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The Promise of Enterpreneurship as a Field of ResearchAuthor(s): Scott Shane and S. Venkataraman

Source: The Academy of Management Review, Vol. 25, No. 1 (Jan., 2000), pp. 217-226Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/259271

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t Academy of Management Review2000, Vol. 25, No. 1, 217-226.

NOTETHE PROMISEOF ENTREPRENEURSHIPS A

FIELDOF RESEARCHSCOTT SHANE

University of MarylandS. VENKATARAMAN

University of VirginiaTo date, the phenomenon of entrepreneurship has lacked a conceptual framework. Inthis note we draw upon previous research conducted in the different social sciencedisciplines and applied fields of business to create a conceptual framework for thefield. With this framework we explain a set of empirical phenomena and predict a setof outcomes not explained or predicted by conceptual frameworks already in exis-tence in other fields.

For a field of social science to have useful-ness, it must have a conceptual framework thatexplains and predicts a set of empirical phe-nomena not explained or predicted by concep-tual frameworks already in existence in otherfields. To date, the phenomenon of entrepre-neurship has lacked such a conceptual frame-work. Rather than explaining and predicting aunique set of empirical phenomena, entrepre-neurship has become a broad label under whicha hodgepodge of research is housed. What ap-pears to constitute entrepreneurship researchtoday is some aspect of the setting (e.g., smallbusinesses or new firms), rather than a uniqueconceptual domain. As a result, many peoplehave had trouble identifying the distinctive con-tribution of the field to the broader domain ofbusiness studies, undermining the field's legit-imacy. Researchers in other fields ask why en-trepreneurship research is necessary if it doesnot explain or predict empirical phenomena be-yond what is known from work in other fields.Moreover, the lack of a conceptual frameworkhas precluded the development of an under-standing of many important phenomena not ad-equately explained by other fields.One example of this problem is the focus inthe entrepreneurship literature on the relative

performance of individuals or firms in the con-text of small or new businesses. Since strategicmanagement scholars examine the differencesin and sustainability of relative performance be-tween competitive firms, this approach is notunique (Venkataraman, 1997). Moreover, the ap-proach does not provide an adequate test ofentrepreneurship, since entrepreneurship isconcerned with the discovery and exploitationof profitable opportunities. A performance ad-vantage over other firms is not a sufficient mea-sure of entrepreneurial performance, because aperformance advantage may be insufficient tocompensate for the opportunity cost of other al-ternatives, a liquidity premium for time and cap-ital, and a premium for uncertainty bearing.Therefore, although a conceptual framework toexplain and predict relative performance be-tween firms is useful to strategic management,it is not sufficient for entrepreneurship.We attempt an integrating framework for theentrepreneurship field in the form of this note.We believe that this framework will help entre-preneurship researchers recognize the relation-ship among the multitude of necessary, but notsufficient, factors that compose entrepreneur-ship, and thereby advance the quality of empir-ical and theoretical work in the field. By provid-ing a framework that both sheds light onunexplained phenomena and enhances thequality of research, we seek to enhance thefield's legitimacy and prevent its marginaliza-

We acknowledge the helpful comments of Ed Roberts onan earlier draft of this note. The authors contributed equallyand are listed alphabetically.217


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218 Academy of Management Review January

tion as only "a research setting" or "teachingapplication."The note proceeds as follows. First, we definethe domain of the field. Second, we explain whyorganizational researchers should study entre-

preneurship. Third, we describe why entrepre-neurial opportunities exist and why some peo-ple, and not others, discover and exploit thoseopportunities. Fourth, we consider the differentmodes of exploitation of entrepreneurial oppor-tunities. Finally, we conclude with brief reflec-tions on the potential value of the frameworkpresented here.

