Abstract and Keywords
The book is intended to be an authoritative survey of recent academic research into entrepreneurship. It aims to meet the needs of those researching in all major academic fields to which entrepreneurship is relevant: industrial economics, business strategy, organizational behaviour, finance and venture capital, and business and economic history. The approach taken in this book construes entrepreneurship in terms of arbitrage, innovation, and risk-taking. Entrepreneurs specialize in taking difficult and complex decisions for which other people do not want to take responsibility.
1.1 Objectives of the book
The modern academic literature on entrepreneurship first appeared in a significant volume about 20 years ago, and it has now reached a reasonable state of maturity (see Shane, 2003). It is therefore an appropriate time to take stock of what has been achieved.
The book is intended to be an authoritative survey of recent academic research into entrepreneurship. It aims to meet the needs of PhD candidates researching in all major academic fields to which entrepreneurship is relevant: industrial economics, business strategy, organizational behaviour, finance and venture capital, and business and economic history. We hope that the contributions will stimulate MBA and doctoral students to investigate outstanding issues, and to open up new research agendas for the future. The book will also provide useful secondary reading for MBA courses on entrepreneurship.
The basic conceptual approach adopted in the Handbook is based upon the entry on entrepreneurship in the Oxford Encyclopaedia of Economic History (2003), which was written by one of the editors of this book. These two Oxford reference works will therefore be broadly consistent in their approach to the subject.
The approach taken in this book construes entrepreneurship in terms of arbitrage, innovation, and risk-taking. Entrepreneurs specialize in taking difficult and complex decisions for which other people do not want to take responsibility. The implication is that entrepreneurs make a vital contribution to economic growth. In performing their role in society, entrepreneurs carry out a range of (p. 2) different tasks: they collect information, make judgement calls, raise finance, and develop business organizations. The intensity of entrepreneurial activity is dependent on multiple factors: the volatility of the environment, market structure and institutions, attitudes to risk, the availability of capital, government policy, cultural factors, and social mobility. The arrangement of the chapters follows the conceptualization.
A number of major reference works on entrepreneurship have recently been published, but while these are very valuable, they are mostly reprints of influential papers. The closest competitor to the present book is Z. J. Acs and D. B. Audretsch (eds) Handbook of Entrepreneurial Research, Dordrecht: Kluwer, 2003. This work has a strong emphasis on conceptual and methodological issues. It highlights the multi-disciplinary nature of the subject, whereas this book is focused more sharply on the disciplines of economics, finance and business strategy. As a result, we believe that the two Handbooks will be complementary.
Although this Handbook focuses on economic aspects, the contributors to this book survey the field as a whole, and draw on literature from other disciplines as appropriate. Publications in a wide range of journals have been cited. Our contributors are drawn from a wide range of backgrounds, and we have made a deliberate attempt to provide an opportunity for younger scholars to contribute. Our authors therefore include a mixture of leading figures and well-established younger scholars, recruited mainly from Europe and North America. Over-reliance on eminent scholars who have developed mature views based on a lifetime's work can sometimes bias a book like this towards a defensive rather than critical approach to this literature. The selection of contributors is guided by the principle that we should promote an independent and critical perspective. Contributors have been asked to identify the weaknesses, as well as the strengths, of the literature, and to set out a research agenda.
1.2 Basic approach
There is always a risk that a Handbook like this will be little more than a compilation of disparate views. To manage this risk, all contributors were provided with a background ‘White Paper’ which set out basic definitions, and outlined how the various themes explored in this book related to each other. Also an author conference was held at which contributors were able to discuss preliminary drafts of each other's chapters.
1.2.1 Development of the concept
The ‘White Paper’ noted that the term ‘entrepreneur’ appears to have been introduced into economic theory by Richard Cantillon (1759), an Irish economist of French descent. According to Cantillon, the entrepreneur is a specialist in taking risk. He ‘insures’ workers by buying their output for resale before consumers have indicated how much they are willing to pay for it. The workers receive an assured income (in the short run, at least), while the entrepreneur bears the risk caused by price fluctuations in consumer markets.
This idea was refined by the US economist Frank Knight (1921), who distinguished between risk, which is insurable, and uncertainty, which is not. Risk refers to recurrent events whose relative frequency is known from past experience, while uncertainty relates to unique events whose probability can only be subjectively estimated. Knight thought that most of the risks relating to production and marketing fall into the latter category. Since business owners cannot insure against these risks, they are left to bear them by themselves. Pure profit is a reward for bearing this uninsurable risk: it is the reward of the entrepreneur.
Popular notions of entrepreneurship are based on the heroic vision put forward by Joseph A. Schumpeter (1934). The entrepreneur is visualized as an innovator who creates new industries and thereby precipitates major structural changes in the economy. Schumpeter was concerned with the ‘high level’ kind of entrepreneurship that, historically, has led to the creation of railways, the development of the chemical industry, and the growth of integrated oil companies. His analysis left little room for the much more common, but no less important, ‘low level’ entrepreneurship carried on, for example, by firms in the wholesale and retail trades. Alfred Marshall (1919) described the role of these firms in some detail, but omitted them from his formal analysis of supply and demand.
The essence of low-level entrepreneurship can be explained by the Austrian approach of Friedrich A. von Hayek (1937) and Israel M. Kirzner (1973). Entrepreneurs are middlemen who provide price quotations as an invitation to trade. While bureaucrats in a socialist economy have little incentive to discover prices for themselves, entrepreneurs in a market economy are motivated to do so by profit opportunities. They hope to profit by buying cheap and selling dear. In the long run, competition between entrepreneurs arbitrages away price differentials, but in the short run, such differentials, once discovered, generate a profit for the entrepreneur.
The insights of these economists can be synthesized by identifying an entrepreneurial function that is common to all approaches. This is the exercise of judgement in decision-making (Casson, 1982). Thus a middleman who buys before he knows the price at which he can resell must make a judgement about what the future price will be, while an innovator must assess whether a new product will prove attractive to consumers.
(p. 4) 1.2.2 Judgement
If information were freely available, and could be processed without cost, then there would be no need for judgement, and no mistakes would ever be made. But access to information differs greatly from person to person. One reason is that sources of information are highly localized: only people ‘on the spot’ can directly observe an event. Different people in different places will therefore have different perceptions of any given situation. They may therefore make different decisions. The nature of the decision therefore depends on the identity of the person who makes it. The entrepreneur matters because their judgement of a situation is potentially unique.
If a situation recurs frequently, it is worthwhile investigating it carefully in order to derive a suitable decision rule. But where unusual situations are concerned, nobody knows the correct decision rule. To improvize a decision quickly, people have to rely on their intuition and analogy with previous experience. Different intuitions, combined with different experiences, lead to different decisions.
Not all entrepreneurs are successful. There is a strong bias in the literature towards successful entrepreneurs, for fairly obvious reasons: successful entrepreneurs make an impact on the national economy, they are inclined to self-promotion, and the enterprises they create survive long enough to leave good records. The successful entrepreneurs are those whose confidence in their judgement turns out to be well placed. For every high-profile success, however, there tend to be numerous failures. Small start-up businesses are notoriously prone to failure in the first two or three years. Failures are often caused by over-confidence, and also by bad luck. It is not uncommon, in fact, to view entrepreneurial ventures as economic experiments (Harper, 1995).
1.2.3 The supply of entrepreneurial ability
Entrepreneurship is a scarce resource, and so it is important to know whether its supply can be increased. This raises the question of whether entrepreneurs are ‘born’ or ‘made’. There is little evidence that entrepreneurial ability is inherited: for example, the evidence on family firms suggests that sons usually display less initiative than the fathers they succeed. There is some support for the idea that entrepreneurial qualities are incubated in adversity. Fatalistic acceptance of poverty is certainly not an entrepreneurial characteristic, but determination to reverse an economic set-back often seems to be (Brenner, 1983). Many entrepreneurs claim to be ‘self-made’, but it is impossible to know whether, in making this claim, they are simply unwilling to give credit to parents, teachers and others who have helped them along their way.
