Availableonlineatwww.sciencedirect.com
Revista
de
Administração
http://rausp.usp.br/ RevistadeAdministração51(2016)323–326
ThinkBox
Why
entrepreneurs
need
firms,
and
the
theory
of
the
firm
needs
entrepreneurship
theory
Peter
G.
Klein
a,baDepartmentofEntrepreneurship,BaylorUniversity,Waco,UnitedStates bDepartmentofStrategyandManagement,NorwegianSchoolofEconomics,Bergen,Norway
Abstract
Firmsareestablishedbyentrepreneurs,andentrepreneurshipistypicallyembodiedwithinafirm.Andyet,theresearchliteratureson entrepreneur-shipandthetheoryofthefirmdevelopedmostlyindependently.Isuggestsomereasonswhytheseliteratureshavestruggledtoconnect,andoffer apotentialpathforward,onethatdescribestheentrepreneurialactastheacquisition,combination,andrecombinationofheterogeneousresources underconditionsofuncertainty.
©2016DepartamentodeAdministrac¸˜ao,FaculdadedeEconomia,Administrac¸˜aoeContabilidadedaUniversidadedeS˜aoPaulo–FEA/USP. PublishedbyElsevierEditoraLtda.ThisisanopenaccessarticleundertheCCBYlicense(http://creativecommons.org/licenses/by/4.0/).
Keywords:Entrepreneurship;Theoryofthefirm;Uncertainty;Judgment
Introduction
Theresearchliteratureonthe economictheoryof thefirm has been around since the 1930s (Coase, 1937), blossoming fully into a distinct research program during the 1970s with theseminalworksofWilliamson(1971,1975,1979),Alchian
andDemsetz(1972),JensenandMeckling(1976),Holmström
(1979),andmanyothers.Thisstoryhasbeentoldmanytimes
(e.g.,Foss&Klein,2012,chapter6)andchaptersonthe“theory
E-mail:[email protected]
PeerReviewundertheresponsibilityofDepartamentodeAdministrac¸ão, FaculdadedeEconomia,Administrac¸ãoeContabilidadedaUniversidadede SãoPaulo–FEA/USP.
ofthefirm”appearintheleadingtextbooksandsurveyvolumes. Thesetheories focus on the benefits andcostsof organizing, managing,andgoverningtransactions[sometimestotheneglect of production costs (Langlois & Foss, 1999)] under various conditions.Theseperspectiveshavespawnedalargesetof theo-reticalandempiricalapplications,extensions,andrefinements, andincreasinglyusethelanguageandstyleofcontemporary for-maleconomics(e.g.,Aghion,Dewatripont,Legros,&Zingales,
2016).
Andyet,thereismuchlessworkinthistraditionexplaining theemergenceofthefirm.1Wheredofirmscomefrom?Mostare establishedbyentrepreneurs,andindeed,themostcommon def-initionof“entrepreneur”foracademicsandpractitionersis“one whoformsanewbusinessorganization.”Onewouldthenthink thatentrepreneurshiptheorywouldbepartofthetheoryofthe firm.Putdifferently,entrepreneurs areindividualswho estab-lish,operate,reconfigure,dissolve,andotherwiseworkthrough firms;henceeconomictheoriesofthefirm–aswellastheoriesof thefirmdrawnfrompsychology,sociology,operationsresearch, andsoon–mightbeconsideredapplicationsofentrepreneurship theory.Alas,neitheristrue;fortheentrepreneurship fieldhas itsownresearchliterature,largelydivorcedfromtheliteratures on firm organization andfirm strategy. The entrepreneurship
1 ArecentexceptionisBylund(2015).
http://dx.doi.org/10.1016/j.rausp.2016.06.007
324 P.G.Klein/RevistadeAdministração51(2016)323–326
literaturefocusesmostlyonindividuals,notorganizations,and onfirmcreation,notfirmoperation.2
Much of my own recent work on entrepreneurship (see
Klein,2017)canbeunderstoodasacalltobring
entrepreneur-ship into the theory of the firm, and the theory of the firm intoentrepreneurship.Contemporaryentrepreneurshipresearch revolves around the concept of the “opportunity” (largely based on the work of economist Israel Kirzner).3 In this approach,entrepreneurshipresearchaskswhy,whenandhow(1) entrepreneurialopportunitiesarise,(2)certainindividualsand firmsandnotothersdiscoverandexploitopportunities,and(3) differentmodesofactionareusedtoexploitthoseopportunities
(Shane&Venkataraman,2000:218).Theopportunity-discovery
approachhasspawnedanambitiousandsweepingresearch pro-gramonthenatureandimplicationsofopportunitiesandtheir relationshiptoindividualandmarketcharacteristics.
