Financial development and entrepreneurship: insights from Africa

Abstract

Purpose: One of the main obstacles to the flourishment of African entrepreneurship is financial constraint. 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 financial development on entrepreneurship in Africa. Design/methodology/approach: This study utilizes data of 20 selected countries in Africa over a period of 2006–2017. International Monetary Fund (IMF) data on broad-based financial development were combined with World Bank Entrepreneurship database. This study uses system generalized methods of moments (system GMM) technique and the recently developed dynamic 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 financial development improves the level of African entrepreneurship; and the tendency of financial development to improve the level of entrepreneurship is conditioned on conducive business regulation and strong institutional quality at a specific threshold value. Originality/value: This is one of the few studies that examines the 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 financial system to accelerate the pace of entrepreneurship development.