The institutional environment is also important. In societies which ascribe high status to noble birth or inherited wealth, the ‘self-made man’ is regarded with suspicion. Societies that value religious and philosophical speculation over practical experimentation will undervalue education focused on management, and the engineering skills required by artisan entrepreneurs. The supply of able entrepreneurs may therefore be discouraged by institutional constraints which discourage ambitious and talented young people from pursuing business careers. On the contrary, societies that give credit to ability to create and to better one's economic fortunes tend to encourage entrepreneurial development.
The reputation of an entrepreneur who owns a firm determines how much finance they are able to raise for their business. An owner whom no one trusts cannot attract investors, and so must accumulate all the capital they require for themselves. However good their judgement, an entrepreneur cannot start a large business unless they have sufficient wealth. The main strategies for capital accumulation are as follows.
• Inheritance. The entrepreneur's parents or wealthy relatives may die while they are still young. Being the first son under primogeniture, and having elderly parents, is an advantage in this respect. Wealth can be augmented by strategic marriage too—for example, acquiring other people's inheritance from wealthy widows (except when their property is entailed).
• By working and saving. This is a slow method, but has the advantage that the entrepreneur may acquire useful skills while in employment, especially if they can obtain a responsible job. They may also make useful contacts with potential customers while in their job.
• By taking risks. A merchant may begin on a small scale by smuggling, gun-running, or piracy, and then become legitimate once sufficient capital has been accumulated. Gambling and insurance fraud are other high-risk options (e.g. over-insuring warehouse contents and then committing arson).
Lack of reputation and shortage of capital is a problem that confronts many entrepreneurs from poor backgrounds. The factors identified above are highly relevant to small businesses started by immigrant refugees and members of minority ethnic groups. Yet, in some societies, there may be collective recognition of the need to channel capital to capability risk-takers with sound judgment. Hence, some societies develop capital market devices to bridge savers and entrepreneurs.
(p. 6) 1.2.5 Social networks and agglomeration
Judgemental decisions normally require the synthesis of different types of information. The entrepreneur needs to create a network of social contacts that can feed them with the information they require. Location in a major metropolis is a great advantage from this point of view. This is the place where travellers often call first when arriving from overseas; it is where journalists collect information for their stories, and where groups of people assemble to take important decisions—politicians in parliament, business leaders at their headquarters, and so on. This explains why so much high-level entrepreneurial activity in any country is concentrated in the metropolis.
Entrepreneurs will reveal their qualities by the kind of choices they make. Young people have to decide, at some stage, whether to remain in the place where they grew up, or to move on elsewhere. Entrepreneurial people are more likely to move and non-entrepreneurial people to stay. Isolated rural areas where there are few opportunities for profit tend to lose their more entrepreneurial young people and, conversely, large cities tend to attract entrepreneurial people.
Entrepreneurs who are prepared to move long distances have a choice of political regimes under which to operate. The regimes that are most attractive to mobile entrepreneurs are likely to possess the classic institutions of the liberal market economy. They will have some or all of the following characteristics:
• Private property, which is freely alienable, subject to certain minimal restrictions;
• Freedom of movement, and freedom to associate with business partners;
• Confidentiality of specific business information, especially regarding relations with customers and suppliers;
• Protection of creative work through patents, copyright, design protection, and so on;
• Access to impartial courts which will enforce property rights and which have the competence to settle complex commercial claims;
• A stable currency, based on prudent control of the money supply;
• Democratic government, with sufficient balance of power between opposing interests to reduce the risks of draconian interventions in industry and commerce;
• Open-ness to immigration by entrepreneurs and skilled workers (and possibly other groups as well).
The relative mobility of the entrepreneur has implications for the family firm (Church, 1993). ‘One day all this will be yours’, the father tells the son, and the son feels morally obliged to succeed his father, even though his interests lie elsewhere. A more entrepreneurial son might turn down the offer and set up his own business in a different industry, forcing the father to look outside the family for a successor—possibly with beneficial results for the firm.
Business owners who remain behind in a declining industry or region may join forces to lobby for protective tariffs or industrial subsidies. They harness organizations, such as trade associations, which may originally have been established to provide training, for price-fixing purposes (Olson, 1982). A secretive and conspiratorial business culture develops, reflecting the entrepreneurial weaknesses of the business group. Similarly, craft guilds or trade unions may try to ‘protect jobs’ by resisting technological change. Inflexible attitudes within a region may deter entrepreneurs in ‘sunrise’ industries, who move away to areas where they have more freedom of action. This suggests that successive waves of innovation will move around a country, avoiding areas where earlier innovations have stagnated, and ossified the business culture (Pollard, 1981). Only the metropolis will remain vibrant because of its continuing ability to attract young entrepreneurs. If the metropolis too goes into decline, then the outlook for the entire national economy is likely to be bad.
Recent literature has expanded the concept of ‘familialism’ and linked it to the institutional environment that shapes outside shareholders' property rights. In locations where shareholder rights are upheld, firms can be entrusted to professional managers who can be adequately monitored and disciplined. In this case, succession is based on capabilities and free of blood-line connections. Families provide the basis for highly successful professionalized firms. In an environment where shareholder rights are not well enforced, however, control has value and outside managers cannot be fully trusted. In this environment, family succession matters—capable offspring who can uphold the family's entrepreneurial capability are valuable. At the same time, the literature shows that there could be internal circulation of capital and other resources within the extended family—the high performance of a few successful family firms could mean the deprivation of resources for start-ups. Moreover, large wealthy families can use pyramidal ownership structures to build family empires and possibly use their economic power to lobby for the kind of government policies that preserve their status quo.
1.2.6 Historical significance of the entrepreneur
Early academic writers on British economic and social history employed the concept of the entrepreneur mainly as a social stereotype. The ‘Victorian entrepreneur’ was a member of an upwardly-mobile lower middle class, imbued with the bourgeois values of proprietary capitalism. The Victorians themselves seem to have been more impressed with their own engineering feats than with their entrepreneurial achievements; thus it was the civil and mechanical engineers, rather than the railway promoters or the company secretaries, that were seen as the heroes of the Railway Revolution (Smiles, 1862). More generally, it was the creation of the (p. 8) Empire, rather than an entrepreneurial domestic economy, that was the main political preoccupation. Modern interest in Victorian entrepreneurship is more a reflection of a desire to recover something that has been lost than the continuation of a concern that the Victorians themselves expressed. However popular publications such as Smiles' Self-Help book (1882), and contemporaneous comments on them, in some ways closely presage modern debates on enterprise culture.
In the United States, a powerful mythology developed around the ‘rags to riches’ entrepreneur (Sarachek, 1978), but detailed investigations (see for example, Taussig, 1915) highlighted the middle-class professional origins of many successful entrepreneurs.
Schumpeter (1939) provided one of the earliest economic applications of entrepreneurial theory. He identified five main types of ‘new combination’ effected by entrepreneurs: new products, new processes of production, the development of new export markets, the discovery of new sources of raw material supply, and the creation of new forms of institution—such as the cartel or trust. Schumpeter's classification fits well with the major forms of innovation that occurred in Europe during the ‘Age of High Imperialism’, 1870–1914. The large-scale entrepreneurial exploits of the ‘robber barons’ of the late nineteenth century—Vanderbilt, Harriman, Rockefeller, and so on—also conform well to Schumpeter's model. Schumpeter claimed that his schema fitted any economy that made extensive use of credit—from the growth of Mediterranean trade during the Renaissance onwards. He also claimed that he could explain Kondratieff ‘long waves’ of 50–60 years duration by the periodic clustering of innovations since the Industrial Revolution. Unfortunately, however, the empirical basis of Schumpeter's speculations on long waves has not stood the test of time very well (see Solomou, 1987).
Pursuing the Schumpeterian theme, Hughes (1965) examined the influence of the ‘vital few’ in promoting economic growth. Hughes's approach is mainly biographical, emphasising the personality factor in entrepreneurship. The great value of his contribution lies in the fact that he recognizes the role of the entrepreneur in the public as well as the private sector, although he sees the public sector entrepreneur as heavily implicated in the growth of bureaucracy. The policy implication of Hughes's study would appear to be that people with entrepreneurial personalities need to be attracted into the private sector where, thanks to competitive markets, the incentives are better aligned with the long-run public interest.
