o Academy
ol Managemenl
fleview
2000. Vol.25, No. 1,217-226.
NOTE
AS A
THEPROMISEOF ENTREPRENEURSHIP
FIELDOF RESEANCH
SCOTTSHANE
UniversitYof MclryIcrnd
S. VENKATARAMAN
UniversitYof Virginic
c conceptuql lromework' In
To dqte, the phenomenon ol entrepreneurship hqs lclcked
the dillerent socicrl science
in
this note we drqw upon previous reseqrch conducted
frqmework lor the
conceptucrl
cr
creqie
to
business
of
lields
disciplines cnd cpplied
and predict c set
phenomen<r
field. With this frqmework we explcin a set ol empiriccrl
<rlreody in exisfrqmeworks
conceptucrl
by
piedicted
of outcomes not explained or
tence in other fields.
For a field of sociql science to hcrve usefulness, it must have a conceptuql lrqmework thqt
explcins cnd predicts ct set of empiriccll phenomenq not explained or predicted by conceptuql frqmeworks alrecrdy in existence in other
fields. To dqte, the phenomenon of entrepreneurship has lqcked such q concePtuql frqmework. Rsther thqn explaining qnd predicting c
unique set of empiricql.phenomens, entrepreneuiship hqs become .' brocd lobel under which
cr hodgepodge of research is housed' Whclt clppeqrs 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 contribution of the field to the brodder domcrin of
business studies, undermining the,field's legitimcrcy.Resecrrchersin other fields &sk why entrepreneurship reseorch is necessary il it does
,roi explain or predict empirical phenomenq beyond whqt is known from work in other fields'
irlor"ot"r, the lclck ol o conceptual lramework
hos precluded the. development of qn understcrndingof mdny important phenomenq not crdequately exploined by other fields'
One example of this problem is the focus in
the entrepreneurship literqture on the relctive
We acknowledge the helpiul comments ol Ed Roberts on
on earlier drqft ol this note. The cuthors contributed egucrlly
qnd <rre listed olPhcbeticollY'
perlormqnce of individuqls or firms in the coniext of sm61llor new businesses.Since strotegic
mqnqgementscholqrsexqminethedifferences
in qnd sustqinqbility of relqtive Periormqnce between competitive lirms, this qpproqch is not
unique (Venkqtcrsmcn, 1997)'Moreover' the opproclch does not provide crn cdequate test oI
entrepreneurship, since entrepreneurship is
.or..irr"d with the discovery cnd exploitation
of profitable opportunities' A perlormsnce cldvcntage over other firms is not a sufficient mecrsure of entrepreneuricrlperformqnce,beccrusecr
performcrnce advcntoge mqy be insuflicient to
compenscltefor the opportunity cost of other cllternatives, c liquidity premium for time ond copital, crnd a premium Ior uncertointy beoring'
Therefore, qlihough c conceptucrllrqmework to
exploin crnd predict relative performance between firms is useful to strategic mcrncrgement'
it is not sufficient for entrePreneurship'
We attempt on integrcting frcmework for the
entrepreneurshiplieldintheformofthisnote.
we believe thqt this lramework will help entrepreneurship researchersrecognize the relationrfrip qmong the multitude of necessqry' but not
sufficient, fcrctors thqt compose entrepreneurship, clnd thereby cdvcrncethe qucrlity o{ empiricqi ond theoreticcrlwork in the field. By providing ct f rqmework thqt both sheds light on
unlxplclined phenomena qnd enhcnces the
qucliiy of resecrch, we seek to enhcrnce the
field's legitimocy cnd prevent its mcrrginolizq217
218
Academy ol Management
"tecching
"cr
reseorch setting" or
tion crs only
cpplication."
The note proceeds qs follows. First, we define
the domcin ol the field. Second, we explcin why
organizctionql reseqrchers should study entrepreneurship. Third, we describe why entrepreneurial opportunities exist cnd why some people, cnd not others, discover qnd exploit those
opportunities. Fourth, we consider the dif{erent
modes of exploitqtion ol entrepreneuriql opportunities. Finclly, we conclude with brief reflections on the potenticrl vqlue o{ the frqmework
presented here.
DEFINITIONOF ENTREPRENEURSHIP
Perhops the lcrgest obstqcle in creoting c conc ept u c l frq me w o rk fo r th e e ntrepreneurshi p
field hos been its definition. To dqte, most reseqrchers 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 enterprising individuqls (Venkqtqrqmqn, 1997).By
delining the lield in terms of the individuql
crlone, entrepreneurship researchers hcve generqted incomplete definitions thct do not withstcnd the scrutiny of other scholars (Gcrrtner,
1988 ).
The definition of qn-entrepreneur cls c person
who establishes cr new orgonization is cn exqmple of this problem. Becquse this definition does
not include considerqtion of the vqriation in the
quclity of opportunities thct different people
identify, it leods resecrchers to neglect to meas ur e o p p o rtu n i ti e s . C o n s e q u e ntl y, empi ri ccl l
support (or lcck o{ support) for qttributes thcrt
diflerentiate entrepreneurs from other members
ol society is often questionqble, beccruse these
attributes conlound the influence of opportunities ond individuals.
In contrcrst to previous reseclch, we define the
field of entrepreneurship os the scholclrly excmincrtion of how, by whom, qnd with whclt eflects
opportunities to create future goods and services crre discovered, evqluqted, cnd exploited
(Venkqtqrctmcn, 1997). Consequently, the field
involves the study of sources of opportunities;
the processes of discovery, evqlucrtion, qnd ex-
Review
Icnucry
ploitotion of opPortunities;qnd the set of indi'
viduols who discover, evqluclte, ond exploit
them.
