Does Micro-Finance Crowdfunding Promote Entrepreneurship in Developing Countries?

The link between innovation and economic growth is well established (Schumpeter, 1934), but entrepreneurship in developing countries is less studied. However, recent research demonstrates that innovation by entrepreneurs is also important for low-income developing countries as for developed countries (Szirmai, Naude, & Goedhuys, 2011). Contrary to the top-down approach of foreign aid, micro-finance crowdfunding websites like Kiva and Zidisha provide capital to developing countries in a new way. This paper examines whether this new model promotes entrepreneurship from two perspectives: social institution and individual innovation. Many researchers have emphasized the proper institutional system as an essential element for entrepreneurship (Hernando de Soto, 2000; Boettke & Coyne, 2003). As argued by de Soto (2000), the lack of legal property rights representational system in many developing economies was the fundamental reason that stymied the transformation of assets ownership into capital, and therefore the property was “dead capital” (p. 30). Without adequate documentation of personal possessions and a legal credit system, even entrepreneurs are equipped with assets and innovative ideas, they are unable to quickly expand production through investment. This paper asks whether a borrowers’ credit and borrowing history on the crowdfunding websites positively relate to the chance of getting crowd funding. If so, then crowdfunding platforms actually help create a property representational system that supports entrepreneurship. A second important dimension of entrepreneurship is “discovery and exploitation of opportunities” (Sahne and Ventakaraman, 2000). A detailed definition and typology of innovation is needed to code innovative practice. Schumpeter (1934) proposed six types of innovative activities: new products, new services, new methods of production, opening new markets, new sources of supply, and new ways of organization. In the later continuation of discussion about innovation, researchers added new elements like marketing and supply chains (Johannessen, Olsen,& Lumpkin, 2001; Kaplinsky & Morris, 2001; Gebreeyesus, 2011). Voeten, de Haan and de Groot (2011) came up with a set of instruments that assess innovation based on newness criteria, value creation criteria and process criteria. A second question is whether more innovative projects have higher chance of getting crowd funding. If so, then crowdfunding platforms could be claimed to promote entrepreneurship. To answer the two questions, a sample of 500 projects will be collected from Kiva, Zidsha, and Babyloan. These websites use different credit rating systems. For instance, for Kiva, field partners give default risk rating; Zidisha uses on-time repayments and lenders’ feedback as credit indications. For the coding of innovation, due to lack of details in most of the descriptions, an entrepreneurial project is coded as innovative if it fits any one of the newness criteria. Regression analysis will be conducted to identify the nature of relations. A preliminary analysis of a small sample has revealed a positive relation between credit rating and chance of getting funded, but a negative relation between innovation and chance of getting funded.