A rather similar conclusion arises from Jones's (1981, 1988) studies of long-term world economic growth. Adopting an international comparative perspective, Jones argues that entrepreneurship is a natural feature of human behaviour which government can either encourage or suppress. Encouragement is provided by a regime of freedom under law, which allows people to carry out experiments in commercial and industrial organization at their own expense. Suppression is effected by governments that fall into the hands of elites, who think they know best which experiments are socially desirable and which are not. They subsidize (p. 9) prestigious experiments out of taxes, and repress ordinary experiments because they are seen as either useless, immoral, or politically subversive.
1.2.7 Entrepreneurship as human capital
Entrepreneurship can be regarded as one of the components of human capital. It is a skill in processing information in connection with judgemental decisions. It includes using social networks to collect information, memorizing and recalling information effectively through association of ideas, and interpreting information using appropriate mental models. Together with other components of human capital—such as skilled manual labour, management and organization—entrepreneurship may be considered as a factor input into a production function. It is an input that improves the allocative efficiency of the economy. It is a substitute for other factors of production such as management. Thus if managers are abundant, but entrepreneurs are scarce, resource allocation decisions that would have been taken by entrepreneurs may be taken by managers instead. This means that a decision that would have been improvised will be taken using imperfect formal procedures.
The demand for entrepreneurship, like the demand for any other factor of production, is a derived demand. Unlike more conventional factors of production, however, the demand for entrepreneurship derives not from the overall level of product demand, but rather from the volatility of such demand. Similarly, it also derives from volatility in supply conditions, such as technological change. Volatility generates novel and complex situations that call for improvised decisions. When volatility increases, there is an increase in the demand for entrepreneurs and a corresponding decline in the demand for managers. This is normally reflected in the formation of more small firms and the restructuring of large firms. The large firms may disappear through bankruptcy, or be split up through management buy-out and ‘asset-stripping’; alternatively, they may be re-organized in a more flexible form, as a coalition of entrepreneurs. Greater competition to hire entrepreneurial employees means that the rewards of entrepreneurship will rise. Pay structures will tend to become more flexible, because it will no longer be possible to offer both entrepreneurial employees and non-entrepreneurial employees the same rates of pay.
1.2.8 Enterprise culture
When there is a general perception in a society that volatility has increased, social and political attitudes may change as well. This is what appears to have happened in many Western industrial countries towards the end of the 1970s. Increasing (p. 10) awareness of global competition, and the failure of large-firm ‘national champions’ to respond effectively, led people to believe that future job-creation would come from small business. Start-up entrepreneurs became popular ‘role models’, creating a new set of myths about the ‘rags to riches’ entrepreneur, and encouraging young people to make their careers in the private sector.
Considered as an historical phenomenon, the enterprise culture of the 1980s and 1990s was a natural reaction to some of the anti-entrepreneurial attitudes that had taken root in the West in the early post-war period. It should not be inferred, however, that this enterprise culture was based on a correct understanding of the role of the entrepreneur. The highly competitive and materialistic form of individualism promoted by ‘enterprise culture’ did not accurately represent the dominant values of successful entrepreneurs of previous generations. For example, the Victorian railway entrepreneurs operated through social networks based in Britain's major provincial towns and cities. The limited amount of evidence that has been collected and analysed in a systematic way suggests that successful entrepreneurship is as much a co-operative endeavour, mediated by social networks, as a purely individualistic and competitive one.
In line with this conceptual approach, the book has been divided into seven parts, dealing respectively with
I Theory and history
II Small firms
V Employment, self-employment and buy-outs
VI Social and cultural aspects
VII Spatial and international dimensions
The contributions to these parts are summarized in sections 1.3–1.9 below.
1.3 Review of the chapters: Theory and history
Martin Ricketts (Ch. 2) begins by considering the entrepreneur in economic history. In the ancient and mediaeval worlds entrepreneurialism was hampered by the defence of vested interests by landed aristocrats, and by concepts such as just prices and usury. Matters improved somewhat in the mercantilist era, but it was (p. 11) not until the agricultural and industrial revolutions that the modern image of the entrepreneur emerged. Ricketts then moves on to consider the entrepreneur in economic theory. Classical economists such as Ricardo viewed entrepreneurship as a type of skilled labour, and entrepreneurs as providers of capital. The economic system was seen as being ‘on a one-way journey to a steady state’. However Adam Smith can be seen as the originator of a theory of economic growth that gives a central role to the entrepreneur. According to Smith, the ‘invisible hand’ promotes economic progress through the division of labour and the growth of the market.
In addressing the entrepreneur in neoclassical theory, Ricketts contrasts the implications of its rationalist and subjectivist foundations. While the rational foundations have led to a focus on statics, such as in general equilibrium theory, the subjectivist foundations led instead to a view, taken by the Austrian School, of market participants as active bargainers and price setters, leading to a system with more unpredictable and Darwinian characteristics.
Ricketts then moves on to consider key aspects of debates on the role of the entrepreneur. Knight viewed the entrepreneur as uncertainty-bearer, for which service the entrepreneur received a reward of pure profit. Schumpeter, on the other hand, focused on the role of the entrepreneur as an innovator, and hence as the source of ‘gales of creative destruction’. Others, such as Casson and Kirzner, have pointed out the role of the entrepreneur as a coordinator of transactions; as intermediator and market-maker. For instance, Kirzner views pure profit as a reward for alertness to opportunities for trade. Neo-Austrians regard resource allocation as an informational rather than a calculation problem.
Finally, Ricketts turns his attention to entrepreneurship in economic development, noting Baumol's suggestion that societies that manage to better channel entrepreneurs into innovative activities, rather than into depredation, crime, and rent seeking are likely to develop faster.
In Chapter 3, Stanley Metcalfe continues the reflective tenor of Chapter 2 by considering how entrepreneurship fits into a long-run evolutionary view of capitalism. He argues that the fundamental historical fact about capitalism is its internal capacity for transformation, and the corresponding transience of the activities and ways of life that it supports. Yet while activities are transient, the institutions of capitalism are remarkably stable; they too evolve, but much more slowly. Heterodox economists, working in a Schumpeterian paradigm, have long recognized market capitalism as a self-organizing system sustaining a spontaneous order; the link between the system and the order, claims the author, is the entrepreneur.
While some writers regard volatility in the economic system as mainly exogenous, Metcalfe argues that it is mostly endogenous. The central analytical problem, he says, is how we analyse change generated within the economic system as distinct from change imposed upon it from outside. Entrepreneurs are the agents of self-transformation: each entrepreneur responds to volatility generated by the activities of other entrepreneurs. To analyse entrepreneurship properly, scholars must (p. 12) recognize the enormous diversity and heterogeneity of attitudes and perceptions within the population of entrepreneurs.
The process of transformation is accelerating, with technological innovation now running at an unprecedented rate. The explanation of this acceleration lies in the progressive accumulation of knowledge. A growing body of public information has been made available that is storable across time and transferable across space, and thus available for the use of future generations and social groups in different locations. As the stock of knowledge grows, so the possibilities for the re-combination of items of information grow faster than an exponential rate. According to Metcalfe, this historical perspective explains the most significant features of the modern entrepreneurial economy.
Nigel Wadeson (Ch. 4) reviews research on cognitive aspects of entrepreneurship. He discusses heuristics and biases, over-optimism, self-efficacy, intrinsic motivation and creativity, counter-factual thinking, intentions-based models, and prospect theory. He then examines in detail the view that entrepreneurship involves an information collection process in which information costs are economized. In some ways the entrepreneur can be viewed rather negatively, as being subject to decision-making biases such as over-optimism. However, in some other respects, the research reviewed paints a positive picture, with the entrepreneur as a creative, motivated, and self-confident individual.
The author refers to both the psychology and entrepreneurship literature. Importantly, the reader is given access to some critiques of theories from psychology which are sometimes treated rather uncritically in entrepreneurship research. Indeed, in the conclusion, Wadeson stresses that psychology is itself an evolving field of study, and that entrepreneurship researchers should take note of criticisms and counter-arguments made by psychologists of theories in their own field.
