Entrepreneurship Theories

What is the planned behavior theory of entrepreneurship? The theory of planned behavior was developed by Polish social psychologist Icek Ajzen (1991) to predict a variety of social behaviors in different fields including consumer behavior, politics, and healthcare. According to the theory, the most important determinants of an individual’s behaviors is their intention to engage in the behavior—not their attitudes toward behaviors as these are only expected to affect intentions. Thus, for example, if a potential voter has the intention to vote they are more likely to vote than if they merely think voting is a good thing to do. The theory hangs on the concept of intentions, which are defined as an individual’s motivation and conscious decision or plan to expend effort to bring about a behavior. The link between intention and action is expected to be stronger when there is a short time gap between them and when there is an appropriate level of specificity between the intention an...

Signaling theory has been used to explain how firms communicate their quality and intentions to investors. For instance, debt and dividends signal quality because low quality firms presumably cannot keep up interest payments over the long run (Bhattacharya, 1979). Signaling theory is used to explain which startups get funded by investors and which do not raise capital. The typical study identifies a set of signals sent by a firm around the time of an initial public offering (IPO). Signals may include top management team characteristics, founder involvement, or the presence of venture capitalists or angel investors. Signalling theory predicts how these signals will affect the signal receiver’s decisions. The next step is to characterize the signals as either positive or negative in terms of their effects on subsequent investments or valuations by public or private investors (see review by Connelly, Certo, Ireland and Reutzel, 2011). For example, founder involvement may be viewed as a po...

Institutional theory is about the rules of the game in a given context (Scott, 2001), such as a business environment. The rules of the game may be formal, informal, or cognitive (taken-for-granted assumptions) about the nature of the business environment.    The main proposition of institutional theory when applied to entrepreneurship may be that: Context-varying social forces shape entrepreneurial success more than does economic efficiency, therefore, entrepreneurs should seek to align their strategies with the norms, beliefs and regulations of their host societies' institutions or change the rules of the game in their favour.   Institutional Entrepreneurship   Levy and Scully (2007) use the idea of the institutional entrepreneur as a "collective agent who organizes and strategizes counter-hegemonic challenges". In other words, whereas for many, the rules of the game are to be followed, institutional entrepreneurs change the rules of the game.    The t...

What is the pecking order theory of entrepreneurship? The pecking order theory was developed by in the 1980’s by finance scholars seeking to understand the financing preferences of firms. Pecking order theory also relates to entrepreneurs’ preferences about financing choices. Financing options include using one’s own personal funds, reinvesting profits back into the business, selling equity to outside investors, and bank debt or loans. At the core of the theory are information asymmetries between the entrepreneur or the startups’ executive team, and the prospective sources of funds for the business—that is, the financiers. Entrepreneurs and other insiders have better information about the business’ operations and potential than do prospective financiers because the former deal with stakeholders and problems on a day to day basis. Financiers usually have to rely on second hand information provided by the leadership team of the startup and the financial statements they provide. ...

What is the resource based theory of entrepreneurship? Jay Barney developed the resource based view of the firm, which is a strategic management theory designed to explain why some firms perform better than others even when they occupy a very similar business environment. The resource-based view seeks to explain why some firms perform better than others by looking to the firms’ resources. This contrasts with earlier perspectives, such as  Porter's five forces , which focus on the external environment as sources of threats and opportunities. The core idea behind the resource-based view is that  competitive advantage  comes from a firm’s effective use of tangible and intangible resources or assets. Tangible assets include plant, equipment and even human resources, whereas intangible assets include things like  trade secrets  and  corporate reputation . VRIO Resources that are valuable, rare, and difficult to imitate or substitute are considered t...