Opportunities and Entrepreneurship Research: A Critique

16 July 2008 at 11:00 am 2 comments

| Peter Klein |

The notion of economic “opportunities,” and their discovery or creation, is one of the core concepts of contemporary entrepreneurship research. But the use of opportunities as the unit of analysis poses several problems. The opportunity-discovery or opportunity-recognition perspective tends to treat economic opportunities as objective phenomena, while, under Knightian uncertainty, profit opportunities are always subjective, existing only in the imagination of economic actors. In an alternative view that Nicolai and I have elaborated in several papers, entrepreneurship is best understood not as perception, but as action, the investment of resources under uncertainty in anticipation of uncertain rewards.

In a new paper, “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” I critique the opportunity-discovery perspective in more detail. In particular, I argue that the literature has misunderstood Israel Kirzner’s concept of “discovery,” the theoretical basis of much of the research on opportunity discovery. Kirzner’s explanandum is not entrepreneurship per se, but equilibration. He invokes the entrepreneur, and his “alertness” to exogenously determined profit opportunities, as a metaphor, to explain the tendency of markets to clear. It is not meant as a positive account of the entrepreneurial function, but rather an instrumental explanation of the market process. Hence a research program based on operationalizing “opportunities,” exploring thow they can be “discovered without search,” and so on, is unlikely to bear fruit.

The paper is forthcoming in the Strategic Entrepreneurship Journal. Comments welcome. Abstract below the fold.

This paper reviews and critiques the “opportunity discovery” approach to entrepreneurship and argues that entrepreneurship can be more thoroughly grounded, and more closely linked to more general problems of economic organization, by adopting the Cantillon-Knight-Mises understanding of entrepreneurship as judgment. I begin by distinguishing among occupational, structural, and functional approaches to entrepreneurship and distinguishing among two influential interpretations of the entrepreneurial function, discovery and judgment. I turn next to the contemporary literature on opportunity identification and argue that this literature misinterprets Kirzner’s instrumental use of the discovery metaphor and mistakenly makes “opportunities” the unit of analysis. I then describe an alternative approach in which investment is the unit of analysis and link this approach to Austrian capital theory. I close with some applications to organizational form and entrepreneurial teams.

Entry filed under: - Klein -, Austrian Economics, Entrepreneurship, Theory of the Firm. Tags: .

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2 Comments Add your own

  • 1. spostrel  |  17 July 2008 at 9:08 pm

    I’ll have to read this paper, of course, but the fundamental distinction you’re making puzzles me. An investment is only identifiable (or distinguishable) as targeting a given opportunity–“I’m going to build a factory to make injection-molded dashboards for use by hot-rod retrofitters,” say–so the investment is indexed by the opportunity. Hence the units of analysis seem indistinguishable.

    I’m also puzzled about the application of subjectivity. Presumably the projector (sorry, I couldn’t resist) in this case sees an opportunity to profitably apply certain technology and capital equipment to a given use. He might be right or wrong, but it’s still an attempt at opportunity recognition in the sense of Kirzner. There’s nothing subjective about whether it’s going to work or not, since reality always bats last. While the projector’s beliefs about what will happen are of course subjective, this project is going to generate some level of profit if attempted and that outcome is a very objective thing.

    If all this is clear in the paper then the above is a big “never mind.”

  • 2. Peter Klein  |  18 July 2008 at 10:14 am

    Steve, these issues are addressed in the paper, though perhaps not clearly. On opportunities, I agree that in every action implies a perceived opportunity, if by “opportunity” we mean simply an objective that is pursued. My problem with the standard literature is that it implies that there exists a set of opportunities larger than the set of actions — hence the concept of “unexploited opportunities.” In my perspective, there are only actions, some of which achieve their desired objectives and some don’t.

    Think of it this way: how do you explain losses in the opportunity-discovery framework? The entrepreneur thought there was a $20 bill on the sidewalk but when he reached down to pick it up, it was gone? In that case it was never there in the first place, so there was no “opportunity” at all. In Kirzner’s framework, the worst that can happen to an entrepreneur is that he breaks even; he either exploits an opportunity or fails to notice one that was there. He can’t make a loss because he doesn’t invest under uncertainty; he simply exploits pre-existing opportunities. (Kirzner has a passage in his 2001 JEL article in which he talks about “mistaken opportunities,” but this seems awkward to me. It’s more straightforward to talk about mistaken actions, i.e., actions that fail to achieve their desired objectives.) To me, the concept of opportunities is redundant and misleading.

    Likewise on subjectivity. Opportunities are perceived, imagined, hoped for. They can only “exist” ex post, after profits and losses have been realized. So I agree completely with your second paragraph.

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