Instrumental Value Theory and the Human Capital of Entrepreneurs
Eli Gimmon and Jonathan Levie
Eli Gimmon is a Lecturer at Tel-Hai Academic College, Israel and Jonathan Levie is a Reader in the Hunter Centre for Entrepreneurship, University of Strathclyde.
The authors would like to thank the two anonymous reviewers and the editor of the Journal of Economic Issues for their comments.
Abstract: Given the contribution of Schumpeterian entrepreneurship to technological progress and well-being, the
accuracy of investment decisions by venture capitalists is a societal issue. Venture capitalists find the human capital of
entrepreneurs difficult to assess. This paper employs instrumental value theory to assess the value of different human
capital factors to the performance of new ventures. A meta-analysis of 29 previous empirical studies that examined the
effect of founder’s human capital on new venture performance suggested that instrumental value theory holds promise
as a guide for research on entrepreneurs’ human capital and new venture performance. It could also help venture
capitalists to make better investment decisions, benefiting society in general.
Keywords: instrumental value theory, entrepreneurship, human capital
JEL Classification Codes: B25, B52, L26, M13, M21
In institutional economics, entrepreneurs are seen to play a critical role in the conversion of technological progress into
economic development and human well-being (McDaniel 2003; 2005; Klein 1988). Although Alfred Marshall and
Thorstein Veblen recognized this in the 19th century, Joseph Schumpeter (1934; 1943) was the first to describe the role
of innovative entrepreneurs in the evolution of the economy in detail. Schumpeterian entrepreneurs disrupt the status
quo by introducing new and better ways of doing things. This typically requires considerable investment of resources to
succeed (see Javary 2004 for an example). For a new venture with little internal financial reserves to draw on, this
means external funding. As Schumpeter himself pointed out, “credit is primarily necessary to new combinations”
(Schumpeter 1934, 70).
At the extreme end of Schumpeterian entrepreneurship are new ventures that are so innovative and asset-poor
that conventional debt finance is not appropriate. A completely different form of funding is required, one that shares
in the upside gain but also accepts the downside risk. This is venture capital. To illustrate how unusual this form of
financing is, only around 8% of American start-up funding needs are met by venture capital (Reynolds 2007). Of the 2
million or so start-up attempts in the United States each year, only around 800 are invested in by venture capitalists,
yet venture-capital-backed firms provide 8% of jobs in U.S. businesses (Shane 2008). Availability of external capital,
then, is a critical institutional factor for Schumpeterian entrepreneurship.
The accuracy of venture capitalists in picking which Schumpeterian entrepreneurs to back is a societal issue, since
poor judgment will lead to a loss of the benefits that society can reap from technological progress. Not only will society
not gain from the innovations these Schumpeterian entrepreneurs seek to introduce, but the venture capitalists will
find their sources of capital drying up as their losses induce fund managers to invest their money elsewhere. Much
decision-making in venture capital is based on intuition and herd behavior (Zider 1998). A wide range of evidence
suggests that the accuracy of venture capitalists’ predictions is not high, with a small number of spectacular successes
boosting the return rates of some funds and masking a low overall “hit” rate in the industry (Zacharakis and Meyer
2000). Indeed, following poor returns, investment in seed and early-stage private sector venture capital funding has
been in relative decline recently, particularly in Europe (Jääskeläinen, Maula and Murray 2007). In summary, given the
economic importance of Schumpeterian entrepreneurship and its dependence on substantial equity funding,
investment choice by venture capitalists is worthy of attention, particularly given the interest of institutional
economists in value and judgment.
Venture capitalists invest based on their judgment of the human and social capital of the entrepreneur(s), the
potential in the technology and the potential in the market (Zacharakis and Shepherd 2005). One of the most difficult
issues for many venture capitalists is assessing the human capital of the founder (Levie and Gimmon 2008). Human
capital (Becker 1975) has more generally been recognized as a key success factor in new venture performance (Stuart
and Abetti 1987; Hart, Stevenson and Dial 1995). A surprising feature of the human capital literature is that there
appears to be no ex-ante method of predicting which of the different forms of human capital commonly employed in
the entrepreneurship literature, and by investors in new ventures, might be expected to have an effect on performance.
