The Impact of Entrepreneurial Finance, Education and Religion on Entrepreneurship

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This post was contributed by Prof Carlo Milana, Prof Helen Lawton Smith and Ning Baines of the Birkbeck Centre for Innovation Management Research (CIMR). The article focuses on a workshop held by the Centre on Friday 15 April titled ‘The Impact of Entrepreneurial Finance, Education and Religion on Entrepreneurship’, sponsored by Wiley

Wiley logoRaising finance is critical for small firms and medium-sized enterprises (SMEs) to survive, innovate and grow. Innovation is typically underfinanced. In this workshop, attention was focused on the influence that entrepreneurial finance and other mitigating cultural factors such as education and religion may exercise on reducing risk in entrepreneurship in the current economic hardship.

Speakers:

  • Jonathan Potter (OECD, Paris) Recent Market and Policy Trends in the Development of Mezzanine Finance and Hybrid Debt-Equity Instruments for SMEs.
  • Victor Martin-Sanchez (King’s College, London) Unemployment and Growth Aspirations: The Moderating Role of Education
  •  Kwame Ohene Djan (University of Agder, Kristiansand, Norway) Does Religious Affiliation Influence the Design of Corporate Governance? Evidence from the Global Microfinance Industry

Chairs:

  • Carlo Milana and Helen Lawton Smith

 

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Mezzanine Finance and Hybrid Debt-Equity Instruments for SMEs

The first speaker Jonathan Potter presented recent and innovative work undertaken by the OECD on the Mezzanine Finance and Hybrid Debt Equity Instruments for SMEs. This is an area of financing that is relatively understudied and is one which is beset by ambiguity in definition. This ambiguity led to a series of challenges to the speaker on the nature and merits of mezzanine finance for SMEs.

Dr Potter explained that the SME sector is characterised by a wider variance of profitability and growth than large enterprises. Survival rate of SMEs is lower. It is difficult to distinguish the financial situation of the firm from its owners. Relations between the firm and its stakeholders are likely to reflect personal relationships to a higher degree than in larger firms. SMEs often obtain funds from informal sources. The problem of asymmetric information between the entrepreneur and the lender is more serious for small firms because of the blurring of the line between the firm and the entrepreneur. Various financial instruments can help overcome the asymmetric information and agency problems. An efficient financial system should have a range of instruments that matches needs of firms. If the right instrument is available for the risk/return profile the market could provide finance for a viable project.

Mezzanine finance is a hybrid instrument – typical mezzanine facility blends several instruments, such as subordinated loan (interest rate above senior loan; principal normally repaid at end as “bullet”), participation in ongoing revenue or profits, or participation in upside share price growth with equity “kicker” (commonly an “equity warrant” allowing purchase of shares at floor price, or equivalent remuneration). It operates in private capital market, in private investment partnerships (with up to about 100 private investors). Funds are supplied by private investors (Limited Partners) – high net worth individuals; family offices; pension funds; other institutions. It has a defined life span (5-10 years) – tend to select investees and do deals in first 3 years, then hold and close fund taking returns at around 8-10 years. At maturity fund, it is liquidated and money returned to investors. Rules are determined by market practice.

However, with uneven presence in OECD countries, commercial mezzanine tends to be focused on larger firms and leveraged buy-outs. It is not generally issued to SMEs with modest returns and which do not want to relinquish control. Public intervention may be needed to stimulate the sector and extend to SMEs, where the private sector does not provide funding. Public intervention mechanisms can be in the form of participation in the market through mandates to private funds; direct provision of funds to SMEs and guarantees/preferential funding of private investment companies.

Mezzanine financing therefore can respond to a market failure in finance for established companies in traditional sectors seeking to grow or effect transformations. It involves features that respond to asymmetric information and agency problems affecting SME finance, allowing higher returns without taking control. It is a relevant niche in the spectrum of finance instruments. Mezzanine finance can fill the gap as the SME owner not required to cede control, can pay the principal at the end, the investor accepts more modest returns but can take a share of the upside. It should lead to more growth in existing SME sector. The public sector can play a role in stimulating this part of the market. Several OECD countries found the instrument valuable, e.g. France, Germany, USA, but in half of OECD countries there was no public mezzanine programme and officials were not familiar with the product.

An issue raised in discussion was about the nature of the UK market and activities of the British Business Bank, particularly given their strong interest in developing this form of finance. It is also clear from the questions asked that there is more research to be done in this field in a number of ways. These include aiding understanding of the extent to which mezzanine can actually impact on earlier stage financing, and how and why it is suitable for firms in some sectors rather than others. And, more evidence was needed on how mezzanine actually operates in some (e.g. European countries) in practical terms and what lessons this might carry forward to future policy.

