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o Academy ol Managemenl fleview 2000. Vol.25, No. 1,217-226. We acknowledge the helpiul comments ol Ed Roberts on on earlier drqft ol this note. The cuthors contributed egucrlly qnd <rre listed olPhcbeticollY' NOTE THE PROMISE OF ENTREPRENEURSHIP AS A FIELD OF RESEANCH SCOTT SHANE UniversitY of MclryIcrnd S. VENKATARAMAN UniversitY of Virginic To dqte, the phenomenon ol entrepreneurship hqs lclcked c conceptuql lromework' In this note we drqw upon previous reseqrch conducted in the dillerent socicrl science disciplines cnd cpplied lields of business to creqie cr conceptucrl frqmework lor the field. With this frqmework we explcin a set ol empiriccrl phenomen<r and predict c set of outcomes not explained or piedicted by conceptucrl frqmeworks <rlreody in exis- tence in other fields. For a field of sociql science to hcrve useful- ness, it must have a conceptuql lrqmework thqt explcins cnd predicts ct set of empiriccll phe- nomenq not explained or predicted by concep- tuql frqmeworks alrecrdy in existence in other fields. To dqte, the phenomenon of entrepre- neurship has lqcked such q concePtuql frqme- work. Rsther thqn explaining qnd predicting c unique set of empiricql.phenomens, entrepre- neuiship hqs become .' brocd lobel under which cr hodgepodge of research is housed' Whclt clp- peqrs to constitute entrepreneurship reseqrch iodcy is some qspect ol the setting (e'g" small businesses or new {irms), rqther thqn cr unique conceprtuol domain. As.cr result, many people hqve hld trouble identifying the distinctive con- tribution of the field to the brodder domcrin of business studies, undermining the,field's legit- imcrcy. Resecrrchers in other fields &sk why en- trepreneurship reseorch is necessary il it does ,roi explain or predict empirical phenomenq be- yond whqt is known from work in other fields' irlor"ot"r, the lclck ol o conceptual lramework hos precluded the. development of qn under- stcrnding of mdny important phenomenq not crd- equately exploined by other fields' One example of this problem is the focus in the entrepreneurship literqture on the relctive perlormqnce of individuqls or firms in the con- iext of sm61ll or new businesses. Since strotegic mqnqgementscholqrsexqminethedi f ferences in qnd sustqinqbility of relqtive Periormqnce be- tween competitive lirms, this qpproqch is not unique (Venkqtcrsmcn, 1997)' Moreover' the op- proclch does not provide crn cdequate test oI entrepreneurship, since entrepreneurship is .or..irr"d with the discovery cnd exploitation of profitable opportunities' A perlormsnce cld- vcntage over other firms is not a sufficient mecr- sure of entrepreneuricrl performqnce, beccruse cr performcrnce advcntoge mqy be insuflicient to compensclte for the opportunity cost of other cll- ternatives, c liquidity premium for time ond cop- ital, crnd a premium Ior uncertointy beoring' Therefore, qlihough c conceptucrl lrqmework to exploin crnd predict relative performance be- tween firms is useful to strategic mcrncrgement' it is not sufficient for entrePreneurship' We attempt on integrcting frcmework for the en t repreneursh ip l i e ld in the fo rmof th i sno te . we believe thqt this lramework will help entre- preneurship researchers recognize the relation- rfrip qmong the multitude of necessqry' but not sufficient, fcrctors thqt compose entrepreneur- ship, clnd thereby cdvcrnce the qucrlity o{ empir- icqi ond theoreticcrl work in the field. By provid- ing ct f rqmework thqt both sheds l ight on unlxplclined phenomena qnd enhcnces the qucliiy of resecrch, we seek to enhcrnce the field's legitimocy cnd prevent its mcrrginolizq- 217 Academy ol Management Review Icnucry ploitot ion of opPortunit ies; qnd the set of indi ' viduols who discover, evqluclte, ond exploit them. Although the phenomenon of entrepreneur- ship provides resecrch questions lor mony dif- ferent scholcrly fields,l orgonizotion scholclrs are {undclmentcllly concerned with three sets of resecrrch questions qbout entrepreneurship: (l) why, when, qnd how opportunities for the creotion of goods qnd services come into exis- tence; (2) why, when, crnd how some people ond not others discover ond exploit these opportuni- ties; and (3) why,when, cnd how dilferent modes of qction are used to exploit entrepreneuricl op- portunities. Before reviewing existing reseqrch to cnswer these questions, we provide several cqvects about our qpProqch. First, we tqke c disequilib- rium qpproach, which dilfers from equilibrium approctches in economics (I(hilstrom & Lqflont, 1979) qnd social psychology (McClellqnd, 196l)' In equilibrium models, entrepreneuriql opportu- nities either do not exist or qre qssumed to be rcrndomly distributed ctcross the population. Be- ccuse people in equilibrium models cqnnot dis- cover opportunities thot diIIer in vcrlue