The Role of Distance and Social Networks on the Geography of Crowdfunding: Evidence from France
27 Pages Posted: 21 Nov 2017 Last revised: 2 May 2018
Date Written: November 17, 2017
By relaxing the constraint of proximity to the investor, crowdfunding platforms promise to reshape the geography of small business and entrepreneurship. A necessary condition is that distance is no longer an impediment to the flow of funding between backers and project developers in different geographical areas. Information plays a central role, especially as the decision to invest in a project depends on information that seems to be highly sensitive to distance (trustworthiness and seriousness of the founder, experience of those involved). This specificity makes the existence of social ties between backers and founders a powerful way to convey information across space. The aims of this article are twofold. First, to estimate the role of distance in the geographical flow of crowdfunding and, secondly, to show how the existence of social ties between geographical areas can shape the flow of funding in a local context. Our analysis draws upon a unique database provided by the French leader in rewards-based crowdfunding. With a dataset containing 12 887 projects and 452 850 contributions, representing a value of €19 million over the period 2012–2015, we estimate, for each pair of the 94 French regions, the number and the amount of bilateral funding actions and their determinants in a gravity-like equation model. Social ties between regions are based on regional migration data from the 2013 French national census. The main result is that the elasticity of distance remains important (around 0.5) in the context of rewards-based crowdfunding platforms. We also show that the existence of social ties between regions not only determines the flow of funding – doubling the number of immigrants in a particular region increases the number of investments by 25% – it also strongly reduces and even cancels out (under some specifications) the impact of geographical distance.
Keywords: Crowdfunding, economic geography, gravity, social networks
JEL Classification: O30, R12, R23
Suggested Citation: Suggested Citation