Making sense of overconfidence in market entry

Entrepreneurs are often described as overconfident (or at least very confident), even when entering difficult markets. However, recent laboratory findings suggest that difficult tasks tend to produce underconfidence. How do entrepreneurs maintain confidence in difficult tasks? Our two laboratory experiments and one archival study reconcile the literature by distinguishing types of overconfidence and identifying what type is most prominent in each type of task. Furthermore, we critically examine the notion that ‘overconfidence’ explains excess market entry: we find that entry into different markets is not driven by confidence in one's own absolute skill, but by confidence in one's skill relative to that of others. Finally, we consider whether overconfidence in relative skill is driven by neglecting competitors or by systematic errors made when considering them. Copyright © 2013 John Wiley & Sons, Ltd.     

Entrepreneurial marketing of international high-tech business-to-business new ventures: A decision-making process perspective

Knowledge of how entrepreneurial marketing is conducted in industrial markets is currently rather weak. This study explores the marketing decision-making process of entrepreneurs undertaking entrepreneurial marketing in international new ventures (INVs) operating in high-tech business-to-business markets. A qualitative study conducted with entrepreneurs from four case firms reveals that due to the iterative, incremental, and co-creative nature of the process, marketing decision making in high-tech business-to-business INVs that is more effectual than causal results in more entrepreneurial marketing. A novel finding is that entrepreneurs alternate causal and effectual marketing forms as a result of their ambidextrous entrepreneurialism, and variations in the internal uncertainty, technological uncertainty, and any market turbulence faced by the firm. We develop a dynamic model presenting the alternation between effectual and causal processes, and the feedback loop of entrepreneurial marketing. The research offers implications for the management of organizations operating under conditions of uncertainty on how their decision-making processes can optimize entrepreneurial marketing, how to create new markets, and how to reduce the perceived uncertainty in industrial markets.     

Mental Models and Successful First‐mover Entry Decisions: Empirical Evidence from Chinese Entrepreneurs

Existing research has identified a variety of mechanisms through which early entrants may be able to develop competitive advantages that favorably influence performance relative to later entrants. At the same time, later entrants can sometimes enjoy cost advantages arising from free riding and the resolution of uncertainty. Despite the impressive array of possible explanations linking entry timing with performance, it is unclear how these explanations align with the cognitive representations that guide managerial decision making. The authors address this gap in the literature by arguing that the resource‐based view of the firm provides potential insight into the way that perceived pioneer advantages and disadvantages influence managerial behavior. The resource‐based view argues that the value of various pioneer advantages will depend on the degree to which those advantages enable pioneers to access and control resources that are costly to copy. Because legal and cultural variables also influence access to resources, the value of specific dimensions of pioneer advantage will vary depending on the macroenvironment within which a firm operates. To test this reasoning, the authors examine the impact of perceived pioneer advantages on the number of first‐mover entry decisions of Chinese service entrepreneurs, who operate in an environment characterized by underdeveloped legal institutions and inadequate legal protections, a fledgling capital market, the limited availability of information about products and industries, and an emphasis on personal connections. The authors hypothesize that these unique characteristics of Chinese markets will affect the perceived importance of sources of pioneer advantage identified in studies of Western (primarily United States) firms. Using data collected from 302 Chinese service entrepreneurs, the authors find strong evidence that the number of pioneer entry decisions made by Chinese entrepreneurs are strongly tied to entrepreneurs’ perceptions that pioneer firms tend to outperform later entrants and have the ability to preempt key assets. In addition, the number of entry decisions is negatively related to perceptions of pioneer cost disadvantages and the level of uncertainty faced by pioneers relative to later entrants. However, consistent with the research hypotheses, perceptions of pioneer leadership and cost advantages do not significantly influence the entry decisions of Chinese service entrepreneurs.     

Growing with the market: How changing conditions during market growth affect formation and evolution of interfirm ties