from those discovered by others, who becomes sn entrepreneur in these models depends solely on the qt t r ibutes of people. For excrmple, in Khi ls t rom cnd Laf font 's (1979) equi l ibr ium model, entrepreneurs qre people who prefer un- certointy. Although we believe thot some dimensions of equilibrium models crre useful lor understand- ing entrepreneurship, we qrgue that these mod- els crre necessorily incomplete. Entrepreneurial behqvior is trcrnsitory (Corroll & Mosakowski, 198fl. Moreover, estimctes of the number of peo- ple who engage in entrepreneuricrl behqvior rqnge {rom 20 percent of the population (Reyn- olds & White, 1997) to over 50 percent (Aldrich & Zimmer, 1986). Since cr lorge qnd diverse grouP ol people engqge in the trcpsitory process of entrepreneurship, it is improbable thqt entrepre- neurship ccrn be explcrined solely by re{erence to q chqrcrcteristic of certqin people independent of the situqtions in which they find themselves. Therefore, when we qrgue thqt some people crnd I For exqmple, economists qre interested in the distribu- tion ol entrepreneuriql tqlent ocross productive cnd unpro- ductive qctivities (Bqumol, 1996). 218 tion crs only "cr reseorch setting" or "tecching cpplication." The note proceeds qs follows. First, we define the domcin ol the field. Second, we explcin why organizctionql reseqrchers should study entre- preneurship. Third, we describe why entrepre- neurial opportunities exist cnd why some peo- ple, cnd not others, discover qnd exploit those opportunities. Fourth, we consider the dif{erent modes of exploitqtion ol entrepreneuriql oppor- tunities. Finclly, we conclude with brief reflec- tions on the potenticrl vqlue o{ the frqmework presented here. DEFINITION OF ENTREPRENEURSHIP Perhops the lcrgest obstqcle in creoting c con- ceptucl f rqmework for the entrepreneurship field hos been its definit ion. To dqte, most re- seqrchers hqve defined the Iield sole/y in terms of who the entrepreneur is crnd what he or she does (Venkotqrcrmqn, 1997). The problem with this crpprocrch is thot entrepreneurship involves the nexus ol two phenomenq: the presence of lucrctive opportunities cnd the presence of en- terprising individuqls (Venkqtqrqmqn, 1997). By delining the l ield in terms of the individuql crlone, entrepreneurship researchers hcve gen- erqted incomplete definitions thct do not with- stcnd the scrutiny of other scholars (Gcrrtner, 1988). The definition of qn-entrepreneur cls c person who establishes cr new orgonization is cn exqm- ple of this problem. Becquse this definit ion does not include considerqtion of the vqriation in the quclity of opportunities thct different people identify, it leods resecrchers to neglect to mea- sure opportuni t ies. Consequent ly, empir iccl l support (or lcck o{ support) for qttributes thcrt diflerentiate entrepreneurs from other members ol society is often questionqble, beccruse these attributes conlound the influence of opportuni- ties ond individuals.In contrcrst to previous reseclch, we define the field of entrepreneurship os the scholclrly excm- incrtion of how, by whom, qnd with whclt eflects opportunities to create future goods and ser- vices crre discovered, evqluqted, cnd exploited (Venkqtqrctmcn, 1997). Consequently, the field involves the study of sources of opportunities; the processes of discovery, evqlucrtion, qnd ex- 219 2000 Shqne qnd Venkqtqroman not others engctge in entrepreneuriol behovior' we cre describing the tendency o{ certqin peo- ple to respond to the situqtionql cues of oppor- tunities-not CI stqble chqrqcteristic that differ- entiates some people from others ccross all situations.2 Second, we argue thot entrepreneurship does not require, but can include, the creqtion of new orgcrnizcrtions. As Amit, Glosten' clnd Mueller (1993) qnd Cqsson (1982) explqin' entrepreneur- ship ccrn qlso occur within qn existing orgcrnizcr- tion. Moreover, opportunities can be sold to other individucrls or to existing organizqtions. In th i sno tewedono texqmine thecreq t iono fnew orgcrnizotions per se but, rqther' refer interested recrders to excellent reviews on firm creqtion in trgonirationcrl ecology (Aldrich' lgg0; Singh & Lr imsden, I990) , economics (Cqves ' 1998; Geroski, 1995), and organizqtionql theory (Gart- ner, 1985; Kqtz & Gcrrtner, 1988; Low & MocMil- lan, 1988).3 Third, our lrqmework complements sociologi- c a l a n d e c o n o m i c w o r k i n w h i c h r e s e q r c h e r s hcrve examined the populction-level fsctors that influence lirm creqtion' Stinchcombe (1965) iden- tified societal factors thcrt enhcnce incentives to orgcnize <rnd orgonizing cbility. Aldrich (1990) on-d Sirrgh cnd Lumsden (1990) hqve provided reviews ol factors enhoncing firm foundings cnd hcrve described the effects of such lqctors as environmentcll ccrrrying cclpclcity' interpopulcr- tion