the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

foreign aid and fiscal governance in melanesia summary recent research suggests that foreign aid is effective at spurring economic growth in recipient countries but its effectiveness is likely to depend upon a number of factors arguably the most important factor determining aid effectiveness is how recipient governments mediate foreign aid inflows this paper investigates this issue for the melanesian countries of fiji papua new guinea the solomon islands and vanuatu for the period 1989 2002 results suggest that foreign aid has led to increases in developmental expenditures and to falls in tax revenues and borrowing results also suggest a very different response to aid grants versus loans

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

economic integration inter and intra industry trade the case of sweden and the ec when trade is heavily restricted a small country may show a false comparative disadvantage in differentiated products at an early stage in the life cycle because firms are confined to a small domestic market an analysis of changes in the pattern of trade between sweden and the ec after the establishment of free trade in manufactures shows that the swedish net export position improved in industries with high rates of growth in demand and turnover of technology the results provide some support for the hypothesis that an initial swedish disadvantage in product cycle goods caused by the limitations of the domestic market was reduced by the free trade agreement i background the decision to create the ec internal market and the recent eea agreement according to which the efta countries are given an opportunity to participate in the european integration process raises questions regarding the integration effects on trade and specialization this process implies the elimination of a number of nontariff barriers such as border controls discrimination against imports in public procurement and technical barriers to trade as well as general deregulation and promotion of competition swedish participation in the internal market will change the volume and structure of swedish trade with the ec it is not clear however precisely what these effects would be would further integration with the common market result in more inter industry trade and specialization according to

the impact of foreign aid on the fiscal behavior of asian ldc governments a comment on khan and hoshino 1992 abstract khan and hoshino 1992 analyze public sector fiscal behavior in the presence of foreign aid using data for five south and southeast asian countries this paper first questions a critical hypothesis test on which khan and hoshino s conclusions depend it then extends khan and hoshino s analysis making explicit both the direct and indirect effects of aid contained within their fiscal response model it argues that a number of khan and hoshino s conclusions do not hold in the context of this representation

the role of comparative costs for determining inter and intra industry trade with developing countries abstract the paper studies intra industry trade of sweden with developing countries it uses a neoclassical two factor multi sector model where it is assumed that goods are differentiated with respect to country of origin in this model the share of intra industry trade between countries with different relative factor prices will be low in sectors with extreme factor requirements i e with very high or very low capital intensity this hypothesis is tested on the share of intra industry trade in sweden s trade with developing countries for a cross section of industries and largely confirmed by the statistical results

the fungibility of us assistance to developing countries and the impact on recipient expanditures a case study of pakistan abstract development assistance continues to be an important source of funds to developing nations donor countries prefer to provide categorical or project aid since it is believed that the typing of aid to a specific project will help to ensure that the funds are used in accordance with the designated objectives development literature indicates however that the ability to tie aid may be illusory specifically recipient nations can cut the ties associated with categorical aid and effectively transform it into purely income augmenting funds i e purely fungible resources the funds legally designated for specific developmental purposes may finance projects whose purposes are not in line with the developmental objective the fungibility of development assistance has received little empirical attention this paper is an effort to fill that gap we formulate an econometric model that explains the response of pakistan s spending for defense public nondefense and private consumption to us assistance within the fungibility framework our results suggest that us assistance to pakistan whether military or nonmilitary is fully transformed into fungible resources with impact on public spending less significant than expected

who bankrolls high tech entrepreneurs abstract where do new technology based firms ntbfs raise outside equity capital to answer that question financial histories were collected from 284 technology based firms founded in new england between 1975 and 1986 financial histories included the year of each round of financing the source the amount and the stage of the financing the 284 firms represented 27 of 1 073 new england ntbfs founded between 1975 and 1986 contained in corptech s corporate technology database one hundred seven 38 were launched with no outside equity investors one hundred seventy seven firms 62 raised 671 million in 445 rounds of equity financing private individuals excluding the founding management team and their relatives were the most common source of equity capital providing 177 rounds of financing for 124 firms ninety firms raised equity from venture capital funds in 173 rounds of financing fewer than 40 firms raised capital from any other single source nonfinancial corporations public stock offerings and other the sample firms raised 76 million from private individuals but almost five times that amount 370 million from venture capital funds public stock offerings accounted for 122 million for all investors the size of a round of financing tended to increase with the stage of the financing overall a typical round of individual investor financing was under 500 000 a typical round of financing from venture capital funds was between 1 million and 3 million public stock offerings typically exceeded 4 million seed and start up financing accounted for 60 of the rounds and 54 of the dollars provided by private individuals as compared to 28 of the rounds and 20 of the dollars provided by venture capital funds the most significant outcome of this research is the conclusion that private individuals and venture capital funds play complementary rather than competing roles in the financing of ntbfs this complementary relationship has two dimensions size and stage at all stages venture capital funds tend to invest substantially more dollars per round than do private individuals second compared to a significantly higher propensity to invest at the seed and start up stages than other investors private investors appear to have longer exit horizons and less risk aversion in fact private individuals provided the seed capital that launched the majority of ntbfs in the sample

