Institutional Profile and Types of Entrepreneurship Role of National Innovation System Components - Free Essay Example

ABSTRACT This study advances scholarship on the institutions-entrepreneurship relationship. Previous studies propose that the dimensions of a country’s institutional profile (Kostova, 1997) directly impact entrepreneurial activities in general and regardless of the type (Valdez and Richardson, 2013; Stenholm, Acs and Wuebker, 2013). Furthermore, while there are several studies indicating that personal characteristics such as age, gender, employment status, household size, marital status may influence the type of entrepreneurship (Robichaud, LeBrasseur, Nagarajan, 2010; Block Wagner, 2010; Verheul Van Mil, 2011? Ashourizadeh, Chavoushi Schà ¸tt, 2014? Jensen, Rezaei, Wherry, 2014), there is a limited knowledge about the role of institutional structures. To address this gap, in this study, we cross level analyze 10776 individuals from 55 diverse countries to find out how countries institutional factors (e.g. countries’ institutional profile and national innovation system) encourage people to choose specific type of entrepreneurship. Using Hierarchical Linear Modeling, the findings indicate that neither institutional profile nor national innovation system factors solely determine the choice between opportunity motivated entrepreneurship (OME) and necessity motivated entrepreneurship (NME); however, OME tends to be higher in instances when supportive institutional arrangements (cognitive, normative and regulatory) get coupled with national innovation system factors. The study contributes to a more nuanced understanding of embedded agency within the institutional logics perspective. It bridges the literatures on individual entrepreneurship and the institutional logics perspective. Furthermore, the study provides context and evide nce on the impact of entrepreneurial education, access to the latest technology and support from venture capitalists on individuals’ entrepreneurial choice. Keywords: Entrepreneurship; National Innovation System; Country Institutional Profile INTRODCTION Do institutions have equal impact on everyone in the society? Under what circumstances individuals will may act differently in terms of choosing entrepreneurial activity? Which individuals are more likely to start a business to exploit un-exploited or under-exploited opportunity rather than starting a business merely out of necessity? These are key issues in examining how social, economic, cultural, and technological change occur? Yet, the literature is yet to fully address them. Though some scholars have examined the role of institutions (e.g. cognitive, normative and regulatory) on the rate of entrepreneurship (Valdez and Richardson, 2013) no one has explored which institutional factors are responsible for individuals choosing specific type of entrepreneurship. Under the institutional logics perspective, such questions can begin to be answered. The main focus of the institutional logics perspective (e.g. Thornton Ocasio, 1999? Thornton, 2002? Seo Creed, 2002? Thornton, Ocasio, Lounsberry, 2012? Pache Santos, 2012? Friedland, 2013) is in the way broader belief systems may shape the cognition, behavior, identity, and goals of economic actors. Under this view, entrepreneurs demonstrate individual agency subject to complex systems of institutional forces. While, usually individuals comply and agree with dominant institutional forces which shape their willingness and ability to act? Under specific circumstances and within certain contexts, individuals may contrast from each other in terms of engaging in business activities (Battilana D’Aunno, 2009? Lawrence, Suddaby, Leca, 2009). This situation of limited freedom due to institutions is known as embedded agency (Granovetter, 1985? Seo Creed, 2002? Garud Karnoe, 2003? Greenwood Suddaby, 2006? Green, Li, Nohria, 2009). To help address issues relating to embedded agency under the growing institutional logics perspective literature’s view of individuals’ future goals, we examine individuals’ choice in new venture activity. It seems plausible that regulative, cognitive, and normative institutions will affect the types of opportunities people see, the decision to start up a venture, the types of organizations they form, the financing arrangements, the management methods they employ, and the growth they achieve (Valdez and Richardson, 2013; Stenholm, Acs and Wuebker, 2013). The institutional context provides the tools, models, and constraints that shape the entrepreneur’s choices about each of these (Valdez and Richardson, 2013). In this study, we address the role that institutional factors play in shaping individuals’ behavior to engage in specific type of entrepreneurship. we do so by examining whether innovation level moderates the relationship between nation’s institutional profile and entrepreneurial choice. Entrepreneurial choice was selected as the appropriate outcome variable because not all types of entrepreneurship have equal impact on countries’ economic development (Acs and Varga, 2005). Results indicate that in countries where the innovation level is higher, supportive and facilitative cognitive, normative and regulatory may encourage potential entrepreneurs to get more engaged with opportunity