the promise of entrepreneurship as a field of research

8/9/2019 The Promise of Entrepreneurship as a Field of Research

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^ cademy oi Managem ent Review

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Vol. 25, No. 1, 217-22G.

NOTE

THE PROMISE OF ENTREPRENEURSHIP AS A

. FIELD OF RESEARCH

SCOTT SHANE

University of Maryland

S. VENKATARAMAN

tiniversity of Virginia

To date the phenom enon of entrepreneurship ha s lacked a conceptual framework. In

this note we draw upon previous research conducted in the different social science

disciplines and applied fields of business to create a conceptual framework for the

field. With this framework we explain a set of empirical phenomena and predict a set

of outcomes not explained or predicted by conceptual frameworks already in exis-

tence in other fields.

For a field of social science to have useful-

n ess ,

i t must have a conceptual framework that

explains and predicts a set of empirical phe-

nomena not explained or predicted by concep-

tual frameworks already in existence in other

fields. To date, the phenomenon of entrepre-

neurship has lacked such a conceptual f rame-

work. Rather than explaining and predicting a

unique set of empirical phenomena, enfrepre-

n urs ip

ha s becom e a broad label under which

a hodgepodge of research is housed. What ap-

pears to const i tu te entrepreneurship research

today is some aspect of the setting (e.g., small

businesses or new firms), rather than a unique

conceptual domain. As a result, many people

ha ve h ad troub le identifying the distinctive con-

tribution of the field to the broader domain of

bu sin ess stud ies, underm ining the field s legit-

imacy. Researchers in other fields ask why en-

trepreneurship research is necessary if it does

not explain or predict empirical phenomena be-

yond what is known from work in other fields.

Moreover, the lack of a conceptual framework

has precluded the development of an under-

standing of many important phenomena not ad-

equately explained by other fields.

One example of this problem is the focus in

the entrepreneurship l i terature on the relat ive

We acknowledge the helpful comments of Ed Roberts on

performance of individuals or firms in the con

text of small or new businesses. Since strategi

management scholars examine the difference

in and s ustain ability of relative performance be

tween competitive firms, this approach is no

un iqu e (Ve nkataram an, 1997). Moreover, the ap

proach does not provide an adequate test o

en t r ep ren eu r sh ip , s in ce en t r ep ren eu r sh ip

concerned with the discovery and exploitatio

of profitable op portu nities. A perform ance ad

va nt ag e over other firms is not a sufficient me a

sure of entrepreneurial performance, because

performance advantage may be insufficient t

compensate for the opportunity cost of other a

ternatives , a liquidity prem ium for time and cap

ital,

and a premium for uncertainty bearin

Therefore, although a conceptual framework

explain and predict relative performance b

tween firms is useful to strategic managemen

it is not sufficient for entrepreneurship.

We attempt an integrating framework for th

entrepreneurship field in the form of this not

We believe that this framework will help entr

preneurship researchers recognize the relatio

ship among the multitude of necessary, but n

sufficient, factors that compose entrepreneu

ship, and thereby advance the quality of empi

ical and theoretical work in the field. By provi

ing a f ramework that both sheds l ight o

u n e x p l a i n e d p h e n o m e n a a n d e n h a n c e s t h


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Academy ol Management Review

Januar

tion as only a rese arch setting or teaching

applicat ion.

The note proceeds as follows. First, we define

the domain of the field. Second, we explain why

organizat ional researchers should study entre-

preneurship. Third , we descr ibe why entrepre-

neurial opportunities exist and why some peo-

ple, and not others, discover and exploit those

opportunities. Fourth, we consider the different

modes of exploitation of entrepreneurial oppor-

tunities. Finally, we conclude with brief reflec-

tions on the potential value of the framework

presented here.

EFINITION OF ENTREPRENEURSHIP

Perhaps the largest obstacle in creating a con-

cep tua l f ramework fo r the en t repreneursh ip

field has been its definition. To date, most re-

searchers have defined the field

solely

in terms

of who the entrepreneur is and what he or she

doe s (Ve nka taram an, 1997). The problem with

this approach is that entrepreneurship involves

the nexus of two phenomena: the presence of

lucrative opportunities and the presence of en-

terp risin g ind ivi du als (V enk ataram an, 1997). By

defining the field in terms of the individual

alone, entrepreneurship researchers have gen-

erated incomplete definitions that do not with-

stand the scrutiny of other scholars (Gartner,

1988).

