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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.

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