Microenterprises as the growth engines in economies - The modeling of microenterprises in the existing growth theories and the real life survival from an innovation to a successful entrepreneurial venture

Abstract

Microenterprises and new knowledge are regarded as important growth drivers today. The objective of the thesis is to consider whether the existing theories take the microenterprises and new knowledge into account in the assumptions and in the models themselves. The traditional neoclassical growth theory by Solow and the more modern one, the endogenous growth theory are chosen as the theories to begin with. It is noticed that neither of the theories take into account the growth drivers proposed by literature and empirical research. As a result, the modified endogenous growth theory, the endogenous growth theory of entrepreneurship is introduced and discussed in detail.

The endogenous growth theory of entrepreneurship assumes that as a consequence of new, spilled over knowledge, entrepreneurial opportunities are created. Thus the model makes the important assumptions that new knowledge needs a mechanism by which it transforms into opportunities, commercialized products and ultimately into profits and economic growth. The mechanism is a new enterprise.

However the endogenous growth theory of entrepreneurship depicts the real growth factors better than its predecessors, the assumption underlying the model that microenterprises are the growth factor brings new deficiencies. The model does not take into account the decision of becoming an entrepreneur and the factors affecting that decision. The most important deficiency is that the financial situation is extremely difficult for microenterprises. The traditional lending institutions, banks, and the formal venture capitalists refuse to lend capital to such high risk ventures. As the thesis proposes, business angels are usually the only option for the microenterprises to receive investment capital that they need for growth. It could be advantageous for the endogenous growth theory of entrepreneurship to take into account also the financial situation of the microenterprises since it affects the establishment, success, growth and disappearance of such enterprises.

The thesis proposes that informal venture capitalists are the main source of financing for microenterprises and that the venture capital markets are inefficient since demand exceeds supply clearly. Actually, the findings are so convincing that the thesis proposes that often without business angel capital, microenterprises cannot grow and thus much growth potential also at the economy level is wasted. Business angels clearly contribute to economic growth.

The final objective is to propose that the hands-on involvement of business angels actually enhances the growth rates of the investee microenterprises. The source of the value added is the business angels’ accumulated human and social capital. By participating with the investee enterprise, business angels perform particular value adding roles which increase the firm growth rate even more. The basis for the argumentation is on the notion that the new entrepreneurs lack all kinds of economical skills; financial, sales and marketing, management, strategic viewpoints as well important networks, among others.