Entrepreneurship and Public Policy
Lecture 1: What is Entrepreneurship, Who are
Entrepreneurs, and Why It Matters
Lecture Overview
• Course overview
• Defining “entrepreneurship”
• The “entrepreneur” and three key elements of
entrepreneurship
• Entrepreneurship and public policy
• Discussion questions
Gates EPP_Lecture 1-2 Spring 2009
Course Overview
• Motivation
• Goals
• Organization
• Requirements
• Logistics
Gates EPP_Lecture 1-3 Spring 2009
Lecture Overview
• Course overview
• Defining “entrepreneurship”
• The “entrepreneur” and three key elements of
entrepreneurship
• Entrepreneurship and public policy
• Discussion questions
Gates EPP_Lecture 1-4 Spring 2009
Who or What Is an Entrepreneur?
A person who acts in a way that is innovative, creative and
oriented toward growth and opportunity.
People who found new businesses, not people who found
religions, social movements, or corporate ventures, or people
who are just acting creatively.
-- Shane, 2008
Entrepreneurship = small business
An entity, new or existing that provides a new product or
service or that develops and uses new methods to produce or
deliver existing goods and services at lower cost
-- Baumol, Litan and Schramm (2007)
Entrepreneurship ≠ small business
Gates EPP_Lecture 1-5 Spring 2009
Types of Entrepreneurship
The academic literature focuses on several questions that draw
distinctions among types of entrepreneurship
• What is the outcome of the entrepreneurial activity?
– Innovative v. replicative
• What motivates the entrepreneur?
– Opportunity entrepreneurship vs. necessity
entrepreneurship
• What is the employment status of the entrepreneur?
– Self-employed vs. employee
– Entrepreneurship v. intrapreneurship
• Does the entrepreneurial activity increase the size of the pie,
or just the entrepreneurs’ share of the pie?
– Productive vs. unproductive (I.e. political lobbying,
organized crime)
Gates EPP_Lecture 1-6 Spring 2009
Types of Entrepreneurship
The academic literature focuses on several questions that draw
distinctions among types of entrepreneurship
• What is the outcome of the entrepreneurial activity?
– Innovative v. replicative
• What motivates the entrepreneur?
– Opportunity entrepreneurship vs. necessity
entrepreneurship
• What is the employment status of the entrepreneur?
– Self-employed vs. employee
– Entrepreneurship v. intrapreneurship
• Does the entrepreneurial activity increase the size of the pie,
or just the entrepreneurs’ share of the pie?
– Productive vs. unproductive (I.e. political lobbying,
organized crime)
Gates EPP_Lecture 1-7 Spring 2009
In This Course, We Focus on Productive,
Innovative Entrepreneurship
• Our key objective is to improve understanding of
how policy can promote productive, innovative
entrepreneurship
• In reviewing existing research, we will need to keep
in mind that:
– Many (most?) studies that look at
“entrepreneruship” are not, in fact, focused on
this type of entrepreneurship
– There is often a disconnect between policy
goals and policy outcomes
Gates EPP_Lecture 1-8 Spring 2009
Entrepreneurship Can be Analyzed at Many
Different Levels
• Individual level:
– Entrepreneurs and their characteristics,
strategies and achievements
• Firm level:
– Firms and their size, technology they produce,
managerial style and outcomes
• Regional and national level:
– Relationship between entrepreneurial activities
or entrepreneurship public policy and economic
growth
Gates EPP_Lecture 1-9 Spring 2009
Entrepreneurship v. Small businesses
• Entrepreneurship research often focuses on small businesses and
startups
• Innovative corporations may also be considered entrepreneurs
regardless of size
• An expanded definition of entrepreneurship encompasses people
both in small businesses and big corporations and acknowledges
their movement from one status to another
Self-employed
Employee
Entrepreneurial
Schumpeterian
entrepreneurs
Intrapreneurs
Managerial
Managerial business
owners
Executive
managers