r d and internal finance a panel study of small firms in high tech industries since joseph schumpeter economists have argued that internal finance should be an important determinant of r d expenditures yet almost without exception previous empirical studies have not found evidence of such a relation using newly available data the authors investigate this puzzle with a panel of 179 small firms in high tech industries under each estimation strategy they employ the authors find an economically large and statistically significant relationship between r d investment and internal finance their results are consistent with the view that because of capital market imperfections the flow of internal finance is the principal determinant of the rate at which small high tech firms acquire technology through r d copyright 1994 by mit press

mechanisms of the aid curse lessons from south korea and pakistan abstractrecently scholars have argued that far from contributing to development foreign aid hinders development but in the 1960s the east asian countries developed rapidly despite receiving large amounts of aid to examine why aid seems to undermine development in some cases but not in others we conduct a detailed comparison of the mechanisms of the aid curse in south korea and pakistan we show that south korea saw astonishing levels of corruption but this did not hinder its development and pakistan had a strong bureaucracy which did not help it to grow the key difference between the two countries was in the strength of their tax systems foreign aid in the context of underdeveloped tax administration leads to increasing cycles of debt that undermine development when foreign aid arrives in the context of commitment to strong taxation a country can avoid the aid curse

foreign assistance investment and defense a methodological study with an application to israel 1960 1979 this paper develops a method for examination of the relations among outlays on capital formation and national defense and receipts of foreign assistance in developing and other aid receiving countries this model and its results should be of interest to any policy analyst concerned with the effects of aid on the indigenous allocation choices by recipients since it allows one to trace out the effect of aid on these allocative decisions the essence of the method and its novelty is to exploit the price changing feature of foreign aid as seen from the recipient s viewpoint to obtain an estimate of the price responsiveness of the recipient country with the response to prices so determined ownand cross price elasticities with respect to defense investment consumption and so forth can be calculated and the corresponding complementarities or substitutabilities among these categories of demand inferred as will become clear this question is closely related to the question of the extent to which there is a de facto diversion of military or nonmilitary foreign aid to other uses 1 this method is applied to israel chosen because of the urgency of its security and development objectives the availability of data and the magnitude of its foreignassistance receipts however the method is applicable to ldcs in general many of which in a struggle to improve living standards and simultaneously guard against perceived security threats turn increasingly to developed states for assistance the effect of aid on investment and growth has concerned economists for a generation and the possibility that aid might be diverted into consumption has long been recognized as well 2 but trade offs between development and defense especially have concerned economists in recent years e benoit found strong positive relations be

vertical and horizontal intra industry trade a cross industry analysis for the united kingdom a large theoretical literature has emerged directed at explaining the presence of intra industry trade iit one of the distinctions which comes out of these models is that between horizontal iit where goods are differentiated by attributes and vertical iit where goods are differentiated by quality in this paper horizontal and vertical iit in u k trade are disentangled using a unit value dispersion criterion and a range of industry characteristics the paper not only points up the relative importance of vertical and horizontal iit in the united kingdom it also demonstrates how a failure to separate them out can impact on the interpretation of empirical results copyright 1995 by royal economic society

trade barriers multinational involvement and intra industry trade panel data evidence from india the article analyses the effects of trade barriers and multinationals on the intensity of intra industry trade iit in a panel of indian manufacturing industries from 1988 to 1999 we find that the intensity of iit increases with the reduction of trade barriers this is expected as greater competition from imports leads individual plants in the domestic industry to specialize in the manufacturing of unique varieties the analysis suggests that horizontal market seeking multinational activities in the domestic industries exert a negative influence on iit this is consistent with the view that horizontal multinationals displace exports to the host country at the same time our results indicate that iit will be stimulated to the extent that the entry of multinationals induces intra industry specialization we also analyse the role of product differentiation and plant level scale economies in determining iit

