O&M co-founder Nicolai Foss will give the 2012 Sherlock Hibbs Distinguished Lecture in Business and Economics Tuesday, 6 March 2012, 10:00-11:30am, in 205 Cornell Hall on the University of Missouri campus. The title is “Open Entrepreneurship: The Role of External Knowledge Sources for the Entrepreneurial Value Chain.” The lecture is sponsored by the Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership (which I direct).

The full announcement (with Nicolai’s impressive bio) is below the fold. The lecture is free and open to the public, so all are welcome!

The Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership invite you to the 2012 Sherlock Hibbs Distinguished Lecture in Business and Economics:

Open Entrepreneurship: The Role of External Knowledge Sources for the Entrepreneurial Value Chain

Nicolai J. Foss
Copenhagen Business School and Norwegian School of Economics and Business

Tuesday, March 6, 2012
205 Cornell Hall
10:00 – 11:30am

Sponsored by the Hibbs Professors of the University of Missouri’s Trulaske College of Business and the University of Missouri’s McQuinn Center for Entrepreneurial Leadership, the lecture is free and open to the public.

Nicolai J. Foss is a Professor of Strategy and Organization at the Copenhagen Business School, a part-time Professor of Knowledge-based Value Creation at the Norwegian School of Economics and Business Administration, and the Head of Department of the Department of Strategic Management and Globalization at CBS. He also holds part-time and visiting professorships at the Lund University, Luiss Guido Carli-Roma, and Agder University. He founded the Center (now Department) of Strategic Management and Globalization at the Copenhagen Business School in 2005, building it from a center with 5 faculty members to a full department with 17 faculty members along with postdocs and PhD students.

He is author or editor of 22 books, 136 journal articles, and 81 book chapters. His work has appeared in the Academy of Management Review, Academy of Management Journal, Organization Science, Strategic Management Journal, Journal of International Business Studies, Journal of Management Studies, Strategic Organization, Strategic Entrepreneurship Journal, Industrial and Corporate Change, Organization Studies, and other leading academic journals. His articles and books have been translated into Chinese, Russian, and Spanish. His newest book, Organizing Entrepreneurial Judgment: A New Approach to the Firm (with Peter G. Klein), is forthcoming from Cambridge University Press.

Foss was a founder of the Danish Research Unit for Industrial Dynamics and a co-founder of the industry-funded Center for Policy Studies, the most influential privately funded Danish think tank. Since 2000 he has raised over €2 million in external funding as research leader and has participated in many additional funded research projects. He is a panel member of the European Research Council and serves as a member of the three-person management group of the Norwegian Center for Service Innovation at the Norwegian School of Economics and Business Administration, which is supported by a €20 million, 8-year grant.

Educated as an economist from the Copenhagen University (1989), Foss his received his PhD from the Copenhagen Business School in 1993, where he has been Assistant, Associate and Full Professor.

The second review article in the latest issue of AMR by Venkataraman, Sarasvathy, Dew, and Forster (VSDF) is more ambitious than the first by Shane, discussed in Part 1. In fact one might describe the ambition motivating the article as grandiose. VSDF “seek to recast entrepreneurship as a science of the artificial” an entirely new way of looking at entrepreneurship in the interest of uncovering (what I take to be universal) principles that can serve as the basis of a new empirical and policy-useful science of entrepreneurship. [I see this article as a companion piece to the article by Sarasvathy and Venkataraman (SV) in ET&P January, 2011, in which this grandiose vision is even more apparent.]

The science of the artificial(supposedly a distinct category of science from natural or social science) is derived from the work of Herbert Simon (1996).

As a theory develops it splits into two streams: (1) “basic” research that continues to refine the causal explanations and (2) “applied” research that seeks to alter the variables of explanation. At that point the phenomenon of interest has become an artifact. …

A science of the artificial is interested in phenomena that can be designed [and controlled]. … Design lies is the choice of the boundary values; control lies in the means to change them. (24).