In Chapter 5, Martin Carter explores the conceptual connections between entrepreneurship and marketing, flowing from the concern of both fields with the organization of market exchange. He examines the relationship from three perspectives: ‘market process’, mainstream ‘marketing’ literature, and the literature on the entrepreneurial firm. While the framework for market processes comes from Austrian models of the entrepreneur, marketing literature provides a more detailed account of how entrepreneurs discover and exploit market opportunities. A synthesis of these approaches is suggested by the theory of the market-making entrepreneurial firm.
Market processes may be of more than one type: gradual (Marshallian) or disruptive (Schumpeterian). These have different implications for marketing. The discussion identifies two modes of marketing, a managerial mode and an entrepreneurial mode, each of which can be viewed as adapted to different types of market process. Research on the entrepreneurial mode has focused on the tension between entrepreneurial orientation, when the firm leads the market in the innovation process, and market orientation, when the firm is more concerned with (p. 13) responding to the market's needs. Finally, the author notes that no clear consensus has yet emerged on the marketing needs of the entrepreneurial firm. This remains the area with the greatest opportunities for future research.
Much of the early literature on entrepreneurship consisted of biographies of successful entrepreneurs. Much useful evidence can be gained from these biographies; they can enliven, and assist the interpretation of, statistics relating to firm formation and entrepreneurial behaviour. The strength and limitation of historical biography as a source for the study of entrepreneurship are critically reviewed by Tony Corley in Chapter 6.
Corley notes that the biographical information contained in the business papers, personal correspondence and diaries of entrepreneurs can shed important light on their cognitive capabilities, knowledge, and cultural attitudes. But biographies need to be handled with caution because authors are liable to distort the evidence, especially when the biography has been commissioned by, or written with the co-operation of, the entrepreneur's family or firm. Biographies as a group do not constitute a representative sample of entrepreneurs—they tend to be biased towards certain sectors (e.g. technologically innovative industries), to certain management styles (e.g. paternalism) and to the founders of large successful and long-lived firms. Notwithstanding these limitations, a great deal can be learned by pooling information from different biographies—especially modern biographies, which normally strive for a higher degree of objectivity than did earlier ones.
1.4 Review of the chapters: Small firms
Robert Cressy provides a most valuable service in Chapter 7: he presents a systematic and easily understood framework which explains the relationships between firm size, survival, and the firm's rate of growth. Initial theories of growth, the most famous of which is Gibrat's Law of Proportional Effect, were of a purely statistical nature. However later work modelled entrepreneurship as a learning process, where the entrepreneur gains feedback information on performance following start-up. The chapter also discusses literature on the effects of capital and other constraints on firm growth. It notes that empirical results that identify a strong influence of capital constraints need to be reassessed based on findings on the role of human capital. The chapter also considers the roles of firm and industry life cycles in firm survival and growth.
The modern theory of small firm growth is based on just a few premises. First, individuals choose entrepreneurship over being employed if the expected pay-off (p. 14) of the former exceeds the latter. The higher a person's capabilities, the higher their pay-off to becoming an entrepreneur. Secondly, individuals are ex-ante not perfectly sure of their capabilities, but they learn from their experiences. The framework's key prediction is that smaller firms have a higher failure rate and yet surviving ones grow faster than larger firms.
Empirical work gives robust support to the prediction. What is particularly interesting is that the initial capitalization does not prolong survival except in the very short run. The literature also shows that small firms' survival is extended when an industry is in a growing phase and is more knowledge-intensive.
The chapter also summarizes the literature on whether personal wealth affects entrepreneurial entry. The positive relation which is reported, suggests that entrepreneurial entrants face liquidity constraints, although the author considers alternative interpretations too.
The dynamics of populations of firms is key to understanding the aggregate impact of small firm formation on economic growth. In Chapter 8, Zoltan Acs presents a detailed statistical examination of the factors which govern new firm formation. Using US annual data on firm births for 384 labour market areas, in six industry sectors, between 1991–98, he finds that firm birth rate is relatively stable over time but varies across regions. Firm birth rates are positively associated with the lack of presence of large firms, the presence of human capital, population growth and income growth. Moreover, educational attainment has a positive relationship with firm birth, primarily in activities that have higher educational requirement. While some of his findings are controversial, this important chapter should provide a stimulus to further research on this topic.
Many small firms are family firms—though not all family firms are small, as Howorth, Rose and Hamilton make clear in Chapter 9. Family firms are a key component of most economies, accounting for up to 65 percent of GDP. Family firms are diverse, ranging from very small to very large firms, with varying levels and structures of family involvement. Family firms are embedded within societies which differ in their values, attitudes, laws, and business practices, and which are the product of complex path-dependent historical processes.
The diversity of the definitions of family firms suggests that there are multiple types of family firm—founder-owned firms, small family-owned firms passed down through generations, large family-owned pyramidal groups where a family utilizes cross shareholding, super voting shares, and vertically layered ownership to leverage family equity to amass control of multiple corporations. The last type of family controlled firms is very different from the other ones. The entrepreneurial tendency ought to be high in the former while the latter should be more adept at rent-seeking.
The authors point out that family kinship allows family firm groups to overcome institutional deficits at the beginning of industrialization. The family boundary defines the boundary of trust, pooling of capital and managerial resources. In (p. 15) addition, family business owners are able to use paternalistic strategies to create or mould business culture. The chapter also discusses intergenerational succession, noting its association with evolution of ownership structure, and the importance of advance planning and preparation of successors for the transition.
The authors emphasize that culture is an important factor in shaping the evolution of family firms. For example, in the US, the management of family firms is often delegated to professional managers, even where family equity ownership remains sizable, whereas in Europe and many parts of Asia family control is valued, and ‘familialism’ emerges. The authors also highlight the need to recognize the roles of family members—in particular those of women—who are neither owners nor managers, but mediate relationships between those who are involved directly in the firm.
Government support for small firms has been an important aspect of industrial policy over the last 20 years in many countries. But does such support offer value for money? Are the additional jobs created, and additional profits generated, greater than the costs of the subsidies provided? In Chapter 10, David Storey examines the important issue of evaluating the effectiveness of government support for SMEs. He points to the large sums of public expenditure involved, and points out the weaknesses of some familiar methods of evaluation. He draws on his extensive experience to suggest a number of improvements in the way in which evaluations should be carried out.
Storey distinguishes between ‘SME policies’ and ‘entrepreneurship’ policies. The former focus on existing businesses, while the latter focus on start-ups. Both types of policy are normally justified by appeal to alleged market failures, such as asymmetric information and imperfect property rights. In the case of SME policies, such failures, if they existed, could lead, for example, to excessive capital rationing. In the case of entrepreneurship, mis-information may lead to the risks of starting a business being systematically exaggerated. Examples of entrepreneurship policy include ‘enterprise-awareness’ programmes in schools, colleges and universities. It also includes the provision of information and advice to those considering starting a business, often with a focus upon ‘under-represented’ groups such as young people, females or those from ethnic minorities.
Storey also distinguishes two ways of implementing policy: by offering subsidies (or subsidized business services), and by improving the general business environment, for example, by reducing ‘red tape’. Some policies may be intended to support all firms, whereas others may be targeted on particular types of firm, such as those encountering specific barriers to growth.
The main thrust of Chapter 10 is to urge a more rigorous approach to the evaluation of government support for SMEs and entrepreneurship. Storey argues that evaluation needs to be built in from the outset of programmes, so that those who implement the programmes know that they will be accountable for their impacts, and feel obliged to collect the evidence from which these impacts can be (p. 16) assessed. Modern social cost-benefit analysis, backed by econometric analysis (including panel data techniques) make evaluation much more reliable and cost-effective than it used to be, and so there is no excuse for failing to evaluate. It is possible that rigorous evaluation could save large amounts of public expenditure on entrepreneurship policies which do not address proven market failures.
1.5 Review of the chapters: Innovation
Knowledge supports growth, but the precise mechanism linking knowledge creation to growth is not yet fully understood. In Chapter 11, David Audretsch and Max Keilbach argue that entrepreneurs play the role of transforming new knowledge that is not used by incumbent firms into growth.
They argue that much of the entrepreneurship literature treats entrepreneurial opportunities as exogenous, whereas in fact they are endogenously created. While large firms create much knowledge, they do not exploit all of this knowledge since its exploitation is tainted with uncertainty (which they denote the ‘knowledge filter’). This leaves opportunities for new and young firms, which constantly take up a large share of the exploitation of new knowledge and its commercialization. A lot of commercialization of innovation is based on knowledge spillovers to small firms set up and run by individuals who are former employees of large firms. Generally, smaller and younger enterprises, especially in knowledge-intensive industries, experience higher growth and also lower survival.
