Determinants of business and financial network formation by Japanese start-up firms: Does founders’ human capital matter?

Abstract

Business start-ups are considered to make major contributions to economic growth. However, most lack the internal business resources necessary for survival and growth. Therefore, business and financial networks that provide business opportunities and external resources are essential for the post-entry performance of start-ups. Although preceding studies examine such networks, most do not explicitly investigate the determinants of network formation. Against this background, the present chapter argues that the formation of business and financial networks by start-up firms depends on founders’ human capital, measured in terms of founders’ educational attainment and business experience. This hypothesis is empirically tested using a large unique company database in Japan. Moreover, the focus is not only on the size of such networks, but also on their quality, which is measured based on the nature of major partners. The empirical results show that lengthy industry experience of 10 years or more on the part of the founder has a significant positive effect on the size of both business and financial networks, while having a university education positively affects both the size and quality of business and financial networks. The analysis further shows that a founder’s specific strengths and personality traits also significantly affect network formation. No distinct differences are found between the determinants of business and financial networks.