CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction
This chapter provided existing literature about human capital and economic performance, it
also highlights concepts, ideas and opinion from authors, experts, and theoretical perspective,
it also shows past and empirical findings that involve secondary data obtained from
textbooks, journal and the internet.

2.1 Definitions of Human Capital

Sullivan and Sheffrin (2003) define human capital as the stock of competences, knowledge
and personality attributes embodied in the ability to perform labor as to produce economic
value.

Human capital represents the investment people make in themselves or by their organizations
that enhance their economic productivity.
Human Capital theory was proposed by Schultz (1961) and developed extensively by Becker
(1964), Schultz (1961) in an article entitled "Investment in Human Capital" introduces his
theory of Human Capital. Schultz argues that both knowledge and skill are a form of capital,
and that this capital is a product of deliberate investment. The concept of human capital
implies an investment in people through education And training. Schultz compares the
acquisition of knowledge and skills to acquiring the means of production.
The difference in earnings between people relates to the differences in access to education
and health. Schultz argues that investment in human capital leads to an increase in human
productivity, which in turn leads to a positive rate of return.

Becker (1964) in his book entitled "Human Capital views human capital as similar to
physical means of production such as factories and machines. Human capital is a means of
production into which additional investment yields additional output. Human capital is
substitutable but not transferable like land, labor, or fixed capital. Bruderl et al. (1992) were
the first researchers to fit human capital theory in the entrepreneurial context by arguing that
although the general application of human capital is on employees, there is no reason why it
should not apply to entrepreneurs as well. Accordingly, entrepreneurs with higher general and
specific human capital can be expected to show higher levels of performance than those with
lower levels of general and specific human capital.
This is termed as entrepreneurial human capital. According to Hessels and Terjesen (2008),
entrepreneurial human capital refers to an individual’s knowledge, skills and experiences
related to entrepreneurial activity. Entrepreneurial human capital is important to
entrepreneurial development. Ganotakis (2010) used the Resource Based Theory (RBT) to
explain the importance of human capital to entrepreneurship. According to RBT, human
capital is considered to be a source of competitive advantage for entrepreneurial firms.

Economist’s Perspective: Human capital refers to the knowledge, skills, and abilities
possessed by individuals that contribute to their economic productivity and potential for
future earnings. (Becker, G. S. (1964). Human Capital: A Theoretical and Empirical Analysis,
with Special Reference to Education)
Sociological View: Human capital encompasses the social and cultural competencies,
including communication skills, social networks, and cultural awareness, that individuals
acquire through education and socialization, enhancing their ability to navigate and succeed
in society. (Bourdieu, P. (1986). The Forms of Capital)
Management Theory: Human capital denotes the collective knowledge, experience, and
expertise of an organization’s workforce, which can be leveraged to achieve strategic
objectives and drive innovation. (Barney, J. B. (1991). Firm Resources and Sustained
Competitive Advantage)
Education Context: Human capital represents the educational attainment, cognitive abilities,
and lifelong learning capabilities of individuals, which are essential for personal
development, economic mobility, and societal progress. (Becker, G. S. (1964). Human
Capital: A Theoretical and Empirical Analysis, with Special Reference to Education)
Human capital encompasses the skills, training, and qualifications possessed by workers that
contribute to their productivity, employability, and potential for earning higher wages in the
labor market. (Mincer, J. (1958). Investment in Human Capital and Personal Income
Distribution)
Human capital encompasses the psychological attributes, such as motivation, resilience, and
adaptability, that enable individuals to effectively utilize their knowledge and skills to achieve
personal and professional goals. (Sternberg, R. J. (1996). Successful Intelligence: How
Practical and Creative Intelligence Determine Success in Life)
Human capital includes the physical and mental health, as well as the healthcare knowledge
and behaviors, of individuals, which are critical for maintaining productivity, reducing
healthcare costs, and improving overall well-being. (Grossman, M. (1972). On the Concept of
Health Capital and the Demand for Health)
Human capital refers to the technical skills, expertise in emerging technologies, and
innovative thinking of individuals, which drive technological advancement, digital
transformation, and competitiveness in the technology industry. (Brynjolfsson, E., & McAfee,
A. (2014). The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant
Technologies)
Human capital represents the investment in education, training, and healthcare made by
governments and societies to enhance the knowledge, skills, and well-being of their citizens,
leading to economic growth, social development, and reduced inequalities. (World Bank.
(2019). World Development Report 2019: The Changing Nature of Work)
Environmental Sustainability: Human capital encompasses the environmental awareness,
ecological literacy, and sustainable behaviours of individuals, which are essential for
promoting environmental stewardship, addressing climate change, and ensuring the long-term
viability of ecosystems. (Stern, P. C. (2000). Toward a Coherent Theory of Environmentally
Significant Behaviour.

