Entrepreneurship Motivation Performance and Risk Business Issues Compe

BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP
ENTREPRENEURSHIP

MOTIVATION, PERFORMANCE AND RISK

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BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP

ENTREPRENEURSHIP

MOTIVATION, PERFORMANCE AND RISK

RICHARD FAIRCHILD
EDITOR

Nova Science Publishers, Inc.
New York

1
Richard Fairchild PhD is lecturer in Corporate Finance in the School of Management, University of Bath, UK.

Copyright 2011 by Nova Science Publishers, Inc.

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Library of Congress Cataloging-in-Publication Data

Entrepreneurship : motivation, performance, and risk / editor, Richard Fairchild.
p. cm.
Includes bibliographical references and index.
1. Entrepreneurship. I. Fairchild, Richard.
HB615.E63447 2011
658.4'21--dc23
2011020790

Published by Nova Science Publishers, Inc. New York
ISBN: 978-1-61470-281-8 (eBook)

CONTENTS

Preface vii
Chapter 1 The Genesis of Firms - Internal Markets, External
Markets and Hierarchies 1
Bob Ryan
Chapter 2 Perception and Reality: Organisational Risk Taking,
Choice of Strategy and Success under Ordinary
Conditions and in Times of Crisis 27
Anna Kdi and Klra Farag
Chapter 3 Performance and Optimality for High Technology Firms:
An Empirical Analysis of Growth and Innovation 55
Gavin C. Reid and Vandana Ujjual
Chapter 4 Fairness Norms and Self-Interest in Venture Capital/Entrepreneur
Contracting and Performance 73
Richard Fairchild
Chapter 5 Entrepreneurial Choice with Respect to U.S. Microentrepreneurs
and Access to Microloans 91
Caroline E. W. Glackin
Chapter 6 Family Entrepreneurship: Opportunity or Threat to Network
Formation? Lessons Learnt from Agri-Tourism 111
Antonia Rosa Gurrieri and Luca Petruzzellis
Chapter 7 Small Business Social Responsibility and the Missing Link:
The Local Context 125
Mara Del Baldo and Paola Demartini
Chapter 8 Ethnic Entrepreneurship and Social Capital: Economic Effects 151
Mara-Soledad Castao Martnez

Contents vi
Chapter 9 Business Motivation and Work-Family Balance Among
Urban and Rural Women Entrepreneurs in Portugal 167
Carla Marques, Gina Santos, Chris Gerry and Gil Gomes
Index 193

PREFACE

In this book, the authors draw together some leading international research (both
theoretical and empirical) that analyzes economic and behavioural issues surrounding
entrepreneurial incentives, performance and risk. The book begins with a conceptual
theoretical analysis of firm development, taking into account its interaction with the four
principal factor markets. Furthermore, conflicts at the managerial level are considered. The
remaining chapters analyze empirically some of the behavioural/psychological/demographic
factors affecting entrepreneurship. In summary, this book draws on international research to
provide insights into the economic and behavioural factors affecting entrepreneurial
incentives, risk-taking and performance.
Chapter 1 - This paper develops a theory of firm development taking into account its
interaction with the four principal factor markets. From that theory, the concept of an internal
market as an ambiguous transactional state is developed. The matrix organisation is then
described as an internal market for labour and three basic modes of management and three
different methods of pricing labour within a matrix structure are identified. The paper
identifies the conditions for the successful operation of the matrix organisation and the likely
causes of conflict between managers within each model of matrix management described.
Chapter 2 - We studied entrepreneurial orientation in ordinary situations and in times of
crisis in Hungarian organisations, using survey method. We investigated how entrepreneurial
orientation is dependent on the success and the development trend of the company. In the
study, we focussed on risk taking, and the two major forms of competition, proactiveness and
competitive aggressiveness. We gathered two types of data: on the one hand, top managers
characterised their companies regarding success, competition and risk taking under ordinary
conditions and in crisis, on the other hand a competent manager described success and risk
taking using objective data.
We found that companies under ordinary conditions take relatively low risks, which they
reduce even further in crisis. Highly successful companies may consider that they have
enough resources to take relatively high risks, to be increased even more in times of crisis.
Moderately successful companies also take some but less risks, but in crisis they considerably
reduce their risk taking. The averagely successful ones are carefully protecting their
resources. The surviving organizations do not take any risks.
The two forms of competition, proactiveness and competitive aggressiveness are not
independent dimensions in Hungarian companies. Our findings reflect that in Hungarian
culture competitive aggressiveness proves to be just as much of a risk taking strategy as
Richard Fairchild viii
proactiveness. Both forms of competition are typical strategy of successful organizations both
under ordinary conditions and in crisis.
Risk taking and proactiveness are reduced even more as a result of crisis in case of the
not really successful companies. This tendency can prevent organisations with less positive
prospects to work out more adaptive strategies, and to find the key to change their situation
by using proactive strategy. Another important finding is that Hungarian companies do not
use flexibly changing adaptive competition strategies along the features of the environment.
Our findings show that all the respondents overestimate both their success and their risk
taking. The direction of distortion regarding their judgement on success and risk taking show
a different pattern depending on the success of the companies. Over-estimation is especially
typical of the successful companies. We can assume that the assessment of the situation is
often intuitive, and that it is a more globally shaped picture rather than an analysis of the
elements of facts that play a role in decision making. In our opinion, serious consequences
can be suffered if managers do not assess precisely their situation and activities.
Chapter 3 This paper examines performance empirically, in terms of growth, innovation
and optimality, for firms active in the risky area of high technology enterprise. Econometric
results are presented on Gibrats Law and the Schumpeterian Hypothesis. Gibratian estimates
suggest a short-run equilibrium size of just 100 employees, but a medium term equilibrium
size of about 1000 employees if innovation is to be optimised. Schumpeterian estimates
suggest that firms must grow, in the long run, to much larger sizes - of beyond 3,000
employees - to achieve Schumpeterian benefits of potentially unlimited scale economies in R
and D. We argue that the principal way to achieve this must be by takeovers and mergers. We
illustrate this with two brief company case studies.
Chapter 4 We consider the combined impact of agency problems and behavioural
factors on venture capital/entrepreneur contracting and performance. Particularly, we develop
a behavioural game-theoretic model in which a venture capitalist and an entrepreneur
negotiate over their respective equity shares, and then exert value-adding efforts in running
the business. Double-sided moral hazard exists in that both parties may exert sub-optimal
effort (the shirking problem). We demonstrate that, for a given level of VC-ability, an
increase in social fairness norms induces the VC to offer more equity to the entrepreneur,
which in turn induces the entrepreneur to exert more effort. This improves venture
performance.
Chapter 5 The U.S. microfinance market developed exponentially during the 1990s and
the early part of the new century with the numbers of providers and borrowers increasing and
the amount of capital expanding even more rapidly. By 2002, the supply of capital was
outpacing the uptake of loans such that there was a surplus of loan pool capital despite the
ever present claims of insufficient funding for small businesses. Prior research (Glackin 2011)
indicated that the full range of costs of borrowing is seriously underestimated and shortfalls in
demand for microdebt are heavily influenced by costs. By examining the barriers, boosters,
costs, and constraints experienced by micro-entrepreneurs, the disconnect between supply and
demand in the microloan marketplace is elucidated. Program, client and prospective client
data is analyzed through a behavioral economics lenses, costs are estimated, and program and
policy implications are explored.
Chapter 6 Literature on entrepreneurship has recently stressed on the strategic
entrepreneurial network in relation with growth theory, underlining the role of technological
Preface ix
change, consumer preferences or markets changes, originated by the different crisis shocks,
and which permit to discovery opportunities.
In such a scenario a wide group of entrepreneurs strongly react through their territorial
connotations; namely the family firms co-localized and well organized in social networks.
The aim of this paper is to empirically verify the existence of this strong link between
entrepreneurship and territory and to put in evidence the existence of internal barrier.
Chapter 7 A development in the socially responsible management debate considers the
following question: is SMEs orientation towards Corporate Social Responsibility sustained
by entrepreneurs values and facilitated by environmental factors that is, of an
anthropological and socio-cultural nature present in the territory where entrepreneurs and
SMEs are sited? The chapter aims at proposing thoughts upon the contribution of SMEs in
spreading the philosophy and practices of CSR and sustainability focusing on the importance
of entrepreneurial values and the relationship with the local context to which the SMEs and
entrepreneurs are profoundly rooted.
In developing the research question, the analysis may be divided on two levels: one
deductive and the other inductive, which correspond to the two main sections of the chapter.
The first section (1-2) presents the theoretical framework by way of recalling threads of
study on entrepreneurship and on business ethics centred upon behaviour, motivations and
business values. The analysis then concludes by presenting a review of the international
studies on the theme of the relationship between managerial culture and territory.
The second section (3-4) is developed by way of a qualitative research methodology
centred upon the analysis of behavior towards CSR and sustainability of a sample of SMEs
belonging to the Marche Region, Italian territory cradle of the small-sized company and
craft traditions.
Empirical evidence presented, highlights how best practices of socially-oriented Marche
SMEs - who are excellent examples of convivial enterprises strongly rooted in their
territories - contribute to a model of Territorial Social Responsibility (TSR) that progresses
within the particular socio-economic context of the region. The social capital, enriched by
values, cultures and traditions tied to a specific community-space, synthesizes intangible
factors that favour the development of CSR and the sustainability of SMEs. The economic
model of gentle capitalism centred around territorial SMEs, which can be found in the
business contexts under discussion, leans on the construction of a large consensus both within
and external to the company, as well as on an environment which is neither restraint or
limitation, rather it is an opportunity. The possible pathway of territorial CSR based on the
culture of doing good in the local context, may offer a possible alternative to the often,
unfortunately, short-sighted turbo-capitalism of the major transnational companies, which
are not rooted in the area where they are located and nomadic in their character.
Chapter 8 Recently, research in economics and sociology has considered the ethnic
entrepreneurship role, because: there is empirical evidence that ethnic minorities tend to have
self-employment rates and an important proportion of businesses in Western industrialized
countries. Also, it is considered that social links have an influence on the entrepreneur
activities of ethnic groups.
In addition, there are significant differences among different ethnic groups that decide to
realise entrepreneur activities. So, if we compare the economic performance of ethnic groups
and rates of self-employment, it is possible to observe these differences among countries and
regions.
Richard Fairchild x
Therefore, in this paper, we consider the factors that have influence in entrepreneur
activities of ethnic groups and ethnic groups characteristics to observer their economic effects
in Spain and Spanish region of Castilla-La Mancha. Also, we analyse the differences among
Ethnic entrepreneurship and Spanish entrepreneurship. In order to do so, we conduct an
empirical analysis for Spain and the Spanish region of Castilla-La Mancha, and we use
theGlobal Entrepreneurship Monitor data.
Chapter 9 - The purpose of this study was to estimate in what ways the dual work-family
role of women impacts on the entrepreneurial motivation of female entrepreneurs in Portugal,
and to examine the influence of the urban-rural dichotomy on their profile as businesswomen.
In order to validate the theoretical model adopted, a questionnaire was administered to urban
and rural women entrepreneurs in Northern Portugal, and the resulting data analysed using
EQS 6.1 structural equation models (SEM) and a statistical methodology able to confirm the
behaviour of the factors involved and the relationship between them. The results suggest that
the motivations compelling women to become entrepreneurs in rural contexts are distinct
from those underpinning the decisions of urban women, i.e. there exists a correlation between
entrepreneurial motivation and the location of the business opportunity that in turn positively
influences womens business start-up decisions. Nevertheless, in both urban and rural
contexts, women proved themselves able to effectively manage a combination of family and
entrepreneurial roles.

In: Entrepreneurship ISBN: 978-1-61470-148-4
Editor: Richard Fairchild 2011 Nova Science Publishers, Inc.

Chapter 1

THE GENESIS OF FIRMS - INTERNAL MARKETS,
EXTERNAL MARKETS AND HIERARCHIES

Bob Ryan

ABSTRACT

This paper develops a theory of firm development taking into account its interaction
with the four principal factor markets. From that theory, the concept of an internal market
as an ambiguous transactional state is developed. The matrix organisation is then
described as an internal market for labour and three basic modes of management and
three different methods of pricing labour within a matrix structure are identified. The
paper identifies the conditions for the successful operation of the matrix organisation and
the likely causes of conflict between managers within each model of matrix management
described.

INTRODUCTION

The theory of the firm has developed considerably in recent years as a number of
important disciplinary perspectives have come together. Within economics the theory of the
firm has developed through neoclassical theory, agency theory, transaction cost economics
and more recently the property right approach (see Holmstrom and Tirole (1989), Milgrom
and Roberts (1992), Radner (1992) and Hart (1995). Other important perspectives have been
generated within the broad body of the contingency theory literature and the social systems
approach. Although the transaction cost literature has developed rapidly in recent years and
was much bolstered by the long overdue award of the Nobel prize in Economics to Ronald
Coase in 1991, there are still powerful critiques of the approach. Of these, the recognition that
the extremes of market and hierarchy are rarely found in practice, and that there is a swollen
middle (Perrow (1986), Hennart (1993)) where most organisational transacting cannot be
uniquely characterised as either hierarchical or market (Powell (1987), Powell (1990) and
Stinchcombe (1990) opened up a new and stimulating literature exploring the economic
terrain of this middle ground.
Bob Ryan 2
Our purpose in this paper is to explore the theory of intermediate organisation form
Ouchi (1980), Thorelli (1986), Powell (1990) and Williamson (1993) in order to develop a
generalised theory of organisational development and, in particular, to explain the tenacity of
the matrix tendency within organisations. According to McGuiness (1991);

s markets and technologies evolve, one would expect the nature of transactions to
change and present new configurations of administrative problems. The emergence of the
matrix form has been interpreted (Knight, 1976) as a structural response to environmental
complexity. However, little work has been done, as yet, on analysing its appearance in terms
of Williamsons framework.
p.56

Following the work of Ackoff (1994), we argue that the Matrix organisation is a form of
internal labour market which a firm can choose to reinforce through a variety of governance
and pricing stratagems. Unlike Ackoff (1994), we are not of the view that that an internal
labour market is a necessary or always a desirable aim of management action but rather, like
Knight, we interpret it as a response to endonegenous conditions. However, in contradiction
to Knight we are of the view that transactional cost ambiguity rather than complexity are the
motivating factors for the formation of a matrix organisation.
In this paper, we accept the Perrow and Hennart position that transaction cost ambiguity
is the rule rather than the exception, and also argue that the tussle between market and
hierarchical modes of transacting is played out simultaneously in a range of largely
independent factor market settings. Our argument leads us to the conclusion that it is the
process of resolving the conflict between market and hierarchy in each of these factor markets
that is the principal driver of structural variety within the firm.
In this paper we outline the development of ann-factor model of the firm, first formally
and then descriptively. This model immediately leads to the conjecture that at each level an
intermediate organisational form will be available which allows the firm to cope with
transactional cost ambiguity (at least in the short-run). We present case evidence that this
conjecture is sustainable. In particular we explore the implications of the model in the context
of the labour market and argue that the conventional matrix is a response to transaction cost
indeterminacy in the labour market.
Finally, we analyse the implications of our model for the management and control of the
firm.

VECTORS OF THE FIRM

The firm has been described as a nexus of implicit and explicit socio- and economic
contracts (Jensen and Meckling, 1976) that both define and change the strategic space
occupied by the firm. At any point in time, a firm will have a range of strategic choices
available. These choices will relate to different factor and product markets, and to the terms
of its engagement with its political and regulatory environment. We can define the concept of
strategic space relating to the dimensions of strategic action available to the firm along which
management control can be exercised. Clearly, at its birth, the number of dimensions along
which the firm could potentially proceed is very large.
The Genesis of Firms 3
We can characterise this strategic space as n-dimensional where each dimension is
characterised by a sequence of incomplete financial and interpersonal investment contracts
that permit a range of different opportunities to be exploited. In those situations where a
strategic dimension is reinforced by managerial control then that dimension will also
represent a conduit through which either endogenous or exogenous change can be mediated.
In this sense, the concept of a structural vector is defined as any strategic dimension through
which change is actively mediated by management.
This model of the firm allows us to envisage the growth of the firm as a process of
unfolding into its n-dimensional strategic space creating M structural vectors which can be
characterised by the concepts of unfolding, sustainability and differentiation. As these internal
transactional vectors unfold they give rise to an important asset value related concept which
we call entanglement. Entanglement destroys the conceptual symmetry in the Coasian
framework and stabilises intermediate organisational forms.

VECTOR UNFOLDING

The concept of unfolding is straightforward. We can envisage an open market as a soup
of virtual firms representing a near infinite set of actual and possible economic transactions.
These economic transactions carry value in exchange as well as a transaction cost overhead.
This overhead is governed by the degree of completion that can be achieved in writing the
contract of exchange in each case.
Three important points need to be stressed about market transacting:

- Market transacting is commonly understood in terms of the invisible hand whereby
independent economic actors exchange factors of production within the context of
legally enforceable contacts and property rights. Conceptually, the intervention of
entrepreneurs introduces the possibility of coordinated production into an otherwise
automatic system and opens the way for the creation of firms and alternative modes
of contracting. The entrepreneur is conventionally regarded as a risk taker and a
coordinator. Of these two aspects we believe the role of coordination to be the most
critical. Coordination is where opportunities for matching transactions in terms of
their regulation, location, time and purpose are identified and then exploited.
Entrepreneurial activity has been classically recognised as one of the principal
economic factors of production although we believe that its full significance within
the markets and hierarchies framework has not been properly understood. In
particular, the key significance of the entrepreneur is his willingness to make the
hierarchy versus market choice in all the factor markets that must be engaged to
achieve their productive goals.
- Transaction costs can be of a number of different types: they may be ad-valorem,
they may be fixed at the level of the individual transaction or they may be fixed at
the level of the class of transaction (so-called market entry and exit costs). These
latter class costs effectively segregate the market into components which we will
restrict to the principal factor markets of entrepreneurship, discussed above, capital,
Bob Ryan 4
land and labour. This is a useful segregation for our concept of the phenomenon of
unfolding.
- Market transactions operate more or less efficiently under a range of legal, social and
trust based instruments of regulation. There is a cost in maintaining and
administering this structure of regulatory governance which is borne at the social
rather than the individual level, which adds an interesting welfare dimension to the
question of transaction cost efficiency which we will return to later.

The first stage of firm unfolding occurs when the entrepreneur recognises that an
economic profit can be gained by (i) identifying the coordination opportunity, (ii) matching
together the economic means of production, (iii) identifying the most appropriate way of
regulating the intended transaction, (iv) executing the transactions, (v) harvesting the
economic profit (i.e., net revenue less the opportunity cost of the economic transactions in
sum), and (vi) consuming or reinvesting the profit earned. If the entrepreneur chooses to
transact within a market setting the following entrepreneurial cycle is achieved:

Figure 1. The Entrepreneurial Cycle.
In order to exploit the opportunity concerned, the entrepreneur may need access to short
term funding, either from their own resources (boot-strapping) or from the short term capital
market.
The interesting stages of this exercise are (ii) and (iii) where the entrepreneur makes the
complex judgment about resourcing the economic factors of production and in particular the
fixed factors, i.e., those factors whose economic value is not fully discharged in use. As we
now understand it, the choice boils down to one of engaging that economic factor though
open market transacting (rented by the job), or by taking ownership (rented by time). It is a
simple but relevant point that the distinction between these two modes of contracting resolves
down to the rights that the entrepreneur can claim over the asset concerned. In a contract by
job the only claim to the asset subsists in the completion of the task concerned. In a contract
by time, the claim on the asset is one of use. In reality, contracting is rarely if ever purely for
the job or purely for time and thus a degree of indeterminacy creeps into the situation. In
Identify
opportunities
Exploit
contracted assets
Harvest Return
Distribute
surplus
Short term
money/venture market
Co-ordinate
Resources
Market (complete)
contracting
contractual terms the first will be characterised by a high degree of completion and the second
by varying degrees of incompletion.
The entrepreneurs choice between the modes of contracting will be governed by a
number of factors, which Williamson (1993) and others have identified as frequency, asset
specificity and uncertainty. What we propose is that to understand the concept of unfolding it
is necessary to grasp the importance of barrier costs in engaging with the different modes of
asset capture within different factor markets.
In a situation where the entrepreneur believes that the capture of capital resources can
best be affected by equity based ownership rather than job based hiring financed by debt, then
a second cycle of activity will be realised which represents a further stage in the of unfolding
for the firm.

Figure 2. The Institutionalisation of Capital.
Under ideal conditions of the sort which excludes the necessity for firms, the issue of
capital acquisition (and its mode of acquisition) can be separated from the asset investment
decision (Fisher-Hirschleifer) and the proportion of debt to equity is independent of the value
of the firm (Miller and Modigliani). However, in reality the decision concerning the most
appropriate mode of financing is determined by a complex set of relationships which exist
between the property rights held by the entrepreneur of the assets concerned, the exit and
entry costs to the asset market concerned and significantly the degree of entanglement
between that asset and others held by the firm. Generally high degrees of asset entanglement
defeat the value-based arbitrage envisaged by Miller and Modigliani, and the value of the
firm is governed by the interdependence of assets, the entrepreneurs rights over those assets
and the way in which they are financed. This is an issue to which we will return later.
The third stage of unfolding occurs when the entrepreneur is forced to decide whether to
engage labour through a time based contract of employment or by the job. If the former is
chosen then a third cycle of activity will be created where the entrepreneur will write a
contract for service which may be effectively open ended (a permanent contract of
employment) or one which is for a fixed term.

Identify
opportunities
Exploit
contracted assets
Harvest Return
Distribute
surplus
Short term
Co-ordinate
Resources
Market (complete )
contracting
Capital
Investment
Plan
Raise
Finance
Invest in Fixed
Assets
Cost of
Capital
Long-term
equity/debt
market
Bob Ryan 6

Figure 3. The institutionalisation of labour and the creation of the fully formed firm.
The engagement with these two cycles of activity leads to the creation of a fully formed
firm i.e., where all of the fixed factors of production are institutionalised rather than engaged
by the job. In the model we have described above the unfolding is described across each of
the four economic factors of production. In reality the degree of differentiation may be much
more complex if there are significant barrier costs around any sub-factor markets with which
the firm may engage.
This simple analysis leads to some useful insights:

- All firms must of necessity engage in some aspect of the entrepreneurial cycle
although not all firms proceed further to capture significant capital or labour assets.
The modern management literature refers to these as virtual firms, i.e., firms where
asset ownership (human or capital) is minimised and the use of the required factors
of production coordinated through market based contracting. The internet based
bookshop (www.Amazon.com) is an often quoted in this context. However, the large
construction companies appear to us to be much more interesting exemplars of this
type of business whose function is principally one of coordination and where
physical plant is hired by the job and labour engaged by subcontracting (the lump).
In the case of construction companies the principal transaction costs are change and
logistic costs (see Volkman and Ryan) which combined with infrequent use favour
the market based solution to the transacting problem. Other firms proceed to engage
the capital ownership cycle but do not then enter the labour market to hire staff on
long term contracts of employment. In the UK, some business schools have
proceeded in this manner whereby the parent university has created a team for the
academic direction of the taught programmes and vested buildings and other assets in
the enterprise. They have then not permitted the School to employ full-time teaching
Identify
opportunities
Co-ordinate
Resources
Exploit
contracted assets
Harvest Return
Market (complete)
contracting
Distribute
surplus
Capital
Investment
Plan
Short term
Raise
Finance
Invest in Fixed
Assets
Cost of
Capital
Long-term
equity/debt
market
Role/job
description
Engage
Labour
Exploit
Labour
Labour Market
Labour
wage
staff due to high anticipated exit costs and frequency problems. The School is then
required to staff its teaching through a variety of short term hour based contracts.
- The separation of ownership from control is an important premise for much of the
modern management and economics literature and in particular for the creation of
agency affects within the firm. This literature is extensive and well known. In our
view it is seriously incomplete because it does not recognise the role of the
entrepreneur which is conceptually distinct from the function of the ownership of the
fixed means of production (a second cycle activity) and control (a third cycle
activity). The agency problems of risk sharing, moral hazard, information asymmetry
and so forth are all mediated by the entrepreneur whose role is critical. For example,
the problem of information asymmetry is dominated by that of coordination because
the individual who holds the power is not the person who holds the information but
the person who understands its value.

The concept of unfolding represents the expansion of the firm into new factor markets
as described above and it is this process which generates the range of functional specialisms
within the management control structure of the firm. Thus, we argue that a firm unfolds
vectors of management control when it chooses to look for new opportunities for the
coordination of the factor or the product market concerned. As described by Clarke and
McGuiness, and Williamson, hierarchy is the conventional response to the management of
functions and this is what we would describe as the vertical vector of management control
within the firm.

SUSTAINABILITY

In order to understand the concept of sustainability it is necessary to clarify an important
distinction. In our discussion hitherto, the entrepreneur has been required to make choices
between competing modes of contracting resources (which we loosely term firm or market
based) on transaction cost grounds. It is important, to force a distinction between this, which
is the mode of transacting, and the mode of resource allocation (which can be either by fiat or
by price).

Fiat Price
Firm
Market
Unregulated
Market
Demand Driven
Formal
Hierarchy
Supply driven
Regulated
Market
Regulated Supply
Competition
Incomplete
contracting
Complete
Contracting
Internal
Market
Constrained Supply
Competition
Bob Ryan 8
It is possible for a market to be heavily regulated (such as the utility industries in the
United Kingdom) where the price of the goods or service is controlled and the competitive
environment managed by a regulator. To a greater or lesser extent all markets in developed
economies are regulated to a degree through a variety of legal mechanisms, national and
international trading agreements as well as a complex array of social customs and constraints.
At the other extreme, pure hierarchy is rarely found but is most closely approximated
within the mainstream Christian churches (such as the Roman Catholic and Anglican
hierarchies), certain political institutions and the civil and diplomatic services. These
institutions are dominated by unequivocal authority structures and represent the epitome of
the planned economy where resources are allocated by fiat rather than price. Thus the real
world occupied by both firms and markets is a hybrid place where governance structures are
compromised and different modes of institutional form exist as entrepreneurs seek the most
efficient routes to production.
The issue of sustainability arises because of the problem of transaction cost ambiguity
and impending failure of hierarchy. In this situation two possible outcomes arise:

- The entrepreneur will seek to capture the benefits of market modes of governance
and/or
- The entrepreneur will seek to capture the benefits of price based methods of resource
allocation through the creation of an internal market for the resource concerned.

In this respect, we argue, that the solution to the response from failure of hierarchy is
different to the response to market failure although the same middle ground is being occupied
in both cases. In the former, the entrepreneur is attempting to capture the benefits of job based
contracting in the context of time based ownership of the resource concerned. In the latter, the
entrepreneur is trying to capture the benefits of ownership without a making a time based
commitment to the resource concerned. Our interest is with the first situation.

The figure above demonstrates the idea that the swing of the market hierarchy
pendulum may swing back from a situation where equity based finance is preferred to a
situation where the negotiability of debt appears more attractive. In this situation an internal
market for capital (ICM) will emerge where different business units are required to compete
for capital resources, pay a requisite rate of return and (crucially) repay capital against an
internally determined repayment schedule. This leads us to a simple financial conjecture
which is that firms which operate such internal capital markets will favour payback rather
than return based models such as the net present value or internal rate of return criterion.
More importantly, we argue that firms which seek to secure the benefits of an internal
capital market will radically separate the users of capital from those its suppliers. Thus, the
head office function as the corporate banker of last resort is created. This process of ICM
formation is often cited as an important characteristic of the multi-divisional firm (M-form)
although the evidence of its superior characteristics in this respect has been unconvincing to
date. In our analysis, the reason for this lack of evidence is not difficult to adduce.
The matrix organisational form commonly recognises two (or more) structural vectors
within the firm. These structural vectors unfold in response to the strategic, economic and
social forces acting upon the firm. The traditional manufacturing or service firm combines a
vertical or control vector representing the hierarchy of functional and supporting
relationships typified by the classical bureaucratic organisation and a horizontal or process
vector representing the structure whereby inputs are converted to outputs through some value
adding mechanism. Firms privilege these vectors differently depending upon a variety of
factors including the impact of external change.
Pure hierarchy (vertical structure) is rarely found but is most closely approximated within
the mainstream Christian churches (such as the Roman Catholic and Anglican hierarchies),
certain political institutions and the civil and diplomatic services. Pure horizontal structure, on
the other hand, represents unregulated market based transacting. What is described as the
bureaucratic firm is where the vertical structure is privileged and the process or horizontal
vector of control is mediated through a sequence of vertically differentiated functions. The
process firm, on the other hand, is one in which the horizontal vector is privileged and the
vertical structure is minimized.
Our interest in this work has been stimulated through consultancy activities in a diverse
range of organisations including firms of auditors, production manufacturers in the
automobile and defense industries, process chemical companies and even academic
institutions. In all of these enterprises we have been surprised by the persistence of matrix
management methods even though many of the managers we have questioned view the matrix
organisation as inherently difficult to operate. We have come to the view that the matrix
organisation form is not a control structure in the following important sense: the matrix and
its analogue, at superior organisation levels, the divisionalised (M- form) firm are attempts to
capture the benefits of market based operation within a conventional hierarchy. Both of these
organisational forms (which are very similar in practice) are a response to ambiguity within
the transactional framework of the firm.
In order to develop these ideas further this paper is organised as follows: in the first part
we extend the TCE theory of firm development to include certain dynamic aspects. In the
second part, we suggest that the contest between markets and hierarchies can lead to unstable
intermediate forms which in competitive markets are likely to be the norm rather than the
exception. In the third part we discuss the managerial and accounting implications of the
matrix organisation before developing the dynamic implications of the matrix in situations of
transactional ambiguity. In the final part we develop some practical insights into the problems
of matrix management.

Bob Ryan 10
A Theory of the Genesis of Firms

As TCE points out, firms as business hierarchies and markets represent competing
ways of organising economic transactions. Markets can be described in many ways. Our
predilection is to describe the market as a 'soup' of virtual firms.
1
This soup represents an
almost endless variety of possible and actual transactions. It is from this soup that firms
emerge as individuals identify the possibilities of more efficient combinations of transactions
through institutionalised relationships.
We can depict a fully formed firm as a set of four interlocking decision cycles and their
consequences. These four decision cycles arise as the emerging enterprise institutionalises
2

the four principle factors of economic production: entrepreneurship, capital, land and labour.
Although, Fishers separation theorem suggests that in a world of perfect certainty and capital
markets the financing (capital) and the investment (land) decisions can be separated, in
practice these two are invariably brought together. For this reason, the model we propose
consists of three institutional decision cycles: entrepreneurship, capital investment and
operations.
The first decision cycle or 'business cycle', as we refer to it, is governed by the seeking of
business opportunities by the entrepreneur who on the basis of those opportunities co-
ordinates a range of institutionalised or market based transactions to achieve a return which
she can deploy to consumption or reinvest in a further turn of the cycle. The business cycle is
characterised by the following stages: the identification of a business opportunity by the
entrepreneur and the definition of a business plan, the capture of the necessary resources to
execute the plan, the co-ordination of the necessary production facilities through either
market or firm transacting, the operational exploitation of those facilities and then the
recovery of the business return and its distribution.
However, many firms do proceed beyond this stage and engage a production investment
cycle whereby, against projections of future operational need a capital budget can be
constructed and the necessary finance and means of production procured and established by
the firm. In such an organisation the means of production have been internalised within the
firm although the operation of those facilities may still be co-ordinated through market based
transacting rather than by the employment of operational level labour within the firm.
3

Finally, a firm may emerge into its third and final stage of development where all levels
of its functioning: business, production (investment) and operations are organised
institutionally rather than through open market transacting. For such a firm to succeed, the

1
Steven Hawking has referred to empty space as a 'soup' of virtual particles which emerge in a quantum way into
actual existence before collapsing back into the nothingness from which they emerged. Near the intense
gravitational field of a black hole one of the pair may be captured and emerge as a neutrino with a real rather
than a virtual existence. This wonderful description of space is strongly reminiscent of the market which
abounds with infinite possibility. At any point in time, the market offers an array of virtual firms which only
spring into existence through human action and the relative competition of costs.
2
By 'institutionalised' we mean internalised within a firm setting, i.e., the factors of production are held in open
ended or incomplete contracts of engagement. For example, equity is institutionalised capital whereas debt
is not, salaried staff are institutionalised labour whereas staff contracted by the job are not.
3
An example of the former is now becoming quite common within business education. Many successful business
schools in the UK originated from entrepreneurial enterprises operated by a small team of business academics.
At a later stage these schools have acquired or been endowed with buildings and other fixed plant. However,
some still do not see it to their advantage to employ more than a small nucleus of staff relying upon externally
contracted teaching staff to deliver their programmes.
costs of internal organisation must be subordinate to the costs of open market transacting at
all three levels a condition which is unlikely to hold under all competitive conditions and at
all times. In figure 1 we show the interlocking set of decision cycles which when organised
within an institutional rather than a market setting characterise the complete firm.

Figure .1 The decision-transacting cycles for a fully formed firm.
These three cycles represent three levels of firm possibility which we can describe in
reduced notation by three circles (B), (P) and (O). In figure 2, we show the emergence of the
firm over time, the first or entrepreneurial stage leads to the business firm (B), the second, or
capital acquisition stage, leads to the production firm and the third, or labour inclusion stage,
Identify Business
Opportunity
Create
Business
Plan
Coordinate
Resources
Market the
Business
Product
Distribute/
reinvest
Surplus
Exploit the
Business
Opportunity
business
monitoring
cycle
THE BUSI NESS OR
ENTREPRENEURIAL
CYCLE
investment
monitoring
cycle
THE
PRODUCTI ON
I NVESTMENT
CYCLE
Create
Investment
Plan
Raise Capital
Finance
Build and Exploit
Capital Asset
Maintain
Capital Asset
Pay Capital
Investment
Returns
operational
monitoring
cycle
THE
OPERATI NG
CYCLE
Contract labour
resources
Exploit the
operating
opportunity
Train and
coordinate labour
Pay labour
cost
owner
capital investor
Bob Ryan 12
leads to the formation of the fully formed firm. The capital intensive firm can be described as
in figure 2b and the labour intensive firm as in figure 2c.
4
The size of each circle represents
its relative organisational gearing, in other words a large (P) relative to (B) and (O) indicates
that the business is largely capital driven against a relatively narrow business base and a small
operational workforce. The modern specialist car manufacturer could be described in this
way.

Figure 2. Firm formation and relative organisational gearing.
The final aspect of this model concerns the relationship between the firm as it emerges
through these three stages and the market. In a now extensive literature, the economics of
intra-organisational transacting have been explored and in particular the costs of management
transacting as the entrepreneur delegates decision making to others have been well defined.
5

However, the dynamical issues which are of interest to us are why firms should emerge in the
way that they do and how they cope with the situation, as often found in competitive markets,
where neither institutional or market transacting is unambiguously indicated by the situation.
The implications of this model of firm development are as follows:

- First, a firm can evolve through three distinct phases to become what we term a 'fully
formed firm'. Each phase has its own transacting characteristics which complement
the predominant markets facing the organisation at that level. In the first phase, the
firm interacts with its output markets and the market for entrepreneurial resources
(the first economic factor of production). In the second phase the firm interacts
with the above, the primary capital market and the market for capital assets. In the
third phase, the interacting market is the labour market which with the other markets
encompass the principle economic markets for which institutional transacting is an
issue.
- Second, the cost competition between market and institutional transacting is likely
to be balanced differently for each of these phases with resultant differences in
structural arrangements (what Williamson
6
refers to as 'governance structures')
dominating at different levels. The survival of the firm relies upon its ability to adapt
these structural alignments to achieve the best fit with the changing contingencies of
the market place.

4
Those who are acquainted with the work of Freud and Berne may notice some similarities here which are not
coincidental.
5
See Jensen and Meckling (1976).
6
Williamson (1991)
B P
B P
B
O
P
B
O
P
B
O
2(a) 2(b) 2(c)
Entrepre-
neurship
Capital
acquisition
The fully
formed firm
The Market
- Third, under certain predictable circumstances, a firm may find the relative cost
competition between the market and itself moving in favour of economic re-
absorption but not to the point where the cost penalties of misalignment threaten the
firm as a whole. This is a state of transactional ambiguity for the firm and one in
which management may wish to act by attempting to win the benefits of resource
allocation through internally governed market mechanisms (internal markets for
short). This is the point at which internal market possibilities may appear over-
whelming and brings us neatly to the next stage of our discussion.
7

The Emergence of Internal Markets

In what is now a wide body of literature a number of governing factors are deemed to be
important in deciding whether market or institutional transacting would be favoured on
transaction cost grounds. Before considering these it is worth reflecting for a moment on the
basic assumptions which motivate TCE in particular those which govern individual
rationality. Oliver Williamson, who was a student of the Nobel prize winner, H A Simon,
adopts the view of individual rationality attributed to Simon namely that individuals exhibit
'bounded rationality'. Now there is some considerable debate as to whether his concept is the
same as what Simon referred to as 'satisficing' which cannot be recast as constrained
maximisation. Jensen and Meckling assert, in their celebrated 1976 paper
8
, that Simon's
concept of satisficing (where individuals can only be expected to seek satisfactory solutions
in their choices given a restricted search of available alternatives) is congruent with their
concept of maximising behaviour constrained by positive search and computational costs.
They state:

'Simon's work has often been misrepresented as a denial of maximising behaviour, and
misused, especially in the marketing and behavioural sciences literature. His later use of the
term 'satisficing' has undoubtedly contributed to this confusion. . . '
p.307

But undoubtedly Simon
9
did not conflate satisficing with maximising, people do not have
'the wits to maximise' (p28) which appears to us to be a long way from saying that people do
not maximise because they are put-off by the costs of searching out alternatives (which would
equate satisificing with local rather than global optimisation) or with the cognitive effort of
undertaking the computations required to achieve the theoretically best possibility amongst
the alternatives available.
At the moment there is still an unresolved contradiction between the rationality
assumptions which support the TCE and the agency theory literatures.
10

7
Rosen (1995) offers an interesting analysis of the problems of forming internal labour markets and establishing an
appropriate pricing structure. Interestingly, he fails to note the significance of the ubiquitous matrix
organisation described in this paper.
8
Jensen and Meckling (1976).
9
Simon (1976).
10
The sad thing about this debate is that it is unnecessary. When there is no experimental way of conclusively, and
under all circumstances, establishing which of two competing theories is correct then it is usually for a very
simple reason because they are both right - and wrong - at the same time. We quite happily hold the position
Bob Ryan 14
The second of Williamson's assumptions is much less contentious namely that individuals
are opportunistic. As a generalisation it seems to fit with our understanding of managerial
behaviour although it should not be taken to mean that managers are never altruistic but rather
that they tend to seek their own advantage using guile if necessary. Three other transactional
characteristics are also important: institutional operation is likely to be favoured when the
frequency and/ or uncertainty of a given transaction is high. Also, where there is a high
degree of asset specificity (in location, use or capability) in production then, again,
institutional transacting is likely to be favoured.
In highly competitive markets, costs of transacting tend towards zero as the degree of
market decentralisation increases. The higher the degree of competition, the less margin there
will be for institutionalised transacting and the less likely will it be that firms will be able to
operate successfully in such markets.
11

The literature on the relative advantages of 'M-form' organisation are well known
although it is useful to represent such a structure as an input output matrix
12
. This focuses
attention on the range of activities which the head-office or holding company (where the
divisions are incorporated as wholly or partly owned subsidiaries) can offer to its divisions.
Taking the business cycle as shown above these 'business level' activities are: financial
management, governance
13
and corporate marketing. Note here that we use the term 'finance'
to cover not only the supply of capital finance us such for the production investment decisions
within divisions but also the central management of that financial function. The input vector
may also include any other central service functions which the head office may wish to retain
under its own discretion such as central RandD.
The M-form is both a capital resource distribution system and an internal market for
scarce managerial skills.
In terms of the model developed in the first part of this paper it represents one view of
internal organisation within the business cycle of the firm where different production cycles
are given autonomy in operation
14
.
Viewing the divisionalised structure as a matrix focuses on the separation of strategic
resource supply and its consumption. It also invites a comparison of the relative capabilities
of different input vectors of the matrix. Technically, there is a limit to the competitive
advantage which can be secured through efficiency in capital allocation. Indeed, capital
allocation is a technical problem of matching need with available supply and the methods for
achieving this are well known and (by and large) well taught in business schools and

that theories based upon assumptions of maximising behaviour and those based upon satisficing assumptions
should both command our interest and our caution. It seems to us that here again we have a duality theorem in
place: if you look for one type of behaviour you will find it if you then look for the other you will find that
too. Our concern over this issue is that irreconcilable disputes over assumptions can smother the insights
which scientists from differing backgrounds can bring to our understanding of the firm.
11
Clearly, multi-product firms will have a role if they can sustain an uncompetitive position through cross-
subsidisation. It may also be that a firm may be able to capture significant benefits in the capital market or
gain some degree of monopoly power over inputs or means of distribution.
12
See Ryan (1994).
13
We use this word in a more general way than that found in the literature to include: entrepreneurship, policy
formation, monitoring and control.
14
The model developed in part one of this paper can be slightly extended if it is necessary to represent this
autonomy of operation:
P
B
O
P
O
universities. Much more significant benefit can be achieved through superior marketing and
governance.

Figure 3. The M form organisation as an input/output matrix.

In the Western economies, and in particular in the UK, holding company operation has
been seen as a substitute for the external capital market and little else. GEC, for example, is
typical of many in this respect in that its holding company management provides minimal
entrepreneurship and marketing skills to the divisional companies but does impose rigid
financial disciplines upon those businesses. It is striking the difference in attitude of UK
senior management compared to their Japanese counterparts heading the Kereitsu
15
. In many
respects, organisations like Mitsubishi, Matsui and others are marketing companies like the
British East India Tea Company of old.
In our view, the critical issue in the successful operation and maintenance of the M-form
(and, we will argue with the Matrix organisation below) is one of setting allocation efficient
prices for the resources consumed. It may also be necessary, given significant product
interdependence between divisions for the holding company to regulate the transfer market
between divisions in order to inhibit decision making which is likely to lead to global sub-
optimisation. The most common problem here is when access is allowed to external markets
on terms which are unfavourable to the firm as a whole.
The M -form hypothesis, attributable to Williamson, is that a divisionalised firm is
competitively superior to a firm with a unitary structure. It is argued
16
that a divisionalised
firm will be superior in the takeover market, in that it will reduce opportunistic behaviour and
will present greater flexibility in strategic resource allocation. However, the evidence that has
been collected is inconclusive and although the M-form hypothesis has not been refuted it has
not been satisfactorily confirmed either.
17
Our contention is, however, that the most important
attribute of the M form firm is the point made by Williamson that it permits a more efficient
allocation of scarce resources providing that pricing mechanisms are in place to prevent their
over-consumption, and thus defeat the 'problem of the commons'.
18
This is the role of

15
See Miyashita and Russell (1994)
16
Williamson (1993).
17
See: Ezzamel and Hart (1987).
18
The problem of the commons is well known within game theory. A certain area of common land can support a
limited number of grazing cattle giving a high level of return to those local people who provide it. However, if
the land is unpriced in use then there is nothing to stop additional people grazing their cattle even though the
CEO
division 1
division 2
division 3
f
i
n
a
n
c
e
g
o
v
e
r
n
a
n
c
e
m
a
r
k
e
t
i
n
g
resource flow
Bob Ryan 16
overhead allocation mechanisms in particular
19
and charging capital at a divisional risk
adjusted (relative to the market) rate of interest.
We will now turn to the operation of internal markets at a more fundamental level in most
firms and that is where a combination of low human asset specificity and infrequency brings
the operating levels of the firm into the region of organisational ambiguity described above.
When the conditions are right and the competitive advantages of firm viz a viz market
transacting move into ambiguity then the relentless pounding of the market against the
defences of the firm will be most severe at the operational level. It is at this point that
responsive management will begin to experiment with, among other things, matrix
management.

The Matrix Organisation

Matrix organisations have, conventionally, been described in terms of their strategic
attributes namely their ability to allow the firm to attend to two dimensions of strategy at the
same time: their product markets and their technology
20
. Recent critiques of the matrix
organisation have focused upon this aspect and on the control issues which these types of
organisations create
21
. However, the body of this criticism ignores the one overriding
characteristic of the matrix namely that it is an emergent form created because of the
transactional ambiguity between institutional and market based labour contracting.

Figure 4. the formal matrix organization.
The perspective which we propose is clearly shown in figure 4 where the internal labour
market is defined by two vectors, a demand vector and a supply vector mediated by an array

land has gone beyond capacity. Providing the land offers a marginal net benefit to the newest entrant
additional demand will be made on the resource even though the total benefit to all users is diminishing.
19
Zimmerman (1979), provides a compelling argument that firms who allocate overheads are likely to achieve
more efficient resourcing decisions on the part of sub-ordinate management than those which do not.
20
The development of matrix organisation theory can be traced through Galbraith (1971), Knight (1977), Davis and
Lawrence (1978), Larson and Gobeli (1987), Bartlett and Ghoshal (1990).
21
See: Peters and Waterman (1982) and Ackoff (1994).
R
1
R
2
R
3
R
4
R
5
R
6

p
1
p
2
p
3
p
4
resource centre or functional (supply) vector
p
r
o
d
u
c
t

o
r

p
r
o
j
e
c
t

(
d
e
m
a
n
d
)

v
e
c
t
o
r
transaction or activity cell
resource flow
of prices established by some approximation to that price which will just 'clear' the short run
supply and no more.
In the conventional operating matrix22 the organisation is arranged as follows: various
resource centres or functional groups are established (possibly under the direction of a
functional leader) which contain staff in particular skill categories and which form the supply
side and, various products or projects (the 'programmes') are managed by either product or
project managers who form the demand side of the internal market. Individual(s) from each
functional group are then 'transacted' into the matrix to form the labour group or team
(denoted by the labour transaction set) assigned to each programme. Once the assignment is
complete then the team is disbanded and return to functional control for reassignment.

For such a matrix to work certain conditions must hold:

- the labour transactions between programmes and the functional groups must be
capable of contractual completion (i.e., job based) which implies a moderate to high
degree of contractual certainty.
- a low to moderate level of frequency of a particular skill input to a programme.
- a moderate to low level of human asset specificity (i.e., labour can be substituted
with reasonable ease between one programme and another).

If a matrix structure is enforced which runs counter to either of these three conditions
then the structure will fail through lack of control and co-ordination (this is the most
commonly cited criticism of matrix management structures). If on the other hand contractual
certainty is high, frequency is very low and there is an external market supply for the labour
(as in the large project construction industry) then the structure is likely to fail because
external contracting of staff on a job by job basis (i.e., open market transacting) is likely to be
the most cost efficient option.
Given that an operational matrix is the most stable organisational form what then are the
implications for the firm? First and foremost, it cannot be managed in any way which is
similar to conventional organisational management. The matrix is not a command and control
structure and the key internal element to its success is that a regulated price mechanism is
established in some way or other. In practice there are three ways to manage a matrix:

- where individual programme managers negotiate on an ad-hoc basis with functional
managers with or without recourse to the external market in the case of over-demand
(laissez-faire model).
- where a central staff allocation system is arranged through a matrix controller (the
regulated model).
- where programme and functional managers meet on a regular basis to agree and
update allocations (the negotiated model).

22
There are endless permutations on the design. Some multinational companies such as BOC, BP and Cadbury
Schweppes (see Goold and Campbell (1987) operate overlaying national management structures against
international product programmes in a supra-national matrix.
Bob Ryan 18
All three models have their strengths and weaknesses. The laissez-faire model is often a
failed version of the managed or negotiated models and unless it is supported by an efficient
pricing mechanism will lead to either the overt or the covert failure of the matrix system.
However, it may also be the indication within a unitary or a departmental structure of a matrix
attempting to get out! Few successful matrix systems appear to survive with this model of
management for long, sooner or later unregulated surges or troughs in labour demand will
create dysfunctions and diseconomies on such a scale that either central management will
intervene or the organisation will fail. However, the use of a flexible pricing system can
overcome many of the problems with the laissez-faire model and bring the matrix to a close
approximation of the external market.
The regulated model can produce a highly efficient matrix operation at minimum
management cost and conflict. With this approach, a single individual operates the matrix as a
staff agency and (preferably) should have the power to rebalance the matrix through short-run
recourse to the external market in the case of over demand. Although, in our experience,
many matrix systems have an overall manager their role is invariably seen as one of
monitoring and adjudication within what is essentially a laissez-faire system. The regulated
model outlined here requires the active establishment of an internal staff agency which
matches staff availability to demand, places the staff in the system and monitors performance.
Apart from performance measurement this model can operate effectively without an internal
pricing mechanism. However, its disadvantages are three fold:

- staff utilisation may not be allocatively efficient,
- it relies, critically, on the skill of the matrix manager who is required to establish a
complex array of interlinked and sometimes, contingent, staff contracts,
- the information costs can be high especially across a large matrix system operating
on a geographically distributed basis.

The negotiated model represents a compromise between the laissez faire and the
regulated model. Under this system, the programme and functional managers meet at regular
intervals (usually under a matrix manager with overall authority to resolve disputes) to plan
and update the usage of staff. If the negotiated model is supported by a flexible pricing
system then this model can be highly efficient in allocation. Its advantages are most obvious
in a system (such as education) which has a regular production cycle and if the meeting is
constructed as an open auction it can allow agreements to be established through consensus
and negotiation. Its transparent disadvantage is that it requires a high degree of skill and
discipline on the part of the managers involved to meet
23
, with the necessary information, to
operate the system.
The questions which must now occupy us are:

- which of the above three models of management is likely to be the most successful
under different circumstances and

23
these days of course such meeting can be either electronically or in person although it seems to us that one of the
great potentials of distributed network systems is that they can be used to approximate an open market auction.
Indeed, the negotiated system I have described if employed with a flexible pricing system would soon revert to
the more allocatively efficient laissez-faire model.
- to what extent do the power relationships within a matrix organisation reinforce or
contradict its operation as an internal labour market.

