Jack of all trades theory of entrepreneurship

What is the jack of all trades theory of entrepreneurship?

The jack of all trades theory of entrepreneurship was proposed by Stanford University economist Edward P. Lazear in a working paper that was eventually published in The American Economic Review in 2004, entitle Balanced Skills and Entrepreneurship.

The theory seeks to explain and predict who becomes and entrepreneur, and which entrepreneurs will be successful. According to Lazear, individuals that become entrepreneurs may have more balance in their investment strategy (on average) as compared with individuals that specialize employee roles.

Jack of all trades, master of none, still better than a master of one?

Lazear's core idea is that entrepreneurs need to be good at many different things, that is, they are generalists rather than specialists. For instance, when first starting out, a restaurant entrepreneur needs to select vendors for inputs such as food, furniture, equipment, and construction. He or she may also need to be good at marketing (pricing, promotion, place selection, and product design) to get customers in the door. The entrepreneur may also need to be able to design a menu and to actually prepare meals or meal prototypes. Hiring and training employees is also an important skill entrepreneurs need to get their businesses up and running. Finally, the skill of persuasion to convince investors to provide capital to get the business going may be important.

While it is unlikely that any one individual will have all of these skills, those that have more than others might be expected to be more likely to start a business and to succeed in business. Most studies examining the theory count the number of functional areas that entrepreneurs have had experience in. For instance, Wagner counted the number of different kinds of professional training and the number of times an individual changed professions.

Evidence and critiques

Overall, the evidence for the jack-of-all-trades theory is mixed. Although some of the studies find support for the theory, even when controlling for sex, nationality and age, other empirical examinations controlling for unobservable characteristics that simultaneously determine skill accumulation and occupational choice seem to disprove the theory (see the work of Olmo Silva). Silva concludes from his Italian sample that: “All in all, this analysis suggests that if a JAT attitude matters for entrepreneurship, it does so as an innate ability. Previous claims, on the ‘causal’ effect of acquiring a balanced skill-mix on the probability of becoming entrepreneur, should be more cautiously interpreted.” Similarly, Åstebro and Thompson (2009) find that “that inventor-entrepreneurs typically have a more varied labor market experience, and that varied work experience is associated with lower household income”.

The debate centers around whether individuals can actually balance skills by varying their curricula studies, work functions, and employers. If so, then individuals seeking to become entrepreneurs might intentionally pursue such variety. If not, that is, if individuals who become entrepreneur simply have a taste for variety that is innate, then no amount of purposeful variety seeking behavior can help. The fact that some studies show that individuals with varied experience and who are not entrepreneurs have lower earnings should give us pause. One is reminded of the individual who starts many things but never finishes—switches majors over and over, changes jobs with abandon, is shifty within their organization—perhaps not exemplar to imitate?

Sources:

Åstebro, T., and Thompson, P. (2011). Entrepreneurs, Jacks of all trades or Hobos?. Research policy, 40(5), 637-649.

Lazear, E. P. (2004). Balanced skills and entrepreneurship. The American Economic Review, 94(2), 208-211.

Silva, O. (2007). The Jack-of-All-Trades entrepreneur: Innate talent or acquired skill?. Economics letters, 97(2), 118-123.

Wagner, J. (2003). Testing Lazear's jack-of-all-trades view of entrepreneurship with German micro data. Applied Economics Letters, 10(11), 687-689.