Description
During this brief illustration pertaining to the entrepreneurial process in a dynamic network perspective.
THE ENTREPRENEURIAL PROCESS
IN A DYNAMIC NETWORK PERSPECTIVE:
A Review and Future Directions for Research
1
Patrizia V. Christensen
John P. Ulhøi
Henning Madsen
The Aarhus School of Business, Denmark
ABSTRACT
The main focus of this paper is on individuals and/or groups of individuals who create or seize a
new technology-based or knowledge-intensive entrepreneurial opportunity. For this purpose, a
theoretical framework for studying entrepreneurship, using financial, social and human capital,
including social ties and networks, has been developed. Research themes or questions
concerning how social ties and entrepreneurs’ background affect the funding, launching and
subsequent development of a new venture in high-tech or knowledge-intensive sectors are
outlined. Also of interest here is how the presence or absence of important environmental factors,
such as financing opportunities and involvement in a technology business incubator, can affect the
success or failure of entrepreneurial efforts.
1
The authors would like to thank the Danish Research Council for funding this project, developed within the
framework of the LOK Center (Copenhagen), and Urs E.Gattiker for his constructive contribution to previous
versions of the paper. Comments and requests for reprints can be sent to John P. Ulhøi, Department of
Organization and Management, The Aarhus School of Business, Haslegaardsvej 10, 8210 Aarhus V, Denmark.
E-mail: [email protected]. The contents of this article do not in any way reflect the opinions of either the employer of the
three authors or the funding agency. The usual disclaimers apply.
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After reviewing the existing literature, the paper concludes by presenting future research
challenges and practical implications for organisations and individuals willing to take advantage
of entrepreneurial opportunities.
Keywords
Competition, entrepreneurship, financial capital, human capital, incubator, internationalisation,
risk theory, social capital, social networks, venture capital.
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1. INTRODUCTION
Previous studies have addressed R&D issues, as well as innovation and technology
management, primarily from the perspective of mature and large firms. Most firms in the
European Union (EU), however, are SMEs (EUROSTAT, 1995). On average, SMEs account for
83% of a country’s annual GNP growth (Reynolds et al., 1999; OECD, 1996), and may also
account for the majority of jobs in an economy. In Denmark, for example, 69.5% of the workforce
is employed in SMEs (EUROSTAT, 1995). There is increasing recognition of the importance of the
positive correlation between the creation of small firms and the impact of SMEs on a country’s
annual GNP growth and employment level (Birch, 1981; OECD, 1996).
SMEs’ importance for GNP growth and employment levels in national economies has also
aroused interest in the processes by which new firms are established and their probability of
success. In this light, a better understanding of entrepreneurs and their environment might be
helpful, since these are usually key actors in the discovery and exploitation of new opportunities.
Until recently, research investigating the founding of new businesses has mainly focused on the
personal characteristics of entrepreneurs (Brockhaus, 1982). Following the original work of
McClelland (McClelland, 1961), researchers have tried to list and describe the personality traits
that identify successful entrepreneurs (Timmons, 1985). A main criticism of this approach is that
it tends to underestimate the extent to which crucial skills can be acquired by learning (Deakins,
1996) and through previous failure in establishing new firms. A too narrow focus on personal
characteristics can also divert attention from the environment the entrepreneur has to operate in
(e.g. a country’s economic policy, as well as its dominant social norms), and from other
important structural and positional characteristics (e.g. social ties and networks).
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There are numerous empirical studies of entrepreneurship, but these are seldom linked to
conceptual schemes, typologies or theories. Moreover, only few of them specifically address
R&D and innovation and technology in connection with the entrepreneurial phenomenon. This
paper attempts to inject some order into the discussion of entrepreneurship by reviewing current
issues and emerging trends, through (i) clarifying key terms typically used in entrepreneurship
research; (ii) presenting a conceptual framework for assessing the entrepreneurial phases
resulting in success or failure; (iii) surveying and critically evaluating representative studies
according to the schemata provided (specifically, discussing research on technology- and
knowledge-intensive firms, social network theory and the entrepreneurial process/stages); (iv)
presenting implications for future research.
This review can be distinguished from earlier ones in that it tries to discuss and integrate
research from a variety of disciplines, such as psychology, sociology, management and
marketing.
The paper is organised as follows: Section 2 introduces definitions of the issues, and
presents a general framework describing how the new knowledge-based entrepreneurial
phenomenon is conceptualised in the context of this study. This includes a short introduction of
the specific issues in the research. Section 3 formulates the main research hypotheses. Finally,
Section 4 outlines some tentative conclusions and suggests implications for researchers and
practitioners.
2. THE ENTREPRENEURIAL PROCESS
In this paper, entrepreneurship is defined as the act of establishing a new venture. This
definition includes the separation from established firms (spin-offs), as long as the effort is
recognisable as that of an individual and not as a corporate or entrepreneurial act. The initiating
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entrepreneur is thus the person who has the idea for the venture and/or establishes the new
business. While the definition neither excludes partnerships or other collective action nor the
existence and importance of supporting entrepreneurs, the focus remains exclusively on the
original initiator/s (Gartner et al., 1994). Attention is also focused exclusively on firms that to a
significant extent depend on the development and/or application of scientific or technological skills
or knowledge, as defined below. While important, issues regarding craft-based firms established
for the sole purpose of self-employment are not discussed here.
2.1 New Technology-Based and Knowledge-Intensive Firms
As mentioned in the introduction, small firms are considered to be important catalysts for change
and innovative efforts. In recent years, interest has also increased in how new technology-based
small firms can help employment and GDP growth (Bollinger et al., 1983; OECD, 1996) in ever
faster changing high-technology markets (OECD, 1999). Such firms are seen as businesses
whose products or services are to some extent dependent on the application of scientific and/or
technological knowledge (Allen, 1992). They can either use novel, advanced technology to
provide a new product or service, and/or employ existing technology in an innovative way. The
products of such a firm do not necessarily need to be technological, therefore (Allen, 1992).
Technology- or knowledge-based SMEs are often also high-growth SMEs (OECD, 1999). The
literature suggests that technology-based, or knowledge-intensive, high-growth SMEs are created
in various sectors of the economy such as biotechnology, computer technology, electronics,
information technology, materials technology and telecommunications (Allen, 1992). While this
paper focuses on such sectors, it will not specifically address small firms as such, being primarily
interested in the entrepreneurial phenomenon. While all start-ups are bound to be small, some of
them are likely to grow rapidly and become medium and large companies within a short time after
their establishment.
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In the following pages, we propose a causal model to show how social ties, the entrepreneur’s
background, and the surrounding institutional environment affect the funding, launching and
subsequent development/growth of a new business venture. The factors included in the model are
those believed to be important in understanding the entrepreneurial process, although their impact
has so far been largely under-researched.
2.2 The Entrepreneurial Phenomenon and Its Environment
The entrepreneur is a key factor to understand how and why new organisations are
established. Entrepreneurship as a function of this factor alone, however, is unable to fully
account for the phenomenon of entrepreneurship (Thornton, 1999). Past research into how
personality traits distinguish successful entrepreneurs from others has, in fact, had limited
success (Brockhaus, 1982; Timmons, 1985).
A more recent strand of research emphasises the importance of external structural
influences on the creation, selection and survival of new ventures. This is generally referred to as
the “ecological” approach (Hannan, 1989; Aldrich, 1999), and is based on aggregated events at
the population level of analysis. Because entrepreneurial innovation is largely a function of
existing infrastructure at the industrial level, the ecological approach has been criticised by some
authors (e.g. Van de Ven and Garud 1989).
According to Shane and Venkataraman (2000), the choice of exploitation mode depends on
the nature of the industrial organisation (financing, first-mover advantages, low barriers to entry),
the opportunity (uncertainty prevails) and the appropriability regime (property and patent laws).
In addition to the influence of existing infrastructure on entrepreneurial development, Reynolds
(1991) has also suggested an extensive set of social networks as an important prerequisite for
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starting a successful new venture. Similarly, the existence of venture capital, business angels or
incubator regions and structures (i.e. Technology Business Incubators) are elements that have
all been put forward as essential ingredients in an entrepreneurial start-up (Thornton, 1999). This
suggests that both personal and business networks, as well as the institutional and social
environment in which the entrepreneurial process takes place, need to be taken into account.
2.2.1 Technology Business Incubator (TBI) Ventures vs. Others
As indicated above, TBIs might have some effect on the launch of a firm and during its pre-
growth phase. High-tech or knowledge-intensive firms are in fact likely to be more risky ventures
than traditional businesses (Allen, 1992), and might therefore benefit from the initial support of a
specialised institutional setting. Moreover, such firms are usually unable to quickly generate
revenue, and their success is difficult to predict (Allen, 1992). To reduce the risks, while at the
same time helping entrepreneurs launch new firms, governments and private entrepreneurs
have introduced various initiatives, including the establishment of TBIs that help obtain and/or
provide seed funding and advice (Bollinger et al., 1983)
2
. The literature highlights the importance
of TBIs in helping to reduce some of these risks while improving the chances for success (for an
extensive review, see Mian, 1997).
Apart from providing start-ups with building space in physical proximity to other firms, a TBI
can also give the new firm the opportunity to lease or rent space below market rates, though our
pilot study challenges this. Moreover, certain facilities, such as reception and canteen services,
can be shared between several firms, thus further helping to reduce costs (Miller and Cote,
2
In Denmark, TBIs take the form of Innovationsmiljøer (Innovation Centers) and Forskerparker (Science Parks),
respectively.
