Cognitive Approaches To Entreprenuership Research, Volume 6 (Advances in Entrepreneurship, Firm Emergence and Growth) (Advances in Entrepreneurship, Firm Emergence and Growth) (PDFDrive)

CONTENTS
LIST OF CONTRIBUTORS vii
COGNITIVE APPROACHES TO ENTREPRENEURSHIP

RESEARCH
Jerome A. Katz and Dean A. Shepherd 1
ORGANIZATIONAL LEARNING BY NEW VENTURES:

CONCEPTS, STRATEGIES, AND APPLICATIONS
Benyamin Bergmann Lichtenstein, G. T. Lumpkin
and Rodney C. Shrader 11
ENTREPRENEURIAL FIT: THE ROLE OF

COGNITIVE MISFIT
Keith H. Brigham and Julio O. De Castro 37
THE ROLE OF REGRETFUL THINKING, PERSEVERANCE,

AND SELF-EFFICACY IN VENTURE FORMATION
Gideon D. Markman, Robert A. Baron and David B. Balkin 73
THE SELF-DETERMINATION MOTIVE AND

ENTREPRENEURS’ CHOICE OF FINANCING
Harry J. Sapienza, M. Audrey Korsgaard and
Daniel P. Forbes 105
EXTENDING THE THEORY OF THE ENTREPRENEUR

USING A SIGNAL DETECTION FRAMEWORK
Jeffrey S. McMullen and Dean A. Shepherd 139
A TRANSACTION COGNITION THEORY OF GLOBAL

ENTREPRENEURSHIP
Ronald K. Mitchell 181
v
vi
THE IMPACT OF ENTREPRENEURIAL EXPERIENCE ON

OPPORTUNITY IDENTIFICATION AND EXPLOITATION:
HABITUAL AND NOVICE ENTREPRENEURS
Deniz Ucbasaran, Mike Wright, Paul Westhead and
Lowell W. Busenitz 231
OPPORTUNITY DEVELOPMENT: A SOCIO-COGNITIVE

PERSPECTIVE
Alice De Koning 265
THE DOMAIN OF ENTREPRENEURSHIP RESEARCH:

SOME SUGGESTIONS
Per Davidsson 315
LIST OF CONTRIBUTORS
David B. Balkin Leeds College of Business, University

of Colorado, Boulder, USA
Robert A. Baron Lally School of Management and
Technology, Rensselaer Polytechnic
Institute, USA
Lowell W. Busenitz Michael F. Price College of Business,
University of Oklahoma, USA
Keith H. Brigham Jerry S. Rawls College of Business
Administration, Texas Tech
University, USA
Per Davidsson Jönköping International Business
School, Sweden
Julio O. De Castro Leeds School of Business, University
Daniel P. Forbes Carlson School of Business,
University of Minnesota, USA
Benyamin Bergmann Department of Management,
Lichtenstein University of Hartford, USA
G. T. Lumpkin Department of Managerial Studies,
University of Illinois at Chicago, USA
Jerome A. Katz Department of Management, Saint
Louis University, USA
Alice de Koning J. Mack Robinson College of
Business, Georgia State University,
Atlanta, USA
M. Audrey Korsgaard Moore School of Business, University
of South Carolina, Columbia, USA
vii
viii
Gideon D. Markman Terry College of Business, University

of Georgia, Athens, USA
Jeffrey S. McMullen Leeds School of Business, University
Ronald K. Mitchell Faculty of Business, University of
Victoria, Canada
Jointly appointed Professor,
Guanghua School of Management,
Peking University, PR China
Harry J. Sapienza Carlson School of Business,
University of Minnesota, USA
Rodney C. Shrader Department of Managerial Studies,
University of Illinois at Chicago, USA
Dean A. Shepherd Leeds School of Business, University
Deniz Ucbasaran Nottingham University Business
School, UK
Paul Westhead Nottingham University Business
School, UK
Mike Wright Nottingham University Business
School, UK
COGNITIVE APPROACHES TO
ENTREPRENEURSHIP RESEARCH
Jerome A. Katz and Dean A. Shepherd
Cognition has always been central to the popular way of thinking about
entrepreneurship. Entrepreneurs imagine a different future. They envision or
discover new products or services. They perceive or recognize opportunities.
They assess risk, and figure out how to profit from it. They identify possible new
combinations of resources. Common to all of these is the individual’s use of their
perceptual and reasoning skills, what we call cognition, a term borrowed from
the psychologists’ lexicon.
While cognition has been central to the way people in general describe
entrepreneurship, it has been only sporadically used as an approach in en-
trepreneurship research. Worse, in many of those early efforts, cognitions were
stipulated theoretically, and rarely checked. This led to ideas such as the belief
in the economic literature that entrepreneurs were great risk-takers. Only when
checked empirically against the harsh reality of entrepreneurs’ self-reports did re-
searchers find that entrepreneurs in fact did not demonstrate a higher-than-average
risk-taking propensity. David McClelland (McClelland, 1961; McClelland &
Winter, 1969) and later Robert Brockhaus (1980) showed that entrepreneurs
tended toward moderate risk-taking. Even this finding endured revision in the
1990s when researchers such as Arnold Cooper (Gimeno, Folta, Cooper & Woo,
1997) discovered that entrepreneurs perceive situations as less risky than
objectively warranted.
Just as risk-taking went through several revisions and refinements, so too did
other elements of the entrepreneurial process such as opportunity recognition,
attribution, self-efficacy, creativity and innovation. Much of this effort to revise
Cognitive Approaches to Entrepreneurship Research

Advances in Entrepreneurship, Firm Emergence and Growth, Volume 6, 1–10
© 2003 Published by Elsevier Science Ltd.
ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06001-X
1
2 JEROME A. KATZ AND DEAN A. SHEPHERD
and refine entrepreneurial cognitions began in the 1980s. Gartner (1985) argued
persuasively for models of entrepreneurship (which he defined as organization
creation) that included or dealt with at least two or more of four potential di-
mensions: person, firm, environment, and process. While some of these elements
had been considered individually before (e.g. process models were discussed by
McClelland, 1961; Shapero, 1975), the explicitly multi-level model Gartner pro-
posed was seen as the most comprehensive to date. Although not intended per se as
an attack on personological approaches, Gartner’s arguments had a chilling effect
on personological research by the late 1980’s when Gartner published two more
articles (Gartner, 1988, 1989) which persuaded many of the editors and reviewers
in the field that a new, more inclusive and rigorous approach to individual level
studies was needed.
While the purely personological approaches common in the entrepreneurship
research of the 1970s and 1980s would typically fail to consider multiple
dimensions, cognitive process models, which often triangulate aspects of the
entrepreneur, perceived elements of the environment, and use a process to tie these
together (often with additional ties to the emerging firm), posed greater promise as
a direction for future research. The model of organizational emergence published
during this period by Katz and Gartner (1988) demonstrated among other things
how individual level phenomena like cognition (e.g. enactment and intentional
processes) could lead to the emergence of new entities at the organizational level,
one of the most detailed cross-level synthesis ever developed in the research
literature. Despite this, Gartner’s challenge of multi-level, multi-dimensional
entrepreneurship research resulted in something of an inadvertent hiatus in
individual-level research. Efforts by several individuals lead to the resumption of
individual-level research with a stronger cognitive basis.
Perhaps the 1980s could be called “The Age of the Conference” for the field
of entrepreneurship. While the first “state of the art” conference began at Baylor
in 1980 (Kent, Sexton & Vesper, 1982), and the first marketing-entrepreneurship
conference was begun by Gerry Hills in 1982 (Cooper, Hornaday & Vesper, 1997)
the late 1980’s saw a set of conferences emerge that held profound impacts on the
cognitive approach to entrepreneurship research. One of these was the Gateways
To Entrepreneurship Research Conferences at Saint Louis University, organized
by Robert Brockhaus and Jerome Katz.
Rather than inviting papers as a ticket of admission, the Gateways Conferences
identified topics, and participants would discuss these, with the goal of generating
new research and publication to come from the Conference. The Conferences
provided the material for the first two volumes of the series you are reading now,
covering topics such as demographic approaches to entrepreneurship, individual
level entrepreneurhsip and firm-level entrepreneurship. That first Gateways
Cognitive Approaches to Entrepreneurship Research 3
Conference in 1987 exposed a rather well-known social psychologist named

Kelly Shaver to entrepreneurship, including a fateful sushi dinner with William
Gartner that would lead to a longstanding collaboration that later became central
to the cognitive approach in entrepreneurship.
Ray Bagby organized a January 1991 conference at the University of Baltimore
on “Interdisciplinary Conference on Entrepreneurship Theory,” in which Frank
Hoy and Jerome Katz supported Bagby as resident experts and discussion leaders.
This resulted in two special issues of Entrepreneurship: Theory & Practice in
1991 and 1992 edited by Lanny Herron, Deborah Smith-Cook and Harry Sapienza
(1991). Included in these special issues were papers by Shaver and Scott (1991)
and Gartner, Bird and Starr (1992) that continue to be cited today as seminal
works in anchoring the modern cognitive approach in entrepreneurship.
Amid these efforts, Gartner felt that the opportunity was right to promote a new
generation of individual-level studies of entrepreneurial processes. His intention
was to hold a “theoretical shoot-out” (Gartner, personal communication, 2003).
The initial result came in the form of a pair of special issues of Entrepreneurship:
Theory & Practice published in Fall 1992 and Winter 1993 with the common
theme “Thus the theory of description matters most” (Gartner & Gatewood,
1992). Included in these special issues were papers on intention (Bird, 1992),
psychosocial cognitive models of choice (Katz, 1992), information processing
(Hansen & Allen, 1992) and group emergence perspectives (Katz, 1993). The
14 articles in these special issues crossed all levels of analysis, but it was clear
that the individual-level approach was still of tremendous interest to the research
community, and that the congitive approach would be one of the major vehicles
for the new generation of studies.
Capitalizing on this observation, Gartner took the lead in developing yet another
special issue of ET&P this one in Spring 1994 with the theme “Finding the
entrepreneur in entrepreneurship,” co-edited by Gartner, Kelly Shaver, Elizabeth
Gatewood and Jerome Katz (1994). That special issue came as an effort to
restart empirical research on individual-level entrepreneurship. Central to this
special issue was to be the direction empirical research in entrepreneurship would
take, and here the impact of Kelly Shaver cannot be underestimated. One of
the developers of modern attribution theory, Shaver was well versed in rigorous
individual-level research approaches, and was to become a tireless networker
bringing entrepreneurship researchers and cognitive theorists together. Gartner,
Shaver and Gatewood had been developing and testing attributional models
with samples drawn from Gatewood’s Small Business Development Center
clientele (e.g. Gatewood, Shaver & Gartner, 1995), making these three a natural
team for the special issue. Katz, who had worked with social psychologists and
entrepreneurship researchers at Harvard, MIT and Michigan was added to aid in
bridging the fields. Together, these four sought out exemplar papers, using current
cognitive theory in rigorous and novel ways. The 1994 Special Issue, building on
the theoretical models introduced in the 1992 and 1993 ET&P special issues, did
much to reintroduce individual level empirical studies to the field of entrepreneur-
ship research. This was evident in models with a strong cognitive element, such
as the event model of Krueger and Brazeal (1994) and the competency model
of Chandler and Hanks (1994), but also in more personality based approaches
such as motivational model proposed by Naffziger, Hornsby and Kuratko (1994).
By this point, the field had come full circle, with individual-level research based
on stronger conceptual foundations and more rigorous empirical approaches,
which had been Gartner’s goal. While in the prior generation of individual-level
approaches personological approaches predominated, the new generation of
individual-level research would have more of a cognitive orientation.
It is worthwhile noting that this very fundamental change in the way research
was conceived and performed was done largely as an effort by very junior profes-
sors. While Shaver, Bagby and Hoy were already senior in their fields, Gartner,
Katz, Gatewood, Bird, Carsrud, Sapienza, Smith-Cook, Herron, Chandler, Hanks,
Hansen, Krueger, and Brazeal were all assistant professors at the time of these
conferences and special issues of the late 1980s and early 1990s. It is possible that
the field of entrepreneurship in those days, with a less evolved infrastructure, was
easier to move than it is today, but it is also fair to say that today there are more
resources, more outlets for publications, and more venues to make ideas heard
than there were 10 or 15 years ago. Arguably the potential for junior faculty to
transform a field of inquiry still very much exists today. What is needed is will to
achieve, a willingness to network, and above all a shared vision of transformations
that will improve the discipline.
The ten years since the publication of these special issues have continued to be
a period of tremendous growth in the sophistication of individual level research,
with even greater discussion and debate on individual level approaches than ever
seen in the field. The cause for much of this came from the development of a
survey for nascent entrepreneurs by the Entrepreneurial Research Consortium.
The survey, later called the Panel Study of Entrepreneurial Dynamics, was
intended as the standard-setter for key variables and measures in entrepreneur-
ship research. Built by over 120 researchers from more than 30 institutions
worldwide (Reynolds, 2000), the research teams developing measures included
many of the most active individual-level researchers in entrepreneurship. The
space limitations inherent in the survey meant that variables and measures
received one of the most detailed, profound, public and critical assessments
ever attempted in the field. As a result, a new distillation of key concepts and
measures in individual-level processes emerged, and because of the widespread
membership and involvement in the ERC/PSED process, these concepts and

measures became among the most widely disseminated and best understood
scales ever developed. Today the impact of the ERC/PSED effort is evident in
the sophistication, elegance, and rigor of the measures used in entrepreneurship
research.
The ERC/PSED was invented and pioneered through the truly monumental
efforts of Paul Reynolds, who had worked at Wharton, Michigan, Marquette,
Babson and the London Business School at different phases of the research
process. Reynolds’s contribution of vision and determination will probably
become a legendary example for research entrepreneurship in academia, and his
contributions to all phases of the research cannot be overstated. But like so many
great entrepreneurial ventures, even those started by an individual often only
come to fruition by the efforts of a team, and for the ERC, and later the PSED,
this came in two stages. Initially, Reynolds, Nancy Carter and William Gartner
worked closely together with the first precursor to the ERC research stream
(Carter, Gartner & Reynolds, 1996), with Gartner working to operationalize the
multi-level variables he discussed in prior works.
As this work proved to viability of a study of nascent or potential entrepreneurs,
the potential for the ERC/PSED emerged. To govern this consortium of institutions
and faculty, an Executive Committee was formed. Reynolds, Carter and Gartner
were immediately elected to the Executive Committee, as were Candida Brush,
Per Davidsson, Mary Williams and Kelly Shaver. The resulting ERC/PSED
surveys in many ways came to embody the new generation of individual-level
cognitive research that Gartner and Shaver worked so hard to develop and
showcase in other venues.
With the past decade of concentrated focus on individual level models of
entrepreneurial cognition in both theory, research and instrument development, the
popular and academic conceptualizations of the entrepreneur as a person driven
by cognitions have neatly come together. Today entrepreneurship researchers
actually study concepts like opportunity and vision, which are immediately
recognizable to the general public as characteristic of entrepreneurs.
Despite the face validity of cognitive models of entrepreneurship to the
general public, the specifics of the theories, instruments and research efforts
themselves are focused on more demanding forms of validation, linked to a more
demanding research community and the action arms of governments and business
funding organizations eager to increase the number of business starts, especially
among high-growth ventures. In developing this volume of the Advances in
Entrepreneurship, Firm Emergence and Growth series, determining which of
the many cognitive advances in entrepreneurship research to present posed a
significant problem of choice.
With an established foundation for cognitive approaches to entrepreneurship,

we took the opportunity in this volume to look forward and showcase the work
of those who we believe will build on this foundation and lead future research on
cognitive approaches to entrepreneurship.
The second chapter is “Organizational Learning by New Ventures: Concepts,
Strategies, and Applications” by Benyamin Lichtenstein, Tom Lumpkin and Rod
Shrader. We asked this team to contribute to Volume 6 for a number of reasons. First,
Benyamin is a passionate advocate of entrepreneurship research on knowledge and
learning, and brings a unique and refreshing perspective to the field. Both Tom and
Rod have already made a substantial contribution to the entrepreneurship literature
– Tom at the intersection of strategy and entrepreneurship and Rod at the inter-
section of international business and entrepreneurship. In this chapter, Benyamin,
Tom and Rod categorize the organizational learning literature into Behavioral,
Cognitive, and Action learning, and suggest a number of ways in which new
ventures could be more successful at learning than larger and older organizations.
They also explore three entrepreneurial contexts where learning might be particu-
larly important and match them to the categories of learning. Benyamin, Tom and
Rod provide an extensive prescriptive/implication section, in which they detail
tactics for both enhancing entrepreneurial learning and studying entrepreneurial
learning.
The third chapter is “Entrepreneurial Fit: The Role of Cognitive Misfit” by
Keith Brigham and Julio De Castro. We invited Keith and Julio to contribute to
this book because their work acts as a counterweight to the conventional wisdom
of the 1990s that research on the stable personal characteristics of entrepreneurs
represented a dead end. In this chapter, they introduce the construct of cognitive
misfit to the field of entrepreneurship within a Person-Organization fit (P-O fit)
framework. They then group types of entrepreneurs according to their cognitive
style and empirically test for misfit when interacting with organizational structure.
They find that an entrepreneur whose cognitive style is mismatched with the firm
context will tend to experience significantly more “negative” outcomes (higher
burnout, lower satisfaction, and higher intentions to exit) than an entrepreneur who
is more in fit. These findings have implications for certain types of entrepreneurs
at different stages of firm growth and maturity.
The forth chapter is “The Role of Regretful Thinking, Perseverance, and Self-
Efficacy in Venture Formation” by Gideon Markman, Robert Baron and David
Balkin. We approached Gideon to contribute a chapter because he is a talented
and motivated young scholar developing important streams of entrepreneurship
research at the individual level of analysis. In this chapter, he continues his
productive association with Robert Baron and David Balkin. Robert has built a
substantial reputation in the fields of psychology and social psychology and over
the last five years has refocused his considerable skills and enthusiasm towards
exploring entrepreneurial cognition and behaviors. David is also a leading scholar
(in human resource management) who has recently turned his attention to the field
of entrepreneurship. In this chapter, Gideon, Robert and David conduct a study
to distinguish inventors who used their patents to start new ventures from those
inventors who also created patents but remained within their existing organizations
(as employees). The basis for the comparison is inventors’ tendency to engage in
regretful thinking, their perceived capacity to persevere in the face of adversity, and
their self-efficacy. The results are interesting, particularly the finding on regretful
thinking.
The fifth chapter is “The Self-Determination Motive and Entrepreneurs’ Choice
of Financing” by Harry Sapienza, Audrey Korsgaard and Daniel Forbes. We are
delighted to have these authors as contributors. Harry’s research typically breaks
new ground and this chapter with Audrey and Dan is no exception. Audrey is a
well-respected scholar of procedural justice and the application of her knowledge
of that literature and different research methods to entrepreneurial issues has
had a major impact on the field. Dan is a young scholar off to an impressive
start. In this chapter, they develop a framework for understanding entrepreneurial
financing choices by investigating the motives of wealth maximization and self-
determination. Specifically, they focus on factors that influence entrepreneurs’
aversion to sharing decision control and their perceptions of decision control
risk. They argue that venture stage, entrepreneurs’ experience and the business
performance of past and current ventures influence decision control risk aversion,
and that industry norms, reputation, and the procedural justice of interactions
with financiers influence perceived decision control risk.
The sixth chapter is “Extending the Theory of the Entrepreneur Using a Signal
Detection Framework” by Jeff McMullen and Dean Shepherd. Jeff is completing
his dissertation at the University of Colorado and will be an Assistant Professor at
Baylor University from August 2003. We invited Jeff to contribute a chapter to this
volume because we believe that he has considerable talent and will likely develop
a number of highly impactful theories within the domain of entrepreneurship.
In this chapter, he, with Dean Shepherd, propose that the decision to pursue
opportunity requires concomitant consideration of belief (uncertainty) and desire
(motivation). When they apply their framework to the better-known economic
theories of the entrepreneur they demonstrate that these theories rely upon one
construct or the other, and that a framework that includes both constructs provides
the opportunity to integrate previously conflicting theories.
The seventh chapter is “A Transaction Cognition Theory of Global Entre-
preneurship” by Ron Mitchell. Ron is probably best known for his work on
expert scripts and has been applying his knowledge and skills to developing our
understanding of entrepreneurial knowledge. Ron is also a passionate advocate

for further developing research on entrepreneurial cognition, e.g. he was the editor
of a recent special issue of Entrepreneurship Theory and Practice on cognition
and information processing. Ron presents a transaction cognition theory of global
entrepreneurship. In this theory, he establishes a relationship between transaction
cognitions – mental models guiding certain economic behaviors – and the success
of transactions. Ron then subjects his theory to a rigorous assessment consistent
with the philosophy of science. This chapter provides a path for future research
on global entrepreneurship.
The eighth chapter is “The Impact of Entrepreneurial Experience on Oppor-
tunity Identification and Exploitation: Habitual and Novice Entrepreneurs” by
Deniz Ucbasaran, Mike Wright, Paul Westhead and Lowell W. Busenitz. The
University of Nottingham has been a source of considerable (and high quality)
entrepreneurship research. The primary drivers behind this reputation are Mike
Wright and Paul Westhead. Deniz Ucbasaran represents the next generation
charged with the responsibility of carrying the torch – a task at which she appears
highly capable. Working with Deniz, Mike and Paul is Lowell Busenitz. Lowell’s
research on the decision making of entrepreneurs has been truly innovative, e.g.
he was the first to investigate the heuristics of entrepreneurs. In this chapter, Deniz
and her colleagues utilize a human capital perspective to highlight cognitive and
behavioral differences between types of entrepreneurs – habitual and novice.
Of particular interest is their exploration of two broad categories of cognition –
heuristic-based thinking and systematic thinking.
The ninth chapter is “Opportunity Development: A Socio-Cognitive Per-
spective” by Alice De Koning. We invited Alice to contribute a chapter to this
volume because she has a way of thinking about entrepreneurship that is new and
refreshing. In this chapter, Alice links an entrepreneur’s cognitive process and
social context in an interdependent process model of opportunity development.
The process model is developed based on insights generated through two phases
of exploratory field research with mostly successful multiple entrepreneurs and
provides an explanation for ways in which people effect entrepreneurs’ thinking
process and opportunity development. Her process model provides both insight
into opportunity development and a means of connecting the streams of research
on opportunity recognition and firm emergence.
The tenth chapter is “The Domain of Entrepreneurship Research: Some
Suggestions” by Per Davidsson. In Volume 3 of this series (1997), S. Venkatara-
man contributed a chapter on behalf of the Journal of Business Venturing, in
which he made his case for a distinctive domain of entrepreneurship. We wanted
to continue this discussion and so asked Per Davidsson to offer his perspective.
In our opinion, Per is one of the leaders of the community of entrepreneurship
scholars and is an editor for Entrepreneurship Theory & Practice in whose behalf
he contributed this article. Per provides a provocative chapter that is bound to (we
hope) stimulate further discussion among entrepreneurship scholars.
These papers go into production at a particularly auspicious time for cognitive
researchers. The 2000–2010 decade has been tagged as “The Decade of Behvior”
by a consortium of more than four dozen scientific organizations worldwide (URL:
http://www.decadeofbehavior.org/), and cognitive researchers are contributing
much of the leading work in this effort. A month before this volume went to press,
one of the 2002 Nobel Prizes in Economics was awarded to Daniel Kahneman,
whose work (originated with Amos Tversky) focused attention on new forms of
cognitive heuristics, revitalizing the field of cognitive science as a whole. These
heuristics even made their way into entrepreneurship, initially through conceptual
models such as the psychosocial cognitive model of entrepreneurship (Katz,
1992), and by now have diffused through the field to the extent that six of the
papers in this volume (Lichtenstein et al.; Markman et al.; McMullen & Shepherd;
Mitchell; Sapienza et al.; Ucbasaran et al.) cite the key works of Kahneman or
Kahneman and Tversky.
With such a background and grounding, this volume reflects an effort to explore
in depth some significant portion of the full range of cognitive theory applicable in
entrepreneurial settings. The volume is intended not just to help define the major
cognitive initiatives of the present, but to provide an early, detailed introduction
to the next generation of research and conceptual issues that define the growing
cognitive orientation in entrepreneurship research.
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ORGANIZATIONAL LEARNING
BY NEW VENTURES: CONCEPTS,
STRATEGIES, AND APPLICATIONS
Benyamin Bergmann Lichtenstein, G. T. Lumpkin

and Rodney C. Shrader
INTRODUCTION
Organizational learning continues to be an important issue for all types of firms.
Managerial accounts of organizational learning are in high demand; for example,
Senge’s The Fifth Discipline (Senge, 1990a) has sold over 500,000 copies in
the U.S. Studies exploring the nature of knowledge creation, intellectual capital,
and knowledge management have been on the rise, with recent papers being
published for academics (McElroy, 2000; Nahapiet & Ghoshal, 1998; Nonaka,
1994), and practitioners (Brown & Duguid, 1998; Fryer, 1999). According
to some experts, the ability to transform information into knowledge through
organizational learning is a critical success factor for all businesses in the
current knowledge-based economy (Davis & Botkin, 1994; Lei, Slocum &
Pitts, 1999).
The importance of organizational learning should be especially strong for new
ventures. Young firms, it can be argued, have a lot to learn and their ability to
do so quickly and accurately is vital to their survival. Research has shown that
older organizations have higher survival rates than newer ones (Carroll, 1983),
due to their ability to encode learning into reliable routines (Levinthal, 1991).

Copyright © 2003 by Elsevier Science Ltd.
All rights of reproduction in any form reserved
ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06002-1
11
12 B. B. LICHTENSTEIN, G. T. LUMPKIN AND R. C. SHRADER
Insofar as small entrepreneurial ventures rely on proactivity and entrepreneurial

strategy making (Dess, Lumpkin & Covin, 1997) their success will also be
dependent on these qualities of organizational learning. Thus, the greater a
learning orientation in a new venture, the greater the likelihood of its long-term
success.
Surprisingly, very little research on organizational learning has been carried
out in new ventures, nor have researchers examined whether new ventures might
be able to learn easier and more effectively than large organizations. Most
of the empirical studies of organizational learning that have been conducted
have focused exclusively on major corporations (Bowen, Clark, Holloway &
Wheelwright, 1994), or on computer simulations of large organizations (Cohen,
March & Olsen, 1972; Herriott, Levinthal & March, 1985; Lounamaa & March,
1987). Although insightful, little effort has been made to apply what has been
learned from these studies to new ventures.
A close look at the writing on organizational learning reveals that new ventures
might be much more likely to learn than large companies. Entrepreneurial firms
have an urgent need to learn due to three factors that are unique to the new
venture experience. First, entrepreneurial behavior is the heart of new venture
creation, and their ability to learn new behavior – particularly the way they learn
to employ social skills – can be the key to success and performance (Baron
& Markman, 2000). Second, the cognitive biases and heuristics that guide the
earliest stages of new venture development (Busenitz & Barney, 1997) usually
need to be “updated” to fit the emergent situation, calling for learning at every
turn. Third, learning is a key to the creative process; this is especially important
for nascent firms engaging in the creative course of opportunity recognition (Hills,
Shrader & Lumpkin, 1999).
This paper endeavors to link the organizational learning literature to the
conditions facing new ventures by addressing three conceptual themes: (1) Why
might new ventures be more likely to engage in successful learning than older,
larger organizations? (2) Which contexts and cognitive arenas might be most
impacted by learning in entrepreneurial firms? and (3) What processes, tools,
and techniques of organizational learning in large organizations might be most
successful in new and small ventures? We begin with a review of the literature on
organizational learning which we summarize into three categories – Behavioral
learning, Cognitive learning, and Action learning. These three categories become
the organizing principle around which we propose distinct answers to the
questions posed just above. Our goal is to integrate literature and provide useful
suggestions to new firm owners and managers interested in extending the learning
in their firms and creating learning organizations.
Organizational Learning by New Ventures 13
ORGANIZATIONAL LEARNING:
A SUMMARY OF THEMES
The processes that contribute to learning outcomes are complex and occur on
multiple levels of analysis (Argyris & Schon, 1978; Kim, 1993; Weick & Roberts,
1993). Many frameworks have been used to describe the qualities and character-
istics of organizational learning, and these perspectives rarely acknowledge each
other. Following earlier work by Lundberg (1995) and others, we categorize the
organizational learning literature into three streams of scholarship: Behavioral
learning, Cognitive learning, and Action learning. Each of these will be described
briefly in the three subsections that follow.
Behavioral Learning
Many of the classic ideas about organizational learning are based on the assump-
tion that organizations are goal-oriented, routine-based systems that respond to
experience by repeating behaviors that have been successful and avoiding
those that are not (Lundberg, 1995). This perspective has two manifestations.
The aim of the first is primarily to describe the acquisition, distribution, and
storage of information and knowledge in a firm (Huber, 1991; Leavitt & March,
1988; Walsh & Ungson, 1991). A second approach focuses on the adaptive
learning concept that trial-and-error learning leads to routines and processes
which confer selective advantage to the firm (Herriott et al., 1985; Levinthal,
1991; Van de Ven & Polley, 1991). Because of the emphasis on learning
from repeated behaviors, this perspective is often referred to as behavioral
learning.
Behavioral learning focuses on the “antecedents and changes in organizational
structures, technologies, routines and systems as the organization responds to
its own experience and that of other organizations” (Lundberg, 1995, p. 7).
These theories argue that organizational learning is an adaptive process and thus
is triggered only by performance gaps or other signals of poor market perfor-
mance (Cyert & March, 1963). In a similar way, since trial-and-error learning
generates routines that tend to make an organization stable, it is only possible
to spark major organizational change through significant externally-generated
structural events such as the hiring of a new CEO (Tushman & Romanelli,
1985) or the approach of an impending deadline (Gersick, 1988). As such,
the learning that occurs from a behavioral approach is primarily incremental
(Levinthal, 1991).
Cognitive Learning
More recently, a perspective has arisen that focuses on the cognitive content of
organizational learning and how changes in individual’s cognitive maps are trans-
ferred such that the organization’s cognitive maps are also changed (Bartunek,
1984; Brown & Duguid, 1991; Kim, 1993; Nonaka, 1994; Weick & Roberts,
1993). Here the focus is on the content of learning rather than on its behavioral
outcomes, on the processes that improve the dissemination of data throughout
a firm, and the utilization of that data to improve performance (Fryer, 1999). In
a general sense, by putting the right processes in place, a learning organization
can transform data into information, and information into knowledge, which
can then be leveraged to generate learning in an organizational setting (Davis
& Botkin, 1994; Kim, 1993). Organizational learning in this sense includes the
process of exploiting externally-generated knowledge (Cohen & Levinthal, 1990)
or transforming internally-stored knowledge (Garud & Nayyar, 1994) to increase
the strategic assets of the firm. Since the assets in question are knowledge or
“thought process” assets, this perspective is referred to as cognitive learning.
These approaches connect to the resource-based view of strategy (Barney,
1991, 2001) by arguing that the knowledge creation process itself creates unique
competencies with which the firm can compete. “Knowledge assets underpin com-
petencies . . .. The firm’s capacity to sense and seize opportunities, to reconfigure
its knowledge assets, competencies, and complementary assets . . . all constitute
its dynamic capabilities” (Teece, 1998). As such, organizational learning leads to
an increase in the “organization’s capacity to take effective action” (Kim, 1993,
p. 43) as well as to the “mobilization of tacit knowledge held by individuals [that
can] provide the forum for a ‘spiral of knowledge’ creation” (Nonaka, 1994,
p. 34). Such learning, in turn, leads to greater firm effectiveness (Edmonson &
Moingeon, 1994).
Action Learning
In contrast to the other two frameworks, action learning approaches focus on the
actual practice of correcting misalignments between what one says and what one
does, in order to produce more effective action in organizational settings (Argyris,
1990; Senge, Kleiner, Roberts, Ross & Smith, 1994; Torbert, 1991). Learning in
this sense becomes an ongoing process, built through a commitment to improve
oneself in the context of improving the organization (Schön, 1983; Torbert, 1973).
With the support of similarly committed individuals, a community of learning prac-
tice can be generated that may significantly impact the quality of communication,
innovation, and team performance in a firm (Senge et al., 1994). According to

this approach learning happens in “real time” – i.e. concurrent with the ongoing
activities in the firm – thus this perspective is referred to as action learning.
Among the numerous insights that have arisen through the research-practice of
action learning is the distinction between first-degree, incremental learning and
second-degree, “double-loop” learning (Argyris & Schon, 1978; Bartunek, 1984;
Bateson, 1972). In first-degree learning, incremental modifications are made
to organizational behaviors or tactics to improve the efficiency of organizing.
Second-degree learning, on the other hand, examines the framework within
which those actions are being done, to continuously ask whether the organization
is pursuing the right goals through the right strategies (Torbert, 1991). Asking this
type of reflective question requires a willingness to uncover hidden assumptions
and face uncomfortable feelings (Argyris, 1990). Developing this awareness is a
key goal of action learning, for it allows individuals and organizations to break
through defensive routines that keep people from producing their best work,
which can impact all areas of organizational life (Argyris & Schon, 1978).
To some degree, action learning involves components of the other two perspec-
tives. In order to examine assumptions and decide whether to improve or totally
alter one’s course of action, cognitive learning is necessary. Similarly, the process
of change that results – whether it involves incremental enhancements to budding
routines, or a shift in strategy or overall direction – necessitates behavioral change.
Action learning thus integrates the other two modes, while adding its own unique
ability to recognize a mis-match between words and actions, the fortitude to face
this mis-match, and the skill to take corrective action in real time.
These three categories – Behavioral learning, Cognitive learning, and Action
learning – provide a framework for exploring why new ventures might be highly
likely to engage in organizational learning.
NEW VENTURES: OPPORTUNITIES FOR

ORGANIZATIONAL LEARNING
New and small ventures provide an ideal context for organizational learning in
several ways. First, just as humans learn at a much faster pace in their formative
years than later in life, new ventures should learn faster than more established
firms. Second, as shown above, much of the literature on organizational learning
focuses on how firms reexamine or break out of established patterns and routines.
Because of their newness, routines and norms that might prevent learning or that
might have to be unlearned may not yet be fully formed in new ventures. Third,
young firms tend to have organic rather than formal structures, allowing for
greater ease of communication among organization members and easier responses

to change, two prerequisites of organizational learning.
In the three subsections that follow, we will examine how each approach to
learning might be useful for new ventures and highlight some of the vital qualities
that can improve entrepreneurial success. We recognize that new firms are heavily
influenced by their founder(s), whose cognitive orientation and decision-making
style play a large role in all aspects of the firm. Thus in the following analysis we
take a developmental approach, examining these three types of learning from the
perspective of the entrepreneur and his/her core team. Given that all organizational
learning is initiated and carried out by individuals (Argyris & Schon, 1978), our
intention is to draw out the individual implications of each of the three perspectives
on learning, and how each perspective reveals the advantages new ventures have
over larger organizations for Behavioral, Cognitive, and Action learning.
Behavioral Learning in New Ventures
The behavioral learning approach has been the one most represented in the
organizational learning literature. Further, behaviorism is one of the founding
movements of psychology (Skinner, 1938) and is central to theories of organi-
zational motivation (Babb & Kopp, 1978). Behavioral learning generally equates
learning with the establishment of stable habits or organizational routines, based
on the performance outcomes of previous actions (Nelson & Winter, 1982).
However, since the initial years of an emerging enterprise are marked by a lack
of formal systems, structures, and roles, there are few consistent elements that
can serve as a basis for incremental improvement of routines (Churchill & Lewis,
1983). At the same time, these issues point to the unique advantages that new
ventures have for learning. Due to the rapid pace of organizing in new ventures,
they hold the potential for a tremendous amount of trial-and-error learning for
key individuals and for the founding team. Similarly, the development of new
systems and structure requires an ongoing stream of organizational experiments,
which can generate even more learning through trial-and-error mechanisms
(Aldrich, 1999). Rather than having to implement a new organizational process
that would encourage such experiments as might be necessary in a large company,
experimentation is often the norm for entrepreneurs, providing great access to
behavioral learning in the early stages of start-up. Additionally, whereas large
companies will have already encoded their learning in routines, the flexibility and
constant ferment in new ventures allows the learning captured by individuals to
be spread throughout the organization before it is locked into specific Standard
Operating Procedures.
Adaptive learning, in which organizational behaviors are modified based on

environmental feedback (Levinthal, 1991), is likely to be much faster and more
responsive in new ventures, whose survival is dependent on the founding team’s
ability to recognize and act on environmental feedback. Accomplishing this
requires embracing failures with successes, and applying the insights from these
experiences to all aspects of their work. In fact, the very lack of financial and
labor resources in new ventures becomes another advantage for learning. Rather
than engaging in long-term planning, entrepreneurs are more likely to act on their
feet, thus increasing the trial-and-error learning in their firms. In the process of
experimentation, the knowledge that is gained can be captured in the intellectual
capabilities of its key members.
According to behavioral theorists, learning has to be stored and retrieved for it
to be useful to an organization. This presents many problems in large companies,
which are often slow in eliciting the knowledge of their members, codifying
this knowledge in useful ways, then indexing it in order to be utilized by others
when facing similar circumstances (Huber, 1991; Kim, 1993). However, a new
venture potentially bypasses this whole issue, simply because in its early years the
essential knowledge is held by the entrepreneur and a small team, and any major
problems are necessarily known to virtually all the key members. Thus, much of
the combined learning in the organization can be accessed simply through calling
a company-wide meeting. Out of this spirit of camaraderie and a mutual drive for
survival, new ventures can use all learning to their advantage – whether sharing
about successes or drawing lessons from mistakes (Petzinger, 1999). New ventures
have been shown to be more likely to share this information internally as a way to
learn and improve (Fryer, 1999). In contrast, large companies often believe it pru-
dent to keep their failures secret, because they don’t want customers, competitors,
media and even their own employees to hear about failures (Argyris, 1990). This
hesitation can be the result of the codification of routines and structures which
not only encode previous learning, but also can decrease the firm’s flexibility
and openness. It is this flexibility and openness in new ventures that make
them especially good at organizational learning. As such, a trial-and-error-type
behavioral approach to learning may be enhanced in new ventures.
Cognitive Learning in New Ventures
Whereas behavioral learning emphasizes the codification of experience in habits

and routines, cognitive learning focuses on one’s internal frameworks for know-
ing – what have been called “cognitive schema” – and in how those frameworks
can be transferred to others and leveraged to improve personal and organizational
action (Kim, 1993). In large companies this transfer of knowledge can be ham-
pered by bureaucratic formalization and control, which is necessary to maintain
integration across multiple business units. In contrast, the limited staffing in new
ventures requires that people take on responsibilities outside their immediate skill
set – everyone becomes a “jack of all trades” – often resulting in an atmosphere
of continuous sharing and change (Petzinger, 1999). This atmosphere encourages
rapid dissemination of information, as well as a constant sharing and interpreting
of multiple meanings about salient organizational events. Through these mental
processes, and the creative conflicts they can engender, new information and knowl-
edge is created; this is the essence of cognitive learning (Nonaka, 1988, 1994).
According to Nonaka’s research, the three qualities for enhancing each
individuals’ ability to create information and knowledge – intention, autonomy,
and fluctuation – are much more likely to exist in small and new firms than
in large corporations. These qualities are best supported in an environment of
“creative chaos, which triggers the process of organizational knowledge creation”
(Nonaka, 1994, p. 28).
[T]he more chaos or fluctuation an organization has inside its built-in structure, the more likely
it is to have a lively information-creation activity. Chaos is used here interchangeably with such
concepts as freedom, fluctuation, randomness, redundancy, ambiguity, and uncertainty. A lively
activity is created since the positive role of fluctuation or chaos widens the spectrum of options
and forces the organization to seek imagination and new points of view (Nonaka, 1988, pp.
60–61).
This happens naturally in new ventures because few systems and layers of
bureaucracy block the natural tendency toward autonomy, creative conflict, and
the possibility to take-in and leverage chance information.
Looking at new venture creation from a projects perspective reveals similar
qualities of cognitive learning (Bird, 1994; DeFillippi & Arthur, 1998). In certain
development projects, for example, “People learned from previous projects,
advanced their skills during the course of their project, and applied what they
learned to renew the company’s capabilities” (Bowen et al., 1994, p. 110). The
typical organizational design in new ventures supports this type of cognitive
learning process that extends organizational knowledge. To the degree that these
knowledge-generating capabilities can be captured and understood, this success
can extend an entrepreneur’s human capital, becoming a strategic capability
for the firm as a whole (Brush, Green & Hart, 2001). This capability relates to
insights from the resource-based view in strategy:
Dynamic capabilities are most likely to be resident in firms that are highly entrepreneurial,
with flat hierarchies, a clear vision, high-powered incentives, and high autonomy (to insure
responsiveness.) The firm must be able to effectively navigate quick turns [and] must constantly
transform and re-transform (Teece, 1998, p. 59).
Developing these capabilities can rarely be done in a vacuum. Research on

“communities of practice” reveals that the combined experiences found in larger
companies results in a repository of accumulated wisdom (Brown & Duguid,
1991). What the young firm lacks in accumulated knowledge, however, it gains
in high levels of collaboration and relative coherence. Further, entrepreneurs
are often embedded in rich information networks, and their organizations often
emerge through those networks. As such, cognitive learning done by founding
individuals generally occurs across organizational boundaries, in a supportive
“ecology of knowledge” (Brown & Duguid, 1998, p. 91). The entrepreneurial need
to form multiple strategic alliances across all dimensions of the business means
that a new venture may be better able to leverage these knowledge ecologies than a
large organization.
Similarly, new venture creation often involves absorbing knowledge and tech-
nology from previous experience and contacts, and integrating it in unique ways
within the firm. The emphasis on survival in new ventures optimally generates an
inherent openness to new ideas, in contrast to the “Not Invented Here” syndrome
that can plague older firms. Thus, entrepreneurial ventures may have a higher
absorptive capacity than larger firms, even though their levels of R&D spending
may be proportionately lower (Cohen & Levinthal, 1990). With innovation playing
such an important role among new entrants (Schumpeter, 1934/1959), the capacity
for utilizing knowledge and technologies in new ways is quite high for new and
small ventures. By contrast, as firms mature and grow, the economic pressures
to internalize many functions often inhibits and slows their ability to learn. In all
these ways, cognitive learning is especially important for new ventures.
Action Learning in New Ventures
Perhaps the greatest potential for learning in small and new organizations
utilizes the action learning framework. These tools for revealing individual’s
underlying assumptions and reasons for acting can be used to support direct,
honest communication and to mitigate misalignments between “espoused theory”
and “theory in use” of leaders and all team members (Argyris, Putnam & Smith,
1985). In general, the creative ferment and drive for survival in new firms makes
it a necessity for entrepreneurs and all members of their founding teams to engage
in this kind of communication. This engagement can give a competitive advantage
to young and small companies.
One of the insights from action learning researchers is that organizational
learning is facilitated when it is nurtured by a group of committed individuals
(Isaacs, 1993; Senge, 1990a, b). The core qualities of learning in a team are
easier to create in a small company that is literally a team, rather than in a large
corporation which is made up of multiple groups in multiple divisions. For
example, a new venture is constantly in the process of building shared meanings,
and the work of creating the company is interlocked with uncovering assumptions
and finding ways to resolve inevitable impasses (Gartner, 1993). Entrepreneurs
in new ventures have a clear advantage over executives in more established firms,
due to their smaller size and commitment to do whatever it takes to survive.
Further, one of the hallmarks of action learning is the ability to engage in
double-loop learning which can modify the underlying values and standards in an
organization (Argyris & Schon, 1978; Torbert, 1991). While extremely difficult in
any context, this type of transformative thinking/action may be easier in a young
firm, whose founding team is less hampered by locked-in assumptions, and may
still be identifying its primary goals (Sarasvathy, 2001). Whereas attempting this
frame-breaking type of learning in large corporations is fraught with problems
and is often unsuccessful (Kotter, 1995), renewal and transformation may be a
natural developmental process in new ventures (Shuman, 1998; Simon, Houghton
& Lumpkin, 2001).
One of the greatest threats to the atmosphere of open-mindedness and honest
interactions is the natural tendency that individuals have to avoid potentially
embarrassing situations and threats (Argyris, 1990). In the face of the perceived
political ramifications of those situations, executives in most large organiza-
tions develop organizational patterns that use defensive routines like “skilled
incompetence” and “fancy footwork” in order to mitigate threatening situations
(Argyris, 1990, p. 63). These defensive routines get stronger as they are reinforced
over time, as individuals responsible increasingly believe that it is unrealistic or
even dangerous to call attention to long-standing assumptions, let alone to work
toward changing them. In the end, organizational rigidity and stickiness sets in,
decreasing innovation, flexibility, and proactive behaviors.
However, these tendencies are much less likely to take hold in new and small
organizations, for many reasons. First, in the same way that new ventures have
fewer rules and routines, individuals in new ventures are less likely to have set
routines and habitual behaviors in their firm compared to members of larger
corporations. Where defensive habits start to emerge in large firms, they can be
identified and discussed much more rapidly in small ventures, where everyone
is essentially in the same place and discomforts can be worked out in real time.
Further, with the firm’s survival at stake there is little to lose in being honest in new
ventures. Thus an optimistic, open atmosphere can be common in small and new
companies, generating a group norm of frankness and clear communication. If the
new venture starts with this type of open-minded attitude, defensive individuals
may end up moving out of the organization. Moreover, persons naturally drawn to
taking a protective stance are not likely to join new ventures in the first place, for
their fear of experimentation prohibits them from working in an entrepreneurial
atmosphere.
THREE CONTEXTS OF
ENTREPRENEURIAL LEARNING
As suggested above, new ventures learn in several different ways. The type
of learning that may occur is likely to be a function of the context that an
entrepreneurial venture is facing. Three particularly contexts that require a
high degree of entrepreneurial learning are a positive use of behavioral skills,
actively working through cognitive biases, and engaging in the creative process of
opportunity recognition. These three contexts requiring entrepreneurial learning
are organized below according to the three types of learning – Behavioral, Cogni-
tive, and Action learning. Thus, the three subsections below briefly describe these
contexts and address the different types of learning that might be beneficial to new
ventures within them.
Developing Social Skills
Since research in social and cognitive psychology indicates that social skills
facilitate the attainment of important outcomes (Meeus, Engles & Dekovic,
2002), it is likely that entrepreneurs with strong social skills are more likely to
be successful (Baron & Markman, 2000). Social skills consist of the ability to
persuade, influence, and favorably impress others, perceptiveness in understand-
ing others’ motives and concerns, and adaptability to different situations and
people (Weber & Harvey, 1994). Such behaviors enhance the interactions that
take place between entrepreneurs and the various constituencies they deal with,
both within and outside of a new venture. Prior research suggests that social skills
can contribute to entrepreneurial success by improving an entrepreneur’s ability
to form effective founding teams, attract quality employees, and obtain funding
(Baron & Markman, 2000, 2003).
In addition, strong social skills contribute to the formation of social capital
(Baron & Markman, 2000). That is, the ability to persuade, impress, and
empathize with others generally opens doors for entrepreneurs by making them
more confident and adaptable. Entrepreneurs without such skills often find it
more difficult to make contacts, build a reputation, and capitalize on their social
capital. Just as skills represent behaviors that entrepreneurs can use to advance
their ventures, social capital is a valuable resource that can be leveraged to obtain
more resources or acquire new knowledge (Nahapiet & Ghoshal, 1998). Thus,
social capital can be an important source of competitive advantage.
The social skills that are needed to generate social capital can be learned.
The type of learning that is most likely to be involved in skills development is
behavioral learning. As the descriptions above indicate, behavioral learning has
two manifestations. The first involves the accumulation of knowledge. Once a par-
ticular social behavior is observed and deemed valuable, an entrepreneur can learn
that skill. Training in social skills is readily available and has proven effective in
modifying entrepreneurs’ social behaviors (Baron & Markman, 2003). A second
aspect of behavioral learning involves trial-and-error learning. Founders seeking
new venture funding often learn quickly that social ineptness can be a serious
impediment to serious fund raising. By learning from their mistakes after being
turned down a few times, entrepreneurs often find that it is social capital and social
skills, as much as the quality of their business plan, that improves their chances
of obtaining funding.
Chris Barrett, founder of Metropolitan Talent Agency, exemplifies the power of
gaining social skills that enact behavioral learning (Petzinger, 1999, pp. 212–215).
The son of a shipyard owner, Barrett left that blue-collar world, enrolling instead
in the High School of Music and Art in Queens, NY. After a number of secondary
acting roles in secondary shows, he decided to learn the business of show business
from the bottom up, becoming a junior talent agent in an established agency.
Learning about behavioral motivation through the bonus system in the agency he
worked for led him to found his own small firm based on different principles.
Counter to industry standards, Metro Talent Agency developed a more creative
bonus structure based on “bonus sharing” that compensated up to three different
agents in a deal: the agent who originally signed the client, the one who was
representing the client, and the one who actually landed the deal. He gave each
agent veto power over any new client who wanted to be represented by the firm, and
developed a data base that allowed every agent to access any information entered
by any other agent in the firm – practices that were unheard of in the industry. This
simple behavioral change resulted in an atmosphere of camaraderie and mutual
gain; not surprisingly the agency expanded dramatically and successfully competes
with the top agencies in the industry.
Overcoming Biases and Heuristics
Entrepreneurs often launch businesses that initially falter because of “misper-

ceiving” venture opportunities (Simon, Houghton & Lumpkin, 2001). However,
ventures that get off to a shaky start do not necessarily fail. Examples of
such early missteps are evident even among firms that later became highly
successful (Collins & Porras, 1997). Research indicates that the cognitive
processes and heuristic-based decision-making styles of entrepreneurs may
lead them to make choices that later could be labeled mistakes (Busenitz &
Barney, 1997). In this context, “heuristics” refers to non-rational decision rules or
cognitive mechanisms that simplify an entrepreneur’s decision-making process.
These simplifying approaches enable entrepreneurs to seize opportunities by
providing decision-making short cuts in complex decision settings (Tversky
& Kahneman, 1974). Thus, a venture launch that may have been avoided if
more rational decision rules were used, propels the founding entrepreneur into a
“corridor” of opportunities to establish the business on a more solid foundation
(Ronstadt, 1988).
The ability to make these types of start-up decisions may actually confer an
advantage on entrepreneurs by making them able to undertake ventures in ways
that other potential founders would be unwilling to attempt (Alvarez & Busenitz,
2001). On the one hand, opportunities that can easily be identified and analyzed
are unlikely to confer any distinct advantage because they may be less rare and
more imitable. On the other hand, unique insights or unanalyzable situations may
push entrepreneurs to be more inventive and risk taking, yet simultaneously shield
their creative opportunity from detection by competitors (Daft & Weick, 1984;
Mosakowski, 1998).
Even though many benefits may accrue to entrepreneurs who rely on biases
and heuristics to make decisions about launching a start-up, ventures that are
based on faulty assumptions must eventually be adjusted to fit environmental and
market realities. The insights and information required to make such adjustments
can be learned. Cognitive learning is the type of learning that is most likely to
be involved in reassessing biases and heuristics. Cognitive learning occurs when
there is a shift in the mental map that changes the way a problem or opportunity
is perceived; no longer can the situation be viewed in the “biased” way it was
seen before (Kim, 1993). In the case of a new venture that is based on a business
model that has proven to be unworkable, the entrepreneurs’ vision or “theory
of the business” (Drucker, 1994) must be altered for the venture to survive.
This approach – wherein a venture is launched based on one set of assumptions
and changes as new information alters the assumptions – may seem chaotic
and uncertain. But it can also lead to the rapid creation of new knowledge and
contribute to an organizational capacity to learn and act (Kim, 1993; Nonaka,
1994). For this to happen, founders and their young firms must foster collaboration
and creativity as well as be flexible and willing to change (Garud & Nayyar, 1994;
Nonaka, 1988).
The e-commerce venture Autobytel provides an interesting example of this type

of learning. Autobytel enjoyed early success by being one of the first car purchas-
ing web sites (and the very first dot-com ever to advertise during the Super Bowl).
Autobytel’s original business model involved providing an online referral service
that linked customers (who use the service for free) to auto dealers (that paid
$5,000 to sign up and average monthly fees of $900). But imitators soon followed,
including the automakers themselves, and Autobytel began rapidly losing dealers.
“The rules have changed,” said CEO Mark Lorimer, and the company had to find
a new way to make money. It did so by reevaluating its competition and reframing
the business it was in: specifically, Autobytel used its proprietary software to
build a comparison shopping site for GM, thus changing from competing against
the automakers to partnering with them. This shift in approach was required to
survive, according to David E. Cole, an auto researcher at the Environmental
Research Institute of Michigan: “Autobytel has good technology . . .. But it has to
find a way to fit in” (Weintraub, 2001). By being willing and able to let go of its
biases and alter its perspective, Autobytel found a way to effectively leverage its
resources.
Successfully Recognizing Opportunities
Opportunity recognition is a critical element of successful entrepreneurship

(Venkataraman, 1997) that may be enhanced by effective learning. Prior theory
and research suggests that opportunity recognition is a staged process involving
multiple steps from the time an idea is generated to the point when a new venture
is launched (e.g. Long & McMullan, 1984). Recently Hills, Shrader and Lumpkin
(1999) linked the notion of a multi-staged process to a model of creativity that is
often used in the study of individual creativity (Csikszentmihalyi, 1996; Wallas,
1926). Consistent with other scholars, their approach identified two broad phases
of opportunity recognition. The first phase is a Discovery phase in which new
venture insights are acquired either through a serendipitous event (Gaglio & Taub,
1992) or a deliberate search process (Bhave, 1994). The second is a Formation
phase which refers to the selection, evaluation, and refinement processes involved
in recognizing opportunities (deKoning, 1999; Timmons, 1994).
A key feature of a creativity-based model of opportunity recognition is its
recursive nature. Opportunity recognition is not limited to a singular “Aha”
experience but it is a process in which insights are contemplated, new information
is considered and knowledge is created. That is, the concept for a business, once
discovered, must be formed into an opportunity through numerous iterations of
evaluation, formation, and the discovery of new insights. This process – which
involves adaptation and change and the conversion of information into knowledge –
is a type of action learning.
Because opportunity recognition occurs in the earliest stages of an en-
trepreneurial process, before routines are established or a culture has set in, it
is likely to involve a highly intense level of learning. It can be argued that, until
a viable opportunity is recognized, there is little else for the venture to learn.
Therefore nearly all early entrepreneurial inquiry and creative activity is focused
on learning the parameters and potential of an opportunity. One can learn how
to create the conditions for this degree of inquiry and creative focus. Action
learning describes the process by which new information is interpreted and
assumptions are challenged continually, in a “double-looped” or multi-looped
process. Action learning applies to both phases of opportunity recognition because
specific insights and assumptions generated in both the Discovery phase and the
Formation phase are recursively acted on and realigned. To do this effectively,
entrepreneurs must question their assumptions and uncover hidden motives that
may obscure how viable a given opportunity may be. Double-looped learning
(Argyris & Schon, 1978; Torbert, 1991), though extremely difficult in any context,
is easier in a newly forming firm that is not yet locked-in to a set of assumptions.
This level of learning applied throughout the opportunity recognition process can
be the impetus for an insight to be successfully identified and implemented.
An example of action learning in the opportunity recognition process occurred
at Stacy’s Pita Chip Co. In 1996, Stacy and Mark Andrus were operating a
successful pita-wrap business in Boston that they wanted to grow. But customers
kept asking for the baked pita chips they made every night from leftover pita
bread and handed out free to customers. Although they loved the pita wrap
business and it generated long lines of customers, people just kept asking for the
low-fat pita chips. So when analyzing how to grow the business they were faced
with a dilemma: chips or wraps. By examining industry trends they were able
to re-think their initial assumptions, and decided that chips offered the stronger
opportunity. “We thought we could get bigger faster with the chips,” said Stacy.
They made a deal with a local distributor and, even though they had no production
and little business experience, they launched a new business. Their willingness
to examine assumptions and their ability to use accumulated knowledge in
new ways helped them grow their pita chip revenues to $1.3 million in 2000
(Stuart, 2001).
These examples of behavioral skills development, overcoming cognitive biases
and heuristics, and successful opportunity recognition provide useful indicators of
how the three different types of learning can manifest and support new ventures.
In the next section, we will provide some general guidelines for stimulating
learning by new ventures.
TACTICS FOR ENHANCING

For young firms, the challenge is how to become learning organizations. New
ventures that survive and grow will themselves eventually age and become more
complex and routinized. It is critically important, therefore, for firms that want
to be strong learners to take steps during their formative years to make learning
a part of their organizational processes. New ventures are especially sensitive
to founding conditions (Bygrave, 1989). Similar to the principle that strategies
formed in the early years tend to guide firms for many years to come (Brush et al.,
2001), young firms can design learning practices into the organization in order to
establish learning as valued principle for firm growth and success. Therefore, in
this section, we identify five learning practice that new ventures might engage in
to create or enhance the learning environment of a young firm.
Create a Learning Atmosphere
In a new venture, the job of creating a learning environment should be a key role
of the firm’s founder(s) (Senge, 1990b). Usually the first to articulate a firm’s
vision, founders and new venture leaders must then set forth a mission, interpret
the environment in terms of the vision and mission, and make sense of events
and circumstances that a new venture faces (Smircich & Stubbart, 1985). Once
these aspects are articulated and set forth, the crucial distinction between regular
firms and learning organizations is the latter’s ability to continuously align the
vision and mission to organizational processes and culture (Collins & Porras,
1997). Alignment in this sense means continuously asking whether the tactics and
operations in the new venture are appropriate given its strategy and purpose, and at
a deeper level, whether the company’s strategy and purpose is on target (Torbert,
1991). Small firms are especially good at these alignment processes.
One approach for generating a learning atmosphere in new ventures relies
on creating “enabling conditions that promote a more favorable climate for
effective knowledge creation” (Nonaka, 1994, pp. 27–29). One condition is
“creative chaos,” which can be generated by emphasizing the critical nature
of organizing in the formative stages of new ventures. By evoking a “sense of
crisis” in the company, members focus attention on forming and solving new
problems, thus engaging in cognitive learning. If supported by their leader’s use
of action learning, employees will develop a strong sense of trust and willingness
to engage in open, committed communication (Smith & Comer, 1994). Another
condition is the creation of redundancy through cognitive learning, where newly

created knowledge is rapidly disseminated throughout the firm, available to be
used by others. Through a combination of new technology and close proximity,
new ventures can consciously develop the processes for sharing knowledge that
can grow with the company (Fryer, 1999; Petzinger, 1999).
Systematic Debriefings
The work of young firms is often organized around specific projects (Bowen et al.,
1994). Projects provide a focus for sets of activities with a specific aim. Because
they represent narrowly defined “pockets” of activity, they can be examined in
terms of what was learned by the organization and organization members. By
initiating a practice of systematically debriefing project processes and outcomes,
young firms can create a learning environment through behavioral learning from
experience, and cognitive learning that integrates member’s mental models (Ross
et al., 1994). Although time consuming, project debriefing can significantly
enhance performance on subsequent projects. Such a program, however, may
be quite challenging to implement in young firms whose top managers are often
hard-working multi-taskers. But the payoff in terms of both short and long
term performance seems to support building this learning technique into the
organization culture from the beginning.
Shared Learning
Under the guidance of Chief Learning Officer (CLO) Steve Kerr, General Electric
has developed a practice of proactive learning among top managers. Managers
of GE divisions are strongly encouraged and evaluated on their ability to find out
about and apply best practices learned from other divisions. A similar sharing
could also be applied to young firms. More broad than systematic debriefing with
its project focus, shared learning practices focus on the learning and insights of
a firm’s top managers and other “thought leaders.” In the GE model, managers
have an annual meeting where they can “brag” about what they learned and ideas
they “stole.” This, according to Kerr, is valued more highly than ideas developed
within the division. Similarly, small firms can activate behavioral learning by
publishing internal brag sheets or engaging cognitive learning by giving periodic
“Who learned the most” awards. In very small firms (less than 10 employees),
every member of the organization could participate in such learning competitions,
perhaps gathering monthly for a Learning Lunch, or developing simple data bases
of lessons learned and insights gained (Fryer, 1999).
Avoid Heedless Interactions
A complementary approach to organizational learning is “heedful performance,”

which contrasts with routine-based habitual action (Weick & Roberts, 1993). In the
process of interrelating in a heedful way, mutually shared fields of understanding
are constructed; this in turn can generate a collective mind. In new ventures, this
collective mind is not a luxury but is the essence of successful organizational
action:
The more heed reflected in a pattern of interrelations, the more developed the collective mind and
the greater the capability to comprehend unexpected events that evolve rapidly in unexpected
ways, [enabling the organization] to meet situational demands (Weick & Roberts, 1993, p. 366).
The cultivation of heedful behavior, especially in an atmosphere that supports

cognitive learning and knowledge-creation can be crucial to successful learning.
In contrast, key members of many organizations often exchange information and
stories that are about the company but that do not aid the organization as much as
potentially tear it down. Research by Weick and Roberts found that this kind of
interaction can be quite destructive. As noted above, they label such interactions as
“heedless.” They recommend instead “heedful” interactions, that is, processes that
build up the organization by contributing to a collective mind. Moreover, utilizing
the action learning format, individuals can be encouraged to notice when heedless
relating is occurring in real time, and bring it up in a reflective way while it is
actually happening. Doing so can not only avoid problems before they grow, but
these types of interactions also build a level of trust and mutuality that can generate
high integrity and strong success in new ventures.
Question Assumptions
One of the aims of creating a learning environment is to generate conditions in

which current practices and even their underlying assumptions can be challenged.
Real organizational learning is enabled by fostering an action learning environ-
ment in which “double-loop learning” is supported at both the individual and
organizational level. That is, individuals can question how their personal notions
and beliefs are contributing to or detracting from firm effectiveness, and the firm’s
values and mission are open for question as well. Both types of questioning are
aimed at the same basic issue: “Am I, or are we, on the right track?”
Developing this atmosphere begins by re-framing errors as guideposts of
learning, and consciously encouraging the making of errors as evidence of
success (Argyris et al., 1985). Then, individuals in new ventures can create a
reflective atmosphere of action learning through several strategies that elicit

first-order and second-order learning. First-order learning can be supported by:
(a) making reasoning public, such that one’s assumptions and inferences are
brought to the surface and tested; (b) initiating experiments and lines of inquiry,
through which new alternatives are offered that expand the choices for dialogue
and interaction; and (c) publicly reflecting on one’s personal reactions to others,
where a genuine reflection of one’s behavior becomes an opening for individual
and group learning (Argyris et al., 1985, pp. 297–302). Second-order learning is
extended by: (a) publicly identifying and inquiring into dilemmas and apparent
inconsistencies; (b) reflecting on actions and redesigning them; and (c) publicly
examining one’s own and others’ responsibility for actions and outcomes (Argyris
et al., 1985, pp. 312–315). Each of these approaches is ideally suited to new
and small companies.
TACTICS FOR STUDYING

One basic premise of this paper is that learning in its various forms is more likely
to occur in new ventures than in larger, older organizations. Within this basic
research question can be found two associated questions: First, what exactly
are the qualities and characteristics that make learning happen in small and new
organizations – what does learning look like in entrepreneurial ventures? Second,
what does “organizational learning” mean in nascent firms, i.e. before there is an
organization per se? We will briefly highlight the potential of these questions to
provide contexts for research in entrepreneurial learning.
Comparing Learning in New Ventures versus Large Organizations
Much of our analysis of Behavioral, Cognitive, and Action learning revolved

around how learning in each of these modes can be accentuated by new and
small organizations in comparison to larger firms. Clearly, any of our assertions
provide valid empirical questions for entrepreneurial researchers. For example,
does trial-and-error learning happen more readily in organizations with greater
structural flexibility, i.e. is there a positive correlation between minimal or organic
structures and adaptive learning? Similarly, does knowledge retrieval happen more
readily within entrepreneurial founding teams than through formal knowledge
management systems in larger organizations? Likewise, do entrepreneurial firms
exhibit cognitive learning more than established firms, through, for example,
greater sharing of information, a greater breadth of strategic interpretations, or a

greater concentration of diverse skills amongst founding teams? Is there evidence
that small, new ventures learn from their mistakes more easily or more rapidly
than large companies? Do small and new firms exhibit greater learning capabilities
through collaboration, coherence and communities of practice than their larger
competitors? Numerous additional new venture versus established company
questions might arise to test implications of different approaches to learning.
Three recent theoretical frameworks can be applied to this general research
question. Perhaps the most likely is the role of effectuation (Sarasvathy, 2001) in
learning, since many of the qualities of effectual thinking are directly implicated
in behavioral, cognitive, and action learning. Another approach is Zahra and
George’s (2002) recent re-conceptualization of Absorptive Capacity [ACAP],
which focuses on the impact of acquisition, assimilation, transformation, and
exploitation in the potential and realization of ACAP. The effect of these
processes and their antecedents and moderators could be compared in small and
new entrepreneurial ventures versus large corporate settings. Third, the recent
Organization Science special issue on Knowledge, Knowing, and Organizations,
presents multiple models and studies of knowledge creation, several of which
could be expanded to study whether these types of cognitive learning occur
more readily in small versus large corporate settings. Finally, many of the studies
referred to already could be used in the same way.
Examining Learning Processes in Entrepreneurial Firms
Whether or not young entrepreneurial firms do in fact learn more readily, better
or faster than large organizations, a separate type of research question would
explore the nature and practice of learning in entrepreneurial contexts. One
set of questions involves the qualities, characteristics, and processes associated
with learning in new ventures, particularly those that distinguish entrepreneurial
ventures which do learn from those that do not, and to what degree that learning
results in some measure of success or benefits in performance. One aspect of
this question is an examination of changes in learning or learning style as a new
venture grows in size and age, essentially correlating learning with some classic
measures of structure, leadership, strategic development, and so on. A different set
of questions are more process oriented, revolving around how learning happens in
new ventures. What are the various forms or modes of learning in these contexts?
What are the micro-processes that are associated with learning in any of its
forms? How do these processes correlate with other known characteristics of
organizing in new ventures? Very in-depth data would be required to uncover
mental models, shared assumptions, and cognitive processes associated with

learning, and some rigorous theoretical work to define what are researchable
outcomes of learning in this context. Finally, are the qualities of action learning –
which are fairly well understood in large companies – similar or different in
new ventures, and within founding teams? This set of questions would explore
the antecedents and precedents for avoiding the negative patterns and habitual
routines associated with defensive learning mechanisms, as well as how an open,
frank, clear communication style can be produced amongst entrepreneurial teams,
and how that might change over time. In this vein, an action-research model might
be appropriate, linking executive coaching and training to specific learning skills,
such as minimizing gaps between espoused theory and theory-in-use, and how
systematic debriefings can increase the capacity and usefulness of learning in
entrepreneurial ventures.
The Levels-of-Analysis Issue: Learning in Nascent Firms
A close reading of our essay reveals a thorny theoretical challenge in distinguish-

ing learning in nascent firms from learning in established organizations. Is there
“organizational learning” before there is a formal organization? More to the point,
how do the processes we’ve identified as learning change as the pre-organization
becomes a more established firm? Does the nature of learning differ when a single
entrepreneur is enacting an opportunity versus when he/she is leading a small
group of individuals in a “firm?” What are the key issues involved in transferring
learning from the head of a founder to the actions of her/his founding team,
and then again into the values and design of the organization that can fulfill the
original conception and future ones as well?
Three models may be helpful in pursuing this set of questions. First, Hills,
Shrader and Lumpkin’s (1999) model of opportunity recognition as creativity
envisions an iterative process leading from initial discovery to venture formation.
This suggests that as the recognition process moves forward, the phenomenon
shifts from being primarily individual-level to firm-level. A longitudinal qual-
itative research effort might begin to uncover how an entrepreneur’s behaviors
and perceptions change over time as their business idea develops into a plan and
potentially into a full-fledged organization. Second, Nonaka’s (1994) Knowledge-
Creation spiral provides an iterative four-stage model for how learning moves from
the individual-level to the group level, to an organization. This model, adapted
to an entrepreneurial context, could provide insight into how a nascent firm
turns into a learning organization. Finally, Kim (1993) makes a useful distinction
between individual’s cognitive maps and organization’s shared schema. A close
examination of how an entrepreneur shares her vision, and how that results in
a collective culture, could offer many insights into the origin of organizational
behavior, as well as an approach to learning that could be adapted to many
different areas.
CONCLUSION
We started this paper by asking: (1) Why might new ventures be more likely to
engage in successful learning than older, larger organizations? (2) Which contexts
and cognitive arenas might be most impacted by learning in entrepreneurial
firms? and (3) What processes, tools, and techniques of organizational learning
in large organizations might be most successful in new and small ventures? After
reviewing organizational learning literature and categorizing it into three areas
– Behavioral, Cognitive, and Action learning – we suggested many ways in
which new ventures could be more successful at learning than larger and older
organizations. We then identified three entrepreneurial contexts where learning
might be particularly important – social skills, cognitive biases, and opportunity
recognition – and we linked each context to one of the three areas of learning.
Finally, we identified five specific tools that can be used to expand entrepreneurial
learning and three issues for future new venture learning research.
There are some limitations to our approach. First, a consistent typology of
organizational learning has not appeared in the literature; ours is but one of many
approaches. Further insights and implications might be drawn from considering
other aspects of organizational learning. Second, one of the challenges for ap-
plying organizational learning to new ventures is in reconciling levels of analysis
between the individual entrepreneurs who start firms, and the organization-level
context of the learning literature. We acknowledge that the way entrepreneurs
learn and the way new ventures learn may be different, and this is an important
topic for future research.
Overall our research suggests that new ventures offer a fertile ground for
the best in organization learning to take root and grow. Chances for both short
term survival and long term success, we believe, will be enhanced as new
ventures adopt organizational learning practices. This paper has identified several
approaches to organizational learning and demonstrated how they might benefit
young and small firms. We hope that this orientation will be beneficial for
entrepreneurs and other key members of new firms, scholars and those who want
to understand how new ventures develop and grow, and our many colleagues
who are striving to support the creation and fulfillment of entrepreneurial
ventures.
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ENTREPRENEURIAL FIT:
THE ROLE OF COGNITIVE MISFIT
Keith H. Brigham and Julio O. De Castro
INTRODUCTION
The concept of fit is central to theories in both the fields of strategic management
and organizational behavior. It is our contention that many key questions in the field
of entrepreneurship might also be successfully addressed through a fit approach.
For instance, why do entrepreneurs often make poor managers? And why must
founders often be replaced by professional managers as their firms grow? The
idea of misfit is implicit in both of these questions. A fit perspective may also be
beneficial in better understanding specific entrepreneurial behaviors. For example,
why does one entrepreneur start and grow multiple businesses over his or her career
(serial) while another might be content with starting only one business (novice)?
or Why does one entrepreneur continually strive to grow his or her firm while
another is content to arrest development (lifestyle) at a certain level? All of these
questions, and obviously many more, can be viewed and examined as questions of
fit.
In this chapter, we present research that employs a fit approach in the study
of entrepreneurs. More specifically, we introduce the construct of cognitive misfit
(Chan, 1996) to the field of entrepreneurship within a Person-Organization fit (P-O
fit) framework. Based on data from 159 entrepreneurs and their firms, and using
hierarchical regression analysis, we group types of entrepreneurs according to their
cognitive style and test for misfit when interacting with organizational structure.
Finally, we demonstrate significant relationships between cognitive fit/misfit and
the outcomes of burnout, satisfaction, and intentions to exit the firm. The disordinal

© 2003 Published by Elsevier Science Ltd.
ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06003-3
37
38 KEITH H. BRIGHAM AND JULIO O. DE CASTRO
(crossed) nature of these interactions suggests the areas where different types of
entrepreneurs are more likely to experience negative outcomes, given the degree of
structure in the firm. It is our contention that this research represents an important
step by providing researchers with a means of placing the individual entrepreneur
back into the entrepreneurship equation without the pitfalls and the limitations
associated with many of the past psychological (trait) studies.
THE CONCEPT OF FIT

The concept of fit has a great deal of intuitive appeal. However, while the
theoretical basis is easy to grasp, measuring fit is often a difficult task. In this
section, we will discuss how the concept of fit has been developed in different
management areas. In the field of strategic management, the concept of fit plays
a central role (Summer et al., 1990). The examination of fit between the firm and
its environment, strategy, structure, processes, and resources and capabilities (e.g.
Amit & Schoemaker, 1993; Chandler, 1962; Lawrence & Lorsch, 1967; Miles &
Snow, 1984) has been an important endeavor in the field. In strategy, the levels
of analysis of fit have usually consisted of combinations of firm or organizational
level variables and environmental variables. The working assumption in these
studies is that greater degrees of fit or congruence between these variables will
be associated with greater firm performance. While the results of these studies
have not always been consistent, there is general empirical support for the positive
relationship between fit and firm performance.
However, in the field of organizational behavior, most fit research incorporates
individual level (person) variables. These person variables are then matched with
some element of the individual’s work environment. The research falling under the
overall domain of person-environment fit can be divided into four main categories.
These include Person-Vocation (P-V) fit, Person-Organization (P-O) fit, Person-
Group (P-G) fit, and Person-Job (P-J) fit (Kristoff, 1996). Of these, the broadest
level of the work environment with which a person may fit is at the vocational level
(P-V fit), whereas a much more narrow focus looks at fit between the employee
and job tasks (P-J fit). In this chapter, we are particularly interested in examining
fit between individual entrepreneurs and their firms. The approach we will present
falls under the P-O fit category.
Recently, there has been a surge of interest in the study of P-O fit in the selection
and organizational research fields. This is based largely on the recent ability of
these types of studies to demonstrate empirical relationships between particular
aspects of P-O fit and many relevant outcomes. Exploring the interaction between
certain characteristics of the individual and the organizational environment is
Entrepreneurial Fit 39
central to the study of Person-Organization fit. Basically, the P-O fit literature
suggests that P-O fit occurs when there is congruence between certain attributes
of the person and those of the organization or the work context (Chan, 1996).
Conversely, a state of misfit exists when attributes of the person and those of the
organization or work context are out of alignment. Personal attributes can include
personality traits, values, cognition, beliefs, interests, and individual preferences.
Organizational or work context attributes can include the climate, culture, norms,
values, structure, strategic needs, and other expectations or demands in the work
environment (Bowen, Ledford & Nathan, 1991; Bretz, Ash & Dreher, 1989;
Chan, 1996; O’Reilly, Chatman & Caldwell, 1991; Rynes & Gerhart, 1990).
In general, strong empirical support exists for the positive relationship between
different facets of P-O fit and individual work attitudes. Greater degrees of fit
have consistently been linked to greater individual satisfaction and organizational
commitment. There is also a clear relationship between P-O fit and the outcomes of
intentions to exit and turnover. Employees with low levels of fit with the organiza-
tion will express higher intentions to exit or quit. Furthermore, several studies have
demonstrated that these intentions are often realized (e.g. O’Reilly et al., 1991).
Longitudinal studies have looked at both intentions to exit and actual turnover,
and concluded that fit is a valid predictor of both intentions to exit and actual
turnover.
Prior research in this area also shows relationships between stress and P-O fit.
This relationship is negative in nature with lower levels of fit being associated
with higher levels of stress. Finally, there is also empirical evidence suggesting
the positive relationship between P-O fit and individual measures of work
performance.
As we have discussed, most of the P-O fit literature has focused on individual
outcomes. While the relationship between higher levels of fit and individual level
outcomes appears clear and direct, the relationship between higher levels of fit
and organizational level outcomes is less certain. While it might seem that an
organization with high levels of internal P-O fit would realize positive organiza-
tional level outcomes, there is little supporting evidence. In fact, several P-O fit
researchers have proposed that there may be a negative relationship between P-O
fit within firms and organizational outcomes. These arguments are based on the
idea that high levels of fit might lead to lack of innovation and strategic myopia.
Conversely, lower levels of P-O fit, especially at the managerial level, might
translate into greater heterogeneity and more positive outcomes. This presents an
interesting paradox. Maximizing individual outcomes may actually serve to lower
organizational outcomes. With the lack of empirical evidence supporting either
side of this argument, it should suffice to say that the link between P-O fit and
organizational outcomes is at best uncertain and in dire need of more investigation.
In the entrepreneurship literature, the concept of fit is often implicit. For

instance, managing a new venture through the stages of start-up to an ongoing,
professionally managed business is generally problematic for entrepreneurs
(Hambrick & Crozier, 1985). The extant literature on this subject attributes
these transitional difficulties, in part, to a mismatch that arises between the
owner/entrepreneur and the firm over time. This mismatch is generally attributed
to a lack of fit between the individual entrepreneur’s abilities and characteristics
and the varying nature of the firm as it progresses through the organizational life
cycle. While these notions of “mismatch” and “fit” are generally accepted, little at-
tention has been paid to the theoretical foundations that would explain the possible
antecedents or salient variables which might explain or be employed to measure
the varying degrees of fit or misfit between the owner/entrepreneur and his or
her firm.
There are two main objectives of this chapter. The first is to demonstrate how the
construct of cognitive misfit combined in a P-O fit approach can be applied to help
understand entrepreneurial behaviors and outcomes. The first part of the chapter
presents the major constructs of cognitive misfit, cognitive style and work context.
We discuss not only the development and measurement of these constructs, but
also why they are particularly well suited for use in the study of entrepreneurial
transitions and many other areas of entrepreneurship. The other main objective of
this chapter is to present findings from a study which employed cognitive misfit
within a P-O fit approach to examine entrepreneurial attitudes and outcomes.
The second part of the chapter presents a brief overview of this study. We focus
mainly on the method of operationalizing cognitive misfit and some measurement
obstacles, the interesting findings, limitations, and future research directions.
COGNITIVE MISFIT
The construct of cognitive misfit was first developed and introduced as a viable
aspect of Person-Organization fit research by Chan (1996). Cognitive misfit
refers to the degree of mismatch between an individual’s preferred and dominant
decision-making style and the style demands (structure) of the work context.
Whereas previously developed facets of P-O fit had included goals, values, ethics,
climate, and particular personality characteristics, Chan argued that incorporating
individual decision-making style at the individual level and structure at the
organizational level was also a viable approach to examining P-O fit. In a study
of 253 engineers, Chan showed that while cognitive misfit was uncorrelated with
job performance, it was a valid predictor of actual turnover.
The construct of cognitive misfit combines the individual’s cognitive make-up

within a P-O fit framework. It is operationalized as the interaction of the
individual’s decision-making style and the style demands of the work context.
We have extended this approach into the field of entrepreneurship by defining the
notion of mismatch in the entrepreneurial transition dilemma as a cognitive misfit
problem between the individual entrepreneur’s dominant decision-making style
and the varying demands of the new venture over time and at different levels of
formalization and structure.
COGNITIVE PERSPECTIVE IN ENTREPRENEURSHIP

In approaching the entrepreneurial transition problem as one of misfit between
the entrepreneur’s cognitive make-up and the varying demands of the new venture
over time, a central element is the individual entrepreneur. Despite the lack of
success of personality and demographic variables in prior research and a movement
towards external explanations of entrepreneurial activity, a number of scholars are
now focusing on the potential role of cognitive factors and processes in studying
entrepreneurship.
The basic premise of this perspective is that key insights into distinguishing
entrepreneurs from others and understanding entrepreneurial behavior may be
attained through the study of how entrepreneurs think, process information,
solve problems, make decisions, and make sense of the complex environments
in which they operate. This perspective assumes that individual differences
do exist both within entrepreneurs as a group and between entrepreneurs and
other homogeneous groups of individuals. Utilizing the cognitive perspective
would appear to be a relevant approach for tackling fundamental issues in
entrepreneurship such as opportunity recognition, new venture creation, and
managing growth. It is a marked departure from simply looking at personality as
a direct predictor of entrepreneurial behavior.
Employing a cognitive perspective in entrepreneurship research, Busenitz and
Barney (1997) found that entrepreneurs and managers in large organizations
employ different biases and heuristics (simplifying strategies used in making
decisions) when faced with complex decisions. This study found significant
differences between entrepreneurs and managers that personality based ap-
proaches had been unable to empirically demonstrate. Baron (1998) also uses a
cognitive approach in presenting how entrepreneurs may be more prone to using
certain cognitive biases and heuristics (counterfactual thinking, affect infusion,
self-serving bias, and planning fallacy) than other types of individuals.
These findings may be explained by the fact that entrepreneurs tend to operate
in more uncertain and complex environments than do other individuals (e.g.
managers in large organizations). The entrepreneur who regularly employs
specific biases and heuristics may be better suited to navigate through the complex
and uncertain environment in which he or she has chosen to operate. The notion
of fit and misfit is implicit in this approach. Wright, Hoskisson, Busenitz and
Dial (2000), suggest that dominant cognitive approaches may be advantageous
or disadvantageous depending on the situation. This point is important. It is the
interaction of the individual’s dominant decision-making style with the particular
demands of a given situation that leads to varying degrees of fit and ultimately to
either positive or negative outcomes.
PSYCHOLOGICAL VERSUS TRAIT APPROACH
Our approach looks at the study of new ventures with a focus on the individual
entrepreneur (Shaver & Scott, 1991). However, while the psychological approach
to exploring new ventures has fallen out of favor (see Gartner, 1988) the theoretical
basis for employing this approach is solid. While psychology does focus on the
individual, it also assumes the interaction of the individual with external situations.
Psychology combines external factors with internal processes; it can be defined
by Lewin’s (1935) expression, B = f(P, E), where behavior is a function of both
person and environment. Neither the person nor the environment alone is enough
to sufficiently explain an individual’s behavior (Shaver & Scott, 1991).
In the extant entrepreneurship literature, the broad psychological approach has
been distorted by studies on the personality of the entrepreneur. The unsuccessful
search for the personality profile of the successful organization founder is what
psychologists would call a personological endeavor (Shaver & Scott, 1991, p. 25).
These types of searches for consistency across multiple situations in personality
traits went out of style in traditional psychology research over thirty years ago,
when Mischel (1968) argued that behavior should be regarded as the consequence
of person-situation interactions (Shaver & Scott, 1991, p. 25).
It is important to distinguish how the cognitive perspective we employ in
addressing the problem of entrepreneurial transition differs from previous attempts
(trait research) to explain certain aspects of entrepreneurial behavior. Gartner
(1985, 1988) asserts that the major thrust of most entrepreneurship research has
been to prove that entrepreneurs are different from non-entrepreneurs. The logic
behind these early trait studies was that if we (as researchers) could answer the
question – Who is the entrepreneur? – Then we would gain an understanding of
the phenomenon of entrepreneurship (personological approach).
Gartner (1985, 1988) went on to state that with respect to personality traits,
there is as much difference among entrepreneurs as there is between entrepreneurs
and non-entrepreneurs, and that researchers should focus on the behavior of
creating a new venture, not the personality of the founder (Gartner, 1988). We
agree with Gartner that research should not continue to focus solely on the
personality of the entrepreneur. However, we do believe that many researchers
have taken his statement as a call to move away from any research that focuses
on the individual entrepreneur.
The inability of the personological (trait) approaches to provide adequate
explanations of the entrepreneurial process has led to three fairly distinct responses
(Busenitz & Barney, 1997). First is the argument that these previous failures were
the result of improper methodologies (Ginsberg & Buchholtz, 1989; Stewart,
Watson, Carland & Carland, 1999). Second, some researchers (following Gartner)
have called for discarding the search for individual differences and have focused
on external and/or economic explanations of entrepreneurial behavior (Aldrich,
1979; Amit, Muller & Cockburn, 1995). The third response, which we employ
in this study, has been to focus on psychological and cognitive determinants of
entrepreneurial behavior (Baron, 1998; Busenitz & Barney, 1997) through an
interaction approach. We concur with Shaver and Scott, who stated that,
The study of new venture creation began with some reasonable assumptions about the
psychological characteristics of “entrepreneurs.” Through the years, more and more of these
personological characteristics have been discarded, debunked, or at the very least found to
have been measured ineffectively. The result has been to concentrate on almost anything except
the individual . . . But none of these will, alone, create a new venture. For that we need a person,
in whose mind all of the possibilities come together, who believes that innovation is possible,
and who has the motivation to persist until the job is done. Person, process, and choice: for
these we need a truly psychological perspective on new venture creation (1991, p. 39).
Whereas personological (trait) research has, at best, only provided marginal

contributions, the potential of research employing a decision-making perspective
appears to hold great promise. This is a truly psychological approach to studying
entrepreneurs. By examining the interaction between the way entrepreneurs
approach and make decisions with different situations and environmental factors,
we may gain a better understanding of why certain entrepreneurs will behave
differently than other entrepreneurs in a given situation. Again, research based on
interactions is based on the tenet that behavior is influenced by the confluence of
the person and the situation (Chell, Haworth & Brearley, 1991). Since many of the
demographic and trait studies focused solely on the individual, it is not surprising
that they showed low correlations with behaviors. Similarly, while situational
factors are clearly integral components of the entrepreneurial process (e.g. Herron
& Robinson, 1993; Shapero, 1984), all individuals will not become entrepreneurs
under comparable circumstances, suggesting that some dimension of the individ-

ual must be in play. Hence, focusing solely on situational factors to explain the
entrepreneurial process would appear to be a clearly under-defined approach.
If one adheres to the tenet that behavior is best understood by studying the
person and the situation, then investigating the psychology of the entrepreneur
should be a primary line of inquiry in entrepreneurship research (Goldsmith &
Kerr, 1991). The study of entrepreneurial cognition and decision-making is a much
more robust and promising approach in studying entrepreneurs than the focus
either on personality or situational factors alone. We believe that these approaches
provide a theoretically sound and promising means for placing the individual
entrepreneur back into a key role in the study of the entrepreneurial process.
COGNITIVE STYLE
In this section, we will provide an overview of cognitive style. The section begins
by providing some basic definitions and assumptions. This is followed by a history
of the development of the cognitive style construct within several distinct areas of
psychology. Finally, we focus on the two decision-making style models that have
been used to operationalize cognitive misfit, distinguishing them from the family
of “learning styles” that are also classified under the broad heading of cognitive
style.
The construct of cognitive style is widely recognized as an important determi-
nant of individual behavior (Sadler-Smith & Badger, 1998). It has been defined as
an individual’s preferred and habitual approach to organizing, representing, and
processing information (Streufert & Nogami, 1989), a built-in and automatic way
of responding to information and situations (Riding & Rayner, 1998), individual
differences in the way people perceive, think, solve problems, learn, and relate to
others (Witkin, Moore, Goodenough & Cox, 1977), and an individual’s character-
istic modes of perceiving, remembering, and problem-solving (Messick, 1984).
Cognitive style is a high-order heuristic and can most easily be conceptualized
as the way the individual’s brain is “hard-wired.” This is a consistent approach
that people employ when they approach, frame, and solve problems. Cognitive
style has certain common characteristics: (1) it is a pervasive dimension that
can be assessed using psychometric techniques; (2) it is stable over time; (3)
it is bipolar; and (4) it describes different rather than better thinking processes
(Sadler-Smith & Badger, 1998).
The term cognitive style has become widely used, and many models and
descriptions fall under the broad classification of cognitive style. A review of
style research and the development of the construct of cognitive style will help
to distinguish the decision-making models used to operationalize cognitive misfit

from the many other models that fall within the broad domain of cognitive
style.
The contemporary field of cognitive style can trace its roots to four main
areas in psychology. These include perception, cognitive controls and processing,
mental imagery, and personality (Rayner, 2000). The term “style” has been
used in the psychology of individual differences to describe psychological
structures or observed behaviors associated with typical forms of functioning.
The term “style” in the study of individual differences is related to various aspects
of the individual’s performance, including cognition, behavior, motivation,
communication, learning, teaching, and organizational behavior (Rayner, 2000).
Beginning in the 1950s, many psychologists began generating descriptions of
thinking and learning that were significantly related to individual differences.
Table 1 provides a brief summary of some of these early attempts at identifying
style dimensions and the creation of style labels to describe the nature of individual
differences in cognition.
It is reasonable to conclude that in the development of cognitive style, a lack
of conceptual agreement over basic terminology in these early studies created a
blurred understanding of the construct of cognitive style. However, these early
works do demonstrate a clearly established cognition-centered approach to the
study of individual differences (Griogorenko & Sternberg, 1995). Acknowledging
these previous studies is important, not only for understanding the foundations
of cognitive style, but also the vast number of distinct labels and models that
continue to create confusion in the field to this day.
Table 1. Early Cognitive Style Dimensions/Labels.