2.1.1 Social Capital

Wu (2008) points out that there is lack of consensus on a precise definition of social capital.

Acquaah (2008) defines social capital as the actual and potential resources embedded in
Networking relationships that are accessed and used by actors (for example, managers of
business enterprises) for actions (for example, conduct of enterprise business activities).
Baker (1990) defines social capital as resource that actors derive from specific social
structures and then use to pursue their interests; it is created by changes in the relationships
among actors. Acquaah (2008) notes that social capital can be divided into internal and
external social capital. While internal social capital deals with the structure and social
networking relationships among actors (that is, individual members) within a system or
organization, external social capital focuses on the structure and social networking
relationships. According to Premanatne (2002), social capital theories include the transaction
cost theory, resources dependency theory and social network theory. Premanatne (2002)
argues that one of the widely used theoretical approaches to study enterprise social capital is
the transaction cost theory. A transaction means a transfer of a good or a service between
technologically separable interfaces. Transaction costs means all costs involved in a transfer
of goods and services from one unit to another. Commons (1931) and Coase (1937)
introduced the idea that transactions form the basis of economic thinking. Commons argues
that individual actions are really transactions instead of either individual behavior or The
exchange of commodities. Williamson (1981) extended the theoretical framework of
transaction costs by demonstrating that transaction cost economics is used to explain a
number of different behaviours such as day to day buying. This involves considering as
transactions not only the obvious cases of buying and selling and emotional interactions.

According to Williamson (1981), the determinants of transaction costs are frequency,

specificity, uncertainty, limited rationality, and opportunistic behavior. Premanatne (2002)
notes
That transactions are characterized by high asset specificity, small numbers bargaining and
Uncertainty. Given these characteristics, market transactions tend to become prohibitively
costly.

In such a situation, firms attempt to overcome transaction costs by vertical integration or of

Looking for other alternatives to the market. Accordingly, small firms in particular have to
Cooperate with other organizations to minimize transaction costs. Pfeffer and Salanick (1978)

Introduced the Resources Dependency Theory (RDT). RDT focuses on how the external
Resources of organizations affect the behavior of the organization. According to the RDT,
Successful performance of a firm depends on resources and supporting networks. The
resources And supports are, particularly important for small firms who have to depend on
some external Actors. Firms are linked to their environments by federations, associations,
customer-supplier Relationships, competitive relationships, and a social-legal apparatus that
define and control the Nature and limits of these relationships as well. According to Barnes
(1954), social network Theory views social relationships as consisting of nodes and ties.
Nodes are the individual actors Within the networks, and ties are the relationships between
the actors. Premaratne (2002) and Jaafar et al. (2009) observe that social relationships are
crucially important to the Entrepreneurial process because the information needed to start and
grow a business is passed To the entrepreneur basically through the existing social networks
of friends. Entrepreneurs Must build reputation-enhancing relationships with outside resource
providers who are willing To share valuable information, technology goods, and finance.

