2010 - Historical Foundations of Entrepreneurship Research

Historical Foundations of Entrepreneurship Research
Hans Landström and Franz T. Lohrke - 9781847209191

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Historical Foundations of
Entrepreneurship Research
Edited by
Hans Landström
Professor in Business Administration, Institute of Economic Research and
CIRCLE, Lund University, Sweden
and
Franz Lohrke
Brock Family Endowed Chair in Entrepreneurship and Chair, Department
of Entrepreneurship, Management and Marketing, Brock School of
Business, Samford University, USA
Edward Elgar
Cheltenham, UK • Northampton, MA, USA

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© Hans Landström and Franz Lohrke 2010
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means, electronic, mechanical or photocopying, recording,
or otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.

William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book

is available from the British Library
Library of Congress Control Number: 2010922123
ISBN 978 1 84720 919 1 (cased)
Printed and bound in Great Britain by MPG Books Group, UK

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Contents
List of contributors vii
Acknowledgements ix
1 History matters in entrepreneurship research 1

Franz Lohrke and Hans Landström
PART I HISTORICAL DEVELOPMENT OF ENTREPRENEURSHIP

AS A RESEARCH FIELD
2 Entrepreneurship research: a history of scholarly migration 15

Hans Landström and Mats Benner
3 Entrepreneurship research: research communities and knowledge platforms 46
Hans Landström and Olle Persson
PART II INTELLECTUAL ROOTS OF ENTREPRENEURSHIP

RESEARCH
Section II.1 Opportunity Recognition

4 Environmental uncertainty and firm-level entrepreneurship 81
Lou Marino, Patrick Kreiser and Anthony Robinson
5 Entrepreneurial alertness and opportunity discovery: origins, attributes,
critique 98
Nicolai J. Foss and Peter G. Klein
6 Opportunity recognition: evolving theoretical perspectives 121
Robert A. Baron
7 The historic roots of entrepreneurial orientation research 142
Verona P. Edmond and Johan Wiklund
Section II.2 Opportunity Evaluation
8 On the relevance of decision-making in entrepreneurial decision-making 163
Saras D. Sarasvathy and Henrik Berglund
Section II.3 Opportunity Exploitation
9 Only the good die young? A review of liability of newness and related new
venture mortality research 185
Brian Nagy and Franz Lohrke
v
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vi Contents
10 Entrepreneurial groups 205

Martin Ruef
11 Governance theory: origins and implications for researching boards and
governance in entrepreneurial firms 229
Jonas Gabrielsson and Morten Huse
12 The historical roots of socio network theory in entrepreneurship research 256
Sarah Jack and Mary Rose
Section II.4 Integrative Works
13 The psychology of entrepreneurs: a self-regulation perspective 289
Alan R. Johnson and Frédéric Delmar
14 Social entrepreneurship: a historical review and research agenda 318
Todd W. Moss, G.T. Lumpkin and Jeremy C. Short
PART III ECONOMIC HISTORY AND ENTREPRENEURSHIP

RESEARCH
15 Historical reasoning and the development of entrepreneurship theory 343

R. Daniel Wadhwani
16 Culture, opportunity and entrepreneurship in economic history: the case of
Britain in the twentieth century 363
Andrew Godley
17 Industrial renewal and entrepreneurship in Sweden: a structural cycle
explanation 383
Hans Landström and Lennart Schön
18 Entrepreneurial capitalism in East Asia: how history matters 406
David Ahlstrom and Linda C. Wang
Index 429

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Contributors
David Ahlstrom, Department of Management, The Chinese University of Hong Kong,
Hong Kong
Robert A. Baron, Spears School of Business, Oklahoma State University, USA
Mats Benner, Research Policy Institute, Lund University, Sweden
Henrik Berglund, Center for Business Innovation, Chalmers University of Technology,
Sweden
Frédéric Delmar, Center for Entrepreneurship Research, EMLYON Business School,
France
Verona P. Edmond, Whitman School of Management, Syracuse University, USA
Nicolai J. Foss, Center for Strategic Management and Globalization, Copenhagen
Business School, Denmark
Jonas Gabrielsson, CIRCLE, Lund University, Sweden
Andrew Godley, Centre for Entrepreneurship, Henley Business School, University of
Reading, UK
Morten Huse, Department of Innovation and Economic Organization, Norwegian
School of Management, Norway
Sarah Jack, Institute for Entrepreneurship and Enterprise Development, Lancaster
University, UK
Alan R. Johnson, Center for Entrepreneurship Research, EMLYON Business School,
France
Peter G. Klein, Contracting and Organizations Research Institute, University of
Missouri, USA
Patrick Kreiser, College of Business, Ohio University, USA
Hans Landström, Institute of Economic Research and CIRCLE, Lund University,
Sweden
Franz Lohrke, Brock School of Business, Samford University, USA
G.T. Lumpkin, Whitman School of Management, Syracuse University, USA
Lou Marino, Culverhouse College of Commerce and Business Administration, The
University of Alabama, USA
vii
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viii Contributors
Todd W. Moss, Rawls College of Business, Texas Tech University, USA

Brian Nagy, Foster College of Business Administration, Bradley University, USA
Olle Persson, Department of Sociology, Umeå University, Sweden
Anthony Robinson, The Hull College of Business, Augusta State University, USA
Mary Rose, Institute for Entrepreneurship and Enterprise Development, Lancaster
University, UK
Martin Ruef, Department of Sociology, Princeton University, USA
Saras D. Sarasvathy, Darden School of Business, University of Virginia, USA
Lennart Schön, Department of Economic History, Lund University, Sweden
Jeremy C. Short, Rawls College of Business, Texas Tech University, USA
R. Daniel Wadhwani, Eberhardt School of Business, University of the Pacific, USA
Linda C. Wang, Department of Management, Michigan State University, USA
Johan Wiklund, Whitman School of Management, Syracuse University, USA

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Acknowledgements
Systematic research on entrepreneurship has now been conducted for about 40 years,
emerging in the 1970s, even though pioneering contributions on entrepreneurship could
be found as far back as in the seventeenth century. As we see it, it is now time to make
historical reflection about and within the field, and our main argument in the book is that
‘history matters in entrepreneurship research’.
The origins of this book came out of a joint discussion at the Academy of Management
Meeting in Philadelphia in 2007. Because we both are interested in historical aspects of
research, particularly entrepreneurship – Franz as the former Division Chair of the
Management History Division and current secretary of the Entrepreneurship Division
within the Academy of Management, and Hans as author of several books and articles
on the intellectual roots of entrepreneurship research – our conversation obviously
focused on the historical, or rather ahistorical, character of entrepreneurship research.
Entrepreneurship had evolved into a rather ahistorical research field, and we were con-
vinced that it was timely to introduce a stronger historical understanding in entrepreneur-
ship research.
This book directly resulted from our conversations and our views about the entrepre-
neurship field. First, we believe that contemporary scholars can learn much from earlier
research on entrepreneurship, which makes it unnecessary to ‘reinvent the wheel’ every
time we start a new study (Part I). Second, we believe that research on entrepreneurship
has become more and more theory driven, in a large part from borrowing concepts and
theories from many different disciplines. In order to import these concepts and theories,
however, we need to understand the assumptions on which these theories are based and
the intellectual roots from which these theories have evolved (Part II). Third, we believe
that we have a lot to learn from the knowledge achieved in the field of economic history,
and from an understanding of the historical setting and institutional context in which the
entrepreneur operates (Part III).
The process involved in the production of the Historical Foundations of
Entrepreneurship Research has been long and hard, but at the same time challenging
and rewarding. At the beginning of the process we selected some of the most prominent
and senior researchers and asked them to write a chapter that would cover some of the
most important concepts and theories in entrepreneurship research today. We were
encouraged to find a very positive reaction from the authors, and it was obvious that
our book proposal was timely. The writing and reviewing process has been intensive,
and the chapters have gone through three rounds of reviews and revisions. A highlight in
the process was the symposium that we organized at the 2008 Academy of Management
Meeting in Anaheim, California. Despite the 8:00 a.m. session time, we were thrilled to
see a crammed seminar room, which convinced us that interest existed in the story that
we have tried to tell.
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x Acknowledgements
First of all, we would like to take the opportunity to thank all the authors involved
in the book. We have been very critical and demanding in our reviews, but throughout
the process the authors have been extremely positive, and also very professional in their
revisions of the chapters. Second, we want to thank Francine O’Sullivan and her staff at
Edward Elgar Publishing, who have always been very supportive and helpful. Finally, as
we have been dedicated to the topic and have taken every possible occasion to talk about
the book and its content, it would be impossible to mention individually the large number
of people who have discussed the subject with us, but all the discussions have been fruitful
and we thank everyone for giving us the opportunity to debate and reflect on this critical
topic.
Hans Landström
Institute of Economic Research and CIRCLE
Lund University
Lund, Sweden
Franz Lohrke
Brock School of Business
Samford University
Birmingham, AL, USA

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1. History matters in entrepreneurship research
Franz Lohrke and Hans Landström
Entrepreneurship investigates how and why some individuals (or teams) identify oppor-
tunities, evaluate them as viable, and then decide to exploit them, whereas others do not,
and, in turn, how these opportunities result in product, firm, industry and wealth creation
(Brush et al., 2003; Shane and Venkataraman, 2000). In a period of ‘creative destruction’
in society, entrepreneurship as a research field emerged in the 1970s and 1980s, paralleled
and reinforced by a host of external factors (e.g. government policy-makers) around the
world that supported entrepreneurship. Along with these external factors functioning as
a springboard for the growth of entrepreneurship research, several intra-scientific expla-
nations could also be found. For example the field showed increasing opportunities for
empirical research and, equally important, the research field offered great opportunities
in terms of research funds, endowed chairs, and publication outlets. As a result, scholars
from many different disciplines rushed into this promising field of research. Since its
emergence in the 1970s and 1980s research on entrepreneurship has grown tremendously
(Landström, 2005), with respect to the number of researchers, published articles, confer-
ences, and journals focused on or opening up for entrepreneurial contributions. Indeed,
the growth is obvious, irrespective of the measurements employed (Katz, 2003).
We are often told that entrepreneurship is very young as a field of research, and that the
field is highly ahistorical in character. The assumption underlying this statement is often
that the pace of change in society today makes it necessary to constantly ‘re-formulate’
our knowledge, and in this respect there is not much point in looking back and learning
from history. New questions and topics arise all the time that attract researchers’ interest
and change the research agenda in entrepreneurship, and, as a consequence, the research
on entrepreneurship has been regarded as highly fragmented.
In contrast to this view of entrepreneurship as a young and ahistorical field of research,
in this book we argue that, although more systematic research on entrepreneurship is
indeed only about 30–40 years old, we can find early contributions in the nineteenth
and twentieth centuries that significantly add to our knowledge of entrepreneurship.
Accordingly, we argue that ‘history matters’ in entrepreneurship research.
First, some of the best and most influential works on entrepreneurship were written
in the early days of entrepreneurship research, and many of these contributions are high
quality intellectual achievements. In addition to the high quality knowledge provided,
the researchers and their writings can represent role models for other entrepreneurship
researchers.
Second, an understanding of past contributions within the field can help to prevent
researchers from ‘reinventing the wheel’ every time they start a new study. Early scholars
on entrepreneurship had a close connection to real entrepreneurs and to society, and their
1
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2 Historical foundations of entrepreneurship research
empirical and mainly descriptive knowledge gives us a detailed understanding of the phe-
nomenon. This deep knowledge, in turn, provides a necessary step in effectively building
theory (Eisenhardt, 1989), and it improves the validity, sophistication and power of the
theoretical models developed (Ghoshal, 2006).
Third, today we can see an increased interest in a theoretical development of entrepre-
neurship research (Brush et al., 2008; Zahra, 2005). As entrepreneurship is highly multi-
disciplinary in character, we borrow concepts and theories from other research fields. In
doing so, we need ‘good groundwork’. When borrowing concepts and theories from other
fields, however, we need to understand the roots and assumptions on which these con-
cepts and theories are based. Otherwise we can make a lot of mistakes in our explanations
and understanding of entrepreneurship as a phenomenon.
Finally, entrepreneurship research is highly related to policy and entrepreneurial prac-
tices, and many of us assume that many of the policies and practices are the best available
– based on the best knowledge available today. History teaches us, however, that what is
best for one place and time, for example, in one country or region at one point in time,
will not always work in other contexts, and policies and practices need also to change
with the times.
The conclusion that can be drawn is that history teaches us to challenge the present
(Witzel, 2009), and in this book we challenge the field of entrepreneurship in three ways.
Specifically, we argue that:
● Entrepreneurship research has a long history, and the phenomenon has for a long
period of time attracted scholars from many different disciplines, indicating that we
have a lot of high quality knowledge to draw from and to build our future research
on.
● Entrepreneurship research has become more and more theory-driven, and, because
the field is highly multi-disciplinary, we tend to borrow concepts and theories from
mainstream disciplines such as economics, psychology, and sociology and adapt
them to the study of entrepreneurship. In borrowing concepts and theories from
other fields it is of vital importance for entrepreneurship researchers to understand
the assumptions on which these theories are based and the intellectual roots from
which these theories have evolved.
● Entrepreneurship scholars have a lot to gain from a closer collaboration with eco-
nomic historians. Knowledge in economic history can significantly contribute to
our understanding of entrepreneurship, and awareness of the historical setting and
institutional context is necessary for scholars to draw sensible generalizations about
entrepreneurial behavior.
Thus, the aims of the book are (a) to historicize the research on the entrepreneur and
entrepreneurship, and (b) to stimulate a fruitful assimilation of historical concerns and
reasoning in entrepreneurship research. In the book the historical aspects of entrepre-
neurship research are developed in three parts. Part I focuses specifically on the field’s
historical development, and the evolution of entrepreneurship as research field in its
own right. Next, in Part II several noted authors provide an historical review of several
key theories employed in entrepreneurship research. We have arranged these as chapters
focusing primarily on theories related to opportunity recognition, evaluation, and exploi-


History matters in entrepreneurship research 3
tation, with two integrative chapters examining the entire process. Finally, in Part III, we
have included chapters focusing on the links between economic history and entrepreneur-
ship, elaborating on our belief that the historical context, i.e. the industrial, economic and
societal setting, is critical for drawing sensible generalizations about entrepreneurship.
PART I: HISTORICAL DEVELOPMENT OF

ENTREPRENEURSHIP AS A RESEARCH FIELD
As noted above, entrepreneurship research is often regarded as a relatively young and

ahistorical field of research. More systematic research on entrepreneurship emerged in
the 1970s and 1980s, and since then, with a rapidly changing society, and a general ambi-
tion among scholars interested in entrepreneurship to understand the ‘entire’ phenome-
non, new questions have emerged all the time. One unfortunate outcome of this growth is
that it tended to make earlier contributions within the field seem less important, and the
field became highly fragmented. As a consequence, early contributions in entrepreneur-
ship research tended to be forgotten rather quickly, increasing the risk of continuously
‘reinventing the wheel’ in entrepreneurship research and missing the possibility to use the
contributions already made, thereby missing opportunities for knowledge accumulation
and effective theory building.
In recent years, however, research in entrepreneurship has become increasingly self-
reflective with a stronger focus on the internal knowledge development within the field,
seen in such trends as an increased number of citations made to earlier entrepreneurship
research (Cornelius et al., 2006). As a consequence, we find a stronger interest in earlier
contributions to entrepreneurship knowledge emerging. This trend is shown not only
in the number of citations, but also in an increased number of state-of-the-art books
published in entrepreneurship that summarize and synthesize our knowledge within dif-
ferent areas of entrepreneurship research, as well as an increased number of PhD courses
around the world that include historical (doctrinal) reflections of the field.
The aim of the first part of the book is to show that entrepreneurship as a phenomenon
has attracted scholarly interest for a long time, and that we have a large body of knowl-
edge on entrepreneurship to draw from and build further research on. Part I contains
two chapters. In Chapter 2, Hans Landström and Mats Benner take the multidisciplinary
character of entrepreneurship research as a starting point, and look particularly at the
migration pattern to (and from) entrepreneurship in order to understand the historical
development of entrepreneurship as an intellectual field. In this respect, they raise two
questions. What was the composition of the field over time, and what main disciplines
have dominated in entrepreneurship research during different time periods? They begin
their review identifying three eras of entrepreneurship research anchored in different
disciplines: the ‘economics era’ from 1870 till 1940, the ‘social sciences era’ from 1940 to
1970, and the ‘management studies era’ from 1970 to the present. Today, they conclude,
the field could be regarded as ‘searching for maturation’ including an intense debate on
the domain of entrepreneurship research, a division of the research community, and an
increased interest in the theoretical development of the field.
Chapter 3, by Hans Landström and Olle Persson, examines entrepreneurship research
as a ‘melting pot’ of concepts and theories borrowed from other disciplines. Employing


bibliometric (i.e. citation-based) analyses they plot the development of research commu-
nities within the field and discuss the possibilities for cross-disciplinary entrepreneurship
research. They conclude that the field has attracted a broad range of scholars from many
different disciplines, but that the research is dominated by those anchored in ‘manage-
ment studies’, and that scholars interested in entrepreneurship are divided into ‘entre-
preneurship researchers’ and ‘disciplinary researchers’. Within the former, they note that
we can find an evolving knowledge platform on entrepreneurship, but as mainstream
disciplines remain important, entrepreneurship as a research field can be characterized as
a ‘bounded’ multi-disciplinary field.
PART II: INTELLECTUAL ROOTS OF ENTREPRENEURSHIP

RESEARCH
Entrepreneurship research has become more and more theory driven (Brush et al., 2008;
Davidsson and Wiklund, 2001; Zahra, 2005). In this respect, entrepreneurship research-
ers have borrowed concepts and theories from mainstream disciplines such as economics,
psychology, and sociology and adapted them to the study of entrepreneurship. Importing
theories from other fields of research is often a necessary first step toward a field devel-
oping unique theories of its own, but when borrowing theories from other disciplines,
we need to contextualize the theories that we use (Zahra, 2007). Imported theories from
other disciplines have been developed to understand fundamentally different phenomena
from entrepreneurship, however, and a mismatch between theory and context can result
in inconclusive or even incorrect findings.
This intellectual borrowing of concepts and theories from other fields has produced
several major benefits. First, as entrepreneurship is a multifaceted phenomenon, study-
ing it often requires multiple concepts and theories because no single theory can simul-
taneously maximize generalizability, simplicity, and accuracy (Weick, 1979). Second,
employing well researched theories from more established disciplines such as economics,
psychology, and sociology can help develop greater rigor and increase the legitimacy
of relatively young fields like entrepreneurship. Third, employing these theories has
strengthened the multi-disciplinary ties between entrepreneurship and other fields (see
Whetten et al., 2009).
At the same time, although this multi-theoretical approach has enhanced entrepreneur-
ship research, it has the potential to produce a cacophony within the field as different
scholars investigate entrepreneurship employing different perspectives (Gartner, 2001;
Herron et al., 1991). In addition, ideas, and, in turn, concepts and theories, are products
of the time and place in which they develop, so each has its own history and important
assumptions (Bedeian, 2004). Thus, in order to better understand important concepts
and theories employed in conducting entrepreneurship research, we have to understand
both the background and intellectual roots from which the theories have evolved. Failing
to do so can lead contemporary scholars to both misinterpret and misapply these bor-
rowed theories.
Thus, in Part II of the book, we extend Zahra’s argument. Not only do we need to
understand the context in which concepts and theories will be applied, we also need
to understand the intellectual roots of the concepts and theories that we import from


other fields, including the assumptions on which the concepts and theories are based,
the intellectual roots from which the concepts and theories emerged, and the continued
development of these theories within their base disciplines. Each theory that we use in
entrepreneurship research is based on underlying assumptions and has probably been
developed within a specific intellectual ‘paradigm’. When entrepreneurship researchers
borrow these theories, however, they may ignore these underlying assumptions and intel-
lectual roots, which may lead to very questionable findings and even contradictory results
that do not add to our knowledge base.
The aim of the second part of the book is to elaborate on the assumptions and intellec-
tual roots on which entrepreneurship research is based. Of course, it is not possible for us
to trace the intellectual roots for all theories used in entrepreneurship research, and Part
II can be regarded as offering examples in which we cover several important concepts and
theories related to opportunity recognition, evaluation, and exploitation, and integrative
works examining the entire process.
Section II.1 Opportunity Recognition
Opportunities can arise from different sources, including exogenous shocks in the envi-
ronment or the existence of asymmetric information across individuals (Eckhardt and
Shane, 2003).
To examine the role of a changing environment, we begin this section with a chapter
by Lou Marino, Patrick Kreiser, and Anthony Robinson (Chapter 4) focusing on the
historical development of environmental uncertainty research. The authors note that, on
the one hand, uncertainty plays a central role in entrepreneurship, but on the other hand,
a relatively greater depth of research has been focused on the influence of ‘risk-taking’
while less attention has been devoted to the role of ‘uncertainty’ in entrepreneurship
research. In the chapter the authors clearly distinguish between the concepts of risk and
uncertainty, and review the historical development of the environmental uncertainty con-
struct and the most commonly employed measures of uncertainty. Two theoretical view-
points, the information uncertainty perspective and resource dependence theory, serve as
the foundation of this analysis, and the authors develop recommendations pertaining to
the use of this key concept in future entrepreneurship research.
The next three chapters continue this focus on how opportunities arise and, in turn,
how entrepreneurs recognize them. In Chapter 5, Nicolai Foss and Peter Klein review
the Austrian school of economics and focus, in particular, on Kirzner’s concept of
‘entrepreneurial alertness’. The authors argue that even though Kirzner’s contribution is
often thought of as the Austrian conception of the entrepreneur, an alternative Austrian
tradition exists that emphasizes the entrepreneur as an uncertainty-bearing, asset-owning
individual, and that this tradition offers some advantages over the discovery approach
(represented, for example, in the Kirznerian incarnations). Foss and Klein are also criti-
cal of the way Kirzner’s work has been interpreted in entrepreneurship research – this
literature goes much beyond Kirzner’s work, making opportunity discovery and its deter-
minants the key feature of the theory, whereas Kirzner’s real interest lies in explaining
market equilibration, a higher-level phenomenon.
In Chapter 6, Robert Baron notes that the concepts ‘opportunity’ and ‘opportunity
recognition’ have been central in entrepreneurship research, and that the volume of


research on these topics has increased considerably in recent years. The aims of this
chapter are to offer basic definitions of the concepts, and to provide an overview of
theoretical perspectives on opportunity recognition within the field of entrepreneurship.
Baron focuses in particular on concepts developed in cognitive psychology to discuss how
potential entrepreneurs may recognize opportunities when others do not, based on differ-
ences in information access and usage.
Finally, in Chapter 7, Verona Edmond and Johan Wiklund elaborate on another central
concept in the field of entrepreneurship research, namely ‘entrepreneurial orientation’ – a
critical construct within research that may affect whether entrepreneurs recognize poten-
tial opportunities or not. The authors examine the historical development of entrepre-
neurial orientations, with the aim of providing an overview of the intellectual roots of
the concept of ‘entrepreneurial orientation’ that originates in organizational and strategy
theory. They first identify key thinkers of the entrepreneurial orientation construct and
then highlight the most influential contributions of each researcher. In this respect, the
progress and the knowledge accumulation of the research field are made visible, and as
a result the gaps in the current body of literature are identified and the authors suggest
several directions for future research.
Section II.2 Opportunity Evaluation
Next, we examine how entrepreneurs evaluate potential opportunities. Scholars have

employed several theories to examine how entrepreneurs’ evaluations may potentially
differ from those of non-entrepreneurs. In Chapter 8, Saras Sarasvathy and Henrik
Berglund provide a detailed review of the theory related to entrepreneurial decision
making. They argue that research into entrepreneurial decision making has accom-
plished only a thin slice of what is possible, because, to date, little effort has been made
to relate findings from entrepreneurship research back to scholarship in decision making.
Sarasvathy and Berglund conclude that it is time to move from modeling entrepreneurial
activity solely as ‘decision’ occurring within the individual–opportunity nexus to include
the ‘design’ of opportunities, in which opportunities are not exogenous to the entrepre-
neurial process, but can also be its outcome or residual.
Section II.3 Opportunity Exploitation
In the next section of the book we examine several theories and frameworks examining
how entrepreneurs exploit what they have decided are viable opportunities. This section
includes four chapters. First, in Chapter 9, Brian Nagy and Franz Lohrke review research
related to liabilities new ventures face. They note that despite more than 40 years of
‘liabilities of newness’ research, the construct remains somewhat ambiguous. In addition,
they review related literature examining ‘liabilities of adolescence’ as well as the relatively
new concept of ‘assets of newness’. Finally, they suggest other theoretical perspectives
(e.g. the resource-based view of the firm) that may help in distinguishing these overlap-
ping constructs.
Second, Martin Ruef focuses his chapter (Chapter 10) on entrepreneurial groups (or
venture ‘founding teams’). For a long time entrepreneurship was regarded as an individual
achievement, and it was not long ago that our view changed, and entrepreneurship was


increasingly seen as a collective act. However, from Ruef’s review of significant research
related to entrepreneurial groups, we learn from historical evidence and frameworks that
can be employed to study entrepreneurial groups, and, in turn, learn that a preoccupa-
tion with groups is far less recent than research on entrepreneurship might suggest. In the
chapter, Ruef offers a selective history of entrepreneurial groups, and traces the intellec-
tual origins of social scientific work on them, emphasizing four classical perspectives: (a)
Georg Simmel’s structural sociology; (b) Ronald Coase’s theory of the firm; (c) the logic
of collective action in entrepreneurial groups, as developed by Mancur Olson; and (d)
theories of ethnic enterprise, with particular implications for the formation and persist-
ence of entrepreneurial groups.
In the third chapter in this section, Chapter 11 by Jonas Gabrielsson and Morten Huse,
the authors discuss governance theory, and give an overview of the historical and intellec-
tual roots of both resource dependence theory and agency theory with a particular focus
on how they have been applied in studies on boards of directors. The overview given in
the chapter will help entrepreneurship scholars to better understand the extent to which
the two theories can be used together and what might be required to make them more
compatible. The authors also provide interesting implications for researching behavioral
aspects of boards and governance in entrepreneurial firms.
In Chapter 12 Sarah Jack and Mary Rose conclude this section with a chapter review-
ing network theory that examines how important an entrepreneur’s personal and profes-
sional network can be in exploiting an opportunity. The aim of the chapter is to explore
the historical and intellectual roots of social network theory, and the authors elaborate
on its application within entrepreneurship research. In addition, they examine the way
in which multi-disciplinary approaches linking history to network theory can enhance
our understanding of the networking behavior of the entrepreneur. In conducting their
review, however, the authors also take a critical view on social network theory and explore
the ways in which networks may act as a constraint to entrepreneurship.
Section II.4 Integrative Works
The last two chapters in Part II provide broad, integrative views of the entrepreneurial
process. In Chapter 13 Alan Johnson and Frédéric Delmar offer an historical review of
psychological research in entrepreneurship, including for example the Theory of Planned
Behavior and Social Cognitive Theory. In addition, they suggest integrative links between
previous and future research into the psychology of entrepreneurs, and, more specifically,
integrate motivation theories within a self-regulation framework, i.e. the capacity of indi-
viduals to guide their activities over time and across changing circumstances. According
to the authors, using a self-regulation perspective allows for a better understanding of the
function and form of the entrepreneurial mindset, and permits integration of empirical
findings about the dynamic nature of the entrepreneurial process.
Part II concludes with Chapter 14, in which Todd Moss, Tom Lumpkin and Jeremy
Short examine the emerging but growing research related to social entrepreneurship.
To shed light on the development of social entrepreneurship as a field of research, the
authors provide an analysis of earlier research within the field by applying a content anal-
ysis of Special Issues on social entrepreneurship in academic journals between 1991 and
2008. The analysis shows that initial work in social entrepreneurship research centered on


change processes in the public policy sphere, moving to value creation in the nonprofit
sector, and currently focuses on theory-driven research in multiple sectors. Finally, the
authors use a historical perspective to identify research opportunities that may predict
future conceptual and empirical efforts examining social entrepreneurship and help frame
a future research agenda within the field.
PART III: ECONOMIC HISTORY AND ENTREPRENEURSHIP

RESEARCH
Historical reasoning has played a profound role in the early development of entrepre-
neurship research; for example, economic historians made pioneering contributions in
understanding the role of the entrepreneurial process in the evolution of industries and
economies. One of the first to call for a more extensive collaboration between economic
historians and economists around entrepreneurship was Joseph Schumpeter who repeat-
edly argued that ‘economic historians and economic theorists can make an interesting
and socially valuable journey together, if they will’ (Schumpeter, 1947).
For a long time economic history has been more or less neglected in entrepreneurship
research, and entrepreneurship researchers have lacked an interest in the historical and
institutional contexts of entrepreneurship. In the last couple of years, however, we can
find a stronger attention among entrepreneurship research towards the knowledge that
can be found in economic history. This interest has re-emerged in line with the repeated
argument in entrepreneurship research that we need to link our knowledge of entrepre-
neurial behavior on the individual and firm levels of analysis to processes of change at
more aggregate levels of analysis (e.g. Davidsson et al., 2001; Low and MacMillan, 1988).
For example, it is not possible to understand the entrepreneur as an individual without
understanding the institutional and historical context within which the entrepreneur is
operating.
The aims of Part III of the book are to re-introduce the interest in economic historical
reasoning in entrepreneurial research, and to show how knowledge in economic history
can contribute to our understanding of entrepreneurship. As argued by Jones and
Wadhwani (2006), the understanding of the historical setting and institutional context
are necessary to draw sensible generalizations about entrepreneurial behavior. The four
chapters included in Part III will give examples of how we can learn from scholars in
economic history, following Schumpeter’s plea, with the vision of stimulating a fruitful
exchange between scholars in economic history and entrepreneurship research.
In Chapter 15 Daniel Wadhwani introduces the section on economic history and entre-
preneurship research by making a detailed examination of the role of historical reasoning
in the development of entrepreneurship as a field of research, and gives an overview of
why history matters in entrepreneurship research. Wadhwani argues that historicism, i.e.
the analytical tradition of contextualizing behavior and cognition in time and place, has
shaped the development of the conceptions of entrepreneurship we use today, particu-
larly those that emphasize the role of the entrepreneurial process in explaining evolution
within industries and economies. In addition, the author gives examples of how histori-
cism has been used by a number of key entrepreneurship theorists and researchers (such
as William Baumol, Joseph Schumpeter, and Alexander Gerschenkron) and shows that


these scholars share an approach to exploring the past in their research on entrepreneur-
ship that recognizes the uniqueness of historical reasoning.
Next, we have included three chapters, by Andrew Godley, Hans Landström and
Lennart Schön, and David Ahlstrom and Linda Wang, examining historical contexts
within Great Britain, Sweden, and East Asia, respectively. In Chapter 16 Andrew Godley
demonstrates how entrepreneurial behavior in Great Britain followed a long-term secular
decline and then suddenly re-emerged at the end of the twentieth century. One lesson
to be learnt is that, in order to understand entrepreneurial behavior, entrepreneurship
researchers ought to embrace longitudinal analysis, and Godley argues that ‘Detailed
reconstruction of historical entrepreneurial activity ought therefore to become ever more
important not only for better economic history, but for our quest to better understand
entrepreneurship itself’.
In Chapter 17 Hans Landström and Lennart Schön follow a similar vein of thought,
arguing that society undergoes long-term cycles, and over the course of these cycles,
the characteristics of innovation and entrepreneurial behavior will change. Based on an
intellectual tradition in economic history from Schumpeter’s ideas about ‘business cycles’
and the Swedish economist Erik Dahmén’s theory on ‘development blocs’, the authors
explain the characteristics of innovation and entrepreneurship over time. The authors
use the long structural cycles identified in the Swedish economy since the mid-nineteenth
century as an empirical example, show how industrial society exhibits a pattern with
periods of positive transformation pressure followed by rationalization and negative
pressure ending in a structural crisis, and explain the cyclic variations in innovative and
entrepreneurial activities in ‘transformation’ and ‘rationalization’ periods.
Finally, in Chapter 18 David Ahlstrom and Linda Wang challenge the ‘cultural argu-
ment’ in explaining the rise of the economies in East Asia. The so called ‘Confucian capi-
talism’ has been a key mode of economic organization in East Asia, and is seen by many
as the explanation of growth in East Asian economies. Ahlstrom and Wang, however, ask
the important question: Is national culture really that important? The authors argue that
history seems to tell a different and more ambiguous story about culture’s contributions
to the development of entrepreneurial capitalism in East Asia. Their conclusion is that
researchers (and other observers) must be careful not to rush to cultural explanations
before examining historical context, path dependencies, institutions, firm development
and other key processes that are largely distinct from culture values. They also argue for
employing a history-based, organizationally oriented level of analysis for future research
to better understand the development of entrepreneurial capitalism in East Asia.
ADDITIONAL READINGS ON HISTORICAL REASONING IN

ENTREPRENEURSHIP RESEARCH
In sum, we have developed this book to provide an historical grounding of entrepreneur-

ship research. We hope you find its contents and lessons useful in enhancing your research
efforts, and we believe that historical reasoning will be important in future research
and understanding of entrepreneurship. As noted, the primary aims of this book are to
help stimulate a ‘historicizing’ of entrepreneurship research and to create an increased
awareness that ‘history matters’.


This volume is the first in a two-volume set focusing on these issues. The current
volume contains original writings by several leading entrepreneurship scholars, whereas
the second volume, Intellectual Roots of Entrepreneurship Research, includes classic foun-
dational works on entrepreneurship. Thus, the present volume provides broad historical
reviews of key theories and concepts, and the second includes what we believe to be
some of the most important seminal works in entrepreneurship. We have organized the
second volume much like the first by grouping these classic works within the opportunity
recognition, evaluation and exploitation framework. In tandem, the two volumes offer a
comprehensive overview of the field and should provide readers with a strong historical
grounding in entrepreneurship research.
For those readers interested in other historical overviews of the field, we suggest, along
with Intellectual Roots of Entrepreneurship Research, the following additional readings:
Cassis, Y. and I. Pepelasis Minoglou (eds) (2005), Entrepreneurship in Theory and History,
New York: Palgrave.
Hébert, R.F. and A.N. Link (2009), A History of Entrepreneurship, Milton Park:
Routledge.
Jones, G. and R.D. Wadhwani (eds) (2007), Entrepreneurship and Global Capitalism,
Cheltenham, UK and Northampton, MA, USA: Edward Elgar.
Landes, D.S., J. Mokyr and W.J. Baumol (eds) (2010), The Invention of Enterprise,
Princeton, NJ: Princeton University Press.
Landström, H. (2005), Pioneers in Entrepreneurship and Small Business Research, New
York: Springer.
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Management, 29, 309–31.
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front of a developing social science’, Entrepreneurship Theory and Practice, May, 375–98.
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research practice and suggestions for the future’, Entrepreneurship Theory and Practice, 24(4),
81–99.
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years on: achievements and future directions for entrepreneurship research’, Entrepreneurship
Theory and Practice, 24(4), 5–15.
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29, 333–49.
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ment’, Entrepreneurship Theory and Practice, 24(4), 27–39.
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entrepreneurship’, Working Paper, Cambridge, MA: Harvard Business School.
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tion: 1876–1999’, Journal of Business Venturing, 18, 283–311.
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Springer.
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Journal of Management, 14(2), 139–61.
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7, 149–59.
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Academy of Management Review, 25(1), 217–26.
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in S.A. Alvarez, R. Agarwal and O. Sorenson (eds), Handbook of Entrepreneurship Research.
Interdisciplinary Perspectives, New York: Springer, pp. 253–68.
Zahra, S.A. (2007), ‘Contextualizing theory building in entrepreneurship research’, Journal of
Business Venturing, 22, 443–52.



PART I
Historical Development of Entrepreneurship as a

Research Field



2. Entrepreneurship research: a history of
scholarly migration
Hans Landström and Mats Benner
INTRODUCTION
This book is about the historical foundations of entrepreneurship research. Thus, it

appears natural to start by stating that entrepreneurship as an intellectual field has a long
history – some pioneering contributions were published as far back as the eighteenth
century, although more systematic entrepreneurship research only began in the 1970s and
1980s. The aim of this chapter is to provide a historical retrospect of the development of
entrepreneurship as an intellectual field. We seek to answer the following questions: ‘How
has the composition of the field changed over time?’ and ‘what main disciplines have
dominated during different time periods?’ We address the issue from a particular angle,
in that we study migration patterns to (and from) entrepreneurship research and analyze
the consequences of migration for the composition of the field over time. Thus, the main
subject of this chapter is the historical formation of entrepreneurship as an intellectual
field. It is important to bear in mind that history can be depicted from many different per-
spectives and that various aspects can be focused upon. We therefore wish to stress that
this is our own subjective description of history, and we are well aware that there might
be other historical foundations of entrepreneurship research.
In this chapter we argue that entrepreneurship as a phenomenon has attracted schol-
arly interest for a very long time. Since the early contributions in the eighteenth century,
entrepreneurship has evolved through three eras in which it has been anchored in differ-
ent disciplines: the economics era (1870–1940), the social sciences era (1940–1970), and
the management studies era (1970–). Initially, entrepreneurship was regarded as a rather
marginal research theme within mainstream disciplines such as economics, and social
sciences like psychology and sociology. The research was conducted by a few individual
researchers within the respective disciplines. However, since the 1980s, entrepreneurship
has evolved toward a field of research in its own right. The evolution of the field was
reinforced by a ‘creative destruction’ in society toward a focus on industrial dynamics
and entrepreneurship, and as a result, entrepreneurship has become a centerpiece in the
political debate in many countries around the world. The development of entrepreneur-
ship as a research field bears the stamp of an intense immigration of scholars, not least
from the broader area of management studies. After the ‘take off ’ in the 1980s, entrepre-
neurship as a research field grew significantly in the 1990s, creating a strong infrastruc-
ture for research. From 2000 onwards, a ‘search for maturation’ within the field could be
identified, including (1) an intense debate on the domain of entrepreneurship research,
(2) the division of the research community into a group of ‘entrepreneurship researchers’
15

and another, rather scattered group of researchers interested in entrepreneurship within

many different disciplines (‘disciplinary researchers’), and (3) an increased interest in the
theoretical development within the field.
The chapter contains six sections. After this introduction section, some early entrepre-
neurship thinking is presented. This is followed by a more detailed discussion in three
separate sections on the economics, the social sciences, and the management studies eras.
The chapter ends with some concluding reflections on the past and future evolution of
entrepreneurship research.
Analyzing the Development of Research Fields – An Analytical Perspective
The dynamics of research fields – their rise, institutionalization and possible demise –
form a central part of social scientific studies. An early example is Ludwik Fleck’s study
of ‘styles of thought’ in the institutionalization of research fields (Fleck, 1979), a theme
also discussed in Thomas Kuhn’s famous paradigm theory (Kuhn, 1962). Both Fleck and
Kuhn stressed the collective and ‘sticky’ nature of knowledge production, but also how
unsolved anomalies in paradigms open up new avenues of research. Kuhn and Fleck
adhered to a structural understanding of scientific change and paid very little attention to
the personal motivation behind migration. This was instead taken up in studies of intel-
lectual migration and mobility patterns between disciplines, focusing on the motivation
for individual researchers to move between fields and how social mechanisms thereby
impacted upon research dynamics (Ben-David, 1970).
The main reasons identified for intellectual migration, and for the formation of new
fields on the basis of migration, were crises and anomalies of various kinds that led to
a search for new theories and methods with a better fit to observations (in line with the
Kuhnian approach), a lack of opportunities within existing fields (due to intellectual
rigidity), and chances to pursue lines of research in a more unrestricted manner within
new fields. Hence, research dynamics may be driven by migration patterns among
researchers triggered by ‘a crisis’ in old fields and/or new opportunities in emerging fields,
and the driving forces can be found in intra-academic mechanisms in the emergence of
new research fields.
Later studies focused on propelling forces beyond academia, for instance how research
areas evolve in political and/or economic environments with their interests and impli-
cations. Many new – often cross-disciplinary and problem-oriented – fields have been
modeled on the basis of practical knowledge interests (Elzinga, 1985), and external (i.e.
non-academic) forces have shaped the re-orientation of scientific inquiries in established
fields (Böhme et al., 1976). The evolution of research fields is, however, not a clear-cut
linear movement from policy to research; it may also reflect researchers’ resource mobi-
lization and their manipulation of policy environments (cf. Bolin, 2007). It seems rea-
sonable to conclude that many research fields, especially those with major political and
economic interests, are shaped by ‘development networks’ consisting of practical and
academic influences, where the content, direction and validation of research are outcomes
of ‘negotiations’ between academic and societal interests (Blume, 1985; Funtowicz and
Ravetz, 1990). Related to this argument, developments in research may also be analyzed
as reflections of resource mobilization among social, political and economic interests (a
resource mobilization approach), informed by the political sociology of science.


A history of scholarly migration 17
Finally, we can also look at the structure of entrepreneurship as an intellectual field

of research as, for example, demonstrated by Whitley’s model (2000), where the social
and intellectual dimensions of different research fields could be analyzed on the basis
of the extent to which the results can be predicted by a common use and understanding
of theories, concepts, and methods, and by a ‘mutual dependency’, reflecting a social
aspect by determining the extent to which scholars need to be coordinated with the intel-
lectual goals of the field in order to obtain resources and make significant contributions.
However, Whitley’s typology of general research fields can be criticized for building on
a discipline-based and somewhat out-of-date view of the organization of sciences. It can
be argued that phenomena in the social realm are often open to interpretation and can be
understood from various perspectives and increasingly addressed in a cross-disciplinary
setting (Landström and Åström, 2011) and, as pointed out by Whitley (2000) himself:
‘scientific fields are no longer coterminous with academic disciplines’ (p. 302), i.e. today,
there is an increasing variation in how scientific work is organized and carried out (see
e.g. Gibbons et al., 1994; Knorr Cetina, 1999; Becher and Towler, 2001). However, irre-
spective of our view of the sciences, we can conclude that migration into a research field
will be facilitated in fields characterized by low predictability of results and low depend-
ency among researchers – as is the case of entrepreneurship research.
This list of sociological explanations of research dynamics is by no means exhaustive;
other sociological approaches pinpoint the role of macro-actors in shaping research
fields and social practices (see Hambrick and Chen, 2008). Based on this reasoning, in
this chapter we discuss the historical evolution of entrepreneurship research and try to
understand its development from the perspective of the migration of scholars to (and
from) entrepreneurship.
EARLY THINKING IN ENTREPRENEURSHIP RESEARCH
Entrepreneurship research has a long history, and in this section we present some early
thinking on entrepreneurship within the emerging fields of economics and political
economics during the eighteenth and nineteenth centuries. The section ends with a dis-
cussion on the further development of the field, from the end of the nineteenth century
onward, and we argue that we can identify phases during which certain specific discipli-
nary approaches dominated entrepreneurship research.
Pioneering Thoughts on Entrepreneurship
The function of entrepreneurship is probably as old as exchange and trade between indi-
viduals in society. However, it was not until economic markets emerged that the concept
gained importance and scientists started to show an interest in the phenomenon. For a
long time the European economy was locked in the feudal system with no security of
property rights and local tolls hampering the free flow of products. During the Middle
Ages these conditions slowly changed, and a system evolved in which entrepreneurship
was primarily embodied by a class of merchants who provided raw materials to the market
for finished goods. In addition, the rise of the cities created a frontier for entrepreneurship
and economic dynamics. In this development, the Italian cities took the lead, and their


commercial success went hand-in-hand with a Renaissance in arts and sciences. The legal
framework was developed, property rights secured, economies monetized; thus, by the
1700s the legal and institutional conditions had changed considerably in favor of innova-
tion, entrepreneurship and economic development (Wennekers and Thurik, 2001).
The first author to give entrepreneurship a more precise economic meaning was Richard
Cantillon (approx. 1680–1734), an Irish-born banker and businessman who lived in Paris.
In his Essai sur la nature du commerce en general (1755/1999) he outlined the principles of
the early (emerging) market economy based on individual property rights and economic
interdependency and recognized three classes of economic agents: landowners, entre-
preneurs, and hirelings (van Praag, 2005; Hébert and Link, 2006; 2009). According to
Cantillon, entrepreneurs were engaged in market exchanges in order to make a profit, and
made business judgments in the face of uncertainty. Cantillon created a vision of how a
capitalist economy works and gave the entrepreneur a pivotal role – as an arbitrager respon-
sible for all the exchange in the economy, and who, in turn, brings about the equilibrium
between supply and demand. A basic characteristic of Cantillon’s analysis was the empha-
sis on risk and uncertainty, and he related the function of the entrepreneur to uncertainty –
entrepreneurship is a matter of foresight and willingness to assume uncertainty (a thought
that was later refined by American economists and not least by Frank Knight).
Cantillon’s essay initiated an interest among French authors on entrepreneurship,
especially among a group called ‘the Physiocrats’ (physiocracy meaning rule of nature),
whose leader François Quesnay (1694–1774) shared Cantillon’s basic economic vision
and emphasized the importance of capital for economic growth. According to the physi-
ocrats, capital comes from the landlords, and entrepreneurs are present in the economy
as farmers (Grebel, 2004; Hébert and Link, 1982; 2006). Another writer who should be
mentioned in the French economics tradition is Jean-Baptiste Say (1767–1832), who was
himself an industrial entrepreneur as manager of a textile mill in Pas-de-Calais (Hoselitz,
1960). He employed an empirical description of what entrepreneurs actually did and
analyzed their function independently of the particular social framework within which
they operated (Hébert and Link, 1982; Kalantaridis, 2004). In contrast to Cantillon, Say
suggested another definition of entrepreneurship, one which emphasized the coordinat-
ing role in production and distribution (i.e. a coordinator): entrepreneurship consists of
combining the factors of production into an organization.
In conclusion, these early French authors considered the entrepreneur as a vital com-
ponent of the market economy, but different aspects were attributed to the entrepreneur
and the concept was developed in a number of different directions. The early thoughts on
entrepreneurship based on French economic literature of the eighteenth and nineteenth
centuries were paralleled or followed by writers in England and Germany during the
classical economics period from 1770 to 1870 (see Table 2.1).
Entrepreneurship in Classical Economics and Political Economy
By the mid eighteenth century, production conditions and social relations were changing,
and a new way of thinking began to emerge. These changes also affected the intellectual
and academic environment. Classic economic theory was developed in the realm of eco-
nomic science and is generally regarded as having its origin in Adam Smith’s (1723–90)
Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776 – a work


Table 2.1 Early thinking on entrepreneurship
Early contributions Classical economists Political economists

(France) (Britain) (Germany)
Richard Cantillon Entrepreneurship was more J.H. von Thünen
‘The Physiocrats’ (e.g. Quesnay, or less neglected in classical Hans von Mangoldt
Baudeau, and Turgot) economics, the exceptions being Gottlieb Hufeland
Jean-Baptiste Say Jeremy Bentham and John Friedrich Hermann
Stuart Mill Adolph Riedel
that in many ways set the trend for economic theory and in which Smith laid the founda-
tion for the analysis of the way the market economy functions. Smith’s work influenced
the view of the entrepreneur in economic science. His entrepreneur was essentially
passive, a prudent, cautious person who adjusted to circumstances (Hébert and Link,
2006; 2009), and he did not distinguish between the capitalist as the provider of the
‘stock’ of the enterprise and the entrepreneur as the ultimate decision-maker – instead the
capitalist became the central actor in Smith’s analysis.
However, there were a number of English classical economists who maintained a
certain amount of interest in entrepreneurship, including Jeremy Bentham (1748–1832),
who criticized Smith for not considering the role of the entrepreneur in society, and
John Stuart Mill (1806–73), who contributed very little to the theory of entrepreneur-
ship but has been recognized as the person who gave the term ‘entrepreneur’ a more
general meaning than that attributed to it by economists at the time. It can be concluded
that the English school of thought mainly interpreted the concept of entrepreneurship
as one who supplies financial capital, and the so-called Smith–Ricardo–Mill tradition
that dominated English classical economics did not give the entrepreneur any nuanced
meaning (Grebel, 2004). As Casson (1987) argued, the disappearance of the entrepreneur
in economic theory is even more pronounced following the rise of the neoclassical school
of economics. After 1870 economic theory focussed increasingly on deterministic models
that emphasized perfect information and perfect markets (Baumol, 1968).
It is interesting to note that there were also some contributions to entrepreneurship
theory from researchers in Germany and Austria. The analyses from these countries
belonged to a tradition that emphasized administration and politics. One economist who
deserves mention is von Thünen (1783–1850), who argued that there is a theoretical differ-
ence between entrepreneurship and management and who considered the entrepreneur as
both an innovator and a risk bearer. Another is Mangoldt (1824–68), who regarded entre-
preneurial profits as the rent for ability, indicating that the entrepreneur should be regarded
as a separate factor of production. The German political economy tradition nurtured the
concept of business leader, and to some extent they could be regarded as anticipators of
Knight’s theory of risk and uncertainty (Grebel, 2004; Hébert and Link, 1982; 2006).
Three Eras of Entrepreneurial Thinking
Since these early contributions, the research field has become highly multidiscipli-
nary with an interest among scholars from many different disciplines. At the risk of


1870–1940 1940–70 1970–

Economics era Social sciences era Management studies era
1850 1900 1950 2000
Figure 2.1 Three eras of entrepreneurial thinking
over-simplification, we argue that three different eras of entrepreneurship research can be

identified, during which some specific disciplines dominated (Figure 2.1).
We hold that entrepreneurship is a complex phenomenon that requires multiple
theoretical lenses to be understood. However, over time entrepreneurship research was
anchored in different theories, initially in economics (1870–1940), followed by the social
sciences (1940–70) and after 1970 in management studies – based primarily on migration
patterns – but has now evolved as a specific research area in its own right.
In this development, the research has moved from being a (rather marginal) theme
within some mainstream disciplines such as economics and social sciences like psychol-
ogy and sociology, mainly based on individual achievements within the respective disci-
pline, toward a more coherent field of research and the creation of a scholarly community
of researchers. This movement from a research theme in mainstream disciplines toward a
field of research in its own right is not unproblematic. Of course there are still some argu-
ments for anchoring entrepreneurship research in mainstream disciplines. For example, it
might be argued that (i) there are few contingencies of interest to entrepreneurship that
are not contained in existing disciplines and therefore there is no need for entrepreneur-
ship researchers to ‘reinvent the wheel’, and (ii) as a research theme within existing disci-
plines, entrepreneurship research is required to meet the quality criteria of the respective
discipline, which is a way for the research to attain academic legitimacy (Davidsson,
2003). On the other hand, as entrepreneurship can be regarded as a rather complex phe-
nomenon, existing theories may not always be optimal for addressing these characteris-
tics, indicating a need to pose new questions and build concepts and models that better
explain the phenomenon (Landström, 2001). Leaving entrepreneurship to mainstream
disciplines may also imply the lack of a strong research community within entrepreneur-
ship research – a community with deep knowledge and familiarity of entrepreneurship as
a phenomenon (Low, 2001) – in addition to which there is no guarantee that research will
focus on the most central questions of entrepreneurship (Acs and Audretsch, 2003).
ECONOMICS ERA (1870–1940)
Even though the interest in entrepreneurship among economists seemed to lose its power
with the rise of the neoclassical school of economics, and most economists were working
within an equilibrium tradition, we can identify a few exceptions who were mainly inter-
ested in disequilibrium processes, based on the ideas of Knight, Schumpeter, and the
Austrian school of thought (Figure 2.2).


American tradition in
• Occupational choice models
economics (e.g. Walker, Frank Knight
Kihlstrom and Laffont/Lucas
Hawley, and Clark)
Karl Marx
Leon Walras • Evolutionary
Research Center in
economics
German Historical School Joseph Schumpeter Entrepreneurial
• Individual
(e.g. Schmoller) History
economists
Austrian school of economics
(e.g. Menger, Wieser, and Hayek/Mises Israel Kirzner
Böhm-Bawerk)
Figure 2.2 The economics era
Knightian Tradition
In the late nineteenth century, the European discussion on entrepreneurship found an

audience in the United States. After the Civil War ended in 1865, the US recovered and
was well on the way to becoming a major industrial power, at which point some US econ-
omists such as Amasa Walker (1799–1875), his son Francis Walker (1840–97), Frederick
Hawley (1843–1929) and John Bates Clark (1847–1938) continued the discussion
about entrepreneurship. Hawley established a risk theory of profit in which he equated
enterprise with risk-taking and regarded risk and uncertainty as commonplace in the
industrial system. This caused a dispute between Hawley and Clark, the pre-eminent
American economist at that point in time, who refused to concede that risk-bearing was
an entrepreneurial activity and argued, as did Schumpeter later on, that all risk is borne
by the capitalist (Hébert and Link, 2006; 2009). Hawley’s contributions can be regarded
as limited, but his work is of interest as it constitutes an intermediate stage between
Cantillon and Knight (Kalantaridis, 2004).
The risk–uncertainty theme was thus later picked up by Frank Knight (1885–1972).
Within the context of the neoclassical framework, Knight considered the entrepreneur
as a key figure in the economic system (Cassis and Pepelasis Minoglou, 2005). Knight’s
contribution to entrepreneurship theory is that he provided a distinction between insur-
able risks and non-insurable uncertainty and also put forward the theory of profit that
related non-insurable uncertainty to rapid economic change and to differences in entre-
preneurial ability. In his thesis Risk, Uncertainty and Profit (1916, revised 1921), Knight
made a distinction between three types of future uncertainties – risk, uncertainty, and
‘true’ uncertainty that occurs when the future is not only unknown, but also unknowable
with unclassifiable instances and a non-existing distribution of outcomes (Sarasvathy
et al., 2003). Knight argued that opportunities arise out of the uncertainty surround-
ing change – if change is predictable there is no opportunity for profit – and the entre-
preneur receives a return for making decisions under conditions of true uncertainty.
Entrepreneurial return, therefore, results from the fact that individual activity cannot
be predicted, and entrepreneurial competence is the individual’s ability to deal with
uncertainty.


The work of Frank Knight has been influential, primarily in the context of different
occupational choice models, i.e. individuals’ choice between becoming an entrepreneur
and choosing alternative occupations. One such model was developed by Lucas (1978),
who argued that individuals differ in their innate entrepreneurial ability, ranging from the
most able, who choose to become entrepreneurs, all the way down to ‘marginal entrepre-
neurs’, who are indifferent to the distinction between entrepreneurship and paid employ-
ment. In addition, Kihlstrom and Laffont (1979) modeled entrepreneurial choice as a
trade-off between risk and returns. In the model, individuals differ with respect to how
risk averse they are, and the least risk-averse choose entrepreneurship and will also run
the largest firms (Parker, 2005).
Schumpeterian Tradition
Joseph Schumpeter (1883–1950) is probably the best known of the economists with
an interest in entrepreneurship at the beginning of the twentieth century. Although
Schumpeter himself was a great admirer of Leon Walras, he considered Walras’ equilib-
rium theory incomplete. He noted that some ‘energy’ existed within the economic system
that created disequilibrium in the market. Schumpeter recognized the role of innovation
in economic growth and understood that innovation had to be implemented by someone
– the entrepreneur. The entrepreneur creates imperfections and growth in the market by
introducing innovations.
In Schumpeter’s extensive scientific production he tried to build a new economic theory
based on change and innovation. In his efforts to create a theory of change he was influ-
enced by the German Historical School – a group of economists critical of the economic
doctrine of the time, especially the English tradition of economic thought – arguing
that in order to understand economic behavior, economists need to comprehend human
motives and behaviors in realistic psychological terms and that an understanding of
historical data is a prerequisite for the proper development of economic theory (Hébert
and Link, 2006). According to this tradition, the entrepreneurial process is characterized
as one of breaking away from old methods of production and creating new ones. The
scholars within the German History School that influenced Schumpeter included Max
Weber and Gustav Schmoller (1838–1917). From Schmoller’s historical and empirical
data he identified a unique factor in all economic activity – the enterprising spirit, or the
entrepreneur. According to Schmoller, the entrepreneur is a creative organizer whose role
is innovation and the initiation of new projects. Despite the fact that Schumpeter consid-
ered Karl Marx’s economic thesis of little scientific value, he regarded Marx’s idea that
capitalism possesses internal dynamics that transform it as a brilliant insight that merited
further development (Smelser and Swedberg, 1994). Schumpeter combined ideas from
Marx and the German Historical School, along with insights from his Austrian forebears,
Menger, Weiser, and his teacher Böhm-Bawerk, but did not follow his predecessors and
instead created something unique.
Schumpeter’s production of scientific works can be regarded as rather fragmented, but
throughout his career there is a very clear line of thought – to formulate a new economic
theory built on change and ‘newness’. Schumpeter was the first to treat innovation as an
endogenous process – the entrepreneur as an innovator and prime mover of the economic
system, who leads the economy away from existing equilibrium positions and forces it to


a higher equilibrium position (van Praag, 2005). His thoughts are presented and analyzed
in works by, for example, Swedberg (1994) and Reisman (2004) – see also Chapter 17.
However, it is generally argued that Schumpeter’s writings fall into two periods – until
approximately 1940 he was mainly interested in developing ideas about entrepreneurship
and integrating them into a new economic theory based on innovation and economic
change, while in the second period, during the 1940s, he focused on the sociological
aspects of entrepreneurship and also tried to sketch a research program in entrepreneur-
ship in economic history (Swedberg, 2000).
Schumpeter’s ideas stimulated a new wave of interest in the mid twentieth century.
At Harvard University – Schumpeter’s academic base during the 1930s and 1940s – a
research program emerged, headed by the economic historian Arthur Cole (1889–1974),
who established the Research Center in Entrepreneurial History in 1948, a multidiscipli-
nary center with an interest in the entrepreneur from the standpoint of economic history.
Schumpeter’s insights later exerted an influence on the school of Evolutionary Economics
(Nelson and Winter, 1982), which applies dynamic analysis to specific historical times and
developments, although it has been argued that the link between Schumpeter’s work and
the new evolutionary economics is in fact rather weak (Andersen, 1994; Fagerberg, 2003).
Schumpeter also influenced a few economists who have carried his heritage further,
such as Erik Dahmén (1950; 1970) who formulated the concept of ‘development blocs’,
William Baumol (1968; 1990; 1993; 2002) who argued that because entrepreneurship is
present in all settings, it is the different institutional structures that generate the vari-
ances in wealth creation across societies, and Harvey Libenstein (1968), who explored the
significance of entrepreneurship in economic development.
Kirznerian Tradition
Carl Menger (1840–1921) is, above all, considered to be the ideological founder of the
so-called Austrian tradition of economic thought. His contribution is mainly at the meth-
odological level. In his seminal work Grundsätze der Volkswirtschaftslehre (1871/1950)
he introduced a subjectivistic view of the economy. He was the proponent of methodo-
logical subjectivism, where economic phenomena are perceived as relations not between
objects but between people. Based on this viewpoint, in order to understand such rela-
tions, economic theory must proceed from the social, cultural and economic conceptions
that govern human actions. Unlike the natural sciences, economics cannot ignore the per-
ceptions, wishes and views of the people studied. This view is also reflected in Menger’s
methodological individualism. Within society and economics, the actors are individuals
– not a group or social class – which means that explanations of economic phenomena
have to proceed from or at least be possible to refer back to individual action (Pålsson-
Syll, 1998; Koppl and Minniti, 2003). Thus, economic changes do not take place in a
vacuum but are created by individuals’ awareness and understanding of a given situation.
This means that the entrepreneur can be considered an ‘agent of change’, who transforms
resources into useful products and services.
The Austrian school of economic thought was further developed by Menger’s dis-
ciples Friedrich von Wieser (1851–1926) and Eugen von Böhm-Bawerk (1851–1914).
Wieser expanded Menger’s ideas and added some dimensions to the entrepreneur, such
as leadership, alertness and risk-bearing. Although Böhm-Bawerk added very little


directly to the theory of entrepreneurship (Hébert and Link, 2006), one of his students,
Ludwig von Mises (1881–1973), continued the ideas of the Austrian school, emphasiz-
ing that the individual is an independent economic entity and that the economic condi-
tions in society are to a large extent influenced by his/her actions. According to Mises,
economics is the study of ‘human action’ – people are not only calculating creatures but
also alert to making use of opportunities. Like Schumpeter, Mises emigrated to the US
when the Nazi party came to power in Germany, but in contrast to Schumpeter he had
some difficulties finding an academic home there. Mises, who is regarded as the leader
of the Austrian school from about 1920 to his death in 1973, was an important influ-
ence on the 1974 Nobel Laurate Friedrich von Hayek (1899–1992). Hayek emphasized
the economic role of knowledge and the dispersion of knowledge among the various
actors in society – different people know different things and the problem is how to
coordinate this dispersed knowledge. He argued that the market process will solve this
‘knowledge problem’ through decentralized decision-making, but nobody knows in
detail how the whole system works. Hayek described market competition as a ‘discovery
procedure’ – anyone in the system may act upon new knowledge or information that
allows him or her to profitably reallocate resources (Koppl and Minniti, 2003; Berglund,
2009).
Today, the most prominent disciple of the Austrian tradition is Mises’s student Israel
Kirzner (1930–) of New York University. In his book Competition and Entrepreneurship
(1973), Kirzner developed the arguments presented by Mises, although he was also
influenced by Hayek’s ideas about the ‘discovery procedure’ (Koppl and Minniti, 2003).
According to Kirzner, it is fundamental for an entrepreneur to be alert in identifying
and dealing with profit-making opportunities (‘entrepreneurial alertness’), i.e. the entre-
preneur tries to discover opportunities for profit and helps to restore equilibrium to the
market by acting on them. The entrepreneurial function involves the coordination of
information, which implies identifying the gap between supply and demand, as well as
acting as a broker between supply and demand, making it possible to earn money from
the difference. Thus, the entrepreneur searches for imbalances in the system. In such situ-
ations, there is an asymmetry of information in the market, which means that resources
are not coordinated in an effective way. By seeking out these imbalances and by con-
stantly trying to coordinate the resources in a more effective way, the entrepreneur leads
the process toward equilibrium. Thus, Kirzner regards the entrepreneur as a person,
who is alert to imperfections in the market thanks to information about the needs and
resources of the different actors and, with the help of this information, is able to coor-
dinate resources in a more effective way, thereby creating equilibrium (see Chapter 5 for
additional discussion of Kirzner’s work).
An alternative conceptualization of the entrepreneur, even if the theoretical construct
was only by implication, was developed by Shackle (1970), who was a student of Hayek
and who argued that knowledge does not constitute the key to understanding human
action, but rather ‘unknowledge’, or as Shackle expressed it ‘[economic agents] can
choose only among imaginations and fictions. Imagined actions and policies can have
only imagined consequences, and it follows that we can choose only an action whose
consequences we can not directly know since we can not be eyewitnesses of them’ (p. 106).
It is the aptitude of imagination that makes individual economic agents enterprising
(Kalantaridis, 2004).


Research Center in
Entrepreneurial History
Arthur Cole
Joseph Schumpeter Historical sociologist approach Sociologist-psychologist approach

– innovation and Leland Jenks and Thomas David McClelland and Everett Hagen
creative destruction Cochran
• Psychologists • Sociologists
Talcott Parsons The modernization of societies – Traits – Deviant behavior
– structural around the world (e.g. Cochran, – Categories of – Culture
functionalism Landes, Jenks, Gerschenkron) entrepreneurs – Networks
Figure 2.3 The social sciences era
SOCIAL SCIENCES ERA (1940–70)
In the mid-twentieth century the idea of the entrepreneur tended to fade away in the
theory of economics (Kalantaridis, 2004), and economics as a discipline became increas-
ingly formalized and mathematically oriented – an approach that made it difficult to
include the entrepreneur in the models of economics (Hébert and Link, 2009). As a
consequence, classical and early neoclassical economic theorists left the concept of entre-
preneurship as a source of structural change within capitalist economies largely unde-
veloped. However, in the 1940s a number of social scientists, for the most part anchored
in economic history and sociology, began to take an interest in entrepreneurship as an
empirical phenomenon. The historical study of entrepreneurship typically employed a
Schumpeterian approach and focused on the modernization process of societies around
the world. By the 1960s this stream of research lost momentum, but scholars from psy-
chology entered the field with an interest in the entrepreneur as an individual, and their
works started to investigate his/her key traits and personality. The research on entrepre-
neurship during the social science era (1940 to 1970) is outlined in Figure 2.3.
Early Historian Sociologists’ Interest in Entrepreneurship
We can find an early interest in entrepreneurship and related questions among historians.
As far back as the mid nineteenth century, economic historians questioned the static the-
ories of classical and neoclassical economics and argued for the use of historical analysis
in order to understand the way in which institutions of capitalism and industries evolved
(Hodgson 2001; Jones and Wadhwani, 2007).
In the early twentieth century a number of historians and historical sociologists
started to emphasize the role of the entrepreneur in the process of economic change
(Jones and Wadhwani, 2007). For example, some German historical sociologists includ-
ing Max Weber (1864–1920) led the way to exploring the role of the entrepreneur in a
changing society. His main contribution to entrepreneurship knowledge was presented
in his well-known work The Protestant Ethic and the Spirit of Capitalism (1904/1970),
in which he placed a strong emphasis on religious influences – primarily the Protestant


work ethic – as a driver of entrepreneurial forces in society. Weber argued that this ethic
created a positive attitude to work and to earning money, which, in turn, facilitated the
development of entrepreneurship and capitalism. Weber also made some contributions to
entrepreneurship in his later, more political writings during the 1910s, when he contrasted
the entrepreneur with the bureaucrat, arguing that as society becomes more rationalized,
bureaucracy tends to increase in importance, and the entrepreneur is the only person who
can keep bureaucracy at bay (Swedberg, 1998; 2000; Martinelli, 1994).
Among the influential historical sociologists of that time were Georg Simmel (1858–
1918), a contemporary of Weber with an interest in interpersonal associations and a
forerunner of modern network analysis, and Werner Sombart (1863–1941), who in his
six-volume magnum opus Der moderne Kapitalismus (Modern Capitalism, 1911), coined
the concept of creative destruction, which later became a key ingredient of Schumpeter’s
theory of innovation.
The Historical Sociologist Approach
For many years, Schumpeter argued for empirical historical studies of entrepreneur-
ship. In a series of articles and speeches he suggested extensive research that involved
greater collaboration between economic historians and economists focusing on how
entrepreneurship shaped the historical development of firms, industries, economies, and
modern capitalism (Jones and Wadhwani, 2006). For example, in the article ‘The creative
response in economic history’ (1947) Schumpeter posited that ‘Economic historians and
economic theorists can make an interesting and socially valuable journey together if they
will’ (p. 149) and called for the use of historical methods in the study of entrepreneurship
(Jones and Wadhwani, 2007).
In the 1940s, a number of economic historians and sociologists began to explore
entrepreneurship as an empirical historical phenomenon, and over the next few decades
historians produced a large body of literature on entrepreneurship and its role in the
modernization process of societies around the world, all of which was partly inspired
by Schumpeter’s plea to employ more elaborate historical methods in the study of entre-
preneurship. Theoretically, the research drew heavily on Talcott Parsons’s structural-
functional theory of social roles. Over the following three decades economic historians
produced a large body of research, in which the role of entrepreneurship in the historical
development of countries around the world was emphasized (Sass, 1978). In addition,
social scientists interested in the process of ‘modernization’ further built on this historical
research base and used it to expand on theories of long-term economic development and
historical change (Wadhwani and Jones, 2007).
The effort was led by the Harvard economic historian Arthur Cole, who in 1948 organ-
ized the Research Center in Entrepreneurial History at Harvard University, which was
highly multidisciplinary in character. Several of the most influential scholars at that point
in time were affiliated to the center, for example sociologists like Talcott Parsons and
economic historians such as Thomas Cochran, Alexander Gerschenkron, David Landes,
and Fritz Redlich, in addition to Schumpeter. The journal Explorations in Entrepreneurial
History provided the institutional mechanism to pull the wide range of empirical studies
together.
The Center adopted an eclectic view of economic history. Cole encouraged a wide


range of approaches to ‘entrepreneurial history’, including socio-cultural studies, neo-

classical economic approaches, and work that focused on the evolution of industries.
Influential contributions to the intellectual milieu were made by two American histori-
ans: Leland Jenks and Thomas Cochran. In the mid-1940s Jenks presented a study in
which he used Schumpeterian reasoning to examine the dynamic and disruptive entre-
preneurial force in American economic development, and over the next few years Jenks
and Cochran elaborated further on Parsons’s structural functional theory to understand
the origins of entrepreneurial ‘roles’ within economic development based on how social,
cultural, and institutional factors promote entrepreneurship in society (Sass, 1978).
Jenks and Cochran’s approach rather quickly became the dominant approach to histori-
cal research on entrepreneurship (Jones and Wadhwani, 2006), and researchers tried to
understand how historical context and social structure shaped the emergence, amount,
and character of entrepreneurship within a particular national setting. In the 1940s and
1950s researchers anchored in economic history produced a large body of knowledge to
explain how historical context and social structures shaped the rise of entrepreneurship
in the transition to capitalism in countries around the world, i.e. related to the main ques-
tion of why some countries had grown while others remained relatively poor over long
periods (Jones and Wadhwani, 2007). By the 1950s historians were engaged in studying
variation in entrepreneurship in countries around the world and linking their findings to
the long-term economic development of nations (see e.g. studies by Cochran, 1950; 1960;
Jenks, 1944; 1949; Landes, 1949; 1953; Sawyer, 1954; Ranis, 1955; Gerschenkron, 1962:
1966).
After a couple of decades, however, this stream of research lost momentum among
economic historians. There are many potential explanations for this decline in interest.
One reason might be that the structural-functional approach employed by the framework
in many studies seemed to produce rather few insights beyond the observation that entre-
preneurship was socially and historically embedded, and the research was criticized for
providing few explanations of the great variety in development paths found in the com-
parative empirical studies conducted in countries around the world. As a consequence,
the modernization framework came under attack for its inability to account for the tre-
mendous variation in development paths and the diversity of conditions in developing
countries (Jones and Wadwani, 2007).
Another explanation for the decline was without doubt the competition that emerged
from new frameworks within economic history, not least from the new organizational
approach to business history pioneered by the MIT professor Alfred Chandler. In his
book Strategy and Structure (1962) he was mainly concerned with the growth of large
professionally managed companies during the period 1850–1950. The new approach
drew on a stronger focus on the organizational and managerial elements of firms in his-
torical change, and Chandler was ambivalent regarding the role of entrepreneurship in
shaping the trajectory of business development (Cassis and Pepelasis Minoglou, 2005).
This new approach seemed to be tremendously promising, and a new generation of busi-
ness historians started to focus their attention on building an ‘organizational synthesis’
of the modern, multidivisional corporation (Galambos, 1970). By the 1970s a clear shift
had taken place, and researchers in economic history increasingly adopted orthodox
neoclassical economic theory and quantitative methods in their research. As a manifesta-
tion of this shift in interest, the Research Center in Entrepreneurial History ran out of


financial and institutional support and was forced to close down in 1958, and the journal
Explorations in Entrepreneurial History was revived as Explorations in Economic History
(Jones and Wadhwani, 2007).
The Psychologist and Sociologist Approach
Although social scientists remained interested in entrepreneurship, it was primarily

through the works of psychologists and sociologists that entrepreneurship research con-
tinued to flourish. At the end of the 1950s and in the early 1960s, a series of large-scale
studies based on a comparative-historical approach were conducted in order to under-
stand the personal traits and characteristics of the entrepreneur. Two seminal studies are
worth mentioning. The best known is David McClelland’s study The Achieving Society
(1961), in which he posed the question: Why do certain societies develop more dynami-
cally than others? He argued that certain norms and values, particularly with regard to
the ‘need for achievement’, are of vital importance for the development of society. The
second was Everett Hagen’s book On the Theory of Social Change (1962), in which he
analyzed the emergence of innovation and technology in England, Japan, Colombia, and
Burma. Whereas McClelland concentrated upon the individual, Hagen focused on the
social groupings, and the question: Why do entrepreneurs more often come from certain
social groupings than others? He claimed that entrepreneurs tend to come from groups
that suffered from a withdrawal of status, i.e. the members of some social groups perceive
that their aims and values are not respected by the groups in society that they respect and
whose esteem they value (Martinelli, 1994; Kalantaridis, 2004).
McClelland and Hagen’s contributions meant that the personal qualities of the entre-
preneur occupied a prominent position in entrepreneurship research within the field of
social sciences during the 1960s and 1970s. Many studies tried to identify the particular
qualities of the entrepreneur. The number of traits identified in research has gradually
increased and, with a few exceptions, it has proven difficult to link any specific traits to
entrepreneurial behavior (Brockhaus, 1982; Delmar, 2000).
The interest in entrepreneurship was evident not only among psychologists but also
within behavioral sciences such as sociology and social anthropology. The content of
sociology as a discipline is very extensive and entrepreneurship has never been a domi-
nant theme within the field. Entrepreneurship research conducted within the field of
sociology can be related to areas such as (Martinelli, 1994; 2004; Kalantaridis, 2004):
● Entrepreneurship as deviant behavior: This research tradition dates back to the

works of Sombart, who argued that the ability to break traditional values is more
frequent among marginal and minority groups than the population at large –
non-acceptance by society enables individuals to disregard the traditional values
that regulate economic behavior (Kalantaridis, 2004). Theoretical constructs
related to social marginality were introduced by Hoselitz (1963) and Young (1971),
and during the 1980s and 1990s several empirical studies (for example Aldrich and
Waldinger, 1990) supported their thesis.
● Entrepreneurship and culture: Following Weber’s comparative analysis of reli-
gious ethics and economic development in the rise of capitalism, and Parsons’s
structural functional theory, scholars within economic history (e.g. Landes, 1953;


Gerschenkron, 1962) as well as sociologists (e.g. Parsons and Smelser, 1957; Lipset,
1967) continued to focus on the cultural aspects of the emergence and development
of industrialization in different countries.
● Entrepreneurship and networks: The study of networks stems back to classic
economics and sociology literature, in which social structure influences market
processes (Veblen, 1972). Research on networks and entrepreneurship has largely
concentrated on three different levels of analysis (Thornton and Flynn, 2003):
network ties between individuals (e.g. Granovetter, 1973; 1985; Burt, 1992), con-
nection of teams and groups (e.g. Aldrich and Zimmer, 1986; Ruef et al., 2003),
and networks of firms and industries (e.g. Freeman, 1986).
In contrast to sociology, few studies of entrepreneurship can be found in social anthro-

pology, but some of the most interesting pioneering work produced in entrepreneurship
is by anthropologists such as Fredrik Barth (1963; 1967) and Clifford Geertz (1963). The
early studies primarily concentrated on social change and economic development but
also focused on the interaction between local entrepreneurship and the social pattern of
the individual.
One conclusion that can be drawn is that entrepreneurship research never attracted
a large number of researchers within the social sciences – the research was mainly
conducted by a couple of individual researchers within the respective discipline, and
the studies were strongly anchored within the discipline. The marginalization of entre-
preneurship may also be explained by a limited interest in entrepreneurship and small
businesses in society – economic development and dynamics were assumed to be based
on mass-production, and large companies were seen as superior in efficiency as well as
the driving force behind technology development. As both sociology and psychology
are fairly broad yet fragmented disciplines, with different research themes competing for
attention, entrepreneurship never gained a strong foothold.
MANAGEMENT STUDIES ERA (1970–)
The 1960s and 1970s were characterized by great economic and political changes in
society. It was a period of ‘creative destruction’ in which new technologies were gaining
ground, changes were taking place in the industrial structure, questions were being raised
about the efficiency of larger companies, attitudes toward entrepreneurship and small
businesses were emerging (‘small is beautiful’ became a catch phrase), and there was an
increased political debate supported by politicians such as Ronald Reagan in the USA
and Margaret Thatcher in the UK. In addition, entrepreneurship gained a foothold in
the curriculum at US business schools and among scholars within management studies
(Landström, 2005).
Against this background, entrepreneurship and industrial dynamics became a domi-
nant theme in society. Many scholars from different areas of management studies rushed
into this promising field of research. Since the 1980s the interest in entrepreneurship in
society has continued, and the field has grown considerably in terms of the number of
researchers but also with regard to the number of publications, journals, and conferences.
The development of entrepreneurship as a research field since the 1980s can be described


as three phases: (i) take-off, (ii) growth, and (iii) a search for maturation. In this section
we elaborate on this development, with the focus on the migration of scholars to (and
from) the entrepreneurship research field.
The ‘Take-off ’ Phase: The Pioneers of Entrepreneurship
As society and political interest changed from large scale structures toward disintegration
and new sources of economic organization and dynamics, a whole line of scholars with
an emergent interest in entrepreneurship and small businesses started to conduct studies
on this ‘new’ and important phenomenon. At first, the management scholars interested
in entrepreneurship picked up where the social scientists had left off – searching for entre-
preneurial traits and personalities. However, over time, the research on the individual
characteristics of the entrepreneur became subject to criticism and was regarded as a
‘dead end’ in entrepreneurship research.
In addition, due to the newness of the field and its lack of identity in terms of con-
cepts, theories and methods, it was easy for researchers from different fields of manage-
ment studies to carry out research on entrepreneurship without experiencing obvious
deficits in competence – entrepreneurship was a ‘low entry’ field – in which research-
ers could rely on concepts and theories anchored in their home field of research. As
a consequence, the research on entrepreneurship became extremely diversified, and it
became a question of discovering this ‘new’ phenomenon from many different angles.
To illustrate the situation during the 1970s and 1980s, Churchill (1992) made an analogy
to the story of the blind men and the elephant, where six blind men touched different
parts of the elephant and gave quite different descriptions of its characteristics – and, in
this relatively unstructured exploration of the ‘elephant’ the researchers discovered that
the animal was different, composed of a number of rather unusual parts and that it was
quite large.
It is obvious that this period was highly influenced by the early research on entrepre-
neurship, which was anchored in economics (e.g. Kirzner, Schumpeter and Knight) as
well as the social sciences, i.e. contributions by economic historians, sociologists and
social anthropologists (e.g. Kilby, Chandler and Cochran) and psychologists who studied
the individual characteristics of the entrepreneur (e.g. McClelland, Collins et al., and
Smith). In the 1980s we can find an increased number of references to management schol-
ars with an interest in entrepreneurship, innovation, and corporate entrepreneurship such
as Drucker, Burns and Stalker, and Kanter, which to some extent indicates that entre-
preneurship and small businesses were seen more or less as ‘small large firms’ in which
management models and concepts were assumed to be applicable. However, at the same
time, some pioneering studies focusing on the specific characteristics of entrepreneurship
and small businesses emerged among the most cited works, for example those by Birch
and Storey (Landström and Åström, 2011).
This early phase of the emerging research field was characterized by enthusiasm and
individualism – a group of enthusiastic scholars rooted in different fields of management
studies started to take an interest in entrepreneurship and small businesses. At the same
time, the research community was small and could be characterized as fragmented and
individualistic, i.e. entrepreneurship research was to a high extent dependent on indi-
vidual initiatives and projects. As a consequence, many initiatives were taken to stimu-


late communication within this fragmented and individualistic community, and in this
period, we can find a great many pioneering contributions to the creation of professional
organizations (e.g. International Council for Small Business, European Council for Small
Business, and the Entrepreneurship Division within the Academy of Management),
academic conferences (e.g. the Babson Research Conference, RENT Conference,
Small Firms Policy and Research Conference in the UK, and the Nordic Conference
on Small Businesses), and scientific journals (e.g. Journal of Business Venturing,
Entrepreneurship and Regional Development, and Small Business Economics).
The ‘Growth’ Phase: Migration, Mobility, and Fragmentation
Entrepreneurship and small business continued to be a ‘hot topic’ in society, and entre-
preneurship as a research field was still characterized as a ‘low entry’ field with a lack
of strong theoretical frameworks and methodologies, but also as one with rather fuzzy
definitions and unclear boundaries. As a consequence, during the 1990s migration into
the field was extensive, not only from scholars within management studies but from many
different disciplines in the social sciences. Entrepreneurship research grew more or less
exponentially. This growth can be measured in various ways, not least in terms of the
number of researchers, but also by the number of published articles, conferences and
journals focusing on or opening up for entrepreneurship contributions – and the growth
of the field is obvious, irrespective of the measurements employed.
There was not only large scale migration into the field, the mobility of scholars in
and out of the field was equally extensive. For example, based on a citation analysis,
Landström (2001) identified four categories of researchers within the field: (i) ad-hoc
transients, i.e. researchers whose publication within the field of entrepreneurship was a
one-off event; (ii) influential transients, i.e. researchers who publish on entrepreneurship
only once, but whose work has become important for entrepreneurship research; (iii)
craftsmen, i.e. researchers who frequently publish on entrepreneurship – staying within
the field for a longer period of time – but whose influence is marginal; and (iv) core group,
i.e. researchers who frequently publish on entrepreneurship and who are often cited by
others (researchers who have a substantial impact upon the research field). During the
1990s the vast majority of researchers within the field could be regarded as transient
researchers – researchers who belonged to some form of mainstream research community
and who only temporarily entered the field of entrepreneurship research, whereas the
‘core group’ of influential entrepreneurship researchers was fairly small.
Partly as a consequence of the high migration and mobility of scholars, and partly
due to a general ambition to understand the ‘entire’ phenomenon, i.e. to comprehend
what this complex and heterogeneous phenomenon really looks like – what Davidsson
(2008) calls ‘phenomenon-driven research’ – the research became highly fragmented,
mainly atheoretical, empirical explorations of the phenomenon. Thus, we find increased
fragmentation with many parallel ‘conversations’, and the field has been criticized for
having little convergence and low knowledge accumulation. For example, Shane and
Venkataraman (2000) argued that entrepreneurship research ‘has become a broad label
under which a “hodgepodge” of research is housed’ (p. 217). Low (2001) spoke about
a ‘potpourri’ of entrepreneurship research (pp. 20–21), Zahra (2005) described entre-
preneurship research as loosely connected and with a ‘mosaic of issues to be explored’


(p. 254), or as Koppl and Minniti (2003) expressed it: ‘We are getting more pieces of the
puzzle, but no picture is emerging’ (p. 81).
The conclusion that can be drawn is that entrepreneurship research during the 1990s
could be regarded as a strongly growing field with a high level of migration into it but also
extensive mobility. The research was characterized by a high degree of fragmentation. It
is interesting to note that the scholars interested in entrepreneurship more or less started
to divide themselves into two different ‘groups’. On the one hand, an increasing group of
scholars that could be considered ‘transient’ with an anchor in different disciplines, who
only occasionally performed studies on entrepreneurship and who regarded themselves
as ‘disciplinary’ researchers. On the other, an emergent group of researchers mainly
anchored in management studies who began to regard themselves as entrepreneurship
scholars – thus it is perhaps not until the 1990s that we can really start talking about
entrepreneurship as a research ‘field’.
Among the emergent group of ‘entrepreneurship scholars’, there was a need to build
a strong infrastructure, and the 1990s were to a very large extent characterized by the
building of it, expressed in terms of an increase in organized forums for communication
between researcher (e.g. conferences and scientific journals), role models (e.g. chairs in
entrepreneurship), and undergraduate, master, and PhD programs and courses in entre-
preneurship. A strong infrastructure is important in emerging research fields, not only
in order to enhance knowledge accumulation (Cole, 1970), but also to create ‘academic
autonomy’ (Merton, 1973), that is, emerging research fields need to legitimate themselves
in the eyes of scholars from other fields, and different kinds of institutions are essential
for this purpose.
A ‘Search for Maturation’: A Discussion on the Domain and the Division of the Research
Community
During the last decade, after almost 30 years of study on entrepreneurship research,
the field was searching for maturation. Some characteristics of this search can be iden-
tified, such as (i) a deeper discussion of central concepts and the delimitation of the
research field, (ii) a realization that entrepreneurship is a complex, heterogeneous and
multi-level phenomenon, and (iii) the return of economics and psychological aspects
of entrepreneurship research. As a consequence we can identify two partly contradic-
tory trends. On the one hand, we have had an opening-up and broadening of the field,
leading to a migration of scholars from many different disciplines, who conduct studies
on a broad range of entrepreneurship themes on a more or less temporary basis. On the
other hand, we have witnessed the creation of a community of entrepreneurship schol-
ars, who conduct entrepreneurship studies on a more regular basis and take part in the
entrepreneurship research ‘conversation’, and who increasingly use a specific language
and become increasingly self-reflective, makes the field less open to multi-disciplinary
approaches.
Domain discussion
As in many young research fields there has been an ongoing uncertainty about and debate
on the central concepts used as well as the delimitation of entrepreneurship as a research
field. The seminal article by Scott Shane and Sankaran Venkataraman (2000), ‘The


promise of entrepreneurship as a field of research’, triggered an intense debate regarding

the domain of entrepreneurship research.
First, we can find proponents who argue for a development of entrepreneurship into a
distinct domain of research, i.e. a domain that predicts a set of empirical phenomena not
explained in other fields of research, for example, newness, novelty and creation (Shane
and Venkataraman, 2000; Davidsson et al., 2001; Bruyat and Julien, 2001; Busenitz et
al., 2003; Scherdin and Zander, 2008) – what can be termed a ‘domain approach’. In this
respect, a narrow domain focus permits scholars to compare and contrast studies but
means that the field becomes less inclusive and the breadth of the topics studied more
limited. For example, Busenitz et al. (2003) argued that entrepreneurship as a research
field needs to establish its ‘own ontological and epistemological base’ in order to define
the boundaries of the field, but also to make theory building possible and create legiti-
macy. In addition, both Busenitz et al. (2003) and Bruyat and Julien (2001) concluded
that, as a domain, entrepreneurship must develop its capacity to probe interesting and
important issues from a solid foundation of entrepreneurship theory. However, there
seems to be an intensive debate among the proponents of the domain approach regarding
how the domain should be defined and delimited.
Second, we can find arguments that entrepreneurship should integrate with theories
from other fields of research to a greater extent (Acs and Audretsch, 2003), not least with
theories in the field of strategy (Meyer and Heppard, 2000; Hitt et al., 2002; Alvarez,
2003) – what can be termed an ‘integrative approach’. For a long time, strategy and
entrepreneurship research have overlapped intellectually as well as in social dimensions.
In the Academy of Management, for example, entrepreneurship started as an interest
group that emerged from the Business Policy Division in 1974. We can thus conclude that
many of the pioneers of entrepreneurship research (see Landström, 2005) can also be
regarded as pioneers within the field of strategic management. The argument is that the
research questions addressed by strategic management and entrepreneurship researchers
are inextricably interwoven. The majority of work conducted in the intersection between
strategy and entrepreneurship have two strands (Alvarez, 2003): an economics approach
concerned with how entrepreneurial activities can result in economic rents (e.g. Alvarez
and Barney, 2004); and a management approach focusing on the design and implementa-
tion of entrepreneurial strategies in different kinds of companies (e.g. Hitt et al., 2002).
Over time, strategic management has been acknowledged as one core approach within
entrepreneurship research, and Grégoire et al. (2006) demonstrated that there is a stream
of entrepreneurship research that focuses on entrepreneurship as a strategy, including a
strong foundation in the resource based view. Today there is a strong group of scholars
arguing for closer integration between strategic management and entrepreneurship, and
this community of researchers has been institutionalized by the launch of a scientific
journal Strategic Entrepreneurship Journal in 2007.
Finally, some researchers are less concerned with the distinctiveness of the domain,
regarding entrepreneurship as a phenomenon ‘out there’ that can be studied from many
different perspectives, pursuing various research interests such as innovation, nascent
entrepreneurship, family business, venture capital, etc. – arguing for what we can call a
‘multiple-research approach’. For example, Gartner (2001) argued that it is not possible to
obtain a comprehensive theory of entrepreneurship – there is no overarching theory that
can connect all the phenomena currently studied under the entrepreneurship umbrella.


As Gartner expressed it, ‘there is no elephant in entrepreneurship’ – meaning that the

various topics do not constitute a congruous whole. As a consequence, scholars should
actively separate into more homogeneous communities to study specific topic areas.
Gartner et al. (2006) revealed that there seem to be a number of such distinct groups of
scholars in the entrepreneurship field within topics such as venture capital, corporate
entrepreneurship, ‘the economists’, strategic entrepreneurship and ethnic entrepreneur-
ship (see also Brush et al., 2008). This suggests that there is an active dialogue going on
around similar research interests, which supports Gartner’s (2001) contention that the
field of entrepreneurship may be evolving into informal homogeneous communities – or
what can be termed emerging ‘research circles’ (Landström, 2005). In this respect the
research field may move from fragmentation to specialization in which scholars will
create more autonomous research areas, not only thematically but perhaps due to the
methodological approaches employed. As a consequence, the development of a theory
of entrepreneurship may not be possible. What we must search for is a diverse range of
theories applicable to various kinds of phenomena (Gartner, 2001) – the development of
‘middle range’ theories that fall somewhere between grand theories and empirical find-
ings, and that attempt to understand and explain a limited aspect of the entrepreneurship
phenomenon (Blackburn and Smallbone, 2008).
The realization that entrepreneurship is a complex, heterogeneous and multi-level

phenomenon
Davidsson (2008) argued that in order to understand the complexity and heterogeneity
of entrepreneurship, there is a need to use knowledge from many different research fields.
During the last decade we can identify a couple of (partly contradictory) trends that
give expression to the characteristics of the phenomenon. These trends may not only be
explained by the complexity and heterogeneity of the phenomenon but also by the divide
between research traditions, academic training, and incentive structures among entrepre-
neurship scholars in the US and Europe, resulting in a stronger convergence around a
dominant research paradigm on the part of scholars in the US and a much more diverse
view on research in Europe (Edelman et al., 2009; see also Landström, 2005; Landström
and Huse, 1996). However, such a statement would be an over-simplification, as many
European scholars within the field are working around a similar paradigm to that of their
US colleagues, and there is a strong international ‘isomorphism’ (Aldrich, 2000) involved,
which brings researchers together through journals, conferences, cross-national projects,
and international exchange of scholars.
Thus, on the one hand, there is a tendency in entrepreneurship research to open up
for a broadening of entrepreneurship, viewing it not only as an economic achievement,
but as a societal phenomenon (including social entrepreneurship, entrepreneurship in
public organizations, etc.), and there are also scholars, particularly in Europe, who go
one step further, arguing for ‘recreating and recontextualizing’ entrepreneurship (Hjorth
et al., 2008). The arguments are based on a perceived lack of creativity and the imposi-
tion of rigid norms in the current dominant approaches in entrepreneurship research,
but are also a form of criticism of the lack of contextualization of entrepreneurship in
recent research. Accordingly, it is important to address the social and cultural context in
which entrepreneurship operates, and this contextualization can be achieved by a closer
relationship to ‘the real world’ and a stronger basis in the social and human sciences.


Accepting entrepreneurship’s eclectic and pervasive benefits generates questions of inter-

est to researchers from a variety of scholarly disciplines (Ireland and Webb, 2007), which
means that the field has the potential to become more multi-disciplinary (Steyeart and
Hjorth, 2003), leading to a migration of scholars from many different disciplines with an
interest in entrepreneurship. These scholars, however, are not always a part of the ‘con-
versation’ in entrepreneurship research.
On the other hand, there is evidence that the entrepreneurship research community is
evolving over time. In order to understand the complexity and heterogeneity of entre-
preneurship we need specific knowledge and a special language. The trend is that entre-
preneurship research has become increasingly self-reflective and more internally oriented
with researchers citing the works of other entrepreneurship researchers, while the influ-
ence of ‘outsiders’ has decreased steadily over time (Cornelius et al., 2006) – highlighting
the fact that knowledge developed within the research field has become more and more
important. In addition, Karlsson (2008) revealed greater use of a specific language
among entrepreneurship researchers, indicating progression along the normal science
route (Aldrich and Baker, 1997). A new generation of entrepreneurship scholars is also
entering the field (Hjorth, 2008). The scholars who currently dominate the field were
for the most part immigrants from other fields (mainly from management studies, but
also economics, economic geography, sociology, etc.), while the new generation is more
strongly anchored in entrepreneurship and in the knowledge developed within the field
– they have participated in PhD programs focused on entrepreneurship and written their
theses on entrepreneurship research problems. Taken together, these aspects will create a
community of scholars in entrepreneurship in its own right, but also make the field less
open to the multi-disciplinary aspects of entrepreneurship.
The return of economics and the social sciences in entrepreneurship research

As long ago as 1968 William Baumol argued that ‘The theoretical firm is entrepreneur-
less – the Prince of Denmark has been expunged from the discussion of Hamlet’ (p. 68),
pointing out that there has been little room for the entrepreneurial element in mainstream
economics. He urged that serious attention should be paid to the role of entrepreneurship
in economics. During recent decades Baumol’s plea has been acknowledged, and several
attempts have been made to include entrepreneurship in economic modeling and analy-
sis. In the 1980s and 1990s a number of seminal contributions were presented within the
field of ‘small business economics’, but it was not until recently that entrepreneurship has
provided a fertile ground for a new generation of scholars within mainstream economics
who migrated into studies on entrepreneurship and have contributed to our knowledge
of it (Bianchi and Henrekson, 2005). In this respect, advances in the availability of data,
lower computation costs, and new analysis techniques have contributed to the possibility
of testing economic theories in the context of entrepreneurship (Minniti and Lévesque,
2008).
In recent years many aspects of entrepreneurship have been studied through the lens of
economic theories. Based on theoretical frameworks such as occupational choice models
(e.g. Lucas, 1978; Kihlstrom and Laffont, 1979; Holmes and Schmitz, 1990), credit ration-
ing models (e.g. Stiglitz and Weiss, 1981; Evans and Jovanovic, 1989), entering models
(e.g. Jovanovic, 1982; Klepper, 1996), etc., economists within the field of ‘Economics
of Entrepreneurship’ have tried to answer, for example, the following questions (Parker,


2005). How many jobs do entrepreneurs create? Are small entrepreneurial ventures more
innovative than large corporations? Do banks ration credits to new ventures? Do capital
constraints impede entry of new ventures? Which entrepreneurial ventures are most likely
to survive and grow?
New fields of economic analysis have also emerged, for example cross-disciplinary
work in economics and psychology created a field of behavioral economics, whereas
economics and strategy have generated a stream of work on the emergence and growth
of firms. In these cross-disciplinary works, the gap between economics and other social
and management sciences is declining, which indicates that economics could move from
a deductive science to an open and inductive one and that a theoretical heterodoxy is
emerging in economics (Minniti and Lévesque, 2008).
Over the years we have learnt that entrepreneurship is not as much about innate quali-
ties of special individuals as the early research assumed. Personality differences do exist
between ‘entrepreneurs’ and ‘others’, but such variables explain only a very low per cent
of the variance. Furthermore, over the course of their lives a rather large and internally
heterogeneous chunk of the human population are actively involved in business start-ups
or other entrepreneurial activities (Davidsson, 2008), and therefore the focus on stable
psychological characteristics of entrepreneurs is unsatisfactory. However, Steyeart (2007)
argued that the field of entrepreneurship studies has done everything to draw the atten-
tion away from the individual entrepreneur in order to make space for understanding
the complexity of the entrepreneurial process and that by using other methodological
approaches, for example narrative approaches, we might re-introduce the individual into
our analyses. ‘Who is the entrepreneur?’ is not the wrong question: it is a ‘right’ question
wrongly formulated in the sense that it holds a rich set of ‘right’ problematizations that
entrepreneurship researchers have to start addressing.
In the last decade many theories focusing on the individual have been the subject of
attention in entrepreneurship research, for example, social cognition, attribution proc-
esses, attitudes, etc. (Shaver, 2003). In this respect research has taken off in different
directions, opening up new possibilities of focusing on, for example, cognitive aspects of
business opportunity recognition – the entrepreneur’s cognitive ability to identify unsat-
isfied needs large enough to create profits is fundamental in the entrepreneurial process
and has become significant in entrepreneurship research. Sarasvathy’s (2001) view on
entrepreneurial decision-making is another theme that focused on the individual and that
has received a great deal of attention – the concept is based on the fact that entrepreneurs
do not always think through a problem in a ‘rational’ way, but act in an ‘effectuation’
way in which s/he uses available resources and learns from failures. The research on
behavioral aspects of entrepreneurs, for example habitual entrepreneurs, should also be
mentioned. Entrepreneurs are expected to learn from earlier experiences, which make
‘habitual’ entrepreneurs behave differently from ‘novice’ entrepreneurs (Westhead and
Wright, 1998).
SOME CONCLUDING REFLECTIONS
In this chapter we have elaborated on the historical development of entrepreneurship as

a research field. We have paid particular attention to the migration of scholars into the


field. In this concluding section we summarize and synthesize our discussions, but also
suggest a stronger theoretical focus in entrepreneurship research as a challenge for the
future.
The Evolution of Entrepreneurship as a Research Field – The Migration of Scholars
Marginal and ‘disciplinary’ anchored research

The (pre-) history of entrepreneurship research – until the 1970s – is one of institutional
immaturity and relative marginalization, where it had not yet evolved into a field in its
own right but rather figured at the margins of several disciplines. Economics is a case in
point, where the entrepreneur was a centerpiece in, for example, Schumpeter’s broad-
ranging studies of economic dynamics and innovation. However, in the inter- and
post-war periods, Schumpeter’s work had a limited impact on mainstream economics,
which was increasingly formalized and based on aggregate data rather than on studies
of firms and actors. Such perspectives found a more congenial environment in the social
sciences such as economic history, where Schumpeter’s notion of the role of innovation
and the entrepreneur as a source of economic dynamics was cultivated in the studies
of social modernization in different societies. With an anchor in the Research Center
in Entrepreneurial History at Harvard University, entrepreneurship was the subject of
strong interest, and several eminent scholars from different disciplines were attracted
by the topic. However, in the wake of a growing critique of the structural-functionalist
paradigm and given the rather sterile results of the studies, entrepreneurship was more
or less deserted by economic history and once again marginalized by the stream of
literature on organizational aspects (pioneered by Alfred Chandler) from the 1960s
onwards. Instead, entrepreneurship was adapted within other social sciences such as
sociology and psychology, which assumed responsibility for continuing the theoretical
interest in entrepreneurship, in which research on personal traits and characteristics
was dominant. As other themes of inquiry became more fashionable in sociology and
psychology – characterized by a pluralism of approaches and methodologies, from
Marxism to hermeneutics (Gouldner, 1970) – social scientists left the scene and gave
the impetus for scholars within the broader framework of management studies to enter
the stage.
During the first two eras, entrepreneurship research in economics and the social
sciences was mainly conducted by a few individual researchers within the respec-
tive disciplines and mainly anchored in the theories of the disciplines in question.
Entrepreneurship did not attract a large number of researchers. The fact that entre-
preneurship research did not become institutionalized was a reflection not only of
the critical dependence on a supply of researchers within the disciplines, but also
of the lack of interest in entrepreneurship in society. It was an era marked by the rise of
mass-producing integrated firms in the US and later in Europe, and the key issues were
primarily related to governance of large corporations in mature sectors and macro-
economic stability, and there was little interest in a policy coalition for entrepreneurship
research. It is therefore difficult to talk about a migration of scholars to the field of
entrepreneurship – one exception might be the mobilization of researchers from differ-
ent disciplines that could be found at the Research Center in Entrepreneurial History
at Harvard University.


The emergence of entrepreneurship as a research field in its own right

Following the gradual decline of Fordism, the 1970s and 1980s became a turning point.
The interest in entrepreneurship emerged from the changes occurring in society. A shift
in focus from large companies to new and small firms could be identified, explained by
factors such as intensified global competition, changes in consumer tastes and a privati-
zation movement that swept over the world. Not least, it was a period of ‘creative destruc-
tion’ in which new technologies were gaining ground (Brock and Evans, 1986; 1989) – a
starting point of what we would later define as the ‘knowledge economy’.
The increased societal interest was paralleled and reinforced by the proliferation of
policy agencies at national, regional and local level that supported entrepreneurship, i.e.
entrepreneurship moved from a residual in economic and employment policies to a politi-
cal centerpiece. As government labor market policies shifted from industrial and employ-
ment subsidies to firm formation and the exploration of new market opportunities, at the
same time as regional policies gradually moved from industrial location to network build-
ing and the creation of new firms, entrepreneurship found itself in the midst of a broader
societal reorganization. This connection with entrepreneurship policy functioned as a
springboard for the growth of entrepreneurship research in the 1980s and 1990s.
Even if we can identify strong support for external factors governing the migration
of scholars to the field of entrepreneurship during the 1980s and 1990s, we can also find
intra-scientific explanations. The field was characterized by an ‘embarras de richesses’, as
it offered increasing opportunities for empirical research and could be characterized as
‘low entry’, with highly permeable boundaries (Busenitz et al., 2003). Entrepreneurship
as a research field also offered great opportunities in terms of research funds, as well as
academic positions, an increased number of outlets for publication, and so on. Finally,
we have to bear in mind that the field of management studies at that time was itself very
young and eclectic, or what Whitley (2000) called a ‘fragmented adhocracy’, in which
many new ideas and theories were developed (such as agency theory, transaction costs
theory, industrial organization, evolutionary theory, etc.) that later formed the core of
the discipline, and in management studies, that included a lot of new themes of research,
entrepreneurship could easily proceed and find space for its development.
Two ‘groups’ of scholars in entrepreneurship research

Today, we find ambiguous, and to some extent contradictory, tendencies in entrepreneur-
ship research, reflected in two groups of scholars. On the one hand, entrepreneurship has
gradually become more institutionalized in the academic landscape, not least through
the building of a strong entrepreneurship research infrastructure and an intensive debate
on the boundaries of the field. Accordingly, a research community of ‘entrepreneurship
researchers’ with a disciplinary anchor in management studies, who are a part of the ‘con-
versation’ in entrepreneurship research and who regard themselves as entrepreneurship
scholars, has evolved. In this respect, the research has been increasingly self-reflective,
with a stronger internal orientation and a more specific language. Interestingly, we can
also find an increased conceptual traffic moving from entrepreneurship to other fields of
management studies, for example a greater number of entrepreneurship articles appear-
ing in leading (empirical) management scientific journals.
On the other hand, despite these signs of gaining academic respectability, entrepre-
neurship is not evolving into a coherent and closed entity. Entrepreneurship as a social


practice enters into new directions, opens up for a broadening of the object of study, and
creates an interest and migration of scholars from many different disciplines, paralleled
by the re-emergence of entrepreneurship within economics and behavioral sciences. As
a consequence, we find scattered and loosely connected researchers anchored in many
different disciplines and theoretical frameworks, who now and then conduct studies on
entrepreneurship. They regard themselves as ‘disciplinary researchers’ and do not to any
great extent participate in the entrepreneurship research ‘conversation’.
Entrepreneurship Research – The Next Step . . .
What will the future look like in entrepreneurship research? One main challenge for
researchers in entrepreneurship will be to engage in more systematic, theory-driven
efforts (Tan et al., 2009). We can see an increased interest in the theoretical development
of the field (Brush et al., 2008) – entrepreneurship researchers are to a lesser extent start-
ing from what is going on ‘out there’, and instead placing greater emphasis on testing
theories that could help us understand the phenomenon of entrepreneurship (Davidsson,
2008). For example, theories such as the resource-based view, evolutionary perspectives,
cognitive theory, etc. have been popular over the last couple of years, and Brush et al.
(2008) argued that there has been an increase in the number of theory-driven articles and
more rigorous inference methods in entrepreneurship research, which suggests that the
study of entrepreneurship is becoming more scientific. In this respect and in line with
the multi-disciplinary character of the field, entrepreneurship researchers borrow heavily
from other fields, which has enhanced the rigor of the research (Zahra, 2007). According
to Zahra (2005), importation of theories from other fields is a necessary first step toward
developing unique theories that help us understand entrepreneurial phenomena. However,
entrepreneurship researchers should not only borrow from other fields but should invent
their own concepts and theories. Thus, they need both to make use of theories from other
research fields and to develop specific theories and models to explain distinctive entrepre-
neurship phenomena that theories from other disciplines cannot explain.
It is in line with this argument that the editors have initiated this book. We believe
that a necessary next step in the development of entrepreneurship research will be to
focus more strongly on systematic theory-driven research, and in this respect we need
to borrow concepts and theories from other disciplines. As shown in this chapter, due
to the fact that entrepreneurship research has long been a multi-disciplinary field, with
a far-reaching migration and mobility in and out of the field, there will be extensive
possibilities for such an importation of concepts and theories from other fields that can
help us understand entrepreneurship. However, in order to do this we need to know
and understand the intellectual origins from which these concepts and theories have
evolved, otherwise we can make many mistakes in our explanations and understandings
of entrepreneurship.
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3. Entrepreneurship research: research
communities and knowledge platforms
Hans Landström and Olle Persson
INTRODUCTION
In Chapter 2 we learnt, among other things, that entrepreneurship is a highly complex

and heterogeneous phenomenon that needs multi-level approaches to be understood. The
challenge for entrepreneurship scholars in the future will be to engage in more systematic
theory-driven research. Zahra (2005) argued that the importation of theories from other
fields is a necessary first step in the creation of unique theories of entrepreneurship –
although the effort to invent concepts and theories of its own should not be neglected.
However, the importation of theories seems to be a particularly suitable avenue in entre-
preneurship research, as the immigration of scholars from other fields into entrepreneur-
ship has for a long time been extensive. Thus, we can expect to find a great potential
for the importation of concepts and theories from many different disciplines as well
as a ‘melting-pot’ of theories flourishing in entrepreneurship research that can help us
understand entrepreneurship – provided that the field is open to such cross-disciplinary
efforts.
In this chapter we follow the above line of argument, which considers entrepreneur-
ship research as a ‘melting pot’ of concepts and theories from many different disciplines
that creates opportunities for cross-disciplinarity and the importation of theories from
other fields. Based on bibliometric (i.e. citation-based) analyses, the aim is to (1) analyze
the development of research communities and knowledge platforms within the field of
entrepreneurship research, and (2) discuss the possibilities of creating a cross-disciplinary
and theory-driven entrepreneurship research.
This chapter contributes to our understanding of the evolving entrepreneurship
research field by showing that:
● Entrepreneurship has attracted a broad range of scholars from many different

disciplines, but the research is dominated by those anchored in ‘management
studies’.
● The research community interested in entrepreneurship is divided into two parts:
on the one hand a group of ‘entrepreneurship researchers’ who mainly have their
roots in management studies, and on the other, a rather scattered group of scholars
from many different disciplines who can be regarded as ‘disciplinary researchers’.
● Within the group of ‘entrepreneurship researchers’ anchored in management
studies, we can find signs of an evolving knowledge platform that increasingly
integrates new literature into the field.
46

Research communities and knowledge platforms 47
● The mainstream disciplines remain relevant, and although we can identify an

evolving research community and knowledge platform in entrepreneurship, the
‘traditional’ disciplines appear to be important.
Based on our findings we conclude that the strong disciplinary boundaries may consti-
tute an obstacle to the importation of concepts and theories from mainstream disciplines
and the creation of cross-disciplinary research within the field.
In the next section we discuss bibliometric studies in general and those dealing with
entrepreneurship in particular. We then describe the development of entrepreneurship
research within different disciplines. After that we outline the development of evolving
research communities and knowledge platforms in entrepreneurship research, indicated
by a stronger ‘internal’ conversation within the field among ‘entrepreneurship research-
ers’ anchored in management studies. This section is followed by one in which we focus
on the characteristics and content of the knowledge platforms over time in entrepreneur-
ship research. Finally, the chapter ends with some conclusions and suggestions for the
creation of a cross-disciplinary field of research.
BIBLIOMETRIC STUDIES AND ENTREPRENEURSHIP
Scientific publications play a central role in knowledge development processes, as they

contribute to knowledge accumulation, guarantee quality and provide input into the
ongoing dialogue between researchers and the creation of networks of researchers with
similar interests. Earlier research contributions are acknowledged by citations, and the
frequency of citations is often assumed to reflect the quality of the study from which they
originate (Cole, 1970). In this way certain opinions are reinforced and institutionalized
and, as a consequence, individual researchers end up playing a substantial role in the
development of a research field (Crane, 1972). The emergent pattern of citations also
introduces a control mechanism, which ensures that new ideas do not greatly diverge
from the dominant research group’s ontological and epistemological stance.
In addition, researchers who work with similar questions and methods tend to form
networks, within which concepts and theories are developed in dialogue through mutual
citations. For example, Whitley (1984) considered citations as a ritual whereby group
membership is confirmed. Failure to assent to acknowledge the view of one’s predeces-
sor is tantamount to a public detachment from the group. Such behavior is especially
common in a loosely structured field of research, where several different actors lay claim
to territory. Entrepreneurship research is one such field, where the network of researchers
is markedly decentralized (Landström and Johannisson, 2001).
Bibliometric Studies – Rationale and Limitations
Bibliometric studies, in which a given field is studied by means of quantitative analysis

and statistics to describe publication patterns, have been undertaken for a variety of
purposes, ranging from the evaluation of academic institutions and quality assessments
of scientific journals, to analysis of the intellectual structure of a scholarly field (Brown
and Gardner, 1985; Romano and Ratnatunga, 1996). Bibliometric analysis is based on


the assumption that if a researcher cites a work, s/he has found it useful, and therefore
the more frequently a work is cited, the greater its role in the scholarly community
(Romano and Ratnatunga, 1996). This form of analysis has been used for a long time
in order to increase understanding of a scientific field (the first bibliometric study dates
back to the early 20th century (Gross and Gross, 1927), but the real pioneer was de
Solla Price (1963/1986), who applied bibliometrics as a method for measuring scientific
impact).
Bibliometric analysis and the reference to the citation behavior of published authors
are not without limitations (Brown and Gardner, 1985; MacRoberts and MacRoberts,
1989). First, we have to bear in mind that bibliometric analysis is based on the assump-
tion that research is essentially cumulative – new research is built on and cites earlier high
quality foundations – i.e. a ‘normal science approach’ (Kuhn, 1970), but we know that
this is not the only way to communicate and organize research, particularly in new and
evolving fields (see e.g. Gibbons et al., 1994; Knorr Cetina, 1999).
Looking more closely at the citation behavior of scholars, it can also be argued that it
is sometimes difficult to know how citations are used in the articles. Citations may, for
example, be biased in favor of ‘popular’ authors, such as Nobel Prize winners, whose
names are used by researchers anxious to legitimize their own works. Citations can also
be used in a negative rather than a confirmative way, i.e. to demonstrate inadequate con-
ceptualization and unreflected methodology (in order to pave the way for the author’s
own contribution). However, relatively few citations in scientific works can be character-
ized as negative (Moravcsik and Murugesan, 1975). In addition, it can be argued that a
work that attracts many citations, negative or otherwise, makes a significant contribution
because it helps to organize the research topic.
Concerns can also be raised regarding the databases used for bibliometric analysis.
Firstly, citations involve an inherent delay (Watkins, 2005). The work has to be published
– a process that can take several years in the social sciences – after which it has to be rec-
ognized and acknowledged in terms of inclusion in the list of cited references (included
in a work that needs to be published). In addition, citation analysis requires some form
of index. In practice, scholars most often use generally available databases, such as the
Social Sciences Citation Index (SSCI). However, even though the SSCI is a great resource
for citation analysis, it has some limitations (Watkins and Reader, 2003). For example,
the database is biased toward journals of US origin, books are covered only to a limited
extent, and there is but limited coverage of the total population of available journals in
many fields of research (in the field of entrepreneurship, the SSCI currently fully indexes
a mere five journals: Journal of Business Venturing, Small Business Economics, Journal of
Small Business Management, Entrepreneurship Theory and Practice and Entrepreneurship
and Regional Development). Thus, in general, the SSCI database has some limitations
when it comes to new and evolving fields such as entrepreneurship.
A conclusion that can be drawn is that the interpretation of the results of bibliomet-
ric analysis should be applied with some caution. However, we are convinced that the
choice of references in a scientific work does provide important information on the ter-
ritory claimed by the author. This way of positioning oneself is not only important for
knowledge accumulation and the creation of a dialogue between researchers, but also
provides crucial information for our understanding of the development of the research
field.


Bibliometric Studies on Entrepreneurship – A Review
Over time many bibliometric studies have been presented in order to understand the
development of the field of entrepreneurship research (a summary of the studies is
presented in the Appendix, Table 3A.1). Bibliometric studies on entrepreneurship are
based on different databases, from broad databases like the SSCI to narrow ones such
as proceedings from specific entrepreneurship conferences (Watkins, 2005). The studies
cover different time periods, and focus on varying aspects of the development of the
field, such as (i) the research themes and communities involved, (ii) the concepts and
research paradigms used in the studies, and (iii) methodological approaches. In rela-
tion to the development of entrepreneurship as a research field discussed in Chapter 2,
we can summarize the conclusions made in earlier bibliometric studies as presented in
Table 3.1.
The conclusions that can be drawn from earlier bibliometric studies on entrepreneur-
ship research are that entrepreneurship seems to be a highly mono-paradigmatic research
field, dominated by a normal-science approach (Kuhn, 1970), which assumes that
progress in research is achieved through an accumulation of empirically tested hypoth-
eses and developed through quantitative studies and statistical techniques. The field also
seems to be geographically dominated by scholars from the US, although the strong
dominance of US scholars in bibliometric studies may be a consequence of differences in
research approaches and publication traditions in different continents.
However, changes have occurred in entrepreneurship research over time. The 1980s
can be called the ‘take-off phase’ of entrepreneurship research (see Chapter 2) due to
the increased interest in entrepreneurship and small businesses in society and immi-
gration into the field by new researchers with different disciplinary backgrounds. This
phase was characterized by an interest in solving practical problems for entrepreneurs,
owner-managers, and the research community, although the ideas developed were loosely
connected and fragmented. As stated in Chapter 2, the 1990s was characterized by an
enormous ‘growth of entrepreneurship research’, and the bibliometric analysis indicated
that many of the researchers within the field could be regarded as ‘transient’ in the sense
that they were only temporarily conducting studies on entrepreneurship and small busi-
nesses. The field was dominated by micro-level analysis (firm and individual level analy-
sis), indicating that the research has a strong foothold in the field of management studies.
In addition, entrepreneurship research has become methodologically more sophisticated,
shifting from descriptive studies to multivariate analysis. During the 2000s, entrepreneur-
ship research can be considered as being a phase of ‘searching for maturation’, reflected
in, for example, increased reliance on literature within the field (internal orientation) and
a sign of stabilization in terms of research themes and specialization. It is interesting to
note the stronger influence of research from outside the US, a consequence of which may
be that entrepreneurship research exhibits a wider range of methodological approaches
(in particular the use of more longitudinal research designs).
Bibliometric Analysis in this Chapter
In this chapter we elaborate on the development of entrepreneurship research within

different disciplines. In accordance with our discussion in Chapter 2, we divide our


Table 3.1 Bibliometric studies on entrepreneurship research: conclusions
Take-off Growth Search for maturation

1970–89 1990–99 2000–07
Research themes Practical oriented Enormous growth Increased reliance on
and research – toward of research, and literature within the
community improving practice geographical field, pointing to the
rather than theory. concentration to unique contributions
North America. of entrepreneurship
The ideas within
research (internal
the field are loosely Upward trend in the
orientation in citations).
connected and quality of research.
explorative, mainly Still a rather
Transient researchers,
based on business fragmented research
i.e. researchers
studies (and social field, but there are
who belong to
sciences such as signs of stabilization
a mainstream
psychology and of research themes and
discipline but who
sociology). increased specialization
temporarily conduct
(with core groups of
Research community entrepreneurship
researchers).
fragmented and studies, allowing
individualistic. scholars from other The US dominates
fields to apply their research, but other
Increased impact
models and concepts countries present their
of entrepreneurship
to entrepreneurial own research traditions
journal articles (JBV
settings. (national differences
and ETP have the
in topics, studies and
greatest impact). The importance
citation patterns).
of publications in
entrepreneurship
increases.
Concepts Entrepreneurship research is a mono-paradigmatic research field
and research dominated by the functionalist paradigm (Burrell and Morgan, 1979)
paradigms
Language specificity has increased over time; less focus on size and age
and increased use of specific words such as ‘opportunity’ and ‘nascent’.
Methodological Diversity of Mono-methodological Still a rather mono-
approaches research approaches field of research, methodological field
(anecdotal, case based on postal of research, based
studies, and so on.), surveys and on mail surveys and
but postal surveys and questionnaire-based questionnaire-based
questionnaire-based techniques. techniques, i.e. in a
techniques dominate. methodological sense,
Research is
there has not been any
Statistical becoming more
substantial change
sophistication in sophisticated, shifting
over time. However,
research is low. from descriptive
increased use of
statistics towards
longitudinal research
more rigorous
designs, multi-research
and multivariate
designs (triangulation),
techniques.