Style Dimension/Labels Author(s)
Tolerant – Intolerant Klein and Schlesinger (1951), Klein, Riley and

Schlesinger (1962).
Broad – Narrow Categorization Pettigrew (1958), Bruner and Tajfel (1961), Kogan and
Wallach (1964), Messick and Kogan (1963, 1966).
Conceptual Integration – Integrative Allard and Carlson (1963), Harvey, Hunt and Schroder
Complexity (1961), Schroeder, Driver and Struefert (1967).
Cognitive Simplicity – Cognitive Allard and Carlson (1963), Bieri (1966), Harvey et al.
Complexity (1961), Messick and Kogan (1966).
Risk Taking – Cautiousness Kogan and Moran (1969), Kogan and Wallach (1964,
1967).
Splitters – Lumpers Cohen (1967).
Source: Adapted from Rayner (2000, p. 121).

While numerous researchers continued to create new labels and models of

cognitive style, others began to recognize that the diversity of style theory
was unproductive and misleading. Lewis (1976, pp. 304–305) stated that, “In
my opinion, the right thing to do is to focus . . . on the search for individual
differences which are basic, in the sense that they underlie (and to that extent,
explain), a whole range of more readily observable differences.” The urgent
need to rationalize and synthesize theory was echoed by many researchers and is
prevalent in the literature (Curry, 1983; Griggs, 1991; Griogorenko & Sternberg,
1995; Rayner & Riding, 1997; Riding & Cheema, 1991).
An attempt at categorizing cognitive styles was made by Messick (1984), whose
research identified 19 key models in the field. He went on to argue that there
needed to be a clear distinction between cognitive styles and cognitive abilities.
Later, Riding and Cheema (1991) proposed that style models could be organized
into two cognitive style families, which they called a Holistic-Analytic group and
a Verbal-Imager group. Key models within the Holistic-Analytic dimension are
presented in Table 2.
In their typology, Riding and Cheema (1991) argued that over 30 different
labels and models of style that had been identified by previous researchers
could be classified based on this typology. Furthermore, they identified a third
group of models of style that existed in the field. They posited that this group
of models was distinct from those that had investigated cognitive processes, but
had still fallen under the broad heading of cognitive styles. This third group was
known as learning styles, but should more accurately be described as learning
strategies.
In management circles, perhaps one of the most well-known learning style
models is Kolb’s (1984) experiential model of learning. The theory is based
on two orthogonal dimensions, which he labeled prehension (taking hold of
experience either through concrete experience or abstract conceptualization) and
transformation (manipulating experience either through reflective observation
or active experimentation). Rayner and Riding (1997, p. 16) described Kolb’s
theory and model as assuming a combination of “ ‘hard wiring’ (cognition) and
‘soft wiring’ (process) that reflects a less stable set of individual differences
which can change over time.” Thus, while cognitive style models that fall
into the Holistic – Analytic family are more cognitive centered and stable,
learning styles may be viewed as a separate family of styles with less stable
characteristics. The specific decision-making styles incorporated in the present
study (and described in detail in the next section) fall under the Holistic – Analytic
heading and should be viewed as somewhat related to, but distinct from, learning
styles.
Entrepreneurial Fit
Table 2. Key Holistic – Analytic Models of Cognitive Style.
Dimension/Labels Description Author(s)
Field Dependency – Independency Individual dependency on a perceptual field when Witkin and Asch (1948), Witkin (1964).
analyzing a structure or form that is part of the field.
Levelling – Sharpening A tendency to assimilate detail rapidly and lose or Klein (1954), Gardner, Holzman, Klein,
emphasize detail and changes in new information. Linton and Spence (1959).
Holist – Serialist The tendency to work through problem solving Pask and Scott (1972), Pask (1976).
incrementally or globally and assimilate detail.
Assimilator – Explorer Individual preferences for seeking familiarity or novelty Kaufmann (1989).
in the process of problem solving and creativity.
Adaptors – Innovators Adaptors prefer conventional, established procedures; Kirton (1976, 1987, 1994).
innovators prefer restructuring or new perspectives in
problem solving.
Analytic – Intuitive Analysts favor a structured approach to problem solving Allinson and Hayes (1996).
and systematic methods of investigation; intuitivists
prefer an open-ended approach to problem solving and
random methods of exploration.
Source: Adapted from Rayner (2000, p. 125).
47
Recent comprehensive reviews of the Holistic – Analytic models within the

cognitive style paradigm (Hayes & Allinson, 1996; Rayner, 2000; Rayner &
Riding, 1997; Riding & Rayner, 1998; Sadler-Smith, 1998, 2000) suggest that:
(1) There are a number of psychometrically sound measures of decision-making
style (for example, Allinson & Hayes, 1996; Kirton, 1976; Riding, 1994);
(2) There is empirical evidence demonstrating that the dimensions measured by
these models are stable over time and independent of intelligence;
(3) These measures of decision-making style interact with external factors affect-
ing individual attitudes and behaviors.
Sadler-Smith (2000, p. 193) concludes that “Unlike the field of ‘learning style,’
which is characterized by divergence and a paucity of robust measures, within the
cognitive style field [decision-making style] there appears to be some convergence
of models and frameworks.” Sadler-Smith and Badger (1998) have argued that
there are two models of decision-making style from within this family that satisfy
the criteria for a “style” and are suitable for use in organizational settings. These
two models are presented in the next two sections.
Adaption – Innovation
The first of these two models of cognitive style is Kirton’s Adaption-Innovation

Theory (KAI) (Kirton, 1976, 1980). According to KAI Theory, individuals are
viewed as falling on a continuum from extreme adaptor on one end to extreme
innovator on the other. Adaption-Innovation as a cognitive continuum places an
individual in a preferred mode of tackling problems at all stages (for example, from
one’s view of what is the problem, what are the relevant data and information for
its resolution, what is the appropriate solution, and how should it be implemented).
As a decision-making preference, it is presumed to be unrelated to level of capacity
such as I.Q. (Kirton, 1989).
The KAI Theory proposes that: (1) an individual’s problem-solving style is
stable and does not change with age or over time; (2) adaptors and innovators
have different attributes, each of which, depending on the circumstances, could
be advantageous or disadvantageous; (3) one of these sets of attributes comes
naturally to an individual; the opposing set has to be learned as part of the
individual’s coping behavior; (4) employing coping behavior is stressful, and
when it is no longer required, there is a marked tendency to return to the preferred
style; (5) forms of coping behavior include changing circumstances to suit the
preferred style or forming a team whose combined preferences cover expected
problem situations (Kirton, 1976, 1980).
Adaptors tend to be conservative, viewing a problem and exploring solutions

within generally accepted guidelines and frameworks. On the other end of the con-
tinuum, innovators see the existing guidelines and framework as being part of the
problem and often incorporate radical or frame-breaking processes or ideas as part
of their solution. Adaptors are characterized by precision, reliability, efficiency, dis-
cipline, and conformity. They seek solutions to problems in previously understood
and accepted ways and appear impervious to boredom, maintaining high accuracy
over long durations of detailed work. Conversely, innovators are typified by
undisciplined thinking and tangential approaches to tasks and problem solving that
cut across accepted paradigms (Kirton, 1989). They are risk-takers who challenge
and tend to operate outside of the existing framework (Buttner & Gryskiewicz,
1993). In general, an adaptive cognitive style forms an ability to do things better
while an innovative cognitive style forms an ability to do things differently
(Kirton, 1989).
KAI Theory is construed as a stable and preferred cognitive strategy for dealing
with all stages of the problem-solving process. In the organizational context,
research has confirmed that systematic differences in KAI mean scores exist
across established functional groups. Specifically, the mean KAI scores of groups
who operate in a relatively structured environment tend to fall on the adaptive
side of the continuum. Examples of these adaptive groups include bankers,
accountants, and those involved mostly in maintenance or production areas (Chan,
Elliot, Ong & Long, 1995; Gul, 1986; Holland, 1987; Kirton, 1980). Alternatively,
groups who operate in relatively unstructured environments have KAI means
that are innovative in orientation. Examples of these innovative groups include
those in marketing, personnel, planning, and research and development (Chan
et al., 1995; Foxall & Hackett, 1994; Holland, 1987; Kirton & Pender, 1982;
Lowe & Taylor, 1986). These findings suggest that that there is a link between the
level of structure in a given organizational context and an individual’s preferred
decision-making style and that individuals may self-select into environments that
are more congruent with their dominant decision-making style.
Intuitive – Analytic
In 1996, Allinson and Hayes developed the Cognitive Style Index (CSI). The
impetus for constructing the CSI was that despite the growing interest in cognitive
style among management researchers and practitioners, there was a shortage
of valid and reliable measures that were convenient for use in organizational
settings. The CSI measures the generic intuition-analysis dimension of cognitive
style. Allinson and Hayes (1996) argue that while there have been a number of
dimensions on which cognitive style has been differentiated [19 separate labels
(Messick, 1984); 29 separate labels (Hayes & Allinson, 1994)], the superordinate
dimension of intuition-analysis encompasses all of these.
The CSI is based upon hemispherical differences in the brain as a possible
source of cognitive style differences. Allinson and Hayes (1996) employ the term
Intuition to describe “right brain” thinking (i.e. judgment based on feeling and the
adoption of a global perspective) and Analysis for “left brain” thinking (i.e. judg-
ment based on mental reasoning and a focus on detail). This idea of hemispherical
differences stems from the work of Sperry (1968) and others in the 1960s on “split
brain” patients. Management theorists have also been influenced by these findings
and their potential. For example, Mintzberg (1976) claims that planning and
management science, with their dependence on logic, require a rational (left-brain)
cognitive style. However, management at the policy level, which involves dealing
with uncertainty, requires a more intuitive (right-brain) style. Allinson and Hayes
(1996) caution that the attribution of differences in analytical versus intuitive
behavior to hemispherical differences in brain function should, in the absence
of conclusive neurophysiological evidence, be treated metaphorically rather
than literally.
In general, intuitivists tend to be relatively nonconformist, prefer an open-ended
approach to problem solving, rely on random methods of exploration, and work
best with ideas requiring a broad perspective. Alternatively, analysts tend to be
more compliant, favor a more structured approach to problem-solving, prefer
systematic methods of investigation, and are especially comfortable with ideas
requiring sequential analysis (Allinson & Hayes, 1996).
There are obvious parallels between the Adaptive-Innovative dimension (KAI)
and the Analytical-Intuitive dimension (CSI). Sadler-Smith and Badger (1998)
assert that the respective poles for both KAI and CSI share a number of features. In
an analysis of decision-making style models, they argued that the analyst (CSI) and
adaptor (KAI) styles could, for convenience, be labeled “analytic” and the intuitive
(CSI) and innovative (KAI) styles may be labeled as “holistic.” They concluded that
both measures approach a fundamental analytic-holistic dimension of cognitive
style and that there is more similarity than difference between the two measures.
WORK CONTEXT STYLE DEMANDS

While certain dimensions of an individual’s cognitive style will remain stable
over time (Hayes & Allinson, 1996; Kirton, 1980), the style demands of the new
venture are variable as the venture grows. Thus, the potential for different degrees
of cognitive fit and misfit between the stable style of the entrepreneur and the
variable style demands of the organizational context are not only likely, but may be
inevitable. From a cognitive misfit perspective, we are particularly interested in the
style demands related to formalization, structure, centralization, and bureaucracy.
Chandler (1962) theorized that organizations develop patterns of organizational
structure in response to common growth and market challenges. Weber (1946,
1947) argued that large organizations are more bureaucratic than smaller ones
and that the relative size of the administrative component should be proportional
to the size of the organization. Blau (1974) argued that while it is true that more
complex organizations have a larger administrative ratio than simpler ones and that
large organizations do tend to be more complex, there is a point of economies of
scale, which allows larger organizations to function with a proportionately smaller
administrative staff. However, despite this possible exception, other aspects of
bureaucratization do appear to be directly related to the size of the organization
(Blau, 1974; Mintzberg, 1979).
Many life-cycle stage models support this idea that the organizational style
demands will change as the organization matures. In their review of the life-cycle
construct, Hanks, Watson, Jansen and Chandler (1994) provide a synthesis of
10 different life-cycle models. All of these models propose that certain key
dimensions of organizations will change with respect to age and size (e.g. levels
of formalization, structure, and bureaucracy).
DECISION-MAKING STYLE AND WORK CONTEXT

Previous work on cognitive style suggests that there is a predictable link between
preferred individual problem-solving/decision-making style and structure and bu-
reaucracy. According to Kirton (1976), “The individual who displays the highly
adaptive decision-making style has been termed ‘organisation man’ (Whyte, 1957),
and is suited to work within large institutions.” Kirton further states that “because
adaptive man works within cognitive systems, he is also at home in bureaucratic
ones . . .” (1976). Thus, the individual possessing an adaptive cognitive style and
the resulting characteristic behaviors, similar to those of “organisation man,” is
much better fitted to a more formalized and bureaucratic organizational work con-
text and also more likely to be found there.
Conversely, the individual who possesses an innovative cognitive style and
exhibits the characteristic behaviors associated with that style is ill fitted for a
bureaucratic organization. The policies and procedures that are an aid and comfort
to the adaptive individual may be a cause of great discomfort and agitation to
the innovative individual. In contrast to an individual with an adaptive cognitive
style and behaviors, the innovator does not seek to reduce conflict or minimize
risks, and solves problems at an accelerated pace and in a frame-breaking or

unpredictable manner. Whereas this cognitive style and resulting behavior is a
liability in organizational settings, it can be an asset in other environments. This is
a key point. Adaptive or innovative styles will be more congruent, or better fitted,
to different organizational work contexts. While the individual entrepreneur’s
KAI type remains stable over time, the style demands of the new venture will
vary according to the structure and size.
In the same vein, Allinson and Hayes (1996) also theorized that individuals
with different decision-making style preferences (i.e. analytic and intuitive) would
have a strong preference for different work contexts. In organizational settings,
analysts will subscribe to the bureaucratic norm and prefer work settings that are
oriented towards careful routines, governed by logic, and clearly structured and
organized. In contrast, intuitivists will prefer freedom from rules and regulations,
and a work setting that is activity oriented, flexible, and unstructured. Allinson
and Hayes (1996) presented correlation data in their initial validation study that
demonstrated support for these claims.
COGNITIVE MISFIT AND COPING BEHAVIOR

The construct of cognitive misfit is determined by the level of incongruence (misfit)
between the entrepreneur’s preferred problem-solving/decision-making style and
the style demands of the firm’s work context. When individuals are in a state of
cognitive misfit, they will employ certain specific coping behaviors to handle the
conflict between their preferred problem-solving style and the conflicting style
demands being placed upon them. KAI Theory suggests that when experiencing
cognitive misfit, innovative individuals may employ adaptive behaviors as part of
their coping mechanisms, and vice versa. However, these coping behaviors are
not sustainable, and there is a marked tendency for individuals to return to their
preferred decision-making style (Kirton, 1976). Exhibiting coping behavior is a
source of great stress and, according to KAI Theory, the individual required to
sustain high levels of coping behavior (exhibiting behaviors associated with the
non-preferred style) will eventually either: (1) change the circumstances to suit his
or her preferred, dominant style or (2) form a team whose combined preferences
cover expected problem situations.
Thus, when the individual entrepreneur experiences high levels of cognitive
misfit (the style demands of the work context are incongruent with his or her
preferred cognitive style), coping behavior will be required. The greater the degree
of cognitive misfit, the more coping behavior is required and, consequently, the
higher amount of stress on the individual (Pervin, 1968). The relationship between
cognitive misfit and coping mechanisms may help us to better understand why
different types of entrepreneurs may exhibit predictable behaviors when faced
with growing a new venture.
RESULTS FROM OUR INITIAL STUDY

Having argued the rationale for using a P-O fit approach and developed the con-
struct of cognitive misfit, we will now present some of the results from our first
attempt at incorporating this framework with the study of owners/entrepreneurs.
The specific hypotheses tested are based on the model in Fig. 1 and restated
below.
Summary of Hypotheses
Hypothesis 1a. Cognitive style moderates the relationship between the

structure of the work environment and burnout. (SUPPORTED)
Hypothesis 1b. For less structured work environments, more intuitive en-
trepreneurs will experience lower burnout than those who are more analytic,
but for more structured work environments, more intuitive entrepreneurs will
experience higher burnout than those who are more analytic. (SUPPORTED)
Fig. 1. Model of an Entrepreneur’s Cognitive Fit/Misfit.


structure of the work environment and satisfaction. (SUPPORTED)
trepreneurs will experience higher satisfaction than those who are more analytic,
but for more structured work environments, more intuitive entrepreneurs will
express lower satisfaction than those who are more analytic. (SUPPORTED)
structure of the work environment and intention to exit. (SUPPORTED)
Hypothesis 3b. For less structured work environments, more intuitive
entrepreneurs will express lower intention to exit than those who are more ana-
lytic, but for more structured work environments, more intuitive entrepreneurs
will express greater intention to exit than those who are more analytic.
(SUPPORTED)
structure of the work environment and intention to grow the business. (NOT
SUPPORTED)
trepreneurs will express lower growth intentions than those who are more
analytic, and the difference between the two groups will increase as the work
environment becomes more structured. (NOT SUPPORTED)
structure of the work environment and percentage change in the number of
employees. (NOT SUPPORTED)
trepreneurs will experience less growth than those who are more analytic, and
the difference between the two groups will increase as the work environment
becomes more structured. (NOT SUPPORTED)
METHODS
Sample
The sampling frame consisted of companies listed in the 2000 Colorado High
Technology Directory. Subsidiaries and not-for-profit companies were excluded
from the sampling frame. Also excluded were those companies with no contact
information or where the only listed contact held a title that clearly signified a
lower level within the organization.
From the total number of 1,791 companies listed in the directory, 1,294
were retained for inclusion in the sampling frame. Through the course of data
collection, another 87 companies were removed for the following reasons: unable
to be contacted (first contact letter was returned as undeliverable); business closed
(included both voluntary and due to deaths); company was acquired or identified
as a subsidiary (notified the author through phone, e-mail, or correspondence).
This left a total number of 1,207 companies that had a possibility of responding
to the mail questionnaire. Of these, 267 usable questionnaires were returned
constituting an effective response rate of 22.1%. A time trend extrapolation test
(Armstrong & Overton, 1977) was conducted as a check on non-response bias.
Subsequent comparison of the two groups (early versus late respondents) through
ANOVA tests indicated no significant differences between the groups on the
explanatory or dependent variables used in this study.
For the present study, a smaller sub-sample of the original data set was used. This
set included only those respondents who currently had ownership in the firm and
were involved in the day-to-day operation of the firm. Also, we included only firms
with more than five employees, as those with fewer than five did not have sufficient
structure to properly test for interactions. This left 159 owners/entrepreneurs in
the current sub-sample for which the hypotheses in this study were tested.
Data Collection
Data were collected through a mail questionnaire between March and April of
2001. For both construction and implementation of the mail questionnaire, the
“Tailored Design Method” (Dillman, 2000) was followed as closely as possible.
Variables and Measures
Cognitive Style Index: Intuition–Analytical. Sadler-Smith and Badger (1998) have

argued that two models and subsequent measures of decision-making style are
suitable for use in organizational settings and can be employed in field surveys –
the Kirton Adaption Innovation Inventory (Kirton, 1976) and the Cognitive Style
Index (Allinson & Hayes, 1996). We chose the more recent Cognitive Style Index
because, as Allinson and Hayes (1996) argue, while there have been a number of
dimensions on which cognitive style has been differentiated [19 separate labels
(Messick, 1984); 29 separate labels (Hayes & Allinson, 1994)], the superordinate
dimension of intuition-analysis appears to encompass all of these. The CSI

measures the generic intuition-analysis dimension of cognitive style.
The CSI consists of 38 items, each requiring the subject to respond on a
trichotomous true-uncertain-false scale. In the present study (n = 159), the in-
ternal consistency and reliability of the CSI measure, as estimated by Cronbach’s
alpha, was 0.86. This is consistent with those reported by Allinson and Hayes
(1996) and other researchers. For our sample of entrepreneurs, the mean CSI
score was 32.06 (S.D. 12.59). The mean for the sample was significantly more
towards the “intuitive” side of the scale than the means reported for other groups
(e.g. various types of managers, business school undergraduates, and teachers
(Allinson & Hayes, 1996)). Despite the shift, the distribution of scores for the
sample remained within acceptable limits for a normal distribution (skewness
0.261, S.E. of skewness 0.191; kurtosis −0.541, S.E. of kurtosis 0.379).
Work Context Index. This is a composite variable created by first summing
the standardized scores of the three structural variables – vertical differentiation,
formalization, and specialization (detailed below). A higher score represents a
more structured, formal and bureaucratic organizational context. The Cronbach’s
alpha for this index was 0.70, and the inter-correlation range was 0.36–0.52. Both
skewness and kurtosis were within acceptable limits.
The variable Vertical Differentiation (Levels) consists of the total number of
organizational levels within the firm (Dewar & Hage, 1978). Respondents were
asked to count the total number of levels in the longest line between direct workers
and the organization’s chief executive officer, including both of these levels (Pugh
& Hinkson, 1976). This resulted in a range of scores from 1 to 6. Higher scores
represent a higher degree of vertical differentiation. Scores were distributed
normally.
The variable Formalization was operationalized using a scale of eleven items.
All eleven items were summed to create an index. The higher the score, the greater
the degree of formalization of the organization. Hanks et al. (1994) employed this
measure of formalization and reported a Cronbach’s alpha of 0.85. For this study,
the Cronbach’s alpha was 0.88, and inter-correlations ranged from 0.15 to 0.75.
Specialization was measured on a scale adapted from Pugh, Hinkson, Hinnings
and Turner (1968). Respondents were given a list of twenty functional areas and
asked to check those in which they have at least one full-time employee. The
item is scored by totaling up the number of functions checked. This provides
possible scores ranging from 0 to 20. A higher score indicates a greater degree of
specialization.
Cognitive misfit is a composite measure based on individual decision-making
style preferences and work context style demands. The cognitive fit score was
calculated by multiplying the individual’s centered CSI score by the centered
Work Context Index score for that individual. The cognitive fit score is the
interaction term between CSI and Work Context. In the present study, the person
variable (i.e. decision-making style as measured by CSI) and the organization
variable (i.e. Work Context as measured by WCI) represent the effects of the
person and the organization. The person × organization product term (interaction)
represents the degree of P-O fit on the expressed main effects (CSI and WCI).
Dependent variables. Burnout has been defined as “a process in which a
previously committed (individual) disengages from his or her work in response
to stress and strain experienced in the job” (Cherniss, 1980, p. 18), and as “a
state of emotional exhaustion caused by excessive psychological and emotional
demands . . .” (Jackson, Schwab & Schuler, 1986, p. 30). It is theorized that
burnout consists of three components: emotional exhaustion, depersonalization of
others, and feelings of diminished personal accomplishment (Maslach & Jackson,
1981). We focused on the nine-item emotional exhaustion component of the
Maslach Burnout Inventory (MBI; Maslach & Jackson, 1986). The emotional
exhaustion component is the most important of the three components (Rosse,
Boss, Johnson & Crown, 1991). Participants are asked to indicate how often they
have felt that way for each of the nine items. A mean of the nine items was used
as the index for burnout. A higher score corresponds to a higher level of burnout.
The Cronbach’s alpha was 0.90, and inter-correlations ranged from 0.35 to 0.70.
Intentions to Exit was measured using four items each scored on a 7-point
Likert-type scale. These four items were used by O’Reilly et al. (1991). A higher
score corresponds to a greater intention to exit. The Cronbach’s alpha was 0.76,
and the inter-correlations ranged from 0.21 to 0.84.
Satisfaction has been measured using numerous different scales. For this
study, we chose to use a measure of satisfaction first developed by Quinn and
Staines (1979). They define satisfaction as “affective reaction to the job,” and the
definition and measure is intended to refer to and measure what they label as “facet
free job satisfaction” (p. 205). This is an established measure of satisfaction and
is reviewed, in depth, by Price and Mueller (1986, pp. 220–223). Besides being an
established measure, it has also been used in two studies (Eden, 1975; Naughton,
1987, using an earlier version) which compared the satisfaction levels between
the self-employed and wage or salaried workers. This allows for the comparison
of scores across somewhat similar groups. The total score for the measure was
calculated by summing the scores for the five individual items. Higher scores
correspond with higher levels of global job satisfaction. The Cronbach’s alpha
was 0.74, and the inter-correlations ranged from 0.33 to 0.58.
Growth intentions was measured using two items. Both of these items were
similar to those used by Westhead and Wright (1998). Respondents were asked,
“How would you prefer for the number of employees in the business to change over
the next TWO years?” and “How would you prefer for the sales for the business
to increase or decrease over the next TWO years?” For both of these items,
participants indicated their response using a 7-point Likert-type scale ranging from
1 = 20% or more decrease, to 7 = More than double. The overall score was cal-
culated by summing the scores for each of the two items. Observed scores ranged
from 2 to 14, and the distribution met the criteria for normality. The Chronbach’s
alpha for the two-item scale was 0.76, and the correlation between the two items
was 0.62.
Employee Growth reflects organizational growth for the firm’s most recent year
of performance. It was calculated using both data from the 2000 Colorado High
Technology Directory and self-reported employment data, based on the following
formula:
% Change in Number of Full-Time Employees

Full-Time Employees 2001−Full-Time Employees 2000
=
Full-Time Employees 2000
This formula was used by Hanks et al. (1994) and is similar to employee growth
formulas used in numerous previous studies.
Control Variables
Following previous P-O fit studies examining similar dependent variables (e.g.
O’Reilly, Chatman & Caldwell, 1991), we controlled for owners education, gender,
and tenure with the firm. In the entrepreneurship literature, education (Cooper
& Dunkelberg, 1987) and gender (Cooper & Artz, 1995; Sexton & Bowman-Upton,
1990) are frequently controlled for. While owners age is also frequently controlled
for in entrepreneurship studies, and was asked for and collected, we chose to use
tenure instead. Tenure was highly correlated with owner’s age, which made the
inclusion of both variables problematic. Virany, Tushman and Romanelli (1992)
have argued that CEO tenure should be controlled for in research seeking to relate
CEO characteristics to firm performance. Given a choice between the two, tenure
appears to be a more relevant variable to this study.
In addition, it seems reasonable to expect that prior or concurrent business
ownership could influence the individual’s level of burnout, intentions to exit, sat-
isfaction, growth intentions, and employee growth. As a result, this was controlled
for by using the dummy variable Serial, which was coded 0 for ownership in only
one firm and 1 for ownership in two or more firms. The final control variable
chosen for inclusion was one that measured firm performance. This variable is
a subjective measure of performance in which the respondent is asked to rate the

current profit performance of his or her firm versus the competition. Inclusion
of this variable as a control is important since a goal of this study is to identify
the relationship between cognitive fit/misfit and the dependent variables over and
above what may be explained by the financial performance of the firm.
Data Analysis
In order to test the hypotheses, we used hierarchical regression. To reduce the

possibility of multicolinearity between the main effects and their interactions,
the independent variables were centered (Aiken & West, 1991). First, the control
variables were added. Next, the centered main effects (CSI and WCI) were entered
as the second block. Finally, the interaction term (CSI × WCI) was entered as the
third block. While the multiple regression equations described above will indicate
whether or not an interaction is significant for a given criterion (dependent) vari-
able, they do not provide much information on the true nature of the interaction.
In order to reveal the true nature of the interaction, the suggested procedure is
to plot the interaction (Aiken & West, 1991). We followed Cohen and Cohen’s
(1983) recommendation to use values of the predictor variable at one standard
deviation above the mean and one standard deviation below the mean. These
values at plus and minus one standard deviation are then substituted back in to the
modified regression equation and plotted to display the interaction. Following this
procedure allows the hypotheses relating to the nature of the proposed interactions
to be tested.
RESULTS
Means, standard deviations, and intercorrelations for the variables used in the
models are presented in Table 3. Of particular interest are the mean scores for
several of the dependent variables. The mean scores for burnout and satisfaction
were extremely high as compared to the reported means for other sample groups
(wage or salaried employees) in other studies. Conversely, the mean score for
intention to exit was very low as compared to employees in other studies. We
further discuss the implications of these findings in the implications section of this
chapter.
The results of the hierarchical regressions are displayed above in Table 4.
For burnout, the main effects model makes a significant contribution over and
above the base model (R 2 = 0.035, p < 0.05). Within the main effects model,
60
Table 3. Means, Standard Deviations, and Correlations.a
8 Mean S.D. 1 2 3 4 5 6 7 8 9 10 11
1. Burnout 22.65 12.59

2. Satisfaction 20.42 4.89 −0.60
−0.62
KEITH H. BRIGHAM AND JULIO O. DE CASTRO

3. Intention to exit 9.81 5.81 0.48
4. Intention to grow 9.50 2.36 0.03 0.01 0.09
5. Employee growth 0.43 1.83 −0.09 0.07 −0.02 0.06
6. Cognitive style index 32.06 12.59 −0.03 0.01 −0.05 −0.16 0.05
7. Work context index 0.00 2.37 −0.16 0.11 0.08 0.02 0.17 −0.07
8. PFMVS 5.10 1.51 −0.32 0.47 −0.36 −0.06 0.17 −0.05 0.05
9. Gender 0.95 0.22 −0.14 0.24 −0.18 0.01 0.05 −0.04 0.12 −0.01
10. Education 4.21 1.16 0.04 −0.01 0.03 0.25 −0.05 −0.05 –0.02 −0.09 −0.11
11. Tenure 14.78 8.55 −0.14 0.09 −0.15 −0.38 −0.17 0.10 –0.17 0.15 0.03 −0.24
12. Serial 0.60 0.49 0.02 0.12 0.04 0.05 −0.05 −0.11 0.05 0.10 0.11 −0.01 −0.06
Note: Correlations greater than 0.16 indicate p < 0.05.

a n = 159.
Entrepreneurial Fit
Table 4. Results of Hierarchical Regression Analysis Regressing the Outcomes on CSI, WCI, and Their Interaction.a
Variable Burnout Satisfaction Intentions to Exit Intentions to Grow Employee Growth
Base Main Inter- Base Main Inter- Base Main Inter- Base Main Inter- Base Main Inter-
Model effects action Model effects action Model effects action Model effects action Model effects action
Performance −0.32*** −0.31*** −0.30*** 0.47*** 0.47*** 0.46*** −0.37*** −0.38*** −0.36*** 0.01 0.01 0.01 0.21** 0.20** 0.20**
Gender −0.15** −0.13* −0.14* 0.25*** 0.24*** 0.24*** −0.20*** −0.21*** −0.21*** −0.04 0.04 0.04 0.06 0.04 0.04
Education −0.02 −0.04 −0.03 0.07 0.07 0.07 −0.05 −0.04 −0.04 −0.18** 0.18** 0.18** −0.08 −0.07 −0.07
Tenure −0.12 −0.15* −0.17** 0.05 0.07 0.04 −0.09 −0.07 −0.04 −0.31*** −0.31*** −0.31*** −0.22*** −0.20** −0.20**
Serial 0.08 0.09 0.08 0.04 0.04 0.05 0.11 0.10 0.08 0.01 −0.01 0.01 −0.09 −0.09 −0.09
CSI score −0.04 −0.06 0.05 0.06 −0.06 −0.08 −0.12 −0.11 0.08 0.09
Work context −0.19** −0.20*** 0.09 0.10 0.07 0.06 −0.03 −0.03 0.14* 0.14*
CSI × Work −0.16** 0.12* −0.22*** 0.02 0.05
context
R2 0.15*** 0.18*** 0.21*** 0.29*** 0.30*** 0.32*** 0.19*** 0.20*** 0.24*** 0.16*** 0.17*** 0.17*** 0.08** 0.11** 0.11**
2
R change 0.15*** 0.04** 0.03** 0.29*** 0.01 0.02* 0.19*** 0.01 0.05*** 0.16*** 0.01 0.01 0.08** 0.02 0.01
an = 159.
∗ Significantat p < 0.10.
∗∗ Significantat p < 0.05.
∗∗∗ Significant at p < 0.01.
61
Fig. 2. Plot of CSI × WCI on (a) Burnout, (b) Satisfaction and (c) Intent to Exit.
the findings suggest that work context has a statistically significant influence on
burnout. The negative sign of the standardized regression coefficient suggests
that burnout was higher for those entrepreneurs with an organizational context
that is less structured, less formal, and less bureaucratic. We hypothesized that
cognitive style moderates the relationship between work structure and burnout.
The interaction model makes a significant contribution over and above the
main effects model (R 2 = 0.026, p < 0.05) and therefore provides support
for Hypothesis 1a. The interaction was plotted to aid with interpretation and is
displayed in Fig. 2a. As hypothesized, for the work context lower in formalization
and structure, burnout was higher for more analytic individuals than for more
intuitive individuals. Conversely, for the work context higher in formalization
and structure, burnout was greater for more intuitive individuals than for more
analytic individuals. Therefore, Hypothesis 1b was supported.
For satisfaction, the main effects model does not make a significant contribution
over and above the base model (R 2 = 0.010, p > 0.10). Within the main effects
model, the findings suggest that neither work context nor cognitive style alone
has a statistically significant association with satisfaction. We hypothesized that
cognitive style moderates the relationship between work structure and satisfaction.
The interaction model makes a significant contribution over and above the main
effects model (R 2 = 0.015, p < 0.10) providing support for Hypothesis 2a.
The interaction was plotted and is displayed in Fig. 2b. As hypothesized, for the
work context lower in formalization and structure, satisfaction was higher for
more intuitive individuals than for more analytic individuals. Conversely, for the
work context higher in formalization and structure, burnout was greater for more
analytic individuals than for more intuitive individuals. Therefore, Hypothesis 2b

was supported.
For intent to exit, the main effects model does not make a significant contribu-
tion over and above the base model (R 2 = 0.088, p > 0.10). Within the main
effects model, the findings suggest that neither work context nor cognitive style
alone has a statistically significant influence on satisfaction. We hypothesized that
cognitive style moderates the relationship between work structure and individuals’
expressed intentions to exit their firm. The interaction model makes a significant
contribution over and above the main effects model (R 2 = 0.047, p < 0.01) pro-
viding support for Hypothesis 3a. The interaction was plotted and is displayed in
Fig. 2c. As hypothesized, for the work context lower in formalization and structure,
intention to exit the firm was higher for more analytic individuals than for more
intuitive individuals. Conversely, for the work context higher in formalization and
structure, intention to exit the firm was greater for more intuitive individuals than
for more analytic individuals. Therefore, Hypothesis 3b was supported.
For growth intentions, the main effects model does not make a significant
contribution over and above the base model (R 2 = 0.012, p > 0.10). Within
the main effects model, the findings suggest that neither work context nor
cognitive style alone has a statistically significant influence on growth intentions.
We hypothesized that cognitive style moderates the relationship between work
structure and individuals’ expressed intentions to grow their firm. The interaction
model does not make a significant contribution over and above the main effects
model (R 2 = 0.001, p > 0.10). Therefore, Hypothesis 4a was not supported.
In addition, having found that the interaction was not significant, Hypothesis 4b
was not supported, and plotting the interaction was rendered moot.
For employee growth, the main effects model does not make a significant
contribution over and above the base model (R 2 = 0.022, p > 0.10). Within
the main effects model, the findings suggest that neither work context nor
cognitive style alone has a statistically significant influence on growth intentions.
We hypothesized that cognitive style moderates the relationship between work
structure and employee growth. The interaction model does not make a significant
contribution over and above the main effects model (R 2 = 0.002, p > 0.10).
Therefore, Hypothesis 5a was not supported. In addition, having found that the
interaction was not significant, Hypothesis 5b was not supported, and plotting the
interaction was rendered moot.
DISCUSSION
The empirical results indicate that when controlling for firm performance, en-
trepreneurial experience, and other demographic variables, there is a significant
relationship between cognitive misfit and the individual entrepreneur’s reported

levels of burnout (H1), satisfaction (H2), and his or her intentions to exit (H3) the
firm. Furthermore, when these significant interactions are plotted and examined in
detail (Fig. 2a–c), they reveal some interesting patterns. These disordinal (crossed)
plots suggest that different types of entrepreneurs (analytic versus intuitive) will
experience different outcomes, given the level of structure and formalization in
their firms. An entrepreneur whose cognitive style is mismatched with the struc-
ture level of her/his firm will tend to experience significantly more “negative”
outcomes (higher burnout, lower satisfaction, and higher intentions to exit) than
an entrepreneur who is more in fit.
This is an important finding. It suggests which types of entrepreneurs will
experience greater difficulty in managing their businesses (from a cognitive
conflict perspective) at different stages of growth and maturity. These results
allow us to offer some prescriptive advice to practicing and nascent entrepreneurs
with respect to where they are more likely to experience cognitive misfit and
the associated negative outcomes as they attempt to grow their businesses. This
is an important step towards better understanding the cognitive component of
entrepreneurial transition difficulties.
Closer examination of the plots reveals that while the interactions for burnout
and satisfaction were as expected, the effects for analytical entrepreneurs are more
marked than those of intuitive entrepreneurs. An initial explanation of that result
could be that intuitive entrepreneurs might be more able to adapt than analytical
entrepreneurs to less than desirable environments. Yet the results for intent to
exit are similar for both analytical and intuitive entrepreneurs, meaning that
while intuitive entrepreneurs might suffer less burnout and greater satisfaction
than analytical entrepreneurs, they are as likely to want to exit the venture when
in misfit. Further research is needed on the nature of analytical and intuitive
entrepreneurs and the implications of misfit for organizations.
The significant relationships between cognitive misfit and burnout, satisfaction,
and intentions to exit support our contention that it is important to look at inter-
actions in the study of entrepreneurship. Individual or firm level variables alone
are not sufficient to explain the dynamic nature of the questions of real interest in
the field. It is the interaction of the person (entrepreneur) and the place (firm) that
yields significant insights and may offer a better understanding of questions such
as the entrepreneurial transition dilemma, serial entrepreneurship, and lifestyle
entrepreneurs. Focusing on the ways that entrepreneurs think and make decisions
in combination with relevant firm level or environmental level variables allows us
as researchers to keep the individual entrepreneur in the equation without falling
into the personological trap that was indicative of so many of the past “trait”
studies.
We failed, however, to uncover significant relationships between cognitive

misfit and growth intentions (H4) and percentage change in employee growth
(H5). With respect to growth intentions, we proposed that individuals would
desire to avoid cognitive misfit and, as a result, would seek to either grow or
arrest development of their businesses in the direction that fit with their dominant
style. While we expected that individuals would want to be in cognitive “fit,”
this non-finding does highlight an interesting paradox. The highly intuitive
entrepreneur is best suited for the early stages of the business; however, growing
the business will likely lead to increased cognitive misfit. It seems plausible that
the desire to achieve growth far outweighs the possible negative consequences of
cognitive misfit (of which the highly intuitive entrepreneur may have little or no
awareness). Further research is needed on this point, as it should provide better
explanatory power to the executive limit scenario and its limitations.
Finally, the relationship between cognitive misfit and percentage change in
employee growth was not significant. This was the only outcome variable that
was at the firm and not the individual level. This is clearly related to the issue of
levels of analysis in entrepreneurship research. It is possible that the ability of the
entrepreneur to influence the growth of the firm over a one-year period was too
small to detect. Also, numerous confounding variables may influence employee
growth. Method and measurement issues have to be examined in depth when
attempting to link entrepreneur and firm level variables, and that link remains
a big concern for entrepreneurship research. However, despite this non-finding,
we believe that whenever possible, entrepreneurship researchers should examine
possible links to traditional performance measures.
Implications for Scholars
In this chapter, we have further validated and extended the construct of cognitive
misfit as a viable facet of P-O fit. We have extended the traditional P-O fit approach
beyond employees and some aspect of their job or organization to owners and their
businesses. This not only adds validity to the P-O fit approach, but demonstrates its
ability to be used to address fundamental questions in the field of entrepreneurship.
This is a multidisciplinary and multilevel approach that allows researchers to in-
clude the individual entrepreneur in the study of entrepreneurship, while avoiding
the limitations and traps of earlier studies using psychological variables.
One problem with employing a multidisciplinary approach such as the one
in this study is that many of the measures were developed for employees within
organizations and not for owners/entrepreneurs. The mean scores for several
of the dependent variables indicate that owners/entrepreneurs are different than
employees with respect to burnout, satisfaction, and intention to exit. New

measures of these variables, scaled specifically for entrepreneurs, would allow us
as researchers to capture much more of the true variance on these variables and
would be a solid contribution to research of this type.
The idea that the owner/CEO/entrepreneur transition dilemma is a problem of
misfit is not new in the management literature. However, which individual and
environmental variables might lead to this misfit and the nature of the relationships
between these variables is very underdeveloped. We provide a framework that
specifies the interaction of two of these variables (cognitive style at the individual
level and work context (structure) at the firm level) as a potential contributing
source of this misfit.
Limitations and Future Research
This study uses intentions as a proxy for actual behavior. Whereas intentions have
been linked to actual behavior in P-O fit studies (Chatman, 1991), it should be
acknowledged that intentions do not always translate into actual behavior. A lon-
gitudinal design is necessary to determine if expressed intentions ultimately lead to
a specific behavior. Also, the generalizability of the results to owners/entrepreneurs
in other types of industries should not be assumed. In the end, the generalizability
of the results of this study can only be determined through testing with different
subjects and settings (Flanagan & Dipboye, 1980). Finally, and as is often the case
with studies of this kind, despite the precautions undertaken and some comparative
support, it is impossible to rule out common method bias.
A number of alternative cognitive style models have been excluded from
this study and could also be potentially relevant. Furthermore, the construct
of cognitive misfit is only one facet of fit by which to explore many of the
lingering questions in entrepreneurship. While this study finds that the construct
of cognitive fit/misfit does hold significant explanatory power with respect to
entrepreneurial behavior, it is likely just one component in what is ultimately a
much more well-defined model of entrepreneurial behavior. Therefore, the results
of this study point to a number of promising avenues for future research.
Studies that combine both individual and situational factors through an
interaction approach may hold great promise (Stewart, 1996). While this study
focused on the interplay between individual decision-making style and the
situational factor of work context, the examination of the interaction between
decision-making style and other situational factors would appear to be a promising
approach. Further, a longitudinal approach would allow us to examine the link
between intentions and actual behaviors and outcomes.
Moreover, if one looks at entrepreneurship as a career choice, then following

entrepreneurs throughout their careers (possibly including multiple new business
formations) seems to be an obvious and logical approach. Why does one
entrepreneur start and grow multiple businesses over his or her career (serial)
while another is content to only start one business (novice) and even arrest
development (lifestyle) at a certain level? Cognitive misfit could add some
substantial understanding with respect to these different types of entrepreneurs.
Roure and Maidique (1986) found that experienced and well-balanced
entrepreneurial teams influence organizational performance. The theory on
decision-making styles explicitly states that one form of coping behavior is the
formation of teams to handle non-preferred tasks or problems (Kirton, 1989).
While the design of this study did not allow for the examination of entrepreneurial
team compositions, this would appear to be a necessary area of investigation.
We propose that the effectiveness of the entrepreneurial team could be examined
by looking at the decision-making styles of the individual team members. Do
well-balanced entrepreneurial teams (from a decision-making style perspective)
outperform teams that are made up of members with similar styles? Do more
experienced entrepreneurs build teams with members having similar or dissimilar
styles to their own? Does having a team with a range of styles and different
from that of the entrepreneur moderate or mediate the relationships found
in this study? There is a large body of existing research on decision-making
style and teams within organizations. Extending this research into the study
of entrepreneurial teams is an important and very promising area for future
research.
CONCLUSION
If, as many researchers have argued, the individual entrepreneur is the most salient
unit of analysis in entrepreneurship research and theory (Herron & Sapienza, 1992),
then a more complete understanding of the entrepreneur is a necessary prerequisite
for a more refined understanding of the process of entrepreneurship. A robust and
comprehensive model of entrepreneurship must demonstrate how the predisposi-
tions and cognition of entrepreneurs are transformed into action (Shaver & Scott,
1991). The findings presented in this paper suggest that cognitive misfit is a use-
ful construct in understanding entrepreneurial attitudes and intentions. Examining
the interactions of entrepreneurs’ different decision-making styles and aspects of
their firms allows us to avoid the limitations associated with focusing on only in-
dividual or firm variables to explain behaviors and organizational outcomes. We
believe that this research represents an important step, not only in gaining a fuller
understanding of the entrepreneurial transition dilemma, but also, in ultimately

creating a more complete model of the entrepreneurial process.
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THE ROLE OF REGRETFUL
THINKING, PERSEVERANCE,
AND SELF-EFFICACY IN
VENTURE FORMATION
Gideon D. Markman, Robert A. Baron

and David B. Balkin
INTRODUCTION
Shane and Venkataraman (2000) and Venkataraman (1997) suggest that the field
of entrepreneurship seeks to understand how opportunities are discovered, created,
and exploited, by whom, and with what consequences (italic added). Surprisingly
and despite the fact that the person – the entrepreneur – is central to the creation
of new ventures, entrepreneurship scholars are reluctant to explicitly include
individual differences in formal models of new venture formation. For example,
notwithstanding the important role that entrepreneurs play in forging new
wealth and creating new jobs, research to identify cognitive processes, attitudes,
behaviors, traits, or other characteristics that distinguish entrepreneurs from others
who opt to work as employees remains somewhat marginal. Indeed, only very
few studies on individual differences have been published in leading management
journals. One possible explanation for this reluctance is that in the past researchers
might have classified most individual differences as traits research and thus
criticism spilled over to include all individual difference research, regardless of

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06004-5
73
74 GIDEON D. MARKMAN, ROBERT A. BARON AND DAVID B. BALKIN
whether the focus was trait, cognitions, emotions, attitudes, behaviors, or other
characteristics.
The goal of this paper is to employ a rigorous methodology in order to assess
the impact of several individual difference factors (factors possessing a firm
foundation in existing theory and empirical findings) on individuals’ decision
to use their inventions (i.e. patents) to start new ventures. Indeed, a more recent
research stream suggests that individual differences might play an important role
in entrepreneurship (Baum, Locke & Smith, 2001). To mention a few studies,
Shane (2000) found that individuals from diverse technological backgrounds who
assess the same technological invention (e.g. 3DP™ ) recognize and then develop
very different business opportunities. Sarasvathy, Simon and Lave (1999) used
verbal protocols to illustrate that entrepreneurs evaluate and process information
differently from bankers. Additional evidence suggests that entrepreneurs, as
compared with managers, may perceive and react to risk differently; entrepreneurs
gathered significantly less information, utilized less formal techniques to analyze
problems, and followed less rational decision processes than managers did
(Busenitz, 1999; Busenitz & Barney, 1997). In contrast, Kaish and Gilad (1991)
found that entrepreneurs spent considerably more time searching for information
and paid attention to different risk cues than did executives of established firms.
Studying several biases such as illusion of control and the belief in the law of
small numbers, Simon, Houghton and Aquino (2000) suggest that entrepreneurs
might not realize that certain tasks are beyond their control. Others noted that
entrepreneurs tend to make quick decisions (Bird, 1988; Eisenhardt, 1989;
Stevenson, Grousbeck, Roberts & Bhidé, 1999). New evidence also confirms
that common cognitive scripts not only explain similarities in decision-making
among entrepreneurs across cultures but also behavioral differences between
entrepreneurs and non-entrepreneurs within countries (Mitchell, Smith, Seawright
& Morse, 2000). Recently, longitudinal and cross-sectional research showed that,
in the architectural woodworking industry, CEOs’ traits, skill, and motivation
were significant (direct and indirect) correlates of ventures growth (Baum & Lock,
2002; Baum, Locke & Smith, 2001). Finally, entrepreneurs and non-entrepreneurs
may react to environmental complexity in contrasting ways. Meyer and Dean
(1990) report that managers replace founding entrepreneurs because the latter
reach the “executive limit”; entrepreneurs fail to adequately reduce environmental
complexity and thereby hinder subsequent venture growth.
These more recent studies hint that older research may have yielded in-
conclusive findings or identified attributes that could not reliably distinguish
entrepreneurs from non-entrepreneurs due to inappropriate methodology such
as invalidate measures and inadequate statistical control (e.g. issues of direct
versus indirect effects; cf. Baum & Locke, in press). Many past studies relied on
The Role of Regretful Thinking, Perseverance, and Self-Efficacy 75
psychometric scales of questionable validity or inappropriate sample populations.

For example, what is the theoretical rationale for comparing entrepreneurs with
managers (Busenitz & Barney, 1997), bankers (Sarasvathy, Simon & Lave,
1999), or students (Chen, Greene & Crick, 1998; Krueger, 1993)? Entrepreneurs
build new businesses regardless of resource availability (Timmons, 1999); they
erect their firms from the ground up, are normally highly vested in their new
venture, and subsequently are liable for their firm’s success or failure. Managers
and bankers, on the other hand, command and control established business
propositions; they are agents not owners, and they are not as exposed to personal
risks as entrepreneurs are. Keeping these contextual variations in mind, it is
easy to understand why research on individual differences that is based on such
samples might provide very inconsistent insights on entrepreneurship.
The challenge of selecting appropriate control groups is related to the daunting
question “who is an entrepreneur and who is not” (Robinson et al., 1991). Thus
an important factor that hinders research in entrepreneurship evolves around pro-
cedures for sample selection. First, due to the aura surrounding economic growth
and innovation, many studies implicitly share a common bias of over-selecting
successful entrepreneurs. Second, despite the importance of technological inno-
vation not many studies actually control for subjects’ ability to innovate and hence
it remains unclear whether reported differences are due to group membership
(e.g. entrepreneurs vs. non-entrepreneurs) or ability to innovate. Third, to our
knowledge, few studies relied on homogenous groups of entrepreneurs and even
fewer relied on random sampling techniques. Ignoring that large variations among
entrepreneurs make comparisons within and across studies difficult, much research
used convenient samples of entrepreneurs who work in diverse, frequently even
unrelated, industries. Finally, researchers in entrepreneurship have a tendency
to “handpick” their samples despite the fact that pre-study knowledge of group
membership might have inadvertently introduced additional confounds and biases.
The foregoing review suggests that although the field of entrepreneurship is in-
terdisciplinary with roots in economics, sociology, management, and psychology,
research on individual differences in entrepreneurship has not drawn extensively
upon the findings and methodologies of social and cognitive psychology. This
is somewhat disappointing because a number of key issues that entrepreneurship
research tries to address focus on human cognitions, thoughts, and mental models
(e.g. “Why do some persons but not others become entrepreneurs?” “What is it
that makes some entrepreneurs so much more successful than others?”). Indeed,
an important objective of this chapter is to augment the methodological standards
currently used in research on individual differences in entrepreneurship by relying
not only on constructs and processes borrowed from sister disciplines such as
social and cognitive psychology, but also on their methodologies.
For the past several years, Baron and his colleagues (e.g. Baron, 1998, 2000;
Baron & Markman, 2000, in press; Baron, Markman & Hirsa, 2002; Markman,
Balkin & Baron, in press; Markman & Baron, 2002) and others (cf. Baum & Locke,
in press; Baum, Locke & Smith, 2001; Shane, 2000) have sought to augment
methodological rigor and create closer conceptual links between entrepreneurship
and cognitions by identifying well-established psychological constructs that seem
relevant to understanding the characteristics and activities of entrepreneurs. Our
research sought to extend this ongoing work. Building on emergent research on
individual differences and entrepreneurship (including, Busenitz & Barney, 1997;
Chen, Greene & Crick, 1998; Honig, 1998; Stewart et al., 1999, to name a few), we
focus on three dimensions that appear to be particularly relevant for entrepreneur-
ship research. The factors examined here are: (a) regretful thinking (an aspect of
counterfactual thinking), thoughts regarding events and outcomes different from
the ones that actually occurred (Baron, 2000); (b) perseverance – perceived ability
to persist and overcome adversity and challenges;1 and (c) self-efficacy – our belief
in our ability to perform certain tasks successfully (Bandura, 1997).
As explained henceforth, we predict that since setbacks, challenges, snags, and
disappointments characterize the process of new venture formation, persons who
start new companies – as compared with ones who don’t – will recall more regretful
thoughts, but will also perceive higher levels of capacity to persevere and self-
efficacy. To reiterate, the goal of this chapter is to address the following question:
Are patent inventors who start new companies (hereinafter called entrepreneurs)
higher in terms of perceived regrets, perseverance, and self-efficacy than inventors
who opt to work as employees for established organizations (hereinafter called
non-entrepreneurs)?
THEORY AND HYPOTHESES

Regretful Thinking: Thinking About Negative Outcomes
Experiencing unintended detrimental consequences or imagining favorable

outcomes that did not materialize is a frequent experience for most people. Such
regretful thinking often occurs in response to information about unfavorable
outcomes and unmet expectations, and frequently leads, in turn, to strong
emotional reactions such as disappointment and blame (Zeelenberg et al., 1998).
For instance, regretful thinking can be observed among Olympic athletes who
win silver medals. Such athletes have been found to be less happy with their
success than are athletes who receive bronze medals (Medvec, Madey & Gilovich,
1995). Research on counterfactual thinking explains this seemingly anomalous
result in the following manner: Silver medal winners are unhappy because they
imagined winning a gold medal (i.e. they imagined better outcomes than they
actually received), while bronze medallists are happier because they imagined
receiving no medal at all (i.e. worse outcomes than they actually received). Thus,
like counterfactual thinking, regretful thinking is a cognitive representation of
alternative consequences and they are activated automatically, particularly (though
not exclusively) in response to misfortunes and disappointments (Baron, 2000).
Regretful thinking is important because such strong sentiments may have
profound effects on one’s mood, understanding of cause-effect relationships,
decision-making, task performance and even personal health (Roese, 1997). For
instance, thoughts may activate the same analgesic pathways that morphine does;
placebos boost blood flow to brain areas that are packed with opiate receptors.
In management, research shows that regret and blame are particularly vivid in
contexts involving product failure (Creyer & Gurhan, 1997). Our basic prediction
is that entrepreneurs, because they encounter potent market and technological
obstacles, experience substantially more regrets than others who invent yet
participate in a very limited way in the commercialization of their technologies.
Championing a new venture can evoke strong emotions; capitalizing on poor
opportunities (and the subsequent failure) or caving in to competition (and
observing how others reap the rewards) can stir up strong regrets.
At first glance, this prediction would appear to be directly contrary to findings
reported by Baron (2000), who reported that entrepreneurs, as compared to
non-entrepreneurs, experienced fewer life regrets and less intense regret over
missed opportunities. However, there appear to be several reasons why Baron
(2000) found fewer regrets in his group of entrepreneurs while we expect to find
more (and more intense) regrets among entrepreneurs in the present research.
First, Baron (2000) worked with a very different population than the one employed
here. The entrepreneurs his research had all started their own businesses (Gartner,
1988), and so can reasonably be described as entrepreneurs. However, in many
cases, these businesses did not involve ideas for new products or services; rather,
they were largely “new variations on existing themes.” In the present research,
in contrast, we focus on persons who have generated ideas for new products or
services and, moreover, have obtained patents on these inventions. In short, they
are all inventors, and to the extent they use their inventions to start new ventures,
are entrepreneurs in the strongest sense of this term, as defined recently by Shane
and Venkataraman (2000). We reason that people who have discovered an idea for
a product or service feel a strong, personal involvement with this idea: after all,
they have truly created it. For this reason, we suggest, they may be more likely to
experience strong regrets following setbacks. In short, they are so “ego-involved”
with their inventions, that they are more likely to experience regrets when they
encounter obstacles while developing these ideas. In contrast, people who invent
under the auspice of and for existing organizations may be less “ego-involved”
with them; indeed, they have chosen to turn the inventions over to others. Thus,
they would be expected to experience fewer or weaker regrets than entrepreneurs.
A second reason why we predict different results in the present study than those
obtained by Baron (2000) is as follows: in his research, Baron used a standard
measure of counterfactual thinking – asking participants to list the three things
they regret most in their lives. This kind of open-ended question leaves participants
free to describe regrets over actions they had taken which had turned out badly
(e.g. “I invested in a stock that went straight down.”) and actions they had not
taken but wish they had (e.g. “I wish I had decided to pursue an MBA degree”).
Research suggests that thinking about actions people wish they had taken but did
not, can be especially unpleasant, so it is possible that the participants in Baron’s
research suppressed reports of such events, thus lowering the total number of
regrets reported. In the present research, we restrict our attention to regrets of
decisions – actions taken that turned out poorly. As a result, participants may be
more likely to report regrets than was true in the research by Baron (2000). And
given the reasoning presented above (i.e. people who start new ventures remain
ego-involved with their inventions), we predict that entrepreneurs will report more
and more intense regrets than non-entrepreneurs.
What about the pattern of regrets reported by entrepreneurs and non-
entrepreneurs? If entrepreneurs are indeed more involved with their inventions
than persons who invent for others, we might expect that the regrets they report
will focus more on business decisions and other factors relating to their new
ventures, while non-entrepreneurs will report a wider range of regrets (e.g. over
education, career choices, etc.). This hypothesis too will be investigated. Overall,
our reasoning concerning regretful thinking leads us to the following hypotheses:
Hypothesis 1. Inventors who build new ventures based on their discoveries

report a higher number of regrets than inventors who invent as employees for
an existing company.
report more intense regrets than inventors who invent as employees for an
existing company.
Hypothesis 3. The regrets of inventors who build new ventures based on their
discoveries focus to a greater extent (than inventors who invent as employees
for an existing company), on business decisions, but to a lesser extent on
other decisions (e.g. ones pertaining to education, career choices, personal
relationships).
Perseverance
Despite repeated assertions – particularly by economic paradigms – that at

the core of entrepreneurship is “opportunities recognition” and “alertness” (cf.
Kirzner, 1997), we maintain that entrepreneurship research must also assess key
activities such as one’s conviction in his or her ability to convert discoveries into
moneymaking services or products. The recognition versus execution debate is
not new and many scholars remain adamant that the opportunity – and particularly
the process of opportunity recognition – remains fundamental to wealth creation
processes (Shane, 2000; Shane & Venkataraman, 2000). We fully agree, yet our
interviews of patent inventors, technology transfer executives, patent attorneys,
and entrepreneurs indicate that only small subsets of all discoveries are actually
commercialized. A typical Silicon Valley VC firm, which receives over 5,000
unsolicited business plans a year and invest only in about ten, will earn industry
admiration once even one of those unsolicited business plans becomes a successful
venture. This inverse exponential relationship between discovered opportunities
and tangible ventures hints that recognizing opportunity is perhaps necessary but
clearly insufficient for entrepreneurship to take place. Because the recognition
of opportunity is largely an intangible, cognitive process to be finally validated
when the new venture or product is finally launched, a fundamental question in
entrepreneurship research is not only who can discover opportunities, but also
who can persevere to harvest them (Shane & Venkataraman, 2000).
Business history is quite familiar with inferior products, services, and tech-
nologies that nevertheless outmaneuvered, out-marketed, and outsold superior
counterparts or vice versa, where advanced products and breakthrough tech-
nologies that despite their pre-eminence were defeated by inferior counterparts.
The Wintel (Microsoft operating system and Intel microprocessor) standard
of personal computers became the dominant computing technology despite
the fact that Apple’s MacIntosh technology provided user-friendlier interface.
The technology to record video data on magnetic tape and the subsequent
battle between Betamax and VHS is another example. To use another anecdote,
although science fiction enthusiasts envisioned teleportation – dematerializing
an object at one location, and sending the details of that object’s precise atomic
configuration elsewhere, where it is reconstructed – as a real opportunity, for
years it was thought to violate the Heisenberg uncertainty principle of quantum
mechanics (Einstein, Podolsky & Rosen, 1935). Now, using a paradoxical feature
of quantum mechanics known as the Einstein-Podolsky-Rosen correlation or
EPR entanglement, it is known that quantum teleportation is possible – at least
with photons (Bennett et al., 1993). The point is that despite the recognition of an
opportunity (i.e. where time and space could be eliminated from travel), complex
technological barriers, high and long-term risk, and intensive investment capital
required to convert such opportunity into a reality daunt entrepreneurs, investors,
and even nations. Like Thomas Edison, who accumulated 1,093 patents and noted
that genius is 1% inspiration and 99% perspiration, we point that it is one thing
to discover opportunities, but an entirely different matter to harvest them.
To recap, we concede that opportunity recognition may be a precondition to
entrepreneurial efforts, yet here we stress that it remains unclear who are the
persons who not only recognize novel, useful, and non-obvious technologies, but
also transform these inventions into establish new ventures. Because the actual
pursuit of opportunities is very challenging (McGrath, 1995), we suspect that
at least part of the answer to this question lies in human variability in terms of
perceived capacity to persevere in the face of adversity.
Although the concept of perseverance has been studied for many years,
most research on this topic has focused on how beliefs, thoughts, and attitudes
persist in light of new information and in spite of the discrediting of old “facts.”
More recently, Eisenberger (1992), Eisenberger, Kuhlman and Cotterell (1992),
Eisenberger and Leonard (1980), have extended this line of work to the domain
of task performance and work persistence. For example, Eisenberger (1992)
found that reinforced effort results in persistence that transfers to different tasks:
the phenomenon of learned industriousness (Eisenberger, 1992) occurs when
high effort on one task (e.g. solving complex anagrams) transfers to another
(e.g. detecting differences between cartoon drawings). Eisenberger and Leonard
(1980) found that high effort reduces disruptive responses such as frustration,
blame, and anger produced by early failure, and thus leading to greater subsequent
tenacity and persistence. Like Eisenberger (1992), we define perseverance as
one’s capability to persist and endure in the face of difficulties, risks, and failure.
We propose that because individuals experience varying levels of adversity,
success is determined, to an important degree, by the extent to which individuals
persevere despite what appear to be insurmountable obstacles, or in Stoltz’s terms
(1997, 2000), adversity. A corollary of this is that perceived perseverance may be
crucial – even if insufficient – for one’s success in entrepreneurial settings.
Perceived capacity to persevere influences individuals’ courses of action, the
level of effort they put forth while pursuing their endeavors, the length of their
endurance and the level of their resilience in the face of lasting obstacles and
repeated failures (cf. Eisenberger & Leonard, 1980). Perceived perseverance also
influences how much stress and setbacks individuals experience while they cope
with taxing situations, and the level of accomplishments they realize (Bandura,
1997). For instance, perseverant people find out ways to circumvent constraints or
change them by their actions, whereas less diligent people are easily discouraged by
impediments and unexpected challenges (Bandura, 1997; Eisenberger et al., 1992).
Launching a new venture requires a high level of conviction in one’s ability to

overcome challenges plus the successfully transformation of the new technologies
into attractive commercial products or services. We propose that people who
discover or invent similar inventions and are exposed to very comparable
obstacles differ in the way they perceive adversity. This proposition begs the
following question: What specific types of perseverance will be most useful to
entrepreneurs? Although the answer to this interesting question depends, to an
important degree, on the various situations entrepreneurs face, a careful review of
available evidence (e.g. Stoltz, 1997, 2000) indicates that two constructs appear
to be particularly relevant. These include, perceived control over adversity and
perceived ownership of the outcome of adversity (regardless of what caused the
adversity in the first place). As detailed below, we predict that technical inventors
who create new ventures perceive higher levels of control over the adversity they
face, and sense greater ownership regarding outcomes of the adversity.
Control: Perceived Control over Adversity
People strive to control events that affect their life circumstances because doing so
provides innumerable personal, financial, and social benefits (Lam & Schaubroeck,
2000). Being able to predict and control events fosters adaptive preparedness,
whereas inability to exert influence over adversity breeds apprehension, apathy,
and at times desperation (Bandura, 1986). Also, because actions are based more
on what is perceived or believed than on what might be objectively true, alleged
control is an important precursor to one’s level of motivation and actions. Specific
perceived control over adversity is a major basis of action because people who
believe they can attain certain outcomes have the incentive to act (Bandura, 1997).
Perceived control over adversity – which is central to most human behaviors and
the focus of this theory – should not be confused with general “locus of control”;
the former refers specifically to control over adversity whereas the latter is a global
measure of one’s ability to influence one’s own fate or outcomes (Stoltz, 1997).
Perceived control over adversity influences the course of action, the level of effort
put forth, and the length of perseverance and resilience in the face of obstacles,
failures, or hardship. Perceived control over adversity also affects how much stress
individuals experience while they cope with taxing environments, as well as the
level of accomplishments they realize (Stoltz, 2000). In short, perceived control
over adversity influences what individuals do and become and their motivation to
act despite impediments.
Theory and practice agree that when confronting setbacks, perseverant
individuals intensify their effort and experiment with new actions, whereas those
who are less perseverant quickly give up (Cervone, 1989). We note that the
development and use of new technologies as a basis for new components or
even end products is the outcome of intensive work conducted by determined,
self-disciplined individuals (cf. McGrath, 1995). Indeed, our interviews with
numerous patent inventors (entrepreneurs and non-entrepreneurs) indicate that
their key challenge is to persevere until they thoroughly troubleshoot vexing
technological obstacles. Since launching a new venture entails a combination of
both technological and business obstacles, it stands to reason that entrepreneurs
would probably have stronger perceived control over their adversity. Stated
differently, launching a business requires strong perceived control over adversity
along both technological and business value chains; entrepreneurs must not
only convert their new technological discovery into working prototypes but also
transform them into viable moneymaking products and services. While we suspect
that all inventors perceive strong control over adversity related to their work, we
expect entrepreneurs to perceive even stronger control over adversity because the
survival and longevity of their young venture depends on their perseverance and
determination to convert their new technology into a business. Hence the following
hypothesis:
Hypothesis 4. Inventors who build new ventures based on their discoveries tend
to have higher perceived capacity to control adversity than inventors who invent
as employees for an existing company.
Accountability: Perceived Ownership of the Outcomes of the Adversity
Accountability, particularly in response to unfavorable events, might manifest

itself as regret, disappointment, and blame (Roese, 1997). Some individuals, for
instance, experience intense discontent when they fail to attain outcomes for
which they have a strong mental image (Medvec, Madey & Gilovich, 1995). Such
strong emotions are important because growing empirical evidence suggests that
emotions have profound effects on perceptions and judgments (e.g. Forgas, 1995),
understanding of cause-effect relationships, decision-making, and thus on task
performance (Mandel & Lehman, 1996). Perceived accountability, despite the
short-term negative affect it generates (e.g. sadness, disappointment, and blame),
is offset by inferential benefits that prove advantageous on a longer-term basis.
For example, when task performance is deemed inferior because of lack of effort
(rather than ability), a causally potent antecedent has been identified; deploying
additional effort will enhance future performance. Substandard execution and
its associated negative affectivity alert us to a particular problem and prompt
corrective thinking and action (Schwarz, Bless, Srtack & Klumpp, 1991). In
short, once accountability “mobilizes” us to rectify negative outcome (Peeters
& Czapinski, 1990), an adaptive reaction is established. Accountable individuals
focus on actions and outcomes; they take steps to circumvent unpleasant events or
center their attention on the outcomes of adversity regardless of its origin (Stoltz,
1997). Because entrepreneurship entails highly turbulent environments in which
the process of transforming technological opportunities into innovative products
or services rarely goes undisturbed, human variability in preference and reaction
to setbacks and disappointments may be quite telling. The question, then, is
whether entrepreneurs, in the presence of adversity and setbacks, perceive stronger
accountability over adversity (regardless of its origin) than do non-entrepreneurs?
Two rationales, both emanating from the interaction between persons’ prefer-
ences and situations (Markman & Baron, 2002), suggest that the answer to this
question is yes. First, there is no strong reason to suspect that inventors differ on
how hard they work on their discoveries. However, because it is public knowledge
that launching a new venture requires resolve to overcome setbacks – including
those impediments generated by others – persons with weak sense of ownership
regarding adversity might shirk from becoming entrepreneurs. Conversely, individ-
uals who take leadership over adversity are more likely to excel in entrepreneurial
settings. Naturally, accountability to harsh circumstances and setbacks could
intensify subsequent to becoming entrepreneurs and as such diminished ownership
over adversity among entrepreneurs might increase business vulnerability. Agency
theory confirms that owners are more committed to and accountable for producing
commercial outcomes than their agents (Deckop, Mangel & Cirka, 1999). This
suggests that accountability and business ownership are causally interrelated:
highly accountable persons are likely to pursue entrepreneurial undertakings and
those who are owners of their ventures likely to become more accountable.
Second, studies report that lack of ownership, as captured by various excuses
and rationalizations, is a self-protecting reaction aiming to reduce personal respon-
sibility for taxing events (Schlenker, 1997; Schlenker et al., 2001). The goal is to
sway others (self-included) that failure did not stem from one’s action as it might
otherwise appear to be; and when self-fault is undeniable, that the “incident” is
merely due to transient blemish rather than permanent attribute (e.g. carelessness
rather than stupidity). Avoiding accountability minimizes negative repercussions,
including reducing negative affect (e.g. guilt, shame, remorse), damage to reputa-
tion, and punishment for failures. Although failure is rarely intentional, individuals
vary greatly in the way they see failure, and thus the prospect of failure guides
many decisions (Schlenker et al., 2001). As entrepreneurial undertakings are
notoriously difficult and the large majority of young businesses fail (Hamel, 2000;
The State of Small Business: A Report to the President, 1995), it stands to
reason that attitudes towards failure influence one’s likelihood of championing

a new venture.
Research confirms that lack of accountability and the assignment of blame are
particularly vivid in contexts involving failure (Taylor, 1995) and that responsibil-
ity diffuses in proportion to group size (Forsyth, Zyzniewski & Giammanco, 2002).
Keeping this in mind, it is apparent that work span and responsibility horizons of
non-entrepreneurs and entrepreneurs are also unequal. Entrepreneurs are in charge
of their business; its growth and the markets to be pursued, its competitiveness, and
of course, failure. Entrepreneurship is an occupation in transition; entrepreneurs
work with more diverse and interdependent stakeholders and they are accountable
for deliverables that are outside their immediate function and control. The
cross-functional nature of their work diverges from the traditional work and com-
partmentalized activities that are common in domains in which non-entrepreneurs
work. The prospect of all-embracing vocation span and the open-ended respon-
sibilities (for good, but also bad) suggest that persons seeking entrepreneurial
careers probably hold themselves responsible and accountable for adversity they
face. On the other hand, persons shirking from taking ownership over predicaments
that are not their doings are rather unlikely to seek entrepreneurial undertaking.
Thus, the interaction between persons’ preferences and contexts (cf. Markman &
Baron, 2002), agency theory and the obvious implications of failure suggest that
persons opting to become entrepreneurs will perceive stronger ownership over
outcome of adversity than their counterparts. This reasoning is summarized by the
following hypothesis:

tend to have higher perceived ownership of the outcome of adversity that they
encounter than inventors who invent as employees for an existing company.
Although studies on individual differences recognize some unavoidable overlaps

between perseverance and self-efficacy, evidence from theoretical and applied
studies on human variability suggests that these constructs have unique features
that merit their conceptual distinctness (Bandura, 1995, 1997; Nir & Neumann,
1995). Hence, to further theoretical development we conclude this theory
section with additional discussion regarding self-efficacy. Testing for the unique
effect of self-efficacy, rather than self-esteem or locus of control, is important
because research has shown that the former is a robust predictor of superior
task performance (cf. Bandura, 1997), and human variability in entrepreneurship
(Baum et al., 2001, 2002; Chen, Greene & Crick, 1998). We reasoned that testing
for the unique effect of perseverance, over and above self-efficacy, would provide
discriminate validity between perseverance and self-efficacy.
Self-Efficacy: Beliefs in our Ability to Effectively Accomplish Certain Tasks
To briefly reiterate, self-efficacy involves the belief that we can organize and
effectively execute actions to produce given attainments (cf. Bandura, 1997;
Chen, Greene & Crick, 1998; Gist & Mitchell, 1992; Krueger & Brazeal, 1994).
Self-efficacy impacts our perceived control, how much stress, self-blame, and
depression we experience while we cope with taxing circumstances, and the level
of accomplishments we realize. It also influences our courses of action, level
of effort, our reaction to failure, and whether our thoughts are self-hindering or
self-aiding (Bandura, 1999; Wood & Bandura, 1989). Vasil (1992) found that
when the effects of experience, academic rank, and disciplinary affiliation are
controlled, scholars high in self-efficacy excel. While many occupations call
for high self-efficacy (Gist & Mitchell, 1992), performing innovative research
resulting in patents is a good example since it is constrained by time, funding,
and uncertain outcomes despite relentless intellectual effort. Moreover inventions
are scrutinized, challenged, and frequently refuted before (and sometimes after)
they attain patent status. Since the process of scientific discovery is strewn with
technological obstacles, successful patenting rests heavily on strong self-belief
(Bandura, 1999; Gist & Mitchell, 1992; Wood & Bandura, 1989). In short,
self-efficacy is central to most human functioning, and since actions are based
more on what people believe than on what is objectively true, thoughts are a
potent precursor to one’s level of motivation, affective states, and actions.
If self-efficacy impacts career undertaking, performance, and success would
it also predict, or at the very least be related to, entrepreneurial pursuits? We
think that it would because of three main reasons. First, people avoid careers and
environments they believe exceed their capabilities (regardless of the benefits
these may hold), but they readily undertake vocations they judge themselves
capable of handling (Krueger & Dickson, 1994), and the higher their self-efficacy,
the more challenging the activities they pursue. Second, because entrepreneurs
operate at the crux of change, innovation, and market perturbation, they personally
realize higher financial, technological, and legal liabilities and uncertainties. On
the other hand, inventors “working-for-others” continue to operate in relative
seclusion and predictability; they are less exposed to market resistance, competi-
tors’ retaliation, or suppliers’ protest. Past research indicates that under taxing
circumstances individuals with higher self-efficacy perform more adeptly (cf.
Bandura, 1997). Finally, although some research has suggested that self-efficacy
successfully differentiates entrepreneurs from non-entrepreneurs (Chen, Greene
& Crick, 1998), as we noted earlier, such inferences stem from studies with
students, managers, and occasionally with handpicked samples of entrepreneurs.
We suggest that starting a new venture – obtaining external funding, recruiting
key partners and employees, and overcoming what appear to be insurmountable

business and technological obstacles – is substantially different than managing
an existing operation or undergoing classroom simulations. Since self-efficacy
reliably predicts the scope of career options considered, occupational interests,
and personal effectiveness, we suggest that it will also be related to the pursuit of
entrepreneurial activity. Thus our last hypothesis is as follows:

have higher self-efficacy than inventors who invent as employees for an existing
company.
METHODS
We decided to focus on a sample of patent inventors because patents are a reason-
able proxy for technological innovation, a precursor to newly developed product
components, and an indication of technological capital (Balkin, Markman &
Gomez-Mejia, 2000). Patents may also erect legal and technical barriers to rivals.
For example, our interviews of patent inventors, technology transfer executives,
and patent attorneys suggested that good patents may provide footholds to new
technologies and therefore are an important source of competitive advantage.
Finally, patents are an indication of inventive capacity that benefits society
(Trajtenberg, 1990).
To reduce selection biases commonly found in entrepreneurship research (see
Markman, Balkin & Baron, in press, for a detailed discussion on this issue), while
obtaining evidence on the hypotheses, we extracted a random sample from a list of
4,861 patent inventors, obtained from the U.S. Patents and Trademark Office. All
4,861 inventors were granted patents for their inventions during 1997 and 1998
for inventions encompassing surgery devices (patent classes 600, 601, 602, 604,
606, 607). Since the original list of 4,861 inventors included only minimal contact
information (i.e. first and last name, city, and state), we used Visual Basic to scan
the Nation Wide Phone Directory (NWPD) software that resides on CD ROMs
and to retrieve complete contact information (e.g. full address and phone number)
for each inventor.
The Visual Basic output yielded 3,491 non-duplicated entries. Then, using
Excel Spreadsheet and the “randomize” command function, we selected a random
sample of 586 patent inventors. Then, in early 1999, all 586 patent inventors were
contacted via telephone, were invited to participate in our study, and were sent a
survey. Two weeks later we called all the non-respondents and then sent our second
batch of survey mailing. We repeated the same procedure two to six additional
times with all non-responding inventors. Although we sent surveys to a random

sample of 568 patent inventors and received 233 surveys back (41% response
rate), only 217 were usable. Hence, in contrast to many studies in entrepreneurship
that compared samples of known entrepreneurs with a sample of predetermined
non-entrepreneurs, we relied on a random sample of inventors, all of whom invent
in the same technological space, at the same time period, and we did not know
ahead of time, which inventors were entrepreneurs and which were not.
Placed at the last section of the mail survey, a qualifying question asked
inventors to indicate whether they used their invention to start their own business
in 1997 or 1998. Such a qualifying question used successfully in previous
studies including the Entrepreneurship Research Consortium (ERC project;
Carter, Gartner & Reynolds, 1996). Of the 217 qualified inventors, 55 (25%)
used their invention to start a new company and therefore were classified as
entrepreneurs (coded as 1), whereas the remaining 162 (75%) did not, and thus
were classified as non-entrepreneurs (coded as 0). This relatively high rate of
entrepreneurship (25%) may be attributable to the monopolistic nature of patents.
Unlike traditional businesses, start-ups anchored in patents enjoy substantial
technological protection, competitive insulation, some legitimacy, and a relatively
wider window of opportunity (Rivette & Kline, 2000).
Before outlining the study’s procedures and operations, it is worthwhile to reem-
phasize four things that distinguish this study from others. First, classification of
participants, in this case, patent inventors as entrepreneurs or as non-entrepreneurs,
was made only after the surveys were collected and data were coded. Second, re-
stricting the assessments of entrepreneurs and non-entrepreneurs to inventors who
invent in the same technological space at roughly the same time period (1997–1998)
provides a stronger test of hypotheses outlined above. Third, although the source
of the primary data collection was based on self-reported surveys, we also verified
data consistency through phone interviews and crosschecks with the U.S. Patent
and Trademarks Office website (e.g. patent count). Fourth, we made an attempt to
account for non-response bias. To this end, we compared our random sample with
46 inventors who refused to return their surveys back on age, formal education,
annual income, and number of patents developed. Data from non-responding
inventors – obtained via phone calls – and analysis showed no significant differ-
ences between the two samples. Finally, because of potential covariation between
opportunities and individuals, Shane (2000) advocates that studies on individual
differences control for the characteristics of the opportunity. To alleviate this
predicament we took three remedial steps: First, using a random sample of in-
ventors implies that the characteristics of the opportunities may also be randomly
distributed between the two groups. Second, our AQ measures were not tied to the
opportunity, but instead were based on the same hypothetical scenarios described
henceforth (Table 1). And finally, inventors in this study invented highly related
patents (surgery devices), which to some extent represents a set of opportunities
with similar characteristics.
Procedures and Operational Measures
Inventors were asked to complete a short questionnaire consisting of several

scales adapted from widely used measures of regretful thinking (Baron, 2000),
perseverance (Stoltz, 1997, 2000), and self-efficacy (Maurer & Pierce, 1998).
Unlike previous research that treated regretful thinking as a unidimensional or
homogenous construct, we assessed three aspects of regretful thinking, including
a quantitative, qualitative, and magnitude measure of inventors’ regrets. The
quantitative and qualitative measures were based on inventors’ responses to an
open-ended question: “think about your life and career and list the decisions that
you regret most.” This question generated two different dimensions of regretful
thinking. First, we counted the quantitative measure of regrets by adding up
the decisions that inventors regretted most. Second, a content analysis of the
same decisions by two independent raters had identified six types of regrets (e.g.
business opportunities, career, education, investment and finance, personal value,
and relationships). Interrater consistency was high; in 92% of the cases they were
in complete agreement. This was the measure of the qualitative nature of regrets.
Finally, on the next page of our survey, participants were also asked to indicate, on
a seven-point scale, how much regret they had experienced regarding the decisions
they had just listed (1 = little regret; 7 = much regret). This was the measure of the
magnitude of regrets. The instruments to measure regretful thinking are depicted in
the Appendix.
The measure of perseverance consisted of a 40-item scale that was developed
and validated by Stoltz (1997, 2000) with more than 100,000 participants from
diverse organizations in a variety of industries. Each item consisted of a statement
representing hypothetical events (e.g. “you apply for a job change and don’t get
it”; “you fail to meet the deadline on a major project”) followed by two questions,
each representing the dimensions described earlier (i.e. control and ownership).
The respondents’ task was to indicate, on a five-point scale, the extent to which the
statements represented them (see Appendix). Factor analysis showed that the two
constructs, composed of eight items each, were reliable (e.g. control: ␣ = 0.77
and ownership: ␣ = 0.81). Following Stoltz’s recommendation (1997, 2000) we
also created one additional variable – a composite of both scores of perseverance.
Despite the fact that self-efficacy measures have generally relied on scales re-
lating to specific tasks, some research calls for broader measures, particularly
The Role of Regretful Thinking, Perseverance, and Self-Efficacy
Table 1. Means, Standard Deviations, and Correlations among Study Variables.a
Mean S.D. 1 2 3 4 5 6 7 8 9
1. Groupb 0.25 0.42

2. Regrets’ strength 5.77 1.21 0.10
3. Count of regrets 2.87 1.62 0.16* 0.02
4. AQ – control 3.40 0.59 0.19** 0.16* 0.11
5. AQ – ownership 3.99 0.51 0.17* 0.23** 0.17** 0.41**
6. Self-efficacy 6.01 0.99 0.17* 0.14* −0.01 0.18** 0.18**
7. Age 48.11 10.81 0.03 −0.07 0.12 0.04 0.06 0.03
8. Education 18.94 3.22 0.23** 0.08 0.00 −0.07 −0.08 0.01 −0.04
9. Innovation 13.21 16.37 0.03 0.10 −0.13* 0.03 −0.04 0.05 −0.01 0.24**
10. Incomec 11,8273 83,845 0.04 0.16* −0.06 0.18** 0.12 0.11 0.04 0.10 0.10
aN = 217.
b Group refers to entrepreneurs versus non-entrepreneurs.
c Income is annual earnings in dollars.
∗ Correlation is significant at the 0.05 level (2-tailed).
∗∗ Correlation is significant at the 0.01 level (2-tailed).
89
when the vocations under consideration have little in common or require a very
diverse set of skills (cf. Bandura, 1997). Since starting ventures requires human
capabilities in many and different domains and validated self-efficacy scales for
patent inventors are not yet available, we used a general scale. Therefore, perceived
self-efficacy in this study was measured in terms of the belief about what one can do
under different conditions with whatever skills one possesses (Chen, Gully & Eden,
2001; Eden & Aviram, 1993). This measure was an eight-item, seven-point scale
(1 = strongly disagree; 7 = strongly agree) that was used successfully in previous
research (Maurer & Pierce, 1998). Items in this scale included such statements as
“I am strong enough to overcome life’s struggles,” “I can handle the situations that
life brings,” and “I usually feel I can handle the typical problems that come up in
life” (␣ = 0.89). All eight measures of self-efficacy are depicted in the Appendix.
Consistent with previous research on individual differences in entrepreneurship,
the survey obtained additional control variables such as age, education (measured
by years of formal education), and personal annual income for 1998. Since all the
inventors in our study worked on novel, non-obvious, and useful technologies, an
additional control variable that our study brings to this line of research is a measure
of one’s inventive capacity as captured by the number of patents granted to each
inventor (Griliches, 1990; Romer, 1996).
Analyses
A MANOVA examined the relationship between entrepreneurs and non-entre-

preneurs (as the fixed factor) on a set of five dependent variables: magnitude of
regrets; number of regrets; control over adversity; ownership regarding outcomes
of adversity; and self-efficacy, where age, years of education, innovation (i.e.
number of patents), and income included as covariates. Content analyses and
discriminant analysis examined the relationship between entrepreneurs and
non-entrepreneurs on all qualitative data regarding inventors’ regretful decisions.
RESULTS
Table 1 presents means, standard deviations, and correlations for all the inventors,
regardless of group membership. As shown in Table 1, the average inventor in this
study was 47 years old, had more than 19 years of formal education, and at the
time of the survey had been granted over 13 patents. In 1998, the average inventor
earned approximately $118,000 a year. Entrepreneurs and non-entrepreneurs were
closely matched on education, age, income, and innovations, and the inventors
who also became entrepreneurs started their firms with two cofounders and raised,
on average, $6 million to build their company.
The results of the MANOVA revealed statistically significant differences be-
tween entrepreneurs and non-entrepreneurs on the sets of dependent variables
(Pillai’s trace = 0.05, F = 3.80, p < 0.02). The size of the multivariate effect of
entrepreneurship on the five dependent variables, as indexed by partial eta squared,
was 0.09. Univariate ANOVAs confirmed that entrepreneurship had significantly
stronger regrets (F = 6.01, p < 0.05), but the two groups did not differ on the num-
ber of regrets (F = 1.44, p = ns). Univariate ANOVAs also revealed that group
membership (i.e. entrepreneurs vs. non-entrepreneurs) was significantly related
to perceived control over adversity (F = 8.03; p < 0.005) and perceived owner-
ship regarding outcomes of adversity (F = 4.07; p < 0.05). Specifically, means
perceived control over adversity and perceived ownership regarding outcomes of
adversity were significantly higher for entrepreneurs than for non-entrepreneurs.
Finally, and consistent with predictions made elsewhere, but with different sam-
ples (Chen, Greene & Crick, 1998), we too find that entrepreneurs tend to have
significantly higher self-efficacy (F = 5.27; p < 0.02).
As described earlier, a content analysis of the qualitative measure of regretful
thinking identified six types of regretful decisions, including business oppor-
tunities, decisions regarding career, education, investments, personal values,
and personal relationships. A discriminant analysis suggested that entrepreneurs
regret more decisions regarding business opportunities whereas non-entrepreneurs
list more regrets about education and career decisions (Chi-square = 30.84;
p = 0.01). The discriminant function accounted for 78% of the between group
variability. Thus, findings reported in Tables 2 and 3 provide support for all
hypotheses except for Hypothesis 1; the difference in entrepreneurs’ and non-
entrepreneurs’ regret count was not significant. That is, Hypothesis 1 was not
Table 2. MANOVA Analysis: Dependent Variable Meansa for Entrepreneurs

and Non-Entrepreneurs.
Dependent Variable Entrepreneurs Non-Entrepreneur F-value ␩2
(H1) Number of regrets 3.21 2.90 1.44 0.01

(H2) Magnitude of regrets 6.15 5.67 6.01* 0.03
(H4) AQ-control 3.65 3.32 8.03* 0.05
(H5) AQ-ownership 4.20 3.90 4.06* 0.03
(H6) Self-efficacy 6.30 5.90 5.41* 0.03
Multivariate effect: Pillai’s trace = 0.09, F = 2.80∗ , ␩2 = 0.09.

a Means adjusted for covariates: age, education, annual income, and number of patents.
∗ p < 0.05.
Table 3. Discriminant Analysis: Structure Matrix of Regret Variables.a

