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Entrepreneurship and Self-Finance

January 3, 2005

 

Abstract: It is a well-known empirical result that self-finance is an important option for people when financing entrepreneurship. It is, however, not entirely clear what the theoretical explanations for this might look like. In fact, the leading entrepreneurial theories even seem to indicate that questions about the existence and extent of entrepreneurship more or less are disconnected from the question of self-finance. The purpose of this paper is to clarify and distill some distinctive theoretical arguments for why self-finance is so important and to clarify what the barriers to self-finance look like. The decisive theoretical argument is that problems related to individual differences in information, perception, interpretation and implementation always will arise as soon as external financing is considered; such problems will not arise when entrepreneurs are able to rely on self-finance. However, there are barriers to self-finance and they fall into two wide categories, (1) barriers to the building up of privately held wealth, regardless of magnitude, and (2) barriers to the preservation of privately held wealth. Many of these barriers are created by political means and can therefore – here they differ from the problems related to external financing – also be alleviated by political means. The conclusions have clear policy implications.

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