Although the phenomenon of entrepreneurship provides resecrch questions lor mony different scholcrly fields,l orgonizotion scholclrs
are {undclmentclllyconcerned with three sets of
resecrrch questions qbout entrepreneurship:
(l) why, when, qnd how opportunities for the
creotion of goods qnd services come into existence; (2) why, when, crnd how some people ond
not others discover ond exploit these opportunities; and (3)why,when, cnd how dilferent modes
of qction are used to exploit entrepreneuricl opportunities.
Before reviewing existing reseqrch to cnswer
these questions, we provide several cqvects
about our qpProqch.First, we tqke c disequilibrium qpproach, which dilfers from equilibrium
approctchesin economics (I(hilstrom & Lqflont,
1979)qnd social psychology (McClellqnd, 196l)'
In equilibrium models, entrepreneuriql opportunities either do not exist or qre qssumed to be
rcrndomly distributed ctcrossthe population. Beccuse people in equilibrium models cqnnot discover opportunities thot diIIer in vcrlue from
those discovered by others, who becomes sn
entrepreneur in these models depends solely on
the qttributes of people. For excrmple, in
K h i l s t r o m c n d L a f f o n t ' s ( 1 9 7 9 )e q u i l i b r i u m
model, entrepreneursqre people who prefer uncertointy.
Although we believe thot some dimensions of
equilibrium models crre useful lor understanding entrepreneurship,we qrgue that these models crrenecessorily incomplete. Entrepreneurial
behqvior is trcrnsitory (Corroll & Mosakowski,
198fl.Moreover,estimctes of the number of people who engage in entrepreneuricrl behqvior
rqnge {rom 20 percent of the population (Reynolds & 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 entrepreneurship ccrnbe explcrinedsolely by re{erenceto
q chqrcrcteristicof certqin people independent of
the situqtions in which they find themselves.
Therefore,when we qrgue thqt some people crnd
I For exqmple, economists qre interested in the distribution ol entrepreneuriql tqlent ocross productive cnd unproductive qctivities (Bqumol, 1996).
2000
Shqne qnd Venkqtqroman
not others engctge in entrepreneuriol behovior'
we cre describing the tendency o{ certqin people to respond to the situqtionql cues of opportunities-not CIstqble chqrqcteristic that differall
entiates some people from others ccross
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' entrepreneurship ccrnqlso occur within qn existing orgcrnizcrtion. Moreover, opportunities can be sold to
other individucrls or to existing organizqtions.In
thisnotewedonotexqminethecreqtionofnew
orgcrnizotionsper se but, rqther' refer interested
in
recrdersto excellent reviews on firm creqtion
&
(Aldrich'
Singh
lgg0;
trgonirationcrl ecology
(
C
q
v
e
s
'
1
9
9
8;
Lrimsden, I990), economics
(GartGeroski, 1995),and organizqtionql theory
ner, 1985;Kqtz & Gcrrtner, 1988;Low & MocMillan, 1988).3
Third, our lrqmework complements sociologicalandeconomicworkinwhichreseqrchers
hcrveexamined the populction-level fsctors that
(1965)ideninfluence lirm creqtion' Stinchcombe
to
incentives
enhcnce
thcrt
tified societal factors
(1990)
Aldrich
cbility.
orgcnize <rnd orgonizing
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' interpopulcrtion processes, qnd institutional factors' Similorly, Baumol (1996)has related the institutioncl
environment to the supply of people who are
willing to creqte firms'
Atthough thes6 other fromewotks crre vcrluoble 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(2) we
covery, cnd exploitation of opportunities;
"*o*irr. the influence ol individuals cnd opportunities, rather thqn environmentql antecedents
and, consequences;qnd (3)we consider a framework brocrder thcrn lirm ereqilott'
2 We qlso orgruethot entrepreneurshipcon be undertsken
undertqke the
by a single individuol or a set ol people who
,Lp. of ihe Processcollectively or independently'
3 Mcny reseqrchers qrgue thot entrepreneurship occurs
(see Roberts' l99l' for q
for reosons other thcn for profit
review), but we discuss only for'profit entrepreneurship'
219
reFourth, our frcrmework <rlso complements
(e'9"
Gcrrtcreotion
secrrch on the Process ol firm
1993)'Exner, 1985; Katz & Gortner, 1988; Kqtz'
plclining this process is importcrnt' but reseqrch
issues
on it involves exqmining o different set of
process
crecrtion
Firm
Irom those we explore'
firm
researchers exqmine resource mobilization'
with
stcrrting
orgcnizing, ond mcrrket moking'
hcrve
the cssumption that opportunities exist'
through
been discovered, crnd will be exploited
the
we
lcrck
Since
firms'
new
the creqtion oi
entrepreof
processes
spqce to review both the
cnd
neurship through mqrket mechonisms
to
discussion
through firm creqtion, we limit our
opthe conditions under which entrepreneuricrl
portunities qre exploited through firms and marIrcrmekets, qnd we refer recrders to these other
iirm
of
process
the
works for informcrtion on
crecrtion.
WHY STUDY ENTREPRENEURSHIP?
Mony scholcrrsask, either implicitly or explicitly, why qnyone should study entrepreneurship'
oatc (Ire difficult to obtqin, theory is underdeqre the
veloped, cnd mqny Iindings to dqte
busiscme qs those obtained in other creqs of
for
ness. In response, we offer three reqsons
infortechnicol
much
studying the topic. First,
crnd
mation is ultim;tely embodied in products
is o
services (Arrow, 1962),and entrepreneurship
mechqnism by which society converts techniccrl
informcrtion into these products and services'
Second, entrepreneurship is c mechcrnism
throughwhichtemporalcrndspctioline{licienmiticies in qn economy crre discovered clnd
different
goted (Kirzner, 1997).Finclly' o{ the
Jour""" of chonge in o ccrpitcrlistsociety' Schumpeter (I934)isolcltedentrepreneuricrllydriven incrunovction in products and Processescrs the
p
r
o
c
ess'
cicll engine driving the chclnge
from
Therefore,the absence of entrepreneurship
our collective theories of mqrkets' firms' orgcnizotions, ond chcnge mcrkes our understanding
Bcruof the business londscope incomplete' As
business
of
study
the
mol eloquently remcrks,
without on,rrrd"rstanding of entrePreneurship
"the
is like the study of Shakespecre in which
the
Prince of Denmqrk has been expunged from
(1989:
66)'
discussion of Hcrmlet"
220
Acodemy ol Management
Review
Icnucrry
given the potentisl to transform them into c dilferent stqte (Kirzner, 1997).Becqusepeople possess different beliefs (becquseol q lucky hunch,
superior intuition, or privote informcrtion),they
The Existence of EntrepreneuricrlOpportunities
mqke diflerent conjectures about the price ot
markets should cleqr or obout whqt poswhich
To hcrveentrepreneurship,youmust first hcve
new
mqrkets could be creqted in the future.