Function Wilks’ Lambda F Sig.
Business opportunity 0.85 0.94 23.58 0.001

Education −0.43 0.99 4.00 0.05
Career −0.35 0.98 6.07 0.01
Value 0.12 1.00 0.45 0.50
Relationship 0.03 1.00 0.02 0.88
Investment −0.01 1.00 0.58 0.45
a Dependent function: Entrepreneurs versus non-entrepreneurs.
supported because although, on average, entrepreneurs reported a slightly a higher

number of regretful decisions than non-entrepreneurs did, the difference was not
statistically significant. On the other hand, since the two groups differed on the
magnitude of their regrets, Hypothesis 2 was supported; entrepreneurs reported
significantly stronger regrets than non-entrepreneurs did. Additionally, and as
predicted by Hypothesis 3, entrepreneurs reported primarily regrets concerning
business opportunities whereas non-entrepreneurs reported mainly regrets about
their career and education. Entrepreneurs, as compared with non-entrepreneurs,
also tend to have significantly higher perceived control over adversity and a greater
sense of ownership regarding the outcome of adversity regardless of the origin of
adversity. Hence, Hypotheses 4 and 5 were supported. Finally, since entrepreneurs
reported significantly higher self-efficacy, Hypothesis 6 was supported too.
To recap, the data offered support for Hypotheses 2–6, but Hypothesis 1 was
not supported. Table 2 shows the adjusted means for the five dependent variables
broken-down for entrepreneurs and non-entrepreneurs. The discriminant function
of the structure matrix and the test of group means for the qualitative data are
reported in Table 3.
DISCUSSION
As we stated at the beginning of this chapter, much research in entrepreneurship is

using tighter theoretical views and better empirical testing to address the question
of individual differences (e.g. Baron, 1998, 2000; Baron & Markman, 2000, in
press; Baron, Markman & Hirsa, in press; Busenitz & Barney, 1997; Chen, Greene
& Crick, 1998; Krueger, 1993; Markman, Balkin & Baron, in press; Markman &
Baron, 2002). We tried to extend this ongoing work by assessing the relationship
between regretful thinking (Baron, 2000), perceived capacity to persevere (Stoltz,
1997, 2000), and self-efficacy on the one hand, and new venture formation on the
other. Findings confirmed that those inventors who start new ventures tend to have
specific regrets (i.e. relating to business opportunities), have significantly stronger
regrets, higher perceived control over the adversity and perceived ownership of
the outcome of adversity that they face, and finally, stronger self-efficacy.
Unlike previous research that shows that entrepreneurs – as compared to oth-
ers – engage in limited counterfactual thinking (cf. Baron, 2000), we found that
entrepreneurs and non-entrepreneurs report almost identical numbers of regretful
decisions. Our research found that not only do entrepreneurs experience stronger
regrets; they also experience regrets over different kinds of decisions than their
counterparts (i.e. business opportunities vs. career and education decisions). We
attribute these findings, which diverge from the ones reported by Baron (2000), to
our unique and random sample of patent inventors and our qualitative measures of
regrets, which were different from the ones employed by Baron, and focused on
regrets over decisions rather than over life events of missed opportunities. As noted
earlier, the different populations employed and the contrasting measures gathered
from participants were expected to generate contrasting patterns of results.
While the finding that entrepreneurs regret mostly decisions about business
opportunity has high face validity (e.g. pursuing opportunities is at the core of
many entrepreneurial activities), a key question is why did non-entrepreneurs, but
not entrepreneurs, regret career and education decisions? Though this question
should be fully addressed by further research, we offer the following explanation.
Job autonomy, particularly in inventive capacity, dramatically influences how
incumbents perceive their work and experience career-related regrets. Unlike
entrepreneurs, non-entrepreneurs work and invent for their employers, and as
such they may encounter stronger barriers to career mobility, limited discretionary
power, and of course, restricted autonomy. A career plateau – the point at which
advancement is improbable – can occur to many astute inventors despite years of
experience. Good engineers have strong problem-solving skills in their respective
technical domains; however, to become executives or managers they need new
skills in management, decision making, business acumen, working well with a di-
verse workforce, as well as foresight and perseverance. Thus, one’s early decision
to become a skilled scientist or engineer may limit the subsequent likelihood of
being groomed for leadership roles and succession to the top management team
(Daily, Certo & Dalton, 1999). As are a result, non-entrepreneurs in our sample
may have many bases for experiencing regrets over their past decisions. While
this explanation is quite plausible, this proposition is beyond the scope of our
study and thus awaiting further empirical testing.
Research in social, cognitive, and applied psychology shows that self-efficacy re-
liably predicts personal effectiveness under diverse tasks and careers (cf. Bandura,
1997), and new studies confirm that entrepreneurs tend to be higher in self-
efficacy than other persons (Chen, Greene & Crick, 1998). We tried to extend such
results to patent inventors and our findings confirm that inventors who start new
ventures have significantly higher self-efficacy. Perhaps even more interesting was
our finding that after controlling for self-efficacy, inventors’ perceived capacity to
persevere continues to distinguish between entrepreneurs and non-entrepreneurs.
Again, results show that, over and above self-efficacy, perceived perseverance
is related to new venture formation; each of the three constructs – self-efficacy
(␩2 = 0.03); control over adversity (␩2 = 0.05); and ownership of outcome of
adversity (␩2 = 0.03) – accounted for unique variance that was not captured by
the other constructs.
Since past research suggests that perceived capacity to persevere predicts
personal effectiveness under diverse tasks and careers (cf. Bandura, 1997;
Eisenberger, 1992), we were curious whether perseverance explains some
variability in inventors’ annual earnings – a crude proxy of personal success.
To this end, we performed a simple stepwise hierarchical regression, in which
we regressed annual income first on all the control variables (age, education,
innovation), and then on self-efficacy and finally on perseverance as captured by
an aggregate measure of perceived control over adversity and ownership of the
outcome of adversity. This post hoc analysis showed that highly perseverant patent
inventors earn significantly more than patent inventors whose perseverance was
very low (adjusted R 2 = 12%; F = 4.40; p < 0.01). To give a concrete example,
the annual earnings of patent inventors who’s average perseverance score was
in the top 20% was approximately $128,692 vs. $93,933, which was the annual
earnings of inventors whose perseverance score was in the bottom 20% – almost
$35,000 per year difference. Thus, higher perseverance scores – as measured
across all patent inventors – were related to higher personal income. Naturally our
ad hoc analysis provides a simple initial assessment of the link between perceived
perseverance and personal success. Such link should be the subject of future
empirical research, which includes wage determination variables.
Implications, Limitations, and Future Research
This study has important implications for research, theory, and practice. It provides
guidance for future research on individual differences in the context of new product
development and innovation, and it makes contributions to our understanding of
individual differences in the context of entrepreneurship. For example, it shows that
even among persons who discover novel, useful, and non-obvious technologies,
those who ultimately undertake the daunting task of creating new ventures appear
to have higher perseverance and higher self-efficacy. However, and despite very
favorable coverage by the popular press, it appears that the entrepreneurial journey
yields particular, and at times stronger, regrets.
Despite the fact that regretful thinking is an important cognition in decision-
making, until recently very little research has focused on this topic in the context of
entrepreneurship (cf. Baron, 2000 as an exception). For example, researchers have
noted that decision makers anticipate and take into account the possibility that
their decisions may produce regretful thoughts (e.g. Loomes & Sugden, 1986).
As such, future research on entrepreneurs’ regretful thinking could be helpful
in understanding how these thought processes and cognitions affect decision
and actions. For instance, regretful thinking, which is primarily associated with
the presence of negative outcomes, together with people’s natural tendency to
avoid disappointment, could explain why some people, but not others, reject the
possibility of starting a new venture. Others showed that people are generally
risk-averse and that this tendency is stronger under conditions of possible gains
than possible loss (Kahneman & Tversky, 1982). To extrapolate from the work
of van Dijk et al. (1999), one reason for this tendency could be that opting not
to start a new business might limit disappointments and regretful thinking. In
other words, increased anticipation of disappointment and regrets might motivate
risk-aversive career paths. Playing it “safe” allows us to expect less, obtain what
we expect more easily, and therefore avoid the perils of becoming chagrined with
disappointments and regretful thinking. Clearly, regrets are interesting cognitions
that await further investigation in the context of new venture formation.
The study’s focus on perseverance and the evidence that people are not victims
of their adversities strike a hopeful note. That is, unlike relatively stable personality
and trait characteristics, perceptions of adversity are somewhat open to modifica-
tion. As perseverance enables human action, at least to some extent people are the
architects of their own destinies (Bandura, 1986). Assuming all else equal, one’s
reaction to adversity is – with the appropriate education and training – improvable
(Stoltz, 1997; Waldroop & Butler, 2000). For example, developing perceived
control and accountability is accelerated when individuals alter the reasons they
assign for their successes and failures. When people change their explanations for
why important and impactful outcomes occurred, they improve their expectations
for positive outcomes in the future (Mifflin & Schulman, 1986; Seligman, Reivich,
Jaycox & Gillham, 1995). Seligman and his colleagues (1995) suggest that pro-
viding individuals with such tools and skills can help them transform helplessness
into mastery that bolsters self-efficacy and perseverance. Teaching individuals to
challenge their thoughts and assumptions can “immunize” them against adverse
impact of setbacks (Eisenberger, 1992). Improving one’s perseverance reduces
the risk of helplessness as it boosts performance, improves physical health, and
increases self-reliance in the face of new challenges (Stoltz, 1997).
At another level, evidence also suggests that a “can-do” attitude rubs off; that be-
ing around dynamic individuals who keep adversity in perspective is infectious (cf.
Smith & Muenchen, 1995). This suggests that entrepreneurs can use their pattern
of thinking (e.g. “can-do”) to inspire and motivate their partners and others who
work with them. Finally, since perceived perseverance is significantly associated
with personal success, we may want to – assuming all else equal – give strong con-
siderations to tenacious entrepreneurs and agents. A corollary of the fact that per-
severance is both augmentable and functional is that it may be worthwhile to assess
this construct among future entrepreneurs. For example, investors such as venture
capitalists may improve their odds if they consider technical inventors’ perceived
perseverance. Similarly, in the context of corporate entrepreneurship, managers
may assess intrepreneurs’ levels of perseverance to identify early career track of
technical people to become champions of new business units. Of course, these
suggestions are tentative and awaiting further empirical testing and validation.
Before concluding, several limitations to this study must be addressed. First,
although dividing patent inventors into entrepreneurs and non-entrepreneurs
simplifies the methodology, it is an oversimplification. In reality, particularly over
time, inventors may “migrate” from working for others to working for themselves
and vice versa. Some inventors may be building their own start-up – which may or
may not be tied to their patent – while holding employment elsewhere. Also, the
survey did not collect data on the organizations in which participants work, and it
is possible that some inventors who were classified as non-entrepreneurs actually
work for start-up firms. In other words, the division of participants into two
dichotomous groups may fail to capture a richness that ranges between what we
categorically termed entrepreneurs and non-entrepreneurs. While the use of two
dichotomous groups proved quite revealing, assessment of more than two groups
was beyond the scope of our study and thus awaiting further empirical testing.
A second limitation stems from the reliance on patent count as a proxy of
innovation. Researchers note that the distribution of patent quality is highly skewed
toward the low end with a long, thin tail into the high-value end (Trajtenberg,
1990). Our interviews with technical inventors, chief technology officers (CTOs),
intellectual property attorneys, and technology transfer directors reveal that fewer
than 10% of patents are commercialized. This is not surprising because many
patents have no market value until they are combined with several other patents
(e.g. Gillette’s Mach 3 is protected with over 30 patents!). Additionally, some
inventors may file for patents for intellectual reasons, others to passively “protect”
technology share, and yet others use patents to strategically position their invention
in a particular technological space. Also, patents may allow inventors to cajole
rivals into alliances, partnerships, and concessions that are not of the rivals’ initial
liking. In short, as patent count is an imprecise proxy of innovation, we suggest
that future empirical research try to distinguish between high- and low-quality
innovations.
As we hinted earlier, future empirical studies should also attempt to measure and
control for additional factors relating to individual differences (e.g. locus of control,
need for achievement, level of motivation, self-esteem, and so on), contextual
factors (e.g. work environment) and various outcomes variables (e.g. starting a
new business, performance, success, etc.). Unfortunately, a key challenge to field
researchers is the unavoidable tradeoff between casting a broad empirical net and
response rate. Highly inclusive survey instruments with a myriad of psychometric
scales are also lengthy and time-consuming, and while such surveys may work
in classroom settings, they are prohibitively difficult to justify to inventors and
scientists or to persuade them to respond.
One final weakness of our study, which is mainly due to its cross-sectional
design, relates to uncertainty regarding causality. Since data were collected after
inventors began building their new ventures, it is unclear whether founding a new
firm increases one’s regrets, perceived control and ownership of adversity, and
self-efficacy, or whether scoring high on these dimensions leads one to found a
new venture. Two points – and a rich research stream on the causal efficacy of
human thought (cf. Bandura, 1995) – suggest that at least perseverance and self-
efficacy are more likely to precede the act of new venture formation than to be the
result of it. First, it is important to recall that we relied on a general, rather than
specific, measure of self-efficacy. Since general self-efficacy is the result of lifelong
experiences; is quite stable by the time individuals are adults (Bandura, 1997); and
since we obtained data from entrepreneurs shortly after they had launched their
new ventures, such short-term business activity, in and of itself, probably did not
elevate one’s self-efficacy in any meaningful way. Second, success and failure in
diverse activities and over prolonged periods of time shape one’s perceived control
over adversity and ownership over outcomes of adversity (Stoltz, 1997, 2000). As
explained above, since our entrepreneurs launched their new ventures only a few
months before we surveyed them, it is unlikely that these relatively short-term
activities had already altered inventors’ perseverance levels in such a significant
magnitudes. Clearly, only longitudinal methods or experimental research design
will fully address this question, but in the meantime, and for the reason outlined
above, we suspect that differences in perseverance and self-efficacy may contribute
to the decision to become an entrepreneur rather than the opposite.
Notwithstanding these limitations, it is important to recognize the recent resur-
gence of interest in individual differences in the field of entrepreneurship (Baron,
1998, 2000; Baum et al., 2001; Busenitz & Barney, 1997; Chen et al., 1998; Ensley
et al., 1999; Honig, 1998; Sarasvathy et al., 1999; Stewart et al., 1999, to name
a few). In this context, this study adds some value as it was based on a random
sample of inventors, all of whom had invented patents in the same technological
space, at the same time period (1997 and 1998), and we – the researchers – did not
know ahead of time which inventors were entrepreneurs and which were not. Col-
lecting income information is another dimension that separates this study from its
predecessors. Our findings suggest that perceived capacity to persevere in the face
of daunting and formidable obstacles may be related to personal success such as
annual earnings. For example, highly perseverant patent inventors enjoyed almost
$35,000 more in annual earnings than less perseverant inventors. Furthermore,
since perceived perseverance explains additional variance that was not captured
by self-efficacy, our study expends our knowledge of individual differences; it
introduces new constructs that we believe merit further empirical testing.
In closing, we found that entrepreneurs, as compared with non-entrepreneurs,
report particular and stronger regrets, significantly higher levels of perceived con-
trol and accountability over adversity, and higher levels of self-efficacy. We also
found that, among our inventors, perseverance is related to personal success as
measured by annual earnings. To the extent that perceived perseverance is vital in
life, we suspect that Confucius was right when he suggested that our greatest glory
is not in never failing, but in rising every time we fail.
NOTE
1. Some entrepreneurship research addressed the issue of persistence and tenacity (cf.
Baum & colleagues, 2001, 2002; McGrath, 1995) and others have used persistence as an
outcome. However, such research neither measured the underlying psychological factors
that make one persist nor made distinctions between types of perseverance.
ACKNOWLEDGMENTS
We gratefully acknowledge that this research was funded in part by the 2001 John
Broadbent Endowment for Research in Entrepreneurship at Rensselar Polytechnic
Institute. The opinions (and errors) are the authors’ and not the grantor’s. We also
thank the participants of the Lally-Darden retreat (2002) and three anonymous
reviewers for their insightful comments and suggestions.
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APPENDIX
Sample Items Used to Measure Perseverance
Inventors used a 5-point scale to indicate the extent to which they agreed with each
of the statements following the situations described below.
Situation: Someone you consider important is not receptive to
your ideas.
Control: How much control do you feel 1 = no 5 = complete
you have in this situation? control control
Ownership: To what extent do you feel 1 = not 5 = completely
responsible for dealing with the responsible responsible
outcome(s) of this situation? at all
Situation: You apply for a job change and don’t get it.
Situation: You fail to meet the deadline on a major project.
General Self-Efficacy Scale
Please indicate the extent to which you agree with each of the following statements
(circle one number for each item).
Strongly Disagree = 1 2 3 4 5 6 7 = Strongly Agree
1. I am strong enough to overcome life’s 1 2 3 4 5 6 7
struggles
2. At root, I am a weak person 1 2 3 4 5 6 7
3. I can handle the situations that life brings 1 2 3 4 5 6 7
4. I’m usually an unsuccessful person 1 2 3 4 5 6 7
APPENDIX (Continued )
5. I often feel that there is nothing I can do 1 2 3 4 5 6 7
well
6. I feel competent to deal effectively with 1 2 3 4 5 6 7
the real world
7. I often think that I’m a failure 1 2 3 4 5 6 7
8. I usually feel I can handle the typical 1 2 3 4 5 6 7
problems that come up in life
Regretful Thinking
Looking back over your entire life, please list the things that you regret most:
Little Regret = 1 2 3 4 5 6 7 = Much Regret

Considering these things you listed 1 2 3 4 5 6 7
on the previous page, how regretful
are you?
THE SELF-DETERMINATION
MOTIVE AND ENTREPRENEURS’
CHOICE OF FINANCING
Harry J. Sapienza, M. Audrey Korsgaard

and Daniel P. Forbes
Capital structure decisions are very much dependent on the owner’s personal preference for
risk-taking, rather than on a strict evaluation of relative costs for different financial possibilities
(Petty & Bygrave, 1993). From the small business owner’s point of view, staying in control and
remaining independent can be challenged when and if he/she admits an external financier into
the business (Bhide, 1992), in that the external financier may be perceived to interfere with the
visions of the small business manager. The fear of losing control over the business certainly
influences the owner/manager’s attitudes towards and use of external financial sources (Ang,
1992; Winborg, 2000).
INTRODUCTION
Take the image of the entrepreneur as a driven accepter of risk, an individual (or
set of individuals) hungry to amass a fortune as quickly as possible. This image
is consistent with the traditional finance theory view of entrepreneurial startups,
one that assumes that profit maximization is the firm’s sole motivation (Chaganti,
DeCarolis & Deeds, 1995). Myers’s (1994) cost explanation of the pecking order
hypothesis (i.e. entrepreneurs prefer internally generated funds first, debt next, and
external equity last) incorporates this economically rational view of entrepreneurs’
financing preferences. According to this view, information asymmetry and

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06005-7
105
106 H. J. SAPIENZA, M. A. KORSGAARD AND D. P. FORBES
uncertainty make the availability of external financing very limited and the cost of
it prohibitively high. To compensate, entrepreneurs must give up greater and greater
control in order to “buy” funds needed to achieve the desired growth and profitabil-
ity. Indeed, Brophy and Shulman (1992, p. 65) state, “Those entrepreneurs willing
to relinquish absolute independence in order to maximize expected shareholder
wealth through corporate growth are deemed rational investors in the finance
literature.” Undoubtedly, cost and availability explanations of financing choices
are valid for many new and small businesses. However, many entrepreneurship
researchers have long been dissatisfied with the incompleteness of this perspective.
Many entrepreneurs wish to accomplish some things other than to amass wealth.
Many want to create something, to shape an organization as they see fit. Indeed,
for some, the primary goal is to be the architect, the creator and/or commander
of the new organization. For some, being in command is merely the means to
attain wealth; for others, being in command is the goal, and wealth generation is
the means. We propose that wealth maximization and self-determination are the
two primary motives driving entrepreneurial financing choices, that the different
degrees of each motive that exist across firms affect their financing choices, and
that trade-offs between the two (when necessary) are complex and dynamic. Our
contribution in this chapter is to develop a framework for understanding how
entrepreneurial firms’ drive for self-determination mixes with wealth creation
motives to explain financing choices. Our main focus is on explicating the factors
that influence the drive for self-determination1 and the perceived risk of losing
control of decisions.
Some entrepreneurship theorists have implied that the wealth maximizing
explanation of financing decisions in small or new firms is inadequate. For exam-
ple, Cressy et al. (1996) and Storey (1994) both observe that even when outside
funds are available, fear of risking independence causes some entrepreneurial firms
to avoid external funds. Others have also attributed financial structure decisions
to risk-taking attitudes as well as need for independence (e.g. Ang, 1992). Citing
Barton and Matthews (1989) and Levin and Travis (1987), Chaganti et al. (1995,
p. 8) argue that the preferences and personal goals of managers play a more potent
role in small, new firms than they do in large, established ones. Several articles
demonstrate that financing in entrepreneurial businesses is “different.” For exam-
ple, Van Auken and Doran (1989) show that newer firms use more debt than older
firms; Chaganti et al. (1995) show that newer firms prefer internally-generated
over external equity to a greater extent than older firms; Van Auken and Holman
(1995) show that financing strategies of private firms change as the firms develop.
In short, a good amount of literature exists which suggests that entrepreneurial
firms’ finance structuring choices do not conform to the expectations of traditional
finance theory (Winborg, 2000). If these empirical observations are valid, how do
we explain the choices made by entrepreneurial firms?
The Self-Determination Motive and Entrepreneurs’ Choice of Financing 107
What we wish to accomplish in this chapter is to highlight the importance of

the motive of self-determination, or “decision control,” in the financing choices of
managers of new firms. We propose a more complex view of financing decisions
that acknowledges the potentially mixed motives of wealth maximization and
self-determination2 : one in which the pursuit of wealth and control are not
independent of one another, one in which past history and future expectations play
significant roles, and one in which the relative balance between the two motives
is salient. For business start-ups, the wealth or profit motive is an assumption
that requires little justification. Therefore, our focus here will be on the decision
control motive, including its antecedents and consequences. We highlight what the
consideration of this motive explains in the financing decisions of entrepreneurs
beyond what might be explained by the more parsimonious single-motive model.
Our central thesis is that, controlling for the strength of the wealth creation
motive, choices among type of financing (e.g. internally generated funds, debt,
outside equity) is determined by entrepreneurs’ drive for self-determination and
their perceptions of the risks to self-determination posed by sources of finance.
An additional element that this second motive introduces is emotion, which may
place limits on rational-economic decision making.
The remainder of the chapter is organized as follows. First, we briefly review
the literature pertinent to understanding the financing choices of startup firms.
We then outline the scope of our theorizing, our key assumptions, and the
relevant theoretical perspectives. In order to develop ideas in depth we focus
on growth-seeking firms wherein the potential for conflict between wealth
and control motives may be greatest. Our theoretical framework begins with
a brief overview of agency theory, decision theory, and organizational justice.
We then develop our views of how growth-seeking firms choose between debt
and equity to fuel further growth and how, once a type of financing has been
picked, they choose among specific providers of the same type of financing. We
develop this final area of theorizing around the concepts of risk perceptions and
willingness to take risks. Here, however, the risk is not economic risk but the risk
of sharing or giving up control. We conclude with a discussion of the boundaries
of our theorizing and the implications of our work for practice and future
research.
LITERATURE ON THE FINANCING STRUCTURE

OF ENTREPRENEURIAL FIRMS
Entrepreneurial finance has been the subject of considerable research attention by
scholars in economics, finance and management. However, much of the existing
literature has focused on the role of financing providers, or the “supply” side of
the entrepreneurial financing process. For example, some of the more prominent
literature streams in the area of entrepreneurial finance are those devoted to the
provision of particular kinds of financing, such as venture capital (e.g. Amit, 1998;
Manigart, 1994), bank loans (e.g. Hancock & Wilcox, 1998; Riding & Swift, 1990),
“angel” investments (e.g. Freear, Sohl & Wetzel, 1994; Haar, Starr & MacMillan,
1988) and public market or “IPO” financing (e.g. Bruton & Prasad, 1997; Deeds,
DeCarolis & Coombs, 1997).
One of the better known contributions in this literature is the “pecking order
hypothesis” (Donaldson, 1961; Myers, 1994), a concept borrowed from general
corporate finance theory, which maintains that entrepreneurs generally prefer
internal financing to debt and debt to external equity. Economic factors form
the basis of this ordering, according to the theory, as entrepreneurs are held to
favor financing options that cost the least and pose the least risk to financial
rewards. Thus, according to this theory, entrepreneurs are reluctant to accept
external equity because of its accompanying threat of wealth dilution, and they
agree to accept it primarily out of a belief that the financial opportunities made
available through it exceed its financial costs. These greater costs for small and
new firms arise out of the business and agency risks inherent in dealing with
startups (Winborg, 2000). The absence of performance history for the venture
and skill verification for the entrepreneurial teams leads to greater perceived
risks of incompetence and opportunism. Additionally, because executing due
diligence is as costly if done on a small firm as on a large one, it is relatively
more expensive for suppliers of capital to process funding for new firms. The
risks are lower for providers of debt to the extent that collateral exists. This
view sees economic factors driving the ordering of financing structure for new
firms.
Research examining entrepreneurial financing decisions from the perspective
of capital providers does suggest a role for non-economic factors. For example,
cognitive biases have been shown to be present in bank lending (Riding & Swift,
1990) and venture capitalists’ decision processes (e.g. Zacharakis & Shepherd,
2001; Zacharakis & Meyer, 1998). Steier and Greenwood (1995, p. 350) observed
that personal references play a stronger role in venture capitalists’ financing
decisions than do business plans and they concluded that “funding is neither fully
reasoned nor divorced from wider contexts.” Sapienza and Korsgaard (1996)
provided some evidence that investors’ decisions to provide additional funding
is affected by their perceptions of the procedural fairness of the entrepreneurial
team. While these studies do provide evidence of some role for factors beyond
pure economic reasoning in capital providers, each also appears fully consis-
tent with the presumption of a dominant economic motive in the behavior of
capital providers.
Although less research attention has been paid to the “demand” side of the
entrepreneurial financing process, some research does exist. For example, some
attention has been paid to “bootstrapping,” the practice whereby entrepreneurs
finance their businesses without formal sources of external financing and rely
instead on the use of internal funds or the careful management of customer and
creditor relationships (e.g. Van Auken & Neeley, 1996; Winborg & Landstrom,
2001). Another stream of literature has examined ventures’ resources and capital
structure, either in descriptive terms (e.g. Bates, 1997) or as determinants
of performance (e.g. Chandler & Hanks, 1998). Consistent with the capital
supply-side literature, researchers collecting data from entrepreneurs tend to
interpret financing structure as determined by financing availability or costs.
However, a significant proportion of this literature introduces an interesting
concept not found in supply-side analyses: many mention the possibility that
mixed or non-economic motives may be driving entrepreneurial choice.
Some researchers of entrepreneurial financing explicitly or implicitly reject the
constrained choice and profit maximization explanations. Chaganti et al. (1995),
for example, complain that the prevailing paradigm erroneously ignores factors
such as owners’ values or goals. Winborg (2000) showed that entrepreneurs
who sought financing to achieve higher growth sought more external funding;
interestingly, he also found that those who professed a “need” for external
financing also held more positive attitudes toward it. Winborg details at length the
great efforts entrepreneurs use to avoid external sources of funding but concludes
that “in some situations, external finance is used despite a negative attitude and
despite a fear of the consequences” (2000, p. 55). One of our central aims in this
paper will be to try to unravel what this “fear” is about (beyond economic loss)
and what encourages or discourages entrepreneurs from facing this fear.
Although the fear of loss of control or, alternatively, the drive for independence
has been frequently mentioned as a key motivator for entrepreneurs (e.g. Ang,
1992; Chaganti et al., 1995; Storey, 1994), few attempt to sort out whether an
observed drive for self-determination is a means to achieve economic ends or
a separate end in itself. For example, Mishra and McConaughy (1999) portray
the “risk of the loss of control and the aversion to debt” of family firms simply
as fear of bankruptcy. Debt may also cause loss of flexibility, and equity may
cause a loss of managerial control (Chaganti et al., 1995); yet it is unclear in
these portrayals whether this fear may be simply reduced to economic terms.
Closer to our intentions, Chaganti et al. posit that some entrepreneurs are
motivated by economic gain for themselves or their families and that others
are motivated by their “desire [for] control over their own affairs and [to] avoid
dependence on others” (1995, p. 9). They provide some support for the argument
that those motivated to a greater extent by economic gain seek a different mix
of external to internal financing than those motivated to a greater extent by

self-determination.
In summary, the literature has focused on the supply side of financing for
new firms. The supply-side logic has justifiably been one of economic ratio-
nality, though some evidence exists that bounded rationality and perhaps even
relationships or politics play a role. The literature is more scant on the demand
side and generally follows the paradigm applied to suppliers. The concept of
mixed motives for entrepreneurs has received some attention in the demand-side
literature, but no over-arching framework exists.
Scope and Premises of our Analysis
We do not view new firms as neatly fitting into “wealth-maximizers” versus “self-
determination-maximizers.” Indeed, often the two motives will be intertwined and
will affect one another directly and indirectly through the choices they provoke.
Instead, we believe that an understanding of new venture financing structure
will be enhanced by developing a theoretical framework that incorporates the
powerful motive of self-determination alongside that of wealth creation. In order
to develop this framework, we focus on the antecedents and consequences of the
self-determination motive in new firms that possess at least enough of a wealth
creation goal to provoke the consideration of external sources of financing.
Critical to our arguments is the concept of self-determination as described
in the psychological theory of intrinsic motivation (Deci, 1980; Deci & Ryan,
2000). We define self-determination as the desire to pursue activities of deep
personal interest (Deci & Ryan, 2000). As such, self-determination appears to
be highly similar to the concept of autonomy, that is, independence or control
over one’s action. Indeed, theory suggests that autonomy is a fundamental and
central need underlying self-determination, but there is more to this motivation
than the need to control. Theorists (Deci & Ryan, 2000) suggest two additional
fundamental needs that drive self-determination: competence and relatedness.
The need for competence is the drive to accomplish goals or outcomes and to have
an effect on one’s environment. The need for relatedness involves the need to form
connections and relationships with other people. Self-determination involves the
joint satisfaction of at least one of these needs along with the need for autonomy.
Thus, self-determination involves experiencing a sense of accomplishment or
mastery in an endeavor over which one has control. Self-determination and
well-being may also be achieved through autonomy in conjunction with secure
relatedness to others. Of the two, research has provided more support for the
importance of the joint effects of autonomy and competence for motivation.
According to this conceptualization, self-determination is an end in itself rather

than a means to achieve desired economic ends. However, the drive for self-
determination can be complementary with economic goals and may thus enhance
economic outcomes for the entrepreneur. That is, an entrepreneur who is driven
to succeed and make an impact on the target industry and who also desires to
maintain a large measure of control or ownership over the firm is apt to be in a
position to financially benefit from his or her successes. However, a direct, positive
relationship between self-determination and economic gain is unlikely, as research
suggests that motivational factors such as need for achievement have a weak direct
effect on venture success and are likely to be dependent on a number of other factors
(Gartner, 1989). Moreover, as our framework will show the motivation for self-
determination may lead entrepreneurs to make sub-optimal financing decisions.
We assume that most individuals or groups of individuals who start new firms
are motivated both by a desire to create wealth and to experience the satisfaction
of directing the enterprise as they see fit. We also assume that the strength and
mix of these two motives vary across new venture teams. The type of financing
sought and accepted by entrepreneurial teams is affected by the mix of wealth
and self-determination motives. If one motive predominates over the other,
such decisions will be relatively easy and consistent over time. For example,
an entrepreneur who seeks above and beyond all else to be her own boss may
forego any outside source of financing and content herself with a “lifestyle”
business. If the wealth accumulation motive predominates, entrepreneurs will
behave according to the assumptions of standard finance theory and seek whatever
type of financing will help achieve wealth, regardless of self-determination
effects. However, if both motives are strong or weak the choices become more
difficult. Entrepreneurs who seek rapid growth but also desire absolute control
over venture decisions, for example, face the difficult task of balancing these
two drives.
The framework we develop is based on several premises. First, we assume
that entrepreneurs have at least some level of choice in terms of financing options.
Although financing choices may be severely constrained by such factors as venture
stage and asset base, even the most constrained have some level of choice (Winborg,
2000). Furthermore, since we will focus on entrepreneurs who have at least some
level of reasonable expectation of external financing, constraints in our framework
are important but do not absolutely determine financing structure. For example,
Smith (1999) showed that, even in the difficult area of venture capital financing,
entrepreneurs have choices among venture capitalists as well as other alternatives.
Second, we assume that, all else equal, entrepreneurs will prefer less costly and
less control-threatening sources of financing. However, all else is not equal and
that is what our framework is about.
Table 1. Goals and Financing Preferences.

Wealth Accumulation Drive
Low High
Self-Determination Drive
High Bootstrapping Early stage: angels, VC
Debt only for survival Late stage: debt, VC
Low VC and angels
Depending on venture stage and
size of funding needs
We assume that different types of financing hold different implications for

growth potential and pose different risks to the entrepreneur’s retention of decision
control. The interplay between growth goals and self-determination concerns on
financing choices is illustrated in Table 1. Generally speaking, we assume that us-
ing only internally generated funds (e.g. entrepreneurs’ equity and sales revenues)
limits the potential rate of wealth accumulation, even though it may not limit total
accumulation in the long run. At the same time, internally generated funds provide
the greatest protection for the self-determination motive. Debt allows greater
potential for growth than working from internally generated funds alone, but this
potential is limited by the payback requirement. Debt introduces some threat to
self-determination as banks and other lenders include covenants regarding the ac-
ceptable actions of the firm (Mishra & McConaughy, 1999). Arms-length external
equity3 provides the greatest potential for rapid growth as it allows new firms to take
bold strategic actions without any short-term payback requirements; at the same
time, external equity poses the greatest threat to the entrepreneur’s decision control
both because of wider-sweeping control rights typically granted to equity holders
and because of the potential active involvement of such providers in the strategic
decisions of new firms. Among external equity sources, there is some reason to
believe that private individuals providing equity pose a lower perceived threat of
wresting decision control than do venture capital firms (Shepherd & Zacharakis,
2000). Face validity for this expectation is reflected in the popular term “angels”
for private investors and the pejorative “vulture capitalists” for formal venture
capitalists. Kotkin (1984) provided some empirical support in documenting the
reluctance of smaller firms to seek venture capital for fear of loss of control.
It is worth noting that these assumptions are consistent with the pecking order
hypothesis but provide a significant refinement. That framework suggests that
entrepreneurs move from internal sources to debt to equity as a function of the
costs and benefits of each, discounted in some manner by the financial risks of
each source (Donaldson, 1961; Myers, 1994). In contrast, our framework suggests
that entrepreneurs may choose financially less-attractive options if they are also
strongly driven by the self-determination motive and if such options pose a certain
level of perceived risk to their own retention of decision control. Whereas finance
theory is based on an analysis of economic costs, our explanation is rooted in an
assessment of the psychological costs associated with these various financing
forms. A final clarification that our framework offers is that it provides a basis
for understanding the choices entrepreneurs make among financing sources of
the same type. The pecking-order hypothesis is silent, for example, on how
entrepreneurs might choose among venture capitalists (or, e.g. among banks)
offering essentially the same valuation or terms. We will argue that such choices
are determined by the perceived threat to self-determination that specific financiers
or financial firms represent to an entrepreneur as well as by the overall value that
specific entrepreneurs place on self-determination. Smith’s (1999) assessment of
why some entrepreneurs chose lower valuation alternatives even when some higher
valuation choices are available is consistent with our premise.
In summary, our framework contributes to theory on new venture financing
by suggesting that entrepreneurs’ preferences for types of financing and for
particular sources within types are influenced by two psychological factors that
have been largely overlooked by prior analyses. The first of these is the overall
value that entrepreneurs place on retaining self-determination, and the second
is an entrepreneur’s perception of the threat that a specific type or source of
financing poses to the entrepreneur’s self-determination. We call this threat to
self-determination “decision control risk,” and we characterize the overall value
that entrepreneurs place on self-determination as an aversion to that risk, or
“decision control risk aversion.” We now develop our theoretical framework for
new venture financing choices by drawing on and then extending existing agency,
decision-making, and organizational justice theory. The development centers
around factors related to risk-taking propensity and risk perception.
THEORETICAL FRAMEWORK
Agency Theory and Risk
Agency theory frames the process of organizational governance as a relationship

between principals and agents in which principals assign to agents the responsi-
bility to carry out certain activities on their (the principals’) behalf. The focus of
agency theory is on how the principal-agent relationship is structured so as to pro-
tect the principal’s interests against the self-interests of the agent. According to the
theory, principals face two sorts of agency risks: adverse selection, the tendency
for the agent to misrepresent him or herself to the principal, and moral hazard,
the tendency for the agent to act opportunistically. Agency theory highlights the
importance of goal conflict and information asymmetry in determining the level
of agency risk to be expected in a given exchange. Specifically, agency risk is
thought to arise to the extent that principals and agents possess divergent goals
and it is difficult or expensive for principals to monitor agents (Eisenhardt, 1989;
Jensen & Meckling, 1976). The theory specifies that agency risks will influence
the principal’s efforts to monitor and control the agent and that the measures used
to monitor and control the agent will influence agent compliance. As past literature
has pointed out, investors seek to minimize the agency risks they face through the
imposition of controls, incentive alignment, and monitoring (Sahlman, 1990).
In the context of corporate governance, the roles of principal and agent are
typically assigned to investors and managers, respectively. This role assignment
reflects the separation of ownership from control that characterizes most large
firms. However, the dynamics of ownership and control in new venture contexts
are different from those in large firm settings for several reasons. First, many
entrepreneurs hold significant ownership stakes in their firms in addition to their
managerial positions. These ownership stakes often go far beyond those that large-
firm managers accumulate through incentive-based compensation plans. In fact, it
is not uncommon for entrepreneurs to hold a majority or a plurality of their firms’
equity shares. Second, the control exercised by entrepreneurs is often greater than
that exercised by managers in larger firms in part because managers have more
discretion in smaller and younger firms (Hambrick & Finkelstein, 1987) but also
because entrepreneurs often have important historical connections to the firm. To
the extent that the entrepreneurs have founded their firms or played some other
instrumental role in the early stages of the firms’ development, they may have
significant non-financial investments in their firms. Additionally, they may have
significant intellectual capital invested in the firm or feel an emotional attachment
to employees, customers or products.
Finally, entrepreneurs are essentially in the role of both agent and principal.
Before approaching venture capitalists for financing, entrepreneurs are not only
managers but also owners of the firm. Whereas in most large firms, investors hire
managers through the board of directors, new venture entrepreneur/managers
effectively hire their owners. Thus, the entrepreneur, in their role of principal,
faces agency risks associated with the investor in the role of agent (Cable &
Shane, 1997; Gifford, 1997). Specifically, as Gifford (1997) points out, venture
capitalists may shirk by choosing not to invest the time or capital necessary
to grow the venture because of opportunity costs (e.g. alternative investments
that they perceive to be more promising) or information asymmetry (e.g. they
may hold negative information about the venture’s prospects that is unavailable
to entrepreneurs).
In addition to the agency risks entrepreneurs face in their role as principal,
their dual roles involve assuming a risk with regard to the loss of control over
the venture, which we believe has profound practical as well as psychological
implications for the entrepreneur. As the new venture takes on outside investors,
the entrepreneur increasingly assumes the subordinate role of agent. As agents,
entrepreneurs are vulnerable to exploitation by investors. Moreover, as the en-
trepreneur takes on the role of agent, his or her stature as a principal is diminished.
Clearly, these risks have practical and economic implications, but they are also
distinct in that they involve psychological issues pertaining to the intrinsic value
that entrepreneurs may place on control and social psychological issues pertaining
to interpersonal trust and other aspects of relationships that facilitate the sharing
of control. Theory on organizational justice suggests that persons in the agent
or subordinate role are keenly sensitive to the potential for exploitation and the
need to protect their self-interests (Korsgaard & Sapienza, 1999). Moreover, this
theory, which will be discussed further below, indicates that agents are concerned
not only with exploitation in the material sense, but in terms of humiliation
and loss of dignity.
In summary, agency theory provides insight into the risks entrepreneurs face
regarding sharing or ceding control to outside investors. Agency theory views risk
as an objective characteristic of the context and sees agents’ risk preferences as
stable; however, individuals’ assessments of risk are not always in line with objec-
tive risk, and their tolerance for risk may vary substantially (Sitkin & Pablo, 1992;
Wiseman & Gomez-Mejia, 1998). In the following section, we review research on
behavioral decision making to identify factors that contribute to risk perceptions
and preferences. This literature examines general factors associated with decision
making and risk taking, independent of the decision content. Although this
perspective is typically applied to economic risk, we believe that understanding
the factors contributing to risk perceptions and preferences have implications for
entrepreneurs’ concerns regarding sharing control and self-determination.
Decision Theory: Risk Propensity and Risk Perception
In their influential review of the factors affecting risk taking behavior, Sitkin and
Pablo (1992) identified two key factors, risk propensity and risk perception. Risk
propensity refers to the general tendency of the individual to take or avoid risks,
whereas risk perceptions are the individual assessments of risk inherent in a sit-
uation. Sitkin and Pablo’s model specifies that the impact of objective risk and
other contextual factors on risk taking behavior are mediated by these two factors.
Subsequent research by Sitkin and Weingart (1995) supported this contention.
Several individual difference and contextual factors influence risk propensity and
risk perception, which we believe have implications for how entrepreneurs handle
risk regarding the sharing of control.
The role of risk propensity in entrepreneurship has received consider-
able empirical attention. The findings of a recent meta-analysis indicate that
entrepreneurs, especially those whose primary goal is growth as opposed to
income, are significantly more risk seeking than non-entrepreneurs or managers
(Steward & Roth, 2001). Other studies, however, suggest that the role of risk
propensity is less clear. For example, Palich and Bagby (1995) failed to find a
difference in risk propensity between entrepreneurs and managers, but they did
find significant differences in risk perceptions and labeling of risk. Similarly,
Forlani and Mullins (2000) found that the decision to start a new venture was
not directly related to risk propensity but rather to risk perception. Ambiguity
regarding the impact of risk propensity on risk taking in entrepreneurship may be
in part due to the focus on risk propensity as a stable trait. That is, it is possible
that entrepreneurs may not be dispositionally risk seeking, but may be more or
less risk seeking as a function of experience and context.
Consistent with this view, Sitkin and Pablo (1992) point to two sources of
risk propensity in addition to individual differences: inertia and outcome history.
Inertia refers to the habitual handling of risk over time; that is, persons who
have previously adopted a risk-seeking strategy continue to make risky decisions
out of habit or precedent. Outcome history refers to the extent to which the
person has been successful in risk-seeking decisions in the past. Those who have
been successful in the past are likely to use risk-seeking strategies in the future,
whereas those who have been unsuccessful become more risk averse (Thaler &
Johnson, 1990). This evidence is consistent with the threat rigidity hypothesis
wherein individuals are apt to be more conservative after experiencing a failure or
threat (Chattopadhyay, Glick & Huber, 2001; Staw, Sandelands & Dutton, 1981).
Both inertia and outcome history suggest that past behavior and past experience
are likely to have important influences on entrepreneurs’ risk-taking with regard
to funding options and sharing control. Because negative performance outcomes
can undermine self-determination (Chattopadhyay et al., 2001), outcome history
may be a particularly relevant variable.
As noted above, risk perceptions are also an important predictor of decision
making (Forlani & Mullins, 2000; Palich & Bagby, 1995). It is important to note
that managers and entrepreneurs do not appear to define risk as it is described
in economic theory (Forlani & Mullins, 2000). In the economics perspective,
risk is narrowly defined as the uncertainty or probability associated with a given
outcome. In contrast, managers and entrepreneurs consider three elements of risk:

the uncertainty of outcomes, the potential losses, and the magnitudes of potential
gains and losses (Forlani & Mullins, 2000; Sitkin & Pablo, 1992; Yates & Stone,
1992). That is, people tend to view a decision as risky if it has a low probability
of success, if there are potential losses, or if the potential losses are significant.
Research on risk perceptions suggests several factors influence individuals’
assessments of risk. One important determinant of risk perceptions is risk
propensity, which is thought to influence attention to and the weighting of
negative versus positive outcomes, thereby leading to overestimation of the
potential for success or failure. Consistent with this view, Forlani and Mullins
(2000) and Sitkin and Weingart (1995) found that risk propensity led to lower
assessments of risk, which in turn led to riskier decision making. These findings
have implications for how entrepreneurs’ prior experience with various funding
options may affect both their willingness to share control and their beliefs about
the extent to which they will actually cede control.
A second influence on risk perceptions is problem framing. Research shows a
consistent effect of framing such that persons facing a decision framed in terms of
losses are more risk-seeking as compared to persons facing a decision framed in
terms of gains (Kuhberger, 1998). Framing effects should be distinguished from
outcome history effects. The effect of framing occurs when a given future event is
framed in terms of risks of loss versus gain (Kuhberger, 1998). In contrast, outcome
history, which leads individuals to label a situation as a threat or opportunity, has
quite the opposite effect, in that persons are more risk-seeking when a positive past
history induces them to label a situation as an opportunity ( Slattery & Ganster,
2002; Thaler & Johnson, 1990). Kahneman and Tversky (1979) speculated that
framing effects result from individuals’ valuing the avoidance of negative outcomes
more than the attainment of positive outcomes of comparable magnitude; in other
words, they perceive that there is more at risk when faced with loss (Sitkin & Pablo,
1992; Sitkin & Weingart, 1995). Thus, individuals view incurring a loss as riskier
than is failure to achieve a gain. Thus, the framing of financing options in terms
of growth/wealth (gains) versus self-determination goals (losses) may influence
entrepreneurs’ risk perceptions of these options.
Experience, independent of the quality (success or failure) of the experience,
also plays a role in shaping risk perceptions. Research suggests a curvilinear
relation between experience and risk perceptions (Sitkin & Pablo, 1992). Very
inexperienced and very experienced individuals tend to be more confident in their
ability to succeed than moderately experienced persons. Moreover, moderately
experienced people tend to have more accurate and stable assessments of success.
Inexperience leads individuals to rely on incomplete information, whereas a high
degree of experience tends to lead to the illusion of control. Thus, the relationship
between experience and risks perceptions has implications for how optimistic
entrepreneurs are regarding financing options as well as the type and extent of
information they attend to in making funding decisions.
To summarize, research suggests that the willingness to face the risks of sharing
control depends on the entrepreneur’s risk propensity and perception of risk. The
more entrepreneurs tolerate risk and the lower they perceive it to be, the more
likely they will choose a funding option that cedes some control to investors.
Situational factors such as prior patterns and success in risk taking influence
propensity and perception of risk. Entrepreneurs’ specific performance history
and experience with financing choices also influence how they perceive the risks
of decision sharing. Furthermore, entrepreneurs’ evaluations of financing sources
may be affected by how others view or frame the risks versus opportunities
inherent in these different sources. Whereas research on risk and decision making
has focused mainly on economic risk, our interest is in the risk of ceding self-
determination. Nonetheless, we believe that similar judgment processes are likely
to operate. For example, the framing effect has been obtained in non-economic
settings, such as personal decisions (Kuhberger, 1998). At the same time, research
suggests that individuals are less apt to employ utility maximizing strategies for
non-economic motives (Frisch & Clement, 1994). Self-determination and the
sharing of control are essentially social-relational concerns rather than economic
concerns, which we believe are influenced by a unique set of factors that extend
beyond strict economic considerations and are governed by processes other than
utility maximization (e.g. Bazerman, 1993). These factors and processes are
addressed in theories of procedural justice, which are discussed below.
Procedural Justice and Perceived Risk
Theories of organizational justice address the causes and consequences of the

fairness of decision processes and outcomes. There are two main forms of justice,
distributive justice, which are evaluations of the allocation of resources, and pro-
cedural justice, which are evaluations of how fairly allocation decisions are made.
Procedural justice is an important perception because it exerts a powerful influence
on reactions to decision making and the quality of relations between exchange
partners. People are more willing to accept a decision when they perceive decision
procedures as just, even when the outcome of the decision is unfavorable to them
(Korsgaard et al., 1995; Schaubroeck et al., 1994). Managers are more likely to
cooperate with a strategic decision (Kim & Mauborgne, 1993) and employees
are more likely to cooperate with their employers (Konovsky & Pugh, 1994;
Moorman, 1991) if they perceive the decision-making procedures to be just. In
contrast, when procedures are unjust, employees are likely to engage in non-
compliant or retaliatory behavior (Greenberg, 1990; Skarlicki & Folger, 1997).
Moreover, the effect of procedural justice extends beyond a single decision; per-
ceptions of procedural justice also exert a strong influence on the perceiver’s trust
in the other party (Korsgaard et al., 1995; Sapienza & Korsgaard, 1996). Given
that trust may lead to lower perceived risk (Das & Teng, 2001), these findings
suggests that procedural justice may play an important role in entrepreneurs’ per-
ceptions of decision control risk. Moreover, perceptions of procedural justice also
affect individuals’ willingness to enter (Busenitz, Moesel, Fiet & Barney, 1997)
and remain in the exchange relationship (Sapienza & Korsgaard, 1996). Thus,
procedural justice has potential value for understanding how interactions with
potential investors may affect entrepreneurs’ decisions about obtaining funding.
Aspects of both formal decision-making procedures and interpersonal interac-
tions influence the perception of procedural justice. The relevant formal aspects
of decision-making procedures include the opportunity for input in the decision-
making process, judgments based on the evidence, correctability or refutability
of the decision, and consistent application of the procedure (Folger, Konovsky
& Cropanzano, 1992; Leventhal, 1980). In addition to formal procedural issues,
perceptions of procedural justice are influenced by interactions with the decision
maker, which is often referred to as interactional justice (Tyler & Bies, 1990).
There are two main facets of interactional justice: interpersonal sensitivity,
or the extent to which individuals are treated with respect and dignity, and
informational justice, or the extent to which individuals are given adequate and
timely information regarding the decision procedure and outcome (Greenberg,
1993; Greenberg & Cropanzano, 1997). Both procedural and interactional
factors give rise to judgments of procedural justice, although the importance
of particular factors may vary somewhat depending on the decision context
(Greenberg & Cropanzano, 1997).
Clearly, procedural justice affects economic value. If exchanges between two
parties are governed by unbiased and legitimate procedures, the parties can expect
to receive what they are due in the long run, even if a given exchange is not
favorable. Simply put, fair procedures help ensure the fair allocation of outcomes.
However, the value of procedural justice extends beyond the protection of material
self-interest. Theories of procedural justice, such as the relational model (Tyler &
Blader, 2000) and fairness heuristic theory (Lind, 2001), suggest that individuals
have two main concerns in exchange relationships. First, they are concerned with
the prospect that their contributions will not be reciprocated (i.e. the other party will
exploit the relationship). Second, individuals are concerned that, if they become
psychologically invested in the relationship, they are in danger of rejection by the
other party or by the group. This latter concern is thought to be the more powerful
motive (Lind, 2001) and to lead individuals to be sensitive to cues regarding their
status and value in the exchange relationship.
The power of the identity motive is rooted in social identity theory, which
concerns how individuals come to define themselves in terms of their memberships
in groups and relationships to others. An individual’s self-concept contains many
facets or aspects that serve to define the self. Social identity is that aspect of a
person’s self-concept that is determined by her/his membership in a particular
group. Threats to social identity involve threats to status and loss of dignity or
“face” and are closely linked to procedural justice (Tyler & Blader, 2000). Being
treated in a procedurally just fashion signifies that the individual’s status and
dignity is preserved. In contrast, unjust treatment can be an assault to one’s dignity
and call into question one’s status.
We believe that procedural justice will have important implications for how
entrepreneurs respond to potential financiers. The fairness of initial interactions
with a potential financier sends signals regarding the financier’s willingness to
directly or indirectly share decision making control and should thus influence
entrepreneurs’ perceptions of decision control risk associated with a given funding
source. Equally important, entrepreneurs’ sense of self-determination is likely
to be influenced by identity concerns that are triggered by unjust treatment in
initial interactions. Recall that self-determination is a joint product of one’s sense
of autonomy and competence. To the extent that an entrepreneur’s autonomy is
limited by taking on outside investors, the importance of maintaining a sense of
competence should be greater. The greater the decision control risk, the more
strongly the entrepreneur will respond to threats to identity, for such threats may
undermine his or her sense of competence and worth. Because procedural justice
signals status and respect, entrepreneurs are likely to be sensitive to procedural
justice factors to the extent that they possess a strong self-determination motive.
Consequently, fairness in initial interactions with potential financiers will likely
influence entrepreneurs’ risk perceptions and preferences regarding financing.
A FRAMEWORK FOR CONSTRAINED

FINANCING CHOICES
In this section we consider some of the most fundamental factors that limit
entrepreneurs’ choice sets and discuss ways in which their beliefs about the
importance of decision control influence the choices they make within those sets.
These choices and the factors affecting them are illustrated in the decision tree
presented in Fig. 1. Entrepreneurs appear to face a bewildering array of financing
options. Yet the number of choices that are economically rational for a given
Fig. 1. Financing Choices Decision Tree.
entrepreneur to pursue at a given point in time is limited. An underlying premise

of our framework is that economic rationality is not the only salient form of
rationality. Choices will also be constrained for some by the extent to which they
increase the prospects for realization of self-determination.
Internal Versus External Financing
Perhaps the most fundamental financing choice entrepreneurs face is whether

to seek external financing at all. In some cases, entrepreneurs will be unable to
obtain external financing because of inadequate revenue history or collateral. Our
attention will be devoted to how choices are made by those entrepreneurs who have
a reasonable option to pursue external funding. We posit that choices will be influ-
enced at least in part by entrepreneurs’ willingness to take decision control risks.
Virtually all forms of external financing require the entrepreneur to sacrifice some
degree of decision control that could be retained if all financing were internally
obtained (Winborg, 2000). In addition, our premise that entrepreneurs possess at

least some minimal level of aversion to sharing decision control implies that the
fear of sharing decisions is salient in a very wide range of circumstances. However,
because significant and rapid growth for early stage ventures is very unlikely
without any use of external financing, entrepreneurs who hold significant growth
goals will be pushed toward use of external financing even though they may find
it frustrating to their self-determination purposes (Winborg, 2000). Conversely,
those for whom self-determination is a predominant motive will be pushed
toward bootstrapping (i.e. avoidance of external financing) even if it frustrates
wealth goals.
Debt Versus Equity
To the extent that entrepreneurs have chosen to pursue external financing, they
must determine which type of external financing to pursue. The most significant
distinction that can be made among alternative financing types is that between
debt and equity. Two factors that affect the availability of debt and equity are
entrepreneurs’ growth aspirations and the stage of the venture’s development.
The stage of a venture’s development especially affects whether or not debt
is available. Lending decisions are determined largely by perceptions of the
borrower’s ability to repay the loan, and an assessment of this ability is frequently
based on historical evidence that the borrowing firm generates sufficiently stable
cash flows to support repayment. However, ventures in a very early stage of
development will not yet have consistently generated cash flows and will be
unable to document their ability to repay a loan. Therefore, ventures in the very
early stages of development may have to confine their search for external financing
to a search among equity sources. And even this choice may be constrained to
angel investors unless the venture possesses a unique and clearly protectable
technology (Ehrlich, DeNoble, Moore & Weaver, 1994). Later stage ventures, by
contrast, may be able to choose between debt and equity, depending on the size
and stability of the cash flows they generate.
Growth aspirations affect the availability of equity because equity investors
seek to realize a rate of return on investment only available through rapid growth
(Sahlman, 1990). Entrepreneurs who have relatively modest growth aspirations
must therefore confine their search to debt sources (or attempt to deceive
investors). Entrepreneurs with high growth aspirations for their firms, by contrast,
may choose between debt and equity. Here, the relative strength of aversion
to decision sharing and the perceived threat of decision sharing risk become
salient. When the willingness to take this decision sharing risk is extremely low,
entrepreneurs will accept the greater business (economic) risks of debt and may
eschew equity even when that offers a higher expected return.
In short, when entrepreneurs are able to choose between debt and equity, their
level of decision control risk aversion will influence their choice. It will do so
because entrepreneurs are likely to perceive a significant difference between the
decision control risks associated with equity and debt financing. Equity generally
involves a more significant sacrifice of entrepreneurial decision autonomy than
does debt. Lenders may impose loan “covenants” or similar restrictions on the
firms’ operations, but these restrictions differ from the involvement of equity
investors in several ways. Loan restrictions are generally contractual restrictions
that are agreed upon up front by the investor and the borrower. As, such, they
are explicit in their formulation and limited in number and scope to the terms that
are included in the loan contract. In addition, they tend to focus on short-term
operational issues that affect that firm’s management of its cash flow. Equity
investors, by contrast, by virtue of their ownership stake, can exert a far more wide
ranging influence on entrepreneurs’ strategic decisions. Although the specific
terms of their involvement, such as the number of representatives they can appoint
to the board, may be contractually determined, the actual degree of influence
they will exert often remains somewhat unclear at the time an investment is
made. Their influence can turn out to be greater than the entrepreneur initially
anticipates, and it can increase over time. In addition, equity investors are more
likely to attempt to influence long-term, “big-picture” strategic decisions of the
firm, and it is this kind of influence that entrepreneurs with a high level of decision
control risk aversion are most reluctant to give up.
In summary, entrepreneurs are likely to perceive that higher levels of decision
control risk are associated with equity financing rather than with debt financing.
The influence that this perceived risk exerts on a specific entrepreneur’s choice
of debt or equity will depend on the level of decision control risk aversion that
that entrepreneur possesses. All other factors being equal, entrepreneurs with high
levels of decision control risk aversion will prefer debt to equity because taking
on equity investors generally involves a sacrificing a greater degree of strategic
decision autonomy. On the other hand, those entrepreneurs with low or moderate
levels of decision control risk aversion may choose either debt or equity, depending
on the strength of their aversion and on the influence of other decision factors. In
fact, all things equal, they are likely to prefer equity, because they may actually
prefer to share decision control with an equity investor than to assume the additional
risk of business failure imposed by loan-related covenants and restrictions.
We emphasize that the type of decision control risk aversion to which we refer
is distinct from the influence of economic self-interest. Decision control risk aver-
sion, in our terms, reflects the degree of intrinsic value that entrepreneurs place on
the sense of self-determination associated with retaining control over the strategic
decisions of the firm. This intrinsic value may correspond to entrepreneurs’ under-
standings of their own economic self-interest, but it need not do so. Entrepreneurs
may also experience internal conflict between the value that they place on self-
determination and their perceptions of their economic self-interest. In the context
of the choice of debt-versus-equity, this kind of conflict is quite likely to occur.
For example, an entrepreneur may perceive that her own economic prospects
would be more favorable if she took on an equity investor, because an equity
investment could provide valuable advice and fuel growth that is more ambitious
and more rapid than debt financing could. However, if the same entrepreneur had
a sufficiently high level of decision control risk aversion, she might well choose to
forgo equity financing because she perceives debt financing to have a lower level of
decision control risk. Should some entrepreneurs wish to maintain decision control
solely because they believe that they can make superior economic decisions, we
would view this as a component of wealth drive rather than self-determination.
We expect that different entrepreneurs will place different values on the economic
opportunities associated with debt and equity and will have different levels of
decision control risk aversion; these differences help explain their choices.
Choosing Among Alternative Investors of the Same Type
As with entrepreneurs choosing between debt and equity, entrepreneurs choosing

among alternative equity investors may find their decision control risk aversion
to be in conflict with their economic interests. For example, an entrepreneur may
perceive that a greater economic payoff can be obtained by accepting financing
from Investor A than from Investor B. This may be because Investor A can offer
more capital or superior supporting services, such as networking and publicity, or
because Investor A offers more favorable investment terms with regard to issues
of valuation and dilution. However, Investor B may still be preferred under such
circumstances, if Investor B is thought to present a lower decision control risk.
If the difference between the decision control risks posed by alternative investors
is great enough, and if an entrepreneur’s level of decision control risk aversion
is great enough, then a choice that runs counter to the entrepreneur’s economic
self-interest will occur.
We expect that the greatest effects of fear of loss of decision control will occur for
entrepreneurs whose choice is restricted to equity because of inadequate collateral
or an insufficient revenue stream. Among those who may consider either equity or
debt, the most decision-control risk averse can choose debt to ameliorate control
concerns. However, those who choose equity in order to promote growth (e.g. early
stage, high-potential ventures) will include a broader mix of individuals: Those

who are the most decision-control risk averse may feel “forced” to choose growth,
while others for whom decision control is less important may not share this sense.
Self-selection among individuals able to choose between debt and equity will cause
the set in the former group to be composed of those more averse to decision control
risk and those in the latter to be less so. Even within these two groups, however,
there will be variation.
Within equity financing, early stage entrepreneurs may have a choice between
angels and venture capitalists. For some, extremely high cash needs may render
angels an economically infeasible choice; for some, insufficient development
of a proprietary technology may rule out venture capital. However, when there
is a choice, we expect those who most fear decision sharing will favor angels
because of the reputation that venture capitalists have for greater control demands
(Kotkin, 1984; Shepherd & Zacharakis, 2000). Assuming equal cost of financing,
entrepreneurs will choose between the two types of equity financing (angels
and venture capitalists) whom they perceive to pose the least threat to their
self-determination. Even when the economic costs are not equal across a given set
of equity financing options (e.g. a set of venture capitalists), entrepreneurs may
pick higher cost deals if their decision control risk aversion is sufficiently high.
As mentioned earlier, Smith (1999) presented evidence that entrepreneurs often
choose less economically favorable deals when given a choice among alternative
investors. One explanation could be that other compensating economic factors ex-
isted, such as investor reputation. Alternatively, the reason could be the explanation
we have offered here: entrepreneurs choose investors who elicit the lowest level of
fear of loss of control.
Entrepreneurs choosing among debt financiers will, like those considering only
equity, favor those lenders whom they perceive to pose a lower decision control
risk, and the extent to which they do so will depend on their overall level of decision
control risk aversion. However, we expect that the influence of decision control-
related factors on a choice among debt financiers will be weaker than the influence
of these factors on a choice among equity investors. This is because the perceived
differences in decision control risk among equity investors may vary more than
those among debt financiers, who are generally perceived to pose less decision
control risk.
In summary, we expect that once a type of financing has been selected (based
on the entrepreneurs’ relative mix of wealth motive and self-determination motive
and the situational factors that constrain choice), the self-determination motive
will play a role in choosing the particular financier. The strength of this role is
likely to be greatest in those “forced” to choose among equity investors because of
the combination of wealth and situational factors. In the next section we explain
the factors influencing control risk aversion and perceived threat of loss of self-
determination.
DETERMINANTS OF DECISION CONTROL RISK

AVERSION AND RISK PERCEPTIONS
Table 2 summarizes the factors affecting decision control risk aversion and
perceived threat of loss of control. The table shows that entrepreneurs’ levels of
decision control risk aversion are influenced primarily by the past performance of
their ventures as well as their own past experiences with decision sharing while
their levels of perceived decision control risk are influenced by framing factors
influenced by industry norms as well by provider-specific factors, including
reputation and procedural justice. These factors are discussed in greater detail in
the sections below.
Determinants of Decision Control Risk Aversion
An entrepreneur’s level of decision control risk aversion refers the degree to which
he or she is averse to sharing control of the firm. This construct is concerned with
control over “big picture” issues pertaining to the strategic direction of the firm, not
everyday operational issues. Although entrepreneurs may also desire control over
mundane issues, and that desire may be related to a desire for strategic control, the
two desires may also arise from separate sources.
The determinants that we focus on are factors pertaining to the entrepreneur’s
prior experiences as an entrepreneur and organizational factors pertaining to the
Table 2. Factors Affecting Decision Control Risk Aversion and Perceived

Decision Control Risk.
Decision Control Risk Aversion Effect
Good Current Venture Performance Increases risk aversion
Good Performance of Past Ventures Increases risk aversion
Good Past Experience with Control Sharing Decreases risk aversion
Perceived Decision Control Risk Effect
Framing Effects: Salience of growth Decreases perceived risk
opportunities vs. decision control loss
Procedural Justice of Initial Interactions Decreases perceived risk
recent performance of the current venture. Clearly, there are other factors that
are likely to influence an entrepreneur’s level of decision control risk aversion.
For example, differences in education, demography or other aspects of individu-
als’ personal backgrounds have been shown to be related to peoples’ beliefs and
cognitive processes (e.g. Taylor, 1975; Wally & Baum, 1994), and such factors
probably influence entrepreneurs’ levels of decision control risk aversion as well.
However, in light of the newness of theory in this area, we will focus here on
several basic determinants pertaining to entrepreneurs’ professional experiences
and the histories of their ventures.
The recent business performance of entrepreneurs’ ventures is one factor
that is likely to affect entrepreneurs’ levels of decision control risk aversion.
Entrepreneurs whose current ventures are successful are, like most managers,
likely to attribute much of that success to their own control of the ventures
(Bettman & Weitz, 1983). Such entrepreneurs are likely to have confidence that
their ventures will continue to be successful as long as they retain control of
them, and their belief in the promise of continued economic success is likely
to contribute to their desire to retain control. However, the influence of venture
success on their desire to retain control is not mediated solely by economic
factors. Several psychological factors are likely to bear on this desire as well.
First, as indicated by research on the self-serving bias (Miller & Ross, 1975),
individuals are likely to attribute performance successes to their own efforts and
abilities and to blame external forces for their failures. Thus, entrepreneurs are
likely to attribute the ventures’ recent success to their own control. The success
of these individuals’ ventures reinforces beliefs in their own abilities, which
should give rise to strong feelings of personal satisfaction with the experience of
being in control. They will be reluctant to give up the sense of control that makes
these beliefs possible, because sharing control of their ventures will dilute the
degree to which they can claim credit for the ventures’ future success. Conversely,
entrepreneurs whose ventures are performing poorly are likely to feel relatively
little satisfaction with and responsibility for their ventures and, accordingly, will
have lower levels of decision control risk aversion.
Second, entrepreneurs who attribute their recent success to their own control
are likely to feel a strong sense of personal responsibility for their firms and the
people involved in them. For these entrepreneurs, the control they exercise over
their ventures is likely to be infused with a variety of personal feelings, such as
loyalty and affection. For example, entrepreneurs whose firms have been successful
may feel a sense of paternalistic responsibility to their employees and customers.
One of the reasons entrepreneurs are likely to value control is that it enables them to
make strategic decisions that benefit these constituencies for whom they may have
strong feelings – decisions that may conflict to some extent with those that would
be prescribed by purely economic analyses. Thus, entrepreneurs may be averse to

sharing control of their decisions because they feel an obligation to continue to
manage their firms in ways that reflect the strong emotional investments they have
in their firms.
Similar reasoning is likely to apply to the performance of previous ventures
founded by serial entrepreneurs. For these individuals, the feelings of personal
satisfaction and responsibility they derive from the management of their current
ventures are likely to be strongly influenced by the performance of previous
firms that they have managed. These past experiences are likely to guide the way
they think about issues of control sharing in their current ventures. Although
the performance of the current venture may still be relevant to the level of
decision control risk aversion levels in such circumstances, the impact of current
performance may actually be overridden by prior entrepreneurial experiences
if such experiences have been particularly extensive or vivid. That is to say,
entrepreneurs whose past venture experiences were sufficiently positive may
seek high levels of decision control even if the performance of their current
ventures is average or poor. Those who experienced only failure in the past
may attribute it to need for outside help and may be more willing to listen to
others.
Another factor that is likely to bear on entrepreneurs’ levels of decision control
sharing aversion is their satisfaction with past experiences they may have had with
decision sharing itself (Cyert & March, 1963). Such experiences will inform their
beliefs about the intrinsic value of decision control. Individuals will be less averse
to sharing decision control if they had a positive experience and more averse to
sharing decision control if that experience was negative.
In determining whether to interpret a past control-sharing experience positively
or negatively, entrepreneurs will look to both economic and non-economic data. If
prior control-sharing experiences yielded poor business performance, that negative
experience is likely to negatively color the way entrepreneurs think about the entire
experience of control-sharing. It should be emphasized that the perspective of such
entrepreneurs will not only be soured by the fear of further economic loss but also
by the feelings of frustration and dissatisfaction that they are likely to associate
with such experiences (Forgas & George, 2001). In addition, however, even if
prior control-sharing experiences yielded average or even above-average economic
outcomes, entrepreneurs will draw on their recollections of the non-economic
aspects of those experiences in formulating positive or negative opinions about the
intrinsic value of retaining versus sharing control. These aspects are independent
of the economic aspects of past experiences, and the opinions they imply about the
intrinsic value of decision control may or may not correspond to the implications
of past economic performance.
Consider, for example, an entrepreneur looking back on a single past venture

experience in which financing was obtained from an equity investor who shared
significant decision control and which was, in the end, highly successful from
an economic standpoint. The entrepreneur might conclude that in spite of the
economic success that was realized, the psychological distress associated with
sharing decision control was very great. An entrepreneur might form such an
opinion if she recalled high levels of stress or anxiety being associated with strategic
disagreements or strong feelings of humiliation or frustration being associated with
the experience of having to compromise certain business principles or abide by
strategic decisions with which she disagreed. If these recollections are sufficiently
strong, they could override the positive opinions about control-sharing that the
economic success might otherwise suggest and lead her to formulate a generally
negative opinion about the experience of control-sharing and, hence, a high level
of decision control-sharing aversion.
Thus, the intrinsic value that entrepreneurs place on retaining decision control is
likely to be influenced by the degree to which their prior decision control-sharing
experiences are positive or negative. And although the economic success of past
ventures in which decision control was shared is likely to figure into such decisions,
it is by no means either the sole determinant nor necessarily the most important one.
Determinants of Perceived Decision Control Risk
As the above analysis suggests, entrepreneurs’ need for self-determination can

factor into financing choices in terms of entrepreneurs’ aversion to losing deci-
sion control. Additionally, self-determination concerns may influence financing
choice in terms of perceptions of the risk of losing decision control. As discussed
earlier, several contextual factors contribute to risk perceptions. In the context of
entrepreneurs’ financing decisions, these factors are likely to reveal themselves in
a number of unique ways. Below, we address how two of these factors, framing
and procedural justice, are manifested in entrepreneurs’ search for financing.
Generally, framing a decision in terms of potential losses leads decision makers
to be more risk seeking than if the decision were framed in terms of gains. That
is, people tend to choose riskier options when attempting to avoid losses than
they would when attempting to attain gains. In the context of financing, the most
salient potential gains of various options are the funding itself and the growth
potential for the entrepreneurial firm. A significant material loss is the loss of wealth
(e.g. loss of equity); however, we also believe that self-determination concerns
are potential losses. Specifically, these losses involve the entrepreneurs’ loss of
control over the firm and their own actions as CEOs. With the potential loss of
control, entrepreneurs may also lose the sense of responsibility for the firms’
successes and failures, and consequently, lose the opportunity for achievement and
demonstrating competence. The threat of these losses is greater in external equity
financing options, and particularly with venture capital. When these potential losses
are made salient (as opposed to potential wealth and growth gains), entrepreneurs
are likely to take risks in attempt to avoid such losses. Thus, they may have an
inflated sense of optimism about their ability to obtain and successfully work with
alternative sources of financing. In other words, entrepreneurs are more likely to
seek private individual equity financing, debt-based financing or bootstrapping than
venture capital when threats to self-determination – as opposed to opportunities
for growth – are made salient.
Self-determination concerns, and the attendant threat of decision control loss,
may be made salient in a number of ways. First, industry norms may help to create
an image of a financing type wherein growth (i.e. gains) or control (i.e. losses) is
more or less prevalent. For example, in certain sectors of industry (e.g. biotech)
wherein some venture capital-backed firms have experienced spectacular success,
the choice between venture capital and other options is apt to be couched in terms
of growth opportunities. Moreover, the history and reputation of specific providers
may influence the frame of choices among financing sources of the same type. For
example, if a particular venture capital firm has a reputation for replacing members
of a firm’s entrepreneurial team, the choice between it and other venture capital
options may be framed in terms of potential loss of decision control.
The perceived risk of working with particular financiers is also influenced by
the perceptions of procedural justice in interactions with potential providers of
financing. Research indicates that people evaluate interactions they have with
exchange partners from the perspective of justice (Lind, 2001). Procedural justice,
in turn, signals a person’s standing in the exchange relationship and informs on
the exchange party’s character (i.e. trustworthiness, benevolence, etc.). In the case
of entrepreneurs, such assessments arising from initial interaction with potential
financiers would likely inform on the risk of losing control and status in the firm.
Consequently, when initial contact between a financier and an entrepreneur is
marked by fair treatment – such as consistent application of standards, open,
two-way communication, and respect – the entrepreneur is likely to view decision
control risk as relatively low.
In summary, we argue that two factors, framing and procedural justice, are
likely to influence perceptions of decision control risk. Industry and reputation
influence the framing of financing options as decision control loss versus growth
opportunities because these factors affect the salience of self-determination
concerns. Procedural justice in interactions with particular financiers influences
risk perceptions because it informs on potential threats to self-determination. It
is also likely that these factors influence the salience and prospects of economic
losses as well, such as loss of potential wealth associated with loss of ownership or
opportunism. To some extent, risk seeking associated with framing and procedural
justice is attributable to both self-determination and economic concerns. However,
we feel that a consideration of both economic and psychological losses and
applying the concept of framing and procedural justice provides insight into how
entrepreneurs may choose riskier and, in some cases, economically suboptimal
financing options.
DISCUSSION
We set out in this chapter to give more explicit recognition to a phenomenon that
has been noted by some previous researchers but that remains under-appreciated
in the entrepreneurship literature generally: that entrepreneurs are often motivated
to start new businesses in order to realize a dream of being creators and controllers
of their own destinies. When this dream does not also incorporate a goal of
accumulating as much wealth as possible, little internal conflict exists regarding
how the dream should be financed, and entrepreneurs will “bootstrap” in order
to sustain operations. However, when the dream includes a vision of rapid wealth
accumulation alongside one of self-determination, realization involves a financing
dilemma. Our primary purpose here was to build a theoretical framework that
helps to explain the impact of the self-determination drive in entrepreneurs who
also seek wealth; the focus of this development was on factors that influence en-
trepreneurs’ aversion to sharing decision control and their perceptions of decision
control risk. In brief, we argued that venture stage, entrepreneurs’ experience and
the business performance of past and current ventures influence decision control
risk aversion, and that industry norms, reputation, and the procedural justice of
interactions with financiers influence perceived decision control risk.
From the perspective of practice, one of the key implications is that a model of
entrepreneurs’ selection criteria may be derived from our analysis. The venture
capital literature is replete with evidence of how equity investors rate investment
opportunities and advice about how they should rate them (Smart, 1999); the
criteria for banks are also well-understood (Winborg, 2000). However, our anal-
ysis suggests that explaining entrepreneurs’ preferences is much more complex
because of the mix of motives involved. Our analysis suggests that entrepreneurs
consider the economic costs and benefits as well as the decision sharing costs
and benefits of financing type and individual financier. While it is useful for
investors or lenders to know that experience and venture performance influence
entrepreneurs’ willingness to take decision control risks, what is particularly
useful for investors is the knowledge that investors can influence perceptions of
decision control risk. For example, investors can frame financing opportunities in
ways that appeal to the self-determination motives of specific entrepreneurs.
Entrepreneurs, for their part, may misrepresent their levels of decision control
risk aversion to investors, for example by persuading investors that they do
not place a high value on self-determination in order to help obtain financing.
Entrepreneurs may do this in order to mollify the concerns of an investor with
whom they are negotiating if they also believe that, in the end, they will be
able to resist the investor’s efforts to influence decision control or if they view
the financing arrangement as simply a short-term fix or a springboard to other
opportunities that pose less decision control risk.
In addition, it is conceivable for entrepreneurs to be unaware of their own
levels of decision control aversion. They might consciously desire to make
financing choices on a strictly economically rational basis and yet be influenced
by self-determination concerns. This assertion is consistent with procedural
justice theory, which suggests that individuals are not consistently rational and
calculative in managing their exchanges with others (Lind, 2001). Instead, persons
often rely on their perceptions of procedural justice as a signal of the exchange
partner’s trustworthiness. Thus, even in attempts to make the most economically
beneficial financing decision, entrepreneurs may be influenced by the fairness of
initial interactions with potential investors in ways that may have little to do with
economic returns.
Thus, our analysis highlights the risks involved in ignoring self-determination
as a motive in financing decisions. These risks affect both investors and en-
trepreneurs. Investors who fail to consider the importance of self-determination
may misinterpret the motives of entrepreneurs. This misinterpretation can lead
to miscommunication and, ultimately, can cause investors to negotiate poorly
with entrepreneurs or to work ineffectively with them after an investment has
been made. It is clear, therefore, that a key task of angels and venture capitalists
is to assess the genuine levels of decision control risk aversion possessed by
the entrepreneurs whose ventures they are considering financing. Because
entrepreneurs’ motives may be obscured, ascertaining these motives will likely
require investors to conduct in-depth and explicit discussions about decision con-
trol issues with entrepreneurs and perhaps to research entrepreneurs’ past decision
sharing experiences with people capable of serving as references on such matters.
Our analysis also suggests that entrepreneurs themselves need to spend some
time reflecting on what their “true” motives are with regard to self-determination
in order to diminish their chances of deceiving themselves. Entrepreneurs who
have both high growth aspirations and a high aversion to decision control risk face
a real dilemma that highlights the importance of accurate self-understanding with
regard to this issue. Entrepreneurs should seek to obtain that understanding by

talking with more experienced entrepreneurs about issues of decision control or
searching their own past personal and professional lives for clues about the value
they actually place on self-determination.
From a theoretical standpoint, our analysis provides some much-needed
clarity and structure to our understanding of how entrepreneurs’ motives for
self-determination influence their financing decisions. Clearly, models that
account only for economic interests (or, for that matter, only for psychological
factors) provide an incomplete picture of how entrepreneurs choose to finance
their businesses. Both types of factors can figure prominently in these decisions,
and models that account for both should be better able to predict financing
choices. An additional theoretical implication of the perspective we put forth
here is that entrepreneurs’ financing decisions are complex and interesting
from a cognitive standpoint, because psychological factors may interact with
economic ones in ways that lead them to make choices that they otherwise
would not or should not make. For example, entrepreneurs’ perceptions of
their own economic prospects may be influenced by the value they place
on self-determination, causing them to underestimate the economic benefit
that external financing might provide. Alternatively, entrepreneurs may be driven
by economic ambitions to accept financing alternatives that are incompatible with
the equally strong motives they may have for self-determination, perhaps because
they erroneously believe that they can resist or manage the process of sharing
decision control.
It should be noted that in developing our analysis, we have focused on the
entrepreneur as an individual decision maker. This focus has simplified the
presentation of our ideas in a constructive way, but we also acknowledge this
simplification as a limitation or boundary condition of our analysis. In the
real world, of course, major new venture management decisions such as those
surrounding the choice of financing are often made by groups of people, not a
single entrepreneur. For example, Sitkin and Pablo (1992) suggest that social and
work context may shape risk perceptions. Group composition, leadership and
culture, and organizational control systems may all influence the perceived risk of
an option. Given evidence of risky shift and groupthink, we speculate that groups
composed of highly similar individuals are apt to be more extreme in their risk
perceptions. Leadership, culture, and control systems can create an environment
in which risk-taking is either supported or discouraged. This last class of factors
suggest that entrepreneurs’ confidence in their ability to maintain control of the
venture after obtaining financing may depend upon their social environment, that
is, the composition of the top management team, the entrepreneurs’ network of
associates, mentors, or role models, and so forth.
In some cases there are several individuals who could plausibly claim to be
entrepreneurs within a single firm, and in other cases entrepreneurs have sur-
rounded themselves with others with whom they effectively share decision control
within the venture, either by virtue of equity ownership or trust. Accounting
for the ways in which group dynamics might interact with the phenomena we
have described in this chapter – for example, by considering how individuals’
potentially differing levels of decision control risk aversion might be reconciled
or considering the implications of team size or composition on the way venture
management teams perceive the decision control risks associated with various
financing choices – would represent valuable extensions of our work, and we
encourage future researchers to pursue such issues.
Future researchers might also consider how trust might relate to the issues
of self-determination discussed in this chapter. For example, trust might enable
entrepreneurs to agree to use external financing even in instances in which they
perceive that a high degree of decision control risk is associated with the type or
source of financing that they choose. We would suggest that, in these cases, trust
does not reduce the risk of decision control, but it can increase an individual’s will-
ingness to take a specific risk. Thus, when entrepreneurs trust a given individual or
institution, it may reduce the influence that their overall levels of decision control
risk aversion have on choices involving those specific financing alternatives.
In summary, our analysis has attempted to show how entrepreneurs’ motives
for self-determination can influence their financing decisions. We hope that our
discussion will spur further contributions in this area by other researchers and will
be useful to educators, investors and entrepreneurs themselves.
NOTES
1. By drive for self-determination (alternatively, fear of loss of decision-making control)

we intend something other than the fear of bankruptcy. Mishra and McConaughy (1999)
labeled family firms’ more conservative use of debt as a fear of loss of control; however,
this position stops short of clarifying the difference between the fear of loss of economic
value and fear of loss of decision-making rights. We argue here that for some the intrinsic
value of being the decision maker cannot be compensated for by economic wealth.
2. In the best of circumstances, entrepreneurs can maximize wealth without endangering
self-determination or can maximize self-determination without endangering wealth. We
assume, however, that maximizing one typically poses some risk to the other.
3. We do not explicitly consider loans or minor equity received from family and friends
in this discussion. Most frameworks tend to consider such sources as internally generated
funds, but such sources may be far murkier in practice. To the extent that no formal obliga-
tions are attached to such sources, they operate like internally generated funds; to the extent
that explicit payback or decision rights are attached, they operate like debt or equity.
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EXTENDING THE THEORY OF THE
ENTREPRENEUR USING A SIGNAL
DETECTION FRAMEWORK
Jeffery S. McMullen and Dean A. Shepherd
INTRODUCTION
Shane and Venkataraman (2000) suggest “the field [of entrepreneurship] involves
the study of sources of opportunities; the processes of discovery, evaluation, and
exploitation of opportunities; and the set of individuals who discover, evaluate,
and exploit them” (p. 218). However, the study of the judgment required for
opportunity evaluation has been greatly overshadowed by interest in opportunity
recognition and to a lesser extent opportunity exploitation. This is surprising
considering the number of economic theories of the entrepreneur that recognize
sound judgment as a principal quality of entrepreneurship (Cantillon, 1755;
Kirzner, 1973; Knight, 1921; Mises, 1949; Say, 1840; Schumpeter, 1934;
Shackle, 1955). In fact, the first recognized theory of the entrepreneur defined
the entrepreneur as someone who exercises business judgment in the face of
uncertainty (Cantillon, 1755/1931, pp. 47–49). Similarly, Knight (1921, p. 271)
suggests that the essence of entrepreneurship is judgment, born of uncertainty,
and argues that it is this judgment that delineates the function of entrepreneur
from that of manager. He goes on to point out that the function of manager
does not in itself imply entrepreneurship but that a manager becomes an
entrepreneur when he exercises judgment involving liability to error (Knight,
1921, p. 97). However, the judgment referred to by these theorists is not just any

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06006-9
139
140 JEFFERY S. MCMULLEN AND DEAN A. SHEPHERD
form of judgment, it is judgment exercised in the decision of whether to take

action.
Because entrepreneurship is concerned with how new and appropriate ideas
are implemented (Amabile, 1997), whether they be new firms (Gartner, 1988),
new products or processes (Schumpeter, 1934, p. 66; Smith & DiGregorio, 2002,
p. 130), entry into new markets (Lumpkin & Dess, 1996) or the reorganization
of entire industries (Schumpeter, 1934, p. 66), entrepreneurship is consistently
represented by two primary elements: novelty and action. We argue, therefore,
that entrepreneurship requires judgment because (1) entrepreneurship cannot exist
without action (Kirzner, 1997; Shane & Venkataraman, 2000); (2) action is al-
ways uncertain (Mises, 1949); and (3) the navigation of uncertainty mandates the
exercising of judgment (Knight, 1921). Moreover, because entrepreneurial action
is action in regard to something new, or “novel action” (Smith & DiGregorio, 2002,
p. 130), it possesses even greater uncertainty than routine actions, and therefore
may necessitate even more judgment. Finally, because new products, processes,
etc. are how businesses reinvent and reinvigorate themselves, this entrepreneurial
judgment is integral to an organization’s effectiveness and sustained performance,
making it a cornerstone of effective strategic management (Schendel & Hofer,
1979) as well as new venture creation (Shane & Venkataraman, 2000).
Why then has the judgment required for opportunity evaluation received so
little attention by entrepreneurship scholars? We propose three primary reasons:
(1) difficulties associated with interpreting existing economic theories of the
entrepreneur; (2) lack of a conceptual framework capable of rigorous empirical
examination; and (3) unfamiliarity by most entrepreneurship enthusiasts with
the empirical methods necessary to test such a framework. This chapter seeks to
advance the field of entrepreneurship by addressing each of these points in detail
thereby helping to fill the void they represent and enabling scholarly advancement
on a number of previously intractable fronts.
INTERPRETATIONS OF ECONOMIC THEORIES