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Unemployment and Growth Aspirations

Victor Martin-Sanchez’s theme was unemployment, entrepreneurial growth aspirations (EGA) and the moderating role of education. He argued that policies targeting human capital formation and entrepreneurial training contribute not only to enhance opportunity-seeking entrepreneurship, but also to territorial economic performance by enhancing the growth aspirations of entrepreneurs.

His research shows that the characteristics of the individual (founder/entrepreneur) and the environment in which the firm operates can act as drivers of EGA. However, during economic slowdowns, it is not clear how the interaction between entrepreneurs’ background and environmental conditions drives the EGA. The paper aims to investigate how an entrepreneur’s education and training shape the relationship between changes in unemployment rates, a variable that signals the economic and employment conditions, and EGA. Entrepreneurs’ judgmental decisions are actually beliefs or conjectures. The conjectures or beliefs depend on how they think the environment in which their firms operate will evolve. If those beliefs about new products or superior production processes are proved right, the entrepreneurs earn a profit; otherwise, they incur a loss. Through the different education processes, individuals gain knowledge and build mental frames and models used to interpret and make sense of the reality that surrounds them.

Education and entrepreneurship training experiences may enable entrepreneurs to gather and process information more efficiently. Accordingly different levels of education will be expected to moderate differently the way unemployment rate changes influence those entrepreneurs’ growth aspirations. Entrepreneurs with higher education are more likely to readjust accurately their conjectures or beliefs about the potential of their new ventures, in the light of changes in the environment. Individuals can learn opportunity‐seeking processes through the avenue of entrepreneurship training, thereby improving both the number of ideas generated and the innovativeness of those ideas. It has been commonly argued that economic crisis periods may destroy some of the old ways of doing business, while new alternatives for those who are able to identify them and dare to take them. The skills and knowledge gained through training in entrepreneurship help entrepreneurs to identify and pursue better opportunities, even in a difficult economic environment. It is shown that an increase in the unemployment rate reduces EGA. There is a connection between economic conditions and entrepreneurial behavior. The general effect of unemployment rate change is contingent upon the entrepreneurship training of the individual. Knowledge and skills gained by individuals’ opportunity identification and exploitation may vanish the influence of global economic conditions. Opportunity identification is a unique capability that might be developed in parallel with other capabilities.

The implications of the research are that there needs to be improvement in the design of public support policies towards entrepreneurs. A better understanding of the determinants of growth intentions will be relevant for anyone with a stake in growing venture, such as venture capitalist, customers, and suppliers.

Does Religious Affiliation Influence the Design of Corporate Governance?

Kwame Ohene Djan’s take on individual and cultural influences on the availability and use of SME finance was that of the influence of religious affiliation, in particular Christianity, compared to secular lending bodies, on the design of corporate governance. His work is inspired by a previous study that investigated the impact of religion on agency costs finding that religion has a significant negative influence on owner-manager agency costs. He points to the mitigation of regulation of religious affiliated firms by the national banking authorities. He drew on evidence from the global microfinance industry.

Like the other speakers, the importance of temporal context was raised. The context here is the debate which began with Max Weber’s classic work. The Protestant Ethic and Spirit of Capitalism where he claims that the Protestant Ethic which focuses on personal agency and diligence, spurred economic development. Although Weber’s thesis has been disputed the more general idea that certain religious attitudes may have positive implications continues to be discussed and supported. The extensive debate regarding the historical role of religion in the development of modern capitalism sharply contrasts with the meager attentionn that has been devoted to religion in current development research efforts.

The objective of the current research therefore is to investigate how religious affiliation influences the design of corporate governance in social enterprises with evidence from the microfinance industry. By using the random effects model, differences are tested between Christian and secular MFIs along various variables including the regulatory framework, Board Size, Board Meetings per Year the number of Female CEOs and the number of International Directors.

The study used panel data on 403 MFIs based in 73 countries across the countries in the world. Generally, the results indicate that Christian MFIs do not have a slacker governance design. The tests indicate, however, that Christian MFIs are relatively less regulated by national banking authorities.

The speaker was challenged on whether it would be more helpful in aiding understanding of microfinance and region if the results were couched as religious affiliation per se rather than Christianity.

The take away from this workshop is that it is very difficult to get a holistic understanding of financing SMEs in both traditional and high-tech sectors. However, by juxtaposing different cultural perspectives as well as economic provides insights that would not normally be available. Exciting times!