The definition of an entrepreneur as a person

who establis hes a new o rganizat ion is an exam-

ple of this problem. Because this definition does

not include consideration of the variation in the

quality of opportunities that different people

identify, it leads researchers to neglect to mea-

sure oppor tun i t ies . Consequent ly , empir ica l

support (or lack of support) for attributes that

differentiate entrepreneurs from other members

of society is often questionable, because these

attributes confound the influence of opportuni-

t ies and individuals.

In contrast to previous rese arch, w e define the

field of entrepreneurship as the scholarly exam-

inatio n of how, by whom, and w ith wha t effects

opportunities to create future goods and ser-

vices are discovered, evaluated, and exploited

(Ve nkata ram an, 1997). Co nseq uen tly, the field

involves the study of

sources

of opportunities;

ploitation of opportunities; and the set of

indi

viduals who discover , ev alu ate , an d explo

th em.

Although the phenomenon of entrepreneur

ship provides research questions for many dif

ferent scholarly fields, ' organization scholar

are fundam entally concerned w ith three sets o

r e sea r ch q u es t io n s ab o u t en t r ep ren eu r sh ip

(1) why, when , and how o ppo rtun ities for th

creation of goods and services come into exis

tence; (2) why, when, an d how some p eople an

not others discover and exploit these opportuni

t ies; an d (3) why, whe n, and how different mo de

of action are used to exploit entrepreneurial op

portunities.

Before reviewing existing research to answe

these quest ions, we provide several caveat

about our approach. First, we take a disequilib

rium approach, which differs from equilibrium

approaches in economics (Khilstrom & Laffon

1979) and social psychology (McClelland, 1961

In equilibrium models, entrepreneurial opportu

nities either do not exist or are assumed to b

randomly distributed across the population. Be

cause people in equilibrium models cannot dis

cover opportunities that differ in value from

those discovered by others, who becomes a

entrepreneur in these m odels depen ds solely o

th e a t t r ib u te s o f p eo p le . Fo r ex amp le , i

Khilstrom and Laffont 's (1979) equil ibr ium

model, entrepreneurs are people who prefer un

certainty.

Although we believe that some dimensions o

equilibrium models are useful for understand

ing entrepreneurship, w e argue that these mod

els are necessar i ly incomplete . Entrepreneuria

behavior is transitory (Carroll & Mosakow sk

1987).

Moreover, estimates of the number of pe

p le who eng age in en t reprene ur ia l behav io

ra ng e from 20 perc ent of the pop ulatio n (Reyn

olds White, 1997) to over 50 percent (Aldrich

Zimmer, 1986). Since a la rge an d div erse grou

of people engage in the transitory process o

entrepreneurship, it is improbable that entrepre

neu rship ca n be explain ed solely by reference

a cha racteristic of certain peo ple ind epen dent o

the situations in which they find themselve

Therefore, when we argue that some people an

For example, economists are interested in the distrib

tion of entrepreneurial talent across productive and unpr


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Shane and Venia taraman

21

not others engage in entrepreneurial behavior ,

we are describing the tendency of certain peo-

ple to respond to the situational cues of oppor-

tunities—not a stable characteristic that differ-

entiates some people f rom others across al l

situations.^

Second, we argue that entrepreneurship does

not require, but can include, the creation of new

organizations. As Amit, Glosten, and Mueller

(1993) and Casson (1982) explain, entrepreneur-

ship can also occur within an existing organiza-

tion. Moreover, opportunities can be sold to

other ind ividu als or to existing o rganization s. In

this note we do not exam ine th e creation of new

organizations per se but, rather, refer interested

readers to excellent reviews on firm creation in

org ani zat ion al ecology (Aldrich, 1990; Singh &

Lu m sd en , 1990), ec on om ics (C av es, 1998;

Ge roski, 1995), an d o rga niz atio nal theory (Gart-

ner, 1985; Katz & Gar tne r, 1988; Low & MacMil-

lan, 1988).^

Third, our framework complements sociologi-

cal and economic work in which researchers

have examined the population-level factors that

influence firm creation. Stinchcombe (1965) iden-

tified societal factors that enhance incentives to

organize and organizing ability. Aldrich (1990)

and Singh and Lumsden (1990) have provided

review s of factors en ha nci ng firm foundings and

have described the effects of such factors as

environmental carrying capacity, interpopula-

tion processes, and institutional factors. Simi-

larly, Baumol (1996) has related the institutional

environment to the supply of people who are

willing to create firms.