OF THE ENTREPRENEUR
The entrepreneur of economic theory is a function not a personality (Hebert
& Link, 1988, p. 154), and for better or for worse a function appears to have
theoretical meaning only in relationship to its respective system. This obser-
vation has two significant implications regarding the proper interpretation of
economic theories of the entrepreneur: one scope restricting and the other scope
expanding.
Extending the Theory of the Entrepreneur 141
Scope Restricting Implications of Entrepreneur as Function
Recognition that the entrepreneur is a function meaningful only in relation to the

system suggests that economic theories of the entrepreneur may be bound by their
unit of analysis (which counter-intuitively is the economy not the individual). That
is, they appear to be inappropriate for the study of the entrepreneur independent of
the system in which he or she operates. Unfortunately, this observation exposes a
necessary restriction to the use of economic theory by management scholars. How-
ever, recognition of this restriction also clarifies numerous empirical contradictions
and theoretical frustrations.
For example, the recent scholarly interest in opportunity recognition has
produced a number of attempts to utilize Kirzner’s (1973) theory of entrepreneur-
ship within the management literature. Kirzner’s (1973) entrepreneur fulfills
the function of an arbitrageur who moves the economy toward equilibrium by
rectifying discrepancies in supply and demand. This process is made possible
through a concept that Kirzner labels entrepreneurial alertness. However, within
Kirzner’s work there is an unwitting dilution of the concept of entrepreneurial
alertness from a description of a behavior that is necessary for the economy to
function properly to a description of a psychological characteristic common to
successful entrepreneurs. We say “unwitting” because Kirzner frequently refers
to his mentor’s belief that, “The economist must never be a specialist. In dealing
with any problem he must always fix his glance upon the whole system” (Mises,
1949, p. 69). If Kirzner truly subscribed to this perspective, then the economy
would be the theoretical unit of analysis and the entrepreneur would be viewed as
the means for explaining why the system functions properly.
However, Kirzner’s later work frequently violates this perspective. For instance,
in his early writings Kirzner (1973, 1979, 1980) argues:
Entrepreneurial alertness is not an ingredient to be deployed in decision-making; it is rather

something in which the decision itself is embedded and without which it would be unthinkable
(1980, p. 11).
He goes on to suggest that entrepreneurial alertness is what happens when the mar-
ket presents a profitable situation that is successfully exploited by an individual who
“fits” the necessary profile (1973, p. 74; 1980, p. 13). In essence, entrepreneurial
alertness is a less mathematical, and therefore more approachable, exposition
of probability theory in which the market presents an objective opportunity for
someone possessing the necessary knowledge. Entrepreneurial alertness ensures
exploitation of this opportunity and consequently perpetuates the market system.
To use an analogy, alertness is like a radio trivia contest. Although you or I
may not know the answer to the trivia question asked by the disc jockey, someone
inevitably does. Therefore, an objective opportunity is argued to exist. The first

individual who knows the answer and calls in to claim the prize is the exhibitor of
Kirzner’s (1973) concept of entrepreneurial alertness. Accordingly, entrepreneurial
alertness has no meaning a priori. By definition, it can only be said to exist post
hoc. For example, Kirzner (1980) notes that,
. . . faulty and inadequate entrepreneurship must be interpreted, therefore, not as evidence of
the absolute scarcity of entrepreneurial alertness . . . but as evidence that the alertness costlessly
available has somehow remained latent and untapped (p. 13).
Therefore, alertness can only be said to exist for the successful radio caller (and
possibly to a lesser degree for those who knew the answer, tried to call, but were
not as fast as the winner). The caller who got through but provided the wrong
answer cannot be said to have exercised alertness. Thus, alertness is a configural
concept in which an objective market opportunity is only an opportunity for those
possessing the necessary attributes. Therefore, because this alertness is a product
of the market, it is problematic for it to be discussed as a universal attribute of
entrepreneurial individuals independent of the system in which they operate.
In his later work, Kirzner (1982, 1997, 1999) broadens his concept of
entrepreneurial alertness as an effort to soften (1982, pp. 156–157) the more
deterministic stances taken in his earlier work (1979, p. 9). In doing so, he
obfuscates the configural nature of the “alertness” concept by discussing it more
in terms of a quality observable in characteristics such as prescience, boldness,
self-confidence, creativity, and innovative ability (Kirzner, 1999). Although this
exposes alertness as nothing more than judgment, it also leads the reader to
believe the concept is separable from the market context. However, we argue
that it is not. This judgment is continually discussed in terms of how well the
entrepreneur’s envisaged future corresponds to the realized future (Kirzner, 1982,
p. 156). Regardless of the degree of linguistic ambiguity employed, the “accuracy”
benchmark implied by this “correspondence” is clearly suggestive that objective
market opportunities exist that some people will accurately identify while others
will not (Addleson, 1995). This suggests that, although the foundation of Kirzner’s
argument has not changed, his explication of “entrepreneurial alertness” has
digressed into a more confusing exposition of entrepreneurial perception.
Based on the above interpretation of Kirzner’s concept of entrepreneurial
alertness, we can now understand why studies building on his work have faced
a number of theoretical and empirical frustrations. For example, building upon
Kirzner’s (1979, 1985) concept of entrepreneurial alertness, Gaglio and Katz
(2001) propose that “H1: In any given market situation, alert individuals are more
sensitive to signals of market disequilibrium than non-alert individuals” (2001,
p. 100) and “H9: Alert individuals are more sensitive to the profit potential of
ideas and events than non-alert individuals” (2001, p. 104). Our interpretation of
Kirzner suggests that these hypotheses are tautological (true by definition) once
one recognizes that “alert individuals” have to be “more sensitive to signals of
market disequilibrium” and “more sensitive to the profit potential of ideas and
events” than non-alert individuals in order to be labeled “alert” in the first place.
It appears that Kirzner’s theoretical ambiguity has lead to insufficient recognition
that the entrepreneur (and his/her alertness) is a function inseparable from the
system. Entrepreneurial alertness is not a quality or attribute of individuals rather it
is a configuration of profitable environmental condition and applicable knowledge
possessed by the individual.
Similar frustrations have been found on the empirical front. For example, in
an altered replication of Kaish and Gilad’s (1991) survey, Busenitz (1996) finds
no evidence of any difference in the degree of Kirznerian “alertness” between
entrepreneurs and managers. According to Kirzner’s theory a person becomes
an “entrepreneur” (can be said to have performed the entrepreneurial function)
because he or she has experienced “entrepreneurial alertness.” Therefore, the
defining factor that delineates entrepreneur from non-entrepreneur (or manager)
is “entrepreneurial alertness.” Any other criteria for discrimination would be
inconsistent with Kirzner’s definition of entrepreneur. Therefore, like Gaglio and
Katz (2001), Busenitz (1996) may have been investigating a form of “alertness”
but we argue that this quality or attribute is not the same “entrepreneurial
alertness” as that conceptualized by Kirzner in his early, theoretically consistent
work in which the entrepreneur is a function of the economy rather than a
psychological/cognitive profile or personality trait.
What is important to note is that Kirzner’s (1973) theory of entrepreneurship
does not constitute an empirical theory (Popper, 1959; Smedslund, 1978) for the
individual because it is true by definition and therefore unfalsifiable (e.g. Greve,
2001; Popper, 1959), but it is a falsifiable theory when the unit of analysis is the
economic system and not the entrepreneur. To illustrate this point we use a football
analogy. Imagine that the economy is a football team, and the entrepreneur is the
quarterback. The objective of the economic theories of the entrepreneur is not to
explain why one quarterback’s statistics are better than another’s. Rather, their ob-
jective is to explain what makes a football team function properly (or perform well).
The entrepreneur is like a quarterback in that each theorist believes that the team
will not move without his actions. Some theorists focus upon the passing skills of
the quarterback and argue that these constitute his primary function in determining
the success of the team. Others point to his smooth handoffs to the running back.
Some emphasize the ability to react to the defense and call better plays at the line
of scrimmage. Finally, others suggest that it is some nebulous leadership quality
that defines an effective quarterback. Regardless of which attributes are considered
definitive of the quarterback, the theorists agree that the function of the quarterback
is integral to the team and that his actions greatly influence its performance.
However, evidence for the theory of the quarterback is observed through the
performance of the team. Thus, the performance of the quarterback irrespective of
the team tells us little about the quality of the theory’s explanatory or predictive
power. It neither confirms nor denies the theory because it no longer recognizes the
quarterback’s function within the team. Similarly, however, knowing the team’s
performance without knowing exactly what the quarterback did or did not do also
tells us little about the persuasiveness of a particular theory of the quarterback, for
there is no way to know whether it was the passing skills, handoffs, play calling,
or leadership that made the difference.
Although these observations impose limitations upon the scope of the theory
of the entrepreneur, they also present potential for the advancement of the theory
of the entrepreneur on two different fronts. The first is analogical and recognizes
that the function of the entrepreneur may be applicable to systems other than the
economy (discussed in the section that follows). The second is empirical and con-
cerns the use of methods that are relatively novel to entrepreneurship researchers,
such as experimental methods (further suggestions offered in the discussion
section below).
Scope Expanding Implications of Entrepreneur as Function
Realization that the entrepreneur is a function meaningful only in relation

to the system suggests unexplored potential for these theories. For example,
because economists who were interested in explaining the mechanics of the
economy developed the original theories of the entrepreneur, the system in which
the entrepreneurial function was discussed was always the economic system.
However, this does not mean that the economy is the only system in which
the entrepreneurial function has meaning. Rather, it suggests that because the
entrepreneur represents a function and not a personality, the role he or she fulfills
is potentially as applicable to the effectiveness of other systems (e.g. industries,
strategic groups, organizations, and even teams) as it is to the economy.
In essence, the entrepreneur of economic theory is like the center of a wheel.
Although the size of the wheel may change, the center fulfills the same function
whether that wheel is for a bicycle or a tractor. Therefore, if the function
of the entrepreneur within the economy is implementing new combinations
(Schumpeter, 1934), then, perhaps, it is the entrepreneur that fills this function
within the organization as well. Similarly, if it is the entrepreneur’s function to
bear the uncertainty that is intrinsic to exercising judgment (Cantillon, 1755;
Knight, 1921; Mises, 1949) then why would this be any different within the
organization? Because economic theories of the entrepreneur (especially those
proposed by “Austrians”) are notorious for neglecting the firm in their haste to
discuss economics in terms of individual action (Casson, 2002), it would appear
that their concepts are readily transferable. However, the challenge then becomes
reconciling seemingly irreconcilable theories. Although a daunting prospect, this
challenge may not be as ominous as it first appears.
SHARED ASSUMPTIONS OF ECONOMIC

THEORIES OF THE ENTREPRENEUR
Regardless of how disparate some economists may argue their theories of the
entrepreneur to be, the fact remains that they share a number of assumptions that
make them more similar than dissimilar. The most important amongst these are
(1) an emphasis on the entrepreneur as a function of the economic system (as
discussed above); (2) a shared ontology (or worldview); and (3) a focus upon one
behavioral aspect of entrepreneurial action to the detriment of others.
Shared Ontology
With a few exceptions (most notably G. L. S. Shackle), most economic theory

devoted to the subject of entrepreneurship has been firmly rooted in a social
realist ontology. Ontology is “the assumptions about existence underlying any
conceptual scheme or any theory or system of ideas” (Flew, 1979, p. 256).
Because social realists suggest that there is a “real” world “out there” apart from
the flawed apprehension of it (Lincoln & Guba, 2000, p. 176), their ontology,
or worldview, consists of a belief in an objective reality. In contrast, social
constructivists believe that there is no social reality other than that negotiated
by society’s members (Lincoln & Guba, 2000). Consequently, their worldview
consists of multiple interpretations and mutual consensus. Accordingly, they
argue that concepts like money do not exist beyond the meaning given to them
through the mutual interpretations of the members of society.1
A Focus Upon Only One Behavioral Aspect of Entrepreneurial Action
Another commonality allowing the possible reconciliation of economic theories

of the entrepreneur is a general realization that the function fulfilled by the
entrepreneur is one that consists of mindful or “purposeful” behavior. In other

words, each of these theories considers entrepreneurial behavior to be intentional
behavior, or “action” (Greve, 2001). Whether attempting to achieve a profit by de-
riving “new combinations” through creativity (Schumpeter, 1934), “seeing” a way
in which factor markets could be coordinated to produce personal profit (Kirzner,
1973), or making a decision under uncertainty that requires a willingness to bear
uncertainty that others would not (Knight, 1921; Mises, 1949), entrepreneur-
ship is discussed as an act of will and the product of a priori entrepreneurial
judgment.
Certain psychological characteristics are argued to be conducive to this
entrepreneurial judgment, and even the economists who continually profess that
the entrepreneur is a function and not a personality often fall victim to conjecture
and hypothesizing in regards to the type of person who would choose to fill the
role (e.g. Schumpeter admittedly commits this economic sin). However, most
economic theories are descriptive, behavioral theories with little to no discussion
of why a person might possess more, or better, perception or motivation than
another person. Self-professedly, these theorists are interested only in what the
entrepreneur does to ensure the effectiveness of the economy. Again, this speaks
to our earlier point that the economist is interested in why the economy works, not
in why the individual who is filling the entrepreneurial function is more insightful
or motivated than his or her fellow human beings.
When psychological characteristics are mentioned, however, they should be,
and frequently are, discussed as necessities of the function, not determinants of
the actors who will fill them. More importantly, however, these psychological
characteristics revolve around one central concept, the decision to engage in
entrepreneurial action, which we define as the attempt to profit personally within
a market context by creating something that is novel to the actor. This definition
has an intention (i.e. “to profit”), a behavior (i.e. “the attempt”), and a number
of social rules or qualifiers regarding both the intention (e.g. “personally”)
and behavior (e.g. “within a market context,” “by creating something,” “that
is novel to the actor”) that, when taken together, enable categorization of the
action as “entrepreneurial,” rather than merely “innovative,” “opportunistic,”
or “creative.” In addition, these various components constitute an “action” as
stipulated by action theorists (see Greve, 2001 for an eloquent articulation of this
position).2
With these assumptions in mind, the question then becomes whether there is
a framework capable of embracing social realism, a “function” as subject, the
many disparate behavioral aspects constituting this function, and the psychological
aspects comprising the judgment responsible for this entrepreneurial action. We
argue that Signal Detection Theory is just such a framework.
AN INTRODUCTION TO SIGNAL DETECTION

THEORY (SDT)
Modern Signal Detection Theory (SDT) evolved from the development of
communications and radar during the first half of the twentieth century. During
World War II engineers developed the principles of SDT in an attempt to discern a
signal from a “noisy” background (Peterson et al., 1954; Tanner & Swets, 1954).
Green and Swets (1966) introduced SDT to psychology for a similar purpose,
to explain detection experiments in which weak visual or auditory signals had
to be distinguished from a “noisy” background (MacMillan & Creelman, 1991).
In essence, SDT is a meta-theory designed to provide a conceptual framework
for analyzing decisions made under uncertainty. As testimony to its effectiveness,
SDT is now being adopted with increasing frequency by scientists in other fields
that place a premium on minimizing error through the development of assessment,
prediction, and decision systems with high accuracy and discriminatory power –
i.e. information retrieval, knowledge testing, psychiatric diagnosis, and medical
detection and decision-making (McFall & Treat, 1999; Swets, 1996).
Like many economic theories of the entrepreneur, SDT presumes that nearly all
reasoning and decision-making takes place in the presence of some uncertainty.
Through its precise language and graphic notation, SDT allows analysis of decision
making in the presence of uncertainty by addressing both worlds of human experi-
ence: the internal world of thought, feeling, and value and the external world of the
environment. Accordingly, it appears well suited to examine the entrepreneurial
decision of whether to pursue an opportunity, defined as a situation believed to
present a feasible and desirable course of action. But, perhaps the best way to
introduce the fundamentals of SDT is through an example.
To apply SDT, one must assume that the aim of the individual is to discriminate
accurately between two mutually exclusive states, the presence or absence of a
signal. SDT is illustrated through experimental methods requiring repeat decisions.
The simplest form of SDT experiment is referred to as a yes-no experiment, because
it requires “yes” and “no” responses (i.e. “Yes,” I believe this to be a signal or “No,”
I do not believe this to be a signal). Although the theory allows for more complex
experiments, we will apply SDT to the phenomenon of entrepreneurial action as
a yes-no experiment in the interest of space and clarity.
Four Potential Outcomes
Imagine that an individual is presented a faint signal. The individual must now
determine which of two mutually exclusive states the signal belongs. If the signal is
believed to exist, then it is classified as signal plus noise. If not, then it is categorized
as noise alone. Because the decision-maker has two choices (“yes” or “no”) and
there are two stimulus classes (signal present or signal absent), potential for four
outcomes exists: hit (signal present and person says “yes”), miss (signal present
and person says “no”), false alarm (signal absent and person says “yes”), and
correct rejection (signal absent and person says “no”). Hits and correct rejections
are desirable, whereas false alarms and misses are not.
The same decision structure applies to the entrepreneurial phenomenon. If one
chooses to act upon a possible signal, then there is the potential for a “false alarm,”
i.e. an error of commission. That is, the prospective entrepreneur may decide to
pursue what is believed to be an opportunity only to realize that he or she was
sadly mistaken. In contrast, if one chooses not to act, then there is the potential for
a “miss,” i.e. an error of omission. In this scenario, the prospective entrepreneur
chooses to forgo what could possibly be an opportunity only to find that his or her
assessment was wrong and that he or she did indeed miss the opportunity.
Scholars in management and economics have embraced the above conceptu-
alization of the entrepreneurial decision. For example, Shane and Venkataraman
(2000, p. 220) state,
An entrepreneurial discovery occurs when someone makes the conjecture that a set of resources
is not put to its “best use” (i.e. the resources are priced “too low,” given a belief about the price
at which the output from their combination could be sold in another location, at another time,
or in another form). If 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 (Casson, 1982).
Casson’s (1982) conceptualization of the entrepreneurial decision of whether to

act upon a possible opportunity is the decision illustrated in Fig. 1. Such a decision
requires individual judgment regarding (1) whether a signal exists and (2) whether
that signal is deemed worthy of action.3,4 Fortunately, SDT provides an ideal
framework for detailed examination of this kind of decision.
Fig. 1. The Entrepreneurial Decision.

Three Elements of Signal Detection Theory
SDT encompasses three independent components comprising the individual’s

decision-making process: signal strength (conceptualized in terms of information
quantity), uncertainty, and motivation.
Signal strength (conceptualized in terms of information quantity). SDT argues
that more information is always desirable because it increases decision accuracy,
i.e. the likelihood of obtaining either a hit or a correct rejection while reducing the
likelihood of an outcome in the two error cells. This is conceptually analogous to
turning up the volume on an auditory signal to ensure enhanced discriminability.
Thus, the more information a decision maker possesses about a signal, defined as
current information that changes one’s belief about the value of a future state (Fiet,
1996), the less confusion there is in its classification.
Uncertainty. Individuals face two kinds of noise factors that contribute to their
uncertainty regarding whether a signal exists: internal noise and external noise.
Many possible sources of external noise exist. Using opportunity evaluation
as an example, external noise may take the form of uncertainty in market
demand, feasibility of production, competitive response, attainability of necessary
resources, etc. This noise is frequently, but not always, reducible. SDT posits that
with the proper training and practice, people can learn what cues to look for, and
that with additional effort, they can acquire more, and more reliable, information.
Thus, through practice people can enhance the quality of their perceptions.
However, due to time constraints, search costs, cognitive limitations, ignorance,
and impatience, omniscience is never achieved.
Although the individual makes every effort possible to reduce the external noise,
there is little to nothing that can be done to reduce internal noise, which refers to
the noisy process of encoding what the individual observes. Numerous factors
contribute to people’s dispositions that could dramatically alter their ability to
discern a signal. Among these are attention, pressure, stress, mood, and age, to
name a few. External noise and internal noise contribute to internal response,
which is best described as an individual’s impression of whether a signal is present
or absent. Internal response is capricious and inherently noisy. Even when there is
no signal present, there still will be some internal response in the individual.
Motivation. In addition to the acquisition of more information, individuals may
choose to forgo additional data collection and rely instead upon their own judgment.
The point at which this tradeoff is made is called the criterion. In fact, because
different individuals feel that the different types of errors are not equal, they may
exhibit different biases in establishing this criterion. For example, two individuals
may be presented the same amount of information. The first person may classify
the signal as present. Although she/he realizes that this may result in a false alarm,
committing a miss error may be a far more costly mistake. In contrast, a second
person that is presented the same amount of information may choose to classify
the signal as absent. For this person, missing a signal may be more palatable than
committing a false alarm error. Thus, people can share equal access to information
but choose dramatically different actions based upon the criterion they employ.
GRAPHICAL REPRESENTATION OF SDT AS APPLIED

TO ECONOMIC THEORIES OF THE ENTREPRENEUR
Figure 2a and b shows a graph of two hypothetical internal response curves. The
curves on the left are for the noise-alone, and the curves on the right represent
the signal-plus-noise. Noise-alone reflects the status quo or routine environment
of the decision maker in which no signal is present. Noise is always present.
Signal-plus-noise represents an introduction of a signal to the decision maker’s
Fig. 2. Internal Response Probability of Occurrence Curves for Noise-Alone and for
Signal-Plus-Noise.
otherwise routine environment. The internal response for the signal-plus-noise case
is generally greater (situated farther to the right) than the internal response for the
noise-alone case, but because a distribution (a spread) of possible responses exists,
the two curves may overlap. When the two curves overlap, there is uncertainty
around whether a signal is truly present.5
Signal Strength and Disequilibrium Economics
Graphically, more information will have the effect of shifting the signal-plus-
noise curve to the right, further away from the noise-alone curve. Figure 2a shows
two sets of probability of occurrence curves. Less overlap exists between the two
curves when more information is present. As a result, the subject’s choices are
less difficult, and the participants are able to pick a criterion that produces a nearly
perfect hit rate with almost no false alarms or misses.
Regardless of whether the actor starts in the midst of a dynamic market process
or in a static equilibrium state, both scenarios would conceive a close proximity
between means to indicate there is little information present to assist in the as-
sessment of whether the signal is indeed present. In contrast, increasing distance
between the means is representative of an increasing amount of information to
assist in assessing whether a signal is present. For example, compare an individ-
ual that hears from a number of friends about problems they are having with an
existing technology with an individual that has information from 5,000 people
about problems that are having with the same technology. In the first example, the
means are close and in the second example the means are further apart. Statistically
speaking, signal strength is analogous to effect size when contemplating the power
of a study.
Uncertainty, the Austrians, and G. L. S. Shackle
There is another aspect of the probability of occurrence curves that determines

detectability of a signal: the spread of the curves. For example, consider the two
curves in Fig. 2b. The separation between the means is the same for the curves
on the right as it is for the curves on the left, but the curves on the right are much
skinnier. Accordingly, the signal is more discriminable when there is less spread
(less noise/uncertainty) in the curves. This is primarily attributable to the existence
of higher quality information or a better understanding of the cues upon which one
should focus his or her attention. As a result of this quality, the signal is clearer. This
produces less overlap between the two probability of occurrence curves and enables
perceptual accuracy. It is analogous to the reliability of a measure – the greater a

measure’s reliability the more predictive it can be of a dependent variable. It is this
element of SDT to which Austrian economists devote the majority of their efforts.
Mainstream Austrian Approaches. Even strong proponents of the rationalist
perspective within Neoclassical Economics recognize that cognitive constraints
of human beings prevent omniscience (e.g. Stigler, 1967, p. 291), but such was
not always the case. Through the efforts of a number of economists critical of
equilibrium theory, unreasonable expectations of human capabilities regarding
decision making have been slowly exposed. Perhaps, this is best developed in the
writings of Frederick A. Hayek (1945, 1948), Ludwig von Mises (1949), and Israel
Kirzner (1973, 1979, 1982, 1985, 1997, 1999), whose work is heavily reminiscent
of the philosophical and methodological approach put forth by Max Weber (1947).
Accordingly, a cornerstone of Austrian economics has been the emphasis of the
subjectivity of knowledge and the need to study economic action from the vantage
point (interpretation) of the actor. These Austrian economists suggest that the
entrepreneur is distinguishable from the non-entrepreneur by the lack of spread
in his or her distribution around the signal plus noise mean. In other words, the
entrepreneur has a skinny distribution rather than a flat, widely spread distribution,
owing to superior perception.
We re-emphasize the word “perception.” Because most Austrians share a
social realist ontology in which the signal-plus-noise mean is conceived of as an
“objective” opportunity awaiting recognition and exploitation, the emphasis is not
on some enduring psychological difference (or “trait”) capable of discriminating
entrepreneurs from non-entrepreneurs. In fact, the Austrians do not care “who”
exploits the opportunity; only that “someone” does, once again re-emphasizing
the behavioral nature of these theories of the entrepreneur. This “someone,” they
argue, fulfills the behavioral requirement of opportunity exploitation because he
or she possessed the appropriate knowledge, i.e. that knowledge which is required
for accurate opportunity recognition and considered to be a prerequisite for
entrepreneurial action. Therefore, the Austrian approach is concerned primarily
with epistemology. These theorists believe the economy is a dynamic process
that draws its momentum from the actions of individuals who possess the
knowledge necessary to recognize the potential of new situations created from
the consequences of predecessors’ decisions and actions.
It is this assumption that underlies Hayek’s (1945) emphasis upon “local”
knowledge, or knowledge of time and place, and explains why Austrians are
typically libertarians. If one shares their conception of entrepreneurship, then
the obvious recommendation for creating a vibrant economy is to allow as many
people as possible the freedom to exploit an opportunity when noticed. Only
through the large numbers that a free society provides can one take advantage
of the probability that the right individuals will be in the right place at the right
time to exploit the opportunity presented by the market process. Both Hayek and
Mises so deeply believed in this platform that they often produced aggressive
but eloquent critiques of the arguments made by advocates of formally planned
economies (e.g. Hayek, 1960).
Because the discovery and pursuit of new means-ends frameworks does
not appear to happen equally to two individuals with comparable information
(Kirzner, 1973, p. 227), many Austrians have begun to hypothesize about the
psychological properties apparently required by the entrepreneurial function. For
example, Harper (1998, pp. 248–251) discusses the necessity of a high internal
locus of control. However, it seems that these theorists have strayed from the
course. Rather than a disciplined description of the properties inherent to the
entrepreneurial function, they are now searching for psychological traits that
would enhance the likelihood that an individual would fill this function. This is
primarily attributable to similar transgressions by Schumpeter (1934) and Kirzner
(1979). For instance, Kirzner (1979) states “The truth is that the ability to learn
without deliberate search is a gift individuals enjoy in quite different degrees. It
is this gift surely, that we have in mind when we talk of entrepreneurial alertness.
Entrepreneurial alertness consists, after all, in the ability to notice without search
opportunities that have been hitherto overlooked” (p. 148). Now, let us juxtapose
this with Kirzner’s earlier statement within the same book:
This entrepreneurial alertness is crucial to the market process. Disequilibrium represents a

situation of widespread market ignorance. This ignorance is responsible for the emergence
of profitable opportunities. Entrepreneurial alertness exploits these opportunities when others
pass them by. G. L. S. Shackle and Lachman emphasized the unpredictability of human
knowledge, and, indeed, we do not clearly understand how entrepreneurs get their flashes of
superior foresight. We cannot explain how some men discover what is around the corner before
others do. . . . As an empirical matter, however, opportunities do tend to be perceived and
exploited. And it is on this observed tendency that our belief in a determinate market process is
founded (p. 9).
Kirzner’s first comment refers to a perceptual gift that appears to represent a trait
(i.e. an enduring, individually determined gift or ability) capable of delineating
entrepreneurs from non-entrepreneurs even after the function of entrepreneur is
fulfilled and they have settled into a managerial capacity. But, the above passage
is closer to how entrepreneurial alertness should be conceived if Kirzner wishes to
remain consistent with his economic argument, which is grounded in a behavioral
description of the entrepreneurial function. In fact, the last two sentences of the
above passage remind us of why entrepreneurial alertness is a configural concept.
After all, if entrepreneurs are defined by the function they fulfill, and the nature
of that function is to recognize and exploit opportunities intrinsic to the market,
then it is inconsistent to speak of all individuals with narrow distributions as

possessing entrepreneurial alertness but possessing less of it than the entrepreneur
who actually exploited the opportunity presented by the market. This would
suggest that anyone who recognizes the opportunity is an entrepreneur regardless
of exploitation, unless: (1) entrepreneurial alertness is no longer synonymous with
the accuracy definitive of the entrepreneurial function; or (2) an “opportunity”
is not singular but instead representative of a set of similar possibilities. By
expanding the scope of entrepreneurial alertness to all those who perceive
the market opportunity, Kirzner unwittingly introduced the need to address
motivation. For without concurrently addressing motivation, Kirzner’s theory is
no longer one of entrepreneurship because there is no guarantee of exploitation.
Instead, it becomes merely an exploration of entrepreneurial perception.
Recently, Smith and DiGregorio (2002) have introduced an alternative, and
perhaps more theoretically consistent, approach to the knowledge construct in
which they propose a more nuanced picture of Austrian economics. They present a
theory of entrepreneurial action that shares the Austrian assumption that different
people possess different stocks of knowledge. However, they subdivide this
knowledge into knowledge of markets, customers, and technologies, and argue
that Koestler’s (1964) concept of bisociation is then responsible for integration
of these concepts and the realization of new possibilities, or “new combinations”
(see Kirzner, 1999 for a reconciliation of his theory with Schumpeter’s in which
he shows the two agree on this bisociative element inherent to the entrepreneurial
function). Finally, Smith and DiGregorio address motivation, if only cursorily, to
reiterate Amabile’s (1996) beliefs that intrinsic motivation is more conducive to
creativity, or in the case of their theory, bisociation.
We, too, share the Austrians’ and Smith and DiGregorio’s view that people
possess different stocks of knowledge. Furthermore, we too agree that some of
these stocks are more appropriate than others for the recognition of particular
signals and that this prior knowledge may enable, or at least enhance, the potential
for recognizing signals. But, for signal recognition to become opportunity
recognition, knowledge must generate the belief that action is warranted. Because
knowledge is frequently defined as properly justified true belief (Audi, 1995,
pp. 233–235), it would seem that today’s prior knowledge is comprised of yes-
terday’s properly justified true beliefs. Likewise, in regards to the decision to act,
tomorrow’s knowledge begins with today’s beliefs, for which time partially
provides a litmus test.
Therefore, prior knowledge and current information contribute to one’s beliefs
regarding the envisaged future, but the strength of these beliefs is diminished by
uncertainty. Lipshitz and Strauss (1997, p. 150) note that, “Uncertainty in the
context of action is a sense of doubt that blocks or delays action.” Thus, for a
belief to produce action, it must be held with enough conviction to overcome such
uncertainty. For example, I may watch someone push a wheelbarrow on a tightrope
across Niagara Falls, and if asked, I may respond that I sincerely believe that the
tightrope walker could put someone inside that wheelbarrow and successfully
cross the Falls again. But when asked if I believe it enough to climb into the
wheelbarrow, my decision would quickly reveal the uncertainty underlying my
belief. The point is that, in the context of action, the concepts of knowledge,
information, and uncertainty congeal to create “belief.” Whether someone acts
depends upon their beliefs, and these beliefs are a function of their knowledge
and uncertainty surrounding it. A tight distribution may tell a story of applicable
knowledge held with reasonable certainty, but it is the belief that such a scenario
generates that is of primary interest.
Regardless of the justification and conviction surrounding a belief, this chapter
emphasizes that increases in knowledge alone (no matter how appropriate and how
diverse), will not produce opportunity recognition or entrepreneurial action with-
out the concomitant consideration of motivation. However, because knowledge is
potentially a prerequisite for successful entrepreneurial endeavor and because it
serves to diminish the uncertainty underlying a belief, one would expect it to be
highly correlated with the propensity for entrepreneurial action. Accordingly, we
suggest the following proposition:
Proposition 1. Strength and quality of information contribute to one’s “belief”

regarding whether a signal is present. Decreases in the uncertainty underlying
this belief are positively correlated with the propensity for entrepreneurial action.
Alternative Austrian Approaches. Before moving to the motivation construct,

however, an emerging alternative to the social realism of mainstream Austrian
economics deserves attention. This movement finds its roots in the psychological,
anti-equilibrium approach taken by Shackle (1955, 1972) and his emphasis upon
enterprise (Shackle’s term for entrepreneurship) as a product of imagination.
Inspired by Shackle’s rejection of the social realist, and somewhat determin-
istic (dis)equilibrium paradigm, recent efforts have taken a hermeneutic turn.
Hermeneutics is the theory or philosophy of interpretation. Championed by
Dilthey, hermeneutics is
. . . the imaginative but publicly verifiable reenactment of the subjective experiences of
others. Such a method of interpretation reveals the possibility of an objective knowledge of
human beings not accessible to empiricist inquiry and thus of a distinct methodology for the
human sciences. One result of the analysis of interpretation in the nineteenth century was the
recognition of “the hermeneutic circle,” first developed by Schleiermacher. The circularity
of interpretation concerns the relation of parts to the whole: the interpretation of each part is
dependent on the interpretation of the whole (Audi, 1995, p. 323).
For example, Addleson (1995) and Maki (2001) propose an alternative paradigm
of Austrian research. They argue that equilibrium should be replaced with
an emphasis upon determining “understanding.” Addleson (1995) builds his
argument partially on Giddens’ (1977) concept of the double hermeneutic, which
states:
. . . the methodologist has two levels of understanding or interpretation to think about. One level
pertains to the theorist’s understanding – the nature of the world that he identifies and describes
in his theory. This level of the double hermeneutic is common to all enquiry. Then there is a
level that is peculiar to social science. The focus here is on the individuals whose social conduct
is the object of analysis (1995, p. 18).
Addleson (1995) suggests that knowledge is merely a starting point not the
answer for why opportunities are “perceived” and pursued. His argument is
surprisingly similar to concepts of sensemaking introduced to management by
Weick (1993, 1995) and flourishing in the work of members of the managerial
and organizational cognition division within the Academy of Management
(Chattopadhyay, Glick & Huber, 2001; Dutton & Jackson, 1987).
Accordingly, a brief digression to discuss whether and how SDT’s uncertainty
element can incorporate these arguments appears merited. The first and perhaps
most important thing to note is a change in language. The term perception is
replaced with interpretation. No longer is the discussion one of whether the indi-
vidual perceives an objective reality accurately, now discussion revolves around
an interpretation of information. In other words, the theorist is interested in how
one “understands” or “makes sense of” a situation.6
What we wish to point out is that the work of Shackle and critical psychologists
such as Weick can be incorporated into the SDT framework presented, but only
if a signal is defined as information (e.g. a new technology) rather than as an
objective opportunity. Accordingly, the distribution around the signal represents
the strength of one’s awareness to the information. This, however, does not yet
imply the infusion of meaning. In other words, the actor merely recognizes
the existence of information but has not attributed this information value. In
contrast, the distribution around the signal for the actor in mainstream Austrian
economics represents the clarity with which that actor has recognized an objective
market opportunity (a signal possessing inherent value). The narrower his or her
distribution, the better his or her perception. Whether conceived of as perception
or interpretation, the actor of both ontological perspectives has yet to become an
entrepreneur. To become an entrepreneur, the signal must be infused with value
or meaning in such a way that action is the outcome of judgment. For this to
happen there must be consideration of a second element of judgment known as
motivation and represented by SDT’s criterion.
Motivation and J. A. Schumpeter
Perhaps the simplest strategy that a person could adopt in evaluating a potential
signal is to pick a criterion location along the internal response axis. Whenever the
internal response is greater than this criterion the decision-maker responds “yes”
and a signal is said to be present, but whenever the internal response is less than
this criterion the decision is “no” and the individual passes on the potential signal.
The vertical lines in Fig. 3 indicate an example criterion. Figure 3 (top) indicates
the two possible outcomes when a signal exists (i.e. “hit” or “miss”) based upon
the location of the person’s decision criterion. Hits correspond to signal-plus-noise
Fig. 3. Decision Outcomes for Internal Response Probability of Occurrence Curves for
Noise-Alone and Signal-Plus-Noise.
Fig. 4. Effect of Shifting the Decision Criterion.
when the internal response is greater than (to the right of) the criterion. When the
internal response is below (to the left of) the criterion, a miss occurs. Figure 3
(bottom) indicates the two possible outcomes when a signal does not exist – either
a false alarm or a correct rejection – depending upon the location of the decision
criterion. False alarms correspond to noise-alone when the internal response is
greater than (to the right of) the criterion, and a correct rejection when the internal
response is below (to the left of) the criterion.
Suppose that an individual chooses a lax criterion (Fig. 4, top), so that the
response is “yes” to almost everything. That person will almost never miss a
signal when it is present and will therefore have a very high hit rate but more false
alarms as well. Thus, there is a clear cost to increasing the number of hits, and
that cost is paid in terms of false alarms. If the individual chooses a strict criterion
(Fig. 4, bottom) then the response is “no” to almost everything and therefore there
will rarely be a false alarm, but also many missed signals. There is no way for
a person to set the criterion to achieve only hits and no false alarms. Given the
uncertainty surrounding the decision, there is always overlap between the noise-
alone and signal-plus-noise curves, and it becomes inevitable that some mistakes
will be made. However, individuals have some say in the type of error they will
tolerate, as reflected by where they choose to locate their criterion. Scholars do
this through their choice of alpha values, which determines the acceptable trade-off
between type I and type II errors.
J. A. Schumpeter
The location of the criterion, or bias exhibited by the actor, is central to much of
the non-Austrian economic theory on entrepreneurship. Schumpeter (1934) and
Knight (1921), like the Austrians, took a behavioral approach to theorizing about
entrepreneurship, but instead of starting with exploitation and arguing that the
entrepreneur is defined by opportunity recognition (i.e. the Austrian approach),
these scholars sought to explore what was necessary in the exploitation portion of
the equation. In fact Schumpeter (1934) notes:
It is no part of [the entrepreneur’s] function to “find” or to “create” new possibilities. These are
always present, abundantly accumulated by all sorts of people. Often they are also generally
known and being discussed by scientific or literary writers. In other cases, there is nothing to
discover about them, because they are quite obvious. To take an example from political life, it
was not at all difficult to see how the social and political conditions of France at the time of
Louis XVI could have been improved so as to avoid a breakdown of the ancient regime. Plenty
of people as a matter of fact did see it. But nobody was in a position to do it. Now, it is this
“doing the thing,” without which possibilities are dead, of which the [entrepreneur’s] function
consists (p. 88).
Accordingly, the bearing of uncertainty emerged as a contender for the attribute

definitive of the entrepreneurial function and was embraced implicitly by Schum-
peter and explicitly by Knight. However, both argue that bearing uncertainty is
merely something that the entrepreneur must do either as a means of “innovating”
(as in Schumpeter’s theory) or as a means of “profiting” (as in Knight’s theory).
The theoretical attribute of being willing to bear uncertainty, however, is merely
a behavior and does not necessarily have anything to say about the motivation
for such behavior (a point made by Schumpeter prior to his own exposition into
the subject (1934, pp. 90–91)). Typically, economists seek to avoid transcending
from the “what” into the “why” of entrepreneurial activity and even Schumpeter
is apologetic before committing his own transgressions (p. 90), but in the end he
yields to temptation:
We shall finally try to round off our picture of the entrepreneur in the same manner in which
we always, in science as well as in practical life, try to understand human behavior, viz. by
analyzing the characteristic motives of his conduct. Any attempt to do this must of course meet
with all those objections against the economist’s intrusion into “psychology” which have been
made familiar by a long series of writers (p. 90).
So what does Professor Schumpeter have to say about the motivation behind en-
trepreneurial action? Quite a lot. Some right, some debatable, but all interesting.
For example,
Within given social circumstances and habits, most of what people do every day will appear to
them primarily from the point of view of duty carrying a social or a superhuman sanction. There
is very little of conscious rationality, still less of hedonism and of individual egoism about it,
and so much of it as may safely be said to exist is of comparatively recent growth. Nevertheless,
as long as we confine ourselves to the great outlines of constantly repeated economic action,
we may link it up with wants and the desire to satisfy them, on condition that we are careful
to recognize that economic motive so defined varies in intensity very much in time; that it is
society that shapes the particular desires we observe; that wants must be taken with reference
to the group which the individual thinks of when deciding his course of action – the family or
any of the group, smaller or larger than the family; that action does not promptly follow upon
desire but only more or less imperfectly corresponds to it; that the field of individual choice is
always, though in very different ways and to very different degrees, fenced in by social habits
or conventions and the like: it still remains broadly true that, within the circular flow, everyone
adapts himself to his environment so as to satisfy certain given wants – of himself or others –
as best he can. In all cases, the meaning of economic action is the satisfaction of wants in the
sense that there would be no economic action if there were no wants. In the case of the circular
flow, we may also think of satisfaction of wants as the normal motive.
Schumpeter focuses his subsequent discussion on enduring dispositions or “traits,”

which we believe is inconsistent with his own argument that the entrepreneur is a
function and should be discussed as such. Thus, instead of discussing motivation
in the same contextually specific manner in which he discussed the behavior, he
moves from transitory function to enduring personality. His use of “typical” as an
adjective describing the entrepreneur frequently indicates this shift in approach
from the conduct or behavior intrinsic to the function of the entrepreneur to a
speculation of the type of individual most likely to fill that function.
Looking back over the development of the field of entrepreneurship, it appears
that Schumpeter’s foray into motivation, coupled with this theoretical shift from
the transitory to the enduring, is possibly responsible for fostering early enthusiasm
in “traits” research by psychologists and management scholars. For example, re-
sponding to the previous passage, Schumpeter (1934) offers hypotheses regarding
entrepreneurial personality such as,
. . . the typical entrepreneur is more self-centered than other types, because he relies less than
they do on tradition and connection and because his characteristic task – theoretically as well
as historically – consists precisely in breaking up old, and creating new, tradition (pp. 91–92).
Experience teaches . . . that typical entrepreneurs retire from the arena only when and because
their strength is spent and they feel no longer equal to their task (p. 92).
. . . there is the dream and the will to found a private kingdom, usually, though not necessarily,
also a dynasty. . . . Closer analysis would lead to discovering an endless variety within this group
of motives, from spiritual ambition down to mere snobbery (p. 93).
Then there is the will to conquer: the impulse to fight, to prove oneself superior to others, to
succeed for the sake, not of the fruits of success, but of success itself (p. 93).
Finally, there is the joy of creating, of getting things done, or simply of exercising one’s energy
and ingenuity. . . . Our type seeks out difficulties, changes in order to change, delights in ventures
(pp. 93–94).
However, Schumpeter finally notes that these are not motives capable of discrimi-
nating entrepreneurs from non-entrepreneurs because these same motives “may in
principle be taken care of by other social arrangements not involving private gain
from economic innovation” (p. 94). Failure to heed this comment set the quest for
the distinctly entrepreneurial trait into motion. But far more damaging to the study
of the psychology of the entrepreneur is the failure to realize that motivation does
not have to be a study of personality traits. Rather, like behavior, motivation can
be transitory and theorized about in such a manner (e.g. see Higgins’ (1997) work
on Regulatory Focus Theory).
Regardless of why the entrepreneur is motivated to implement new combi-
nations, it is clear that the entrepreneur of Schumpeter’s (1934) theory has a
very lax criterion, meaning that the entrepreneur has a bias for the new over the
routine and therefore a willingness to bear the uncertainty intrinsic to all action,
and accentuated in novel action. Although Schumpeter (1934) preferred to stick
with description of entrepreneurial conduct, or the behavioral element of the
entrepreneurial function, he definitely recognized the existence of a process pre-
ceding this behavior, a process including motivation and worthy of deeper analysis.
He notes:
What other [motives] could be provided and how they could be made to work as well as the
“capitalistic” ones do, are questions which are beyond our theme. They are taken too lightly
by social reformers, and are altogether ignored by fiscal radicalism. But they are not insoluble,
and may be answered by detailed observation of the psychology of entrepreneurial activity, at
least for given time and places (p. 94).
F. H. Knight and Others
Schumpeter, however, was not the only economist who chose to describe the
behavior inherent to entrepreneurial action. Professor Frank H. Knight (as well
as, Austrian, Ludwig von Mises) also recognized that entrepreneurship required a
willingness to bear uncertainty. Knight delineated uncertainty from risk, arguing
that uncertainty had unknown probabilities, was inestimable, and therefore
uninsurable. Risk, in contrast, was none of these things. This distinction takes on
meaning in relation to the entrepreneurial function because Knight argued that
the entrepreneur receives his profit because of his or her willingness to bear an
uncertainty that others would not. This willingness allows for the achievement of
residuals not attributable to the three factors of land, labor, and capital. Accord-
ingly, the entrepreneurial function as visualized by Knight mandates a lax criterion,
which ensures the classification of a signal as an opportunity and the bearing
of uncertainty.
Uncertainty, and the judgment it necessitates, provides the foundation for most
of Knight’s theorizing regarding the function of the entrepreneur. Knight (1921)
points out “Any degree of effective exercise of judgment, or making decision, is
in a free society coupled with a corresponding degree of uncertainty-bearing, of
taking the responsibility for those decisions” (271). He expounds:
With uncertainty present, doing things, the actual execution of activity, becomes in a real sense
a secondary part of life; the primary problem or function is deciding what to do and how to do
it. The two most important characteristics of social organization brought about by the fact of
uncertainty have already been noticed. In the first place, goods are produced for a market, on
the basis of an entirely impersonal prediction of wants, not for the satisfaction of the wants of
the producers themselves. The producer takes the responsibility of forecasting the consumer’s
wants. In the second place, the work of forecasting and at the same time a large part of the
technological direction and control of production are still further concentrated upon a very
narrow class of the producers, and we meet a new economic functionary, the entrepreneur
(p. 268).
Given this argument, it becomes fairly simple to map Knight’s entrepreneur on

to SDT’s conceptual framework. After all, his theory already conceptualizes the
entrepreneur in terms of decision making. Because this decision concerns some-
thing unprecedented and unique, it requires the entrepreneur to exercise judgment
regarding whether the profit potential compensates him for the psychological cost
associated with bearing the uncertainty involved in its pursuit. Thus, uncertainty
and the willingness to bear uncertainty both contribute to judgment. Knight (1921)
explicates:
Uncertainty thus exerts a fourfold tendency to select men and specialize function: (1) an adapta-
tion of men to occupation on the basis of kind of knowledge and judgment; (2) a similar selection
on the basis of degree of foresight, for some lines of activity call for this endowment in a very
different degree from others; (3) a specialization within productive groups, the individuals with
superior managerial ability (foresight and capacity of ruling others) being placed in control of
the group and the others working under their direction; and (4) those with confidence in their
judgment and disposition to “back it up” in action specialize in risk-taking (p. 269).
It seems evident also that the system would not work at all if good judgment were not in fact
generally associated with confidence in one’s judgment on the part both of himself and others.
That is, men’s judgment of their own judgment and of others’ judgment as to both kind and
grade must in the large be much more right than wrong (p. 269).
The statement implies that a man’s judgment has, in an effective sense, a true or objective value
(pp. 269–270 fn).
In a noble effort, Knight’s theory encompasses many of the issues accentuated

by both the Austrians and Schumpeter. However, it, too, is behavioral in nature.
Even though Knight devotes a considerable amount of time and thought to the
concept of judgment, he discusses the location of the criterion merely in terms of
perceived profit potential. As for signals and the uncertainty surrounding them,
Knight discusses them more as a function of managerial need (i.e. forecasting
future sales) than as opportunities awaiting evaluation or exploitation.
In conclusion, for all his discussion regarding uncertainty and judgment,
Knight’s theory contemplates judgment primarily in terms of the location of the
criterion. He makes some acknowledgment to differences in knowledge but not in
reference to the discernment of opportunity. Rather, this knowledge is discussed
more in terms of explaining why uncertainty produces specialization within the
firm. For example, Knight argues that employees are promoted to management
upon proving the quality of their entrepreneurial judgment. That is, they not only
exhibit the foresight necessary to navigate uncertainty effectively, but also, they
possess the confidence to back it up with action, which requires the bearing of this
uncertainty. Thus, ascending the firm hierarchy is closely tied to a reputation for
specializing in making tough decisions, such as those requiring entrepreneurial
judgment.
Recently, several other economists have begun to explore determinants of the
location of the criterion. In particular, Baumol (1993a, b) and Casson (1995) have
begun to embrace the notion that the supply of entrepreneurs is not finite but rather
a function of environment and therefore capable of manipulation by policy makers
at the economic or organizational level. The argument is that it is the expected
payoff structure that determines whether individuals will seek to fulfill the
entrepreneurial role. Therefore, if making an organization more entrepreneurial
were the goal, then the means would involve increasing the pecuniary rewards
associated with entrepreneurial action. Casson (1995) takes this a step further and
ties it to business culture. Therefore, it seems that organizational commitment
to rewarding and expecting novel action is representative of what scholars
loosely refer to as an entrepreneurial culture and can take shape in the cogni-
tive and regulative mechanisms frequently discussed by institutional theorists
(Scott, 1995).
Although the motivation represented by the criterion is clearly an important

element of the decision to act entrepreneurially, it alone is incapable of predicting
whether entrepreneurial action will occur. After all, it takes the concomitant con-
sideration of belief (uncertainty) and desire (motivation) to derive entrepreneurial
action. Therefore, knowing the location of the criterion and just how willing to
bear uncertainty a person might be, does not guarantee that a signal will be per-
ceived or interpreted as an opportunity. Accordingly, we suggest the following
proposition:
Proposition 2. One’s belief (and underlying uncertainty) regarding the pres-

ence of a signal requires an evaluation. This evaluation is a function of desire
(motivation) such that the individual must value the expected payoff associated
with the successful action enough to prefer action and the possibility of com-
mitting an error of commission to inaction and the possibility of committing
an error omission. Therefore, increases in the payoff structure of action (rela-
tive to inaction) are positively correlated with the propensity for entrepreneurial
action.
In summary, SDT provides a means of examining a decision under uncertainty.

This decision requires an individual to classify an object, such as a signal, as
present or absent. Action is then dependent upon: (1) the degree of uncertainty
underlying the belief of whether the signal is present; (2) the desirability of
acting on that signal as expressed through the individual’s motivation and
his or her strategic inclination in coping with that uncertainty; and (3) the
necessary environmental conditions. The underlying uncertainty or “noise” is
a function of the quantity and quality of information, frequently referred to
by scholars as perception or interpretation and expressed as both the distance
between means and the spread of the distributions. The strategic inclination of
the decision-maker is represented by the location of the individual’s decision
criterion.
ENTREPRENEURIAL ACTION AS SYNTHESIS

We will now demonstrate how SDT allows the reconciliation of these economic
theories of the entrepreneur and how the concomitant consideration of the
constructs of belief (uncertainty) and desire (motivation) explain the likelihood
of entrepreneurial action. As a means of achieving this end, it is beneficial to
introduce a tool called the ROC (Relative Operating Characteristic) curve used
by SDT to convey graphically both constructs simultaneously.
The ROC Curve
ROC curves (Fig. 5) capture both a decision-maker’s decision bias and ability
to discriminate a signal from noise. The curves are plotted with the hit rate on
the vertical axis and the false alarm rate on the horizontal axis. If the criterion
is strict, then both the false alarm rate and the hit rate will be very low. As the
criterion becomes more lax, the hit rate and the false alarm rate both increase.
Therefore, the ROC is comprised of a number of points, each of which reflects a
different decision criterion. As one moves from left to right along the curve, one
is witnessing the effect of making the criterion more lax. Also, for any reasonable
choice of criterion, the hit rate is always larger than the false alarm rate. As a
result, the ROC curve is bowed upward. A straight line reflects a pure chance
event. The ROC curve characterizes the choices available to people. They may set
their criterion anywhere, but any choice that they make will result in a hit and false
alarm rate somewhere on the ROC curve.
Theoretical Reconciliation of the Theory of the Entrepreneur

Using SDT’s ROC Curve
Although we have applied various elements of the SDT framework to economic

theories of the entrepreneur, the ROC curve allows synthesis within one diagram
of the insights of these economists while simultaneously exposing differences
and potential limitations of their theories. Because the theories of Schumpeter
(1934), Kirzner (1973), and Knight (1921) are the most original of the economic
theories of the entrepreneur and the most influential within both the economics
and management literature today, we will use them for illustrative purposes.
Schumpeter’s innovator and the ROC curve. The uncertainty faced by Schum-
peter’s entrepreneur is high for all those who would contemplate action. In
other words, no one possesses knowledge that allows for the perception of less
uncertainty than everyone else because everyone is considering novel, radical
innovations in the form of new combinations (1934, p. 66). Schumpeter does
recognize individual differences in the ability to generate new combinations, but
as shown earlier he emphasizes that “doing” is what delineates entrepreneurs from
non-entrepreneurs. This assumption prevents explicit recognition of perceptual
differences amongst market actors and attributes differences in the likelihood of
entrepreneurial action primarily to differences in entrepreneurial motivation. In
effect, Schumpeter’s (1934) theoretical conceptualization views various actors as
different points on the same ROC curve (see the d = 1 curve for an example).
Who will act entrepreneurially, therefore, is merely a question of who sets their
166
JEFFERY S. MCMULLEN AND DEAN A. SHEPHERD
Fig. 5. The ROC (Relative Operating Characteristic) Curve.
criterion farthest to the right. This accounts for why Schumpeter’s entrepreneur
must be an “adventurer,” “empire-builder,” “leader,” or any one of a number of
other terms embracing the notion of assuming exceptional levels of uncertainty.7
What the assumption fails to account for is why a number of “real world” en-
trepreneurs are often risk averse individuals who are far from adventurous gamblers
but instead are conservative creators of wealth who act only when the “perfect”
opportunity presents itself. In other words, Schumpeter fails to account adequately
for “low-levels” of entrepreneurship such as starting service firms. Although these
individuals are dismissed as not truly being entrepreneurs (i.e. their actions are
not radically innovative enough to qualify as entrepreneurial), it would seem that
this is a distinction that arises from conceptual limitations rather than theoretical
justification.
Kirzner’s alert arbitrageur and the ROC curve. Entrepreneurial motivation
becomes a given in Kirzner’s theory, while the emphasis is placed on alertness
to entrepreneurial opportunities (1973). In essence, all of the individuals con-
templated by Kirzner are points at the far right side of an ROC curve. What
differentiates the individual that acts entrepreneurially from those that do not is
the quality of his or her perception. In other words, Kirzner’s entrepreneur is an
individual with a d of four while his or her peers are on the ROC curve at a d
of one. To make this point, Kirzner focuses upon an arbitrage opportunity where
uncertainty is nearly abolished through the individual’s alert realization while
walking down a street that an apple can be bought for $5 and sold to baker of
apple pies a block later for $6. This means that at the moment of opportunity
recognition, the entrepreneur is exercising extreme levels of knowledge in which
uncertainty is absent and the probability of occurrence curves do not overlap.
Although Kirzner has come under criticism from fellow Austrian economists
for eliminating uncertainty from the equation (see Kirzner, 1982 for criticism
and response), in all fairness it should be noted that Kirzner did this to make a
point. He sought to eliminate uncertainty to show that opportunity is more than
mere speculation and that entrepreneurship requires the individual to “recognize”
that an opportunity for profit does exist (Kirzner, 1973, p. 86). However, because
there is no way to eliminate time from the equation, uncertainty is still present
even in arbitrage, and this “recognition” remains merely a highly probabilistic
“guess” or well justified belief. Kirzner’s efforts crystallize the importance and
subjectivity of perception but at the expense of the development of entrepreneurial
motivation. However, when the probability of occurrence curves overlap heavily,
the importance of motivation becomes difficult to ignore – Schumpeter’s work
is testimony to this. What is important, however, is that a second pillar of en-
trepreneurial action is accentuated, a pillar which is communicable through SDT’s
framework.
Knight’s (or Mises’) uncertainty bearer and the ROC curve. Both Knight
(1921) and Mises (1949) emphasize the role of uncertainty in the economy and
both theorists consider the entrepreneur to be the bearer of this uncertainty.
Although there is no evidence that Mises was directly influenced by Knight, his
explanation of the entrepreneurial function is not substantially different from
Knight’s (Hebert & Link, 1988, p. 130), and therefore no distinction will be
made when discussing this profile. Both these theorists conceptually recognize
the overlap of the probability of occurrence curves and the existence of a decision
criterion. Therefore, they sufficiently embrace the concept of uncertainty, and
they recognize that entrepreneurs must be willing to tolerate this uncertainty to
act. However, because both are concerned with economic behavior as it relates to
their explanations of how the economic system works, neither examine why the
decision criterion is located where it is.
This observation is not limited to the efforts of Knight and Mises. As mentioned
before, both Schumpeter and Kirzner also fail to contemplate motivation other
than cursorily because they believe such study to be the domain of psychology and
unnecessary to the explanation of how the system operates. Ironically, though, each
theory conceptualizes the entrepreneur as an economic actor who uses judgment to
deal with novel and complex problems. Casson (2002) makes a similar observation:
Judgment is a capacity for making a successful decision when no obviously correct model
or decision rule is available or when relevant data is unreliable or incomplete. Cantillon’s en-
trepreneur needs judgment to speculate on future price movements, while Knight’s entrepreneur
requires judgment because he deals in situations that are unprecedented and unique. Schum-
peter’s entrepreneur needs judgment to deal with the novel situations connected with innovation
(p. 4).
Although judgment is central to entrepreneurship, it is given insufficient attention

because of the economists’ focus upon the behavior of the entrepreneur. If the fo-
cus of the theory is upon explaining why the economy operates as it does, and the
entrepreneurial function completes this explanation, most economic theorists con-
sider profit to be an adequate answer to the question of why a particular individual
steps into this role and fulfills the function. Even for Schumpeter, the attributes
discussed are intended to be in relation to those required by the function, not by
the individual that decides to fulfill that function.
This introduces an interesting opportunity to bridge the gap of the study of
the entrepreneur as function within the economy with the study of entrepreneur as
personality. Unlike economists, management scholars are typically concerned with
the actor rather than an actor. In fact, the concept of strategic management can be
contemplated as an attempt to understand why a firm was first to match the desired
characteristics of the current economic system so that one can advise the firm on
how best to ensure that they fill this function in a perpetually changing future of
never-ending evolutionary market process (see Rumelt, 1979, pp. 197–198).
At the heart of this dilemma is motivation. Because entrepreneurship can only
occur if one is willing to act, and one can only be willing to act if he or she is
willing to tolerate the potential of making a mistake, it appears that a key to either
enacting the future or positioning one’s self appropriately is through discovering
the composition of the constructs of belief (uncertainty) and desire (motivation)
and developing these accordingly. Only by recognizing that both constructs to-
gether create entrepreneurial action can one realize that different compositions
can produce identical behavior. Thus,
Proposition 3. Entrepreneurial action arises from a belief-desire configuration

(or “intention”). Conducive environmental conditions are then required to allow
this intention to be converted into behavior. Belief is a function of one’s certainty
regarding the presence or absence of a signal, whereas desire is a function of
how personally motivating the belief is.
DISCUSSION
We believe that an SDT framework provides a basis for extending the theory of
the entrepreneur yet there are still a number of important issues that need to be
addressed, including debate over the nature of opportunities and challenges in
empirically testing this chapter’s propositions.
The “Nature” of the Signal
Perhaps the most controversial element in this chapter is the “nature” of the
signal. This speaks to a potentially divisive question concerning the philosophy
of social science, specifically, one of ontology. Within the ever-increasing circle
of entrepreneurship researchers, two camps appear to be emerging. First, there
are those who view opportunities as “objects” possessing an existence regardless
of whether an entrepreneur identifies and exploits them (Shane & Venkataraman,
2000, p. 220). For these individuals, discussion of a signal as representative of an
“objective” opportunity is non-threatening and consistent with their worldview.
However, there is a second camp whose argument is equally persuasive. These
scholars argue that opportunities are often enacted phenomena with no existence
independent of the individuals who envision and/or exploit them (Gartner et al.,
working paper, p. 4). For these scholars, discussion of a signal as representative
of an “objective” opportunity undermines their worldview. They fear that the

language that accompanies this realist ontology is reflective of an artificially
constructed framework super-imposed upon the phenomenon by scholars to help
them make sense of it (p. 3). They argue that the consequence of such a framework
is that it obfuscates scholarly understanding of the phenomenon as it actually
occurs. For example, by using words such as “discovery,” which they argue are
not used by people when confronting the phenomenon in its natural state, scholars
distort findings by introducing their own conceptions of the phenomenon to
be explained.
Although this debate is integral to “good” science, it remains diluted as a discus-
sion of the nature of opportunity and unrecognized for what it is, a philosophical
debate about the nature of the social world and of human action (McMullen &
Corbett, 2003). However, recognizing the foundation of the debate allows one to
address it. There are two ways to tackle this issue. The first is pragmatic and satis-
factory for applying the SDT framework using experimental methods. The second
is theoretical and must be discussed to extend the framework to the study of the
phenomenon within natural settings.
The pragmatic solution to SDT’s conceptualization of the nature of the signal.
Perhaps the easiest way to address the philosophical nature of the signal is to avoid
it. Arguably, this is precisely what many psychologists, such as Simon, Tversky and
Kahneman, and Giegerenzer, have done. Using experimental methods or controlled
tasks, the researcher is able to observe individual behavior within an “objective,”
somewhat microcosmic, reality. For example, Simon’s work using the game of
chess or Tversky and Kahneman’s framing experiments, both examine judgment
and decision-making in regard to an “objective” answer (i.e. one that is logically
right or wrong). Historically, the quality of the individual’s decision has been
determined by equating “good” judgment with “rational” judgment as determined
by statistics, or probability theory (Hastie, 2001, p. 660). Accordingly, these tasks
are not subject to multiple interpretations. In essence, the item to be judged in such
a study is similar to an auditory signal, which the researcher controls and which
he or she can be certain either exists or does not exist. Moreover, motivation is a
non-issue because the motive of all participants, i.e. to make the “right” decisions,
is known by the researchers.
This same approach can be used to apply the SDT framework to the decision
of whether to engage in entrepreneurial action. Because one can control within an
experiment the amount of information presented to the individual, the researcher
can control the distance between the means in such a way as to ensure substantial
distance or close proximity. Thus, regardless of whether an “opportunity” in
the real world ever objectively exists, one can create an experiment in which an
opportunistic situation does undoubtedly exist (i.e. the potential for arbitrage).
However, whether a situation can be classified as an opportunity if an individual

recognizes it and deems it unworthy of exploitation, and whether an arbitrage
opportunity is an “entrepreneurial” opportunity, are both important issues to
which we will return in a moment.
On a final note, we wish to point out that SDT can also be used to examine
a change in someone’s preference regardless of “accuracy.” That is, SDT can
determine which cues under which conditions influence one to be more or less
likely to act regardless of whether that action is or is not “wise.” Therefore, whether
SDT is best used by attempting to address “accuracy” is also debatable. What we do
wish to reemphasize is that, through controlled experiments, the distance between
the means (and therefore the “objective existence” of the signal) can be determined
without necessarily taking a philosophical stance regarding the objectiveness of
the social world.
The theoretical solution to SDT’s conceptualization of the nature of the signal.
The presence or absence of the signal poses the greatest challenge for the use
of SDT when conceptualizing entrepreneurship in the “real world.” However, the
previous argument provides some potentially valuable insight into how several
issues might be addressed. First, it begs the question, “Is there a difference between
opportunity for someone and opportunity for a particular actor, and if so, how
would this relate to the philosophical nature of the signal?” Because economic
theorists seek to explain the mechanics of the system, they concern themselves
primarily with discussion of opportunity as “opportunity for someone.” Although
this implies an “objectiveness” to the nature of the opportunity, it does not imply
that it is an opportunity for everyone that sees it. For example, Kirzner (1999)
states:
. . . the seer who can imagine how the world might be improved by a radical innovation, but who
lacks the needed boldness and initiative (to shoulder the risks which he would have to assume
in order actually to introduce this innovation to reality in a world fraught with uncertainties) –
has in fact not yet really discovered an available, attractive opportunity for innovation. If he has
not seen that opportunity in so shining a light that it drives him to its implementation in spite
of the jeering skepticism of others, and in spite of the possibility of its ultimate failure – then
he has not really “seen” that opportunity (p. 13).
Thus, the situation is deemed feasible but not desirable. Alternatively, the presence
of a signal could mean only that there is something within the environment that was
not there before – for any one of a host of reasons (i.e. a change in technological
abilities, a change in consumer preferences, etc.) – and that for someone possessing
the right type of knowledge and desire, an opportunity exists.
Two levels are at work here. First, there is a potentially objective stage in that an
opportunity for someone (i.e. a signal) exists owing to exogenous factors. Ignoring
debate of whether this is an opportunity, one could concede that something (i.e. a
technology) now exists that did not exist before and that this technology enables
new commercial possibilities. Second, there is an interpretive stage, in which there
is an individual assessment of whether the opportunity for someone is an opportu-
nity for him or her. To answer this question one must exercise judgment regarding
whether a stimulus (i.e. signal) could be effectively exploited by him or her (to be
discussed in greater detail in the next section). At this point, it seems possible for
social realists and social constructivists to coexist peacefully. Social realists would
discuss this stage in terms of perception, (i.e. Who will “accurately” recognize the
potential of this technology, and why?) whereas social constructivists would dis-
cuss the stage in terms of the attribution of meaning or sensemaking (i.e. Will the
actor notice this new technology, and what will it mean to him or her? How does
he or she come to make sense of it in such a way as to deem it an opportunity, a
threat, or merely a distraction?).
One solution is that the general definition of signal, i.e. current information
that changes one’s belief about the value of a future state (Fiet, 1996), could be
defined more narrowly for examination in natural settings, i.e. as a technological
invention that allows for profit possibilities generally thought to be impossible or
cost prohibitive prior to its existence (see Shane, 2000, for an example). Perhaps,
this approach merely represents a sheepish sidestepping of philosophical concerns
by shifting the nature of the question from “what is entrepreneurial discovery?” to
“what is scientific discovery?” but given that philosophers have debated the nature
of existence for thousands of years, this will have to do for the time being.
Therefore, it is our assumption that an objective reality exists at least in relation
to what is and is not currently technologically possible. This position, however,
implies nothing regarding the nature of the social world. For example, Hebert and
Link (1988, pp. 121–123) point out that even G. L. S. Shackle, a radical subjectivist,
recognizes limitations on what is possible. In fact, it is Shackle’s conception of
bounded uncertainty that we wish to embrace in relation to the strength of the
signal (or distance between the means):
If a man can set no bounds to what may follow upon any act of his own, he evidently looks
upon himself as powerless to affect the course of events. There are, indeed, two views of history
which would compel him to acknowledge his own powerlessness. If history is determinate, he
cannot alter its predestinate course. If history is anarchy and randomness, he cannot modify
this randomness nor mitigate the orderlessness of events. It is only a bounded uncertainty that
will permit him to act creatively (1966, p. 86).
Therefore, it seems that there are limitations on that which is possible at any
moment in time. But, just as time changes, so do these limitations on what is
possible. Imagination perpetually tests these limitations, sometimes deeming
them unsatisfactorily prohibitive and, consequently, action ensues. Other times
they appear insurmountable and inaction is believed to be the wise choice. But,
regardless of the judgment exercised and the subsequent decision made, life is full
of stimuli that direct attention, some of which are compelling to many, like the ob-
vious possibilities that would accompany the creation of a teleporter, and some of
which are compelling to few, like the slowly developed possibilities of the internet
prior to the creation of web browsers. In both cases, a signal exists, but whether
and how this signal is recognized is the domain of Signal Detection Theory’s
uncertainty element.
METHODOLOGICAL POSSIBILITIES FOR

TESTING THE FRAMEWORK
To investigate empirically the possibilities arising from this framework, scholars
must use a research method that can either simultaneously test the information
about the signal (strength and quality) and motivation (in terms of the level of
preference for an error of omission relative to an error of commission) on en-
trepreneurial action or be able to test one of the constructs while controlling for
the other. SDT has been primarily tested using experiments. Experiments provide
researchers the opportunity to control and manipulate the system and to capture the
decision-maker’s opportunity assessment and willingness to act. For example, the
quantity of information can be increased about a signal to decrease an individual’s
uncertainty about whether a signal represents an opportunity.
In laboratory settings, motivation has typically been operationalized by manip-
ulating the financial rewards associated with the cells of the payoff matrix, i.e.
varying the costs associated with an error of omission and those for an error of
commission. For entrepreneurship research, these costs would represent the ex-
pected costs of missing a good opportunity (e.g. from loss of market share) and
the expected costs of false alarm (e.g. the investments in new equipment and/or
loss of market reputation). These examples represent motivating cues from the
environment; however, as we point out above individual differences are likely to
be important. Operationalizations of motivation that captures differences between
individuals are likely to arise from the choice of motivation theory. For example,
regulatory focus theory offers an existing instrument to capture an individual’s
preference for an error of omission over an error of commission.
Experimental methods are typically high on internal validity yet raise questions
of external validity. Testing our framework in the field using, for example, a survey
methodology will complement research on entrepreneurial action that relies on
experiments by offering greater external validity although there are a number of
challenges in doing so. The philosophical question about the nature of an opportu-
nity is highlighted in the section above. It obviously has implications for empirical
investigations. A survey methodology could capture an individual’s perception

of his/her stock of knowledge through measures of self-efficacy adapted to the
task of discriminating whether a signal exists or not and the task of effectively
exploiting opportunities. A survey could also include existing measures of human
capital to capture an individual’s “actual” stock of knowledge, especially as it
relates to interpreting signals from the environment and in exploiting opportunities
effectively in the market place. For motivation, items from existing measures of
regulatory focus could be used to capture an individual’s predilection towards
entrepreneurial action. These existing measures could be adapted to capture the
individual’s perception of environmental cues and their motivating influence.
Alternatively, scholars could capture the decision maker’s subjective assessments
of the values in each of the pay-off cells and or more directly ask them to state
what they believe are the costs of omission and costs of commission.
Although a survey methodology has a number of limitations in capturing data on
decision-making (e.g. self reporting and retrospective reporting biases (Shepherd
& Zacharakis, 1997)), it can collect data on the tangible outcomes of those deci-
sions. For example, the number of novel products and processes introduced; the
number of new market segments or new geographical regions entered; the number
of prototypes being tested; the number of new patents generated; etc. Ideally these
measures would be triangulated with objective secondary data.
Whether conducting empirical research in the laboratory or in the field on the
system’s influence on the entrepreneurial action of individuals or firms, there are a
number of challenges facing scholars who wish to test empirically the framework
proposed in this chapter. Those that are able to meet these challenges will make
an important contribution to the field of entrepreneurship and likely contribute to
the literature on the psychology of action.
CONCLUSION
We hope to have conveyed the potential benefits associated with applying a Signal
Detection framework to the theory of the entrepreneur. By recognizing that the
entrepreneur of economic theory is a function and not a personality, we have argued
that these theories are as applicable to the firm as they are the economy. However,
because of their behavioral nature, they merely describe what it is that entrepreneurs
do to ensure the vitality of the system. For these theories to become prescriptive
and helpful to firm managers and policy makers, the antecedents to these behaviors
must be understood such that managers can either identify the right people to
hire or know how to manipulate the environment in such a way as to induce the
desired behavior. We hope to have shown that SDT enables rigorous theoretical
conceptualization and empirical investigation of these antecedents within the very

framework capable of reconciling the many theoretically identified behaviors that
constitute dimensions of entrepreneurial action.
Using this SDT framework, we have illustrated that the decision to pursue op-
portunity requires one to recognize a signal and classify it as both feasible and
desirable. Because feasibility is a belief possessing varying degrees of uncertainty
regarding whether a signal exists, and because desirability represents an evalua-
tion of whether the payoff expected is worth the psychological (and other related)
costs that would be expended in its pursuit, it appears that the decision to act
entrepreneurially not only requires judgment but also that it is a member of the
familiar expectancy-value (belief-desire) models common to both judgment and
decision making research (Hastie, 2001) and action theory (Greve, 2001).
This observation suggests that “opportunity” and “action” are both concepts that
require concomitant consideration of belief (uncertainty) and desire (motivation).
However, our application of SDT to the better-known economic theories of the
entrepreneur has exposed their reliance upon one construct or the other. This
not only impairs scholarly understanding of entrepreneurial judgment, it also
suggests that some explanations of why the economic system works may be
incomplete. For example, it seems that Austrians like Hayek who focus upon
knowledge asymmetries as a primary explanation of why new firms emerge may
have identified only half of the puzzle. If one shares the view that knowledge
asymmetry is a probabilistic approach to explaining firm emergence then it seems
that a second probability distribution must also be acknowledged, one regarding
desire/motivation. SDT suggests that it is not enough merely to know that profit is
possible, one must also want to pursue it. This suggests a slightly more complex
foundation for an entrepreneurial theory of the firm.
In the end, we hope to have “alerted” the reader to the theoretical and empirical
benefits of applying SDT to economic theories of the entrepreneur. Given that
entrepreneurship often seems to be an elusive concept incapable, or at least uncon-
ducive, to rigorous theorizing and empirical investigation, we feel confident that
the reader will share our enthusiasm in regard to the potential that SDT presents
in advancing scholarship in the emerging field of entrepreneurship.
NOTES
1. The fact that economists share this social realist ontological perspective is often
obfuscated by labels such as “subjectivist” that are frequently embraced by “Austrian”
economists and meant to distinguish them from Neo-classical economists. Although the
term “subjectivist” would seem to suggest social constructivist sympathies, such is not
the case. The subjectivism referred to by leading Austrian theorists, such as Ludwig von
Mises or Israel Kirzner, is not in reference to ontology but rather epistemology, or the
theory of knowledge. Although the “subjectivist” distinction may be helpful in delineating
“Austrians” from Neo-classical economists, who build theories around individuals capable
of objectively interpreting (making purely rational choices in) this objective reality, it is
misleading. These Austrian economists are indeed referring to different interpretations
when they use the term “subjectivism,” but these different interpretations are in reference
to epistemological limitations suffered to a greater or lesser extent by individuals within an
economy who are attempting to interpret an objective reality accurately (Addleson, 1995).
Therefore, “Austrian” economists may not share the same epistemological stances as more
“objective” Neo-classicists, but they still share the worldview that there is an objective
reality that is more or less accurately depicted by certain members of the economy.
2. It should be noted that the core action components (i.e. “the attempt to profit”) were
augmented by one “qualifier” at a time and only when deemed absolutely necessary to
delineate “entrepreneurial” from potential substitutes. The logic behind this approach is
as follows: if “entrepreneurial” is not distinguishable from possible synonyms, such as
“innovative” or “creative,” then it would seem that critics who suggest that entrepreneurship
does not constitute a distinct scholarly domain and is merely a context regarding new
ventures would be justified in their argument. Although it took a number of qualifying
phrases and clauses to derive our definition, it does appear that “entrepreneurial” is unique
and conceptually distinguishable from rival adjectives. Moreover, we wish to point out that
the “ship” in “entrepreneurship” suggests that entrepreneurship is an activity in much the
same spirit that “leadership” is an activity. Therefore, the attempt to define the adjective
“entrepreneurial” rather than the nouns, “entrepreneurship” or “entrepreneur,” is not only
easier to do in the abstract, it is also logically advantageous for describing a behavior that
is present to greater or lesser extents owing to its inherently transitory nature (Carroll &
Mosakowski, 1987).
3. Note that these decisions involve a signal not an opportunity. Although we assume
the objectivity of the signal, we do not make the same assumption regarding opportunity.
The difference between the concepts, we argue, lies in the valuation process intrinsic to the
decision to act. In other words, an opportunity can only be said to exist once the individual
attributes a signal value. This happens as a result of imagining to a greater or lesser extent
the payoff of each possible quadrant. Moreover, this valuation contains two components that
may take only nanoseconds to occur: (1) some attempt at an objective calculation; and (2) a
subjective evaluation of how motivating the first calculation is to the decision maker. Should
this process produce a decision to act, then an opportunity is believed to exist. Whether this
belief corresponds with a future reality is another matter – one of outcome. Therefore,
judgment is something one exercises in the decision of whether to act, but judgment is also
something classified as “good” or “bad,” depending upon the outcome of that decision. It
is the first form of judgment with which this paper is primarily concerned.
4. Although the term judgment is frequently used in exclusive reference to the quality of
the process used to derive an answer to the first question, i.e. whether a signal does or does
not exist, we wish to point out that the concept is equally applicable to the second question,
i.e. whether the signal is deemed worthy of action. If the concept of judgment refers to
how closely the future reflects people’s present beliefs about it, then it would be equally
applicable to questions of a motivational nature as well. For example, if one applies this
definition of judgment, then to discriminate a signal accurately and to calculate that signal’s
payoff accurately does not mean “good” judgment has been exercised unless that action
also meets the individual’s belief regarding the subjective valuation criteria. Barnard (1938)
makes a similar observation in his discussion of the difference between effectiveness and
efficiency in which he argues that effectiveness refers to “what” to do, whereas efficiency
refers to “why” one does it. If one acts and finds that “the why” is not satisfied, then a
discrepancy between a future reality and present belief has occurred suggesting that “good”
judgment has not been exercised. Therefore, we argue that, in reference to the decision of
“whether to act,” judgment is as applicable to the motivational decision of “why to act” as
it is to the cognitive decision of “what to do.”
5. To capture a complete description of how discriminable the signal is from no signal,
the most widely used measure is called d-prime (d ). The following formula is provided to
capture both the separation and the spread: d = separation/spread. This number, d , is an
estimate of the strength of the signal. Its primary virtue, and the reason that it is so widely
used, is that its value does not depend upon the criterion the subject is adopting. Instead, it
is a true, objective measure of the internal response as captured by the situation.
6. Additionally, it is questionable whether the term “epistemology” is appropriate any-
more. Because epistemology traditionally refers to a theory of knowledge grounded in the
belief that an objective reality exists, some argue that, once this ontological assumption is
replaced with hermeneutics or phenomenological philosophical paradigms, discussions of
“epistemology” should cease (see Addleson, 1995 for an excellent articulation of such a
position).
7. It should be noted that both Atkinson and McClelland developed models of Need
for Achievement that resembled many of the arguments made by Schumpeter. In fact,
the application of McClelland’s work to entrepreneurs was inspired by Schumpeter and
constitutes one of the first rigorous psychological forays into entrepreneurship. Sharing a
functionalist bent, these works are not contentious of the framework we have presented.
Rather, they merely take a more prescriptive approach focused more upon encouraging
people to fill the role identified by more descriptive Economic theories of the Entrepreneur.
They can be incorporated into the motivational element of the SDT framework just as
Schumpeter’s description of the entrepreneur as an innovator can be incorporated. Although
they broach subjects such as how some people will find more opportunities than others, they
are primarily concerned with how one can be encouraged to bear the uncertainty intrinsic
to entrepreneurship.
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A TRANSACTION COGNITION
THEORY OF GLOBAL
ENTREPRENEURSHIP
Ronald K. Mitchell
ABSTRACT
Global entrepreneurship may be defined to be the creation of new,

value-adding transactions or transaction streams anywhere on the globe.
The objective of this chapter is to present and examine a theory of global
entrepreneurship. At the World Economic Forum held in Davos, Switzerland,
in January 1999, UN Secretary General Kofi Annan called for global en-
trepreneurship to meet the needs of the disadvantaged and the requirements
of future generations. This chapter first presents a transaction cognition
theory of global entrepreneurship that is intended as a path for research that
responds to this call. Second, this chapter examines the theory from three
critical viewpoints: (1) capability for explanation; (2) theoretical and oper-
ational utility; and (3) verifiability through the logic of scientific inference,
and presents likely propositions that are surfaced by the analysis. Finally in
this chapter, some of the likely implications of this theory within the context of
globalization are discussed.
INTRODUCTION
It has been suggested that global entrepreneurship is: the creation of new, value-
adding transactions or transaction streams anywhere on the globe (Mitchell,

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06007-0
181
182 RONALD K. MITCHELL
Smith, Morse, Seawright, Peredo & McKenzie, 2002). Until it was understood
within the scholarly community that a new global economy had emerged
(Friedman, 2000), traditional entrepreneurship theory – especially in the West –
focused on such definitions of entrepreneurship as “the creation of new ventures”
(Low & MacMillan, 1988) and “the pursuit of opportunity without regard to
resources currently controlled” (Stevenson & Jarillo, 1990). Questions have
arisen within the global scholarly community about how such Western definitions
apply in the global setting (Busenitz & Lau, 1996; Hofstede, 1994; McDougall &
Oviatt, 1997). Entrepreneurship scholars throughout the world are reaching the
inescapable conclusion that, with the globalization of the world’s economy, they
also need to globalize entrepreneurship theory (McDougall & Oviatt, 2000).
In this chapter I explain how global entrepreneurs use planning, promise and
competition cognitions to organize exchange relationships that utilize the imper-
fections inherent in market systems to create new value. It appears to be probable
that this process is a cross-border phenomenon, and that it occurs regardless of
culture or version of the market system (see, e.g. Mitchell, Smith, Seawright and
Morse, 2000; Mitchell et al., 2002). Accordingly, further development of these
ideas might provide a foundation for the globalization of entrepreneurship theory.
This two-section chapter presents a transaction cognition theory of global
entrepreneurship that is intended to help to open a path for globalized en-
trepreneurship research. In the first section, I provide a brief summary of
transaction cognition theory, which suggests a relationship between transaction
cognitions – mental models guiding certain economic behaviors – and the
success of transactions. In the second section, I explore the implications of this
theory for an experimental science of global entrepreneurship, using concepts
from scholars who have offered standards for assessing philosophy of science
implications in theory development (Freeman, 1986; Kuhn, 1970; Popper, 1979;
Stinchcombe, 1968). The purpose of this second section is, further, to establish a
sound foundation for research, teaching, and practice in global entrepreneurship,
and to present likely propositions that arise from the analysis.
SECTION 1: A THEORY OF GLOBAL

ENTREPRENEURSHIP
Transaction cognition theory (TCT) is derived from a fundamental model of
transactions using principles from cognitive science and transaction cost economic
(TCE) theory. In this section of the chapter, I explain how transaction cognition
theory provides the foundation for a working definition of global entrepreneurship
that itself “crosses borders” (McDougall & Oviatt, 1997, p. 293).
A Transaction Cognition Theory of Global Entrepreneurship 183
Transaction cognition theory decomposes a transaction into its three basic

elements: an individual, other persons, and the work. According to this theory,
variability in human performance can be attributed to variability in cognitions
related to these elements of a transaction. In particular, bounded rationality is a
source of variability in cognitions related to the individual who is creating the
work; opportunism has its impact due to cognitions that occur because of the
presence in the transaction of other persons who are using the work; and work
specificity has its impact on cognitions related to the work itself. The exact link
of these cognitions to performance by and large follows the lines suggested by
Williamson (1975, 1985, 1991, 1996; Schure, 2001 personal communication).
As is described in more detail elsewhere (Mitchell, 2001b), the path that I have
followed to develop a transaction-cognition-based foundation for studying global
entrepreneurship follows a direction suggested by Arrow (1969) who drew atten-
tion to a parallel between physical systems and economic systems. Arrow (1969,
p. 48) asserted that “transaction costs” are the economic equivalent of friction in
physical systems. With this suggestion as a starting point for the development of a
theoretical model of global entrepreneurship, I have asked two relevant questions:
What model in physical systems is sufficiently basic that it crosses borders? and
Is there a comparable socioeconomic structure?
Through discussions in various meetings with colleagues from around the globe,
I have identified a suitable exemplar in answer to the first question. I find common
agreement that the planetary model of the atom is a physical system-model that
is sufficiently basic that it crosses borders. This being the case, one can then
ask: what is the equivalent, in economic systems, to the planetary model-atom
in physical systems? Figure 1 illustrates an answer that provides a basis for a
model of global entrepreneurship. It is a socioeconomic system-model that also
appears to be basic enough to cross borders: both geographical and cultural. The
transaction, as represented in this model, is the basic unit of analysis.
However, in pursuing the physical/economic analogy further, one encounters
a second standard that must also be satisfied: The economic model suggested
must correspond to socioeconomic laws that also cross borders. Transaction cost
economic theory suggests such principles.
Arrow (1969, p. 48) defined transaction costs to be the costs of running an
economic system. Notice that this definition does not appear to be limited by
any particular borders, or to be confined to any particular economic system
within such borders. The notion of transaction costs as defined by Arrow is
useful to us then, because regardless of the base economic system considered,
it enables us to specify the factors that cause socioeconomic costs – the (human
nature-introduced) features of an economic environment that (due to the social
Fig. 1. The Elements of a Basic Transaction.
aspect) are not perfect. Transaction costs in social systems are thus thought to be
the equivalent of friction in physical systems (Williamson, 1985, p. 19). We can
then reason that if one can similarly relate the manner in which transaction costs
are used to achieve results in economic systems to the way that friction is used
to achieve results in physical systems, principles and laws that cross borders can
thereby be identified (Mitchell, 2001b).
Williamson’s (1975, 1985) TCE approach to understanding the effects of
transaction costs and the TCT approach differ fundamentally1 in at least one
respect (Schure, 2001, personal communication). Williamson (1985) stressed that
absences of bounded rationality, opportunism, and asset specificity have differing
impacts on the contracting arrangements of agents. For example, when bounded
rationality is absent (agents are perfectly rational), the contracting process greatly
relies on planning (1985, p. 31). In this case, hierarchies (firms) are likely to
govern transactions because planning is “cheap” and brings transaction costs
down. Another example: when the asset to be traded in the transaction is not
specific, low transaction costs are achieved by competition. A market transaction
occurs with no need for the firm. Williamson therefore claimed that institutions
(markets and hierarchies) arise to minimize transaction costs.
By way of contrast, the assumption in TCT is that different individuals have
different levels of planning, promise, and competition skills at a given time
(though these skill levels can change over time). Bad planning skills lead to
high transaction costs, especially in an environment that is characterized by
opportunism and asset specificity. And bad competition skills imply high trans-
action costs if bounded rationality and opportunism are both present and assets
Fig. 2. The Effects of Friction.
are not specific. In contrast, then, TCE derives social structure (markets versus
hierarchies) from transaction costs, while TCT explains how social cognitions
(Fiske & Taylor, 1984) change transaction costs by changing social structure.
Williamson asserted that: “our understanding of complex economic organization
awaits more concerted study of the sources and mitigation of friction” (1996,
p. 87). Transaction cognition theory enables the beginning of such concerted study.
A further examination of how physical system-friction is utilized assists with
such study. For example, within the construction of automobiles, we find combi-
nations of friction uses that demonstrate how friction is well employed in physical
systems. Figure 2 illustrates four states of friction.
To paraphrase Williamson (1981), in a well-working automobile, the bearings
“glide,” the tires have “traction,” the gears do not “slip,” and there is low “drag”
from wind resistance. This successful physical-system result is accomplished
through the design of well-working physical interfaces that utilize friction where
it is needed and minimize it where it is not. Elsewhere (Mitchell, 2001b), I have
argued in more detail that high economic performance might also be designed
into a system by creating and using effective levels of transaction cognitions, that
– as in the physical systems case – minimize the effects of transaction costs.
It is therefore useful to inquire what, in more detail, are transaction cognitions?

And since the term “transaction” has already been specified, the explanation next
requires an understanding of the concept of cognitions.
Cognitions have been defined as all the processes by which sensory input is
transformed, reduced, elaborated, stored, recovered, and used (Neisser, 1967).
Transaction cognitions are the specialized mental models or scripts (Arthur, 1994;
Read, 1987) that guide individuals’ economic responses to the three principal
sources of variability in their economic behavior introduced by the fundamental
nature of transactions (Fig. 1). Individuals/transaction creators introduce bounded
rationality due to the cognitive limitations of individuals, the addition of “others” to
the transaction introduces opportunism due to the lack of clarity about the extent
of self-interest-seeking guile in the individual/other relationship, and the work
introduces specificity (once time and effort have been expended in the creation of
a particular work, that time cannot be recaptured and redeployed for the creation
of some other work, Williamson, 1985).
These three attributes of frequent transacting cause transaction costs under
uncertainty and frequency of transacting (Williamson, 1985, p. 31). Bounded
rationality produces the human cognitions that cause costs by converting intend-
edly rational behavior into limitedly rational behavior (Simon, 1979; Williamson,
1985, p. 30, 1996, pp. 326–327). Opportunism – a behavioral condition of self-
interest-seeking with guile (1985, p. 30) – creates the cognitions of social friction
and increases transaction costs due to moral hazard and distrust. Asset specificity
refers to nontrivial investment in transaction-specific assets (Williamson, 1985,
1991, p. 79); and such investment increases social friction through cognitions
associated with commitment and nonreployability (Ghemawat, 1991; Williamson,
1985), which also increase transaction costs. Hence, the presence of bounded
rationality, opportunism, and asset specificity creates particular cognitions that
give rise to transaction costs (Williamson, 1996, pp. 326–327).
It stands to reason that as a result, the parties to an exchange will think
through (adopt cognitively based) social arrangements that take these market-
imperfection-creating cognitions into account, to ensure that transactions can,
in fact, be completed. Williamson (1985, p. 31) identified three special social
structuring/contracting arrangements – planning, promise, and competition – that
organize exchange relationships subject to transaction costs within imperfect
markets. Planning is defined to mean a socioeconomic arrangement where all the
relevant issues in a transaction are identified and settled by the parties, and that
any dispute will be effectively resolved within a court system (1985, pp. 30–31).
Promise is defined to be a socioeconomic understanding where the word of the
transacting parties is as good as their bond (1985, p. 31). Competition is defined
to mean a socioeconomic contracting situation where markets are efficacious,
Table 1. Some Attributes of the Contracting Process (Williamson, 1985, p. 31).

