Entrepreneurship and Public Policy

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

Course Overview • Motivation • Goals • Organization • Requirements • Logistics

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

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)

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

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

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 Source: Carree & Thurik 2002

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

Roles of “Entrepreneur” • The person who assumes the risks associated with 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

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).

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

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

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

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.

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

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).

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

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 non-entrepreneurs 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

Conceptual Framework Linking Entrepreneurship to Growth

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

Public Policy May be Able to Help Individuals Identify Entrepreneurial Opportunities • Education • General • Science and technology education • Entrepreneurship education • Patent system

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

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?

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

Entrepreneurship and Public Policy