Although these other frameworks are valu-

able to entrepreneurship scholars, they involve

a set of issues different from those with which

we are concerned. Our framework differs from

the se in that (1) w e focus on the existen ce, dis-

covery, and exploitation of opportunities; (2) we

examine the influence of individuals and oppor-

tunit ies, rather than environmental antecedents

an d con sequ enc es; and (3) we consider a frame-

work broader than firm creation.

We also argu e that entrepreneurship can be undertaken

by a single individual or a set of people who undertake the

steps of the process collectively or independently.

Many researchers argue that entrepreneurship occurs

Fourth, our framework also complements re

sea rch on the p roc ess of firm crea tion (e.g., Gart

ne r, 1985; Katz & G ar tn er , 1988; Katz, 1993). Ex

plaining this process is important, but researc

on it involves examining a different set of issue

from those we explore. Firm creation proces

researchers examine resource mobilization, firm

organizing, and market making, starting wit

the assumption that opportunities exist, hav

been discovered, and will be exploited throug

the creation of new firms. Since we lack th

space to review both the processes of entrepre

n e u r s h i p t h r o u g h m a r k e t m e c h a n i s m s a n

through firm creation, we limit our discussion t

the conditions under which entrepreneurial op

portunities are exploited through firms and mar

kets, and we refer readers to these other frame

works for information on the process of firm

creation.

WHY STUDY ENTREPRENEURSHIP?

Many scholars ask, either implicitly or explic

itly, why anyone should study entrepreneurship

Data are difficult to obtain, theory is underde

veloped, and many f indings to date are th

same as those obtained in other areas of bus

ness. In response, we offer three reasons fo

studying the topic. First, much technical info

mation is ultimately embodied in products an

services (Arrow,

1962),

and e ntreprene urship is

mechanism by which society converts technic

information into these products and service

S e c on d , e n t r e p r e n e u r s h i p i s a m e c h a n i s m

through which temporal and spatial inefficien

cies in an economy are discovered and mit

g at ed (Kirzner, 1997). Fi na lly , of the differen

sources of ch an ge in a capitalis t society, Schum

peter (1934) isolated entrepreneurially driven i

novation in products and processes as the cru

c i a l e n g i n e d r i v i n g t h e c h a n g e p r o c e s

Therefore, the abse nce of entrepr ene ursh ip fro

our collective theories of markets, firms, organ

zations, and change makes our understandin

of the business landscape incomplete . As Bau

mol eloquently remarks, the study of busine

without an understanding of entrepreneursh

is like the study of Sh ak esp ear e in which th

Prince of Denmark has been expunged from th


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THE EXISTENCE DISCOV ERY AND

EXPLOITATION OF ENTREPRENEURIAL

OPPORTUNITIES

The Existence of Entrepreneuria l Opportunit ies

To ha ve entre pren eurs hip, you must first hav e

entrepreneurial opportunit ies. Entrepreneurial

opportunities are those situations in which new

goods, services, raw materials, and organizing

methods can be introduced and sold at greater

th an thei r cost of produ ction (C ass on, 1982). Al-

though recognition of entrepreneurial opportu-

nities is a subjective process, the opportunities

themselves are object ive phenomena that are

not known to all parties at all times. For exam-

ple, the discovery of the telephone created new

opportu nities for comm unication, w hethe r or not

people discovered those opportunit ies.

Entrepreneurial opportunities differ from the

larger set of all opportunities for profit, particu-

larly opportunities to enhance the efficiency of

exisfing goods, services, raw materials, and or-

ganizing methods, because the former require

the discovery of new me ans-e nds relat ionships,

whereas the latter involve optimization within

existing means-ends frameworks (Kirzner, 1997).

