Entrepreneurship The Geography of Entrepreneurship Session 5/10 Toke Reichstein, INO, CBS http://www.cbs.dk/staff/reichstein
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Previous Session • Managers vs. Entrepreneurs • Intrapreneurship • Cross organization linking • Contextual vs. Predispositional • Some empirical data 2
This Session • Clusters • Social capital & social networks • Location choice of the entrepreneur • Liquidity events • Opportunities and social ties 3
Literature
• Papers: •
Stuart, T. E. & Sorenson, O. (2003), “Liquidity Events and the Geographic Distribution of Entrepreneurial Activity”, Administrative Science Quarterly, Vol. 48(2), pp. 175-201
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Stuart, T. E. & Sorenson, O. (2003), “The Geography of Opportunity: Spacial Heterogeneity in Founding Rates and the Performance of Biotechnology Firms”, Research Policy, Vol. 32(2), pp. 229-253
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Motivation for Geography Development in any given country is always characterized by significant variations in the intensity and character of economic order from one place to another Scott & Storper, 2003 5
Motivation for Geography A man from Mars - or from the real world would be surprised to find that economic geography and the theory of international trade are sharply distinct fields Krugman 2000 6
Growth of Danish Regions - Turnover
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Growth of Danish Regions - Employment
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Unemployment Across Danish Regions
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Biotech Firms Across USA 1983
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Biotech Firms Across USA 1995
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Frequency of Start-ups per 1000 Inhabitants
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Explanation of regional differences - Clusters • Clusters (e.g. Silicon Valley, Las Vegas, Bangalore, Silicon Fen) • Geographical concentration of industries • Policies on cluster formation/promotion • Generally believed there to be positive effects of clusters on growth and economic activity • Among other entrepreneurship
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Cluster Theories I Traditional View • Traditional location and agglomeration theory • Determinants of optimal location choice • Transport costs of inputs • Distance to customers • Competitors locations
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Cluster Theories II Agglomeration • Alfred Marshall - Benefits from co-location • Economies of Specialization - extended division of labor among co-located firms • Technological externalities - knowledge flows more easily over short distances • Economics of labor pooling - increased pool of labor with particular skills and capabilities
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Cluster Theories III New Economic Geography • New Economic Geography • Relatively immobile resources • Interaction between increasing returns and transportation cost • Up- and Downstream industries concentrate • Creates industrial districts and cross regional specialization differences
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Cluster Theories IV Porter • Porter’s approach A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field linked by commonalities and complementarities • Descriptive and non-formalized focus on competitiveness of organizations • Competitive advantage resides outside firm boundaries - local environment • Institutions and spill-overs • Policy plays an important role - but not proactive in setting up new clusters
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Cluster Theories V Innovation Systems • Regional innovation systems • Close overlap with Porter’s approach • Learning regions - collective learning • Interactions between agents key for understanding innovativeness • Knowledge key resource - learning the key process • Infrastructure in the form of universities may drive regional economic development
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Cluster Theories VI Entrepreneurship • Entrepreneurship, Industrial Dynamics and Industrial Ecology: • Drawing on Organizational Sociology and Evolutionary modeling of industries • Competition is not only on output side but also input side - competition for resources • Co-location is not necessarily beneficiary
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Clusters and Entrepreneurship I • Geographical concentration of industries may be attributed to: • Variations in Entrepreneurial Opportunities • ... not variations in economics of production and distribution • Exit rates are generally higher in concentrated areas of a given industry suggest no direct benefit from co-location
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Clusters and Entrepreneurship II • Also much higher entry rate in such areas much larger pool of entrepreneurs coming from the larger base of firms • Concentration of firms in geographically delimited areas exists despite disadvantages of co-location • Entrepreneurship activities generally defines specialization pattern across regions
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Clusters and Entrepreneurship III • Why do the firms locate in such regions if there are disadvantages? • Location of firm formation is determined by social network • Entrepreneurs set-up their new firm close to their old firm - exploit social network • Accessing vital resources - financial and human capital • Social ties - family, friends, etc.
