Confusing Entrepreneurship

I recently attended a conference session on entrepreneurship research in which one of the presenters started out formulating a composite entrepreneurship index consisting of 24 variables that “commonly” are used to “measure entrepreneurship.” The term entrepreneurship as used in this presentation, however, remained undefined.

That is, until someone asked what was meant by entrepreneurship. This followed upon showing a circle diagram showing “firm births” (i.e., firm creation) within which a smaller circle showed “entrepreneurship” as a sub category (not the picture to the right). The conclusion in the paper that these circles were supposed to illustrate was that states were shown to do a better job of creating firms than entrepreneurs. All according to the composite index.

This statement almost made me fall out of the chair. But looking at my notes again I realize that the presenter meant that states are, at least according to this composite index, better at creating firms than they are at creating entrepreneurship. This should not be very surprising, since entrepreneurship is hardly something that we can get more of from regulation or taxation (unless we measure political entrepreneurship).

Following the question from the audience, the presenter attempted to define entrepreneurship as opposed to firm creation: “All entrepreneurs start firms, but all firm births are not by entrepreneurs,” he stated. Not a very clarifying attempt at a clarification, upon which the following illustration was given. Imagine somebody starting a restaurant, and this restaurant in time reaches its market climax and at that time has maybe 10 employees. The business does well. Is this entrepreneurship? No, not if the owner is satisfied with his firm’s size and does not aim for it to grow. Because entrepreneurship, we learned, is characterized by quickly growing one’s business – especially if one turns to sell it off for billions of dollars to then move on to start new projects. Then starting a firm is entrepreneurial.

I am not convinced by this definition. It seems unclear and arbitrary – and it is hard to see how this type of entrepreneurship is different from venture capitalism. But perhaps this is the kind of confusion we must accept if we see entrepreneurship as only firm creation. Especially if we try to “fix” the definition by excluding startups that are not all that entrepreneurial, such as franchises.

Are Great CEOs Born, Not Made?

David Aaker writes on the issue of whether entrepreneurs are made or born at the HBR Network Blogs. While not targeting entrepreneurs specifically, but CEOs, Aaker’s take is that great CEOs are born and not made. For two reasons: they have executive talent, which Aaker defines as a

good feel for selecting, motivating, and evaluating people; developing and selling a strategy; creating an inspiring culture; developing an organizational structure and management process that work for the strategy; fostering cooperation across silos; understanding and using financial measures; and an understanding of how marketing, branding, finance, production, distribution contribute to strategy,

and they also have “a flare” for good strategic judgment. I am not sure in what sense these two qualities are different, since the “good feel” he calls talent seems to involve at least as much judgmental ability as it involves skill. As he writes, “a CEO [with the right talent] who is missing background in some of [the above quoted] areas will quickly pick it up,” which to me implies an extraordinary ability to imagine patterns and outcomes – and a superior judgment in what works, what doesn’t, and how to find a solution.

But judgment is the second quality. So please excuse me if I have a hard time distinguishing between the two.

What I find fascinating, however, is how similar Aaker’s view of the “gifted CEO” is to Frank Knight’s discussion in Risk, Uncertainty, and Profit (1921) on entrepreneurship as the exercise of superior judgment. The second quality fits obviously and perfectly in Knight’s framework, but the first fits as well. Knight does not say the entrepreneur is necessarily a “jack of all trades” (Lazear, 2004) but that he knows where to find the necessary knowledge. In this sense, the entrepreneur exercises not only his own judgment, but is involved in judgmental assessment and decision-making regarding others’ judgment.

Knight was also clear about judgment being something that one can develop through experience. Hence, judgment can be learned, but cannot necessarily be taught. Those with plenty of experience – and perhaps with diverse such – should ceteris paribus have better judgment than those without. So from a Knightian point of view, Aaker’s view of the great CEO being “born, not made” appears both right and wrong.

But what is really striking is how well Aaker’s experience and Knight’s theory go together. This is what characterizes great scholarship: it reinforces and explains the experiences of practitioners. Just like theoretical business scholarship can and should learn from those who practice business, practitioners can have much to learn from theory. Perhaps even if they are born with superior judgment.

“Show Me the Carfax!”

The Columbia Daily Tribune ran a nice piece last weekend on Carfax, founded in Columbia in 1984 by local entrepreneur Ewin Barnett. Carfax is a fascinating entrepreneurial story: Ewin was working with state DMV records used by direct marketing companies to compile lists of names and addresses, and noticed that the records also contained VIN and title numbers, information that could be used to track the life history of the car. A moment of Kirznerian insight, followed by a lot of Knightian investment, led to a business that now employs 600 people and recently processed its 9 billionth automobile record. (Ewin sold the company in 1993 and it’s now headquartered in Virginia, but the technical staff remains here in Columbia, along with most of the employees.)

Startup Weekend to Columbia!

Despite the financial crisis, the whole world seems to organize “startup weekends” like crazy. The initiative does not make any policy prescriptions; it is purely a hands-on experience where anybody and everybody is welcome to engage in the “manically lazy” labor of entrepreneurship. The point is to offer a creative setting in which one can develop ideas into business plans or businesses.

Indeed, the organizers/sponsors promise wannabe-entrepreneurs a great opportunity within “risk-free environments where everyone is expected to roll up their sleeves and dive into the exhilarating world of startups.”