sible
entrepreneuricrlopportunities. Entrepreneuriql
crnd sellers hqve different beliefs
buyers
When
opportunities crrethose situations in which new
of resources,both todcy qnd in
vqlue
the
crbout
goods, services,rqw mqteriqls, cnd orgcnizing
goods
crnd services ccrnsell qbove or
the future,
methods cqn be introduced and sold crt greoter
below their mcrgincl cost of production (Schumthcrn their cost of production (Cosson, lg82).Alpeter, I934).An entrepreneuricrldiscovery occurs
though recognition of entrepreneuriol opportuwhen someone makes the conjecture thqt o set
nities is a subiective process, the opportunities
"best
use" (i.e.,the
o{ resourcesis not put to its
themselves crre objective phenomenq that clre
"too
given
c belief
low,"
resources ctre priced
not known to clll pcrties qt crll times. For examqt
which the output lrom their
about the price
ple, the discovery of the telephone creqted new
combinqtion could be sold in qnother loccrtion,
opportunities for communiccrtion,whether or not
of qnother time, or in qnother form). I{ the conpeople discoveredthose opportunities.
jecture is qcted upon qnd is correct, the individEntrepreneurial opportunities dif{er from the
ucrl will ecrn qn entrepreneuricl profit. If the
lcrrger set of oll opportunities for profit, porticuis scted upon crnd is incorrect, the
of
conjecture
elficiency
the
lorly opportunities to enhonce
will incur cn entrepreneuricll loss
individual
orcrnd
mqtericrls,
existing goods, services, rqw
(Casson,
1982).
require
gcnizing methods, beccuse the lormer
Entrepreneurship requires thct people hold
the discovery of new meons-ends relcrtionships,
beliefs qbout the vcrlueof resourcesfor
different
whereqs the lctter involve optimizction within
First, entrepreneurship involves
(Kirzner,
recrsons.
two
1997).
existing meqns-endslrameworks
joint
where severql different reproduction,
Beccrusethe rcnge of options ond the consebe
brought together to creqte the
to
have
sources
quences o{ exploiting new things are unknown,
For the entrepreneur to
product
service.
or
new
entrepreneuricrl decisions cqnnot be made
obtqin control over these resourcesin crway thct
through an optimizqtion process in which meq
makes the opportunity profitoble, his or her conchqnicql cqlculations crremade in response to
jecture
about the qccuracy of resource prices
given set of qlternqtives (Bcrumol,1993).
must difler from those of resource owners and
Entrepreneurial opportunities come in cr vclriother potenticl entrepreneurs (Casson, 1982).II
ety of forms. Although the focus in most prior
resource owners hcd the sqme conjectures cts
research has been on opportunities in product
the entrepreneur, they would seek to cpproprimorkets (Venkqtqrqmqn, I997), opportunities
the prolit from the opportunity by pricing the
cte
the
of
cqse
as
in
the
mqrkets,
crlsoexist in factor
so thqt the entrepreneur's profit cp(Schumpeter,
resources
1934).
mclteriqls
discovery of new
There{ore,for entrepreneurship
proached
zero.
product
entrepreneurmqrket
Moreover, within
owners must not shore
resource
the
occur,
to
(1985)
diflerent
three
hos described
ship, Drucker
conjectures.Secentrepreneur's
the
(l)
completely
of
the
creation
categories of opportunities:
qll
(potenticl
entrepreneurs)
people
qs
if
ond,
of
Posoccurs with the invention
new informqtion,
conjectures,
entrepreneurihl
the
sctme
(2)
sessed
new technologies; the exploitction of market
they would compete to copture the sqme entreinefliciencies thqt result lrom informqtion osymqcross
preneuriol profit, dividing it to the point that the
time ond geography;
metry, crs occurs
incentive to pursue the opportunity was elimiand (3) the reaction to shilts in the relqtive costs
qlternqtive
ncrted(Schumpeter,I934).
uses lor resources,cts
crndbenefits of
But why should people Possessdifferent beoccurs with politicol, regulotory, or demoliefs qbout the prices at which mqrkets should
graphic changes.
clecrr?Two ctnswershqve been offered. First, crs
Previous resecrrchershqve orgued thcrt entreKirzner (1973)has observed, the process of dispreneuricll opportunities exist primarily becovery in q mcrrketsetting requires the porticicquse different members of society hcve diflerent beliefs crboutthe relqtive vcrlueof resources, ponts to guess ecrchother's expectcrtionscrbout cr
THE EXISTENCE,DISCOVERY,AND
EXPLOITATION OF ENTNEPRENEURIAI
OPPORTUNITIES
Shqne ond Venkotqtamsn
wide variety ol things' People mqke decisions
onthebosisolhunches,intuition'heuristics'
qnd qccurqte qnd inqccurqte informcrtion,cctus.
the
ing their decisions to be incorrect some of
qlw.'ys
this
correct'
not
ctre
tirie. Since decisions
"errors" thqt crecrteshortcges'
process leads to
An indi!,-,rft,rr.s, clnd misallocated resources'
"error" may
qn
vidlcl <rlert to the presence of"too
low"'recombuy resourceswhere pricescre
prices are
bine them, crndsell the outputs where
"too high."