Uzzi (1999) demonstrates that the closeness of relationships range from between arm’s length
to an embedded one. Arm’s length ties are characterized by lean and infrequent transactions.
They function without prolonged personal or social contact between actors. Embedded ties or
relationships create long-term social contacts.
Sociological Perspective: Social capital refers to the network of social relationships, norms of
reciprocity, and trust within a community or society, which facilitates cooperation,
collaboration, and collective action for mutual benefit. (Putnam, R. D. (1995). Bowling
Alone: America’s Declining Social Capital)
Economic Analysis: Social capital encompasses the interpersonal connections, shared values,
and social trust that enable individuals and groups to access resources, information, and
opportunities, leading to enhanced economic outcomes and overall well-being. (Coleman, J.
S. (1988). Social Capital in the Creation of Human Capital)
Political Science Perspective: Social capital denotes the relationships, networks, and civic
engagement within a society, which empower citizens to participate in political processes,
foster democratic governance, and promote social cohesion. (Putnam, R. D. (2000). Bowling
Alone Revisited: The Role of Social Capital in Generating Social Change)
Community Development: Social capital represents the social cohesion, collective efficacy,
and sense of belonging within a community, which empower residents to address local
challenges, promote social inclusion, and enhance quality of life. (Fukuyama, F. (2001).
Social Capital, Civil Society, and Development)
Organizational Behavior: Social capital encompasses the relationships, trust, and shared
norms among members of an organization, which facilitate communication, collaboration,
and knowledge sharing, leading to improved performance and innovation. (Nahapiet, J., &
Ghoshal, S. (1998). Social Capital, Intellectual Capital, and the Organizational Advantage)
Healthcare Framework: Social capital includes the social support networks, community
cohesion, and collective action for health promotion and disease prevention, which contribute
to improved health outcomes and reduced healthcare disparities. (Kawachi, I., & Berkman, L.
F. (2001). Social Ties and Mental Health)
Environmental Sustainability: Social capital encompasses the collaborative networks,
collective action, and community resilience in addressing environmental challenges, such as
climate change, resource management, and biodiversity conservation. (Pretty, J., & Smith, D.
(2004). Social Capital in Biodiversity Conservation and Management)
Education Context: Social capital refers to the relationships, networks, and social resources
available to students, which support academic achievement, social integration, and positive
youth development within educational settings. (Coleman, J. S. (1988). Social Capital in the
Creation of Human Capital)
Urban Planning: Social capital denotes the social connections, trust, and community
engagement within urban neighborhood, which promote social cohesion, neighborhood
revitalization, and sustainable urban development. (Jacobs, J. (1961). The Death and Life of
Great American Cities)
International Development: Social capital represents the interpersonal relationships, trust, and
social norms within societies, which are considered critical for poverty reduction, economic
development, and inclusive growth in developing countries. (Woolcock, M. (1998). Social
Capital and Economic Development: Toward a Theoretical Synthesis and Policy Framework)

2.1.2 Financial Capital

According to Van Praag (2003), financial capital includes debt and equity. This is known as
capital structure. Sogorb Mira (2002) points out that the most relevant capital structure
theories. That explain the capital structure of small and medium enterprises (SMEs) are those
related to static trade-off, adverse selection and moral hazard (agency theory) and the pecking
order theory. Andree and Kallberg (2008) point out that the genesis of modern capital
structure theory lies in the work of Modigliani and Miller (1958) in their famous proposition I
often referred to as the “irrelevance theorem”. The theorem suggests that, under certain
perfect market assumptions,
Such as absence of taxes, bankruptcy costs, agency costs and asymmetric information, the
value of the firm is unaffected by how the firm is financed. This implies that the choice of
capital structure does not affect a firm’s market value. It is the assets of a firm that determine
the value of the firm and not the way by which these assets are financed. The initial perfect
market assumptions, on which the 1958 theory of Modigliani and Miller was based, were
later reviewed in 1963 with the introduction of the tax benefits of debt. This is attributed to
the fact that a perfect market does not exist in the real world. Since interest on debt is tax-
deductible, thereby creating tax savings for the borrower, it becomes possible for firms to
minimize their costs of capital and maximize shareholders’ wealth by using debt. This is
known as the leverage effect of debt (Modigliani and Miller 1963). According to Miller and
Modigliani (1963), a firm should have 100% debt in its capital structure. This way the firm
can take absolute advantage of the tax shield.

