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Schumpeter and Entrepreneurship in the Large, Established Firm

Tuesday 02 September 2014

Last week, Nicolai Foss posted a short blog piece on entrepreneurship in the established firm. In the subsequent exchanges of commentary, it was noted that Schumpeter wrote of this beginning in the late 1920s (in German) and in two of his most most cited (and sometimes read) books, The Theory of Economic Development and Capitalism, Socialism, and Democracy – written in English after his move to Harvard University. Unlike his early writings, wherein the entrepreneurship cycle was about new firms supplanting old firms, these books allowed for innovation to happen as a strategic choice within large oligopolistic firms. Naturally, this type of innovation does not supplant the existing firm – a strategic suicide, but permits a number of production functions to coexist in the large, established firm. And any of these may be jettisoned over time in response to their failure to sustain profits.

 These insights from Schumpeter are scattered in these two books and his other writings. And if a reader hasn’t gotten past the paragraphs on creative destruction, these insights remain unseen.

 Fortunately, one scholar has invested the time and intellect necessary to bring these scattered insights together and formalized a model that contrasts with the small-firm entry/exit model of Schumpeterian competition. Esben Sloth Andersen is a professor of evolutionary economics and industrial dynamics at Aalborg University. His scholarly portfolio brings together his work on simulation models of innovation and industry evolution, his examination of theories and models from evolutionary biology, and a series of erudite publications on Schumpeter and his work. Andersen has written three books that are must-reads for persons working in evolutionary economics, entrepreneurship, and strategy and competition. The first is a mid-1990s volume titled Evolutionary Economics: Post-Schumpeterian Contributions (Pinter), in which he uses simulation methods to elucidate Nelson and Winter’s 1989 classic book, while relating it to other models of firm and market dynamics. The two recent books – Schumpeter’s Evolutionary Economics (Anthem, 2009) and Joseph A. Schumpeter: A Theory of Social and Economic Evolution (Palgrave Macmillan, 2011) – are truly marked by erudition. That is, they are comprehensive, clear, and have a “spine” constructed by the author that makes the subject matter coherent.

 At the risk of offending Professor Andersen by offering caricatures of his works, I would say that the 2009 book is more comprehensive. It is very complete in covering Schumpeter’s work on economic dynamics, with specific contrast to prevailing static economic theory, from the first German texts of 1908 and 1912 through the complex tome of Business Cycles (1939), and to the posthumous History of Economic Analysis. In this book, Andersen introduces his conceptions of three Schumpeterian evolutionary models, which he calls Mark I, Mark II, and Mark III. The first contains the small-firm entry/exit model and contains the elements of the cyclical innovation model. The second introduces the “trustified” economy and permits large, oligopolistic firms to evolve without self-destruction within the innovation cycle. The third considers the social dynamics which were evident in the early Schumpeter’s interest in evolutionary social science: the interlocking social, political, and economic systems which he wrote about in Capitalism, Socialism, and Democracy. Andersen makes it clear that there is not one Schumpeterian evolutionary model, although he gently notes that in a casual reading of any or all of Schumpeter’s books, one will not find this obvious.

 The most recent book, which is part of the Palgrave series on Great Thinkers in Economics, contains all of the main arguments of Andersen’s 2009 book and presents them in an exceptionally clear exposition. Some of the historical details and some elaborations are left out to more effectively highlight the Mark I, II, and III models. I have purchased a dozen copies of this book to share out with graduate students and colleagues and find it to be a superb way to enter the literature by Schumpeter and about Schumpeter. There is some interesting biographical material, as well. I would argue that this is a place to begin, then one gets even more from reading McCraw’s Prophet of Innovation and Andersen’s Schumpeter’s Evolutionary Economics.

 Finally, for skimmers, I point to chapter 9 in Schumpeter’s Evolutionary Economics and chapters 10 and 14 in the Palgrave book as the places to see the model of innovation in the large, established firm. Then, we can respond to Professor Foss’ call to arms.

