The Theory of Entrepreneurship

Creating and Sustaining Entrepreneurial Value

Chandra S. Mishra, R. Zachary

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137376428
• eBook ISBN:
  9781137371461
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

The Theory of Entrepreneurship examines the interiors of the entrepreneurial value creation process, and offers a new unified and comprehensive theory to afford empirical investigations as well as delineate a broader view of the entrepreneurial contextual milieu.

PART I

STARTING UP: INTRODUCTION

CHAPTER 1

THE IMPERATIVE AND MISSING CRUX OF ENTREPRENEURSHIP RESEARCH

A Theoretical Beginning for Enhancing Entrepreneurship Research

The Theory of Entrepreneurship: Creating and Sustaining Entrepreneurial Value posits that entrepreneurship is a crucial yet disorderly and complicated social process of value creation, and challenges researchers to expand and recast our research approaches and empirical tools to fully grasp this unruly and understudied process. We propose to intricately examine the interiors of this entrepreneurial process. At the same time, we offer a new unified and comprehensive entrepreneurship theory to afford empirical investigations as well as delineate a broader view of the entrepreneurial contextual milieu.

Some 20 years ago, Amit et al. (1993) argued that it may be too ambitious to expect a complete theory of entrepreneurship due to its interdisciplinary and complex nature. We have nevertheless made an attempt to explain the interiors of the entrepreneurial process by unifying and integrating various insights gleaned from several functional disciplines, such as economics, finance, marketing, decision sciences, sociology, psychology, management, and strategy, among others. Our purpose is to posit a comprehensive and unified entrepreneurship theory.

The theory we are proposing is a two-stage value creation and appropriation framework, namely the Entrepreneurial Value Creation Theory. In Stage 1—Formulation, an entrepreneur driven by entrepreneurial intention discovers an external opportunity or the reverse occurs where opportunity leads to intention. These two input routes into Stage 1 of our Entrepreneurial Value Creation Theory are consistent with the Global Entrepreneurship Monitor’s (GEM) distinction between opportunity-based entrepreneurship where opportunity precedes intention versus necessity-based entrepreneurship were intention precedes opportunity (Kelly, Singer, and Herrington, 2011). Relative to our Entrepreneurial Value Creation Theory, the entrepreneur internalizes, in both incidences, the intention and opportunity with their available resources to build an entrepreneurial competence.

We also offer the Theory of Entrepreneurial Intentionality, which delineates the sequential stages of intention internally and with others as the entrepreneur moves forward to enter the broader processes of venture formulation. This is the venture formulation stage or the nascent stage of value creation. Many entrepreneurs fail at this stage. The feedback step at this stage is to determine if the venture formulated has developed sufficient entrepreneurial competence to move to Stage 2—Monetization. We propose the Theory of Entrepreneurial Competence to explain how the entrepreneurial competence is effectuated.

Next, in the second stage, the entrepreneurial competence that is developed in Stage 1—Formulation is reconfigured to create entrepreneurial reward and sustainable value. Entrepreneurial competence is leveraged and appropriated using a business model design that embeds isolating mechanisms and dynamic complementary capabilities. The Business Model Theory captures the interiors of Stage 2—Monetization.

Each stage of the Entrepreneurial Value Creation Theory has a source of value, a value lever to enhance value appropriation, an iterative feedback link in each stage and between the two stages, a value amplifier mechanism, and a value-added output. These concepts are further explained in detail within the following chapters and summarized in chapters 5, 9, and 10.

Good theory embeds the principle of reflecting reality with well-defined constructs and processes. Such a theory of entrepreneurship must be comprehensive in its scope and detail as well as inclusive of the salient disciplinary views necessary to represent the phenomenon at hand. Without this, there exist two major concerns of narrowness and lack of specificity. Amit et al. (1993) defined the theory of entrepreneurship as “a verifiable and logically coherent formulation of relationships; or underlying principles that explain, predict entrepreneurial activity (e.g. characterize conditions that are likely to lead to new profit opportunities and to the formation of new enterprises), or provide normative guidance (i.e. prescribe the right action in particular circumstances)” (p. 819).

Without a fundamental, integrative, and unified theoretical base, high-quality research is impossible. Myopic thinking or single-disciplinary views will yield little of value. For example, economists have ignored the reality that entrepreneurship is both a social and economic process (Coase and Wang, 2011). Without an overarching theory, we will see the trees but not the forest. Heretofore, this appears to have been the case. In the never-ending discourse over whether opportunity exists independent of the individual or not (McMullen, Plummer, and Acs, 2007), the fundamental premise that entrepreneurship is a social process carried out by many has been excluded and set aside, presumably for the simplicity assumption. Unfortunately, too much simplicity invoked by single-disciplinary views leaves us with many aspects of entrepreneurship unexplored or excluded.

