Enhancing entrepreneurship development in Bosnia and Herzegovina through adequate governmental financial support

1. THEORETICAL BACKGROUND OF THE RESEARCHThe problem of financing entrepreneurial activity is probably as old as this activity itself. Many businesses fail due to problems in financing. Mostly, early stage businesses are in need of start-up capital.Literature on financing entrepreneurial activity recognises two main sources of financing entrepreneurial activity: personal resources and financing from external resources. There are numerous factors which influence the use of these sources of financing (e.g. stage of development, age, entrepreneur's gender, development of financial markets etc). Sherman (2005) found that in the initial phase of business development entrepreneurs mostly use personal funds, or rely on government funds.Early stage funding of entrepreneurial activity in the Western Balkan countries is influenced by a number of market failures which are considered to be major obstacles for further entrepreneurship development in this region. Even though the Balkan region has an emerging start-up scene the governments are not sufficiently supporting their development. Government support for entrepreneurs in early stages of entrepreneurial activity is of great importance because most of these businesses are not eligible to apply for commercial bank loans due to formal, and strict procedures, as well as a high risk which is related to the early stages of business operations. In most cases banks are unwilling to consider giving loans to start-ups, which are mostly in need of new capital in order to finance their further growth or even in need of initial capital in order to start a business. According to Aktekin & Sohl (2011), searching for capital for entrepreneurs is a time consuming process that can have serious effects on survival of the business and its growth. Cassar (2004) claims that early stage external funding is important and critical in the early stage of the venture's existence.Lerner (2009) stated that governments have a positive role in "kick-starting entrepreneurship" and their funding is important, especially in times of crisis, because entrepreneurship is a business with increased returns. Even though the general entrepreneurial climate is important, it is equally important that governments "intervene directly in the entrepreneurial process" through fund allocation. Vanacker and Deloof (2013) believe it was the financial crisis which began around 2008 that turned the focus of researchers towards financing and success of business start-ups. Availability of financing for SMEs has also been determined as important for their growth and development (Ou, Haynes, 2006; Cook, 2001). Specific financing strategies are required especially during the start-up phase due to the lack of trading history or higher risks (Berger & Udell, 1998; Cessar, 2004; Huyghebert & Van de Gucht, 2007). However, some authors agree that financing of start-ups cannot be standardized and that the lifecycle/financing approach is not applicable to all SMEs in all industries and of all sizes (Abdulsaleh & Worthington, 2013; Gregory et al., 2005; Berger & Udell, 1998). These findings, however, are opposite to the presumptions of Myer's (1984) pecking-order theory suggesting that internal sources of financing are prioritised during early stages of firm's existence wherein external sources are being considered afterwards. On the other hand, other empirical studies like Abdulsaleh & Worthington (2013), Gregory et al. (2005) led to conclusions that older businesses rely more on internal financing due to the fact that they can accumulate earnings and that internal funds are mostly available for their business operations. A recent OECD study (2015) claims that broadening financing options which are available and accessible to SMEs is a key challenge for policy makers in the quest for fostering their development.Different and often contradictory results of various empirical studies indicate that more scientific attention should be directed towards researching this area. …