Research Summary: Market conditions are known to matter for firm performance and growth. This study explores how changing levels of uncertainty and competition affect interfirm ties of entrepreneurial firms as markets transition from nascent to growth stage. Tracing six entrepreneurial game publishers during the growth stage of the U.S. wireless gaming market, the findings reveal that in a growth stage market, as uncertainty decreases, certain ties of entrepreneurial firms are terminated. First, existing partners may cut ties and become competitors after entering the market directly. This is a “winner's curse” as more successful firms are more likely to entice their partners to enter the market directly. Second, ties may be terminated as prominent firms that are “overwhelmed” with too many partners cut ties with low to mediocre performance, while their remaining partners enter a positive spiral of tie strength and performance. Finally, as uncertainty decreases, new firms may enter the market as competitors to prominent firms. While entrepreneurial firms with high‐ and low‐performing ties to prominent partners may find ties with these new entrants attractive, those with mediocre ties to few prominent partners find this move too risky and wait for a first mover to legitimate it. Overall, the findings show that changing levels of uncertainty and competition in growth stage markets can have different consequences for firms due to heterogeneity in their ties and power relative to partners. The findings provide several contributions to literature regarding the relationship among interfirm ties, firm performance, and market evolution. Managerial Summary: Based on interviews at six entrepreneurial game publishers in the United States and their partners, this study shows how changing levels of uncertainty and competition in growing markets can have different consequences for firms based on the different types of alliances in their portfolio and their power relative to partners. The findings highlight the importance of managing partners differently based on alliance type and goal of the partner. They advocate remaining flexible in alliance management as information asymmetries, intentions and bargaining power of partners can change and lead to abrupt alliance dissolution. They show that alliance portfolio management goes beyond a firm's capability of managing individual alliances, and provide a tool for managers to evaluate their alliance portfolios and take the necessary precautions.     

Explaining Asset Mispricing Using the Resale Option and Inflation Illusion

We investigate the overconfidence theory and inflation‐illusion hypothesis of asset mispricing. Both concepts address subjective asset valuation but place the impetus on differing explanations within the standard dividend‐growth model. We find that one of the theoretical outcomes of overconfidence—asset turnover—consistently explains mispricing in U.S. housing markets. Further, we find that asset turnover subsumes expected inflation in certain specifications, suggesting that dispersion in investors' beliefs is a better explanation of asset mispricing than the investors' inability to properly discount future cash flows.     

The dark side of institutional intermediaries: Junior stock exchanges and entrepreneurship

Research Summary : Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary : Investors and entrepreneurs face uncertainty when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain as desired deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it is more challenging to manage technology firm growth as well as there is potential opportunity to investigate other industries. Finally, for policy‐makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.     

Incumbent strategic behavior in financial markets and the exit of entrepreneurial start‐ups

This paper empirically investigates the forces that shape the post‐entry exit probability of entrepreneurial start‐ups, with an emphasis on the impact of incumbents' strategic behavior in financial markets. We find that entrepreneurial start‐ups in highly competitive industries are more likely to exit and that leverage compounds this exit risk. However, the latter result only holds when potential adverse selection and moral hazard problems in financial markets are large at start‐up. Under these circumstances, competitors can negatively influence creditors' perceptions on entrepreneurial quality or behavior through aggressive strategic actions to impede future financing and induce the start‐up's exit. Copyright © 2004 John Wiley & Sons, Ltd.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

Pioneering Advantages and Entrepreneurs' First‐mover Decisions: An Empirical Investigation for the United States and China

New ventures are often launched for the purpose of pioneering an innovative new product or service in the marketplace. Entrepreneurs or founders of new ventures thus often have to make the decision whether to be the market pioneer or the first mover. While being a first mover potentially is advantageous, it also involves taking risks and facing uncertainties. Entrepreneurs must assess the benefits and risks of pioneering in the first‐mover decision‐making process to realize the potential competitive advantages associated with being a pioneer. Previous research has shown how entrepreneurs perceive potential gains and losses associated with exploring opportunities as the key defining element of entrepreneurial decision‐making. Past studies have also indicated that cultural and business environmental factors affect both perceptions and decision‐making. However, studies to date have insufficiently addressed the relationship between entrepreneurs' perceived pioneering advantages/disadvantages and their first‐mover decisions, with little attention to cross‐national differences. This study includes hypotheses postulating how entrepreneurs' perceived advantages and disadvantages of pioneering affect the number of first‐mover decisions made by entrepreneurs in two different cultural contexts, the United States and China. We collect data from 152 U.S. entrepreneurs and 140 Chinese entrepreneurs over a four‐year period and carry out empirical tests on the hypotheses using Poisson regression models. Our results provide insight on how culture affects perceptions of advantages and disadvantages of pioneering, and how these perceptions impact the likelihood of making a first‐mover decision. We find that a higher level of perceived advantages will drive first‐mover decisions, whereas perceived disadvantages will deter first‐mover decisions. The negative effect of perceived erosion disadvantages on the number of first‐mover decisions was higher for Chinese entrepreneurs, consistent with the high risk‐aversion culture in China. However, this effect was not found for perceived uncertainty disadvantages, suggesting that the risk‐averse characteristics of Chinese entrepreneurs is an oversimplification, and that the Chinese cultural, business, and legal environment helps offset uncertainty disadvantages. We also find an interesting positive moderating effect of perceived advantage on the relationship between perceived disadvantages and the number of first‐mover decisions in China only. That is, if perceived advantages are low, Chinese entrepreneurs are more risk averse than U.S. entrepreneurs; but if perceived advantages are high, Chinese entrepreneurs are more risk‐seeking than U.S. entrepreneurs. This finding again challenges the risk aversion conclusion found by previous studies of Chinese managers.     

