“entrepreneurship as a profession and process of firm ... · “entrepreneurship as a profession...

“Entrepreneurship as a profession and process of firm

formation”

UAB - Departament d’Economia de l’Empresa

profession and process of firm formation”

Dr. Christian Serarols i Tarrés

Bergamo, 2011

1. Important questions about venture creation

a) What does create a new venture mean?

b) Why is entrepreneurship so important for the economy?

c) Why is so difficult to create new firms?

Outline

d) Why entrepreneurship fulfils a social function?

e) Why entrepreneurship and entrepreneurs are not sufficiently valued and considered by the society?

2. Myths about entrepreneurship

3. Historical evolution of Entrepreneurship as a field of research

4. Methodological aspects

5. Theoretical approaches to study entrepreneurship: economic, psychological, institutional and managerial

6. Process of firm formation

1.a. What does create a new venture mean?

� Before answering this questions we need to clarify some basic concepts:

New venture/firm

� An enterprise justifies its existence and legitimacy as a social organisation in the possibility and capability of producing gods to organisation in the possibility and capability of producing gods to satisfy human needs

� The starting point is always a BUSINESS OPPORTUNITY (oriented to cover a recognised or latent need) based on a BUSINESS IDEA

� To exploit this OPPORTUNITY we need to: acquire, organise and combine different production factors (with competitive costs and prices) => this is the entrepreneur’s function (it is called entrepreneurship-”función empresarial” and it is considered the fourth production factor)


Venture creation is based on the following ingredients:

� Identification of a business opportunity� Identification of a business opportunity

� Production factors (material, immaterial and human) - RBV

� The market where the business will operate

� The strategy

� The entrepreneur (background, attitudes, motives, etc.)

� But this entrepreneurial function is based on two fundamental pillars: innovation and risk taking

Innovation

� It is so close to entrepreneurship that some economists (Schumpeter, for example) consider that innovation is the fundamental part of


example) consider that innovation is the fundamental part of entrepreneurship

� According to Schumpeter, Entrepreneurship consists on doing new combinations that can be:

a) Introduction of a new product or service

b) Introduction of a new production method

c) To open a new market

d) To conquer a new supply source

e) To create a new organising form in the industry

� These innovative ideas are the starting point of any business initiative

� Example: after 11-S => tourism reduction=> it appears the “low cost” => great success (Ryanair, Vueling, etc.)

Innovation

� These companies stem their business in a new strategic conception that implies a new combination of production factors (b or d according to Schumpeter) => the same objective (to transport passengers) but with other “means):


other “means):

i. Using Internet to reserve and buy flight tickets (self-service)

ii. An exclusive use of the electronic boarding ticket

iii. Eliminate commissions to intermediaries (with the above 2 points)

iv. To use smaller airports, close to big cities to reduce costs and avoid the common delays in big airports

v. Less time used in carrying passengers which allows that planes can fly more hours (11 instead of 8, like the rest of companies)

vi. To use less models of planes => to save on maintenance

vii. Routes are planned so that the crew could fly back to the base daily => save costs on hotels, “per diems” (meal allowance)

viii. Less staff (1 for every 4.000 passengers instead of 1.000 for the rest of firms)


� With this example, we have another proof on how the entrepreneurial spirit and the innovation capacity of new and SME’s companies can influence big enterprises and competitors, in general

Risk assumption (risk taking)

� Create a new firm, adapt to the changes in the environment, manage � Create a new firm, adapt to the changes in the environment, manage and organise production factors, be creative and innovative implies acting under uncertainty => this implies risk

� For that, risk taking is inherent to the entrepreneur, and s/he assumes the role of responsible of the feasibility of such a process in front of the society, using her/his own capital, effort and wage as guarantee

To create a firm means:

� Combine different production factors in an innovative way

� Be creative

� Risk assumption

1.b. Why is entrepreneurship so important for the economy?

� It is the sap of the Market economy and an essential factor for the economic development of a country/region (see Max Webber, for example)

� The economic feasibility of the system depends, in large measure, on the disappearance of inefficient businesses and the entry into the the disappearance of inefficient businesses and the entry into the system of a sufficient number of new firms (business density)

For example, Population Ecology Model explains this phenomenon:

� Firms of a certain dimension is characterised by their slowness or even their inability to adapt themselves to the changes in the environment => their bureaucracy and inertia restrict innovation

� When the environment is importantly/rapidly changing, it appears new firms to take the advantages offered by this change

� F.E. PC’s were not introduced in the market by big companies (Honeywell, IBM, etc.) but by new entrepreneurs (Bill Gates, Steve Jobs, etc.)

� GEM has identified (54 countries) a positive correlation between the “venture creation index” and GBP growth index (r=0,47 => very high)

1.c. Why is so difficult to create new firms?