entrepreneurial activities rather than necessity motivated ones. This study has several implications for the understanding of institutions, entrepreneurship, and opportunity recognition. First, it further demonstrates the value of the institutional logics perspective in explaining the nature of how institutions impact individuals. By highlighting a situation in which agents differ in their responses to institutional forces, the importance of one of the institutional logics perspective’s defining features, embedded agency, is further validated. Second, this study advances understanding about the entrepreneurial opportunity (Shane, 2000). Entrepreneurship scholars have increasingly grappled with whether personal or contextual characteristics matter most for successful entrepreneurship. Third, this study has important implications for the study of nations’ economic development. It does so by highlighting conditions in which national innovation system factors seem to have a stronger impact on potential entrepreneurs’ entrepreneuri al choice. Specifically, supportive institutional profile components coupled with higher levels of entrepreneurial education, access to the latest technology and support from venture capitalists, increase the likelihood of individuals getting engaged in opportunity motivated entrepreneurship rather than necessity motivated ones. THEORY DEVELOPMENT Institutional Logics, Embedded Agency, and Entrepreneurship The institutional logics perspective considers institutions as the outcomes of systems of interconnected and logically cohesive ideologies that have taken root within societies over long periods of time. These systems of institutional logics are socially constructed, historical outlines of material practices, conventions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality (Thornton Ocasio, 1999). In sum, institutional logics are the underlying thought patterns and worldviews that support and shape human behavior. Each institutional logic includes several practices, beliefs, values, and rules. By participating with these institutions, agents gain identity, legitimacy, a basis of attention, a basis for strategy, and goals for the future (Ocasio, 1997). Relying on these insights, the notion of embedded agency is supported arguing that individuals are embedded agents using individual discretion within a complex institutional environment (Thornton, Ocasio, Lounsbury, 2012). In other words, people have freedom, but it’s limited. All the time, individuals’ activities are formed based on the logics they are surrounded with. Individuals end up choosing which goals to pursue based on the institutional logic that shapes their focus of attention (Thornton et al., 2012). Individuals’ focus of attention is shaped by: (a) the degree to which a particular institutional logic has been historically institutionalized within a given society (b) the degree to which agents are embedded in fields consisting of conflicting logics and (c) the situational context(s) (i.e. the immediate time and place) in which individuals find themselves (Thornton, et al., 2012). Institutional arrangements and entrepreneurial activity There have been quite a few studies of the relationship between entrepreneurial activity and what we are calling institutional variables, such as culture, government regulations, and economic policies. These are described later. There have also been a few studies examining the three pillars of institutions around entrepreneurship. Since it is difficult to develop and operationalize measures of institutional pillars, not many studies have investigated the role of institutional arrangements on entrepreneurship. While some of them viewed the Scott’s (1999) three institutional pillars as dependent constructs (e.g., Hirsch, 1997), other studies treated them as separate constructs that have different impacts on entrepreneurial activities (Busenitz, Gomez, Spencer, 2000). This is in line with previous research and arguments by Kostova (1997) and Scott (1995, 1998). Even accepting the argument that the three pillars have considerable conceptual overlap in the institutional literature, the argument by these scholars is that the constructs can be defined to focus on three distinct dimensions of institutions. The notion of a â€Å"country institutional profile† was introduced by Kostova (1997). Kostova believed that nation business behavior could be explained through the understanding of government policies, common shared knowledge by a society or culture, and the societal values and norms. However, this profile must be directed toward a specific sphere of activity or field and cannot be generalized across multiple domains. Busenitz et al. (2000) used Kostova’s approach using college business students to develop and validate measures of the regulative, cognitive, and normative dimensions of a nation’s institutional profile particularly around entrepreneurship activity. Cultural-Cognitive Components The cognitive institutional pillar refers to the people’s collective understandings of the social reality that is used as a reference of meaning within a society. This pillar states that society’s cognitions form the individuals’ interpretations and beliefs (DiMaggio Powell, 1983; Meyer Rowan, 1977; Scott, 1995). â€Å"Traits† research