So a useful theory is itself an artifact something that can be used to understand and (importantly) control aspects of the (social) world. And, I suppose, the new science of entrepreneurship will eventually develop such artifacts. [At the end of the article they talk about “recasting opportunities as artifacts” – so I am not sure how this is all connected.]

My lack of expertise regarding the work of Herbert Simon (something which I am now more encouraged to remedy) prevents me from pronouncing with confidence on this part of the article. Suffice it to say that the meaning and contribution of this new “science of the artificial” is far from clear to me. I am left with a feeling that if it is indeed such an important and path-breaking meta-scientific turn, the authors should be able to explain it better. It should be more accessible and transparent. I am left highly skeptical, but I urge readers of this post to read the article and perhaps enlighten me and others.

VSDF claim new ground in three areas 1) understanding opportunities as made as well as found, 2) moving beyond new combinations to transformations 3) developing a new nexus around actions and interactions. In each of these I find their arguments in part unclear or unpersuasive or both, and where I see something of value I don’t see it as new.

They are strongest on the first category – seeing opportunities as made as well as found. They have a nice analysis of the proverbial $100 bill on the sidewalk waiting to be found. Is this an opportunity found (discovered) or made (created) or both? As they point out, in order for this to be an opportunity at all the bill has to exist, someone has to find it (objective conditions), the finder has to know it is $100 bill (subjective interpretation) and other people have to acknowledge its value and be willing to accept it (intersubjective considerations). For an opportunity to exist, certain actions and preconditions must be fulfilled – “actions and interactions that constitute the atomic units of ‘making’ a market opportunity” (26). They proceed to point out that this applies to all opportunities regardless of their degree of objectivity or “creativeness.” Indeed, I believe this is true, and I like the phrase “made or found” – but I don’t think their resolution is new. Isn’t this is line with the sort of thing that Peter Klein and others (among whom I would like to count myself) have been saying for some time? In a fundamental sense “made or found” is irrelevant. What matters is that entrepreneurs take actions that add value above and beyond what was expected or seen before.

This relates to the second category – moving beyond new combinations to transformations. Here they seem to be arguing (I say ‘seem’ because there is a fog of verbiage obscuring the bottom line argument) that successful entrepreneurship involves something transcendental. It is more than simply the reorganization of existing resources. Well, yeah! What about all the recent discussion of ‘emergence’ and similar ideas. Moreover, I think they go wrong in their treatment of the concept of “new combinations.” They see this idea as coming from the natural sciences, like chemistry. But I take it to come from Schumpeter, and later, and more clearly, from Lachmann, where it means something entirely different from the notion of physical transformation. VSDF may be falsely attributing a materialist fallacy to the notion of “new combination”.

At the heart of all this is the importance of an understanding of all resources as types of economic capital. [In the final  section of the article VSDF talk about artifacts “embodying knowledge” and come close to a capital-theoretic approach without quite getting there or mentioning capital]. What makes something capital is not its physical nature per se, but, rather, the value of the function it can perform. The conservation laws of physics ensure that matter-energy cannot be created or destroyed. The whole point of capital theory, as pointed out clearly by Böhm-Bawerk, is that while the entrepreneur can never create anything in the physical sense, he can add value to what exists. In fact he talks about the transformation of resources into more useful forms and combinations. Physical transformations may or may not be involved. An interesting issue is whether capital accumulation necessarily involves technological change, something about which Böhm-Bawerk was ambiguous and about which Hayek and Lachmann wrote a lot. This theme is evident in the huge recent literature on the relationship between production and design and related themes like modularity. VSDF talk about design as an element of entrepreneurial action without addressing the large volume of work on this – for example Baldwin and Clark’s Design Rules.

VSDF see the distinction between combination and transformation as adding empirical traction to the study of entrepreneurial events, and they give some examples of each. They characterize transformative actions as ones that entail the freedom to choose one’s ends and well as one’s course of action. I don’t know – is this new? Is this helpful? It leaves me a bit exasperated because I just don’t see it.

The third category – developing a new nexus around actions and interactions.  They talk about some interesting case studies and make some astute observations. What this adds up to, again, I am not sure. But I will leave that for now.