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1987; Mian, 1997). Just as important may be that a TBI can also offer financial, human and
social capital in the form of, for example, managerial and legal know-how (Mian, 1997).
Table 1 outlines the above in a more formal structure. At the moment, there is nothing in
the literature about TBI-sponsored and non-sponsored firms’ chances for success (Bugliarello,
1998). In Denmark, recent studies commissioned by the government to investigate the
performance of local TBIs have focused exclusively on firms established within such
environments (Erhvervsfremmestyrelsen, 2000). However, the literature stresses that
measuring these effects is difficult, and that TBIs have not always been as successful as
expected (Mian, 1997).
Table 1 suggests that, in order to better understand the importance of the support provided by
TBIs, it might be helpful to look at firms that have benefited from TBI resources vs. others. For
example, if TBIs are successful in reducing the risk of high-technology ventures for subsequent
investors (e.g. Allen, 1992), TBI-supported or related start-ups should do better in the
entrepreneurial tournament (see Hypothesis 2.3 and 3.2 in the following sections).
2.3 Growth, Success, Failure and Other Outcomes
The above suggests that the existing infrastructure, and the personal characteristics and social
ties of entrepreneurs play an important part in the foundation of a new business. However, the
literature also suggests that the success, failure or other outcome (e.g. a take-over) of a new
venture can be explained by organisational and environmental factors. Research shows that,
among other things, strategic factors influence the performance and possible survival of new
ventures (cf. Liebermann and Montgomery, 1988). For example, an entrepreneur and/or
manager must decide where to locate the new venture in order to obtain a competitive
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advantage (Besanko et al., 1996). However, not all competitive advantages and entrepreneurial
opportunities are immediately apparent to everyone, which results in an asymmetry of beliefs
about opportunities (Hayek, 1945).
An entrepreneur is expected to have special insights, or to possess special information, which
enable him/her to discover and explore entrepreneurial opportunities which others either fail to see
or mainly see a risk of failure. This by no means implies that entrepreneurs never fail. On the
contrary: the creation of new firms has always been accompanied by the death of others - what is
generally referred to as “creative destruction” (Schumpeter, 1939), or simply “business
dynamics” (Reynolds et al., 1999). Traditionally, economic growth is accompanied by company
turbulence or “churning” (Reynolds et al., 1999). It is evident, however, that the likelihood of
discovering entrepreneurial opportunities must be influenced by various factors. We propose that
human and social capital are useful theoretical stepping-stones to a further understanding of the
entrepreneurial phenomenon.
While the above indicates that the failure of new ventures is part of the entrepreneurial
tournament, research on new ventures seems to be biased towards successes (Shepherd,
1999). However, the past experience of an entrepreneur, including experiences from failed
ventures, can be invaluable to the success of new ventures.
In order to further our understanding of the entrepreneurial process, failures will also have to
be included in the study of entrepreneurship. Our research will explicitly address this issue by
following entrepreneurs after the failure of their initiative, and by controlling whether and to what
extent previous experiences of failure influence the establishment and success of new
entrepreneurial attempts.
2.4 Towards the Development of a Causal Model of Entrepreneurial Success
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As discussed earlier, entrepreneurship is influenced by many different factors, and will result in
successes as well as failures. Entrepreneurs starting new knowledge-intensive or technology-
based firms are often scientists, or have a scientific or technical background and some prior
business experience in technology-related sectors. Frequently, they are also the inventors of the
new product (Roberts, 1991). The following section presents a framework for identifying the key
factors affecting entrepreneurship, which are also included in this study (Figure 1).
------------------------------
Insert Figure 1 about here
------------------------------
Figure 1 illustrates how various factors, such as social, human and financial capital, as
well as the characteristics of the market, contribute to the success of an entrepreneurial
venture. The figure is divided into two levels of analysis. The first level focuses on the
entrepreneur as an individual social actor, while the second concerns the newly established firm.
During the early stages of a new venture’s development, the characteristics of both the
entrepreneur and the market are likely to be the best indicators of the firm’s success and early
growth. Later on, however, the firm is likely to become increasingly independent of the
entrepreneur, in part because s/he will typically give up part of his control and ownership of the
firm to obtain new financial capital. At this stage, the firm’s success is likely to become an
additional, independent factor for access to new funding opportunities.
An entrepreneur’s social capital consists of all the social relationships and social structures
that can be used to achieve his goals. Social capital is the result of a dynamic interaction, and is
potentially present in all non-conflict-based social relations. However, it only becomes “capital”
when it is used by actors in concrete situations (Coleman, 1990; Pizzorno, 1999; Portes, 1998).
Individual social capital consists of the set of social relations (social ties) surrounding the actor –
in our case, the entrepreneur – that can more or less be consciously mobilised when needed.
The person’s gender, age and family background are generally expected to influence the number
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and type of social ties. For example, a person with extensive business experience will have
access to people with special know-how, while a graduating student is likely to lack such
contacts (Campbell and Heffernan, 1981). These social relations (or ties) can be private or
business-related (cf. Figure 1).
Collective social capital is the result of all social interactions and relations that take place, or
have taken place, in a given society. Social capital gives rise to what is defined as the
“institutional environment.” For example, Maurice et al. (1980) found in their study that
organisational processes develop within an institutional logic that is unique to a society. This
institutional logic includes norms and values, as well as the interpersonal trust level. Trust is
defined as confidence in others’ moral integrity or goodwill in dealing with unpredictable issues
(Ring and Van de Ven, 1994).
Collective social capital is also “structural embeddedness,” which implies that the
entrepreneur’s position may affect the possible success of a new venture. Varying levels of and
unique access to collective social capital, e.g. via the support of a TBI’s facilities and resource
network, can give rise to a particular set of economic opportunities. The latter help explain
different behaviours in response to seemingly identical environmental uncertainty (Burt, 1992).
We define human capital as resulting from the experience and educational background of the
entrepreneur (see also Figure 1). Experience and education can be general, or related
specifically to the business sector and entrepreneurial activity. In this sense, the number of
years, as well as level and type, of education, including courses and languages, are part of the
human capital at the disposal of the entrepreneur. Again, also in this case, age, gender and
socio-economic background of the family of origin are likely to influence the educational and
professional opportunities and choices of future entrepreneurs.
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According to Figure 1, financial capital can be made up of personal and general funds.
Personal funds can be sweat equity (i.e. time invested by the entrepreneur without getting paid),
an entrepreneur’s own funds, and help from family and friends, as well as bank loans based on
personal collateral. Other capital might include seed funding from a development agency,
government–backed loans, or funds from a venture capital (VC) firm (Shepherd, 1999).
All three types of capital - social, human and financial - are assumed to be related to each
other, as shown in Figure 1. For example, social capital in the form of contacts to certain
resource centres (e.g. government agencies) may help securing external funding. Later on, the
firm’s success might allow the hiring of the new human capital needed to increase the probability
of success, thereby creating additional individual and social capital.
An entrepreneur may decide to launch a new venture if s/he has the human, social and
financial capital needed to start a firm. If not, s/he may decide that additional financial or human
capital is needed first, and try to get another partner and more financing in order to launch or
expand the firm. Social, human and financial capital thus come into play both before the launch
and during the various initial phases of a new firm.
The model in Figure 1 outlines a causal model to be tested after a subsequent data collection
phase. Human, social and financial capital, together with the type of company and
characteristics of the market, constitute the four main factors or latent variables influencing the
success of new ventures. A new venture’s success is defined first and foremost as its survival,
and secondly as its growth. Growth might be measured through different indicators, such as an
increase in the number of employees, or the firm’s capital, sales, revenue, profit and so forth.
For this research, various measures of growth will therefore be combined in an overall index of
growth.
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Internationalisation is seen here as a “split variable”. In other words, since internationalising
and non-internationalising firms are likely to follow different paths of growth, and the definition of
growth itself might need to be different for the two kinds of enterprises, they will be treated
separately.
Various authors have proposed different phases through which entrepreneurs are supposed
to pass in the process of establishing new ventures (Wilken, 1979; Roberts, 1990; Roberts,
1991; Gattiker and Ulhøi, 2000). For the purposes of this research, these have been summarised
into two generic stages, namely the pre-growth/development stage and the first growth phase of
entrepreneurship (cf. Table 1).
During the “development stage”, initial problems have not yet been overcome, and the firm is
typically dependent on either the support of an incubator environment, other institutions, or
persons providing resources at low cost, such as partners working without salary in their spare
time (“sweat equity”). Some entrepreneurs may still be working for the source organisation, such
as their previous employer. Thus, the source organisation, which in the case of technology or
knowledge-intensive firms is likely to be a university or research centre or unit, may allow the
entrepreneur to exploit various resources in order to carry out R&D (Roberts, 1991). At this
stage, entrepreneurs might also rely on private resources, e.g. personal savings or loans from
friends or family. A bank loan may be guaranteed by personal collateral (Roberts, 1991). Since it
is often difficult to predict the potential for success of high-technology firms, this makes them
less attractive to venture capitalists than conventional businesses (Allen, 1992).
