o Academy ol Managemenl fleview

2000. Vol.25, No. 1,217-226.

NOTE

AS A
THEPROMISEOF ENTREPRENEURSHIP
FIELDOF RESEANCH
SCOTTSHANE
UniversitYof MclryIcrnd

S. VENKATARAMAN
UniversitYof Virginic
c conceptuql lromework' In
To dqte, the phenomenon ol entrepreneurship hqs lclcked
in the dillerent socicrl science
this note we drqw upon previous reseqrch conducted
lields of business to creqie cr conceptucrl frqmework lor the
disciplines cnd cpplied
phenomen<r and predict c set
field. With this frqmework we explcin a set ol empiriccrl
piedicted by conceptucrl frqmeworks <rlreody in exis-
of outcomes not explained or
tence in other fields.

For a field of sociql science to hcrve useful-
ness, it must have a conceptuql lrqmework thqt
explcins cnd predicts ct set of empiriccll phe-
nomenq not explained or predicted by concep-
tuql frqmeworks alrecrdy in existence in other
fields. To dqte, the phenomenon of entrepre-
neurship has lqcked such q concePtuql frqme-
work. Rsther thqn explaining qnd predicting c
unique set of empiricql.phenomens, entrepre-
neuiship hqs become .' brocd lobel under which
cr hodgepodge of research is housed' Whclt clp-
peqrs to constitute entrepreneurship reseqrch
iodcy is some qspect ol the setting (e'g" small
businesses or new {irms), rqther thqn cr unique
conceprtuol domain. As.cr result, many people
hqve hld trouble identifying the distinctive con-
tribution of the field to the brodder domcrin of
business studies, undermining the,field's legit-
imcrcy.Resecrrchersin other fields &sk why en-
trepreneurship reseorch is necessary il it does
,roi explain or predict empirical phenomenq be-
yond whqt is known from work in other fields'
irlor"ot"r, the lclck ol o conceptual lramework
hos precluded the. development of qn under-
stcrndingof mdny important phenomenq not crd-
equately exploined by other fields'
One example of this problem is the focus in
the entrepreneurship literqture on the relctive
We acknowledge the helpiul comments ol Ed Roberts on
on earlier drqft ol this note. The cuthors contributed egucrlly
qnd <rre listed olPhcbeticollY'
217
perlormqnce of individuqls or firms in the con-
iext of sm61llor new businesses.Since strotegic
mqnqgementscholqrsexqminethedifferences
in qnd sustqinqbility of relqtive Periormqnce be-
tween competitive lirms, this qpproqch is not
unique (Venkqtcrsmcn, 1997)'Moreover' the op-
proclch does not provide crn cdequate test oI
entrepreneurship, since entrepreneurship is
.or..irr"d with the discovery cnd exploitation
of profitable opportunities' A perlormsnce cld-
vcntage over other firms is not a sufficient mecr-
sure of entrepreneuricrlperformqnce,beccrusecr
performcrnce advcntoge mqy be insuflicient to
compenscltefor the opportunity cost of other cll-
ternatives, c liquidity premium for time ond cop-
ital, crnd a premium Ior uncertointy beoring'
Therefore, qlihough c conceptucrllrqmework to
exploin crnd predict relative performance be-
tween firms is useful to strategic mcrncrgement'
it is not sufficient for entrePreneurship'
We attempt on integrcting frcmework for the
entrepreneurshiplieldintheformofthisnote.
we believe thqt this lramework will help entre-
preneurship researchersrecognize the relation-
rfrip qmong the multitude of necessqry' but not
sufficient, fcrctors thqt compose entrepreneur-
ship, clnd thereby cdvcrncethe qucrlity o{ empir-
icqi ond theoreticcrlwork in the field. By provid-
ing ct f rqmework thqt both sheds light on
unlxplclined phenomena qnd enhcnces the
qucliiy of resecrch, we seek to enhcrnce the
field's legitimocy cnd prevent its mcrrginolizq-
218 Academy ol Management
"cr "tecching
tion crs only reseorch setting" or
cpplication."
The note proceeds qs follows. First, we define
the domcin ol the field. Second, we explcin why
organizctionql reseqrchers should study entre-
preneurship. Third, we describe why entrepre-
neurial opportunities exist cnd why some peo-
ple, cnd not others, discover qnd exploit those
opportunities. Fourth, we consider the dif{erent
modes of exploitqtion ol entrepreneuriql oppor-
tunities. Finclly, we conclude with brief reflec-
tions on the potenticrl vqlue o{ the frqmework
presented here.
DEFINITIONOF ENTREPRENEURSHIP
Perhops the lcrgest obstqcle in creoting c con-
c ept u c l frq me w o rk fo r th e e ntrepreneurshi p
field hos been its definition. To dqte, most re-
seqrchers hqve defined the Iield sole/y in terms
of who the entrepreneur is crnd what he or she
does (Venkotqrcrmqn, 1997). The problem with
this crpprocrch is thot entrepreneurship involves
the nexus ol two phenomenq: the presence of
lucrctive opportunities cnd the presence of en-
terprising individuqls (Venkqtqrqmqn, 1997).By
delining the lield in terms of the individuql
crlone, entrepreneurship researchers hcve gen-
erqted incomplete definitions thct do not with-
stcnd the scrutiny of other scholars (Gcrrtner,
1988 ).