Scott (1972) and Kraus and Litzenberger (1973) point out that theoretically, 100% tax shield
does not exist in reality because of distress costs. Therefore, the optimization of capital
structure involves a trade-off between the present value of the tax rebate associated with a
marginal increase in leverage and the present value of the costs of bankruptcy. According to
Stiglitz and Weiss (1981), agency problems such asymmetric information and moral hazards
can impact on the availability of credit and hence the capital structure of SMEs. Stiglitz and
Weiss termed this phenomenon credit rationing. According to Myers (1984), the Pecking
Order Theory (POT) suggests that there is no well-defined optimal capital structure; instead
the debt ratio is the result of hierarchical financing overtime. The foundation of POT is that
firms have no defined debt-to-value ratio. Management has a preference to choose internal
financing before external financing. When a firm is forced to use external financing sources,
managers select the least risky and demanding source first. When it is necessary to issue
external sources, debt Issuance is preferred to new equity.
Economic Perspective: Financial capital refers to the monetary assets, such as cash, stocks,
bonds, and other financial instruments, that individuals, businesses, and governments use to
generate income, invest in productive assets, and facilitate economic activities. (Higgins, R.
C. (1977). How Much Growth Can We Afford?)
Corporate Finance: Financial capital represents the funds raised by a company through equity
(e.g., shares) or debt (e.g., loans, bonds) financing, which are utilized for investment in
operations, expansion, research, and development, with the aim of generating returns for
shareholders. (Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate
Finance)
Investment Management: Financial capital encompasses the funds allocated by investors to
various asset classes, such as equities, fixed income securities, real estate, and alternative
investments, with the objective of maximizing returns and managing risk to achieve financial
goals. (Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments)
Banking Sector: Financial capital refers to the funds deposited by individuals and businesses
in banks and other financial institutions, which are then lent out to borrowers or invested in
financial markets to earn interest or dividends. (Fabozzi, F. J., Modigliani, F., & Ferri, M. G.
(2010). Foundations of Financial Markets and Institutions)
Macroeconomic Analysis: Financial capital represents the pool of savings within an economy
that can be channeled into productive investments, influencing economic growth,
employment, and overall prosperity. (Solow, R. M. (1956). A Contribution to the Theory of
Economic Growth)
Entrepreneurial Finance: Financial capital encompasses the initial investment and subsequent
funding rounds obtained by entrepreneurs from venture capitalists, angel investors, or
crowdfunding platforms to start, grow, and scale their businesses. (Mason, C. M., & Harrison,
R. T. (2006). Entrepreneurial Capitalism and Finance: A Critical Review, Theoretical
Foundations, and Suggestions for a Future Research Agenda)
Public Finance: Financial capital refers to the resources raised by governments through
taxation, borrowing, or issuing bonds, which are used to finance public expenditures,
infrastructure projects, social programs, and debt servicing. (Musgrave, R. A., & Musgrave,
P. B. (1989). Public Finance in Theory and Practice)
Real Estate Industry: Financial capital represents the funds invested in real estate assets, such
as residential properties, commercial buildings, and land, for the purpose of generating rental
income, capital appreciation, and portfolio diversification. (Brueggeman, W. B., & Fisher, J.
D. (2016). Real Estate Finance and Investments)
International Finance: Financial capital encompasses the flows of funds across national
borders, including foreign direct investment, portfolio investment, and international
borrowing, which have implications for exchange rates, balance of payments, and global
economic stability. (Eichengreen, B., & Portes, R. (1987). The Anatomy of Financial Crises)
Personal Finance: Financial capital represents the savings, investments, and assets
accumulated by individuals and households, including bank accounts, retirement funds, real
estate properties, and securities, which are managed to achieve financial security, wealth
accumulation, and retirement planning. (Gitman, L. J., & Joehnk, M. D. (2018). Personal
Financial Planning)
2.2 Empirical Review
2.2.1 Human Capital and Firm Performance According to Ganotakis (2010), human capital
can be divided into general human capital and
Specific human capital. General human capital for the case of the entrepreneur is usually
Measured by the educational qualifications and by the total number of years of working
Experience. Specific human capital includes specific business education, specific skills,
industry related experience and managerial experience. The SME Financing Data Initiative
(2009) examines the role of experience in SME growth using the Managerial Capacity Index
(MCI). The MCI presents a composite measure of managerial experience and activity. The
study finds that a high score in the managerial capacity index is positively associated with
both strategic planning practices and high firm performance and growth. Lefebvre and
Lefebvre (2002) report that in ovative and managerial capabilities of the management team
are strongly associated with export performance and firm growth. Martin and Staines (2008)
find that lack of managerial experience, skills and personal qualities as well as other factors
such as adverse economic conditions, poorly thought out business plans and resource
starvation are found as the main reasons why new firms fail. The distinguishing feature of
high growth and low growth small firms is the education, training and experience of senior
managers. Lyles et al. (2004) evaluate managerial competencies as measured by the education
of the founder, managerial experience, entrepreneurial experience, start-up experience and
functional area experience versus new venture performance. The results show that relative
profits tend to be high when an entrepreneur has more education and experience in the line of
business. On the other hand, profitability tends to be low when the entrepreneur has only start
up and managerial experience, but lacks an educational background. The results confirm the
importance of education to new venture success. Bosma et al. (2004) also find that the
endowed level of talent of a small business founder is not the unique determinant of
performance. Rather, investment in industry-specific and entrepreneurship specific human
capital contributes significantly to the performance of small firm founders. The result shows
that human capital appears to influence the entire set of performance measures (profitability,
employment and survival). Former experience of the business founder in the industry in
which he starts his business appears to improve all performance measures. Moreover,
experience in activities relevant to business ownership increases the firm's survival time.
Finally high-educated people make more profits, while those who have experience as an
employee create more employment. Other empirical studies, such as Small-bone and Welter
(2001) and Hisrich and Drnovsek (2002), find that managerial competencies as measured by
education, managerial experience, start-up experience and knowledge of the industry
positively impact on the performance of new SMEs. Herrington and Wood (2003) point out
that lack of education and training have reduced management capacity in SMEs in South
Africa. This is one of the reasons for the low level of entrepreneurial creation and the high
failure rate of new ventures. Lack of skills, experience and knowledge are also key limiting
factors for entrepreneurship in South Africa.