Each event lasts for 54 hours and aims to let “developers, designers, marketers, product managers and startup enthusiasts come together to share ideas, form teams, build products, and launch startups.” The startup weekend comes to Columbia, Mo. on September 30th – October 2nd 2011. The immense and intense entrepreneurial activity will all take place throughout the weekend at Museao on 3500 Buttonwood Drive.

Watch the “No Talk. All Action.” introduction video here.

The Kauffman Solution

Ewing Marion Kauffman Foundation president Carl Schramm and vice president Robert Litan write in the Huffington Post how to solve the financial crisis through supporting entrepreneurship in startup ventures. As noted in the article’s title, they have in mind a change to the legal institutions that would potentially “jump-start” the American economy – at no cost to the already strained government budget. And they expect that these changes mean that “we could enjoy permanently a one percentage point increase in our growth rate.”

Their proposal is a “Startup Act” with the explicit purpose to

encourage the building of more scale firms, lower the cost of capital for financing them, accelerate the development of new commercially relevant ideas, and remove barriers to expansion for new and existing firms

Schramm and Litan assume (and probably rightly so) that there are plenty of entrepreneurial and innovative minds out there who would like nothing more than to start their own businesses, but are (for many reasons) held back. Even though they propose the regular “tweaking” of bureaucratic red tape in order to more smoothly provide permits and certificates to business owners and entrepreneurs, the main points are of another kind – and they are well taken. They identify the main problems for economic growth through entrepreneurship and propose the following solutions:

  • import a lot more skilled workers who wish to work and start companies in the US
  • change the tax code to include a permanent capital gains exemption on investments in startups
  • soften the onerous requirements of the Sarbanes-Oxley Act

The common denominator to the underlying problems that fundamentally hinder entrepreneurship should be clear. Rather than provide specially selected individuals, firms, or industries with subsidies and support, government can and should allow entrepreneurs to unobstructed see the market landscape for what it is – without added distortions or costs. Entrepreneurship is a profit-induced response to the existing market structure and expected future demands, and is therefore a core part of the market as well as key ingredient to economic growth. On the flip side, any legislation, regulation, or bureaucratic rules aimed at “fixing” specific (politically opportune) problems only makes the market less predictable and thereby subjects existing and hopeful entrepreneurs to increased uncertainty.

What Schramm and Litan are implying is that we need to realize that entrepreneurship is (and provides) a fundamental market function and that it therefore functions best on the market’s terms. Firms should not necessarily be completely unregulated, but added regime uncertainty only interferes with the entrepreneurial function and makes it more difficult for entrepreneurs to be successful.

Manically Lazy Entrepreneurs?

In the so-called “information age” or “knowledge economy” those with knowledge of how to make the most out of computers and software can find ways to completely restructure or re-engineer business processes and radically challenge “how it has always been done.” For instance, someone with programming skills can (depending on the infrastructure at hand) replace tedious manual-labor-based routines with automatized procedures – thereby freeing up labor for other tasks and capital for other investments.

One effect of this new set of opportunities is the greatly increased power of decentralization and spontaneity; another effect is that the organization can potentially be in a “continual flux,” which itself may be(come) costly (but sometimes made into a comparative advantage). The role of management therefore changes, often in a way described as away from old-style direction of processes and tasks and toward support of performers of tasks.

This raises obvious issues of entrepreneurship in organizations and how to make sure the organization itself remains entrepreneurial. And what are the drivers of entrepreneurship in the “knowledge economy.” Rick Falkvinge, for instance, argues that what drives entrepreneurs – at least in information-technology-based solutions – is that they are “manically lazy.” They work hard, says Falkvinge, only to avoid “boring” work, much like Mises’s entrepreneurs act in order to “remove or … alleviate the felt uneasiness” (p. 14), and gladly invest time and effort to never have to do this kind of work before.

Of course, if the primary motive for entrepreneurs is to avoid boredom rather than create [organizational] value, then this confirms the Williamsonian thesis that shirking is a real and present danger in any organization.

Bert Hoselitz on Entrepreneurship and Economic Development

A few posts and consequent conversations about Bert Hoselitz have appeared at Organizations and Markets in the last few years.

I discovered him when I found the reprint of his excellent piece on “The Early History of Entrepreneurial Theory”.

Others discovered him as the translators (with James Dingwall) of Menger’s Principles of Economics.

Hoselitz founded the journal Economic Development and Cultural Change and edited it for more than three decades. Indeed, economic development was his professional passion. He worked extensively in India and was part of the very active community of scholars from across the social sciences that were engaged in development projects supported by USAID, the UN, and the NGOs. One of his papers appears in a compendium of 45 articles on theory and practice of economic development that were gleaned from hundreds of papers presented at a conference in Geneva that marked the United Nations’ Decade of Development.

The paper by Hoselitz is similar to another he wrote for The American Journal of Economics and Sociology a decade earlier.

Both papers are built on the argument that economic progress in the post-colonial, post-WWII developing world can benefit from entrepreneurial activity in small- and medium-sized manufacturing companies if  (1) governments make sufficient investments in infrastructure, notably power and transportation; (2) there are stable institutions to support and protect contracts and market entry; and (3) governments do not embrace pan-economic central planning. He believes that mixed economies can work. Read more of this post

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