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Cognitive Training in Psychological Wellbeing

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This post was contributed by Jessica Swainston, a PhD researcher under the supervision of Professor Nazanin Derakshan, investigating the effects of adaptive cognitive training on building resilience in breast cancer survivors. Jessica attended Professor Derakshan’s Birkbeck Science Week event on Thursday 14 April, titled ‘How can adaptive cognitive training improve resilience and mental well-being?’

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A Crisis in Psychological Health

Emotional disorders such as anxiety and depression are of increasing prevalence. The world health organisation has recently estimated that 50 million years of work, an annual global loss of £651bn, will be lost to anxious and depressive disorders between now and 2030. This figure is not only critical for the state of the economy, but more importantly is concerning for the future psychological wellbeing of individuals, their families, and the society we live in.

As it stands, current pharmacological and therapeutic treatments have been shown to be only modestly effective in both the treatment and prevention of such disorders. It is imperative then that more research is carried out in order to better understand the underlying mechanisms involved in these conditions. By achieving this, there is hope that we can develop effective interventions to not only treat psychopathology, but further to build resilience against its onset and recurrence.

Building Resilience

So, how do we become more resilient? How do we continue to cope with the ever demanding stresses that society and life place upon us?

Professor Nazanin Derakshan and her team are currently attempting to address this very issue, and was discussed in her captivating talk during the Birkbeck Science week.

Derakshan is of the mind that our ability to flexibly direct where we place our attention, is the key mechanism in regulating our emotions and boosting our psychological resilience. In other words, the better we are at paying attention to our current goal (e.g. Writing this blog post), the less cognitive resources we have available to attend to irrelevant intruding and ruminative thoughts (e.g. ‘What if I fail my PhD?!’). Accordingly, there has been a wealth of research to support this claim.

A multitude of behavioural studies have indicated that individuals with high levels of Anxiety and Depression have inefficient levels of attentional control, which is a critical component of our working memory, a system that monitors the incoming and temporary storage of information. In addition, anxious individuals have been shown to require recruitment of additional cognitive resources, in a compensatory manner, to reach the same performance levels as non-anxious individuals, thus indicating poor processing efficiency and filtering of irrelevant information. That is, anxious individuals must invest more effort in reaching required goals than non-anxious individuals, a factor that will more quickly lead to cognitive and emotional fatigue.

Of further importance, neuroimaging studies have indicated that anxiety and depression are associated with irregular connections between the limbic (emotional) and prefrontal (cognitive) systems of control in the brain. More explicitly, increased activity in the limbic areas have been linked to decreased activity in the prefrontal areas of the cortex, further highlighting the association between inefficient pre-frontal cognition and increased emotional activity.

How can we improve our Attentional Control?

If then attentional control is the key mechanism by which emotional vulnerability can be moderated, how then can this process be targeted?

In a new and exciting line of research, it transpires that there is potential to improve our levels of attentional control through adaptive cognitive techniques that train working memory. For example, a series of studies have shown that improvements in working memory on an adaptive n-back task, in which participants are required to remember the position of a visual or auditory target n-trials back, have been shown at both the behavioural and neural levels. Importantly, gains in working memory abilities have been shown to transfer to other tasks requiring attentional processes, indicating that the training may help to improve cognitive control across varying tasks, not just on the task itself.

Benefits of Cognitive Training in Psychological Health and Sports Performance

So, considering that the well documented link between emotion and cognitive function, can attentional control training decrease anxious and depressive symptomatology? Further, is the training applicable to other circumstances, such as improving anxious states that can interrupt sports performance? Professor Derakshan presented some preliminary findings that show great promise.

As yet, compared to control groups, a course of adaptive attentional control training has shown to result in:

  • Reduced levels of state anxiety
  • Reduced levels of depressive and ruminative symptomatology ( at behavioural and neural levels)
  • A decrease in cancer related thoughts in Breast Cancer survivors
  • Improved tennis performance in a high pressure environment

Cognitive Training as an aid to current therapies

Professor Nazanin Derakhshan

Professor Nazanin Derakhshan

Professor Derakshan raised an interesting point in relation to the future directions and clinical relevance of cognitive training in psychological health. A number of current psychological therapies such as mindfulness and cognitive behavioural therapy are of varied success. This may in part be due to the lack of attentional resources that severely depressed and anxious individuals possess. If one’s attention is poor, how can one easily engage in a 10 week course of psychological therapy which requires focus and concentration?

It can often be problematic. Thus if, as a complimentary treatment, attentional control processes are improved through training, patients will be better enabled to pay attention and gain the most value from their psychological therapy. In fact, one recent study by Course-Choi et al., (2016) showed just this. Results indicated that a combined course of mindfulness and attentional control training showed greater reductions in trait worry, compared to a course of mindfulness by itself.