It exists several arguments, but I am focussing on some of them:

� “To exercise a profession without having learnt it” (Veciana, 2005)

� This subject does not usually appear in the syllabus of the majority of degrees (at most, it appears as optional)

� It does not exists a knowledge area on “Entrepreneurship” (it is like a Medicine Faculty that does not have obstetrics, gynaecology and paediatrics)

� Our students lack the necessary formation on this issue

� Proof of this is the high mortality rate (from 20 to 80% during the first 3 years of operation)

� Curiously, those that have higher education and business experience are around the 20%

1.c. Why is so difficult to create new firms?

� Entrepreneur’s motivations and personal characteristics (Say, 1840) => are different in comparison to the rest of the population:

� Knowledge about the creation process, business management and the sector where the firms operatesector where the firms operate

� Capacity to take decisions under uncertainty situations

� Planning capacity

� Capacity of managing, delegating, communicating and negotiating

� Creativity, “need of achievement”, etc.

� In fact, the success is f (knowledge, skills, abilities and motivations of the entrepreneur)

1.d. Why entrepreneurship fulfils a social function?

� Because it implies the creation of new jobs (at least for the own entrepreneur) => it contributes to reduce unemployment

� The history of mankind is the history of the emancipation of men and women (from being slaves, subjects of absolute monarchs, etc. to democracy where we choose our way of life)democracy where we choose our way of life)

� In the workplace, the fact of being an entrepreneur involves labor emancipation => one step closer to the emancipation of man / woman

� Of course, it is more comfortable to work for others and ask them to create more jobs rather than take personal responsibility to create your own livelihood

� It is a matter of culture and attitudes towards entrepreneurship

� The welfare state has taken on social protection of individuals and has produced “subjects” that have been used to request to the State to solve all their problems => instead of worrying about themselves for solving their own future

1.e. Why entrepreneurship and entrepreneurs are not sufficiently valued and considered by

the society?

� It comes from far and dates back to classic economists. For example, Adam Smith (1776 – The Wealth of the Nations) does not mention the entrepreneur => only workmen and capitalists and the direction/management function is preformed by “administrative employees”

� Either smith and David Ricardo developed their value theory based on production costs (the wage of the worker, interest rate of the invested capital and rents paid for the land used) => they do not differentiate the capitalist from the entrepreneur (4th production factor)

� For decades, has been the “bad of the movie” => exploiting workmen

� According to the historian Tortella (1995), this attitude is due to:

� The old aristocratic prejudice against work, particularly manual

� The traditional Catholic mistrust towards capitalism

� Intellectual passivity and respect for the orthodoxy imposed by the Inquisition

� Low educational levels and the long tradition in favour of government investment, regulation and the standarditzation of business activity in “gremios”

1.e. Why entrepreneurship and entrepreneurs are not sufficiently valued and considered by

the society?

� Only in recent years, due to unemployment rates, society has begun to realize of the importance of entrepreneursentrepreneurs

� In recent times the term "emprendedor" is broadly used which we believe is wrong

� It can even be considered a euphemism at the expense of the correct word => “empresario” (Entrepreneur, Unternehmer, etc.).

2. Myths about entrepreneurship

MYTH 1: Difficulty in creating a new venture in present times

� In the survey that we conduct among entrepreneurship’s students at the Business and Economics Faculty, they consider that it is more difficult to create a company today than in the past (due to a higher competition and a lack of financial resources)and a lack of financial resources)

� Taking into account that entrepreneurship is based on a latent or non-identified need by the competitors => non-existent competition or ver weak

� Saturation of the market => it is only applicable to mature markets but not for emergent markets

� We have several areas with opportunities: demographic changes, new technologies, sustainability, privatizing public services, etc.

MYTH 2: Lack of financial resources

� The lack of financial resources is usually the first factor for start-ups failure in SMEs in the EU => case studies show that important entrepreneurs started their businesses with very scarce funding (own resources, 3F’s) and that they have created big successful companies (Dell, Microsoft, Zara, etc.)

� It has never existed such an availability of money for funding new firms


� Entrepreneurship represents one of the majors engines of growth and job generation (new firms, growth of existing ones, job generation)

� Entrepreneurship as a field of research is relatively young, but it has its origins in the XVIII and XIX centuries in the papers of some its origins in the XVIII and XIX centuries in the papers of some classic economists (Veciana, 1999)

� It is a complex and multidisciplinary phenomenon (Psychology, Management, Economy, Biology, etc.)

� The last 30 years have been very fruitful in developing this area as a research programme:

� Gartner, 1985 y 2001; Low y Macmillan, 1988; Veciana, 1999; Shane y Venkataraman, 2000; Blackburn y Kovalainen, 2009…


The word derives from the French “entreprendre”

� It refers refers to individuals who were “undertakers”, meaning those who “undertook” the risk of a new enterprise.

� However, early entrepreneurs were also: soldiers of fortune, � However, early entrepreneurs were also: soldiers of fortune, adventurers, builders, merchants, etc.