Source: Carree & Thurik 2002
Gates EPP_Lecture 1-10 Spring 2009
Entrepreneurship Arises When an Entrepreneur
Employs an Entrepreneurial Opportunity
• Entrepreneurship involves the nexus of two
phenomena (Shane & Venkataraman, 2000)
– The presence of lucrative opportunities
• Determined by social, economic and
technological environment
– The presence of enterprising individuals
• Determined by motivation, aspiration,
knowledge and skills
Gates EPP_Lecture 1-11 Spring 2009
Lecture Overview
• Course overview
• Defining “entrepreneurship”
• The “entrepreneur” and three key elements of
entrepreneurship
• Entrepreneurship and public policy
• Discussion questions
Gates EPP_Lecture 1-12 Spring 2009
Roles of “Entrepreneur”
• The person who assumes the risks associated with
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•
•
•
•
•
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uncertainty
The supplier of financial capital
An innovator
A decision-maker
An industrial leader
A manager or a superintendent
An organizer and coordinator of economic resources
The owner of an enterprise
An employer of factors of production
A contractor
An arbitrageur
An allocator of resources among alternative uses
The person who realizes a start-up of a new business
–
Sources: Hebert and Link, 1989; Van Dijk and Thurik, 1995; Van Praag, 1996
Gates EPP_Lecture 1-13 Spring 2009
Entrepreneur v. Capitalist
• Schumpeterian view suggests that the role of entrepreneur
can be separated from the role of the capitalist
– Entrepreneur identified opportunities in the economy
– Capitalist bears the risk
• Others view risk-bearing as a key element or characteristic of
entrepreneruship (Knight, 1921)
– Capital markets provide an inefficiently low level of capital
to entrepreneurs due to moral hazard and adverse
selection problems
– Entrepreneurs self-finance and bear the risk of failure
– This perspective is consistent with empirical evidence on
liquidity constraints as a barrier to entrepreneurship
(Evans and Bojanovic, 1989; Fairlie and Robb, 2008).
Gates EPP_Lecture 1-14 Spring 2009
Theory Suggests Three Key Elements of
Entrepreneurship
• The existence of entrepreneurial opportunities
• The discovery of entrepreneurial opportunities
• The exploitation of entrepreneurial opportunities
• Implies that policies to promote entrepreneurship
might operate through three distinct avenues
Source: Lee & Venkataraman, 2006
Gates EPP_Lecture 1-15 Spring 2009
Entrepreneurial Opportunities Are Thought to Be a
Basic Characteristics of the Economy
• Entrepreneurial opportunities are essentially profit-making
opportunities:
– Situations in which new goods, services, methods can be
introduced and sold at a price that exceeds production
costs (Casson, 1982)
– Differ from other market opportunities which optimize
existing, rather than new, means-end relationships
• Entrepreneurial opportunities come in a variety of forms
– New products, materials, technology, information,
production process, organizing methods
Gates EPP_Lecture 1-16 Spring 2009
Several Factors May Influence the Discovery of
Entrepreneurial Opportunities
If entrepreneurs are those who identify opportunities, why do
some people discover them and not others?
• Blind luck
• Differences in prior information necessary to identify an
opportunity
– Prior information that is complementary with the new information
triggers an entrepreneurial conjecture
• Differences in cognitive properties
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Ability to identify means-ends relationships
The inclination to construct counterfactual
The likelihood of experiencing inaction inertia
The ability to combine existing concepts and information into new ideas
• Source: Lee & Venkataraman, 2006
Gates EPP_Lecture 1-17 Spring 2009
Several Factors May Influence the Discovery of
Entrepreneurial Opportunities
If entrepreneurs are those who identify opportunities, why do
some people discover them and not others?
