The Origins Of Entrepreneurial Opportunities

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How readily an unexploited profit opportunity is recognized is related to the ways in which entrepreneurial opportunities arise. Some profit opportunities are easier to spot than others. Holcombe (2003) argues that entrepreneurial opportunities arise from three different sources: factors that disequilibrate the market, factors that enhance production possibilities, and as the by-product of previous entrepreneurial actions. Within a neoclassical framework, and within Kirzner's (1973) framework, factors that disequilibrate the market provide the most obvious source of entrepreneurial opportunities. If some trades are being made at disequilibrium prices, then an entrepreneurial opportunity exists, and the act of entrepreneurship pushes the market toward equilibrium.

Factors that Disequilibrate the Market

Kirzner (1973, pp. 72-75) contrasts his equilibrating view of entrepreneurship with Schumpeter's (1934), which Kirzner characterizes as disequilibrating. "Schum-

peter's entrepreneur acts to disturb an existing equilibrium situation____The entrepreneur is pictured as initiating change and generating new opportunities" (pp. 72-73, emphasis in original). Kirzner then quotes Schumpeter as concluding that entrepreneurship is at odds with equilibrating activity. Kirzner, in contrast, argues that the entrepreneur "... brings into mutual adjustment those discordant elements which resulted from prior market ignorance" (p. 73, emphasis in original). Kirzner raises the issue because he believes Schumpeter's discussion of entrepreneurship is "... likely to generate the utterly mistaken view that the state of equilibrium can establish itself without any social device to deploy and marshal the scattered pieces of information which are the only source of such a state" (pp. 73-74).2

A key point here is seen in Kirzner's reference to the scattered pieces of information required to equilibrate the market. The necessary information is readily available in the form of market prices, but for entrepreneurship to equilibrate the market, there must be somebody with the knowledge required to take advantage of the information. If the market is disequilibrated through a shift in supply or demand, the change in the status quo should provide a relatively obvious signal of an entrepreneurial opportunity, and provides the most likely case that an entrepreneurial opportunity would be recognized. People who already trade in a market are likely to spot opportunities that are created by factors that disequilibrate the market as a byproduct of their routine economic activity, so many people will have the required knowledge, and relatively little wisdom is required to spot such a profit opportunity.

Factors that Enhance Production Possibilities

The second source of entrepreneurial opportunities, factors that enhance production possibilities, create entrepreneurial opportunities in several different ways.

Most obviously, more production means people have higher incomes, so there is a profit opportunity to produce more output for them to purchase. More significantly, higher incomes will lead to changes in the mix of goods demanded. As income rises, people tend to demand more automobiles relative to bicycles, and may shift from auto or train travel to travelling by air. People may demand more steak relative to hamburger, and may demand more restaurant meals relative to home-cooked meals. Changes in the composition of demands for various types of output creates profit opportunities. Perhaps more significant as a source of profit opportunities, a more productive economy has a greater role for the division of labor, as Smith (1776) noted, so even if the output of all goods did increase proportionally, there would still be the opportunity to change production methods to produce more efficiently with a finer division of labor. As Richardson (1975, p. 351) notes, in Smith's view "the division of labor is at once both a cause and an effect of economic progress." Young (1928) and Kaldor (1972) also emphasize Smith's principle of the division of labor as an important and underappreciated engine of economic progress.

In this case, the exact nature of an entrepreneurial opportunity will not be as obvious as in the previous case (for factors that disequilibrate the market). If there is an opportunity to produce new goods to sell to a broader market, it is not always obvious what new goods it would be profitable to produce. Likewise, if there is an opportunity to profit from increased specialization in production, or by any other change in the production process, it is not always obvious how this could be done. Consider Henry Ford's insight that because of a growing market, automobiles could be mass-produced on assembly lines to lower the cost and bring the opportunity of automobile ownership to the masses. Many people had the same market information as Ford, but he had the wisdom to seize that profit opportunity. While it looks obvious in hindsight, many automobile companies led by people with less wisdom than Ford failed in the early 20th century. For a similar example, consider the success of Palm Pilots - small hand-held computers. Do readers recall the Apple Newton, which was Apple Computer's entry into that market only a few years before the Palm Pilot? Apple spotted the information signaling a profit opportunity in that market before Palm,3 Apple had the knowledge to see that there was a profit opportunity (the evidence is Palm's profit in that market), but Apple was unable to profit from it.

Profit opportunities created by enhanced production possibilities probably take more wisdom to turn into actual profits than those created by the other two categories. The process by which profit opportunities are generated is more evolutionary and continuous than in the other cases, the knowledge required to make a profit is typically substantial, and the wisdom necessary to make good decisions is substantial, as the Newton-Palm example illustrates. One interpretation of this example is that the failure of the Newton in this market provided information to Palm which helped them to succeed. These opportunities are considerably more complex than spotting a $20 bill lying on the sidewalk, or seeing that something can be bought for less in one location than it can be sold for in another, and the failure of the Newton to capitalize on the same profit opportunity later exploited by Palm illustrates the difficulty of seeing the exact nature of a profit opportunity.

