Showing posts from August, 2017

Birth order theory of entrepreneurship

Birth order theory is the construction of 1950's psychoanalysts (think Sigmund Freud, Carl Jung, and Alfred Adler) who posited that when (the timing) an individual is born, in relation to the birth of siblings, shapes experiences and personalities. Birth order is laden with so much cultural meaning both within families and in societies in general, that it guides psychological development.

Robinson and Hunt quote Rychlak' (1981:145) summary the typical logic behind birth order theories as follows:

"In a multiple-child family, the firstborn child not only becomes a great believer in power, but as an adult he or she is more likely than other children in the home to have a conservative, conforming outlook, to be a 'regular citizen' and a conventional individual. The second-born child is likely to feel a sense of challenge in the family constellation. . . If a second-born child has any talent, we are more likely to see this offspring develop it than the others becaus…

Genetic theory of entrepreneurship

The genetic approach to entrepreneurship looks to biological inheritance to explain the tendency for an individual to become an entrepreneur and succeed in entrepreneurial ventures.

Research on genetic links is spurred on by considerable anecdotal evidence that the children of entrepreneurs are more likely to become entrepreneurs than the children of non-entrepreneurs.

Genetic research tries to tease out family and environmental factors (learning, role modeling, and resources) from genetic factors.

Nicolaou et al. (2008) conclude that when one twin becomes an entrepreneur then the other twin is more likely to, even when controlling for family upbringing and other environmental factors. They suggest that testosterone levels are inherited and related to the decision to become an entrepreneur.

Later studies have added more depth to the analysis, looking to personality traits as mediators. For instance, Shane et al. (2010) study twins (with 50% and 100% similar genes) and conclude that…

Radical subjectivism theory of entrepreneurship

What is the radical subjectivist theory of entrepreneurship? Ludwig M. Lachmann was a German Economist who proposed a radical subjectivist theory of entrepreneurship as an alternative to existing Austrian School theories of entrepreneurship (e.g., altertness theory or uncertainty-bearing theory or creative destruction theory).

According to Lachmann, entrepreneurs develop plans according to their subjective knowledge and expectations. Expectations form as a result of the creative imagination of entrepreneurs, who may envision many competing futures. Entrepreneurs continually revise their plans as they encounter new bits of market information during exchange experiences. Capital is seen as continually recombining due to the process of capital regrouping. As capital is invested sub-optimally, errors lead to new temporary stocks of capital that need to be redeployed toward new purposes. Institutions are viewed as signposts that provide the rules of the game for millions of individuals, …

Misfit theory of entrepreneurship

Hofstede et al. (2004) suggest that misfit individuals attempt to start ventures because they do not share the dominant cultural values. The assumption is that misfit individuals are dissatisfied with their job prospects and are more likely to attempt entrepreneurial careers as alternatives.

The misfit theory of entrepreneurship has been used to explain why immigrants are often more entrepreneurial than native born populations. Immigrants' credentials may not respected in their new home countries. Their skills may be undervalued, their certifications and degrees may not be trusted or considered invalid or inadequate. Moreover, immigrants from countries with a different language and culture find it more difficult to integrate and find it more difficult to find lucrative employment (Kahn et al., 2017).

In sum, imperfect information from foreign experience and education coupled with lingual and cultural differences make it more difficult to enter the workforce as salaried employees.…

Liquidity constraint theory of entrepreneurship

Founding a new venture is more common among individuals with greater access to financial capital because financial capital makes it easier to acquire the resources needed to start ventures. For instance, Evans and Jovanovic (1989) find that wealthier individuals are more likely to enter into entrepreneurship because they can risk their own capital.

There is some evidence that many employees make the leap to entrepreneurship during liquidity events such as initial public offerings and acquisitions of their parent firms which can put significant financial resources into the hands of employees that own shares or options in the company. These employees, now flush with cash, have the financial freedom to spin out new ventures from their parent firms into independent companies (Stuart and Sorenson, 2003).