Table 3.1 (continued)
Take-off Growth Search for maturation

1970–89 1990–99 2000–07
Micro-level analysis and more sophisticated
dominates (firm-level statistical techniques.
and individual-level
Wide variety of
analysis).
dependent variables
in the studies, which
indicates difficulties in
comparability between
studies.
Note: ETP: Entrepreneurship Theory and Practice; JBV: Journal of Business Venturing.
analysis into management studies, economics and ‘other fields’ (for example economic
history, psychology, and sociology) and analyze the changes in research over time. We
divide time into three periods; 1970–89, 1990–99, and 2000–07, approximately corre-
sponding with the ‘take-off phase’, ‘growth phase’ and ‘search for maturation’ discussed
in Chapter 2.
The data for this study is based on a topic search of the SSCI using Web of Science
– covering titles, keywords, and abstracts – published between 1956 and 2007. The
search resulted in 14 388 articles citing 455 950 references published between 1776 and
2007. The search terms used were: ‘entrepreneur*’ or ‘small business*’ or ‘small firm*’
or ‘emerging business*’ or ‘emerging firm*’ or ‘new venture*’ or ‘emerging venture*’ or
‘founder*’.
The above search strategy was primarily designed to find as many papers as possible
within entrepreneurship research. Thus, the recall of papers can be considered good, as
not many papers will be lost. However, in terms of precision or relevance, the search will
naturally identify a certain number of papers that do not belong to the study of entre-
preneurship. To increase the relevance somewhat, the analysis can employ other criteria
such as journal categories to include or exclude areas of less relevance. In this chapter we
use journal subject categories to compare the citation behavior of different disciplines.
One discipline is called ‘management studies’, which consists of the journal categories
management, business, and business finance. The second major field is economics, which
corresponds to the journal category ‘economics’. All other categories are grouped in one
large category labeled ‘other fields’.
The focus of the paper is cited documents and as such we consider the precision and
recall problems less significant. It is the knowledge base rather than a complete survey of
the research field that is the subject of our attention. Another limitation is that Web of
Science does not include books as citing documents; however it includes cited books. We
have no indication so far that the books in the field have different citation behavior than
the articles in the field. Cited references were partly standardized in order to reduce varia-
tion in spelling. In the case of books, the first year of print was generally used. To further
reduce variation, only the first initial of cited first authors was used.


THE GROWTH OF ENTREPRENEURSHIP RESEARCH WITHIN

DIFFERENT DISCIPLINES
Entrepreneurship is a complex, heterogeneous and multi-level phenomenon that seems
to require multiple disciplinary lenses to be understood. In Chapter 2 it was argued that
over time, entrepreneurship research was anchored in different disciplines, initially ‘eco-
nomics’, followed by the ‘social sciences’ (e.g. economic history, psychology, and sociol-
ogy), and that since the 1970s it has been rooted in the field of ‘management studies’.
In order to provide a picture of the development of works on entrepreneurship within
different disciplines, we describe the growth of publications over time (see Figure 3.1).
In the analysis we have used fraction sums of the publications, since publications can
be classified within different fields. For example, the journal Small Business Economics
is classified as being 50 per cent within the field of management studies and 50 per cent
within the field of economics, whereas the Journal of Business Venturing is classified as
100 per cent within management studies.
The results are presented in Figure 3.1, and we can conclude that the interest among
scholars within different disciplines was rather low prior to 1990. However, from 1990
onwards, and most especially since the year 2000, we can see a significant growth in the
number of publications, particularly within the area of management studies, and to
some extent within economics, whereas the interest among psychologists and sociologists
appears stable at a rather low level.1 It is also interesting to note that during the 1990s
entrepreneurship seems to have attracted a broad range of scholars from many different
disciplines (the number of publications from ‘other fields’ grew significantly during the
1990s and this trend continued into the 2000s). In the analysis, the category ‘other fields’
includes 133 different disciplines and sub-disciplines in which articles on entrepreneur-
ship appeared, and there seems to be a special interest among disciplines with a con-
textual and spatial focus, such as geography, environmental studies, area studies, urban
studies, and anthropology.
The results confirm our earlier argument that it was mainly scholars within the field
of management studies who maintained an interest in entrepreneurship over the last
decades. However, entrepreneurship has for a long time been a ‘hot topic’ in society,
attracting a broad range of scholars from many different disciplines within the social sci-
ences, which reinforced the fragmented character of the field that characterized the 1990s
and continued during the early part of the 2000s.
The development of entrepreneurship research in different disciplines implies that
we may find somewhat different research communities interested in entrepreneurship
research – following the line of argument from Chapter 2. On the one hand, there is a
community of ‘entrepreneurship researchers’ with a disciplinary anchor in management
studies, who in many cases regard themselves as entrepreneurship researchers. They
attend entrepreneurship conferences and publish in entrepreneurship journals, and in
this way create a research community that shares a great deal of tacit knowledge of entre-
preneurship and small businesses and focuses on research problems of central impor-
tance for knowledge accumulation in the field. On the other hand, there is also a loosely
connected group of ‘disciplinary researchers’ rooted in a large variety of disciplines,
who are more or less interested in entrepreneurship, but who have over time conducted
studies and published works on entrepreneurship. They do not regard themselves as


450
400
350
M2388 – LANDSTROM PRINT.indd 53

300
Management Studies
250 Economics
Sociology
200 Psychology
133 other subfields
Number of articles
150
53
100
50
0
1950 1960 1970 1980 1990 2000 2010
Publication year
Notes:
For the whole period, the sum of paper fractions for each subfield is: Management Studies, including Business, Business Finance, Management (3577),
Economics (1577), Sociology (443), Psychology (387), Planning and Development (376), Political Science (302), Geography (250), Environmental Studies (230),
Public Administration (203), Social Sciences, Interdisciplinary (182), Law (179), Information Science and Library Science (150), Area Studies (148), Urban
Studies (141), Operations Research, Business and Management Science (141), Education and Educational Research (136), Anthropology (123).
We use paper fractions since papers may be classified into more than one subfield.

Figure 3.1 Publications by subfield and major fields
29/9/10 11:45:24
entrepreneurship researchers, nor do they participate in the entrepreneurial ‘conversa-

tion’. Instead, they publish in disciplinary-based journals, and they may focus more on
problems that are central to the discipline than on entrepreneurship. As a consequence,
in a cognitive sense, there might be many different meanings of the phenomenon of entre-
preneurship and the contexts in which it is studied – not always linked to the understand-
ing and contexts that are reflected upon among researchers related to the community of
scholars in entrepreneurship.
EVOLVING RESEARCH COMMUNITIES AND KNOWLEDGE

PLATFORMS IN ENTREPRENEURSHIP RESEARCH
A young and evolving field of research like entrepreneurship always lacks a strong
knowledge platform of its own – it takes some years to build such a platform that one can
read and cite. However, based on the distinction between the two groups of researchers
in entrepreneurship, i.e. that between ‘entrepreneurship researchers’ and ‘disciplinary
researchers’, we can expect to find an evolving knowledge platform mainly developed by
the group of ‘entrepreneurship researchers’ with their roots in management studies. In
this section we elaborate on these propositions by analyzing the internal dialogue between
researchers within the field of entrepreneurship.
Figure 3.2 reveals that the downloaded set of entrepreneurship publications from man-
agement studies journals has a higher share of all its citations in Web of Science from the
downloaded set compared with publications in economics and ‘other fields’. The share
1
Management Studies
0.9 Economics
Share of all citations from within the field
Other fields
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1980 1985 1990 1995 2000 2005 2010
Publication year
Figure 3.2 The relative share of all citations from Web of Science from the downloaded
set of entrepreneurship publications between 1980 and 2007


of entrepreneurship citations varies somewhat over time, but a general impression is

that it is rather stable within the respective disciplines, with an upward trend in manage-
ment studies and economics since the year 2000. As a consequence, since the number of
publications on entrepreneurship is increasing significantly over time, more and more
citations are made to publications within the field of entrepreneurship. This is a first indi-
cation that the internal dialog between entrepreneurship researchers within ‘management
studies’ is stronger than in ‘economics’ and ‘other fields’. However, there are still a large
number of papers in Web of Science that cite the downloaded set and could potentially be
part of the field. However, they were not identified by our search strategy and are prob-
ably of less relevance.
Another indication of an evolving community of ‘entrepreneurship researchers’
anchored in management studies is shown in Figure 3.3. For publications in management
studies journals, the mean number of citations to the field is higher and faster growing
compared to economics and other fields. Thus, the growth of citations within the field of
entrepreneurship has been significant in management studies during the 2000s.
A third indication of the same tendency is that entrepreneurship publications in man-
agement studies have a higher percentage of citations to their own field, i.e. publications
in management studies (82 per cent), compared to economics (52 per cent) and other
fields (52 per cent) (Table 3.2). It should also be noted that ‘management studies’ received
a higher share of citations compared to ‘economics’ and ‘other fields’. For example, pub-
lications in management studies are cited in 33 per cent of publications in economics, and
39 per cent by publications in ‘other fields’, whereas publications in management studies
cite only 9 per cent of publications in economics, and 8 per cent in ‘other fields’, indicat-
ing that publications in ‘management studies’ constitute some form of ‘core’ literature in
the field of entrepreneurship.
From our discussion we can conclude that the field of entrepreneurship is dominated
by publications in management studies and that the interaction among the scholars in
entrepreneurship is also dominated by this discipline. Furthermore, it is quite obvious
9
Mean number of citations to the field
Management Studies
8
Economics
7 Other
6
5
4
3
2
1
0
1980 1985 1990 1995 2000 2005 2010
Publication year
Figure 3.3 The mean number of citations to the downloaded set of entrepreneur
publications by main field between 1980 and 2007


Table 3.2 Citations between main fields from 1980 to 2007 (in per cent)
Citing main field Cited main field

Management Economics Other fields Total
studies
Management studies 82.3 9.2 8.5 100.0
Economics 33.2 52.5 14.3 100.0
Other fields 38.9 9.6 51.5 100.0
Total 68.0 13.2 18.8 100.0
Share of papers 42.4 13.6 44.0 100.0
that the field is becoming more and more self-reliant, i.e. citations are increasingly made
to publications within entrepreneurship anchored in management studies, and that
entrepreneurship researchers in other disciplines are citing publications on entrepreneur-
ship in management studies. The conclusion to be drawn is that we find, in line with
our assumptions, an indication of an evolving knowledge platform in entrepreneurship
research, mainly developed among the group of ‘entrepreneurship researchers’ with their
roots in management studies. The emerging knowledge platform in entrepreneurship
has taken a long time to appear – about 40 years of more or less systematic research on
entrepreneurship – but in this respect, entrepreneurship is not very different from any
other emerging field in the social sciences.
If we take a more detailed look at the citation network among the publications, we
find that the core of the network mainly consists of publications in management studies
journals (‘white circles’ in Figure 3.4). However, the figure draws our attention to the fact
that the citations seems to cluster within each discipline. Following our earlier discussion,
most citations refer to management publications, but we can also find, for example in the
upper right corner, an ‘economics cluster’ (‘black circles’) with publications heavily cited
among economists but only partly by management scholars. The citation pattern is not
evident to the same extent among publications in ‘other fields’ (‘grey circles’).
Figure 3.4 indicates that there seems to be a clear divide between scholars with roots in
different disciplines – ‘entrepreneurship researchers’ with their roots in management tend
to cite works with a basis in management studies and not rely on works outside the field,
and scholars in economics follow a similar path – economists tend to cite other econo-
mists (the citation pattern of scholars in ‘other fields’ is not evident to the same extent). In
the next section we elaborate on the emerging knowledge platforms in entrepreneurship
and discuss the works that constitute them.
THE CHARACTERISTICS AND CONTENTS OF KNOWLEDGE

PLATFORMS IN ENTREPRENEURSHIP RESEARCH
From the previous section we can conclude that there are signs of an evolving knowledge
platform in entrepreneurship research, particularly within the group of ‘entrepreneur-
ship researchers’ with roots in management. To elaborate further on the development of
knowledge platforms in entrepreneurship, in this section we pose the following questions.


Note: Publications cited at least 25 times, with at least two connections. White circles = Management
studies, Black circles = Economics, Grey circles = Other fields.
Figure 3.4 Citations among publications within the field
Which are the most cited works in each time period, irrespective of when they were pub-
lished? Which are the most cited works published in each time period, and cited over all
later periods? Thus, on the one hand, we are analyzing the works that are highly cited
at different periods in time, i.e. the most cited works during the period 1970–89 (take-
off phase), 1990–99 (growth phase), and 2000–07 (phase of searching for maturation),
and in this analysis we mainly find the ‘classical works’ that have influenced the field,
representing the ‘research basis’ in entrepreneurship research. On the other hand, we
are analyzing the works that have been published during a certain time period and have
then been influential over time, thus representing the ‘core works’ published in each time
period.
Following our argument in the previous section indicating that the entrepreneur-
ship research community is divided into different parts, we would expect to find fairly
limited knowledge platforms shared between scholars rooted in various disciplines. If
we analyze the ten most cited works within each discipline during each time period,
and look for works that have been highly ranked within more than one discipline (see
Tables 3.3 to 3.5), we can conclude, in line with our expectation, that there seem to be no
strong shared knowledge platforms within the field of entrepreneurship, i.e. few works
are highly ranked in more than one discipline (with very few exceptions such as the
classic works by Schumpeter and McClelland). The conclusion that can be drawn is that
the disciplinary roots seem to be more important than a general knowledge platform in
entrepreneurship.


As there seems to be a strong disciplinary basis in the development of knowledge plat-

forms in entrepreneurship, we focus our analysis of the development of such platforms
on the following categories: management studies, economics, and ‘other fields’.
Management Studies
By focusing on the research basis over time in management studies, we can identify (see
Table 3.3) a change in the citation pattern from behavioral aspects in the period 1970–89
(with citations to McClelland, Collins et al., and Hornaday and Aboud, but also cita-
Table 3.3 Most cited works in management studies
Most cited works in each time period, irrespective of when they were published
Ranking 1970–89 1990–99 2000–07
Take-off phase Growth phase Search for maturation
1 McClelland (1961) Porter (1980) Schumpeter (1934)
2 Chandler (1962) Schumpeter (1934) Barney (1991)
3 Collins et al. (1964) Porter (1985) Shane & Venkataraman
(2000)
4 Burns & Stalker (1961) Williamson (1975) Cohen & Levinthal (1990)
5 Schumpeter (1934) Williamson (1985) Lumpkin & Dess (1996)
6 Collins & Moore (1970) Low & MacMillan Porter (1985)
(1988)
7 Porter (1980) Nunnally (1967) Porter (1980)
8 Peters & Waterman McClelland (1961) Nelson & Winter (1982)
(1982)
9 Hornaday & Aboud Nelson & Winter (1982) Penrose (1959)
(1971)
10 Timmons (1977) Jensen & Meckling (1976) Stinchcombe (1965)
Most cited works published in each time period, and cited over all later periods
1 Porter (1980) Barney (1991) Shane & Venkataraman
(2000)
2 Porter (1985) Cohen & Levinthal Shane (2000)
(1990)
3 Nelson & Winter (1982) Storey (1994) Zahra et al. (2000)
4 Jensen & Meckling Lumpkin & Dess (1996) Autio et al. (2000)
(1976)
5 Williamson (1985) Venkataraman (1997) Davidsson & Honig (2003)
6 Covin & Slevin (1989) Burt (1992) McDougall & Oviatt
(2000)
7 Pfeffer & Salancik (1978) Petersen & Rajan (1994) Shane & Stuart (2002)
8 Williamson (1975) Busenitz & Barney Adler & Kwan (2002)
(1997)
9 Miller (1983) Aldrich (1999) Shane & Cable (2002)
10 Timmons (1977) Eisenhardt & Baum et al. (2000)
Schoonhoven (1990)


tions to management literature such as Burns and Stalker, Porter, Peters and Waterman,
and Timmons), toward a stronger interest in strategic management during the 1990s
and 2000s with an anchor in Porter, and later on in the resource-based view (e.g. Barney,
Cohen and Levinthal, and Penrose). Thus, looking at the citation pattern during the last
period we can conclude that entrepreneurship researchers are still rooted in the discipline
of management studies, and particularly in a strategic management approach. It is also
interesting to note the influence of Schumpeter in all periods. Schumpeter seems to gain a
high and even increasing importance over time, which may indicate that entrepreneurship
research is trying to create an identity of its own.
Turning to the influential works (core works) published during each time period we can
conclude that the 1970s and 1980s seem to be the decades of strong theoretical develop-
ment within the discipline of management studies, which also influenced scholars with
an interest in entrepreneurship. Some of the theories in management studies that have
been highly influential originated in the 1970s and 1980s, for example, industrial organi-
zation (Porter, 1980; 1985), transaction costs theory (Williamson, 1975; 1985), agency
theory (Jensen and Meckling, 1976), evolutionary perspective (Nelson and Winter, 1982),
resource dependence (Pfeffer and Salancik, 1978), and strategic management (Miller,
1983; Covin and Slevin, 1989). Over time, these theoretical contributions from 1970 to
1989 have been frequently cited by entrepreneurship scholars, indicating that for a long
time entrepreneurship researchers wanted to legitimize themselves in their own discipline
and reinforce the strong theoretical anchor and tradition derived from management
studies that we can find in entrepreneurship research since the 1970s.
It is more difficult to identify a particular core of works published in the 1990s that
have become highly influential (cited) in management oriented entrepreneurship studies
– the citations show a mix of different aspects of entrepreneurship that emerged during
the 1990s and confirm our view of the decade as one of ‘fragmented’ entrepreneurship
research (see Chapter 2). However, the importance of the resource-based view (Barney,
1991; Cohen and Levinthal, 1990) seems obvious, as it is also linked to a broader inter-
est in strategic aspects of entrepreneurship (represented by Lumpkin and Dess, 1996;
Busenitz and Barney, 1997). In the 1990s some influential works were also published in
an attempt to synthesize and theorize entrepreneurship, represented by Storey (1994),
Venkataraman (1997), and Aldrich (1999).
In the 2000s we can identify core works that start to build their own knowledge
platforms in entrepreneurship, and these years clearly bear the stamp of Scott Shane’s
work on entrepreneurship – Shane has four contributions among the ten most cited
works published in the 2000s. In addition, we can find three important themes based on
entrepreneurship as a field in its own right: (1) the domain discussion of entrepreneur-
ship strongly focused on in the works by Shane (Shane and Venkataraman, 2000; Shane,
2000), (2) the internationalization of entrepreneurial firms – for example in the special
issue of the Academy of Management Journal 2000 (Zahra et al., 2000; Autio et al., 2000;
McDougall and Oviatt, 2000), and (3) a strong interest in social capital and networks
and their impact on start-ups, performance, and venture capital (Davidsson and Honig,
2003; Shane and Cable, 2002; Shane and Stuart, 2002; Adler and Kwan, 2002; Baum et
al., 2000).
It is clear that, for a long time, entrepreneurship researchers rooted in management
studies relied on mainstream management works, particularly those related to the field of


strategic management. In the 2000s, however, many works with a stronger entrepreneur-
ship focus have been emerging and have quickly become highly influential (cited), for
example the works by Scott Shane, Per Davidsson and Shaker Zahra, indicating that a
stronger knowledge platform of its own is emerging in entrepreneurship research.
Economics
An obvious knowledge platform in economics is represented by Schumpeter, who, over

all time periods, has been frequently cited by economists interested in entrepreneurship
(see Table 3.4). In the period 1970–89 economists seem to have relied heavily on classic
works on entrepreneurship in economics, particularly Schumpeter (1934; 1939; 1942;
1954) but also Kirzner (1973; 1979), and Knight (1921). At the same time as the industrial
landscape radically changed in the 1970s and 1980s, a number of pioneering contribu-
Table 3.4 Most cited works in economics
Ranking 1970–89 1990–99 2000–07
1 Schumpeter (1934) Schumpeter (1942) Evans & Jovanovic (1989)
2 Kirzner (1973) Schumpeter (1934) Evans & Leighton (1989)
3 Schumpeter (1942) Evans & Leighton (1989) Schumpeter (1934)
4 Knight (1921) Williamson (1985) Blanchflower & Oswald
(1998)
5 Coase (1937) Stiglitz & Weiss (1981) Schumpeter (1942)
6 Schumpeter (1954) Evans & Jovanovic (1989) Jovanovic (1982)
7 McClelland (1961) Jovanovic (1982) Stiglitz & Weiss (1981)
8 Schumpeter (1939) Williamson (1975) Lucas (1978)
9 Kirzner (1979) Piore & Sabel (1984) Holtz-Eakin et al.
(1994b)
10 Scherer & Ross (1980) Nelson & Winter (1982) Holtz-Eakin et al. (1994a)
1 Evans & Jovanovic Blanchflower & Oswald Blanchflower (2000)
(1989) (1998)
2 Evans & Leighton (1989) Holtz-Eakin et al. (1994b) Blanchflower et al. (2001)
3 Jovanovic (1982) Holtz-Eakin et al. (1994a) Johnson et al. (2002)
4 Stiglitz & Weiss (1981) Bates (1990) Hellmann & Puri (2002)
5 Kirzner (1973) Storey (1994) Gompers & Lerner (2001)
6 Lucas (1978) Saxenian (1994) Klepper (2001)
7 Kihlstrom & Laffont Petersen & Rajan (1994) Cressy (2000)
(1979)
8 Piore & Sabel (1984) Baumol (1990) Johnson et al. (2000)
9 Williamson (1985) Audretsch (1995) Hellmann et al. (2000)
10 Nelson & Winter (1982) Gertler & Gilchrist (1994) Kaplan & Strömberg
(2003)


tions were published within the field of ‘small business economics’ – introducing a more
dynamic or evolutionary framework and a stronger emphasis on the role and contribu-
tions of entrepreneurship and small businesses in society – a knowledge platform that
became heavily cited among economists during the 1990s and the early part of the 2000s.
For example, Richard Nelson and Sidney Winter (1982) were among the pioneers with
their evolutionary model of economic development, a model that was further adapted by
Jovanovic (1982). In addition, there was great interest in the question of why individu-
als become entrepreneurs – entrepreneurial choice models – represented by highly cited
works by Evans and Jovanovic (1989) and Evans and Leighton (1989). Among seminal
works frequently cited in entrepreneurship research, we can also find Robert Lucas’s
(1978) new growth theory, but also Piore and Sabel (1984), who provided an historical
review of industrial development since the early nineteenth century.
In the 1990s and 2000s, we can identify three distinct and somewhat different areas
of work that have been published as well as cited by economists. First, many works
were published and frequently cited on the entry, survival and growth of new firms (e.g.
Blanchflower and Oswald, 1998; Holtz-Eakin et al., 1994a; 1994b; Bates, 1990; Storey,
1994; Audretsch, 1995). In this respect, a large number of studies emphasized the impor-
tance of capital as well as the role of capital constraints in the decision to become an
entrepreneur and as a determinant for the survival and growth of new firms (e.g. Petersen
and Rajan, 1994; Gertler and Gilchrist, 1994). Second, probably due to the exceptional
growth of the IT sector in the late 1990s and venture capitalists’ involvement in the devel-
opment of the sector, some of the most cited works are related to venture capital (e.g.
Hellmann and Puri, 2002; Hellmann et al., 2000; Gompers and Lerner, 2001; Kaplan and
Strömberg, 2003). Finally, there was a great interest in international comparisons of self-
employment in different countries, and Blanchflower’s studies on self-employment rates in
OECD countries are among the most cited during the period 2000–07 (e.g. Blanchflower,
2000; Blanchflower et al., 2001), but the entrepreneurial development in post-communist
countries also attracted attention (e.g. Johnson et al., 2000; 2002).
It appears that entrepreneurship research in economics has a rather strong theoretical
anchor, which is embedded in the reasoning of Schumpeter but also in classic entrepre-
neurship works such as Kirzner and Knight. The pioneering studies on ‘small business
economics’ that were mainly presented during the 1980s, have in later decades been
extremely influential among entrepreneurship researchers rooted in economics. With
‘small business economics’ as a basis for research, entrepreneurship and small business
seem to have developed in several different directions since the pioneering achievements
of the 1980s and 1990s.
Other Fields
Despite the fact that the category ‘other fields’ represents a very heterogeneous group of
research fields, there are several themes that seem to be fairly persistent with regard to
both citations and publication patterns over time (Table 3.5).
The 1970s were characterized by a high level of immigration, particularly into the larger
cities in the US as well as the UK, which led to social problems, unemployment, violence
and race riots that triggered an increased interest in ethnic minority entrepreneurship
among sociologists, with pioneering studies by Ivan Light and Edna Bonacich. Interest


Table 3.5 Most cited works in ‘other fields’
Ranking 1970–89 1990–99 2000–07
1 McClelland (1961) Piore & Sabel (1984) Porter (1985)
2 Schumpeter (1934) Light (1972) Schumpeter (1934)
3 Storey (1982) Light & Bonacich (1988) Storey (1994)
4 Birch (1979) Granovetter (1985) Rogers (1962)
5 Bonacich & Modell Schumpeter (1934) Yin (1984)
(1980)
6 McClelland et al. (1969) Waldinger et al. (1990) Saxenian (1994)
7 Weber (1908/1958) Kingdon & Thurber Harvey (1989)
(1984/1995)
8 Collins et al. (1964) Bonacich (1973) Granovetter (1985)
9 Light (1972) Portes & Bach (1985) Penrose (1959)
10 Peters & Waterman Williamson (1975) Putnam et al. (1993)
(1982)
1 Porter (1985) Storey (1994) Shane & Venkataraman
(2000)
2 Piore & Sabel (1984) Waldinger et al. (1990) Light & Gold (2000)
3 Granovetter (1985) Saxenian (1994) Putnam (2000)
4 Light (1972) Putnam et al. (1993) Florida (2002)
5 Light & Bonacich (1988) Aldrich & Waldinger Etzkowitz & Leydesdorff
(1990) (2000)
6 Harvey (1989) Light & Rosenstein Etzkowitz et al. (2000)
(1995)
7 Yin (1984) Osborne & Gaebler Shane (2000)
(1992)
8 Williamson (1975) Barney (1991) Etzkowitz (2003)
9 Portes & Bach (1985) Portes & Sensenbrenner Curran (2000)
(1993)
10 Bonacich & Modell Burt (1992) Acs (2002)
(1980)
in ethnic immigrant entrepreneurship has continued among sociologists, with influential

contributions during the 1990s by, for example, Waldinger et al. (1990), Aldrich and
Waldinger (1990), Light and Rosenstein (1995), and Portes and Sensenbrenner (1993)
(see Table 3.5).
Another research theme that has persisted in ‘other fields’ over time concerns the
changes in society and the evolution of a post-modern, knowledge-intensive society,
pioneered by Michael Piore and Charles Sabel’s book The Second Industrial Divide
(1984) and David Harvey’s book The Condition of Postmodernity (1989), followed by
contributions by Robert Putnam (2000; Putnam et al., 1993). During the 2000s, there
have been several publications on innovation studies, which has become a core theme


among scholars anchored in ‘other fields’, and deals with the creation of innovations and
new knowledge as well as the role of universities, regions, and societies in the new knowl-
edge creation. The extensive number of publications during the 2000s that fairly quickly
became frequently cited, not least Henry Etzkowitz’s ideas about the Triple Helix model
(university – industry – government), which attracted much interest, while contributions
by Florida (The Rise of the Creative Class, 2002, and Acs (Innovation and the Growth of
Cities, 2002) also received a great deal of attention.
Finally, the theme of social networks emerged during the 1980s, influenced by
Granovetter’s (1985) seminal work on strong and weak ties. Networks continued to be
important in entrepreneurship research, as did Burt’s work (Structural Holes. The Social
Structure of Competition, 1992).
The ‘other fields’ category is strongly heterogeneous and includes many different
research topics, most of which do not attract a large number of scholars. Nevertheless,
some research themes stand out and have been fairly persistent over time: ethnic minority
entrepreneurship, knowledge-based society, and social networks in entrepreneurship.
Knowledge Platforms in Entrepreneurship – Summary
It can be concluded that entrepreneurship as a research field lacks a strong knowledge

platform, although such a platform seemed to be emerging during the 2000s among
‘entrepreneurship researchers’ rooted in management studies. However, in general, the
‘traditional’ disciplines appear to be important in the analysis of knowledge platforms in
entrepreneurship. Thus, the field can be characterized as a ‘bounded’ multi-disciplinarity
of research in which the knowledge platforms are mainly linked to the theoretical frame-
works that have been developed within the respective mainstream disciplines, and there
is very limited cross-fertilization between scholars interested in entrepreneurship within
different disciplines.
The base disciplines matter to a great extent in entrepreneurship research. The aca-
demic system is rooted in the ‘traditional’ disciplinary boundaries – our theories, our
academic education and careers, our social networks, and so on. There are many argu-
ments indicating that the disciplines are the basis for understanding entrepreneurship (see
Landström, 2005); for example, many concepts and theories for understanding entrepre-
neurship can be found in the knowledge that is rooted in the ‘traditional’ disciplines. It is
important to take advantage of this knowledge in entrepreneurship research, despite the
fact that it takes a long time to create cross-fertilization between scholars with different
disciplinary backgrounds.
CONCLUSIONS
In this chapter we have demonstrated, firstly that a research community of ‘entrepre-

neurship researchers’, mainly anchored in the field of ‘management studies’, is evolving
over time. These researchers show a stronger self-reliance in their citation pattern, in
which citations are increasingly made to publications within the field of entrepreneur-
ship. Secondly, we have demonstrated that there are signs of an emerging ‘knowledge
platform’ in entrepreneurship research, especially within the group of ‘entrepreneurship


researchers’. In the 2000s, works with a strong entrepreneurship focus have become
highly influential within the field.
The development of a research community and a knowledge platform has taken
time, which is not unusual in new fields of research – but an obstacle has been that
the mainstream disciplines matter and the strong disciplinary boundaries have made
cross-disciplinary research difficult. The ‘bounded’ multi-disciplinarity of entrepreneur-
ship research makes it necessary to find new ways to organize such cross-disciplinary
research.
We believe that an important challenge for entrepreneurship researchers in the future
will be to engage in more systematic theory driven research and, as entrepreneurship is a
phenomenon characterized by high complexity, heterogeneity, and multi-level considera-
tions, we need cross-disciplinary approaches in order to understand the phenomenon.
As argued by Davidsson (2003), in the future we need to combine entrepreneurial and
disciplinary knowledge, which can be achieved by (i) entrepreneurship researchers learn-
ing more about theory and method from the disciplines, (ii) disciplinary researchers
focussing on entrepreneurship research, and (iii) collaboration between entrepreneurial
and disciplinary researchers. According to Davidsson, all three directions are likely to be
explored in the future.
NOTE
1. At the beginning of the 1990s, Web of Science introduced abstracts in their analysis, which automatically
provided more hits, and could partly explain the growth trend in entrepreneurship research during the
1990s.
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APPENDIX
Table 3A.1 Entrepreneurship research in bibliometric studies
Article Time frame Sample Conclusions
Research themes and community

Romano & 1986–92 Small business An increased impact of entrepreneurship
Ratnatunga journals (JSBM, journal articles over time. JBV and
(1996) ISBJ, ETP, JBV, ETP had the greatest impact on the
SBE, and API) advancement of small business research.
Ratnatunga & 1986–92 Small business The research field is characterized as a
Romano (1997) journals (JSBM, loose collection of ideas rather than a
ISBJ, ETP, JBV, coherent structure.
SBE, and API) Most of the articles were explorative
in nature and attempted to rationalize
concepts and variables used in small
business research.
Déry & Toulouse 1986–93 Articles in JBV The authors relied heavily on disciplines
(1996) associated with business studies and
entrepreneurship, followed by disciplines
in the social sciences (psychology and
sociology).
The field is characterized by a
fragmentation of social relations among
researchers.
Shane (1997) 1987–94 Entrepreneurship Ranking the impact of authors and
articles in 19 institutions in entrepreneurship research.
management and
entrepreneurship
journals
Landström (2000) 1987–99 JBV, SBE, JSBM Enormous growth of the research
and Technovation community (approx. 10 per cent per
year during the 1990s). Geographical
concentration in North America. The
strength of the research community
in NA is further confirmed by the fact
that collaboration between researchers
in NA seems to be more pronounced,
and NA is an intellectual center that
attracts collaboration from researchers
who mainly come from countries with
a less developed infrastructure within
Landström (2001) 1987–99 JBV, SBE, JSBM The research community in
and Technovation entrepreneurship constitutes a rather
heterogeneous group of researchers.


Table 3A.1 (continued)

Most researchers within the field can be
regarded as ‘transients’, i.e. researchers
who belong to some mainstream
discipline and who temporarily visit the
field of entrepreneurship research. There
are very few researchers who work in
entrepreneurship on a continual basis.
Busenitz et al. 1985–99 Leading The boundaries of the entrepreneurship
(2003) management field are highly permeable, i.e. allowing
journals (AMJ, scholars from other fields to apply their
AMR, ASQ, JM, models and concepts to entrepreneurial
MS, OS, and settings.
SMJ) Changes have occurred:
– Some evidence was found of an
upward trend in the number of
published entrepreneurship articles in
leading management journals, but the
percentage of entrepreneurship articles
remains low.
– Initially, exchange in entrepreneurship
research published in mainstream
management journals was dominated
by non-entrepreneurship citation
sources, but increasingly, exchange
relies upon dedicated entrepreneurship
journal citations (not least to JBV).
Grégoire et al. 1981–2004 Full papers in Entrepreneurship research shows:
(2006) Frontiers of – Varying levels of convergence over
Entrepreneurship time as well as an evolution of the
Research conceptual themes that have attracted
(Babson scholars over the years.
Conference) – The field increasingly relies on its
own literature, pointing toward the
unique contribution of the research to
management science.
Cornelius et al. 1982–2004 SSCI of the ISI Entrepreneurship research exhibits
(2006) Web of Science increased maturation in the sense that the
field shows:
– An increased internal orientation in
citations.
– Stabilization of research themes, and
increased specialization of research.
– Identification of core groups of
researchers.


Reader & 1972–2000 Unique database Based on 78 prominent entrepreneurship

Watkins (2006) researchers, identification of nine
clusters of authors within the field of
– Fragmented research that is difficult to
categorize into sub-fields.
– Relative paucity of citations across
– as opposed to within – sub-fields
as well as social networks across sub-
fields.
– National differences in topics studied
and citation patterns.
Entrepreneurship is very much a social
activity.
Schildt et al. 2000–04 30 journals Identification of the 25 most central
(2006) selected from research streams in entrepreneurship
SSCI of the ISI research.
Web of Science – The research remains highly
fragmented.
– Noncumulative – limited citations of
earlier research.
– The US dominates but other countries
employ their own research tradition.
– Research is not highly cited outside the
field (sense of isolation).
Crump et al. 1995–06 Entrepreneurship Ranking of the impact of authors and
(2009) articles in 26 affiliations in entrepreneurship research
management and (cf. Shane, 1997).
entrepreneurship
journals, and
three US annual
entrepreneurship
conferences
Concepts and research paradigms
Karlsson (2008) 1989–2007 Entrepreneurship Language specificity has increased over
journals (JBV, time in entrepreneurship research.
ETP, ERD, and – A reduction of the importance of size
SBE) words, stability of age words, and
rapid recent expansion of the use of
specific words such as opportunity,
nascent, and very recently, bricolage.


Grant & Perren 2000 Entrepreneurship Entrepreneurship research is a

(2002) journals (ETP, mono-paradigmatic research field. A
JBV, JSBM, meta-theoretical analysis reveals the
SBE, ISBJ, and dominance of the functionalist paradigm
ERD) (Burell and Morgan, 1979)
Kyrö & Kansikas 1999–2000 Entrepreneurship Methodological concerns in relation
(2005) journals (ETP, to epistemological and ontological
JBV, SBE, considerations are non-existent in the
JSBM, and ERD) articles.
Management – Quantitative research dominates and
journals (AMR, progress is concentrated on more
AMJ, AME, sophisticated statistical methods.
SMJ, OS, JM, – Qualitative methods are few (but
and ASQ) increasing).
– Borrowing of methods from other
fields of science is almost invisible in
the articles.
Methodological approaches
Paulin et al. 1961–80 ABI/INFORM The field is evolving: earlier work
(1982) and Management tended to use non-methodological,
Contents contemplative, or anecdotal methods.
A majority of studies employed a
descriptive or case study design. A
trend toward more systematic empirical
methods can be discerned.
Churchill & Lewis 1981–84 Ten major Little has changed since the 1982 analysis
(1986) management (Paulin et al., 1982). Research on
journals, entrepreneurship is more oriented toward
Frontiers of improving practice than theory – it is a
Entrepreneurship practice-oriented field of research.
Research – Considerable diversity in research –
(Babson many different topics under study,
Conference), but the category encompassing
and Harvard most studies is ‘how to manage
Symposium on entrepreneurial ventures better and
Entrepreneurship more effectively’.
1983 – Survey techniques and a combination
of informal and reflectional
observations are the most common
methodologies in the studies.
Available data, lack of good theory,
and a ‘comfortableness’ with proven
methodologies influence what is
studied.


Aldrich (1992) 1985–90 Ten major Research approaches and methods

management have not changed very much since the
journals, JBV, early 1980s – entrepreneurship is still a
and Frontiers of mono-methodological field of research.
Entrepreneurship However, some minor changes are
Research (1986 apparent:
and 1989) – The field has continued to expand its
repertoire of research approaches and
analytical techniques.
– Mail surveys are still common, but
public and archival sources are
becoming more popular. A growing
minority of researchers are using
multivariate statistics.
Aldrich & Baker 1981–95 Ten major Research approaches and methods used
(1997) management in entrepreneurship research have not
journals, JBV, changed much over the past 15 years,
and Frontiers of other than a break with journalistic and
Entrepreneurship armchair methods after 1985. Surveys
Research (1986, have remained the dominant method,
1989, 1990, and and response rates are low. Statistical
1994) sophistication has improved slightly – at
least at the low end.
Landström & 1994 ETP, JBV, Comparison between entrepreneurship
Huse (1996) JSBM, ERD, and research in North America and Europe.
ISBJ Despite the fact that there is a great
diversity within entrepreneurship
research in Europe, the research seems to
be more descriptive. European scholars
use a broader range of methodologies,
and focus on research questions on an
aggregate level of analysis compared to
their colleagues in NA.
Dean et al. (2007) 1976–2004 Entrepreneurship Data analysis in entrepreneurship
(ETP) and journals (ETP research is becoming more sophisticated.
1985–2004 and JBV) – Over time there has been a shift
(JBV) from descriptive statistics and
nonparametric tests for hypothesis
testing to more rigorous techniques
such as linear models, logistic
regressions, and so on.
– Entrepreneurship researchers have
increasingly utilized longitudinal
designs.


McDonald et al. 1985–2004 Entrepreneurship Entrepreneurship research is dominated

(2004) journals (ERD, by positivist approaches and research
ETP, ISBJ, JBV, methods.
and JSBM) – Entrepreneurship research is a ‘mono-
method field’ dependent on postal
surveys and questionnaire-based
techniques.
Davidsson & 1988/89 Entrepreneurship – Entrepreneurship research is
Wiklund (2001) and 1998 journals (ETP, dominated by micro-level analysis,
JBV, and ERD) predominantly using the firm or the
individual as the level of analysis.
– The micro-level dominance seems to
have increased over the years.
– An almost complete lack of studies
that combine levels.
Chandler & Lyon 1988–98 Entrepreneurship – There has been an increase in the
(2001) (1999) (ETP and JBV) use of multivariate techniques and
and management some modest but greater utilization
journals (AMR, of reliability and validity tests in the
AMJ, SMJ, OS, course of the decade.
MS, JM, and – Almost nine out of ten studies
ASQ) focus on one level of analysis, the
majority being at firm (53 per cent) or
individual level (35 per cent).
Bouckenooghe et 1999–2003 Entrepreneurship Entrepreneurship research is dominated
al. (2004) (ETP, JBV, SBE, by non-experimental research strategies,
and JSBM) and mainly sample surveys (52 per cent)
management and field studies (35 per cent). As a
journals (AMJ, consequence, entrepreneurship research
SMJ, ASQ, OS, is characterized by the use of research
MS and JM) methods that ensure external validity but
have limited internal validity.
– Increased use of longitudinal data
collection, multi research designs
(triangulation), and more sophisticated
statistical techniques.
Brush et al. 2003–05 Entrepreneurship Entrepreneurship researchers are using
(2008) journals (JBV, a wide variety of dependent variables
ETP, ISBJ, and (the lack of convergence in dependent
SBE) variables suggests that there is little
comparability), and performance,
broadly defined, is the most popular
dependent variable (showing a strong



link between entrepreneurship and
strategic management scholars).
– The most popular unit of analysis is
the firm (30 per cent) followed by the
individual (11 per cent) and firm +
environment (11 per cent).
Edelman et al. 2003–05 Entrepreneurship Few changes have occurred in research
(2009) Compared journals (JBV, methodologies over the ten years since
with ETP, JSBM, Aldrich and Baker’s study (1997), but
1981 –95 ISBJ, SBE, and there is a widening gap in methodologies
(Aldrich ERD) between entrepreneurship research in the
& Baker, Management US and Europe.
1997) journals (ASQ
and AMJ)
Mullen et al. 2001–08 JSBM, JBV, and Improvements have been made regarding
(2009) ETP the use of a solid methodological base for
theory development in entrepreneurship
research, but the evolution has not been
sufficient. For example, there is a need
for improvement with regard to sampling
issues (sample size and potential biases),
construct validity (measures of internal
consistency and reliability), and internal
and external validity.
Note: AME: Academy of Management Executive; AMJ: Academy of Management Journal; AMR: Academy
of Management Review; API: Asian Pacific International Management Forum; ASQ: Administrative Science
Quarterly; ERD: Entrepreneurship and Regional Development; ETP: Entrepreneurship Theory and Practice;
ISBJ: International Small Business Journal; JBV: Journal of Business Venturing; JM: Journal of Management;
JSBM: Journal of Small Business Management; MS: Management Science; OS: Organization Science; SBE:
Small Business Economics; SMJ: Strategic Management Journal.


PART II
Intellectual Roots of Entrepreneurship Research



Section II.1
Opportunity Recognition



4. Environmental uncertainty and firm-level
entrepreneurship
Lou Marino, Patrick Kreiser and Anthony Robinson
INTRODUCTION
The concept of uncertainty has maintained a central position in the study of entrepre-
neurship since Cantillon first coined the term ‘entrepreneur’ in his Essai sur la nature du
commerce en general (Essay on the Nature of Commerce in General, published 1755). In
this work, Cantillon described an entrepreneur as a risk-taker who bears uncertainty in
buying a fixed quantity of goods for a certain price with the intention of selling these
goods at a future date in markets that have a demand and price levels that are indeter-
minate at the time the resources are acquired. Knight (1921) reinforced the fundamental
relationship between entrepreneurship and uncertainty in his book Risk, Uncertainty
and Profit. In this work, Knight clearly delineated between risk and uncertainty, and
argued that entrepreneurs are economic actors, who earn profit from bearing uncer-
tainty.
Acknowledging the key role that uncertainty plays in entrepreneurship, numerous
researchers have examined the relationship between uncertainty and a wide variety of
antecedents and consequences of entrepreneurial activities. Studies that have exam-
ined the impact of uncertainty in the entrepreneurship literature include research on
varied topics such as the impact of environmental hostility on the relationship between
corporate entrepreneurship and firm performance (Zahra and Garvis, 2000), the role
of technological uncertainty on technology alliance formation in entrepreneurial firms
(Steensma et al., 2000), the impact of environmental dynamism on the relationship
between entrepreneurial leadership and new venture performance (Ensley et al., 2006),
the relationship between environmental dynamism, entrepreneurial orientation and
access to capital on small business performance (Wiklund and Shepherd, 2005), and the
impact of environmental turbulence on the choice of governance modes in external tech-
nology sourcing arrangements (Van de Vrande et al., 2009).
Despite the empirical studies that have been conducted on the role of uncertainty in
the entrepreneurship literature, a relatively greater depth of theoretical research has been
focused on the influence of risk-taking, while less attention has been devoted to the role
of uncertainty in this area (Alvarez, 2007). This is an especially significant issue given
that risk-taking and uncertainty represent independent concepts, and both constructs
represent different elements of the entrepreneurial process (Knight, 1921). In an effort to
promote additional research on the theoretical impact of uncertainty on entrepreneurial
activities, this chapter clearly distinguishes between the concepts of risk and uncertainty,
reviews the historical development of the environmental uncertainty construct and the
81

most commonly employed measures of uncertainty, and develops recommendations per-

taining to the use of this key concept in future entrepreneurship research.
In order to achieve these objectives, the chapter is structured in the following manner.
The first section explores the conceptual differences between the uncertainty and risk-
taking constructs. Particular attention is devoted to the role that uncertainty plays in the
entrepreneurial process. The second section provides an in-depth examination of previ-
ous research efforts examining the concept of uncertainty. Two theoretical viewpoints,
the information uncertainty perspective and resource dependence theory, serve as the
foundation of this analysis. We also examine the manner in which researchers from both
viewpoints have operationalized the uncertainty construct in previous studies. The third
section integrates these various arguments to highlight the implications of this chapter
for organizations and researchers. The use of the uncertainty construct in future research
efforts, as well as the importance of uncertainty to entrepreneurial firms, is considered.
DISTINCT CONSTRUCTS: EXPLORING THE DIFFERENCES

BETWEEN UNCERTAINTY AND RISK
The argument that entrepreneurial firms are more willing to immerse themselves in
uncertain environments than are non-entrepreneurial firms has been a central tenet of
entrepreneurial theory since the earliest days of the discipline (Knight, 1921). However,
there is often a lack of clarity in the entrepreneurship literature when authors discuss
uncertainty and risk as they are frequently treated as synonymous concepts. Authors have
recently begun to more precisely distinguish between the two concepts, with the concept
of risk-taking having received a relatively disproportionate amount of scrutiny in recent
entrepreneurship research (Alvarez, 2007; Alvarez and Barney, 2005; Janney and Dess,
2006). Although Knight (1921) initially suggested developing a clear, theoretical differen-
tiation between risk and uncertainty, the call for a more precise differentiation between
these concepts was not stressed in the modern entrepreneurship literature until Janney
and Dess’s (2006) and Alvarez’s (2007) work. In defining these two key concepts, Knight
differentiated between risk (which involves decision-making scenarios when the prob-
ability of an outcome is known or can be reasonably inferred) and uncertainty (which
refers to decision-making contexts in which this probability can be neither known nor
calculated with any reasonable degree of confidence).
In a review of the use of the concept of risk in entrepreneurship, risk-taking has been
defined as the ‘degree to which managers are willing to make large and risky resource
commitments – i.e. those which have a reasonable cost of failure’ (Miller and Friesen,
1978, p. 923). Building on this conceptualization, Miller (1983) argued that risk-taking
is an essential element of entrepreneurship and that entrepreneurs engage in construc-
tive risk-taking. Similarly, Baird and Thomas (1985) defined entrepreneurial risk-taking
as the propensity of a firm’s management team to engage in taking calculated business
risks. In reviewing the role of risk in the entrepreneurship literature, Janney and Dess
(2006) noted that three conceptualizations of risk dominate the literature: defining risk
as variance, downside loss, and opportunity (or opportunity-cost). They argued that the
conceptualization most salient for entrepreneurs and entrepreneurial decision-making,
especially in the context of launching a new venture, is risk as downside loss. Authors


Environmental uncertainty and firm-level entrepreneurship 83
who have utilized this conceptualization of risk (e.g. Lumpkin and Dess, 1996) have
tended to define it as a manager’s ability to assess the likelihood of experiencing loss.
This ability to assign the probability of a loss is a key distinction between risk and
uncertainty. Building on the work of Knight (1921), Alvarez (2007) points out the ‘growing
agreement that one of the most important differences between non-entrepreneurial and
entrepreneurial decision-making is that the former takes place under conditions of risk,
while the latter takes place under conditions of uncertainty’ (Alvarez, 2007, p. 429). This
is a significant distinction given that entrepreneurs tend to be more optimistic about
the business situations that they pursue than non-entrepreneurs and ‘may not think of
themselves as being any more likely to take risks than non-entrepreneurs’ (Palich and
Bagby, 1995, p. 426). Janney and Dess (2006) argued that entrepreneurs may not have a
higher risk preference than the general population, but they may simply have access to
specialized knowledge that allows them to assess the true nature of risk in a situation.
Combining these arguments with Knight’s views regarding uncertainty, it is possible to
conclude that entrepreneurial firms may in fact be more willing to tolerate ambiguous
and uncertain situations than non-entrepreneurial firms, but may not necessarily be any
more willing to take risks.
Consistent with these arguments is the concept of the learning curve (Wiersma, 2007)
and entrepreneurial learning (Hayton, 2005; Zahra et al., 1999). Organizations involved
in entrepreneurial activities experience higher levels of experimental learning, which
occurs internally and leads to the creation of new knowledge that is distinct to that par-
ticular organization (Zahra et al., 1999). As levels of experimental learning go up, the
amount of risk inherent in future activities is reduced. However, if risk-taking is consid-
ered to be a fundamental element of firm-level entrepreneurship, then at some point an
organization’s level of experimental learning would cause their levels of risk-taking to fall
below that ‘suggested’ level, thus making them less entrepreneurial by definition. Clearly
in this situation, the firm is no less entrepreneurial; they have simply developed a more
effective approach to create and/or exploit opportunities while utilizing a lower level of
risk-taking. Further, if a learning curve exists, then the risk associated with firm-level
entrepreneurship would be reduced over time as the organization learns how to reduce its
probability of failure and enhance its chances of success. Again, this would imply that a
particularly high level of risk-taking is not always necessary for an organization to engage
in entrepreneurial activities.
Uncertainty in Entrepreneurial Firms
As previously noted, one of the first authors to assess the impact of uncertainty on
entrepreneurial behaviors was Richard Cantillon (1755/1959) in his Essai sur la nature
du commerce en general. Although Cantillon does not offer a precise definition of uncer-
tainty in this text, it is clear that he equates uncertainty with the inability to predict a
future state or condition. Consistent with Cantillon’s conceptualization, Knight (1921)
defines uncertainty in terms of the entrepreneur’s inability to accurately predict a future
situation. However, as noted, Knight makes a key distinction between risk and uncer-
tainty. According to Knight, the term risk is properly used to refer to situations in which
the possibility of potential outcomes and the probabilities of these outcomes can be
expressed in terms of mathematical probabilities before a decision is made. Thus, under


conditions of risk the decision-maker is able to insure against possible negative outcomes.
Within Knight’s context, uncertainty represents ‘defects of managerial knowledge,’ and it
is these defects that account for profit and loss. Under conditions of uncertainty decision-
makers are not able to insure against possible negative outcomes because not only are
they unable to predict the probability that any specific outcome will occur, but they are
unable to meaningfully foresee the true range of possible outcomes.
As the discipline of entrepreneurship gained prominence in the organizational litera-
ture in the 1980s and 1990s, a number of researchers recognized that uncertainty played
a significant role in the entrepreneurial process. For example, Covin and Slevin (1989)
examined the relationship between environmental uncertainty (in the form of environ-
mental hostility) and a firm’s strategic posture. Likewise, McGrath et al. (1992) exam-
ined cultural differences between entrepreneurs and non-entrepreneurs. One of the key
characteristics assessed in this study was the tolerance for uncertainty. However, Knight’s
distinction between risk and uncertainty seems to have been largely ignored in the
entrepreneurial literature until Brouwer’s (2000) study of innovation, which combined
Knight’s concept of uncertainty with Schumpeter’s (1934) model of innovation. This
distinction between risk and uncertainty and their respective roles was further clarified by
Alvarez and Barney (2005), who examined how entrepreneurs organize firms under con-
ditions of risk and uncertainty. As interest in the impact of uncertainty on entrepreneur-
ship continues to grow, it will become even more necessary for researchers to understand
the historical evolution of the concept and the role it has played in the early foundations
of the organizational literature.
THE HISTORICAL EVOLUTION OF THE UNCERTAINTY

CONSTRUCT
The entrepreneurship literature draws its primary conceptualizations of uncertainty from

the management literature, which has been predominately focused on the exogenous
uncertainty that exists in the external environment. It has generally been argued that
the external environment consists of all the factors outside the firm that an organization
must consider when making strategic decisions (Duncan, 1972). Thus, uncertainty in the
external environment, or the inability to predict the future state of these factors, is an
important consideration for firms during the strategic decision-making process (Barnard,
1938). However, there has never been a consensus on a specific definition of environmen-
tal uncertainty in the organizational literature and multiple conceptualizations have been
explored (e.g. Barnard, 1938; Duncan, 1972; Lawrence and Lorsch, 1967; Milliken, 1987;
Pfeffer and Salancik, 1978; Tan and Litschert, 1994; Thompson, 1967).
Despite the breadth of conceptualizations of uncertainty, Tan and Litschert (1994)
argued that the vast majority could be categorized into one of two dominant perspec-
tives: information uncertainty or resource dependence theory. The information uncer-
tainty perspective is consistent with Knight’s (1921) assertion that uncertainty represents
a defect in managerial knowledge. Similar to Knight’s arguments, Barnard (1938) argued
that uncertainty arises from a lack of perfect information about the environment. A
number of researchers have adopted this perspective in their theory building, including
Lawrence and Lorsch (1967), Thompson (1967), Duncan (1972), and Milliken (1987).


Building on this tradition, more recent research in entrepreneurship such as Sapienza

(1992), Ensley et al. (2006), Harper (2008), and McVea (2009) have conceptualized uncer-
tainty from an information-based perspective.
Research on environmental uncertainty was largely dominated by Barnard’s conceptu-
alization until the early 1970s. At this time, researchers began to examine the impact of
organizational and environmental resources on organizational processes. One of the most
influential schools of thought in this area was resource dependence theory, established
by Child (1972) and Pfeffer and Salancik (1978). Within this theoretical framework, envi-
ronmental uncertainty is not seen as being manifested through a lack of information on
the part of key managers. Rather, uncertainty is argued to be the result of organizational
dependence on resources that are controlled by external constituencies and the power dif-
ferentials that exist as organizations attempt to manage critical resource flows from part-
ners (Pfeffer and Salancik, 1978). Researchers who have drawn upon this theory include
Child (1972), Pfeffer and Salancik (1978), Dess and Beard (1984), and Finkelstein (1997).
More recently, entrepreneurship scholars including Zahra and Garvis (2000), Specht
(1993), Begley et al. (2005), and Steensma et al. (2000) have examined uncertainty utiliz-
ing conceptualizations consistent with the resource dependence theory. The following
sections will explore the major tenets of these two theoretical perspectives (information
uncertainty and resource dependence).
The Information Uncertainty Perspective
One of the earliest management scholars to explore the relationship between firms and
their external environment was Chester Barnard (1938). He examined the impact that
environmental uncertainty had on organizational strategies in The Functions of the
Executive. A fundamental premise of this book was Barnard’s belief that executives
and their firms experienced strategic uncertainty due to the inherent instability of the
external environment. Similar to Knight (1921), Barnard argued that the inability of
managers to comprehend all the information present in a given environmental situation
was the primary cause of this uncertainty. Barnard felt that ‘under most ordinary condi-
tions, even with simple purposes, not many men can see what each is doing or the whole
situation’ (Barnard, 1938, p. 106). This is similar to Knight’s (1921) view of uncertainty
arising as a result of a defect in managerial knowledge. From Barnard’s perspective, the
imperfect knowledge regarding the environment posed significant problems as it created
ambiguity during the strategic decision-making process.
Barnard’s assertions were expanded and refined by several authors including Simon
(1957), March and Simon (1958), and Cyert and March (1963). One of the primary
contributions of this line of research was the introduction of the concept of ‘bounded
rationality’. According to Thompson, bounded rationality is concerned with organiza-
tional processes related to the ‘choice of courses of action in an environment which does
not fully disclose the alternatives available or the consequences of those alternatives’
(Thompson, 1967, p. 9). This is an important contrast to more traditional research in
classical economics that assumed perfect information was available to all actors.
Executives operating under bounded rationality could be expected to make rational
choices, but only based on the relatively limited and incomplete information they were
able to access when making strategic decisions.


The information uncertainty perspective developed by Barnard was further enhanced

by Lawrence and Lorsch (1967) and Duncan (1972). In both of these works, the authors
argued that imperfect knowledge about the environment created uncertainty for firms.
However, these authors argued that the primary impact of uncertainty on strategic
decision-making was through the interaction of the firm, its managers, and the environ-
ment. Thus, firm-level and individual-level characteristics could be expected to impact
the amount of uncertainty perceived in the external environment.
An additional contribution offered by Lawrence and Lorsch (1967) was their deline-
ation between three components of environmental uncertainty. Lawrence and Lorsch
argued that the first component of uncertainty was the inability of management to
consistently acquire accurate information regarding the state of the external environ-
ment. The second component focused on the challenges managers faced in determining
whether an adequate fit had been achieved between the firm and its environment due to
the lengthy time span required for feedback after strategic action. The final component
concerned the difficulty managers faced with regard to the uncertainty inherent in causal
relationships. The authors argued that it was very difficult for firms to accurately predict
not only the effect that specific environmental changes would have on the firm, but also
the impact that specific strategic actions would have on the external environment.
Duncan furthered clarified the importance of the interaction between managers and
the environment by arguing that the degree of uncertainty is not a constant feature, but
rather is ‘dependent on the perceptions of organization members and thus can vary in
their incidence to the extent that individuals differ in their perceptions’ (Duncan, 1972,
p. 325). Duncan argued that the overall amount of uncertainty present in the environ-
ment is not an objective constant, but is determined by managerial perceptions of that
environment. Building on Duncan’s work, Hitt et al. (1982) argued that managerial per-
ceptions of environmental uncertainty can also be influenced by the importance manag-
ers assign to certain environmental variables and that organizations are more likely to
respond to environmental factors that they judge as having a high degree of importance
to firm survival.
The common theme unifying the works of Knight (1921), Barnard (1938), Lawrence
and Lorsch (1967), and Duncan (1972) was the fundamental belief that it was impossible
for a firm to acquire perfect knowledge about its environment. This lack of information
created uncertainty for the firm and impacted strategic decision-making. Scholars in the
information uncertainty perspective tended to be more interested in managerial percep-
tions of uncertainty in the external environment than in the objective state of the environ-
ment (Sharfman and Dean, 1991). The rationale for this was that managerial perceptions
ultimately determined a firm’s choice of strategic actions and influenced a firm’s overall
evaluation of its strategic options.
Information Uncertainty and Perceptual Measures of Uncertainty
Given the fundamental assumption within the information uncertainty perspective that
managerial perceptions ultimately shaped strategy formation, researchers adhering to
this perspective have typically employed perceptual measures of uncertainty (Buchko,
1994; Daft et al., 1988; Dickson and Weaver, 1997; Duncan, 1972; Hrebiniak and Snow,
1980; Miles and Snow, 1978; Milliken, 1987; Sawyerr, 1993; Tung, 1979). Researchers in


this perspective argued that environmental conditions not perceived by managers are not
able to have a significant impact on strategic decision-making and thus ‘objected to the
use of objective measures of environmental uncertainty’ (Sawyerr, 1993, p. 290).
Similar to the manner in which Knight (1921) identified uncertainty as the fundamen-
tal driver of entrepreneurial profit, Thompson (1967) asserted that uncertainty was ‘the
fundamental problem for complex organizations and coping with uncertainty [was] the
essence of the administrative process’ (Thompson, 1967, p. 159). Thompson argued that
uncertainty in the external environment was most properly conceptualized as being a
multidimensional construct. Thompson theorized that the two primary dimensions of
uncertainty were homogeneity/heterogeneity and stability/dynamism. Homogeneous
environments contained very similar elements while heterogeneous environments con-
sisted of many elements that were different in nature. Alternately, the stability/dynamism
dimension focused on the rate of change present in the environment. Stable environments
were thought to be more predictable as they typically remained unchanged. Dynamic
environments presented significant uncertainty to managerial decision-makers as they
changed at a very rapid pace.
Building on Thompson’s multidimensional conceptualization, as well as the work of
Emery and Trist (1965), Duncan (1972) argued that there were two main dimensions
along which the environment could be measured: the simple–complex dimension and
the static–dynamic dimension. The simple–complex dimension measured the number of
factors that were present in the environment. A complex environment contained many
different defining factors while a simple environment consisted of a small number of key
factors. Similar to Thompson’s dynamic environments, the static–dynamic dimension of
Duncan’s conceptualization of uncertainty was concerned primarily with the amount
of change in these factors. A dynamic environment was in a constant state of change
whereas a static environment experienced little or no change.
Further extending the multidimensional conceptualization of environmental uncer-
tainty, Milliken (1987) distinguished between three types of uncertainty that existed in a
firm’s external environment: state, effect, and response uncertainty. State uncertainty was
perhaps closest to Knight’s and Barnard’s conceptualizations of uncertainty and referred
to the general unpredictability of the environment and its various components. Effect
uncertainty was similar to Lawrence and Lorsch’s conceptualization of causal ambiguity
and captured a firm’s inability to predict the effect of future environmental changes on
their business operations. Finally, response uncertainty focused on the difficulty firms
had in predicting the response of their competitors to a particular strategy that the firm
implemented. Within Milliken’s conceptualization, these three concepts acted together to
determine the overall level of uncertainty present in a firm’s external environment.
Numerous studies have examined how perceptual levels of environmental uncertainty
impact entrepreneurial strategies. The primary argument of these studies is that strategic
approaches and outcomes are both affected by environmental conditions. For instance,
entrepreneurial firms that innovate in environments characterized as more dynamic
tend to enjoy greater performance levels (Russell and Russell, 1992). Perceptions of
opportunities associated with more uncertain environments allow entrepreneurial firms
to exploit market prospects with greater amounts of risk-taking. Zahra and Bogner’s
(2000) study reinforced this finding. They found that introducing radical product innova-
tions in dynamic environments positively impacted new venture performance. However,


increasing patents and copyrights in these rapidly changing conditions allowed competi-
tors to more easily imitate product introductions and were less beneficial than not pro-
tecting intellectual property in this way.
Additionally, the manner in which new ventures engage in strategic planning has been
linked to levels of perceived environmental uncertainty. Uncertainty in dynamic markets
requires greater amounts of planning to reduce the amount of ambiguous information
and to enhance learning (Castrogiovanni, 1996). Gruber (2007) found that speeding up
planning activities and engaging in high value planning in highly dynamic marketplaces
can be more beneficial than doing so in slowly changing markets. Organizations tended
to innovate and create more businesses in dynamic markets, particularly as their financial
performance of these businesses increased (Zahra, 1993). Van de Vrande et al. (2009)
found that environmental uncertainty associated with turbulence can affect governance
mode choices when firms are pursuing corporate entrepreneurship. For example, manag-
ers selected less integrated modes (i.e. non-equity alliances) in turbulent environments
due to the greater flexibility associated with them.
Dynamic environments also influence the linkages between the various types of entre-
preneurial leadership and new venture performance. Specifically, the dynamic nature of
some environments enhances benefits related to transformational leadership as opposed
to transactional leadership (Ensley et al., 2006). The rapid change experienced in dynamic
environments lends itself to a leadership style that is better adapted to change than those
that seek to maintain current operations. Furthermore, the level of optimism entrepre-
neurs possess and the effect on venture performance is moderated by environmental
dynamism (Hmielski and Baron, 2009). The negative relationship between managerial
optimism and firm performance intensifies as dynamism increases due to more heuristic
decision-making and a failure to consider all opportunities.
Finally, research regarding entrepreneurial orientation (EO) has examined the degree
to which perceived environmental uncertainty affects organizations. Using a configura-
tional approach, Wiklund and Shepherd (2005) found that the level of dynamism in a
firm’s environment influenced the extent to which a high EO improves performance. High
EOs in more stable environments, when combined with access to capital, helped augment
firm performance. Conversely, low EOs in dynamic environments, when combined with
access to capital, tended to be associated with improved firm performance.
In summary, the information uncertainty perspective suggests that managerial percep-
tions of environmental uncertainty impact both the strategic options implemented by
firms, as well as the ensuing performance associated with these strategic choices. We next
examine the resource dependence theory view of uncertainty.
Resource Dependence Theory
Although the information uncertainty perspective dominated the organizational litera-

ture for the early part of the twentieth century, managerial scholars in the 1970s began to
question the extent to which key decision-makers were able to accurately perceive levels
of environmental uncertainty. In response to these concerns, researchers began to search
for more objective methods of conceptualizing and operationalizing the environmental
uncertainty construct. One of the first efforts in the management literature to focus pri-
marily on objective conceptualizations of uncertainty was resource dependence theory


(Pfeffer and Salancik, 1978), which is predicated on the belief that organizations are
dependent on scarce resources for their survival and that the firm’s external environment
is the source of these scarce and finite resources. Uncertainty, therefore, is created as a
result of the firm’s lack of control over these resources. In order to reduce uncertainty
and ensure their own survival, organizations are forced to develop strategies that allow
them to effectively compete for, control, and exploit these resources.
In contrast to the information uncertainty perspective, resource dependence theory
posits that the lack of control over critical resources, rather than a lack of information,
gives rise to environmental uncertainty. Environments that are abundant in resources are
considered to be less hostile and uncertain than are environments characterized by low
levels of resources in which firms must intensely compete for these scarce resources. These
hostile environments are characterized by greater uncertainty as firms are able to predict
neither their ability to gain access to key resources nor the potential moves of key rivals
as they compete to capture resources. Within resource dependence theory, one of the key
mechanisms that firms must utilize to effectively manage uncertainty is to develop relation-
ships with key constituencies in their external environment that control scarce resources.
In a similar way to several researchers in the information uncertainty perspective,
Pfeffer and Salancik (1978) proposed a multidimensional conceptualization of uncer-
tainty that could be used to assess resource dependence theory. From this perspective, the
uncertainty that firms faced was impacted by the level of conflict and interdependence
among key firms. This conflict and interdependence was ultimately a function of the
concentration of power and authority, munificence (the availability of resources), and
the interconnectedness among firms in the external environment (Pfeffer and Salancik,
1978). Taken together, these factors determined the amount of uncertainty faced by an
organization in a particular operating environment.
Within the entrepreneurship literature, scholars who have employed a resource depend-
ence theory of uncertainty include Specht (1993), Begley et al. (2005), and Steensma et
al. (2000). While conceptualizing munificence as a key aspect of environmental uncer-
tainty, Specht (1993) proposed that the rate of new venture formation depends directly
on resource munificence. He argued that the extent to which market, social, political,
economic, and infrastructural resources are subjectively known to exist provides a more
viable explanation for the rate of new venture formation than do the traits of individual
entrepreneurs. Begley et al. (2005) utilized the resource dependence framework to test
these propositions and found empirical evidence to support the notion that political-
economic resource considerations influenced the entrepreneur’s desire to start a new busi-
ness. Using a similar framework and a slightly different approach, Steensma et al. (2000)
found that the resource dependence theory offered greater explanatory power than trans-
action cost theory when considering how collectivist cultures influence perceived technol-
ogy uncertainty and alliance formation relationships. Technology alliances were found to
reduce uncertainty among small and medium-sized enterprises (SMEs) and were seen as
a way to help these organizations acquire and develop key resources.
Resource Dependence and Objective Measures of Uncertainty
When examining the environmental uncertainty construct, researchers based in the

resource dependence theory have employed both perceptual and objective measures of


uncertainty. However, objective (archival) measures have been most commonly employed
to measure the organizational dependence on resources (e.g. Boyd, 1990; Dess and
Beard, 1984; Goll and Rasheed, 1997; Simerly and Li, 2000; Wiersema and Bantel, 1993;
Yasai-Ardekani, 1989). Authors who have employed objective operationalizations of
uncertainty argue that resource scarcity in the external environment represents an empiri-
cally verifiable condition, and thus should be measured objectively. Consistent with this
perspective, Yasai-Ardekani stated that ‘environmental munificence and scarcity refer to
the objective condition of an environment’ and should thus be measured with objective
industry-level data (Yasai-Ardekani, 1989, p. 133).
One of the first authors to develop a measure that focused on the organizational
dependence on resources in the external environment was Child (1972), who utilized three
dimensions to conceptualize the external environment: rate of change, complexity, and
illiberality. The first two dimensions were similar to those theorized by Thompson (1967)
and Duncan (1972). However, Child also developed a third dimension called ‘illiberality’
which referred to the overall availability of resources in the external environment.
The most influential operationalization of uncertainty in the context of resource
dependence theory was developed by Dess and Beard (1984). They built on the work
of previous authors to develop a three-dimensional measure of uncertainty, similar to
Child’s conceptualization, which they termed ‘dynamism’, ‘complexity’, and ‘munifi-
cence’. Taken together, these three dimensions could be utilized in order to objectively
measure the level of uncertainty present in a given environment. Specifically, environ-
ments with high levels of dynamism, complexity, and hostility indicated high levels of
uncertainty, whereas low levels of these three variables acted to reduce the overall amount
of environmental uncertainty.
The first two dimensions were not altogether different from those posited by the infor-
mation uncertainty perspective. The first dimension, dynamism, was similar to the static/
dynamic element of Duncan’s model, the variability dimension of Child’s model, and the
stability/dynamism component of Thompson’s conceptualization. Specifically, dynamism
referred to the ‘rate of change and innovation in an industry as well as the uncertainty
or predictability of the actions of competitors and customers’ (Miller and Friesen, 1983,
p. 222). The second component of Dess and Beard’s measure was ‘complexity’. This
component was conceptually similar to Thompson’s heterogeneity/homogeneity dimen-
sion and Duncan’s simple/complex component. Within Dess and Beard’s framework,
complexity referred to ‘the level of complex knowledge that understanding the environ-
ment requires’ (Sharfman and Dean, 1991, p.683). This dimension was concerned with
the overall number of factors that a firm needed to analyze in its external environment.
As the number of environmental factors that must be considered by a firm increased, so
did the level of uncertainty present in the environment.
In addition to the fact that their operationalization could be objectively measured,
there was another important distinction between the Dess and Beard framework and
the earlier frameworks developed by researchers in the information uncertainty perspec-
tive. The third component of Dess and Beard’s conceptualization took into account the
availability of resources in the external environment. This final component of Dess and
Beard’s operationalization measured ‘munificence’. Munificence described the level of
resources available to firms and could thus be used to assess resource dependence (Tan,
1996). The concept of munificence was included in order to account for the depend-


ence that organizations had on resources that were often outside the firm’s control. This
dimension was similar to Child’s ‘illiberality’. The opposite of munificence, or environ-
mental hostility, has also been utilized extensively in previous research efforts. Covin and
Slevin (1989) argued that ‘hostile environments are characterized by precarious industry
settings, intense competition, harsh, overwhelming business climates, and the relative
lack of exploitable opportunities’ (Covin and Slevin, 1989, p. 75).
The concept of munificence/hostility has received considerable attention in the entre-
preneurship literature. For example, Specht (1993) argued that the rate of new venture
formation depends on the extent to which sufficient resources exist to support the pres-
ence of the new venture. Specht’s propositions were subsequently supported by empirical
evidence from Begley et al. (2005). The empirical support offered by this study regarding
the role that munificence plays in the entrepreneurial setting suggested that the impact of
munificence persists across various regional settings, differing stages of economic devel-
opment, and a range of cultural groups. These findings strengthen the application of the
munificence variable to different contexts and groups.
Although studies have shown that resource munificence increases the rate of new
venture formation, it has also been argued that high levels of resource munificence
improve the chances of a new venture being able to survive and maintain adequate
levels of growth. Castrogiovanni (1996) posited that new venture survival was greater in
highly munificent environments given the more favorable trade-offs between supply and
demand. Even those firms that are poorly managed and/or poorly positioned may enjoy
some level of profitability in a munificent environment. Gartner et al. (1999) provided
evidence to support this notion when analyzing the environmental conditions faced by
new business startups.
The dependence on resources also has consequences for corporate entrepreneurship
activities. For instance, under hostile conditions when munificence is expected to be
low, businesses tend to engage in strategic change or renewal activities. Efforts to reduce
hostility may lead to business divestitures (Zahra, 1993). The limited availability of
resources encourages firms to pursue more conservative strategies, which may include
cost reductions (Zahra and Bogner, 2000). As with new ventures, corporate entrepre-
neurship activities under hostile conditions tend to focus on increasing the chances for
survival through improved efficiencies rather than through greater exploitation efforts.
Having made these assertions, it is important to note that some might argue that small
firms in hostile environments tend to take more entrepreneurial postures (Covin and
Slevin, 1989). Yet whichever camp one falls into with regard to the impact of hostility
on entrepreneurial strategy formation, most scholars strongly believe that the objective
availability of resources is an important consideration when attempting to explain and
predict entrepreneurial behaviors.
IMPLICATIONS AND CONTRIBUTIONS
The preceding arguments illustrate that while risk-taking has traditionally been viewed
as a central concept in the entrepreneurship literature, there is significant benefit to be
gained by expanding our inquiries to also include the role of uncertainty in the entrepre-
neurial process. In an effort to encourage such research, this chapter has delineated the


distinct concepts of risk-taking and uncertainty, while paying particular attention to the
theoretical role played by uncertainty in impacting firm-level entrepreneurship. We have
also included a discussion of the historical evolution of the uncertainty construct in the
organizational literature to provide a more thorough understanding of how the field has
moved from the early conceptualizations of uncertainty by authors such as Knight to the
conceptualizations that are employed today.
In particular, we have analyzed the development of two different theoretical perspec-
tives, the information uncertainty perspective and resource dependence theory, and
assessed the role that both of these theories play in impacting entrepreneurial behavior.
However, the chapter would not be complete without a discussion of the implications of
these arguments for both researchers and practitioners. The following sections look at
implications for managers, organizations, and future research efforts. The final section
offers several concluding thoughts regarding how the uncertainty construct should be
examined in future studies on the topic of firm-level entrepreneurship.
Research Implications
Future entrepreneurship research would benefit from the continued development of a

clear and accurate understanding of the role of environmental uncertainty in the entre-
preneurial process. In particular, researchers should be aware of the theoretical and
empirical distinctions between the concepts of uncertainty and risk-taking. For instance,
if risk-taking was included in a model of entrepreneurship, it would indicate that a high
level of risk-taking should always be a goal of the entrepreneurial firm (as is a high level
of other variables such as innovativeness). However, theoretical and empirical evidence
suggests that there is not an optimum level of risk-taking that should be displayed by an
entrepreneurial firm. For example, McClelland (1960) argued that entrepreneurs tend to
be moderate in their willingness to engage in risk-taking behavior and that they tend to
avoid excessive levels of risk-taking because such behaviors contain a high probability of
failure. On the other hand, environmental uncertainty has been shown to play an impor-
tant role in determining the success of entrepreneurial organizations (Covin and Slevin,
1989; Lumpkin and Dess, 1996; Miller and Friesen, 1983; Zahra, 1993).
Future research efforts should be undertaken in order to establish additional types
of uncertainty that may have a specific and identifiable impact on the entrepreneurial
process. For example, Dimov and Milanov (2010) identified two types of uncertainty that
entrepreneurs may face in the venture capital syndication process: egocentric uncertainty,
which focuses on a lack of information a focal firm may have regarding decisions that
need to be made for an investment to succeed, and altercentric uncertainty, which focuses
on the inability of external parties to accurately judge the quality of the entrepreneurial
firm as a potential partner (Dimov and Milanov, 2010). Additionally, Van de Vrande et al.
(2009) differentiated between exogenous (e.g. environmental dynamism) and endogenous
(e.g. relational uncertainty) information uncertainty in examining the impact of uncer-
tainty on governance mode decisions in external technology sourcing.
These more recent conceptualizations are important as they are indicative of two sepa-
rate issues that need to be addressed to facilitate the continued development of the role
played by the uncertainty construct in the entrepreneurial process. First, the vast majority
of uncertainty research has focused solely on the entrepreneurial firm or the entrepre-


neur. However, there is a need to understand how uncertainty will impact other actors
that are involved in the entrepreneurial process, such as potential investors. Second, these
recent studies recognize that there are different types of uncertainty that may be either
endogenous or exogenous to the entrepreneurial process. For example, Marino et al.
(2008) found that when firms in developing economies face extreme levels of uncertainty
from sources that are generally exogenous to the entrepreneurial process (i.e. the collapse
of an economic system), entrepreneurial activities can be interrupted as firms fall victim
to increases in threat rigidity.
Managerial Implications
The environmental uncertainty construct also has important ramifications for entrepre-
neurial organizations. For example, concepts such as environmental munificence and
dynamism have a direct impact on performance levels of entrepreneurial firms (Lumpkin
and Dess, 2001; Miller and Friesen, 1982; Zahra, 1996). The plentiful resources and
opportunities afforded to firms in munificent environments allow them to enjoy height-
ened levels of performance (Dess and Beard, 1984). In such environments, the relative
ease with which firms can acquire the resources necessary for the pursuit of organiza-
tional objectives and the decreased threat of competition fosters higher rates of firm sur-
vival and growth (Castrogiovanni, 1991). The constant rate of change in highly dynamic
environments also creates numerous opportunities that entrepreneurial firms can exploit
(Miles et al., 2000). For these reasons, it is likely that entrepreneurial firms operating in
highly munificent or highly dynamic environments will achieve higher levels of perform-
ance than firms operating in more hostile or stable environments.
CONCLUDING THOUGHTS
One of the main questions implicit in previous research efforts was whether objective
or perceptual measures should be utilized in order to more accurately operationalize
the uncertainty construct. It is our contention that the existence of expanded research
methodologies and statistical techniques make it possible for researchers to utilize both
types of measures in future studies. Although multiple dimensions of uncertainty have
long been included in theoretical conceptualizations of uncertainty, perhaps it is time
that multiple measures of uncertainty are utilized as well. Given the complex nature of
the uncertainty construct, it is likely that objective and perceptual measures both provide
unique (and accurate) assessments of differing elements of the construct. Thus, we would
argue that a variety of methodological techniques should be utilized in future research
efforts on the topic of uncertainty.
Qualitative, survey, and archival methods can all be effectively utilized to assess the
uncertainty faced by entrepreneurial firms. Interviews, case studies, and other qualitative
techniques can be utilized to assess the perceptions of environmental uncertainty. For
example, interviews with key decision-makers within entrepreneurial firms might provide
very important insights into how these companies utilized environmental perception
when formulating and implementing their strategies. Survey data can be utilized to assess
perceptions of the environment, as well as the resulting impact on strategy formation and


firm performance. Archival data can be utilized to examine the objective state of a firm’s
external environment, and when combined with performance information, can be utilized
to assess the impact of these environmental conditions on firm survival and profitability.
Utilizing all three of these techniques (qualitative, survey, and archival) would provide a
more comprehensive and in-depth understanding of the impact of environmental uncer-
tainty on entrepreneurial activities.
In summary, while environmental uncertainty has played a central role in the develop-
ment of the entrepreneurship literature, it has received relatively less research attention
than the risk-taking construct. However, in order to develop a unique theory of entrepre-
neurship and to legitimize entrepreneurship as a field of study, we strongly believe that
it is necessary for uncertainty to be included as a fundamental element of this theory.
For this to be possible, researchers must understand not only the historical foundations
of the uncertainty construct, but how this concept has evolved in the entrepreneurship
literature and the important role that it plays in facilitating our understanding of the
entrepreneurial process.
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5. Entrepreneurial alertness and opportunity
discovery: origins, attributes, critique
Nicolai J. Foss and Peter G. Klein
INTRODUCTION
Israel Kirzner’s concept of entrepreneurship as alertness to profit opportunities is one of

the most influential modern interpretations of the entrepreneurial function. Shane and
Venkataraman’s (2000, p. 218) important assessment defines entrepreneurship research
as ‘the scholarly examination of how, by whom, and with what effects opportunities to
create future goods and services are discovered, evaluated, and exploited.’ As such, ‘the
field involves the study of sources of opportunities; the processes of discovery, evalua-
tion, and exploitation of opportunities; and the set of individuals who discover, evaluate,
and exploit them.’ Shane’s A General Theory of Entrepreneurship (2003) cites Kirzner
more than any writer except Joseph Schumpeter. More generally, the entrepreneurial
opportunity, rather than the individual entrepreneur, the startup company, or the new
product, has become the centerpiece of the academic study of entrepreneurship (Gaglio
and Katz, 2001; Shane, 2003; Shane and Venkataraman, 2000).
Kirzner’s framework builds on the market-process approach associated with the
Austrian school of economics and can trace its roots further back to Richard Cantillon,
J.B. Clark, Frank A. Fetter, and other writers. Kirzner himself sees his contribution as
primarily an extension of the work of Mises and F.A. Hayek, in effect bridging Mises’s
(1949) emphasis on the entrepreneur with Hayek’s (1946; 1968) concept of market
competition as an unfolding process of discovery and learning.1 Among mainstream
economists, Kirzner has been cited in the literature on occupational choice, and there
have been a few attempts to formalize his model of the market process (Littlechild,
1979; Littlechild and Owen, 1980; Yates, 2000), in the context of a more general inter-
est in equilibration processes (Fisher, 1983). Kirzner has explained the Austrian model
of the entrepreneurial market process to readers of the prestigious Journal of Economic
Literature (Kirzner, 1997a). Still, his work has been more influential among management
scholars than among economists, who tend to view equilibration as a second-order phe-
nomenon; the main focus of theoretical work in economics today (both microeconomic
and macroeconomic) remains identifying and characterizing market equilibria in terms
of existence, uniqueness, and stability. In this sense, the opportunity-discovery branch
of the entrepreneurship literature provides an example of management scholarship that
builds upon a simple, yet fundamental insight from economics, and pushes that insight in
directions that economists are reluctant to go.
This chapter traces the origin and development of the concept of entrepreneurial
alertness and its place as the centerpiece of the opportunity-discovery approach to entre-
98

Entrepreneurial alertness and opportunity discovery 99
preneurship. In particular, we place Kirzner’s contribution within the broader context

of the Austrian school of economics, comparing and contrasting it with other Austrian
conceptions of entrepreneurship. We argue that even though Kirzner’s contribution is
often thought of as the Austrian conception of the entrepreneur, an alternative Austrian
tradition, in fact, exists that emphasizes the entrepreneur as an uncertainty-bearing,
asset-owning individual and that this tradition offers some advantages over the discovery
approach (whether in the Kirznerian or modern-management incarnations). We also
critically discuss the way Kirzner’s work has been interpreted and used in the theoretical,
empirical, and experimental literatures looking into the antecedents and consequences
of such opportunity discovery. As we argue, this literature goes much beyond Kirzner’s
work, making opportunity discovery and its determinants the key feature of the theory,
whereas Kirzner’s real interest lies in explaining market equilibration, a higher-level
phenomenon.
THE AUSTRIAN SCHOOL OF ECONOMICS
The Austrian school of economics (Böhm-Bawerk, 1889; Hayek, 1948; 1968; Kirzner,
1973; Lachmann, 1956; Menger, 1871; Rothbard, 1962; Mises, 1949) is increasingly well
known in management studies for its contributions to the theory of entrepreneurship
and the complementary ‘market process’ account of economic activity (Chiles, 2003;
Chiles and Choi, 2000; Hill and Deeds, 1996; Jacobson 1992; Langlois, 2001; Roberts
and Eisenhardt, 2003). Other characteristically Austrian ideas such as the time structure
of capital (Hayek, 1941) and the heterogeneity of capital goods (Lachmann, 1956) have
received less attention (but see Foss et al., 2007b; Chiles et al., 2007). Like all ‘heterodox’
approaches, the Austrian school occupies a marginal position among contemporary,
mainstream economists, though Hayek’s theory of the business cycle has attracted
renewed interest in the last few years (e.g. Oppers, 2002).
Here we offer a brief sketch of the history and development of the Austrian school,
with particular reference to its approach to the entrepreneur. As we discuss in more
detail below, the Austrian tradition is more diverse than is conventionally recognized.
For example, we see important differences between Kirzner’s approach to entrepreneur-
ship and that of Menger, the early twentieth-century American representatives of the
Austrian school, and Mises, Kirzner’s teacher and the most important and influential of
the modern Austrian economists.
Menger and the Early Austrian School
The Austrian tradition begins with Carl Menger (1871), who sought to develop a causal,
realistic account of price formation (and other economic phenomena) in contrast to the
inductive, historicist approach that dominated late nineteenth-century German econom-
ics. Menger’s approach emphasized the subjectivity of economic value, marginal analysis,
resource heterogeneity, distributed knowledge, and the time-structure of production. The
entrepreneur figures prominently in Menger’s account of production, though not in the
sense emphasized by Kirzner. The entrepreneur is described by Menger (1871, p. 68) as a
coordinating agent who is both capitalist and manager.


Entrepreneurial activity includes: (a) obtaining information about the economic situ-
ation; (b) economic calculation – all the various computations that must be made if a
production process is to be efficient (provided that it is economic in other respects); (c)
the act of will by which goods of higher order (or goods in general – under conditions
of developed commerce, where any economic good can be exchanged for any other) are
assigned to a particular production process; and finally (d) supervision of the execution
of the production plan so that it may be carried through as economically as possible. This
formulation emphasizes the importance of uncertainty and knowledge, and the deliber-
ate, decisive action of the entrepreneur in arranging the productive resources at his or her
disposal. Menger also makes the entrepreneur a resource owner, as do Knight (1921) and
Foss et al. (2007b).
In his emphasis on uncertainty-bearing Menger picks up a theme introduced by
Richard Cantillon, often considered a forerunner of the Austrian tradition (Rothbard,
1995; Thornton, 1999). Cantillon was the first economist to analyze the entrepreneur
systematically. In the Essai sur la nature du commerce en general (1755), he described three
classes of economic agents, landowners, wage workers, and entrepreneurs whose main
purpose is to engage in arbitrage, motivated by the profit that may stem from ‘buying at a
certain price and selling at an uncertain price’ (Cantillon, 1755/1931, p. 54):
Entrepreneurs work for uncertain wages, so to speak, and all others for certain wages until they
have them, although their functions and their rank are very disproportionate. The General who
has a salary, the Courtier who has a pension, and the Domestic who has wages, are in the latter
class. All the others are Entrepreneurs, whether they establish themselves with a capital to carry
on their enterprise, or are Entrepreneurs of their own work without any capital, and they may
be considered as living subject to uncertainty; even Beggars and Robbers are Entrepreneurs of
this class.
Thus, Cantillon saw uncertainty as an integral part of understanding profits and

emphasized that entrepreneurs, rather than being a distinct group of individuals, are
all those who bear commercial risk. He also emphasized the importance of foresight
and argued that entrepreneurs do not need to own capital, a characteristic of Kirzner’s
approach that we discuss in more detail below.
In the 1880s and 1890s, an Austrian school coalesced around Menger and his disciples,
most notably Eugen von Böhm-Bawerk and Friedrich Wieser. Important British and
American economists such as Philip Wicksteed, John Bates Clark, Herbert J. Davenport,
and Frank A. Fetter also adopted and developed Menger’s principles of pricing and his
causal-realistic approach to economic theorizing. Clark, for example, developed a theory
of the entrepreneur based on the distinction between the ‘static state’ and ‘dynamic socie-
ties’ (Salerno, 2008, p. 18). Under static conditions, the entrepreneur’s function is ‘purely
passive . . . the entrepreneur in his capacity of buyer and seller does not even do the work
which purchases and sales involve . . . Sales and purchases are made in his name, but he
does none of the work that leads up to them’ (Clark, 1918, p. 122). There is essentially
nothing for the entrepreneur to do under static conditions because under such conditions
all factors of production are already allocated to their optimal uses, so that profits and
losses will be zero. However, in the ‘dynamic society’ profits and losses are unavoidably
present, because under such conditions and the uncertainty that accompanies them, the
entrepreneur ‘makes the supreme decisions which now and again lead to changes in the


business’ (Clark, 1918, p. 124). The entrepreneur, in Clark’s view, is the ultimate decision-
maker, and that ‘part of the management of a business which consists in making the most
far-reaching decisions cannot safely be entrusted to a salaried superintendent or other
paid official, and must get its returns, if at all, in the form of profits’ (Clark, 1918, p. 157).
This means that the entrepreneur must also be the owner of the business.
Clark’s contemporary, Frank A. Fetter, known primarily for his contributions to the
theory of capital and interest, also gave the entrepreneur a central role in the process
of resource allocation (Fetter, 1905; 1915; 1977). Fetter’s explanation of the differences
between short-run and long-run profits anticipates both Knight’s (1921) distinction
between ‘risk’ and ‘uncertainty’ and Kirzner’s concept of market equilibration. In the
long run, Fetter argued, the net returns to production are determined by interest rates,
themselves determined by the market’s rate of ‘time preference’, or the relative valuation
of present and future consumption. In the short run, business incomes fluctuate around
these ‘normal’ returns because some entrepreneurs are better able than others to antici-
pate future prices and can thus acquire resources at prices below the present discounted
values of their eventual contributions to output, leaving profit in addition to interest. In
doing so, these entrepreneurs bid up the prices of the ‘underpriced’ factors and help bring
about the long-run equilibrium in which such profits are eliminated.2
Fetter’s (1905, pp. 286–7) description of the entrepreneur (he uses the term ‘enter-
priser’) identifies uncertainty-bearing as the key entrepreneurial function. The entre-
preneur (a) ‘guarantees to the capitalist-lender a fixed return’, (b) ‘gives up the certain
income to be got by lending his own capital, and, becoming a borrower, offers his capital
as insurance to the lender’, (c) ‘gives to other workers a definite amount for services
applied to distant ends’, and (d) ‘risks his own services and accepts an indefinite chance
instead of a definite amount for them’. He also serves as an ‘organizer’ and ‘director’,
possessing ‘unusual foresight’ and the ‘ability to judge men and tact in relations with
them’ (Fetter, 1905, p. 268). In short, the entrepreneur ‘is the economic buffer; economic
forces are transmitted through him’.
As the specialized risk-taker, he is the spring or buffer, which takes up and distributes the strain
of industry. He feels first the influence of changing conditions. If the prices of his products fall,
the first loss comes upon him, and he avoids further loss as best he can by paying less for mate-
rials and labor. At such times the wage-earners look upon him as their evil genius, and usually
blame him for lowering their wages, not the public for refusing to buy the product at the former
high prices. Again, if prices rise, he gains from the increased value of the stock in his hand that
has been produced at low cost. If the employer often appears to be a hard man, his disposition
is the result of ‘natural selection’. He is placed between the powerful, selfish forces of competi-
tion, and his economic survival is conditioned on vigilance, strength, and self-assertion. Weak
generosity cannot endure. (Fetter, 1905: 287–88)
As in Knight and Kirzner, the entrepreneurial role is not limited to new-venture crea-
tion or the introduction of new products, services, production methods, and the like, but
lies at the heart of the everyday affairs of production and exchange.
Mises, a student of Böhm-Bawerk, and Mises’s younger colleague Hayek, more a
student of Wieser than of Böhm-Bawerk, would develop and extend the Austrian tradi-
tion in the early twentieth century, with Kirzner, Murray Rothbard, both Mises students,
and Ludwig Lachmann, a Hayek student, making critical contributions in the 1950s,
1960s, and 1970s. Recent scholars have noted considerable variety within the Austrian


school, particularly in its modern interpretations. Salerno (1993), in particular, argues

that there are two distinct strands of Austrian economics, both tracing their origins to
Menger. One strand, manifest in the works of Wieser, Hayek, and Kirzner, emphasizes
disequilibrium, the informational role of prices, discovery of already existing opportu-
nities, and profit-seeking behavior as an equilibrating force. Another strand, developed
by Böhm-Bawerk, Mises, and Rothbard, focuses on monetary calculation and forward-
looking, uncertainty-bearing, entrepreneurial appraisal and investment, rather than
discovery.3 The concept of entrepreneurship as alertness to profit opportunities created
by disequilibrium comes out of the Wieser–Hayek–Kirzner strand. There are, however,
important precursors to both strands.
Wieser and Hayek: The Beginnings of the ‘Discovery View’
In his treatise Social Economics (1914) Wieser presented an eclectic definition of the
entrepreneur as owner, manager, leader, innovator, organizer, and speculator. He noted
that the entrepreneur ‘must possess the quick perception that seizes new terms in current
transactions as his affairs develop’ (Wieser, 1914, p. 324), the first hint of alertness as an
entrepreneurial attribute.
Wieser’s student, Hayek, did not contribute to the theory of entrepreneurship per se,
but his discovery view of competition, developed in a series of essays from the mid-1940s
(notably Hayek, 1945; 1946) as a critical reaction to the perfect-competition model, is
a crucial input into the opportunity discovery approach. Competition, Hayek argued,
should be understood not as a static state of affairs, but as a rivalrous process that is
essentially a procedure for discovering ‘who will serve us well: which grocer or travel
agency, which department store or hotel, which doctor or solicitor, we can expect to
provide the most satisfactory solution for whatever personal problem we may have to
face’ (Hayek, 1946, p. 97). The basis for this conceptualization is the characteristically
Austrian emphasis on dispersed knowledge, present already in Menger, but fully articu-
lated by Hayek. Competition, Hayek maintains, is the mechanism that makes best use of
dispersed knowledge – it is an effective way to discover knowledge we do not yet know is
available or indeed needed at all (Hayek, 1968/2002).
However, Hayek is not entirely forthcoming on how exactly the market performs this
discovery function. Entrepreneurs are mentioned only in passing.4 Indeed, different
mechanisms underlying the market’s discovery process can be imagined, depending on
how much intention, rationality, and learning ability are ascribed to market participants.
At one extreme lies a selection mechanism that selects effectively among various entre-
preneurial ventures formed essentially in ignorance of consumer preferences (Alchian,
1950; Becker, 1962). Such a process is heavily error-prone, and, more importantly, no one
learns from past errors. Although Hayek’s writings may sometimes describe such proc-
esses in which the system, and not individual agents, are ‘rational’ (Langlois, 1985), most
other Austrians have strongly emphasized the intentions of entrepreneurs in coping with
uncertainty and ignorance, allowing for various degrees of error. Indeed, Kirzner has
often conceptualized the market process as one of a ‘systematic’ elimination of errors.
Interestingly, one of Kirzner’s earliest papers is a strong critique of Becker’s (1962)
evolutionary argument that one can dispense entirely with the rationality of market
participants in doing basic price theory (Kirzner, 1962). Kirzner’s entrepreneur is highly


rational, or perhaps more precisely, extra-rational, in going beyond the given means-ends
frameworks and noticing previously undiscovered opportunities for pure profit. Kirzner,
then, supplies a crucial mechanism (or micro-foundation) for the Wieser–Hayek discov-
ery view: a competitive market is a superior setting because it generates entrepreneurial
discoveries through the exercise of alertness. As Kirzner (1973, p. 14) argues, ‘our confi-
dence in the market’s ability to learn and to harness the continuous flow of information
to generate the market process depends crucially on our belief in the benign presence of
the entrepreneurial element.’ Although the entrepreneur may not search for any profit
opportunity in particular, the lure of pure profit may nevertheless lead him or her to
continually scan the horizon, as it were (Kirzner, 1997a, p. 72).
Böhm-Bawerk, Mises, and Rothbard
Böhm-Bawerk was one of Austria’s most prominent economists, not only as a theorist
but as a three-time Austrian minister of finance (whose picture still graces Austria’s 100
schilling note). His work was mainly on the theory of capital and interest (Böhm-Bawerk,
1889), and his approach has largely been abandoned within mainstream macroeconomic
theory. (He also authored a penetrating and original critique of Marx (Böhm-Bawerk,
1898)). Perhaps for this reason, his work is little known to contemporary management
scholars.
Böhm-Bawerk’s two most important students were Joseph Schumpeter and Ludwig
von Mises. Mises is generally considered the most important twentieth-century repre-
sentative of the Austrian school, and his work provided a main impetus to the ‘Austrian
revival’ of the 1970s (Vaughn, 1994; Salerno, 1999). Mises became an internationally
known monetary theorist with the publication of his Theory of Money and Credit in 1912,
followed by an important 1920 article and 1922 book on the economic theory of social-
ism (Mises, 1920; 1922). Mises’s best-known book is his 1949 treatise, Human Action,
which continues to be a foundational text for Austrians.
Kirzner has always described his work as an extension of Mises’s theory of the market
process.5 Mises, Kirzner’s mentor and teacher at New York University, and Kirzner
are usually lumped together as offering a unified Austrian account of the entrepreneur.
However, as we clarify later, we see Mises as closer to the Cantillon–Knight position
that entrepreneurship is judgment over the deployment of resources, not alertness per se.
Kirzner (1973, pp. 39–40) agrees that in a world of uncertainty, resource owners exercise
entrepreneurial judgment in allocating their resources to particular uses. But he goes on
(1973, pp. 40–43) to introduce the analytical device of the pure entrepreneur, the agent
who discovers profit opportunities without putting any resources at stake, and claims
that this function, rather than investment under uncertainty, is the ‘driving force’ of the
market economy. This view, we maintain, and the Wieser–Hayek–Kirzner account in
general, is very different from the view found in Cantillon, Knight, and Mises.
Mises’s own position is somewhat ambiguous (Salerno, 2008). The entrepreneur, Mises
writes, ‘shows how the activities of enterprising men, the promoters and speculators,
eager to profit from discrepancies in the price structure, tend toward eradicating such
discrepancies and thereby also toward blotting out the sources of entrepreneurial profit
and loss.’ Describing this equilibrating process ‘is the task of economic theory’ (Mises,
1949, pp. 352–3). Elsewhere, however, Mises describes the entrepreneur as an investor, an


economic actor who bears uncertainty, rather than discovering (certain) opportunities for
gain. ‘[T]he outcome of action is always uncertain. Action is always speculation’ (Mises,
1949, p. 253). Consequently, ‘the real entrepreneur is a speculator, a man eager to utilize
his opinion about the future structure of the market for business operations promising
profits. This specific anticipative understanding of the conditions of the uncertain future
defies any rules and systematization’ (Mises, 1949, p. 582).
This emphasis on action under conditions of uncertainty calls to mind Cantillon’s
(1755) brief account of the entrepreneurial function and Knight’s (1921) concept of
entrepreneurial judgment. Judgment is business decision-making when the range of
possible future outcomes, let alone the likelihood of individual outcomes, is gener-
ally unknown (what Knight terms uncertainty, rather than mere probabilistic risk).
Exercising judgment thus requires the investment of resources (primarily, the purchase
of factors of production in the present, in anticipation of future receipts from the sale of
finished goods).6 Alertness, or awareness of particular conditions, does not itself involve
judgment, and does not, in this understanding, have a direct effect on the allocation of
resources.
Kirzner’s contemporary Murray Rothbard, another influential contemporary Austrian
economist, was among the first to question Kirzner’s strict separation between the
‘discovery’ and ‘ownership’ functions of the entrepreneur (Rothbard, 1995). Rothbard
argued that unless buying and selling are instantaneous, even arbitrageurs bear uncer-
tainty, in that selling prices may change after goods and services are acquired for arbi-
trage. More generally, the driving force of the market economy is not Kirzner’s ‘pure
entrepreneur’, but the capitalist-entrepreneurs who invest resources in anticipation of
uncertain rewards:
Kirzner’s entrepreneur is a curious formulation. He need not, apparently, risk anything. He is

a free-floating wraith, disembodied from real objects. He does not, and need not, possess any
assets. All he need have to earn profits is a faculty of alertness to profit opportunities. Since he
need not risk any capital assets to meet the chancy fate of uncertainty, he cannot suffer any
losses. But if the Kirznerian entrepreneur owns no assets, then how in the world does he earn
profits? Profits, after all, are simply the other side of the coin of an increase in the value of one’s
capital; losses are the reflection of a loss in capital assets. The speculator who expects a stock to
rise uses money to purchase that stock; a rise or fall in the price of stock will raise or lower the
value of the stock assets. If the price rises, the profits are one and the same thing as the increase
in capital assets. The process is more complex but similar in the purchase or hiring of factors
of production, the creating of a product and then its sale on the market. In what sense can
an entrepreneur ever make profits if he owns no capital to make profits on? (Rothbard, 1985,
pp. 282–3)
Summary
In short, the Austrian tradition comprises a variety of diverse elements, some com-
plementary but others distinct. Methodological individualism, subjectivism, realism,
human purpose, resource heterogeneity, the division of labor and division of knowledge,
dynamic processes of adjustment, and decentralized organizational structures are key
elements in all strands of Austrian economics. However, there are important differences
among scholars working in this tradition. In particular, we distinguish a Wieser–Hayek–
Kirzner strand, emphasizing knowledge, discovery, and process, and a Böhm–Bawerk–


