Trust: The Social Virtues and the Creation of Prosperity

(1975). The Limits of Organization. Journal of Economic Issues: Vol. 9, No. 3, pp. 543-544.

The Limits of Organization

We examine the effect of trust on financial investment and contracting decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms’ individual partners further contributes to the effect of trust. Education and work experience reduce the effect of trust but do not eliminate it. We also examine the relationship between trust and sophisticated contracts involving contingent control rights and find that, even after controlling for endogeneity, they are complements, not substitutes.

The Importance of Trust for Investment : Evidence From Venture Capital (Revision of DP 2009-43)

A model of business success was developed with motivational resources (locus of control, self-efficacy, achievement motivation, and self-reported personal initiative) and cognitive resources (cognitive ability and human capital) as independent variables, business owners' elaborate and proactive planning as a mediator, and business size and growth as dependent variables. Three studies with a total of 408 African micro and small-scale business owners were conducted in South Africa, Zimbabwe, and Namibia. Structural equation analyses partially supported the hypotheses on the importance of psychological planning by the business owners. Elaborate and proactive planning was substantially related to business size and to an external evaluation of business success and was a (partial) mediator for the relationship between cognitive resources and business success. The model carries important implications for selection, training, and coaching of business owners.

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Business owners' action planning and its relationship to business success in three African countries

We examine the effect of trust on financial investment decisions in a micro-economic environment where trust is exogenous. Using hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. We then consider the relationship between trust and performance, evaluating two competing hypotheses: one based on the notion that higher trust benefits investment performance, the other based on the notion that lack of trust constitutes a hurdle to investments. We find evidence of a negative relationship between trust and exit performance, especially for IPOs. We further show that more sophisticated investors are more likely to make low trust investments, and that by doing so they achieve superior performance. Based on this and some additional evidence we conclude that lack of trust is a hurdle to making venture capital investments, but that investors who overcome this hurdle tend to do well.

/pdf/the-importance-of-trust-for-investment-evidence-from-venture-4o5slbwj6w.pdf

The Importance of Trust for Investment: Evidence from Venture Capital

This article reports on findings from interviews with fledgling entrepreneurs in four former Soviet republics (Belarus, Kazakhstan, Russia, and Ukraine). Analysis of the interviews was conducted against a backdrop of concepts from the literature of civil society, social capital, and entrepreneurship as applied to small business development. The main finding of the study was the unanimous claim by the entrepreneurs that trust was one of two prime requisites for success, and this in societies that had been culturally depraved for many years. From this finding, two models were developed incorporating civil society, social capital, and trust to more fully depict the entrepreneurial environment.

M.B. Neace

Papers

Entrepreneurs in Emerging Economies: Creating Trust, Social Capital, and Civil Society