Financial Constraints and Entrepreneurship: Evidence from the Thai Financial Crisis

Poorly functioning financial markets can limit entry of new firms and lead to inefficient production in existing firms. Small-scale entrepreneurs that have limited access to formal financial markets may be particularly affected by financial constraints. Despite this, small entrepreneurial firms are an important source of innovation, jobs and economic growth in both developed and developing countries. In the U.S., 44 percent of the private work force is employed in small firms, which account for approximately 50 percent of non-farm gross domestic product (GDP). Striking similarities exist between small firms in the U.S. and those in developing countries. In Thailand, for example, small firms employ 60 percent of the work force and account for approximately 50 percent of GDP. Investment from banks and other formal financial institutions is typically limited in small firms. Thus, in both the U.S. and Thailand, two-thirds of the initial investment in small firms comes from savings and funds from family and friends.