• Blind luck
• Differences in prior information necessary to identify an
opportunity
– Prior information that is complementary with the new information
triggers an entrepreneurial conjecture
• Differences in cognitive properties
–
–
–
–
Ability to identify means-ends relationships
The inclination to construct counterfactual
The likelihood of experiencing inaction inertia
The ability to combine existing concepts and information into new ideas
• Source: Lee & Venkataraman, 2006
Gates EPP_Lecture 1-18 Spring 2009
Characteristics of the Individual and the Environment
Influence the Exploitation of Opportunities
• Individuals will only exploit an entrepreneurial opportunity if they
perceive a positive expected values from doing so
• The following characteristics of an individual can influence the
expected value of an opportunity:
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Opportunity cost, including other labor market opportunities
Financial resources
Social capital, social ties to investors -- the network success hypothesis
Education
Prior employment and/or entrepreneurial experience (generalist vs. specialist)
Personality characteristics
• Economic and environmental factors can also influence the expected
net payoff
•
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–
–
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Expected demand
Competitive environment
Cost of capital
Technology life cycle
Source: Lee & Venkataraman, 2006; Companys and McMullen, 2007.
Gates EPP_Lecture 1-19 Spring 2009
Characteristics of the Individual and the Environment
Influence the Exploitation of Opportunities
• Individuals will only exploit an entrepreneurial opportunity if they
perceive a positive expected values from doing so
• The following characteristics of an individual can influence the
expected value of an opportunity:
–
–
–
–
–
–
Opportunity cost, including other labor market opportunities
Financial resources
Social capital, social ties to investors -- the network success hypothesis
Education
Prior employment and/or entrepreneurial experience (generalist vs. specialist)
Personality characteristics
• Economic and environmental factors can also influence the expected
net payoff
•
–
–
–
–
Expected demand
Competitive environment
Cost of capital
Technology life cycle
Source: Lee & Venkataraman, 2006; Companys and McMullen, 2007.
Gates EPP_Lecture 1-20 Spring 2009
Neoclassical Perspective on Entrepreneurship
Emphasizes the Role of Risk Preference
• Fundamental attributes of people, rather than information
about opportunities, determine who becomes an entrepreneur
• Neoclassical equilibrium theories leave little room for
entrepreneurial opportunities
– Assumption that markets are perfect does not allow
people to recognize opportunities that others do not see
– Everyone can recognize all entrepreneurial opportunities
• Existence of entrepreneurs emerges from assumptions that
people differ in terms of their risk preference
– People who are more risk-taking become entrepreneurs;
those who are more risk-averse become employees
Gates EPP_Lecture 1-21 Spring 2009
Alternative Perspectives Emphasize the Role of
Asymmetric Information About Opportunities
• Information about opportunities, rather than fundamental
attributes of people, determine who becomes an entrepreneur
• Entrepreneurial opportunities exist because
– Economies operate in constant transition from equilibrium to
disequilibrium to equilibrium
– Information on market price movement is imperfectly distributed
– Individuals have different beliefs about the relative values of resources,
given the potential to transform them into a different state (Kirzner,
1997)
• Cultural Cognitive School
– Opportunities are subjective
– Distinctive cultural knowledge is the basis for sustainable competitive
advantage (Rindova and Fombrun, 1999; Companvs and McMullen, 2007
• Sociopolitical School
– Opportunities are objective
– Competitive advantage stems from insights gleaned through new social
relationships which provide new data or a reinterpretation of existing
data (Granovetter, 1985; Companvs and McMullen, 2007).
Gates EPP_Lecture 1-22 Spring 2009
Alternative Perspectives Emphasize the Role of
Asymmetric Information About Opportunities
• Information about opportunities, rather than fundamental
attributes of people, determine who becomes an entrepreneur
• Entrepreneurial opportunities exist because
– Economies operate in constant transition from equilibrium to
disequilibrium to equilibrium
– Information on market price movement is imperfectly distributed
– Individuals have different beliefs about the relative values of resources,
given the potential to transform them into a different state (Kirzner,
1997)
• Cultural Cognitive School
– Opportunities are subjective
– Distinctive cultural knowledge is the basis for sustainable competitive
advantage (Rindova and Fombrun, 1999; Companvs and McMullen, 2007
• Sociopolitical School
– Opportunities are objective
– Competitive advantage stems from insights gleaned through new social
relationships which provide new data or a reinterpretation of existing
data (Granovetter, 1985; Companvs and McMullen, 2007).