DEFINITIONOF ENTREPRENEURSHIPPerhaps the largest obstacle in creating a con-ceptual framework for the entrepreneurshipfield has been its definition. To date, most re-searchers have defined the field solely in termsof who the entrepreneur is and what he or shedoes (Venkataraman, 1997). The problem withthis approach is that entrepreneurship involvesthe nexus of two phenomena: the presence oflucrative opportunities and the presence of en-terprising individuals (Venkataraman, 1997). Bydefining the field in terms of the individualalone, entrepreneurship researchers have gen-erated incomplete definitions that do not with-stand the scrutiny of other scholars (Gartner,1988).The definition of an entrepreneur as a personwho establishes a new organization is an exam-ple of this problem. Because this definition doesnot include consideration of the variation in thequality of opportunities that different peopleidentify, it leads researchers to neglect to mea-sure opportunities. Consequently, empiricalsupport (or lack of support) for attributes thatdifferentiate entrepreneurs from other membersof society is often questionable, because theseattributes confound the influence of opportuni-ties and individuals.In contrast to previous research, we define thefield of entrepreneurship as the scholarly exam-ination of how, by whom, and with what effectsopportunities to create future goods and ser-vices are discovered, evaluated, and exploited(Venkataraman, 1997). Consequently, the fieldinvolves the study of sources of opportunities;the processes of discovery, evaluation, and ex-

ploitation of opportunities; and the set of indi-viduals who discover, evaluate, and exploitthem.Although the phenomenon of entrepreneur-ship provides research questions for many dif-ferent scholarly fields,1 organization scholarsare fundamentally concerned with three sets ofresearch questions about entrepreneurship:(1) why, when, and how opportunities for thecreation of goods and services come into exis-tence; (2) why, when, and how some people andnot others discover and exploit these opportuni-ties; and (3)why, when, and how different modesof action are used to exploit entrepreneurial op-portunities.Before reviewing existing research to answerthese questions, we provide several caveatsabout our approach. First, we take a disequilib-rium approach, which differs from equilibriumapproaches in economics (Khilstrom & Laffont,1979) and social psychology (McClelland, 1961).In equilibrium models, entrepreneurial opportu-nities either do not exist or are assumed to berandomly distributed across the population. Be-cause people in equilibrium models cannot dis-cover opportunities that differ in value fromthose discovered by others, who becomes anentrepreneur in these models depends solely onthe attributes of people. For example, inKhilstrom and Laffont's (1979) equilibriummodel, entrepreneurs are people who prefer un-certainty.Although we believe that some dimensions ofequilibrium models are useful for understand-ing entrepreneurship, we argue that these mod-els are necessarily incomplete. Entrepreneurialbehavior is transitory (Carroll & Mosakowski,1987). Moreover, estimates of the number of peo-ple who engage in entrepreneurial behaviorrange from 20 percent of the population (Reyn-olds & White, 1997) to over 50 percent (Aldrich &Zimmer, 1986). Since a large and diverse groupof people engage in the transitory process ofentrepreneurship, it is improbable that entrepre-neurship can be explained solely by reference toa characteristic of certain people independent ofthe situations in which they find themselves.Therefore, when we argue that some people and

'For example, economists are interested in the distribu-tion of entrepreneurial talent across productive and unpro-ductive activities (Baumol, 1996).


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2000 Shane and Venkataraman 219

not others engage in entrepreneurial behavior,we are describing the tendency of certain peo-ple to respond to the situational cues of oppor-tunities-not a stable characteristic that differ-entiates some people from others across allsituations.2Second, we argue that entrepreneurship doesnot require, but can include, the creation of neworganizations. As Amit, Glosten, and Mueller(1993) and Casson (1982) explain, entrepreneur-ship can also occur within an existing organiza-tion. Moreover, opportunities can be sold toother individuals or to existing organizations. Inthis note we do not examine the creation of neworganizations per se but, rather, refer interestedreaders to excellent reviews on firm creation inorganizational ecology (Aldrich, 1990; Singh &Lumsden, 1990), economics (Caves, 1998;Geroski, 1995), and organizational theory (Gart-ner, 1985; Katz & Gartner, 1988; Low & MacMil-Iaxn,1988).3Third, our framework complements sociologi-cal and economic work in which researchershave examined the population-level factors thatinfluence firm creation. Stinchcombe (1965) iden-tified societal factors that enhance incentives toorganize and organizing ability. Aldrich (1990)and Singh and Lumsden (1990) have providedreviews of factors enhancing firm foundings andhave described the effects of such factors asenvironmental carrying capacity, interpopula-tion processes, and institutional factors. Simi-larly, Baumol (1996) has related the institutionalenvironment to the supply of people who arewilling to create firms.