Pricing and Accounting Control within the Matrix

Embracing the concept that matrix organisations represent an internal market in situations
of structural ambiguity has a number of implications for accounting policy within the firm.
Unfortunately, the efficiency and cost gains which can be won through such internal markets
come at a price and that price is the increased systems enablement and monitoring which is
required. In all apart from the fully regulated matrix choices must be made about the pricing
system and the methods of monitoring and control which will most surely secure the
efficiency benefits of an internal labour market.
In practice, pricing labour within a matrix can be achieved as follows

- firm based labour charges based upon standard labour rates (allocated pricing),
- locally established prices with competitive bidding (local prices),
- prices based upon prevailing market rates with any imputed shadow prices
(economic pricing).

(i) Allocated Pricing
The first method is widely adopted in practice although its implications are not widely
understood. With such a model, the programme manager will face an array of standard hourly
labour rates |SLR| (usually standard direct labour cost plus some on-cost proportion for
allocated overheads) and an array of actual labour usages in terms of labour hours employed
in production |AH|. The programme managers will, given a value of output on programme (p)
realise a production value vector |V|

.
|AH|. In most standard costing systems a uniform standard rate is applied to staff time which
simplifies this expression to SLR
.
manager can be defined as:

LPR = |V|/ [SLR
.
|AH|]

Given constant standard labour rates, programme manager will attempt to secure those
employees from the functions with the highest marginal productivity in the pool. Lower
productivity employees will tend to be under-utilised which given information asymmetry
between the functional and programme manager is likely to lead to a problem of adverse
selection. Another consequence of this procedure because no rate variances are passed
through the matrix then the labour cost variance will be attributable to usage only. It is
straightforward to predict the destination of the constituent activity and efficiency variances
which will tend to be distributed against the functions and in favour of programmes.
As far as the functional managers are concerned they will be judged on hours utilised
under such a system as using a simple ratio of functional labour efficiency (FLE) gives:

FLE= [SLR
.
|AH|]/[SLR
.
|SH|] (a)
Bob Ryan 20
= |AH|/|SH|

where: |SH| = total standard hours vector (by individuals).
Clearly then the functional managers will focus on obtaining as high a staff utilisation as
possible with the principal effort going towards placing the most difficult staff with the
lowest marginal productivity first. Under either a laissez faire or a negotiated model of matrix
management using a single standard labour rate for staff yields a quite clear conflict of
interest:

- programme managers can appropriate higher than average rates of labour
productivity by seeking experienced staff on higher than standard pay (as rates are
not passed through the matrix) this will tend to push down the utilisation ratios of
functional managers.
- functional managers will attempt to place low productivity staff first overplaying
their capability at the expense of more senior qualified staff.

Under a regulated system, however, the matrix manager can regulate the supply of staff
into each programme maintaining a balance of skill levels matched to production priorities.

(ii) Local Pricing
Local pricing can take one of two forms:

- standard labour rates are set for different skill levels or,
- complete price variability is permitted with a competitive auction for staff left in the
system at any point in time.

Under both of these two system programme managers will expand their programme of
production (or reduce price sensitive delivery dates) until the point that their marginal
revenue equals their marginal cost of production (including the labour element drawn from
the matrix). Their labour productivity ratio will be the same as with the allocated model
except that instead of an array of usages multiplied by a single standard labour rate scalar they
will face a product of either:

- the standard labour rates at given skill levels and the usages at each skill level or,
- the internally negotiated labour prices times the usages at those prices.

Under the first option however, the standard labour rates are only likely to reflect
opportunity costs either at or below full labour capacity. The shadow prices of labour at
excess capacity will not be revealed. Given this, there will be no incentive to re-deploy within
the matrix and assuming no access to the external market (which is quite likely in the short-
run) then negotiation is likely to fail. Under full price bidding the system can clear the
shadow prices and re-deployment will be induced at over-capacity. Unplanned excess usage
variances on programmes will tend, under both systems, to favour the functional managers
inducing as it does so an increased utilisation of staff at higher than average labour rates.
24

The functional manager's performance under both of these systems will be value based as the
analogue of formula (a) above cannot be reduced to hourly utilisation alone. In the case of the
full bid pricing system, the functional manager will be assessed against a functional labour
efficiency ratio of:

FLE = [|P|
.
|AH|]/[SLR
.
|SH|]

where: |P| is the negotiated price array
The most significant disadvantage of such a pricing system is that it passes the problem
of planning staff utilisation and bidding to the programme manager (although in most
production systems he or she is likely to have the best access to the necessary information to
make such plans). The cost of error can be high, however, as any manager who under-plans
the utilisation of staff time is likely to have to bear the full shadow price of the labour against
their programme account at the expense of the marginal programme. If labour utilisation is
under capacity then the adverse variance on the programme will pass to the benefit of the
functional manager.
The advantage of such a system is that in as far as it is possible to reflect the opportunity
cost of labour time, labour resources will tend to flow to the favour of those programmes
offering the highest marginal contribution to the business. In this sense, therefore, this method
of pricing is likely to be most efficient in allocating internal labour resources.

(iii) External Pricing
Under this system, programme managers are required to pay the ruling external
replacement price for labour. The system is very similar to that described in (ii) above except
that the prices charged are likely to reflect the external opportunity cost
25
. In practice, such a
method will only be relevant where the external market for labour is a very close substitute
for the labour held within the firm (i.e., there are little firm specific skills required). In such a
situation, the justification for firm transacting at the operational level is likely to be very weak
indeed and such market testing is likely to lead to employed labour being subcontracted out of
the business.

Matrix Management in Practice

Each of the three approaches to matrix management has its own strengths and
weaknesses in application although the first, the laissez faire model, (which in our experience
is the most commonly found in practice) is the one which is most fraught with problems. The
reason for this is that this mode of matrix management represents the closest approximation to

24
The benefit passes to the functional manager up to capacity working. Beyond that point, if overworking cannot
be induced, a zero sum situation will arise and the adverse variance will move under full price bidding to
compensate the manager holding the marginal project.
25
The external opportunity cost is the opportunity cost assuming unconstrained market supply. Internal opportunity
cost is equivalent to the shadow price of the scarce resource when supply is constrained (see Ryan, 1995
(op.cit)).
Bob Ryan 22
open market negotiation and most remote from the conventional cultures of hierarchy
management.
Often the matrix structure is introduced by senior management as an experiment in
organisational engineering without any understanding of the implications of what is being
done. Where a matrix system is justified on economic grounds then it seems to us that firm
management must consider two issues:

- the degree of ambiguity that the firm faces and govern the matrix appropriately.
- the division of the firm into those components where matrix management is justified
and those where it is not.

In figure 5, we trace out the possibilities of management and labour pricing from the
discussion in the previous sections of this essay.
The diagonal in figure 5 represents the three management and accounting configurations
which are likely to be most stable. Both laissez faire/external market pricing and
regulated/allocated labour charging represent relatively unambiguous ways of operating
matrix structures: the former is most closely aligned with open market transacting and
presumably, where this method of operation is justified, the grounds for maintaining a
permanently employed labour force are tenuous indeed. The latter, on the other hand,
represents the closest matrix analogue to conventional hierarchical operation. In our
typography, the negotiated/local pricing option is the one which if justified represents the
most ambiguous matrix form in that the distribution between market and hierarchical
transaction costs are likely to be mot evenly balanced.

Figure 5. Matrix management and pricing structures.
In one major aerospace manufacturing firm (firm A) a matrix management system had
been introduced with staff drawn from functional departments with (sometimes) no
HIERARCHY
LOW
HIGH AMBIGUITY
LOW
MARKET
PRICING MECHANISM
Allocated Local External
M
A
N
A
G
E
M
E
N
T

M
O
D
E
L
Regulated
Negotiated
Liassez-faire A
B
discussion with the functional managers concerned. The firm had severe problems with over-
runs, poor project cost control and project manages were not above raiding other less critical
projects for staff without consulting the functional managers concerned, ( a term we refer to
as 'matrix dipping'). Project staff were all costed at a standard labour rate (direct cost plus four
hundred per cent) and the consultancy exercise was the first occasion that all functional and
project managers had met as a group (either formally or informally) in the previous eighteen
months. This firm had clearly entered our typography as a regulated matrix using allocated
labour costs and had rapidly migrated to the highly unstable conjunction of laissez faire
management and centrally determined allocated labour costs. Central management were on
the point of winding up the matrix and returning to an organisation based upon departments
within divisions.
We observed the exact opposite in a financial services organisation (firm B). On that
occasion senior management decided upon a policy of engaging the active involvement of all
staff. Indeed, so successful were they that rooms could not be found which were large enough
to accommodate all of the staff concerned and the meetings overran sometimes by many
hours. Matrix managers were allowed to negotiate and to a large extent agree the transfer
price of labour between programmes. This system broke down under poor coordination of the
negotiation process and the matrix migrated to a laissez-faire mode before the matrix broke
down with large scale staff redundancies and ensuing reorganisation.
The second concern of senior management is to clearly identify those sections of the firm
where a response to the matrix imperative is necessary. A simple test is to ask the question
who should be reporting to two (or more) 'bosses' ? As noted before, this dual reporting
structure is the critical difference between a 'normal' organisation and a matrix organisation.
The dual reporting relationship can best be represented by a reporting triad (figure 6). In
business this breaks the conventional orthodoxy of control: one person, one boss. However,
as figure 6 shows, for most of us a dual reporting structure was our very first experience of
management.

Figure 6. The management and the original reporting triad.
Where some form of internal market appears to be beneficial within the firm (perhaps on
grounds of enhanced staff flexibility) then a highly regulated matrix management system is
indicated. However, as ambiguity builds, prices are likely to reveal more information and lead
to more efficient resource allocation than can be achieved managerially. In this situation a
negotiation model with locally agreed prices (using either open bid pricing or skill related
standard labour rates) is likely to lead to more efficient allocation. Finally, where an external
labour market appears to be a close substitute then a laissez-faire management system based
upon external market pricing presents the last stage through which matrix management can
pass before operational dissolution occurs. We would stress however that the matrix tendency
in firms is usually very dynamic and may not rest in any one of our typical states for long.
P vector manager R vector manager
Activity cell individual of manager
Mum Dad
Me
Bob Ryan 24
The creation of the dual reporting lines unleashes a behavioural/political dynamic that must
be acknowledged and understood before it may be shaped.
The experience of Fords is that has taken senior management a considerable period of
time to come to terms with the dynamics of the Ford 2000 matrix. At more operational levels,
management and employee attitudes are much slower to adjust and much time is spent in
managing meetings and in establishing the dual reporting mentality.
Within any organisation where the economic imperatives create a matrix tendency there
is a need for senior management to identify where the boundaries of the hierarchy and the
pseudo-market represented by the matrix should be drawn. In some organisations the matrix
component may be relatively small with only a fraction of the firms labour transacting
exposed in the ways we have described above.
There has been a realisation for sometime in firms with long term experience of
successful matrix management that the political and interpersonal skills of the key matrix
managers are critically important. Ford as part of the implementation of Ford 2000 set up a
management development programme for senior managers. This consisted of seminars that
included 'matrix culture' and negotiation skills; the organisation development teams have
specified the behaviours to be encouraged in developing the new empowerment policy. Ford
is also exploring the use of assessment centre techniques to identify managers with the most
suitable behavioural skills (technical excellence is the basic requirement) to become effective
matrix managers.
There is now an almost evangelical zeal to eradicate what is called 'chimney mentality'
within the company. Intel has an even more sophisticated approach, it has a model of
desirable behavioural skills and uses critical incident interviewing techniques to identify them
in its development and selection processes.
The concept is very similar to the competency models presented by Richard Boyatzis in
his book 'The Competent Manager' (1982). The outcome of the organisational development
interventions and techniques engaged in by these firms is the creation of an open consensus
building culture.
Decision-making is measurably more 'democratic' (see Smith 1983). The ever present
problem of meetings escalation is rigorously monitored. The walls of meeting rooms in Intel
are decorated with Gospel -like texts expounding the virtues of good meetings management
and techniques plus the all important question 'Is this meeting really necessary ?'
We found a further problem, project prioritisation. The freedom in the matrix can allow
strong personalities to dominate causing 'matrix dipping' at the vector levels and the
promotion of 'pets' at the higher level.
In a building society where we felt this was a severe problem we devised a rating to assist
the board in allocating priorities. We selected ten criteria from perceived areas of benefit to
the firm in its matrix related business. These included projects to introduce profitable new
services ; to enter new markets; to improve market share; to improve internal
communications; to comply with new regulations and so on. We invited each member of the
board to rate any new project against the criteria and to use their ratings as a basis for
prioritisation. This simple approach had a transforming effect upon the way the matrix was
managed.

CONCLUSION

In this essay we have argued that firms emerge in stages from the market environment
and the degree of emergence which occurs is dependent upon the relative transaction costs in
the firm's principal factor markets. A fully integrated theory would require a discussion of the
involvement of transfer pricing for the partly complete real assets between moictes of the
firm. We have then sized upon the ubiquitous matrix organisation form to develop the
possibility first mooted by Rosen of internal labour markets.
The matrix organisation is so pervasive in so many different organisational sectors that
we are forced to the conclusion that it is justified by economic imperatives rather than in
terms of being yet a further management control structure. In fact in terms of conventional
management control and co-ordination techniques it appears more often a manifestation of
chaos. The matrix tendency has grown with the increasing complexity of products and
services we now offer our clients. We suspect that the information explosion and deregulation
have driven the diversity of choice which our markets now demand. In this sense we do not
choose matrix management it chooses us.
We have identified some of the political dynamics and the cultural dimensions that make
matrix management behaviourally so different. Whatever the economic imperative for matrix
management dysfunctional management behaviours can and have produce anarchy and
disintegration.
The theory of matrix management , both economic and behavioural, and the internal
pricing structures which we have developed in the last part of this essay lead us to the
conclusion that this organisational form is capable of adaptation to suit different levels of
transactional ambiguity and that certain modes of operation may be favoured given the
market circumstances which the firm faces.

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Boyatzis, R.E. (1982) The Competent Manager. Wiley Interscience.
Burns, T., and Stalker, G.M., (1 96 1) The Management of innovation, Tavistock.
Coase (1937), The Nature of the Firm in Williamson O.E., and Winter, S.G., The Nature of
the Firm. Oxford University Press, 1993.
Dalton, G.W. Barnes,L.B. , and Zala A. (1968) The Distribution of authority in
FormalOrganisations, M.I.T.Press, Cambs. Mass.
Davis, S.M., and Lawrence, P.R., (1978) Problems of matrix Organisations Harvard Business
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Eldridge,N.,(1995) Reinventing Darwin - the great evolutionary debate. Phoenix, London.
Bob Ryan 26
Ezzamel, M.and Hart, H., (1987) AdvancedManagementAccounting- an organisational
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Smith,P.E. (1 983) Structure, Power and Process in Matrix Organisations Ph.D. (unpublished)
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Vol LIV, No.3.


Chapter 2

PERCEPTION AND REALITY
-
: ORGANISATIONAL RISK
TAKING, CHOICE OF STRATEGY AND SUCCESS UNDER
ORDINARY CONDITIONS AND IN TIMES OF CRISIS

Anna Kdi and Klra Farag
ELTE PPK Psychology Institute, Centre for Economic and Decision Psychology
1064 Budapest, Izabella u. 46, Hungary

ABSTRACT

We studied entrepreneurial orientation in ordinary situations and in times of crisis in
Hungarian organisations, using survey method. We investigated how entrepreneurial
orientation is dependent on the success and the development trend of the company. In the
study, we focussed on risk taking, and the two major forms of competition, proactiveness
and competitive aggressiveness. We gathered two types of data: on the one hand, top
managers characterised their companies regarding success, competition and risk taking
under ordinary conditions and in crisis, on the other hand a competent manager described
success and risk taking using objective data.
We found that companies under ordinary conditions take relatively low risks, which
they reduce even further in crisis. Highly successful companies may consider that they
have enough resources to take relatively high risks, to be increased even more in times of
crisis. Moderately successful companies also take some but less risks, but in crisis they
considerably reduce their risk taking. The averagely successful ones are carefully
protecting their resources. The surviving organizations do not take any risks.
The two forms of competition, proactiveness and competitive aggressiveness are not
independent dimensions in Hungarian companies. Our findings reflect that in Hungarian
culture competitive aggressiveness proves to be just as much of a risk taking strategy as
proactiveness. Both forms of competition are typical strategy of successful organizations
both under ordinary conditions and in crisis.
Risk taking and proactiveness are reduced even more as a result of crisis in case of
the not really successful companies. This tendency can prevent organisations with less
positive prospects to work out more adaptive strategies, and to find the key to change

-
The European Union and the European Social Fund have provided financial support to the project under the grant
agreement no. TMOP 4.2.1./B-09/KMR-2010-0003.
Anna Kdi and Klra Farag 28
their situation by using proactive strategy. Another important finding is that Hungarian
companies do not use flexibly changing adaptive competition strategies along the features
of the environment.
Our findings show that all the respondents overestimate both their success and their
risk taking. The direction of distortion regarding their judgement on success and risk
taking show a different pattern depending on the success of the companies. Over-
estimation is especially typical of the successful companies. We can assume that the
assessment of the situation is often intuitive, and that it is a more globally shaped picture
rather than an analysis of the elements of facts that play a role in decision making. In our
opinion, serious consequences can be suffered if managers do not assess precisely their
situation and activities.

INTRODUCTION

Taking risks, making use of opportunities, readiness to innovate while also recognising
risks and adaptive risk taking are some of the most important issues in 21
st
century economic
psychology.
The general features of todays economic environment such as strong competition,
continuous technical development, and constant changes in the economic and technical
environment necessarily result in the pressure for companies to develop all the time, and to
adapt their activities and technologies to the new demand. Companies have to become more
and more enterprising in order to keep up competitiveness, meaning that they must perceive
and make use of, or even create possible business opportunities.
It is especially important in times of economic crisis that companies recognize and make
use of the opportunities offered by hard times, to foresee changes and to assess and manage
risks correctly.
Several authors (Block and MacMillan, 1993; Guth and Ginsberg, 1990; Zahra, 1991;
Zahra, 1993) emphasized that the success of the company depends on whether it is
characterised by the so called entrepreneurial orientation. But what is this entrepreneurial
orientation?
According to Schumpeters (1934) early thinking, the essence of enterprising is
innovation; this is what leads us to income and to the sustainable development of the
company.
Covin and Slevin (1986) introduced the concept of entrepreneurial behaviour, listing
three factors innovation, proactiveness and risk taking under this behaviour. Lumpkin
and Dess (1996) added another three dimensions to the Covin and Slevin category, and
the five dimensional version was re-named entrepreneurial orientation. So, entrepreneurial
orientation means innovation, proactiveness, risk taking, autonomy and competitive
aggressiveness. The authors (in agreement with others, such as the early forerunner
Schumpeter) consider innovation as the key to entrepreneurial orientation. The essence of
entrepreneurial orientation is innovation: creating new products, new processes or new
values. Innovation is always risky, therefore risk taking is a necessary precondition.

Perception and Reality 29
Entrepreneurial orientation can be given in terms of the following activities for already
existing companies:

A new business develops within the company that can be the antecedent or even the
result of innovations conquering new markets.
Transformation of existing companies by refreshing and transforming new thoughts
and ideas that can be the foundations for the company.
Innovation.

Several authors studied empirically too, the antecedents and the results of entrepreneurial
orientation. In their studies in different countries, they also gave empirical evidence of the
positive effect entrepreneurial orientation had on performance (e.g. Frese et al., 2002; Hult et
al., 2004; Lee et al., 2001; Smart and Conant, 1994; Swierczek and Thai, 2003; Wiklund,
1999; Wiklund and Shepherd, 2005; Yusuf, 2002). Zahra and Covin (1995) found in their
longitudinal study that entrepreneurial orientation increases financial performance and
profitability, and it also gives a competitive edge and improves competition positions. They
found that proactiveness and risk taking as manifested in the development of new products
were the driving forces behind increased performance. Another advantage of entrepreneurial
orientation is that it encourages the company to use different strategies, and all this
complement one another; this way they give a competitive edge to the organisation. Zahra
found in his 1991 study that entrepreneurial orientation had a positive effect both on increased
sales and on financial profitability, yet other studies found this effect only in the increased
sales, but not in financial profitability (Morris and Sexton, 1996; Saly, 2001).
Lumpkin and Dess (2001) were willing to scrutinise more thoroughly the complex
category of entrepreneurial orientation. In contrast to the former theories published in
literature earlier, these authors are of the opinion that entrepreneurial orientation typical of
companies is not one-dimensional but it is a complex phenomenon, and it has a complex
relationship with the success of companies. They studied proactiveness and competitive
aggressiveness. Proactiveness means thinking ahead, looking into the future, a behaviour
based on anticipated trends, and the introduction of innovative steps to overcome the
competition, while competitive aggressiveness describes how a company intends to over-
perform its competitors, how fighting they are and how strong their reaction to the steps of
the competitors are. Proactiveness is related more to the creation and establishment of
resources that guarantee the competitive edge, while competitive aggressiveness is related to
protecting them. In their field study, they used factor analysis of the opinion of 124 top
managers entrusted with strategic decision, and they found that proactiveness and competitive
aggressiveness are independent dimensions of entrepreneurial orientation. Having studied the
correlation between performance and these two dimensions, they found that proactiveness had
a positive correlation with performance, while competing was only loosely linked to it. When
they also took into account the life cycle of the organisation, the picture became more fine-
tuned: performance was improved in the earlier stages by proactiveness, later, in the more
mature period, by competitive aggressiveness. Environment proved to be another factor:
in a dynamic environment, where the company comes across fast changes and a lot of
uncertainties, proactiveness is the winning strategy, while in a hostile environment where
there is a lot of competition and scarce resources it is competitive aggressiveness that leads to
success.
Several people have raised the question of what external and internal factors affect the
manifestation of entrepreneurial orientation within an organisation, and what external and
internal factors must be present for the real success of this kind of behaviour.
Since our study focuses on the risk taking dimension of entrepreneurial orientation, as a
dimension that is closely linked to innovation and proactiveness, we approach this question
from now on from the aspect of risk taking.
What do we call risk taking and what are the features of entrepreneurial orientation in an
organisation?
Risk taking is a special form of decision making, which comes with a high degree of
uncertainty regarding the possible positive and/or unpleasant consequences of the decision
taken (Sitkin and Pablo, 1992)
Organisational risk taking is executed by one or more persons working in the
organisation (mostly managers) and is a daring decision or series of decisions in uncertain
situations which can have negative outcomes as well, and the final consequence of the
decision can affect the entire organisation. Managers said in our former qualitative studies
that a decision in an organisation is risky if there is lack of information, if it is made under
pressure (of time, of human nature), if there is a lot at stake, there is a lot of money involved,
or if there are projects that are too big for the company, their consequences affect a lot of
people, there are a lot of challenges in them, perhaps reputation is at risk, or risk must be
taken for the sake of survival.
What are the factors that affect organisational risk taking?
Early research studied and analysed organisational risk taking as a unifactorial
phenomenon. Later on multi-dimensional analysis and the investigation of the interaction
between different factors of organisational risk taking has become accepted.

THE ROLE OF ORGANISATIONAL CULTURE (HOFSTEDE, 1980)

Uncertainty orientation is an important dimension of the organisational culture.
Individuals in an organisation who tolerate uncertainty do not feel that ambiguous situations
and bigger risks pose a threat, they accept unusual and innovative ideas, they are motivated to
performe. In organisations that do not tolerate uncertainties so well, the members of the
organisation resist innovation, they feel that risks and ambiguous situations threaten them.

THE ROLE OF TOP MANAGEMENT
(STEVENSON, ROBERTS AND GROUSBECK, 1994)

Whether entrepreneurial orientation is capable of working in the given organisation
depends on the philosophy and commitment of the top management of the organisation. The
top manager has to launch the stages of the enterprising process, meaning that he or she must
recognise the opportunity, shape the business concept, obtain resources and actually do
business. The comparison of managers and entrepreneurs proved that managers were trying
less to achieve success, they are less willing to take risks, and therefore they have a less
positive attitude towards innovation. So it is not at all that evident that managers are willing
to act upon entrepreneurial orientation (Stewart, Watson, et al., 1998.)

THE ROLE OF MI DDLE MANAGERS
(HORNSBY, KURATKO, ZAHRA, 2002)

Besides top managers, middle managers also have a key role in starting entrepreneurial
action, in innovation processes and in risk taking. Five internal organisational factors shape
the role of middle managers. The right use of reward, obtaining the support of top
management, accessibility to resources and their usability, supportive organisational structure
and tolerance to risk taking and failure are all important for the behaviour and active
participation of middle managers.

THE ROLE OF THE GROUP (JANIS AND MANN, 1972)

Groupthink so typical of homogeneous top manager groups results in the fact that they
appreciate mutual support and consensus more than rational debate and the quality of
decision. Due to the phenomenon of risky shift (Stoner, 1968), the group perceives more or
less risks than its members in individual situations. Members of homogeneous top
management see therefore similar, either extremely big, or small risks and they are
overconfident of their correct decisions. Their perception of risks will, in turn, affect the
degree of risk taking.

THE ROLE OF THE REWARD SYSTEM (OUCHI, 1977)

The risk taking behaviour of individuals acting in an organisation is affected by how the
organisation rewards it. If the outcome of the activities is rewarded, it holds risk taking back
because a risky decision means possible failure. But if the process is rewarded, meaning they
encourage risk taking behaviour, and top managers act as examples to be followed in risk
taking, the willingness to take risks will increase.

PROFIT OR LOSS: THE ROLE OF PREVIOUS PERFORMANCE

Different authors describe different views on how success and failure affect risk taking.
Tversky and Kahneman (1981) proved in their famous prospect theory that the assessment of
a risky situation is defined by whether people perceive the outcome as profit or as loss. In
case of loss, meaning failure, they are risk takers, in case of gain, they are risk avoiders (they
do not want to risk the already obtained good, or the ones they are certain to get, however,
they also prefer bigger, but uncertain loss to certain loss).
Thaler and Johnson (1991), on the other hand, point out that the previous individual
history in risk taking is not indifferent either. People do not judge profit or loss by themselves
compared to a starting point, but their behaviour is affected by whether they had won or lost
before. Risk taking depends on what has been achieved so far, decisions of the past give a
background and determine the perception of the choices and of the outcomes. Gain achieved
before often encourage people to take risks, while earlier losses urge people more to avoid
risk taking (the collected extra income, the obtained profit can be risked, but a loss, or deficit
warn us to be cautious).

THE ROLE OF RESOURCES

The different reactions to profit or loss can be generalised regarding the different
resource situations as well: in case of plenty of resources, risk taking decreases, while in
scarce times it increases (Tversky and Kahneman 1981). The reason is that those in a good
position feel they have a lot to lose, while those in a bad position fee they have nothing to
lose, they are more willing to take risks. March and Shapira (1992) underscore that in a
positively assessed situation people focus on the opportunities, therefore in case of plenty of
reserves and resources risk taking increases, while in scarce times risk taking is reduced.
Osborn and Jackson (1988) also found that if the revenues of a company grow, they risk more
than if they drop. This is confirmed by the findings of Thaler and Johnson (1991): managers
of flourishing companies take higher risks. Dutton and Jackson (1983) explain the above
findings saying that people in a better situation feel that risks are smaller. The dangerous
survival point plays an especially important role where resources are exhausted and
survival is at risk. Here too, authors have different opinions: Bromiley (1991) feels that in
case of a bigger threat, risk taking is higher to avoid death, Staw, Sanderland and Dutton
(1981) say, on the other hand, that near survival situations lead to rigidity and the aversion of
extreme risk.

THE ROLE OF COMPETENCE

According to Heath and Tvesky (1991), people take risks in an environment in which
they feel competent. Day and Wensley (1988), as well as Prahalad and Hamel (1990)
extended this statement to organisational environment too. The decision maker takes his/her
competence into account, reacts fast and firmly to risky situations, if he/she is competent.

THE ROLE OF THE ENVIRONMENT

The environment surrounding the company has a strong affects on whether risk taking is
the right and successful strategy. Two important dimensions of the environment have been
identified which highly affect the success of companies: one is the dynamics of the
environment, (predictability, diversity, uncertainty), and the other is the hostility of the
environment (strong competition, in which the annihilation of the adversary is the objective).
Lumpkin and Dess (2001) consider entrepreneurial orientation as mentioned above a
complex phenomenon that is in a complex relationship with the success of the enterprise. The
two dimensions he found independent, proactiveness and competitive aggressiveness, are
connected to the environmental conditions in such a way that in a dynamic environment the
proactive, risk taking strategy proves to be appropriate, while in a hostile environment the
aggressive, competing strategy works.

EMPIRICAL APPROACHES STUDYING THE INTERACTION
OF THESE FACTORS

Lumpkin and Dess (2001) includes the factor of the development stage of the industry a
s well. Proactivenessa response to opportunitiesis an appropriate mode for firms in
dynamic environments or in growth stage industries where conditions are rapidly changing
and opportunities for advancement are numerous. Firms in hostile environments, or in mature
industries where competition for customers and resources is intense, are more likely to benefit
from competitive aggressivenessa response to threats.
Mullins (1996) studied the interaction between success and competence of risky
decisions related to growth. He also stressed that entrepreneurial orientation and risk taking
are not permanent and key characteristics of an entrepreneur. Decisions involving great risks
are made with careful consideration of such things as security and loss or the maintenance of
the status quo. Mullins identified four syndromes in his study using a questionnaire:

The fat cat syndrome: successful and competent organisations do not take risks
The hot hand syndrome: unsuccessful, but competent organisations take risks
The self efficacy syndrome: successful but incompetent organisations take risks
The throw in the towel syndrome: unsuccessful and incompetent organisations do not
take risks

We found in our earlier study on the relation of success, risk taking and competence
(Farag, 2008) that only the most successful companies take big risks, and the willingness to
take risks decreases with decreasing success. In case of successful companies, risk taking
changed together with the trend of changes as well, (if the situation of the organisation
improved, risk taking increased, if it deteriorated, it decreased), while in case of unsuccessful
organisations, this happened the other way around: risk taking increased when the situation
deteriorated, and it decreased if the situation improved. Contrary to the findings of
Lumpkin and Dess we found, that successful companies are characterised by competitive
aggressiveness. In dynamic and hostile environment they follow a proactive, and in dynamic
but friendly environment a competitive aggressive strategy. We gained some interesting
results when we analysed the data and contrasted the answers given to global questions (how
big risks does your company take) with those that referred to the specific manifestations of
risk taking. We found that respondents had different judgements than the actual data showed
when making global judgements. They linked success to competence (though this correlation
was not true in the light of actual data), and both successful and unsuccessful companies
considered themselves risk taking even though this was true only for the successful ones.
Successful companies were also wrong in thinking that if their situation deteriorated, they
take risks. So we could say that subjective judgements and judgements based on questions of
facts are significantly different. These result make us question the practice of organizational
studies accepting the perception of the manager about his/her own or about his/her
organizations success or risk taking as a data, and not questioning the reality of such
judgements. A number of psychology studies have proven that reality is not evidently the
same as perception. On the one hand, we cannot experience reality directly, but we
reconstruct it culturally individually or in a group (Mead, 1934). On the other hand, however,
the limits of our cognitive capacity prevent us from perceiving reality precisely, the
environment crowded with stimuli overloads our cognitive capacity, and therefore we
misinterpret the data, we translate ambiguous information in line with our own expectations,
and we see regularities in accidental series of events. Motivation can also affect our
perception of the reality, we can be overwhelmed by optimism and feel that negative events
(illness, failure) are more likely to happen to others than to us. One often wrongly suppose
that others are supportive of his ideas. (We can read a lively summary of distortions in the
book by Gilovich, 1991.) Studies on different distortions have been made in the context of
organisations as well. One of the typical distortions is the overconfidence of managers that
can negatively affect their decisions. Managers overestimate the return on investment, and
therefore they do not invest in the best possible way (Malmendier, U., Tate, G. (2002).
Overconfidence can also affect decisions made in connection with acquisitions (Rayna
Brown, R., Sarma, N. (2007). Managers overestimate the value of their own companies which
results in a more conservative risk taking regarding their participation in the external money
markets. Though Malmendier, U., Tate, G., Yan, J. (2005), Dess and Robinson, (1984) found
that top managers perceived precisely the real performance of their companies, but this
opinion was true specifically to the top management.
These considerations encouraged us to confirm our previous results study on a larger
sample regarding the differences in statements based on actual data, and subjective, global
opinions.

OUR STUDY AMONG HUNGARIAN ECONOMIC ORGANISATIONS

There were several aspects leading us in organising our study:

1) We wanted to contribute to the clarification of the contradictory statements found in
literature about the amount of resources and risk taking, considering how the
willingness to take risks changes in case of plenty or scarce resources, and in case of
success or failure.
2) As we have pointed it out, organisational research base their analysis of the
organisation processes on self declared questionnaires in such a way that they accept
the data obtained through self-declaration as actual facts. One of the important
questions in our study was to explore the possible discrepancies between reality and
representation, and to study how representation and reality affect the selected
strategy. In order to achieve this, we studied to what extent reality and representation
were correlated in case of two important indicators (success and risk taking), and
what impact they had on selecting a strategy. In our present study, we test
discrepancies in a more direct way, based on stricter criteria, and on a larger sample.
3) Research findings on entrepreneurial orientation and our own earlier findings were
based on studies made under ordinary economic conditions. During an economic
crisis, it is an especially important issue how organisations judge their prospects and
opportunities depending on their resources, and how they manage risks. Will the
abundance of resources make organizations more optimistic or daring, more risk
taking, or on the contrary, will organisations, that have the necessary resources
become more careful when conditions deteriorate? Will the organisations become
more risk taking or more careful, when resources are scarce?

We created a working model that integrates the factors affecting organisational risk
taking, based on earlier findings and on the focus of our study (Figure 1).

Figure 1. Working model of factors affecting organisational success and risk taking.
Different elements of entrepreneurial orientation, the perceived nature of the
environment, the values of the organisation related to organisational risk taking and
competition, as well as their procedures were investigated.. In the current article, however, we
present in detail only a few questions and findings as follows:

How are success, competence and risk taking related in Hungary?
To what extent do proactiveness and aggressive behaviour characterise the market
behaviour of the studied companies in Hungary?
How are these factors affected by the economic crisis?
How do success, hostile or friendly environment and the economic crisis affect the
choice for either proactive or aggressive, competing strategy?
Success and risk taking are more closely related to economic indicators, or
psychological variables? Are objective indicators and the psychological variables
correlated?

Based on earlier studies (Farag, 2008) we assume the following:

1) Representation related to success, risk taking and reality are not the same:
representation highly affects the choice of strategy.
2) The higher level of risk taking is typical of successful companies.
3) We had found earlier that risk taking decreased depending on the situation of the
company, as the development direction of the company turns negative. Therefore we
assume that companies also react to economic crisis by reduced risk taking.
4) We had found in our earlier study that in Hungarian companies there is no clear
distinction between these two forms of competition, they use proactive and
competitive aggressiveness strategies together. Our findings indicated that a dynamic
and friendly environment triggered competitive aggressiveness, while a dynamic and
hostile environment triggers proactiveness. We assume that in the dynamic and
hostile environment of the economic crisis, proactiveness increases.

METHOD

In-depth interviews were made among the top managers before the study, assessing the
attitudes and ideas of managers regarding risk taking. Based on the findings of the in-depth
interviews and literature, we re-wrote and supplemented a questionnaire from a study on a
smaller sample. We used two questionnaires for the study.
The managers questionnaire studies the following areas: characteristics of risky
decisions, risk taking, success and competitiveness, the typical features of risk taking or risk
avoiding managers, assessment of the areas and extent of organisational risk taking,
assessment of the factors effecting organisational risk taking, and finally self-description of
the managers filling out the questionnaire. We used the questionnaire of Antoncic and Hisrich
(2001) to draw up our questionnaire.
The questionnaire on the objective data of the company includes questions on general
business data and on the objective indicators of success and profitability. Since companies are
reluctant to disclose their financial data, and requesting such information would have resulted
in no answers at all to these questions, we followed other peoples procedure (Naman and
Slevin, 1993). We did not ask for figures, rather the chief executive or financial manager of
the company filled out the scales in comparing to other companies. The end points of the 5
degrees scales were well over average well under average. We can argue for the objectivity
of the obtained data by referring to the already mentioned finding that the perception of top
managers proved to be correct (Dess and Robinson, 1984;). Considering that the performance
of a company consists of several factors, we followed the procedure by Wiklund (1999) and
Poon et als. (2006) when we asked about success from several aspects.
The managers questionnaire was filled out by top and middle managers. They also
answered questions on success and profitability on a scale of five (e.g.: with end points of
highly successful at survival point).
By using these questionnaires we were able to measure success and risk taking in two
ways: through managers judgement and through the objective indicators. Later, the answers
were compared directly. We established the companys trend of change (improving,
stagnating, deteriorating) with the help of data given in the objective questionnaire. We
established competence by a direct question triggering global judgement. In order to separate
the two dimensions of competition, three questions of the questionnaire assess proactiveness,
and two assess competitive aggressiveness.
There are six questions in the questionnaire asking about the dynamic nature/hostility of
the environment. Questions and items in the managers questionnaire were assessed by the
managers in two situations: ordinary economic environment, and in times of economic crisis.
The questionnaires were taken after the first six months of the economic crisis in April-
June, 2009, which proved to be especially suitable for managers to distinguish their earlier
behaviour in an ordinary economic environment from that of the economic crisis.

SAMPLE

The questionnaires were filled out by managers of small, medium and large Hungarian
companies, altogether b 285 managers of 75 companies. The composition of the sample was
balanced. The rate of Hungarian privately owned companies was 40%, of foreign privately
owned companies was 22%, and of state owned companies was 38%. According to size, 21%
of the companies were micro enterprises, 35% medium and 45% large companies. 39% of the
companies had been in business even before the change of the system, 19% of them were
established in the first 5 years after the change of the system, 31% of them were established
5-15 years ago, and 11% in the last 5 years.

RESULTS

Special features of Organisational Risk Taking and Competition
under Ordinary Circumstances

a. Success, Risk Taking and Competence
Companies identified success with sales revenues. So we also take this indicator when we
study the impact of real success.
First those answers were chosen in which managers described the situation and their own
behaviour under ordinary circumstances. (Figure 1) In line with our earlier findings we found
that that risk taking increases in parallel to success (ANOVA F = 2,56, p< 0.03).
Note that the level of risk taking is low, on a scale of 5 the average is 2.56, SD= 0.67).
Successful companies gave a value of only 2.8, average one 2.52, and unsuccessful ones 1.9,
meaning that the level of risk taking even in case of successful companies is only moderate,
and unsuccessful companies hardly take any risks at all.

Figure 1. Competence and risk taking according to the objective success of the companies listed in three
categories.

Figure 2. Competence and risk taking according to objective success listed in five categories.
If we take a more fine-tuned version of success, in which companies were grouped into 5
categories based on success, the difference is even more pronounced between the risk taking
of companies at survival point and the highly successful companies 1 vs. 3.09. (Figure 2).
We also observed that even the categories of survival point and unsuccessful differ
greatly, the at survival point takes no risks at all, while the unsuccessful ones takes the
medium level risks (2. 81).
Objective success does not affect to what extent organisations consider themselves
competent.

b. Competition
Companies participating in the study clearly consider their strategies rather proactive
(mean 3.81, SD = 0.081) and moderately aggressive (mean 2.57, SD = 0.08). Our findings
indicate that a company that is proactive, is also often very aggressive, meaning that the two
strategies do not stand separately, companies follow the two strategies in together (r= 0.40,
p<0.000).
If we relate competition strategies to success, we can see that there is no significant
difference between successful and unsuccessful companies in proactivness, but the level of
competitive aggressiveness is significantly lower in unsuccessful companies. (ANOVA F =
5.02, p<0.001). Highly successful companies use the strategy of proactiveness and
competitive aggressiveness together. (Figure 3)

Figure 3. Proactiveness and competitive aggressiveness according to the objective success of companies
listed in five categories.
We also studied how the two forms of competition are related to risk taking.
Risk taking by companies is a significant concomitant only to competitive aggressiveness
(r= 0.23, p<0.001, ANOVA F = 5.31, p<0.000)
Competitive aggressiveness is much more typical of risk taking companies than of the
non-risk taking ones, but no significant difference can be shown at the level of proactiveness.
(Figure 4).
Risk taking companies choose the strategies of proactiveness and competitive aggressive-
ness together.

c. Environment and Competition Strategies
Environment is characterised by two dimensions (Lumpkins and Dess 2001) static-
dynamic and friendly-hostile. 53% of the managers participating in the study consider
environment being static and 47% dynamic. 77% consider it friendly, and 23% hostile.

Figure 4. Proactiveness and competitive aggressiveness according to the objective risk taking of the
company.
Proactive strategy is more typical of companies than competitive aggressiveness. They do
not distinguish between static and dynamic environment when choosing the competition
strategy, but both competitive aggressiveness (ANOVA F = 10.069, p <0.001) and
proactiveness (ANOVA F = 7.24, p <0.007) are significantly higher in a dynamic
environment (Figure 5) than in a static one.

Figure 5. The dynamics of environment and the chosen strategy.
Companies show a significantly lower proactiveness in a hostile environment (ANOVA F
= 6.43, p <0.001) than in a friendly one, but the level of their competitive aggressiveness does
not change significantly (Figure 6).

Figure 6. Friendliness of the environment and the chosen strategy.

Changes in Risk Taking and Competition of Organisations in Times of Crisis

a. Success, Risk Taking and Changes in Competence
We investigated whether crisis motivates companies to increase or to reduce risk taking.
Under ordinary conditions, the average of actual risk taking is 2.56, SD= 0.067, in times of
crisis it is 2.22, SD= 0.07. So, companies, in general, do not reduce significantly, their risk
taking in times of crisis.
We also wanted to find out if the successful and the unsuccessful companies react the
same way to crisis regarding their risk taking strategy. (Figure 7).

Figure 7. Changes in objective risk taking as a function of the objective success of the company.
In times of crisis companies at survival point and the highly successful companies both
increase their risk taking significantly, while the rest of the companies reduce their risk
taking. So, companies in extreme success conditions consider risk taking as a tool to cope
with the crisis.
Crisis does not affect significantly how competence is judged.

b. Changes in Competition
We also study how the two forms of competition, proactiveness and competitive
aggressiveness are affected by crisis. Proactiveness of companies decrease significantly in
times of crisis (t = 4.51, p <0.000), wile their competitive aggressiveness does not change.
(Figure 8)

Figure 8. Changes in proactiveness and competitive aggressiveness in times of crisis.
If we look at the impact of crisis as a function of success we can say that while the level
of competitive aggressiveness does not change in all groups, the level of proactiveness
decreases in every category, except in the highly successful companies, and companies at
survival point are not at all proactive any more (Figure 9).

Figure 9. Changes in proactiveness in times of crisis as a function of the objective success of the
company.
The biggest change in the competition strategies occur in risk taking companies which
reduce both proactiveness and competitive aggressiveness in crisis. The less risk taking ones
do not change their competition strategy (Figure 10).

Figure 10. Changes in the chosen strategy in times of crisis as a function of the objective risk taking of
the company.

c. Environment and the Changes in Competition Strategies
Assessing the static or dynamic nature of the environment does not change in crisis (in
ordinary situation the ratio is 47/53%, in crisis it is 45/55%). Yet a lot more people consider
the environment hostile (52% instead of 23%t), and fewer consider it friendly (47% instead of
72%).
The above mentioned reaction to crisis does not depend on the hostility or friendliness of
the environment.

Reality and Representation: Success and Risk Taking

As we have shown earlier, success was defined in two ways. Besides the already analysed
objective indicators, we used a 5 point Likert type scale to study to what extent the manager
considers his/her organisation successful. We call this judgements subjective success.
We studied to what extent the subjective success can be identified with success as defined
by economic indicators, meaning how precise and realistic the managers perception of
success is. Our correlational study indicates that perceived success has no significant
correlation with any of the possible economic indicators such as profit/loss, return on
investment or any other income related indicator. Under ordinary economic circumstances,
significant correlation can be seen only between sales revenues and perceived success, but
even this value is mediocre (r = 0.21, p<0.000). In the situation of economic crisis, no
significant correlation can be shown between perceived success and any of the indicators of
objective success. So we can say that in times of crisis the perception of success does not
follow success as established by objective indicators.
Risk taking was also measured by two methods: besides questions based on facts, we
used a 5 point Likert type scale, which we called subjective risk taking. According to the
findings of our correlational study, a significant correlation can be shown between subjective
and real risk taking both under ordinary conditions (r = 0.21, p<0.000) and in times of crisis (r
= 0.24, p<0.000.
Below we study in detail which direction distortion takes, and if it is affected by
economic circumstances (ordinary or crisis situation).

a. Perceived and Real Success: Distortion of J udgments about Success
The objective successfulness of the companies show the following distribution: (Figure
11).

Figure 11. Distribution of objective success.
The subjective successfulness of the companies show the following distribution: (Figure
12). Every company considers itself significantly more successful both under ordinary
conditions (t = 11.69, p<0.000) and in times of crisis (t = 9.58, p<0.000), than what the
objective indicators show.
If we consider the direction of the distortions by categories of success, we can see, that a
lot more companies considered themselves more successful than average, or highly successful
than what the objective data would justify, as the subjective estimations are higher than the
objective ones. (Figure 13 and Figure 14).
The rate of overestimating success in ordinary and crisis situations is the same. Reality
decreases, but underestimation increases in times of crisis.

b. Perceived and Real Risk Taking: Distortion of J udgments about Risk Taking
Companies estimate their risk taking significantly higher under ordinary conditions (t =
6.93, p<0.000) than what the actual figures show. In times of crisis this is reversed, the rate of
subjective risk taking becomes significantly lower (t = -2.04, p<0.04) than the level of real
risk taking. (Figure 15).

Figure 12. Distribution of perceived success.

Figure 13. Deviation of perceived and real success by categories, under ordinary circumstances.

Figure 14. Deviations of perceived and real success by categories in times of crisis.

Figure 15. Difference between the average values of perceived and real risk taking.
Let us see how success affects distortions. Is it the successful or the unsuccessful
company that sees its own risk taking more realistically? We studied to what extent
companies are precise regarding success. Therefore we compared the differences between
subjective and real risk taking of objectively differing success groups. (Figure 16).

Figure16. Differences in perceived and real risk taking as a function of real success.
All three groups (highly successful, average successful and unsuccessful) significantly
overestimated their own risk taking under ordinary conditions. In crisis, overestimation in the
highly successful and average successful group is less, in the unsuccessful one, however,
overestimation increases significantly.
Since managers do not perceive real success precisely, it is worth studying the precision
of the judgement based not on objective but on subjective perception of success as well.
(Figure 17).


Figure 17. Difference between perceived and real risk taking as a function of subjective success.
The distortion based on subjective success is smaller. Under ordinary conditions
companies considering themselves highly successful still significantly overestimate their risk
taking, but the average ones are already precise in their judgement, and the distortion of the
unsuccessful becomes negligible.

c. How Precise I s the J udgement on the Change of the Risk Taking Strategy
in Times of Crisis?
We also studied whether the respondents perceive correctly the changes in their own risk
taking strategy during crisis.
As we could see earlier, companies in times of crisis reduce their risk taking slightly, but
not significantly. Now we study the question of to what extent they use this strategy
consciously. (Figure 18).

Figure 18. Real and perceived changes in risk taking in times of crisis as a function of real success.

Figure 19. Changes in real and perceived risk taking in times of crisis as a function of perceived
success.
The managers of the highly successful and the successful companies feel that they
significantly reduce their risk taking, even though real reduction is negligible, meaning they
overestimate the rate of reduction in their risk taking. Regarding the unsuccessful group,
however, this is the contrary, even though they too, reduce their risk taking slightly, they feel
it is significantly increased.
If we consider the subjective judgements of success and the correctness of the
perceptions of strategy changes, we find that companies considering themselves successful
perceive the reduction in their risk taking as being higher than it is in reality, those who
consider themselves average in successfulness significantly underestimate the rate of
reduction in their risk taking, and those who think they are unsuccessful also underestimate
but a less extent - the rate of reduction in their risk taking. (Figure 19).

Development Trends and Risk Taking

Based on our earlier results, we assumed that the direction of development of companies
affects risk taking. If a company feels that things are going better and better, or if they feel
things are changing in the wrong direction, this affects the willingness to take risks.
Let us see then, how the development trends (improving, stagnating, deteriorating) affect
risk taking.
We made a correlational study to investigate the effect of development trends, and we
found the following significant correlations (p<0.000):

perception of past development faith in future performance (r = 0.58)
perception of past development assumption of future failure (r = 0.56)
perception of past development assumption of future market opportunities (r =
0.36)
perception of past development expecting success (r = 0.33)
perception of past development lack of assumption of future market opportunities
(r = - 0.31)
perception of past development perception of competence (r = 0.29)
perception of past development risk taking (r = 0.26)

The findings of the correlational study clearly prove that there is a significant correlation
between past performance and expectations for the future, and competence and risk taking.
Having studied the development trends we saw that companies that show an improving and
stagnating trend under ordinary conditions consider themselves more risk taking (ANOVA, F
= 3,574, p <0.007). Regarding real risk taking, however, there seem to be no significant
difference between the different groups. This also means that companies showing stagnating
of improving trends under ordinary conditions overestimate their risk taking, while companies
showing deteriorating trend judge relatively precisely the rate of their risk taking (Figure 20).

Figure 20. Relationship between development trends and risk taking under ordinary conditions.
No significant difference is shown in times of crisis between the different groups,
meaning the trend of change just by itself little affect either subjective or real risk taking.