Thus, in this book we posit a unification of existing disparate segments of the entrepreneurial process into a broad, comprehensive theory with sufficient detail to research the interiors of the entrepreneurial process, namely Entrepreneurial Value Creation Theory.

Further, without an integrative and unified theory, research may lack specificity. If relevant but omitted research variables are the case via a limited theoretical scope, the subsequent research results are biased (Gujarati, 2003; Heckman, 1979; Johnston and DiNardo, 1997; Kmenta, 1997). If theoretical constructs, relationships, and processes are limited or under-specified, again the research results are meaningless.

The theoretical key is to represent the entrepreneurial experience to its fullest and as close to reality as is possible. Such an approach requires a broad and comprehensive view with a multidisciplinary complexity. We hope to fill this theoretical void with our Entrepreneurial Value Creation Theory presented herein.

Definition of Entrepreneurship and the Entrepreneur

Low and MacMillan (1988) defined entrepreneurship as the process of founding a new venture. Later, Amit et al. (1993) refined the definition of entrepreneurship as the process of extracting profits from new, unique, and valuable combinations of resources in an uncertain and ambiguous environment. Aldrich and Ruef (1999) suggested multiple interpretations of the term entrepreneurship including founding a new organization which may or may not result in creating value (pp. 62–65).

Thus, the process of value creation is central to the conceptualization of entrepreneurship. We therefore define entrepreneurship as the entrepreneurial process driven by entrepreneurial intention and a desire for entrepreneurial reward, the process that involves from identifying an entrepreneurial opportunity to build an entrepreneurial competence to finally appropriating the entrepreneurial reward. Note that entrepreneurship is driven by the desire for reward, not greed, as it is often misconstrued. Entrepreneurship is thus defined as a process of value creation and appropriation led by entrepreneurs in an uncertain environment; and the dynamics of the interiors of this entrepreneurial process (the so-called black box) are presented in our Entrepreneurial Value Creation Theory.

Entrepreneurship or the entrepreneurial process can be internal or external, in that a venture can be created by an individual entrepreneur independently or within a corporation. Corporate entrepreneurship fosters ventures within major companies or with the assistance of corporations to meet their strategic objectives. Similarly, entrepreneurship can be domestic, international, or global, depending on where the venture is located. Entrepreneurship is often and commonly seen within family businesses. Also, to speed up the time necessary to reach the appropriate market, entrepreneurs may choose to franchise a business process instead of developing the product or the process from inception. Furthermore, in social entrepreneurship, a venture is developed with a mission to serve a social cause. There are other contexts and locations where entrepreneurship or new venture development may occur.

In “The Nature of the Firm,” Coase argued that: “The main reason why it is profitable to establish a new firm would seem to be that there is a cost of using the price mechanism” (Coase, 1937, p. 390). These costs are later called transaction costs, the elimination of which necessitates the formation of a new venture. It is the entrepreneur who drives the entrepreneurial process to help reduce these transaction costs with her special skills in marshaling resources to bring a firm into existence. Mishra and Zachary (2013, p.435) argued, ‘The Nature of the Firm’ is truly the emergent Theory of the Entrepreneur in which the entrepreneur takes central stage and provides the coordination of resources within the firm more efficiently than can be achieved outside the firm.” Indeed, Coase (1937, p. 392) determined that:

The entrepreneur has to carry out his function at less cost, taking into account the fact that he may get factors of production at a lower price than the market transactions he supersedes, because it is always possible to revert to the open market if he fails to do so.

Thus, the entrepreneur and entrepreneurship are central to Coase’s (1937) theory, in that the entrepreneur is able to marshal and configure the resources more efficiently, thus lowering the transaction costs, than what the external markets or intermediaries can do. Schumpeter (1911, 1934) described the entrepreneur as a leader or the “man of action.” Schumpeter argued (Mishra and Zachary, 2011, p. 2):

In general, we start from a static economy and then introduce our new agens, so that it stands out in all its aspects . . . In a strictly static state, production and consumption move, as described, in the same well-trodden tracks. Always the same goods—and always in the same quantities—are always produced and consumed by the same people . . . Now it is very important to clearly bear in mind this unrealistic picture because it offers a contrast against which our phenomena are easier to recognize. Our man of action withdraws part of the goods existing in the static economy, our starting point, from the previous static uses they commonly served or were produced to fulfill, and then proceeds to use them in a different manner. This is what we understand as the carrying out of new combinations. (Schumpeter, Becker, and Knudsen, 2002, p. 406)

