AND BEYOND

Institutions and Entrepreneurship

Institutions and Entrepreneurship

• Cognitive, normative, and regulative environment.

– Cognitive: shared perceptions about the boundaries and viability of new kinds of economic activity.

– Normative: normative actors-explicitly shape social norms and values (social movement organizations, professions, industry associations, certification organizations, status hierarchies).

– Regulative/coercive: laws and administrative guidelines that constitute basic rules governing market transactions/Coercive actors. Rule of law, corruption,

Institutional

Environment

New venture structure & processes

Opportunity creation

Opportunity exploitation

Nascent Entrepreneurship• Liability of newness (cognitive)

– Legitimacy– Networks– Reputation

• Liability of size – Limited resources

• May lack normative support (industry associations)

• Powerful incumbents

• Institutional inertia (existing structures favor incumbents)

My Focus

• How does the relative capacity of political institutions to enforce policy enable or constrain entrepreneurial processes and outcomes?

Cocaine processing lab under attack

Alfonso Cotes(2011) & Blockbuster (2009)

Miguel Barrios & Michael Cobb

New Power StructuresThe Tunisian Revolutionaries

Institutional Failure

• Political institutions can have profound impact on fledgling organizations (Weber, 1978)

• The “most remarkable features of institutions” is that “they enable newly organized actors to act” (Fligstein, 2001)

• Political turmoil—local confrontations inspired by or oriented to the wider national political scene—is a salient phenomenon (Carroll, Delacroix, Goodstein, 1988)

Colombian entrepreneur

Institutional Failure• Stichcombe’s call to take into account

impact of political stability and conflict on organizations (1965:169)

• New firms benefit from strong, stable, supportive state infrastructure (Aldrich, 1979; Pearce, 2001)

• Political turmoil favors agile and innovative firms

• Individual and organization rigidifying effects

• In contexts of high uncertainty, entrepreneurs face greater challenges in garnering the necessary support, such as labor, capital, and customers, needed to survive the first few years after founding (Sine, Haveman, & Tolbert, 2005)

Bogotá 1947

Institutional Failure• Increases risk• Decreases trust• Decreases risk taking &

exploration

• 1 standard deviation increase in violence

– Failure of 120,000 new ventures

– Loss of 250,000 jobs

– Increases the probability of failure by 150%

Bogotá 1947

Regime Change• Increases uncertainty

and risk• Changing regulatory

regimes• Reduces benefit of old

regime ties

• • Increases failure by

620%

Bogotá 1947

Corruption• Increases uncertainty &

risk

• Increases the cost of doing business

• Increases failure by 120%

How do these environments affect Entrepreneurial processes & strategies

• Planning

• Networking

Networking

• Network building activity & venture survival

• Political turmoil influences entrepreneur’s sense of uncertainty

• Most research on networks focus on benefits of ties without looking at costs and risks of engaging in network-building activities

• Trust required to reach out to non-redundant ties

• Network-building activities are likely to be perceived as more risky when PT is high

Colombian bootlegger entrepreneur: Licor de panela producer and retailer

planning, network building, and political turmoil

• Network building venture survival

• Political turmoil venture survival

• Political turmoil moderates business planning

• Political turmoil reduces networking, thereby increasing failure

With military ties Without military ties0%

10%

20%

30%

40%

50%

60%

70%

80%

Percentage of Firms that Fail

With military ties Without military ties0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Percentage of Firms Expropriated

Military ties and venture survival

• Military ties offers new ventures benefits:

– Governmental support, exports – Protection – Business contracts – Credibility

General Than Shwe, Burma

Egypt’s Higher Military Council, 2011

Synd. Condor

• Fritz Hammer, July 1927

• German investors• German

technologists• Brazil’s largest

airline by 1935• Expropriated 1943

Otto Ernst Meyer, April 1927

German investors German

technologists Brazil’s 2nd largest

airline by 1935 Major Alberto Bins Audience w/state

assembly-state tax subsidy

VARIG

Contingency of military ties: Military resources

• Military resources may improve benefits of military ties (Pfeffer & Salancik, 1978)

• Indicator of its influence over civilian government

• Indicator of coercive power

Contingency of military ties: Political instability

• Political instability may increase military autonomy & benefit of ties

• Special protection from criminal networks, violence, heavy handed government responses.

Contingency of military ties: Foreign ownership

• Ventures with foreign ownership experience negative impacts of national sentiment

• Popular way for civilian governments to build political support: Evo Morales in 2006

• Government treatment to domestic vs. foreign

Contingency of military ties: Competitive markets

• Military ties can provide access to scarce resources and information.

• Access to limited credit (Faccio, Masulis, & McConnell, 2006)

Expropriation

Military Tie reduces the rate of expropriation by 86% Foreign ownership increases the rate of expropriation by 10x Having a military tie mitigates the negative effects of foreign ownership

Results: Failure Analysis Military ties reduces the rate of failure by approx. 53%

Regime change increases the impact of military ties

Military ties are more effective in countries in which the military is more powerful

Military ties mitigates the negative effect of foreign ownership

Military ties reduces the negative effect of domestic conflict

Military ties reduces the negative effect of inter and intra industry competition

Conclusion

• Institutional environments shape– Founding– Growth– Entrepreneurial processes

• We need more research that examines how institutional environments shape nascent entrepreneurs

• Institutional theory in sociology– Power is a missing component

– In complex environments with weak political institutions, we need to take coercive actors seriously General Augusto Pinochet

Nascent Entrepreneurship• Liability of newness (cognitive)

– Legitimacy– Networks– Reputation

• Liability of size – Limited resources

• May lack normative support (industry associations)

• Powerful incumbents

• Institutional inertia (existing structures favor incumbents)

Key Question: How does one obtain such affiliations

Affiliations are now a central topic in my international courses.