The promise of entrepreneurship as a field of research - Shane & Venkataraman - Article

The field of entrepreneurship has lacked a conceptual framework that explains and predicts a set of empirical phenomena not explained or predicted by conceptual frameworks already in existence in other fields. What appears to constitute entrepreneurship research today is some aspect of the setting (e.g., small businesses or new firms), rather than a unique conceptual domain. Therefore, it’s hard to distinguish the contribution of the field to the broader domain of business studies and to explain why research is necessary. Moreover, the lack of a conceptual framework has precluded the development of an understanding of many important phenomena not adequately explained by other fields. Therefore, this note will propose an integrating framework. By providing a framework that both sheds light on unexplained phenomena and enhances the quality of research, the field’s legitimacy is enhanced and its marginalization as only a “research setting” is minimalized.

Definition of entrepreneurship

To date, most researches have defined entrepreneurship solely in terms of who the entrepreneur is and what he or she does. The problem with this approach is that entrepreneurship involves the nexus of two phenomena: the presence of lucrative opportunities and the presence of enterprising individuals. An example is defining an entrepreneur ‘as a person who establishes a new organization’, because it leads researches to neglect measuring the quality of opportunities. Therefore, the definition used is: the field of entrepreneurship is the scholarly examination of how, by whom and with what effects opportunities to create future goods and services are discovered, evaluated and exploited. Consequently, the field involves the study of sources of opportunities, the processes of discovery, evaluation and exploitation of opportunities, and the set of individuals who discover, evaluate and exploit them.

Organization scholars are fundamentally concerned with three sets of research questions about entrepreneurship:

1. why, when and how opportunities for the creation of goods and services come into existence;

2. (2) why, when and how some people and not others discover and exploit these opportunities; and

3. (3) why, when and how different modes of action are used to exploit entrepreneurial opportunities.

In this paper, a disequilibrium approach will be taken. In equilibrium approaches, people cannot discover opportunities that differ in value from those discovered by others, so who becomes an entrepreneur in these models depends solely on the attributes of people. These models are incomplete, because only a stable characteristic that differentiates some people from others across all situations is described. In this paper, the tendency of certain people to respond to the situational cues of opportunities is described.

Further, it’s argued that entrepreneurship does not require, but can include, the creation of new organizations. Entrepreneurship can also occur within an existing organization, and opportunities can be sold to other individuals or to existing organizations.

The proposed framework complements sociological and economic work in which researchers have examined the population-level factors that influence firm creation. The framework in this paper differs from others because:

1. the focus is on the existence, discovery and exploitation of opportunities;

2. (2) the influence of individuals and opportunities is examined, rather than environmental antecedents and consequences; and

3. (3) a framework broader than firm creation is considered. Fourth, the framework also complements research on the process of firm creation.

Why study entrepreneurship?

There are three reasons for studying entrepreneurship:

• Much technical information is ultimately embodied in products and services, and entrepreneurship is a mechanism by which society converts technical information into these products and services;

• Entrepreneurship is a mechanism through which temporal and spatial inefficiencies in an economy are discovered and mitigated;

• Entrepreneurially driven innovation in products and processes is the crucial engine driving the change process.

The existence, discovery and exploitation of entrepreneurial opportunities

The existence of entrepreneurial opportunities

Entrepreneurial opportunities are those situations in which new goods, services, raw materials and organizing methods can be introduced and sold at greater than their cost of production. Although recognition is a subjective process, the opportunities themselves are objective phenomena that are not known to all parties at all times. Entrepreneurial opportunities are different from opportunities of existing goods/services, because the former require the discovery of new means-ends relationships, whereas the latter involve optimization within existing means-ends frameworks. Entrepreneurial decisions cannot be made through an optimization process.

Entrepreneurial opportunities come in different forms: (1) the creation of new information, as occurs with the invention of new technologies; (2) the exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography; and (3) the reaction to shifts in the relative costs and benefits of alternative uses for resources, as occurs with political, regulatory or demographic changes.

Previous researchers have argued that entrepreneurial opportunities exist primarily because different members of society have different beliefs about the relative value of resources. An entrepreneurial discovery occurs when someone makes the assumption that a set of resources is not put to its “best use”. Entrepreneurship requires that people hold different beliefs about the value of resources for two reasons. First, entrepreneurship involves joint production, where several different resources have to be brought together to create the new product or service.