Although these other frameworks are valu-able to entrepreneurship scholars, they involvea set of issues different from those with whichwe are concerned. Our framework differs fromthese in that (1) we focus on the existence, dis-covery, and exploitation of opportunities; (2) weexamine the influence of individuals and oppor-tunities, rather than environmental antecedentsand consequences; and (3) we consider a frame-work broader than firm creation.

Fourth, our f ramework also complements re-search on the process of firm creation (e.g., Gart-ner, 1985; Katz & Gartner, 1988; Katz, 1993). Ex-plaining this process is important, but researchon it involves examining a different set of issuesfrom those we explore. Firm creation processresearchers examine resource mobilization, firmorganizing, and market making, starting withthe assumption that opportunities exist, havebeen discovered, and will be exploited throughthe creation of new firms. Since we lack thespace to review both the processes of entrepre-neurship through market mechanisms andthrough firm creation, we limit our discussion tothe conditions under which entrepreneurial op-portunities are exploited through firms and mar-kets, and we refer readers to these other frame-works for information on the process of firmcreation.

WHYSTUDYENTREPRENEURSHIP?Many scholars ask, either implicitly or explic-

itly, why anyone should study entrepreneurship.Data are difficult to obtain, theory is underde-veloped, and many findings to date are thesame as those obtained in other areas of busi-ness. In response, we offer three reasons forstudying the topic. First, much technical infor-mation is ultimately embodied in products andservices (Arrow, 1962),and entrepreneurship is amechanism by which society converts technicalinformation into these products and services.Second, entrepreneurship is a mechanismthrough which temporal and spatial inefficien-cies in an economy are discovered and miti-gated (Kirzner, 1997). Finally, of the differentsources of change in a capitalist society, Schum-peter (1934) isolated entrepreneurially driven in-novation in products and processes as the cru-cial engine driving the change process.Therefore, the absence of entrepreneurship fromour collective theories of markets, firms, organi-zations, and change makes our understandingof the business landscape incomplete. As Bau-mol eloquently remarks, the study of businesswithout an understanding of entrepreneurshipis like the study of Shakespeare in which "thePrince of Denmark has been expunged from thediscussion of Hamlet" (1989: 66).

2 We also argue that entrepreneurship can be undertakenby a single individual or a set of people who undertake thesteps of the process collectively or independently.3Many researchers argue that entrepreneurship occursfor reasons other than for profit (see Roberts, 1991, for areview), but we discuss only for-profit entrepreneurship.


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THE EXISTENCE, DISCOVERY, ANDEXPLOITATIONOF ENTREPRENEURIAL

OPPORTUNITIESThe Existence of Entrepreneurial Opportunities

To have entrepreneurship, you must first haveentrepreneurial opportunities. Entrepreneurialopportunities are those situations in which newgoods, services, raw materials, and organizingmethods can be introduced and sold at greaterthan their cost of production (Casson, 1982). Al-though recognition of entrepreneurial opportu-nities is a subjective process, the opportunitiesthemselves are objective phenomena that arenot known to all parties at all times. For exam-ple, the discovery of the telephone created newopportunities for communication, whether or notpeople discovered those opportunities.Entrepreneurial opportunities differ from thelarger set of all opportunities for profit, particu-larly opportunities to enhance the efficiency ofexisting goods, services, raw materials, and or-ganizing methods, because the former requirethe discovery of new means-ends relationships,whereas the latter involve optimization withinexisting means-ends frameworks (Kirzner, 1997).Because the range of options and the conse-quences of exploiting new things are unknown,entrepreneurial decisions cannot be madethrough an optimization process in which me-chanical calculations are made in response to agiven set of alternatives (Baumol, 1993).