Previously used resources should have culminated in technology assets. Resources can
have been used to draw up a well-developed business plan, produce a working prototype, or
obtain a patent. Receiving resources and commitments requires trust. Better technology assets
can be interpreted by investors as the additional information they need to reduce risk (Rosen and
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Olshavsky, 1987) and negative prospects. Finally, providing important information to investors
should also increase trust in a project by helping them to reduce their risk perception (McNamara
and Bromiley, 1999; Ring and Van de Ven, 1994).
Once the firm has survived the initial establishment phase, it is expected to enter its first
growth phase. Growth may result in the enterprise leaving the incubator environment if it was
launched in such an environment. These types of enterprise are likely to be 2-3 years old
(Gattiker and Ulhøi, 2000). However, some data suggest that new technology-based firms might
stay in the incubator for up to 3-5 years (OECD, 1997).
3. RESOURCES AND ENTREPRENEURSHIP
Figure 1 illustrates a causal model of the entrepreneurial process.
The relationships shown need testing, and the subsequent findings may lead to modifications
of the proposed model. Nevertheless, we have put forward a number of research hypotheses
based on this model and the literature review above. In the following sections, we will discuss the
factors supposed to influence the entrepreneurial process - human, social, financial capital, and
the main issues related to technology and market characteristics - in more detail.
3.1 Human capital
Figure 1 suggests that human capital consists of specific (e.g. industry experience) and
general (e.g. length of education) human capital. Entrepreneurs have different educational and
professional backgrounds, and these are likely to have a strong influence, in terms of competitive
advantages and disadvantages, on the process of starting a new business (Roberts, 1991).
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Differences in human capital might be distinguishable based on the entrepreneur’s background,
e.g. academia, business and venture capital firms or investors (Allen, 1992).
Academics, for example, are likely to have a strong technical and/or professional background,
easy access to R&D facilities, and perhaps also a clear idea about the present and future needs
of the market. Moreover, they might have a variety of important connections (personal and
institutional networks). However, they are likely to lack crucial managerial skills, including the
ability to envision practical applications of their own ideas and the necessary managerial and
market experiences. Academics are also generally aware of the importance of protecting
intellectual rights, particularly when external sponsorship is involved (Allen, 1992). This is at least
true for natural scientists, engineers, and others with similar backgrounds.
Entrepreneurs coming from the industry are likely to know how to transform innovative ideas
into marketable products. In addition, they might have a good insight into the business world,
clear ideas about what is needed for the success of a new business, and personal ties to
business people with important skills (Gattiker and Ulhøi, 2000). Some have also suggested that
a distinction should be drawn between novices and ‘average’ or ‘typical’ entrepreneurs and
experienced founders. The habitual entrepreneur starts new businesses and usually moves on
after a few years (McMillan, 1986).
Entrepreneurs with experience in venture capital firms might have important connections to
possible sources of financial capital, but lack technical and managerial skills.
Entrepreneurs’ educational and professional experiences directly related to their new venture
are sometimes referred to as “specific human capital” (Cressy, 1999). These experiences might
be very important for the success of a new venture. When evaluating the probability of an
entrepreneur’s success, therefore, it is important to take previous experiences into account, e.g.
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whether they attended business or technical schools and courses, or have already established a
firm (Starr et al., 1993). Based on the above, we now propose the first hypothesis:
Hypothesis 1.1: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneur(s) with critical competencies
and specific human capital, such as:
a) technical (e.g. science education)
b) managerial (e.g. habitual entrepreneur)
c) market-related areas (e.g. experience in same industry)
The success of a new venture might also be influenced by “general human capital” (Cressy,
1999), which we define as consisting of length of education, previous work experience in other
sectors, and knowledge of languages that may ease or foster the early establishment of
international connections (see section 3.4).
All the above elements can contribute to the ability of the entrepreneur to discover new
opportunities and find the best way to take advantage of them. The above suggests testing the
following hypothesis:
Hypothesis 1.2: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneur(s) with general human capital,
such as:
a) a higher academic degree
b) other professional experiences
Age, gender, and other socio-economic background variables can also influence the
formation of general, as well as specific, human capital. For example, previous studies report
that women face disadvantages in the entrepreneurial tournament, which in some cases affect
business growth negatively (Moore and Buttner, 1997). Moreover, women tend to choose certain
types of educational institutions or courses that do not help them develop the kind of human
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capital required to be a successful entrepreneur. This choice might also exclude them from
important social networks.
Cressy (1999) found in his study that age, understood as “owner’s maturity”, affects a new
venture’s possibility of success and growth positively through the impact on the increased
human capital.
Again, having successful entrepreneurs in the family should help the individual secure the
human and social capital needed to succeed (Beyers et al., 1998).
All these elements can affect the entrepreneurial attempt directly and/or indirectly. In
particular, they might affect the ability of the entrepreneur to select an effective managerial team,
obtain initial and seed capital, establish useful personal and institutional contacts, and discover
opportunities for expansion in foreign markets (Reynolds and White, 1996). This results in the
following additional hypothesis:
Hypothesis 1.3: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be indirectly, positively affected by entrepreneur(s) who are:
a) male
b) older
c) from a family of entrepreneurs
3.2.Social Capital
As Figure 1 indicates, social capital consists of individual and collective social networks, ties
and structures that help the individual get access to information and know-how. According to
Aldrich and Widenmeyer (1993), social ties connecting entrepreneurs to resource providers (e.g.
other entrepreneurs and knowledgeable individuals) facilitate the acquisition of resources and the
exploitation of opportunities.
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Social ties can be strong or weak. Supporters of the weak-ties hypothesis argue that these
are more effective means for knowledge-sharing. A person who belongs to a social network with
weak ties is more likely to gain access to new information than if he was exclusively surrounded
by strong ties (Granovetter, 1973, 1974). In order to obtain information and establish business
relations, the entrepreneur needs to be in contact with other persons who can provide
complementary knowledge and resources (Johannisson, 1988; Larson, 1991; Bollinger et al.,
1983). These persons are likely to be accessible, directly or indirectly, through private or
business-related ties.
In the literature, weak ties have often been associated with the generation of ideas, whereas
strong ties tend to be related to problem-solving (Leonard-Barton and Sinha, 1993; Henderson
and Cockburn, 1994; Eisenhardt and Tabrizi, 1995; Hansen, 1999). Unfortunately, it is still
unclear precisely how weak social ties come into play in new technology- or knowledge-based
firms. However, innovation literature emphasises the fact that close and frequent social
interaction between relevant internal groups and functions during the internal development
process improves the effectiveness of the innovation process (Ebadi, Utterback, 1984; Leonard-
Barton and Sinha, 1993; Henderson and Cockburn, 1994; Eisenhardt and Tabrizi, 1995). We
therefore propose to test the following hypothesis:
Hypothesis 2.1: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneurs with access to a social
network made up of weak ties.
In addition to weak social ties, strong ties based on personal relationships may also play an
important role for an entrepreneur. Hu and Kronelliussen (1997) write that personal ties result in
improved company performance. Support, knowledge, and complementary resources can be
acquired through such ties, which lead to social co-operation between key players (e.g.
Johanson and Mattsson, 1987). Powell (1990) attributes success in inter-organisational relations
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to sentiments of friendship and a sense of diffusing personal obligations (social contracts) which
arises between people involved in exchange relationships.
Beyers et al. (1998) suggested that researchers should focus attention on “other people”
with “whom the entrepreneur spends time and how they respond” (p. 1-5). In turn, this will permit
the study of how social networks help the individual to obtain vital input in the competition for
scarce resources. This suggests that the following hypothesis should be tested:
Hypothesis 2.2: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by partners having strong social ties amongst:
a) each other, and
b) with co-operating parties (e.g. board members and investors).
As pointed out earlier, institutions and interpersonal contacts constitute what we refer to as
“collective social capital”. They can either hinder or support the entrepreneur’s efforts to mobilise
additional resources for the venture. Being supported by a TBI or related/located at a TBI
represents social capital that, in turn, should help reducing the perceived risk of a project from an
investor’s perspective (Bugliarello 1998). Moreover, the access to TBIs may result in the TBI
providing the firms with access to seed money and other support. Accordingly, a new venture’s
success could be influenced by a TBI in several ways. Direct influence could be exercised
through the funding of the new venture, or the distribution of financial capital (Bugliarello 1998).
Active participation of the TBI in the project’s development (e.g., writing business plan and
assessing market potential) or being involved in the management of the firm after its
establishment, would instead represent forms of indirect contribution through the delivery of
additional human capital, e.g., finding a manager (Mian 1997).
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In other words, TBIs can offer the entrepreneur an indirect contribution in terms of business
and advice ties (social capital). These ties can be established with consultants, with other
entrepreneurs or with investors (e.g., Hu & Kronelliussen 1997). Hence, we propose the
following hypothesis:
Hypothesis 2.3: The growth of new ventures (e.g. employment, sales, revenue, and
profits) will be positively affected by entrepreneurs with access to a TBI’s
resources (e.g. financial, social and human capital).
3.3 Financial Capital
Financial capital is an important strategic asset, which is needed for the foundation, survival
and growth of any new venture. The search for external capital (investors) is likely to be the
activity that takes up most of the time of new as well as established entrepreneurs. This means
that, while financial capital is an important factor in the entrepreneurial process, it is also an
intermediate goal on which other resources are spent, especially human and social capital.