Secoid, crsSchumpeter(1934)exploined' economies opercrtein cr constqnt stqte o{ disequilibrium. Technologiccl, politiccl' socicrl'regulcrtory'
and other types of chcrnge offer cr continuous
ways
supply of new information about different
it
mclking
By
wecrlth'
enhqnce
to
to use resources
more
a
into
resources
possible to trqnsform
the
vcrluoble form, the new informqtion alters
resources'
the
therefore'
vcrlue of resourcesond,
is
proper equilibrium price' Becquseinformction
qctors
do
qll
economic
ditttibuted,
i*p.rf""ily
time'
not receive new inlormqtion at the scrme
information
obtain
Consequently, some people
new
before others about resourceslying fallow'
oPenmcrrkets
discoveries being mcde, or new
ing up. II economic qctors obtain new information before others, they cqn purchcrseresources
cn
crt below their equilibrium vcrlue cnd ecrn
rethe
entrepreneurial profit by recombining
(Schumpeter'
"our"L= crnd then selling them
1934).
mqy
The informationql sourcesof opportunity
technologry'
new
ol
cqse
the
in
be easier to see
buttheyneednot'berestrictedtotechnologiccl
of
developments. For exqmple' the productign
themovieTitonicgenercttednewinforrricrtion
qbout who wcts ct desirsble teen idol' An entre'
pr.rr.,r, could respond to this new informqtion
o{ Leoty acting on the conjecture thcrt posters
nclrdoDeCcpriowouldsellforgreoterthsntheir
cost of Production'
deBeccruse entrepreneuricrl opportunities
qnd
beliefs'
pend on qsymmetiies of igforfiction
beLventucrlly, entrepreneuriql opportunities
opporthe
come cost inefficient to pursue. First,
provide
tunity to eqrn entrepreneuricrlprofit will
opporan incentive to mqny economiccrctors'As
22r
demcrnd'
the opportunity and increctseoverall
domincrte
to
"o*p.iitiott eventuolly begins
ol
(Honnon & Freemcn, 1984)'When the entry
crt
rcrte
ct
qdditioncl entrepreneurs reaches
exceeds
which the bene{its from new entrcrnts
the
pursue
the costs, the incentive for people to
entrepreopportunity is reduced, becquse the
qmong more crnd
,rl,-,riol profit becomesdivided
more crctors(SchumPeter,1934)'
Second,theexploitotionofopportunity.proobout
vides informqtion to resource providers
ond
possess
they
thqt
the vqlue oI the resources
in
time'
over
prices
lecrdsthem to rqise resource
entrepreneur's
the
of
order to ccpture some
the
prolit for themseives(Kirzner'1997)'In short'
qbout the
qnd
leqrning
diffusion of inlormation
with
o""uro"y of decisions over time' combined
for
incentive
the
the lurs of profit, will reduce
people to pursue any given opportunity'
deThe durcltion ol cny given opportunity
of
provision
pends on ct vcrriety of lcctors' The
protecpcrtent
*orropoly rights, cs occurs with
the dution or qn exclusive contrqct' increcrses
ration. Similcrly, the slowness of iniormation
with
dilfusion or th; Icgs in the timeliness
inwhich others recogrnizeinformction also
provides
creose the durotion, porticulclrly il time
qs occur with the
reinforcing odvantoies, such
stqndqrds or lecrning
adoption tf technicql
"inability of others (due to
",r-L". Fincrlly, the
subvcrrious isolcting mechsnisms) to imitqte'
resources
rcrre
the
stitute, trade for or ccquire
(Venkcrtqrqiequired to drive down the surplus"
durqtion'
*ot, 1997:I33) increcses the
The Discovery of Entrepreneuriql Opportunities
Although on opportunity for entrepreneuriol
this
profit milnt exisi,-cln individuol cqn eorn
opporthe
thqt
irofit ont if he or she recognizes
thclt cn osymGiven
value'
has
and
iunity exists
the exismetry ol belieis is a precondition for
all
tence of entrepreneuricrl opportunities'
everyone
opportunities must not be obvious to
in time'
point
cny
At
(Hayek,
1945)'
crIIof the time
discover
will
popul<rtion
tttt
tt
only some subset
a given opportunity (Kirzner' 1973)'
iVfty do some petple crnd not others discover
Alpcrticulcrr entrepreneurial opportunities?
retunitiescrreexploited,inlormotiondi{Iusesto
luck'
blind
is
ihough the nuII hypothesis
the
of
other members of society who cqn imitqte
ccrtegories
brocrd
seqrch hos suggttita two
innovaporticinnovator qnd crppropriqte some o{ the
thct
probcrbility
fcrctorsthat influence the
entry of
tor's entrepreneuricl profit' Although the
opportuniulqr people will discover pcrrticular
validate
imitating entrepreneurs initiclly mcly
222
Acodemy of Monogement
ties: (l) the possession of the prior inlormqtion
necessqry to identify cln opportunity and (2) the
cognitive properties necessary to vcrlue it.
Inlormction corridors. Humcrn beings cll possess different stocks of in{ormcrtion,and these
stocks oi informqtion inlluence their ability to recognize pcrticular opportunities.Stocksol informqtion creqte mentql schemcrs,which provide c
frcrmework for recognizing new information. To
recognize crn opportunity, cn entrepreneur hqs to
hcrveprior informqtion that is complementcry with
the new information, which triggers crn entrepreneurial conjecture(Kcrish& Gilcrd, 1987).This prior
in{ormqtion might be obout user needs (Von Hippel, 1985)or specilic crspectsof the production
function (Bruderl, Preisendorfer,& Ziegler, 1992).