Kirzner (1985) contended that entrepreneurs perceive potentially valuable opportunities and initiate actions to meet market needs more efficiently. Amit et al. (1993) defined entrepreneurs as individuals who identify business opportunities, and assemble and coordinate new combinations of resources, so as to appropriate most value from their innovations in an uncertain environment. An uncertain environment is central to the process of entrepreneurship, in that the future reward from the innovation and the probabilities of realizing the reward are unknown (Knight, 1921).

Amit et al. (1993) argued that the critical characteristics of entrepreneurs are difficult to observe ex-ante, as ex-post it is difficult to know if a venture has failed due to merely bad luck or low entrepreneurial ability (i.e., a type of market failure known as adverse selection). Thus, ex-post it is difficult to predict the profiles of individuals who will choose to become entrepreneurs. Amit et al. (1993) summarized the literature on the personality of entrepreneurs to reflect four key traits: need for achievement, internal locus of control, high risk-taking propensity, and tolerance for ambiguity. An entrepreneur has a high need for achievement, in that the entrepreneur sets goals and she accomplishes them through her effort and desire for feedback (McClelland, 1961). The internal locus of control means that the entrepreneur believes that she can control her destiny through her own actions (Rotter, 1966). Entrepreneurs are perceived to be high risk-takers, although there is not enough evidence to support this theory (Wu and Knott, 2006). Entrepreneurs have a greater capacity to tolerate ambiguity than managers (Amit et al., 1993).

But the definitional and methodological problems associated with the literature on entrepreneurial traits, as observed ex-post, such as biases toward successful entrepreneurs and noncomparability of samples, raise the possibility that the observed entrepreneurial traits are actually arising from entrepreneurial experience (Amit et al., 1993). Thus, it is difficult to distinguish the characteristics or personality traits of the entrepreneurs from those exhibited by managers.

Theoretical Shortcomings of Extant Entrepreneurship Research

Approximately one hundred years ago, Joseph A. Schumpeter published his first book, Theorie, in 1911, and hence researchers from all disciplines have sought to examine the role and action of the entrepreneur. Heretofore, the entirety of Schumpeter’s works has shaped entrepreneurship research (Mishra and Zachary, 2011). Yet so little has emerged or been examined regarding the interiors of the entrepreneurial experiences and its processes. Moreover, today’s research opportunities are unfolding with few viable and comprehensive theories that offer a detailed view of the core of entrepreneurship as well as its surrounding environments (Heck, Hoy, Poutziouris, and Steier, 2008; Heck and Mishra, 2008; Mishra and Zachary, 2011; Zachary and Mishra, 2010).

Today, most treatments of entrepreneurship consist of a cadre of disparate and discipline-based conceptual and theoretical discourse that offers their particular value and contributions. Recently, William J. Baumol (2010, 2011) has introduced researchers to a price theory of innovation and entrepreneurship, modeling the Schumpeterian approach within the framework of microeconomics theory, extending microeconomics theory to a new frontier.

Previously, innovation was not included within the price system, in that a new product is functionally (in terms of utility) not different from an existing product, so there is no need to model entrepreneurial activity separately within the microeconomics theory, a theory of price determination and resource allocation. The recent work by Baumol (2010), made an exception, albeit in contrast to his previous writings. In The Microtheory of Innovative Entrepreneurship, Baumol modeled the Schumpeterian approach, the process of innovation, within the realms of microeconomics.

On a juxtaposed parallel school of thought, Nobel Laureate Ronald H. Coase and his coauthor Ning Wang (2011) concluded that economic price theory is primarily concerned with resource allocation but says little about the process of innovation and entrepreneurship. Coase and Wang consider innovation and entrepreneurship to be a complicated social process for which there is a paucity of research. Singularly, Coase and Wang moved the firm into the social realm and incorporated into our thinking a broader and more comprehensive view of its essence and complexity. Coase’s (1937) groundbrea...

Table of contents

• Cover
• Title
• Part I   Starting Up: Introduction
• Part II   From External Intention and Opportunity to Entrepreneurial Competence
• Part III   From Entrepreneurial Competence to Entrepreneurial Reward
• Part IV   Summing Up: The Theory of Entrepreneurship
• Index