The Psychology of Entrepreneurship

J. Robert Baum, Michael Frese, Robert A. Baron

• Publisher: Psychology Press
• Year: 2014
• ISBN:
  9781317613787
• Edition: 1
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

Entrepreneurship is essential for international social and economic well-being, as new ventures are the dominant source of job creation, market innovation, and economic growth in many societies. In this book, a noted group of researchers use findings, methods, and theories of modern psychology as the basis for gaining important, new insights into entrepreneurship-and into the hearts and minds of the talented, passionate professionals who create new business ventures.

The Psychology of Entrepreneurship, a volume in the SIOP Organizational Frontiers Series, is the first book written about the psychology of entrepreneurship, and includes over 60 research questions to guide industrial organizational psychology, organizational behavior, and entrepreneurship research about entrepreneurs. It seeks to answer questions such as, how and why do some people, but not others, recognize opportunities, decide to start new ventures, and organize successful, rapidly growing new ventures?

Some topics addressed include:

• methods to help researchers explore the domain of entrepreneurship research;
• the entire process of starting a new business;
• characteristics of the individual entrepreneur;
• the history of entrepreneurship education;
• the cross-cultural effects of entrepreneurship; and
• the viewpoints of seasoned psychologists who analyze current entrepreneurship research methods.

This book will appeal to teachers, students, and researchers in the areas of industrial organizational psychology, organizational behavior, entrepreneurship, and management.

1
Entrepreneurship as an Area of Psychology Study: An Introduction

J. Robert Baum
Michael Frese
Robert A. Baron
Jerome A. Katz

The Need to Understand The Entrepreneur

Entrepreneurship is fundamentally personal. Although entrepreneurship research has shown that there are multiple personal, organizational, and external causes of successful new venture creation (Baum, Locke, & Smith, 2001; Rauch & Frese, 2000), it takes human vision, intention, and work to conceive and convert business ideas to successful products and services. Through their thinking and action, entrepreneurs themselves integrate human and financial resources to organize, produce, and market products and services that yield value for customers and workers.

According to venture financiers, entrepreneurs’ personal characteristics (individual differences) are the most important factors for business success—even more important than the business idea or industry setting (Shepherd, 1999; Zopounidis, 1994). Entrepreneurs themselves claim that their decisions and actions are the most important reasons for their company’s survival (even as they complain about external challenges and resource shortages) (MacMillan, Siegel, & SubbaNarasimha, 1985; Sexton, 2001).

Despite the belief that entrepreneur’s personal characteristics are important for new venture success, the psychology of the entrepreneur has not been thoroughly studied. We believe that industrial/organizational (I/O) psychology researchers have much to offer the dynamic field of entrepreneurship research—particularly in terms of general theoretical knowledge about human psychology and research technique sophistication. In turn, I/O psychology theory will be enriched, and I/O psychology researchers will gain professionally from the study of entrepreneurs.

Benefits for I/O Psychologists: The Intersection of I/O Psychology and Entrepreneurship

The Psychology of Entrepreneurship addresses the many points of intersection between traditional I/O psychology and entrepreneurship. First, organizations are the central phenomenon of organizational psychology, and organizations only come about through entrepreneurs and entrepreneurship. This implies that to be interested in the development of organizations, I/O researchers need to be interested in the entrepreneurial process.

Furthermore, the founders of organizations typically influence the development and culture of the units that they start, and their influence persists throughout and beyond their lives (Schein, 1987). The relationship between the entrepreneur and the organization that he or she founded can be quite complicated, as discussed by Baron in chapter 2 of this book. Thus, organizational psychologists ought to be interested in entrepreneurship if they take the roots of the phenomenon that they are studying—the organization—seriously.

Second, there are interesting issues involving multiple levels of analysis and multiple stages of business in entrepreneurship:

1. In the beginning, the solitary entrepreneur has an enormous influence on the start-up firm (Schein, 1983, van Gelderen, Frese, & Thurik, 2000).
2. As the new venture grows, influence shifts to the entrepreneurial team and key employees (Savage, 1979).
3. Subsequently, organizational factors dominate the established firm.

Not all business founders are good managers of their businesses and therefore it makes sense to search for differential predictors of the emergence and success of organizations. We think this is similar to the importance of the differentiation of effective and ineffective leadership in leadership research (Lord, de Vader, & Alliger, 1986).