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In other words, no commonly accepted theory is routinely used to sort or classify founder’s human capital factors exante as relevant or irrelevant to venture performance.
We propose the use of instrumental value theory as interpreted by J. Fagg Foster (Tool 1993a; Ranson 2008) as a
tool for ex-ante prediction of the effect of different forms of human capital on new venture performance. In this article,
we test its ability to predict performance through a meta-analysis of published empirical studies of founder’s human
capital and performance. We argue that the use of instrumental value theory is valid in this case because accurate
choice of Schumpeterian entrepreneurs by venture capitalists is in the interests of society generally, not just venture
capitalists.
As Baldwin Ranson (2008) has remarked with specific reference to instrumental value theory, applicability is the
final test of the correctness of theories. Although applying instrumental value theory as an aid to ex-ante prediction
might appear to violate Deweyan principles that context is key (Dewey 1939; Gordon 1990) and that instrumental
value is dynamic (Klein 1988), we argue that by applying it in the narrow case of new venture performance, and
remaining sensitive to alternative interpretations, some degree of useful generalization is possible. We find the
instrumental criterion helpful as a way of ordering, as a first approximation, the value of different forms of human
capital to Schumpeterian entrepreneurship, while recognizing that this approach has its critics.
This study aims to make a contribution to instrumental value theory through illustrating its value in classifying
human capital that is useful for predicting new venture performance. This is important because there are many forms
of human capital, and a classification enables a theory-driven focus on the human capital that really matters in a
particular context. The paper also answers a call for further meta-analysis in economics (Pressman and Montecinos
1996, 879). A third contribution is to suggest how the instrumental value framework can guide further research in
areas that have not been addressed before, for example by separating out the instrumental and ceremonial value of
social capital factors such as reputation.
Instrumental Value Theory and New Venture Performance
Veblen’s recognition of the importance of technological innovation to social progress, and how such progress can be
hindered, is a central concern of institutionalism. One way in which progress can be hindered is what Clarence Ayres
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(1961, 31) refers to as “ceremonial adequacy,” a kind of imitation of technological adequacy. He illustrated this with
the following example: “The tribal medicine man purports to be altering the course of events in imitation of the tool
activities by which technicians really do alter the course of events. Recognizing it makes possible a clear differentiation
of technological reality from ceremonial fantasy, and so the real values from fancies, or pseudo values.”
These ideas were built on by Foster and refined by Marc Tool into the notion of an instrumental value principle,
with pre-defined ends: preservation of the species (“the continuity of human life”) and meritocracy (“non-invidious recreation of the community”), and means: “the instrumental use of knowledge” (Tool 1979, 293). As an aid to
employing this principle in analysis, Bush and Tool (2003) introduced the concepts of instrumental value and
ceremonial value. They define factors with “instrumental value” as tools or skills employed in the application of
evidentially warranted knowledge to problem-solving processes. Ceremonial values “provide the standards of judgment
for invidious distinctions, which prescribe status, differential privileges, and master-servant relationships, and warrant
the exercise of power by one social class over another” (Bush 1987, 129). In other words, factors with “ceremonial
value” are defined as status symbols or labels.