The definition of qn-entrepreneur cls c person
who establishes cr new orgonization is cn exqm-
ple of this problem. Becquse this definition does
not include considerqtion of the vqriation in the
quclity of opportunities thct different people
identify, it leods resecrchers to neglect to mea-
s ur e o p p o rtu n i ti e s . C o n s e q u e ntl y, empi ri ccl l
support (or lcck o{ support) for qttributes thcrt
diflerentiate entrepreneurs from other members
ol society is often questionqble, beccruse these
attributes conlound the influence of opportuni-
ties ond individuals.
In contrcrst to previous reseclch, we define the
field of entrepreneurship os the scholclrly excm-
incrtion of how, by whom, qnd with whclt eflects
opportunities to create future goods and ser-
vices crre discovered, evqluqted, cnd exploited
(Venkqtqrctmcn, 1997). Consequently, the field
involves the study of sources of opportunities;
the processes of discovery, evqlucrtion, qnd ex-
Review Icnucry
ploitotion of opPortunities;qnd the set of indi'
viduols who discover, evqluclte, ond exploit
them.
Although the phenomenon of entrepreneur-
ship provides resecrch questions lor mony dif-
ferent scholcrly fields,l orgonizotion scholclrs
are {undclmentclllyconcerned with three sets of
resecrrch questions qbout entrepreneurship:
(l) why, when, qnd how opportunities for the
creotion of goods qnd services come into exis-
tence; (2) why, when, crnd how some people ond
not others discover ond exploit these opportuni-
ties; and (3)why,when, cnd how dilferent modes
of qction are used to exploit entrepreneuricl op-
portunities.
Before reviewing existing reseqrch to cnswer
these questions, we provide several cqvects
about our qpProqch.First, we tqke c disequilib-
rium qpproach, which dilfers from equilibrium
approctchesin economics (I(hilstrom & Lqflont,
1979)qnd social psychology (McClellqnd, 196l)'
In equilibrium models, entrepreneuriql opportu-
nities either do not exist or qre qssumed to be
rcrndomly distributed ctcrossthe population. Be-
ccuse people in equilibrium models cqnnot dis-
cover opportunities thot diIIer in vcrlue from
those discovered by others, who becomes sn
entrepreneur in these models depends solely on
the qttributes of people. For excrmple, in
K h i l s t r o m c n d L a f f o n t ' s ( 1 9 7 9 )e q u i l i b r i u m
model, entrepreneursqre people who prefer un-
certointy.
Although we believe thot some dimensions of
equilibrium models crre useful lor understand-
ing entrepreneurship,we qrgue that these mod-
els crrenecessorily incomplete. Entrepreneurial
behqvior is trcrnsitory (Corroll & Mosakowski,
198fl.Moreover,estimctes of the number of peo-
ple who engage in entrepreneuricrl behqvior
rqnge {rom 20 percent of the population (Reyn-
olds & White, 1997)to over 50 percent (Aldrich &
Zimmer, 1986).Since cr lorge qnd diverse grouP
ol people engqge in the trcpsitory process of
entrepreneurship,it is improbable thqt entrepre-
neurship ccrnbe explcrinedsolely by re{erenceto
q chqrcrcteristicof certqin people independent of
the situqtions in which they find themselves.
Therefore,when we qrgue thqt some people crnd
I For exqmple, economists qre interested in the distribu-
tion ol entrepreneuriql tqlent ocross productive cnd unpro-
ductive qctivities (Bqumol, 1996).
 219
Shqne qnd Venkqtqroman
2000
re-
Fourth, our frcrmework <rlso complements
not others engctge in entrepreneuriol behovior' creotion (e'9" Gcrrt-
secrrch on the Process ol firm
we cre describing the tendency o{ certqin peo- 1993)'Ex-
ple to respond to the situqtionql cues of oppor- ner, 1985; Katz & Gortner, 1988; Kqtz'
plclining this process is importcrnt' but reseqrch
tunities-not CIstqble chqrqcteristic that differ- issues
entiates some people from others ccross
all on it involves exqmining o different set of
Firm crecrtion process
situations.2 Irom those we explore'
firm
Second, we argue thot entrepreneurship does researchers exqmine resource mobilization'
stcrrting with
not require, but can include, the creqtion of new orgcnizing, ond mcrrket moking'
hcrve
orgcrnizcrtions.As Amit, Glosten' clnd Mueller the cssumption that opportunities exist'
through
(1993)qnd Cqsson (1982)explqin' entrepreneur- been discovered, crnd will be exploited
the
ship ccrnqlso occur within qn existing orgcrnizcr- new firms' Since we lcrck
the creqtion oi
tion. Moreover, opportunities can be sold to spqce to review both the processes of entrepre-
other individucrls or to existing organizqtions.In neurship through mqrket mechonisms
cnd
discussion to
thisnotewedonotexqminethecreqtionofnew through firm creqtion, we limit our
orgcrnizotionsper se but, rqther' refer interested the conditions under which entrepreneuricrl
op-
in
recrdersto excellent reviews on firm creqtion portunities qre exploited through firms and mar-
(Aldrich' lgg0; Singh &
trgonirationcrl ecology kets, qnd we refer recrders to these other
Ircrme-
Lrimsden, I990), economics ( C q v e s ' 1 9 9 8; the process of iirm
(Gart- works for informcrtion on
Geroski, 1995),and organizqtionql theory crecrtion.
