Posts filed under ‘Entrepreneurship’
| Peter Klein |
David Howden’s generous review of Organizing Entrepreneurial Judgment appears in the March 2015 issue of the International Entrepreneurship and Management Journal. Excerpt:
This ambitious book has a three-fold purpose. First, it seeks to clarify “entrepreneurship” in a manner amenable to both modern management and economics literature. Second, it redefines the theory of the firm in order to integrate the role of the entrepreneur more fully and give a comprehensive view on why firms exist. Finally, and most successfully, it sheds light on the internal organization of the firm, and how entrepreneurship theory can augment our understanding of why firms adopt the hierarchies they do. . . .
Organizing Entrepreneurial Judgment is a massive undertaking, and one that ambitiously spans the unnecessary divide between management studies and economics literature. For the scholar seriously contemplating exploiting this gap further, the book is highly recommended. Having thoroughly enjoyed reading this rendition of their entrepreneurial theory of the firm, it is this reviewer’s hope that Foss and Klein continue to carve out this growing niche straddling the two disciplines. Following up with a more direct and focused primer on their firm would be a welcome contribution to further the growing field.
Also, at last November’s SDAE conference, the book received the 2014 FEE Prize for best book in Austrian economics.
We have several new papers coming out that develop, extend, and defend the judgment-based perspective. Details to follow.
| Peter Klein |
The old Keynesian idea that war is good for the economy is not taken seriously by anyone outside the New York Times op-ed page. But much of the discussion still focuses on macroeconomic effects (on aggregate demand, labor-force mobilization, etc.). The more important effects, as we’ve often discussed on these pages, are microeconomic — namely, resources are reallocated from higher-valued, civilian and commercial uses, to lower-valued, military and governmental uses. There are huge distortions to capital, labor, and product markets, and even technological innovation — often seen as a benefit of wars, hot and cold — is hampered.
A new NBER paper by Zorina Khan looks carefully at the microeconomic effects of the US Civil War and finds substantial resource misallocation. Perhaps the most significant finding relates to entrepreneurial opportunity — individuals who would otherwise create significant economic value through establishing and running firms, developing new products and services, and otherwise improving the quality of life are instead motivated to pursue government military contracts (a point emphasized in the materials linked above). Here is the abstract (I don’t see an ungated version, but please share in the comments if you find one):
The Impact of War on Resource Allocation: ‘Creative Destruction’ and the American Civil War
B. Zorina Khan
NBER Working Paper No. 20944, February 2015
What is the effect of wars on industrialization, technology and commercial activity? In economic terms, such events as wars comprise a large exogenous shock to labor and capital markets, aggregate demand, the distribution of expenditures, and the rate and direction of technological innovation. In addition, if private individuals are extremely responsive to changes in incentives, wars can effect substantial changes in the allocation of resources, even within a decentralized structure with little federal control and a low rate of labor participation in the military. This paper examines war-time resource reallocation in terms of occupation, geographical mobility, and the commercialization of inventions during the American Civil War. The empirical evidence shows the war resulted in a significant temporary misallocation of resources, by reducing geographical mobility, and by creating incentives for individuals with high opportunity cost to switch into the market for military technologies, while decreasing financial returns to inventors. However, the end of armed conflict led to a rapid period of catching up, suggesting that the war did not lead to a permanent misallocation of inputs, and did not long inhibit the capacity for future technological progress.
| Peter Klein |
Some upcoming events of interest to O&M readers:
- “Research and Policy Change Inspired by Ronald Coase,” 27-28 March 2015, Washington DC
- Berkeley-Paris Organizational Economics Workshop, 10-11 April 2015, Paris
- BHC/EBHA Workshop Historical Approaches to Entrepreneurship Theory & Research, 24 June 2015, Miami FL
- TILEC Economic Governance Workshop, “Economic Governance and Social Preferences,” 3-4 September 2015, Tilburg
| Peter Klein |
Bryan Hong, Lorenz Kueng, and Mu-Jeung Yang have two new NBER papers on strategy and organization using a seven-year panel of about 5,500 Canadian firms. The papers exploit the Workplace and Employee Survey administered annually by Statistics Canada. The data, the authors’ approach, and the results should be very interesting to O&M readers. Here are the links to the NBER versions; there may be ungated versions as well.
Business Strategy and the Management of Firms
NBER Working Paper No. 20846, January 2015
Business strategy can be defined as a firm’s plan to generate economic profits based on lower cost, better quality, or new products. The analysis of business strategy is thus at the intersection of market competition and a firm’s efforts to secure persistently superior performance via investments in better management and organization. We empirically analyze the interaction of firms’ business strategies and their managerial practices using a unique, detailed dataset on business strategy, internal firm organization, performance and innovation, which is representative of the entire Canadian economy. Our empirical results show that measures of business strategy are strongly correlated with firm performance, both in the cross-section and over time, and even after controlling for unobserved profit shocks exploiting intermediates utilization. Results are particularly striking for innovation, as firms with some priority in business strategies are significantly more likely to innovate than firms without any strategic priority. Furthermore, our analysis highlights that the relationship between strategy and management is driven by two key organizational trade-offs: employee initiative vs. coordination as well as exploration of novel business opportunities vs. exploitation of existing profit sources.