processes, qnd institutional factors' Simi- lorly, Baumol (1996) has related the institutioncl environment to the supply of people who are willing to creqte firms' Atthough thes6 other fromewotks crre vcrlu- oble to entrepreneurship scholcrs' they igii'olve cr set of issues different from those with which we cre concerned- Our frqmework diflers from these in thct (I) we focus on the existence' dis- covery, cnd exploitation of opportunities; (2) we "*o*irr. the influence ol individuals cnd oppor- tunities, rather thqn environmentql antecedents and, consequences; qnd (3) we consider a frame- work brocrder thcrn lirm ereqilott' Fourth, our frcrmework <rlso complements re- secrrch on the Process ol firm creotion (e'9" Gcrrt- ner, 1985; Katz & Gortner, 1988; Kqtz' 1993)' Ex- plclining this process is importcrnt' but reseqrch on it involves exqmining o different set of issues Irom those we explore' Firm crecrtion process researchers exqmine resource mobilization' firm orgcnizing, ond mcrrket moking' stcrrting with the cssumption that opportunities exist' hcrve been discovered, crnd will be exploited through the creqtion oi new firms' Since we lcrck the spqce to review both the processes of entrepre- neursh ip th rough mqrke t mechon isms cnd through firm creqtion, we limit our discussion to the conditions under which entrepreneuricrl op- portunities qre exploited through firms and mar- kets, qnd we refer recrders to these other Ircrme- works for informcrtion on the process of iirm crecrtion. WHY STUDY ENTREPRENEURSHIP? Mony scholcrrs ask, either implicitly or explic- itly, why qnyone should study entrepreneurship' oatc (Ire difficult to obtqin, theory is underde- veloped, cnd mqny Iindings to dqte qre the scme qs those obtained in other creqs of busi- ness. In response, we offer three reqsons for studying the topic. First, much technicol infor- mation is ultim;tely embodied in products crnd services (Arrow, 1962), and entrepreneurship is o mechqnism by which society converts techniccrl informcrtion into these products and services' Second, entrepreneurship is c mechcrn ism throughwhichtemporalcrndspct io l ine{ l ic ien- cies in qn economy crre discovered clnd miti- goted (Kirzner, 1997). Finclly' o{ the different Jour""" of chonge in o ccrpitcrlist society' Schum- peter (I934) isolclted entrepreneuricrlly driven in- novction in products and Processes crs the cru- c ic l l engine dr iv ing the chclnge process ' Therefore, the absence of entrepreneurship from our collective theories of mqrkets' firms' orgcni- zotions, ond chcnge mcrkes our understanding of the business londscope incomplete' As Bcru- mol eloquently remcrks, the study of business without on,rrrd"rstanding of entrePreneurship is like the study of Shakespecre in which "the Prince of Denmqrk has been expunged from the discussion of Hcrmlet" (1989: 66)' 2 We qlso orgrue thot entrepreneurship con be undertsken by a single individuol or a set ol people who undertqke the ,Lp. of ihe Process collectively or independently' 3 Mcny reseqrchers qrgue thot entrepreneurship occurs for reosons other thcn for profit (see Roberts' l99l' for q review), but we discuss only for'profit entrepreneurship' 220 THE EXISTENCE, DISCOVERY, AND EXPLOITATION OF ENTNEPRENEURIAI OPPORTUNITIES The Existence of Entrepreneuricrl Opportunities To hcrve entrepreneurship,you must first hcve entrepreneuricrl opportunities. Entrepreneuriql opportunities crre those situations in which new goods, services, rqw mqteriqls, cnd orgcnizing methods cqn be introduced and sold crt greoter thcrn their cost of production (Cosson, lg82). Al- though recognition of entrepreneuriol opportu- nities is a subiective process, the opportunities themselves crre objective phenomenq that clre not known to clll pcrties qt crll times. For exam- ple, the discovery of the telephone creqted new opportunities for communiccrtion, whether or not people discovered those opportunities. Entrepreneurial opportunities dif{er from the lcrrger set of oll opportunities for profit, porticu- lorly opportunities to enhonce the elficiency of existing goods, services, rqw mqtericrls, crnd or- gcnizing methods, beccuse the lormer require the discovery of new meons-ends relcrtionships, whereqs the lctter involve optimizction within existing meqns-ends lrameworks (Kirzner, 1997). Beccruse the rcnge of options ond the conse- quences o{ exploiting new things are unknown, entrepreneuricr l decisions cqnnot be made through an optimizqtion process in which me- chqnicql cqlculations crre made in response to q given set of qlternqtives (Bcrumol, 1993). Entrepreneurial opportunities come in cr vclri- ety of forms. Although the focus in most prior research has been on opportunities in product morkets (Venkqtqrqmqn, I997), opportunit ies crlso exist in factor mqrkets, as in the cqse of the discovery of