The Entrepreneurial Context

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Entrepreneurs do not act in a vacuum and entrepreneurial actions take place in well-defined contexts. Thus, understanding the entrepreneurial process requires that we consider the context in which entrepreneurs develop their efforts. For any individual, the entrepreneurial context consists of the knowledge required by the individual and of the set of more or less binding constraints that are a function of his social and economic circumstances. Sue Birley, for example, argues that "there is no dichotomy between entrepreneurs and non-entrepreneurs; with the right stimulus, the most unexpected people can become entrepreneurs" (Wright, 2001, pp. 37-38). As a result, understanding the entrepreneurial context requires the understanding of what socio-economic variables provide incentives for individuals to become entrepreneurs, whether or not certain conditions are more conducive to entrepreneurial success than others, and, most important, what knowledge potential entrepreneurs possess of their environment.

Much of the literature on entrepreneurial knowledge is consistent with the literature discussing internal control and with the methodological subjectivism and process orientation of the Austrian approach. Different people know different things. Knowledge is contextual. Thus, the knowledge that guides economic decision-making is dispersed among many independently acting agents (Yates, 2000). The knowledge of what to produce, how to produce it, and so on is scattered across many different economic actors. The Austrian knowledge problem is that of coordinating this dispersed knowledge. Entrepreneurial knowledge isjust a specific case of the Austrian knowledge problem. Hayek recognized that the division of labor produces a division of knowledge and showed how the market process solves the knowledge problem through decentralized decision-making (Hayek, 1948). If the market is a spontaneous order in Hayek's sense, then market participants have only partial understandings of it. Because of this knowledge asymmetry, alert individuals in the market can always profit from the discovery of new opportunities within the system. This is why Hayek was led to describe the market competition as a "discovery procedure" (Hayek, 1978). Hayek's theory of the market as a discovery procedure forms an essential part of Kirzner's notion of entrepreneurial discovery.

In Kirzner's theory of entrepreneurship, discovery is not only possible in the market; it is necessary. Those who discover new techniques enjoy profits. Those sticking to the old ways of doing things suffer losses. The idea of entrepreneurial discovery is important for understanding the acquisition of knowledge for entrepreneurial activities. In the case of entrepreneurship, the knowledge required is often knowledge about opportunities created by the environment or by the possibility of a new product or process. The founding of a new business often requires entrepreneurs to improvise. Because of the trial and error period characteristic of any improvisation, the entrepreneurial process is a non-institutionalized form of acquiring knowledge. "Their heuristic-based logic gives entrepreneurs a competitive advantage in quickly learning about new changes and what the implication of those changes are for the development of specific discoveries" (Aldrich & Martinez, 2001, p. 50).

Along complementary lines, Choi (1993a, b) argues that, in society, people have the possibility of acquiring knowledge from others' practices. Trial and error processes in society generate conventions. That is, people identify mutually compatible "paradigms." These conventions make social life possible. Their stability, however, makes innovation difficult. Social and economic practices, therefore, tend to continue through time, even as experiences of different individuals might suggest to some that by adopting alternative paradigms, profit is possible. The entrepreneur discovers the neglected opportunities and tries to capture them. In the process, the prevailing practices are transformed. Choi calls the process of entrepreneurial discoveries and their eventual adoption by the rest of the society a social learning process.

When studying the context of entrepreneurial decisions, in addition to issues related to knowledge, Low and MacMillan (1988) stress the importance of studying entrepreneurship in a contextual and process-oriented way. In particular, they view entrepreneurship as either the result of strategic adaptation, or as emerging from the ecology of a given population. The strategic adaptation perspective emphasizes the pro-active behavior of individuals whom, after having identified opportunities, gather the resources necessary to exploit these opportunities and create the strategies required for their exploitation. The crucial issue in this line of research is entrepreneurial knowledge. The population ecology approach, instead, emphasizes external factors such as the sources of opportunities and the mechanisms used for selecting specific sets of actions necessary to increase the likelihood of exploiting successfully any particular opportunity. The underlying assumption of this line of research is that the environment of entrepreneurial decisions is formed, among other things, by the characteristics of other organizations in the population. The crucial issue in this line of research is social capital.

