A better way forward for female entrepreneurs

Achieving gender equality in economic opportunities is a struggle that has many dimensions. Not only is there a pay gap between men and women who are salaried employees, stark gender gaps also exist in the area of entrepreneurship. In particular, more men report being business owners than women, and even when women are business owners, their firms are generally smaller and are less valuable than those owned by men.

Researchers have considered a number of factors that might help explain why a gender gap in entrepreneurship might emerge. The possible explanations include gender-specific approaches to balancing career and family, different choices of business sector in which to operate, a differential aversion to financing one’s business through debt, and greater obstacles for women to access business funding in general. For public policy to be effective in this area, it is crucial that we identify the relative importance of these various possibilities.

In the article, “Entrepreneurship and Gender: Differential Access to Finance and Divergent Business Value,” recently published in the Oxford Review of Economic Policy, Katharina Wiesemeyer and I use unusually detailed German data to try and infer some of the key reasons that gender differences in entrepreneurship arise in Germany and many other countries throughout the world.

The German data, known as the German Socio-Economic Panel (GSOEP), are quite useful because they follow the same individuals over many years and contain information on an individual’s family composition, financial and tangible assets, as well as business ownership status and total business value amongst entrepreneurs who own a business. The GSOEP enables us to more thoroughly examine the relationships between gender, personal wealth, business ownership and business value than previous researchers who were constrained to work with more limited data sources.

One of the main relationships that we study in the German data is the correlation between personal wealth and the likelihood to become a business owner. An individual who wishes to become a business owner often needs financial capital to start a business. This can be from personal savings and other sources of income, such as spousal earnings. A positive correlation between personal wealth and business ownership can indicate that entrepreneurs are liquidity constrained. That is, entrepreneurs have difficulties accessing borrowed funds and must use their own financial resources to start or maintain a business.

In our study, we find that the probability a woman reports being a business owner increases by 7.1 percentage points with a 1% increase in personal wealth. Among males, the corresponding magnitude is only 1.32 percentage points, and is not statistically significant. These results suggest that access to finance may be a substantial impediment to business ownership in Germany, but only for females. In a prior study, I found very similar results using data from the United Kingdom. More restricted access to finance among female entrepreneurs seems to be a key reason for the worldwide under-representation of women in business ownership.

The data also reveal sharp gender differences in the total business value of already existing businesses. On average, male entrepreneurs own businesses that are worth 40% more than those of female entrepreneurs. Moreover, we find that owning a bank loan increases average business value by €96,500 for men and €174,545 for women. This means that obtaining a bank loan has a strong gender-equalizing effect on total business value. Having secured a bank loan is a key determinant of the business value gender gap. The data also clearly indicate that women business owners in Germany are less likely to have secured a bank loan than men.

A NUMBER of initiatives by policymakers and practitioners have already been introduced to try and promote female entrepreneurship. They include training programs, counseling, mentoring, and access to finance on favorable terms. One of our recommendations is that even more attention needs to be given to encouraging business loan applications among female entrepreneurs. It is also important to change perceptions about the barriers to accessing finance. Female entrepreneurs may be discouraged from even applying for a business loan due to an expectation of little chance of securing one.

Another direction to address the problems emanating out of the traditional banking sector is to aid the development of alternative sources of finance, such as crowdfunding. Crowdfunding may be more attractive to female entrepreneurs discouraged from accessing traditional sources. However, there is emerging evidence that crowdfunding may not be as promising as had been hoped. Analysis of the rewards-based platform Kickstarter suggests that while females have a higher success rate in obtaining funding, they tend to raise less finance, and have more success in attracting funding from other females than males. Examination of a Swedish equity crowdfunding platform shows that even female investors are more likely to invest in projects with a higher proportion of male investors.

This suggests that more radical disruption in the market for business loans is sorely needed to help level the playing field for female entrepreneurs. The answer to that call may lie in tokenization and more widespread use of cryptocurrencies which are out of the control of the traditional banking sector. However, governments around the world would need to buck the trend of ever more regulation and restrictions in this exciting area of fintech. The top-down approach of legislators would just result in decision-making power being put back in the hands of the traditional banking industry and continuation of the unacceptable, gender-discriminating status quo.

The writer is a professor at University of London, Royal Holloway and Jerusalem Institute for Market Studies.