Do strategy choices matter for nascent firms? A study on effectuation and causation impacts on new ventures outcomes

Principal Topic : Nascent entrepreneurship has drawn the attention of scholars in the last few years (Davidsson, 2006, Wagner, 2004). However, most studies have asked why firms are created focussing on questions such as what are the characteristics (Delmar and Davidsson, 2000) and motivations (Carter, Gartner, Shaver & Reynolds, 2004) of nascent entrepreneurs, or what are the success factors in venture creation (Davidsson & Honig; 2003; Delmar and Shane, 2004). In contrast, the question of how companies emerge is still in its infancy. On a theoretical side, effectuation, developed by Sarasvathy (2001) offers one view of the strategies that may be at work during the venture creation process. Causation, the theorized inverse to effectuation, may be described as a rational reasoning method to create a company. After a comprehensive market analysis to discover opportunities, the entrepreneur will select the alternative with the higher expected return and implement it through the use of a business plan. In contrast, effectuation suggests that the future entrepreneur will develop her new venture in a more iterative way by selecting possibilities through flexibility and interaction with the market, affordability of loss of resources and time invested, development of pre-commitments and alliances from stakeholders. Another contrasting point is that causation is ''goal driven'' while an effectual approach is ''mean driven'' (Sarasvathy, 2001) One of the predictions of effectuation theory is effectuation is more likely to be used by entrepreneurs early in the venture creation process (Sarasvathy, 2001). However, this temporal aspect and the impact of the effectuation strategy on the venture outcomes has so far not been systematically and empirically tested on large samples. The reason behind this research gap is twofold. Firstly, few studies collect longitudinal data on emerging ventures at an early enough stage of development to avoid severe survivor bias. Second, the studies that collect such data have not included validated measures of effectuation. The research we are conducting attempts to partially fill this gap by combining an empirical investigation on a large sample of nascent and young firms with the effectuation/causation continuum as a basis (Sarasvathy, 2001). The objectives are to understand the strategies used by the firms during the creation process and measure their impacts on the firm outcomes. Methodology/Key Propositions : This study draws its data from the first wave of the CAUSEE project where 28,383 Australian households were randomly contacted by phone using a specific methodology to capture emerging firms (Davidsson, Steffens, Gordon, Reynolds, 2008). This screening led to the identification of 594 nascent ventures (i.e., firms that are not operating yet) and 514 young firms (i.e., firms that have started operating from 2004) that were willing to participate in the study. Comprehensive phone interviews were conducted with these 1108 ventures. In a likewise comprehensive follow-up 12 months later, 80% of the eligible cases completed the interview. The questionnaire contains specific sections designed to distinguish effectual and causal processes, innovation, gestation activities, business idea changes and ventures outcomes. The effectuation questions are based on the components of effectuation strategy as described by Sarasvathy (2001) namely: flexibility, affordable loss and pre-commitment from stakeholders. Results from two rounds of pre-testing informed the design of the instrument included in the main survey. The first two waves of data have will be used to test and compare the use of effectuation in the venture creation process. To increase the robustness of the results, temporal use of effectuation will be tested both directly and indirectly. 1. By comparing the use of effectuation in nascent and young firms from wave 1 to 2, we will be able to find out how effectuation is affected by time over a 12-month duration and if the stage of venture development has an impact on its use. 2. By comparing nascent ventures early in the creation process versus nascent ventures late in the creation process. Early versus late can be determined with the help of time-stamped gestation activity questions included in the survey. This will help us to determine the change on a small time scale during the creation phase of the venture. 3. By comparing nascent firms to young (already operational) firms. 4. By comparing young firms becoming operational in 2006 with those first becoming operational in 2004. Results and Implications : Wave 1 and 2 data have been completed and wave 2 is currently being checked and 'cleaned'. Analysis work will commence in September, 2009. This paper is expected to contribute to the body of knowledge on effectuation by measuring quantitatively its use and impact on nascent and young firms activities at different stages of their development. In addition, this study will also increase the understanding of the venture creation process by comparing over time nascent and young firms from a large sample of randomly selected ventures. We acknowledge the results from this study will be preliminary and will have to be interpreted with caution as the changes identified may be due to several factors and may not only be attributed to the use/not use of effectuation. Meanwhile, we believe that this study is important to the field of entrepreneurship as it provides some much needed insights on the processes used by nascent and young firms during their creation and early operating stages.