Some thoughts on microfoundations of entrepreneurship: emergence, aggregation, and supervenience

Wednesday 27 August 2014

I have posted recently on the microfoundations of entrepreneurship, particularly of collective entrepreneurship. This latter term is used to denote the superset of team entrepreneurship or group entrepreneurship – whether as a startup or within and existing organization – and entrepreneurial ventures that are a strategic alliance of (usually small) firms, as in the wine trails and food hubs I am studying with my colleagues. For me, the context of the collective as a stand-alone new venture or a team venture in a large corporation is less important than the phenomenon of this particular form of collective action. That is, how do these groups form and act jointly in new venture creation?

In one post, I looked to the discipline of philosophy. I highlighted the work on social ontology as one lens to study group intention (to act) and group agency – the ability for a collective to act. This is truly a microfoundational approach to the study of the inception of collective ventures. I intend to see in the next two years whether the theories of group agency from the social ontology literature can be linked empirically to the model of relational demography proposed by Martin Ruef. Ruef is concerned with the “glue” that holds entrepreneurial teams together. There is no obvious reason to believe that mechanisms that permit group formation and initial agency will remain as the group/firm evolves over time. In fact, one of the most interesting subjects to research might be the process of defections from startup teams and firms as the venture matures. To what extent are defections a result of the changing context of the venture, thus violating the initial conditions for group intention? To what extent are defections caused by significant changes in the group ethos from the startup to the established enterprise? And, is the changed ethos necessary to maintain the group agency inherent in the established firm – Ruef’s glue?

This brings me to a post today on the Organizations and Markets website. Nicolai Foss points to an essay in Strategic Organization he co-authored with Jacob Lyngsie on entrepreneurial activity in the established firm. The paper takes on the construct of the entrepreneurial opportunity as a useful explanans for entrepreneurial activity. See my wholehearted agreement with this issue here. But the paper caused me to think more about the relationship between two issues near and dear to Professor Foss’ heart: entrepreneurship as a function distinct from firm founding and the microfoundations of organizational theory and strategic management. See, for example, these posts on microfoundations at Organizations and Markets (here, here, and here).

There is a troubling term in the microfoundations project: emergence. If the microfoundational models of actions within and at the interface with the market are necessarily grounded in individual action, as the micro-fundamentalists aver, then there must be something that links individual intention and individual action to group intention and to group action. One often sees this described as emergence of the higher-level phenomenon from the lower-level phenomenon. I will leave aside the social fact that emergence is the sine qua non of the claptrap known as critical realism. Even social scientists that are wary of critical realism will invoke emergence, or aggregation (see Barney and Felin, 2013). Aggregation would seem easier than emergence, as “adding up” is an easier thing to do than describing an emergence process. But, anyone who has taken a graduate course in price theory has seen the aggregation problem with something as (seemingly) simple as aggregating individual demand functions into a market demand function.

Emergence as a research phenomenon provokes me to ask two questions. What explains emergence? That is, emergence is an explanandum, a phenomenon that must be explicable. If one cannot explain how group action emerges from individual action (save for “adding up”), then it is mysterious – the same argument that reductionists have made against holistic explanation for centuries. And, of course, this is the reason that the micro-fundamentalists express a reference for micro-level explanations. The second question follows. What does emergence explain? Obviously, we are meant to see that emergence explains the micro-macro linkages. But to do so requires that emergence must be understood as a phenomenon in sufficient detail to show how it explains macro phenomena. It is not enough to declare that it explains; one must confirm the explanation with empirical research. See a paper that André Ariew and I wrote for the Strategic Management Society Special Conference on Microfoundations held in Copenhagen 13-15 June 2014. The paper describes in detail the issues of explanatory reduction in following a microfoundations project.

Ariew and Westgren Microfoundations and Reductionism

The other word we can consider at this point is supervenience. This term is closely aligned with emergence, but has a more concrete definition. One may say that a set of facts supervenes on another set of facts. This works with social facts as well as physical facts. That is, a supervenience relation may exist between the attitudes and actions of a group and the attitudes and actions of its individual members. This, I believe, is the essence of the microfoundations project: discovering how group actions supervene upon group members.