In revisiting the ontology and epistemology of “opportunity,” VSDF draw on the interesting work of the philosopher Donald Davidson. Every action involves the objective, the subjective and inter-subjective. A new tripod? By inter-subjective (no reference to Shutz) they mean not merely the total of all shared meanings and understandings that permit us to act, but, apparently, something more particular about the action itself, more idiosyncratic I guess. But, again, this is not new nor particularly well handled. So much has been written about the role of institutions in human action. How is this different and how does the difference matter. Ten years after Promise more promise?

As I said initially I think what this is all about is the question of entrepreneurship as an empirical science in the sense of the discovery of universal elements that can be useful for policy or entrepreneurial action itself – a very old theme. Austrian economists, in discussing the business cycle,  for example,  have had to face the perennial question of “what makes an entrepreneur?” – how are some individuals better able to perceive opportunities for value-creation? I don’t see how this question can be answered. It goes to the heart of the working of the market process – a complex-adaptive system that defies description in mechanical terms. Yet, in the end, it is that which VSDF (and probably many others) are seeking. See for example, Table 1 of SV in which they compare their  new entrepreneurial science with natural science, suggesting that the former has still to develop an understanding of the key elements of entrepreneurship so that they can be taught and learnt by anyone! I guess on this we will just have to agree to disagree, at least until time proves one of us wrong.

Along with Don Siegel, Nick Wilson, and Mike Wright, I am guest editing a special issue of Managerial and Decision Economics on the “Effects of Alternative Investments on Entrepreneurship, Innovation, and Growth.” Proposals are due 15 June 2011. A special issue conference for developing the papers is planned for 29 October 2011 at the SUNY Global Center in Manhattan. The conference is jointly sponsored by the SUNY-Albany School of Business, the Centre for Private Equity Research at Imperial College Business School, and the McQuinn Center for Entrepreneurial Leadership. Further details and submission guidelines are below the fold.

Call for Papers: 
Special Issue of Managerial and Decision Economics

EFFECTS OF ALTERNATIVE INVESTMENTS
ON ENTREPRENEURSHIP, INNOVATION, AND GROWTH

Submission Due Date: June 15, 2012
Special Issue Conference: October 29, 2012

Guest Editors:
Peter Klein, University of Missouri
Donald Siegel, University at Albany, SUNY
Nick Wilson, Leeds University Business School
Mike Wright, Imperial College Business School

Special Issue Conference sponsored by
School of Business, University at Albany, SUNY
Centre for Private Equity Research, Imperial College Business School
McQuinn Center for Entrepreneurial Leadership, University of Missouri

Introduction

The past decade has brought rapid growth in a variety of specialist alternative investment vehicles, including venture capital, business angel funds, later-stage private equity, hedge funds, sovereign wealth funds, infrastructure funds, and real estate funds. The importance of venture capital and angel investment for new firms, particularly in high-growth, high-technology sectors, is well known. But alternative investments span a wide range of company types, from small, early-stage ventures with high growth rates but little cash flow to large firms in mature industries that generate substantial cash flow.

Alternative investment vehicles introduce new forms of financing with different objectives and diverse forms of involvement by investors in portfolio firms. Alternative investors differ widely in skills, goals, experience, and investment time horizons. They often invest across a variety of institutional environments, transferring standard investment approaches from one sector or country to another. Because these alternative equity stakes are generally less liquid than shares in publicly traded enterprises, their growth raises a host of important issues for the organization and governance of portfolio companies, for the structure of industries heavily dependent on alternative investment pools, and for entrepreneurship, innovation, and economic growth more generally.

This special issue of Managerial and Decision Economics focuses on the effects of alternative investments on entrepreneurship, innovation, and economic growth. These issues are especially timely given current debates about the role of alternative investments in stimulating economic outcomes and the need for diverse sources of capital to stimulate economic growth in conditions of severe recession. We welcome theoretical papers, large scale quantitative analyses, and focused case studies.

