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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Comments (7)

1. Posted by Brett McDonnell on November 6, 2006 @ 13:37 | Permalink

Good stuff. I see, as an initial matter, the attraction of keeping entrepreneurship and "intrapreneurship" separate. In the longer run, though, they need to be brought together, I think, for standard Coasean reasons. The question of whether certain innovative activities are done within separate entrepreneurial firms or within larger firms is ultimately one of comparative transaction costs. A given activity is done within one big firm rather than separately if the costs of integration are less than the costs of disintegration. One can't ultimately make sense of that choice without understanding the costs of each alternative.


2. Posted by Vic on November 6, 2006 @ 17:56 | Permalink

Along similar lines as Brett, I'd say that the question whether innovative activities take place inside big firms or outside isn't just a question of transaction costs, but also regulatory costs. And so ultimately the question of regulatory design has to take both sides into account. For example, one cannot easily determine whether SOX is a good idea for growth companies without also considering its impact on large companies.


As a matter of definition and a starting point, though, I agree that it's useful to define entrepreneurship in terms of smaller companies rather than all innovation. I would further refine the focus to growth companies rather than mom and pop companies.


3. Posted by Joshua Wright on November 7, 2006 @ 8:05 | Permalink

Gordon, this sounds like a fun and interesting project. A few quick reactions:

First, I *think* I'm on board with Brett here about carving out within firm activities as a special unit of study but not sure that you're making a firm boundary distinction here if I understand correctly. Really, aren't you making a distinction between new and old firms engaging in "within firm" innovation?

Second, and a related point, isn't this best characterized as a theory of entrepreneurship (or "discovery and exploitation of profitable opportunities" if you like) under constraints you think describe the situations commonly faced by new firms but might also face older firms, middle aged firms, etc.: lack of experience and resources?

Third, as an empirical matter, is it true that new firms face lack of experience and resources relative to "established" firms?

Fourth, and back to Brett's point, new firms are certainly capable of attracting resources and bringing experienced entrepreneurs within the firm. Ultimately, it seems like another path for this research agenda is to describe why different forms of innovation take place within the firm v. contractually with a set of smaller firms. This is not a critical point. There is a lot that can be said about the studying the forces that lead to this particular form of innovation --- but it may lead you into all sorts of useful insights about innovation for different types of firms, and perhaps questions about why different types of innovation occur in older v. newer firms, etc.

I look forward to seeing this develop!


4. Posted by Bill Knox on November 7, 2006 @ 10:21 | Permalink

It's somewhat ironic that I stumble upon this discussion as I just finished reading a book called the Entrepreneurial Imperative by Carl J. Schramm (founder of the Kauffman Foundation).

In the book entrepreneurship is defined as: the process in which one or more people undertake economic risk to create a new organization that will exploit a new technology or innovative process that generates value to others.

Thus “intrapreneurship” is not entrepreneurship (by definition).

That said, I think everyone involved in this post would find this book very interesting. Carl’s argument is simple; he asserts that true entrepreneurship – and nothing else – can give America the necessary leverage to remain an economic superpower. Not technology, not education and certainly not manufacturing.

While the comments section is not an appropriate space to discuss all the details of his argument I do recommend the book to anyone who has an interest in American entrepreneurship in the context of the global economy.


5. Posted by Paul Frankel on November 7, 2006 @ 11:43 | Permalink

Actually - Schramm is the fourth president of the Kauffman Foundation, not the founder.


6. Posted by Gordon Smith on November 7, 2006 @ 13:18 | Permalink

Thanks to everyone for the comments. This is very useful to me.

Brett, it's a fair point, and we decided to exclude intrapreneurship only late in the game because we were interested in focusing on small/new firms. So we thought about this. My hunch is that you are probably right, that talking about the comparative costs of small firm-big firm entrepreneurship will be unavoidable as the field of "law and entrepreneurship" develops.

Vic, I agree on the need to distinguish between growth companies and "mom and pops." That's one reason that I started with Schumpeter. His emphasis on "novelty" seemed to be directed at growth companies. Maybe that doesn't get us all the way there, but I think it's a start.

Josh, I am intrigued by your first point. I think you are right that we are "making a distinction between new and old firms engaging in 'within firm' innovation." But I can't tell whether you think that's a defensible position.

Your second point is dead on, and we make the distinction between new and old as a rough cut. I am not sure about the answer to #3, mainly because we don't have a very tight conception of "established" firms. If an "established" firm is any firm that isn't new, then we may have a problem. I need to think some more about that.

I like point #4 very much. This goes back to Vic's point about regulatory cots, but I suspect that law has a lot to do with whether innovation is carried out in new or "established" firms.

In light of the foregoing, Bill will not be surprised to learn that I find Carl's definition of entrepreneurship attractive. Thanks for pointing that out, Bill.

And Paul is right about Carl's connection to Kauffman. My sense is that he is doing a lot to raise the profile of the foundation, both inside and outside academe.

A final note. I take solace in the fact that we don't need a definition of "law and entrepreneurship" with firmly defensible boundaries. The field will develop (or not) based on the value of talking about entrepreneurial activity, however defined, as a distinctive phenomenon with unique legal/regulatory issues. This modest paper is our first effort to push that ball forward.


7. Posted by Joshua Wright on November 7, 2006 @ 16:45 | Permalink

Perfectly defensible Gordon! The question of defensibility, I suppose, goes to whether one thinks there is some reason to believe that innovation within firms is different between new and old firms. You've got a working hypothesis on this score, and it will be interesting to see what you find.

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