stream literature is an example of cognitive research in entrepreneurship, which goes back to Weber (1904) and McClelland (1961), who used the Protestant work ethic and the need for achievement to explain the apparent differences in entrepreneurship among societies. Thereafter, there has been an extensive body of entrepreneurship research investigating the relationship between different aspects of entrepreneurship and cognitive factors (particularly from entrepreneurial trait perceptive) such as innovativeness (McClelland, 1987; Schumpeter, 1949), risk-propensity (Sexton Bowman, 1983; Shaver Scott, 1991), persistence (Ne ider, 1987), internal locus of control (Shapiro, 1975; Shaver Scott, 1991), desire for personal control (Greenberger Sexton, 1988), need for achievement (McClelland, 1987; Shaver Scott, 1991), self-efficacy (Chen, Greene, Crick, 1998), and energy level ( Sexton Bowman-Upton, 1986). While some studies revealed that some traits may be universal to entrepreneurship activity (e.g., Baum et al., 1993; McGrath, MacMillan, Scheinberg, 1992), others believed that culture plays a significant role in entrepreneurial activity (Thomas Mueller, 2000). Due to the limitations of the individual traits approach, entrepreneurship scholars have shifted their focus toward national level cognitive factors, mostly the elements of national culture. While this approach avoids the issue that intrinsic personal traits can completely predict the individual behavior, the major limitations of studies adopting this approach (e.g., Baum et al., 1993; McGrath et al., 1992; Shane, 1992), are that they are mostly concentrated on the United States and Western Europe (Thomas Mueller, 2000), and are focused on Hofstede’s (1980:25) definition of national culture which is â€Å"the collective programming of the mind which distinguishes the members of one human group from another . . . [an d] includes systems of values† (Hayton, George, Zahra, 2002). Addressing these limitations, some recent studies (e.g., Valdez and Richardson, 2013; Stenholm, Acs and Wuebker, 2013), have attempted to incorporate measures of cognitive attributes into a broader set of institutional measures. Additionally, using available cross-national data on differences among entrepreneurs’ knowledge, beliefs, and understanding as indicators of differences in country-level cognitive institutions, these recent studies, have tried to lessen the limitations of the existing measures of cultural dimensions. The results acknowledge the notion that the variance of entrepreneurial cognitions across countries will result in different rates of entrepreneurship. However, they do not provide the full picture since they mostly miss other measures of institutional constructs including normative and regulative (Kostova, 1997; Busenitz et al., 2000). Normative Components Social norms, values, and beliefs related to human behavior form the normative institutional pillar (Scott, 1995; Busenitz et al., 2000). Within a society, perspectives are shared socially, embedded and transmitted by people (Kostova, 1997) and they gain legitimacy based on the extent to which the related action is getting accepted (Veciana Urbano, 2008). Translating these insights into entrepreneurship language, norms and values can define the desirability of entrepreneurship as a career within a society. In other words, individuals entrepreneurial intentions are influenced by the attitudes, beliefs and expectations of a social reference group which ca be family, relatives, and also a larger set of social references (national-level) (Krueger, Reilly, Carsrud, 2000; Stenholm, Acs Wuebker, 2013). Indeed, prior studies have found a positive correlation between the rate of new venture creation and a positive view toward entrepreneurs, and a negative correlation between undesirable so cietal view toward those who previously failed and the founding rates within a country. For instance, Lounsbury and Glynn (2001) found that the extent to which successful entrepreneurs are introduced publicly is significantly associated with entrepreneurial activity in a society. In fact, a favorable impression of entrepreneurial activity by educational system and the media can make access to necessary resources easier for entrepreneurs (Verheul, Wennekers, Audretsch, Thurik, 2002; Stenholm, Acs Wuebker, 2013). What makes the normative pillar distinct from the cognitive pillar is that the normative pillar is concerned with what people consider legitimate, acceptable ways of gaining something that has broad societal approval, while the cognitive pillar reflects principles that are believed and internalized by individuals (DiMaggio Powell, 1983). In other words, the normative elements are broader and more collective social pulses of what is legitimate in the view of the society; while the cognitive elements are aggregates of every single individual’s concepts and beliefs that drive individuals (Valdez Richardson, 2013). Regulatory Components The regulatory pillar refers to policies, rules and laws that shape individual behaviors (Scott, 1995; Veciana Urbano, 2008). This dimension of institutional arrangement can either promote or hinder entrepreneurship through defining the extent of risk involved in the formation and start of a new business (Baumol