This pattern is consistent with a Lamarckian evolution. Active Lamarckian evolution depends on the presence of entrepreneurship capital which involves ‘a milieu of agents and institutions that are conducive to the creation of new firms.’ This involves social acceptance of entrepreneurial behaviour and individuals' willingness to deal with the risk of creating new firms. It also involves the participation of financing agents who are willing to share the risks. Thus, entrepreneurship capital involves possibly many legal, institutional and social factors—some of which are examined later in Chapter 20.
Not all innovations are started by entrepreneurs who create start-ups; large firms also play an important role in innovation, as indicated in Chapter 12, in which Walter Kuemmerle argues that large firms enjoy relative economic stability that can foster investment in innovation. They have more resources than small firms to take on risky, long-term and large-scale development and manufacturing projects. Large firms also train their own technical and managerial talent. However some of their employees later join smaller firms, or start firms on their own.
The author argues that an entrepreneurial climate within a large firm is necessary but not sufficient as a condition for a high rate of innovation. He suggests three approaches that may keep large firms innovative: (1) conceptual approaches, (2) organizational structure and spatial approaches, and (3) leadership and organizational culture approaches. These three approaches are complementary rather than mutually exclusive. The conceptual approach is to distinguish activities that (a) increase the stock of knowledge available to a firm (resources) from (b) activities that make use of this stock of knowledge (opportunities). Managers need to emphasize both. The second approach pertains to making efforts to increase communication across units and layers of the firm, and to locate the authority to make decisions in the hands of those whose knowledge makes them well placed to take them. Finally, organizational leadership is about creating a culture that is conducive to entrepreneurship and innovation; the culture is created through the stimulation and support of certain values on the one hand and through specific quantifiable goals on the other hand.
The theme of innovation is developed further by Berchicci and Tucci in Chapter 13. They reconsider the widely-held view that new entrants are more effective innovators than longer-established incumbent firms. They argue that incumbents are often quite effective innovators, but that they may deliberately delay the commercial exploitation of some of their inventions, giving the appearance that their innovation performance is weak. The authors provide a comprehensive review of the literature, setting out both the strengths and weaknesses of entrants and incumbents with respect to innovation. They then examine some recent empirical evidence that suggests that incumbents on average are neither failing to develop new technologies (even radical/disruptive technologies), nor failing to enter new technology-enabled markets. They argue that incumbents may be quite effective in developing technologies, but that they may deliberately defer their commercialization.
While such delay may be irrational, it need not be so necessarily. A rational innovator will attempt to time the innovation to maximize its net present value. This is not the same thing as innovating as soon as the net present value becomes positive. In the early stages of market growth, it may pay to wait until the market has achieved a critical mass before innovation proceeds, or until more technological information is available. This is particularly the case if incumbents are more able than novice players to compress the time that it takes them to enter. Another factor is that the incumbent firm may already be producing a competitive product. Introducing a new product while continuing to produce the old product may encourage price competition, whereby rents are redistributed to consumers and away from the firm. Such considerations may weigh less heavily with entrants as they fear competitive imitation more than do incumbent firms, and they have no established products with which their innovation will compete. The authors conclude with some interesting implications for entrepreneurial strategy.
(p. 18) 1.6 Review of the chapters: Finance
Venture capital (VC) is a key issue in the financing of start-ups and in the expansion of high-growth firms. In Chapter 14, Robert Cressy provides a systematic overview of recent research on this topic. He begins by clarifying the various terminologies employed in the industry.
Cressy suggests that traditional financial market players like banks are not adequately equipped to finance entrepreneurial entries. The reason cited is that bank financing often needs collateral while entrepreneurial entry is based on knowledge and skills, intangibles that are not suitable as collateral. The difficulty may first lie in the mis-match in the term structure between returns to entrepreneurial financing and bank liabilities—banks have to pay interest periodically and regularly while entrepreneurial returns come long after initial investments.
While the mis-match in term structure between assets and liabilities can be dealt with via staggering, there exist other obstacles. One of them is bank regulations—in some countries like the US, commercial banks (until quite recently) were not allowed to own shares or to be involved in investment banking. These restrictions prevented them from providing services that are more useful to entrepreneurs—for example, Initial Public Offerings (IPOs)—and to investors—for example, the use of share ownership to signal their confidence on the quality of an entrepreneurial project.
A more general point is that bridging between investors and entrepreneurs calls for multiple skills: for example, the ability to ‘separate the wheat from the chaff’ in identifying entrepreneurs to finance, to monitor entrepreneurial behaviour, and to nurture an entrepreneur's business development. These skill requirements lead to the development of venture capitalists who are specialists in bridging between investors and entrepreneurs. VCs construct their dealings with both investors and entrepreneurs using cleverly designed incentive contracts, through which they retain the rights to discipline entrepreneurs. They also utilize syndication and staged release of financing to entrepreneurs.
Finally, the paper discusses the evaluation of VC performance. The critical difficulty is the need to adjust for survival bias and to gauge performance not just on private returns but also social returns.
Another source of venture capital is corporate venture capital. Gary Dushnitsky (Ch. 15) provides a comprehensive discussion of corporate venture capital (CVC). CVC is a minority equity investment by an established corporation in a privately-held entrepreneurial venture. It is not to be confused with corporate venturing. In corporate venturing, a corporation finances corporate employees for venturing initiatives. CVCs are mostly undertaken by large incumbent firms which tend to fund larger start-ups than VCs. CVCs tend to support start-ups in the parent (p. 19) corporations' industry or a related industry. CVCs surge in periods when high expectation of growth are fuelled by rapid technological change; in recent years they have tended to concentrate on the computer and pharmaceutical industries. While CVC activities tend to be concentrated in the US, US companies' share of CVC has declined in recent years, which reflects the fact that non-US companies are forming CVCs that participate in the US market.
The author classifies CVC strategic objectives along a continuum ranging from seeking substitutes to sponsoring complements. ‘Substitute’ means CVC investment activity is used to identify novel products, services, or technologies that may replace existing corporate products, services, or technologies. Complementary CVC investment activity is used to seek innovations that increase the value of existing corporate businesses.
While CVC-backed ventures experience favourable performance, it is unclear whether this reflects CVC parents' ability to pick winners or to build superior ventures. To understand the contribution of CVCs to entrepreneurial success, it would be useful to investigate how a venture's performance is affected by the technological overlap of the CVC parents and the entrepreneur, the product complementarity or substitutability, and the extent to which business operations are shared. With this in mind, the author suggests a variety of future directions that can deepen our understanding of CVC's impact on the subject both at a micro and a macro level.
1.7 Review of the chapters: Employment, self-employment and buy-outs
Entrepreneurs interact with the labour market in multiple ways. In a very informative chapter, Simon Parker (Ch. 16) presents a systematic examination of these interactions. People make an occupational choice when they decide to become entrepreneurs. They also participate in the labour market when they hire employees. The chapter considers how human capital theory and labour supply models can be used to analyse such behaviour.
Parker first makes it clear that to become self-employed is a labour market choice. An individual compares the outcomes of being self-employed and being an employee. Traditional economic models assume that the former is riskier, but has greater upside potential. A person who is more likely to choose self-employment is more self-confident and less risk-averse. Also, the person derives more non-pecuniary benefits from self-employment and has lower financing (p. 20) constraints. These simple economic considerations can link the propensity to become self-employed with demographic data: for example, age, initial personal wealth, family financial security, education, and previous life experiences.
The author discusses in detail the relationship between entrepreneurs' earnings and education, as compared to the same relationship for the employed. The relationship is complicated because education is a heterogeneous good and there is self-selection in getting an education (e.g. highly capable self-employed people may have deliberately by-passed extensive formal education).
The chapter also reports on the factors that determine firm performance. Experience, formal education, size of the start-up, and access to financing all contribute to survival. High earnings delay retirement decisions. Interestingly, self-employment is often used as a bridge job between ‘salaried’ employment and actual retirement. While small firms are allegedly important in supporting employment growth, few self-employed actually hire outside workers and the bulk of jobs are created in a few exceptionally dynamic fast growing industries.