Mises-Rothbard strand, emphasizing monetary calculation and decision-making under

uncertainty.
Management scholars, particularly those working on entrepreneurial discovery and
opportunity identification, may wish to study these strands more carefully, and to
consider Austrian insights that have not made appearances in contemporary manage-
ment theory. For example, the Hayekian emphasis on tacit knowledge and spontaneous
processes of discovery has influenced the knowledge-based view of the firm and, to a
lesser degree, Williamson’s transaction cost economics (Williamson, 1991). But Austrian
capital theory is largely unknown among management scholars, despite its close con-
nection to concepts of resource heterogeneity (firm-specific resources and capabilities,
asset specificity, etc.) that are central to strategic management (Foss et al., 2007b). The
Austrians also made important early contributions in the areas of property rights,
knowledge, incentives, and institutions (Foss and Klein, 2010). We hope that interest in
Austrian ideas within the opportunity-discovery tradition will lead to greater attention to
Austrian contributions in these other areas as well.
KIRZNER AND ENTREPRENEURIAL ALERTNESS
We turn next to Israel Kirzner’s important and influential interpretation of entrepre-

neurship as alertness, or discovery, of opportunities for gain. Kirzner, Mises’s student
and colleague at New York University and director of its graduate program in Austrian
economics until his retirement in 2001, is one of the best-known and most cited Austrian
economists. Here we briefly summarize Kirzner’s approach to entrepreneurship and its
place within the broader Austrian and mainstream entrepreneurial literatures. We then
summarize some controversies surrounding Kirzner’s views, both within and outside
the Austrian tradition. These include disagreements about the equilibrating nature of
entrepreneurial action (and the market process more generally), the relationship between
entrepreneurial discovery and innovation, Kirzner’s approach to entrepreneurial creativ-
ity, and the role of resource ownership in the Kirznerian system.
Kirzner’s Contribution
Kirzner’s Competition and Entrepreneurship (1973) is conventionally seen as the seminal

modern Austrian statement on entrepreneurship. Kirzner’s later work on entrepreneur-
ship has mainly consisted in clarifying the positions in that book (Kirzner, 1979a; 1992;
1997b; 2009), as well as relating them to other theories of entrepreneurship, and applying
them to, for example, regulation (e.g. Kirzner, 1984; 1985) and ethics (Kirzner, 1989).
In Kirzner’s framework, profit opportunities result from prices, quantities, and quali-
ties that diverge from their equilibrium values. Some individuals tend to notice, or be
alert to, these opportunities, and their actions bring about changes in prices, quantities,
and qualities. The simplest case of alertness is that of the arbitrageur, who discovers a
discrepancy in present prices that can be exploited for financial gain. In a more typical
case, the entrepreneur is alert to a new product or a superior production process and steps
in to fill this market gap before others. Success, in this view, comes not from following a
well-specified maximization problem, such as a search algorithm (High, 1980), but from


having some insight that no one else has, a process that cannot be modeled as an optimi-
zation problem.7 Entrepreneurship, in other words, is the act of grasping and respond-
ing to profit opportunities that exist in an imperfect world. Unlike other approaches in
modern economics, the imperfections in question are not seen as temporary ‘frictions’
resulting from ill-defined property rights, transaction costs, or asymmetric information.
Although those imperfections can be cast in an equilibrium mold – as in the modern
economics of information – Kirzner has in mind a market in permanent and ineradicable
disequilibrium.8
Kirzner’s approach, like that of Knight, Schumpeter, and other key contributors to the
economic theory of entrepreneurship, sees entrepreneurship as an economic function, not
an employment category (i.e. self-employment) or type of firm (i.e. a startup company).9
The main effect of the entrepreneurial function is market equilibration: by closing pockets
of ignorance in the market, entrepreneurship always stimulates a tendency towards equi-
librium (Selgin, 1987). While Kirzner’s ‘pure entrepreneur’, an ideal type, performs only
this function, and does not supply labor or own capital, real-world business people may
be partly entrepreneurs in this sense, partly laborers, partly capitalists, and so on. As we
suggested in the previous section, the relationship between entrepreneurial discovery and
capital investment distinguishes Kirzner’s approach sharply from Knight’s (and, argu-
ably, from that of Kirzner’s mentor, Ludwig von Mises). Because Kirzner’s (pure) entre-
preneurs perform only a discovery function, rather than an investment function, they do
not own capital; they need only be alert to profit opportunities. Kirznerian entrepreneurs
need not be charismatic leaders, do not innovate, and are not necessarily creative or in
possession of sound business judgment. They do not necessarily start firms, raise capital,
or manage an enterprise. They perform the discovery function, and nothing else.
Key in Kirzner’s work is his distinction between ‘Robbinsian maximizing’ and ‘entre-
preneurial alertness’. The first conforms to the standard picture of economic man
as applying given means to best satisfy given but conflicting ends in a fundamentally
mechanical way (Robbins, 1932). Because everything is given, action becomes purely
a matter of calculation. Kirzner argues that this conceptualization of behavior cannot
accommodate the discovery of new means, new ends, and the setting up of new means-
ends structures. As a result, the dynamic market process cannot be captured by the model
of Robbinsian maximizing; another behavioral quality is needed, namely the quality of
entrepreneurial alertness to previously unexploited profit opportunities. Alertness ranges
from the discovery of a ten dollar bill on the street to the discovery of a new, highly
profitable drug. Thus, entrepreneurs are discoverers; they discover new resource uses,
new products, new markets, new possibilities for arbitrage – in short, new possibilities
for profitable trade. Alertness is not the same as search (Stigler, 1961), the deliberate
search for new information. Rather, entrepreneurship is the act of discovering, or being
alert to, information and opportunities that others fail to perceive. It is not only that
entrepreneurial activity reduces our lack of knowledge about which products, processes,
new organizational forms, etc. are needed; it is more fundamentally that entrepreneurial
activity alleviates our ignorance about what we don’t know. What Kirzner calls ‘sheer
ignorance’ is ‘necessarily accompanied by the element of surprise – one had not hitherto
realized one’s ignorance’ (Kirzner, 1997a, p. 62).
Combining his notion of entrepreneurial behavior with Hayek’s notion of the market
as a dynamic process, Kirzner develops a view of the market process as a continual


process of entrepreneurial discovery of previously unnoticed opportunities for pure

profit. The profits earned in this process reflect the discovery and exploitation of profit
opportunities that would not have been grasped in the absence of entrepreneurial activity.
Thus, the entrepreneurial function is beneficial because it alleviates the problems of coor-
dination introduced by the division of knowledge (Hayek, 1945). Here Kirzner invokes
the welfare concept, borrowed from Hayek, of ‘plan coordination’, a concept that has
generated considerable controversy within the Austrian school.10
Kirzner’s fiction of the pure entrepreneur is introduced to elucidate the coordinating
function of entrepreneurship. Although Clark and Mises introduced similar devices to
emphasize selected aspects of entrepreneurship, Kirzner sees his construct as capturing
its very essence. Kirzner has been insistent that the pure entrepreneur is a non-owner
(Kirzner, 1975). ‘An important point,’ Kirzner argues (1973, p. 47), ‘is that ownership
and entrepreneurship are to be viewed as completely separate functions. Once we have
adopted the convention of concentrating all elements of entrepreneurship into the hands
of pure entrepreneurs, we have automatically excluded the asset owner from an entre-
preneurial role. Purely entrepreneurial decisions are by definition reserved to decision-
makers who own nothing at all.’ Thus, the entrepreneur is a pure decision-maker, and
nothing else. As such, anyone can be a pure entrepreneur.
The notions of decision-making in the context of entrepreneurship raise several perti-
nent questions. For example, the notions of ‘alertness’ and ‘discovery’ suggest that there
are separate phases in the act of entrepreneurship. Similarly, Kirzner often talks about
the exploitation of opportunities, which adds another possible phase (following discov-
ery). These phases could conceivably be separated by long stretches of time. Relatedly,
they could have widely different antecedents or determinants. However, Kirzner seems to
treat alertness, discovery, and exploitation as parts of one Gestalt – inseparable parts of
a whole, and does not seem interested in exploring their relationship. As we argue below,
this is presumably because his explanatory concern is equilibration, not the entrepreneur
as such.
However, even if entrepreneurship is ultimately a means to understanding a higher-
level phenomenon, equilibration, the antecedents of entrepreneurship can still be impor-
tant and worthy of academic study. The modern entrepreneurship literature in economics
and management research has suggested several possible antecedents such as the personal
skills (Lazear, 2004), cognitive biases (Busenitz and Barney, 1997), and prior experi-
ence (Shane, 2000), as well the characteristics of the parent company (Gompers et al.,
2005), the institutional environment (Bjørnskov and Foss, 2008), and other background
characteristics (Xue and Klein, 2010). However, like other contributors to the economic
theory of entrepreneurship (notably Schumpeter and Knight), Kirzner is not interested
in such antecedents, presumably because his aim is to construct a general theory of the
equilibrating function of entrepreneurship. He does, however, argue that government
interference with the price mechanism inhibits the entrepreneurial discovery process (e.g.
Kirzner, 1979b).
[D]irect controls by government on prices, quantities, or qualities of output production or input

employment may unintentionally block activities which have, as yet, not been specifically envis-
aged by anyone. Where these blocked activities turn out to be entrepreneurially profitable activi-
ties (perhaps as a result of unforeseen changes in data), the likelihood of their being discovered


is then sharply diminished. Without necessarily intending it, the spontaneous discovery process
of the free market has thus been, to some extent, stifled or distorted. (Kirzner, 1982a)
Debates on the Kirznerian Discovery Approach
Kirzner’s approach has stimulated considerable controversy, both within and outside the
Austrian school of economics. Among Austrians, debate has focused on the inherently
equilibrating aspect of entrepreneurial discovery. Kirzner wants to maintain equilibrium
(as understood by mainstream economists) as a meaningful and useful analytical cate-
gory. The Austrian quarrel with equilibrium economics is that we are ‘entitled to demand
a theoretical basis for the claim that equilibrating processes systematically mold market
variables in a direction consistent with the conditions postulated in the equilibrium
models’ (Kirzner, 1997a, p. 65). However, this ‘theoretical basis’ has not been offered by
mainstream economists. This criticism of equilibrium economics echoes Hayek (1937),
who argued that economists should devote analytical attention to understanding those
learning processes that establish congruence between ‘subjective data’ (i.e. agents’ percep-
tions) and ‘objective data’ (i.e. real scarcities and preferences). However, unlike Hayek,
who argued that the ‘pure logic of choice’ was not helpful in this regard, Kirzner claims
that entrepreneurship is a logical category that supplies the ‘story’ which might account
for ‘the economists’ confidence in the special relevance of the intersection point in [the]
demand and supply diagram’ (Kirzner, 1997a, p. 66). This may be interpreted as implying
that entrepreneurship is always and inherently equilibrating (Selgin, 1987).
However, by explicitly raising the need to theorize equilibrating processes, Kirzner may
also be seen as linking up with work in mainstream economics that has dealt with the
issue of how markets can converge to equilibria (cf. Selgin, 1987, p. 44), notably so-called
‘stability theory’ (Scarf, 1960). Also, some mainstream economists have argued that it is
only meaningful to make use of the equilibrium construct if it can be theoretically dem-
onstrated that there may exist a tendency to equilibrium (Fisher, 1983). Thus, Kirzner
may be seen as forging linkages to important contributions from mainstream economics.
However, overall this work demonstrates that strong assumptions must be made for con-
vergence to take place – and no such assumptions are explicitly made in Kirzner’s work.
There are several ways in which entrepreneurship may fail to equilibrate markets within
Kirzner’s own analytical system. First, if opportunities can be posited as existing objec-
tively, then if entrepreneurs fail to discover all opportunities, equilibration does not take
place (a possibility allowed for by Kirzner himself). Second, if by equilibrium Kirzner has
in mind Hayek’s sense of multi-period plan coordination, then Kirzner has introduced an
inter-temporal dimension that may wreak havoc with the whole notion of entrepreneur-
ship as equilibrating. In parts of Kirzner’s early work (e.g. Kirzner, 1973), the exercise of
entrepreneurship does not seem to presuppose uncertainty. If entrepreneurship means
overcoming sheer ignorance by the exercise of alertness, this is a logically correct infer-
ence. However, uncertainty is clearly a fundamental aspect of action (Mises, 1949), and
it is difficult to see the usefulness of a theory of entrepreneurship that abstracts from it.
However, introducing uncertainty may destroy the basis for the claim that entrepreneur-
ship is equilibrating.
In particular, Ludwig Lachmann, drawing on English economist George Shackle’s
work on the radically uncertain, ‘kaleidic’ economy, raised strong doubts in the 1970s


concerning equilibration.11 If the future is unknowable and emerges from creative acts
in a kaleidic manner, current profits and losses – which are based on past actions – do
not provide reliable guides to future-oriented current actions (Lachmann, 1976). Only a
small subset (e.g. futures markets) of the full set of intertemporal prices exists. In other
words, there is very little rational basis for entrepreneurs to form expectations of future
consumer demands and resource scarcities, and such expectations are, therefore, more
likely to be divergent than convergent.12
Selgin (1987) argues that these debates misunderstand the nature of the equilibration
process. Correctly understood, ‘equilibration’ does not refer to coordination of plans
as in Hayek (1937), mainstream stability theory, convergence to rational expectations
equilibrium, and the like; it refers to entrepreneurial profits and losses. These are strictly
subjective categories and have no objective basis outside the minds of entrepreneurs:
It is necessary . . . to treat entrepreneurial profit opportunities as the unique products of the

valuations and understanding (Verstehen) of actors who will seek their exploitation. Upon the
fact of action, these ‘imagined’ or ‘understood’ (rather than ‘perceived’) profits are, logically and
temporally, destroyed. Thus, action leads to the systematic elimination of entrepreneurial profit
and loss; it is equilibrating. (Selgin, 1987, p. 39)
Thus, equilibration in this (Misesian) sense makes no reference to the state of knowl-
edge of market participants and whether their plans are consistent or not. In fact, Selgin
(1987) dismisses the very notion of coordination in a world in which profit opportunities
cannot be thought of as ‘objectively existing’, in which preferences have no existence apart
from actions, etc. Klein (2008b, p. 182) argues, following Salerno (1991), that Mises has in
mind a concept of coordination that refers only to real-world exchanges, not the move-
ments of prices and quantities toward some hypothetical long-run equilibrium values. In
this sense, the existence or nonexistence of equilibrating tendencies in the unhampered
market – the issue that divided ‘Kirznerians’ and ‘Lachmannians’, and dominated much
of the Austrian discussion in the 1980s – is relatively unimportant. For Mises, the critical
‘market process’ is not the convergence to equilibrium, but the selection mechanism in
which unsuccessful entrepreneurs – those who systematically overbid for factors, relative
to eventual consumer demands – are eliminated from the market (Mises, 1951).
Other economists have emphasized the contrast between the Kirznerian and
Schumpeterian entrepreneurs, asking if Kirzner’s entrepreneur can also innovate, be crea-
tive, take risks, and so on. Kirzner emphasizes that his ‘pure entrepreneur’ performs only
a discovery function and need not be an innovator in the Schumpeterian sense of disrupt-
ing an existing equilibrium allocation of resources by introducing new products, services,
sources of supply, production methods, etc. Kirzner does not deny that businesspeople,
resource owners, financiers, traders, and the like exercise boldness, creativity, and imagi-
nation, only that an entrepreneur need not exercise these functions to perform the role of
alertness to previously unknown profit opportunities. ‘My entrepreneurs were engaged in
arbitrage, acting entrepreneurially even when they might not be seen as Schumpeterian
“creators”. . . . In so emphasizing the difference between Schumpeter’s theory of entre-
preneurship and my own, I was motivated by my primary scientific objective. This was to
understand the nature of the market process – even in its simplest conceivable contexts’
(Kirzner, 2009, p. 147).
A recent stream of management literature, discussed in more detail below, conceives


the distinction between Kirznerian discovery and Schumpeterian innovation in terms of

different kinds of profit opportunities. Under particular circumstances – for instance,
mature industries with well-functioning product and factor markets, little technological
change, a stable customer base, and so on – gains from trade may be regarded as ‘discov-
ery opportunities’. Under different circumstances, such opportunities do not exist, and
entrepreneurs must ‘create’ their own products, markets, production methods, and so
on, and these may be regarded as ‘creation opportunities’ (Alvarez and Barney, 2007).
This perspective, we believe, takes the discovery metaphor too literally. Kirzner does not
mean that opportunities literally are given, objectively, in the environment, independent
of human creativity. ‘Discovery’ is an analytical construct, an instrumental device, not a
description of behavior. As Kirzner explains in a 1997 interview:
I do not mean to convey the idea that the future is a rolled-up tapestry, and we need only to be
patient as the picture progressively unrolls itself before our eyes. In fact, the future may be a
void. There may be nothing around the corner or in the tapestry. The future has to be created.
Philosophically, all this may be so. But it doesn’t matter for the sake of the metaphor I have
chosen. Ex post we have to recognize that when an innovator has discovered something new,
that something was metaphorically waiting to be discovered. But from an everyday point-of-
view, when a new gadget is invented, we all say, gee, I can see we needed that. It was just waiting
to be discovered. (Kirzner, 1997b)
Notice that Kirzner describes opportunities as ‘metaphorically waiting to be discov-

ered’, not literally waiting to be discovered. He is not offering a particular ontology or
epistemology, just proposing an analytical device, designed for a specific purpose (to
understand equilibration).
We have discussed elsewhere the relationship between entrepreneurship and resource
ownership (Foss and Klein, 2005: Foss et al., 2007a; Foss et al., 2007b; Klein, 2008a).
Kirzner’s entrepreneurs do not own capital; they need only be alert to profit opportuni-
ties. Because they own no assets, they bear no uncertainty. Critics have seized on this point
as a defect in Kirzner’s conception. According to this criticism, mere alertness to a profit
opportunity is not sufficient for earning profits. To reap financial gain, the entrepreneur
must invest resources to realize the discovered profit opportunity. ‘Entrepreneurial ideas
without money are mere parlor games until the money is obtained and committed to the
projects’ (Rothbard, 1985, p. 283). Moreover, excluding the few cases where buying low
and selling high are nearly instantaneous (say, electronic trading of currencies or com-
modity futures), even arbitrage transactions require some time to complete. The selling
price may fall before the arbitrageur has made his sale, and thus even the pure arbitrageur
faces some probability of loss. In Kirzner’s formulation, the worst that can happen to an
entrepreneur is the failure to discover an existing profit opportunity. Entrepreneurs either
earn profits or break even, but it is unclear how they suffer losses.13
ENTREPRENEURSHIP AS OPPORTUNITY DISCOVERY
The contemporary opportunity identification literature seeks to build a positive research

program by operationalizing the concept of alertness (Busenitz, 1996; Cooper et al., 1995;
Demmert and Klein, 2003; Gaglio and Katz, 2001; Kaish and Gilad, 1991; Kitzmann


and Schiereck, 2005). How is alertness manifested in action? How do we recognize it,
empirically? Can we distinguish ‘discovery’ from systematic search? What are the psy-
chological characteristics of particularly ‘alert’ individuals? However, as discussed by
Klein (2008a), this positive research program may miss the point of Kirzner’s metaphor
of entrepreneurial alertness: namely, that it is only a metaphor. Kirzner’s aim is not to
characterize entrepreneurship, per se, but to explain the tendency for markets to clear. In
the Kirznerian system opportunities are (exogenous) arbitrage opportunities and nothing
more. Entrepreneurship itself serves a purely instrumental function; it is the means by
which Kirzner explains market clearing. As Kirzner (2009, pp. 145–6) explains, reviewing
his main contributions and critiquing his own critics:
[M]y own work has nothing to say about the secrets of successful entrepreneurship. My work has
explored, not the nature of the talents needed for entrepreneurial success, not any guidelines to
be followed by would-be successful entrepreneurs, but, instead, the nature of the market process
set in motion by the entrepreneurial decisions (both successful and unsuccessful ones!). . . . This
paper seeks (a) to identify more carefully the sense in which my work on entrepreneurial theory
does not throw light on the substantive sources of successful entrepreneurship, (b) to argue that
a number of (sympathetic) reviewers of my work have somehow failed to recognize this limita-
tion in the scope of my work (and that these scholars have therefore misunderstood certain
aspects of my theoretical system), (c) to show that, despite all of the above, my understanding
of the market process (as set in motion by entrepreneurial decisions) can, in a significant sense,
provide a theoretical underpinning for public policy in regard to entrepreneurship.
Of course, arbitrage opportunities cannot exist in a perfectly competitive general-

equilibrium model, so Kirzner’s framework assumes the presence of competitive imper-
fections, in the language of strategic factor markets (Alvarez and Barney, 2004; Barney,
1986). Beyond specifying general disequilibrium conditions, however, Kirzner offers no
theory of how opportunities come to be identified, who identifies them, and so on; iden-
tification itself is a black box. The claim is simply that outside the Arrow–Debreu world
in which all knowledge is effectively parameterized, opportunities for disequilibrium
profit exist and tend to be discovered and exploited. In short, what Kirzner calls ‘entre-
preneurial discovery’ is simply that which causes markets to equilibrate.
Contemporary entrepreneurship scholars, considering whether opportunities are
objective or subjective (Companys and McMullen, 2007; McMullen and Shepherd,
2006), note that Kirzner tends to treat them as objective. Again, this is true, but misses
the point. Kirzner is not making an ontological claim about the nature of profit opportu-
nities per se – not claiming, in other words, that opportunities are, in some fundamental
sense, objective – but merely using the concept of objective, exogenously given, but not-
yet-discovered opportunities as a device for explaining the tendency of markets to clear.
To a certain extent this confusion is caused by the different levels of analysis, Kirzner
moving on the level of markets, modern entrepreneurship scholars being concerned
with entrepreneurs per se. However, this is a case of a fruitful misunderstanding, for
the basic notion that opportunity discovery may be taken as the unit of analysis, and
that analytical and empirical attention may center on the antecedents to such discovery,
has led to a positive research program. This program emphasizes the means by which
individuals identify and react to opportunities, relying largely on survey data (Busenitz,
1996; Cooper et al., 1995; Kaish and Gilad, 1991). These studies suggest that founders
of new ventures (the operational definition of entrepreneurs) spend more time gathering


information, and rely more heavily on unconventional sources of information, than do

managers of existing enterprises.
CRITIQUES OF THE DISCOVERY APPROACH
The alertness or discovery perspective faces several challenges, however. First, a precise
definition of opportunities has remained elusive. Typically, opportunities are defined
very broadly; Shane and Venkataraman’s (2000, p. 220) influential paper defines entrepre-
neurial opportunities as ‘those situations in which new goods, services, raw materials, and
organizing methods can be introduced and sold at greater than their cost of production.’
This involves not only technical skills like financial analysis and market research, but also
less tangible forms of creativity, team building, problem solving, and leadership (Hills
et al., 1997; Hindle, 2004; Long and McMullan, 1984). It can involve both the recogni-
tion of already existing opportunities and the creation, ex nihilo, of new opportunities
(Alvarez and Barney, 2007). Although value can, of course, be created not only by start-
ing new activities, but also by improving the operation of existing activities, research
in opportunity identification tends to emphasize the launching of new ventures (firms,
products, or services). As summarized by Shane (2003, pp. 4–5),
the academic field of entrepreneurship incorporates, in its domain, explanations for why,
when and how entrepreneurial opportunities exist; the sources of those opportunities and the
forms that they take; the processes of opportunity discovery and evaluation; the acquisition of
resources for the exploitation of these opportunities; the act of opportunity exploitation; why,
when, and how some individuals and not others discover, evaluate, gather resources for and
exploit opportunities; the strategies used to pursue opportunities; and the organizing efforts to
exploit them.
A recent debate asks whether opportunities are ‘discovered’ or ‘created’. Alvarez and
Barney (2007) distinguish, within the applied entrepreneurship literature, a ‘discovery
approach’, in which entrepreneurial actions are seen as responses to exogenous shocks,
and a ‘creation approach’, in which such actions are taken as endogenous. ‘Discovery
entrepreneurs’ focus on predicting systematic risks, formulating complete and stable
strategies, and procuring capital from external sources. ‘Creation entrepreneurs’, by con-
trast, appreciate iterative, inductive, incremental decision-making, are comfortable with
emergent and flexible strategies, and tend to rely on internal finance. More generally, as
noted by McMullen et al. (2007, p. 273), ‘some researchers argue that the subjective or
socially constructed nature of opportunity makes it impossible to separate opportunity
from the individual, [while] others contend that opportunity is as an objective construct
visible to or created by the knowledgeable or attuned entrepreneur.’
Klein (2008a) argues that the discovery–creation distinction places too much emphasis
on the ontology of the opportunity, and that opportunities should be treated instead as
instrumental constructs, as metaphors useful for the economist or management theorist,
rather than frameworks for entrepreneurial decision-making itself. In the Knightian
approach (as developed in Foss et al., 2007b, and Foss et al., 2007a) opportunities are
best characterized as neither discovered nor created, but imagined. The creation meta-
phor implies that profit opportunities, once the entrepreneur has conceived or established


them, come into being, objectively, like a work of art. Creation implies that something is
created. There is no uncertainty about its existence or characteristics (though, of course,
its market value may not be known until later). By contrast, the concept of opportunity
imagination emphasizes that gains (and losses) do not come into being, objectively, until
entrepreneurial action is complete (i.e. until final goods and services have been produced
and sold).
Another issue relates to entrepreneurial opportunities and profit opportunities more
generally. Shane and Venkataraman (2000) define profit opportunities as opportunities
to create value by enhancing the efficiency of producing existing goods, services, and
processes, reserving the term entrepreneurial opportunities for value creation through
‘the discovery of new means–ends frameworks’, appealing to the Kirznerian distinction
between Robbinsian maximizing and entrepreneurial alertness described above. They
may misunderstand Kirzner (and the Austrians more generally) on this point, however.
In a world of Knightian uncertainty, all profit opportunities involve decisions for which
no well-specified maximization problem is available. Kirzner does not mean that some
economic decisions really are the result of Robbinsian maximizing while others reflect
discovery. Instead, Kirzner is simply contrasting two methodological constructions for
the analysis of human action.
An alternative approach is to focus not on what opportunities ‘are’, but what opportu-
nities ‘do’. Opportunities, in this sense, are treated as a latent construct that is manifested
in entrepreneurial action – investment, creating new organizations, bringing products to
market, and so on. Empirically, this approach can be operationalized by treating entre-
preneurship as a latent variable in a structural-equations framework (Xue and Klein,
2010). Moreover, by treating opportunities as a latent construct, this approach sidesteps
the problem of defining opportunities as objective or subjective, real or imagined, and so
on. The formation of entrepreneurial beliefs is treated as a potentially interesting psycho-
logical problem, but not part of the economic analysis of entrepreneurship. It also avoids
thorny questions about whether alertness or judgment is simply luck (Demsetz, 1983), a
kind of intuition (Dane and Pratt, 2007), or something else entirely.
If opportunities are inherently subjective, and we treat them as a black box, then the
unit of analysis should not be opportunities, but rather some action – in Knightian terms,
the assembly of resources in the present in anticipation of (uncertain) receipts in the
future. One way to capture the Knightian concept of entrepreneurial action is Casson
and Wadeson’s notion of ‘projects’ (Casson and Wadeson, 2007). A project is a stock of
resources committed to particular activities for a specified period of time. (Opportunities
are defined as potential, but currently inactive, projects.) Focusing on projects, rather
than opportunities, implies an emphasis not on opportunity identification, but on oppor-
tunity ‘exploitation’. More generally, this perspective suggests that entrepreneurship
research should focus on the execution of business plans.
Foss et al. (2007b) offer an account of opportunity exploitation that combines the
Knightian concept of judgment and the Austrian approach to capital heterogeneity. In
Knight’s formulation, entrepreneurship represents judgment that cannot be assessed in
terms of its marginal product and which cannot, accordingly, be paid a wage (Knight,
1921, p. 311). In other words, there is no market for the judgment that entrepreneurs
rely on, and therefore exercising judgment requires the person with judgment to start a
firm. Of course, judgmental decision-makers can hire consultants, forecasters, technical


experts, and so on. However, in doing so they are exercising their own entrepreneurial
judgment. Judgment thus implies asset ownership, for judgmental decision-making is
ultimately decision-making about the employment of resources. The entrepreneur’s role,
then, is to arrange or organize the capital goods he or she owns. As Lachmann (1956,
p. 16) puts it: ‘We are living in a world of unexpected change; hence capital combinations
. . . will be ever changing, will be dissolved and reformed. In this activity, we find the real
function of the entrepreneur.’
CONCLUSIONS
The concept of entrepreneurial alertness continues to be one of the most heavily used,
and potentially valuable, constructs in entrepreneurship research. It dovetails nicely with
ideas from microeconomic theory about equilibration and arbitrage, and it appears to
have recognizable empirical analogs in processes of decision-making, evaluation, assess-
ment, environmental recognition, and the like. It is easy to see why the concept of alert-
ness has become foundational in applied entrepreneurship studies.
However, as Kirzner’s recent essay (2009) makes clear, the relationship between the
theoretical construct of alertness and the applied study of opportunity recognition
is subtle and complex. Kirzner (2009) sees his concept of the entrepreneurial market
process as relevant to applied work not primarily to management research, but in public
policy. After arguing that Schumpeterian creativity can, in an important sense, be sub-
sumed as a category of alertness – even Schumpeter’s innovations can, ex post, be seen as
improvements that were waiting to be discovered – Kirzner (2009, p. 151) notes that ‘the
way in which policymakers understand the market economy is likely to carry enormously
significant implications for encouragement or discouragement of entrepreneurial creativ-
ity.’ Specifically, although ‘[w]e know very little that is systematic about what “switches
on” alertness . . . it does seem intuitively obvious that alertness can be “switched off ” by
the conviction that external intervention will confiscate (wholly or in part) whatever one
might notice.’
More generally, it suggests that we can analyze specifically the effects of the competi-
tive, regulatory, and technological environment on entrepreneurial behavior, an approach
that is not easily squared with the pure concept of alertness, as Kirzner conceives it. In
essence, Kirzner wants to treat alertness as an analytical primitive, and there is indeed
very little mention of antecedents to alertness in his work. However, as indicated by
the above quotation Kirzner – like contemporary management scholars studying entre-
preneurship – does allow antecedents to slip into the analysis. Kirzner has in mind
regulation, antitrust, and other government policies that affect business decision-making.
However, similar arguments could possibly also be applied to alertness within organiza-
tions: the belief that senior managers will appropriate the rent streams created by discov-
ery or creation of new activities or uses of assets by lower-level employees will likely stifle
‘entrepreneurial’ activity within the firm.
Our own work on entrepreneurship and the firm (Foss and Klein, 2005; Foss et al.,
2007a; Foss et al., 2007b; Klein, 2008a) suggests a different way of incorporating Austrian
insights in management research, combining the Knight–Mises concept of entrepre-
neurship as judgment and the Austrian approach to capital heterogeneity. Austrian


capital theory, we argue, provides a unique foundation for an entrepreneurial theory of

economic organization. Neoclassical production theory, with its notion of capital as a
permanent, homogeneous fund of value, rather than a discrete stock of heterogeneous
capital goods, is of little help here. Transaction cost, resource-based, and property-rights
approaches to the firm do incorporate notions of heterogeneous assets, but they tend
to invoke the needed specificities in an ad hoc fashion to rationalize particular trading
problems – for transaction cost economics, asset specificity; for capabilities theories, tacit
knowledge; and so on. The Austrian approach, as described above, offers a more rigorous
and systematic treatment of heterogeneity.
Entrepreneurs, who seek to create or discover new attributes of capital assets (in the
sense of Barzel, 1997), will want ownership titles to the relevant assets, both for specu-
lative reasons and for reasons of economizing on transaction costs. These arguments
provide room for entrepreneurship that goes beyond deploying a superior combination
of capital assets with ‘given’ attributes, acquiring the relevant assets, and deploying these
to producing for a market: entrepreneurship may also be a matter of experimenting with
capital assets in an attempt to discover new valued attributes. Such experimental activity
may take place in the context of trying out new combinations through the acquisition
of or merger with other firms, or in the form of trying out new combinations of assets
already under the control of the entrepreneur. Hence we see many fruitful complemen-
tarities between the theory of economic organization and Austrian theories of capital
heterogeneity and entrepreneurship.
NOTES
1. More specifically: ‘The key to understanding the market process is to understand the dynamic character
of market competition. But the neoclassical focus on perfect competition as an equilibrium state of affairs
prevented appreciation of this insight. It was not until Hayek’s pioneering, but insufficiently-appreciated
work on the dynamically competitive market as a process of mutual discovery, that Austrian economics
was able explicitly to grapple with this embarrassing hiatus. It was particularly in the work of Ludwig von
Mises that this writer discovered, in the Misesian entrepreneur and in the Misesian dynamically competi-
tive process, what he believed (and believes) to be the true solution. My 1973 work was written in order to
spell out this solution’ (Kirzner, 2009, p. 147).
2. As Rothbard (1977, p. 16) puts it: why does an entrepreneur borrow at all if in so doing he will bid up the
loan rate of interest to the rate of time preference as reflected in his long-run normal rate of profit (or his
‘natural rate of interest’, to use Austrian terminology)? The reason is that superior forecasters envision
making short-run profits whenever the general loan rate is lower than the return they expect to obtain.
This is precisely the competitive process, which tends, in the long run, to equalize all natural and loan rates
in the time market. Those entrepreneurs ‘with superior knowledge and superior foresight,’ wrote Fetter,
‘are merchants, buying when they can in a cheaper and selling in a dearer capitalization market, acting as
the equalizers of rates and prices.’
3. Schumpeter is often classified with the Austrian economists but, despite being trained by Böhm-Bawerk,
was most heavily influenced by Walras and is better classified as a neoclassical equilibrium theorist. See
also Klein (2008b) on these two strands within the Austrian tradition.
4. Hayek (1968/2002) mentions that competition ‘is important primarily as a discovery procedure whereby
entrepreneurs constantly search for unexploited opportunities that can also be taken advantage of by
others. . . . [This] ability to detect certain conditions . . . can [be used] effectively only when the market tells
them what kinds of goods and services are demanded, and how urgently’ (Hayek, 1968/2002), that is, how
effectively the price system works. Hayek also uses the term ‘entrepreneur’ in his earlier writings on social-
ist calculation and capital theory, but he seems to mean simply ‘businessman’, and does not distinguish
sharply among entrepreneurs, managers, capitalists, and other business professionals.
5. ‘I have always emphasized that my own contribution is simply an expansion and deepening of insights


articulated by my teacher, Ludwig von Mises’ (Kirzner, 2009, p. 146). See also Kirzner (1982b) for
Kirzner’s most extensive reflections on the relations between his and Mises’s work.
6. Knight (1921) introduces the concept of judgment to decompose business income into two elements, inter-
est and profit. Interest is a reward for forgoing present consumption, is determined by the relative time
preferences of borrowers and lenders, and would exist even in a world of certainty. Profit, by contrast, is a
reward for anticipating the uncertain future more accurately than others and exists only in a world of ‘true’
uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or
losses based on the differences between factor prices paid and product prices received. This understanding
of entrepreneurship is central to Mises’s argument that rational economic planning is ‘impossible’ under
socialism (Mises, 1920). Entrepreneurs make production plans based on the current prices of factors of
production and the anticipated future prices of consumer goods. What Mises calls ‘economic calcula-
tion’ is the comparison of these anticipated future receipts with present outlays, all expressed in common
monetary units. Under socialism, the absence of factor markets, and the consequent lack of factor prices,
renders economic calculation – and hence rational economic planning – impossible. Mises’s point is that a
socialist economy may assign individuals to be workers, managers, technicians, inventors, and the like, but
it cannot, by definition, have entrepreneurs, because there are no money profits and losses.
7. Kirzner is careful to distinguish alertness from systematic search, as in Stigler’s (1961; 1962) analysis of
searching for bargains or for jobs. A nice example is provided by Ricketts (1987, p. 58): ‘Stigler’s searcher
decides how much time it is worth spending rummaging through dusty attics and untidy drawers looking
for a sketch which (the family recalls) Aunt Enid thought might be by Lautrec. Kirzner’s entrepreneur
enters a house and glances lazily at the pictures which have been hanging in the same place for years. “Isn’t
that a Lautrec on the wall?”’ See also Kirzner (1997a) for his most extensive discussion of the distinc-
tion between ‘sheer ignorance’ and asymmetric information, and the role of alertness in overcoming the
former.
8. For details on Kirzner’s treatment of equilibrium see Klein (2008b).
9. See Klein (2008a) for more on the distinction between occupational, structural, and functional approaches
to entrepreneurship.
10. O’Driscoll and Rizzo (1985, pp. 80–85) argue that plan coordination – they call it Hayekian equilibrium –
is not consistently defined in the Austrian literature. On plan coordination see also Salerno (1991), Klein
(2008b), and Klein and Briggeman (2009).
11. Lachmann’s perspective has generated relatively little attention among management scholars. An excep-
tion is Chiles et al. (2007).
12. Note that Lachmann (1986) does allow for temporary market clearing, that is, Marshallian short run
equilibria.
13. This has been a critique of Kirzner’s work from the beginning (i.e. the publication of Kirzner, 1973). See
Salerno (2008) for a stocktaking and assessment of Austrian views of the entrepreneurs, and a summary
of some of the early (Austrian) critiques of Kirzner’s work.
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6. Opportunity recognition: evolving
theoretical perspectives
Robert A. Baron
INTRODUCTION
Ideas are the beginning of all achievement.
(Bruce Lee)
Every field has, at its core, a set of basic terms – concepts or ideas that play a central role
in that field’s key activities and in its efforts to understand the phenomena on which it
focuses. In physics, such terms include ‘matter’ and ‘energy’; in biology, ‘cell’ and ‘repro-
duction’; and in psychology, terms such as ‘stimulus’ and ‘behavior’ are fundamental.
Entrepreneurship, as a field of scholarly activity (Shane and Venkataraman, 2000), is no
exception to this basic rule, and among its central terms or concepts are ‘opportunity’
and ‘opportunity recognition’. The centrality of these terms is suggested by the quota-
tion above – words to the effect that all human endeavors, including the formation of new
business ventures, begin with ideas – cognitive activity in the minds of specific persons.
It is also suggested by the considerably increased volume of research on these topics in
recent years. That is a central assumption of the present discussion which, overall, seeks
to accomplish two major tasks.
First, basic definitions for these terms will be offered – definitions that closely reflect
decades of careful thought by scholars in the field of entrepreneurship. Second, the
remainder of the chapter will focus on providing an overview of the development of
theoretical perspectives on opportunity recognition within the field of entrepreneurship.
Reflecting changes in entrepreneurship itself, these frameworks have become increasingly
sophisticated and comprehensive in nature, and the present chapter describes the course
of such advances, as well as their implications for ongoing research.
BASIC DEFINITIONS
Many definitions of the term ‘opportunity’ have been proposed (e.g. Bhave, 1994; Herron
and Sapienza, 1992; Kirzner, 1979; Shane, 2003), but careful examination of these con-
trasting proposals suggests that most include reference to three central characteristics:
(1) potential economic value (i.e. the potential to generate profit); (2) newness (i.e. some
product, service, technology, etc. that did not exist previously), and (3) perceived desir-
ability (e.g. moral and legal acceptability of the new product or service in society). For
the purposes of the present discussion, therefore, a definition derived from these previous
121

views, but also consistent with the emerging cognitive perspective on this issue, is pro-
posed. Specifically, ‘opportunity’ is defined as perceived means of generating economic
value (i.e. profit) that have not previously been exploited, and are not currently being
exploited by others, and are perceived, in a given society, as desirable (or, at least, socially
acceptable).1 The means of generating profit include the creation of something new (e.g.
new products, services, technologies, markets, or production processes) as well as utiliza-
tion of existing products, services, technologies, etc. in ways that offer increased potential
for generating economic value. An example of this latter form of opportunity would be
identifying new uses for an existing product. Note that there is no assumption that per-
ceived opportunities will, in fact, generate profit; rather, opportunities involve the ‘per-
ception’ by one or more persons that such outcomes can be obtained by certain means.
The definition offered above also suggests that opportunities have a social or societal
component: to be a bona fide opportunity, means of generating profit must not only be
new, they must also be acceptable to members of the society in which the new ventures
are launched and operate. This requirement is included to avoid labeling as opportunities
activities that involve new products or services that can potentially generate huge profits,
but are inconsistent with, or even inimical to, the norms and values of a society. Although
recent evidence suggests that experience in operating ventures that violate societal norms
(e.g. new ventures defined as illegal or immoral in a particular society) can contribute to
entrepreneurs’ human capital (Aidis and van Praag, 2007), it is important to exclude from
the concept of business opportunities actions that result in actual harm to a large number
of persons, or that violate a society’s well-established values. Perhaps a concrete example
will help clarify this point.
Imagine, for instance, that a chemist discovers a new chemical that is incredibly addic-
tive; exposure to just a few molecules induces intense cravings for this substance in the
persons who encounter it. Further, the chemical has cumulative effects that are truly
harmful; over time, continued exposure to it seriously damages the nervous system.
In some countries (e.g. those without strict regulation of drugs), the chemist could,
if unscrupulous, produce the drug and sell it to an ever-growing number of persons
who would become instantly and hopelessly addicted. The chemical would be new and
perhaps the means of distributing it would also be novel (e.g. given specific properties of
the chemical, it would have to be stored and transported in special ways). Moreover, the
potential profits would be enormous. However, labeling this discovery an ‘opportunity’
would, in the opinion of the present author, render a major disservice to the vast major-
ity of entrepreneurs who, in contrast, work diligently to bring useful and/or beneficial
products and services to market.
To recap, then, for the purposes of the present discussion, ‘opportunity’ will be defined
in terms of the three criteria noted above: potential profitability, newness, and social
desirability in a given society.
If opportunity is defined in this manner, then within the present context, the term
‘opportunity recognition’ refers to the cognitive process (or processes) through which
individuals conclude that they have identified an opportunity. The processes that lead to
such cognition can be relatively automatic in nature (i.e. rapid, requiring minimal effort,
difficult to express in words) or relatively controlled in nature (i.e. slower, more effortful,
and readily expressed verbally; e.g. Schneider and Shiffrin, 1977). However, ultimately,
the outcome of this process is the conscious thought that a specific and describable busi-


Opportunity recognition 123
ness opportunity has been identified. It is important to note, as emphasized by Ardichvili

et al. (2003) and McMullen and Shepherd (2006), that opportunity recognition is only the
initial step in a continuing process. As such, it is distinct both from detailed evaluation of
the feasibility and potential economic value of identified opportunities and from active
steps to develop these opportunities through new ventures. Further discussion of these
aspects of the process are presented in a later section. Having offered these basic defini-
tions, I turn next to an overview of theoretical development with respect to the process
of opportunity recognition.
THEORIES OF OPPORTUNITY RECOGNITION: FROM

ALERTNESS AND EXPERIENCE TO UNDERLYING
COGNITIVE PROCESSES
If opportunities involve ideas (e.g. conceptions of potentially valuable new products or

services), then the words of Bruce Lee (presented at the start of this chapter) do ring true:
in a sense, everything else in the new venture creation process derives from this beginning.
In other words, entrepreneurs’ decisions to found new ventures often stem from their
belief that they have identified an opportunity no one else has yet recognized, and can
benefit from being first to enter the marketplace with this new product or service (Durand
and Courerderoy, 2001). Because opportunity recognition is often the start of the entre-
preneurial process, it is not at all surprising that it has long been a central concept in the
field of entrepreneurship. Until recently, however, little effort was made to examine it as
a ‘process’ – a series of events or occurrences that, ultimately, generate identification of
specific business opportunities. Rather, opportunities were defined largely in economic
terms: any idea for a new product, service, raw material, market, or production process
that can be successfully exploited so as to generate economic benefits for stakeholders
was viewed as constituting an opportunity. Further, the approach to understanding
opportunity recognition was, to some extent, purely empirical in nature. Often, research
on this topic simply sought to establish that, for instance, individuals with a broad range
of work experience, or those with a high level of technical expertise, are more likely to
recognize opportunities in certain domains than persons lower on these dimensions (see
e.g. Shane, 2003). Efforts to understand the processes involved – cognitive or otherwise –
that underlie these relationships were relatively rare (e.g. Gaglio and Katz, 2001 provides
one notable exception). In other words, an over-arching theoretical framework was not
an integral part of this early research. This changed when, primarily in work by Shane
(2000; 2003) a basic unifying principle was identified: information. In essence, it was sug-
gested that having more information or better access to information than other persons,
was a key foundation of opportunity recognition. This focus on information developed
in several different directions, including the role of active search for information, being
particularly alert to specific kinds of information, and having extensive knowledge in a
field or industry – knowledge that provided entrepreneurs with an initial ‘edge’ they use
in recognizing potentially valuable opportunities (e.g. Ardichvili et al., 2003; McMullen
and Shepherd, 2006). It is discussed in detail here because in an important sense, it paved
the way for efforts to apply the findings and principles of cognitive science to the task of
understanding the essence of opportunity identification (see below).


Access to Information and its Effective Use as the Basis for Opportunity Recognition
A key question that has emerged and re-emerged in efforts to understand opportunity
recognition is this: why are some people and not others able to discover specific opportu-
nities? If we can understand why certain people recognize opportunities that others over-
look, it can be reasoned, this will potentially provide key insights into how this process
takes place – and how, perhaps, it can be enhanced. A focus on information, both access
to it and its effective use, provides important insights into this question, but only, as will
be noted below, initial insights of this type.
Greater access to information

With respect to greater access to information, it has been suggested – and confirmed in
many studies – that specific persons gain an advantage with respect to opportunity recog-
nition by having enhanced access to relevant information. They gain this edge in several
different ways. For example, they may have jobs that provide them with information ‘on
the cutting edge’ that is not widely available to others. Jobs in research and development
or marketing appear to be especially valuable in this respect.
Another way in which individuals gain superior access to information is through varied
work and life experience – factors that, because they contribute to individuals’ knowledge
base, also increase their creativity (Blanchflower and Oswald, 1998). Finally, entrepre-
neurs often gain enhanced access to information through a large social network (Ozgen
and Baron, 2007). Other people often serve as a valuable source of information, and fre-
quently the information they provide cannot be acquired easily in any other way.
Superior utilization of information

Greater access to valuable information is only the beginning of the process, however. It
was further suggested, in early theorizing, that entrepreneurs who recognize opportuni-
ties not only have greater access to information than other persons, they are also better
at ‘using’ such information. In other words, cognitive skills or abilities also enter the
picture. As a result of having greater access to information, some persons have richer
and better-integrated stores of knowledge than other persons – for instance, more
information (retained in memory) about markets and how to serve them. This, in turn,
enhances their ability to interpret and use new information because, not only do they
have more information at their disposal, it is also better organized, too. Large quantities
of well-organized information play a key role in creativity, so it is not at all surprising
that persons who identify opportunities have also been found to possess richer and better
organized stores of information (e.g. Sternberg, 2004).
Other aspects of cognition relating to the effective utilization of information play a
role. For instance, persons who found new ventures tend to be higher in intelligence
than persons who do not, for example managers (Shane, 2003). Moreover, entrepre-
neurs have been found to be higher in intelligence even when this was measured many
years in the past – when they were, on average, 12 years old (Van Praag and Cramer,
2001) Additional evidence suggests that entrepreneurs are especially likely to be higher
than other persons in ‘practical intelligence’ – the ability to solve the varied problems
of everyday life (Sternberg, 2004). Finally, and again, far from surprising, entrepreneurs
are higher in creativity than other persons (Baron and Shane, 2008). In other words,


they are more adept at combining the information at their disposal into something
new.
In sum, it seems clear that a key component in opportunity recognition is ‘information’
– greater access to it, and better cognitive tools for putting it to good use.
The Search for Information: Active Searches, Alertness, Prior Knowledge, and Social
Networks
Although access to information plays a key role in opportunity recognition, three other
factors were soon identified as important in theoretical proposals concerning the nature
of opportunity identification. These included engaging in an ‘active search’ for, ‘alert-
ness’ to opportunities (i.e. the capacity to recognize them when they emerge), and ‘prior
knowledge’ of a market, industry, or customers, and information provided by social
networks, as foundations for recognizing new opportunities in these areas. Although at
first glance these factors are diverse, they are related by common interest in the search
for information. Research findings have provided support for the importance of all three
factors. For instance, with respect to an active search for opportunities, many studies
indicate that entrepreneurs are more likely than other persons (e.g. managers) to engage
in such activities (Kaish and Gilad, 1991). Additional evidence for the importance of
active search is provided by an intriguing study in which a group of highly successful
entrepreneurs (all belonging to the Chicago area Entrepreneurship Hall of Fame) were
compared with other entrepreneurs who were not so eminent (Hills and Shrader, 1998).
The highly successful entrepreneurs were found to be less likely to identify their oppor-
tunities from public information such as magazines, newspapers, and trade publications,
and more likely to seek opportunities in more exclusive sources, such as personal contacts
and specialized publications. These and other findings indicate that actively searching for
information is an important factor in the recognition of many opportunities by entrepre-
neurs, although, as noted by several authors, such searches must be carefully directed to
succeed (Fiet et al., 2004). In some cases, these searches can proceed in a relatively ‘auto-
matic’ manner rather than in a conscious and carefully directed one.
Alertness, in contrast, emphasizes the fact that opportunities can sometimes be recog-
nized by individuals who are not actively searching for them, but who possess ‘a unique
preparedness to identify them . . .’ when they appear (Kirzner, 1985, p. 48). Kirzner, who
first introduced this term into the entrepreneurship literature, defined it as referring to
‘alertness to changed conditions or to overlooked possibilities.’ What are the foundations
of entrepreneurial alertness? It has been suggested that alertness rests, at least in part, on
cognitive capacities possessed by individuals – capacities such as high intelligence and
creativity (Shane, 2003). These capacities help entrepreneurs to identify new solutions
to market and customer needs in existing information, and to imagine new products and
services that do not currently exist.
Systematic evidence for the importance of cognitive processes in entrepreneurial alert-
ness has been obtained in several studies. For instance, as noted earlier, intelligence has
been found to be linked to founding new ventures (De Wit, 1993). Creativity, another
aspect of cognition, has also been found to play a role in alertness; entrepreneurs tend
to score higher on various tests of creativity than other persons (Fraboni and Saltstone,
1990). Additional findings indicate that other personal characteristics, too, promote


alertness. Optimism – the belief that events will generally result in favorable outcomes –
has been found to be positively linked to opportunity recognition (Krueger and Brazael,
1994), and, more recently, to actual performance of new ventures (Hmieleski and Baron,
in press). Perceptions of risk, too, may be important, because individuals who perceive
high levels of risk in many situations may be reluctant to view almost any idea as a bona
fide opportunity (Stewart and Roth, 2001).
A third factor that was suggested as important in theoretical perspectives that empha-
sized the role of information in opportunity recognition is prior knowledge of a market
or industry. Much evidence offered support for this view, suggesting that information
gathered through rich and varied life experience (especially, through varied business and
work experience) can be a major ‘plus’ for entrepreneurs in terms of recognizing poten-
tially profitable opportunities. For example, it has been found that prior knowledge of
customer needs and ways to meet them greatly enhances entrepreneurs’ ability to provide
innovative solutions to these problems – in other words, to identify potentially valuable
business opportunities (Shane, 2000).
Finally, a very different type of factor, the breadth of entrepreneurs’ social networks,
was also included in theoretical frameworks emphasizing the importance of information
in opportunity recognition. Specifically, it was suggested that the broader the entrepre-
neurs’ social networks (i.e. the more people they know and with whom they have rela-
tionships), and the more conferences and professional meetings they attend, the more
opportunities they would identify. This suggestion, too, has been confirmed by many
studies (e.g. Aldrich and Kim, 2007; Ozgen and Baron, 2007). Social networks are an
important source of information for entrepreneurs, and as such, often provide the ‘raw
materials’ on which opportunity recognition rests.
In sum, considerable evidence suggested that a theoretical perspective on opportunity
recognition that emphasized the importance of information – both access to it and its effec-
tive use – was both useful and accurate. As useful as it is, however, this perspective generally
devotes very little attention to the key question of how opportunity recognition actually
occurs – what cognitive processes underlie the emergence, in the minds of specific entrepre-
neurs, of ideas for new products or services? This question, in turn, derives from the basic
assumption that recognition of specific opportunities is an event that occurs primarily in
the minds of individual entrepreneurs. Although information can – and often is – shared
or exchanged, and various events and trends in markets, technology, and government poli-
cies (to mention just a few variables) can be readily observed by many persons, it is often
just one or a few individuals who move from these external conditions and changes to the
formulation of cognitive representations that constitute recognized opportunities. If this
perspective is adopted, an important route for enriching and expanding theoretical frame-
works concerning opportunity recognition becomes available: adaptation of existing, and
often well-validated theories of human cognition to the task of understanding opportunity
recognition. It is to these recent developments that we turn next. Before doing so, however,
the historical foundations of the cognitive perspective will be briefly reviewed.
Historical Roots of the Cognitive Perspective
Before considering applications of cognitive theory to understanding opportunity recog-

nition, it is useful, given the focus of this volume, to briefly consider the historical roots


of this theory. In fact, the term ‘cognitive perspective’ is more appropriate to the present
discussion than ‘cognitive theory’, because this perspective actually encompasses many
different theories, most of them focused on specific aspects of human cognition such as
memory, information processing, decision making, and problem solving, to name just a
few (e.g. Matlin, 2004). Notably, the pendulum of scientific opinion concerning the use-
fulness or appropriateness of efforts to understand human cognition has swung widely –
one might say ‘wildly’ – in the development of psychology and other disciplines that focus
on human behavior and the human mind (Schultz and Schultz, 2007).
Initially, the field of psychology was identified largely with efforts to understand human
cognition. More specifically, one group of early psychologists, the ‘structuralists’ (e.g.
Wilhelm Wundt), suggested that the newly emerging field of psychology should focus on
efforts to understand the structure of the human mind – the basic components of which
consciousness is constructed. They argued that even complex cognitive phenomena such
as problem solving and creativity are based on ‘mental structures’ composed of simpler
cognitive elements – for instance, sensations, associations, and volitions. In order to iden-
tify these components and develop a broad ‘roadmap’ of the human mind, structuralists
often used the method of introspection, careful self-examination of conscious experience
by objective observation, often performed by individuals trained in this method.
Unfortunately, despite amazing diligence in their pursuit of these goals, the structur-
alists’ approach ultimately seemed, to most psychologists, to be a dead-end, producing
nothing of concrete or lasting value. This set the stage for what is now known as ‘radical
behaviorism’, the most famous proponent of which was John B. Watson. Watson and
other behaviorists concluded that because cognitive events are hidden from direct view,
they can never form the basis for a scientific field of psychology. Thus, they totally
rejected the structuralists’ conception of the nature of psychology as an independent
discipline. Rather, behaviorists contended, overt behavior – which can be seen and,
even more importantly, precisely measured – is the appropriate focus of a scientific
field of psychology. The behaviorist view became tremendously popular, and prevailed
in the young field of psychology for several decades – until, in fact, the 1950s. During
this period, psychologists directed little, if any, attention to cognitive processes we now
recognize as crucial to all aspects of human existence – memory, judgment, reasoning,
problem-solving, and language.
It became increasingly clear, however, that although cognitive processes and events
could not be observed directly, they could be studied objectively and systematically. What
was required was the development of indirect measures of these events. For example, the
basic nature of memory could be investigated by exposing individuals to verbal informa-
tion they had never encountered previously (e.g. nonsense syllables). Further, measures
such as reaction time (e.g. the time required to respond to various stimuli) could, espe-
cially with advances in electronics that made it possible to measure this in milliseconds,
provide the external indices of internal cognitive processes that behaviorists demanded.
The result of these changes was growing interest, in psychology and other fields, in key
aspects of human cognition. In fact, progress in understanding such central topics as
memory and language development proceeded so rapidly, that by the 1970s, psychology
and other fields were experiencing a ‘cognitive revolution’ – an expansion of a cognitive
perspective to encompass virtually all aspects of human behavior. For instance, in social
psychology (and soon afterwards, in the management fields of organizational behavior


and human resource management), a cognitive perspective strongly influenced – and

added to – knowledge concerning social perception (for example how we perceive and
seek to understand other persons), attitude change and persuasion, group processes (such
as group decision making), and even human aggression (as in attributions concerning
provocations from others) (Baron et al., 2009).
Further rapid progress in converting inner cognitive processes into events that can
be observed and measured has come, in recent years, as a result of the development of
techniques for measuring neural activity in human brains as individuals engage in various
cognitive tasks. PET scans, MRI, and other techniques developed initially for medical
uses were soon pressed into service in research designed to reveal the physiological and
neural foundations of cognition.
The ultimate result of all these historical trends and developments is that at present,
the cognitive perspective is being applied to a very wide range of phenomena, including,
as described in more detail in the next section, opportunity recognition. As such, its value
is so widely recognized that this issue is no longer a topic of debate. Indeed, at present,
researchers and theorists in many different fields, from psychology, cognitive science and
other social sciences (e.g. economics and sociology), through many branches of man-
agement, could no more imagine eliminating this perspective from their work than they
could imagine deleting statistical procedures from their efforts to interpret their data.
Given this current state of affairs, it is not at all surprising that a cognitive perspective has
been widely adopted in entrepreneurship theory and research (e.g. Mitchell et al., 2007).
The next section describes how this perspective – and specific aspects of it – can add to
our understanding of one central aspect of entrepreneurship: the identification of new
business opportunities.
APPLYING COGNITIVE THEORIES TO THE PROCESS OF

OPPORTUNITY RECOGNITION
If opportunity recognition is viewed primarily as a cognitive process, then three key

questions arise. (1) What is the process (or processes) through which opportunities
are initially identified? (2) Once individuals have perceived what they believe to be an
opportunity, how do they decide whether this opportunity is real – a bona fide business
opportunity worthy of further consideration – or a potential ‘dead-end’ that will not
yield projected economic benefits? (3) What skills or cognitive frameworks play a role
in opportunity recognition? In other words, what frameworks, acquired through experi-
ence, contribute to the capacity to perceive connections among highly diverse conditions
and changes?
These questions will now be considered in the context of major cognitive theories:
models of pattern recognition, which relate closely to the issue of how information is
organized in semantic memory, the memory system that retains general information
about the world, and theories concerning the decision mechanisms through which indi-
viduals conclude that the patterns they have perceived are, or are not, sufficiently clear to
be viewed as actual opportunities. In discussing these decision mechanisms, the relevance
of signal detection theory (e.g. Swets, 1992) and regulatory focus theory (e.g. Higgins,
2006) will be explored in more detail.


Pattern Recognition: Opportunities as Complex, Discernible Patterns
In cognitive science, ‘perception’ refers to the complex process through which we inter-
pret information brought to us by our senses and integrate it with information already
stored in memory (e.g. Baddeley, 1997). To the extent that opportunities exist in the
external world as complex patterns of observable stimuli, perception must, logically, play
a role in opportunity recognition. Presumably, there is a pattern of observable events
or stimuli in the external world that entrepreneurs can notice or perceive; whether this
pattern is or is not recognized is, in a sense, the central question of opportunity recogni-
tion. Basic research on perception refers to this task as ‘object’ or ‘pattern recognition’
(e.g. Matlin, 2004), and it involves a process through which specific persons perceive
complex and seemingly unrelated events or stimuli as constituting ‘identifiable patterns’.
In essence, it involves recognizing links between apparently unrelated trends, changes,
and events – links suggestive of patterns that connect them together. The patterns sug-
gested by these links or connections then become ‘figure’ instead of undifferentiated (and
often overlooked) ‘ground’ (i.e. background). As applied to opportunity recognition,
then, pattern recognition involves instances in which specific individuals ‘connect the
dots’ – perceive links between seemingly unrelated events and changes. The patterns they
perceive then become the basis for identifying new business opportunities. In the discus-
sion that follows, the potentially important role of pattern recognition in opportunity
identification will be described. Before turning to that task, however, it is useful to pause
to briefly consider the origins of this particular cognitive theory.
Historical Foundations of Modern Pattern Recognition Theories
Early research on perception was focused on determining the limits and parameters of
‘sensation’ – the sensitivity of our various senses (vision, hearing, touch, etc.) to physi-
cal energy in the external world (Schultz and Schultz, 2007). Thus, most early research
was focused on establishing ‘thresholds’ in each sensory modality. In other words, initial
research focused on such questions as, ‘How much physical energy is required for indi-
viduals to accurately report the presence of some stimulus – a light, a sound, an odor,
etc?’ and then, somewhat later, ‘How large a difference, physically, must exist between two
stimuli in order for them to be perceived as different?’ These were important questions,
but they did not address the question of how we interpret such sensory input in order to
construct a complex and sophisticated view of the world. We do not, in general, perceive
the external environment as consisting of discrete stimuli (or packets of energy). Rather,
we perceive it as organized and meaningful, and the process through which we combine
sensory input into such interpretations is generally termed ‘perception’ (e.g. Wolfe et al.,
2008).
Growing recognition that perception involves active cognitive processes was advanced
eloquently by a group of German psychologists known, collectively, as the ‘Gestalt psy-
chologists’. As the word ‘gestalt’, a German word that means a set of items perceived as
a whole, suggests, these psychologists noted that our perceptions of the external world
do not consist of individual sensations, but rather, reflect complex combinations of such
sensory input. Thus, the ‘whole’ – our understanding of the world around us – is indeed
greater than the sum of its sensory parts. The Gestalt psychologists also called attention


to the fact that perceptions are organized – they follow basic principles that, in a sense,
make the task of understanding the environments in which we live, more efficient. This is
certainly not the place to examine all the principles or organization Gestalt psychologists
established, but perhaps it is useful to briefly mention just a few of these principles, which
were carefully confirmed in extensive research: the law of similarity – the more similar
stimuli are, the more likely they are to be grouped together in our perceptions; nearness
– the closer, physically, stimuli are, the more likely they are to be grouped together; and
the law of closure – in our minds, we tend to ‘complete’ incomplete patterns, sometimes
‘seeing’ stimuli that are not objectively present. In other words, we fill in missing parts
in order to create unified, interpretable perceptions. In addition, the Gestalt movement
called attention to the important distinction between figure and ground – distinct shapes
or patterns which stand out against less differentiated background.
The principles established by Gestalt psychologists (especially figure/ground relation-
ships) led logically to another historical development: efforts to understand precisely how
distinct events, objects, or stimuli are cognitively linked together into ‘emergent patterns’.
Several different models of this process of pattern recognition have been suggested, and
as noted below, they are directly relevant to the process of opportunity recognition. The
two models of pattern recognition for which there is currently most evidence will now be
described.
Theories of Pattern Recognition
How, precisely, does pattern recognition occur? Many different models of this process
exist, but all agree on the following basic point: individuals notice various events in the
external world (e.g. changes in technology, markets, and government policies) and then
utilize cognitive frameworks they have acquired through past experience to determine
whether these events are related in any way – whether, in short, they form a discernible
pattern. Different models focus on contrasting kinds of cognitive frameworks, but the
process is much the same in all of them.
Prototype models
One widely accepted model of pattern recognition suggests that individuals employ
‘prototypes’ as a basis for recognizing patterns. Prototypes are idealized representations
of the most typical member of a category (i.e. a class of objects or events that seem to
belong together). Basically, newly encountered events or trends are compared with exist-
ing prototypes to determine whether they belong to specific categories or can be seen as
connected in some manner. For instance, most people possess a prototype for ‘vehicle’.
This mental framework is broad enough so that everything from a huge truck to a bicycle
or even an elevator can be recognized as a vehicle, while other objects that do not match
this prototype well (e.g. stairs or roller skates) are excluded. Prototypes seem to represent
the modal or most frequently experienced combination of attributes associated with an
object or pattern. So, for example, the prototype of ‘vehicle’ would probably include such
attributes as a mechanism for achieving movement, some kind of control gear, some
means of holding or securing passengers, and so on.
Applying prototype models to opportunity recognition, entrepreneurs may use proto-
types as a means for identifying patterns among seemingly unrelated events or trends. For


instance, consider a physician engaged in medical research. Because of extensive on-the-

job experience, this individual has a clearly developed prototype for ‘effective treatment’
of various diseases (e.g. the treatment is safe, it can be used ethically with patients, and
it enhances recovery from the illness). Further, this prototype may be especially clear for
illnesses in which the physician specializes – ones with which she or he has had consider-
able experience. Now, imagine that this physician reads an article about a new advance in
scientific knowledge concerning a basic physiological process – a process that is suspected
to play a role in certain diseases. In addition, the physician knows, from actual experience,
that existing treatments for these diseases have major side effects. Using her prototype of
‘effective treatment’ and perhaps other prototypes as well (e.g. prototypes concerning the
nature of a given disease and how it develops), she now recognizes potential links between
the new scientific advance and potential treatments for a specific illness. In other words,
her prototypes help her to perceive an emergent pattern in these diverse events. She also
realizes that if these perceived links are confirmed, this will suggest ways of developing
new drugs effective in treating this illness. In short, she has noticed this possibility (i.e.
opportunity) because prototypes she possesses have helped her to do so – to notice an
emergent pattern among seemingly diverse and independent events.
Much evidence suggests that individuals do indeed form prototypes and that once they
exist, these cognitive frameworks are employed in many ways. For instance, individu-
als often use them for perceiving patterns in diverse and seemingly unrelated events or
trends. Used in this manner, prototypes may well play an important role in the process of
opportunity recognition.
Exemplar models
A very different model of pattern recognition emphasizes the importance of specific
knowledge rather than idealized prototypes. Such ‘exemplar models’ (Hahn and Chater,
1997) suggest that as individuals encounter new events or stimuli, they compare them
with specific examples (i.e. exemplars) of relevant concepts already stored in memory. For
instance, a physician’s concept of ‘effective treatment’ for a given kind of disease would
not consist solely of an idealized representation of the most typical ‘effective treatment’
she or he can imagine (a prototype); rather, it would also include numerous examples
of ‘effective treatments’ the physician has actually encountered, exemplars that vary
in many respects (e.g. exemplars of excellent treatments with few negative side effects
as well as very poor ones that are not highly effective and that do involve negative side
effects). Exemplar models seem especially relevant to opportunity recognition because
they do not require the construction of prototypes. Rather, individuals simply compare
newly encountered events or stimuli with examples of a given concept already present in
memory.
Overall, research in cognitive science suggests that both prototype and exemplar
models may be necessary to fully understand how individuals notice emergent patterns
in diverse and apparently unrelated events or changes (Nosofsky and Palmieri, 1998),
but further, detailed examination of the evidence pointing to this conclusion is beyond
the scope of the present discussion. Suffice it to say, therefore, that given the powerful
and pervasive role of pattern recognition in many aspects of perception and cognition,
it seems reasonable to suggest that this process plays an important role in opportunity
recognition too (Baron, 2006). Overall, the cognitive frameworks individuals construct


through experience (e.g. prototypes and exemplars) may provide the basis for identifying
emergent patterns, and in at least some instances, these patterns then suggest new busi-
ness opportunities.
Theories of pattern recognition are elegant and offer important insights into a basic
perceptual process. But are they directly applicable to understanding the nature of
opportunity recognition? Several lines of evidence suggest such relevance, and it is to this
information that we turn next.
Evidence that Pattern Recognition Plays a Role in Opportunity Identification
Several lines of evidence suggest that pattern recognition may indeed play a key role
in opportunity recognition. First, it is clear that many opportunities exist for years
before they are noticed and developed. For instance, consider wheeled luggage of the
type that is now used by a large majority of all air travelers. Such luggage was used for
decades by air flight crews before it was introduced into the market for general sale.
Why? Perhaps because no one ‘connected the dots’ between several seemingly unrelated,
but pertinent trends: a large increase in the number of passengers, growing problems
with checked luggage, expansion in the size of airports, and so on. Once these trends
were linked into a unified pattern within the minds of several different entrepreneurs, a
product that would help meet the needs of a large and growing market was suggested.
Once it appeared, it quickly dominated the market for luggage and drove earlier models
to extinction.
Similarly, there is a large body of evidence in cognitive science suggesting that pattern
recognition is a basic aspect of our efforts to understand the world around us. That is,
we do indeed expend considerable effort searching for patterns among various events
or trends in the external world. To the extent that opportunity recognition also involves
perceiving links or connections between seemingly independent events or trends, it may
be closely related to this basic perceptual process.
Third, empirical evidence exists indicating that predictions derived from models of
pattern recognition are accurate and that, therefore, such models offer important insights
into the nature of this process (e.g. Baron, 2006; Baron and Ensley, 2006). This evidence
will be reviewed below, but before describing it, another important issue relating to
opportunity identification will be examined.
Opportunities: Discovered or Created?
Throughout this discussion, it has been assumed that opportunities exist in the external
world and are recognized or discovered by entrepreneurs who have the cognitive equip-
ment (i.e. the experience-based cognitive frameworks) needed to accomplish this task.
Although existing theories differ on the mechanisms that play a role in this process, most
agree that it is one of ‘discovery’ or ‘identification’, and this, of course, is the guiding
principle in efforts to apply theories of pattern recognition to this task. It is important to
note, however, that a sharply contrasting view also exists. Several scholars (e.g. Alvarez
and Barney, 2005; 2007) have proposed that opportunities are not so much discovered as
created. They contend that entrepreneurs, by their actions, actually ‘build the mountains’
– create the opportunities they then exploit. In other words, opportunities do not exist


independent of entrepreneurs (as, for instance, mountains do); rather they emerge as
entrepreneurs begin to act on, and within, their environments.
This perspective certainly has appeal; growing evidence indicates that only rarely do
entrepreneurs discover an opportunity and proceed to develop or exploit it in the ways
they initially plan. Rather, the process is often one that evolves as the nature of the
opportunities in question become clear, and sometimes change radically over time (e.g. as
a result of the actions of competitors or shifts in markets, demographics or technology).
Recognizing this fact, many entrepreneurs report that they truly ‘make it up as they go
along’. Although they begin with relatively clear ideas about what they want to accom-
plish and the kind of products or services they wish to bring to market, they soon change
their goals, business models, and strategies in response to an ever-changing and always
complex environment.
The fact that these changes occur does not, however, offer a compelling case for the
view that opportunities are created rather than discovered. In most instances, entrepre-
neurs do not begin the process until they have some idea of the products or services
they believe to be new and potentially profitable. Certainly, their ideas about the nature
of these new products and services do change, and the new ventures they launch, too,
are often transformed as entrepreneurs adapt to ever-changing circumstances. Still, it
appears that there is at least some initial act of discovery or identification – some kind of
‘connect the dots’ phenomenon – that underlies the entire process.
Overall, it is suggested here that there may not be a strong or rigid line between ‘discov-
ery’ and ‘creation’, where opportunities are concerned. One can argue that even if oppor-
tunities exist in the external world as something to be discovered, they do not really take
form until one or more persons perceive their existence – until entrepreneurs connect or
link seemingly disparate and unrelated events into meaningful patterns that then suggest
new products or services. So, in essence, opportunities are both ‘discovered’ to the extent
that the potential for them is generated by changes in the external environment, and
‘created’, because it is only when these trends and changes coalesce within the minds of
individual entrepreneurs that concrete ideas, worthy of overt action, emerge. Hence, for
the remainder of this discussion, I will assume that opportunities are both discovered and
created, and will move forward from that assumption.
We turn next, therefore, to another important question. Once entrepreneurs conclude
that they have identified an opportunity, how do they then decide whether this opportu-
nity is real – that is, worth pursuing or exploiting?
Pattern Verification: Are the Perceived Patterns Real?
As anyone who has ever failed to notice a stop sign or another vehicle while driving can
attest, perception is a probabilistic process. Although some stimuli in the external world
are so clear or strong that they will be recognized by virtually everyone, many others are
weaker and less distinct, so that recognizing them is far less certain. Moreover, as a result
of underlying biological processes, sensitivity to external stimuli varies over time, so that a
specific individual may perceive a given stimulus at one time, but fail to perceive the same
stimulus at another time. These principles also apply to pattern recognition. Although
some patterns are so clear as to leave little room for error, many others are far more
subtle and difficult to observe. This suggests that in many instances, individuals will be


uncertain as to whether they have, or have not, perceived a pattern constituting a business
opportunity. How do they then decide whether the pattern they have tentatively identified
is indeed real – close enough to their concept of ‘business opportunity’ to warrant further
consideration? In other words, how do they then verify the patterns they think they have
observed? Several cognitive theories are directly relevant to this task.
One such theory, signal detection theory (Swets, 1992), takes careful account of the fact
that whenever individuals attempt to determine whether a stimulus is present or absent,
four possible outcomes exist: (1) the stimulus is actually present and the perceiver recog-
nizes this fact (a ‘hit’ or correct identification); (2) the stimulus is present but the perceiver
fails to recognize it (a ‘miss’); (3) the stimulus is absent and the perceiver concludes, erro-
neously, that it is present (a ‘false alarm’); and (4) the stimulus is absent and the perceiver
correctly concludes that it is absent (a ‘correct negative’ or ‘correct rejection’).
The theory further notes that many factors determine the relative rate at which indi-
viduals experience hits, misses, false alarms, and correct rejections in any given situation.
Some of these relate to the properties of the stimuli themselves (e.g. the stronger the stim-
ulus, in physical terms, the easier it is to be certain that it is present). Additional factors,
in contrast, relate to the current state of the perceiver (e.g. is this person fatigued? highly
or weakly motivated to be alert?).
Still other factors involve the subjective criteria perceivers apply to the task. Consider
the situation faced by an entrepreneur, who believes that she has identified an opportu-
nity for a profitable new venture. The venture is one that she can start in her spare time
and for which little or no capital is needed. As a result, she may set her subjective criterion
for concluding ‘This is a good business opportunity’ quite low: the costs of a false alarm
are minimal (a little wasted time and effort) relative to the potential gains of a hit.
In contrast, consider another entrepreneur who has recognized an opportunity that
cannot be pursued on a part-time basis and for which large amounts of start-up capital
are required. Under these circumstances, the entrepreneur will probably set her criterion
for concluding ‘This is a good opportunity’ somewhat higher. The costs of a false alarm
are potentially very high and potential rewards are reduced by the large proportion of the
business that will be owned by investors. In short, potential costs and benefits of starting
a new venture determine where prospective entrepreneurs will set their criteria for con-
cluding that an opportunity they have perceived is real and therefore worthy of further
consideration.
Signal detection theory also offers additional insights into the nature of this process.
For example, it suggests that individuals may differ greatly with respect to sensitivity –
the ability to distinguish between situations in which the crucial stimulus (i.e. a pattern
suggesting existence of an opportunity) is present and ones in which it is not. What are
the origins of such differences? A cognitive perspective suggests that they may involve the
knowledge structures on which individuals rely in identifying the complex patterns that
constitute opportunities: the accuracy and clarity of their prototypes or the range and
content of their exemplars for the concept ‘business opportunity’. If this is indeed so,
then research designed to compare the prototypes and exemplars of highly experienced
entrepreneurs with those of less experienced ones might well reveal intriguing differ-
ences.
Applied to entrepreneurship, and the process of opportunity recognition, signal detec-
tion theory further suggests that whether entrepreneurs set their subjective criteria for


concluding ‘This is a real opportunity’ relatively low or relatively high may also be influ-
enced by other factors, such as their motives (Baron, 2002). For example, entrepreneurs
who are strongly motivated to minimize risks, and to avoid pursuing false alarms, may
set their subjective criteria relatively high, whereas those who are relatively tolerant of
risk and more concerned about overlooking bona fide opportunities may set their criteria
somewhat lower (see e.g. Busenitz and Barney, 1997; Krueger and Dickson, 1994; Stewart
and Roth, 2001). Similarly, entrepreneurs who are high in certain personal characteristics
(e.g. optimism) may set their subjective criteria low, with the result that they experience
many false alarms. Interestingly, research findings suggest that entrepreneurs are gener-
ally more subject to an optimistic bias than other persons (e.g. Busenitz and Arthurs,
2006); this leads to the prediction that they tend to set their subjective criteria for identi-
fying business opportunities relatively low – unless other factors counter or reverse this
tendency.
Another cognitive theory that has recently received much attention, regulatory focus
theory (Higgins, 1998), calls attention to additional factors that may influence indi-
viduals’ decisions concerning whether they have or have not perceived an opportunity.
In other words, it, too, is relevant to the task of pattern verification. Briefly, this theory
suggests that in regulating their own behavior to achieve desired ends, individuals adopt
either a ‘promotion focus’, in which they focus primarily on attaining positive outcomes,
or a ‘prevention focus’, in which they focus primarily on avoiding negative outcomes
(Higgins, 2006).
When combined with signal detection theory (Baron, 2004), regulatory focus theory
suggests that when individuals adopt a promotion focus (an emphasis on positive out-
comes), they will tend to concentrate on attaining hits (on recognizing a stimulus when it
is present) and on avoiding misses (failing to recognize a stimulus that is in fact present).
In contrast, when they adopt a prevention focus (an emphasis on avoiding negative
outcomes), they will concentrate on avoiding errors; thus, they will be especially careful
to attain correct rejections and to avoid false alarms. In other words, together, signal
detection theory and regulatory focus theory suggest that entrepreneurs who focus on
obtaining positive outcomes will set their subjective criteria for concluding that they have
recognized opportunities relatively low: they will identify many opportunities and avoid
misses, but will also experience many false alarms. In contrast, entrepreneurs who focus
primarily on avoiding negative outcomes will set their subjective criteria relatively high,
thus experiencing few false alarms but a larger number of misses (failing to notice oppor-
tunities that exist). Reliable measures of these two self-regulatory foci exist (e.g. Brockner
et al., 2004), so these predictions can be readily investigated in future research.
How Some Entrepreneurs Become Exceptionally Adept at Recognizing Opportunities:

The Role of Expertise and Expert Performance
It has long been observed that some entrepreneurs are much better at identifying poten-
tially profitable opportunities than others. A pattern recognition perspective suggests
that one source of such differences is straightforward: some entrepreneurs have ‘better’
(i.e. broader, more fully-developed, and more interconnected) cognitive frameworks
than others, and so are more successful at ‘connecting the dots’ – noticing patterns that
suggest new products or services (Baron, 2006). However, a large literature on the nature


of expertise and expert performance points to another possibility as well: perhaps, as a

result of years of experience in searching for, recognizing, and evaluating opportunities,
some entrepreneurs become true experts in this task. This is certainly not the place to
discuss the vast literature on expert performance in detail; however, several key findings
of that research (conducted mainly in the field of cognitive science), suggest that long-
term, effortful processing of information relating to opportunities may provide entrepre-
neurs with major advantages with respect to opportunity recognition.
First, it is important to note that existing literature on expert performance – generally
defined as consistently superior, reproducible performance on tasks that are representa-
tive of a particular domain or activity (e.g. Ericsson, 2006) – indicates that such perform-
ance does not stem from innate talents or sheer amount of time spent in a given domain
of performing a specific activity. On the contrary, in many fields, ranging from sports and
medicine to science and music, most people do not continue to show improved perform-
ance as their time in the domain increases. Rather, most reach a plateau in the ‘ordinary’
range, and only a few individuals surpass this level and demonstrate truly exceptional
performance. Systematic research suggests that a key reason why a few individuals do
attain truly superior performance is that they engage in what is known as ‘deliberate
practice’ – practice that continues on a regular basis for many hours and is highly focused
on attaining specific, task-related goals (e.g. Hodges and Starkes, 1996). Such training
has been found to be a key ingredient in the development of exceptional performance in
many different fields (e.g. Ericsson et al., 1993). Indeed, it appears that even if individuals
do possess exceptionally high levels of talent, deliberate practice is still required to trans-
late this talent into high levels of performance.
Engaging in deliberate practice provides the persons who perform it with several key
benefits. First, they gain increased stores of domain-specific information and enhanced
cognitive frameworks for storing and processing such information. The value of such
information has been well documented in past research in the field of entrepreneurship,
where many studies indicate that the greater an entrepreneur’s knowledge of a given field
or industry, the greater the likelihood that the new ventures he or she launches will be
successful (e.g. Fiet, 1996; Fiet and Patel, 2006). Further, as noted earlier, research find-
ings also indicate that the more fully developed an entrepreneur’s cognitive frameworks
for organizing and processing such information, the greater his or her effectiveness in
identifying potentially profitable business opportunities (Baron and Ensley, 2006).
Second, deliberate practice provides individuals who perform it with enhanced ‘self-
regulatory’ and ‘metacognitive’ mechanisms. Self-regulatory mechanisms are aspects
of cognition that assist individuals in monitoring, regulating, and enhancing their own
performance. These skills are useful in a wide range of contexts.
Third, and perhaps most dramatic, deliberate practice provides individuals with actual
enhancements to basic cognitive processes. For example, persons who engage in focused,
effortful cognitive activity in a given domain may develop improved perceptual skills
in that domain: they can often make finer discriminations than novices, and are gener-
ally superior at recognizing complex patterns than novices (e.g. Baron, 2006; Ericsson,
2004). Further, participation in extensive deliberate practice may also produce changes in
‘working memory’, the memory system that provides temporary storage of information
currently being processed as individuals perform various cognitive tasks (e.g. Ericsson,
2005). Such memory, which is widely viewed as the system underlying consciousness, is


known to have severely limited capacity: it can retain and process only small amounts of
information at any given time. However, a growing body of evidence suggests that as a
result of engaging in deliberate practice, individuals experience significant increases in
the ‘effective capacity’ of their working memory. They do this by forming stronger and
more numerous links between working memory and long-term memory – the memory
system that holds large amounts of information for long periods of time (years or even
decades). As these connections are forged, persons gaining expertise in a given domain
acquire enhanced capacity to retrieve information stored in long-term memory. This
means that they gain enhanced access to large amounts of information relevant to the
tasks they are performing – information that is not present in working memory, but can
readily be ‘imported’ into it from long-term memory. This enhanced access, in turn, can
greatly improve performance by permitting experts in a given domain to use this infor-
mation to guide their current performance and to better anticipate future events. In a
sense, it effectively increases the capacity of working memory beyond what it was prior to
deliberate practice. The end result is the development of what some researchers describe
as ‘long-term working memory’ – working memory that is so intimately linked with long-
term memory, that persons who have developed it possess a greatly expanded capacity
for processing information relevant to the domain in which they are expert (Ericsson and
Kintsch, 1995).
As a concrete example, consider an entrepreneur known to the author who has started
and successfully run many new ventures. When asked how he managed to identify one
highly profitable business opportunity after another, this entrepreneur made the follow-
ing comment: ‘I just know. When I consider an opportunity, I can see hundreds or thou-
sands of others in my mind’s eye . . . And when I see how this idea compares with those,
I know instantly whether it will work . . .’ These words are consistent with the findings of
basic research suggesting that experts in many fields acquire enhanced working memory,
a cognitive capacity that provides them with augmented access to vast stores of informa-
tion acquired through past experience.
Together, the benefits provided by deliberate practice may enhance entrepreneurs’
ability to recognize opportunities, to accomplish this task quickly and efficiently, and to
choose, from among potential opportunities, those that offer the greatest actual economic
potential. Of course, entrepreneurs cannot ordinarily engage in deliberate practice in the
same way that it occurs in many other domains. Given the rapidly changing, time-urgent
environments in which they function, they simply do not have the opportunity to engage
in long periods of uninterrupted, highly focused deliberate practice. Similarly, it can be
argued that even if they have such opportunities, it is unclear what specific tasks or skills
they would practice. Entrepreneurs focus on somewhat different activities and tasks
during different phases of new venture creation. However, as suggested by Baron and
Henry (2010), entrepreneurs may still reap at least some benefits of deliberate practice
merely as a result of focusing intently and persistently on key aspects of the process of
starting and running new ventures. In other words, just as world-class chess champions
spend many hours each day examining the moves and countermoves in previous games,
and so sharpen their own playing skills, entrepreneurs can acquire enhanced skill at
opportunity recognition and other tasks by carefully examining large numbers of cases
involving opportunity identification and related processes. As a result of such activ-
ity, they may acquire well-developed cognitive frameworks, improved self-regulatory


mechanisms, and enhanced access to information stored in long-term memory – and

do so vicariously, without engaging in overt deliberate practice. These enhanced cogni-
tive capacities, in turn, may help them to perform several tasks that play an important
role in shaping new venture performance, including recognizing and evaluating business
opportunities.
In sum, it seems possible that the cognitive processes that contribute to expertise in
many other fields may also be at work in the domain of entrepreneurship, and that those
entrepreneurs who – perhaps because they possess certain characteristics, such as high
levels of self-control, conscientiousness and self-efficacy (Tice et al., 2007) – are able to
engage in deliberate, highly focused processing of opportunity-relevant information, may
acquire enhanced capacity to accomplish this crucial task.
CONCLUDING COMMENTS
Cognitive theories such as the ones described here have greatly enriched current under-
standing of the process of opportunity identification. For this reason, it seems desirable
for the field of entrepreneurship to continue to expand its store of useful conceptual and
theoretical tools by ‘importing’ additional frameworks from cognitive science and other
fields. Needless to say, adapting these frameworks, which are often highly sophisticated
and employ highly developed (and narrow) research methodologies, is far from a simple
task. However, doing so may help the field of entrepreneurship answer important ques-
tions such as these:
1. What, specifically, is alertness? Does it relate to differences in thresholds for ‘notic-

ing’ patterns or specific events or trends? Can it be understood within the context of
signal detection theory?
2. How do entrepreneurs acquire expertise? How do they manage to reap the cognitive
benefits of traditional deliberate practice, even though they cannot engage in such
activity? Is it through vicarious experiences, in which they benefit from the experience
– and errors – of others?
3. What individual-level factors (skills, characteristics, motives, values) play a role in
opportunity recognition? Such factors may be an important reason why entrepre-
neurs differ greatly with respect to their skill in this.
4. Can individuals be trained to be more proficient at opportunity recognition? How?
5. How does the overall quality of opportunities identified by entrepreneurs shape the
later development of their new ventures?
6. What is the role of ‘affect opportunity recognition’? A vast body of evidence indi-
cates that affect and cognition interact continuously and in complex ways. Does
positive affect, for example, enhance entrepreneurs’ capacity to identify potentially
valuable opportunities? Or does it send them down the path of ‘false alarms’?
Further investigations designed to gather evidence on these and many related ques-
tions will assist the field of entrepreneurship in making further progress toward its
central, overarching goal: acquiring full understanding of the complex process through
which entrepreneurs convert their ideas, visions, and dreams into successful operating


companies – and so create wealth not only for themselves, but for their communities and
societies as well.
NOTE
1. This definition focuses primarily on ‘traditional’ entrepreneurship, where entrepreneurs form new ventures
with a profit motive. The growing literature on ‘social entrepreneurship’, however, expands this view to include
creating ‘societal’ along with ‘economic’ value. See, for example, Moss et al., Chapter 14 in this volume.
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7. The historic roots of entrepreneurial
orientation research
Verona P. Edmond and Johan Wiklund
INTRODUCTION
Entrepreneurship is an ever evolving and maturing discipline within the organizational

research family. Although the area of entrepreneurship is still relatively young in terms of
empirical research, significant efforts have been made to develop the empirical grounding
of the entrepreneurship field. One area of research in the field, entrepreneurial orienta-
tion (EO), has perhaps made the most significant empirical advances and has developed
into a well-established construct within entrepreneurship research. EO and its intellectual
roots constitute the focus of this chapter.
Originating from the work of organizational and strategy scholars, EO refers to the
strategy making processes of firms, processes which have been shown to lead to new
entry (Lumpkin and Dess, 1996) and to enhance the performance of firms (Wiklund
and Shepherd, 2005). EO has become a central concept in the domain of entrepreneur-
ship and has received a substantial amount of theoretical and empirical attention (Covin
et al., 2006). More than 100 empirical studies of EO have been conducted, including
a recent meta-analysis of the relationship between EO and performance (Rauch et al.,
2009). Viewed collectively, these studies point to at least three areas of agreement: (1)
EO typically has positive effects on firm performance; (2) the measurement of EO is
typically carried out using a scale developed by Danny Miller in 1983 and later refined
by Covin and Slevin in their 1986 and 1989 works; and (3) the measurement instrument
is technically sound and has predictive, discriminant, and convergent validity. Several
issues, however, are still under examination and debate including antecedents and dimen-
sionality of EO as well as factors that may moderate the EO–performance relationship.
Therefore, given the stage of current research on EO, this is a suitable time for more
closely examining where EO research comes from and where it is heading.
The purpose of this chapter is to provide an overview of the intellectual roots and
development of entrepreneurial orientation. To do this, we identify key thinkers of the
EO construct, highlighting the most influential contributions of each. We endeavor to
highlight the systematic manner in which the research has progressed, showing how
scholars have effectively built on the work of those before them. We also expose the gaps
in the current body of EO literature and propose directions for future study.
This chapter, which is divided into five major sections and an appendix, proceeds as
follows. The first two sections discuss the intellectual beginnings of EO and the subse-
quent conceptual and empirical developments of the construct. The third section on ‘EO
empirical works’ provides information on what we believe are very influential studies in
142

The historic roots of entrepreneurial orientation research 143
EO research, specifically those which have served to stimulate interest in and to push
forward research in this area. The fourth section ‘Debates in EO research’ outlines areas
of contentious discourse in the EO stream of research. The fifth section reports theoreti-
cal and methodological issues associated with EO research and provides suggestions for
future investigation. Finally, the Appendix (Figure 7A.1) is a timeline of the key thinkers
in entrepreneurship orientation research identified and discussed in this chapter.
THE CONCEPTUAL ROOTS
The conceptual roots of EO can be traced to an approximately 20-year period, starting

in the early 1960s with the work of the Aston Group and ending in 1983 with the work
of Danny Miller (see Appendix). This period of time begins with a paradigmatic shift in
how researchers examine organizations and concludes with the development of a meas-
urement scale for studying firm level entrepreneurship.
The Aston Group
The initial intellectual roots of EO research can be traced back to the Aston group of
organization scholars in the UK. During the 1960s they published a series of papers in
Administrative Science Quarterly (ASQ), stemming from a discontent because:
There has been almost no systematic exploration of the causal connection between contextual
factors and certain administrative systems rather than others, or certain group and individual
behaviors rather than others. . . . In our view, the present study of work organization and behav-
ior can no longer be content with a priori postulations or a continuing succession of one-case
studies. (Pugh et al., 1963, p. 291)
More precisely, these scholars set out to examine systematically the structure and func-
tioning of organizations and to relate those variables to other variables of the organiza-
tions, such as behavior, performance, and context – the latter dimension including size,
technology, history and ownership. One important aim of this work was to develop
standardized measurement scales for organizational structure that could be broadly used
across a wide variety of organizations. The other purpose was to use these measurement
scales to generate empirically derived typologies of organizations, which the scholars
did in a number of writings. The work of these scholars, therefore, can be viewed as the
genesis to contemporary empirical research on organizations as they shifted the research
focus from descriptive social science methodologies to more of a natural science focus –
one that calls for the definition, operationalization and empirical testing of variables. The
pervading thought was that this new focus would facilitate comparative and generalizable
studies.
The McGill Group
This approach to the study of organizations was adopted by a research group at McGill
University in Montreal, Canada. In particular, this group further developed the ideas
of organizational typologies as well as refined ways of measuring organizations and


their environments. Important for the context of this chapter, the people at McGill
started taking an interest in entrepreneurial aspects of firms. One early publication
was penned by Henry Mintzberg, a McGill scholar of business policy and organi-
zation studies. Mintzberg, up to the time of the publication of ‘Strategy-making in
three modes’ (1973), had focused his work on managerial and organizational issues,
particularly emphasizing structure, power, and forms of organizations. It was in the
1973 article that he generated a typology consisting of three modes of strategy making,
one of them being the entrepreneurial mode, which was characterized as having four
major characteristics: (1) an active search for new opportunities, (2) power which is
centralized in the hands of the chief executive, (3) dramatic leaps forward in the face
of uncertainty, and (4) growth as the dominant goal (Mintzberg, 1973). Likewise,
Mintzberg’s colleague Pradip N. Khandwalla in ‘Some top management styles, their
context and performance’ (1976) identified seven management styles, capturing the
beliefs and norms about management held by key decision makers. Again, one of these
styles was entrepreneurial management style, characterized among other things by a
high level of risk-taking.
The Contributions of Danny Miller
Danny Miller, a protégé of Henry Mintzberg and also a scholar of business policy and
organization studies, continued the work on business organizations. It was with his
1983 publication of ‘The correlates of entrepreneurship in three types of firms’ that the
research on EO really started. The paper fits well within the McGill tradition of empiri-
cally studying different types of firms, quantifying environment, strategy and structure
to derive a typology. With regard to the current EO research, its main contributions,
however, are somewhat different from those probably intended by the author – predicting
entrepreneurship in different types of firms had not yet become a major concern.
We would argue that the main contributions were, first, that the paper shifts the focus
from the individual to the organization as the actor of entrepreneurship. This is suc-
cinctly captured in the statement that: ‘There has been a strong tendency to identify
entrepreneurship with a dominant organizational personality, generally an independent-
minded owner-manager who makes the strategic decisions for his firm. . . . This paper
shifts the emphasis somewhat, looking at the entrepreneurial activity of the firm’ (Miller,
1983, p. 770, emphasis in original).
The second main contribution was that it clearly defined what characterized the
entrepreneurial firm: ‘An entrepreneurial firm is one that engages in product-market
innovation, undertakes somewhat risky ventures, and is first to come up with “proac-
tive” innovations, beating competitors to the punch’ (Miller, 1983, p. 771, emphasis in
original). Innovativeness refers to ‘a firm’s propensity to engage in and support new
ideas, novelty, experimentation, and creative processes that may result in new products,
services, or processes’ (Lumpkin and Dess, 1996). Risk-taking relates to ‘the degree in
which managers are willing to make large and risky resource commitments’ (Miller and
Friesen, 1978). Proactiveness is defined as ‘taking initiative by anticipating and pursuing
new opportunities and by participating in emerging markets’ (Lumpkin and Dess, 1996).
Notably, this view of entrepreneurship was not rooted in any theory or based on previous
empirical or conceptual work. The definition is instead rather commonsensical. Perhaps


Miller defined entrepreneurship in this way with one eye towards the measurement scales
to which he had access.
The third contribution of Miller’s 1983 paper, which is probably the main one, is that,
based on previous McGill research, it provided a measurement scale for tapping firm-
level entrepreneurship. The origins of this scale can be traced to Khandwalla (1976),
who developed a measurement scale to gauge the relationship between a firm’s perform-
ance, structure, and environmental context. Together with Peter Friesen, Miller built on
Khandwalla’s work to separately examine risk taking and innovation at the firm level
(Miller and Friesen, 1978; 1982). But it was in his 1983 article that Miller added the
dimension of proactiveness and also combined these three dimensions into a unified way
of measuring firm-level entrepreneurship, or EO. To our knowledge, this was the first
time such a measurement scale was developed.
EO FRAMEWORK AND DEVELOPMENTS
Covering a decade, the years between 1986 and 1996 (see Appendix) unveiled critical
developments to the EO measurement scale and the EO conceptual model. This period
birthed the term ‘entrepreneurial orientation’, and also ushered in fresh discussions on
research methodology related to EO.
Covin and Slevin’s Conceptual Model of EO
The work of Miller was extended by Jeffrey Covin and Dennis Slevin (1986; 1989). Slevin,
an organizational behavior scholar, had conducted prior research on organizational
innovation and the role that individuals play in establishing environments conducive for
organizational performance. Covin, at the time a newly minted professor and strategic
management scholar, had an interest in factors that affect firm performance. The two
combined their interests and expertise to further develop, validate, and refine the meas-
urement scale for firm-level entrepreneurship.
In the revised scale, nine items make up this measurement instrument – three items
each for innovativeness, risk-taking and proactiveness. Most EO empirical work to date
has been based on this scale as designed or on some modification of it. Covin and Slevin
also conceptualized and hypothesized how the EO construct was related to performance
(1989) and carried out a number of empirical studies. Consistent with strategic manage-
ment research (and subsequent EO research), they mainly focused on the link between the
construct and performance, as opposed to Miller (1983), who studied its antecedents.
Recognizing the expansion of entrepreneurial thought into the corporate ranks, Covin
and Slevin (1991) proposed a sophisticated conceptual model of firm EO. This model was
developed to identify EO antecedents and consequences as well as the moderating vari-
ables of the EO–performance relationship.
Their EO model (see Figure 7.1) consisted of the following elements: dependent
variable – performance; independent variable – EO; external variables – environmental
technological sophistication dynamism and hostility, and industry life cycle; strategic
variables – firm’s mission strategy, business practices and competitive tactics; and internal
variables – top management values/philosophies, organizational resources/competencies,


Entrepreneurial Firm
posture (orientation) performance

EXTERNAL STRATEGIC INTERNAL
VARIABLES VARIABLES VARIABLES
External environment Mission strategy Top management

• Technological Business practices and values and philosophies
sophistication competitive tactics
• Dynamism Organizational
146
• Hostility resources and
• Industry life competencies
cycle stage
Organizational culture
Organizational
structure

Moderating effect Strong main effect Weaker main effect
Figure 7.1 Covin and Slevin’s conceptual model of EO (1991)
29/9/10 11:45:27
and organizational culture. The external variables, strategic variables and internal vari-
ables were all depicted as factors which could affect the EO–performance relationship.
A benefit of this model, as proposed by the authors, is that it captures more variables
than previous models have. They argued that even though the prior models had a high
degree of face validity (i.e. they appeared to measure the EO–performance relationship),
these relationships tended to be modeled in an oversimplified way. Among other things,
this model provides a framework to guide researchers away from simple direct effects
testing of the EO–performance relationship and toward more comprehensive studies
that would look at moderator effects. The Covin and Slevin (1991) model has been very
influential in the study of EO, which has accelerated since the model’s development. As
discussed in the following sections, scholars began to investigate many of the questions
proposed by Covin and Slevin (1991). Some scholars have explored the moderators of
the EO–performance relationships suggested in the model (e.g. Barrett and Weinstein,
1999; Dimitratos et al., 2004; Marino et al., 2002), whereas others have examined EO’s
dimensionality (Lumpkin and Dess, 1996; Rauch et al., 2009), the cultural validity of the
EO measurement scale (Knight, 1997; Kreiser et al., 2002; Rauch et al., 2009), methodo-
logical approaches (Wiklund, 1999), the potential effects of time on EO (Wiklund, 1999),
and the theoretical grounding of the construct (Wiklund and Shepherd, 2003). It seems
that the era for developing the EO framework was successful because it ushered in a new
period – a period of empirical activity.
Zahra’s Critique
Shaker A. Zahra (1993) presented a critique of the Covin and Slevin (1991) model
of EO. Acknowledging the numerous advantages of the model (e.g. it presented a
clear framework, integrated research findings to date, offered theories regarding the
EO–performance relationship, provided future research questions), Zahra (1993) offered
suggestions to revise and extend the model. These included: (1) to specify the nature of
entrepreneurship (intensity, formality and type of behavior); (2) to include dimensions of
EO other than innovativeness, risk-taking and proactiveness; (3) to account for multiple
levels of analysis (corporate, business strategic unit and functional levels); (4) to distin-
guish between domestic and international ventures; and (5) to eliminate the technological
sophistication variable as it seemed to be redundant with environmental dynamism.
Based on a review of citations for each of these two articles, it appears that the original
model offered by Covin and Slevin (1991) has received substantial scholarly attention
whereas the modifications suggested by Zahra (1993) have received a more modest fol-
lowing. This possibly could be attributed to the fact that the proposed modifications by
Zahra (1993) did not change the logic or the usefulness of the original model, and to the
‘first mover advantage’ held by Covin and Slevin (1991).
Clarifications by Lumpkin and Dess
The work of Tom Lumpkin and Gregory Dess, both strategic management scholars,
extended the discussion on EO in several ways. First, they are credited with coining the
term ‘entrepreneurial orientation.’ Next, they introduced two additional dimensions –
autonomy and competitive aggressiveness – as salient dimensions of EO, challenging


the thought on the three-dimensional depiction as introduced by Danny Miller in 1983.

These scholars argued for increased research examining the moderating effects of certain
factors on the EO–performance relationship and also challenged the dominant uni-
dimensional perspective on the dimensionality of EO.
Lumpkin and Dess’s seminal article ‘Clarifying the entrepreneurial orientation con-
struct and linking it to performance’ (1996) built on Covin and Slevin’s (1991) model and
incorporated some of the suggestions made by Zahra (1993), in particular his notion that
entrepreneurship extended beyond the three dimensions suggested by Miller (1983) and
used by Covin and Slevin. Importantly, the actual term entrepreneurial orientation (EO)
was coined by these authors, who made a clever distinction between entrepreneurship
on the one hand and EO on the other, building on the simple distinction between ‘what’
and ‘how’. Noting the practice of borrowing concepts from strategy and applying them
to firm-level entrepreneurship, the authors indicated that the term ‘entrepreneurship’
in the early strategic management literature signified ‘going into business.’ However, as
the strategic management field matured, a focus on the methods, practices, and decision
making styles of managers surfaced. As such, Lumpkin and Dess (1996) acknowledged
the major entrepreneurial processes and labeled these ‘entrepreneurial orientation’ (EO).
In other words, they connected entrepreneurship with what (as opposed to how), which
they defined as new entry. Although appearing consistent with William Gartner’s (1988)
conceptualization of entrepreneurship as ‘new venture’, the authors argued that their
perspective was broader than that of Gartner. Specifically, they argued that Gartner’s
conceptualization related only to the new creation of organizations, that the concept of
‘new entry’ included the activities of individuals and firms alike, and that the process
did not necessarily include creating a new organization. EO was associated with the how
of this behavior, suggesting that new entry is accomplished through actions that are
autonomous, innovative, risky, proactive and competitively aggressive.
Additions to the Covin and Slevin Model
Lumpkin and Dess (1996) also proposed modifications to the EO concept as presented
by Miller (1983). Specifically, the authors challenged Miller’s (1983) tri-dimensional
depiction of EO by adding two additional dimensions, autonomy and competitive
aggressiveness, and proposing that the EO construct was not uni-, but multi-dimensional.
The additions could be viewed as a response to Zahra’s (1993) suggestion that the ‘. . .
Covin and Slevin model (and research in this area) would benefit from recognizing other
dimensions of firm-level entrepreneurship’ (p. 6). Interestingly, autonomy was specifi-
cally mentioned by Zahra – ‘. . . Burgelman’s [1983, 1991] work has established the need
for differentiating formal (“induced”) and informal (“autonomous”) entrepreneurship
activities. . . . Informal activities reflect the autonomous efforts undertaken by individual
members of an organization’ (Zahra, 1993, p. 6). The addition of the competitive aggres-
siveness dimension was probably a result of empirical analyses, which showed that one
item of the proactiveness dimension of Covin and Slevin’s scale tended to load on its own
factor in factor analysis. This item explicitly captures ‘undoing the competitor’, which
arguably relates more closely to competitive aggressiveness than to proactiveness.
Lumpkin and Dess (1996) defined autonomy as the ‘ability and will to be self-directed
in the pursuit of opportunities’ (p. 140). To support the inclusion of this dimension, the


authors cited the independent spirits of those who historically have sacrificed security in
the pursuit of freedom and creativity and the role of autonomous behavior in the entre-
preneurship literature. Beginning with the work of Mintzberg (1973), the entrepreneurial
strategy-making mode was characterized by the strong, decisive and powerful leader.
This mode, along with the command mode of strategy-making (Hart, 1992) and the com-
mander mode (Bourgeois and Brodwin, 1984) were cited as examples of the autonomous
leadership in small firms in which the leader’s visions and actions drive the activities of
the organization. Likewise, the authors spoke of the individuals in large firms who serve
as resource gatherers, rule benders, and risk-takers in their attempt to drive firm innova-
tion. Lumpkin and Dess (1996) thus viewed autonomy as a defining characteristic of
entrepreneurship – one that was a salient dimension of EO to be included.
Based on previous studies, the authors also proposed the addition of competitive
aggressiveness as a dimension of EO. Competitive aggressiveness is defined as a firm’s
propensity to challenge and outperform its competitors (Lumpkin and Dess, 1996).
The authors argued that this concept’s undeniable presence in the literature – the adop-
tion of unconventional tactics (Cooper et al., 1986), targeting competitors’ weaknesses
(MacMillan and Jones, 1984), adopting a strategy that focuses on value added products
and cost reductions (Woo and Cooper, 1981), and developing scales that measured the
competitiveness and aggressiveness of processes used by managers (Ginsberg, 1985;
Khandwalla, 1976) – supported its inclusion as an EO dimension.
The Contingency Approach
Lumpkin and Dess (1996) also present a set of contingency relationships to explain
how EO enhances performance. This approach follows the earlier suggestions of Covin
and Slevin (1991) which urged scholars to investigate factors that might moderate the
EO–performance relationship. The contingency approach, as outlined by Lumpkin and
Dess (1996), suggests that many (e.g. environmental, managerial, and industrial) factors
influence how the dimensions of EO are configured in order to promote enhanced per-
formance of a firm. These authors identified several contingency variables on which the
EO–performance relationship could depend. These variables fall into two categories
– organizational factors and environmental factors. The organizational factors include
structure, strategy, strategy-making processes, firm resources, culture, and top manage-
ment team characteristics. The environmental factors include environmental and industry
characteristics. These organizational and environmental factors were all outlined in the
earlier work of Covin and Slevin (1991). In addition, it was proposed that scholars take a
closer look at how performance is operationalized in empirical studies and consider using
non-financial, as well as financial, measures of a firm’s performance.
EO as a Multi-dimensional Construct
Lumpkin and Dess (1996) also proposed that EO should be viewed as a multi-dimensional
construct. Opposing the original conceptualization of EO as uni-dimensional (Covin and
Slevin, 1989; Miller, 1983), they suggested that EO’s dimensions could vary independ-
ently of each other; thus, a firm could be entrepreneurial without having high levels
of every EO dimension. It could have high levels of one dimension, but lower levels of


another. They also hypothesized that the level of a certain EO dimension exhibited by
a firm is determined by the type of opportunity being pursued and the environmental
setting of the firm. As such, EO dimensions could have a unique configuration for each
opportunity and/or each setting.
The work of Lumpkin and Dess (1996) has provided fertile ground for debate. In
particular, scholarly discussions on EO dimensionality have created interesting dialogue.
The majority of empirical work relies on EO as defined by the three dimensions of inno-
vativeness, risk-taking and proactiveness, whereas others have adopted the usage of the
additional dimensions of autonomy and competitive aggressiveness. Regarding the issue
of uni-dimensionality and multi-dimensionality, both approaches are still being used in
parallel. Some favor the uni-dimensional approach whereas others have heeded the call
of Lumpkin and Dess and view EO as consisting of separate dimensions. These issues on
dimensionality will be explored in further depth later in this chapter.
The work of Lumpkin and Dess has had considerable impact on the progression of
EO research. In particular, the conceptual and methodological frameworks introduced
by these scholars have spurred many researchers to question the prior trend of viewing
EO as a construct consisting of only three dimensions which co-vary. As such, the field
is currently charged with providing empirical evidence which will either substantiate or
refute these assertions.
EO EMPIRICAL WORKS
It is impossible to give credit to all important contributions in the EO literature, so in

this section we limit ourselves to works that we feel have been influential in moving the
field in new directions. We make no claim that we treat the topic exhaustively or that we
have necessarily included all the most important pieces. We do believe, however, that the
works we mention have played a role in guiding the direction of EO research. Spanning
a six-year period (see Appendix), we begin with the contributions of Knight (1997),
which highlighted cross-cultural issues regarding the measurement of EO. We end our
discussion with the work of Wiklund and Shepherd (2003), which gave a novel theoretical
grounding for EO.
Cross-cultural Scale Validity
Extending the influence of Miller (1983) and Covin and Slevin (1986; 1989) and facilitat-
ing the emerging interest in international business, Gary Knight (1997) recognized the
lack of cross-cultural validity and reliability in scales designed to measure EO. This situ-
ation was attributable to the fact that the widely adopted EO measurement scale (Covin
and Slevin, 1989; Miller, 1983) was developed in North America, and its validity and
reliability had been established only in the English-speaking areas of North America. To
address this international measurement issue, Knight (1997) conducted an assessment
of the cross-cultural validity and reliability of this EO measurement scale using English
and French managers in Quebec, Canada. This assessment confirmed that the scale was
reliable and valid in the French Canadian context, in addition to an English-speaking
population.


Knight also noted that there were some interesting differences between the English-
speaking and the French-speaking respondents related to the confirmatory factor analy-
sis and Cronbach Alpha tests performed to assess the reliability of the scale. For example,
the variable ‘new techniques’ loaded on ‘proactiveness’ on the French questionnaire, but
loaded on both ‘innovativeness’ and ‘proactiveness’ on the English questionnaire. Also,
in the test of internal consistency, the variable ‘R & D leadership’ exhibited a low cor-
relation (.245) on the French questionnaire. These occurrences represented the exception
in Knight’s (1997) study, and did not adversely affect the overall reliability of the scale.
However, the reasons for the noted exceptions were not explored, and we suggest that
they could be attributable to cultural influences on EO. In other words, some nuance in
the translation of the scale from English to French or some connotation inherent in the
English version of the scale could exist that did not translate into the French version.
The findings of this cross-cultural validity of the scale likely spurred increased interna-
tional research on EO (Low et al., 2007; Real et al., 2006) and its measurement in different
contexts (Antoncic and Hisrich, 2001). This is supported by the findings of Rauch et al.
(2009), who noted rapid expansion of EO research, in particular outside North America.
They found that in the 1980s, three studies were published – all from North America.
The 1990s saw fourteen studies, twelve from the USA, one from Europe and one from
Australia. Between the years 2000 and 2006, no less than 34 studies were published.
Twenty-two of these used data from outside the USA, with seven from Asia, eight from
Europe, two from Australia and five utilizing data from more than one continent. The
remaining twelve studies were carried out in the USA. These findings suggest that EO
research is becoming increasingly popular around the globe.
Methodological Issues
Acknowledging prior research, which suggested that national culture could have signifi-
cant influence on a firm’s entrepreneurial orientation, and seeking to facilitate increased
cross-cultural studies of EO, Kreiser et al. (2002) conducted a study on the psychometric
properties of the Covin and Slevin EO scale. Their goal was to test the validity of this
scale in cultural settings located outside North America and to assess the dimensionality
of EO. Based on a sample of firms from Australia, Finland, Mexico, the Netherlands,
Norway and Sweden, findings of this study supported the cross-cultural validity of
the scale. This study, therefore, extended and provided support for the work of Knight
(1997). In addition, this research examined the dimensionality of EO and supported the
Miller/Covin and Slevin concept of a three-dimensional structure consisting of innova-
tiveness, risk-taking and proactiveness. The question of whether the dimensions of EO
could co-vary was also addressed by these scholars. The results of this examination con-
tested the assertions of Covin and Slevin and supported Lumpkin and Dess’s view that
the dimensions of the EO construct could vary independently of each other. This study
also highlighted the fact that even though our knowledge of EO, its character, and its
effects on performance has vastly increased over the last few decades, our understanding
is still very much incomplete.
As a group, these studies point to the need to further investigate the dominant percep-
tion that an entrepreneurial firm has to have high levels of innovativeness, risk-taking and
proactiveness. For example, can firms, such as those classified as imitators, be considered


entrepreneurial even if they have high levels of only one or two of these dimensions?
Continued study is needed to clarify this and other questions related to the dimensional-
ity of EO.
The effects of EO on performance have traditionally been tested in cross-sectional
studies. As such, for years the temporal dimension of this relationship remained
untested. Johan Wiklund (1999) explored the sustainability of the EO–performance
relationship in a two-year longitudinal study of small firms. His results revealed that the
positive effects of EO on performance were not only maintained over the period of the
study, but that the effects increased with time. Importantly, although the study did not
test causality in any strict sense, it had a time lag between measuring EO and perform-
ance outcomes, which was suggestive of causality. In addition, the results suggested that
investments in EO seem to provide long-term benefit, which has important practical
implications.
Theoretical Grounding of the EO Construct
Johan Wiklund and Dean Shepherd (2003) took a novel perspective on EO by building
on the logic of the resource based view (RBV). They argued that competitive advantage
resides in resources that are valuable, rare, inimitable, and organized, suggesting that EO
could reflect the ‘organized’ aspect. This approach also heeds the call of Lumpkin and
Dess (1996) to investigate the contingency effects of a firm’s internal characteristics on
the EO–performance relationship. The findings showed that EO serves as a positive mod-
erating factor between a firm’s knowledge-based resources and performance. Perhaps
more importantly, however, this study took a novel perspective on EO by providing a
solid theoretical grounding for the concept and the construct, placing it firmly within
RBV. This action pointed EO research into a direction that, until that time, had been
rather elusive, because although EO research has enjoyed a fruitful tradition of empiri-
cal investigation, the concept had yet to find a theoretical base. Notably, EO studies
have tended to build on previous conceptual and empirical works, but have not endeav-
ored to explain the ‘why’ of the findings. We believe that this chapter should present an
‘aha’ moment for researchers, one that will motivate them to focus more work on the
theoretical development of EO.
DEBATES IN EO RESEARCH
Certain areas of EO research remain open for clarification despite the significant growth
in this line of inquiry. Two such areas, dimensionality and the relationship of EO to
performance, are discussed in this section.
Dimensionality
A review of past EO research unveils some interesting research debates. One relates
to measurement of EO and more specifically the appropriateness of the original three
dimensions of EO, innovativeness, risk-taking and proactiveness, as proposed by Miller
(1983). As discussed earlier, Lumpkin and Dess (1996) argued for the inclusion of five


dimensions in the EO construct – adding autonomy and competitive aggressiveness to

the original trio of dimensions. Although this conceptualization has been adopted by a
few authors (e.g. Frese et al., 2002) this has not been the common practice of entrepre-
neurship scholars. Critics hold that autonomy may be more of an individual-level char-
acteristic and therefore difficult to create and maintain at a firm level, or that autonomy
is an antecedent of EO rather than a separate dimension. The major criticism against
competitive aggressiveness is that it simply does not relate to entrepreneurship, at least
not in all cultural contexts. Thus, although competitive aggressiveness may be important
to performance, it may fall outside of the entrepreneurship domain.
A review of the literature also shows that other dimensions have been included in
the EO construct. Some of these are: analysis, defensiveness and futurity (Morgan and
Strong, 2003; Venkatraman, 1989); strategic planning activities, customer needs and
wants identification, vision to reality, identification of opportunities (Smart and Conant,
1994); strategic renewal (Zahra, 1996); futurity, risk affinity, analysis, and defensiveness
(Tan and Tan, 2005); and assertiveness (Walter et al., 2006). These and other dimensions
have not received any significant following among researchers.
We believe that the reason why the dimensionality of EO is still debated and remains
unresolved is that the construct was initiated without any solid theoretical ground-
ing. Using logic, examples, and rhetorical skill, it is probably possible to argue for any
number of dimensions of the EO construct. Our review indicates that rather than wor-
rying too much about conceptual issues, EO researchers have been very pragmatic in
their approach to the issue of the number of EO dimensions. They have typically utilized
measurement scales that are available, and that have seemed to work empirically based
on previous research. A three-dimensional version of the instrument consisting of nine
well-established items is, of course, easier to use than a longer five-dimensional version
where not all items have been developed and validated. Such practical issues are probably
a reason why the three-dimensional instrument developed by Covin and Slevin (1986;
1989) still dominates. Given the origin of EO research in the ambitions of the Aston
group to weigh and measure organizations, this approach is true, in a way, to the origins
of the research.
The second debate in the study of EO is about the uni- or multi-dimensionality of EO.
Uni-dimensionality refers to the tendency of all variables in question to co-vary, that is,
when a firm scores high on one variable, it will also score high on the others. Miller (1983)
proposed that the EO construct was uni-dimensional based on the ‘intuitive’ reasoning
that an entrepreneurial firm would exhibit innovativeness, risk-taking and proactiveness.
This position was adopted by Covin and Slevin (1989), who further developed the EO
measurement scale as designed by Miller. In a recent meta-analysis, the uni-dimensional
nature of EO could not be rejected (Rauch et al., 2009).
The uni-dimensionality of EO was challenged by Lumpkin and Dess (1996), who
argued that the dimensions of EO need not co-vary, but that based on a particular
context, each could vary independently of the others. These authors suggested that the
uni-dimensional measure of EO would not fully capture the distinct contribution of each
dimension and suggested a multi-dimensional conceptualization of the construct. This
position has also found some empirical support (e.g. Kreiser et al., 2002).
It appears, however, that researchers have primarily investigated EO as a uni-
dimensional construct (e.g. Becherer and Maurer, 1999; Covin et al., 2006; Lee et al.,


2001; Miller and Toulouse, 1986; Smart and Conant, 1994). Again, we attribute this to
pragmatism because it is analytically easier to deal with a uni-dimensional than a multi-
dimensional construct. It is also clear that in the vast majority of studies, the dimensions
of EO correlate positively to such an extent that combining all items into one variable
does not violate measurement conventions. Interestingly, a recent paper addressing EO
dimensionality showed that this issue is much more complex analytically than previously
assumed (George, 2006). Much more likely remains to be said on this issue. Our pre-
diction, however, is that for practical reasons, scholars will predominantly rely on the
uni-dimensional approach.
EO and Performance
The dominant focus of entrepreneurial orientation research has been on the construct’s
relationship to performance, with most scholars assuming a positive relationship. This
hypothesis has been consistently supported in empirical tests (e.g. Covin and Slevin,
1986; Lumpkin and Dess, 2001; Wiklund, 1999; Zahra and Covin, 1995), suggesting that
EO enhances performance. Building on this consistency of results, empirical work began
to investigate those factors that might moderate the EO–performance relationship.
Although the early research on EO focused largely on the direct effect of this construct
on a firm’s performance, a stream of research has emerged which uses the contingency
approach to studying the EO–performance relationship. The use of this approach, as
promoted by several scholars (e.g. Covin and Slevin, 1991; Lumpkin and Dess, 1996),
has shown that the EO–performance relationship can be affected by other variables. For
example, uncertainty in a firm’s home country was found to have a positive and moderate
effect on the firm’s international EO–performance relationship (Dimitratos et al., 2004).
Other factors have also been found to exercise moderating effects in EO studies, including
a firm’s life cycle stage (Lumpkin and Dess, 2001), national culture (Marino et al., 2002),
network capabilities (Walter et al., 2006), and strategic decision making participativeness,
strategy formation mode, and strategic learning from failure (Covin et al., 2006).
A configurational approach can also produce richer results than those obtained
through bivariate correlations. The significance of using this approach in EO research
was demonstrated by Wiklund and Shepherd (2005). They tested the three-way inter-
action of EO, access to capital, environmental dynamism and its influence on perform-
ance. Comparing the results of main effect, contingency and configurational models, they
found that the configurational model yielded the most informative findings. This study
also suggested that researchers extend this approach to include additional variables for
configurational analysis.
FUTURE CHALLENGES AND DIRECTIONS FOR EO

RESEARCH
On the basis of our documenting EO research to date, some future challenges and oppor-
tunities for research become clear. In the sections below, we identify areas that we believe
hold significant promise for future investigation. We begin with a discussion on the theo-
retical grounding for EO research, followed by a discussion on measurement issues. We


then provide thoughts on the potential relationship between EO and failure as well as
levels of analysis used in EO research. We conclude with a discussion on antecedents and
causal mechanisms of EO.
Theoretical Grounding
Research has developed substantially since the 1960s when the Aston group first started
its attempts to measure organizational characteristics. Likewise, entrepreneurship research
was in its infancy when Miller developed his approach and measurement scale in the early
1980s. As a result, EO research has a very empirically driven origin, and research has
largely remained empirical. Today, however, management and entrepreneurship research
is theory driven to a much larger extent. A major challenge for EO research, therefore, is
to provide the construct and research with a solid theoretical grounding.
This is not the place to make suggestions as to exactly how this should be done. We
do note, however, that strategy research increasingly deals with dynamic issues that are
largely entrepreneurial in nature. Potentially, EO research can find a theoretical habitat
within these dynamic approaches in strategy research. One such approach is to view EO
through the lens of absorptive capacity theory. According to this theory, ‘the ability of
a firm to recognize the value of new, external information, assimilate it, and apply it to
commercial ends is critical to its innovative capabilities’ (Cohen and Levinthal, 1990). If
we remember Covin and Slevin’s conceptual model of EO (Figure 7.1), we could be led
to examine an organization’s absorptive capacity (internal variable) as a moderator in the
EO–performance relationship.
We also believe that it is probably less fruitful to try to develop a unique EO theory
separate from other theories in entrepreneurship or strategy research. An added benefit
of a solid theoretical grounding is that it may be easier for EO scholars to publish their
work in the kind of high quality journals that favor theory-driven research.
Measurement
In terms of empirical issues, despite substantial efforts in the past, a concern remains
with EO measurement; thus, there remains opportunity to improve the EO measurement
scale, particularly in non-US contexts. Although notable advances have been made in this
arena (Knight, 1997; Kreiser et al., 2002), the scale still has not been validated for univer-
sal usage. Additional validation, and even the development of new measurement scales,
would facilitate the growing body of international EO research.
In addition, although the majority of the current research uses the dimensions of
innovativeness, risk-taking and proactiveness in measuring EO, Rauch et al. (2009) noted
that due to the paucity of studies that had been conducted using additional dimensions
of EO, the impact of additional dimensions on performance has not yet been adequately
determined. Thus, this remains a rich area for further inquiry. For example, Brown et
al. (2001) operationalized and validated a firm-level entrepreneurship construct labeled
‘Entrepreneurial Management’ as an alternative to EO. They showed that their six dimen-
sions of this construct were positively associated with each of the EO dimensions, so
some or all of these dimensions could potentially be integrated into the EO construct to
arrive at a more complete measurement scale.


Researchers may also want to consider the suggestions of Zahra (1993) that have not
yet been incorporated into EO research. These ideas include considering non-financial
outcomes (e.g. retention of the best employees or the creation of a positive organizational
environment) in addition to the financial outcomes of entrepreneurial activity.
EO and Failure
The relationship between performance and EO continues to be a fertile area of research.