new mclteriqls (Schumpeter, 1934). Moreover, within product mqrket entrepreneur- ship, Drucker (1985) hos described three diflerent categories of opportunities: (l) the creation of new informqtion, qs occurs with the invention of new technologies; (2) the exploitction of market inefliciencies thqt result lrom informqtion osym- metry, crs occurs qcross time ond geography; and (3) the reaction to shilts in the relqtive costs crnd benefits of qlternqtive uses lor resources, cts occurs with pol i t icol, regulotory, or demo- graphic changes. Previous resecrrchers hqve orgued thcrt entre- preneuricl l opportunit ies exist primari ly be- cquse different members of society hcve difler- ent beliefs crbout the relqtive vcrlue of resources, Acodemy ol Management Review Icnucrry given the potentisl to transform them into c dil- ferent stqte (Kirzner, 1997). Becquse people pos- sess different beliefs (becquse ol q lucky hunch, superior intuition, or privote informcrtion), they mqke diflerent conjectures about the price ot which markets should cleqror obout whqt pos- sible new mqrkets could be creqted in the future. When buyers crnd sellers hqve different beliefs crbout the vqlue of resources, both todcy qnd in the future, goods crnd services ccrn sell qbove or below their mcrgincl cost of production (Schum- peter, I934). An entrepreneuricrl discovery occurs when someone makes the conjecture thqt o set o{ resources is not put to its "best use" (i.e., the resources ctre priced "too low," given c belief about the price qt which the output lrom their combinqtion could be sold in qnother loccrtion, of qnother time, or in qnother form). I{ the con- jecture is qcted upon qnd is correct, the individ- ucrl will ecrn qn entrepreneuricl profit. If the conjecture is scted upon crnd is incorrect, the individual will incur cn entrepreneuricll loss (Casson, 1982). Entrepreneurship requires thct people hold different beliefs qbout the vcrlue of resources for two recrsons. First, entrepreneurship involves joint production, where severql different re- sources have to be brought together to creqte the new product or service. For the entrepreneur to obtqin control over these resources in cr way thct makes the opportunity profitoble, his or her con- jecture about the qccuracy of resource prices must difler from those of resource owners and other potenticl entrepreneurs (Casson, 1982). II resource owners hcd the sqme conjectures cts the entrepreneur, they would seek to cppropri- cte the prolit from the opportunity by pricing the resources so thqt the entrepreneur's profit cp- proached zero. There{ore, for entrepreneurship to occur, the resource owners must not shore completely the entrepreneur's conjectures. Sec- ond, if qll people (potenticl entrepreneurs) Pos- sessed the sctme entrepreneurihl conjectures, they would compete to copture the sqme entre- preneuriol profit, dividing it to the point that the incentive to pursue the opportunity was elimi- ncrted (Schumpeter, I934). But why should people Possess different be- liefs qbout the prices at which mqrkets should clecrr? Two ctnswers hqve been offered. First, crs Kirzner (1973) has observed, the process of dis- covery in q mcrrket setting requires the portici- ponts to guess ecrch other's expectcrtions crbout cr 22r Shqne ond Venkotqtamsn wide variety ol things' People mqke decisions o n t h e b o s i s o l h u n c h e s , i n t u i t i o n ' h e u r i s t i c s ' qnd qccurqte qnd inqccurqte informcrtion, cctus. ing their decisions to be incorrect some of the tirie. Since decisions ctre not qlw.'ys correct' this process leads to "errors" thqt crecrte shortcges' !,-,rft,rr.s, clnd misallocated resources' An indi- vidlcl <rlert to the presence of qn "error" may buy resources where prices cre "too low"'recom- bine them, crnd sell the outputs where prices are "too high." Secoid, crs Schumpeter (1934) exploined' econ- omies opercrte in cr constqnt stqte o{ disequilib- rium. Technologiccl, politiccl' socicrl' regulcrtory' and other types of chcrnge offer cr continuous supply of new information about different ways to use resources to enhqnce wecrlth' By mclking it possible to trqnsform resources into a more vcrluoble form, the new informqtion alters the vcrlue of resources ond, therefore' the resources' proper equilibrium price' Becquse informction is i*p.rf""ily ditttibuted, qll economic qctors do not receive new inlormqtion at the scrme time' Consequently, some people obtain information before others about resources lying fallow' new discoveries being mcde, or new mcrrkets oPen- ing up. II economic qctors obtain new informa- tion before others, they cqn purchcrse resources crt below their equilibrium vcrlue cnd ecrn cn entrepreneurial profit by recombining the re- "our"L= crnd then selling them (Schumpeter' 1934). The informationql sources of opportunity