Because the range of options and the conse-

quences of exploiting new things are unknown,

e n t r e p r e n e u r i a l d e c i s i o n s c a n n o t b e m a d e

through an optimization process in which me-

chanical calculat ions are made in response to a

given set of alternatives (Baumol, 1993).

Entrepreneurial opportunities come in a vari-

ety of forms. Although the focus in most prior

research has been on opportunities in product

markets (Venkataraman, 1997) , opportunit ies

also exist in factor markets, as in the case of the

discovery of new materials (Schumpeter, 1934).

Moreover, within product market entrepreneur-

ship,

Drucker (1985) has described three different

categories of opportunities: (1) the creation of

new information, as occurs with the invention of

new technologies; (2) the exploitation of market

inefficiencies that result from information asym-

metry, as occurs across time and geography;

an d (3) the reac tion to shifts in the rel ativ e c osts

an d benefits of altern ative us es for resources, a s

occurs wi th po l i t ica l , regu la to ry , o r demo-

graphic changes .

Previous researchers have argued that entre-

preneur ia l oppor tun i t ies ex is t p r imar i ly be-

cause different members of society have differ-

given the potential to transform them into a dif

ferent s ta te (Kirzner, 1997). B eca us e pe op le po s

sess different beliefs (because of a lucky hunch

superior intuition, or private information), the

make different conjectures about the price a

which markets should clear or about what pos

sible new m arkets could be create d in the future

When buyers and s ellers hav e different belief

about the value of resources, both today and i

the future, goods and services can sell above o

below their marginal cost of production (Schum

peter,

1934).

An entrepreneurial discovery occu

when someone makes the conjecture that a se

of reso urce s is not put to its best use (i.e., th

reso urce s are price d too low, given a belie

about the price at which the output from thei

combination could be sold in another location

at another time, or in another form). If the con

jecture is acted upon and is correct, the individ

ual will earn an entrepreneurial profit. If th

conjecture is acted upon and is incorrect, th

individual will incur an entrepreneurial los

(Casson, 1982).

Eritrepreneurship requires that people hol

different beliefs about the value of resources fo

two reasons. First , entrepreneurship involve

joint production, where several different re

sources ha ve to be brought togethe r to crea te th

new product or service. For the entrepreneur t

obtain control over thes e resourc es in a way th a

makes the opportunity profitable, his or her con

jecture about the accuracy of resource price

must differ from those of resource owners an

other po tent ial e ntr ep ren eu rs (Cass on, 1982).

resource owners had the same conjectures a

the entrepreneur, they would seek to appropr

at e the profit from th e opportunity by pricing th

resources so that the entrepreneur 's profit ap

proach ed zero. Therefore, for e ntrep rene ursh i

to occur, the resource owners must not shar

completely the entrepreneur 's conjectures. Se

ond, if all people (potential entrepreneurs) po

sessed the same entrepreneurial conjecture

they would compete to capture the same entr

preneurial profit, dividing it to the point that th

incentive to pursue the opportunity was elim

nated (Schumpeter, 1934).

But why should people possess different b

liefs about the prices at which markets shou

clear? Two answers have been offered. First,

Kirzner (1973) has observed, the process of di

covery in a market setting requires the partic


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22

wide variety of things. People make decisions

on the basis of hunches, intuition, heuristics,

and accurate and inaccurate information, caus-

ing their decisions to be incorrect some of the

t ime.

Since decision s are not alw ay s correct, this

proc ess lea ds to errors that crea te shorta ges,

surpluses, and misallocated resources. An indi-

vidu al alert to the pres enc e of an error may

buy resou rces wh ere prices are too low, recom-

bine them, and sell the outputs where prices are

too high.

Second, as Schumpeter (1934) explained, econ-

omies operate in a constant state of disequilib-

rium. Technological, po litical, social, regulatory,

and other types of change offer a continuous

supply of new information about different ways

to use re source s to en ha nc e wea lth. By making it

possible to transform resources into a more

valuable form, the new information alters the

value of resources and, therefore, the resources'

proper equ ilibrium price. Becau se information is

imperfectly distributed, all economic actors do

not receive new information at the same time.