Entrepreneurial Opportunities Produced by Entrepreneurship

The third and most significant source of entrepreneurial opportunities arises from entrepreneurial actions that have taken place in the recent past. As Kirzner (1973) depicts it, entrepreneurial opportunities lie unnoticed until entrepreneurs see and act on them. If this was all there was to it, entrepreneurial opportunities would be used up as entrepreneurs exploited them. Once the market reached equilibrium, no more opportunities would appear - unless, as noted above, factors disequilibrated the market, or production possibilities were enhanced. However, entrepreneurial actions themselves produce new entrepreneurial opportunities, as Holcombe (1998), Minniti (1999), and Minniti and Bygrave (2000) note. Consider, for example, the cordless computer mouse. Some entrepreneur had the idea that computer users would prefer a mouse that was not tethered to the computer by a cord, so created a battery-operated mouse that would communicate with the computer through radio waves or infrared light (there are at least these two types of cordless mice). That entrepreneurial insight would not have been possible had Steve Jobs and Bill Gates not had the entrepreneurial insight to adapt Xerox's graphical user interface to the PC. And in turn, the graphical user interface would not have been an entrepreneurial opportunity had not the PC been commercialized. And the opportunity to create the PC would not have been available had the microprocessor not been developed, and there would have been no opportunity to develop the microprocessor without the invention of the transistor. The point is that entrepreneurial actions do not use up entrepreneurial opportunities: on net they create more entrepreneurial opportunities. The main source of entrepreneurial opportunities is from the act of entrepreneurship itself.

To see entrepreneurship in this way adds to Kirzner's (1973) model of entrepreneurship in an important way. As Kirzner describes it, entrepreneurial opportunities lie unnoticed until entrepreneurs seize them, but Kirzner does not describe where they come from, and leaves the impression that entrepreneurs use up entrepreneurial opportunities as they act on them. Seen in the broader way described here, entrepreneurs create new entrepreneurial opportunities as they act on existing ones, so entrepreneurial actions create more opportunities and more entrepreneurship. One might picture, following Kirzner, profit opportunities lying unnoticed until the spark of recognition hits an entrepreneur, but in fact, most entrepreneurial opportunities do not lie unnoticed for long. The opposite is true: most profit opportunities get noticed by entrepreneurs because they are new. This is true whether the entrepreneurial successes are spectacular or more mundane.

This effect of entrepreneurship suggests Schumpeter's vision of economic progress as a spontaneous, revolutionary, and discontinuous process.4 Surely the seizing of an entrepreneurial opportunity can upset people's expectations, because almost by definition (Kirzner's definition, at least), entrepreneurial actions must come as a surprise to everyone but the entrepreneur, because nobody noticed the opportunity before. But once the entrepreneur acts, information on the entrepreneurial activity becomes widely available as market data, alerting others to the potential of profit opportunities.

Consider some great American fortunes. Andrew Carnegie was able to build the foundations of U.S. Steel by capitalizing on the newly developed Bessemer process. John D. Rockefeller's Standard Oil Company developed because he was able to control the distribution network, which at the time relied on the recently-constructed railroad infrastructure. Henry Ford's assembly lines were feasible only when there was enough of a mass market for automobiles, and the fortunes of Bill Gates rose along with the fledgling personal computer industry. None of these individuals invented the technology that made them wealthy, but they had the insight to take advantage of an entrepreneurial opportunity. Note, however, that in each case the opportunity was newly developed, and the entrepreneurial opportunity did not go unnoticed for long. Entrepreneurial opportunities are not just lying around waiting for someone to notice them. Rather, they appear and then entrepreneurs rapidly move to take advantage of them.

Consider again the innovation of the cordless computer mouse. It is a small development, to be sure, but is a good example of an entrepreneurial insight and the capitalization of a previously unnoticed profit opportunity. The profit opportunity arose solely because of a previously non-existent market niche, and once that market niche appeared, it did not take very long for an entrepreneur to seize on the idea. Notice that this entrepreneurial insight did not arise for either of the first two reasons discussed earlier. It did not arise because of a profit opportunity created by a temporary disequilibrium in the market. Before personal computers used mice (which also is an example of an entrepreneurial insight), there would have been no possibility for the insight, regardless of how far the market was out of equilibrium. It did not arise because of the second reason either, which is a bigger market. The division of labor has nothing to do with the insight that a mouse could communicate with a computer through infrared or radio technology (although it might have something to do with what type of firm produces the technology). An increase in wealth could not create the demand for infrared mice without the innovation of mice as a computer input device. This entrepreneurial insight capitalized on a new opportunity, which was created by other entrepreneurial insights.

In each of the above examples, the entrepreneur had some specific knowledge of time and place as a context for new information revealed through the market about profit opportunities produced by recent entrepreneurial acts. The entrepreneurial act of seizing those opportunities that produces the engine for economic progress, and lays the foundation for more entrepreneurial discoveries.

Where do entrepreneurial opportunities come from? Many of them come from the actions of other entrepreneurs. Henry Ford could not have succeeded in mass-producing automobiles until there was a substantial market, including infrastructure such as roads, gasoline stations, and repair facilities. Bill Gates could not have made his fortune had not Steve Jobs seen the opportunity to build and sell personal computers, and Steve Jobs could not have built a personal computer had Robert Noice not invented the microprocessor. When entrepreneurs take advantage of profit opportunities, they create new entrepreneurial opportunities that others can act upon. Entrepreneurship creates an environment that makes more entrepreneurship possible.

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