The Continued Misuse of the “Opportunity” Construct

I’ve been sharply critical of the “opportunity discovery” perspective in entrepreneurship studies (e.g., here, here, and here). A post by Thomas Eisenmann on today’s Harvard Business Review’s Blog Network reminded me of these criticisms. The post elaborates on Howard Stevenson’s famous definition, entrepreneurship as “the pursuit of opportunity beyond resources controlled.” There are many problems with this definition, some discussed in an earlier post by Per. Much of the research literature, including not only my stuff but also important contributions from Sharon Alvarez and Jay Barney, Saras Sarasvathy, Per Davidsson, and others challenges the idea the profit opportunities exist, objectively, waiting to be discovered. Entrepreneurs don’t pursue “opportunities,” they pursue goals, plans, ideas, or visions, which require real resources to pursue, and which may or may not be realized.

Actually the HBS working definition of opportunities, as elaborated by Eisenmann, sounds much like the subjectively perceived goals I have in mind:

“Opportunity” implies an offering that is novel in one or more of four ways. The opportunity may entail: 1) pioneering a truly innovative product; 2) devising a new business model; 3) creating a better or cheaper version of an existing product; or 4) targeting an existing product to new sets of customers. These opportunity types are not mutually exclusive. For example, a new venture might employ a new business model for an innovative product. Likewise, the list above is not the collectively exhaustive set of opportunities available to organizations. Many profit improvement opportunities are not novel–and thus are not entrepreneurial–for example, raising a product’s price or, once a firm has a scalable sales strategy, hiring more reps.

These are just Schumpeter’s examples of innovation. They describe the entrepreneur’s plans, not anything in the objective environment. They certainly have little to do with the notion of opportunity emphasized by Israel Kirzner and adopted by Scott Shane.

Fine, you say, this is just a terminological quibble. When the HBS entrepreneurship group says “opportunities,” they mean business plans. But this is an awkward and confusing usage, one that lends itself easily to misunderstanding. Consider dictionary definitions of “opportunity.” Merriam-Webster gives us

1. a favorable juncture of circumstances (the halt provided an opportunity for rest and refreshment)
2. a good chance for advancement or progress

Or, if you prefer the Oxford English Dictionary, try this:

1. a time or set of circumstances that makes it possible to do something (increased opportunities for export; the night drive gave us the opportunity of spotting rhinos)
2. a chance for employment or promotion (career opportunities in our New York headquarters)

These definitions clearly describe outside circumstances, objective and external to the actor, not the actor’s personal, subjective beliefs. But the only reasonable meaning of entrepreneurial opportunities refers to the latter. In plain English, opportunities are not at all like “opportunities” as used by HBS.

Isn’t it time we dump the “opportunity” construct altogether?

Freedom and Entrepreneurship?

The relationship between institutions and economic development has been studied in numerous papers, and the findings are rather well aligned: institutions supporting the freedom of individuals to make private choices have a positive effect on economic growth and entrepreneurship. Institutions that are core to so-called liberal democracies, such as protection of property rights, the rule of law, and procedural/formal equality, are often found to be directly and positively correlated with the creation of economic wealth.

This already established relationship is further studied in a new study from the Mercatus Center at George Mason University, which takes a broader approach and studies the effect of freedom in general on entrepreneurship (measured as startup growth) and, hence, economic growth and prosperity. The study, Freedom and Entrepreneurship: New Evidence from the 50 States authored by Joshua C. Hall, John Pulito, and Benjamin VanMetre, finds that there is indeed a positive, empirical and significant relationship between freedom and entrepreneurship. But disaggregating the composite measure of “freedom” into “personal freedom” and the more commonly studied “economic freedom,” they find that the latter is the driver of this relationship. Hence, personal freedom is not a significant factor in entrepreneurship.

This finding is very interesting and raises quite a few questions. For instance, what does this mean in terms of policy and the attempts to help the developing world “catch up” with the developed ditto? And what does this tell us about the People’s Republic of China, which combines (limited and regional) economic freedom with personal unfreedom? (It would also be interesting to relate this finding to e.g. the thesis in Ronald Coase’s latest book, How China Became Capitalist.)

Interesting research questions such as these are, of course, in addition to the moral or ethical dimension of the policy suggestions that can be derived from these findings. What are the possible implications of learning that entrepreneurship and economic growth and prosperity result from economic but not personal freedoms?

From a McQuinn Center point of view, however, other questions emerge as potentially more interesting. If a quantitative measure of startups is positively related to economic but not personal freedom, where does entrepreneurship as judgment come in? Entrepreneurial judgment is not necessarily solely economic, but has a distinct personal or social flavor to it.

The sound entrepreneurial imagining of future opportunities under Knightian uncertainty may be derived partly from the experience of economic action (and the understanding of economic causal relationships), but the lack of personal freedom should also have an effect the entrepreneurial abilities of would-be judgmental entrepreneurs. It seems likely that personal unfreedom should affect entrepreneurially minded people’s scope of thinking and their judgmental ability. A related question: what is the role of personal freedom to such types of free-thinking that causes innovation? And do innovation and entrepreneurial judgment therefore call for re-aggregation of the freedom measure?

The implications of this study’s contribution, especially the research questions the findings give rise to, are potentially enormous. The study’s “mere” extension of the existing literature opens up for a lot of very interesting research questions.