� Early reference in the 14th century…

� Tax contractors individuals who paid a fixed sum of money to a government for the license to collect taxes in their region.

� In the 19th century

� The “captains of industry”, the risk takers, the decision makers, the individuals who aspired to wealth and who gathered and managed resources to create new enterprises.


4 stages (can be more)

� The origins…

� It starts with Cantillon on 1775 and lasts until the XIX century

� Cantillon was credited with giving the concept of entrepreneurship a central role in economics.

� In his Essai sur la nature du commerce en général, Cantillon described an entrepreneur as:

� “a person who pays a certain price for a product to resell it at an uncertain price, Thereby making decisions about obtaining and using resources while consequently assuming the risk of enterprise”

� A critical point in Cantillon’s argument was that entrepreneurs consciously make decisions about resources allocations


� The origins…main focus

� Trying to define who an entrepreneur is and what s/he does

� In fact, what the function s/he performs in the economic process (entrepreneurial function)(entrepreneurial function)

� Many authors talked about it: Say, von Thünen, Mill, Marshall, etc.

� Smith and Ricardo => for them this function does not exist (capitalist)

� They never agreed on a common definition nor entrepreneurial function, but why??

� They live in the framework of essentialist definitions (Socrates, Plato, Aristotle…) which tries to identify through intuition “the” or “the most essential” characteristics of an object => each author considers different

� In fact, they wanted to explain the “entrepreneur’s profit”, a rent different from land, labour and capital


� The origins… some definitions

� Say described an entrepreneur as one who possessed certain arts and skills of creating new economic enterprises, yet a person who had exceptional insight into society’s needs and was able to fulfill

� Mill elaborated on the necessity of entrepreneurship in private enterprise. The term entrepreneur became common as a description of business founders, and the “fourth factor” of endeavor was entrenched in economic literature

� Menger: “the change agent who transforms resources into useful goods and services, often creating the circumstances that lead to industrial growth”.

� Schumpeter: consists in doing things that are not generally done in the ordinary course of business routine (products, methods, markets and forms of organizations)


� The origins… some definitions

� Hébert & link (1982) summarized the 12 functions/definitions

� A person who assumes the risk associated with uncertainty

A supplier of financial capital� A supplier of financial capital

� A decision maker

� An industrial leader

� A manager or superintendent

� Organizer/coordinator of economic resources

� Proprietor of an enterprise

� Employer of factors of production…


� Historical studies… main focus

� In the beginning of the 20th C. historical studies on enterprises,

entrepreneurs and entrepreneurial function began to proliferateentrepreneurs and entrepreneurial function began to proliferate

� They were published in Harvard Studies in Business History and in the

Journal of Business and Economic History

� This process culminates in 1958 with the creation of the “Research

Center in Entrepreneurial History” at Harvard (Arthur H. Cole was the

leader of a group of historians, sociologists and economists)


� Historical studies… main focus

� According to Cole, this Research programme should include:

� Biographies of entrepreneurs and history of their firms

Analysis of different types of entrepreneurs (f.e. leaders in certain � Analysis of different types of entrepreneurs (f.e. leaders in certain industries)

� Entrepreneurial function

� In fact, these authors studied the entrepreneur as a factor of economic development from a historical perspective


� The beginning of the scientific research programme in the field of business administration…

� We need 3 circumstances to date the birth of a SRP:

� A small group of researchers that begin to investigate in a new field or � A small group of researchers that begin to investigate in a new field or approach

� They feel the need to exchange information and organize a congress/conference

� An specialised journal within the field is edited (which includes the research done in the field)

� Veciana establish this birth in 1949 and this phase lasts until 1979

� See the paper for the main events (1949 Rencontres at st. Gall)

� We observe 2 subprogrammes: a) SMEs and, b) Entrepreneur and New Venture Creation


� Consolidation and explosion…

� The publication of Birch’s report “The job generation process” is the starting of the consolidation of the field.

� From 1969-76 (US) 50% of the jobs were created by new firms� From 1969-76 (US) 50% of the jobs were created by new firms

� This report aroused great interest either in academia and politics

� From now on, politicians understood the need to promote and support entrepreneurship

� They were also other events:

� Famous proceedings at Babson (Frontiers of Entrepreneurship Research) in 1981

� 1985 first number of Journal of Small Business Venturing or 1988 E:T&P

� 1989 the creation of the EDP…


� The methodological issues related to Entrepreneurship are mainly due to:

� Delimitation of the field of study

A conceptual “core” that enables the explanation and forecast of the � A conceptual “core” that enables the explanation and forecast of the empirical phenomena non-explained by other research programmes (Cuervo et al., 2007:12)

� According to Veciana the problems faced by this discipline are:

