*Seeds
by lucasabia

3 factors affecting crowdfunding volumes

According to a new study at the Cambridge Judge Business School, University of Cambridge, entitled Law, trust, and the development of crowd financing and based on a database of more than 1,300 crowdsourcing platforms in 152 countries compiled by the Cambridge Centre for Alternative Finance,

the overall level of crowd financing volume is strongly positively related to the level of development of the market.

In particular, there are three factors that significantly affect the volume of crowd financing:

  1. aspects of the legal system such as corruption control and regulation quality;

  2. the costs of using traditional financial institutions;

  3. and a set of user demographics including the level of access investors have to formal financial institutions and their ability to access the Internet.

The study also found that the volume of crowd financing appears related to the level of trust individuals have for strangers, because such funding relies almost entirely on anonymous donors who have no social or other formal interactions with the recipients.

As a consequence, the research shows that crowd sourcing has grown quickly in the developed world while lagging in developing countries.

In particular, the three largest crowd financing markets in 2015 were China ($103 billion), the US ($28 billion) and UK ($5 billion) – while far lower volume in some emerging markets included $40 million in India, $16 million in Kenya, $7 million in Nigeria and $4 million in Ghana.

rau-raghavendra-229x205Study author Raghavendra Rau, Sir Evelyn de Rothschild Professor of Finance at Cambridge Judge says that: “While one might expect crowdfunding to take off rapidly in the developing world the way that mobile banking did, in fact the real crowdfunding growth is coming in developed countries.”

About the practical implications, Professor Rau argues the study offer suggestions for both the players in the market and policymakers:

For platforms engaged in crowd financing, the study offers suggestions for country characteristics where crowdfunding is likely to succeed as an alternative to formal institutions, while from a policy perspective, the country level determinants of alternative finance volume help to make decisions on where regulations might help or hinder the growth of these markets.

Download the full paper here.