Strom, 2007). Further, regulatory institutions influence entrepreneurship by influencing the access to the resources required by individuals to create new businesses (Busenitz et al., 2000) or even the ease of starting a new business (Verheul et al., 2002). In general, entrepreneurial opportunities are higher in nations with less regulation, free markets and few barriers to entry (El-Namaki, 1998) and small-business sector is larger where business start-up costs are lower (Ayyagari, Beck, Demirguc-Kunt,2007). In countries with unstable regulatory settings and lack of intellectual property rights, respectively, entrepreneurship opportunity cost may increase significantly a nd individuals may be discouraged to specialize or exploit their capabilities to the fullest (Aidis, 2005; Autio Acs, 2010). Further, weak support from regulatory institutions may result in unproductive country-level entrepreneurship (Webb, Tihanyi, Ireland, Sirmon, 2009) and excessive bureaucracy, taxation and other types of regulations have negative effects on entrepreneurial activities and new venture creation (Webb et al. 2009). Fiscal incentives, tax rates, subsidies, labor market regulation, and bankruptcy legislation are other examples of how regulations can directly impact entrepreneurship in a society through determining the rewards and the risks of the various occupational opportunities (Wennekers, Uhlaner, Thurik, 2002). In fact, laws and regulations that restrict economic freedom result in enhancement of the transaction cost for entrepreneurially-oriented individuals who want to launch a new venture. Thus, regulatory arrangements can be set in a way to manipulate this equation to make â€Å"new venture creation† easier for entrepreneurs (McMullen, Bagby Palich, 2008). Types of Entrepreneurial Activity In the previous sections, it was mentioned that countries institutional profile components (cognitive, normative and regulatory) have positive impacts on the rate of entrepreneurship in general. Entrepreneurial activity can be conceptualized as either opportunity or necessity motivated. Opportunity motivated entrepreneurship activities are embarked upon in the spirit of innovation (Wennekers Thurik, 1999) and profit and growth (Carland, Hoy, Boulton, Carland, 1984) or may entail the leveraging of existing information in a new way (Kirzner, 1973, 1985, 1997). On the other hand, a necessity-motivated venture may be undertaken to provide employment and meet financial obligations out of economic necessity (Reynolds et al., 2002). An opportunity-motivated entrepreneur might create a new company and establish a new venture even he or she may have other occupations to satisfy their financial needs. On the other side, a necessity-motivated entrepreneur would generally start a new business to provide self-employment. Based on these insights, it could be argued that opportunity-motivated entrepreneurship has the potential to advance a country’s economy, while necessity entrep reneurship mainly sustains it. Previous research has indicated that necessity- and opportunity-motivated entrepreneurship should be considered separately when attempting to understand how context relates to the level of entrepreneurial activity (Valdez Richardson, 2013). Institutions appear to shape both the type and the level of entrepreneurial activity. In a study using 2001 GEM data, two elements of the culture-cognitive pillar were significantly related to these two branches of entrepreneurship (Morales-Gualdrà ³n Roig, 2005). Specifically, when respondents felt that they had the skills, knowledge, and experience to start a business, they were more likely to engage in both opportunity- and necessity-motivated entrepreneurship. When respondents were fearful of starting a business, they were less likely to engage in either type of entrepreneurship. The environmental context of countries may support one type of entrepreneurship more than the other (Valdez and Richardson, 2013). Opportunity motivated entreprene urship is more consistent with the Schumpeterian innovations which contribute significantly to economic growth through providing greater job growth, exports, and exploitation of new market niches (McMullen, Bagby Palich, 2008). While previous studies believe that opportunity entrepreneurship has a positive significant effect on economic development, Acs and Varga (2005) go beyond that and argue that necessity motivated entrepreneurship has no effect (Acs and Varga, 2005). Accordingly, it would be critical for countries to encourage their potential entrepreneurs to choose opportunity motivated entrepreneurship over necessity motivated ones. The environmental context of countries may support one type of entrepreneurship more than the other (Valdez and Richardson, 2013), so it can be assumed that set of institutional structures that provide an opportune environment for innovations and knowledge-driven economic growth would increase the probability of people being engaged more in opportunity motivated entrepreneurship. Necessity/Opportunity entrepreneurship and country-level innovation As it was described earlier, necessity entrepreneurship comprises of individuals who decide on entrepreneurship without considering any entrepreneurial opportunity, because they do not have a better employment