1. Lack of respect or lack of academic legitimization

2. The sterile debate on defining Entrepreneurship

3. Entrepreneurship research as a distinctive research domain


1. Lack of respect or lack of academic legitimization

� This problem is also stated in Low & MacMillan (1988) and Low (2001)

� Veciana argues that this problem does not “lay in the nature of the phenomenon” but is caused by the following problemsphenomenon” but is caused by the following problems

2. The sterile debate on defining Entrepreneurship

� This problem is stated by Low (2001) again, however, Veciana thinks that it is not due to the broadness of the field or range of disciplines

� Veciana attributes it to “our obsession” in defining concepts, which almost acquire meaning by its definition (traditionally we have been influenced by the Greeks: Socrates, Plato and Aristotle)

� This is called the methodological essentialism (not so popular at present according to Popper, Bunge y Chalmers)


� Every author has its own “essential” characteristic that leads to a definition => this is useless

� For example:

Entrepreneurial firm (Carlan et al., 1984)� Entrepreneurial firm (Carlan et al., 1984)

� Entrepreneurial event (Gartner, 1985 and Bird, 1989)

� Entrepreneurial activities (Gartner, 1988)

� Entrepreneurial process, entrepreneurial behaviour, etc.

� However, what is funny that after rejecting, criticising or discussing such definitions, the authors usually propose theirs


� From the point of view of philosophy of science, the leading authors agree that essentialist definitions are of no use:

� Popper, Bunge and Chalmers

� “Definitions must be rejected as a fundamental procedure for establishing � “Definitions must be rejected as a fundamental procedure for establishing meaning” (Chalmers, 1986:78)

� “The concepts can only be precisely defined in the language of some theory and will be as precise as the theoretical framework that they utilize is precise” (Chalmers, 1986:29)


3. Entrepreneurship research as a distinctive research domain

� It needs to be a distinctive domain, according to Shane and Venkataraman:

� “it needs to have a conceptual framework that explains and predicts a set of � “it needs to have a conceptual framework that explains and predicts a set of empirical phenomena not explained by other fields”

� Researchers in other fields ask why entrepreneurship research is necessary if it does not explain and predict phenomena beyond what is known from work in other fields” => they think it is due to its definition

� In that sense, Veciana goes back to philosophy of science to understand how a theory is formed (Popper, Lakatos and Kuhn). We need:

� A set of hypothesis (Popper)

� A “hard core” or basic assumptions (Lakatos) or a paradigm/general theoretical assumptions (Kuhn)


� We should first develop a solid “hard core” (a set of falsifiable hypotheses), we have several examples in business administration:

� Population Ecology Model (firms and death of firms)

� Transaction Cost Economics (hierarchies and markets) Transaction Cost Economics (hierarchies and markets)

� Resource-based view (base of resources that influences the success of the firms)

� To differentiate entrepreneurship from other disciplines (marketing, management, etc.) it should focus, explain and predict a set of empirical phenomena not explained by the rest

� Some authors focus on “existence, discovery and exploitation of opportunities” (Stevenson & Jarillo, Shane & Venkataraman or Low among others)


� Although important, the “opportunities” can not be the “core” of entrepreneurship because other disciplines deal with this issue:

� Strategy/marketing/business administration use the SWOT analysis for the formulation of strategy

� This justifies the criticism of researchers in other fields...

� Or innovation (we have Schumpeter for example)

� Traditionally, the discipline of Business Administration has focussed on “big corporations” since its development in the 50’s-60’s (see Galbraith 1967) => up to now

� But some phenomena was ignored in the economy:

� Creation of new enterprises

� SME’s

� Family firms


� So, Veciana thinks that: “its distinctive domain should be the three areas that are not the object of study by other disciplines in the field of business administration”

� Entrepreneurial function and creation of new firms (individual and corporate)

� Management, growth, development and problems of SMEs

� Family firms

� Veciana classifies the first domain according to:

� Level of analysis: micro (individual), meso (corporate) and macro (global/country)

� Approach: economic, psychological, socio-cultural/institutional and managerial (the literature generally does not include the managerial approach)


� The reasons why Veciana proposes this classification are:

� There are more approaches than the 2 proposed by Shane & Venkataraman (trait and opportunity)

� To supply students a guide that allows them to deepen in their study or in a specific theoryspecific theory

� Some remarks:

� This classification is not exhaustive and doest not integrate all the possible theories

� The inclusion of one theory in one box or another is not always easy (it depends on the importance attributed to a certain aspect of it)