Social capital is important because it allows individuals to obtain resources that are otherwise unavailable to them (Aldrich, 1999; Davidsson & Honig, 2002). Transforming an idea into a new organization requires entrepreneurs to acquire a variety of resources and to allocate attention among multiple tasks (Greene & Brown, 1997). In this context, social capital is important because actions involving innovation and multiple tasks present ambiguous environments (March & Olsen, 1976). In the case of entrepreneurship, forexample, the individual may lack knowledge about the subsidiary activities necessary to the working of the venture. When the business environment is not transparent, the set of necessary tasks and their characteristics is fuzzy and the entrepreneur cannot be assumed to know the true structure of his decision-making model. If an entrepreneur is willing to act on a perceived opportunity, it is because he believes to possess a comparative advantage in that specific market. But he does not have a comparative advantage in coping with ambiguity. Thus, he focuses his attention on his specific talent while coping with ambiguity by leveraging cues and information provided by the behavior of other entrepreneurs.

Everything else being the same, the larger the number of entrepreneurs he observes, the lower the ambiguity he experiences (Minniti, 2001). By observing others, our potential entrepreneur acquires information and skills. He meets other individuals who have similar or complementary expertise. Throughout this process his social environment becomes important and the access to a certain amount of broadly defined social capital helps him to define the set of his entrepreneurial tasks. The existence of a significant number of entrepreneurs also legitimizes his activity and enables him to exploit a number of established routines. In fact, researchers have shown that when choosing in an ambiguous environment, agents tend to base their decisions on social cues (Aldrich, 1999). Aldrich and Zimmer (1986), in particular, have shown that participation in social networks is a crucial element for entrepreneurs. Saxenian (1990) has argued that much of the success of Silicon Valley is to be attributed to its availability of social capital.

The role played by social capital in entrepreneurial decisions is best understood in the context of the literature on embeddedness (Jack & Anderson, 2002), and the literature on social networks (Aldrich, 1999; Aldrich & Fiol, 1994).

Embeddedness defined as the nature, depth, and extent of an individual's ties into the environment, has recently been indicated as one of the relevant elements of the market process (Dacin et al., 1999; Jack & Anderson, 2002; Uzzi, 1997). Individuals are viewed as being embedded in ongoing systems of social relations (Granovetter, 1985). In the context of entrepreneurship Carsrud and Johnson (1989) argue that the exploitation of business opportunities is strongly influenced by interdependencies that mold the patterns of social interactions among individuals. Embeddedness is relevant to entrepreneurship because it helps the entrepreneur to identify resources and constraints when committing to founding a new organization. Jack and Anderson (2002) argue that entrepreneurship is not merely an economic process but draws from the social context which shapes and forms entrepreneurial outcomes. According to their analysis, embedding is the mechanism whereby an entrepreneur becomes part of the local structure and learns how to draw upon and use the resources provided by available social capital.

Much research about embeddedness exploits Giddens' view of structuration as a theoretical framework to explore the link between the entrepreneur and his social context (Giddens, 1979,1984). Applying structuration to the study of entrepreneur-ship enables sociologists to recognize how social structures affect and encourage entrepreneurial activity, particularly in terms of resource availability or constraint (Jack & Anderson, 2002). As a result, this approach contributes directly to our understanding of what external conditions are more conducive to entrepreneurial behavior and, possibly, entrepreneurial success. In fact, some researchers claim that embedding enables entrepreneurs to recognize and realize opportunities that fit the specific needs of a local situation and, under certain conditions, endows entrepreneurs with a competitive advantage. Chell and Baines (2000), for example, find that the information and resources gathered by being embedded compensated for environmental constraints and, as a result, facilitate the entrepreneurial process.

