Entrepreneurship & New Venture Growth Final

Small Business

-Absence of market power -High element of risk and uncertainty -Autonomy of running own business (requires intrinsic motivation) -Owned and managed by same individual(s) or family -Legally independent (ex: LLC) -Small share of the marketplace

Joseph Schumpeter

-Austrian-born American economist/political scientist -Finance Minister in Austria in 1919; professor at Harvard University -One of the most influential economists of 20th century -Work was famous with economics of innovation/entrepreneurship and business cycle -Argued that innovation should be seen as a radical and disruptive departure from existing practice -Innovation was typified capitalism -Revolutionizing the economic structure creating a new one

Entrepreneurial rates across countries

-Differ due to different characteristics in each country -Some areas have larger entrepreneurial rates -Developing countries may potentially have less other employment opportunities, and more opportunities for new businesses

Defining Small: Issues w/ Monetary Approach

-Exchange rate differences, inflation rates cause issues -May provide an unreliable picture of small business numbers

Context also matters

-Institutional framework (Autio and Acs, Estrin et. al) -Cultural norms (Tominc and Rebernik) -Socioeconomic environment (Hessels) -Regional economic context (Kibler, Stuetzer)

Impact of entrepreneurship

-Job creation -Economic development -Regional development -Social well being

Fritsch and Storey, 2014 - Regional Studies

-Literature review looking at regional new business formation -Emphasis on the role of formal and informal institutions of entrepreneurship -Main challenge: explain why in high-income countries (despite regional differences in terms of culture) the relative position of regions in terms of new business formation rates shows little/no variation over time

How do we differentiate countries?

-Location: Europe vs. Africa vs. America vs. Asia -Wealth: Rich vs poor vs BRIC -Language: Anglo vs ROman vs Arabic -Values: Religions -Climate: temperate vs tropical -Political system: democracy vs dictatorship -Human rights: for women, children, religious minorities -Infrastructure: railways, airports

Some issues with patents

-Measure of invention not innovation activity -Important in some sectors but not in others -Cost of patenting and difficulties in enforcing patents to bias toward large business -Variety of motives (bureaucracy, reputation) -Use of alternative strategies (e.g. trade secrets)

Measuring innovation: intermediate output measures

-Measures can be patents applied for, granted or number of new product announcements -Patents are negative right which "shelter" the innovator -Governments agree to patent protection to foster innovative activity (otherwise entrepreneurs may not innovate) and to promote 'spillover' benefits Advantages: -Better measure b/c patents are costly so minimizes 'trivial' patents -Better measure of innovation output than R&D expenditure/workers

Davidsson and Honig, 2003 - Journal of Business Venturing

-Nascent entrepreneurs w/ greater levels of human capital --> more prone to discover attractive entrepreneurial opportunities -Higher amounts of HC --> greater self-confidence --> influences entrepreneurial outcomes -But, higher levels of HC will weaken the startup up process towards successful completion

How does innovation occur?

-Not just about inputs (exogenous) but also being smart (endogenous) -Spillover effects -Competitor and maintain competitive advantage -Path dependent (what you have done in the past) and context specific (i.e. rural area vs Silicon Valley)

Bosma and Sternberg, 2014 - Regional Studies

-Opportunity-driven entrepreneurship (instead of necessity) tends to be large in urban areas; more opportunities, connections, informations and resources --> creativity -Higher levels of economic growth and diversity of economic activities positively predict opportunity-driven entrepreneurial activity -Reduction of employment growth motivates involvement of necessity-driven entrepreneurial activity in urban areas (Spanish case) --> no other employment alternatives Necessity entrepreneurship may have higher failure rates b/c less resources, knowledge, and just choosing a business > choosing right opportunity

Entrepreneurial success

-Passion for business -Product and customer focus -Tenacity despite failure -Execution intelligence

Diagnose of Institutional Contexts

-Political and social systems -Openness -Product markets -Labor markets -Capital markets

Baumol's typology of entrepreneurs

-Productive entrepreneurship -Unproductive entrepreneurship -Destructive entrepreneurship

Measuring innovation: input measures

-R&D Expenditure or the number of R&D / 'knowledge' workers employed (scientists, engineers) -Not necessarily correlated between inputs/outputs (an innovation) -Biased toward large businesses (for small business, innovation across company and not just R&D) -Limited measure of innovation (measure of money/labor resources expended rather than measure of innovations gained)