Level of analysis

Economic approachPsycological

approachInstitutional approach

Managerial approach

MICRO

� Entrepreneurial function as fourth factor of production

�Theory of entrepreneurial profit

�Theory of occupational choice under uncertainty

� Traits theory

�Psychodynamic theory

� Margination theory

�Role theory

�Network theory

�Leibenstein’s x-efficiency theory

�Behavioral theory of the entrepreneur

�Modes of new venture creation

�Modes to become an entrepreneur

MESO �Transaction cost theory

�Network theory

�Incubator’s theory

�Evolutionary theory

�Modes of new enterprise succes and failure

�Corporate entrepreneurship

MACRO

�Schumpeter’s theory of economic development

�Theory of the endogenous regional development

�Kirzner’s entrepreneur theory

� Weber’s theory of economic development

�Theory of social change

�Population ecology theory

�Institutional theory

5. Theoretical approaches to study entrepreneurship: economic

� The theories included under this approach try to explain the entrepreneur’s function based on the economic “rationality”

[Micro] Entrepreneurship as a fourth production factor

� This approach studies the entrepreneur’s function for its importance as production � This approach studies the entrepreneur’s function for its importance as production organizer

� Some of the most important authors within this approach are: Say, Mill and Marshall among others. According to these authors, the main entrepreneur’s functions can be summarized as:

� To decide the gods to produce to satisfy human needs

� To determine and acquire the means of production (materials, capital and labour)

� To establish the production plan or to decide about the optimal combination of factors

� To guide all production and commercialization processes

� Since Marshal, these functions have been considered as the fourth production factor


[Micro] Theory of the benefit of the entrepreneur

� The study of entrepreneurship by economists during the XIX century had, as a main objective, to explain the benefit of the entrepreneur, a type of income that is considered different from land, interest on capital and the wage of the that is considered different from land, interest on capital and the wage of the worker rent

� This is considered as a residual income/rent, which includes:

� A risk premium (“prima de riesgo”)

� The employer's wage

� The entrepreneur's income is derived from the shortage of people with entrepreneurial skills

� The theory of the benefit of the entrepreneur that has had more supporters is based on the risk of the entrepreneur (Cantillon, Mangoldt, Weber, Knight, Kihlstrom and Laffont).


[Micro] Theory of occupational choice under uncertainty

� Perhaps it was the most successful line in the development of the model of entrepreneurship

� The models covered by this theory seek to explain why certain people � The models covered by this theory seek to explain why certain people choose to become entrepreneurs while others prefer to work for others

� These models tend to consider (f.e. Chamley 1983): risk, profit and wages as determinants of occupational choice, in a model where risk plays a key role in corporate behavior

� The model is grounded on an unrealistic assumption => that the decision to become an entrepreneur is taken solely on the basis of propensity / aversion to risk and, above all, that everyone has the same ability to do regardless of being entrepreneur or worker


[Macro] Schumpeter’s Theory of Economic Development

� The most important contribution of Schumpeter lies on his explanation of how entrepreneurship (and entrepreneurs) contribute to economic development

� As a summary, according to Schumpeter, the main factor of economic development is innovation, understood as this “new combination of production means” and focussing on venture creation that, at the same time, depends on the entrepreneur’s behaviour.

� Schumpeter’s ideas have significantly influenced he development of the Evolutionary Theory of the Firma (Nelson y Winter, 1982; Teece, 1986a y 1986b; Dosi, 1991)


[Macro] Endogenous Theory of Regional Development

� The central concept is the “spillover effect”

� The spillover models are based on the hypothesis that every new investment produces an external diffusion effect to the firm that investment produces an external diffusion effect to the firm that executes it, that increases firms’ productivity in a certain industry and within the region and that enables to maintain the endogenous growth

� The spillover effect on the learning and experience come from different types of investment, in physical capital, in R+D and in human capital

� According to Veciana, the learning processes, knowledge diffusion and, for extent, the spillover effect in a certain territory is produced by these factors: human capital, social mobility, social networks and entrepreneurial capital, being this last (the capacity of creating new ventures, Audretsch & Keilbach, 2004) the central element of the theory=> a field in expansion (economic geography)

5. Theoretical approaches to study entrepreneurship: psychological

� This approach is focussing in the study of the characteristics of the individuals that can lead to an entrepreneurial act (Stevenson y Jarillo, 1990)

� This psychological approach is based on the assumption that people that decide to create their own companies have a different psychological profile decide to create their own companies have a different psychological profile than the rest of the population

� Among the most important traits, most of the empirical research within the field agree on them, there are: need of independence, need for achievement, locus of internal control, propensity to assume risks, intuition and future vision

[Micro] (Personality ) Trait Theory

� The origins of the psychological approach dates back to the investigation conducted by McClelland (1961) and Collins, Moore and Unwalla (1964)

� Their last objective is to identify successful entrepreneurs and, thus, establish policies to foster venture creation and job generation


[Micro] Trait Theory

� Some traits and motivations that can affect:

� Need of independence

� Need of achievement, personal energy and initiative development� Need of achievement, personal energy and initiative development

� Internal control

� Risk spirit or risk-taking

� Unsatisfied person or “marginalised”