Hurst and Lusardi (2004) find some evidence for liquidity constraints however only at the top of the range, suggesting that only very wealthy individuals are more likely to become entrepr…

Locus of control theory and entrepreneurship

What is the locus of control theory of entrepreneurship? Among personality theories of entrepreneurship, locus of control has received considerable attention. The concept was developed in the 1950s by Julian Rotter who is an American psychologist working on social learning theories.

Locus of control refers to an individual’s perception about the causes of their life conditions. External locus of control describes an individual that believes that most of their life conditions are determined by forces outside of their control, such as like deities, governments, power structures, institutions, and also fate or luck. Internal locus of control describes an individual that believes that they are their own master and can act to change their own life conditions. They are viewed as a continuum and most individual are situated between the two extremes of complete external control and total internal control orientations.

When applied to entrepreneurs, those with an external locus might believe…

Contingency theory and entrepreneurship

Contingency theory proposes that an organization’s performance is determined by the fit between its resources, structure and strategies on one hand, and the external environmental conditions on the other hand (e.g., political, economic, social, technological).

A core concept in contingency theory is fit. Fitness is viewed as a match between the organization's characteristics and the characteristics of the environments around them.

At the heart of the theory is the assumption of equifinality, that is, that there are many different ways to achieve performance and that the right way depends upon the conditions in the environment of the firm in question (Lawrence and Lorsch, 1967). This also implies that a one-size-fits-all approach to strategy is doomed to fail.

For example, when a firm’s technological environment is characterized by rapid change or turbulence, then a firm may perform better with a more organic structure (flatter hierarchy, less formal control, etc…), whereas when a …

Kirzner's alertness theory of entrepreneurship

What is the alertness theory of entrepreneurship?Israel Kirzner is a British-American economist and emeritus professor at New York University. He is associated with the Austrian school of economics. Below, we review Kirzner's alertness theory of entrepreneurship.

Kirzner argues that entrepreneurs balance supply and demand by detecting market imperfections and exploiting them. Market imperfections are caused by information asymmetry and bounded rationality.
Information asymmetry refers to cases where different stakeholders have varying information about a business venture. If one stakeholder uses the information advantage to profit from the another, it is engaging in opportunistic bargaining.

Bounded rationality refers to the idea that humans are not perfectly rational. Neo-classical and Classical economics model the assumptions of economic man, and tend to ignore bounded rationality.

According to Kirzner, the profits entrepreneurs receive from entrepreneurship are their reward fo…

Disruptive innovation theory and entrepreneurship

What is the disruptive innovation theory of entrepreneurship? Disruptive innovation theory of was developed by Harvard Business School professor Clayton Christensen in his famous book entitled The Innovator’s Dilemma (2003).

Keywords: disrupt, disruptive, disruption, innovation, technology

Christensen’s core argument is that new entrants succeed when they pursue disruptive innovation whereas incumbents tend to pursue sustaining innovations. Disruptive innovations are technologies, products and business models that are lower performing than incumbent offerings along traditional dimensions of performance, but compensate with increased simplify, convenience, customizability, or affordability. For example, the Nintendo Wii disrupted the Xbox and Sony Playstation by offering lower quality graphics in exchange for the simplicity in the intuitive movements offered by gyroscopic technology added to the controllers. This allowed younger children, game novices, and older gamers to be able to…

Emancipation and entrepreneurship

What is the emancipation theory of entrepreneurship?  The term emancipation has roots in Roman era practices of buying, selling and keeping slaves, but also wives and children. In Roman times, a son needed to be freed from the legal authority of the father to make his own way in the world. The term is also associated Lincoln’s Emancipation Proclamation, which, in the U.S., was used to criminalize slavery. In the women’s liberation movement, emancipation is associated with breaking free from bonds of marriage to a man.

In a very interesting paper, Rindova and associates (2009) propose that entrepreneurship can be thought of as means of emancipation. They take a positive spin on a critical theory perspective. They define entrepreneuring as efforts to create new economic, social, institutional and cultural environments via the actions of groups or individuals. To bolster their arguments, they point out three key way in which entrepreneuring resembles emancipation processes. These are se…

Strategic disagreements and entrepreneurship

What is the strategic disagreements theory of entrepreneurship? Steven Klepper (2007) was an American economist at Carnegie Mellon University. He introduced the used the concept of strategic disagreements to explain a particular type of entrepreneurship commonly referred to as spinout (or employee spinoff) entrepreneurship.

