Impact of Venture Capital Financing on SMEs’ Growth and Development in Ghana

Abstract

SMEs’ contributions to economic development both in developing and developed countries have been well documented in the economic literature. SMEs have been acknowledged as a catalyst for economic development. Furthermore, SMEs are the main engine for employment creation, economic growth, innovation, poverty alleviation and income distribution in both developed and developing countries. Most economic and management literature has documented empirical studies on the impact and drivers of venture capital financing in developed countries such as the US and Europe, but few empirical studies exist on developing countries, especially Ghana. This is because the industry is new and also due to the lack of data. Thus, this study investigates the impact of venture capital financing on SMEs’ growth and development in Ghana. The study also examines the factors that drive venture capital investments activity in Ghana, and identifies the factors which influence SME owners’ accessibility to venture capital financing in Ghana. The study applied both propensity score matching (PSM) and difference-in-difference (DiD) estimation techniques to determine the effects of venture capital financing on SMEs’ growth and development in Ghana. The, result shows a positive and significant correlation between venture capital financing and SMEs’ growth in the context of employment and sales in Ghana. The study used panel data analysis to examine the factors, which drive venture capital investments activity in Ghana. The results suggest that GDP growth rate, labour market rigidities, capital gains taxes and institutional quality are the key drivers of the venture capital industry in Ghana. Next, we also applied a logit regression model to identify and analyse the factors which influence SME owners’ accessibility to venture capital financing in Ghana. Our findings show that SME owner/managers’ socio-demographic factors and macroeconomic variables such as gender, education, geographical location, business plan, social networks and interest rate charges influence SME owner/managers’ ability to obtain venture capital financing.