Does venture opportunity variation matter? investigating systematic process differences between innovative and imitative new ventures

The central thesis in the article is that the venture creation process is different for innovative versus imitative ventures. This holds up; the pace of the process differs by type of venture as do, in line with theory-based hypotheses, the effects of certain human capital (HC) and social capital (SC) predictors. Importantly, and somewhat unexpectedly, the theoretically derived models using HC, SC, and certain controls are relatively successful explaining progress in the creation process for the minority of innovative ventures, but achieve very limited success for the imitative majority. This may be due to a rationalistic bias in conventional theorizing and suggests that there is need for considerable theoretical development regarding the important phenomenon of new venture creation processes. Another important result is that the building up of instrumental social capital, which we assess comprehensively and as a time variant construct, is important for making progress with both types of ventures, and increasingly, so as the process progresses. This result corroborates with stronger operationalization and more appropriate analysis method what previously published research has only been able to hint at.

The role of immigrant entrepreneurs in international new ventures

Immigrant Entrepreneurs (IE) are often portrayed as being pushed into self-employment due to employment barriers in their adopted countries. But IE have human resources, like international experience, which can help them form international new ventures (INV). We question the role of IE in INV. We use randomly selected data from 561 young firms from the Comprehensive Australian Study of Entrepreneurial Emergence (CAUSEE) project. We find that IE are overrepresented in INV and have many of the characteristics known to facilitate INV success. These findings have relevance to policy makers, IE and NE.

Human resource characteristics of international new ventures : the role of immigrant entrepreneurs

Immigrant Entrepreneurs (IE) are often portrayed as pushed into self-employment due to employment barriers in their adopted countries. But IE have human resources, like international experience, which can help them form international new ventures (INV). We question the role of IE in INV. We use randomly selected data from 561 young firms from the Comprehensive Australian Study of Entrepreneurial Emergence (CAUSEE) project. We find that IE are over-represented in INV and have many characteristics known to facilitate INV success including more founders, university degree, international connections and technical capability. These findings are relevant to policy makers, and nascent IE.

Gender and new venture outcomes : not better or worse, just different

We investigate how differences in the goals of male and female entrepreneurs affect business resources, outcomes and satisfaction with those outcomes. To investigate this topic we use the CAUSEE database to access a longitudinal sample of 247 female-controlled and 332 male-controlled young Australian firms. We find that female entrepreneurs are less motivated by business growth, invest less time developing their businesses and yet even when profits are lower they are more satisfied with their profit performance. Our results support prior qualitative studies indicating that female business owners want greater flexibility and manageability in terms of balancing their family and work responsibilities. Our findings also suggest that future dialogue on firm performance should include an analysis of the entrepreneur’s achievement in terms of both financial and personal goals.

Does venture opportunity variation matter? Investigating systemic process differences between innovative and imitative new ventures

The central thesis in the article is that the venture creation process is different for innovative versus imitative ventures. This holds up; the pace of the process differs by type of venture as do, in line with theory-based hypotheses, the effects of certain human capital (HC) and social capital (SC) predictors. Importantly, and somewhat unexpectedly, the theoretically derived models using HC, SC, and certain controls are relatively successful explaining progress in the creation process for the minority of innovative ventures, but achieve very limited success for the imitative majority. This may be due to a rationalistic bias in conventional theorizing and suggests that there is need for considerable theoretical development regarding the important phenomenon of new venture creation processes. Another important result is that the building up of instrumental social capital, which we assess comprehensively and as a time variant construct, is important for making progress with both types of ventures, and increasingly, so as the process progresses. This result corroborates with stronger operationalization and more appropriate analysis method what previously published research has only been able to hint at.