There are novice entrepreneurs and there are also habitual entrepreneurs. Habitual entrepreneurs are composed of serial entrepreneurs and portfolio entrepreneurs. Serial entrepreneurs are those who sell or close down a business with significant share ownership and yet maintain a significant ownership stake in a newly started/acquired/inherited business. Portfolio entrepreneurs maintain significant share ownership in multiple businesses that are new/acquired/inherited. In Chapter 17, Deniz Ucbasaran, Paul Westhead and Mike Wright examine the difference between novice and habitual entrepreneurs.
The evidence suggests that habitual entrepreneurs have more managerial human capital but are not necessarily better educated than novice entrepreneurs. Habitual entrepreneurs are more likely to be motivated by ‘being their own boss’, while novice entrepreneurs are more likely to choose to become an entrepreneur because of financial opportunities, such as family inheritance, or other reactive reasons. Compared with novice entrepreneurs, habitual entrepreneurs are more daring in making financial commitments to their start-ups and yet are also more cautious, for example, they tend to collect more information before starting a business. Habitual entrepreneurs are more able to identify business opportunities, and to capitalize on their organizational capabilities. They therefore invest more in R&D, and put greater emphasis on productivity and efficiency, and on cost and quality control, and so forth. Habitual entrepreneurs sometimes display different cognitive characteristics due to their experiences. However empirical research gives conflicting evidence on the average performance difference between novice and habitual entrepreneurs.
The chapter reviews the policy implications, and then gives detailed advice on directions for future research. It concludes by questioning Jovanovic's view of entrepreneurial learning in which entrepreneurs learn their abilities by engaging in running a business. The authors argue that this fails to explain why habitual (p. 21) entrepreneurs do not necessarily out-perform novice entrepreneurs, and why some failed entrepreneurs choose to try again.
Small firms need not be founded from scratch as ‘green-field’ enterprises; they can also be created as going concerns through buy-outs of divested activities previously operated by large firms. Management buy-outs of this type are the topic of Chapter 18 by Mike Wright and Andrew Burrows.
Buy-outs have typically been associated with the taking of listed firms into private hands using private equity funds and sometimes debts. The firms are often in industries with mature products and stable cash flows. In a management buy-out, incumbent senior management initiates the transaction and becomes the main non-institutional equity holder. The chapter explains that management buy-out leads to a significant replacement of ownership control and also a significant increase in ownership concentration. The impacts are higher incentives for the new controlling party to seek efficiency improvements, to take risks, and also for close monitoring of performance. Also the new controlling party is more likely to undertake entrepreneurial innovations and strategic changes. The chapter successfully blends together the agency cost reduction and entrepreneurial aspects in deciphering the intricacy of MBOs.
1.8 Review of the chapters: Social and cultural aspects of entrepreneurship
The social dimensions of entrepreneurship are examined by Amir Licht and Jordan Siegel in Chapter 19. The authors use institutional economics and cross-cultural psychology to analyse entrepreneurs as agents of social and economic change. Entrepreneurship reflects personal priorities (e.g. self-enhancement and openness to change) and important personality traits. Inevitably, the level and modes of entrepreneurial activity are affected by the surrounding culture and by legal rules.
The influence of culture has long been recognized. Cultures that maintain high individualism, high masculinity, low uncertainty avoidance and low power distance are conducive to entrepreneurship, the authors claim. The two most important core institutions for encouraging entrepreneurship are well-defined property rights and the rule of law. The literature is rather unsettled on what shapes these institutions. Candidates include colonial past, distribution of economic power, type of industries at the early stage of development, and cultural tradition.
Entrepreneurs have to find ways to overcome institutional deficiencies. It is well known that weaknesses in social institutions create difficulties in raising (p. 22) entrepreneurial finance and in establishing transactional trust. In societies with weak social institutions close-knit networks are developed to overcome the deficiency. The challenge for entrepreneurs is to establish a reputation so as to be allowed into these social networks.
Chapter 20, by Kathy Fogel, Ashton Hawk, Randall Morck, and Bernard Yeung, examines the institutional obstacles to entrepreneurship. The authors point out that entrepreneurship is a composite act, consisting of information gathering and processing, the identification of arbitrage opportunities, risk-taking, managing start-ups and market entry, and procuring financial backing, technological expertise, and other inputs. These activities are inter-temporal in nature and their success depends on intangibles embodied in the entrepreneur. Start-ups are vulnerable to entry deterrence by incumbents, to rent-extraction, and even to outright asset-grabbing by established dominant corporations or government officials.
An interventionist government imposing burdensome rules and market regulations can stifle incentives to be entrepreneurial, while high quality government bureaucracy may actually help. Concentrated control of corporations in the hands of a few rich families may spell trouble for entrepreneurs. Dominant elites may translate their economic power into political influence to protect their status quo—including erecting entry barriers into profitable industries and opposing liberalization measures that would favour start-ups. Based on 1997 to 2001 entry data from 34 European countries, the authors generate preliminary empirical evidence supportive of these ideas.
Their work should be seen as an early contribution. Understanding the interactive dynamic relationship between entrepreneurship and the stages of development, and the associated evolution of institutions, remains a challenging and fruitful topic.
Ethnic minority entrepreneurship has attracted a good deal of attention from researchers. Chapter 21, by Anuradha Basu, provides a comprehensive survey of this field. Basu begins by noting that in most Western industrialized countries, ethnic minorities tend to have high self-employment rates. The significant economic contribution made by minority-owned businesses has led Western policy-makers to regard self-employment as a promising route for ethnic minorities to achieve economic and social advancement, and to be accepted by the majority community. At the same time, there is growing concern about the heterogeneity in the economic performance of ethnic groups. Unfortunately, empirical studies have tended to focus on the experiences of specific ethnic groups, rather than a comparison between them.
Self-employment among minorities can be partly explained by racial discrimination which pushes ethnic minorities into self-employment. But this cannot be the whole story, because starting a business is not an ‘easy’ option: it may require educational qualifications, skills, and fluency in the host country language, as well as macroeconomic conditions. It also requires access to finance. This leads (p. 23) to another consideration: namely the cultural norms and ethnic resources of immigrant groups. The Gujarati Lohanas, Ismailis, and Marwaris, for example, have a tradition of business and trading, and value entrepreneurship far more than paid employment (Dobbin, 1996). These communities encourage hard work, self-sufficiency, thrift, and provide informal credit institutions too.
Ethnic enclaves can create entrepreneurial opportunities in particular neighbourhoods. They provide a local market, and access to relatively inexpensive labour. However, excessive reliance on family or co-ethnic labour can be detrimental to a business. Ethnic businesses that supply mainstream, non-ethnic products to national and international markets tend to out-perform those who operate purely in local enclaves. Differences in business success between different ethnic groups merit further research, and so too does the process of assimilation: there are still relatively few studies of the way that changing educational attainment influence inter-generational business succession among ethnic minority entrepreneurs.
The migration of entrepreneurs is the subject of Andrew Godley's contribution in Chapter 22. Immigrants have often become successful entrepreneurs—famous historical examples include Nathan Mayer Rothschild, Khwaja Wajid and Greek shipping merchants, among others. The explanation is not simply that they have brought with them outside information and technology. Immigrants are self-selected for their risk-taking and resourcefulness. Because they are new and external members of a society, immigrants have more limited vocational choices. In order to move up the social ladder, they are forced to choose risky activities in which they have a chance to excel. As a result, they are more likely to set up their own businesses, and less likely to choose government jobs and the professions. To manage their risks in an unfamiliar environment, immigrants tend to be closely-knit and to share resources with one another. This allows them to pool financial resources and to avail themselves of supportive social networks, all of which are conducive to entrepreneurial activity.
In Chapter 23, Candida Brush provides a critical review of the literature on women entrepreneurs, and offers suggestions for future lines of research. She notes that studies on women entrepreneurs are sparse in spite of their growing importance over the past decades. Possible explanations are that women's participation in entrepreneurship is a new phenomenon, that there is a presumed similarity between male and female enterpreneurs, and that women entrepreneurs' activities still lack legitimacy and institutional support.