The inlormation necessqry to recognize crny
given opportunity is not widely distributed
qcross the populotion beccruseof the specializcrtion of informqtion in society(Hcyek, 1945).People specialize in inlormqtion because specicrlized informcrtion is more useful thon genercl
inlormqtion for most crctivities (Becker & Murphy, 1992).As q result, no two people share cll of
the some inlormqtion qt the same time. Rother,
information about underutilized resources,new
technologry,unscrteddemqnd, qnd politiccl cnd
regulcrtoryshifts is distributed qccording to the
idiosyncratic life circumstcrncesol each person
in the populction (Venkcrtcrrqmcn,
1997).
The development ol the Internet provides c
uselul example. Only crsubset of the population
hcrshad entrepreneurial conjecturesin response
to the development ol this technologi'y.Some
people still do not know whqt the Internet is or
thct profitable opportunities exist to exploit it.
Cognitive properties. Since the discovery of
entrepreneuriql opportunities is not cn optimizcrtionprocess by which people mcrkemechqnicql 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 entrepreneuricrlopportunities. Even if c person possessesthe prior
informcrtion necessqry to discover qn opportunity, he or she mcry fail to do so becquse of qn
incbility to see new meqns-endsrelqtionships.
Unfortunately, visualizing these relqtionships is
dilficult. Rosenberg(1994)points out thcrthistory
is rife with excmples in which inventors fqiled
to see commercial opportunities (new mecnsends relationships) thqt resulted from the inven-
Review
tion ol importont technologies-from
grcph to the lqser.
Jcnucry
the tele-
Prior resecrrchhcrsshown thot people differ in
their crbility to identify such relqtionships. For
excrmple,reseqrch in the field of cognitive science hqs shown thot people vqry in their obilities to combine existing concepts crnd informction 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 successful 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 discover 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 opportunities, qnd qre less susceptible to inqction inertiq.
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 decide to exploit the opportunity. We do not hqve
precise figrures on the aborting ol discovered
opportunities, but we do know thct not all discovered opportunities are brought to fruition.
Why, when, crnd how do some people and not
others exploit the opportunities thct they discover? The qnswer agoin qppecrrsto be q function 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 willingmessof people to exploit them. Entrepreneuricl opportunities vqry on severcrl dimensions,
which influences their expected value. For excrmple, c cure for lung ccncer has greoter expected vcrlue thon does q solution to students'
need for snqcks crt cr locql high school. The exploitction of crn entrepreneurial opportunity re-
Shone ond Venkqtsrsman
probobility of exploitction ol entrepreneuricrl
quires the entrepreneur to believe that the exits cost'
lpportunity becouse lecrrning reduces
profit will be
entrepreneuricrl
the
of
value
i""t"d
The decision to exploit crnentrepreneuri:J.:piorg. enough to compensate for the opportunity
is qlso inlluenced by individucrl differportunity
of
cos't oI other qlternqtives (including the loss
new prodences in perceptions' The crecrtionof
o{
risk'
leisure), the lack of liquidity ol the investment
ucts and markets involves downside
becring
lor
premium
cr
ond
inmoney,
be
crnd
time
must
beccruse time, effort, and money
1934)'
Schumpeter'
(Kirzner,
1973;
returns is
uncertainty
vested before the distribution of the
qvercge'
on
thot'
shown
has
1997)'SevTo dqte, reseorch
known (Knight, I92I; Venkcrtcrrqmqn'
hoving
opportunities
exploit
individucrl
entrepreneurs
ercrl reseqrchers have crrgued thcrt
this risk
bear
to
highei expected vqlue' In porticulor' exploitawillingness
differences in the
is
demclnd
expected
when
tion is more common
inlluence the decision to Lxploit entrepreneuriql
inI979;Knight'
Icrge (Schmookler,1966;Schumpeter' 1934)'
oppor,lr"ities (Khilstrom& Lq{font'
(Dunne' Roberts'
opportuexploit
who
duJtty profit mcrrgins ore high
people
f 0if l. For exqmple,
is
cycle
lile
technology
positively
the
1988),
more
& Samuelson,
nities tend to lrqme informqtion
young (Utterbcrck,1994),the density of competiqnd then respond to these positive perceptions
neither
is
sPqce
opportunity
pcrrticulclr
iion itt a
(Pqlich & BogbY,1995)'
1984)'
oPfortoo low nor too high (Hclnnan& Freeman'
The decisionio exploit entrepreneuriol
popcnd
(Shcne'
1996)'
differlow
is
individual
the cost of ccrpitcl
tunities is ciso influenced by
is
entrcrnts
opportuother
from
exploit
ulcrtion-level learning
ences in optimism. People who
of
ovcriloble (Aldrich & Wiedenmeyer' 1993)'
nities typicolly perceive their chqnces
entreol"potentiol
reolly
cll
Individual differences.Not
success o, *u,"h high"t thon they
the
qnd much higher thtn those of others in their
preneurs will exploit opportunities with
crn
1988)'
sctmeexpected vcrlue'The decision to exploit
industry (CoJper, Woo' & Dunkelberg'
firms,
the
of
new
opportunity involves weighing the vqlue
Mo,eo,,er, when these people crecrte
thqt
scqle econgenerclte
to
costs
the
crgcinst
oplortunity
they often enter industries in which
qt
less thqn mini',rli.r" cnd the costs to generate vcrlue in other
o-i"" Play cn importcrnt role
cnd they
mum efficient ="o1" (Audretsch' 199I)'
wctys. Thus, people consider the opportunity
the equilibqctivities in mcrking
enter industries crt rates exceeding
"o=i of pursuing alternqtive
I982)'a
(Gort
Klepper'
&
opportuniexploit
rium number of lirms
the decision whether or not to
in
points
most
ct
opPortheir
when
industries'
However, in most
ties qnd pursue opportunities
crnd
1988)'
crl''
(Dunne
et
Cockburn'
time, most new firms fcril
tunity cost is lower (Amit, Mueller' &
(Audretsch'
conpeople
cddition'
In
1987)'
Iew firms ever displclce incumbents
1995;Reynolds,
opporexploit
