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Summary Innovation & Entrepreneurship (2024)
- Instelling
- Rijksuniversiteit Groningen (RuG)
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LECTURE 1: ENTREPRENEURSHIP – AN OPPORTUNITY-BASEDFRAMEWORK
This lecture will first give a very brief introduction to the organization of the course; we will
especially focus on what is expected from you in the assignment and give you some clues
on how to find a suitable product innovation for the group assignment. However, the largest
part of the lecture introduces the concepts of innovation and entrepreneurship and their
interrelationships. Finally, we discuss how different measures can be used to measure
innovation success.
Mandatory Literature
1. Shane, S. and S. Venkataraman (2000), The Promise of Entrepreneurship as a
Field of Research, Academy of Management Review, 25(1), 217-226,
https://doi.org/10.2307/259271
A performance advantage over other firms is not a sufficient measure of entrepreneurial
performance, because a performance advantage may be insufficient to compensate for the
opportunity cost of other alternatives, a liquidity premium (=the additional compensation
used to encourage investments in assets that cannot be easily or quickly converted into cash
at fair market value) for time and capital, and a premium for uncertainty bearing.
(Performance advantage only useful for strategic management)
DEFINITION OF ENTREPRENEURSHIP
Entrepreneurship involves the intersection of two phenomena:
1. the presence of lucrative opportunities and
2. the presence of enterprising individuals.
The field of entrepreneurship as the scholarly exam ination of how, by whom, and with
what effects opportunities to create future goods and services are discovered, evaluated,
and exploited
The field involves:
- the study of sources of opportunities;
- the processes of discovery, evaluation, and exploitation of opportunities.
- the set of individuals who discover, evaluate, and exploit them.
Organization scholars are fundamentally concerned with three sets of research questions
about entrepreneurship:
1. why, when, and how opportunities for the creation of goods and services come into
existence;
2. why, when, and how some people and not others discover and exploit these
opportunities;
3. why, when, and how different modes of action are used to exploit entrepreneurial
opportunities.
Approach:
1. we take a disequilibrium approach, which differs from equilibrium approaches in
economics and social psychology.
, a. Entrepreneurial behavior: the tendency of certain people to respond to the
situational cues of opportunities.
2. Entrepreneurship does not require but can include, the creation of a new organization
3. The framework complements sociological and economic work in which researchers
have examined the population-level factors that influence firm creation.
a. Focus of framework
1. We focus on the existence, discovery, and exploitation of
opportunities;
2. We examine the influence of individuals and opportunities, rather than
environmental antecedents and consequences; and
3. We consider a framework broader than firm creation
4. complements research on the process of firm creation (the conditions under which
entrepreneurial opportunities are exploited through firms and markets)
The Existence of Entrepreneurial Opportunities
To have entrepreneurship, you must first have entrepreneurial opportunities.
Entrepreneurial opportunities are those situations in which new goods, services, raw
materials, and organizing methods can be introduced and sold at greater than their cost of
production.
- The opportunities themselves are objective phenomena that are not known to all
parties at all times.
Because the range of options and the consequences of exploiting new things are unknown,
entrepreneurial decisions cannot be made through an optimization process in which
mechanical calculations are made in response to a given set of alternatives.
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; and
3. the reaction to shifts in the relative costs and benefits of alternative uses for
resources, as occurs with political, regulatory, or demographic changes
An entrepreneurial discovery occurs when someone makes the conjecture that a set of
resources is not put to its "best use".
- the conjecture is acted upon and is correct, the individual will earn an entrepreneurial
profit.
- If the conjecture is acted upon and is incorrect, the individual will incur an
entrepreneurial loss
Entrepreneurship requires that people hold different beliefs about the value of resources for
two reasons:
1. the resource owners must not share completely the entrepreneur's conjectures
(otherwise the entrepreneur's profit approaches zero).