Although prior studies have firmly established the relationship of EO and perform-
ance in surviving firms, little (if any) of the prior work has examined the role of EO on
firm failure (Rauch et al., 2009). Extant literature implies that firms can be ‘too’ entre-
preneurial, and that this behavior can lead to failure. For example, Rauch et al. (2009)
suggested that a firm’s propensity for risk taking can not only lead to improvements in
performance, but also to higher incidence of failure. Additional research in this area
could help to determine whether, in fact, EO can have opposite effects on performance,
and to determine which characteristics of this construct (such as degree or level of EO
exhibited) facilitates positive or negative outcomes.
Levels of Analysis
Future work could also focus on clarifying the levels of analysis (Davidsson and
Wiklund, 2001) and integrating the findings of EO research into a single framework.
To date, various studies have investigated this phenomenon at the firm, business unit, or
functional level, but a framework is also needed, that facilitates an understanding of how
findings from these studies relate to each other.
Antecedents of EO
Miller started out by examining the antecedents of EO, but most research since then has
looked at the consequences. We feel, however, that there is still plenty of opportunity
for making a contribution to the EO literature by further examining its antecedents. For
example, why do some firms become entrepreneurial, whereas others refrain from doing
so? The variables included in Covin and Slevin’s model of entrepreneurship (1991) might
be investigated as possible antecedents. As such, one might consider examining whether
the degree of technological sophistication, environmental dynamism or hostility, life cycle
stage, certain business practices, or top management values/philosophies act as anteced-
ents to firm entrepreneurial behavior. Although not intended to be exhaustive, this list
provides a good starting point for identifying possible antecedents to EO. Investigators
may obtain the most revealing results by testing the direct effects of possible antecedents
of EO as well as testing configurational relationships between various antecedents, EO,
and performance.
Performance and Causal Mechanisms
Finally, the recommendations for the future listed above clearly point out that the causal
mechanisms underlying the positive performance implications of EO are still not well


understood. There is, however, a general movement in the literature towards explicating
the mechanisms of phenomena. As stated by Davis and Marquis (2005, p. 340): ‘The
most productive theoretical work going forward will be in the cataloging and develop-
ing organizational mechanisms,’ and in-depth case studies are ideal for explicating such
mechanisms. A fruitful research design would likely be to select some cases that score
high on the EO scale and some that score low, and documenting in detail the reasons
for and consequences of these differences in behavior, as well as what kinds of entrepre-
neurial behaviors tend to cluster together. Such research could likely serve to illuminate
(but not provide definite answers to) many of the remaining challenges that we have just
discussed.
Given that the EO research has been so successful at developing measurement scales,
showing relationships with other important variables and building a cumulative body of
research in entrepreneurship, this call for case studies may appear out of date. As we men-
tioned in the beginning of this chapter, however, we should keep in mind that EO research
builds on the work of the Aston group conducted in the early 1960s. These researchers
set out to measure organizations using an approach inspired by the natural sciences. In
the cataloguing and measurement of important aspects of organizations, they built on
extensive field work and case studies. Returning to such methods almost 50 years later
would likely reveal many new and exciting aspects of EO.
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APPENDIX
EO Conceptual Roots EO Framework Development EO Empirical Work

(1-2-3) (4-5-6-7-8) (9-10-11-12)
1 9 11
3 5 7
1960s 1997 2002
1983 1989 1993
Aston Group Knight Kreiser, Marino and
Miller Covin and Slevin Zahra
in UK Weaver
160
2 4 6 12
8
1973 1986 1991 10 2003
1996
Mintzberg Covin and Slevin Covin and Slevin 1999 Wiklund and
Lumpkin and
Wiklund Shepherd
Dess
Figure 7A.1 Timeline: key thinkers in EO research

29/9/10 11:45:27
Section II.2
Opportunity Evaluation



8. On the relevance of decision-making in
entrepreneurial decision-making
Saras D. Sarasvathy and Henrik Berglund
INTRODUCTION: ENTREPRENEURSHIP AS
DECISION-MAKING
The very first Frontiers of Entrepreneurship Research, published in 1981, included an

article on venture capital decision-making. Mostly atheoretical, it just mapped out the
process of decision-making.
Thereafter, Olson defined entrepreneurs as decision makers:
This paper has characterized entrepreneurs as decision makers who identify and capitalize on
opportunities through approaches that emphasize innovation, profitable venture identification,
effectiveness rather than efficiency, and nonprogrammed or ambiguous situations. (Olson,
1986)
The link between decision theory and entrepreneurs was noted as early as 1959,
however, in Administrative Science Quarterly. In a paper entitled ‘Managers and entrepre-
neurs: a useful distinction?’, Heinz Hartmann argued for decision-making as a basic and
useful differentiator between managers and entrepreneurs.
More recently, however, scholars are beginning to include affect and even biologi-
cal and neurological processes in determining entrepreneurial behavior. Yet, when we
examine the actual use of decision-making research in our scholarship, it is clear that
only a thin slice of what is possible has been accomplished, to date. Even more impor-
tantly, hardly any efforts have been made to take results from entrepreneurship back to
scholarship in decision-making – whether to cumulate overlapping findings or to chal-
lenge assumptions and claims.
Accordingly, in this chapter, we hope to highlight both the untapped possibilities
from decision-making to entrepreneurship and the opportunities for dialog back from
entrepreneurship to decision-making. We begin with a brief overview of the history of
decision-making, which turns out to be a tapestry of arguments around the notion of
‘rationality’.
A HISTORY OF DECISION-MAKING: FROM RATIONALITY TO

DEVIATIONS TO PLURAL VIEWS
Most theories used in entrepreneurship research consist as variations of classical models

examining economic rationality. In recent times, the trend has been to look at research
163

from cognitive psychology, with a particular emphasis on deviations from classical

rationality – such as heuristics and biases (Baron, 1998). Formal models of decision-
making under risk (Douglas and Shepherd, 2002) and uncertainty (Fiet et al., 2005) have
also been used.
The history and theory of rationality, however, has a lot more to offer than classical
economic rationality and its deviations. In The Nature of Rationality, philosopher Robert
Nozick (1993) argued for the importance of acknowledging modes of rationality that go
beyond expected utility maximization. In social settings it is, for instance, important to
embrace the symbolic utilities of acts themselves, and more generally it is important to
recognize the rationality of producing novel outcomes and new ideas. Along the same
lines, Jim March (1978) had earlier observed a range of human behaviors that are in open
conflict with the canons of classical rationality: e.g. choices based on inconsistent, vague,
fleeting or ostensibly unimportant preferences. While acknowledging that such behaviors
are often irrational, March, like Nozick, also argued that it is quite possible that in some
situations – especially situations characterized by uncertainty and ambiguity – such
behaviors are highly appropriate and that they represent ‘not necessarily a fault in human
choice to be corrected but often a form of intelligence to be refined by the technology of
choice rather than ignored by it’ (March, 1978, p. 598).
Clearly, both philosophical and organizational understandings of rationality are open
to a much broader spectrum of explanations than those traditionally included in models
of rational decision-making. Moreover, because many interesting entrepreneurial activi-
ties take place in uncertain and ambiguous situations, the field probably has much to gain
from embracing such broadened conceptions of rationality and decision-making.
A Historical Review of Rationality
The sheer volume of work related to rationality and the diversity of fields that build
upon various conceptions of it preclude any attempt at a comprehensive review, short
of a complete encyclopedia. Therefore, we limit ourselves here to a simple chronological
listing of several different types of rationality and then move toward a framework rel-
evant to entrepreneurship research.
Decision-making under certainty

While assuming a certain level of rationality, many classical economists, including Adam
Smith, also speculated about the psychological make-up of the individual agents populat-
ing their theories. However, in the 1930s a group of economists started to build strictly
mathematical models of the economy, based on a few simple axioms including complete
and transitive preferences and rational choice (e.g. Samuelson, 1938). In these models,
environmental constraints and possible outcomes are assumed to be known and stable.
Decision-making is then a matter of calculating the optimal alternative. With some
modifications (discussed next), this is the type of rationality that the bulk of mainstream
economics is based on.
Decision-making under risk and uncertainty

Although nowadays considered fundamental to economic theorizing, risk was not for-
mally incorporated into the discipline until fairly late. In more colloquial terms, risk and


On the relevance of decision-making in entrepreneurial decision-making 165
uncertainty had been part of economic discourse for quite some time (cf. the discussion
of judgmental decision-making under true uncertainty below), but it was only when
precise mathematical models were extended to also include risky choices – i.e. where all
outcomes and their respective probabilities are treated as objectively known – that risk
truly became central to economic theory (von Neumann and Morgenstern, 1944). Even
with risk present, however, choices are still a matter of rationally maximizing expected
utility within a given decision framework. Consequently, although there are choices to
be made, little room for the type of creativity commonly associated with entrepreneur-
ship exists because changes in the decision environment always come from the outside.
In the words of Baumol, ‘until exogenous forces lead to an autonomous change in the
environment . . . the firm is taken to replicate precisely its previous decisions, day after
day, year after year’ (Baumol, 1968 p. 67). Many economists have therefore sought to
explain entrepreneurship by focusing on certain individuals’ extraordinary capabilities
(e.g. Caplan, 1999; Demsetz, 1983) or risk-propensities (e.g. Kihlstrom and Laffont,
1979) when facing a given decision-environment.
In the entrepreneurship field, studies of how entrepreneurs make risky decisions
abound. In line with the economists just cited, the assumption in many of these studies
is that risks can be accurately evaluated and that entrepreneurs tend to either underesti-
mate these risks or overestimate their own ability to avoid or overcome them (Camerer
and Lovallo, 1999; Forbes, 2005; Koellinger et al., 2007). Empirically, however, the issue
of whether entrepreneurs are indeed risk takers is mixed. In two meta-reviews of this
rather vast and robust literature, one found that entrepreneurs were risk averse (with
a small effect size; Miner and Raju, 2004) and the other found the opposite (also with
small effect size; Stewart and Roth, 2001). Other studies have focused on the decision to
enter into self employment, which is modeled as a matter of individuals maximizing their
expected utility given a known decision framework that includes individual ability and
potential incomes, combined with constraints such as attitudes toward risk, independ-
ence and work effort (cf. Douglas and Shepherd, 2000; 2002; Lévesque et al., 2002). When
the expected utility from self employment outweighs that of employment, the rational
individual decides to become an entrepreneur.
When decisions are made under conditions of uncertainty – where outcomes are
known but their probabilities are not – it is impossible to rationally calculate expected
utilities, something which is possible when probability sets are known objectively (i.e.
decision-making under risk) or subjectively (see Bayesian rationality below). This lack of
information makes the definition of rationality problematic because it forces the decision-
maker to rely on more or less arbitrary decision-making strategies such as: choose the
alternative where the worst possible outcome is as good as possible (maximin), or choose
the alternative where the best possible expected utility is as good as possible (maximax)
(Pearman, 1977). Adoption of strategies such as these reflects either a pessimistic or an
optimistic outlook. Thus it appears that accounts of entrepreneurial decision-making
under uncertain conditions – much as decision-making under risk – boil down to
individual risk-propensities or attitudes.
Bayesian rationality
Bayesian, or subjective expected utility, models of decision-making are quite similar to
models of decision-making under risk. Instead of assuming that the probabilities of


outcomes refer to likelihoods in the physical world, however, Bayesian models assume
that such probability sets are subjective, i.e. that they are based on the limited informa-
tion about the world that the agent currently has available (Savage, 1954). Agents are still
assumed to maximize their expected utility, but based on both a subjective utility func-
tion and a subjective probability set. A key feature of Bayesian rationality is that decision
makers update their subjective probability sets with experience (Oaksford and Chater,
2009). As a result, the Bayesian decision maker will gradually make more qualified deci-
sions based on more and more information about the world.
Fiet and colleagues have developed a normative Bayesian model of entrepreneurial
decision-making, in which individuals plan and search systematically for pre-existing
opportunities. This is achieved as individuals restrict their search to a limited domain
of inquiry – in which the subjective probabilities of all alternative outcomes are known
– and within this domain make optimal decisions, e.g. investments in new information
signals (Fiet, 2002; Fiet et al., 2005).
Bounded and procedural rationality

The notion of judgment has also been the focus of attention of a large body of research
in behavioral decision theory that was originally motivated by Herbert Simon’s work
on bounded rationality. Models of bounded rationality embrace much of the classical
model of rational decision-making (Simon, 1955; 1977). Individuals still seek to maxi-
mize their expected utility in a known decision environment, but with some added con-
straints on information processing capacity, problem solving skills, and memory usage.
Because these limitations make the task of maximizing expected utility overwhelming,
the decision-making process is brought into sharper focus as people are forced to rely on
‘satisficing’ decision-making procedures.
Much of the work on entrepreneurial cognition can be seen as explorations of bounded
rationality in the context of entrepreneurial decision-making. Often these studies focus
on how certain cognitive heuristics and biases produce decisions that deviate from the
precepts of classical rationality. Drawing on these insights, entrepreneurship scholars
have found evidence that entrepreneurs are more prone than others to certain biases such
as overconfidence, belief in the law of small numbers and illusion of control (Busenitz
and Barney, 1997; Camerer and Lovallo, 1999; Simon et al., 2000), and less prone
than bankers to certain biases such as status quo bias (Burmeister and Schade, 2007).
Although such biases can clearly be both harmful and beneficial to entrepreneurship,
the goal is often to help entrepreneurs identify their flawed modes of reasoning and help
them behave more in accord with classical rationality (e.g. Baron, 1998).
Other proponents of process rationality downplay outcomes and expected utilities
even more – partly because the uncertainty of future preferences make expected utility
calculations problematic (March, 1978) – and instead highlight salient attributes of the
decision-making process as such. The argument is that outcomes can often be seen as
ancillary end-results of processes that are halted, redirected and driven forward by the
pleasures and pains of the process itself, including wishes to avoid discomfort or embar-
rassment (March, 1978), or ambitions to signal legitimacy or creativity (Nozick, 1993).
In an example from the entrepreneurship field, Honig and Karlsson (2004) found that the
decision to write a business plan could be better explained as the result of coercive and
mimetic forces than as a consequence of rational considerations.


Prospect theory and regret theory

Clearly acknowledging the bounds on human rationality, prospect theory is an empiri-
cally grounded model of decision-making that accounts for a number of empirically iden-
tified violations of the axioms of rational decision-making (i.e. axioms that are common
to decision-making under risk and Bayesian decision-making; Kahneman and Tversky,
1979). Prospect theory divides decision-making procedure into two phases: editing and
evaluation. During the editing phase, the agent analyzes the problem’s ‘prospects’ (i.e. its
outcomes and probabilities) in a way that yields a simpler representation of the problem,
for example by reducing, combining or simplifying prospects. The most important
editing, however, consists in determining a reference point that marks the border between
what is considered a loss or a gain. During the evaluation phase, the agent chooses the
prospect with the highest utility. When doing so, however, people tend to: (1) value
similar sized losses higher than gains, (2) overvalue small probability events and under-
value medium and high probability events, and, (3) most importantly, be risk-averse in
gain situations and risk-prone when facing losses.
A number of authors have suggested prospect theory as a useful framework for under-
standing how entrepreneurs decide to take, what appear to be, extraordinary risks when
developing their companies (Busenitz et al., 2003). Prospect theory has also been used
to explain the decision to become an entrepreneur. Baron thus suggests that: ‘persons
who choose to become entrepreneurs tend to frame many situations in terms of losses;
that is, they focus on the possibilities for economic gains they will forfeit if they ignore
or overlook an opportunity and continue to work for an existing organization’ (Baron,
2004, p. 225).
Similarly, regret theory seeks to improve on the classical model of rationality by
incorporating behavioral evidence. This is done by including the feelings of regret (or
rejoicing) that subjects anticipate, should a better (worse) outcome than the one chosen
materialize. The result is a two dimensional utility function U(X, Y), where X represents
the traditional expected utility and Y denotes the difference in utility between actual out-
comes and best (worst) alternatives (Sugden, 1986). Although regret theory has, to the
best of our knowledge, not been used by entrepreneurship researchers, it is a parsimoni-
ous theory that can explain decision paradoxes such as how the same person can be both
risk-prone and risk-averse (see Markham et al. (2002) for related literature on regretful
thinking). For example, if you consider betting on a particular horse for the next race and
then decide not to, it would be awful to see it win at long odds, making you more likely
to actually bet. In the same way, seeing your house burn down after you have decided not
to insure it would be an occasion for strongly felt regret, making you more likely to buy
insurance.
Judgmental decision-making under true uncertainty

Many economists of entrepreneurship highlight the need to clearly separate the notion
of probabilistic risk from true uncertainty. True uncertainty here refers to situations
where both potential outcomes and their probabilities are unknown, in part because
the situations in question are unique and unrepeatable (Cantillon, 1755, p. 54; Knight,
1921, p. 227; Mises, 1949, p. 110). Consequently, decision-making under uncertainty has
to rely on some form of qualitative judgment or intuition rather than on quantitative
calculations. In his well known discussion on judgmental decision-making under true


uncertainty, Frank Knight did not specify the content of ‘judgment’ but simply assumed
that this capacity existed in humans; that evolution has brought about something in our
relationship with the world that allows us to make sound decisions even in the face of a
radically uncertain future:
The ultimate logic, or psychology, of these deliberations is obscure, a part of the scientifically
unfathomable mystery of life and mind. We must simply fall back upon a ‘capacity’ in the intel-
ligent animal to form more or less correct judgments about things, an intuitive sense of values.
We are so built that what seems to us reasonable is likely to be confirmed by experience, or we
could not live in the world at all. (Knight, 1921, p. 228)
The issue of what constitutes judgment is an intriguing one. As discussed above, behav-
ioral decision theorists have identified a variety of heuristics and biases to which human
beings in general are prone. Proponents of ecological rationality, however, argue that
seeing heuristics as imperfect versions of optimal statistical procedures may tell the wrong
story (Bullock and Todd, 1999; Gigerenzer and Todd, 1999). These authors argue that
human beings have evolved to use fast and frugal heuristics that help them adapt to and
survive in changing environments. Consequently, environmental fit and functionality, not
the internal properties of the problem solving process, provides the key to understanding
human cognition. Also, in certain cases, with some interesting corrective procedures such
as alternative presentations of the same data – frequencies versus point estimates in prob-
ability problems, for example – the so-called ‘biases’ disappear (Gigerenzer et al., 1988).
Like Knight, many recent entrepreneurship researchers continue to simply assume that
there exists such a thing as good judgment and that some people have it and others do
not. Casson (2005, p. 329) makes the case for entrepreneurial judgment as follows:
Judgemental decision-making involves an element of improvisation rather than exclusive reli-

ance on routines. It makes use not only of publicly available information but also of private
information available only to a few. The exercise of judgment involves a synthesis of all this
information, for it is rarely the case that a single item of information is sufficient for taking an
important business decision. Although everyone makes judgmental decisions from time to time,
only the entrepreneur specializes in this activity.
Langlois (2007, p. 1112) uses a definition much closer to Knight:
Judgment is the (largely tacit) ability to make, under conditions of structural uncertainty, deci-
sions that turn out to be reasonable or successful ex post.
By black-boxing the specifics of the entrepreneurial decision-making process, these

authors seek to draw out the implications of true uncertainty for aspects of entrepre-
neurial organization and behavior. One way this is done is to make judgmental decision-
making the basis of a theory of the firm (Langlois, 2007). Because qualitative judgments
about uncertain outcomes cannot be bought and sold on a market – for reasons that also
include moral hazard and the general problem of buying and selling information (Arrow,
1962) – the argument is that entrepreneurs must capitalize their judgments themselves
(Foss et al., 2007; Langlois, 2007). Others relate judgmental decision-making under
true uncertainty to charismatic leadership. Because judgments are highly subjective and
hence difficult to communicate, it is difficult for entrepreneurs to use rational arguments


when persuading employees or partners as to why the formers’ visions of the future are
plausible and worthy of allegiance. Therefore, entrepreneurs must rely on other ways of
ensuring that goals and efforts are aligned. In this context, Witt (1998) speaks of the need
for cognitive leadership and Langlois (1998), drawing on Weber, sees the entrepreneur as
displaying charismatic authority.
Vickers (1965) takes a more normative view and urges humans to develop good judg-
ment almost as an imperative for the future. His focus is thus on the particularities of
important human situations and the impossibility of simply extrapolating from the
past or following so-called ‘general laws’ in making decisions involving complex policy
matters. At the end of his seminal compilation of detailed case studies that illustrate the
particularities that necessitate judgment as opposed to mere rationality, Vickers (1965,
p. 261) concludes:
For if my analysis is remotely right, the future of our society depends on the speed with which it
can learn – learn not primarily new ways of responding, though these are needed, but primarily
new ways of appreciating a situation that is new and new through our own making . . .
A recent stream of research in entrepreneurship has begun looking into the black-box
of entrepreneurial judgment under true uncertainty, codifying an internally consistent
set of heuristics used by expert entrepreneurs called ‘effectual logic’. (See our outline of
effectual rationality below.)
Post-hoc rationality
Most temporally oriented decision-making models assert that actions follow from and
conform to given preferences (e.g. a utility function). People are assumed to start with a
given set of preferences and, based on this, arrive at some form of decision regarding how
to behave in given situations (e.g. maximize expected utility). Models of post-hoc ration-
ality reverse this sequence. Actions are still seen as consistent with preferences, but this
consistency is brought about by individuals acting first and only later, when the outcomes
can be observed, forming preferences (Weick, 1995).
Hill and Levenhagen (1995) argue that successful entrepreneurs must be able to deal
with substantial uncertainty and ambiguity. This is in part accomplished through the
retrospective development of plausible visions of the venture’s future. Besides being criti-
cal as a way to reflexively establish order in the face of uncertainty and ambiguity, vivid
post-hoc rationalizations also enable entrepreneurs to more effectively communicate
broad and abstract concepts.
Creative and phenomenological rationality

In a major assault on the limitations of the notion of rationality, Hans Joas (1996)
painstakingly pointed out that most models of rationality ignore at least three important
aspects of decision-making, namely: ‘corporeality’, the fact that decision makers only
have imperfect control over their bodies; ‘situatedness’, the fact that decision makers are
situated in particular circumstances and those circumstances often are inextricable from
the decision parameters; and ‘sociality’, the fact that decision makers are social beings
who operate within the context of and interact with other human beings in important
ways that make a difference to the way they make decisions.


In effect, Joas’s argument boils down to the conclusion that most familiar models of
rationality are actually special cases where corporeality, situatedness and sociality do not
matter or are deemed not to matter. The moment we become more realistic about these
three ‘assumed away’ aspects of real decision-making, everything changes. In particular,
when we open up the decision space to these three dimensions of reality, the creativity of
all action becomes inescapable and obvious. For the most part, creative action is not the
exception but the norm in the human realm. In particular, the usual utilitarian calculus
of rational decision-making ought to be relegated to those few specialized instances when
we can assume away corporeality, situation and sociality. For most real world decisions
and actions, it is better and more useful to use a Pragmatist philosophical basis than a
Utilitarian one.
Similarly, Spinosa et al. (1997) draw on the phenomenological tradition to argue that
the root source of innovative, or ‘history-making’, entrepreneurship cannot be explained
in terms of abstract rational analyses. Grounded in an ontology that sees individuals as
inseparable from the world, i.e. as ‘being-in-the-world’ (Dreyfus, 1991), such entrepre-
neurship must instead be understood in terms of individuals who sense, hold on to and
engage with anomalies that they perceive in their everyday social and cultural practices.
The results of such ‘disclosive’ activities are inconceivable in advance. Moreover, echoing
March’s admonition to treat future preferences as unknown, such activities are also seen
to fundamentally change the worldview of the entrepreneur. This is elegantly illustrated
with the example of falling in love:
When a man falls in love, he loves a particular woman, but it is not that particular woman he
needed before he fell in love. However, after he is in love, that is after he has found that this
particular relationship is gratifying, the need becomes specific as the need for that particular
woman, and the man has made a creative discovery about himself. He has become the sort of
person that needs that specific relationship and must view himself as having lacked and needed
this relationship all along. In such a creative discovery the world reveals a new order of significa-
tion that is neither simply discovered nor arbitrarily chosen. (Dreyfus, 1979, p. 277)
Both Joas’s exposition of creative rationality and Dreyfus’s phenomenological account

argue for a ‘made’ rather than a ‘found’ worldview. This is very much in line with both
effectual rationality, described below, and the notion of moving from decision-making to
design that we urge at the end of this chapter.
Recent developments directly related to entrepreneurship

More recently, researchers more directly involved in entrepreneurial decision-making
have begun to realize that new conceptions of rationality may be required to describe
what entrepreneurs do in building new ventures and creating innovations in the market-
place. Some noteworthy developments include:
Practical intelligence In the preface to his seminal book on the topic, Sternberg (2000,
p. xi) describes practical intelligence as follows:
Practical intelligence is what most people call common sense. It is the ability to adapt to, shape
and select everyday environments. Intelligence as conventionally defined may be useful in eve-
ryday life, but practical intelligence is indispensable. Without some measure of it, one cannot
survive in a cultural milieu or even in the natural environment. In our work, we have studied


many aspects of practical intelligence, although we have concentrated on one particularly

important aspect of it, tacit knowledge, namely the procedural knowledge one learns in everyday
life that usually is not taught and often is not even verbalized.
Sternberg and colleagues have developed metrics, designed experiments and carried
out fieldwork on the use of practical intelligence in a variety of different domains includ-
ing entrepreneurship. In an article in the Journal of Business Venturing, Sternberg (2004)
explains how practical intelligence may be combined with creative intelligence to generate
and implement valuable new ideas in entrepreneurship:
The most important kind of intelligence for an entrepreneur, or really anyone else, is successful
intelligence, which involves a balance of analytical (IQ-based), creative, and practical intelli-
gence. (Sternberg, 2004, p. 196)
Although research on practical intelligence is at the level of the individual, tacit knowl-
edge in the form of successful routines and capabilities is important in the case of firms,
especially the type of high-technology, high-growth firms that policy makers everywhere
want to foster. Eisenhardt (1989) studied decision-making in high-velocity environments
and has since connected her findings with the literature on dynamic capabilities in the
strategic management literature (Eisenhardt and Martin, 2000).
Ad-hoc rationality Winter (2003) examined the notion of ‘dynamic capabilities’ to

argue that there are more ways for an organization to change than through the use
of dynamic capabilities. Broadly speaking, dynamic capabilities involve the ability
of organizations to change their capabilities in response to changing environments.
As Teece et al. (1997, p. 526) define the term, dynamic capabilities are the capabilities
by which firm managers ‘integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments’ (Teece et al., 1997, p. 516) in
order to achieve sustained competitive advantage.
Winter cites Collis (1994) to observe that one could define an infinite regression of
such capabilities – with normal operational capabilities at the zero-order, dynamic capa-
bilities as first-order capabilities, and the ability to know when to change those being
second-order and so on ad infinitum. In an important sense then, Winter argues, such
higher order capabilities are unlikely to exist, simply because higher order changes in the
environment most probably are highly unpredictable and simply cannot be ‘prepared for’
in any meaningful sense. Instead, Winter (2003, pp. 992–3) proposes the notion of ad-hoc
problem solving:
Whether it is because such an external challenge arrives or because an autonomous decision to

change is made at a high level, organizations often have to cope with problems they are not well
prepared for. They may be pushed into ‘firefighting’ mode, a high-paced, contingent, oppor-
tunistic and perhaps creative search for satisfactory alternative behaviors. It is useful to have a
name for the category of such change behaviors that do not depend on dynamic capabilities –
behaviors that are largely non-repetitive and at least ‘intendedly rational’ and not merely reac-
tive or passive. I propose ‘ad hoc problem solving’. Ad hoc problem solving is not routine; in
particular, not highly patterned and not repetitious. As suggested above, it typically appears as
a response to novel challenges from the environment or other relatively unpredictable events.
Thus, ad hoc problem solving and the exercise of dynamic capabilities are two different ways to
change – or two categories comprising numerous different ways to change.


But then Winter goes on to admit that there may be patterns and learnable heuristics
within ad-hoc problem solving, especially with long practice and experience such as in
the case of jazz musicians:
Of course, close study of a series of ‘fires’ may well reveal that there is pattern even in ‘firefight-
ing.’ Some of the pattern may be learned and contribute positively to effectiveness, and in that
sense be akin to a skill or routine. (Winter, 2003, p. 993)
At least one such discernible pattern of internally consistent heuristics is what con-
stitutes effectual logic, the decision–action framework by which expert entrepreneurs
transform extant realities into new ventures and new markets.
Effectual rationality Through a series of studies that compared expert entrepreneurs

with novices and expert corporate executives, elements of effectual rationality have been
identified and related to new market creation (Sarasvathy and Dew, 2005), marketing
(Read et al., 2009), private equity investing (Wiltbank et al., 2009), as well as Austrian
(Sarasvathy and Dew, 2010) and behavioral (Dew et al., 2008) and evolutionary
economics (Sarasvathy et al., 2010a). Effectual logic is means-driven, driven by
affordable loss rather than expected return as the criterion for investment, and focused
on co-creating new ventures and markets through stakeholder self-selection processes
aimed at both shaping the environment and making the future rather than predicting
and adapting to them. Effectual logic is pragmatist at its core and takes a creative rather
than a search-and-select stance toward decision-making. It is also action-oriented and
explicitly incorporates ad-hoc or serendipitous problem solving by leveraging rather
than avoiding unexpected contingencies.
Several of these recent developments in decision-making approaches listed above have
not yet been fully developed in entrepreneurship research. We believe that the work to
date has barely scratched the surface of what is possible, simply because entrepreneurship
is a particularly rich domain for a pluralistic view of rationality and also a rather unique
domain that encompasses a multi-dimensional decision space – a Galapagos island of
human problem solving, as it were. In the next section, we provide an outline of the space
through practical examples attached to key theoretical concepts, some of which have not
yet been introduced to entrepreneurship research or even to the scholarship in decision-
making in general.
THE PROBLEM SPACE FOR DECISION-MAKING IN

ENTREPRENEURSHIP: FROM UNCERTAINTY TO OPENNESS
An interesting trend that emerges through a historical analysis of conceptions of ration-

ality is the increasing entanglement of the decision maker with other decision makers
as well as with the environment in which decisions occur and decision makers operate.
Indeed, it is this entanglement that is of particular interest to entrepreneurship research.
In order to understand the role of decision-making in entrepreneurship research, per
se, it is good to begin with Knight’s typology of risk and uncertainty. This typology clas-
sifies temporal uncertainties exogenous to the decision maker’s actions and unhooked
from issues of interaction – between decision makers, between decision makers and their


Table 8.1 Elements of the entrepreneurial decision space and relevant tools to tackle
them
Element of decision space Relevant rationality/ Key scholarly work

tools
Uncertainty Risk: known Classical rationality Arrow (1962), von
distribution, unknown Neumann and
draw Morgenstern (1944)
Uncertainty: unknown Bayesian rationality Oaksford and Chater
distribution, unknown (2009)
draw
True uncertainty/ Judgment Vickers (1965), Boettke
ignorance: unknowable Ad-hoc rationality (2002), Winter (2003),
distribution Effectual logic Sarasvathy (2008)
Openness Ambiguity: preferences Behavioral decision Simon (1977), March
and goals unknown theory (1978), Kahneman
and/or conflicting Ecological rationality and Tversky (1979),
Creative rationality Gigerenzer and Todd
(1999), Joas (1996)
Isotropy: what counts Relevance logic Fodor (1983)
as data is unknown
Causality: distribution Causal surgery Pearl (2000)
depends on human diagrams
action
environments and of course, between and within the same decision maker’s preferences,
tastes and values. If we bring these exogenous issues into the decision-making process,
we begin to work with a space that is more characteristic of entrepreneurial decisions.
In other words, entrepreneurship highlights problems not only of uncertainty, but also
of ambiguity, isotropy and causality – all indicative of openness or too much informa-
tion rather than too little as in the case of Knight’s typology. Briefly, ambiguity refers to
unpredictable changes and conflicts in entrepreneurs’ own preferences and goals; isotropy
refers to the problem of knowing what information is relevant to the decision under
consideration and what needs to be ignored as irrelevant; and causality refers to possible
changes in the environment caused by human action. See Table 8.1 for a summary of
these and how each relates (approximately) to different types of rationality discussed in
the previous section as well as certain new tools emerging in literatures both within and
outside of entrepreneurship.
In the rest of this section we elaborate on each of these using practical examples. The
point here is not to suggest solutions to these problems but to clarify the decision space
so we can get a feel for new possibilities for research at the interface of decision-making
and entrepreneurship.
In the previous section, we have already examined issues connected with uncertainty.
It might be useful, however, to exemplify them in at least one particular context of entre-
preneurship, namely, new venture creation. The canonical example of entrepreneurial


opportunity in the neo-classical mold is arbitrage – or the $500 bill left on the sidewalk. In
this world of perfect information, all that the entrepreneur has to do is pick up the $500.
When we move from this skeletal example to a more realistic one, we can see the role of
risk (namely, known distribution, unknown draw) in the case of franchise opportunities.
When an entrepreneur seeks to open a new McDonald’s franchise, for example, he or
she faces risk that is mostly calculable and predictable. Yet, unlike the arbitrage example,
the skills, experience and other resources of the entrepreneur do matter in terms of the
eventual shape and performance of the particular franchise any given entrepreneur ends
up developing.
We can contrast that type of risk with uncertainty, which requires a certain amount of
trial and error with systematic updating of beliefs through experimental learning. Take
the case of Ecotricity:
Committed to a low-impact lifestyle, Vince began his journey into business by building small-
scale windmills to serve his personal energy needs and limit his dependency on commercial
power. One of the most complex pieces of the puzzle was finding out how to assess environ-
ments in order to identify a location providing the kind of consistent wind needed to drive
turbines. Not finding adequate solutions on the market, Vince started crafting wind-monitoring
towers in 1991 and in 1992 he founded Western Windpower. Western attracted large orders
from clients such as Scottish Power, and is now Nexgen Wind, the UK’s market leader in wind
monitoring equipment.
. . . Armed with more knowledge of wind measurement and power generation, Vince gained per-
mission to establish a wind farm in the UK in 1992. Just three years later, he founded Ecotricity
(originally the Renewable Energy Company), offering the radical alternative of ‘green’ electricity
to both household and business customers. The firm operates 12 wind farms today, representing
10 per cent of England’s wind energy, 46GWh/year of renewable electricity (at the end of 2007),
and a saving of around 46 000 tonnes of CO2 emissions a year as compared with the same
amount of ‘brown’ energy. (Read and Sarasvathy, 2008, p. 16)
Contrast this with the development of something like the commercialization of the
Internet, where at any given point in time, it was never clear what would be the next
application that would show up and work well – or not. Similar uncertainties and con-
sequently a plethora of possible, but highly uncertain, opportunities abound in the case
of iPhone, Facebook and Twitter applications. Here it is not only a matter of experimen-
tation of what might work that contributes to the uncertainty, but the thrill of a whole
new industry-changing application that might develop overnight that adds to the overall
volatility. In fact, in a profound philosophical sense, one could argue that Knightian true
uncertainty characterizes the problem space for all entrepreneurship, especially at the ear-
liest stages of firm founding – simply because a potential infinity of factors may impact
decisions such as whether to start a venture at all, which venture to start, which ventures
not to start and whether and with whom to co-found, and so on and on.
As mentioned above, however, the frayed edges of the decision space for entrepreneur-
ship does not stop at Knightian uncertainty. There is the added issue of openness, start-
ing with the preferences of the entrepreneur himself or herself. Here the case of Kaarma
is illustrative:
What do you do when you wake up in a lather one day in San Francisco and realise you actually
want to be living on a sparsely populated Estonian island in the middle of the Baltic Sea? You
make sure that you will be able to support yourself by starting a company there, of course. That


is what Stephen and Ea Greenwood did when they moved to the island of Saaremaa in 2004.
But then come the details – what kind of company, where to start, and how to make it work?
(Read and Wiltbank, 2009)
Sometimes, even if the entrepreneur clearly knows what he or she wants to accomplish
and several parameters of the potential market are known, the decision space for particular
implementations might remain open-ended due to a number of equally attractive options or
alternatives that contradict each other in ways that make it impossible to choose using tradi-
tional decision criteria. Starbucks is a famous case in point. In the early days when Howard
Schultz was still trying to perfect the coffee shop of his dreams through Il Giornale, he was
flooded with input from customers on the ambiance of the place – be it the color on the walls
and furniture, the background music, menu format, or the notion of the barista. Schultz’s
problem is not unique in this regard. Every entrepreneur faces a plethora of implementa-
tion decisions – such as name, logo, whether or not to create a Twitter account, office space,
whether, when, how and how many meetings, and so on – several of which might turn out to
be more or less important in hindsight. Add to this list, conflicting advice from well-wishers
and mentors, exciting ideas from almost everyone the entrepreneur talks to, and information
pouring from every communication medium encountered during each day – and very soon
the environment gets so isotropic that the entrepreneur sometimes simply gives up.
Isotropy refers to the inability to clearly distinguish ex ante what information may
or may not turn out to be relevant ex post. The word isotropy is made up from Greek
iso (equal) and tropos (direction) and literally signifies uniformity in all directions. The
conceptual notion of isotropy has been identified by philosophers and roboticists under
different rubrics such as the frame problem and the relevance problem. Fodor (1983)
studied it in some depth in the context of scientific discovery, for example, and used it in
constructing a taxonomy of cognitive systems. For our purposes, it is important to note
only that the problem of isotropy exists regardless of the truth (or probability of truth)
of the facts, i.e. regardless of actors’ ability to predict. In fact isotropy is not limited to
the unknown aspects of a given problem, but arises from what is known and the relative
relevance of different aspects of the known. Thus isotropy is different from Knightian
uncertainty where the problem is one of classification and prediction; it is also different
from Bayesian updating where the issue concerns how one interprets additional data; in
isotropy the problem is one of what counts as data in the first place – before it can be
classified or used to update one’s expectations.
The final aspect of openness in the entrepreneurial decision space that we need to come
to grips with consists in the fact that not only do entrepreneurs actively change, trans-
form and reshape the environments in which they operate, the more experienced ones
actively believe that the environment is not exogenous to their actions. This means that
even ex ante the choice set they perceive as available is different from the choice set others
might see if they believed the environment to be mostly exogenous. An actual classroom
example might help us see the intuition here. Conventional wisdom takes the position that
the future comes from the past. Entrepreneurs invert this paradigm to argue that the past
is a reliable predictor of the future only to the extent the entrepreneur is not taken into
account. Eminent probability theorists have also begun taking human agency seriously in
studies of causality. Pearl (2000), for example, has invented a ‘do’ operator in a new kind
of probability calculus where human agency is modeled through causal diagrams.


It is tempting to argue that every company that exists would have come into existence
in one form or another – and hence the role of any particular entrepreneur is irrelevant
to our understanding of the phenomenon. This Panglossian attitude does not help the
entrepreneur in the trenches who is striving to make good decisions nor is it of any use
to the development of normative approaches to point out better and worse ways to make
those decisions. Moreover, Panglossian explanations fail to address the issue of time lags
in the development of key ventures such as those that helped commercialize the Internet.
Take, for example, a successful restaurant called ‘Unsicht’ in Germany. It is a restaurant
where dinner is served in pitch darkness by blind waiters. It is interesting to ask whether
the market for such a restaurant arose exogenously and an alert entrepreneur responded
to the demand, or whether demand for such a restaurant was created through the fact
of an entrepreneur creating the concept. If the latter, in what way can we argue that
such a restaurant would have come to be, one way or another? And if so, why did it not
happen sooner than the twenty-first century? Would it not have been more likely in an
age without electricity or in a place without electricity today? Counterfactuals aside, one
can find hundreds of examples of ventures that created their own markets and came to be
simply because someone decided to make it happen. Faddoctor.com provides a long and
lively list of ventures that created fads ranging from Rubik’s cube to the wackywallwalker
rubber octopus.
In sum, when we move from the history of decision-making theories to the reality of
practical entrepreneuring, it is clear that an almost unlimited scope exists for profitable
research in the future. An enumeration of these possibilities would be too far outside the
scope of this chapter. Instead we point out just two jumping off points – one involving
the future of a key issue in current entrepreneurship research (namely the individual–
opportunity nexus), and the other having to do with the very role of decision-making in
future entrepreneurship research.
IMPLICATIONS FOR THE INDIVIDUAL–OPPORTUNITY

NEXUS: QUESTIONING THE QUESTION
Few would dispute that both (a) modes of decision-making rationality and (b) aspects
of decision environments are necessary to fully understand entrepreneurial decision-
making. Indeed, the widespread idea that entrepreneurship, generally, comprises a
‘nexus of individuals and opportunities’ (Venkataraman, 1997; Shane, 2003) is based
on this very premise. The nexus view constitutes a considerable improvement over older,
individual-centered, theories of entrepreneurship. Nevertheless, the preceding reviews
make clear some of its limitations by showing how it fails to incorporate two very impor-
tant aspects of entrepreneurship.
First, it focuses exclusively on the ‘lower’ levels of decision-maker rationality and deci-
sion environments, i.e. those where individuals make decisions by performing rational (or
biased) calculations or somehow forming intuitive judgments regarding the state of an
independent (albeit sometimes poorly known) decision environment. Focus is squarely on
individuals who discover (or believe that they discover) objectively existing opportunities
and act to exploit these (Shane and Venkataraman, 2000). The ‘higher’ level modes of
rationality and decision environment discussed above do not enter into the nexus theory.


In response to such charges, it is sometimes pointed out that these lower-level nexuses
(e.g. rational choice or alert discovery of existing opportunities) describe the majority of
start-ups, which are neither innovative nor growth-oriented (Shane, 2008, p. 64) but quite
mundane (Aldrich, 2009, p. 30). However, as Per Davidsson has repeatedly pointed out,
entrepreneurship theories should not be built by democratic vote: ‘it is not a given that
every empirical case should be deemed equally important for our theory building and
theory testing’ (Davidsson, 2004, p. 68, cf. Davidsson, 2005, p. 46; 2008, p. 137). Quite to
the contrary, because neither the impact nor the workings of all ‘entrepreneurial’ activi-
ties are equal, it is critical to pay special attention to the theoretically more interesting
modes of entrepreneurship. Thus, while the nexus theory may be representative in some
quantitative sense, it fails to describe what are arguably the most important and theoreti-
cally interesting forms of entrepreneurship.
This leads to the second, and related, limitation of the nexus view. It assumes that
individuals and opportunities exist independently of each other; an assumption that
implies that they can also be treated in isolation. For instance, it is assumed that the
characteristics of individuals and opportunities can be gauged separately and thereafter
‘added up’ to establish their total impact as causes of entrepreneurial behavior. Shane et
al. (2003, p. 269) thus write that: ‘Researchers need to know the magnitude of the force
exerted by the opportunities themselves to accurately estimate the effect of the individual
motivations.’ However, as we move up the two taxonomies and embrace more and more
innovative modes of entrepreneurship, we see that it becomes more and more difficult
to keep decision maker and decision environment analytically, indeed ontologically,
separate.
In sum, the nexus idea constitutes an improvement over individual-centered theories by
regarding entrepreneurship as comprising both individuals and opportunities. However,
as shown by Joas (1996) and Spinosa et al. (1997), in order to grasp the nature of truly
creative modes of entrepreneurship, the relation between individual and opportunity
(or agent and structure, if you will) can probably no longer be thought of as a detached
dualism but needs to be treated as an integrated duality where the development of each is
inseparable from the development of the other (cf. Giddens, 1984). This brings us to the
most important issue for research into entrepreneurial decision-making: how relevant is
the notion of ‘decision-making’ per se?
CONCLUSION: FROM DECISION TO DESIGN
Perhaps it is time we moved from modeling entrepreneurial activity as ‘decisions’ occur-

ring within the individual-opportunity nexus to expanding the domain of our questions
to include the ‘design’ of opportunities. In this view, opportunities are not exogenous to
the entrepreneurial process, but can also be its outcome or residual. Opportunities, as
well as ventures and markets and even institutions, may at times be initiated and pro-
pelled by individual and collective action while simultaneously being structured by those
constraining elements of the decision space that are harder to transform or at least are
deemed stable during the design process.
Decision theories mostly ignore design. In modeling the choice between A and B, they
take A and B as outside the scope of decision analysis. In contrast, design is interested in


how A and B come to be in the first place. A brief examination of the etymology of the
two words might be useful here:
c. 1380, from O.Fr. decider, from L. decidere ‘to decide’, lit. ‘to cut off ’, from de- ‘off ’ +
cædere ‘to cut’
c. 1548, from L. designare ‘mark out, devise’, from de- ‘out’ + signare ‘to mark’, from
signum ‘a mark, sign’.1
The quintessential symbol of decision is the decision tree with forking branches and
nodes at which reality is cut into paths taken and paths forgone. The potter’s wheel serves
as the symbol for design, evoking images of clay being molded into an infinite variety of
shapes and sizes. Both are part of the entrepreneurial process. But focusing exclusively
on one without the other cuts us off from coming to grips with the phenomenon in more
useful ways.
Of course, some models of the decision-making process, such as the one illustrated in
Mintzberg et al. (1976), do incorporate design as a key element. Design, however, in the
sense in which Herbert Simon (1996) used it in The Sciences of the Artificial, is a domain
worthy of study in itself. Entrepreneurship, in our opinion, ought to be as much, if not
more, a phenomenon of design as of decision. Moreover, the study of design is bound
to have much to offer the study of decisions. For example, consider the well-studied
decision between working for a wage versus starting a venture. If looked at as a decision
problem, the choice is modeled as an either-or – evoking the etymology of ‘cutting’ the
world into two separate pathways. If looked at as a design problem, it is possible to think
through a combination (continuing to work while building the venture on the weekends
or through a spouse) or a third or fourth path such as getting one’s company to fund a
spin off or taking a sabbatical and so on. Although decisions often force a choice between
alternatives, design includes the creation of new alternatives, and the latter is particularly
important not only for scholarship, but for the practice, pedagogy and policy of entre-
preneurship.
Scholars in entrepreneurship have begun to take notice of this importance. Take for
example recent work arguing for a more ‘creative’ view of opportunities (Alvarez and
Barney, 2007; Berglund, 2007; Sarasvathy et al., 2003) in addition to calls for the study of
the creation of new networks (Aldrich and Kim, 2007) and new institutions (Battilana,
2009). In a series of five essays under the rubric, ‘Made as well as found’, Sarasvathy et
al. (2010b) have outlined several key ideas from disciplines such as economics, sociology,
psychology and philosophy that can be used to begin the study of entrepreneurship as a
science of the artificial. The essays suggest methods and theoretical lenses for studying
individual entrepreneurs and their stakeholders as makers of opportunities, ventures,
markets and institutions as well as seekers of the same. They also urge ways to focus on
fabrication processes in addition to discovery processes and examine the outcomes of
entrepreneurship as artifacts and not only as unexplored landscapes mapped out through
the pursuit of pre-existing opportunities. In all of these, and in new methods and tools
that we can bring to bear on these, the key unit of analysis is interaction – interaction
between entrepreneurs and their stakeholders, entrepreneurs and their external environ-
ment, and between entrepreneurs’ own preferences, tastes and values.


Armed with a view of entrepreneurship as a domain of design, we believe that in the

near future when our students come asking us about the fork in the road ahead in their
lives, we can, like Yogi Berra, advise them to take it.
NOTE
1. http://www.etymouline.com, accessed 1 June 2009.
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Section II.3
Opportunity Exploitation



9. Only the good die young? A review of
liability of newness and related new venture
mortality research
Brian Nagy and Franz Lohrke
INTRODUCTION
New ventures often face discouraging odds in terms of their potential long-term survival.
For example, both organizational studies and entrepreneurship textbooks frequently cite
new venture failure statistics that suggest over half of all new ventures will fail within
their first four years of existence. Although these high rates may result, in part, from
how ‘failure’ is defined (e.g. selling a successful new venture would be classified as having
‘failed’ in some governmental surveys, see Headd, 2003), organizational researchers have
frequently suggested these high mortality rates occur because most new ventures face a
‘liability of newness’. This liability results from a new venture’s lack of an established
track record, which, in turn, makes it difficult for its managers to convince potential
resource providers (e.g. investors, suppliers, and customers) to conduct business with the
firm (Singh et al., 1986). Without these resources (e.g. capital, raw materials, and continu-
ing sales), however, a new venture often faces dim survival chances. In addition, a new
venture can initially lack internal efficiencies (e.g. established organizational routines),
which can also create significant operational (e.g. cost) disadvantages relative to its more
established competitors (Stinchcombe, 1965).
Given these high mortality rates among new ventures, numerous organizational studies
have examined liability of newness (LoN) issues. Stinchcombe (1965) introduced the
construct, and researchers have since examined it in several conceptual (e.g. Shepherd
et al., 2000) and empirical (e.g. Singh et al., 1986) studies. Many of these works have
framed LoN as a legitimacy issue; that is, managers need to obtain favorable judgments
of acceptance, appropriateness, and worthiness for both themselves and the ventures they
lead (Zimmerman and Zeitz, 2002). In short, the granting of legitimacy by organizational
stakeholders serves as a precursor to subsequent investments and economic transactions,
and, therefore, serves to mitigate LoN threats (Shepherd et al., 2000). Along with legiti-
macy, studies have also suggested and tested other related theoretically linked conditions
such as lack of perceived reputation, reliability, accountability, and trustworthiness as
contributors to the malevolent condition of newness (e.g. Choi and Shepherd, 2005;
Delmar and Shane, 2004).
Despite this established body of research, consensus on both how to define the LoN
construct and its overall impact on new ventures is far from universal. For example, along
with investigating LoN in new ventures, researchers have employed it at different levels
185

of analysis including industry (Aldrich and Fiol, 1994), and organizational type or ‘form’
(e.g. Hannan and Freeman, 1977) as well as to investigate different organizational types
including those undergoing significant strategic change (e.g. Amburgey et al.,1993) or
entering overseas markets (Zaheer, 1995).
On the other hand, other scholars have suggested that new ventures may actually enjoy
a ‘honeymoon’ period, including initial acceptance by key stakeholders, which eventually
diminishes, resulting in a ‘liability of adolescence’ rather than ‘newness’ (Brüderl and
Schüssler, 1990). In a related vein, Choi and Shepherd (2005) recently introduced the con-
struct ‘assets of newness’, suggesting that ventures, in some circumstances, can actually
gain advantages based on their ‘newness’ that may at least partially counteract liabilities
associated with a firm’s newness. Other recent theoretical work has examined benefits
related to newness in specific industries that thrive on innovation and dominant design
changes (e.g. Carayannopoulos, 2009). Consequently, despite the oft cited daunting odds
of new venture survival noted above, the extent to which new ventures face LoN and what
boundary conditions exist between LoN and other related constructs, such as liability of
adolescence (LoA) and assets of newness (AoN), remain somewhat ambiguous.
Accordingly, in this chapter, we endeavor to sort through these disparate new venture
concepts. We begin our discussion by reviewing both theoretical developments and extant
empirical efforts examining LoN. Specifically, we discuss, in detail, the conditions and
dimensions associated with the construct, focusing on the likely impacts these conditions
and dimensions have on new venture success or failure. As expected, most conditions
tied to newness seem to have malevolent effects on start-up viability. We also discuss
the original and seminal theoretical writings of Stinchcombe (1965) and then employ
the theoretical lenses of institutional theory, strategic theory, and stakeholder theory to
both categorize and summarize extant empirical works related to LoN. In doing so, we
review several empirical works that examine dimensions of this multi-faceted construct,
focusing primarily on issues related to new venture legitimacy. Next, we review studies
examining LoA and AoN. Finally, we highlight two other theoretical perspectives, the
resource-based view of the firm and trust, that may provide fruitful avenues for future
LoN studies to help better circumscribe the boundaries of the LoN, LoA, and AoN, and,
thus, provide important avenues for future new venture research.
THE EVOLUTION OF THE LIABILITY OF NEWNESS

CONSTRUCT
A critical topic of many theoretical and empirical efforts in the organization research has
been the disparity in mortality rates between newer, start-up firms and older, more estab-
lished firms (Hannan and Carroll, 1995; Hannan and Freeman, 1989). Entrepreneurship
researchers have long noted the significant differences in survival probabilities between
established and new firms and have investigated several issues associated with new ven-
tures’ high failure rates (Delmar and Shane, 2004; Shepherd et al., 2000; Thornhill and
Amit, 2003).
Organizational researchers have often assumed an inverse relationship exists between
firm age and firm failure (although, as we have already noted, this view is not universal).
According to this view, the greater the age of an organization, the less likely it is to fail,


A review of liability of newness 187
ceteris paribus (Carroll, 1983; Freeman et al., 1983; Thornhill and Amit, 2003). In most
cases, firm newness hampers start-ups’ abilities to thrive in their environments, given the
time and continuous effort required to attain legitimacy, to be perceived as reliable, and
to establish a verifiable history of serving the needs of stakeholders (Aldrich and Auster,
1986; Choi and Shepherd, 2005; Hannan and Freeman, 1984; Zimmerman and Zeitz,
2002). These disadvantages associated with newness can become particularly problematic
as firms enter the commercialization stage of new venture growth (Kazanjian, 1988).
Stinchcombe (1965) identified four conditions that affect the degree to which a new
venture will face LoN issues (see Table 9.1). First, organizational members newly assem-
bled to act as a unit often have little in common with one another, other than a general
knowledge of business practices and norms. Thus, they face many challenges related to
learning new roles and performing in new ways within a new venture. Unlike established
organizations that often have succession plans in place and employ those plans to ensure
knowledge is passed from one generation of organizational members to the next, newly
hired individuals working within new ventures often must learn new behaviors and norms
associated with their new and heretofore unestablished roles. The general ‘outside’ knowl-
edge that accompanies hiring an organizational member at times will provide a partial
foundation for learning new skills and attaining new knowledge; the lack of extant ‘inside’
knowledge, however, often proves problematic and results in internal inefficiencies. The
inside knowledge that is passed down and disseminated through organizational members
within established organizations tends to be far more detailed, direct, and understand-
able, given the ability of seasoned organizational members to support the passing on of
this information by relating it to actual experiences they have had in the organization.
Second, Stinchcombe discusses the liability new ventures face while seeking to achieve
consistency in day-to-day performances without the appropriate routines in place to
do so. In order to achieve acceptable organizational performance, new venture leaders
must define roles, set routines, and develop standardized operating procedures that are
tested at a time when new members of the organization are uncertain about their roles
in the organization. When large organizational performance variance results from this
uncertainty, bottlenecks, unnecessary costs and interpersonal conflicts are likely to occur
(Nelson and Winter, 1982). Recurring organizational performance issues will lead to
a ‘perpetual psychology of crisis’ prevailing within organizations lacking routines and
standard practices.
The third condition plaguing new ventures, as noted by Stinchcombe, is the lack of
trust among new venture employees. Indeed, he noted that, in some cases, groups inside
a new venture (e.g. founding teams) can have interactions that resemble those among
strangers. Although founding team members may heavily depend on one another and
one another’s capabilities, uncertainty about members’ knowledge and capabilities may
raise doubt related to whether organizational tasks are being completed correctly and in
line with organizational visions and goals.
Fourth, Stinchcombe noted that new ventures lack critical external ties. Further, the
probability stakeholders will significantly rely on new ventures is likely very low due to
lack of social ties. He discussed this stakeholder reliance as an asset that new ventures
must sometimes purloin from their more established competition if they themselves are
to become established in a particular marketplace. As long as a sense of reliance serves to
bond the new venture and its customers, the ties that bind the constituents to the venture


Table 9.1 Examples of research examining LoN, LoA, and AoN issues
Topic/Authors Level of analysis Conceptual dimensions Independent variable

operationalizations
Liability of Newness
Stinchcombe Organizational form New roles that must be Conceptual
(1965) or firm established. Bottlenecks
that must be solved by
‘perpetual psychology of
crisis’, ‘social relations
among strangers within
the firm’, ‘lack of stable
external ties’
Carroll and Organizational Relationship between Economic indicators
Delacroix population firm age and new such as imports and
(1982) venture failure exports
Freeman, Carroll Organizational Relationship between Organizational age,
and Hannan population firm age and new dissolution versus
(1983) venture failure merger
Hannan and Organizational form Role of the selection Conceptual
Freeman process in generating
(1984) structural inertia
Aldrich and Fiol Industry Cognitive and Conceptual
(1994) sociopolitical legitimacy
in emerging industries
Thornhill and Firm Firm resource Changing industry
Amit (2003) endowments or conditions, managerial
deficiencies, based on knowledge, financial
the RBV, that relate to management, market
new venture failure development
Liability of Adolescence
Levinthal and Interorganizational Relationship-specific Firm size, firm
Fichman relationships asset development diversification, task
(1988) effects on continued difficulty, qualified
relationships auditor opinion
Brüderl and Organizational Initial resource and Firm size, firm legal
Schüssler population organizational legal form
(1990) form effects on new
venture failure
Preisendörfer and Organizational Human capital effects on Founder age, founder
Voss (1990) population new venture failure industry experience
Henderson (1999) Firm Competitive strategy Age, technology
effects on LoA strategy
Thornhill and Firm Firm resource Changing industry
Amit (2003) endowments or conditions, managerial
deficiencies, based on knowledge, financial
the RBV, that relate to management, market
new venture failure development


Topic/Authors Level of analysis Conceptual dimensions Independent variable

operationalizations
Strotman (2007) Firm Firm- and industry- Firm size, industry
level characteristics that growth, size,
impact new venture concentration, rate
failure of entry economies of
scale, technological
regime
Assets of Newness
Choi and Firm Role of age and other Organizational
Shepherd dimensions of newness age, cognitive
(2005) that impact stakeholder legitimacy, product/
support service reliability,
accountability,
affective congruence,
strategic flexibility
can be managed and a continuous stream of revenues will likely increase the probability
the new venture will survive and prosper.
Following Stinchcombe, subsequent research has studied several issues related to LoN.
We briefly review three of these, focussing on external and internal obstacles to survival,
specific different forms of novelty, and other general organizational challenges related to
newness.
External and Internal Obstacles to Survival
Subsequent research has built on Stinchcombe’s classification by examining LoN issues

arising from obstacles present both within and outside a new venture. Aldrich and
Auster (1986) noted that externally, environments characterized as highly dynamic and
competitive often create several barriers that keep these ventures from prospering. High
levels of product differentiation and significant barriers associated with technological
developments, regulations, licensing, vertical integration, retaliatory competitive actions,
and experiential effects tied to tactic knowledge often thwart new firms’ efforts to execute
strategic actions. Many of these externally derived obstacles make acquiring resources
and cultivating capabilities very difficult, especially for start-up firms.
Internal obstacles to survival primarily result from new venture leaders’ inabilities to
create roles and structure in their organizations, as well as the failure to communicate the
need for roles and structure among organizational members. According to Aldrich and
Auster (1986), new venture leaders must discover cost-effective methods of structuring and
managing internal operations if their firms are to survive. Internally derived obstacles of
newness relate to a large number of organizational challenges, including those associated
with training, establishing new routines, structuring governance mechanisms, and operat-
ing at optimal levels of efficiency. These operational obstacles stem from the challenges
organizational leaders face when planning, organizing, commanding, coordinating, and


controlling begin in the organization (Fayol, 1949). Given the lack of experience in most
new ventures associated with these vital managerial functions, methods for their execu-
tion and completion often must be borrowed from more established organizations with
histories of operating effectively (DiMaggio and Powell, 1983).
Novelties Related to Newness
Similar to Aldrich and Auster (1986), Shepherd et al. (2000) posited that constraints and
novelties associated with LoN can be either externally or internally rooted. They note
that from the outset, new ventures face liabilities in many forms, primarily (1) differences
between new venture managers’ and potential stakeholders’ knowledge of the new venture
(i.e. ‘information asymmetry’) and (2) a general lack of knowledge, or, alternatively, the
existence of ignorance, within and outside the new venture. These shortfalls are at the
root of three novelties that must be quickly minimized if a new venture is to survive.
The first is ‘novelty to the market’, which is tied to a new venture’s lack of legitimacy
and its need to institutionalize processes and offerings. Another, ‘novelty to management’
is linked to the social relationships inside and outside the firm, including a start-up team’s
reputation and collective social ties that link the firm to its potential stakeholders. Finally,
because new ventures often lack the routines and knowledge necessary to effectively
produce their products and services from their available resources, the ‘novelty in produc-
tion’ also impedes their early operations. We next examine each of these in turn.
Novelty to the market Firm survival is enhanced by the products and activities that
to observers seem recognizable and familiar (Delmar and Shane, 2004; Hannan and
Freeman, 1984; Meyer and Rowan, 1977). Because a new venture may offer innovative
products or services, potential stakeholders are not immediately familiar with the firm
and its offerings.
‘Novelty to the market’ is defined as key stakeholders’ general lack of knowledge related
to a new venture and that venture’s products and services. Shepherd et al. (2000) relate
this inherent liability to the amount of information about the new venture available to
key stakeholders such as customers and investors. Specifically, in contrast to information
related to established and well-known firms in a market, the awareness of a new venture
as well as the amount of important information about it is often, and sometimes pur-
posely, quite limited. As a result, new firms can lack the legitimacy needed to be perceived
as effective and reliable (Hannan and Freeman, 1984). Specifically, in order to compete in
most industries, new venture managers must strive to simultaneously create the percep-
tion that their organizations are legitimate and trustworthy by disseminating information
related to their venture’s competencies and affable qualities. In addition, in attempting
to manage stakeholder perceptions and demands, new firms create the external routines
needed to minimize the uncertainty shrouding their firms by fostering awareness among
stakeholders and continuously servicing them, thereby becoming viewed or rated as reli-
able and competent (Delmar and Shane, 2004; Singh et al., 1986; Zimmerman and Zeitz,
2002). At the same time, new venture managers must guard against revealing too much
information about the firm, particularly proprietary information that may compromise
key organizational knowledge vital to creating and sustaining the venture’s competitive
advantage.


Novelty to management A second type of novelty relates to stakeholders’ perceptions of

a new venture’s top management team. ‘Novelty to management’ is defined as uncertainty
stemming from stakeholders’ lack of knowledge about a team’s competency, experience,
and skills. A proven record of managing projects or ventures in environments characterized
as uncertain and ambiguous, coupled with beneficial relationships with stakeholders, will
aid new venture managers’ efforts to minimize this particular novelty. The focal stakeholder
related to this type of novelty is most often the financial investor (Evans and Leighton,
1989; Shane and Cable, 2002), but it might also relate to stakeholders residing in the
broader environment, such as the media and governmental agencies.
If knowledge and a general understanding of the successes and potential of the leader-
ship team can be relayed to potential stakeholders, social ties may be established. These
bonds, in turn, increase the probability the two parties will engage in transactions that
bind stakeholders and new venture managers if the former are eventually convinced that
the latter are qualified (Fried and Hisrich, 1994; Shane and Cable, 2002).
Novelty in production New ventures may rely on both innovation and novel resource
transformation methods to produce goods and services that will be valued by market
constituents. Paradigm shifts as well as systematic innovations to production processes
with the use of new technologies can be troublesome to manage, however, especially
when all other facets of the organization are new as well (Teece, 1996). Uncertainty
and complexity associated with production technologies used by new ventures are often
linked to difficulties related to the production of goods and services (Schumpeter, 1934;
Thompson, 1967).
Novelty as it relates to the production process is viewed as problematic whenever new
technology is introduced into an organizational setting in an effort to spur innovation
and create competitive advantage. Thus, ‘novelty in production’ is defined as new venture
managers’ lack of knowledge pertaining to the production technology used by a new
firm. The common effect of novelty in production is difficulty in manufacturing a new
product or rendering a new service given the lack of knowledge and experience among
the firm’s production team members (Shepherd et al., 2000).
This novelty actually may be internally rooted in two features of new venture work
groups. First, because the firm is new, the assembly of the production group is very recent
and untested. As Stinchcombe (1965) noted, this may lead to uncertainty related to work
roles, duties and responsibilities within the entire organization, especially those functions
directly tied to the production department. In a firm’s infancy, formal structures and
standard operating procedures often do not exist, and much knowledge must be gained
via experiential learning. Second, because new venture production team members may
also be working with new technologies, uncertainties related to the technologies will often
negatively affect production, and, in turn, many other facets of the organization.
Other Challenges Associated with Firm Newness
As noted, internally derived conditions of newness are often related to learning efforts,
establishing new routines, structuring governance mechanisms, and developing various
other internal processes in a new venture. Failure to manage these functions sometimes
results in new ventures lacking reliability, accountability, inventory, information, parts,


and services requested or required by customers and other stakeholders (Aldrich and
Auster, 1986; Choi and Shepherd, 2005). New ventures may face additional challenges,
however.
Other potential external liabilities include experiential barriers, licensing and regula-
tory barriers, and barriers associated with brand recognition and market acceptance
(Aldrich and Auster, 1986; Choi and Shepherd, 2005). The degree to which these external
factors manifest themselves is, therefore, highly dependent on how well new ventures
attract and manage stakeholders in their task and broad environments. By properly man-
aging stakeholder perceptions and demands new ventures can minimize LoN by creating
the social ties and external routines needed in order to attain legitimacy and be viewed as
reliable, accountable and available (Choi and Shepherd, 2005; Delmar and Shane, 2004;
Zimmerman and Zeitz, 2002).
Legitimacy While formulating new strategic initiatives and business models, new
venture managers must consider the environments in which their firms compete
(Aldrich, 1995). New firms must develop relationships with environmental constituents
before and after they bring products to market. From the perspective of a new venture,
legitimacy is one of the assets that it must develop if it is to prosper. Legitimacy is an
opportunity-enhancing characteristic that results from customers perceiving firms
as competent, effective, and worthy. It has been defined as a condition of low-level
acceptability that is bestowed upon new venture firms after expectations and claims
based on stakeholder norms and values have been met (Ashforth and Gibbs, 1990;
Brown, 1997). Thus, ultimately, legitimacy, like beauty, exists in the eyes and perceptions
of the beholder.
Legitimacy involves favorable judgments of acceptance, appropriateness, and worthi-
ness made about individuals and the organizations they lead (Zimmerman and Zeitz,
2002). The granting of legitimacy by organizational stakeholders serves as a precursor
to subsequent investments and economic transactions (Shepherd et al., 2000). Extant
research has posited that attaining legitimacy facilitates new firm survival by provid-
ing firms with access to resources such as capital, employees, and ties to customers that
they otherwise would not be able to obtain (Aldrich and Fiol, 1994; Meyer and Rowan,
1977; Zucker, 1987). In addition, legitimacy may be a ‘threshold’ variable – below some
minimum level, a new venture will struggle for survival, but once obtained, it gains
greater access to resources (Zimmerman and Zeitz, 2002).
Reliability Inconsistencies hinder new venture performance, and, in turn, negatively

skew customer perceptions. Reliability is defined as the ability to produce the same
or compatible goods or services in various settings at different times. Measurements
of product attributes, service time, and information correctness are just a few of the
important determinants that will contribute to stakeholders’ perceptions and judgments
of a venture’s reliability. Uncertainty in the minds of key customers related to the ability
of new ventures to produce consistent products or services is the essence of this LoN
dimension (Choi and Shepherd, 2005).
Accountability Accountability is defined as the extent to which responsibility has been

assigned for operational activities as well as for the outputs of those activities within


an organizational context. A common precursor to accountability is documentation of

how an organization transforms inputs into outputs (Hannan and Freeman, 1984). The
inherent problem for new ventures is their lack of established and documented processes
for production and servicing stakeholders.
Sometimes potential investors and key customers assess accountability levels through
signaling methods employed by organizations. The ISO 9000 and QS 9000 standardi-
zation and quality certifications are two examples of such signals, which signify that
accountability levels within organizations are high. Through detailed documentation of
procedures and practices a firm often can assure customers that its manufacturing and
quality systems are capable of identifying inconsistencies in processes, products and serv-
ices, and that the firm has established who is responsible for correcting problems (Briscoe
et al., 2005).
Accountability levels, however, are not only derived from globally recognized certifica-
tion programs. Evidence of well-honed organizational routines and dynamic capabili-
ties can also indicate firms have high levels of accountability within their organizations
(Nelson and Winter, 1982; Pisano, 1994).
Availability Availability is defined as the condition of possessing desired information

and resources at the times they are requested or required (Choi and Shepherd, 2005).
Organizational size and newness play roles in hampering the ability to provide products
and information to market as the market demands them (Aldrich and Auster, 1986).
When firms are new to the market, they often attempt to stay as lean as possible with
regard to capital expenditures, staff payrolls, and inventories in efforts to control costs.
These efforts are economically correct (Barnard, 1938), but by attempting to stay
small in the early stage of development, new ventures often lack the information, the
employees, and the inventories to satisfy customer needs (Aldrich and Auster, 1986).
Information and resources might be requested by customers so they can develop
answers to product-related questions (e.g. origins of components). Information and
resources to fulfill these requests, however, are often not available in new ventures due to
lack of experience and size.
EMPIRICAL STUDIES RELATED TO LIABILITY OF NEWNESS
The need to empirically investigate and understand LoN has prompted a progressive
stream of discussion and empirical research that has resulted in some understanding
of who new venture constituents are and why they maintain their conservative postures
relative to new ventures (Aldrich and Fiol, 1994; Choi and Shepherd, 2005; Delmar and
Shane, 2004; Shepherd et al., 2000). A considerable amount of work remains to be done
on methods for minimizing the uncertainty among the many relationships new ven-
tures have with their constituents (Choi and Shepherd, 2005; Shepherd and Zacharakis,
2003).
Extant research suggests three different approaches to minimizing LoN: the institu-
tional, strategic, and social approaches. The theoretical and empirical works that have
adopted these approaches have received significant attention in entrepreneurship and
management journals, and each has been employed, often in isolation from the other


perspectives, to examine LoN issues. We next examine each approach in turn, and discuss
its central tenets as they relate to organizational newness.
Institutional Approach
The institutional theoretical strand of evolutionary theory is the most widely established
approach used to describe how firms manage LoN. This approach combines elements
of institutional theory (DiMaggio and Powell, 1983) with the entrepreneurship context
and assumes that because a new venture is most often unique in appearance and operat-
ing in unfamiliar fashions, its products and services are often immediately regarded as
both unreliable and unaccountable. A new venture, therefore, must add more common
and familiar activities, resources, and firm attributes to increase the probability it will be
perceived as legitimate in the industry (Choi and Shepherd, 2005; Hannan and Freeman,
1984; Meyer and Rowan, 1977).
Successful efforts to minimize the malevolent properties tied to newness are often
made through ‘isomorphic’ means that hinge on the existence of institutionalized norms
and standards in existing industries. Unfortunately for many start-ups, a newly formed
industry might provide its component organizations little hope for legitimacy attain-
ment and the establishment of trust and routines, due to lack of history, established
standards, and institutionalized norms (Aldrich, 1995). For example, firms founded in
the earliest stages of an industry’s development might not be able to understand and
mimic what external stakeholders view as acceptable and legitimate, because of the lack
of information available about their constituents’ dealings in other more established
industries.
Researchers have empirically tested the importance of new ventures adhering to indus-
try norms, thereby gaining the acceptance they need in order to acquire needed resources
from environmental constituents. For example, Singh et al. (1986) examined how new
ventures establish legitimacy through listing their ventures in community directories,
obtaining charitable registration numbers, and forming a board of directors. Their
results revealed that all three factors leading to legitimacy significantly reduced death
rates among those firms sampled. In the same vein, Delmar and Shane (2004) empirically
tested whether the occurrence and timing of founders’ organization activities influence
survival rates. Results related to their tests of the importance of establishing a legal entity
and the completion of a business plan suggest these organizational actions are signifi-
cantly related to reducing LoN.
Strategic Approach
The second approach to minimizing LoN relates to the Schumpeterian strand of evo-
lutionary economic theory. This approach argues that new firm survival is enhanced by
obtaining, controlling, and recombining resources in ways superior to those of established
firms (Schumpeter, 1934). By virtue of their newness, start-ups lack routines necessary
to effectively transform resources into finished products or services. Thus, to compete
with more operationally advanced firms, new ventures must establish and foster routines
that enhance stakeholder perceptions of reliability, consistency and appropriateness. If
the methods for resource transformation prove beneficial to environmental constituents


and competitors, dissemination of those methods can serve to diminish the detrimental
effects of utilizing unrecognized processes and thereby minimize LoN.
This approach borrows heavily from strategic choice theory in highlighting potential
ways to minimize LoN. Specifically, the approach contends that both established and
new organizations’ successful operations depend on the strategic choices managers make
concerning the manipulation of firms’ environments, and the competitive advances
organizations make while operating in their environments (Child, 1972). An example
of this approach to combat LoN is the situation where a new venture operating in the
technology sector attempts to change a dominant design in its industry. By imparting
highly effective and highly regarded processes and methods, its managers hope to proac-
tively acquire societal support and legitimacy (Suchman, 1995). The effectiveness of this
approach is highly contingent on both the capabilities of the new venture’s management
and the nature of its operating environment. For example, this approach may be most
useful in establishing legitimacy among stakeholders befuddled by uncertainty in highly
dynamic environments (Borum and Westenholz, 1995; Oliver, 1991).
Two empirical works stress the potential of enacting sound firm strategy while vying
for acceptance in a particular environment. Henderson (1999) studied failure rates among
United States personal computer firms. Her results suggest that firms in the adolescent
stage of growth should formulate and enact unique, firm-specific strategies rather than
adopt recognizable industry standard offerings. The results may be industry-specific;
however, the value of proprietary offerings in many other industries seems quite salient.
Tornikoski and Newbert (2007) provide further evidence that deviating from industry
norms might also prove beneficial when certain nascent organizations seek legitimacy
and funding. In their empirical study, the researchers tested whether promotional efforts,
applying for a patent or trademark, and projecting financial statements is positively
related to legitimacy attainment. They conclude that efforts made to frame and charac-
terize a firm as decidedly differentiated from other resident organizations in an industry
significantly increase the firm’s chances of attaining legitimacy.
Stakeholder Approach
The third approach to understanding and describing how new ventures minimize LoN
draws from the social relationship school of evolutionary theory, which contends that
venture survival hinges on establishing and managing social relationships between the
entrepreneur and the outside stakeholders (Stinchcombe, 1965; Stuart et al., 1999). Given
both a new venture’s limited track record and the difficulty associated with thoroughly
disseminating organizational information into the firm’s environment, potential stake-
holders often face a high ‘adverse selection’ risk when considering whether to do business
with a new venture (Akerlof, 1970). Consequently, they often have very few incentives
to break ties with their current, more established partners and customers and foster new
social relationships with new venture leaders with whom they have little acquaintance
(Stinchcombe, 1965).
When stakeholder knowledge pertaining to the founding team and new venture proves
deficient, market, production, and/or management novelty is often present. As previously
mentioned, these novelties can significantly reduce the probability that the new venture
will survive or even be founded (Shepherd and Shanley, 1998; Shepherd et al., 2000). It


is, therefore, necessary for entrepreneurs to seek social ties and employ them to amass
resources and compete in their chosen markets (Aldrich and Zimmer, 1986). Social ties
are considered among the most important catalysts for many types of economic transac-
tions (Arrow, 1974), making those who are able to establish and use social ties often far
more successful than those who cannot (Granovetter, 1985).
Organizational managers, in general, must strive to properly manage customer rela-
tionships and expectations so as to achieve acceptance and recognition among market
competitors (Donaldson and Preston, 1995; Freeman, 1984). Thus, they must usually
spend large amounts of valuable time and energy to discern and manage key stakeholders’
needs and desires, as their firms’ resources, reputation and power are derived from these
particular stakeholder relationships (Frooman, 1999; Jahwahar and McLaughlin, 2001;
Scott and Lane, 2000). For new venture managers, in particular, the amount of attention
specifically paid to key stakeholders like customers, investors, and other constituents is an
especially salient concern because their actions have profound effects on new ventures in
the early stages of operation (Schroeder et al., 2002; Yli-Renko et al., 2001).
A number of empirical inquiries have underscored the necessary nature of managing
stakeholder relationships while firms are in their earliest stages of growth. In terms of
cognitive legitimacy – that is, the legitimacy that is attained through the ability to dis-
seminate knowledge about the entrepreneurial founding team members, the new venture,
and the new venture’s offerings to key stakeholders – what seems to be most important
is the quantity of information available to stakeholders to reduce the concerns associ-
ated with newness (Shepherd and Zacharakis, 2003). Shane and Cable (2002) found that
establishing strong network ties to potential financiers has a positive impact on gaining
the funding necessary to found a venture. Calling it the ‘social embeddedness solution’,
the researchers reveal evidence suggesting that the most important reason why nascent
entrepreneurs are able to obtain funding whereas others cannot is new ventures’ ability to
transfer information to potential financiers. These transfers can stem from the petition-
ing entrepreneurs as well as the entrepreneurs’ referrals, and both can provide social ties
and reliable sources of information and recommendations. In addition, Shepherd and
Zacharakis (2003) reported that the more information is available to consumers about
the new venture’s products, organization, and management, the higher the propensity for
customers to deem the venture legitimate.
LIABILITIES OF ADOLESCENCE
In contrast to LoN, which posits high initial new venture mortality followed by declining
failure rates, the liability of adolescence (LoA) perspective posits that new ventures may
enjoy a ‘honeymoon’ period early on, followed by increasing venture failure (Levinthal
and Fichman, 1988). Organizational researchers embracing the LoA perspective contend
that managers may navigate new ventures through their initial LoN challenges based
on their abilities both to draw from their ventures’ initial resource stocks (e.g. financial,
goodwill, and psychological commitment by both new venture owners and key stake-
holders), and to capitalize on their stakeholders withholding judgment until after the
start-up phase when they can better assess performance (Fichman and Levinthal, 1991).
Thus, rather than failure risks starting out high in a new venture’s existence and declining


monotonically, as is typically posited in LoN research, LoA studies typically hypothesize

that failure risks may start low, increase, and then decline, resulting in an inverted-U
shape relationship (Brüderl and Schüssler, 1990). Once they have passed successfully
through the start-up phase, the major threat facing these adolescent firms arises from
routines they have developed that may have aided their survival initially, but which soon
after lock them in to inertial actions that ultimately prove fatal, especially in dynamic
environments (Thornhill and Amit, 2003).
Empirical results lend some support to this LoA hypothesis. For example, in an early
ecological study, Preisendörfer and Voss (1990) found that mortality rates of (West)
German firms, rather than starting out high and declining, as is suggested by LoN, actu-
ally started low, increased, and then later began to decline. They attributed this trend to
an initial ‘honeymoon’ or ‘probationary’ period in which the founder exerts significant
effort and customers may give some initial support to the company. Closer examina-
tion of their data, however, reveals that new venture mortality tended to peak around
10 months after founding, then declined, suggesting that they adopted a much shorter
view of venture ‘newness’ than the typical five to seven years employed in many entrepre-
neurial studies (e.g. Shrader and Simon, 1997). This issue notwithstanding, their findings
provided early evidence that (1) key contingencies (e.g. human capital based on founder
age and industry-specific experience) can impact LoN, and (2) LoN may not monotoni-
cally decline as age increases.
Employing similar methods, Brüderl and Schüssler (1990) employed a resource-
dependency perspective to posit that new ventures would exhibit different mortality pat-
terns, but these patterns, in general, would follow an inverted-U shape track, as posited by
LoA. Their results supported their hypothesis, with mortality rates peaking between one
and fifteen years after founding, depending on a firm’s initial size, legal form, and industry.
More recent studies have begun directly comparing and contrasting LoN with LoA
by examining critical contingency variables that might affect a new venture’s early or
delayed mortality (Hannan, 1998). For example, Henderson (1999) employed a sample
from the US computer industry to examine whether new ventures that relied on inter-
nally developed, proprietary technology exhibited different mortality rates than those
that employed technology based on prevailing industry standards. She found that the
latter were more likely to suffer from LoA, suggesting that different mortality patterns
can exist within the same population depending on a firm’s competitive strategy. In addi-
tion, Thornhill and Amit (2003) employed the resource-based view of the firm (RBV)
to examine whether different explanations account for firm failures at different stages of
development. They found that ventures that succumbed to LoN tended to lack manage-
rial resources and financial management capabilities, whereas those that capitulated to
LoA were often unable to adjust to a changing environment. Strotman (2007) also found
that industry characteristics (e.g. minimum efficient scale and dynamism) related to new
venture mortality in a pattern consistent with the LoA hypothesis.
ASSETS OF NEWNESS
Benevolent properties associated with newness, referred to as assets of newness (AoN),

are time-specific characteristics of start-ups that have the potential to aid teams in their


quests for new venture viability and profitability. Instead of hindering new venture
success and survival, AoN are viewed as stocks of intangible distinctions that cast the
new venture as fresh, amicable and malleable in the eyes of customers and other key
stakeholders, thereby aiding or buffering the firms in their start-up stage (Fichman and
Levinthal, 1991). Stakeholders who perceive innovation, new orientations, and change
as key elements to the progression of technological and societal advancement may
view these distinctions as very desirable. As new ventures age and become engrained in
their internal and external processes and relationships, however, their novelty may fade.
Therefore, exploiting these early attractive distinctions is a vital step in the commerciali-
zation stage of new venture development. Two salient distinctions, affect and organiza-
tional flexibility, represent two critical AoNs, which facilitate the interaction between new
firms and their constituents (Choi and Shepherd, 2005).
Affect congruence Affect congruence is the level of consistency between the needs and
desires of a particular customer and the goals, values and aspirations of a new venture
(Choi and Shepherd, 2005). Stakeholders may support new ventures because they value
innovative products (Carayannopoulos, 2009) or perceive the new venture team as
affable, eager, and youthful (Lutz, 1982). So long as the firms are viewed as new to the
market and offering innovative products and services, influential stakeholders (e.g. ‘early
adopter’ customer groups) may view them in a positive light. These cognitions, thus, can
be regarded as an asset associated with being new.
Flexibility New venture firms may also develop competitive advantages by

demonstrating the ability to quickly respond to changing competitive conditions and
dynamism in the marketplace (Hitt et al., 1991). As firms age and become entrenched
in their markets, the relationship between flexibility and competitive advantage often
becomes inverse in nature because structural inertia provides benefits, including
economies of scale (Aldrich and Auster, 1986; Hannan and Freeman, 1984). Therefore,
the asset may often times be short-lived.
Flexibility is measured in three forms: operational, tactical, and strategic. Operational
flexibility is the ability to conform endogenous processes to exogenous changes (Galbraith,
1990; Suarez et al., 1995), tactical flexibility refers to a firm’s capability to exploit oppor-
tunities stemming from the environment (Johnson et al., 2003), and strategic flexibility
refers to its capability to generate firm-specific options in an effort to align itself with cus-
tomer needs and proposals (Hitt et al., 1998; Johnson et al., 2003). These strategic options
are formulated in response to market uncertainty and pressures to adopt new technology,
innovations and standards, and each is considered a beneficial property of new ventures
lacking structure and routine (Carayannopoulos, 2009; Choi and Shepherd, 2005).
FUTURE RESEARCH
Our review suggests that organizational research has made tremendous progress in exam-
ining the issues new ventures face that can impact survival, particularly in terms of how
they can attain legitimacy. At the same time, some issues that Stinchcombe (1965) and
others have proposed remain under-researched. In particular, most research, to date,


has focused on external issues (e.g. stakeholder perceptions) related to LoN rather than
several internal issues that may also imperil new ventures (studies focusing on initial
resource endowments represent an exception). Thus, to conclude our review, we highlight
two other theoretical perspectives – the resource-based view of the firm (RBV) and trust
– that may prove critical in future research efforts to circumscribe the boundaries of LoN,
LoA, and AoN.
First, according to the RBV, a firm’s competitiveness is enhanced by the extent to
which it can develop and maintain control over resources (e.g. brand name or reputation)
or capabilities (e.g. workforce creativity or flexibility) that are valuable, rare, imperfectly
inimitable, and lacking strategically equivalent substitutes (Barney, 1991). Some resources
could contribute to a new venture’s AoN (e.g. affect congruence), and, in turn, mitigate
some of the LoN issues it faces. In addition, LoA studies have also cited the importance
of initial resource endowments (Hannan, 1998), including some (e.g. goodwill and top
management social capital) that would qualify as resources based on the RBV definition
(Fichman and Levinthal, 1991; Packalen, 2007).
At the same time, depending on the resource or capability, some interesting future
research questions arise. For example, as noted above, a firm’s legitimacy often depends
on its ability to conform to widely accepted norms related to organizational characteris-
tics (DiMaggio and Powell, 1983). Conversely, employing the RBV, a firm’s competitive
advantage is predicated on its ability to differentiate itself from competitors. In a new
venture context, conformity could result in a new venture failing to ‘stand out’ or attract
attention in a crowded competitive landscape. Thus, one critical future research question
for LoN research involves the extent to which a new venture must balance conformity
with differentiation as it moves through the different phases of the start-up process (cf.
Deephouse, 1999).
On a related note, many resources and capabilities result from establishing firm rou-
tines (Nelson and Winter, 1982), which, as Stinchcombe (1965) notes, represents a critical
step in overcoming LoN. At the same time, however, establishing these routines can also
decrease a new venture’s future ability to adapt, which may be critical when operating in
dynamic environments. Indeed, routines that have survival value early in a new venture’s
life may become ‘core rigidities’ later in life (Leonard-Barton, 1992), contributing to a
potential LoA (Thornhill and Amit, 2003). Consequently, examining the role of routines,
as well as how different types of routines contribute to early versus later venture survival,
is an important future research issue.
Second, how new ventures establish stakeholder trust also warrants close examination.
Trust represents an important, multifaceted construct in organizational research, and
Stinchcombe (1965) notes that a lack of trust among new venture employees represents
a critical issue contributing to a new venture’s LoN. In addition, lack of external ties,
which represents another key issue, can include an external trust dimension. For example,
Aldrich and Fiol note that ‘[t]rust is a critical first-level determinant of the success of
founding entrepreneurs because, by definition, there is an absence of information and
evidence regarding their new activity’ (1994, p. 650).
The role of trust within organizations, in general, and new ventures, in particular,
has received increasing attention. To date, however, most trust research has adopted
either agency or social exchange theory (Whitener et al., 1998). Employing the former,
studies have examined how external agents (e.g. venture capitalists) structure contracts


with a new venture to overcome problems related to potential information asymmetry

and goal incongruence with founding teams (Batjargal and Liu, 2004). This research
has focused primarily on the economic side of the relationship and has often dealt with
issues arising after a new venture has become more established (e.g. its initial public
offering). Employing the latter, studies have examined the evolution of trust over time
(Dibben, 2000). New ventures, however, may not have sufficient history to have exhibited
trustworthy behavior, and some forms of trust can be exceedingly difficult for a person
or organization to create in the short run (Blois, 1999). Consequently, studies examin-
ing how founding teams develop trust among themselves and how external stakeholders
initially come to trust both founding teams and a new venture represent important future
issues for LoN research (Smith and Lohrke, 2008).
CONCLUSION
Entrepreneurship researchers often portray potential new venture stakeholders as

untrusting and skeptical constituents, sometimes responsible for the demise of a new
venture if their inquiries and concerns are not acknowledged and managed. This por-
trayal is somewhat valid given the high failure rates of most start-ups which can be
largely attributed to stakeholder relations. Researchers have acknowledged that both
stakeholders’ lack of trust and their general skepticism often stem from the novelty
of new ventures, and both are manifested in the uncertainties associated within new
venture–stakeholder relationships and the novelty of internal processes of new firms
at start-up (Hannan and Freeman, 1984; Schumpeter, 1934; Stinchcombe, 1965). New
venture leaders must grapple with these uncertainties and manage them effectively from
the outset of the venture if it is to succeed (Delmar and Shane, 2004; Shane and Cable,
2002).
In an effort to provide additional insight into these issues, we first reviewed extant LoN
research and discussed how new ventures can gain legitimacy with external stakehold-
ers. We then examined the related constructs, LoA and AoN, as well as extant research
comparing these constructs with LoN. In doing so, we note that additional research is
needed to circumscribe the boundaries of these distinct, but overlapping, constructs. To
help guide future research, we discussed key issues and presented two other theoretical
perspectives that may be useful. Based on our review, it would seem promising for future
studies to specifically examine the role that different industry, firm, and top management
characteristics play in the extent to which a new venture encounters LoN, LoA or AoN.
Some of these characteristics include:
● Industry – new or established, segmented or homogenous.

● Firm – differentiation or cost-based strategy, broad or early-adopter target
market.
● Top management – overall industry experience, experience working together in
previous start-ups.
We hope these suggestions will provide guidance to future research endeavors focusing
on LoN and related new venture mortality research topics.


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10. Entrepreneurial groups
Martin Ruef
INTRODUCTION
To many observers, a focus on entrepreneurial groups – or, more colloquially, venture

‘founding teams’ – is a thoroughly modern pre-occupation. It was only in the late 1980s
and early 1990s that scholars in business management and policy began to question
the image of the heroic individual found in traditional treatments of entrepreneurship.
Writing in the Harvard Business Review, the economist Robert Reich (who would become
Bill Clinton’s Secretary of Labor six years later) argued that ‘to compete effectively in
today’s world, we must begin to celebrate collective entrepreneurship’ rather than ‘the
traditional myth of the entrepreneurial hero’ (1987, p. 78). Some management think-
ers had touted the importance of ‘team entrepreneurship’ as much as a decade earlier
(e.g. Timmons, 1975; 1979), but a new generation of scholars were the first to call for a
systematic program of research that would document the prevalence of entrepreneurial
groups, describe their properties, and assess their impact on business performance (e.g.
Kamm et al., 1990; Gartner et al., 1994). In a review of developments in entrepreneur
research and theory, Gartner and colleagues (1994, p. 6) noted that ‘the “entrepreneur” in
entrepreneurship is more likely to be plural, rather than singular’. They offered an expan-
sive definition of the entrepreneurial group, which included owner-managers, investors,
organizational decision-makers, family members, advisors, critical suppliers and buyers
as possible candidates in the entrepreneur role.
Contributors to the management literature have primarily displayed an interest in
teams as a contemporary phenomenon. In this chapter, I suggest that the historical
evidence and frameworks that can be deployed to study entrepreneurial groups are far
less recent than this literature might seem to suggest. Indeed, the social sciences evi-
dence a long pedigree of research devoted to entrepreneurs and the collective nature
of activities surrounding the creation of new organizations (Ruef and Lounsbury,
2007). The goals of the chapter are twofold. First, the chapter offers a selective history
of entrepreneurial groups, addressing the legal origins of commercial partnerships in
Roman and medieval law, the elaboration of partnership systems in the Mediterranean
region during the Renaissance, and the evolution of entrepreneurial groups during the
Industrial Revolution. Second, it traces the intellectual origins of social scientific work
on entrepreneurial groups. I emphasize four classical perspectives, in particular: (a)
Georg Simmel’s structural sociology; (b) Ronald Coase’s theory of the firm; (c) the logic
of collective action in entrepreneurial groups, as developed by Mancur Olson; and (d)
theories of ethnic enterprise, with particular implications for the formation and persist-
ence of entrepreneurial groups.1 In designating these as ‘classical’ perspectives, I apply the
205

informal criterion of emphasizing contributions that were published by the mid-1970s,

a time when a number of new organizational theories with broad implications for entre-
preneurial studies (including organizational ecology, institutional theory, and transaction
cost economics) first emerged.
My review of the historical literature is necessarily selective. It is fairly easy to locate
work on entrepreneurial groups that has intellectual roots aside from the classical
perspectives discussed in this chapter. For instance, in a study of the decision-making
biases of venture capitalists who are evaluating entrepreneurial teams, Franke and his
colleagues (2006) employ social identity theory, a perspective developed by Henri Tajfel
in the late 1970s (Tajfel and Turner, 1979), which also draws on earlier research on in-
group and out-group comparisons (e.g. Bass and Duntemann, 1963). Despite the utility
of social identity theory for understanding group dynamics, I restrict my attention to
historical social science perspectives that sought to address the process of entrepreneurial
association even when those perspectives were first formulated. That is, I focus on schol-
ars who discuss entrepreneurial partnership per se, not simply generic aspects of group
formation and functioning. In the concluding section of the chapter, I suggest how the
classical perspectives continue to raise questions that animate contemporary research on
entrepreneurial groups.
HISTORICAL EVIDENCE
Many of us – especially those raised in an Anglo-American context – take it for granted

that individuals can readily construct autonomous, organizational entities to act on their
behalf. However, even a cursory review of the historical record suggests that societies
differ greatly in the amount of agency they accord to entrepreneurs and their organi-
zational ventures (Hwang and Powell, 2005; Meyer and Jepperson, 2000). Institutional
frameworks strongly influence whether entrepreneurial groups are short-lived affairs that
are tied closely to the fates of their creators, or whether they are able to develop as inde-
pendent and, potentially, perpetual legal fictions. Between the late Middle Ages and the
nineteenth century, the understanding of entrepreneurial groups in Western civilization
displayed considerable stability for four or five centuries, only to be disrupted by rapid
social and legal changes during the era of industrialization.
From the Middle Ages to the Industrial Revolution
The German sociologist Max Weber (1864–1920) offered one of the earliest, and
most prescient, treatments of the historical origins of entrepreneurial groups. In his
J.D. dissertation on the History of Commercial Partnerships (hereafter, HCP), Weber
(1889/2003) compared the influence of Roman and Germanic commercial laws on
partnerships among medieval entrepreneurs. He based his analysis on a systematic
review of Italian and Spanish legal charters and statutes from the eleventh through
the sixteenth centuries, with detailed case studies of commercial law in Florence and
Pisa’s Constitutum Usus. Beginning with a discussion of Roman property law, Weber
(Chapter 1) argued that the legal differentiation of partnerships (societas) from indi-
vidual entrepreneurs participating in them (socius) was largely nominal in this legal


Entrepreneurial groups 207
form: ‘the partnership, as merely a complex of obligatory relations among the socii, is
of no concern to third parties; in its legal consequences, a transaction a socius makes
on the account of the partnership is no different from any transaction made on a
personal account’ (1889/2003, p. 54). The differentiation between individual and group
strengthened, however, with the growing needs of maritime and overland trade during
the Middle Ages. Two new organizational forms – the societas maris and societas terrae
– relied increasingly on a cash fund that was separate from the assets of entrepreneurs
participating in the venture (1889/2003, Chapter 2). A further development was the
emergence of the joint household in Germanic law. This organizational form intro-
duced the concept of solidary liability, whereby the debt of a family or community
member ‘encumbers the joint assets’ of that community (1889/2003, p. 98). The concept
was quickly generalized in the Middle Ages to commercial partnerships, as joint house-
holds were not only defined in terms of kinship ties, but also in terms of cohabitation
and ‘communities of labor’ (e.g. craft guilds).
In broad strokes, what Weber was identifying theoretically in the HCP were a set of
institutional conditions that would allow for the social construction of entrepreneurial
groups: partnerships that had a legal, economic, and social existence apart from the
entrepreneurs that constituted them. A concrete example in this respect involves his
comparison of medieval commendas, or trade associations (see Lutz, pp. 22–7, in Weber
1889/2003). In the unilateral commenda, investment capital was provided by only a
single party, while in the bilateral commenda, investment came from (at least) two parties
(see Figure 10.1). Each organizational form involved both a commendator (or passive
investor) and an entrepreneur known as a tractator. The unilateral commenda differed,
however, in that all of the financial risk was borne on the part of the passive investor,
who contributed to a fund that would be managed by the tractator, serving as his or her
agent. In contrast to prevailing legal wisdom, Weber (1889/2003, pp. 135–6) argued that
the lack of a separate fund in the unilateral commenda meant that it was not an insti-
tutional precursor of modern partnerships. Indeed, the weak organizational foundation
that the unilateral commenda provided for entrepreneurial ventures led to its eventual
replacement by simpler financing arrangements, such as commercial loans. The bilateral
commenda, by contrast, specified the existence of a fund that was separate from the
assets of investors and entrepreneurs and, in Weber’s account, served as a legal template
for modern partnership forms.2
As Weber’s legal history of partnerships attests, entrepreneurial groups have been a
prominent feature of Western capitalism since its origins, even predating it according
to some definitions. During the late Middle Ages, associations of businessmen already
thrived in the Mediterranean region. These groups were not simply a reflection of eco-
nomic growth, but an important catalyst as well. In thirteenth-century Italy, the historian
Thomas Blomquist (1971, pp. 157–8) has argued, ‘the favored method of doing business
. . . was through association: at all levels of business, capital and/or labor were pooled in
order to realize a maximum economic potential’. Whether the primary purpose of such
associations was to achieve ‘maximum economic potential’ is a debatable empirical point,
but the prevalence of entrepreneurial groups is not. For example, the northern Italian city
of Lucca, a center of the silk trade, featured at least 22 large-scale (international) busi-
ness partnerships by the late 1200s, some with as many as 19 partners (ibid, pp. 159–60).
Through associates in Flanders, Champagne, Paris, and England, these groups penetrated


+75% +50%
Commendator Commendator
–100% –66%
100% 66%
Managed Separate
fund Venture Venture
fund
Agency 33%
+25% +50%
Tractator Tractator
–0% –33%
Unilateral commenda Bilateral commenda
Note: Positive percentages correspond to financial contributions and shares of profit. Negative percentages
correspond to losses borne by each partner.
Source: Ruef and Lounsbury (2007, p. 8); based on Weber (1889/2003).
Figure 10.1 The organizational structure of two medieval forms of entrepreneurial

partnership
markets in Northern Europe and contributed to the widespread influence of the Italian
associational business model.
By the time of the Renaissance, Europe witnessed not just the emergence of a precur-
sor of modern partnerships, but also of ‘partnership systems’: autonomous firms (either
sole proprietorships or partnerships) that were connected together through a single
or small group of entrepreneurs. As Padgett and McLean (2006) document, the new
organizational form was first developed in Florence during the late 1300s to encourage
diversification and protect entrepreneurs against the risk of unlimited liability. Prominent
adopters included Francesco Datini, the merchant of Prato, who between 1382 and
1410 participated in one of the first partnership systems (Origo, 1957/1992), as well as
the banker Giovanni di Bicci de Medici and his descendents, Cosimo and Lorenzo ‘the
Magnificent’ de Medici (de Roover, 1966). The birth of partnership systems was a major
organizational innovation at the time, predating other forms of entrepreneurial groups
such as the limited liability partnership, which was not developed until 1408 in Florence
and not widely adopted until the 1500s (Padget and McLean, 2006, p. 1466).
During the early stages of the Industrial Revolution, business partnerships evidenced
little change from their medieval and Renaissance forebears. Considering partnership
agreements (actes de société) in Lyon between 1783 and 1793, Taylor (1963, p. 49) com-
mented that ‘as an entrepreneurial form the partnership met all the needs of business
practice . . . before the [French] Revolution and . . . differed in no important way from
partnerships of the Renaissance. On the other hand, it was far removed from the 19th
century corporate or joint-stock institution . . . [The partnership] had more in common
with the remote past than with the organizational forms that appeared some seven


decades later’. The Lyonnaise partnership agreements, which were typical of much of
late eighteenth-century Europe, ran for short terms (three to eight years), established
fixed financial relationships, and defined a line of specialized trade among partners. But
the content of the agreements also suggests that these businesses were more than eco-
nomic units. Highlighting their character as ‘households’, Taylor notes that ‘partners and
employees often lived in the buildings that the companies rented[;] clerks got meals
and rooms in addition to salaries, and servants, warehouse workers, and artisans lived
and worked in the house’ (1963, p. 53). The combination of business partners and
workers from different status ranks at the same physical site led to ‘a curious mixture of
commerce and gentility’ in these enterprises (p. 54).
The legal forms available to entrepreneurial teams evolved considerably during the
nineteenth century. At the beginning of the century, entrepreneurs who sought to found
a venture together had little choice but to create a business partnership – or to seek a
special charter from a legislature that would allow them to incorporate their enterprise
under public auspices (Lamoreaux, 1998). Over the course of the succeeding decades, the
diffusion of general laws of incorporation in the United States and Europe greatly simpli-
fied the chartering of corporate entities.
Aside from the obvious implications of the corporate form for the liability of business
owners (which was far more limited than in commercial partnerships), it also had crucial
implications for the longevity and governance of entrepreneurial ventures. As suggested
by Taylor’s Lyonnaise example, partnership agreements tended to end after a fixed period
of time, and they also tended to be dissolved by the death of one of their members. The
corporation, by contrast, was ‘more commonly chartered in perpetuity’ and its life ‘was
independent of that of any of its stockholders’ (Lamoreaux 1998, p. 66). In terms of
governance, the autonomy of an owner of the corporate venture to act on behalf of the
organization was also severely limited compared to the simpler business partnership. The
legal view of these entrepreneurial groups evolved only gradually over the century: at the
beginning of the 1800s, ‘the view that corporations were artificial creatures of the state
held sway; by the middle it was increasingly common to view corporations as private
contracts made by “aggregations” of businessmen; by the end, the courts were moving
toward the view that corporations were legal persons in the eye of the law’ (p. 67). These
institutional developments represented a culmination of the evolutionary process whose
legal origins were already identified by Weber in the late medieval period.
Historical Diversity in Entrepreneurial Groups
Although much of the historical literature on commercial partnerships has emphasized

associations among male participants, entrepreneurial groups have likewise played an
important role for women. In nineteenth-century Britain, women comprised roughly a
fifth of all entrepreneurs, with a particularly strong concentration in the garment trades
(Nenadic, 1998). Because these businesses often relied on ‘the cultivation of “dove-
tailed” effort whereby the income-producing activities of one related woman reinforced
and supplemented those of another’ (ibid, p. 633), kinship-based co-partnerships rep-
resented the dominant form of organization. For instance, in Stana Nenadic’s sample
of 53 female-run Edinburgh garment firms, more than 80 per cent depended on kin co-
partnerships, most commonly sibling or mother-daughter teams.3 Owing to family law


at the time, these ‘co-partneries’ became associated with separate funds that resembled
the more formal arrangements found among male entrepreneurs in other contexts. As
Nenadic suggests, ‘in family financial affairs, sisters were treated as a package, bound
together for life – or until they married – the individualised interests of each sister
subordinated to those of the family as a whole’ (1998, p. 635). Moreover, in contrast to
some of their male counterparts, ‘the non-individualised character of women’s capital
and women’s business . . . probably negated any imperative to maximize profits in the
interests of self’ (ibid.). In Victorian Britain, then, one could argue that entrepreneurial
groups were even more critical to business development among women than among
male entrepreneurs.
Considering the importance of entrepreneurial groups in the West, one might also
ask whether a similar influence can be identified during the emergence of Asian capital-
ism. Here the historical evidence is more difficult to interpret, given the unique pathway
taken by these economies vis-à-vis the Occident. In Japan, entrepreneurial activity in
the medieval Buddhist economy was undertaken by monasteries and temples (Collins,
1997), whereas secular capitalism was generally unknown before the Muromachi period
(1333–1460). On the surface, the monastic enterprises appear quite different than the
business partnerships that formed in the Mediterranean basin around the same time
period. As the sociologist Randy Collins suggests, however, insightful parallels can
be drawn with respect to the organizational preconditions of capitalist development.
Monastic culture encouraged an ethos of asceticism and investment, much as entre-
preneurial groups did in the West. Similar to the ‘separate fund’ that appeared in the
European partnership forms, the collective nature of monastic entrepreneurship was
critical to capital accumulation: ‘Because celibate monks could not siphon [material
capital] off to family consumption, it was the monastic corporation that grew rich’ (ibid.,
p. 848). Some monasteries even recruited bands of wandering ascetics (hijiri), who had
existing entrepreneurial skills as itinerant merchants and artisans. During the Kamakura
period (1185–1333), monastic enterprises gained in political and economic status and
subsequently served as the dominant institution in Japanese society for nearly two-and-
a-half centuries (Collins, 1997).
Summary
The historical record suggests, therefore, that the concept of the entrepreneurial group
is neither distinctively modern nor distinctively Western. From its origins, capitalist
development has relied on groups of entrepreneurs to pool resources and competencies,
manage risk, expand into new territories, offer social support, and share responsibility for
undertakings, both large and small. The legal evolution of these groups can be character-
ized broadly in three phases: (a) cases where the distinction of individual entrepreneurs
and groups is largely nominal (e.g. Roman societas); (b) cases where the group maintains
a separate fund from its members (communities of labor, joint households, Japanese
monastic enterprise); and (c) cases where the responsibilities (debts and obligations) of
the group are separated from the personal responsibility of the participating entrepre-
neurs (joint stock corporations). Over time, these legal conditions allowed for the emer-
gence of entrepreneurial groups that were fully independent from the ‘natural’ persons
that created them (Coleman, 1974; Ruef and Lounsbury, 2007).


HISTORICAL PERSPECTIVES
Now let us turn to the historical frameworks that have been used to study entrepreneurial
groups. Who are their progenitors, and what is their impact on the contemporary social
sciences? Over the course of the century following Weber’s treatment of commercial
partnerships, a number of sociologists and economists tackled the functions and dys-
functions of entrepreneurial groups. Arguably, the most enduring of these contributions
can be found in four intellectual traditions, including the structural sociology of Georg
Simmel, Ronald Coase’s theory of the firm, Mancur Olson’s logic of collective action,
and sociological theories of ethnic enterprise.
Simmel’s Structural Sociology
Georg Simmel (1858–1918) was a contemporary of Weber and early proponent of

structural sociology, a forerunner of modern network analysis.4 He had a particular
interest in interpersonal associations, which he described as the ‘form (realized in innu-
merable, different ways) in which individuals grow together into units that satisfy their
interests’ (1917/1950, p. 41). These units comprised a diverse set of groups, including
social gatherings, religious sects, military alliances, extended families and (most notably
for our purposes) business partnerships. While Simmel devoted considerable attention
to the simplest structural arrangements – dyads and triads – he also maintained that
structural sociology should account for the origin and composition of larger groups.
It was in these settings, he maintained, that an ‘autonomous, super-individual unit’
(Simmel, 1908a/1950) transcends the individual personalities involved and confronts
members as an objective structure. Like Weber, Simmel was thus intrigued by groups
as an intermediate building block between individual persons and formal organiza-
tions.
In Simmel’s work, a tension between autonomy and constraint is evident even in the
simplest of entrepreneurial partnerships. Considering dyads of business partners, he
noted that:
The formation and operation of the business rests, exclusively perhaps, on the cooperation of
these two personalities, nevertheless the subject matter of the cooperation, the business or firm,
is an objective structure. Each of the two [entrepreneurs] has rights and duties toward it that in
many respects are not different from those of any third party. And yet this fact here has another
sociological significance . . . Because of the objective character of the economic system, busi-
ness is intrinsically separate from the person of the owner, whether he be one or two, or more
persons. (Simmel, 1908a/1950, p. 132)
The question of the legal separation of a business from the entrepreneurs that create
it – the central concern for Weber’s historical analysis of entrepreneurial partnerships –
was taken for granted in Simmel’s structural sociology. In Simmel’s mind, this fact alone
was enough to fundamentally differentiate the social psychological dynamics of entrepre-
neurial dyads from other dyadic relationships, such as monogamous marriage.
Elaborating on this perspective, Simmel suggested that the addition of a third partici-
pant in a group created new tensions and opportunities. When the other two participants
had limited prior affiliation or interpersonal trust, an individual who comprised the


third element of the triad could assume the role of a broker or intermediary. A broker
with self-serving motivations was identified by Simmel as the tertius gaudens (or the
‘third who enjoys’), because s/he could derive benefit from potential conflict between
the other two members of the group (Simmel, 1908a/1950, pp. 154–5). In contemporary
structural sociology, this arrangement is seen by Ronald Burt as a defining characteristic
of entrepreneurial activity: ‘when you take the opportunity to be the tertius, you are an
entrepreneur in the literal sense of the word – a person who generates profit from being
between others . . . [E]ntrepreneur refers to a kind of behavior, the tertius is a successful
entrepreneur’ (Burt, 1992, p. 34).
Recent work on entrepreneurial groups has documented the impact of the tertius role
on economic inequality within business partnerships. In one nationally representative
sample of US founding teams, the equity share held by participating entrepreneurs was
significantly higher when they assumed brokerage positions, mediating between weakly
connected partners (Ruef, 2009). Consistent as well with Simmel’s intuitions, however,
the exercise of the tertius strategy was not appropriate in all contexts. As he (Simmel,
1908a/1950, p. 159) argued, ‘the advantage accruing to the tertius derives from the fact
that he has an equal, equally independent, and for this reason decisive relation to two
others’ (italics added). Where entrepreneurs serve in a mediating position between their
spouses or kin, who are co-owners in a startup business, and other partners, their lack
of independence can lead to strong norms against the ‘divide and conquer’ strategy of
the tertius gaudens. Consequently, the empirical evidence for the US suggests that entre-
preneurs do not derive a greater equity stake in such contexts than would be expected in
the absence of brokerage opportunities (Ruef, 2009). By the same token, David Obstfeld
(2005) has found that an alternative strategy – the tertius iungens (or ‘third who joins’)
– may apply when an entrepreneur seeks to act as a non-partisan mediator between two
disconnected parties.
Aside from his analysis of the tertius gaudens, Simmel’s work has other implications for
contemporary work on entrepreneurial groups. His essay on ‘the stranger’, for instance,
highlighted the relationship between outsider status and middleman entrepreneurs,
who make a living from intermediate trade between otherwise closed societies (Simmel,
1908b/1950). These middleman entrepreneurs are distinguished by their contact with
diverse segments of society, but they lack an ‘organic’ connection, ‘through ties of kinship,
locality, and occupation, with any single one’ (ibid., p. 404). A theoretical implication that
follows from this claim is that an in-group affiliation bias should be sustained among mid-
dleman minorities, despite their regular contact with out-group members (typically, in the
role of customers or suppliers). Recent statistics on homophilous (in-group) affiliations
in entrepreneurial partnerships tend to support this contention. Among US startups in
1998, for instance, the rate at which minority entrepreneurs formed new businesses with
members of their own ethnic group was over 800 times the rate expected under a model
of random mixing, while the comparable rate for white entrepreneurs was over 100 times
random expectations (Ruef et al., 2003, Table 9, Model 3).
In other work, Simmel highlighted the effect of group size and composition on cohe-
siveness. He argued that group ‘solidarity decreases in the measure in which numerical
increase involves the admission of heterogeneous individual elements’ (1908a/1950,
p. 95). Again, his theory bears directly on modern conceptions of entrepreneurial groups,
particularly the tension between a desire for functional diversification and the inter-


personal conflict that may result from team heterogeneity (Ensley, 1999). This paradox
– which also pertains to top management teams more generally (Amason, 1996) – was
anticipated by Simmel in terms of ‘the disadvantages for cohesion and unity’ follow-
ing from increases in group size, coupled with the ‘advantages of nearing [functional]
completeness’ (1908a/1950, p. 95).
Following Simmel, structural sociology moved in two (quite distinctive) directions,
each of which bears on the analysis of entrepreneurial groups. One direction involved
the post-World War II development of sociometry, the formal methodological toolkit
for collecting data on and analyzing social networks (see Wasserman and Faust (1994)
for a systematic overview). While network analysts, on the whole, only gradually
recognized the relevance of their framework for entrepreneurial behavior, it is now
well established that ‘most forms of entrepreneurship are centered around firms and
interaction rather than around the activities of a single, heroic actor’ (Swedberg and
Granovetter, 2001, pp. 12–13). Some crucial theoretical milestones in the development
of this relational view of entrepreneurial groups have been Mark Granovetter’s (1985)
influential statement on the ‘embeddedness’ of economic life and Burt’s (1992) concep-
tualization of the ‘network entrepreneur’, both of which exhibit a strong Simmelian
pedigree.
The other direction is the relationship of social structure outside of the organization
to the internal dynamics of the entrepreneurial venture (Aldrich, 1979/2007). Arthur
Stinchcombe’s path-breaking (1965) essay re-ignited sociological interest in this topic,
emphasizing the fragility of entrepreneurial groups that formed without the benefit of
pre-existing relationships that could be imported into startup enterprises. For entrepre-
neurial teams, ‘the process of inventing new roles, the determination of their mutual rela-
tions and of structuring the field of rewards and sanctions . . . have high costs in time,
worry, conflict, and temporary inefficiency’ (1965, p. 148). These problems of organiza-
tional learning are compounded because ‘new organizations must rely heavily on social
relations among strangers’ (p. 149), producing networks within the group that may be
threatened by a lack of interpersonal trust. Stinchcombe argued that the problems could
be mitigated by institutions – such as universalistic laws, religious norms, and contractual
instruments – that enforce agreements developed among strangers.5 These institutions
seem to figure prominently in the history of entrepreneurial groups discussed in the
previous section, with the bilateral commenda, for instance, providing a legal foundation
for agency relationships in late medieval trade in the Mediterranean, and Buddhist oaths
serving a similar function among entrepreneurial hijiri in Japan.
In both the modern network and macro-structural treatments of entrepreneurship,
we continue to see the sociological concepts (e.g. the ‘tertius gaudens’, the ‘stranger’)
introduced by Georg Simmel. His legacy has had a far-reaching effect on the structural
analysis of entrepreneurs and groups. Some contemporary analysts of entrepreneurial
phenomena frame their analysis explicitly in Simmelian terms (Aldrich and Kim, 2007;
Burt, 1992, 2000; Obstfeld, 2005; Ruef, 2002). In other cases, such as the wide-ranging lit-
erature on social networks and business founding (e.g. Baker and Nelson, 2005; Renzulli
et al., 2000), the intellectual debt is palpable yet unstated. What seems clear is that our
understanding of the structural features of entrepreneurial groups – including size, diver-
sity, in-group bias, brokerage, and potential for conflict – would be diminished without
Simmel’s pioneering work.