SUMMARY AND CONCLUSIONS

We studied entrepreneurial orientation in ordinary situation and in times of crisis in
Hungarian organisations, using survey method. We investigated how entrepreneurial
orientation is dependent on the success and the development trend of the company. From
among the typical features of entrepreneurial orientation, we focussed on risk taking, and the
two major forms of competition, proactiveness and competitive aggressiveness. Top
managers answered questions related to the market position of their companies, to their risk
taking and attitudes regarding risk taking. We asked them how risk taking and competition
developed under ordinary conditions and in times of crisis. A competent manager of the
company described success and risk taking using objective data. This way we had an
opportunity to gain data on to what extent managers opinion on success and risk taking is
close the objective data.
We found that companies under ordinary conditions take relatively low risks. An
important objective of our study was to establish how the willingness of risk taking changes
in case of plenty or scarce resources, or in case of success or failure. The question was
approached in two ways: on the one hand, different groups were compared based on success,
and this way we could identify the reactions of groups with different resources, and on the
other hand, we could follow the reactions to crisis, when resources became scarce.
Taking the aspect of success into consideration, we found that from among the companies
put into five categories (highly successful, moderately successful, average in successfulness,
unsuccessful, and being at survival point) the highly successful and the unsuccessful ones
were willing to take the biggest risks. The highly successful ones may feel that they have
sufficient resources to take risks, and the unsuccessful ones feel that they can improve their
situation by taking risks. The average successful ones and the moderately successful ones are
carefully protecting their resources. Companies at the survival point take the least risks.
How do the organisations with different resources react to a situation when prospects
deteriorate and resources become scarcer? The highly successful ones increase their risk
taking significantly in times of crisis, and the ones at the survival point do the same but a
lesser extent. Groups belonging to the other three, not extreme categories, reduce risk taking,
the moderately successful ones significantly. So we can say that the highly successful group
is risk taking both under ordinary conditions and in times of crisis, and the ones at survival
point are risk avoiding, but this behaviour is adjusted slightly in times of crisis. Groups that
are closer to the average success point react to crisis by avoiding risks.
Our findings solve the contradictions found in literature regarding the predictions on the
role of resources. We found that risk taking is typical of both the successful and the
unsuccessful companies depending on the prospects. In our study, highly successful
companies are the ones that take the most risks compared to the others (Thaler and Johnson
1994, March and Saphira 1992), and this increases slightly in times of crisis. In the meantime
unsuccessful companies which are not yet in danger (the unsuccessful ones) too, take risks as
long as they still hope for positive prospects. Companies in average situation take small risks
which they reduce even more in times of crisis. We also caught hold of this U shaped
correlation of resources and risk taking in our earlier studies using experimental method
(Farag, 2008). The role of weighting of prospects is supported by the fact that crisis affects
risk taking: successful companies take risks even in times of crisis, unsuccessful ones are
willing to take less risks if the trend of development turns negative. The special role of the
survival point is highlighted by the finding that companies in a very bad situation which take
no risks at all without a crisis slightly increase their willingness to take risks in times of crisis.
The companies use the two types of competition together, even though literature says that
proactiveness and competitive aggressiveness exclude rather than support one another. In line
with our earlier study we did not find any difference of proactive strategy usage in groups that
differ in success: all the companies characterised themselves as proactive. Success is
correlated only with competitive aggressiveness, and the successful companies are more
aggressively competitive than the unsuccessful ones. We expected to find that risk taking
would correlate only with proactiveness, but we found that risk taking correlates more
strongly with competition. Organisations reacted to the crisis by reducing their proactiveness,
and the ones being at the survival point did not show any proactiveness at all. The two
competing strategies were used more in a dynamic environment than in a static one, and
proactiveness is lower in a hostile environment than in a friendly one. Hungarian companies
do not use their competition strategies as it can be expected based on Lumpkin and Dess
(2001) suggestion; competitive aggressiveness and proactiveness are not independent
dimensions, and competitive aggressiveness is more closely related to performance than to
proactiveness. In a hostile environment competitive aggressiveness does not increase, but
proactiveness decreases.
Risk taking and proactiveness are reduced even more as a result of crisis in case of the
not really successful companies. This trend (reaction to the deteriorating prospects) had
already been seen in our previous study as well. This tendency can prevent organisations with
less positive prospects to work out more adaptive strategies, and to find the key to change
their situation by using proactive strategy. Another interesting finding is that Hungarian
companies do not use flexibly changing adaptive competition strategies along the features of
the environment.
Highly risk taking companies use both forms of competition. Our findings reflect that in
Hungarian culture competitive aggressiveness proves to be just as much of a risk taking
strategy as proactiveness. Both forms of competition are typical strategy of successful
organizations both under ordinary conditions and in times of crisis.
The exploration of the possible discrepancies of reality and representation is a key issues
in our study. We had a double purpose behind this. On the one hand, we wished to check the
validity of the self-declaration type of questionnaires used widely in organizational studies,
and on the other hand we wanted to find out how psychological factors influence the choice
of strategy. We used two important indicators (success and risk taking) to figure out the
existing discrepancies of reality and representation.
Our findings show that all the respondents overestimate both their success and their risk
taking. Using a different method in our earlier study, we found this overestimation as well,
comparing global judgements and partial judgements relying on facts. We could attribute
overestimation to the unpacking effect (Rottenstreich and Tversky 1997.), when the
individual judgement of the elements resulted in a higher total value than the global
judgement. In the current study, when global opinions were compared to objective data, it
became evident that not only the simple unpacking effect prevails, but overestimation itself is
also at play. Just as we can see from the correlations of success and risk taking, the
assessment of ones own situation can significantly affect decisions. We can assume that the
assessment of the situation is often intuitive, and that it is a more globally shaped picture
rather than an analysis of the elements of facts that play a role in decision making.
Regarding real and subjective success, distortions by the different groups show a very
similar picture in as much that their own risk taking is always overestimated. However, there
is a difference as to what extent.
Summing up the most prevalent distortions, contrary to real risk taking, companies feel
that under ordinary conditions their risk taking increases in parallel to their success, and in
times of crisis, on the other hand, most companies report a reduction in risk taking. The
companies at the survival point are exceptions, which reports on a more than real increase in
risk taking during crisis. The highly successful companies do not detect the increase of their
real risk taking in times of crisis; the unsuccessful ones on the other hand do not see the
reduction of their real risk taking.
Overestimated risk taking under ordinary conditions is especially typical of the successful
and of the surviving companies, whether we categorize them based on their real or subjective
success. It is also typical that they feel the changes of risk taking in crisis more significant
than in reality. The unsuccessful companies think they increase their risk taking, but the
actual data do not substantiate this. They do not apply this appropriate strategy in realty.
It is important to stress that global judgements and objective indicators show a significant
difference both in judging success and risk taking. Global judgements reflect the belief that
success and risk taking are higher than reality, and also that in times of crisis risk taking is
significantly reduced. Therefore we draw the conclusion that companies do not create a
precise picture on their own situation, nor on their own strategy.

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Chapter 3

PERFORMANCE AND OPTIMALITY FOR HIGH
TECHNOLOGY FIRMS: AN EMPIRICAL
ANALYSIS OF GROWTH AND INNOVATION

Gavin C. Reid
-
and Vandana Ujjual
*

ABSTRACT

This paper examines performance empirically, in terms of growth, innovation and
optimality, for firms active in the risky area of high technology enterprise. Econometric
results are presented on Gibrats Law and the Schumpeterian Hypothesis. Gibratian
estimates suggest a short-run equilibrium size of just 100 employees, but a medium term
equilibrium size of about 1000 employees if innovation is to be optimised.
Schumpeterian estimates suggest that firms must grow, in the long run, to much larger
sizes - of beyond 3,000 employees - to achieve Schumpeterian benefits of potentially
unlimited scale economies in R and D. We argue that the principal way to achieve this
must be by takeovers and mergers. We illustrate this with two brief company case
studies.

Keywords: High technology, Scottish firms, Gibrats Law, the Schumpeterian Hypothesis.

1. INTRODUCTION

High technology firms are often regarded as the life blood of advanced, information
intensive economies, Borg (2009). They are by their nature risky, but also hold out the
promise of high performance, in terms of innovation and growth. This paper is about the
growth and innovative performance of a sample of over eight hundred high technology firms
in Scotland, one of the most innovation intensive countries in the world, ranked second in the
world (size adjusted) to Switzerland, in terms of citations, Corbyn (2008).

-
Tel: 01334 462431, Fax: 01334 462444, Email: gcr@st-andrews.ac.uk
Gavin C. Reid and Vandana Ujjual 56
Econometric estimates are provided of equilibrium short run firm size (using regressions
models that are variants of the Gibrat Law), and of the firm size that is best suited to
maximizing innovation performance in the medium term. The sample was n = 836 firms, and
the time period was 2003 to 2004. It is found that most high technology firms are well below
their maximal medium term innovative performance potential. Only very few firms manage
to achieve in the long run that large scale of operation (lying in the so called Schumpeterian
range), beyond which increasing returns to innovation are possible.
The key analytical argument of this paper is briefly as follows. Given certain fixed
factors (k) (e.g. plant, organizational technology, location, human capital) the small high
technology firm has an equation of motion in size which may be written as S
t
= f(S
t-1
; k)
where S denotes size and t is a time subscript. Assuming stable dynamics (e.g. | f| < 1) an
equilibrium size, say S is determined. This size S is assumed to be optimal with respect to
innovation, in the sense that, given k, high technology firms aim to maximize their innovative
performance at this equilibrium firm size. The innovation-performance/size envelope I = I(S)
is then defined as the upper bound of the set of individual innovation size relationships, one
for each k. In the estimation work reported upon below, the adopted form for this envelope is
cubic, which is the simplest function that displays both long-run local equilibrium, and yet
admits of the potential for unlimited scale economies at very large firm sizes. We therefore
identify three critical firm sizes:

a) S the equilibrium size to which our typically small high tech firms tend, given fixed
factors k
b) S* the size at which such firms could (locally) maximize their innovative
performance, if factors could be varied.
c) S** the size that would be necessary to reap potentially unlimited scale economies in
R and D (the Schumpeterian range).

The above firm sizes are subject to the restriction that S < S* < S**.
Against this background, this paper provides evidence on equilibrium firm size for a
sample of Scottish high-technology firms over the period 2003-04 (cf. Scottish Executive,
2004). Our data were obtained from over eight hundred firms across five sectors, using
postal/electronic questionnaires and field work interviews. The clusters considered were in
the following technologies: software (cf. Scottish Enterprise, 2002), life-sciences (cf. Scottish
Enterprise, 2002), microelectronics, optoelectronics (cf. Scottish Enterprise, 2005) and digital
media. Econometric evidence is presented using cross-section regressions to test Gibrats Law
and the Schumpeterian Hypothesis.
Our principal findings about our sample of Scottish high technology firms are: (a) that
they have high but falling growth rates, with an implied short run equilibrium size (S ) of
about one hundred employees; (b) that their medium term equilibrium size (S*), taking
account of future investments and organisational innovation, may be as high as one thousand
employees; and (c) that, nevertheless, they would need to be at least three times larger (S**)
to enjoy the benefits of industrial-style scale economies of RandD. Concerning the latter, it is
argued that growth to this scale (viz. of beyond three thousand employees) is unlikely to be
possible by internally generated growth, and that therefore it may need to occur, if at all, by a
process of takeovers and/or mergers. Two brief company case studies, Micro-Emissive
Performance and Optimality for High Technology Firms 57
Displays and Pro-Strakan, both well known Scottish high technology companies, are used to
illustrate this argument.
Our results are developed in the following order: research methodology, including
questionnaire design; statistical and econometric evidence, focusing on tests of Gibrats Law
(see Gibrat, 1931; Sutton, 1997; Calvo, 2004) and the Schumpeterian Hypothesis (see Acs
and Audretsch, 1991; Kohn and Scott, 1982; Nicholas, 2003). A novelty of this paper is that
we use cross section-data with a dynamic component to it, rather than the more familiar time
series data. A concluding section reviews the results of the whole paper, and discusses the
implications of the key results, illustrating them with two short case studies.

2. RESEARCH METHODOLOGY

The empirical analysis of this paper is based on new primary source data. The data
gathered were obtained (in 2003-04) from high technology firms in Scotland, across five
sectors: optoelectronics, microelectronics, digital media, life sciences and software. These
sectors have been the cornerstone of Scottish high technology policy (Scottish Enterprise,
2002a, Partners in Development), and indeed were selected by us for this reason. Of these,
software was not included in the DTIs cluster mapping exercise, nor in Scottish Enterprises
earliest cluster initiatives, whilst the others were. However, it is a large and thriving sector,
dealt with under other SE initiatives. For example, in the Scottish Software Game Plan of
2003, its synergies with other major knowledge based industries were specifically noted as
being crucial to what was described as the national economic ecosystem. This is important,
as software is the largest high-technology sector in Scotland, being host, at the time of the
study, to world leading companies, like IBM, NCR, Hewlett-Packard, Cisco, Sun and Oracle.
The enquiry was conducted using a questionnaire which examined: performance;
resources; collaboration and cooperation; embeddedness; and innovation. General discussion
of these results is developed elsewhere. Here, we focus on methodology.
The instrument (questionnaire) was piloted in August 2003, and the postal questionnaire
was implemented between October 2003 and January 2004. The database of all firms
contacted was constructed separately for each sector (see Table 1). Then firms were identified
as being specifically high technology enterprises, using the SIC codes defined as relating to
high technology by Butchar (1987), for the UK, and by Thompson (1987) for the USA. For
sectors which were not SIC-based, Department of Trade and Industry sources were used (see
DTI, 2000, 2001) to extract the high-technology firms.
In making a comparisons between the Scottish population distribution of high technology
firms, and the sampled ones, for these five high technology sectors of Table 1, reference was
made to the Scottish Executives National Statistics Publication (see Scottish Economic
Statistics, 2004, 2005), where data for the relevant year, namely 2003, were available. A
2

test indicated that the sectoral composition of our sample (see Table 1) did not differ
significantly from that found in the Scottish population of firms [
2
(4) = 0.345 < 9.49, for =
0.05].
Finally, as regards the underpinning of the research questions addressed in the
questionnaire, an important reference point was the OECDs Oslo Manual (see OECD, 1996,
1997) so far as guidelines are concerned, and the house style of the Centre for Business
Research (CBR) of the University of Cambridge. In its focus on new and improved products,
an important intellectual influence was Schmookler (1996). That aside, the design, content
and format of the questionnaire was novel, and aimed to be both well found in the literature
and of a design that would facilitate statistical and econometric testing (e.g. of Gibrats Law,
the Schumpeterian Hypothesis, and the Innovation-Performance relationship).

Table 1. Sources and Composition of Population and Sample

Sector Sources Population Sample

1. Software
Software IS 186 186
Lanarkshire Software 52 19
Rampart Scotland 80 25

2. Life Science
Biotech Scotland 440 150

3. Microelectronics
Scottish Microelectronics 203 187

4. Optoelectronics
Scottish Optoelectronics Association 90 80

5. Digital Media
Interactive Tayside for Digital Media 200 189
____ ___
TOTALS 1251 836

The results of the questionnaire are informative. They paint a rather healthy picture of
high technology enterprise in Scotland during the study period. Such firms are small, but
innovation intensive, and international in outlook (including in their collaborative activities
and in the markets into which they sell). They embody high levels of human capital, and are
quick to get new products and services to market. Unless they are large and mature (which are
the minority of firms in the sample), they do not take many steps, in a formal sense, to protect
intellectual property, which suggests, given the short time to market, that trade secrecy is
important (cf. Lerner et al., 2004).
Whilst firmly embedded on the factor market side, our sampled firms are scarcely
embedded on the goods market side, with most principal markets being outside Europe, let
alone the UK. Collaborative arrangements focus on customers and suppliers, with their
purpose heavily directed towards information exchange and marketing. Size (and its correlate
age) is very important. Thus the size distribution (e.g. the micro firm / SME / large firm
distinction) accounts for a lot in explaining the variety of forms of conduct observed.
For this reason, the statistical and econometric work, which we report upon below,
focuses on size as a key attribute. It does so with reference to: rate of growth (including
convergence to an optimal firm size); and scale economies in innovation (and specifically in
RandD). In the latter case, for example, it asks whether these effects are local and/or global,
so far as size is concerned. In a formal sense, these issues will be examined under headings
which test the hypotheses of Gibrat (1931) and of Schumpeter (1942).

3. STATISTICAL AND ECONOMETRIC EVIDENCE:
GIBRATS LAW AND THE SCHUMPETERIAN HYPOTHESIS

This Section tests two models of growth and innovation performance. The first (Section
3.1) involves an extension of the Gibrat Law, and allows us to estimate the short run
equilibrium size of the high technology firm. It also allows us to look at short run dynamics,
in terms of the adjustment path to equilibrium. The second (Section 3.2) involves estimating a
model that allows us to test the Schumpeterian Hypothesis, that at sufficiently large scale,
increasing returns to innovation are possible. It also allows us to identify a type of medium
run equilibrium firm size, in which innovative performance is maximized.

3.1. Gibrats Law

The questionnaire instrument described above allowed us to measure firm size over the
years 1999 to 2003, using three different measures of size: turnover (R), employees (L) and
exports (X). In turn, the ratio of employees to turnover provides an (albeit simple) measure of
labour productivity (L/K). These data were used to test the Law propounded first by Gibrat
(1931), which says, as applied to businesses, that the rate of growth of a firm is independent
of its size. The Gibrat Law can be embedded in the more general model

(1)

where S
t
measures size in time period t, and are constants, and {
t
} is a sequence of
independently distributed positive random variables. The Gibrat case occurs when = 1. This
is the null hypothesis. The usual alternative hypothesis is < 1, which is to say that smaller
firms grow faster than larger firms. Equation (1), in estimable form, can be expressed in
natural logarithms as:

or, more simply

(2)

where s
t+1
= ln S
t+1
, s
t
= ln S
t
, = ln and
t
= ln
t
. If a least squares estimate of (2) is written
as

(3)
t t t t
S S S c
| ) 1 (
1
/

+
=
t t t
S S c | ln ln ln ln
1
+ + =
+
t t t
s s | o + + =
+1
t t
s s | o

+ =
+1

Then equilibrium log size (s
*
) can be solved as:

(4)

which is achieved if . The passage to equilibrium of a firm, given a start-up size
of s
0
is determined by the equation of motion (3), which can trace out the log size period by
period. Thus

and so on. To illustrate, if the year 2001 is represented as the base year (year 0), and the next
measurement is in 2003 (year 2), the estimated version of equation 3 (using 112 observations)
is given as:

where s is log turnover. The coefficient is positive, and significantly less than unity (prob.
value = 0.000). The implied equilibrium log size (s
*
) is 7.96 which translates into size (S
*
), in
millions of pounds, as 2.86m.
Figure 1 presents a so-called phase diagram, where the 45 line represents equilibrium, as
along it s
t+1
= s
t
, which says that the size measure does nor vary period by period. The
estimated equation (5) is represented approximately by log s
t+1
= 1.2 + 0.8 log s
t
. The
equilibrium size (s
*
) is identified, as is a possible path to equilibrium, by arrowed lines from a
lesser starting value.
To summarise, the data suggest a stable dynamic adjustment process (as ) with an
equilibrium sales value that is plausible for the small firms of our sample. Of course, this
extrapolation assumes no change in the form of the firm (e.g. in terms of innovation,
corporate form), whereas the reality may be that the firm may mutate (e.g. may enjoy
enhanced productivity over time), which can significantly raise the implied equilibrium size,
in terms of sales (and of variables which correlate with it, like employment).
Similar tests of Gibrats Law were made using different time intervals (e.g. 2000 to 2003)
and different size measures (e.g. employment, labour productivity). The general finding (see
Table 2, Column 2) was that was less than unity, but was effect is what one would expect:
gets larger as is accommodates to the greater scope for adjustment by firms that may occur
over longer time periods.
) 1 (
*
|
o

= s
1 0 < < |
) (
0 1 2
0 1
s s s
s s
| o | o | o
| o
+ + = + =
+ =
0
2
s | | o o

+ + =
) 5 (
8323 . 0
) 37 . 23 (
843 . 0 247 . 1
2
1
=
=
+ =
+
R
t
s s
t t
) 5 (
8323 . 0
) 37 . 23 (
843 . 0 247 . 1
2
1
=
=
+ =
+
R
t
s s
t t
1 < |

Table 2. Range of values of and S
*

Size Measures

(Slope)

S
*
(Equilibrium Size)
Turnover 0.84 0.91 2.9m - 13.4m
Employment 0.89 0.94 109 137
Productivity 0.62 0.78 55.7 86.5
Notes: (a) Sample size n = 836. (b) Equilibrium size (column 3) has been converted from s
*
(log size) to
S
*
(size in its natural units viz. GBP, full-time employees, and GBP per full-time employee,
respectively).

Figure 1. Fitted Least Squares Regression of Gibrats Law.
Table 2 also provides comparisons of estimates (column two) for the three different
size measures (column 1), turnover (R), employment (L), and labour productivity (R/L).
There is a faster rate of adjustment for labour productivity, compared to sales and
employment, lending support to what was suggested above, namely that the firm itself may be
changing over time, and is likely to become more productive (e.g. because of learning by
doing effects). We tested for heteroskedasticity (see McCloughan, 1995) for these equations,
and generally did not reject the null hypothesis of homoskedasticity (e.g. in the employment
|

case
2
= 1.76 < 4.605, for = 0.01). However, there was some evidence of heteroskedasticity
for some variants of the productivity equation. But even with heteroskedasticity, we do get
unbiased estimates.
A further point to note is that the magnitudes of equilibrium sizes (column three, Table 2)
are plausible for this sample. Thus it is credible that small firms with an average size of 750k
in 2003 should grow on, some years later, to an equilibrium size of between 2.9m - 13.4m.
True, this would imply a small scale of operation (on average), but as we have observed most
high technology firms in Scotland are small. This is reinforced by the equilibrium
employment figures (column 3, Table 2) which range from 109 to 137 full-time employees.
This puts the typical high-technology firm in Scotland firmly into the small and medium-
sized enterprise (SME) category indeed towards the smaller end of that size class.
To conclude the discussion of Table 2, it suggests a sensible equilibrium level of
productivity per employee (R/L). The range is from 55.7k to 86.5k which can be compared
with the evidence to hand. From the questionnaire data we found that mean revenue per
employee (our productivity measure) was 103k per employee in 2002, and the estimated
figure for the same variable, in 2003, was 118k per employee, both of which are perhaps on
the high side (probably because of the presence of some very big firms in the sample), but
certainly achievable by many firms in the sample. On the other hand, the median data, which
better represent the micro-firm element in the sample, suggest a lower productivity. For
example, the median labour productivity in 2002 is 36.7k, and, using the estimated figure for
2003, is 33.9k. All of this evidence points to quite small scales of operation for our sample
of Scottish high technology firms, both in terms of actual size, and in terms of predicted
equilibrium size. In turn, this SME status seems to be consistent with relatively high levels of
labour productivity. This then prompts the question: what has happened to the supposed
advantages of scale in undertaking R&D? Are there not economies of scale to be reaped by
large industrial research facilities? This is the subject to which we now turn, in the next
section, on the Schumpeterian Hypothesis.

3.2. The Schumpeterian Hypothesis

It was Joseph Schumpeter who, in several works, including his Capitalism, Socialism and
Democracy (1942), argued that, because of scale economies in innovation, big business had
superior innovative performance to small business. This argument was subsequently
popularised and elaborated by JK Galbraith in his American Capitalism (1952) and other
works. However, neither Schumpeter nor Galbraith was an econometric analyst, nor did they
provide econometric evidence for what we are calling here the Schumpeterian Hypothesis.
In reality, their evidence was informal and rather flimsy, though work of others has
subsequently provided more substantial evidence in support of the Hypothesis. For example,
Barber, Metcalfe and Porteous (1989) have emphasised the superior opportunities large firms
have for exploiting complementarities between R&D and manufacturing processes; and
Stinchcombe (1990) has emphasised size advantages, like the availability of internal finance,
the spreading of fixed costs of innovation, high economies of scale in the industrial
manufacturing side of innovation, and scope economies between the latter and R&D itself.
Opposed to the Schumpeterian view is what Acs and Audretsch (1990) have called the
New Industrial Organization, as applied to SMEs, in contrast to large corporate enterprises.
This view has been built up further by Acs and Audretsch (1991), and a wide range of
followers, including Rothwell and Dodgson (1994), Cohen and Klepper (1996), Tether and
Storey (1998), Love and Roper (2002) and Freel (2003). A complex web of arguments is
constructed, indicating why small firms might have advantages over large firms in innovation
performance, including: flexibility; creativity; generation of new knowledge; lack of
bureaucracy; superior incentives for innovation; and better protection of intellectual property.
All this is a matter of addressing analytical arguments to support what, by the end of the
1980s, was becoming to be an accepted empirical finding, namely that, adjusting for scale,
small firms have higher innovative performance than large firms. Thus Baumol et al (1984)
had found small firms displayed a better patenting performance than large firms, and Oakey,
Rothwell and Cooper (1988) had found that small firms had increased their relative share of
innovation since World War II. Pattier (1988) focused more on deficiencies in large firm
innovation performance, through balkanising their monopoly position and shelving
opportunities for innovation, which made their relative performance decline as compared to
smaller firms. The latter had no monopoly power to exert, and rapidly had to embrace
innovative opportunities, or risk being driven to the wall by eager small competitors, who
were hungry for a share of the action in new, emerging markets.
The position we take in this paper is that it may be possible to conceive of both views as
being correct that deriving from Acs and Audretsch (1990), championing the nimble, niche
playing, small firm as innovator, and that deriving from Schumpeter (1942), championing the
large scale, diversified giant as innovator. This is reflected in the equivocal empirical
literature, with, for example, Kinugasa (1998) rejecting the Schumpeterian Hypothesis for
Japanese airlines, and Nicholas (2003) accepting Schumpeter for the 1920s in the USA. If the
truth be told, Schumpeter fully analysed both cases (see McCraw, 2007). The first case, for
small entrepreneurial firms, was espoused in his Theory of Economics Development (in
English in 1934, but much earlier, 1911, in the original German); and the second, for
industrial giants, was espoused in Capitalism, Socialism and Democracy (1942). As Langlois
(2003) has put it, there were two Joseph Schumpeters, each relating to distinct historical
epochs, the first, stretching back into the nineteenth century, and the heyday of small business
capitalism, and the latter relating to mature large scale industrial capitalism, with large
corporate research facilities. In the latter era, there emerged the prospect of routine paths to
innovation, steered by a highly gifted cadre of technocrats: famously to be described by
Daniel Bell (1974) as the technocracy. What we will argue is that the early Schumpeter has
now become more relevant again, with its focus on agile, small entrepreneurial firms; and that
this can, indeed, sit side-by-side with what we now know as the Schumpeterian Hypothesis,
which relates to the industrialisation of innovation and the exploitation of both scale and
scope economies of innovation in very large corporate firms.
The method we use builds on the earliest work of Comonor (1967), which used
regression models to test whether firm size and innovativeness were positively associated , as
developed by the likes of Grabowkel (1968), Fisher and Temin (1973), Loeb and Lin (1977),
Baumol et al (1984), Acs and Audretsch (1991) and Reid et al (1996). Indicative of the
general findings of these works was the study of Pavitt et al (1987), which found that,
generally, micro-firms and the largest corporate entities had the greater innovation
performance, though the strength of this relationship varied across industries. Here, we
propose to take that finding a step further, and argue for both small scale and large scale
advantages in innovation.
The basis for the modelling is a polynomial function of the third degree (viz. cubic
function) for exploring innovation intensity, of the form:

(6)

where I is an innovation measure, the |
I
are regression coefficients, S is a size measure (e.g.
sales, employment) and c is a stochastic disturbance term.
Equation (6) presents a wide variety of empirical possibilities, in terms of forms in which
it can be estimated, e.g. depending on the choice of dependent variables. As dependent
variable, we can use a variety of patent and product development measures of innovation.
Here, the two we focus on are: the ratio of patents granted to sales (which we call Patent
Intensity), and the ratio of Sales to RandD staff (which we call RandD Productivity). The size
variable (S) for the independent variables of equation (6) will be taken to be employment,
partly because this is a natural size measure, but also because this avoids the potentially
spurious correlation with the dependent variable (which involves sales, either in the
numerator or denominator, in each case) which would arise were sales also to be used as the
size measure in the regression.
The estimated coefficients for these two variants of equation (6) were as in Table 3. Prob
values are in brackets under coefficients. In each case, the linear coefficient ( ) is positive
and significant, the quadratic coefficient ( ) is negative and significant, and the cubic
coefficient is positive and significant. The overall fit, judged by an F-test, is also good, and
highly statistically significant in each case.
Cubic innovation equations of the form of equation (6) were estimated in eight variants,
apart from the two reported upon in Table 3. The various innovation measures used (both of
inputs and outputs) depended upon related variables like intensity of patents filed (output
measure) and expenditure intensity per employee (input measure). They all suggest a generic
form to the cubic equation, as represented in Figure 2. Across the seven estimates made, the
size variable S
*
, measured by employment, fell within the range of 867 to 1,637 employees,
with most being around 1,000, and indeed the average being 1,075. S
*
is that size of firm for
which innovation intensity is at a local maximum. We observe, first, that this is quite a large
figure, approximately twice the usual upper limit for an SME. However, it falls far short of
the employment size of large corporations, which frequently run to tens (or even hundreds) of
thousands. Against that perspective, 1,000 employees is still on the small side. To the right of
S
*
lies S
**
, which denotes both that size at which innovation is at a local minimum; and also
that size beyond which the estimated function becomes both increasing and convex. That is,
beyond S
**
, the Schumpeterian Hypothesis is supported. The typical value of S
*
for the
estimates is around 3,000; and, indeed, the average value for this is 3,169 employees. So, the
Schumpeterian Hypothesis is supported, but only at very large business sizes. At the same
time, and without contradiction, we can say that the New Industrial Organization view is also
supported, with the local maximum for innovation being at the level of 1,000 employees.

c | | | | + + + + =
3
3
2
2 1 0
S S S I
1
|
2
|
Table 3. Estimates of Cubic Innovation Equation by Least Squares Regression

Coefficients

1. Output Innovation Measure 1.21.10
-4
(0.000)
-7.72.10
-8
(0.001)
1.06.10
-11
(0.001)
Patent Intensity = Patents Granted
Sales

R
2
= 0.123
F = 6.189 Prob.Value = 0.000

Coefficients

1. Input Innovation Measure 1.113

(0.000)
-7.28.10
-4
(0.001)
1.04.10
-7
(0.002)
RandD Productivity = Sales
RandD Staff

R
2
= 0.133
F = 6.318 Prob.Value = 0.000

Notes: (a) For regressions, size variable (S) is always employment. (b) For regression 1, dependent
variable is Patent Intensity; for regression 2, dependent variable is RandD Productivity. Prob. (c)
Values are given in brackets, under each coefficient estimate. (d) Sample size n = 836.

It may be noted that this size (S
*
) is considerably larger than the equilibrium firm size
which was suggested when the Gibrats Law was being tested. There, the equilibrium
employment sizes were all above 100 employees, but less than 150 employees. However, it
was observed that typically the equilibrium size rose, the longer the time interval over which
the Gibrat model was tested. This is partly a purely formal effect (the more the time, the more
the opportunity for change), but also is an intrinsic effect, in that the small firm itself is often
changing over time, notably in its organisational form, but also in many other key aspects,
including IT usage, product range, in-house and out-house staff training etc. To each of these
forms, there exists an implied medium-run equilibrium size (see Figure 3 below).
Now, it may be that in small firms which are not high technology based this pace of
change is slower, and may not occur at all. To a fair extent, this must be so, as most small
firms do not grow to a considerable degree: only the gazelles or ten percenters are noted
for market growth
1
. However, the typical technology based firm is different from most firms.
It has a much higher human capital content (e.g. on average, in the sample, all employees
were college graduates), and a greater focus on training (about ten per cent of labour costs, on
average). Further, it has a far-reaching network (the modal collaborator being in the rest of
the world). Therefore, for such firms, one would expect relatively rapid organisational
change, superior access to outside finance, and generally, a smarter, more agile, small firm
strategy. For such firms, growth to an equilibrium size of 1,000 employees may be by no
means implausible.

1
Gazelle is a term due to Birch (1981) and Storey (1994) introduced the term ten percenter with a similar intent,
in reference to the small proportion (10% or less) of high growth firms in any start-up sample.
1
|
2
|
3
|
1
|
2
|
3
|

Note: (a) I is an innovation measure (e.g. patent intensity); S is a size measure (e.g. full-time
employees). (b) At S
*
the cubic attains a (local) maximum; and at S
**
it attains a (local) minimum.
Figure 2. Cubic Relation Between Innovation and Size.

Notes: (a) I is an innovation measure; (b) S is a size measure; (c) S* is a local maximum for I(S, k) at
which I is locally concave, and I is the envelope of individual functions of I parameterised by the
scale parameter k; (d) for each such k there is a scale parameter k, specific to each firm scale,
generating a set of concave functions, seven of which are drawn below the envelope; and (e) S** is
a local minimum for I at which I is locally convex, and for S > S** this convexity (i.e. increasing
returns to innovation) continues indefinitely.
Figure 3. The Envelope of Innovation Performance.

However, what our model [of equation (6), Table 3, Figure 2 and Figure 3] suggests is
that growth from this size to very much larger sizes (suggested as being above 3,000
employees) may not be easy. There is a right-skew to the cubic curve (i.e. it is not symmetric
about S
*
), so the distance to go, in order to reach the threshold of size at which the
Schumpeterian effect kicks in, namely S
**
, is twice the distance travelled in going from
start-up to S
*
. Not only that, going from a scale of zero to S
*
, involves increasing innovation
performance which will please owners, stockholders, managers, backers and a variety of other
stakeholders. However, going from S
*
to S
**
involves a diminution in innovation
performance, precisely because the evidence is that S
*
is the implied SME equilibrium scale
of operation, or local equilibrium, beyond start-up.
Given this, one might then ask how such growth can be, and has been, attained by the
research giants of today. One answer might be strategic vision the possibility of seeing
beyond a long period of declining innovation performance while scale is built up, so it
becomes possible to reap the full benefits of scale and scope economies and comple-
mentarities, and thereby to achieve the advantages that Schumpeter (1942) emphasised. The
other answer, more plausibly, is that firms moving rapidly up the innovation-performance
trajectory will become attractive acquisitions by larger firms which are themselves facing
falling innovation performance. Alternatively, but in the same spirit, the firm growing rapidly
towards S
*
(then beyond) may seek merger possibilities with several similar sized potential
partners. The strategy here is to simply buy-in (rather than build-up) to the scale
economies and complementarities that are sought, in order to join the biggest players in the
technology game.

CONCLUSION

This paper reports on findings into the growth and early performance of high technology
firms in Scotland. Our sample was based on primary source data on the following sectors:
microelectronics, life sciences, digital media, optoelectronics and software. Sample evidence
was on 836 firms, over the period 2003 to 2004. Consideration was given to statistical and
econometric testing of Gibrats Law and the Schumpeterian Hypothesis.
Our main focus was on evidence concerning performance and innovation. Performance
was examined in terms of growth, especially sales growth and employment growth. The
sampled firms displayed high growth rates, which were found to depend (negatively) on size.
Thus the greater the size of firm, the lower the growth rate (which rejects the simple Gibrats
Law). This implies an equilibrium size of firm, but one which is contingent on the form of the
firm. Assuming no change in the form of the firm (e.g. though innovation), this equilibrium
size was estimated to be about 120 employees. However, such high tech firms do indeed
change their form considerably over time, through RandD, investment in plant and
equipment, training and through organisational innovation. All such changes will raise the
implied equilibrium firm size, and indeed this effect may well be occurring continuously,
rather than periodically.
Growth was linked to innovation performance, in terms of both input and output
measures of innovation. A cubic curve, relating innovation to size, was estimated on our
cross-section of firms, and this functional form gave a good fit to data. It suggested the
relationship shown in Figure 3. There, the underpinning to Figure 2 is developed more fully.
Overall, the innovation (I) and size (S) relationship is shown in Figure 3 as being of an
inverse S-Shape, initially concave and then convex. In particular, the envelope character of
the size/innovation relationship is made apparent by the smaller, concave innovation curves
lying below the envelope, and making tangent to it. This is illustrated in Figure 3 by a family
of optimum firm sizes, for which the I(S) curve is an upper envelope.
2
Each of these smaller
curves relates to possible equilibria (at typical output S < S* in the notation adopted at the
start of the paper) of the high technology firm in the short run. Of these, the favoured one in
the medium term is at output S*, at which innovative output is (locally) maximised.
On this performance curve, this local optimum for the size of the high technology firm is
found to be at about 1,000 employees. This is very much higher than the optimum implied by
extrapolations based on the modified Gibrat model (which is about an eighth of this), as
discussed for Table 2 above. These, more logically, should be associated with short period
equilibria, with given plant, location, human capital etc. However, if those extrapolations (e.g.
as illustrated by Figure 1 above) were based on a given form of firm, they are only notional
forms of equilibria, which would only arise were the high-tech firm to be complacent, and
unwilling to develop. In the case of the high technology firm, this is highly unlikely to be the
case, given that they specialise in innovation. More likely, for each given, initial form of the
firm, there is an implied short run equilibrium size. As this form changes, by the innovation
process itself, so the implied equilibrium size rises.
Finally, beyond S
**
(at very large scales, involving thousands of employees) we do
indeed find evidence in support of the Schumpeterian Hypothesis, that is to say, evidence of
considerable economies of scale in innovation. It is suggested that, for mature high-
technology firms, movement from size S
*
to sizes beyond S
**
may not necessarily be
incremental, but may involve activities like trade sales, takeovers and mergers.
Two brief case studies will be used to illustrate the importance of scale, as highlighted by
the results discussed above. They are both Scottish high technology firms, Micro-Emissive
Displays (MED), and ProStrakan. The evidence we draw upon is not based on our interviews
or our questionnaire derived statistical dataset, but on publicly available information. MED,
was founded by Professor Ian Underwood as a spin-out from Edinburgh University. It
produced small, low energy use TV screen, with applications in a wide range of consumer
electronics, including mobile phones, camcorders, view finders and virtual reality goggles. It
structured itself rather like a university research team, with the research base in Edinburgh,
and the manufacturing plant in Dresden. Despite having world class technology, it did not
grow, and with an employment size of just 50 (well below the short run equilibrium of 100 or
more which we identified above) it became a victim of the credit crunch of 2008, to which it
was highly risk exposed. Thus, as electronics manufacturers decreased production in
anticipation of lower consumer demand, falling revenue led MED to seek more outside
financial support, which unfortunately evaporated as global credit markets seized up. Despite
having been launched on Londons alternative investment market (AIM) in 2004, MED went
into receivership on 25 November 2008.
By contrast, ProStrakan, a Scottish Borders based high tech pharmaceuticals firm,
thought beyond the scale of typical university research teams. Presenting itself to investors as
a high growth enterprise, ProStrakan chose to grow by both merger (with ProSkelia in 2004)

2
Let I = I(S,k) denote the relationship between innovation (I), size (S), and a scale parameter (k). The latter
denotes, continuously, the different possible sizes of the innovating firm (e.g. a micro firm, a small firm, a
medium sized firm). Each small curve below the envelope in Figure 3 is defined for a distinct k. Let I = I(S,k)
be written in so-called implicit function form as F(I,S,k) = 0. Then the envelope curve in Figure 3 is obtained
by eliminating k from the implicit functions F(I,S,k) = 0 and F
k
(I,S,k) = 0 where F
k
denotes partial derivative
with respect to k.
and acquisition (with APS Pharma in 2005), as well as by internally generated growth. It is
now, with approximately 200 employees, about twice the size of the short run equilibrium we
have identified. ProStrakan recently went to market with the product Sancuso, a new drug
(administered in convenient patch form) that alleviates the effects of chemotherapy. Revenue
estimates are very favourable. The US market is its major one. This is estimated to generate
80m sales p.a. in 2013. Sancusos total US market potential is estimated to be of the order of
$1.4 billion. In looking beyond the science campus, and the university scale of activity,
ProStrakan has both survived and flourished, whereas MED (with, in its own way, just as
good technology) has foundered in the face of manufacturing recession.
Thus our findings do not suggest a contradiction between an optimal small firm size, and
the prospect of potentially unlimited scale economies in innovation, but do suggest that
movement from the former to the latter may require some radical shift in the growth process
e.g. from internally generated growth, to growth by acquisition and mergers.

ACKNOWLEDGMENTS

This research was made possible by a ScotEconNet grant, for which the authors express
thanks. A number of people have been of assistance in helping to improve an earlier version
of this draft, including Dr Patrick McCloughan of Indecon International Consultants who
gave us detailed comment, from which we have benefited, and Keith Johnson Glancey of
Scottish Enterprise, who provided us with a speedy policy response. The paper has also
benefited from discussion in the Brown Bag seminar series of the School of Economics and
Finance, University of St Andrews. The authors remain responsible for such errors of
omission or commission that this paper may contain.

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Chapter 4

FAIRNESS NORMS AND SELF-INTEREST
IN VENTURE CAPITAL/ENTREPRENEUR
CONTRACTING AND PERFORMANCE

Richard Fairchild
School of Management, University of Bath, UK

ABSTRACT

We consider the combined impact of agency problems and behavioural factors on
venture capital/entrepreneur contracting and performance. Particularly, we develop a
behavioural game-theoretic model in which a venture capitalist and an entrepreneur
negotiate over their respective equity shares, and then exert value-adding efforts in
running the business. Double-sided moral hazard exists in that both parties may exert
sub-optimal effort (the shirking problem). We demonstrate that, for a given level of
VC-ability, an increase in social fairness norms induces the VC to offer more equity to
the entrepreneur, which in turn induces the entrepreneur to exert more effort. This
improves venture performance.

1. INTRODUCTION

Venture capitalists specialise in financing risky, innovative start-up companies that may
be unable to obtain funding elsewhere. Hence, the venture capitalist sector has the potential to
be a great source of economic wealth creation. However, researchers have identified that the
performance of venture capital-backed firms may be adversely affected by the complex
economic relationships, and the extreme double-sided incentive problems, that exist between
the investor (the venture capitalist) and the investee (the entrepreneur).
More recently, it has been recognised that venture-backed performance may also be
affected by behavioural factors. It is argued that venture capitalist/entrepreneurial cooperative
value-creating efforts may be affected (either destroyed or enhanced) by reciprocal feelings of
fairness, trust, empathy and spite.
Richard Fairchild 74
In this paper, we consider the combined impact of agency problems and behavioural
factors on venture capital/entrepreneur contracting and performance. Particularly, we develop
a behavioural game-theoretic model in which a venture capitalist and an entrepreneur
negotiate over their respective equity shares, and then exert value-adding efforts in running
the business. Double-sided moral hazard exists in that both parties may exert sub-optimal
effort (the shirking problem). This may be mitigated by feelings of fairness (we model this
using the concept of social- or fairness-norms), which may induce the venture capitalist to
offer more equity to the entrepreneur, which in turn induces the entrepreneur to exert more
effort.

1.1. Existing Literature on Venture Capitalist/Entrepreneur Contracting

Researchers have identified that venture capitalist/entrepreneur financial contracting may
be subject to extreme problems of moral hazard and asymmetric information. Hence, venture
capitalists and entrepreneurs have developed contracts that attempt to overcome these
problems and align the parties interests (Klausner and Litvak 2001).
Research into the financial contract between the venture capitalist and the entrepreneur
can be traced back to Sahlmans (1990) seminal paper. Early models (e.g., Admati and
Pfleiderer 1994; Amit, Glosten and Muller 1990; Bascha 2000) usually assumed that either
the manager or the venture capitalist has the power to decide on the form of financial
contract. Recent research (e.g., Kaplan and Stromberg 2000) recognizes the importance of
negotiations between the manager and the venture capitalist over both cash-flow rights and
control rights in the financial contract.
Furthermore, the early financial contracting models (e.g., Baker and Gompers 1999)
assumed a pure principal-agent relationship in which the venture capitalist, as principal,
suffers from moral hazard problems from the entrepreneur, as agent. However, Smith (1998)
argues that both parties contribute to wealth creation, and therefore a form of double-sided
moral hazard exists. Recently, models have been developed to analyze this type of agency
problem (e.g., Casamatta 2003, Elitzur and Gavious 2003, Fairchild 2004, Repullo and Suarez
2004, De Bettignies and Brander 2007, De Bettignies 2008, Fairchild 2009). In each of these
models, the entrepreneur and the venture capitalist both supply value-adding effort, and
double-sided moral hazard exists due to the parties incentives to shirk. The first-best
financial contract maximises firm value. However, Fairchild (2004) demonstrates that the
ability to achieve the first-best contract is affected by the players relative bargaining powers
and value-adding abilities.
The existing financial contracting models assume that entrepreneurs and venture
capitalists maximize utility based on narrow self-interest. However, behavioral economists
are increasingly recognizing that relationships may be affected by psychological factors, such
as feelings of fairness and reciprocity (e.g., Bolton 1991, Rabin 1993, Fehr and Schmidt
1999, Bolton and Ockenfels 2000), empathy (e.g., Sally 2001), and trust (e.g., Berg et al
1995, Bolle 1995, Huang 2000, Bacharach et al 2001). Furthermore, these feelings may affect
the outcomes of negotiations and performance.
Following Fehr and Schmidts (1999) model of inequity aversion (in which players are
concerned about fairness of outcomes), experimental principal-agent games (e.g., Anderhub
et al 2001, Fehr et al 2001, Fehr and Gachter 2002, Fehr and Schmidt 2004) reveal that the
Fairness Norms and Self-Interest 75
principal frequently offers equity, and the agent frequently exerts effort, in excess of the
minimal levels predicted by game theory. Therefore, these experiments provide empirical
support for mutual feelings of fairness. Furthermore, we note that these experimental results
motivate our theoretical analysis, in which we examine the effects of fairness on the venture
capitalists equity offer to the entrepreneur, and the effort levels exerted by both the VC and
the entrepreneur.
In this paper, our objective is to catalyze the research agenda by developing the first
formal game-theoretic model to incorporate fairness into venture capital/entrepreneur
financial contracting and performance.
Although no explicit game-theoretic models exist examining the impact of fairness on
venture capitalist/entrepreneur relationships and performance, conceptual approaches exist.
For example, Cable and Shane (1997) focus on post-investment performance, and argue that
mutual cooperation between the entrepreneur and the venture capitalist is important for
project success. They further consider how the parties may trade-off short run gains from
defection versus long-run gains from cooperation. The authors consider the use of the
prisoners dilemma framework for considering this situation. They argue that the prisoners
dilemma approach is superior to existing research that uses the agency perspective.
Lehtonen et al (2004) compare the agency approach with Procedural Justice (PJ) Theory,
and argue that the latter focuses on the perceived sense of fairness in making decisions.
According to PJ, the more one party perceives a procedure to be fair, the greater they will
trust the other party. Kim and Mauborgne (1991, 1993) argue that an increase in a persons
perception of fairness may lead to an increase in commitment to decisions, performance,
behavior and attitude. Sapienza and Korsgaard (1996) provide empirical evidence that a
persons willingness to share information and provide timely feedback signals his openness
and honesty.
Therefore, Procedural Justice Theory may be particularly relevant to the venture
capitalist/entrepreneur relationship. Sapienza (1989) argues that VCs often complain that
entrepreneurs are reluctant to share information. De Clercq and Sapienza (2001) argue that
increased trust and communication between entrepreneurs and venture capitalists can create
relational rents. Shepherd and Zacharakis (2001) argue that open and frequent
communication between the entrepreneur and the venture capitalist may result in an increase
in perceptions of fairness and trust, thus mitigating agency problems. Our model analyses
these arguments in a formal manner.
PJ theory can also be applied to the VCs opportunistic threat of early exit. The VC may
use this threat to re-negotiate the terms of the contract in her favour. According to PJ theory,
feelings of fairness and trust may be positively related to intentions to remain in a
relationship. Conversely, Shepherd and Zacharakis (2001) discuss how VCs may pursue
short-term gains, at the expense of the entrepreneur, through harvesting the venture rather
than re-investing in firm growth, and pressuring the entrepreneur to pursue short-term, rather
than long-term, profitability. Empirical research by Busenitz et al (1997) suggests that
performance may be enhanced if a venture capitalist-entrepreneur relationship is framed as
being fair. In summary, research in PJ suggests that perceptions of fairness should be
positively related to long-term performance of the VC/E relationship, and negatively related
to the risk of opportunism.
Utset (2002) provides an extensive discussion of reciprocal fairness and strategic
behaviour in venture capitalist/entrepreneur relationships. He argues that the performance of
the venture is at risk from the combination of two main factors. Firstly, the entrepreneur may
have mistaken beliefs about the fairness of the VC at the time of contracting. Secondly, as he
begins to realise over time that the VC may have an incentive to act opportunistically, the
entrepreneur may react with costly self-preserving strategic behaviour and retaliation.
The main objective of our game-theoretic model is to understand the impact of fairness
on the players negotiated equity stakes, effort levels, and performance of the venture. In
order to analyse this, there are several approaches to fairness that we could use. Fehr and
Schmidt (2000) provide a useful classification of the fairness models. They note that there are
two main approaches. The first approach is to assume that some of the agents have social
preferences, whereby they gain utility from their own absolute payoff and their payoff
relative to the other agents (see, for example, Adreoni and Miller 2000, Bolton 1991,
Kirchsteiger 1994, Fehr and Schmidt 1999). The second approach considers intention-based
reciprocity. In this approach, a player reacts to the other players intentions. Therefore, if a
player feels that her opponent has acted with kindness, she will react by being kind in return.
To analyse this kind of behaviour, we cannot use standard game theory. Instead we must use
behavioural or psychological game theory (first developed by Genakoplos et al 1989).
Intention-based models of reciprocity include Rabin (1993) and Falk and Fischbacher
(1999), who examine reciprocal fairness, Sally (1999), who examines reciprocal empathy,
and Huang (1999), who considers the effects of social equity-norms on the equilibrium of
ultimatum bargaining games.
In this paper, we have chosen Huangs (1999) social equity-norm approach as being most
relevant to our problem. Huang considers the effect of equity-norms on ultimatum offers in
bargaining games
1
.
The rest of the paper is organised as follows. In section 2, we present the model, and
solve for the VCs equilibrium equity offer. In section 3, we analyse equilibrium venture
performance. In section 4, we briefly outline some hypotheses that may arise from our model.
Section 5 concludes the paper.