Entrepreneurial opportunities come in a vari-ety of forms. Although the focus in most priorresearch has been on opportunities in productmarkets (Venkataraman, 1997), opportunitiesalso exist in factor markets, as in the case of thediscovery of new materials (Schumpeter, 1934).Moreover, within product market entrepreneur-ship, Drucker (1985) has described three differentcategories of opportunities: (1) the creation ofnew information, as occurs with the invention ofnew technologies; (2) the exploitation of marketinefficiencies that result from information asym-metry, as occurs across time and geography;and (3) the reaction to shifts in the relative costsand benefits of alternative uses for resources, asoccurs with political, regulatory, or demo-graphic changes.Previous researchers have argued that entre-preneurial opportunities exist primarily be-cause different members of society have differ-ent beliefs about the relative value of resources,

given the potential to transform them into a dif-ferent state (Kirzner, 1997). Because people pos-sess different beliefs (because of a lucky hunch,superior intuition, or private information), theymake different conjectures about the price atwhich markets should clear or about what pos-sible new markets could be created in the future.When buyers and sellers have different beliefsabout the value of resources, both today and inthe future, goods and services can sell above orbelow their marginal cost of production (Schum-peter, 1934).An entrepreneurial discovery occurswhen someone makes the conjecture that a setof resources is not put to its "best use" (i.e., theresources are priced "too low," given a beliefabout the price at which the output from theircombination could be sold in another location,at another time, or in another form). If the con-jecture is acted upon and is correct, the individ-ual will earn an entrepreneurial profit. If theconjecture is acted upon and is incorrect, theindividual will incur an entrepreneurial loss(Casson, 1982).

Entrepreneurship requires that people holddifferent beliefs about the value of resources fortwo reasons. First, entrepreneurship involvesjoint production, where several different re-sources have to be brought together to create thenew product or service. For the entrepreneur toobtain control over these resources in a way thatmakes the opportunity profitable, his or her con-jecture about the accuracy of resource pricesmust differ from those of resource owners andother potential entrepreneurs (Casson, 1982). Ifresource owners had the same conjectures asthe entrepreneur, they would seek to appropri-ate the profit from the opportunity by pricing theresources so that the entrepreneur's profit ap-proached zero. Therefore, for entrepreneurshipto occur, the resource owners must not sharecompletely the entrepreneur's conjectures. Sec-ond, if all people (potential entrepreneurs) pos-sessed the same entrepreneurial conjectures,they would compete to capture the same entre-preneurial profit, dividing it to the point that theincentive to pursue the opportunity was elimi-nated (Schumpeter, 1934).But why should people possess different be-liefs about the prices at which markets shouldclear? Two answers have been offered. First, asKirzner (1973) has observed, the process of dis-covery in a market setting requires the partici-pants to guess each other's expectations about a


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wide variety of things. People make decisionson the basis of hunches, intuition, heuristics,and accurate and inaccurate information, caus-ing their decisions to be incorrect some of thetime. Since decisions are not always correct, thisprocess leads to "errors" that create shortages,surpluses, and misallocated resources. An indi-vidual alert to the presence of an "error" maybuy resources where prices are "too low," recom-bine them, and sell the outputs where prices are"too high."Second, as Schumpeter (1934)explained, econ-omies operate in a constant state of disequilib-rium. Technological, political, social, regulatory,and other types of change offer a continuoussupply of new information about different waysto use resources to enhance wealth. By making itpossible to transform resources into a more