Small and medium Business owners in South Africa often lack the expertise experience and
training related to the Business they establish, Because of the managerial deficiency, there is
the prevalence of Necessity (survivalist) compared to opportunity entrepreneurial activity in
South Africa. Leitao and Franco (2008) point out that empirical research has obtained a range
of results regarding this relationship between human capital and performance, but those
results are not consensual. Empirical literature such as Shiu(2006), Appuhami (2007) and
Chan (2009) find Insignificant relationship between human capital and firm performance. In
view of the evidence provided in the review of empirical literature, this study hypothesizes
that owners’ human capital is positively associated with the performance of SMES.

2.2.2 Social Capital and Firm Performance Okten and Osili (2004) examine the impact of
social capital on the growth of SMEs. The results suggest that social capital has an influence
on the growth of an SME, especially through contacts with other entrepreneurs. Social capital
helps SMEs to tap resources in external environment successfully and pave the way to new
markets. Shane and Cable (2002) agree that social capital through networking can be used to
reduce information asymmetry in creditor/debt or relationships. Access to financial capital is
one of the determinants of the success of SMEs. Ngoc et al. (2009) agree that networks also
help a firm learn appropriate behaviour and there- fore obtain needed support from key
stakeholders and the general public. Robb and Fairlie (2008) examine the reasons why
Chinese, Indians and Korean SMEs are successful in the dias- pora. Hayer and Ibeh (2006)
find that social capital helps SMEs to internationalise. Gumede and Rasmussen (2002)
observe that the social capital of SMEs in South Africa is limited. Very few SMEs in South
Africa engage in networks, like business associations. Kiggundu (2002) and Barr (2002)
argue that networks contribute to business success and continuity. However, it seems as if the
South African entrepreneur experiences difficulties in establishing and maintaining business
networks which function effectively. Roxas (2008) notes that on the empirical level, the links
Between social capital and other variables like economic development, organizational
performance, And particularly innovation performance are not unequivocal. Acquaah (2008)
agrees that the Effect of social capital on business activities and performance is complex and
evidence exists to Suggest that social capital does not always benefit the outcomes of
business activities by Enhancing performance. Rowley etal. (2000) and Atieno (2009) find
that not all measures ofsocial capital enhance firm business performance. Based on the
empirical evidence, this study hypothesises that owners’ social capital is positively associated
with the performance of SMEs.
Indeed, while earlier studies that have considered the contribution of human capital to
economic performance (Barro 1991: Mankiw, Romer & Weil 1992) have typically found a
large and signifi cant influence of such capital as proxiod by enrollment rates on income per
capita, later papers (Benhabib && Spiegel 1994; Pritchett 2001) have not only found an
insignificant contribution, but in some cases have actually established a negative relationship
between human capital and income.