2. THE MODEL

2.1. The General Setting

We consider a setting in which a risk-neutral entrepreneur, drawn from a mixed
population of self-interested and fair types, has an innovative idea, but lacks the personal
funds to start his venture. Therefore, he approaches a risk-neutral venture capitalist, drawn
from another mixed population of self-interested and fair types, in an attempt to obtain start-
up finance. The players types (fair or self-interested) are private knowledge.
The parties negotiate over the financial contract (particularly, they negotiate over the
players relative equity stakes). We assume that the venture capitalist has all of the bargaining
power, and so makes a take-it-or-leave-it equity offer to the entrepreneur. Once the financial

1
Other interesting social-norm games are a) The waitress-tipping game, which examines why diners give generous
tips to waitresses, even if they have no intention of visiting that restaurant again (the social norm here is that a
good tip is expected by society), and b) Levitts ( ) bagel analysis, in which office-workers pay for their bagels
on a voluntary basis.
contract has been agreed, the entrepreneur and the venture capitalist provide effort input into
running the firm, and their efforts affect the probability of the ventures success.
Our objective is to consider the effects of fairness, combined with the extent of the VCs
value-adding abilities, on financial contracting (the venture capitalists equity offer to the
entrepreneur), the players effort levels, the ventures performance (in terms of success
probability and expected value), and economic welfare.
There are several models of fairness that we could employ. We have chosen to use a
social norm approach. A fair VC makes an equitable equity proposal to the entrepreneur. A
self-interested VC makes an offer that may diverge from the social norm. An entrepreneur
who is concerned with fairness observes the equity offer from a self-interested venture
capitalist, and compares it with the fair offer. The difference affects his effort level. A self-
interested entrepreneur makes no such comparison. We demonstrate that the equilibrium
equity offer, effort levels, venture performance, and welfare depends on the proportion of
self-interested and fair entrepreneurs and VC in the economy, combined with the level of the
VCs value-adding abilities.

2.2. The Time Line

The timing of the game is as follows. At date 0, a risk-neutral entrepreneur (drawn
randomly from a population, consisting of fair and self-interested entrepreneurs) has
an idea for a new venture, but no private funds. His new project requires investment funds
Therefore, he approaches a risk-neutral venture capitalist (randomly drawn from
another population, consisting of fair and self-interested VCs) in an attempt to
obtain financing. Each players type (fair or self-interested) is private knowledge. We
describe our approach to fairness in more detail below.
At date 1, the VC and the E negotiate over their relative equity stakes. Specifically the
VC makes an ultimatum proposal regarding the equity allocation and for the
entrepreneur and the venture capitalist respectively (this reflects the idea that the VC has the
bargaining power). The entrepreneur chooses whether to accept or reject the proposal. If the
entrepreneur rejects, both players receive payoffs of zero. If the entrepreneur accepts, the
game continues to date 2.
In date 2, the entrepreneur and the VC exert respective effort levels and which
affect the date 3 probability of success as follows. In date 3, the project succeeds with
probability
2
in which case it provides income of The project
fails with probability in which case it provides income of zero. Therefore, the
expected value of the project is
Note that and are the Es and VCs respective ability parameters. We are
interested in considering the players relative abilities. We model this using the following
relationship where represents the VCs relative ability (that is, in
relation to the entrepreneurs ability). When only the entrepreneur has ability (we

2
Of course, we constrain this probability to lie between zero and unity. We discuss this further later in the paper.
r r 1
. 0 > I
r r 1
] 1 , 0 [ e o o 1
m
e
vc
e
,
vc vc m m
e e p + = . 0 > R
, 1 p
. ) ( R e e pR V
vc vc m m
+ = =
m
vc
,
E vc
u = ] 1 , 0 [ e u
, 0 = u
term this the single-sided moral hazard case). When the VC has some value-adding
ability (double-sided moral hazard). When the VC and the E have equal value-adding
ability. Note that we assume that the VC cannot have more ability than the E.
After the success or failure of the project is revealed at date 3, the players are paid
according to the financial contract that was agreed at date 0, and the game ends.
Note that, since the entrepreneurs and the VCs efforts are
substitutes in our model
3
.
Exerting effort is equally costly for the entrepreneur and the VC; that is, the disutility-of-
effort (or cost-of-effort) functions are given by Hence, the
players face increasing marginal costs of effort.

2.3. Social Fairness Norms versus Self-Interest

There are several approaches to fairness that we could have employed in our model.
(Altruism, reciprocal fairness, inequity-aversion, reciprocity, spite, empathy, retaliation).
Instead, we have chosen to focus on the social norm (or equity norm) approach (see Huang
1999), combined with the inequity-aversion approach pioneered by Fehr and Schmidt (1999).
In this approach, the social norm provides a bench-mark, and deviations from this norm
provide some disutility for the players. However, the extent of this disutility depends upon the
strength of the norm. This is measured as the probability that the player will play that norm.
Hence, if there is a high probability that the player will play that norm, deviations provide
extreme disutility. If there is a low probability that the player will play that norm, deviations
provide a low disutility. Hence, intentions matter (See Huang 1999 for a detailed discussion,
and analysis, of these arguments).
In our model, the VC makes an equity proposal, which the E compares with the social
norm, where the social norm is the equity proposal that equates the Es and VCs expected
payoff. A deviation form the social norm provides a disutility for the E, where the strength of
the disutility depends on the probability that the VC will make the fair offer. This affects
the effort level of the E, which in turn affects the VCs proposal.

2.4. The Players Decisions

We solve the game-theoretic model using backward induction. That is, we firstly take as
given that a particular type of E has matched with a particular type of VC (self-interested or
fair) at date 0, and that the VC has proposed equity allocation at date 1 (which the
E has accepted), and we proceed to solve for the players optimal effort levels and
at date 2.

3
Casamatta (2003) considers a double-sided moral hazard problem in which the entrepreneurs and the VCs efforts
are substitutes. In contrast, in Repullo and Suarez (2004), and Fairchild (2009), the parties efforts are
complements. We leave the analysis of the interaction of complementary efforts and fairness norms for future
research.
, 0 > u
, 1 = u
,
vc vc m m
e e p + =
. ) ( , ) (
2 2
vc vc m m
e e c e e c | | = =
r
o o 1 ,
*
m
e
*
vc
e
2.4.1. The Entrepreneur Matches with a Self-I nterested VC
The entrepreneur cannot observe the VCs type. However, all that the entrepreneur cares
about is the equity offer, which he can observe. We denote the equity offer from the self-
interested VC as (where the sub-script denoted the ultimatum offer). We denote the
equity offer from the fair VC as (to be examined in the next sub-section 3.4.2).
We denote the Es and the VCs respective expected payoffs as follows (note that the
terms and in equation (2) represent the ventures success probability given that the
VC has matched with the self-interested or fair E respectively. We discuss this further below);

(1)

(2)

where the first term of equation (1) represents Es equity share of the expected project value,
given the VCs ultimatum equity offer to the E, and the second term represents his date 2
effort costs. The third term represents our innovation in this model. This is the Es disutility
from receiving an equity allocation that is different from the equity-norm The
strength of this disutility depends on the proportion of fair VCs in the economy. If
is large, there is a high probability that the E will match with a fair VC. In this case, if the
E observes a deviation from the fairness-norm (that is, he has matched with a self-interested
VC), he will experience a large disutility. On the other hand, if is small, there is a low
probability that E will match with a fair VC. Therefore, he suffers a small disutility from
observing an inequitable equity offer. The Es optimal effort level maximises equation (1).
Now consider the self-interested VCs expected payoff, equation (2). The VC cannot
observe the Es type. She knows that, with probability she will match with a fair E, while,
with probability she will match with a self-interested E. Since the self-interested E is
not concerned with the social norm, in equation (1). Therefore, a self-interested E will
exert a different effort level, and this will result in a different success probability than if
the VC had matched with a fair E. The fair Es effort level will provide success probability

A self-interested VC chooses her equity offer to maximise equation (2).

2.4.2. The Entrepreneur Matches with a Fair VC
As a benchmark case, we first consider a fair VC. She offers a fair equity stake that
equalises the expected payoffs (this is the equity-norm).
We derive the equity-norm by considering equations (1) and (2). By definition, the
fair VC will propose

U
o U
F
o
ES
P
EF
P
), (
2
U F E U E
r e PR o o | o = [
, ] ) 1 )[( 1 ( ] ) 1 [(
2
VC EF U ES U VC
e R P r R P r | o o + = [
U
o
U
o .
F
o
] 1 , 0 [ e r
r
r
, r
, 1 r
0 = r
ES
P
.
ES EF
P P =
U
o
F
o
F
o
.
F U
o o =
Therefore, equation (1) becomes

(3)

for both types of E (fair or self-interested). That is, since the fair VC offers the equity norm
it is irrelevant whether the fair VC matches with a self-interested or fair E. Either
type of E faces the same expected payoff function (3). Therefore, whether a fair VC matches
with a fair or self-interested E, Es optimal effort will be identical for either type, and
for either type. Therefore, when the fair VCs expected payoff (3)
becomes

(4)

We solve for the equilibrium fair offer by backward induction. Firstly, we
derive the players optimal effort levels, given the fair VCs proposal We do so by
substituting into (3) and (4), and solving
and We thus obtain the optimal effort levels for the fair VC and either type of E,
given that the fair VC has proposed These are as follows;

(5)

Substituting these optimal effort levels into and then
substituting into (3) and (4), we obtain the indirect payoffs for either type of E, given that he
has matched with a fair VC who proposes

(6)

(7)

Equating (6) and (7), we obtain the fair (payoff-equalising) equity proposal as
follows;

2
E U E
e PR | o = [
,
F U
o o =
EF ES
P P = ,
F U
o o =
. ) 1 (
2
VC F VC
e PR | o = [
,
F U
o o =
.
F
o
vc E m E vc vc m m
e e e e p u + = + = , 0 =
c
[ c
E
E
e
. 0 =
c
[ c
VC
VC
e
.
F U
o o =
.
2
) 1 (
* ,
2
*
|
u o
|
o R
e
R
e
E F
VC
E F
E

= =
, ] [ R e e PR V
VC E E E
u + = =
;
F U
o o =
2
2 2 2 2
]
2
) 1 (
4
[ R
E E
E
|
u o o
|
o
+ = [
2
2 2 2 2
]
2
) 1 (
4
) 1 (
[ R
E E
VC
|
o o
|
u o
+
= [
,
F
o
Proposition 1: If the VC is fair, she proposes the equity-norm

(8)

This proposal equates the players payoffs.

2.4.3. The VC I s Self-I nterested; Revisited
Having derived the fair VCs optimal equity proposal, we now return to the case where
the VC is self-interested. First, consider the case where the self-interested VC has matched
with a fair E, and has made the equity proposal Using equation (1), we derive the
fair Es optimal equity proposal by solving We thus obtain the fair Es optimal
effort;

(9)

The self-interested Es optimal effort level is obtained by simply setting in
equation (9).
The self-interested VCs optimal effort level is given by equation (5) (replacing with
regardless of whether she has matched with a self-interested or fair E
4
. Therefore, we
substitute for (5) and (9) into and then into (1) and (2) to
obtain the fair or self-interested (r = 0 in equation (1)) Es and the self-interested VCs
indirect payoffs;

(10)

(11)

Note that, if the E is self-interested, r = 0 in equation (10).

4
Note that the self-interested VCs optimal effort level is independent of the type of E because efforts are
independent substitutes in the success probability function. If the efforts were complements, the VCs optimal
effort level would then depend on her anticipation of the Es optimal effort level. Since the VC cannot observe
Es type, this analysis would be much more complex. We discuss this further in the conclusion.
.
) 1 ( 3
1 2 1
2
2 4 2
u
u u u
o
+
=
F
.
F U
o o =
. 0 =
c
[ c
e
E
.
2
)] ( [
*
|
o o o R r
e
E U F U
E

=
0 = r
F
o
),
U
o
, ] [ R e e PR V
VC E E E
u + = =
2
2 2 2
]
2
) 1 ))( ( (
4
)) ( (
[ R
r r
VC F U U E F U U
E
|
o o o o
|
o o o +
+
+
= [
2
2
2
2
2
2
2
2
]
4
) 1 (
2
) 1 (
)[ 1 (
]
4
) 1 (
2
)) ( )( 1 (
[
R r
R
r
r
VC U E U U
VC U E F U U U
VC
|
o
|
o o
|
o
|
o o o o
+
+
= [
When the self-interested VC makes her equity proposal, she does not know whether she
has matched with a fair or self-interested E, but she does know the respective probabilities
and Therefore, she chooses her optimal equity proposal to maximise her
expected payoff. Therefore, from equation (11), we derive the self-interested VCs optimal
equity proposal, by solving We obtain the following;
Proposition 2: The self-interested VCs optimal equity proposal is;

(12)

We observe that there is a relationship between the fair equity proposal and
and that this relationship is moderated by the influence of the VCs relative ability and the
strength of the fairness norm Further, the analysis is complicated by the observation that
the fair equity proposal is affected by the relative ability parameter (see equation (8)
in proposition 1).
For example, if the VC has no ability equation (8) reveals that the fair equity
proposal is Since the VC has no ability (and hence exerts no effort), her fair
(payoff-equalising) offer compensates the entrepreneur for his effort costs. Given the
moderating impact of societal fairness is as follows. If society has a self-interest norm,
equation (12) (with reveals that a self-interested VC offers As the
societal fairness norm increases towards equation (12) reveals that a self-interested
VCs optimal equity offer increases towards
Next, consider the case where the VC and E have equal ability Now, the fair
equity proposal (from equation (8)) is This is intuitively sensible. Since the E and
the VC have equal ability, an equal share of the equity will induce the players to exert equal
effort, and therefore, their expected payoffs will be equalised. Given that the
moderating impact of societal fairness is as follows. If society has a self-interest norm,
equation (12) (with reveals that a self-interested VC offers That is,
since the players have equal ability, and since the VC does not need to worry about the Es
feelings of fairness, the VC will take all of the equity, since she can contribute to project
success on her own (in practical terms, this might mean that the VC takes all of the equity,
and retains the E as a paid employee, with a fixed salary). As the societal fairness norm
increases towards equation (12) reveals that a self-interested VCs optimal equity offer
increases towards
r
. 1 r *
U
o
. 0
=
c
[ c
VC
VC
e
.
) 1 ( 2
) 1 ( 1
*
2 2
2 2
u
o u
o
+
+ +
=
r
r
F
U
F
o *,
U
o
u
. r
F
o u
), 0 ( = u
.
3
2
=
F
o
, 0 = u
r
, 0 = r )
3
2
=
F
o .
2
1
=
U
o
, 1 = r
.
3
2
=
U
o
). 1 ( = u
.
2
1
=
F
o
, 1 = u
r
, 0 = r
)
2
1
=
F
o
. 0 =
U
o
, 1 = r
.
2
1
=
U
o
Note that, in both cases, and the self-interested VCs optimal equity offer
increases towards the fair equity offer as the societal fairness norm increases towards unity.
We observe in the next section that this is a general result for all relative ability parameters

2.4.4. Graphical Analysis of Self-Interested VCs Equity Offer
Since the relationship between the fair equity proposal and is complicated by
the influence of the VCs relative ability and the strength of the fairness norm and
further complicated by the observation that the fair equity proposal is affected by the
relative ability parameter we now proceed to present numerical results for the entire
parameter intervals and
Diagram 1 demonstrates the effect of relative ability and fairness on the self-interested
VCs equilibrium equity proposal for and Table 1 demonstrates the
effects of fairness on the equity offer for the range of in 0.1 increments.

Diagram 1.
Diagram 1 demonstrates that, as the level of the societal fairness-norm increases, the VC
increases her equity offer to the E, regardless of the level of VC ability. Further, for any level
of VC ability, the self-interested VCs equity offer approaches the fair VCs equity offer as
the level of fairness approaches unity.
0 = u , 1 = u
]. 1 , 0 [ e u
F
o *
U
o
u , r
F
o
, u
] 1 , 0 [ e u ]. 1 , 0 [ e r
, 0 = u , 5 . 0 = u . 1 = u
] 1 , 0 [ e u
Fairness and Self-interested VC's Equity Offer
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Fairness
S
e
l
f
-
i
n
t
e
r
e
s
t
e
d

V
C
'
s

E
q
u
i
t
y

O
f
f
e
r
Table 1. Self-interested VCs Optimal Equity Proposal

VC
ability/Fairness

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
0 0.50 0.50 0.51 0.53 0.55 0.57 0.59 0.61 0.63 0.65 0.67
0.1 0.50 0.50 0.51 0.53 0.54 0.56 0.59 0.61 0.63 0.65 0.67
0.2 0.49 0.49 0.50 0.52 0.54 0.56 0.58 0.60 0.62 0.64 0.66
0.3 0.48 0.48 0.49 0.51 0.53 0.55 0.57 0.59 0.62 0.64 0.66
0.4 0.46 0.46 0.47 0.49 0.51 0.53 0.56 0.58 0.61 0.63 0.65
0.5 0.43 0.43 0.45 0.46 0.49 0.51 0.54 0.57 0.59 0.61 0.63
0.6 0.39 0.40 0.41 0.43 0.46 0.49 0.52 0.54 0.57 0.59 0.62
0.7 0.34 0.34 0.36 0.39 0.42 0.45 0.48 0.52 0.55 0.57 0.60
0.8 0.26 0.27 0.29 0.32 0.36 0.40 0.44 0.48 0.51 0.54 0.57
0.9 0.16 0.17 0.20 0.24 0.29 0.34 0.39 0.43 0.47 0.51 0.54
1 0.00 0.01 0.06 0.11 0.18 0.25 0.31 0.37 0.42 0.46 0.50

The table can be read horizontally or vertically. First, we note, from the graph and table
(horizontally) that the self-interested VCs equity offer is positively related to the societal
fairness-norm. For any level of ability, the optimal equity offer increases towards the fair
offer as the fairness norm increases towards unity. The increase is steeper (shallower) for
higher (lower) VC ability.
The intuition is that, for low VC ability, the self-interested VC makes a high equity offer
to the E, even when the fairness norm is low. For high VC ability, the self-interested VC
takes much more of the equity for low levels of the fairness-norm, increasing the equity offer
to the E much more rapidly as the fairness norm increases.
Reading the table vertically, we note that for a given level of fairness, the VCs offer to
the E falls as the VCs ability increases.

3. EQUILIBRIUM VENTURE PERFORMANCE

In this section, we consider the combined effects of fairness (in the form of social norms)
and value-adding abilities on the equilibrium equity proposal, effort levels, and expected firm
value for the entire parameter intervals and
We consider the effect of relative ability and fairness on ex ante expected firm value,
from the point of view of an external observer, who knows the probabilities of a fair or self-
interested E matching with a fair or self-interested VC. This provides a measure of expected
venture performance. Hence, expected firm value is given by;

u
] 1 , 0 [ e u ]. 1 , 0 [ e r
)]. , ( [ ) 1 ( ] , ( [ ) 1 ( ) ; ( [ ) (
2
. S S F S i F
E VC V r E VC V r r E VC V r V E + + =

Diagram 2.

Table 2.

VC
ability/
Fairness

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
0 0.500 0.518 0.539 0.561 0.583 0.604 0.624 0.641 0.655 0.664 0.667
0.1 0.503 0.521 0.541 0.563 0.585 0.606 0.626 0.643 0.656 0.665 0.668
0.2 0.510 0.528 0.548 0.570 0.591 0.612 0.632 0.649 0.662 0.671 0.674
0.3 0.524 0.541 0.560 0.581 0.603 0.623 0.642 0.659 0.672 0.680 0.683
0.4 0.543 0.560 0.579 0.599 0.620 0.640 0.658 0.674 0.687 0.695 0.697
0.5 0.571 0.587 0.605 0.624 0.643 0.663 0.680 0.696 0.708 0.716 0.717
0.6 0.610 0.624 0.641 0.658 0.676 0.694 0.711 0.726 0.737 0.745 0.746
0.7 0.662 0.675 0.689 0.704 0.720 0.736 0.752 0.766 0.778 0.784 0.785
0.8 0.735 0.746 0.756 0.767 0.780 0.793 0.807 0.820 0.831 0.838 0.839
0.9 0.840 0.846 0.850 0.854 0.860 0.869 0.879 0.891 0.901 0.908 0.910
1 1.000 0.996 0.986 0.976 0.969 0.969 0.973 0.981 0.990 0.997 1.000

Diagram 2 demonstrates that, as the level of fairness increases, expected firm value
unambiguously increases for nearly all levels of VC ability, except when the VC and the E
have equal ability In this case, we observe that firm value has a slight U-shape as a
function of fairness. The intuition is that increasing fairness drives the self-interested VC to
offer more equity to the E. This reduces VCs effort (which, since her ability is high, has a
Fairness and Expected Firm Value
0.000
0.200
0.400
0.600
0.800
1.000
1.200
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Fairness
E
x
p
e
c
t
e
d

F
i
r
m

V
a
l
u
e
u
. 1 = u
negative impact on firm value). Further, increasing Es fairness reduces Es effort level for
proposals less than the equity norm.
We next present table 2.
From the table, we observe the following. Reading horizontally, expected firm value is
unambiguously increasing in the level of the fairness norm for all levels of VC ability, apart
from the case where the VC and E have equal ability, when the effect of fairness is U-shaped.
Reading vertically, for any given level of fairness norm, the expected value of the firm is
unambiguously increasing in VC ability.

4. SUGGESTED EMPIRICAL TESTS

We have analysed the interaction between VC ability and societal fairness norms on the
VCs equilibrium equity offer to the E, and the expected venture performance (in the form of
expected firm value). In this section, we discuss possible methods of testing our results.
Tests of behavioural models take three major forms; a) Quantitative analysis using large
datasets, b) experiments, and c) surveys. In terms of testing VC/E relationship and
performance, b) and c) are probably the most appropriate.
From our model, we suggest the following hypotheses. Holding VC ability constant:

Hypothesis 1: A positive relationship exists between societal fairness and the VCs equity
offer to the E.
Hypothesis 2: A positive relationship exists between societal fairness and venture
performance.
Hypothesis 3: A positive relationship exists between societal fairness and expected
venture values.
Hypothesis 4: A positive relationship exists between societal fairness and venture-backed
IPO activity.

CONCLUSION

We have developed a game-theoretic model of venture capital that analyses the combined
effects of social-norms of fairness and VC-ability on a) the VCs equilibrium equity offer to
the E, and b) the expected performance of the venture. Our model shows that venture
performance is positively related to social equity-norms. A greater feeling of fairness induces
a higher equity offer from the VC, which in turn induces a higher value-adding effort from
the E.
Our model suggests an interesting future research agenda. It suggests that venture
performance may be affected by a combination of VC-ability and social norms of fairness.
Therefore, international and cross-country comparisons would be useful. For example, it is
claimed that, in some societies, self-interest dominates (for example, US and UK?). Other
societies may be characterised by a culture of fairness (eg China?). How would these societal
characteristics affect venture performance?
Our analysis may explain the vast contractual variations observed by Kaplan and
Stromberg (2000). This may be because of difference in feelings of fairness, VC-ability and
bargaining power. Further empirical analyses of venture capital contracts may prove useful.
We have focused on equity contracts. An interesting analysis of venture capital financial
contracting is provided by Cumming (2005). Motivated by the research that claims that VCs
make great use of convertibles, Cumming compares the financial contracts of US and
Canadian VCs. He demonstrates that US VCs make great use of convertibles while Canadian
VCs make great use of equity, with very little evidence of convertible usage. The author
considers various reasons for these differences, including addressing agency conflicts,
taxation, learning, and institutional factors. However, an interesting factor that he mentions is
the behavioral factor of fairness. He argues that equity contracts may be viewed as a more fair
and equal type contract. Therefore, the evidence might be supportive of the view that
Canadian VCs and entrepreneurs might have a more trusting and fair relationship than US
VCs and entrepreneurs. In our analysis, we do not consider this, since we only consider equity
contracts. However, future research should consider this.
Our model focuses on the cash flow rights associated with the financial contract. We do
not consider the control rights. Some researchers argue that behavioural factors affect both
cash flow and control rights. For example, Lu et al (2006) consider the VC/entrepreneur
relationship as a dynamic pure principal-agent relationship, where the VC is subject to post-
investment agency risk from Es opportunistic behaviour. The authors argue that the VCs
ability to act with ex post reprisal may contain the Es opportunistic behaviour.
Utset (2002) discusses the dynamic relationship between the VC and the E, and argues
that long-term opportunism by the VC can lead to value-damaging reprisal activity by the E,
even if this reduces Es payoff. Hence, Utsets discussion complements Lu et als discussion
of VC reprisal activity.
Lehtonen et al (2004) also consider VCs opportunism towards the entrepreneur, taking
into account two stages; the early phase and the mature phase.
Manigart et al (2002) consider a behavioral factor not considered in our model; that of
trust. They consider the debate regarding whether trust and control are complements or
substitutes. The substitute argument states that increasing trust reduces the need for control.
The complement argument argues that trust and control go hand-in-hand. The authors provide
an experiment that demonstrates that, as trust increases, entrepreneurs provide more pro-
investor controls in the contract. This would be an interesting case to model and test further.
Scholars are just beginning to understand the economic and behavioural factors that
affect venture capital/entrepreneur relationships and performance. Hence, this provides an
exciting future research agenda.

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Chapter 5

ENTREPRENEURIAL CHOICE WITH RESPECT
TO U.S. MICROENTREPRENEURS
AND ACCESS TO MICROLOANS

Caroline E. W. Glackin
Shepherd University, Shepherdstown, West Virginia, USA

ABSTRACT

The U.S. microfinance market developed exponentially during the 1990s and the
early part of the new century with the numbers of providers and borrowers increasing and
the amount of capital expanding even more rapidly. By 2002, the supply of capital was
outpacing the uptake of loans such that there was a surplus of loan pool capital despite
the ever present claims of insufficient funding for small businesses. Prior research
(Glackin 2011) indicated that the full range of costs of borrowing is seriously
underestimated and shortfalls in demand for microdebt are heavily influenced by costs.
By examining the barriers, boosters, costs, and constraints experienced by micro-
entrepreneurs, the disconnect between supply and demand in the microloan marketplace
is elucidated. Program, client and prospective client data is analyzed through a behavioral
economics lenses, costs are estimated, and program and policy implications are explored.

INTRODUCTION

In the United States, microcredit
1
(microdebt) has been ascribed the potential to
accomplish a wide variety of social goals including poverty alleviation, the empowerment of
women, and community economic development. For microentrepreneurs, microloans present
an opportunity to secure business capital and attain their goals. In the approximately 30 years
since the U.S. microcredit movement first emerged, it has evolved into the microfinance
2

1
A microloan is defined as a loan of $35,000 or less for the owners of a business with five employees or fewer.
2
Microfinance is defined as a financial mechanism through which formal and informal financial institutions make
very small loans (microcredit) to the entrepreneurial working poor microentrepreneurs) to start, maintain,
or expand small businesses (microenterprises) (Carr and Tong, 2002, p. 2).
Caroline E. W. Glackin 92
movement and undergone considerable change. Yet, with all of its successes, U.S. micro-
finance has reached neither the significant scale nor financial sustainability anticipated by its
supporters. Recent work in the field reports that, Achieving greater scale has been one of the
primary challenges facing the microenterprise industry for more than a decade. (Edgcomb,
2010) Microentrepreneurs have choices regarding their business risk and reward alternatives
and microloans are one aspect of entrepreneurial choice.
By addressing many of the key aspects of borrowing in terms of financial and opportunity
costs, regulatory and policy barriers, individual and programmatic barriers, and behavioral
factors, the demand-side of the microlending (microdebt) market can be better understood.
Application of an estimation of costs to individual borrower data from two distinctive U.S.
microlenders provides an additional lense into the subject. Policy and program implications
arise from the results.

1. MICROENTERPRISE DEVELOPMENT AND MICROLENDING

Microlending has been adopted as an approach to poverty alleviation and community
development in the United States over the past 30 years. Initially, practitioners and policy
makers presumed that the lack of access to capital was the primary impediment to the
capacity for the self-employed reaching self-sufficiency. Most previous research concentrated
on the delivery system -- program design, program costs, outputs, and impact (Bhatt 1997;
Himes and Servon 1998; Bhatt, Painter et al. 1999; Servon 1999; Else 2001; Robinson 2001;
Edgcomb and Klein 2005). By the advent of the 21
st
century there was a supply of capital
chasing low-income entrepreneurs in many areas of the country.
The field of microfinance has been active in the international context, particularly in
Asia, Africa and Latin America, since the mid-1970s when Muhammad Yunus founded the
Grameen Bank in Bangladesh. Roots of sustainable microfinance in the formal sector began
in Indonesia with Bank Dagang Bali and subsequently Bank Rakjat Indonesia (BRI) as early
as 1970 (Robinson 2001). Through 1,395 international microfinance institutions (MFIs), 86.2
million borrowers have taken up microloans (Gonzalez 2009). These programs have made
financial services much more widely accessible to those at the bottom of the pyramid (BOP).
The microfinance revolution was led by donor-funded nongovernmental organizations
(NGOs) that were often unregulated and limited in capital resources so that they could only
reach a very small portion of microcredit demand (Robinson 2001). This outreach often was
to poor, rural women who had little or no access to other sources of capital. Models often
consisted of solidarity or peer groups that made loan decisions and monitored members. The
model which emerged over time is one in which profitable financial institutions finance the
economically active poor (Robinson 2001; Armendariz de Aghion and Morduch 2010).
With shifting emphasis in microfinance to increasing scale and sustainability has come
the addition of services to meet the needs of targeted populations. In the 1980s and 1990s the
emphasis was on credit, groups, women, microbusinesses, and graduation while more
recently a flexible range of services, convenience, continuity, and reliability rose to the
forefront (Morduch and Rutherford 2003). There are common elements among programs, yet
clients may be understood differently than in the past. Morduch and Rutherford (2003, p. 3)
note, Now, typical microfinance clients might be better understood as men and women from
Entrepreneurial Choice with Respect to U.S. Microentrepreneurs 93
poor households seeking a wide range of savings and loan services to support a diverse set of
consumption needs and investment opportunities.
The microenterprise development (MED)
3
field in the United States emerged
approximately a decade after it did so internationally. The growth and breadth and depth of
international microcredit programs and interest in womens empowerment were two driving
forces. The concept of microenterprise development has bipartisan appeal in the United
States: The ideology of the microfinance movement fits particularly well with American
belief systems in self-reliance, independence, and individual achievementThe notion that
people in the United States could learn from the developing world has added to the appeal of
microfinance programs. (Taub 2002)
Some original U.S. microloan programs, such as ACCION USA, FINCA and Working
Capital were based upon peer group
4
microcredit models in Asia and Latin America. While
early international programs such as Grameen Bank and ACCION International had
emphasized providing credit to rural microentrepreneurs with a focus on poverty alleviation
and had begun to evolve into sustainable commercial financial institutions, U.S. programs in
the 1980s were an assortment of goals, providers and target markets.
The U.S. microenterprise development field has been characterized by diversity and
relatively small scale since its inception. MED is viewed variously as a strategy to assist
in asset accumulation, poverty alleviation, community and economic development,
empowerment of disadvantaged populations, and to improve access to credit. MED programs
operate at the intersection of social welfare and economic development (Servon 1999). The
target populations include low-income populations, women, minorities, welfare recipients,
refugees, residents of targeted geographic areas, specific ethnicities, and those lacking access
to credit. Programs providing MED services include local governments, community action
agencies, womens economic development organizations, traditional business and economic
development organizations, refugee services, community colleges, and stand-alone micro-
enterprise development agencies (Else 2001).
The most recent comprehensive roster, the 2002 Directory of U.S. Microenterprise
Programs, identified 650 U.S. MED programs with 554 practitioner programs that served a
cumulative total of 541,000 clients through FY2000 (Walker and Blair 2002). The 198
microlenders identified had cumulatively issued over $210 million in over 37,000 loans with
an average loan size of approximately $5,700. During FY2000, lenders served a total of 9,800
borrowers with an average of 50 loans per agency.
A FY2008 census of the field identified 696 microenterprise programs including 362
microlenders (FIELD 2010). FIELD identified 359 programs not included in the FY2002
survey and found that 180 prior respondents stopped providing MED services, either through
closure or discontinued services. However, the microloan data for FY2008 suggested a
decline in the number of borrowers (9,191) and increased loan size to an average of $10,979
for a total of $100,912,050 in loans with estimated outstanding loans of $173,637,960 and
$235,282,605 in microloan capital pools (FIELD 2010).

3
Microenterprise development in the U.S. is defined as financing, training, mentoring, counseling and other kinds
of technical assistance provided to individuals starting or operating a business that generally employs less than
five people, or that can use a loan less than $35,000.
4
Peer group models or solidarity groups involve a group of borrowers, often four to ten of them, who are
responsible for loan review and approval and are accountable for repayment. In the U.S., the group also may
serve as the training and technical assistance source. Typically, if one borrower is delinquent or in arrears, no
other group member may borrow.
In the United States, the field evolved differently from its evolution internationally in
terms of scale and sustainability. Early shortages of loan pool capital had been generally
eliminated with deployment at 57 percent in FY2000 (Walker and Blair 2002) and an
estimated 73 percent in FY2008. However, recent reductions in loan pool capital by investors,
reduced earnings from program investments and other economic factors have led to a
reduction in supply due to poor economic conditions with FY2008/2009 reflecting this
reduction.
Importantly, the issue of capital constraints appears to be easing, as noted by the
Opportunity Finance Network, The number of CDFIs
5
reporting that they are capital
constrained fell to 28% after hovering at or near 50% in each of the five previous quarters.
This finding hold true across asset size, primary financing sector, and region. (2010, p. 3)
Some of the most innovative programs, such as ACCION USA (629 loans in FY2009),
ACCION New Mexico-Arizona-Colorado (370) and Justine Peterson (457 loans) are
operating at higher levels of deployment (Edgcomb, Klein et al. 2010). The FIELD program
of the Aspen Institute in cooperation with the Association for Enterprise Opportunity has
established the Scale Academy which is focused on identifying replicable means of attaining
scale and these programs are a part of that effort.

2. RESEARCH ON THE DEMAND-SIDE OF MICRODEBT

Research by Glackin (2011) examines the factors contributing to the mismatch between
microdebt demand and the supply of U.S. microloan capital. The research identifies the
continuing gap between microloan capital availability and loan disbursements, as well the
significant numbers of potential microloan customers remaining undercapitalized and
provides explanatory insights. The level of idle capital among U.S. microenterprise programs
and challenges in reaching scale can be attributed to a number of possible causes.
Undeployed capital, aside from reserve requirements, can be due to factors on the supply
side and the demand side. One supply factor is the rapid increase of funding availability
outpacing the capacity of programs to add microloan customers (Glackin 2011). Many
programs began to receive substantial capital infusions in the late 1990s through the
U.S. Small Business Administrations (SBA) Microloan Program and the Community
Development Financial Institutions (CDFI) Funds Core Program. There has been ample
opportunity for the market to absorb this supply since then. The recent economic downturn
has reduced private sector capital availability for microlenders and investment earnings have
declined. Another possible supply side explanation is incomplete or insufficient information
flows to target populations, so that they are not aware of the funding and do not recognize it
as an option.
Demand-side factors include lack of demand for capital and lack of viable microloan
customers. While there may be a perception that microloans are the only financing option for
microloan customers, there are alternatives such as friends and family, credit cards, home
equity loans, loan sharks, and title lenders. Another factor that may apply is that
microentrepreneurs do not approach microlenders due to an expectation of being declined, as

5
CDFIs are U.S. Treasury Department certified Community Development Financial Institutions and encompass a
wide range of lenders. Microenterprise lenders are a subset of this.
has been found with minority small business owners (Bates 1995; Blanchflower, Levine et al.
1998; Cavalluzzo, Cavalluzzo et al. 1999). Bhatt (1997) asserts that the operational policies of
some microenterprise programs may have driven potential customers to seek other sources of
financing, perhaps increasing economic inequities rather than reducing them. In one study,
over half of the borrowers from a large microloan program used microloans to consolidate
other debt, indicating that they already had access to capital (Himes and Servon 1998). In
addition, another study reports that the bulk of the demand for microloans is probably met via
credit cards (Bates and Servon 1996). Schreiner summarizes the situation; Although credit-
card debt is high priced, it has low transaction costs and very low total costs. Likewise, loans
from the so-called fringe banks pawn shops, check cashing outlets, and rent-to-own stores
have high prices but low total costscompetition has pushed other financial intermediaries
closer to the poor (Schreiner 2001).
Among all of the possible causes for lack of loan capital uptake and relatively small
scale, the one addressed here is the cost of consumption of microloans in the United States,
the barriers to access and the constraints on microentrepreneurs. While these factors underlie
the concerns of information flows, demand, and qualifications, they go well beyond these
simplistic explanations and uncover a complex and diverse set of issues that can and do have
a profound effect on the ability of microloan programs to serve their targeted populations.
In the United States context, scant attention has been given to the question of failure to
take up loan pool capital as an indicator of microentrepreneurs choice and access issues. As
the field has matured, interest in outcomes has prevailed (Anthony 1996; Edgcomb and Klein
2005; Fernando 2006; Cull, Demirg et al. 2009; Drolet 2009; Hulme and Arun 2009;
Armendariz de Aghion and Morduch 2010; Becchetti 2010). When microloan programs were
striving to obtain sufficient loan capital to meet borrower demand, they did not expect to have
substantial idle loan pool capital. They were concerned with demonstrating that the relatively
small amounts of capital could make a substantial difference for the microentrepreneurs, their
families and their communities. The issue of scale and sustainability has received increasing
attention has the field has matured and untapped potential is recognized.
The FIELD program of the Aspen Institute (Edgcomb and Klein 2005) estimated that
there were approximately two million entrepreneurs, later increasing the number to 10 million
(Edgcomb and Klein 2009), who could not access services they might need. As micro-
enterprise programs worked to reach scale and sustainability, they also raised increasing
amounts of loan pool capital. As Taub (2002, p. xi) states, Unfortunately, the hype
surrounding these efforts has often outrun their performance, noting that low volumes and
high default rates are problematic in the United States. The field has taken the approach of
working on innovations to attain scale, which is essentially building loan demand (Edgcomb
and Klein 2009).
The consumption costs
6
of services for social welfare are at the core of the analysis.
Microloan customers in the United States are individual consumers of microfinance products.
While microloans are not public goods and are generally not offered by government entities,
they act like government provided goods and services in many ways and carry their
characteristics. Microloans can support social welfare objectives. Microloans are available to
the disadvantaged entrepreneurs who are either on the margins or disconnected from the

6
In the context of this paper, consumption costs are the costs of the consumer to acquire and usefully utilize a
microloan. Some of these costs are readily quantifiable while others are not. If consumption costs are too high,
potential and entitled consumers may be priced out of the market for microloans.
mainstream. They are available through third sector and public sector organizations, albeit
often with private sector support. They are priced at an interest rate well below cost and are
offered for unbankable customers. The consumption costs of such social welfare goods are
not particularly well understood, but are typically regressive, with the highest costs associated
with the smallest loans, and include participation costs (Warren and Weschler 1986). Services
may not be consumable as available or may be too costly, thereby pricing people out of
consumption of products and services designed for them. These costs include such factors as
time, effort, money, and psychological and physical burdens. In essence, goods may be
effectively rationed via these consumption costs.
The above description of social welfare services costs applies directly to microlenders
and entrepreneurs. Microentrepreneurs have a choice, although constrained, as to whether
they elect to take on microdebt in the form of a microloan. The assumption for this
discussion, based upon industry history, is that the supply of microloan capital is adequate to
meet the consumers needs. Quite simply, the U.S. microentrepreneur has a decision to make
regarding whether the loan is worth it and to pursue a microloan or not.
The determination of the worth of a microloan includes not only the assessment of the
interest costs, but also the effort, suitability, and other opportunity costs. While the totality of
understanding the decision process is complex, theories of consumption reduce it to a
decision based upon either maximizing or satisficing utility. Because entrepreneurship can
easily be understood as the customers best available option (Servon 1999), this study
assumes satisficing behavior. Therefore, the microloan customer is expected to borrow at the
level that satisfies their needs to the best of their ability.
The totality of costs of a microloan is not entirely transparent or completely opaque at the
inception of the borrowing process. In the case of a microloan, the interest rate is typically
clearly revealed as well as any up front training fees. Other up front financial costs and
opportunity costs are frequently hidden, whether intentionally through program design or
program staff or because they vary so substantially from customer to customer. In any case,
the prospective microloan borrower makes the initial decision to pursue microdebt with
partial information rather than full information. This leads to an under pricing of the loan,
making it more desirable. However, during the application and loan closing process, potential
borrowers may renege and withdraw as the additional costs are revealed. For those who
borrow and then encounter unanticipated costs, the value of the microdebt, perhaps in terms
of profits or other values, is reduced so that the loan does not have the full anticipated value.
When microentrepreneurs borrow from microlenders they are receiving a bundled good
much as homeowners buy not only a home (shelter) but the features, benefits and amenities
associated with that home. In the case of microdebt, the bundle may consist of the products or
services acquired with the proceeds, the value of training and technical assistance, pride of
ownership, the power of self-determination, and anticipated earnings and wealth creation.
Hedonic price indices model this bundle of value and permit the estimation of values of
bundles for other consumers (Malpezzi, Ozanne et al. 1980; Deaton 1992). The challenge
inherent in using hedonic price indices with microloans is that, unlike a house, there is not a
clear and specific selling price, but there are explicit and implicit costs. This warrants further
investigation, although it is beyond the scope of this work.
Economists have debated the existence, nature and importance of liquidity constraints for
entrepreneurs (Evans and Jovanovic 1989; Holtz-Eakin, Joulfaian et al. 1994; Xu 1998;
Cressy 2000). Liquidity constraints matter because they serve as barriers between potential
customers and the loan capital that they need. While liquidity constraints are the basis of the
microenterprise field, the potential impact on microentrepreneurs has not been fully explored.

3. TAXONOMY OF MICRODEBT

Recent research includes the development of an analytical framework for the
consumption costs and factors for U.S. microloan customers and the development of a
taxonomy (Glackin 2011). The case study research consists of six parts to estimate microloan
customer costs, barriers and constraints: written questionnaires (managers and customers);
information session observation, interviews with staff and key informants; customer and
leaver interviews, and a document review.
According to the 2002 Directory of U.S. Microenterprise Programs (Walker and Blair
2002), there were 198 agencies that reported microlending activity and in 2010 The FIELD
Program identified 362 microlenders (FIELD 2010). For this research, Glackin selected a two
microlenders to operationalize the applied research question. The choice of two case studies
for this exploratory analysis is based upon a desire to complete in-depth analysis of multiple
aspects of the research question. Certainly, the study of two programs is not sufficient to
support broad generalizations and additional research could include a range of U.S. microloan
programs. However, for this analysis to identify the barriers, costs and constraints, a study of
two programs with differences along key variables is appropriate. Table I profiles the
programs. Both had been in existence for over 10 years when they were studied in 2002 and
have not only historical performance, but also quality individual and program data.
One program included in the study is an urban program (Program A), based in a large
northeastern city, which emphasizes individual loans. Program A began lending in 1992 as a
peer group lender and had made 516 loans through the end of 2001 totaling $1.3 million. As
of March 2002, Program A had 76 active microloan clients (excluding those who were
significantly delinquent). It is part of one of the oldest and largest microloan programs in the
United States. Loans range from $1,500 to $25,000. The program does not generally provide
start-up financing and offers stepped loans. It is credit-driven rather than training-led and is
part of a network of microlenders.
The other program included in the study is a rural program (Program B), covering 11
counties in the Midwest with an over 20,000 square mile coverage area that has a total
population of approximately 310,000 and emphasizes training and consulting. Program B
begin lending in 1990 and had made 253 loans through the end of 2001 totaling over $2.8
million. As of July 2002, Program B had 41 active microloan clients. Loans range from $500
to $100,000 with $35,000 used as the limit for microloans. The region has traditionally
depended upon natural resources and tourism. The program often provides start-up financing
and has a standardized business plan curriculum that it uses and licenses. It is a training-led
lender rather than a credit-led one.
Neither of these programs is considered to be typical of microlending programs across
the United States in scale, amount of training and technical assistance offered/required, or
underwriting. They are, however, two of the most respected and studied programs in the
United States. The management of Program A has placed considerable emphasis on
streamlining the microlending process to reduce the costs of program operations for scale and
sustainability purposes and to increase access. Program A can be viewed as a critical case
for analysis, in that the program has utilized both peer and individual loans, has survived a
critical juncture when portfolio performance was abysmal, and has made numerous
programmatic changes to support financial viability. The barriers, costs and constraints facing
Program As customers should be among the lowest in the United States. The management of
Program B has placed considerable emphasis on developing the appropriate training and
technical assistance for microentrepreneurs in this rural area and on making access to services
a priority. Program B can be viewed as a critical case for analysis of rural, training led
microlenders.

Table I. Characteristics of Programs Studied

Program A Program B
Location Northeast Midwest
Setting Urban Rural
Year Program Started 1992 1989
Type of Lending Individual, formerly group Individual
Type of Technical
Assistance
Individual consulting Classes and individual
consulting
Average Loan Size $2,519 $11,607
Loan Size Range $1,500 - $25,000 $300 - $100,000
Average Loans per Year 52 21
Source: 2002 Directory of U.S. Microenterprise Programs and program data.

In the cases studied through multiple methods, it is apparent that much more than out-of-
pocket costs matter to microentrepreneurs. Other factors are more important to customers,
leavers, and key informants. Such factors may include: psychosocial factors; discrimination;
regulatory and legal; economic factors; lack of information; trust; social capital; religious
practices, and language and culture. There are costs and experiences that are common across
programs and individuals, while others are unique to individual microentrepreneurs. The
common factors tend to be program-driven. However, within any program, individual
experiences depend upon the microentrepreneurs individual life circumstances, as well as
interactions with individual program staff. In other words, program policies, rules, standards
and services can be largely controlled by the field staff in terms of their effects upon customer
costs.
The results of the study suggest that (a) at least some microentrepreneurs perceive the
benefits of taking a microloan as greater than the costs, and (b) some microentrepreneurs find
that doing so is worthwhile more than others. Throughout the process, prospective borrowers
must complete small and large tasks to the satisfaction of program staff and other decision-
makers. These hoops and hurdles create a filtering process that may price certain
prospective borrowers out of the market. The decision with respect to is it worth it? is
unique to each microentrepreneur. Microentrepreneur self-confidence and staff responsive-
ness are critical components of retention and completion. The taxonomy summarizing factors
applicable to U.S. microloan customers in the sample programs is in Table II.

Table II. Taxonomy of U.S. Microloan Borrowing

Cash Costs Non-Cash Costs Regulatory and
Policy Barriers
Behavioral Factors
Sunk Costs
Invested Prior
to Loan
Approval
Training and
Registration Fees
Training Time Licenses Framing Effects
Technical
Assistance Fees
Technical
Assistance Time
Business
Regulations
Loss Aversion
Transportation Travel Time Documented U.S.
Citizenship
Endowment
Effects
Application Fees Application
Preparation Time
Credit History Mental
Accounting
Documents and
Copying
Preparation Time Religious Laws and
Practices
Time Discounting
Compliance Additional Effort Lending Limits Time Inconsistent
Preferences
Peer Group Dues
or Fees
Group
Participation
Time
Business Type
Limits by Law or
Lender Policy
Trust
Child Care Representativeness
Lump Sum
Costs
Expended
upon
Acceptance
Closing Fees Equity
Commitment
Individual Barriers Sequential
Decision Making
Transportation Travel Time Business or
Resource
Knowledge
Availability
Heuristic
Documents and
Copying
Preparation Time Language and
Culture
Confirmation
Biases
Peer Group Fees Group
Participation
Learning Factors Context Effects
Compliance Additional Effort Social Capital Choice Bracketing
Time
Distributed
Costs or
Incremental
Costs
Interest Payments Collateral
Pledged
Emotions
Loan Service
Charges
Programmatic
Barriers

Late Fees and
Penalties
Geography
Compliance Costs Time Program Resources
Transportation Travel Time Staff Skills
Bank Fees and
Charges
Cost Shifting
Group Loan
Payments
Group
Participation

Membership Dues
Source: Glackin, C. (2011), Microfinance Malaise.

Beyond the factors involved in microdebt found above, the research lends itself to
creating a rudimentary estimate of microentrepreneurs financial and transaction costs
7
of
borrowing under alternative financial assumptions using data on training, technical assistance

7
Transaction costs are the implicit and explicit expenses incurred by participants in financial markets to effect
financial transactions excluding interest payments, the cost of funds and loan losses. These costs fall into two
broad categories: the opportunity cost of time spent by borrowersas they negotiate financial contracts, and
explicit expenses incurred by all participants to form, to fulfill, and to enforce those obligations Adams, D. W.
(1995). Transaction costs in decentralized rural financial markets. Agriculture in liberalizing economies:
Changing roles for governments. D. Umali-Deininger and C. Maguire. Washington, DC, The Work Bank:
249-265.
and loans from diverse U.S. microloan programs. From the aggregate information, several
techniques are used to obtain estimates of borrower costs. These include: a review of the
pertinent literature on costs and microenterprise, an identification of costs, the calculation of
the specific costs associated with programs analyzed by the Aspen Institute in the Self-
Employment Learning Project and included in the 1999 Directory of U. S. Microenterprise
Programs (Langer, Orwick et al. 1999); and an estimation of total costs.
The estimate of the costs of borrowing for customers in each of the programs is based
upon self-reported and program data. With values assigned for borrower time and the added
financial costs, an average loan of $8,911 from Program A cost approximately $3,624
(40.7%) and an average loan of $14,007 from Program B cost approximately $9,746 (69.6%).
The training and registration, technical assistance, application, and interest costs for Program
A were $1,311 (14.7%) and for Program B were $4,367 (44.8%). The study did not ask
borrowers which of the costs were transparent or which they had calculated, so that it is not
know what costs were apparent and meaningful to them. Clearly, the perceived benefits
(rewards) outweighed the costs for those securing microdebt.
Without incorporating the full range of consumption costs as well as the required skills,
sophistication, and knowledge, the customer costs of borrowing are seriously underestimated.
Assuming that prospective borrowers at least require that the costs of borrowing or the
perceived value or worth of the loan equals or exceeds the benefits of borrowing, rational
microentrepreneurs may determine that taking a microloan is not worthwhile when they are
effectively priced out of the market.
In addition to identifying the taxonomy and estimating costs of borrowing, it is apparent
that customer and staff ratings of the importance of borrowing challenges to customers are not
aligned with one another. Table III includes the rankings by party. Customer ratings include
the top factors as: capital availability, lack of cash flow, lack of equity, poor credit history,
and no collateral. Staff ratings are: poor credit history, capital availability, time for training,
lack of cash flow, and lack of equity. Interestingly, staff rates time constraints for training and
technical assistance and the lack of experience and business training among the top 10 factors
and customers do not include them, opting to emphasize financial factors, lending limits and
discomfort with banks. Further, those potential customers that did not borrow cited program
requirements and customer service as the most common reasons for not borrowing, and both
factors are controlled by programs. Pricing and personal/family issues are also prevalent.
Fully 80 percent of those leavers interviewed did not borrow elsewhere although only 51.7
percent had not started a business. A substantial number of microentrepreneurs started their
businesses without the debt capital they thought necessary. This suggests that there is a
disconnect between programs and their customers, offering additional explanatory value for
the lack of demand.