Behavioral Assumption Implied Contracting
Process
Bounded Rationality Opportunism Asset Specificity
0 + + Planning
+ 0 + Promise
+ + 0 Competition
+ + + Governance∗
0 = absence; + = presence.
Note: Williamson’s insight that “governance” results when all three conditions exist provides a foun-
dation for further elaboration of transaction cognition theory that is beyond the scope of this
chapter but is discussed thoroughly elsewhere (Mitchell, 2001b).
fully contestable, and where even natural monopolies are subject to bidding
processes (1985, pp. 31–32). The transaction attributes of bounded rationality,
opportunism, and asset specificity have implications for the social organization of
the contracting process into planning-, promise-, and competition-based exchange
relationships as suggested in Table 1.
As illustrated in Table 1, in an imperfect economy, one in which behavioral
assumptions and social organization are connected, the following three special
cases arise: (1) in the absence of bounded rationality, planning will suffice to
ensure the completion of transactions; (2) in the absence of opportunism, promise
is sufficient; and (3) in the absence of specificity, competition enables transacting
(1985, pp. 31–32). One can infer from this analysis, then, that this special set
of cognitions – planning, promise, and competition – is also likely to impact the
behaviors that give rise to market imperfections.
In the real world one can observe and can therefore assume, that individual
transaction creators introduce transaction costs due to bounded rationality, other
persons introduce transaction costs due to opportunism, and the nature of the
work itself introduces transaction costs due to specificity, into a given transaction.
When these observation-based assumptions are mapped onto the basic transaction
as illustrated in Fig. 3, the relationships denoted in Table 1 lead to derivation of
the three cognition sets that are essential to a successful transaction: planning,
promise, and competition cognitions.
Table 2 presents definitions for planning, promise, and competition cognitions
and suggests the relationship between these cognitions and bounded rationality,
opportunism, and specificity, respectively.
Thus, three types of cognitions – cognitions about planning, which are mental
models that help individuals develop analytical structures for solving previ-
ously unstructured problems; promise, which are mental models that promote
Fig. 3. The Transaction Cognition Model.
Table 2. Proposed Relationships between Planning, Promise, and

Competition Cognitions and Transaction Costs due to Bounded
Rationality, Opportunism, and Specificity, as Defined.
Cognition Constructs Relationship Transaction Costs due to the Sources
of Market Imperfection
Planning Cognitions: Mental models – Bounded Rationality: Behavior that is

(Arthur, 1994) that assist in developing intendedly rational, but limitedly so
analytical structures and courses of (Simon, 1979; Williamson, 1985).
action to solve previously unstructured
market problems that relate to the
production and delivery of the Work to
Other Persons.
Promise Cognitions: Mental models that – Opportunism: Self-interest-seeking
help in identifying and prioritizing with guile (Williamson, 1985).
other parties to economic relationships,
and in building the mutual trust in
economic relationships needed to effect
an agreement between the Individual
transaction creator(s) and Other
Persons.
Competition Cognitions: Mental models – Specificity: The non-redeployability
that can create competitive bargaining of assets (Williamson, 1985).
positions (i.e. some Work to offer that
can be created by Individual
transaction creator(s)).
trustworthiness in economic relationships (Mitchell et al., 1997); and competition,

which are mental models that can create sustainable competitive advantage – are
expected to impact transaction costs, the success of transacting, and therefore
the amount of new value added by transactions that can now succeed which
otherwise would have failed due to transaction costs. Entrepreneurial opportunity
(Kirzner, 1982) may therefore be thought to occur when entrepreneurs use
planning, promise, and competition cognitions to enact transactions that would
otherwise fail owing to transaction costs. Entrepreneurship can in this respect be
conceptualized as an essentially cognitive process (Mitchell et al., 2000).
The Microsoft – IBM transaction, wherein Microsoft became the supplier of the
operating system for all IBM personal computers, can illustrate each of the three
cognitions and how it contributes to a successful transaction. As the model dia-
grammed in Fig. 3 suggests, a completed transaction between Microsoft and IBM
required use of all three of these cognitions. A review of the actual circumstances
illustrates the role of each type of cognition.2
First, for the product they envisioned to be competitive, it was necessary that
Microsoft’s Bill Gates and colleagues acquire rights to use the early DOS (disk
operating system) source code – not then owned by Microsoft – that would form
the foundation of the product (Zone C: the Individual – Others link). Through the
use of bargaining and competitive techniques (Fig. 3: Zone C), this key element
of the product was acquired (transaction costs owing to specificity were reduced).
Also necessary was the development of a relationship of trust between the IBM
executives and Microsoft, which assured IBM that they could rely on the Microsoft
team (Zone B: the Individual – Work link). Through the use of references and in-
person meetings, the promise of reliable production and delivery (Fig. 3: Zone
B) was communicated in such a way that the possibility of transaction costs from
opportunism could be diminished to an acceptable point in the Microsoft – IBM
deal, an action that made transaction completion more likely.
Finally, before the transaction could occur, Bill Gates and his associates had
to overcome their limited knowledge of the market for their services (Zone A:
the Work – Others link). Gates and Co. reduced these knowledge limits through a
series of events that can be labeled “the planning process” (Fig. 3: Zone A), while
knowledge limits remained relatively higher for potential rivals. This permitted
the fledgling Microsoft to minimize the effect of transaction costs – an action
that, again, made a completed transaction more likely. Thus, three necessary pre-
conditions for the occurrence of the Microsoft – IBM transaction, one of the signal
high-performance economic events in computing history, were satisfied.
The key point to note in this example is that without the presence of the requisite
planning, promise, and competition cognitions, or mental scripts (Glaser, 1984,
Mitchell, 2001b), the transaction would likely have failed owing to the transaction
cost-based social frictions. With a sufficient level of these cognitions present, a

completed transaction – despite, or perhaps because of the effective use of trans-
action costs/social friction3 – resulted.
I therefore argue that in the cognitions of entrepreneurs as the designers of
new transactions, one can identify certain fundamentals that one can expect to
observe across borders. It then remains to elaborate how design (Simon, 1981)
or effectuation (Sarasvathy, 2001) activity in the arrangement of socioeconomic
systems (the creation of new transactions) ought to take place.
This elaboration can be accomplished by our establishing a theoretical linkage
between thinking (cognitions) and the reduction of social friction (transaction
costs). Recall in the previous automobile example, the paraphrase of Williamson
(1981, p. 552), which reads:
With a well-working (socioeconomic) interface, as with a well-working machine, these (trans-

actions) occur smoothly. In mechanical systems we look for frictions: do the gears mesh, are
the parts lubricated, is there needless slippage or other loss of energy? The economic coun-
terpart of friction is transaction cost: do the parties to the exchange operate harmoniously, or
are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other
malfunctions?
One might then ask: How is it that harmony can be increased, and malfunctions de-
creased in transacting systems? Psychologist William James wrote that the greatest
discovery his age was the idea that, in essence, we become what we think about
(James, 1890). This notion may provide a key to answering the question about
increasing harmony and decreasing malfunctions in transacting systems.
Recent entrepreneurship research suggests that common economic thinking pat-
terns exist globally (Busenitz & Lau, 1996; McDougall & Oviatt, 2000; Mitchell
et al., 2000, 2002). Transaction cognition theory implies that new transactions are
more likely to succeed when an individual transaction creator possesses sufficient
levels of planning, promise, and competition cognitions. Thus, I can offer these
general and specific definitions of global entrepreneurship:
General – Global entrepreneurship is defined to be: the creation of new
(value-adding) transactions or transaction streams anywhere on the globe.
(Global entrepreneurship therefore might be thought generally to occur because
global entrepreneurs cause transactions to succeed that would have otherwise
failed, or not occurred at all because of transaction costs/social frictions).
Specific – Global entrepreneurship is defined to be:
The use of transaction cognitions (planning, promise, and competition
cognitions)
to organize exchange relationships (among an individual, other persons, and the

work)
that reduce the transaction costs/social frictions caused by sources of market
imperfections (bounded rationality, opportunism, and specificity)
to create new value.
Who, then, are the designers of new transactions anywhere on the globe? Trans-
action cognition theory suggests that these economic actors are, in fact, global
entrepreneurs.
Transaction cognition theory thus provides a basis for a definition of global
entrepreneurship that is highly integrative and is useful for research, teaching, and
for the development of practical technology for the creation of new (value-adding)
transactions or transaction streams anywhere on the globe (Mitchell, 2001b). In
my view, it is this border-spanning attribute that qualifies this theory as global.
In the following section I examine the transaction cognition theory of global
entrepreneurship from three critical viewpoints: (1) its capability for explanation;
(2) its theoretical and operational utility; and (3) its verifiability through the
logic of scientific inference, and present several propositions that surface in this
analysis.
SECTION 2: AN EXAMINATION OF THE THEORY

Previously in this chapter, drawing on the cross-level theories of transaction cost
economics (Williamson, 1985) and social cognition (Fiske & Taylor, 1984), I have
presented general and specific definitions of entrepreneurship that, I believe, are
not only realistic – in that they correspond to actual economic behavior in the real
(imperfect) economic world – but are also plausible bases for scholarly analysis.
Such analysis relies on two key ideas: (1) the composition of a basic transaction
that does not vary across borders; and (2) cross-border cognitions that explain
the basic transaction’s occurrence in imperfect markets – which together suggest
a transaction cognition theory of global entrepreneurship. In this section I hope
to demonstrate that the general and specific definitions presented previously can
provide the basis for further analysis in both this chapter and in future research.
Also specified in Section 1, are the market imperfections basic to transacting,
their impacts on exchange relationships, and the resulting cognitions, which are
critical to successful transacting. These specifications, I hope, will help researchers
to interpret prior work and to propose entrepreneurship theoretical models that flow
from first principles, and contribute to the development of an entrepreneurship
research paradigm.
However, like most preparadigmatic research (Kuhn, 1970), global en-

trepreneurship research at present might be described to consist of mostly
“random fact gathering” (Leahey, 1987, p. 16). Thus, in the search for better
theory and measures in the field of entrepreneurship, an appeal to other disciplines
for analogues has been suggested (MacMillan & Katz, 1992). I consider physics
and genetics as both offering cases that illustrate the development of a composition
theory4 (Rousseau, 1985) that provides a basic unit that applies across units of
analysis. In physics, as noted earlier, Neils Bohr’s planetary model of the atom
was a theoretical structure that could explain matter at the subatomic, atomic,
and molecular levels while providing a basic “unit,” or integrating model. In
genetics, Crick and Watson model of DNA provided a theoretical structure that
could explain the development of living organisms at multiple levels of analysis
based upon a basic “unit” in a way that is similar to the planetary atom model
in the physical-system case. These analogues motivate the investigation and
identification of an economic equivalent to physics’ planetary model and genetics’
double helix, which produces the basic transaction model as its result.
But the need for a common basis upon which to successfully organize and inter-
pret a set of random facts, poses commensurability problems – the need for a least
common denominator. A problem of this nature prompts the following paradigm
organizing “shared exemplar” – type challenge to the field (Kuhn, 1970): Produce
a theoretically and empirically valid set of common terms for field of global
entrepreneurship. Each expression in an analysis of global entrepreneurship needs
to be representable using these common terms. Since entrepreneurial phenomena
occur on at least two levels of analysis: the individual and the firm (Mitchell,
2001b), common terms must – like their arithmetic counterparts – enable cross
level analysis. As such, they should represent theory that extends across levels of
analysis but remains testable with “data at the lowest measurement level possible”
(Rousseau, 1985, pp. 29 and 31). It is in the service of this objective that the global
entrepreneurship assertions of transaction cognition theory will now be examined
from several critical viewpoints: (1) their capability for explanation; (2) their
theoretical and operational utility; and (3) their verifiability through the logic of
scientific inference.
The analysis in these three subsections proceeds as follows: in the first, I
examine prior research to see if the theory can serve as a common term, explaining
previously observed phenomena, even phenomena that prior theory has been
unable to explain (Popper, 1979, p. 46). In the second subsection, I evaluate how
useful the transaction cognition model might be for resolving some theoretical
difficulties in entrepreneurship research, relating previously unconnected things,
and predicting phenomena that have not so far been observed, as well as how
testable the theory is (Popper, 1979, pp. 47–48). In addressing testability, I present
analyses relating to the operational utility (susceptibility to operationalization) of

the theory (Freeman, 1986; MacMillan & Katz, 1992; Mitchell, 1994). I conclude
this section with an examination of verifiability, using the “logic of scientific
inference” (Stinchcombe, 1968) to evaluate the theory’s external validity.
Capability for Explanation
Somewhat fortuitously, the extant literature on entrepreneurship might be seen to

fall quite easily into three groupings that respectively focus attention on individuals
(entrepreneurs themselves), work (firms), and others (economies). This body of
theory and findings, a foundation for thinking about entrepreneurship, chronicles
both explained and unexplained phenomena. Table 3summarizes representative
work from this foundation literature in three parts corresponding to: individual,
work, and other, respectively.
The phenomena observed in previous research are varied and extensive
(column 1), although some observations have been contradictory (column 2),
which understandably has created an obstacle to further theory building, especially
to explaining global entrepreneurship phenomena. However, these observations
appear to be coherent when examined using the lens of transaction cognition
theory (column 3). The proposed transaction cognition theory explanations
demonstrate the theory’s ability to serve as the necessary common term that might
explain observed phenomena, both the previously explained and the previously
unexplained. An examination of this assertion for each of the groupings in
Table 3 follows.
The Individual (Entrepreneur)

As summarized in Table 3, at least eight major theoretical reasons for entrepreneur-
ship among individuals were investigated in the period 1961–1986, the most recent
active period of investigation at this level of analysis. Support was found for expla-
nations based upon age, immigration, religion, and social learning; mixed support
was found for gender; and findings have been contradictory in the case of locus
of control, need for achievement, and risk-taking propensity. The equivocality of
this research has lead many in the management sciences to view entrepreneurship
theory at the individual level with distrust (MacMillan & Katz, 1992).
However, as shown in the table and discussed below, transaction cognition
theory suggests a common-term explanation that accounts well for each of
these previously observed phenomena. At the individual level of analysis, the
previously observed phenomenon in question is the regular, but not adequately
explained, appearance of individual entrepreneurs. As the lead article in an issue
194
Table 3. Transaction Cognition Theory Explanations of Some Observed Phenomena.
Theory Findings Transaction Cognition Theory Explanation
Part 1: The Individual (Entrepreneur)

Age. Self-employment is related to age (Evans Supported. The young are less likely to Cognitive models can be created in young or
& Leighton, 1986). become entrepreneurs: time in labor force old; mental models vs. age are the key variable
increases reputation, funding, and goodwill (Ericsson & Charness, 1994; Gardner, 1983).
(Aronson, 1991).
Education. Self-employment relates to Supported. The educated are more likely to Type of education matters (Chandler & Jansen,
education: strongly for women; weakly for start businesses (Reynolds, 1991). 1992; Vesper, 1996); knowledge gains can be
men (Evans & Leighton, 1986). accelerated (Glaser, 1984).
Gender. Gender affects likelihood of Mixed. Lower: due to fewer assets (Cromie & Choice of entrepreneurship by men/women
entrepreneurship (Hisrich & Brush, 1986). Birley, 1991) and less access (Brush, 1992); depends upon cognitive maps (Carter, Williams
No effect: (Buttner & Rosen, 1989; Sexton & & Reynolds, 1997; Walsh & Fahey, 1986).
Bowman-Upton, 1990).
Immigration. Immigrants are more likely to Supported. Immigrants create social networks Promise-based mental models build social
become entrepreneurs (Bonachich, 1973). vs. rely on distant family (Aldrich & Zimmer, networks, which decrease venturing transaction
1986); entrepreneurship substitutes for social costs, as argued herein.
mobility (Waldinger, Aldrich & Ward, 1990).
Locus of Control. Entrepreneurship is related Contradictory. Self-employed workers have Cognitions affect self-efficacy (belief in
to locus of control (Berlew, 1975). higher locus of control; higher locus of control orchestration capacity) (Bandura, 1986; Gist &
RONALD K. MITCHELL
likely to prompt self-employment (Evans & Mitchell, 1992), which affects perceptions of
Leighton, 1986); locus of control does NOT risk (Krueger & Dickson, 1993, 1994) and
distinguish entrepreneurs (Brockhaus & Nord, intention to venture (Krueger & Carsrud, 1993).
1979; Hull, Bosley & Udell, 1982).
Need for Achievement. Men with high need for Contradictory. Supported, cross-sectionally Effective use of transaction cognitions satisfies
achievement are more likely to enter and longitudinally (McClelland, 1961, 1965); achievement needs (Arthur, 1994).
entrepreneurship (McClelland, 1961, 1965). but can’t distinguish from managers
(Brockhaus & Horowitz, 1986).
Table 3. (Continued )
A Transaction Cognition Theory of Global Entrepreneurship

Religion. The Protestant ethic encourages Supported. Protestants more likely to be self Religion as social learning affects cognitions
entrepreneurship (Weber, 1985 (1930)). employed than non-Protestants (Carroll, 1965; (VanLehn, 1989). Cognition variance explains
Jeremy, 1984; Singh, 1985). outcome variance (Arthur, 1994; Gist &
Mitchell, 1992).
Risk-taking Propensity. Entrepreneurs are Contradictory. High growth entrepreneurs less Level of cognitive competence (expertise)
more risk taking than the general population risk avoiding than managers (Miner, 1990); affects risk taking (Heath & Tversky, 1991),
(Hull et al., 1982). risk-taking propensity not distinguishing of because uncertainty is reduced (Krueger, 1993).
entrepreneurs (Brockhaus, 1980).
Social Learning. Social learning and genetics Supported. Heredity (Gardner, 1983), early Performance comes from cognitions created
lead to variance in traits, which leads to experiences (Walters & Gardner, 1986), through deliberate practice (Ericsson, Krampe &
variance in venturing (McClelland, 1975). demographics (Csikszentmihalyi, 1988), and Tesch-Romer, 1993), which depends upon
use of information processing strategies individuals’ endowments (Ericsson & Charness,
(Siegler & Shrager, 1984) affect traits. 1994; Gardner, 1983, 1993).
Part 2: The Work (Firm)
Characteristics of the Venture. Venture charac- Some support. The management team, stage of Pattern recognition cognitions affect
teristics affect performance (Stuart & Abetti, venture, type of product, etc. affect VC performance (Arthur, 1994); venture patterns
1990). financing (Hall & Hofer, 1993). can be standardized (Mitchell, 1998b).
Environment. Environmental factors are Supported. Industry structure, not personal Cognition-based skill and skill propensity
associated with venture performance (Cooper, characteristics affects venture performance (Herron, 1990), and venture expertise (Mitchell,
1993; Gartner, 1985). (Kunkel, 1991; Sandberg, 1986). 1994) related to performance.
Rate of Entrepreneurship. Low numbers of Supported (Shane, 1996). Domain experience improves cognitions through
ventures created discourage subsequent feedback (Ericsson et al., 1993); venture
organizational formation (Aldrich, 1990, and exposure affects feasibility perceptions
others). (Krueger, 1993).
Venture Strategy. V-strategy affects Supported (Kunkel, 1991; McDougall, 1987; Competition mental models affect venture
performance (Sandberg, 1986). McDougall, Robinson & DeNisi, 1992). success as argued herein.
Part 3: Other Persons (The Economy)
195
Change. Entrepreneurship increases in times of Supported (Shane, 1996). Security seeking and thereby, security seeking
technological change (Schumpeter, 1939). cognitions increase during times of change
(Durant, 1935).
196
Table 3. (Continued )
Demand. Changes in demand influence rates Supported. Demand growth and The need for economic security (provisions in
of entrepreneurship (Stinchcombe, 1965). self-employment are significantly and store) affects individual cognitions, which lead
positively related (Aronson, 1991; Evans & to need satisfaction behavior (Mitchell, 1998a).
Leighton, 1986).
Failure Rates. New business failure rates Contradictory. Failures create floating Failure is a specialized experience that provides
influence rates of entrepreneurship resources for ventures, but also signal trouble critical knowledge that increases expert
(Stinchcombe, 1965; Venkataraman, Van de (Delacroix & Carroll, 1983). cognitions (Malone, 1997); those with expertise
Ven, Buckeye & Hudson, 1990). perceive lower risks (Krueger & Dickson, 1993).
Interest Rates. The relationship between Supported (Shane, 1996). Interest rates reflect risk – one way of
interest rates and rates of entrepreneurship conceptualizing the cost of failed transactions
over time will be negative and significant (Venkataraman et al., 1990) as it impacts upon
(Shane, 1996). cognitions in the economy. Cognition-based
expertise affects risk taking (Heath & Tversky,
1991), because uncertainty is reduced (Krueger,
1993).
Political Change. Entrepreneurship is Supported. Political turmoil enhances As the need for economic security increases
associated with political change (Aldrich, formation rates (Carroll & Hannan, 1989, and during times of turmoil, venturing cognitions are
1979; Stinchcombe, 1965). others). invoked and updated (Arthur, 1994) along with
security seeking behaviors.
RONALD K. MITCHELL
Unemployment. People are pushed into Supported. (Hamilton, 1989, and others). The need for economic security creates a
self-employment by unemployment demand for cognitions to meet that need (Arthur,
(Oxenfeldt, 1943; Phillips, 1962; Steinmetz & 1994), which are created according to the theory
Wright, 1989). described later herein.
Wealth. Entrepreneurship is associated with Supported. Economic development is Planning scripts lead to venturing arrangements
societal (Stinchcombe, 1965) and personal associated with entrepreneurship (Wilken, (Leddo & Abelson, 1986) such as access to and
(Evans & Leighton, 1986) wealth. 1979) and entrepreneurship is associated with assembly of resources, which enable the
personal savings (Evans & Jovanovic, 1989). application of expertise (Mitchell, Smith,
Seawright & Morse, 1998)
of the Journal of Business Venturing dedicated to theory building in the field of

entrepreneurship earlier stated,
[In] over 200 years of the study of entrepreneurship . . . no theory of entrepreneurship has been
developed that would explain or predict when an entrepreneur . . . might appear or engage in
entrepreneurship (Bull & Willard, 1993, p. 183).
Further, in one of the most comprehensive studies of this phenomenon, Shane

demonstrated that the rate of entrepreneurship in the U.S. economy has varied
over time and that these variations have not been random (Shane, 1996, p. 761).
He stated the need for a theory that could account for all of the findings he examined
from earlier studies (Evans & Leighton, 1986; Steinmetz & Wright, 1989). Shane
characterized research in the field as ad hoc hypotheses in need of new theory to
“identify forces that change the propensity of Americans [individuals] to become
entrepreneurs” (1996, p. 773). Of course, it would be even better if such theory also
explained – in a reciprocal manner – why some individuals choose jobs instead of
entrepreneurship.
The transaction cognition model also sheds light on the entrepreneurship/job
trade-off. As noted earlier in the chapter, transaction costs are the consequences
of social friction in exchange behavior. At the organizational level of analysis,
scholars have extensively used the concept of transaction costs to argue that
hierarchies (firms) and markets are alternative systems for governing transactions
that are based on transaction-cost-driven “substitutions at the margin” (Coase,
1937, p. 387; Williamson, 1975). But there appears to be no reason to suppose
that the application of transaction-cost-driven substitution at the margin is
limited solely to questions of how firms form when markets fail (Coase, 1937).
Theoretically, transaction costs can explain a variety of alternative system choices
at various levels of analysis, including the individual level.
Thus, for example, scholars who have conducted research using prospect theory
have found that that losses loom larger than gains to individuals in psychological
“prospect” (Kahneman & Tversky, 1979, p. 288) and that actual utility tends to be
less than expected utility – a difference that (although not suggested specifically
by the authors) may, when viewed through the lens of transaction cognition
theory, be suggested to likely occur as a consequence of the transaction costs
that are generated within the situations studied.5 A person’s choice between a job
and self-employment might therefore be explained by a transaction-cost-induced
substitution at the margin (a decision to transact with a “boss” rather than with
multiple customers in a marketplace), as perhaps could success or failure in a job
(“in” or “out” of a particular economic governance system: e.g. “boss system”
or “self-employed” system). Choosing whether venturing or job holding will
be more reliable requires the use of specialized cognitions about creating social
arrangements based upon promise. Promise cognitions help individuals assess

the likelihood that those with a “stake” (Clarkson, 1995; Mitchell, Agle & Wood,
1997) in their economic well-being (or “stakeholders”) will, in fact, be reliable in
exchange relationships.
Under the assumptions of the transaction cognition model, the social commit-
ments made by individuals – such as choosing a job – should be related to costs
that attend the transactions associated with that social choice. Thus, where the
cognitions of an individual might result in work-specificity (whether the preferred
work is a job or self-employment) the costs of transacting in the alternative system
become prohibitive. For example, if my exchange cognitions center on “work
that I like and can do,” and if work that I like and can do involves using highly
sophisticated equipment that is only available to people who take jobs in particular
organizations, self-employment involves higher transaction costs, and I may see
more “promise” in employment with a well-equipped organization. Alternatively,
if I have been raised in a setting where mental models of self-employment have
been readily available and I have internalized them along with a sense of positive
self-efficacy (Gist & Mitchell, 1992; Krueger & Dickson, 1993, 1994), then I
may view a job to have relatively higher transaction costs and see more promise
in a venture. The transaction cognition model is therefore likely to account –
through a logical extension of transaction cost economic theory – for the broad
range of social commitment/promise decisions made in exchange relationships.
Accordingly, it is expected that, regardless of geography or culture:
Proposition 1. The effective level of the transaction cognitions (planning,
promise, and competition cognitions, but especially promise cognitions) of
individuals is associated with their venturing behavior vs. job holding (the
substitution at the margin of one state of individual transacting, venturing
behavior, for its alternative, a job).
Table 3 demonstrates the idea of transaction cognitions explaining a wide variety
of alternative system choices in the area of individual exchange relationships in
an imperfect economy. As is shown in the table, both contradicted and supported
findings are explainable using transaction cognition theory. Furthermore, it is
noteworthy within this analysis, that the explanation logic appears to be unbounded
by geography or economic system. This framework thus offers the possibility that
the phenomenon of global entrepreneurship exists within a theoretically tractable
domain, and it further suggests that specific planning, promise, and competition
skills might be identified. Of course, one natural consequence of the identification
of the specific skills within a domain is an increase in their teachability. I have
explored the educational implications of the existence of a theory of global
entrepreneurship in greater detail elsewhere (Mitchell, 2001b).
But entrepreneurship is a cross-level (Rousseau, 1985) phenomenon. Thus,

transaction cognition theory also suggests that individuals create firms using
transaction cognitions. Four of the more common explanations of the phenomenon
of firm creation are examined next.
The Work (Firm/Venture)

Between 1986 and 1993 – during a period of more intense focus on venture-based
explanations for entrepreneurship – general support was found for theories
that look to the characteristics of the venture, the environment, the number of
ventures created, and venture strategy to explain entrepreneurial phenomena. As
summarized in column 3 of Table 3: Part 2, transaction cognition theory accounts
for each of these findings and, again, suggests a common-term explanation, that –
at the firm level of analysis – accounts for both previously explained phenomena
and for phenomena that prior theory has been unable to explain. At the venture
level of analysis, the phenomenon in question is the formation and performance
(success versus failure, Birch, 1988; Shapero & Giglierano, 1982) of ventures.
Transaction cost theory suggests that an alternative governance system will
be invoked when the costs of organizing an extra transaction within an existing
governance system become equal to the costs of carrying out the same transaction
through an exchange on the open market (Coase, 1937, p. 396). Thus, when
exchange behavior by a firm is no longer effective, transaction costs will drive
the transactions into the open market (i.e. a venture will fail). It follows that
transaction failure and venture failure are closely related (Venkataraman, Van de
Ven, Buckeye & Hudson, 1990). According to the transaction cognition model,
ventures fail when plans fail, because planning scripts (cognitions that help
individuals cope with bounded rationality) reduce the transaction costs that arise
from bounded rationality.
This simple but powerful idea appeals to the very essence of transaction cost
economics, confirming the notion that economizing on transaction costs is the
best plan (Williamson, 1991, pp. 76 and 90). Williamson suggests that such
“first-order” economizing (e.g. waste elimination) can have many times more
influence on results (e.g. “ten times”) than the ordinary cost and pricing decisions
made in exchanges (1991, p. 79). It stands to reason, then – using the other half of
this bi-directional argument – that lack of a plan for transaction cost economizing
will have a great deal to do with the failure of exchange behaviors. For example,
a plan to manage opportunism in a competitive marketplace can save a job or a
customer (first-order economizing): a far more important result than the successful
negotiation of wage rates or sale prices (“second-order” economizing). It is there-
fore likely that the success or failure of ventures will be correlated with effective
planning for (or first-order economizing on) transaction costs – a very appealing
public policy opportunity (e.g. cut waste, not wages; increase productivity,
not prices).
Most of the analyses cited above were conducted using the U.S. economy as
a data source. Accordingly, it might be expected that the Western framing of the
questions and the research (Hofstede, 1994) might limit the generalizability of
the research into global theory. However, the reader is reminded of evidence that
cognitive models (Busenitz & Lau, 1996), specifically, cross-cultural cognitive
models of entrepreneurship (Mitchell et al., 2000, 2002) can explain venture cre-
ation decisions.
Thus, it might be expected that, regardless of geography or culture,
Proposition 2. The effective level of the transaction cognitions (especially the

planning cognitions) of individuals is associated with the venture creation deci-
sion (the substitution at the margin of one state of hierarchical transacting, the
decision to form a firm, for its alternative, the failure to form a firm).
Other Persons (The Economy)

The study of the effects of an economy on entrepreneurship levels has spanned
most of the last 50 years. Included in Part 3 of Table 3 is a summary of seven
representative and generally supported theories of entrepreneurship according to
which changes in technology, demand for entrepreneurs, failure rates (contradic-
tory), interest rates, political change, unemployment, and wealth are examined
for their relationship to the size of the entrepreneurial group within an economy.
Transaction cognition theory also accounts for these findings and provides a
common-term explanation. At this level of analysis, the economy level, the pre-
viously observed phenomenon in question is the level of entrepreneurship within
an economy.
Transaction cognition theory suggests that the level of entrepreneurship within
an economy will be affected by the level of competition scripts (specifically, cogni-
tions that can create competitive advantage) because engagement in the exchange
process is based upon decisions as to whether to bargain/exchange/transact, or not.
The need for economic security has been defined as “the desire to have provisions
in store for an uncertain future” (Durant, 1935, p. 2), and in modern society,
“provisions” are mainly obtained through exchange relationships. Logically
then, the reason why people in an economy may or may not enter into exchange
relationships should relate primarily to the level of this need. By definition, a
low level of the need for economic security could result from an absence of
desire, from uncertainty, or both, and higher levels of this need – and the resulting
competition cognitions – could explain why change, demand, and other factors
(Table 3: Part 3) lead to variance in entrepreneurship levels within an economy.
The propensity to “compete” may be higher or lower, given specific circum-

stances, but given the effect of provisions in store, desire, and uncertainty on the
creation of competition scripts, the transaction cognition model is expected to
account for levels of entrepreneurship. According to the model, those who do not
seek to enter exchange relationships see the transaction costs of competing within
them as just too high. For those who do enter into exchange relationships, the
transaction costs of not doing so are unacceptable. Thus, there is reason to expect
that, regardless of geography or culture,
Proposition 3. The effective level of the transaction cognitions (especially
the competition cognitions) of individuals is associated with the level of en-
trepreneurship within a society (the substitution at the margin of entry into
exchange relationships for nonparticipation in exchange).
The implications of this proposition are quite broad, and they illuminate the
earlier-stated transaction cognition definition of global entrepreneurship. Whereas
Schumpeter wrote that “everyone is an entrepreneur when he actually carries
out new combinations, and loses that character as soon as he has built up his
business when he settles down to running it as other people run their businesses”
(1934, p. 78), the transaction-cognition-theory-based definition implies that
entrepreneurial status occurs transaction by transaction, instead of business by
business (unless, of course, each transaction constitutes a business). Thus, high
economic performance, such as sustained growth, occurs when the obstacles
to transacting are minimized (Williamson, 1996, p. 332). Under transaction
cognition theory, it is entrepreneurship that accomplishes this objective, through
transformations of socioeconomic “slippage and drag” into “glide and traction”
(Fig. 2). (Please also see Mitchell, 2001b.)
Theoretical and Operational Utility
The foregoing discussion provides reasons for the inclusion of transaction

cognition theory within the body of mainstream entrepreneurship theory as
a theory of global entrepreneurship, and accordingly, suggests the necessity
for an evaluation of its theoretical utility: the capability of the transaction-
cognition model to contribute to that body of theory. Philosophers of science
have repeatedly demonstrated that more than one theoretical construction
can always be placed upon a given collection of data (Kuhn, 1970, p. 76).
Thus, for new theory in a field to be taken seriously, it must be useful: (1)
in resolving theoretical difficulties; (2) in simply relating previously uncon-
nected things; (3) in predicting phenomena that have not yet been observed;
and (4) in being more readily testable than other theory (Popper, 1979,
pp. 47–48).
Resolution of Some Present Theoretical Difficulties

The field of entrepreneurship needs better theory (Low & MacMillan, 1988;
MacMillan & Katz, 1992). Politicians (e.g. Newt Gingrich, former Speaker of
the U.S. House of Representatives) have often called for the encouragement of
“maximum entrepreneurial behavior” in the U.S. economy (Kimbro, 1995), and
academicians have also called, for more and better teaching of entrepreneurship
within universities (Porter, 1997; Porter & McKibbin, 1988). Yet weak theory
leaves the field of entrepreneurship open, at best, to over dependence upon the
unsystematic, such as the “war stories” of successful entrepreneurs (Katz, 1995),
to provide guidance for scholars, policy makers, and practicing and aspiring en-
trepreneurs. And further, the lack of strong theory can, at worst, lead to the abuse of
the entrepreneurship concept by a wide variety of individuals who are free to invoke
entrepreneurship to support or explain virtually any means, end, or phenomenon
(Harwood, 1982, p. 91; McMullan & Long, 1990, pp. 57–58).
Existing entrepreneurship theory does explain some phenomena, such as
the behavior of venture capitalists under various conditions (Hall & Hofer,
1993; Manigart, Wright, Robbie, Desbrieres & DeWale, 1997). It has been
unable to explain others, such as (as previously noted) when an entrepreneur
might appear or engage in entrepreneurship (Bull & Willard, 1993, p. 183).
Further, the fields from which existing entrepreneurship theories have been drawn
each impose domain-based limitations on theory development. For example,
economics provides elegant theory, but it is difficult to operationalize in the case
of individual entrepreneurs (Baumol, 1993). Psychology provides a rich analysis
of individual characteristics, but psychology-based studies do not consistently
relate individual characteristics to performance outcomes because these studies
appear to be case-specific and not replicable (Brockhaus & Horowitz, 1986;
Sexton & Bowman-Upton, 1991). Strategy research provides tools for explaining
performance outcomes but heretofore has had limits for linking these to the
behaviors of individual entrepreneurs (Cooper, Willard & Woo, 1986; Kunkel,
1991; MacMillan & Day, 1987; Sandberg, 1986).
Transaction cognition theory resolves some of these theoretical difficulties (as
demonstrated above) through its ability to explain previous findings at several
levels of analysis. Further, when using transaction cognition theory, researchers
are no longer constrained to view the economic, psychological, and strategic per-
formance views as competing explanations; rather, they can view them as elements
of an overall transaction cognition “composition” explanation (Rousseau, 1985).
For example, transaction cognition theory reconciles strategy-based theories of
entrepreneurship with those based on economics or personality by suggesting that

individual cognitions influence venture strategy through competition cognitions.
And further (if one takes the liberty of making a few substitutions in order to draw
parallels), one can argue that some of the earliest entrepreneurship scholarship
contains the outlines of transaction cognition theory.
As an illustration, consider the writings of Nicholas Baudeau (parentheticals
added), who provided part of the foundation for the study of the entrepreneurial
function within economics. He argued as follows: “Nothing is more evident
[than that] we need a numerous race of farmers or chief farmers endowed
with the knowledge [cognitions] of their art . . . who are willing to translate
that into [economic] action” (1910, p. 51). The outlines of planning, promise,
and competition cognitions can also be inferred from the writings of a seminal
psychologist, Jean Baptiste Say (parentheticals also added). He wrote this: “Those
who are not possessed of a combination of these necessary qualities [cognitions]
about the complex operations needed to surmount abundant obstacles [plans] the
process of reducing anxiety and repairing misfortune [promise], and of devising
expedients [competition] “are unsuccessful in their undertakings [transactions do
not occur]; their concerns soon fall to the ground” (Say, 1847/1964, p. 331). A
stretch? Perhaps; but perhaps not, if Say’s statement is viewed with the intention of
evaluating whether transaction cognition theory can resolve theoretical difficulties
in three previously separate streams in entrepreneurship theory.
Simply Relating Previously Unconnected Things

Prior to development of the relationships suggested in this chapter, the notions of
planning, promise, and competition as implied contracting processes (Williamson,
1985) were theoretically unrelated to the organization of exchange relationships
among the components of the basic transaction (the individual, the work, other
persons). Further, these social processes were not explicitly suggested to be
associated with types of cognitions that affect transaction success either locally or
globally. In addition, none of these ideas had yet been associated with the notion
that the use of the general market imperfection creators (bounded rationality,
opportunism, and specificity) to advantage through the use of specific cognition
sets might be the essence of global entrepreneurship (Section 1).
It is beyond the scope of this chapter to develop more than a few of the
implications of this new set of theoretical relationships for entrepreneurship
research. Some of the most obvious are the need to investigate and specify
geographically and/or culturally what cognitions are included within each set of
effective planning, promise, and competition cognitions. Another line of research
would be an attempt to link the notion of specific creators of market imperfections,
such as isolating mechanisms (Rumelt, 1987), to the more general set of market
imperfection creators (bounded rationality, etc.). Still another line of research

might reexamine cross-level problems in prior research to ascertain whether
applying transaction cognition theory provides new insight. Also, since much
more theory and many more findings about entrepreneurship exist than I have
excerpted in Table 3, a more complete evaluation of the capability of transaction
cognition theory to explain prior literature should be undertaken. And, of course,
the basic theoretical propositions that form the foundation of transaction cognition
theory should be tested for external validity in new research at the individual, firm,
industry, economy, and society levels of analysis. Further, an examination of the
theoretical utility of transaction cognition theory should also explore the capability
of the theory to help researchers frame new questions – to predict new phenomena.
Predicting Phenomena That Have Not So Far Been Observed

In the field of entrepreneurship – as a social science – “phenomena that have not so
far been observed” may take at least three forms: (1) they may be manifest in new
levels on existing relationships; (2) they may appear as new relationships; or (3)
they may not yet be known to exist. The following paragraphs are a nonexhaustive
discussion further examining transaction cognition theory as a theory of global
entrepreneurship as to its capability to enable the prediction of phenomena that
have not so far been observed.
New levels of existing relationships. Above, I have developed the idea that
existing relationships among entrepreneurship phenomena can be observed at
least three levels of analysis: the individual, the firm, and the economy. At present,
data show that roughly 90% of the individuals in the U.S. labor force at any
given time are not involved in entrepreneurship (Evans & Leighton, 1986) and
that approximately 80% of those individuals spend their entire careers in jobs
(Steinmetz & Wright, 1989). Even research showing the doubling of the number
of new businesses created per 1,000 individuals in the 1980s, from approximately
20 to approximately 40 (from 2 to 4%) (Gartner & Shane, 1995) does not indicate
much movement toward an equally probably career choice between “jobs” and
“entrepreneurship.” And, of the ventures created, a significant proportion fail
– 50–80%, depending upon the analytic technique applied to the data (Cooper,
Dunkelberg & Woo, 1988; Kanter, North, Bernstein & Williamson, 1990, p. 424;
McMullan & Long, 1990; Shapero & Giglierano, 1982). Data also show that most
of society participates in some exchange behavior through participation in the
labor force (Levi, 1998). Transaction cognition theory suggests that entrepreneur-
ship occurs at the transaction level. Under this new definition of entrepreneurship,
it is likely that we might discover new proportions on levels of job holding and
entrepreneurial employment. Under this construction, it is further possible that the
percentage of individuals who are known to act entrepreneurially would be much
Fig. 4. A Transaction Cognition Theory Model of Individual Economic Decision-Making

Behavior.
higher than previously reported, thereby also suggesting new levels on existing
relationships. Additionally, transaction cognition theory suggests a relationship
between transaction cognitions and transaction success. One might therefore
expect the revision of another type of level to be expected on existing relationships:
that, as the level of transaction cognitions/scripts acquired by individuals increases,
the levels of entrepreneurship at various levels of analysis should also increase.
Also, as suggested in Fig. 4 (as described in note 3), it is logical to expect that
a transaction-cognition-acquisition sequence begins with competition cognitions
and continues with promise and planning cognitions, in that order. Further, it
appears likely that a given population will have some proportion of individuals at
each stage of this sequence of cognitions.
However, every society contains a range of motivations to acquire and utilize
transaction cognitions.6 We might therefore expect susceptibility to the acquisition
and use of transaction cognitions to vary geographically and culturally depending
upon the proportion of this group that exists as an initial condition at each stage,
producing a further new set of levels on existing relationships.
New relationships. One of the reasons that MacMillan and Katz (1992) give for
suggesting an appeal to other disciplines for assistance in the development of en-
trepreneurship theory is that these somewhat more mature fields have encountered
and solved problems that commonly occur in newer fields. As one example of new
theoretical relationships that might be predicted in entrepreneurship theory, I wish
to introduce into entrepreneurship and development theory and idea from another
“milieu” (1992, p. 1): the field of electrical engineering.
A problem that has been studied extensively in electrical engineering, and that is
analogous to a similar problem in entrepreneurship, is the problem of inductance.
Inductance, or reactivity, occurs in electromechanical situations such as electric
motor acceleration or deceleration, where either sparks (from the application of
more electricity to a motor than its inertial characteristics can transfer into motion)
or shocks (from the energy remaining in an electric motor when motion is arrested:
the generator effect) are created. In electrical engineering, the level of this reactivity
is termed inductance (I) and can be computed as a function of a reactivity constant
(C) that represents the inertial characteristics of the mechanism, multiplied by the
rate of change (a derivative) as shown in the formula below.
di
I=C
dt
Transaction cognition theory suggests new inductance-based relationships.
Transaction cognition-based inductance – the propensity for a transaction to
fail (“sparks” or “shocks” in economic transacting) – might be thought of as a
function of C, the level of planning, promise, and competition cognitions (the
reactivity constant), multiplied by the rate of change in transaction flow. When
conceptualized in this manner, new relationships in global entrepreneurship are
suggested, especially in the area of value conservation.
For example in the electric motor case, “sparks”-type (start-up) inductance has
been managed through the creation of new motor designs that have lowered the
level of inertia (represented in the above formula by the reactivity constant “C”) to
result in the invention of the coreless motor in the late 1940s. “Shocks”-type (slow
down) inductance is usually managed through the use of some type of capacitor
(such as in the 2003 Honda Civic Hybrid Gasoline/Electric car which uses the
braking process to recharge its batteries) to store excess energy.
In the entrepreneurship case, one of the key implications of the theory proposed
in this chapter is that the level of cognitive inertia in entrepreneurship (such as
the capability to manage a startup without a lot of failure-generating waste) is
susceptible to change (entrepreneurship as transaction cognitions can be taught),
and therefore is susceptible to design. Also, the study of new methods to enhance
the storage of previously wasted energy (to increase levels of created value
that is retained/conserved), such as the study of learning from entrepreneurial
failures, is only beginning (e.g. McGrath, 1999). Thus, one new relationship
suggested by the theory might therefore be an association between the teaching
of entrepreneurial cognitions (lowering levels of transaction reactivity/transaction
costs: levels of “C ”) and increases in the capacity of venturers, organizations,
industries, or economies to sustain: more rapid growth, accelerated change,
or sustained environmental turbulence (i.e. in lowering transaction inductance:
levels of “I ”).
The further development of such newly suggested relationships within
entrepreneurship and economic development domains, and the analysis of related
measurement issues, is beyond the scope of this chapter. Doubtless other new
formulations relating entrepreneurial phenomena can be derived using transaction
cognition theory as well. But while space does not permit further development
along these lines herein, it should be noted that “transaction inductance theory”
holds promise as a partial explanation of global economic phenomena at the
individual, firm, and economy levels, and provides some evidence that transaction
cognition theory is useful in suggesting such new relationships.
Phenomena not previously known to exist. One of the most exciting aspects of
new theory development is that sound new theory also predicts phenomena not
known to exist whose existence is subsequently confirmed by empirical investiga-
tion. Theory progresses no faster than its measures (Nunnally, 1978) because of
the need for theoretical conceptualization to suggest what to look for next.
What does transaction cognition theory suggest that might exist but has not
yet been measured? The theoretical developments introduced here, suggest that
researchers might expect to find the existence of stable planning, promise, and
competition transaction scripts in a variety of contexts; these would include tech-
nical fields, industries, cultures, and jobs. So, for example, it should be possible
to map phenomena not previously known to exist, such as a global culture of
entrepreneurship, among all individuals who have created ventures, regardless of
their country of origin (e.g. Mitchell et al., 2000), or to map the expert scripts one
can use to rise to the tops of organizations, industries, or for that matter, economies
(e.g. Yew, 2000).
Also, like chess masters (Chase & Simon, 1972) and other superb performers
(Ericsson, 1996), entrepreneurs should be susceptible to assessment as to level
of expertise; such a rating scale would be a distinct advantage for those asked to
finance their ventures. Another consequence of further development of transaction
cognition theory, might be the advent of the professional entrepreneur (e.g. please
see Mitchell et al., 2002) – evaluated for entrance into the profession much as
are accountants, lawyers, and doctors. And should this prove to be possible, the
creation of new firms might even become susceptible to management and assess-
ment using the well-developed systems of quality assurance that have managed to
eliminate all but a minute fraction of quality problems in other domains. Accord-
ingly, should transaction cognition theory prove to be efficacious in these areas,
one might also expect growing dissatisfaction with the 50–80% failure rate of
new ventures (Cooper et al., 1988; Kanter et al., 1990, p. 424; McMullan & Long,
1990; Shapero & Giglierano, 1982), especially in non-first-tier economies, where
failure is an unwelcome luxury. Hence, social policies would be explicitly framed
to enhance planning, promise, and competition cognitions, and to thereby enhance
overall economic welfare.
Summary. The possibilities outlined above demonstrate the capability of trans-
action cognition entrepreneurship theory to predict phenomena that have not so
far been observed. Additional possibilities can be expected as theory develops
and as new studies are conducted. Next suggested, is the idea that improvement
in the testability of entrepreneurship theory should also be possible through the
introduction of a transaction cognition theory of global entrepreneurship.
Be Better Testable
Testability within the social sciences – at least as indicated by the structure of most
empirical journal articles – revolves around data gathering, measurement, and data
analysis. To be better testable, a theory should contribute to each of these activities,
which together should enhance the theory’s operational utility.
Data gathering. The creation of sampling frames has been problematic in the
study of entrepreneurship, as it has been in most social science research (Freeman,
1986; McDougall & Oviatt, 1997, p. 303; Pedhazur & Schmelkin, 1991). One of
the reasons for this difficulty is that the phenomena in question are idiosyncratic
(MacMillan & Katz, 1992). However, when they are reduced to the transaction
level, many of these idiosyncratic elements disappear, becoming part of the
demographic or categorical aspects of a given sample. Whereas under prior theory
it has been necessary to track entrepreneurs through venture entries and exits, it
now becomes possible through the introduction of transaction cognition theory
to identify entrepreneurs at the point of transacting. Entrepreneurship research
will be well served by the creation of such a sampling frame, which will facilitate
larger-sample studies that better capture the range of variance in independent
variables (Freeman, 1986). Early results from studies drawing on transaction
cognition theory suggest progress in the attainment of these standards; they
demonstrate that although alternative explanations for differences in cognitions
– such as age or country – may be significant, transaction cognitions still explain
significant additional variance within and across countries (e.g. Mitchell, Smith,
Morse, Seawright, Peredo & McKenzie, 2002). These studies thereby illustrate
possible ways to ameliorate difficulties in the development of a sampling frame for
venture formation research conducted at the individual unit of analysis (Freeman,
1986, p. 301). Entrepreneurship theory may thus advance through the easing effect
that improvement in methods of measurement (Nunnally, 1978) has upon the
generation of sampling frames.
Measurement. I encourage scholars who wish to investigate cognition-based
models of entrepreneurship but have been constrained by a lack of tested
measures of cognitive constructs to explore use of the script cue recognition
approach (Mitchell, 1994; Mitchell & Chesteen, 1995; Mitchell & Seawright,
1995; Mitchell et al., 2000; Morse, Mitchell, Smith & Seawright, 1999). Prior
measurement operationalizations in cognitive psychology can be characterized
as following a micro approach; for instance, color recognition studies depend on
micro observations such as eye movements. A script cue recognition approach, that
uses a formative indicators measurement logic (Howell, 1987, p. 121; Nunnally,
1978; Pedhazur & Schmelkin, 1991, p. 54), might alternatively be characterized
as a macro approach that enables significant results through sampling (Nunnally,
1978) rather than through enumeration of script cues.
Critics of transaction cost economics have long suggested that one of the
critical flaws in the theory is its insusceptibility to measurement (Granovetter,
1985; Perrow, 1986). Linking cognitions to transaction cost theory to create
a transaction cognition theory of global entrepreneurship represents a positive
step toward the measurement of transaction costs. Just as cognitions (which are
unobservable) can be measured by observing the behaviors they produce – such as
eye movements (Posner, 1973) – transaction costs (which are also unobservable)
can be measured by observing the transaction-cognition-based behaviors that
transaction costs produce, such as the venturing behaviors indicated by venture
creation script cue recognition (Mitchell et al., 2000). Further research should
focus on the elaboration of this measurement method as a means to suggest more
generalized measurement techniques in the field of transaction cost economics
and in transaction cognition entrepreneurship theory.
Data analysis. Early studies using transaction cognition theory to suggest
sampling frames and measures have revealed no barriers to the use of advanced
statistical analysis. Thus, where applicable, transaction cognition theory has
produced theory and measures that have been used successfully in analysis of vari-
ance (ANOVA and MANOVA; Mitchell et al., 2000); exploratory, confirmatory
factor, and multiple discriminant analysis (Mitchell, 1994; Mitchell & Seawright,
1995); regression analysis (Mitchell et al., 1999); and cluster analysis (Mitchell
et al., 2002). In short, the concepts and measures of a transaction-cognition-based
theory of global entrepreneurship appear to be susceptible to the creation of
interval-based scales consistent with the assumptions of inferential statistics

(Mitchell, 1994; Nunnally, 1978).
Summary
With the foregoing two subsections as a foundation (the examination of the theory
as to its capabilities for explanation and utility), the evaluation of a theory of global
entrepreneurship based upon transaction cognition theory can proceed to address
its third objective. In the following subsection, then, the capacity of the theory to
stand up to tests of external validity will be examined using the logic of scientific
inference.
Application of the Logic of Scientific Inference
In this section, I employ one of the fundamental approaches to evaluating the

construction of social theory (Stinchcombe, 1968) to examine the credibility of a
transaction cognition-based theory of global entrepreneurship. Some exploratory
research that was conducted in the early stages of theory development is sum-
marized here and is evaluated according to Stinchcombe’s criteria (1968, p. 20).
These cited studies include primarily my own published empirical investigations
between 1994 and 2002, which hopefully will serve as a template for replication
and further evaluation of the external validity of the theory.
The Logic of Scientific Inference

Stinchcombe (1968) explained how, under the positivist, falsification logic that
is a norm in the social sciences (Kuhn, 1970), theory that passes tougher tests is
considered to be more credible than theory that passes only weak tests. Stinch-
combe described four situations to illustrate this point; and Fig. 5 (where “⇒”
signifies “implies”) presents these four situations. According to Stinchcombe,
the relationships presented in Fig. 5 suggest “both that the more different things
Fig. 5. Credibility and Tests of Theory (Stinchcombe, 1968).

we can derive (situation III), and the more different kinds of implications we can
derive (situation IV), the stronger will be our test of the theory” (1968, p. 20).
Further, “If the theory stands up under a tougher test, it becomes more credible
than it is if it stands up when we have subjected it only to weak tests. If it fails any
of the tests, it is false, either in the underlying statement or in the specification of
the observations which the concepts of the theory refer to” (Stinchcombe, 1968,
p. 20).
To establish such a “guarantor of knowledge” (Mitroff & Turoff, 1973) at
this point in the analysis, I depart somewhat from Hegelian skepticism as the
primary means of proof and instead adopt a more Kantian integrative approach
to address questions of external validity. When external validity is evaluated in
light of Stinchcombe’s four exemplars (Fig. 5), it is, I hope, evident that any
claim of substantial credibility for transaction cognition theory ought to be based
more upon situations III and IV (the more integrative guarantors) and less upon
situations I and II (the skeptical/falsification guarantors). This is not to say that the
first two should be rejected, but rather – as I believe Stinchcombe does – should
be treated as the foundation of an integrative ontology. As shown below, it is my
assessment that the four cases of exploratory research cited as evidence constitute
at least a “situation III” test. The research listed here has been underway for some
time. In this case I consider these previous studies (that fall into the “B1 , B2 , B3
similar” category) to include:
(1) B1 , my dissertation research, in which three similar outcomes, the compo-

sition, classification, and creation of new venture formation expertise, were
studied quantitatively at the individual/firm level of analysis in a sample of
entrepreneurs and business nonentrepreneurs from the western United States
(Mitchell, 1994). In this study, the association of cognitive variables with new
venture formation was tested, which resulted in an analysis of the composition,
the capability to classify, and the capability for the creation of new venture
formation expertise. B1 thus demonstrated “similarity in implications across
types of tests” through an examination of the relationship between cognitive
variables and new venture formation.
(2) B2 , research that drew new samples from other countries, used the same or a
similar research design to that of my dissertation (e.g. Mitchell & Seawright,
1995), and further explored the issues raised by the new sampling frames.
Thus, in this study, with composition held constant, classification was tested
in two countries beyond the U.S.: Mexico and Russia. B2 represents other
similar implications across sampling frames.
(3) B3 , qualitative research that explored in much more depth the nature and func-
tion of the expert scripts of entrepreneurs, while still utilizing exert information
processing theory as the basic interpretive lens. In this study, the underlying
concept that cognitive scripts are related to new venture formation was evalu-
ated using qualitative methods with data from the same U.S. setting (Mitchell,
1996). B3 demonstrated further similar implications across data type.
(4) B4 , quantitative research that expanded to utilize new types of analysis
and additional sampling frames. In this study, 39 hypotheses based upon a
finer-grained composition of new venture formation expertise scales were
tested in seven Pacific Rim countries: Canada, the U.S., Mexico (North
America), Chile (S. America), Australia, China, and Japan (Asia) (Morse
et al., 1999). This list was further tested/expanded in Mitchell et al., 2000,
2002, respectively. B4 substantially expanded the list of similar implications
across new types of tests and new sampling frames.
Please note that in this research stream the implications of the theory
(Situation III) exist in a variety of dimensions:
Across types of tests in B1 ,
Across sampling frames in B2 ,
Across data type in Study B3 , and
Across new types of tests and new sampling frames in B4 .
Next Steps in the Inference Logic

Categorized within the Stinchcombe framework previously presented (Fig. 5) are
a set of suggestions developed and discussed with colleagues for further advance-
ment of the credibility of transaction cognition theory itself. These suggestions
have been divided into two lists: new implications of the Situation III list – research
that can further render transaction cognition theory substantially more credible,
and creation of a representative situation IV list: research that can lead to much
more credibility.
Additions to the Situation III List. The following list of additions includes
possible research initiatives that, if successful, will further support the idea that
transaction cognition theory is – based on these tests – substantially more credible.
The suggestions for new initiatives include:
(1) B5 , new quantitative research that, while still at the individual/firm level of
analysis, develops new instruments from transaction cognition theory as in-
troduced within this article, and collects data worldwide, perhaps utilizing the
Web or another information technology to access respondents.
(2) B6 , new qualitative research designed to enlarge understanding of the nature
of cognitions that may cancel or limit the efficacy of planning, promise, and
competition cognitions; fatalism, refusal, and dependency, for instance, may
be negatively linked to the three transaction cognitions in the order listed

(Gurnell, 2000; Mitchell, 2001b).
(3) B7 , new quantitative research to calibrate such canceling cognitions (e.g.
fatalism, refusal, and dependency cognitions) with the primary cognitions
(planning, promise, and competition), and to develop a model for the use of
resulting indexes in further research.
Representative Situation IV List. These are research initiatives that have the
potential to lead to much more credibility of a transaction cognition theory of
global entrepreneurship. According to Stinchcombe (1968), to accomplish this
task one needs to establish first that these implications as predicted by the theory
are (in the Stinchcombe sense) “quite different” from one another, and second to
establish the existence of these implications in the empirical world. At least seven
possibilities are suggested:
(1) B1 , new research that expands the transaction model to include multiple nodes
in place of the standard structure. Such research might explore, for example,
partnerships as transaction creators (e.g. individual 1, individual 2, . . . n), or
specific, theoretically-driven additions to “others” or to “works” (e.g. please
see Mitchell & Morse, 2002; Mitchell, Morse & Sharma, in press 2003 for a
report on the first steps taken in this direction).
(2) B2 , cross-level research in which the constructs and propositions proposed
within this chapter are operationalized and tested as hypotheses.
(3) B3 , new research that utilizes compatible theories (e.g. social exchange
theory) to examine history and historical institutions for evidence of the inter-
dependencies, processes, and relationships suggested by transaction cognition
theory.
(4) B4 , new research that addresses the some of the problems within neoclassical
economics that yet remain to be explained.
(5) B5 , new research that applies transaction cognition theory to issues in the
management of currencies.
(6) B6 , new research that designed to explain the transitions among transacting
systems (e.g. barter to market ↔ market to barter).
(7) B7 , new research that expands the transaction model to explain noneconomic
phenomena, such as political transactions (e.g. Mitchell, 2001a) or religious
transactions.
But the foregoing are only a few ideas to “prime the pump” for additional
transaction cognition theory research, and to help the reader to perhaps envision
the likelihood of continuing increases in the credibility of the theory. I am therefore
hopeful that colleagues in multiple disciplines will interpret the suggestion of
this list of ideas to be an invitation to participate in a transaction cognition-based

exploration of multiple topics that is truly just beginning.
Limitations
To be useful, a theory must have boundaries: the specification of where and when its
application is likely to be less valuable (Bacharach, 1989). Transaction cognition
theory is no exception. In this section, I discuss the limitations of transaction
cognition theory as they relate to the context, composition, classification, and
creation of transaction cognitions.
Context
Explicit in the transaction cognition theory argument is the idea that transaction
cognitions exist within a social world. Accordingly, a primary boundary of trans-
action cognition theory is that it is intended to apply to the analysis and explanation
of socioeconomic phenomena.7
Also implicit is the idea that the social world does not exist in isolation
but rather, exists within an environment. Thus, the veracity of the theoretical
relationships suggested here might depend heavily upon both the short and long
term environmental conditions under which they occur; for instance in the short
term, the transaction cognitions that occur in the midst of a typhoon may not
at all resemble those that occur under normal weather conditions. Longer-term
environmental considerations consist of, for example, the natural resource
endowments available to transaction-creating individuals. Thus, although higher
levels of transaction cognitions may be related to higher levels of resource
acquisition and use, physical limitations of climate, geography, geology, and so
forth that could dramatically impact upon the relationships suggested here must be
recognized.
Further, however, one must recognize that the physical environment is only
one part of an overall environment. Accordingly, it is important to acknowledge
that individual transaction cognitions exist within a social web of institutions that
will shape and constrain them. Thus, while it is possible to assert that transaction
cognitions can have an impact on institutions through what is now becoming known
as institutional entrepreneurship (Garud, Jain & Kumaraswamy, 2002), it should
be recognized that the institutions existing at a point in time form the context within
which transaction cognitions must operate. Institutions, and therefore contexts of
operation, vary. Taking such variability into account in boundary setting is critical
in the case of a theory such as transaction cognition theory, which has helping to
explain global entrepreneurship as a goal.
Composition
I first investigated the composition of new venture formation expertise in my
dissertation (Mitchell, 1994). The three-factor structure that emerged from that
research has since been confirmed with multiple-country samples in several
follow-on studies (e.g. Mitchell et al., 2000, 2002). Within this chapter, I have
argued that there is a fundamental theoretical reason for the continued emergence
of these three factors in empirical research: i.e. that the constructs/variables that
result from empirical work in fact tap into an underlying cognitive map that is
based in the three-element structure of the transaction itself, and thus arise from
the actual existence of planning, promise, and competition cognitions in the
empirical world. The propositions advanced here represent this thesis. However,
it is important to remember, that to my knowledge only Proposition 2 has any
empirically based validation (previously noted) at the time of this writing (Fall
2002). Thus, although transaction cognition theory can provide a likely argument
for the levels of individual entrepreneurial employment, new venture formation,
and entrepreneurship within a society, it still requires extensive further testing for
the limits of its external validity to be established.
Classification
Underlying the assertion that the effective level of transaction cognitions is
related to levels of individual employment (Proposition 1), venture creation
(Proposition 2), and entrepreneurship within a society (Proposition 3) is the idea
of a cognitively based classification that distinguishes between entrepreneurs and
nonentrepreneurs on the basis of the notion that entrepreneurs are more “expert”
than nonentrepreneurs (Mitchell, 1994). Fundamentally, this assertion involves
making between-groups distinctions that are based upon individual possession of
higher or lower levels of transaction cognitions.
As Fig. 6 illustrates, however, within-group distinctions are also likely to exist.
I have given extensive attention to the between-group theoretical case, but the
theoretical development of reasoning for the within-group case is just beginning
(e.g. Mitchell et al., 2002). Researchers should therefore take care to clearly specify
the conditions under which transaction cognition theory is to be used in the within-
group case. It is key that the likely sources of variance be taken into account; these
are unknown at this point but might include cultural values and cognitive biases
(e.g. Busenitz & Lau, 1996) and might be of vast and material concern. It is obvious,
I think, that this is a likely avenue for extensive future research.
Creation
The idea that transaction cognitions affect social structure, which in turn affects
transaction costs and thereby economic opportunity, is a nontraditional use of
Fig. 6. TCT-Based Classification Differences.
the principles of transaction cost economics (Schure, 2002, personal communi-

cation). However, as the theory is developed and elaborated, the reader will, I
hope, see a theoretically sound justification for a nurture versus nature approach
to entrepreneurship: a proactive effort to create entrepreneurs. But limits to the
extension of this thesis should be noted.
For example, while transaction cognition theory advances a global (uni-
versal) model of entrepreneurship – i.e. to explain after over 200 years of
unsuccessful research . . . why an entrepreneur might appear and/or engage in
entrepreneurship (Bull & Willard, 1993, p. 183) – it nevertheless does not explain
global entrepreneurship – e.g. how to start or to build a global firm (Oviatt &
McDougall, 1995). Further, as noted above, it is as yet unknown what impact
canceling and other alternative socioeconomic cognitions (Gurnell, 2000) might
have on transaction cognitions, and thus on transaction-cognition-theory-based
explanations for global entrepreneurship. Thus, transaction cognition theory
offers a cross-border model for the existence of entrepreneurship where it is found,
but it does not purport to state that having transaction cognitions is a sufficient
condition for the creation of entrepreneurs, ventures, or entrepreneurship within
a given society. Further research might fruitfully explore the additional elements
required in each of these cases.
CONCLUDING THOUGHTS
The objective of this article has been to investigate and identify a theory of global
entrepreneurship that crosses borders – an economic parallel to physics’ planetary
model and genetics’ double helix – that uses composition theory, and produces
basic concepts that can provide common denominators for understanding global
entrepreneurship. In this chapter, I have defined global entrepreneurship as the
creation of new (value-adding) transactions or transaction streams anywhere on
the globe. This phenomenon has an ever-more important place in the world.
At the World Economic Forum held in Davos, Switzerland in January 1999, UN
Secretary General Kofi Annan focused the attention of the world on the possibilities
for global entrepreneurship by stating:
Let us choose to unite the power of markets with the authority of universal ideals. Let us choose
to reconcile the creative forces of private entrepreneurship with the needs of the disadvantaged
and the requirements of future generations.
This call, at this point in time, is important, because the second wave of global-
ization is now sweeping across the planet (Friedman, 2000). The first wave (from
the mid 1800s to the late 1920s) was driven by the drop in the cost of transporting
physical goods following the invention of steamships, railroads, and automobiles.
The second wave, which began in the 1980s, is driven by the dramatic reduction
in telecommunications costs – the ease of moving ideas from mind to mind via
microchips, satellites, fiber optics, and the Internet (2000, p. xviii). The first
wave of globalization created economic shifts that stimulated boom (1920s) and
bust (the Great Depression). First wave-globalization also led to inequities in
distribution of the new industrial-revolution-and-globalization-created wealth
that polarized discussion predominantly around distribution issues (Marx &
Engels, 1848) with scant attention to addressing production issues in tandem.
Furthermore, first wave-globalization gave rise to class-struggle-based revolutions
that effectively shut down Globalization 1 as a system, and replaced it with a Cold
War System (Friedman, 2000, p. 7). But neither the first globalization system nor
the Cold War system has produced satisfactory global economic results. In fact,
the reverse has been true.8
The first wave of globalization entailed the creation of wealth from new
methods for the production and distribution of industrial products, but the Cold
War distorted the development of this new wealth production process early in its
evolution, yielding a warped and misshapen economic world that has not fully, as
yet, addressed problems of global wealth production and distribution. The legacy
of the Cold War is a new planet wide patchwork of partitions, because during
the Cold War, “both your threats and opportunities . . . tended to grow out of who
you were divided from” (Friedman, 2000, p. 8). And thus the global community
is left with unfair production and distribution of wealth worldwide, such that 5
billion people presently exist in second, third, and fourth economic tiers, with
fewer than 1 billion people in the first tier producing and distributing a majority
of the wealth (Mitchell, 2001b, pp. 346–348; Prahalad & Hart, 1999). This state
of affairs raises serious questions about the wisdom of our approach – as a global
community – to value creation and value sharing, both of which, I believe, are
essential to truly achieving high-performance economic results.
In his Ruffin Lecture on stakeholder value and the entrepreneurial process,
Professor S. Venkataraman asserted that the foregoing two processes, value
creation, and value sharing, are common ground for both the fields of business
ethics and entrepreneurship (Venkataraman, 1999). This observation echoes the
writings of Victor Hugo, who in the 19th century offered his opinion that the two
main problems of society were: (1) the production of wealth (value creation);
and (2) its distribution (value sharing) (Hugo, 1982/1862, p. 722, parentheticals
added). The connections between transaction cognition theory and the stake-
holder concept relate to both the production and the distribution of wealth in
society (Mitchell, 2002).
This is important, I think, because the second wave of globalization is now
beginning to generate the capability to produce vast new reservoirs of wealth that
is generated from information. I cannot help but wonder about the outcome of
“globalization 2” if – as in the case of “globalization 1” – discussion becomes
polarized around only the distribution of wealth. Can we expect a second wave of
revolutions? A second Cold War? Or should we instead try to produce a better set
of results? The evidence suggests that it is time to fully understand and engage
global entrepreneurship, and the UN Secretary General has issued a call to do just
that. But what might this in fact mean?
First of all, because new wealth creation is based upon bringing “on line” the
talents and capabilities of at least 3–5 billion presently under-engaged minds,
functional “economic” literacy must be discussed and understood as a necessary
condition. Seen through the transaction cognition theory lens, it might be viewed
that the real enemy of economic development is ignorance – the LACK of
transaction cognitions. In this chapter I have argued that the possession of three
possibly universal subsets of knowledge liberates the creative forces that are at the
foundation of functional economic literacy for everyone; these subsets of knowl-
edge are (of course) planning, promise, and competition cognitions. Transaction
cognition theory suggests that desired economic results can be achieved through
accurate economic thought and thus, that those who possess effective levels
of these three universal subsets of knowledge are “functionally” economically
literate and therefore can enact successful new transactions anywhere on the
globe, regardless of culture or political system.
At present, functional literacy is defined as the ability of individuals to use
reading, writing and computational skills in everyday life (Tharoor, 2002). Thus,
to repair past economic damage and to establish a sound foundation for future
economic development and entrepreneurship, I suggest that, to the present

functional literacy list that normally includes: (1) reading; (2) writing; and (3)
computational skills (Tharoor, 2002), should be added (4) economic thinking skills
– in the form of transaction cognitions. Research, in as many countries around the
world as have been so studied, has found that wealth creation, represented, for ex-
ample, by the venture creation decision, is related to certain transaction cognitions
(e.g. Mitchell et al., 2000, 2002). As of this printing, data have been collected and
analyzed from Australia, Belarus, Canada, Chile, China, Czech Republic, France,
Germany, Italy, Japan, Mexico, Russia, the United Kingdom, and the United
States of America. I believe that as research continues, it will also be shown that
poverty results at least in part, from the absence of key transaction cognitions (the
confirmation of which is a likely extension of the foregoing research).
Second, understanding and engaging global entrepreneurship might mean that
our present new source of value creation (information-based value) provides an
opportunity to revisit our conceptions of value creation and value sharing. I do
not believe that the revenue model for the information age (i.e. who makes money
from information, who should make money from information, and how can money
be made from information) is yet fully understood. Thus, so-called “irrational
exuberance” in the stock market of the late 1990s (Shiller, 2000) conjured trillions
of dollars in e-stock market value, value that subsequently vanished for lack of a full
understanding of how, for example, the information technology of the web would
lead to investor returns (Will, 2001). And consequently, because the information
age is still lacking a fully developed revenue model, there presently appears to
be a significant opportunity to redefine the wealth distribution process, as linked
through IT, to wealth creation. To further illustrate this point, I’ll develop this line
of reasoning briefly in the following paragraphs.
In both West and East, there is evidence that a myopic focus upon distri-
bution only – through the creation of a variety of redistributive institutions
– has been insufficient to create a high-performance economic world for the
majority. Societies have experimented extensively with the idea of compulsory
redistribution of wealth, and they continue to experiment. But after all of this
trying, the idea of forced wealth redistribution has not yet succeeded in creating
widespread prosperity within target groups, despite its egalitarian appeal. It
seems that money can be redistributed, but not prosperity. So what if, instead
of continuing down a problematic old road, the global community were to take
the new opportunity offered by the emergence of the information-driven wealth
creation possibilities9 of the second wave of globalization? What if we were to
construct a global entrepreneurship model that is based upon both value creation
and value sharing: production and distribution? The logic for one such argument
follows.
It is well known that to make money from information, one must be able to
exclude others from it (Casson, 1982). But because information technology makes
it virtually impossible over the long run to exclude people from information,
the present pre-information age methods for excluding others (borders, locks,
copyrights, etc.), are no longer very effective. It is possibly for this reason that
the lack of a revenue model has been a problem for the valuation of dot.com
companies in the stock market in recent years. However, what if we looked at
this problem counterintuitively? What if we considered that the very absence
of such a revenue model might be signaling an opportunity for more effectively
producing and distributing wealth? What might be envisioned then, are new
combinations that arise to reorganize socioeconomic relationships in the same
way that Schumpeter (1934) envisioned new combinations reorganizing industry
relationships to create new value. What might such new combinations look like?
In the past (as noted), the separation of the production and the distribution of
wealth was accepted as the natural state of affairs (Hugo, 1982/1862, p. 722). In
the information age, this separation need no longer be the case, because – owing to
the communications revolution – production and distribution are, or can be, much
more closely connected. Thus we can speculate: What if every producer (individual
who creates a work for other persons) could acquire functional economic literacy:
a fundamental understanding of effective planning, promise, and competition cog-
nitions as they apply within their industry and society? The information revolution
would then offer new wealth creation/distribution opportunities for people to apply
information to transform problems that are based on social friction and transaction
costs (the problems that I have called “slippage” and “drag”), into the opportunities
of “glide” and “traction,” (Mitchell, 2001b) which are also based on social friction
and transaction costs. For example, why couldn’t a producer of IT-based intellec-
tual property in Chengdu or Chittagong offer it for sale (an individual, produces a
work, for other persons) in a global IP (intellectual property) “E-Bay”-type auc-
tion? And why couldn’t the created value – in a currency of choice – be credited to a
bank account electronically immediately upon the completion of the transaction?
Can we not therefore envision an IT-based production and distribution stream?
And if we can, what would it take to make such a thing, and other such things,
possible? These, and questions of like kind, motivate continuing research effort,
with the transaction cognition approach offering possibilities.
In conclusion, I should note that in addition to the specific limitations presented
earlier, the foregoing presentation and analysis in this chapter is also limited
by the typical disabilities of cross-disciplinary (Freeman, 1986) and cross-level
(Rousseau, 1985) analysis. Further, the analysis presented in this chapter generates
claims and in some instances propositions that have yet to be subjected to tests.
However, I hope that this chapter offers sufficient evidence, argumentation, and
perhaps imagination, that the additional work needed to elaborate the theory, and
to refine it as needed, will be seen to be a worthy undertaking. It is to this task, and
to the possibility that undertaking it will move the field of global entrepreneurship
forward toward a complete entrepreneurship paradigm, that attention should now
turn. I look forward to the dialogue that I hope these ideas will generate.
NOTES
1. Although in his 1996 book (Chapter 13, pp. 326–327), the conceptual distance is nar-
rowed substantially, in that Williamson now suggests cognitive antecedents to institutional
organization.
2. Interestingly, most events in the transaction creation sequence seem to follow steps
that successively answer the questions: (1) what do I have to offer? (2) can I make a deal?
and (3) can I produce and deliver it? This suggests that the order of cognition use may not,
in practice, be planning, promise, competition, but rather, competition, promise, planning.
Bounded rationality would not, then, be the first transaction attribute that transaction creators
would address. Instead, the sequence appears to be first specificity, then opportunism, and
then bounded rationality. Planning is thus made practical because bounded rationality has
itself been “bounded” in the enactment of the transacting sequence.
3. For more information, please see the more detailed discussion of social frictions in a
related research monograph (Mitchell, 2001b).
4. Composition theory contains constructs that are functionally similar across levels. A
properly specified compositional model is a prerequisite for the specification of multi-level
models (Rousseau, 1985, p. 29).
5. Kahneman and Tversky provide one of the clearest illustrations of the transaction
costs that arise from bounded rationality. Essentially, they found that the actual value of
economic choices made by individuals (actual utility) was less than the possible value
(expected utility) because the individuals ignored or overweighted highly unlikely events
or neglected or exaggerated highly likely events. These errors stemmed from reflection
effects – risk aversion in the positive domain and risk seeking in the negative domain (1979,
p. 268) – and isolation effects: disregarding the shared attributes of decisions to focus on the
distinguishing ones (1979, p. 271). According to prospect theory, these effects arise from
cognitive errors that occur in individuals’ coding, combination, and/or cancellation (1979,
p. 274) of relevant information, which taken together limit, or bound, rationality.
6. For example, in every society there are individuals who lack the desire to exchange.
This desire may be absent for many reasons; a nonexhaustive list includes the following: a
value choice (for instance, self-denial for a spiritual purpose); age (for instance, individuals
being too young or old to care for themselves); a disability (for instance, no awareness of
the need owing to developmental difficulties); or an individual judgment that provisions in
store are sufficient, given the perceived level of uncertainty (for instance, being rich, or rich
enough – a perception that, of course, also varies by case). Further, some locations on Earth
are so congenial, and the societal norms so structured, that economic uncertainty, and thus
exchange behavior, is virtually irrelevant.
7. One exception is the exploratory application of transaction cognition theory in the
political realm by my son Rob, in his integrated studies thesis (Mitchell, 2001a).
8. Some authors interpret the increase in global GNP from $1.3 trillion in 1960 to almost
$30 trillion in the late 1990s, the doubling of world trade between 1987 and 1997, and the
fact that the number of overweight people on the planet today has caught up with the
number of underweight people to mean that “the last half of the 20th century has brought
unequalled prosperity and a better standard of living to most of the world’s population”
(LaChance, 2000, pp. 82 and 85). To some? Perhaps. To more people than ever? Certainly,
due to population growth. An accomplishment? Definitely. Enough? In my view, not even
close.
9. This argument does not diminish the value of “such cutting edge industries as brick,
carpet, insulation, and paint” (Buffet, 2001) or other basic businesses, which arguably work
better with improved information. Rather, it suggests that a possible information age revenue
model should more closely align the value creation and value distribution.
ACKNOWLEDGMENTS
The author gratefully acknowledges the contributions of colleagues to his
endeavor: the editors and reviewers; several colleagues who have commented in
detail on the research monograph from which this chapter is drawn: Jim Chrisman,
Paul Godfrey, Norris Krueger, Patricia P. McDougall, Eric Morse, Craig Pinder,
Paul Schure, Brock Smith; my 2001 UVic post-doctoral seminar colleagues:
Po-Chi (Paul) Chen, Chun-Hung (Brendon) Lai, Shaw-Chang (Roy) Maa, Ana
Maria Peredo, Chenting (Eric) Su, and Wen Ching (Peter) Yu; and, the participants
in the 2002 Minneapolis Doctoral Workshop on International Entrepreneurship
sponsored by Georgia State University and the University of Minnesota. The
refinements and improvements I credit to them, and I retain as author, full
responsibility for any remaining deficiencies. I also wish to acknowledge the
invaluable contributions of Persephone Doliner, Fritz Faulhaber, Wendy Farwell,
and Charmaine Stack, and to thank my family for their unfailing support.
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THE IMPACT OF ENTREPRENEURIAL
EXPERIENCE ON OPPORTUNITY
IDENTIFICATION AND EXPLOITATION:
HABITUAL AND NOVICE
ENTREPRENEURS
Deniz Ucbasaran, Mike Wright, Paul Westhead

and Lowell W. Busenitz
ABSTRACT
Evidence suggests habitual entrepreneurs (i.e. those with prior business
ownership experience) are a widespread phenomenon. Appreciation of the
existence of multiple entrepreneurial acts gives rise to the need to examine
differences between habitual and novice entrepreneurs (i.e. those with no
prior business experience as a founder, inheritor or purchaser of a business).
This paper synthesizes human capital and cognitive perspectives to highlight
behavioral differences between habitual and novice entrepreneurs. Issues
relating to opportunity identification and information search, opportunity
exploitation and learning are discussed. Avenues for future research are
highlighted.

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06008-2
231
232 DENIZ UCBASARAN ET AL.
INTRODUCTION
Empirical studies in entrepreneurship have generally ignored the heterogeneity of
entrepreneurs in their samples. In this chapter, we argue that there is a need to distin-
guish between entrepreneurs who have had no prior experience in entrepreneurship
(novice entrepreneurs) and those who have been involved in entrepreneurship prior
to their current venture (habitual entrepreneurs). MacMillan (1986) clearly distin-
guishes novice entrepreneurs from habitual entrepreneurs. He argues that novice
entrepreneurs do not develop an experience curve with respect to the problems and
processes involved in starting a new business. In contrast, habitual entrepreneurs
have established many businesses, analyzed these efforts, and after several attempts
have recognized their mistakes and at least partially corrected them in subsequent
ventures. Ignoring the heterogeneity of entrepreneurs in this respect has led to
an unduly static view of the entrepreneurial process, since evidence suggests
that a significant proportion of businesses are owned by habitual entrepreneurs
(Westhead & Wright, 1998). Furthermore, entrepreneurship is not restricted to
the creation of new businesses. The exploitation of wealth creating opportunities
may take the form of the purchase or the inheritance of a business (Cooper &
Dunkelberg, 1986; Davidsson, Low & Wright, 2001; Shane & Venkataraman,
2000; Wright et al., 2000)1 . Habitual entrepreneurs may therefore be defined to
include individuals who have started, purchased or inherited more than one venture
and novice entrepreneurs as those who have started, purchased or inherited one
venture. The magnitude of habitual entrepreneurship is evident in the U.S. with
figures ranging from 51% (Schollhammer, 1991) to 63% (Ronstadt, 1986). Outside
the U.S., Kolvereid and Bullvåg (1993) found that 34% of surveyed entrepreneurs
in their Norwegian sample were habitual entrepreneurs. Westhead and Wright
(1998) reviewing existing studies reported figures ranging from 11.5 to 45.5%
for the United Kingdom.
Despite the prevalence and significance of the phenomenon and a plea over
a decade ago that to really understand entrepreneurship there was a need to
research entrepreneurs who had undertaken more than one venture (MacMillan,
1986), there has been limited theoretical development, and systematic empir-
ical examination of the habitual entrepreneurship phenomenon. In particular,
there is a need to understand the impact of entrepreneurial experience on the
critical entrepreneurial step of opportunity recognition (Hills, 1995; Shane &
Venkataraman, 2000; Venkataraman, 1997).
To help fill this gap, we synthesise two complementary bodies of research,
human capital and (entrepreneurial) cognition, and build a model that provides
greater insights into the value and contribution of entrepreneurial experience to
the opportunity identification and exploitation process. Traditional perspectives
The Impact of Entrepreneurial Experience on Opportunity Identification 233
on human capital suggest that experienced entrepreneurs would have higher levels
of human capital endowments, which in turn will affect behavior in a positive way.
Entrepreneurial cognition theory, which attempts to explain how entrepreneurs
think, provides a tool for analyzing how human capital may be used in the
entrepreneurial process (Baron, 1998; Busenitz & Barney, 1997; Busenitz & Lau,
1996; Manimala, 1992; Palich & Bagby, 1995; Smith et al., 1988). Integrating
this body of research, this paper attempts to explain how novice and habitual
entrepreneurs may differ in the way they identify opportunities. Further, building
on attribution theories, the paper goes to explain why certain entrepreneurs
will remain novices and why some will continue to exploit entrepreneurial
opportunities and become habitual entrepreneurs.
This paper is structured as follows. The following section outlines the human
capital and cognitive approaches to entrepreneurs. This is followed by the devel-
opment of a model of opportunity identification and exploitation. The final section
discusses the implications of the analysis, draws some conclusions and identifies
areas for further research.
HUMAN CAPITAL AND THE ENTREPRENEUR

Human capital resources consist of achieved attributes, which are linked to
increased levels of productivity (Becker, 1975). More recently, the term human
capital has been broadened to include the cognitive abilities of entrepreneurs
(Alvarez & Busenitz, 2001) as well as accumulated work and habits that may
have a positive or negative effect on productivity, both in market and non-market
sectors (Becker, 1993). An entrepreneur’s human capital can impact the extent to
which other resources, such as social and financial, can be accessed and leveraged.
We now address the links between human capital, experience and cognition. First,
we examine the role of entrepreneurial experience in building human capital.
Second, we examine cognition as a component of an entrepreneur’s human
capital.
The Role of Entrepreneurial Experience in Building Human Capital
Education and work experience are the characteristics most often thought of in
reference to human capital (Greene & Brown, 1997). Following Becker (1975)
and Brüderl, Preisendorfer and Zeigler (1992), Cooper, Gimeno-Gascon and Woo
(1994) focused on four categories of an entrepreneur’s human capital: general
human capital, management know-how; industry specific know-how and the ability
to acquire financial capital. Prior research highlights that human capital comprises
a broad range of aspects: the owner-founder’s achieved attributes (Becker,
1975), family background characteristics (Greene & Brown, 1997), reputation
(Dollinger, 1998), attitudes and motivations (Birley & Westhead, 1990), gender,
ethnic origin, industry specific know-how (Cooper, Gimeno-Gascon & Woo,
1994), competencies (Chandler & Jansen, 1992), age (Cressy & Storey,
1995), education and management experience (Cooper, 1981, 1985; Greene &
Brown, 1997; Westhead, 1995). Entrepreneurs can develop their human capital
over time which can then be utilized to gain access to a predictable uninterrupted
supply of critical resources (Cooper, Gimeno-Gascon & Woo, 1994; Dahlqvist,
Davidsson & Wiklund, 2000; Greene & Brown, 1997; Hart, Greene & Brush,
1997). The experiences, skills and competencies associated with the human capital
resources of entrepreneurs are widely regarded as influencing organizational
survival and development (Bates, 1998; Chandler & Hanks, 1994; Gimeno,
Folta, Cooper & Woo, 1997; Mosakowski, 1993; Storey, 1994; Westhead,
1995). In general, studies reveal that successful businesses are associated with
owner-founders who possess greater amounts of human capital. Entrepreneurs
with more diverse levels of human capital are purported to have the ability to
develop relevant skills and contacts, and are able to tap into dense information and
resource networks.
Once an initial opportunity has been exploited, an entrepreneur may choose
to engage in a subsequent venture. Managerial work experience is seen as a key
empirical indicator of managerial human capital (Castanias & Helfat, 2001).
Following a similar logic, entrepreneurial experience may be viewed as a signif-
icant contributor to an entrepreneur’s human capital (Chandler & Hanks, 1998;
Gimeno, Folta, Cooper & Woo, 1997; Stuart & Abetti, 1990). Previous business
ownership experience may provide entrepreneurs with a variety of resources or
assets that can be utilized in identifying and exploiting subsequent ventures, such
as real entrepreneurial experience; additional managerial experience; an enhanced
reputation; better access to finance institutions; and broader social and business
networks. Indeed, the view that individuals accumulate resources over time has
a long standing tradition in vocational and career theory.2 The development of
subsequent businesses owned by habitual entrepreneurs can therefore be enhanced
by overcoming the liabilities of newness (Aldrich & Auster, 1986; Stinchcombe,
1965) and attaining developmental milestones quicker (Starr & Bygrave, 1991).
Prior entrepreneurial experience can be utilized to enhance entrepreneurial skills
and reputations that help to influence the reallocation of resources in subsequent
ventures established, purchased or inherited (Shane & Khurana, 2003). Wright,
Robbie and Ennew (1997b) showed that venture capitalists perceived certain
assets of serial entrepreneurs (i.e. those habitual entrepreneurs who choose to
exit from their previous venture(s) before embarking on another one) that gave
them greater credibility and leverage in obtaining financial resources for their
subsequent ventures. Entrepreneurs with successful track records are generally
perceived as being more credible. Most notably, some habitual entrepreneurs may
leverage this experience to obtain financial resources for their subsequent ventures
from banks, venture capitalists and informal investors. Entrepreneurs with
successful track records in business are more credible and have more experience
in dealing with the technical requirements generally requested by investors.
Habitual entrepreneurs can lever this experience and obtain financial resources
for their subsequent ventures from banks, venture capitalists and informal
investors.
Habitual entrepreneurs who learn from their experiences can enrich their en-
trepreneurial skills. Getting through the ambiguity of one or more entrepreneurial
situation gives them the confidence to find their way through another en-
trepreneurial experience. Hart, Greene and Brush (1997) found that both the depth
(i.e. measured in years) and breadth (i.e. measured in number of ventures founded)
of entrepreneurial experience were important contributors to success in garnering
and maintaining access to resources. Conversely, Chandler and Jansen (1992)
found that the number of ventures previously initiated, and the years spent as an
owner-manager were not significantly related to the performance of the surveyed
venture. Similarly, neither Kolvereid and Bullvag (1993), Birley and Westhead
(1993) nor Westhead and Wright (1998, 1999) were able to identify performance
differences between businesses founded by novice entrepreneurs and those
founded by habitual entrepreneurs. This evidence supports the view that prior
entrepreneurial experience is associated with assets (e.g. attaining developmental
milestones quicker) and liabilities (e.g. hubris and denial). Nonetheless, prior
entrepreneurial experience is likely to have a significant impact on subsequent
ventures owned by the entrepreneur.
The assets and liabilities approach to experience, while useful, provides a
somewhat static view of the contribution of entrepreneurial experience to an
entrepreneur’s human capital and subsequent behavior. This literature highlights
the role of entrepreneurial experience ex post, that is as a product rather than
a process. Further, it provides limited insight into why certain entrepreneurs
will choose to engage in subsequent entrepreneurial activity while others will
choose to stick with a single venture or exit the business. The next section extends
this traditional view of human capital to incorporate entrepreneurial cognition.
The cognitive perspective on human capital suggests that entrepreneurial be-
havior (i.e. the opportunity identification process) is significantly influenced
by the way entrepreneurs think, perceive, and evaluate their environment and
experiences.
Cognition as a Component of an Entrepreneur’s Human Capital
An individual’s human capital will impact their subsequent activities. Similarly,

individual cognition will influence decision making and actions (Schwenk, 1986).
Cognition and human capital are linked to the extent that an individual’s mindset
(i.e. cognition) is an important contributor to the development and deployment
of human capital (Castanias & Helfat, 2001). There is a case therefore for taking
a broader view of human capital to encompass both traditional components (e.g.
skills and education) and cognitive components which in turn will determine how
such skills and education are utilized.
Many researchers in the 1960s and 1970s attempted to better understand the
entrepreneurial difference by examining a host of traits such as risk-taking and
need for achievement, but unfortunately, those findings were largely disappointing
(see Low & MacMillan, 1988 for a review). Though the adoption of a cognitive
approach to explore the entrepreneurial difference is well-established3 (cf.
Jaques, 1976), recently an increasing amount of attention has be channelled
into understanding how entrepreneurs think and make strategic decisions from
a cognitive perspective (Baron, 1998; Busenitz & Barney, 1997; Forbes, 1999).
If entrepreneurs do indeed have a unique mindset or orientation (Lumpkin &
Dess, 1996), then given the strengths and weaknesses of this mindset in various
competitive environments, it may be a potential source of competitive advantage
(Barney, 1991).
Cognitive theory is concerned with how incoming sensory stimulation is
“transformed, reduced, elaborated, recovered, and used” (Neisser, 1966, p. 4).
Cognitive theorists view stimuli largely as information. Processed information
is integrated into a “belief” that gives “meaning” to the external environment
(Weiner, 1980). The essence of a cognitive model of behavior can be illustrated as
follows:
Stimuli (i.e. information or event) → Mediating Cognitive Event → Behavior
The “mediating cognitive event” (Weiner, 1980) involves a set of cognitive
processes such as information scanning and selection, information combination
and, perception of causality. If cognitive processes are not carefully considered,
an incorrect understanding of entrepreneurial behavior will be presented (Hitt &
Tyler, 1991). In this study, we focus on two types of such processes. First, we
examine heuristics which are central to the processing of information. Second,
we examine attribution theory which explains individual perceptions of causality.
A discussion of these two cognitive processes and associated biases is presented
before moving on to examine how they can impact entrepreneurial behavior (i.e.
opportunity identification and exploitation).
Cognitive Processes I: Heuristics

The cognition literature suggests there are two broad types of cognitive orienta-
tion. These are a systematic cognitive orientation (also referred to as conscious
cognitive processing or rational information processing) and heuristic-based
cognitive orientation (also referred to as automatic cognitive processing or limited
capacity processing). Systematic processing (rational) models assume that people
thoroughly process all relevant information in order to maximize a relevant
outcome (Lord & Maher, 1990). Unfortunately, while this type of processing is
optimal (i.e. accurate), it is slow (requiring time) and requires effort (requiring
cognitive resources) (Kullik & Perry, 1994). Heuristic-based processing models
focus on how individuals simplify information processing while still generating
adequate but not optimal behaviors (Lord & Maher, 1990). The latter type of
processing is easier (requiring less cognitive effort) and is more efficient (requiring
less time) than systematic models.
Individual heuristics (and associated biases) can influence the strategic
decisions made by individuals. An understanding of strategic decision making is
incomplete without attention to these heuristics (Schwenk, 1986). Limited mental
processing capacity requires people to indulge in strain-reducing activities (i.e.
heuristics) when making strategic decisions, especially in complex situations
where less complete or uncertain information is available. This has particular
implications for entrepreneurs because they regularly find themselves in situations
that tend to maximize the potential impact of various heuristics (Baron, 1998).
Such heuristics and biases may include “anchoring and adjustment,” “availability,”
and “overconfidence” which may result from “representativeness” (Bazerman,
1990; Hogarth, 1980; Powell, 1987; Tversky & Kahneman, 1974). Indeed, Katz
(1992) demonstrates how the heuristics of availability, anchoring and adjustment
and, representativeness can be used to model an individual’s choice to become
self-employed (as opposed to being a salaried employee).
The relevance of these heuristics (and biases) may be particularly strong in the
context of entrepreneurship, as these cognitive processes can be an effective and
efficient guide to strategic decision-making especially in complex situations where
less complete or uncertain information is available. Entrepreneurial cognition is as-
sociated with the more extensive use of heuristics and individual beliefs that impact
decision-making (Wright, Hoskisson, Busenitz & Dial, 2000). A more systematic
decision-making style is typically associated with accountability, compensation
schemes, the structural coordination of business activities across various units,
and future developments are justified with quantifiable budgets. New insights are
usually not obtained from existing data. Rather, they are identified from experience
and interpreting new combinations of information via unique heuristic-based logic
(Wright, Hoskisson, Busenitz & Dial, 2000).
In probing these cognitive processes, it is important to first understand

the utility of such decision-making. Individuals engaging in entrepreneurship
typically operate under the conditions of decision uncertainty and decision
complexity (Hambrick & Crozier, 1985). Given the level of uncertainty they
face, entrepreneurs frequently use heuristics to piece together limited information
to make convincing decisions in the face of much turbulence (Busenitz &
Barney, 1997). Without heuristic-based logic, the pursuit of new opportunities
becomes too overwhelming and costly for those decision-makers who seek a more
factual base. Without the elaborate policies, procedural routines and structural
mechanisms common to established organizations, heuristics may have a great
deal of utility in enabling entrepreneurs to make decisions that exploit brief
windows of opportunity (Tversky & Kahneman, 1974).
Cognition is not homogeneous across individuals and a variety of cogni-
tive styles, strategies and processes exist. The following bipolar continuum
indexes, for example, have been presented to categorize individuals in terms
of their cognitive style (where cognitive styles are enduring differences in
cognitive structure and processes across individuals (Schneider & Angelmar,
1993): Kirton’s (1976) adaptation-innovation inventory (KAI); Riding’s (1991)
wholist-analytical dimension; Allinson and Hayes’s (1996) analytical-intuitive
cognitive style index; Gavetti and Levinthal’s (2000) looking forward-looking
backward approach and; Gaglio and Katz (2001) non-alert and alert continuum.
Groups of individuals at extremes of these continuums tend to be distinguished
on the basis of the extent to which they thoroughly process all relevant
information.
Recent research on entrepreneurial cognition indicates that entrepreneurs are
more significantly influenced by heuristics in their decision-making than managers
(Baron, 1998; Busenitz & Lau, 1996; Forbes, 1999). Entrepreneurial cognition
studies (see Forbes, 1999, for a review) have tended to focus on entrepreneurs
as a single group. However, a number of studies suggest that entrepreneurs are
heterogeneous (Westhead & Wright, 1998; Woo, Cooper & Dunkelberg, 1991). It
is possible, therefore, that entrepreneurs will differ with regard to their cognitive
processes. As intimated above, cognition can be viewed as lying along a contin-
uum. In this study, we distinguish between entrepreneurs who exhibit a strong
reliance on entrepreneurial cognitive processes (i.e. heuristics and beliefs), and
those that exhibit a weak to more moderate reliance on entrepreneurial cognitive
processes. We refer to these two extremes as strong entrepreneurial cognition
and weak entrepreneurial cognition respectively. The two polar extremes relating
to the entrepreneurial processes continuum describe “different” rather than
“better” thinking processes, though particular cognitive processes may be more
appropriate in certain situations.
Cognitive processes can be utilized to differentiate novice entrepreneurs from

habitual entrepreneurs. Both novice and habitual entrepreneurs will identify
a business opportunity that is facilitated by their entrepreneurial cognitive
processes. From the outset, habitual entrepreneurs are characterized as relying
heavily on heuristics. Novice entrepreneurs exhibit an entrepreneurial orientation
(i.e. tendency to use heuristics), but it is generally not as pronounced as the
orientation exhibited by habitual entrepreneurs. Novice entrepreneurs embarking
on a venture, possibly based on some innovation may be comfortable with seeing
the business mature over time, as is consistent with their weaker entrepreneurial
cognition4 . On the other hand, a habitual entrepreneur will generally become very
restless with an individual business, as it grows into the more mature phases, and
the ambiguity diminishes. Indeed, arousal (activation) theory (Hebb, 1955) posits
that individuals prefer and seek out “optimal levels” of stimulation, with the
“optimal level” varying from individual to individual. A habitual entrepreneur’s
strong entrepreneurial cognition draws them towards more ambiguous and
complex environments and information, in turn facilitating the identification of
additional ventures.
The extent to which these two groups of entrepreneurs rely on heuristic-based
cognitive processes may be crucial to the identification of opportunities and the
nature of these opportunities. While an entrepreneurial cognitive orientation may
be important in distinguishing habitual entrepreneurs from novice entrepreneurs,
these two groups may also differ with regard to the way they attribute causality
to events and outcomes. Attribution theory is a useful tool for understanding why
certain entrepreneurs will move on to becoming habitual entrepreneurs while others
will remain novice entrepreneurs.
Cognitive Processes II: Causal Attribution

The way previous entrepreneurial experiences are evaluated and interpreted may
impact whether an individual becomes a habitual entrepreneur. If entrepreneurial
experiences are seen as experiments, entrepreneurs should evaluate carefully and
objectively the feedback from these experiences (Nystrom & Starbuck, 1984).
Attribution theories, first developed by Heider (1958), suggest there may be a
number of cognitive processes that influence how individuals evaluate and learn
from their experiences. These theories assume that people are motivated to seek
meaning in their own behavior and surrounding environment. Heider’s (1958)
model suggested that people attempt to enhance or protect their self-esteem by
taking credit for success (internal attribution) and denying responsibility for failure
by attributing this to external factors (external attribution). Weiner (1985) extended
Heider’s single internal-external dimension of causal attribution. He presented
three dimensions of attribution: causal locus (internal or external cause); stability
(whether the cause is transient or not); and controllability (whether the cause can
be controlled or influenced by the individual or not).
Individuals who reflexively make stable (the cause is going to last for a long
time), global (it is going to undermine many areas of my life), and internal (it
is my fault) explanations for unfavorable outcomes are more likely to give up
and suffer learned helplessness (Seligman, 1975). The “learned helplessness”
paradigm, which derives its origins from attribution theories states that indi-
viduals often possess the requisite skills and abilities to perform a particular
task. However, some individuals may exhibit sub-optimal performance because
they attribute prior failures to causes which they cannot change, even though
success is possible (Abrahamson, Seligman & Teasdale, 1978; Martinko &
Gardner, 1982). In contrast, those who seek external attribution view the cause
of the problem as being transitory and narrow in its effects. As a result, such
individuals will be more likely to see adversity as a challenge, transform problems
into opportunities, endeavour to adapt/develop skills, maintain confidence,
rebound quickly from setbacks and persist (Schulman, 1999). The term “learned
optimism” has been used to describe this cognitive orientation. The concept of
learned optimism is similar to the principle of reactance theory, which states
that if one loses control, attempts are made by the individual to restore control
(Brehm, 1966).
Applying the principles of attribution theory, Gatewood et al. (1995) have
explored how the cognitive orientation of potential entrepreneurs will have a
significant influence on their willingness to persist in entrepreneurial activity in
the face of difficulties. They found that the attributional measures used in their
study were effective in predicting both persistence in activities and persistence
for success in business creation.
Both types of cognitive processes discussed above (i.e. heuristics and causal
attribution) may be useful in understanding how entrepreneurs behave (the
relationship between these cognitive processes and entrepreneurial behavior
will be discussed later). There may, however, be appropriate and inappropriate
uses of these cognitive processes (Nisbett & Ross, 1980). The extent to which
these processes induce effective behavior, however, will be determined by
learning.
Cognitive Processes, Bias and Learning

Experience provides a framework for processing information and allows informed
and experienced entrepreneurs with diverse skills and competencies (i.e. net-
works, knowledge, etc.) to foresee and to take advantage of disequilibrium profit
opportunities that they proactively or reactively identify (Kaish & Gilad, 1991).
Based on an earlier learning experience, entrepreneurs can use their acquired
skills and knowledge to identify a business opportunity or to leverage resources.