Instrumental value theory in application, as proposed by Tool, has been criticized as ambiguous (Samuels 1995,
99), and as little more than value judgment based on two desirable conditions, when other equally desirable conditions
might have been chosen instead (Gordon 1990). In turn, these criticisms have been refuted by Tool (1990) with the
argument that the criteria of instrumental value theory are neither absolute nor eternal; they are normative objects of
inquiry. Tool regarded the instrumental value principle “a product of inquiry and subject to revision or abandonment
by further inquiry. It has no standing except as a construct for inquiry and as a tool for analysis and judgment. Its
relevance is repeatedly tested by its incorporation in, and guidance of, inquiry and its use as a judgmental standard in
problem solving . . . It is derived exclusively from the experience continuum of people and . . . it articulates what often
has historically been meant by progress, reform, or betterment” (1110). Supporting this view, Bush has noted that a
particular activity or behavior may have either instrumental or ceremonial significance, or sometimes it may possess
both ceremonial and instrumental significance (Bush 1987).
While the argument over the validity of the Bush/Tool approach to instrumental value theory has never been
satisfactorily resolved, there is general agreement that what is instrumental in one context might be ceremonial in
another. Thus, value judgments are context-dependent. For any particular context, a judgment that an attribute is
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ceremonial or instrumental is continually subject to review as the priorities and knowledge of society changes. This
should not prevent the application of instrumental value theory, but rather it makes any conclusions tentative and
subject to review. For our purposes, the principal merit of the value dichotomy is that it forces us to ask “what is the
instrumental value of this characteristic,” and not accept the face validity, so to speak, of a label. Instrumental value
theory has been applied to a range of economic issues, including pricing in the international petroleum industry (Tool
1993b), the granting of intellectual property rights to innovators (Adkisson 2004), timber resource use in Maine
(Welcomer and Haggerty 2007), and government and household deficits (Todorova 2007).
Few attempts have been made to link institutional economics to non-cognitive human capital, that is, personal
human resources rather than personality resources. One of these is Figart (2003), who examines institutional policies
that provide non-invidious employment. While the original focus of Veblen (1899), appropriate to his time, is
invidious distinctions between the leisure classes and the working classes, Deborah Figart elaborated on ceremonial
distinctions based on gender, race-ethnicity, class identity, nationality, or sexual preferences. She employed the
instrumental value theory to seek greater understanding of human capital development.
A second example, from the field of entrepreneurship (Gimmon 2006), explores how investors appeared to invest
in entrepreneurs who did not have the relevant knowledge and experience of growing a new venture, but did have high
credentials and awards from academia. These academic credentials did not predict subsequent performance, when
relevant knowledge and experience (which did predict subsequent performance) were controlled for.
This paper employs instrumental value theory to assess the value of different human capital resources1 of venture
founders in terms of their likely effect on subsequent venture performance. In other words, we use instrumental value
theory as a thinking device to work through the likely effect of different types of human capital on new firm
performance. We then test whether this method is better than chance (the simplest alternative means) by conducting a
meta-analysis of different studies of human capital and new venture performance. This represents our attempt at an
instrumental evaluation, or an assessment of the effectiveness of the instrument used to achieve the purpose relative to
some alternative means (Gordon 1990). Using this theory we can posit that any specific type of founder’s human
capital has instrumental value if it contains the means and abilities for enhancing performance of the founder’s
venture.
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Bush and Tool’s concept of “ceremonial value” is worth defining in this context. If a particular type of founder’s
human capital does not contain the means and abilities for enhancing performance of the founder’s venture, but is
nevertheless used in practice as a measure of human capital, and expected by third parties in society such as financial
investors to influence performance, then in the Bush/Tool formulation of instrumental value that characteristic has
ceremonial value.
While ceremonial criteria are generally seen in the institutionalist tradition as invidious from a societal
perspective, John Meyer and Brian Rowan (1977, 351) suggested that
(c)eremonial criteria of worth . . . are useful to organizations: they legitimate organizations with internal
participants, stockholders, the public, and the state . . . The incorporation of structures with high
ceremonial value, such as those reflecting the latest expert thinking or those with the most prestige, makes
the credit position of an organization more favorable. Loans, donations, or investments are more easily
obtained.