Consequently, some people obtain information

before others about resources lying fallow, new

discoveries being made, or new markets open-

ing up. If economic actors obtain new informa-

tion before others, they can purchase resources

at below their equilibrium value and earn an

entrepreneurial profit by recombining the re-

sources and then sell ing them (Schumpeter ,

1934).

The informational sources of opportunity m ay

be easier to see in the case of new technology,

but they need not be restricted to technological

developments. For example, the production of

the movie itanic generated new information

about who was a desirable teen idol. An entre-

preneur could respond to this new information

by acting on the conjecture that posters of Leo-

nard o DeCap rio would sell for grea ter than their

cost of production.

Because entrepreneur ia l oppor tuni t ies de-

pen d on asym m etries of information a nd beliefs,

eventual ly , en trepreneur ia l oppor tuni t ies be-

come cost inefficient to pursue. First, the oppor-

tunity to ea rn e ntrep rene urial profit will provide

an incentive to man y econom ic actors. As oppor-

tunities are exploited, information diffuses to

other members of society who can imitate the

innovator and appropriate some of the innova-

the opportunity and increase overall demand

compet i t ion even tua l ly beg ins to domina t

(Hann an & Fre em an, 1984). W hen the entry o

add i t iona l en t r ep reneurs r eaches a r a te a

which the benefits from new entrants exceed

the costs, the incentive for people to pursue th

opportunity is reduced, because the entrepre

neurial profit becomes divided among more an

more actors (Schumpeter, 1934).

Second, the exploitation of opportunity pro

vides information to resource providers abou

the value of the resources that they possess an

leads them to raise resource prices over time, i

order to capture some of the entrepreneur

profit for them se lv es (Kirzner, 1997). In short, t h

diffusion of information and learning about th

accuracy of decisions over time, combined wit

the lure of profit, will reduce the incentive fo

people to pursue any given opportunity.

The duration of any given opportunity de

pends on a variety of factors. The provision o

monopoly rights, as occurs with patent prote

tion or an exclusive contract, increases the du

ration. Similarly, the slowness of informatio

diffusion or the lags in the timeliness wit

which others recognize information also in

crea se the duration, particu larly if time provide

reinforcing advantages, such as occur with th

adopt ion of technical s tandards or learnin

curve s. Finally, the inability of oth ers (due

various isolating mechanisms) to imitate, su

stitute, trade for or acquire the rare resourc

required to drive down the surp lus (Venkatar

man, 1997: 133) increases the duration.

The iscovery of Entrepreneurial Opportun iti

Although an opportunity for entrepreneuri

profit might exist, an individual can earn th

profit only if he or she reco gnize s that the oppo

tunity exists and has value. Given that an asym

metry of beliefs is a precondition for the exi

tence o f en t r ep reneur ia l oppor tun i t i e s , a

opportunities must not be obvious to everyo

all of the time (Hayek, 1945). At any point in tim

only some su bset of the population will discov

a given opportunity (Kirzner, 1973).

Why do some people and not others discov

par t icular entrepreneur ia l oppor tuni t ies? A

though the null hypothesis is blind luck, r

search has suggested two broad categories

factors that influence the probab ility that pa rt


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t ies : (1) the p os se ssi on of the prior information

ne ce ss ary to identify a n oppo rtunity an d (2) the

cogni t ive propert ies necessary to value i t .

Information corridors. Human beings all pos-

sess different stocks of information, and these

stocks of information influence their ability to rec-

ognize particular opportunities. Stocks of informa-

tion create mental schemas, which provide a

framework for recognizing new information. To

recognize an opportunity, an entrepreneur has to

hav e prior information that is complem entary with

the new information, which triggers an entrepre-

neurial conjecture (Kaish Gilad,

1987).

This prior

information m ight be ab out u ser ne ed s (Von Hip-

pel,

1986) or specific as jjects of the produ ction

function (Bruderl, Preisendorfer, Ziegler, 1992).

The information necessary to recognize any

given opportuni ty is not widely dis t r ibuted

across the population because of the specializa-

tion of info rma tion in soc iety (Hayek, 1945). Peo-

ple special ize in information because special-

ized information is more useful than general

information for most a ctiv ities (Becker & Mur-

phy,

1992).