For example, they can utilize experience gained from structuring deals to secure
finance from a venture capitalist (Wright et al., 1997a, b). The value of resources
and skills acquired through prior business ownership experience is, in part,
dependent on the ability of experienced entrepreneurs to learn from their previous
experience.
Cognitive processes may influence the extent and nature of learning. Central to
most models of learning is achieving new understanding and interpretations (Daft
& Weick, 1984). Higher-level learning involves the formation and use of heuristics
to generate new insights into solving ambiguous problems (Lei, Hitt & Betis,
1996). Conversely, lower-level learning tends to be associated with repetitious
observations and routinized learning. Consistent with the notion of single-loop
learning, lower-level learning is associated with few changes in underlying policies
or values (Argyris & Schön, 1978). Gavetti and Levinthal (2000) characterize
cognitive processes (“off-line” thinking) as being forward-looking and based on
individual beliefs and mental models of how the world works. These mental models
often provide linkages between choices and the potential impact of those choices.
Entrepreneurs who rely extensively on heuristics may therefore be more likely to
generate new insights as a result of making such linkages. This in turn can induce
and reinforce the use of higher-level learning.
Cognitive processes are difficult to change, especially if an entrepreneur has
been previously successful (Busenitz & Barney, 1997). Whether or not the initial
venture can be interpreted as a success or a failure may impact on the learning and
subsequent behavior of entrepreneurs. Success is frequently sought, while failure is
avoided (McGrath, 1999). Individuals may be forced to evaluate their thinking and
behavior when faced with failure (Sitkin, 1992). In contrast, there may be minimal
incentive to evaluate or reconsider thinking patterns or behaviors if success is the
outcome (irrespective of the causes of that success). Indeed, attribution theories
(Heider, 1958) suggest that individuals have a tendency to attribute their successes
to themselves (internal attribution) and failure to external factors (external attri-
bution). The ability of entrepreneurs to objectively reflect on and evaluate their
experiences (whether they are successes or failures) may be critical in determining
their future performance.
Hence, while cognitive processes may be a source of sustained competi-
tive advantage they may limit the ability of some entrepreneurs to adapt in
response to changing/different market and technological conditions. In some
cases, however, habitual entrepreneurs may effectively reflect and evaluate
their experiences and develop expertise. Habitual entrepreneurs may develop
expertise in various stages of the entrepreneurial process, such as opportunity
recognition or resource acquisition. On the other hand, heuristics and biases
may influence ones perception of uncertainty and complexity. As intimated

earlier, there is an obvious danger that habitual entrepreneurs operating in the
same sector as their previous venture may attempt to replicate actions that were
previously successful (i.e. hubris). If experienced entrepreneurs are not aware
of (or fail to respond to) changing external environmental conditions, there is a
risk that habitual entrepreneurs may make serious mistakes when operating their
subsequent ventures.
Individuals generally adjust their judgment by learning from feedback about past
decisions (Bazerman, 1990). Due to delays or bias in this feedback, individuals
may be prone to errors in their learning. Even experienced decision-makers do
not always know why and how they do what they do. Due to this problem, some
entrepreneurs may exhibit basic judgmental biases that are unlikely to be corrected
in the real world (Tversky & Kahneman, 1986). Nisbett and Ross (1980) argue
that an indiscriminate use of heuristics can lead people into serious judgmental
errors. However, they insist that in many contexts, heuristics can be helpful and
efficient tools of inference. They argue that the normative status of using heuristics,
and the pragmatic utility of using them, will depend on the judgmental domain
and context. Louis and Sutton (1991) argue that individual effectiveness is not
determined by how well an individual functions in a particular cognitive mode.
Rather, individuals who are able to “switch cognitive gears” are likely to be more
effective in a given domain.
Northcraft and Neale (1987) found that even experienced decision-makers
tended to be very biased. Further, while most “effective decision-makers” are
effective in a specific domain, experience without expertise can be quite dangerous
when it is transferred to a different context or when the environment changes
(Dawes, 1988). Neale and Northcraft (1989) have argued that the development
of expertise could eliminate or mitigate biased decision making. They view
experience simply as repeated feedback, while expertise requires that the
decision-makers have a conceptual understanding of what constitutes a rational
decision-making process. Developing expertise requires constant monitoring
and awareness of the decision-making processes. Consequently, individuals who
know what they are doing and why, and those who have learnt from previous
events (i.e. failures and successes) generally avoid decision-making biases (e.g.
over-confidence and insufficient adjustments resulting in the repetition of past
errors).
In order to understand the impact cognitive processes have on entrepreneurial
behavior, the following section uses the above dynamic human capital perspective
to developed a model of how opportunities are identified by novice and habitual
entrepreneurs and why certain novice entrepreneurs go on to become habitual
entrepreneurs.
THE USE OF HUMAN CAPITAL IN THE

ENTREPRENEURIAL PROCESS: OPPORTUNITY
IDENTIFICATION AND EXPLOITATION
One of the fundamental reasons for the fascination with entrepreneurs and
the inventions that they develop seems to center around why and how they
see new opportunities. An entrepreneurial opportunity invariably involves the
development of some new idea that most others overlook. In the context of
environmental change, those with an entrepreneurial cognitive orientation (i.e.
extensive use of heuristics) often see new opportunities where most others are
concerned with protecting themselves from emerging threats and changes. Very
few studies have focused upon opportunity recognition and information search
processes exhibited by different types of entrepreneurs (Alsos & Kolvereid,
1999). While stocks of information create mental schemas providing a framework
for recognizing new information, opportunity recognition and information search
by entrepreneurs may be a function of an individual’s capacity to handle complex
information (Venkataraman, 1997). Venkataraman (1997) draws attention to three
main areas of difference between individuals that may help understanding of
why certain individuals recognize opportunities while others do not: knowledge
(and information) differences; cognitive differences; and behavioral differences.
“Why,” “when” and “how” certain individuals exploit opportunities appears to
be a function of the joint characteristics of the opportunity and the nature of
the individual (Shane & Venkataraman, 2000). This section explains differences
between novice and habitual entrepreneurs with respect to two stages of the
entrepreneurial process: opportunity identification and the exploitation of
opportunities.
Opportunity Identification
The possession of idiosyncratic information allows people to see particular

opportunities that others cannot, even if they are not actively searching for such
opportunities (Shane, 2000). However, simply being in possession of valuable
information is insufficient for entrepreneurship. The ability to make the connection
between specific knowledge and a commercial opportunity requires a set of
skills, aptitudes, insights, and circumstances that are neither uniformly nor widely
distributed (Venkataraman, 1997). It follows, therefore, that the extent to which
individuals recognize opportunities and search for relevant information to evaluate
the opportunity will depend on the make-up of the various dimensions/aspects of
an individual’s human capital.
Two broad perspectives relating to opportunity and search behavior have

been identified (Kaish & Gilad, 1991; Woo, Folta & Cooper, 1992). The first
perspective, based on neo-classical economic theory, takes a “conscious search
perspective” in which information search is a means of optimizing performance
(Caplan, 1999; Stigler, 1961). Entrepreneurs are assumed to know a priori where
the invention/innovation needs to be made and can accurately weight the cost
and benefits of acquiring new information. Entrepreneurs may invest in specific
information surrounding a targeted invention enabling them to be in a better
position to discover the new opportunities (Fiet, 1996).
The second perspective, based on Kirzner’s (1973) work relating to “en-
trepreneurial alertness,” suggests that the opportunities cannot be accurately
modelled as a rational search process, since opportunities are unknown until
discovered (Kaish & Gilad, 1991). The focus therefore should be on the process
side of discovery. Entrepreneurial alertness refers to “flashes of superior insight”
that enable one to recognize an opportunity when it presents itself (Kirzner, 1997).
Entrepreneurial alertness involves a distinctive set of perceptual and cognitive
processing skills that direct the opportunity identification process (Gaglio
& Katz, 2001).
In assuming that both the search for information and the process involved are
important, we argue here that an entrepreneurial cognition perspective enables us
to extend models of opportunity identification. Entrepreneurial cognition enables
one to build on specific information to make new leaps in the development of new
discoveries and inventions. It is apparent that, although all information cannot
be codified and explicitly stated, entrepreneurs have a deep sense of the relevant
inter-relationships between what appears to be superficial and unnecessary in-
formation. Building on these deeper understandings, entrepreneurs often quickly
develop new hunches about how a new variable such as another technological
breakthrough or an environmental change will impact a specific project long before
it can be methodically and rationally explained. These hunches can be viewed in
terms of mental schemas (the cumulative experience, learning and meanings an
individual has encountered and constructed about a specific domain) that provide
a framework for recognizing and evaluating information relevant to an opportunity
(Gaglio, 1997).
The introduction of several new signals and bits of information may indicate
that a change is starting to occur. Combining these bits of information with a
heuristic-based logic may prompt an entrepreneur to conclude that an important
opportunity resides here. To invest in more complete information will require cost
and further delay the development of the discovery process for two reasons. First,
given the very limited resources that entrepreneurs typically possess, investing
in substantial amounts of information is rarely possible. Second, obtaining the
critical information will probably require considerable amounts of time, further

delaying the discovery process. If new opportunities are not pursued until relatively
complete information is obtained, the window of opportunity for the new invention
is likely to be closed.
Heuristic-based logic also has relevance for entrepreneurial discovery that
goes beyond the practical economics of investments in substantial amounts of
information. The decision-making literature has typically approached heuristic
issues as a phenomenon that needs to be corrected (e.g. Schwenk, 1986; Zajac &
Bazerman, 1991). However, as already indicated, there is an emerging thought that
there may be some positive implications to their use (Krabuanrat & Phelps, 1998;
Wright et al., 2000). As intimated in the previous section, habitual entrepreneurs
can be distinguished from novice entrepreneurs with respect to their more
extensive reliance on cognitive processes (i.e. heuristics). This cognitive approach
allows individuals to make inferences and envisage cause-effect relationships
even though they may not be individually experienced (Gavetti & Levinthal,
2000). Applied to the entrepreneurial context, we may expect the strength of
entrepreneurial cognition (i.e. reliance on heuristics) to influence the opportunity
identification process. We examine several aspects of opportunity identification:
the search for information, the quantity of opportunities identified in a given
period and the nature and value of the opportunities identified.
The Search for Information

The amount and nature of information sought (Kaish & Gilad, 1991) can be influ-
enced by the extent to which an entrepreneur relies on entrepreneurial cognitive
processes (i.e. heuristics). A strong reliance on heuristics can enable an individual
to build on specific information to make new leaps in the identification and devel-
opment of opportunities. A strong entrepreneurial cognitive orientation may result
in the individual feeling less need to collect relevant information. This is because
cognitive approaches (Gavetti & Levinthal, 2000) allow the individual to envisage
the outcome of a particular opportunity without actually having to exploit it and
hence bear the associated risks and costs. Habitual entrepreneurs, who we have
argued display a strong reliance on entrepreneurial cognitive processes, might
therefore require less information to identify an opportunity than their novice
counterparts. Indeed, both empirical and conceptual work suggests that this may be
the case. Cooper et al. (1995) found that on average, habitual entrepreneurs sought
less information than novice entrepreneurs. McGrath and MacMillan (2000)
suggest that habitual entrepreneurs avoid “analyzing ideas to death” and may
therefore avoid deliberate, time-consuming and analytically correct models. Fiet
et al. (2000) suggest that habitual entrepreneurs may search for less information
because they may be more likely to concentrate on searching within a more
specific domain of venture ideas based on routines that worked well in the
past. Ronstadt’s (1988) “corridor principle” suggests that the best new venture
opportunities may only be revealed when the entrepreneur is involved in a venture
since greater information becomes available about relevant networks, resources,
markets and products. Finally, evidence from other fields suggests that when faced
with an ill-structured problem, individuals with high levels of knowledge will
attempt to add structure by making inferences and drawing on existing knowledge
(Simon, 1973). On the basis on this discussion, the following proposition
can be derived:
P1. Habitual entrepreneurs will search for less information in the opportunity
identification process than their novice counterparts.
The Quantity of Opportunities Identified

While habitual entrepreneurs may search for less information relative to their
novice counterparts, this does not necessarily mean that they identify fewer op-
portunities. Indeed, due to their extensive use of heuristics, habitual entrepreneurs
may be able to make more efficient use of information. Gaglio and Katz (2001)
propose the possibility of entrepreneurial alertness falling along a continuum.
Due to their cognitive orientation and experientially acquired human capital,
habitual entrepreneurs may be at the alert end of the spectrum.
Gaglio (1997) has argued that some people habitually activate a schema5
regardless of its appropriateness to the moment. Such “chronic activators” have an
added sensitivity to the features stored in their schema such that they can notice it
in unambiguous situations and notice it in the midst of an otherwise overwhelming
amount of stimuli. Hence, entrepreneurs (or certain groups of entrepreneurs)
may be characterized by their “habitual” schema activation, which would explain
how alertness might be uncontrollable as Kirzner (1973) claims. We would
expect habitual entrepreneurs to display a tendency towards habitual schema
activation. Further supporting this tendency is the possibility of some individuals
having a higher “optimal level” of stimulation as posited by activation theory
(Hebb, 1955). In addition, some habitual entrepreneurs may have accumulated
financial resources which they may want to channel into a subsequent venture.
The availability of these funds may make them more “alert” to opportunities
and increase their tendency to unify and connect what otherwise appear to
be superficially disparate information. This discussion suggests the following
proposition:
P2. In a given period, habitual entrepreneurs will identify a greater number of

opportunities than their novice counterparts.
Quality of Opportunities Identified

When an individual broadens the domain of their search, s/he may increase the
likelihood of identifying a valuable business opportunity. Habitual entrepreneurs
who have a stronger reliance on entrepreneurial cognitive processes, may be
able to use their heuristics to identify opportunities in domain they have no
prior experience. Wright et al. (1997a, b) noted, however, that some habitual
entrepreneurs move into domains in which they have limited knowledge while
trying to replicate successful practices used in a familiar domain. It may be
beneficial, therefore, if the entrepreneur’s previous investments and repertoire
of routines (i.e. history) constrain his/her future behavior. Indeed, Shane (2000)
argues that knowledge in a particular market is crucial in identifying opportunities
in that area. Gavetti and Levinthal (2000) posit that intelligent action is driven
both by cognitive and experiential influences. Cognitive search is broad in that
it considers numerous alternatives simultaneously whereas experiential search is
narrow since it is limited by the number of experiences one can have in a given
period. On the other hand, cognitive search can be misspecified while experiential
search tests the alternatives on the basis of the actual environment rather than a
mere representation of the environment (Gavetti & Levinthal, 2000). Previous en-
trepreneurial experience may reduce the likelihood of an entrepreneur moving into
unfamiliar territory where they may be at a relative disadvantage to incumbents.
Habitual entrepreneurs may have a unique advantage in that they can combine
experiential search with cognitive search. For habitual entrepreneurs, their human
capital comprising of experientially acquired knowledge and their cognitive
orientation may be critical in identifying and taking advantage of valuable
dis-equilibrium profit opportunities (Kaish & Gilad, 1991). Novice entrepreneurs
who have a relatively weak reliance on entrepreneurial cognitive processes and
who have had no prior experience in entrepreneurship, may therefore be at a dis-
advantage when it comes to evaluating the quality of an opportunity. We therefore
propose the following:
P3. Habitual entrepreneurs will be more effective in identifying valuable

opportunities than their novice counterparts.
Opportunity Exploitation
While existing research on entrepreneurial cognition may explain how en-

trepreneurs identify opportunities and how there may be differences between
habitual and novice entrepreneurs in this respect, minimal attention has been
paid to why opportunities are exploited once they are identified. The use of
heuristic-based thinking may also have implications for the exploitation of

opportunities. Heuristic-based thinking may allow individuals to overcome
barriers more effectively. For example, the representativeness heuristic can enable
decisions to be made without having complete information. Since the execution of
an entrepreneurial idea often takes place in an uncertain environment, the repre-
sentativeness heuristic may be critical to enable the entrepreneur to move forward.
Similarly, the over-confidence heuristic may also encourage the entrepreneur to
make the transition from opportunity identification to opportunity exploitation.
The heuristic dimension of entrepreneurial cognition does not, however, explicitly
explain why certain entrepreneurs may choose to become habitual entrepreneurs.
Building on these theories of attribution and learned helplessness, we develop
a simplified model that theoretically predicts whether or not an entrepreneur
will remain as a novice entrepreneur (or indeed exit from the entrepreneurial
career) or continue entrepreneurial activity to become a habitual entrepreneur.
Once the entrepreneur has exploited his/her initial entrepreneurial opportunity,
he/she will at some point evaluate the venture with respect to its performance.
Based on the entrepreneur’s mode of causal attribution we may anticipate the
effects on the individual’s entrepreneurial career. Figure 1 provides an overview
Fig. 1. The Impact of Attribution on the Decision to Become a Habitual Entrepreneur.

of the model. The model highlights several stages involved in the decision
whether or not to become a habitual entrepreneur. The first stage involves
identifying the perceived outcome of the entrepreneurial venture and determining
whether it is a success or a failure. The second stage involves interpretation of
the outcome and identification of the causes of the success or failure (causal
attribution). The third stage relates to the behavioural response and outcome.
Individuals will persist in an activity if they attribute the reasons for their
success to internal, stable, and intentional factors while attributing their failures
to external, variable, or accidental factors (Gatewood et al., 1995). Having
attributed the outcome to a particular set of causes, however, the entrepreneur
may respond proactively (through further evaluation and learning) or reactively
(subject to bias). Finally, the entrepreneur will make a decision as to whether
he/she will continue entrepreneurial activity to become a habitual entrepreneur
or remain a one-time (novice) entrepreneur. These various stages are discussed
below.
Stage 1: Perceived Outcome of Entrepreneurial Act

Following exploitation of an initial entrepreneurial opportunity, the entrepreneurs
will at some point evaluate the venture with respect to its performance. This
performance may be evaluated in numerous ways. For those who initiated the
venture primarily motivated by financial reward for example, the venture’s success
may be valued in terms of financial performance indicators. Some entrepreneurs
may be motivated by other criteria and hence may, for example, evaluate the venture
in terms of personal satisfaction. McGrath (1999) defines failure as the termination
of an initiative that has fallen short of its goals. Gimeno, Folta, Cooper and Woo
(1997) presented a model in which the decision to terminate a venture depends on an
entrepreneur’s own threshold of performance which is determined by human cap-
ital characteristics such as alternative employment opportunities, psychic income
from entrepreneurship and the switching costs involved in moving to alternative
occupations. Irrespective of how it is measured, however, the entrepreneur will
decide whether the venture is to be deemed a success or a failure. The en-
trepreneur will then attribute this success or failure to various internal or external
factors.
Stage 2: Causal Attribution

As intimated above, individuals may attribute different causes to a particular
outcome, which may in turn influence their subsequent behavior. The success
or failure of the venture may be attributed to internal causes (e.g. skills and
intelligence) or external causes (e.g. market conditions, regulatory changes)
(Zacharakis et al., 1999). Internal attributions may be associated with individual
ability or effort, while external attributions are associated with task difficulty or
luck (Heider, 1958). Once a causal attribution has been sought and identified, the
entrepreneur may consciously or subconsciously respond in a number of ways.
Indeed, the term explanatory style has been used to explain how individuals will
explain success and in particular failure (Abrahamson, Seligman & Teasdale,
1978). These explanatory styles and their impact on subsequent behavior are
discussed below.
Stages 3: Behavioral Responses and Outcomes

Attribution of Success: If the entrepreneur attributes their success to internal
causes, we propose that there may be two behavioral responses. Firstly, the
entrepreneur may not truly evaluate the causes of the success and may do so due to
self-serving bias or overconfidence. In turn, the entrepreneur may not objectively
evaluate the experience and identify lessons to be learned from that experience.
The perception of success may have positive and negative elements. Sitkin (1992)
argues that success may be helpful in a number of ways – the rewards of success
may stimulate confidence and persistence, increase the coordinated pursuit of com-
mon goals and enhance efficiency. Success is thought to stimulate persistence not
simply because individuals are rewarded for success, but also because it provides
a secure and stable basis for launching future activity (Weick, 1984). Sitkin (1992)
also argues, however, that a number of liabilities may be associated with success,
which may take the form of complacency, restricted search and attention, risk-
aversion and homogeneity. If an entrepreneur does not objectively evaluate their
success therefore, he/she may be prone to these liabilities. While they may wish
to replicate their success, they may find themselves sticking with their winning
“formula” even though the circumstances may have changed (what Sitkin, 1992,
refers to as “homogeneity”). These liabilities may be particularly apparent when
the entrepreneur relies on and is unable to switch out of heuristic-based thinking.
On the other hand, if the entrepreneur is objective about the experience and
attempts to learn from it, he/she may further evaluate the cause of success. As
discussed earlier, attribution theorists suggest that decisions subsequent to the
causal attribution may be influenced by additional characteristics of the cause
– such as stability and controllability. If the entrepreneur identified the cause
of success as being unstable, he/she may be reluctant to repeat entrepreneurial
activity. Alternatively, if the entrepreneur feels he/she has significant control
over the cause, they may choose to continue entrepreneurship. In contrast to
the concept of learned helplessness, individuals susceptible to learned optimism
(Schulman, 1999) may be more likely to view causes as controllable and unstable
(this is in contrast to learned helplessness when causes, particularly negative ones,
are seen as stable and uncontrollable).
Where causes of success are attributed to external factors, we may expect

differing behavioral responses depending on the extent to which the entrepreneur
objectively evaluates the experience. If the success is considered to be due to
an external factor and the entrepreneur displays patterns of behavior resembling
learned helplessness, as highlighted above, they may feel they have no control
over the cause. Faced with the belief of lack of control, the entrepreneur may be
reluctant to repeat entrepreneurial activity in fear that the external causes may
not be present a second time round. In cases where the entrepreneur displays
learned optimism and conscious learning, however, the response may be different.
If the entrepreneur views the cause as being unstable but controllable, the
entrepreneur may choose to continue entrepreneurial activity. On the other hand,
if the entrepreneur identifies the cause of success as being due to unstable and
uncontrollable factors, then he/she may choose not to pursue a second venture.
The differing causal attributions of success lead to an array of behavioral out-
comes. Therefore, the following propositions are derived:
P4. Those novice entrepreneurs who attribute their success to internal factors
will become habitual entrepreneurs.
P5a. Those novice entrepreneurs who attribute their success to external
factors and who are susceptible to learned helplessness will remain novice
entrepreneurs.
P5b. Those novice entrepreneurs who attribute their success to external factors
and who are able to clearly evaluate and learn from their experience will either;
(i) remain a novice entrepreneur if they perceive to have no control over the
cause or;
(ii) become a habitual entrepreneur if they perceive to have control of the
external cause.
Attribution of Failure: Attribution theories have been most commonly applied to
negative outcome situations. Faced with a particular negative outcome, once again
we may expect entrepreneurs to vary in terms of their explanatory styles. If the
entrepreneur attributes the cause of failure to internal factors and is susceptible to
learned helplessness they are unlikely to engage in a subsequent venture and in
most cases will choose to exit from the initial venture. We may anticipate a similar
response even if the locus of the cause is external. If, however, the entrepreneur is
not subject to learned helplessness and is able to objectively evaluate the venture,
he/she may choose one of two options. In the event that the entrepreneur identifies
the cause as being unstable and controllable (such as lack of skills), he/she may
choose to do something about this cause (e.g. attend training courses, bring in a
partner). Indeed, Sitkin (1992) argues that failure represents a “clear signal” that
facilitates the recognition and interpretation of otherwise ambiguous outcomes.
Further, with failure, old ways of thinking and acting may be shaken and new ways
may be developed (Louis & Sutton, 1991). In contrast, however, the cause of fail-
ure may be viewed as being stable and uncontrollable, in which case the objective
entrepreneur is unlikely to engage in subsequent entrepreneurial activity. We may
expect a similar response if the cause is attributed to external factors. Entrepreneurs
susceptible to learned optimism (Schulman, 1999) and hence persistence that at-
tribute the cause of failure to external factors may hold the view that a change in
the external environment could allow them to succeed the second time round.
The above discussion suggests that:
P6a. Those novice entrepreneurs who attribute their failure to internal
causes and who are susceptible to learned helplessness will remain novice
entrepreneurs.
P6b. Those novice entrepreneurs who attribute their failure to internal factors
internal cause or;
(ii) become a habitual entrepreneur if they perceive to have control over the
internal cause.
P7a. Those novice entrepreneurs who attribute their failure to external
causes and who are susceptible to learned helplessness will remain novice
entrepreneurs.
P7b. Those novice entrepreneurs who attribute their failure to external factors
external cause or;
(ii) become a habitual entrepreneur is they perceive to have control of the
external cause.
The above discussion suggests that entrepreneurs, faced with a particular outcome
will behave differently in their decision to pursue an entrepreneurial career. These
differences can be explained by the attribution and learning styles adopted by the
entrepreneur. Those entrepreneurs who decide to subsequently become habitual
entrepreneurs will do so by identifying further entrepreneurial opportunities. To
do so, the entrepreneur may rely on heuristics and their mental schemas discussed
in the previous section. Experience may have a significant contributory influence
on the identification of subsequent venture ideas. This may take various forms
such as broadening the entrepreneur’s mental schema (since this is influenced by
experience and accumulated knowledge). Further, there is evidence to suggest that
due to their track record, habitual entrepreneurs may also find themselves in a
situation where an opportunity is brought to them (Wright et al., 1997a, b).
DISCUSSION AND CONCLUSIONS

In this study, we have synthesized a human capital and cognition perspective
to explain the emergence of different types of entrepreneurs. The study defines
human capital in a broad sense to incorporate the cognitive styles utilized by
entrepreneurs. Entrepreneurial experience is often considered an important
component of an entrepreneur’s human capital and hence subsequent activities.
The extent to which entrepreneurs can translate previous ownership experience
into higher subsequent entrepreneurial (and organizational) performance is likely
to depend on a number of intangible considerations such as cognition and learning.
It is suggested that entrepreneurs may adopt different cognitive approaches when
interpreting events and making decisions.
Two broad categories of cognition have been highlighted: heuristic-based
(i.e. automatic) thinking and systematic (i.e. rational) thinking. Entrepreneurial
cognition is often associated with heuristic-based thinking. While heuristic based
thinking has its merits, particularly under conditions of uncertainty it may lead
to a number of errors and biases in decision-making, such as over-confidence
and representativeness. Systematic thinking can overcome some of these biases.
It can, however, often be timely and costly. Further, heuristic-based thinking
can facilitate the identification and exploitation of entrepreneurial opportunities.
Habitual entrepreneurs, as a result of their strong entrepreneurial cognition may be
particularly effective in the identification of entrepreneurial opportunities. Based
on their entrepreneurial cognition, we proposed that habitual entrepreneurs would
search for less information but would identify a greater number of opportunities
in a given period. Further, it was argued that habitual entrepreneurs would be
more likely to identify opportunities of superior quality.
While entrepreneurial cognition may explain an entrepreneur’s tendency to
identify opportunities, it does not explicitly explain why certain entrepreneurs
embark on subsequent ventures while others do not. The cognitive and learning
strategies utilized to evaluate and learn from experiences may influence the deci-
sion of an entrepreneur to become a habitual entrepreneur. Drawing on attribution
theory, we explain why certain entrepreneurs will select continued entrepreneur-
ship (i.e. habitual entrepreneurship) while others will choose to remain one-time
entrepreneurs. Attribution theory was used to explain the tendency to exploit oppor-
tunities. Our analysis highlights that causal attribution itself is subject to potential
bias. For example, an entrepreneurs who was successful the first time round may
attribute this success to his/her own ability, when in fact external factors may have
had a crucial role in the success. Failure to acknowledge this may have a negative
effect on subsequent ventures, if the entrepreneur is susceptible to overconfidence.
The impact of experience per se on overcoming the problems associated with
biases and heuristics is debatable. Bazerman (1990) suggested that experienced
decision-makers may not explicitly know why and how they do what they do. If
experience is not truly evaluated, it becomes simple feedback that is interpreted
with limited awareness. Some entrepreneurs may reflect and consciously evaluate
their previous business ownership experiences whilst others do not. If experience
is translated into expertise, decision-makers have a conceptual understanding of
what constitutes a rational decision-making process. Most notably, it can be used
to avoid biases. Further, expertise may facilitate the switching of cognitive gears
(Louis & Sutton, 1991) from heuristic-based thinking to systematic thinking where
appropriate.
Our analysis suggests several areas for future research. Since entrepreneurs
may be seen as “idiosyncratic” and “path-dependent” units under the human
capital perspective, there is scope for understanding this heterogeneity. Exploring
entrepreneurs as a complex set of resources and capabilities is likely to aid our
understanding of entrepreneurship. Most notably, the approach is likely to be
of great use in understanding which path entrepreneurs take (i.e. strategies) and
how this will affect their performance. This chapter has attempted to highlight
that while human capital is crucial in determining the viability and nature of the
entrepreneurial act, it may serve as a barrier if the individual experience biases
his/her thinking and learning. Furthermore, depending on the environmental
conditions faced by entrepreneurs, human capital may erode over time or with
changing circumstances. The entrepreneur must, therefore, develop the necessary
skills, resources and capabilities to renew their human capital base in order to
maintain/obtain a sustained competitive advantage. While this may be relevant
for entrepreneurs generally, in terms of venture survival, it may also be important
in the context of habitual entrepreneurship where the entrepreneur may be
carrying out a subsequent entrepreneurial act. Additional entrepreneur-level
as well as firm-level studies are required to explore the relationship between
entrepreneurial human capital (and its development and deployment) and
the competitive strategies pursued by different types of entrepreneurs and
organizations.
Additional research is also warranted focusing on how entrepreneurs learn and
how they use their experience-based knowledge. In order to take advantage of
the efficiency benefits that heuristic-based thinking can offer, it may be important
to understand how entrepreneurs can (and should) switch from one mode of
thinking to the other. An appreciation of these issues is likely to require in-depth
exploratory qualitative research. Also, there is a need to explore the extent to which
entrepreneurs adopt heuristic based information processing or systematic infor-
mation processing with regard to the entrepreneurial process. There is, therefore,
a need to examine the link between the extent to which entrepreneurs adapt (or
learn) from their previous entrepreneurial experience. Studies suggest that even in
the learning process, entrepreneurs may be prone to biases (e.g. attribution bias).
There is evidence to suggest that individuals can be taught to overcome various
decision-making biases with the potential for improving subsequent performance
(Koriat & Goldsmith, 1996; Strack & Hannover, 1996). High levels of deliberate
practice, associated with informative feedback, opportunities for repetition and
opportunities for correction of errors, may increase an individual’s awareness,
and may induce non-biased learning (Ericsson, Krampe & Tesch-Romer, 1993).
Further, there may be broader benefits to society as a result of developing expertise.
Knowledge may be easier to transfer, whereas “mindless” learning from experience
is difficult to communicate (Bazerman, 1990). Where heuristic-based thinking is
used, such “mindless” learning may be commonplace.
An understanding of habitual entrepreneurs compared with novice entrepreneurs
has implications for the investment behavior of financial institutions and for policy-
makers and practitioners providing support for entrepreneurship and economic
development. From a policy perspective therefore, there may be scope for assisting
entrepreneurs in overcoming detrimental biases and barriers to subsequent success.
To encourage best practice, the resources (such as skills, competencies, networks,
etc.) accumulated and leveraged by successful habitual entrepreneurs need to be
identified and disseminated. As intimated earlier, unless it is understood how and
why entrepreneurs behave the way they do, the transfer of knowledge is prohibited.
In order to address this research gap, studies conducted in a variety of industrial,
locational, national and cultural settings need to carefully examine the human
capital and cognitive processes of habitual entrepreneurs compared with novice
entrepreneurs and their implications for opportunity recognition, information
search, opportunity exploitation and ultimately entrepreneurial performance.
In order to examine, in particular the cognitive dimension of human capital,
researchers can draw upon existing studies from psychology, management and
entrepreneurship. Measures are already available that operationalize various
aspects of entrepreneurial cognition, in particular in the area of biases and
heuristics (Forbes, 1999). Further, a number of learning inventories have been
developed to distinguish individuals on the basis of their learning preferences
and styles (e.g. Kolb, 1984). Entrepreneurial experience should be captured not
just in terms of whether the entrepreneur has prior entrepreneurial experience

but in terms of the magnitude and nature of the experience. Stuart and Abetti
(1990) detected that their composite measure of entrepreneurial experience
(measured in terms of the number of previous ventures and the role played in
them) was the only factor that significantly explained variations in the selected
performance indicators. In distinguishing experience from expertise, expert
information processing theory can provide insight into how experts think and
behave. In addition, an examination of the literature on meta-cognitive knowledge
(i.e. knowledge about an individual’s cognitive processing, including awareness
of thinking resources and capabilities, culminating in the ability to direct the
learning process (Metcalfe & Shimamura, 1994; Nelson, 1992)) may prove useful
in distinguishing expertise from simple feedback experience provides.
A variety of techniques can be used to measure the dimensions of opportunity
identification and exploitation discussed in this study. Numerous measures have
been used to examine the sources and intensity of information search (Cooper, Folta
& Woo, 1995; Kaish & Gilad, 1991). In evaluating the quality of an opportunity,
a selection of measures may need to be used. Fiet and Migliore (2001) use a panel
to rank ideas using four criteria from the resource and competence literatures that
reflect the capacity necessary to generate a sustainable competitive advantage and
above average earnings. Using a panel of experts ranging from academics, expert
entrepreneurs and financiers, it may be possible to identify a list of attributes
associated with a valuable opportunity. Chandler and Hanks (1994) use a six-item
scale to measure the quality of an opportunity. The nature and amount of resources
utilized to initiate the venture may also be an indicator of its potential value,
particularly in terms of financial and human capital. The amount of initial finance
invested in the business may at least give some indication of the initial scale of the
venture (Cooper, Folta & Woo, 1995). The willingness of external financiers may
also be an indicator of potential value.
In this paper we have focused on the simple dichotomy between novice and
habitual entrepreneurs. Research has suggested that there may be important
within-group differences regarding novice and habitual entrepreneurs. Some
habitual entrepreneurs may exhibit serial behavior, exiting one venture before en-
tering subsequent ones, while others may develop a portfolio of contemporaneous
ventures (Westhead & Wright, 1998). Similarly, while some novice entrepreneurs
may only ever exploit one venture, others may go on to become habitual
entrepreneurs. Further research might also usefully examine the extent to which
these within group differences are associated with different types of cognitive
processes and learning.
Further, while we have assumed that entrepreneurship may involve the start-up
of new ventures, or the purchase or inheritance of an existing business, empirical
evidence suggests that both novice and habitual entrepreneurs may cite different
motivations for business ownership (Westhead & Wright, 1998). These motivations
have been found to range from wealth creation to autonomy and ensuring fam-
ily security. Not all business owners will be wealth creators. Additional research
is required to examine the extent to which motivations for business ownership
are influenced by the entrepreneur’s cognition and how these motivations affect
entrepreneurial behavior.
As becoming a habitual entrepreneur takes place over time, there is a need
for research in this area to be conducted on the basis of longitudinal analyses.
Longitudinal samples are subject, in particular, to major problems regarding sample
attrition. However, this may be less of a problem for theory building purposes.
Longitudinal analysis may be especially important for analyzing those novice
entrepreneurs who may or may not go on to become habitual entrepreneurs.
NOTES
1. We acknowledge that not all business ownership will involve wealth creation. This
is evident from the motivational diversity highlighted in a number of empirical studies
(Birley & Westhead, 1990; Westhead & Wright, 1998). In this study, however, we assume
that business ownership involves wealth creation (whether this be in the form of start-
up, purchase or inheritance of a business). This is consistent with Hawley’s (1927) work
where he argued that ownership rights are crucial for undertaking entrepreneurship, since
they allow the entrepreneur to make decisions about the coordination of resources to gain
entrepreneurial rents, in return for absorbing the uncertainty of owning those resources. We
return to this issue in the conclusion.
2. Osipow (1973) introduced an open systems model of careers in the 1960s, while
Ronstadt (1988) independently developed his work on the corridor principle in the 1970s.
Katz (1992), integrating the two, developed a psychosocial model of employment status
choice.
3. Eliot Jacques developed a model of bureaucracy which incorporated small firm cre-
ation. This model was based on the cognitive differentiation approach of psychoanalyst
Melanie Klein. His work has been argued to have influenced other scholars exploring en-
trepreneurship through a cognitive lens such as H. Levinson and A. Zalenznik and more
recently Kets de Vries and Danny Miller.
4. Some novice entrepreneurs become habitual entrepreneurs. We can reasonably spec-
ulate that these “transient” novice entrepreneurs will exhibit a reliance on entrepreneurial
cognitive processes exhibited by habitual rather than one-time novice entrepreneurs (i.e. in-
dividuals who will only ever own one independent business). Over time, “transient” novice
entrepreneurs who benefit from learning will develop a knowledge base similar to a habit-
ual. Their cognitive processes will, therefore, enable them to have ownership stakes in more
than one venture.
5. Where schema are defined as “dynamic mental models that represent an individual’s
knowledge and beliefs about how physical and social worlds work” (Gaglio & Katz, 2001,
p. 97).
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OPPORTUNITY DEVELOPMENT:
A SOCIO-COGNITIVE PERSPECTIVE
Alice de Koning
INTRODUCTION
Over the last ten years, researchers have increasingly focused on the pursuit of
opportunity as one of the central acts of entrepreneurship. This chapter proposes
a model of opportunity recognition which emphasizes the process through which
entrepreneurs interact with their social contexts to develop opportunities, that
is, to develop and shape ideas into attractive opportunities. The central research
question is “how does an individual use his or her social context to recognize
opportunity?” The question can be re-phrased in two parts, highlighting the two
sides of the influence process. First, how do the people around the individual
affect both the entrepreneurial thinking process and the opportunity ideas? And
second, how does the individual structure his or her social context and use the
people surrounding him or her for recognizing and pursuing opportunities?
Granovetter (1985) argued that economic activity is embedded in a social
context. The implication of being embedded may be both limiting and enabling.
Studies of entrepreneurial networks have shown that entrepreneurs’ networks may
play a significant role in giving advice, providing resources, access to expertise,
and numerous other aspects (e.g. Aldrich, 1999; Hansen, 1999; Ostgaard &
Birley, 1996; Starr & Macmillan, 1990). Social context also defines the rewards,
and therefore may shape the personal incentives of the people who recognize
opportunities (Davidsson, 1995). Thus, an individual’s social network should
have a direct or indirect impact on opportunity recognition. With the diversity of

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06009-4
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network studies now available as a basis for further investigation, the theoretical
link between opportunity recognition and social context is now being explored.
In this study, I specifically link insights into social context to the cognitive
process at an individual level, to contribute to our understanding of the process
of opportunity development. By bringing social context to the question of
opportunity development, I try to enhance the perspective on the entrepreneur
as an actor in a process leading to the emergence of a firm, thus linking the
recognition and pursuit of opportunities into an interdependent process. This
approach helps connect research on opportunity recognition and firm emergence.
I also hope to create a model that may be applied to the ongoing development
and growth of a firm. By focusing on the entrepreneurial actor in a social context,
we may be able to generate insights common to opportunity orientation in both
corporate and individual entrepreneurship.
In this chapter I present a framework of opportunity development as a socio-
cognitive process. The framework is based on insights generated through two
phases of exploratory field research with mostly successful multiple entrepreneurs
(serial and portfolio, cf. Westhead & Wright, 1998). These entrepreneurs were
selected because their many successful new ventures suggested some expertise
in opportunity recognition. The field work was used to ground the development
of a tentative descriptive theory of opportunity development (Eisenhardt, 1989),
rich in detail and scope. The goal of the study was to propose a perspective on
opportunity recognition which places the entrepreneur in his social context and
takes into account the time required to develop ideas.
Opportunity Recognition
Opportunity recognition is used in two ways in this chapter. First, opportunity

recognition may be used to describe the general area of research into how,
when, and why opportunities are recognized. Second, as noted below, the term
opportunity recognition may refer specifically to the cognitive experience of
noticing an opportunity in the market. In this paper, unless otherwise specified, I
use opportunity recognition to refer to the general area of research.
Opportunity recognition has been investigated under a number of different
terms, often reflecting underlying differences in research question and concept.
For example, Gaglio (1997) uses the term opportunity identification, following
Long and McMullan’s concept of creative insight, and proposes the framework
of cognitive schema to integrate findings on information search, biases, alertness
and other influencing factors to push forward the research agenda on opportunity
recognition. Shane and Venkataraman (2000) prefer the term opportunity
Opportunity Development 267
discovery, following Schumpeter’s usage (see also Shane, 2001). Using Hayek’s
conceptualization of markets (1988), they argue that opportunities exist in the
market due to localized information distribution, and that an entrepreneur moving
through this information landscape may discover specific opportunities. Hills,
Lumpkin and Singh (1997) and Hills and Shrader (1998), working more clearly
in a Kirzner paradigm, use the term opportunity recognition, and emphasize the
moment of insight into the commercial value of an idea. Their research uncovers
a number of characteristics and antecedents of opportunity recognition.
Not only are there various terms for opportunity recognition used within
entrepreneurship research, there are also important differences underlying the
semantics. For example, one perspective suggests that opportunities exist in the
public market and are recognizable to any one with eyes to see, as is implied
in the concept of alertness (e.g. Hills, Lumpkin & Singh, 1997). At the other
extreme, opportunities are so rooted in the prior knowledge, local information,
skills or resources of the individual that the opportunity does not exist for more
than a few people who are able to effectuate the opportunity into a venture
(e.g. Sarasvathy, 2001; Shane, 2000).1 Despite the differences in terminology
and possible underlying conceptualizations, the empirical research findings are
complementary, suggesting that the nature of opportunities exists on a continuum
from market opportunities for any interested party to recognize to highly
personalized opportunities rooted in an individual’s location or prior knowledge
(cf. Dew, Sarasvathy, Velamuri & Venkataraman, 2002). In this chapter, the
data gathering and analysis tend toward the second view of opportunity and
opportunity recognition, using a more personalized concept of opportunity.
In the context of research on opportunity recognition, Bhave (1994) used
the term opportunity recognition to describe both a process of turning an idea
into a business concept, and as a triggering event that identified the initial idea.
O’Connor and Rice (2000) illustrate the complementary perspectives of event and
process in their study of breakthrough innovations in large companies, which they
argue requires a series of opportunity recognition events by project leaders as part
of a broader development process, before an innovation can reach the market.
Inspired by Bhave (1994), I use the term opportunity development to describe
the process of developing initial opportunity ideas towards a business concept.
By initial opportunity idea, I mean the first idea or observation that is perceived
as a potential opportunity by the actor. This idea could be a focus on a customer
problem, a technology or technique with potential for developing applications, or
the desire to leverage a resource. A business concept defines how a new product
or service creates value added for targeted customers, and how the business
will capture some of that value added as profits. The process of opportunity
development may be incomplete at the time of launching a venture, if the ideas are
268 ALICE DE KONING
not shaped fully into a business concept. While recognizing that these definitions
include a number of relatively problematic terms and assumptions, the primary
emphasis in this chapter is not on the specific type or timing of the conceptual
milestones achieved, but rather on the iterative evolution of the opportunity.
THE RESEARCH METHODOLOGY: TWO PHASES

OF FIELD WORK AND ANALYSIS
The field study was designed to explore the process of identifying and developing
new business opportunities. Exploratory research is appropriate given the relative
lack of previous research in the field of opportunity recognition at the time the
study was conducted, and I choose to analyze extreme cases, for which qualitative
methods are deemed more appropriate (Birley, Muzyka, Dove & Rossell, 1995).
For this study, the extreme case of successful serial entrepreneurs was chosen as
the basis of the sample. The other key exploratory aspect of the field study was the
decision to collect data through open-ended questioning designed to encourage
the entrepreneurs to generate detailed narratives that could include types of data
not anticipated by my theoretical training. The primary objective for the field
research was to collect narratives of pre-venture processes from entrepreneurs,
including both pursued and abandoned opportunity ideas. Through an iterative
process of data analysis and literature review, beginning early in field study process,
the opportunity development model was developed. The field study provides a
basis for theoretical generalizability beyond the unique characteristics of the study
participants. Although extensive examples and anecdotes are drawn from the data
to build the model of opportunity development, these citations cannot be construed
as evidence supporting the empirical generalizability of the model. Without the
insight gained from the entrepreneurs’ narratives, however, the combination of
concepts drawn from research in opportunity recognition and social context would
have been unlikely.
The focus of the field study was successful serial entrepreneurs, because they
seemed to have a well-honed ability to recognize opportunities (Macmillan, 1986;
Starr & Bygrave, 1991). Each one would also have several opportunity experiences.
The data gathering was collected in two phases, which followed guidelines for
bounding data gathering, and thus also facilitating analysis (Miles & Huberman,
1994). In the first phase, successful serial entrepreneurs with two or more successful
ventures were included; in phase two greater emphasis the screening characteristics
were refined to include entrepreneurs with at least three successful ventures, more
successes than failures, and perceived significant increase in personal wealth. Thus,
an entrepreneur with marginal wealth gain or who chose to conceal his financial
Fig. 1. Sample Structure: Participants of Phase Two.
success for whatever reason would not be included in this study. The comparative
sample was intended to contrast success and failure, and many businesses versus
one business (see Fig. 1). The goal of these screening procedures (and eliminating
a few cases after interviews) was to avoid ambiguous cases, allowing the analysis
of theoretical extremes (Birley et al., 1995; Eisenhardt, 1989; Yin, 1984).
Study Participants
For both phases, the participants were identified largely through people with
some connection with INSEAD or its faculty. These ranged from MBA alumni,
to occasional guest lecturers, to participants in the owner director program.
In all cases, the individuals were screened for whether they “fit” the defined
case. In some cases, interviews were organized before a true evaluation could
be completed. In these cases, the interviews were conducted, but the interview
data was ignored (e.g. in the case of entrepreneurs who were under 30 years of
age). In addition to INSEAD contacts, potential participants were suggested by
colleagues in other institutions and by study participants. The rather international
sample should not confound data, as entrepreneurs tend to be quite similar despite
nationality (McGrath & MacMillan, 1992).
In phase one, nine successful serial entrepreneurs and one successful private in-
vestor in a wide range of service and manufacturing industries were interviewed.
270 ALICE DE KONING
The participants interviewed were males between the ages of 40 and 65. In phase
one, the nationalities were quite mixed: one each lives in Britain, the U.S., Belgium,
Canada, and the Netherlands, and five in France. Of the French residents, one was
an American, and another French-American. I chose to continue using data from
the interview with a private investor because he was instrumental in the opportu-
nity development process at science-based start-ups that were still defined products
and markets (cf. surrogate entrepreneurs, Franklin, Wright & Lockett, 2001). Data
gathering in phase one was conducted in 1996 and no further participants were in-
terviewed when conceptual saturation was reached, and more in-depth analysis and
conceptual development was needed to motivate the next phase of field research.
Phase two included male entrepreneurs of the same range of ages focused on low
and medium technology manufacturing, to avoid possibly confounding elements
such as degree of “novelty” of the opportunities (Bhave, 1994). The phase two
participants were interviewed in 1997 and 1998. Of the serial entrepreneurs,
one each lived in Mauritius, Sweden, U.S.A., Switzerland, two in England, and
four in France. The five single business entrepreneurs were located in Nigeria,
Austria, and France. The comparative analysis provides insight into differences
in frequency of opportunity development that leads to venture creation. Only
one failed serial entrepreneur was interviewed – more were identified, but their
contacts preferred to protect them from direct enquiry. This limits the ability to
tease out distinctions between high and low quality opportunity development,
separate from the issue of frequency.
Some indicators of the participants of the two phases of the field research
are summarized in Tables 1 and 2. The “ignored” participants are noted in the
Table 1. Participants of Phase One.

Code No. of Business No. of Success No. of Industry Country Approx. Age
A 23 20 2 England 45
B 15 8 5 France (U.S.) 45
C 10 8 3 France 55
D 3 3 2 U.S.A. 65
E 8 6 3 France (U.S.) 55
F 9 7 2 France 45
G 8 7 2 France 40
H 7 7 1 Belgium 55
I 8 8 2 Netherlands 60
J 7 7 4 Canada 65
Number of Industries: This is a strictly subjective evaluation, essentially reflecting the entrepreneurs’
own characterisation of the differences between their businesses.
Entrepreneur C is the private investor; all others are successful serial entrepreneurs.
Table 2. Participants in Phase Two.

Code No. of No. of No. of Country Approx. Included in Category
Business Success Industry Age Analysis?
K 3 2 2 Switzerland 45 Yes SSE

L 2 2 1 Nigeria 40 Yes OBE
M 2 2 1 France 45 Yes OBE
N 1 1 1 Austria 55 Yes OBE
O 4 3 2 France 40 Yes SSE
P 6 6 1 Mauritius 45 Yes SSE
Q 3 3 1 England 65 Yes SSE
R 1 1 1 England 30 No
S 4 3 2 France 55 Yes SSE
T 1 1 1 France 60 Yes OBE
U 4 3 1 France 35 Yes SSE
V 15 15 3 Sweden 50 Yes SSE
W 2 2 2 Norway 30 No
X 1 1 1 France 60 Yes OBE
Y 8 8 1 Gulf States 40 Yes SSE
Z 53 52 6 U.S.A. 60 Yes SSE
AA 3 2 2 England 40 Yes FSE
SSE: successful serial entrepreneur; OBE: one business entrepreneur; FSE: failed serial entrepreneur.
Number of Industries: This is a strictly subjective evaluation, essentially reflecting the entrepreneurs’
own characterisation of the differences between their businesses.
Number of companies: In the case of Entrepreneur Z, several companies operated essential the same
business in different geographical areas.
Entrepreneurs L & M are counted as a successful one business entrepreneur, because the first venture
is an inherited family business and shared with other family members.
summary charts below, to allow the reader to evaluate the overall mix. Brief case
summaries are in the appendices. Where specific cases are cited in this paper,
the entrepreneurs are identified by letter codes, reflecting the concern of some
entrepreneurs for confidentiality.
Data Gathering
In both phases, the primary objective for the field research was to collect narratives
of pre-venture processes. Building a conceptual framework during and after the
first phase of interviews resulted in more focused interview protocols, including
some directed lines of questioning to collect types of contextual data that did not
naturally emerge while the participants told the narratives of specific opportu-
nities. Each interview began with an explanation and discussion of the research
272 ALICE DE KONING
questions. After summarizing the entrepreneurs’ career path, the participant and
I jointly selected some a few opportunity development processes (typically 2–4
situations), both those pursued and those abandoned and with some concern for
timing within the entrepreneurs’ career and for variance in types of opportunities.
The interviews concluded by reviewing the interview protocol, to ensure that all
the major issues would be covered. In fact, the discussion of major failures and
successes, and how those ideas emerged, usually covered the questions quite
naturally. Most interviews lasted 1–2 hours, and on-site interviews sometimes
included plant tours. The interviews were most often recorded by hand, although
in phase two, a tape recorder was also occasionally used, when appropriate and if
the participant felt comfortable with recording. Field notes of the interviews were
typed up promptly, within 24 hours for phase one, and within one or two days for
phase two, except during a particularly productive week when several interviews
were conducted and the volume of typing required extra time. In phase two, the
field notes were sent to the entrepreneurs for immediate feedback. This process
was designed to allow for efficient and timely verification of the details.
The oral histories of the entrepreneurs allowed me to reconstruct longitudinal
data on specific opportunity development processes and careers. Retrospective
narrative does have inherent biases of recall which must be frankly recognized.
Holstein and Gubrium (1995) suggest shifting the emotional frame and redirecting
attention to different content can lead to participants recalling more details. Also,
Hansen (1995) and Curran, Jarvis, Blackburn and Black (1993) found that
event-based questions elicited detailed and seemingly more accurate information.
Thus, even given the biases of retrospective narrative, these factors can give
some confidence that the data is sufficiently rich and reflective of entrepreneurial
processes to allow insights and model building.
Analyzing the Oral Histories
The analysis of the interview data was conducted through iterative comparisons
of the case histories, allowing similarities and themes to emerge from the data.
Initially broad categories were used to organize the data (cf. Glaser & Strauss,
1967). These themes pointed to a broad range of published research, which
was used to explain and structure further analysis. The iterative process of data
analysis and literature review helped eliminate some issues where extensive
existing research obviated the value of exploratory research. It also indicated new
themes and deeper understanding of certain factors (such as the role of networks),
which led to a fresh analysis of the narratives of phase one. As the analysis of
phase one drew to a close, a model of opportunity development was constructed
of two levels of analysis, three cognitive activities and four clusters or roles in the
social context.
Data analysis for phase two followed the process discussed by Eisenhardt
(1989) in her synthesis of earlier guidelines for comparative case research.
The focus of the first order analysis was to validate the proposed opportunity
development model and related propositions through checking whether the cases
replicated the proposed relationships. The process began by looking within the
successful serial entrepreneur cases, looking for similarities in practices and
context. The tentative conclusions generated by these comparisons then were
checked against the comparative groups. The process was necessarily iterative,
given the inherent challenges in analyzing qualitative data of large samples. The
second stage of analysis was oriented to looking more closely at the dynamics
and the interactions between cognitive and network activities implied by the
opportunity development model. The final model now includes two levels of
analysis, four cognitive activities, and four clusters or roles in the social context,
with one role excluded and another added after analyzing the full data set. Some
comments on these shifts in the model are included in the concluding discussion.
The process of gathering and analyzing the data was conducted by the author,
and is therefore somewhat idiosyncratic in both coding the data and in the choice
of related research literatures. The interim results were regularly “tested” on
colleagues, and their suggestions contributed to the overall process. For example,
colleagues pointed to several recent papers in network analysis linking together
earlier work on source of relationships, nature and stability of strong ties, and its
impact of venture growth related to resource access, that were especially valuable
new sources for informing analysis (e.g. Ostgaard & Birley, 1996; Young, 1998).
This suggests a possible problem with replicating the results, again emphasizing
the exploratory nature of the study, and that the primary goal of the study was to
generate theoretical insight rather than empirical generalizability.
The integrative approach used to develop the model drew inspiration from
the empirical data, but relies on existing research to develop the arguments. One
shortcoming of this approach is that the underlying data which inspired this
perspective is less evident; an advantage is that the discussion shows linkages
between research streams and suggests possible new interpretations throughout.
A SOCIO-COGNITIVE PERSPECTIVE OF
OPPORTUNITY DEVELOPMENT
The opportunity development model is presented in three steps. First, the four cog-
nitive activities are defined and explored. Second, four roles of the social context
274 ALICE DE KONING
Fig. 2. Cognitive Activities and Roles in the Social Context.
are identified. In the third step, the interaction of the cognitive activities and roles
in the social context are explored. The interactions in the opportunity development
process are summarized in Fig. 2. From the perspective of the entrepreneurial
career, information scanning occurs largely within the network of weak ties
provides opportunities for opportunity identification and for solving specific
problems in the opportunity development process. Concept creation occurs within
the network of strong ties as the entrepreneur uses thinking-through-talking with
his or her inner circle. From the perspective of the specific opportunity or venture,
the entrepreneur seeks needed information from a network of entrepreneurs and
experts whose knowledge makes them useful. These relationships are usually
weak ties also. Concept creation is deepened through a process of accessing
resources and building an action set.
Cognitive Activities of Opportunity Development
As opportunities are developed, the entrepreneur engages in two categories of

cognitive activity, information gathering and concept creation. The distinction
between information gathering and concept creation (or information processing)
is somewhat artificial, but is in fact a common simplifying assumption made in
artificial intelligence, and applied to human intelligence (see Simon on creativity,
1984). In this framework, information gathering is oriented to collecting bits of
information, which are processed (sorted, combined, etc.) to create new concepts or
ideas, a specific combination of the blocks. The two elements of the opportunity
development may also be described as a process of collecting, combining and
configuring a specific set of information bits into a unique business concept.
Information gathering includes information scanning and seeking. Information
scanning refers to generalized information gathering which may be spontaneous
or planned. Information seeking is a more targeted search of information.
Concept creation is the cognitive process which creates the (re)combination
of information or convergence of ideas. Two specific activities are highlighted
in concept creation: thinking-through-talking and assessing resources. Both of
these emphasize cognition in relation to other people; strictly speaking, many
more cognitive activities could be indicated, but the opportunity development
framework limits its focus on the two activities most clearly identifiable in the
narrative analysis.
Information Scanning
Information scanning is a constant human activity. We notice our environment,
and pick out the bits that seem most relevant and interesting. Scanning can be
planned or spontaneous, and is driven by conscious and unconscious priorities.
Hamrefors (1998) argues that spontaneous scanning activity is driven by cognitive
filters, which reflect the biases and interests of the scanner and may include strictly
personal interests or potential for profitability, depending on the individual. The
scanning may seem somewhat random, if the entrepreneur has broad interests. In
the case of entrepreneurs with many existing activities in one particular industry,
they may notice new opportunities “in the line of duty” (corridor effect, Ronstadt,
1988). The general orientation to that industry, leads to a relatively predictable
spontaneous scanning pattern. In fact, many of the entrepreneurs in this study had
more than one business in the same industry, with related concepts or customers
or technology.
In the case of successful entrepreneurs, opportunity-oriented information
scanning seems part of their “nature” (Hills, 1995). The entrepreneurs’ cognitive
filters or schema are more opportunity or business oriented than most people. Thus,
successful entrepreneurs seem to pick out entrepreneurially relevant information
from their environment. The research on cognitive biases in entrepreneurs could
be partly reinterpreted as descriptions of scanning filters. For example, Sarasvathy,
Simon and Lave (1998) found that entrepreneurs are more oriented to emphasizing
low risk than high return in making business choices. Gaglio and Taub (1992)
found that entrepreneurs had a very strong tendency to personalize business
problems, using themselves and their own abilities as the framework for evaluating
business situations, rather than the analytic models of management studies. Both
276 ALICE DE KONING
these studies suggest that entrepreneurs have different filters than managers
in organizations, affecting what information is noticed, how it is valued, and
how analyzed.
Planned information scanning may be described as a deliberate attempt on
the entrepreneurs’ part to change their filters. Sometimes the entrepreneurs in
the study made a conscious decision to start a new business, even though no
opportunity had been identified. (Cf. Zeitsma (1999) finds motivation precedes
opportunity recognition.) In this case, the narratives show that information
scanning was launched as a deliberate strategy. For example, Entrepreneur O
described how he and his brother agreed that their current (inherited) business had
too low margins, and that they would never be able to be more than a commodity
broker (they also produced a commodity product which supplemented their
trading business, but not with significantly better margins). The brothers discussed
what sorts of businesses might be interesting, and began scanning every avenue
for possible opportunities (both start-up concepts and takeover targets were
considered). Survival motivated their scanning. Likewise, as young entrepreneurs,
Entrepreneurs U and P wanted to avoid working for someone else yet had few
resources. They “aggressively” scanned their environments for possibilities.
The initiating opportunity recognition event described by Bhave (1994) or
opportunity identification (Gaglio, 1997) comes out of the information scanning.
In other words, a convergence of data is “suddenly” recognized as an opportunity,
something worth considering. Entrepreneur Q’s partner, who ran the building
supply shop, read an article about increasing asthma problems related to dust
mites, and realized there was an opportunity in easy-to-install floor coverings to
replace carpeting. Entrepreneur U returned to his home in southern France after
a long trip in Japan, and noticed that the golf courses and charming chateaux
could be combined into affordable golf holidays for Japanese tourists. (He never
pursued the concept – later research showed that a new entrant into tours had high
upfront costs.) These cases strongly suggest spontaneous information scanning. In
the case of Entrepreneur O and his brother, the planned scanning strategy turned
into opportunity development when they recognized a takeover target which was
the right size (small), complexity (quite simple) and situation for them. They
still had to develop an opportunity out of this target, but the process started with
recognizing these elements and an attraction to the product (chocolate truffles).
Judged retrospectively, some opportunity development processes do not begin
with a specific event of opportunity identification. Entrepreneur Q describes
his entry in to cement post manufacturing as the result of wanting to extend
the product range in his London lumber store. This time, though, the product
extension issue got out of hand as a result of his search for suppliers. (A summary
of his narrative runs like this: I want to have cement posts in the store; supply
is uncertain and the price is too high for many good uses of cement posts, yet
the idea is great; are there other ways of making cement posts cheaper? Other
suppliers? This beginning led to a fact-finding tour in France and Belgium.) If
we see the decision to extend the product line as the beginning of the opportunity
development process, then it began with a fairly normal purchasing event. In any
case, an initiating vision or opportunity identification event is not essential to the
process, but effective information scanning is.
As the idea evolves in the early stages of opportunity development, the need for
firmer information to develop the original opportunity ideas become clear. One
effect of realizing that more information is required, is that the entrepreneur’s
cognitive filters are changed by the new interests generated by the developing
opportunity, thus changing the scanning. This change in cognitive filters often
leads to the serendipitous discovery of relevant information. To use a metaphor,
the entrepreneurs’ antennae are tuned to receive the right broadcasts. In some
cases, the information discovered can lead to a dramatic shift in focus. For
example, Entrepreneur U discovered an opportunity for developing karaoke in
France, because he was attuned to information that would help create attractive
package holidays for Japanese. Also, at this point, the entrepreneur also begins
seeking information in earnest.
Information Seeking
Information seeking is directed at answering specific questions or enhancing
contextual knowledge. Without the information, the opportunity either never
progresses or is poorly conceived. It is more proactive than scanning and is driven
by a specific and conscious agenda. The seeking activity may be more or less
precise, in the sense that the entrepreneur may have a relatively broad question
(Entrepreneur Z asked an engineering consultant how the sewage treatment
industry worked) or a very specific question (later, he asked the consultant about
the utility of a specific type of low cost piping). Whatever the question, the
entrepreneur does not wait for the answer to appear from casual and unplanned
encounters, but actively seeks out the necessary information. For the entrepreneurs
interviewed, even the least successful of them, information seeking usually meant
contacting people, and did not include a trip to the library or other data search.
Any business opportunity concept has many gaps and more information can
always be deemed necessary. The data in this study echoed Vesper’s early research
on patterns in questioning by entrepreneurs is an unusual study that tried to create
a systematic understanding of the process of information seeking (1991). Vesper
developed a list and typology of questions which entrepreneurs used to get infor-
mation, emphasizing the early stage or “filtering” questions. As Vesper noted, the
entrepreneurs clearly prioritize their information needs, shifting from one area to
278 ALICE DE KONING
another. Thus, the entrepreneurs note only not the gaps in their ideas, but also pri-
oritize their information seeking to fill the most important gaps. For example, once
Entrepreneur Z had identified a customer (his heuristic for deciding to launch), his
next priority was to identify his downside risks and use information seeking to find
ways to minimize those risks. Many times, the entrepreneurs said that they acted
while still unsure about many things, but had confidence in their ability to respond
to those issues because they had good information on the critical elements.
Information gathering is a necessary part of developing opportunities, providing
the fodder for creating the details of the business concept. Parallel to gathering
information, the entrepreneurs worked on concept creation in using conversation
(thinking-through-talking) and assessment of potential resources for the business,
as discussed below. The concept creation activities would in turn identify specific
problematic or interesting elements, which would return attention to information
seeking.
Thinking-Through-Talking, Or Using Conversation as a Tool for Concept Creation

Thinking-through-talking is a core part of concept creation. In opportunity
development, the initial opportunity idea needs to be clarified and fleshed out.
Talking about opportunity ideas to others, entrepreneurs are forced to flesh out
the vision and to describe details. Conversation makes the entrepreneurs think
through building details and arguments. Writing to an imaginary audience (e.g.
a business plan) may perform the some of the same function, but none of the
entrepreneurs in the sample made use of writing to think.
Thinking-through-talking suggests that the very process of articulating ideas
often leads to actually forming the ideas. Shotter suggests, “even in the sphere
of business our ways of talking work to produce rather than simply to reflect the
objects of which we talk” (1993, p. 101). In his book, Shotter argues that managers
should be understood as authors of “conversations for action,” who through their
conversation with others create a reality in which they and others act. This goes
beyond Weick’s perspective, “how can I know what I think until I see what I
say” (1989), which suggests that the articulation of ideas makes us conscious of
our thoughts. Once consciousness is achieved, we may evaluate the concepts and
move forward in shaping these ideas. Shotter goes further, suggesting that the rules
of conversation impose a logic on our messy thoughts, and thus talking is thinking
in a very real sense (1993). In this study, the perspective of Weick dominates,
but Shotter’s argument that conversation is the means through managers produce
history (action) has relevance, both for thinking-through-talking and assessing
resources.
The process of articulation, and of trying to make the listener understand,
forces the entrepreneurs to become more precise and explicit in their thoughts. As
the conversation proceeds, it may not be possible to fully articulate the new idea,
and thus the entrepreneur realizes more work on the idea is needed. One way of
characterizing the opportunity development dialogue is that the entrepreneur is
forced by the listener to follow the rules of conversation (a language game, in
philosophical terms). The rules of conversation enforce a kind of logic on the
creative thought. Part of the listener’s job is to force the entrepreneur to follow the
logic of conversation, thus challenging the entrepreneur to think more clearly. The
listener’s other role is challenge the ideas themselves, for example challenging
market assumptions, and questioning whether customers would pay for the prod-
uct. Weick does not emphasize the role of the listener in this process, but simply
argues that it is hearing one’s own talking that helps thinking. Given research in
psychology which suggests that writing down one’s thoughts can be as effective
as talking to a therapist (Persaud, 1998), Weick’s perspective may be sufficient.
Thinking-through-talking is most obvious, and possibly most important, in the
cases of long-term partnerships. Entrepreneur O, for example, has always worked
with his brother, sharing an office, overhearing all phone conversations and
running their companies together. For them, talking is essential to thinking if only
because their thinking is as much team work as any other aspect of the business.
Entrepreneur G, an inventor, is also tied to a “career” partner, a sales and marketing
expert with no understanding of science. Entrepreneur G relies on conversation
with his partner to extend his thinking, precisely because his different expertise
forces G to find new ways of expressing his ideas so that his partner understands.
Often this understanding takes months of dialogue, said Entrepreneur G, but
he had learned through past mistakes the value of taking all the time necessary
because successful communication usually signaled successful invention. Three
of the successful serial entrepreneurs in phase two would frequently downplay the
importance of these conversations, because they do not seem to contribute much to
the opportunity development, but the narratives have details suggesting otherwise.
Entrepreneur Z denied speaking about business matters with his wife, for example,
but then described several ventures by saying “my wife and I decided . . .” In
contrast, Entrepreneur J seemed much more conscious of the role and value of
these early conversations, noting several people that acted as his confidants. None
of the one-business entrepreneurs seemed to engage in thinking-through-talking.
This cognitive activity, judging by the analysis of the case stories, is the most
ambiguous of all four. As noted above, three of the successful serial entrepreneurs
seemed to discount the value of talking things through, to take these conversations
for granted. Perhaps we all do not sufficiently appreciate the role of dialogue in
thought. Only two serial entrepreneurs in the two phases of field research had
a self-conscious attitude to this cognitive activity, though not necessarily seeing
it as opportunity development or thinking but more part of a close personal
280 ALICE DE KONING
relationship. Nonetheless, the opportunity narratives showed such processes at

work. Six serial entrepreneurs, for example, talked with their parents or siblings
often in the early phases of their career, yet these were most often viewed as
advice sessions (e.g. Entrepreneurs P and U). In some cases, the very negative
attitudes of these listeners led an entrepreneur to discount the positive cognitive
value of the debate. Entrepreneur J took a contrary position, in that he specifically
mentioned his old accountant and wife, pessimists both, as essential partners in
the opportunity development process.
Assessing Resources
Assessing resources plays a critical part in concept creation and contributes to
information seeking. Assessing resources begins when the details of how to exploit
the business opportunity are not clear, when no business strategy and organization
has been fixed. When asking questions and discussing things with colleagues
is not enough to advance the opportunity development process, identifying,
co-opting and assessing resources may be the next step or alternative (cf. Starr
& Macmillan, 1990; Stevenson & Jarillo, 1990). The entrepreneurs put detail
into the business opportunity through assessing resources, moving the organic
big-picture vision towards a more detailed plan for the business. By searching
for resources, assessing both what they want and what they think they can get
on what terms, entrepreneurs explore the possibilities of the opportunity idea. In
this context, the term “resources” refers to the broad range of necessary resources
for starting a business, from expertise and customer contacts, to plant and
equipment and funding.
Important examples for assessing resources include identifying and meeting
with a potential customer, or identifying a critical asset (e.g. plant site). En-
trepreneur S actually secured a large packaging order with a three-month delivery
date, before looking for a plant or funding. He believed he could serve a high
margin niche with innovative packaging design and manufacture, and first secured
the technical expertise of an engineer and the revenue in a large contract. Securing
these two critical assets was important to his thinking process, helping him define
more precisely his target market and product strategy.
Assessing resources also may play an important role in information seeking.
The successes and failures in response to the entrepreneurs’ attempts to gain
resources become very valuable information, as strong signals that supplement
information that gained through direct questioning. For example, the search for
funds to start an R&D project, may provide better information on how “sellable”
the concept is, partly because the request for a commitment of funds induces
greater honesty and less social niceness than simple questions. Also, identifying
customers by name may be a better estimate of potential market acceptance, than
an analysis of macro market demographics. Thus, the process of identifying and

assessing the resources required and available also contributes to the information
gathering aspect of opportunity development. Entrepreneur P experienced the
importance of assessing resources as he moved from acting as an agent to building
his own manufacturing business. The process of assessing resources not only
confirmed the potential of the business, but also helped focus on the product line
strategy. Entrepreneur Z used the identification of customers as his key market
research – if there were customers, he was sure he could develop a profitable
business concept.
Equally important, however, is the impact of assessing resources on concept
creation. Assessing resources is essential to the creative process, and is more
than getting better data to use in creating the concept. The resources available
are assessed in terms of the opportunity, and directly impact the development
of the opportunity. The business concept is shaped by and perhaps even changes
dramatically, according to how much and what is available. Assessing resources
provides an important bridge or transition between opportunity development and
venture launch.
One factor in assessing resources on opportunity development is resource
parsimony. Starr and Macmillan (1990) noted that entrepreneurs responded to
constrained resource availability by creatively figuring out how to do more with
less. One example of this parsimony was Entrepreneur Z’s use of a signed lease
to secure a loan to start his sewage treatment business. Bankrupt only two years
earlier, he otherwise would have obtained no credit. The credit constraint led
to re-conceiving his business concept, and rewriting the terms of his customer
contracts to allow him to use the contracts as collateral. Likewise, the credit
constraint forced him to become very creative in minimizing his plant costs –
this was achieved by asking “stupid” questions about industry practice during
a meeting with an expert. The net result was a business that was much more
profitable and required less capital than his earlier concept.
Resource parsimony is not the only aspect of assessing resources that directly
impacts the refining process. Other possible factors may include resource bounty.
For example, the willingness of a business contact to give away rights to a patent
gave Entrepreneur V a windfall opportunity to exploit an invention for checking
rubber quality that his company developed for a client. Entrepreneur Z’s lease
contract mentioned above was granted on the condition that he also provided
servicing. Although initially he hesitated, the “condition” quickly became an
important profit-generating part of the business following a little research (How
much work is involved? How hard is it to manage? Can the plant be redesigned
to further simplify servicing?), and again rethinking the business concept. In the
contrasting cases of one-business entrepreneurs seemed to abandon the process
282 ALICE DE KONING
of developing their ideas if the immediately available resources did not fit their
initial assessment of risks and what they needed. For example, Entrepreneur
T briefly investigated the possibility of acquiring a small related business, but
quickly abandoned the project when he decided that the political constraints
would inhibit his ability to actually run the plant efficiently. This judgment may
have been accurate – the previous owner had gone bankrupt – but he did not seem
to consider possible solutions or resources to overcome those constraints.
The Interdependence of Cognitive Activities

As noted in the beginning of this section, the distinction between information
gathering and concept creation is somewhat stylized. The four cognitive activities
do not happen independently of one another, in a logical and serial fashion. Rather,
the process is typically initiated by identifying an opportunity idea in through
scanning, and the other activities begin when appropriate, ending with rather
intense work to “finish” assessing resources. The activities overlap, intensify
and become more interdependent as the entrepreneurs become more and more
committed to the opportunity development process and move towards refining
the business concept. While the focus of the process becomes more narrow
and precise in the sense of knowing what product-market is being targeted,
the cognitive activities generate a broader concept with greater detail. This is
particularly evident in the similarities between information seeking and assessing
resources. Seeking information may begin by asking about the potential market
size is, and move to identifying specific customers. At this point, the search for
more information about the potential market and the assessment of resources
such as customers overlap dynamically. Similarly, the process of co-opting
and assessing resources is an important part of thinking, because it allows the
entrepreneur to test some key assumptions or critical variables that are identified
as the business concept is being developed. Nonetheless, it is useful to distinguish
these four cognitive activities, to tease out the differences between gathering more
building blocks versus constructing the building (to use metaphoric terms).
Opportunity Development Roles in the Social Context
Having described the opportunity development process in terms of the cognitive

activities, we now turn to the social context. In Fig. 3, the social context is pictured
as concentric circles around the entrepreneur: the inner circle, action set, and
network of weak ties and experts. In this section the four roles or clusters in the
social context are defined. After discussing the social context at a general level,
we return to how social context is linked to the cognitive activities.
Fig. 3. Social Context and Cognitive Activities.
The literature on entrepreneurial networks typically uses the typology of

networks of strong ties and weak ties developed in sociology. Strong ties are
defined as relationships which have frequent contact and close personal ties to the
entrepreneur. Most studies on entrepreneur’s networks do not make the distinction
between the inner circle and action set that is proposed here. One reason may be
that cross-sectional surveys cannot easily distinguish between the entrepreneur
and his or her firm (cf. Dubini & Aldrich, 1991). In fact, entrepreneurs of smaller
firms seem to identify their personal networks with the firms’ network as they
choose not to delegate networking type tasks (e.g. Birley et al., 1991; Ostgaard
& Birley, 1996). The result is that two levels or units of analysis are collapsed,
with a resulting fuzziness in some of the results. It is when researchers look
at serial entrepreneurs that these problems become most obvious. Following
phase one, this study identified the two separate levels of analysis; Westhead and
Wright came to the same conclusion following their study of serial and portfolio
entrepreneurs (1998). Without making the distinction between entrepreneur and
venture, all the strong ties may be treated equally, or else some personal ties may
be ignored although they are significant for the entrepreneur’s career, because
they are not directly involved in the current venture.
The Inner Circle

The inner circle describes the people close to the entrepreneur personally. The
narratives suggest that the entrepreneurs have a small circle of people with whom
they discuss things regularly. These people are not necessarily entrepreneurs,
and in fact may have no entrepreneurial orientation. On the contrary, in some
284 ALICE DE KONING
cases they are valued for the counter or negative perspective, as for example
Entrepreneur J valued his wife and pessimistic accountant. Where the phrase
“inner circle” is misleading perhaps, is that it is too suggestive of a formal council,
or a group of people who recognize themselves and the others as being influential.
The inner circles described by the successful serial entrepreneurs were not a
group, but rather a collection of individuals. As individuals, they act as intelligent
and trustworthy listeners who are willing to engage in tough discussions with
the entrepreneur.
To the extent that the case interviews were able to identify specific inner circle
members, the number of people seemed to range from one to four people. The
inner circle often included one or two family members or old friends; it often
also included professionals with whom there was a long-standing relationship.
For example, Entrepreneur O related to two brothers, one a partner and the other
a neighbor, plus an accountant and a valued executive in his company. The inner
circle seemed to be stable over time, even when the entrepreneur moved from one
enterprise to the next. Although the relationships of the inner circle are stable,
they are not static. As with all people, close relationships can evolve over time.
Some changes in the inner circle were observed and seemed logical. For example
Entrepreneur F’s most valued confident in his younger years was his father, but he
was later supplanted by a partner. Relative to other people in the entrepreneurs’
network of strong ties, however, the inner circle seemed very stable over longer
time periods. As the cases suggest, the relationships in the inner circle often
were rooted in social relationships, but over time evolved to include relationships
originating in the business task environment. This finding echoes Johannisson’s
rare longitudinal network analysis of a sample of Swedish entrepreneurs’ top five
contacts (1996). Johannisson found that the more successful entrepreneurs, over
a seven year time period, were more likely to have the same people as part of their
top five contacts. He also found that over time the successful entrepreneurs had
an increasing number of close friendships that began as task relationships.
The Action Set

The action set describes a network of strong ties, like the inner circle, but is
built by the entrepreneur to pursue a specific venture opportunity. The term was
used in this context by Hansen (1995), who defined the action set as the resource
providers for a venture who form a strong network around the entrepreneur as
the business opportunity is shaped and moves towards start-up. The action set,
Hansen found, may include people providing funding, professionals with critical
expertise, customers, and other types of resource providers. Building the action
set is clearly closely related to assessing resources, and this connection and its
implications will be discussed in the next section. As the venture moves closer to
start-up, the members of the action set build stronger ties with the entrepreneur and
with each other in the sense of high frequency of interaction with the entrepreneur
and each other.
The entrepreneur recruits the members of the action set, in response to the
evolving shape of the business opportunity, as it is being developed, from existing
strong or weak ties, or even strangers. This study found the action sets were typ-
ically recruited from the weak ties, and thus within the opportunity development
process the roles of certain people shifted. The entrepreneurs relied somewhat on
existing relationships to build the action set, for example recruiting people who
had worked with them in previous ventures. In comparison to the inner circle
though, the action sets of the entrepreneurs seemed much more transient group
of people, and in all cases were chosen for their appropriateness to the specific
venture concept.
At its best, the action set reflects (and helps create) the entrepreneur’s best
possible business concept. Within this group of people, the entrepreneur is very
much the visionary leader, who enacts his vision and creates a high level of
commitment from participants (Filion, 1991). Gartner, Bird and Starr (1992)
suggest that entrepreneurs “act as if,” and thus induce the emergence of new
ventures. In recruiting the action set, the entrepreneurs created a team as if the
business concept was viable, and in that process built a viable concept. Recruiting
and building the action set seemed to be an important task for the entrepreneurs
within the process of opportunity development.
The most striking example of the venture-oriented action set in the field study
was Entrepreneur A. Most of his businesses involved purchasing an existing
business and turning around the operations. Before making a decision on whether
to acquire an interesting target, he made sure that critical parts of the action set
were organized. In one situation, for example, this included a customer who
historically had purchased 30% of the plant’s products and a production manager
with an interest in part ownership and skill in running daily operations. Similarly,
Entrepreneur Y had a strong focus on identifying the people to help run a new
venture before making a commitment to start, particularly when locating in a new
country. Entrepreneur Z always had at least one partner identified and at least
one customer. In all, only four successful serial entrepreneurs seemed to have
a weaker emphasis on building an action set, and these all had fewer than five
ventures. Of the one-business entrepreneurs, only one seemed to recognize the
value of building a strong action set.
The Network of Weak Ties

