Entrepreneurship Goes beyond StartupsENTREPRENEURS HAVE LONG BEEN THE MISSING PIECE IN SOCIAL SCIENCE RESEARCH, BUT THIS IS CHANGING. WE NOW NEED TO UNDERSTAND THE COMPANY LEVEL DRIVERS OF ENTREPRENURIAL IDEAS BY NICOLAI FOSS
by Nicolai Foss, Rodolfo Debenedetti Chair of Entrepreneurship, Bocconi University
On October 8, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2018 was awarded to Paul Romer for his contributions to what is often called the “New Growth Theory.” (Romer shared the Prize with William Nordhaus). The Prize Committee explained its reasons for picking Romer in the following way: Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.
➜ A Missing Piece
While Romer’s Nobel Prize is no doubt fully deserved, it can be argued that one key factor is missing from his account of “how economic forces” influence “new ideas and innovations” - namely, entrepreneurship. After all, it isn’t really “knowledge” per se that functions “as a driver of long-term economic growth.” Rather, entrepreneurs see possibilities in commercially leveraging what happens at the expanding knowledge frontier.
Those entrepreneurs whose judgment indicates that such knowledge may be profitably deployed towards producing new goods or services or using the knowledge directly in production have a strong incentive to do so. However, intuition (as well as a huge body of research) also suggests that entrepreneurs differ in ways that have implications for the extent to which new knowledge is noticed and put to good commercial use.
Intuition (and, again, research) also suggests that the institutional matrix of an economy also plays a key role here, notably by incentivizing or discouraging entrepreneurs to exploit the relevant knowledge. And, as entrepreneurs are usually embedded in (existing or start-up) companies, key aspects of companies also influence the extent to which entrepreneurs will and can act on possibilities for profitably deploying new ideas to commercial uses.
In other words, entrepreneurs, acting under institutional and organizational constraints and enablers, are the missing piece in the knowledge-and-growth puzzle. I deliberately say “missing,” for if truth be told, the entrepreneur has been missing from much social science research, in spite of his or her centrality in driving economic dynamics. The late economist William Baumol spoke of “playing Hamlet without the Prince of Denmark” (i.e., the central character is missing!). By way of example, there has not, so far, been a Nobel Prize for entrepreneurship research.
➜ The Entrepreneur
However, research in entrepreneurship has been booming over the last few decades (including in economics), as new chairs and programs are created and huge funds are put into entrepreneurship programs, in response to demand from corporate and public-sector decision-makers. As is typical of an emerging scientific field, knowledge is, however, quite fragmented and tends to accumulate within silos defined by disciplines. For example, economists tend to think of entrepreneurship as self-employment. Many management scholars associate it with startups and the creation of a new organization. Psychologists highlight the psychological profiles of entrepreneurs. Sociologists stress how entrepreneurs are embedded in networks that provide access to resources, including advice. Within these fields are further divisions. For example, in management research, at least four distinct approaches exist, namely the “opportunity recognition,” “creation,” “effectuation,” and “judgment-based” views.
The most general view of the entrepreneur probably is that he or she is a decision-maker who exercises judgement over scarce resources in a state of uncertainty in the hope of making a profit by satisfying customer/consumer preferences in the future. Executing such judgment requires having the support of organizational infrastructure and investments in complementary assets (production, sales, marketing). The extent to which such judgement will give rise to actual action and investments depends on institutions and policies. The broader point is that entrepreneurship does not always involve forming a new company. It is fundamentally a particular kind of behavior—forward-looking, uncertainty-bearing, and profit-seeking. This behavior can be exercised not only by startups but also by established companies.
➜ Entrepreneurship Theory and Politics
The latter point is an important one. For virtually all of what we call “entrepreneurship policy” is oriented towards startups. Somehow, in the minds of public decision-makers, the vitality of the economy has become associated with startups. This may be problematic. Virtually all startups die again, and very quickly. They create relatively few jobs. Their productivity is much lower than more established companies. Much entrepreneurship policy may be a waste of resources. Indeed, only a tiny fraction of startups succeed. Some of these become engines for jobs, value creation, and growth. But this suggests we should be directing the research attention beyond startups.
Thus, much more research attention needs to be devoted to the entrepreneurial behaviors of established companies. There is, of course, much attention paid to innovation, but entrepreneurship is a broader behavior and is not narrowly about product or process innovation. In particular, we need to become better at understanding the company-level drivers of entrepreneurial ideas and how these get transformed into actual actions and investments, and what roles organizational structure and controls play in this process. This will allow us to better link the company-level component to research such as Romer’s Nobel-prize winning contributions. Entrepreneurship is an exciting and important area. However, it is vital that it is not confined to a narrow silo, solely preoccupied with startups and self-employment.
Read more about this topic:
Carlo Mammola and Luigi Mastromauro. Predicting Startup Success with Data
Good Business Plan not Enough for Success. Interview to Alisée de Tonnac
Creating an Identikit of Entrepreneurs from 1850 to Present
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The Key Role of Taxation Regimes for Startups
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Experimental DecisionMaking Approach Attracts Funding
Entrepreneurs Who Act Like Scientists Get Better Results
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Looking at Gender Bias in Funding Yields a Surprise Result
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Social Networks Foster Entrepreneurship
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Connecting the Dots on How WWI Unleashed new Business Performance