Characteristics of immigrant entrepreneurs and their involvement in international new ventures

We studied 561 young firms in Australia to understand the involvement of immigrant entrepreneurs (IE) in international new ventures (INV). We found that IE are over-represented in INV and have many characteristics known to facilitate INV success including more founders, university degree, international connections and technical capability. Our study has implications for immigration policy and economic policy and the efficient use of a nation’s human capital. This research challenges a necessity-based stereotype of immigrant entrepreneurs by identifying areas in which immigrant entrepreneurs have natural competitive advantages over native entrepreneurs. This research makes a contribution to the theory of immigrant entrepreneurship by identifying the significant role of immigrant entrepreneurs in INV and the suitability of immigrant entrepreneurs for the development INV. We inform diverse streams of research in transnational and immigrant entrepreneurship with broader strategic work on the creation of INV.

Strategic renewal and competitive advantage in opportunity-driven and conservative new ventures

Strategic renewal has received relatively little attention in the context of new ventures. We examine the relationship among strategic renewal, competitive advantage and performance in opportunity-driven and conservative new ventures. Based on longitudinal data of a random sample of almost 373 new ventures, the link between strategic renewal and performance can be better understood by adding the mediating role of competitive advantage. Our results indicate that increased levels of strategic renewal positively relate to competitive advantage in conservative ventures, but not in opportunity-driven ventures. These findings place a different perspective on the dominant view that entrepreneurs should be opportunity maximizers. It suggests that both conservative and opportunity-driven new ventures can be successful if they follow different paths of strategic renewal in shaping competitive advantage.

Innovation and change in new ventures

This paper examines the innovativeness of nascent and young entrepreneurial firms in Australia. Findings of interest in this paper include: • The vast majority of new ventures offer some degree of innovation in some aspect of their business, be it the product, the process, their market selection or their marketing approach. • With close to 75 per cent claiming they do more than taking mere imitations to the market, novelty in the product/service is the type of innovation most commonly offered by start-up firms. • The innovativeness of start-ups varies by industry. Construction start-ups stand out as particularly low in innovation across all indicators, while Manufacturing stands out the most in the positive direction. • Team start-ups other than spouse teams have higher novelty, as do ventures started by founders with prior start-up experience. • There is no association between the founders’ level of education and the novelty of the ventures they (try to) create.

Does Venture Opportunity Variation Matter? Investigating Systematic Process Differences Between Innovative and Imitative New Ventures

The central thesis in the article is that the venture creation process is different for innovative versus imitative ventures. This holds up; the pace of the process differs by type of venture as do, in line with theory-based hypotheses, the effects of certain human capital (HC) and social capital (SC) predictors. Importantly, and somewhat unexpectedly, the theoretically derived models using HC, SC, and certain controls are relatively successful explaining progress in the creation process for the minority of innovative ventures, but achieve very limited success for the imitative majority. This may be due to a rationalistic bias in conventional theorizing and suggests that there is need for considerable theoretical development regarding the important phenomenon of new venture creation processes. Another important result is that the building up of instrumental social capital, which we assess comprehensively and as a time variant construct, is important for making progress with both types of ventures, and increasingly, so as the process progresses. This result corroborates with stronger operationalization and more appropriate analysis method what previously published research has only been able to hint at.

When to pull the plug and when to take the plunge : timing strategic decisions about new ventures

It is not uncommon for firms to explore a new venture under the belief it will generate profits, only to find out later that although costs accumulated, profits did not materialize. To manage the high level of uncertainty involved in this process, new ventures are generally designed as vehicles of exploration (Wu, 2012) that allow for a staged investment of resources, starting with small initial investments that can be scaled up or discontinued as uncertainty is resolved over time (Folta, 1998; Li and Chi, 2013). As such, new ventures provide firms a vehicle by which they can probe an uncertain future (Brown and Eisenhardt, 1997) without fully committing early on to an irreversible course of action (Folta, Johnson, and O’Brien, 2006). Our focus in the present paper is on the timing of strategic decisions that firms make regarding their exploration ventures. Prior research in the fields of entrepreneurship, real options reasoning, and decision speed has demonstrated a link between the timing of making decisions and performance (Baum and Wally, 2003; Eisenhardt, 1989; Judge and Miller, 1991). The antecedents to the timing of decisions, however, are less understood and pose an interesting dilemma.

Business model adaptation in new ventures: are technology-based firms different?