From the perspective of opportunity development, the network of weak ties is
important for two purposes. First, the network of weak ties is a major source
286 ALICE DE KONING
of information. Second, the network of weak ties is an important source of

potential resource providers, and therefore also a source of potential action set
members.
Entrepreneurship research investigating networks often emphasizes the role
of the entrepreneur as an information broker in a large network of weak ties
(e.g. Krackhardt, 1995). A weak tie is an acquaintance or contact with whom
one meets or speaks rarely, and from whom useful or fresh information may be
obtained (Granovetter, 1973, 1975). An alternative theoretical explanation for
the information value of weak ties is Burt’s structural holes argument (1992).
Burt argues that access to fresh information is less dependent on the frequency
of contact, and more on the density of ties between networks of contacts. He
defines an entrepreneur as an information broker with ties into many unconnected
networks, holding an informational advantage of others in his or her network.
The surveys on entrepreneurs’ networks have tried to capture the number of
useful weak ties (how many people have you talked to about your business in the
last six months, besides the top five contacts) as well as the networking activity
(e.g. how many hours a week do you spend networking, and are any networking
activities delegated to employees in the company) (e.g. Drakopoulou Dodd &
Patra, 2002; Johannisson, 1996; Ostgaard & Birley, 1996, among many others).
The results show that entrepreneurs initiate most of these contacts, suggesting a
general pro-active approach to finding useful weak ties. The narratives of phase
two, suggested that constant networking activity is required to create new ties and
keep tenuous links to others. Dubini and Aldrich (1991) point out that over time,
the weak ties in an entrepreneurs’ network are more likely to get to know each
other, so that the information value of these ties decreases over time. In fact, the
Aldrich, Reese and Dubini (1989) study found a correlation between increasing
density in personal networks, and the amount of time spent on maintaining contacts
versus initiating new contacts. In considering the network of weak ties, it is useful
to consider the structure of the ties and the networking activities used to create
new ties.
The weak ties described in the interviews came from an number of sources.
First, many ties were created through the “task environment,” that is through the
normal operations of their business. In some cases, 5–15 years of corporate careers
helped build a network of industry and professional contacts. Entrepreneurs P and
H made particular use of these networks in their early years, while the fact that
B, T and Z started their entrepreneurial careers around age 40, gave them quite
powerful networks. In the narratives, a wide range of sources for the networks
of weak ties were evident. Looking specifically at information “incidents” that
impacted an opportunity development process, in addition to ties originating in
the task environment, the major sources of useful weak ties seemed to be college
alumni networks, military links and occasionally hobbies. College ties were a very
common and important source of information, both undergraduate and graduate,
but especially MBA. Military links figured in some cases, usually related to
compulsory military service. Hobbies were more rarely a source of useful network
contacts, though entrepreneur S was a skiing fanatic, and would meet useful people
on the slopes.
Over time, new ties tended to come from the task environment. In particular, all
the entrepreneurs built strong industry networks, sometimes through dominating
a relatively small market, sometimes through using the more formal means
of trade associations and fairs. Networking activities ranged from trade fairs,
to local business associations, to small informal events and parties. In the
cases where trade fairs were a critical part of the entrepreneurs’ networking
activity, it is not clear whether this bias reflects an industry imperative or the
entrepreneur’s choice in networking activity. For example, Entrepreneurs I, M,
and P specifically mentioned that they never missed trade fairs (respectively,
in turbine engines, automotive and knitwear industries). Others also attended
trade fairs, but did not emphasize their role. In addition, industry ties would
be built through friendships developed in normal trade activity, or being active
in boards. Many of the ties would be initiated by the entrepreneur, based on a
specific and defined interest in a person’s expertise – chance plays a role in every
person’s life, but was not relied on unduly (cf. Birley, Cromie & Myers, 1991,
who found most contacts were initiated by the entrepreneurs, regardless of their
overall success).
The college alumni network showed surprising resilience: the contacts between
alumni were infrequent, but regular enough to maintain links. Many of the en-
trepreneurs named former colleagues who were successful in a various industries
who had proved a rich source of information and other new contacts. These
contacts were often based on an MBA network, but also included les grands
écoles (France’s elite undergraduate professional schools) or other undergraduate
programs. These ties were maintained by attending alumni functions and arranging
small informal parties or events. For example, Entrepreneur K organized a small
annual golf tournament with three fellow alumni. Entrepreneur S lunched, dined
and skied with many fellow alumni, both from his MBA and undergraduate years.
In many cases, for example Entrepreneurs V and Z, new contacts were built
through taking teaching positions at business schools.
In comparing single business and serial entrepreneurs in phase two, a significant
difference showed in the level of effort spent in maintaining these weak ties.
Interestingly, phase two showed that the single business and failed serial en-
trepreneurs initiated distinctly less networking activity with their college network,
a more dramatic difference than in networking with industry based networks. The
288 ALICE DE KONING
single business entrepreneurs seemed to maintain relations with only a few old
colleagues, and never attended alumni events. The failed serial entrepreneur in
phase two, Entrepreneur AA, had annual contact with two undergraduate friends,
and none with previous MBA colleagues except his one-time partner. Also, his
industry networking was limited to occasional phone calls to a number of old
contacts at related and customer companies.
Network of Entrepreneurs and Experts

A subset of the network of weak ties deserves special attention. Many of the
entrepreneurs spoke of networking with other entrepreneurs and with recog-
nized experts to advance their opportunity development process. Many of the
entrepreneurs had relatively more frequent contact with other entrepreneurs,
though not necessarily in the same industry. The data suggests that within a more
general network of weak ties, the successful serial entrepreneurs also have a
network of information brokers like themselves. In other words, they are adept at
maintaining ties to others who also enjoy the role of an information broker with
a network full of structural holes. To the extent that entrepreneurs are willing to
reciprocate in sharing contacts and information, this more specialized network
could lead to highly efficient access to an extremely broad network of weak ties.
Note that the ties are still weak ties; that is they are not tightly linked in the
sense of frequent contacts and overlapping friendships. This phenomenon was
most evident in Entrepreneurs K, A and S. In fact, Entrepreneur S had a very
high level of confidence that he could get any information or resource he needed
through these contacts.
In addition to other entrepreneurs, various experts also played a special role for
opportunity development. Lawyers and accountants acted as weak ties who were
information brokers. These contacts were less likely to be interested in pursuing
opportunities themselves, but often could identify resources or takeover targets.
Industry experts, for example specialized consultants, were another significant
source of information. Many of these ties were initiated during the opportunity
development process, in order to address a specific issue. Several examples from
the narratives are cited in the next section. In some cases, these experts would
eventually become part of the action set.
Summary Comment on Social Context

This section has built a terminology for discussing roles in the social context in
terms of opportunity development: inner circle, action set, network of weak ties
and network of entrepreneurs and experts. Many of the links between the cognitive
activities and social context are implicit in the descriptions of the terms, but will
be developed in greater detail in the following section.
The definite distinction between the two types of strong ties became evident
because the successful serial entrepreneurs seemed to feel free to seek the
resources they wanted from their extended network of weak ties, and did not
feel tied down to what is available “close to home.” Thus, the structure of
social context proposed here may reflect a pattern unique to successful serial
entrepreneurs. As a counter example, a more restricted use of social context
was observed in African-Americans (Young, 1998), and Greek entrepreneurs
(Drakopoulou Dodd & Patra, 2002), who tended to stick with family and close
friends for advice and resources. In this study, I am found that at the individual
and career level of analysis, the emphasis of the strong ties may be on the advice
network (i.e. inner circle), while at the business or venture level, the strong ties
may be more focused on resources. This particular aspect of successful serial
entrepreneurs’ networking behavior would be worth investigating in a future
empirical study.
Opportunity Development Interactions of Cognitive

Activities and Social Context
This section describes the relationship between the cognitive activities and social
context, with a stronger focus on what seems to be the best practice of successful
serial entrepreneurs. Note that these assertions should be viewed not as normative
suggestions for practitioners, but as propositions for future research. The major
emphasis in the discussion is not the linear order of the opportunity development
process, but rather on the link between a specific activity and types of relationships
in the social context.
Briefly, the linkages between activity and social cluster are as follows.
Information gathering, both scanning and seeking, was linked to the network of
weak ties. Information scanning seemed much broader, at times almost random;
while information seeking was more likely to target other entrepreneurs or
experts. Thinking-through-talking, which begins early in the process, occurs
most frequently and iteratively within the inner circle. In some cases, though, an
entrepreneur may make unexpected thinking progress in a conversation with a
relative stranger. Assessing resources is part of the process of building the action
set. The action set by definition does not exist at the beginning of an opportunity
development process, but is built during the process.
Within each of the interactions of cognitive activity and social context, the
narratives of the entrepreneurs gave further detail and more specific insights.
Although the larger picture gives a strong framework for opportunity development,
the details are also illuminating.
290 ALICE DE KONING
Information Gathering in the Network of Weak Ties
Effective information scanning seems to depend on a number of factors. According

to cognition researchers, everyone engages in information scanning. The issue for
opportunity development is how much new and useful information is gathered. A
high level of networking activity is necessary, both to maintain and initiate new
contacts. These two themes have been developed by previous entrepreneurship
research (for review see Aldrich, 1999), within a broader context of entrepreneurial
activity. With information scanning, cognitive filters must be oriented towards
seeing market gaps, technological possibilities, etc. Because the cognitive filters
may affect the contacts initiated or “scanned,” the filters not only affect the
information noticed, but also the networking activity. In information seeking,
successful serial entrepreneurs seemed inclined to emphasize personal sources of
information, rather than other sources. The personal sources were almost invari-
ably experts or other information brokers – their efficiency in finding information
was evident.
Scanning and Networking for “Fresh” Weak Ties

Networking activity seems to be a critical factor in effective information scanning.
It is clear from the case data that scanning by the successful serial entrepreneurs
depended on regular contacts with people, more than printed sources. The range
of activities cited was broad – from lunching regularly with former colleagues
and new contacts, attending trade fairs with the express intention of meeting
people for the first time (meetings may be planned or not), to participating in civic
functions or donating time as board members. What was striking, comparing the
most successful to the comparative sample, was the overall frequency and range
of these contacts. Entrepreneur AA, the failed serial entrepreneur said he kept
in touch with the industry by calling a few old contacts working for customers,
and annual dinners with three old college buddies. Because he handled sales for
his company, that task involved some travel and meeting strangers, but otherwise
his scanning activities were quite passive and his social activities restricted to a
small group of people. This pattern contrasted with many of the successful serial
entrepreneurs, such as Entrepreneur S who maintained contacts with dozens of
colleagues from previous jobs and schools, and was always meeting new people.
The difference between efforts to find customers and networking for build useful
contacts for building the business or finding information, was clear in the cases.
As Birley et al. (1991) found, building a customer base may involve the same
pro-active attitude and types of activities as building a useful network of weak ties,
but the entrepreneur who did not balance efforts in both directions seem to lack
growth potential.
Success, both in performance and opportunity development, seemed related

to the level of networking activity. From the perspective of network theory,
the association is logical. If we accept that opportunity development depends
on finding useful new information, then an effective network of weak ties is
necessary. Over time, people who have a mutual acquaintance are more likely to
know each other directly (cf. Aldrich, Reese & Dubini, 1989). Thus, to maintain
an information advantage over the long term, the entrepreneur must engage in
continual networking activity to refresh the network by building new weak ties.
In the case of college alumni networks, the problem of staleness may decrease
because the alumni often do not live in the same geographic area nor work in the
same industries as their peers. The lack of proximity may ensure that these “old”
weak ties maintain a high level of information novelty.
Having a large network of weak ties is not a sufficient condition, however, for
opportunity development. It is logically possible to have a large circle of contacts,
and never notice or develop a good business idea. Porac, Baden-Fuller and Thomas
(1989) found that many companies in the Scottish knitwear industry confirmed
their beliefs about the market by restricting their information scanning to certain
sources. Most striking was the tendency to use existing customers to analyze the
market for their products, which clearly restricted any reinterpretation of their
customer profile or evolution of their product lines. Their work suggests that
cognitive schema or filters can become self-fulfilling prophesies, because of their
impact on who is contacted. To take the entrepreneurs’ perspective, their cognitive
filters have an impact not only on information scanning, but also on networking
activity. One danger suggested by Porac et al. is that the network of weak ties may
be too small or not diverse enough to provide new information or perspectives.
Entrepreneurs in the sample differed in their networks of weak ties. Both the
failed serial entrepreneurs and successful single-business entrepreneurs seemed
to have significantly more restricted networks of weak ties than the successful
serial entrepreneurs. Although his perspective had changed in the last two years,
Entrepreneur N clearly relied on a few local industry contacts and his employees
as his informants. Entrepreneur AA, as noted, relied on a small and very stable set
of industry contacts for information, although for survival reasons he was actively
searching for customers. Entrepreneur X became nostalgic when remembering his
old MBA pals, but did not have any contact with any one of them in the last several
years. Entrepreneur T was similar, with his contacts restricted to a few local
entrepreneurs, his customer network (which required extensive travel), and other
horse racing fanatics. None of these entrepreneurs seemed strongly oriented to
moving outside their existing circle. These entrepreneurs contrasted strongly with
the successful serial entrepreneurs who would comment that they had just spoken
with a former colleague recently, or attended some business-oriented function,
292 ALICE DE KONING
or other obvious places or means of networking. Their patterns suggested that a

greater diversity was sought and maintained, although perhaps not consciously.
The narratives seemed to suggest that real diversity must exist in the network
of weak ties to actually challenge the entrepreneurs’ tendency to be stuck in
restrictive cognitive filters.
Information Seeking from Entrepreneurs and Expert

The successful serial entrepreneurs seemed to use specialized experts and other
entrepreneurs for information seeking, depending on the situation. The most
striking example was Entrepreneur Z, who hired a consultant to tell him everything
he knew about the sewage treatment industry. This incident was early in his
entrepreneurial career, and soon after becoming totally bankrupt – the expense
must have been significant. Yet interviewing an expert allows for a higher level of
interactivity with the information. Because Entrepreneur Z felt free to ask “stupid
questions” (his words), which sometimes surprised his informant, the answers he
received tapped the person’s expertise (and even tacit knowledge) in a way that
a database search could never do. For example, he asked if the plant had to be
installed underground? The consultant was very surprised – at the time, no one
had ever built above ground – but he was also expert enough to be able to say
confidently it was only a problem of aesthetics. The expert’s answers gave En-
trepreneur Z ideas for refining the business concept of leasing sewage treatment, in
ways that dramatically increased his profitability (by simplifying construction and
later deconstruction of the plants). The narratives did not include other examples
of actually hiring experts for information seeking, but in many cases an expert
was relied on. For example, Entrepreneur V used a consultant while developing
process equipment business, although he was able to “pay” for the time and
expertise with goodwill.
The successful serial entrepreneurs emphasized their direct approach to infor-
mation seeking – they find the right person, and ask their questions. Entrepreneur Z,
for example, would even hire a consultant at an hourly rate, in order to learn about
an industry that he was interested in. Entrepreneur K would invariably call a friend
or use friends to make the necessary contacts. He observed that, unlike his manager
friends, he would never waste a whole evening having dinner to get a few bits of
information. A direct approach was preferred. The entrepreneurs seemed to ask for
information without hesitation – and a few noted that they themselves would never
hesitate to answer other people’s questions either. The contacts used for information
seeking were rarely casual meetings. Entrepreneur I used trade fairs to meet people,
but made sure to arrange meetings before leaving home. Entrepreneur S used his
alumni network extensively, but initiated the contacts when and where he needed
them, not relying on special alumni events to supply contacts. This may seem
obvious, but the single business successful entrepreneurs seemed to initiate far
fewer contacts with experts and relied more on their existing networks or on chance.
Information seeking is much more targeted than scanning, because the
entrepreneur has specific questions to answer and problems to resolve. The value
of the network of weak ties for information seeking is both for identifying and/or
gaining access to people with right expertise, and for having direct contacts that
can provide the necessary answers. All the entrepreneurs almost invariably used
people to answer their questions – databases and library resources were rarely
used. Even industry data, which probably was published somewhere, was sought
through people and through conversations. This bias to personal information
sources may reflect the low-tech nature of most of the entrepreneurs’ businesses in
this study. Alternative explanations for using experts are that interviews are often
more time efficient than library searches in new topic areas, and no public source
can be as up-to-date nor have the tacit knowledge of an expert active in their field.
Entrepreneur K observed that he often got information from “lone wolves”
like himself. In talking to other entrepreneurs, which all the successful serial
entrepreneurs seemed to do, they often were interested in checking information
of a more generic nature. For example, locations for plants or hints about
specific people, would be freely traded information. Many of the successful serial
entrepreneurs had a network of powerful entrepreneurs and professionals from
whom they got information readily; some of the contacts overlapped with their
alumni network. These contacts most likely were part of the entrepreneurs’ more
specialized network of information brokers, each with their own strong network of
weak ties. In addition to their existing contacts, they did not seem to hesitate to call
some one, if they wanted their views. Entrepreneur A’s narrative, for example, is
sprinkled with comments like “I learned from . . .” and “I called . . .” As suggested
in the studies of networking activities (e.g. Johannisson, 1996; Ostgaard & Birley,
1996), the entrepreneurs were much more likely to initiate the majority of their
business ties, rather than to rely on people approaching them. This proactive
stance suggests a strong task orientation, perhaps with specific information
seeking questions in hand, influences how successful entrepreneurs build their
networks. Unlike Birley et al.’s (1991) Northern Ireland entrepreneurs, however,
there seemed to be little hesitation among the successful serial entrepreneurs to
maintain contacts with other entrepreneurs.
To summarize, the successful serial entrepreneur’s information seeking, in using
experts and entrepreneurs, seemed to have a greater potential to collect better
information. First, a person who works in a field is more likely to have current
and up-to-date information on trends, than a database which often has delayed
availability. Second, by interviewing an expert, the entrepreneur is using an more
efficient information retrieval tool. And finally, by learning through conversation,
294 ALICE DE KONING
the entrepreneur is more likely to access tacit knowledge in addition to explicit

information.
The value of targeted, prioritized information seeking is directly related to the
entrepreneurs’ process of concept creation. By balancing information seeking
with thinking-through-talking and later assessing resources, the entrepreneurs
focus on the business opportunity and building a concept, and not on broader
and vaguer questions of industry and market. Thus, without a strong process
of concept creation (both thinking-through-talking and assessing resources),
information seeking could become an endless journey.
Concept Creation and the Network of Strong Ties
Concept creation is linked to an entrepreneur’s strong ties, in contrast to infor-

mation seeking. Taking a longer-term perspective than many entrepreneurship
studies, however, we can discern a pattern that distinguishes between the inner
circle and action set. The entrepreneur is far more likely to engage in repeated,
open-ended discussions about opportunities with longer-term strong ties. The
implication is that these people know more and see more of the entrepreneur than
any one else. In contrast, the action set is a more instrumental group of strong
ties. Members of the action set may be old friends or colleagues, but their role is
based on their potential contribution or commitment to the specific business. The
distinction between these types of strong ties appears to be robust, based on an
informal meta-analysis of existing network analysis studies.
In this sub-section, I develop observations on the interaction between the activi-
ties of concept creation and the strong ties, with arguments and details that suggest
why the successful serial entrepreneurs seem to enjoy a more effective opportunity
development process. Several factors are discussed which may explain “best prac-
tice” in concept creation. Themes relate to the inner circle, include persistence in
the relationship, character of the interaction, trust, and expertise of the individual
members. Themes on the action set include the dynamic process of building the
action set, the source of the members (i.e. largely weak ties), the strong task
orientation in building the action set, and the relationship of assessing resources
and building the action set to refining the business concept. The sub-section ends
with some comments on the entrepreneurs’ credibility and its impact on recruiting
an action set.
Thinking-Through-Talking and the Inner Circle

When thinking-through-talking about an opportunity helps develop the concept,
the character of the inner circle is often important. Most significantly, many of the
successful serial entrepreneurs rely on the willingness of the listeners to ask tough
questions and honestly report what they do or don’t understand. The members of
the inner circle are protective in the sense that they are willing to spend time and
energy to listen, and to take the ideas seriously, however roughly articulated. They
are challenging in the sense that they force the entrepreneur to formulate her ideas
more clearly, more logically.
The critical aspect of the inner circle is the persistence of the relationships
and the persistence of the dialogue. These two aspects allow opportunities to
develop into business concepts, both in sense of increasing detail and in the sense
of developing a holistic vision (as used by Filion, 1991). For Entrepreneur F, the
process of building new opportunities based on innovation in process technology
was a process of repeated dialogues between Entrepreneur F and his partner until
complete clarity and understanding had been achieved. Entrepreneur F also relied
on his father, who was also scientifically trained, and thus his perspective was val-
ued for different reasons. Entrepreneur P observed that he chatted with his father
frequently – in the context of the narrative it is clear that his father helped him
get started as an entrepreneur, and also remains critical as a frequent and trusted
dialogue partner. Entrepreneur J valued his accountant both for his pessimism
and his loyalty. Entrepreneur V and his two brothers institutionalized the concept
of an inner circle and thinking-through-talking in their week long “white smoke”
council meetings. The meetings included any one with relevant expertise for the
developing business opportunity, often the inventor and one or two managers with
relevant manufacturing or marketing experience in related businesses, as well as
the brothers. The meetings are designed to talk through all and any major issues
of the business opportunity, with particular focus on the technology, market, and
efficiency competitive advantages for the invention and the business. The meetings
are held behind closed doors, and do not conclude until consensus is reached and
decisions made.
Yet the idea that entrepreneurs pursue thinking-through-talking with members
of their inner circle, though intuitively appealing, is not unambiguously supported
by the data. Many people, including the entrepreneurs in the study, have had the
experience of talking about some problem or idea to a total stranger, and suddenly
realizing the new formulation is a good way of articulating the ideas and have
new insight in the business concept. The narratives suggest that several of the
successful serial entrepreneurs perhaps did not have partners or other confidants.
In fact, several entrepreneurs denied any need to talk to people – in Entrepreneur
K’s words, he sees entrepreneurs as “lone wolves.” However, in most of these
cases, a little later in the interviews one or more discussion partners is revealed.
Most often, these inner circle members have no equity stake in the business, and
no operating responsibility, which may explains why the entrepreneurs discount
296 ALICE DE KONING
their significance for the opportunity development process. Lacking the unusual
self-awareness of Entrepreneur J (who recognized the role of his wife for his own
thinking, even when she was an at-home mother and housewife), the entrepreneurs
perhaps tended to ignore their inner circle while telling their “business” story.
In reviewing the field notes, it is difficult to discern significantly different
patterns in inner circles between the different groups of entrepreneurs. Rather,
the narratives of the comparative sample of entrepreneurs suggested a mix
between having no apparent inner circle, and not taking the time to think or
talk. In the case of Entrepreneur AA, the pattern seems to be more a lack of
thinking-through-talking in general, even though over time he owned several
businesses with different partners, most recently with an MBA colleague. His
narratives often included the comment that he was too busy to notice something,
or too busy to talk about issues. Only two of the single business entrepreneurs had
partners, and they were both in family businesses. Thus, one suggestion of the data
is that successful single business entrepreneurs tend to keep to themselves, not
using the benefits of a partner or an inner circle for developing their ideas at all.
Curran et al. (1993) noted that their field work using critical incidents to
investigate network behavior, showed that half the entrepreneurs in fact talk to
no one at all, even in the face of serious crises. Thus, the difference between
successful serial entrepreneurship and one-business or failed serial entrepreneurs
may be talking about issues versus not talking. Thinking-through-talking seems
to have more impact on success and serial ventures, than the existence of the type
of relationship that would allow such intense conversation. The ambiguity of the
entrepreneurs themselves in giving their narratives, however, suggests that some
caution in interpretation is necessary.
Where interpretation of the narratives is clear, the members of the inner circle
were either partners or else not involved in the businesses at all. In the case of
the partners, they were usually very tight dialogue partners, and thus it often
seemed the entrepreneurs restricted their inner circle to their partners. Otherwise,
the entrepreneurs often seemed interested in inner circle members who offered
some strong perspective or expertise. The professional qualifications or business
expertise of the inner circle would help directly in the listening skills, providing
a high level of intelligence and/or knowledge to the listening and questioning. In
addition, however, their expertise would also allow them to provide timely and
appropriate advice. It seemed that the inner circle is not only a circle of listeners,
but also valued for offering timely advice, which re-directed the thinking process
or provided needed encouragement. Among the inner circle members identified in
the data, the most common professions are accountants or lawyers. Less common
was engineers. The professionals often form a key part of the inner circle, perhaps
because despite their expertise they are unlikely to become competitors. Another
possibility is that these professionals are associated with the business(es), and
thus have a solid background knowledge to enable discussion, yet because their
role is neither as entrepreneur nor manager provide a more distanced perspective.
These professionals often become a minor part of the action set also, and provide
access to useful secondary networks. Even when the entrepreneurs’ businesses
grow, they often continue to retain the same professionals, not for their services
(which often are supplemented or even replaced to better serve the businesses’
needs), but for their character and relationship with the entrepreneur. For example,
Entrepreneur Z and J used their accountant in this way, and Entrepreneur O had this
type of tie with a lawyer.
A few entrepreneurs did rely on employees in the firm as an inner circle.
Entrepreneur Y was particularly remarkable in this respect: he has created
a learning organization in which many people have their own inner circles.
Discussion of any new idea is welcomed, and even if he personally hates an idea,
his employees feel free to persist in discussing and exploring new opportunities.
He himself has built a core of senior staff and line executives, who function as his
inner circle. Entrepreneur N was very interesting as a successful single-business
entrepreneur, in that he had recently discovered the value of delegation and of
treating his top employees more as equals.
Assessing Resources and Recruiting the Action Set

Assessing resources and creating the action set are dynamically intertwined. More
than any of the other roles in the entrepreneurs’ social context, the action set is
created to respond to the opportunity being developed. As the business concept
evolves, the process of recruiting the action set becomes less and less tentative,
moving from networking to extracting commitments. The networking activity of
recruiting an action set is a key part of the cognitive process assessing the resources.
Recruiting the action set and assessing resources are concurrent activities, because
both move the vision or idea, closer to the realm of reality.
The action set seemed to be usually recruited from the network of weak ties
in most cases. There were some cases, where the entrepreneurs relied on some
repeated relationships. For example, some members of an action set may have
cooperated in previous ventures (typically as investors), or they were also members
of the inner circle, especially in the case of repeated partnerships. Entrepreneur E,
for example, had started three of his businesses with the same partner. Although
most of their business activities were separate and their major venture together
failed, they were close friends and seemed to act as inner circle members for each
other. In the sample as a whole, the proportion of overlap between the pre-existing
strong ties and the action set seemed low, and in any one action set the majority
of members seemed to be recruited from the network of weak ties. Because so
298 ALICE DE KONING
much of the action set depends on the network of weak ties, clearly an extensive
and well maintained network is an important aspect of building strong action sets.
The lack of a strong network of weak ties may also partly explain why so many
successful single business entrepreneurs did not pursue new business opportuni-
ties – even if the information gathering was sufficient to identify an opportunity,
they were excessively limited in building an appropriate action set to manage
risks and investments.
The opportunity development narratives suggest that the process of assessing
resources and recruiting the action set had a very strong instrumental or task
orientation among the most successful entrepreneurs. The entrepreneurs empha-
sized the concerns or needs of the business opportunity in their drive to assess
the resources, rather than allow the social relationships of their strong ties drive
the range of resources recruited. In his longitudinal study, Johannisson (1996)
observed that growth entrepreneurs built task-based relationships effectively,
and often turned them into friends, while non-growth ones stayed “stuck” or
embedded in their pre-existing social ties.
The reason assessing resources and recruiting the action set are so critical to
refining the business opportunity, is partly because surprise resource discoveries
can open up new possibilities for exploiting the opportunity, and also because not
getting an apparently essential resource forces the entrepreneur to think up new
strategies and even new opportunities. A very important aspect of these resources
is the customer – identifying and recruiting the support of critical customers can
lead to a very powerful action set. Numerous opportunity development narratives
seemed to gain steam as a customer was identified – Entrepreneur P’s buying
agency, Entrepreneur V’s quality process robot venture, Entrepreneur Z’s sewage
treatment business, Entrepreneur U’s French karaoke video production – the
examples are throughout the narratives.
The interaction of recruiting an action set and assessing resources is well
illustrated by Entrepreneur S. Following his MBA graduation, he managed to
get a large order for a unique style plastics container from a major cosmetics
company. This order was obtained through a slightly misleading networking
strategy (he pretended to interview for a job, until he was set up with the relevant
Vice-President, and then switched to selling mode). During the following series
of meetings, Entrepreneur S had to prove he could make the product, which he did
with the help of an engineer he recruited. Once he had the order confirmed, he had
two months to find a plant and equipment, to hire staff, and finalize the moulds. As
he says, this was in the days before venture capital existed in France, when getting
funding was very difficult – much more so than now, in his opinion. Through
effective networking activity, and careful assessment of his options to ensure a
profitable solution, he was able to find a plant to “borrow” and equipment to lease.
The moulds he purchased with the pre-payment on the order. The whole process
involved intense yet effective assessment of resources: depending on what funding
and other resources he could find, he had to consider alternative strategies of
taking an existing firm as a partner, or subcontracting the manufacturing. Neither
of these strategies were ideal, because he might have lost his knowledge-based
advantage in creating the unique containers and thus would have had a weaker
business concept.
The narratives contain many similar stories. Often, the entrepreneurs them-
selves seemed most intrigued by the process they went through in scrounging for
resources, and adapting the projects accordingly. Obviously, the problems of too
few resources were experienced by the successful serial entrepreneurs more often
earlier in their careers. Finding the “right” resources continued to be an interesting
challenge to the successful serial entrepreneurs. Nonetheless, this process of
adapting to the circumstances was a consistent theme. Entrepreneur A, for
example, mentioned that people specifically asked him to include him in the next
project, which eased some aspects of assessing resources, but he did not accept
their offer if they did not improve the business concept. In contrast, Entrepreneur
T, who manufactured collapsible kayaks, seemed to reject business opportunities
because they weren’t feasible, rather than considering ways to make changes
in the concept. He apparently considered several small businesses in his region,
but each one had problems or else he didn’t have the time or money right at the
moment the opportunity was available. To a certain extent, these explanations are
very reasonable, particularly since Entrepreneur T enjoyed a wonderful lifestyle
that he would not want to jeopardize. But he also seemed to put very little effort
into assessing the resources and considering other ways to shape the concept. The
other single business entrepreneurs seemed similar, often lacking the patience
and persistence to assess resources beyond their immediate circle and to adapt the
business concept. From the perspective of analyzing sources of greater success in
opportunity development, the successful serial entrepreneurs seemed to explore
and assess a greater range of resources, and showed a greater willingness to refine
the business concept appropriately through building an action set from a diverse
network of ties.
DISCUSSION OF FINDINGS
The exploration of interactions between social context and cognitive activity make
clear that two different levels of analysis are relevant to opportunity development,
the entrepreneurs’ careers and their ventures. Although the focus of the study is
primarily on the process of developing opportunities, there clearly are aspects to
300 ALICE DE KONING
managing or acting within the social context which must be considered in terms
of the entrepreneurial career and not just the immediate situation of developing
the opportunity. Interestingly, the distinction between an opportunity and the
entrepreneurial career has not often been evident in entrepreneurship research.
One result of studying serial entrepreneurs, with their many ventures, is that the
different levels of analysis become patently clear (cf. de Koning & Muzyka, 1996;
Westhead & Wright, 1998).
In looking at the social context, the discussion so far suggests many ways
in which the entrepreneur is affected by and affects the social context, which
clearly would impact the opportunity development process. Many aspects of
the social context, for example the network of weak ties, appear as constants or
even constraints on the opportunity development process. These factors influence
the quality of what occurs within opportunity development. The broader or
longer-term perspective of the entrepreneurial career is necessary to explore how
the entrepreneur affects the social context and moves beyond the limits of their
context. Before turning to these issues, I briefly discuss the role of the two phases of
field study and the iteration of analysis on the evolution of the model of opportunity
development.
Two Phase Field Study and the Evolution of the Model
The model of opportunity development presented in this paper represents the con-
cluding arguments of an iterative and two-phase exploratory process. To clarify the
impact of the process on the model, I will review some specific changes that were
introduced into the model. First, information gathering was initially treated as a
single construct. After the data was collected, I was read a series of studies on the
concept of spontaneous scanning, which lead to further review of the interviews
with the intent of tying my information gathering category to information scanning.
In the process, I realized that scanning represented only a subset of information
gathering references, and the idea of information seeking, as distinct from scan-
ning, emerged. This tied in well with research on entrepreneurial questioning by
Vesper (1991). This distinction in information gathering then led to re-evaluating
the category of the network of weak ties. I first noted that the information seeking
items seemed tied to experts, and then realized the fellow entrepreneurs also
were asked frequently for information. Thus, the two new distinctions were
added to the model.
Second, the model on opportunity development no longer gives a distinct
role to entrepreneurs’ partners. Analysis of the partner data, using the combined
sample of phase one and two, showed that generalizations about partners were
impossible. Even when equity was shared 50-50 over a series of different ventures,
the relationship between the partners varied. For example, Entrepreneurs O,
V and H were partnership of equals in terms of decision making, initiating
strategic decisions and developing opportunities. These relationships suggested
that the single entrepreneur was not relevant unit of analysis, but rather the dyad
functioned as a unit. Other long-term partnerships were more like a visionary
leader matched with a strong operating or marketing person, such as Entrepreneurs
F and Q. These types of entrepreneurial partnerships suggested inner circle roles.
Many entrepreneurs relied on different partners for each venture, according to the
needs of the business, such as with Entrepreneurs A and Z. These partnerships
suggested members of the action set. This finding suggests interesting research
questions for future research, but more immediately, I eliminated the category of
partnerships from the model of opportunity development.
The Career and Sources of Ties
Within research on entrepreneurial networks, considerable attention has been paid

to the issue of the source of relationships. One reason for this concern seems to
be the implication that entrepreneurs are restricted by their embedded networks
(Dubini & Aldrich, 1991, for comment on this point). The implication of the
research is that over time, the entrepreneurs should have more strong ties which do
not originate in the social ties, as already discussed in the third section. The source
of contacts in fact has implications for all aspects of the social context. Over time,
we find more and more contacts and even close friends of the entrepreneur (strong
ties) come from relationships that began as task relationships. For example, the
career partner and close friend of Entrepreneur F, began as a sales manager in
his first venture. Also, there were numerous examples of the dangers of relying
too closely on social contacts, even from the successful serial entrepreneurs.
Entrepreneur P, for example, regretted the fact that his family convinced him to
start a business with his uncle as a partner, and was currently thinking about how
to remove him from the business without doing damage to the family dynamics.
Entrepreneur U went through a horrible year, after taking a very close friend as
a partner in his business – a decision apparently based entirely on sentiment,
and not a good idea.
The social context seems to shift naturally from ties sourced from largely
social sources to more task or instrumental sources. Over time, the entrepreneurs
invested more and more time in relationships that birthed in the task environment.
Hite (2001) argues theoretically, and Johannisson (1996) shows in a longitudinal
study, that this shift is necessary for the growth of the businesses.
302 ALICE DE KONING
Liability of Experience
Starr and Bygrave point out that some entrepreneurs are handicapped by their
experience (1991). These entrepreneurs are successful at a certain stage of the
product life cycle, and their skills are well adapted to that stage, yet they seem to
overestimate their skills. As they lead ventures in other parts of the product cycle
or industry evolution, their over-confidence may result in failure, because they
don’t adapt to different market and industry conditions. The problem, say Starr
and Bygrave, is that they have learned or extrapolated from too few incidents, a
well documented cognitive bias. For the successful serial entrepreneurs, this does
not seem to be a problem, most obviously because the sample selection would have
eliminated those who started to experience failure. Entrepreneur F did mention that
he took nearly four years to re-conceptualize a venture which nearly failed. He
argued that the near-failure was due to the fact he did not think through the concept
enough before starting, and that carelessness was due to his own over-confidence.
Taking responsibility for the near-failure, he was determined to be more careful in
the future. Entrepreneur AA, the failed serial entrepreneur, may be partly explained
by this phenomenon, although his most recent failure was in an industry he never
had worked in before, so this suggests whatever overconfidence he may have had,
was not in skills related to the product life cycle, but rather his self-efficacy beliefs
in general.
Interestingly, Entrepreneur B has experienced much more failure recently, and
this is probably due to the learning liabilities suggested by Starr and Bygrave. After
a career in finance, he became an entrepreneur in the shrinking low-technology
sector of old-fashioned household and cleaning products, where his skills in
buying, selling and restructuring companies was critical to survive and succeed in
the consolidating industry. Cash rich and confident of his entrepreneurial skills,
he later started several companies in unrelated industries. His skills did not fit
these ventures, and the result has been mediocre success or outright failure. His
continuing survival is due to his ability to exit these weak companies, again
due to his ability to buy and sell effectively. Most of the other successful serial
entrepreneurs seemed to be more modest in their ventures, sticking more carefully
to a range of activities that fit their skills and their success continues.
When Success Attracts Resources
The growing reputation of the successful serial entrepreneurs attracts resources,

of a type and amount not normally available to nascent entrepreneurs. This
“embarrassment of riches” can be a problem, if the result is less careful and less
creative opportunity development. The impact on assessing resources is most

obvious, as discussed briefly in the third section. Many types of resources may
become accessible, from technology to capital to management staff. For example,
Entrepreneur H described a young inventor who approached him with a new
technology, who needed his credibility and his cash to create the new company.
Many of the successful entrepreneurs were approached by potential investors,
who wanted to participate in future ventures. The biggest danger is that the excess
of resources means that asset parsimony (Starr & Macmillan, 1990) does not
enforce the discipline the entrepreneur needs to continually improve the business
concept and therefore the opportunity development process may become weak in
its final stages. Even if the business starts, it may fail to achieve strong margins,
and thus be vulnerable to competitors. Entrepreneur F’s near failure, noted
above, was also partly due to the fact all the necessary resources fell into place
quickly. With more constrained resources, Entrepreneur B may have avoided
several mistakes also.
Many of the successful serial entrepreneurs invested in ventures of younger
entrepreneurs. The private investment activities were not researched in detail, but
the evidence that most successful serial entrepreneurs had at least one or two pri-
vate investments provides strong evidence that financial resources were no longer
a constraining factor. If the successful serial entrepreneurs were able to avoid the
mistake of skipping critical parts of the concept creation, the increasing access to
resources should result in more companies, starting more frequently and running
more companies concurrently. This acceleration depends partly on the preferences
of the entrepreneurs. Entrepreneur S, for example, clearly preferred to use his
resources to grow his current venture and did not seem interested in having more
than one company at a time. (He was very passionate about skiing, and preferred to
spend his “free” time on the slopes.) In contrast, Entrepreneurs A, V and Z enjoyed
the challenge of starting up and turning around businesses, and their narratives
show an increasing rate of new businesses over time. Thus, of the successful
serial entrepreneurs with the most ventures, there seems to be a disproportionate
rate of business foundings which can be best explained by the increased access
to resources.
CONCLUSION
This study extends current research on opportunity recognition by proposing a
model of cognitive activities within a social context that emphasizes the process
of developing initial opportunity ideas into business concepts. To summarize,
the opportunity development model begins with the initial process perspective
304 ALICE DE KONING
of Bhave (1994), and explores issues of cognition and social context to better
understand the process. In this perspective, opportunity development includes
both information gathering within the context of the network of weak ties, and
concept creation in the context of strong ties. But introducing two levels analysis,
the entrepreneurial career and the venture, we can further distinguish between
information scanning in the network of weak ties, and information search related
to the specific venture among entrepreneurs and experts, also linked by weak
ties. We can also distinguish between thinking-through-talking in the inner circle,
a stable group of people around the individual entrepreneurs, and assessing
resources while building an action set appropriate to the specific venture. The
ideas presented in the model are grounded in an extensive and emerging research
literature on the broad areas of opportunity recognition and the social context of
entrepreneurs. I believe opportunity development provides a valuable addition to
the concepts of opportunity identification, alertness, and opportunity evaluation
in the general field of opportunity recognition research.
The opportunity development model adds new perspectives to both current
opportunity recognition research and entrepreneurial networks, both indepen-
dently and in the interaction between the two areas. In many cases, such as use
of information, information search and questioning, and the role of the network
of weak ties, the linkage between these research streams has been apparent
already; the opportunity development model discusses in detail further useful and
potentially valuable distinctions. Also, I believe the exploration of the distinction
between the entrepreneurial career and the venture have helped unpack the ideas
related to the strong ties network. In addition, the concept of thinking-through-
talking provides an interesting addition to cognition studies in opportunity
recognition.
The model is grounded in oral histories of opportunity development and in
entrepreneurship research literature. The approach provides a rich basis for
theoretical development, but the results must be submitted to empirical testing.
The structured comparative sample for this study uses performance in terms
of opportunities recognition and wealth creation as the basis for selecting
participants; this implies the model provides guidelines for improving opportunity
development. To test such a model, then, a longitudinal study is needed which
would allow for evaluation of performance outcomes after collecting data on the
opportunity development process. Specific issues, such as the role of partners
and the inner circle, or the role of thinking-through-talking in the development
of opportunities, could be studied for further insight without making any
performance connections. Research techniques from experiments to longitudinal
network analysis provide possibilities to further develop the model and provide
empirical support.
As a first step, this study provides a basis for further understanding the process
of opportunity development. The most obvious limitation in this study, of course,
is that the data used to generate the model of opportunity development cannot be
said to validate or prove the accuracy of the conclusions. Through evaluation of
the results in published studies, some supporting data can be found for parts of
the model. Nonetheless, further empirical tests should be pursued as a next step.
Three specific issues must be addressed. First, the emphasis on successful serial
entrepreneurs has been an interesting field research process, but this sample may
be too unique to offer any generalizability. Second, the sample emphasizes low and
medium technology manufacturing, which many of the serial entrepreneurs sup-
plemented with a number of service companies. This focus means that the model
may have less relevance for high-technology, innovation-driven entrepreneurship.
Third, the situation of well-established entrepreneurs may be so different than
that experienced by novice or nascent entrepreneurs, that the model may have
limited generalizability or practical value to a broad range of entrepreneurs.
Finally, the retrospective narratives provide a rich set of data for analysis and
reflection, but the natural fading of memories and other recall biases probably
distort the data. These issues are key concerns to be addressed in future extensions
of the research.
Stevenson and Jarillo (1990) suggested that entrepreneurship is “the pursuit
of opportunity without regard to the resources currently controlled.” The en-
trepreneurs’ concern with both opportunities and resources comes through in the
opportunity development process, because the need to achieve a good business
concept implies a clear vision of how the business will operate and profit from the
opportunity. If we understand the pursuit of opportunity as the dynamic of creating
a business concept, the phrase could be restated “development of opportunities
with regard to resources being brought under direct or indirect control.” The
issue of resources raises the question of how entrepreneurs gain knowledge of
and access to resources – which turns our attention back to the entrepreneurial
context.
The general research question “How are opportunities developed?” is too
broad a question to be answered satisfactorily in a single research project. The
specific research question of the thesis “What is the impact of the social context
on opportunity development?” emerged from the first phase of exploratory field
work and was addressed more directly as the research developed. Combining the
elements of process, time and social context has been challenging, but I believe
the research has resulted in a useful and important model of opportunity devel-
opment which moves away from an individualistic perspective, and introduces
a process of dynamic interaction between the entrepreneurs and their social
context.
306 ALICE DE KONING
NOTE
1. For more detailed exploration of this and other issues see Gaglio’s (1997) excellent
review of opportunity identification.
ACKNOWLEDGMENTS
I gratefully acknowledge all the feedback and support I have received over the
years from conference participants at Babson Kauffman Research Conference,
the Academy of Management meetings, Global Entrepreneurship Research
Conference and the Marketing/Entrepreneurship Interface; from colleagues at
INSEAD, Stockholm School of Economics, Jönköping International Business
School and Georgia State University. Your suggestions have helped improve
the paper in every way; the failings that remain are all mine. I particularly
acknowledge Daniel F. Muzyka, whose financial, moral and intellectual support
made this research both feasible and exciting.
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APPENDIX A
Short Biographical Sketches of Phase One Participants
Entrepreneur A specialises in manufacturing industries that are dominated by

“poor management.” He buys factories, always with at least one partner, turns
around the operation, and eventually sells out. In some cases, he consolidates
several operations before selling. His primary interest is in food processing, but
he has also invested in other similar basic manufacturing industries (e.g. paint
brushes). In addition to his entrepreneurial activities, he also invests as a silent
partner in new ventures.
Entrepreneur B likewise specialises in turning around operations, although he
has also started up several ventures. He has worked with several different partners.
He is less focussed than entrepreneur A, however, and has interests in commercial
and manufacturing operations, and sells services and products. For example,
one start-up operation works in the executive out-placement industry, helping
redundant executives create their own businesses rather than finding another job.
Another involved a successful turnaround operation of a bankrupt factory that
achieved break-even within a year. Entrepreneur B was an investment banker,
and became an entrepreneur so he could continue to live in Paris. One of his
self-reported skills as an entrepreneur is structuring creative financial deals. Since
the completion of phase one, Entrepreneur B has experienced a number of failures,
although retaining a few successful ventures and high level of personal wealth.
Entrepreneur C is a self-described “business angel” who “actively” invests in
new ventures. However, we included him in the study because he is very involved in
the ventures he invests in and acts as a de facto team member. The line between “an-
gels” and entrepreneurs, as we noted above, is sometimes very hazy. He provided
an interesting perspective both on inventor-entrepreneurs (he invests in very high
technology companies, using his Ph.D. in nuclear physics to inform his evaluation
and to influence the evolution of the companies), and on how the actual business
opportunities evolved from pure technical invention. In the case of his investments,
the opportunity formation process occurred largely after the venture had started.
Entrepreneur D described himself as an analytic entrepreneur, one who decided
to start a business, and very analytically invested in markets to find the right
opportunity. In practice, most of his activity has been in the communications
industry, starting as a journalist and lobbyist, and eventually running a company
which designed, manufactured and sold communications hardware (see Churchill,
1988). He is now semi-retired, and keeps busy as a board member and “angel.”
Entrepreneur E has invested primarily in retailing or marketing operations,
including a few franchises. He usually focuses on consumer products or services,
310 ALICE DE KONING
where he sees a big gap in the market. He always has been involved in start-ups –
even his franchise investments were always made when the business concept was
just entering the French market. He has a long-term partner, with whom many of
his ventures were (and continue to be) initiated.
Entrepreneur F and G have been working together for most of the last 20
years, starting up new ventures in a number of industries. Their most consistent,
though not exclusive, commitment has been in a natural resources/processing
industry, providing innovative lower-cost solutions to basic processing problems.
Entrepreneur F is a creative engineer, while Entrepreneur G takes the business man-
agement and market orientation. These entrepreneurs often have sold new ventures
before they have proven successful, in order to concentrate on another business.
Entrepreneur H left consulting to become an entrepreneur with his partner (an
ex-investment banker). They have built several international specialty retailing
chains. Starting with a distribution license to bring a carpet retailer to Benelux,
they eventually created a number of joint ventures with successful but small
family-owned specialty retailers, complementing the original owners’ knowledge
of the products with their experience in rolling out nation-wide chain stores. In
other ventures, their involvement is usually restricted to board membership.
Entrepreneur I has created and purchased companies in die-casting, component
maintenance, heat treatment, and other related industries for several decades. His
current focus is on jet engine and turbine components. He continuously searches
for new applications and new customers for his product lines and specialities,
and has gone through several cycles of diversification and focussing. He started
decades ago, he says, by bringing U.S. process technology to Europe. Today, his
companies serve international customers, with plants located in several countries
– although he still describes himself as a relatively small player.
Entrepreneur J has developed a large family business, with two major product
groups, media and advertising. He is well-known within Canada for introducing
TV Guide into the market (despite the dominance of large publishing houses)
and cellular phones. He continues to expand, and is now looking for a new major
product line. He described most of his major successes as beginning with casual
comments by people in his business network.
APPENDIX B
Short Biographical Sketches of Phase Two Participants
Entrepreneur K left INSEAD with the intention of starting his own company as
soon as possible. After working as a personal assistant to an entrepreneur, he took
over a candle factory. Despite widespread bankruptcies in the industry, he has

remained profitable. From making candles, he moved into consignment sales in
retails shops, primarily convenience stores. His latest venture has been a chain
of discount perfume shops, which grew very rapidly. He has recently exited this
business.
Entrepreneur L is an engineer, with a bent for solving technical problem.
His closely related businesses involve an innovation for oil fields. His biggest
challenge is pricing high enough, so that his company is credible against
“Western” competitors – even with generous salaries, Nigerian employees are
relatively cheap. He also struggles with Western perception that good technology
cannot originate in countries like Nigeria. Within the country, he says he is unique
as an entrepreneur with a very long time horizon for investment, unlike the more
short-term horizon of the numerous trader entrepreneurs.
Entrepreneur M had a successful 15-year career in the automotive industry,
before joining the family firm. This business supplies automotive components.
In reaction to pressure from the automotive companies, who wanted to devolve
component design to the suppliers, he initiated a new design company. Investors
and partners included other component suppliers. The design company is doing
well, despite early challenges.
Entrepreneur O, with his brother, took over the family hide trading firm
after their father nearly bankrupted the firm in an ill-conceived joint venture.
They have managed to save the company, and added a tanning factory to the
operations. Hides have become a commodity product, however, so the brothers
are aggressively pursuing a diversification strategy. They have sold a hide-related
business they started earlier, and recently purchased a small chocolate truffles
factory (against a rival bid from Nestlé). This factory is now profitable, and they
continue to search for similar small troubled firms.
Entrepreneur P began his first firm, a buying agency for knitwear, when he and
his wife returned to Mauritius for the birth of their first child. The agency began
with contacts in Germany and France, and became quite successful. Over the
last 15 years, he has extended his interests in knitwear with a knitwear machine
manufacturing and sales agency, label manufacturing, and other specialized
agencies. He recently has invested in manufacturing in South Africa also.
Entrepreneur Q began his career as an entrepreneur when he took over the
family lumber supply store. In serving the contractors of North London, he soon
identified other opportunities. A major success was a cement post factory, using
a new technique he discovered and imported from France. After the drama of
discovering his long-time accountant and partner was not trustworthy, he has
had to rebuild and reinvest in his businesses. Over the last few years, his son has
joined him as a partner in the business.
312 ALICE DE KONING
Entrepreneur R was not included in the thesis. He has created a thriving business
in computer services, supporting installation and ongoing training and support
for major financial and inventory management programs. His customers include
Glaxo. The company began as a small software programming consultancy, with
two partners and one employee. After struggling for three years, Entrepreneur R
took a three month sabbatical to rethink the company. The result has been a dra-
matic shift in the product and market, with resulting high growth. One interesting
aspect of his managerial style, is an emphasis on hiring long-term unemployed
people and providing the necessary training. In one case, a 55-year-old former
executive provided the credibility he needed to sell to older executives of large
companies. Enthusiasm and commitment is understandably very high.
Entrepreneur S began dabbling in entrepreneurship while working as an
acquisitions analyst in New York, a job he took after enjoying a year as a ski bum
(in his own words). His early venture was a charter tour company, specializing in
Alps ski trips, which began as a group of friends who wanted to ski together. After
moving to London to turn around a failing acquisition related to his full-time
employer, he discontinued the charter business, quit his job, and went to Zurich
where he eventually founded an agency selling plastics packaging machinery.
While earning an MBA at INSEAD, he began a packaging company with a
contract from L’Oreal. About 10 years later and after growing to 10 factories
across Europe, he sold out to a larger company. He tried becoming a private
investor, but experienced failures and frustration with bad management. He then
bought a company based in Provence, with manufacturing and a related retail
chain. Products are a mixture of perfumes, soaps, and bathroom decorations,
around the traditional scents and themes of Provence. After fixing the operations
so that they became profitable, he now is focused on developing a luxury brand
and global chain of retail shops. At present there are over 200 stores world wide.
Entrepreneur T decided to leave his corporate career in his late 30s. After much
research, he bought a company manufacturing collapsible kayaks for military
and civilian markets. The founder was over 70, and no longer able to manage
profitably. After cutting a sympathetic deal, Entrepreneur T moved the company
into Brittany, took advantage of some government subsidies, and managed
to quickly become profitable. Despite a long-term problem with French tax
authorities, his efforts support a comfortable lifestyle which includes a stable of
racehorses and a home in a restored abbey. The company has 17 employees, sells
its products globally, and competes against about 15 rivals in this niche market.
Entrepreneur U returned from his youthful global wanderings, to a very tight
labor market in the early 1990s. He spent several months trying to develop ideas
for businesses, and eventually backed into an opportunity to supply karaoke
machines to the French market. Since that initial business started, he has expanded
his activities almost every year. Two major businesses are corporate event
management (including karaoke), and French music video production, which he
started to supply to the French karaoke market.
Entrepreneur V began his first venture in large, custom-designed doors, for
example for. He is the youngest of three brothers, who have worked together on
at least 15 ventures. Another early venture was the development of accounting
software, which they regret they sold out too soon. The brothers have started many
businesses related to construction engineering. Eventually they decided they
excelled at business start-ups, and decided to try to formalize their knowledge
through setting up a business incubator. They are now working through their
second incubator. They are confident they understand the necessary processes
and problems of opportunity formation and start-up, but struggle to formalize
how to “pick” good entrepreneurs. Their businesses now also include CAD/Cam
and lasers technology expertise. Two recent companies include a machine that
provides low-cost and simple analysis of the quality of rubber before it is man-
ufactured into products, and the technology to make customized ceramic dental
implants.
Entrepreneur W was not included in the thesis. He has recently become an en-
trepreneur, after spending several years in Hong Kong working in sales. He recently
purchased a floor covering factory from a larger company, located in his home town
in Norway. The factory produces both coverings, and the machinery required to
make the coverings. He successfully purchased the company through a two-stage,
and well-timed negotiation which minimized his personal costs. He also refocused
the product line and sales staff, to emphasize high margin products. The company is
now profitable. He is currently investigating an opportunity to start a floor covering
factory in southern Africa, and expects to become a serial entrepreneur.
Entrepreneur X is the third generation in the family sugar business. Because
of the massive consolidations in this industry, the family business survives as a
relatively minor shareholding in a large company. He continues to represent the
family as an active director of the company. Current plans include acquisitions
outside of France. His own entrepreneurial experience was limited to a few years,
when he ran a concession selling and servicing cars.
Entrepreneur Y is the youngest of three brothers, who was sent by his father
from India to manage the family operations in Saudi Arabia. He eventually
developed a group of companies, all related to the bakery industry, throughout the
Gulf states. As his children are growing older, and the business is developing very
independently of the Indian concerns, he recently bought out his Gulf operations
and withdrew all claims from the family business. He has a very interesting
managerial style, which emphasizes experimentation and learning throughout the
organization.
314 ALICE DE KONING
Entrepreneur Z started his entrepreneurial career by investing all his money – $2

million – in a ship which was being converted to a hotel in Florida. He lost every
penny when the ship had a fire because of a legal technicality in the contracts (hotel
and ship liens are very different apparently). In the process of rebuilding, he started
a series of companies, to a total of 52 today. Many of the companies are separate
entities but similar businesses. The range of activities includes group homes,
juvenile delinquent homes, rendering plants, denture manufacturing, sewage
treatment installations, leases and service, and golf/cross-country properties. The
companies are run by people he hires, to whom he eventually gives an equity
stake. He has direct contact with most companies only twice a year, but is always
active looking for ways to improve or extend the businesses. He also has directed
the entrepreneurship program and taught at university business schools. His scope
of activity is impressive, considering he started his first major venture at 39 years.
His only early ventures were small activities to earn money as a college student.
Entrepreneur AA started his first business, extremely detailed maps of London
city showing each building and listing occupants, in response to his frustration
in finding clients’ offices. He kept his full-time job at an investment bank, and
developed a profitable little business which he eventually sold. His next ventures
were a partnership to sell Italian wine in England, and a peripheral involvement
in an agency to sell English automotive components in France. The wine agency
was sold; he withdrew from the other business because of lack of commitment.
After completing his MBA, Entrepreneur AA and a fellow alumnus bought out
a Vickers factory, to produce small engines. Within a few years, most of their
British customers were bankrupt, and they began looking globally for customers.
Larger Japanese companies seriously challenged their survival. The company was
sold (and soon after closed) to a downstream English company. Entrepreneur AA
is now trying to establish a viable small business, using some of the plant and
equipment that was excluded from the company sale.
THE DOMAIN OF
ENTREPRENEURSHIP RESEARCH:
SOME SUGGESTIONS
Per Davidsson
DEVELOPMENT – AND LACK THEREOF – IN

ENTREPRENEURSHIP RESEARCH
There is progress in entrepreneurship research. Important works in entrepreneur-
ship increasingly appear in highly respected, mainstream journals (see Busenitz
et al., 2003; Davidsson, Low & Wright, 2001). There is conceptual development
that attracts attention (e.g. Shane & Venkataraman, 2000) and handbooks are
compiled, providing the field with more of a common body of knowledge (Acs
& Audretsch, 2003a; Shane, 2000a; Westhead & Wright, 2000). Further, there
is evidence of methodological improvements (Chandler & Lyon, 2001) and
accumulation of meaningful findings on various levels of analysis (Davidsson
& Wiklund, 2001). Moreover, due to time lags in publication the reported
improvements are likely to be underestimated. This author’s experience as
organizer, reviewer and participant in core entrepreneurship conferences on both
sides of the Atlantic (e.g. Babson; RENT) suggests that much of the lower end of
the quality distribution has either disappeared from the submissions or is screened
out in the review process. Much more than used to be the case a few years back we
find among the presented papers research that is truly theory-driven; research on
the earliest stages of business development, and research that employs methods
suitable for causal inference, i.e. experiments and longitudinal designs.

ISSN: 1074-7540/doi:10.1016/S1074-7540(03)06010-0
315
316 PER DAVIDSSON
This is not to deny that there is confusion, signs of identity crisis, or widespread
frustration among entrepreneurship researchers because of a sense that the field
of entrepreneurship research has not come “far enough, fast enough” (Low, 2001)
or that we are “getting more pieces of the puzzle, but no picture is emerging”
(Koppl & Minniti, 2003). The literature is full of definitions of entrepreneurship,
which differ along a number of dimensions, e.g. whether entrepreneurship should
be defined in terms of dispositions, behavior, or outcomes,1 whether it belongs
in the economic-commercial domain or can be exercised also in not-for-profit
contexts; whether it belongs only in small and/or owner-managed firms or in any
organizational context, and whether purpose, growth, risk, innovation or success
are necessary criteria for something to qualify as entrepreneurship (Gartner, 1990;
Hébert & Link, 1982; Kirzner, 1983).
There is, no doubt, disagreement on conceptual issues and a perceived need
to try to sort these out (Bruyat & Julien, 2000; Gartner, 2001; Low, 2001; Shane
& Venkataraman, 2000, 2001; Singh, 2001; Zahra & Dess, 2001). There are also
numerous empirical attempts to understand the field or assess it progress (Aldrich
& Baker, 1997; Busenitz et al., 2003; Cooper, 2003; Davidsson & Wiklund, 2001;
Grégoire, Déry & Béchard, 2001; Landström, 2001; Low, 2001; Meeks, Neck &
Meyer, 2001; Meyer, Neck & Meeks, 2002; Reader & Watkins, 2001). Of these,
Low (2001, p. 20) and Meeks et al. (2001) find almost no order at all in empirical
work published under the entrepreneurship label. The others find meaningful
patterns but also reason for frustration, or even for very pessimistic views on the
future and potential contribution of the field.
I personally think that on the contrary, we now finally have the intellectual
building blocks in place that are necessary for the creation of a strong paradigm
in entrepreneurship, which can lead to academic credibility and respect as well
as a stream of scholarly and practically meaningful research contributions. The
purpose of this manuscript is to facilitate further progress in entrepreneurship
through elaboration on several such intellectual building blocks. Drawing pre-
dominantly on ideas developed by Kirzner (1973), Venkataraman (1997; Shane &
Venkataraman, 2000, 2001) and Gartner (1988, 2001), I strive to achieve three
things. Firstly, I want to make a clearer distinction between the definition of en-
trepreneurship as a societal phenomenon, and the delineation or entrepreneurship
as a scholarly domain. These are not identical. The former describes the function
of entrepreneurship in society, while the latter suggests what entrepreneurship
researchers should study in order to generate maximum knowledge about this
societal phenomenon. Arguably, the distinction should make it easier both to
agree upon and communicate what entrepreneurship is, on the one hand, and
what entrepreneurship research should study on the other. In addition, it may be
useful to regard the teaching subject “entrepreneurship” as a – in part – separate
The Domain of Entrepreneurship Research 317
issue. Second, I want to achieve a domain delineation that is more complete than
its predecessors; one which makes room for both Venkataraman’s and Gartner’s
views on entrepreneurship, and which tries to find an agreeable middle ground on
important issues where entrepreneurship scholars seemingly disagree. This may
seem an insurmountable task given the apparent conflict and confusion reported
above. However, I believe that a lot of the apparent conflict is superficial and
can be reconciled. Third, I want to go further than the predecessors in pointing
out what the suggested domain delineation implies for the design and analysis of
empirical research on entrepreneurship.
In the next section, I will discuss entrepreneurship as a societal phenomenon,
arguing that from this perspective Kirzner’s (1973) notion that entrepreneurship
consists of the competitive behaviors that drive the market process is highly
useful. I will then turn to entrepreneurship as a scholarly domain, which also
includes a discussion of the central concept “opportunity.” After reviews of
Venkataraman’s (1997; cf. Shane & Venkataraman, 2000) and Gartner’s (1988)
viewpoints I will propose that when talking about the scholarly domain, we would
benefit from a delineation that does not presuppose the outcome, and focus on the
behaviors undertaken in the processes of discovery and exploitation of ideas for
new business ventures. The scholarly domain, then, should study these processes
as well as their antecedents and effects.
I will further discuss how entrepreneurship relates to other scholarly domains,
essentially agreeing with Low (2001) that “entrepreneurship as distinct domain”
and “entrepreneurship belongs in the disciplines” are, in fact, mutually dependent
strategies for the development of the field. Before concluding I will also discuss
some of the many methodological challenges that arise for entrepreneurship
research because of issues related to emergence, process, heterogeneity, and level
of analysis.
ENTREPRENEURSHIP AS SOCIETAL PHENOMENON

Many scholars include in their understanding of the concept “entrepreneurship”
the criterion that the outcome is somehow successful or influential. Others hold
that entrepreneurs act under genuine uncertainty and that therefore one should
base the definition on the behavior itself and not the outcome, which is more or
less contingent on luck (cf. Gartner, 1990). This is a strong indication that we
need to separate entrepreneurship as a societal phenomenon – its role in societal
organization and/or the economic system – from entrepreneurship as a scholarly
domain, i.e. what entrepreneurship research should study. When we think of
entrepreneurship as a societal phenomenon it is a distinctive advantage to include
318 PER DAVIDSSON
an outcome criterion and make clear, for example, that mere contemplation over
radically new ideas or vain introduction of fatally flawed ones do not amount to
“entrepreneurship.” It is along with this type of view on entrepreneurship, then, that
criteria like “wealth creation” or “value creation” rightfully belong (Drucker, 1985;
Morris, 1998).
A discussion of entrepreneurship as a societal phenomenon, including an
outcome criterion, benefits from the work of economic theorists. The major
intellectual building block I will use in this section is the notion in Austrian
economics that entrepreneurship consists of the competitive behaviors that drive
the market process (Kirzner, 1973, pp. 19–20).2 This definition is based jointly on
behavior and outcomes. I choose this definition because it gives a satisfactorily
clear delineation of the role of entrepreneurship in society. It puts entrepreneurship
squarely in a market context and makes clear that it is the suppliers who exercise
entrepreneurship – not customers, legislators, or natural forces that also affect
outcomes in the market.
The “drive the market process” part is about the outcome: entrepreneurship
makes a difference. If it does not, it is not entrepreneurship. That is, sellers who
introduce new, improved or competing offerings in an emerging or pre-existing
market give presumptive buyers new choice alternatives to consider, attract
additional new entrants as followers, and/or give incumbent firms in existing
markets reason to, in turn, improve their market offerings. As a result, resources
are put to more effective and/or efficient use. This is what driving the market
process means, and this is what entrepreneurship does. Importantly, driving the
market process does not require that the first mover makes a profit but refers to the
suppliers as a collective. Even if it eventually loses out the first mover contributes
to driving the market process if subsequently someone gets it right, which leads
to a lasting change in the market.
Put in slightly different words, entrepreneurship as a societal phenomenon is
the introduction of new economic activity that leads to change in the marketplace
(cf. Herbert Simon in Sarasvathy, 1999b, pp. 2 and 11). This is illustrated in Fig. 1.
Note that “new” along the market axis means either that an entirely new market
emerges, or that an activity is new to an existing market. Likewise along the firm
axis “new” means that the new activity is an independent start-up, i.e. a new firm
emerges as a result, or it is an internal new venture, i.e. the activity is new to
the firm.
Under the suggested definition the left hand side of the figure – quadrants I
and IV – exemplify entrepreneurship, whereas quadrants II and III do not. This
conjures also with the argument developed at some length by Baumol (1993) in
that imitative entry and internationalization are included in the concept, whereas,
e.g. take-over is excluded.
Fig. 1. Firm and Market Newness of Economic Activities.
New Offer as Entrepreneurship
Starting with quadrant I the first entry reads “New offer.” This refers to the situation
where something so new is introduced that a new market is created (Bhave, 1994,
p. 231; Sarasvathy, 1999a) or at least no supplier has previously made the same
offer in the same market. There is hardly any disagreement among scholars that
this should be included in the concept of entrepreneurship, although some might
want to restrict the inclusion to situations where a new and/or independent firm is
behind the new offer.
The first category, new product or service, corresponds to Schumpeter’s (1934)
“new product” and Bhave’s (1994) notion of “product novelty,” respectively, and
requires no further explanation. The second category, new bundle, refers to any
combination of product and service components that – as a package deal – is unique
relative to what has previously been offered on the market, although no individual
component may be strictly new. This overlaps with Schumpeter’s (1934) general
idea about “new combinations,” with Bhave’s (1994) notion of “new business
concept,” and with Amit and Zott’s (2000) “new business model” – as long as
the new combination, concept or model includes newness as perceived by buyers
and competitors. In some cases it amounts to Schumpeter’s (1934) category
“re-organization of an entire industry.” An illustrative case is IKEA, where the
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newness was not in the piece of furniture in use, but in the division of labor among
different actors, including the consumer, in the production and distribution of
the end product.
IKEA would also qualify under the third category included in “new offer,” new
price/value relation. This does not create a new market but drives the market
process because it changes consumer choices and give other competitors reason
to change their offerings. Consequently, Kirzner (1973, pp. 23–24) explicitly
discusses offering the same product at a lower price as one form of entrepreneur-
ship. A new price/value relation may be contingent upon organizational change
(quadrant II), but this is not necessarily the case. It may also represent a strategic
change that relies on expected scale economies in production or a switch from
low volume/high margin to high volume/low margin strategy.
New Competitor as Entrepreneurship
The second main entry in quadrant I is “New competitor.” This is when a new,
start-up firm enters the market, or an existing firm launches a new product line
in a situation where other firms already supply the market with essentially the
same product. That is, I suggest that not only innovative but also imitative en-
try be included in the entrepreneurship concept (cf. Aldrich, 1999; Aldrich &
Martinez, 2001). The reason for imitative entry to be included in the entrepreneur-
ship concept is that such entry drives the market process in the sense that consumers
get additional choices and incumbent firms get reason to change their behavior to
meet this new competition.
Moreover, it has been observed that entry with complete lack of novelty tends
not to appear empirically (Bhave, 1994, p. 230; Davidsson, 1986). No entrant is
a perfect clone of an existing actor. Therefore, trying to include an innovativeness
criterion in the definition of entrepreneurship would create problems. Rather
than drawing the line at zero innovation (which would exclude no cases) one
would be forced to define an arbitrary limit across different industries and
types of novelty. This problem is aggravated by the fact that what appears
new in one market may be a blueprint copy of what already runs successfully
in a different market (Gratzer, 1996). All in all, then, there are several good
reasons to include imitative market entry in the concept of entrepreneurship as
a societal phenomenon. While both aspects of the entrepreneurship, it may be
advantageous to model the antecedents and effects of “innovation” and “imitative”
new ventures differently in theories and empirical analyses (cf. Samuelsson,
forthcoming).
Geographical Market Expansion as Entrepreneurship
Defining entrepreneurship the way we have done makes it logical to include also
quadrant IV – geographical market expansion – in the concept of entrepreneur-
ship. Although by now the activities are (largely) no longer new from the firm’s
perspective their introduction in new markets – if not totally unsuccessful – drives
the market process in these new places. This may to some look like over-extending
the entrepreneurship concept. However, when IKEA enters its nth country market
it may well be as revolutionary for the consumers and competitors in that market
as it was for Swedish consumers and furniture retailers when IKEA first developed
its concept. If IKEA’s entry is successful it reflects Schumpeter’s (1934) “new
market” category of economic development. The alternative to require newness
to the firm as a criterion would lead to less desirable consequences. For example,
had Southwest Airlines successfully introduced their concept in the European
market it would not constitute entrepreneurship. If instead a new actor (e.g. Ryan
Air) copied the concept and took it to the European market it would count as
entrepreneurship. This is less than satisfactory from any perspective, and from a
market perspective it is unacceptable.
Organizational and Ownership Changes are not Entrepreneurship
By contrast, according to our conceptualization the organizational and ownership

changes listed in quadrant II do not by themselves constitute entrepreneurship. It
is certainly conceivable (and likely) that reorganization facilitates the creation of
new economic activity by the organization. However, it is also conceivable that
organizational units that are transferred to new ownership and/or undergo internal
reorganization experience changes in job satisfaction and/or financial performance
without at all changing the consumers’ choice options or influencing the behavior
of competitors. Actually, there are at least four cases: (a) an organizational or
ownership change is intended to lead to more new market offerings by the firm,
and does so; (b) same as (a) but the intended increase in new market offerings
does not happen; (c) the change is undertaken for other reasons and has no effect
on the firm’s market offerings; and (d) the change is undertaken for other reasons
but has the unintended effect of also making the firm more entrepreneurial. I think
it is valuable to conceptually separate the organizational or ownership change
from its effects. Therefore, it is the (successful or influential) launching of new
business activities that might follow from it, and not the organizational change
itself, that constitutes entrepreneurship.
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The argument is perhaps easier to accept if we move to the level of societal

organization. Politicians can decide on changes in how society is organized
and introduce, e.g. de-regulation or other institutional changes which create
opportunity in market x and therefore an increase in competitive behaviors that
drive the market process in that market, i.e. entrepreneurship. According to
my argument, it is not the politician who exercises entrepreneurship in market
x, but the micro-level actors in that market. The political decision facilitates
entrepreneurship. In the same way, a manager may facilitate entrepreneurship
through organizational change, but it is the market related activities that may
result, and not the organizational change per se, that constitute entrepreneurship.
This conceptual distinction is also the reason why I refrain from including
Schumpeter’s (1934) “new production method” and “new source of supply,” as
well as Bhave’s (1994) “novelty in production technology,” in the definition of
entrepreneurship as societal phenomenon (cf. Davidsson, Delmar & Wiklund,
2002; Kirzner, 1983, p. 288). As we shall see, the study of how organizational
change relates to discovery and exploitation of new venture ideas remain an
important question for entrepreneurship as a scholarly domain.
Business as Usual and Non-Entrepreneurial Growth
Turning now to quadrant IV, “Business as usual” here is at first glance as easy to
exclude from the notion of entrepreneurship, as was “New offer” in quadrant I easy
to include. But not even here does there seem to exist full agreement. First, we
have von Mises’ denial of the existence of such a thing as “business as usual” when
saying that “In any real and living economy every actor is always an entrepreneur”
(Mises, 1949, p. 253). One can argue that no market action is completely void
of novelty. For example, when a daily newspaper carries out the totally expected
and routine actions of producing a new issue and distributing it to its subscribers
and usual sales outlets, it is a new issue, and not yesterday’s paper, that is being
distributed. Competitors will equally routinely read it, and it cannot be ruled out
that some part of the contents may have a twist that inspires the competitor to do
something in a future issue, which it would otherwise not have done. In other words,
we find an element of “competitive behavior that drives the market process” in these
routine actions. Although this seems to lead to a delimitation problem similar to
the arbitrary innovation criterion discussed above, my conclusion in this case goes
in the other direction. That is, there is a lot of “known products for known buyers”
activity going on that is so clearly predominantly of a “business as usual” character
that it is not very difficult to classify it as such both conceptually and empirically,
and thus exclude it from entrepreneurship as a societal phenomenon.
More problematic, perhaps, is the fact that there exist explicit and implicit
definitions of entrepreneurship, which do not clearly require that “business as
usual” be excluded. For example, Cole (1949) defined entrepreneurship as “a
purposeful activity to initiate, maintain and aggrandize a profit-oriented business.”
This means that he included mere “maintenance” while stressing “freedom of
decision” (p. 88), making entrepreneurship equal to “starting and/or running
and/or expanding one’s own firm.”3 Although explicit reference to Cole is
infrequent, this is a recurrent implicit definition in research published under
the “entrepreneurship” label. While I hold that many differences in views on
entrepreneurship can be reconciled or are of marginal importance, this is not one
of them. When entrepreneurship is defined as the competitive behaviors that drive
the market process, “business as usual” can never be included.
The issue of non-entrepreneurial growth is tricky for slightly different reasons
(see Davidsson, 2002, for an elaborate discussion). When an economic actor
exploits a venture idea, there will be no well-defined moment at which “entry”
ends and “continued, routine exploitation” begins. Schumpeter (1934) held
that mere volume expansion was not entrepreneurial, while he included the
opening of new markets. It is a similar distinction I have in mind here. By
“non-entrepreneurial growth” I mean passively or re-actively letting existing
activities grow with the market. This would not provide much cause for alert
among competitors nor give customers new choices.
Outcomes on Different Levels
It was pointed out in the beginning of this section that while we have included an
outcome criterion in the definition of entrepreneurship, it is not necessary that each
and every individual venture that drives the market process is successful in itself.
This is illustrated in Fig. 2. “Venture” could here mean the sole activity of a new
firm or a new, additional activity by an established firm. Thus, “venture” should not
be interpreted (necessarily) as new firm or company, but as a new-to-the-market
activity as discussed above.
Naı̈ve conceptions of venture outcomes typically classify them as successes
or failures. Figure 2 complicates the picture by considering outcomes on two
levels, venture and society. If we turn first to quadrant I we find ventures that are
successful in themselves and which produce net utility to society as well. These
ventures are analytically unproblematic. Their successful entries into the market
no doubt “drive the market process” and hence they exercise entrepreneurship
under the definition we have chosen. Likewise, the failed ventures in quadrant III
are analytically unproblematic. These represent launching efforts that do not take
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Fig. 2. Outcomes on Different Levels for New Ventures (New Economic Activities).
off financially, and neither do they inspire followers or incumbent firms so that
the eventual net effect becomes positive on the societal level.
The catalyst ventures in quadrant IV are an interesting category, and probably
make up a large share of all new ventures (internal or independent) in any real
economy. Although not successful on the micro-level – perhaps because they are
outsmarted by followers or retaliating incumbents – they do “drive the market
process” precisely because they bring forth such behavior on the part of other
actors. An unsuccessful venture that inspires more profitable successors does
not complete the entrepreneurial process but still contributes to entrepreneurship
as a societal phenomenon. As the total effect on the economy is not necessarily
smaller than for “success ventures” the catalysts are a very important category
from a societal point of view (cf. Low & MacMillan, 1988; McGrath, 1999). This
should serve as a warning against too simplistic a view on micro-level failure.
The ventures in quadrants I and IV, then, represent entrepreneurship while the
failed ventures in quadrant III do not. What about the “Re-distributive” ventures
in quadrant II? These are ventures that yield a surplus on the micro-level while
at the same time the societal outcome is negative. Examples could be trafficking
with heavy drugs or – as in an actual case in Sweden – a graffiti removal operation
whose owners used nighttime to generate demand for their business. Thus, those
involved in the venture enrich themselves at the expense of collective wealth.4
Does this represent entrepreneurship? It has been pointed out that re-distribution
of wealth is an important function of entrepreneurship in capitalist economies
(Kirchhoff, 1994). However, what has here been labeled “success ventures” also
re-distribute wealth, in addition to creating new wealth. The theoretical status
of “re-distributive” ventures is determined, I would argue, by the answer to
“towards what?” entrepreneurship drives the market process. Schumpeter (1934)
and Kirzner (1973, p. 73) give seemingly contradictory answers to that question,
but in actual fact the movement from Schumpeter’s (local) equilibrium and the
movement towards Kirzner’s (global) equilibrium are in full agreement insofar
as that entrepreneurship drives the market process towards more effective and/or
efficient use of resources. Therefore, I would on theoretical grounds suggest that
“re-distributive” ventures do not represent entrepreneurship.5 Entrepreneurship
as a societal phenomenon leads to improved use of resources in the economic
system as a whole.
The portrayal of possible outcomes in Fig. 2 is, of course, still a radical
simplification. Outcomes are described as dichotomous and no explicit time
horizon was introduced. Only two out of many possible levels of outcomes
(e.g. venture, firm, industry, region, nation, world) were discussed. In practice,
assessing exactly where individual ventures fit into this framework would in
many cases be very difficult, and contingent on the time perspective. Nonetheless,
I think it is useful to highlight the distinctions made here and to note that as
theoretical categories not only “success ventures” but also “catalyst ventures”
carry out the entrepreneurial function in the economy, whereas neither “failed
ventures” nor “re-distributive ventures” fulfill this role.
Degrees of Entrepreneurship?
The inclusion of imitative entry, as well as the admittedly vague borderline

between the end of the entrepreneurial exploitation process and the beginning of
non-entrepreneurial growth, call for a discussion of “degrees” of entrepreneurship
(cf. Davidsson, 1989; Schafer, 1990; Tay, 1998). It seems natural to treat
entrepreneurship not as a dichotomous variable, but to say that some ventures
show more entrepreneurship than others. But what should be the criterion
by which we judge the degree of entrepreneurship? There are at least three
possibilities:
The degree of (direct and indirect) impact on the economic system. This
is a criterion that is consistent with defining entrepreneurship as the compet-
itive behaviors that drive the market process. In a theoretical discussion of
entrepreneurship as a societal phenomenon, then, this should be the preferred
criterion, i.e. the most correct one. For research practice the criterion has severe
shortcomings because impact can only be assessed after the fact and not in real
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time, and because even then it can be very difficult to obtain even roughly correct
estimates of total impact of direct and indirect effects on a complex economic
system. A variation (or an indicator) of this criterion is “how much net wealth is
created,” but this suffers from similar assessment problems.
The degree of novelty to the market. This is intuitively appealing in the
sense that what is more creative is seen as a higher degree of entrepreneurship.
Although the above-discussed problem of comparing very different kinds of
novelty pertains to this criterion it has the advantage that it can be reasonably well
assessed in real time. The main problem is that while successfully introduced
innovative new activities are likely to have larger market impact on average,
there is no guarantee that a high degree of novelty ascertains market effect.
History is full of weirdo inventions that nobody wanted or cared about. Some
seemingly relatively marginal innovations revolutionize markets and create great
private and societal wealth while some radical innovations have marginal impact
or fail altogether. Therefore, when market effect is part of the definition of
entrepreneurship the degree of novelty is at best a rough proxy for degree of
entrepreneurship.
The degree of novelty to the actor. Sometimes expressions like “That was very
entrepreneurial of you (or of that firm)” are heard, meaning that the action was
radically different from what that actor has done before (but not necessarily very
novel or valuable as the market sees it). Relating the degree of entrepreneurship to
the history of the actor rather than to the market in this way has highly undesirable
consequences. With this type of criterion previous inactivity or conservatism
increases an actor’s potential for showing a high degree of entrepreneurship.
Moreover, it is a criterion that regards it more entrepreneurial to do something
totally unrelated to one’s prior experience. Theories as well as empirical findings
suggest this may not be a wise move (Barney, 1991; Sarasvathy, 2001; Shane,
2000b). I would therefore discourage its use in any academic context.
In all, while there is a conceptual need for discussing “degrees of entrepreneur-
ship” there is no easy or straightforward way to actually assess such variation.
Of the available alternatives, the degree of impact on the economic system
is the criterion that matches the definition of entrepreneurship (as a societal
phenomenon) that I have proposed. One might conceive of entrepreneurship
itself as a graded phenomenon or hold that empirical instances that qualitatively
are instances of entrepreneurship have quantitatively different impact on the
economic system. I do not believe it to be a hugely important distinction whether it
is entrepreneurship itself or its impact that is a matter of degree. However, degree
of novelty either to the market or to the actor is better regarded as a possible cause
of variations in the degree of entrepreneurship (or impact of entrepreneurship)
than being a direct measure of such variation.
Conclusions on Entrepreneurship as a Societal Phenomenon
I have suggested here that entrepreneurship as a societal phenomenon consists of

the competitive behaviors that drive the market process (towards more effective
and efficient use of resources). In contexts where less precision is required the even
easier and roughly equivalent entrepreneurship is the creation of new economic
activity can be used. Relative to many other alternatives I would argue that the
suggested definitions have advantages in terms of being clearly delimited, logically
coherent, and easy to communicate. They are clearly and fully explained as “when
a supplier introduces something on a market so that buyers get a new alternative to
choose from (potentially increasing the value they get for their money); this action
may also make incumbent suppliers change their market offerings and/or attract
additional suppliers to the market.”
Further, despite being clearly delimited the definition is permissive in that it does
not take a restrictive stand on purposefulness, innovation, organizational context,
or ownership and personal risk-taking. Hence, while some would like to include
more restriction in the definition they should in these regards at least find room
for their favorite notions of entrepreneurship within the definition suggested here.
Importantly, the view of entrepreneurship I propose is consistent with the views
expressed by professional users of the concept. In Gartner’s empirical analysis,
out of 90 attributes the most agreed upon central features of “entrepreneurship”
were: (1) the creation of a new business; (2) new venture development; and (3)
the creation of a new business that adds value. That is, new activity and successful
outcome are emphasized (note that items 1 and 2 mention new “business” or
“venture” – not “firm” or “organization” – and that item 3 says “adds value” which
may or may not mean micro-level success). By contrast, few regard, e.g. buy-out as
an important entrepreneurship attribute (Gartner, 1990, p. 20). The view I suggest
is also consistent with Lumpkin and Dess’ (1996) definition of entrepreneurship
as “new entry,” which they separate from the concept of “entrepreneurial
orientation.”
In some respects the suggested definition of entrepreneurship as a societal
phenomenon is restrictive, and this may cause some controversy. First, a successful
outcome – at least indirectly in the form of lasting market impact – is required.
As described above this is necessary in order to exclude fundamentally flawed
attempts to launch inferior novelty on the market. The outcome criterion will
be relaxed when we turn to entrepreneurship as a scholarly domain. Second, the
exclusion of organizational change from the definition may arouse opposition.
However, the exclusion concerns organizational change per se. Hence, the study of
how organizational change affects entrepreneurial action remains a valid and im-
portant question for entrepreneurship research. For these reasons the exclusions of
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failed ventures and organizational change from the definition are not as restrictive
as it might first seem.
The remaining aspect most likely to be a source of disagreement, I believe,
is the restriction to market situations, to new economic activities. However,
“economic” should not necessarily be interpreted as restricting the term for the
“commercial” domain. Markets or market-like situations exist outside of industry
and commerce. For example, politicians try to appeal to voters and journalists, and
when they find novel ways to do so rival politicians may try to copy or improve
upon winning recipes. In various forms of arts and sports there exist everything
from a fully commercial industry to human action that is governed by entirely
different principles than the market logic. As long as there are close equivalents
to both customers and competitors, it may be meaningful in such domains to talk
about “entrepreneurship” as defined here.
Admitting that similar processes of creative re-combination of resources
occur in other domains as well I believe it is useful to restrict the use of the
entrepreneurship concept at least to the extended domain of market-like situations.
One reason for this is, simply, that it is valuable to make the concept as distinct and
well defined as possible. Moreover, those who want to include novelty through
“new combinations” (Schumpeter, 1934) in any domain of human behavior in the
concept of “entrepreneurship” have reason to contemplate the full implications of
this choice. For example, when this view is applied the events of September 11,
2001, must be considered an entrepreneurship masterpiece. To conceive of a fully
fueled passenger jet as a missile and to combine the idea of hi-jacking with that
of kamikaze attacks is certainly innovative, and in terms of impact – economic
and otherwise – it has few parallels. However, regarding these attacks as driving
market processes is far-fetched, and this author would therefore suggest they be
not regarded an instance of entrepreneurship.6
ENTREPRENEURSHIP AS A SCHOLARLY DOMAIN

