This paper attempts to reconcile the risk-bearing characterization of entrepreneurs with the stylized fact that entrepreneurs exhibit conventional risk-aversion profiles. We propose that the disparity arises from confounding two distinct dimensions of uncertainty: demand uncertainty and ability uncertainty. We further propose that entrepreneurs will be risk averse with respect to demand uncertainty, yet "apparent risk seeking" (or overconfident) with respect to ability uncertainty. To examine this view, we construct a reduced-form model of the entrepreneur's entry decision, which we aggregate to the market level, then test empirically. We find that entrepreneurs in aggregate behave as we predict. Accordingly, risk-averse entrepreneurs are willing to bear market risk when the degree of ability uncertainty is comparable to the degree of demand uncertainty. Potential market failures exist in instances where there is a high demand uncertainty but low performance dispersion (insufficient entry), or low demand uncertainty but high performance dispersion (excess entry).entry, risk, entrepreneur, uncertainty, overconfidence
The resource‐based view (RBV) of strategy holds that superior organizational routines can be a source of value if and only if there is an isolating mechanism preventing their diffusion throughout industry. Generally this isolating mechanism is taken to be the tacitness of the routines. However, the existence of franchises, a market for organizational routines, poses a challenge to this RBV—if the routine is to be conveyed across a market, it can't be tacit. This paper examines the necessary and sufficient conditions of the RBV to find the weak link leading to the paradox of explicit, yet valuable franchise routines. Copyright © 2003 John Wiley & Sons, Ltd.
Approximately 80–90 percent of new firms ultimately fail. The tendency is to think of this failure as wasteful. We, however, examine whether there are economic benefits to offset the waste. We characterize three potential mechanisms through which excess entry affects market structure, firm behavior, and efficiency, then test them in the banking industry. Results indicate that failed firms generate externalities that significantly and substantially reduce industry cost. On average these benefits exceed the private costs of the entrants. Thus failure appears to be good for the economy. Copyright © 2005 John Wiley & Sons, Ltd.
One of the concerns with strategy as a field is that its goal (durable profits) appears at odds with that of microeconomics (homogeneous firms with zero profits). Thus even if we can find sources of durable profits, maybe we shouldn't—because doing so comes at the expense of social welfare. In this sense, strategy is an ‘economic bad.’ Probably the most vivid evidence of this tension is the fact that Porter's Competitive Strategy (1982) is Industrial Organization turned on its head—exploiting indications of anti‐competitive behavior to create prescriptions for durable profits. This study presents a parallax view in which the field of strategy is an economic good. In this view, heterogeneity stimulates innovation and economic growth. The underlying logic is that heterogeneity fuels diffusion; diffusion erodes leaders' shares; the loss of shares stimulates innovation, which in turn fuels new diffusion. I develop this view through a simple model of firms embedded in an industry, and then evaluate the model via simulation. The key issue for the model is whether there are steady states that sustain heterogeneity and innovation. Results indicate that heterogeneity persists in roughly half the industry conditions I examined. Furthermore innovation and growth are sustained under those conditions. What is comforting about the set of conditions is that they accommodate (and indeed require) all the things we hold dear: industrial policy, and strategic as well as routine behavior by firms. The new insights are as follows: (1) heterogeneity fuels growth (thus ‘strategy’ is an economic good, rather than anathema to allocative efficiency); (2) persistent heterogeneity is feasible even in the presence of spillovers (without isolating mechanisms); (3) but this heterogeneity (while persistent) requires managers to actively preserve the inherent value of their resource advantages—firms can't rest on their laurels; (4) policy prescriptions differ from those of prior innovation models. Copyright © 2003 John Wiley & Sons, Ltd.
Research Summary: Innovation is the principle driver of firm and economic growth. Thus, one disturbing trend that may explain stagnant growth is a 65% decline in firms’ R&D productivity. We propose that the rise of outside Chief Executive Officers (CEOs) may be partially responsible for the decline because those CEOs are more likely to lack technological domain expertise necessary to manage R&D effectively. While this proposition was motivated by interviews with Chief Technology Officers (CTOs), we test it at large scale. We find that firm R&D productivity decays during the tenure of outside CEOs relative to that of inside CEOs. We further find this effect is more pronounced for firms with high R&D intensity and for firms employing outside CEOs with more remote experience, lending circumstantial support for the underlying assumption regarding lack of expertise. Note that this is not a call for boards to avoid outside CEOs, rather it is recommendation to consider the implications for innovation. Managerial Summary: While outside CEOs offer advantages over internal candidates, we argue one unintended consequence is weaker innovation. This argument was prompted by two coincident trends: a 65% decline in companies’ R&D productivity and a doubling of outside Chief Executive Officers (CEOs). The argument was reinforced by interviews with Chief Technology Officers (CTOs), who recounted shifts in orientation from R&D as an investment to R&D as an expense that occurred shortly in response to a new CEO. We felt this shift was more likely with outside CEOs because they may lack technological domain expertise necessary to effectively manage R&D. Our results are consistent with the argument—company R&D productivity decreases under outside CEOs. Note, however, that we don’t advocate avoiding outside CEOs, rather we recommend R&D firms consider technological domain expertise during CEO hiring.
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