A firm’s business model (BM) is an important driver of its relative performance. Constructive adaptation to elements of the BM can therefore sustain the position in light of changing conditions. This study takes a configurational approach to understanding drivers of business model adaptation (BMA) in new ventures. We investigate the effect of human capital, social capital, and technological environment on BMA. We find that a universal, direct effects, analysis can provide useful information, but also risks painting a distorted picture. Contingent, two-way interactions add further explanatory power, but configurational models combining elements of all three (internal resource, external activities, environment) are superior.

ACE research vignette 041: Business Planning and the emergence of new ventures

This series of research vignettes is aimed at sharing current and interesting research findings from our team of international Entrepreneurship researchers. In this vignette, Christophe Garonne and Per Davidsson examine the value of business planning for business start-ups.

Opportunity Exploration and Exploitation in International New Ventures: A Study of Relationships’ Involvement in Early Entrepreneurial and Internationalisation Events

International new ventures (INVs) are firms that engage very early after their foundation, if not immediately, in inter-national activities. INVs are a relatively recent phenomenon that deviates from earlier theories on international business. In order to develop our understanding of the emergence and early internationalisation of INVs three different research areas are built upon in the dissertation: International Entrepreneurship, Entrepreneurship and Networks. Net-works have been identified as important for INVs. However, there is a lack of more profound studies regarding the way different types of relationships influence INVs. Few studies are concerned with exploration and exploitation of opportunities and research on the benefits and drawbacks of entrepreneurs’ relationships for the international opportunity recognition process has been called for. By taking a network approach to opportunity exploration and exploitation, the dissertation develops our under-standing of how entrepreneurs’ relationships are involved in exploring and exploiting opportunities during an INV’s early and critical entrepreneurial and internationalisation events. The critical events are studied during three phases: pre-founding, start-up and early internationalisation. Since internationalisation is present from the very beginning, the early internationalisation phase may be parallel to both the pre-founding and the start-up phase. The dissertation contributes to international entrepreneur-ship research in mainly two ways. First, by offering a deep insight into which opportunity exploration and exploitation activities entrepreneurs’ relationships are involved. Second, by adding to our understanding of what the relationships contribute to these activities, mainly in the sense of benefits gained through the relationships. Studying micro firms in real time in their early development towards INVs is considered a unique contribution of the study as it offers valuable insights into pre-founding, start-up, pre-internationalisation as well as early internationalisation. The study shows that in order to understand the development of INVs, it is beneficial to go back to times when there was no thought of starting the INV. By focusing on the entrepreneurs’ background and relationships a more complete picture of the INV is gained. Relationships created at former workplaces or during school time might be the ones that develop business opportunities and set off internationalisation. By focusing on the pre-founding phase, the study also contributes to entrepreneurship literature as this stage has often been neglected or assumed obvious in earlier research. This dissertation shows that an important and mostly lengthy pre-founding phase precedes the decision to start a f rm. In addition, the integration of entrepreneurs’ real experiences with existing theory to develop a continuum for the strength of relationships allows for contributions to network theory.

New Ventures’ influence on the Growth of SME Employment, Production and Exports in India: Does Institutional Credit matter?

New ventures are considered to be a major source of small firm growth. In Indian context the contribution of new ventures in terms of new employment, production and exports has largely remained unexplored. It is equally important and unexplored, the significance of the contribution of bank credit to the growth of new ventures in India. This paper is an attempt to throw light on these two aspects. The research is based on secondary data of the liberalized period provided by Ministry of Micro, Small and Medium Enterprises, Government of India and Reserve Bank of India. To analyze the influence of bank credit growth on new ventures and the influence of new ventures on growth of additional employment, additional production and additional exports, we used a Bi-Variate Vector Auto Regression. Based on the model generated, Granger causality tests are conducted to obtain the results. The study found that rate of growth of bank credit causes the number of new ventures, implying any increase in the rate of growth of bank credit will be beneficial to the growth of new ventures. The study also concluded that new ventures are not causing the growth of additional employment or additional production. However new ventures cause the growth of additional exports. This is reasonable as entrepreneurs start their new ventures with minimum possible employment and relatively low rate of capacity utilization and they come up to take advantage of the process of globalization by catering to the international market.