While this may be true for the organization, it is not true for society in general. Once performance becomes
disconnected from means and abilities, and becomes dependent on ceremonial, tribute-paying, and rent-seeking, then
productive entrepreneurship becomes unproductive (Baumol 1990) and the provision of resources such as venture
capital to the entrepreneurial function becomes needlessly inefficient from a societal perspective.
In summary, instrumental value theory would appear to be a useful tool to identify which human capital factors
might affect new venture performance and which might not.
A Test of Instrumental Value Theory
As Foster pointed out, “the building of a generalization and the process of verification through application [are] not
separate, nor can either exist without the other” (Foster 2007, 88). In this spirit, a meta-analysis of previous empirical
studies of human capital and venture performance was conducted to assess the value of instrumental value theory in
classifying ex-ante the instrumental value of different forms of founder’s human capital. Meta-analyses are still relatively
5
rare in the economic literature, despite Steven Pressman and Veronica Montecinos’ (1996, 879) call for meta-analysis
as a way of breaking down barriers between different schools of thought and extracting further understanding from
existing empirical work. Meta-analysis is a set of statistical procedures designed to accumulate results across
independent studies that address a related set of research questions (Hunter, Schmidt and Jackson 1982). The
accumulation of results across different studies provides more accurate representation of the population relationship
than is provided by individual study estimators. Meta analysis derives generalization and practical simplicity from
studies that are not the same by ignoring distinctions among the studies that make no important difference (Glass,
McGaw and Smith 1981).
We identified 12 different human capital factors of new ventures’ founders that had been proposed in previous
empirical studies as affecting the performance of their ventures. We then used instrumental value theory to classify
each factor as having instrumental value or not in this context. After this, we noted the extent to which each of these
factors actually predicted venture performance in those studies. We expected the founder’s human capital factors that
were classified ex-ante as having instrumental value to positively affect venture performance and the founder’s human
capital factors that were classified ex-ante as not having instrumental value to have no effect on venture performance.
Finally, we tested the outcomes using a statistical test to confirm that the difference in proportions of factors judged ex
ante to be instrumental or not and factors found ex post to affect performance or not were not due to chance. This
methodology ensured that we would not succumb to tautology, in other words that we would not define our constructs
on the basis of outcomes.
Founder’s Human Capital Resources
Following an extensive literature search, we reviewed 29 empirical studies of new venture performance that included
human capital variables. These studies represent all significant, cited, empirical work on the relationship between
founder’s human capital and new venture performance up to early 2007. The reviewed studies are (by chronological
order of year of publication): Rothwell et al. (1974); Cooper and Bruno (1977); Maidique and Hayes (1984); Maidique
(1986); Stuart and Abetti (1987); Goslin (1987); Perry, Meredith and Cunnington (1988); Dubini (1990); Bruderl,
Preisendorfer and Zeigler (1992); Reynolds (1993); Cooper, Gimeno-Gascon and Woo (1994); Lussier (1995; Lussier
6
and Pfeifer 2001); Yusuf (1995); Hart, Stevenson and Dial (1995); Bamford, Dean and McDougall (1996); Low and
Abrahamson (1997); Gartner, Star and Bhat (1998); Gadenne (1998); Shepherd, Douglas and Shanley (2000); Baum,
Locke and Smith (2001); Shane and Stuart (2002); Kakati (2003); Florin Lubatkin and Schulze (2003); Brown and
Hanlon (2004); Lee and Lee (2004); Schwartz, Harms, and Grieshuber (2005); Lee and Chang (2005), Gimmon
(2006), Hsu (2007).
These studies tested the performance of new ventures as measured by monetary indicators (such as growth of sales
profits), or by market share, or if these kinds of indicators were premature then performance was indicated by survival
versus discontinuity of the venture. All of these criteria for performance are commonly used in the literature of
entrepreneurship as measures of venture performance; each has flaws and no one measure has emerged as the best
measure of performance for new ventures. Most of the studies used quantitative techniques to analyze the data, which
was either primary data of a chosen sample or secondary data. A human capital factor was considered to affect venture
performance if multivariate statistical analysis showed an independent (that is, controlling for other factors) association
with a p value of .05 or less, a cutoff value that is commonly used in the social sciences to identify associations that are
highly likely (in a statistical sense) to be systematic. The 29 studies covered a wide range of industry sectors in
developed economies, and over one third of the cohorts (11) were in high technology sectors.
