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.     

Learning to collaborate through collaboration: How allying with expert firms influences collaborative innovation within novice firms

Research summary : Strategic alliances have been recognized as a means for firms to learn their partners' proprietary knowledge; such alliances are also valuable opportunities for partner firms to learn tacit organizational routines from their counterparts. We consider how relatively novice technology firms can learn intraorganizational collaborative routines from more experienced alliance partners and then deploy them independently for their own innovative pursuits. We examine the alliance relationships between Eli Lilly & Co. (Lilly), a recognized expert in collaborative innovation, and 55 small biotech partner firms. Using three levels of analysis (firm, patent, and inventor dyad), we find that greater social interaction between the partner firm and Lilly subsequently increases internal collaboration among the partner firm's inventors. Managerial summary : Can collaborating externally advance internal collaboration? Yes. Our research found that collaboration among scientists at small, early‐stage biotechnology firms significantly increased after these firms formed highly interactive R&D alliances with a large pharmaceutical company known for its expertise in such collaboration. It is well known that alliances help new firms learn specific new technologies and commercialize innovations. Our study broadens the scope of potential benefits of alliances. New firms can also learn collaboration techniques, deploying them internally to enhance their own abilities in collaborative innovation. Managers should take this additional benefit into consideration in developing their alliance strategies. Pursuing alliance partners with expertise in collaboration and keeping a high level of mutual interactions with partner firm personnel should be important considerations to extract this value. Copyright © 2015 John Wiley & Sons, Ltd.     

Facing Constraints to Growth? Overseas Chinese Entrepreneurs and Traditional Business Practices in East Asia

Overseas Chinese entrepreneurs in East Asia have achieved notable success in a number of traditional, slow growth industries. This success has been ascribed to distinctive aspects of Chinese business culture that favor alacrity, adaptability, networking, and close control of firm operations. Recently, some have suggested that the same characteristics that have promoted these firms' success in slower growth sectors may hinder firm success in faster growth sectors of the economy. To explore this proposition, we conducted in-depth interviews with forty-one entrepreneurs, venture capitalists, and government officials all working with fast growth entrepreneurial firms in East Asia. The results suggest that, in general, Overseas Chinese entrepreneurial firms also follow many of the traditional business practices associated with Overseas Chinese firms. Most venture capitalists and government officials in the sample expressed concern that these practices are hindering the building of firms that can be taken public and experience the high growth consistent with vibrant entrepreneurial firms. The results also showed that the Overseas Chinese entrepreneurs sampled are aware that some of these characteristics may be creating constraints to faster growth and, at the behest of venture capitalists and government officials, are sometimes making the changes thought necessary to create faster growth firms.     

Sorting things out: valuation of new firms in uncertain markets

New business models combined with a lack of objective operating data result in significant information asymmetry and uncertainty in the valuation of new firms in emerging markets. Information asymmetry increases the risks of both adverse selection and moral hazard. When traditional differentiators of firm quality are lacking, such as in emerging economic sectors, markets may turn to secondary information sources to filter and sort firms. We investigate the roles played by observable corporate governance characteristics as indirect indicators of new firms' potential qualitative differences. Markets may sort firms based on such characteristics because they are perceived to be correlated with desired but unobservable characteristics and actions and they lower the risks of both adverse selection and moral hazard. Our study of publicly traded U.S. Internet firms found that firm market valuation was strongly associated with corporate governance characteristics (e.g., executive and director stock‐based incentives, institutional and blockholder stock ownership, board structure, and venture capital participation). In addition, firm age moderated how markets used some quality proxies to determine firm valuation during the post‐IPO period. Copyright © 2003 John Wiley & Sons, Ltd.     

Do foreign entrepreneurs benefit their firms as managers?

Research summary: The entrepreneurship literature has extensively studied an individual's decision to found a new venture, but it has little to say about the individual's choice to operate this venture personally or hire an agent. This decision is particularly challenging for foreign entrepreneurs, who, in addition to traditional factors, such as agency costs and personal preferences, need to take into consideration the benefits and liabilities of foreignness. Using novel data on foreign entrepreneurial firms and instrumenting for the owner‐manager choice with a visa policy change, we find that managing foreign entrepreneurs significantly improve firm performance. Our results further suggest that foreign owner‐managers reduce operating costs but have no effect on the firm's productivity and growth. Managerial summary: Immigrants represent a significant part of the population in the United States and Europe and are often more entrepreneurial than local nationals. However, a person starting a firm in a foreign country faces unique challenges. One important choice that a foreign entrepreneur has to make is whether to operate the firm personally or hire a local agent. Foreign entrepreneurs are often believed to be worse managers because they have limited local knowledge and skills. However, our results point to the contrary: We find that managing foreign entrepreneurs significantly improve firm performance by decreasing firms' operating costs. This happens because foreign owner‐managers often have access to unique resources, higher work incentives, and superior management skills acquired at home. Copyright © 2016 John Wiley & Sons, Ltd.     

Growth strategies for service firms

Two characteristics of services—intangibility of the offering and simultaneity of production and consumption—have important implications for strategic planning. Four of these implications are described. Life cycle, experience, and market share, which are the usual determinants of profitability that provide guides for strategic planning are not easily applied to the service firm. Therefore growth strategies need to be revised. In its second part the paper suggests alternative growth strategy paths for service firms. It brings forward three main remarks. First, the service firm should not overuse its delivery system and its image by attempting to serve the needs of too many sociodemographic segments. Second, service development and concentric diversification are not sequential choices; the latter is not so distant from the former as may be commonly perceived. Third, expansion to out-of-country markets represents a risk discontinuity; it should be approached by service firms with considerable flexibility and willingness to interact with different cultures.     

Does it pay to acquire technological firms?

Abstract The paper focuses on several research questions: How do the firms differ in terms of their strategic objectives for foreign acquisitions? What are the determinants of ‘success’ of acquisition? What are the differences between the American and German firms in terms of their acquisition strategies and successes? Our special interest was to get a closer look into the technological motive of the foreign acquisitions. This made a two-step procedure necessary. A first survey of 86 firms had to identify those acquisitions which were motivated by technological interests through a questionnaire. Findings: There are four classes of companies with different motives for acquisitions: Market oriented entrepreneurs, Short-term profit seekers, Technological acquirers, Preemptive market protectors. The second survey investigated the process and the results of acquisitions with a special view on the role of research and development through 60 interviews in 30 acquisition cases in both acquiring and acquired units. Findings: A network of variables explains the success. The most important are context variables (uncertainty, cultural differences), size of both firms, low degree of formalization, expertise, and lack of conflicts about technological philosophy.     

Diversification of cable television firms into broadband products

This research provides a new perspective to investigate the broadband diffusion in eight states of the U.S. by studying the two-stage entry decisions, namely, upgrading and subsequent product decisions, by the cable television system operators, one of the early dominant players in the broadband market, and examines the role of competition, market characteristics and firm heterogeneity in the cable company's decisions in a dynamic setting. Comparing the empirical results of the decision models of both stages can give new insights into the dynamics of broadband diffusion. The empirical results show that the subsequent product decision is affected more by the demand determinants, while the upgrading decision is affected more by the cost determinants. The results also indicate that policies which aim to reduce the entry cost such as a low city fee can largely encourage firms to upgrade the network, while subsequent policies that help boost the demand can help firms diversify into new digital services early. The effectiveness of competition policy in the broadband diffusion is confirmed in both stages. Strategic responses by cable firms to the presence of RBOCs are more noticeable in the second-staged product decision than in the first-staged upgrading decision.     

An empirical analysis of organizational strategies by entrepreneurial high-technology firms

Many start-up, high-technology firms commercialize an emerging technology through cooperative arrangements. This paper empirically investigates the determinants of entrepreneurial high-technology firms to form cooperative relationships. The statistical results on data drawn from the commercialization of the new biotechnology show that the propensity to cooperate is positively correlated with the distance of firms' competitive position in relation to their rivals. The follower is more likely to seek cooperative relationships than the leader in commercializing new products. However, the competitive pressure impacts firms in different ways, depending on their internal capabilities to commercialize a new product. We found that firm size is negatively correlated with the use of cooperative arrangements. The study also found that the organizational mode of cooperative arrangements is predominantly selected by the high-tech. start-up firm in commercializing their new products in foreign markets.     

Slack resources,firm performance,and the institutional context: Evidence from privately held European firms

Research summary : Integrating the behavioral and institutional perspectives, we propose that a country's formal institutions, particularly its legal frameworks, affect managers' deployment of slack resources. Specifically, we explore the moderating effects of creditor and employee rights on the performance effects of slack. Using longitudinal data from 162,633 European private firms in 26 countries, we find that financial slack enhances firm performance at diminishing rates, whereas human resource (HR) slack lowers performance at diminishing rates. However, financial slack has a more positive effect on firm performance in countries with weaker creditor rights, whereas HR slack has a more negative effect on performance in countries with stronger employee rights. The results provide a richer view of the relationship between slack and firm performance than currently assumed in the literature. Managerial summary : A key dilemma managers often encounter is whether, on the one hand, they should build in excess resources to buffer their firms from internal and external shocks and to pursue new opportunities or whether, on the other hand, they should develop “lean” firms. Our study suggests that excess cash resources—which are usually viewed as easy to redeploy—benefit firm performance, especially when firms operate in countries with weaker creditor rights. However, excess human resources—which are usually viewed as more difficult to redeploy—hamper firm performance, particularly when firms operate in countries with stronger labor protection laws. Thus, the management of slack resources critically depends on the characteristics of these resources (e.g., redeployability) and the institutional context in which managers operate. Copyright © 2016 John Wiley & Sons, Ltd.     

Founding conditions and the survival of new firms

We analyze the effects of founding conditions on the survival of new firms. Based on arguments from several theoretical perspectives, namely economics, organizational ecology, and the resource‐based view of the firm, we develop hypotheses that relate the survival of firms to the conditions confronted by firms at each moment and to those prevailing at the time of founding. We develop an empirical model that allows the effects of founding conditions to be transitory and estimate how long such effects last. The results of estimating such a model indicate that founding effects are important determinants of exit rates. Moreover, in most cases, their effect on survival seems to persist with little attenuation for several years following the founding of the firm. Overall, our findings suggest that there is no absolute superiority of any of the aforementioned theoretical perspectives over the others, and there are important elements in all of them to explain the survival of firms. Copyright © 2009 John Wiley & Sons, Ltd.     

Estimating the mark-up over marginal cost: a panel analysis of Japanese firms 1971–1994

In this paper, we propose a new method to estimate mark-ups over marginal cost at the firm level. This method is based on the identity between the short-run elasticity of output to inputs, the mark-up rate, and the factor shares. We then apply this method to a panel of Japanese firms in 21 industries over 24 years. We have three main results. First, there is strong evidence of imperfect competition in this panel, in which internationally competitive industries show low mark-ups. Second, the mark-up rate differs considerably among firms and its distribution is skewed. Third, the mark-up rate over marginal cost shows strong procyclicality, and its sensitivity is uniform within the industry.     

Type of entrepreneur,type of firm,and managerial motivation: Implications for organizational life cycle theory

Miner Sentence Completion Scale measures of managerial motivation for a sample of Oregon entrepreneurs were compared with interview data on entrepreneur and firm type using a system of differentiation derived from the Enterprising Man (Collins, Moore and Unwalla, 1964) research. Certain relationships between aspects of managerial motivation and firm expansion and growth were found. In addition, the overall level of managerial motivation among the entrepreneurs relative to corporate managers was found to be low, and the previously noted association between an opportunistic entrepreneurial type and growthoriented firms was confirmed. These findings are discussed in the context of organizational life cycle theory with special reference to the early stages of transition from entrepreneurial to bureaucratic forms and various typologies of entrepreneurs. It appears that under certain circumstances growth may not require a shift in leadership style, but that in some important respects entrepreneurial and bureaucratic systems are managerially distinct.     

Industry characteristics influencing the technical output: A case of small and medium size firms in the US

Using the small and medium size firms in the US as a sample, this paper reports on interrelationship among patents, publications and new products. Correlates of R&D expenditure, patents and papers and new products are presented. Relationships between firm size and R&D output and productivity are also investigated.
Since the study is based on correlational analysis, causal inferences are not drawn. The data indicates that the three indicators are related, but their strength of relationship varies with industries. Growth of sales is related with new products, but not with patents or papers.
Although the data point to the fact that small firms are more productive than their larger counterparts, there are many reasons to come to such a sweeping generalisation. Reporting of R&D data is not reliable for small firms as the very definition of R&D differs from firm to firm. Nature of R&D also changes as the firm grows in size; opportunities for patents or new products also change accordingly. These make it difficult to accurately measure and compare the R&D efficiency across firms of different sizes.     

