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Summary theory session 7
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Theory session 7SOURCE: GIMENO
Why do some firms survive while other firms, with equal economic performance, do not?
Unidimensional model of economic performance and survival = this model can be seen as natural
selection, the firms that make profits are selected or adopted by the environment and others are
rejected and disappear. This view implies an unidirectional relationship between economic
performance and survival. Economic performance and survival have the same
determinants/predictors. So, firms who are most likely to discontinue are those that perform the
worst.
This article assumes that survival is not only determined by economic performance, but also by the
organization’s threshold of performance…
Threshold of performance model = the threshold of performance is the level of performance below
which the dominant organizational constituents will act to dissolve the organization. So, survival is
not strictly a function of economic performance, but performance relative to a firm-specific
threshold. This threshold is determined by an entrepreneur’s human capital characteristics. The
findings of this study suggest that firms with low thresholds may choose to continue or survive
despite comparatively low economic performance. Reference/aspiration levels of an owner can be
compared with threshold of performance. By identifying how thresholds differ systematically across
firms, it is possible to explain why, given the same level of performance, some firms exit while others
do not.
Threshold of performance/ability to withstand poor performance is partly is influenced by:
- The mobility of the assets and resources controlled by the organization's owners:
o Dissolve: if the owner of a firm can have alternative uses for the resources, they can
liquidate the firm for a reasonable value. So, if other alternatives for using the
resources are more appealing, owners might choose to dissolve the firm.
o Exit: if there is uncertainty about future pay-offs due to low economic performance,
owners can also choose to exit (although this is not a rational decision). Owners can
also choose to accept the uncertainty with the hope that conditions will improve.
- The buffers or accumulated resources: organizations are able to survive at least until their
original resources are depleted.
- The owners objectives: owners can have other objectives than the maximization of
economic returns. For instance, family businesses offer pride and an identity.
- The voice of non-owners: firms in which non-owner members exercise substantial
organizational influence may remain in business at low levels of economic performance
despite a preference by owners to terminate the business. Non-owners
(managers/employees) have developed firm-specific skills and can put effort in influencing
the decisions-making structure of the organization. In small entrepreneurial firms, the
entrepreneur is likely to exert control over decisions, non-owners are therefore less
influential than in larger/older firms.
- The voice of external constituents: debt-holders, customers, suppliers, government and
community organizations) may persuade low-performing but legitimate organizations to
survive.
- Human capital considerations: according to the human capital theory individuals choose an
occupation/employment that maximizes the present value of economic and psychic benefits
over their lifetimes. Human capital theorists have likened the entrepreneurial exit decision to
,the more general case of an individual's decision to leave current employment.
Entrepreneurs can be viewed as choosing between remaining in the current venture or
obtaining alternative employment. There may be situations in which entrepreneurs do not
continue their business, although they perform better than other entrepreneurs. This can be
due to alternative employment opportunities with more attractive returns, there is a low
physic attachment to the venture, low costs switching into new employments etc.
o General human capital (x1): measured by such constructs as formal education and
the prior work experience of the entrepreneur, may lead to skills that are useful
across a wide range of occupational alternatives. High human capital elevate
economic performance (EPE), but also broaden opportunities in alternative
employment (EPA). So, survival depends on the relative payoff of the venture vs.
alternative.
Hypothesis 1: General human capital will be positively related to the
economic performance of the venture and also to the entrepreneur's
threshold level of performance. Hence, a priori, general human capital has an
indeterminate effect on the likelihood of exit.
o Human capital specific to current venture (x2): results from education, training, or
experience that has a limited scope of applicability. Investments in specific human
capital create value in a particular business (EPE) context but do not have relevance
in alternative occupations (EPA), thus no influence on threshold of performance (TE).
A measure of specific human capital is an entrepreneur's knowledge of customers,
suppliers, products, and services within the context of the venture.
Hypothesis 2: Specific human capital will be positively related to the
economic performance of the venture but should have no influence on the
entrepreneur's threshold level of performance. As a result, specific human
capital should be negatively related to the likelihood of exit.
o Physic income from entrepreneurship (x4): the psychic income, or personal
satisfaction the entrepreneur derives from self-employment. Many entrepreneurs
are motivated, at least in part, by non-economic goals, including satisfaction from
the autonomy of self-employment, liking the type of work or personal attachment
due to parents who are also self-employed (role models). Entrepreneurs who have
an intrinsic motivation for the activity or who come from entrepreneurial families are
likely to obtain a higher psychic income from entrepreneurship (PIE) than those who
do not have those backgrounds and motivations. So, the threshold level of
performance (TE) is lower for entrepreneurs with high intrinsic motivation, indicating
that they may be willing to accept lower economic returns to gain personal
satisfaction from the venture.
Hypothesis 3: High psychic income from entrepreneurship should have no
influence on the economic performance of the venture but should decrease
the entrepreneur's threshold level of performance. As a result, higher levels
of psychic income from entrepreneurship should be negatively related to the
likelihood of exit.
o Switching costs (x6): costs inherent in the act of switching between two alternative
occupations, this does not include the difference in returns between the
occupations. It reflects the efforts and expenses the individual would need to
undertake in job searches and retraining, as well as the psychic costs of not knowing
whether a suitable job can be found. It is expected that older entrepreneurs will be
less willing to switch occupations, due to concerns about job seeking.
, Hypothesis 4: Factors associated with an entrepreneur's cost of switching to
alternative occupations should have no influence on economic performance
of the venture but should decrease the entrepreneur's threshold level of
performance. As a result, higher levels of switching costs should be
negatively related to the likelihood of exit.
o Combination of variables
Entrepreneurs with previous venture start-up or ownership experience may
be endowed with human capital that is valuable in new venture situations
because they have experience in the start-up process and in running their
own business. This experience may not be as valuable in alternatives that
include work in established firm.
Owners with prior entrepreneurial experience may be psychologically
attracted by the thrill of start-up and thus decide to quit and start another
venture unless current performance is high.
The number of jobs previously held by the entrepreneur may signal both
general human capital and switching costs
are likely to gain general human capital that can be applied across a
number of alternatives.
many job changes may signal that the individual was forced out of
those jobs because of poor performance or low degrees of general
human capital.
entrepreneurs who have changed jobs frequently in the past may
face lower switching costs
Functions behind the determination of businesses:
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