Knowledge that Transforms

This article presents a comprehensive analysis of the environment experienced by private businesses in China through examining their relationships with the major stakeholders—namely government, supplier, employee, customer, and competitor. Since the announcement of the economic reform in 1978, substantial political and economic power has been delegated from the central government to the regions. Endowed with this power, local governments have crucial influence on the size of the private sector within their jurisdiction. Being outside the state allocation plan, private firms have less access to raw materials and credit. In the volatile political climate of China, they are vulnerable to attack during political campaigns. Maintaining a cordial relationship with local cadres, through paying bribes and various charges, is thus a prerequisite for survival. Having solicited political backing, a private entrepreneur can not only run his business more smoothly, but also may be more tolerated in his illegal activities such as tax evasion, profiteering, and selling banned products. In short, the whole situation can be described as a collusion of local governments and private businesses at the expense of the central government's interest. Under the economic reform, the distribution system has become less rigid than before. It is easier for private firms to secure supplies, whether raw materials or manufactured goods. Labor input is also not a problem for most private firms which are small in size and employ mainly unskilled workers. However, large private enterprises have to compete with state, collective, and foreign enterprises for managerial staff who are in short supply. There have been marked changes in the consumption pattern since the early 1980s. People spend less on staple foods and more on non-staple foods, consumer goods, and services. Moreover, China is experiencing a consumption boom. Altogether this offers great opportunities to the private sector, which has been expanding its share of industrial output and retail sales very fast. On the other hand, competition is becoming much keener. State enterprises are improving their efficiency and giant multinational corporations are rushing in. As there are few entry barriers, private entrepreneurs are also competing fiercely among themselves. The ideological contradiction of having labor exploitation by private entrepreneurs in a socialist country has prevented the Chinese government from actively encouraging private business. The private sector has been assigned a supplementary role in the dominant public economy. This status has led to discrimination against private firms in obtaining factor inputs, accounting partly for their vulnerability to bureaucratic harassment by local cadres. This will continue to hamper private business development. It is concluded that ideological and political reforms, in addition to the economic reform, are required for providing a more conducive environment for private businesses. The Chinese experience of liberalizing the private sector offers useful insights to governments of other developing countries.

This article examines the validity of the venture evaluation model in Korea by directly comparing the relative importance of evaluation criteria on the funding decision with the relative importance of factors influencing venture's empirical performance. Specifically, we first identify the relative importance of evaluation criteria based on whether a deal is accepted or rejected (current evaluation model). Next, we derive the relative importance of those criteria revealed in the empirical performance, based on the success/failure of ventures that overlap with the deals originally used as accepted cases (performance-based model). Finally, to better understand the differences between the two models, we measure the general perceptions of venture capitalists on the importance of those criteria without regard to specific deals (normative model). To identify potentially important criteria, we reviewed the existing related studies on evaluation criteria, and we interviewed 10 venture capitalists. As a result, we selected 31 evaluation items. The questionnaire consists of two parts and deals with the following four cases: In part A: 1.1. case 1: general perceptions concerning the 31 criteria. In part B:2.2. case 2: one of the most successful ventures.3.3. case 3: one of the least successful ventures.4.4. case 4: one of the rejected ventures. Using a five-point scale, we asked the respondents to rate the 31 criteria based on their general perceptions without referring deals (case 1), and on the specific deals they had handled (cases 2, 3, and 4). To prevent any firm or respondent from affecting the results more than it ought to, we distributed the questionnaire to each firm in proportion to the investment amounts; we also asked the respondents to fill out only one questionnaire including four cases. Seventy-four venture capitalists (including 10 interviewed) responded to this questionnaire. They have worked as investment directors or managers in the top-rated 20 venture capital companies, selected according to investment amounts. On the basis of the ratings of 31 criteria for the previous four cases, we developed three investment models. First, the current evaluation model reveals which criteria are more important in deciding whether or not to fund. The model measures the relative importance of evaluation factors in discriminating between the accept (case 2 and case 3) and the reject (case 4) decision. Second, the performance-based model consists of the relative weights of evaluation factors influencing the two performance categories—success (case 2) and failure (case 3). This model shows the relative importance of evaluation criteria that are reflected in the venture's empirical performance. Finally, we identify the normative model, revealing the venture capitalists' general perceptions concerning the importance of individual criteria in light of their past field experiences (case 1). By comparing the three models, we find that the importance of these criteria revealed from venture capitalists' perceptions and empirical performances is fairly similar but not sufficiently reflected in the actual deal evaluation. In particular, the entrepreneur-related characteristics are not considered the most important in evaluating venture proposals according to the current evaluation model, but they do turn out to be the most important factors in evaluating empirical performance. This is in strong contrast to the findings of some existing studies, which contend that the entrepreneurrelated criteria ultimately determine the funding decision. Instead, the result confirms the previous assertion that the evaluation of managerial capability is the most challenging task in the venture selection process. In the current evaluation model, financing ability is considered more important than either superiority of product and technology or production capability, contrary to venture capitalists' perceptions and empirical performance results. Therefore, it seems necessary to raise the level of specialization of venture capital firms through the acquisition of managerial skills from developed countries and by enhancing the technical background of individual venture capitalists.