ner, 1985;Kqtz & Gcrrtner, 1988;Low & MocMil-
lan, 1988).3
Third, our lrqmework complements sociologi-
calandeconomicworkinwhichreseqrchers WHY STUDY ENTREPRENEURSHIP?
hcrveexamined the populction-level fsctors that Mony scholcrrsask, either implicitly or explic-
(1965)iden-
influence lirm creqtion' Stinchcombe
thcrtenhcnce incentives to itly, why qnyone should study entrepreneurship'
tified societal factors
cbility. Aldrich (1990) oatc (Ire difficult to obtqin, theory is underde-
orgcnize <rnd orgonizing qre the
veloped, cnd mqny Iindings to dqte
on-d Sirrgh cnd Lumsden (1990)hqve provided busi-
scme qs those obtained in other creqs of
reviews ol factors enhoncing firm foundings cnd for
ness. In response, we offer three reqsons
hcrve described the effects of such lqctors as much technicol infor-
environmentcll ccrrrying cclpclcity' interpopulcr- studying the topic. First,
crnd
tion processes, qnd institutional factors' Simi- mation is ultim;tely embodied in products
is o
lorly, Baumol (1996)has related the institutioncl services (Arrow, 1962),and entrepreneurship
environment to the supply of people who are mechqnism by which society converts techniccrl
willing to creqte firms' informcrtion into these products and services'
Atthough thes6 other fromewotks crre vcrlu- Second, entrepreneurship is c mechcrnism
oble to entrepreneurship scholcrs' they igii'olve throughwhichtemporalcrndspctioline{licien-
miti-
cr set of issues different from those with which cies in qn economy crre discovered clnd
different
we cre concerned- Our frqmework diflers from goted (Kirzner, 1997).Finclly' o{ the
these in thct (I) we focus on the existence'dis- Jour""" of chonge in o ccrpitcrlistsociety' Schum-
(2) we
covery, cnd exploitation of opportunities; peter (I934)isolcltedentrepreneuricrllydriven in-
"*o*irr. the influence ol individuals cnd oppor- novction in products and Processescrs the
cru-
tunities, rather thqn environmentql antecedents cicll engine driving the chclnge p r o c ess'
and, consequences;qnd (3)we consider a frame- Therefore,the absence of entrepreneurship
from
work brocrder thcrn lirm ereqilott' our collective theories of mqrkets' firms' orgcni-
zotions, ond chcnge mcrkes our understanding
Bcru-
of the business londscope incomplete' As
mol eloquently remcrks, the study of business
2 We qlso orgruethot entrepreneurshipcon be undertsken
by a single individuol or a set ol people who
undertqke the without on,rrrd"rstanding of entrePreneurship "the
,Lp. of ihe Processcollectively or independently' is like the study of Shakespecre in which
3 Mcny reseqrchers qrgue thot entrepreneurship occurs the
(see Roberts' l99l' for q
Prince of Denmqrk has been expunged from
for reosons other thcn for profit discussion of Hcrmlet" (1989: 66)'
review), but we discuss only for'profit entrepreneurship'
220 Acodemy ol Management Review Icnucrry

THE EXISTENCE,DISCOVERY,AND given the potentisl to transform them into c dil-

EXPLOITATION OF ENTNEPRENEURIAI ferent stqte (Kirzner, 1997).Becqusepeople pos-
OPPORTUNITIES sess different beliefs (becquseol q lucky hunch,
superior intuition, or privote informcrtion),they
The Existence of EntrepreneuricrlOpportunities mqke diflerent conjectures about the price ot
To hcrveentrepreneurship,youmust first hcve which markets should cleqr or obout whqt pos-
entrepreneuricrlopportunities. Entrepreneuriql sible new mqrkets could be creqted in the future.
