Embeddedness theory of entrepreneurship

What is the embeddedness theory of entrepreneurship?

Karl Polanyi was an Austrian-Hungarian economic sociologist in the middle years of the twentieth century. He coined the term 'embeddedness' to mean the extent that economic activity is constrained by institutions that are non-economic. Non-economic institutions may include:

1) kinship or family
2) religious or cultural
3) power and politics

Embeddedness can also be thought of as the nature, depth and extent of an individual’s ties into the environment (Jack and Anderson, 2002). Patterns of economic exchange become embedded in webs of social relations that over time leading to the development of trust and reciprocity (Uzzi, 1997).

Embeddedness affects decisions about who to transact with including potential investors and customers of entrepreneurs' ventures. For instance, someone that graduates from Stanford may be more likely to get investment from someone in the Stanford venture capital network, but they may also be more likely to get funding from outside that network because they have access to the high status network.

Startups may accumulate supportive resources from existing or new ties (Hite and Hesterly, 2001). Entrepreneurs that don't have the right ties to access network resources may use various strategies to overcome this barrier. It is interesting to think about how an entrepreneur goes about developing the right stakeholder networks to get funded. For instance, founders that have worked for prestigious firms may be deemed investment worthy, thus entrepreneurs can seek to work for prestigious firms as an in. Another possibility is to spinout an idea from a prestigious firm, or to find partners from or hire from the desired networks.

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Sources:

Hite, J. M., and 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. and 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, 35-67.

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