New technology- or knowledge-based firms have distinctive financial needs during their
various evolutionary stages. The pre-company stage, where laboratory and other facilities of a
“source-organisation”, or the basement of the entrepreneur’s own house, often fulfil the need for
financial capital, is followed by the pre-growth or development stage. In this stage, the company
still often lacks an operating prototype, and has not yet worked out a very well developed
business plan - if it has one at all. Here, the risk is still substantial, and unless seed funding is
provided by a TBI, it can sometimes be difficult for the venture to get established (Bugliarello,
1998).
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Shane and Venkataraman (2000) note that, even when exploring an opportunity, uncertainty
prevails and the venture may fail. Financing is thus affected by the potential risk inherent in any
new venture (Gattiker and Ulhøi, 2000). Since the future success of new technology- or
knowledge-based firms is difficult to predict, and such ventures are more risky than traditional
businesses, obtaining capital may be particularly difficult (Allen, 1992).
According to risk theory, risk assessment is based on the individual’s perception of the
likelihood of loss associated with an investment decision (Kahneman and Tversky, 1979;
McNamara and Bromiley, 1999). Perceived risk is associated with a need to identify and
measure the risk(s) an entrepreneur or firm is exposed to, and to what extent (Hodder, 1999).
Risk aversion, in turn, is strongly influenced by whether or not trust exists between the actors
involved. Studies have shown that, when individuals evaluate situations associated with risk,
there is a positive relationship between risk and return and a negative relationship between risk
and loss (Kahneman and Tversky, 1979).
However, if positive prospects are associated with a risk decision, and they are not
significantly different from ones associated with the non-risk choice, people will opt for the non-
risk choice (Gottfries and Hylton, 1987; Kuehlberger et al., 1999). Moreover, the more complex
the technology, the more difficult the risk assessment procedure for potential investors. Investors
will therefore prefer less risky choices (Philpott, 1994) that require less funding, thereby reducing
the negative prospects of the loss of their investment (Kahneman and Tversky, 1979).
In traditional organisations, complexity of technology may require radical changes in users’
habitual behaviour, thereby making its adoption and diffusion more difficult to assess and predict
(Gattiker, 2000) for potential investors.
Moreover, complex technologies tend to require heavy investment before a prototype is ready
to go to the market.
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This leads to the following hypothesis:
Hypothesis 3.1: Obtaining capital or financing for projects/firms is negatively
affected by trying to obtain funding for (relatively):
a) complex technology requiring
b) heavy investment.
Investors’ perceived risks of a venture’s possible success may also be influenced by the
characteristics of the firm and its development. Potential investors’ will, for example, be more
likely to trust a project if the entrepreneur has invested his own capital (human, social or
financial) in it. This will give investors the impression that the entrepreneur has the goodwill and
moral integrity needed to deal with unpredictable events and situations (Ring and Van de Ven,
1994). In other words, the risk perception of potential investors can be softened if entrepreneurs
have already invested their personal capital and time (i.e. ‘sweat equity’) in the project.
If, therefore, an entrepreneur has spent his time developing a comprehensive business plan
or product prototype at an early stage in the project, risk perception should be reduced (Deakins,
1996) and the likelihood of obtaining capital should increase. This leads to the following
hypothesis:
Hypothesis 3.2: Obtaining capital or financing for projects/firms is positively
affected by previously having
a) invested private funds and/or sweat equity
b) obtained seed money (e.g. government, TBI or other)
In general, high-tech entrepreneurs have proved unwilling to give up control in the first stages of
new ventures (Philpott, 1994). However, entrepreneurs may have to give up part of their equity,
depending on how investors perceive the risk. Risk perceptions are affected positively by several
23 of 34
factors, thereby reducing the percentage of equity and control that entrepreneurs might have to
give up in order to obtain capital.
Among other things, technology assets can influence the total amount of equity to be invested
in a new venture as well as the percentage of equity remaining to the entrepreneur. For example,
while the overall amount of equity or capital can rise rapidly with additional investment, the
entrepreneur’s share might actually be reduced (i.e. s/he is left with a smaller piece of a larger
cake). In contrast, the entrepreneur can increase his share of the equity if important milestones
are reached, thereby ensuring new capital while at the same time investors reduce their share
(Gattiker and Ulhøi, 2000).
Success paired with rapid growth during the first few years requires additional equity and risk
capital, which, in turn, will often push the entrepreneur’s ownership below 50% (e.g. Beyers et
al., 1998; Gartner et al., 1994). An entrepreneur can have invested sweat equity and own capital
beforehand (Deakins, 1996), however, which can have a positive effect on the valuation of the
firm for parties considering investments. This leads to the following hypothesis:
Hypothesis 3.3: Entrepreneurs seeking capital/financing or venture capital will
retain a larger share of the equity if:
a) they have invested their own capital and time in the project
b) a functioning prototype exists and/or property rights can be secured
c) (e.g. patent)
3.4 Internationalisation of high-tech start-ups
As discussed above, internationalisation is a characteristic path of development for some
firms. Research has found that most of the conventional companies in traditional industries that
24 of 34
internationalise at some point in their development tend to act in accordance with the so-called
“stage theory.” According to this theory, firms internationalise in a slow and incremental manner,
increasing their internationalisation if and when they gain the necessary experience and
knowledge. In recent years, however, new technology-based or knowledge-intensive firms show
an increasing tendency to be “born global,” by which is meant that they start interacting globally
shortly after their launch (Jolly and Alahuhta, 1992; Madsen et al., 1999; Vahlne, 2000).
Research into technology-based firms indicates that rapid internationalisation has a positive
effect on growth (Bell, 1995). Of particular interest here is how the entrepreneur’s human and
social capital helps the firm to expand beyond domestic markets. Research also suggests that
living abroad, and having first-hand knowledge of foreign markets and business opportunities due
to previous working experiences, helps a person succeed in other businesses with
internationalisation activities (Burgel and Murray, 1998).
The above suggests that specific human capital, such as work experience abroad and
knowledge of other languages, should help a new venture to expand into foreign markets. To the
best of our knowledge, such research on new technology-based or knowledge-intensive firms is
lacking, which suggests the following hypothesis:
Hypothesis 4.1: Success in the internationalisation of a technology-based or
knowledge-intensive firm will be positively affected by entrepreneur(s) with
critical competencies and specific human capital, including having:
a) worked abroad
b) studied abroad
c) knowledge of foreign languages
Moreover, the establishment of personal or business-related international connections might
ease expansion in foreign markets, due to the information gained through social ties (see section
25 of 34
3.2). In fact, though, as previously mentioned, there is no general agreement among authors
about the relative importance of weak and strong ties with regard to either employment and
mobility (Granovetter, 1974; Burt, 1992), or entrepreneurship (Light, 1984; Light and Bonacich,
1988), there is little doubt that social ties and social capital are among the most important
vehicles of strategic information. This is especially true for situations where actors enter
“unknown territory”, such as new jobs or markets. This leads to the last hypothesis:
Hypothesis 4.2: Success in the internationalisation of a technology-based or
knowledge-intensive firm will be positively affected by entrepreneur(s) with
critical international, personal or business-related social relations (ties).
4. CONCLUSIONS AND IMPLICATIONS
A first important conclusion that can be drawn from the literature reviewed in this paper is
that, in the fields of entrepreneurship, strategy and social networks, there is a limited cross-
feeding and integration of research results. Such a limited exchange of ideas across disciplines
is a stumbling block to our understanding of entrepreneurship and of how individuals exploit
entrepreneurial opportunities. We therefore argue, along with Blalock (1984), that, to better
understand how people use social, human and financial capital in the entrepreneurial
tournament, researchers should adopt an interdisciplinary approach.
New technology- and knowledge-intensive firms contribute greatly to the economic success
of a country, both in terms of exports, employment, innovation, and R&D. This is widely
recognised (Bollinger et al., 1983), and governments are trying in various ways to foster the
development of such firms. However, efficient measures can only be developed based on a
thorough understanding of the complex dynamics underlying the entrepreneurial process in this
26 of 34
sector. Moreover, a greater awareness of the factors which facilitate or hamper the discovery
and exploitation of entrepreneurial opportunities, and of the various phases through which the
entrepreneurial process passes, might help entrepreneurs develop more advanced strategies.
Our understanding of what makes new technology-based or knowledge-intensive firms succeed
involves a variety of factors. Some of these refer directly to the entrepreneur as an individual
embedded in a social context, others to the new firm as an actor itself, in a context characterised
by a certain institutional setting. All these elements interact and influence each other at any given
time and across time. We propose, therefore, to investigate them through a variety and
combination of different methods (surveys and in-depth qualitative interviews), and in a
longitudinal perspective.
Finally, entrepreneurial success is closely related to the experience of failure. Previous
failures contribute to the development of an entrepreneur’s human capital through the natural
process of learning. In addition, the general acceptance of the risks connected with
entrepreneurship, including the possibility of failure and bankruptcy, constitute an important
aspect of the social environment influencing a country’s economic activity. For these reasons,
we have decided to explicitly include this issue in our investigation.
In light of the information gathered, and of the practical needs of knowledge expressed by the
public and the private sector in Denmark, we have formulated a set of research hypotheses that
will be tested during the empirical part of the research. These hypotheses are summarised in a
causal and process model of entrepreneurship, which will be subjected to empirical verification.