opportunities crrethose situations in which new When buyers crnd sellers hqve different beliefs
goods, services,rqw mqteriqls, cnd orgcnizing crbout the vqlue of resources,both todcy qnd in
methods cqn be introduced and sold crt greoter the future, goods crnd services ccrnsell qbove or
thcrn their cost of production (Cosson, lg82).Al- below their mcrgincl cost of production (Schum-
though recognition of entrepreneuriol opportu- peter, I934).An entrepreneuricrldiscovery occurs
nities is a subiective process, the opportunities when someone makes the conjecture thqt o set
"best
themselves crre objective phenomenq that clre o{ resourcesis not put to its use" (i.e.,the
"too given c belief
not known to clll pcrties qt crll times. For exam- resources ctre priced low,"
ple, the discovery of the telephone creqted new about the price qt which the output lrom their
opportunities for communiccrtion,whether or not combinqtion could be sold in qnother loccrtion,
people discoveredthose opportunities. of qnother time, or in qnother form). I{ the con-
Entrepreneurial opportunities dif{er from the jecture is qcted upon qnd is correct, the individ-
lcrrger set of oll opportunities for profit, porticu- ucrl will ecrn qn entrepreneuricl profit. If the
lorly opportunities to enhonce the elficiency of conjecture is scted upon crnd is incorrect, the
existing goods, services, rqw mqtericrls, crnd or- individual will incur cn entrepreneuricll loss
gcnizing methods, beccuse the lormer require (Casson, 1982).
the discovery of new meons-ends relcrtionships, Entrepreneurship requires thct people hold
whereqs the lctter involve optimizction within different beliefs qbout the vcrlueof resourcesfor
existing meqns-endslrameworks (Kirzner, 1997). two recrsons. First, entrepreneurship involves
Beccrusethe rcnge of options ond the conse- joint production, where severql different re-
quences o{ exploiting new things are unknown, sources have to be brought together to creqte the
entrepreneuricrl decisions cqnnot be made new product or service. For the entrepreneur to
through an optimizqtion process in which me- obtqin control over these resourcesin crway thct
chqnicql cqlculations crremade in response to q makes the opportunity profitoble, his or her con-
given set of qlternqtives (Bcrumol,1993). jecture about the qccuracy of resource prices
Entrepreneurial opportunities come in cr vclri- must difler from those of resource owners and
ety of forms. Although the focus in most prior other potenticl entrepreneurs (Casson, 1982).II
research has been on opportunities in product resource owners hcd the sqme conjectures cts
morkets (Venkqtqrqmqn, I997), opportunities the entrepreneur, they would seek to cppropri-
crlsoexist in factor mqrkets, as in the cqse of the cte the prolit from the opportunity by pricing the
discovery of new mclteriqls (Schumpeter, 1934). resources so thqt the entrepreneur's profit cp-
Moreover, within product mqrket entrepreneur- proached zero. There{ore,for entrepreneurship
ship, Drucker (1985) hos described three diflerent to occur, the resource owners must not shore
categories of opportunities: (l) the creation of completely the entrepreneur's conjectures.Sec-
new informqtion, qs occurs with the invention of ond, if qll people (potenticl entrepreneurs) Pos-
(2)
new technologies; the exploitction of market sessed the sctme entrepreneurihl conjectures,
inefliciencies thqt result lrom informqtion osym- they would compete to copture the sqme entre-
metry, crs occurs qcross time ond geography; preneuriol profit, dividing it to the point that the
and (3) the reaction to shilts in the relqtive costs incentive to pursue the opportunity was elimi-
crndbenefits of qlternqtive uses lor resources,cts ncrted(Schumpeter,I934).
occurs with politicol, regulotory, or demo- But why should people Possessdifferent be-
graphic changes. liefs qbout the prices at which mqrkets should
Previous resecrrchershqve orgued thcrt entre- clecrr?Two ctnswershqve been offered. First, crs
preneuricll opportunities exist primarily be- Kirzner (1973)has observed, the process of dis-
cquse different members of society hcve difler- covery in q mcrrketsetting requires the portici-
ent beliefs crboutthe relqtive vcrlueof resources, ponts to guess ecrchother's expectcrtionscrbout cr
 22r
Shqne ond Venkotqtamsn

demcrnd'
the opportunity and increctseoverall
wide variety ol things' People mqke decisions to domincrte
"o*p.iitiott eventuolly begins
onthebosisolhunches,intuition'heuristics' ol
(Honnon & Freemcn, 1984)'When the entry
qnd qccurqte qnd inqccurqte informcrtion,cctus. ct rcrte crt
the qdditioncl entrepreneurs reaches
ing their decisions to be incorrect some of exceeds
ctrenot qlw.'ys correct' this which the bene{its from new entrcrnts
tirie. Since decisions pursue the
"errors" thqt crecrteshortcges' the costs, the incentive for people to
process leads to entrepre-
An indi- opportunity is reduced, becquse the