As a result , no two peop le s har e all of

the same information at the same time. Rather,

information about underutilized resources, new

technology, unsated demand, and poli t ical and

regulatory shifts is distributed according to the

idiosyncratic life circumstances of each person

in the population (Venkataraman, 1997).

The development of the Internet provides a

useful example. Only a subset of the population

has had entrepreneurial conjectures in response

to the development of this technology. Some

people sti ll do not know what the Internet is or

that profitable opportunities exist to exploit it.

Cognitive properties. Since the discovery of

entrepreneurial opportunities is not an optimi-

zat ion process by which people make mechani-

cal calculations in response to a given a set of

alternatives imposed upon them (Baumol, 1993),

people must be able to identi fy ne w me ans-e nds

relat ionships that are generated by a given

change in order to discover entrepreneurial op-

portunities. Even if a person possesses the prior

information necessary to discover an opportu-

nity, he or she may fail to do so because of an

inabi l i ty to see new means-ends relat ionships.

Unfortunately, visualizing these relationships is

difficult. Rosenberg (1994) points out that history

is rife with examples in which inventors failed

to see commercial opportuni t ies (new means-

tion of important technologies—from the tel

graph to the laser.

Prior research has shown that people differ i

their ability to identify such relationships. Fo

example, research in the field of cognitive sc

ence has shown that people vary in their abil

t ies to combine existing concepts and inform

tion into new ide as (see Ward, Smith, & Vai

1997,

for sev era l revie w a rticles). Recently, a fe

researchers have begun to evaluate empir ical

the role that cognitive properties play in th

discovery of entrepreneurial opportunities (se

Busenitz & Barney, 1996; Kaish & Gilad, 199

Shav er & Scott, 1991). For exam ple , Sa ras va th

Simon, an d Lave (1998) ha ve s how n tha t s ucc es

ful entrepreneurs see opportunities in situation

in which other people tend to see risks, where

Baron (in press) has found that entrepreneu

may be more likely than other persons to di

cover opportunities because they are less like

to engage in counterfactual thinking (i .e. , le

likely to invest time and effort imaging wh

might hav e been in a given situation), le

likely to exp erien ce regret over mis sed opport

nit ies,

and are less susceptible to inaction ine

tia.

The Decision to Exploit Entre prene urial

Opportuni t ies

Although the discovery of an opportunity is

necessary condition for entrepreneurship, i t

not sufficient. Subsequent to the discovery of a

opportunity, a potential entrepreneur must d

cide to exploit the opportunity. We do not hav

precise figures on the aborting of discovere

opportunities, but we do know that not all di

covered opportunities are brought to fruitio

Why, whe n, and how . do some pe ople a nd n

others exploit the opportunities that they di

cover? The answer again appears to be a fun

tion of the joint ch ara cte ristic s of the o pportun i

and the nature of the individual (Venkatarama

1997).

Nature of the opportunity. The characteristi

of opportunities themselves influence the wil

ingn ess of people to exploit them . Entreprene u

ial opportunities vary on several dimension

which influences their expected value. For e

ample, a cure for lung cancer has greater e

pected value than does a solution to student

need for snacks at a local high school. The e


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Shane and Venicafaraman

d v alu e of the entr epre neu rial profit will be

lack of liquidity of the in vestm ent of

n ce rta in ty (Kirzner, 1973; Sch um pete r, 1934).

To date, research ha s shown that , on avera ge,

en t rep reneurs exp lo i t oppor tun i t i e s hav ing

higher expected value. In particular, exploita-

tion is more common when expected demand is

large (Schmookler, 1966; Schumpeter, 1934), in-

dustry profit margins are high (Dunne, Roberts,

Sam uel son , 1988), the technology life cycle is

young (Utterback, 1994), the density of competi-

tion in a particular opportunity space is neither

too low nor too hig h (Ha nna n Fre em an, 1984),

th e cost of cap ita l is low (Sha ne, 1996), a nd pop -

ulation-level learning from other entrants is

av ai la bl e (Aldrich W ieden me yer, 1993).

Indiv idual differences. Not all potential entre-

preneurs will exploit opportunit ies with the

same expected value. The decision to exploit an

opportunity involves weighing the value of the

opportunity against the costs to generate that

value and the costs to generate value in other

w a y s .

