Grand Unified Theory of Entrepreneurship

Grand Unified Theory of Entrepreneurship

Spoiler: there is none, but if we don’t academically challenge our definitions update our understanding of how systems work, we’ll fail as a society to grow with sincerity.

On Exploring Attributes and Models of Entrepreneurship to Define Growing Startup Communities

Modern research has consistently shown the importance of entrepreneurship in driving growth by capitalising on opportunity through innovation. This growth is critical to emerging economies and beneficial to entire regions as entities. Although the study of entrepreneurship as an economic function — nor the study of its significance — is not novel, attempts to study it as a system related to growth are fairly recent and scholarship is limited. The concept of entrepreneurial growth has overwhelmingly been approached from an economic standpoint, understandably, due to the first definitions of the role of an entrepreneur at the beginning of the 20th century. This paper will first review previous models of entrepreneurship — ranging from the Austrian School’s initial breakthroughs to modern framework approaches — seeking to define a regional, clustered, and networked startup community. Because of the fragmented and nebulous development of the field of entrepreneurship, the field has been abstractly constructed through “adapting theoretical and conceptual work from such fields as sociology, psychology, anthropology, marketing, management, finance, organisational behaviour, and engineering.” (Kurtako 3) Evidently, the breadth of new concepts now stems much further than the initial purely economic theories, but attributes of growth and community are disjunct, if not entirely lacking in these approaches. This paper proposes that the relationship between economic, anthropological, geospatial, and other entrepreneurship theories is governed by a series of network dynamics related to conventional factors of community. However, communities as entities must be further defined in order to properly understand and apply models of entrepreneurship in a business context — with real applicability rather than abstract, singular theories. Additionally, this essay will analyse and propose growth measurements by calling into question the significance of traditional and modernistic factors of entrepreneurship, with the hope that research may be extended to future forms of startup communities.

Review of Previous Models

Since initial definitions of entrepreneurship arise from economics, the first models of entrepreneurship are primarily microeconomic and singular, viewing entrepreneurship as a function, or process, of or within the economy (Functional Entrepreneurship). Arguably the first significant analysis of the role of the entrepreneur comes from Fetter in 1905. His economic view redefines the idea of “rent” in a more general sense, which is critical to understanding the value of capitalised by Functional Entrepreneurship. Rothbard offers an overview of the theory:

We are using “rent” to mean the unit price of the services of any good. It is important to banish any preconceptions that apply the concept of rent to land only … It therefore applies as well to prices of labor services (called “wages”) as it does to land or any other factor. The rent concept applies to all goods, whether durable or nondurable. . . . The price of the “whole good,” also known as the capital value of the good, is equal to the sum of the expected future rents discounted by . . . the rate of interest.

(Fetter qtd. in Andersson 27)

Fetter’s ultimatum is that value can be measured as either rent or as capital value, which lays the foundation for following theories. (Andersson 27) Schumpeter, over three decades later, described the actual function of the entrepreneur in relation to Fetter’s idea of capital, saying entrepreneurs are responsible for “the doing of new things or the doing of things that are already being done in a new way.” (qtd. in Andersson 28) This breakthrough and recognition of Functional Entrepreneurship as an economic driver effectively begins the formulation of the first model of entrepreneurship following classical and neoclassical thought — the Austrian Market Process (AMP). AMP focuses on individual human action within a knowledge market, with its own supply and demand. Stressing that the entrepreneur is a necessary disruptive force, the Schumpterian view emphasises that the introduction of new products occurs at the cost of pushing others out of the market — known as creative destruction. This model is quickly built upon by renowned economists Mises and Hayek, and eventually Kirzner who argues that Functional Entrepreneurship is, in fact, an equilibrium force rather than a destructive one. It is also noted that Kirzner “combines Mises’s view of the market as an entrepreneurial process with Hayek’s view of the market as a means of transmitting and coordinating knowledge.” (Andersson 21) AMP effectively serves as the first theory of entrepreneurship, but it is simply an economic one.

In order to work towards a networked model which includes community, spatial relationships must first be taken into account. Andersson describes the need for this a geospatial model: “A spatial extension of the theory of entrepreneurship helps explain several of the most common phenomena associated with economic development, such as urbanization, migration, and changes to the profit opportunities.” (Andersson 21) Building off of AMP, Andersson argues that there are four inherently spatial functions of entrepreneurship: a “spatial positioning” related to discovery, Functional Entrepreneurship as a component of constructing regional economy, demonstrating Fetter’s idea of rent and land use over time, and linking locations and profits with institutions. (Andersson 21) It is the final point which begins to blend the economic AMP with entrepreneurship as not merely a function of a larger economic system but a system on its own. Andersson continues,

The importance of the entrepreneur’s choice of location arises from spatial accessibility differences regarding future profit opportunities. Locations with good access to tacit knowledge … make such locations superior “generators” of profit opportunities. But the location does not only determine the access to discoveries of potential profit opportunities. Human cultures and institutions also have a spatial dimension, which means that the entrepreneur’s location may in part decide his alertness.