I point you to one of the books I noted in my introduction to social ontology: Group Agency by Christian List and Philip Pettit. In this book, List and Pettit discuss supervenience with particular regard to the group agent (i.e. the firm-as-agent) and the members of the firm. This is a very careful analysis of the propositions that must hold for us to say that the actions of the group agent truly supervene on the attitudes and actions of the members of the group. In their analysis, they show that no voting rules are sufficient to support supervenience, but they claim that robust group rationality (a set of necessary conditions) will support what they call holistic supervenience – not tied to particular propositions or sets of propositions that we might call decisions of group ventures. Then they spend the bulk of the book describing the desiderata of organizational structures that permit individual attitudes to be aggregated, including incentive alignment and control. Management scholars will recognize these phenomena are part and parcel of organization theory. List and Pettit just bring these to light within the context of organizational design to permit group agency.

Just like what Foss and Lyngsie wish to see in corporate entrepreneurship research.

A Structural Hole in Salt Lake City

Wednesday 06 August 2014

My writing coach says that I should write first thing in the morning, but writing took second place this morning to the arrival of three new bookcases in my office. Forty-five linear feet of new storage and display! So all the books were sorted and re-shelved. I separated the strategy from organization theory, Schumpeter from everyone else, and the philosophy of science from science. And the critical realism and evolutionary economics books are now on a bottom shelf in the corner – out of sight.

Anyhow, back to the subject at hand, even though it is nearly midnight.

A Structural Hole in Salt Lake City

Dear reader, if you are unfamiliar with the term structural hole, as it is used in social network research, I shall elucidate briefly. One of the least intuitively named constructs in the social sciences, the structural hole is a knowledge bridge between two different networks. The “hole” represents a sparse nexus of connections in the overall network. In a visualization, this would look like a gap in what would otherwise be a dense web of redundant connections.

Now to describe it as a bridge, rather than a hole…

One of the exciting scholarly partnerships that will drive new thinking in entrepreneurship research is between Robert Wuebker and Russell McBride of the Eccles School of Management at the University of Utah. Rob has a background in startups and innovation. Russ is a philosopher of mind. They work together, across the network boundary between strategy and cognitive science, on developing a new theoretical account of entrepreneurial action. It is based upon social ontology, in which Russ was trained under John Searle of the UC-Berkeley Department of Philosophy.

At the Academy of Management meetings in Philadelphia this week, Rob organized a session on the social ontology of entrepreneurship. Russ led off the session with an introduction to social ontology, stressing the importance of the language – speech acts – in building shared understanding of concepts that take on the ontological status of social facts. The classic examples used are paper money as currency and socially constructed titles like “President of the United States”. This presentation was followed by a very interesting “next step” paper co-authored by McBride, Wuebker, and a researcher from ESADE in Spain, Jana Thiel. In this paper, (see here) they do two important things. First, they explicitly unyoke entrepreneurial action from entrepreneurial opportunities, particularly those that are allegedly discovered as objective facts. Second, they propose a three-phase process of the creation of a new social institution – the entrepreneurial venture – that begins with a declarative (speech act). This phase is followed by enrollment, the social interactions that occur around the declarative between persons that will associate with the venture (team members, funders, customers). The third phase is embedding, completing the construction of the new social reality by linking the venture to the broader social environment, i.e. the market. Along the way, the authors note the linkage to the microfoundations project that is afforded by a theory of entrepreneurial action that cannot be mimicked by “the opportunity”.

I want to make one observation about the ambitious project that Wuebker and McBride and their collaborators have begun. There are two important levels in which social ontology will inform entrepreneurship research. First, the process of social ontology occurs at the level of the community of scholars engaged in creating social facts that can be researched and taught. The community can agree on the constructs, models, and processes associated with innovation and other forms of entrepreneurial action. Second, social ontology offers an account of entrepreneurial action that that deals with what I call collective entrepreneurship, others call team entrepreneurship, and what Wuebker calls joint action. Rather than having some mysterious, emergent process or just-so stories serving as the accounts of entrepreneurial action, accounts that are based on social ontology can be defensible as good science.

Collective Entrepreneurship – Social Ontology as a Microfoundation

Thursday 31 July 2014

I have withheld posts to this blog for more than a week, as I prepared a written piece to support some comments I will make to a professional development workshop at the annual conference of the Academy of Management. I look forward to this conference for two reasons. First, I really enjoy Philadelphia — a city I came to love as a youngster who spent summers here with cousins, up through my second year at university. Secondly, the conference always has some provocative paper sessions and vigorous discussions in the hallways and surrounding barrooms. This year, the scholars who engage in entrepreneurship have put together some top-flight sessions.

