Financing, Regulatory Costs and Entrepreneurial Propensity Yuen-Ping Ho Poh-Kam Wong ABSTRACT. In this paper, we compared the availability of different types of financing sources to address the issue of capital availability to entrepreneurial propensity and we scru- tinise the influence of business costs by utilising a new com- posite index using data from the World Bank’s Doing Business Database. The availability of three types of financing sources was analysed: traditional debt financing, venture capital financing, and informal investments. The study’s findings show that only informal investments have statistically significant influence on entrepreneurial propensity. Regulatory business costs were found to deter opportunity driven entrepreneurship, but had no impact on necessity entrepreneurship. KEY WORDS: business cost, entrepreneurial activity, financing, informal investment, venture capital. JEL CLASSIFICATIONS: G24, L26, M13. 1. Introduction In examining the determinants of entrepreneur- ial propensity, the entrepreneurship literature is rich in studies that have focused on the psychological and demographic characteristics of individual business founders. More recently, researchers such as Specht (1993) have moved from the ‘‘traits’’ approach, to adopt a ‘‘rates’’ approach that focuses on factors that influence organisational formation at a more aggregated industry or national level. In this paper, we examine two such environmental factors that may act as entry barriers and negatively influ- ence the rate of new firm creation in an econ- omy: capital requirements and regulatory business cost. We study the influence of capital requirements by analysing the availability of financing sources that might ameliorate the problem of high capital requirements faced by entrepreneurs. To examine the impact of regu- latory costs, we utilise data on government regulation of business registration. The literature on industrial organisation and strategic management has established that a number of factors can deter potential new ven- tures from being formed despite the existence of market opportunities. Empirical studies have found that high entry barriers deter new venture entry (Dean and Meyer, 1996). The use of multiple approaches and measures of entry barriers in prior empirical studies has led to some disagreement on which types of entry barriers are the strongest deterrent. Neverthe- less, there is consensus that the extent of entry barriers will relate negatively to the extent of new firm formation. A more detailed overview of the relevant theoretical and empirical litera- ture on entry barriers is presented in Section 2.1 of the literature review. Our choice to study capital requirements and regulatory costs is motivated by studies that have found these two factors to be important in deterring entry of new firms. The deterrent effect of government-imposed costs on new firm entry has been observed in several studies such as de Soto (1990), Klapper et al. (2004) and Desai et al. (2003). Capital requirements deter new firm entry in two ways. Firstly, certain compli- cated production processes need large amounts of capital that few entrepreneurs are capable of acquiring, as discussed by economists such as Bain (1959) and Koch (1974). Secondly, capital requirements deter entry of new firms that have limited access to capital (Van Auken, 1999). A more detailed discussion of the pertinent litera- ture on capital requirements and regulatory costs as entry barriers is presented in the litera- ture review in Section 2. Final version accepted on October 2006. Yuen-Ping Ho, Poh-Kam Wong Entrepreneurship Centre National University of Singapore Singapore E-mail: yuenping@nus.edu.sg Small Business Economics (2007) 28:187–204 Ó Springer 2006 DOI 10.1007/s11187-006-9015-0