Occasional economic papers III: The reserve bank research papers

Abstract

Questioning the underlying assumptions of the process of creative destruction, we conceptualize an alternative process of creative construction that may characterize the dynamics between entrants and incumbents. We discuss the underlying mechanism of knowledge spillover strategic entrepreneurship whereby knowledge investments by existing organizations, when coupled with entrepreneurial action by individuals embedded in their context, results in new venture creation, heterogeneity in performance and subsequent growth in industries, regions and economies. The framework has implications for future research in entrepreneurship, strategy and economic growth. JEL-classification: L16, L21, M13, O11, O40, O57 The fundamental question in the emerging field of strategic entrepreneurship is how firms combine entrepreneurial action that creates new opportunities with strategic action that generates competitive advantage (Hitt et al. 2002). We confront this question by developing the creative construction approach, which identifies knowledge spillovers as a key mechanism that underlies new venture formation and development at the micro level, and economic growth at the macro level. The development of this framework flows from the recognition that although strategy and entrepreneurship theory abounds with Schumpeterian accounts of creative destruction and incumbent displacement by new entrants, our understanding of new venture emergence and associated externalities is less acute. By specifying the process whereby ideas, technologies, and structures are rendered obsolete and displaced by new and superior ones, Schumpeter's idea of creative destruction has become the dominant framework for entrepreneurship and economic development. The concept highlights the tension between innovation and selection: innovations of new firms unleash selection pressures on existing firms. The view is particularly powerful in explaining analysis of what happens as economic structures change from within; however, it is remarkably silent with regard to mechanisms identifying how new entrants emerge, why the process of displacement occurs, and whether increasing returns to knowledge investments could benefit entrants, incumbents and the economy alike. We identify some implicit assumptions in this approach, and juxtapose these against insights from accepted frameworks in the strategy and entrepreneurship literature to describe aspects of an emerging paradigm that we call creative construction, with knowledge spillovers as the underlying mechanism. The literature that links knowledge spillovers to entrepreneurship emphasizes that incumbent organizations are an important source of new entrants, particularly when they underutilize the knowledge they create (Agarwal, Echambadi, Franco and Sarkar, 2004; Klepper, 2006; Klepper and Sleeper, 2005; Shane and Stuart, 2002). Building on this work, we identify the endogeneity of entrepreneurial opportunities and action, and the intriguing possibility that Jena Economic Research Papers 2008-008 knowledge can lever...