Research Questions

Research questions that contributors to the special issue might address include:

• How does the nature of deals vary by different types of alternative investor? What factors are influential in determining these differences?
• What are the relationships between financial structuring of deals and the nature and extent of entrepreneurship and innovation in portfolio firms?
• How does financial structure affect entrepreneurial alertness, judgment, and innovation not only in new firms, but in established organizations as well?
• To what extent do alternative investors engage in funding both restructuring and innovative activities? What are the effects of alternative investments on growth at the level of the firm, sector, region, and economy?
• How do buyout firms attempt to increase innovation within public companies that are taken private?
• How have the roles of alternative investment vehicles changed over time, as in the changing roles of venture capital firms and business angels in Silicon Valley?
• How do venture capital and angel investors organize themselves into networks? How do these affect venture performance?
• What is the nature of the contractual relationships between alternative investors and founders or operators of startup companies?
• What explains the clustering of alternative investments across industries? Across time and place?
• To what extent can alternative investors, as “active” participants in their portfolio companies, themselves be modeled as entrepreneurs?

Papers on related issues not explicitly listed above are also welcome.

Submission and Review Process

Submissions must be made on or before June 15, 2012. All papers will be externally reviewed according to standard policies of Managerial and Decision Economics.

Conference Details and Time Line

To aid in the development of papers, a special issue conference will be held at the SUNY Global Center in Midtown Manhattan October 29, 2012.

Accommodation and meals will be provided for all authors and discussants attending the conference. Financial support is provided by the School of Business and the Center for Institutional Investment Management at the University at Albany, SUNY, the Centre for Private Equity Research at Nottingham University Business School, and the McQuinn Center for Entrepreneurial Leadership at the University of Missouri.

Key dates:
June 15, 2012: Deadline for electronic submission of papers to the conference and special issues
August 15, 2012: Notification to authors regarding acceptance for conference
October 29, 2012 : Special Issue Conference at the SUNY Global Center

More Information

For additional information, please contact see http://mcquinn.missouri.edu/cfp2012June15.htm or contact the special issue editors:
Peter Klein, University of Missouri, pklein@missouri.edu
Donald Siegel, University at Albany, SUNY, dsiegel@uamail.albany.edu
Mike Wright, Imperial College, London, mike.wright@imperial.ac.uk
Nick Wilson, Leeds University Business School, nw@lubs.leeds.ac.uk

Raghu Rajan’s AFA presidential address is now online as an NBER working paper:

The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments.

The January 2012 issue of the AMR (available here for subscribers or those with academic access) features two review articles assessing the progress of the “Promise” examined in the well-known article by Scott Shane and Sankaran Venkataraman (AMR 2000: The Promise of Entrepreneurship as a Field of Research) — one from each of the original co-authors. The first is an interesting, if somewhat pedestrian, article by Scott Shane. The second is a much more profound and ambitious contribution by Venkataraman together with Saras Sarasvathy, Nicholas Dew, and William Forster.

In the decade since that article there has, indeed, been a significant shift in the focus of research in entrepreneurship. Most notable, perhaps, is the focus on entrepreneurial “opportunities” — familiar to Austrian economists from the work of Israel Kirzner, but by now a standard element in the story. Each of the articles spends considerable time revisiting questions about the nature of entrepreneurial opportunities and provides its own resolutions. Here I will provide just a quick overview of this part of Shane’s article. (I intend to provide one for the second article soon).

In considering the “nexus of opportunities and individuals” offered originally in “Promise” as a reason to shift attention from the person to the function, Shane addresses the question of whether entrepreneurial opportunities should be considered “objective” or “subjective” — a question that has proliferated in this research stream, albeit with varying focus and terminology. The problem is, it seems to me, that the notion of “opportunity” is one that depends on the formation of a mental image by some individual or individuals. Opportunity implies plan — a plan of action to use, transform, combine, existing resources in a profitable way. Without the plan there is just the world. So how can “opportunity” be objective? This is related to the question: are opportunities “discovered” (Alvarez and Barney: Organizaҫões em Contexto, 2007) or are they created; or in the words of Venkataraman, et. al. are they made or found?