� Intuition, future vision, obsession and action people

� Tolerance to ambiguity

� The results from many different empirical research have not always been conclusive => this line of research have been given up (very popular in the 60’s-70’s)


[Macro] Kirzner’s Theory of the Entrepreneur

� The key element is a quality or attribute of the entrepreneur, “alertness” or shrewdness, that defines and distinguishes him from the rest of the population and , based on that, tries to explain his market processpopulation and , based on that, tries to explain his market process

� For Kirzner (1973), the entrepreneur is the one being “alert” of business opportunities non-identified by others

� Then, what defines an entrepreneur is his “alertness” or capacity to identify them

� Kirzner’s market is imbalanced (disequilibrium) and imperfect

� Because the market is in disequilibrium, there are business opportunities => the entrepreneur, with his actions, leads the market to an equilibrium, that logically, it is never reached

5. Theoretical approaches to study entrepreneurship: institutional

� All theories included within this approach have, as a common denominator, that the decision to become an entrepreneur is conditioned by external factors or the environment (socio-cultural and institutional)

� This approach is undoubtedly the most prolific in terms of the number of � This approach is undoubtedly the most prolific in terms of the number of theories

� Although early studies on this approach appear in the beginning of the twentieth century, it is in the last two decades where it emphasizes and increases the interest of researchers

[Micro] Marginalization Theory

� This theory emphasizes the importance of some event, usually negative, which triggers and/or rushes the process of starting a business

� Thereby, creating a company is not always the result of a deliberate and cold act, as the culmination of a rational process of analysis and decision, but begins with the breaking of the previous lifestyle


[Micro] Marginalization Theory

� This break has been called in several ways: “deterioration of the role", “triggering event”, break of the contract and the person suffering from it is generally considered a “socially marginalized”, trapped in an unsafe and generally considered a “socially marginalized”, trapped in an unsafe and threatening situation

� According to this theory misfit and marginalized people are more likely to become entrepreneurs => has been confirmed empirically

� Being outside the social system, creating your own business is a career and a chance to get a “Modus Vivendi” and therefore some recognition and social integration


[Micro] Role Theory

� It tries to explain why in certain geographical areas there a lot of businesses and very few in others

� The environment where a dominant industrial sector or the existence of � The environment where a dominant industrial sector or the existence of entrepreneurial role models to follow is abundant, produces a domino effect that stimulates the emergence of more entrepreneurs (Nueno, 1996)

� The values of society and business experiences in the past, with its successes and failures, legitimate the activity in the present, because it acts as an incentive in the process of business creation

� An increase in social legitimization involves changes in individual preferences

� If there is also an environment where the employer is properly valued, ie there is a possibility of obtaining social status, will enhace a more proactive environment for business creation (Alonso and Galve, 2008:18) => even in family business


[Micro-Meso] Network Theory

� This theory gained prominence in the eighties with the work of Birley (1985), Aldrich et al. (1986 and 1987) and Johannisson (1988) that have led to a stream of research around the impact of networks in the process of business stream of research around the impact of networks in the process of business creation

� It is based on the idea that entrepreneurial function is inserted and develops in a social network

� The creation of a new business needs and is favored or constrained by a complex web of relationships between the future entrepreneur, the resources and the opportunities (ie, formal: banks, chambers of commerce and informal: family, friends, colleagues)

� Network theory focuses on five dimensions, namely: a) size, b) density, c) degree of scope, d) Heterogeneity e) centrality of the nodes

� [Criticism] But what about the idea, strategy, entrepreneur, etc..??


[Meso] Incubator Theory

� The incubators are aimed at assisting potential entrepreneurs in starting their businesses by providing basic infrastructure, resources and different types of services and information for its implementation.

� This theory is based on the acquisition of the needed skills by the would-be entrepreneur in previous situations, enabling him to later create his company (Bull and Willard, 1993)

� Generally, the organization where the entrepreneur has been working before, often, it is where he discovers business opportunities and matures his idea into a business (Aldrich and Wiedenmayer, 1993, Reynolds, 1997)

� In some cases, the incubator can help the start-up by participating in the equity, providing financial support and management advice or becoming its largest customer => spin-offs


[Macro] Weber’s Theory of Economic Development

� “Protestant Ethic and the Spirit of Capitalism”, published in 1905

� Weber believes that the entrepreneur-capitalist’s behavior has been highly influenced by his religious beliefsinfluenced by his religious beliefs

� Hence, the business would peak in those areas in which Protestant ethics was dominant, which derived the following factors that had a decisive impact on the development of businesses (Veciana, 2007):

� The concept of man's vocation, which means that a person's primary responsibility is to fulfill his duties as best as possible, whatever the position that God had given him in life.

� The Calvinist notion of predestination. For Calvinists, everyone is destined to play a role in life, and must accept it.

� Asceticism which prescribes hard work, savings and condemns conspicuous consumption (not to flaunt-ostentation when purchasing goods).