According to Brush, all three explanations are plausible. The limited existing studies suggest that there is a bias in women enterpreneurs' choices of activities—female entrepreneurs tend to enter into businesses which fit the feminine image (e.g. retailing) while male enterpreneurs exhibit no such bias. Female entrepreneurs frequently choose activities that tend to have a higher failure rate and a higher financial barrier. At the same time, women entrepreneurs' businesses seem to experience less growth. It is unclear whether the outcome is due to the (p. 24) characteristics of their chosen activities or whether there exist institutional biases which restrict women enterpreneurs' access to resources.
Another question is whether the observations indicate economic inefficiency. It would be interesting to control for endogeneity in order to distinguish between differences in female and male entrepreneurs' capabilities and the impact of institutionalized biases, as these have different implications for economic efficiency.
In Chapter 24, Marina Della-Giusta and Zella King examine attempts by governments to promote ‘enterprise culture’, and review the evidence for the success of such initiatives in the UK and elsewhere. The authors refer to ‘enterprise culture’ as a set of shared values that are conducive to entrepreneurial behaviour.
Britain's lack of entrepreneurial behaviour in the past was attributed to its education system which had no regard for industrial or vocational skills, its financial system which had little concern for small business, and confrontational industrial relations. To tackle these deficits, a wide range of government programmes intended to promote enterprise culture were introduced in the 1980s, targeted at the unemployed, trainees, and school and university students. These programmes were backed up by policies such as the privatization of state-owned enterprises and a push for more cost-accountability in public enterprises.
The results have been mixed. While trade union power has been weakened, there is little evidence to suggest that British workplaces have become more enterprising and innovative. At the same time, there has been a significant decline in satisfaction with working hours. Business start-up rates and numbers of small businesses are rising, but it is unclear whether these changes represent short-term industrial restructuring or a long-term rise in entrepreneurship. The rise in self-employment could reflect reductions in eligibility for unemployment benefit, as well as buoyant macroeconomic demand. Hence, at best, evaluative evidence suggests that policies have a mixed effect. On balance, it seems to be more difficult to change attitudes to entrepreneurship through public policy and ‘cultural engineering’ than many people believe.
1.9 Review of the chapters: Spatial and international dimensions
Many policy-makers have been impressed with the success of regional clusters in stimulating entrepreneurship—whether in New England, California, or the textile districts on Northern Italy. In Chapter 25, Philip McCann examines recent theoretical developments that explain the way that geographical clustering in industrial (p. 25) districts may encourage new firm developments. Drawing upon the ‘contemporary geography of innovation’, the author points out four possible explanations for clustering. It may be merely a geographic coincidence; it may be a result of spatial differences in the phases of product or profit cycles; it could be due to variations in the characteristics of locations that lead to differences in the geography of creativity and entrepreneurship; and, finally, it could arise because innovation is most likely to occur in small and medium-sized enterprises, whose spatial patterns happen to be uneven.
The author proceeds to develop a typology of inter-firm relations in centres of agglomeration. In a pure agglomeration, inter-firm relations are inherently transient and firms are essentially atomistic. Some agglomeration centres have industrial complexes characterized by long-term stable and predictable relations between the firms in the cluster. The third type of spatial industrial cluster features a social network where there is mutual trust between key decision-making agents in different organizations; the trust may be at least as important as decision-making hierarchies within individual organizations.
The typologies set up in the paper offer much food for thought. For example, from a policy perspective, the typologies suggest investigation of the type of location-specific institutional characteristics that could induce innovations. Institutional characteristics that induce transactional trust among firms may promote agglomeration. From a firm strategy perspective, the typologies identify important factors in locational choice; for example, firms that experience more spillover outflows to rivals than spillover inflows from rivals would choose to keep their distance from agglomeration centres, while firms in the opposite situation may choose to migrate to them.
Recent years have witnessed a burgeoning literature on ‘born global’ SMEs. Some writers have challenged the traditional ‘Uppsala view’ that the internationalization of the firm is an incremental process. This topic is addressed by Peter Buckley in Chapter 26. Recent rapid changes in technologies, faster product development, and large scale globalization of markets have encouraged some SMEs to alter their internationalization strategies—especially where Internet technology can be used to coordinate global marketing and research activities.
While SMEs are constrained in their rate of international growth—both financially and managerially—they could become international by joining a network that is global in scale. To internationalize directly, SMEs have two main alternatives—a simultaneous ‘big bang’ approach, or an incremental approach. The incremental approach involves learning by doing, and a gradual accumulation of resources. It also provides ‘option value’: a ‘failure’ in a specific location may provide a learning opportunity that facilitates future expansion. Although the simultaneous approach offers the prospect of higher profits at an earlier date, and the consolidation of ‘first mover’ advantage, it also has substantial attendant risks, which mean that it is the appropriate choice for only certain sorts of firm. In particular, it is more appropriate (p. 26) for firms that intend to internationalize through exporting than for those that intend to internationalize through foreign direct investment.
The Handbook concludes with an authoritative survey of issues relating to entrepreneurship in transition economies by Saul Estrin, Klaus Meyer and Maria Bytchkova in Chapter 27. The chapter has five main sections. First, the authors point out that entrepreneurial activities are tied to the stage of development—entrepreneurship in transition economies is different from entrepreneurship in a mature economy. At the beginning of transition, the heritage from planning has its effect on entrepreneurship—former state owned firms were breeding grounds for entrepreneurs and serve as a source of fixed assets. Former party members with connections to political and economic elites are also natural ‘entrepreneurs’ as they can make things happen in the midst of corruption and chaos, which typically characterize the beginning of transition. Later, as greater political and economic stability is achieved, the price mechanism begins to function, and property rights are defined, a more normal kind of Schumpeterian entrepreneur may emerge. The authors leave us with a puzzle: Is the more successful transition in some Eastern European countries and the lack of progress in some states like Russia related to entrepreneurial development?
The second section examines obstacles to entrepreneurship in transition economies; the list is more extensive than for mature economies. Corrupt government and ineffective regulatory frameworks are certainly significant obstacles. EBRD and World Bank surveys reflect a broad consensus that institutional development is higher in Central European countries than in former Soviet republics, and this may explain the different tracks of development in the two regions. Interestingly, survey results suggest that entrepreneurs are more concerned about governmental obstacles like taxes, financing and policy instability than social and institutional obstacles such as crime and the functioning of the judiciary.
The third section focuses on entrepreneurial entry. The authors point out the need that the growth of a new small-firm sector is not necessarily evidence of an upsurge in entrepreneurship—it may represent the incorporation of enterprises previously operating on grey or black markets. Empirical studies that incorporate this concern suggest no lack of potential entrepreneurs in many transition economies—except, perhaps, in Russia, where people seem to have lower aspirations to self-employment.
The fourth section examines the characteristics of entrepreneurs in transition economies. While some are workers escaping from poverty, others are professionals, former cadres, and returned expatriates. Some of the most successful entrepreneurs are from families with an entrepreneurial tradition, and have had previous exposure to business. Moreover, they have higher economic aspirations (or are greedier) and have a more positive attitude towards the government.
The final section surveys the strategies of entrepreneurs in transition economies. The authors note that entrepreneurs often collaborate to build substitutes for (p. 27) missing markets and institutions—they share trade credits, pool family resources, and form networks to enhance their collective reputation.
1.10 Concluding thoughts
The publication of this Handbook provides a convenient opportunity to take stock of recent progress in the field and to assess the opportunities for future research. The chapters which follow demonstrate that the study of entrepreneurship has progressed remarkably over the last 20 years. Twenty years ago, most theories of entrepreneurship were expressed in very general terms. They are sometimes described as ‘Biblical’ in their approach. They were concerned with major conceptual issues, such as the nature of economic profit, the difference between risk and uncertainty, and the relation of market process to market equilibrium. These theories were quite successful in explaining long-term historical trends, but were considered to be of little value in analysing the dynamics of small-firm behaviour. Since then the theory of entrepreneurship has been progressively refined, so that there is now a much closer connection between theories of entrepreneurship on the one hand and theories of the firm, and theories of business strategy, on the other.