!,-,rft,rr.s, clnd misallocated resources' "error" may qmong more crnd
qn ,rl,-,riol profit becomesdivided
vidlcl <rlert to the presence of"too
low"'recom- more crctors(SchumPeter,1934)'
buy resourceswhere pricescre
prices are Second,theexploitotionofopportunity.pro-
bine them, crndsell the outputs where obout
"too high." vides informqtion to resource providers
thqt they possess ond
the vqlue oI the resources
Secoid, crsSchumpeter(1934)exploined' econ- prices over time' in
lecrdsthem to rqise resource
omies opercrtein cr constqnt stqte o{ disequilib- of the entrepreneur's
order to ccpture some
rium. Technologiccl, politiccl' socicrl'regulcrtory' the
prolit for themseives(Kirzner'1997)'In short'
and other types of chcrnge offer cr continuous qnd leqrning qbout the
ways diffusion of inlormation
supply of new information about different with
to enhqnce wecrlth' By mclking it o""uro"y of decisions over time' combined
to use resources the incentive for
resources into a more the lurs of profit, will reduce
possible to trqnsform
the people to pursue any given opportunity'
vcrluoble form, the new informqtion alters de-
therefore' the resources' The durcltion ol cny given opportunity
vcrlue of resourcesond, provision of
is pends on ct vcrriety of lcctors' The
proper equilibrium price' Becquseinformction pcrtent protec-
ditttibuted, qll economic qctors do *orropoly rights, cs occurs with
i*p.rf""ily the du-
time' tion or qn exclusive contrqct' increcrses
not receive new inlormqtion at the scrme
obtain information ration. Similcrly, the slowness of iniormation
Consequently, some people with
new dilfusion or th; Icgs in the timeliness
before others about resourceslying fallow' in-
mcrrkets oPen- which others recogrnizeinformction also
discoveries being mcde, or new provides
creose the durotion, porticulclrly il time
ing up. II economic qctors obtain new informa- qs occur with the
reinforcing odvantoies, such
tion before others, they cqn purchcrseresources stqndqrds or lecrning
cn adoption tf technicql
crt below their equilibrium vcrlue cnd ecrn "inability of others (due to
the re- ",r-L". Fincrlly, the
entrepreneurial profit by recombining sub-
(Schumpeter' vcrrious isolcting mechsnisms) to imitqte'
"our"L= crnd then selling them the rcrre resources
stitute, trade for or ccquire
1934). (Venkcrtqrq-
mqy iequired to drive down the surplus"
The informationql sourcesof opportunity durqtion'
in the cqse ol new technologry' *ot, 1997:I33) increcses the
be easier to see
buttheyneednot'berestrictedtotechnologiccl
of
developments. For exqmple' the productign The Discovery of Entrepreneuriql Opportunities
themovieTitonicgenercttednewinforrricrtion
qbout who wcts ct desirsble teen idol' An entre' Although on opportunity for entrepreneuriol
this
profit milnt exisi,-cln individuol cqn eorn
pr.rr.,r, could respond to this new informqtion thqt the oppor-
ty acting on the conjecture thcrt posters
o{ Leo- irofit ont if he or she recognizes
iunity exists and has value' Given thclt cn osym-
nclrdoDeCcpriowouldsellforgreoterthsntheir the exis-
metry ol belieis is a precondition for
cost of Production' all
de- tence of entrepreneuricrl opportunities'
Beccruse entrepreneuricrl opportunities everyone
qnd beliefs' opportunities must not be obvious to
pend on qsymmetiies of igforfiction (Hayek, 1945)'At cny point in time'
be- crIIof the time
Lventucrlly, entrepreneuriql opportunities tt tttt popul<rtion will discover
the oppor- only some subset
come cost inefficient to pursue. First,
provide a given opportunity (Kirzner' 1973)'
tunity to eqrn entrepreneuricrlprofit will
oppor- iVfty do some petple crnd not others discover
an incentive to mqny economiccrctors'As Al-
pcrticulcrr entrepreneurial opportunities?
tunitiescrreexploited,inlormotiondi{Iusesto is blind luck' re-
the ihough the nuII hypothesis
other members of society who cqn imitqte brocrd ccrtegories of
innova- seqrch hos suggttita two
innovator qnd crppropriqte some o{ the probcrbility thct portic-
entry of fcrctorsthat influence the
tor's entrepreneuricl profit' Although the opportuni-
validate ulqr people will discover pcrrticular
imitating entrepreneurs initiclly mcly
222 Acodemy of Monogement
ties: (l) the possession of the prior inlormqtion
necessqry to identify cln opportunity and (2) the
cognitive properties necessary to vcrlue it.
Inlormction corridors. Humcrn beings cll pos-
sess different stocks of in{ormcrtion,and these
stocks oi informqtion inlluence their ability to rec-
ognize pcrticular opportunities.Stocksol informq-
tion creqte mentql schemcrs,which provide c
frcrmework for recognizing new information. To
recognize crn opportunity, cn entrepreneur hqs to
hcrveprior informqtion that is complementcry with
the new information, which triggers crn entrepre-
neurial conjecture(Kcrish& Gilcrd, 1987).This prior
in{ormqtion might be obout user needs (Von Hip-
pel, 1985)or specilic crspectsof the production
function (Bruderl, Preisendorfer,& Ziegler, 1992).