Coase’s Theory of the Firm
The theory of the firm developed by the British economist Ronald Coase (1910–) is
widely recognized as a cornerstone of modern institutional economics. Nevertheless, at
first glance, its implications for entrepreneurial groups may seem far from obvious. Oliver
Williamson, Coase’s most influential and active proponent, writes that the theory of
the firm highlighted the fact that, in addition to the price mechanism of the market, the
‘economic system is also made up of subsystems, of which the large corporation is a con-
spicuous member’ (Williamson and Winter, 1993, p. 3, italics added). When we survey the
contemporary literature on the governance of firms, much of it is devoted to the analysis
of large and mature enterprises (see David and Han (2004) for a review). Closer scrutiny
of Coase’s seminal work suggests, however, that in both terminology and content, there
is much effort to address the nature of the entrepreneurial firm. Moreover, contemporary
economic work on the formation of entrepreneurial partnerships has drawn extensively
from Coase’s inspiration.
‘The nature of the firm’ (1937) considers two ‘co-ordinating instruments’ in the
economy – one being the price mechanism and the other being the ‘co-ordinating
function of the “entrepreneur”’ – and asks ‘why co-ordination is the work of the price
mechanism in one case and of the entrepreneur in another’ (p. 389). The central feature of
Coase’s response, now well rehearsed by students of transaction cost economics, is that
the price mechanism imposes costs on market exchange (through problems of contract
enforcement, monitoring, and the like) that can be alleviated by the entrepreneur who is
coordinating similar transactions within the business firm. The ‘transactional’ view, in
turn, leads Coase to his definition of the firm, which ‘consists of the system of relation-
ships which comes into existence when the direction of resources is dependent on an
entrepreneur’ (Coase, 1937, p. 393).
When this system of relationships involves a set of other entrepreneurs, then Coase’s
definition circumscribes the boundaries of the entrepreneurial group. The size of the
group ‘becomes larger as additional transactions (which could be exchange transactions
co-ordinated through the price mechanism) are organised by the [focal] entrepreneur and
becomes smaller as he [sic] abandons the organisation of such transactions’ (ibid.). Coase
defines the process of combination as an event ‘when transactions which were previously
organised by two or more entrepreneurs become organised by one’ and contrasts this
with integration, which ‘involves the organisation of transactions which were previously
carried out between the entrepreneurs on a market’ (pp. 397–8). As in all facets of the
theory of the firm, the decision as to when an entrepreneur should seek out combina-
tion or integration (and, thus, form a venture with greater transactional scope) depends
on the costs of organizing, the likelihood that the entrepreneur will make ‘mistakes’ that
would otherwise be corrected in the market, and the economies of scale that accrue to
the entrepreneurial group.
By most accounts, Ronald Coase’s article only exercised a limited influence in the
decades after it was published (see Coase (1988) for a retrospective). Even after its
resuscitation by Williamson in the 1970s, the initial impetus of transaction economics
steered the theory of the firm away from small, entrepreneurial ventures (Williamson,
1975, 1985). Nevertheless, recent applications have highlighted the relevance of Coase’s
ideas for entrepreneurial groups. In a model of the allocation of rights in venture capital


contracts, for instance, Thomas Hellmann (1998) proposes that the willingness of an
entrepreneur to give up control rights to an outside investor (e.g. permitting the replace-
ment of the entrepreneur by a professional manager) is partially a function of the entre-
preneur’s wealth constraints and equity stake. As in Coase’s formulation, the decision
also hinges on the relative productivity of entrepreneurs (e.g. ability to achieve low organ-
izing costs) compared to professional management (Hellmann, 1998, p. 60). Similarly, in
a study of joint ventures between Chinese and foreign partners, Chong-En Bai and his
colleagues (2004) offer a theoretical model that emphasizes the private economic benefits
and verifiable payoff to both partners as influencing the character of control-right and
revenue sharing arrangements. Both Bai and colleagues and Hellmann build on the trans-
action cost economics (TCE) of Williamson (1985), which addresses the implications
of opportunism, bounded rationality, and incomplete contracting for the allocation of
control rights in business firms. Their approaches differ from TCE insofar as they con-
sider features of entrepreneurial groups (e.g. founder replacement, revenue sharing) that
tend to be ignored in Williamson’s focus on mature businesses.
One of the most explicitly historical efforts to develop Coase’s ideas in order to under-
stand entrepreneurial partnerships can be found in Avner Greif’s (2006) influential text
on medieval trade. As Greif points out, a central problem in long distance mercantile
exchange at the time was the reliance of entrepreneurs on overseas agents, a contractual
partnership fraught with uncertainty and potential for theft or malfeasance. One possi-
ble solution – emphasized in other treatments of these partnerships (e.g. Rosenberg and
Birdzell, 1986) – is that these mercantile relationships would only be reliable if they were
constructed on the basis of a ‘natural group’, the family. Like Coase, Greif sought to
identify other institutions and organizational arrangements that were able to reduce the
transaction costs inherent in these affiliations.
A response that arose serendipitously among the (Jewish) Maghribi traders in the
eleventh century was the creation of a reputational mechanism that reflected past mer-
cantile conduct. As Greif writes (1989, p. 862), ‘the Maghribi traders did not establish a
separate religious-ethnic community . . . nor did they represent a “natural” group, which
binds together individuals in all (or at least most) important aspects of their lives.’ But
these traders did operate on a repeated basis through business associates and, in that
process, constituted an informal entrepreneurial group – which Greif terms a ‘coalition’.
The Maghribi coalition was sustained by several institutional mechanisms, few of them
sanctioned formally by law in the medieval states of the Mediterranean basin. Perhaps
foremost among these, according to Greif, was an implicit contract that governed the
relationships among coalition members. Maghribi traders agreed to employ only other
coalition members as agents and to pay them a premium for their mercantile services. In
addition, ‘all coalition merchants agree[d] never to employ an agent who cheated while
operating for a coalition member’ and were permitted to cheat any trader who had previ-
ously cheated a member of the coalition (Greif, 1989, p. 868). Like Coase’s ‘firm’, then,
Greif’s Maghribi coalition offered an organizational solution to the problem of rampant
transaction costs in the open market.
Greif’s research demonstrates that the concept of transaction costs can have wide-
ranging implications for our understanding of entrepreneurial coordination in social
groups. The Maghribi coalition represents a relatively informal organizational arrange-
ment for managing these costs. Another – more formalized – arrangement identified by


Greif was the merchant’s guild, which was especially prevalent among the traders of the
German Hansestädte (2006, Chapter 4). These exemplars flesh out the abstract features
of the Coasian firm and illustrate how transactions costs may affect the nature of organi-
zational activities among entrepreneurs. By cataloguing other organizational arrange-
ments and the solutions they offer to instances of market (or state) failure, institutional
economists can fruitfully extend Coase’s approach to a variety of historical cases of
entrepreneurial groups.
Olson’s Theory of Collective Action
Mancur Olson (1932–98) is often credited with introducing the analysis of groups with
shared interests into economics. In his classic book The Logic of Collective Action (1965,
revised 1971), Olson addressed the ‘free rider’ problem, whereby the contributions offered
by group members toward collective goals decline with increases in group size.6 The free
rider problem tends to arise in groups, such as entrepreneurial teams, where access to
collective rewards (e.g. startup profits) is defined in advance and, for any given group
member, is not contingent on their subsequent effort. A strong version of this dilemma
applies when entrepreneurial groups formally specify ownership shares (and other ben-
efits) early in the startup process based only on the ostensible competencies and traits of
owner-managers, with little provision for sanctioning entrepreneurs whose subsequent
investment of time, ideas, or other resources falls short of expectations. More commonly,
there is not a complete ‘impossibility of exclusion’ from collective goods (Hardin, 1982;
Oliver, 1993), since business partnerships retain some ability to remove lackadaisical
participants from the group. Still, the process of exclusion from the group imposes suf-
ficient burden and turmoil that the free rider problem remains highly salient even in these
contexts.
Given the assumptions that (a) group members cannot be excluded from collective
benefits (at least not without burden) and that (b) those benefits are produced jointly
through the actions of group members, Olson argued that rational individuals would
engage in shirking behavior, especially within larger groups where the link between indi-
vidual effort and collective outcomes was less tangible. Applying his theory to business
partnerships, Olson wrote:
The fact that the [business] partnership can be a workable institutional form when the number
of partners is quite small, but is generally unsuccessful when the number of partners is very
large, may provide another illustration of the advantages of smaller groups. When a partnership
has many members, the individual partner observes that his [sic] own effort or contribution will
not greatly affect the performance of the enterprise, and expects that he will get his prearranged
share of the earnings whether or not he contributes as much as he could have done. The earnings
of a partnership, in which each partner gets a prearranged percentage of the return, are a col-
lective good to the partners, and when the number of partners increases, the incentive for each
partner to work for the welfare of the enterprise lessens. (Olson, 1971, p. 55)
In Olson’s perspective, there are compositional features of social groups that serve
to mitigate the free rider problem. Particularly important, in this respect, are social
incentives that encourage individuals to contribute, even when they might otherwise
be inclined toward free riding. Olson distinguishes between groups bound by strong
pre-existing social relationships and those that lack such interpersonal ties: ‘if a small


group of people who had an interest in a collective good happened also to be personal
friends . . . and some of the group left the burden of providing that collective good
on others, they might, even if they gained economically by this course of action, lose
socially by it, and the social loss might outweigh the economic gain’ (ibid., p. 60). Part
of the reason that strong social networks are crucial to mitigating free riding is that they
offer selective incentives to individuals that must not be explicitly agreed upon or paid
for by other members of the group. As a consequence, these social incentives avoid the
circularity inherent in the provision of private economic incentives to resolve the collec-
tive action problem, in which one collective action problem (the provision of collective
goods) begets another (the creation of a system of selective incentives to resolve that
problem).
During the late 1960s, the impact of Olson’s monograph on the study of entrepre-
neurship was immediate, especially when ‘entrepreneurs’ are defined broadly to include
actors in the political as well as the business realm. In the revised edition of the book, in
1971, Olson wrote that ‘some recent writers, in discussions of the difficulty of providing
collective goods for unorganized groups, have introduced the idea of the entrepreneur
who might help a group obtain a collective good it lacked’ (1971, p. 173). Frohlich and
Oppenheimer (1970; 1972), for instance, advocated an entrepreneurial theory of political
behavior that was developed explicitly based on Olson’s ideas. The earliest formulation
of such a theory was advanced by Robert Salisbury (1969), distinguishing between lead
entrepreneurs, who develop an incentive structure for a new organization, and mere sup-
porters, who are offered these incentives at the opportunity cost of organizational mem-
bership. In Salisbury’s framing, the successful emergence of new organizations hinges on
the particular mix of benefits – material, solidary, and expressive – between lead entre-
preneurs and supporters. Olson’s problem of collective action was thus re-formulated as
a problem of exchange within a group.7
Despite its origin as a theory of economic groups, Olson’s theory has since been
applied almost exclusively to the formation of groups outside the world of business.8 As
Nownes and Neeley (1996, p. 122) write, ‘Olson’s logic remains the dominant paradigm
for explaining the formation (or lack of formation) of non-economic and public inter-
est groups’. In their own study of public interest group founders, Nownes and Neeley
identified only partial support for an exchange-theoretic formulation of Olson’s thesis:
‘virtually all entrepreneurs noted that they [could] offer charter members nothing in
return for their support . . . a member responding to initial entrepreneurial pleas has little
or no prospect of personal or collective gain’ (p. 137). Still, political scientists have rou-
tinely invoked Olson in drawing a link between entrepreneurs and political groups (e.g.
Ainsworth and Sened, 1993; Moe, 1988; Schneider and Teske, 1992).
Some of these contributors have also raised questions about the relevance of Olson’s
theory of collective action for new business partnerships. Owing to the free rider problem,
Schneider and Teske (1992, p. 741) suggest that the ‘stereotypical private sector entrepre-
neur works alone or in a small organization, thus solving collective action problems by
avoiding collectivities’. By contrast, ‘a public sector entrepreneur is much more likely to
need a collective group foundation to survive and prosper in the political marketplace.’
Nownes and Neeley (1996) approach the issue from a different angle, suggesting that
the free rider thesis may apply to the maintenance of effort in established groups, rather
than the elicitation of effort in new ones. This will be true, in particular, if newly formed


organizations tend to receive substantial support from specific patrons, while older
organizations rely on the incremental support of a broader set of supporters.9
To test the applicability of the theory of collective action to business partnerships,
I conducted an empirical study of entrepreneurial effort (hours worked and additional
funds invested) among a nationally representative sample of startups (Ruef, 2010,
Chapter 7). As anticipated by Olson’s thesis, effort decreased substantially as the number
of owners in an entrepreneurial group grew larger. Olson also argued that the free rider
problem could be resolved in face-to-face groups through social pressures created by
intimate bonds among participants. In an entrepreneurial context, a particularly impor-
tant source of such pressure involves the substantial number of ties between spouses and
cohabiting (intimate) partners. Where such ties exist, we expect little free riding among
entrepreneurs, since shirking in the amount of time and money devoted to the venture has
immediate repercussions in the domestic realm. Consistent with these intuitions, I found
that the free rider problem, i.e. the covariation of group size and level of entrepreneurial
effort, was absent when a group of business startup owners included intimate partners.
The importance of Olson’s theory for the formation of political groups is widely
acknowledged, but its implications for entrepreneurial activity in other sectors (e.g.
business or social entrepreneurship) would benefit from further attention. Olson’s entre-
preneur also retains an unusually heroic persona, often serving as a deus ex machina to
resolve the (otherwise) unsolvable problem of collective action. This heroic attribution
was pursued by Olson himself, when he wrote that the:
[E]ntrepreneur, who is generally trusted (or feared), or who can guess who is bluffing in the bar-
gaining, or who can simply save bargaining time, can sometimes work out an arrangement that
is better for all concerned than any outcome that could emerge without entrepreneurial leader-
ship or organization. (1971, p. 175)
As Olson acknowledged, such heroic visions must be tempered by the constraints on

entrepreneurial groups: entrepreneurs ‘strive mightily to organize large groups . . . [but]
many of [these efforts] will come to naught’ (p. 176).10 The puzzle for a theory of collective
action is identifying the social conditions and incentives under which entrepreneurs can
develop stable and successful groups that produce collective goods.
Theories of Ethnic Enterprise
The last classical theory of entrepreneurial groups that I review does not derive from the
work of a single scholar, but, rather, from the work of a set of sociologists who reinvig-
orated interest in ethnic enterprise during the early 1970s. On a sporadic basis, one can
readily locate earlier articles and monographs on ethnicity and entrepreneurship, such
as Rose Lee’s (1949) research on the changing organizational structure of Chinatown
businesses. In the United States, there was also a sustained intellectual tradition that
addressed entrepreneurial activity among African-Americans, including such influential
works as E. Franklin Frazier’s (1957) Black Bourgeoisie and W.E.B. DuBois’s (1899) The
Negro in Business. Arguably, however, it was not until the 1970s that sociologists devel-
oped a general theory of ethnic enterprise, as opposed to the empirical generalizations
that were found in much of the preceding scholarship.11
Three scholars – Ivan Light, Edna Bonacich, and Howard Aldrich – were especially


influential in developing the theory of ethnic enterprise and cultivating its implications
for entrepreneurial groups. Light’s (1972) Ethnic Enterprise in America offered one of
the first comparative examinations of entrepreneurial activity across a number of ethnic
categories, including Chinese, Japanese, and African-Americans. The puzzle identified by
Light was that the Chinese and Japanese immigrants were historically ‘poor and visibly
non-European and were subject to racial discrimination on that account . . . [the] very
qualities [that] tended to force [them] into the classic small business occupations with
which they have now become identified in the popular mind’ (1972, pp. 5–6). At the same
time, African-Americans, who were located in a similarly disadvantaged social location,
lacked a corresponding level of prevalence among small business owners. Quoting Nathan
Glazer and Daniel Moynihan on the same point, Light noted that the ‘complete absence
of a business class’ among African-Americans was ‘especially perplexing’ (p. 4).12
According to Light, the theoretical solution to this puzzle lay in group processes.
Descriptively, this could already be seen to some extent in the comparative propensity of
Asians and African-Americans to form entrepreneurial groups: ‘there was a noteworthy
tendency of Chinese and Japanese to operate partnerships with more than one owner . . .
while most of the black stores were solo proprietorships employing no hired labor’ (p. 11).
This difference in associational propensity may have proven to be minor, had it not also
reflected on the ability of entrepreneurs from these different ethnic categories to secure
business financing. Light suggested that the Chinese and Japanese had imported institu-
tions – such as rotating credit associations (hu in China and ko in Japan) – which made
it easier to capitalize small businesses, while similar institutional traditions from Africa
and the Carribean (e.g. the West African esusu) ‘vanished from [the] cultural repertoire’
(p. 36) of African-Americans during slavery and beyond. The rotating credit associations
were essential, not only as a means of distributing capital, but as a system of mutual trust
among Chinese and Japanese immigrants. In Light’s theory, it was the absence of group
generalized exchange that accounted for the dampened entrepreneurial activity among
African-Americans.
Extending Light’s insights, Edna Bonacich (1973) developed a theory of ‘middleman
minorities’, entrepreneurs from minority ethnic groups who assume an intermediary
mercantile position between producer and consumer.13 Internationally, a variety of ethnic
minorities, such as the Chinese of Southeast Asia, Indians in East Africa, Jews in Europe,
or Armenians in Turkey, have taken on this role in host societies outside of their own.
Like Light, Bonacich acknowledged that part of the catalyst for entrepreneurship among
these minorities was the hostility of the host society and the effects of ‘sojourning’, a
form of temporary migration in which individuals plan to return to their homeland once
their economic or political prospects have improved. But these are merely necessary, not
sufficient conditions for middleman entrepreneurship. The missing variable, according
to Bonacich’s theory, was the appearance of ‘a general “group” orientation’, which is
‘undoubtedly a product of conditions in the country of emigration’ (1973, p. 584). This
group orientation yields an unusually high level of solidarity among middleman minori-
ties, marked by features such as marital homogamy, residential self-segregation, the per-
petuation of a distinct language and education, and an avoidance of political activism
in the host society (except when the minority group itself is threatened). For middleman
entrepreneurs, in turn, this communal solidarity reinforces ‘family, regional, dialect, sect,
and ultimately ethnic ties’ that distribute business credit and information, allow for the


recruitment of inexpensive labor, and place informal limits on business competition with
co-ethnics (p. 586).
A third component of the classical perspective on ethnic enterprise involves the ecological
succession of neighborhoods and how it impacts startup opportunities for entrepreneurs
and their co-ethnic partners. Theories of ‘ecological succession’ – how one ethnic popula-
tion in a neighborhood (or other urban region) replaces another – could be traced back to
the Chicago School of Robert Park, Ernest Burgess, and their collaborators in the 1920s
and 1930s (Aldrich, 1975). Although subsequent investigators also hypothesized that these
residential changes would be associated with changes in the ecology of businesses, the thesis
received little empirical attention until the 1970s. Howard Aldrich, along with his long-time
collaborator Albert Reiss, proposed a number of parallels between residential turnover and
the character of ethnic enterprise. Among black-owned business, for instance, the ‘removal
of white-owned competition allows black businessmen to occupy types of businesses pre-
viously closed to them[;] as white businessmen leave the more desirable niches in the busi-
ness structure, we would expect black and Puerto Rican entrepreneurs to move quickly to
fill them’ (1976, p. 848). These succession dynamics occur not just because of commercial
vacancies in a neighborhood, but because ethnic enterprise has a ‘group’ orientation. The
mix of businesses in a neighborhood must be responsive to the fact that a ‘new [ethnic] pop-
ulation [often] has different tastes and lower income’ (Aldrich, 1975, p. 339). Ethnic busi-
ness enterprises may also be dependent on other ‘new’ ethnic organizations – newspapers,
churches, and voluntary associations – to attract business partners, workers, and customers
or, more generally, to promote their efforts within the local community.
Pioneered over 30 years ago, theories of ethnic enterprise have inspired a rich and
cumulative body of scholarship. It is not possible in the remainder of this section to
review the numerous branches of this literature exhaustively (see Aldrich and Waldinger
(1990) and Light (2005) for useful summaries), though several strands of research stand
out. One area of intense empirical and theoretical attention has involved the entrepre-
neurial groups that arise from ethnic enclaves. Empirical debates in this area have often
centered on the question as to whether the segregation and solidarity associated with
ethnic enclaves generates economic benefits for immigrants; and, in particular, whether
these benefits differ between entrepreneurs and non-entrepreneurs (Portes and Jensen,
1989; Portes and Zhou, 1996; Sanders and Nee, 1987). Theoretical refinement of the
enclave concept has emphasized the co-occurrence of ethnic enterprises in a given geo-
graphic locale and the implications this generates for social networks among entrepre-
neurs and their co-ethnic employees (Portes and Shafer, 2007).
A related development has been the testing of theories bearing on ethnic enclaves
and ecological succession in countries aside from the United States. Aldrich and col-
leagues (1985) found that segregation and social distance explained much of the contact
between shopkeepers and customers in three urban areas of England. A follow-up study
in the same region detailed the social networks of Asian and white shopkeepers, finding
that both ethnic groups relied heavily on kin and friends in starting and sustaining new
businesses, with some variation in capitalization and parental background (Zimmer
and Aldrich, 1987). Despite considerable differences in migration histories and political
systems, the ecological succession of small Asian-owned businesses in the English context
closely resembled the pattern found among black and Puerto Rican entrepreneurs in the
United States (Aldrich, et al., 1989; Aldrich and Reiss, 1976).


Recent work on ethnic identity and social networks has also considered the cross-
national character of many ethnic entrepreneurial groups themselves. As Alejandro
Portes and his colleagues note, ‘instead of focusing on traditional concerns about [the]
origins of immigrants and their adaptation to receiving societies, this emerging perspec-
tive concentrates on the continuing relations between immigrants and their places of
origin’ (2002, p. 279). Using data on respondents who had migrated to the United States
from Colombia, the Dominican Republic, or El Salvador, Portes and his co-authors
found that the social networks of Latino immigrant entrepreneurs contained a large
number of non-local ties, with the ratio of non-local to local ties averaging 0.77 to 1. The
prevalence of a transnational orientation among immigrant entrepreneurs has likewise
received extensive qualitative attention, including Annalee Saxenian’s (2006) monograph
on Indian, Chinese, and Israeli entrepreneurs in Silicon Valley, which documents the
ability of entrepreneurial groups to overcome international trade barriers and connect
regional economies.
Research on ethnic enterprise has thus sustained several insights from the pioneer-
ing work of Light, Bonacich, and Aldrich. First, there is an understanding that ethnic
identity, apart from the economic circumstances of the entrepreneur, produces both
opportunities and constraints in the creation of new organizations. Second, the reason
for the pervasive effect of ethnic identity is the ‘group orientation’ it entails; as Aldrich
and Waldinger (1990, p. 112) note, ‘what is “ethnic” about ethnic enterprise may be no
more than a set of connections and regular patterns of interaction among people sharing
common national background or migratory experiences.’ Finally, there is an inherently
comparative aspect to the study of these entrepreneurial groups – contrasting their
activities and performance across ethnic enclaves, across generations, and across locales
(Granovetter, 1995).
CONCLUSION
If the classical perspectives on entrepreneurial groups had fallen into disuse, then this
review would be largely of historical interest. But, as the preceding discussion has sug-
gested, contemporary observers of new business and political ventures continue to draw
extensively on the legacy of Simmel, Coase, and Olson, as well as the theories of ethnic
enterprise developed by sociologists in the 1970s. In this concluding section, I seek to
identify the central questions that animate these perspectives and how they relate to one
another. I also address some respects in which the classical perspectives are underutilized
by research on ‘founding teams’ that appears in specialized entrepreneurship journals.
Figure 10.2 offers a basic typology of the classical perspectives and the central research
questions they pose. One obvious distinction among the perspectives is disciplinary. The
work of Georg Simmel and the scholarship on ethnic enterprise is rooted in sociology,
and thus has a stronger emphasis on the identity and informal relationships among par-
ticipants in entrepreneurial groups. By contrast, the work of Ronald Coase and Mancur
Olson is rooted in economics (or, in the latter case, perhaps political economy), and thus
has a stronger emphasis on the incentives and costs incurred among participants, as well
as the ‘productivity’ of entrepreneurial groups as a whole. While these disciplines some-
times share explanatory variables, the outcomes they highlight tend to be distinctive. For


Disciplinary Orientation
Sociology Economics

Conceptual Group structure Classical antecedent: Georg Simmel Classical antecedent: Mancur Olson
emphasis
(Size, relationships, Question: Question:
heterogeneity, etc.)
How does the structure of a group How does the structure of a group
generate potential for conflict, impact individual effort and the
cohesion, or opportunity? potential for collective action?
Contemporary example: Burt (2004) Contemporary Example: Nownes and

Neeley (1996)
222
Classical antecedent: Theories of Classical antecedent: Ronald Coase
ethnic enterprise
Characteristics of members/ Question:
transactions
Question:
How does membership in a group
(Demography, benefits, costs) How does membership in an (ethnic) reduce costs that would be incurred in
group yield access to capital, an open market?
information, and other support?
Contemporary example: Greif (2006)
Contemporary example: Portes,
Haller and Guarnizo (2002)

Figure 10.2 Classical perspectives on entrepreneurial groups in the social sciences
29/9/10 11:45:29
instance, both Simmel and Olson consider size to be a crucial feature of entrepreneurial
groups. In Simmel’s structural sociology, the question is how the increasing size of a
group will affect its level of internal cohesion and conflict. In Olson’s logic of collective
action, the question is how the increasing size of a group will affect the level of entrepre-
neurial effort on the part of each participant.
The other distinction among the classical perspectives is more subtle, pertaining to
their tendency to address features of group structure as a whole (e.g. size, heterogene-
ity, relational composition) or features of the individual members or transactions that
constitute a group (demography, benefits, costs). Applying this standard, the explanations
of Simmel and Olson are both structural in nature. By contrast, theories of ethnic enter-
prise tend to infer that entrepreneurs have access to supportive institutions in an ethnic
community – such as rotating credit associations – by virtue of their individual demographic
characteristics. Similarly, Coase’s theory of the firm argues that individual transactions are
the appropriate units of analysis in judging what exchanges should be internal to the entre-
preneurial firm and what exchanges should occur on the open market. The structure of the
entrepreneurial group, as a whole, is somewhat ancillary to these concerns.
The classical perspectives on entrepreneurial groups thus offer variation in both their
units of analysis and disciplinary orientation, features that – in turn – allow these per-
spectives to pose a rich array of research questions concerning entrepreneurial outcomes.
Despite their impact on disciplinary research, what remains remarkable is that little
of the literature in business management (and, particularly, in specialized journals on
entrepreneurship) makes much use of the classical perspectives. Even early contributions
in business management that examined the effects of founding team composition (e.g.
Eisenhardt and Schoonhoven, 1990) were relatively selective in their references, often
emphasizing highly cited precursors (such as Stinchcombe, 1965) while ignoring the
broader historical body of work on entrepreneurial groups. Considering our understand-
ing of entrepreneurial groups, the consequences of this elision are not merely ones of
historical myopia. Many of the questions posed by the classical perspectives have received
only partial answers in contemporary empirical research.
It is hoped that this review will help stimulate entrepreneurship scholars to think
further about the issues of group conflict and cohesion as raised by Simmel, transaction
costs as raised by Coase, free-riding as raised by Olson, and ethnic solidarity as raised by
scholars of ethnic enterprise. What may be especially promising are analyses of entrepre-
neurial groups that employ more than one of these classical perspectives simultaneously.
How do brokerage opportunities and ethnic identities combine, for instance, to affect the
distribution of rewards in business partnerships? Can the loss of entrepreneurial effort
due to free-riding in large startup teams be offset by reductions in transaction costs?
Scholars who draw on several of the classical perspectives will be well positioned to
answer such questions about the structure and effects of entrepreneurial groups.
ACKNOWLEDGEMENTS
The initial inspiration for this historical review arose during a professional development
workshop at the 2007 Academy of Management (AOM) conference in Philadelphia, in
which I addressed the past and future of research on entrepreneurial teams. I would like


to thank Howard Aldrich, Mark Granovetter, Hans Landström, and Franz Lohrke for
their helpful feedback on an earlier draft of this chapter. As always, any errors of fact or
interpretation remain those of the author.
NOTES
1. A fifth classical perspective, Max Weber’s ideal-types of commercial partnerships, will be addressed in my
review of historical evidence on entrepreneurial groups.
2. Using his case study of commercial law in Pisa, Weber also examines partnerships that lacked a separate
fund, but treats them as peripheral to the institutional evolution of this organizational form (see discus-
sion by Lutz in Weber 1889/2003, p. 25).
3. Partnerships among male entrepreneurs in the same city were less common.
4. Broadly construed, structural sociology entails the assumption that ongoing social relationships are critical
to the explanation of individual identities, attitudes, and actions. It can be contrasted with ‘undersocial-
ized’ conceptions of actors (which presume that individuals follow a utilitarian model of action, apart
from their social context) and ‘oversocialized’ conceptions (which presume that individuals answer to
internalized norms or beliefs, again apart from their present social context) (Granovetter, 1985).
5. The severity of these problems also depends on the culture that is adopted by entrepreneurial groups from
the broader community, including ‘norms concerning the extent of solidarity, norms about whose troubles
one has to worry about and to contribute to alleviate’ (Stinchcombe, 1965, p. 187).
6. The ‘free rider’ problem, per se, did not originate with Olson, but enjoys a long scholarly pedigree extend-
ing back to Hume and Rousseau, among others (see Frohlich and Oppenheimer, 1970, pp. 104–6). Paul
Samuelson first formulated the problem in economic terms.
7. Salisbury’s formulation owes an obvious (and acknowledged) debt to two previous intellectual traditions
in the social sciences, one being the exchange theory framework in sociology, as advanced by George
Homans (1961) and Peter Blau (1964); the other being the theory of incentives in organizations, first put
forward by Chester Barnard (1938) and subsequently advanced by Clark and Wilson (1961). What appears
novel about Salisbury’s treatment is that he explicitly ties exchange theory and the balance of incentives
among members to the creation of new organizations, rather than the survival of existing ones.
8. This coincides with the welcoming reception accorded to Olson’s theory of collective action among
political scientists and comparatively luke-warm reaction in contemporary economic theories of organiza-
tions.
9. There are other well-known critiques of Olson’s argument that will not be reviewed here. Useful overviews
can be found in Hardin (1982) and Oliver (1993).
10. Consequently, the entrepreneurial partnerships in representative samples tend to be small. In the contem-
porary United States, most business startups involve one or two founders, occasionally three or four, and
seldom five or more (Ruef et al., 2003).
11. Given a sufficiently generous interpretation, a research interest in ethnic enterprise can also be traced
back to Weber and Simmel, who noted the propensity of individuals assuming a marginalized identity in
a society to band together for economic survival.
12. To a large extent, this empirical generalization is historically contingent. Between the late 1990s and the
present, rates of entrepreneurship among African-Americans have tended to be higher than those among
whites in the United States (Ruef, 2010).
13. Unlike Burt’s (2000) ‘network entrepreneur’, this conceptualization does not automatically equate entre-
preneurship with the act of brokerage. Bonacich notes that many forms of entrepreneurship – such as
those found in the agricultural or industrial sectors – tend to be excluded from the occupational repertoire
of middleman minorities.
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11. Governance theory: origins and
implications for researching boards and
governance in entrepreneurial firms
Jonas Gabrielsson and Morten Huse
INTRODUCTION
All firms, small as well as large, new as well as old, can be described as having two com-
plementary systems: a production system and a governance system. The production
system consists of the business activities used by the firm to facilitate the transformation
of input resources into the output that is offered on the market. Activities organized and
carried out in most firms include procurement, operations, logistics, marketing and sales,
and interaction with suppliers and customers. The overall focus is to manage the firm and
its input resources to efficiently and effectively design, produce and distribute its output.
The governance system, on the other hand, allocates rights and responsibilities among
the various providers of input resources in and around the firm and gives some of them
– generally the providers of financial resources – the power to make decisions and exer-
cise control to influence the direction and performance of the enterprise (Huse, 2007).
The overall focus is on determining how critical resources will be acquired, controlled
and deployed so as to increase the wealth of the business, and how to deal with conflicts
between various coalitions of resource providers who have potentially divergent goals.
The governance system in a firm includes both external and internal mechanisms that
direct, administer and control the firm and its operations (O’Sullivan and Diacon, 1999;
Collin, 2003). Examples of external governance mechanisms include competition on
product markets, state legislation and regulations, managerial labor markets, and pres-
sure from the media. Examples of internal governance mechanisms include the board of
directors, auditing, and compensation systems for firm managers. The various external
and internal mechanisms making up the governance system of the firm thus form a
complex web of institutional arrangements that influence its direction and performance
through particular features of incentives, supervision, best practices, ‘rules of the game’,
links to external sources of knowledge, and internal channels to diffuse knowledge.
Entrepreneurial Firms
In this chapter we address the issue of governance in entrepreneurial firms as opposed

to the large and mature corporations that most often have been studied in academic
research (Gabrielsson and Huse, 2004). However, there is no accepted or consistent way
of defining an entrepreneurial firm.1 We refer in our discussion to firms that are in the
229

early or ‘entrepreneurial’ stage of the organizational life cycle (Greiner, 1972; Quinn and
Cameron, 1983). At this stage, firms are generally involved in building up their resource
base, entering new or established markets, and searching for additional capital and allies.
Entrepreneurial firms can in this respect – in an ‘ideal typical’ way (Weber, 1947) – be
characterized as operating in one or a few product markets, with small managerial hierar-
chies, close relationships between owners and managers, and management of the organi-
zation in a largely personalized way. These characteristics provide a strong contrast to
larger and more diversified corporations which have structurally complex organizations,
distant and invisible shareholders, and multiple layers of management. The small entre-
preneurial firm thus provides a fundamentally different context when it comes to issues
and problems of governance.
We think that our focus on governance in entrepreneurial firms can be of interest for
at least two reasons. First, entrepreneurial firms account for a relatively large share of
the total amount of organized economic activity in most developed market economies.
Second, these firms are considered as the most important for creating value in society,
and they are often associated with positive outcomes such as job creation, innovation
and economic growth (Birch, 1979; Kirchoff, 1994). Their significance, in terms of sheer
numbers as well as their potential for wealth creation, makes the understanding of princi-
ples for ‘good’ governance highly relevant for a wide range of stakeholders in and around
the entrepreneurial firm, including founders, investors, and employees.
As noted above, governance refers to a broad range of mechanisms that direct, admin-
ister and control the firm and its operations. In this chapter we specifically focus on the
governance provided by the ‘board of directors’, since this internal governance mecha-
nism has been the most widely examined and reported in main entrepreneurship journals
(e.g. Ford, 1988; Rosenstein, 1988; Daily and Dalton, 1992; Borch and Huse, 1993; Daily
and Dalton, 1993; Rosenstein et al., 1993; Huse, 1994; Finkle, 1998; Fiegener et al.,
2000a; 2000b; Fiegener, 2005; Gabrielsson and Winlund, 2000; Johannisson and Huse,
2000; Bennett and Robson, 2004; Gabrielsson, 2007a; 2007b; Voordeckers et al., 2007;
Brunninge et al., 2007; Clarysse et al., 2007). We want to emphasize at this point that past
studies do not focus solely on entrepreneurial firms (as we define these). Rather, many
of them discuss boards of directors in small, often privately held firms. However, most
studies include entrepreneurial firms in their samples and often address theoretical issues
that are relevant to consider when studying this subset of small firms.
A widely held assumption in research on boards and governance is that the characteris-
tics of entrepreneurial firms generally speak against active boards, as CEOs often have the
authority to overrule boardroom decisions and also to directly remove board members.
However, empirical studies also suggest that boards of directors in entrepreneurial firms
can – and sometimes do – play an active role in shaping strategies and influencing organi-
zational performance in this setting (e.g. George et al., 2001; Daily et al., 2002). Several
theories have been employed in past research to explain the conditions under which a
board of directors may take action and assert power over the direction and performance
of a firm (Zahra and Pearce, 1989; Hung, 1998). Two theoretical perspectives, however,
stand out when reviewing research that has addressed the issue of boards and governance
in entrepreneurship research, namely ‘resource dependence theory’ and ‘agency theory’
(Huse, 2000; Gabrielsson and Huse, 2005).2 Consequently, we focus on these two theories
in the remainder of the chapter.


Governance theory 231
Aim of the Chapter
In this chapter, we aim to give an overview of the historical and intellectual roots of both
resource dependence theory and agency theory with a particular focus on how they have
been applied in studies of boards and governance. The underlying motivation for this
endeavor is that we believe scholars interested in issues of board governance in entre-
preneurial firms could benefit from such an overview for at least two reasons. First, we
think that an increased understanding of the origins and history of resource dependence
theory and agency theory would contribute positively to continued knowledge accu-
mulation within the field. For example, the two theories are often seen as largely com-
plementary perspectives that are used to justify board tasks such as resource provision
and monitoring (e.g. Gabrielsson and Winlund, 2000; Voordeckers et al., 2007). There
is, however, often very little reflection and discussion about the assumptions underlying
each theory. Both, for example, emphasize the value in adopting outside board members3
but the underlying reasons for this recommendation as well as the characteristics that
outside board members should have to add value differ in the two theories.
Moreover, there may be some potential problems in the joint application of resource
dependence theory and agency theory when researching boards and governance in
entrepreneurship research. For example, resource dependence theory focuses on how the
management team can control actors external to the firm so that the latter will provide or
give access to critical resources. In agency theory the focus is on the very opposite – how
actors external to the firm can control the management team. Thus, at first glance they
seem to provide rather different implications for the design of effective board governance.
An overview of the origins of resource dependence theory and agency theory and the
problems each theory seeks to address may, therefore, help entrepreneurship scholars to
better understand to what extent the two theories can be used together and what might
be required to make them more compatible.
Second, we think that both resource dependence theory and agency theory provide
interesting implications for researching behavioral aspects of boards and governance in
entrepreneurial firms. Research on boards and governance has in recent years increas-
ingly emphasized the need to more closely study behavioral processes and relational
dynamics in and around the boardroom (Forbes and Milliken, 1999; Finkelstein and
Mooney, 2003; Huse, 2005; Huse and Zattoni, 2008). There has, however, been an exces-
sive bias in past entrepreneurship research towards studying only compositional aspects
of boards. Actual board behavior has on the other hand been treated largely as a ‘black
box’ (Huse, 1998) where the behavior or conduct of boards is inferred from their demo-
graphic characteristics. As a result, there has been very little attention to how boards in
entrepreneurial firms actually work and how board members in this context may improve
their behavior to contribute to value creation, despite the importance of such knowledge
for further theory-building as well as the development of best-practice recommendations
for entrepreneurial firms.
In addition to the reasons stated above, we think that an overview of the historical and
intellectual roots of resource dependence theory and agency theory can be of interest
for a wider audience of entrepreneurship scholars. Both theoretical perspectives have,
for example, been employed in research areas within the entrepreneurship field such as
franchising (Dant, 2008), family firms (Schulze et al., 2003; Lester and Cannella, 2006)


and strategic alliances in small firms (Das and Teng, 2000). Although we do not specifi-
cally address the application of resource dependence theory and agency theory in these
contexts, our review and discussion may be relevant for these research areas as well.
The rest of the chapter is structured as follows. The next section briefly introduces the
issue of governance in entrepreneurial firms. Thereafter, we examine the historical roots
of resource dependence theory followed by a similar examination of agency theory. The
chapter then compares the two theories. We also address the implications for the joint
application of the theories, and make suggestions for future research that seeks to better
understand behavioral processes and relational dynamics in and around the boardroom
in entrepreneurial firms.
GOVERNANCE IN ENTREPRENEURIAL FIRMS
Governance has traditionally not been seen as much of an issue in entrepreneurial firms,
because they are characterized as relatively non-complex organizations with ownership
and control consolidated in one individual (i.e. the owner-manager) where coordination
is effected largely by direct supervision. This simplified view, however, has in recent years
been increasingly challenged for a variety of reasons. For example, in entrepreneurial
firms that start to experience growth there is eventually a need for functional managers
to take on duties currently performed by the owner4 (Greiner, 1972; Churchill and Lewis,
1983). The governance literature identifies this transition as a critical step in the develop-
ment from a founder-managed to a more professionally managed firm (e.g. Whisler, 1988;
Daily and Dalton, 1992; Gedajlovic et al., 2004; Gabrielsson, 2007a). This transition
means that job assignments become more specialized, and the increasing complexity in
the organization calls for more sophisticated control systems to coordinate major ele-
ments of the growing firm. It also means that planning procedures become more formal-
ized and that an effective compensation and reward system has to be developed. Among
other things, this marks an emerging need to separate strategic and operational responsi-
bilities and to start contemplating questions about how the firm is governed rather than
just managed.
Moreover, some entrepreneurial firms may already, in their early years of operations,
seek additional equity from external owners (De Clercq and Manigart, 2007). Firm
managers may in this respect have access to superior information regarding the resources
and performance of the enterprise and can consequently take advantage of this informa-
tion asymmetry for their own purposes, which in turn can cut back the returns of other
investors (Markman et al., 2001). These potential problems could in turn lead to external
owners demanding increased board oversight in the entrepreneurial firm. The pressure
from external owners is also something which has been found both in empirical studies of
the post-involvement activities of venture capitalists (Gabrielsson and Huse, 2002) and in
more general studies of boards and governance in small firms (Westhead, 1999; Fiegener
et al., 2000b; Gabrielsson, 2007b).
Furthermore, contemporary literature on governance tends to emphasize contractual
and incentive structures in the governance process while neglecting other important tasks,
such as assisting the management team in building a wider set of relationships to deal with
business risks in the firm’s competitive domain and extracting critical resources that are


vital to firm performance (Borch and Huse, 1993; George et al., 2001). Entrepreneurial
firms are in this respect often coping with liabilities of newness (Stinchcombe, 1965;
Shepherd et al., 2000) and smallness (Aldrich and Auster, 1986), which create difficulties
in building and maintaining stable relationships with important stakeholders and generat-
ing economies of scale. Having access to an active board of directors that can provide the
firm with timely resources may, therefore, be a crucial ingredient for improving its chances
of long-term survival. A governing board could identify critical strategic issues, increase
the legitimacy of the firm, and provide timely access to resources that otherwise would not
be accessible (Borch and Huse, 1993; Rosa and Scott, 1999; Deutsch and Ross, 2003).
The arguments above suggest that entrepreneurial firms can benefit from the support
that a governing board can offer. As indicated earlier, the two theories most commonly
employed for understanding principles for effective board governance in small firms are
resource dependence theory and agency theory. We now continue with an overview of the
history and intellectual roots of each theory.
RESOURCE DEPENDENCE THEORY
Resource dependence theory seeks to explain organizational and inter-organizational

behavior in terms of the critical resources that an organization depends on. The theory
posits that an organization must interact with its environment either to purchase resources
or to distribute its finished products, where the key to organizational survival is the ability
to acquire and maintain resources critical for its operations (Pfeffer and Salancik, 1978,
p. 2). A basic premise in the theory is that organizations to a large extent are in permanent
interaction with other entities in the environment where resource exchange relationships
take place (e.g. Thompson, 1967), thereby creating resource dependencies. The theory
predicts that the survival and success of a firm are dependent on its abilities to link the
firm with its external environment. As such, the theory posits that the firm should seek to
initiate and maintain control over scarce and valued resources essential to organizational
survival, in order to achieve organizational effectiveness, defined as ‘the ability to create
acceptable outcomes and actions’ (Pfeffer and Salancik, 1978, p. 7).
Organizations as Open Systems
The general thinking underlying resource dependence theory originates from open system
theory, a perspective conceiving the organization as a system that is influenced by and
interacts with the environment in which it operates (Katz and Kahn, 1966; Thompson,
1967). Katz and Kahn (1966, p. 16) describe the system perspective as ‘. . . basically con-
cerned with problems of relationships, of structure, and of interdependence rather than
with the constant attributes of objects’. Open system theory was initially developed by
the biologist Ludwig von Bertanlanffy in his essay ‘The theory of open systems in physics
and biology’ (1950). In the opening remarks of his essay he states that ‘a system is closed
if no material enters or leaves it; it is open if there is import and export and, therefore,
change of the components’ (1950, p. 23). Thus, von Bertanlanffy emphasized the idea
that real systems5 are open to their environment and interact with the environment, which
results in continual change and evolution.


Before open system theory, organizations were largely seen as closed and self-contained
entities which operated autonomously within relatively fixed boundaries, and studies
dealt with issues such as internal operations, motivation, communication, task design,
etc. (e.g. Taylor 1911; Barnard, 1938; Fayol, 1949). It should perhaps be pointed out
that the idea of using a system perspective to understand organizations was not entirely
novel. For example, although dealing mainly with internal operations, Chester Barnard
(1938) emphasized the importance of understanding the social character of cooperation
in The Functions of the Executive. In his book he argues that human organisms function
in mutual conjunction with other organisms, with their interdependence evolving over
time (p. 11). He also describes the organization as a system composed of the activities of
human beings (p. 77). Hence, even if open system theory provided a fresh perspective in
the study of organizations when it was introduced in the 1950s, the general idea of apply-
ing systems thinking for understanding organizations already existed. The introduction
of open system theory, however, raised the idea that organizations are open to and inter-
act in close association with what is construed to be their external environment, and the
perspective introduced theoretical concepts such as input, throughput, output, system
boundaries and interdependence. These concepts were then increasingly adopted and
implemented by scientists across a range of different disciplines, including the study of
organizations (e.g. Rhenman, 1964; Emery and Trist, 1965; Katz and Kahn, 1966).
The Organization and the External Environment
By the end of the 1960s the open system perspective was more or less mainstream think-
ing in organization theory. The external environment is described in this perspective as
consisting of other organizations and individuals that exert economic, political and social
influence on the focal organization (Katz and Kahn, 1966; Yuchtman and Seashore,
1967). Another feature of the external environment is that it provides resources that
enable the organization to persist and evolve over time but also makes the organiza-
tion dependent on others in order to obtain these resources (Thompson, 1967). Both
these features are expected to have a critical impact on the structure and behavior of
organizations. However, even if resource dependence theory conceives organizations as
open systems (Pfeffer and Salancik, 1978, p. 1), it is also emphasized that the relation-
ship between the environment and organizational structures and decisions is not perfect
(Pfeffer and Salancik, 1978, p. 227). Rather, organizations are seen as ‘loosely coupled’
(e.g. Weick, 1976) with their environments, something which makes external relationships
important but, at the same time, indeterminate. These indeterminate relationships allow
potential variations in how organizations are able to manage constraints in their resource
environments, by maintaining external linkages to organizations on which they depend
for critical resources. These potential variations are moreover a key trigger for the analy-
sis of resource dependence, as they point to the value of understanding how the distribu-
tion of power in and around the organization influences its behavior and design.
Two fundamental questions addressed in resource dependence theory are: who con-
trols the organization, and how do such distributions of power and influence arise? The
interest in these two questions connects resource dependence theory with early literature
and research in sociology that analyze power in and around organizations. An impor-
tant source for this stream of research is Philip Selznick who, in his book TVA and the


Grass Roots (1949), uses power-based arguments to study inter-organizational relations.

Organizations are described in Selznick’s study as adaptive social structures affected by
their environments where external groups fight for control of them, which, in turn, con-
strains organizational action and behaviors. An important part of his study is the analysis
of co-optation as a mechanism to cope with the tensions and dilemmas caused by struc-
tural arrangements and environmental constraints. Co-optation in this context means
inviting a representative of the source of constraint into the internal decision-making or
advisory structure of the organization with the aim of averting threats to its stability or
existence, thus trading some of the organization’s autonomy for support (Selznick, 1949,
p. 13).
Another important source for the development of what came to be resource depend-
ence theory is the early work conducted by social exchange theorists such as Blau (1964)
and Emerson (1962). These theorists focus on power as a function of social relations and
emphasize that some form of interdependence is a necessary condition for exerting influ-
ence. Power is, moreover, not zero-sum, as two actors can have power over each other and,
thus, be interdependent. The connection between social structure and the use of power is,
therefore, central in this stream of research, where power is seen as the mechanics that can
explain the relations of the actors in a network. There is however an important difference.
Whereas social exchange theorists focus on individual actors, the attention in resource
dependence theory was recast towards describing the actions of organizations.
The External Control of Organizations
There are several studies from the late 1960s until the mid-1970s that more or less explic-
itly build on the general idea underlying resource dependence theory, that organizational
behavior is determined by external social constraints and resource interdependence (e.g.
Thompson, 1967; Yuchtman and Seashore, 1967; Zald, 1970; Pfeffer, 1972a; 1972b;
1972c; Walmsley and Zald, 1973; Aldrich and Pfeffer, 1976; Pfeffer and Nowak, 1976).6
However, the most definite reference to resource dependence theory is the book The
External Control of Organizations by Jeffrey Pfeffer and Gerald R. Salancik, published
in 1978. They develop ideas about conflicts of interest in and around organizations, and
how power influences structures and patterns of behavior aimed at acquiring and main-
taining necessary external resources. The result is a highly political theory that identifies
and analyzes the ways in which firms become constrained by their environment and the
strategies managers can employ to cope with these dependences. A basic assumption in
the theory is that of political struggle, where different coalitions of actors try in a highly
self-interested manner to influence each other to their own advantage, and where con-
flicting demands are described as largely incompatible (Pfeffer and Salancik, 1978, p. 27).
In this vein, the theory posits that resource exchange and power relations in and around
organizations influence the behavior and design of organizations. Moreover, organiza-
tions are seen as unable to internally generate all the resources required to maintain
themselves, resulting in dependence on transactions and relations with external actors
and organizations in their environment for their survival (Aldrich and Pfeffer, 1976,
p. 83). This dependence on external resources constrains organizational action, and man-
agers must effectively manage resource dependences if the organization is to survive and
function. As such, organizations are involved in a constant struggle for autonomy and


discretion while also being confronted with constraints and external control (Pfeffer and
Salancik, 1978, p. 257).
Resource dependence theory focuses on the flow or exchange of resources between
organizations (or units within the organization) and the resulting dependences and
power differentials that are created. It is these dependences that provide the basis for
external control over an organization. These arguments can be directly related back to the
pioneering work of the social-exchange theorist Richard Emerson and his essay ‘Power-
dependence relations’ (1962), where he developed the idea that power is the property of
a social exchange relationship and not of an actor, because it ‘resides implicitly in the
other’s dependency’ (p. 32). Moreover, it is stated that ‘the power of A over B is equal
to and based upon the dependence of B upon A’ (p. 33). Thus, in the analysis Emerson
(1962) asserted that dependence and power are a function of the value that one actor
places on resources controlled by another and the relative availability of alternative
resources. Power is hence seen as deriving from resource connections, and those individu-
als, subunits or other organizations that exclusively provide the most needed resources
will have the most power over or within the focal organization.
Building on these ideas, Pfeffer and Salancik (1978) apply power-dependence concepts
to analyze and understand how interactions, with external actors and organizations in
the environment where resource exchange relationships take place, affect and constrain
an organization. A way of alleviating sources of external constraint is to strengthen the
relationship with the particular sources of dependence, something that follows Selznick’s
(1949) insights regarding organizational co-optation. Pfeffer and Salancik (1978) thus
suggest that a main task of the management is to establish ‘negotiated environments’
(e.g. Cyert and March, 1963, p. 119) that are favorable to the organization (Pfeffer and
Salancik, 1978, p. 263). This means that the organization, instead of having to anticipate
future reactions in the environment, avoids uncertainty in resource acquisition by enter-
ing and negotiating exchange relationships with other organizations. They also present a
detailed analysis of specific sets of strategies and tactics that can be employed to manage
these external constraints and dependences in the external environment, and they discuss
the conditions under which the measures are appropriate. Strategies to manage resource
dependences include mergers and acquisitions, diversification, board interlocks and co-
optations, joint ventures, and direct political action (Pfeffer and Salancik, 1978, chapters
5–8).
Resource Dependence Theory and the Board of Directors
Researchers interested in issues of boards and governance have used resource depend-
ence theory to provide a conceptual basis for how board members can assist the firm in its
attempt to acquire and maintain resources critical for its operations (Zahra and Pearce,
1989; Johnson et al., 1996; Huse, 2005). As indicated above, resource dependence theory
identifies the board of directors as playing a crucial role in linking the organization to
its environment by co-opting representatives from important external organizations with
which it is interdependent (Zald, 1969; Pfeffer, 1972c; 1973; Pfeffer and Salancik, 1978,
p. 167). Board members are selected to maximize the provision of critical resources, and
board members are seen as important boundary-spanners who provide timely informa-
tion and convey critical resources to firm managers (Zald, 1967; Pfeffer, 1972c).


An important qualification for board members’ ability to link the organization with
its external environment is their personal legitimacy and reputation. Pfeffer and Salancik
for example argue that ‘prestigious or legitimate persons or organizations represented on
the focal organization’s board provide confirmation to the rest of the world of the value
and worth of the organization’ (1978, p. 145). The composition of the board can in this
respect be seen as an important mechanism for managing resource dependencies. The
emphasis on board members as boundary-spanners in resource dependence theory has
moreover led to a focus on the value of having large boards composed of experienced and
reputable ‘outsiders’ (Zahra and Pearce, 1989; Johnson et al., 1996). Through their posi-
tions and networks of relationships, these outside board members are seen as important
in contributing with advice and counsel, facilitating inter-firm commitments and provid-
ing access to critical resources.
With its emphasis on mechanisms for acquiring and maintaining resources critical for
business operations, resource dependence theory seems particularly applicable to the
study of boards and governance in entrepreneurial firms. Entrepreneurial firms often
face an uncertain environment and they may also lack both economic and political
power (Pfeffer and Salancik, 1978), something which may call for the adoption of board
members that can link the organization with its external environment and assist the firm
in providing access to critical resources. Entrepreneurial firms may furthermore lack a
sense of ‘historical legitimacy’ (Selznick, 1949, p. 259) and may thus benefit from using
co-optation as a means to recruit representatives from important external organizations
on the board, to represent the organization and become a basis for its legitimacy claims.
An active board of directors can in this respect be expected to be involved in reducing
dependency between the entrepreneurial firm and external contingencies and by that
ultimately aid in the survival of the firm.
There are studies in the entrepreneurship field that seem to largely support the expecta-
tions derived from resource dependence theory. In a study of successful entrepreneurial
firms, Daily and Dalton (1992) for example find that the number and proportion of
outside board members were positively associated with higher financial performance.
In another study of small corporations, Daily and Dalton (1993) report a positive asso-
ciation between the number and proportion of outside board members, board size and
financial performance. In both cases, they interpret their findings as consistent with the
resource dependence theory assumption that larger boards and more outside board
members are associated with higher board involvement in service and resource provi-
sion roles, which in turn influence firm performance. There are also empirical studies
presenting evidence that resource provision and networking tasks performed by board
members are related to performance advantages. Borch and Huse (1993) identify the
informal networks mediated by the board of directors in small firms as very important
for improved environmental exchange power and in uncertainty reduction, and they find
that the members of the board have to be seriously examined in order to match the firm’s
need for service. Consistent with the idea that interlocks are a mechanism to access scarce
resources, George et al. (2001) report in a study of small and medium-sized enterprises
(SMEs) that firms with a board networking strategy performed better than those firms
that did not actively pursue the development of networks. Furthermore, Gabrielsson and
Politis (2007) find that a higher involvement in networking activities by board members
improves the competitive performance of small technology based firms by encouraging a


more entrepreneurial and proactive strategic orientation. Thus, to conclude, it seems fair
to argue that resource dependence theory is a viable approach for researching issues of
boards and governance in entrepreneurial firms.
AGENCY THEORY
Agency theory is about the problem of divergent interests between two opportunistic
and self-serving parties in a contractual relationship. An agency relationship is a contract
where one or more principals hire one or more agents to perform some service, and then
delegate decision-making authority to these agents (Ross, 1973; Jensen and Meckling,
1976). The theory identifies that agents are subject to moral hazard7 when they do not
bear the full economic consequences of their decisions. Moreover, delegation of decision-
making authority imposes problems of information asymmetry, where the principal
cannot perfectly and costlessly monitor the actions of the agent. Consequently, principals
face the risk that opportunistic agents will take advantage of the situation for their own
benefit by engaging in activities and behavior that harm welfare and induce unwanted
costs for principals, such as free riding or shirking.
Conflict of Interests between Shareholders and Managers
Agency theory is a general theory of principal–agent relationships that has been applied
to a broad range of substantive contexts. However, the specific problem that agency
theory deals with in research on boards and governance is the conflict of interests between
shareholders and managers.8 The identification of this potential conflict is relatively old
in the study of business enterprise and can be found in the writings of well-known econo-
mists. In The Wealth of Nations, Adam Smith (1776 [2000], p. 276) argued that managers
could not be expected to watch over other people’s money as if it were their own. For
this reason, he expected that both ‘carelessness and excess’ would exist in these types of
companies. Alfred Marshall (1920, p. 212) made a similar analysis in his book Industry
and Trade, where he suggested that salaried managers were seeking the greatest comfort
and the least risk for themselves. As a result, they could not be expected to strive very
energetically for improvement.
Although addressed by economists such as Smith and Marshall, among others, the
potential problem of the conflict of interests between shareholders and managers was
brought to a wider audience by Berle and Means (1932) in their book The Modern
Corporation and Private Property. Their concerns were aimed at ensuring that the accu-
mulated surplus of the organization was given to shareholders, rather than staying in the
hands of the emerging powerful class of professional managers. These managers were
seen as having interests that were not necessarily in line with those of the sharehold-
ers and, given the enormous freedom and power that was delegated to them, Berle and
Means (1932) concluded that some kind of control mechanism had to be instituted to see
that profits were properly distributed back to the rightful owners. Hence, there was a need
for a system of checks and balances to align the actions and behavior of managers with
the desires and preferences of shareholders.
The problem of the separation of ownership from control in the modern corpora-


tion that was raised by Berle and Means (1932) led to the subsequent development of
managerial theories of the firm, in which the works of Baumol (1959), Marris (1964)
and Williamson (1964) are among the most acknowledged. Managerial theories of the
firm make the assumption that owners seek to maximize shareholder wealth, while man-
agers maximize a utility function that includes remuneration, power, job security, and
status. These theories moreover assume that managers have a certain level of discretion
and freedom to alter the goals and objectives of the firm they are managing. It is thus
suggested that managers seek to stabilize or improve their own position by maximizing,
for example, revenue from sales (e.g. Baumol, 1959) or growth (e.g. Marris, 1964) at the
expense of shareholders.
The Emergence of Agency Theory
Even though the problem of the separation of ownership from control has long been
recognized and discussed in the economic literature, it was not until the 1970s that a
common framework started to emerge for analyzing the problems associated with the
separation of ownership from control. The theoretical foundations of these efforts
can be traced back to the analysis of labor contracts in agrarian economies, whereby a
landowner allows a tenant to use land in return for a share of the crop that is produced
– something which is generally called ‘sharecropping’ (Otsuka et al., 1992; Casadesus-
Masanell and Spulber, 2007). Dating back almost 200 years,9 the sharecropping literature
analyzes the alternative contractual arrangements that may exist between a landowner
and a tenant farmer, for example the incentive effects of fixed rents compared to rent paid
as a share of output produced from the rented land. According to Casadesus-Masanell
and Spulber (2007), it is this origin that explains why economists primarily view agents as
workers performing production tasks.
An important landmark in the development of agency theory as we know it today is
Marvin Berhold who, in the essay ‘A theory of linear profit-sharing incentives’ (1971),
develops a general model for the analysis of incentive contracts between principals
and agents. In his analysis, Berhold (1971, p. 461) describes the incentive function as
the relationship between the monetary reward and the characteristics of the agent’s
performance. If the incentive function is acceptable to the agent, then an optimal
incentive function (from the viewpoint of the principal) can be selected in terms of a
sharing ratio and a fixed reward. The interaction between risk-sharing and perform-
ance incentives for the agent is central in his analysis of the optimal sharing ratio. Here,
Berhold (1971, p. 481) shows that the optimal sharing ratio decreases when the agent’s
risk increases, thus shifting the risk to the principal. Similarly, the optimal sharing ratio
increases when the principal’s risk increases, thus shifting the risk to the agent. As such,
the model developed by Berhold (1971) can be considered an early version of agency
theory as it emphasizes the provision of appropriate incentives so that agents act in the
way principals wish.
Another important landmark for the development of agency theory is Ross’s (1973)
influential essay ‘The economic theory of agency: the principal’s problem’, which refor-
mulated agency problems and incentive contracts as embedded in agency relationships.
Ross defines an agency relationship as ‘when one, designated as the agent, acts for, on
behalf of, or as representative for the other, designated the principal, in a particular


domain of decision problems’ (1973, p. 134), thus suggesting that the agency problem
is generic in society. The ‘principal’s problem’, according to Ross, is to design an incen-
tive compensation package with fixed and performance-based pay that optimizes the
expected utility of both principals and agents. As such, the problem is one of selecting an
appropriate compensation system that will produce behavior by the agent consistent with
the preferences of the principal.
Agency Theory and the Theory of the Firm
Both Berhold (1971) and Ross (1973) discuss the general problem of agency in relation
to incentives and compensation contracting. The problem of agency was then subse-
quently developed and applied to the theory of the firm by Jensen and Meckling (1976)
in their essay ‘Theory of the firm: managerial behavior, agency costs and ownership
structure’. They recognize the general nature of the agency problem, suggesting that
it ‘exist[s] in all organizations and in all cooperative efforts – at every level of man-
agement in firms’ (Jensen and Meckling, 1976, p. 309), but they focus on the control
problems that arise in firms as a result of a separation of ownership from the direct
control of decision-making in the firm. Based on the ideas of Alchian and Demsetz
(1972), they conceptualize the firm as a set of contracts among factors of production
(owners, managers, employees, suppliers etc.) where each factor is motivated by its
self-interest.10 Owners, in this nexus-of-contracts view of the firm, are depicted as the
rightful residual claimants, because they are the only group of contracting stakehold-
ers that bears the risk of not getting any returns on their investments. All other stake-
holders (employees, suppliers, etc.) who provide factor inputs needed for production
are, due to the assumption of efficient markets,11 expected to receive an appropriate
compensation for their provision of resources, which is adjusted depending on the
market price for each input. Managers have a unique position in the firm as they enter
into contractual relationships with other stakeholders, make strategic decisions and
allocate resources.
Jensen and Meckling (1976, p. 312) state that a wholly-owned firm managed by its
owner will operate decisions that maximize his or her utility. However, they go on to
argue that when the owner-manager’s fraction of equity falls this will encourage him
or her to appropriate larger amounts of corporate resources in the form of perquisites.
Thus, the separation of ownership from control induces agency problems in the entrepre-
neurial firm as owners will bear the costs of managerial decisions that do not maximize
shareholder wealth. Opportunistic and self-serving managers can thus be expected to be
involved in non-profit-maximizing activities and maximize their own pay and benefits at
the expense of firm resources when they do not bear the wealth effects of their decisions.
These non-profit-maximizing activities mean that the economic residual created by the
firm (the owner’s claim) will be reduced. These circumstances imply that owners have
proper incentives to monitor the behavior and decisions of managers. To secure their
best interests, agency theory thus suggests that principals should resolve potential agency
problems through bonding and monitoring mechanisms.12
Later, Fama (1980) further developed the analysis in his essay ‘Agency problems and
the theory of the firm’ by arguing that the two tasks usually attributed to the entrepreneur
– management and risk-bearing – should be treated as naturally separate factors within


the set of contracts that constitutes the firm. From this perspective, he contends that
‘ownership of the firm is an irrelevant concept’ (Fama, 1980, p. 290) and argues that sepa-
ration of ownership13 and control is an efficient form of economic organization as the
firm is disciplined through competition from other firms. This competition forces firms to
develop devices for efficiently monitoring the performance of the firm as of its individual
members (in particular its managers). Moreover, he places particular emphasis on the
monitoring and discipline provided by efficient markets, both within and outside the firm.
As such, Fama (1980) develops the perspective on management and risk-bearing as sepa-
rate factors of production where each is faced with an alternative market for its services.
These markets also provide them with opportunities, where owners can take their capital
elsewhere if they wish and where managers, through the managerial labour market, are
motivated toward performance so that they can get promoted (internal labour market) or
recruited in the future (external labour market). In sum, Fama (1980) argues that the evo-
lution of devices for monitoring the firm is determined by market forces and that these
devices have efficiency properties.
Agency Theory and the Board of Directors
In addition to the market mechanism, agency theory identifies the board of directors as
a cornerstone in the governance system of a firm. In the oft-cited essay ‘Separation of
ownership and control’, Fama and Jensen (1983) suggest that the separation of manage-
ment and risk-bearing functions survives partly due to the benefits of specialization,
but also because of an effective common approach to control the agency problems that
arise. Here, they emphasize that the contract structures of firms separate the initiation
and implementation of the decisions (i.e. decision management) from the ratification
and monitoring of decisions (i.e. decision control). The latter is provided by a board of
directors who are responsible for hiring, compensating, and firing the CEO and for moni-
toring managerial and firm performance to shield the invested stakes of shareholders
from potential managerial self-interest. The board of directors, consequently, functions
as an important information system that can reduce agency problems and maximize
shareholder value.
The most important qualification for board members in agency theory is independ-
ence, which generally means that they should have no personal or professional relation-
ship to the firm or firm management (Zahra and Pearce, 1989). Board members who are
not independent are expected to have fewer incentives to monitor the CEO and other firm
managers. An issue that could compromise the board’s ability to be independent and set
its own agenda is the dual leadership structure (often referred to as CEO duality), and
agency theory thus recommends a separation of the CEO and board chairperson roles.
Another qualification that can influence the board’s ability to be independent is board
members’ equity compensation, as ownership aligns their own interests with those of
shareholders (Jensen and Meckling, 1976). A majority of independent outside board
members with an equity stake in the business is then, in turn, expected to make boards
actively involved in strategic decision-making and in monitoring managerial and firm
performance, thereby enabling them to take independent action and assert power (Fama
and Jensen, 1983).
Agency theory is most often connected with the analysis of boards and governance


in large publicly held corporations, but it can very well be applied to any firm context
when the two functions of decision-making and residual risk-bearing are separated. The
analytical focus of agency theory makes it applicable to use when studying effects of the
separation of these two functions in the entrepreneurial firm. Agency theory would, for
example, suggest that external owners exert pressure to implement independent govern-
ance structures in order to protect them from potential managerial opportunism (Jensen
and Meckling, 1976). The theory would also posit that small but growing entrepreneurial
firms can gain performance benefits from the external oversight an independent board
can offer when the organization faces problems of asymmetric information due to
increasing delegation and functional specialization (Fama and Jensen, 1983). An active
board of directors in entrepreneurial firms can, in this respect, be expected to be involved
in reducing the risk of potential managerial misbehavior by instituting proper incentives
(for example, performance-based pay) and by closely monitoring managerial and firm
performance.
There are some studies in the entrepreneurship field that seem to support expecta-
tions derived from agency theory. For example, both Rosenstein (1988) and Gabrielsson
and Huse (2002) find in their studies of firms where venture capitalists (VCs) have
invested alongside management that VC-backed firms have a larger number of board
seats and with outside VC-appointed board members rather than the CEO in power.
Moreover, Fried et al., (1998) find that boards in VC-backed firms are more involved in
both strategy formulation and evaluation compared to boards where board members
do not have large ownership stakes. The findings are in line with agency theoretic
expectations that outside ownership significantly changes the governance structure of
small firms. This pattern is also found in more general studies of boards of directors in
small firms, where influential external stakeholders, such as outside owners, often seek
to avoid centralized leadership authority and the domination of the CEO in strategic
decision-making by adopting outsiders on the board (e.g. Westhead, 1999; Fiegener et
al., 2000b; Gabrielsson, 2007b). The adoption of independent board members seems
thus to be a response to satisfy the demands from owners not directly involved in man-
aging the company.
There are also some studies that support the idea that external monitoring by inde-
pendent boards can provide proper incentives for managers to promote long-term and
potentially risky strategies aimed at innovation and change. Brunninge et al. (2007), for
example, find that although closely held SMEs in general exhibit less strategic change
(compared to SMEs with more widespread ownership structures), they can overcome
this potential weakness and achieve strategic change by adopting independent board
members on the board. In a study of medium-sized corporations Gabrielsson (2007a)
finds that board involvement in the ratifying and monitoring stages of strategic decision-
making is positively associated with CEOs’ commitment to take a more entrepreneurial
strategic posture. In another study of small technology based firms Gabrielsson and
Politis (2008) make a distinction between boards’ involvement in strategic and financial
controls,14 and they find that boards’ involvement in strategic control is positively associ-
ated with process innovation, while boards’ involvement in financial control is positively
associated with organizational innovation. To conclude, there consequently seems to be
general support for the use of an agency theory approach when researching issues of
boards and governance in entrepreneurship research.


COMPARING THE TWO THEORIES
From our review, it is evident that the two theories have similarities, complementarities,
and differences. As the objective of this chapter is to give an overview of the historical
and intellectual roots of resource dependence theory and agency theory with a particular
focus on how they have been applied in studies of boards and governance, we want to
emphasize that the characteristics and assumptions identified are not fully comprehen-
sive, nor do we present a detailed account of all possible relevant comparative aspects.
Instead, our aim has been to illustrate those similarities, complementarities and differ-
ences that may garner interest among scholars working with issues of board governance
in the entrepreneurship field.
With respect to similarities, both theories have assumptions of managerial behavior
guided by self-interest. Agency theory is explicit about this assumption, for example in
the discussion of utility maximization in agency relationships (Jensen and Meckling,
1976, p. 308). Resource dependence theory, however, also posits that managers treat
outside constituencies in a self-interested manner to suit the interests of the organization
(Pfeffer and Salancik, 1978, p. 263). Thus, both theories have a self-interested position
with respect to the behavior of managers. Moreover, both identify the board of direc-
tors as a cornerstone in the governance system of the firm and note especially the value
of outside board members. Resource dependence theory, for example, suggests that
resource-constrained firms have a considerable lack of economic and political power,
which in turn creates a need to be flexible in establishing effective linkages with the exter-
nal environment through outside board members (Pfeffer and Salancik, 1978). Agency
theory, on the other hand, stresses the need to have a vigilant board with a majority of
outside (independent) board members that can shield the invested stakes of sharehold-
ers from potential managerial self-interest (Fama and Jensen, 1983). Thus, both theories
identify outside board members as key contributors in the governance process.
With respect to complementarities, each theory has a different focus. Resource
dependence theory, through its attention to interorganizational relationships and power
dependences between the firm and various constituencies, primarily focuses on the exter-
nal environment. On the other hand, agency theory, through its attention to potential
managerial self-interest, focuses on the internal environment of the firm, and, in par-
ticular, board–management relationships. The two theories are also complementary in
the sense that scholars have used them to provide theoretical justifications for both a
resource provisioning and monitoring role for the board (Hillman and Dalziel, 2003).
Resource dependence theory emphasizes aspects of a board’s resource provisioning role,
encompassing tasks such as securing critical resources, providing external legitimacy, and
networking. Agency theory emphasizes the board’s monitoring role, which encompasses
tasks such as monitoring managerial and firm performance and being involved in deci-
sion control to protect the rights of residual claimants (i.e. shareholders).
There are also some notable differences between the two theories. First, resource
dependence theory acknowledges the existence of market inefficiencies and power dif-
ferentials, and board members are seen as resources (or as resource providers) supporting
the dominant coalition in the achievement of corporate goals. As such, the theory has no
a priori definition of which stakeholder group belongs to the dominant coalition, and cor-
porate goals and objectives are seen as the result of negotiation and political bargaining


among the different coalitions of stakeholders in and around the firm. Agency theory, on
the other hand, assumes that stakeholders operate in a context where markets are efficient
and relatively quickly adjust to new circumstances. The contracts between all stakehold-
ers, except shareholders, are also assumed to be made ex ante, which means that there is
no room for ex post bargaining. If stakeholders do not like the terms of a contract, they
can always seek a better alternative. Agency theory consequently identifies shareholders
as the rightful dominant coalition, and boards are elected in their service to maximize
their wealth by protecting them from opportunistic and self-serving managers.
In addition, there are differences between the two theories when it comes to their view
on the rationality of decision-makers. With its close association with concepts and think-
ing from Cyert and March (1963), resource dependence theory more or less implicitly
adopts the assumption that decision-makers in and around the firms are boundedly
rational, which means that they experience limits in their ability to process informa-
tion and solve complex problems (e.g. Simon, 1957). The different modes or strategies
of adaptation that are delineated in resource dependence theory can, in this respect, be
seen as different kinds of satisficing behavior in an environment of uncertainty. Agency
theory, however, assumes that decision-makers are fully rational. This means that they
are assumed to search for optimal solutions with the objective of maximizing their own
benefits (Jensen and Meckling, 1976, p. 307). Assuming full rationality implies that mana-
gerial discretion becomes a potential problem, as it allows greater space for managers to
serve their own rather than shareholder objectives. If not constrained or in some way
controlled, for example by a vigilant board of directors, increased managerial discretion
may lead to agency costs which influence firm performance negatively. This can be put
in contrast to resource dependence theory, which posits that managerial discretion is
dictated and constrained by environmental conditions, which reduce the organization’s
ability to take independent action and pursue its objectives and goals. The boundary-
spanning activities of the board of directors are, in this respect, an important means
for coping in an environment of uncertainty and by that increasing managers’ freedom
to make decisions and choices. As such, the different views on rationality in the theories
mean that they provide contradictory normative implications as to whether managerial
discretion should be increased or constrained. The identified similarities, complementari-
ties and differences are summarized in Table 11.1
IMPLICATIONS FOR THE JOINT APPLICATION OF THE

THEORIES IN ENTREPRENEURSHIP RESEARCH
Both resource dependence theory and agency theory provide rich and widely acknowl-
edged conceptual foundations that can be used to address issues of governance in
entrepreneurship research. Resource dependence theory, for example, fits well to the
entrepreneurial context as new and small firms need to build and maintain favorable and
stable relationships with key stakeholders to survive and prosper. Their limited influence
and bargaining power may, in this respect, call for the importance of gaining access to
resources, influence and legitimacy through the networks of their board members (Borch
and Huse, 1993). Also, agency theory can be seen as a highly relevant perspective for
understanding the risk of conflicting goals between contracting parties in entrepreneurial


Table 11.1 Resource dependence theory and agency theory compared
Similarities Complementarities Differences

Managers are assumed to be Resource dependence theory Resource dependence assumes
driven largely by self-interest is externally focused – incomplete contracting setups
agency theory is internally among all stakeholders –
focused agency theory assumes ex
ante contracting between all
stakeholders except between
shareholders and managers
The board of directors is Resource dependence Resource dependence theory
identified as a cornerstone theory identifies a resource identifies need for boards to
in the governance system of provision role for the board increase managerial discretion
the firm, especially outside – agency theory identifies – agency theory identifies need
board members a monitoring role for the for boards to constrain or
board control managerial discretion
firms. Conflicts can in this respect arise between owners and managers, as well as between
part-owners, for example in the division of the value created by the firm as well as in the
struggle for power and control rights (Gabrielsson and Huse, 2005). This, in turn, calls for
the need to implement governance mechanisms such as a vigilant and independent board
of directors in order to reduce potential agency problems (Gedajlovic et al., 2004).
Although each theoretical perspective can be used in its own right, neither of them
seems to be able to independently provide a full explanation of the complexities of gov-
ernance issues in entrepreneurial firms (Daily et al., 2002). Resource dependence theory,
for example, with its emphasis on the ways in which firms become constrained by their
environment, has a relatively narrow focus on what goes on inside the organization. The
environmental context, on the other hand, is often insufficiently examined in agency
theory due to the overemphasis on the problems of agency. The joint application of both
resource dependence theory and agency theory may in this respect provide a more holistic
and balanced view on board governance in the entrepreneurial firm, whereby the differ-
ent theories provide complementary perspectives. This combinatory approach is well in
line with the growing consensus in studies of boards and governance concerning the need
for theoretical pluralism (e.g. Hung, 1998; Daily et al., 2003) and where the behavior of
boards can be related to the distinctive organizational characteristics and task environ-
ment of the firm (Huse, 1998; Lynall et al., 2003; Huse and Zattoni, 2008) as well as to
the personal attributes of the CEO and individual board members (Hillman and Dalziel,
2003; Shen, 2003).
This joint application of resource dependence theory and agency theory in studies
of boards and governance in entrepreneurial firms, however, also calls for a need to
understand the basic assumptions underlying the two theories. As is evident from our
overview of each theory’s historical roots, they originate from different intellectual
traditions and, thus, also partly rely on different assumptions. Resource dependence
theory, with its roots in organizational sociology, adopts a perspective that emphasizes
power differentials, market inefficiencies and political struggle to explain organizational


action. Agency theory, with its roots in the financial economics discipline, on the other
hand, assumes rational actors who contract for profit in efficient markets. Thus, whereas
resource dependence theory acknowledges the ongoing struggle for power and influence
over organizational resource-allocation decisions among different coalitions of stake-
holders, the theoretical assumptions in agency theory completely overlook this possibil-
ity. Perhaps the easiest way to deal with this situation when combining the two theories
is to relax at least two basic assumptions in agency theory. Relaxing these assumptions
does not invalidate either the existence of agency relationships or the potential agency
problems that arise from them, but it prompts consideration of some features not treated
in the theory’s standard version.
The first assumption to be relaxed is that of efficient markets, which means that stake-
holders may not have freedom of entry into and exit from contractual relationships (Hill
and Jones, 1992). Relaxing this assumption would open up the possibility for power
differentials between parties in an exchange. This, in turn, rejects the idea of complete
contracting ex ante for all stakeholders except between shareholders and managers (Huse
et al., forthcoming). Acknowledging the existence of incomplete contracts for all stake-
holders involved in resource exchange would open up the possibility for more ex post
negotiation (Rajan and Zingales, 1998) while rejecting the idea that shareholders have
all the bargaining power. The second assumption to be relaxed is that of fully rational
economic actors.15 The incomplete contracting between stakeholders can in this respect
be explained not only by the existence of information asymmetries but also by bounded
rationality. In fact, bounded rationality makes all contracts unavoidably incomplete.
The result of the two relaxations above is a slightly modified version of agency theory
which – much in line with resource dependence theory thinking – acknowledges the exist-
ence of more or less temporary market inefficiencies and unequal resource dependences
and power differentials between managers and stakeholders (for similar reasoning in
previous studies, see Hill and Jones, 1992). These market inefficiencies create potential
agency conflicts, not only between managers and shareholders, but also between manag-
ers and a wider set of stakeholders who cannot receive payments with reference to the
market price as their investments have limited or no value outside the context of the
firm (Blair, 1998). The board of directors is then primarily functioning as an impartial
mediator that balances and interprets the sometimes conflicting interests of the value-
adding stakeholders who embody the core capabilities of the firm (i.e. the dominant
coalition). Moreover, incompleteness of contracts results in an increased need for ex post
negotiation and bargaining among the contracting stakeholders about how to distribute
the surplus (Rajan and Zingales, 1998). This creates the need for a mechanism, such as
a board of directors, which can coordinate resource allocations and reduce costly and
potentially value-destroying bargaining processes.16 Furthermore, accepting that all
economic actors are constrained by bounded rationality suggests that the divergence
between the desires of principals and the actions of agents is not necessarily due only to
agents’ self-serving behavior, which is one-sidedly emphasized in standard agency theory
(Jensen and Meckling, 1976), but also to the inability of agents to reliably and compe-
tently deliver what is expected (Hendry, 2002).17 This would mean that, in addition to the
risk of opportunism, there can also be agency problems related to the limited information
they have, the cognitive limitations of their minds, and the finite amount of time they
have to make decisions.


To conclude this section, we think the above-mentioned modifications18 will bring the
two theories closer to each other in terms of basic assumptions without violating the
basic premise in agency theory that there is a need to protect the interests of principals
(shareholders/stakeholders) from potential misbehavior by agents (managers) through
bonding or monitoring activities. In line with resource dependence theory thinking, the
changes also suggest that board members can be used to assist managers in dealing with
the complexity and uncertainty of strategic decision-making by collecting and utilizing
relevant and timely information, knowledge and other resources from various stakehold-
ers in and around the firm. Moreover, we believe that the suggested changes are closer
to what is already widely assumed in entrepreneurship research, for example markets in
disequilibrium (Knight, 1921; Schumpeter, 1942; Kirzner, 1973), power differentials due
to variations in the access to resources (Penrose, 1959; Aldrich and Auster, 1986) and
decision-makers as boundedly rational economic actors (Sarasvathy, 2008).
SUGGESTIONS FOR FUTURE RESEARCH ON BOARDS AND

GOVERNANCE IN ENTREPRENEURIAL FIRMS
In the introduction of this chapter we suggested that both resource dependence theory
and agency theory provide implications for researching behavioral aspects of board
governance in entrepreneurial firms. We have also argued in the chapter for bringing the
theories closer together. In this section, we summarize a number of areas where we think
further research is highly warranted to promote the accumulation of knowledge in these
areas.
Researching Behavioral Aspects of Board Governance
An interest in behavioral aspects of board governance calls for closer study of how
boards actually work and how board members may improve their behavior to contribute
to value creation. A highly interesting area of research within a resource dependence
framework is to study the motivations, intentions and behaviors of co-opted individuals
on the board of directors in entrepreneurial firms. Co-opted board members, in resource
dependence theory, are expected to become involved in helping the focal organization to
control its environment by influencing their constituencies. Indeed, Pfeffer and Salancik
suggest that, ‘when an organization appoints an individual to a board, it expects the indi-
vidual will come to support the organization, will concern himself with its problems, will
variably present it to others, and will try to aid it’ (1978, p. 167). However, there is a need
to scrutinize this largely untested behavioral assumption that co-opted board members
would change their loyalty so that they mainly pursue the interests of the entrepreneurial
firm, instead of the organization which until recently has been their main home institu-
tion (for a more extensive critique of this assumption, see Donaldson, 1995, p. 154). It
could for example be just as likely that they join the board for other reasons, for example,
to monitor the focal firm to benefit their home institution.19
An interesting area of research from an agency theory point of view is the issue of
independence in relation to board members in entrepreneurial firms. Independence is
seen in agency theory as a key feature of effective boards (Fama and Jensen, 1983), and


this feature has been associated with outside (or non-executive) board members. Past
studies, however, have suggested a general need to distinguish between outside and inde-
pendent board members (see, for example, Gabrielsson and Winlund, 2000). The adop-
tion of outside board members and the separation of the CEO and board chairperson
roles, for example, are not necessarily found to be associated with greater board involve-
ment in shaping strategy, reviewing management policies, or contributing professional
advice (Ford, 1988). Consequently, an outside board member should not, by definition,
be expected to behave independently, even if he or she brings considerable competence
and experience into the boardroom. Moreover, conceptualizing independence as a behav-
ioral rather than a structural feature raises interesting questions about to what extent
and under what conditions outside board members in entrepreneurial firms are acting
‘independently’ in the way agency theory prescribes. It also connects to recent discussions
about the need to examine whether there is a trade-off between independence and the
presence of firm-specific knowledge required to understand and evaluate complex firm
decisions (e.g. Huse et al., 2009).
Joint Application of Resource Dependence Theory and Agency Theory
When jointly applying resource dependence and agency theory in entrepreneurial firms,
there are also some areas where we think research is highly warranted. The first is how
various outside board members contribute with different kinds of value-adding ben-
efits in entrepreneurial firms. Resource dependence theory suggests that outside board
members contribute added value by bringing different linkages and resources to a board.
Agency theory suggests that outside board members contribute added value by introduc-
ing checks and balances to correct potential harmful managerial behavior and protect
the assets of the firm. Past research, however, has primarily relied on relatively rough
distinctions between inside and outside board members (Gabrielsson, 2007b), whereas
a more fine-grained analysis of different categories of outside (and perhaps also inside)
board members could provide a much more detailed understanding of what kind of
value-added contributions a given type of board member is likely to bring to the board
(Hillman et al., 2000).
Another interesting area of research when jointly applying resource dependence and
agency theory is the extent to which the entrepreneurial firm is able to effectively imple-
ment and use the value-added contributions provided by outside board members. Such
attempts may need to distinguish between ‘potential’ contributions and ‘realized’ contri-
butions. Potential contributions would here refer to the set of potential benefits that the
entrepreneurial firm can receive from its outside board members. The realized contribu-
tions, on the other hand, would refer to the successful implementation and incorporation
of such resource contributions into the venture’s operations with the hope of improving
its performance. This conceptual distinction suggests that entrepreneurial firms can
vary significantly in their ability to effectively implement and utilize the value-adding
contributions that outside board members can bring. Making such a distinction would
also allow researchers to abandon viewing the value-adding benefits from outside board
members as a simple transferring process, and instead turn more attention towards the
study of why some attempts to contribute resources fail while others thrive.
A third area of research when jointly applying resource dependence and agency theory


is to study how board members’ involvement in monitoring versus resource provision

tasks evolves and changes as the entrepreneurial firm develops and moves through the
organizational life cycle (e.g. Lynall et al., 2003; Bonn and Pettigrew, 2009). This may
also include studies of how boards in entrepreneurial firms balance (or fail to balance)
the speed and flexibility in decision-making that often are seen as critical features for
competitiveness in small firms (e.g. O’Gorman, 2000) against the need to formalize rules,
reporting procedures and job descriptions as the firm grows. Such endeavors would
not only contribute to our scholarly knowledge of how processes of board governance
emerge and develop over time, but would also go beyond the fundamentally static con-
ceptions of boards of directors that often dominate research on corporate governance
(Gabrielsson and Huse, 2004).
CONCLUSIONS
Studies of boards and governance have a long history in business research. Although
these studies traditionally have focused on large firms (Gabrielsson and Huse, 2004) this
interest has also spilled over to include firms that are in the entrepreneurial stages of the
organizational life cycle. In this chapter we have provided an overview of the historical
and intellectual roots of resource dependence theory and agency theory with a particu-
lar focus on how they have been applied in studies of boards and governance. Despite
the frequent use of these theories by scholars addressing issues of governance in entre-
preneurial firms, they also tend to be used in a largely metaphorical sense to justify the
need for board members to perform resource provision and monitoring tasks. Thus, our
underlying motivation for the review has been that a better understanding of the origins
and thinking behind the theories should contribute positively to knowledge accumulation
within the field.
In short, our review suggests that both resource dependence theory and agency theory
provide powerful conceptual foundations that can be used to address issues of board
governance in entrepreneurship research. Based on this, we also discuss some similarities,
complementarities, and differences between the two theories that may have implications
when combining arguments from resource dependence theory and agency theory. With
regard to similarities and complementarities, there seems to be enough common ground
for their joint application in studies of boards and governance. With regard to differ-
ences, however, we identify a need to relax some of the assumptions in agency theory to
bring the two theories closer together. This, we hope, will stimulate further research on
how board members, through their performance of resource provision and monitoring
tasks, can contribute to the creation of wealth, value and satisfaction for the range of
stakeholders in and around the entrepreneurial firm.
ACKNOWLEDGMENTS
We are indebted to Franz Lohrke and Hans Landström, the editors of this book, for
their valuable comments on earlier drafts of this chapter. We are also grateful for the
comments given by Diamanto Politis in the course of developing this work.


NOTES
1. ‘Entrepreneurial’ can refer to such different firm characteristics as being young (Daily et al., 2002), innovative
(Covin and Slevin, 1988), fast-growing (Daily and Dalton, 1993) or owner-controlled (Carland et al., 1984).
2. The dominance of resource dependence theory and agency theory is the case also in studies of boards of
directors in general. For an overview, see for example Gabrielsson and Huse (2004).
3. Outside directors have in entrepreneurship research often been defined as directors who are not execu-
tive managers or relatives of the CEO (whether employed by the firm or not) (Fiegener et al., 2000b;
Gabrielsson, 2007b).
4. Research on small firm growth indicates that managerial appointments are usually made when a firm
reaches a size between 10 to 20 employees (Storey, 1994, p. 10).
5. von Bertanlanffy discussed living organisms as open systems in his article, hence the term ‘real systems’.
6. Please note that the terminology varies. Yuchtman and Seashore (1967) refer to the systems-resource
approach, Zald (1970) and Walmsley and Zald (1973) refer to the political economy model, and Thompson
(1967) refers to the power-dependency model.
7. Moral hazard means that people act less carefully when they are protected from some (or all) risk than
when they are fully exposed to risk. The moral hazard problem originates from the analysis of insurance
market contracts where an individual may influence the probability of the insured event to his advantage
(e.g. Spence and Zeckhauser, 1971).
8. A distinction is sometimes made between two different types or versions of agency theory in the literature:
the ‘positivist’ approach and the ‘principal–agent’ approach. The positivist approach is most often used
in corporate governance research. It is more empirical, largely verbal and concentrates on the problem of
separation of ownership from control (e.g. Fama and Jensen, 1983). The ‘principal–agent’ approach is
used to analyse all principal/agent relationships. It is more normative, much more mathematical and con-
centrates on the design of specific ex ante contract specifications (e.g. Holmström, 1979). In this chapter
we are referring to the positivist approach in our discussion. However, even if there are some differences
in focus and style between the two approaches, we want to emphasize that the background and analytical
core is pretty much the same.
9. Early contributors to the economic analysis of labor contracts in sharecropping include for example both
Smith (1776) and Marshall (1890).
10. Antecedents of this perspective can be found in Coase (1937) and Coase (1960).
11. Agency theory assumes that markets are in or near an efficient equilibrium (e.g. Fama, 1980; Jensen, 1983).
12. Bonding mechanisms – such as compensation packages – reward agents when they achieve the goals of the
principals and penalize them when they violate the interests of principals. Monitoring mechanisms – such
as a vigilant board of directors – observe the behavior and performance of the agents.
13. Ownership of capital (risk bearing) should here not be confused with ownership of the firm.
14. The distinction is based on Hoskisson and Hitt (1988) and Baysinger and Hoskisson (1990). Financial
controls are clear and unambiguous and based on objective decision areas such as the organizational
budget, equity, liquidity and finance. Strategic controls recognize the more long-term dimensions of
business enterprise and are based on strategically relevant decision criteria that are more subjective, for
example decisions related to external market and user needs and new products.
15. This relaxed assumption is not very controversial as it appears in Eisenhardt’s (1989) widely cited article.
16. These resource allocations may of course not lead to a fair return on investments as unequal resource
dependencies may make ex post surplus and ex ante investments sharing unrelated.
17. Accepting bounded rationality also suggests that principals cannot always express exactly what they want,
but this is another problem not dealt with here. See for example Hendry (2005).
18. These modifications also open the way for the application of new theoretical approaches, such as team
production theory, in studies of boards and governance in entrepreneurial firms (Huse et al., 2008).
19. We want to point out that this possibility is far from ignored in resource dependence theory. On the
contrary, it was discussed by Selznick (1949) and also in later work by Palmer (1983) and Mizruchi and
Stearns (1988). However, we are not aware of any attempts that examine the loyalty of co-opted board
members in the entrepreneurship literature.
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12. The historical roots of socio network
theory in entrepreneurship research
Sarah Jack and Mary Rose
INTRODUCTION
The field of entrepreneurship has seen a dramatic increase in studies focusing on net-
works and social relations. This is particularly evident amongst European scholars where
network research has emerged as a popular theme since the turn of the century (Uhlaner,
2002). Such interest can partly be attributed to scholars moving away from dealing with
the entrepreneur in isolation and instead looking to the consequences of embeddedness
and the impact, implications and relevance of networks for entrepreneurship (Hoang and
Antoncic, 2003). This line of enquiry has possibly come about as a reaction against the
view that the entrepreneur is an atomistic, isolated economic actor, undersocialised and
immersed in a process quite different from other social phenomena (Araujo and Easton,
1996; Hoang and Antoncic, 2003). Instead, current thinking seems to be that social
relations and the social context cannot only influence entrepreneurship but, because
economic action is embedded, social networks can impact economic performance and,
consequently, the shape and form of entrepreneurial outcomes (Granovetter, 1992; Ring
and Van de Ven, 1992; Snow et al., 1992; Jones, Hesterly and Borgatti, 1997; Arrow, 2000;
Jack and Anderson, 2002). It has even been said that within the entrepreneurial context,
entrepreneurs are actually a product of their social environment, and how they perceive
opportunities is influenced by social interaction and social background (Anderson and
Miller, 2002). Some have gone so far as to argue that entrepreneurship is actually a social
undertaking which is carried out in – and so should be understood within the context of –
social systems (Sarason et al., 2006). This not only raises the importance of social context
but also highlights the significance of social relations.
As the view that the entrepreneur is intimately tied through the social relations in which
s/he is embedded to a broader network of actors has gained popularity, so has network
research (Hoang and Antoncic, 2003; Kim and Aldrich, 2005). Recent reviews dem-
onstrate growth in published articles over time in key academic journals. For example,
between 1995 and 2005, 71 articles appeared in key academic journals. Yet, throughout
this time there seems to be continued interest in a number of core themes, with embed-
dedness, evolution, growth and performance, opportunity perception and recognition,
ties and social capital remaining very much in vogue (Jack, 2010). This growth in inter-
est demonstrates that networks are becoming more widely acknowledged as one way to
explain entrepreneurial success (Elfring and Hulsink, 2003).
Social network theory has been used to demonstrate the nature and effect of the
interaction and exchange that takes place between individuals (Harland, 1995; Maguire,
256

The historical roots of socio network theory in entrepreneurship research 257
1983). It perceives individuals as being related to each other by sets of transactions

which have implications for the actors wider than the exchange itself (Mitchell, 1973). A
social network has been defined as ‘the actual set of links of all kinds amongst a set of
individuals’ (Mitchell, 1973) and ‘sets of ties linking several actors’ (Nelson, 1988, p. 40).
The general understanding is that links such as friends of friends (Boissevain, 1974),
group obligations (Bourdieu, 1986) and strong and weak ties (Granovetter, 1973) provide
those who are party to a particular network with privileged information and access to
opportunities, and enable individuals to obtain resources that might be difficult to access
otherwise (Jack, 2005). Accordingly, a network perspective illustrates that people are
dependent on others and that the individual is an interacting social being able to manipu-
late others and be manipulated by others (Boissevain, 1973). According to Banck (1973)
there are also three notions about a social network that are perceived to be important:
(1) an individual has social relations with other individuals, who in turn have social rela-
tions with others, either directly or indirectly, (2) an individual is entangled in a network
of social relations, the structure of which influences the behaviour of the individual and
(3) the individual is supposed to be able to manipulate to a certain measure the social
network for his/her own ends (Banck, 1973).
The purpose of this chapter is to demonstrate the historical and intellectual roots of
social network theory within entrepreneurship research. In doing so, this chapter high-
lights the theoretical origins of the entrepreneurial network perspective. We begin by
exploring the origins of social network theory. The discussion then demonstrates how the
term and key concepts have been applied within entrepreneurship research and used to
try and understand the entrepreneur and process in which s/he is immersed. Thereafter
we examine the way in which interdisciplinary approaches linked to history enhance our
understanding of the networked innovating entrepreneur. Following on from this we
explore the ways in which networks may act as a constraint to entrepreneurship. Finally,
we consider potential future directions for research. By combining the discussion of
social network theory, entrepreneurship, innovation and history, this chapter explores
how such combinations enrich our understanding of entrepreneurship and entrepre-
neurial processes. This approach also helps support a concern raised in the literature that
there is a need to view networks using spatial and temporal perspectives (Schutjens and
Stam, 2003). We would argue that this can be achieved by drawing on history and his-
torically based theories and turning to historians to help us with this task. This seems to
make sense considering ‘historians have always assumed that to understand and interpret
personal relations was their main business’ (Cooley, 1956, p. 122).
THEORETICAL ORIGINS
It is difficult to identify when the term ‘social network’ was first adopted. The social
network approach seems to have emerged from dissatisfaction with a strictly struc-
tural approach, offering a deeper understanding of human behaviour (Boissevain and
Mitchell, 1973). Historically the term ‘a network of social relations’ ‘was used to rep-
resent a complex set of inter-relationships in a social system’ but prior to the 1950s it
tended to be used as a metaphorical way of looking at things rather than as an analytical
concept (Mitchell, 1969, p. 1). Early writings suggest that network theory was seen as key


Table 12.1 Historical foundations of socio perspectives in entrepreneurship network

research (adapted from Tichy et al., 1979)
School of Perspective Key theorist(s) Key emphasis/focus

thought
Sociology Process outlook Park (1924) Patterns of interaction and
Cooley (1956) communication as being key to
Simmel (1950) understanding social life
Functionalism Parsons (1960) The need to focus on underlying
Mitchell (1969) determinants of recurring social
relations
Anthropology Exchange theories Levi-Strauss The content of the relationships
(1969) joining individuals, the conditions
Malinowski under which they would exist and
(1922) the evolution of such bonds
Frazer (1919)
Homans (1961)
Blau (1964)
Ekeh (1974)
Social Role theory – Katz and Kahn Implies network concepts but has
psychology organizations (1966) been limited to first order role sets
are ‘fish nets’ of Kadushin (1968) (i.e. individuals directly linked to
interrelated offices Gross, Mason the focal person) and evidences an
and McEachern individual bias
(1958)
to bridging sociological analysis of human behaviour and personal/motivational aspects

(Noble, 1973). Studies defined networks as ‘the set of persons who can get in touch with
each other’ and contacts as ‘the individuals who comprise a network’ (Katz, 1966, p. 203).
However, others have said it is better to think of a network as ‘the set of linkages among
persons and contacts as the set of persons connected by these linkages’ (Mitchell, 1969,
p. 4).
Theoretical origins of network research can be traced to three broad schools of
thought: sociology, anthropology and social psychology, especially role theory (Tichy et
al., 1979; Nohria and Eccles, 1992). These are represented in Table 12.1 which draws on
Tichy et al.’s (1979) work to demonstrate historical foundations of socio perspectives of
network research. In Table 12.1 some of the key theorists who, according to Tichy et al.
(1979), are considered to have laid the foundations on which network research was built
are presented along with their perspectives.
What is interesting about the material presented in Table 12.1 is the key role that
anthropology and sociology have played in developing thinking about networks. From
sociology and anthropology perspectives, we really begin to be introduced to the
aspects of interaction, communication, social relations and the ‘bonding’ of individuals.
However, what stands out from Table 12.1 are elements which are really seen to be quite
significant within social network theory but which have been driven by sociology. These


elements are (1) exchange and the actual nature of exchange and (2) the need to take a
process outlook and consider patterns in behaviour, and this is perhaps why sociological
perspectives have really dominated social network research (see also Parkhe et al., 2006).
In terms of social psychology and role theory much of the work within this area seems to
have considered the relationship between the individual and his/her role in the organiza-
tion (Katz and Khan, 1966). For instance, Katz and Khan (1966) argue that organiza-
tions consist of patterned behaviour, and if members are perceived to misunderstand the
boundary of the organization or misbehave, they are seen to be threatening the life of
the organization. Such work has helped us to understand the types of roles individuals
take on, group norms and conformity. However, this perspective has perhaps been less
influential in entrepreneurship, possibly due to the nature of entrepreneurship and entre-
preneurial networks, because aspects of social psychology and role theory take more of
a group view rather than an individual one. And, ‘networks have to do with (social) indi-
viduals, rather than with groups’ (Banck, 1973). Also, role theory discussions have much
more of an intra- rather than inter-firm perspective and thus could be argued to be less
applicable for entrepreneurship research. As a consequence, the use of social psychology
and role theory will not be elaborated on further here.
A More Sociological Perspective on Social Networks
In tracing the routes of network theory we are introduced to the ideas of the sociolo-
gist Park (1924; 1926). According to Park, society exists through communication and,
by communicating with other individuals, experiences are shared and life is maintained.
Park’s (1926) ideas were based on the concept of social distance:
The individual who is not concerned about his status in some society is a hermit, even when his
seclusion is a city crowd. The individual whose conception of himself is not at all determined
by the conceptions that other persons have of him is probably insane . . . A person is simply an
individual who has somewhere, in some society, social status; but status turns out finally to be a
matter of distance – social distance. (p. 10)
In developing his point Park (1926) goes on to argue that in all our personal relation-
ships we are clearly conscious of the degree of intimacy with others. Park (1926) pointed
out that while it is the relations that individuals have with and to others that are impor-
tant, social interaction is an aspect of social phenomena that comes about as a result of
changing attitude, the social experiences of the individual and the inhibiting effect of self-
consciousness. Moreover, Park (1926) described social relations as far from homogeneous
and subject to change.
This notion of interaction runs through much of the early writings regarded as being
core to the foundations of social network theory. Simmel (1950), for instance, when
writing about society, talks about interaction and how society is the name for a number
of individuals connected by interaction. Simmel (1950) continues by saying that interac-
tions produce society and that it is through linking together and coming together that
people are tied to others. Thus, it is not purely interaction which is important but the ties
which people have to others and how these ties might impact on individuals, affect and
influence the way they live their lives. Cooley (1956) introduces us more directly to the
idea of individuals contributing to social life and that it is the process of how they choose


and the choices that they make in terms of interaction which are interesting aspects.
Cooley (1956) also discusses how in order to have society it is necessary that people get
together somewhere, but any study of society must be supported by a good understand-
ing of personal ideas. So, while these early writings introduce us to the idea of the social
element in people’s lives, they do not lose sight of the individual. Instead they perceive the
individual as a social animal immersed in a social process.
These themes of interaction and process are continued in later writings. However,
here we are also introduced to the recurring nature of social relations and their practical
application. The 1950s saw quite a dramatic increase in the number of studies looking at
links, exchange and reciprocity in terms of social behaviour and more use of the actual
term social network itself. Initial work using the notion of social networks tended to
concentrate on the nature of links among people as this was perceived as the most sig-
nificant feature (Barnes refers to this as ‘mesh’ and Bott as ‘connectedness’) (Mitchell,
1969). Early studies include Barnes (1954), who drew on Fortes’s (1949) notion of ‘the
Web of Kinship’ to develop the idea of using a social network to describe and consider
social behaviour of individuals and their behaviour with others with whom he/she may
not necessarily be in touch with directly. Barnes (1954) is certainly one of the first to use
the term ‘social network’ in a more systematic way (Noble, 1973). However, Bott (1955;
1956; 1957) is considered one of the first to actually apply the term ‘social network’ in a
more analytical way (Noble, 1973). Bott’s (1955; 1956; 1957) work on conjugal roles and
the patterns of relationships in London families began to develop the idea of close knit/
loose knit networks more extensively. Mayer (1961; 1962; 1964) and Pauw (1963) used
the idea of a social network to consider the behaviour of types of migrants in London
and concentrated specifically on a point drawn out in Bott’s work that ‘the behaviour of
people who are members of a “close knit” group of friends is likely to be considerably
influenced by the wishes and expectations of these friends as a whole, while those whose
acquaintances do not know one another may behave inconsistently from time to time
without involving themselves in embarrassment’ (Mitchell, 1969).
Epstein (1961) was probably one of the first to begin to question variation in differ-
ent parts of a network and relate this more specifically to interaction (Noble, 1973). T.
Parsons (1960) refers to the relevance of the interaction processes and the significance of
the structures of relationships among actors, the recurring nature of these relations and
the systems of norms and expectations that exist within and between relations but also
in society as a whole. These aspects are also evident from other studies written around
the area. So, for example, Bott’s (1955; 1957) work on families and kinship, Granovetter’s
(1973) work on strong and weak ties and the labor market, and Padgett and Ansell’s
(1993) work on political parties and elite networks would all claim to be concerned with
what actually takes place in people’s lives, the relations in which individuals are embedded
and how relations might impact on behaviour. Moreover, such studies do not lose sight
of the individual but also take the perspective that s/he is immersed in social relations that
can have an impact.
A More Anthropological Perspective on Social Networks
The theory of social exchange originated in social anthropology with scholars such as
Frazer (1919), Malinowski (1922), Levi-Strauss (1969) and Bohannan (1955) (Ekeh,


1974). Certain unit ideas of social exchange theory are evident throughout sociological
writings and really demonstrate the significance of exchange (Ekeh, 1974). Although
they might receive varying emphasis and approval or disapproval from social exchange
theorists, the following seem to be regarded as being central to social exchange theory:
(1) the relationship between economic exchange and social exchange; (2) the structure of
reciprocity; (3) restricted exchange and generalized exchange; (4) exploitation and power;
and (5) the contribution of social exchange processes to social solidarity (Ekeh, 1974).
Examples of scholarly writing about social exchange theory include Homans (1961)
and Levi-Strauss (1969). For example, Homans (1961) talks about interaction and social
contacts and describes social behaviour as representing an ‘exchange of activity, tangible
or intangible, and more or less rewarding or costly, between at least two persons’ (p. 13).
Homans (1961) also describes how one individual might change (even influence) the
behaviour of others. Central to Levi-Strauss’s (1969) theory of social exchange is the idea
and principle of reciprocity, a social usage consisting of what he refers to as univocal or
directional reciprocity. Blau (1964) argues that social exchange is an underlying factor in
relations between individuals and groups. He argues that the basic idea of social exchange
is based on reciprocity and social reward so the mutual exchange that occurs over time
creates a social bond between individuals. Blau (1964) also argues that individuals associ-
ate with one another because they can profit from the other and through being associated
with the other. Certainly aspects of exchange and reciprocity really lie at the very heart
of social network theory. Malinowski’s (1922) ethnographical account of life as a native
in the South Sea Islands demonstrates the nature of exchange, sociological relations,
especially family and group members, and the mechanisms used for exchange between
individuals. This work also shows that ties exist between individuals and demonstrates the
importance of give and take to the social fabric of a society.
Conclusions from Early Studies on Social Networks
What is clear from this fairly brief historical review is that early work within both sociol-
ogy and anthropology identified elements which appear to be relevant to network theory.
Specifically, the human being is a social being embedded within a social context, a being
that is immersed in a network of relationships with whom reciprocal exchange is expected
and anticipated to take place. Moreover, these relationships can be manipulated by all
parties involved so that if and when made manifest, they can impact on the individuals
involved in many different ways and with varying consequences.
SOCIAL NETWORK THEORY AND ENTREPRENEURSHIP
It is on these foundations that entrepreneurial social network theory has and is being
built. In doing so, entrepreneurship scholars have drawn on and built upon many of
the concepts presented and associated with these foundations of social network theory.
Within entrepreneurship, the social network perspective can really be regarded as the
primary focus of the majority of research. It is also the most prolific in terms of
the development of data analysis tools and their application to a range of social science
topics (Araujo and Easton, 1996). The definitions of a network presented earlier in the


introductory section emphasize the notion of actors and links between actors. Within the
field of entrepreneurship, the personal network perspective is based on the principle that
entrepreneurship is a social role (Brüderl and Preisendörfer, 1998, p. 214) and that the
relationship between the entrepreneur and the social context is perceived to be important.
According to Aldrich et al. (1987), the social network perspective rests on two fundamen-
tal premises. Firstly, entrepreneurs succeed because they are able to identify opportuni-
ties and obtain scarce resources (e.g. money, social support, product ideas, markets, and
information) from their environments to start and build businesses. Secondly, resources
are obtained through exchange relationships between the entrepreneur and his/her social
networks (e.g. relatives’ loan money; husbands or wives grant permission to use family
resources; colleagues or business contacts become partners or customers; and acquaint-
ances give advice about lawyers, accountants and bankers). This being the case, it would
seem fairly certain that an entrepreneur’s networks are likely to be based on experience,
which not only determines the range of contacts, but may also influence perceptions of
opportunities and courses of action (Birley, 1985; Aldrich and Zimmer, 1986; Dubini and
Aldrich, 1991; Johannison 1998; Chell and Baines, 2000; Johannison et al., 2002; Lechner
and Dowling, 2003).
Networks are important because entrepreneurship can be facilitated or constrained
by an entrepreneur’s position in a social network (Aldrich and Zimmer, 1986). Studies
carried out have demonstrated the importance of building relationships for entrepreneur-
ship (Johannisson and Peterson, 1984; Birley, 1985; Aldrich and Zimmer, 1986; Carsrud
and Johnson, 1989; Johannisson et al., 1994; Bloodgood et al., 1995). However, what
is especially interesting about networks and entrepreneurship is that although entre-
preneurs are generally associated with independence and innovation, entrepreneurship
seems to emerge at the junctions of social and professional information networks that
supply entrepreneurs with ideas, exchange opportunities and access to valued resources
(Araujo and Easton, 1996). According to Johannisson (2000, p. 368), whilst management
needs structure, entrepreneurship thrives on process, ambiguity and action. This leads
entrepreneurs to continuously network as they pursue and react to new realities. So,
although some might perceive entrepreneurship as being an individual role, it is actually
a social undertaking with individuals being immersed in a social process. According to
MacMillan (1983), building contacts and networks is a critical factor in determining the
success of a firm. Moreover, it is now recognized that ‘organizations are strongly embed-
ded in environments and environmental influences penetrate organizations in many ways’
(Aldrich, 1999, p. 5).
Networks represent the ‘collaborative’ relationships formed by individuals within firms,
with other firms and with other organizations. Networking itself involves a social process
which takes place over time involving identifying common interests, gaining knowledge
and experience of other individuals, and building trust, a crucial element of networks
(Jack, 2005). The actual activity of networking has been described as a ‘system by which
entrepreneurs can tap resources that are external to them, i.e. that they do not control’
(Jarillo, 1989, p. 133). As a consequence, ‘entrepreneurs can, in theory, take advantage of
the wider social network in which their ties are embedded’ (Kim and Aldrich, 2005, p. 2).
Networks involve links with and to the social structure with such links providing informa-
tion, creating opportunities and enabling resource access (Uzzi, 1997; Premaratne, 2001;
Florin et al., 2003; Hite, 2005). Moreover, links to the social structure and the level/extent


to which an individual is embedded can influence, affect and impact on the shape and
form of economic outcomes (Uzzi, 1997; Chell and Baines, 2000; McDade and Spring,
2005). Given the emphasis placed on networks, it is not too surprising that we are seeing
an increasing number of studies focusing on networks and entrepreneurship.
As highlighted previously, the number of studies focusing on networks and relations in
and between individuals has increased dramatically (Hoang and Antoncic, 2003; Parkhe
et al., 2006). The actual extent of the popularity of network research is evident from a
review of key academic journals between 1995 and 2005 which illustrates that a total of
71 articles relating to a range of themes and aspects and using a variety of contexts were
published (Jack, 2010).1 These studies all claim to be focused on understanding entre-
preneurial networks at some level and in some way. And while all might not claim to be
using social network theory specifically, by dealing with entrepreneurship and an aspect
of networks they are all contributing to our understanding of the whole in some way.
Table 12.2 shows clearly the popularity of network research within entrepreneurship. It
also elaborates on the themes that have been studied and the key findings from the various
work carried out. What is interesting is the breadth and number of themes that have been
considered. However, key themes seem to have been returned to often during the period
considered, especially embeddedness, evolution, growth and performance, opportunity
perception and recognition, particular ties and social capital. Another interesting point
raised from Table 12.2 is that within each theme identified there does not always appear
to be agreement in relation to networks. Take, for instance, the strong and weak tie debate
as an area where contradictory evidence has emerged.
What studies have shown is that networks not only influence individuals but can also
impact significantly on the ways in which organizations are managed, developed, main-
tained and sustained (Halinen et al., 1999; Ahuja, 2000; Nelson, 2001; Karamanos, 2003).
Some claim that networks are even ‘reshaping the global business architecture’ (Parkhe
et al., 2006, p. 560). Assuming this is the case, then understanding networks has impor-
tant theoretical and practical consequences, particularly in grasping how entrepreneurs
and their organizations operate and function (Jack, 2010). What is also clear from Table
12.2 is that while there is a wide body of literature forming and consensus about the sig-
nificance of networks for entrepreneurship, much less is known about why they may go
wrong and what the consequences might be, how they may change in configuration and
capability through time, and the differences in networking behaviour among different
categories of entrepreneurs in different cultures (Anderson et al., 2009).
Table 12.2 also shows that network research can involve the study of a wide range of
features and aspects such as size, structure, interactional processes, influences, behaviours
and skills (Coviello, 2005, p. 39). While this breadth might be seen to be problematic by
some, it is what also makes network research so interesting.
A criticism of extant work is that rather than focusing on process related issues, as
earlier sociological work did, studies have tended to be more concerned with looking at
structural aspects of networks, particular elements related to structure and outcomes
such as network ties. Although network research has been criticised for this, process
related issues have started to become more popular (Jack, 2010; Slotte-Kock and
Coviello, 2010) since Hoang and Antoncic’s (2003) critique of the network literature and
‘cry’ for more process work. However, to date structural aspects of entrepreneurial net-
works have received more attention than processual issues (O’Donnell et al., 2001; Hoang


Table 12.2 Themes and findings of network research 1995–2005 (adapted from Jack,
2010)
Themes Author(s) Key finding

Embeddedness Uzzi (1997) Explains link between social structure and
economic performance
Johannisson et al. Shows supplementarity of layers/orders of
(2002) embeddedness
Jack and Anderson Key role in shaping, and sustaining environment,
(2002) creates opportunities, and improves performance
Uzzi and Gillespie Social embeddedness affects financial performance
(2002) of firm
Evolution Hansen (1995) Social resources active ingredient in
entrepreneurial networking
Johannisson (1998) Knowledge-based entrepreneurs more concerned
with networking than traditional entrepreneurs,
both include social ties
Minguzzi and Influenced by relationships established with
Passaro (2001) economic environment
Schutjens and Need for young firm networks to be seen in spatial
Stam (2003) and temporal context
Greve and Salaff Entrepreneurs build networks that vary by phase
(2003) of entrepreneurship
Hite (2005) Emerging firms tap into external network to
discover opportunities and mobilize necessary
resources
Gender Lerner et al. (1997) Network affiliations (particularly single)
important for female entrepreneurs in Israel
Katz and Williams Weak tie network efforts are less than those of
(1997) managers, female entrepreneurs engage in weak-
tie networking less than salaried male managers
Growth and Donckels and Need to invest in network formation for growth
performance Lambrecht (1995)
Donckels and Importance of forming networks for small
Lambrecht (1997) business growth
Lee and Tsang Entrepreneurs industrial and management
(2001) experience affects growth
Havnes and Networking sustains long-term objectives of firms
Senneseth (2001)
Lee et al. (2001) External links to VCs predict start-up
performance
Rodan and Importance of access to heterogeneous knowledge
Galunic (2004)
Peng (2004) Strength of kinship networks important for
workforce size of rural enterprises
McDade and Able to develop networks that strengthen
Spring (2005) economic growth in Africa


Human and social Dakhli and De Positive for human capital and innovation but
capital Clercq (2004) partial for trust and associational activity
Interfirm/alliances Franke (1999) Proposes adaptation of net-broker concept to
manage virtual web and overcome implications of
evolution
Huggins (2000) Formal groups potent but initially facilitated
through informal network
Soh (2003) Performance improves as becomes more central in
technology collaboration network
Internationalization Keeble et al. (1998) Internationalization embedded in successful
local networking, research and technology
collaboration
National differences Drakopolou Dodd National differences in networking exist
and Patra (2002)
Network incubator Bøllingtoft and Mechanisms facilitating or hindering networking
Ulhøi (2005) in incubators can be divided into two categories
Clarysse et al. Three distinct incubation models relating to
(2005) network contacts
Opportunity Krackhardt (1995) Predictions about networking conditional on
perception/ larger structure in which ties are embedded
recognition Arenius and De Residential area influences perception of
Clercq (2005) entrepreneurial opportunities
Particular ties/ Özcan (1995) Networks strengthen the innovative flexibility and
characteristics competitiveness of small firms
Brüderl and Support from strong ties more important than
Preisendörfer weak ties
(1998)
Chell and Baines Different ties useful for different purposes,
(2000) association between networking and business
performance
Elfring and Strong ties secure crucial information
Hulsink (2003)
Grandi and Need to look at team composition when deciding
Grimaldi (2003) to invest/support new venture
Kingsley and Geographically and socially mixed, used to gather
Malecki (2004) information
Julien et al. (2004) Importance of weak tie networks
Jack (2005) Importance of strong tie networks
Raising finance/ Fiet (1995) VCs consult formal network more than BANs
venture capital/ who distinguish between informants
BANs Mason and Majority investments via not-for-profit networks,
Harrison (1997) private sector used for different type



Steier and Development of supportive network helps survival
Greenwood (2000)
Shane and Cable Mechanism for information for investors
(2002)
Florin, Lubatkin Social resources leverage productivity of ventures
and Schuze (2003) resource base
Baron and Need to look at particular aspects of social
Markman (2003) behaviour to understand entrepreneurial success
Resources Premaratne (2001) In Sri Lanka entrepreneurial networks provide
important resources
Relationship with Yli-Renko and Need for systematic research approach for new
environment Autio (1998) technology firms
Littunen (2000) Need to match growth ambitions with
entrepreneurial resources
Kodithuwakku Importance of social networks for resource
and Rosa (2002) mobilization
Spinouts/spinoffs Nicolaou and Strong non-redundant ties in instrumental
Birley (2003) networks and strong supportive ties in expressive
relationships are important antecedents of
entrepreneurial behaviour
Social capital Cooke and Wills Social capital building associated with enhanced
(1999) business, knowledge and innovation performance
Batjargal and Liu Social capital and strong ties affect investment
(2004) process
Yli-Renko et al. Knowledge acquisition plays mediating role
(2001) between social capital and knowledge exploitation
Shane and Stuart Founder’s social capital represents important
(2002) endowment for early stage organizations
Anderson and Jack Social capital is a process with structural and
(2002) relational aspects
Liao and Welsch No significant differences in various dimensions
(2005) of social capital between nascent entrepreneurs
and general public. Patterns of association
differentiate, not amount of social capital
Davidsson and Bridging and bonding social capital (strong and
Honig (2003) weak ties) predictor for nascent entrepreneurs
Social interaction Lechler (2001) Social interaction important in teams but not only
success factor
Structure and Human and Involvement in manufacturing network
outcomes Provan (1997) advantageous, has transactional and
transformational outcomes


and Antoncic, 2003; Jack, 2010; Slotte-Kock and Coviello, 2010). As a consequence, we
realize and recognize structural features associated with the constitution of networks. We
know networks (1) are formed on the basis of relationships that tie relational homogene-
ity, diversity, density, (2) that the extent to which individuals within a network know each
other are relevant issues (3) that ties vary in terms of strength, and (4) that there are dif-
ferent measures of centrality and reachability (see Kim and Aldrich, 2005). We also know
that networks enable individuals to access resources and social support (Renzulli and
Aldrich, 2005). However, we know much less about the downside of networks.
CONCEPTUAL ROOTS OF SOCIAL NETWORKS
In tracing the roots of social network research there are some concepts which have been
used and applied to the study of entrepreneurial networks. In the following section, we
highlight a selection to illustrate how current understanding has been shaped.
Strength of Weak Ties
Most network studies looking at ties are characterized by the use and application of
Granovetter’s strong and weak tie hypothesis (for examples, see Aldrich et al., 1987;
Hills et al., 1997). Granovetter (1973), and subsequently Burt (1992a; 1992b), argued
that a network should consist of both strong and weak ties because the nature of these
ties influences the operation and structure of networks (Jack, 2005). Weak ties represent
heterogeneous ties and are perceived to be a critical element of social structure, enabling
information to flow into other social clusters and the broader society (Burt, 1992a), and,
in turn, creating the possibility of connections to other social systems (Ibarra, 1993).
Contrastingly, strong ties are perceived as less beneficial than weak ties: they are likely
to provide redundant information because they can be anticipated to move in similar,
if not the same, social circles (Granovetter, 1985; Burt, 1992b). Thus, the homogeneity
of strong ties is thought to be less effective, breeding local cohesion but also leading
to overall fragmentation (Granovetter, 1973; Ibarra, 1993; Maguire, 1983). However,
cumulating evidence that emphasizes the importance of weak ties has fuelled the debate
on the relative value of strong versus weak ties (Hoang and Antoncic, 2003; Jack, 2005).
So, whilst the strong and weak tie hypothesis has become an established paradigm,
questions arise over its applicability, particularly within the context of entrepreneur-
ship (Brüderl and Preisendörfer, 1998; Elfring and Hulsink, 2003; Jack, 2005). Network
ties, particularly for emerging firms, provide the ‘conduits, bridges and pathways’ to
opportunities and resources but the characteristics of these ties influence how they are
‘identified, accessed, mobilized and exploited’ (Hite, 2005, p. 113). So, the ties that form
a network can have a significant impact on the type and extent of resources acquired
(Jack, 2005).
Embeddedness
Granovetter (1985) also argued that actors are embedded in concrete, ongoing systems
of social relations and that behaviour is so constrained by ongoing social relations that


to construe them as independent is a misunderstanding. According to Uzzi (1997, p. 35),

research into embeddedness can help to advance understanding of how social structure
affects economic life. He referred to embeddedness as ‘a puzzle that, once understood,
can furnish tools for explicating not only organizational puzzles but market processes’
(Uzzi, 1997, p. 64). As Carsrud and Johnson (1989) note, the new business develop-
ment process is strongly affected by social contacts or linkages, which in fact form the
patterns of social interaction. Burt (1992a) describes this as bridging ‘structural holes’.
Social embeddedness is relevant to entrepreneurship because it helps the entrepreneur
identify social resources, an essential step to founding organizations (Hansen, 1995).
Furthermore, being embedded within the social context means access to more support
during the entrepreneurial process but also a likelihood of increased entrepreneurial
activity (Schell and Davig, 1981).
Embeddedness, however, can also act as a constraint. Whittington (1992, p. 697) pointed
out that agency is constrained by an environment that is made up of socio-economic
features. Uzzi (1997, p. 57) identified conditions when embeddedness can be turned into a
liability, for example: the unforeseeable exit of a core network player; institutional forces
rationalizing markets; even over-embeddedness. Embeddedness can also influence the
way in which value is and can be extracted – affecting resource availability, opportunity
perception and shaping the entrepreneurial event. Steier and Greenwood (1995, p. 349)
provided an account of the problems encountered when venture capitalists withdraw
funding from an enterprise: ‘the entrepreneurs had become their friends’. Anderson and
Jack (2000) illustrated that the social stigma attached to failure in small, close communi-
ties where everybody knows each other, can have tragic consequences. Even Schumpeter
(1934, p. 87) provided an account of how those within the social context can react against
someone who wishes to do something new by condemning it, simply because it is an
unfamiliar procedure:
Even a deviation from social custom in such things as dress or manners arouses opposition . . .
this opposition is stronger in primitive stages of culture than others, but is never absent. Even
mere astonishment at the deviation, even merely noticing it, exercises a pressure on the indi-
vidual. The manifestation of condemnation may at once bring noticeable consequences in its
train. It may even come to social ostracism and finally to physical prevention or to direct attack.
(Schumpeter, 1934, p. 87)
So, the fear of social exclusion could prevent any individual activity which would not
be acceptable to the group (Schumpeter, 1934). Similarly, Johannisson (1990) argued that
individual entrepreneurs take both economic and social risks which may lead to social
exclusion while Anderson and Jack (2000) illustrated that social embeddedness can also
have negative effects because of group expectations.
Structural Holes
Burt’s (1992a, p. 28) structural holes thesis deals with the hole, or gap, which is spanned
between non-redundant contacts; ‘whether a relationship is strong or weak it generates
information benefits when it is a bridge over a structural hole’. Network contacts are
redundant if they lead to the same people and hence provide the same information ben-
efits, i.e. each person knows what the other people know (Burt, 1992a; 1992b). Therefore,


it is the number of non-redundant contacts that becomes important. Non-redundant

contacts are disconnected in some way – ‘either directly in the sense of no direct contact
or indirectly in the sense of one having contacts that exclude others’ (Burt, 1992b, p. 65).
Burt (1992a) demonstrated this by explaining that two contacts are redundant to the
extent that they are connected by a strong relationship, for instance father and son, which
provides easy access but leads to the same information. Where contacts have no direct
ties with one another, they are non-redundant because each can lead to different informa-
tion and resources. Therefore, the structural holes argument is linked to the strength of
ties and homogeneity. Burt’s (1992a; 1992b) thesis deals with the hole spanned between
non-redundant contacts since it is this (structural) hole which he argues is important in
generating information benefits.
Although in Burt’s (1992a; 1992b) view it is the space between the links (in a network)
which is effective and important, the real value of the structural holes argument is in
helping to understand the size of the hole and what is actually going on within that hole,
particularly if a network is visualized as a grid of mutuality, where people with some
commonality are brought together for a variety of reasons. Where contacts have no direct
ties with one another, they are non-redundant because each can lead to different informa-
tion and resources. Accordingly, network positions associated with the highest economic
return lie, between, not within, dense regions of relationships, i.e. structural holes (Walker
et al., 1997). In the context of entrepreneurship this is relevant because it infers that
structural holes may present opportunities for brokering information flows among firms
and, consequently, this offers the possibility of greater economic payoffs as potentials are
created (Walker et al., 1997).
Social Capital
In the literature of political science, sociology and anthropology, the idea of social capital
has been used to refer to the set of norms, networks and organizations through which
people gain access to power and resources that are instrumental in enabling decision-
making and policy formulation (Serageldin and Grootaert, 2000, p. 45). Social capital
is partly the social glue that produces cohesion; it may be thought of as a collection of
networks, i.e. the ‘social group’ into which one is socialized or aspires to be socialized;
it is an aggregation of reputations and a way to sort out reputations; and it includes the
organizational capital that managers develop through their management style (Stiglitz,
2000, p. 60). Relations within and beyond the firm have also been referred to as social
capital (Burt, 1992b, p. 58). It is a feature of social networks that facilitates coordina-
tion and cooperation for mutual benefit (Flora, 1998, p. 488), so it can also be viewed as
sets of resources embedded in relationships (Burt, 1992a; 1992b). Social capital includes
many aspects of the social context which involve social interaction, such as social ties,
trusting relationships and value systems which facilitate the actions of individuals located
in a particular social context (Nahapiet and Ghoshal, 1998; Tsai and Ghoshal, 1998).
According to Anderson et al. (2007) social capital can be considered a productive asset,
making possible certain ends which, in the absence of social capital, would not be pos-
sible, or would be more difficult (Coleman, 2000).
An actor’s embeddedness in social structures endows them with social capital (Portes
and Sensenbrenner, 1993; Oinas, 1999). Hence social capital is created within the


embedding process; an end (a product of networks) as well as a means (of enabling)