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doc_679498019.pdf
During this brief illustration pertaining to the entrepreneurial process in a dynamic network perspective.
THE ENTREPRENEURIAL PROCESS
IN A DYNAMIC NETWORK PERSPECTIVE:
A Review and Future Directions for Research
1
Patrizia V. Christensen
John P. Ulhøi
Henning Madsen
The Aarhus School of Business, Denmark
ABSTRACT
The main focus of this paper is on individuals and/or groups of individuals who create or seize a
new technology-based or knowledge-intensive entrepreneurial opportunity. For this purpose, a
theoretical framework for studying entrepreneurship, using financial, social and human capital,
including social ties and networks, has been developed. Research themes or questions
concerning how social ties and entrepreneurs’ background affect the funding, launching and
subsequent development of a new venture in high-tech or knowledge-intensive sectors are
outlined. Also of interest here is how the presence or absence of important environmental factors,
such as financing opportunities and involvement in a technology business incubator, can affect the
success or failure of entrepreneurial efforts.
1
The authors would like to thank the Danish Research Council for funding this project, developed within the
framework of the LOK Center (Copenhagen), and Urs E.Gattiker for his constructive contribution to previous
versions of the paper. Comments and requests for reprints can be sent to John P. Ulhøi, Department of
Organization and Management, The Aarhus School of Business, Haslegaardsvej 10, 8210 Aarhus V, Denmark.
E-mail: [email protected]. The contents of this article do not in any way reflect the opinions of either the employer of the
three authors or the funding agency. The usual disclaimers apply.
2 of 34
After reviewing the existing literature, the paper concludes by presenting future research
challenges and practical implications for organisations and individuals willing to take advantage
of entrepreneurial opportunities.
Keywords
Competition, entrepreneurship, financial capital, human capital, incubator, internationalisation,
risk theory, social capital, social networks, venture capital.
3 of 34
1. INTRODUCTION
Previous studies have addressed R&D issues, as well as innovation and technology
management, primarily from the perspective of mature and large firms. Most firms in the
European Union (EU), however, are SMEs (EUROSTAT, 1995). On average, SMEs account for
83% of a country’s annual GNP growth (Reynolds et al., 1999; OECD, 1996), and may also
account for the majority of jobs in an economy. In Denmark, for example, 69.5% of the workforce
is employed in SMEs (EUROSTAT, 1995). There is increasing recognition of the importance of the
positive correlation between the creation of small firms and the impact of SMEs on a country’s
annual GNP growth and employment level (Birch, 1981; OECD, 1996).
SMEs’ importance for GNP growth and employment levels in national economies has also
aroused interest in the processes by which new firms are established and their probability of
success. In this light, a better understanding of entrepreneurs and their environment might be
helpful, since these are usually key actors in the discovery and exploitation of new opportunities.
Until recently, research investigating the founding of new businesses has mainly focused on the
personal characteristics of entrepreneurs (Brockhaus, 1982). Following the original work of
McClelland (McClelland, 1961), researchers have tried to list and describe the personality traits
that identify successful entrepreneurs (Timmons, 1985). A main criticism of this approach is that
it tends to underestimate the extent to which crucial skills can be acquired by learning (Deakins,
1996) and through previous failure in establishing new firms. A too narrow focus on personal
characteristics can also divert attention from the environment the entrepreneur has to operate in
(e.g. a country’s economic policy, as well as its dominant social norms), and from other
important structural and positional characteristics (e.g. social ties and networks).
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There are numerous empirical studies of entrepreneurship, but these are seldom linked to
conceptual schemes, typologies or theories. Moreover, only few of them specifically address
R&D and innovation and technology in connection with the entrepreneurial phenomenon. This
paper attempts to inject some order into the discussion of entrepreneurship by reviewing current
issues and emerging trends, through (i) clarifying key terms typically used in entrepreneurship
research; (ii) presenting a conceptual framework for assessing the entrepreneurial phases
resulting in success or failure; (iii) surveying and critically evaluating representative studies
according to the schemata provided (specifically, discussing research on technology- and
knowledge-intensive firms, social network theory and the entrepreneurial process/stages); (iv)
presenting implications for future research.
This review can be distinguished from earlier ones in that it tries to discuss and integrate
research from a variety of disciplines, such as psychology, sociology, management and
marketing.
The paper is organised as follows: Section 2 introduces definitions of the issues, and
presents a general framework describing how the new knowledge-based entrepreneurial
phenomenon is conceptualised in the context of this study. This includes a short introduction of
the specific issues in the research. Section 3 formulates the main research hypotheses. Finally,
Section 4 outlines some tentative conclusions and suggests implications for researchers and
practitioners.
2. THE ENTREPRENEURIAL PROCESS
In this paper, entrepreneurship is defined as the act of establishing a new venture. This
definition includes the separation from established firms (spin-offs), as long as the effort is
recognisable as that of an individual and not as a corporate or entrepreneurial act. The initiating
5 of 34
entrepreneur is thus the person who has the idea for the venture and/or establishes the new
business. While the definition neither excludes partnerships or other collective action nor the
existence and importance of supporting entrepreneurs, the focus remains exclusively on the
original initiator/s (Gartner et al., 1994). Attention is also focused exclusively on firms that to a
significant extent depend on the development and/or application of scientific or technological skills
or knowledge, as defined below. While important, issues regarding craft-based firms established
for the sole purpose of self-employment are not discussed here.
2.1 New Technology-Based and Knowledge-Intensive Firms
As mentioned in the introduction, small firms are considered to be important catalysts for change
and innovative efforts. In recent years, interest has also increased in how new technology-based
small firms can help employment and GDP growth (Bollinger et al., 1983; OECD, 1996) in ever
faster changing high-technology markets (OECD, 1999). Such firms are seen as businesses
whose products or services are to some extent dependent on the application of scientific and/or
technological knowledge (Allen, 1992). They can either use novel, advanced technology to
provide a new product or service, and/or employ existing technology in an innovative way. The
products of such a firm do not necessarily need to be technological, therefore (Allen, 1992).
Technology- or knowledge-based SMEs are often also high-growth SMEs (OECD, 1999). The
literature suggests that technology-based, or knowledge-intensive, high-growth SMEs are created
in various sectors of the economy such as biotechnology, computer technology, electronics,
information technology, materials technology and telecommunications (Allen, 1992). While this
paper focuses on such sectors, it will not specifically address small firms as such, being primarily
interested in the entrepreneurial phenomenon. While all start-ups are bound to be small, some of
them are likely to grow rapidly and become medium and large companies within a short time after
their establishment.
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In the following pages, we propose a causal model to show how social ties, the entrepreneur’s
background, and the surrounding institutional environment affect the funding, launching and
subsequent development/growth of a new business venture. The factors included in the model are
those believed to be important in understanding the entrepreneurial process, although their impact
has so far been largely under-researched.
2.2 The Entrepreneurial Phenomenon and Its Environment
The entrepreneur is a key factor to understand how and why new organisations are
established. Entrepreneurship as a function of this factor alone, however, is unable to fully
account for the phenomenon of entrepreneurship (Thornton, 1999). Past research into how
personality traits distinguish successful entrepreneurs from others has, in fact, had limited
success (Brockhaus, 1982; Timmons, 1985).
A more recent strand of research emphasises the importance of external structural
influences on the creation, selection and survival of new ventures. This is generally referred to as
the “ecological” approach (Hannan, 1989; Aldrich, 1999), and is based on aggregated events at
the population level of analysis. Because entrepreneurial innovation is largely a function of
existing infrastructure at the industrial level, the ecological approach has been criticised by some
authors (e.g. Van de Ven and Garud 1989).
According to Shane and Venkataraman (2000), the choice of exploitation mode depends on
the nature of the industrial organisation (financing, first-mover advantages, low barriers to entry),
the opportunity (uncertainty prevails) and the appropriability regime (property and patent laws).
In addition to the influence of existing infrastructure on entrepreneurial development, Reynolds
(1991) has also suggested an extensive set of social networks as an important prerequisite for
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starting a successful new venture. Similarly, the existence of venture capital, business angels or
incubator regions and structures (i.e. Technology Business Incubators) are elements that have
all been put forward as essential ingredients in an entrepreneurial start-up (Thornton, 1999). This
suggests that both personal and business networks, as well as the institutional and social
environment in which the entrepreneurial process takes place, need to be taken into account.
2.2.1 Technology Business Incubator (TBI) Ventures vs. Others
As indicated above, TBIs might have some effect on the launch of a firm and during its pre-
growth phase. High-tech or knowledge-intensive firms are in fact likely to be more risky ventures
than traditional businesses (Allen, 1992), and might therefore benefit from the initial support of a
specialised institutional setting. Moreover, such firms are usually unable to quickly generate
revenue, and their success is difficult to predict (Allen, 1992). To reduce the risks, while at the
same time helping entrepreneurs launch new firms, governments and private entrepreneurs
have introduced various initiatives, including the establishment of TBIs that help obtain and/or
provide seed funding and advice (Bollinger et al., 1983)
2
. The literature highlights the importance
of TBIs in helping to reduce some of these risks while improving the chances for success (for an
extensive review, see Mian, 1997).
Apart from providing start-ups with building space in physical proximity to other firms, a TBI
can also give the new firm the opportunity to lease or rent space below market rates, though our
pilot study challenges this. Moreover, certain facilities, such as reception and canteen services,
can be shared between several firms, thus further helping to reduce costs (Miller and Cote,
2
In Denmark, TBIs take the form of Innovationsmiljøer (Innovation Centers) and Forskerparker (Science Parks),
respectively.
