July 17, 2006
"Law & Entrepreneurship"
Posted by Gordon Smith

The study of entrepreneurship in law schools is primitive. While legislatures, regulators, and courts sometimes tailor rules to small or emerging businesses, law typically is not organized according to whether the regulated actor is an entrepreneur. As a result, scholars who aspire to study "law and entrepreneurship" must confront the fundamental challenge of defining their field.

The word "entrepreneur" is derived from the French word entreprendre, which means "to undertake." An entrepreneur, therefore, connotes "one who undertakes." Implicit in this general description of an entrepreneur is the existence of an opportunity that the entrepreneur is attempting to exploit.

Opportunities sometimes are portrayed as gemstones: a valuable item that is to be discovered by the entrepreneur. Others portray opportunities as inventions: they are meant to be created. Under either characterization, however, the entrepreneur does not rest once the opportunity is identified. The process of exploiting the opportunity is the essence of entrepreneurship, and this process inevitably leads to the creation of organization:

At the most general level, entrepreneurship is the creation of value through the creation of organization. Entrepreneurs discover, invent, reveal, enact, and in other ways make manifest some new product, service, transaction, resource, technology, and/or market that has value to the community or marketplaceā€¦. [T]he process of creating value operates through the creation of a multiperson system (organization) that transforms input such as materials, money, and time into output such as product and services. Excluded are the activities of the solely self-interested (the clever thief and the con artist) and those who create without deliberate and choiceful organizing of human resources (e.g., artists, inventors, and solo-self-employed professionals). Included are those who start a business or nonprofit agency and those who transform (acquire, redirect, restructure, and "turn around") existing organizations so they add new values to the community or marketplace. (Barbara J. Bird, Entrepreneurial Behavior 3 1989).)

The domain of "law and entrepreneurship" follows naturally from this understanding of entrepreneurship. "Law and entrepreneurship" is, at root, the study of the legal structure of organizations. This study includes the contracts, statutes/regulations, and common law doctrines that apply to the formation, governance, and termination of organizations.

If you are still reading, you may be wondering why I feel impelled to organize the study of "law and entrepreneurship." The explanation is that our understanding of the legal structure of organizations is lumpy (e.g., we understand a lot about public corporations and venture capital relationships, but relatively little about strategic alliances) and incomplete (i.e., empirical studies of organizations tend to focus on a narrow range of questions). By searching for coherence across various types of organizations and asking a broader range of questions about those organizations, I believe that we can improve our understanding of the role of law in shaping organizations of all type. This is the motivation for my interest in empirical studies of relational contracts.

With that background, does the notion of "law and entrepreneurship" articulated above seem like a  sensible first step at defining the field? I realize that the definition is very broad, including, among other things, the entirety of "business organizations" law. But why not consider business organizations a sub-field of "law and entrepreneurship"? Under what theory are the formation, governance, and termination of partnerships, corporations, and other limited liability firms outside the scope of "law and entrepreneurship"? And if the study of those business forms were connected in more meaningful ways to other organizations, wouldn't that be a good thing?

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