(Anderson and Jack, 2002; Jack and Anderson, 2002). According to Walker et al. (1997),
in the entrepreneurial context firms with less social capital are more vulnerable to oppor-
tunistic behaviour, are less able to build an enduring history of effective cooperative
behaviour with partners over time, and have to spend more time and effort monitor-
ing the relationship. In contrast, the more social capital available to a firm, the fewer
resources it needs to manage existing relationships and the more resources it can use to
establish new ones (Walker et al., 1997).
NEW COMBINATIONS
The above discussion has demonstrated the extent to which the study of entrepreneurial
networks has been enriched by the application of theories based on sociology and social
anthropology. In this section, we broaden the discussion about the disciplinary roots and
demonstrate how links to history enhance our knowledge. Taking the discussion forward
in this way is interesting because it helps broaden understanding about the networked
innovating entrepreneur.
If interdisciplinarity is a crucial feature of the study of networks, academic boundaries
still remain surprisingly acute even in closely related areas:
Given the inherent interrelatedness of entrepreneurship, innovation and creativity, one would
expect there to have been a natural conscious blending of research interests, results, methodolo-
gies and diverse applications; yet each field is neatly compartmentalised with little cross pollina-
tion. For example, creativity is rooted firmly in psychology and innovation has primarily been
examined in fields of technology and engineering. (Brazeal and Herbert, 1999)
This view was echoed in a Harvard Business School interview with Geoffrey Jones,
co-editor of The Oxford Handbook of Business History (2008). He observed that
despite having much to offer the study of entrepreneurship and management, business
history has developed in a separate silo, which has ‘resulted in the spread of influential
theories based on ill-informed understandings of the past’ (Silverthorne, 2008). In this
context, Schumpeter’s (1947) emphasis on the potential for co-evolution of knowledge
by economists and economic historians is especially apposite. The creative impact of
‘new combinations’ on the economic system is equally applicable to academic research,
where innovation takes place at the boundaries of disciplines drawing together comple-
mentary approaches. In this section we explore both the origins and evolution of theories
informed by history and show how they can be combined to develop understanding of
the relationship between entrepreneurship, networks and innovation.
Schumpeter, Entrepreneurship, History and Path Dependency
This chapter has already traced the development of sociologically based theories on
entrepreneurship. Understanding the relationship between innovation, entrepreneurship,
history and networks adds a dimension generally lacking from studies based on social
theory, and involves examining both macro and micro perspectives. It inevitably takes
us back to Joseph Schumpeter, for whom innovation and entrepreneurship were the


dynamic engines of change at the heart of capitalist growth and were inseparable from
historical context (Schumpeter, 1934; 1947). Some recent research has integrated histori-
cal methodology with analysis of the innovative enterprise (O’Sullivan, 2000; Lazonick,
2003). Lazonick observed that the ‘innovative process is cumulative because the possibili-
ties for transforming technological and market conditions today and tomorrow depend
on the development of those conditions in the past’ (2003, p. 35).
Scholars have challenged the role of Schumpeter’s ‘hero entrepreneur’ at the heart of
economic development (Cassis and Minoglou, 2005, p. 10). However, embedding the
entrepreneur within a shifting set of networks, implied by Schumpeter’s ‘new combina-
tions,’ provides a dynamic landscape for understanding the innovative entrepreneur and
the impact which he or she may have on economies, on regions and on firms. History then
is not just about the past. It can be used to understand the present and the future. The
links between past and future and the cumulative nature of innovation, are the result of
the social learning processes associated with it (Lazonick, 2003).
Path Dependency
Historical analysis and several theories underpinned by history, including path depend-
ency and communities of practice, help us make sense of networking behaviour by entre-
preneurs. Path dependency, or the influence of past events and knowledge on the future,
was originated by the economist Paul David, who was one of the pioneers of the ‘new
economic history’ combining economics, cliometrics and history to make sense of the
economic growth process (David, 1975). His interest in path dependency grew out of this
work, and he argued that the solution of comparatively small problems in the past pro-
vides the foundation for the choices of the future. The long term impact of ‘learning by
doing’ on human behaviour potentially leads to ‘lock in’, as in the case of the QWERTY
keyboard, which was originally developed for mechanical typewriters to reduce jamming
of keys. Its survival through the transition first to electric typewriters and then to the per-
sonal computer reflects the way habit and familiarity increase the costs of change (David,
1985). He likened the impact of path dependency to the ‘deepening of wheel ruts by each
successive vehicle’ (David, 1997, p. 123). The idea lies at the heart of evolutionary theories
of economic change (Nelson and Winter, 1982) and underpins innovation theories on the
emergence of dominant design (Utterback, 1996).
Path dependency has been largely overlooked by scholars of entrepreneurship,
(Jones and Wadhwani, 2005). At first glance the ‘locking in’ of behaviours and activi-
ties seems the very antithesis of entrepreneurship, innovation and change. But, if we
are to move from generic theories of entrepreneurship to those which explain regional
and international differences in behaviour, it is vital to appreciate the forces shaping
choices. The application of institutional and evolutionary theories – which themselves
draw on both Schumpeter and path dependency theory – help to explain such differ-
ences (Nelson and Winter, 1982; North, 1990). ‘Institutions are the rules of the game
in a society or, more formally, are the humanly-devised constraints that shape human
interaction’ (North, 1990). They may be either the formal laws created by governments
or the informal codes of practice and of behaviour found in organizations, communi-
ties, regions or countries. They help to create order and form the basis for coopera-
tion in an uncertain world. For example, formal laws and regulations are the basis of


property rights, whilst informal codes underpin trust and shape expectations of the
likely behaviour of associates.
The idea that ‘institutions matter’ and that understanding the rules of the game
is crucial to an appreciation of economic behaviour underpins the ‘new institutional
theory’ of North, Williamson, Hodgson and Casson (Williamson, 1985; 2000; Hodgson,
1988; Casson, 1991). Yet, Williamson does not explain the international diversity of
experience and has been strongly criticized by sociologists and some economists for his
neglect of networks. Starting with the assumption that firms are embedded within the
society of which they are part, it has been demonstrated that in East Asia, for example,
firms are inseparable from their socially based networks. In this context, networks are
not an intermediate stage between firm and market as Williamson implies, but constitute
the norm (Redding, 1990; Biggart and Hamilton, 1992). Additionally, drawing on evo-
lutionary theory, some economists have pointed to the path dependency of innovation,
showing the impact of firm-specific routines on the choice of technology, which helps to
explain divergent as opposed to convergent business behaviour (Langlois and Robertson,
1995).
Entrepreneurs never, therefore, innovate in isolation, so links to investors, competi-
tors, suppliers, customer and governmental organizations need to be considered when
studying innovation (Lundvall, 1992; Edquist, 1997). By setting innovation behaviour
against the formal and informal rules of the game, business historians and economists
have explored the potential of the ‘new institutionalism’ for international comparisons
(Zysman, 1994; Casson and Rose, 1997; Knutsen et al., 1999).
During the 1990s, a number of business historians demonstrated that entrepreneurial,
and indeed family, firms were embedded within distinctive regional and sometimes
international networks, from which they derived competitive advantage. Scranton dem-
onstrated the development of innovative, specialized networked forms as the basis for
Philadelphia’s competitive advantage, while Rose, in comparing business values between
the United States and Britain, found regionally distinctive behaviours, underpinned by
varying types of networks (Scranton, 1997; Rose, 2000). In this work networks were a
dynamic phenomenon and acted as a bridge between past and future. The growing inter-
est in social capital, identified earlier in this chapter, is also reflected in business history
and, by looking at the benefits of ‘connectedness’, builds on the historical analysis of net-
works. In particular this has led to a special issue of the journal Business History edited
by Pamela Laird, who concluded that building ‘social capital mattered most where there
were few other assurances of predictability, reliability, authority or reciprocity’ (Laird,
2008, p. 692). In other words, reliance on social capital building has historically been an
important antidote to uncertainty.
Schumpeter saw innovation as evolutionary. But it is by moving beyond the individual
entrepreneur to the embedded entrepreneur that the combination of theory and history
becomes especially powerful, because innovation is a knowledge-based process, where
the entrepreneur combines bodies of skill and expertise. Because innovation occurs most
readily at the interstices of areas of expertise, it is enhanced by entrepreneurial networks,
which facilitate boundary crossing. Entrepreneurial networks have increasingly been
identified as crucial to innovation. Much has been written identifying the importance
of networks to combinations of knowledge in the supply chain. As Powell and Grodal
observe, ‘[E]xisting knowledge within a network is recombined in novel ways. Indeed


novelty is often the unanticipated result of configuring existing knowledge, problems and
solutions. As a consequence of such collisions or transpositions, firms can generate some-
thing they were unable to generate on their own’ (Powell and Grodal, 2005, p. 75).
Yet networks are not just crucial for vertical collaboration within the supply chain, they
are significant when boundary crossing involves mixing old and new knowledge and the
avoidance of path dependent ‘lock in.’ Work that draws on Schumpeter emphasizes how
the majority of designs and innovations represent ‘new combinations of old and new’ –
old product and new process, old product and new material, old skills and new products
(Abernathy and Clark, 1985). Historical experience demonstrates how important com-
bining old and new knowledge and skills has been for radical innovations such as the
automobile (Hounshell, 1984).
Schumpeter believed the trajectory of any innovation was intimately related to its
historical context, and argued that creativity involves not necessarily developing some-
thing new, but having the imagination to see old things in new ways and move ‘outside
the ruts of established practice’ (Schumpeter, 1947). Creativity alone does not lead to
commercialized innovations, and it is here that the link with entrepreneurship and entre-
preneurial networks becomes crucial. Entrepreneurship involves the recognition and
assessment of opportunities and is often the bridge between creativity and innovation.
Innovation is, by implication, an evolutionary process with the discontinuities typically
coming from boundary crossing, which leads to new combinations. It is entrepreneurial
imagination that transforms the shadow of the past into an inspiration for the future.
The entrepreneur is involved in what can be described as the dance of two questions –
‘what is needed?’ and ‘what is possible?’ – and the interplay of these two questions is an
ongoing process. Responses to the two questions are shaped by changing knowledge of
the external environment, by social and business networks, by changes in the legal system,
changes in the competitive environment and by market forces (Stefik and Stefik, 2004).
Viewed in this light, networks underpin development and change in economies, sectors
and firms. Based upon knowledge, they are inseparable from a dynamic approach to the
co-evolution of innovation in industries (Malerba, 2006).
Rather than staying trapped by their past, networked entrepreneurs may engage in
‘mindful deviation’ and in so doing create new innovative pathways. Theorists setting
out to develop beyond path dependency to path creation have shown that this can be
achieved by a combination of external and internal awareness or receptivity to the unfa-
miliar, combined with an understanding of the need to convince hearts and minds of the
benefits of change (Garud and Karnøe, 2001, p. 6; Bessant et al., 2004, pp. 32–3). All this
implies that the dynamic dance of the two questions ‘what is needed?’ and ‘what is pos-
sible?’ will not be conducted in isolation, but will be embedded in and underpinned by
social networks within and outside firms. The innovative entrepreneur is then engaged in
a social process and ‘those who attempt to create new paths have to realise that they are
part of an emerging collective and that core ideas and objects will modify as they progress
from hand to hand and mind to mind’ (Garud and Karnøe, 2001, p. 20).
It has, for example, been shown how new combinations of knowledge from the indus-
trial past of a region could provide the foundation for competitive advantage in the
future. This was the case in the North West of England when networking relationships,
underpinned by the social capital of entrepreneurs, combined with the skills of ancillary
sectors (that were the legacy of industrialization) contributed to innovation in one of the


UK’s more dynamic consumer goods sectors, from the 1960s to the 1990s (M. Parsons
and Rose, 2003; 2005; Rose et al., 2007).
This chapter has traced the evolution of thinking on social processes, highlighting how
understanding of embeddedness and trust has shaped our understanding of entrepre-
neurship. A historical perspective highlights the complexity of the innovation process
in which entrepreneurs are engaged and demonstrates the importance of a networked
approach to innovation.
Communities of Practice
This chapter has already revealed the importance of anthropology in shaping thinking
on networks, social change and social capital. The impact extends to innovation through
the development of the concept of communities of practice. The communities of practice
literature provides an exciting bridge between entrepreneurship, innovation and networks
and one which is underpinned by historical path dependency models of ‘learning by
doing’ already discussed. Although informal communities of practice have always existed,
the term was first used by anthropologist Jean Lave and educationalist Etienne Wenger in
1987 as part of their analysis of apprenticeship (Wenger and Snyder, 2000). Formalized
and developed by Lave and Wenger during the 1990s, this social learning theory is based
on the experiential learning achieved within groups united by the shared passion for and
practice of particular activities. Sharing history and experience brings with it free flowing
communication which in turn fosters a creative and innovative solution to problems
(Lave and Wenger, 1991; Lave, 1993; Lave and Chaikin, 1993; Wenger, 1998).
Communities of practice theory has been applied to explain diffusion of innova-
tion, or the barriers to it in large scale companies (Brown and Duguid, 1991) and the
entrepreneurial process within family firms (Aldrich and Cliff, 2003). Although largely
neglected in small firms, it has found applications in the context of local and regional
entrepreneurial networks. Applied to the innovation process, this theory helps to explain
the evolution of experience, knowledge and practices especially within industrial clusters.
The analysis of Silicon Valley has revealed that the clustering of the same and related
industries has created overlapping communities of practice which mean that entrepre-
neurial knowledge is ‘in the air’ (Brown and Duguid, 2002). Proximity to competitors
reinforces awareness of the implications of their innovations and fine tunes opportunity
recognition. In addition, there has developed a breed of venture capitalists experienced
in hi-tech start ups, while in universities such as Berkeley and Stanford, academics are
habitual entrepreneurs, which reinforces and feeds the environment (Brown and Duguid,
2002; Kenney and Goe, 2004). The lived and shared experience of entrepreneurs, venture
capitalists and technologists in Silicon Valley is not based on long lasting relationships.
Instead, it is based on the building of tacit knowledge of what makes the region function,
a shared knowledge which influences innovation and entrepreneurship. The distinctive
history of the region has therefore shaped and continues to shape the communities of
practice which are themselves long in the making.
This analysis highlights why history matters to the understanding of the distinctive-
ness of different industrial clusters and the potential dangers of ‘top down’ government
policies to promote industrial clusters (Brown and Duguid, 2002). It helps us understand
the entrepreneurial process and how, through operating within overlapping communities


of practice, entrepreneurs may develop innovative ideas – through new combinations. In

addition communities of practice can be used to explain the diffusion of innovation and,
especially differing patterns of diffusion within different societies.
The importance of communities of practice theory in entrepreneurial networks and
innovation is not confined to industrial clusters, however; it is also linked to the role of
lead-users in innovation identified by von Hippel. Lead-user innovators are those who
innovate for use rather than sale and are consequently typically embedded within a com-
munity of practice (von Hippel, 1988; 2005). The development of this theory around
both industrial users and consumers has important implications for our understanding
of the role of entrepreneurial networks in innovation. It shifts the focus of innovation
from the R&D department of the large scale company to networks of users and has been
identified in hi tech and low tech sectors and especially in sporting goods, strongly influ-
encing designs and design processes. The majority of lead-users do not, however, become
entrepreneurs and those that do are often lifestyle entrepreneurs. However where entre-
preneurs are themselves users, and hence part of overlapping communities of practice,
this can significantly enhance the quality of dialogue with their customers (von Hippel,
2005; Lüthje et al., 2005; Baldwin et al., 2006; Rose et al., 2007)
NETWORKS AS A CONSTRAINING FORCE AND THE

DOWNSIDE OF NETWORKS
The network concept is certainly useful in examining many types of social situations
and to interpret a variety of social behaviour (Barnes, 1969; Mitchell, 1969). From work
carried out on social networks several interactional characteristics and criteria have been
identified as being significant: anchorage, reachability, density, range, content, directed-
ness, durability, intensity and frequency (see Mitchell, 1969, pp. 12–29). But, because of
the diversity of contexts in which the term social network has been used and applied,
confusion does appear in the literature as researchers have their own interpretations and
introduce refinements to the meaning of the term to suit thier own particular problems
(Barnes, 1969).
Criticisms have also been made concerning the use of social network theory as an ana-
lytical framework, primarily based on the point that a social network perspective often
takes social structures as a given (Aldrich, 1982; Granovetter, 1985; Jones et al., 1997),
raising concerns about the perception and interpretation of structure and agency in terms
of influencing behaviour and how the initiation, reproduction and change of structures
are brought about (Emirbayer and Goodwin, 1994; Mizruchi, 1994; Araujo and Easton,
1996). Moreover, those using the term ‘network’ have been accused of loosely applying it
to describe any type of interaction between persons or groups (Shaw, 1997; Havnes and
Senneseth, 2001). Yet, despite these criticisms, there does seem to be widespread consen-
sus that networks are a useful mechanism for interpreting social behaviour. However, the
study of personal networks requires ‘meticulous and systematic detailed recording of
social interaction’ (Mitchell, 1969, p. 11) and Cooley (1956) would argue that in order to
understand social life one should study it through observation.
In addition, much of the network literature demonstrates an almost evangelical faith in
the power of networks to improve the environment faced by entrepreneurs. Collaborators,


however, may cheat or free-ride on goodwill, leading to a breach of trust and a break-
down in relations, and entrepreneurs may choose to destroy as well as build social capital.
Some concerns were raised earlier but here we take a broader perspective.
Successful collaborations are based upon mutual trust and mutual benefit. However,
misplaced or misjudged expectations, as the relationship develops, can undermine fragile
trust and reverse any potential gains (Bowey and Easton, 2007). In their discussions
about network development Smith and Lohrke (2008) point out that even though trust
is a core element of networks, trust might also constrain network development and
work against the entrepreneurial process. These authors raise the issues that (1) trust
levels can change as a result of a negative outcome and that this can impact on how an
entrepreneur is perceived and (2) overembeddedness and ‘over trust’ can lead to distrust.
Anderson and Jack (2000) raise concerns about embeddedness and group expectations.
They argued that the pressure these aspects can place on the entrepreneur can lead to
loss of face and can have tragic consequences, arguments echoed by Schumpter (1934)
and Johannisson (1990).
Another concern is that networks are by no means always inclusive and may exclude
ethnic groups or those whose backgrounds or life experiences differ from established
groupings and the ‘accepted’ social norm. Successful entrepreneurs from ethnic minori-
ties have been found often to feel there is a need to join predominantly white clubs to
build their social capital (Mulholland, 1997). However, social exclusion among socially
disadvantaged groups can lead them to develop their own institutional base better tai-
lored to their needs and aspirations.
There is also the ‘threat’ from technological change and the rise of the internet as these
have altered the capabilities of networks and modes of communication. Globalization
and flexible organizations are some of the consequences of such technological changes.
Recent research has demonstrated, however, that there are barriers to the effective func-
tioning and building of virtual teams and that far from ceasing to be important, geogra-
phy and locality do still matter (Kimble et al., 2000; Brown and Duguid, 2002; Asheim
and Gertler, 2005).
CONCLUSION: THE FUTURE FOR SOCIAL NETWORKS IN

ENTREPRENEURSHIP RESEARCH
So, while network research within entrepreneurship has increased in popularity in

recent years, the network approach itself is not new and has been used in organizational
research since the 1930s and at least the 1950s in sociology and anthropology (Nohria,
1992). Although its use and popularity by social science researchers has without doubt
intensified in recent years, much is owed to its founding disciplines which are often
overlooked (Parkhe et al., 2006). A perspective that has not been fully explored here, for
reasons mentioned earlier, is that of social psychology and especially role theory. Yet,
such a perspective might be appropriate when looking at corporate entrepreneurship, the
‘building’ of teams for entrepreneurship and family business research, especially if it were
to build on the work of Bott (1955; 1956; 1957).
Undoubtedly, a substantial body of work has accumulated over the years that devotes
considerable attention to the analysis of networks within the entrepreneurial context.


However, network analysts need to be cautious as they have been criticized for being
casual, even careless, in their prescriptions of how entrepreneurs can easily achieve
optimal network positions when in reality entrepreneurs suffer from barriers of homoph-
ily, social boundaries and bounded rationality (Kim and Aldrich, 2005). Table 12.2
highlights popular and relevant research themes such as the structure and patterning of
relationships, causes and effects and input-output relationships, and the development of
predictive, often sophisticated, models that not only demonstrate that individuals use net-
works but also that networks have structures with key features. Although this might seem
selective, a similar pattern can be found in inter-organizational network research. Here
Oliver and Ebers (1998) point that out researchers have dealt with the vast, complex and
fragmented field by means of a selective approach, concentrating on particular theoreti-
cal issues or literatures.
The productive information and resources gathered through social networks can com-
pensate for constraints and the use of social networks can counteract many difficulties
(Jack, 2005). However, as highlighted in our discussion, the use of social networks can also
be problematic. Yet, it is through social networks that entrepreneurial action can convert
‘limited’ resources into a ‘rich environment’ (Jack, 2005), although for the entrepreneur
this can involve taking both economic and social risks. Despite considerable empirical
and theoretical development (Hoang and Antoncic, 2003), a need exists to further under-
standing about particular network aspects, including the embeddedness and impact of
social mechanisms (Jones et al., 1997), what really goes on within a network over time by
taking a process perspective (Hoang and Antoncic, 2003; Jack, 2010; Slotte-Kocke and
Coviello, 2010), and issues surrounding the downside of networks.
There is a perspective that in terms of theory development, network research is at the
‘cusp of an exciting new phase of advances’, anticipated to ‘remain vibrant far into the
future’ (Parkhe et al., 2006, p. 567). It might even be the case that it is through relations,
interactions and networks that entrepreneurship is really carried out (Anderson et al.,
2005). So, by continuing to consider networks, by thinking about the networked innovat-
ing entrepreneur and by taking a historical perspective, our understanding can only be
enhanced.
NOTE
1. Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly,

American Journal of Sociology, Entrepreneurship and Regional Development, Entrepreneurship Theory and
Practice, Journal of Business Venturing, Journal of Management, Journal of Management Studies, Journal
of Small Business Management, Management Science, Organisation Studies, Organization Science, Small
Business Economics, and the Strategic Management Journal.
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Section II.4
Integrative Works



13. The psychology of entrepreneurs:
a self-regulation perspective
Alan R. Johnson and Frédéric Delmar
INTRODUCTION
In this chapter, we suggest theoretical and integrative links between previous and future
research into the psychology and, more specifically, the motivation of entrepreneurs
using a self-regulation perspective. Recent research in work motivation has shifted
from focusing on the single concept of ‘goal setting’ and ‘intentions’ towards a broader
understanding of self-regulation processes (Diefendorff and Lord, 2008). Self-regulation
is the capacity of individuals to guide their activities over time and across changing
circumstances (Kanfer, 1990). We aim to incorporate this broader understanding into
entrepreneurship research as we believe it allows for a better understanding of the func-
tion and form of the entrepreneurial mindset. In addition, a self-regulation perspective
permits integration of empirical findings about the dynamic nature of the entrepreneurial
process, while keeping goal-directed individuals as the central actors in that process.
We review psychological research in entrepreneurship for the following reasons. First,
self-regulation theories – such as the Theory of Planned Behavior (Ajzen, 1991), through
its core concept of behavioral intentions, and Social Cognitive Theory (Bandura, 1991),
through its core concept of self-efficacy – are among the most popular motivation theories
used in entrepreneurship research. However, it is not well known among entrepreneur-
ship scholars that the foregoing work motivation theories may be integrated within a self-
regulation framework, together with more recently emerging research streams, including
but not limited to cognitive and learning styles (Sadler-Smith and Badger, 1998) as well
as goal generating and goal striving. Thus, we show how these theories may be brought
together. We do this by offering a historical review of the literature on entrepreneurship
and motivation. Although we also review the earliest research done in this field, our main
emphasis is on research done after 1990. We hope our review clearly points towards the
common denominator of self-regulation and that it can lead to clearer interpretation and
integration of both theoretical and empirical findings.
Second, the foregoing work motivation theories, as they have been applied in entre-
preneurship research, have mostly emphasized differences in individuals’ characteristics
(e.g. perceived behavioral control or self-efficacy) in a relatively static way, while often
ignoring individuals’ processes and dynamic situational influences in the entrepreneurial
context. In addition, entrepreneurship is dynamic because people move in and out
from it. Individuals are theorized to evolve under uncertainty and adapt in response
to changes in the environment based on their own information processing abilities and
their established goals, which may be revised from time to time, perhaps, in the face of
289

performance feedback from interim outcomes in their task environment. Recent meth-
odological developments for working with longitudinal data, brought together in our self-
regulation framework, allow scholars to hypothesize and test models that integrate both
between-individual and within-individual differences in their dynamic processes, and
disturbances from the entrepreneurial context, that is to say, both between and within
individual variance on various characteristic and process determinants of entrepreneurial
behavior, and subsequent outcomes, with boundary conditions. Multilevel analysis is
also made possible by moving between individual and team levels. We believe that our
self-regulation framework and empirical agenda can help entrepreneurship scholars to
move forward toward more complex models that allow for fuller explanations of how the
entrepreneurial mindset is constructed and how it translates over time into both entrepre-
neurial behaviors, and interim outcomes.
We conceptualize individuals in a time sensitive, episodic, entrepreneurial process in
which their characteristics, their self-regulation processes, and their situational influences
all contribute to determining their interim outcomes. This view is consistent with the
temporal perspective adopted in both previous organizational behavior process theory
(Marks et al., 2001) and entrepreneurship process theory (Baron, 2007). Of the two, our
framework more closely resembles Marks and her coauthors’ episodic perspective, rather
than Baron’s process composed of a pre-launch phase, a launch-phase, and a post-launch
phase, because it is finer-grained than previous entrepreneurial process contributions.
It is more fine-grained because individuals’ self-regulation processes may repeat within
the phases identified in previous entrepreneurship theorizing, that is to say, pre-launch,
etc. We refer to this cyclical feature of our framework as ‘episodic’ to denote our theo-
rizing that individuals do not employ self-regulation processes (e.g. goal establishment
and revision) just once, but rather they repeat these processes over and over again. The
specific regularity and frequency of individuals’ repetitions of self-regulatory processes
in entrepreneurship and other contexts, however, is still an open empirical question to be
explored in future research (Ployhart, 2008).
In organizational contexts, self-regulation has been used to understand how goals are
set, the processes through which goals influence behavior, explanations for goal achieve-
ment or non-achievement, and how goals either get revised or new goals are adopted
in their place (Vancouver, 2000). From a practical perspective, the importance of self-
regulation has grown as a result of changes in most work settings that place more respon-
sibility on employees (Wood, 2005), which is also likely to be the case for entrepreneurs
and nascent new venture teams. Flatter organizational structures, because of reduced
layers of middle-management, are associated with more worker participation and
empowerment initiatives, often combined with virtual and remote work practices, which
taken together place more burden on individuals to self-manage their behavior at work.
Research on self-regulation can help identify specific strategies that can be taught to both
employees and entrepreneurs alike so that they may better manage their work activities
(Frayne and Geringer, 2000; Keith and Frese, 2005).
This chapter is divided into three main sections and a discussion, and aims to review
and extend cognitive theories used to explain entrepreneurial behavior. Our work is based
on current developments in both industrial and organizational (I/O) psychology and
organizational behavior where research has converged on a self-regulation perspective to
explain the complexity of human behavior, in general, and work motivation, in particu-


The psychology of entrepreneurs 291
lar. A self-regulation view in an entrepreneurial context is useful because it allows for the
inclusion of both individuals’ characteristics and processes in the explanation of their
behaviors, and then subsequent outcomes. In the first section, we propose a theoretical
framework to guide entrepreneurship scholars who want to integrate a self-regulation
perspective into their research. In the second section, we review the research done in
entrepreneurship. This review is divided in two parts. The first section reviews research
done up until 1990, which can be considered to be research conducted during the emer-
gence of entrepreneurship as a research field. The second part focuses on research after
1990 when entrepreneurship and research journals such as Journal of Business Venturing,
Entrepreneurship Theory and Practice, Small Business Economics and others became
more established. In the third section, we link our self-regulation model and research
in entrepreneurship to the current developments in the I/O literature. Thereby, we trace
the historical roots of both entrepreneurship research and I/O psychology and organi-
zational behavior, emphasizing the need for a convergence on a self-regulation perspec-
tive to explain the complexity of human behavior, in general, and entrepreneurship, in
particular.
A PROPOSED THEORETICAL FRAMEWORK
Self-regulation is the capacity of individuals to guide their activities over time and across
changing circumstances (Kanfer, 1990). Regulation implies the modulation of thought,
affect, behavior, or attention via deliberate or automated use of specific mechanisms and
supportive skills (Karoly, 1993). Vancouver and Day agreed that self-regulation refers to
processes involved in attaining and maintaining goals, but take a more private psycho-
logical view, where goals represent inherently desired states (Vancouver and Day, 2005).
The foregoing definitions of self-regulation suggest that it is central to understanding the
self and many aspects of both social and psychological human functioning (Vohs and
Baumeister, 2004), and its definitions also suggest that it is typically a conscious, willful
process. An alternative view with growing empirical evidence also suggests, however, that
self-regulation may also occur without awareness in an automatic fashion (Lord and
Levy, 1994).
Self-regulation theories are a subset of cognitive theories that posit psychological con-
structs (e.g. goal establishment) and social constructs (e.g. shared goal establishment in
teams) serve as important determinants of both individuals’ behavior and their interim
outcomes. Cognitive theories try to explain these behaviors and outcomes based on how
individuals perceive and interpret information around them over time (Kanfer, 1990).
Entrepreneurship researchers are now turning their attention towards cognitive theories
that help to explain how individuals perceive and understand the world around them, and
furthermore, in combination with individuals’ characteristics, show how over time, their
interactions with their environments influence their behaviors, and their subsequent out-
comes (Baron, 1998; Delmar, 2006; Frese, 2007). As we mentioned above, cognitive theo-
ries assume that individuals do not possess perfect knowledge of the world because there
is simply too much information out there to handle. As a consequence, individuals have
to select some information and interpret it, and thus, based on information processing
from their previous experiences, individuals tend to see and know the world differently


Stable Traits Situational

• Ability
• Personality
Influences
• Perceived social • Task novelty
norms & complexity
• Human capital • Social capital
• Intrinsic rewards • Environmental
• Cognitive styles uncertainty
Motivation System
Information Emergent Goal Goal Interim
Processing States Generation Striving Outcomes
• Attitudes • Perceived • Behavioral • Goal directed • Opportunity
• Attention, behavioral intentions behaviors recognition
encoding, control (PCB) • Goal • Social interaction & evaluation
storage, & • Self-efficacy establishment • Entrepreneurs
retrieval • Goal orientation • Goal planning entry & exit
• Goal evaluation • Goal revision • New venture:
creation, survival,
profit, & growth
Individual Characteristics Individual Processes Task Environment
Figure 13.1 The psychology of entrepreneurs: an episodic framework
(Taylor, 1998). In short, just like other individuals, entrepreneurs are actively involved in
the construction of their own realities.
In Figure 13.1, we illustrate our episodic self-regulation framework, which we offer to
explain some of our foregoing observations about entrepreneurs’ behavior and interim
outcomes, based on previous research and theory in entrepreneurship. It is based on an
integrative self-regulation perspective that has been emerging from I/O, educational, and
clinical branches of psychology. This integrative self-regulation perspective has brought
together different strands in cognitive theory that deal with human behavior, in general,
and more specifically for I/O psychologists, theories that deal with work motivation.
Our hope is that the framework may allow entrepreneurship scholars to address some
weaknesses and limitations in previous research identified and discussed in the next
section. Current research using cognitive theory can be perceived as fragmented because
no overarching perspective, or framework, has been proposed to organize accumulating
empirical results. It is not obvious how work on, for example, cognitive styles (Brigham
et al., 2007), formation of intention (Thompson, 2009), and self-efficacy (Kickul et al.,
2009) can be understood relative to each other. A self-regulation framework allows us
to make such integrations from previous work, and in addition, it allows us to identify
important research areas that yet need to be investigated in order to better explain how
entrepreneurs think and behave.
In short, our framework is intended to allow scholars to better integrate various


types of characteristics and processes, feedback loops, and boundary conditions for the
many aspects of entrepreneurial behavior and interim outcomes to be investigated. All-
inclusive models, however, are generally discouraged in our field, primarily because of the
absence of overarching theoretical clarity and parsimony. With that in mind, our frame-
work may be more useful to scholars who want to organize several constructs, which have
been taken from two or more sub-systems of our framework, into a putative model. For
models of this moderate scope, using longitudinal research designs and analysis tools
available through structural equation modeling, researchers can test relatively sophisti-
cated hypotheses that combine (a) mediated or indirect relations between three or more
variables and (b) control for unobserved heterogeneity of time-invariant characteristics.
Our framework tries to integrate the following features of previous motivation research
in an entrepreneurial context:
● Stable Traits Individual differences are defined across people (between-individual

variations). Differences between individuals tend to be stable, or slowly changing, in
an entrepreneurial context and include variables like perceived social norms, ability,
personality, and experience. The effects of individual differences on the motivational
system tend to be mediated through intra-individual processes (see below).
● Information Processing Intra-individual processes and behaviors are all defined

within individuals (within-individual variations). These differences within individu-
als may change over time, often in response to feedback from their task environ-
ment. For example, intra-individual processes include variables that operationalize
the extent to which people process information but that are not part of the motiva-
tion system.
● Motivation System is composed of three sub-systems: ‘Emergent States’, ‘Goal

Generation’ and ‘Goal Striving’. The motivation system is also constituted by
intra-individual states, processes and behaviors (Chen and Kanfer, 2006).
● Situational Influences Context, or situational characteristics, include variables

like task novelty, uncertainty, complexity, and stage in the venture creation process
that are likely to moderate the effects of intra-individual processes and the moti-
vational system on interim outcomes. In the language of control theory, these are
disturbances to the relation between behavior and outcomes.
● Interim Outcomes Response variables relevant to entrepreneurship include oppor-

tunity identification and evaluation, labor status change, firm creation, financial or
strategic performance, and firm growth. All of the foregoing systems in the frame-
work are posited to explain interim outcomes, in some combination, in an episodic,
iterative, view of individuals’ engagement with the entrepreneurial process. For
example, Ozgen and Baron (2007) show how social sources of information facili-
tate opportunity recognition.
By integrating the foregoing features from previous work motivation our framework
allows for:


● A longitudinal perspective and the incorporation of a more dynamic theoretical

approach to entrepreneurship as an episodic process with feedback loops. Feedback
loops from interim outcomes at a particular time to antecedent systems at a later
time are a condition sine qua non of a dynamic and episodic framework in the
behavioral sciences (Kluger and DeNisi, 1996). In addition, there may be several
reciprocal loops operating between other constructs from one time to another,
which may not involve interim outcomes. A longitudinal perspective brings in
time-varying explanatory factors for entrepreneurial behaviors and outcomes in
individuals’ lives and facilitates the incorporation of construct valid variables (e.g.
self-efficacy) that change in value for particular individuals over time (Austin and
Vancouver, 1996).
● Multiple levels of analysis – aggregation to a team level of analysis is often required
by the empirical context. Chen and Kanfer (2006) argued that an analogous self-
regulation model may be applied at a team level of analysis, which may become rel-
evant as entrepreneurs recruit other individuals into nascent new venture teams.
Figure 13.1 illustrates the more stable psychological characteristics of entrepreneurs

towards the left-hand side, which are relatively distal predictors of their behaviors and
outcomes. Some examples of entrepreneurs’ characteristics from the literature are listed
under the broad heading of ‘stable traits’, which are relatively slow-changing or time-
invariant aspects of individuals. As one looks towards the right-hand side of the figure,
the characteristics and processes associated with entrepreneurs are progressively more
proximal and time-varying predictors of their behaviors and outcomes (Baron et al.,
2007; Delmar, 2006; Kanfer, 1992). Some examples of entrepreneurs’ characteristics,
processes, behaviors, and interim outcomes of interest are listed under each (sub-) system
of the work motivation framework.
We next explain the elements of Figure 13.1 in more detail. Firstly, the more stable
traits of entrepreneurs are distal influences on outcomes, that is to say, their influence is
argued to be indirect, and thus, their affect is argued to be transmitted through several
more proximal constructs. The stable traits of entrepreneurs include cognitive ability,
personality traits, and human capital. Human capital is taken to include entrepreneurs’
previous experience and various knowledge, skills, and abilities (KSAs) that may be
relevant to a nascent new venture (Delmar, 2006; Rauch and Frese, 2007). In addition,
entrepreneurs’ stable traits may contribute to what is fed through from information
processing to their motivational sub-systems. Analytically, these influences may be mani-
fested through interactions between stable traits and information processing constructs
before feeding through to influence motivational sub-systems and interim outcomes
(Simons et al., 1999).
Secondly, information processing is how entrepreneurs are able to make sense of
what is happening, both from psychological sources, inside themselves, and from social
sources, coming from the task environment that is around them (Hinsz et al., 1997).
Information processing is then argued to feed into the self-regulation system (Vancouver,
2000). Perhaps information comes into one or more of individuals’ motivation sub-
systems in parallel, or perhaps, information enters through one sub-system and passes to
the others in series. Vancouver (2000) suggests the former, and this is what is illustrated
in Figure 13.1, by the arrow connecting information processing with the dashed rectangle


that contains the three motivation sub-systems – emergent states, goal generation, and
goal striving.
Thirdly, emergent states, goal generation, and goal striving, have the strongest influ-
ence on individuals’ interim outcomes, and most other distal influences, with the possible
exception of ability, are argued to pass through these motivation sub-systems (Chen and
Kanfer, 2006). As we mentioned above, Chen and Kanfer’s framework encompasses both
individual and team levels of analysis, and many cross-level relations, but our frame-
work for entrepreneurs’ self-regulation is restricted to an individual level of analysis.
The framework at an individual level may be more relevant during the pre-launch phase
(Baron, 2007), but following Chen and Kanfer’s framework, it can be extended by adding
a team level of analysis if and when entrepreneurs develop their opportunity to include
other individuals, to form nascent teams in their new ventures.
Fourthly, situational influences contain many elements that are likely to moderate
the influence of the entrepreneurs’ characteristics, processes, and behaviors on their
interim outcomes. Situational influences include, for example, novel and complex
opportunities (e.g. innovation) and the entrepreneurs’ social capital (e.g. access to
social networks and other facets of the environment). We argue, however, that over
time entrepreneurs may reduce their situational constraints (Aldrich and Fiol, 1994)
through feedback loops from their interim outcomes. For example, entrepreneurs’
social capital can be argued to strengthen their social competence in order to secure
necessary funding to create new ventures (situational influences can positively moder-
ate the relation between goal striving and interim outcomes), but once created, new
ventures can attract key customers, who may commit to a burgeoning product or
service, and such commitments, in turn, are argued to increase the social capital avail-
able to entrepreneurs (interim outcome at time (t-1) affects situational influences at
time (t), through a feedback relation).
Fifthly, entrepreneurs’ interim outcomes include various iterations of milestones in the
creation of a new enterprise. Interim outcomes are typically operationalized through a
variety of response variables depending on the focal development phase (Baron, 2007),
which include opportunity recognition and evaluation, and production of business plans
(pre-launch phase), new venture creation, securing of venture funding and survival
(launch phase), and preparing the developing firm for initial public offering, growth
and profitability (post-launch phase). Many of these outcomes are correlated, but their
connections to each other and their antecedents are left unclear from previous research,
because researchers are inclined to consider only one or two of these outcomes in a
particular study (Delmar, 1997).
Sixthly, and finally, several feedback loops are posited to exist between interim out-
comes at time (t-1) and predictors at time (t). From a psychological perspective, we posit
that the feedback loop from interim outcomes at time (t-1) to information processing at
time (t) may be the most important, because this is the one that allows entrepreneurs to
make sense of feedback from their task environment, before going back into the moti-
vation system and revising their goals and planning a new strategy for what to do next
(Frese, 2007; Gollwitzer, 1990; Vancouver, 2000). In addition, there is also occasionally a
feedback loop posited from goal generating at time t to goal striving also at time t, before
any interim outcome feedback. This loop equates to the notion that sometimes indi-
viduals realize, in advance of any external feedback, that their established goals and/or


implementation plans are unsustainable and need to be revised immediately (Gollwitzer,

1990).
To sum up, we argue that research examining entrepreneurs’ profiles in terms of psy-
chological characteristics and processes should take into account task environment com-
plexity and entrepreneurs’ responses to that complexity over time. Therefore, research
has evolved towards more proximal explanations where entrepreneurial behavior and
business performance are explained through cognitive theories and where some situ-
ational factors are modeled explicitly. As we see in the next section, previous research in
entrepreneurship has focused heavily on individuals’ traits (cognitive styles), information
processing (attitudes), emergent states (perceived behavioral control and self-efficacy),
but also more recently on the fit between context and person (Dimov, 2007). It is still
rare to see entrepreneurship studies, however, that take into account goal establishment,
goal implementation, goal striving and goal evaluation/revision processes, including the
role of feedback from the task environment. In the next section we dig deeper into the
strengths and weaknesses of contemporary research.
PREVIOUS USE OF COGNITIVE THEORIES
We use our self-regulation as an umbrella term, or super-ordinate theory, for a set of

work motivation theories, which include the most popular cognitive theories that have
been used in entrepreneurship research. Current research in entrepreneurship behavior
includes cognitive styles of various sorts (e.g. Sadler-Smith and Badger, 1998) and con-
tinuing work on behavioral intentions.
Since 1990, entrepreneurship scholars have applied both the theory of planned behavior
(perceived behavioral control and behavioral intentions) and social cognitive theory (self-
efficacy) extensively, but as we mentioned above, it is not well known that these theories can
be integrated in a self-regulation framework. Both the foregoing theories can be described
generically as expectancy-valance theories (Pittman, 1998; Vroom, 1964), that is to say, they
are based on the assumption that individuals’ behaviors are determined by their cognitive
evaluation of the information available to them about the positive and negative outcomes
of that behavior or object. They were already coupled in Locke’s (1991a) special edition of
Organizational Behavior and Human Decision Processes, which was devoted to cognitive
self-regulation theories. These and other contributions from influential scholars have been
consolidated during more recent years in two handbooks of self-regulation (Baumeister
and Vohs, 2004; Boekaerts et al., 2000), special issues in leading journals (e.g. Boekaerts et
al., 2005; Locke, 1991a), and several chapters in edited volumes (e.g. Kanfer et al., 2008).
We structure this section in the following way. First, we discuss the history of psycho-
logical research in entrepreneurship up until 1990, focusing specifically on the early work
evoking motivation. In the second and major part, we review specific studies made after
1990, starting with a more general overview of strengths and weaknesses of previous
research in the field. 1990 serves as an important milestone because the complexity of
entrepreneurial behavior became an integral part of the research agenda (Gartner, 1988;
Shaver and Scott, 1991) and more sophisticated statistical methods (e.g. structural equa-
tion models) became more easily available, permitting the empirical test of more complex
models (Davidsson, 1989).


Understanding the Historical Roots of Motivation Research in Entrepreneurship
Most of the early research on the entrepreneur’s psychology focused on personality

traits. Despite recent advances, however, personality is not likely to explain more than
a minor share of entrepreneurial behavior. Personality is often loosely defined in terms
of regularities in action, feelings, and thoughts that are stable characteristics of the
individual across situation and time (Snyder and Cantor, 1998). The lack of results can
be explained by theoretical as well as methodological problems characterizing the per-
spective (Carsrud and Johnson, 1989; Chell et al., 1991; Delmar, 1996; Gartner, 1988;
Herron and Robinson, 1993; Sexton and Bowman, 1985) but even if these problems
are mitigated, personality traits remain distal to outcomes as specified in Figure 13.1.
It is probably too simplistic to relate a trait to the state of being an entrepreneur or the
outcome of the firm. Entrepreneurs are not, to a large degree, different from people in
general.
Some trait research, however, is of particular interest to scholars working on the
motivation and self-regulation of entrepreneurs. One of the best-known characteristics
associated with entrepreneurs is McClelland’s ‘need for achievement’ (McClelland, 1961;
McClelland and Winter, 1969), another is ‘locus of control’ (Rotter, 1966), and these are
combined in several motivation theories (Weiner, 1985).
Need for achievement

This trait is also closely related to risk taking as it takes into account the perceived risk
of the situation as well as the perceived level of competence. According to McClelland,
entrepreneurs are individuals that have a high need for achievement, and this makes
them especially suitable to create ventures. McClelland’s theory identifies the situations
preferred by individuals high in need for achievement, and which situations arouse
the achievement motivation. Individuals who are high achievers will choose a sit-
uation defined by: individual responsibility, moderate risk-taking as a function of skill,
knowledge of results of decisions, novel instrumental activity, and anticipation of
future possibilities.
Thus, it is the prospect of achievement satisfaction, not money, which drives the
entrepreneur. Money is important primarily as a measure of how well one is doing in
business. McClelland’s theory has received fairly consistent empirical support, suggest-
ing that there is a relationship between entrepreneurship and achievement motivation
(Begley and Boyd, 1987; Bellu, 1988; Davidsson, 1989; Delmar, 1996; Johnson, 1990;
McClelland, 1961; Perry et al. 1986). The basic features of self-regulation are present in
need for achievement motivation as feedback from interim outcomes is an integral part
of the theory.
More recently Miner and his associates have developed McClelland’s achievement
motivation theory by developing five motive patterns instead of the single achievement
motive. This task motivation theory suggests that it is not possible to predict behavior
or performance on the basis of a single value, as is the case of need for achievement, but
that performance can be predicted by a complex set of values or motive patterns. Miner’s
five motive patterns form an overall index of task motivation. They are: self-achievement;
risk-taking; feedback of results; personal innovation; and planning for the future. Results
show consistent validity for the scale, especially the total score on all scales combined


correlate significantly with entrepreneurial performance, particularly growth (Bellu,

1993; Bellu and Sherman, 1995; Miner et al., 1989; 1992; Miner et al., 1994).
Locus of control
The concept of ‘locus of control’ first appeared in Rotter’s social learning theory
(Rotter, 1966) of how individuals’ perceptions of control affect their behavior. The
theory assumes that individuals categorize events and situations based on their underly-
ing, shared properties. One such category concerns whether a potential end or goal can
be attained through one’s actions or follows from luck or other uncontrolled external
factors. A person believing that the achievement of a goal is dependent on his or her own
behavior or individual characteristics believes in internal control. If, on the other hand, a
person believes that an achievement is the result of luck and external factors, she believes
in external control. Therefore, locus of control is conceived as one determinant of the
expectancy of success (Weiner, 1992).
Empirical results indicate a low to moderate positive correlation between internal
control and entrepreneurs, and there is a weak tendency that a high internal orientation
is associated with better performance (Brockhaus, 1982; Miller and Toulouse, 1986). A
number of studies, however, have reported no significant differences between entrepre-
neurs and managers with respect to locus of control (Sexton and Bowman, 1985). In
psychology, the concept and measurement of locus of control has been heavily criticized
(Furnham and Steele, 1993), and the concept has been more or less abandoned in favor
of attribution theory which has a more complex view on causality orientation (Anderson
and Strigel, 1981; Weiner, 1985) as well as by Bandura’s social cognitive theory which
was formulated prior to Rotter’s locus of control theory. As a result, locus of control is
a concept which should probably not be included in future empirical research on entre-
preneurial behavior. ‘Need for achievement’ can still be seen in research on entrepreneur-
ship as a part of more complex efforts and represents probably one of the best-validated
traits related to entrepreneurship. In the next section, we look at more recent advances
in research.
An Overview of the Strengths and Weaknesses in Present Research
Since the beginning of the 1990s, entrepreneurship research has moved from trait theo-
ries towards cognitive theories, which are better able to explain the complexity inherent
in entrepreneurs’ behavior and subsequent outcomes. Empirical studies are, for example,
relying more and more heavily on mediation and moderation analyses (Brigham et al.,
2007; Lee et al., 2009; Liñán and Chen, 2009) and structural equation models (Baum et
al., 1998; Baum et al., 2001).
The use of cognitive theories allows for a better understanding of why people engage
in entrepreneurial behaviors. The contribution of these theories is that they enable us
to better understand the interaction between entrepreneurs’ characteristics and proc-
esses and their situations. Stated differently, there is a movement away from studying
entrepreneurs’ traits and states, and towards studying their traits, states, and processes
in combination with situations, which are posited to lead to entrepreneurial behavior,
and subsequent outcomes (Baron, 1998; Carsrud and Johnson, 1989; Shaver and Scott,
1991). Behavior is theorized to be heavily influenced both by how individuals perceive


their environment or context (e.g. novelty, munificence, complexity and uncertainty) and
how it is mediated through their perceptions. Thus, researchers should, but do not always,
acknowledge context as an important boundary condition to their hypothesized relations
between entrepreneurs’ characteristics and processes and their behaviors and outcomes.
Cognitive theories from a self-regulation perspective provide a basis for understanding
the choices made by entrepreneurs and why they persist in doing what they are doing.
They have some important advantages. First, they are easy to operationalize. Second,
they have demonstrated validity. Third, frameworks such as the one presented here have
considerable advantages over personality trait-based models. Instead of talking about a
set of non-changeable characteristics, scholars are able to discuss cognitive processes that
may alter over time. Cognitive models have both (a) greater power to explain entrepre-
neurial behavior and (b) more practical advice to offer on how to train and educate future
entrepreneurs.
Recent applications of cognitive models in entrepreneurship research, however, have
had several important limitations. The first is a tendency to focus on single individual
entrepreneurs, as opposed to entrepreneurial teams. Teams are an increasingly popular
unit of analysis among scholars and an increasingly relevant real world phenomenon. The
second limitation is a tendency to see entrepreneurs’ decisions as being static, as opposed
to dynamic. This leads to a number of errors: (a) differences between individuals on
various characteristic and process variables are overly stressed, as opposed to differences
within individuals on these variables over time; (b) the importance of feedback from the
task environment, and other variables at earlier time periods, is suppressed or ignored;
and (c) important contextual contingencies that moderate relations between individual
characteristic and process variables and behavior and/or outcome variables, are often not
modeled. The third limitation is that intra-individual processes that indirectly transmit
the effects of individual differences and information processing variables to behavioral
and outcome variables are poorly integrated. Taken together, these limitations lead to a
restricted understanding of what is popularly known as the entrepreneurial mindset and
its effects on new venture creation and growth. Actually, our call for a more complex and
dynamic view of entrepreneurs’ behavior and outcomes is not the first; Shaver and Scott
(1991) in their seminal article made some very similar arguments.
In sum, there is a need for an individual level understanding of the characteristics and
processes leading to entrepreneurial behavior and outcomes, which has the possibility
to include a team level of analysis. Research is evolving towards more integrated and
complex models that take into account not only the psychological and non-psychological,
for example, age and sex (Gupta et al., 2009), characteristics and processes of entrepre-
neurs, but also situational variables. Several important pieces, however, are missing as
we have pointed out when we presented our framework. Perhaps this is because of an
overemphasis on some motivation theories.
Cognitive and Learning Styles
There have been several recent contributions on cognitive styles (Brigham et al., 2007;
Dutta and Thornhill, 2008; Haynie and Shepherd, 2009; Kickul et al., 2009) and learning
styles (Dimov, 2007). Cognitive style is a type of heuristic that individuals employ when
they approach, frame, and solve problems. It can be defined as an individual’s preferred


or habitual approach to organizing, representing, and processing information (Streufert

and Nogami, 1989). It is built-in and automatic (Riding and Rayner, 1998), and it differs
among individuals (Messick, 1984). It is someone’s preferred way of learning or solving
problems. According to Brigham et al. (2007, p. 31), research has shown that: (1) cogni-
tive styles are pervasive dimensions that can be assessed using psychometric techniques;
(2) they are stable over time; (3) they are bipolar; and (4) they describe different rather
than better thinking processes. In the terms of our framework, cognitive styles would be
construed as a characteristic of individuals.
In entrepreneurship research, cognitive styles have been used in several ways. Brigham
et al. (2007) use cognitive styles as a moderator of relations between organizational
structure and both individuals’ job satisfaction and intention to exit. These mediate the
effect of cognitive styles on firm turnover. Dimov (2007) and Kickul and her co-authors
(2009) looked at how cognitive styles affect individuals’ progression from opportunity
recognition behaviors to opportunity exploitation behaviors. Dutta and Thornhill (2008)
used individuals’ cognitive styles as a mediator between competitive pressure and growth
intention in a qualitative study of 30 Canadian entrepreneurs.
Haynie and Shepherd (2009) developed a scale for cognitive adaptability based on
a meta-cognitive theory that addresses the issue of self-regulation and offers a bridge
between cognitive styles and our view of self-regulation. They define cognitive adapt-
ability as ‘the ability to be dynamic, flexible, and self regulating in oneís cognitions given
dynamic and uncertain task environment’ (p. 695). Their approach to self-regulation
is from an information processing point of view (i.e. how sense making is achieved)
as opposed to our approach from a more motivational point of view, but again in our
opinion, these approaches are consistent. According to them, cognitive adaptability is the
aggregate of five dimensions: goal orientation, meta-cognitive knowledge, meta-cognitive
experience, meta-cognitive control, and monitoring. Their concept is still one of a stable
individual trait, but speaks closely to our view of individuals as self-regulating actors, and
their dimensions could be redistributed to cover most sub-systems of our framework.
Attitudes and the Theory of Planned Behavior
Taking our review of cognitive theories that scholars have applied to entrepreneurship
a little further back in time, two models are of principal interest to us, the theory of
planned behavior (TPB) and social cognitive theory (SCT), because they have both been
used extensively in entrepreneurship research and integrated under a self-regulation per-
spective. TPB and SCT address different parts of the motivation system. Attitude-based
models such as TPB (Ajzen, 1991; 1995) deal with how individuals’ intentions are formed.
Conversely, the SCT model, with its self-efficacy concept, focuses on the importance of
individuals’ perceived domain knowledge and how their motivation is formed in achieve-
ment contexts. Self-efficacy is an important complement to intention models because
it helps adapt them to achievement contexts and to explain how individuals’ perceived
competence affects their intentions. The two may be tested within the same framework
(Wilson et al., 2007).
Attitudes are a major concept in motivation theory. An attitude is an evaluation of
an object or a concept, that is to say, the extent to which someone judges an object or
concept to be good or bad (Eagly and Chaiken, 1993). In psychological language, individ-


uals’ traits such as ‘locus of control’ or ‘over-optimism’ are weak determinants of specific
behaviors. Attitudes are more specific and therefore considered to be more proximal to
individuals’ behavioral intentions, and, thus, attitudes are more important determinants
of behavior. In addition, attitudes are interesting because of their applied relevance. If
attitudes are believed to have an impact on behavioral intentions, then it is potentially
important to understand how attitudes can be changed. Thus, the impact of attitudes on
entrepreneurial behavior is worthy of close examination, because (a) they are supposed
to have a directive influence on behavior and (b) they are much easier to change than
personality and other stable traits. The possibility of changing attitudes suggests that if
attitudes characterizing entrepreneurs who start new businesses were known, then other
people could be influenced to adopt those same attitudes and, as a result, the number of
people starting new businesses could be increased (Davidsson, 1995; Kolvereid, 1996a;
1996b; Krueger, 1993).
One limitation to the foregoing summary of relations between individuals’ attitudes
and intentions and their behaviors concerns how well individuals’ attitudes and inten-
tions actually predict behaviors and how precisely they explain when or why they engage
in specific actions (Bagozzi and Warshaw, 1992; Doll and Ajzen, 1992; Kim and Hunter,
1993). Intentions are tendencies or dispositions to behave in a generally favorable or
unfavorable way towards the object of an attitude. This means, for example, that it is
difficult to predict if someone will start a business because they have positive attitudes
towards starting businesses. It is only known that people will act in accordance with their
attitudes. This means that people with positive attitudes towards starting businesses will
behave favorably to things connected to business start-ups, for example, (a) encourage a
friend or relative to start a business, (b) help to finance a start-up effort, or even (c) estab-
lish their own business. Thus, a shortcoming of attitude theories is that they don’t give
much information about how individuals’ evaluations of a concept are translated into
behavioral intentions, behaviors, actions, and subsequent outcomes. In other words, atti-
tude theories help us understand how and why individuals make choices, but they do not
give much guidance about the degree of effort and persistence that individuals will engage
in when striving to achieve their chosen goals (Locke, 1991b). Empirical work shows
only moderate correlations between intentions and behavior: individuals’ intentions
explain only around 30 per cent of the variance in their behavior. For example, Kolvereid
and Isaksen (2006) found in their longitudinal study of Norwegian entrepreneurs that
their intentions predicted 39.7 per cent of the variance in their behavior (Kolvereid and
Isaksen, 2006). The development of better-validated instruments of entrepreneurial
intentions is now addressing these moderate correlations somewhat (Liñán and Chen,
2009; Thompson, 2009).
Nevertheless, the advantages of attitude research override many of the disadvantages.
The possibility to examine attitudes towards different facets of entrepreneurship, across
a wide variety of populations, and the possibility to easily communicate the results to a
wider audience (e.g. policy makers) remains compelling. Furthermore, even if attitudes
are not perfect predictors of individuals’ behavior, they are still much better predictors
than personality characteristics. Thus, attitude theories have received considerable atten-
tion within the field of entrepreneurship. Two attitude concepts have been predominantly
researched, namely attitudes towards becoming self-employed, or starting a business, and
attitudes towards new business growth. The research on these concepts has been based


either on formal attitude theory or on finding simple relationships among attitudes and
the concept.
The most prevalent model is Ajzen’s (1991) theory of planned behavior (TPB), or
theories derived from it. TPB argues that behavioral intentions are predicted by three
factors: attitudes, social norms, and perceived behavioral control. TPB is important
because models of individuals’ attitudes provide understanding about their beliefs and
feelings towards entrepreneurship and how they play out in behavioral intentions and
actions, and consequently, allow policy makers to create a more supportive environment
for new venture creation. Thus, many entrepreneurship researchers have invoked TPB,
but few have fully tested the model. Most researchers only test the hypothesized rela-
tions between the three predictor factors (i.e. attitudes, subjective norms, and perceived
behavioral control) and behavioral intentions, leaving the link between behavioral inten-
tions and either goal striving behaviors or interim outcomes unexamined. More precisely,
it is likely that the coefficients among the factors and their relative weights vary across
contexts, cultures, age and sex. Nevertheless, some worthwhile results have been achieved
by scholars investigating new venture creation (Davidsson, 1995; Kolvereid, 1996a;
Kolvereid, 1996b; Kolvereid and Isaksen, 2006; Krueger and Brazeal, 1994; Krueger and
Carsrud, 1993; Krueger and Dickson, 1993; Shepherd and Krueger, 2002), new venture
growth (Davidsson, 1989; Kolvereid, 1992; Kolvereid and Bullvag, 1996; Wiklund, 1998;
Wiklund et al., 2003), and the effect of entrepreneurship education (Athayde, 2009;
Peterman and Kennedy, 2003; Souitaris et al., 2007; Wilson et al., 2007).
Irrespective of which of these topics scholars are investigating, they tend to arrive at
similar results. First, attitudes do not predict, by themselves, individuals’ intentions to
start or expand a business. Second, subjective norms have even weaker predictive power
than attitudes, which suggests that what others believe or feel is important does not
overtly affect entrepreneurs’ intentions. Perceived behavioral control, however, is impor-
tant and stands out as the strongest predictor of behavioral intentions for entrepreneurs;
it is also affected by education in the subject. In other words, someone will try to start
a business if they believe that they can do it, in terms of, (a) having the ability, and (b)
having the knowledge required to carry out the behavior. Thus, perceived behavioral
control, or perceived feasibility, is a key component in the prediction of someone engag-
ing in entrepreneurial behavior.
To sum up, research on attitudes and entrepreneurship has yielded consistent find-
ings. A number of studies have found that perceived behavioral control was the single
most important predictor of intentions. Both attitudes and subjective norms have been
found to play a relatively minor role. Attitude models such as TPB, however, offer little
information in explaining how and why a certain behavior is chosen by an individual.
Specifically, intentions are far from perfect predictors of subsequent behavior, let alone
interim outcomes, and it is not clear what the exact nature of the relation between inten-
tion and behavior is.
Social Cognitive Theory
The common denominator between attitude-based models and achievement context

models is the search for control. That is, individuals try to organize their lives in ways that
give them some perceived control. As we explained above, TPB is concerned with pref-


erences (i.e. what is and what is not important). Achievement context models deal with
both behavior and outcomes (i.e. actual performance). The aim of social cognitive theory
(SCT) is to explain individuals’ goal directed behaviors (Bandura, 1986; 1991; Wood
and Bandura, 1989). The theory assumes that most individual behaviors have a purpose,
which is regulated, at least tacitly, by some of their own forethought. More precisely,
individuals tend to form beliefs about what they can do, they anticipate the likely conse-
quences of their prospective actions, they set goals for themselves, and they plan courses
of action that are likely to produce a desired outcome. In SCT, perceived self-efficacy is
the central mechanism and is the key to understanding how individuals function during
their setting up goals and their carrying out actions needed to fulfill them. In comparison
to TPB, which focuses on predicting behavior, SCT is more relevant for explaining the
function of perceived behavioral control and its effect on both individuals’ behaviors and
outcomes (i.e. performance).
Self-efficacy is a concept concerned with individuals’ beliefs about their capabilities to
produce performances that influence events affecting their lives (Bandura, 1995). In other
words, it is about individuals’ beliefs in their capacity to mobilize motivation, cognitive
resources, and courses of action needed to control events that affect them. Someone’s
belief in their efficacy influences: (a) the decisions that they make, (b) their degree of aspi-
ration, (c) how much effort they mobilize in a given situation, (d) how long they persist at
a task in the face of difficulties and setbacks, and (e) whether their thought patterns are
self-hindering or self-aiding. Feedback on individuals’ degree of achievement is central to
the theory, as individuals’ negative or positive achievement spirals affect their perceived
self-efficacy, and in turn, their negative and positive achievement spirals affect their per-
ceived self-efficacy. Nevertheless, SCT also posits that negative spirals of achievement can
be broken through individuals’ engagement with appropriate self-efficacy training.
Scholars have posited individuals’ perceived self-efficacy to be a key explanatory factor
for entrepreneurial behavior (Boyd and Vozikis, 1994) because, in business settings, it
has been associated with individuals’ initiating and persisting with achievement oriented
behaviors (Wood and Bandura, 1989). Westerberg (1998) has shown that entrepreneurs’
perceived self-efficacy has significant effects on their businesses’ strategies and perform-
ance. In general, the firms of entrepreneurs with high perceived self-efficacy have higher
performance (i.e. profitability, customer satisfaction, and firm survival) than the firms
of entrepreneurs with low perceived self-efficacy. Forbes (2005), however, turned around
the causality implying that the firm’s strategic decision making was influencing the entre-
preneurs’ self-efficacy. Perceived self-efficacy has also been shown to be positively related
to someone’s intention to start their own business and their exploration of new oppor-
tunities (Chen et al., 1998; Kickul et al., 2009; Krueger and Dickson, 1993). It is also
an important outcome of entrepreneurship education (Peterman and Kennedy, 2003),
especially for women (Wilson et al., 2007).
Although the roots of self-efficacy can be traced back to the classic individual trait
concept of locus of control (Rotter, 1966) there is an important difference: individuals’
self-efficacy depends on the situation, whereas locus of control is generally stable across
situations. Thus, someone can have high self-efficacy in one situation, and simultane-
ously, they may have low self-efficacy in another. For example, individuals may perceive
themselves as capable rock climbers, but poor in business matters, even though the two
situations involve considerable risk taking.


It has actually been proposed that the two concepts (‘self-efficacy’ and ‘perceived
behavioral control’) affecting motivation and behavior are synonymous. However, Ajzen’s
(1991) own description of the relationship between perceived behavioral control and
behavior would suggest that perceived behavioral control may be divided into (a) a reflec-
tion of skills and ability and (b) a proxy of actual control. Hence, the first is related to
Bandura’s (1991) self-efficacy and the second to perceived controllability over behavior
(Rotter, 1966). Empirical research supports the theoretical distinction between self-
efficacy and perceived behavioral control (Armitage and Conner, 1999; Manstead and
Eekelen, 1998), suggesting that perceived self-efficacy (i.e. perceived ability) is a better
predictor of intention and behavior than is perceived control. These findings, however,
only concern specific types of behavior (e.g. dieting or school achievement), and we do
not know if they apply to other behaviors in different domains. Hence, there is still a need
to keep both concepts when trying to explain entrepreneurial motivation and behavior.
Summing Up Cognitive Models in Entrepreneurship
This section has reviewed three different cognitive models that are argued to converge
towards self-regulation theory, that is to say, cognitive styles, attitude-based models
(e.g. theory of planned behavior) and achievement-context models (e.g. social cognitive
theory). Various applications of these models have already greatly enhanced scholars’
understanding of entrepreneurial behavior. The theoretical value of cognitive models is
that they offer a sophisticated theoretical frame of reference which incorporates more of
the complexity in entrepreneurs’ behavior, and still allows scholars to actually test hypoth-
esized models. The models are, in the configuration of their component constructs, closer
to individuals’ actual behavior. In addition, cognitive models allow variation both within
and between individuals. Taken together, the foregoing features lead to more explanatory
power than previous formulations of predictors for entrepreneurial behavior.
To illustrate some of the increased explanatory sophistication available to scholars from
using cognitive models to guide their entrepreneurship research, consider, for example,
Baron and Markman’s (2003) study of entrepreneurs’ social competence. Their results
illustrate the importance to scholars’ understanding that (a) situational constraints can
act as boundary conditions on relations between predictors of entrepreneurial behaviors
and their response variables of interest, (b) entrepreneurs’ skills may develop over time,
and (c) more time-varying and proximal concepts are likely to generate important results
for understanding the psychology of entrepreneurs. Finally, scholars may offer better
explanations for how entrepreneurs behave by focusing on entrepreneurs’ cognition,
that is to say, how entrepreneurs come to understand the information around them and
process that information in order to organize themselves to behave accordingly. However,
present research focuses heavily on single individuals and many core motivation theories
leave much to be explored.
MORE RECENT APPLICATION OF COGNITIVE THEORIES
In the previous sections, we have first shown a general framework to organize current cog-
nitive theories. We then moved into a review of empirical findings. In this section, based


on current discussion in the I/O psychology and organizational behavior literatures, we

show how these theories may be brought together and what the advantages of doing so
are (Diefendorff and Lord, 2008). In this way we hope to better motivate the acceptance
of our framework. It might also help researchers in entrepreneurship to discover new
types of theories to explore in an entrepreneurship setting.
Self-regulation addresses not only individuals’ willpower to work hard on achieving
their goals, but also their flexibility to work smart by approaching their goals pragmati-
cally. Diefendorff and Lord (2008) expanded on these potentially opposing aspects of
self-regulation by saying that sometimes self-regulation involves individuals in persisting
on a task until they have completed it, but other times individuals need to disengage from
a task when even their best efforts are doomed to failure. In the case of entrepreneurs,
self-regulation may involve individuals initiating action to take advantage of some oppor-
tunity in the environment, but it may also involve them in being cautious and delaying
commitments until conditions are right or more important goals have been achieved.
Finally, self-regulation may involve individuals’ flexibility in allocating attention between
two or more goals or focusing on just one goal and ignoring all others. Thus, the key
to effective self-regulation is the individual’s ability to act in multiple goal environ-
ments while responding to internal conditions in a flexible and context-sensitive manner
(Mitchell et al., 2008).
Interest in self-regulation has sources across several behavioral science disciplines. In
clinical work, early conceptions emphasized psychological processes that were posited
to mediate between individuals and their own functioning (Karoly and Kanfer, 1982).
Findings in goal setting research seemed to fit this view of psychological processes medi-
ating between individuals and their behavior, and subsequent outcomes, and thus, suggest
that a self-regulation perspective might also be useful for understanding the effectiveness
of goal setting in organizational settings (Locke and Latham, 1990). In addition, applica-
tions of self-regulation theory have incorporated developments in scholars’ understand-
ing of both individuals’ self structures (Mischel and Ayduk, 2004) and dynamic systems
in general (Carver and Scheier, 1998), which bring in emotion as well as cognition (Lord
et al., 2002).
Taxonomy of Theories within Self-regulation
In the following sections, we describe a three-way taxonomy of theoretical approaches

that can be described as focusing to a greater or lesser extent on ‘structure’, ‘phase’, and
‘content’ of individuals’ self-regulation theories (Diefendorff and Lord, 2008; Grant and
Dweck, 1999). We further develop this taxonomy by examining the implications of these
theoretical approaches for research design and then use these ideas to develop some prin-
ciples that may help future entrepreneurship researchers to integrate structure, phase, and
content perspectives in their empirical work.
Grant and Dweck (1999) observed that most theories have something to say about
each aspect of self-regulation; nevertheless, each tends to emphasize one of the three
approaches over the others. ‘Structural theories’ of self-regulation endeavor to formu-
late general principles that apply to goal directed behavior across an extensive range
of individuals, places, and times. Specifically, they describe individuals’ self-regulation
constructs and relations between constructs (Bandura, 1991; Carver and Scheier, 1998),


for example, individuals’ goals, behaviors, and some relations between the two, and prob-
ably, one or more moderating, or mediating, variables. ‘Phase theories’ of self-regulation
focus on the sequence of goal oriented activities, which typically start with individuals’
goal establishment and end with goal attainment, or sometimes, goal revision (Gollwitzer,
1990). These theories break individuals’ self-regulation into steps and describe the tasks
that individuals try to accomplish in each step, along with their accompanying cognitive,
emotional, and behavioral resource requirements. ‘Content theories’ of self-regulation
describe how individuals’ differences on one or more characteristics can affect their
approach to goals and self-regulation processes (Grant and Dweck, 1999). Table 13.1
summarizes how the foregoing taxonomy of existing theories can be integrated in the
self-regulation framework that we illustrated in Figure 13.1 and outlined in the first part
of the chapter. The left hand column in Table 13.1 is a re-arrangement of the (sub-)
systems and relations posited in our integrative framework, illustrated in Figure 13.1.
The three columns to the right of the first column list analogous features from struc-
tural, phase, and content theories of self-regulation, respectively. The structural theories
column mostly contains features from a control theory (CT) negative feedback loop
(Carver and Scheier, 1998). The phase theories column contains mostly features from
Gollwitzer’s (1990) theory of action phases and mindsets. Finally, the content theory
column contains contributions from several authors that conceptualize particular dimen-
sions on which individuals differ. The idea behind Table 13.1 is to show how research can
move forward by integrating original source theories, while trying to do not too much
violence to the source theory, and to illustrate the value of doing so. An alternative table,
for example, might substitute TPB for CT.
Structural Theories
Structural theories of self-regulation identify general systems and relations between those
systems and sub-systems that apply to goal directed behavior across a range of individu-
als, places, and times. According to Kanfer (2005), structural theories, including CT and
SCT, have been the most commonly investigated self-regulation theories by organiza-
tional researchers, and she includes goal setting theory (Locke and Latham, 1990) with
SCT for these purposes (Kanfer, 2005). Diefendorff and Lord (2008) noted the disagree-
ments in the literature about the relative merits of CT and SCT (Bandura and Locke,
2003; Vancouver and Day, 2005; Vancouver et al., 2001), but following their lead, we
choose to combine the two approaches and describe their basic tenets, as follows.
Social cognitive theory (SCT) has many similarities to CT. SCT views self-regulation
as a cyclical process where individuals receive performance feedback with respect to
progress towards their goals, which leads them to make adjustments to their current
behaviors in order to reduce discrepancies between their interim outcomes and their goals
(Zimmerman, 2000). SCT assumes that individuals structure their goals hierarchically
(Bandura and Locke, 2003). Control theory (CT) also assumes that individuals maintain
a hierarchy of goals, with short-term concrete goals lower down in the hierarchy, and
longer term, more abstract goals higher up. Lower-level goals are conceived as strategies
for attaining higher-level goals (Lord and Levy, 1994). Thus, individuals devise lower-
level action goals in order to reduce goal-to-performance feedback discrepancies further
up in their goal hierarchy.


Table 13.1 Integration of existing theories: (sub-)systems (.) and relations (S)
Integrative framework Structural theories Phase theories Content theories

. Stable traits – – . Intrinsic rewards
. Cognitive styles
. Information processing . Input . Goal evaluation –
(Perception of (Evaluative
variable) mindset)
Stable traits S
Information processing
Outcomes (t-1) S Stimuli Action conclusion
. Motivation system
Information processing Perceptual signal
S Motivation system
. Emergent states – – . Goal orientation
S Emergent states
. Goal generation . Standard . Goal establishment –
(Goal) (Deliberative
mindset)
. Goal revision
(Evaluative
mindset)
Information processing Goal error signal Goal choice
S Goal generation
. Goal planning
(Implemental
mindset)
Goal striving (t) S Revise strategy
Goal generation (t)
. Goal striving . Output . Goal striving –
(Changes in (Actional mindset)
behavior)
Information processing Output error Action intension
S Goal striving signal
. Situational influences . Disturbances – –

Outcomes (t) S
Situational influences
(t+1)
. Interim outcomes . Effect on – –
environment
(Variable)
Goal striving S behavior
Outcomes
Situational influences x External
Motivation S Outcomes contingencies


Bandura and Locke (2003) claim, however, that SCT emphasizes discrepancy pro-
duction, that is to say, individuals setting new goals that are higher than their previous
interim outcomes. The SCT argument rests on an assumption that motivation resides in
individuals engaging effort by their generating challenging goals, specifically, producing
discrepancies between their goals and their previous interim outcomes by generating new
and even higher goals. The alternative view, attributed to CT, is that individuals engage
effort by their striving to achieve their chosen goals, specifically reducing discrepancies
between their goals and their previous interim outcomes by putting their plans to achieve
their chosen goals into action. These apparently opposing positions on producing and
reducing discrepancies between individuals goals and their interim outcomes is, at least
partly, reconcilable through the phase approach to self-regulation (e.g. Gollwitzer, 1990),
which we discuss in the next section.
Phase Theories
Phase theories of self-regulation describe distinguishable steps that individuals make

when conceiving and pursuing goals. Lewin et al. (1944) described the motivation process
as consisting of two phases: goal generating and goal striving (Lewin et al., 1944). ‘Goal
generating’ involves individuals weighing the reasons for pursuing their activities to
determine what goal will ‘emerge or become dominant’ (p. 376), for example, to engage
in a new venture or not. ‘Goal striving’ involves individuals performing behaviors in the
service of goal attainment, such as initiating action, putting forth effort, trying different
task strategies, and persisting in the face of obstacles or setbacks. For example, entrepre-
neurs may initiate the set-up of a new venture by doing some preliminary activities. Goal
setting refers to individuals’ selecting goals, whereas goal striving refers to their behaviors
directed towards existing goals.
Other researchers have adopted the distinction between goal generating and goal
striving, and some have added steps to further explicate the process (Karoly, 1993;
Zimmerman, 2000). According to Diefendorff and Lord (2008), Gollwitzer’s (1990)
four-phase approach to goal setting within a self-regulation perspective is particularly
well articulated, has received the most research attention, and is the most widely adopted
(p. 158).
The four phases in Gollwitzer’s (1990) conceptualization of self-regulation are
as follows: (1) goal establishment; (2) goal planning; (3) goal striving; and (4) goal
evaluation/revision. Gollwitzer (1990) argued that each self-regulation phase has a spe-
cific task to be accomplished and they are each separated by boundary events, specifically,
goal choice, action initiation, and action conclusion. In addition, he argues that the task
in each phase is facilitated by particular mindsets, which prepare individuals to act in
ways that enable them to accomplish the task. The mindsets influence what individuals
pay attention to through the contents of their thoughts, and thus help them accomplish
phase specific tasks.
The goal establishment phase is accompanied by a ‘deliberative’ mindset, which helps
individuals to be open to information and to attempt to evaluate the feasibility and
desirability of competing goals. This phase ends when goals have been selected and
individuals move on to the planning phase. The goal planning phase is facilitated by an
‘implemental’ mindset, which is characterized by cognitive tuning of individuals’ goals


towards action-related information and an incomplete and optimistic analysis of the

desirability and feasibility of their goals. This phase, and goal generation phases more
generally, ends when action begins, and at that point individuals enter the goal striv-
ing phase. This phase is accompanied by an ‘actional’ mindset, which helps individuals
immerse themselves in their tasks and not be distracted by unrelated information. Once
individuals have completed their actions, they enter the evaluation phase, characterized
by a similarly named ‘evaluative’ mindset, which enables individuals to revisit their goals’
feasibility and desirability. Individuals carry forward any revisions to their goals, which
arise during the evaluation phase, into the next iteration of their self-regulatory goal
setting phases.
To sum up, phase models of self-regulation offer a detailed description of how indi-
viduals perform tasks in an iterative sequence of goal directed behaviors, and how
their accompanying cognitions and thought contents change accordingly through time
(Diefendorff and Lord, 2008). However, phase theories do not explain how self-regulation
constructs are related to interim outcomes over time (i.e. structural theories), nor do they
address the more specific details of what individuals are pursuing (i.e. content theories).
In the next section we address content theories.
Content Theories
Content theories of self-regulation focus on specifying the nature and origin of indi-
viduals’ goals and how individual differences impact on their goals within self-regulation
(Ryan and Deci, 2000). Content theories often invoke individuals’ characteristics (e.g.
basic needs or personality constructs) as determinants of their goals or how individuals’
goal content is reflected in their goals. Diefendorff and Lord (2008) include the following
examples in their review of the content category of self-regulation theories: self deter-
mination (Ryan and Deci, 2000), regulatory focus (Higgins, 1997), and goal orientation
(Dweck, 1986). Here we restrict ourselves to Grant and Dweck’s (2003) goal orientation
theory, which we believe to be most relevant to entrepreneurial context.
Goal orientation focuses on individuals having different types of goal in particular situ-
ations (Dweck, 1986), and thus, it is more context sensitive, and more like an emergent
state from our framework, than either of the other content theories mentioned, which
are more like individual traits. Individuals may adopt either a learning-goal orientation
(LGO) or performance-goal orientation (PGO). Individuals adopting an LGO exert
effort in order to build up their knowledge, skills, and competences on activities and tend
to believe that their abilities can be developed. Individuals adopting a PGO exert effort in
order to show off their knowledge, skills, and competences to others and tend to believe
that their abilities are fixed. This is an important development from and difference from
‘need for achievement’. VandeWalle et al. (2001) further subdivided individuals adopting
a PGO, into those with ‘approach’ and those with ‘avoidance’ performance goal orienta-
tions. Individuals adopting the approach variant of PGO still exert effort in order to show
off their knowledge, skills, and competences to others, but those adopting the avoidance
variant of PGO exert effort in order to steer clear of displaying any incompetence to
others. It is likely that entrepreneurs who adopt different goal orientations might perform
differently. The choice of goal orientation might depend on previous entrepreneurial
experience.


Summary of the Theory Taxonomy
Structural theories of self-regulation explain how individuals set, pursue, and revise goals
over time, without describing any details about what individuals are pursuing. These
theories of individual self-regulation posit connections between abstract concepts (e.g.
direction, effort, persistence, and strategy development), which are theoretically impor-
tant to researchers and are practically useful to managers, but are formulated independ-
ent from goal phases or goal content. Researchers’ empirical testing of structural theories
of self-regulation has focused on research questions about individuals’ goal attainment,
response to discrepancies, and goal revisions. This is still an open and promising field for
research by entrepreneurship scholars.
Phase models of self-regulation (e.g. Gollwitzer, 1990) focus on breaking down indi-
viduals’ phases into discrete, sequenced steps, each with distinctive tasks for them to
accomplish, and characteristic cognitive mindsets. Researchers’ empirical testing of
phase theories has focused on the differences between various cognitive processes that
facilitate the unfolding of two or more phases of self-regulation.
Content theories of self-regulation describe the types of goals that individuals pursue
and how goal content and goal framing can influence individuals’ self-regulation.
Researchers’ empirical testing of content theories has tended to measure or manipulate
the types of goals individuals pursue and examine the influence of goal content on indi-
viduals’ performance, affect, and well-being, among other response variables.
According to Diefendorff and Lord (2008), although structural, phase, and content
theories provide insight into individuals’ self-regulation, there have been relatively few
attempts to integrate the three approaches. They further suggest that the most important
future developments in self-regulation research will come from integrations of two or
more of these approaches as researchers attempt to develop more nuanced understand-
ings of goal oriented behaviors. They also express concern that not many studies have
addressed these integrative research questions, and furthermore, they worry about the
focus on between-person (e.g. goal orientation) rather than within-person variation that
would be consistent with extant structural theories of self-regulation (Vancouver et al.,
2001). Once more, most of these issues remain to be researched in an entrepreneurship
context.
DISCUSSION
We have presented a general self-regulation framework of entrepreneurial behavior that

can be used to organize current and future empirical research. It is in line with current
developments in I/O psychology and organizational behavior where models are being
developed to accommodate more of the subtleties in human behavior, and their subse-
quent outcomes. In this concluding section, we explore how our framework is similar to
other dynamic models such as effectuation theory, and how it can be used to better iden-
tify causal effects in an entrepreneurial context. We believe that our framework in combi-
nation with modern longitudinal research design and data analysis techniques can serve
scholars who will be able to improve the conduct of future research into entrepreneurial
behavior and interim outcomes, while at the same time building on the considerable body


of knowledge that already exists. We also argue that there is both much to be done and
much to be optimistic about.
First, as we have seen above, although entrepreneurship researchers have made sig-
nificant progress, both substantively and methodologically, there is still only limited
knowledge about many of the causal mechanisms that we are interested in. Second,
entrepreneurship scholars are likely to rely mostly on observational data, and we need
tools to infer causality under these circumstances. Entrepreneurship research, however, is
regularly criticized for not paying sufficient attention to problems related to endogeneity
and unobserved heterogeneity (Shane, 2006). Third, nevertheless, modern longitudinal
designs and analysis techniques offer scholars some important advantages for testing
complex models. Fourth, important practical implications arise from cognitive theories
that better account for the complexity of entrepreneurial behavior.
How is this framework different from others such as effectuation theory? Effectuation
theory (Sarasvathy, 2001) could be argued to be another self-regulation framework,
but its direct roots are traced to decision making theories and research on expertise.
Sarasvathy and her coauthors (Dew et al., 2004; Sarasvathy and Dew, 2005) developed
a self-regulating theory to address how entrepreneurs behave in uncertain situations
to make decisions on how to implement new ventures. It was developed to show how
expert entrepreneurs go about constructing new ventures and markets. It explains how
they think, act, and solve problems. In effectuation theory, expert entrepreneurs also rely
heavily on feedback from their environments. However, the objectives of effectuation
theory are different from our objectives, as they focus on why some individuals achieve
a particular outcome, that is to say, construct new venture(s) and market(s), whereas we
focus on how entrepreneurs’ behaviors and outcomes are explained by an integration of
various self-regulation theories. Nevertheless, the two approaches are consistent, while
our framework could be adapted to ‘why’ research questions about differences between
experts and novices, we are focusing on ‘how’ questions about the combination of various
human characteristics, processes, and behaviors as they are applied in entrepreneurial
settings.
Counterfactual argumentation or the potential outcome model is an increasingly
popular way to generate theory and research designs that are better able to establish
causality (Pearl, 2000). Counterfactual argumentation becomes especially important
when scholars can no longer rely on experimental research designs. This is likely to be
the case in research on entrepreneurial behavior and interim outcomes, even though
there have been some very interesting experimental studies recently. The balance between
internal and external validity, however, remains a particular challenge for entrepreneur-
ship researchers. Therefore, experimental designs cannot be the only methodology for
scholars interested in explaining entrepreneurial behavior. We believe that our framework
can help researchers to better identify which models to test and still achieve high internal
validity.
Moving scholars interested in entrepreneurial behavior into a longitudinal research
design realm offers many exciting possibilities to expand their empirical contexts and
extend their potential theoretical contributions. Persistence is a principal element in
most definitions of motivation, and thus, serious consideration of persistence requires
some longitudinal element to the research design (Ployhart, 2008). However, the most
pressing questions associated with entrepreneurial behavior research are not about the


operation of self-regulatory mechanisms within a single or short-term cycle, but rather,

they are about how person and contextual factors influence the development, use, and
maintenance of different self-regulation patterns over time. Examples of practical ques-
tions include: how are members of a founding team influenced not only by their own
characteristics and processes, but also the characteristics and processes of the emerging
new venture team? How do individual differences in self-regulatory skills affect individual
suitability for entrepreneurship? What goals and forms of self-regulatory activity increase
new venture success? Which aspects or forms of self-regulatory processing promote per-
sonal initiative and interpersonal competence? How does the novelty and complexity of
the opportunity affect self-regulation processes? Current entrepreneurship research and
theories focused on specific characteristics and processes are generally not designed to
answer such questions. Longitudinal, multilevel research designs are needed to investigate
goal and self-regulatory patterns as a function of individual, context and time (Kanfer,
2005).
ACKNOWLEDGEMENT
The authors contributed to this article equally and order was determined by the toss of a
coin. The authors would also like to thank the editors and Kelly Shaver for many helpful
comments on an earlier draft of this chapter.
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14. Social entrepreneurship: a historical review
and research agenda
Todd W. Moss, G.T. Lumpkin and Jeremy C. Short
INTRODUCTION
Social entrepreneurship (SE) research is currently in a nascent state, yet recent reviews of
this stream project a future marked by a variety of contexts and theoretical foundations
to describe and explain the SE phenomenon (Short et al., 2009). From its beginnings in
the public policy sphere, SE research has grown to include research in nonprofit and for-
profit contexts (e.g. Harjula, 2006; Haugh, 2007; Waddock and Post, 1991). Additionally,
SE research has expanded from samples in the United States to a variety of countries
such as the United Kingdom (Spear, 2006), Canada (Anderson et al., 2006), China (Ma
and Parish, 2006), Kenya (Ndemo, 2006), Ukraine (Phillips, 2005), and New Zealand
(Luke and Verreynne, 2006), as well as multinational samples (Spear and Bidet, 2005).
SE research initially focused on individual ‘heroes’ and anecdotal evidence, yet today it
is becoming more theory-driven and research is gaining a foothold in top management
and entrepreneurship outlets (Short et al., 2009). For example, current SE research draws
from diverse perspectives such as institutional theory, Austrian economics, and agency
theory (e.g. Chamlee-Wright, 2008; Townsend and Hart, 2008; Tracey and Jarvis, 2007).
Given the broad spectrum of SE research, in this chapter we espouse a broad definition
of social entrepreneurship as a process whereby resources are combined in new ways to
explore and exploit opportunities for social value creation by meeting social needs, stimu-
lating social change, or creating new organizations (Mair and Marti, 2006).
To shed light on the development of SE as a field of research, we provide a unique
analysis of SE based on historical perspective (Lawrence, 1984). In historical perspective,
information from the past is used to interpret current knowledge and to predict future
developments. Historical perspective is one method to fruitfully examine advancements
in research streams. For example, over the past century, strategic leadership scholars have
identified distinct leadership behaviors that were effective in a given time period, only to
find that these same behaviors may be ineffective in later periods as circumstances change
(Pajunen, 2006). However, historical perspective reveals that a leader’s ability to (1)
absorb, utilize, and apply external knowledge, (2) understand social relationships, and (3)
take the right action at the appropriate time, were the basis of effective strategic leader-
ship in the early 1900s much like they are today (Pajunen, 2006).
To highlight the development of important themes in the salient literature that may
hold insights for SE research, we content analyze Special Issue themes from academic
journals from the time that SE research first appeared in the literature. The appearance
of a particular theme in a Special Issue grants that theme a form of legitimacy; conse-
318

Social entrepreneurship 319
quently, these themes may be viewed by researchers as increasingly desirable, proper,

or appropriate within scholarly domains (c.f. Suchman, 1995). The history of Special
Issues thus serves as a framework in which the development of more specific phenomena
may be studied. Consequently, developments in SE research may be better described by
comparing them with themes in Special Issues found in the greater academic literature.
We provide a chronological review of the SE literature to highlight the historical develop-
ment of the SE field. We show that initial work in SE centered on change processes in
the public policy sphere, moving to value creation in the nonprofit sector, and currently
focuses on theory-driven research in multiple sectors.
A second contribution of our chapter is to explain how SE research has been influ-
enced by academic thinking in management, entrepreneurship, and other fields publish-
ing SE research over time, as manifest in journal Special Issues. We find that in 62 per
cent of the cases, the increase or decrease of themes in Special Issues in one time period
is followed by similar changes in later time periods in the same themes in SE articles.
This suggests that SE researchers are responsive to contemporary issues in the broader
literature.
As a third contribution to research on SE, we use historical perspective to identify
research opportunities that may predict future conceptual and empirical efforts exam-
ining SE and help frame a SE research agenda. Highlighting key themes of interest in
management, entrepreneurship, and research in other fields will provide SE scholars
with a glimpse into how to make their research more interesting and attractive to a wider
audience, and potentially provide insights for scholars aspiring to publish SE research in
top-tier journals. Consequently, we conclude with a proposal for future research based on
current trends in journal Special Issues, aimed at increasing the exposure and legitimacy
of SE research.
Taken as a whole, we use a unique methodology to describe the history of SE research,
explain its development and predict its future, thus addressing the three main goals for
organizational research (cf. Kerlinger, 1986). Basing our analysis on historical perspec-
tive thus provides researchers with a rich context within which to frame their own SE
contributions. By mapping the historical roots of SE research in this fashion, we provide
an aid to SE researchers who aspire to set forth in new directions rather than follow the
trails of the past. In the sections that follow we describe our methodology, report our
results, discuss how SE research has developed in 1991–2008, and close with suggestions
for future research.
METHODOLOGY
Historical perspective is defined as ‘the study of a subject in light of its earliest phases and
subsequent evolution,’ with the objective of sharpening one’s vision of the present, rather
than of the past as traditional studies of history seek to accomplish (Lawrence, 1984,
p. 307). One example of the difference between historical research and historical perspec-
tive is exemplified by studies of the Great Depression in the United States during the
1930s. ‘Historical research’ involves studying documents and artifacts of the Depression
to reach a better understanding of people’s attitudes during that time, while ‘historical
perspective’ is using the same information to explain people’s attitudes today (Lawrence,


1984). Placing phenomena in different historical settings is useful for revealing contrasts
and discovering unexpected insights (Ancona et al., 2001).
Historical perspective research requires that scholars go beyond the use of cross-
sectional data, thus enabling them to generalize findings about changes over time and to
examine the stability or variance of these findings. In the case of the Great Depression,
for example, research based on historical perspective could examine the stability of
people’s attitudes regarding employment, spending and investing during the 1930s with
their attitudes during the global recession of 2008–10. Such a study could allow scholars
to uncover those factors that are generalizable over time. We adopt Lawrence’s (1984)
historical perspective approach to the specific case of the history of academic thought in
management, entrepreneurship, and other fields on the development of SE research. Our
rationale for applying historical perspective to SE research is to explore how SE research
has evolved over time, and to examine how key areas of academic importance, manifest
in Special Issues of top management and entrepreneurship journals, may have influenced
the current state of research in SE. Results from our analysis are then used to inform
future research opportunities and directions in SE research.
Sample
In order to ascertain the historical development of the SE body of research, we looked for
SE articles in peer-reviewed journals in business and other fields using the EBSCO, ABI/
INFORM, Web of Knowledge, and Science Direct databases for peer-reviewed scholarly
articles. Within these databases, we searched the article title, abstract, and keywords pro-
vided by the authors for the phrases ‘social entrepreneurship,’ ‘social entrepreneur,’ ‘social
enterprise,’ or ‘social venture.’ Our search yielded 183 relevant articles, representing the
sample used for our coding scheme and content analysis. We had no initial starting date
for our sample time frame in order to capture all possible SE articles. The first SE article
appeared in 1991, and the growth in the number of SE articles from that time until 2008
is shown in Figure 14.1. Of particular significance in Figure 14.1 is the rapid growth in
the number of SE articles. This recent growth in SE research compares favorably with
entrepreneurship research more broadly, as highlighted by Ireland and Webb (2007), sug-
gesting that SE research is increasing in the academic consciousness.
Potential reasons for the growth of SE research could be the result of a number
of factors. First is the rise of foundations like the Skoll Foundation for Social
Entrepreneurship, founded in 1999 by eBay’s first president Jeff Skoll, and Ashoka, the
global association of the world’s leading social entrepreneurs, which tripled in size from
1999 to 2002 (Ashoka, n. d.). Second is the publication of mass-media books by social
entrepreneurs such as Mohammad Yunus in 2000 and 2003, and Bill Drayton in 2004.
These books highlight the impact of SE around the globe. Finally, social entrepreneurs
have been the recipients of national and international awards. Muhammad Yunus is
perhaps the best-known example, receiving the Nobel Peace Prize in 2006.
For our comparison sample of Special Issues, we drew from two sets of journals. First,
we looked at top management and entrepreneurship journals in order to gauge the impact
of these areas on SE research. We examined journals selected by Tahi and Meyer (1999)
and Busenitz et al. (2003), who used top journals to gauge the progress and impact of
management and entrepreneurship research, respectively. Second, we included Special


Social entrepreneurship articles published per year

50
45
40
35
Number of articles
30
25
20
15
10
5
0
1990 1995 2000 2005
Year
Figure 14.1 Growth of articles on social entrepreneurship over time, 1991–2008
Issues in other social science journals, such as public policy and nonprofit management
journals, in which SE research from our sample of articles appeared at least three times.
The time period for our search of Special Issues in both sets of journals was 1991–2008,
consistent with our sample of SE articles. In our count of Special Issues, we included
only those Issues with concrete themes, and not those that published general confer-
ence proceedings without an identifiable theme. Our search yielded 400 Special Issues
representing 23 journals. Table 14.1 lists each journal, the number of articles about SE
that the journal published, and the number of Special Issues in the journal. For example,
Nonprofit Management and Leadership published five SE articles between 1991 and 2008,
and had seven Special Issues during the same time period.
Journal Special Issues highlight areas of research in which growing numbers of
scholars are interested (Jermier, 1998), where more attention is warranted (Cohen and
Sproull, 1991), and where growth of the phenomenon in question has major implica-
tions for research and practice (Schendel, 1991). Additionally, journal Special Issues have
significantly higher citation rates than regular issue articles, and therefore have greater
impact on knowledge development (Olk and Griffith, 2004). In essence, Special Issues
are a key indicator of which themes are considered to be legitimate in a given field at a
given time because inclusion of the theme in a Special Issue implies that research in that
theme is desirable, proper, and appropriate. As these themes become legitimized, Special
Issues may be reasonably expected to steer future thought and research in the direction
of these themes. In a general sense, history supplies the raw materials required for his-
torical perspective (Lawrence, 1984). Examining the history of academic thought in SE
research, as well as in Special Issues in management, entrepreneurship, and other fields,
provides one explanation for how SE research has developed in the way that it has. This
explanation may then be extended to predict future directions and opportunities for SE
scholars.


Table 14.1 Number of social entrepreneurship articles and Special Issues, 1991–2008
Journal Social Special

entrepreneurship Issues
articles published
Top management and entrepreneurship journals
Academy of Management Journal 1 25
Academy of Management Review 1 19
Administrative Science Quarterly – 2
Journal of Management – 6
Organization Science – 18
Strategic Management Journal – 17
Entrepreneurship Theory and Practice 4 28
Journal of Business Venturing – 10
Strategic Entrepreneurship Journal 2 –
Other journals publishing at least three social entrepreneurship articles
Journal of World Business 6* 11
International Journal of Social Economics 6* 26
Voluntas: International Journal of Voluntary and 6 7
Nonprofit Organizations
Journal of Nonprofit and Public Sector Marketing 6* 9
Harvard Business Review 5 7
Business Strategy Review 5 1
Nonprofit Management and Leadership 5 7
Journal of Business Ethics 5 54
International Journal of Entrepreneurial Behaviour and 5* 7
Research
Journal of Developmental Entrepreneurship 4 2
Stanford Social Innovation Review 4 –
Public Administration Review 4 13
Nonprofit and Voluntary Sector Quarterly 4 8
International Journal of Public Administration 3 123
Total 76 400
Note: Asterisk (*) indicates journal published a Special Issue on social entrepreneurship.
Analysis
To start our historical perspective analysis, we coded the titles of the 400 Special Issues
into specific dimensions based on research area. In instances where the Special Issue titles
were unclear, we referred to the introductory article and titles of the remaining articles
in the Special Issue to guide the coding process. Some Special Issue titles were explicit,
such as ‘Capital Budgeting’ in the International Journal of Public Administration. Yet the
same journal published a Special Issue titled ‘Developments of State Audit in Israel in the
Memory of Prof. Asher Friedberg,’ which required us to search the introductory article to
deduce its dimensions of National Culture and Public Sector Management. Two of the
authors of this chapter independently categorized the dimensions into broader themes


using a modified Delphi procedure (Dalkey, 1969; Reger and Palmer, 1996; Short and
Palmer, 2003). During the first round of analysis, the raters classified dimensions for the
Special Issues as they saw fit. In subsequent rounds, themes and dimensions that the two
raters agreed upon were retained. Each rater then independently reassessed themes and
dimensions for which there was not complete agreement. Raters then added dimensions
to themes, created new themes, or judged dimensions to be idiosyncratic, but did not alter
the theme labels or move dimensions to other themes that were agreed upon in previous
rounds. The modified Delphi procedure was continued until the raters were satisfied
that further convergence was unlikely. Maintaining rater independence in the coding of
dimensions and themes avoided potential biasing that may have occurred due to interper-
sonal or political processes that could have contaminated independent judgments (Reger
and Palmer, 1996). In total, our coding of the 400 Special Issues resulted in 66 specific
dimensions, categorized into 13 broader themes. The final step was to code our sample of
183 SE articles according to these dimensions and themes, based on title, abstract, and
article introduction, after which we recorded appearance counts of each dimension and
theme. The Appendix (Table 14A.1) contains the details of the Special Issues organized
by theme.
The coding process allowed for Special Issues and SE articles to be coded into
either one dimension or two dimensions, depending on content. For example,
Entrepreneurship Theory and Practice published a Special Issue on ‘Financing and
Entrepreneurship’ (Entrepreneurial Financing dimension) and another on ‘Corporate
entrepreneurship in a Global economy’ (Corporate Entrepreneurship and Global
dimensions). As for SE articles, Nonprofit Management and Leadership published an
article by Dart (2004) titled ‘The legitimacy of social enterprise’ (Institutional Theory
dimension) and one by Mancino and Thomas (2005) titled ‘An Italian pattern of social
enterprise: the social cooperative’ (Community Enterprises and Co-ops, and National
Culture dimensions).
Finally, we sorted the themes in Special Issues and SE articles into three time periods
of six years each over the 18 years of our sample: 1991–96, 1997–2002, and 2003–08.
Splitting the sample into multiple periods of time, rather than aggregating the sample
as a single period (cf. Busenitz et al., 2003), changes cross-sectional data to longitudinal
data and consequently enables application of historical information to inform current
developments and future possibilities (Lawrence, 1984). In using three time periods, we
are able to view curvilinear trends in the data, as well as draw explanatory and predic-
tive conclusions about how changes from one time period to another may influence
subsequent time periods. Scholars in previous studies examining change in strategy and
entrepreneurship research over time have likewise grouped their samples into three time
periods (Dean et al., 2007; Shook et al., 2003).
RESULTS
Table 14.2 shows how the mix of Special Issue and SE article topics has been changing
over time. As the number of SE articles has been increasing over time in every theme,
basing our conclusions simply on growth in the number of articles would not be very
informative. We therefore examined changes in the percentage of Special Issues and SE


Table 14.2 Themes of journal special issues and social entrepreneurship articles
Theme and dimension Special Issues (number and Social entrepreneurship

change in percentage, articles (number and change in
N = 400) percentage, N = 183)
1991–96 1997–2002 2003–08 1991–96 1997–2002 2003–08
Change Processes 12 24 (23%) 12 (−54%) 2 2 (−89%) 11 (15%)
Change processes 1 14 7 2 1 8
Role of time 8 7 – – – –
Role of technology 3 3 5 – 1 3
Human Capital 13 14 (−34%) 16 (5%) – 4a 14 (−27%)
Cognition research – 1 3 – – 1
Diversity issues 1 2 1 – – –
HRM 7 4 2 – – 1
Individual differences 2 1 2 – – 6
Leadership 1 3 3 – 3 5
Trust – 1 2 – 1 –
Women in 2 2 3 – – 1
management
International and Global 17 32 (16%) 29 (−17%) – 2a 17 (78%)
Emerging economies 2 5 7 – 1 6
Global 10 15 16 – – 1
National culture 5 12 6 – 1 10
Management Practice 10 12 (−26%) 10 (−23%) – 2a 15 (57%)
Decision making 1 3 2 – – 1
Governance – internal 4 3 5 – 1 4
Management practices 4 6 2 – – 6
Marketing practices 1 – 1 – 1 4
Management Theory 9 4 (−73%) 8 (84%) – 1a 30 (529%)
Entrepreneurship as 1 – 2 – – 8
a field
Institutional theory – 1 – – – 8
Organizational ecology 2 – – – – 1
Organizational identity – 1 1 – 1 –
Organizational 3 – 4 – – 2
behavior
Organizational theory 3 2 1 – – 9
Sociology – – – – – 2
Networking and 1 8 (392%) 8 (−8%) 1 7 (−25%) 13 (−61%)
Collaboration
Alliances – 2 1 – 1 –
Collaboration – 3 3 – – 5
Cooperation 1 – – – – 1
Networks – 2 3 – 2 5
Partnerships – 1 1 1 4 2
Nonprofits 3 11 (126%) 10 (−16%) – 9a 21 (−51%)
Nonprofit – 4 5 – 6 9
management
Nonprofit marketing – 1 1 – 2 2
Philanthropy 1 2 1 – 1 9
Volunteerism 2 4 3 – – 1



1991–96 1997–2002 2003–08 1991–96 1997–2002 2003–08
Public Policy 24 37 (−5%) 51 (27%) 2 3 (−84%) 14 (−2%)
Civic engagement – 1 3 – – –
Human services 3 5 8 – – 4
Governance 1 1 2 – 1 3
– regulatory
environment
Public policy 4 17 15 1 1 4
Public sector 15 13 23 1 1 2
management
Public sector 1 – – – – 1
marketing
Scholarship and 13 18 (−15%) 21 (7%) – 3a 22 (54%)
Learning
Learning/knowledge – 6 7 – 1 6
transfer
Research methods 3 3 5 – – 4
Role of university 2 3 2 – 1 3
Theory/theory building 8 6 7 – 1 9
Social Responsibility and 11 23 (29%) 35 (40%) – 3a 19 (33%)
Ethics
CSR/Social 2 4 11 – 2 13
performance
Environmental 2 3 2 – 1 3
sustainability
Equity/justice – 1 1 – – 2
Ethics 7 15 21 – – 1
Strategy and Economics 11 14 (−22%) 10 (−34%) – 4a 7 (−63%)
Capabilities 1 3 – – – 1
Competition 2 1 1 – 4 –
Corporate strategy 1 2 1 – – –
Economics 3 4 6 – – 3
Resource-based view 1 1 1 – – 1
Strategic processes 2 2 1 – – –
Strategy 1 1 – – – 2
Type of Enterprise 1 4 (146%) 9 (107%) – 1a 12 (152%)
Cultural industries – 1 – – – 1
Community – – 1 – 1 9
enterprises and Co-
ops
Family business 1 – 6 – – –
Franchises – 2 – – – 2
SMEs – 1 2 – – –
Value Creation 11 20 (12%) 21 (−3%) 1 15 (61%) 72 (1%)
Corporate 0 3 – – – –
entrepreneurship



1991–96 1997–2002 2003–08 1991–96 1997–2002 2003–08
Economic 1 3 3 – 2 4
development
Entrepreneurial 1 – – – – 4
financing
Entrepreneurship – 5 1– – 4 26
Innovation 3 2 1 1 3 11
Performance 6 4 5 – 1 8
Value creation – 3 2 – 5 19
Totalb 136 221 240 6 56 267
Notes:
a
Change in percentage is undefined; the initial period had no articles in this particular theme.
b
Special issues and articles were coded into one or two dimensions; total is therefore not the total sample of
special issues or social entrepreneurship articles.
articles in each theme over time. For example, in 1991–96 there were 12 Special Issues
about Change Processes out of 136 total Special Issue themes (8.8 per cent). In 1997–
2002 there were 24 Special Issues regarding Change Processes out of 221 Special Issue
themes (10.6 per cent), which increased the percentage of this theme in Special Issues
by 24 per cent. During the third period, 2003–08, there was a decrease in the percentage
of Change Processes in Special Issues by 54 per cent. Thus, Table 14.2 indicates that the
percentage of Special Issues with themes on Change Processes in 1991–2008 is shaped
like an inverted U, with an increase from period one to period two and a decrease from
period two to period three. In contrast, SE articles about Change Processes displayed
the opposite trend. From period one to period two there was a decrease in the percent-
age articles regarding Change Processes by 89 per cent, but from period two to period
three that percentage increased by 15 per cent. SE articles about Change Processes thus
show a U-shaped trend. In addition to U-shaped and inverted U-shaped trends, Table
14.2 also indicates that some themes displayed strictly decreasing and strictly increasing
trends. For example, the percentage of Special Issues in Management Practice was strictly
decreasing, while the percentage of SE articles in the same theme was strictly increasing.
In short, Table 14.2 shows that themes in five of thirteen Special Issues were inverted
U-shaped (38 per cent), four were U-shaped (32 per cent), two were strictly increasing (15
per cent), and two were strictly decreasing (15 per cent). Trends were quite different for
our sample of SE articles, in which three of thirteen were inverted U-shaped (23 per cent),
one was U-shaped (8 per cent), seven were strictly increasing (54 per cent), and two were
strictly decreasing (15 per cent).
These figures reveal some noteworthy trends in Special Issues and SE research. First,
53 per cent of themes in Special Issues were increasing from periods one to two, while
77 per cent of the themes in SE articles experienced the same trend. This finding makes
sense because, as Table 14.2 indicates, the dearth of SE articles in period one means that


most themes could only increase in period two. In contrast, the number of increasing and
decreasing themes in Special Issues was much more evenly divided. Second, from period
two to period three, 47 per cent of themes in Special Issues were increasing, compared
with 62 per cent for SE articles. The greater increase in SE themes indicates that research
in SE continues to cover a greater diversity of themes over time. Again, the number of
increasing and decreasing themes in Special Issues is more evenly split. Overall, these
findings suggest that the relative growth or decline of themes in Special Issues from 1991–
2008 seems to resemble a random distribution, much like a coin toss. Over the same time
period, the growth of themes in SE articles has continually expanded. We next review the
implications of these changes.
DISCUSSION
In our discussion, we first describe how SE research developed in 1991–2008 by exam-

ining articles published during three time periods. We propose that SE research during
each time period is characterized by a number of overarching themes taken from our
analysis of Special Issues, and that ‘popular’ themes in one time period tend to decline in
subsequent time periods. Next, we concentrate on how the current developments in SE
research may be explained by past developments in Special Issues, finishing with how the
current state of research manifest in Special Issues may hold clues into future research
opportunities in the emerging research domain of SE.
Period One (1991–96): Public Policy and Change
Bill Drayton organized Ashoka in 1980 to promote positive social change, yet it was not
until the early 1990s that SE became the subject of academic research. Only three articles
were published during period one. Recall that we coded articles in up to two themes; thus,
while only three articles were published during period one, there are a total of six themes
as shown in Table 14.2: Change Processes (2), Public Policy (2), Value Creation (1), and
Networking and Collaboration (1). These early works do not explicitly extend and build
theory; rather, they examine the phenomenon of SE as found in the public and nonprofit
sectors.
Waddock and Post first defined social entrepreneurs as ‘private sector citizens who
play critical roles in bringing about “catalytic changes” in the public sector agenda and
the perception of certain social issues’ (1991, p. 393). These private sector citizens tried
to initiate change processes to improve policy making and implementation, rather than
being directly involved in the solutions to solve the social problems; examples of such
entrepreneurs include those responsible for Hands Across America (an organization that
raised money to fight hunger and homelessness in 1986) and the Partnership for a Drug-
Free America. The authors focus on the leadership characteristics necessary for social
entrepreneurs, such as the ability to bound complex problems into a single vision; signifi-
cant personal credibility to create networks and gain resources; and the generation of fol-
lower commitment based on social values that creates a collective purpose (Waddock and
Post, 1991). While not explicitly stated, SE in this context seems to relate to charismatic
and transformational leadership. In these theories, leaders articulate an appealing vision,


and induce followers to rise above their own self-interest for the benefit of the team or
organization (Yukl, 2005).
At the same time, Roberts and King provided a similar definition for ‘policy entrepre-
neurs’ as those who, ‘from outside the formal positions of government, introduce, trans-
late, and help implement new ideas into public practice’ thus becoming, in effect, public
innovators (1991, p. 147). They extend the work of scholars in the public policy domain
such as Lewis (1980) and Kingdon (1984), who examined entrepreneurship strictly within
governmental organizations. Drawing loosely on innovation theory, Roberts and King
(1991) suggest that public policy innovations pass through four stages: creation of the
idea; design of the idea into a bill and then a law; implementation of the idea as a new
program; and institutionalization of the idea as an established practice. Policy entrepre-
neurs are therefore involved in the first three of these four stages.
Finally, Garrett (1996) presents a case study of SE in the context of his and others’
efforts to create a novel charter school. Project Chrysalis was initially started as a part-
nership between a local school and a nonprofit organization. These two groups created a
service-learning summer program for the largely minority student body in the Houston
Independent School District to offer rapid development in an atmosphere free from
drugs, gangs, violence, and poverty. The program’s success convinced the program direc-
tors that the curriculum should be expanded and developed to create a charter school,
which required a physical site, school board approval, and additional students. After
meeting these requirements, the school opened its doors for the 1995–96 school year.
While not explicitly mentioning theory, Garrett’s (1996) case study could serve as an
exemplar for a number of theories related to entrepreneurship. For example, opportunity
discovery theory suggests that exogenous competitive imperfections arise from contextual
changes within an industry or market (Alvarez and Barney, 2007; Kirzner, 1973). The
Project Chrysalis experience is suggestive of an opportunity discovery process stemming
from such conditions. When Garrett and his colleague graduated from their universities
and entered the Teach for America program in Houston, they were disappointed when
students who had progressed in their classes struggled and regressed in later years. That
is, the teachers noticed a ‘competitive imperfection’ in the current school system that led
to an opportunity to improve student learning by creating a new context for learning.
As these examples show, the pioneering roots of SE were initiated in nonprofit and
government entities to promote innovation and change.
Period Two (1997–2002): Nonprofits and Value Creation
Period two contained 31 SE articles, and was characterized by growth in four main
themes: Value Creation, Nonprofits, Strategy and Economics, and Human Capital (see
Table 14.3). Value creation in an SE context refers chiefly to social value creation through
entrepreneurial processes. Social entrepreneurs see where an unmet need exists that the
state cannot or will not meet, and then gather resources to make a difference and build
organizations for broad social benefit (Emerson, 1999; Thompson et al., 2000). They
have also learned how business principles can empower them to more effectively fulfill
their social missions (Sagawa and Segal, 2000). In addition to creating social value, social
entrepreneurs may also improve economic value creation through efforts in job training
and self-employment programs in community revitalization efforts (Wallace, 1999). While


Table 14.3 Key historical trends in social entrepreneurship research over three time
periods
Period 1 Period 2 (1997–2002) Period 3 (2003–08)

(1991–96)
Theme Theme Change (%) Theme Change (%)
Relative Public Policy Value 61 Management 529
Growth Creation Theory
Change Nonprofits –a Type of 152
Processes Enterprise
Networking Strategy and –a International 78
and Economics and Global
Collaboration
Value Human –a Scholarship 54
Creation Capital and Learning
Relative Change −89 Strategy and −63
Decline Processes Economics
Public Policy −84 Networking −61
and
Collaboration
Networking −25 Nonprofits −51
and
Collaboration
a
Note: Change in percentage is undefined; the initial period had no articles in this particular theme.
SE articles in period one tended to focus on changing existing processes, economic and
social value creation seems to imply effort on a more grand scale with widespread implica-
tions for organizations.
The Nonprofits theme was also an area of key growth during period two. Nonprofit
(NFP) organizations are recognized as organizations that increase the general welfare of a
citizenry. To improve the performance of NFPs, managers in these organizations are fre-
quently taught entrepreneurship principles (Badelt, 1997). Dees (1998) presents NFPs in
a similar manner, as organizations seeking to grow their funding base through integration
of for-profit operations to complement their mainstream activities. While SE research
in period two contained articles targeting public policy, scholars generally shifted to
studying how to improve the entrepreneurial nature of NFP organizations. Finally, there
were a moderate number of articles that addressed Strategy and Economics, and Human
Capital. Articles in the Strategy theme centered exclusively on competition, with most of
the articles describing interactions of NFPs and for-profits battling in the same market
space (e.g. Dees, 1998; Ryan, 1999), while Human Capital articles were generally about
leadership in an SE context (e.g. Barman, 2002).
Our historical analysis uncovered an interesting trend in SE research during period
two. We found that each theme in the first period was found to decline in later time
periods. For example, Change Processes and Public Policy were both key themes during
period one. However, in period two both of these themes drastically declined relative to


other themes in SE. While this change may simply reflect a cyclical research pattern (e.g.
Mahoney, 1999), a comparison with those themes that experienced high growth reveals
another potential explanation. It appears that the sector of interest during period two
shifts from the public to the nonprofit arena, while the key phenomena of interest is
value creation rather than change processes. Additionally, if this trend continues, we
expect that the key themes in period two (Value Creation, Nonprofits, Strategy and
Economics, and Human Capital) will decline in period three. The consensus of scholars
in 1997–2002 thus seems to be that SE is principally a phenomenon of social value crea-
tion that takes place in the NFP sector, rather than how to bring about change in the
public sector.
Period Three (2003–08): Theory-driven across Multiple Sectors
The final period of SE research in our study contained 145 articles, and saw high
levels of relative growth in four key themes: Management Theory, Type of Enterprise,
International and Global, and Scholarship and Learning (Table 14.3). While research
into SE as a NFP phenomenon continues (cf. Foster and Bradach, 2005; Seelos and
Mair, 2005), the explosive growth of the Management Theory theme is reflected by the
inclusion of different perspectives and greater acceptance into top-tier management and
entrepreneurship journals. Part of the expansion may be attributable to the greater use
of theory-driven research, as several articles mentioned specific theories that provided
the lens through which to study SE. For example, Young (2006) examined social enter-
prises in light of organizational theory to explain the various structures adopted by these
enterprises. Other scholars present conceptual evidence to delineate how social ventures
and commercial ventures may be similar and different based on a prevailing model of
entrepreneurship (Austin et al., 2006). Maguire et al. (2004) explore SE through the lens
of institutional theory to inform institutional entrepreneurship, which strengthens the
legitimacy of SE research in the broader academic domain. Their theory-driven work
also delineates formal propositions to clearly guide future scholars.
Scholarship and Learning is a second and related theme that has experienced rela-
tive growth in period three. Articles in Scholarship and Learning principally aim to add
clarity and boundaries to the concept of SE. Some of the work in this theme is concerned
with clarifying definitions of SE (e.g. Martin and Osberg, 2007), while others propose
models of SE based on their case studies and grounded theory (e.g. Spear, 2006; Tracey
and Jarvis, 2007). Work in both Management Theory and Theory and Theory Building
is distinct from earlier work in periods one and two in that scholars move from strictly
anecdotal evidence to increased qualitative and quantitative analyses.
Third, there is growing consensus that SE is a multi-contextual construct that has more
to do with the aim of creating social value rather than a particular sector or organiza-
tion. In the introduction to a Special Issue of Journal of World Business dedicated to SE,
Christie and Honig (2006) observe that SE has been reported in entrepreneurial firms,
as well as NFP and the public sector. While providing economic benefits, community-
based enterprises are examples of SE in that they provide social benefits to community
members (e.g. Peredo and Chrisman, 2006; Tracey et al., 2005). Another growing area of
SE research involves social cooperative organizations characterized by democratic partic-
ipation by all members and limited distribution of profits (e.g. Lindsay and Hems, 2004;


Mancino and Thomas, 2005; Thomas, 2004). These types of organizations are officially
recognized entities that are separate and distinct from other types of social ventures.
Finally, SE research in period three is marked by a distinct increase in the number of
articles in the International and Global theme. The role of national culture is prominent
in this theme, as exemplified by a study of indigenous peoples in Canada. There is an
inseparable link between the economic and social improvements to individuals, families,
communities, and nations that are available through entrepreneurial activity among
indigenous peoples (Anderson et al., 2006). Other scholars examine social enterprise in
emerging economies, such as in Ukraine (Phillips, 2005), Kenya (Ndemo, 2006), Nigeria
(Nwankwo et al., 2007), and India (Rego and Bhandary, 2006). SE scholars increasingly
realize that these phenomena are pervasive worldwide and not limited to developed coun-
tries such as the UK or the USA.
As with the changes from period one to period two, we found that key themes of
relative growth in period two became themes of relative decline in period three (Table
14.3). While a focus on NFP contexts in period two may have been novel, more recent
SE research seems to have moved away from defining social ventures by purely NFP
status to include a wide variety of sectors and organizations united by a common goal of
meeting social needs. Additionally, the relative growth of the Management Theory, and
Scholarship and Learning themes in period three could suggest that scholars have rec-
ognized the need for improved theory-driven research, to the detriment of other themes
that may have been more popular in the past. If key themes in one time period continue
to decline in future time periods, we would expect to see the Management Theory,
Scholarship and Learning, Type of Enterprise, and International and Global themes to
be supplanted by different themes in 2009–14.
Having identified themes that experienced relative growth or decline over the course of
the history of SE research in the academic literature, we next use historical perspective to
show how themes in journal Special Issues may have impacted the way that SE research
has developed and what the future may hold.
Current Developments in Social Entrepreneurship Research
Applying historical perspective provides one explanation for the current developments
of SE research in light of past Special Issue themes. We thus explored how changes from
1991–96 (period one) to 1997–2002 (period two) in Special Issue themes compared with
developments in SE articles from period two (1997–2002) to period three (2003–08). Our
rationale was that the appearance of a specific theme in a Special Issue is an indication
that the theme is timely and important, and therefore a legitimate area on which scholars
may focus. Accordingly, given that the themes in Special Issues are legitimate research
areas, scholars in the emerging field of SE would gravitate toward these themes in their
studies of the SE phenomenon to increase the likelihood of their work being published.
Increasing scholarly output based on legitimate research themes would thus increase the
legitimacy of SE research as a whole in the eyes of the greater academic community. As
the legitimacy of SE research increases, SE scholars would consequently increase their
chances for promotion, tenure, and merit-pay increases (e.g. Pfeffer, 1993). In short, SE
scholars may have incentive to use Special Issue themes as the basis for their own research
efforts.