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1987; Mian, 1997). Just as important may be that a TBI can also offer financial, human and
social capital in the form of, for example, managerial and legal know-how (Mian, 1997).
Table 1 outlines the above in a more formal structure. At the moment, there is nothing in
the literature about TBI-sponsored and non-sponsored firms’ chances for success (Bugliarello,
1998). In Denmark, recent studies commissioned by the government to investigate the
performance of local TBIs have focused exclusively on firms established within such
environments (Erhvervsfremmestyrelsen, 2000). However, the literature stresses that
measuring these effects is difficult, and that TBIs have not always been as successful as
expected (Mian, 1997).
Table 1 suggests that, in order to better understand the importance of the support provided by
TBIs, it might be helpful to look at firms that have benefited from TBI resources vs. others. For
example, if TBIs are successful in reducing the risk of high-technology ventures for subsequent
investors (e.g. Allen, 1992), TBI-supported or related start-ups should do better in the
entrepreneurial tournament (see Hypothesis 2.3 and 3.2 in the following sections).
2.3 Growth, Success, Failure and Other Outcomes
The above suggests that the existing infrastructure, and the personal characteristics and social
ties of entrepreneurs play an important part in the foundation of a new business. However, the
literature also suggests that the success, failure or other outcome (e.g. a take-over) of a new
venture can be explained by organisational and environmental factors. Research shows that,
among other things, strategic factors influence the performance and possible survival of new
ventures (cf. Liebermann and Montgomery, 1988). For example, an entrepreneur and/or
manager must decide where to locate the new venture in order to obtain a competitive
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advantage (Besanko et al., 1996). However, not all competitive advantages and entrepreneurial
opportunities are immediately apparent to everyone, which results in an asymmetry of beliefs
about opportunities (Hayek, 1945).
An entrepreneur is expected to have special insights, or to possess special information, which
enable him/her to discover and explore entrepreneurial opportunities which others either fail to see
or mainly see a risk of failure. This by no means implies that entrepreneurs never fail. On the
contrary: the creation of new firms has always been accompanied by the death of others - what is
generally referred to as “creative destruction” (Schumpeter, 1939), or simply “business
dynamics” (Reynolds et al., 1999). Traditionally, economic growth is accompanied by company
turbulence or “churning” (Reynolds et al., 1999). It is evident, however, that the likelihood of
discovering entrepreneurial opportunities must be influenced by various factors. We propose that
human and social capital are useful theoretical stepping-stones to a further understanding of the
entrepreneurial phenomenon.
While the above indicates that the failure of new ventures is part of the entrepreneurial
tournament, research on new ventures seems to be biased towards successes (Shepherd,
1999). However, the past experience of an entrepreneur, including experiences from failed
ventures, can be invaluable to the success of new ventures.
In order to further our understanding of the entrepreneurial process, failures will also have to
be included in the study of entrepreneurship. Our research will explicitly address this issue by
following entrepreneurs after the failure of their initiative, and by controlling whether and to what
extent previous experiences of failure influence the establishment and success of new
entrepreneurial attempts.
2.4 Towards the Development of a Causal Model of Entrepreneurial Success
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As discussed earlier, entrepreneurship is influenced by many different factors, and will result in
successes as well as failures. Entrepreneurs starting new knowledge-intensive or technology-
based firms are often scientists, or have a scientific or technical background and some prior
business experience in technology-related sectors. Frequently, they are also the inventors of the
new product (Roberts, 1991). The following section presents a framework for identifying the key
factors affecting entrepreneurship, which are also included in this study (Figure 1).
------------------------------
Insert Figure 1 about here
------------------------------
Figure 1 illustrates how various factors, such as social, human and financial capital, as
well as the characteristics of the market, contribute to the success of an entrepreneurial
venture. The figure is divided into two levels of analysis. The first level focuses on the
entrepreneur as an individual social actor, while the second concerns the newly established firm.
During the early stages of a new venture’s development, the characteristics of both the
entrepreneur and the market are likely to be the best indicators of the firm’s success and early
growth. Later on, however, the firm is likely to become increasingly independent of the
entrepreneur, in part because s/he will typically give up part of his control and ownership of the
firm to obtain new financial capital. At this stage, the firm’s success is likely to become an
additional, independent factor for access to new funding opportunities.
An entrepreneur’s social capital consists of all the social relationships and social structures
that can be used to achieve his goals. Social capital is the result of a dynamic interaction, and is
potentially present in all non-conflict-based social relations. However, it only becomes “capital”
when it is used by actors in concrete situations (Coleman, 1990; Pizzorno, 1999; Portes, 1998).
Individual social capital consists of the set of social relations (social ties) surrounding the actor –
in our case, the entrepreneur – that can more or less be consciously mobilised when needed.
The person’s gender, age and family background are generally expected to influence the number
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and type of social ties. For example, a person with extensive business experience will have
access to people with special know-how, while a graduating student is likely to lack such
contacts (Campbell and Heffernan, 1981). These social relations (or ties) can be private or
business-related (cf. Figure 1).
Collective social capital is the result of all social interactions and relations that take place, or
have taken place, in a given society. Social capital gives rise to what is defined as the
“institutional environment.” For example, Maurice et al. (1980) found in their study that
organisational processes develop within an institutional logic that is unique to a society. This
institutional logic includes norms and values, as well as the interpersonal trust level. Trust is
defined as confidence in others’ moral integrity or goodwill in dealing with unpredictable issues
(Ring and Van de Ven, 1994).
Collective social capital is also “structural embeddedness,” which implies that the
entrepreneur’s position may affect the possible success of a new venture. Varying levels of and
unique access to collective social capital, e.g. via the support of a TBI’s facilities and resource
network, can give rise to a particular set of economic opportunities. The latter help explain
different behaviours in response to seemingly identical environmental uncertainty (Burt, 1992).
We define human capital as resulting from the experience and educational background of the
entrepreneur (see also Figure 1). Experience and education can be general, or related
specifically to the business sector and entrepreneurial activity. In this sense, the number of
years, as well as level and type, of education, including courses and languages, are part of the
human capital at the disposal of the entrepreneur. Again, also in this case, age, gender and
socio-economic background of the family of origin are likely to influence the educational and
professional opportunities and choices of future entrepreneurs.
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According to Figure 1, financial capital can be made up of personal and general funds.
Personal funds can be sweat equity (i.e. time invested by the entrepreneur without getting paid),
an entrepreneur’s own funds, and help from family and friends, as well as bank loans based on
personal collateral. Other capital might include seed funding from a development agency,
government–backed loans, or funds from a venture capital (VC) firm (Shepherd, 1999).
All three types of capital - social, human and financial - are assumed to be related to each
other, as shown in Figure 1. For example, social capital in the form of contacts to certain
resource centres (e.g. government agencies) may help securing external funding. Later on, the
firm’s success might allow the hiring of the new human capital needed to increase the probability
of success, thereby creating additional individual and social capital.
An entrepreneur may decide to launch a new venture if s/he has the human, social and
financial capital needed to start a firm. If not, s/he may decide that additional financial or human
capital is needed first, and try to get another partner and more financing in order to launch or
expand the firm. Social, human and financial capital thus come into play both before the launch
and during the various initial phases of a new firm.
The model in Figure 1 outlines a causal model to be tested after a subsequent data collection
phase. Human, social and financial capital, together with the type of company and
characteristics of the market, constitute the four main factors or latent variables influencing the
success of new ventures. A new venture’s success is defined first and foremost as its survival,
and secondly as its growth. Growth might be measured through different indicators, such as an
increase in the number of employees, or the firm’s capital, sales, revenue, profit and so forth.
For this research, various measures of growth will therefore be combined in an overall index of
growth.
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Internationalisation is seen here as a “split variable”. In other words, since internationalising
and non-internationalising firms are likely to follow different paths of growth, and the definition of
growth itself might need to be different for the two kinds of enterprises, they will be treated
separately.
Various authors have proposed different phases through which entrepreneurs are supposed
to pass in the process of establishing new ventures (Wilken, 1979; Roberts, 1990; Roberts,
1991; Gattiker and Ulhøi, 2000). For the purposes of this research, these have been summarised
into two generic stages, namely the pre-growth/development stage and the first growth phase of
entrepreneurship (cf. Table 1).
During the “development stage”, initial problems have not yet been overcome, and the firm is
typically dependent on either the support of an incubator environment, other institutions, or
persons providing resources at low cost, such as partners working without salary in their spare
time (“sweat equity”). Some entrepreneurs may still be working for the source organisation, such
as their previous employer. Thus, the source organisation, which in the case of technology or
knowledge-intensive firms is likely to be a university or research centre or unit, may allow the
entrepreneur to exploit various resources in order to carry out R&D (Roberts, 1991). At this
stage, entrepreneurs might also rely on private resources, e.g. personal savings or loans from
friends or family. A bank loan may be guaranteed by personal collateral (Roberts, 1991). Since it
is often difficult to predict the potential for success of high-technology firms, this makes them
less attractive to venture capitalists than conventional businesses (Allen, 1992).