alternative, and opportunity entrepreneurship, which constitutes the voluntary decision to enter the entrepreneurial career in order to exploit an unexploited or underexploited entrepreneurial opportunity, either imitative (Kirznerian) or innovative (Schumpeterian), even if other employment alternatives are available (Reynolds et al., 2002) Accordingly, it can be expected that the necessity entrepreneurship and opportunity entrepreneurship may have different relationships with level of innovation, since the two activities are fundamentally different (cf. Reynolds et al. 2002). In the case of necessity entrepreneurship, it is highly likely that the entrepreneurial action is related to a negligible extent of innovation, and therefore, that necessity entrepreneurship either has no significant relationship or even a negative relationship with innovation, when the aggregated national level is taken into consideration (Mro?ewski Kratzer, 2016). This tendency is a result of the fact that necessity entrepreneurs, e.g. unemployed persons, tend to have less human capital and entrepreneurial talent (Lucas 1978; Thurik et al. 2008) and are less likely to sustain growth-oriented firms (Wong et al. 2005; Shane 2009). Necessity entrepreneurship may therefore be better classified as self-employment rather than as growth entrepreneurship (Anokhin and Wincent 2012). If a country’s entrepreneurship structure is dominated by this kind of unproductive entrepreneurship, growth-oriented entrepreneurial strategies (e.g. innovation) are not likely to be prevalent among ent repreneurs, which results in less innovation on the national level. Consequently, the relationship between innovation and necessity entrepreneurship is either insignificant or negative (Mrozewski, Kratzer, 2016) On the other side, opportunity entrepreneurs have the motivations to advance their economic, social or mental status through the pursuit of a certain entrepreneurial opportunity. It is very common for opportunity entrepreneurs to give up employment alternatives and in effect face high opportunity costs. This is why opportunity motivated entrepreneurship is characterized by high levels of risk. This situation translates into a high degree of motivation, a strong goal orientation as well as a more sophisticated business strategy (e.g. innovation), which guarantees satisfying returns in order to level opportunity costs (Mrozewski, Kratzer, 2016). At an aggregated level, therefore, it is expected that countries with lower innovation levels will have relatively high necessity-driven entrepreneurial activity and countries with higher innovation levels will have relatively high opportunity-driven entrepreneurial activity. National innovation system The theoretical framework that allows scholars to identify the distinctive aspects of a nations innovation environment that provides people with more opportunities is reflected in National Innovation Systems which refers to the flow of knowledge, technology and information among people, enterprises and institutions which is key to the innovative process at the national level (OECD, 1996, Bartholomew, 1997). Country-specific general and structural components of society (such as political and educational systems) influence the accumulation and diffusion of knowledge required for innovation. Institutional perspectives mention two ways in which national institutional arrangements impact country patterns of innovation. First, the societal institutions which support industrial innovation vary substantially country by country. For example, in many countries, the policies and practices of a nations universities and government research institutes are shaped by the nations singular historical development. In other words, since technology-driven industries are often supplied by universities and research institutes for knowledge and human capital, the technological performance of a countrys firms is influenced by the features of these institutions (Ergas, 1987; Nelson, 1993; Porter, 1990). Second, national context influences the institutional arrangements and behavioral patterns of firms and indivi duals. For example, the organization of work and patterns of communication within and between firms, or between firms and universities reflect broader societal characteristics that have been imprinted on firms and institutionalized over time (Kogut 1991; Powell and DiMaggio 1991). A country’s innovative performance extremely relies on the way these elements work with each other to create and diffuse knowledge and technology. For example, public research institutes, academia and industry serve as research producers carrying out RD activities. On the other hand, governments either central or regional play the role of coordinator among research producers in terms of their policy instruments, visions and perspectives for the future (Bartholomew, 1997). Furthermore, in order to enhance innovation level in a country, innovative actors must get coupled with each other and the government has to promote and activate trust among the different innovation actors (Chung, 2002). These corporations could take place in forms of joint research, personnel exchanges, cross patenting, and purchase of equipment (OECD, 1997). NIS has been captured in different ways in previous studies (Bartholomew, 1997, Godin, 2009). Examples include capital market actors like venture capitalists; a skilled labor force, laws related to the use of information technology as well as the availability of the latest technologies; and the proximity of universities (Bruno and Tyebjee, 1982; Lee, Florida Acs, 2004; van De Ven, 1993). In following section, I am going to see how the components that shape a nation’s innovation performance, affect the likelihood of potential entrepreneurs getting involved in opportunity motivated entrepreneurship, which is significantly related to the level of innovation in a country. Entrepreneurship Education and Training There are several arguments for why individuals differences in terms of education play an important role in explaining the discovery of and opportunities. There is a network argument that relates education to opportunity recognition. Whereas prior research has often focused on how access to resources is important after opportunities for business creation have been recognized (Steven- son and Jarillo, 2007), Arenius Clercq (2005) argue that opportunities are recognized by some individuals and not by others based on their differential access to resources. More specifically, they reason that individuals education may enhance opportunity recognition through the facilitation of access to knowledge, e.g., connections to other knowledgeable others such as alumni network contacts (Cohen and Levinthal, 1990; Burt, 1992). It can be also argued that individuals educational level will positively affect the likelihood to perceive opportunities because highly-educated individuals have a broader knowledge base to draw from and thus a higher likelihood that they can relate this knowledge to potential entrepreneurial opportunities (Cohen and Levinthal, 1990). training and education specifically in the field of entrepreneurship, in one hand, enhances populations ability to recognize and pursue entrepreneurial economic opportunities and on the other hand provides people with the necessary technical skills and competencies required to launch new start-up firms (Hynes, 1996; Henry, Hill Leitch, 2005). Based on the arguments above, it can be hypothesized that: Hypothesis 1: Countries’ institutional profile will be more significantly positively associated with OME in countries with higher levels of Entrepreneurship Training and Education. University–Industry Collaboration The collaboration between universities and the industry is increasingly perceived as a vehicle to enhance innovation through knowledge exchange. The collaboration between industries and universities is defined as interaction between any parts of the higher educational system such as universities and industry aiming mainly to encourage knowledge and technology exchange (Stenholm, Acs and Wuebker, 2013). Countries vary in the extent to which firms collaborate with research institutions and higher educational system, reflecting differences in the commercial orientation of academia (Kenney, 1986; Ergas, 1987). Promoting university–industry collaborations results in improvemnets in innovation and economic competitiveness at institutional levels (e.g. countries and sectors) through knowledge exchange between academic and commercial domains (Perkmann et al., 2013). Additionally, linkage between universities and industries has been accepted as a determining tool for enhancing organizational capacity in open innovation — where an organization employs external networks in developing innovation and knowledge (Dess Shaw, 2001), as a complementary option to traditional internal RD (Harvey Tether, 2003). Summarizing these arguments, it can be stated that, collaboration between universities and industry is largely seen as one approach to improve innovation in the economy by facilitating the flow and utilization of technology-related knowledge and experience across sectors (Inzelt, 2004; Perkmann, Neely Walsh, 2011). Since, opportunity motivated entrepreneurship is characterized by innovation level, it can be assumed that higher levels of university–industry collaborations, may induce higher opportunity motivated entrepreneurial activities. This leads to the second hypothesis: Hypothesis 2: Countries’ institutional profile will be more significantly positively associated with OME in countries with higher levels of University–Industry Collaboration. Availability of Latest Technology The most traditional way that comes to our minds in terms of knowledge flow in the innovation system may be the diffusion of technology as new equipment and machinery. Nations vary substantially in manner in which technology is diffused within the society (Bartholomew, 1997). In some nations technology diffusion is considered to be an explicit part of the governments mandate; diffusion-oriented innovation policies†. Accordingly, programs, institutions and structural linkages are established by government expressly for this purpose of facilitating industrys appropriation of new scientific developments (Ergas, 1987; Ostry, 1990). Most studies show that technology diffusion at country level has positive impacts on productivity and innovation. The dissemination of technology is also shown to be as important as RD investments to innovative performance in many cases (Lundvall, 2007)