Empirical work has progressed too. Twenty years ago, much of the empirical work was focused on job creation by SME start-ups. Emerging global competition was destroying jobs in traditional manufacturing sectors dominated by large oligopolistic firms with hierarchical management structures. Encouraging people to start their own business was seen by policy-makers as a useful way of getting the unemployed back to work. It would help to rebuild the economy along more flexible and responsive lines. Recording start-ups and tracking the growth of new firms became a major focus of research, and in the process, some of the wider issues addressed by theory disappeared. Today, however, there is much greater emphasis on testing theories of the formation and growth of firms rather than simply constructing a statistical profile of the SME sector. Shanes' (2003) recent work shows convincingly how theory and measurement have converged; it also shows that entrepreneurship theory has, on the whole, been remarkably successful in explaining the major features of SME behaviour. In contrast to some other areas of applied economic and social research, entrepreneurship theory has proved remarkably successful in interpreting the relevant empirical evidence.
It has always been a central claim of theories of entrepreneurship that entrepreneurship is core and not peripheral to the performance of the economy. Entrepreneurs contribute a scarce and valuable resource: while different authors (p. 28) may give it different names—for example, uncertainty-bearing, exercise of judgement, innovative capability, and so on—they are all agreed that different endowments of this resource can explain the significant differences in economic performance that remain once the impacts of the traditional factors of production—land, labour and capital—have been taken into account. This applies to explaining the differences between countries, between regions, and between cultural and ethnic groups. The pervasive influence of the entrepreneurship can be seen in the great diversity of topics included in this Handbook. There is hardly any aspect of economic and social behaviour which is not affected by entrepreneurship. Indeed, if every possible area of impact had been considered, this Handbook would have been at least twice its present length.
A consequence of the centrality of entrepreneurship is that, while much has already been achieved on the research front, more still remains to be done. The centrality of the entrepreneur within the firm has significant implications for the future modelling of firm behaviour, as well as for empirical research in business and industrial economics. The way that entrepreneurs recognize opportunities for innovation, and the distinctive features of their business judgement, have implications for cognitive economics—an emerging subject at the interface of economics and psychology. Cognition is related to personality—it raises the question of whether different personality types are better suited to entrepreneurship than others, and whether particular types of personality fit a person for a particular type of entrepreneurial activity. This links entrepreneurship to sociology, and thence to social history. However, the theory of entrepreneurship does not yet possess an adequate typology of personalities: although self-confidence and pragmatic problem-solving are widely recognized as entrepreneurial attributes, the way that entrepreneurs frame decisions and deploy heuristics requires further investigation
Personalities can be moulded by culture and institutions. Institutions such as law and contract also influence the ability of entrepreneurs to appropriate a reward from their efforts. A significant amount of recent literature on entrepreneurship highlights the way that institutions can either encourage or inhibit entrepreneurship, and channel it into either socially useful or socially damaging channels. The interface between entrepreneurship and institutions appears to be a particularly fruitful area for future research.
Popular hype on entrepreneurship has tended to emphasize the competitive nature of entrepreneurial behaviour. This view generally derives from placing a disproportionate emphasis on the entrepreneur's strategic decisions on product innovation and pricing. It ignores the fact that in order to set up and grow a business, an entrepreneur needs the active co-operation of investors, bankers, suppliers and employees. Entrepreneurs need to exploit social networks in order to identify potential partners, and they need to ‘leverage’ the opportunities provided by family and community links in building trust with the other people on (p. 29) whom their success depends. Twenty years ago, some writers on entrepreneurship uncritically accepted the political propaganda surrounding ‘enterprise culture’, with its emphasis on the competitive nature of the entrepreneur, but nowadays most writers take a more objective, and therefore more critical, view. The successful entrepreneur is not a compulsive competitor, but a person who chooses whom to compete against, and whom to co-operate with, and exercises appropriate judgement when making these choices.
Evolutionary economists have argued that as knowledge of a subject accumulates, a critical mass of knowledge is achieved at which new combinations of existing knowledge generate new results at an accelerating rate. It is quite possible that the study of entrepreneurship has now attained this critical level of knowledge, at which increasing returns to the stock of knowledge are obtained. If so, then the research opportunities in the field are greater than ever before. While much of the necessary groundwork may already have been carried out, and the foundations laid, the edifice itself is far from complete. The field should therefore prove attractive to the next generation of scholars.
Applying the theory of entrepreneurship to this issue predicts a bright future for the study of entrepreneurship. Theory suggests that researchers of high ability will be attracted to the field in increasing numbers to take advantage of the opportunities that it provides. If this analysis is correct, then this Handbook could become obsolete within the next ten years. Nothing would delight the editors more if this prediction were to come true.
Aldcroft, D. (1964). ‘The Entrepreneur and the British Economy, 1870–1914’. Economic History Review (2nd ser.), 17: 113–34.Find this resource:
Brenner, R. (1983). History: The Human Gamble. Chicago: University of Chicago Press.Find this resource:
Cantillon, R. (1755). Essai sur la nature du commerce en generale (ed. Henry Higgs, 1931). London: Macmillan.Find this resource:
Casson, M. (1982). The Entrepreneur: An Economic Theory. Oxford: Martin Robertson.Find this resource:
Church, R. (1993). ‘The Family Firm in Industrial Capitalism: International Perspectives on Hypotheses and History’. Business History, 35(4): 17–43.Find this resource:
Harper, D. A. (1995). Entrepreneurship and the Market Process. London: Routledge.Find this resource:
Hayek, Friedrich A. von (1937). ‘Economics and Knowledge’. Economica (New ser.), 4: 33–54.Find this resource:
Hughes, J. R. T. (1965). The Vital Few: The Entrepreneur & American Economic Progress. New York: Oxford University Press.Find this resource:
Jones, E. (1981). The European Miracle. Cambridge: Cambridge University Press.Find this resource:
—— (1988). Growth Recurring. Oxford: Clarendon Press.Find this resource:
Kirzner, Israel M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press.Find this resource:
(p. 30) Knight, F. H. (1921). Risk, Uncertainty and Profit. Boston: Houghton Mifflin.Find this resource:
Marshall, A. (1919). Industry and Trade. London: Macmillan.Find this resource:
Morck, R. and B. Yeung (2004). ‘Family Control and the Rent-Seeking Society’. Entrepreneurship: Theory and Practice, (Summer) 28(4): 391–409.Find this resource:
—— and —— (2003). ‘Agency Problems in Large Family Business Groups’. Entrepreneurship: Theory and Practice, (Summer) 27(4): 367–82.Find this resource:
Olson, Mancur (1982). The Rise and Decline of Nations. New Haven, CT: Yale University Press.Find this resource:
Pollard, S. (1981). Peaceful Conquest. Oxford: Oxford University Press.Find this resource:
Sandberg, L. G. (1981). ‘The Entrepreneur and Technological Change’, in R. Floud and D. McCloskey (eds) The Economic History of Britain Since 1700: 2. 1860 to the 1970s. Cambridge: Cambridge University Press.Find this resource:
Sarachek, B. (1978). ‘American Entrepreneurs and the Horatio Alger Myth’. Journal of Economic History, 38: 439–56.Find this resource:
Schumpeter, J. A. (1934). The Theory of Economic Development (trans. Redvers Opie). Cambridge, MA: Harvard University Press.Find this resource:
—— (1939). Business Cycles. New York: McGraw-Hill.Find this resource:
Shane, S. (2003). A General Theory of Entrepreneurship: The Individual—Opportunity Nexus. Cheltenham: Edward Elgar.Find this resource:
Shaver, M. and F. Flyer (2000). ‘Agglomeration Economies, Firm Heterogeneity, and Foreign Direct Investment in the United States 2000’. Strategic Management Journal.Find this resource:
Smiles, S. (1862). Lives of the Engineers. London: John Murray.Find this resource:
—— (1882). Self-Help. London: John Murray.Find this resource:
Solomou, S. (1987). Phases of Economic Growth, 1850–1973. Cambridge: Cambridge University Press.Find this resource:
Taussig, F. W. (1915). Inventors and Moneymakers. New York: Macmillan.Find this resource:
Wiener, M. J. (1981). English Culture and the Decline of the Industrial Spirit. Cambridge: Cambridge University Press.Find this resource: