Effectuation under risk and uncertainty: A simulation model

Effectuation was first proposed as an expert entrepreneur's decision-making framework under uncertainty, but the applications of effectuation beyond the condition of uncertainty have seen less attention. Using an agent-based simulation model, this paper investigates the effectiveness of effectuation relative to causation in uncertain and risky contexts. The simulation overcomes the shortcomings of think aloud protocols typically used in effectuation research. The results suggest that effectuation outperforms causation in both risky and uncertain contexts until the entrepreneur can predict the future correctly > 75% of the time. This suggests expanding the boundary of effectuation from uncertainty to whenever predicting the future is challenging.     

Perceived uncertainty and behavioral logic: Temporality and unanticipated consequences in the new venture creation process

In this study, drawing on effectuation theory, we combine analytical strategies for process data to examine inductively and theorize how founder teams' perceptions of uncertainty and behavioral logics develop during new venture creation processes. The results reveal four phases and suggest a possible evolution from a causal conditional relationship between perceived uncertainty and behavioral logics to an integrative relationship. We bring to light the notion of temporality and unanticipated consequences, discuss their central roles in perceived uncertainty, effectuation, and causation, and offer revelatory insights into why and when effectuation is used in relation to uncertainty and entrepreneurial action.     

International network formation,home market institutional support and post-entry performance of international new ventures

Effectuation and causation decision-making logics are noted to be major alternative approaches to international network formation. However, knowledge is lacking on how and the conditions under which the two approaches contribute to post-entry performance of international new ventures (INVs). We integrate the theory of effectuation and institutional development logic to explain how effectuation and causation approaches to international network formation individually and jointly contribute to post-entry performance under varying conditions of home market institutional support. We test our proposed framework on primary data from 228 INVs in a sub-Saharan African economy. Results suggest that greater uses of both effectuation and causation approaches to international network formation are associated with stronger post-entry performance. More interestingly, results show that the joint effect of the two international network formation approaches on post-entry performance is amplified under conditions of low home market institutional support. Our findings provide theoretical and managerial insights on the importance of complementing effectual and causal reasoning in international network formation in weak home market institutional environments.     

Corporate effectuation: Entrepreneurial action and its impact on R&D project performance

Innovative products are widely recognized as an important source of competitive advantage. However, many companies have difficulties finding efficient and successful approaches to different types of R&D projects, particularly those that involve a high level of innovativeness. Therefore, the present study moves effectuation theory from the entrepreneurial context to R&D research. First, the characteristics of an effectual approach in the context of R&D projects are developed and differentiated from those of conventional prediction-based strategies (causation). Second, using a thorough qualitative and quantitative scale-development process to capture particularities of effectual and causal dimensions in the R&D context, expert interviews and a pilot study (123 R&D projects), the study develops a multi-factor measurement model of effectuation and causation. These measures are validated in a follow-up study with a larger sample of 400 projects. Third, the new measures are applied to test two central hypotheses: (a) effectuation is positively related to success in highly innovative contexts, (b) causation approaches are beneficial in projects with low levels of innovativeness. Overall, this study moves the effectuation logic from the entrepreneurial to the corporate R&D context, captures its particularities, and investigates its performance outcomes.     

Antecedents and consequences of effectuation and causation in the international new venture creation process

The selection of the entry mode in an international market is of key importance for the venture. A process-based perspective on entry mode selection can add to the International Business and International Entrepreneurship literature. Framing the international market entry as an entrepreneurial process, this paper analyzes the antecedents and consequences of causation and effectuation in the entry mode selection. For the analysis, regression-based techniques were used on a sample of 65 gazelles. The results indicate that experienced entrepreneurs tend to apply effectuation rather than causation, while uncertainty does not have a systematic influence. Entrepreneurs using causation-based international new venture creation processes tend to engage in export-type entry modes, while effectuation-based international new venture creation processes do not predetermine the entry mode.     