Previously used resources should have culminated in technology assets. Resources can
have been used to draw up a well-developed business plan, produce a working prototype, or
obtain a patent. Receiving resources and commitments requires trust. Better technology assets
can be interpreted by investors as the additional information they need to reduce risk (Rosen and
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Olshavsky, 1987) and negative prospects. Finally, providing important information to investors
should also increase trust in a project by helping them to reduce their risk perception (McNamara
and Bromiley, 1999; Ring and Van de Ven, 1994).
Once the firm has survived the initial establishment phase, it is expected to enter its first
growth phase. Growth may result in the enterprise leaving the incubator environment if it was
launched in such an environment. These types of enterprise are likely to be 2-3 years old
(Gattiker and Ulhøi, 2000). However, some data suggest that new technology-based firms might
stay in the incubator for up to 3-5 years (OECD, 1997).
3. RESOURCES AND ENTREPRENEURSHIP
Figure 1 illustrates a causal model of the entrepreneurial process.
The relationships shown need testing, and the subsequent findings may lead to modifications
of the proposed model. Nevertheless, we have put forward a number of research hypotheses
based on this model and the literature review above. In the following sections, we will discuss the
factors supposed to influence the entrepreneurial process - human, social, financial capital, and
the main issues related to technology and market characteristics - in more detail.
3.1 Human capital
Figure 1 suggests that human capital consists of specific (e.g. industry experience) and
general (e.g. length of education) human capital. Entrepreneurs have different educational and
professional backgrounds, and these are likely to have a strong influence, in terms of competitive
advantages and disadvantages, on the process of starting a new business (Roberts, 1991).
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Differences in human capital might be distinguishable based on the entrepreneur’s background,
e.g. academia, business and venture capital firms or investors (Allen, 1992).
Academics, for example, are likely to have a strong technical and/or professional background,
easy access to R&D facilities, and perhaps also a clear idea about the present and future needs
of the market. Moreover, they might have a variety of important connections (personal and
institutional networks). However, they are likely to lack crucial managerial skills, including the
ability to envision practical applications of their own ideas and the necessary managerial and
market experiences. Academics are also generally aware of the importance of protecting
intellectual rights, particularly when external sponsorship is involved (Allen, 1992). This is at least
true for natural scientists, engineers, and others with similar backgrounds.
Entrepreneurs coming from the industry are likely to know how to transform innovative ideas
into marketable products. In addition, they might have a good insight into the business world,
clear ideas about what is needed for the success of a new business, and personal ties to
business people with important skills (Gattiker and Ulhøi, 2000). Some have also suggested that
a distinction should be drawn between novices and ‘average’ or ‘typical’ entrepreneurs and
experienced founders. The habitual entrepreneur starts new businesses and usually moves on
after a few years (McMillan, 1986).
Entrepreneurs with experience in venture capital firms might have important connections to
possible sources of financial capital, but lack technical and managerial skills.
Entrepreneurs’ educational and professional experiences directly related to their new venture
are sometimes referred to as “specific human capital” (Cressy, 1999). These experiences might
be very important for the success of a new venture. When evaluating the probability of an
entrepreneur’s success, therefore, it is important to take previous experiences into account, e.g.
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whether they attended business or technical schools and courses, or have already established a
firm (Starr et al., 1993). Based on the above, we now propose the first hypothesis:
Hypothesis 1.1: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneur(s) with critical competencies
and specific human capital, such as:
a) technical (e.g. science education)
b) managerial (e.g. habitual entrepreneur)
c) market-related areas (e.g. experience in same industry)
The success of a new venture might also be influenced by “general human capital” (Cressy,
1999), which we define as consisting of length of education, previous work experience in other
sectors, and knowledge of languages that may ease or foster the early establishment of
international connections (see section 3.4).
All the above elements can contribute to the ability of the entrepreneur to discover new
opportunities and find the best way to take advantage of them. The above suggests testing the
following hypothesis:
Hypothesis 1.2: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneur(s) with general human capital,
such as:
a) a higher academic degree
b) other professional experiences
Age, gender, and other socio-economic background variables can also influence the
formation of general, as well as specific, human capital. For example, previous studies report
that women face disadvantages in the entrepreneurial tournament, which in some cases affect
business growth negatively (Moore and Buttner, 1997). Moreover, women tend to choose certain
types of educational institutions or courses that do not help them develop the kind of human
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capital required to be a successful entrepreneur. This choice might also exclude them from
important social networks.
Cressy (1999) found in his study that age, understood as “owner’s maturity”, affects a new
venture’s possibility of success and growth positively through the impact on the increased
human capital.
Again, having successful entrepreneurs in the family should help the individual secure the
human and social capital needed to succeed (Beyers et al., 1998).
All these elements can affect the entrepreneurial attempt directly and/or indirectly. In
particular, they might affect the ability of the entrepreneur to select an effective managerial team,
obtain initial and seed capital, establish useful personal and institutional contacts, and discover
opportunities for expansion in foreign markets (Reynolds and White, 1996). This results in the
following additional hypothesis:
Hypothesis 1.3: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be indirectly, positively affected by entrepreneur(s) who are:
a) male
b) older
c) from a family of entrepreneurs
3.2.Social Capital
As Figure 1 indicates, social capital consists of individual and collective social networks, ties
and structures that help the individual get access to information and know-how. According to
Aldrich and Widenmeyer (1993), social ties connecting entrepreneurs to resource providers (e.g.
other entrepreneurs and knowledgeable individuals) facilitate the acquisition of resources and the
exploitation of opportunities.
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Social ties can be strong or weak. Supporters of the weak-ties hypothesis argue that these
are more effective means for knowledge-sharing. A person who belongs to a social network with
weak ties is more likely to gain access to new information than if he was exclusively surrounded
by strong ties (Granovetter, 1973, 1974). In order to obtain information and establish business
relations, the entrepreneur needs to be in contact with other persons who can provide
complementary knowledge and resources (Johannisson, 1988; Larson, 1991; Bollinger et al.,
1983). These persons are likely to be accessible, directly or indirectly, through private or
business-related ties.
In the literature, weak ties have often been associated with the generation of ideas, whereas
strong ties tend to be related to problem-solving (Leonard-Barton and Sinha, 1993; Henderson
and Cockburn, 1994; Eisenhardt and Tabrizi, 1995; Hansen, 1999). Unfortunately, it is still
unclear precisely how weak social ties come into play in new technology- or knowledge-based
firms. However, innovation literature emphasises the fact that close and frequent social
interaction between relevant internal groups and functions during the internal development
process improves the effectiveness of the innovation process (Ebadi, Utterback, 1984; Leonard-
Barton and Sinha, 1993; Henderson and Cockburn, 1994; Eisenhardt and Tabrizi, 1995). We
therefore propose to test the following hypothesis:
Hypothesis 2.1: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by entrepreneurs with access to a social
network made up of weak ties.
In addition to weak social ties, strong ties based on personal relationships may also play an
important role for an entrepreneur. Hu and Kronelliussen (1997) write that personal ties result in
improved company performance. Support, knowledge, and complementary resources can be
acquired through such ties, which lead to social co-operation between key players (e.g.
Johanson and Mattsson, 1987). Powell (1990) attributes success in inter-organisational relations
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to sentiments of friendship and a sense of diffusing personal obligations (social contracts) which
arises between people involved in exchange relationships.
Beyers et al. (1998) suggested that researchers should focus attention on “other people”
with “whom the entrepreneur spends time and how they respond” (p. 1-5). In turn, this will permit
the study of how social networks help the individual to obtain vital input in the competition for
scarce resources. This suggests that the following hypothesis should be tested:
Hypothesis 2.2: The growth of new ventures (e.g. employment, sales, revenue and
profits) will be positively affected by partners having strong social ties amongst:
a) each other, and
b) with co-operating parties (e.g. board members and investors).
As pointed out earlier, institutions and interpersonal contacts constitute what we refer to as
“collective social capital”. They can either hinder or support the entrepreneur’s efforts to mobilise
additional resources for the venture. Being supported by a TBI or related/located at a TBI
represents social capital that, in turn, should help reducing the perceived risk of a project from an
investor’s perspective (Bugliarello 1998). Moreover, the access to TBIs may result in the TBI
providing the firms with access to seed money and other support. Accordingly, a new venture’s
success could be influenced by a TBI in several ways. Direct influence could be exercised
through the funding of the new venture, or the distribution of financial capital (Bugliarello 1998).
Active participation of the TBI in the project’s development (e.g., writing business plan and
assessing market potential) or being involved in the management of the firm after its
establishment, would instead represent forms of indirect contribution through the delivery of
additional human capital, e.g., finding a manager (Mian 1997).
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In other words, TBIs can offer the entrepreneur an indirect contribution in terms of business
and advice ties (social capital). These ties can be established with consultants, with other
entrepreneurs or with investors (e.g., Hu & Kronelliussen 1997). Hence, we propose the
following hypothesis:
Hypothesis 2.3: The growth of new ventures (e.g. employment, sales, revenue, and
profits) will be positively affected by entrepreneurs with access to a TBI’s
resources (e.g. financial, social and human capital).
3.3 Financial Capital
Financial capital is an important strategic asset, which is needed for the foundation, survival
and growth of any new venture. The search for external capital (investors) is likely to be the
activity that takes up most of the time of new as well as established entrepreneurs. This means
that, while financial capital is an important factor in the entrepreneurial process, it is also an
intermediate goal on which other resources are spent, especially human and social capital.