I have been reading the literature of social ontology. It deals with the structures that permit and support group intentions and agency. That is, it is not enough to say that “I intend to pursue outcome J” and “you intend to pursue outcome J”, therefore we collectively intend to reach J. This is especially true in nominally large groups, where each member may accept the value of outcome J and tacitly support those members of the group who actively intend to pursue J, but to say that the whole group collectively intends that the group pursue J is patently false.

The philosophers who write on the subject make the distinctions clear between intentions held by individuals and intentions that are held by the group in some way that is not reducible to the simple summation of each member’s intentions. Moreover, they construe intention to include a commitment to action with a specific content, not just exist as an attitude or state of mind. Note the differences among the following.

1. I intend to start a new venture that uses intellectual property I control.

2.I intend to start a new venture that uses intellectual property I control and I will hire expertise in marketing to enable this.

3. I intend to start a new venture that uses intellectual property I control. Amelia intends to start a new venture that uses her particular skills in marketing.

4. Amelia and I intend to start a new venture that uses my intellectual property and her marketing skills.

5. Amelia and I intend to start a new venture to produce a dog food product that reduces Fido flatulence. I contribute my intellectual property and Amelia contributes her marketing expertise to this jointly owned venture, which will lead to shared outcomes for both of us.

It is the last instantiation of intended joint action that satisfies the strict requirements of shared intention for social ontologists, as it has specific content (‘we intend to jointly do J”) and has implications of commitment by both parties, shared understanding and beliefs, and a jointly obtainable outcome that is unobtainable by either party. As a caricature, this has elements of “I know that you know” and “you know that I know” and “I know that you know that I know”, etc. But a careful reading of the literature shows the necessity for making distinctions between individual intentions (even though they may parallel those of other individuals) and those intentions that are truly joint. The ontologists posit a number of accounts for how the jointness is established, ranging from shared ethos to pre-existing interpersonal commitment to shared formal plans to established authority relationships.

I have attached the essay I wrote for the session on social ontology and entrepreneurship. It has three parts. The first part looks exactly like the previous blog post on collective entrepreneurship. The second part addresses two projects that I am involved with that empirically test the Ruef model of relational demography for collectives of small firms. This blog will report on the empirical work in the  coming months. The third section introduces social ontology and describes some of the recent books produced on the subject and how they are related to our interests in the individual-collective boundary in entrepreneurship. A reading list follows this section.

An Essay on the Social Ontology of Collective Entrepreneurship

Collective Entrepreneurship – Introduction

Monday 14 July 2014

This post has two purposes. First, it begins a series of written posts to describe a research program that I and several colleagues have embarked upon in the past 18 months. Collective entrepreneurship, as I define it, includes both entrepreneurial teams — a typical unit of analysis in the field — and joint entrepreneurial ventures whose members are firms. Subsequent posts will describe particular studies of entrepreneurial collectives. This post is conceptual. The second purpose is to test a writing method that permits me to move between writing projects with limited friction. This method is described in an earlier post.

I must highlight two sources of inspiration for the post below. The first is a comprehensive review of literature by Molly Burress and Michael L. Cook, which is in the reference list. Cook holds the Robert D. Partridge Chair in Cooperative Leadership at the University of Missouri. He is recognized internationally for his research and education programs on cooperatives. Burress served as a program director for Cook at the time the literature review was completed. Suffice it to say that their joint effort in completing the review is gratefully acknowledged. The second inspiration is Martin Ruef’s 2010 book, The Entrepreneurial Group (Princeton University Press). His model of the what binds members of entrepreneurial teams to each other is a powerful tool for analysis.

The term collective entrepreneurship appears only recently in the literatures of economics, management, and entrepreneurship. In a review of the literature, Burress and Cook (2009) note 240 publications that invoke this term since 1964, with more than half the references occurring since 2000. They develop a taxonomy of the motivations for the juxtaposition of collective with entrepreneurship ranging from theoretical development through public policy and political action. Burress and Cook define the scope of the collective as a significant axis in the taxonomy. The scope of the collective action ranges from “intra-organizational efficiency” to “inter-organizational goals” to “economic growth and development” through “socio-political change”. That is, the narrowest scope is the entrepreneurial team or venture and the largest is the social movement. Entrepreneurial joint ventures and public-private partnerships are exemplars of scope interior to the axis.