Shane thinks now that the whole debate was probably unnecessary and that opportunities must be objective. If not, then there is no way to talk about unsuccessful entrepreneurial action. If, as asserted by our esteemed host Professor Peter Klein (Strategic Entrepreneurship Journal, 2008), opportunities are “imagined” and “are inherently subjective — they do not exist until profits are realized” (180) — “then unsuccessful entrepreneurship is a logical impossibility. No entrepreneur can fail to generate an entrepreneurial profit” (Shane, 16). No profit, no opportunity really existed.

Shane resolves this by making a distinction between entrepreneurial opportunities and business ideas. The latter are subjective. Juxtaposing the two rescues the notion of failed entrepreneurship.

This strikes me as unacceptably ad hoc, to say the least. I think Shane does not really understand what “subjectivism” is all about and, as a result, his treatment is rather superficial. Nevertheless, he may be incidentally right in suggesting that aspects of the debate are unnecessary. I refer to the ontological status of “opportunity.”  Subjectivism in economics and related fields is an epistemological issue, not an ontological one. Accordingly, I would say as follows: Opportunities originate as perceptions — perceptions of what can be done to earn a profit. (Klein says “imagined” which I think is essentially the same as perceived.) Perceptions are both real and subjective. These perceptions may turn out to be right or wrong. The “discovery” of an opportunity is, strictly speaking, the formation of a perception, a plan involving real (objective) resources. So, action in pursuit of a perceived (discovered, created) opportunity is entrepreneurial action and may be successful or unsuccessful.

Alvarez and Barney — Academy of Management Annals, 2010 — blurring epistemology and ontology, want to make a distinction between exogenously and endogenously generated opportunities. I am not sure this is a viable or profitable distinction. To repeat, all opportunities are about perceptions that can be right or wrong.

TBC: Part 2.

Did you know 2012 is the centenary of Charles Dickens’s birth? Dickens is often lumped with Carlyle, Shaw, Ruskin, etc. as a Romantic, Victorian, literary anti-capitalist. (Carlyle indeed disliked capitalism, but not for the usual reasons.) But Dickens, as I originally learned from Paul Cantor, was a wildly successful capitalist and entrepreneur, a driving force behind the great nineteenth-century innovation of the serialized, commercial novel. Consider the following from one Dickens scholar:

Stephen Marcus has called Dickens “the first capitalist of literature” in the sense that he worked within apparently adverse conditions to take advantage of new technologies and markets, creating, in effect, an entirely new role for fiction. In Charles Dickens and His Publishers, Robert Patten quotes Oscar Dystel (president and chief executive of Bantam Paperbacks) on the three “key factors” in his development of a successful paperback line: availability of new material, introduction of the rubber plate rotary press, and development of magazine wholesalers as a distribution arm. As Patten points out, parallel factors operated in the Victorian era: a plethora of writers, new technologies, and expanded distribution. And as methods of papermaking, printing, and platemaking increased in efficiency, so did means of transportation. By 1836, a crucial network of wholesale book outlets in the Strand, peddlers, provincial shops, and the royal mailmade possible by the development of paved roads, fast coaches, and eventually the national railway systemhad been consolidated. The final task facing early publishers was, then, to develop the newly accessible market for their commodity. By lowering prices, emphasizing illustrations and sensational elements, and increasing variety of both form and content, publishers created readers within the largest demographic groups: the rising middle and working classes, where readers had essentially not existed before. . . .

Concurrently with these marketing advances, Dickens transformed the narrative from a standard series of bumbling sportsmen’s sketches into a picaresque based in London but depicting urban infiltration of the country. The fifth number introduced a working-class character, Sam Weller, and his father. Audiences responded well to Dickens’s humorous but sympathetic textual representation of these urban characters. Sales soared after Sam appeared on the scene, and readers apparently wrote Dickens to ”counsel him to develop the character largelyto the utmost.” And Dickens, already showing the true responsiveness to his audience that contrasts so markedly with the simulated responsiveness of Chapman and Hall, answered by making Sam central to the Pickwick adventures.