who
people
s i d e r t h e i r c o s t s f o r o b t a i n i n g t h e r e s o u r c e s n e c . 199I),suggestingthat
qbout
optimistic
qvercge, cre overly
essary to exploit the opportunity' For excrmple' tunities, on
This
exthe vcrlueo{ the oplortunities they discover'
E'rans cnd Leighton (1991)showed thqt the
opof
exploitction
the
ploitcltion of opportunities is more - corn'lnon overoptimism mot-ittcttes
stimulcting
port,-,rrityby limiting informqtion'
*t "n people hcrve grecter fincrnciql ccpitol'
(Kclhnemqn &
(1986)
reviewqd
rosy forecqsts of tttt future
Similcily, Aldrich .'nd Zimmer
for relasoLovcrllo, 1994),triggering the seqrch
resecrrchfindings thot showed thclt stronger
(Kclish
&
of inlormcrtion
crc- ti.r.ty small o*o""tt
cicl ties to resource Providers lcrcilitate the
crnd
lirst
cct
Gilod, I99I), and leoding people to
quisition of resources and enhcrnce the proba1997)'
Bcrney'
(Busenitz
&
onclyze lqter
litity ol opportunity exploitotion' Furthermore'
importhqt
(1989)
Otir., individual differences mqy be
found
Dunkelberg
Coop"r, W;, and
exploit opiI
tant in exploining the willingness to
p"ofl" cre more likely to expGit opportunities
peoportuniti.r. R"=.Lrchers have orgued thot
lor enifr"y hcrve developed useful informcrtion
ple with grecrterself-efficcrcycrndmore.internol
trepreneurship from their previous employment'
opporio",r, of control qre more likely to exploit
pr"=.r*obly beccuse such informcrtion reduces
to
people
requires
the
tunities, becquse exploitction
ihe cost of opportunity exploitation. Fincrlly,
prior extransferqbitity ol informqtion from the
ql"
1989)'
perience to the opportunity (Cooper et
o The iniormotion signcls generated by the entrepreneurl" well cs prior entrepreneurial experience
process crreweqk'
iol
(Ccrrroll & Moscrkowski, I987)' increcrses the
Academy ol Monagement Review
qct in the {qce ol skepticism of others (Chen,
Greene, & Crick, 1998).Similarly, opportunity exploitcltion 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 opportunity is cl setting in which people ccrn qchieve,
providing c vcluoble cue for those who possess
c high need for cchievement (McClellqnd, I96l).
Consequently, those who qre high in need for
qchievement moy be more likely thcn other
members of society to exploit opportunities.
Readers should note thot the ottributes that
increqse the probability ol opportunity exploitation do not necesscrily increcrse the probcbility
of success. For excmple, overoptimism might be
qssocicrted with cr higher probcrbility of both exploitation and fcilure. Of the populction of individucrls who discover opportunities in a given
industry, those who qre pessimistic mc:y choose
not to exploit discovered opportunities becquse
they more sccurqtely estimcte whct it will tclke
to compete qnd how mqny other people will try
to do similcrr things. Overoptimistic individuols
do not stop themselves from exploiting these
opportunities, becquse their overoptimism limits in{ormqtion and motivcrtes rosy foreccrsts of
the future.
MODESOF EXPLOITATION
Another criticcl question concerns how the exploitction o{ entrepreneurial opportunities is orgcrnized in the economy. Two mcjor institutioncl
c r r r qn g e me n ts fo r th e e x p l o i tcti on of these
opportunities exist-the creqtion of new {irms
(hierarchies) qnd the sqle ol opportunities to exis t ing fi rms (mq rk e ts )-b u t th e common crssumption is thct most entrepreneuricll octivity
occurs through de novo stcrtups. However, people within orgcrnizqtions who discover opportunities sometimes pursue those opportunities on
behall of their existing orgonizctions and sometimes estqblish new orgonizctions, whereos
independent qctors sometimes sell their opportunities to existing organizations crnd sometimes estoblish new organizctions to pursue the
opportunities.
Reseorch shows thot the choice of mode depends on the nqture of the industriql orgcnizcrtion, the opportunity, clnd the cppropriobility regime. Reseqrch in industrial orgcrnizqtion hcrs
Ionuory
shown thqt entrepreneurship is less likely to
take the form oI de novo stcrtups when ccpitol
mcrrketimperfections mqke it diflicult for independent entrepreneurs to secure finqncing (Cohen & Levin, 1989).Entrepreneurship is more
likely when the pursuit of entrepreneuricl opportunity requires the elfort oI individuqls who
lcck incentives to do so in lcrge organizations;
when scqle economies,first mover crdvontcges,
and leqrning curves do not provide cdvcntcges
to existing firms (Cohen & Levin, lg89); qnd
when industries hcrvelow bqrriers to entry (Acs
& Audretsch, 1987).Reseqrch on the cppropricbility of inlormqtion has shown thot entrepreneurship is more likely to tcrke the {orm of de
novo stcrrtupswhen informcrtion cqnnot be protected well by intellectucl property lcws, inhibiting the sale of entrepreneuriql opportunities
(Cohen & Levin, 1989).Finolly, resecrrchon the
nqture of opportunities hqs shown thqt entrepreneurship is more likely to take the form of de
novo stortups when opportunities ctre more uncertoin (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 relevqnt field of study. Although those in the field
fqce mqny difficult questions, we hove presented a frqmework for exploring them. We recognize thqt we mqy have offered some uncertqin
assumptions, potenticlly flcwed logical arguments, or hove made stqtements that will prove,
ultimoteiy, to be inconsistent with datc yet to be
collected. Nevertheless, this frqmework provides a stclrting point. Since it incorporcrtesinformqtion gclined from many disciplinary vantage points and explored 'through many
dillerent methodologies, we hope thqt it will
prod scholqrs from mqny dif{erent fields to join
us in the quest to crecrtea systemqtic body o{
inf ormotion qbout entrepreneurship. Mcrny
skepticsclcim thqt the creqtion of such a body ol
theory qnd the subsequent qssembly of empiriccl support for it qre impossible. We hope thct
other scholqrs will join our ef{ort to prove those
skeptics wrong.