Behavioral Reasons for New Product Failure: Does Overconfidence Induce Overforecasts?

Efforts to organize and integrate research findings on new product performance determinants have lagged since the last significant overview paper appeared over a decade ago. Importantly, this literature has not considered entire categories of factors that are known to affect managerial decisions and behavior, namely those that pertain to decision‐makers' cognitive limitations and incentive structures. This research empirically investigates one specific cognitive distortion heretofore neglected in studies of new product commercialization—overconfidence, commonly defined in the literature as excessive belief in one's own abilities to generate superior performance. To lay the groundwork for subsequent exploration, the paper first introduces a behavioral model that both organizes well‐understood new product performance determinants and illuminates others heretofore not studied, namely incentive alignment and cognitive limitations and biases. The model summarizes extant research and allows development of research hypotheses related to overconfidence. The hypotheses and empirical investigation motivated by the model address two questions about the impact of overconfidence on new product commercialization activities. First, the study explores whether overconfidence is associated with overforecasting new product demand. Second, it evaluates two complementary mechanisms that may account for overconfidence‐induced overforecasts. The empirical findings are based on data generated in the course of management simulation workshops conducted among graduate students at three leading business schools in India. Three hundred thirty participants played individually four rounds of a computer‐based simulation game that involved decisions pertaining to new product development (including product formulation) and commercialization strategies. The decisions were captured and analyzed using statistical techniques. The results reveal that decision‐makers' overconfidence is associated with a higher likelihood of overforecasting new product sales. The observed effect is fully mediated by flawed tactical decisions that dampen demand, namely elevated product pricing. Sensitivity analyses show that these results are robust to a number of alternative explanations. However, the study finds no evidence implicating overconfident individuals as poor “innovators”—overconfident and nonoverconfident decision‐makers experienced comparable market demand for their new products. The paper concludes with a discussion of the results and provides specific recommendations for practice.     

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

In this paper we study the effect of price floor regulations on the organization and performance of markets. The standard interpretation of the effects of these policies is concerned with short‐run market distortions associated with excess supply. Since price controls prevent markets from clearing, they lead to higher prices. While this analysis may be correct in the short‐run, it does not consider the dynamic equilibrium consequences of price controls. We demonstrate that price floor regulations can have important long‐run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low‐cost retailers. Moreover, we show that these factors can indirectly lower productivity and possibly even prices. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Québec and show that the policy led to more competition between smaller/less efficient stations. This resulted in lowered sales, and, despite the reduction in efficiency, did not increase prices.     

Does pre‐entry licensing undermine the performance of subsequent independent activities? Evidence from the global aerospace industry, 1944–2000

We study how firms' use of in‐licensing for their initial entry to a business domain can detract from the performance of their subsequent autonomous endeavors in the domain. We argue that in‐licensing produces high levels of causal ambiguity about factors that drive the performance achieved with the licensed product. In turn, the experience that firms gather through pre‐entry licensing is likely to generate superstitious learning and overconfidence that undermine the performance of licensees' subsequent independent operations. The biases will be particularly strong in the face of contextual dissimilarity. We find consistent evidence in a study of firms that entered the global aircraft industry between 1944 and 2000. The research helps advance the understanding of the benefits and costs of markets for technology. Copyright © 2012 John Wiley & Sons, Ltd.     

Markets without boundaries

Western economies, and the US in particular, are experiencing a dramatic diversification and proliferation of information activities which will effect all aspects of leisure and business. Against this background, Manley Irwin considers the nature of market entry, the reasons why markets are changing so rapidly, and the implications for both public and private sectors. He concludes that the blurring of market boundaries will defuse and decentralize economies, spur competition and encourage entrepreneurial activity.     

Option value and entry timing

When facing uncertainty, firms entering new markets can make initial foothold investments rather than undertake large sunk investments. Such investments are real call option purchases. They offer management flexibility, but also raise questions about whether and when to increase commitments to new markets. We present an entry timing decision criterion and discuss its application to a variety of market entry situations. Optimal timing for exercising real options depends on current dividends, possibilities for preemption, and whether the option is simple or compound, proprietary or shared. Our analysis reveals critical assumptions and new theoretical insights regarding market entry timing. Copyright © 2002 John Wiley & Sons, Ltd.     