The inlormation necessqry to recognize crny
given opportunity is not widely distributed
qcross the populotion beccruseof the specializcr-
tion of informqtion in society(Hcyek, 1945).Peo-
ple specialize in inlormqtion because specicrl-
ized informcrtion is more useful thon genercl
inlormqtion for most crctivities (Becker & Mur-
phy, 1992).As q result, no two people share cll of
the some inlormqtion qt the same time. Rother,
information about underutilized resources,new
technologry,unscrteddemqnd, qnd politiccl cnd
regulcrtoryshifts is distributed qccording to the
idiosyncratic life circumstcrncesol each person
in the populction (Venkcrtcrrqmcn, 1997).
The development ol the Internet provides c
uselul example. Only crsubset of the population
hcrshad entrepreneurial conjecturesin response
to the development ol this technologi'y.Some
people still do not know whqt the Internet is or
thct profitable opportunities exist to exploit it.
Cognitive properties. Since the discovery of
entrepreneuriql opportunities is not cn optimi-
zcrtionprocess by which people mcrkemechqni-
cql cqlculqtions in response to a given o set oI
alternqtives imposed upon them (Bqumol, 1993),
people must be qble to identify new mecrns-ends
relationships that qre genercted by c given
chcnge in order to discover entrepreneuricrlop-
portunities. Even if c person possessesthe prior
informcrtion necessqry to discover qn opportu-
nity, he or she mcry fail to do so becquse of qn
incbility to see new meqns-endsrelqtionships.
Unfortunately, visualizing these relqtionships is
dilficult. Rosenberg(1994)points out thcrthistory
is rife with excmples in which inventors fqiled
to see commercial opportunities (new mecns-
ends relationships) thqt resulted from the inven-
Review Jcnucry
tion ol importont technologies-from the tele-
grcph to the lqser.
Prior resecrrchhcrsshown thot people differ in
their crbility to identify such relqtionships. For
excrmple,reseqrch in the field of cognitive sci-
ence hqs shown thot people vqry in their obili-
ties to combine existing concepts crnd informc-
tion into new ideqs (see Ward, Smith, & Vqid,
I997,for seversl review articles).Recently,c few
reseqrchers hqve begun to evqluqte empiricclly
the role that cognitive properties plcy in the
discovery ol entrepreneuricl opportunities (see
Busenitz & Barney, lgg6; Kcish & Gilcrd, 1991;
Shcrver& Scott, l99t). For exqmple, Sorcsvathy,
Simon, qnd Lqve (1998)hqve shown thqt success-
ful entrepreneurs see opportunities in situations
in which other people tend to see risks, wherecrs
Bcrron (in press) hcs found thot entrepreneurs
may be more likely thon other persons to dis-
cover opportunities becquse they are less likely
to engcge in counterfactuol thinking (i.e., less
likely to invest time and eflort imcging whct
"might
hcrve been" in q given situqtion), less
likely to experience regret over missed opportu-
nities, qnd qre less susceptible to inqction iner-
tiq.
The Decision to Exploit Entrepreneurial
Opportunities
Although the discovery of an opportunity is c
necessqry condition for entrepreneurship, it is
not sufficient. Subsequent to the discovery oI qn
opportunity, cr potential entrepreneur must de-
cide to exploit the opportunity. We do not hqve
precise figrures on the aborting ol discovered
opportunities, but we do know thct not all dis-
covered opportunities are brought to fruition.
Why, when, crnd how do some people and not
others exploit the opportunities thct they dis-
cover? The qnswer agoin qppecrrsto be q func-
tion of the joint characteristics of the opportunity
qnd the ncture of the individualffenkctcrcmqn,
r997).
Nqture oI the opportunity. The chqrcrcteristics
of opportunities themselves inlluence the will-
ingmessof people to exploit them. Entrepreneur-
icl opportunities vqry on severcrl dimensions,
which influences their expected value. For ex-
crmple, c cure for lung ccncer has greoter ex-
pected vcrlue thon does q solution to students'
need for snqcks crt cr locql high school. The ex-
ploitction of crn entrepreneurial opportunity re-
 Shone ond Venkqtsrsman

probobility of exploitction ol entrepreneuricrl

quires the entrepreneur to believe that the ex- its cost'
of the entrepreneuricrl profit will be lpportunity becouse lecrrning reduces
i""t"d value
The decision to exploit crnentrepreneuri:J.:p-
iorg. enough to compensate for the opportunity is qlso inlluenced by individucrl differ-
of portunity
cos't oI other qlternqtives (including the loss new prod-
o{ ences in perceptions' The crecrtionof
leisure), the lack of liquidity ol the investment risk'
ond cr premium lor becring ucts and markets involves downside
time crnd money, must be in-
(Kirzner, 1973; Schumpeter' 1934)' beccruse time, effort, and money