[Macro] Social Change Theory

� For this theory, the social characteristics are determinant for entrepreneurship, being the main factor that conditions it:

� The degree of mobility, both social and geographical , and the nature of the means of � The degree of mobility, both social and geographical , and the nature of the means of mobility in a given society or social context (Bruton, 1960; Hoselitz 1960, McClelland, 1961)

� Most authors maintain that a high degree of social mobility encourages entrepreneurship,

� However, Hagen (1962 and 1968) is positioned in the opposite direction saying that what really promotes entrepreneurship and entrepreneurial behavior is a relatively social blockade

� That is, some mobility means are blocked while it exists the possibility of upward socially through business activity and success

5. Theoretical approaches to study entrepreneurship: management

� Business creation is the result of a rational decision-making process which are critical the knowledge and the techniques developed in business management

� They are action-oriented theories , to provide knowledge and models for � They are action-oriented theories , to provide knowledge and models for the creation of ventures focusing on the work of the entrepreneur in this process

[Micro] Theory of X-efficiency of Leibenstein (1968)

� Originally developed for other purposes, it has been applied by the author to analyze the role of the entrepreneur

� X-efficiency is the degree of inefficiency in the use of resources within the company, measuring the extent of the failures respect its productive potential

� X-efficiency arises because the company's resources are used in a wrong way, because they are absurdly consumed or because they are scarce


[Micro] Theory of X-efficiency of Leibenstein (1968)

� Leibenstein identifies several differences among his theory and the neoclassical:

� Labour contracts are incomplete, because they do no quantify the amount of effort required

� Effort is discretionary, ie it is the worker himself who decide how much effort to put on it

� Contracts are asymmetric because they perfectly specify the wages of workers and trade-offs of employees, but not the obligations of workers

� Leibenstein sees the company as an organization composed of different individuals without unanimity among its objectives

� The entrepreneur is interested in maximizing profits, but the agents not, and are the ones making decisions and pursuing their own objectives, which are not compatible with maximizing their effort

� The role of the organization is applying pressure on workers to maintain or increase their efforts leading the company toward its neoclassical production frontier

� The lack of efforts of others and the consequent ineffectiveness of the organizations that employ them, create opportunities for entrepreneurs


[Micro] Entrepreneur’s Behavioural Theory

� This approach focuses on the study of the behavior the entrepreneur (what he does), unlike the psychological that focuses on how the entrepreneur is

� This distinction is important, because as psychological traits are considered to � This distinction is important, because as psychological traits are considered to be a part of the entrepreneur’s personality and, therefore, impossible or difficult to change, behaviors are based on skills or abilities that can be learned

� Some behaviors that can be learned:

� Ability to search and collect information

� Ability to identify opportunities

� Ability to manage risks

� Capacity to build up relationships

� Ability to make decisions under uncertainty

� Leadership skills and capacity to learn from experience


[Micro] Models regarding the Process of Venture Creation

� Much of the research on process of venture creation has assumed a linear, unitary process, composed of a set of activities, beginning with the recognition of a business opportunity and culminating with the first sale (e.g. Galbraith, of a business opportunity and culminating with the first sale (e.g. Galbraith, 1982; Kazanjian & Drazin, 1990; Liao et. al., 2005; Shane & Venkataraman, 2000; Webster, 1976).

� Empirical explorations (e.g. Carter et. al., 1996; Hansen and Bird, 1997; Reynolds and Miller, 1992) have found that no one pattern or sequence of events is common to all emerging organizations.


[Meso] Models regarding the success or failure of new firms

� While according to the psychological approach, the success of new ventures depends on the profile of the entrepreneur and in socio-cultural environmental factors, here we stem on the hypothesis that there are several factors, here we stem on the hypothesis that there are several variables which determine the success and failure of enterprises, and those variables can be controlled by the entrepreneur

� The literature of this approach includes descriptive studies, conceptual models, case studies, surveys, longitudinal studies, etc.

� Some of these studies have almost focused exclusively on data and financial ratios, others have focused on market-related variables, industry and product strategy and the entrepreneur, etc.


[Meso] Corporate Entrepreneurship

� This theory analyzes the phenomenon of entrepreneurship when it develops within an established company, also called “corporate entrepreneurship” or “intrapreneurship”“intrapreneurship”

� This phenomenon is a response to the increasing globalization of the economy and the acceleration of technological change as a result of new technologies, which causes large companies to promote the identification of new opportunities and/or the development of new products (Veciana, 1999)

� This approach seeks to encourage entrepreneurship in large companies and uses the knowledge obtained in the context of other approaches to develop entrepreneurship in big companies

� This approach is not new, since under the name “Venture Management” several investigations were conducted in the seventies


There are 2 approaches to study the process of firm formation:

� Stage-based models, which assume that the process is linear, unitary and composed of a set of activities beginning with the idea and culminating with the first salethe first sale

� Interactive process, currently, the view of the process of new venture creation as a linear process is loosing ground in favor of an interactive process without a clear sequence of events.