In the work we are doing in the McQuinn Center for Entrepreneurial Leadership, we take a similar view of the primacy of organizational scope, though we are less interested in those collective actions where the benefits are not appropriable by the members of the collective. In all entrepreneurial ventures, social and public benefits may exist but as a phenomenon to be studied, they are more à propos to social movements research. We recognize, on the other hand, that social movements provide opportunities for entrepreneurs to act, perhaps as a collective, and to appropriate entrepreneurial rents (Weber, Heinze, & DeSoucey, 2008).

Let us consider three forms of collective entrepreneurship and the explicit boundaries they engender. The first is the entrepreneurial team that collectively founds and manages an organization. Reich (1987) correctly notes that the preponderance of entrepreneurial ventures are not founded by the iconic “lone inventor”; most new ventures represent the combined efforts of a number of individuals – though their particular levels of investment may vary. This view is elaborated by Ruef (2010), who begins his treatise on group entrepreneurship with Toqueville’s vision of an associative culture in America and describes the phenomenon of collective action among “co-founders, employees, investors, advisors, or unpaid helpers” (p. 13) to create new firms. Ruef develops a model of the relational demography of group adhesion to the shared venture that is built upon four key elements: structure (roles and contracts), strong ties (networks and trust), homophily (shared characteristics), and identity (shared subjective beliefs and goals). We find this model to be a useful point of departure for collective ventures, within and between firms.

The second common instantiation of collective entrepreneurship is the cooperative form of organization. Most of the examples of this type of organization arise in the agricultural sector, where cooperatives have more than a century of importance to the American and European economies. Agricultural cooperatives have been institutionalized as a form of collective action to counteract market power in the markets into which farmers sell and from which they purchase inputs (Knapp 1969, 1977; Nourse 1942). The traditional cooperative had farms as members of the collective enterprise, with one membership/voting share for each farm. Note that this is a different form of collective than the entrepreneurial team, as the members are themselves individual firms.

Some recent research into cooperatives as entrepreneurial collectives raise the question of whether such organizations can act “entrepreneurially” in the face of changing market conditions (Bijman and Doorneweert 2008, Cook & Plunkett 2006, van Dijk 1999, Nilsson 1999). One interesting conceptual issue raised in these papers is whether entrepreneurial activity (innovation, new products, new markets, etc.) occurs at the level of the collective as an organizational strategy or at the level of the individual member-farmer. This is a particular instance of the broader question of whether actions can be taken by groups or only by members of the group – the central tenet of methodological individualism.

Both the entrepreneurial team literature and the entrepreneurial cooperative literatures require the establishment of a firm as the “envelope” around the collective action. The entrepreneurial firm discussed by Ruef has a social identity, as well as legal status. The same holds for the agricultural cooperative, which under various statutes in the United States, is organized as a corporation. The “membrane” around the collective action is an organizational form.

The third form of collective entrepreneurship in the literature considers collective action without this membrane, and overlaps with Burress and Cook’s category of “economic growth and development”. We might call this networked entrepreneurship. Networked entrepreneurship, as we see it, follows closely the model proposed by Johannisson and colleagues in describing a geographically delimited, networked community of entrepreneurs that jointly enact their business environment in common (Johannisson and Dalhstrand 2008; Johannisson, Ramirez-Pasillas and Karlsson 2002). These networks include research parks and industrial clusters. The members of this collective form are typically firms or strategic business units rather than individuals.

Read more…

Opportunity and Explanation (2) — Some Issues with Opportunity as Explanans

Friday 11 July 2014

To complete a paper on the explanatory value of the opportunity construct, one must sort out the current and historical models of entrepreneurship. The historical analysis of the opportunity is simple; it was not separable from the entrepreneurial functions that characterized the roles that entrepreneurs played in the economy – except as it had vernacular meaning. Beginning with Shane and Venkataraman (2000) the opportunity was identified as a construct apart from individual (entrepreneurial) attributes and the actions of the entrepreneur. Consider Figure 1 below, taken from Shane’s 2003 treatise. The opportunity exists in time and space, caused by some change in technology, tastes and preferences, industry structure, or socio-political environment. The opportunity is discovered by some number of alert latent entrepreneurs. Some number of them decide to exploit their discovery and  make the requisite investments, including the use of, or new instantiation of, a business organization. In Figure 2. Shane makes explicit the number of steps required of the entrepreneur and entrepreneurial firm between the (objectively known) existence of the opportunity and the performance outcomes (survival, profitability, etc.).