4. HOW BEHAVIORAL FINANCE AND ECONOMICS
ENHANCE UNDERSTANDING

Even as microcredit has evolved into microfinance, the field continues to strive for
improvements in efficiency and increases in demand. The previously described research
explored the demand side of the microfinance market equity by examining the barriers,
boosters, costs, and constraints facing microenterpreneurs in accessing microdebt. The results
identified a method from program to estimate explicit and implicit borrower costs, adapt
requirement and other programmatic aspects to improve accessibility without impairing credit
quality. This research can be informed by the work in behavioral economics and opportunities
for increasing scale and sustainability are enhanced by this perspective.

Table III. Comparison of Scoring Rank of Top 10 Challenges
by Source Microloan Barriers, Costs and Constraints

Customers Staff Type of Factor
Capital Availability 1 2 Social
Lack of Cash Flow 2 4 Financial Constraint
Lack of Equity 3 5 Financial Constraint
No Collateral 4 7 Financial Constraint
Weak Collateral 5 10 Financial Constraint
Discomfort with banks 6 8 Psychosocial
No Credit History 7 Financial Constraint
No Co-Signer 8 Social Capital
Poor Credit History 9 1 Financial Constraint
Too Few Dollars 10 Programmatic
Time for Training 3 Transaction Cost
Lack of Experience 6 Human Capital
Lack of Business Training 9 Human Capital

Testing behavioral aspects such as mental accounting, loss aversion, hyperbolic
discounting, availability heuristics, and framing more explicitly could yield substantial
understanding of how prospective borrowers decide whether to apply for microloans and to
accept or decline the financing that is offered by microfinance institutions. Improved
understanding, if adapted into product design, service delivery and marketing could generate
an exponential increase in demand. One area that appears to have abundant opportunities for
U.S. microfinance is libertarian paternalism (Thaler and Sunstein 2003). By designing in
choice that are best for borrowers as default selections where choice points arise, more
borrowers might secure loans that are well-suited to them.
The previously included taxonomy is cast in light of behavioral finance and economics
with categories of cash and non-cash costs, regulatory/policy barriers, and behavioral aspects
of decisions and viewed as sunk costs, lump sum costs, and intertemporal costs. Beginning
with prospect theory (Kahneman and Tversky 1979), behavioral economics has addressed
gaps between neo-classical economic theory and observed behavior. It focuses on market
failures and offers up explanations for what amount to patterns of anomalies. Building upon
the concept of bounded rationality (Simon 1957), behavioral economics recognizes the use of
heuristics rather than strictly relying upon optimization because the complexity of choices and
the inability of individuals to accurately assess expected utility, and identifies patterns in the
anomalies. As shown in the taxonomy, a number of aspects of behavioral economics appear
to fit the prior research findings (Glackin 2002; Glackin 2003) with respect to the demand
side factors of the U.S. microfinance movement.
The key points of prospect theory, which created a reference dependent model of
consumer choice, may well fit prospective microloan customers as they decide whether or not
to take up a microloan. Assuming that the individuals reference level is his or her status quo,
monetary consequences of acquiring current debt in the form of a microloan, often partially
repaid prior to experiencing risky future benefits, may lead to both positive and negative
returns having diminishing returns characteristics. If in fact losses are weighted more heavily
than gains
and the probability of loss is greater than that of a gain; loss-aversion may lead to lower
demand. It is unclear whether decision makers will be risk averse, although they may well be.
One could argue that by virtue of being entrepreneurs they are risk seeking. Research on how
decision makers view the final results of their choices would be valuable to programs.
Loss aversion, as commonly demonstrated through endowment effects experiments
appears to be a factor for at least some U.S. microloan customers. Economists research on
loss aversion (Kahneman, Knetsch et al. 1991; Tversky and Kahneman 1991; Bernartzi and
Thaler 1995; Thaler, Tversky et al. 1997; Genesove and Mayer 2001) has empirically
demonstrated that buyers routinely value a commodity less than do sellers. One way to apply
this is to consider that lenders value their funds more highly than do borrowers. They may
misunderstand the full cost of loans, thereby literally assigning a different value and not
perceiving the gap. Or, the lenders may view the value of their loans as the anticipated
percentage gains in sales or profits for borrowers with allowing for the prospect of losses.
Another case of endowment affects may arise in the U.S. context when borrowers must
pledge collateral they value at a higher level than the lender values it. In addition, any loss of
assets for the poor is more substantial and meaningful than a loss of equal monetary value to a
more affluent individual ($10,000 is a greater portion of wealth to someone with a net worth
of $12,000 than of $100,000.).
Mental accounting (Arkes and Blumer 1985; Heath 1995; Heath and Soll 1996; Prelec
and Loewenstein 1998; Gaerling, Karlsson et al. 1999; Thaler 1999; Ranyard, Hinkley et al.
2006) is likely a factor in the microloan process as well. In fact, interviews reflected the
inclusion of sunk costs in borrower assessment of value even though sunk costs are already
paid and should not influence rational behavior. Honoring this sunk cost occurs when these
nonrefundable expenses are treated as being equal to current investments (Hastie and Dawes
2001). As prospective borrowers move through the lending process, it seems likely that they
hold perceptions about the outcomes they expect and that they compare actual performance to
those perceptions. It is reasonable to expect that microloan consumers sort sources and uses
of funds into mental accounts. Finally, borrowers may practice choice bracketing by the
ways they view their accounts (Read, Loewenstein et al. 1999). More research is needed to
determine the prevalence of using mental accounting among microloan customers.
As alluded to earlier, borrowers may experience time discounting. It is not clear how they
perceive the value of their microloans immediate as a lump sum, as gains distributed over
time, or as a lump sum gain in the future or how they value it as an intertemporal
transaction. Work of behavioral economists (Frederick, Loewenstein et al. 2002; Loewenstein
and O'Donoghue 2002; Loewenstein, Read et al. 2003; Diamond and Vartianinen 2007;
Mullainathan 2007) would suggest that a consistent discount rate does not apply across the
decision horizon. Microloan customers may value their choices differently across time,
perhaps in a manner consistent with hyperbolic discounting theory, such that they are
impatient in the short-run and patient in the long-run. Mullainathan (2007) suggests that with
time inconsistency, The relationship between the profitability and social efficiency of
microcredit potentially is weak. The question is the extent to which the loans exaggerate
short-run impatience and to which they solve long-run liquidity constraints. Understanding
how borrowers (and prospective borrowers) value their choices over time could assist in
developing products and services that are better suited to the targeted individuals and result in
greater scale and sustainability.
The importance of trust in financial relationship for the poor and for microloan customers
has been widely reported. Some researchers (Carr and Schutz 2001; Rhyne 2009) suggest that
lower-income families choose not to use mainstream financial services partially because they
distrust the service providers. Where microloans are granted through a peer lending model
with joint liability, trust of other group members is essential (Smets and Baehre 2004) and
strategies to reduce the importance of trustworthiness or to increase knowledge of other
members becomes critical (Guinnane 2001). Of particular interest is the suggestion that,
Group liability is often more a threat than a reality, but it can be a very powerful threat.
(Harper 2007) Borrowers and those who chose to exit from programs without borrowing
express distrust of MFI program staff as concerns as well as belief in the trustworthiness of
staff as motivating factors (Glackin 2003). Other research (Hall 2008) demonstrates evidence
that low-income individuals place a greater significance on trust in their financial choices
than those who are wealthier. If trust involves the features of vulnerability and uncertainty
(Heimer 2001), then it is particularly utilitarian to understand it with respect to microfinance
clients, who are among the most vulnerable populations. The literature on trust is extensive
and may be particularly relevant to the discussion of the failure of the U.S. microfinance
market.
Representativeness as described by behavioral economics may also be a factor for
microloan borrowers. To the extent that they establish probabilities of outcomes based upon
how well the example represents the class (Camerer and Loewenstein 2003), they may
misjudge probabilities based upon their knowledge of a class of information. In the case of
microentrepreneurs, the classes could include lenders, lawyers and the like.
Because the process of securing a microloan in the United States is multi-step and
extends over a multi-day to several month period, shortened by certain online products,
borrower typically experience sequential decision making. Sequential decision making occurs
when decisions or outcomes are interrelated because they depend upon each other (Gaerling,
Karlsson et al. 1999). The order of decisions and/or outcomes may matter to microloan
customers.
The data in the prior primary research demonstrate that emotional upheaval and a range
of emotions are involved in the microlending process in the United States. While traditional
economics might rely upon decisions being made based upon the probability and desirability
of the consequences of the choices, expected emotions (to occur when the outcomes occur)
and immediate emotions at the time of choice, may explain a significant number of decisions
(Rick and Loewenstein 2008). Rick and Loewenstein suggest that, And much of the thrust of
behavioral economics has involved, or at least could be construed as involving an enhanced
understanding of emotions. The role of emotions in microfinance decision-making could be
evaluated to better understand it and to improve the experience.

5. IMPLICATIONS

The implications of this research range from programmatic opportunities to policy
options to revisiting target markets and customers. If microenterprise development is to fulfill
its mission as part of the U.S. poverty alleviation tool kit, microloans must be genuinely
accessible to those who can and will best use them. It is insufficient to build it and they will
come in the field of microenterprise. Microfinance programs should reach their target
customers and serve them efficiently and effectively without pricing borrowers out of the
market due to high costs and barriers yielding insufficient worth. The value of the microdebt
to the customer is determined not only through its price and terms, but also by the interests,
preferences, constraints, and opportunities for customers. In order to take up microloans,
microentrepreneurs must be able to identify funding resources, believe that they can access
the resources, and perceive the value of them.
The research suggests that there is a range of potential programmatic approaches to
reduce barriers, costs and constraints for U.S. microfinance customers and to strengthen the
positive factors. The microlending process can be streamlined without significantly reducing
loan quality through such options as: elimination of duplication, minimizing time spent and
maximizing the value of that time, and requiring applicants to provide only information that is
used by the programs to analyze risk. Financial costs can be reduced through careful attention
to minimizing such costs as: training and technical assistance, transportation, child care,
documents and copying, interest, service charges and fees, bank fees, and compliance.
Program partners can improve communications and collaboration. Expectations can be made
explicit for all parties; so that costs are transparent and anticipated outcomes are clear. Table
IV provides a rudimentary method for estimating the cost of a microloan to a specific
microentrepreneur or for a set of program participants. It can serve as a launching point for
better understanding the more comprehensive cost picture and can be used to assist in
reducing those costs while exercising prudent financial management.
New methods to increase applicant creditworthiness can be implemented. One of the
most promising new models in the United States is a proven business model both in the
United States and throughout the world. It is a savings led credit model that is being
implemented. Key to many of most highly regarded development finance programs in the
world and vital to addressing the issues of equity and collateral in the United States, is the
role of savings in microenterprise development. Individual Development Accounts (IDAs) are
a policy solution that may open many doors for microentrepreneurs and microloan programs.
IDAs can be treated as credit enhancements for microloan applicants (Glackin and Mahoney
2002; Ssewamala and Sherraden 2004). In addition, programs may investigate the financial
needs of target markets and identify other unmet or unsatisfied needs. Internationally,
microfinance institutions have tested a number of different approaches to this concern
including adding educational and health services to their mix, but have discontinued the
majority of the non-financial services when others have taken them up and eliminated the
need for microfinance institutions to bridge the gap (Morduch and Rutherford 2003).
Programs can take proactive measures to mitigate the negative effects of certain factors
affecting microloan customers and build a positive environment for microlending. Programs
can be designed and implemented to have positive contributions to success factors. They also
can partner with other organizations to provide support. For example, the emotional factors
can be constructively directed via clarifying expectations regarding personal data and
minimizing intrusive data requests, and by consciously creating a welcoming, caring
environment, and building trust. Programs can work deliberately to avoid discrimination. In
addition, with respect to regulatory and legal factors, programs can facilitate access to
services and information. Target markets for microloans can be reconsidered to maximize
potential gains.
A number of public policy implications also arise out of this analysis of microloan
customer costs and factors. There are broad policy implications, issues concerning laws and
regulations, and administrative and funding considerations. From a policy perspective, given
the limited and declining amount of financial support offered to the microenterprise field by
federal, state and local governments, policies that are more supportive of microentrepreneurs
could be implemented. These policy options range from the retention of means-tested benefits
until self-employment becomes sustainable and sufficient assets are accumulated to prevent
the rapid return to poverty through reduced or progressive regulations on business enterprise.
Incremental public policy changes may occur with respect to microenterprise development,
some of which could reduce barriers, costs and constraints for potential microloan customers.
Further, need and demand can be explored from a marketing perspective to identify policy
factors and polices can address the market failure of commercial financial institutions in
serving disadvantaged U.S. microentrepreneurs.
Specifically, behavioral economics presents the opportunity to apply the tenants of
libertarian paternalism to U.S. microfinance markets. Libertarian paternalism (Thaler and
Sunstein 2003; Thaler and Bernartzi 2004) suggests that the framing of choices to put forward
the best choice for the individuals well-being without taking away choice has the potential to
lead to better decisions. By designing in choices that are best for borrowers as default
selections where choice points arise, more borrowers might secure loans that are well-suited
to them. This does not mean increasing rigidity in product and service design, but it
potentially means simplifying the loan processing to reduce barriers, costs and constraints. A
careful analysis of individual program and aggregate industry materials and processes could
yield a reformulation of decision points and defaults to improve borrower experiences and to
increase product uptake. This could also lead to greater costs efficiencies and sustainability in
addition to enhanced scale.
When the analytical framework, research results and implications are considered
together, a clear picture of the barriers, costs and constraints facing U.S. microloan customers
appears.

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Economics Letters 58(1): 91-95.


Chapter 6

FAMILY ENTREPRENEURSHIP: OPPORTUNITY
OR THREAT TO NETWORK FORMATION?
LESSONS LEARNT FROM AGRI-TOURISM

Antonia Rosa Gurrieri
-
1
and Luca Petruzzellis
2

1
University of Foggia, Corresponding Author
DSGP, Largo Papa Giovanni Paolo II, 1, 71100 Foggia, Italy,
2
University of Bari, DISAG,
Via Camillo Rosalba, 70124, Bari, Italy

ABSTRACT

Literature on entrepreneurship has recently stressed on the strategic entrepreneurial
network in relation with growth theory, underlining the role of technological change,
consumer preferences or markets changes, originated by the different crisis shocks, and
which permit to discovery opportunities.
In such a scenario a wide group of entrepreneurs strongly react through their
territorial connotations; namely the family firms co-localized and well organized in social
networks.
The aim of this paper is to empirically verify the existence of this strong link
between entrepreneurship and territory and to put in evidence the existence of internal
barrier.

Keywords: Entrepreneurship; Social Network; Tourism; Family Firm strategy.

1. INTRODUCTION

As relations among firms increase and strengthen, networks become one of the main
forms to go global. Networks are therefore composed of firms with asymmetric

-
Email: a.gurrieri@unifg.it, Tel.: +39 0881 58 22 46
Antonia Rosa Gurrieri and Luca Petruzzellis 112
characteristics connected to their specific abilities, links between firms, activities (production,
R and D, marketing, etc.) and resources. Generally speaking, such a distance could imply the
failure of firms collaboration.
Research on networks has mainly focused on unstructured networks and cooperation,
even though in recent years the amount of structured networks created for specific purposes
increased. However, such a view does not explain the relations among small firms; in the
social network analysis cultural components emerge.
The social and relational elements are based on the logic of belonging to a group which
facilitates relations and exchanges between the members and on a similarity that presupposes
a tacit exchange of competence and behaviour (Torre and Gilly, 1999; Rallet, 2002). The
basic requirement is represented, on the one hand by the basic knowledge to interact among
the firms of the group (inter-organizational relation) and, on the other, by business acumen in
coordinating the different forms and levels of knowledge of the various components (intra-
organizational relation).
In addition, some characteristics of the territory in which the firms are co-located, such as
the role of family links (Gurrieri, 2008; Gurrieri and Petruzzellis, 2008) and the strategic role
of entrepreneurs/managers of family business (Carella et al, 2008), strongly influence the
game.
In particular, family firms may have a higher potential in terms of both price and quality
and they are often able to operate with limited investment.
This paper tries to understand the influence of family links role in determining barriers to
protect family traditions. The assumption is based on the extent to which each family
entrepreneurial network is unique due to its intrinsic characteristics and connotations (family
links). The expected results should fill the gap of the existing literature on the link between
networks and entrepreneurship, which indeed would be in contrast with the general tendency
on the globalization process.

2. LITERATURE

The knowledge flow within an agglomeration helps to minimize the distance between
learning and innovation, thus constituting an externality for the firms that belong to the group.
Since agglomeration is usually driven by an external stimulus based on spillovers, both the
conditions of uncertainty and information asymmetry are obvious for potential entrants in the
specific area.
The growth of small and medium enterprises, in terms of single units and group, has to be
reconsidered with respect to resource reallocation and ownership. This would allow the
advantages of a larger size in order to compete at various levels. Firms are connected by their
geographical and organizational-professional cohesion, as well as the entrepreneur reputation
(Harhoff et al., 2003). Therefore, reciprocity, trust and mutual recognition constitute the
main informal ties. The role of the entrepreneur is strategic in knowledge production and
transmission given by absorptive capacity and social capital. The former is the ability to use
and implement external information and knowledge. The information gained from being part
of a network also contributes to form absorptive capacity. The mechanisms of knowledge
Family Entrepreneurship 113
creation and learning a process of reciprocal interaction between the entrepreneurs of the
network are evident (Maskell, 2001).
However, the limitations of absorptive capacity derive mainly from the cognitive distance
between those who spread knowledge and those who perceive it. The cognitive elements of
absorptive capacity based on the processes of knowledge and learning must be formed
between the entrepreneur and the context in which he/she operates. The greater the stock
of knowledge of each single entrepreneur, the more obvious the transfer of new knowledge
between and within the units of the group. The link between absorptive capacity and
knowledge is given by the people within the firm and the institutions.
Trust based relations have a multidimensional structure in which culture, institutions,
people, networks and social norms are concentrated in relational goods. In literature the role
of social capital has been deeply investigated. Therefore, while absorptive capacity
establishes the centrality of the entrepreneurs network, the network form is the condition to
share know-how.
Through the social substrate the entrepreneurial network becomes the way to spread
competencies and knowledge. Both trust and legitimacy minimize the risks related to the
network entrepreneurial relationships (Grabher and Ibert, 2006). In particular, legitimacy
helps in filtering information since it is strictly embedded in cultural norms and individual
perception. On the contrary, trust, which is relational by nature, relies upon repeated
interaction and it has a social character and organizations membership. Moreover, reputation,
relations and reciprocity of a specific territory are the social features on which ties among
entrepreneurs in the network are founded. The entrepreneurial figure is than considered a tool
of social relations in the network.
In addition, each entrepreneur in the network could benefit from resources such as
knowledge, social capital and other types of resources. Nejkamp (2003) and Hanson and
Blake (2009) sustain the importance of networks for successful entrepreneurs. Both the
entrepreneurs ability to innovate and the location advantages in supporting network
necessities, determine the networks identity. The process of social interaction is stressed on
gender, cultural and social links and network structure (Ridgeway and Smith-Lovin, 1999).
Thus it is possible to believe that social identity influences peoples access to entrepreneurial
networks.

3. ENTREPRENEURIAL NETWORKS

Entrepreneurial networks, especially in the case of SMEs, facilitate the share of
resources, supporting information and competitive advantages (Capo-Vicedo et al., 2008). In
such a model culture and cognitive features are crucial. Supporting culture is the basic
structure of cultural networks, in which the uncertainty of quality and self reinforcing
feedback loop are informal components.
Cultural roots reflect some social characteristics of each entrepreneur. In particular, ethic
and genetic similarities between the agents (both managers and owners) are qualitative
indicators of the networks (Gurrieri, 2008; Gurrieri and Petruzzellis, 2006). However, the
strength of the group, that is the cycle of discovery and creation of new opportunities, is really
important in an entrepreneurial network. Previous research (Alvarez and Barney, 2007;
Sorenson and Fleming, 2004) has highlighted discovery and creation as steps to survive and
win in a global competitive market.
The role of team network are crucial aspects, even if Zahra (2008) maintains that a single
entrepreneur and the social context equally play a crucial role.
Instead, the cognitive process is full of sensitive activities, such as imagination, flexibility
and emotions. Knowledge is at the basis of all these aspects, and in particular know how
results to be stronger considering the sociological ties of the entrepreneurs.
Among the socio-institutional typological links, long lasting relations, reciprocity
and trust, and co-operation are to be found in an entrepreneurial network. The willingness and
intentions of the agents emerge again. As a consequence, entrepreneurs with similar
characteristics automatically will be attracted and establish social links, due to trust,
reputation and mutual recognition and all the social ties among the entrepreneurial networks.
However, sharing the same social substratum does not imply entrepreneurs homogeneity.
Moreover, common historical heritage (which could be an indicator of tradition and memory
of the place) and trust among entrepreneurs (indicator of family tradition) could capture
all the similarities and differences within the co-agglomerated firms in a network. Indeed, a
distinctive element is the different level of social capital in determining the level of strategy
in a network and a factor to produce new ideas and know how. Both the role of network
entrepreneurship and the presence of social and emotional elements (e.g. family) are
fundamental in underpinning new opportunities.

3.1. Family Networks of Entrepreneurs

Family networks and the process of creation of new family firms, which derives from a
family entrepreneurial unit, have been deeply analysed in (entrepreneurial) literature.
However, the push-elements of the entry mode (Parker and Van Praag, 2010) have been under
researched, especially in term of people (human capital). In fact, Parker and Van Praag (2010)
suggest that new entrepreneurs with a family matrix invest differently from other typologies
of entrepreneurs.
Generally, the people, whether manager or workers, are represented by the family
members of the family owner. Therefore, the owner of the original (first) family business can
easily trust his/her members-workers, due to informal and precious information.
On the contrary, new entrepreneurs without an original family firm can choose their
workers and managers only through formal information, such as their resumes or level of
education. Previous studies on human capital (Parker and Van Praag, 2006; Van Praag et al.,
2009) demonstrate that formal human capital is much more versatile, since it creates high
returns in entrepreneurship and paid employment.
Experiences in family business also show that new (family) entrepreneurs with a high
level of education prefer to invest in formal human capital. Such a choice is probably due to
the perception of the mechanisms that constitute a high cultural background. This is, may be,
the same reason that actually pushes the owners-managers of the first and second generation
of family entrepreneurs to give a higher level of formal education to their sons.
In the family business that chooses this option human internal (family) capital, either
formal or informal is recognizable.
Consequently, the member of the families (e.g. sons and daughters) are pushed to be
entrepreneurs. They can choose between the original family firm or a new venture. In this
case, the new venture is often strictly connected with the original family business, which is
only a strategic choice that usually derives from a family social network configuration.
The choices of whether or not being an entrepreneur, forming a new firm, working in
network with the original family business and showing informal (i.e. derived from the family
culture and links) and formal abilities (derived from the level/type of education), could help
all new firms, especially the small ones, to survive and win in the national and international
competition.
Such a mechanism is necessary to establish social barriers to protect the family network,
because family entrepreneurs are in-house.
However, this structure is developed if the family specific issues are minimized (e.g.
family rivalries, the coincidence between the level of education with the capacity of acting)
(Handler, 1992; Steier, 1991).
In fact, the level and quality of the relations in the family and among the family
networking units, represent the strength of the family group; but not always all the units build
their links on these features. In this consideration are involved the conflicts among the family
members and the different families determine network performance: Sam Steinberg grew a
small grocery store founded by his mother into a multimillion-dollar supermarket and real
estate empire. However, his dictatorial leadership style led to animosity and resentment
among family members. The conflict among the family members become so great that the
Steinbergs eventually sold their enterprise (Gersick et al., 1997, p.212). A high possibility
of risk of conflicts among family firms exists. They have sentimental nature, are nourished by
negative feelings, such as anger, rivalry and usually produce a low level of performance.
In order to avoid such an issue, the family network should maintain altruistic behavior in
order to foster a stronger cohesion of the network and to achieve better performances. In the
same direction Eddleston and Kellermans (2007) sustain the negative correlation between a
low level of concentration control and positive results in a participative strategy process of the
family. Therefore, the lower the conflicts the better performances and the easier the passage
from a generation to another. In this scenario feelings like trust, altruism and a common sense
of family responsibilities (Zahra, 2003) are strongly evident. Both the single family and the
network are sources of resources and the social ones motivate each member to maximize
family performance and to fulfill business goals.
To better understand the importance of family social (informal) network, only
entrepreneurial networks that rely on people (entrepreneurs) are to be considered, without
introducing other figures. This choice could help the analysis of SMEs in general and family
ones in particular: in fact, even if this is a limit for every kind of study, it permits to estimate
only the entrepreneurs and entrepreneurial team (family) ideas.
Network is a vital condition especially for SMEs. The existing relationships in the
network, the entrepreneurs involved and the governance of networking links, stimulate the
reproduction of other relations. These new links, both inter-organizational and interpersonal,
are new resources for the group and represent the ways to model the network and unravel new
entrepreneurial opportunities.
The proper and rapid use of these resources help the actors (entrepreneurs) to start-up
new firms, by taking advantages by all the information, relations, sharing knowledge, feelings
that flow in the network. In this way the family network has more visibility, increasing its
reputational aspect and signaling content.
In addition, in a scenario characterized by uncertainty and strong dynamism, this
mechanism could increase the reputation of the entire family network, giving positive signals.
Further, the social mechanisms that support the network are at the basis of the governance and
assume more importance than the classic legal enforcement.
Moreover, a study on family - social network could allow foster new and positive
practices and ideas from the sharing of knowledge, both resulting in re-elaborating the
failures derived from previous-bad-practices and (introducing and sharing) new ones. This
system could be another form of protection of the group and thus another barrier for the social
network. Such a consideration, together with the one on the altruistic behavior of the family
network, reinforce the network bonds just promoting a collectivistic culture (in the sense
of culture oriented in an organizational-involvement way), interdependence, loyalty and
dedication.
Furthermore, a study on family network could avoid the exclusion of a monopolistic
power that a single unit (in the network) can exert for the introduction of an innovation or a
new idea, because social-family-links surpass the monopolistic entrepreneurial behavior in
favor of family welfare. In such a scenario social elements such as ethic-culture (sensibility,
imagination, novelty and creativity), trust, honor, legitimacy and the blood-links play a
strategic role being privileged channels of communication among entrepreneurs. Therefore, in
a family network the figure of the social entrepreneur is palpable.
Mair and Marti (2006, p. 39) give a general definition of the social entrepreneur:
encompassing a wide range of activities: enterprising individuals devoted to making a
difference; social purpose business ventures dedicated to adding for-profit motivations to the
nonprofit sector; new types of philanthropists supporting venture capital like investment
portfolios; organizations that are reinventing themselves by drawing on lessons learned
from the business world. In the past decade social entrepreneurship has made a popular name
for itself on the global scene as a new phenomenon that is reshaping the way we think about
social value creation.
Also the ability in driving social problems, constructing social wealth and differentiates
such a figure from other kinds of entrepreneurs. He/she usually suggests creative keys in
order to face family crisis and problems.
In addition, the sharing of ideas and innovation in the family network team favors the
production of spillover effects and minimize the costs of exchanging and sharing ideas since
they are family members and for example they do not need to organize business meetings.
Every single social-family network is unique; thus, the overall amount of knowledge and
ideas (sharing) that it produces is the maximum possible (Poyago-Theotoky, 1995; Parker,
2008), with a presumably quite high level of efficiency. This vision could reshape the general
evaluation and interpretation of family-entrepreneurial networking scenario.
Moreover, the governance of a family network, based on trust reputation-legitimacy and
all the social mechanisms at its basis, have mutual actions to emerge, thus reducing
transaction costs.
Previous research (e.g. Gurrieri, 2008) has widely demonstrated the existence of
networks based on local family firms and their performances.
H1: the family team network is function of the process of social interaction between
family members with ethic and genetic similarities.
Moreover, social networks (Boschma, 2005; Gurrieri and Petruzzellis, 2008) are strongly
characterized by the cultural capital, from which trust and cooperation derive. Therefore,
absorptive capacity and social capital are mechanisms of knowledge transmission.
H 2: Socio-economic features, such as capital, trust (individual perceptions), legitimacy
(cultural norms), absorptive capacity, the protection of family output, constitute a barrier.

Figure 1. A perfect family network.

4. THE SELECTED SECTOR AND THE MODEL

National and international policy makers are pushing the re-valuation of traditional
sectors especially with respect to services; among them tourism represents a green field rich
of opportunities. Consumers need to satisfy their needs toward new business models. New
expectations of the demand are balanced by a new vision of the offer that is a combination of
particular infrastructures, primary resources and high service quality. The agri-tourism sector
has been chosen in order to investigate the family network. Such a phenomenon has been
studied in an area, Apulia, a territory of Southern Italy, characterized by small firms often
organized in family entrepreneurial networks.
Such a model is connected with a family tradition and the ownership of masseria, i.e. a
typical rural house where rich families lived more than 100 years ago. The ownership is
characterized by family transmission, which means that one of the sons inherited it.
In order to use these properties the owners have recently rented the rooms to tourists,
offering bed and breakfast format. Together with these rural houses, agricultural activities are
run by the families in order to produce all the products for the breakfast, such as wheat, milk,
cheese, and fruit that sometimes are also sold on the market.
1 BARRIER
HIGH HUMAN CAPITAL INVESTMENT (PARKER AND VAN PRAAG 2006)
FORMAL - HIGH LEVEL OF EDUCATION
INFORMAL - SOCIAL TIES AND INTERNAL KNOWLEDGE
COLLECTIVISTIC
CULTURE
(GURRIERI & PETRUZZELLIS 2009)
2 BARRIER
PERFECT FAMILY
NETWORK
NEXT GENERATION ORIGINAL FAMILY FIRM
3 BARRIER
NEW ENTREPRENEURS NETWORK
STRATEGY MAKING
PROCESS
LOW CONCENTRATION
CONTROL
(KELLERMANS &
EDDLESTON 2004)
4 BARRIER
ALTRUISM, LEGITIMACY, TRUST
(ZAHRA 2003)
Moreover, other members of the family have bought other rural estates to run the same
activity. However, these acquisitions are usually possible only if there is a link between the
(first) family who wants to buy and the family who sells. Such a connection prevents
foreigners or entrepreneurs outside these families to enter such a sector.
Therefore, trust and social ties with other local entrepreneurs-members of the families
determine the relationship intensity. The inheritance of the niche firm by a family member
fosters the process of creating a close-knit network. Both the single local production units and
the innovations (and links) that are established among them contribute to the network
formation.
Moreover, territorial institutions condition the transmission of the abilities and relation-
ships among the families of local entrepreneurship. Spillovers, then, bring to form of co-
opetition with the relationship between families as a strong barrier for foreigners. Most of the
entrepreneurs of the network analyzed are members of rotary or lions clubs, which is a
distinctive trait of the families. In fact, the members of this clubs are reciprocally reverential
to each other.
In addition, the motivations to operate in this area seem to be peculiar of the family firm.
The strong relationship between entrepreneurs and the specific competences based on
families and territory imply that firms are not affected by the competitiveness of emerging
economies, especially in terms of costs.
Each entrepreneur has a leading role as they dominate particular and typical niche
markets connected to each other in a close-knit network of social ties.
In order to study the sector a questionnaire has been developed. It is divided in three
different sections; the first deals with the network features (model of cooperation-
relationships); the second analyzes the family entrepreneurship (demographic characteristics)
and the last one regards the links with territory and institutions. Entrepreneurs and their firms
have been followed for 3 years (2007-2009). In the first year the response rate was about
35%, while it grows in the other two. The initial sample was composed of about 80 firms
(Gurrieri and Petruzzellis, 2009).

Table 1. Characteristics of the sample

Age of the entrepreneur: 50 years (average), the youngest is 40, the oldest is 75
Education: degree or master (72%)
Gender: man 85%
Type of firm and competencies: 65% family business; 35% one-man; 62% inherited
capabilities (firm specialization) from the family
Innovation and changes: 80% has changed machinery every five years
Firms: 60% of the sample was established in late 1990s

Firstly a measure of family run (familiarity) has been calculated through an Index. The
choice of introducing this Index is due to the fact that the great portion of the sample is an
entrepreneur- member of a family run. Thus, this index is:

K
H= -
k=1
P
k
log P
k

where P
k
= N
k
/ N
N
k
= number of entrepreneurs/firms in kth group
N= total sector size (number of firms).
It explains different types of entrepreneurship: i) entrepreneurs who directly inherited the
firm; ii) entrepreneurs who started their activity 20 years ago (old); iii) entrepreneurs who
started their activity 10 years ago (relatively young); iv) new entrepreneurs. Moreover, due to
the features used for evaluating the familiarity, a high value of it indicates a high family link
among entrepreneurs.
However, the variables that changed during the period, represent a limitation that is
minimized by the measure of the error for the different years that is toward zero.

Table 2. Descriptive statistics

Variables Standard Deviation Mean
Number of firms 1.044,30 624.48
Entrepreneurs 355.62 207.31
Level of education (degree) 663.49 357.69
Gender - man 13.34 45.14
Index 0.49 0.38
Traditional culture (Trust) 0.25 0.11
Individual Perception
(Profit culture)
576.15 480.25
Legitimacy (moral culture) 0.05 0.14
Absorptive Capacity (Family
control)
0.46 0.29
Presence of protection of output 0.47 0.33

4.1. Discussion

Since the main research hypothesis is that the family networks are able to construct
strong social bonds that rely on family and local conditions and traditions, the tourism sector
in the selected area reflects the micro universe of each family. However, the sector features
and the selected variables, shift easily from a micro (family) to a macro (family network)
universe.
The average entrepreneur is male (91%), with a degree (or a degree and a master) (71%).
All entrepreneurs in the area have a pathological attachment with the culture of the
territory.
The variable trust reflects a traditional vision of the entrepreneur and is measured by
the answer to the question do you believe that the level of reciprocity with other members of
the family determines a strong link among you? (dichotomous); the variable legitimacy
identifies the link between the entrepreneur and the catholic vision of the relationship. The
respondents were asked to rank in a scale from 1 to 5 (1 low 5 very high) the level of
their catholic vision; and family control indicates a measure of the absorptive capacity
(the relative question is do you feel emotionally strongly dependent to your original family
firm? (dichotomous).
However, even though in literature absorptive capacity is related to the innovation
process, in this paper represents a measure of the strict link with the territory and its ancient
traditions.
The variable culture of profit (now profit) identifies the simple concept of making
money by asking the entrepreneurs whether or not their main aim is to have profit
(dichotomous).
Moreover, the variable presence of protection of the output (now protect) reflects the
entrepreneurs choice to protect their production (dichotomous).

Table 3. Zero- Order Correlation of the variables

Entrep Profit Edu Gender Trust Legitimacy Protec Abs.Capa. Index
Entrepr 1.00 -
.31***
.43*** .70*** .34*** -.18*** .15*** .04 -
.18***
Profit -
.31***
1.00 -
51***
-
.32***
-
.43***
.08 -
.22***
-.04 .26***
Edu .43*** -
.51***
1.00 .27*** .35*** .06 .04 .03 -.07
Gender .70*** -
.32***
.27*** 1.00 .27*** -.35*** .17** .09 -
.25***
Trust .34*** -
.43***
.35*** .27*** 1.00 .20*** -.14* -.09 .22***
Legitimacy -
.18***
.08 .06 -
.35***
.20*** 1.00 -
.23***
-.16** .37***
Protec .15*** -
.22***
.04 .17*** -.14* -.23*** 1.00 -.45*** -
.55***
Abs. Cap. .04 -.04 .03 .09 -.09 -.16** -
.45***
1.00 -
.50***
Index -
.18***
.26*** -.07 -
.25***
.22*** .37*** -
.55***
-.50*** 1.00
*p< .05; ** p< .01; *** p< .001.

In table 3 Pearson (r) correlation coefficients of the selected variables of the multiple
regression are shown. Since exists r it allows to sustain whether or not a perfect linear relation
between two variables (r= 1.00), or the absence of one (r = 0). (The alternative is 0r1)s.
Four combinations result statistically significant (p < .001) with different levels of
correlation. In particular, there is a weak link between the variable entrepreneurs and the
variable culture of profit. As expected, this effect confirms the strong influence of social
relations. Moreover, the variable level of education is weakly related to the variable
entrepreneurs, while, as expected, a very strong relation emerges between the variable
entrepreneurs and the variable trust, entrepreneurs and gender. This could be
explained by a male-culture-entrepreneurship, typical of this territory.
The variable index is not statistically significant, while the variable presence of
protection is weak. However, since it is both positive and statistically significant, it could be
read as a signal of the presence of internal barriers. In fact, from the questionnaire emerges
the entrepreneurial orientation towards a rapid selection of what is really precious if family
production.
Furthermore an OLS regression has been carried out in order to understand the influence
of those variables on family network entrepreneurs and their ability to protect the nucleus.
The results are not really comfortable, even if R
2
is more than 60%. Fortunately, the variable
gender (with a very high estimated coefficient), legitimacy (with a very high estimated
coefficient and statistically very significant) are very interesting. The factor trust is weak
statistically (0.5 level).
The expected results of the OLS regression were partially different. Probably, not all the
information about the selected variables is exhaustive. Moreover, many other such as
relations with institutions, banks, financial banks should be considered.
This analysis is exploratory in nature. The findings highlight that more variables,
especially those that measure factors external to the network, should be considered in order to
assess their influence on the network life.

CONCLUSION

According to the literature on entrepreneurial network and orientation, the family
assumes a strategic role especially for SMEs and in particular for those that present a form of
network.
The social entrepreneur, who often represents the ownership and the management of the
family firm, has a specific role in the network. In a family group the emotional feelings might
prevail on the structural ones, in order to avoid some internal limits of the network such as a
central control and internal conflicts.
This paper tried to verify the potential strong links among entrepreneurs and the existence
of internal barriers. Some of the variables that identify the social links are also an expression
of internal protection. The results support the hypotheses. As one of the basic concept on
which this paper was based is the uniqueness of each family network, this paper contributes to
filling the gap of the existing literature on the link between networks and entrepreneurship,
which indeed is in contrast with the general tendency on the globalization.
However, the generalizability of the results is not strongly proven since the findings are
related to a particular reality of family firms in a peculiar low sector. The results support the
idea that the relation SMEs of family network-emotive elements could be considered a way to
survive and win the global competition.
Indeed, operating in particular conditions, such as absence of institutions, the members of
the family must have a strong link with territory, which is the force of the hypothesis.
Some limitations exist. First, this is only a single group and localized in a particular
territory. Second, the investigated network is a low tech one. Moreover, in this paper it is
represented a perfect family network, but we are conscious that this is only an ideal
situation, since many structural and emotional factors could influence the network.
In the model only some variables are introduced. We believe in the opportunity of using
other factors in order to better support and demonstrate the hypothesis. In particular, it is
crucial to investigate either the structural elements (formal and informal education, ties and
holes, strategy processes) or the emotional ones (ethic and collectivistic culture) to establish
the effective existence of other kinds of bonds. Moreover, future research should extend this
study to other social networks, with other features and in other territories.

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Chapter 7

SMALL BUSINESS SOCIAL RESPONSIBILITY
AND THE MISSING LINK: THE LOCAL CONTEXT

Mara Del Baldo and Paola Demartini
1

ABSTRACT

A development in the socially responsible management debate considers the
following question: is SMEs orientation towards Corporate Social Responsibility
sustained by entrepreneurs values and facilitated by environmental factors that is, of an
anthropological and socio-cultural nature present in the territory where entrepreneurs
and SMEs are sited? The chapter aims at proposing thoughts upon the contribution of
SMEs in spreading the philosophy and practices of CSR and sustainability focusing on
the importance of entrepreneurial values and the relationship with the local context to
which the SMEs and entrepreneurs are profoundly rooted.
deductive and the other inductive, which correspond to the two main sections of the
chapter.
The first section (1-2) presents the theoretical framework by way of recalling threads
of study on entrepreneurship and on business ethics centred upon behaviour, motivations
and business values. The analysis then concludes by presenting a review of the
international studies on the theme of the relationship between managerial culture and
territory.
The second section (3-4) is developed by way of a qualitative research methodology
centred upon the analysis of behavior towards CSR and sustainability of a sample of

1
Mara Del Baldo is Assistant Professor at the Department of Business Studies, University of Urbino Carlo Bo,
Italy. She teaches Small Business Management, and Accounting. Her main research interests are in small
business economics and management with particular focus on Corporate Social Responsibility and small
entrepreneurs/SMEs business ethics. She published in Italian and foreign Journals (Piccola Impresa/Small
Business, Sinergie, Economia Aziendale Online; Journal of Management and Governance, International
Journal of Sustainable Society) as well as in national and international conferences proceedings. Paola
Demartini is Associate Professor of Management and Accounting at the Department of Management and Law
(University of Rome3, Italy). Her main research interest are in small business economics and management and
she is currently involved in research project on SMEs CSR. She is the executive Editor of Piccola
Impresa/Small Business. She published in Italian and foreign Journals as well in national and international
conferences proceedings. Sections 1, 2.1 and 3 are to be attributed to Mara Del Baldo; sections 2.2 to Paola
Demartini; the conclusions (4) are common to both authors.
Mara Del Baldo and Paola Demartini 126
SMEs belonging to the Marche Region, Italian territory cradle of the small-sized
company and craft traditions.
Empirical evidence presented, highlights how best practices of socially-oriented
Marche SMEs - who are excellent examples of convivial enterprises strongly rooted in
their territories - contribute to a model of Territorial Social Responsibility (TSR) that
progresses within the particular socio-economic context of the region. The social
capital, enriched by values, cultures and traditions tied to a specific community-space,
synthesizes intangible factors that favour the development of CSR and the sustainability
of SMEs. The economic model of gentle capitalism centred around territorial SMEs,
which can be found in the business contexts under discussion, leans on the construction
of a large consensus both within and external to the company, as well as on an
environment which is neither restraint or limitation, rather it is an opportunity. The
possible pathway of territorial CSR based on the culture of doing good in the local
context, may offer a possible alternative to the often, unfortunately, short-sighted turbo-
capitalism of the major transnational companies, which are not rooted in the area where
they are located and nomadic in their character.

1. INTRODUCTION

The aim of this chapter is to propose a reflection on the contribution of SMEs in
spreading the philosophy and practices of governance directed towards Corporate Social
Responsibility (CSR) as well as sustainability. It focuses on the importance of entrepreneurial
values as well as the relationship with the territory, or rather the local context within which
the entrepreneurs and SMEs are profoundly rooted. Sharing a system of common values
which arises from a whole range of intangible context (social, anthropological, cultural)
factors, specific to location, contributes to build a favourable business climate wherein the
SMEs, together with other local actors, take part in constructing sustainable company and
territory strategies.
The theme of sustainability cuts right across every area of the life and work of
humankind and, in recent decades is panning out as being an imperative of planetary
proportions, which involves companies, particularly large ones, first-hand main actors in the
processes of globalisation and development (and destruction, at times, unfortunately) of the
economy and of the local and general environment where they are situated.
Sustainable management refers to the ability of an enterprise to meet economic,
environmental and social requirements over the long term. Until a few years ago, the
necessity for sustainability in strategic decisions has for the most part only been accepted in
major enterprises (Hopwood et al., 2005; Stead and Stead, 2008). In comparison to them,
SMEs sustainability strategies and practices have so far remained widely unknown or
underestimated (Rutherfoord, Blackburn and Spence, 2000).
Attention paid to the SME was mainly developed in the European context following the
Council of Lisbon in 2000, which specifically addressed SMEs. In recent years there have
been various surveys carried out both on a national and international level, on the relationship
between CSR, sustainability management and small enterprise. From these studies emerge
areas of light and shadow, which seem to underline however the presence of both internal and
external factors typical of the SME, which differ from those of larger-sized companies.
On the one hand, these studies underline the information gap regarding themes and the
context of sustainability and the limited adoption of tools and processes of accountability, due
Small Business Social Responsibility and the Missing Link 127
to lesser availability of resources (financial, human, information) as well as the predominance
of an informal approach to CSR (sunken or silent CSR). Most SMEs are unable to
communicate CSR-related activities to external stakeholders (Murillo and Lozano 2006) and
responsible behaviour of SMEs is especially focused on internal stakeholders.
On the other, the heterogeneity of SMEs is regarded as a positive assumption for the
development of different approaches on implementation of sustainable strategies. The
proactive orientation of SMEs is relevant, even if it is not explicit (Matten and Moon, 2004;
Spence and Rutherfoord, 2003; Mandl, 2006) and it attests to sustained socio-competitive
creativity. The need to deepen the understanding of the motivations of the small firms
commitment to CSR emerges (Castka et al., 2004; Morsing, 2006; Nielsen and Thomsen,
2006) in order to bring to light the specifics of SMEs (Jenkins, 2004). CSR cannot be
considered a prerogative of large companies (Russo and Tencati, 2006) and it is necessary to
adopt a different perspective with respect to conventional theories, suggesting possible
courses of action which appeal to the specifics of small enterprises.
First and foremost among these, the role of the owner/entrepreneur is considered as well
as the importance of entrepreneur values and behaviours in guiding the enterprise, of which
he is an integral part, towards CSR strategies. Such values often correspond to those of the
entrepreneurial family, whose dynamics are closely related to (whether for good or for bad) to
those of the company.
A further set of specifics element relates to the fact that these business values are shared
with the territory wherein the company operates, in areas of widespread entrepreneurship
made up of a thick fabric of SMEs where context (historical, social, cultural, anthropological)
factors facilitate courses of harmonious development of the industrial and social
environment (gentle capitalism).
A third characteristic element relates to the importance of relationship processes. The
capacity of weaving formal and informal relationships, which is based on the bonds between
people, and facilitated by the reduced and slender organisation complexity, finds a favourable
development context especially among small companies. Such relationships develop within
the company (in direct relations between entrepreneur-manager, family, employees,
collaborators) and with external stakeholders, whether contractual or otherwise (customers,
suppliers, administrations and institutions, whether local or otherwise, origin communities).
Stratification of these relationships, makes the creation of networks formed by a multiplicity
of actors possible. Actors who participate in the construction of sustainable development
forms: enterprises, trade associations, consumer associations, financiers (local banks, i.e.,
savings or co-operative banks), non-profit associations, institutional bodies (municipality,
provincial and regional authorities, chambers of commerce), etc.
In light of all this, the research question that orientates the work here is the following:
Why are there certain contexts, in Italy (but not just here), like in the Marche, where there is a
high level of CSR-oriented SMEs? Do the cultural and spatial origin context of SMEs and
their being embedded in the local area, as well as values and entrepreneurial behaviour,
constitute a driver of culture, best practices of CSR and sustainability? There are two
propositions at the basis of this study:

Proposition 1. At the heart of CSR widespread throughout SMEs of a certain area, there
are common values which derive from the culture and a common root which are passed on
and which today translate into the particular missions of companies with a soul.
Proposition 2. These values, common among the other main protagonists of the territory
(institutions, associations), translate into a particular activism and sensitivity towards CSR
that operates at a local level and assumes the contents of social responsibility and territorial
sustainability (TSR: Territorial Social Responsibility).

deductive and the other inductive, which correspond to the two main sections of this paper.
The first section presents the theoretical framework by way of recalling threads of study
on entrepreneurship and on business ethics centred upon behaviour, motivations and business
values. The analysis then concludes by presenting a review of the international studies on the
theme of the relationship between managerial culture and territory.
The second section is developed by way of a qualitative research methodology centred
upon the analysis of behaviour towards CSR and sustainability of a sample of SMEs
belonging to the Marche Region, Italian territory cradle of the small-sized company and
craft traditions. Using a cognitive approach (entrepreneurial cognition), the study of corporate
cases permits identifying the values and behaviour of entrepreneurs and companies that stand
out for their good practice within the context of policies of CSR and sustainability carried out
in the region and permits to trace the features of a Marche model of socially-responsible
orientation centred on the best practices of SMEs who are excellent examples of convivial
enterprises strongly rooted in their territories.