This research seeks to identify variables that should be related to venture performance. It is hypothesized that both market attractiveness and resource-based capabilities are directly related to new venture performance. In addition, specific resource-based capabilities are hypothesized to be directly related to the competitive strategies chosen by a firm. Finally, the “fit” between strategies and resource-based capabilities is hypothesized to be related to venture performance. The sample consisted of all manufacturing businesses (SIC codes 20–39) started or reorganized in the corporate form between 1980 and 1991 in nine counties in northwestern Pennsylvania, as identified by a major marketing research service. Of the 800 companies surveyed, completed questionnaires were returned for 155, representing a 19% response rate. The 155 responding companies had a median age of 5 years with a median of 15 employees. The major products of companies in the sample included flour, lumber, household and office furniture, plastic containers, tools and dies, ready mixed concrete, pipe fittings, measuring devices, paint and varnish, machine tools, electroplate, carbon and graphite composite products, plastic laminated products, circuit boards, electronic components, and parts for internal combustion engines. In general, the results confirm the validity of the measures of environmental and organizational characteristics as we have adapted them for new ventures. As hypothesized, perceived market attractiveness and the overall abundance of resource-based capabilities were significantly related to venture performance. Also, in two of three cases, the evidence suggests that specific resource-based capabilities are related to the firm's stated competitive strategies. Finally, although the relationship between “fit” and performance is not supported in all cases, the performance of the emerging manufacturing ventures included in this sample appears to be enhanced when resource-based capabilities are supportive of a cost leadership strategy and when firms seeking to differentiate based on product and service quality have the resource-based capabilities to support that strategy. The results of this emerging research stream will make an important contribution to our understanding of the factors that impact firm performance. For scholars the results provide additional information needed to develop comprehensive new venture performance models. A clear understanding of the factors that have a strong influence on venture performance will enable practitioners to better identify viable business opportunities and academicians to provide potential business founders with tools to help them recognize opportunity. In addition, the identification of appropriate levels of abstraction will provide building blocks for future research that seeks to integrate environmental and firm-level constructs.