Table 14.2 shows that in eight out of thirteen themes (62 per cent), increases or
decreases in themes of Special Issues from period one to period two were followed by
respective increases or decreases in the same themes in SE articles from period two
to period three. Those themes that increased include Change Processes, International
and Global, Social Responsibility and Ethics, Type of Enterprise, and Value Creation.
Themes that decreased in both Special Issues and SE articles include Human Capital,
Public Policy, and Strategy and Economics. Additionally, in 30 per cent of the themes, or
four out of thirteen (Human Capital, Public Sector and Policy, Social Responsibility and
Ethics, and Type of Enterprise), the magnitudes of these trends in both Special Issues
and SE articles were strikingly similar. For example, the percentage of Special Issues on
Social Responsibility and Ethics grew by 29 per cent in period one, followed by a percent-
age increase in SE articles of 33 per cent in period two. Another example is the Type of
Enterprise theme, which showed a percentage growth of 146 per cent for Special Issues
followed by a percentage growth of 152 per cent in SE articles. These results suggest that
in many themes, historical perspective provides a compelling rationale as to why research
in SE has developed in the way that it has.
It is also instructive to look at the five themes where changes in Special Issue
trends from period one to period two actually ran counter to later changes in SE
articles (Management Practice, Management Theory, Networking and Collaboration,
Nonprofits, and Scholarship and Learning). For example, the Management Theory
theme displayed the largest percentage decrease of all Special Issue themes from period
one to period two (−73 per cent). However, the same theme in SE articles showed by
far the largest increase in percentage for the SE themes from period two to period three
(529 per cent). Historical perspective provides possible explanations for the discrepan-
cies in the development of Special Issues and SE research by using historical events to
interpret findings. In the case of Management Theory, the decrease in Special Issues
could be the result of a research cycle within a scholarly community (e.g. Mahoney,
1999). A particular emphasis on Management Theory in Special Issues of social science
journals could be highlighted in one period, only to decrease in a subsequent period as
other themes become a higher priority to journal editors. However, with SE research
in its infancy, Management Theory plays an increasingly important role as scholars
explore new theoretical foundations that explain the SE phenomenon and progress the
field beyond only anecdotal evidence. Historical factors that are unique to either Special
Issues as a manifestation of broader academe, or to SE research in particular, may
therefore account for the ways in which specific themes have differentially developed in
each area.
Themes in Future Social Entrepreneurship Research
While scholars cannot know the future, an analysis based on historical perspective can
provide clues into what the future may bring (Lawrence, 1984). Following the same legiti-
macy logic used to explain recent SE research, current developments in Special Issues may
also provide insights into SE studies yet to come. Next, we examine the potential impact
of the growth or decline of Special Issues over the period 2003–08 on the relative growth
or decline of themes in SE research for perhaps the next six year-year period. Table 14.4
displays those themes which were decreasing or increasing in both Special Issues and SE


Table 14.4 Increasing and decreasing themes in Special Issues and social entrepreneur-
ship articles, from period two (1997–2002) to period three (2003–2008)
Special Social Entrepreneurship (SE) Articles

Issues (SI)
Increasing Decreasing
Theme SI% SE% Theme SI% SE%
Increasing Management 84 529 Human Capital 5 −27
Theory
Scholarship and 7 54 Public Policy 27 −2
Learning
Social 40 33
Responsibility and
Ethics
Type of Enterprise 107 152
Decreasing Change Processes −54 15 Networking and −8 −61
Collaboration
International and −17 78 Nonprofits −16 −51
Global
Management −23 57 Strategy and −34 −63
Practice Economics
Value Creation −3 1
articles, and provides a starting point for our discussion on possible future directions and
research opportunities in SE.
Themes growing in 2003–08 in Special Issues include Human Capital, Management
Theory, Public Policy, Scholarship and Learning, Social Responsibility and Ethics, and
Type of Enterprise. While these themes are on the rise in Special Issues, in SE research
the same themes are either decreasing or increasing. Human Capital and Public Policy are
currently in decline, but there are a number of opportunities that scholars could explore
that would result in an increase in SE research in these themes over 2009–14, consistent
with current trends in Special Issues. In the Human Capital theme, there is a paucity of
work in the dimensions of Cognition Research, Diversity Issues, Trust, and Women in
Management. For example, seven Special Issues focused on Women in Management, three
of which were from entrepreneurship journals. Yet only one SE article focuses on women as
social entrepreneurs, a study in which Phillips (2005) examines women non-governmental
organization (NGO) activists in Ukraine. That only one article focuses on women as social
entrepreneurs is all the more intriguing given that the 2004 Global Entrepreneurship
Monitor (GEM) study in the UK found that women are far more likely to be social entre-
preneurs than mainstream entrepreneurs (Harding, 2004), suggesting that a SE context
may be a more fruitful research setting in which to study female entrepreneurship.
The themes of Management Theory, Scholarship and Learning, Type of Enterprise,
and Social Responsibility and Ethics are on the rise in both Special Issues and SE articles.
Recall that trends identified over multiple time periods suggest that the first three of these
themes should decline in 2009–14. However, for these themes to continue to increase, schol-
ars should focus on some of the untapped dimensions for future SE research. For example,


the Management Theory theme includes Organizational Identity. There have been two
Special Issues on Organizational Identity and only one SE article, in which Young (2001)
uses it to propose structural and strategic implications for social enterprises. Yet organiza-
tions may have multiple identities that may be in conflict when the needs of one identity
are detrimental to the needs of another (Foreman and Whetten, 2002; Golden-Biddle and
Rao, 1997). Social ventures must balance competing demands of fiscal health and business
savvy while also fulfilling their social missions (McDonald, 2007; Vega and Kidwell, 2007),
and these demands may be reflections of dual identities. Additional research in organiza-
tional identity is needed and would contribute to additional growth in this theme.
Historical perspective also suggests how themes in Special Issues that are presently in
decline may impact the future of SE research. These themes include Change Processes,
International and Global, Management Practice, Networking and Collaboration,
Nonprofits, Strategy and Economics, and Value Creation. Of these seven themes, three
(Networking and Collaboration, Nonprofits, and Strategy and Economics) decline from
1997–2002 to 2003–08 in SE research as well and may continue the downward trend.
Research focusing on various aspects of nonprofits is one example. Scholars increasingly
recognize that SE may be found in multiple sectors, and not just the nonprofit sector (e.g.
Christie and Honig, 2006). As the number of SE publications continues to grow, there
could also be a corresponding increase in the diversity of contexts in which SE is studied,
as well as studies that compare SE across sectors.
The four themes of Change Processes, International and Global, Management Practice,
and Value Creation increase from period two to period three in SE research, while decreas-
ing in Special Issues. Applying a historical perspective to the Management Practice theme
provides some clues as to why these trends may continue. The peak number of Special
Issues on Management Practice – which includes dimensions on decision making, inter-
nal governance, and management and marketing practices – occurred in 1997–2002, the
latter part of which happens to correspond with governance scandals such as Enron.
The Enron tragedy provided an unfortunate opportunity for academics to address topics
related to control, risk, and governance in organizations. It should therefore come as no
surprise that Special Issues during period two addressed topics such as critical perspec-
tives on organizational control; risk, management, and options in organizations; and cor-
porate governance reforms in developing economies. In 2003–08, Special Issues focused
less on these areas. Over the same time period, SE research on Management Practice has
grown relative to other themes. Historical perspective analysis based on a legitimacy logic,
however, suggests that 2009–14 will see a decrease in SE research regarding Management
Practice that corresponds with the trends seen in Special Issues.
The above suggestions for future developments in SE research in 2009–14 are but one
possibility. As the SE field matures and becomes more established in the scholarly com-
munity, the degree of variance or change in topics may decrease as ‘tribes’ of SE scholars
coalesce to identify key issues for research that match their common interests. Similarly,
there are diverse theoretical perspectives, contexts, and questions regarding SE research,
such as those regarding nonprofit, government, and for-profit organizations in a variety
of countries. Such diversity suggests that the state of SE research may mirror Gartner’s
(2001) sentiments about the proverbial theoretical ‘elephant’ in entrepreneurship studies,
in which ‘blind’ scholars attempt to describe a whole phenomenon when they in fact
describe only a small part of it. It may be impossible for scholars to develop a compre-


hensive theory of SE given the diversity of topics and theories used to study SE. Rather,
it may make more sense for communities of SE researchers to systematically engage in the
creation of a body of information (Gartner, 2001). These tribes or communities of schol-
ars would therefore develop knowledge about SE based on ‘tribal affiliation’, independent
of topics of interest in the broader management community.
CONCLUSION
The present study is an apt use of historical perspective in a number of ways suggested by
Lawrence (1984) that contribute to our knowledge of the historical development of SE
research. First, the design of the study was based on the assumption that generalizable
findings about changes in the themes of Special Issues and SE articles can only be made
using longitudinal data. Second, by comparing Special Issues to SE articles over time, the
study provides an explanation for how developments in SE research may have been influ-
enced by themes in Special Issues. Finally, the longitudinal nature of the study allows us
to make predictions into how the future of SE research may be shaped by current trends
in themes of Special Issues.
While our study presents a novel application of historical perspective to the history of
SE research, it is not without limitations. First, our study does not account for other his-
torical phenomena that may influence SE research and research in other academic fields
that would be reflected in Special Issues. For example, in our discussion we mention the
impact of the Enron disaster on Special Issues. This impact appears to have decreased as
time has progressed, and SE research may be expected to follow the same trend. However,
a crisis in a prominent nonprofit organization may influence SE research greatly while
only producing a mild impact on the broader academic literature as manifested in Special
Issues. Alternately, a resurgence in Special Issues in the Corporate Strategy theme would
not be expected to impact SE research, as no social ventures of which we are aware are
publicly traded or act as holding companies. The nascency of SE research also seems to
pre-empt studies on mergers and acquisitions of social ventures.
Second, due to our selection criteria for Special Issues, i.e. journals that have pub-
lished three or more SE articles, we found that some journals had a greater impact on
our findings than others. For example, the International Journal of Public Administration
published only three SE articles, yet it published 123 Special Issues in 1991–2008, or over
30 per cent of the total Special Issues we coded. Despite these limitations, we believe that
historical perspective using journal Special Issues may still be realistically used to make
tentative explanations and predictions about SE research.
Historical perspective is a useful tool that provides explanations for phenomena that
would be otherwise unavailable if purely cross-sectional data were used. In this chapter,
we used a novel methodology to examine nearly two decades of data about the themes of
Special Issues in top management and entrepreneurship journals, and in journals that are
actively publishing SE research. We used the analysis to provide explanations for develop-
ments in SE research based on a legitimacy logic. We found that 62 per cent of the theme
changes from our sample of Special Issues from periods one to two corresponded with
changes in SE articles from period two to period three, providing exploratory evidence
that themes in journal Special Issues influence themes selected by SE scholars.


Additionally, we suggested a few possibilities as to what the future of SE research may

hold over the next six years. The legitimacy logic used in this chapter supports the idea that
distinct themes in SE research will grow or decline relative to other themes. Alternatively,
communities of scholars with interest in distinct SE topics may form as the field matures,
independent of developments in the broader management and entrepreneurship fields.
We expect the number of SE articles to continue to grow, and to increase in top man-
agement and entrepreneurship journals as well. Such growth will serve to strengthen
the legitimacy of SE research in the broader academic community. We therefore invite
scholars and doctoral students with an interest in SE to target high-impact journals and
to embrace topics of current relevance in management and entrepreneurship.
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APPENDIX
Table 14A.1 Journal Special Issues organized according to themeb
Journal 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Top Management and Entrepreneurship Journals
Academy of 2 2 3 2 4 4 – 1 7 2 – – 5 32
Management
Journal
Academy of 4 3 1 2 2 1 – 2 5 2 – – 2 24
Management
Review
Administrative – 1 – 1 – – – – – – – – – 2
Science
Quarterly
Strategic 3 – 2 1 2 1 – – 2 – 10 – 2 23
Management
Journal
Organization 2 1 1 5 5 2 – – 3 – 3 1 – 23
Science
Journal of 1 – – 1 1 – – – 3 – 1 – – 7
Management
Entrepreneurship 1 11 1 – 2 1 – – 4 – 1 6 8 35
Theory and
Practice
Journal of 1 1 – – – 1 – – 4 – 1 3 – 11
Business
Venturing
Strategic – – – – – – – – – – – – – –
Entrepreneurship
Journal
Other Journals
Journal of World – 2 13 1 – – – 1 – 1 2 – 1 21
Business
International – – 4 – – – 2 2 – 2 5 – 1 16
Journal of Social
Economics
Voluntas: – 1 4 – – – 6 2 1 – – – – 14
International
Journal of
Voluntary
and Nonprofit
Organizations
Journal of – – 1 – – 1 3 4 2 1 – – – 12
Nonprofit and
Public Sector
Marketing
Harvard Business – 4 – 1 – – – – – – – – 3 8
Review


Journal 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Business Strategy – 1 1 – – – – – – – – – – 2
Review
Nonprofit – – – 2 – 1 3 – 1 2 1 – – 10
Management and
Leadership
Journal of Business 1 4 16 6 – – – – 3 49 2 2 1 84
Ethics
International 1 2 – – – – – – 1 1 1 1 7 14
Journal of
Entrepreneurial
Behaviour and
Research
Journal of – – 2 – – – – – – – – – 2 4
Developmental
Entrepreneurship
Stanford Social – – – – – – – – – – – – – –
Innovation
Review
Public 1 2 – – – 2 2 11 1 – – – 2 21
Administration
Review
Nonprofit and – – 2 – – – 7 3 2 – 1 1 – 16
Voluntary Sector
Quarterly
International 31 8 27 10 5 3 1 86 13 9 7 – 18 218
Journal of Public
Administration
Total journals per 48 43 78 32 21 17 24 112 52 69 35 14 52 597
themea
Notes:
a
Special Issues were coded into one or two dimensions; total is not the Special Issue total.
b
1: Change Processes; 2: Human Capital; 3: International and Global; 4: Management Practice; 5: Management
Theory; 6: Networking and Collaboration; 7: Nonprofits; 8: Public Policy; 9: Scholarship and Learning; 10:
Social Responsibility and Ethics; 11: Strategy and Economics; 12: Type of Enterprise; 13: Value Creation; 14:
Total themes per journal.


PART III
Economic History and Entrepreneurship Research



15. Historical reasoning and the development
of entrepreneurship theory
R. Daniel Wadhwani
INTRODUCTION
To many, history may seem irrelevant to the study of entrepreneurship today. The pace,
nature, and forms of entrepreneurial activity in our time make the phenomenon appear
new and unique, with few relevant comparisons in the past (Dana et al., 2004). Historical
evidence on entrepreneurship is fragmentary, messy, and difficult to analyze using con-
ventional social scientific methods. Moreover, researchers often label the field itself ‘new’
or ‘young’ (Cooper, 2003). History, one could conclude from much of today’s scholar-
ship, is at best marginal to our understanding of entrepreneurship.
Yet historical reasoning has played a more profound role in the development of
modern conceptions of entrepreneurship than most researchers in the field recognize.
Many of the premises that shape the field today originate from historical reasoning and
research. Historicism has been especially important in understanding the links in the
entrepreneurial process between the actions of individuals or firms and change within
industries, economies, and societies.
Not surprisingly, understanding the role of historicism in the development of theo-
ries of entrepreneurship requires a deeper historical perspective than is typically offered
in conventional accounts that date the emergence of the field to the 1970s and 1980s.
This chapter takes that deeper perspective in order to examine the role of historical
reasoning and research in the development of entrepreneurship as a field of thought
and investigation. The chapter not only establishes that entrepreneurship research and
reasoning has a much deeper tradition than is commonly recognized, but also argues
that historicism – the analytical tradition of contextualizing behavior and cognition in
time and place – has shaped the development of the conceptions of entrepreneurship
we use today.
The first section of the chapter examines the role of historicism in the development of
entrepreneurship as a field of reasoning and research. I show that historical reasoning
has been essential to the development of modern conceptions of entrepreneurship, par-
ticularly those that emphasize the role of the entrepreneurial process in explaining evo-
lution within industries and economies. Historicism’s assumptions about the agency of
economic actors and the evolution of economies have been essential to the emergence of
entrepreneurship as an area of research. In the second section, I examine how historicism
has been used by a number of key entrepreneurship theorists and researchers. Though
historicism does not prescribe a unitary methodology or theory, I show that these schol-
ars share an approach to exploring the past in their research on entrepreneurship that
343

recognizes the uniqueness of historical reasoning. I conclude by considering the role of

historical research and reasoning in the future of the field.
THE HISTORICAL TRADITION IN ENTREPRENEURSHIP

RESEARCH
Entrepreneurship researchers today famously disagree over the definition of the phe-
nomenon they study. Some have defined it as a type of organizational process, such as
starting up a company or entering a new market (Gartner, 1985; 1988), whereas others
have offered behavioral and cognitive definitions, particularly focusing on how individu-
als recognize opportunities (Stevenson and Jarillo, 1990; Kirzner, 1973). One particularly
important line of thought, however, conceives of entrepreneurship as a dynamic, dis-
equilibrating process that occurs through the interaction between enterprising individu-
als and potentially lucrative opportunities (Shane and Venkataraman, 2000; Eckhardt
and Shane, 2003). The entrepreneur, in this line of thought, is an innovative economic
agent, who pursues new business opportunities that hold the potential to change the way
a market or industry functions, and hence acts as an endogenous source of dynamism
in market economies (Schumpeter, 1928; 1934; 1942; Gunther McGrath, 2003). Unlike
definitions that focus solely on individual behavior or organizational forms, this concep-
tualization reflects the dynamic and disruptive connotations that we typically associate
with entrepreneurship today.
Conceived in this way, the modern concept of entrepreneurship owes much to the
historical tradition in economic thought. This section outlines the development of his-
torical reasoning in economic thought and its relationship to the dynamic understand-
ing of entrepreneurship we have today. The first sub-section briefly outlines how and
why historical reasoning about economics, markets, and business shaped the origins
of the modern view of entrepreneurship. The next sub-section examines how this view
influenced the social scientific study of entrepreneurship during most of the twentieth
century and assesses the contributions of this research. The final sub-section consid-
ers the reasons for the relative decline of historicism in research on entrepreneurship
in the last quarter century and its impact on the mix of scholarship being produced
today.
Historicism and the Origins of Modern Entrepreneurial Thought
Historicism in economics traces its roots to the ‘historical schools’ of economic thought
that developed in nineteenth-century England and Germany. Historicists were critical
of the abstract theories of classical economics (Hodgson, 2001). They often charged
that economists – particularly after Ricardo – had developed a body of theory that was
largely divorced from the realities of economic life. Classical theory, historicists pointed
out, ignored the socio-cultural institutions in which economic exchange was embedded,
overlooked the dynamic transformations that the Industrial Revolution was creating
in the economy, and ignored the creative agency of entrepreneurs (or ‘undertakers’, as
they were more often called) in using their insight and will to pursue projects that funda-
mentally changed the economy. In looking at the historical record, for instance, Gustav


Historical reasoning and the development of entrepreneurship theory 345
Schmoller insisted that the ‘enterprising spirit’ was crucial to a wide range of real eco-
nomic activities that involved the creation of new organizational projects and innovation
(Herbert and Link, 2006). Hence, as a modern intellectual construct, entrepreneurship
grew out of a critique of classical economics’ failure to deal with the will and capabilities
of economic agents to pursue endeavors that fundamentally changed systems of produc-
tion within the economy.
Historicism provided fertile intellectual ground for the development of concepts and
theories of entrepreneurship for several reasons. First, unlike the classical economists,
the historical economists rejected abstract economic reasoning in favor of embedded,
inductive research about businesses and industries. Schmoller, in particular, emphasized
the production of historical monographs on business and economic topics as the path to
progress in economics (Ebner, 2000; Herbst, 1965). In these inductive studies, the histori-
cal economists often documented and commented on the role of entrepreneurs as distinct
agents within the economy as well as the role of economic mindsets, topics that had
largely been ignored by the classical economists (Ebner, 2000). Second, unlike the clas-
sical economists, the historical economists did not accept materialist ontology or purely
hedonistic motives as the basis for economic behavior. Rather, they included the will and
the mind as essential factors in the study of economics. Questions of what shaped entre-
preneurial will and mindset were, thus, at the forefront of their study of economic topics.
Finally, unlike the classical economists, the historical economists’ studies made them
keenly aware of the ways in which the Industrial Revolution was transforming indus-
tries and economies. They, therefore, embraced a much more dynamic and evolutionary
approach to the study of economics than the classical economists (Ebner, 2000). These
three characteristics of nineteenth-century historicism – inductive historical methods, the
inclusion of will and mind as economic subjects, and an evolutionary perspective on the
economy – would fundamentally shape the development of entrepreneurship thought
and research over the next century.
The most significant way in which historicism maintained its influence on entrepre-
neurship theory and research was through the work of early economic sociologists,
particularly Werner Sombart and Max Weber. Both embraced the tenets of historicism,
often engaged in reasoning about entrepreneurship from historical evidence, and are
referred to as members of the ‘Youngest Historical School’ (Schumpeter, 1954). Unlike
the older historians, however, Sombart (1911; 1915) and Weber (1904; 1923) sought not
just to produce detailed historical studies about their subjects but also to use inductive
reasoning to theorize about ‘ideal types’ and patterns in entrepreneurial behavior and
economic change.
Sombart, for instance, began to conceive of entrepreneurs as essential agents of change
within capitalist societies and explored the socio-cultural and religious backgrounds of
entrepreneurs and the circumstances that shaped their propensity to create and innovate
in methods of economic production. Indeed, Reinert (2002) has suggested that Sombart
– not Schumpeter – was the first to introduce the concept of ‘creative destruction’ to eco-
nomic research, in his grand synthesis Modern Capitalism.
Weber (1904; 1923), too, engaged historical reasoning to induce his contentions about
an entrepreneurial spirit in modern capitalism – a mentality that differentiated the market
economy as an economic system from earlier forms of economic organization. Though
his ideas on the origins of the ‘spirit of capitalism’ are most often associated with The


Protestant Ethic (1904), it is in his less commonly read General Economic History (1923,
see also Swedberg, 1998) that he most extensively explains his ideas on the origins of
modern capitalism. In General Economic History Weber explains the mix of economic,
political, and cognitive changes that he associates with the development of modern
enterprise and the entrepreneurial approach to economic opportunities that distinguish it
from traditional economies, in which entrepreneurial attitudes and pursuits were viewed
with suspicion.
The younger historicists, thus, theorized that an entrepreneurial spirit or drive under-
lay the historical shift from what were considered static, ‘traditional’ economies to
dynamic, modern ones. In pursuing economic opportunities in a new way and with new
vigor, entrepreneurs undermined the deferential ties that limited economic change in tra-
ditional societies and unleashed a new set of expectations and attitudes about economic
exchange, productivity, and economic accumulation that defined modern capitalism. In
this sense, historicists conceived the entrepreneur as a distinct agent of economic and
historical change – a perspective that differentiated them from the materialist dialec-
tics of Marxist views of history as well as the ahistoricism of the classical economists
(Swedberg, 1998).
While the historical economists and sociologists embraced the study of entrepreneur-
ship and change in their studies, classical and neoclassical economists continued to
largely ignore it. There were a few exceptions to this generalization, and these exceptions
typically arose when economists engaged historical evidence. Marshall, for instance,
developed the notion of ‘industrial districts’ – what we now might call entrepreneurial
clusters – in work in which he took a much more inductive and historical approach to
examining economic phenomena. In Industry and Trade, for instance, Marshall (1919,
pp. 7–8) admits that ‘the more I knew of the work of [the English historicist] Sir W.J.
Ashley and the late Professor Schmoller, the warmer became my regard for them.’
However, with few exceptions (Knight, 1921), entrepreneurial topics remained marginal
in neoclassical economics.
The more significant competing line of reasoning on entrepreneurship to emerge at
the time was that of Carl Menger (1871) and the Austrian school of economics. Menger
and other Austrian economists shared with the historicists an understanding of the
importance of the subjectivity and cognition of economic agents, a line of thought on
the nature of entrepreneurship that has been most fully developed by Kirzner (1973),
with whom many entrepreneurship scholars are familiar (Koppl and Minniti, 2003).
However, unlike the historicists, the Austrian economists gave far less attention to the
evolutionary nature of entrepreneurial processes. Austrian economists also remained
highly committed to deductive reasoning and to strict methodological individualism,
stances that precluded the kind of engagement with examining embedded entrepre-
neurial phenomena in temporal contexts that historians considered essential to scholarly
progress.
In sum, more than other traditions of economic reasoning, historicism embraced
a dynamic view of economic processes that sought to understand the origins of the
endemic change that seemed to characterize modern economies. It also emphasized the
cognitive outlook and social contexts shaping economic agents and the impact of these
on the pursuit of entrepreneurial opportunities. In doing so, it laid the foundations
for modern conceptions of entrepreneurship and the entrepreneur and for grounded


research on the economic agency of these actors that flourished across the social sciences
in the twentieth century.
Entrepreneurship and the Study of Modern Economic Growth in the Twentieth Century
Over the course of the twentieth century, the historicist conception of entrepreneurship
became a focus of research across a wide range of social scientific disciplines. Scholarly
attention turned to entrepreneurship because of its theorized link to economic growth.
Social scientists sought to take the early historians’ impressionistic notions of the rela-
tionship between entrepreneurial spirit and economic change and to engage in more
systematic theory and research into the sources of entrepreneurial supply and its impact
on economic development. In doing so, social scientists embraced not only the histori-
cist conception of entrepreneurship but also a wide range of historical evidence in their
search for the roots of modern economic growth.
More than any other twentieth-century scholar, Joseph Schumpeter shaped the devel-
opment of historically oriented research on entrepreneurship and economic growth.
He did so by bringing together the tools and theories of neoclassical economics and
the entrepreneurship-focused, evolutionary view of the economy found among the his-
torical economists. Schumpeter’s views on entrepreneurship and economic growth were
fundamentally shaped by the historical school (Macdonald, 1965; Ebner, 2000), as well
as those of the Austrian economists (McCraw, 2007). But while the young Schumpeter
embraced the entrepreneurial dynamism of the historical school, he initially rejected its
methods and searched to apply the quantitative tools of the neoclassical school to evolu-
tionary economics. Over time, however, Schumpeter increasingly embraced sociological
and historical methods as the way to understand entrepreneurship and the dynamics
of capitalist economies. In Business Cycles (1939), he immersed himself in the study of
the histories of five industries in the United States, Great Britain and Germany – an
experience that fundamentally shaped his thinking during the last decade and half of his
life. As Thomas McCraw (2006; 2007) has shown, Schumpeter’s engagement with busi-
ness history fundamentally shaped how he came to think about the process of ‘creative
destruction’ in Capitalism, Socialism, and Democracy. Looking back at his own career in
History of Economic Analysis (1954), Schumpeter himself admitted history’s influence on
his thinking. In another article, he discussed the value of moving back and forth between
theory and history in understanding entrepreneurship: ‘Personally, I believe that there is
an incessant give and take between historical and theoretical analysis and that, though
for the investigation of individual questions it may be necessary to sail for a time on one
tack only, yet on principle the two should never lose sight of each other’ (Schumpeter,
1949, p. 75).
Schumpeter’s originality derived from taking the historical economists’ ideas about
entrepreneurship and embedding them within a theory of endogenous change and
growth within capitalist societies (Freeman and Louca, 2001; Herbert and Link, 2006).
By doing so he hoped to bring together neoclassical economics’ traditional focus on equi-
librium economics and the notion of innovative entrepreneurship found in the research
of the historical school. His embrace of historical methods and research in turn reshaped
how he thought about the process of innovation and entrepreneurship within economies.
Despite his early emphasis on the individual heroic entrepreneur, Schumpeter came to


argue – especially after his historical work in Business Cycles – that large, monopolistic
firms could, in fact, innovate and act entrepreneurially. Increasingly he emphasized the
many forms that entrepreneurship could take within an economy, a conclusion he drew
from the historical record. History also allowed Schumpeter to examine the process of
creative destruction over time and to see how innovations disrupted existing business
models and transformed industries – a process that was difficult to study using other
methodologies.
In fact, one might argue that Schumpeter’s contribution to entrepreneurship research
was not just theoretical but also methodological. His embrace of historical methods as
essential to the study of entrepreneurial processes contributed significantly to the flower-
ing of research in the field following World War II. Schumpeter (along with economic
historian Arthur Cole) played an important role in promoting this research agenda by
establishing the Center for Entrepreneurial History at Harvard in 1948. The Center drew
a number of well-known historians, economists, sociologists, and psychologists, all of
whom conducted historically oriented research on entrepreneurship. The Center’s publi-
cation – Explorations in Entrepreneurial History – was the first academic journal dedicated
to empirical research in the field and included famously lively debates and forums that
engaged both the history and theory of entrepreneurship. Especially in the early years
of the Center, entrepreneurial history was embraced as a broad and interdisciplinary
social scientific endeavor that sought to build on theories of entrepreneurship through
empirical research in the historical tradition (Jones and Wadhwani, 2008). Although the
burgeoning interest in research on entrepreneurship and economic growth was centered
in the United States, the Schumpeterian research agenda also took root in scholarship
being produced in Europe and Asia on the historical origins of modern economies (Jones
and Wadhwani, 2007).
The most robust stream of entrepreneurship research to emerge during these years
focused on the historical effects of socio-cultural institutions on entrepreneurial behavior.
A number of the scholars associated with the Center for Entrepreneurial History – most
notably sociologist Leland Jenks (1949) and historians Thomas Cochran (1950; 1960)
and David Landes (1949) – drew on and adapted Talcott Parsons’s (Parsons and Smelser,
1956; Parsons, 1960) structural functional theories of social roles and norms to examine
entrepreneurship in a wide array of historical settings. The fundamental tenet of most of
the research was that socio-cultural norms and institutions regulated the permissibility
and acceptance of innovative and disruptive entrepreneurship and that studying these
norms and role structures historically could lead to a better understanding of their effects
on entrepreneurial activity and economic change over time. While the post-war historical
scholarship on entrepreneurship eschewed Sombart and Weber’s sweeping generaliza-
tions about ‘ideal types’, it nevertheless worked within the Weberian tradition of blending
economic and sociological study in historical contexts to examine patterns in how beliefs
and norms had affected entrepreneurial behavior (Jones and Wadhwani, 2007; 2008).
The wave of Cold War era scholarship engaged psychologists, political scientists, and
economists in addition to historians and sociologists in historical evidence on the cultural
and institutional roots of modern entrepreneurial behavior and significantly widened the
scope of research to include developing countries as well as developed. Thomas Cochran
(1965, p. 25) noted, ‘The more economists labored with the exotic cultures of Asia,
Africa, and Latin America the more impressed they became with the force and intricacy


of social factors’ in shaping entrepreneurial behavior and decision making. Identifying

which ‘social factors’ mattered and precisely how they shaped entrepreneurial behavior
and economic growth, however, was no simple matter. Although dozens of publications
explored the non-economic roots of entrepreneurial behavior in traditional and modern
economies, they differed significantly in their stands on which psychological (McClelland,
1961; Hagen, 1962; 1963) and sociological (Cochran, 1960; 1965) determinants mattered.
Modern entrepreneurial attitudes and behaviors were, thus, found to depend on a wide
variety of factors: the prevalence of achievement orientation in a society (McClelland,
1961), the extent of technological creativity (Hagen, 1962; 1963), the existence of cultural
norms that accepted disruptive entrepreneurs (Cochran, 1965; Hirschmeier, 1977), and
the ease of status mobility, among other factors. In each case, the cultural, psychological,
or social factor under consideration was reported to be critical to the transition from a
static, traditional economy to a modern entrepreneurial one.
While welcoming the comparative and historical scope of the research, critics com-
plained about the lack of clarity in the claimed causal relationships and the rigid, often
over deterministic view of the influence of culture and society on business. Peter Kilby
(1971), an economist who studied entrepreneurship in Africa, noted that the range of
activities and skills that entrepreneurship required varied significantly by time and place,
while most research treated entrepreneurship as a single variable that fitted neatly into a
modernization framework. For instance, institution creation and political processes typi-
cally played a major role in new business creation and innovation in these contexts, a his-
torical pattern that most modernization theories ignored. Economic historian Alexander
Gerschenkron (1962; 1966) was even more critical of the use of linear modernization
models to explain entrepreneurship and economic change. Gerschenkron acknowledged
that the development of cultural and institutional norms in some settings may have
affected the development of modern entrepreneurship but warned that we ‘must be very
wary of generalizing such findings and regarding them in a way as necessary prereq-
uisites.’ He lamented (1966, p. 252) that ‘[i]t is precisely this [determinism] that is done
by several sociologists and psychologists who are trying to develop general theories of
modern industrialization with particular stress on the entrepreneurial element therein.’
Gerschenkron’s point (discussed more fully later in this chapter) was that the paths to
modern industrialization could vary fundamentally and that the value of history was in
being able to see such patterns rather than to impose a single linear model on historical
development.
By the 1970s, the appeal of broadly conceived studies that made sweeping claims about
the historical roots of modern entrepreneurship had begun to decline among social sci-
entists. In part this was because, as Kilby and Gerschenkron pointed out, the historical
evidence on entrepreneurship could not be fitted into a neatly linear model of economic
modernization. Modernization theory came under attack on multiple fronts as scholars
questioned its assumptions about the distinctions between traditional and modern socie-
ties and its lack of attention to the role of international power (Leff, 1979; Wallerstein,
1974) in shaping the paths to economic growth available to local entrepreneurs. Interest
in entrepreneurship research also waned as historical social scientists, influenced by the
interest in the systematic application of quantitative methods to social scientific phenom-
ena, turned to examining topics where such methods could more readily be applied. For
instance, Explorations in Entrepreneurial History was renamed Explorations in Economic


History, a publication dedicated to the application of quantitative methods to the study

of the past. Influenced by the work of Alfred D. Chandler (1962), business historians
once dedicated to examining the entrepreneur, began instead to focus on organizational
innovations in the firm more narrowly as a way of more rigorously studying economic
change (Jones and Wadhwani, 2008). Each of these developments undermined the style
of the broad synthetic studies that put forth general historical models of entrepreneurial
development.
In retrospect, the many weaknesses of the wave of mid-twentieth century scholarship
on entrepreneurial history are apparent. It too often relied on a general, linear model of
historical development that failed to deal with the wide variations in historical experience
it encountered. It often lacked clear specifications about the nature of the entrepreneurial
behavior it was studying. It could also often be blind to the issues of power and politics
and how these shaped the historical experience of entrepreneurship and the existence
of entrepreneurial opportunity around the world. In addition, as a body of research, it
failed to build a set of lasting generalizations about the nature of entrepreneurship and
its impact on economic change.
Yet, despite its many limitations, its influence on subsequent developments in social
scientific and historical work on entrepreneurship and economic change should not be
underestimated. The limitations of a grand historical synthesis on entrepreneurship and
its relation to economic development led subsequent generations of researchers in the his-
torical social sciences to disaggregate entrepreneurial phenomena and to engage in more
focused studies of the elements of the entrepreneurial process. Many of these streams of
research have roots in the entrepreneurial history of the earlier era. Much of the current
work on institutions and entrepreneurial activity grew directly out of the research of
this era and the ideas of many of its most important scholars (North, 1990; Baumol,
1990) were shaped by the entrepreneurial history of this era. Likewise, the discovery of
the wide variations in the organizational form of entrepreneurship led to a sustained
stream of studies on innovation in organizations (Cuff, 2002; Graham and Shuldiner,
2001; Hounshell and Kenly Smith, 1988). Other streams of research have emphasized
the great variety of entrepreneurial paths and trajectories that define modern economies.
Still other elements of the earlier scholarship – such as Arthur Cole’s (1959) work on the
importance of information and spillovers of useful knowledge and opportunities in the
entrepreneurial process – are being rediscovered by scholars (Audretsch and Keilback,
2006). Space limitations prevent a full account of the many streams of historical research
into which historical work on entrepreneurship fragmented. (For an overview of this
work, see Jones and Wadhwani, 2008.) Yet their common roots and assumptions lie in
the historical tradition of entrepreneurship research that flourished in the mid-twentieth
century.
Rise of the Behavioral Approach and the Marginalization of History
Today, historicism continues to be an influential form of reasoning in the social sciences

(North, 1990; Pierson and Skocpol, 2002; Thelen and Steinmo, 1992), but ironically it
has been marginalized in mainstream entrepreneurship research, especially in the United
States. The reasons for the decline of historicism are complex but largely pertain to the
origins of the current wave of work.


The recent stream of entrepreneurship research based in business schools emerged in

the 1970s and 1980s just as social scientific interest in applying entrepreneurship to mod-
ernization theory was waning. Unlike the earlier research, the recent wave of scholarship
has associated entrepreneurship with small businesses and start ups. This inclination was
the product of concurrent historical developments, particularly the competitive chal-
lenges that large diversified firms in mature industries began to face in the last third of the
twentieth century (Landström, 2005). In contrast, small business researchers were finding
that start ups and SMEs were an important source of job creation (Birch, 1979) and
innovation (Acs, 1984; Acs and Audretsch, 1990) in the economy. The economic vitality
(and political legitimacy) of the small business and start up sector – particularly in high
technology industries – was seen in sharp contrast to the antiquated administrative rigid-
ity and sluggish performance of large, professionally managed firms. Policymakers in the
Reagan–Thatcher years quickly picked up on the shift and promoted entrepreneurship
and small business in both policies and rhetoric. Demand for entrepreneurship education
– in terms of small business start up and administration classes – began to soar in busi-
ness schools as students perceived the shift in career opportunities. Interest in entrepre-
neurship education and research hence grew out of the contemporary concern with small
business and job creation, rather than the broader concern with explaining economic
change that had motivated earlier researchers (Landström, 2005).
Emerging out of this milieu, the scholarship in this area embraced a behavioral and
organizational approach to the study of entrepreneurship. Stevenson and Jarillo (1990),
for instance, argued that understanding entrepreneurial behaviors and their efficacy in
relationship to the existence of an opportunity was more appropriate for business schools
than the broad functional and historical studies of the past, while Gartner (1985; 1988)
argued that the key lay in the organizing of a new firm. The scholarship hence tended to
focus on narrow, discrete categories of behaviors and cognitive acts, such as firm found-
ing, team building, and financing. Thus, in studying individual and firm-level patterns
of entrepreneurship – such as opportunity identification, resource acquisition or team
creation – the recent wave of scholarship far surpasses older work. (Details on these con-
tributions can be found in many of the other chapters of this book.)
However, the broader links between these entrepreneurial behaviors and processes
of economic change within industries, societies, and economies was almost completely
sidelined. In theoretical pieces and in surveys, entrepreneurship researchers repeatedly
called for more studies that linked entrepreneurial behaviors at the level of the individual
and the firm to processes of change and development at the levels of the industry and
economy. Low and MacMillan (1988), for instance, argued that entrepreneurship research
needed to address the links between firm and individual level phenomena and processes
of change and development at the industry and economy levels, a plea that was later
echoed by Davidsson and Wiklund (2001). On the whole, however, very little effort has
been made on this front in mainstream entrepreneurship research and the key journals
have remained committed to focused studies of entrepreneurial behavior and firm found-
ing. Chandler and Lyon (2001), for instance, found a declining attention in mainstream
entrepreneurship journals to the industry, regional, and economy levels of analysis and
identified a mere 7 per cent of studies as including multi-year analysis of any sort.
There were a number of notable exceptions to this general pattern of intellectual
development. In Europe (and especially in the UK) historicism continued to be more


extensively integrated into entrepreneurship research. Casson (1990; 1995; 2010; Casson
and Godley, 2005), for instance, continued to take historicism seriously in developing
theory, and business historians often engaged entrepreneurial theory systematically in
their research (Bergoff and Moller, 1994; Godley, 2001; Nicholas, 1999; 2000). Likewise,
European and American researchers who examined entrepreneurial clusters and indus-
trial districts more consistently linked individual and firm behavior to industries, regions,
and economies, and engaged the historical record in doing so (Zeitlin, 2008b). A few
economists also began to expand the scope of their research to engage in work on infor-
mation and knowledge spillovers (Audretsch and Keilback, 2006; Rajshree et al., 2008).
On the whole, however, until recently mainstream entrepreneurship research showed little
interest in the broader relation of entrepreneurship to historical context and economic
change.
In recent years, however, entrepreneurship scholars have begun once again to consider
more critically the role of change and history in their field. Baumol and Strom (2007) have
suggested that mainstream entrepreneurship research ought to take historical evidence
more seriously, and Rita Gunther McGrath (2003, p. 521) reminded us that ‘[t]he study
of entrepreneurship is fundamentally about the process of economic change.’ Historians,
too, have called for a re-engagement with entrepreneurship theory (Cassis and Minoglou
2005; Jones and Wadhwani, 2007; 2008). A return to the use of historical reasoning and
the study of change in entrepreneurship necessarily begins with a fuller understanding
of the role of historicism in the development of the field. As this section has shown, his-
torical reasoning has played a formative role in the development of the field over the last
century and a half. In contrast to the abstraction and historically static approach of clas-
sical and neoclassical economics, historicism provided fertile ground for the theoretical
development of entrepreneurship, especially as it relates to the central issues of innova-
tion, change and development within the economy. Historicism will likely again be crucial
if entrepreneurship research is to re-engage the vital issues of industrial change and devel-
opment. The next section hence explores historicism from a different angle by considering
its role in the thinking of a number of major theorists of entrepreneurship.
HISTORICISM AS A MODE OF INVESTIGATION
What exactly is historicism, and why has it, as a way of reasoning, been important to
the development of entrepreneurship as a field? One way to look at history – perhaps the
more common way in the mainstream social sciences these days – is to think of it as the
cumulative sequence of events that took place in the past. History, in this sense, is simply
the evidentiary record from the past. Interpreted in this way, history provides a vast store
of evidence and information against which to test and modify theory. Social scientists
working in this tradition, including entrepreneurship scholars, have typically used his-
torical evidence to test hypotheses prevalent in their fields. Nicholas (2008), for instance,
has used data from the early twentieth century to test the impact of innovation on stock
prices, and Foreman-Peck (2005) has elaborated on methods for testing entrepreneurial
activity in historical contexts. Sometimes history is also used in this way to modify the
basic social scientific theory, but the real value in this first approach is the richness of
evidence it provides for testing theory.


The first approach to history is an important and legitimate tradition in the histori-
cally oriented social sciences, but it is not the historical tradition that has yielded the
most significant insights into the entrepreneurial process. The more significant line of
historical inquiry from the point of view of the development of entrepreneurship as a
concept is one that approaches the past not simply as a body of empirical evidence to
be tested but rather one that approaches reasoning about the past as inherently different
from social scientific reasoning about the present. The Oxford English Dictionary defines
this form of historicism as ‘the attempt, found especially among German historians
since about 1850, to view all social and cultural phenomena, all categories, truths, and
values, as relative and historically determined, and in consequence to be understood
only by examining their historical context.’ History, in this sense, offers insights into
the variation of human experience and the origins of phenomena that are not readily
apparent by examining the present alone. The point of this approach to historical
reasoning is not simply to test existing theory, but rather to expand understanding of
the origins or development of a phenomenon or its relationship to other phenomena
that are not perceptible through current experience alone and hence often lie outside
contemporary theory. It is this approach to the fundamental uniqueness of historical
reasoning (and not just history as a body of evidence) that has been the more fruitful
one in the development of modern conceptions of entrepreneurship and its place in
economic change.
Historical reasoning of this type does not prescribe a unitary methodology or approach
to understanding or identifying the differences of the past and how they inform theory
and evidence. It would, therefore, be artificial and misleading to describe or prescribe ‘the
historical theory or method’ for studying entrepreneurship. Rather it is more fruitful to
examine the work of a variety of notably successful entrepreneurship theorists and schol-
ars to see how their engagement with historicism shaped their conclusions about entre-
preneurship. The rest of this section hence looks at the role of historical reasoning in the
work of three notable entrepreneurship theorists: William Baumol, Joseph Schumpeter,
and Alexander Gerschenkron.
William Baumol and Historical Institutionalism
Baumol recently wrote in the Strategic Entrepreneurship Journal that ‘we need to see the
great value of history as a source of evidence on the workings of entrepreneurship and its
strategic orientations. Because of the inherent heterogeneity of entrepreneurial activities,
considerable difficulty besets the analytical study of entrepreneurship via a body of inter-
nally compatible and directly comparable statistics’ (Baumol and Strom, 2007, p. 237). It
is a methodological theme that Baumol has repeated several times during his long career
exploring the determinants of the supply of entrepreneurship and its effects on economic
growth (Baumol, 1968). Baumol’s approach emphasizes the limits of conventional social
scientific methods in studying entrepreneurship not simply because the heterogeneity of
entrepreneurship makes statistical comparisons difficult, but also because the very hetero-
geneity of the historical record on entrepreneurship provides a key to understanding entre-
preneurial behavior and how it is shaped by its context. Historicism, in Baumol’s approach,
provides us with an important way to understand entrepreneurship (particularly its supply)
because it allows us to examine a richer variety of contexts than is available in the present.


The great variety of entrepreneurship found over historical time allows us to better induce
theories of entrepreneurial behavior and how it is shaped by context.
Baumol’s approach to historicism is perhaps most clearly apparent in
‘Entrepreneurship: productive, unproductive, and destructive’ (1990), an article that has
often been reprinted and cited as a seminal piece on the relationship between institutions
and entrepreneurial behavior. Drawing on secondary source research on business and
enterprise from Ancient Rome to the Renaissance, Baumol induces the proposition that
social institutions fundamentally shape the allocation of entrepreneurial efforts to pro-
ductive, unproductive, and even destructive activities by ‘influencing the relative payoffs
society offers to such activities’ (1990, p. 893). In discussing his historicist methodology,
Baumol explicitly notes that the differences of the past provide a foundation for exam-
ining the effects of institutions on entrepreneurship that conventional social science
research on entrepreneurship could not address. ‘Given the inescapable problems for
empirical as well as theoretical study of entrepreneurship, what sort of evidence can one
hope to provide?’ asked Baumol (1990, p. 895). ‘Since the rules of the game change very
slowly, a case study approach to investigation of my hypotheses drives me unavoidably
to examples spanning considerable periods of history and encompassing widely different
cultures and geographic locations.’
Baumol’s approach to the value of historicism in studying entrepreneurship has been
long echoed by others examining the relationship between institutions and entrepreneur-
ship. Indeed much of the post-World War II wave of scholarship on entrepreneurial
history was motivated by a similar view of the role of historicism in studying entrepre-
neurship (Jones and Wadhwani, 2008). In that case, the primary research question con-
cerned the sociocultural norms that promoted or inhibited innovative entrepreneurship,
but the Baumol approach is broadly applicable to any investigation of the relationship
between institutions and entrepreneurial behavior. (For a broader discussion of the appli-
cability of historical institutionalism in the social sciences see Braudel, 1958.)
Schumpeter and the Path Dependence of Entrepreneurial Processes
Though Schumpeter, too, was interested in the relationship between institutions and
entrepreneurship and believed the topic to be an important area of study (Schumpeter,
1947), his theoretical concerns and his approach to historicism were different. Schumpeter
embraced historicism based on its ability to account for change over time. Unlike meth-
odologies that allowed the researcher to isolate specific causes and effects or that allowed
researchers to grapple with the equilibrating nature of markets, historicism’s value for
Schumpeter lay in establishing and documenting the directionality of economic change
in real historical time and context. From a theoretical perspective, history showed that
disruptive innovations and changes rippled through industries, economies and societies
in sometimes unpredictable ways that fundamentally changed how these industries and
economies worked. Entrepreneurship ‘shapes the whole course of subsequent events and
their “long-run” outcomes’, Schumpeter pointed out. It ‘changes social and economic
situations for good, or, to put it differently, it creates situations from which there is no
bridge to those situations that might have emerged in its absence. This is why creative
response is an essential element in the historical process; no deterministic credo avails
against this’ (Schumpeter, 1947, p. 150). In studying such phenomena and their impact,


there was little point in trying to isolate Newtonian cause and effect; real value came with
studying it as an embedded process taking place in real historical time to examine how
exactly an innovation unseated existing businesses and business models and spilled over
into a wide array of related areas. There was no real methodological substitute for exam-
ining such historical processes.
Like Baumol, Schumpeter came to his conclusion about the value of historicism not
based on aprioristic methodological assumptions, but by actually engaging in the histori-
cal evidence. As Thomas McCraw (2007) has shown, Schumpeter’s studies in business
history within his massive Business Cycles (1939) laid the foundation for both his meth-
odological turn toward history as well as the evolution of his own theories of the nature
of entrepreneurship. Much of Business Cycles is in fact an extensive historical account of
the development of five industries – textiles, railroads, steel, automobiles, and electricity
– in the United States, Great Britain, and Germany. ‘With Business Cycles, Schumpeter’s
entrepreneurs cease to be ideal types – as they tended to be in earlier works – and become
flesh-and-blood people who did specific things at specific times and places,’ explains
McCraw (2006, p. 260). The engagement with history, in particular, shaped Schumpeter’s
accounts of ‘creative destruction’ and the wider social and economic impact of innova-
tion discussed in Capitalism, Socialism and Democracy (1942).
One particularly vivid example for Schumpeter of history’s ability to reveal the broader,
path-dependent impact of innovation was the railroad. ‘Railroadization’, as he called it,
became his ‘stand example’. Railroads were not only innovative businesses in their own
right that upended incumbent transportation firms in canals and turnpikes; they also
drove down the costs and time involved in transportation in ways that created turmoil
and change in the standard business models of a host of industries. The creation of a
national railway system transformed production, distribution and marketing businesses
in many industries as national competition increasingly replaced local competition. Its
growth also stimulated innovation in a host of related industries including fuels, metals,
and machinery. History demonstrated how railroads, as entrepreneurial innovations,
fundamentally transformed the economy and the nature of many businesses in a way that
static models or simplified cause-and-effect studies could not explain (Schumpeter, 1939;
McCraw, 2006; see also Jenks, 1944). The notion of path-dependent technological and
innovative spillover continues to hold promise in entrepreneurship research (Cole, 1959;
1968; Audretsch and Keilback, 2006).
Schumpeter’s engagement with history affected his ideas in a number of ways. He
increasingly emphasized the diverse types of organizational forms that entrepreneurship
could take, including not just the new firm but also larger corporations and even govern-
ment agencies. His sense of historicism led him to ponder in Capitalism, Socialism, and
Democracy (1942) how entrepreneurship was changing the structure and nature of capi-
talism itself. It was history’s unique ability to reveal the process of change that ultimately
attracted Schumpeter and was echoed by others who elaborated on the concept of entre-
preneurship as a process of continuing change within capitalism.
Schumpeter also gained from history a keen sense of unevenness and lack of linear-
ity in the process of change. It was partly this that led him to look at historical change
comparatively in Business Cycles and consider how entrepreneurial processes did not
usually unfold predictably because of variations in time and circumstance. But it was
his contemporary at Harvard, Alexander Gerschenkron, who more fully laid out the


contention that the historical record suggested the process of entrepreneurial change or
creative destruction could proceed along widely varying paths and forms depending on
time and context.
Gerschenkron and the Contingency of Entrepreneurial Processes
Among entrepreneurship scholars, Gerschenkron is probably the least well known of

the three figures examined here. However, his influence as an economic historian who
theorized about the timing and character of the process of entrepreneurial change is
widespread. He is best known for his work on how the timing and context of a coun-
try’s industrialization affected the character of economic change and industrialization.
Gerschenkron (1962) argued that although individual entrepreneurs played a crucial role
in the innovation and economic development process of early developers such as Great
Britain, countries that followed this industrial leader – such as Germany and Russia –
experienced very different entrepreneurial processes in their progress toward industriali-
zation. Late developing countries may have lacked the stock of entrepreneurial talent of
early developers but they had the precedent and knowledge of early developers on which
they could build. In such a late developing context, other actors and institutions could
and did coordinate the entrepreneurial process as a legitimate substitute for individual
actors and firms. In Germany, Gerschenkron argued, banks played this crucial role in
making entrepreneurial decisions that propelled the creation of industrial concentra-
tion and the creation of comparative advantages in heavy industry. In Russia, it was the
state.
Gerschenkron’s basic position was that the historical record refuted linear or unitary
theories of the role of entrepreneurship in historical change; whereas the individual
entrepreneur and the start up firm were certainly historically important in some con-
texts, other actors and organizations acted as ‘alternatives’ in other contexts. ‘There is
a deep-seated yearning in the social sciences for the discovery of one general approach,
one general law valid for all times and all climes,’ Gerschenkron (1962, p. 67) noted,
‘[b]ut these attitudes must be outgrown.’ To Gerschenkron history suggested that there
were in fact alternative processes of entrepreneurial change and varying paths to indus-
trial development. Careful historical research and reasoning could not and would not
reveal any single ‘law’ of entrepreneurial change but it could allow us to identify and
theorize alternative entrepreneurial paths and patterns, and the conditions that gave rise
to these.
What is suggested here, therefore, is that a serious effort should be made to try to establish
through empirical research the spatial and temporal limitations within which the use of such an
approach is reasonable and defensible. The discovery of these limits will itself push the research
work into discovery of other sets of propositions and hypotheses, which may be more promis-
ing in treating situations, and historical sequences which differ widely from those for which the
conceptual framework originally was designed. (Gerschenkron, 1962, pp. 69–70)
Some of the details of Gerschenkron’s assertions about the role of banks and the state
in late developing countries have been challenged by other scholars, but the central thesis
that timing and context affect the character and direction of entrepreneurial change has
not really been refuted. In some cases, neo-Gerschenkronians have used the concept


to explain the rise of high technology industries in small late developing countries like
Israel, Ireland, and Taiwan (Breznitz, 2007). More generally, the notion that history illu-
minates not general law but alternative strategic choices available to actors has become
common in the historical social sciences (Zeitlin, 2008a).
The approaches to historicism taken by Baumol, Schumpeter, and Gerschenkron share
a common understanding that history can render insights into concepts, processes and
theories that are difficult or impossible to deduce through traditional social scientific
methods. Although different in their approach to historicism, they each embrace the
assumption that history is not just a body of evidence but a mode of reasoning about
the past for which there is no simple substitute in conventional social scientific methods.
The extensive record of conceptual contributions from entrepreneurship theorists from
Sombart to Baumol suggests the vitality of historicism as a mode of reasoning about
entrepreneurial phenomena and the contributions that historicism has made to the
modern understanding of entrepreneurship.
CONCLUDING THOUGHTS
Historicism has played a long and formative role in the development of entrepreneur-
ship as an intellectual field. The premises underlying historical schools of thought on
economics – such as the evolutionary nature of industries and economies and the role
of economic agents as creative actors – lay the foundations for the emergence of entre-
preneurship as an area of scholarly inquiry. As we have seen in this chapter, despite its
current marginalization, historicism and historical investigation has shaped the develop-
ment of a number of important areas of entrepreneurship research, and many of the
most notable entrepreneurship theorists of the twentieth century explicitly discussed the
importance of historical reasoning for progress in the field.
If research in the area is once again to investigate seriously the entrepreneurial process
at levels of the industry, region, economy, and society (and not just at the levels of the
individual and the firm), then a re-engagement with historicism will almost certainly be
necessary because this approach is crucial for contextualizing entrepreneurial behavior
at multiple levels and for examining the relationship between entrepreneurship and eco-
nomic change. Historical perspective, in fact, fundamentally reshapes the questions we
ask and the conclusions we draw. Rather than concluding, in a timeless way, that small
business and start ups are entrepreneurial and innovative, it demands that we ask why
these organizational forms have been especially innovative in a particular time and place
(our own). Rather than simply relating entrepreneurship with quantities of innovation
and growth, it forces us to ask what paths of development and directions of change par-
ticular clusters of entrepreneurial activity opened up and which alternative paths were in
turn foreclosed. In short, it demands that we consider critically the dynamic relationship
between entrepreneurship and its place in time.
One important step toward re-historicizing research on entrepreneurship is to re-
consider how the intellectual history of the field is currently framed. Many researchers in
the area think of the field as emerging in the 1970s and 1980s and conceive of its intellec-
tual agenda as relatively new. This self-conception is reinforced by the fact that much of
the older scholarship is not easily available in the online databases and guides to research


in the field that entrepreneurship scholars typically use to review literature. Though it
may take more effort by researchers to ferret out the older scholarship, re-engaging the
rich and long intellectual history of the field is important for multiple reasons. It rein-
forces the legitimacy and gravity of entrepreneurship as a field of social scientific investi-
gation and as a tradition of thought that extends back to at least the nineteenth century.
It also offers researchers access to a broader set of theoretical concepts and studies than is
available by examining the current literature alone. In addition, it is especially important
to examine historicist modes of research that consider the entrepreneurial process at the
regional, industry, social and economic levels through time.
Another crucial step toward re-historicizing the field would require expanding the
range of methodologies available to researchers, especially as they ask multi-level ques-
tions about entrepreneurial processes. Too often, mainstream entrepreneurship research-
ers today envision the field as making progress and gaining legitimacy only through
hypothesis testing using quantitative data and ceteris paribus methods that focus on the
individual and sometimes the firm. Such research clearly has an important and central
place in the field and is capable of addressing a particular (but limited) range of research
questions. The effort to study consistent units of behavior or organizational types allows
a certain analytical rigor, but its conclusions must be ultimately understood to be specific
to a time and place. As historicists recognized, the form and nature of entrepreneur-
ship evolved with the economic system. Methods sensitive to exploring the variation in
entrepreneurial behavior and form are hence a crucial complement to conventional social
scientific approaches when studying the phenomenon over time, especially in addressing
some of the ‘bigger’ questions about entrepreneurship that conventional social scientific
methods and assumptions are poor at addressing. Such issues as the role of entrepreneur-
ship in shaping industrial and economic change, the variety of entrepreneurial behavior
and organizational forms, and the relationship between entrepreneurship and other facets
of economic institutions and behaviors are often best and most expansively addressed
through historical methods that examine entrepreneurship as a complex, socially and
historically embedded phenomenon.
Indeed, the long intellectual history of the field illustrates that entrepreneurship itself
emerged as a heterodox concept in part because no single school or method seemed to
adequately capture the creative role of entrepreneurship in the economy. Entrepreneurial
thought and research has in turn flourished most when the field embraced not unitary
methodological or theoretical strictures but when it engaged a thoughtful eclecticism
in considering the nature of entrepreneurship and its place in the economic world.
Historicism has been a crucial element of that eclecticism and will once again play a criti-
cal role if entrepreneurship research re-engages the questions of the links between indi-
vidual behavior and broader processes of change and development within the economy.
ACKNOWLEDGEMENT
The author would like to thank Hans Landström, Franz Lohrke, Geoff Jones, Jeff Fear
and audiences at the Academy of Management and Babson Entrepreneurship Research
Conference for insightful comments on earlier drafts of this chapter.


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16. Culture, opportunity and entrepreneurship
in economic history: the case of Britain in
the twentieth century
Andrew Godley
INTRODUCTION
For much of the twentieth century, Britain was thought to be imbued with an anti-
entrepreneurial culture (Aldcroft, 1964). From the aftermath of the First World War
until the late 1990s, economic performance was viewed as disappointing and entrepre-
neurial inadequacies were first to be blamed. The concerns were exaggerated because of
the legacy of being the first industrial nation. It is this remarkable juxtaposition of both
exceptional entrepreneurial success and subsequent entrepreneurial failure that makes the
case of British entrepreneurial culture in the twentieth century so important to any wider
understanding of the relationship between culture and entrepreneurship today.
In 1900 British firms enjoyed a 35 per cent share of the global trade in manufactured
products, when Britain had less than 2 per cent of the world’s population. This eco-
nomic success was the foundation of global political power. Power brought rewards for
Britons in the early twentieth century, most obviously among the entrepreneurial and
capitalist classes. In 1913 the richest 0.1 per cent of Britons received over 12 per cent of
the nation’s income! Economic success had emerged through Britain’s early dominance
of world textiles markets – cotton and woollen – and then the iron and steel industry,
coal, shipbuilding and other pre-mass production forms of mechanical engineering, the
so-called the ‘staple’ industries. But by the beginning of the twentieth century, British
economic success was increasingly tied to investments in overseas markets (Matthews
et al., 1982; Atkinson 2002). It is these two themes – of specialization in the staple
industries and overseas investments – that must be emphasized in order to understand
the economic and cultural contexts of entrepreneurship in Britain in the twentieth
century.
By 2000 Britain enjoyed only a 6 per cent share of world trade in manufactures,
barely one-sixth the share at the century’s beginning (Economist, 2005). With the dis-
appearance of the staple industries, Britain, the country of the world’s first industrial
revolution and the global superpower of 1900, had been relegated to the second divi-
sion of national economies. In what was seen as a great indignity in the UK, Italians
celebrated Il Sorpasso in 1990, as the GDP of Italy overtook that of the UK for the first
time since the days of the Medici. The 1992 ejection from the European Exchange Rate
Mechanism seemed to be the culmination of almost a century of economic weakening.
Of course, British households were many times richer than they had been at the century’s
363

beginning, but such was the deterioration of Britain’s rank in the world order, that the
overwhelming consensus was that the country had somehow failed during the twentieth
century.
Influential commentators penned titles like The British Disease (Allen, 1976), How
British is the British Sickness? (Brittan, 1978), and ‘The slide of Britain’ (Porter, 1990,
pp. 482ff.). But then in the final few years of the century an economic renaissance appeared
to take place, as British economic growth accelerated. Suddenly the entire framework for
interpreting Britain’s twentieth-century economic experience was transformed. What
was it all about, after all, if not a story of decline? Although its determinants still remain
subject to considerable debate, this very recent transformation in British economic for-
tunes demands that economic historians begin to reinvestigate the traditional interpreta-
tion of relatively poor British twentieth-century performance, the alleged failure of its
entrepreneurs, and their apparently anti-entrepreneurial culture.
So, free from having to account for inexorable relative economic failure and its inferred
entrepreneurial deficiencies, this survey departs from the conventional treatments of the
topic. Instead we begin with a discussion of British entrepreneurship and culture, before
rehearsing core themes from widely accepted theories of entrepreneurship, and then
proceed to surveying the areas of significant entrepreneurial activity in a more or less
chronological fashion. The conclusion then offers some thoughts on the implications of
new theory for historical research on entrepreneurship, and on the increasing need for
entrepreneurship scholars to embrace more historical research.
BRITISH ENTREPRENEURS AND ENTREPRENEURIAL

CULTURE
A summary of the traditional explanation of British industrial lethargy throughout the

twentieth century would underline that Britain’s entrepreneurs have been an obvious and
persistent target. Over the course of the century, the focus of blame has moved from a
fairly general concern with their allegedly poor leadership in what were the emerging
industries of the second industrial revolution, to specific criticisms of apparent failure by
entrepreneurs to invest in new technology, or to adopt improved management techniques.
Explanations of why British entrepreneurs failed to invest in new equipment, techniques,
or organization (and so apparently to forego profits so willingly) often revolved around
allegedly anti-entrepreneurial qualities in British culture. David Landes famously quipped
that British enterprise reflected a:
. . . combination of amateurism and complacency. . . . The British manufacturer was notorious

for his indifference to style, his conservatism in the face of new techniques, his reluctance to
abandon the individuality of tradition for the conformity implicit in mass production. (Landes,
1969, p. 337)
Despite fierce criticism from scholarly historians, Martin Wiener’s claim that Britain
possessed an ‘anti-industrial spirit’ (1981) resonated with politicians and public alike;
it has had a powerful impact on public policy, providing the moral underpinning of 25
years of the promotion of the ‘enterprise culture’. In fact, and despite the criticism, much
evidence has emerged to support one or other of the culturalists’ hypotheses. Although


Culture, opportunity and entrepreneurship in economic history 365
sadly for Wiener, his elegant pitch for the influential but effete elite as the principal retard-
ant has been exposed as somewhat shallow.
Landes and Wiener see this British anti-entrepreneurial culture as essentially non-
rational in the material world studied by economic historians (Landes, 1997). But despite
being the focus of an enormous volume of scholarly research, little economic history has
focused systematically at understanding culture itself. This is partly the result of the intel-
lectual heritage of economics in the subject. Even Doug North’s Nobel Prize-winning
account of how key institutions led to the economic superiority of the West gave little
attention to the interaction of national cultures and national institutional structures
(North, 1990). Indeed, there are few studies that even exploit typologies and models of
culture with anything like the sophistication seen in management scholarship (Hofstede,
2001; Hampden-Turner and Trompenaars, 1993). Outside a few studies exploring the
association between entrepreneurship (or more widely defined economic development)
and religion, or regional values, there remains a reluctance within the subject to embrace
culture as an explanatory variable.
The important conclusion of these few studies is that the differences between British
and other nations’ entrepreneurs ought not to be overstressed. Recent comparative
studies mostly highlight similarities. Where variations are observed, they rarely support
the notion of ‘failure’. Cassis (1997) and Wardley (1999), for instance, warn against
judgments of inferiority among British big business. Berghoff discovered that the entre-
preneurs in British provincial towns closely matched German entrepreneurs across a
range of parameters (Berghoff and Möller, 1994; Berghoff 1995). Although Nicholas
(1999), Rose (1986) and others have debated the relative merits of the persistence of
family control, it was only in the United States that family control ever stopped being the
norm. And even then recent research suggests that family control in the US remains far
more pervasive than generally thought. The implication remains that the most developed
nations had broadly similar familial, regional and corporate norms during the process of
industrialization and growth.
But this relegation of the cultural explanation for British entrepreneurial failure in
the twentieth century to an ever-diminishing residual factor by most economic history
research has been challenged by Godley’s (2001) analysis of the inter-relationships
between culture, immigration and social rigidities, and entrepreneurial aspiration.
Godley compares British and US society at the outset of the twentieth century. British
society had already matured and stabilized by 1900, with powerful social rigidities set in
place. There were fundamental barriers to the supply of entrepreneurs able to bring about
‘creative destruction’. As Kindleberger noted, by 1900 the supply of outsider entrepre-
neurs, with their distinctive cultures, had diminished (Kindleberger, 1964). A wave of
European immigrants during the early and middle decades of the nineteenth century had
contributed many important figures to the Industrial Revolution and was succeeded by
a far larger population of immigrants from 1880 to 1914, but this one was dominated by
East Europeans, who lacked both skills and capital to make any immediate impact on the
British economy – although, as explained below, their role was to be profound indeed by
mid-century.
Moreover, in the early decades of the century, there were relatively few self-made entre-
preneurs in Britain. To be sure, there weren’t many anywhere else. Even in the United
States, the Horatio Alger ideal was exposed as a myth. Senior executives and the leading


business owners were disproportionately drawn from the elite. But the sheer extent of the
rigidity between the main social classes has been a feature of successive studies of social
mobility in Britain. Not only did such immobility retard competitive entry from below,
but without any credible prospect for social ascent, it influenced expectations and values
among the dispossessed. This was to influence persistently low educational attainment
among the working classes, which later became important in explaining low levels of
labour productivity growth. But Godley’s comparison of East European Jews in both the
United States and in Britain showed that as Jewish immigrants assimilated host country
cultural values, their preference for entrepreneurship altered. Those in Britain began
increasingly to opt for craft employment rather than business careers for any given wage
and profit level. With no options for self-advancement, British working class culture rein-
forced its strong and conservative craft values, erecting an additional barrier to pursuing
self-employment. And so with fewer competitive challenges from either immigrants or
from aspirant men from below, Britain’s entrepreneurial incumbents remained in place.
Such relative frigidity among the entrepreneurial class was underpinned by the move to
protectionism from the Import Duties Act of 1932 onwards until the 1970s. Cultural and
regulatory protection allowed the incumbent business-owning families to serve much of
the British market however they wished and with relative impunity for the middle decades
of the century.
ENTREPRENEURSHIP THEORY AND ENTREPRENEURIAL

OPPORTUNITIES
The relationship between culture and entrepreneurship has been fraught with scholarly
contention for over forty years. But the mechanism between entrepreneurship and cul-
tural values can be better understood once the economic function of entrepreneurship
is clarified. After all, it is widely acknowledged that there is much more to being an
entrepreneur than being self-employed. One of the main reasons why entrepreneurship is
valued, and usually commands respect in successful economies, is that entrepreneurship
is a scarce ability. The value of entrepreneurship is reflected in the above-average profits
earned by firms controlled by successful entrepreneurs. Entrepreneurs can appropriate
their personal rewards either through ownership of a firm, or as managers whose success
is recognized by promotion, bonuses, stock options, or other forms of performance-
related pay.
But what is it that entrepreneurs do with this scarce ability? According to Schumpeter
(1939), innovation is the key function of the entrepreneur. Without the entrepreneur,
the rate of innovation would be lower, productivity growth would be smaller, and the
economy would fail to develop as it should (Baumol, 1990). But why is the capac-
ity to innovate so scarce? According to Schumpeter, innovation requires vision and
commitment – vision to imagine an alternative world in which the innovation has taken
place, and commitment to mobilize resources to realize the vision rather than to just to
sit back and fantasize about it. Only a few people with heroic temperament have these
qualities, according to Schumpeter.
Kirzner (1973; 1979) takes a different approach: he argues that entrepreneurs discover
opportunities that could easily be missed. Although not every one has an opportunity to


innovate, many people have an opportunity to arbitrage. In a volatile economy markets

are always in disequilibrium, and people who are alert can always find opportunities to
buy cheap and sell dear. Unlike Schumpeter, Kirzner believes that almost everyone has
the potential to be an entrepreneur. Recognizing opportunities is a function common to
both these writers. From the perspective of the economic theory of entrepreneurship, the
emphasis on the various opportunities acknowledges that the demand for entrepreneur-
ship, as for any factor of production, can vary. While conceptualizing entrepreneurship
as subject to market forces simplifies our understanding of the topic, Eckhardt and
Shane (2003) have underlined that this is a market that rarely settles into any stable equi-
librium.
This is an important observation for our reinterpretation of the role of entrepreneur-
ship in British twentieth-century economic history, because if the market for entrepre-
neurship is assumed to function more or less effectively, for price information to signal
where entrepreneurial endeavour is best allocated, a reasonable interpretation of Britain’s
comparatively disappointing performance is that British entrepreneurs err by acting irra-
tionally: that British culture was indeed somehow disadvantaging entrepreneurs in profit-
seeking activities. As noted above, this has been the over-arching meta-narrative in recent
decades among British economic historians. If however the assumption of equilibrium-
type behaviour in the market for entrepreneurship is relaxed, then very different potential
explanations arise, explanations focusing on comparative differences in opportunities
facing British and American or German or French or other entrepreneurs.
Explanations of relative entrepreneurial performance that depend solely on access to
entrepreneurial opportunities, however, are also insufficient. In a world characterized by
disequilibria, market information is unreliable and uncertainty abounds. Not all oppor-
tunities are, therefore, what they seem. Some may be traps for the unwary. Knight (1921)
emphasizes the risks that are taken by the entrepreneur. No-one can be certain that an
opportunity will turn out well. Risks are subjective, so that different people perceive
different degrees of risk in the same opportunity (Casson, 1982). This subjectivity (or
‘cognitive differences’ to adopt the term preferred in the management literature) high-
lights the difference between being an entrepreneur and being a successful entrepreneur.
Entrepreneurs innovate and take risks, but successful entrepreneurs discriminate between
good risks and bad risks. They do not need to discriminate perfectly; they simply need to
do it better than competitors in the same industry.
The decisions of entrepreneurs, when taken collectively, affect the aggregate perform-
ance of the economy. It is sometimes supposed that from a social perspective, more entre-
preneurship is always desirable, but this depends upon how entrepreneurship is defined.
If defined as innovation, then it is certainly possible to ‘have too much of a good thing’
because excessive innovation can artificially reduce the supply of traditional products,
and subject working lives to unnecessary change. It is also obviously possible to have too
much risk. Whilst some risk is unavoidable in any innovation, successful entrepreneurs do
not incur avoidable risks, however bold and charismatic they may appear as a result.
The one thing that it is impossible to have too much of is good judgment. Casson, like
Schumpeter and Kirzner, assumes that market volatility creates entrepreneurial oppor-
tunities. While Eckhardt and Shane (2003) have recently used the term ‘discovery’ to
account for the perception and valuation of entrepreneurial opportunities, Casson used
the term ‘judgment’ (Casson, 1982). Judgment has to be involved whenever a decision is


made without access to any generally agreed rule derived from publicly available, vali-
dated information (Casson and Godley, 2007). Good judgment trades off the risks of
missing good opportunities through failure to innovate against the risk of making mis-
takes by making the wrong sort of innovation. A successful entrepreneur with good judg-
ment takes only the opportunities that are really profitable. Provided that social incentives
are properly aligned by a competitive market system, private profit will be associated with
enhanced social welfare and higher performance. The market for corporate control allo-
cates the best entrepreneurs to the most responsible jobs, by recruiting the most reputable
entrepreneurs to run the biggest firms in their field. Badly performing entrepreneurs who
have lost reputation are replaced; if the board of directors does not dismiss them then
the firm will be taken over as shareholders sell out to the highest bidder. The essence of
entrepreneurship, therefore, is the exercise of entrepreneurial judgment.
Consider what happens when relevant information is pervasive and cheap. Then firms
are able to establish reliable algorithms of how to manage a set of functions, and the
business activity represents the classic small firm in perfectly competitive markets. But
should some exogenous event cause turbulence in the economy, information may no
longer be either cheap or easily available. Any transaction then becomes risky, because,
in the absence of credible price information, no single entrepreneur can know what other
market participants are doing.
This approach shares many similarities with Eckhardt and Shane’s view that entre-
preneurial opportunities derive from two generic sources: exogenous shocks (such as
changes in policy, societal shifts on the creation of new knowledge) and information
asymmetries. Casson’s approach, in fact, is less concerned with separating differences in
their sources, but more with examining the implications for entrepreneurial behaviour of
these two determinants of entrepreneurial opportunities. Thus exogenous events create
market disequilibria, leading to the rapid depreciation in the value of the existing stock
of knowledge and market institutions.
But the judgment-intensive entrepreneur minimizes risk through a twofold response
to increased information asymmetries – first, by developing a framework to interpret the
impact of the exogenous shock, and, second, by investing in gaining additional, relevant
information. Superior frameworks lead to superior outcomes for any given investment,
of course, but developing such a judgment-intensive framework depends on testing the
self-perception of complex and inchoate commercial situations, and so requires efficient
information acquisition. The acquisition of additional information at times of great
uncertainty, therefore, is important not only to reduce asymmetric information in and of
itself, but also to assist with the developing and testing of new interpretative frameworks.
Both the need to acquire specialist information and the need to refine interpretive frame-
works lead entrepreneurs to seek out the opinions of other information gathering special-
ists. Thus, Casson and Godley have recently emphasized that one of the most striking
features of entrepreneurial behaviour, the strength and persistence of entrepreneurial
networks, is a response to the need to refine and test interpretative frameworks as well as
to ensure privileged access to sources of information (Godley and Casson, 2010). These
specialized groups, expert in particular fields, with access to privileged sources of infor-
mation, are also more likely to find that they can command privileged access to funding,
as investors follow their trails.
Entrepreneurship then, certainly in a larger historical context, is about far more than


firm formation and venture capital funding (the two features so beloved of manage-
ment scholars today) and can be most frequently located in those environments that
call for the greatest intensity of judgment. Judgment is of course not an observable
variable. But given the reasonable assumption that entrepreneurs need other entrepre-
neurs for privileged access to information, testing and validating their interpretative
frameworks, as well as for specialized sources of venture financing, the presence of
entrepreneurial networks is likely to be positively correlated with entrepreneurial judg-
ment.
For this summary of history, culture, opportunities and entrepreneurship, the focus is
on the case of Britain in the twentieth century (albeit with extensive international com-
parison). It fashions an explanation for entrepreneurship’s apparent long-term secular
decline and then sudden re-emergence at the century’s end. Posing the entrepreneurial
function as a series of investments in information acquisition and developing a level of
expertise at interpreting complex commercial situations suggests that entrepreneurs and
entrepreneurial networks have high sunk costs. It would be rare for an expertise devel-
oped in one sector to be relevant when transferred to another. This may be construed as
an entrepreneurial ‘failure’, but only in the sense that distinguished physicists, say, might
be castigated for being flawed violinists. The extent to which British entrepreneurial net-
works were able to diversify their expertise bases into higher value areas also depended
on external circumstances. This approach, with an explicit assumption that the market
for entrepreneurship is typically characterized by disequilibrium, therefore follows
Eckhardt and Shane in emphasizing the importance of opportunities in explaining the
disappointing British entrepreneurial outcomes, rather than the traditional economic
historians’ emphasis on some as yet not well described cultural norms. But this approach
far from ignores the role of culture. Networks loom large in this explanation. Network
membership is strongly correlated with some significant (although non-suffocating) level
of cultural homogeneity (Granovetter’s famous ‘weak ties’, 1973). Over historical time
and space, these culturally specific networks are observable. As the chapter outlines,
British entrepreneurs throughout the first three-quarters of the twentieth century found
themselves both facing situations where the value of the stock of their entrepreneurial
expertise suddenly depreciated because of a series of exogenous events, and yet (with rare
exceptions) where their cultural capital, sunk in pre-existing networks, was insufficient to
allow successful diversification until the century’s end.
ENTREPRENEURSHIP, NETWORKS AND BRITISH CULTURE

IN THE TWENTIETH CENTURY
When Royal Dutch Shell acquired Weetman Pearson’s oil major, Mexican Eagle, in
1919, the Shell Group had engineered control of Britain’s most valuable company (Bud-
Frierman et al., 2010). It was one of the most dramatic corporate events in the new
century. It also highlights where so much British entrepreneurial activity was located.
British overseas investment had attained wholly unprecedented levels by the First
World War. Never before nor since has any nation committed such a large part of its
economic resources to activities overseas (Edelstein, 2004). The link between domestic
consumption and overseas investment was abundantly clear, for it was such prodigious


levels of British investment in foreign economies that led to the creation of transport
networks and infrastructure necessary for integrating far flung places into the world
trading system, enabling the world’s resources to be productively deployed. It was invest-
ment in railways, ports and harbours, in tramways and electric utilities, in plantations
of tea, coffee, cotton, rubber and cocoa, in mines and oil wells, all around the world,
within and outside the Empire, that created the supply lines, the institutional framework
for market exchange, as well as the principal economic activities themselves that led to a
level of global economic integration that has only very recently been recaptured.
In 1913 British domestic industry remained especially focused on the traditional staple
industries; 60 per cent of British exports still came from the cotton and woollen textiles,
coal, iron and steel and machinery sectors (Magee, 2004). But these were all sectors that
depended upon a high labour content of production. They were all sectors that were
vulnerable, therefore, to either cheaper labour or substitution through mechanization.
Moreover the sectors that were growing in prominence in the world economy were sectors
that relied on both a much higher scientific content of production and far more sophis-
ticated managerial practices – most obviously in electrical engineering, chemicals and
advanced mechanical engineering sectors.
The world’s leading producers of electric power generation equipment, of synthetic
dyestuffs and automobiles depended upon a qualitatively superior level of engineering
knowledge in product and process design. Compared with Britain’s leading firms in the
staples, the technological content of production at Siemens’ vast factory site in Berlin, or
the move to systematic research and development at Bayer or BASF in the chemicals and
pharmaceuticals industries, or the intensity of the flow of production at Ford’s Highland
Park manufacturing plant, revealed a level of inferiority that shocked British commenta-
tors of the day. Britain’s share of exports from vehicles and electrical goods was barely 1
per cent in 1913. And while British chemicals output and export share was higher, British
chemicals firms were largely focused on increasingly outdated products and processes
(Lindert and Trace, 1971).
In these technologically advanced sectors, first movers pursued vertical integration
strategies and developed strong managerial capabilities in order to compensate for the
absence of specialist market-making intermediaries in what were novel markets. Given
the British specialization in older, more labour intensive industries, it is unsurprising that
overall British labour productivity had been overtaken by the new technological leaders
of the United States and Germany by 1913 (Broadberry, 1998). But it was also the case
that with intermediaries already established in these sectors, British entrepreneurs were
not forced to develop managerial capabilities in the same way as US and German tech-
nologically advanced firms were. Thus, the prevailing theme of British twentieth-century
economic history was set. As other nations specialized in the more technologically inten-
sive sectors of the second industrial revolution, British firms and entrepreneurs appeared
unable to make the transition from their specialization in the lower productivity staples
into the higher productivity new sectors. When British entrepreneurs emerged in these
sectors, they typically were able to enjoy success only when protected from the full force
of competition. As levels of protection began to disappear in the 1970s and 1980s,
so British weaknesses here were exposed, and these firms failed (Godley and Casson,
2010).


ENTREPRENEURSHIP, CULTURE AND OPPORTUNITIES: 1900

TO 1930
British entrepreneurship has largely been criticized because of the relatively poor per-
formance of the British domestic economy, especially during the 1960s and 1970s when
other economies began to overtake Britain with great regularity. But at the outset of the
period perhaps the greatest concentration of entrepreneurial activity was not to be found
in the domestic economy at all, but rather overseas. This was not simply the exploita-
tion of privileged access to the Empire, although, of course, British firms were actively
engaged in Imperial markets (Hannah, 1980, pp. 61–3), but rather the concentration on
ever more sophisticated business operations throughout the entire globe, notably, like
Weetman Pearson, in Latin America.
Of course Britain’s entrepreneurs, like their American and German equivalents, were
active and successful in the domestic economy as well. Broadberry’s study of compara-
tive productivity reveals that British firms held comparative advantages in several staple
industries, most notably in cotton textiles in 1913 (Broadberry, 1998). As already noted,
however, these sectors tended to be more labour intensive than the newer industries. With
British labour comparatively expensive, and with mechanization reducing the advantages
of skill, British comparative advantage leached away – to Germany in coal mining as
early as 1911, for example. Other countries found their natural resource endowments lent
themselves for more efficient use. In iron and steel, for example, it was apparent by 1900
that British ores were located in relatively expensive areas. In a world of scarce entrepre-
neurial talent, British home-based entrepreneurs were concentrated in what were, at the
time, sunset industries. Their routes to increasing profitability were not always obvious
or sustainable.
In the past economic historians have criticized what was comparatively poor invest-
ment by British entrepreneurs in the newer industries of mechanical engineering and
automobiles, the industries of the second industrial revolution (Alford, 1988). These were
sectors where competitiveness depended on creating and exploiting new knowledge, and
the new knowledge was emerging first in the US and Germany, not Britain. Even worse
from the perspective of critics, British entrepreneurs were not even notably successful in
gaining second-mover advantages, compared with French, Italian and Japanese entrepre-
neurs later in the century.
From the perspective of the entrepreneurs themselves, however, it is easier to under-
stand why there was reluctance to embark on wholly new ventures in these sectors, where
their existing stock of expertise carried little value and where their traditional networks
of information gathering carried little relevance. Given such high sunk costs by entre-
preneurs in information acquisition, the costs associated with embarking on ventures in
the newer industries may have seemed prohibitive. In particular, in the face of declining
profits at home, British entrepreneurs were faced with a very obvious alternative in invest-
ing in more profitable opportunities overseas (Jones, 1994). The judgment-intensive,
decision making entrepreneur in Britain before 1930 was faced with a far greater range of
opportunities from internationalizing than competitors elsewhere, and a far greater likeli-
hood of profitable activities there than by trying to compete with established first-mover
German chemicals and electricals or US automobiles and mechanical engineering firms.
By 1914 the range of industries British entrepreneurs were investing in around the


globe had increased markedly. Late nineteenth-century foreign direct investment was
very much concentrated in railways, land ownership and mining. Although these three
sectors still loomed large by 1914, other sectors had together increased their share of
British foreign direct investment markedly. Corley’s (1994) sectoral breakdown of British
overseas firms shows that oil companies represented over 5 per cent of the total by 1914.
Overseas banking and insurance companies were 4 per cent of the total. Various utilities
companies, from tramways and electric power station builders, to gas and water work
producers, together accounted for nearly one-tenth of the total. These newer investments
in higher value adding sectors were together at least as significant as the more traditional
entrepreneurial ventures by then.
Collectively this role of overseas entrepreneurship was enormously important. The
stock of British foreign direct investment was 45 per cent of total global foreign direct
investment in 1913. British overseas investments were, in other words, the key entrepre-
neurial route for integrating resources into the global economy at the time, not the world’s
emerging giants in automobiles, chemicals and electricals.
These British entrepreneurial teams would, therefore, move from one overseas venture
to the next, reconstituting themselves as appropriate, bringing in new experts, dropping
those whose expertise was now less relevant. During the early decades of the twentieth
century they became ever more global in focus, not only in the regions of the world
they operated in, but also in the individuals brought in, with American and European
specialists recruited into the teams where necessary. Much of this overseas activity was
property-based entrepreneurship, and much required high sunk costs in location-specific,
indivisible assets. These were typically large, complex projects that required specialist
expertise and access to sophisticated sources of venture capital.
As a new opportunity emerged, an entrepreneurial team formed and then sought
first tier financing by selling equity stakes on the London Stock Exchange. Despite the
obvious high risk associated with placing new ventures, there was evidently sufficient
demand from investors. Companies would then return to the market for any subsequent
round of financing. Compared with what is overwhelmingly a private market for venture
capital today, the venture capital market in the early decades of the twentieth century
appears to have been both more sophisticated and transparent as well as successful in
raising what were very large amounts (Corley, 1994).
These entrepreneurial networks of (mostly) British businessmen remained highly
active during and after the First World War right through to the 1970s (Jones and Wale,
1999; Jones, 2000). As the world economy developed, so British foreign direct investment
switched increasingly from older ventures (building and managing overseas railways, for
example) to new (Corley, 1997). They proved to be an optimal organizational response
to the worldwide demand for complex project management skills exercised over long dis-
tances in an era when relatively poor communications meant corporate head offices were
unable to monitor such investments.
Such flexibility and loose and efficient organizational structures, however, depended on
a relatively stable institutional structure for their viability. These entrepreneurial ventures
were knowledge-transferring, market-creating organizations. But once projects were
up-and-running, dedicated operators and specialist intermediaries took control of the
resulting revenue flows. The geographically dispersed resources easily became integrated
into the existing world economy and its institutions supporting international trade. They


remained dependent on what was a sophisticated institutional structure supporting con-

tractual rights. But when the turmoil of the First World War was followed by the greater
turbulence of the 1930s global crisis, they were unable to internalize markets. As transac-
tion costs became too high, they had no alternatives and were forced to withdraw. The
existing stock of information and institutional structures were unable easily to adapt to
the changing global environment, and the number of genuine opportunities declined.
Initially, in fact, the British response to regional shocks was to search for alternative
entrepreneurial opportunities and to relocate as market activity was foreclosed. For
instance, from 1917 to 1922, first Russia, then the Ottoman Empire, Ireland and Mexico
all plunged into civil war and conditions for international trade deteriorated. British
entrepreneurs responded by moving to newer regions of the globe and pursuing emerg-
ing opportunities. They were responsible for much of the development of the eastern
seaboard of China during the 1910s and 1920s, and the rapid economic growth in the
short-lived boom in the Middle East in the 1920s, for example (Plüss, 2004; Jones, 2000).
But during the 1930s profits plummeted. Although income from British foreign direct
investment remained broadly stable in real terms between 1907 and 1927, it fell from then
to 1938 (Corley, 1997). After the Second World War, large swathes of the globe put up
the shutters again. South East Asia, China, Africa and the Middle East all declared their
own intifas against the previously ubiquitous British entrepreneur.
Thus, focusing on overseas investments suggests that there was no failure in British
entrepreneurial culture during the twentieth century. Rather there was something of a
bifurcation in activities. Previously successful areas like the staple industries found the
competitive environment increasingly harsh and increasingly sought government protec-
tion (Bamberg, 1988). But before the 1930s, opportunities overseas increased. British
entrepreneurs with long histories and vast accumulated expertise (notably of course
through developing global markets for the staple industries) developed an institutional
structure for their entrepreneurial ventures overseas. Their great contribution to the
world economy was not especially in the realm of new technology, but in drawing together
skills and finance to initiate and complete complex projects far away from the centres of
financial power. These were novel solutions to the dilemmas posed by the risks of such
long distance trades suffering from opportunistic behaviour by agents in far flung places.
The longstanding criticism of the British entrepreneurs in the twentieth century, that
they failed to invest in the new industries of automobiles, chemicals and electricals, is, in
other words, a simple misinterpretation of the situation. Why should they have ventured
into areas where they were particularly at a disadvantage compared with American and
German technological leaders and when British entrepreneurial networks were enjoying
such striking success at developing and exploiting overseas ventures?
ENTREPRENEURSHIP, CULTURE AND OPPORTUNITIES: 1930S

TO 1970S
As far as the wider picture of British entrepreneurship is concerned, the epoch-making

events occurred elsewhere. The global economic crisis of the 1930s and the subsequent
war and decolonization meant that British outward direct investment was threatened.
Overseas assets were sold, often at a loss, and funds repatriated into a stagnant British


economy. The Pearson Group, for example, switched focus from being one of the world’s
most entrepreneurial oil majors, to becoming a London-based investment trust. No
doubt the directors’ lunches improved, but Pearson’s entrepreneurial dynamism fizzled
out (Bud-Frierman et al., 2010). Other overseas groups with fewer opportunities to cash
out also mutated.
The twin strike on British entrepreneurship of an uncompetitive currency after 1926
and then the global economic crisis of the 1930s simply undermined the ability of entre-
preneurs to act in the two core areas of comparative advantage: the traditional staple
industries at home and the newer overseas focused entrepreneurial ventures. The expertise
so carefully acquired by the key entrepreneurs and their networks over so many years had
suddenly lost its value. New entrepreneurs and new networks needed to emerge. And, in
what was an unprecedentedly difficult international environment during the 1930s, those
new networks began to prosper at home because after the passing of the 1932 Import
Duties Act, Britain became a highly protected market.
The conventional treatment of the 1930s in economic history textbooks is to empha-
size the emergence of important new firms and sectors in the British economy. Although
unemployment still reached almost 30 per cent at the worst moments, the British economy
seemed to weather the 1930s crisis better than elsewhere, with entrepreneurs like Morris
and Austin in the automobile industry and the successful merger of the Nobel and
Brunner Mond chemicals firms to form ICI (in 1926). Although this reflects important
shifts in economic activity, we should be cautious, however, in embracing such an inter-
pretation wholeheartedly. By 1939, the staple industries still dominated British output
and exports, and the combined output of the much vaunted British motor car industry
and the electrical engineering industry amounted to less than 5 per cent of total manufac-
turing output. The new infant industries remained protected but relatively insignificant.
What can be stated is that the impact of rising real living standards from 1933 onwards
created new demands, and many British entrepreneurs were not slow in meeting them.
The entrepreneurial response to the growth in consumer demand in Britain continued
a long trend. Earlier innovations in branded consumer goods saw the rise of the power-
ful British tobacco industry, in particular W.D. and H.O. Wills, which amalgamated with
others to form Imperial Tobacco (Alford, 1973; Hannah, 2006). Other companies devel-
oped strong brands in foodstuffs and confectionery, beverages and branded medicines in
the first half of the twentieth century. Rank, Huntley and Palmers, Horlicks, Colman,
Cadbury and Rowntree in foodstuffs, Guinness in beverages, and Beecham in household
products all embraced novel marketing campaigns and built up strong brands. But,
perhaps tellingly, all of these family firms were managed by second, third or even later
generations as early as the first decades of the twentieth century.
More pertinently for new entrepreneurial networks, increasing consumer demand
meant increasing entrepreneurial opportunities to meet this growing demand for new
services. Here the trend was for genuine new entrants – in catering and retailing, in trans-
port and in entertainment. Nevertheless the genuine entrepreneurial entrants in these
sectors, like their counterparts in automobiles, electricals and chemicals, were unable to
build firms and industries with significant productivity advantages over German and
American rivals (Broadberry, 1998; 2006). During the protected 1930s, 1940s and 1950s
this largely did not matter. The British market had become a largely domestic concern
and British entrepreneurs were able to enjoy success in meeting domestic needs. As tariff


barriers began to fall from the 1960s and international competition re-emerged, however,
British frailties in the tradable sectors became exposed.
The outbreak of war in September 1939 heralded necessary encroachment of govern-
ment control over ever greater swathes of the British economy. Along with the entire
private sector, entrepreneurship was squeezed. The post-war period began in Britain with
a leitmotiv that was antipathetic to free market activity. The continuing problems of coal
and steel prompted the Labour Government to nationalize the industries to both protect
remaining jobs and improve the management. Similarly the continually underperforming
railway companies were forced to come under Government ownership. With the crea-
tion of the Welfare State, very much higher marginal tax rates, and the adverse effect on
planning from the ‘stop-go’ demand management policies, the post-war environment for
entrepreneurs was very different.
Other economies in Europe also pursued the model of extensive state involvement
in the economy and experienced successful growth records. The French most notably
enjoyed les trente glorieuses from the late 1950s as State-led restructuring brought mana-
gerial advantages and additional investment to its preferred sectors. But while the British
economy grew at an unprecedented rate during the late 1950s and early 1960s, the British
experiment with central planning was less successful. The Golden Age, characterized by
Big Government, Big Business and Big Unions, began to sour in the British economy
during the 1960s and 1970s.
Yet within this standard treatment of faltering post-war economic maturity, entrepre-
neurial inertia and a relative decline in living standards, there remained an active entre-
preneurial hinterland. With annual economic growth at 3–4 per cent, such was the rate
of change that entrepreneurial opportunities inevitably emerged. Gerald Ronson, one of
Britain’s leading property entrepreneurs since the 1960s, suggested it was an easy time to
be an entrepreneur because there was so little competition.
Ronson was one of 70 to 80 Jewish property millionaires identified in Oliver Marriott’s
The Property Boom (1967), who collectively transformed much of the British commercial
property landscape during the 1950s through to the 1970s. They were the most dynamic
entrepreneurial presence in an otherwise sluggish private sector. The most spectacularly
successful of all was Charles Clore, whose search for new property deals brought him to
realize that traditional and conservatively managed retail chains were sitting on enor-
mously undervalued property portfolios and were reluctant to allow their asset base to
be realized. Clore decided that they should be forced to and so pioneered competitive
takeovers in Britain with his hostile acquisition of the large, integrated shoe company
J. Sears.
Sears in 1953 could be described as a stereotype of the conservatively managed, third
or fourth generation British family firm; its entrepreneurial phase had finished several
decades before (Jefferys, 1954). It was one of Britain’s largest firms and dominated shoe
manufacturing, with the largest shoe factory in Britain. Its undervalued property portfo-
lio of 920 shoe stores (in High Streets throughout the land) was the attraction to Clore
(Clutterbuck and Devine, 1987, p. 64). The 1948 Companies Act provided the legal struc-
ture for transfers of share ownership, but until Clore, no one had tested the legitimacy of
contested takeovers. The culture and tradition of the City was that if the target company’s
board did not agree to the takeover, minority shareholders would not accept an offer. By
appealing directly to shareholders and offering them an attractive price, Clore introduced


the market for corporate control into Britain, after having become aware of the idea
while in the United States. He went on to repeat the trick several times and so indirectly
became Britain’s leading retailer during the 1960s. Moreover, the demonstration effect
prompted others to hunt for publicly listed firms, where management seemed chronically
unable to generate any reasonable profit from their asset bases. The ultimate knock-on
effect of Clore’s innovation on the British economy was enormously significant. Clore’s
reward was a huge personal fortune but popular infamy. By the early 1970s, the property
entrepreneurs appeared to be the only group in society (apart from pop stars and football
players) with the Midas touch. But unlike Ringo Starr or George Best, entrepreneurs
plumbed new depths of unpopularity.
Much of British productivity growth from the 1950s through to the 1980s came from
the substantial invasion of American multinationals (Godley, 1999; 2003; 2006; Godley
and Williams, 2009a; 2009b). This mostly caused indigenous British business to lose out,
as British entrepreneurs were unable to compete with US manufacturing and service
standards. Elsewhere, however, British entrepreneurship gained, though in a wholly
unanticipated manner. The creation of the Eurobond market was the catalyst that enabled
London to recapture its position as the world’s leading centre of international finance
and the role of American multinational subsidiaries was crucial. Siegmund Warburg had
pioneered the concept of firms issuing dollar-denoted bonds as an innovative use of the
pool of offshore dollars. But President Kennedy’s Interest Equalization Tax (1963) along
with the Foreign Direct Investment Program (1968) required US corporations to finance
overseas investment by overseas borrowings. Eurobond issues rose dramatically in conse-
quence from $348m in 1963 to £5,508m in 1972 (Ferguson, 2009; Roberts, 2001).
The City of London had stagnated in the years since 1930. Investment banking had
diminished in importance and British positions in international trade had deteriorated,
so there was relatively little to do. Banking had also become heavily regulated. Where
innovation was occurring, with Clore’s property-related activities, or with Warburg’s
creation of the Eurobond market, participation was restricted to a small group of
insiders – the entrepreneurial networks. The London Stock Exchange, formerly the locus
of so much dynamic venture capital funding for overseas investments before the 1930s,
had sacrificed competitive behaviour for comfort. Overseas ventures had collapsed. In
Michie’s history of the London Stock Exchange, the chapter covering the 1950s is enti-
tled ‘Drifting towards oblivion’ (Michie, 1999). The Eurodollar and Eurobond markets
lifted the City out of its torpor.
This was too late for British entrepreneurship to benefit from any of the technology
bubbles in the American stock markets during the 1950s and 1960s. Without any equiva-
lent of the active US Over-the-Counter securities trading market, there were almost no
Initial Public Offerings in electricals in Britain during the late 1950s and early 1960s.
New issues to young electrical companies in the US peaked at $135m and $140m in 1959
and 1960 respectively (O’Sullivan, 2006). In Britain there were successful diversifications
by the dominant and long established electricals companies into consumer appliances
(AEI developed their ‘Hotpoint’ brand), but the entrepreneurial developments met with
only short-lived success. A.J. Flatley gained some prominence for novel clothes drying
machines and John Bloom some notoriety for his electric washing machines, but neither
entrepreneur could match the market power of the large incumbents and so they withdrew
in 1962 and 1964, respectively (Corley, 1966, pp. 55–61). The dead hand of protectionism


short-circuited competitive entry and there was simply no equivalent of the American
electronics revolution that ultimately led to the modern computer industry there.
Outside the stultifying effect of government control, entrepreneurs remained active
in the postwar ‘Golden Age’, most spectacularly in property, but also in transforming
British retailing and pharmaceuticals. Entrepreneurs in Britain’s traditional overseas
markets struggled against the forces of decolonization and nationalist economic poli-
cies. One who kicked against this trend was Tiny Rowland, who built up Lonrho, but
so aggressive was his approach in sub-Saharan Africa that Conservative leader Edward
Heath described him as the ‘unacceptable face of capitalism’ and was widely lauded for
doing so. No doubt Rowland deserved vilification. But the reputation of entrepreneur-
ship was at a low ebb. For as the economic fortunes of most began to stagnate in the
1970s, the politics of envy dictated that the successful few were vilified. There was no one
to champion the entrepreneurs’ cause. That such a high proportion of the successful few
at this time were second or third generation Jewish immigrants prompted them to adopt
low profiles. In obituaries in the British press, Jewish magnates were described principally
for their philanthropic work. Even then anti-entrepreneurialism meant Britain lost out.
These Jewish tycoons endowed more university chairs in Israel than Britain. Elsewhere
the dynamic, innovative few left in the ‘Brain Drain’, especially for the former dominions,
the United States, and, increasingly, mainland Europe. Emigration’s corollary was the
unprecedented rate of immigration, especially of Asians from the Indian subcontinent
and East Africa, many of whom would become important British entrepreneurs by the
century’s end.
ENTREPRENEURIAL CULTURE AND OPPORTUNITIES IN THE

1980S AND 1990S
In very recent years the role of the state in the British economy has been peeled away
through successive reforms in the Thatcher, Major and Blair governments. The priva-
tization programme was supposed to release entrepreneurial dynamism into older and
mature industries. In fact, more important to the British economy has been the impact of
the resumption of globalization in the 1980s and 1990s. As the South East Asian ‘tiger’
economies and then China became more fully integrated into the world economy, many
British businesses found themselves unable to compete. As the floor on world unskilled
wages fell, so British clothing manufacturing virtually ceased, for example. But British
entrepreneurs were quick to spot the opportunities of managing long-distance trading
relationships with the low-cost producers in these low-wage economies. Indeed, as China
has grown to become the factory of the world, the value adding activity is in the market-
making, not the manufacturing. Suddenly the long dormant British business skills of
international negotiation and managing cross-cultural relationships flourished, as did
the much diminished but never extinguished networks of expertise. The leading retailers
Philip Green and Tom Hunter both rose to prominence through managing their Asian
supply chain, for instance. The continued British presence in Hong Kong provided an
important bridge for business links into China and longstanding connections with India
have powered the ‘offshoring’ move there.
Firm formation continued to rise throughout the 1990s. But in contrast to the 1970s


entrepreneurship was increasingly seen as a desirable option. Close examination of entre-

preneurial attitudes (e.g. Global Entrepreneurship Monitor, 2008) show that in the heady
days of the ‘dot.com bubble’, entrepreneurship became seen increasingly as an attractive
career route. As so often in the past, it was outsiders that represented the driving force,
with many Asian immigrants (especially those expelled from East Africa after 1972) cre-
ating successful businesses.
CONCLUSION
The conventional survey of British economic performance over the twentieth century has
prompted considerable gloom among economists and economic historians and, in con-
sequence, a persistent search for scapegoats. The entrepreneur has never been far away as
a favourite target, and some sort of cultural failing has been a repeated accusation. But
the theory advanced here of entrepreneurship existing outside a stable market equilib-
rium, and so the entrepreneurial function as a series of lumpy investments in informa-
tion acquisition and in collective framework validation efforts can help entrepreneurship
researchers both to better understand the British experience in the twentieth century (for
so long thought to be the classic case of ‘entrepreneurial failure’), and to extend such an
analysis to other countries’ historical experiences.
First, it changes our understanding of British entrepreneurship. This survey began by
giving belated but nevertheless due emphasis to Britain’s role as provider of entrepre-
neurial services to the world in the first half of the twentieth century. This specialization
in transferring knowledge-intensive project management skills into complex infrastruc-
ture or resource-focused investments has been neglected by historians for too long. It
was this entrepreneurial endeavour that powered global economic integration from the
1880s through to the 1920s, not the firms of the second industrial revolution. British
entrepreneurs had developed specialized skills, specific institutional structures and
sophisticated and culturally specific entrepreneurial networks to engage in these activi-
ties. As the profitability of the staple industries in the world’s most advanced economy
began to slacken in the 1900s, British entrepreneurs naturally gravitated toward overseas
opportunities.
Yet fortune was not on their side. The international crisis of the 1930s, the Second
World War, slow post-war restructuring, and then the traumas of decolonization reduced
the value of much of the stock of painfully acquired entrepreneurial expertise. Growth in
the world economy from the 1930s on was increasingly based on high technology manu-
facturing, where British entrepreneurial expertise was relatively thin. Without much use,
these entrepreneurial networks slowly dispersed, or entered sectors where their expertise
carried little favour. Only with the resumption of rapid global economic integration in the
1980s, and especially in the 1990s did British comparative advantage in managing long-
distance international trade reassert itself.
At home the competitive environment deteriorated, partly because of direct effects
of government policy in promoting protectionism and encouraging the cartelization of
British business, but also because of restrictions on immigration and the long acceptance
of grave social divides in British culture. Free from competitive rivalry after 1932, British
incumbent entrepreneurial families and business owners responded predictably and


settled for a comfortable life. Unsurprisingly British relative productivity fell alarmingly
after World War Two and innovative, entrepreneurial types emigrated in droves.
The most significant new group of entrepreneurs to emerge in the middle decades of
the century were a group of East European Jewish immigrants, who largely enjoyed their
career success through exploiting the property market. This was closely bound up with
retailing, and many proved to be exceptional retailers also. As the reversal of protection-
ism continued from the 1980s onward, so entrepreneurship slowly began to renew itself
in Britain: first, in overseas trading and multinational investments, and then finally in the
embrace of new technology at the century’s end.
This chapter has, therefore, sought to demonstrate how entrepreneurial opportunities
ebbed and flowed, prompting appropriate responses from British entrepreneurs at dif-
ferent times. Given Britain’s striking preference for international trade and investment
already by the early decades of the century, its entrepreneurs were acutely vulnerable
to the exogenous shocks that circumscribed globalization during the century’s middle
decades.
This chapter has also emphasized the importance of information asymmetries and the
varying institutional responses to them, with a focus on collective information acquisi-
tion and framework validation. Developed further this ought to produce much richer
descriptions and more robust interpretations of other entrepreneurial behaviour in the
twentieth century; of the divergent outcomes of different ethnic groups in their entre-
preneurial endeavours in the US, for example, or of the remarkably persistent strength
among German entrepreneurs in engineering-intensive sectors, or of Italian entrepre-
neurs in fashion-intensive sectors, for instance.
Entrepreneurship researchers ought to go beyond simply writing better history,
however. As Eckhardt and Shane (2003) have clearly indicated, one important methodo-
logical consequence of explicitly recognizing the limits to assuming any form of equi-
librium in the market for entrepreneurship is that conventional cross-sectional analyses
will provide misleading results. Far more appropriate methods, they contend, for under-
standing and analysing entrepreneurial behaviour must instead be those that embrace
longitudinal analysis. Detailed reconstruction of historical entrepreneurial activity ought
therefore to become ever more important not only for better economic history, but for
our quest to better understand entrepreneurship itself.
ACKNOWLEDGEMENT
This chapter draws on material contained in ‘Britain, 1900–2000’, in D.S. Landes,

J. Mokyr and W.J. Baumol (eds) (2010), The Invention of Enterprise: Entrepreneurship
from Ancient Mesopotamia to Modern Times, New York: Princeton University Press,
pp. 243–72.
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17. Industrial renewal and entrepreneurship in
Sweden: a structural cycle explanation
Hans Landström and Lennart Schön
INDUSTRIAL RENEWAL AND ENTREPRENEURSHIP OVER

TIME
It has been known for many years that the level of entrepreneurship in a society differs
strongly over time. For example, in his historical exposé including ancient Rome, early
China, and, in particular, the Middle Ages and Renaissance Europe, William Baumol
(1990) demonstrated that entrepreneurship behavior in terms of innovative activi-
ties and business development differs significantly from one time period to another.
However, he argued that it is not the supply of entrepreneurs in a society that changes
over time, but the variety of roles to which the entrepreneur’s efforts can be allocated.
Some of these roles can be regarded as productive in the sense of promoting innovation
and business development, whereas others can be considered more or less destructive
and damaging to the economy (e.g. rent seeking and organized crime). The ‘rules of
the game’, i.e. the relative rewards for different kinds of entrepreneurial activities in a
society, in turn, have a profound effect on entrepreneurial behavior in different periods
and societies.
It can also be argued that there is a strong relationship between the growth and dynam-
ics in a society and the level and characteristics of entrepreneurship. For example, Kyrö
(2006) stated that entrepreneurship is a phenomenon that gains in importance in periods
when society experiences some form of ‘transition’, i.e. when ideas of freedom and the
need for a new kind of reality are especially vital for growth. In this respect the dynamics
in society seem to have cyclical variations. For example, the evolution of entrepreneur-
ship, innovation and industrial dynamics during the transition that took place at the
beginning of industrialization in the eighteenth and nineteenth centuries was followed by
an era during which modern society was built on the large corporations and mass produc-
tion that emerged and dominated the western world.
The idea that society follows such long-term cycles or long waves originated in the
nineteenth century (cf. Juglar, 1862; Jevons, 1884), but attracted more attention among
scholars in economics and economic history in the interwar period following the publica-
tion of the observations of the Russian economist Nikolai Kondratiev in the 1920s. The
interest in long cycles vanished during the post-war boom, but reappeared in the 1970s
and 1980s. With the crisis in the 1970s, evidence of long fluctuations increased, notably
due to the work of Christopher Freeman and Carlota Perez (Freeman and Perez, 1988).
Their interest, however, was very much directed toward the appearance of technical inno-
vations and the political framework of the economy. In this respect, the Lund School of
383

Structural Analysis has developed the economics of innovation, from entrepreneurial

activity to structural change at macro level.
In this chapter we follow this vein of thought – society undergoes some form of long-
term cycles, and the characteristics of innovation and entrepreneurial behavior change
over the course of these long waves. Thus, the first aim of the chapter is to explain the
characteristics of innovation and entrepreneurship over time using an intellectual frame-
work of long-term cycles in society.
The theory of long-term cycles follows an intellectual tradition in economic history
based on Schumpeter’s ideas about ‘business cycles’ and the Swedish economist and eco-
nomic historian Erik Dahmén’s theory on ‘development blocs’. We place these theories
in a framework of long structural cycles elaborated by a group of economic historians
attached to the Lund School of Structural Analysis at Lund University in Sweden. As
Schumpeter’s and Dahmén’s reasoning is extremely important for our understanding,
the second aim of the chapter is to present the ‘business cycles’ and ‘development bloc’
theories in greater detail, and in this sense the chapter traces the intellectual roots of the
idea of long structural cycles.
The contributions of the chapter are:
● A detailed elaboration of the theories behind the reasoning of long structural

cycles in society, including Schumpeter’s theory of ‘business cycles’ and Dahmén’s
argumentation in his theory of ‘business cycles’.
● On the basis of these theories to discuss the long structural cycles identified in the
Swedish economy since the mid nineteenth century, in which industrial society
exhibits a pattern with periods of positive transformation pressure followed by
rationalization and negative pressure ending in a structural crisis.
● An explanation of cyclical variations in innovative and entrepreneurial activities in
‘transformation’ and ‘rationalization’ periods.
The chapter is divided into six sections. After this introduction, the next two sections
elaborate on the life and contributions of Joseph Schumpeter, and discuss in detailed his
book Business Cycles, published in 1939. A presentation of Erik Dahmén’s ‘development
bloc’ theory follows. The next section provides a detailed description of how the Lund
School of Structural Analysis has used the ‘development bloc’ theory in the context of
long-term cycles and empirically developed it in a Swedish context. Finally, the chapter
ends with some remarks on the relationship between cyclical variation, and innovative
and entrepreneurial activities in society.
JOSEPH SCHUMPETER – LIFE AND CONTRIBUTIONS
The end of the nineteenth century was characterized by the emergence of new indus-
tries and the building of modern enterprises, and many authors claimed to foresee the
death struggle of small firms in the economy. However, despite the prevailing beliefs,
Joseph Schumpeter was convinced that a unique and central factor existed in economic
activity – the entrepreneur – who was the key figure in economic development and
dynamics due to her/his ability to introduce innovations and initiate new activities,


Industrial renewal and entrepreneurship in Sweden 385
i.e. there was an ‘energy’ within the economic system that created disequilibrium in
the market. Thus, similarly to the way in which Adam Smith defined of land, labor
and capital as the key input factors of the economy in An Inquiry into the Nature and
Causes of the Wealth of Nations (1776/1976), Schumpeter added innovation as a driver
of economic growth and prosperity in society. Thus, the concept of innovation plays
a central role in Schumpeter’s writing. In general, Schumpeter’s scientific work can be
regarded as rather fragmented, but throughout his career there is a clear line of thought
– to construct a new economic theory built on newness and disequilibrium, which com-
plemented Walras’s theory of a static (and stationary) economy (Swedberg, 1994). In
this section we summarize Schumpeter’s contributions, but also provide a picture of the
individual behind them.
The Life of Joseph Schumpeter
Joseph Alois Schumpeter was born on 8 February 1883, in the small town of Triesch,
at that time part of the Austro-Hungarian Empire (presently Trest in the Republic of
Slovakia). The family was Catholic and had for several generations belonged to the elite
of the town. His father, who was a textile manufacturer, died when Joseph was only four
years old. At the beginning of the 1890s the family moved to Vienna. The ten-year-old
Schumpeter was sent to a very exclusive private school, and in 1901 he graduated with
top grades. He immediately enrolled at the law department of the University of Vienna
(economics was at that time taught at the law department). At the turn of the century
several of the world’s most famous economists such as Carl Menger, Eugen von Böhm-
Bawerk and Friedrich von Wieser were active at the Department of Law. In 1906 at the
age of 23, Schumpeter obtained his doctoral degree in economics (formally law). After
graduation, Schumpeter’s career could be regarded as changeable and did not always
follow a clear path; for example, despite his obvious genius, he was never offered an aca-
demic position at the University of Vienna. Schumpeter’s career is summarized in the
Box 17.1 (Swedberg, 1994; Reisman, 2004).
Schumpeter experienced a great deal of misfortune in the mid 1920s. His finan-
cial problems as a consequence of too risky investments and the bankruptcy of the
Biedermann Bank of Vienna, in addition to the fact that his mother died in 1926, fol-
lowed a couple of months later by his wife and son (Josef) in childbirth, made him very
pessimistic and melancholic and to some extent self-destructive. His wife and mother
became a personal cult, and he immersed himself in work and travel (Swedberg, 1994;
Reisman, 2004).
In terms of his professional career, Schumpeter is often regarded as difficult to under-
stand. He wanted to learn how to teach, but communication was not his strength: his
arguments were not always easy to follow, his meaning was not always clear, and his liter-
ary style often obstructed his message, as he wrote in a rather complex way, characterized
by long sentences, numerous qualifying phrases, careful definitions of terms, and so on
(Reisman, 2004).
To some extent Schumpeter’s ideas and arguments about the innovative entrepre-
neur who generated ‘creative destruction’ in the economy did not become incorporated
into mainstream economics or economic policy-making and were more or less erased
by Keynes and his General Theory of Employment, Interest and Money (1936/73). In


BOX 17.1 THE CAREER OF JOSEPH SCHUMPETER

1906 Post-doctorate degree at the London School of Economics
1907–08 Practiced law at the International Mixed Tribunal in Cairo
1909 ‘Habilitation’ degree (associate professor) at the University of
Vienna
1909–11 Teacher of economics at the University of Chervotsky (a town
then in the east of the Austro-Hungarian Empire but today in
Ukraine)
1911–21 Professor of Economics at the University of Graz
1919 Finance minister in a Social Democratic government in
Austria
1921–24 President of the Biedermann Bank of Vienna (during the eco-
nomic crisis of 1924 in Austria, the bank failed and Schumpeter
became bankrupt)
1925–32 Professor of Economics at the University of Bonn
1927–28, 30 Visiting Professor at Harvard University
1931 Visiting Professor at Tokyo College of Commerce
1932–50 Professor of Economics at Harvard University (Schumpeter
became an American citizen in 1939)
Joseph Schumpeter died of a cerebral hemorrhage on the night of 7–8 January
1950, at the age of 66.
comparison with Schumpeter, Keynes’s reasoning had a much more profound effect
on the economic debate, which may be due to the fact that he was more normative and
emphasized, to a greater degree, the state’s opportunities to influence economic develop-
ment. In addition, the Great Depression in the 1930s made Schumpeter’s theories appear
irrelevant and even wrong. Thus, Keynes received far more attention, while Schumpeter’s
works only attracted a small minority of scholars in economics, as well as other social
scientists, particularly sociologists.
The lack of interest among mainstream economists is reflected in the citation patterns.
From 1956 until roughly the mid 1990s, Keynes received a great many more citations by
mainstream economists. However, an interesting fact is that since the world economic
slowdown in the 1970s, there has been a major revival of Schumpeter’s ideas and works,
and as a consequence since the mid 1990s he has received more citations in general com-
pared to Keynes and has just caught up with the latter in terms of citations in economics
journals. From the mid 1990s, Schumpeter’s book Capitalism, Socialism and Democracy
(1942) appears to have become more influential, and there is growing acceptance of his
central messages, not only by scholars in general but also among economists (Diamond,
2008). As politicians have not always been successful in dealing with the occasional
occurrences of serious economic difficulties and fairly low economic growth in industrial
countries, Schumpeter’s reasoning has become the subject of more and more interest and
attention.