2. LITERATURE REVIEW

2.1. Entrepreneurship and CSR: the Role of Values

The recognition of an ethical and social dimension of business activity is founded on a
vast corpus of theory. The earliest contributions (Bowen, 1953) have been progressively
enriched in the last twenty years, producing a vast and complex frame of normative
references that has given food for lively and rich debates involving different academic
disciplines: business-economics, management, sociology, anthropology, philosophy (Carrol,
1994).
Different groups of theories (instrumental, political, integrative and ethical theories)
form the core of this literature; they likewise correspond to different approaches, focused on
one of the following aspects of the social context: economics, politics, social integration and
ethics (Garriga and Mel, 2004). Together, this corpus of theories primarily referred to large-
scale businesses. Nevertheless, the growth of interest in SMEs, from which spring, not
isolated cases of best practice
2
, finds within ethical theories
3
interpretative reasons for

2
There are numerous research centres that study the behaviour of the small to medium-sized companies. Among
which, one can cite the Copenhagen Business School (CBS), Denmark.
3
Ethical theories are based on ethical responsibilities of corporations to society and focused on the ethical
requirements that cement the relationship between business and society. As main approaches Garriga and Mel
(2004) distinguish the normative stakeholder theory (Freeman, 1984; Donaldson and Preston, 1995), the
Universal Rights (UN Global Compact, 1999), the sustainable development (World Commission on
Environment and Development, 1987), and the common good approach (Maritain, 1966; Mel, 2002; Sacconi,
2006, 2008; Zamagni, 1995; Bruni and Zamagni, 2004).
thought which give importance to the specifics of small businesses and the role of business
values.
The concept of entrepreneurship is one derived from entrepreneur and takes his personal
characteristics and the functions and roles carried out by him into account (Marchini, 2000).
Subjective variables lie at the core of entrepreneurship, which serve to explain behaviours,
returns to personal characteristics and motivation of a psychological and sociological nature.
Various studies have identified common traits in subjects who are entrepreneurs. The
attention, placed on the set of personal preferences, motivation, values, characteristics
(activism and energy; orientation towards the future; desire for responsibility, ambition;
passion; willingness; commitment; perseverance; enthusiasm) as well as on existential
conditions (the need of achievement, McClelland, 1965), enlarges to the variables of a social
nature (hereditary factor, imitation factor, experience factor) leading to different interpretative
models (the theory of social marginality, Stanworth and Curran, 1973). Such approaches
strongly put the role of the economic factor, as a driving element of company creation, back
into perspective.
Attention to motivational and relational aspects allows for understanding the link
between business values and orientation towards CSR and sustainability. The vision and
business values are at the core of a firms mission and of the system of government typical for
small businesses that are socially oriented. In SMEs the entrepreneur is both the driver and
implementer of values. Managers exhibit their personal values through the exercise of
managerial discretion and SME owner-managers have the autonomy to exercise such
discretion (Hemingway and Maclagan, 2004). In the sphere of typology matrix studies on
entrepreneurship, different works of research have identified the drivers of strategic choices
to be the values and the attitudes of small entrepreneurs. They utilize social scientific
concepts to explain the behaviour of individuals and of social systems. Numerous
classifications of entrepreneurs have been drawn up, based on the types of objectives and
personal characteristics they possess. This was done to obtain typologies of small-scale firms
utilized in economic-business analyses.
In the context of strategic studies on these businesses, strategic models have been
proposed (Julien, Grepme, 1994) which place the objectives of the entrepreneur (which are
identified with that of the firm) among the key variables that influence strategy next to
organisational factors, the environment (intended as global society and as sectors of activity)
and production activities. Values
4
and attitudes towards the social context are central factors
in the strategic system, which is guided by the entrepreneurs goals; they are expressed by the
vision, the entrepreneurial formula (Coda, 1985). Values nourish the organization and
enhance the spirit of entrepreneurialism (Lamont, 2002). They are like roots, which inspire
the strategic orientation of responsibility and constitute the most important source of
identification inside the firm and the primary basis of external legitimization. Values and
attitudes influence individual and collective behaviour in many ways in the field of strategic
management; those possessed by the entrepreneur or by the management are considered
among the principle factors that determine the strategic decisions of the enterprises.
(Marchini, 2000, p. 92). Values recognizable to human nature (the system of perennial

4
Values are abstract ideals of those that are considered good, desirable, preferable; they dont have a specific
object or situation and construct models that guide and determine action, scope, attitudes, ideology or
representation of itself in terms of others. Even the attitudes are beliefs possessed by people, but are less
stable and always refer to a specific object or situation. (Marchini, 2000, p. 92).
values: honesty, loyalty, justice, respect for human life, Catturi, 2003) forge the ethical
constant of the business management and represent the premise for entrepreneurial
success. Company spirit and vocation (understood as being the whole set of personal traits,
experiences, motivating forces, competences) increase possibilities of success and define the
corporate culture which, in turn, is tied into a dynamic relationship with the context of its
environment, understood as being the general as well as the specific socio-economic and
business environment.
Competitive positioning of the firm springs not only from adapting to the binomial
trade/mission but also from the business capacity to open itself up to ethical values
dominant in society, to the resulting roles and responsibilities and thus to the necessity of a
legitimacy in which factors of valorisation of its image and the strategic importance of such
factors, even in the small firms, render the above-mentioned capacity a component of the
strategic orientation of the entrepreneur (Marchini, 1995, p. 114).
Entrepreneurial motivations and aims are also central in the theory of social success of
the entrepreneur (Sciarelli, 2007), measured not only by the results achieved by the enterprise,
but more so by the achievement of respect gained from the surrounding community. Social
leadership is an end result of entrepreneurial activity and social power finds its
counterbalance in social responsibility attributed to, and embraced by, the entrepreneur. He is
rarely motivated by purely economic factors and he is oriented towards reaping the benefits
of his choices (Zamagni, 2007) in the long term. More often, he experiences ample stimuli
under the social profile, he is characterized by a strong identification with the organisation
(organisational commitment) and with the local environment wherein he operates. For the
owner-manager, the link between the companys success and his own is personal and more
closely visible with respect to that which is realized in the contexts of large companies. In
SMEs the same visibility and approachability of the entrepreneur makes him capable of
arousing emulative behaviours and of transmitting to the whole organisational body values
coherent with social and ethical profiles.
In the light of what has been said, we may state that although the literature on ethics has
paid less attention to small firms (Spence, 1999), in these contexts ethics finds its own matrix
in three essential aspects: the influence of the subjective sphere, which in the small firm is
maximized, the importance of relating to internal actors and to the external ones, proclaimed
by its limited dimension, and the social rooting of the small business and of its creator (Del
Baldo, 2006).

2.1.1. Personal Values and Socially-Oriented Territorial Values
CSR and sustainable strategies in SMEs are particularly influenced by the person and
personality of the entrepreneur. The process of orientation towards CSR and sustainability is
normally promoted by the owner/entrepreneur and depends on his ethical orientation and
values (Vyakarnam et al., 1997; Spence et al., 2000; Joseph, 2000; European Commission,
2001; European Union, 2004; Molteni, Pedrini and Bertolini, 2006). The personal element
in small businesses is at the centre because of the tight framework of interpersonal relations
that is held together by the entrepreneur and/or the family/owner, which stratifies itself inside
and outside the firm. SMEs are typically family-owned enterprises, normally legally and
economically independent. The business is nearly always linked to the family, which is
essentially composed of a human factor, a civil cell, over the socio-economic entity. Where
the family is virtuous and cohesive and places itself at the service of the firm, family ties
become the firms resources and contribute to the growth of both its credibility and its
reputation in the eyes of the stakeholder.
Secondly, the relational factor is a distinctive aspect of the small business owner and of
the small-sized business (Birley, 1985) and is the driver of specific business strategies not
always, nor necessarily aimed at, quantitative development. The paths of growth diverge from
the biological models of life cycles of the firm (Churchill and Lewis, 1983), and focus
instead on the forms of particular developments among which those centred on an orientation
towards CSR and sustainability merge. Indeed, one can talk of strategies of qualitative
development (Marchini, 1995) based on the capacity to weave systems of informal, family-
based and social relationships that constitute the framework on which inter-organisational
relationships are incorporated. These relationships are at the base of the concept of relational
goods, as well as at the base of the dimension of reciprocity which considers them as goods
that the traditional economy does not acknowledge (Bruni, 2007). Factors that have and have
to do with altruism, moral gratification, the logic of happiness (Baldarelli, 2005),
satisfaction, gratuity and gifts (Gui and Sudgen, 2005; Bruni and Porta, 2004) come into play.
Finally, small entrepreneurs are often active members of a territorial community, of
which they represent the creative soul, to which they are intimately linked and in which
they reinvest part of the economic wealth they generated and their energies. The small-scale
business owner can become a privileged witness of CSR thanks to a strong rooting in the
socio-economic environment. SMEs - especially rooted in their respective region and
characterized by long-term, established mechanisms and rules - possess a good starting
position for a sustainability strategy as a result of their structure and regional infusion
(Leborgne and Lipietz, 1991; Storper, 1995).
Various studies have highlighted the contribution of CSR in terms of increasing the social
capital of SMEs, of participating in the construction of the common good (Thompson and
Smith, 1991; Spence and Schmidpeter, 2003), of contributing to the sustainability of specific
territories (Del Baldo, 2006b; Matacena and Del Baldo, 2009). Trust is built both on
geographical closeness, common history and on joint activities as well (Peredo and Chrisman,
2006).
The virtuous circle of entrepreneurship and the corporate culture depend on the context of
the environment defined in terms of business environment as well as on the presence of
selective entrepreneurial policy (Minguzzi and Passaro, 2000; Passaro and Thomas, 2009).
The importance of the relationship with the territory of reference has opened up
interpretative approaches founded on the analysis of interaction between processes, reference
context and business results, at the basis of evolution and corporate success within the field of
entrepreneurship research (Aldrich and Martinez, 2001). The perception of the external
environment being favourable (or hostile) and adequate (or not) as well as trust/distrust as
regards the context of location are important variable factors. A favourable business climate,
which springs from a system of anthropological, social and positive economic factors, has an
influence on the development of the business and favours orientation towards CSR. This
orientation finds fertile land in commonly-held values, and sets off a virtuous process that is
at the basis of sustainable corporate development as well as the place where the company is
rooted.
Liability, identity and sense of belonging to a precise cultural and ethical context, as well
as closeness to internal and external networks, flexibility, innovative drive and adaptive
competences are attributes of SMEs. Due to these qualifications, SMEs are able to act
appropriately towards the assumptions of their particular sector. The majority of common
SME-sustainable measures becomes manifest in the respective territorial contexts (EU
Commission 2002a, 2002b). SMEs support schools, sports clubs, cultural institutions, fairs
and local monument protection, as well as social services like: nursing homes, sheltered
workshops, hospitals, charitable institutions, childrens funds, socially-committed clubs
and citizens groups, museums, theatres, sports activities through donations, sponsoring,
advertisement, resources, technical and organisational support, as well as personal and
voluntary commitment. The commitment also includes active membership in trade
associations, examination boards or parish councils.
That which has been said explains the development of peculiar approaches to CSR,
centred on a logic of SME involvement in networks or based on membership in specific
districts (Molteni, Antoldi and Todisco, 2006; Battaglia et al., 2006; rskov, 2006;
Kromminga and Dresewski, 2006). The participation of the SME in networks characterized
by the presence of a plurality of interests, both public (local organisations, chambers of
commerce, universities and research centres) and private (trade associations, non-profit
organisations, credit institutions, professional orders), facilitate the implementation of actions
and programmes of socially-oriented development of SMEs and of the local environment in
which they are inserted (Fugazza et al., 2006; Lepoutre, 2006). These networks, appear to be
fundamental for the realization of policies and strategies tailored to CSR (Maa, 2006) and
place themselves at the base of a possible model for social responsibility of the territory.

2.2. From CSR to TSR Territorial Social Responsibility

The above-mentioned networks that arise between local public authorities and private
actors, profit and not for profit organisations of a specific geographical area, can develop the
effects of sustainable measures put into practice by the different networks actors. These local
networks are based on informal and tacit relationships, whose results are often not
communicated or simply not measured. However, they are based on a stock of social capital,
such as trusts, norms and networks, that tend to be self-reinforcing and cumulative (Lipparini,
2002). Thus, when there is a common aim to improve the quality of life that ties together
individuals and organizations belonging to the same territory, it is possible to introduce the
notion of Social Responsibility of the Territory.
Territorial Social Responsibility (TSR) is a concept that has thus far not been adequately
studied. From the concept of social responsibility of the business, the perspective shifts to a
vision of the collective. No longer is responsibility solely the realm of the individual firm,
which is called to put itself in relation to the collective, but rather it is the whole community,
the territory, which comes to be conceptualized as an unicum. The application of social
responsibility of a business to the territory finds force in the objective of improving the
communitys quality of life and of marrying economic events with social and environmental
attention through the lens of sustainable development. Social responsibility of the territory is
founded, therefore, on the rediscovery of shared values that the territorys economic, social
and institutional actors know how to reinforce, thanks to solid networks of relationships.
However, it is important to underline is that this approach can be applied only in specific
social and economic contexts where all local actors public and private ones, individuals and
organisations have absorbed a common culture that spreads in mutual values with respect to
the way business is run.
The concept of culture reminds to beliefs, norms, traditions and attitudes that drive the
behaviour of individuals and organisations belonging to a definite community (Schein, 1990).
In literature there are many research about the relations between culture and management
(Hofstede, 1980) but just a few investigate the impact of culture on corporate social
performance. Ringov and Zollo (2007) interesting contribution offers empirical evidence to
test the assumption that corporationssocially responsible behavior is influenced by specific
dimension of the cultural context in their home country (i.e., following the dimensions
proposed by Hofstede
5
: i) a more feminine culture tending to emphasize social relationships
and interpersonal harmony; ii) a low power-distance culture is associated with a high
employee involvement in decision-making processes, thus it leads to a more inclusive
stakeholder-orientation approach to management).
Those results are consistent with the findings of the report on European SMEs and Social
and Environmental Responsibility, showing a highest percentage of SMEs sustainable-
oriented in those Nordic Countries (i.e. Finland, Denmark, Ireland, Norway, The Netherlands
and Sweden) notably characterized by a more feminine and a low power-distance culture.
Thus, in our opinion, to better understand the phenomenon it is not sufficient to consider
the cultural dimensions at a national level, but one should consider also the different local
culture that exist in the same Country. That is the case of Italy where CSR attitude not equally
distributed in the different Italian regions (Perrini, Pogutz and Tencati, 2006).
As literature poses (Becattini, 1979 and 1999) in Italy there are some territories
characterized by the presence of relational environmental between local actors sharing a
collective identity arising from the past of the region where they live (Bagnasco, 1977;
Braudel, 1979; Putnam, 1993). That is, in our opinion, the rationale why the Marche along
with other Italian territories such as Tuscany and the Veneto
6
(Peraro and Vecchiato, 2007),
offers an interesting laboratory to study not only the extent of CSR, but also Social
Responsibility of the Territory. As an example, the initiatives of the Marche Region (i.e. the
SIRM project System of Responsible Business for the Marche Region created between
2005-2006 constitutes a primary ethical territorial network) have advocated both for paying
close attention to civil society through corporate responsibility and for favoring the adoption
of best practices on the part of individual firms (Demartini, 2009).

3. CASE STUDY: MARCHE, A REGION RICH IN ITALIAN
SMALL CHAMPIONS OF CSR

3.1. Research Methodology

The study was developed according to a qualitative approach and a methodology based
on field case studies. The fieldwork approach consists of pinpointing the internal factors

5
Hofstede (1980) proposes four dimensions to characterise different national culture: power distance,
individualism, masculinity and uncertainty avoidance.
6
Those territories are all characterised by the same industrial development model (i.e.the Third Italy model). See
section 3.2.2.
(organisational structures, internal micro-processes, attitudes, points of view, perceptions)
that, together with the corporate characteristics (size, sector, age of the business, etc.) and the
general contextual factors (economic, political, cultural, etc.) able to explain orientation
towards CSR and sustainability of entrepreneurs and SMEs (Adams, 2002).
In general terms, the case method (Yin, 1994) has the dual aim of detailing the principal
characteristics of the phenomena, and of both understanding and analyzing the dynamics of a
given process. Specifically, the case method constitutes a precious instrument for capturing
the diverse manifestations of CSR in SMEs as well as for indicating best practices and
suggesting criteria for further action (Craig, 2003). The utility of the cases also reside in the
possibility of giving value to the experiences of entrepreneurs who are champions for
corporate social responsibility (Jenkins, 2006a-b).
The study was centred on the analysis of ten Marche SMEs
7
(multiple/collective case
study approach) enrolled in the Italian trade association (Confindustria), belonging to mature
and emergent sectors characterized by different social and environmental contexts that
represent the entrepreneurial and economic fabric of the region. In the choice of enterprises,
we considered the cohesive and multi-certified Italian SME typologies (Molteni and
Lucchini, 2004)
8
. The analysis was based on the collection of information acquired in May-
June 2009 from various in-depth semi-structured interviews (paper-and-pencil interview
method) with top entrepreneurs/managers (founder/successor, managing director, general
manager), as well as with different employees, on direct observation during visits to the
selected enterprises, and on the analysis of available documentary sources (content analysis).

3.2. Findings

The companies have their sensibility and dedication to CSR in common. Specifically, the
selected enterprises are characterized by the following aspects:

1. presence of a framework of ethically-connoted values, shared by the leaders of the
firm and diffuse throughout the organisation;
2. realisation and promotion of CSR actions and strategies as well as sustainability;
3. adoption of CSR communication tools and development of systems of accountability.

Below, the evidence relative to these three aspects are summarised.

1. The entrepreneur, man of values

The first aspect that emerged from this piece of research relates to the existence of a
strong system of values that inspires a corporate culture oriented towards CSR and

7
In the definition of a SME, along with the attributes defined by the Recommendation of the Commission of the
European Community on 6 May 2003; 2003/361/CE, the qualitative parameters (independence of the
economic subject, connection between ownership and control) were considered, following an approach
diffusely adopted in the studies and in research on small-sized businesses.
8
Molteni and Lucchini identify a typology of orientations among Italian firms (cohesive firms, multi-certified,
aware, able to be mobilized and skeptical), based on two coordinates (intensity of the phenomenon that is,
the socially responsible behavior and qualitative aspects linked to the practices of CSR and to corporate
behavior).
sustainability. CSR is translated into business principles and is the practical implementation
of a companys ethos. In each of the firms taken into consideration, the economic subject
(entrepreneur and managers), shares the base values that guide the decision-making
process, in keeping with the socially-oriented vision, and give origin to an entrepreneurial
vocation which not everybody has and which makes all the difference. Values common to
entrepreneurs (specifically highlighted by people interviewed) are: diligence, labour, equity,
trust, honesty, simplicity, integrity, parsimony, sense of family, team spirit, enthusiasm,
energy, responsibility, communicative nature. Such values are widespread and shared by
the internal stakeholders (employees) and those external to the company, thus reinforcing
stakeholder engagement and commitment process. Value orientations and ethical principles
that guide strategic decisions also constitute the principal facets of the process of social
accountability and reinforce the organisational culture.
The entrepreneur is visible and strictly integrated in the enterprise. He represents, with
his personal commitment and engagement, the first best practices or, in other words, the
first internal change-agent. In all of the cases the owner-manager is directly responsible for
directing CSR principles and activities of the company and is also strongly involved in the
well-being of the local community where he lives and where the company is placed.
All of these businesses exemplify a strategic and structured approach to CSR and align
business values, purpose and strategy with the social and economic needs of stakeholders,
while embedding responsible and ethical business policies and practices throughout the
company. CSR is experienced as a way of doing business and a way of being business. The
influence of the practices of CSR on the strategic profile is manifested overall in terms of the
development of a culture of responsibility in and of the firm.
In these companies every individual is inserted into the centre of the company and
rendering him a protagonist of CSR. Purpose, vision and values are constantly reinforced
through culture and processes and continuously communicated throughout the organisation
and beyond (Grayson and Hodges, 2004). The organisational strength is participation; climate
is social and organisationally diffuse. Values, mission, objectives are constantly reinforced
across the culture and processes, articulated in a flexible and organic structure. The decision-
making process is based on collaboration, sharing and transparency. Relational approach is
centred on trust.
Also as regards governance, the entrepreneurial family wherever it so exists shares
values and strategic orientation with external managers, improving the managerial
development of the company. In various cases, the cohabitation and the generational passage
were facilitated by a sharing of personal and family values, that found their synthesis in
practice as well as in the instruments of socially-responsible management.
A further aspect connected to the sharing of values which support orientation towards
CSR relates to the wealth of intangible resources that characterize those firms interviewed.
The cohesion to stakeholders is a source of mobilizing resources with far-reaching
consequences in terms of growth of intangible capital and of development of intangible
resources.

In order to illustrate, some passages taken from interviews of entrepreneurs/managers are
here reported:

Values sustain actions; actions that are positive and responsible generate a type of
development that respects humans and the environment. (...) Large businesses look to the
quarterly reports and are not disposed to sew the seeds for the long term, to live on trust. (E.
Loccioni, the Loccioni Group, entrepreneur of the year 2007, Ernst and Young Award for Quality
of life).
Values constitute the firms Culture and, therefore, have their own value, their own richness.
They are their own intangible goods, which strengthen faith and certainty in the business (S.
Pierfederici, President of BoxMarche s.p.a.).
Our Global Report is not only a report of numbers, but also of values. It permits our
stakeholders to have a reliable idea of how the business fulfils that sort of delegation that civil
society has conferred to produce a better world for all goods, services and human relationships.
(T. Dominici, Managing director of BoxMarche s.p.a, winner Oscar di Bilancio Award 2007).
Ours is a way of being an open enterprise from the very beginning, born to welcome
interlocutors as carriers of value; formation, collaboration, team work are our practices. (...) From
a strong shared culture and from driven human resources can arise the commitment for the
Common Good and the strength to face the market. (E. Loccioni, of the Loccioni Group).
Perhaps its a little presumptuous, but we love to define ourselves as the agents of
civilization. The small entrepreneur is a builder (of systems, of men, of wealth); he relates himself
to the world, to his clients, to his community; he lives his passions, hopes, dreams, plans. The
enterprise is a narrative identity, it tells a story, it constructs its own self. For this reason, it has a
soul and it has those intangible assets linked to the spirit and dignity of the person. (T. Dominici,
Managing director of BoxMarche, Nomination 2005 Sodalitas Social Award, multi-stakeholder
counterpart for the Italian CSR Forum).
We are a company made up of people. Strong human relationships unite the network, that
throughout the years has been consolidated, transmitting experiences and visions that are at the
foundation of our success. Our activity is the carrier of change both in the lives of our clients and
around our team. (R. Forni, General Manager of Della Rovere Group).
From the very beginning I have felt welcome, like a part of the family, and Ive been given
the trust necessary to grow. Ive done, and I continued to do, my best to personally embrace those
same values and to experience the company as a communal good, recognizing the entrepreneurial
spirit that Ive had the good fortune to know (T. Dominici, Managing director of BoxMarche
s.p.a.).
Whoever has the economic power must be the one most responsible. We are certain that
CSR grows stakeholder value, social consensus, economic value, giving origin to more trust and
understanding and the best transparency to governance. In this sense, whats central is the example
top management sets. (G. Arvizzigno, Director of Product Development, Quality Control and
Social Responsibility of TVS s.p.a.).
Our intangible values are imagination (to know how to create), energy (to achieve our
dreams), responsibility (for the air we breathe, the land we walk on, the resources that we utilize,
the trust that we gain. (E. Loccioni, the Loccioni Group).
There are three ways of being a leader: through price, through technology, through intimacy.
This is our way. My greatest satisfaction is when I see others happy. (R. Forni, General Manager
of Della Rovere Group).

2. Socially oriented actions and strategies: cohesive and multi-certified enterprises

In the first group of companies (cohesive enterprises, which numbers eight firms) the
fronts of engagement of CSR are systematic and creative and manifest themselves in a variety
of forms: involvement, giving value and training of employees; transparency in processes and
in the modes of governance; presence of formal and informal instruments and procedures for
internal and external information disclosure; vast range of operations with the local
community (donations, sponsorships, promotion and production directed to projects of
social, cultural, environmental, etc. merit); relationships with non-profit organisations and
associations (local, national and international); stable and durable collaboration with clients,
suppliers, and financial partners; attention to the global environment, across the activation of
procedures and programmes of environmental protection and of quality of life (recycling
waste, reduction of emissions, saving energy, etc.). Moreover, these enterprises intensely
cooperate with existing research, education and training centres within the local context (i.e.
universities) which is brought about through supporting research projects, issuing study
grants, doctoral grants, creating masters degree courses as well as other degree courses, and
promote initiatives directed to make the most of the local historical, cultural, food-and-drink
heritage. The firms then offer services and benefits to both their own employees as well as to
specific categories of stakeholders: discounted prices of their products; business and sales
agreements and both services and company products given over to employees needs,
recreational and training activities (i.e. FAAMs business school) or the benefits provided to
co-operative credit bank clients.
Another distinctive aspect of these cohesive companies is constituted by the commun-
ication of CSR. Communication consists of multifarious initiatives, financed to make the
function of the government house organs transparent, beyond the adoption of different forms
of reporting and commitment towards the stakeholders, such as: sharing all of the
management data with associations/shareholders/financial partners (i.e. BoxMarche);
occasions of yearly open-house meetings during the year aimed at specific categories of
stakeholders (Fbl-Della Rovere Group); regional and local meetings (TVS); holding
stakeholders forums in which the results achieved in the past financial year are presented and
objectives for the future are discussed.
On the whole, such behaviour increases the level of reputation and of consensus, and
augments quali-/quantitative development which, at the same time, depends on and returns
to the territorial context in which the businesses are found. Eventual forms of incentives are
not important: these firms run by themselves.
In the second group of companies (multi-certified enterprises, which numbers two
firms), the orientation to CSR is more focused on procedural forms, founded in their client
offerings and in their requests to their own suppliers for ethical, social and environmental
guarantees (green purchasing ISO and Vision certification, quality of products, etc.).
Nevertheless, these enterprises appear to be very dynamic and seem to be in evolution: they
are multiplying the fronts of engagement towards CSR; they research more structured forms
of communication (projects to implement their social and environmental reports); they
implement modifications to their system of government (family succession; insertion of new
top figures outside of the family general manager, managing director). In other words,
they are marking out a path. In these cases the providing of measures of support (fiscal
incentives, ratings for the participation in public competitions and calls for bids for favourable
financing, personalized consultancy, adhesion to moments of exchange of good experiences)
can accelerate their development.

3. Communication of good practices and use of accountability tools

Every enterprise is characterized by the adoption of processes of social and
environmental certification and/or by the regular publication of social and environmental
reports. Among the former, we find the ISO9000, Vision 2000, SA8000 (Social
Accountability Standard), EMAS/ISO 14001 certifications. Among the latter, CSR
communication tools range from the less "structured" ones (charter of values) to the more
formalised ones aimed at internal and external stakeholders: codes of ethics, social reports,
sustainability reports, integral accounting (global report). The presence of direct and indirect
instruments of accountability (Rusconi, 2006), allows making orientation towards CSR clear,
reinforcing the socially-oriented commitment and activating listening and collaboration forms
with the various categories of stakeholder (employees, customers, suppliers, financiers,
community, public administration, etc.). By using such instruments, values and mission are
explicated and communicated, ensuring consistency in decision-making processes and
avoiding value-gaps. They also facilitate the transition from a state of listening to a proactive
one (entrepreneur/management guided by stakeholders).

3.2.1. Convivial Enterprises, Companies of Worth
The centrality of CSR with respect to the development of these firms allows one to
connote them as spirited business (Lamont, 2002) and as CSR enterprise (Kvle and
Olsen, 2006). They are high-performing companies where competitive success grows out of
their commitment to values and to the human spirit. Spirited businesses, in other words, are
companies with a soul (Catturi, 2006). They have a character, their own personality, which
is the fruit of individuals who interact with each other, but above all, fruit of the values and
principles founded in their mission and translated into their governance. The firms are
conceptualised as narrative identity, that, in fact, every day tells a story that traces its
origins from the traditions of the entrepreneurs and territory. CSR is not considered merely an
opportunity for raising the firms visibility and reputation, but above all as a means of
actively contributing to the construction of a socio-economic environment, with a rich return
of effects on their tangible (economic-financial performance) and intangible profile. They
focus on vision and values, communication, top-level management commitment, effective
tools and mechanism of stakeholder engagement.
The value of BoxMarches products is measured by a profound harmony with all of our
travel companions who smile, suffer, and live within the company. With the passion that we
put into this partnership, we will obtain significant results even in the global context, which
doesnt mean only internationally, but also in the family. A friendship that is transformed
into a partnership. And this is beautiful. (BoxMarche s.p.a., letter from the Managing
Director, Global Report 2007).
9

A type of art lives within these companies, running a harmonious business, reconciling
economic objectives and more proportional humane ones, and providing daily examples of

9
The Global Report contains the balance, asset and liability statements, social and environmental reports, and an
analysis of intellectual capital.
each. The profiles of convivial enterprises (Balloni and Trupia, 2005) that emerge do not
correspond to a codified managerial model, but to a business way of being in which
conviviality is not merely a sentiment, but is an operative practice for organisation and
governance. In such contexts the capacity of individual initiatives, in absence of rigid forms
of hierarchical coordination, remains vibrant. It is spurred on by the sense of belonging and
on overall empowerment. That which is given achieves superior goals with respect to the
forms of government that privilege the achievement of objectives in the logic of
executiveness based on a system of checks and balances. Convivial enterprises are
testimonies of entrepreneurial passion; they are given organisational strength and intangible
riches. The socially-oriented philosophy and the relative instruments of accountability
institutionalize and give representation and transparency to the qualities of the firms. These
last elements signal the passage from one model of informal responsibility, still prevalent in
the universe of small-sized firms, towards a new, proactive model, from the concept of
enlightened entrepreneur to CSR policy.
From the cases considered in the empirical study, a model characterised by forms of
stakeholders relationships based on instruments that provide for transparency and
representation of those qualities of the firm and its principal actors arises. In this way, one can
view the co-penetration of the two drivers of socially-oriented governance: discipline and
commitment. The former is formalised and codified, the latter is informal, emergent and
value-based (Minoja and Romano, 2006).
Conviviality is a manifestation of an attitude of learning by interacting, which
translates into planning, innovation and more generally, the capacity to improve relationships
and the territory itself. These last aspects refer to the active involvement of the enterprise in
local development, because business success goes alongside with the surrounding local
context. This translates into the creation of functional networks among businesses, Chambers
of Commerce, trade associations, banks, non-profit and local organisations - which all
become nodes of a cooperative network whose end is to develop the territory.
One of the principle motivations of Marche entrepreneurs is the desire to do something
useful for their own community. This is because the histories of their businesses have always
been founded on passion rather than merely on pure mathematical sums. The companies
studied, defined in terms of convivial enterprises are examples of transformation from a
rural culture to an industrial one which came about without upsetting those characteristics of
environment and territory where they developed. Such enterprises actively live a new phase
of the challenge of innovation interpreted as being not just technological innovation, rather
cultural innovation of the way of thinking and working, leaning on and adopting the values
of man, which are becoming ever more important in the economics of knowledge. And they
are able to face the challenge by believing in people, aware of the fact that success depends
on the ability to interpret, share and make dreams come true together.

3.2.2. The Link with Local Context: Territorial SMEs
The effort of the companies interviewed in advancing best practices of CSR is nourished
by the will and desire to testify to and understand best practices adhering to multiple
occasions of exchange and comparison (workshops, forums, meetings, testimonies, etc.). The
affiliation in local, national, international networks of CSR highlights a holistic approach to
CSR and is the sign of a mature and structured approach, which opens up an important path in
sustainable development in which the SMEs are not trailed along by larger-sized companies
(in that they are their sub-suppliers and, therefore, required to respect ethical standards or
quality standards of their own products and processes), but of which they are the first main
players.
Analysis of this aspect (proposition 2), underlines the centrality of the sense of
belonging to a specific geographical context as the fruit of anthropological, social and
cultural roots summarised within the values aforementioned. This sense of identity facilitates
the promotion and sharing of sustainability projects concerning the local socio-economic
environment and the reciprocity of the exchange. The affiliation into geographical zones
historically characterised by a solid rural tradition, typical expression of Marche culture, is at
the base of the effort of the companies in circulating well-being within the local community
in which the firms, themselves, are located.
For the reason of highlighting this aspect, below a summary of the thoughts of the
entrepreneurs interviewed is as follow provided. Almost always does reference to the
importance of common roots and belonging to a territory which they owe much to and to
which they give much back, come through.

We have emotional ties to the territory. We want to use our abilities to sustain the local economy. Our
activities are not only business choices. Our ability, though we are a small firm compared to other companies,
is to weave threads (through the determination to follow the dream of an enterprise and of the environment
in which it is inserted); it is to pull thread (through cohesion and collaboration inside and outside the firm)
and to stretch thread (through the motivation that feeds creativity, understanding, sensibility, the capacity to
listen) of a network. A network made, first and foremost, by Men. (T. Dominici, Managing director of
BoxMarche s.p.a.).
The challenge of the market can be won on ones values. FAAM operates at all levels so as to reinforce
those criteria of social, environmental and regional respect that characterizes its activity. The recipe of
FAAM on the path to development has Man as its final stop. Our working environment expresses the
passions, valorises relationships, and communicates quickly to a territory attentive to traditions, towards
which it nurtures a sentimental bond. (F. Vitali, President of FAAM Group, Former-president of
Confindustria Marche).
The company acts as an interpreter of social and environmental concerns, doing its own job well,
generating profit in a responsible way with respect to its economic partners, its community and its
environment. (F. Paolini, entrepreneur, of PRB s.r.l., President of Gruppo Giovani, Confindustria Pesaro-
Urbino).
Our bank is leveraged on one attitude: proximity, which is physical, relational, family-oriented,
oriented to our associates, to the personalization of products and services. That means identifying oneself
with the local economy, starting from the region and having the capacity to render it a protagonist. The
components of the board of directors are exponents in the areas in which BCC operates and it has committed
itself on its own honour to create social values for its associates and for the community. (L. DAnnibale,
General Manager of Banca di Credito Cooperativo (BCC), Gradara).
It is an important responsibility that which we call our business, inasmuch we have inherited the land
from our fathers, but we also have on loan from our children. The firm is the carrier of responsibility that
doesnt get used up in the creation of projects, wealth and jobs, values that we must also keep in mind, but the
activities of the company extend to the development of actions aimed above all at the territorial context in
which it operates and to the ensemble of all of its interested parts, as well. (T. Dominici, Managing Director
of BoxMarche s.p.a.).
C Virginia is a country house that has invested heavily in the latest photovoltaic and geothermic
system. Our business project, having originated in a dream, wishes to demonstrate a simple message: we
cannot create nature, landscape, but we can respect them and we can attribute worth to our traditions, from
the countryside traditions to food and drink ones, to those healthy customs handed down from our fathers and
grandparents, who knew how to love our land as well as give worth to our future. (G. Rossi of C Virginia
Country House s.p.a.).
Whats important is the passion you do things with. This is the principle that over the years allowed us
to grow, to arrive at certain finishing lines we never contemplated at the outset of our business, without ever
having reneged on our identity, without ever having forgotten where we come from, where we live (G. Bini
of Lordflex s.p.a.).
The story of the Gruppo Paradisi is one of a business adventure that has lasted for half a century till
now, like many others who have marked the success of the enterprise in Marche. A story which is, at the
same time, original and unrepeatable in that it is founded on the willingness to construct a chance for so
many, a story belonging to the Vallesina district, a piece of land where the metalworking industry has always
played a fundamental role, the emblem of work and social development. (Antonio Paradisi, founder of
Paradisi Group, Jesi).
Our size substantially remains the same as that at the beginning. A precious heritage which has served
towards looking forward in a spirit of innovation where business objectives and care towards those that make
them daily possible have succeeded in finding the right harmony together. This is where the realisation of that
concept of responsibility which makes us take the role that the company covers for the whole territory into
consideration, for those who work there as well as for the others who indirectly become interested. (Sandro
Paradisi, founders son).
We have the privilege of working in this territory and we have never once thought about moving. We
want our competence to be used to support the local economy. We have an affective link with the territory,
and the historic centre of the Varnelli distillery, in the small mountain village of Pievebovigliana (Sibillini
Mountains) is a distinctive element. We constituted the Girolamo Varnelli Foundation in 2002 which
intends to carry out certain initiatives relating to culture, training and the society and all connected to the
tradition of distilled drinks and to bringing out the richness of the territory where the company operates,
through involving renowned interlocutors in our activities, as well as the dissemination of principles of ethics
and effort which typically make up a cultural, typical characteristics of the business. (O. Varnelli, Chief
Executive of Varnelli Distillery s.p.a.).

An examination of the socio-economic contexts of Marche territory, formed
predominantly by SMEs, and which attempts to understand the essence of the people and
their history, allows us to more closely view an entrepreneurial system constructed on solid
principles. And it allows us to discover evidence of a gentle capitalism, which expresses
itself in a development model founded on the synergy between the recuperation of the past,
defence of traditional understandings, of local culture, of the quality of the landscape and its
protection for the future through research by advanced sectors and care for the environment.
It also allows us to discover an indirect but important protagonist: the territory of Marche.
The influence of the territory upon corporate competition has been treated in depth in
theoretical debate in various ways. On the one hand, in macro-economic approaches, it is
summarized in the concept of comparative advantage (low labour costs, differentiated
supplies of resources, acquaintances, competences, capabilities) and it is used to explain those
factors that regulate international trade exchange. On the other, theoretical thought has
addressed approaches aiming towards combined evaluation of the determinants: country,
sector, enterprise and, more recently, it has focused on the transferable and replicable nature
of such advantage. Studies on the industrial estates have made it plain how the variety of
locations and relationships between places have an essential function in generating
competitive advantages (or disadvantages) of a country and businesses based in a particular
district. Other studies have underlined the need for SMEs to adopt responsible behaviour
owing to the strong link that they have with the local system (Harvey, Van Luijk and
Corbetta, 1991). Various studies have analysed the processes of industrialisation diffuse in
Central-North-Eastern Italy within which lies the Marche region. Some have identified factors
such as the culture, history, institutions, beliefs and communal convictions, as a sort of humus
of the intangible assets of the context, difficult to define and to quantify (Cipolla, 1990).
These factors played an important role in determining the rate and form of industrialization of
Italy. Numerous scholars, historians, social theorists and economists have expressed
themselves in the same way, underscoring the active role of the entire local society in
favouring unfractured development (Fu and Zacchia, 1983) that have characterised the
economic model of the Marches and, more generally, the Third Italy (The NEC model -
North-Eastern Central Italy). The analyses have portrayed Italian districts as a type of humus
fertilised by previous manufacturing experiences in the medieval era (from the 13th to 15th
centuries). From this perspective one finds a justification of the birth of local systems of
production (or industrial districts, Becattini, 1979) that are based on forms of collaboration
and trust between firms inside a division of labour often organised around a company that
acts as a leader, just as labour had been organised and subdivided among members of rural
families. In the Marches, such proto-industrial activities inside numerous small - to medium-
sized towns across the territory (which are called cities despite their low populations) were
artisan in form. It is precisely in such Italian villages that economic historians have found the
roots of diffuse entrepreneurship that has characterised the development of the Third Italy
(Bagnasco, 1977).
The intangibles or social capabilities thus correspond to a genius loci, connected to a
particular place. The aforesaid convivial enterprises plunge their roots into a territorial
model based on holy agriculture that has characterised the Marche region from the first half
of the 1800s to the post-WWII era. These champions of CSR, inserted into a territory rich
in testimonies of socially-responsible behaviour, many of whom must yet emerge, are also
due to their ability to communicate their own engagement and to their ability to manage
relationships with multiple stakeholders. The capacity of moulding the socio-economic terrain
from which they come comes from the richness and the appeal of their own virtuous
testimony, which is called to imitate the virtues.
Together with the enterprises, network actors, the first of whom were active promoters,
play a propulsive role in producing tangible effects at the local level, in terms of quality of
life of the people and of functions of local welfare: work, home, help, social services, health,
services for workers and training. In this context one well understands the dimensions of
freedom, solidarity and shared responsibilities put into motion, a mechanism that mobilizes
the intelligences and creativity, and which goes beyond economic data and financial
statement forecasts of the firm. CSR of the territorys SMEs is intended to better articulate
the participatory dimension. The territory thus becomes the place in which avenues of
sustainable development can be concretely constructed and on which reciprocal approaches
can be forged. It becomes a subject and a protagonist. And the network that developed
activates new mechanisms of participation and planning, and allows for the recuperation of
the territorys identity (Cant and Gavinelli, 2008). Socially-oriented country governance
or local governance (Balloni and Trupia, 2005) is made possible by an integrated
representation of social, economic and institutional communal feeling, not sectorial like the
districts, but like that of a territory. Throughout the years, in various districts, the
deterioration of the socio-cultural (and not only industrial) atmosphere has made the
relationship between economy and society, and between the firm and the environment, more
difficult. When small and medium towns search for rapid and extensive development, they
have mutated their own nature, and, at the same time, lost part of their social ties and
their local identity, because of a decline in social consensus with regards to industry and
industrialisation. Only in those territories, as in Marche, developing networks between
economic actors and actors coming from civil society and from local politics, territorial
closeness will solidly form in terms of reciprocity of exchange, of tradition, trust, identity,
and will create a heritage of understanding, relationships, of images and values that are rare
goods in an era of globalisation, able to stop injustice and insecurity in moments of
difficulty like today.
Thus, the best practices of socially-oriented Marche SMEs contribute to a model of
territorial development (Graph 1) that progresses in this particular socio-economic context.

Source: our elaboration.
Graph 1. CSR model based upon territory enterprises.
This model of sustainable development that appeals to the territorys businesses totally
depends on the capacity of the whole productive, associative, entrepreneurial and institutional
world to act and to be made to act in socially-responsible ways, and thus capable to be
territorially characterised in a unified sense. This possible way of experimenting with CSR
throughout the territory above all points to the recognition of roles, starting with the SME
and the socially-oriented entrepreneur, an enlightened entrepreneur, who fosters the
sustainability of a collectiveness in the territory in which it lies. Marche SMEs that create
distinctive features of CSR in their own mission, governance and accountability release
energies and are orientated towards sustainable development. Such a model opens up an all-
new dimension to the analysis, a new point of view that is that of comparison between
systems of stakeholders, who operate in the territory itself: companies, business associations,
institutions. Among these subjects relationship capacity makes up the necessary soft skill
and awareness. Territorial CSR is therefore not the exclusive perspective of every SME, but it
represents the essentials of a shared orientation.

CONCLUSION

Another development in the CSR debate may consider the following question: Do best
practices of CSR increase social capital of the territory? If yes, then what role do SMEs play
in constructing the structural components of the territory?
In the complex of studies conducted on CSR and sustainable management, there is a lack
of precise and established theoretically-based concepts which are specific to SMEs, which
thus needs to be filled
10
. Research must disengage itself from the perspective of major
enterprises and instead centre its attention on SMEs, with their own specific concerns and
solutions, in order to determine the specific sustainability patterns of SMEs.
If we use these as our base premise, this chapter proposes a reflection upon the
importance of business values, shared and reinforced throughout given areas, with reference
to the proclaiming of CSR and orientation towards sustainability of the SME by way of paths
rooted within the local contexts. Deductive and inductive analysis is aimed at supporting
the role of small and medium-sized businesses in providing examples of, and driving, real
means of good governance many of which truly spring from that family-based world of
capitalism, often criticized , which hosts precious testimonies.
Empirical analysis carried out on a sample of Italian SMEs, CSR-oriented and belonging
to the Marche region strengthens the propositions posed as basis for the study. The social
strategy of the enterprises observed is based on an effective government of systems of
relations within the firm whose principal actor is the owner-entrepreneur/manager. The
successful entrepreneur always appears to be the one who helps rediscover values, and who is
capable of creating solid rapports and true relationships with interlocutors. A solid ethical
framework depends both on entrepreneurs personal values as well as on a synthesis of socio-
cultural and anthropological, environmental factors. This so called genius loci characterises
the given territorial area, such as Marche, marked by a proliferation of local systems of
production formed predominantly by small businesses and a strong social cohesion.
The possible pathway of territorial CSR based on the culture of doing good in the local
context, may offer to be a possible alternative to the often, unfortunately, short-sighted
turbo-capitalism of the major transnational companies (Matacena, 2008), which are not
rooted in the area where they are located and nomadic in their character. The economic
model of gentle capitalism centered around territorial SMEs, which can be found in the
business contexts under discussion, leans on the construction of a large consensus both within
and external to the company, as well as on an environment which is neither restraint or
limitation, rather it is an opportunity. An actor in the foreground can therefore be identified,
in that industrial world made up of minor companies, often less visible since it is scattered
and fragmented, and sees the territory as a resource and is studded with virtuous situations,
which with their own daily effort to bet on a brighter future, on knowledge and on territory,
defend and make the most of not just the economy, but also the environment and landscape,
the cultural, historic and artistic heritage of a country. Convivial companies, experienced as

10
There are basic CSR issues that all SMEs have a responsibility for, amongst them the creation of a good
working environment where diversity is encouraged, the fair distribution of wealth in a community, and the
protection of the environment. SMEs are often portrayed badly in relation to such basic responsibility and are
frequently seen as a problem within the CSR debate (Jenkins, 2006a, p. 3). One improvement in the
observation of phenomena increasingly more intent on capturing the virtuous behaviours carried out by small
businesses will be to provide a reason for the existence of submerged CSR (Molteni, 2004, p. 123).
common good, do not limit themselves to being hidden champions, rather they offer the
chance to inspire the world in another manner. It is opportune to bet on this way of doing
business in the era of globalisation, where, paradoxically, competition seems to be destined to
be played out on the excellence of individual areas. In the paradigm of international
competition, avoiding the disintegration of the old economic systems, which are rooted in the
territory, is essential, as is making the most of territorial capital, of specifics. Here is the
starting line for building new economically-sustainable development itineraries, which
preserves territorial structures and vocations.
Faced with markets that are too contractual and globalised and not very communitarian in
nature, markets which nourish and gratify our solitary-minded selves but which leave our
desires for communion and relationships unsatisfied, incapable of offering a shared identity,
the new needs of the individuals, more and more become solidified in a widespread social
question of specifics, ethics, local typicality, of areas of low human settlement characterised
by more well-considered rhythms of life and by less frenzied relationship systems. An answer
to these needs comes from the territory of small municipalities which still are home to that
interweaving of knowledges, culture and nature which best marries with conservation and
local development, as well as from territorial companies which are not able to do without
considering people, rights and the dignity of the workers and the quality of their life
environment.
To sum up then, CSR is not a complicated challenge and one difficult to journey for
SMEs if the effort, together with the added value that it means, is adopted by a whole set of
actors, each with his own role and competences. The territory thus becomes the centre to
favour competition choices, not just economic but also social, which are projected towards
the medium and long-term.
As far as the reflections matured during the course of this study are concerned, future
developments of this piece of research may go on in two main directions. On the one hand,
the analysis will be extended to include a broader sample of Marche entrepreneurs, in order to
deepen knowledge of common traits on which to base the path of sustainable growth of the
region by amalgamating with other minor companies and involving the larger ones already
operating throughout the territory. On the other, a critical evaluation of the model turning our
attention to other Italian regions and to international contexts characterised by widespread
entrepreneurship is opportune in order to identify the cultural, anthropological and social
variables which make up the values context as well as to evaluate, in a comparative key, the
social responsibility and territorial sustainability model which has resulted from this
research work.

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Chapter 8

ETHNIC ENTREPRENEURSHIP AND SOCIAL CAPITAL:
ECONOMIC EFFECTS

Mara-Soledad Castao Martnez
-

University of Castilla-La Mancha
Plaza de la Universidad, 1
02071 Albacete, Spain

ABSTRACT

Recently, research in economics and sociology has considered the ethnic
entrepreneurship role, because: there is empirical evidence that ethnic minorities tend to
have self-employment rates and an important proportion of businesses in Western
industrialized countries. Also, it is considered that social links have an influence on the
entrepreneur activities of ethnic groups.
In addition, there are significant differences among different ethnic groups that
decide to realise entrepreneur activities. So, if we compare the economic performance of
ethnic groups and rates of self-employment, it is possible to observe these differences
among countries and regions.
Therefore, in this paper, we consider the factors that have influence in entrepreneur
activities of ethnic groups and ethnic groups characteristics to observer their economic
effects in Spain and Spanish region of Castilla-La Mancha. Also, we analyse the
differences among Ethnic entrepreneurship and Spanish entrepreneurship. In order to do
so, we conduct an empirical analysis for Spain and the Spanish region of Castilla-La
Mancha, and we use theGlobal Entrepreneurship Monitor data.

1. INTRODUCTION

In recent years there has been a huge growth in the importance of immigration as a source
of employment and income for people who are unable to find work in their own countries.
Generally speaking Spain is one of the most sought after destinations for immigrants due to

-
e-mail contact: mariasoledad.castano@uclm.es
Mara-Soledad Castao Martnez 152
its geographical position, development, ageing population and significantly low birth rate
(Galindo, et al., 2006).
Immigration is welcomed by receiving countries as a way to satisfy the demand for
workers in jobs which the native population rejects or in sectors where there is a lack of
qualified workers. Immigration is therefore regarded as a short term solution in filling this
demand.
In the first case immigrant workers are mainly employed in the hardest and worst-paid
jobs and so form part of the lowest social classes. Their great hope is that in the next
generation their children will use the opportunities offered by education and training to climb
up the social ladder and that the most unwanted jobs will then be left for others as has
occurred throughout history.
It has been observed that the entrepreneurial initiatives undertaken by immigrants
resident in Spain have grown in number and have diversified significantly, thus offering them
a quicker way up the social ladder. Despite the fact that these activities are largely focussed in
the sector of micro companies (small shops, bars, travel agencies, hairdressers, phone centres
etc), there also exists a great variety of other activities such as several NGOs, international
cooperation agencies, cultural associations, educational centres, social communication
networks, among others (Cavalcanti, 2007).
The importance of the immigrant phenomenon and its economic implications has recently
led to the publication of studies on the role of the immigrant entrepreneur and its economic
effects (Rath and Kloosterman, 2000 and Basu, 2006).
In section two this paper presents a theoretical analysis of the ethnic entrepreneur
followed by a study of the role of social capital in ethnic entrepreneurship. There is then an
empirical analysis comparing the entrepreneurial activity of immigrant and Spanish
entrepreneurs. The entrepreneurial activity of both groups is compared. In the comparison of
the results obtained for 2006 and 2007 in Castilla la Mancha and Spain the figures used are
those provided by Entrepreneurship Monitor. A short section with conclusions closes this
study.