mqy be easier to see in the cqse ol new technologry' buttheyneednot'berestr ictedtotechnologiccl developments. For exqmple' the productign of themovieTi tonicgenerct tednewinforr r icr t ion qbout who wcts ct desirsble teen idol' An entre' pr.rr.,r, could respond to this new informqtion ty acting on the conjecture thcrt posters o{ Leo- nclrdoDeCcpriowouldsel l forgreoterthsntheir cost of Production' Beccruse entrepreneuricrl opportunities de- pend on qsymmetiies of igforfiction qnd beliefs' Lventucrlly, entrepreneuriql opportunities be- come cost inefficient to pursue. First, the oppor- tunity to eqrn entrepreneuricrl profit will provide an incentive to mqny economic crctors' As oppor- tun i t i esc r reexp lo i ted , in lo rmot iond i { Iuses to other members of society who cqn imitqte the innovator qnd crppropriqte some o{ the innova- tor's entrepreneuricl profit' Although the entry of imitating entrepreneurs initiclly mcly validate the opportunity and increctse overall demcrnd' "o*p.i i t iott eventuol ly begins to domincrte (Honnon & Freemcn, 1984)' When the entry ol qddit ioncl entrepreneurs reaches ct rcrte crt which the bene{its from new entrcrnts exceeds the costs, the incentive for people to pursue the opportunity is reduced, becquse the entrepre- ,rl,-,riol profit becomes divided qmong more crnd more crctors (SchumPeter, 1934)' Second , theexp lo i to t iono foppor tun i t y .p ro - vides informqtion to resource providers obout the vqlue oI the resources thqt they possess ond lecrds them to rqise resource prices over time' in order to ccpture some of the entrepreneur's prolit for themseives (Kirzner' 1997)' In short' the diffusion of inlormation qnd leqrning qbout the o""uro"y of decisions over time' combined with the lurs of profit, will reduce the incentive for people to pursue any given opportunity' The durcltion ol cny given opportunity de- pends on ct vcrriety of lcctors' The provision of *orropoly rights, cs occurs with pcrtent protec- tion or qn exclusive contrqct' increcrses the du- ration. Similcrly, the slowness of iniormation dilfusion or th; Icgs in the timeliness with which others recogrnize informction also in- creose the durotion, porticulclrly il time provides reinforcing odvantoies, such qs occur with the adoption tf technicql stqndqrds or lecrning ",r-L". Fincrlly, the "inability of others (due to vcrrious isolcting mechsnisms) to imitqte' sub- stitute, trade for or ccquire the rcrre resources iequired to drive down the surplus" (Venkcrtqrq- *ot, 1997: I33) increcses the durqtion' The Discovery of Entrepreneuriql Opportunities Although on opportunity for entrepreneuriol profit milnt exisi,- cln individuol cqn eorn this irofit ont if he or she recognizes thqt the oppor- iunity exists and has value' Given thclt cn osym- metry ol belieis is a precondition for the exis- tence of entrepreneuricr l opportunit ies' al l opportunities must not be obvious to everyone crII of the time (Hayek, 1945)' At cny point in time' only some subset tt tttt popul<rtion will discover a given opportunity (Kirzner' 1973)' iVfty do some petple crnd not others discover pcrticulcrr entrepreneurial opportunities? Al- ihough the nuII hypothesis is blind luck' re- seqrch hos suggttita two brocrd ccrtegories of fcrctors that influence the probcrbility thct portic- ulqr people will discover pcrrticular opportuni- 222 ties: (l) the possession of the prior inlormqtion necessqry to identify cln opportunity and (2) the cognitive properties necessary to vcrlue it. Inlormction corridors. Humcrn beings cll pos- sess different stocks of in{ormcrtion, and these stocks oi informqtion inlluence their ability to rec- ognize pcrticular opportunities. Stocks ol informq- tion creqte mentql schemcrs, which provide c frcrmework for recognizing new information. To recognize crn opportunity, cn entrepreneur hqs to hcrve prior informqtion that is complementcry with the new information, which triggers crn entrepre- neurial conjecture (Kcrish & Gilcrd, 1987). Thisprior in{ormqtion might be obout user needs (Von Hip- pel, 1985) or specilic crspects of the production function (Bruderl, Preisendorfer, & Ziegler, 1992). The inlormation necessqry to recognize crny given opportunity is not widely distr ibuted qcross the populotion beccruse of the specializcr- tion of informqtion in society (Hcyek, 1945). Peo- ple specialize in inlormqtion because specicrl- ized informcrtion is more useful thon genercl inlormqtion for most crctivities (Becker & Mur- phy, 1992). As q result, no two people share cll of the some inlormqtion qt the same time. Rother, information about underutilized resources, new technologry, unscrted demqnd, qnd politiccl cnd regulcrtory shifts is distributed qccording to the idiosyncratic life circumstcrnces ol each person in the populction (Venkcrtcrrqmcn, 1997). The development