Dencker and Gruber, 2014 - Strategic Management Journal

-The riskier the opportunity, the greater the performance of the startup -The value of founder knowledge (experience) is relative to the type of opportunity exploited -High-risk opportunities favor founders w/ managerial experience on predicting start-up performance -But, low-risk opportunities favor founders w/ industry specific experience on predicting start-up performance

Enemies of Innovation

1) Fundamentalism (imposing something as the truth, in acting, thinking, etc.) 2) Isolationism: remaining separate from others (people, groups) 3) Bad Education System: can restrict thinking, prevent you from developing certain important skills 4) Knowledge Centralization: how do we manage the knowledge we share? 5) Luddites: A person opposed to increased industrialization of new technology 6) The business itself -Lack of demand -Lack of R&D -Poor business model -Lack of resources -Inertia / not flexible

Shane and Venkataraman's (2002) Assumptions

1) Opportunities in the market are not able to be exploited by just anyone. Cognitive dimension determines it -- how one processes information from the market 2. We each have differing perceptions of value of each opportunity, and don't exploit opportunities the same way

OCED Four types of innovation definitions

1) Product innovation 2) Process innovation 3) Marketing innovation 4) Organizational innovation

2 Frameworks for Interpersonal, Cultural Differences

1) WVS -- World Value Study 2) Hofstede Cultural Values

Common myths on entrepreneurs

1. Entrepreneurs are born not made 2. Entrepreneurs are gamblers (instead of moderate risk takers) 3. Entrepreneurs are primarily motivated by money 4. Entrepreneurs are young and energetic 5. Entrepreneurs love the spotlight

Schumpeter's 5 Types of Radical Innovation

1. Introduction of a new method of production Ex) Henry Ford, assembly line 2. Opening up of new market Ex) India East Company - India/Asia 3. Conquest of a new source of supply of raw materials or half manufactured goods Ex) Steel manufacturer 4. Creation of a new type of industrial organization Ex) Limited Liability Partnerships 5. Introduction of a new good Ex) Personal computers in the '80s

Entrepreneurship: 2 phenomena

1. Presence of lucrative opportunities 2. Presence of enterprising individuals

Entrepreneurship 3 research areas (from 2 phenomena)

1. Sources of opportunities 2 .Processes of discovery, evaluation and exploitation 3. Set of individuals who discover, evaluate and exploit them

The credibility carousel

5 main stakeholders who could impact credibility of new opportunity in market: -People -Customers -Money -Suppliers -Premises

Corporate entrepreneurship

Acting entrepreneurial within established firms

Curran and Blackburn 2001 "Grounded Approach"

Alternative to monetary approach Ask individuals if they think a business is big or small (b/c relative to country) -Not ideal b/c has to do with perceptions of individual -Difficult to provide harmonized statistics

Cell Phone Industry Evolution

Cell phone launched in 1973 by Martin Cooper, head of Motorola R&D Nokia -- could choose different colors, cell phone tones, successful in market -Sold most # of different types of phones of all brands -Went bankrupt -Didn't bring office to phone unlike Blackberry

Productive Entrepreneur Example

Cistercian Monks -Acquire land -Invest in animal flocks -Create and maintain water mills

"Doing Business" Measures

Complexity and Cost of Regulatory Processes: -Starting a business -Dealing with construction permits -Getting electricity -Paying taxes -Trading across borders Strength of Legal Institutions: -Getting credit -Protecting minority investors -Enforcing contracts -Resolving insolvency -Labor market regulation

Macro factors

Country, institutions, overall economic situation (need-to-be entrepreneurs)

CAGE

Cultural Administrative Geographic Economic

Institutional framework (Autio and Acs, 2010)

Education and money will help launch a business to be bigger, but depends on regulations in the country -Well educated --> see more opportunities, have more background on how to exploit opportunity -If more educated, might see larger risks and not aspire to grow as large due to regulatory frameworks -Context moderates how we predict things like future growth

High traditional values

Emphasize the importance of religion, parent-child ties, deference to authority and traditional family values People embrace these values also reject divorce, abortion, euthanasia and suicide. These societies have high levels of national pride and a nationalistic outlook

