Financial development and entrepreneurship: insights from Africa
| DOI | https://doi.org/10.1108/JFRC-09-2021-0079 |
| Published date | 18 April 2022 |
| Date | 18 April 2022 |
| Pages | 596-617 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Folorunsho M. Ajide,Titus Ayobami Ojeyinka |
Financial development and
entrepreneurship: insights
from Africa
Folorunsho M. Ajide
Faculty of Social Sciences, University of Ilorin, Ilorin, Nigeria, and
Titus Ayobami Ojeyinka
Faculty of Social Sciences, Obafemi Awolowo University, Ile-Ife, Nigeria
Abstract
Purpose –One of the main obstaclesto the flourishment of African entrepreneurship is financialconstraint.
Existing studies on the nexus between entrepreneurship and financial development are inconclusive,while
the position of African economies remains unknown. The purpose of this paper is to empirically study the
impact of financialdevelopment on entrepreneurship in Africa.
Design/methodology/approach –This study utilizes data of 20 selected countries in Afri ca over a period of
2006–2017. International Monetary Fund (IMF) data on broad-based financial development were combined with
World Bank Entrepreneurship database. This studyuses system generalized methods of moments (system GMM)
technique and the recently developeddynamic panel threshold based on dynamic panel GMM.
Findings –The following findings emerged: financial development does not spur entrepreneurship in
Africa; there is a threshold at which financialdevelopment improves the level of African entrepreneurship;
and the tendency of financial development to improve the level of entrepreneurship is conditioned on
conducivebusiness regulation and strong institutional qualityat a specificthreshold value.
Originality/value –This is one of the few studies that examinesthe impact of financial development on
entrepreneurship in Africa. This study shows that the financial development relies on the effectiveness of
regulatory environment to extend loan and other financial services to new firm entrants. In addition, the
results of this study reveal that the assumption of linearity in the nexus between finance and
entrepreneurship is not tenable for the case of Africa. Therefore, policymakers should keep on developing
African financialsystem to accelerate the pace of entrepreneurshipdevelopment.
Keywords Africa, Dynamic panel threshold, Financial system, New firm entry
Paper type Research paper
1. Introduction
This paper pursues two specific objectives. It also addresses the impact of financial
developmenton entrepreneurship forthe case of African economies which hasbeen neglected
in the literature.The auxiliary objectivescomplement themain focus of the paper by:
ascertainingthe threshold of a broad-basedfinancial system on entrepreneurship; and
investigates the relevance of business start-up regulations in the nexus between
financial development and entrepreneurship in the context of African nations.
Consequently, we are able to advance previous studies (Dutta and Sobel, 2018;Léon, 2019;
Omri, 2020;Dutta and Meierrieks, 2021) that do not consider the peculiarities of African
JEL classification –G2, G10, M13, N27
JFRC
30,5
596
Received27 September 2021
Revised15 December 2021
30January 2022
Accepted24 March 2022
Journalof Financial Regulation
andCompliance
Vol.30 No. 5, 2022
pp. 596-617
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2021-0079
The current issue and full text archive of this journal is available on Emerald Insight at:
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economies. Our study considers all aspects of a financial system which are largely ignored
by previous studies. The study also differs in the area of financial development
measurement. It benefits from the recently developed broad-based financial development
proposed by Svirydzenka (2016). Unlike a single measure, our measure of financial
development coversoverall performance of financial system in terms of its access,depth and
efficiency. Using this measure,we offer valuable guides to policymakers on how the level of
financial system can improvethe level of entrepreneurship in Africa.
Recent trends show that there has been an increasing awareness of the role and the
importance of entrepreneurship as a catalyst for economic growth and development. In
specific, entrepreneurship is conceived as a major factor of production based on its
importance in promoting growth, generating employment and driving innovation in the
economy (Braunerhjelm, 2014;Bayar, Gavriletea and Ucar, 2018). However, despite the
potentials of entrepreneurship to drive sustainable economic growth and development, its
impacts, among the African countries, have not been felt. One major factor advancedin the
literature, inhibiting the growth of entrepreneurship, is finance. Besides, lack of funding
constitutes a major bottleneck on entrepreneurial activities, most especially among the
African nations that are characterised by the vicious cycle of poverty stemming from low
capital to low productivity and low income. Hence, a study on the nexus between financial
development and entrepreneurship that is centred on African economies is in a good
direction. This is premised on the fact that the financial sector provides a mechanism for
saving and credit mobilization for the sustainability of entrepreneurial activities that are
capable of stimulating rapid economic growth and development. To the best of our
knowledge, no study has specifically focused on the group of African economies in this
debate.
To fill this important knowledge gap, we follow the study of Klapper and Love (2011)
and Chambers and Munemo (2019) in exploring the entrepreneurship data of World Bank
called new entry density defined as the number of new firms registered as limited liability
per 1,000 working adult population. This measure captures the vital aspect of
entrepreneurial venturing and, most importantly, data of this nature are available for a
number of countries in Africa. In addition, the nature of the data is independent of the level
of development unlike other proxies that are based on self-employment. Also, it does not
have overstating problem of entrepreneurship that has been plagued by other measures of
entrepreneurship, for instance, the Global Entrepreneurship Monitor (Chambers and
Munemo, 2019). As explained earlier, due to ongoing controversy on the measurement of
financial development, we measured the level of financial development via a broad-based
index of financial system. The overall financial sector performance is measured in terms of
accessibility, depth and efficiency of financial institutions and financial markets in Africa.
The depth captures the liquidity and size of the financial system, while the accessibility
captures ease at which citizens have access to financial services. The financial efficiency is
concerned with the extent of which financial services are offered as lower costs
(Svirydzenka, 2016). Our measure of financial development captures both bank and non-
bank financial institutionsand capital markets.
By using the system generalized method of moments (GMM) which addresses the
problem of simultaneity biasedness and endogeneity issues, we document that financial
development does not promote entrepreneurship in Africa. We also utilize the technique of
Seo and Shin (2016), with the application proposed by Seo, Kim and Kim (2019), which is
built on the framework of GMM to ascertain the threshold at which financial development
could promote entrepreneurship. Findings reveal that the overall development in financial
sector must attain 26.5% before it can promote entrepreneurship in Africa. The results also
Financial
development
597
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