valuable form, the new information alters thevalue of resources and, therefore, the resources'proper equilibrium price. Because information isimperfectly distributed, all economic actors donot receive new information at the same time.Consequently, some people obtain informationbefore others about resources lying fallow, newdiscoveries being made, or new markets open-ing up. If economic actors obtain new informa-tion before others, they can purchase resourcesat below their equilibrium value and earn anentrepreneurial profit by recombining the re-sources and then selling them (Schumpeter,1934).The informational sources of opportunity maybe easier to see in the case of new technology,but they need not be restricted to technologicaldevelopments. For example, the production ofthe movie Titanic generated new informationabout who was a desirable teen idol. An entre-preneur could respond to this new informationby acting on the conjecture that posters of Leo-nardo DeCaprio would sell for greater than theircost of production.

Because entrepreneurial opportunities de-pend on asymmetries of information and beliefs,eventually, entrepreneurial opportunities be-come cost inefficient to pursue. First, the oppor-tunity to earn entrepreneurial profit will providean incentive to many economic actors. As oppor-tunities are exploited, information diffuses toother members of society who can imitate theinnovator and appropriate some of the innova-tor's entrepreneurial profit. Although the entry ofimitating entrepreneurs initially may validate

the opportunity and increase overall demand,competition eventually begins to dominate(Hannan & Freeman, 1984). When the entry ofadditional entrepreneurs reaches a rate atwhich the benefits from new entrants exceedsthe costs, the incentive for people to pursue theopportunity is reduced, because the entrepre-neurial profit becomes divided among more andmore actors (Schumpeter, 1934).

Second, the exploitation of opportunity pro-vides information to resource providers aboutthe value of the resources that they possess andleads them to raise resource prices over time, inorder to capture some of the entrepreneur'sprofit for themselves (Kirzner, 1997). In short, thediffusion of information and learning about theaccuracy of decisions over time, combined withthe lure of profit, will reduce the incentive forpeople to pursue any given opportunity.The duration of any given opportunity de-pends on a variety of factors. The provision ofmonopoly rights, as occurs with patent protec-tion or an exclusive contract, increases the du-ration. Similarly, the slowness of informationdiffusion or the lags in the timeliness withwhich others recognize information also in-crease the duration, particularly if time providesreinforcing advantages, such as occur with theadoption of technical standards or learningcurves. Finally, the "inability of others (due tovarious isolating mechanisms) to imitate, sub-stitute, trade for or acquire the rare resourcesrequired to drive down the surplus" (Venkatara-man, 1997: 133) increases the duration.The Discovery of Entrepreneurial Opportunities

Although an opportunity for entrepreneurialprofit might exist, an individual can earn thisprofit only if he or she recognizes that the oppor-tunity exists and has value. Given that an asym-metry of beliefs is a precondition for the exis-tence of entrepreneurial opportunities, allopportunities must not be obvious to everyoneall of the time (Hayek, 1945). At any point in time,only some subset of the population will discovera given opportunity (Kirzner, 1973).Why do some people and not others discoverparticular entrepreneurial opportunities? Al-though the null hypothesis is blind luck, re-search has suggested two broad categories offactors that influence the probability that partic-ular people will discover particular opportuni-


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222 Academy of Management Review Januaryties: (1) the possession of the prior informationnecessary to identify an opportunity and (2) thecognitive properties necessary to value it.Information corridors. Human beings all pos-sess different stocks of information, and thesestocks of information influence their ability to rec-ognize particular opportunities. Stocks of informa-tion create mental schemas, which provide aframework for recognizing new information. Torecognize an opportunity, an entrepreneur has tohave prior information that is complementary withthe new information, which triggers an entrepre-neurial conjecture (Kaish & Gilad, 1987).This priorinformation might be about user needs (Von Hip-pel, 1986) or specific aspects of the productionfunction (Bruderl, Preisendorfer, & Ziegler, 1992).The information necessary to recognize anygiven opportunity is not widely distributedacross the population because of the specializa-tion of information in society (Hayek, 1945). Peo-ple specialize in information because special-ized information is more useful than generalinformation for most activities (Becker & Mur-phy, 1992). As a result, no two people share all ofthe same information at the same time. Rather,information about underutilized resources, newtechnology, unsated demand, and political andregulatory shifts is distributed according to theidiosyncratic life circumstances of each personin the population (Venkataraman, 1997).