Klepper credited spinouts with the creation of clusters like Silicon Valley and Detroit. A spinout occurs when an employee of a firm leaves to start a new business. Most spinout entrepreneurs create ventures that compete indirectly with their employers by pursuing new strategies or going after new markets with differentiated products. However, the seeds of spinout ventures often originate in parent firms. For instance, many entrepreneurs report that they are exploiting ideas that were generated inside of the organizations of their previous employers (Bhide, 1994).

Strategic disagreements refer to disagreements between employees and managers regarding the prospects…

X-efficiency theory of entrepreneurship

What is the x-efficiency theory of entrepreneurship?Harvey Leibenstein, American economist, developed X-efficiency theory in the 1960s. He views entrepreneurs as gap-fillers and input complementors. Gaps (X-inefficiency) emerge when there are inefficiencies in markets, such as when incumbents do not utilize their resources efficiently (Leibenstein, 1966;1978) because of political, normative, cognitive, and structural factors.

A classic example is the startup without a union that enters a market where all the incumbents have strong unions. The cost advantage of disorganized labor may help firms with low cost business models to thrive at the bottom of the market at margins that are uneconomical for incumbent firms to pursue within the target ranges given to them by their shareholders.

If the maximum possible productive use of a resources is greater than the actual use by incumbents, an arbitrage opportunity emerges that an entrepreneur can exploit for profit. Entrepreneurs can also imp…

Achievement motivation theory of entrepreneurship

What is the achievement motivation theory of entrepreneurship? Harvard psychologist David McClelland developed the Achievement Motivation Theory in his book entitled The Achieving Society in 1967. McClelland sought to explain why some societies are more economically successful than others. For answers, he looks at the entrepreneurial behaviors of individuals, which he thought were key to the development of all economies.

According to McClelland, entrepreneurs do things in a new and better way and make decisions under uncertainty. Entrepreneurs are characterized by a need for achievement or an achievement orientation, which is a drive to excel, advance, and grow. By focusing in on a particular need, he was able to challenge the then prevailing great man theory of entrepreneurship as well as religious theories of entrepreneurship. He believed that entrepreneurship is learned and that such learning can be encouraged fruitfully.

Need for achievement The need for achievement contrasts wi…

Jack of all trades theory of entrepreneurship

What is the jack of all trades theory of entrepreneurship? The jack of all trades theory of entrepreneurship was proposed by Stanford University economist Edward P. Lazear in a working paper that was eventually published in The American Economic Review in 2004, entitle Balanced Skills and Entrepreneurship.

The theory seeks to explain and predict who becomes and entrepreneur, and which entrepreneurs will be successful. According to Lazear, individuals that become entrepreneurs may have more balance in their investment strategy (on average) as compared with individuals that specialize employee roles.
Jack of all trades, master of none, still better than a master of one? Lazear's core idea is that entrepreneurs need to be good at many different things, that is, they are generalists rather than specialists. For instance, when first starting out, a restaurant entrepreneur needs to select vendors for inputs such as food, furniture, equipment, and construction. He or she may also need …

Information processing theory of entrepreneurship

What is the information processing theory of entrepreneurship? Information Processing Theory is explained by Allen Newell and Herbert A. Simon (1972) in their book entitled Human Problem Solving. The book focuses on how humans think and process information. They view the human system as including the sensual, memory and arousal subsystems.

Hansen and Allen (1992) borrow the theory of information processing to explain and predict the creation of new ventures. They start with the assumption that business environments produce information in varying quantities and varieties. For instance, a very simple environment might produce a small amount of very similar information, whereas a complex environment produces a large quantity of heterogeneous information.

A complex environment might match a fast-paced, ever-changing high-tech industry, whereas a simple environment might match a slow moving traditional industry such as the restaurant industry.

A single individual may find it difficult or i…