Knowledge relatedness and the performance of multibusiness firms

This study examines corporate performance effects of cross‐business knowledge synergies in multibusiness firms. It synthesizes the resource‐based view of diversification and the economic theory of complementarities to conceptualize cross‐business knowledge synergies in terms of the relatedness and the complementarity of knowledge resources across business units of the multibusiness firm. The study hypothesizes that corporate performance is improved when the firm simultaneously exploits a complementary set of related knowledge resources across its business units. In a sample of 303 multibusiness firms, the study finds that synergies arising from product knowledge relatedness, customer knowledge relatedness, or managerial knowledge relatedness do not improve corporate performance on their own. Synergies arising from the complementarity of the three types of knowledge relatedness significantly improve both market‐based and accounting‐based performance of the multibusiness corporation. Copyright © 2004 John Wiley & Sons, Ltd.     

Socioemotional wealth and IPO underpricing of family firms

Socioemotional wealth (SEW), i.e., the noneconomic utility a family derives from its ownership position in a firm, is the primary reference point for family firms. Family firms are willing to sacrifice economic gains in order to preserve their noneconomic utility. Thus, we argue that family firms sacrifice IPO proceeds by choosing higher IPO underpricing than nonfamily firms if underpricing helps them protect their SEW. Our empirical results, based on a sample of 153 German IPOs, support our hypothesis. On average, family firms have 10 percentage points more IPO underpricing than nonfamily firms. Copyright © 2014 John Wiley & Sons, Ltd.     

Intellectual capital drivers of product and managerial innovation in high-tech and low-tech firms

There is widespread understanding that intellectual capital (IC), consisting of the valuable knowledge resources of an organization, is a key enabler of innovation activities; however, little is known about the more specific contingencies impacting the relationship between IC and innovation. Thus, this article examines firm technology level and innovation type as contingency variables. It was argued that because high-tech and low-tech firms differ in terms of several knowledge characteristics (complexity, tacitness and pace of renovation), it is likely that their innovation performance is supported by different combinations of IC components. Furthermore, differences between product/service and managerial innovation could also lead to changes in the degree of relevance of various IC components. To test these contingency hypotheses, a survey dataset collected from 180 Spanish companies is analysed using structural equation modelling. The results demonstrate that both firm's technology level and type of innovation affect how IC influences innovation performance. The findings contribute to a knowledge-based perspective on innovation and pave the way for a more context-sensitive and contingency-mindful approach to understanding innovation and knowledge-based value creation.     

Lessons in product innovation: A case study of biotechnology firms

Firms that are able more quickly than others to add value through product development will be the winners in technology-based industries. This paper examines value-added progress by contrasting four agricultural biotechnology firms that have managed to create value with one that failed to do so. Lessons were induced for new firms struggling to develop products in emerging industries such as biotechnology. The following findings emerged from manager interviews and secondary data. In contrast to the ‘progressive’ firms, the failed firm neglected to develop a clear product-market focus, complementary skills outside its core technology, and relationships with universities and government. These contrasts seemed to stem from differences in the financing arrangements and the level of organizational politics. The failed firm received a generous one-time funding and had a relatively high level of politics, whereas the funding of the progressive companies was tied to performance milestones and little politicking took place. The reasons for organizational politics are discussed.     

Informational Networks, Entrepreneurial Action and Performance

This paper develops a model that incorporates personal and business networks, firm action, and performance based on the existing literature. It explores the links between information and entrepreneurial-type action, and action and performance. Survey data was collected from a sample of 100 manufacturing firms in Thailand. Results show that entrepreneurs value the information they receive from their networks. However, there is little statistical support for tangible links between personal or business networks and entrepreneurial action and performance, or between action and performance.     

The role of new firms: Births,deaths and job generation

The contribution of both new and small firms towards economic recovery is now universally accepted as significant. What is still unclear, however, is the extent of that contribution, particularly with regard to the new firm. Despite this, governments at all levels, federal, state and county, have designed strategies for fostering entrepreneurial activity. With little specific knowledge of the target population, these strategies have been either general in nature or based on economic theory, and, as a consequence, little is known about whether they have been effective in affecting the natural process, and in what geographic locations. This research studied the whole population of new firms started in St. Joseph County, Indiana, between 1977 and 1982. It was concerned with both birth and death patterns, and the net jobs generated. The results confirmed the general findings of others that new firms play a significant role in job generation. Over the period, the number of jobs created by a new firm was a consistent 2.9 per cent of the total number of jobs in the industrial sectors studied. Moreover, this exceeded the 1.75 per cent of jobs lost through firms withdrawing from the labour market. Within this, activity in both firms and jobs was found to be centred in only a few SIC categories, and the results of this research suggest that simple tests of volatility and gain will help to focus strategic plans for aid on those sectors where the natural process is already generating the most new jobs.