Knowledge that Transforms

Research Summary Institutional changes create entrepreneurial opportunities and entrepreneurs strategically respond to institutional pressure. However, we lack an understanding of how institutional changes impact entrepreneurial strategies. By exploiting the regional disparities in China's economic transition, we examine how institutional changes alter the effects of entrepreneurial strategies. Using data from an alumni survey in China, we find that relationship‐based strategies are positively associated with firm size in the early stage of the institutional change, innovation‐based strategies appear more effective in the late stage, and “cocoon‐based” strategies are associated with larger firm size in the intermediate stage. We propose that entrepreneurs may temporarily leverage “cocoon institutions” to buffer uncertainty in the broader institutional environment. Overall, we contribute to research at the intersection of institutional change and entrepreneurial strategies. Managerial Summary Institutional environments influence the effectiveness of entrepreneurial strategies. How should entrepreneurs adopt different strategies at different stages of an institutional change? We tackle this question by examining China's transition from a planned economy to a market economy. Using data from an alumni survey in China, we find that relationship‐based strategies promote firm growth in the early stage, innovation‐based strategies appear more effective in the late stage, and locating in science parks benefits firm growth in the intermediate stage. Overall, our study implies that entrepreneurs should adopt different strategies to fit different types of institutional environments. Also, our study provides implications to policymakers that cocoon institutions, such as science parks, may be temporarily effective during the intermediate stage of an institutional change.

Research Summary There continues to be substantial debate on whether and how providing inclusive access to finance through microcredit promotes entrepreneurship‐led development at the base of the pyramid. We contribute to this literature by examining differences in household‐level outcomes associated with microfinance loans given for different purposes, and identifying conditions under which the most impact is achieved. Defying common expectations, loans funding microenterprises do not exhibit greater impact than those funding traditional livelihood activities, and loans funding new microenterprises fare particularly poorly. However, loan impact improves when multiple members of a borrower group seek livelihood loans together, and when the provided loans better match the individual financial needs of the borrowers. Our findings underscore the need to refine how microfinance is applied as a tool for development. Managerial Summary Comparing across microfinance loans given for different purposes, we find that the average impact associated with loans supporting traditional livelihoods is at least as high as that for loans supporting microenterprises, and that the impact of loans specifically funding new microenterprises is lower than those for growing existing microenterprises. We also find that the impact of livelihood loans is greater when multiple members of a borrower group are engaged in livelihood‐focused activities, and that loans that better match borrowers' specific needs have a superior impact. We conclude that we need to move beyond the black‐or‐white debate regarding whether microfinance works to a nuanced understanding of when it is effective, that is, examining conditions under which microcredit customers—whether aspiring entrepreneurs or not—can thrive.

Research Summary This research develops and tests an empirical model for crisis management in reward‐based crowdfunding. Drawing from the SCCT literature, we identify which crisis response strategy best mitigates a crisis of confidence that arises when backers publicly criticize a reward‐based crowdfunding campaign during the live funding period. The results of our experimental study show that by using a rebuild response strategy (i.e., offering compensation, apologizing, and taking responsibility), founders can mitigate the impact of the crisis of confidence on potential backers' funding intentions. Our study also unravels the underlying mechanisms driving this effect: affective and cognitive perceptions of the product and the founder fully mediate the effect of founders' response strategies on potential backers' funding intentions. Managerial Summary This study investigates crisis management strategies in reward‐based crowdfunding. Specifically, we compare the effectiveness of three different response strategies (rebuild, diminish, deny) that founders can adopt when reacting to a publicly visible, negative comment on their crowdfunding page. We test the effects of these strategies in an experiment among 514 participants. Our results show that using a rebuild strategy works better than a diminish or a deny strategy to increase potential backers' funding intentions, because a rebuild strategy enhances perceived likability and trust, while lowering perceived risk. Since communication strategy is key for the reward‐based crowdfunding campaign's ultimate success, we recommend that crowdfunding campaign founders adopt a strategic plan for their public interaction with backers and use an appropriate response strategy.

Research Summary Why do some young firms change their business models while others do not? Why do some firms make small changes, while others make more substantial changes? And does industry context matter? Drawing on organizational learning theory and utilizing a unique database tracking 187 young firms through the first decade of the mobile health industry, we examine the role of customers in young firms' business model adaptation. We find a positive impact of customer portfolio breadth (capturing the number and diversity of customers) on both the likelihood and degree of business model change. Importantly, industry segment maturity moderates this relation: customer effects are strongest in the earliest, most uncertain stages. Our study provides a rare view into how a new industry and its young ventures co‐evolve. Managerial Summary Customers have been viewed as critical in a start‐up venture's search for an initial business model, but their role in young firms' business model adaptation has not been examined. In this study, we show that a young firm's customer portfolio breadth is an important driver of business model change, especially at the earliest, most uncertain stages of an industry. Our results highlight the value of customers as sources of knowledge in emerging industries, and suggest that when making decisions about establishing and fostering customer ties, entrepreneurs should consider the number and diversity of those ties in the context of the maturity of the young firm's industry segment.