uncertainty returns is
thot' on qvercge' vested before the distribution of the
To dqte, reseorch has shown 1997)'Sev-
hoving known (Knight, I92I; Venkcrtcrrqmqn'
exploit opportunities individucrl
entrepreneurs ercrl reseqrchers have crrgued thcrt
highei expected vqlue' In porticulor' exploita- differences in the willingness to bear this risk
when expected demclnd is
tion is more common inlluence the decision to Lxploit entrepreneuriql
in-
Icrge (Schmookler,1966;Schumpeter' 1934)' oppor,lr"ities (Khilstrom& Lq{font'
I979;Knight'
(Dunne' Roberts'
duJtty profit mcrrgins ore high f 0if l. For exqmple, people who exploit opportu-
1988), the technology lile cycle is more positively
& Samuelson, nities tend to lrqme informqtion
young (Utterbcrck,1994),the density of competi- qnd then respond to these positive perceptions
iion itt a pcrrticulclr opportunity sPqce is neither
(Pqlich & BogbY,1995)'
1984)'
too low nor too high (Hclnnan& Freeman' The decisionio exploit entrepreneuriol
oPfor-
is low (Shcne' 1996)' cnd pop- individual differ-
the cost of ccrpitcl tunities is ciso influenced by
from other entrcrnts is exploit opportu-
ulcrtion-level learning ences in optimism. People who
of
ovcriloble (Aldrich & Wiedenmeyer' 1993)' nities typicolly perceive their chqnces
Individual differences.Not cll potentiol entre- reolly ol"-
success o, *u,"h high"t thon they
the qnd much higher thtn those of others in their
preneurs will exploit opportunities with
crn 1988)'
sctmeexpected vcrlue'The decision to exploit industry (CoJper, Woo' & Dunkelberg'
of the new firms,
opportunity involves weighing the vqlue Mo,eo,,er, when these people crecrte
generclte thqt scqle econ-
oplortunity crgcinst the costs to they often enter industries in which
',rli.r" cnd the costs to generate vcrlue in other o-i"" Play cn importcrnt role
qt less thqn mini-
cnd they
wctys. Thus, people consider the opportunity mum efficient ="o1" (Audretsch' 199I)'
qctivities in mcrking the equilib-
"o=i of pursuing alternqtive enter industries crt rates exceeding
exploit opportuni- (Gort & Klepper' I982)'a
the decision whether or not to rium number of lirms
in
when their opPor- industries' ct most points
ties qnd pursue opportunities However, in most
Cockburn' (Dunne et crl'' 1988)' crnd
tunity cost is lower (Amit, Mueller' & time, most new firms fcril
(Audretsch'
1987)' In cddition' people con- Iew firms ever displclce incumbents
1995;Reynolds, oppor-
people who exploit
s i d e r t h e i r c o s t s f o r o b t a i n i n g t h e r e s o u r c e s n e c . 199I),suggestingthat qbout
qvercge, cre overly optimistic
essary to exploit the opportunity' For excrmple' tunities, on This
E'rans cnd Leighton (1991)showed thqt the
ex- the vcrlueo{ the oplortunities they discover'
the exploitction of op-
ploitcltion of opportunities is more - corn'lnon overoptimism mot-ittcttes stimulcting
*t "n people hcrve grecter fincrnciql ccpitol' port,-,rrityby limiting informqtion'
(Kclhnemqn &
Similcily, Aldrich .'nd Zimmer
(1986) reviewqd rosy forecqsts of tttt future
for rela-
resecrrchfindings thot showed thclt stronger
so- Lovcrllo, 1994),triggering the seqrch
of inlormcrtion (Kclish &
crc- ti.r.ty small o*o""tt
cicl ties to resource Providers lcrcilitate the cct lirst crnd
quisition of resources and enhcrnce the proba- Gilod, I99I), and leoding people to
onclyze lqter (Busenitz & Bcrney' 1997)'
litity ol opportunity exploitotion' Furthermore' impor-
Coop"r, W;, and Dunkelberg (1989) found thqt Otir., individual differences mqy be
exploit op-
p"ofl" cre more likely to expGit opportunities
iI tant in exploining the willingness to
peo-
lor en- portuniti.r. R"=.Lrchers have orgued thot
ifr"y hcrve developed useful informcrtion
ple with grecrterself-efficcrcycrndmore.internol
trepreneurship from their previous employment' oppor-
pr"=.r*obly beccuse such informcrtion reduces io",r, of control qre more likely to exploit
requires people to
the tunities, becquse exploitction
ihe cost of opportunity exploitation. Fincrlly,
prior ex-
transferqbitity ol informqtion from the
ql" 1989)'
perience to the opportunity (Cooper et
o The iniormotion signcls generated by the entrepreneur-
l" well cs prior entrepreneurial experience
process crreweqk'
(Ccrrroll & Moscrkowski, I987)' increcrses the
iol
 Academy ol Monagement Review
qct in the {qce ol skepticism of others (Chen,
Greene, & Crick, 1998).Similarly, opportunity ex-
ploitcltion involves cmbiguity, cnd people who
hqve cr greater tolerqnce for ambiguity moy be
more likely to exploit opportunities (Begley
.&
Boyd, 1987).Finclly, the exploitqtion of opportu-
nity is cl setting in which people ccrn qchieve,
providing c vcluoble cue for those who possess
c high need for cchievement (McClellqnd, I96l).