Enterprise

Entrepreneur owns and manages the firm

Serial entrepreneurs

Entrepreneurs who found multiple businesses

Productive Entrepreneurs

Entrepreneurs who maximize their individual (private) and social benefits

University factors

Entrepreneurship education, and industry ties

Individual factors

Gender, age, education, income, extraversion, agreeableness, conscientiousness, neuroticism, openness, self-efficacy, role models

Formal Institutions

Government, universities, church

UK Entrepreneurship

Has been increasing -Record annual increase of 330,000 businesses -Sustained growth since 2000 -Most businesses are small or medium sized

Secular-rational values

Have opposite preferences to traditional values. Societies place less emphasis on religion, traditional family values and authority. Divorce, abortion, euthanasia and suicide are seen as relatively acceptable (suicide less so)

Micro Enterprise (EU)

Headcount: <10 Turnover: <2 million euros Balance Sheet Total: <2 million euros

Medium-sized Enterprise (EU)

Headcount: <250 Turnover: <50 million euros Balance Sheet Total: < 43 million euros

Small Enterprise (EU)

Headcount: <50 Turnover: <10 million euros Balance Sheet Total: <10 million euros

Self-expression Values

High priority to environmental protection, growing tolerance of foreigners, gays and lesbians and gender equality, and rising demands for participation in decision-making in economic and political life

Laursen and Salter, 2006 - Strategic Management Journal

How companies come up with new ideas -Look at innovation measures: how companies create new ideas -Firms who are more open to external sources or search channels have higher level of innovative performance

Informal Institutions

How well accepted entrepreneurship is in a country, hand gestures, communication tools, social capital and culture

Causation

I want to become an entrepreneur, I will follow a systematic approach to figure out what a good idea could be Tend to have less experience with entrepreneurship. As such, goes thru a more structured plan about how to go about it More young entrepreneur oriented

Destructive Entrepreneurs Main Characteristics

Illegal activity

Factos of Entrepreneurship

Individual w/ Environment -Individual factors -Group (family) factors -Organization factors -University factors -Macro factors

Productive Entrepreneur Main Characteristics

Innovative people, generate profits, create jobs, pay taxes, wealth creators, add benefit to society

Unproductive Entrepreneur Example

Lawyers -Assumption they are very rent-seeking oriented -Do not care about what the client did and weather or not they are guilty, they just want to win Ambulance chasing and other litigation; tax evasions and avoidance

1) Economist Perspective

Look at entrepreneurship in a more pragmatic way -Someone becomes an entrepreneur because they believe that doing so will maximize their personal UTILITY -Focus on OUTCOME

Unproductive Entrepreneurs

Maximizes individual (private) but not necessarily social benefits; focused on their own utility and not beyond

Destructive Entrepreneurs

Maximizes individual but not social benefits

2) Organizational Theory Approach

More social science oriented -Activities an entrepreneur would lead have certain CONSEQUENCES TO SOCIETY -Good codes --> influence on society -Not only about maximizing utility; matters what they do -Focus on processes and "MEANS" (not just the end)

Productive Entrepreneur Today

Obsession with a quality on the idea, and obsession with the quality of the product that will be launched -High quality entrepreneurs -Ingvar Kamprand of Ikea

Group (family) factors

Parents/grandparents entrepreneurs, in-group collectivism

Establishment

Part of a larger structure so it does not have the power to hire people or control things Ex) one Pret A Manger; Carrefour

Survival Values

Place emphasis on economic and physical security. Linked with relatively ethnocentric outlook and low levels of trust and tolerance

Destructive Entrepreneurs Examples

Political Payments -Bribery and corruption -Mafia Pirate economy Drug dealing Prostitution Racketeering

Hofstede: 4 dimensions

Power distance (small-high) -People's acceptance of unequal distribution of power Collectivism-individualism -Individual freedom vs belonging to a group Femininity-Masculinity -Assertive, decisive and aggressive leaders and focus on material rewards vs. compassion, relationships, and focus on 'quality of life' Uncertainty avoidance (low-high) -More or less risk resistance to changes

Regional Economic Context (Kibler, 2013)

Regional Environment --> Attitude, Subjective Norm, Perceived behavioral control All of these factors --> entrepreneurial intention

Regional economic context (Stuetzer, 2014)