venture capital growing pains should the market diet abstract this paper examines recent trends in the venture capital market and current research that explores the impact of these trends high returns in the venture capital industry caused by the surging market for venture backed initial public offerings and recent reductions in the capital gains tax rate have led to dramatic increases in venture capital commitments this rise in fundraising has had dramatic effects on various segments of the venture capital market which may indicate overheating the terms and conditions of venture capital limited partnerships have changed reflecting the growth in demand for venture capital services the share of profits retained by venture capitalists has increased while the restrictiveness of the partnership agreements has eased venture firms are raising substantially larger funds with increasing pressure to find investments thereby moving to later stage investments the price of investments has also responded to the growing desire to increase investment finally institutional investors are increasingly looking internationally for new investment opportunities in venture capital to avoid potential market excesses

intra industry trade with multinational firms recent developments including the analysis of firm level adjustment to falling trade costs have contributed to a revival of interest in intra industry trade iit most empirical work still relies on the standard grubel lloyd measure this however refers only to international trade disregarding income flows stimulated by repatriated profits of multinational firms given the overwhelming importance of the latter this is a major shortcoming this paper provides a guide to measurement and estimation of the determinants of bilateral iit shares from the perspective of new trade theory with multinational firms we develop an analytically solvable general equilibrium model to investigate the impact of investment costs multinational activities and income flows from repatriated profits we also discuss and quantify the bias of the grubel lloyd index associated with repatriated profit flows of multinationals using bias corrected versions of the grubel lloyd index as the dependent variable we demonstrate that the determinants motivated by our theoretical analysis offer important insights into variations in iit shares

financing and advising optimal financial contracts with venture capitalists this paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project without moral hazard it is optimal that both exert effort with moral hazard if the entrepreneur s effort is more efficient less costly than the advisor s effort the latter is not hired if she does not provide funds outside financing arises endogenously this explains why investors like venture capitalists are value enhancing the level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives

angel financing and public policy an overview abstract within the past few years public efforts have sought to encourage individual or angel investors this article provides an overview of the motivations for these efforts it assesses the underlying challenges that the financing of young growth firms pose the ways that specialized financial intermediaries address them and the rationales for public efforts to encourage angel investors the final section raises a set of questions about the practical implementation of these efforts

when bureaucrats meet entrepreneurs the design of effective public venture capital programmes recently public efforts to finance small high technology firms have proliferated we review the motivations for these efforts and make some preliminary observations about their design we explore the underlying challenges that the financing of young growth firms poses the ways that specialised financial intermediaries address them and the rationales for public efforts to finance these companies the final section makes a set of observations about the ways in which the structure of these efforts can most effectively complement private sector activity a frequent fault in programme design is the presumption that technological criteria can be divorced from business considerations when evaluating firms the federal government has played an active role in financing new firms particularly in high technology industries since the soviet union s launch of the sputnik satellite in recent years european and asian nations and many us states have adopted similar initiatives while these programmes precise structures have differed the efforts have been predicated on two shared assumptions i that the private sector provides insufficient capital to new firms and ii that the government either can identify investments which will ultimately yield high social and or private returns or can encourage financial intermediaries to do so in contrast to other government interventions designed to boost economic growth such as privatisation programmes these claims have received little scrutiny by economists the neglect of these questions is unfortunate while the sums of money involved are modest relative to public expenditures on defence procurement or retiree benefits these programmes are very substantial when compared to contemporaneous private investments in new firms government programmes in this arena have been divided between those efforts that directly fund entrepreneurial firms and those that encourage or subsidise the development of outside investors in this paper i will focus on public venture capital initiatives programmes that make equity or equity like investments in young firms or encourage other intermediaries to make such investments in some such programmes such as the advanced technology program and the small business innovation research programmes discussed below the funds are provided as a contract or outright grant while these efforts have proliferated a consensus as to how to structure these programmes remains elusive while the design of regulatory agencies has been extensively studied from a theoretical and empirical perspective little work has

is foreign aid fungible evidence from the education and health sectors this paper adopts a new approach to the issue of foreign aid fungibility in contrast to most existing empirical studies panel data are employed that contain information on the specific purposes for which aid is given this allows linking aid that is provided for education and health purposes to recipient public spending in these sectors in addition aid flows that are recorded on a recipient s budget are distinguished from those that are not recorded on budget and the previous failure to differentiate between on and off budget aid is shown to produce biased estimates of fungibility sector program aid is the measure of on budget aid whereas technical cooperation serves as a proxy for off budget aid the appropriate treatment of off budget aid leads to lower fungibility estimates than those reported in many previous studies specifically in both sectors and across a range of specifications technical cooperation which is the largest component of total education and health aid leads to at most a small displacement of recipient public expenditures