Thus, people consider the opportunity

cost of pursuing alternative activities in making

the decision whether or not to exploit opportuni-

ties and pursue opportunities when their oppor-

tunity cost is lower (Amit, Mueller, 8f Cockburn,

1995; Reynolds, 1987). In addition, people con-

sider their costs for obtain ing the resources nec-

essary to exploit the opportunity. For example,

Evans and Leighton (1991) showed that the ex-

ploitation of opportunit ies is more common

when people have greater f inancia l capi ta l .

Similarly, Aldrich and Zimmer (1986) reviewed

research findings that showed that stronger so-

cial ties to resource providers facilitate the ac-

quisition of resources and enhance the proba-

bility of opportunity exploitation. Furthermore,

Cooper, Woo, and Dunkelberg (1989) found that

people are more likely to exploit opportunities if

they have developed useful information for en-

trepreneurship from their previous employment,

presumably because such information reduces

the cost of opportunity exploitation. Finally, the

transferability of information from the prior ex-

perience to the opportunity (Cooper et al., 1989),

as wel l as pr ior entrepreneur ia l exper ience

probability of exploitation of entrepreneurial

opportunity because learning reduces its cost.

The decision to exploit an entrepreneurial op-

portunity is also influenced by individual differ-

ences in perceptions. The creation of new prod-

uc t s and marke t s invo lves downs ide r i sk

because time, effort, and money must be in-

vested before the distribution of the returns is

know n (Knight, 1921; V en ka ta ram an , 1997). Sev

eral researchers have argued that individua

differences in the willingness to bear this risk

influence the decision to exploit entre pren euria

opportunities (Khilstrom Laffont, 1979; Knigh

1921). For exam ple, people who exploit opportu

nities tend to frame information more positively

and then respond to these positive perceptions

(Palich Bagby, 1995).

The decision to exploit entre pren euria l oppor

tunities is also influenced by individual differ

ences in optimism. People who exploit opportu

n i t i e s typ ica l ly pe rce ive the i r chances o f

success as much higher than they really are—

and much higher than those of others in thei

indu stry (Cooper, Woo, Du nke lber g, 1988)

Moreover, when these people create new firms

they often enter industries in which scale econ

omies play an important role at less than mini

mum efficient sc al e (Audre tsch, 1991), an d they

enter industries at rates exceeding the equilib

rium nu m be r of firms (Gort Kleppe r, 1982).̂

However, in most industries, at most points i

time,

most new firms fail (Dunne et al.,

1988),

an

few firms ever displace incumbents (Audretsch

1991),

sug gestin g that p eople who exploit oppo

tunities, on avera ge, are overly optimistic abou

the valu e of the opportun ities they discover. Thi

overoptimism motivates the exploitation of op

portunity by limiting information, stimulatin

rosy forecasts of the future (Kahneman

Lovallo, 1994), trig ge rin g th e se ar ch for rela

tively small amounts of information (Kaish

Gilad , 1991), an d l ea din g pe op le to act first an

analyze later (Busenitz Barney, 1997).

Other individual differences may be impo

tant in explaining the willingness to exploit op

portunit ies . Researchers have argued that peo

ple with greater self-efficacy and more intern

locus of control are more likely to exploit oppo

tunities, because exploitation requires people

*

The information signals generated by the entrepren


8/11

Academy o anagement fleview Janua

act in the face of skepticism of others (Chen,

G re e ne ,

Crick, 1998). Sim ilarly, opp ortun ity ex -

ploi ta t ion involves ambiguity, and people who

have a greater tolerance for ambiguity may be

more likely to exploit opportunities (Begley

Boyd, 1987). Finally , the e xp loitatio n of o ppo rtu-

nity is a setting in which people can achieve,

providing a valuable cue for those who possess

a high need for achievement (McClelland, 1961).

Consequently, those who are high in need for

achievement may be more l ikely than other

members of society to exploit opportunities.