The frugal entrepreneur: A self-regulatory perspective of resourceful entrepreneurial behavior

The present research complements extant perspectives of resourcefulness, which assert that resourceful behaviors arise out of responses to environmental constraints, by developing a model illustrating that entrepreneurs self-impose constraints on resource acquisition and deployment for differing reasons. Specifically, we introduce a novel conceptualization of frugality and differentiate it from self-control to develop a set of hypotheses that frugality predicts resource use behaviors based on long-held preferences (e.g., effectuation and bricolage) and self-control predicts resource use behaviors based on known end states or goals (e.g., causation and pre-commitments). After accumulating evidence of reliability and validity for a new measure of frugality contextualized for entrepreneurship research, the results support our self-regulatory theoretical framework. Our study contributes to research on resourcefulness by making multiple theoretical insights, and we outline numerous future research opportunities for applying the construct of frugality to explain entrepreneurial behavior.     

Revisiting the relationship between product and international diversification in new ventures: The moderating effect of effectuation processes

This study examines the relationship between product and international diversification in new ventures, suggesting effectuation processes to be key moderators of this relationship. Effectuation processes allow young firms to attenuate constraints imposed by the liabilities of newness, the uncertainty and the lack of prior diversification experience these firms face and which may significantly restrict the number of growth opportunities they can jointly exploit in the short run. Specifically, the findings indicate that reliance on experimentation, maintenance of flexibility and securement of pre-commitments positively moderate the relationship between product and international diversification in new ventures. From all effectuation processes, only the adoption of the affordable loss principle lacks a significant effect on the link between the two growth strategies. Theoretical and empirical implications are further discussed.     

Weaving network theory into effectuation: A multi-level reconceptualization of effectual dynamics

This paper positions effectuation as a network-driving and network dependent phenomenon and suggests that understanding networks and network processes is essential to understanding the dynamics of effectuation. We argue that the implementation of effectuation is influenced by the nodal, relational, and structural characteristics of pre-existing and emerging networks, and by the processes through which these networks come about. We use these arguments to develop a multi-level, multi-theoretical reconceptualization of effectuation that provides for distributed agency and collective cognition of network members. We allow for the simultaneous and interactional use of effectual and causal logics, as well as the co-construction of knowledge, identity, and social capital within and across network levels. Our model also addresses changing uncertainty as opportunities develop, nuances of effectual interactions, and evolving market dynamics. Our propositions and reflections offer directions for further studies at the intersection of network and effectuation research.Executive summaryThere is little doubt that effectuation is reshaping how we think about entrepreneurial cognition and behavior. A core argument is that under conditions of uncertainty, entrepreneurs can co-create opportunities by collaborating with other willful agents. This moves us away from classical views of entrepreneurship and positions effectuation as a network-driving and network-dependent phenomenon. Yet, recent debate highlights that effectuation research has paid insufficient attention to the network of external parties involved. As a result, although the extant model of effectuation recognizes the importance of networks, our understanding of the relationship between effectual logic and entrepreneurial networks is far from complete.Several theoretically important and practically relevant questions arise from this knowledge gap. For example if we think about network development, how are potential stakeholders brought to mind and persuaded to commit if end-points and stakeholder preferences are both unknowable? What are the characteristics (i.e. structure, content and governance) of the networks that emerge through these commitments? Reciprocally, how do the characteristics of the emerging network influence effectual processes and outcomes?In this paper, we begin to address this line of questioning by considering effectuation not only at the level of the individual but also through lenses reflective of the three levels of analysis commonly adopted in network research: i) dyadic relationships, ii) the entrepreneurial network, and iii) the market more generally. While we attend to pre-existing networks (the constitution of which is likely to affect the probability of adopting effectual logic), our focus is on linking the individual and emerging networks across these levels.At the level of the individual, we break from prior effectuation research and ascribe new and influential roles to entrepreneurial ideas and instrumental mindsets in focusing an entrepreneur's attention on particular relationships (i.e. the cognitive activation of a cohesive network involving interested and persuadable individuals). At the level of the dyad, we suggest the very nature of interactions between actors can influence individual choice of logic. We specify that stakeholders will expect signs of process legitimacy (e.g. cognitive flexibility on the part of the entrepreneur) before making effectual commitments. We also move away from assumptions about altruistic behavior to suggest that power and influence will accrue to stakeholders whose resources are at risk and/or perceived by others to resolve uncertainty. At the level of the entrepreneurial network, we link effectuation to a brokerage orientation (tertius iungens) that enhances inclusiveness surrounding means and collective cognition. Moreover, we move beyond the narrow view of facilitating and constraining factors portrayed in the effectuation literature to argue that (e.g.) i) with respect to network content, resource specificity will shape possible futures; ii) with respect to governance, trust, supported by social mechanisms will predominate; and, iii) with respect to structure, specific network characteristics will be more supportive of certain aspects of effectuation than others (e.g. cohesive networks are more supportive of collaboration, but may limit the flexibility needed to embrace contingencies). At the market level, we posit that on the one hand, institutions will shape effectual processes. On the other hand, effectual processes are more likely than causal processes to create new institutions and/or supplant existing institutions.Overall, our study contributes to the understanding of both effectuation and networks by offering a multi-level, multi-theoretical re-conceptualization of the dynamics of effectuation. Our arguments should spur research in at least three interdependent areas: i) uncertainty and individual cognition; ii) network processes surrounding interactions and commitments; and iii) the contingent effects of network characteristics on effectuation. For practitioners, our insights should help shape thoughts about i) who to interact with in the face of uncertainty; ii) what stories to tell and how to deal with image management; iii) what to expect during negotiations; iv) how to broker relationships to enhance the ‘co’ in ‘co-creation’; and moreover, v) what network characteristics might facilitate or constrain their efforts.     

Career motives and entrepreneurial decision-making: examining preferences for causal and effectual logics in the early stage of new ventures

The influence of entrepreneurs’ career motives is examined on two alternative modes of decision-making logic; causation and effectuation. Based on Sarasvathy’s (Acad Manage Rev 26(2):243–288, 2001) seminal study, causation is defined as a decision-making process that focuses on what ought to be done given predetermined goals and possible means, and effectuation as a decision-making process emphasizing the question of what can be done given possible means and imagined ends. Analysis suggests that entrepreneurs who identify themselves with linear or expert career motives have a higher preference for causal decision-making logic. Entrepreneurs who identify themselves with spiral or transitory career motives have a higher preference for effectual decision-making logic. In addition, indications that prior start-up experience moderates the relationship between career motives and effectual decision-making logic for spiral-minded entrepreneurs is found. The overall results give ample support for the assumption that entrepreneurs’ career motives influence their decision-making.     

Ecological rationality and entrepreneurship: How entrepreneurs fit decision logics to decision content and structure

During new venture creation, entrepreneurs make decisions in a variety of areas from seeking funding to hiring employees. When and why entrepreneurs use effectual or causal logics to make such decisions is poorly understood. In this study, we integrate ecological rationality theory and effectuation theory to examine how the nature of decisions influences entrepreneurs' use of decision logics. In a qualitative study with 41 entrepreneurs across 290 decisions, we explore how decision content (what the decision is about) and decision structure (what information about a decision is represented in the decision-maker's mind) influence entrepreneurs' use of effectual or causal logics. We extend our findings in an experiment with 224 entrepreneurs where we manipulate decision structure. Our results suggest that decision content influences entrepreneurs' mental representations of decision structure. In turn, the combination of two elements of decision structure — decision complexity and the perceived costs of implementing different options — drives entrepreneurs' use of decision logics. We contribute to the effectuation literature by integrating it with ecological rationality theory, introducing the concept of decision fit as a driver of decision logics, and developing our understanding of hybrid decision-making (the simultaneous use of effectuation and causation).     

Born globals’ decision-making logics during their entrepreneurial process

Journal of International Entrepreneurship - New entrepreneurial logics such as effectuation, bricolage, and causation have become increasingly important in the entrepreneurship literature since the...     

Predictive and effectual decision-making in high-tech international new ventures – A matter of sequential ambidexterity

This study investigates the international opportunity exploration and exploitation processes of high technology international new ventures (INVs) operating in the global medical devices sector. Drawing upon the effectuation and causation perspectives, we contribute to the micro-foundations of international entrepreneurship research in the early innovation development space by focusing on decision-making logics of techno-entrepreneurs of INVs. Specific focus is afforded to the phases of their exploration and exploitation of international opportunities leading to international new venture creation. In the pre-start-up and start-up stages of international new ventures, we find that sequential ambidexterity applies to how the subject firms manage the exploration and exploitation of opportunities in the delivery of their innovations to global markets.This research advances prior international entrepreneurship studies by focusing on the opportunity and innovation processes on the individual level. We identify different decision-making logics in the different phases and contrary to earlier findings in the international entrepreneurship (IE) area, we found causation logic to dominate the initial stages of exploration and effectuation logic, in the latter stages. Prior commercial experience presented itself as a key determining factor in the decision-making path chosen by international techno-entrepreneurs. Our study further extends the view of organizational ambidexterity by offering empirical insights into the relevance of sequential ambidexterity for understanding the processes of innovation exploration and exploitation in high-tech INVs and the decision-making logics driving these processes.     

ASYMPTOTIC EQUIVALENCE OF RISK MEASURES UNDER DEPENDENCE UNCERTAINTY

In this paper, we study the aggregate risk of inhomogeneous risks with dependence uncertainty, evaluated by a generic risk measure. We say that a pair of risk measures is asymptotically equivalent if the ratio of the worst‐case values of the two risk measures is almost one for the sum of a large number of risks with unknown dependence structure. The study of asymptotic equivalence is particularly important for a pair of a noncoherent risk measure and a coherent risk measure, as the worst‐case value of a noncoherent risk measure under dependence uncertainty is typically difficult to obtain. The main contribution of this paper is to establish general asymptotic equivalence results for the classes of distortion risk measures and convex risk measures under different mild conditions. The results implicitly suggest that it is only reasonable to implement a coherent risk measure for the aggregation of a large number of risks with uncertainty in the dependence structure, a relevant situation for risk management practice.     

DYNAMIC INDIFFERENCE VALUATION VIA CONVEX RISK MEASURES

The (subjective) indifference value of a payoff in an incomplete financial market is that monetary amount which leaves an agent indifferent between buying or not buying the payoff when she always optimally exploits her trading opportunities. We study these values over time when they are defined with respect to a dynamic monetary concave utility functional, that is, minus a dynamic convex risk measure. For that purpose, we prove some new results about families of conditional convex risk measures. We study the convolution of abstract conditional convex risk measures and show that it preserves the dynamic property of time-consistency. Moreover, we construct a dynamic risk measure (or utility functional) associated to superreplication in a market with trading constraints and prove that it is time-consistent. By combining these results, we deduce that the corresponding indifference valuation functional is again time-consistent. As an auxiliary tool, we establish a variant of the representation theorem for conditional convex risk measures in terms of equivalent probability measures.     

A meta-analytic review of effectuation and venture performance

Though much research in entrepreneurship makes the fundamental assumption that opportunities are found, new work is emerging which questions this core tenet. Effectuation, for example, positions the entrepreneur as co-creator of opportunities, together with committed stakeholders. In this study, we conduct a meta-analysis of the articles published in the Journal of Business Venturing, summarizing data on 9897 new ventures to connect three of the principles of effectuation positively with new venture performance. In so doing, we offer both specific insight into precisely measuring effectuation and a general method for extracting variables from prior work to measure new constructs.     

Social interaction via new social media: (How) can interactions on Twitter affect effectual thinking and behavior?

Social interaction plays a central role in effectuation processes, yet we know little about the implications for effectuation when an entrepreneur interacts via particular channels such as social media. To address this gap, our paper uses an inductive, theory-building methodology to develop propositions regarding how effectuation processes are impacted when entrepreneurs adopt Twitter. Twitter is a microblogging platform that can facilitate a marked increase in interaction. We posit that Twitter-based interaction can trigger effectual cognitions, but that high levels of interaction via this medium can lead to effectual churn. We also posit that there is one factor, perceived time affordability, that predicts the level of social interaction in which an entrepreneur engages via Twitter. Further, we propose two factors that moderate the consequences of social interaction through Twitter. These factors are community orientation and community norm adherence. Implications for our understanding of effectuation, of social interaction, and of the impact of social media on entrepreneurial firms are discussed.     

FOREIGN EXCHANGE RATES AND FOREIGN DIRECT INVESTMENT IN THE UNITED STATES

The hypothesis that foreign direct investment into the United States responds to variations in exchange-rate levels and to exchange-rate uncertainty is tested for the period 1976-1998. We account for nonstationarity and cointegration in the data series and use conditional measures of exchange-rate uncertainty. While a long-run relationship exists among foreign direct investment in-flows as a share of GNP, the real exchange rate, and the GARCH measure of exchange-rate volatility, we find no discernible link between the real exchange rate and inward foreign direct investment in the short run. We also conclude that foreign direct investment decreases in response to increases in exchange-rate uncertainty in the short run when we use a conditional measure of exchange-rate uncertainty.     

The Primitive Uncertainty Construct: Possibility,Potential Surprise,Probability and Belief; Some Experimental Evidence

This paper investigates the nature of the primitive uncertainty measure by means of a laboratory experiment that consists of four uncertain situations. It considers the related pair of possibility and potential surprise associated with George Shackle; and the supposedly related pair, belief and probability. The assessment of the relative merits of potential measures of uncertainty is based upon modal responses and χ² tests. It is found that the dominant uncertainty concept is potential surprise, and the subjects' explanations of their choice of an uncertainty concept gave substantial weight to possibility where it is felt that there is vagueness or doubt about the outcomes in a given situation     

E-Service Quality: A Meta-Analytic Review

The dominance of the internet as a shopping and distribution channel also necessitates an understanding of e-service quality. Using means-ends-chain theory, we develop a conceptual framework to understand the different models and the associated multiple measures that have been developed to examine this construct. We test the measures empirically using meta-analytic techniques. We also summarize the impact of e-service quality on key outcomes—customer satisfaction, repurchase intentions, and word-of-mouth, as well as the moderating impact of three contextual factors: country culture, regulatory environment, and industry context. Results indicate that e-service quality has four underlying dimensions (website design, fulfilment, customer service, and security/privacy) though their relevance for overall e-service quality is moderated by country-specific (uncertainty avoidance, masculinity, power distance, individualism), regulatory environment-specific (financial secrecy, rule of law), and industry-specific (services/goods, retailing/banking) factors as well as research-design factors.     

Organising new business in a turbulent context: Opportunity discovery and effectuation for IJV development in transition markets

Research on entrepreneurship has suggested entrepreneurial phenomena to take place in a wide variety of contexts that deal with new venture emergence. Opportunity discovery and effectuation are seen as the essence of entrepreneurship. The present study examines entrepreneurial behaviour in the organising of an international joint venture (IJV) in Polish transition markets. The paper aims to answer the following question: How is an international joint venture organised in turbulent context through opportunity-discovery and effectuation behaviours? Based on theoretical analysis and a longitudinal case study, we illustrate the organising of an international joint venture in transition markets through specific behaviours of opportunity discovery and effectuation. We show especially the relationship-based nature of all the behaviours. The study advances international entrepreneurship research by emphasising the intertwinedness of the entrepreneurial behaviours with the drastic developments in the transition markets and the evolution of the IJV partnership.