Shane qnd Venkqtqrqman
2000
REFERENCES
Acs, 2., & Audretsch, D. 1987.Innovcrtion, market structure'
ond Iirm size. Eeview oI Econornicsond Stotistics' 7l:
567-574.
Aldrich, H. 1990.using crn ecologicol perspective to study
orgonizotionqlloundingrctes'EntrepreneurshipTheory
ond Prsctice, SPring: 7-24'
Aldrich. H.. & wiedenmeyer, G. 1993.From traits to rotes:
Anecologicclperspectiveonorgonizotionolloundings.
Adrqnces in Enlrepreneurship' Firm Emergence' ond
Growth,l: t4$-195.
Aldrich. H., & Zimmer, C. 1986.Entrepreneurship through
sociol networks.In D. Sexton & R. Smilor (Eds.).The oil
qnd science of entrepreneurship' 3-123'Ccmbridge' MA:
B<rllinger.
Amit, R..Glosten.L., & Mueller, E' 1993'Chollenges to theory
development in entrepreneurship reseorch' /ournal of
Monogement Studies, 30: 81$-834'
225
&
Cosson, M. 1982.Ihe entrepreneur' Totowq' NJ: Bornes
Noble Books.
qnd new findings on
Csves, R. 1998.Industriol orgcrnizotion
qnd
firms'
Iournal of Economic
mobility ol
the turnover
Literature, 36: 1947-1982.
Chen, C., Greene. P., & Crick, A. 1998'Does entrepreneuriol
sell-efficqcydistinguish entrepreneursfrom monogers?
Iournsl of BusinessVenturing, 13:295-316'
Cohen, W., & Levin, R. 1989.Empiriccrlstudies of innovqtion
ond market structure. In R. Schmolensee & R' Wiilig
(Eds.),Handbook of industricrl orgonizotion'vol' II: 1060I107.New York: Elsevier.
Cooper, A., Woo, C., & Dunkelberg, W' 1988'Entrepreneurs'
perceived chonces for success' Ioutnal of BusinessVen'
twing,3: 97-108.
Cooper, A., Woo, C., & Dunkelberg, W' 1989'Entrepreneurstrip ona the initiql size of firms' Iownal oI Business
Venturing,4:317-332.
Drucker. P. 1985. Innovstion ond entrepreneurship' New
Amit, R., Mueller, E., & Cockburn, I' 1995'OpportunitY costs
ond entrepreneuriql cctivity. Ioutnal of Businessventur'
ing. l0: 95-106.
Arrow, K. 1962.Economic welfqre and the allocqtion ol resources for invention. In R' Nelson Gd')' Ihe rate ond
direction oI inventive octivity: Economic snd social factors: 509-626.Princeton,M: Princeton University Press'
York: HorPer & Row.
Dunne, T., Roberts.M., & Sqmuelson,L' 1988'Patternsoi firm
entry ond exit in U.S. monulocturing industries' Rond
Iournal ol Economics,i9:495-515'
Evqns, D.. & Leighton. L' 1989.Some empiricol ospects o{
entrepreneurship. Arnericcrn Economic Beview' 79:
Audretsch, D. 1991.New firm survivol and the technologicol
regime. Revjew of Econornicsond Stotistics, 68: 520-526.
Gqrtner, w. I985.A conceptuol lramework lor describing the
phenomenon o{ new venture creotion' Academy oI Man'
ogement Review, I0: 696-706'
Gcrtner, W. B. 1988-Who is the entrepreneur? is the wrong
Boron, R. In press. counterfoctuql thinking cnd venture formqtion:Thepotentiqleflectsofthinkingqbout"whqt
might hcrvebeen." Iournal of Business Venturing'
Bcumol, W. J. 1989.Entrepreneurship in economic theory'
Americqn Economic Eeview P<rpersond Proceedings:
64-71.
Bqumol,w'I993'Formqlentrepreneurshiptheoryineconom.
ics: Existence and bounds. Iournol of Business Yentur'
ing,8: 197-210.
Bqumol, W. 1996. Entfepreneurship, mot'cg?ment' ond the
slructure of poyotls- Ccmbridge, MA: MIT Press' ur
Becker,G., & Murphy, K. 1992.The division of lobor' coordincrtion costs, and knowledge' Quorterly /ournol of Eci
nornics, 107:I 137-1160'
Begley, T'. & Boyd, D. 1987.Psychologicql chcrqcteristics
associoted with performcnce in entrepreneuriql firms
ond smoller businesses. Journol of Business venturing,
2: 79-93.
Bruderl, J., Preisendorfer,P., Et ZiegYer,R' 1992' Survivql
chqncesoinewlyfoundedbusinessorgonizotions.
Arnerican SociologicaI Review, 57: 227-242'
Busenitz,L., & Bcrrney,l.1997.Dii{erencesbetween entrepreneurs and monogers in lorge orgonizotions:Bicses cnd
heuristics in strategic decision-moking. Iournol of Busi'
ness Venturing, 12:9-30.
Carroll, G., & Mosqkowski, E. 1987'The cqreer dynomics of
self-empioyment. Administrotive Science Quqrterly' 32:
570-589.
519-535.
question.ArnericgnloutnglofSmollBusiness,|2:L|-32.