The development of the Internet provides auseful example. Only a subset of the populationhas had entrepreneurial conjectures in responseto the development of this technology. Somepeople still do not know what the Internet is orthat profitable opportunities exist to exploit it.Cognitive properties. Since the discovery ofentrepreneurial opportunities is not an optimi-zation process by which people make mechani-cal calculations in response to a given a set ofalternatives imposed upon them (Baumol, 1993),people must be able to identify new means-endsrelationships that are generated by a givenchange in order to discover entrepreneurial op-portunities. Even if a person possesses the priorinformation necessary to discover an opportu-nity, he or she may fail to do so because of aninability to see new means-ends relationships.Unfortunately, visualizing these relationships isdifficult. Rosenberg (1994) points out that historyis rife with examples in which inventors failedto see commercial opportunities (new means-ends relationships) that resulted from the inven-

tion of important technologies-from the tele-graph to the laser.Prior research has shown that people differ intheir ability to identify such relationships. Forexample, research in the field of cognitive sci-

ence has shown that people vary in their abili-ties to combine existing concepts and informa-tion into new ideas (see Ward, Smith, & Vaid,1997, for several review articles). Recently, a fewresearchers have begun to evaluate empiricallythe role that cognitive properties play in thediscovery of entrepreneurial opportunities (seeBusenitz & Barney, 1996; Kaish & Gilad, 1991;Shaver & Scott, 1991). For example, Sarasvathy,Simon, and Lave (1998)have shown that success-ful entrepreneurs see opportunities in situationsin which other people tend to see risks, whereasBaron (in press) has found that entrepreneursmay be more likely than other persons to dis-cover opportunities because they are less likelyto engage in counterfactual thinking (i.e., lesslikely to invest time and effort imaging what"might have been" in a given situation), lesslikely to experience regret over missed opportu-nities, and are less susceptible to inaction iner-tia.

The Decision to Exploit EntrepreneurialOpportunitiesAlthough the discovery of an opportunity is anecessary condition for entrepreneurship, it isnot sufficient. Subsequent to the discovery of anopportunity, a potential entrepreneur must de-cide to exploit the opportunity. We do not haveprecise figures on the aborting of discoveredopportunities, but we do know that not all dis-covered opportunities are brought to fruition.Why, when, and how do some people and notothers exploit the opportunities that they dis-cover? The answer again appears to be a func-tion of the joint characteristics of the opportunity

and the nature of the individual (Venkataraman,1997).Nature of the opportunity. The characteristicsof opportunities themselves influence the will-ingness of people to exploit them. Entrepreneur-ial opportunities vary on several dimensions,which influences their expected value. For ex-ample, a cure for lung cancer has greater ex-pected value than does a solution to students'need for snacks at a local high school. The ex-ploitation of an entrepreneurial opportunity re-


