When capital does not matter: How entrepreneurship training buffers the negative effect of capital constraints on business creation

Abstract

Research summary: Entrepreneurship training is an effective means to promote business creation. We examine the effect of entrepreneurship training in conjunction with capital constraints, which entrepreneurs frequently experience in the context of developing countries and emerging economies. We develop a theoretical model that explains how entrepreneurship training attenuates the negative effect of capital constraints on business creation by developing financial mental models. To test our model, we conducted two longitudinal, randomized field experiments in developing countries. Our studies show a moderation effect of entrepreneurship training on the relationship between capital constraints and business creation. Results reveal that financial mental models mediated this moderation. The study demonstrates the role that entrepreneurship training plays in dealing with capital constraints in entrepreneurship in developing countries and emerging economies. Managerial summary: A major barrier for entrepreneurship is capital constraints. In the context of developing countries and emerging economies, where people experience severe capital constraints, the common thinking suggests improving access to capital as the major solution for overcoming capital constraints in business creation. Our study provides empirical evidence for a different point of view: It emphasizes the importance of entrepreneurship training as an effective means to cope with capital constraints when starting businesses. Our findings show that entrepreneurship training reduces the negative effect of capital constraints on business creation through financial mental models. This implies that entrepreneurship training improves participants' financial mental models and hence supports them in starting businesses despite capital constraints. Consequently, we recommend promoting entrepreneurship training to overcome capital constraints in business creation.