ol the Internet provides c uselul example. Only cr subset of the population hcrs had entrepreneurial conjectures in response to the development ol this technologi'y. Some people still do not know whqt the Internet is or thct profitable opportunities exist to exploit it. Cognitive properties. Since the discovery of entrepreneuriql opportunities is not cn optimi- zcrtion process by which people mcrke mechqni- cql cqlculqtions in response to a given o set oI alternqtives imposed upon them (Bqumol, 1993), people must be qble to identify new mecrns-ends relationships that qre genercted by c given chcnge in order to discover entrepreneuricrl op- portunities. Even if c person possesses the prior informcrtion necessqry to discover qn opportu- nity, he or she mcry fail to do so becquse of qn incbility to see new meqns-ends relqtionships. Unfortunately, visualizing these relqtionships is dilficult. Rosenberg (1994) points out thcrt history is rife with excmples in which inventors fqiled to see commercial opportunities (new mecns- ends relationships) thqt resulted from the inven- Acodemy of Monogement Review tion ol importont technologies-from grcph to the lqser. Jcnucry the tele- Prior resecrrch hcrs shown thot people differ in their crbility to identify such relqtionships. For excrmple, reseqrch in the field of cognitive sci- ence hqs shown thot people vqry in their obili- ties to combine existing concepts crnd informc- tion into new ideqs (see Ward, Smith, & Vqid, I997, for seversl review articles). Recently, c few reseqrchers hqve begun to evqluqte empiricclly the role that cognitive properties plcy in the discovery ol entrepreneuricl opportunities (see Busenitz & Barney, lgg6; Kcish & Gilcrd, 1991; Shcrver & Scott, l99t). For exqmple, Sorcsvathy, Simon, qnd Lqve (1998) hqve shown thqt success- ful entrepreneurs see opportunities in situations in which other people tend to see risks, wherecrs Bcrron (in press) hcs found thot entrepreneurs may be more likely thon other persons to dis- cover opportunities becquse they are less likely to engcge in counterfactuol thinking (i.e., less likely to invest time and eflort imcging whct "might hcrve been" in q given situqtion), less likely to experience regret over missed opportu- nities, qnd qre less susceptible to inqction iner- t iq. The Decision to Exploit Entrepreneurial Opportunities Although the discovery of an opportunity is c necessqry condition for entrepreneurship, it is not sufficient. Subsequent to the discovery oI qn opportunity, cr potential entrepreneur must de- cide to exploit the opportunity. We do not hqve precise figrures on the aborting ol discovered opportunities, but we do know thct not all dis- covered opportunities are brought to fruition. Why, when, crnd how do some people and not others exploit the opportunities thct they dis- cover? The qnswer agoin qppecrrs to be q func- tion of the joint characteristics of the opportunity qnd the ncture of the individualffenkctcrcmqn, r997). Nqture oI the opportunity. The chqrcrcteristics of opportunities themselves inlluence the will- ingmess of people to exploit them. Entrepreneur- icl opportunities vqry on severcrl dimensions, which influences their expected value. For ex- crmple, c cure for lung ccncer has greoter ex- pected vcrlue thon does q solution to students' need for snqcks crt cr locql high school. The ex- ploitction of crn entrepreneurial opportunity re- Shone ond Venkqtsrsman quires the entrepreneur to believe that the ex- i""t"d value of the entrepreneuricrl profit will be iorg. enough to compensate for the opportunity cos't oI other qlternqtives (including the loss of leisure), the lack of liquidity ol the investment o{ time crnd money, ond cr premium lor becring uncertainty (Kirzner, 1973; Schumpeter' 1934)' To dqte, reseorch has shown thot' on qvercge' entrepreneurs exploit opportunit ies hoving highei expected vqlue' In porticulor' exploita- tion is more common when expected demclnd is Icrge (Schmookler, 1966; Schumpeter' 1934)' in- duJtty profit mcrrgins ore high (Dunne' Roberts' & Samuelson, 1988), the technology lile cycle is young (Utterbcrck, 1994), the density of competi- iion itt a pcrrticulclr opportunity sPqce is neither too low nor too high (Hclnnan & Freeman' 1984)' the cost of ccrpitcl is low (Shcne' 1996)' cnd pop- ulcrtion-level learning from other entrcrnts is ovcriloble (Aldrich & Wiedenmeyer' 1993)' Individual differences. Not cll potentiol entre- preneurs will exploit opportunities with the sctme expected vcrlue' The decision to exploit crn opportunity involves weighing the vqlue of the oplortunity crgcinst the costs to generclte thqt ',rli.r" cnd the costs to generate vcrlue in other wctys. Thus, people consider the opportunity "o=i of pursuing alternqtive qctivities in mcrking the decision whether or not to exploit opportuni- ties qnd