Social exchange theory of entrepreneurship
Social Exchange Theory: The Currency of Trust in Entrepreneurship
Why do stakeholders support a new venture when there is no guarantee of financial return? The answer often lies in Social Exchange Theory (SET).
While traditional economic theory looks at the exchange of money, SET looks at the exchange of social costs and rewards. It regards trading relations as built on norms of reciprocity and mutual benefit (Emerson, 1981).
The Core Pillars of Exchange
According to De Clercq et al. (2010), successful entrepreneurial relationships rely on two fundamental mechanisms:
1. Reciprocity
Reciprocity is the exchange of privileges based on mutual trust. It comes in two forms:
- Direct Reciprocity: "I buy you lunch today; you buy me lunch next week." The debt is clear and specific.
- Extended Reciprocity: "Paying it forward." The assumption is that if you contribute to the environment, the environment will eventually pay you back, even if indirectly.
2. Mutual Benefit (Attraction)
In the literature, this is often called "Mutual Attraction." It implies that neither party is preying on the other; both have something to gain. In traditional subsistence cultures, tribes donate surpluses to neighbors with no time-bound expectation of repayment, creating a safety net based on shared survival.
The Mental Calculation
At its heart, Social Exchange Theory posits that all relationships are formed by a subjective cost-benefit analysis and the comparison of alternatives.
Entrepreneurs are constantly being evaluated by their stakeholders (investors, employees, partners) on this equation: Rewards - Costs = Relationship Value.
Relationships vs. Traits
This theory offers a vital shift in perspective. Unlike psychological theories that focus on the individual (e.g., "Is the founder resilient?"), the Social Exchange perspective focuses on the relationship.
Successful entrepreneurs are not just "great men" or "lone wolves"; they are master nurturers of social exchange. They build a reputation for fairness over time, which engenders the trust necessary to survive lean times.
The Warning: Path Dependence
Social exchange processes need continual care. A reputation for reciprocity is Path Dependent.
This means history matters. If an entrepreneur tarnishes their reputation by failing to reciprocate or by violating trust, it is often impossible to reset the path. In the social economy, bankruptcy laws do not exist to wipe the slate clean; once trust is bankrupt, the venture usually fails.
Video: Social Exchange Theory in 5 Minutes
References
De Clercq, D., Dimov, D., & Thongpapanl, N. T. (2010). The moderating impact of internal social exchange processes on the entrepreneurial orientation–performance relationship. Journal of Business Venturing, 25(1), 87-103.
Emerson, R. M. (1981). Social exchange theory. In Social Psychology: Sociological Perspectives. New York: Basic Books.