Upon reviewing these 29 studies, we classified all their tested individual variables that measured different aspects
of founder’s human capital into as few types as possible by comparing the definitions of the variables. We preserved the
original terminology used in the literature as far as possible. This resulted in 12 different types being identified. These
12 founder’s human capital factors are (in alphabetical order) as follows:
1.
Academic titles (doctor or professor)
2.
Age
3.
Education
4.
Entrepreneurial mind-set — this is a commonly used term in the literature for a wide range of
entrepreneurial personality, culture and sense factor constructs.
5.
Ethnicity
6.
Founder’s team compatibility
7
7.
Gender
8.
General management experience
9.
Industry-related experience
10. Learning ability
11. Parent(s) were entrepreneurs
12. Start-up experience
Next, using instrumental value theory, we categorized these 12 human capital factors as having instrumental value
or not having instrumental value in the context of new venture performance. Instrumental value relates to tools and
skills that are employed in the application of knowledge to problem-solving processes (Bush 1983, 37). These tools and
skills are resources containing the required means and abilities for achieving the goals or leading to the desired results.
Instrumental value “is rooted in causal comprehension of events and consequences” (O’Hara and Tool 1998, 7).
Contextualizing this general definition, human capital factors having instrumental value would be those that are
applied in problem-solving processes containing the means and abilities for enhancing venture performance, which are
those tools and skills containing the required means and abilities for achieving the founder’s goals for the new venture.
Looked at in this way, the factors listed above that possess these qualities are easily identifiable. They are those that
denote relevant skills, knowledge or experience, such as prior industry experience, management experience, start-up
experience (provided learning had taken place), founding team compatibility (this would facilitate the application of
relevant experience and knowledge of different team members), learning ability (since venture creation is an iterative
process) and perhaps aspects of education, and entrepreneurial mind-set, where relevant. We labeled these as having
“instrumental value,” and following the theory we predicted that all of these should have positively affected venture
performance in all empirical studies.
All other factors were classified by default as not having instrumental value. As pointed out by Bush and Tool,
certain characteristics of individuals have no instrumental value but may nevertheless be valued by society. This can
result in a misallocation of resources, a central concern of instrumental value theorists (Tool 1993b). We note that
some of these non-instrumental factors, which Bush and Tool might label “ceremonial” by virtue of their value by
society, might correlate weakly with certain instrumental factors, such as relevant experience or social capital (Honig,
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Lerner and Raban 2006; Baron and Markman 2000). If the effects of these underlying factors of instrumental value are
not controlled for in assessment of human capital, these “ceremonial” factors might be interpreted by others (including
providers of finance and researchers) as signals of instrumental value.
As an example, “education” might be measured using metrics of instrumental value, for example training in a
relevant technology or management skill, or with a proxy measure, such as “academic title,” which might well have no
instrumental value independent of its association with education. “Parents were entrepreneurs” may be a weak proxy
for entrepreneurial mindset or industry, general management, or start-up experience. “Age” is often used as a proxy for
experience, ability, and physical condition (Cooper and Gimeno-Gascon 1992). However, youth can have high
ceremonial value in some societies and old age can have high ceremonial value in others. “Gender” can transmit very
different ceremonial messages in different cultures, as well as being a weak proxy for experience (Lerner, Brush and
Hisrich 1997; Carter et al. 2007). These examples serve to illustrate the value of instrumental value theory in
sharpening value judgment. With instrumental value theory, the dangers of proxy measures are revealed.