The entrepreneurial view of the firm stresses the need for a more insightful understanding of business leaders within sets of SMEs. Here, competitiveness emerges as a network-embedded capability and the coordination among firms, maximizing firm-specific competencies, represents a strategic leverage in accomplishing and maintaining a sustainable competitive advantage. When the goal is not only greater efficiency in terms of the lowest cost but innovation in terms of how to improve productive performance by changing the way in which it is undertaken, a critical issue becomes the entrepreneur's ability to create, manage, and recombine the set of relationships with external suppliers. The ability to glue external expertise and capabilities in an original and unique way is considered the key factor in pursuing innovative performance. As orchestrators of inter-firm linkages, entrepreneurs relying on personal networks and prior relationships are able to identify possible sources of knowledge. As coordinators of such innovative ties, they combine a wide set of diverse competencies not only to overcome size constraints through development cost reduction, but also to recoup ideas and creativity for the realization of more complex typologies of innovation. These elements reduce the level of uncertainty, while enhancing early cooperation between firms. Because the entrepreneur is supposed to be able to manage a higher number of “innovative poles”, which can be better managed thanks to trust and reputation developed in prior relationships, the different management topology could be associated with a different level of supplier contribution to the development of new products. This paper provides insights into the role of suppliers in the new product development process, and explores the role of the entrepreneur in promoting and managing a wide set of external, innovative ties. Attention is focused on 103 small- and medium- sized firms located within two Italian industrial networks where interdependencies are unusually large and complex. With respect to the first aim, the empirical analysis confirmed SME's structural recourse to suppliers. More important, the contribution of such resources is not necessarily limited to cost reductions and marginal improvements. Although incremental contributions certainly exist and are relevant, more complex relationships largely focused on joint design and development emerge as important patterns in buyer—supplier interaction. With respect to the second aim, an entrepreneurial explanation of SMEs' innovative performance is advanced. In a competitive environment where the actors are not atomistic, but exist within systems of actors, the relational capability could represent for entrepreneurial firms the way to gain a sustainable competitive advantage. We found entrepreneurs who, exploiting basic experiences, seek new combinations among the various inter-firm ties, relying upon such linkages as a vehicle for transferring and combining their organizationally embedded learning capability. Our findings showed that (1) when the entrepreneur is leading and managing the business, more suppliers are involved in the development of new products, and (2) the type of contribution given by suppliers differs by management typology. More precisely, the incremental type of contribution is dominant whenever professional management is present, while the relevance of architectural and radical topologies increase when the entrepreneur is present. On a broader level, the findings suggest further studies to address the question of how internally determined, rather than spontaneous, is the evolution toward a network structure in sets of SMEs similar to those studied. We showed that the number and the quality of inter-firm relationships cannot be explained merely by environment-specific factors.

The process model of entrepreneurial venture creation developed in this paper is based on interviews with entrepreneurs who started twenty-seven business in a range of industries in upstate New York. The venture creation process described here is an iterative, nonlinear, feedback-driven, conceptual, and physical process. The model includes internally and externally stimulated opportunity recognition, commitment to physical creation, set-up of production technology, organization creation, product creation, linking with markets, and customer feedback. For analytical convenience, the process has been divided into the opportunity stage, the technology set-up and organization-creation stage, and the exchange stage. Business concept, production technology, and product are respectively the core variables representing the three stages. Entrepreneurs introduce differing amounts of novelty at each core variable during venture creation, and the varying amounts of novelty qualitatively distinguish one kind of entrepreneurship from another. For the researcher, the model suggests a better method for specifying samples of entrepreneurial firms. It shows how studies on the context of venture creation can be more specific, and proposes that novelty at the core variables be operationalized as a step toward defining the entrepreneurial content of ventures. For the prospective entrepreneur, the model will serve as a useful road map. It will alert the entrepreneur to the strategic issues at each stage in the venture creation process, particularly when introducing significant novelty at any of the core variables.

The market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures. This market consists of a diverse set of high net worth individuals (business angels) who invest a portion of their assets in high-risk, high-return entrepreneurial ventures. The emerging consensus of the characteristics of the individual investor is that of a well-educated,middle-aged individual with considerable business experience and a substantial net worth. These informal investors appear to prefer investing in the early start-up stage of the venture and, if given a choice, prefer that their investments be located close to home. One consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds. They are not. In terms of their competence in the many areas of venture investing, these Individual investors range from the successful, cashed-out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other. At the same time, little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread, or about these non-angels' propensity to join the fold. Thus, this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing. An analysis of the data reveals three groups of high net worth Individuals: business angels with experience investing in entrepreneurial ventures, interested potential investors with no venture investment history but who express a desire to enter the venture investment market, and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy. Business angels and potential investors (both the interested and non-interested segment) share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture. As the issues move from the general to the specific, divergence in investment attitudes takes place among the two groups, but this divergence is in terms of magnitude or intensity, rather than in contrasting or opposing views of the process. The potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor, especially in terms of the dollar amount committed to any one investment. While the business angel is more interested than the potential investor across all stages of financing, the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing. In contrast, the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts. The potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market. For the interested group to increase their interest in providing venture capital, these potential investors want assistance in monitoring the performance of the venture investment, followed by assistance in pricing and structuring. Both of these resources relate more to the technical aspects of venture investing and Indicate that these are the areas where the potential investor is least likely to have expertise. Other resources, such as finding and evaluating the investment opportunity, appear to represent less of a stimulus for the potential investor. In many respects, interested potential investors act like business angels across several dimensions. Both consider the later stages of the development of the venture as the preferred stage to invest. The business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing. Where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing. The potential investor will commit a smaller dollar amount to any one venture, is more inclined to participate with other investors, and is more apt to see venture investing as a diversification strategy than is the seasoned business angel.

