Summary |
In this book authors outline three important mechanisms through which frictions in the capital markets lead to financing constraints for entrepreneurs. Perhaps the most important factor governing the ability of startups to raise sufficient capital for their projects is the depth of the local capital markets. This depth is therefore a natural starting point for measuring financial market development for funding new capital-intensive projects, through metrics like industries sectors with a greater need for external finance develop faster in countries with deeper capital markets. Fisman and Love find that, in particular, startup firms struggle with overcoming weaknesses in financial market development, even where established firms are able to use trade credit as a substitute for formal financing.
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