Gates EPP_Lecture 1-23 Spring 2009
There is Still Much to Learn About
Entrepreneurial Motivation
• Analyses that better control for entrepreneurial
opportunities
• Analyses that account for the fact that individuals
with a high need for achievement may be drawn to
entrepreneurial activities
• Relationship between risk-taking and
entrepreneurship
• Role of other personal characteristics: tolerance
for ambiguity, desire for control, ability to set clear
goals
Gates EPP_Lecture 1-24 Spring 2009
Lecture Overview
• Course overview
• Defining “entrepreneurship”
• The “entrepreneur” and three key elements of
entrepreneurship
• Entrepreneurship and public policy
• Discussion questions
Gates EPP_Lecture 1-25 Spring 2009
Policymakers Believe Entrepreneurship Promotes
Economic Growth
Research strives to find empirical evidence for the link between
entrepreneurship and economic success at several levels
• At the individual level
– Whether and how entrepreneurs perform better than nonentrepreneurs in self-realization and personal wealth
(Block & Wagner, 2006)
• At the firm level
– How size, R&D, managerial style etc. affect firm
performance (Carree & Thurik 2002)
• At the regional/national level
– How entrepreneurship affects economic growth
• Entrepreneruship measured in terms of the number of
start-ups, resident employment composition, firm size
composition affect economic performance (Carree &
Thurik 2002)
• Very difficult to disentangle cause and effect
Gates EPP_Lecture 1-26 Spring 2009
Conceptual Framework Linking Entrepreneurship to
Growth
Gates EPP_Lecture 1-27 Spring 2009
Public Policy Can Influence the Availability of
Entrepreneurial Opportunities
• Macroeconomic policies
– Economic regulation
• Deregulation across the developed countries in the
late 1980s
– Market reform in former central planning economies
(China, Russia, Vietnam and more)
– Industry policy (Japan, S. Korea, Taiwan etc.)
• Other Policies
– Anti-global warming (construction technique example in
the Netherlands)
– Federal R&D investment
– Policies influencing liquidity (bank regulation, interest
rates, etc)
– Creating and maintaining property rights
• Auction of PCS spectrum
Gates EPP_Lecture 1-28 Spring 2009
Public Policy May be Able to Help Individuals Identify
Entrepreneurial Opportunities
• Education
– General
– Science and technology education
– Entrepreneurship education
• Patent system
Gates EPP_Lecture 1-29 Spring 2009
Public Policy Can Help to Encourage Individuals
Exploit Opportunities That They Have Identified
• Entrepreneurship education
• Financial assistance programs
• Health insurance policy
• Bankruptcy laws
• Minority entrepreneurship programs
• Loan programs
– Subsidized loans
– Micro-finance
• Small business research grants
Gates EPP_Lecture 1-30 Spring 2009
Lecture Overview
• Course overview
• Defining “entrepreneurship”
• The “entrepreneur” and three key elements of
entrepreneurship
• Entrepreneurship and public policy
• Discussion questions
Gates EPP_Lecture 1-31 Spring 2009
Discussion Questions
• On what basis should a government evaluate the success of a
program to promote entrepreneurship?
– Are program objectives articulated clearly
– What measures are used to track success and how
closely are they related to goals
– What is success? Starting a business? The success of a
business?
– Against what alternative is success being measured?
– What about cost-benefit trade-offs?
• What types of policies could national, state and local
governments enact in order to generate more entrepreneurial
opportunities?
Gates EPP_Lecture 1-32 Spring 2009
Presentation Papers
• Davidsson, Per and Honig Benson, “The Role of
Social and Human Capital among Nascent
Entrepreneurs”, Journal of Business Venturing
18(2003), pp.301-331
• Lazear, Edward P., "Entrepreneurship" (April 2003).
IZA Discussion Paper No. 760. Available at SSRN:
http://ssrn.com/abstract=333802
Gates EPP_Lecture 1-33 Spring 2009