In her work in development, Emily Chamlee-Wright takes an Austrian view of entrepreneurship and explains how cultural meanings influence entrepreneurs (Chamlee-Wright, 1997). Her ethnographic approach complements and supports the embeddedness view. Among other things, Chamlee-Wright provides useful case studies illustrating the importance of trust, reputation, and personal relationships in regulating the supposedly anonymous forces of the market. Each culture and each market has its own mechanisms for producing trust. Thus, Chamlee-Wright shows that entrepreneurs are cultural figures. One the one hand, entrepreneurs' actions reflect the cultural environment in which they act. On the other hand, their actions are an important influence on the culture in which they operate. Development theory should take account of the role of entrepreneurs as cultural figures.

The embedding process embraces the cultural structure of a community and consists in understanding the nature of the structure and the perpetuation of the structure while enriching its complexity (Johannisson, 1988; Weick, 1969). The networks, ties and relationships of the entrepreneur determine the level of his embeddedness in the environment. Thus, social networks provide the mechanism for becoming embedded.

The contribution of the literature on social networks to our understanding of the entrepreneurial process lies in its illustration of how entrepreneurs embed as a mechanism to pursue and exploit opportunities. The social network approach illustrates how opportunity recognition and realization are conditioned by the dynamics of the entrepreneur and the social structure (Aldrich & Martinez, 2001). If entrepreneurship is embedded in a social context, then it must build upon society. The implicit argument is that when studying the entrepreneur, the context has to be taken into account because the social environment is more than simply the sum of its individual components (Minniti, 2001).

A network of social relationships is important to an entrepreneur because it gives him access to the resources possessed by others in the community or industry. The location of the entrepreneur within the larger community is important because it affects his ability to acquire resources. Finally, the strength of the relationship with contacts is important because it determines the entrepreneur's ability to exploit the resources provided by his community. In fact, entrepreneurial actions are conditioned by ongoing structures of social relations (Jack & Anderson, 2002). Aldrich and Zimmer (1986), for example, argue that entrepreneurship is embedded in a social context. Also, Carsrud and Johnson (1989) claim that entrepreneurial activity is encouraged or inhibited by individuals' positions in a social network and that entrepreneurs are dependent upon the information and resources provided by social networks.

In the context of social networks, population density and relational density have been shown to affect the survival of new businesses too (Baum & Mezias, 1992; Hannan & Carroll, 1992; Hannan & Freeman, 1989). Individuals trying to create new ventures in populations with high density find more opportunities to learn effective knowledge and create extensive social networks, but they also encounter more intense competition (Baum & Oliver, 1992; Delacroix & Rao, 1994). Relational density, by increasing the legitimacy of a whole population, protects new entrepreneurs from potential constraints from other social forces (Zucker, 1989).

Clearly, other contextual variables are relevant for entrepreneurship. In addition to knowledge and social capital, several economic circumstances are crucial to entrepreneurial behavior. Variables relating to external conditions such as the availability of financing, labor markets, and quality of existing infrastructure, in other words, issues related to the economy, have all been shown to be important. Most of the work in those areas has been conducted by economists who study these topics in finance, labor economics and industrial organization. Although an extended review of this literature is beyond the scope of this survey, it is worth listing some of the contributions that, in various fields, deal directly with entrepreneurs and entrepreneurship as discussed in the two previous sections of this paper. Among others, Evans and Jovanovic (1989), Evans and Leighton (1989), and Kihlstrom and Laffont (1979) discuss the importance of financial resources and constraints on entrepreneurial decisions. Gifford (1998) and Murphy et al. (1991) discuss the optimal allocation of human resources. Gromb and Scharfstein (2002) and Hamilton (2000) discuss the interdependence between entrepreneurial decisions and conditions in the labor market. Leazar (2002) argues that entrepreneurs are jacks-of-all-trades who may not excel at any one skill but are competent in many, and links entrepreneurial decisions to the previous work experiences of the entrepreneur. Gompers and Lerner (2001), Kortum and Lerner (2001), and Lerner and Gompers (2001) discuss entrepreneurship and venture capital. Finally Gompers and Lerner (forthcoming) discuss initial private offerings. In line with neoclassical methodology, most of these studies use representative agent models and focus on issues of scarcity and allocational efficiency rather than on the behavioral attributes of the individual.

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