This stands in stark contrast to a very large body of microeconometric labor research that has
found a strong and persistent relationship between educational levels and wage rates.
Although estimates are noisy and may depend on the time period chosen, the general result
that earnings increase linearly with schooling completion has been found to hold for both
U.S. (Heekman, Lochner & Todd 2006) as well as international (Peracchi 2006) data.

This micro-macro incongruence has led to various efforts aimed at resolving the paradox.
One approach argues that human capital is either poorly measured or mismeasured. This
approach stresses how existing education stock data may either suffer from systematic data
deficiencies (Cohen & Soto 2007; Doménech & de la Fuente 2006), fail to capture important
quality dimensions (Behrman & Birdsall 1983; Hanushek & Kimko 2000), or be subject to
high rates of measurement error when first-differenced (Krueger & Lindahl 2001).
Accounting for these measurement issues would then resolve the paradox.

Another school of thought has stressed the importance of educational governance failures,
Fac tors such as teacher absentocism, informal payments, and corruption in schools can
severely erode the productivity of the education sector (Reinikka & Svensson 2005; Rogers
2008) and reduce the incentives for human capital accumulation (Gupta, Davoodi &
Tiongson 2001). This institu- tional failure has implications for growth outcomes (Acemoglu,
Johnson & Robinson 2005). Given the poor institutional environment in which learning
occurs, the failure of traditional educational

Statistics to capture the actual stock of human capital is hardly surprising. These two
resolutions are not unrelated; governance failures often imply poor quality of educa tion.
Nonetheless, authors have tended to stress one approach over another.
The major challenge in the empirical study of the role of human capital in growth is centered
of the endogeneity of human capital. While there is a strong theoretical basis for how human
capital can drive growth in both neoclassical (Lucas 1988) and endogenous (Romer 1990)
models, there is also the possibility of reverse causality, possibly through a discount rate
chamel (Bils & Klenow 2000), or more generally through improvements in human
development (Suri, Boozer, Ranis & Stewart 2011). This endogeneity suggests that naïve
attempts to measure the contribution of human capital will almost certainly encounter a bias
in their estimates,

Our empirical analysis adopts a two-stage strategy: First, we estimate national-level

educational production functions that include institutional governance and inputs to schooling
as covariates. Second, we use these estimates from the first stage as instruments for human
capital in cross-country regressions of (steady-stase) income. This method not only provides
new cross-country estimates of the impact of governance measures on educational outcomes,
but also addresses the endogeneity concerns that arise when using direct measures of
education in regressions of this nature.

Moreover, use of instrumental variables (IV) allows us to reconcile the two major expla
nations that have been advanced to resolve the micro-macro human capital puzzle. By
including governance measures in the education production function, we directly account for
the institutional framework in which human capital accumulation occurs. The methodology
also allows us to sidestep the concerns surrounding the mismeasurement of human capital, so
long as our instruments are chosen carefully and satisfy the necessary validity conditions.
Finally, in our robustness checks we also demonstrate that the results remain robust to fully
endogenizing institutions in a System Generalized Method of Moments (System GMM)
setting.