Third, industrial organizational research and entrepreneurship research both focus on performance outcomes. Industrial and organizational psychologists evaluate performance in terms of supervisory judgements; however, entrepreneurship research measures performance more completely and more objectively in terms of market performance (e.g., organizational survival, growth, and profitability). Although there are problems with such measures of growth and profitability in entrepreneurship, clearly, such a performance concept is not just a function of individual behaviors. Environmental factors and luck clearly play a part. Thus, performance as measured in entrepreneurship research is a much more meaningful performance concept than the one related to supervisor rating of performance. I/O performance concepts are often confounded with organizational politics and communication issues (impression management). Thus, we think that it would be beneficial to routinely test whether certain theories of performance, developed in the area of employee performance and performance assessment of supervisors, generalize to the area of entrepreneurial performance.

Fourth, the direct personal implications of performance are typically higher for entrepreneur–business owners than for employees; thus, characteristics that support coping, including knowledge, skills, ability, and motivation, are relevant for understanding entrepreneurs and the entrepreneurship process. We also believe that I/O psychologists may gain from testing established psychological theories in the relatively simple, but extreme, entrepreneurship setting (Eden, 1973). The setting is simple in the sense that one or a few persons start new organizations; for a time, the young organization and its products and processes provides a compact, low-complexity laboratory for I/O psychologists. Furthermore, the entrepreneurship setting is extreme in the sense that it is dominated by high uncertainty, time pressure, and resource shortages. According to Dov Eden (1973), these conditions provide an attractive, time-compressed setting for studies of human cognition and behavior under trying conditions.

Fifth, by its very nature, entrepreneurship research has been more cross-cultural because differential founding rates have been shown to exist across different countries (Reynolds, Bygrave, Autio, Cox, & Hay, 2002). Cross-cultural management and cross-cultural entrepreneurship should be much more strongly related to each other and should be used to test each other’s hypotheses (House, Hanges, Javidan, Dorfman, & Gupta, 2004). Fit to culture and misfit (niche) are both adequate hypotheses about entrepreneurial success. So again, this is an interesting area to explore and summarize.

Sixth, recent entrepreneurship research may guide I/O psychologists to focus on personal abilities such as opportunity recognition, which has received much attention from entrepreneurship researchers but little attention from general psychologists. Psychologists may be interested in entrepreneurship research about new personality trait concepts such as passion for work (Baum & Locke, 2004) and renewed attention to old personality concepts, such as achievement motivation and the “Big Five” personality attributes (Ciavarella, Buchholtz, Riordan, Gatewood, & Stokes, 2004). I/O psychologists who study knowledge and expertise may also benefit from entrepreneurship studies that have explored entrepreneurs’ complex requirements for domain, management, and marketing knowledge in the entrepreneurship setting.

Psychologists Began Entrepreneurship Research

Like so many other social sciences, entrepreneurship’s legitimization came from the efforts of psychologists. It’s not uncommon in academic disciplines for a single work to galvanize attention and respect for an emerging field, and David McClelland’s (1961) book The Achieving Society did this for the field of entrepreneurship.

Unfortunately, 30 years of personality research following McClelland’s lead yielded scant knowledge that financiers, practitioners, and entrepreneurship researchers considered useful for predicting entrepreneurship outcomes (Gartner, Shaver, Gatewood, & Katz, 1994). For example, associations between achievement motivation and choice of entrepreneurship as a career and between achievement motivation and new venture success in 20 studies yielded significant correlations, but the explained variance was less than 5% (Johnson, 1990). However, a new cohort of psychology-based researchers has broadened and deepened the search for the individual differences that cause entrepreneurship. Many of these cutting-edge researchers have successfully uncovered personality traits, competencies, cognitions, behaviors and environmental conditions that impact new venture creation and success. Much of this work is included in this book.

Entrepreneurship Fundamentals

We now briefly introduce a few fundamentals of entrepreneurship. First, we elaborate our statement that entrepreneurship is socially and economically important. Second, we explain the challenge caused by the unresolved definition of entrepreneur and entrepreneurship. [There are multiple definitions of “entrepreneur” in terms of (a) business stages (Shane, 2003), (b) types of businesses (Timmons, 2000), (c) business goals (Smith & Smith, 2000), (d) levels of innovation (Shane, 2001), (e) degrees of independence (Bird, 1989), and (f) management roles (Bird, 1989).] Third, we review the characteristics and importance of the entrepreneur’s situation (entrepreneurship environments present high uncertainty, high risk, urgency, and resource scarcity). Together, the “definition” and “situation” sections of this chapter point to data collection and measurement challenges and opportunities. Finally, we present a brief history of research about the psychology of entrepreneurship from the 1930s to the early 1990s.