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2000 Shane and Venkataraman 223quires the entrepreneur to believe that the ex-pected value of the entrepreneurial profit will belarge enough to compensate for the opportunitycost of other alternatives (including the loss ofleisure), the lack of liquidity of the investment oftime and money, and a premium for bearinguncertainty (Kirzner, 1973; Schumpeter, 1934).To date, research has shown that, on average,entrepreneurs exploit opportunities havinghigher expected value. In particular, exploita-tion is more common when expected demand islarge (Schmookler, 1966; Schumpeter, 1934), in-dustry profit margins are high (Dunne, Roberts,& Samuelson, 1988), the technology life cycle isyoung (Utterback, 1994), the density of competi-tion in a particular opportunity space is neithertoo low nor too high (Hannan & Freeman, 1984),the cost of capital is low (Shane, 1996), and pop-ulation-level learning from other entrants isavailable (Aldrich & Wiedenmeyer, 1993).Individual differences. Not all potential entre-preneurs will exploit opportunities with thesame expected value. The decision to exploit anopportunity involves weighing the value of theopportunity against the costs to generate thatvalue and the costs to generate value in otherways. Thus, people consider the opportunitycost of pursuing alternative activities in makingthe decision whether or not to exploit opportuni-ties and pursue opportunities when their oppor-tunity cost is lower (Amit, Mueller, & Cockburn,1995; Reynolds, 1987). In addition, people con-sider their costs for obtaining the resources nec-essary to exploit the opportunity. For example,Evans and Leighton (1991) showed that the ex-ploitation of opportunities is more commonwhen people have greater financial capital.Similarly, Aldrich and Zimmer (1986) reviewedresearch findings that showed that stronger so-cial ties to resource providers facilitate the ac-quisition of resources and enhance the proba-bility of opportunity exploitation. Furthermore,Cooper, Woo, and Dunkelberg (1989) found thatpeople are more likely to exploit opportunities ifthey have developed useful information for en-trepreneurship from their previous employment,presumably because such information reducesthe cost of opportunity exploitation. Finally, thetransferability of information from the prior ex-perience to the opportunity (Cooper et al., 1989),as well as prior entrepreneurial experience(Carroll & Mosakowski, 1987), increases the

probability of exploitation of entrepreneurialopportunity because learning reduces its cost.The decision to exploit an entrepreneurial op-portunity is also influenced by individual differ-ences in perceptions. The creation of new prod-ucts and markets involves downside risk,because time, effort, and money must be in-vested before the distribution of the returns isknown (Knight, 1921; Venkataraman; 1997). Sev-eral researchers have argued that individualdifferences in the willingness to bear this riskinfluence the decision to exploit entrepreneurialopportunities (Khilstrom & Laffont, 1979;Knight,1921). For example, people who exploit opportu-nities tend to frame information more positivelyand then respond to these positive perceptions(Palich & Bagby, 1995).The decision to exploit entrepreneurial oppor-tunities is also influenced by individual differ-ences in optimism. People who exploit opportu-nities typically perceive their chances ofsuccess as much higher than they really are-and much higher than those of others in theirindustry (Cooper, Woo, & Dunkelberg, 1988).Moreover, when these people create new firms,they often enter industries in which scale econ-omies play an important role at less than mini-mum efficient scale (Audretsch, 1991), and theyenter industries at rates exceeding the equilib-rium number of firms (Gort & Klepper, 1982).4

However, in most industries, at most points intime, most new firms fail (Dunne et al., 1988), andfew firms ever displace incumbents (Audretsch,1991), suggesting that people who exploit oppor-tunities, on average, are overly optimistic aboutthe value of the opportunities they discover. Thisoveroptimism motivates the exploitation of op-portunity by limiting information, stimulatingrosy forecasts of the future (Kahneman &Lovallo, 1994), triggering the search for rela-tively small amounts of information (Kaish &Gilad, 1991), and leading people to act first andanalyze later (Busenitz & Barney, 1997).Other individual differences may be impor-tant in explaining the willingness to exploit op-portunities. Researchers have argued that peo-ple with greater self-efficacy and more internallocus of control are more likely to exploit oppor-tunities, because exploitation requires people to

4The information signals generated by the entrepreneur-ial process are weak.