Readers should note that the a t t r ibutes that

increase the probability of opportunity exploita-

t ion do not necessari ly increase the probabil i ty

of success. For example, overoptimism might be

associated with a higher probability of both ex-

ploitation and failure. Of the population of indi-

viduals who discover opportuni t ies in a given

industry, those who are pessimist ic may choose

not to exploit discovered opportun i t ies b eca use

they more accurate ly est imate what i t wil l take

to compete and how many other people will try

to do similar things. Overoptimist ic individu als

do not stop themselves from exploiting these

opportuni t ies , because their overoptimism l im-

its information and motivates rosy forecasts of

the future.

shown that entrepreneurship is less l ikely t

take the form of de novo startups when capita

market imperfections make it difficult for inde

pendent ent repreneurs to, secu re finan cing (C

he n Levin, 1989). En trep ren eu rsh ip is mo r

likely when the pursuit of entrepreneurial op

portunity requires the effort of individuals wh

lack incentives to do so in large organizations

when scale economies, f i rs t mover advantages

and learning curves do not provide advantage

to ex istin g firms (Co hen Levin, 1989); an

when industries have low barriers to entry (Ac

Au dretsch , 1987). Re sear ch on the appr op

ability of information has shown that entrepre

neurship is more likely to take the form of d

novo startups when information cannot be pro

tected well by intellectual property laws, inhib

iting the sale of entrepreneurial opportunitie

(Cohen Levin, 1989). Fina lly, re se arc h on th

nature of opportuni t ies has show n that entrepre

neurship is more likely to take the form of d

novo startups when opportuni t ies are more un

certa in (Cas son, 1982), wh en op po rtun ities d

not require complementary assets (Teece, 1986

and when opportuni t ies des t roy competenc

(Tush man An derso n, 1986).

MO DES OF EXPLOIT TION

Another critical question concerns how the ex-

ploitation of entrepreneurial opportunities is or-

gan ized in the econom y. Two major institution al

a r ra nge me nt s fo r t he e xp lo i t a t i on o f t he se

opportunities exist—the creation of new firms

(hierarchies) and the sale of opportunities to ex-

is t ing fi rms (markets)—but the common as-

sumption is that most entrepreneuria l act ivi ty

occurs through de novo startups. However, peo-

ple within organizat ions who discover opportu-

ni t ies sometimes pursue those opportuni t ies on

behalf of their existing organizations and some-

t ime s e s t a b l i sh ne w orga n iz a t ions , w he re a s

independent actors sometimes sel l their oppor-

tuni t ies to exis t ing organiza t ions and some-

t imes establ ish new organizat ions to pursue the

opportuni t ies .

Research shows that the choice of mode de-

pends on the nature of the industria l organiza-

tion, the opportunity, and the appropriability re-

CONCLUSION

Entrepreneurship is an important and re le

vant field of study. Although those in the fiel

face many difficul t quest ions, we have pre

sented a framework for exploring them. We rec

ognize that we may hav e offered som e un certa i

assumptions, potent ia l ly f lawed logical argu

men ts, or hav e m ade s ta tem ents that wil l prov

ultimately, to be incon sistent with da ta yet to b

col lected. Nevertheless, this framework pro

vides a starting point. Since it incorporates in

formation gained from many disciplinary van

t a g e p o i n t s a n d e x p l o r e d t h r o u g h m a n

different methodologies, we hope that i t wi

prod scholars from many different fields to joi

us in the quest to create a systematic body o

i n f o r m a t i o n a b o u t e n t r e p r e n e u r s h i p . M a n

skep tics claim th at the crea tion of such a body o

theory and the subsequent assembly of empir

cal support for it are impossible. We hope tha

other scholars will join our effort to prove thos


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Shane and VenJcataraman

22 5

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Scott Shane is associate professor of entrepreneurship in the Robert H. Smith School

of Business and director of research at the Dingman Center for Entrepreneurship at

the University of Marylan d. He received his

Ph.D.

from the University of P enns ylvan ia.

His current research focuses on entrepreneurship in high-technology settings.

S. Venkataraman is the Sa mu el L. Slover Assoc iate Professor of Busine ss A dministra-

tion an d director of researc h at the Batten Center for Entrep reneuria l Lea dersh ip in the

Darden Graduate School of Business Administration at the University of Virginia. He

received his Ph.D. from the University of Minnesota. His current research focuses on

entrepreneurship theory.


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the promise of entrepreneurship as a field of research

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