methodology/approachUsing the generalised least squares estimator, the authors employ a framework that allows us to distinguish between the marginal impact of financial access on new business formation in developing economies with high and low levels of Internet penetration rates. Furthermore, the authors distinguish between financial institutions and financial markets.FindingsThe authors find that increased accessibility for financial institutions promotes entrepreneurial activity, while financial market access has a negative relationship with new business formation. Furthermore, the authors find that the marginal impact of financial institution access increases in magnitude as Internet penetration increases. The effect does not hold for financial markets.Research limitations/implicationsThe major limitation lies in the measurement of new business formation, as it focuses on the formal entrepreneurial sector and overlooks the informal economy and entrepreneurs operating as sole proprietors.Practical implicationsPolicymakers should continue to promote the development of the information communication and technology sector and digitalisation policy while increasing financial accessibility in the financial system.Originality/valueThis study provides new empirical evidence on the greasing role of technology to leverage the impact of financial access on new business formation. Furthermore, the study distinguishes this effect by differentiating between financial institutions and markets.