Figuring Shane

If the opportunity is so important to the entrepreneurial process, why are there so many mediating actions and decisions between the existence and the outcomes? How much of the outcomes does the existence of the opportunity explain?

There is an aside on these questions that will be addressed later: what is the definition of the opportunity? The corollary, of course, is what is the definition of an opportunity? That is, is this a model of universals or particulars? As we will see later, there is a number of unsatisfying definitions that will affect the ontological status of the construct.

Let us turn now to another issue: what does entrepreneurship explain? In the historical analyses, one sees a number of entrepreneurial functions or roles that have been studied as explanations of economic outcomes of interest. See Hébert and Link’s (2009) volume, A History of Entrepreneurship (Routledge). They identify a dozen roles that have been invoked from the seminal treatment by Cantillon up through the middle of the 20th century. The Hébert and Link treatise does not separate the roles or the authors associated with the roles by whether the explananda were at the micro-level (e.g. new venture or firm founded, profits) or at the macro-level (e.g. sectoral growth or evolution, price equilibration or disequilibration, functional distribution of incomes). It is not a simple task to identify the explananda , but I propose a trial taxonomy in Figure 3 below.

My taxonomy highlights my belief that most of the early economic thought with respect to entrepreneurship (from Cantillon and the French Physiocrats through the Austrian School and Schumpeter) explained sector-level phenomena.  I shall expand on this later.

Entrepreneurial Function and Analysis Level

The foregoing leads me to Figure 4. Given the “location” of the opportunity construct as a prior condition to entrepreneurial action, one must question how much explanatory value it has. Figure 4 considers the roles of the opportunity as explanantia for micro- and macro-level phenomena. I consider two forms of opportunity as described by Alvarez and Barney (2007, 2010): objective opportunities (as proposed by Shane) and subjective opportunities, which are created interior to the minds of active entrepreneurs in some process of conjecture and experimentation. In each quadrant of the figure, I pose a question and I offer a statement about the explanatory value of the opportunity.

One can see that I am not sanguine about the construct. I will justify my questions and statements in a later post.

And then, we can move on to the sloppy reification of Schumpeterian and Kirznerian opportunities in the recent literature. It is to weep.

Opportunity and Explanation

Tuesday 08 July 2014

The paragraphs below represent the introduction and conclusions of a paper to be fully elaborated: the relationship between “opportunity” as it is invoked in entrepreneurship research and “explanation” as it is conceived in the philosophy of science. This is an exercise based upon Thomas Basbøll’s methods as a writing coach, wherein each paragraph is meant to contain one supported claim, to be constructed over 27 minutes. The six paragraphs that follow were constructed over 2 hours and 35 minutes.

 

§ 1. The World

The field of entrepreneurship is relatively young within the broad domain of organization and management studies. As such, scholars in the field spend a great deal of time with the self-conscious processes of legitimation: definition, codification, consensus-seeking, and territory-claiming. In part, this is because the conceptual roots of entrepreneurship research are planted in economics, sociology and psychology, as well as the other sub-fields of management: finance, strategy, organizational behavior, and marketing. Another source of the legitimation crusade is that entrepreneurship became important in business schools because of the demands for practical training for entrepreneurs-in-waiting and by stakeholders for describing the phenomena of business founding, innovation, venture planning, and noncorporate behavior in some coherent manner. Fields of study where theory lags practice are self-conscious. So it was with strategic management. So it is with entrepreneurship.

§ 2. The Science

In little more than a decade, the ontology of entrepreneurship research has fastened to the construct of the opportunity, much as a colony of mussels cling to a derelict dock piling. As Short, Ketchen, Shook, and Ireland write in their 2010 review article on this construct, ““Indeed, opportunities are one of the key concepts that define the boundary and exchange conditions of the entrepreneurship field” (p. 41). In a workshop at the 2013 Academy of Management, Jay Barney pronounced the opportunity to be the sine qua non of entrepreneurship research. As an editor of the Strategic Entrepreneurship Journal, he sees the construct invoked often in current research manuscripts. One can point to Shane and Venkataraman (2000) as the seminal piece in the ontological process – the first mussel spat. The subsequent elaboration of the opportunity as a construct distinct from the human qua entrepreneur that exploits the opportunity is the core of current entrepreneurship research.

