What is the resource dependency theory of entrepreneurship?
Jeffrey Pfeffer and Gerald R. Salancik (1978) proposed the resource dependency theory as a way to explain the behavior of organizations by looking to the contexts in which they operate. Organizations are influenced by numerous external contingencies, thus the theory views the role of the manager as acting to reduce dependencies, especially the power of other actors to exert control over vital resources, often by increasing the power of the focal organization.
The assumptions of the theory are that organizations are the main units of analysis for understanding society. Organizations are viewed not as autonomous, but rather, they are seen as constrained by webs of dependence relationships with other organizations that can exercise power.
Success and survival are uncertain because of the ever-changing power relations among organizations. Organizations manage inter-dependencies creating new patterns of inter-dependence and inter-organizational power. Power is typically exerted in a way that reduces the profits of the less powerful actor while increasing the profits of the more powerful actor.
Managers take strategic actions to reduce environmental dependence, such as mergers (especially vertical integration), joint ventures, changes to boards of directors, political activities, and executive changes. For instance, Netflix vertically integrated into content creation to gain market power over content price setters.
How does the resource dependency theory relate to entrepreneurship?
The theory suggests that new ventures need to be weary of the power of other actors and should try to ensure that they are not too dependent on any one outside actor that might try to take advantage of their power. New ventures tend to be careful not to become too dependent on powerful outside actors unless they have defensive mechanisms at their disposal, or the resource provided are critical for survival (Katila et al. 2008). The presence of resource dependencies with powerful actors may also make it difficult for new ventures to acquire subsequent resources as such dependencies may act as negative signals.
New ventures manage relationships with powerful actors in special ways, such as using formal contracts, embeddedness, and strategic alliances (Yli-Renko et al., 2001). For example, if a new venture forms a joint venture with a powerful incumbent, then the incumbent may resist wielding power over the venture because it might reduce the value of their own ownership shares in the venture. Similarly, embeddedness through close ties allows social sanctions and reputation effects to constrain the behavior of powerful actors.
Yli-Renko, H., Sapienza, H. J., and Hay, M. (2001). The role of contractual governance flexibility in realizing the outcomes of key customer relationships. Journal of Business Venturing, 16(6), 529-555.