resource fungibility the flypaper effect and the expenditure impact of grants in aid the typical assumption that intergovernmental grants in aid alter a recipient s budget constraint according to the legal provisions of grant programs was first challenged by mcguire 1975 1978 in a model where local officials are able to convert some fraction of conditional aid into pure fungible resources this paper develops a model of local government expenditure decisions based on mcguire s original work and applies it to data for large u s city governments the results lend strong support to the fungibility hypothesis additionally and importantly the results provide very little evidence in support of the so called flypaper effect of unconditional grants this is due to a more appropriate specification of the unconditional aid variable

what drives micro angel investments despite of the significant role of informal venture capital in the financing of new entrepreneurial ventures there is little research explaining the factors determining the propensity of individuals to make microangel investments building on two theoretical frameworks a social psychological theory of planned behavior and an economic theory on the determinants of demand for risky assets in household portfolios we develop a set of hypotheses predicting the propensity of individuals to make informal investments in new businesses owned by others in our analysis we test whether the determinants of micro angel investments are similar when investing in a business owned by a close family member versus more distant business the hypotheses are tested using data from 6007 interviews of finnish adults carried out in the global entrepreneurship monitor program in 2000 2002 the findings show that the theoretical frameworks have more power in explaining investments in firms not owned by close family members the study provides new understanding of the differences in the drivers of different types of micro angel investments

why foreign economic assistance there is general agreement in the economics literature that resource flows among countries in response to market incentives enhance global economic efficiency and welfare in both rich and poor countries it has also been argued that in the presence of capital market imperfections the transfer of resources from developed country governments to the governments of developing countries on commercial terms either directly or through multilateral agencies can normally be expected to be welfare enhancing in both developed and developing countries 1 these arguments do not apply however to official development assistance that involves a substantial grant element two arguments have typically been used in support of transfers that include a grant component one set is based on the economic and strategic self interest of the donor country the second is based on the ethical or moral responsibility of the residents of wealthy countries toward the residents of poor countries both sets of arguments have been the subject of continuous challenge i argue in this article that neither the donor self interest nor the ethical responsibility argument can be rejected on logical or theoretical grounds i also assert that the empirical evidence in support of both the economic and the strategic self interest arguments is exceedingly weak the ethical responsibility arguments impose less burden on the empirical evidence but they are subject to continuous challenge by political theorists and moral philosophers donor self interest

on the measurement of intra industry trade countries or more specifically newly industrialising countries increased in importance as exporters of manufactures over this period some 6o of the overall expansion of trade in manufactures comprised trade within western europe and north america a phenomenon which appears to have increased in importance as a consequence of the growth of trade between manufacturing nations is intra industry trade i e the simultaneous import and export of commodities classified in the same industry or product group although there are considerable difficulties associated with the computation of a meaningful summary statistic of the importance of intra industry trade relative to total trade a substantial amount of evidence now exists to suggest that intra industry trade has increased in importance to the point where it may account for in excess of 6o of total trade in most developed market economies 2 intra industry trade is important for at least two reasons first accurate measurement of pure intra industry trade can give some indication of the importance of determinants of international exchange other than relative factor proportions recent work has for example emphasised the role of preference diversity and decreasing costs despite attempts to generalise the heckscherohlin model neither of these factors can be comfortably accommodated consequently the heckscher ohlin postulate that countries specialise in and export commodities which use their abundant factor intensively is of little value in explaining intra industry exchange secondly there is a possibility that adjustment to trade expansion may be easier when the expansion takes the form of an increase in intra as opposed to inter industry exchange 3 in order to explore either of these issues empirically or to test any of the models of intraindustry exchange which have emerged in recent years 4 intra industry trade has to be measured as accurately as possible the principal complication with measurement is the unknown influence of categorical aggregation this paper discusses alternative approaches to assessing the influence of categorical aggre

categorical aggregation and international trade a comment the central issue of the literature on intra industry trade iit is the extent to which iit is a substantive phenomenon or a statistical artefact due to aggregation greenaway and milner hereafter gm have recently proposed an adjusted index of iit to shed new light on categorical aggregation and they contrast this index with the widely adopted procedure of disaggregating the standard iit index the contrast is a false one gm s disaggregated treatment of the standard index is not the method adopted by the cited earlier studies while gm s adjusted index is the one which these writers did in fact use the usual definition of iit is xj m2 i xj amj where xj and mj are exports and imports of thejth industry for comparability this is conventionally stated as a percentage of total trade

