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The impact of financial and human capital on the performance of an entrepreneurial business

Bachelor thesis research by Iffat Ngoesmin 

In June 2016, Iffat Ngoesmin graduated from the Tilburg School of Economics and Management at Tilburg University. He followed the bachelor Business Economics and wrote his bachelor thesis in the area of performance of entrepreneurs.

When managing an entrepreneurial business, both financial and human capital are regarded as key factors for its successful development. The daily business performance of an entrepreneurial business requires financial capital, which can be acquired externally through public and private investors. Literature suggests that human capital, enhanced through education and training, is also an important element in the success of a company (Becker, 1993). The problem arises in determining whether the investment in human capital does actually influence the performance of a firm. Considering financial and human capital as the independent variables, and the performance of an entrepreneurial business as the dependent variable, this thesis looks to investigate whether both of these forms of capital contribute to an enhanced business performance.

This paper attempts to determine the impact of financial and human capital on the performance of an entrepreneurial business. Both the entrepreneur and the entrepreneurial business are entities involved in the firm’s value creation process, where entrepreneurial businesses are created by entrepreneurs. The business performance is influenced, on one hand, by the types of financial capital that a business can access: private equity funding such as business angels, public funding, or venture capital. On the other hand, human capital is a major factor in generating future growth and prosperity (Hansson et al, 2004), and it can be obtained through investments in schooling or training (Unger et al., 2009).

In revealing the differences regarding the level of support of financial resources and human capital towards the performance of entrepreneurial businesses, this investigation collected its data by performing a literature review.

Referring to several measures including growth and profitability, the findings suggest that financial and human capital affect the performance of an entrepreneurial business favorably. The investigation shows a difference in perception by different kinds of entrepreneurs: lifestyle entrepreneurs, for instance, perceive performance as self-fulfillment, and the social aspect is valued more than the monetary benefits, especially by female entrepreneurs. The study also indicates that financial capital, divided into private equity funding and public funding, has a positive effect on the business performance of large firms but not for smaller companies, since successful small businesses might invest using retained earnings. Private equity funding has an advantage in the fact that, especially from venture capital, the investor contributes to the business with managerial inputs. For public funding, debt is the go-to source of financial capital for an entrepreneur, since it allows the entrepreneur to maintain himself/herself in full control of the business. Human capital also has a positive impact and contributes to performance through characteristics such as educational level, prior experience in the industry, and whether an individual received training. Knowledge and skills appeared to be the foremost characteristics of human capital.

Ultimately, this study shows evidence that both financial and human capital have a positive impact on the performance of an entrepreneurial business, and that an entrepreneur should consider both these key elements when making investments that could enhance the performance of his/her company.

 

References

Becker, G.S. (1993). Human capital: a theoretical and empirical analysis with special references to education. Chicago: University of Chicago Press

Hansson, B., Johanson, U., & Leitner, K.-H. (2004). The impact of human capital and human capital investments on company performance. Evidence from literature and European survey results. Cedefop Reference series, 54, 264-319

Unger, J.M., Rauch, A., Frese, M., & Rosenbusch, N. (2009). Human capital and entrepreneurial success: A meta-analytical review. Journal of Business Venturing, 26, 341-358