2. THEORETICAL ANALYSIS OF THE ETHNIC ENTREPRENEUR

Interest in entrepreneurial activity has been observed since the 1980s, motivated by
changes in the economy. SMEs, self-employment and micro companies became one of the
main sources of job creation, mainly in EU countries: This has aroused the interest of
economists in this area (Garca, Crespo Mart, 2008).
According to Leebaert, (2006), entrepreneurs and smaller scale companies, due to their
greater flexibility with regards entering and leaving markets, are able to react swiftly to
changes in production processes, demand and technological changes. They also act as a
fundamental element for the social cohesion and integration of immigrants and minorities in
general.
Specialised publications analyse entrepreneurial activities in the light of the pull and
push factors which characterise them. These activities arise through a set of personal and
situational variables, whose interaction leads the entrepreneur to take the decision to create a
company. Included among the personal factors we can find educational background, age,
Ethnic Entrepreneurship and Social Capital 153
marital status and support networks (Butler and Herring, 1991, Jackson and Rodey, 1994,
Robinson and Sexton, 1994), and also certain psychosocial characteristics such as the need
for achievement, the tendency to take risks (Gatewood, Shaver and Gartner, 1995, Daz
and Rodrguez, 2003, Hansemark, 2003, Vecina, 1999), a greater tolerance of ambiguity
(McClelland, 1961, Naffziger, 1995, Rauch y Frese, 2000, Littunen, 2000), characteristics of
the so-called entrepreneurial spirit (Caird, 1990) and the analysis of some particular factors
affecting success in new businesses (Ballantine et al., 1992; Lewis et al., 1984).
Traditional theories based on the neoclassical model, only focus on efficient management
as a way to reach the production frontier (Amin Salim, 2005).
As previously mentioned a growth in entrepreneurial activity has been observed in
immigrant receiving countries. This growth is frequently motivated by the difficulties
immigrants face in entering the job market, by language problems and by the excessively low
salaries they are often paid. They are thus led to the professional option of self-employment
or the creation of a small company which allows them to better their economic and social
standing.
There exist many different studies analysing the factors which stimulate entrepreneurial
activity in the case of immigrants (Daz and Gonzlez 2005: 91).
Mavratsas (1997) says that immigrants entrepreneurial behaviour is conditioned by
various factors: economic factors (competition, access to the market and to capital), personal
factors (age, education, prior experience) and sociocultural factors (local tolerance, support
networks, niche concentration). Sanders and Nee (1996) consider that ethnic entrepreneurs
require two types of resources: economic and human resources.
However, according to Ndoen, et al. (2002), the ethnic entrepreneurs activity depends to
a great extent on society in the immigration receiving country. This attitude is positively
conditioned by different economic, social and personal variables such as: access to the market
or consumers; ethnic niche; access to capital, tolerance in the receiving society; social support
networks (family or friends); age; prior business experience; time of residence in the
receiving society.
Other different theories also exist, which can be grouped into those which take a
structural approach and those which place more emphasis on more cultural aspects (Daz and
Gonzlez 2005: 91-93).
Portes y Bach, (1985), who favour the structural approach, note the concentration of
ethnic entrepreneurs in certain areas or section of a city, which have been given the name of
ethnic enclaves. This approach considers that when individuals emigrate to another country,
their initial thought is to enter the job market of the receiving society. However once they are
in the job market, they change their mind when they perceive there is a clear business
opportunity by which they will be able to access greater economic development. This can
either take the form of the creation of companies which sell ethnic products or services to
people from their own national group of origin (such as food, hairdressing, restaurants), or the
entrance into markets neglected by local entrepreneurs, which require a high concentrations
of intensive labour (small retail outlets, textile industry). Immigrants and local workers are
immersed in similar circumstances within the work market and opting for this type of activity
avoids conflict with the native population.
These enclaves do not only guarantee a determined market but also have a social function
in that they help new immigrants enter the receiving society. A positive effect has been
observed in some cities where ethnic enclaves have grown up (for example Madrid or
Barcelona) where the economic activity of certain neighbourhoods has been reactivated.
These are neighbourhoods in decline, populated by immigrants who then open up commercial
establishments and small businesses and so reactivate the economic activity in these
depressed areas abandoned by the local population (Cavalcanti, 2007).
This model has various distinctive characteristics: geographical concentration,
interdependence between social networks and business relations and a relatively sophisticated
division of labour. The enclave works as a substitute environment for the immigrants, making
it easier for them to adapt to a foreign country and providing them with two basic psycho-
social needs: employment and a sociocultural community (Daz and Gonzalez, 2005: 92).
The social capital existing in ethnic enclaves can also be a disadvantage (Portes and
Landolt, 1996), in places where the communities and networks are isolated (Narayan and
Shah, 1999), or where in-fighting works against a societys collective interests (such as
ghettos and gangs). Entrepreneurs may also be placed under heavy obligations by family
networks which impede the growth of their companies. (Gambetta, 1988; Portes and
Sensenbrenner,1993). The binding type of social capital provided by the family, while
essential for the creation of the company, as will be analysed in the following section, later
becomes a cost which will impede its development (Woolcok and Narayan, 2000, Carrasco
and Castao, 2008).
This is the predominant theoretical approach among sociologists and anthropologists
(Min and Bozorgmehr, 2000; Rath and Kloosterman, 2000). This is why the large majority of
the studies in this field focus on concrete ethnic groups analysed via this type of resources.
However there exist other resources which have traditionally been considered of importance
for the development of entrepreneurial behaviour such as human capital or financial capital
(Min and Bozorgmehr, 2000) which have yet to be studied.
Waldinger, Aldrich and Ward (1990) suggest an interactive model which overcomes the
limitations of the ethnic enclave model. Despite recognising the theoretical value of the
concept of ethnic enclave, these authors opt for abandoning the term and instead focus on
developing an interactive approach which identifies an extensive range of structural factors
and factors within the ethnic group itself which influence the immigrants entrepreneurial
activity, without giving more weight to some than others (Tsui-Auch, 2005).
This model suggests that immigrants have a certain individual and collective
predisposition to creating their own economic and working possibilities and possess the
capacity to exploit some ethnic and class resources which are characteristic of their
community.
One of the cultural aspects to be considered is the Midddleman Minority Theory. The
basis of this model (Bonacich, 1972) is the fact that many of the most active groups in the
field of business are from immigrant minorities with a great trading tradition, who, socially
excluded in their receiving society, are driven to seek out business, even in a foreign country,
by their characteristic entrepreneurial spirit. In this way, through self-employment, they
receive recognition in the receiving society which at an internal level encourages a reaction of
certain social solidarity which provides them with support and favours the success of their
businesses as was the case of Jewish minorities in Europe (Daz and Gonzalez, 2005).
This theory is criticised by groups of immigrants who have made progress without the
existence of this social confrontation (Sanders and Nee, 1996) and without the background of
a tradition in business activity or commerce (Sowell, 1996).
Light and Roach (1996) consider the difficulty of access to the work market as a factor in
the decision to create a company. The large number of companies created by immigrants is
due to a combination of the collectives social cohesion and the difficulties of their access to
the work market, together with the low salaries they are paid, as has previously been
mentioned. This leads some immigrants to look for alternative opportunities through self-
employment and the development of strong economic and social ties among the members of
their own ethnic community.
The entrepreneurial activity undertaken by immigrants provides a series of benefits which
goes further than just a source of income and work for the entrepreneurs who decide to set up
their own businesses. The companies often provide work opportunities for individuals of the
same nationality as the owner. They may also contribute indirectly to the creation of new
opportunities for other immigrants since the development of a new business generates the
need for supplies and some companies may even necessitate the creation of their own
distribution channels. These networks may then stimulate the creation of other new
businesses which provide employment for more people (Rath and Kloosterman, 2000),
besides also stimulating in a large number of occasions commercial relations with their
countries of origin. (Hormiga and Batista, 2007).

3. SOCIAL CAPITAL AND THE ETHNIC ENTREPRENEUR

In companies created by immigrants the social capital is fundamental in understanding
their creation and the way they work. Above all it is the family that occupies an important
place in the different cycles of the companys development (creation, maintenance, expansion
and succession or closure) (Gallo, 1998). This type of social capital is also known as binding
social capital, which is typified by strong family links or vertical ties which link people who
are equal in important aspects (ethnic group, age, sex, social class, etc.) (Woolcock and
Narayan 2000; Alder and Kwo, 2002).
In each stage the family plays a different, predominant role. The use of the family is
much greater during the initial phase of the company and at succession. The solidarity of the
family in the undertaking of the business project acquires greater relevance during the
companys beginnings and at times of crisis (Martnez, 2007 and Sander and Nee, 1996)
The family is also a material resource, particularly as a workforce, which is the principal
competitive advantage of a family company. The use of the family as an informal workforce
provides the entrepreneur with flexible staff and saves on bureaucratic and recruitment costs.
The resource of family as a cheap or free workforce is more viable in the case of traditionally
structured families than in other types. (Martnez, 2007)
Social networks are therefore essential elements in the creation and development process
of a company. These networks can carry out the following functions:

1) The extended family provides a secure social network which resolves material and
financial needs during difficult times (Woolcok and Narayan, 2000 and Worms,
2003, pp. 321-323).
2) Relatives are a source of financial and human capital for entrepreneurs at the onset of
their activity (Geertz, 1962).
3) They are a source of information and education and provide new opportunities for
the potential creation of ideas and projects (Leito, 2004)
4) Social networks promote contact with other people of the same nationality which
provide knowledge of the their possible needs, which permits access to niche markets
with important business opportunities (Min y Bozorgmehr, 2000)
5) They allow the entrepreneur to combine professional and social relationships and
take benefit from possible synergies (Leito, 2004)
6) They provide an environmental and socio-political bond for the entrepreneur, 2004).
7) They facilitate the recruitment of immigrant workers from the country of origin with
lower salaries than those established in labour agreements
8) The influence of entrepreneurial parents on their children can be seen. The level of
entrepreneurial activity is higher than that of the rest of the population (Scherer et al.,
1991, Cooper y Dunkleberg, 1987; Matthews and Moser, 1996).
9) The theory of the ethnic enclave points out that immigrants look after themselves and
some of them are even able to help new members, providing training and acting as
tutors in the creation of their new businesses (Sander and Nee, 1996).
10) Finally it should be mentioned that families select the members who are to emigrate
or on many occasions they select themselves for emigration in order to improve their
social and economic conditions. These individuals are typified by a spirit of
achievement and the desire to prosper, which could encourage a greater tendency to
create companies (Hormiga and Bastida, 2007).

However, Pessar (1995) suggests that on some occasions the family or ethnic enclaves
impose negative effects on their members such as the exploitation and manipulation
characteristic of some immigrant social networks (Pessar 1995 and Froschauer, 2001). As has
already been mentioned binding social capital can stop companies growing since it may
impede the creation of the type of the social capital which extends bridges and establishes
business or commercial relationships outside ethnic enclaves.

4. ENTREPRENEURIAL ACTIVITY ACCORDING TO COUNTRY
OF ORIGIN: AN EMPIRICAL ANALYSIS

This section contains an empirical analysis comparing the entrepreneurial activity of
the immigrant population with that of the native population. Different variables have been
selected from the survey conducted by the GEM observatory for Spain and Castilla La
Mancha for the years 2006 and 2007.
The GEM project is used to try to measure entrepreneurial activity from the point of view
of what could be defined as the entrepreneurial spirit, how it influences preparations for
setting up a business, the fear of failure, relationships or vision of business opportunities
(Reynolds et. al, 2005).
It must also be mentioned that the GEM project differentiates between two collectives of
foreigners: the general regime (developing countries) and EU regime (other developed
countries), considering that the reception of the latter is simpler than that of the former
(Coduras, 2007). The first group will undertake entrepreneurial activities largely conditioned
by necessity: problems of access to the work market, low salaries, the impossibility of
developing a professional career, while the second group will principally be motivated by
business opportunities.
Table 1 shows entrepreneurial activity. This is measured as the percentage of initiatives
undertaken by the 18-64 age group from the country of origin with which a person registers
when declaring as the owner or director of a business initiative with less than 42 months of
activity (De la Vega, at el, 2007).

Table. 1. Entrepreneurial activity according to country of origin

Spaniards
EU regime
foreigners
General regime
foreigners
Origin not
provided Total

Spain
2006
Entrepreneur 6.8 10.4 14.2 19.1 7.3
Non entrepreneur 94.6 89.8 86 80.9 92.7

2007
Entrepreneur 7.2 11.5 13 23.7 7.6
Non entrepreneur 92.8 88.5 87 76.3 92.4

Castilla-La Mancha
2006
Entrepreneur 7.2 16.7 26.1 0 7.6
Non entrepreneur 92.8 83.3 73.9 0 92.4

2007
Entrepreneur 8.1 16.7 20.7 0 8.5
Non entrepreneur 91.9 83.3 79.3 0 91.5

Source: Gem Data.

It can be observed in table 1 that in both the case of Spain and Castilla La Mancha
foreigners are more entrepreneurial than Spaniards. Foreigners from developing countries are
also much more entrepreneurial than both Spaniards and foreigners from developed countries.
f we compare 2006 and 2007 it can be observed that the activity of entrepreneurs from
both Spain and Castilla La Mancha increases slightly. On the other hand the proportion of
foreigners from the general regime undertaking entrepreneurial activity decreases slightly in
Spain and somewhat more significantly in Castilla La Mancha where it goes down 6.5%. This
could be due to the expectations of economic recession whish existed in 2007.
The main conclusions which can be reached from Table 2 are that foreigners have a
proportionally greater tendency to start businesses, especially those from the general regime.
This is due to two reasons: one is a more developed mentality with regards creating initiatives
and the other is the greater need to do so for survival. These figures confirm the theoretical
aspects previously analysed.
Table 2. Differences in mentality between foreigners and Spaniards in 2007

Spain 007
Spaniards
EU regime
foreigners
General regime
foreigners
Origin not
provided
Plans to start a business within 3 years 5.60% 11.30% 22.10% 21.10%
Has closed in the last 12 months 1.0% 0.90% 2.30% 13.20%
Has met an entrepreneur in the last 2 years 35.40% 35.30% 43.30% 28.90%
Fear of failure 46.70% 39.60% 40.10% 33.30%
Starting a business is a good professional
option 59.90% 62.30% 67.20% 73.70%
Possesses skills an knowledge necessary to be
an entrepreneur 46.70% 56.60% 52.40% 73.00%
Perceives good opportunities 24.30% 27.50% 35.40% 21.10%
Prefers the general populations standard of
living 55.70% 45.60% 58.20% 63.20%
Success as an entrepreneur is the way to
social status 53.10% 50.50% 56.80% 54.10%
CLM-2007
Plans to start a business within 3 years 5.30% 10.50% 29.30% 0%
Has closed in the last 12 months 0.90% 0% 0% 0%
Has met an entrepreneur in the last 2 years 33.80% 52.60% 29.80% 100%
Fear hot failure 46.00% 52.60% 56.10% 100%
Starting a business is a good professional
option 60.10% 68.40% 66.70% 100%
Possesses skills an knowledge necessary to be
an entrepreneur 46.20% 47.40% 55.20% 0%
Perceives good opportunities 25.90% 31.60% 40.40% 0%
Prefers the general populations standard of
living 57,50% 65.00% 68.40% 100%
Success as an entrepreneur is the way to
social status 54,80% 45.00% 50.00% 0%
Source: Gem Data.

However regarding the question Have you met an entrepreneur in the last two years?
the results are markedly different according to the figures for Spain of for the region of
Castilla La Mancha.
In the case of Spain the results indicate that the immigrant population is generally more
in contact with people who set up new companies. This could motivate the higher level of
entrepreneurial activity among this collective. If you know people around you who have been
able to develop their own business, the influence of the role model makes the possibility seem
more plausible and viable. (Hormiga y Bastida, 2007). However in Castilla La Mancha the
EU regime foreigners are those who know more entrepreneurs than the Spaniards or the
general regime foreigners.
In the case of the Spain it is precisely the Spanish who most fear failure while in Castilla
La Mancha it is the immigrants who fear it most. This may well be due, as we have already
mentioned, to negative expectations regarding the Spanish economy and possibly the fact that
the income per head in Castilla La Mancha is lower than the average in Spain leads to even
greater uncertainty.
Foreigners are also of the opinion that starting a business is a sound professional option
and believe to a greater extent than Spaniards that they are in possession of the skills and
know how needed to start a small business. This does not mean that the Spanish are less well
prepared. It is rather that immigrants feel more capable of undertaking a business project.
There is the sense that the immigrant population tends to shun the idea of entrepreneurship as
a risk and sees it as being as valid as any other job opportunity.
Foreigners, especially those of the general regime, have a greater perception of
opportunities, both in Spain and Castilla-la Mancha. This is perhaps due to the difficulty of
access to the job market which makes them see the possibility of activities which allow them
to develop professionally or the opening in markets within ethnic enclaves which they can
fill.
Finally in the case of Spain it is the immigrants who are less disposed towards accepting
the standard of living they are offered, perhaps due to the low salaries they receive in the job
market. Yet in Castilla-La Mancha there is a lower percentage of Spaniards willing to accept
their standard of living and who are more convinced than immigrants that success as an
entrepreneur will lead to an improvement in their social status.
The distribution by sectors of entrepreneurial activity depending on the country of origin
is shown in table 3.

Table. 3. Sector of initiatives according to origin of entrepreneur

Spain
2006 Spanish EU regime General reg.
Origin not
provided Total
Extractive 7.00% 0.00% 2.30% 0.0% 6.40%
Transforming 29.90% 13.50% 32.20% 50.00% 29.80%
Company services 24.60% 23.70% 35.10% 37.50% 24.80%
Consumer oriented 38.50% 41.80% 51.40% 12.50% 39.00%
2007
Extractive 5.10% 4.80% 1.40% 0.00% 4.70%
Transforming 28.80% 9.50% 25.80% 0.00% 28.00%
Company services 26.40% 31.00% 22.60% 0.00% 26.00%
Consumer oriented 39.60% 54.80% 50.20% 100.00% 41.40%
CLM
Extractive 10.00% - 0% 9.10%
Transforming 30.00% - 0% 27.30%
Company services 20.00% - 0% 18.20%
Consumer oriented 40.00% - 100% 45.50%
2007
Extractive 8.50% - 10.00% 8.30%
Transforming 24.60% - 30.00% 24.40%
Company services 23.20% 25.00% 20.00% 23.10%
Consumer oriented 43.70% 75.00% 40.00% 44.20%
Source: Gem Data.
The greatest proportion of entrepreneurs is found in the consumer oriented sector, with a
special emphasis on immigrants. In the transforming industry there is a greater number of
general regime immigrants while EU regime immigrants dominate the services to companies
sector. In 2007, in Castilla-la Mancha there was a significant increase in entrepreneurial
initiatives by immigrants from developing countries in the extractive sector, possibly because
agriculture is still a major industry in this region.

Table 4. Product and innovation

Spain
2007 Spanish EU regime General regime
Origin not
provided Total
All 19.90% 33.30% 18.70% 87.50% 20.30%
Some 28.90% 28.90% 24.00% 12.50% 28.30%
None 51.20% 37.80% 57.30% 0.00% 51.40%

CLM
All 17.30% - 16.70% 16.90%
Some 28.80% 50.00% 8.30% 27.90%
None 53.80% 50.00% 75.00% 55.20%

Table 5. Level of competitiveness

Spain
2007 Spanish EU regime General regime Origin not provided Total
Much 59,10% 32,60% 58,80% 66,70% 58,50%
Some 31,20% 50,00% 35,80% 22,20% 32,10%
Little 9,70% 17,40% 5,30% 11,10% 9,40%
CLM
Much 58,70% 50,00% 63,60% 58,80%
Some 31,60% 50,00% 27,30% 31,80%
Little 9,70% - 9,10% 9,40%
Source: Gem Data.

Table 6. Age of technologies utilised

Spain
< 1 year 9.70% 15.20% 14.60% 66.70% 10.60%
1-5 years 16.90% 19.60% 16.40% 11.10% 16.80%
> 5 years 73.40% 65.20% 69.00% 22.20% 72.60%
CLM
< 1 year 6.40% - 8.30% 6.40%
1-5 years 9.60% - - 8.80%
> 5 years 84.00% 100% 91.70% 84.80%
Source: Gem Data.
The study now proceeds to analyse other figures shown in the following tables for Spain
and Castilla-La Mancha which are related to the characteristics and development of
foreigners entrepreneurial activities in comparison with those of the Spanish.
Innovation is still lacking among both local and immigrant entrepreneurs. In relation with
this point Spanish entrepreneurs face a high
1
degree of competition since their businesses tend
to be similar to ones already in existence. Lastly it can be seen that in all cases a high
percentage of the technology in use is more than five years old.
If we analyse the degree of market expansion (Table 7), in Spain the best results
correspond to EU regime immigrants followed by those of the general regime. However in
Castilla-La Mancha the native entrepreneurs are the ones with greater expectations of market
expansion albeit with low figures. Only 0.6% expects a high degree of expansion while 5.8%
expect it to an average degree. There is 50% of EU regime immigrants who have no
expectations of market expansion and 50% expect slight expansion. It is the general regime
immigrants who show a greater proportion of zero expectation of expansion and of average
expectation.

Table. 7. Potential for market expansion

Spain
None 57.20% 28.90% 58.00% 11.10% 56.50%
Small 33.10% 57.80% 27.40% 22.20% 33.00%
Average 7.20% 13.30% 12.80% 55.60% 8.10%
High 2.50% 0.00% 1.80% 11.10% 2.40%
CLM
None 61.50% 50.00% 66.70% 61.60%
Small 32.10% 50.00% 25.00% 32.00%
Average 5.80% - 8.30% 5.80%
High 0.60% - - 0.60%
Source: Gem Data.

Table 8. Degree of Internationalisation

Spain
75-100% 7.30% 22.70% 10.60% 55.60% 8.20%
25-75% 12.10% 27.30% 26.60% 11.10% 13.90%
1-25% 21.40% 15.90% 21.70% 11.10% 21.30%
Dont export 59.20% 34.10% 41.10% 22.20% 56.60%
CLM
75-100% 5.40% 25.00% 18.20% 6.70%
25-75% 8.10% - 9.10% 7.90%
1-25% 23.50% 25.00% 18.20% 23.20%
Dont export 63.10% 50.00% 54.50% 62.20%
Source: Gem Data.

Table 8 shows the level of internationalisation of entrepreneurial activities. EU regime
foreigners direct their businesses more towards export followed by the group of immigrants

1
In 2007 the situation of EU regime immigrants improved.
from developing countries. It is worth noting that Spanish entrepreneurs show little interest in
the export market.

CONCLUSIONS

Immigration has become a topic for study in Spain. It is a source of employment and
income for people who immigrate and covers the demand for workers in certain industries in
receiving countries.
Specialist publications analyse the reasons why some immigrants decide to undertake
entrepreneurial activities and the characteristics of these immigrants. The most common
reasons are: problems of access to the job market, the jobs they do are usually the hardest and
lowest-paid, difficulty getting financial resources and language problems.
The way in which social capital can facilitate entrepreneurial activity is also analysed.
The extended family among immigrants is a great source of financial and human capital and
information. Immigrant networks often provide niche markets with significant possibilities
for commercial exploitation and also allow for the recruitment of a low-cost workforce.
It has been observed that both in Spain as a whole and in Castilla La Mancha immigrants,
especially those form developing countries, are more entrepreneurial than the Spanish. This
may be explained by psychosocial characteristics since immigration itself is an enterprising
project. These entrepreneurial activities also allow immigrants to make economic and social
progress.
Despite evolving favourably in 2006 and 2007, this tendency has been seen to be slowing
down in the case of Spain and in Castilla La Mancha a decrease has been noted in the case of
immigrants of necessity. This is due to the expectations of recession existing in 2007 and
which were confirmed in 2008. This has a negative effect on the generation of entrepreneurial
activities, especially on those of immigrants since it increases the difficulty of finding sources
of finance, which is one of the greatest obstacles to be overcome when setting up any
business.
A greater perception of opportunities is observed in immigrants. They feel more prepared
than the Spanish to start a business and have more contact with other entrepreneurs, which
could explain their higher level of entrepreneurial activity.
Finally there exists a low degree of innovation, internationalisation and market expansion
both among immigrants and the Spanish.

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Chapter 9

BUSINESS MOTIVATION AND WORK-FAMILY
BALANCE AMONG URBAN AND RURAL WOMEN
ENTREPRENEURS IN PORTUGAL

Carla Marques, Gina Santos, Chris Gerry and Gil Gomes
University of Trs-os-Montes e Alto Douro / CETRAD Research Unit, Portugal

ABSTRACT

The purpose of this study was to estimate in what ways the dual work-family role of
women impacts on the entrepreneurial motivation of female entrepreneurs in Portugal,
and to examine the influence of the urban-rural dichotomy on their profile as
businesswomen. In order to validate the theoretical model adopted, a questionnaire was
administered to urban and rural women entrepreneurs in Northern Portugal, and the
resulting data analysed using EQS 6.1 structural equation models (SEM) and a statistical
methodology able to confirm the behaviour of the factors involved and the relationship
between them. The results suggest that the motivations compelling women to become
entrepreneurs in rural contexts are distinct from those underpinning the decisions of
urban women, i.e. there exists a correlation between entrepreneurial motivation and the
location of the business opportunity that in turn positively influences womens business
start-up decisions. Nevertheless, in both urban and rural contexts, women proved
themselves able to effectively manage a combination of family and entrepreneurial roles.

Keywords: Women entrepreneurs, motivation, work-family balance, womens double role,
urban-rural dichotomy, SEM approach.

1. INTRODUCTION

In contemporary advanced economies, entrepreneurship is seen both as one of the
principal driving forces behind economic progress and a fundamental policy instrument for
confronting the new and rapidly-changing competitive environment (Bettis and Hitt, 1995). In
Carla Marques, Gina Santos, Chris Gerry et al. 168
recent decades, the promotion of entrepreneurship has been debated at countless conferences
and analyzed in innumerable studies, and has come to occupy a central role in the economic
paradigm of the 21
st
century
1
.
The study reported on here contributes to the literature on female entrepreneurship that
has emerged from the 1980s onwards. By the time the first studies of psychological and
sociological differences between male and female entrepreneurs were being published in the
USA in the mid 1970s (Schreier, 1975; Schwartz, 1976), the constraints on womens self-
employment in less developed countries had already become a focus of attention for social
scientists analyzing so-called informal (i.e. unregistered) business activities (see e.g.
chapters in Bromley and Gerry 1979 and in Young, Wolkowitz and McCullagh, 1982).
Thereafter, studies focusing more specifically on female entrepreneurship began to multiply,
beginning with more exploratory works (Schreier, 1975; Schwartz, 1976), out of which
developed more specific analyses (cited in Carter and Shaw, 2006), with the theme gradually
becoming a major focus of attention among academics, politicians, policy-makers and other
stakeholders involved in the sphere of entrepreneurship (Henry, 2007). The recent work of
Carter, Anderson and Shaw (2001), Carter and Shaw (2006) and Holmquist and Carter (2009)
provides comprehensive and perceptive contextualisations of the key issues surrounding
female entrepreneurship.
In the latter decades of the 20
th
century, a further stimulus to the study of businesswomen
was provided by their increasing penetration of the labour market and the associated tendency
for more females to grasp entrepreneurial opportunities (OECD, 2000). According to Hisrich
and Peters (2004), women create three times as many new businesses as men and, in the
specific case of Portugal, women constitute 48% of all entrepreneurs, a level significantly
above the average (GEM, 2004). The OECD (2005) further reports that in only five of its
member countries (including Portugal) has female self-employment recently grown (Carter
and Shaw, 2006), suggesting that a more detailed analysis of the phenomenon in these
particular countries would be of value.
In our view, any attempt to gain a more detailed and accurate understanding of the
dynamics of female entrepreneurship first needs to focus on womens motivations to become
entrepreneurs, on the particularities of their psychological and cognitive profiles, and on
urban and rural contexts as potential differentiating factors in motivation and success.
However, since a womans dual reproductive and productive role is fundamental to
understanding how the balance between work and family is managed, not only is it necessary
to clarify what underpins a womans work-related activities, but also to unpack the family
dimension, which typically encompasses the overall management of the household, child
rearing, care of elderly relatives, and the provision of emotional and psychological support to
partners.
Despite the fact that more recent studies of female entrepreneurship (e.g. Buttner and
Moore, 1997; Diaz Garcia, 2000; Mallon and Cohen, 2001; DeMartino and Barbato, 2003;
Carter and Shaw, 2006; Brush and Gatewood, 2008) have helped to identify the factors
motivating women to establish their own firms and those determining their entrepreneurial
success, few analysts have attached importance to the businesswomans dual role as
homemaker and entrepreneur (Caputo and Dolinsky, 1998; Byron, 2005; Carter and Shaw,

1
On the evolution of entrepreneurship as a field of study, and on the specific research issues inherent in it, see e.g.
Kuratko (2006).
Business Motivation and Work-Family Balance 169
2006; Ford, Heinen and Langkamer 2007; Shelton, 2008), and fewer still have focused on the
influence that urban versus rural contexts may have on start-up decisions and subsequent
business performance (Driga, Lafuente and Vaillant, 2009). The present study attempts to fill
a part of this lacuna by focusing simultaneously on these two important but under-researched
dimensions. In addition to the research mentioned in this introduction, the present study also
draws on work conducted by Marques, Ferreira, Rodrigues and Ferreira (2010) which
supports the idea that cognitive as well as conventionally-defined psychological factors
should be employed in the profiling of potential entrepreneurs.
The chapter is structured as follows. Following this introduction, the authors provide a
theoretical discussion of the psychological and cognitive attributes that motivate women to
become entrepreneurs and that are associated with their dual work-family role. After some
methodological considerations, the authors present and discuss the results of the study,
concluding with a reflection on its principal limitations, its implications for management
practice, and potential future avenues of research.

2. MOTIVATION AND WORK-FAMILY BALANCE
OF WOMEN ENTREPRENEURS

2.1. Psychological and Cognitive factors

In spite of the attention they have received from academics over the years, the
psychological characteristics influencing start-up decisions and subsequent business success
still remain among the least well-understood aspects of entrepreneurship (Sexton and
Bowman, 1985). Until recently, researchers typically focused on the personality traits of
aspirant or active entrepreneurs (McClelland, 1961; Brockhaus, 1980): a series of
psychological characteristics considered to be good predictors of entrepreneurial behaviour
were gradually assembled as a result of the pioneering work of McClelland (1961) and the
contributions of those inspired by his research (Hornaday and Aboud, 1971; Bygrave, 1989;
Koh, 1996). Readers conversant with behaviouralist theory in general and the analysis of
business motivation in particular, will already be familiar with the psychological
characteristics listed in Figure 1 (below), which provides a chronology of those traits
currently associated with entrepreneurial behaviour and the authors responsible for their
identification.
According to Bowen and Hisrich (1986), the traits most frequently referred to in the
foundational behaviouralist literature on entrepreneurship are (a) the need for achievement;
(b) the locus of control; and (c) risk taking. The gender dimension was raised in the mid-
1970s, with Schreier (1975) and Schwartz (1976) publishing their research on the
distinctiveness of male and female entrepreneurs psychological profiles, with more key
studies appearing throughout the 1980s and early 1990s (Hisrich and OBrien 1982, Goffee
and Scase 1983, Hisrich and Brush 1983, Goffee and Scase 1985, Bowen and Hisrich 1986,
Hisrich 1986, Stevenson 1986, Birley 1989, Lee-Gosselin and Grise 1990, Stevenson 1990,
Brush 1992).
According to authors such as Marques et al. (2010), the capacity of psychological
attributes alone to explain the differences between entrepreneurs and non-entrepreneurs
remains limited, mainly due to lack of agreement over the precise content of each attribute
and the resultant difficulty in clearly distinguishing one from the other.

Source: Authors Literatures survey.
Figure 1. Different authors perspectives on entrepreneurs psychological characteristics.
Drawing on Gatewood, Shaver and Gartner (1995), Marques et al. (2010) go on to argue
that researchers will gain greater insight into the factors influencing business success and
sustainability by including cognitive as well as psychological traits in the analysis i.e. by
also focusing on how entrepreneurs think and why they tend to act in the way that they do
2
.
In the most credible theories relating to how humans process information, according to
Walsh (1995), we are endowed with what might be called our own knowledge architectures
or cognitive structures which help us to make sense of available data and to take decisions
accordingly. The concept of cognitive structure, conceived of as something that formats the
various products of cognition, and generates representations of what we conventionally refer
to as knowledge, can provide a means of making sense of how knowledge is received,
processed and used. Some researchers (e.g. Mitchell, 1994) have gone as far as affirming that
such cognitive structures may be the prime differentiating factor between entrepreneurs and
non-entrepreneurs. From this general perspective, Baron (2004) argues that specifically
entrepreneurial cognitions are used to accelerate the speed at which certain types of
information are processed, and at which certain types of decisions are reached, particularly
with regard to the type of complex, challenging and ambiguous problems implied in
situations characterized by information overload, highly charged emotions, time pressure and
fatigue.

2
An early study by Brockhaus & Horwitz (1986) concluded that entrepreneurs who believed themselves able, by
way of their actions, to exercise some degree of control over their business environment, demonstrated greater
persistence and perseverance. These results could be interpreted as suggesting that if entrepreneurs believe
that they can exercise control over their wider macro (political and social) environment as well as their more
specific micro (personal and family) environment, they would even more persistent as entrepreneurs and,
possibly, more successful in business.
Psychological characteristics Principal authors
Need for achievement McClelland 1961; Hisrich & Peters 2004
Locus of control Kourilsky 1980; Bygrave 1989
Risk taking McClelland 1961; Brandstatter 1997; Van Praag & Cramer 2001
Gender identity Bowen & Hisrich, 1986
Self-esteem Hisrich & Peters 2004
Autonomy McClelland 1961; Douglas 1999
Self-confidence Kourilsky 1980; Hisrich & Peters 2004
Innovation McClelland 1961; Torrance, 1972; Koh 1996
Creativity Baird 1972; Kourilsky 1980; Hisrich & Peters 2004
Organizational & leadership skills Hornaday & Aboud, 1971; Hisrich & Peters 2004
Source: authors literature survey
Entrepreneurial cognitions, according to Mitchell, Busenitz, Lant, McDougall, Morse and
Smith (2002, p.97) are the knowledge structures that people use to make assessments,
judgments, or decisions involving opportunity evaluation, venture creation, and growth. This
definition provides a useful starting point, since it integratively combines conclusions drawn
both by cognitive psychologists who have focused on issues of perception, and management
scientists who have studied entrepreneurship from a more specifically business perspective.
The first studies of entrepreneurial cognitions focused on cognitive biases and
heuristics (Busenitz, 1992) in the sphere of strategic decision making, and what Krueger and
his collaborators (Krueger, 1993; Krueger and Dickson, 1994) saw as the factors under-
pinning entrepreneurs perceptions of the desirability and feasibility of planned behaviour At
around the same time, cognition-based approaches began to be employed by Mitchell (1994)
to distinguish entrepreneurs from non-entrepreneurs, and by Palich and Bagby (1995) to
explain entrepreneurial risk-taking. Baron (1998) believed there were some cognitive
mechanisms such as those based on counterfactual thinking, attributional style, self-
justification and the planning fallacy that might help to explain entrepreneurial behaviour
that had hitherto seemed perverse or even irrational. Furthermore, Mitchell and Chesteen
(1995) argued that, in inculcating entrepreneurial expertise, cognition-based training was
likely to be more successful than traditional approaches.
Though the vast majority of the above-mentioned studies failed to reveal or simply did
not look for differences between male and female entrepreneurs, a small number did point
to potential differentiating factors based on gender, as Figure 2 suggests:

Figure 2. Gender-based psychological/cognitive traits that may differentiate female from male
entrepreneurship.
Importantly, the study conducted by Watson and Newby (2005) posited the existence of a
continuum of behavioural traits, ranging from the relatively more feminine to the
preponderantly masculine that were found among all entrepreneurs, as opposed to the crude
dualistic model that had previously taken for granted, in which males were more generously
endowed with pro-entrepreneurship psychological attributes than females. According to
Watson and Newbys view, all entrepreneurs regardless of their biological gender display
Authors Gender-based differences
Carland & Carland (1991)

Intuition. Females tend to be strongly intuitive, focusing on the big
picture rather than on the directly perceived reality on which males
concentrate.
Carland & Carland (1991)
People-orientation. Womens views and actions are more people
oriented than those of men, the latter being more thinking-
oriented (i.e. using what is usually termed logic or rationality).
Zhao, Seibert & Hills (2005)
Gerry, Marques & Nogueira
(2008)
Preference for self-employment. Women (in general) and women
students and recent graduates (in particular) report lower levels of
intention to embark on an entrepreneurial career than men.
Sexton & Bowman-Upton (1990)

Autonomy & openness to change. Women entrepreneurs are more
autonomous, have greater propensity for change, are more open to
new experiences, more routine-averse, and more readily adjust their
values and opinions.
Sexton & Bowman-Upton (1990)

Physical energy and resilience. Women entrepreneurs energy levels
are lower than those of males in terms of activity, intensity, reserves
and stamina.
Sexton & Bowman-Upton (1990) Risk. Women entrepreneurs are more risk-averse.

evidence of both feminine and masculine cognitions (albeit differentially) with women
having a greater concentration of the former, men a greater concentration of the latter, and the
majority lying somewhere between these two extremes.

2.2. Motivation

Over the years, many authors have used the classic Maslow or Herzberg models to
explain the motivations underpinning entrepreneurial behaviour and decisions, with others
(Stanworth and Curran, 1973; Miner, 1990; Davidsson and Wiklund, 1999; Ferreira, 2003)
drawing on McClellands theory that most people have a basic need for self-realization.
However, in recognizing that entrepreneurship is highly variable across cultures and between
individuals, Silva, Sales and Souto (2004), conclude that it is difficult to posit a universally-
applicable set of motivations
3
underpinning the business start-up decision.
However, in certain unfavourable economic conjunctures, other factors may influence
start-up decisions more than the need for self-realization (Silva et al., 2004). The term
necessity entrepreneurs was used by Minniti, Arenius and Langowitz (2005) for those who
establish an enterprise due to job-dissatisfaction or enforced unemployment and opportunity
entrepreneurs for those who recognize a business opportunity and establish a firm to exploit
it. The genesis of the entrepreneurship decision may be the result of a distinct combination of
push factors and pull factors (Granger, Stanworth and Stanworth, 1995), the former
consisting of dissatisfaction with current employment and career progression possibilities,
and the latter comprising the need for a new personal challenge, greater independence or self-
realization, stimulated perhaps by the identification of a business opportunity (Mallon and
Cohen, 2001). While factors pushing males into entrepreneurial activity appear to be less
important than pull factors, the same may not be true of women: in principal, faced with a
combination of a seemingly unbreakable glass ceiling and the specificities of her family
responsibilities, a woman may simply reconcile herself to salaried employment or seek
greater self-realization through entrepreneurship.
Buttner and Moore (1997) identify only one study (in which women constitute only a
small minority) that explicitly compares male and female entrepreneurs start-up motivations.
The results of this lone study suggested that, while both men and women establish firms to
enhance their social status, economic well-being, personal independence and capacity for self
realization (Brush and Gatewood, 2008), what drives males to become entrepreneurs is more
related to the desire to achieve upward social mobility and status for themselves and their
families, while female entrepreneurs do so more with a view to achieving personal goals,
confirming the conclusion reached by Bailyn (1993) that women entrepreneurs structured
their individual objectives much more around their personal lives. Maysami and Goby (1999)
concluded from their research that women are also strongly motivated to start their own
businesses by the wish to more fully use the skills and abilities they have already acquired via
training or work experience.

3
The initial and fundamental challenge faced by entrepreneurs is associated with the start-up decision, and/or the
decision to operationalize an exit strategy from one business initiative and move on to another. Launching a
business requires the entrepreneur to innovate, accept some degree of risk, and assume responsibilities that
extend beyond him/herself. Subsequently, challenges relating to the adaptive growth of the firm must be met.
In the more recent literature on entrepreneurial motivation, the importance of womens
dual role has begun to be recognized. Caputo and Kolinsky (1998) found that women with
young children displayed a much greater propensity to take up self-employment, a conclusion
supported by the research of DeMartino and Barbato (2003) who, having questioned recent
male and female MBA graduates regarding the likelihood of their becoming entrepreneurs,
found family-related motivations to be the strongest among women with children.
On the basis of this literature review, and taking into account the aims of the research, it
appeared most worthwhile to test the following motivation-related hypotheses:

H
0.1
: Psychological factors positively influence the motivation of women entrepreneurs;
and
H
0.2
: Cognitive factors positively influence the motivation of women entrepreneurs.

2.3. Women and the WorkFamily Balance

Though the potential conflict between womens employment and family roles has been a
source of commentary and controversy since the dawn of the industrial revolution, it was only
in 1964 that the theme began to be discussed in the organizational context. Role theory (Kahn
et al., 1964) posited the existence of conflicts between the roles assumed by (or imposed on)
different actors in an organization, and suggested that the effects of such ambiguities could
extend beyond organizational frontiers, and that their mitigation would need to take both the
organization and its external environment into account. Applying this approach to a womans
work and family roles (in general), and a womans roles as entrepreneur and mother (in
particular), we can conclude that her performance in both roles will be critical to the success
of the enterprise: when the demands of one interfere with the performance of the other,
conflict between the work and family spheres ensues (Greenhaus and Beutell, 1985).
Though the issue of work-family balance has been fairly thoroughly analyzed for salaried
women workers, little research exists on this problem as experienced by women entrepreneurs
(Shelton, 2008). Studies by Stoner, Hartman and Arora (1990) and Parasuraman, Purohit,
Godshalk, and Beutell (1996) of North American women entrepreneurs showed that growth
in work-family conflicts were directly related to a declining level of satisfaction with
professional life, with the conjugal relationship and/or with life in general all of which
increased mental stress and physical fatigue. It also seems clear that the preoccupation with
maintaining a balance between business and family roles is typically a female one (Marlow,
1997) both from the material perspective (i.e. how much time is devoted to each role) and
from the psychological standpoint (feelings of duty/ responsibility, desire for material
advancement and personal accomplishment, fear of the relationship and/or business failing).
Some studies have suggested that mothers with entrepreneurial spirit obliged to develop
their time management skills so as to avoid conflicts between their roles as mother/partner
and entrepreneur in fact, displayed greater flexibility in combining professional and
domestic responsibilities
4
(Caputo and Dolinsky, 1998).

4
Cherlin (2001) affirms that a life combining work and parenthood can be a source of both satisfaction and personal
realization. While the reality many women face implies the exercise of a multiplicity of roles, the capacity to
manage such complexity is seen as part of a womans psychological and cognitive profile; indeed, scientific
Logically, since time and energy are the two main limiting factors in the establishment of
an optimal work-family balance (Ruderman, Ohlott, Panzer and King, 2002), the
corresponding resources expended in fulfilling one role are not available for the other. The
greater the demands imposed by one role, the more resources that will have to be expended
on its fulfilment, and the greater will be the likelihood of conflict arising over the current
allocation of resources to the other role. This problem is all the greater when an individual
attaches substantial (not necessarily equal) value to each role and seeks to respond
appropriately and effectively in both (Ruderman et al., 2002).
Drawing on Greenhaus and Beutell (1985), we can argue that the three key parameters of
work-family conflict are: (a) the limited time available to fulfil all the roles that individuals
explicitly or implicitly accept; (b) the tension experienced by actors in fulfilling each of their
roles (and in managing the resources allocated to each of them); and (c) the forms of
behaviour adopted in each role and in the management of multiple roles. Thus the demands
5

of the family and those of entrepreneurship are positively correlated with work-family
conflict (Shelton, 2006).
In his conservation of resources theory, Hobfoll (1989) argues that people strive to
acquire, accumulate and protect that which they value: material assets such as houses, cars,
clothes; personal characteristics such as self-esteem; life conditions such as a satisfying
emotional relationship with someone supportive, or financial stability; and both time and
energy, including the energy to pursue and apply knowledge. Stress occurs when these
resources diminish, are threatened, are not adequately replenished or are lost. Hobfolls
approach is helpful in examining what happens when difficulties arise in the management of
the work-family balance, and the individual is forced to adjust, more or less successfully, the
distribution of time and energy available for family and entrepreneurial roles, respectively.
The additional energy expended may generate dissatisfaction (with one role, or the other, or
with both), anxiety, stress or even burn-out. Difficulties of this sort arise when fulfilling
one of the roles implies stretching the available resources beyond what is deemed acceptable
by those involved in the fulfilment of the other.
Married women entrepreneurs are likely to devote more time and energy to meeting
domestic demands than do their unmarried counterparts (Ford et al., 2007) and, while it is
advantageous to have a spouse who helps in meeting domestic demands (Hundley, 2001),
undoubtedly additional time and effort is also required to maintain a successful marriage. The
involvement of spouses in the same business venture can be a source of tension, often due to
suboptimal joint or divisive univocal decision-making (Danes and Olson, 2003). Having a
family can also make significant impact on a businesswomans success, according to studies
cited by Buttner and Moore (1997): even if spouses and their parents assume some domestic
responsibilities, married women entrepreneurs may still bear a disproportionate share of the
burden. Nevertheless, while some studies suggest that there are few discernable differences in

and anecdotal evidence suggests that women have a marked facility for planning the performance of various
tasks in parallel.
5
According to Byron (2005) and Shelton (2008), the key data required to assess family and professional demands
include: number of hours devoted to family and to employment, and the flexibility of working hours; the
extent of workplace/ family-based stress, workplace/family support, professional/family involvement; number
and age of children (Huang et al., 2004; Prottas & Thompson, 2006), existence of disabled/aged dependents
(Prottas & Thompson, 2006), marital status (Blau et al., 1998), the employment status of the entrepreneurs
partner, and (non) involvement in the business (Van Auken & Werbel, 2006); and demographic and economic
data (such as age, gender, income).
the impact of the family factor on the success of male and female entrepreneurs (Morris,
1995), the fact that working women accumulate skills in flexibly managing work and family
roles, may help to explain their decision to become entrepreneurs (Fierman, 1990).
The literature available on womens dual work-family role suggests a third hypothesis:

H
0.3
: Womens dual work-family role influences positively their motivation as
entrepreneurs.

2.4. Urban-Rural Differences

Entrepreneurial activity is not the same in every country, region, city or town and is
subject to a wide variety of influences. According to Martins (2006), geographical variations
in the distribution of entrepreneurship can be explained largely by the structural
characteristics of the local and regional economy. While fundamentally stimulated by
individual behaviour, decisions, motivations and knowledge, entrepreneurship and entrepre-
neurial success depends significantly on the nature of the firms external environment. In
many cases, the conditions, opportunities and resources in the firms immediate environment
in particular, the economic, financial, social and physical infrastructure at local and regional
levels will be determinant. The ideal entrepreneurship environment is one in which firms
can take advantage of economies of agglomeration and/or proximity regarding the supply of
raw materials, skilled labour, technology, capital and information. Typically, rural areas have
few if any of these advantages: networks have not yet evolved, technology may be backward,
innovation remains alien to the culture, and firms have to fight much harder to become and
remain competitive.
Entrepreneurs in the Portuguese Interior interviewed by Portela et al. (2008) stressed the
importance of the firms location in its success or failure. Put another way, along the
continuum from urban to rural, and from central to peripheral, there are enormous variations
in business success. Some considered their rural location a negative factor, due to the greater
isolation, lower population density and consequent weaker demand, in addition to the longer
distances their products and services had to travel. Others felt that setting up a firm in the
city is risky too, due to the abandonment of the old urban centres in favour of the suburbs
(Portela et al. 2008, p.128).
While in most studies on the subject, women entrepreneurs are assumed to constitute a
homogenous group (Bruin et al. 2006), Gatewood, Carter, Brush, Greene and Hart (2003)
have concluded that distinct categories of businesswomen can be identified according to
where and under what circumstances their firms operate, and how they evolved. If key
contextual variables such as location and business environment are not taken into account, the
complex process of female entrepreneurship may be misspecified.
In positing that location influences whether or not women will establish their own firms,
we need to identify an appropriate distinction between urban and rural. Grimes (2000, p.13)
views rural areas as those parts of the space economy which are least affected by the process
of urbanisation, and are therefore more associated with a much more dispersed pattern of
population distribution and economic activity. They are also affected by varying levels of
peripherality, depending on their distance from markets and their access to services.
Typically two criteria have been used to distinguish rural from urban locations:
population level and population density. The former, favoured by the influential Global
Entrepreneurship Monitor (GEM), defines a municipality as rural if its population is below
5,000, whereas the latter which is internationally recognized, and widely employed by
policy-makers and academics classifies a municipality as rural if its population density is
below 150 inhabitants per square kilometre. Having the advantage of being widely used in the
specific field of entrepreneurship studies, and more readily permitting comparison with other
research on similar themes, the GEM definition was adopted for the present study.
On the basis of the above considerations, a fourth hypothesis can be proposed:

H
0.4
: The location (i.e. rural or urban) of the business initiative positively or negatively
affects the entrepreneurial motivation of women.

Based upon the literature review presented above and in line with the aims of this
research, we now can now visualize the four hypotheses in the form of a model (see Figure
3).

Figure 3. Proposed model of womens entrepreneurial motivation.

3. METHOD

3.1. Sample and Procedures

The type of statistical methods frequently used in the studies of women entrepreneurs
referred to in the literature review were employed in the present study merely to confirm the
results of a more advanced modelling of the data using structural equations (Buttner and
Moore, 1997; Diaz Garcia, 2000). The data was collected via questionnaire from female
proprietors of enterprises located both in rural and urban areas, selected regardless of the
business sector in which the firm was operating. The key criteria for constituting the sample
were that rural and urban contexts should be as equally represented as possible, and that
respondents should (1) be significant shareholders in their companies; (2) be actively
involved in the day-to-day functioning of the firm; and (3) exercise managerial and/or
technical leadership in the firm. The questionnaire design drew heavily both on the
substantive content of the empirical research consulted during the literature review, as well as
on the questionnaires used in the respective studies.
Before the questionnaire was administered, business associations in each of Portugals
regions were consulted (as were APME the Portuguese Association of Women
Entrepreneurs, and similar bodies) with a view to gaining access to up-to-date information on
women entrepreneurs. Having gathered information from each regarding their membership,
businesswomen were contacted by telephone or e-mail in order to gauge their willingness to
participate in the study. Subsequently, primary data on respondents identity, on their
companies, and on the variables necessary for the testing of the four hypotheses, were
collected, providing the researchers with a number of replies sufficiently large to ensure
representativity and an accurate overview of female entrepreneurship.
The questionnaire designed and tested in the second trimester of 2010, requested answers
reflecting (1) the companys main characteristics; (2) the respondents identity and personal
details; (3) her motivations for establishing it; (4) her work-family balance; and (5) her
psychological and cognitive profile. The data was elicited using predominantly closed
questions giving the respondent multiple choices, structured according to a 1-5 Likert scale,
allowing the respondent to express the relative strength of her answers.
A total of 171 businesswomen either living in, or operating their firms from, urban and
rural areas in the North of Portugal were surveyed. Of this sample, two-thirds (66.7%) were
between 25 and 44 years old, making them comparable to their counterparts worldwide
(GEM, 2009). While more than three-quarters (78.4%) of respondents were married, 78.9%
had dependent children, very few (11.1%) were permanent care providers to dependent
adults. Over half (55.5%) had attended elementary and secondary school (without necessarily
completing their studies), but only 18.7% had a university degree.
The share of rural- and urban-located firms in the sample was approximately 40% and
60%, respectively, with the proportion of rural- and urban-resident respondents being almost
equal. The majority of firms were in the tertiary sector mainly shops and other forms of
retail sales, wholesale commerce, restaurants and similar establishments. In 40.4% of cases,
the entrepreneur herself had drafted the business plan, with only 6.4% having had recourse to
professional help in this regard.