(Andersson 25)

The correlation of cultures and institutions strictly outside of the economic model creates the idea of Systemic Entrepreneurship, in this case anthropological. Anthropology — the comparative study of human societies and development — as a theory of entrepreneurship implies that a new venture is created by the influence of culture. A small study tested cultural influences (individualism vs collectivism, masculinity vs femininity, power distance, uncertainty avoidance) against attributes of Systemic Entrepreneurship relating to the individual. Contrary to previous assumptions, the study found that collectivist cultures were likely to promote entrepreneurial values just as individualistic cultures, suggesting the need for further research. Consistent with previous research, however, it was shown that values of masculinity promoted individual new venture creation. (Goktan 466) Interestingly, the study also demonstrated “a significant positive relationship between uncertainty avoidance values and macro-entrepreneurship.” (Goktan 466) The implication is, against prior opinion, that entrepreneurs are not inherent risk-takers but risk-avoiders. The traditional qualities of Systemic Entrepreneurship are amplified in collectivist cultures, depending on the balance of values and nationalistic identity.

Finally, this leads to a new network theory as the foundation of a definition of community. While AMP is strictly concerning Functional Entrepreneurship, the knowledge network models can be used to describe broader-scale Systemic Entrepreneurship.

The graph outlines the relationship between network capital and the knowledge spillover theory of entrepreneurship. (Huggins 114) While previous models of endogenous and spatial regional growth have focussed on the existence and transfer of knowledge capital, little research has been done to the participation of networks or interlinking of knowledge capital and entrepreneurship capital. The implications of the new Huggins and Thompson network model, after mathematical interpretation, is that enterprises must account for a balance between current output of capital versus future output of capital. (Huggins 116) Even with this new theory, no research has been done to demonstrate the disparity between symmetry and asymmetry in capital outputs. Regardless, the current research suggest three factors:

  1. The nature of the firms established by entrepreneurs;
  2. the nature of the knowledge accessed by firms; and
  3. the spatial nature of the networks existing between those accessing and sourcing knowledge.

Role of Venture Capital

Other forms of capital have been more or less explored, such as venture capital and financing. Venture capital investment is money provided by investors to startup firms and small businesses with perceived long-term growth potential. Although it is understood that, economically, venture capital investments are important to creating accessible capital markets, this investment is often claimed to be a key indicator of startup activity without truly understanding the relationship to startup communities. Freeman first argued that venture financing is necessary as an engine of growth in the economy. However, this claim is dependant on an assumption that the economy requires financial capital for entrepreneurship; ultimately a view limited to Functional Entrepreneurship. (Xiao 13) Concerning this limitation, an essay preceding Freeman’s claim makes the assertion:

Private, nonproft, and subsidized public efforts aimed at providing venture capital and stimulating high technology entrepreneurship must confront the fact that venture capital alone will not magically generate entrepreneurship and economic development. It is important that such efforts recognize the nonfinancial side of venture investing and attract experienced personnel who can tap into established entrepreneurial networks and secure coinvestors. More significantly, establishing public venture funding in an area lacking the requisite entrepreneurial climate or technology infrastructure may create a “catch 22” situation where locally oriented funds invest in bad deals or where venture capital is simply exported to established high technology regions.

(Florida 1988)

Understanding Community

The idea that significant initial venture capital is a determinant of new firm formation rests on the idea that early and mid-stage startups require capital in their venture and development stages. However, this model is much less significant when being applied to the idea of Systemic Entrepreneurship, which can compensate for a lack of financial capital with knowledge capital and spatial resources. New high-technology firms and startups in other new and emerging industries are increasingly more able to gain startup traction with low overhead costs. Furthermore, a better model of distinctly Systemic Entrepreneurship must demonstrate the networked relationship of human capital, accelerators, incubators, and co-working spaces in addition to the Huggins and Thompson model of knowledge and entrepreneurial capital.

The factors of community Systemic Entrepreneurship are thus spatial and temporal at both micro and macro scales. Growth over time can also be observed from a nonfinancial perspective, as “entrepreneurial insights lay the foundation for additional entrepreneurial insights, which drive the growth process” (Holcombe qtd. in Andersson 24) Andersson analyses this from a spatial model, considering:

The existence of an accumulation of entrepreneurship creates an environment where present profit opportunities exist because of past entrepreneurial actions. Certain opportunities would not exist and could therefore not be discovered, were it not for the prior actions of other entrepreneurs … even though knowledge does not create entrepreneurial discoveries, it creates discoverable opportunities.

(Andersson 24)

Extensibility and Application

Grandiose, universal theories from the perspective of single disciplines deeply underestimate the multidimensionality of real-world entrepreneurship. New indicators will need to be explored to measure regionality, clustering, and networking. Deriving a better theory of entrepreneurship requires a more formal distinction between Functional Entrepreneurship and Systemic Entrepreneurship. By supporting the investigation with comparisons of growth in other regions applications may serve many implications. Additionally, by synthesising models and theories for facilitators of growth within entrepreneurial communities, new frameworks can be provided to see change over time, segmental gaps, and capital movement.

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