§ 3. My Thesis

This paper critically examines the construct of the entrepreneurial opportunity for its value in explanation. What does the opportunity do as explanandum and explanans? I will use an historical perspective, in part, to answer this question. For the long period of time beginning with Cantillon (1755) and ending (more or less) with Schumpeter (1911, 1934, 1942) and Kirzner (1973, 1979, 1997), entrepreneurship was the explanans for some phenomenon of interest: sectoral growth, the functional distribution of income and wealth, market dynamics, or the creation of non-land wealth. The young Schumpeter created an idealtypus entrepreneur as an explanans to the phenomenon of innovation, but later abandoned this project by retreating to entrepreneurship qua innovation as an economic function to explain economic evolution. We do not see much work on entrepreneurship as explanandum until the 1960s, when the investigations into personal attributes of entrepreneurs began with McClelland (1961). Now, it appears that the opportunity is being used as explanandum (where does it come from?) and explanans (how does it explain new venture formation?) I will argue that its value in explaining entrepreneurship is limited and therefor is of limited interest as an explanandum.

§ 4. The Roadmap

The paper has four sections. First, I will present a brief history of entrepreneurial thought to locate entrepreneurship as explanandum and to highlight the various forms of the entrepreneurial function that have been used as explanation. Then I will review the lack of consensus on the definition of the opportunity construct and how that will affect its value in scientific explanation. The third section reviews the very recent literature on whether opportunities (as explananda) are inherently objective or subjective. From the perspective of scientific explanation of entrepreneurship, one might regard this issue as a red herring. A thorough investigation of the literature reveals it to be more like the Fish-Slapping Dance, if I might be excused for extending the metaphor. The fourth section makes the case that the separation of opportunities into the categories of Schumpeterian (creation) and Kirznerian (discovery), which is an extension of the objective/subjective categorization, unfairly and incorrectly reifies the economic functions proposed by Schumpeter and Kirzner. Thus, it closes the argument by returning to the historical perspective.

§ 39. The Claim

We have examined the construct of the opportunity as a component in scientific explanation. Where does it contribute as explanans to an argument about entrepreneurial outcomes? If the outcome is at the macro-level, such as sectoral growth or the functional distribution of income, then one can argue that opportunities can pre-condition the payoffs if and only if the opportunities are concrete and observable. To the extent that one maintains that opportunities are subjective, then there is no way to aggregate subjective beliefs and conjectures into any explanation of macro- outcomes. If the outcomes are seen at the micro-level, then what is the payoff from knowing the specific beliefs or conjectures of an entrepreneur or entrepreneurial team? And if the opportunity is objective and available to multitudes, it explains almost nothing about individual ventures and their profitability. Such micro- explanations have limited value in entrepreneurship research for generalization, for modeling, and for theory-building.  Given the limitations of the explanatory power of the opportunity, there is no compelling reason to study it as explanandum. And with the current status on the construct as ill-defined, subject to debate over whether it is objectively or subjectively known, it holds no more value in scientific explanation than the vernacular term.

§ 40. Whither Next?

If entrepreneurship is to develop as a research field and  fulfill Shane and Venkataraman’s (2000) “promise”, then scholars must get past the sloppy language of opportunities. Constructs must be confirmed in empirical research so that the shared understanding will exist. Endless theorizing about the existence and nature of constructs, based upon appeals to prior (and unconfirmed) definitions will not advance the field. Care must be taken to develop constructs with respect to their value in explanation. What is to be explained? Is it a micro- or macro-phenomenon? Consider the alternative constructs that preceded the invocation of the opportunity: the functions of risk and uncertainty bearing, arbitrage, innovation of production processes, opening new markets, coordination of the enterprise. These are well codified and we can explain economic outcomes (new revenue streams, profits, and employment) by them. For much of the research agenda in the field of entrepreneurship, this is sufficient.

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