In summary, the founder’s human resources employed in previous studies of new venture performance that we
considered to have instrumental value are (in alphabetical order): education; entrepreneurial mind-set; founder’s team
compatibility; general management experience; industry related experience; learning ability; and start-up experience.
Those considered as not having instrumental value were: academic titles; age; ethnicity, gender; and parents were
entrepreneurs. Our next step was to identify which factors significantly enhanced new venture performance in all the
studies in the meta-analysis, and to analyze any patterns that emerged from a comparison of instrumental and noninstrumental factors. The results of this analysis are reported in the next section.
Results
Table 1 cross-tabulates the factors and studies used in the meta-analysis and for each study, the table shows whether
each factor was measured and if so whether it was found to significantly enhance new venture performance.
Insert Table 1 about here
9
As Table 1 shows, only half of these factors have been tested by more than a handful of studies, and only two of
these, education and founding team compatibility, show overwhelming consensus on an effect. We return to the issue
of model specification below.
Table 2 presents the pattern of ex-ante classification of human capital using instrumental value theory and ex-post
classification of those human capital factors that enhanced performance and those that did not. Meta-analysis of the
findings of the 29 previous empirical studies tends to support our a-priori classification. Of the total of 85 tests of
independent effects of one of these factors on performance, 69 were on factors we classified ex-ante as instrumental, and
16 were on factors we classified ex-ante as not instrumental. Of the 69 tests on instrumental factors, 53 were significant
and 16 were not, a ratio of 3.3:1. Of the 16 tests on non-instrumental factors, 8 were significant and 8 were not, a ratio
of 1:1.
Insert Table 2 about here
In all, over three-quarters of the tests on instrumental value factors showed significant independent effects, while
only half of the tests on non-instrumental value factors showed significant independent effects.
A statistical chi-square test of all significant and non-significant factors in the 29 previous studies confirmed that
the probability of finding this pattern due to chance, assuming the tests were all independent, was 0.0318, or around 3
in 100. This is within the p < .05 cut-off traditionally deemed in the social sciences as evidence of a systematic
association between variables when employing statistical tests. This test assumes independence of observations (in this
case, each test of an independent effect counts as one observation). Our test violates this assumption since each
observation is nested in one of 29 different multivariate analyses, each of which in turn varies by number of factors and
number of non-human capital factor control variables employed. Another option would be to choose a series of
comparisons of one instrumental factor and one non-instrumental factor at random, test for significance, repeat, and
test the pattern that emerges. A series of ten such tests using a table of random numbers and Fisher’s exact test drew
ten successive non-significant results. This does not support the case that using instrumental value theory would
produce a better than chance prediction ex-ante.
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This result prompted us to reflect the patterns in Table 2 back on the patterns in Table 1. We found that every
study that tested for effects of non-instrumental factors failed to test all instrumental factors with which these noninstrumental factors might reasonably be expected to correlate weakly. In other words, the independent effects or separate
influences of the factors we classified as non-instrumental were not fully revealed by these studies. For example, the
Reynolds 1993 study measures gender effects without measuring management experience. It finds gender to have a
significant effect. The Cooper, Gimeno-Gascon, and Woo 1994 study, Lussier 1995 study and Lussier and Pfeifer 2001
study measure parental effects without measuring start-up experience. They find parental effects to be significant. The
Schwartz, Harms, and Grieshuber 2005 study finds age and gender to be significant factors, but it only includes two
out of the seven instrumental value factors in its model.
While it is not possible to know what the results of these studies would have been had they measured all 12
human capital factors instead of some of them, instrumental value theory would lead us to suggest that at least some of
the significant results for non-instrumental value factors may be due to non-measurement of weakly correlating
instrumental factors.