Duringthelastdecade,however,theopportunity-discovery approach hasbeen challenged onontological, epistemic, and methodological grounds. Alvarez and Barney (2007) argued thatopportunitiesdonotalways existobjectively“outthere,” butmustbecreatedbyentrepreneurialaction.The“effectuation approach,”buildingoncognitivescienceandassociatedin par-ticularwiththeworkofSarasvathy(2008),seesentrepreneurs notasdiscovering(orcreating)profitopportunities,thentaking actionstoexploitthoseopportunities,butasacting experimen-tally,incrementally,andwithlimitedforesight,takingadvantage ofresourcescurrentlyathand–whatisoftendescribedas “brico-lage”(Baker&Nelson,2005;Garud&Karnøe,2003).
Athirdchallengetotheopportunity-discoveryview,
build-ing on Cantillon (1755), Knight (1921), Mises (1949), and
Casson(1982),questionstheverynotionofopportunities,
find-ingtheopportunitymetaphor redundantatbest,misleadingat worse.Myrecentbook,OrganizingEntrepreneurialJudgment: ANewTheoryoftheFirm(Foss&Klein,2012),isdedicatedto reconstructing,elaborating,andextendingthis“judgment-based view.”Inthisapproach,entrepreneurshipisconceptualizedas judgmentaldecision-makingwhichtakesplaceinamarket set-ting underuncertainty. Entrepreneurscombine heterogeneous assets,whichdifferintheirattributes,anddeploytheseassets withinafirmtotheproductionofnewofferingsthatmaysatisfy customerwantsataprofit.Ratherthanpursuingmetaphorical opportunities–whichareonlyrealizedexpost,afterprofitsand lossesarerealized–entrepreneurspursueprofits,andtrytoavoid losses,byanticipatingfuturemarketconditions.Andtheydoso byestablishing,organizing,andreorganizingbusinessfirms.
Entrepreneurialjudgment
Thejudgment-basedviewispartofalargerstreamofresearch seekingtomakeaction,notopportunities,theunitofanalysisfor
2 Recentworkon“strategicentrepreneurship”(Klein,Barney,&Foss,2013)
hasbeguntoapplyentrepreneurialconcepts,tools,andmethodstoestablished firms,butaddslittletoconventional(transactioncost,agencytheoretic,or prop-ertyrights)explanationsoffirmexistence,boundaries,andinternalorganization.
3 SeeKleinandBylund(2014)foradiscussionofKirzner’sinfluenceonthe
field.
entrepreneurshipresearch(Holcombe,MichaelHolmes,Klein,
&DuaneIreland,2014;Klein,2008;McMullen&Shepherd,
2006). The term judgment comes from Knight (1921), who
describedjudgmentasdecision-makingunderun-certaintythat cannotbemodeledorparameterizedasasetofformaldecision rules. Judgment is midway between the “rational decision-making” of neoclassical economicsmodelsandblind luckor randomguessing.Wesometimescallitintuition,gutfeeling,or understanding.InaworldofKnightianuncertainty,and hetero-geneous capitalresources withattributesthat aresubjectively perceivedandunknowableexante,someagencymustbearthe responsibilityofowning,controlling,deploying,and redeploy-ingtheseresourcesintheserviceofconsumerwants.That,in thejudgment-basedperspective,istheroleoftheentrepreneur. Theentrepreneur’sjobistocombineandrecombine heteroge-neouscapitalresourcesinpursuitofprofit(andtheavoidanceof loss).Whentheentrepreneurissuccessfulinacquiringresources atpricesbelowtheirrealizedmarginalrevenueproducts–i.e., whentheentrepreneurexercisesgoodjudgment–sheearnsan economic profit. Whenher judgments are poor,she earnsan economic loss. Competition amongentrepreneurs (and those who provide financial capitalto entrepreneurs)tends tosteer ownership and control of productive resources toward those entrepreneurswithbetterjudgment.
Unlikeotherapproachestoentrepreneurship,the judgment-based view closely links entrepreneurship to ownership and economicorganization.Knight(1921,p.271)arguedthat judg-mentaldecision-makingisinseparablefromresponsibilityand control,thatis,ownershipanddirectionofabusinessventure. “Theessenceofenterpriseisthespecializationofthefunction ofresponsibledirectionofeconomiclife...Anydegreeof
effec-tive exercise of judgment, or making decisions, is in a free society coupled with acorresponding degree of uncertainty-bearing,oftakingtheresponsibilityforthosedecisions.”Hence entrepreneursownassets,andentrepreneurialactionismanifest infirms.