Fit by adaptation or fit by founding? A comparative study of existing and new entrepreneurial cohorts in China

Extant research provides ambiguous views on the network adaptability of existing ventures and new ventures during environmental change. Applying an institutional perspective, this research aims to provide a clearer picture by comparing the adaptation and network configurations of existing vs. new entrepreneurial cohorts during China's institutional change after 1992. The qualitative and quantitative analyses show that the existing cohort of entrepreneurs displays network inertia, in that they largely maintain strong tie‐based political and market networks; the new cohort instead demonstrates better adaptation by establishing fewer political networks but more weak and diverse market networks. This comparative research unpacks the institutional mechanisms underlying such differences, and serves as a ground for future investigations dealing with the strategic actions of different entrepreneurial cohorts that are largely neglected in previous studies. Copyright © 2014 John Wiley & Sons, Ltd.     

Choosing between Order‐of‐Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald's Restaurant Outlets

We demonstrate how a non‐nested statistical test developed by Vuong [1989] can be used to assess the suitability of alternate order‐of‐entry assumptions used for identification purposes in empirical entry models. As an example, we estimate an entry model of McDonald's and Burger King restaurant outlets in United States. The data set focuses on relatively small ‘isolated’ markets. For these markets, the non‐nested tests suggest that order‐of‐entry assumptions that give Burger King outlets a first‐mover advantage are statistically preferred. Last, a Monte Carlo experiment provides encouraging results suggesting that the Vuong‐type test yields reliable results within the entry model framework.     

Constraints in acquiring and utilizing directors' experience: An empirical study of new‐market entry in the pharmaceutical industry

In this study we provide evidence that firms considering entering new markets are more likely to appoint directors with experience in those markets; and subsequently, we show that directors' market experience increases the likelihood of new‐market entry. Moreover, we explore the presence of constraints in both, acquiring experienced directors and utilizing their experience. Specifically, we find that experienced directors are less likely to join firms with financial restatements in the recent past as well as firms with a lower status than the firms where they currently serve. In addition, we find that interlocking directors' experience is less likely to lead to new‐market entry for firms that lack new‐product development experience and that exhibit a high level of market overlap with interlocked firms. Copyright © 2013 John Wiley & Sons, Ltd.     

Foreign‐born academic scientists: entrepreneurial academics or academic entrepreneurs?

Although foreign‐born scholars make up a significant portion of the US professoriate, little is known about how their ‘foreign‐born’ identity directly or indirectly affects their entrepreneurial prowess. This article integrates role identity theory with theoretical arguments from social network and cultural proximity theories to examine whether foreign‐born academic scientists can better be characterized as entrepreneurial academics (strong government grant productivity) or academic entrepreneurs (strong involvement in the creation and commercialization of university‐invented technologies). Our analysis indicates that foreign‐born academic scientists seem more successful in attracting research resources, but are less successful in exploiting their inventions through entrepreneurial activities. They can therefore be best described as entrepreneurial academics. These findings may partially explain the tepid performance of many research‐intensive universities in terms of technology transfer and commercialization. We discuss the policy implications of our findings and provide guidance for academic entrepreneurs.     

DISTANCE,BANK HETEROGENEITY AND ENTRY IN LOCAL BANKING MARKETS*

We examine the determinants of entry into Italian local banking markets during the period 1991–2002 and build a simple model in which the probability of branching in a new market depends on the features of both the local market and the potential entrant. Econometric findings show that banks are more likely to expand into those markets that are closest to their pre‐entry locations. Large banks are also more able to cope with distance‐related entry costs than small banks. Finally, banks have become increasingly able to open branches in distant markets, due to the advent of information and communication technologies.     

Spectrum Licensing,Policy Instruments and Market Entry

Competition policy attempts to address the potential for market failure by encouraging competition in service markets. Often, in wireless communication service markets, national regulatory authorities seek to encourage entry via the spectrum assignment process. Instruments used include the assignment mode (auction or beauty contest), setting aside licenses and providing bidding (price and quantity) credits for potential entrants, and making more licenses (spectrum blocks) available than there are incumbent firms (excess licenses). The empirical analysis assesses the effectiveness of these policy instruments on encouraging entry. The econometric results show that the probability of entry is enhanced by using auction assignments and excess licenses. Furthermore, quantity, but not price, concessions encourage entry.