Entrepreneurship Theories

What is the population ecology theory of entrepreneurship? Hannan and Freeman's (1977) population ecology theory hangs on the assumption that environments can only handle a fixed number of organizations of each type. After a certain point is reached, there are diminishing returns to density that eventually balance out through the mortality of organizations. The theory is about the tension between the need to be considered as legitimate in order to compete, but also the need to be competitive. As more organizations enter the market, they become increasingly legitimate, but this leads to greater competition making survival more challenging. Thus, the early market is dominated by the need for legitimacy , while the later market is dominated by competitive forces of selection. As environments change, often due to innovations introduced by organizations within them, mortality rates increase for organizations experiencing high levels of resistance to change. Inertial forces guaran...

Stewardship theory was put forward by Lex Donaldson and James Davis in the late 1980s as an alternative to agency theory, which they viewed as having negative assumptions about managers. Agency theory views agents (managers and entrepreneurs) as self-interested and opportunistic and views the relationship between principals (investors) and agents as necessarily conflicting. Agency theory is the logic behind providing managers and other employees with stock-based compensation to align the interests of the employees with those of the shareholders by making the employees into shareholders. In contrast to agency theory, stewardship theory posits that managers and entrepreneurs are motivated to act in the interests of their organizations and principals. The core idea is that the rewards from pro-social behavior have greater utility than individualistic or self-serving behaviors. The steward receives greater personal satisfaction when the organization is successful and therefore act...

Too often, entrepreneurship is viewed as a solo job. This myth is perpetuated because of the heroic status that many entrepreneurs are conferred. For instance, the stories of Richard Branson, Steve Jobs, Bill Gates, Elon Musk and others reinforce the idea that entrepreneurs are individuals carving out a new world on their own. More often entrepreneurs work in social networks to get their ventures up and running, to grow and to thrive. From a social network theory perspective, entrepreneurship is viewed as embedded in networks of enduring social relations (Walker et al., 1997). Research on entrepreneurship from a social network perspective has gained steam and evidence that networks are useful tools for gaining access to resources has emerged. Social capital is loosely defined as the value of venture founders’ network resources! Networks may act as substitutes for investment capital. Private information flows over networks that can only be accessed through social interactions. An e...

What is the transaction cost theory of entrepreneurship? Transaction cost economics is often attributed to the work of Ronald H. Coase in the 1930s, who used it as a way to explain the existence of organizations. Transaction costs occur whenever an economic exchange happens. Search and information costs describe the work of determining the availability of inputs and identifying the most affordable source of inputs in a market, or finding the best partner for an exchange (Williamson, 1975). Oliver Williamson shared in the 2009 Nobel Prize in part for his work on transaction cost theory. Bargaining costs and policing costs are two types of transaction costs that can significantly impact the efficiency of exchange. Bargaining costs refer to the time and effort required to negotiate prices, contracts, and other agreements. In some cases, this may involve employing lawyers or other professionals with expertise in contract development to ensure that agreements are solid and legally enf...

Jeffrey Pfeffer and Gerald R. Salancik (1978) proposed the resource dependency theory as a way to explain the behavior of organizations by looking to the contexts in which they operate. Organizations are influenced by numerous external contingencies, thus the theory views the role of the manager as acting to reduce dependencies, especially the power of other actors to exert control over vital resources, often by increasing the power of the focal organization. The assumptions of the theory are that organizations are the main units of analysis for understanding society. Organizations are viewed not as autonomous, but rather, they are seen as constrained by webs of dependence relationships with other organizations that can exercise power. Success and survival are uncertain because of the ever-changing power relations among organizations. Organizations manage inter-dependencies creating new patterns of inter-dependence and inter-organizational power. Power is typically exerted in...