Consequently, those who qre high in need for
qchievement moy be more likely thcn other
members of society to exploit opportunities.
Readers should note thot the ottributes that
increqse the probability ol opportunity exploita-
tion do not necesscrily increcrse the probcbility
of success. For excmple, overoptimism might be
qssocicrted with cr higher probcrbility of both ex-
ploitation and fcilure. Of the populction of indi-
viducrls who discover opportunities in a given
industry, those who qre pessimistic mc:y choose
not to exploit discovered opportunities becquse
they more sccurqtely estimcte whct it will tclke
to compete qnd how mqny other people will try
to do similcrr things. Overoptimistic individuols
do not stop themselves from exploiting these
opportunities, becquse their overoptimism lim-
its in{ormqtion and motivcrtes rosy foreccrsts of
the future.
MODESOF EXPLOITATION
Another criticcl question concerns how the ex-
ploitction o{ entrepreneurial opportunities is or-
gcrnized in the economy. Two mcjor institutioncl
c r r r qn g e me n ts fo r th e e x p l o i tcti on of these
opportunities exist-the creqtion of new {irms
(hierarchies) qnd the sqle ol opportunities to ex-
is t ing fi rms (mq rk e ts )-b u t th e common crs-
sumption is thct most entrepreneuricll octivity
occurs through de novo stcrtups. However, peo-
ple within orgcrnizqtions who discover opportu-
nities sometimes pursue those opportunities on
behall of their existing orgonizctions and some-
times estqblish new orgonizctions, whereos
independent qctors sometimes sell their oppor-
tunities to existing organizations crnd some-
times estoblish new organizctions to pursue the
opportunities.
Reseorch shows thot the choice of mode de-
pends on the nqture of the industriql orgcnizcr-
tion, the opportunity, clnd the cppropriobility re-
gime. Reseqrch in industrial orgcrnizqtion hcrs
Ionuory
shown thqt entrepreneurship is less likely to
take the form oI de novo stcrtups when ccpitol
mcrrketimperfections mqke it diflicult for inde-
pendent entrepreneurs to secure finqncing (Co-
hen & Levin, 1989).Entrepreneurship is more
likely when the pursuit of entrepreneuricl op-
portunity requires the elfort oI individuqls who
lcck incentives to do so in lcrge organizations;
when scqle economies,first mover crdvontcges,
and leqrning curves do not provide cdvcntcges
to existing firms (Cohen & Levin, lg89); qnd
when industries hcrvelow bqrriers to entry (Acs
& Audretsch, 1987).Reseqrch on the cppropri-
cbility of inlormqtion has shown thot entrepre-
neurship is more likely to tcrke the {orm of de
novo stcrrtupswhen informcrtion cqnnot be pro-
tected well by intellectucl property lcws, inhib-
iting the sale of entrepreneuriql opportunities
(Cohen & Levin, 1989).Finolly, resecrrchon the
nqture of opportunities hqs shown thqt entrepre-
neurship is more likely to take the form of de
novo stortups when opportunities ctre more un-
certoin (Ccrsson,1982),when opportunities do
not require complementcry crssets(Teece,l986),
qnd when opportunities destroy competence
(Tushman & Anderson, 1986).
CONCLUSION
Entrepreneurship is qn importcnt ond rele-
vqnt field of study. Although those in the field
fqce mqny difficult questions, we hove pre-
sented a frqmework for exploring them. We rec-
ognize thqt we mqy have offered some uncertqin
assumptions, potenticlly flcwed logical argu-
ments, or hove made stqtements that will prove,
ultimoteiy, to be inconsistent with datc yet to be
collected. Nevertheless, this frqmework pro-
vides a stclrting point. Since it incorporcrtesin-
formqtion gclined from many disciplinary van-
tage points and explored 'through many
dillerent methodologies, we hope thqt it will
prod scholqrs from mqny dif{erent fields to join
us in the quest to crecrtea systemqtic body o{
inf ormotion qbout entrepreneurship. Mcrny
skepticsclcim thqt the creqtion of such a body ol
theory qnd the subsequent qssembly of empiri-
ccl support for it qre impossible. We hope thct
other scholqrs will join our ef{ort to prove those
skeptics wrong.

2000 Shane qnd Venkqtqrqman
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scott Shcrneis qssocicte professor of entrepreneurship

in the Robert H. Smith School
of Business ond director of reseqrch qt the Dingmcn
Center for Entrepreneurshipot
the university of Mcrylond. He received his Ph.D.from
the University of pennsylvoniq.
His current reseorch locuses on entrepreneurshipin
high-technologysettings.
s' venkatarcrmqnis the somuel L. Slover Associote
Prolessoro{ BusinessAdministrq-
tion ond-directoroi reseorchot the BattenCenter lor
' EntrepreneuriolLeodershipin the
Dorden Grqduqte School ol BusinessAdministrqtion
ot the University of virginic. He
received his Ph'D';ftom the University ol Minnesota.
His current resecrch Iocuseson
entrepreneurshiptheory.
5