Warwick Business School

Key learning objectives  Examine the approaches of economists and organisational theorists to understanding entrepreneurship

Warwick Business School Reminder of last time…  No agreed definition of the entrepreneur  Casson (1982) defines an entrepreneur as ‘someone who specialises in making judgemental decisions about the co- ordination of scarce resources’ (p. 23).  Fundamental to the entrepreneur is the presence of uncertainty: if everything is known there is no need for the entrepreneur  Theorists generally agree that arbitrage (differences in prices) is important: Temporal arbitrage (differences in prices between two time periods) Spatial arbitrage (differences in prices between two locations)

Warwick Business School Economist’s approach  Uncertainty  Adopt a choice framework – people make choices and work within a ‘utility’ framework  Focus on outcomes of economic activity  No common approach adopted by economists: Risk bearers? Special people? Risk ‘lovers’? Innovators? Market adjusters?

Warwick Business School Four common economic themes 1. The individual exercises a choice between becoming an entrepreneur or an employee and is able to switch between them. 2. The choice to switch between the two depends on the utility of each state. 3. The recognition that the income from being an entrepreneur is more risky than that from being an employee. 4. The choice is also influenced by differences between individuals in terms of their entrepreneurial talent and attitudes to risk.

Warwick Business School ‘Classic’ economic approach  ‘What makes an entrepreneur?’ Blanchflower and Oswald (1998): Separates out the self-employed from the employed Seeks to distinguish utility of self-employment – finds that the self-employed are happier than the employed Suggests that psychological traits play no role in someone becoming self-employed: what constrains business entry is a lack of access to finance

Warwick Business School Organisational definitions  “Entrepreneurship is the pursuit of an opportunity without concern for current resources or capabilities.” (Stevenson, Roberts and Grousebeck, 1985)  “Entrepreneurship is the creation of organisations, the process by which new organisations come into existence.” (Gartner, 1988)  “Entrepreneurship encompasses acts of organisational creation, renewal or innovation that occur within or outside an existing organisation.” (Sharma and Chrisman, 1999)

Warwick Business School Organisational approaches  Shared concern with uncertainty and outcomes  No common approach adopted by organisational theorists (e.g. focus on different units of analysis (e.g. individual, business)) and different stages of entrepreneurial activity (e.g. start up, growth)  Focus on the people and tend to be relatively more interested in entrepreneurial processes (e.g. entrepreneurial decision making)

Warwick Business School Entrepreneurial traits  Approach suggests that people have underlying stable psychological/genetic dispositions  Hence what dictates entrepreneurship is that people will have one or more traits:  Need for achievement (NAch), locus of control & risk taking propensity

Warwick Business School Evidence on the entrepreneurial personality  Gartner’s (1988) finds no evidence to support claims: which traits – on their own? In combination  Rauch and Frese (2007) argue that personality is correlated with entrepreneurship (garbage in & garbage out?)

Warwick Business School The entrepreneurial ‘gene’  Nicolaou et al (2008) & Nicolaou & Shane (2010) work on twins research reopens the debate:  Studying twins a natural experiment: some twins are identical (100% of genes); others twins are fraternal (c.50% genes) so if identical twins show more likelihood of becoming self-employed it shows a genetic basis to entrepreneurship  Nicolaou et al (2008) found that identical twins were more likely to be self-employed in the UK; Nicolaou & Shane (2010) show consistent results for the US

Warwick Business School Importance of cognitive biases  Cognitive biases are mental ‘distortions’ we make in our decision making and beliefs.  Good evidence for the existence of over- optimism as being more commonly found amongst business owners/self-employed (Cooper et al, 1988; Arabsheibani et al, 2000)  Tolerance for ambiguity (Bhide, 2000)  Hindsight bias (Craig and Cassar, 2009)

Warwick Business School Conclusions  Economists and organisational theorists agree on the importance of uncertainty, arbitrage and outcomes  Economists, like organisational theorists, disagree amongst themselves  Economists tend to emphasise outcomes whilst organisational theorists emphasise processes  Renaissance of importance of traits  Importance of cognitive biases