In sum, Professor Derakshan presented a compelling theoretical framework for improving our cognitive flexibility as a means to build resilience and protect against emotional vulnerability. With this in mind, there is promise for improving psychological health in the coming years. As poignantly remarked by Derakshan,

‘It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change’. – Charles Darwin, 1809.

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The Speech/Song Illusion

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This post was contributed by Rosy Edey, PhD student and graduate teaching assistant in the Department of Psychological Sciences. Rosy attended a Birkbeck Science Week 2016 event on Thursday 14  April – ‘Talk: The Speech/Song Illusion’ – (led by Dr Adam Tierney)

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Sadly all good things must come to an end, and the finale of Birkbeck’s 2016 Science Week was a compelling musical one, by one of Birkbeck’s newest members of the Psychology Department, Dr Adam Tierney. In a humorous and engaging way Adam took the audience through the scientific story of the “evolution of music”. Music seems almost completely purposeless, and let’s face it a little bit strange, so why do we love it so much?

What is music?

Adam placed the first known musical instrument (an intricate bone flute) back 40,000 years, which was way before the first record of written word (5000 years ago), but much later than (a good estimate of) when we first evolved to make vocalisations (400,000 years ago). The absolute origin of music is obviously very difficult to pinpoint – as it is possible (and probable) that way before we built tools – like the bone flute – to make music, we were signing our hearts out in the moonlight.

This questionable timing of the birth of music raises the question: what came first, speech or music? Whichever one came first, if one evolved from the other we would expect music and language to share similar characteristics. Indeed, Adam presented evidence that both the huge varieties of globally spoken languages and music from around the world share common universalities (which at first seemed very unlikely based on the diversity of music that was perfectly demonstrated through a bizarre example of washing machine “music” and also a collection of songs from the playlist from the Voyager I and II spacecraft gold plates).

These shared acoustic qualities included alternating beat patterns, descending melodic contours, and increases in final phrase duration. Using the very complicated sounding “Normalised Pairwise Variability Index” (i.e. jargon for a measure of rhythmic alteration, or a measure of paired stress in phrases) Adam showed there were also commonalities between languages and music within and between specific countries (basically English music sounds English, and French sounds French, but English music/ language does not sound like French music/language). All of these beautiful subtleties hidden in the acoustics of spoken word and music provide vast amounts of data, which signal meaning to the listener. These underlying similarities do hint that music and speech are distant cousins.

Music as Speech with added extras

Playing music with speech can change it into a song; The Jazzy Sarah Palin Interview was a good example of this:

 

And it seems even without music our brains can transform speech into music. Diana Deutsch discovered this phenomenon in 1995, while looping some spoken data.

After several iterations the phrase “sometimes behave so strangely” no longer sounded like speech, and had converted into song (I now cannot even read this phrase without hearing the tune). All the phrases in Adam’s Corpus of Illusion Stimuli turned into singing, but interestingly, the “control” sentences didn’t have the same effect. This illusion appears to be a useful tool to test further the idea of music evolution and ask more detailed questions, such as: “what is required for speech to become song?” and “what mechanisms are going on in our brains when we change speech into song?”

Testing the Science

Dr Adam Tierney

Dr Adam Tierney

Adam has pulled out the acoustic elements that predict what speech phrases are heard as song. He suggests there are two main factors which induce the illusion; increased beat variability and increased pitch intervals. Remarkably, there is large variability between people’s experience, and being a trained musician doesn’t improve your ability to detect the illusion.

So what is going on in the brain? Adam’s hunch was that these ‘musical’ phrases are processed in the same way as when listening to speech, but with a little added extra. And this does in fact seem to be the case, we activate a similar network to when we hear normal speech, but extra activation in regions that are highly pitch sensitive (e.g. Heschl’s Gyrus – a very early part of the auditory system), and also motor regions (e.g. precentral gyrus – which hosts a map of the body, but specifically the mouth region) when we listen to the ‘song’. Interestingly, there were no regions that were more active for just speech over the song phrases. Adam suggested participants were imagining singing and tapping along to the beat, and processing the pitch more deeply in these ‘song’ phrases. This evidence neatly fits the behavioural data, showing that phrases that have a strong rhythm and more of a melody are processed differently by the brain, which results in them being distorted from speech into song.

Although it is virtually impossible to know the true origin of music, Adam managed to make quite a convincing case that song is just speech with some ribbons on, and quite possibly did evolve from speech.

