November 06, 2006
"Law & Entrepreneurship" Redux
Posted by Gordon Smith

This past summer, I posted some preliminary thoughts on "law and entrepreneurship" as a field of study. Since then I have been reading more of the entrepreneurship canon, and working with my finance colleague, Masako Ueda, on a project, the first product of which I will post on SSRN later this week. My views on "law and entrepreneurship" have evolved. Here are some paragraphs (sans footnotes) from a draft of my paper with Masako:

Joseph Schumpeter famously identified the “process of Creative Destruction” as the “essential fact about capitalism.” In Schumpeter’s view, the entrepreneur is the agent of creative destruction, and the distinguishing attribute of entrepreneurial activity is novelty. Entrepreneurs create new products, improve the manufacture of existing products with new methods, exploit new sources of supply, and develop new forms of organization.

According to Schumpeter, entrepreneurial activity “constitutes a distinct economic function” because its very novelty ensures that it transcends the present body of understanding and because society resists novelty, thus requiring of the entrepreneur the distinctive skill of “getting things done.” Schumpeter’s prediction that entrepreneurs would become obsolete seems passé in the wake of the revolutionary technological developments of the past few decades, but getting novel things done remains at the heart of modern conceptions of the entrepreneurial process.

Though entrepreneurship as a distinct field of research is still searching for an identity, entrepreneurship scholars gradually are forging a consensus about the core commitments of the field. In describing the entrepreneurial process, for example, scholars typically focus on “the discovery and exploitation of profitable opportunities.” Novelty is inherent in such opportunities, and “entrepreneurship is the mechanism by which society more fully appreciates its investment in the creation of new knowledge, such as research and education.”

...

We restrict our attention to “the discovery and exploitation of profitable opportunities” by new firms and exclude entrepreneurial activities by established firms from our definition of entrepreneurship. The latter is sometimes called “intrapreneurship." Scholary interests in intrapreneurship are clustered around the issue of how to circumvent organizational inertia in established firms and to get novel things done, as opposed to conducting routine business. Important issues in entrepreneurship by new firms arise from lack of experience and resources, which established firms usually possess. Given these significant differences between intrapreneurship and entrepreneurship by new firms, we gain little from mixing the two forms of entrepreneurship together.

Our conception of “law and entrepreneurship” follows naturally from the foregoing description of entrepreneurship and encompasses positive law (including constitutions, statutes, and regulations), common law doctrines, and private ordering that relate to “the discovery and exploitation of profitable opportunities by new firms.” While much entrepreneurship research focuses on the characteristics of entrepreneurs or on the performance of entrepreneurial firms, law and entrepreneurship studies should focus on the legal structure and regulation of entrepreneurial firms. Many entrepreneurship scholars emphasize the importance of organization to the study of entrepreneurship.

Of course, as always, comments are most welcome.

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