The author’s and publishers’ narrative, advertising, and distribution techniques, innovative from an entrepreneurial standpoint, proved overwhelmingly successful. By number 5, Pickwick’s circulation had increased to forty thousand per number, where it stayed throughout the run. As Norman N. Feltes is careful to stress in his Modes of Production of Victorian Novels, this success is generally attributed to literary genius, lucky accident, and marketing ability, combining to explode upon the literary world. But, Feltes argues, the historical processes that shaped and determined the material production of Pickwick Papers are as important as “genius, luck, and the shrewdness of Chapman and Hall.” The series’ success certainly depended on a combination of perfect timing, insight into the potential of advertising, Dickens’s great comic skill and ability to reflect his audience, and fine-tuning of the narrative to respond to audience desire. But all these factors could not have arisen simultaneously without the particular nexus of economic, technological, and ideological conditions existent in the 1830s.

The source is Jennifer Hayward’s Consuming Pleasures: Active Audiences and Serial Fictions from Dickens to Soap Opera.

This year’s DRUID conference, “Innovation and Competitiveness: Dynamics of Organizations, Industries, Systems and Regions,” is 19-21 June 2012 in Copenhagen. See the call for papers below the fold. Submission deadline is 29 February. 

 

Who was the most significant entrepreneur in the bible (old Testament)?

I ask my students this trying to lead them to Joseph. As a result of his interpretation of Pharaoh’s dreams, not only he, but the whole of Egypt reaps enormous profit. He recognizes the meaning in the dreams and counsels Pharaoh on how to profit from impending misfortune — thus also alleviating the misfortune of many others (by investing in times of plenty to cover the looming famine).

But, thinking about this a bit more, one may argue that what we have here is a veritable entrepreneurial team. After all, it is Pharaoh who has the dream, the vision, though he needed Joseph to interpret it. One without the other was nothing — together they were everything. And then there is the fact that that Pharaoh exercises his judgment in believing Joseph. He takes a huge risk and elevates this lowly, condemned Jewish prisoner to the highest office. He puts aside his ego and courageously follows his better judgment. Surely Schumpeter should have been proud, no?

The Fall 2011 issue of California Management Review is a special issue on “Environmental Management and Regulatory Uncertainty.” I don’t think the authors have been reading Robert Higgs but they nonetheless offer some interesting perspectives on nonmarket strategy and political entrepreneurship. I look forward to future issues on Enron and Goldman Sachs (is it yet considered a branch of the Federal government?).

Back from the SEA meetings in Washington DC, the venue for our annual SDAE conference and membership meeting. At the annual banquet we honored Leonard Liggio for his contribution to the teaching of Austrian economics. Dick Wagner gave the presidential address. Both received a standing ovation.

The panels were well attended and, from what I could tell, the quality very high. I presented my paper on Entrepreneurial Paradoxes (which has been around for a while). Young Bak Choi commented on it and presented an interesting paper on the role of entrepreneurship in economic development and development policy. David Harper and Anthony Endres presented a paper on another variation on the theme of heterogeneous capital and its structure. Perhaps most interesting was a paper by a strategic management Ph.D candidate at York University, Mohammad Keyhani (co-authored with Moren Lévesque), on “The Role of Entrepreneurship in the Market Process: A Simulation Study of The Equilibrating and Disequilibrating Effects of Opportunity Creation and Discovery.” Randy Holcombe commented. Interesting that the issue of equilibration is considered important enough to investigate with simulations. But it raises some important questions. My own current view, having spent a lifetime contemplating the issue, is that we are no nearer an answer than we ever were, and that perhaps the more important distinction is between entrepreneurial actions that add value and those that do not.

Next year’s meetings will be in New Orleans. The president-elect of the SDAE is Larry White. He will be putting together the panels. So if you have an interest in presenting a paper, discussing one, or chairing a panel, let him know (lwhite11@gmu.edu).