2. All people (potential entrepreneurs) possessed the same entrepreneurial conjectures,
they would compete to capture the same entrepreneurial profit, dividing it to the point
that the incentive to pursue the opportunity was eliminated
,Why should people possess different beliefs about the prices at which markets should clear:
1. the process of discovery in a market setting requires the participants to guess each
other's expectations about a wide variety of things.
2. Economies operate in a constant state of disequilibrium. Technological, political,
social, regulatory, and other types of change offer a continuous supply of new
information about different ways to use resources to enhance wealth.
Because entrepreneurial opportunities depend on asymmetries of information and beliefs,
eventually, entrepreneurial opportunities become cost inefficient to pursue.
1. When the entry of additional entrepreneurs reach a rate at which the benefits from
new entrants exceeds the costs, the incentive for people to pursue the opportunity is
reduced, because the entrepreneurial profit becomes divided among more and more
actors.
2. The diffusion of information and learning about the accuracy of decisions over time,
combined with the lure of profit, will reduce the incentive for people to pursue any
given opportunity.
The "inability of others (due to various isolating mechanisms) to imitate, substitute, trade for
or acquire the rare resources required to drive down the surplus" increases the duration.
The Discovery of Entrepreneurial Opportunities
Although an opportunity for entrepreneurial profit might exist, an individual can earn this
profit only if he or she recognizes that the opportunity exists and has value. Given that an
asymmetry of beliefs is a precondition for the existence of entrepreneurial opportunities, all
opportunities must not be obvious to everyone all of the time. At any point in time, only some
subset of the population will discover a given opportunity
factors that influence the probability that particular people will discover particular
opportunities:
1. the possession of the prior information necessary to identify an opportunity and
2. the cognitive properties necessary to value it.
Information corridors
Stocks of information create mental schemas, which provide a framework for recognizing
new information. To recognize an opportunity, an entrepreneur has to have prior information
that is complementary with the new information, which triggers an entrepreneurial
conjecture.
No two people share all of the same information at the same time. Rather, information about
underutilized resources, new technology, unsated demand, and political and regulatory shifts
is distributed according to the idiosyncratic life circumstances of each person in the
population.
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
After the discovery of an opportunity, a potential entrepreneur must decide to exploit the
opportunity.
Why, when, and how do some people and not others exploit the opportunities that they dis-
cover? Appears to be a function of the joint characteristics of the opportunity and the nature
of the individual
Nature of the opportunity
The characteristics of opportunities themselves influence the willingness of people to exploit
them.
The entrepreneur must believe that the expected value of the entrepreneurial profit will be
large enough to compensate for the opportunity cost of other alternatives, the lack of liquidity
of the investment of time and money, and a premium for bearing uncertainty.
Exploitation is more common when expected demand is large, industry profit margins are
high, the technology life cycle is young, the density of competition in a particular opportunity
space is neither too low nor too high, the cost of capital is low and population-level learning
from other entrants is available.
Individual differences
Not all potential entrepreneurs will exploit opportunities with the same expected value. The
decision to exploit an opportunity involves weighing the value of the opportunity against the
costs to generate that value and the costs to generate value in other ways. Thus, people
consider the opportunity cost of pursuing alternative activities in making the decision whether
or not to exploit opportunities and pursue opportunities when their opportunity cost is lower
- Exploitation of opportunities is more common when people have greater financial
capital,
- Stronger social ties to resource providers facilitate the acquisition of resources and
enhance the probability of opportunity exploitation.
- People are more likely to exploit opportunities if they have developed useful
information for entrepreneurship from their previous employment, presumably
because such information reduces the cost of opportunity exploitation
- transferability of information from the prior experience to the opportunity, as well as
prior entrepreneurial experience, increases the probability of exploitation of
entrepreneurial opportunity because learning reduces its cost.
The decision to exploit entrepreneurial opportunities is also influenced by individual
differences in optimism.
The decision to exploit an entrepreneurial opportunity is also influenced by individual
differences in perceptions
Other individual differences may be important in explaining the willingness to exploit
opportunities
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