Estimating Management Practice Complementarity between Decentralization and Performance Pay
NBER Working Paper No. 20845, January 2015
The existence of complementarity across management practices has been proposed as one potential explanation for the persistence of firm-level productivity differences. However, thus far no conclusive population-level tests of the complementary joint adoption of management practices have been conducted. Using unique detailed data on internal organization, occupational composition, and firm performance for a nationally representative sample of firms in the Canadian economy, we exploit regional variation in income tax progression as an instrument for the adoption of performance pay. We find systematic evidence for the complementarity of performance pay and decentralization of decision-making from principals to employees. Furthermore, in response to the adoption of performance pay, we find a concentration of decision-making at the level of managerial employees, as opposed to a general movement towards more decentralization throughout the organization. Finally, we find that adoption of performance pay is related to other types of organizational restructuring, such as greater use of outsourcing, Total Quality Management, re-engineering, and a reduction in the number of layers in the hierarchy.
| Peter Klein |
We’ve addressed the widely held, but largely mistaken, view of creative artists and entrepreneurs as auteurs, isolated and misunderstood, fighting the establishment and bucking the conventional wisdom. In the more typical case, the creative genius is part of a collaborative team and takes full advantage of the division of labor. After all, is our ability to cooperate through voluntary exchange, in line with comparative advantage, that distinguishes us from the animals.
Christian Caryl’s New Yorker review of The Imitation Game makes a similar point about Alan Turing. The film’s portrayal of Turing (played by Benedict Cumberbatch) “conforms to the familiar stereotype of the otherworldly nerd: he’s the kind of guy who doesn’t even understand an invitation to lunch. This places him at odds not only with the other codebreakers in his unit, but also, equally predictably, positions him as a natural rebel.” In fact, Turing was funny and could be quite charming, and got along well with his colleagues and supervisors.
As Caryl points out, these distortions
point to a much broader and deeply regrettable pattern. [Director] Tyldum and [writer] Moore are determined to suggest maximum dramatic tension between their tragic outsider and a blinkered society. (“You will never understand the importance of what I am creating here,” [Turing] wails when Denniston’s minions try to destroy his machine.) But this not only fatally miscasts Turing as a character—it also completely destroys any coherent telling of what he and his colleagues were trying to do.
In reality, Turing was an entirely willing participant in a collective enterprise that featured a host of other outstanding intellects who happily coexisted to extraordinary effect. The actual Denniston, for example, was an experienced cryptanalyst and was among those who, in 1939, debriefed the three Polish experts who had already spent years figuring out how to attack the Enigma, the state-of-the-art cipher machine the German military used for virtually all of their communications. It was their work that provided the template for the machines Turing would later create to revolutionize the British signals intelligence effort. So Turing and his colleagues were encouraged in their work by a military leadership that actually had a pretty sound understanding of cryptological principles and operational security. . . .
The movie version, in short, represents a bizarre departure from the historical record. In fact, Bletchley Park—and not only Turing’s legendary Hut 8—was doing productive work from the very beginning of the war. Within a few years its motley assortment of codebreakers, linguists, stenographers, and communications experts were operating on a near-industrial scale. By the end of the war there were some 9,000 people working on the project, processing thousands of intercepts per day.
The rebel outsider makes for good storytelling, but in most human endeavors, including science, art, and entrepreneurship, it is well-organized groups, not auteurs, who make the biggest breakthroughs.
| Peter Klein |
In the opportunity-discovery perspective, profits result from the discovery and exploitation of disequilibrium “gaps” in the market. To earn profits an entrepreneur needs superior foresight or perception, but not risk capital or other productive assets. Capital is freely available from capitalists, who supply funds as requested by entrepreneurs but otherwise play a relatively minor, passive role. Residual decision and control rights are second-order phenomena, because the essence of entrepreneurship is alertness, not investing resources under uncertainty.
By contrast, the judgment-based view places capital, ownership, and uncertainty front and center. The essence of entrepreneurship is not ideation or imagination or creativity, but the constant combining and recombining of productive assets under uncertainty, in pursuit of profits. The entrepreneur is thus also a capitalist, and the capitalist is an entrepreneur. We can even imagine the alert individual — the entrepreneur of discovery theory — as a sort of consultant, bringing ideas to the entrepreneur-capitalist, who decides whether or not to act.
A scene from Fargo nicely illustrates the distinction. Protagonist Jerry Lundegaard thinks he’s found (“discovered”) a sure-fire profit opportunity; he just needs capital, which he hopes to get from his wealthy father-in-law Wade. Jerry sees himself as running the show and earning the profits. Wade, however, has other ideas — he thinks he’s making the investment and, if it pays off, pocketing the profits, paying Jerry a finder’s fee for bringing him the idea.
So, I ask you, who is the entrepreneur, Jerry or Wade?
| Peter Klein |
That’s the conclusion of a new NBER paper by Andy Young, Matthew Higgins, Don Lacombe, and Briana Sell, “The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data” (ungated version here). “We find evidence that a county’s SBA lending per capita is associated with direct negative effects on its income growth. We also find evidence of indirect negative effects on the growth rates of neighboring counties. Overall, a 10% increase in SBA loans per capita is associated with a cumulative decrease in income growth rates of about 2%.” As the authors point out, SBA loans represent funds that also have alternative uses, and SBA-sponsored clients may not be the most worthy recipients (in terms of generating economic growth).
The results are largely robust and, perhaps more importantly, we never find any evidence of positive growth effects associated with SBA lending. Even when the estimated effects are statistically insignificant, the point estimates are always negative. Our findings suggest that SBA lending to small businesses comes at the cost of loans that would have otherwise been made to more profitable and/or innovative firms. Furthermore, SBA lending in a given county results in negative spillover effects on income growth in neighboring counties. Given the popularity of pro-small business policies, our findings should give reason for policymakers and their constituents to reevaluate their priors.