In Table 2, the non-instrumental factor with the greatest proportion of significant to non-significant studies is
gender. The effect of gender on venture performance has been much studied. Possible explanations for women’s
apparent lower rate of success in growing new businesses include gender differences in choice of industry, a lower
average quantity of industry, management and start-up experience due to different labor market experiences associated
with gendered family responsibilities, and different socialization experiences of males and females resulting in a lower
quantity and/or quality of instrumental social capital among female entrepreneurs (Lerner, Brush and Hisrich 1997;
Manolova et al. 2007). Although gender discrimination by lenders has also been suggested as a cause (Cooper, GimenoGascon and Woo 1994, 389), studies suggest that the independent effect of the gender of loan applicants is modest
(Carter et al. 2007). Again, this literature suggests that had researchers controlled for instrumental factors, thereby
measuring the independent effects of factors we classified as non-instrumental, their results for non-instrumental factors
might have been different.
Conclusion
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In this study, instrumental value theory was employed to provide better assessment of founder’s human capital and to
facilitate a deeper understanding of the contribution of founder’s personal resources to venture performance. The
usefulness of the theory in addressing the research questions posed is demonstrated by the correct prediction of 72% of
associations between different forms of human capital and performance in a meta-analysis of 29 empirical studies.
Secondly, it suggests that those studies that found significant effects for factors we classified ex-ante as non-instrumental
may have done so because of under-specification of their models. We conclude that much better specification of
models is required if empirical research on human capital and new venture performance is to progress.
The classification should also be of value to investors as they seek to assess the human capital of founders. Some
founders may wish to offset weaknesses in their instrumental human capital by displaying high levels of “ceremonial”
capital. As a specific example, one could imagine a scenario where an entrepreneur who does not have the relevant
knowledge and experience of growing a new high technology venture would present his high credentials and awards in
different fields in order to convince investors he is capable of growing a successful new venture. Time-poor investors
can be tempted to take assessment shortcuts, such as assuming that a high technology new venture founder with an
academic title has the necessary technical experience without actually checking this (Levie and Gimmon 2008).
Utilizing instrumental value theory could help investors to better predict new venture performance. For example, when
a Boston Venture Capitalist says “entrepreneurs from Ottawa get attention” (Mason, Cooper and Harrison 2002, 274),
he is using the founders’ origin as a proxy for attributes related to their human and social capital. Instrumental value
theory would guide financial investors to check founders’ human and social capital more directly.
Finally, the use of instrumental value theory in this context would benefit society, by directing resources more
accurately to founders with high instrumental human capital. This would increase the rate of Schumpeterian
entrepreneurship and, as a result, technological progress.
Limitations and Further Research
In this article we considered only human capital factors and not social capital factors. Further work could address this
issue. Instrumental value theory would classify social capital that is employed in new venture creation and management
as instrumental. However, it warns us that, just as in the case of human capital, the use of status symbols as proxies for
12
social capital could misallocate resources. For example, scientist-founders can bring reputation to the venture (Murray
2004), and reputation influences investors (Harrison, Cooper and Mason 2004). Certain commonly used measures of
reputation in business, such as the perceived prestige of the founder’s alma mater in the United States, honors such as a
Nobel Prize in the United States or a knighthood in the United Kingdom, or army rank such as a retired general in
Israel, appear from an instrumental value theory perspective to be ceremonial in nature; they may or may not correlate
with instrumental factors such as the quality of the founder’s social network or technical skills. As Peteraf (1993, 187)
has pointed out, “a brilliant Nobel Prize winning scientist may be a unique resource, ( . . . but . . . m)anagers should ask
themselves if his productivity has to do, in part, with the specific team of researchers of which he is a part.” We suggest
further research could apply the theory of instrumental value to founder’s social capital and tease out the ceremonial
value of “reputation” from its instrumental value. We predict that if the instrumental factors of human and social
capital are fully controlled, the ceremonial nature of status symbols will in turn be fully revealed.
Note
1.
We employ the term “resource” in the same way as resource-based theory employs it as something potentially valuable to the firm and which
might contribute to its competitive advantage (Alvarez and Busenitz 2001, 756).
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