3.2. Measurement and Indicators

Motivation. A battery of 25 questions was adopted, each with a five-point Likert scale for
answers, structured so as to range from 1 (never) to 5 (always), in order to measure
enterprise start-up motivations; the questions drew on those used by Tang et al. (2007),
Buttner and Moore (1997), DeMartino (2003), Diaz Garcia (2000), Driga et al. (2009),
Shelton (2008), and Hisrich and Brush (1985).
Balance between work-family roles. A series of 11 five-point questions was used
(structured as above) to assess the balance between womens roles at work and in the family,
based on Shelton (2008), Stoner et al. (1990), Parasuraman et al. (1996), Byron (2005), Burt
(2000), and Carter and Shaw (2006).
Psychological factors. In order to profile respondents psychological traits, a series of 17
five-point questions was employed (structured as above), as used in Marques et al. (2010),
based on Luchinger and Bagby (1987), Bygrave (1989), Douglas (1999) and Hisrich and
Peters (2004).
Cognitive factors. In order to assess cognitive factors potentially influencing respondents
entrepreneurial motivation and performance, 15 five-point questions were posed (structured
as above), as used in Marques et al. (2010), based on Tang et al. (2007), Gaglio and Katz
(2001), and Baron (2004).

4. STRUCTURAL EQUATION MODELLING

In order to analyse the validity of the theoretical model, recourse was made to a structural
equation model (SEM) and to statistical methods with confirmatory capability. The SEM
includes statistical techniques that permit causal relations between latent (i.e. not directly
observable) variables to be evaluated via a set of observed variables. The advantages of
this technique make it preferable to the available alternatives, because it (1) allows for
the variance to be unstable over time; (2) enables the calculation of measurement errors
(observed variables); (3) enables the statistical significance of each causal effect to be rapidly
calculated; and (4) allows overall adjustment of the hypothetical model to be achieved (Byrne
1994).
In the calculations required for testing each model, undertaking the factorial analysis and
factor validation (using Cronbachs alpha), the final selection of factors was based on the
average of the variables associated with each factor. Indicators used for the latent variables
were taken as being reflexive. Evaluation of the measurement models was then carried out
using overall and specific measures of fit, with the overall result showing the extent to
which the data fitted the models covariance matrix. The methods adopted for final decision-
making were 2, 2/gl, CFI and RMSEA (Byrne 2001; Schreiber et al. 2006).

4.1. Confirmatory Factor Analysis

Confirmatory factor analysis (CFA) allows us to confirm structural patterns in the data,
i.e. if given latent factors are responsible for the behaviour of given variables that correspond
to a pre-determined pattern, a specific theory, or the results of a given study (Maroco, 2010).
CFA is generally used to evaluate how well a given measurement model fits the structure of
correlation characterizing the manifested variables, thereby constituting the first step in
evaluating the SEM. From a formal standpoint, CFA is a measurement tool for the SDEM
model (Maroco, 2010).


Figure 4. Confirmatory Factorial Analysis.

Figure 5. Recommended values for evaluating the fit of SEM model.
The factorial validity of psychological, cognitive and motivational factors in the sample
of businesswomen was evaluated using CFA with EQS 6.1 software; the overall fit of the
CFA models was evaluated using the indicators and reference values suggested by Maroco
(2010, p.51), i.e. the comparative fit index (CFI), the standardized RMR, and the root mean-
square error of approximation (RMSEA). Figure 4 presents the values of the factors
Indicators of fit Recommended values
Cronbachs Very good : > 0.9
Good : [0.8, 0.9[
Fair: [0.7; 0.8[
Weak: [0.6, 0.7[
Unacceptable: < 0.6.
Perfect: = 1
Very good: [0.95, 1[
Good: [0.9, 0.95[
Poor: < 0.9
Good: < 0.08
Acceptable: < 0.1
p-value 0.05
Very good: 0.05
Good: ]0.05; 0.10]
Unacceptable: >0.10
CFI (Comparative fit
I ndex) (Maroco, 2010).
Standardized RMR (Brown,
2006).
RMSEA (Root mean square
error of approximation)
(Maroco, 2010)
Consistency (Maroco, 2007).
comprising each of the four dimensions (motivation, psychological factors, cognitive factors
and work-family balance) after the CFA, Cronbachs alpha coefficient, CFI, standardized
RMR, and RMSEA
6
tests had been applied.The internal consistency of each factor attained
acceptable values (with a Cronbachs alpha of > 0.60) for the following factors: self-
realization, family, challenges, social status, finances (motivations); creativity/innovation,
self-esteem, self-confidence, autonomy (psychological factors); optimism/perception of
success, rigour in problem solving (cognitive factors); and time for oneself (womens work-
family balance).
In addition to using Cronbachs alpha to check the internal consistency of a model, CFA
was also used to test the validity of the theoretical construct and displayed moderately high
indices of fit. Dimensions with statistically insignificant associations were discarded. Figure 5
presents the recommended values for the indicators of fit.

4.2. The Entrepreneurial Profile of Women Entrepreneurs

Structural equations were employed to evaluate the model linking psychological,
cognitive and motivational factors relating to the profile of women entrepreneurs. CFI and
GFI indices were used to evaluate the quality of the adjustment because they perform well for
values above 0.90. RMSEA was also applied, with a confidence level of 90% and a
probability s0.05, with a value of s0.10 indicating an acceptable fit and, in line with Maroco
(2010), s0.05 indicating a very good fit.

Figure 6. Adopted model of psychological and cognitive factors and of women entrepreneurs
motivations for start-up decisions in both rural and urban locations.
Given the relatively large number (5) of variables included in the self-esteem dimension,
it was disaggregated into two parcels, designated SE
a
and SE
b
, based on the mean average

6
For a detailed justification of the use of these indicators of fit, see Maroco (2010).
of the respective variables. One parcel contained three variables and the other two, the
variables having been randomly assigned to each parcel.
Figure 6 summarizes the model of the psychological, cognitive and motivational factors
relating to women entrepreneurs applied. It should be noted that womens dual role as home-
maker and entrepreneur proved not to be statistically significant.
The model fits well with the structure of variance-covariance of the 14 variables under
analysis [(_
2
(71)=99.52; p<0.05); (_
2
/g.l.=1.401), (CFI=0.957), (GFI=0.923), (RMSEA=
0.049; p(RMSEs0.05)=1.000, IC(90%)=]0.022; 0.070[. Chi-square tests for each variable
showed that motivational factors had the greatest weight in the overall chi-square.
Given that one of the aims of this study was to ascertain whether different types of
motivations come into play when women decide to establish their own businesses in rural as
opposed to urban areas, variables related to motivation were disaggregated into two factors
(self-realization and challenges).
All the factors motivational, cognitive and psychological were found to have
indicators with positive and acceptable loadings, indicating that, in all cases, each factor had
been well portrayed by the corresponding variables, as indicated in the Figure below:

Figure 7. Results of application of SEM.
Furthermore, a significant correlation was found between the cognitive factor rigour and
the psychological factor self-esteem (with t=0.44 and P<0.05), indicating that the more
marked is the presence of the cognitive factor, the more present will be the psychological
factor and vice-versa.
The influence of the psychological factors on motivation (self-realization and
challenges) was also shown to be significant (with r=0.31; P=<0.05; r=0.43; P<0.05),
indicating that (a) a one-unit increase in the score of the psychological factor self-esteem is
accompanied by an increase of 0.31 units in the self-realization score; and (b) and a one-unit
increase in the score of the psychological factor self-esteem is accompanied by an increase
of 0.43 units in the challenges score. Similarly, there is a significant influence of cognitive
factors over motivation, expressed in the significant influence of the cognitive factor rigour
on motivation (for self-realization, |=+0.32 with P<0.05 and for challenges, |=+0.24 with
P<0,05 ), indicating that a one-unit increase in the score of the cognitive factor is
accompanied (a) by a 0.32 unit increase in self-realization, and (b) by a 0.24 unit increase in
challenges.
Finally, the influence of the self-realization motivation proved significant for
entrepreneurial initiatives launched in a rural context (with r=0.56 and P=<0.05) and/or by
female rural inhabitants, whereas for company start-ups in urban areas, the significant
motivational factor was challenges (with r=0.66 and P=<0.05).

CONCLUSION

Main Findings

The psychological factor in women entrepreneurs motivation to start their own
businesses that proves to be statistically significant is generally that of self-esteem and,
more specifically, the desire for greater autonomy. This is a somewhat surprising result: while
it has often been observed in general studies of entrepreneurship (e.g. by Hisrich and Peters
2004, and Marques et al., 2010), to date it had not emerged in studies of women
entrepreneurs. Indeed, the novelty of the result is all the greater since, traditionally, the need
for self-esteem and the desire for greater autonomy have been considered intrinsically
masculine aspects of the entrepreneurs psychological profile.
The most relevant cognitive factor to emerge was that of rigour in the resolution of
problems, a conclusion that corroborates the results of previous studies (e.g. Marques et al.,
2010). Among the motivational variables incorporated into this factor, that of challenges is
the most relevant and, it should be noted, the cognitive factor rigour correlates with the
psychological factor self-esteem.
Also, the motivations of the businesswomen surveyed emanated more from the positive
pull of self-employment (such as the need for new challenges, and/or the desire for greater
autonomy) than the negative push of dissatisfaction with salaried employment and/or
domestic duties, in line with the results of the study by Buttner and Moore (2007) who gave
precedence to internal factors (desire for self-realization and personal/professional
development) over external factors (e.g. profits and the growth of the firm) conventionally
used to measure entrepreneurial success.
It nonetheless remains important to be able to examine the growth of the firm from the
standpoint of the types of motivation that lead women to establish firms. As early as the
1960s, Smith (1967) established the following dualistic distinction between craftsmen and
opportunist entrepreneurs: in contrast to the middle class, educated, professionally
experienced, risk-taking, investment attracting, market-oriented opportunists who see no
limit to their earning capacity, the artisanal entrepreneur had blue collar social origins,
lower educational qualifications, little management experience, was averse to risk,
paternalistic, valued autonomy over outside involvement, and aimed only for a comfortable
standard of living. From this perspective, a company launched by an artisan is unlikely to
experience more than modest rates of growth.
Since most of the women surveyed in our study had only medium-level educational
attainments, in principal they could be considered closer to artisanal than opportunist
entrepreneurial motivations and behaviour. Studies by Bigoness (1988) and Brenner and
Tomkiewicz (1979) concluded that women in general exhibit a preference for jobs that allow
them to grow personally and professionally, whereas men favour employment that
maximizes earnings. Carter and Shaw (2006) reported that women entrepreneurs are
concentrated in retail commerce and personal services (Marcucci, 2001) activities that,
paradoxically, offer less time-flexibility and decision-making autonomy (Jennings and
McDougald, 2007), being among the most competitive and least lucrative sectors of the
economy (Rogers et al., 2001). Our results also confirm these conclusions, for it is precisely
these types of businesses that had been established by the majority of the women
entrepreneurs surveyed in the present study.
More than 78% of our sample combined the roles of home-maker and breadwinner,
strongly suggesting that womens dual work-family role does not directly explain the
motivations underpinning their decisions to launch business initiatives. However, in order to
test this possibility, samples would need to contain similar numbers of dual-role-players
and women without extensive family responsibilities. It may well be that, as Burt (2000) has
suggested, specificities of family context may function as a catalyzing, mediating or
moderating factor rather than a causal one.
Throughout the lives of entrepreneurs and non-entrepreneurs there would appear to be an
equal probability of marriage, starting a family, divorce and remarriage; however, when these
events occur in the life of a woman, they increase the likelihood that she will establish her
own enterprise. Thus the family variable rather than being a predictor of whether a woman
will become an entrepreneur, appears rather to be a predictor of when this will occur.
Authors such as Cherlin (2001) and Vandewater, Ostrove and Stewart (1997) have
stressed that while the dual work-family role is both a complex and challenging reality for
women, particularly mothers, the latter display higher levels of welfare and satisfaction than
their unemployed counterparts. For this reason, and for reasons presented above, it seems that
there is a need to alter the way the way we think not only about womens employment
(including self-employment) but also to promote changes in how women perceive their own
employment be it salaried or entrepreneurial in nature.
Our results also demonstrate that while rural womens motivations for becoming
entrepreneurs have their origins in the challenges that such initiatives offer, urban
businesswomen seem to be motivated more by their desire for greater personal autonomy. In
turn, this suggests that the environment in which the start-up decision is made and concretized
exerts an influence over motivation the rural context being arguably less favourable to
entrepreneurial success than the urban.

Policy Implications

The study has identified a key psychological trait self-esteem among the women
entrepreneurs surveyed, that is traditionally associated with entrepreneurs in general who, as
we know, are predominately male; it has also demonstrated that where the location and
environment of the entrepreneurial initiative (i.e. rural versus urban) influences the
underlying motivation. The main policy implication of these two results is that much more
must be done to promote the emergence of context-relevant conditions within the local
economy that would allow women to more readily launch their own business ventures.
Among the priorities frequently emphasized by specialists in rural and regional business
development are improved physical, logistical and IT infrastructures, greater institutional
density, more extensive networks of entrepreneurs, better access to financial information and
skills, the expansion of micro-credit, additional help in the design of business plans, and
supplementary training in management techniques. More detailed studies could identify more
clearly the priorities for stimulating female entrepreneurship.
In our view, some of the crucial questions raised by this particular result which would
require detailed analysis and appropriate policy formulation in the future would include the
following: (a) what are the respective roles of local stakeholders in the promotion of womens
entrepreneurship? (b) who are the key local agents best placed to provide the skills, services
and information required? (c) is network-based cooperation crucial for stimulating the
sustainable creation of rural enterprises? (d) are the new-technology-based services
causing the motivations of urban and rural women entrepreneurs to converge? (e) do major
differences exist in the entrepreneurial motivations of women entrepreneurs active in the
primary, secondary and tertiary sectors?

Limitations and Future Studies

Clearly, the present study is not without its limitations, and if these are taken into
account, future studies should provide a clearer view not only of how the variables studied
here are empirically related and interact with each other, but what other variables might be
worthwhile including, and what other contexts could be explored.
Firstly, because women with a dual role constituted such a large proportion of the sample
(almost 79%), it exhibits less than ideal representativeness. A future sample could be
designed to include a larger proportion of women entrepreneurs with insignificant work-
family role. A similar questionnaire could be applied, with more attention paid to the specific
extent of work and family roles, and could be complemented by detailed qualitative
interviews focusing on the details of womens motivations for launching their own firm and
the environmental context in which the decision was made. In a larger sample, additional
variables such as those related to entrepreneurs socio-demographic, socio-professional and
socio-economic characteristics could be surveyed an included in the structural equations
model.
Secondly, more complex causal links could be investigated. For example, future studies
could focus more explicitly on psychological, cognitive and dual role aspects of forced and
opportunistic women entrepreneurs: single mothers, divorcees and women recently made
unemployed may be impelled to launch their own firms out of sheer necessity, and may do so
on the basis of fewer resources (Minitti et al., 2005), compared to those who grasp a business
opportunity not only because they have the appropriate profile, but because they pro-
actively judge it to be a viable improvement on their current situation, and are endowed with
(or can gain access to) the resources necessary to concretize it.
The third limitation of the study (which could also be interpreted as a strength) is that so
far very little research has been devoted to exploring connections between womens
entrepreneurial motivations and their work-family balance from a comparative urban-rural
perspective. Furthermore, on the grounds that the relationship between entrepreneurial
motivations, personal profiles and womens dual role may differ according to the level of
economic (or indeed, human) development, future studies could be conducted in different
kinds of development contexts
7
.

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INDEX

A
access, 4, 15, 20, 21, 65, 92, 93, 95, 98, 104, 105,
113, 153, 155, 156, 157, 159, 162, 175, 177,
184
accessibility, 31, 101
accountability, 126, 134, 135, 138, 139, 143, 148
accounting, 9, 19, 22, 101, 102, 107, 108, 138,
146
acquisitions, 34, 67, 118
activism, 128, 129
adaptation, 25
adhesion, 138
adjustment, 59, 60, 61, 178, 180
adults, 177
advancement, 33, 173
aerospace, 22
affirming, 170
Africa, 92
age, 58, 90, 134, 152, 153, 155, 157, 174
ageing population, 152
agencies, 93, 97, 152
aggressiveness, vii, 27, 28, 29, 33, 36, 37, 39, 40,
41, 42, 43, 49, 50, 51
agriculture, 142, 160
alertness, 187, 190
alternative hypothesis, 59
altruism, 115, 131, 150
altruistic behavior, 115, 116
analytical framework, 97, 105
anchoring, 54
anger, 115
annihilation, 32
ANOVA, 37, 39, 40, 41, 49
anthropologists, 154
anthropology, 128
anxiety, 174
arbitrage, 5
Asia, 92, 93
assessment, viii, 24, 28, 31, 36, 51, 96, 102
assets, 5, 6, 12, 102, 105, 136, 142, 174
asymmetric information, 74
asymmetry, 7, 19, 112
atmosphere, 142
attachment, 119
authorities, 127, 132
authority, 8, 18, 25
autonomy, 14, 28, 129, 180, 182, 183
aversion, 32, 74, 78, 101, 102, 106, 107, 108,
109, 190
avoidance, 133
awareness, 143
B
Bangladesh, 92
banks, 95, 100, 101, 121, 127, 139
bargaining, 74, 76, 77, 87, 88, 89, 149
barriers, viii, 91, 92, 95, 96, 97, 98, 100, 101,
104, 105, 112, 115
base, 12, 34, 60, 68, 131, 132, 135, 140, 144, 145
base year, 60
behavioral aspects, 101
behaviors, 187
belief systems, 93
benefits, viii, 8, 9, 13, 14, 19, 55, 56, 67, 96, 98,
100, 102, 105, 130, 137, 155, 185
bias, 108
birth rate, 152
black hole, 10
blood, 55, 116
boils, 4
Bolivia, 185
bonds, 116, 119, 121, 127
borrowers, viii, 91, 92, 93, 95, 96, 98, 99, 100,
101, 102, 103, 104, 105
Index 194
Brazil, 185, 187, 188, 190
bureaucracy, 63
burn, 174
business cycle, 10, 14
business education, 10
business environment, 130, 131, 170, 175
business ethics, ix, 89, 125, 128, 149, 150
business management, 130
business model, 104, 117
businesses, ix, 15, 59, 100, 128, 129, 134, 135,
136, 137, 138, 139, 141, 143, 144, 151, 153,
154, 155, 156, 157, 161, 168, 172, 181, 182,
183, 186
buyers, 102
C
CAM, 106
capital intensive, 12
capital markets, 9, 10
capitalism, ix, 63, 126, 127, 141, 144
career development, 185
career success, 189
case studies, viii, 55, 56, 57, 68, 97, 133
case study, 71, 97, 134, 146
cash, 74, 87, 100, 101
cash flow, 87, 100
cattle, 15
CBS, 128, 146, 147, 148, 149
Census, 107
certification, 137, 138
CFI, 178, 179, 180, 181
challenges, 30, 92, 94, 100, 172, 180, 181, 182,
183, 189
chaos, 25, 185
checks and balances, 139
cheese, 117
chemical, 9
chemotherapy, 69
Chicago, 53, 186
child rearing, 168
children, 132, 140, 152, 156, 173, 174, 177
China, 86
cities, 142, 153
City, 189
civil society, 133, 136, 143
civilization, 136
classes, 103
classification, 76, 189
clients, 25, 92, 93, 97, 103, 136, 137
climate, 126, 131, 135
closure, 93, 155
clusters, 56, 70
coercion, 109
cognition, 128, 170, 171, 189, 191
cognitive biases, 171
cognitive capacity, 34
cognitive effort, 13
cognitive perspective, 185
cognitive process, 114
cognitive profile, 168, 173, 177
cognitive theory, 189
collaboration, 57, 104, 112, 135, 136, 137, 138,
140, 142
collateral, 100, 102, 104
colleges, 93
combined effect, 84, 86
commerce, 127, 132, 154, 177, 183
commercial, 93, 105, 154, 155, 156, 162
commodity, 102
common sense, 115
communication, 75, 116, 134, 137, 138, 149, 152
communities, 95, 106, 127, 154
community, ix, 91, 92, 93, 126, 130, 131, 132,
133, 136, 138, 139, 140, 144, 154, 155
comparative advantage, 141
competition, vii, viii, 10, 12, 13, 14, 27, 28, 29,
32, 33, 35, 36, 37, 39, 40, 42, 43, 49, 50, 51,
71, 88, 89, 95, 115, 141, 145, 153, 161
competitive advantage, 14, 16, 113, 141, 155
competitive conditions, 11
competitive markets, 9, 12, 14
competitiveness, 28, 36, 118, 148, 160
competitors, 29, 63
complement, 12, 29, 87
complexity, 2, 25, 101, 127, 173
compliance, 89, 104
composition, 37, 57, 189
conference, 146
configuration, 115
conflict, vii, 1, 2, 18, 20, 115, 153, 173, 174, 187
conflict of interest, 20
confrontation, 154
consensus, ix, 18, 24, 31, 126, 137, 144
conservation, 145, 174
construction, ix, 6, 17, 126, 127, 131, 138, 144
consulting, 23, 97, 98
consumer choice, 101
consumers, 95, 96, 102, 153
consumption, 10, 14, 15, 93, 95, 96, 97, 100, 106,
109
content analysis, 134
contingency, 1
contradiction, 2, 13, 69
convergence, 58
Index 195
cooperation, 57, 75, 88, 89, 94, 112, 117, 118,
149, 152, 184
coordination, 3, 4, 6, 7, 23, 139
coping strategies, 188
corporate governance, 149
correlation, x, 29, 33, 43, 44, 49, 50, 64, 115,
120, 167, 178, 181
correlation coefficient, 120
correlations, 48, 51
cost, 1, 2, 3, 4, 7, 8, 12, 13, 17, 18, 19, 20, 21, 23,
78, 95, 96, 99, 100, 102, 104, 106, 154, 162
counseling, 93
counterbalance, 130
country of origin, 156, 157, 159
covering, 97
creativity, 63, 70, 116, 127, 140, 142, 180, 185
credit history, 100
credit market, 68
creditworthiness, 104
criticism, 16, 17
cultural norms, 113, 117
culture, vii, ix, 24, 27, 30, 51, 86, 98, 113, 115,
116, 119, 120, 121, 125, 126, 127, 128, 130,
131, 133, 134, 135, 136, 139, 140, 141, 144,
145, 148, 175
curriculum, 97
customer service, 100
customers, 33, 58, 94, 95, 97, 98, 100, 101, 102,
103, 104, 105, 127, 138
cycles, 6, 10, 11, 14, 155
D
danger, 50
database, 57
decentralisation, 14
decision makers, 102
decision-making process, 133, 135, 138
defence, 9, 141
deficiencies, 63
deficit, 32
delegates, 12
Delta, 163
democracy, 149
demographic characteristics, 118
demographic factors, vii
denial, 13
Denmark, 128, 133
dependent variable, 64, 65
depth, 36, 93, 97, 134, 141, 188
deregulation, 25
destruction, 71, 126
developed countries, 156, 157, 168
developing countries, 156, 157, 160, 162
deviation, 78, 79
dichotomy, x, 167
dignity, 136, 145
diminishing returns, 102
direct cost, 23
direct observation, 134
directors, 140
disclosure, 137
discomfort, 100
discrimination, 98, 105, 106, 190
dissatisfaction, 172, 174, 182
distortions, 34, 44, 46, 51
distribution, 10, 14, 22, 44, 57, 58, 71, 144, 155,
159, 174, 175
disutility, 78, 79
diversification, 108
diversity, 25, 32, 70, 93, 144
DOI, 189
domestic demand, 174
donations, 132, 137
draft, 69
drawing, 116, 172
dream, 140
duality, 14
dynamism, 116
E
earnings, 94, 96, 183
East Asia, 163
economic activity, 154, 175
economic crisis, 28, 35, 36, 37, 43
economic development, 91, 93, 106, 153
economic downturn, 94
economic indicator, 36, 43
economic performance, ix, 151
economic power, 136
economic progress, 167
economic psychology, 28
economic relations, 73
economic systems, 145
economic theory, 101
economic welfare, 77
economic well-being, 172
economics, viii, ix, 1, 7, 12, 70, 71, 89, 91, 101,
103, 105, 106, 108, 109, 125, 128, 139, 150,
151
economies of scale, 62, 68
ecosystem, 57
editors, 52
education, 18, 115, 119, 121, 137, 152, 153, 156
educational attainment, 183
Index 196
educational background, 152
educational qualifications, 182
efficient resource allocation, 23
effort level, 75, 76, 77, 78, 79, 80, 81, 84, 86
elaboration, 143
e-mail, 151, 177
emerging markets, 63
emigration, 156
emotion, 108
empathy, 73, 74, 76, 78
employees, viii, 19, 55, 56, 59, 61, 62, 64, 65, 66,
67, 68, 69, 91, 127, 134, 135, 137, 138
employment, 5, 6, 10, 60, 61, 62, 64, 65, 67, 68,
114, 151, 154, 155, 162, 172, 173, 174, 182,
183, 187, 189
employment growth, 67
employment status, 174
empowerment, 24, 91, 93, 139
energy, 68, 129, 135, 136, 137, 174
enforcement, 116
engineering, 22, 187
England, 71, 188
entrepreneurs, ix, x, 3, 8, 30, 54, 74, 75, 77, 87,
88, 89, 92, 95, 96, 102, 111, 112, 113, 114,
115, 116, 118, 119, 120, 121, 125, 126, 128,
129, 131, 134, 135, 136, 138, 139, 140, 144,
145, 152, 153, 155, 157, 158, 160, 161, 162,
164, 167, 168, 169, 170, 171, 172, 173, 174,
175, 176, 177, 180, 181, 182, 183, 184, 185,
186, 187, 188, 189, 190
environment, viii, ix, 2, 8, 25, 28, 29, 32, 33, 35,
36, 37, 40, 41, 43, 51, 53, 104, 126, 129,
130, 131, 132, 136, 137, 138, 139, 140, 141,
142, 144, 145, 148, 149, 154, 167, 170, 175,
183, 184
environmental conditions, 33
environmental factors, ix, 125, 144
environmental protection, 137
equilibrium, viii, 55, 56, 59, 60, 62, 65, 67, 68,
69, 76, 77, 80, 83, 84, 86
equipment, 67
equity, viii, 5, 8, 10, 73, 74, 75, 76, 77, 78, 79,
80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 94,
100, 104, 106, 135
ETA, 122
ethical standards, 140
ethics, 128, 130, 138, 141, 145
ethnic groups, ix, x, 151, 154
Europe, 58, 70, 72, 147, 148, 154
European Commission, 130, 147
European Community, 134
European Social Fund, 27
European Union (EU), 27, 130, 132, 147, 152,
156, 157, 158, 159, 160, 161
evidence, ix, 2, 9, 15, 29, 56, 57, 62, 67, 68, 69,
72, 75, 87, 88, 103, 111, 126, 133, 134, 141,
147, 151, 172, 174
evolution, 94, 131, 137, 168
exclusion, 116
exercise, 4, 23, 57, 129, 170, 173, 177
expertise, 171, 189
exploitation, 10, 63, 72, 156, 162
export market, 162
exports, 59
exposure, 188
external environment, 131, 173, 175
externalities, 106
F
factor analysis, 29, 178
factor market, vii, 1, 2, 3, 5, 6, 7, 25, 58
fairness, viii, 73, 74, 75, 76, 77, 78, 79, 82, 83,
84, 85, 86, 87, 88, 89, 90
faith, 48, 136
families, 95, 103, 115, 117, 118, 142, 155, 156,
172, 186
family conflict, 173, 174, 186, 190
family firms, ix, 111, 112, 114, 115, 116, 121
family members, 114, 115, 116
family support, 174
fat, 33
fear, 156, 158, 173
feelings, 73, 74, 75, 82, 87, 115, 121, 173
financial, 3, 8, 14, 15, 23, 27, 29, 36, 54, 68, 74,
75, 76, 77, 78, 87, 88, 91, 92, 93, 95, 96, 98,
99, 100, 103, 104, 105, 121, 127, 137, 138,
142, 154, 155, 162, 174, 175, 184, 186
financial capital, 154
financial data, 36
financial institutions, 91, 92, 93, 105
financial intermediaries, 95
financial markets, 99, 105
financial performance, 29, 54, 138
financial resources, 162
financial stability, 174
financial support, 27, 68, 105
Finland, 133
firm management, 22
firm size, 56, 58, 59, 63, 65, 67, 68, 69, 70
firm value, 74, 84, 85, 86
fixed costs, 62
flexibility, 15, 23, 63, 114, 131, 152, 173, 174,
183, 186
food, 128, 137, 140, 153
Index 197
force, 7, 121, 132
Ford, 24, 169, 174, 187
formal education, 114
formal sector, 92
formation, 2, 9, 12, 14, 118, 136, 189
formula, 21, 129
foundations, 29
framing, 54, 88, 101, 105
freedom, 24, 142
Freud, 12
friendship, 138
funding, viii, 4, 73, 91, 94, 104, 105
funds, 76, 77, 99, 102, 132
G
game theory, 15, 75, 76, 88, 89
gangs, 154
generalizability, 121
Germany, 148
gifted, 63
glass ceiling, 172
global competition, 121
globalization, 112, 121
goods and services, 95
governance, 2, 4, 8, 12, 14, 15, 89, 115, 116, 126,
135, 136, 137, 138, 139, 142, 143, 144, 149
grants, 137
graph, 84
gravitational field, 10
grazing, 15
growth, viii, 3, 33, 53, 55, 56, 58, 59, 65, 66, 67,
68, 69, 71, 75, 93, 111, 112, 128, 131, 135,
146, 151, 153, 154, 171, 172, 173, 182
growth rate, 56, 67
growth theory, viii, 111
guidelines, 57
H
happiness, 131
harmony, 133, 138, 141
harvesting, 4, 75
Hawaii, 89
health, 104, 142
health services, 104
heterogeneity, 127
heteroskedasticity, 61
hiring, 5
history, 32, 88, 96, 100, 131, 141, 152
holding company, 14, 15
homeowners, 96
homogeneity, 114
honesty, 75, 130, 135
Hong Kong, 188
host, 57
hostility, 32, 37, 43
House, 140
housing, 107, 108
human, 6, 10, 16, 17, 30, 56, 58, 65, 68, 114, 127,
129, 130, 136, 138, 145, 153, 154, 155, 162,
185, 186
human capital, 56, 58, 65, 68, 114, 154, 155, 162,
186
human nature, 30, 129
human resources, 136, 153
humus, 141
Hungary, 35
hybrid, 8
hypothesis, 15, 119, 121, 175, 176
I
ideal, 5, 121, 175, 184
ideals, 129
identification, 10, 100, 129, 130, 169, 172, 187
identity, 113, 131, 133, 136, 138, 140, 141, 142,
145, 177
ideology, 93, 129
image, 130
images, 143
imagination, 114, 116, 136
imitation, 129
immigrants, 151, 152, 153, 154, 155, 156, 158,
159, 160, 161, 162, 164
immigration, 151, 153, 162
improvements, 100
income, 28, 32, 43, 77, 92, 93, 103, 151, 155,
159, 162, 174
increasing returns, 56, 59, 66
independence, 93, 134, 172
independent variable, 64
India, 15, 108
individual perception, 113, 117
individualism, 133
individuals, 10, 13, 14, 20, 31, 93, 98, 101, 103,
116, 129, 132, 133, 138, 145, 153, 155, 156,
172, 174
Indonesia, 92, 108
induction, 78, 80
industrial policy, 72
industrial revolution, 173
industrialisation, 63, 141, 143
industrialization, 142
industrialized countries, ix, 151
Index 198
industries, 8, 9, 33, 57, 63, 69, 162
industry, 17, 33, 53, 70, 71, 72, 92, 96, 105, 141,
142, 153, 160, 187
inequity, 74, 78
information exchange, 58
infrastructure, 175
inheritance, 118
insecurity, 143
insertion, 137
institutionalisation, 6
institutions, 8, 9, 88, 92, 101, 104, 109, 113, 118,
121, 127, 128, 132, 141, 143
integration, 26, 152
integrity, 135
intellectual capital, 138
intellectual property, 58, 63
interdependence, 5, 15, 116, 154
interface, 188, 190
internal barriers, 120, 121
internal change, 135
internal consistency, 180
internal environment, 53
internal rate of return, 9
internalised, 10
international trade, 141
interpersonal relations, 130
interpersonal skills, 24
intervention, 3
intimacy, 136
investment, 3, 5, 10, 14, 34, 43, 53, 67, 68, 75,
77, 87, 93, 94, 112, 116, 182
investments, 56, 88, 94, 102
investors, 68, 94
invisible hand, 3
IPO, 86
Ireland, 133
isolation, 175
issues, vii, 12, 16, 22, 28, 51, 52, 59, 95, 100,
104, 105, 108, 115, 144, 146, 168, 171
Italy, 111, 117, 125, 127, 133, 141, 146, 149, 186
J
job creation, 152
joint ventures, 69
justification, 21, 142, 149, 171, 180
K
kicks, 67
knowledge acquisition, 72
L
labour force, 22
labour market, 2, 6, 12, 13, 16, 19, 23, 25, 168
lack of control, 17
landscape, 140, 141, 144
Latin America, 92, 93
laws, 105
laws and regulations, 105
lawyers, 103
lead, 9, 15, 18, 19, 21, 23, 25, 32, 75, 87, 102,
105, 159, 182
leadership, 115, 130, 149, 177
leadership style, 115
learning, 61, 71, 87, 88, 112, 113, 139
lending, 61, 97, 100, 102, 103
lending process, 102
lens, 132
level of education, 114, 115, 120
Libertarian, 105, 109
life cycle, 29, 53, 131
life sciences, 57, 67
light, 33, 101, 126, 127, 130, 152
liquidity, 96, 103, 107, 108
loans, viii, 91, 93, 94, 96, 97, 98, 100, 101, 102,
105, 106, 107
local community, 135, 137, 140
local conditions, 119
local government, 93, 105
loci, 142, 144
locus, 169
longitudinal study, 29, 187
love, 136, 140
low risk, vii, 27, 50, 190
loyalty, 116, 130
Luxemburg, 147
lying, 56, 68, 172
M
machinery, 118
majority, 104, 132, 154, 171, 172, 177, 183
man, 118, 119, 134, 139, 190
management, vii, ix, 1, 2, 3, 6, 7, 9, 12, 13, 14,
15, 16, 17, 18, 20, 21, 22, 23, 24, 25, 30, 31,
34, 52, 53, 89, 97, 104, 121, 125, 126, 128,
129, 133, 135, 136, 137, 138, 144, 146, 153,
168, 169, 171, 173, 174, 182, 184
manipulation, 156
manufacturing, 9, 22, 62, 68, 69, 71, 142
mapping, 57, 147
marginal costs, 78
Index 199
marginal product, 19, 20
marginal revenue, 20
marital status, 153, 174
market failure, 8, 101, 105
market position, 49
market share, 24
marketing, 13, 14, 15, 54, 58, 69, 101, 105, 112
marketplace, viii, 91
marriage, 174, 183
married women, 174
masculinity, 133
materials, 105
matrix, vii, 1, 2, 9, 13, 14, 15, 16, 17, 18, 19, 20,
21, 22, 23, 24, 25, 114, 129, 130, 178
matter, iv, 63, 78, 96, 98, 103, 109, 149
measurement, 53, 60, 178
media, 56, 57, 67
median, 62
membership, 113, 132, 177
memory, 114, 191
mentoring, 93
mergers, viii, 55, 56, 68, 69
meta-analysis, 187
methodology, ix, x, 57, 125, 128, 133, 167
metropolitan areas, 108
Mexico, 94
MFI, 103
microelectronics, 56, 57, 67
microloan, viii, 91, 93, 94, 95, 96, 97, 98, 100,
101, 102, 103, 104, 105
middle class, 182
minorities, ix, 93, 151, 152, 154
mission, 104, 129, 130, 135, 138, 143
missions, 127
mobile phone, 68
modelling, 64, 176, 186
models, x, 9, 18, 24, 56, 59, 74, 75, 76, 77, 86,
93, 104, 129, 131, 167, 172, 178, 179
modifications, 137
money markets, 34
monopoly, 14, 63
monopoly power, 14, 63
Moon, 127, 148
moral hazard, viii, 7, 73, 74, 78, 88, 89
morality, 147
motivation, x, 129, 140, 167, 168, 169, 173, 175,
176, 178, 180, 181, 182, 183, 184
moulding, 142
multidimensional, 113
multinational companies, 17
multiple regression, 120
museums, 132
myopia, 109
N
Namibia, 52
national culture, 133
nationality, 155, 156
native population, 152, 153, 156
natural resources, 97
negative effects, 104, 156
negative outcomes, 30
Netherlands, 133, 149
next generation, 152
NGOs, 92, 152
niche market, 118, 156, 162
nodes, 139
North America, 173
Norway, 133
nucleus, 10, 120
null, 59, 61
null hypothesis, 59, 61
nursing, 132
nursing home, 132
O
objectivity, 36
observed behavior, 101
omission, 69
openness, 71, 75
operations, 10, 97, 137
opportunism, 75, 87
opportunities, ix, 3, 7, 10, 28, 32, 33, 35, 48, 49,
62, 63, 93, 101, 104, 106, 111, 113, 114,
115, 117, 152, 155, 156, 157, 158, 159, 162,
164, 168, 175, 189
opportunity costs, 20, 92, 96
optimism, 34, 180
optimization, 101
optoelectronics, 56, 57, 67
organizational behavior, 54
organize, 116
organs, 137
outreach, 92
ownership, 4, 5, 6, 7, 8, 26, 88, 96, 106, 112, 117,
121, 134, 187
ownership structure, 26
P
parallel, 37, 51, 174
parenthood, 173
parents, 156, 174
participants, 99, 104
Index 200
patents, 64
paternalism, 101, 105, 109
pedagogy, 189
peer group, 92, 93, 97
penalties, 13
performance measurement, 18
permit, ix, 3, 96, 111, 178
perseverance, 129, 170
personal accomplishment, 173
personal autonomy, 183
personal goals, 172
personal values, 129, 144, 147
personality, 130, 138, 169, 191
personality traits, 169
Petroleum, 70
pharmaceutical, 71
pharmaceuticals, 68
phase diagram, 60
Philadelphia, 105
playing, 63
policy, viii, 14, 19, 23, 24, 57, 69, 91, 92, 101,
104, 105, 109, 117, 131, 139, 165, 167, 168,
176, 184, 189
policy makers, 92, 117
policy options, 104, 105
policy problems, 109
politics, 128, 143
pools, 93
population, 57, 76, 77, 97, 154, 156, 158, 159,
175, 176
population density, 175, 176
portfolio, 98
Portugal, vi, x, 167, 168, 177, 187, 189
positive correlation, 29
positive relationship, 86
poverty, 91, 92, 93, 104, 105, 107
poverty alleviation, 91, 92, 93, 104
power relations, 19
predictability, 32
preparation, iv
present value, 9
president, 140
President, 136, 140
price mechanism, 17
primary data, 177
principles, 135, 138, 141
probability, 77, 78, 79, 81, 102, 103, 180, 183
problem solving, 180
procedural justice, 89, 90
product design, 101
product market, 2, 7, 16
professional development, 182
profit, 4, 31, 32, 43, 116, 120, 127, 132, 137, 139,
140
profitability, 29, 36, 37, 75, 102
prognosis, 26
program staff, 96, 98, 103
programming, 186
project, 17, 21, 23, 24, 25, 27, 75, 77, 78, 79, 82,
125, 133, 140, 147, 155, 156, 159, 162
proliferation, 144
property rights, 3, 5, 89
proposition, 82, 140
prospect theory, 31, 101
protection, 63, 116, 117, 119, 120, 121, 132, 141,
144
psychological variables, 36
psychological well-being, 189
psychology, 34, 54, 106, 185
psychosocial factors, 98
public administration, 138
public goods, 95
public policy, 105
public sector, 96
publishing, 169, 187
Q
qualifications, 95, 131
qualitative research, ix, 125, 128
quality of life, 132, 137, 142
quality standards, 140
questioning, 34
questionnaire, x, 33, 36, 37, 57, 58, 59, 62, 68,
118, 120, 167, 176, 177, 184
R
rate of return, 8
rationality, 13, 89, 101
raw materials, 175
reactions, 32, 50
real assets, 25
real estate, 115
reality, 4, 5, 6, 34, 36, 48, 51, 52, 60, 62, 68, 103,
121, 173, 183
recalling, ix, 125, 128
reception, 156
recession, 69, 157, 162
reciprocity, 74, 76, 78, 88, 112, 113, 114, 119,
131, 140, 143
recognition, 1, 112, 114, 128, 143, 154, 188
recommendations, iv
recovery, 10
Index 201
recreational, 137
recycling, 137
refugees, 93
regional policy, 70, 71
regression, 63, 64, 65, 120, 121
regression model, 63
regulations, 24, 105
relatives, 168
relevance, 155
reliability, 92
renaissance, 188
rent, 95
representativeness, 184
reproduction, 115
reputation, 30, 88, 112, 113, 114, 116, 131, 137,
138
requirements, 94, 100, 126, 128
research facilities, 62, 63
researchers, 73, 87, 103, 169, 170, 177
resentment, 115
reserves, 32
resolution, 182
resource allocation, 7, 8, 13, 15
resource management, 185
resources, vii, 4, 5, 7, 8, 10, 12, 15, 21, 27, 29,
30, 31, 32, 33, 34, 35, 50, 57, 92, 104, 112,
113, 115, 117, 127, 131, 132, 135, 136, 141,
153, 154, 174, 175, 184, 188
response, 2, 7, 8, 9, 23, 33, 69, 107, 118
responsiveness, 98
restaurants, 153, 177
retail, 153, 177, 183
retaliation, 76, 78
revenue, 4, 62, 68
rewards, 31, 100
risk, vii, viii, 3, 7, 16, 27, 28, 29, 30, 31, 32, 33,
34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 46,
47, 48, 49, 50, 51, 52, 53, 54, 63, 68, 75, 76,
77, 87, 88, 89, 92, 102, 104, 106, 108, 109,
115, 159, 169, 171, 172, 182, 188, 189
risk aversion, 106
risks, vii, 27, 28, 30, 31, 32, 33, 34, 35, 38, 48,
50, 90, 113, 153
risk-taking, vii, 171, 182, 189
RMSEA, 178, 179, 180, 181
role conflict, 190
roots, 113, 129, 140, 142, 190
routes, 8
rules, 98, 131
rural areas, 175, 177
rural development, 189
rural women, x, 92, 167, 183, 184
S
savings, 93, 104, 108, 109, 127
scale economies, viii, 55, 56, 58, 62, 67, 69
scarce resources, 15, 30, 34, 50
school, 6, 10, 14, 132, 137, 177
science, 52, 69, 70
scope, 60, 62, 63, 67, 96, 129
second generation, 114
securities, 88
security, 33, 89
segregation, 4
self-confidence, 98, 180
self-efficacy, 188, 191
self-employed, 92, 188
self-employment, ix, 105, 151, 152, 153, 154,
155, 168, 173, 182, 183, 186, 188
self-esteem, 174, 180, 181, 182, 183
self-interest, 74, 76, 77, 78, 79, 80, 81, 82, 83, 84,
85, 86
self-sufficiency, 92
seller, 107
sellers, 102
SEM model, 179
seminars, 24
semi-structured interviews, 134
sensitivity, 128
service provider, 103
service quality, 117
sex, 155
shadow prices, 19, 20
shape, 30, 31, 85
shareholders, 137, 177
shelter, 96
showing, 49, 115, 133, 178
SIC, 57
signalling, 88
signals, 75, 116
Singapore, 189
small businesses, viii, 91, 129, 130, 144, 148,
154, 190
small firms, 60, 62, 63, 65, 112, 117, 127, 130,
148, 150
social capital, ix, 98, 109, 112, 113, 114, 117,
126, 131, 132, 144, 150, 152, 154, 155, 156,
162
social class, 152, 155
social consensus, 136, 142
social construct, 71
social context, 114, 128, 129
social contract, 149
social development, 141
social environment, 127
Index 202
social identity, 113
social integration, 128
social interactions, 88
social network, ix, 111, 112, 115, 116, 117, 121,
154, 155, 156
social norms, 84, 86, 113
social problems, 116
social relations, 113, 120, 131, 133, 156
social relationships, 131, 133, 156
social responsibility, 128, 130, 132, 134, 145,
146, 147, 149
social services, 132, 142
social standing, 153
social status, 158, 159, 172, 180
social support, 153
social support network, 153
social welfare, 93, 95, 96
society, 24, 76, 82, 107, 128, 129, 130, 141, 142,
153, 154, 164
sociology, ix, 128, 151
software, 56, 57, 67, 71, 179, 189
solidarity, 92, 93, 142, 154, 155
solution, 6, 8, 104, 152
South America, 185
Spain, x, 151, 152, 156, 157, 158, 159, 160, 161,
162, 187
specialists, 184
specialization, 118
spillover effects, 116
spillovers, 112, 122
spin, 68
stakeholders, 67, 127, 135, 136, 137, 138, 139,
142, 143, 149, 168, 184
standard of living, 158, 159, 183
state, vii, 1, 13, 37, 72, 105, 130, 138, 149
states, 23, 87, 95
statistics, 119
stimulus, 112, 168
stockholders, 67
strategic management, 129, 150
stress, 23, 52, 173, 174, 188
stretching, 63, 174
structural characteristics, 175
structure, vii, 1, 4, 7, 9, 13, 14, 15, 17, 18, 22, 23,
25, 31, 53, 70, 89, 113, 115, 131, 135, 170,
178, 181
style, 56, 57, 171, 190
substitutes, 78, 81, 87
substrate, 113
succession, 137, 155
Sun, 57
supplier, 71
suppliers, 9, 58, 127, 137, 138, 140
surplus, viii, 91
survival, 12, 30, 32, 37, 38, 42, 50, 51, 90, 108,
157
sustainability, ix, 3, 7, 8, 92, 94, 95, 98, 101, 103,
105, 125, 126, 127, 128, 129, 130, 131, 134,
135, 138, 140, 143, 144, 145, 170
sustainable development, 28, 127, 128, 132, 139,
142, 143, 145
sustainable growth, 145
Sweden, 133
Switzerland, 55, 106
symmetry, 3
sympathy, 89
syndrome, 33
synthesis, 135, 144
T
takeover, 15, 123
target, 93, 94, 104
target population, 93, 94
target populations, 93, 94
taxation, 87, 88
taxonomy, 97, 98, 100, 101
teams, 24, 68, 88
technical assistance, 93, 96, 97, 99, 100, 104
technical change, 70
techniques, 24, 25, 100, 178, 184
technological change, ix, 111, 152
technological progress, 70
technologies, 2, 28, 160
technology, viii, 16, 55, 56, 57, 58, 59, 62, 65,
67, 68, 69, 71, 72, 136, 161, 175, 184
telephone, 177
tenants, 105
tension, 174
territorial, ix, 111, 118, 126, 128, 131, 132, 133,
137, 140, 142, 143, 144, 145
territory, ix, 111, 112, 113, 117, 118, 119, 120,
121, 125, 126, 127, 128, 131, 132, 138, 139,
140, 141, 142, 143, 144, 145, 147
tertiary sector, 177, 184
testing, 21, 52, 58, 67, 86, 177, 178
Third World, 185
thoughts, ix, 29, 125, 140
threats, 33
time constraints, 100
time periods, 60
time pressure, 170
time series, 57
total costs, 95, 100
tourism, 97, 117, 119
trade, 58, 68, 70, 75, 127, 130, 132, 134, 139
Index 203
trade-off, 70, 75
traditions, ix, 112, 119, 120, 126, 128, 133, 138,
140
training, 65, 67, 93, 96, 97, 99, 100, 104, 137,
141, 142, 152, 156, 171, 172, 184
transaction costs, 6, 22, 25, 95, 99, 116
transactions, 2, 3, 4, 10, 17, 99
transfer pricing, 25
transformation, 139
transmission, 112, 117, 118, 122
transparency, 135, 136, 137, 139
transportation, 104
triggers, 36
trustworthiness, 103
turnover, 59, 60, 61
U
U.S. Treasury, 94
underwriting, 97
uniform, 19
United, 8, 91, 92, 93, 94, 95, 97, 103, 104, 106,
107, 109, 150, 164
United Kingdom (UK), 6, 8, 10, 15, 57, 58, 69,
70, 71, 72, 73, 86, 90, 146, 149, 187
United Nations (UN), 128, 150
United States (USA), 57, 63, 69, 71, 72, 91, 92,
93, 94, 95, 97, 103, 104, 106, 107, 109, 164
168, 185
universe, 119, 139
universities, 15, 132, 137
urban, x, 97, 109, 167, 168, 169, 175, 176, 177,
180, 181, 182, 183, 184, 185
V
validation, 52, 178
valuation, 117
variable factor, 131
variables, 36, 59, 60, 64, 97, 119, 120, 121, 129,
145, 152, 153, 156, 175, 177, 178, 180, 181,
182, 184, 189
variations, 87, 175
vector, 3, 7, 9, 14, 16, 19, 20, 24
venture capital, viii, 73, 74, 75, 76, 77, 86, 87, 88,
89, 90, 116, 187
Vietnam, 54
vision, 67, 116, 117, 119, 129, 132, 135, 138, 156
vulnerability, 103
W
Washington, 99, 105, 106, 107, 108, 109, 164
waste, 137
wealth, 73, 74, 96, 102, 116, 131, 135, 136, 140,
144, 186
web, 63
welfare, 4, 77, 93, 95, 116, 142, 183
well-being, 105, 135, 140, 191
wholesale, 177
Wisconsin, 90
wood, 72
wood products, 72
workers, 76, 114, 142, 145, 152, 153, 156, 162,
173
workforce, 12, 155, 162
working hours, 174
working women, 175
workplace, 174
World Bank, 108, 165
World War I, 63
worldwide, 177
worry, 82
Y
yield, 101, 105

Entrepreneurship Motivation Performance and Risk Business Issues Compe

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BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP

Gavin C. Reid and Vandana Ujjual 60

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Gavin C. Reid and Vandana Ujjual 62

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