FossandKlein(2015)offerasummaryofthejudgment-based
viewandrespondtosomecriticismsandconcerns.Oneproblem isthat thetheoryislargelyagnosticabouttheexactcognitive andpsychologicalmechanismsunderlyingentrepreneurial judg-ment. Forexplainingfirm existence,boundaries, andinternal structure,ageneral,abstractconceptionofjudgmentmay suf-fice.Buttheremaybegainstoamoresystematictreatmentof decision-makingunderuncertainty,followingthinkerssuchas Shackle(Packard,Clark,&Klein,2016)orBayesiandecision models(Bewley,1986,1989).Anotherissueasthat“judgment,” astheactofmakingdecisionsunderuncertainty,isoften con-fusedwiththeordinary-languagemeaningofjudgment,which connoteswisdom,discernment,ordiscretion.Judgmentperse, as we use the term, is different from “good judgment.” Of course,givenmarketcompetition,entrepreneurswho systemat-icallymakegoodjudgmentswilltendtoprosperattheexpense of thosewhotendtomakepoor judgments,sothereisalink betweenjudgmentperseandgoodjudgment.Butthepotentially ambiguousnatureoftheterm“judgment”hasledtosome unnec-essaryconfusion(e.g.,Foss&Klein,2012:95–96;Sarasvathy
P.G.Klein/RevistadeAdministração51(2016)323–326 325
Judgmentandfirmexistence,boundaries,andinternal organization
Howdoesthejudgment-basedapproachhelpusdealwiththe “classic”Coaseanquestionsaboutfirmemergence,boundaries, andinternalorganization?First,asKnight(1921)pointedout, entrepreneurialjudgmentisnon-contractible.Inotherwords,if judgmentrepresentsresidual decisionauthorityabout theuse ofproductiveassets,thenjudgmentcannotbedelegated with-outsellingtheasset.Anentrepreneur-ownercanseekadvice,of course,butbearstheultimateresponsibilityforsolicitingadvice, followingor rejecting advice,andmakingfinaldecisions. To exercisejudgment,then,theentrepreneurmustbeanowner– i.e.,muststartand/oroperateafirm.Putdifferently,a prospec-tiveentrepreneur(orteamof entrepreneurs)maybeunableto communicateexpectationsaboutaprojectorbusinessplan–a specificwayofcombiningheterogeneouscapitalassetstoserve futureconsumerwants– insuchawaythat otheragents can assessitseconomicimplications.Organizingafirmmayalsobe alow-costmeansofexperimentationwithdifferentasset com-binationsandemploymentcontracts,underthecoordinationof theentrepreneur(Foss,2001).Theexistenceofthefirmcanthus beexplainedbyaspecificcategoryoftransactioncosts,namely, thosethatclosethemarketforentrepreneurialjudgment.
Inthisapproach,afirmisanentrepreneurplusthealienable assetssheowns andcontrols.Themulti-person firmincludes multipleownersand/oremployeeswhomayexercise“derived judgment”onthepartoftheentrepreneur-ownerorowners,who exercisejudgmentinselecting,monitoring,anddelegating deci-sionauthoritytotheseemployees.Organizationalcharacteristics (size,verticalboundaries,diversification,ownershipstructure, internalorganization, etc.) evolve over time as entrepreneurs experimentwithdifferentcombinationsofheterogeneousassets and different strategies and business models. As Lachmann
(1956:16)putit,“Wearelivinginaworldofunexpectedchange;
hencecapitalcombinations...willbeeverchanging,willbe
dis-solvedandreformed.Inthisactivity,wefindtherealfunction oftheentrepreneur.”
Advancingthetheory
Ongoing and future research on entrepreneurship and the theory of the firm fits into several categories. First, several papers seek tooperationalize entrepreneurial judgment more specificallyinthe contextof economic organizationandfirm strategy(Fossetal., 2016;Godley&Casson, 2015;Halberg,
2015;McCaffrey,2015;McMullen,2015;Packardetal.,2016).
Anotherstreamlookatapplicationsofthejudgment-based per-spective to innovation, public policy, corporate governance, non-market action, and more (Klein, McGahan, Pitelis, &
Mahoney, 2010; Kolympiris & Klein, 2016; McCaffrey &
Salerno,2011).Economistsandothersocialscientiststendto
applyentrepreneurial metaphors too loosely,referring to cre-ative andinnovativepersonsas “entrepreneurs”withoutfully consideringthedifferencesininstitutionalcontext(forexample, governmentbureaucratsareinvestingotherpeople’sresources underconditionsofuncertainty,nottheirownresources).Butwe
maybeabletogainsomeinsightonthebehaviorofnon-market actors,andtheemergenceandgrowthofpublicorganizations,by thinkingaboutentrepreneurialprocessesofresourceassembly andrecombination.
Thetheoryofthefirm,inturn,canbenefitfurtherby think-ingmoresystematicallyaboutfirmemergence,howfirmsadapt and respond to economic change, andhow established firms canbemoreentrepreneurialandinnovative.Doingsorequires goingbeyondtheproduction-functionapproachtothefirm,and evenbeyondthetransactioncost,property-rights,and agency-theoreticperspectives thatdominatethemoderntheoryof the firm.Thiswillhelpthescholarlycommunityexploitmorefully thepotentialgainsfromtradebetweenthesetwofields.
Conflictsofinterest
Theauthorsdeclarenoconflictsofinterest.
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