New technology- or knowledge-based firms have distinctive financial needs during their
various evolutionary stages. The pre-company stage, where laboratory and other facilities of a
“source-organisation”, or the basement of the entrepreneur’s own house, often fulfil the need for
financial capital, is followed by the pre-growth or development stage. In this stage, the company
still often lacks an operating prototype, and has not yet worked out a very well developed
business plan - if it has one at all. Here, the risk is still substantial, and unless seed funding is
provided by a TBI, it can sometimes be difficult for the venture to get established (Bugliarello,
1998).
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Shane and Venkataraman (2000) note that, even when exploring an opportunity, uncertainty
prevails and the venture may fail. Financing is thus affected by the potential risk inherent in any
new venture (Gattiker and Ulhøi, 2000). Since the future success of new technology- or
knowledge-based firms is difficult to predict, and such ventures are more risky than traditional
businesses, obtaining capital may be particularly difficult (Allen, 1992).
According to risk theory, risk assessment is based on the individual’s perception of the
likelihood of loss associated with an investment decision (Kahneman and Tversky, 1979;
McNamara and Bromiley, 1999). Perceived risk is associated with a need to identify and
measure the risk(s) an entrepreneur or firm is exposed to, and to what extent (Hodder, 1999).
Risk aversion, in turn, is strongly influenced by whether or not trust exists between the actors
involved. Studies have shown that, when individuals evaluate situations associated with risk,
there is a positive relationship between risk and return and a negative relationship between risk
and loss (Kahneman and Tversky, 1979).
However, if positive prospects are associated with a risk decision, and they are not
significantly different from ones associated with the non-risk choice, people will opt for the non-
risk choice (Gottfries and Hylton, 1987; Kuehlberger et al., 1999). Moreover, the more complex
the technology, the more difficult the risk assessment procedure for potential investors. Investors
will therefore prefer less risky choices (Philpott, 1994) that require less funding, thereby reducing
the negative prospects of the loss of their investment (Kahneman and Tversky, 1979).
In traditional organisations, complexity of technology may require radical changes in users’
habitual behaviour, thereby making its adoption and diffusion more difficult to assess and predict
(Gattiker, 2000) for potential investors.
Moreover, complex technologies tend to require heavy investment before a prototype is ready
to go to the market.
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This leads to the following hypothesis:
Hypothesis 3.1: Obtaining capital or financing for projects/firms is negatively
affected by trying to obtain funding for (relatively):
a) complex technology requiring
b) heavy investment.
Investors’ perceived risks of a venture’s possible success may also be influenced by the
characteristics of the firm and its development. Potential investors’ will, for example, be more
likely to trust a project if the entrepreneur has invested his own capital (human, social or
financial) in it. This will give investors the impression that the entrepreneur has the goodwill and
moral integrity needed to deal with unpredictable events and situations (Ring and Van de Ven,
1994). In other words, the risk perception of potential investors can be softened if entrepreneurs
have already invested their personal capital and time (i.e. ‘sweat equity’) in the project.
If, therefore, an entrepreneur has spent his time developing a comprehensive business plan
or product prototype at an early stage in the project, risk perception should be reduced (Deakins,
1996) and the likelihood of obtaining capital should increase. This leads to the following
hypothesis:
Hypothesis 3.2: Obtaining capital or financing for projects/firms is positively
affected by previously having
a) invested private funds and/or sweat equity
b) obtained seed money (e.g. government, TBI or other)
In general, high-tech entrepreneurs have proved unwilling to give up control in the first stages of
new ventures (Philpott, 1994). However, entrepreneurs may have to give up part of their equity,
depending on how investors perceive the risk. Risk perceptions are affected positively by several
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factors, thereby reducing the percentage of equity and control that entrepreneurs might have to
give up in order to obtain capital.
Among other things, technology assets can influence the total amount of equity to be invested
in a new venture as well as the percentage of equity remaining to the entrepreneur. For example,
while the overall amount of equity or capital can rise rapidly with additional investment, the
entrepreneur’s share might actually be reduced (i.e. s/he is left with a smaller piece of a larger
cake). In contrast, the entrepreneur can increase his share of the equity if important milestones
are reached, thereby ensuring new capital while at the same time investors reduce their share
(Gattiker and Ulhøi, 2000).
Success paired with rapid growth during the first few years requires additional equity and risk
capital, which, in turn, will often push the entrepreneur’s ownership below 50% (e.g. Beyers et
al., 1998; Gartner et al., 1994). An entrepreneur can have invested sweat equity and own capital
beforehand (Deakins, 1996), however, which can have a positive effect on the valuation of the
firm for parties considering investments. This leads to the following hypothesis:
Hypothesis 3.3: Entrepreneurs seeking capital/financing or venture capital will
retain a larger share of the equity if:
a) they have invested their own capital and time in the project
b) a functioning prototype exists and/or property rights can be secured
c) (e.g. patent)
3.4 Internationalisation of high-tech start-ups
As discussed above, internationalisation is a characteristic path of development for some
firms. Research has found that most of the conventional companies in traditional industries that
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internationalise at some point in their development tend to act in accordance with the so-called
“stage theory.” According to this theory, firms internationalise in a slow and incremental manner,
increasing their internationalisation if and when they gain the necessary experience and
knowledge. In recent years, however, new technology-based or knowledge-intensive firms show
an increasing tendency to be “born global,” by which is meant that they start interacting globally
shortly after their launch (Jolly and Alahuhta, 1992; Madsen et al., 1999; Vahlne, 2000).
Research into technology-based firms indicates that rapid internationalisation has a positive
effect on growth (Bell, 1995). Of particular interest here is how the entrepreneur’s human and
social capital helps the firm to expand beyond domestic markets. Research also suggests that
living abroad, and having first-hand knowledge of foreign markets and business opportunities due
to previous working experiences, helps a person succeed in other businesses with
internationalisation activities (Burgel and Murray, 1998).
The above suggests that specific human capital, such as work experience abroad and
knowledge of other languages, should help a new venture to expand into foreign markets. To the
best of our knowledge, such research on new technology-based or knowledge-intensive firms is
lacking, which suggests the following hypothesis:
Hypothesis 4.1: Success in the internationalisation of a technology-based or
knowledge-intensive firm will be positively affected by entrepreneur(s) with
critical competencies and specific human capital, including having:
a) worked abroad
b) studied abroad
c) knowledge of foreign languages
Moreover, the establishment of personal or business-related international connections might
ease expansion in foreign markets, due to the information gained through social ties (see section
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3.2). In fact, though, as previously mentioned, there is no general agreement among authors
about the relative importance of weak and strong ties with regard to either employment and
mobility (Granovetter, 1974; Burt, 1992), or entrepreneurship (Light, 1984; Light and Bonacich,
1988), there is little doubt that social ties and social capital are among the most important
vehicles of strategic information. This is especially true for situations where actors enter
“unknown territory”, such as new jobs or markets. This leads to the last hypothesis:
Hypothesis 4.2: Success in the internationalisation of a technology-based or
knowledge-intensive firm will be positively affected by entrepreneur(s) with
critical international, personal or business-related social relations (ties).
4. CONCLUSIONS AND IMPLICATIONS
A first important conclusion that can be drawn from the literature reviewed in this paper is
that, in the fields of entrepreneurship, strategy and social networks, there is a limited cross-
feeding and integration of research results. Such a limited exchange of ideas across disciplines
is a stumbling block to our understanding of entrepreneurship and of how individuals exploit
entrepreneurial opportunities. We therefore argue, along with Blalock (1984), that, to better
understand how people use social, human and financial capital in the entrepreneurial
tournament, researchers should adopt an interdisciplinary approach.
New technology- and knowledge-intensive firms contribute greatly to the economic success
of a country, both in terms of exports, employment, innovation, and R&D. This is widely
recognised (Bollinger et al., 1983), and governments are trying in various ways to foster the
development of such firms. However, efficient measures can only be developed based on a
thorough understanding of the complex dynamics underlying the entrepreneurial process in this
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sector. Moreover, a greater awareness of the factors which facilitate or hamper the discovery
and exploitation of entrepreneurial opportunities, and of the various phases through which the
entrepreneurial process passes, might help entrepreneurs develop more advanced strategies.
Our understanding of what makes new technology-based or knowledge-intensive firms succeed
involves a variety of factors. Some of these refer directly to the entrepreneur as an individual
embedded in a social context, others to the new firm as an actor itself, in a context characterised
by a certain institutional setting. All these elements interact and influence each other at any given
time and across time. We propose, therefore, to investigate them through a variety and
combination of different methods (surveys and in-depth qualitative interviews), and in a
longitudinal perspective.
Finally, entrepreneurial success is closely related to the experience of failure. Previous
failures contribute to the development of an entrepreneur’s human capital through the natural
process of learning. In addition, the general acceptance of the risks connected with
entrepreneurship, including the possibility of failure and bankruptcy, constitute an important
aspect of the social environment influencing a country’s economic activity. For these reasons,
we have decided to explicitly include this issue in our investigation.
In light of the information gathered, and of the practical needs of knowledge expressed by the
public and the private sector in Denmark, we have formulated a set of research hypotheses that
will be tested during the empirical part of the research. These hypotheses are summarised in a
causal and process model of entrepreneurship, which will be subjected to empirical verification.
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