pursue opportunities when their opPor- tunity cost is lower (Amit, Mueller' & Cockburn' 1995; Reynolds, 1987)' In cddition' people con- s ider thei rcostsforobta in ingtheresourcesnec. essary to exploit the opportunity' For excrmple' E'rans cnd Leighton (1991) showed thqt the ex- ploitcltion of opportunities is more - corn'lnon *t "n people hcrve grecter fincrnciql ccpitol' Similcily, Aldrich .'nd Zimmer (1986) reviewqd resecrrch findings thot showed thclt stronger so- cicl ties to resource Providers lcrcilitate the crc- quisition of resources and enhcrnce the proba- litity ol opportunity exploitotion' Furthermore' Coop"r, W;, and Dunkelberg (1989) found thqt p"ofl" cre more likely to expGit opportunities iI ifr"y hcrve developed useful informcrtion lor en- trepreneurship from their previous employment' pr"=.r*obly beccuse such informcrtion reduces ihe cost of opportunity exploitation. Fincrlly, the transferqbitity ol informqtion from the prior ex- perience to the opportunity (Cooper et ql" 1989)' l" well cs prior entrepreneurial experience (Ccrrroll & Moscrkowski, I987)' increcrses the probobility of exploitction ol entrepreneuricrl lpportunity becouse lecrrning reduces its cost' The decision to exploit crn entrepreneuri:J.:p- portunity is qlso inlluenced by individucrl differ- ences in perceptions' The crecrtion of new prod- ucts and markets involves downside r isk ' beccruse time, effort, and money must be in- vested before the distribution of the returns is known (Knight, I92I; Venkcrtcrrqmqn' 1997)' Sev- ercrl reseqrchers have crrgued thcrt individucrl differences in the willingness to bear this risk inlluence the decision to Lxploit entrepreneuriql oppor,lr"ities (Khilstrom & Lq{font' I979; Knight' f 0if l. For exqmple, people who exploit opportu- nities tend to lrqme informqtion more positively qnd then respond to these positive perceptions (Pqlich & BogbY, 1995)' The decisionio exploit entrepreneuriol oPfor- tunities is ciso influenced by individual differ- ences in optimism. People who exploit opportu- n i t i es t yp ico l l y pe rce ive the i r chqnces o f success o,*u,"h high"t thon they reolly ol"- qnd much higher thtn those of others in their industry (CoJper, Woo' & Dunkelberg' 1988)' Mo,eo,,er, when these people crecrte new firms, they often enter industries in which scqle econ- o-i"" Play cn importcrnt role qt less thqn mini- mum efficient ="o1" (Audretsch' 199I)' cnd they enter industries crt rates exceeding the equilib- rium number of lirms (Gort & Klepper' I982)'a However, in most industries' ct most points in time, most new firms fcril (Dunne et crl'' 1988)' crnd Iew firms ever displclce incumbents (Audretsch' 199I), suggesting that people who exploit oppor- tunities, on qvercge, cre overly optimistic qbout the vcrlue o{ the oplortunities they discover' This overoptimism mot-ittcttes the exploitction of op- port,-,rrity by limiting informqtion' stimulcting rosy forecqsts of t t t t future (Kclhnemqn & Lovcrllo, 1994), triggering the seqrch for rela- ti.r.ty small o*o""tt of inlormcrtion (Kclish & Gilod, I99I), and leoding people to cct lirst crnd onclyze lqter (Busenitz & Bcrney' 1997)' Otir., individual differences mqy be impor- tant in exploining the willingness to exploit op- portuniti.r. R"=.Lrchers have orgued thot peo- ple with grecrter self-efficcrcy crnd more.internol io",r, of control qre more likely to exploit oppor- tunities, becquse exploitction requires people to o The iniormotion signcls generated by the entrepreneur- iol process crre weqk' qct in the {qce ol skepticism of others (Chen, Greene, & Crick, 1998). Similarly, opportunity ex- ploitcltion involves cmbiguity, cnd people who hqve cr greater tolerqnce for ambiguity moy be more likely to exploit opportunities (Begley .& Boyd, 1987). Finclly, the exploitqtion of opportu- nity is cl setting in which people ccrn qchieve, providing c vcluoble cue for those who possess c high need for cchievement (McClellqnd, I96l). Consequently, those who qre high in need for qchievement moy be more l ikely thcn other members of society to exploit opportunities. Readers should note thot the ottributes that increqse the probabil ity ol opportunity exploita- tion do not necesscrily increcrse the probcbility of success. For excmple, overoptimism might be qssocicrted with cr higher probcrbility of both ex- ploitation and fcilure. Of the populction of indi- viducrls who discover opportunities in a given industry, those who qre pessimistic mc:y choose not to exploit discovered opportunities becquse they more sccurqtely estimcte whct it wil l tclke to compete qnd how mqny other people will try to do similcrr things. Overoptimistic individuols do not stop themselves from exploit ing these opportunities, becquse their overoptimism lim- its in{ormqtion and motivcrtes rosy foreccrsts of the future. MODES