The Contributions of Schumpeter
Schumpeter was a highly productive researcher and during his career he wrote nine
major books, more than 200 papers and over 90 book reviews. His most influential books
are The Theory of Economic Development (1934), Business Cycles (1939), Capitalism,
Socialism and Democracy (1942), and History of Economic Analysis, which was published
posthumously in 1954. Short summaries of the books are provided in Table 17.1.
Some comments can be made regarding Schumpeter’s main contributions. Firstly, the
first edition of Theorie der Wirtschaftlichen Entwicklung appeared in 1911 but was offi-
cially published in 1912, while the second edition of the book was published in German
in 1926. The English edition entitled The Theory of Economic Development (which is
the most frequently cited) was based on the second edition of the German version and
published in 1934. However, the first and second German editions are quite different.
The main changes made by Schumpeter in the second edition were that he rewrote large
sections of Chapter 2 (‘The fundamental phenomenon of economic development’) and
Chapter 6 (‘The business cycle’), and completely omitted his original Chapter 7 (‘The
economic system seen as a whole’) (Reisman, 2004). The first edition of the book (1912)
is considered more eccentric, whereas in the more streamlined 1926 and 1934 editions
Schumpeter tries to relate more strongly to the mainstream discussion in economics at
that point in time (Swedberg, 1994).
Secondly, it should be noted that Schumpeter’s work and view on entrepreneurship
underwent a change over time (see Table 17.2). Up to the 1930s he was mainly inter-
ested in developing his mode of reasoning about entrepreneurship and in integrating
these trains of thought into his new economic theory based on innovation and change.
However, during the interwar period in the US he had encountered a different corporate
world to that of the Austria of his youth. In the US, the corporate scene was dominated
not by small firms with clearly distinguishable entrepreneurs but by large corpora-
tions with advanced research departments engaged in planned research, which inspired
Schumpeter’s interest in innovative activities in existing organizations. This change in
focus finds expression in his book Capitalism, Socialism and Democracy (1942).
SCHUMPETER’S ‘BUSINESS CYCLES’ (1939)
In his book Business Cycles (1939) Schumpeter elucidated his arguments on long cycles,
which had been already introduced in his theory of economic development (Schumpeter,
1912/1934). In this section we present Schumpeter’s theory of business cycles as well as
the intellectual tradition on which it is based.
The Intellectual Roots of ‘Long Cycles’
The idea that economies and societies move in long cycles has attracted researchers for
a long time (see reviews in Freeman, 1984; Reijnders, 1990; Tylecote, 1992). The nine-
teenth century produced pioneering contributions by Juglar (1862) and Jevons (1884),
while Marx (1893/1971) also stressed the importance of ‘industrial cycles’, arguing that
the cycle is a manifestation of the limitation of the capitalist mode of production and


Table 17.1 The major works of Joseph Schumpeter
The Theory Business Cycles Capitalism, Socialism History of Economic

of Economic (1939) and Democracy (1942) Analysis (1954)
Development (1934)
The book is regarded In the Theory Capitalism, Socialism The book was edited
as Schumpeter’s of Economic and Democracy by Schumpeter’s
principal work on Development constitutes without widow from an
economic theory, (1934) Schumpeter doubt Schumpeter’s uncompleted
in which he first introduced his theory most popular manuscript
presented his of business cycles, work. In this book and published
famous theory of but it was in Business he focused on the posthumously in
entrepreneurship. Cycles (1939) that institutional structure 1954.
he elucidated his of society and raised
Schumpeter It contains a very
arguments and the question as to
focused on the detailed historical
explained the cyclical whether capitalism as
forces that change analysis of the
nature of the creation an economic system
the equilibrium development of
of new businesses would be able to
in the economic economics (and
– swarms – during survive.
system, through closely related
different periods of
the introduction of Schumpeter argued sciences) – from the
time.
innovations. that increased Greeks to modern
The book contains rationality in times. History of
The entrepreneur
an extremely detailed society weakens Economic Analysis
is the central
exposition of entrepreneurship and – which is about
actor in this
different phases of leads to the stagnation 1200 pages long – is
development toward
the business cycles in of capitalism. Due to regarded as one of
disequilibrium –
Germany, England economies of scale, the best works ever
in the ‘hunt’ for
and the USA since large corporations written about the
profit s/he breaks
the mid 18th century. have an innovative history of economics.
traditions and habits
advantage over
by introducing In addition, Business
small firms, and the
innovations. Cycles contains
economic landscape
an interesting
Another central is dominated by giant
methodological
actor is the bank. As corporations.
discussion. In
changes take time,
contrast to the In the book he viewed
someone needs to
focus on aggregated capitalist society
assume the risks
analysis in neo- as an evolutionary
before the innovation
classical economics, process, and it is the
has reached the
Schumpeter argued innovations created
market, and in this
in favor of more by companies that
respect, the banks
disaggregated and initiate this process by
are central, as they
historical analysis. destroying the old and
lend money to the
creating the new, i.e.
entrepreneur.
‘creative destruction’
–which is the core of
capitalist society.
Sources: Swedberg (1994); Pålsson-Syll (1998); Reisman (2004).


Table 17.2 Schumpeter Mark I and Mark II
Schumpeter Mark I regime Schumpeter Mark II regime

The Theory of Economic Capitalism, Socialism and
Development (1934; 1912) Democracy (1942)
Industry characteristics Less concentrated markets. More oligopolistic and
monopolistic markets.
Low entry barriers. High entry barriers.
Large number of small firms. Economies of scale.
Similarities Innovations are central to economic development.
Entrepreneurship is a function that is delimited in time.
The capitalist assumes the risk.
Differences Focus on the individual. Focus on the function.
Only ‘first degree’ innovations are A lower requirement on the
counted. innovation level.
Table 17.3 Kondratiev’s long cycles
Rise Decline
Cycle I 1787–93 1810–17 1844–51
Cycle II 1844–51 1870–75 1890–96
Cycle III 1890–96 1914–20
that its periodical recurrence would put the entire bourgeois society on trial (Reijnders,
1990). However, it was the Russian Nikolai Kondratiev, who worked in Moscow in the
1920s and founded the Moscow Business Conditions Institute (Koniunkturnyi Institut),
who received the most attention and is regarded as the ‘father’ of long waves, despite
the fact that it has been questioned whether he was really the originator of the idea,
which had been outlined by the Dutch economist J. van Gelderen in 1913 (Tinbergen,
1984).
Kondratiev argued that economic cycles or long waves of 45 to 60 years occur in society
(Kondratiev, 1925/1979) and identified three long waves in the economy, the approximate
timing of which can be seen in Table 17.3.
Some comments can be made on the three long waves identified by Kondratiev and
later accepted by Schumpeter. First, they were allied in the most simplified form to the
dissemination of steam power, the railway boom, and the joint effects of the motor
car and electricity. Second, according to Kondratiev, the long waves are international
in character, i.e. their periods coincide especially in European countries. Finally, in his
original paper Kondratiev observed that during the downswing of long waves there
was an increase in the rate of discovery and invention of production and communica-
tion techniques, which were then applied on a large scale in the subsequent upswing, i.e.
the diffusion of innovations in the capital goods sector of the economy was associated
with the upswing (Kondratiev, 1925/1979, p. 536). At that point in the development of
his ideas he did not formulate an explanatory theory of the relationship between these


phenomena. Later, however, he developed his position toward a fuller model of the
process (Kondratiev, 1935).
An interest in Kondratiev’s works emerged among Western economists during the
depression of the 1930s, because unlike these economists, he had predicted not only the
economy’s decline, but also that it would end and be followed by a new boom (Tylecote,
1992).
Business Cycles (1939)
The argument that inventions and innovations were important for economic develop-
ment was picked up by Joseph Schumpeter, who had been thinking along similar lines in
his 1934 book, and formed the basis for his own long wave theory. Schumpeter stressed
the role of technical progress and tried to explain how basic innovations (e.g. the steam
engine and the railway) and the ‘swarming’ of smaller, secondary innovations which fol-
lowed, created a long wave, but also how the initial impulse gradually dissipated, thus
leading to a downswing (Tylecote, 1992).
The book Business Cycles, published in 1939, is a massive and impressive two volume
work of almost 1100 pages. Schumpeter was ambitious in his approach to the study
of the cyclical process of the economy. The ultimate goal of his study was to develop
a ‘conceptually clarified history, not of crises only, nor of cycles or waves, but of the
economic process in all its aspects and bearings to which theory merely supplies some
tools and schemata, and statistics are merely a part of the material’ (Schumpeter, 1939,
p. 220). Schumpeter differs from Kondratiev in that the latter clearly exhibits the traits of
an inductive approach, i.e. Kondratiev stressed the importance of empirical observations
and developed his theory by generalizing from observations to the economy as a whole,
whereas Schumpeter was more or less deductive – starting with an abstract general level
of argumentation and subsequently filling in more details that corresponded more closely
with reality (Reijnders, 1990).
According to Schumpeter, innovations are the vehicle of economic change, and he
considered innovation a distinct internal factor of change. Innovation intrudes into the
system and gives rise to a cumulative process of growth. However, innovations do not
remain isolated events and are never randomly distributed over the whole economic
system, but tend to cluster in certain sectors and their surroundings, occuring in bunches,
simply because a pronounced burst of basic innovations is followed by a growing swarm
of imitators (Schumpeter, 1939, p. 75). Once the application of the original innovation
has become general, recuperative forces take over and establish a new equilibrium (of the
same nature as the former equilibrium but situated at a higher level).
The entrepreneur becomes important in the innovation process as s/he is an individual
who has the ability to decide in favor of untried possibilities because her/his horizon is
wider and her/his propensity to resist change is lower than that of other individuals. If
the entrepreneur becomes successful s/he will make a profit during a period, but her/his
success will also help others to overcome their original inhibition, because it is easier to
make similar things or improve it in similar lines. There will be many imitations that will
spread the innovation over a larger part of the economy (Reijnders, 1990).
Schumpeter’s theory of business cycles is based on the general idea that innovation is a
strong vehicle for economic change that forces the economy to move from one equilibrium


to another and that innovations tend to cluster in time. According to Schumpeter, busi-
ness cycles comprise two phases, a primary and a secondary movement (see Schumpeter,
1939, p. 145; see also Reijnders, 1990, pp. 31–5):
● A ‘primary movement’ occurs when the entrepreneur intervenes in a market in

equilibrium by buying plant and equipment in order to fulfill her/his innovative
work. S/he can only obtain the necessary resources by diverting them from their
previous use, which immediately disrupts the existing market equilibrium. But
the real changes occur when the new firms are up and running, as they gradually
challenge the market position of the ‘old’ firms and strengthen the disequilibrium
process that had already started. The ‘old’ firms face competition from firms that
are superior in productive capacity and cost structure, causing some to disappear
and forcing others into a painful process of modernization. The disappearance of
‘old’ firms does not necessarily imply a recession as long as new firms continue to
emerge, and in this respect the recession threat may be overcompensated. However,
the turning point comes when the entrepreneurial activity vanishes, and (1) pro-
duction takes place at the minimum cost that equals price, and profit disappears,
i.e. the shift from monopolistic to pure competition, and/or (2) the entrepreneurial
activity creates a dynamic that makes it very difficult to plan new ventures and
calculate the risk of failure, which further hampers other entrepreneurial activi-
ties. Thus, Schumpeter’s ‘primary movement’ includes two phases: ‘prosperity’ and
‘recession’.
● A ‘secondary movement’ is initiated and based on the first. The prosperity created
by the upturn of the primary movement creates a reaction from the ‘old’ firms
that tend to respond to the new situation in a speculative way – cyclical clusters of
errors occur, especially when a recession is on the way, and behavior is governed
by pessimism, creating a spiraling negative effect that results in a depression.
The depression may continue indefinitely, although Schumpeter expected it to be
hampered by the fact that not all elements in the chain break down – the healthy
elements of the economy function as a buffer and contribute to a weakening of the
contractive forces. Revival occurs when the economy starts ‘feeling’ its way back to
equilibrium. Thus, Schumpeter’s introduction of a secondary movement leads to
a representation of a cycle consisting of four phases: ‘prosperity’ (growth); ‘reces-
sion’ (maturity); ‘depression’ (decline); and ‘revival’ (introduction).
Schumpeter argued that different cycles appear simultaneously (1939, pp. 166–8), and
their length can vary widely, although he expected the duration of the different cycles to
cluster around certain average values. In this respect, Schumpeter suggested a three-cycle
scheme including a ‘long cycle’ of approximately 60 years (similar to the Kondratiev
cycles), an ‘intermediate cycle’ of about ten years, and a ‘short cycle’ of approximately 40
months (pp. 170–74). Schumpeter also indicated that the different cycles are interrelated,
and he assumed that each higher order cycle constitutes what he termed the ‘neighbor-
hood of equilibrium’ for the cycle of the next lower order, i.e. the longer waves present a
movement that is perceived as normal business conditions in cycles of the next lower level
(Reijnders, 1990).
In order to demonstrate the existence of long waves, Schumpeter rejected a strict use


of rigid statistical methods and argued that the method used should always be based
on a thorough historical analysis. In Business Cycles Schumpeter placed a great deal
of emphasis on the historical development of business cycles in Great Britain, France,
Germany, and the United States. More than two-thirds of the book is devoted to this
historical analysis, in which Schumpeter used only time-series data for the purpose of
illustrating his arguments as opposed to testing his theory.
Criticism of Schumpeter’s Theory of ‘Business Cycles’
Even though Schumpeter’s book and thesis did not receive as much attention as
Kondratiev’s initial ideas, it did not escape criticism (Kuznets, 1940; Tylecote, 1992) on
the following grounds: (1) Schumpeter’s theory is based on the relationship between
the distribution of entrepreneurial ability in a society and the development of innova-
tions. But given an infinite supply of possible innovations there is no reason why the
entrepreneur should wait for the next pioneering step, and in this respect the ‘rhythm’ of
Schumpeter’s cycles can be questioned. (2) Schumpeter left a crucial gap in his theory by
his failure to explain the creation of basic innovations and why they appear in clusters
every fifty years or so, i.e. he was unclear about why such clusters occur every 45 to 60
years. (3) Schumpeter applied an historical method to the analysis of his long waves of
economic development; the problem is that he was unsuccessful in linking his cycles to
clearly observed statistical realities.
ERIK DAHMÉN AND ‘DEVELOPMENT BLOCS’
Erik Dahmén (1916–2005) became one of the leading Swedish economists and is
regarded as the main proponent of the so-called Swedish School of Growth. Over the
years, Dahmén’s thinking influenced many Swedish economic historians and economists,
but outside Scandinavia he seems to be more or less neglected. Dahmén wrote mainly in
Swedish, and as is the case with many other pioneering works (cf. Schumpeter), his con-
cepts are not always distinct, and his ideas were overshadowed by Schumpeter’s.
Early Contributions of Erik Dahmén’s Thinking
Dahmén began his studies in economics at Lund University in Sweden in 1935 under
the guidance of the Swedish economist Johan Åkerman. At that time Åkerman was
greatly influenced by Thorstein Veblen and his evolutionary (Darwinist) theory of society
(Erixon, 2007). Åkerman devoted a great deal of attention to the work of Friedrich von
Hayek and his discussion on capital misallocation. Against this background, Åkerman
suggested that Dahmén should focus his studies on the problem of capital misallocation,
thus capital misallocation by firms became the point of departure in Dahmén’s bachelor
thesis, presented in 1939, but also the basis of his theory development throughout the rest
of his career (Henriksson, 2002).
In his bachelor thesis (1939) Dahmén elaborated on the role of capital misalloca-
tion in the structural transformation process. One important observation that Dahmén
made in his bachelor thesis was that capital misallocation tended to ‘clump’ together. He


demonstrated that misallocation within one area of the economy was usually followed
by additional misallocations in other areas, indicating that capital misallocations are
connected and interdependent (Westberg, 2007), thus creating ‘clusters’. This clustering
process can be explained in different ways, but one important reason was that invest-
ments were dependent on each other, which can also be regarded as an important factor
explaining the long-term business cycles in the economic system. In later works, Dahmén
used the concept ‘development blocs’ to describe this clustering process and argued that
the process is valid in expansion situations as well as in the contraction of the economy
(Henriksson, 2002).
In his subsequent PhD studies Dahmén was soon introduced to the works of Schumpeter.
The second edition of Schumpeter’s Theorie der Wirtschaftlichen Entwicklung (1926) was
included in Åkerman’s course in economics at Lund University, but it was not until
Dahmén read Schumpeter’s book Business Cycles (1939) that he more seriously started
to immerse himself in Schumpeterian thinking. Schumpeter’s reasoning allowed Dahmén
to better articulate his own conceptual contributions, and it was probably through the
influence of Schumpeter’s writings that in spring 1941 he coined the concept ‘develop-
ment blocs’, despite the fact that it was more or less a renaming of the clusters of capital
misallocations that he had identified in his bachelor thesis (Henriksson, 2002). In this
respect, 1941 can be considered the year in which a shift took place in Dahmén’s way of
thinking, from a depressive Hayekian view to a more open and creative Schumpeterian
perspective.
This change is expressed in his licentiate thesis (1942) ‘Ekonomisk strukturanalys.
Begreppet felinvestering som konjunkturteoretiskt instrument’ (Economic structural
analysis. The concept of capital misallocation as a business cycle instrument), in which
he elaborated further on his view of economic development and change and especially
on the importance of capital misallocations for business cycles and long-term economic
development. In addition, in his licentiate thesis Dahmén formulated a broad research
program for his subsequent research that included four general structures (or analytical
areas): production structure; economic-political structure; monetary structure; and social
structure. His idea was that these four structures constituted an integrated theory of eco-
nomic transformation. Dahmén was unable to carry out this plan for various reasons and
instead focused on the development of a conceptual formation around the analysis of the
production structure (Westberg, 2007).
Dahmén always regarded himself as Schumpeterian, although these early contribu-
tions reveal that he presented some of his ideas ahead of his master and that in many
respects they are characterized by a stronger theoretical coherence and greater original-
ity than those of Schumpeter. For example, it is worth mentioning that as early as 1939
Dahmén formulated a basic theoretical view on the role of capital misallocation in the
structural transformation process that he later presented in his licentiate thesis (1942).
Thus, Dahmén was ahead of Schumpeter in developing a theory about the process that
Schumpeter later called ‘creative destruction’ in Capitalism, Socialism and Democracy
(1942), but for which he, in contrast to Dahmén, provided no theoretical foundation
(Westberg, 2007). In addition, Dahmén studied two aspects of the transformation process
– one positive and one negative – which implies that his model was in many respects
better-developed than his source of inspiration. Finally, not only did Dahmén present
his thoughts earlier than Schumpeter and produce a better-developed transformation


process model, but he also succeeded in creating a methodological tool for historical
causal analysis – something Schumpeter failed to achieve. Dahmén presented this contri-
bution in his PhD thesis, which subsequently achieved the most attention all of his work
internationally.
Dahmén’s Thesis ‘Entrepreneurial Activity and the Development of Swedish Industry,

1919–1939’ (1950)
After presenting his licentiate thesis in 1942, Erik Dahmén moved to Stockholm where
he had obtained a position at the Research Institute of Industrial Economics (Industrins
Utredningsinstitut, IUI), a private research institute founded in 1939 by the Federation
of Swedish Industries and the Swedish Employers’ Confederation ‘to conduct research
on economic and social issues with relevance for industrial development’. It was at the
Institute that Dahmén wrote his major work Svensk industriell företagarverksamhet:
kausalanalys av den industriella utrecklingen 1919–1939 (Entrepreneurial Activity and the
Development of Swedish Industry, 1919–1939) (1950; 1970), which was presented as his
PhD thesis at Lund University in 1951. Dahmén became professor of economics at the
Stockholm School of Economics in 1958. It is significant that for a long time Dahmén
was also closely connected to one of the major banks in Sweden, Stockholms Enskilda
Bank (later a part of SEB), and the sphere around the Wallenberg family – long one of
the leading families in Swedish industry.
Development blocs and complementarities

Dahmén’s thesis was based on detailed empirical studies of several industries in Sweden
and built on the ideas in his licentiate thesis (1942). In the thesis he introduced a large
number of new concepts that he elaborated on at a later stage of his career. The most
important one was that growth and economic development occur in the context of devel-
opment blocs. The basic idea was that in many cases economic transformation originates
from synergies and complementarities between different technologies, investments, com-
panies and industries. In order to fully utilize industrial opportunities it is often necessary
to make investments that complement each other in various industries and product areas,
and when this occurs a development bloc has been created. In other words: development
blocs are a form of cluster (or network) of integrated physical production and distribu-
tion that creates powerful synergy effects in time and space.
Thus, in order to understand the dynamics of development blocs, the concept of com-
plementarities became important: that is, different parts of a combination could affect
each other in a positive way. In simple terms, one example of complementarities is egg
and bacon (at least in some civilizations), the opposite being substitutions, where one
factor compensates for another. For example, tea and coffee are usually regarded as sub-
stitutes for each other (Schön, 2007). Neoclassical economic theory is mainly based on
substitutions, where the problems are focused around the question of how to distribute
scarce resources between competing aims. In contrast, Dahmén’s reasoning is based on
complementarities. Development blocs are formed around innovations that change these
complementarities, which in turn require a transformation of the economy. Thus, renewal
and growth within one area of the economy create a need and an opportunity to increase
capacity, thus leading to renewal within other, complementary areas of the economy. For


example, the extension of the railroads and railroad system in the nineteenth century
became a strong force that made trade in society more extensive and efficient, i.e. a devel-
opment bloc was created around transportation in general and railroads in particular
that implied a far-reaching transformation in society. A development bloc works as a
breeding ground for other (sequential) innovations, i.e. chain reactions occur, leading
to pressure to make changes within the development bloc as new forms of dependencies
arise between different areas of society (Westberg, 2007).
Development blocs can be more or less extensive, ranging from individual activities to
far-reaching transformation processes in society. Thus they can occur in different ranges,
from small scale to large changes that involve a large part of society. In this respect, the
most important are those innovations that have a far-reaching influence on the produc-
tion and infrastructure of society (Schön, 2007) – what was later called ‘General Purpose
Technologies’ (Bresnahan and Trajtenberg, 1995). The concept of the development bloc
is, however, more dynamic and open than the taxonomic concept of a general purpose
technology. In particular, the development bloc concentrates on the innovative trans-
formation of complementary links in the economy, which is a strategic characteristic of
economic growth.
The positive and negative sides of the transformation process

At an early stage Dahmén realized that the transformation process comprised two
aspects, one positive and one negative. In his 1942 licentiate thesis Dahmén analyzed dif-
ferent mechanisms that could be considered central for understanding how the positive
side laid the foundation for the negative side of the transformation process. In contrast
to Schumpeter, Dahmén devoted a great deal of time and thought to understanding both
aspects of the transformation process and developing a comprehensive model of the total
transformation (whereas Schumpeter talked more generally about ‘the logic of creative
destruction’). In a similar way to that by which innovations are created, some existing
phenomena become obsolete, as they are subject to competition from growing develop-
ment blocs. Phenomena on the negative side of the development bloc are characterized
by a need to change or wind up activities in favor of those situated on the positive side.
This also makes it possible to release resources (e.g. labor and capital) and transfer them
to the positive side of the development bloc or to other sectors of the economy. During
his final years Dahmén devoted a great deal of effort to elaborating on the concept of
‘transformation push’ to describe the dynamics between the positive and negative side of
the transformation process (Westberg, 2007).
Methodological considerations
Throughout his career, Dahmén argued that in order to understand economic develop-
ment and growth it is necessary to be in close contact with the economic reality under
study (something that Dahmén himself experienced through his long and close rela-
tionship with the Swedish industrialists Marcus and Jacob Wallenberg), as opposed to
building abstract models based on sophisticated mathematical methods. In this respect
Dahmén was highly critical of the development of mainstream economics. In addition,
the interest among economists must, according to Dahmén, be directed toward the
behavior of individual companies and the market processes created by those companies,
as an understanding of economic development on an aggregated level demands that one


understands micro level (firm level) behavior. The analysis must also include institutional
conditions of importance for the companies’ behavior and the interplay between the
companies and their markets (Karlson et al., 2007).
In order to achieve this understanding of the relationship between the micro and
macro level of analysis, Dahmén used a causal analysis, in which the point of departure
is the changes that occur at company level, especially among the firms leading (pioneer-
ing) the development. It is not possible to explain the transformation processes on more
aggregated levels until such changes are analyzed (Westberg, 2007). In addition, one
main thesis in the causal analysis developed by Dahmén is that industrial transformation
cannot be separated from the historical circumstances, and therefore it is necessary to
make a historical reconstruction and analysis of the circumstances in which the transfor-
mation processes are embedded (Carlsson, 2007).
According to Dahmén, there is a constant struggle between new and old in the
economy – new innovations drive old combinations of production factors out of the
market – and in this respect entrepreneurship and technical development are driving
forces in the transformation. For both Dahmén and Schumpeter, the entrepreneur is the
real source of change, as s/he introduces innovations to the market and thus becomes
the driving force behind the transformation processes. The entrepreneur identifies new
market possibilities and needs and is the actor behind the changes and growth in society
due to taking initiatives and commercializing the business opportunities created by the
innovations (Schön, 2007).
The Swedish School of Growth
For a long time Erik Dahmén was an active researcher at IUI in Stockholm. Bo Carlsson
and Gunnar Eliasson were also active at the Institute and can be considered the succes-
sors of Dahmén as well as central contributors to the research tradition known as the
Swedish School of Growth.
The Swedish School of Growth emphasizes economic growth as an evolutionary
process in which entrepreneurship and innovations play an essential role – the ‘new’ chal-
lenges the ‘old’ in a process of creative destruction that generates economic development.
Growth becomes the combined consequences of individual firm formations, expansions,
contractions, and liquidations. In addition, the design of institutions (‘the rules of the
game’) that influence entrepreneurship and innovations is considered of crucial impor-
tance for growth in the economy (Johansson and Karlsson, 2002).
Bo Carlsson, attached since the 1980s to the Case Western Reserve University in Ohio,
USA, is probably the best-known researcher among Dahmén’s successors. Carlsson has
particularly emphasized the importance of technology innovations in industrial develop-
ment with a technological systems theory (Carlsson and Stankiewics, 1991; Carlsson,
2002). According to Bo Carlsson, technological systems refer to ‘networks of agents
interacting in a given area of technology, operating within a particular infrastructure, to
generate, exploit and diffuse technology’ (Carlsson and Stankiewics, 1991, p. 111) and,
thus, it is the emergence and uses of a generic technology in various applications that are
focused upon, for example, the use of biotechnology in many different industrial applica-
tions. In this respect, Carlsson emphasizes the flow of knowledge that keeps the technol-
ogy system together rather than the flow of products and services.


Gunnar Eliasson, Professor Emeritus in Industrial Economics at the Royal Institute

of Technology in Stockholm, and for a long time CEO at IUI, developed a theory
about ‘competence blocs’ in which he emphasized non-physical and non-technical
aspects of production and argued that technical as well as economic competencies
are required in order to create and utilize business opportunities, i.e. it is necessary to
develop a comprehensive competence bloc with distinct but supplementary competen-
cies (Eliasson, 1996; Eliasson and Eliasson, 1996). A competence bloc can be regarded
as the total supply of competencies that are necessary to create, choose, and identify
profitable products and services and to develop them for industrial production. The
competence bloc includes advanced customers, inventors and innovators, entrepre-
neurs, industrialists, venture capitalists, and actors on the secondary markets, as well
as skilled workers. The actors within the competence bloc represent different functions,
and in order to create an efficient industrial process it is necessary to have a competence
bloc that is complete, where each function includes a critical mass of actors (Henrekson
and Stenkula, 2007).
As indicated by this short discussion, the various contributions by the pioneers within
the Swedish School of Growth complement each other in the sense that, in his theory
of development blocs, Dahmén emphasized the physical dimension of industrial devel-
opment, whereas the technological system approach by Carlsson was focused on the
importance of the technology, while Eliasson’s reasoning highlighted the importance of
competence and human capital for the creation of a dynamic economy and growth. A
common framework for all three contributions is the central importance of the institu-
tions, in the form of, for example, laws, rules, and norms, in industrial development and
growth (Johansson and Karlsson, 2002).
DEVELOPMENT BLOCS IN STRUCTURAL CYCLES
Erik Dahmén’s idea about development blocs has received a great deal of attention, espe-
cially among the group of researchers associated with the Swedish School of Growth.
Dahmén has also inspired structural economics researchers at the Department of
Economic History at Lund University, Sweden – the university where Dahmén started
his academic career in the 1930s. Over a long period, a group of economic historians in
Lund have tried to empirically develop the theory and concepts initially created by Erik
Dahmén, who never formulated a theory on structural cycles – he only made the observa-
tion that the economy follows some form of long-term cyclical waves. However, based on
the ‘development bloc’ concept, one main argument among economic historians at Lund
University has been that since the mid 19th century, industrial society has exhibited a
pattern of structural renewal and positive transformation pressure followed by periods
of rationalization and negative pressure that end in a structural crisis. Thus, Dahmén’s
initial finding that there was a shift from negative transformation pressure in the Swedish
economy during the 1920s to positive pressure after the crisis of the 1930s has been
extended into a long-term cyclical pattern. There are also indications that behavior at
the micro level interacts with these shifts in trends at the macro level. In this way the
research group at Lund University links Dahmén’s reasoning on development blocs with
Schumpeter’s theory on structural cycles.


Long-term Structural Cycles: The Development of the Swedish Economy
Studies on Swedish economic development since the mid nineteenth century reveal a
pattern of structural change that has been modeled within a framework of a structural
cycle linked to the industrial and social dynamics expressed by the development bloc
concept.
The investment ratio in Swedish industry, defined as fixed capital investments in rela-
tion to value added in industry in fixed prices, over the period 1850 to 2005 (Figure 17.1),
is a major indicator of shifts in behavior. The ratio exhibits a strong cyclical pattern –
with low points in the early 1890s, early 1930s, and late 1970s or early 1980s. These low
points coincide with international crises, after which followed roughly 25–30 years char-
acterized by a rising investment ratio that culminated in the mid-1870s, the late 1910s,
0.24
0.20
0.16
0.12
0.08
0.04
0.00
1850 1875 1900 1925 1950 1975 2000
Note: Investments include only material investments (buildings and equipment), about which information is
available dating back to the nineteenth century. Since there was a shift to more immaterial investments from
the mid 1970s onwards, the level of the curve is lower from the 1980s.
Source: Schön (1994), Swedish National Accounts.
Figure 17.1 The ratio of investments to value added in Swedish industry, 1850–2005
(fixed prices with annual and five-year moving averages)


the early 1960s and around 2000, and subsequently 10–15 years of a falling ratio to the
troughs in the years of crisis (Schön, 1998).
The investment ratio shown in Figure 17.1 indicates a periodization of Swedish indus-
trial development in cycles of 40 to 50 years running from one crisis to another, with the
troughs in the years 1845/50, 1890/95, 1930/35, and 1975/80. The investment pattern has
its counterpart in the periodization of labor productivity increases in Swedish industry
from 1890 onwards. In the subsequent decades leading up to the crises, development had
the opposite characteristics – while the contribution from the reallocation of resources
was negligible, productivity growth within branches accelerated, due to the fact that, on
the one hand, new productivity-raising techniques became more diffused and adapted to
all branches, making the industrial structure more homogeneous, and, on the other, that
growth branches experienced a relative fall in prices, which reduced or eliminated their
lead in value added per worker, thus contributing to an increased homogenization of the
industrial structure (Schön, 1998).
It can be debated as to whether it is possible to generalize this pattern to other countries.
As Sweden is a small and industrially specialized country that has been highly dependent
upon the world market, it can be assumed that the patterns identified in Sweden accu-
rately reflect important patterns in countries around the world and thus without doubt
correspond strongly to international trends (Schön, 1998). However, some particularities
in timing and characteristics can be found. For example, in the 1930s, Sweden was mainly
on the positive side of the worldwide crisis and performed better than most other coun-
tries – industry moved quite rapidly from a crisis to new expansion. On the other hand,
the international crisis that occurred with the downswing in 1973/74 was delayed and
prolonged by a few years in Sweden, and we can date the crisis and the turning-point in
the Swedish economy to the period 1975/1980 (ibid.)
Long-term Structural Cycles: Transformation, Rationalization and Crisis
According to our analysis in the previous subsection, evidence from Sweden indicates
that the economy has followed long-term structural cycles of about 40–50 years and
that each structural cycle has been initiated and shaped by some international economic
crisis. The creative destruction of a structural crisis opens the way for the expansion of
new development blocs that have been formed during the preceding periods. Within each
long-term structural cycle there has been a shift between two fundamentally different
behaviors that we can term transformation and rationalization, characterized by (Schön,
1991; 2001):
● A transformation period, i.e. a period dominated by the transformation of indus-

trial structures in which resources are reallocated between industries and by the
diffusion of basic innovations in the economy, thus providing new bases for such
reallocation. During these periods, investment is generally long term and directed
toward increasing capacity in new areas of production, as well as development
power of industry. At the same time, a large number of new ventures as well as
new combinations of old ones are funded during this period, which stimulates
the supply of risk capital on the market. These characteristics indicate a diffusion
of new development blocs with innovative activities in production with relatively


Table 17.4 Long term cycles
Transformation Rationalization Crisis (turning point)

1850 1875 1890
1890 1920 1930
1930 1960 1975
1975 2000 (2010)
small-scale innovative activities related to production and directed to markets close

at hand. New development blocs turn expansion inwards, i.e. innovative produc-
tion mostly takes place on a fairly small scale and is directed toward the familiar
local markets. The end of the transformation period is characterized by a series of
structural tensions, for example, renewal in similar directions in many industrial
countries and incipient industrial development in new countries add both to devel-
opment perspectives and to uncertainty; and
● A rationalization period, i.e. a period dominated by the concentration of resources
in the most productive units within the industry and by measures to increase
efficiency in the different lines of production – aimed at enhancing the efficiency
of existing structures and operations and decreased resource utilization. Thus,
rationalization leads to more rapid growth in productivity and to higher growth
rates of real income as well as to stagnation in the ratio of investments to income.
Investments, which are short-term in character, are directed toward reducing costs
in existing structures and operations, as well as increasing the competitive power
of industry. Specialization and widening of markets become more important, i.e.
international competition increases with the weakening of domestic markets and
international integration measures are intensified.
Although transformation and rationalization are processes that to a large extent take
place simultaneously in an economy, historically there have been shifts in emphasis
between periods of transformation and rationalization. These shifts occur with consid-
erable regularity within a long structural cycle, for example, 25 years of emphasis on
transformation, followed by some 15 years of emphasis on rationalization. Thus, we can
find a pattern of long cycles characterized by crisis – transformation – rationalization
and, starting from the mid nineteenth century, the following long cycles can be identified
(Table 17.4).
The model of long-term structural cycles can be regarded as deterministic, but it
should not be exaggerated – the cycles tell us about a way to move, due to a systematic
play of forces, but they do not tell us where to go. The model emphasizes crises as a
period of comparatively open-ended choice between paths to follow in the decades to
come (Schön, 1998).
Long-term Structural Cycles and Development Blocs
According to our argument, an economic crisis represents a fundamental turning point in

the long-term economic development in society and creates changes in terms of growth


that appear after the crisis. In the new transformation period we can find not only an
increase in the investment ratio and a shift to long-term investments, but also the appear-
ance of new growth branches and development blocs. In the development of long-term
structural cycles in Sweden we can find different development blocs centered round basic
innovations, particularly in the field of power and communication (Schön, 1991; 1998).
The upswing in the long-term structural cycle from the 1850s onwards was mainly
linked to the breakthrough of mechanized factories in Sweden, the modernization of
steel processes, and the construction of railways, as well as a period of increased utiliza-
tion of Swedish natural resources for an expanding export trade.
The structural cycle at the end of the nineteenth century witnessed the breakthrough
of modern industrial society and increased the sophistication of urban industry in terms
of machinery and new consumer goods. This development was based on the diffusion of
new motor, electrical, or combustion engines, with a widening scope for mechanization
within industry. Due to the importance of energy-intensive industries in Sweden, electric-
ity gained a particularly important position during the structural cycle around the turn
of the century.
From the 1930s, and especially after the Second World War, new development blocs
were created around the expansion of electrification and the diffusion of automobiles.
There was a wave of investments around the development of an infrastructure linked
to basic innovations of the preceding cycle. For example, it created a much broader
spectrum of applications for electrical applications and small motors in handicraft and
household.
In the cycle initiated in the 1970s, the appearance of the microprocessor became the
centre of new development blocs, i.e. the use of knowledge and information in the pro-
duction of goods and services created new directions of growth. However, the impor-
tance of innovative activities during periods of transformation should not be emphasized
too strongly. It could be argued that the basic innovations forming the structural cycle
had appeared long before the start of the cycle. But the appearance of an innovation is of
minor importance in this context – it is the diffusion that counts. An extensive diffusion
requires that a new technology becomes competitive within a wide range of applications
and that complementary activities sustain the diffusion of the development bloc.
CYCLICAL VARIATIONS IN RELATION TO INNOVATION AND

ENTREPRENEURSHIP
In this concluding section we link our discussion on development blocs and long struc-
tural cycles, on the one hand, and innovative and entrepreneurial activities on the other.
First, we elaborate on the connection between structural changes and innovative activi-
ties. As indicated above, a close connection between innovative activities and structural
crises can be questioned due to the fact that the basic innovations often appeared decades
before the start of the crisis. When innovations first appear they are generally expensive
to implement, have a narrow range of applications, are fairly small scale and directed
toward familiar markets. In order to form new development blocs around the innovation,
it is necessary to acquire efficient capital equipment at a reasonable price.
Thus, in order to create a broad impact and extensive diffusion, new technologies


must become competitive within a wide range of areas. The diffusion of innovations is
facilitated by a continuing adaptation of new technology to different areas and condi-
tions, accomplished in a dual process of standardization and specialization, which is
further strengthened through geographical expansion. The diffusion of the innovation
will widen markets and strengthen consumer demand, but also increase competition on
the market.
Second, we elaborate further on the relationship between structural cycles and entre-
preneurship. In the upswing after a structural crisis, entrepreneurial activity has flour-
ished in new growth branches with a pronounced increase in the number of new firms.
Such was the case in the 1850s, 1890s, 1930s, and 1980s. However, the radical innovations
at the center of new development blocs usually appeared some decades earlier. Early
start-ups have taken the lead in transformation after the crises, while further entrepre-
neurial initiatives have spurred the growth of the new development blocks. Some decades
later – as in the 1880s, 1920s, and 1960s – concentration into larger units has been part
and parcel of rationalization.
In transformation, long-term investments in new ventures, knowledge, ideas and
firms provide greater scope for visions of the future. Visionary leaders come to the fore
and set the agenda. Transformation pressure is positive, which is in line with Dahmén’s
terminology, and investments are made to provide new opportunities. At an early
stage of development, there is close interaction between the innovating entrepreneur
and the market, which increases the importance of local or regional economies. That
is particularly the case with innovations that generate spillovers. Standardization and
specialization lead to the widening of markets and diffusion of knowledge. During
rationalization, however, technology becomes more standardized and competition is
fiercer. Transformation pressure is negative toward cost-reducing investments. Rational
leaders with a short-term perspective of efficiency-increasing measures take over the
steering wheel.
The relation between structural cycles and the characteristics of innovative and entre-
preneurial behavior in the economy is summarized in Table 17.5.
Table 17.5 shows that innovative activities in transformation periods are character-
ized by product innovation, initially on a relatively small scale and directed to markets
close at hand. Entrepreneurial activities increase and many new independent ventures
(start-ups) appear in the economy, often based on visionary entrepreneurs making long-
term investments in new areas of production. There is also knowledge diffusion, both in
new technological areas and geographically. The driving forces behind the development
include a high degree of variation and uncertainty in society. The transformation and
diffusion of new technologies are further stimulated by deregulation and an expanding
risk capital market.
In rationalization periods innovations become more process oriented in order to
increase the efficiency of production, and entrepreneurship decreases in terms of the
number of start-ups, while there is an increase in mergers and corporate entrepreneur-
ship. Managers who make short-term investments directed toward reducing costs domi-
nate the economy, the markets become wider and international competition increases.
The driving forces in rationalization periods include homogeneity and stabilization of
the economy, whereas economics of scale dominate the development of the industrial
structure (larger corporations).


Table 17.5 Innovative and entrepreneurial activities during transformation and

rationalization periods
Transformation periods Rationalization periods

Innovative Product innovations Process innovations
activities – on a fairly small scale, directed – in order to increase the efficiency
toward a familiar market close at of production
hand
Entrepreneurial Increase of independent new Decrease of independent new
activities ventures (start-ups) ventures (start-ups)
Increase of innovative new Increase in mergers, outsourcing,
ventures and corporate entrepreneurship
Visionary entrepreneurs who set Rational managers, who make
the agenda and make long-term short-term investments directed
investments directed toward new toward reducing costs
areas of production
Diffusion of technologies in Specialization and widening of
different areas and geographical markets, increased international
contexts competition, and more intense
international integration
Driving forces Variation and uncertainty Homogeneity and stability
Spill-over effects and knowledge Economies of scale
diffusion
Deregulation Regulation
An expanding risk capital market A contracting risk capital market
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18. Entrepreneurial capitalism in East Asia:
how history matters
David Ahlstrom and Linda C. Wang
INTRODUCTION
The rise of East Asian economies from Japan to China and Southeast Asia has motivated
much study of how these economies grew so quickly and inspired a model for economies
in the developing world (Berger and Hsiao, 1988; Fallows, 1995; Johnson, 1982; Rowher,
1995; Vogel, 1979). This has encouraged further inquiry on specific East Asian business
systems including what has come to be called Chinese entrepreneurial capitalism or
more generally ‘Confucian capitalism’ (Baumol et al., 2007; Bond and Hofstede, 1990;
Hamilton, 2006; Kotkin, 1992; Redding, 1990; Whitley, 1992).1 Confucian capitalism
is thought by many to be a key mode of economic organization in East Asia not only
because of its economic significance to local economies, but also because of its complex
network organization and compatibility with the modern virtual organization (Ahlstrom
et al., 2004; Chen, 2001; Redding, 1990; Whitley, 1992). Researchers have stressed the
importance of Chinese culture, in general, and Confucianism, in particular, as a key
explanation for this putatively unique business system in East Asia much in the way Max
Weber’s (1951) ‘Protestant work ethic’ has been used to explain economic growth in the
West (e.g. Kao, 1993; Redding, 1990; Seagrave, 1995; Weidenbaum and Hughes, 1996;
Whitley, 1992).
Indeed, the economies that have developed the most rapidly during the twentieth
century are mainly Confucian-influenced East Asian ones, most notably those of Japan,
South Korea, Hong Kong, Singapore, Taiwan, and Mainland China.2 Limited evidence
asserts an association between (primarily Confucian) cultural values and economic
growth over time in these economies (e.g. Bond and Hofstede, 1990). That Confucian
system is thought to include harmonious and tolerant Chinese management style, thrift
and self-sacrifice, loyalty to top management and reciprocal loyalty to valued employees
and suppliers. In addition, at the strategic level, Confucianism places an emphasis on
social capital and networking, which is of particular importance in a globalizing world
(De Bary, 1988; Chen, 2001).
Can it be concluded that Chinese cultural influence, in general, and Confucianism, in
particular, have played a major, largely unambiguous role in the emergence of entrepre-
neurial capitalism and growth in these East Asian economies as its proponents suggest
(Bond and Hofstede, 1990; Kotkin, 1992; Weidenbaum and Hughes, 1996)? This view is
perhaps best summarized by economic historian David Landes (2000, p. 2) who wrote:
‘If we learn anything from the history of economic development, it is that culture makes
almost all the difference.’ Yet does culture really make almost all the difference? Or is
406

Entrepreneurial capitalism in East Asia 407
culture’s role a lot more ambiguous and mixed in with institutions and various traditions
that are more proximate contributors to entrepreneurial and economic development? If
the latter is the case, then how might the historical background and context of the region
and its institutions help to explain entrepreneurial capitalism in East Asia? Research that
addresses historical context (Van de Ven, 2007; Zald, 1996) is beneficial to theory devel-
opment, because it does not allow complex phenomena such as entrepreneurial develop-
ment to be automatically attributed to culture or some other latent variable with little
further explanation (Singh, 2007).
In keeping with that spirit of inquiry, this chapter explores historical evidence regarding
entrepreneurial capitalism in East Asia, particularly investigating the culturist explana-
tion to entrepreneurial growth there.3 Culture has been cited as an important explana-
tory factor in many studies by sociologists and economic historians going back to Max
Weber (1951), David Landes (1998) and other theorists (Cochran, 1960; Harrison, 2006;
Shane, 1995; Hayton et al., 2002). Given the commercial primacy of the largest migrant
group in the region, the Chinese, it is easy to see how economic data promote ideas of the
exceptionalism of Chinese entrepreneurialism through Confucian influence. The share
of listed equity in Southeast Asian stock markets controlled by Chinese firms has been
estimated at between 50 per cent and 80 per cent, depending on the country in question.
This compares with an ethnic Chinese share of population of 10 per cent in Thailand, 29
per cent in Malaysia and 77 per cent in Singapore and single digits elsewhere in Southeast
Asia. Researchers in the 1990s estimated that ethnic Chinese interests controlled 45 per
cent of major firms in the Philippines, and a majority or near-majority of the largest
corporations in Indonesia, Thailand, and Malaysia (Eklof, 2002, p. 223; Rivera, 1991;
Studwell, 2007, p. xv). More recent research holds that small numbers of ethnic Chinese
families dominate economies from Hong Kong to Southeast Asia (Economist, 2009). It
seems obvious to some that culture must be the explanation, especially given the other
successful economies in East Asia such as Japan and Korea have strong Confucian
influence.
But does culture really make almost all the difference as David Landes says? History
seems to tell a different, more ambiguous story about culture’s contribution to the
development of entrepreneurial capitalism in East Asia. In spite of limited correlational
evidence (e.g. Bond and Hofstede, 1990), there actually is little research that shows cul-
ture’s direct, positive influence on entrepreneurship or other firm performance outcomes
in East Asia in spite of much theorizing on culture’s effects (Singh, 2007). This is not to
say that culture does not matter, but researchers and other observers must be careful in
rushing to cultural explanations before examining historical context, path dependencies,
institutions, firm development and other key processes that are largely distinct from
culture values (Krugman, 1994; Van de Ven, 2007).
To examine questions about what history can add to the understanding of entrepre-
neurial capitalism in East Asia, the arguments about the development of firms in this
region and culture’s impact must be investigated. Accordingly, in this chapter we examine
the culturist argument and how it has been used to explain economic development in
East Asia. Next, we consider the limits of the cultural explanation, and raise four key
problems, each of which is examined in historical context to build an understanding of
entrepreneurial capitalism in East Asia. Finally, we assess this chapter’s contribution in
employing a history-based, organizationally oriented level of analysis for future research


into the effects of history, path dependencies, and culture on the development of entre-
preneurial capitalism in East Asia.
CULTURE AND OTHER FORCES IN EAST ASIA
Research in this area can be broadly categorized into the culturist and culture-skeptic
(Yeung 2007) views on East Asian development, and is summarized in Table 18.1.
The culturist argument as a basis for entrepreneurial and economic development goes
back to Weber’s (1951) well-known hypothesis that the Protestant work ethic lay behind
the development of capitalist society. Similarly, Weber argued that Confucianism could
hinder the establishment of capitalism, though not its development. Interestingly, a
number of analysts up to the 1970s concurred with Weber’s argument that Confucian
values, particularly conservatism and antagonism to commercial activity (merchants
occupy a very low position in the Confucian firmament), actually impeded rather than
aided East Asian development.4
By the end of the 1970s, with East Asian growth in full swing, this belief turned
sharply. Well-known Rand strategic analyst Herman Kahn (1979) wrote about a distinc-
tive capitalism rising in East Asia influenced primarily by Confucianism. Kahn’s work
was picked up by a number of journalists (e.g. Fallows, 1995; Kotkin, 1992; Rowher,
1995; Seagrave, 1995) and social scientists coming from a range of disciplines from busi-
ness to sociology to history (e.g. Pan, 1990; Redding, 1990; Weidenbaum and Hughes,
1996; Whitley, 1992). Gordon Redding’s (1990) account was among the most influential.
Though expressing some doubt, it articulated a particularistic cultural style of Chinese
entrepreneurial capitalism and how it led to entrepreneurial development and economic
growth. Others were more specific in stressing that culture can lower transaction costs
and improve organizational and government coordination from which other firms and
economies should learn (Chen, 2001; Fallows, 1995; Gibney, 1992).
Such culturist theories reached their apex during Asia’s boom years of the 1990s as a
number of books about the powerhouse economies of East Asia appeared. Though some
were cursory journalistic accounts (e.g. Rowher, 1995), many were more serious aca-
demic studies. Among the more influential were the pioneering work of Thomas Sowell’s
(1997) Migrations and Cultures and Joel Kotkin’s (1992) Tribes: How Race, Religion and
Identity Determine Success in the New Global Economy, which showed how ethnic ties
and culture promote economic prosperity. Other works included The Lords of the Rim
(Seagrave, 1995), Murray Weidenbaum and Samuel Hughes’s The Bamboo Network:
How Expatriate Chinese Entrepreneurs Are Creating a New Economic Superpower in Asia,
Chris Jenks’s (1993) Culture: Key Ideas, and historian David Landes’s (1998) landmark
The Wealth and Poverty of Nations. Others, wanting to avoid too close an association
with Confucianism or Chinese culture, utilized the purposely vaguer term ‘Asian values’
in assessing and promoting economic systems, particularly in countries with smaller
ethnic Chinese minorities (e.g. Fallows, 1995; Mahathir, 1999; Mahbubani, 2008). Still
others focused more on the Chinese diaspora’s impact on business in the region and its
key role utilizing essentially culturist arguments as well (Lever-Tracy, 2002; Ong and
Nonini, 1997; Seagrave, 1995).
Yet at the same time, a small but steady stream of economists and other social scientists


Table 18.1 Key authors on culture and entrepreneurial development in East Asia
Main influences Key author Key citations on entrepreneurship and

on entrepreneurial development in East Asia
system
Culturist
Culture Frank Gibney Gibney, F. (1992), The Pacific Century: America
and Asia in a Changing World, New York:
Scribners.
Joel Kotkin Kotkin, J. (1992), Tribes: How Race, Religion
and Identity Determine Success in the New
Global Economy, New York: Random House.
Chris Jenks Jenks, C. (1993), Culture: Key Ideas, London:
Routledge.
David Landes Landes, D. (1998), The Wealth and Poverty of
Nations, New York: W.W. Norton.
Gordon Redding Redding, S.G. (1990), The Spirit of Chinese
Capitalism, Berlin and New York: W. de Gruyter.
Thomas Sowell Sowell, T. (1997), Migrations and Cultures: A
World View, New York: Basic Books.
Murray Weidenbaum, M. and S. Hughes (1996), The
Weidenbaum Bamboo Network, New York: Free Press.
Chinese diaspora Constance Lever- Lever-Tracy, C. (2002), ‘The impact of the
Tracy Asian crisis on diaspora Chinese tycoons’,
Geoforum, 33(3), 509–23.
Lever-Tracy, C., D. Ip and N. Tracy (1996), The
Chinese Diaspora and Mainland China, London:
Macmillan.
Donald Nonini Ong, A. and D. Nonini (1997), ‘Toward a
cultural politics of diaspora and
transnationalism’, in A. Ong and D.M. Nonini
(eds), Ungrounded Empires, London:
Routledge, pp. 323–32.
Business systems Victor Limlingan Limlingan, V.S. (1986), The Overseas Chinese in
ASEAN, Manila: Vita Development Co.
Victor Mallet Mallet, V. (2000), The Trouble With Tigers:
The Rise and Fall of South-east Asia, London:
HarperCollins.
Richard Whitley Whitley, R. (1992), Business Systems in East
Asia, London: Sage.
Culture skeptics
Institutions and Arif Dirlik Dirlik, A. (1992), ‘The Asia-Pacific idea’,
path Journal of World History, 3(1), 55–79.
dependency Dirlik, A. (ed.) (1998), What is in a Rim? Critical
Perspectives on the Pacific Region Idea, Lanham,
MD: Rowman and Littlefield.


Main influences Key author Key citations on entrepreneurship and

on entrepreneurial development in East Asia
system
Linda Lim Lim, L.Y.C. (1996), ‘The evolution of Southeast
Asian business systems’, Journal of Southeast
Asia Business, 12(1), 51–74.
Henry Yeung Yeung, H.W.C. and K. Olds (eds) (2000),
Globalization of Chinese Firms, New York:
Macmillan, pp. 1–28.
Yeung, H.W.C. (2004), Chinese Capitalism
in a Global Era: Towards Hybrid Capitalism,
London, UK: Routledge
Kunio Yoshihara Yoshihara, K. (1988), The Rise of Ersatz
Capitalism in South East Asia, Singapore:
Oxford University Press.
Entrepreneurship Thomas Menkhoff Menkhoff, T. and S. Gerke (eds) (2002), Chinese
Entrepreneurship and Asian Business Networks,
Richmond, UK: Curzon.
Siu-lun Wong Wong, S. (1988), Emigrant Entrepreneurs, Hong
Kong: Oxford University Press.
Shaker Zahra Hayton, J.C., G. George and S. Zahra (2002),
‘National culture and entrepreneurship: a review
of behavioral research’, Entrepreneurship Theory
and Practice, 26(2), 33–53.
History Wellington Chan Chan, W.K.K. and A. McElderry (eds) (1998),
‘Historical patterns of Chinese business’, Journal
of Asian Business, Special Issue, 14(1), 1–69.
Edmund Gomez Gomez, E.T. and H.H.M. Hsiao (eds) (2001),
Chinese Business in South-East Asia, Richmond,
UK: Curzon.
Lynn Pan Pan, L. (1990), Sons of the Yellow Emperor: The
Story of the Overseas Chinese, Boston: Little,
Brown & Co.
Joe Studwell Studwell, J. (2007), Asian Godfathers, London:
Profile Books.
more skeptical of culturist argument started to emerge (L.Y.C. Lim, 1996; 2000; Mallet,
2000; Sachs, 2000; Yeung, 2004; 2006; Yoshihara, 1988). Led by Japanese and Southeast
Asian scholars, their ranks broadened in the run-up to and aftermath of the Asian finan-
cial crisis in 1997–98 (Studwell, 2007). These commentators questioned the robustness
and resilience of East Asian firms, particularly expressing skepticism with the argument
that Confucian culture (or some other vague notion of ‘Asian values’) was the reason for
East Asian economic growth (Yoshihara 1988). Other commentators in trying to explain
the impressive growth of entrepreneurial capitalism in East Asia commended other forces
such as the unique business structures and varieties of capitalism not necessarily linked


directly to culture (Menkhoff and Gerke, 2002; Whitley, 1992). Some researchers stressed
the importance of historical context and development (Chan and McElderry, 1998;
Gomez and Hsiao, 2001; Pan, 1990), whereas others saw the development through a lens
of business groupings (Limlingan, 1986), institutions (Peng, 2003; Carney et al., 2009),
and collaborative rentier arrangements with East Asian governments (Lim, 1996; Mallet,
2000; Studwell, 2007).5 All, however, shared skepticism about culturist arguments.
To many of the culturist school, however, links between ethnic Chinese around the
region and the success of Confucian-influenced societies seem obvious in that the eco-
nomic dynamism of the system is based on cooperation, long-term contracts and reduced
transaction costs (Gibney, 1992). The culture-skeptic school counters that although
the DaVinci Code-like aura of the sprawling ‘Confucian conglomerates’ does make for
stirring stories, the culturist view fails to distinguish important institutional forces and
historical processes that could shed more light on the development of entrepreneurial
capitalism in East Asia (Studwell, 2007; Wilkinson, 1996).
CHALLENGING THE CULTURIST PERSPECTIVE
How can this debate be resolved? As Gomez and Hsiao (2001) maintain, the historical
context is helpful in understanding entrepreneurial capitalism in East Asia and the limits
of cultural explanations. Admittedly, national culture is an important influence on the
organization of societies, business systems and institutions, and on individual, group
and organizational behavior (Fukuyama, 1995; Landes, 1998; Redding, 1990; Westwood,
1997). Culture does matter, and its frequency in social science research reflects this
(Huntington and Harrison, 2000; Whitley, 1992). Yet, the culture argument is a thorny
one that must be made with care to avoid the critique that it is always possible to find
some cultural considerations to explain whatever has happened, particularly when there
is a great deal of causal ambiguity in the success of the firms and industries being studied
(Barney, 1991).
Although the culturist perspective on the success of East Asian entrepreneurial capital-
ism is interesting and captures a lot of attention, the account has several key flaws, four
of which are illuminated by a better understanding of the historical context and develop-
ment of the region. First, economic development in East Asia has shown long periods
of both growth and stagnation, whereas the culture has been largely invariant, or at least
has been treated that way by culturist studies (Singh, 2007). This means it is difficult to
attribute recent economic growth to culture without some qualification. Second, the sup-
posedly homogeneous Chinese culture yielded differences in behavior (subcultures) when
various Chinese communities migrated to different countries around Southeast Asia.
This lack of cultural homogeneity raises further questions about a uniform Confucian
culture in East Asia influencing firm organization and performance. Third, the cultural
argument has been heavily socially constructed by politicians, researchers, and govern-
ments in recent years as a post hoc explanation for entrepreneurial development (Dirlik,
1998). This raises significant validity questions about retrospective explanations for firm
success without any process studies tracing firm and industry development. Finally,
cultural and institutional factors apart from Confucianism, such as Taoism, Buddhism,
Christianity, and varying forms of governance have also played a role in influencing


the economic systems in East Asia (Berger and Hsiao, 1988; Studwell, 2007). There are
further potential methodological issues with the culturist argument such as the ecologi-
cal fallacy problem when using population level data to infer behavior of individuals or
firms (King et al., 1994), problems with measurement of culture, and, as noted, fallacious
assumptions of cultural homogeneity and time-invariance of culture. The methodologi-
cal dimensions of these problems have been well covered elsewhere and are not addressed
at length here (e.g. Gaur, et al., 2007; Singh, 2007).6
HISTORICAL CONTEXTS
Asia’s Development: Miracle Growth?
Among the many successful East Asian economies, Japan is often cited as the exemplar
for the culture and economic success claims (e.g. Johnson, 1982; Landes, 1998; Vogel,
1979). Japan has often been held up as a poor East Asian country that seemed to rise
almost overnight to become the second largest economy in the world. Yet those who see
the ‘overnight’ emergence of a powerful Japan only in the 1960s and 1970s overlook that
country’s relatively early industrialization in the nineteenth century and the military chal-
lenge it posed to several European powers and the United States in the first half of the
twentieth century, particularly in World War Two. Industrialization in earnest came to
the West in the mid-1800s, and Japan began to industrialize with the Meiji Restoration
not long after that. Japan was able to accelerate its modernization by being a fast follower
in a number of industries (Westney, 1987) and bringing in top foreign experts in numer-
ous fields to help in that endeavor (Jones, 1980). Near the end of the nineteenth century,
Japan was able to defeat a much larger and well-armed China in the Sino–Japanese War
and a decade later, routed a major European power (Russia) in the Russo–Japanese
War of 1904–05. By World War One, Japan was already an industrial power with near-
universal education and literacy, a budding Pacific empire, and a powerful military
(Andrain, 1994, pp. 31–4; Costello, 1982).
During World War One Japan took advantage of disruptions in the European econo-
mies to capture markets for consumer goods and textiles, first in Asia and later in Europe
and America. In the 1920s, Japan boasted the world’s third largest navy and the largest
economy in Asia (Costello, 1982). By the late 1930s, its economy was third in the world;
Japan’s prewar auto industry was on a par with Europe’s (Perkins 2000). Immediately
before and during World War Two, Japan produced very impressive military hardware
such as super battleships like the Yamato, the Long Lance Torpedo and the Zero fighter,
and had designed the long-range six-engine Fugaku bomber, with which the Japanese
planned to deliver the world’s first smart bombs (and biological weapons that they had
already tested) to North America (Costello, 1982; Francillon, 1979; Frank, 1999).7 Thus,
Japan’s postwar economic miracle was hardly that; Japan was just returning to the eco-
nomic prominence it held in the decades before the war.
The underdevelopment of other parts of Asia has also been exaggerated, which in
turn can overstate current economic performance. Before the Industrial Revolution
transformed the world’s economy, the huge agricultural populations of Asia produced a
significant share of the world’s economic output. For instance, for much of the last mil-


lennium, China accounted for nearly a third of world GDP (Chen, 2009). At the time of
the reign of Chinese Emperor Qian Long in the latter part of the eighteenth century, the
Chinese economy was larger than that of the British Empire. At the end of the eighteenth
century, Asia as a whole registered 37 per cent of the world’s economic output. Yet by the
twentieth century, Asia’s share of GDP had dropped considerably, rising slightly back to
31 per cent by the end of the century (Perkins, 2000).
By the late twentieth century, Asian economies had recovered considerably from their
weak performance in the previous two centuries, and were achieving growth rates of 8 to
10 per cent annually versus about 3 per cent in the West. Cultural arguments were sud-
denly back in vogue. The same cultural attributes that had been used by Weber and others
to explain Asia’s underdevelopment were now being used to explain Asia’s rapid growth.
Researchers and commentators explored the ways that kinship, racial, and ethnic ties
created new international business networks and government–business partnerships, ena-
bling low costs and rapid growth (e.g. Fallows, 1995; Kotkin, 1992; Mahbubani, 2008).
If the culturist argument were correct, it would be hard to see how the relatively invari-
ant Confucian cultures in East Asia could engender such sizeable variation in economic
performance.
Further problems with the culturist argument are evidenced by the recent history of
East Asian entrepreneurial capitalism (Baumol et al., 2007; Huang, 2008; Krugman,
1994). Returns in listed companies in East Asia have been far from impressive, even
during the decade and a half boom years of equity markets, before the 2007–08 financial
upheavals. In contrast to the tiger economies image, East Asia posted the worst stock
market performance of any emerging region in the 1990s and 2000s. For example, from
1993 – when the first significant international investments came into Southeast Asian
equity markets – to the end of 2006, total dollar returns with dividends reinvested in
Indonesia and Malaysia were worse than for money left in a London bank account.
Singapore produced less than half the gain of the New York or London markets, with
which only the Hong Kong stock market was comparable. Thailand and the Philippines
actually produced negative returns; this all remained generally true in 2009–10 in light of
the large drops in equity markets in 2007–08.
East Asian history over the centuries shows other significant swings in economic
performance and productive capacity in the region. The fact that several East Asian
economies went from being leading economies throughout the Middle Ages, to stagna-
tion for a century or two, then back to dynamic economic growth and again to checkered
growth in recent years, challenges the validity of cultural factors as an explanation for
entrepreneurial development. Clearly, the essential cultures did not change – at least few
argue that they did. This additional scope and historical context alone suggests problems
with the culturist argument, which are further evidenced by the lack of homogeneity in
Chinese business around East Asia.
Culture and the Heterogeneity of Chinese Business
The large swings in performance of firms and economies in East Asia in the nineteenth
and twentieth centuries cast doubt on culture’s power to explain the growth of entrepre-
neurial capitalism. But simply because the performance of firms and economies has been
inconsistent does not rule out culture’s influence. Firm performance is multifaceted, and


culture may be having a significant effect on organizations that is masked somewhat by

the sharp ups and downs in world markets. This begs the question: do the firms in East
Asia have key commonalties that can be explained by (relatively uniform) cultural vari-
ables putatively present in ethnic Chinese firms in Asia? Regionally common structures
might suggest isomorphic cultural elements at work and suggest the importance of
underlying cultural variables.
The central role of the family in Confucian-influenced society is a good starting place
and requires little explanation. The Confucian system establishes clear hierarchical
relationships within the family and between the family and higher levels of the govern-
ment, culminating in the head of government. This system is still a central component
of Chinese, Korean, and Japanese society. Yet how similar are the organizations of the
region? Do they have some characteristics that have been derived from the same underly-
ing (Confucian) culture or are other ethical philosophies such as Taoist, Buddhist, and
Christian teachings, and other institutional factors also exerting influence?
The Chinese emigrants of the era of mass migration from the nineteenth century
through the end of China’s revolution in 1949 were not especially homogenous to begin
with (Pan, 1990). This is evident in the matter of spoken language. China remains a
place where one need journey only 100 kilometers from home to encounter a different,
largely unintelligible Chinese dialect (DeFrancis, 1984). When migration out of China to
Southeast Asia took place, people left home not so much as Chinese, but as members of
rather different dialect groups that all happened to be from China, such as the Cantonese,
Hainanese or Hakka, who grouped together (and did business together) in their new
Southeast Asian domiciles (Pan, 1990). Explorer George Windsor Earl noted in the early
1800s that there was much friction among the various Chinese dialect groups in Southeast
Asia, almost as if they were from different countries (Earl, 1837). Victor Purcell, writing
just after World War Two, observed that different Chinese dialect groups in Southeast
Asia had been brought into a proximity not experienced in China. This led to a great deal
of friction, not cooperation, in their adopted homelands. People groups speaking differ-
ent dialects regarded one another almost as foreigners and conflict was common (Purcell,
1947). Some dialect groups even blamed others (such as the Hakka or Cantonese) for
fanning the Taiping Revolution and other uprisings in China (Yu, 2002).
The fragmentation by dialect groups also created significant differences in migrants’
behavior (Pan, 1990). For example, the Hakka people often owned Chinese medicine
shops, the Hainanese opened coffee shops, and the Shanghai natives ran garment facto-
ries. The tendency for the dialect groups to stick together and create their own associa-
tions reinforced the diversity among firms and business groups in Southeast Asia (Pan,
1990). In such circumstances, the indistinct association between countries and their
cultures limits conclusions to broad generalizations that have little explanatory value.
Ethnic Chinese business is not a uniform, self-contained entity, but exhibits a great deal
of variation. The assumed Chinese transnational ethnicity and the implied economic
relationships among ethnic Chinese entrepreneurs need to be put in the context of pro-
duction processes centered in foreign direct investment and sophisticated supply chains
around Asia (Yeung, 2004).
If the firms in Southeast Asia and Hong Kong are rather diverse, this further calls into
question the uniform culturist argument. With such localized identities come parochial
and sometimes conflicting values and interests among Chinese businesses, which may


bear closer resemblance to a global patchwork of many small enterprises that have little
similarity with each other (Kao, 1993; Studwell, 2007; Wilkinson, 1996). East Asian firms
and particularly overseas Chinese ones can be quite different and do not work together
as the culturists predict (Studwell, 2007). In business dealings, the Taiwanese often dis-
trust their Hong Kong or mainland counterparts, whereas Singaporeans are conscious
of deep-seated differences between themselves and the mainland Chinese. It is interesting
that when the Singapore government decided to create a major industrial park in China
they did not choose a Chinese province in which they would have clan and dialect connec-
tions, such as Guangdong or Fujian, but rather they selected a region west of Shanghai,
where they perceived the future business prospects to be strongest, contrary to what a
culturist argument would predict.
Researchers have often used the major East Asian conglomerates as exemplars of
Confucian businesses.8 Can many East Asian firms be characterized as ‘smaller and
younger versions’ of the most successful conglomerates in the region, such as those run
by Hong Kong’s Li Ka Shing or Malaysia’s Robert Kuok? Are they similar to the nimble
billionaires described in business literature such as Forbes Global or the hagiographies
on Chinese business leaders (Chan, 1996; G.T. Lim, 2004; MacBeth, 2003)? Many must
believe this, because a literature review on Chinese enterprise in East Asia shows that the
research has been limited to a number of key individuals and conglomerates. Yet recent
research has led to doubts as to whether a few conglomerates run by a handful of Asia’s
leading ethnic Chinese-owned firms can be used as the research site to support the cultur-
ist argument. Hong Kong, in spite of its laissez faire image, has rather limited competition
in a number of areas from banking to airlines, to cargo handling to retail, all of which
benefits the largest regional firms such as Mr Li Ka-Shing’s Cheung Kong. Several other
regional economies have done the same thing: for example Macau allowed Stanley Ho
to enjoy a four-decade monopoly in casino gambling (which ended in 2002). Although
much popular literature would argue that there is extensive business cooperation among
Chinese entrepreneurs, detailed empirical studies have indicated that such ethnic capital
is concentrated in the hands of a small number of family firms, almost Latin America
style (Claessens et al., 2000; Economist, 2009). The average ethnic Chinese family firm is
not a smaller version of the large East Asian conglomerates, and the large conglomerates
can hardly be called ‘Confucian capitalists’, as many of them derived initial success from
government concessions and licenses (Studwell, 2007; Economist, 2009).
The Social Construction of Confucianism
The recent intellectual history of Confucianism presents a third difficulty with the cul-
turist argument and reinforces the necessity of understanding historical processes.9 As
noted, those determined to find the roots of entrepreneurial success in ethnic Chinese
communities in Asia have been aided in their views by a fashionable theory. What the
Protestant ethic has done for Europe, it is posited, Confucianism has done for East Asian
societies (Chen, 2001). Yet the insistence on Confucianism and its influence on com-
merce in East Asia is heavily socially constructed, having been presented in recent years
to explain the growth of entrepreneurial capitalism in East Asia, particularly in ethnic
Chinese communities.
That there might be a Confucian variant of capitalism was an idea that did not


originate in China or among Chinese scholars but in recent scholarship in the West, with
extensive government support in East Asia (Dirlik, 1998). Though many in the postwar
period held that Confucianism and traditional aspects of Chinese culture hindered entre-
preneurial development, Japan’s rise and China’s reforms under Deng Xiao-ping led to
a gradual restoration of Confucian ideology (Dirlik, 1998). Neo-Confucian societies, as
Hermann Kahn (1979) described them, were thought to register higher growth rates than
other cultures because of two related sets of characteristics that included the nurturing
of dedicated, responsible, and educated individuals with an enhanced sense of commit-
ment and loyalty to the family and its business. These were thought to be cultural ideals
embedded in the Confucian ethic.
Kahn’s observations have been echoed and extended by many writers and researchers
from the popular press, sociology, management, and history (Kotkin, 1992; MacFarquhar,
1980; Mahbubani, 2008; Pan, 1990; Redding, 1990). Over the years, the research become
more detailed and nuanced, attributing further elements of Confucianism to Chinese
capitalism while omitting the anti-entrepreneurship elements. Confucian values, as
expressed in daily life through strong family structures, commitment to education, and
kinship or pseudo-kinship social networks are among the most frequently researched
and cited of such Chinese cultural characteristics. The discourse was further broadened
through a series of conferences, especially in East Asia and around the Pacific Rim
including the University of Hawaii. These conferences produced numerous proceedings
and volumes of discussions on Confucianism and its relationship with modernization and
entrepreneurship (Dirlik, 1992). Numerous articles have been published in the People’s
Republic of China – over one thousand on Confucianism in the 1980s alone – only a
few years after many Confucian temples and artifacts were destroyed in the Cultural
Revolution’s effort to root out vestiges of Confucianism. It may be no exaggeration to
point to the discussion of Confucianism as one of the most prolific intellectual industries
of that decade (Dirlik, 1998).
Singapore was particularly aggressive in its Confucian and Sinification campaigns.
In the late 1970s, a movement got under way under the direction of the Singapore gov-
ernment and what was the first Chinese-language university outside China – Nanyang
University (now the English language-based Nanyang Technological University). Former
Premier Lee Kuan Yew proclaimed to a Chinese New Year’s gathering in 1982 the impor-
tance of instilling Confucian values in Singapore’s citizens, particularly the schoolchil-
dren. Singapore also instituted a very successful ‘speak Mandarin’ campaign whereby
Chinese students in Singapore would learn Mandarin Chinese as a second language, or
study in a Chinese language school. The Singapore government introduced Confucianism
into the school curriculum and started to fund conferences on Confucianism and entre-
preneurship (Dirlik, 1992).
Taiwan similarly built its legitimacy as an alternative form of governance to that of
Mainland China upon its faithfulness to a more traditional Chinese culture, emphasizing
Confucianism. Mainland China has started funding Confucian institutes, and in early
2009, China funded the first Confucian institute in the Caribbean, at the prestigious
University of the West Indies in Jamaica.
This all suggests that what has come to be called ‘Confucian capitalism’ may be little
more than a social construction of a new post-revolutionary discourse on capitalism. This
is a phenomenon that British historian Eric Hobsbawn (Hobsbawn and Ranger, 1992)


has called ‘the invention of tradition’; that is, the reorganization and rearrangement of
social, political, and ideological characteristics associated with a particular tradition or
value set – in this case Confucian values (transformed to ‘Asian Values’ in Malaysia and
other East Asian countries where Chinese are in the minority) – to achieve certain policy
ends. The recent intellectual history of this topic suggests that Confucianism as a belief
system is not well specified and may be a recent construction, especially with respect to its
impact on commerce. This led one Korean researcher to write that the rapid transforma-
tion of scholarly opinion on Confucianism is unmatched in the evaluation and applica-
tion of a set of traditions (Koh, 1992). The extensive attention given to Confucianism
would have been unlikely without the intense activity and sponsorship of the 1980s and
early 1990s by East Asian governments (Koh, 1992). Much research remains to be done
on the characteristics of Confucian organizations and the implications for their structure
and performance.
Other Institutional Factors
A fourth problem with a strict Confucian-culturist view and its impact on entrepreneurial
capitalism is that Confucianism is but one of many forces acting on firms and entre-
preneurs in East Asia; others include Taoism, Buddhism, and Christianity (Berger and
Hsiao, 1988). Taoism, with its balancing forces, plays a big part in the day to day life in
Chinese communities (Nisbett, 2004). Yet Confucianism and Taoism have rather differ-
ent views of urban and rural life, money-making and commercial activity. Indeed, there
is an adage that every Chinese is a Confucianist when he is successful and a Taoist when
he is a failure (Nisbett, 2004). This is not to say that Confucianism is not important, but
it needs to be specified clearly and its effects separated from Taoism, and other nebulous
cultural terms such as the ever-present guanxi, which is treated like an all-purpose, unique
cultural phenomenon, even though it is not.
What can be gathered from Confucian and Taoist influence on Chinese societies?
Confucianism traditionally scorned hard work and all forms of physical exertion while
idealizing leisure and effortless success. This might be surprising to North Americans
raised on rugged individualism or to Japanese familiar with stories extolling the hard
work of farmer and reformer Ninomiya Kinjiro. The Confucian gentleman had long fin-
gernails and pale skin, to show that he did not have to work outside doing manual labor.
Taoism reinforced this attitude by elevating to the highest philosophical level the princi-
ple of wu-wei, or non-effort, of accomplishing things with the minimum expenditure of
energy. Similarly, in Chinese military thinking, such as the work of Sun Tzu – which is
very influential in East Asian business thought – it was best to win battles not by exerting
prodigious effort but by compelling the opponent to exhaust himself (Sun, 1963; Graff
and Highham, 2002). Writing on Chinese business makes a similar point about how effec-
tive strategies will allow opponents to flail away until they are tired or quit (Chen, 2001).
Apart from winning through less effort, Taoist philosophy emphasizes the importance
of ‘good luck’, the likelihood of which can be increased by proper ritual acts (Tu, 1996).
Taoism has the concept of the Tao (the Way), or the forces of nature and history, that
gives a philosophical foundation to the basic Chinese view that much of life is determined
by forces external to the actors involved. In this view, some people are more skilled than
others in going with history’s ebb and flow and thus receiving good luck. Others take their


own lonely path and are destined for bad luck or too much extra effort. Still others fool-
ishly buck the tide altogether and are destined to frustration and defeat (Nisbett, 2004).
This stress on good fortune does not, however, produce a fatalistic approach to life as
there are always things that can be done to return to good luck. If things turn out badly,
it might have only been bad luck, attributable to the individual’s failure to appease the
correct authorities, which can be corrected in time. Similarly, Chinese culture also stresses
the rewards of supplication, or humbling oneself, a psychological orientation that also
goes against the grain of the self-reliant individual (Lai et al., 2010).
The paradoxical combination of achievement, conformity, and dependency was
central to the traditional Chinese socialization practices, which sought to teach the child
early that conformity to the rituals and wishes of others was the best way to good luck
and that being ‘different’ was dangerous. Confucian duties of the sons to the father, and
of the younger and older brothers to each other, were lifetime obligations. The tradition
was, thus, inward looking, and there was a basic instinct to distrust people outside of the
family and close friends, which further illustrates the mixed effect Confucianism has on
commerce (Spence, 1990). In contrast, many Japanese primary schools prominently dis-
played a statue of Ninomiya Kinjiro, the nineteenth-century reformer who used to carry
his firewood while at the same time reading a book, to illustrate diligence to the Japanese
people. In Japan, however, the tests of achievement in both samurai and merchant fami-
lies were in terms of competition against outside parties and forces. Moreover, a son or
younger brother could set out on his own; if successful, he became a gosenzo – the head
of a new family line, established through his risk-taking and independence, not unlike the
Horatio Alger-style, rugged individualist extolled in the US.
What does the historical record say about the important philosophies of Confucianism,
Taoism and their impact on early entrepreneurship in China? The Chinese invented
paper, printing by movable type, gunpowder, an early mechanical clock, the magnetic
compass, and an early piston bellows. Yet these technological advances were often devel-
oped by Taoist monks and scholars, primarily for ritual or ceremony at the behest of the
Emperor or Mandarinate and not for commercial purposes (Kennedy, 1987). Property
rights did not exist such that these innovations could be protected, developed, and wealth
concentrated for further expansion. Many in China and later in Southeast Asia thought
entering the Civil Service was the surest way of success and this drew some of the most
intelligent and innovative individuals into government bookkeeping and bureaucracy as
the most sought after and respected profession (Pan, 1990). Similarly, for every Chinese
citizen who prospered from trading, there were hundreds who remained aloof from com-
mercial activities. More recently, higher levels of the Protestant work ethic in Malaysia
than in Britain (Furnham and Muhiudeen, 1984) and the existence of high levels of
Confucian-style values in the US (Robertson and Hoffman, 2000) raise further doubts
about the usefulness of national culture for explaining entrepreneurial capitalism, and
emphasize further the importance of the historical context of development in these
economies (Dielman, 2010).
The enthusiasm for business is by no means a general Chinese trait. In China itself, the
merchant has been disparaged as the lowest of people until the economic reform period,
though in some official circles in China the entrepreneur is still not to be trusted, even
after decades of economic reform (Huang, 2008). In a society ordered by Confucian
values, the ability to profit from trading was never admired, and this likely dampened


Chinese entrepreneurship. Confucian disregard for science and commerce has also at
times been a constraint to economic development. If there is such a thing as a tradition
of entrepreneurship among the Chinese, it is found more among the coastal Chinese and
the diaspora (Scarborough, 1998). The fiercely independent Teochew entrepreneurs and
the Hokkien traders who sailed to Southeast Asia were not heirs to some long mercantile,
Confucian tradition. Rather, they were people who, by emigrating, were able to leave the
local culture and institutions behind and seek out the trading opportunities that allowed
them to build their businesses and to keep their wealth.
DISCUSSION
The previous section shows ways in which historical context can help to improve the
understanding of culture’s impact on entrepreneurial capitalism and development in East
Asia, particularly with regard to culture’s influence. At the most general level, the relative
economic success of East Asian economies and firms suggests that certain factors includ-
ing cohesive, thrifty families, a focus on prescribed roles, discipline, and filial piety have
a cultural basis and are important to entrepreneurship. These factors, however, are also
present in important family business systems around the world, which raises the question
of whether institutions, particularly the rule of law, and resulting organizational proc-
esses and structures, explain more about the industrial systems in East Asia and other
developing economies than culture (Peng et al., 2008; Singh, 2007).
Specifically, the more abstract argument about a Confucian value system driving a
unique form of Chinese entrepreneurialism does not stand up well to analytical scrutiny.
In particular, it fails to distinguish between Confucianism and a roster of vague moral
teachings including influences from Taoism, Buddhism and Christianity, and other belief
systems that are not always observed in practice by their followers. Nor does it explain
the significant differences in entrepreneurial orientation among various dialect groups
outside of China. Notions of a cultural imperative downplay historical context. Those
who say that Chinese are born entrepreneurs commit the same logical fallacy as those who
say European Jews were born to be jewelers and bankers. Such arguments overlook that
in pre-nineteenth century Europe, Jews were excluded from guilds and from many areas
of trade and farming, while the Christian church proscribed its followers from lending
money at interest. Most economic opportunities for European Jews were restricted while
those in banking were thus easily available.
Something similar is true of vocations in Southeast Asia. Colonial administrators
were drawn from indigenous populations, while many commercial areas associated with
trading, gambling, and real estate were left to the ethnic Chinese immigrants. Educated
Indians and Sri Lankans in the British Empire tended to be recruited for government and
professional positions. Hence an observer outside the high court in downtown Singapore
or Kuala Lumpur today could be forgiven for believing that some underlying cultural
influence accounts for the large number of lawyers and judges of subcontinental herit-
age. Yet this proclivity to law is not created by Indian culture, but is based on the legacy
of British colonial rule on the Malay Peninsula. When the Chinese arrived in Southeast
Asia, they were frequently barred from government service and from many professions,
and were often not permitted to own agricultural land or engage in farming; opportunities


in trade and commerce, however, were left open to them. When World War Two came,
Japan, as an occupying power, turned to established Chinese traders to help run the local
economies. This opened further commercial opportunities from banking to rice trading
to property management, hotels and gaming which Southeast Asia’s Chinese-owned con-
glomerates effectively exploited (Seagrave, 1995; Studwell, 2007).
But there is Confucianism and neo-Confucianism, and the Confucianism the expo-
nents of this theory are talking about is not that of old imperial China, but a set of values
and attitudes common to all the national cultures falling within the orbit of Chinese
civilization and Confucian influence (Bell and Chaibong, 2003). They further argue
that these attributes – a developed capacity for discipline and delayed gratification, an
emphasis on harmony in social relations, and respect for superiors – have given the tiger
economies of East Asia a comparative advantage in modern capitalist development.
In this view, Chinese managers, who have a widely noted cultural tendency to rely on
informal ties and personal connections to achieve organizational goals, fit well within this
regional trading economy, and possibly the increasingly global world economy. However,
Boisot and Child (1996), Peng (1997), and Peng and Heath (1996) argue that, in addition
to cultural influences, institutional imperatives during the transition may further neces-
sitate the extensive reliance on personalized exchange relationships, a (cultural) reliance
that should wither over time.
Such an institutional interpretation is borne out by similar findings from developing
economies throughout Central and Eastern Europe (e.g. Grabber and Stark, 1997; Buck
et al., 1998). In these countries there is little influence of the Chinese (or Asian) culture
that places a premium on interpersonal ties. The importance of cooperative relationships
or family ties for businesses in Asia and other emerging economies is due to the under-
development of institutions and markets rather than to cultural factors (Fukuyama,
1995; Peng and Heath, 1996). Ethnic business networks in Asia can also be explained
by inadequate markets, corrupt governments, weak legal systems, poor financial and
banking sectors, and the absence of reliable intermediaries, as opposed to culture. Rather
than being primarily driven by cultural values such as trust and collectivist tendencies,
Fukuyama (1995) argues that these networks operate within low trust cultures driven
importantly by inadequate institutions. Chandler’s (1990) concept of ‘personal capital-
ism’ to explain the overlaps of structure and management of family businesses in Britain
has potential for explaining business patterns in Asia, as Carney (1998) illustrates with
Chinese family businesses in Hong Kong.
Culture might be a useful latent moderator, but is unable to explain much on its own,
apart from the institutional and historical, path-dependent context of its setting (Singh,
2007). Though there is correlational evidence on culture and GDP growth (Bond and
Hofstede, 1990), much research remains to be done on culture in general, the prevalence
of Confucian and other cultural values among entrepreneurs in East Asia, and the rela-
tionship of these values to individual and organizational behavior, and (ultimately) to
firm structure and performance.
Implications for Research
To understand entrepreneurship and competitiveness in Southeast Asia is to understand

Chinese businesses, how they were started, and how they have developed. Although there


has been much recent research on the Chinese family business (e.g. Ahlstrom et al., 2004;
Carney, 1998; Yeung, 2002; 2006), researchers have often treated the cases largely ahis-
torically and have seldom followed the growth and development of these firms over time
(Ahlstrom et al., 2004; Roseberry and O’Brien, 1991). Past research has often looked at
the contemporary conditions of Chinese firms around Southeast Asia and concluded,
from their reported profit margins, and growth rates, and from surveys of competitive-
ness, that these firms are becoming the next, Sony, Toyota, or Samsung (e.g. Asia, Inc.,
1997). Yet building a brand and competing globally is a notoriously complex process and
it often takes years if not decades for a firm to build those capabilities. This is reflected
in past lists of potential globally competitive firms among Chinese family businesses that
failed to become world beaters, often because of internal family dissent (Cushman, 1991;
Wong, 1985), or government intervention (Economist, 2009; Huang, 2008) – problems
which would have been highlighted by historical or process research intended to trace
their development.
A very limited amount of research has been conducted that actually follows the devel-
opment of these firms (Dielman, 2010). Such research is needed to identify the regionally
and globally competitive firms as opposed to a cross sectional slice of what may only be
today’s good performers, benefiting from government concessions or arbitrage opportu-
nities (Yoshihara, 1988; Studwell, 2007). The few studies that have been conducted using
historical research examining these firms’ development and the impact of local institu-
tions have eschewed cross sectional studies, preferring to follow these firms’ life cycles.10
Wong (1985) conducted one such study, finding that Chinese family businesses in East
Asia typically go through four stages of development: emergent, centralized, segmented,
and disintegrative.
The disintegrative stage is of particular interest as it calls attention to why Chinese
family firms have had a great many problems in growing beyond a certain size or
establishing a sustained presence in an industry (Ahlstrom et al., 2004; Carney, 1998;
Yoshihara, 1988). For example, one major factor contributing to the disintegration of
the family firm is the issue of succession and control of the firm or its divisions. There
are several prominent examples, such as the gradual breakup of the Haw Par Group built
by Aw Boon Haw (the firm that produces Tiger Balm ointments). At one point, the Haw
Par Group was considered a major player in the regional newsprint business, but it has
gone the way of many disputed family firms. In order to avoid problems associated with
attributing causality to correlations, firms such as these need to be studied over time using
process research (Van de Ven, 2007), with the help of archival data such as firm docu-
ments, financial data and news reports to ascertain how they started, how they grew and
how centrifugal forces may have affected their sustainability. This chapter has challenged
the popular notions of a common culture-based form of Chinese entrepreneurial capital-
ism and suggested ways in which historical study can help to build understanding.
The phenomenon of troubled family firms is by no means unique to Chinese culture or
Confucianism, though some commentators have suggested that problems may arise from
the purported low trust nature of Chinese societies (Fukuyama, 1995). Goody (1996,
pp. 141–8) discovered similar problems among family firms in India, and Rose (1993)
found a similar problem with succession and continuity of family firms in the West. Even
studies of the old Quaker family firms that were so active in early British and American
commerce found some problems with succession, control, and breakup of family firms


in spite of strong cultural admonitions to the contrary (Walvin, 1998). A clearer under-
standing of the entrepreneurial firm and its process of founding and growth (or breakup)
will help to identify processes that are common to most family firms or to isolate those
unique to entrepreneurial firms in ethnic Chinese communities.
Expanding the scope of analysis beyond cross sectional studies or literature reviews of
the past few years shows that the culturist argument for economic development in East
Asia is problematic. This chapter concurs with the argument that there is a heterogene-
ity of styles of business organization and management and influences among members
of the Chinese business community (e.g. Hodder, 1996). In addition, even the overseas
Chinese in East Asia are not homogeneous and do not have a homogeneous cultural base,
apart from an emphasis on family business and connections, which may be a reaction to
the institutional structure of the region (Peng, 2003). Research on the development of
firms in East Asia and the historical context, as well as the history of the region, would
shed much more light on how firms and economies developed, what can be learned from
the East Asian experience, and how indispensable (or dispensable) is culture in that devel-
opmental experience.
In sum, culture does impact entrepreneurship; it is implausible that a force as prevalent
as culture, within which business activities are embedded, can be irrelevant. Culture is a
broadly based underlying cognitive factor that affects society in general. Entrepreneurship
rests on the argument that the contextualization that will improve strategy theory should
primarily focus on the institutional environment and stage of development, not on
cultural influences.
Yet little research has been able to establish the direct and specific impact of cultural
values on entrepreneurship firm strategy and performance (Singh, 2007). Much research
measures culture implicitly at the national level, or uses a single measure for everyone
in a given country. This makes it difficult to conclude whether the observed differences
between firm samples in two countries are due to cross-cultural or cross-national differ-
ences (Lau and Ngo, 2001). In the 1950s and 1960s, social scientists argued that East Asia
was not likely to become wealthy because Confucianism, Taoism, and other socio-cultural
factors limited the appetite for goods and services and further hindered commercial
development. But, as is well known, the last several decades have witnessed the significant
economic growth of Japan, Hong Kong, Singapore, South Korea, Taiwan, and Mainland
China. As such, the current line of culturist thinking argues that the current success of
Asia is culture-driven and based on the emphasis given to study, hard work and har-
monious relationships. Yet how did this happen without any major changes in culture?
If Asia’s workforce is hard-working and harmonious because of culture, it should have
also been that way one or two hundred years ago. If culture was not causing economic
growth in those economies in past centuries, how did essentially the same culture start
causing economic growth recently? To use cultural variables as a direct explanation for
the economic growth in East Asia over the past several decades one would have to find
some significant and striking changes in those variables in recent years, yet such changes
did not occur. As this chapter has argued, culture may moderate commercial activity but
it falls short as a direct explanation for entrepreneurship and economic growth.
Future research utilizing a historically based, organizational level of analysis is nec-
essary to better understand entrepreneurial capitalism in East Asia. Research into the
dynamics of these economies and their organizations should be undertaken through an


inter-disciplinary approach. This could help provide insights into new theoretical per-
spectives or models that could be developed to explain more cogently the effects of insti-
tutions, culture, history and path dependencies on the development of entrepreneurial
capitalism in East Asia (Khanna, 2009). This chapter contributes to that effort by sug-
gesting several of the problems and limitations of the culturist argument, and what needs
to be better understood about the history of a region so that cogent cultural factors can
be grasped and utilized in future study of the development of entrepreneurial capitalism
in East Asia.
NOTES
1. The term ‘Confucian capitalism’ is a heuristic term to describe the historically and geographically specific
form of entrepreneurial capitalism that refers to the social organization and political economy of the
Confucian-influenced economies. These include the ‘overseas Chinese’ societies outside mainland China
proper, particularly in East and Southeast Asia (Hong Kong, Macau, Taiwan, Singapore, Indonesia,
Malaysia, the Philippines, Thailand and Vietnam), as well as Korea and Japan.
2. Malaysia, Thailand, and Vietnam also have sizeable Chinese minorities and have experienced solid eco-
nomic growth.
3. The culturist explanation (in the East Asian context) stresses learned cultural values such as need for
achievement, thrift and other values often linked to Confucianism in explaining the development of entre-
preneurial capitalism and economic growth in East Asia (Wilkinson, 1996).
4. Although Weber did not think Confucianism was particularly helpful to capitalism’s development, he
thought that the Confucian emphasis on hierarchy and order would help to build an economy once capi-
talism was suitably introduced and nurtured (Pye, 2000).
5. Rentier capitalism refers to a type of capitalism whereby much income is generated from property and
received as interest, rents, dividends, or capital gains. In East Asia, rentier capitalism and its gains are
thought to be heavily derived from government concessions (such as gaming rights or local rice distribu-
tion) given to the favored – often well-connected Chinese businesspeople (Studwell, 2007).
6. There are several other methodological and research design problems related to the way culture is meas-
ured and used in many studies. For example, even if culture and related factors influence firm strategy
and performance, their impact is likely to be complex and indirect, possibly by influencing organizational
structures, processes, authority relationships, and corporate governance. As a result, culture’s impact on
strategy, entrepreneurship, and individual firm performance is still far from accepted (Gaur et al., 2007;
Shane, 2008; Singh, 2007).
7. The Fugaku six-engine bomber was designed to have a range of 20 000 kilometers – sufficient to attack the
US West Coast and return to Japan or fly through to German-occupied Europe. Designed in 1942, it never
went into production as the project was cancelled not long after the Allied invasion of France in 1944.
Japan did continue with the development of smart bomb biological weapons. After successfully testing
them in China, Japan had several ready and scheduled for use, to be delivered by light aircraft launched
from modified submarines. Only the war’s end prevented their deployment against the United States west
coast in the autumn of 1945 (Francillon, 1979; Frank, 1999, pp. 324–5).
8. It was not uncommon for culturalist writers to argue that East Asian business leaders such as Thaksin
Shinawatra, the embattled former Prime Minister of Thailand, and Indonesia’s Bob Hasan are exemplary
Confucian business leaders who did not receive significant government concessions in building their busi-
ness empires. Recent research (and events) in Thailand, Indonesia and elsewhere strongly suggest other-
wise (Studwell, 2007).
9. Neither the intellectual history of Confucianism nor the process of entrepreneurial development is meant
to be exhaustive here. Rather, they provide an illustration of what must be studied to unpack changing
dynamics of Chinese capitalism so that culture’s impact can be suitably addressed.
10. It is always interesting to follow up on the lists of ‘most competitive’ family firms in Southeast Asia
a decade later. For example, a fine Asian fast food chain – Jollibee of the Philippines – was supposed
to dispose of McDonalds in short order because Jollibee had better ‘connections’ among the overseas
Chinese around the region and understood Asian tastes better than McDonalds (Pritchard, 1998).
About a decade later, Jollibee had about 160 restaurants around East Asia, while McDonalds has over a
thousand – and that number excludes those in Japan.


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Index
agency theory 7, 238–42 other institutional factors 417–19
agency theory versus resource dependence social construction 415–17
theory 243–7 Covin, Jeffrey 145–7
incentive contracts 239–40 creative destruction 1, 15, 29, 38
Aldrich, Howard 28–9, 34, 35, 189–90, 192,
220, 262 Dahmén, Erik 9, 23, 392–4
assets of newness 6, 197–8 Davidsson, Per 8, 20, 31, 34, 36, 39, 64, 177
Austrian school of economics 5, 23–4, 99–105, decision-making 163–72
346 Bayesian rationality 165–6
bounded rationality 85, 166, 244, 246, 250
Barnard, Chester 85–6, 234 design 177–9
Baumol, William 23, 35, 353–4, 383 entrepreneurial decision-making 6, 170–72,
bibliometric analysis 3–4, 47–51, 320–23 172–6, 176–9
in entrepreneurship research 49 rationality 164–70
limitations 47–8 Dess, Gregory 90, 147–50
social entrepreneurship 320–21 development blocs 39–5, 400–401
board of directors 230, 236–8, 241–2, 247–9 disciplinary researchers 4, 31, 32, 38–9, 52, 54
Bonacich, Edna 219–20 domain of entrepreneurship research 32–4
bounded multi-disciplinary field 4, 63
business cycles 9, 390–92 early thinking in entrepreneurship research
primary movement: prosperity and recession 17–20
391 economic history 8–9, 347–50, 364–6
secondary movement: depression and revival economics era 3, 15, 20–25
391 economics of entrepreneurship 35–6
effectuation theory 170, 172, 310–11
Cantillon, Richard 18, 21, 81, 83, 100 embeddedness 267–8
Casson, Mark 19, 367–9 entrepreneur as an individual 28–9, 30, 36,
Chandler, Alfred 27, 37, 350 297–9
classical economics 18–19, 25 locus of control 298
Coase, Ronald 214–16, 250 need for achievement 297–8
Cochran, Thomas 27, 348–9 entrepreneurial activities 401–3
cognitive perspectives/theories 126–38, entrepreneurial alertness (EA) 5, 24, 98–9,
296–304 105–8, 125–6
cognitive styles 299–300 EA versus search 107, 111
historical roots 126–8 entrepreneurial culture 364–6
planned behaviour 300–302 Britain 369–78
process of opportunity recognition East Asia 408–11, 413–19
128–38 entrepreneurial firms 229–30
role of expertise and expert performance entrepreneurial groups 6–7, 205–6
135–8 diversity within 209–10
social cognitive theory 7, 302–4 entrepreneurial orientation (EO) 6, 88,
Cole, Arthur 23, 26–7, 348 142–3
communities of practice 274–5 conceptual model 145–50, 152–4
Confucian capitalism 411–12 conceptual roots of EO 143–5
critiques 419–20 empirical studies 150–51
historical background 412–13 EO and performance 154, 156–7
429

430 Index
methodological issues in EO research legitimacy 185, 190, 192, 194, 196, 199, 237
151–2 liabilities of adolescence 6, 196–7
ongoing debates 152–4 liabilities of newness 6, 185–93
theoretical grounding of the EO construct approaches to study LoN 193–6
152, 155 novelties related to newness 190–91
entrepreneurship as a multi-disciplinary Light, Ivan 219
phenomenon 35 long-term cycles 9, 387–90
entrepreneurship as a multi-level phenomenon long structural cycles 9, 397–401
34–5 rationalization periods 399–400
entrepreneurship researchers 4, 31, 32, 38–9, transformation periods 399–400
52, 54–6 Lumpkin, Tom 147–50
eras of entrepreneurial thinking 19–20
ethnic entrepreneurship 218–21 management studies era 3, 15, 20, 29–36
evolution of entrepreneurship as a research March, James 164
field 37–9 market (dis)equilibrium 101, 105–6, 108–9,
evolutionary economics 23 111, 115, 367, 369
Marx, Karl 22
founding teams, see entrepreneurial groups McClelland, David 28, 297
fragmentation of entrepreneurship research Menger, Karl 23, 99–102, 346
31–2 migration of scholars 16–17, 31, 35, 37–8
Miller, Danny 144–5
Gartner, William 33–4, 334–5 Mintzberg, Henry 144, 149, 178
German Historical School 22 Mises, Ludwig von 24, 103–4
Gerschenkron, Alexander 8–9, 26, 349, mobility of scholars 31
356–7 modernization process in society 26–7, 37
governance system 229–30
growth phase of entrepreneurship research neoclassical economics 21, 25
31–2 networks
number of publications 52–3 boards of directors 237
disadvantages 268
Hayek, Friedrich 24, 98, 102–3 ethnic group 220–21, 416, 420
heterogeneity of entrepreneurship 34–5 information sources 368–9
historical research versus historical perspective opportunity recognition 125–6
319–20 social entrepreneurship 334
historical sociologist approach 26–8 see also social network theory
historicism 8, 344–52
Olson, Mancur 7, 216–18
information asymmetry 5, 106, 116, 190, 200, opportunity 121–2
232, 238, 368 opportunity evaluation 6, 167, 292
infrastructure of entrepreneurship research 32 opportunity exploitation 6–7
innovation 22, 355, 401–3 resource assembly 113
institutional theory 194, 199, 272, 330 opportunity recognition 5–6, 121–8
integrative works 7–8 affect 138
cognitive processes 128–37
Jenks, Leland 27, 348 critiques 112–14
discovery 102–3, 110–12
Keynes, John Maynard 385–6 discovery versus creation 112–13, 132–3
Kirzner, Israel 5, 23–4, 98, 105–10 importance of information 123–6
Knight, Frank 18, 21–2, 81–3, 83–4, 101, intelligence 124, 170–71
167–8, 172–3 pattern recognition 129–32
knowledge platforms in entrepreneurship pattern verification 133–5
research 54–6 prior knowledge 126
economics 60–61 process 123–6
management studies 58–60 regulatory focus theory 135
other fields 61–3 signal detection theory 134–5


Index 431
Parsons, Talcott 26, 28–9, 348 period 3: theory-driven across multiple

path dependency 271–4, 354–6 sectors 330–31
Pfeffer, Jeffrey 89, 233–6 social network theory 7, 29, 256–70
Physiocrats 18 anthropological perspective 260–61
prospect theory 167 critiques 275–6
psychologist approach 28–9 social network theory and entrepreneurship
261–7
Research Center in Entrepreneurial History 23, sociological perspective 259–60
26–8, 37, 348 social sciences era 3, 15, 20, 25–9
resource-based view of the firm 152, 199 sociologist approach 28–9
resource dependence theory 88–91, 233–8 Sombart, Werner 26, 28, 345
co-optation 235 specialization of entrepreneurship research
open system 233–4 34
power 235–6 stakeholders 195–6, 243–4, 246
resource dependence versus agency theory Stinchcombe, Arthur 187–9, 213
243–7 structural holes 268–9
return of economics in entrepreneurship Swedish School of Growth 396–7
research 35–6
return of social sciences in entrepreneurship take-off phase of entrepreneurship research
research 35–6 30–31
risk 18, 21, 164–5 theory of planned behaviour 289, 302
risk-taking 5, 21, 82–3 Thompson, James 85, 87
transaction costs theory 214–16, 411
Salancik, Gerald 89, 233–6 trust 199, 211–12, 218, 262, 276, 421
Say, Jean-Baptiste 18
Schmoller, Gustav 22, 344–5 uncertainty 5, 18, 21, 81–2, 167–9
Schumpeter, Joseph 8–9, 22–3, 26, 270–73, differences between uncertainty and risk
347–8, 354–6, 366, 384–7 82–3, 164–5
search for maturation in entrepreneurship entrepreneurship research 83–4
research 32–6 historical evolution of the uncertainty
self-efficacy 303–4 construct 84–91
self-regulation framework 291–6, 305–10 information uncertainty perspective 85–8
Shane, Scott 32–3, 59, 98, 177, 190–91 managerial implications 93
Shepherd, Dean 190–91, 196, 300 munificence, dynamism and complexity
Simmel, Georg 7, 26, 211–13 90
Simon, Herbert 166, 178 objective measures of uncertainty 89–91
Slevin, Dennis 145–7 research implications 92–3
Smith, Adam 18–19, 238, 385 state, effect and response 87
social capital 269–70 subjective measures of uncertainty 86–8
social cognitive theory 289, 302
social entrepreneurship 7–8, 323–35 Venkataraman, Sankaran 32–3, 98
changes in topics over time 323–7
future of social entrepreneurship research weak ties 267
332–5 Weber, Max 22, 25–6, 28–9, 206–9, 345–6
period 1: public policy and change 327–8 Whitley, Richard 17, 38
period 2: nonprofits and value creation
328–30 Zahra, Shaker 4, 39, 46, 87–8, 91, 147


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Historical Foundations of Entrepreneurship Research

Hans Landström and Franz T. Lohrke - 9781847209191

M2388 – LANDSTROM PRINT.indd i 29/9/10 11:45:22

M2388 – LANDSTROM PRINT.indd ii 29/9/10 11:45:22

Hans Landström and Franz T. Lohrke - 9781847209191

M2388 – LANDSTROM PRINT.indd iii 29/9/10 11:45:22

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2010922123

ISBN 978 1 84720 919 1 (cased)

Printed and bound in Great Britain by MPG Books Group, UK

Hans Landström and Franz T. Lohrke - 9781847209191

M2388 – LANDSTROM PRINT.indd iv 29/9/10 11:45:22

1 History matters in entrepreneurship research 1

PART I HISTORICAL DEVELOPMENT OF ENTREPRENEURSHIP

2 Entrepreneurship research: a history of scholarly migration 15

PART II INTELLECTUAL ROOTS OF ENTREPRENEURSHIP

Section II.1 Opportunity Recognition

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10 Entrepreneurial groups 205

PART III ECONOMIC HISTORY AND ENTREPRENEURSHIP

15 Historical reasoning and the development of entrepreneurship theory 343

Hans Landström and Franz T. Lohrke - 9781847209191

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M2388 – LANDSTROM PRINT.indd vii 29/9/10 11:45:22

Todd W. Moss, Rawls College of Business, Texas Tech University, USA

Hans Landström and Franz T. Lohrke - 9781847209191

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M2388 – LANDSTROM PRINT.indd ix 29/9/10 11:45:22

Hans Landström and Franz T. Lohrke - 9781847209191

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M2388 – LANDSTROM PRINT.indd 1 29/9/10 11:45:22

Hans Landström and Franz T. Lohrke - 9781847209191

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PART I: HISTORICAL DEVELOPMENT OF

As noted above, entrepreneurship research is often regarded as a relatively young and

Hans Landström and Franz T. Lohrke - 9781847209191

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PART II: INTELLECTUAL ROOTS OF ENTREPRENEURSHIP

Hans Landström and Franz T. Lohrke - 9781847209191

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Section II.1 Opportunity Recognition

Hans Landström and Franz T. Lohrke - 9781847209191

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Section II.2 Opportunity Evaluation

Next, we examine how entrepreneurs evaluate potential opportunities. Scholars have

Section II.3 Opportunity Exploitation

Hans Landström and Franz T. Lohrke - 9781847209191

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Section II.4 Integrative Works

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PART III: ECONOMIC HISTORY AND ENTREPRENEURSHIP

Hans Landström and Franz T. Lohrke - 9781847209191

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ADDITIONAL READINGS ON HISTORICAL REASONING IN

In sum, we have developed this book to provide an historical grounding of entrepreneur-

Hans Landström and Franz T. Lohrke - 9781847209191

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