Entrepreneurship as a scholarly domain7 aims at better understanding of the soci-
etal phenomenon we call “entrepreneurship.” Paradoxically, however, delimiting
research only to empirical cases known to qualify under the definition we discussed
above would not lead to maximized knowledge accumulation, and therefore
it does not work adequately as a delineation of this scholarly domain. Most
importantly, while including an outcome criterion is desirable when we discuss
entrepreneurship as a societal phenomenon, it becomes a burden when we think
of entrepreneurship as a scholarly domain. This is because we have to be able
to study entrepreneurship as it happens, before the outcome is known. It would
be awkward indeed not to know until afterwards whether one was studying
“entrepreneurship” or not. To study the processes as they happen is important
also in order to avoid selection and hindsight biases. In order to understand the
successful cases we need to study also those that fail. Further, it is not reasonable
to ask of every empirical study of “entrepreneurship” that the outcome on every
relevant level be awaited and assessed. Researchers must be allowed to go deeply
into aspects of the process without following up on the outcomes – and still be
acknowledged for doing “entrepreneurship research.” That is, attempts to offer
buyers new choices should suffice.
Moreover, it is not a given that previous and current entrepreneurship practice
has all the answers needed to develop normative theory about entrepreneurship,
or that finding real cases of “best practice” is the only or most accessible road
towards developing such knowledge (Davidsson, 2002). Empirical entrepreneur-
ship research may be well advised to study induced entrepreneurial situations as
well, such as experiments or simulations (cf. Baron & Brush, 1998; Fiet, 2002;
Sarasvathy, 1999a).
While helpful for clarifying the role of entrepreneurship as a societal phe-
nomenon, Kirzner’s (1973) theorizing – like that of many other economists –
only provides limited guidance for what empirical studies should be conducted
in order to understand and facilitate entrepreneurship. There is little process
perspective on individual entrepreneurial events in Kirzner’s analysis. Discovery
is conceived of as instantaneous and ascribed to “alertness” – an ability that is
costless and thus has to be inborn, or – as critics have pointed out – equivalent to
luck (Demsetz, 1983; Fiet, 2002). Neither does Kirzner consider exploitation to
be part of entrepreneurship.8 Kirzner’s interest is to distill the theoretical kernel
of the function of entrepreneurship in the economic system and not to guide
empirical research.9
To seek guidance for entrepreneurship as scholarly domain – including
empirical work – we will have to look elsewhere. Acknowledging that others
have also made important contributions to giving direction to entrepreneurship
research (e.g. Aldrich, 1999; Fiet, 2002; Low, 2001; Low & MacMillan, 1988;
Sexton, 1997; Stevenson & Jarillo, 1990) I will concentrate on the contributions
of the two probably most persistent and cited proponents of entrepreneurship as
a distinct domain of research, Bill Gartner and Sankaran Venkataraman.
The reasons why I focus on those two perspectives are the following. First, as
I see it, each represents a major step forward towards making entrepreneurship
a coherent, productive and respected scholarly domain. However, each also
contains elements that may make it difficult for some prospective followers to
fully embrace them. Secondly, there are emerging signs of a divide between those
two perspectives. This is an unfortunate and unnecessary development. As I see it,
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with some clarification, elaboration and slight modification, the two perspectives
can be combined and extended into a delineation of the scholarly domain of
entrepreneurship that current “entrepreneurship researchers” as well as outside
observers can appreciate.
Venkataraman’s View
Venkataraman’s suggested delineation of the field was first presented to a broader

audience in Venkataraman (1997). It has subsequently been refined and elaborated
by Shane and Venkataraman (2000). The latter state as their point of departure
(2000, p. 217) that “For a field of social science to have usefulness it must have
a conceptual framework that explains and predicts a set of empirical phenomena
not explained or predicted by conceptual frameworks already in existence in other
fields.” They go on to define the field of entrepreneurship as:
[T]he scholarly examination of how, by whom, and with what effects opportunities to create
future goods and services are discovered, evaluated, and exploited (Venkataraman, 1997). Con-
sequently the field involves the study of sources of opportunities; the processes of discovery,
evaluation, and exploitation of opportunities; and the set of individuals who discover, evaluate,
and exploit them (p. 218).
They further point out the following three sets of research questions as especially
central: (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; and (3) why, when and how
different modes of action are used to exploit entrepreneurial opportunities. In the
subsequent dialogue they agree with Zahra and Dess (2001) that the outcomes
of the exploitation process represent a fourth important set of research questions,
adding that outcomes on the level of industry and society should be considered as
well (cf. Venkataraman, 1996, 1997). As regards antecedents of the process and
its outcomes they emphasize the characteristics of individuals and opportunities
as the first-order forces explaining entrepreneurship and hold that environmental
forces are second order (Shane & Venkataraman, 2001). They describe their ap-
proach as a disequilibrium approach (cf. Eckhardt & Shane, 2003). They highlight
variations in the nature of opportunities as well as variations across individuals.
Further, they point out that entrepreneurship does not require, but can include, the
creation of new organizations (cf. Simon in Sarasvathy, 1999b, pp. 11, 41–42; Van
de Ven, 1996). In short, they depict the economy as fundamentally characterized
by heterogeneity.
One reason to show particular interest in this delineation of the field is, simply,
that it has stimulated considerable discussion, debate and commentary, as well
as some following (Busenitz et al., 2003; Davidsson & Wiklund, 2001; Erikson,
2001; Gartner, 2001; Low, 2001; Meyer et al., 2002; Shepherd & DeTienne, 2001;
Singh, 2001; Zahra & Dess, 2001). Behind this great interest lies, I believe, the fact
that the focus is clearer and in important ways different from that of some other ex-
plicit or implicit definitions of entrepreneurship. At the same time it is open-ended
on issues where others may have been overly restrictive. In my view, the combi-
nation of focus and openness that Shane and Venkataraman (2000) show solves
many of the problems associated with earlier definitions and research streams in
entrepreneurship. Some important merits of their contribution are listed below.
They try to delineate the scholarly domain rather than suggesting yet another
definition of the societal phenomenon. Making this distinction is in itself a
contribution.
Focusing on the creation of future goods and services, their delineation directs
attention to the problem of emergence (cf. Gartner, 1993). This adds a distinctive
feature to entrepreneurship research; an element that is missing in established
theories in economics and management.
They put the main focus on goods and services rather than including organi-
zational change per se (cf. Sharma & Chrisman, 1999) or creative behavior
in any context. They thereby carve out a domain that has a manageable size
and relatively clear boundaries, and which is consistent with Kirzner’s (1973)
notion that entrepreneurship is what drives the market process.
While retaining an interest in individuals they emphasize their actions (en-
trepreneurship) and fit with the specific “opportunity” rather than general charac-
teristics of entrepreneurs. They thereby avoid the dead end of “trait research.”10
As to openness, their domain delineation includes two partly overlapping
processes, discovery and exploitation.11 In line with empirical evidence (Bhave,
1994; de Koning, 1999b; Van de Ven, 1996) this refutes the view that discovery
is instantaneous and that entrepreneurship consists solely of discovery (cf. Fiet,
2002; Kirzner, 1973).
No mention is made of the age, size or ownership of the organizations in which
“opportunities” are pursued. Shane and Venkataraman (2000) even point out
the existence of alternative modes of exploitation for given “opportunities” as
an important research question. Hence, the stated domain includes corporate
entrepreneurship as well (Stevenson & Jarillo, 1990; Zahra, Karutko & Jennings,
1999). By implication, small business research is included only when it deals
explicitly with discovery and exploitation of “opportunities” to create future
goods and services (cf. Hornaday, 1990).
They do not include purposefulness (cf. Bull & Willard, 1993; Cole, 1949) in
their domain delineation. They thereby avoid an overly rationalistic view and
332 PER DAVIDSSON
make room for the possibility of luck (Demsetz, 1983) and serendipity (Bhave,
1994; Gartner, 1993; Sarasvathy, 2001) in entrepreneurial processes.
Finally, if we disregard for the moment their definition of opportunity, Shane
and Venkataraman’s (2000) wording “. . . with what effects” makes the field
open to different types of direct and indirect outcomes of processes of discovery
and exploitation, e.g. satisfaction, learning, imitation and retaliation in addition
to financial success or failure. Importantly, the perspective suggests that in
line with Fig. 2 above, an important task for entrepreneurship research is to
assess not only outcomes on the micro-level, but on other levels (e.g. societal
wealth creation) as well (Shane & Venkataraman, 2001; Venkataraman, 1996;
Venkataraman, 1997, cf. Low & MacMillan, 1988).
These many positives arguably make Shane and Venkataraman’s framework the
best effort to date to delineate entrepreneurship as a distinct scholarly domain.
However, in order for it to gain more widespread acceptance there are some
aspects that need further elaboration, clarification or even modification. Firstly, as
observed also by Singh (2001), their central concept “opportunity” is problematic.
They hold that, among other things, we should study with what effects “opportu-
nities” are exploited. They then adopt Casson’s (1982) definition of opportunity as
“those situations in which goods, services raw materials and organizing methods
can be introduced and sold at greater than their cost of production.” This makes
entrepreneurship become characterized by certainty rather than uncertainty
regarding one important aspect of the effects of the pursuit of opportunity: it
is profitable. As I see it, Casson’s definition is compatible with the view of
entrepreneurship as a societal phenomenon that we have developed above, but
largely unhelpful for entrepreneurship as a scholarly domain as it is inconsistent
with having the outcomes of entrepreneurship as an unrestricted research question.
This apparent weakness of Shane and Venkataraman’s exposition points at a more
general problem in the entrepreneurship literature, namely that “opportunity” is
becoming a central concept but one which often is ill-conceptualized or applied in
an inconsistent manner.
Secondly, the phrase “discovery, evaluation and exploitation” contains words
with objectivist and abusive connotations, and may leave the impression of
a rationalistic, linear process. Such interpretations misrepresent Shane and
Venkataraman’s intended meanings and positions, but some clarifications on how
to interpret the terms and the process may be needed before others are willing to
subscribe to this vocabulary.
Third, Shane and Venkataraman (2000) position themselves away from Gartner
(cf. below), emphasizing that they address a different set of issues than the
creation of new organizations (cf. also Eckhardt & Shane, 2003). They have good
reason for doing so, as they want to highlight the possibility of different “modes
of exploitation” for a given “opportunity.” However, this may also create an
unnecessary divide or make it wider than it needs to be. After discussing Gartner’s
view of the field of entrepreneurship and trying to combine it with Venkataraman’s
I will return to each of these three issues and try to offer solutions to the identified
problems.
Gartner’s View
Gartner’s (1988) view – which he is careful to present as a suggestion for

re-direction rather than a formal “definition” – is that entrepreneurship is the
creation of new organizations. This choice of focus has two origins. One was
a perceived lack of treatment of organizational emergence in organization
theory. Somehow organizations were assumed to exist; theories started with
existing organizations (cf. Katz & Gartner, 1988). The other was a frustration
with the pre-occupation that early entrepreneurship research had with personal
characteristics of entrepreneurs. For these reasons, Gartner (1988) suggested
that entrepreneurship research ought to focus on the behaviors in the process of
organizational emergence. This view certainly has a lot to commend it:
It has a clearly defined focus, thereby avoiding the risk of over-extending the
field.
It inspired a fruitful re-direction of the field from a dispositional to a behavioral
view on entrepreneurship.
It has a strong process orientation.
It addresses an ecological void that has been given only cursory treatment in
economics and management studies.12
It is offered as a minimalist definition. Gartner does not exclude other aspects of
entrepreneurship, but argues that organization creation is a situation where we
should “all” be able to agree that entrepreneurship is taking place. Accordingly,
Gartner has no problem welcoming Shane and Venkataraman’s (2000) article
as “a significant theoretical contribution” and “a courageous step in the right
direction” (Gartner, 2001, pp. 29, 35).
The main problem with Gartner’s (1988) approach is that it does not emphasize
the discovery process. Further, his approach directs no or only cursory attention
to the possibility of alternative modes of exploitation for given “opportunities”
(Shane & Venkataraman, 2000; Van de Ven, Angle & Poole, 1989). If interpreted
as a delineation of the (entire) scholarly domain his take on entrepreneurship
appears overly narrow in these regards.
334 PER DAVIDSSON
On the other hand his perspective may seem overly permissive in that he does
not explicitly restrict what kind of emerging organizations qualify. Taking the
argument to extremes, a new stamp collectors’ club and even a new anthill or
school of fish is a “new organization.” Many would be reluctant to accept these
as instances of “entrepreneurship.”
I have not found in Gartner’s writings a clear statement regarding whether an
attempt to create a new organization has to be successful in order to constitute
entrepreneurship. It is possible to read into his argument that regarded as a
societal phenomenon entrepreneurship consists of the actual emergence of new
organization, i.e. that success is required. His emphasis on behavior (Gartner,
1988) and his involvement in real-time study of start-up processes (Carter, Gartner
& Reynolds, 1996; Gartner & Carter, 2003) clearly suggest that start-up attempts
regardless of outcome qualify as the object of study for the scholarly domain.
The creation of a new organization is a special case of organizational change.
I have argued above that organizational change does not in itself constitute
entrepreneurship. My argument may thus seem decidedly anti-Gartnerian. This is
not my intention. I regard Bill Gartner as one of the greatest intellectual contribu-
tors to the field of entrepreneurship research, in particular for re-directing interest
from characteristics of small business owners to behavior in the entrepreneurial
process. Importantly, while I would challenge that “the fundamental outcome of
entrepreneurial behavior is the organization itself” (Gartner & Carter, 2003) it is
important to note that his “creation of new organization” should not necessarily be
read as “creation of new, owner-managed firms.” Gartner (1988, p. 28) explicitly
discusses internal venturing. Although he – arguably with good reason – regards
the emerging new firm as a particularly promising arena for studying it, his
interest is in “organizing” in the Weickian sense (Gartner, 2001, p. 30; cf. Gartner
& Carter, 2003), not necessarily the creation of formal and legally defined
organizations. Organizing is an important aspect of the exploitation process for
all new activity regardless of the formal or legal organizational context.
In conclusion, I see Gartner’s focus on organizing as an incomplete domain
delineation (of entrepreneurship) because it disregards the discovery process. The
focus he suggests is, I believe, the natural task for an organization theorist to take
on within a somewhat broader domain.
Combining Gartner’s and Venkataraman’s Perspectives
As I see it, Shane and Venkataraman’s and Gartner’s views on entrepreneurship

are not opposing but compatible and complementary. While highlighting different
aspects of the entrepreneurial process as being the most fundamental, the two
perspectives are far from clashing heads on. In order to further develop the scholarly
domain of entrepreneurship I believe we should try to combine and extend their
respective contributions.
In his various writings, Gartner has established at least three very important
foundations for entrepreneurship as a scholarly domain:
Entrepreneurship is about behavior (rather than dispositions/characteristics).
Entrepreneurship is a process.
Entrepreneurship is about emergence.
Shane and Venkataraman (2000) have adopted these three aspects of Gartner’s
reasoning. In addition, they offer important broadening of Gartner’s domain:
The entrepreneurial process consists of two sub-processes, discovery and ex-
ploitation.
Entrepreneurship leads to the emergence not only or primarily of new (indepen-
dent) organizations, but to the emergence of new goods or services. While their
emergence has to be organized (an important part of the exploitation process) this
can occur within new or established organizations, i.e. through different modes
of exploitation.
Entrepreneurship can have a range of interesting and important outcomes on
different levels.
Emphasizing a disequilibrium perspective, Shane and Venkataraman (2000; cf.

Eckhardt & Shane, 2003) also suggest a particular perspective on the economic
system. Although some pressure towards conformity should be admitted (Aldrich,
1999; Raffa, Zollo & Caponi, 1996) I believe it sound to regard this as fundamental
to this scholarly domain:
The economy is characterized by heterogeneity; this remains a permanent and
fundamental feature of economic actors and environments.13
In a powerful manner, this combination of the two perspectives offers clear

direction for the field. The scholarly domain of entrepreneurship should study the
processes of discovery and exploitation from a behavioral perspective under the
assumption of heterogeneity, taking an interest in different types of outcomes on
different levels of analysis.
Standing on the shoulders of solid predecessors also allows us to see – and
hopefully solve to some extent – additional conceptual issues that have to be
dealt with before we have achieved a strong paradigm for entrepreneurship
research. Some of the issues I believe need further elaboration are the concept of
“opportunity” and the role of uncertainty, as well as the meaning of “discovery”
336 PER DAVIDSSON
and “exploitation” and the interrelatedness of these two processes. This is what
I will turn to in the immediately following sections.
Uncertainty and the Concept of Opportunity
In addition to the seven points derived from Gartner’s and Venkataraman’s

perspectives, let me suggest as the eighth fundamental point for the scholarly
domain of entrepreneurship that:
The economy is also characterized by uncertainty; this remains a fundamental
feature of most economic actions and environments in the context of discovery
and exploitation of ideas for new goods and services.
What I refer to here is genuine, Knightian uncertainty (Knight, 1921), i.e. a
situation where the future is not only unknown, but also unknowable (Sarasvathy,
Dew, Velamuri & Venkataraman, 2003). I do not argue that all decisions for all
actors are non-calculable. However, the situations in which behaviors aimed at
creating new economic activity are undertaken often have this characteristic. That
is, information collection and processing, careful planning and calculation cannot
give a conclusive and reliable answer as to whether something will be successful or
not; only (trial) implementation will tell. Very rarely are entrepreneurial situations
certain in the way Kirzner (1973) portrays them. Kirzner likens entrepreneurial
opportunity with realizing that a free ten-dollar bill is resting in one’s hand,
ready to be grasped. If we should use the ten-dollar bill metaphor at all, I would
suggest the true situation is more like spotting the bill from your balcony. From
that distance one would face the (calculable) risk that the bill was for anything
from one to a hundred dollars. But moreover, while you dash down the stairs it
may blow away, or someone else may get it before you, or it may turn out upon
closer look that it was not a real money note, after all, but some kind of toy
money. There is no way the finder can tell before she takes the decision to run
down the stairs. In order to understand behaviors in such situations it is important
to start from a theoretical perspective that acknowledges or even emphasizes
uncertainty.
This brings us to the concept of opportunity. The increased use of this concept
in entrepreneurship has been accompanied with increased attention to the earliest
phases of the entrepreneurial process, which is sound development. However, de-
spite its recent popularity and apparent centrality to entrepreneurship (de Koning,
1999b; Eckhardt & Shane, 2003; Gaglio, 1997; Hills & Shrader, 1998; Sarasvathy
et al., 2003; Shane & Venkataraman, 2000), there is reason to question whether
“opportunity” really is a very useful concept for entrepreneurship research. By
Casson’s (1982) definition, which Shane and Venkataraman (2000) adopt, an

opportunity is known to be profitable. By almost any definition, an opportunity
is known to be a favorable situation. For example, the Oxford English Dictionary
(cited from Sarasvathy et al., 2003) defines opportunity as “A time, juncture, or
condition of things favorable to an end or purpose, or admitting of something being
done or effected.” Therefore, the term “opportunity” is fundamentally opposed
to acknowledging uncertainty as an inescapable aspect of the environment of the
emerging activity and/or organization that the entrepreneurship scholar tries to
study and understand. At the time, the actors cannot know whether or not what
they pursue is an “opportunity.”
If we take Shane and Venkataraman’s (2000) delineation of the field and their
definition of opportunity at face value, we have a suggested scholarly domain that
should only study successful cases, and which is – in practice – restricted to doing so
retrospectively (cf. Baumol, 1983; Singh, 2001). If only profitable “opportunities”
are studied, Shane and Venkataraman’s (2000) second and third sets of research
questions (about individual differences and different modes of action) would not
address why some people pursue unprofitable venture ideas or why in some cases
a particular mode of exploitation leads to an unprofitable result. These appear to
me to be highly interesting and relevant questions for entrepreneurship research,
which relate to the uncertainty emerging activities operate in.14
This is the first major problem with the opportunity concept. Entrepreneur-
ship as a scholarly domain needs to regard on-going emergence as an instance of
entrepreneurship, and acknowledge the uncertainty that typically surrounds such
activity. The positively laden concept “opportunity” as normally understood and
defined is therefore an unsuitable label for on-going pursuits. One way to solve
this problem is to consistently talk about perceived opportunity as long as a situa-
tion’s profitable or favorable nature is unproven. However, resorting to “perceived
opportunity” is not an ideal solution because of its inherent ambiguity. It could
mean either “objectively existing opportunity, and also perceived” or “perceived
to be an opportunity, but not (necessarily) objectively being one.”
This brings us to the second major problem with the opportunity concept. This is
the question whether “opportunities” objectively exist or if the actor creates them.
That is, do “opportunities” exist “out there,” independently of a person identifying
and acting upon the opportunity, or do entrepreneurs create “opportunities” where
none existed before they conceived of them? This is a hotly debated issue where
scholars tend to take strong positions, which points to a risk for a major divide
among entrepreneurship researchers. This problem is aggravated by the fact that
leading proponents of the perspectives that I try to merge and extend tend to
take different sides on this issue (cf. Eckhardt & Shane, 2003; Gartner & Carter,
2003; Shane & Venkataraman, 2000; Venkataraman, 1997). However, rather
338 PER DAVIDSSON
than being deeply ontological I believe those differences to be based largely

on semantic issues. Scholars may take different positions in part because they,
simply, mean different things when they use the concept. With a more refined
view of “opportunity” and its “components” (cf. Moran & Ghoshal, 1999) more
agreement is possible to achieve. As I see it, there are at least three possibilities:
Objectivist: Opportunities exist “out there” as individual, “ready-to-use”
entities. They are like mushroom in the forest. Some are bigger and some are
smaller; some grow early and some grow late. Although they are not necessarily
easy to find, they are out there, and they are equally big and equally accessible to
anyone who goes to or happens to be in the forest.
Objectivist-Subjectivist: Opportunities exist “out there” as individual, “ready-to-
use” entities. However, because of individual differences in perception, knowledge
and skills, all actors do not have access to exactly the same opportunities.15 It is
like mushroom-picking for the chosen few. The mushroom still exist “out there”
at the same times and sizes for all actors, but some of us have developed better
perceptual abilities regarding well-camouflaged mushroom, and can therefore
find opportunities hidden for others. Alternatively, some only know about a few
types of edible mushroom whereas others are experts and find edible species all
over the place. Further, some are good chefs and can convert the mushroom into
a delicacy, whereas others mess up in the kitchen due to lacking cooking skills.
That is, after successful discovery they fail in the exploitation process.
Subjectivist-Creative: Opportunity is not about anything existing “out there” at
all. Opportunities are created in the entrepreneur’s mind and it is not meaningful
to talk about these opportunities separate from their creators. If it has anything at
all to do with mushroom, it is because the actor chose to paint or sculpture a mush-
room (which could be two-dimensional, blue in color, five feet high, make funny
noises – and be started as an attempt to create an apple rather than a mushroom).16
The objectivist position clashes with our heterogeneity assumption and seems
to have few if any followers among entrepreneurship scholars who ever gave the
issue a thought. Shane and Venkataraman (2000; cf. Shane, 2000a, b; Eckhardt &
Shane, 2003) seem to favor the objectivist-subjectivist position, whereas writers
like de Koning (1999b), Gartner and Carter (2003) and Sarasvathy (2001) are
more supportive of the subjective-creative perspective. Now, who is right? Both, I
believe. As I see it, the following three points should be easy for most scholars to
agree upon.
(a) Opportunity exists out there, independently of particular actors. However,

opportunities do not exist as complete, individual entities. Rather, opportunity
exists as an uncountable in the form of technological possibilities, knowledge,
and unfulfilled human needs backed with purchasing power.
(b) Venture ideas are the creations of individuals’ minds. They are specific
(but changeable and more or less elaborate) entities that are acted upon.
Whether these reflect opportunity or not can only be known afterwards and –
paradoxically – only when the outcome was successful (because failure may
be due either to poor exploitation or to lack of opportunity; cf. Eckhardt &
Shane, 2003).
(c) Because of differences in knowledge, skills, motivations and other disposi-
tions, individuals (and firms) differ from one another as regards what venture
ideas they can and will pursue and as regards what external opportunity they
can profitably exploit, and how.
Let us take the Ice Hotel – an unlikely but highly successful international tourist
attraction in the far north of Sweden – as our example. Dismissing entirely the
idea that opportunity exists “out there” in this case means denying that its success
and viability has anything to do with its location in a dark, cold and remote
(i.e. exotic) location, albeit within reasonable reach for international air travel.
Dismissing the notion that venture ideas are the creations of individuals’ minds
would mean arguing that the specific Ice Hotel concept – this particular response
to the co-existence of coldness, darkness and remoteness in one place and wealthy
potential tourists hungry for new experiences in other places – somehow existed
before an entrepreneur (Yngwe Bergkvist) conceived of it. Dismissing the third
point means holding that you or I would be equally likely as Mr. Bergkvist to
come up with the Ice Hotel idea and/or succeeding with it. Apart from those who
subscribe to extreme ontological positions at any cost, I think it should be much
easier for scholars to agree with all of the above three points than to refute one or
more of them.
It is not fruitful for entrepreneurship as a scholarly domain that a central concept
like “opportunity” is used for: (i) a set of external conditions known in retrospect
to be favorable (to some people) for the successful discovery and exploitation
of new business activities; (ii) a set of external conditions thought (by some
people) but not proven to be existing and favorable for the successful discovery
and exploitation of new business activities; (iii) specific new venture initiatives
known in retrospect to be viable; and (iv) specific new venture initiatives that are
currently being pursued but whose viability is not yet proven.
The term “opportunity” is particularly misleading for the last category, which
at the same time arguably is the most central unit of interest for the scholarly
domain of entrepreneurship. I suggest this entity be referred to as Venture Idea in
order to underline that its viability is not yet proven and to disconnect it from any
argument as regards to which extent it is externally or internally based. Venture
ideas are internally generated (i.e. created in individuals’ minds) based on more
340 PER DAVIDSSON
or less explicit and more or less “correct” perceptions of external conditions. Over
time, they can change and become more and more elaborate. This leads us to:
The entrepreneurial discovery process starts with the conception of a venture
idea. This venture idea, including the activities and structures that evolve around
it, is the focal unit of interest in entrepreneurship research.
The Meaning and Interrelatedness of “Discovery” and “Exploitation”
The term discovery may be suspected to reflect an objectivist view on venture

ideas, i.e. that they somehow exist “out there,” ready to be discovered. It should
be clear from the above that this is not the view I recommend. Rather, like
Eckhardt and Shane (2003) I use the term “discovery” to maintain consistency
with prior literature, despite its potentially misleading connotations. Discovery
refers to the conceptual side of venture development, from an initial idea to a
fully worked out business concept where many specific aspects of the operation
is worked out in great detail, especially as regards how value is created for the
customer and how the business will appropriate some the value (de Koning,
1999b, p. 121). Importantly, discovery is a process – the venture idea is not
formed as a complete and unchangeable entity at a sudden flash of insight. Thus,
it includes not only what is elsewhere called “idea generation,” “opportunity
identification” and “opportunity detection,” but also “opportunity formation” and
“opportunity refinement” (Bhave, 1994; de Koning, 1999a, b; Gaglio, 1997). Also
importantly, discovery refers to the initial conception and further development
of a venture idea, not a proven opportunity. In some cases, then, the discovery
process ends with the realization that the venture idea did not reflect favorable
external conditions in the way the involved actors initially thought it did.
The term exploitation may evoke negative associations from its use in other
contexts. In the present context I would suggest it is a neutral term referring to
the decision to act upon a venture idea, and the behaviors that are undertaken
to achieve its realization. The exploitation process deals primarily with resource
acquisition and co-ordination, as well as market making (see Eckhardt & Shane,
2003; cf. also Sarasvathy, 1999a; Van de Ven, 1996). Exploitation thus has to do
with the attempted realization of ideas, and should in this context carry none of
the negative connotations associated with the word “exploitation” is certain other
contexts. Like discovery, exploitation is a process that may or may not lead to the
attainment of profit or other goals.
Further, the sequential feel of the phrase “discovery, evaluation and exploita-
tion” may give the impression of a linear, orderly process. In line with empirical
evidence (Bhave, 1994; de Koning, 1999b; Sarasvathy, 1999a) I think discovery

and exploitation are best conceived of as overlapping processes. For example, an
entrepreneurial process may start with an individual perceiving what she thinks
is an opportunity for a profitable business [discovery]. In the efforts to make this
business happen, contacts with resource providers and prospective customers [ex-
ploitation] make it clear that the business as initially conceived will not be viable
[feedback to discovery]. The individual changes the business concept accordingly
[discovery] and continues her efforts to marshal and coordinate the resources
needed for the realization of the revised business concept [exploitation]. Although
the above process starts with an element of discovery, this is not necessarily
always the case. Empirical research suggests that venture creation processes can
follow almost any sequence (Carter et al., 1996; Gartner & Carter, 2003).17
With those clarifications, I hope that a broader set of scholars are prepared to
accept the notions of discovery and exploitation processes as useful conceptual
tools for the scholarly domain of entrepreneurship.
Core Research Questions for the Scholarly Domain of Entrepreneurship
Returning to Fig. 1, according to the perspective developed here entrepreneurship

research is research that ask questions about real or manipulated instances of “new
offer,” “new competitor” or “geographical market dispersion” (quadrants I and
IV). Relating to the heterogeneity issue, a seriously under-research area here con-
cerns the characteristics of new venture ideas and how these characteristics relate
to antecedents, behavior and outcomes. Samuelsson (2001) represents one of the
few entrepreneurship studies that have explored the nature and effects of charac-
teristics of venture ideas, and followers are needed. While an abundance of studies
have tried to assess the characteristics of entrepreneurs, very few have focused on
the characteristics of the venture ideas they pursue (cf. Shane & Venkataraman,
2000, p. 218).18
With regard to quadrant II, while organizational changes do not in themselves
represent entrepreneurship they remain important possible antecedents in en-
trepreneurship research. Therefore, studies referred to by Ucbasaran, Westhead
and Wright (2001, p. 64) showing that management buy-outs are associated
with increased development of new products, are examples of entrepreneurship
research. Empirical tests of Stevenson’s argument that certain organizational
changes would facilitate entrepreneurship in established organizations (Stevenson,
1984; Stevenson & Jarillo, 1986) would clearly be instances of entrepreneurship
research, as would empirical tests of the relationship between “entrepreneurial
orientation” on the one hand, and actual discovery and exploitation behaviors on
342 PER DAVIDSSON
the other (cf. Lumpkin & Dess, 1996). Creation of new organizations (Gartner,
1988) remains a very central aspect of the exploitation process in entrepreneurship
research, at least as long as these new organizations aim at “new offer” or
becoming a “new competitor.” Finally, quadrant III (business as usual, and
non-entrepreneurial growth) does not exemplify entrepreneurship but can be
included in entrepreneurship research for comparative purposes.
In relation to Fig. 2, I suggested above that only success ventures and catalyst
ventures exercise entrepreneurship as we defined the societal phenomenon.
However, entrepreneurship as a scholarly domain should not delimit its empirical
study to these two categories but include also re-distributive ventures and failed
ventures. Indeed, I would suggest that in showing a genuine interest in outcomes
on different levels, and in providing a more refined and empirically informed view
on “failure,” entrepreneurship can distinguish itself from other fields and make
strong contributions to social science at large (cf. Low, 2001; Venkataraman,
1997). The question of when successful venture level outcomes are and are not
associated with successful outcomes on the societal level, and vice versa, is highly
relevant but seldom asked. It is conceivable that under certain circumstances the
successful pursuit of ideas for new ventures does not benefit society (cf. Baumol,
1990). It is also possible to conceive of a situation where entrepreneurial efforts
on the whole benefit society while at the same time the most likely outcome on
the micro-level is a loss – and that therefore the rational decision is to refrain from
entrepreneurship (cf. Olson in Sarasvathy, 1999b, p. 35). Both of these situations
represent important problems that entrepreneurship research can help societies to
solve or avoid. The question of differential outcomes on different levels can also be
asked from the perspective of the corporate manager: when and why does and does
not new venturing – successful or not at the venture level – contribute to company
performance? Again, because of potential learning and cannibalization the answer
is not a simple one to one relationship between venture- and organizational
level outcomes.
The issue of catalyst ventures, then, is of particular interest. Too narrow or
simplistic a view on “failure” may lead to gross misrepresentation of the benefits
of attempts to create new business activity, on micro – as well as aggregate levels.
What in a narrow perspective appears to be a “failure” may instead be a beneficial
“catalyst” either because those directly involved in the failure learn for the future
or because others imitate. Kogut and Zander (1992) discuss the first possibility
while Van de Ven (1996) casts some doubt on the extent to which learning really
takes place. Aldrich (1999) and McGrath (1999) discuss both possibilities. A
possible outcome of deeper and more refined research into apparent “failure” is
that pure failure as defined in Fig. 2 is far less usual than previously thought (cf.
Gimeno, Folta, Cooper & Woo, 1997, pp. 69 and 72). I think one of the first things
entrepreneurship scholars should try to get rid of is the bias against failure. In
addition to the “catalyst” potential, both theory and empirical evidence actually
suggest that experimentation that may end in failure as well as the demise of
less effective actors are necessary parts of a well-functioning market economy
(Davidsson, Lindmark & Olofsson, 1995; Eliasson, 1991; Reynolds, 1999;
Schumpeter, 1934).
An alternative point of departure for a discussion of core research questions
are the four sets of research questions that Shane and Venkataraman (2000, 2001)
suggested for the scholarly domain of entrepreneurship research. Adapted to our
above reasoning these questions read as follows:
(1) Why, when, where, how and for whom does opportunity for the creation of
new goods and services come into existence?
(2) Why, when and how do individuals, organizations, regions, industries, cultures,
nations (or other units of analysis) differ in their propensity for discovery and
exploitation of new venture ideas?
(3) Why, when and how are different modes of action used to exploit venture
ideas?
(4) What are the outcomes on different levels (e.g. individual, organization, in-
dustry, society) of efforts to exploit venture ideas?19
The first question is about the existence of entrepreneurial opportunity. It requests
empirical study of when and why (as well as “where” and “for whom”) “real”
opportunity has come into existence, e.g. as a result of technological or institu-
tional changes. As depicted in Fig. 3, it is a question that can be asked at different
types of entities or levels of analysis, e.g. for nations, regions or other spatial units
over time or across space, as well as for organizations, industries or population
sub-groups. Asking this question is a prerequisite for building strong theory about
where opportunity will emerge in the future. Building such theory is a challenging
but important aspect of scholarship in entrepreneurship, which feeds directly
into entrepreneurship education (cf. Davidsson, 2002) where learning where to
look for opportunity should be one of the most central features (cf. Drucker,
1985; Vesper, 1991). As noted earlier, proven “opportunity” can only be studied
in retrospect. That, however, is not the only problem. As remarked in an earlier
note it is impossible to know the universe of not-yet-discovered, but potentially
viable, venture ideas. Therefore, not even the number of venture ideas that are
both acted upon and proven successful is a direct measure of opportunity-density.
Fig. 3. Graphical Representation of RQ 1.

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Fig. 4. Graphical Representation of RQ 2–4.
It is inescapable that whatever measure is used for opportunity density, it will

be a proxy measure.
Research questions 2–4 are graphically represented in Fig. 4. As I see it,
the middle box is a necessary part of the research design for these questions
to be “entrepreneurship research,” whereas the outer boxes may or may not be
included in the research design. In other words, an explicit focus on behaviors
in the discovery and/or exploitation processes, or on the existence and/or
characteristics of venture ideas as discussed above, or on or both, is required
(cf. Davidsson & Wiklund, 2001). As discussed earlier, I think that questions
2–4 have to be addressed for venture ideas rather than only for “opportunities”
proven to be profitable. Otherwise, many aspects of question 4 would not be very
meaningful.
With regard to question 2, I agree with Shane and Venkataraman (2000) that
individual(s) should remain a core interest for entrepreneurship research, at
least when the interest in personality is replaced by an interest in knowledge
and cognition (Busenitz & Barney, 1997; Shane, 2000b). However, when the
individual is used as the level of analysis it is often advisable not to have a single
event (e.g. being or not being in the process of starting a firm; acting or not acting
upon a particular venture idea) as the dependent variable. In order to be able to
single out what was truly attributable to the individual from the idiosyncrasies
of the particular venture idea a more appropriate analysis might be to relate
individual characteristics to patterns of repeated entrepreneurial behavior (cf.
Davidsson & Wiklund, 2001; Ucbasaran et al., 2001; Venkataraman, 1997).
I have generalized question 2 also to other levels of analysis. That is, it should
include the questions about why, when and how, e.g. organizations, networks,
competence clusters, regions, industries, cultures or nations differ as regards
discovery and exploitation propensity, in addition to differences in opportunity
density (cf. Reynolds, Storey & Westhead, 1994; Shane, 1992). For example,
due to the distinction between “opportunity-based” and “necessity-based”
entrepreneurship, nations and regions may have similar firm start-up rates for
very different reasons, and representing very different levels of real, profitable
opportunity. Therefore, also the quality of the enacted ideas has to be considered
(Davidsson, 1995; Reynolds, Camp, Bygrave, Autio & Hay, 2001). The same
problem is likely to occur on the organizational level. A firm desperately struggling
for its survival may take more new initiatives than a firm that is doing well, even
if more objective opportunity is available for the latter (March & Sevón, 1988).
The third question concerns modes of action. This can be understood as includ-
ing all aspects of behavior in the process. This very central set of questions – what
individuals and other economic entities actually do in order to come up with ideas
for businesses, how they refine those ideas, and make them happen – needs much
more investigation. Researchers have only just begun to address them seriously
(e.g. Bhave, 1994; Carter, Gartner & Reynolds, 1996; Chandler, Dahlqvist &
Davidsson, 2002; Delmar & Shane, 2002; Fiet & Migliore, 2001; McGrath, 1996;
Samuelsson, 2001; Sarasvathy, 1999a).20
One important aspect that this question highlights is the need for studies that
apply the “venture idea” itself as the unit of analysis (Davidsson & Wiklund, 2001).
This is a possibility rarely used or even considered by researchers in other fields.
Applying this level of analysis is highly relevant for entrepreneurship research,
and a possibility for entrepreneurship researchers to make unique contributions.
Such studies would follow samples neither of individuals nor of organizations, but
precisely new, emerging activities – i.e. venture ideas and what evolves around
them – from their conception and through whatever changes in human champions
and organizational contexts might occur along the way. With this approach the
mode of exploitation would not be locked in by the design. In some cases what
originated as a de novo start-up is transferred to an existing firm; in other cases
what originates within a firm may be spun out at an early stage. Case studies
describing the process in detail (Van de Ven et al., 1999) as well as survey studies
designed for the purpose (Chandler et al., 2002) can apply this level of analysis.
Concerning the fourth question entrepreneurship researchers can make a
contribution by employing a more complex and less narrow-sighted view on
outcomes, as discussed above in relation to Fig. 2. As indicated in Fig. 4 this entails
also following up on outcomes on more than one level. Put differently, both direct
and indirect outcomes are of interest. Not only venture and societal levels are of
interest (and the latter may be very hard to assess). For example, in a venture-level
study, as discussed above, outcomes can be assessed for its host organization
(if any) and for the industry, in addition to assessing the venture-level outcome.
Different types of outcomes are also of interest. Entrepreneurial processes do
not only have financial outcomes, and affect not only those directly involved in
the project. Supplementary outcome assessment may concern, e.g. satisfaction,
learning, imitation and retaliation.
Related to the issue of heterogeneity, Venkataraman (1997) raises the impor-
tant issue that relative (financial) performance may often not be an adequate
outcome measure for entrepreneurship research. Venkataraman focused on firm
performance but the problem is the same for other levels of analysis as well. If
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heterogeneity is taken seriously the following situation is conceivable. Individual

A chooses to try to exploit a venture idea (x) that actually has less potential than
the best possible idea she could have pursued with success. At the same time,
individual B manages to find and act upon the very best venture idea available
to her (y). Further, individual A’s exploitation of x is substandard relative to what
would have been possible for her, whereas individual B’s exploitation of y reaches
the theoretical maximum. And yet, while y performs to B’s satisfaction and even
exceeds her expectations, x performs better than y when we compare across them.
To whom and for what purpose is this relevant to know? And if it is relevant to
know, would not in this case other yardsticks be more relevant to A and B as well as
to outside observers? It is not easy to give clever and general advice on what should
be done instead of assessing relative performance. However, Venkataraman’s
(1997) observation should caution against habitual and mindless application of
relative performance as the (sole) outcome measure in entrepreneurship research.
Another set of “questions within the questions” that are seriously under-
researched – and perhaps under-emphasized above – concerns the several issues
of fit that arise from heterogeneity along several dimensions. This concerns fit
between individuals’ prior knowledge and (information about) the new oppor-
tunity (e.g. Cooper, Folta & Woo, 1995; Shane, 2000a, b); relatedness between
organizations’ prior knowledge, resources or capabilities and (information about)
the new potential venture (e.g. Cohen & Levinthal, 1990; Teece, Pisano & Shuen,
1997; Van de Ven, 1996); relatedness of the knowledge and characteristics of key
individuals involved in the processes, i.e. the homogeneity or heterogeneity of
the team (e.g. Nahapiet & Ghosal, 1998; Zahra & Wiklund, 2000); fit between
existing resources and what strategies can lead to the venture’s success (e.g.
Chandler & Hanks, 1994) and fit between characteristics of the new potential
venture and current user practices (e.g. Raffa, Zollo & Caponi, 1996). Empirically
based knowledge on these issues is limited, which means abundant opportunity for
research contributions.
Conclusions on Entrepreneurship as a Scholarly Domain
Summing up the above, when we think of the scholarly domain a suitable definition
of entrepreneurship could be the behaviors undertaken in the processes of discovery
and exploitation of ideas for new business ventures. This definition connects well
to Venkataraman’s and Gartner’s perspectives without presupposing the outcome.
Not even this definition, however, fully describes the scholarly domain. Therefore,
I would propose the following delineation of entrepreneurship as a scholarly
domain:
Starting from assumptions of uncertainty and heterogeneity, the scholarly

domain of entrepreneurship encompasses the processes of (real or induced, and
completed as well as terminated) emergence of new business ventures, across
organizational contexts. This entails the study of the origin and characteristics
of venture ideas as well as their contextual fit; of behaviors in the interrelated
processes of discovery and exploitation of such ideas, and of how the ideas and
behaviors link to different types of direct and indirect antecedents and outcomes
on different levels of analysis.
As I see it, this delineation is broad enough to encompass core issues highlighted
by Venkataraman’s and Gartner’s respective perspectives. At the same time, it
is distinct enough to be the basis of a community and coherent theory building
(Gartner, 2001; Low, 2001). As will be discussed in the next main section I would
argue that this scholarly domain holds promise of explaining and predicting “a set of
empirical phenomena not explained or predicted by conceptual frameworks already
in existence in other fields” (Shane & Venkataraman, 2000) although considerable
overlaps exist, which entrepreneurship researchers should take advantage of.
What Has Been Left Out?
I have excluded from the suggested domain delineation criteria like “value cre-
ation,” “wealth creation,” or other indicators of “success,” arguing that such criteria
belong in a definition of entrepreneurship as a societal phenomenon (cf. Section
2 above). I have further excluded criteria like purpose and motivation, skill or
expertise, and expectations of gain for self (cf. Bull & Willard, 1993; Cole, 1949;
Fiet, 2002; Gartner, 1990; Hisrisch & Peters, 1989) from the definition of the phe-
nomenon as well as from the domain delineation. This is because these are, as I
see it, not necessary ingredients of entrepreneurship as a societal phenomenon or
scholarly domain. They are of central interest, however, from a third perspective:
entrepreneurship as a teaching subject. Entrepreneurship students can be assumed
to expect to learn what it takes to succeed in entrepreneurial endeavors, and it
is therefore understandable that scholars who have the teaching subject in mind
want to include criteria of this kind. For entrepreneurship as a scholarly domain
or societal phenomenon I would argue, however, that they are unnecessary and
potentially misleading restrictions.
The American Academy of Management Entrepreneurship Division includes in
its domain statement also issues like self-employment, small and family business
management, and management succession (cf. Gartner, 2001). Such topics
may also make sense from the perspective of entrepreneurship as a teaching
subject. Teaching is directed at individuals; in this case often entrepreneurs
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or would-be-entrepreneurs, meaning “business founders” (and sometimes also

“venture champions”). From this perspective, entrepreneurship easily becomes
“anything that is of great concern to entrepreneurs, i.e. business owner-managers.”
Business founders become – and often stay – self-employed. If they stay with
the business they have founded they become managers of a small business, which
often engages other family members as well. Eventually, the issue of succession
becomes a major concern. Therefore, these issues become natural parts of courses
or programs in “entrepreneurship.”
However, unless explicitly related to competitive behaviors that drive the mar-
ket process the issues pertaining to self-employment, or smallness, or family, or
succession do not reflect the societal phenomenon “entrepreneurship.” A scholarly
domain could be delimited to the concerns of business owner-managers over their
lifetime. However, this would be a domain far removed from our definition of the
societal phenomenon, because small and independently owned businesses do not
necessarily have a larger role in driving the market process than have other types of
suppliers. Further, given the diversity of issues such a domain would encompass,
it would also be a poor prospect for coherent theory development (Gartner, 2001).
Many scholars who are interested in entrepreneurship as defined above also
have interests in – and do research on – issues like firm growth or small business
management. We should not give up those other interests. However, we should be
careful not to inappropriately put the “entrepreneurship” label on them. Careless
application of that label gives the entrepreneurship domain a “hodgepodge”
or “pot-pourri” appearance, which hinders theory development and academic
legitimacy (Gartner, 2001; Low, 2001; Shane & Venkataraman, 2000). When
small- or family business research explicitly addresses characteristics of venture
ideas and/or behaviors in the processes of discovery and exploitation, it qualifies
as entrepreneurship research. When these issues are not explicitly treated in the
research, I strongly suggest the entrepreneurship label not be used.
THE DISTINCTIVENESS OF THE

ENTREPRENEURSHIP DOMAIN
It appears that for Venkataraman (1997; Shane & Venkataraman, 2000) and
for Gartner (1988, 2001) establishing entrepreneurship as a distinct (and re-
spected) scholarly domain, is an important goal. One could counter-argue that
entrepreneurship research is best pursued within established disciplines like
economics, psychology and sociology as well as within the various branches
of management studies. A first strong reason for this is that despite Shane and
Venkataraman’s (2000) alleged focus on explaining and predicting phenomena
not explained or predicted in other fields, there are few contingencies of interest to
entrepreneurship scholars that are not the topic of theory in at least some discipline
in the social sciences (cf. Acs & Audretsch, 2003a; Delmar, 2000; Thornton,
1999). Not making full use of the tools available within the disciplines would
appear to be a wasteful practice. Second, disciplinary research is required to meet
the quality criteria of the respective discipline. Thus, the pursuit of entrepreneur-
ship questions by disciplinary researchers should be a way for entrepreneurship
to attain academic respectability. Therefore, I agree with Low (2001, p. 23)
that entrepreneurship as a distinctive domain is desirable but not viable in
isolation, i.e. without theoretical input and quality standards from other fields
of research.
It is not so easy, however, that all the theory entrepreneurship researchers need
already exists in the disciplines. No matter how sophisticated the tools, they may not
always be adequate for the task at hand (cf. Davidsson & Wiklund, 2000). Under
the perspective on entrepreneurship research that I have developed some of the
questions one should ask before applying existing theory “as is” are the following:
(1) Does the theory acknowledge uncertainty and heterogeneity?
(2) Can it be applied to the problem of emergence, or does it presuppose the
existence of markets, products or organizations in a way that clashes with the
research questions?
(3) Does the theory allow a process perspective?
(4) Does it apply to the preferred unit of analysis (e.g. “venture idea” or “emerging
venture” rather than “firm” or “individual”)?
(5) Is it compatible with an interest in the types of outcomes that are most relevant
from an entrepreneurship point of view?
Theories exist, and whenever possible, entrepreneurship research should deduc-
tively test theory from psychology, sociology and economics as well as from
various branches of business research. However, as a scrutiny of some existing
theories in relation to the five questions above would show, they are not always
optimal for research questions addressing the processes and analysis levels of
most relevance to entrepreneurship research. Therefore, the domain must allow
also for filling gaps and asking new questions through inductive, theory-building
approaches.
Thus, the existence of disciplinary theories that relate to all or most entrepreneur-
ship research questions does not prove there is no need for entrepreneurship
as a distinct scholarly domain. In addition, if it is clear that most core research
questions in entrepreneurship would fit in some discipline, it is equally clear that
entrepreneurship is not in its entirety a sub-division of any one established disci-
pline (Shane & Venkataraman, 2001). As pointed out by Low (2001) the obvious
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problem with leaving entrepreneurship research to the disciplines is the lack

of community. The existing community of long-time entrepreneurship scholars
has a portfolio of hard-earned, close-up knowledge about entrepreneurship, e.g.
that it is not primarily about individual heroes; that most start-ups are imitative
and not very growth-oriented; that only a tiny minority ever use venture capital;
that available data sources typically do not cover the early stages of emergence
of new ventures; that “start-up” is not one event but a series of behaviors that
may be undertaken in different order and over very different durations of time;
about the extent of heterogeneity of entrepreneurial efforts along a number of
dimensions, and so forth. Temporary visitors would no doubt be naı̈ve about many
of these things, as were entrepreneurship researchers in the formative stages of
the field. Therefore, without the trading of such knowledge through a research
community, strong theoretical and methodological schooling from disciplines
may not suffice for making maximally fruitful contributions to the understanding
of entrepreneurial phenomena.
The issue of lack of community is a very real problem. In an interesting and
comprehensive citation analysis, Landström (2001) has shown that the recent
tremendous growth of entrepreneurship research has been accompanied by an
increasing share of “transitory” contributors, i.e. scholars with their main home
in some mainstream discipline and just one publication in entrepreneurship. In
addition, his analysis shows that despite their disciplinary training these scholars
are largely non-influential. This supports the idea that disciplinary knowledge
has to be combined with deep familiarity with the phenomenon in order to make
really valuable contributions.
The strongest argument for entrepreneurship (also) as distinct domain, however,
is the following. If left to the disciplines, there is no guarantee that a lot of research
would be conducted on the most central questions of entrepreneurship, as we have
here outlined that scholarly domain. Many of these questions may be peripheral to
every discipline (cf. Acs & Audretsch, 2003b). Therefore, a failure to collectively
cover the entrepreneurship agenda is neither a problem nor a shortcoming on the
part of the disciplines. When an interest in maximum knowledge development
about entrepreneurship is the vantage point, however, it becomes a problem.
Concluding the discussion of the domain vs. the disciplines I would argue that
knowledge about entrepreneurship is best developed if deep familiarity with the
phenomenon is combined with disciplinary knowledge and standards. This can be
achieved in three ways: (a) researchers who focus their research more or less exclu-
sively on entrepreneurship learn more theory and method from the disciplines; (b)
disciplinary researchers who occasionally apply their knowledge to entrepreneur-
ship read a lot of entrepreneurship research before conducting and publishing
their studies; and (c) direct collaboration between topical and disciplinary experts.
I would argue that all three of these are more likely to happen in the presence of
a distinct, coherent and acknowledged domain of entrepreneurship research.
SOME FURTHER SUGGESTIONS FOR EMPIRICAL

RESEARCH IN ENTREPRENEURSHIP
Although there has been considerable progress in empirical entrepreneurship
research, much more is needed in order to realize the potential of entrepreneurship
as a scholarly domain. At the time of this writing it is still the case that a lot of the
research presented in “entrepreneurship” outlets address research questions that
are not clearly about entrepreneurship as defined here – or anywhere. Neither are
they always clearly different from research questions addressed in other fields.
Most studies are cross-sectional rather than process-oriented, and work with
samples of existing firms or established business owner-managers rather than
emerging new ventures and people in the process of becoming entrepreneurs
(Aldrich & Baker, 1997; Chandler & Lyon, 2001; Davidsson & Wiklund, 2001).
But there are hopeful signs. For example, in the Frontiers of Entrepreneurship
Research 2001 (Bygrave et al., 2001) the first 172 pages were devoted to Nascent
and Start-up Entrepreneurs, Opportunity Recognition, and New Venture Creation
Process. As recently as in the 1999 edition most of the first 200 pages were
devoted to “characteristics of entrepreneurs” (Reynolds et al., 1999). Below I will
offer some guidance that I hope can help strengthen this positive trend.
General Design Issues
Before going into any detail, let us just point out some of the most important
and obvious implications for empirical work that the argument so far has given.
First, theories exist. Whenever possible, entrepreneurship research should apply
existing theory, after ascertaining that the theory is conceptually adequate for
the task. However, the domain must allow also for filling gaps and asking new
questions through inductive, theory-building approaches. This will likely require
both in-depth and broadly based investigations. I would argue that a systematic
combination of qualitative and quantitative approaches within focused research
programs has the highest probability of attaining a high yield.
Second, entrepreneurship is about emergence. This means that the objects
under study have to be captured at – or traced back to – a very early stage.
Studying samples of established small firms or business owner-managers does
not automatically capture aspects of emergence. Third, we have discussed
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entrepreneurship as behaviors in the processes of discovery and exploitation. This

calls for longitudinal research. Cross-sectional designs do not capture processes
very well. Fourth, we have accepted heterogeneity and uncertainty as fundamental
and permanent features of the economy. This has a series of implications for
selection of theories, samples, analysis methods and interpretations.
Clearly, doing good empirical work on entrepreneurship is going to be
difficult and requiring some creativity and ingenuity. It is not for the lazy or the
faint-hearted. For those who appreciate challenges it can be all the more rewarding.
Sampling and Data Collection
In my treatment of sampling and data collection issues I will put the heaviest
emphasis on a kind of study that I find to be very short in supply in spite of its
potential for addressing very central research questions in entrepreneurship. This is
the longitudinal, real time study of samples of emerging business activity, using the
venture itself as the level of analysis. I will only provide occasional commentary
on other types of study.
I have argued that entrepreneurship research should study the behaviors un-
dertaken in the processes of discovery and exploitation of ideas for new business
ventures. Behaviors in such processes can be studied on various levels of analysis,
which entails the problem of measuring but not sampling them (cf. Fig. 4).
However, as suggested above and unlike the previous preference for samples
of individuals or firms (Chandler & Lyon, 2001; Davidsson & Wiklund, 2001),
entrepreneurship researchers should consider using the emerging new venture
itself as the level of analysis. Doing so involves several tough but interesting
sampling challenges related to (non-)existence, frequency, and heterogeneity.
The essence of the problem of existence is that it will be difficult to sample
directly from available business registers. In many countries most new, indepen-
dent start-ups remain so small that they never enter official business registers (cf.
Aldrich, Kalleberg, Marsden & Cassell, 1989). When and where they do, they
typically do so at a late stage. Internal ventures are even more invisible in business
registers. Archival data can be of some use for aggregate level or historical studies,
and advice on how emerging firms and populations can be located in archives
at early stages is provided by Aldrich et al. (1989), Aldrich and Martinez (2001)
and Katz and Gartner (1988). However, even with the most ingenious approach,
success (selection) bias is almost certain to hamper the analysis. Because only
efforts that have survived to a certain stage are included, risk-taking behaviors
that increase outcome variance will be interpreted as success factors. Therefore,
primary data collection techniques for capturing discovery and exploitation
processes at early stages are needed for the study of entrepreneurial processes as
they happen, without selection and hindsight biases.
This leads to the problem of frequency. In the absence of a sampling frame
that lists the population of emerging ventures, the sampling process has to start
with something else. In the Panel Study of Entrepreneurial Dynamics (PSED)
the solution was to start from a sampling frame of households to arrive at a
representative sample of the adult population of individuals (Reynolds, 2000; cf.
Reynolds et al., 2001). With this approach, all contacted individuals are asked
a series of nested screening questions, the most important being whether they
are at present trying to start a new business. Because only a small fraction is
involved in entrepreneurial processes at any given time a very large sample
has to be screened in order to arrive at a sizable number of cases eligible for
continued study. Although there may exist ways to make the sampling more
efficient (cf. Reynolds & Miller, 1992) the frequency problem will always mean
that sampling for entrepreneurship studies will be expensive. So-called “snowball
sampling” (Douglas & Craig, 1983, p. 213) could reduce the monetary cost but
only at the cost of introducing bias. Because more and more people know about
an emerging venture the longer it has been active, and because well-networked
nascent entrepreneurs appear to be more successful (Davidsson & Honig, 2003),
snowball sampling is likely to yield a sample of emerging ventures that is farther
into the process, and more successful, than average.21
It may be possible to further refine the PSED method of capturing processes in
early stages, but a two-stage sampling process of this kind is likely to remain an
important tool for entrepreneurship research. For example, Chandler et al. (2002)
recently extended it to internal ventures by starting from a large cohort of firms and
screening them for emerging internal ventures. In their case the firms were young
and small. If extended to larger firms the additional complication is added that no
single individual can be assumed to know early on about all new initiatives that
are taken within the firm. Therefore, procedures for locating relevant informants
have to be developed.
Another aspect of the frequency problem concerns the earliest stages of the
discovery process, i.e. when new ideas are initially conceived of. This is a
particularly infrequent phenomenon, which creates particular challenges for the
researcher (cf. Simon in Sarasvathy, 1999b, p. 52). For example, field studies of
“entrepreneurs” mimicking Mintzberg’s (1974) study of managers are unlikely to
capture initial discovery. The early stages of discovery may be better researched
through laboratory methods (Fiet & Migliore, 2001; Sarasvathy, 1999a). This also
attracts attention to another important sampling issue, namely that the behaviors
of practicing entrepreneurs do not necessarily give all the answers needed for the
development of normative entrepreneurship theory. Therefore, entrepreneurship
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research – especially when addressing discovery – can work also with sam-
ples composed of individuals other than (nascent) entrepreneurs (Davidsson,
2002; Fiet, 2002).
The frequency problem is further aggravated by the problem of heterogeneity.
After investing in the expensive screening procedure needed for obtaining a sample
of ongoing entrepreneurial processes the research may end up with a sample that
is too diverse for any strong relationships to emerge. This is one of the problems
with PSED and its sister projects in other countries. A random sample of ongoing
independent start-ups will be heterogeneous along many dimensions. In addition,
it will be dominated by relatively modest and imitative efforts (Aldrich, 1999;
Delmar & Davidsson, 1999; Samuelsson, 2001). Pre-stratification of the underly-
ing screening sample may be a way to get more homogeneous samples, or samples
with a higher yield of high-potential ventures. Individuals may be stratified by, e.g.
education or occupation. When firms are used for screening of samples of emerging
internal ventures traditional stratification variables like firm age, size and industry
can be used.
However, it is not a given that these pre-stratifications can deal with the most
relevant aspects of heterogeneity. For example, Bhave (1994) points out that type
of novelty (in product, business concept, or production technology) may be a
better indication of similarity than is industry classification. For many purposes
post-stratification may be the only way to obtain more homogeneous samples.
When this is the case the only alternative is to increase the size of the study,
so as to make possible analysis of subgroups not identifiable a priori. This, of
course, further increases the cost of sampling for good empirical research on
entrepreneurship.
With a qualitative approach it may be easier to distil cases that are at the same
time less heterogeneous and more relevant for the research questions. However, the
very heterogeneity that would motivate such an approach in the first place makes the
applicability of theory generated from a small number of cases even more narrow
and uncertain than when the cases are drawn from a more homogeneous population.
Heterogeneity is not only a problem that should be designed away. Aspects
of heterogeneity may just as well be the essence of research questions in
entrepreneurship (cf. above). The conventional way of doing this is to carefully
measure the aspects of heterogeneity that are of interest and to include control
variables and interaction effects in the analysis. This helps, but can never
simultaneously address all aspects of heterogeneity in a satisfactory manner. Less
conventional studies combine homogeneity and heterogeneity in fruitful ways.
Gratzer’s (1996, 1999) complete reconstruction of the rise and fall for the auto-
mated restaurant industry in Sweden, and Shane’s (2000b) study of all individuals
and business initiatives associated with a particular technological innovation are
examples of retrospective studies where focus on a narrow empirical context (i.e.

homogeneity) allows interesting insights about heterogeneity.
The Problem of Process
The process character of entrepreneurship creates additional challenges. We have

noted already that this calls for longitudinal studies, which are still short in supply
(Aldrich & Baker, 1997; Chandler & Lyon, 2001). The first problem that comes to
mind when discussing longitudinal data collection is attrition, i.e. the tendency for
the sample to get smaller and smaller over time because cases cannot be located or
refuse to continue to participate in the study. Experiences from PSED and related
studies have been, however, that attrition in this regard is not the big problem. On
the contrary, once nascent entrepreneurs have been identified and taken through
the initial interview they have been very willing or even enthusiastic about further
participation.22 Instead, there are other but less obvious problems that have to be
dealt with.
First, firm start-up processes have different duration. In some cases the time
between the first concrete step towards a new business, and an up and running firm,
is a matter of weeks or months. In other cases it takes several years, or the process
may never be completed nor terminated. As longer processes are eligible for
sampling over longer periods of time, a sample of on-going initiatives identified
at a given point in time will in a sense have an over-representation of long start-up
processes relative to short processes. This may require some kind of correction
either in the sampling procedure or in the analysis (cf. Delmar & Shane, 2002).
Second, when sampling emerging business ventures some minimum criterion
is needed in order to determine whether a case qualifies, e.g. that some concrete
start-up activity like “talking to the bank,” “writing a business plan” or “renting
premises” has been undertaken. Likewise, a maximum criterion is needed beyond
which the case is no longer an emerging venture but an established one (cf. Shaver
et al., 2001). With these criteria in place, however, the problem remains that when
sampled at a particular point in time the sampled venture efforts will be captured
at different stages of development. Some will be caught at the very earliest
stages while others may be close to “up and running.” In the PSED research, the
use of questions that give “time stamps” for different gestation activities helps
address this question. Cases that appear to be “eternal start-ups” that will never be
completed may be eliminated from the analysis, and the data can be re-organized
using the reported time of a certain activity as the anchor rather the time of the
interview (Delmar & Shane, 2002). Alternatively, either the number of start-up
behaviors or the time elapsed since the first behavior can be used as a control
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variable in the analysis (Honig & Davidsson, 2000). However, it is inevitable that
samples of real emerging processes will have some heterogeneity of this kind on
the time dimension.
Third, when re-contacted over time it will happen in each wave that some
of the cases no longer are “emerging ventures” but either abandoned efforts
or established business operations. Conceptualizations, analysis strategies and
methods have to be applied that ensure that these differential outcomes do not
cause biased results. Fourth, among those cases that still are “emerging ventures”
when re-contacted, one possibility is that the initial respondent is still pursuing
the same venture idea. This is an unproblematic case, as is the case when the case
when the original respondents and all other team members have abandoned the
project. It is also possible, however, that: (a) the initial respondent is still trying
to start a business, but based on a completely different idea; or (b) the initial
respondent is no longer active in the process, but other team members continue to
pursue the original venture idea. Because of these unstable relationships between
individuals and ventures it has to be decided what is the level of analysis, i.e.
what it is, that should be followed over time. This is not a decision that should
be taken lightly. A data set that follows individuals may be appropriate for some
theories and research questions whereas a venture-based data set may be more
appropriate for other theories and research questions. Therefore, one attractive
alternative is to create, within the same study, different versions of the data set,
where the different versions use the individual(s), the emerging venture, or the
juxtaposition of the two (cf. Shane & Venkataraman, 2000) as the basic unit.
Finally, when the emerging venture is the entity being followed situations will
arise when it has to be asked whether the studied entity is in a meaningful way still
the “same” unit, or if it has changed so much that it is now a different emerging
venture than the original one. This, too, is a tricky issue to settle. For some
purposes keeping such chameleons in the sample may create disturbing noise. In
other cases the changes in the business concept that occur over time may be the
researchers’ main interest. While perhaps particularly pronounced when studying
early stages and dynamic aspects of the economy, this problem is in no way unique
to entrepreneurship research. For example, in a study that followed business
firms over a ten-year period we found that a majority of these firms underwent
such changes that it could be questioned whether they could meaningfully be
considered “the same” units at the end of the period (Davidsson & Wiklund, 2000).
Measurement and Data Analysis
Apart from the challenges of sampling and following the sample over time, there
are additional challenges associated with measurement and data analysis. There is
a lack of validated measures of central concepts in entrepreneurship (Chandler &

Lyon, 2001). This is particularly true for concepts that are central in entrepreneur-
ship research but not in the disciplines or in other fields of research, such as
“venture idea,” “discovery behaviors” and “exploitation behaviors” (Davidsson,
2000). Although some work in this direction has been done in PSED and related
studies (Chandler et al., 2002; Davidsson & Honig, 2003; Reynolds, 2000;
Samuelsson, 2001) much more remains to be done. Likewise, non-traditional
assessment of outcomes on different levels needs to be developed. Another aspect
of improved measurement is the combination of data sources for triangulation
purposes, which has been infrequent in entrepreneurship research (Chandler &
Lyon, 2001). As noted above, archival data are likely not to exist for emerging
business activities. However, teams rather than single individuals run a large share
of all independent start-ups, and probably an even larger share of all internal ven-
tures. This makes it possible reduce common method variance through the use of
multiple respondents.
I have emphasized repeatedly that entrepreneurship is characterized by
heterogeneity and that it is a process, which should be studied over time. One
aspect of heterogeneity is that the most interesting cases are likely to be found
at the outskirts of distributions. Another is that a sample of emerging businesses
is going to consist of entities that were initiated at different points in time, and
likewise will “graduate” into established new businesses at different points in
time. I have also remarked, with Venkataraman (1997), that relative performance
may not be the most relevant outcome variable.
As a consequence, the standard package of statistical analysis methods will not
be the most appropriate tools for analyzing this phenomenon. These methods are
often developed for cross-sectional analysis and focus around central tendencies
and variance – preferably normally distributed – around them. Outliers are a
problem, as are incomplete data. This means that the researcher who wants to do
really good empirical work will have to find and learn methods that better match
the research questions and data characteristics at hand. This, too, is a development
that has only just begun. To name a few examples that probably point out the
right direction we have Gimeno et al.’s (1997) careful adaptation of analysis tools
to the analysis problem, Delmar and Shane’s (2002) use of event history analysis
and Samuelsson’s (2001) introduction of latent growth modeling to the domain of
entrepreneurship research.
CONCLUSION
I argued in the introduction to this chapter that rather than being a confused
research community heading for disaster we now have the intellectual building
358 PER DAVIDSSON
blocks in place to build a strong paradigm for entrepreneurship research. My

purpose with this manuscript has been to bring together and elaborate on insights
that others have provided, in the hope that doing so could help researchers conduct
entrepreneurship research that constitutes genuine and valuable contributions to
academia and practice.
The field of entrepreneurship can achieve greater coherence, I argued, if we
realize that different views on what entrepreneurship is to a great extent are due to
differences in emphasis on entrepreneurship as societal phenomenon, as scholarly
domain, or as a teaching subject. I have tried to clarify these distinctions and
to point out where various criteria do and do not belong, in the hope to show
that what appears to be opposing views are in fact rather easy to reconcile in
many cases. Reaching a reasonable level of agreement on what entrepreneurship
research should study may be much easier than it might first seem.
More specifically, I have suggested that it is adequate to include some kind
of “success” in the definition when we have entrepreneurship as a societal
phenomenon – but not the scholarly domain – in mind. Leaning on Kirzner
(1973) I suggested that the societal phenomenon is well captured by the notion
that entrepreneurship consists of the competitive behaviors that drive the market
process. I argued that criteria like purposefulness, skill and expectation of gain
for self come naturally when we think of entrepreneurship as a teaching subject,
but may be overly restrictive from the other perspectives. I also argued that
while topics like self-employment, small business management, and family
business succession might fit naturally in an entrepreneurship teaching context,
they represent a diverse set of phenomena that are not necessarily related to
“entrepreneurship” as we have defined the societal phenomenon.
With regard to the scholarly domain I have tried to develop a perspective that
makes use of and room for earlier contributions by Gartner (1988, 2001) and by
Shane and Venkataraman (2000, 2001). I have also proposed what I hope to be an
agreeable middle ground position on the issue of opportunity as created or existing
independently of the actor. I have further proposed – along with Low (2001) – that
neither “entrepreneurship as separate domain” nor “entrepreneurship belongs in
the disciplines” is the right strategy for maximizing knowledge development about
entrepreneurship. Entrepreneurship research requires input from the disciplines
but it also needs the community created by or in a distinct domain. The domain
delineation I suggested reads:
Starting from assumptions of uncertainty and heterogeneity, the scholarly
domain of entrepreneurship encompasses the processes of (real or induced, and
completed as well as terminated) emergence of new business ventures, across
organizational contexts. This entails the study of the origin and characteristics
of venture ideas as well as their contextual fit; of behaviors in the interrelated
processes of discovery and exploitation of such ideas, and of how the ideas and
behaviors link to different types of direct and indirect antecedents and outcomes
on different levels of analysis.
Finally, I discussed a number of method challenges in entrepreneurship
research. In particular, I argued for more studies that use the venture idea and the
activity that evolves around it as the unit of analysis. Such studies would capture
new business initiatives at an early stage and follow them over time, through
whatever changes in human champions and organizational contexts that might
occur.
Entrepreneurship as a scholarly domain has the potential to generate unique
insights about phenomena of very high societal relevance. In order to realize that
potential, the field needs to continue to improve. In the role as researchers this is a
task we can take on along two routes. First, we can be more careful with how we
use the word “entrepreneur” and its derivatives. Second, we can conduct better re-
search, following some of the suggestions outlined in this chapter. That is, we can
make our research more theory-driven, have it address research questions closer
to the heartland of the scholarly domain, and apply more adequate methodology.
Doing such research requires ingenuity and attention to many new challenges in
sampling, measurement and analysis. The problems may seem prohibitive, and one
should not expect every single study to have a perfect solution to every possible
problem. That would be asking too much. From senior researchers and research
foundations one can reasonable demand that more large-scale, longitudinal
studies be conducted. Doctoral students and junior scholars under time and tenure
constraints could then “tap into” these pre-existing studies. Alternatively, they
could focus on research questions that do not demand process data, such as devel-
opment and validation of better measures of concepts, or “laboratory” research
on discovery.
Researchers do not have the only key role. Reviewers, conference organizers
and journal editors are very important for the field’s future development. As I see it,
they should give priority to research on emergence of new business activities. They
should also continue to welcome research on, e.g. self-employment, small business,
family business, organizational change, regional development, or strategy and firm
performance – but only when these issues are explicitly linked to the existence
and characteristics of venture ideas, to behaviors in the processes leading to their
discovery and exploitation, and to the outcomes of such efforts. It is when holders
of such roles become tougher in asking “is this really about entrepreneurship?” that
the scholarly domain of entrepreneurship can become a logically distinct and co-
herent field of research. Achieving this is necessary for entrepreneurship research
to make real progress, to earn and deserve respect, and provide a better basis for
community.
360 PER DAVIDSSON
EPILOGUE
Writing a manuscript of the present kind is an idea one gets or a kind of assignment
one accepts only in moments of outrageous hubris. It is, of course, beyond the
capacity of most scholars, and certainly beyond the capacity of the current author,
to have the overview that would be needed in order to really manage such a task.
So the punishment for the hubris, I guess, is to realize that every reader will be
able to spot many omissions, misrepresentations, or even pure errors. However,
I rationalize my overly pretentious effort on the grounds that: (a) I have admired
others work of the same kind and found it very rewarding to read it, even if I did
not find every line they wrote well-informed or logically convincing; and (b) if we
were allowed to speak only when in possession of complete knowledge we would
not say much at all.
A conference reviewer of the extended abstract of a (much different) early
draft of this manuscript opened her “comments to author(s)” by pointing out that
“Paradigm development seldom takes place through normative claims . . . .” This
is a critique well deserved – and well taken. In a similar vein, Aldrich and Baker
(1997, p. 398) point out:
What lesson can be learned from history? Influence comes from exemplary research, not from
propagation of rules or admonition. The field will be shaped by those who produce research
that interests and attracts others to build on their work (. . .). Those who believe they know the
path forward need to do such work themselves and (. . .) provide exemplars that attract others
to follow.
This is an idea that I have tried to take seriously. Therefore, I have referred
repeatedly in this manuscript to other researcher’s work that I find exemplary and
worth following, in the hope that some curious readers may check the sources.
I have further had the privilege to lead the Program on Entrepreneurship and
Growth (PEG) at the Jönköping International Business, where we have tried to
apply some of the ideas outlined above. That is, we run longitudinal, real time
projects using the “emerging new venture” as the level of analysis; we do study
behaviors that shape the discovery and exploitation processes, and we do research
on the characteristics of venture ideas, and their effects. Whether or not any of
our research will be regarded “exemplary” and worth following is, however, for
others to judge.
NOTES
1. The disposition-based view sees (the degree of) entrepreneurship as an inherent
characteristic of, e.g. individuals, regions, or cultures. While it is not impossible to
gain valuable insights from a dispositional view (e.g. Baumol, 1990) I would generally
discourage its use, and instead use behavior- and outcome-based criteria.
2. This choice should not be interpreted as a general preference by the author for Kirzner’s
theorizing over, e.g. Schumpeter’s or Baumol’s. As will become evident, while I find
Kirzner’s way to express the role of entrepreneurship very useful and clarifying there are
many aspects of Kirzner’s theory that I find debatable or less useful.
3. Alternatively, Cole’s definition can be interpreted as requiring initiation and main-
tenance and aggrandizement. While much tougher than the “and/or” interpretation this is
still fundamentally different from the market-based view of the societal phenomenon of
entrepreneurship that I suggest be used.
4. Starting from an ideal situation where existing regulatory frameworks were optimally
designed for the functioning of the economy, “re-distributive” ventures would coincide with
ventures that break the law in order to achieve their goals. In a real economy regulatory
frameworks are unlikely to be optimally designed and “legal yet re-distributive” and “illegal
yet socially beneficial” ventures are both possible, making it very difficult to classify with
certainty in which category (quadrant) each individual venture belongs. The conceptual
distinctions between the categories in Fig. 2 may nevertheless be valuable.
5. Kirzner (1973, p. 94) asserts that entrepreneurial activity is always competitive
and competitive activity is always entrepreneurial. In combination with the assertion that
entrepreneurship moves the economy towards equilibrium, i.e. towards more efficient
resource use, this does not seem to leave room for the existence of “re-distributive” ventures.
However, Kirzner points out that his assertion is made for a (hypothetical) market economy
free of government limitation on individual economic action. In real economies, I would
argue, “re-distributive” ventures undoubtedly exist. Moreover, one might wonder whether
Kirzner’s reciprocal identity between competitive and entrepreneurial behaviors would
hold in an economy free of government intervention. In such an economy a producer may
well try to win the market by killing his competitors and/or burning their premises. Either
“competitive” must be defined in way that such behaviors for some reason do not qualify,
or their existence is inconsistent with Kirzner’s assertion that all competitive behavior
is entrepreneurial.
6. With a strained argumentation one can say, of course, that al-Quaida operates in
the “market” for recruiting future terrorists, and that by demonstrating the “power” and
“success” of the September 11 attacks it drives the market process in that market, presumably
making it harder for “competing” terrorist organizations to attract the same recruits.
7. I have chosen to follow Shane and Venkataraman’s (2000) terminology. Alternatively,
what I discuss could have been called entrepreneurship as “research domain” or “field of
research.”
8. According to Kirzner (1973) “Entrepreneurship does not consist of grasping a free
ten-dollar bill which one has already discovered to be resting in one’s hand; it consists of
realizing that it is in one’s hand and that it is available for the grasping.”
9. Reportedly when asked at a seminar whether entrepreneurs could be studied empiri-
cally, Kirzner was not able to give an answer (Beckman, 1990, p. 100).
10. In fact, one of Schumpeter’s (1934) few weaknesses was that despite first defining
the entrepreneur as a function in the economy and not as a flesh-and-blood individual,
he could not resist the temptation to speculate about the goals and characteristics of the
“entrepreneur,” thereby probably inspiring a lot of not very productive research (Gartner,
1988; Kilby, 1971). However, the “trait approach” in early entrepreneurship research
did not come out with a complete lack of findings (cf. Johnson, 1990). Personality has
362 PER DAVIDSSON
also “bounced back” to some extent both in psychology proper and in entrepreneurship
research, showing that with better conceptualizations, sampling and measurement stronger
results can be obtained (Church & Burke, 1994; Gasse, 1996; Miner, 1996). However,
innate characteristics of individuals will no doubt remain a minor issue in explaining
entrepreneurial behavior and outcomes. Researchers who find it difficult to give up the
idea of attributing entrepreneurial processes to the entrepreneur have a tendency to end
up in circular reasoning (Ensley, Carland & Carland, 2000) or very strained definitions of
“individual” (Bruyat & Julien, 2000) when faced with the fact that between the original
identification of a “new to the world” business idea, and the successful exploitation of
that idea in a particular geographic market, we may find a series of different individuals
who assume various initiating, supporting, implementing and imitating roles, either
concurrently or sequentially (Gratzer, 1996). Shane and Venkataraman (2000) retain a
strong interest in the role of individuals – so much so that Venkataraman (1997) has been
criticized for precisely that reason (Schoonhoven & Romanelli, 2001). Cole (1969, p. 17)
admitted that the Harvard center he led for many years devoted considerable effort to
defining the “entrepreneur” – but without success. However, Shane and Venkataraman’s
(2000) interest in individuals concerns primarily the matching of individuals and venture
ideas (Shane, 2000b) and with a well chosen “by whom” – which could mean one or
more people who assume different roles in the discovery and exploitation processes;
concurrently or in a relay – they avoid most of the problems associated with such
an interest.
11. The observant reader may note that Shane and Venkataraman (2000) actually
distinguish between three processes, as the quote reads, “. . . discovered, evaluated,
and exploited . . . .” Venkataraman’s (1997) original reads, “. . . discovered, created, and
exploited . . . .” In Shane and Venkataraman (2000) separate sub-sections are devoted to
elaboration on discovery and exploitation, but none to evaluation. The same is true for
Eckhardt and Shane (2003). On this basis I think it makes sense to say that “discovery” and
“exploitation” are the two main processes, and that the possibility of “opportunity creation”
as well as the process of “opportunity evaluation” are captured within these two main
processes.
12. This has also led other scholars to adopt Gartner’s definition (Aldrich, 1999;
Thornton, 1999) although some would exchange “creation” for “emergence” thus
de-emphasizing behavioral and strategic aspects. While keeping behavior as the main
interest Gartner (1993) himself has later preferred “emergence” in order to de-emphasize
the planning and rationalistic connotations of “creation.”
13. For example, individuals are heterogeneous with respect to experience, skills and
cognitive capacity (Cohen & Levinthal, 1990; Conner & Prahalad, 1996; Shane, 2000a, b)
and also have heterogeneous motivations (Birley & Westhead, 1994). Two important as-
pects of organizational heterogeneity are governance structure (Coase, 1937; Foss, 1993;
Williamson, 1999) and resources (Barney, 1991; Cohen & Levinthal, 1990; Collins &
Montgomery, 1995; Foss, 1993; Galunic & Rodan, 1998; Greene, Brush & Hart, 1999;
Penrose, 1959; Teece, Pisano, & Shuen, 1997). Whether or not a new venture evolves
within an existing organization the external environment in a broader sense will also be
heterogeneous (Baumol, 1990; Chandler & Hanks, 1994) and the characteristics of the
external environment may have profound effects on what venture ideas are attractive and
likely to succeed (Zahra & Dess, 2001). Heterogeneity also occurs over time. Individuals
and organizations learn and change over time and whether or not they choose to remain
in the “same” environment, the characteristics of the environment are not stable, either
(Aldrich, 1999; Aldrich & Martinez, 2001; Miner & Mezias, 1996). It follows from all this
heterogeneity that the universe of perceptible and profitable opportunity is not the same for
all individuals or organizations, and that therefore they will come up with different venture
ideas and different exploitation strategies. Importantly, they will also have different views on
what constitutes a successful or acceptable outcome (Gimeno, Folta, Cooper & Woo, 1997;
Venkataraman, 1997).
14. Judging from other parts of their writings I think it is safe to say that Shane and
Venkataraman (2000) did not intend to suggest that entrepreneurship can only be studied
retrospectively. Disappointingly, though, they did not take the chance to sort this out in
the debate following upon the publication of their article (Shane & Venkataraman, 2001).
Both Shane and Venkataraman have subsequently been involved in manuscripts portraying
a more refined view of “opportunity” (Eckhardt & Shane, 2003; Sarasvathy et al., 2003)
but none that completely solves the problems with the “opportunity” concept discussed
here. At the root of the problem, I believe, lies that Shane and Venkataraman (2000) first
set out to delineate the scholarly domain of entrepreneurship, but then fail to uphold the
distinction between the scholarly domain and the societal phenomenon. I would argue
that it is entrepreneurship as a societal phenomenon in the sense discussed above that
Shane and Venkataraman (2000) have in mind when they adopt Casson’s (1982) defini-
tion of entrepreneurial opportunity. This definition fits with their first research question,
about why, when and how “opportunities” come into existence, and with their assertions
that “To have entrepreneurship, you must first have entrepreneurial opportunities” (p. 220)
and “Although the discovery of an opportunity is a necessary condition for entrepreneur-
ship, it is not sufficient” (p. 222). When they argue (Shane & Venkataraman, 2000, 2001)
that ventures fail because opportunities were poorly exploited one might wonder by what
criterion we can determine that they were “opportunities” at all in Casson’s sense, and
thus that they belong in the scholarly domain of entrepreneurship? How difficult Casson’s
opportunity concept is to apply consistently is illustrated also by Shane and Venkatara-
man’s assertion that “many people exploit opportunities that are unlikely to be successful”
(Shane & Venkataraman, 2001, p. 15), which is not congruent with defining opportunity as
profitable.
15. According to this perspective, although opportunities objectively exist “out there,”
it is impossible to know the universe of not-yet-discovered, viable venture ideas that are
within reach for a particular actor (cf. Sarasvathy et al., 2003). It is therefore reasonable
to think of each individual’s universe of viable venture ideas as infinite. Nonetheless,
because of perceptual and knowledge differences some individuals have easier access to
more viable ideas than have others. This statement may seem paradoxical but is no more
so than the fact that the universe of all positive integers and the universe of all positive
even integers are both infinite, and nonetheless the latter is “smaller” than the former.
16. We may still require, however, that it is an opportunity only if the entrepreneur (or
possibly an imitator) successfully convinces the world that this creation has value.
17. Eckhardt and Shane (2003) suggest there is a sequence from existence of opportu-
nities, to discovery of opportunities, and further to exploitation. They hold that “While this
process may have feedback loops and certainly is not linear, we theorize that it is directional.
Opportunities exist prior to their discovery and opportunities are discovered before they are
exploited. The opposite direction is not possible because opportunities cannot be exploited
before they exist.” I do not think that even a directional hypothesis should be a basic
364 PER DAVIDSSON
assumption for entrepreneurship as a scholarly domain. The problems inherent in starting

with the “existence of opportunity” have been dealt with above. Moreover, consider the fol-
lowing examples (note that Eckhardt and Shane admit that “discovery” does not necessarily
reflect “real” opportunity). Discovery without existence: any process that turns out a failure
because the actor was wrong about the perceived external opportunity; it did not exist. Dis-
covery before existence: an entrepreneur develops a business concepts that becomes viable
only because of an external chock that happens after the idea was developed, and which was
unknowable until it occurred. Exploitation before discovery: Bhave’s (1994) result suggest
it is rather common that while trying to solve a problem for themselves, individuals engage
in what would be classified as exploitation behaviors and only afterwards do they come to
see their solution also as an idea for a business. Exploitation without discovery: a venture
may become successful “by mistake,” i.e. generate revenue by other means and from
other buyers than the intended ones. That is, the “discovered” opportunity did not exist,
but the attempt to exploit it successfully exploited another, existing but non-discovered,
set of external conditions (“opportunity”). Having said this, empirical results support the
notion that the process is – on average – directional, involving first an intention, which
over behaviors related to resource acquisition and boundary-creation lead to exchange
(Samuelsson, forthcoming).
18. Interestingly, this disproportionate interest in the individual is shared by diffusion
research, where only about one percent of the close to 4,000 studies have focused on the
characteristics of the innovation, whereas more than half of them focus on the individuals
who adopted them (Rogers, 1995). The categorization of innovations in diffusion research
along the dimensions relative advantage, complexity, compatibility, trialability and observ-
ability is nevertheless a source of inspiration for assessing venture ideas. The distinctions
imitation, competence-enhancing innovation, and competence-destroying innovation are
also likely to be useful (cf. Aldrich, 1999; Anderson & Tushman, 1990), as are Bhave’s
(1994) distinctions between different types of novelty: in product, in business concept or in
production technology.
19. Relative to the original, I have added “where” and “for whom” in question 1, and
changed “opportunities” to “opportunity.” In questions 2–4 I have substituted “venture
ideas” for “opportunities.” I have also generalized question 2 to any unit of analysis rather
than restricting it to the individual level. Note that the fourth question is not explicitly stated
by Shane and Venkataraman (2000) but derived from their domain definition as well as from
Shane and Venkataraman (2001) and Venkataraman (1997).
20. Shane and Venkataraman (2000) have a more narrow view on question 3, showing
a particular interest in why and with what consequences some venture ideas are commer-
cialized as de novo start-ups, whereas for others an existing organization is used for the
launching. Acknowledging that this is a highly interesting and previously much neglected
issue in entrepreneurship research I have little to add to Shane and Venkataraman’s (2000)
treatment.
21. Note that the suggested two-stage sampling procedure will result in over-sampling
of team ventures. This can be corrected by post-weighing given that information exists on
the true proportions of team and solo start-ups.
22. For the Swedish study I have this information in the capacity of principal investigator
(cf. also Delmar & Shane, 2002). As regards the US effort I have the information from being
a member of its executive committee and from personal communication with the initiator
and co-ordinator of the project, professor Paul D. Reynolds.
ACKNOWLEDGMENTS
The ideas presented in this chapter are an outgrowth of conceptual and empirical
work conducted within the “Program on Entrepreneurship and Growth in SMEs”
(PEG), which was funded mainly by the Knut & Alice Wallenberg Foundation,
and which involved a large number of Swedish and international scholars.
Forerunners to – and early drafts of – this manuscript have been presented at
several seminars and doctoral consortia. Colleagues have been generously sharing
their views on earlier versions, thus helping to shape my thinking, sharpening
my arguments, and clarifying the exposition. With the risk of forgetting someone
who has been really important I would like especially to thank PEG collaborators
Candida Brush, Gaylen Chandler, Jonas Dahlqvist, James O. Fiet, Veronica
Gustavsson, Scott Shane and Johan Wiklund, as well as Jerry Katz, Pramodita
Sharma, Ivo Zander and an anonymous reviewer for the RENT 2001 conference,
for their comments and suggestions. While their help has been invaluable and
certainly increased the quality of the end product, the responsibility for the views
put forward in this manuscript, and the remaining flaws, remains with the author.
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CONTENTS

LIST OF CONTRIBUTORS vii

COGNITIVE APPROACHES TO ENTREPRENEURSHIP

ORGANIZATIONAL LEARNING BY NEW VENTURES:

ENTREPRENEURIAL FIT: THE ROLE OF

THE ROLE OF REGRETFUL THINKING, PERSEVERANCE,

THE SELF-DETERMINATION MOTIVE AND

EXTENDING THE THEORY OF THE ENTREPRENEUR

A TRANSACTION COGNITION THEORY OF GLOBAL

THE IMPACT OF ENTREPRENEURIAL EXPERIENCE ON

OPPORTUNITY DEVELOPMENT: A SOCIO-COGNITIVE

THE DOMAIN OF ENTREPRENEURSHIP RESEARCH:

David B. Balkin Leeds College of Business, University

Gideon D. Markman Terry College of Business, University

Jerome A. Katz and Dean A. Shepherd

Cognitive Approaches to Entrepreneurship Research

Conference in 1987 exposed a rather well-known social psychologist named

membership and involvement in the ERC/PSED process, these concepts and

With an established foundation for cognitive approaches to entrepreneurship,

understanding of entrepreneurial knowledge. Ron is also a passionate advocate

Benyamin Bergmann Lichtenstein, G. T. Lumpkin

Cognitive Approaches to Entrepreneurship Research

Insofar as small entrepreneurial ventures rely on proactivity and entrepreneurial

innovation, and team performance in a firm (Senge et al., 1994). According to

NEW VENTURES: OPPORTUNITIES FOR

greater ease of communication among organization members and easier responses

Behavioral Learning in New Ventures

Adaptive learning, in which organizational behaviors are modified based on

Cognitive Learning in New Ventures

Whereas behavioral learning emphasizes the codification of experience in habits

Developing these capabilities can rarely be done in a vacuum. Research on

Action Learning in New Ventures

Developing Social Skills

Overcoming Biases and Heuristics

Entrepreneurs often launch businesses that initially falter because of “misper-

The e-commerce venture Autobytel provides an interesting example of this type

Successfully Recognizing Opportunities

Opportunity recognition is a critical element of successful entrepreneurship

TACTICS FOR ENHANCING

Create a Learning Atmosphere

condition is the creation of redundancy through cognitive learning, where newly

Avoid Heedless Interactions

A complementary approach to organizational learning is “heedful performance,”

The cultivation of heedful behavior, especially in an atmosphere that supports

One of the aims of creating a learning environment is to generate conditions in

reflective atmosphere of action learning through several strategies that elicit

TACTICS FOR STUDYING

Comparing Learning in New Ventures versus Large Organizations

Much of our analysis of Behavioral, Cognitive, and Action learning revolved

greater sharing of information, a greater breadth of strategic interpretations, or a

Examining Learning Processes in Entrepreneurial Firms

mental models, shared assumptions, and cognitive processes associated with

The Levels-of-Analysis Issue: Learning in Nascent Firms

A close reading of our essay reveals a thorny theoretical challenge in distinguish-

Lundberg, C. (1995). Conceptual issues in organizational learning. International Journal of Organiza-

Keith H. Brigham and Julio O. De Castro

Cognitive Approaches to Entrepreneurship Research