What Is the Impact of Informal Entrepreneurship on Venture Capital Flows?

Eunice Santos,João J Ferreira,Carla Azevedo Lobo,Cristina I Fernandes

doi:10.1007/s13132-020-00701-w

Abstract

There has been a diverse range of research on the factors enabling informal entrepreneurship as well as the means to avoid or to eradicate its incidence. Several researchers argued that venture capital and financial flows, in general, contribute to economic growth and development. There have also been observations of how the investor level of trust in institutions facilitates investment decisions. This trust comes into play at the level of informal entrepreneurship and the ability of governments to control this type of entrepreneurship. Given that a great deal of research on this subject focuses its analysis on developing countries, we have chosen to investigate the reality of European countries precisely because of the scarcity of studies on the effect of informal entrepreneurship in this context. Our research aims to assess how informal entrepreneurship effects on venture capital flows. We use aggregated data at country level collected from a variety of sources, including the World Bank, Organization for Cooperation and Development and World Economic Forum, between 2006 and 2015 and 23 countries in Europe, corresponding to 230 observations (panel no. balanced). Through econometric estimation, which took place according to methodologies based on multiple regression models for panel data, the results demonstrate how informal entrepreneurship has a negative moderating effect between GDP and venture cUKapital flows. We intend to contribute to a better understanding of the effect of informal entrepreneurship on the flows of venture capital.

Highlights

This current research seeks to evaluate the effect of informal entrepreneurship on venture capital flows
When we study the effect that the existence of informal entrepreneurship has on the venture capital flows, we convey the importance of the level of trust that investors need to perceive in the institutions in which they will invest their money
Our paper is structured as follows: we present the literature review, in which we develop the relationship of informal entrepreneurship, GDP and financial flows

Summary

Introduction

This current research seeks to evaluate the effect of informal entrepreneurship on venture capital flows. When we study the effect that the existence of informal entrepreneurship has on the venture capital flows, we convey the importance of the level of trust that investors need to perceive in the institutions in which they will invest their money. As far as we know, this research is the first to articulate the effect of informal entrepreneurship on venture capital, in Europe, where the level of informality is considered relatively low This problematic framework rarely gets approached in Europe and correspondingly justifying the importance of this study. Boettke and Coyne (2009) maintain that institutions can facilitate economic, political and social interactions, fostering incentives for different courses of action and guiding the emergence of economic actors When these rules are well-defined, opportunism declines, trust rises and there is greater recourse to long term contracts and thereby cutting transaction costs and fostering efficient institutional structures (Arias and Caballero, 2006). As EU economies have become increasingly regulated, this has raised the costs of launching and running a business and effectively served to drive more companies and employees into the informal sector (OECD, 2015)

Literature Review

Methodology

Results and Discussion