Definition (stage-based)

� “the process that takes place between the intention to start a business and making the first sale” (Gatewood et. al. 1995)

� Other authors include more stages:

� Consolidation: where the entrepreneur squeezes out undesirable partners to establish his leadership and guarantee the surviving of the firm, pay debts, etc. (Veciana)


Stage Models

� An in-depth revision of the different stage models in the literaturereview reveals some similarities that should be noticed

� All of them share three main stages:� All of them share three main stages:

� Gestation / concept: where the idea of the new venture is set up

� Planning: where the entrepreneur has to transfer what he has “in mind” toa plan

� Implementation: where the team is created, resources are gathered,financial aid is obtained and the product or service is launched

� All these models do not belong to Internet-based firms, except the onefrom Carrier et. al.


� Four big stages has been detected:� Gestation/Concept, planning, implementation and redefinition

Concept stage

� Most of the entrepreneurs had in mind the idea to create a firmbut they had not detected an opportunity first

� Began to search for a business opportunity when the Internetbecame widespread for commercial purposes in Spain (late 90’s)

� Low investments and operation costs

� They were aware of the potential offered by the Internet (eitherby working or conducting research in the field)

� Motivations, the majority “pull”


Planning stage

� Two ways of facing the creation of the new venture:

� 62.5 % DPE (Design-Precedes-Execution)

� 37.5 % improvisational founded (Design As They Create It)� 37.5 % improvisational founded (Design As They Create It)

� 50 % of the cyberentrepreneurs invested a tremendous amountof effort to determine the needs of different potential customersand the industry’s structure

� Surveys, brainstormings, universities, marketing research study andprototypes

Implementation stage

� Three main behaviours are identified.


1. 37,5 % provided all the resources by themselves

2. 50 % involve other people and entrepreneurs in their projectswhen they searched for support => “team founding”

3. Technological partner (firm already created)3. Technological partner (firm already created)

Redefinition stage

� The firm is already operating, sales are being conducted and alot of effort is put on receiving feedback from the market(Veciana, Serarols)

� It culminates with the redefinition of business opportunity andthe adjustments that need to be done to the organisation forits survival


Redefinition stage

� 3 groups according to their behaviour

25 % had to completely redefine his business opportunity1. 25 % had to completely redefine his business opportunitybecause their current products/services did not match customer’sneeds or were not willing to pay for them

2. 50 % although they were successful, they had to diversify theirproducts to grow because the Spanish market was not as big asto generate a critical demand of their products => + resources

3. 25 % have maintained their initial business model


Self-employmentintentions

Opportunitysearch andbusiness idea

Create asolution

Evaluation ofthe opportunity

Legalconstitution(venturecreation)

Productdevelopmentand launching

CONCEPT STAGE PLANNING STAGE IMPLEMENTATION STAGE

Productdevelopmentand launching

Gatherresources-(search forsupport)

creation)

First sales

Refinement of the business

First sales

REDEFINITION STAGE

Patterns detected:

1Concept– implementation –planning/redefinition (B.com, E.com and F.com)

2Concept – planning – implementation –redefinition (A.com, D.com, G.com and H.com)

3Concept – planning – implementation (C.com)

6. Process of firm formation - Problems

Vesper (1980)

� Failure to find a venture idea with sufficient margin potential

� Failure to develop an effective sales generation scheme

Failure to obtain operational financing� Failure to obtain operational financing

Others

� Know-how: In that sense Gartner (1984) found out that less than 50% of the entrepreneurs had the necessary skills before beginning thestart-up, though they relied on learning them during the process ofventure start-up (or knowing the sector as well)

� Team formation: the best criterion to form a team is the one thatcomplements aptitudes and functions to be developed, the worst thecapital (Veciana, 1988; Ollé, 1997)


Others

� Formal form: there is a huge number of papers needed to start.Veciana (1988) considered one of the first hurdles to overcome whencreating a firm.

� Time frame: Time frames and delays. Delays with: bank credit,product design or development, basically resulting in cash-flowproblems. Some business have failed because of bad planning and notbecause a bad conception.

� Previous experience: Mac Millan (1986) suggested that there was anexperience curve of entrepreneuring that enabled multiple ventures toovercome or avoid obstacles of start-ups


CONCEPT STAGE PLANNING STAGE IMPLEMENTATION STAGE

- High-venture idea - Know-how - Marketing/selling - High-venture idea - “Founder fever” - Previous experience in

entrepreneurship - Psychological factors of

the entrepreneur

- Know-how - Time frame - Formal form - Marketing research - Team formation - Failure to obtain

financing

- Marketing/selling - Product development - Shortage of demand - Shortage of skilled

employees - Soft entries - Cash break - Product/service

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