CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The role of the young entrepreneurial firm as an engine for

economic growth has garnered substantial attention during the last

several decades. In particular, innovative startup firms with growth

ambitions are considered to contribute disproportionately to

innovation, the creation of jobs, and wealth in the larger economy

(Kirchoff and Newbert, 2007). As such, fostering the development

and success of innovative startup firms has become a major

objective in most countries, and policymakers have directed

significant amounts of energy and resources toward finding direct

or indirect methods to stimulate entrepreneurial efforts.

One area of particular focus for policymakers, practitioners and

scholars alike is the nature and structure of the capitalization

strategies that fund small firms (Cassar, 2004). This interest is

related to a general concern among policymakers that such firms

often suffer from financial constraints due to ‘funding gaps’.

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Whether such gaps actually exist is debatable; the academic

evidence supporting this contention is scarce (Cosh et al., 2009).

Indeed, a majority of small businesses seem not to have any

particular difficulties surviving by their own means or obtaining

external financing (North et al., 2010). Nevertheless, certain types of

small firms apparently face challenges in accessing needed funding,

particularly young and innovative ventures (Freel et al., 2012).

Factors that may contribute to young innovative firms’ vulnerability

to capital constraints include high Research Development costs,

high proportions of intangible assets with limited collateral value,

and a need for large amounts of working capital due to rapid growth

(Denis, 2004). As such, the funding of innovative startups

continues to be a central concern of policymakers and scholars. A

number of both academic and practitioner-oriented studies and

reports have analyzed the funding portfolios of startup firms (Robb

and Robinson, 2010). However, the pursuit and development of

these policies, namely the factors that affect and benefits of,

capitalization, are still hampered by the limited, albeit growing,

empirical information relating to these factors and benefits.

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Smaller firms are an important part of the regional and national

economic systems that make up the European economy. In

particular, they play a key role in promoting and stimulating

economic dynamism, job creation, and growth through their

contribution to innovation, competitiveness and productive ‘churn’.

The ability of smaller firms to access finance is crucial in order that

these firms can fund the level of investment that maximizes their

growth potential. Lack of finance not only reduces the rate of new

business formation, but impedes the ability of existing firms to grow

and can endanger their survival. Specifically, external finance is an

important part of the market mechanism which facilitates the

efficient allocation of resources within economic systems (BIS,

2012). Venture capital generates a specific, significant effect in the

region where the target company is based. The distinction between

mutual and commercial credit suggests that both types of bank are

important for regional growth but the role of mutual banks is

greater in economically deprived areas [EDAs]. Mutual banks and

venture capital both proved to be substantial factors for economic

growth in regional contexts (Pistoresi and Venturelli, 2012).

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The entrepreneur’s attitude towards financing, not surprisingly,

plays an important role in shaping how the company’s capital

structure will be formed. The entrepreneur’s willingness to share

control of the business when obtaining financing is of central

importance. Retaining control and full decision-making control also

increases the prestige and status that comes with ownership

(Huyghebaert and Van de Gucht, 2007). Consequently, some

entrepreneurs who have the capability to choose, i.e., whose

ventures are profitable enough to reinvest proceeds or who have

sufficient levels of their own capital, tend to avoid external financing

(Vanacker and Manigart, 2010). Furthermore, such entrepreneurs

are likely to prefer external debt if outside funding is needed, since

such funding avoids the dilution of ownership and loss of control

(Berger and Udell, 2008). Other entrepreneurs, however, may seek

to share risk with less risk-averse investors such as business

angels and venture capitalists, appreciating the non-monetary

values that such investors bring to the table (ibid.).

1.2 Statement of Problem

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The shortcomings and the growing importance of capitalization

strategies in the policy domain have magnified the need for a

sounder basis for internationally comparable indicators of funding

and, indeed, for an internationally accepted measure of

capitalization strategies that facilitates and forms the basis of these

measures. But the measures, and so the framework, need to be able

to provide information not only on how many strategies there are or

the level of capitalization success, say, but they also need to be able

to provide information on indicators that determine these levels,

and, ideally, an indication of the impact that these levels have in

meeting specific policy targets; since creating a more

entrepreneurial economy or more entrepreneurs say, is merely a

means to some bigger end, and not the end in and of itself.