Research Summary Anticipating that innovation nurtures entrepreneurship, we began an extended case study of an innovative start‐up in the space industry. We quickly saw that institutions imposed formidable barriers to implementing entrepreneurship from innovation. Curious about how, why and the extent of this situation, we widened our study to other start‐ups, CEOs of existing businesses, an incubator, a technology transfer office and key influencers in large space companies and agencies. We found that institutions and policies had, in effect, shrunk the entrepreneurial field, leaving little room for enterprise. Conceptualizing from this, we propose the institutions create an “entrepreneurial space.” Theoretically, we explain how this concept of an entrepreneurial space can be usefully applied in other contexts. Managerial Summary The space industry is extremely innovative. It is also dominated by two powerful incumbent firms and a third that is highly regulated. This research examines how entrepreneurship in the space industry is shaped by institutions, and what this implies for the freedom to be entrepreneurial. We investigate this question in the French European context. We find that while the industrial context and institutions had completely pushed entrepreneurship out of the upstream segments it flourished in the margins of this industry. The upstream segment is not at all entrepreneurial; downstream is the entrepreneurial milieu of the space industry. We recommend that policymakers (a) strengthen private‐public‐partnership arrangements; (b) implement policies to attract venture capitalists to transform and reinvigorate the upstream segment; and (c) design specific incubation mechanisms for space start‐ups.

Research Summary Our understanding of entrepreneurial orientation (EO) is limited by the inattention to why a firm arranges itself to give rise to EO, what sets its strategic intent, and what affects its contribution to performance. These omissions have led to calls for a causally adjacent theory of EO. Grounded in knowledge‐based theory, we investigated (a) how knowledge production gives rise to EO, (b) how the relationship between EO and profitability is mediated by knowledge use, and (c) how this relationship between EO and knowledge use is moderated by stakeholder engagement. Using multirespondent, multisource data from small‐size and mid‐size enterprises in two economically distinct East Asian countries, Taiwan and Japan, empirical evidence supports our theory. Our findings are consistent across both studies. We contribute a knowledge‐based theory of EO. Managerial Summary Why do some firms organize to be entrepreneurial while others do not, and why do some entrepreneurially oriented firms profit more financially than others? We find that those firms that organize processes to accumulate, aggregate, activate, store, manage, and distribute knowledge become more entrepreneurial oriented as the means to create wealth from this “knowledge production.” In other words, knowledge production can affect perceptions of opportunities and resources, leading to choices about organizational arrangements to best use knowledge. However, we find that the firm also needs to be adept at knowledge use to profit financially from its entrepreneurial endeavors, and leading firms utilize stakeholder engagement to strengthen the relationship between entrepreneurial behavior and knowledge use on the route to greater profitability.

Research Summary We investigate the short‐ and long‐term effects of public sponsorship in the form of grants on venture growth and subsequent investment funding. We adopt a temporal approach and assess our results using discontinuous growth modeling. This approach allows us to unpack the complexity of sponsorship interventions and provide insights into how quickly, how long, and under what conditions grants augment growth. Using a proprietary sample of 129 ventures located in eight incubators, we find that securing an initial grant increases the rate at which ventures acquire private investment capital but not revenue over time. We draw on resourcefulness theory and signaling theory and explore the moderating role of venture size. We discuss our contributions to the entrepreneurship and public policy literatures. Managerial Summary Are public grants effective at sparking entrepreneurial growth? To deepen our understanding of public policies that are designed to promote innovative entrepreneurship, we investigate the short‐ and long‐term effects of new venture grant sponsorship. We study 129 ventures located in eight business incubators over a 4‐year period. Our results indicate that although there are initial advantages to receiving a grant, there are also potential shortcomings as grant receipt does not directly influence long‐term revenue growth. We theorize that having abundant access to grant capital reduces the ventures need to “stretch” resources and grow revenue over time. Yet, initial grants seem to signal to investors that the venture represent a “good bet” as investment trajectories follow the opposite growth pattern, increasing steadily over time.

Research Summary Innovative entrepreneurship, defined as the creation of new products, services, production methods, or business models, is critical for firm, industry, and economic growth and a key determinant of societal well‐being. This special issue explores the roles of institutions and government policies in promoting or impeding innovative entrepreneurship. In this introductory editorial, we review theory and evidence on entrepreneurship at the macro‐institutional and micro‐policy levels, highlighting costs and benefits of alternative institutional environments and targeted policy interventions, as well as interactions within and across levels. We summarize the six papers in the special issue, discuss their contributions to the literature, and suggest how future work can build upon these and other papers to advance our understanding of the conditions and mechanisms underlying successful entrepreneurial innovation. Managerial Summary Innovation and entrepreneurship bring new products and services to market, help firms and industries to grow, and generate improvements in social and economic life. The papers in this special issue explore the background conditions—laws, political processes, regulations, tax policy, subsidies, training programs, and more—that make entrepreneurship and innovation successful. Both “macro” and “micro” policies can stimulate successful entrepreneurial and innovative outcomes, but can also become politicized, be ineffective, and generate unintended consequences. The papers offer lessons to researchers, policymakers, and practitioners about making entrepreneurship and innovation more successful.

Research summary We meta‐analyze the structural relationship between human capital, the ability to generate new venture ideas, and the favorability of opportunity beliefs to address divergent theoretical predictions and inconsistent empirical findings. We test a two‐stage process model of entrepreneurial opportunity identification, distinguishing between the ability to generate new venture ideas and the favorability of third and first‐person opportunity beliefs. We also distinguish between two categories of human capital: general and specific human capital. Our results suggest that general and specific human capital are positively associated with the ability to generate new venture ideas. Furthermore, only specific human capital matters in influencing the favorability of opportunity beliefs, yet the ability to generate new venture ideas is far more important than human capital for the favorability of opportunity beliefs. Managerial summary How does an individual's human capital relate to the attractiveness of opportunities identified? In this study, we review the body of literature on this topic and analyze the relationships between two types of human capital—general and specific human capital, the ability to generate new venture ideas, and the attractiveness of opportunities. We find that both general human capital—primarily education and work experience—and specific human capital—industry and entrepreneurial experience—are useful for generating new venture ideas. However, only specific human capital is useful when assessing which new venture ideas can turn into attractive opportunities. We also find that the ability to generate new venture ideas is more strongly associated with the attractiveness of opportunities than either type of human capital.