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act in the face of skepticism of others (Chen,Greene, & Crick, 1998). Similarly, opportunity ex-ploitation involves ambiguity, and people whohave a greater tolerance for ambiguity may bemore likely to exploit opportunities (Begley &Boyd, 1987). Finally, the exploitation of opportu-nity is a setting in which people can achieve,providing a valuable cue for those who possessa high need for achievement (McClelland, 1961).Consequently, those who are high in need forachievement may be more likely than othermembers of society to exploit opportunities.Readers should note that the attributes thatincrease the probability of opportunity exploita-tion do not necessarily increase the probabilityof success. For example, overoptimism might beassociated with a higher probability of both ex-ploitation and failure. Of the population of indi-viduals who discover opportunities in a givenindustry, those who are pessimistic may choosenot to exploit discovered opportunities becausethey more accurately estimate what it will taketo compete and how many other people will tryto do similar things. Overoptimistic individualsdo not stop themselves from exploiting theseopportunities, because their overoptimism lim-its information and motivates rosy forecasts ofthe future.

MODESOF EXPLOITATIONAnother critical question concerns how the ex-ploitation of entrepreneurial opportunities is or-ganized in the economy. Two major institutionalarrangements for the exploitation of theseopportunities exist-the creation of new firms

(hierarchies) and the sale of opportunities to ex-isting firms (markets)-but the common as-sumption is that most entrepreneurial activityoccurs through de novo startups. However, peo-ple within organizations who discover opportu-nities sometimes pursue those opportunities onbehalf of their existing organizations and some-times establish new organizations, whereasindependent actors sometimes sell their oppor-tunities to existing organizations and some-times establish new organizations to pursue theopportunities.Research shows that the choice of mode de-pends on the nature of the industrial organiza-tion, the opportunity, and the appropriability re-gime. Research in industrial organization has

shown that entrepreneurship is less likely totake the form of de novo startups when capitalmarket imperfections make it difficult for inde-pendent entrepreneurs to secure financing (Co-hen & Levin, 1989). Entrepreneurship is morelikely when the pursuit of entrepreneurial op-portunity requires the effort of individuals wholack incentives to do so in large organizations;when scale economies, first mover advantages,and learning curves do not provide advantagesto existing firms (Cohen & Levin, 1989); andwhen industries have low barriers to entry (Acs& Audretsch, 1987). Research on the appropri-ability of information has shown that entrepre-neurship is more likely to take the form of denovo startups when information cannot be pro-tected well by intellectual property laws, inhib-iting the sale of entrepreneurial opportunities(Cohen & Levin, 1989). Finally, research on thenature of opportunities has shown that entrepre-neurship is more likely to take the form of denovo startups when opportunities are more un-certain (Casson, 1982), when opportunities donot require complementary assets (Teece, 1986),and when opportunities destroy competence(Tushman & Anderson, 1986).

CONCLUSIONEntrepreneurship is an important and rele-vant field of study. Although those in the fieldface many difficult questions, we have pre-sented a framework for exploring them. We rec-ognize that we may have offered some uncertainassumptions, potentially flawed logical argu-ments, or have made statements that will prove,ultimately, to be inconsistent with data yet to becollected. Nevertheless, this framework pro-vides a starting point. Since it incorporates in-formation gained from many disciplinary van-tage points and explored through manydifferent methodologies, we hope that it willprod scholars from many different fields to joinus in the quest to create a systematic body ofinformation about entrepreneurship. Manyskeptics claim that the creation of such a body oftheory and the subsequent assembly of empiri-cal support for it are impossible. We hope thatother scholars will join our effort to prove thoseskeptics wrong.


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Scott Shane is associate professor of entrepreneurship in the Robert H. Smith Schoolof Business and director of research at the Dingman Center for Entrepreneurship atthe University of Maryland. He received his Ph.D. from the University of Pennsylvania.His current research focuses on entrepreneurship in high-technology settings.S. Venkataraman is the Samuel L. Slover Associate Professor of Business Administra-tion and director of research at the Batten Center for Entrepreneurial Leadership in theDarden Graduate School of Business Administration at the University of Virginia. Hereceived his Ph.D. from the University of Minnesota. His current research focuses onentrepreneurship theory.

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