Importance of Entrepreneurship

Entrepreneurship is important because it is the economic mechanism through which inefficiencies in economies are identified and mitigated. Furthermore, entrepreneurs convert technological and organizational innovation into better products and services (Schumpeter, 1911 and subsequent editions) and motivate established competitors to improve products and processes. The Organization for Economic Cooperation and Development (OECD) has stated, “Entrepreneurship is central to the functioning of market economies” (OECD, 1998). The U.S. Small Business Administration went even further, to declare, “In short, the crucial barometer of economic freedom and well-being is the continued creation of new and small firms in all sectors of the economy by all segments of society” (Small Business Association, 1998).

Entrepreneurship through establishment of new independent businesses was so successful in the United States during the 1980s and 1990s in creating new jobs that it overcame the elimination of over 5 million jobs in established big business (Kirchhoff, 1997). On the other hand, more than 50% of new ventures fail within 5 years in the United States. (Aldrich, 1999; The State of Small Business: A Report to the President, 1995) and in other countries (Bruederl, Preisendoerfer, & Ziegler, 1992); thus, it is important to understand the factors that influence new venture creation and growth.

A few entrepreneurs such as Bill Gates, Michael Dell, Sergey Brin, and Larry Page have created companies that disturb, shape, and improve important business domains. Ultimately they have made outsized contributions to society and the economy. These entrepreneurs represent the “ideal type” that informs our conception of entrepreneurship. However, not all new ventures grow to make large differences in products, markets, or national economies. Indeed, most founders establish ventures that continue as small businesses for life. But even these new permanently small businesses are a major economic force. Taken together, U.S. firms with fewer than 500 employees are identified as small businesses, and they account for 51% of private sector output, employ 51% of private sector workers, and constitute 99% of all employers (Small Business Association, 2001). The big contributors mentioned (Gates, Dell, etc.) were small businesses during the time from their emergence as promising new ventures until they grew beyond “small.” In summary, those who found and operate the categories of businesses referred to as new promising ventures and new small businesses are important research subjects in terms of their impact on absolute gross national product (GNP) and employment and their potential for social and economic impact.

Entrepreneurship Defined

There are hundreds of definitions of entrepreneur, entrepreneurship, and entrepreneurial. The root word apparently has sex appeal because many people want to be labeled as entrepreneurs or want their thinking and behavior described as “entrepreneurial”—even in established firms. Many attempts have been made to capture the meaning of entrepreneur and to create useful definitions, and we offer past and current thinking. We point to the current dominant definition of entrepreneurship (Shane & Venkataraman, 2000); however, empirical researchers are left to struggle with selection of appropriate subjects for study because current definitions are very general. Thus, it is probably best to (a) offer clear descriptions of samples, and (b) remember that readers understand entrepreneurship through dynamic ideal types and personal experiences. Thus, today’s dominant definition may be temporary.

Cantillon (1680–1734) defined entrepreneurs as “those who are willing to buy at a certain price and sell at an uncertain price” (quoted in Blaug, 2000, p. 379). Weber in 1898 suggested, “Entrepreneurship means the taking over and organizing of some part of an economy in which people’s needs are satisfied through exchange for the sake of making a profit and at one’s own economic risk” (as quoted in Swedberg, 2000, p 26). Schumpeter (1911 and later editions) suggested that entrepreneurship occurs under five conditions of newness: new goods, new production methods, new market...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Series Foreword
• Preface
• Contributors
• 1 Entrepreneurship as an Area of Psychology Study: An Introduction
• 2 Entrepreneurship: A Process Perspective
• 3 Born to Be an Entrepreneur? Revisiting the Personality Approach to Entrepreneurship
• 4 Entrepreneurs’ Competencies
• 5 Entrepreneurial Motivation
• 6 Entrepreneurs as Organizational Products Revisited
• 7 Cognition and Capabilities in Entrepreneurial Ventures
• 8 The Psychological Actions and Entrepreneurial Success: An Action Theory Approach
• 9 Entrepreneurship and Leadership
• 10 Education and Training in Entrepreneurship
• 11 Intrapreneurship and Innovation
• 12 Cross-Cultural Entrepreneurship: The Case of China
• 13 Method Challenges and Opportunities in the Psychological Study of Entrepreneurship
• 14 Psychology, Entrepreneurship, and the “Critical Mess”
• 15 C2D2: Psychological Methods in Entrepreneurship Research
• 16 Research Gains: Benefits of Closer Links Between I/O Psychology and Entrepreneurship
• Author Index
• Subject Index