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Genealogy of a Cluster - NorCom
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Stuart & Sorenson
• Sociologists • Liquidity constraints story (ASQ) • Opportunity and social ties (RP)
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Liquidity Constraints Story I • Primary obstacle faced by entrepreneurs is the liquidity constraint • Most businesses are founded using personal wealth • Most entrepreneurs start-up a business in the industry at which they worked prior - most start-ups are what we call spin-offs organizations act as incubators of new firm formation
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Liquidity Constraint Story II • Two key questions then arise: 1. How do nascent entrepreneurs mobilize capital for launching their own business? 2. What incentives do these people have to leave their current employer?
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Short common answer: Liquidity events
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Liquidity Events • Liquidity events could be: • Initial Public Offerings - first time issuing of common stock (shares) to the public • Acquisitions - Established firm acquires an emerging venture 27
Effect on Capital Constraint • Liquidity constraints often offers the insider stakeholders the option to capitalize • Option settings lower barriers to selfemployment for entrepreneurial individuals • In particular true for high-technology industries - option set-up is common • Often top-management and technologist that hold option - high-potential entrepreneurs
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Effect of Initial Public Offerings & Acquisitions • Redistribution of intraorganizational power • Increased bureaucratization & formalization • Shifts in strategic focus to short-term profits • Impose other structures, systems, cultures, values, or routines - in particular in acquisitions done by very different firms • Upper management often changed
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Perception of the Entrepreneur • Routinization inhibiting innovative organizations • Lower tolerance and freedom for experimentation • Less focus on the individual achievements alienation of workers - no incentive element • Disruption of match between career interests and employment context • Generates conflict
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Covenants Inhibiting • The tendency for movement into selfemployment is inhibited by non-compete covenants (e.g. contracts on secrecy, contracts on restricted post-employment career choices) • Wide-spread among venture capitalists to use such when providing funding • Restricts not only within industry entrepreneurship - fear of legal action
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The geography Angle • Liquidity events indeed may induce nascent entrepreneurs - in particular in the neighborhood of the firm subject to the event • Institutional set-ups in the form of employment laws influence geographical boundaries of entrepreneurial activities • Intra population event may trigger population level variations -> e.g. cluster formation
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Opportunity and Social Ties Story I • Wondering: Why do industries characterized by primary inputs like IP, human and financial capital - that is inexpensive and quick to move across space - concentrate geographically • Input constraints not the explanatory element of the equation • Study of spatial heterogeneity in founding rates
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Opportunity and Social Ties Story II • Proposed explanations for this observed regularity • Clustering of the individuals that are most likely to start a company in that industry • Clustering of these entrepreneurs social and professional ties to resource providers Aim: To explore regional differences in the conditions that enable entrepreneurs to assemble the resources to start a new firm
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Liability of Newness • Lack of committed resources/workforces • Lack slack resources • Ineffective organizational designs • Poorly developed relationships with customers and suppliers • High uncertainty about future existence
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Social and Prof. Ties to Resource providers • Social ties mediates the liability of newness and therefore new venture formation • Social and professional relations are localized • Easier to leverage on connections if close to the resources • Difficult to start-up in areas without resources • Opportunities are realized in resource abundant areas
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Social and Prof. Ties to Resource providers • Three required resources for venturing • Ideas and specialized knowledge of the technology • Venture capital • Human capital
• Physical distance to these resources hampers venture activity
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Stuart & Sorenson Findings • Social capital which is instrumental in for mobilizing recourses is to a large extent geographically localized • New ventures will surface in regions with ample supplies of resources • Represents the entrepreneurial opportunities • Rise of the industrial cluster through resource based circumstances - resource in widely defined
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Exercise • How do the Stuart & Sorenson papers fit into the cluster debate? • Are there any link between the Stuart & Sorenson paper and previous session/ literature? • Critique 39