Clearly, the development of such a framework is a formidable

challenge. Capitalization strategies is after all a phenomenon that

manifests itself throughout the economy in many different forms

with many different outcomes, and these outcomes are not always

related to the creation of financial wealth, for example they may be

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related to increasing employment, tackling inequalities, or indeed,

increasingly, environmental issues.

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1.3 Conceptual framework

Capitalization Strategies Entrepreneurship

success

Friends
Profit and Creativity

Angel Investor

Family Members

Banks

Crowd Funding Economic Growth

The conceptual framework above is the schematic representation of

the functional relationship between capitalization strategies and

entrepreneurship success. In the diagram, capital rising strategies

is measured in terms of friends, angel investor, family members,

banks and crowdfunding; these dimensions represent the

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independent variables of the study. While, entrepreneurship

success is measured in terms of profit and creativity and economic

growth; these measures represent the dependent variables.

1.4 Purpose of the study

Based on the above conceptual frame work, the general purpose of

this study is to determine capital rising strategies and

entrepreneurship success.

1.5 Objective of the study

1. To examine the relationship between friends and profit and

creativity.

2. To examine the relationship between angel investor and

economic growth.

3. To examine the relationship between family members and

profit and creativity.

4. To examine the relationship between banks and economic

growth.

5. To examine the relationship between crowdfunding and

economic growth.

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1.6 Research Question

1. What is the impact of friends on profit and creativity?

2. What is the impact of data angel investor on economic growth?

3. What is the impact of family members on profit and creativity?

4. What is the impact of banks on economic growth?

5. What is the impact of crowdfunding on economic growth

1.7 Research Hypothesis

HO1 There is no significant relationship between friends and

creativity.

HO2 There is no significant relationship between angel investor and

economic growth.

HO3 There is no significant relationship between family members on

profit and creativity.

HO4 There is no significant relationship banks and economic growth

HO5 There is no significant relationship crowdfunding and economic

growth

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1.8 Significant of studies

Experience confirms that capitalization strategies plays an

important role in modernizing and developing the economy, as well

as improving the lifestyle of startup firms in the society adopting it.

For these reasons, this study finds importance in countries who

want to adopt national policies to stimulate the creation of

entrepreneurship projects; although such projects are considered

risky and have a high percentage of uncertainty and failure. This

study has significant for dynamic administrative leadership and

economic development, and reflects on the vitality of the national

economy as a whole.

1.9 Scope of the study

The conceptual scope of this study is capitalization strategies and

entrepreneurship success. The geographical scope is rivers state

and the unit of analysis is some selected small and medium scale

business enterprise in Port Harcourt.

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1.10 Limitation of study

The study will be carried out during the academic session where

other academic activities are going on and this could influence the

schedules for data collection. However the researcher will maximize

on the busy times. Another limitation is that this study will use a

large sample size of different secondary schools in Port Harcourt;

due to the allocated time and time required for analysis. Some

respondents may not answer the questionnaire or some may give

false answers hence affect the results.

1.11 Definition of Terms

Friend: A person other than a family member, spouse or lover

whose company one enjoys and towards whom one feels affection

Angel investor: An angel investor (also known as a business angel,

informal investor, angel funder, private investor, or seed investor) is

an affluent individual who provides capital for a business start-up,

usually in exchange for convertible debt or ownership equity.

Family: Members of the immediate family may include spouses,

parents, brothers, sisters, sons, and daughters. Members of the

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extended family may include grandparents, aunts, uncles, cousins,

nephews, nieces, and siblings-in-law.

Bank: A bank is a financial institution that accepts deposits from

the public and creates credit.

Crowdfunding: Crowdfunding is the practice of funding a project or

venture by raising small amounts of money from a large number of

people, typically via the Internet. Crowdfunding is a form of

crowdsourcing and alternative finance.

Profit: Profit is a financial benefit that is realized when the amount

of revenue gained from a business activity exceeds the expenses,

costs and taxes needed to sustain the activity.

Creativity: Creativity is the act of turning new and imaginative

ideas into reality. Creativity is characterized by the ability to

perceive the world in new ways, to find hidden patterns, to make

connections between seemingly unrelated phenomena, and to

generate solutions.

Economic: Economic is concerned with the production,

distribution and consumption of goods and services.
Growth: Growth is an increase in size, number, value, or strength

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