Embeddedness Theory of Entrepreneurship
Embeddedness Theory argues that economic activity is not an isolated event. Instead, it is constrained by non-economic institutions and social structures.
The term was coined by economic sociologist Karl Polanyi in the mid-20th century. He argued that you cannot separate business from the society in which it operates. These "non-economic" constraints include:
- Kinship: Family ties and obligations.
- Culture: Religious beliefs and social norms.
- Politics: Power dynamics and government structures.
Trust, Reciprocity, and the "Web"
In the context of modern entrepreneurship, embeddedness refers to the nature, depth, and extent of an individual’s ties to their environment (Jack & Anderson, 2002).
As entrepreneurs interact, patterns of economic exchange become embedded in a web of social relations. Over time, these repeated interactions lead to the development of trust and reciprocity (Uzzi, 1997). This reduces the risk of doing business, as partners are less likely to cheat someone they are socially connected to.
The "Stanford Effect": Access to Resources
Embeddedness dictates who we transact with. It acts as a filter for investors and customers.
Example: The Signaling Power of Networks
Consider a founder who graduates from Stanford University:
- Direct Access: They are more likely to get investment from the Stanford Venture Capital network due to direct ties.
- Signaling: They are also more likely to get funding from outside that network. Why? Because the "Stanford" affiliation signals high status, acting as a proxy for quality to strangers.
Strategies for Outsiders (Hite & Hesterly)
Startups accumulate resources through their ties (Hite & Hesterly, 2001). But what if an entrepreneur lacks these privileged networks? The theory suggests several strategies to "embed" oneself into a high-value network:
- The "Prestige" Employment Route: Working for a prestigious firm (e.g., McKinsey, Google) before founding a startup can validate the founder's quality to investors.
- The Spinout Strategy: Launching a venture that is a direct spinout of an existing credible firm.
- Strategic Hiring: Finding co-founders or early employees who already possess the desired network ties to bridge the gap.
Video: Karl Polanyi and the Great Transformation
Academic Sources
- Hite, J. M., & Hesterly, W. S. (2001). The evolution of firm networks: From emergence to early growth of the firm. Strategic Management Journal, 22(3), 275-286.
- Jack, S. L., & Anderson, A. R. (2002). The effects of embeddedness on the entrepreneurial process. Journal of Business Venturing, 17(5), 467-487.
- Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of embeddedness. Administrative Science Quarterly, 42(1), 35-67.