Therefore, for entrepreneurship to occur, the resource owners must not share completely the entrepreneur’s conjectures. Second, if all people (potential entrepreneurs) possessed the same entrepreneurial conjectures, they would compete to capture the same entrepreneurial profit, dividing it to the point that the incentive to pursue the opportunity was eliminated.

Entrepreneurship also requires that people possess different beliefs about the prices at which markets should clear. First, as Kirzner (1973) states, the process of discovery in a market setting requires the participants to guess each other’s expectations about a wide variety of things, and this can lead to some “errors” that create shortages, surpluses and misallocated resources. Second, as Schumpeter (1934) explained, economies operate in a constant state of disequilibrium. Changes offer a continuous supply of new information about different ways to use resources to enhance wealth, but this information is unequally distributed. If economic actors obtain new information before others, they can purchase resources at below their equilibrium value and earn an entrepreneurial profit by recombining the resources and then selling them at a profitable price.

Because entrepreneurial opportunities depend on asymmetries of information and beliefs, entrepreneurial opportunities become cost inefficient to pursue. First, the opportunity to earn entrepreneurial profit will provide an incentive to many economic actors. When the entry of additional entrepreneurs reaches a rate at which the benefits from new entrants exceeds the costs, the incentive for people to pursue the opportunity is reduced, because the entrepreneurial profit becomes divided among more and more actors. Second, the diffusion of information and learning about the accuracy of decisions over time, combined with the lure of profit, will reduce the incentive for people to pursue any given opportunity.

The duration of any given opportunity depends on:

1. the provision of monopoly rights;

2. (2) the slowness of information diffusion; and

3. (3) the “inability of others to imitate, substitute, trade for or acquire the rare resources required driving down the surplus”.

The discovery of entrepreneurial opportunities

Research has suggested two broad categories of why particular people do discover opportunities, and others don’t:

1. the possession of the prior information necessary to identify an opportunity and

2. the cognitive properties necessary to value it.

Information corridors. Stocks of information create mental schemas, which provide a framework for recognizing new information. To recognize an opportunity, an entrepreneur has to have prior information that is complementary with the new information, which triggers an entrepreneurial conjecture. This information is not widely available, because of the specialization of information in society (Hayek, 1945). No two people share all the same information at the same time.

Cognitive properties. People must be able to identify new means-ends relationships that are generated by a given change in order to discover entrepreneurial opportunities. Visualizing this relationship is difficult and people differ in their ability to do this. Successful entrepreneurs have cognitive properties that play an important role in this discovery process.

The decision to exploit entrepreneurial opportunities

A potential entrepreneur must decide to exploit the opportunity, once discovered. Joint characteristics of the opportunity and the nature of the individual determine this.

Nature of the opportunity. The characteristics of opportunities themselves influence the willingness of people to exploit them. The entrepreneur needs to believe that the expected value of the entrepreneurial profit will be large enough to compensate for the opportunity costs of other alternatives, the lack of liquidity of the investment of time and money, and a premium for bearing uncertainty.

Individual differences. The decision to exploit an opportunity involves weighing the value of the opportunity against the costs to generate that value and the costs to generate value in other ways. In addition, people consider their costs for obtaining the resources necessary to exploit the opportunity. The decision is also influenced by individual differences in perceptions. The creation of new products and markets involves downside risk, because time, effort and money must be invested before the distribution of the returns is known. Furthermore, individual differences in optimism influence the decision. Other individual differences may also be important, like self-efficacy, internal locus of control, greater tolerance for ambiguity and high in need for achievement. It should be noted that the attributes that increase the probability of opportunity exploitation do not necessarily increase the probability of success.

Modes of exploitation

The exploitation of entrepreneurial opportunities is organized in the economy in two ways – the creation of new firms (hierarchies) and the sale of opportunities to existing firms (markets) – but the common assumption is that most entrepreneurial activity occurs through de novo start-ups. This choice of mode depends on the nature of the industrial organization, the nature of the opportunity and the appropriability regime.

Conclusion

This paper has tried to provide a starting point (with the conceptual framework) of exploring entrepreneurship as field of study. The authors hope that other scholars are joining in their effort to create a systematic body of information about entrepreneurship.