Regional characteristics --> opportunity perception --> entrepreneurship Regional characteristics --> entrepreneurship Regional characteristics: assessed at the regional level Opportunity perception and Entrepreneurship: assessed at the individual level

Unproductive Entrepreneur Main Characteristics

Rent seeking often involving bureaucracy

Organization factors

Restrictive innovative climate, job satisfaction

SB vs. LB: Owner's motivation

SB: Diverse LB: Shareholder value Consequence: Diverse business performance

SB vs. LB: Human Resources

SB: Diverse (e.g. satisfied/exploited) practices LB: Attracts educated workers seeking a career Consequence: SB job satisfaction higher but LB have better pay

SB vs. LB: Strategy

SB: Flexibility LB: Price Consequence: SB is more likely to pioneer innovation

SB vs. LB: Risk of failure

SB: High LB: Low Consequence: SB focus on survival/growth

SB vs. LB: Internal Organization

SB: Informal LB: Formal Consequence: LB seeks to reduce "internal" uncertainty

SB vs. LB: Finance

SB: Limited choice LB: Wider choice Consequence: LB have greater access to finance

SB vs. LB: Employee Wages

SB: Low LB: High Consequence: Hire different types of workers

SB vs. LB: Investment

SB: Low LB: High Consequence: LB focus on investment

SB vs. LB: Political Influence

SB: Low LB: High Consequence: LB have more political power

SB vs. LB: Formal Training

SB: Low LB: High Consequence: SB seen as 'backward'

SB vs. LB: Brand

SB: No brand value LB: Brand important Consequence: LB focus on brand

SB vs. LB: Management

SB: Owner-manager LB: Employee-manager Consequence: SB incentives more aligned

SB vs LB: Market power

SB: Price taker LB: Price maker Consequence: SB focus on niche

Small Enterprise

Same owner and management

Effectuation

See an opportunity and exploit it Could be a serial entrepreneur, more likely to create a large firm because they have more experience, resources, capital

Small Business Key Words

See themselves as customer-focused Seen by large business as lacking credibility and unreliable Uncertainty, diversity, flexibility, failure

Large Businesses: Key Words

See themselves as reliable Seen by small businesses as bureaucratic, price maker Reliability, brand, market power, influence

Inventors vs Innovators

Sewing Machine: Elias Howe vs Isaac Singer Vacuum: Murray Spangler vs WH Hoover Mouse: Douglas Engelbart vs Apple Macintosh Cola: RC Cola vs Coca Cola

How do individuals go about creating a business?

Social Capital and Human Capital are key to discovering and exploiting opportunities Intentionality, resources, boundary (overcome by VCs, angel investors, crowd funding), exchange

Social Capital

Social networks; relationships/connections you have; share knowledge and resources Entrepreneurial ecosystems: Silicon Valley, incubators, accelerators, co-working spaces Learn from competitors, share information and specialize

Entrepreneur

Someone who takes the risk to transform an invention or idea into a viable business

WVS: Cultural Differences

Survival/Self-expression values -Economic/physical security > self-expression and quality of life -Respondent describes self as not very happy -Respondent has not / would not sign a petition -Homosexuality is never justifiable -You have to be very careful about trusting people Traditional/secular-rational values -God very important in respondent's life -Children: obedience and faith > independence and determination -Abortion is never justifiable -Strong sense of national pride -More respect for authority

Innovation

The first commercialization of the idea

Invention

The first occurrence of an idea for a new product or process

Marketing Innovation

The implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing

Process Innovation

The implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software (cost advantages)

Organizational Innovation

The implementation of a new organization method in the firm's business practices, workplace organization or external relations

Product Innovation

The introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses Includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness, functional characteristics (quality advantages)

Entrepreneurship

The process by which individuals pursue opportunities without regard to resources they currently control Concerned with discovery, evaluation and exploitation of profitable opportunities

Baumol's main implications

There are certain "rules of the game" and based on how entrepreneurs would act with these, they would be characterized as productive, unproductive or destructive Entrepreneurs change which type they are based on the incentives they face and the environmental conditions they are existing within

Astebro, 2003 - The Economic Journal

Very few inventors make money out of their ideas -Inventors are unrealistic optimists that overestimate their abilities -Independent inventors are "skewness lowers" and look for minuscule probability of extreme gains -Society and inventors would be better off if poor quality inventors were not pursued