Alliances with Japanese corporations are generally regarded as difficult and demanding and the literature suggests that there are four reasons for this—general cultural differences; perception and understanding of the legal contract and differences in attitudes to the ways in which this form of arrangement can contribute to organizational learning; the placing of the locus of activities on the value chain; and the effects of global versus multidomestic differences. The article suggests that for small independent firms, the creation of alliances across national boundaries is a social event that relies upon the building and nurturing of a series of entrepreneurial networks. In countries as culturally diverse as Japan and the U.S.A., this may be realized through the use of gatekeepers who facilitate the creation of a “network-of-networks.” The authors analyze the creation of a successful international strategic alliance between the technology-based companies of Kinkel in Japan and three companies in Silicon Valley, U.S.A. None of the four companies are major corporations. From analysis of the case study, the following conclusions are made: 1.1. International strategic alliances between small firms can be more symmetric than those between large and small firms.2.2. Even if national cultures are starkly different, there are common features that characterize technology-based businesses regardless of their country of origin.3.3. Accepting a fit of organizational culture, patience is a key factor of success.4.4. The key to success is a “networker of networks,” a key person or company whose role is to create a global network of local networks.5.5. Social events, such as international symposia, exchange programs, or conventions are important mechanisms for identifying potential partners.6.6. The most important implication of this case study is that the nature of the project will usually require a network of small businesses with different resources.

Field studies of organizational decline and turnaround have provided evidence that economically troubled firms can undertake recovery from sharp financial losses in different ways. As suggested by a recent stream of research, the most promising of these ways is for businesses that have retrenched to initiate recovery strategies designed to redirect their remaining resources toward more promising product-market combinations. The choice of this set of alternatives, known as entrepreneurial recovery strategies, is the topic of the research that was undertaken. Entrepreneurial recovery strategies involve reformulation of a firm's products, services, markets, or principal technologies in ways that represent a new or radically altered competitive posture. They are contrasted to efficiency recovery strategies that entail retaining the current product-market-technology orientation but on a smaller and more efficient scale. As these descriptions suggest, the thrust of research on recovery strategies has been to merge the findings from entrepreneurship studies on new venture creation and corporate intrapreneurship with strategic management studies on retrenchment and recovery. Our project extends this process by treating recovery strategies as the central element in a turnaround model. The research was specifically designed to address two research questions: 1. Which functional areas are most emphasized by small market share (SMS) firms that pursue entrepreneurial versus efficiency recovery strategies? 2. What are the performance implications for adopting entrepreneurial versus efficiency recovery strategies for mature-industry, SMS manufacturers based on the cause of the performance downturn? The research questions were investigated through an empirical analysis of 32 companies, each of which controlled less than 1% of their mature manufacturing industry's total sales. Two executives from each of these companies responded to a 162-item questionnaire designed to assess the cause of a downturn that occurred anytime during the period of 1976–1985, any changes in strategy components during the recovery, and the emphasis placed on specific functional level activities during the response to the decline. Additionally, objective measures of performance were used to assess the performance implications of entrepreneurial and efficiency strategies. The major findings from the research included: (1) a high degree of strategy change among the participant firms; (2) a focus on marketing and production functional areas by SMS firms that pursued entrepreneurial recovery strategies, and a focus on finance and management functional areas for SMS firms that pursued efficiency recovery strategies; and (3) a relatively poor level of performance among SMS firms that pursued entrepreneurial recovery strategies. The main implication from the study is that SMS companies in mature manufacturing industries should consider the adoption of efficiency-oriented recovery strategies to foster economic revival. The research should be replicated in industries that vary both technologically and in stage of life cycle to determine if entrepreneurial strategies represent more viable alternatives in certain other turnaround situations or for other industry populations.