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LECTURE 1- ENTREPRENEURSHIP- AN OPPORTUNITY BASED FRAMEWORKCreative Destruction:
Creative Destructive: comparative quiet periods - shocks that destroy advantages & replace - new dominate firms.
→ the continuously product & process innovation mechanism by which new production units replace outdated ones // essential
fact of capitalism (Schumpeter)
Disruptive Technologies:
New entrants are associated with the creation of new disruptive technologies → radical innovations | Established firms→
incremental innovations.
(Shane & Venkataraman, 2000): Entrepreneurship as an opportunity-base framework
Entrepreneurship as the ability to exploit opportunities:
- Entrepreneurship (Innovation): Discovery + Exploitation (development & commercialization) of a lucrative opportunity
- Opportunities: (selling good/services/raw materials/organizing methods that can be sold higher than their cost | Does not
require the creation of new organizations- can be done within an established firm.
Opportunity discovery- process to identify them is subjective- Heterogeneity: (e.g. different information, specific capabilities)
generates a comparative advantage that allows some individuals and not others to act on certain opportunities
4 Types of innovations: (depending on the locus/ key stages of entrepreneurship)
All in house - Incumbent Discovers + Incumbent Exploits it (e.g. Apple Ipad) (Note: Sometimes, the incumbent may not
commercialize the product in order to avoid the disruption of current products)
External Invention - Startup Discovers + Incumbent Exploits it (e.g. Hunt & W.R.Grace)
Spinout - Incumbent Discovers + Startup Exploits it (e.g. Creation of a new firm/ startup to exploit)
Entrepreneurial Inventor - Startup Discovers + Startup Exploits it (e.g. Facebook)
Comparative Advantages/Disadvantages of startup & incumbent firms through 3 dimensions:
,SUMUP: Entrepreneurship/Innovation is about discovering & exploiting opportunities by incumbent & startups/new entrants-
depending on their comparative advantages - Entrepreneurship does not only happen in new ventures.
(Asbebro, 2003): measures the returns to innovation done by startups & incumbents.
Return on independent inventive efforts/activities is less (11.4%) - because there are a lot of firms that fail - than in the
established firms (25%)- better in ripping returns / suggestion- incumbents might have more competitive advantages.
(Garcia-Macia et al., 2019)- measures how destructive is innovation:
Creative disruption- expectation: Incumbents lose jobs to new entrants -> Not proved- creative disruption doesn't account for
that much | most companies that shrank did so but by little (destructive effects on employment are not pervasive) | most
growth comes from small improvements/ incremental innovations that incumbents already own -> proposition: the fact about
capitalism might be steadily incremental innovation and not creative disruption.
(De Loecker et al., 2020):
Corporations seem to be able to gain an increasing market power w/ the increase in the markups (price/marginal cost of
production)- inconsistent w/ incumbent firms being threatened by new entrants/ aligned with the history that incumbents might
became dominant.
(Bloom et al, 2020; & Jones, 2010):
Describe a pattern in which ideas are getting harder to find because research productivity is declining- need for more research
efforts to produce the same number of innovations than before.
Burden of Knowledge - As the knowledge keeps advancing/ becomes more sophisticated - more difficult to innovate & it’s
necessary to be better in accessing resources than before.
(Azoulay et al, 2020):
Successful entrepreneurs are middle aged (learning effects)- 45 is the mean age for founding 1-1000 fastest growing ventures.
Resources/Networking are really important to exploit an opportunity.
SUMUP: Opportunities are exploited by individuals who have a comparative advantage over other agents.
Evidence suggests that the ability of incumbents to innovate might have increased over time.
Articles:
Shane, S. and S. Venkataraman (2000), The Promise of Entrepreneurship as a Field of Research
Definition of entrepreneurship
Entrepreneurship involves the nexus of two phenomena:
1. The presence of lucrative opportunities
2. The presence of enterprising individuals
- Entrepreneurship is the scholarly examination of how, by whom, and with what effects opportunities to create future goods and
services are discovered, evaluated, and exploited. Hereby, the field involves the study of the sources of opportunities, the
processes of discovery, evaluation, and exploitation of opportunities, and the set of individuals who discover, evaluate, and
exploit them.
- To have entrepreneurship, you need to have entrepreneurial opportunities: those situations in which new goods, services, raw
materials, and organizing methods can be introduced and sold at greater than their cost of production.
, Entrepreneurial opportunities differ from the larger set of all opportunities for profit, particularly opportunities to enhance the
efficiency of existing goods, services, raw materials, and organizing methods, because the former require the discovery of new
means-ends relationships, whereas the latter involve optimization within existing means-ends frameworks
- There are three different categories of opportunities:
1. The creation of new information, as occurs with the invention of new technologies.
2. The exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography.
3. The reaction to shifts in the relative costs and benefits of alternative uses for resources, as occurs with political, regulatory, or
demographic changes.
- Entrepreneurship requires that people hold different beliefs about the value of resources.
1. Entrepreneurship involves joint production, where several different resources have to be brought together to create the new
product or service.
2. If all people (potential entrepreneurs) possessed the same entrepreneurial conjectures, the incentive to pursue the
opportunity would be eliminated (having to divide the profit).
- Entrepreneurial opportunities become cost inefficient to pursue because entrepreneurial opportunities depend on asymmetries
of information and beliefs.
1. Entrepreneurial opportunities often arise from gaps or imbalances in information and beliefs among economic actors. When
individuals identify an opportunity to earn entrepreneurial profit, they act upon it, motivated by the potential for financial gain.
However, as these opportunities are exploited and success becomes evident, other actors in the market try to imitate the initial
innovator in order to also profit from the opportunity. This competition and imitation can reduce the profitability of the
opportunity over time.
2. The exploitation of opportunity provides information to resource providers about the value of the resources that they possess
and leads them to raise resource prices over time, in order to capture some of the entrepreneur's profit for themselves (reduces
incentive of entry).
why do some people and not others discover particular entrepreneurial opportunities? 2 broad categories of factors:
1. Information corridors: human beings all possess different stocks of information, and these stocks of information influence their
ability to recognize particular opportunities.
2. The cognitive properties necessary to value it (cognitive properties): people must be able to identify new means-ends
relationships that are generated by a given change in order to discover entrepreneurial opportunities.
The decision to exploit entrepreneurial opportunities.
Discovering an opportunity is not sufficient, next the entrepreneur must decide to exploit the opportunity. -> Resulting from
joint characteristics of the opportunity and the nature of the individual.
Exploitation is more common when: 1. Expected demand is large 2. Industry margins are high 3. Technology life cycle is young 4.
Competition not too low – too high 5. Cost of capital is low 6. Population-level learning from other entrants is available
Individual differences: not all decide to exploit but a greater chance of exploitation results when:
1. Greater financial capital 2. Useful experience in entrepreneurship 3. Also influenced by individual differences in perceptions
- Entrepreneurship is less likely to take the form of de novo startups when: • Capital market imperfections make it difficult for
independent entrepreneurs for secure financing.
- Entrepreneurship is more likely to take the form of de novo startups when: • when scale economies, first mover advantages,
and learning curves do not provide advantages to the existing firms and when industries have low barriers to entry. • Information
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