angels and non angels are there differences abstract the market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures this market consists of a diverse set of high net worth individuals business angels who invest a portion of their assets in high risk high return entrepreneurial ventures the emerging consensus of the characteristics of the individual investor is that of a well educated middle aged individual with considerable business experience and a substantial net worth these informal investors appear to prefer investing in the early start up stage of the venture and if given a choice prefer that their investments be located close to home one consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds they are not in terms of their competence in the many areas of venture investing these individual investors range from the successful cashed out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other at the same time little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread or about these non angels propensity to join the fold thus this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing an analysis of the data reveals three groups of high net worth individuals business angels with experience investing in entrepreneurial ventures interested potential investors with no venture investment history but who express a desire to enter the venture investment market and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy business angels and potential investors both the interested and non interested segment share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture as the issues move from the general to the specific divergence in investment attitudes takes place among the two groups but this divergence is in terms of magnitude or intensity rather than in contrasting or opposing views of the process the potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor especially in terms of the dollar amount committed to any one investment while the business angel is more interested than the potential investor across all stages of financing the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing in contrast the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts the potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market for the interested group to increase their interest in providing venture capital these potential investors want assistance in monitoring the performance of the venture investment followed by assistance in pricing and structuring both of these resources relate more to the technical aspects of venture investing and indicate that these are the areas where the potential investor is least likely to have expertise other resources such as finding and evaluating the investment opportunity appear to represent less of a stimulus for the potential investor in many respects interested potential investors act like business angels across several dimensions both consider the later stages of the development of the venture as the preferred stage to invest the business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing the potential investor will commit a smaller dollar amount to any one venture is more inclined to participate with other investors and is more apt to see venture investing as a diversification strategy than is the seasoned business angel

high tech r d subsidies estimating the effects of sematech abstract sparked by concerns about their shrinking market share 14 leading u s semiconductor producers with the financial assistance of the u s government in the form of 100 million in annual subsidies formed a joint r d consortium sematech in 1987 using compustat data on all u s semiconductor firms we estimate the effects of sematech on members r d spending profitability investment and productivity in so doing we examine two hypotheses the commitment hypothesis that sematech obligates member firms to spend more on high spillover r d and the sharing hypothesis that sematech reduces duplication of member r d spending whereas the commitment hypothesis provides a rationale for the government subsidies the sharing hypothesis does not we find that sematech induced members to cut their overall r d spending on the order of 300 million per year providing support for the sharing hypothesis

a theoretical analysis of optimal financing strategies for different types of capital constrained entrepreneurs in this paper we compare two alternative financing strategies that capital constrained entrepreneurs can adopt they can either wait until they raised enough money to complete their project the more conservative strategy or use limited resources to achieve some intermediate milestone before contacting large outside investors such as venture capitalists the more adventurous strategy we examine how the choice of financing strategy is affected by entrepreneurial types life style serial and pure profit maximizing entrepreneur we show that specific entrepreneurial characteristics may ultimately affect the shape of firms as they may pursue different strategies to achieve similar goals the paper generates a number of empirical predictions on security design the interplay between angel and venture capital finance and the professionalization of the venture capital market c 2006 elsevier inc all rights reserved

the fungibility of u s military and non military assistance and the impacts on expenditures of major aid recipients abstract this paper examines the impact of u s military and non military assistance on the allocation of public and private sector spending for eight major recipients over the 1972 1987 period the model assumes that an aid recipient s effective post assistance budget constraint is a priori unknown and must be estimated two versions of the model are tested in version a the data is converted into real u s dollars using official exchange rates in version b the data is converted using purchasing power parity exchange rates provided by summers and heston 1991 major findings are the same for both versions u s aid is highly fungible with a significant portion channeled to the private sector where it finances current consumption relatively more than investment

a cross section analysis of intra industry trade in the u k abstract in this paper the inter industry patterns of intra industry trade in the united kingdom are explored a cross section econometric model is explained and estimated for the year 1977 two samples of 37 and 68 observations are tested using a variety of proxies for features of market structure including market concentration product differentiation and cost conditions the results suggest that a significant proportion of the inter industry variation in intra industry trade can be explained by the model