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Investigating the moon and meteorites

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This post was contributed by Dr Jennifer Harris, postdoctoral researcher in Birkbeck’s Department of Earth and Planetary Sciences. Dr Harris attended two Birkbeck Science Week 2016 events on Tuesday 12 April: Analysing the Moon (led by Dr Louise Alexander); and Looking Inside (led by Natasha Almeida)

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What small fragments of rocks can tell us about the moon, the formation of the Solar System and even the early Milky Way was the subject of the second half of Birkbeck Science Week 2016’s Planetary Science evening on Tuesday 12th April.

Dr Louise Alexander, a postdoctoral researcher and Birkbeck student alumna based in the UCL/Birkbeck Centre for Planetary Sciences, and Natasha Almeida, a Birkbeck PhD student and Meteorite Curation Assistant at the Natural History Museum spent an entertaining and informative hour detailing just how much could be gleaned from tiny fragments of extra-terrestrial rocks, and how exactly they go about doing this in their own research.

Apollo Moon samples

Dr Louise Alexander

Dr Louise Alexander

The first half of the session was dedicated to the Moon with Louise Alexander giving us an introduction to the lunar samples brought back by the Apollo astronauts that she uses in her research.

As anyone who’s ever spent any time looking at the full moon can tell you, the moon can be divided into two rough units, one bright and one dark. Lunar samples also fall into these two categories representing the dark Mare basalts and the brighter highland rocks together with a third category of pyroclastic samples. Information from these samples can be used to provide evidence to support the Giant Impact Formation theory of the moon, tell us about the moons internal structure and help to validate surface age estimates from crater counting techniques.

The particular samples that Louise’s work has focused on are all Mare Basalts and are fragments only millimetres in size. Key instruments for extracting data from such small samples are Electron Microprobes, like the one housed by Birkbeck Department of Earth and Planetary Sciences, and Gas Mass Spectrometers.

These instruments enable scientists to peer inside tiny fragments of rock and identify the different mineral crystals that comprise it. Despite the size of each sample, by looking at a large number of them Louise and her collaborators are able to build up a picture of the petrological variety that exists within the Apollo 12 site.

It’s now been over 40 years since the last samples were brought back from the moon and so it’s in the interests of those scientists lucky enough to be in possession of any of them to squeeze as much data out of them as possible. Having used them to gain an understanding of the history of the moon Louise and her colleagues are now investigating the possibility that these samples could have recorded evidence of high energy galactic events over the past few billions of years as the moon has moved through the Milky Way.

This research is still in its infancy and Dr Alexander was keen to point out that the best samples for doing this would be ones from several metres beneath the lunar surface. Sadly for this research no such samples have ever been collected, but if we were to send people back to the moon they could be!

Mapping inside meteorites

Natasha Almeida

Natasha Almeida

An important consideration of the analysis that was described in the first half of the session was that many of the techniques resulted in the destruction of the sample. However not all analysis has to be destructive as we would find out from Natasha Almeida. As a curator Natasha has a professional bias towards preserving her unique and precious samples, whilst as a researcher, still wanting to exploit them as much as possible.

The Natural History Museum in London is home to the oldest collection of meteorites in the world and makes crucial loans of their 4870 samples to researchers across the globe. These meteorites are fragments of the surfaces of Mars and the Moon, and surfaces and interiors of numerous asteroids, some of which have been identified and some of which have not. In order to analyse these rare rocks Natasha uses equipment most of us will have some experience of, an X-Ray scanner, more specifically a micro-CT scanner. Just like a medical CT the NHM’s micro-CT makes use of X-rays to scan through the rock and build up a 3D picture of its interior.

There are some clear differences however; primarily the strength of the beam and the duration of the scan. Rock is more impervious to X-Rays than flesh and bone requiring a much stronger beam and a longer scan time. Each scan results in a 3D image with a resolution of down to 5mm/voxel (a voxel is a 3D pixel) and around 20 – 30Gb of data.

With these images Natasha has extracted a variety of information from numerous meteorites including spotting internal structures and features that would otherwise only be found by cutting into the sample, tracing cracks to establish the possibility of internal contamination by the atmosphere of the Earth and mapping out internal fractures and pores. This final result is especially key for meteorites as the historical methods for working out the porosity of a rock sample involve dunking it in a bucket of water. This method is a purely quantitative one that tells you how much space is in the rock but not how it is distributed unlike micro-CT.

In addition submerging your sample in a tank of water definitely counts as a high contamination risk, something meteoriticists and curators try and avoid like the plague! Unlike the electron microprobe analysis discussed in the first half of this session micro-CT for meteorite analysis is a technique that is still in its infancy but it certainly holds a lot of promise, especially if we have to wait another 40 years for people to bring us back more samples from another planetary body.

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