The two papers closest in spirit to our own are the ones by Dias & Tebaldi (2012) and
Hanushek & Kimko (2000), Like us, the first paper is interested in the relationship between
institutions, human capital, and economic performance. It develops a theoretical model that
links institutions to human capital, but the econometric analysis does not adopt a two-step
approach to estimating the mediating effect that governance plays in its effect on human
capital, as we do here. The latter paper does use a similar two-step estimation procedure, but
the first stage does not include our key conditioning variable of interest, institutional quality.
Moreover, unlike these papers, our empirical
Work follows directly from a theoretical model, which leads us to estimate the first stage in
levels, Rather than growth rates.
Our approach is also complementary to the work of Glaeser, La Porta, López-de Silanes
Shleifer (2004) as well as Bhattacharyya (2009). The former uses two-stage strategy to argue
That human capital, rather than institutions, is a stronger predictor of per capita income,
while The latter unbundles institutions to resolve the multicollinearity problem between
institutions and Human capital. Unlike both of these papers, we employ a different choice of
instruments, and

2.2.3 Financial Capital and Firm Performance Elsenhardt and Martin (2000) use the Resource
Based Theory to demonstrate the importance of Financial capital to the performance of
SMEs. Access to financial capital to purchase fixed and current assets is important to a
sustaining a firm’s competitive advantage. Empirical studies such as Wiklund and Shephered
(2004), Zhou and Chen (2008) identify that SMEs need financial capital to obtain physical
resources in order to take advantage of business opportunities. Lack of physical resources is a
critical failure factor SMEs. According to Bolingtoft et al. (2003), to establish and sustain an
SME, the entrepreneur needs to have access to different types of resources (i) human capital:
(ii) physical capital; and (iii) financial capital, each playing different, but equally important
roles during the life cycle of a new small business .
Bolingtoft et al.(2003) further point out that there are many explanations offered for the
failure of new SMEs.

One of the most frequently cited reasons is resource poverty. Garcial-Teruel and Martinez-
Solano (2007) point out that non-availability of working capital is a major constraint to the
survival and growth of new SMEs. Pretorius and Shaw (2004) posit that financial capital can
be internal or external. A vastmajority of SMEs depend on internal finance Internal finance is
often inadequate for SMEs to survive and grow, Carpenter and Petersen (2002) find that
growth of SMEs is constrained by dependence on internal finance. Fierce competition in the
light of globalization trends, rapid techno logical development, shorter product cycles, and
innovation requirements has put pressure on SMEs to increase and speed up their
development investments. It is, however, increasingly difficult to keep the costs within the
constraints.
According to many economic historians, real wages in Europe were stagnant from at least
1200 to about 1800 (Allen 2001; Clark 2005, 2007a, b). As can be seen in Fig. 1, real wages
may have been stagnant, but they were not unchanging during those centuries. The real wages
of both agricultural laborers and building craftsmen rose when population decreased, as
during the Black Death (peaking around 1350), and they fell as populations rebounded. They
varied, as well, due to agricultural vicissitudes. But, on average, they changed little. World
population increased, but only slightly from around -5000 BC until around 1800 AD (see Fig.
2).

By and large, the data series in Figs. 1 and 2 point to a classic Malthusian equilibrium –
stagnant real wages during long periods, small increases in popula- tion, and occasional
periods of real wage growth followed by increased population and subsequent decreased
wages. The Malthusian problem was twofold: a fixed amount of resources in the form of land
and no fertility controls.

But sustained growth in real income per capita and in real wages is apparent in mid-
nineteenth century Europe (see Figs. 2 and 3) and somewhat earlier in North America.
Population growth had been extremely low but increased enormously in the period just after
the “industrial revolution.” The demographic transition set in at various moments in Europe
and North America. It occurred in the United States and France in the early 1800s, in parts of
Europe later in the nineteenth century, and in Other parts of Europe as late as the early
twentieth century.
By the nineteenth century many parts of Europe, the Western Hemisphere, and Elsewhere had
entered the modern era of economic growth and had escaped the
Malthusian trap. How the regime change came about is one the most important.

2.3 conceptual framework

This study was guided by the following conceptual framework