Geroski. P. 1995.What do we know obout entry? Infernqtionol lournol of Industrial Otganizotion' 13:421-440'
o{
Gort, M., & Kiepper, S. 1982.Time pcths in the dillusion
product innovations. Economic loutnol 92: 630-653'
Honncrn,M., & Freeman,J. 1984'Structurol inertio ond orgonizotional chonge. Americon Sociologicol Beview' 49:
149-164.
Hoyek. F. 1945-The use ol knowledge in society' Americon
Economic Beview, 35: 519-530'
bold
Kohnemqn, D., & Lovcllo, D. 1994'Timid choices ond
{oreccsts:A cognitive perspectiveon risk toking' In R' P'
Rumelt, D. E. Schendel. & D. Teece Gds')' Fundqmental
issues in strotegy; A resesrch ogendc: 7l-96' Boston:
Bollinger.
Kdish, S., & Gilqd, B. 1991.Choracteristics oi opportunities
seqrch oi entrepreneursversus executives:Sources' interests, cnd generql qlertness' /ournol of Business Ven'
turing,6: 4$-61.
Kqtz, I., & Gortner, W. 1988.Properties ol emerging orgoni'
zqtions. Academy of Monagement Beview' 13: 429-44I'
IGrilstrom,R., & Lqffont, J' 1979'A generol equilibrium entreqver'
preneuri<rl theory ol firm formction bosed on risk
87:7L9-748'
Econorny'
Politiccl
dI
of
sion. Journ
Kirzner,I. 1973.Competition ond enfrepreneurship'Chicogo:
UniversitY of Chicogo Press.
226
Acodemy o[ Monagement
Review
fonucry
Kirzner, I. 1997.Entrepreneuriol discovery ond the
competitive morket process: An Austricn qpprooch.
Iournal of
Economic Literqture,35:60-85.
Schumpeter, I. 1934.Capifolism, sociolism, qnddemocrocy.
New york: Horper & Row.
Knight, F. 1921.Bis&, uncertainty ond pto[it New
York:
Augustus Kelley.
shone, s. l996.Exploining vqriotion in rotes of entrepreneurship in the United Stqtes: lggg_lggg.IournqloI Management,ZZ:747_791.
Low' M" & MocMillqn' I' lg88' Entrepreneurship:
Pcst research ond luture chollenges' Ioutnol of Minagement'
14:139-16l
Mcclellond, D. lgGl. The dchieving sociery. princeton,
NJ:
Vqn Nostrand.
Palich, L., & Bogby,X. lgg5.Using cognitive theory
to explcin
entrepreneuriqr risk-toking: choilenging conventionol
wisdom. Iournsl of BusjnessVenturing, l0: 425_43g.
Reynoids, P. 1987.New firms: Societal contribution versus
survivol potentiol. Iournal of Business Venturing,
Z:
231-246.
Reynolds, P., & White, S. 19g7.Ihe enrrepreneuriolprocess.
Greenwich. CT: Greenwood press.
Roberts, E. lggl. Enfrepreneurs in hig.h tecfin ology:
lessons
trom Ivllr and beyond. New york: oxiord irniversity
Press.
Rosenberg,N. lgg4. Uncertointy ond technologicol
chcnge.
Conference on growth and developrnent..Ihe economics
oI the Zlst century. stqniord, cA: stonford university,
Center for Economic policy Reseqrch.
Sqrasvsthy, D., Simon, H., & Love. L. lggg. perceiving
ond
mcncging business risks: Dilferences between entrepreneurs ond bsnkers. /ournol of Economic
Behavior
and Orgonizstion, 33: 207-225.
Schmookler,I. lgOO.Inyenlion and economic growth.
Com_
bridge, MA: Hqrvcrd University press.
Shqver,K. G., & scott, t. R. lggl. person,process,qnd choice:
The psychology of new venture creqtion. Enfrepreneurship rheory ond Proctice,winter :2J-42.
Singh.l., & Lumsden,C. lgg0.Theory cnd reseorchin orgonizctionql ecology. Annuol Review of Sociology., 16:
l6l-195.
Stinchcombe.A. 1965.Sociol structure cnd orgonizqtions.
In I. Morch (Ed.), Handbook of organizotions..260_290.
Chicogo: Rond McNolly.
Teece,D. 1986.Profiting from technological innovation: Im_
plicctions for integrotion, colloboration, licensing,
ond
public policy. Besearch policy,lS: 2g6_30S.
Tushmqn, M., & Anderson, p. l9g6. Technologicql disconti_
nuities crnd orgonizationql environments. Adminisrro_
tive ScienceQuorterly, 3l: 43g_465.
Utterbock, I. 1994. Mostefing the dynomics o/ innovdtion.
Combridge, MA: Horvard BusinessSchool press.
venkotoramon, s- rggz.The distinctive domoin of entrepreneurship reseorch: An editor.s perspective. In Kqtz & R.
I.
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.MonagementScience,32: 7gl_g05.
Wqrd, T.. Smith. S., & Void, I. Gds.). 1g97.Crearive rfioughl.
wcshington, DC: Americon psychologicol Associatiln.
scott Shcrneis qssocicte professor of entrepreneurship
in the Robert H. Smith School
of Business ond director of reseqrch qt the Dingmcn
Center for Entrepreneurshipot
the university of Mcrylond. He received his Ph.D.from
the University of pennsylvoniq.
His current reseorch locuses on entrepreneurshipin
high-technologysettings.
'
s' venkatarcrmqnis the somuel L. Slover Associote
Prolessoro{ BusinessAdministrqtion ond-directoroi reseorchot the BattenCenter lor
EntrepreneuriolLeodershipin the
Dorden Grqduqte School ol BusinessAdministrqtion
ot the University of virginic. He
received his Ph'D';ftom the University ol Minnesota.
His current resecrch Iocuseson
entrepreneurshiptheory.
5