OF EXPLOITATION Another criticcl question concerns how the ex- ploitction o{ entrepreneurial opportunities is or- gcrnized in the economy. Two mcjor institutioncl crrrqngements for the exploi tct ion of these opportunities exist-the creqtion of new {irms (hierarchies) qnd the sqle ol opportunities to ex- ist ing f i rms (mqrkets)-but the common crs- sumption is thct most entrepreneuricll octivity occurs through de novo stcrtups. However, peo- ple within orgcrnizqtions who discover opportu- nities sometimes pursue those opportunities on behall of their existing orgonizctions and some- times estqblish new orgonizctions, whereos independent qctors sometimes sell their oppor- tunities to existing organizations crnd some- times estoblish new organizctions to pursue the opportunities. Reseorch shows thot the choice of mode de- pends on the nqture of the industriql orgcnizcr- tion, the opportunity, clnd the cppropriobility re- gime. Reseqrch in industrial orgcrnizqtion hcrs Academy ol Monagement Review Ionuory shown thqt entrepreneurship is less likely to take the form oI de novo stcrtups when ccpitol mcrrket imperfections mqke it diflicult for inde- pendent entrepreneurs to secure finqncing (Co- hen & Levin, 1989). Entrepreneurship is more likely when the pursuit of entrepreneuricl op- portunity requires the elfort oI individuqls who lcck incentives to do so in lcrge organizations; when scqle economies, first mover crdvontcges, and leqrning curves do not provide cdvcntcges to existing firms (Cohen & Levin, lg89); qnd when industries hcrve low bqrriers to entry (Acs & Audretsch, 1987). Reseqrch on the cppropri- cbility of inlormqtion has shown thot entrepre- neurship is more likely to tcrke the {orm of de novo stcrrtups when informcrtion cqnnot be pro- tected well by intellectucl property lcws, inhib- iting the sale of entrepreneuriql opportunities (Cohen & Levin, 1989). Finolly, resecrrch on the nqture of opportunities hqs shown thqt entrepre- neurship is more likely to take the form of de novo stortups when opportunities ctre more un- certoin (Ccrsson, 1982), when opportunities do not require complementcry crssets (Teece, l986), qnd when opportunities destroy competence (Tushman & Anderson, 1986). CONCLUSION Entrepreneurship is qn importcnt ond rele- vqnt field of study. Although those in the field fqce mqny difficult questions, we hove pre- sented a frqmework for exploring them. We rec- ognize thqt we mqy have offered some uncertqin assumptions, potenticlly flcwed logical argu- ments, or hove made stqtements that will prove, ultimoteiy, to be inconsistent with datc yet to be collected. Nevertheless, this frqmework pro- vides a stclrting point. Since it incorporcrtes in- formqtion gclined from many disciplinary van- tage points and explored ' through many dillerent methodologies, we hope thqt it will prod scholqrs from mqny dif{erent fields to join us in the quest to crecrte a systemqtic body o{ inf ormotion qbout entrepreneurship. Mcrny skeptics clcim thqt the creqtion of such a body ol theory qnd the subsequent qssembly of empiri- ccl support for it qre impossible. We hope thct other scholqrs will join our ef{ort to prove those skeptics wrong. 225 2000 Shane qnd Venkqtqrqman REFERENCES Acs, 2., & Audretsch, D. 1987. Innovcrtion, market structure' ond Iirm size. Eeview oI Econornics ond Stotistics' 7l: 567-574. Aldrich, H. 1990. using crn ecologicol perspective to study orgonizotionql loundingrctes'EntrepreneurshipTheory ond Prsctice, SPring: 7-24' Aldrich. H.. & wiedenmeyer, G. 1993. From traits to rotes: Anecologicclperspectiveonorgonizotionol loundings. 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The distinctive domoin of entrepre- neurship reseorch: An editor.s perspective. In I. Kqtz & R. Brockhaus (Eds.), Advqnces in entrepreneurship, firm ernergence, and growth, vol. 3: llg_13g. Greenwich, CT: IAI Press. Von Hippel, E. 1986. Lead users: A source oi novel product concepts. Monagement Science, 32: 7gl_g05. Wqrd, T.. Smith. S., & Void, I. Gds.). 1g97. Crearive rfioughl. wcshington, DC: Americon psychologicol Associatiln. scott Shcrne is qssocicte professor of entrepreneurship in the Robert H. Smith Schoolof Business ond director of reseqrch qt the Dingmcn Center for Entrepreneurship otthe university of Mcrylond. He received his Ph.D. from the University of pennsylvoniq.His current reseorch locuses on entrepreneurship in high-technology settings. s' venkatarcrmqn is the somuel L. Slover Associote Prolessor o{ Business Administrq-tion ond-director oi reseorch ot the Batten Center lor Entrepreneuriol Leodership in the' Dorden Grqduqte School ol Business Administrqtion ot the University of virginic. Hereceived his Ph'D';ftom the University ol Minnesota. His current resecrch Iocuses onentrepreneurship theory. 5
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