ENT 305_ASU_ASSIGNMENT_WEEK 2_THE RELATIONSHIP BETWEEN ENTREPRENEURSHIP AND ECONOMIC GROWTH

THE RELATIONSHIP BETWEEN ENTREPRENEURSHIP AND ECONOMIC

GROWTH

ARIZONA STATE UNIVERSITY

ENT 305 - PRINCIPLES OF ENTREPRENEURSHIP

WEEK 2

6.1 INTRODUCTION:

The emergence of endogenous growth models has attributed the role of

entrepreneurship as one of the most important factors determining the dynamics of economic

development. Research has been concentrated on aspects of regional economic growth.

Theoretical hypotheses about the relationship between entrepreneurship and economic growth

must be supported by economic reality. Therefore, many empirical studies have been

conducted, mostly in the last 10 years. There are two main questions that are the object of

empirical verification whether entrepreneurship has a positive impact on economic

development and if so, how strong the impact is and whether the level of entrepreneurship

depends on the level of economic growth.

Any empirical verification, regardless of how sophisticated the verification method is,

must find and use a concrete measure of the phenomenon being analyzed. In the case of

economic growth, the problem is simple. There are generally accepted measures of growth

GDP or GDP per capita. International comparisons are also not difficult due to the

standardization of GDP statistics. Economic development is also considered from an

employment perspective. Entrepreneurial activities, which are mostly carried out by SMEs,

are expected to have a positive impact on employment. Finding a decent measure of

employment is not a complicated task, although there are some differences in employment

and unemployment statistics between countries.

The main problem is related to defining and measuring entrepreneurship. In general,

researchers agree that entrepreneurship has a complex meaning and entrepreneurship is a

multidimensional phenomenon. According to the theoretical background the emphasis is

concentrated on one of the important characteristics of entrepreneurship. For some,

entrepreneurship is equivalent to the innovative behavior of the entrepreneur, for others it is

an attitude related to risk-taking or opportunity-seeking. Regardless of the definition, the

question arises as to how to measure entrepreneurship and evaluate its impact on economic

growth. In most empirical studies in this area, measures of entrepreneurship are simple and

unidimensional. Usually this is the rate of new ventures or start-ups. Sometimes

entrepreneurship is expressed by self-employment and, sometimes, by an innovation index.

Through these simple entrepreneurship measures, researchers try to evaluate the direct

impact of entrepreneurship on national or regional economic growth, expressed in GDP, or on

economic development, expressed in employment. The use of the self-employment rate or

self-employment rate as the most common measure of entrepreneurship has some underlying

causes that arise from the SME paradigm.

This paradigm is a consequence of observing the economies of developed countries in

the 1980s and 1990s. The rapid expansion of small businesses in those years This has created

a widespread belief that new small businesses are the most important source of

entrepreneurship and as dynamic and innovative factors, they contribute directly to economic

growth. Fortunately at the same time, theoretical models of endogenous growth, with

entrepreneurship as one of the important variables explaining economic welfare creation, have

been put forward. Although some previous empirical studies attempted to evaluate the

direction and strength of the impact of entrepreneurship on economic growth, we focus on

more recent studies, i.e. those conducted in the last decade.

6.2 ENTREPRENEURSHIP AND ECONOMIC GROWTH:

There are many recent empirical analyses of the impact of entrepreneurship on

economic development. Economic growth is analyzed at national, regional and industry

levels. Several measures of economic development are used GDP per capita, employment or

productivity growth. Entrepreneurship is measured by the self-employment rate or by various

indices of new firm formation (Table 6.1).

Self-employment is an expression of entrepreneurship because a person, instead of

being employed, decides to undertake his or her own economic activities. Self-employment

preference is often considered an expression of independence. It is also one of the most

important characteristics of an entrepreneur. In models that link economic growth to

entrepreneurship, the preference for self-employment is one of the variables that influence

entrepreneurial activity and impact national or regional economic development (Guzman and

Santos 2001). The relationship between self-employment and the level of economic

development of OECD countries was analyzed in depth by Knuth (2006) and Carree et al.

(2002).

Using OECD data on the percentage of non-agricultural self-employment over the

period 1973-1998, Knuth analyzed the changes in self-employment over the period and its

impact on employment and economic growth. Based on the change in the number of self-

employed, four groups of countries can be distinguished. Countries with a relatively low and

declining share, from 10% to 7% (US, Denmark, France), countries with a low but increasing

share, from 5% to 10% (Sweden, Finland, Germany, Netherlands), countries with a medium

share, between 10% and 15%, increasing (Belgium, Ireland, UK) or declining (Japan) and

countries with a high and growing share, over 15% (Portugal, Spain).

There is no clear relationship between the number of entrepreneurs and the general

employment or unemployment situation. In some countries, the impact of increased self-

employment is positive. However, in countries with the lowest number of entrepreneurs

(USA, Denmark), the unemployment rate is also low. The results do not support the

hypothesis of a positive impact of self-employment on the level of economic development.

The relationship between the self-employment rate and GDP per capita is rather negative.

Countries with relatively low long-term self-employment rates have achieved high levels of

GDP per capita. In Germany, France, the United States, Denmark, Sweden, Norway, the

Netherlands and Finland, the self-employment rate has not exceeded the 10% mark for the

past two or three decades. At the same time their GDP per capita reached the highest level

among developed countries, between IDR 200 Million and IDR 350 at constant prices. This is

even more surprising for countries like Denmark, the United States or France where there has

been a constant decline in self-employment rates, especially since the 1980s. On the other

hand, in countries like Portugal, Spain and Italy where self-employment rates show a clear

growth trend and reach high levels of between 15% and 25%, GDP per capita is the lowest,

between IDR 100 million and IDR 200 million at constant prices.

a. Percentage share of non-agricultural self-employment in total employment

b. Number of business owners (excluding agriculture) as a share of the labor force

c. Total Entrepreneurial Activity Rate TEH is the percentage of the adult population who

are starting new capital or are young business owners/managers.

d. Proxies for entrepreneurship are: annual market penetration by new domestic

producers and by foreign producers and the number of major innovations.

e. Entrepreneurial capital means the capacity of society to generate new companies =

number of startups per 1,000 population

Carree et al. hypothesize a "U-shaped equilibrium relationship between the level of

business ownership and per capita income". There is a tendency for the level of business

ownership to decrease and then increase again. This means that there is a level of economic

development with a minimal level of business ownership. Empirical analysis of 23 OECD

countries over the period 1976-1996 shows that economies with below-equilibrium levels of

business ownership can benefit from an increase in the number of new start-ups. When the

level of business ownership is above the equilibrium level, it can cause difficulties for the

growth of new small firms.

In general, "The level of business ownership is known to affect growth economy through

deviations from the equilibrium level as a consequence, economies can have too few or too

many business owners and both situations can result in growth penalties". The authors

conclude that the results of the study should be interpreted with caution. The interpretation of

business ownership is difficult and unclear. In particular, the business ownership rate does not

account for qualitative differences between high-tech and traditional startups. In contrast, the

business ownership or self-employment index is only quantitative, without reflecting the

quality of ownership.

Looking at the qualitative aspects of entrepreneurship, it is necessary to analyze the two

types of entrepreneurs and the creation of new companies. It matters whether a self-employed

person or business owner only employs himself or also employs others, thus creating new

jobs. The first type of entrepreneur sells their labor in exchange for a reward comparable to a

wage but under different legal conditions. This is of course different from being an employee,

as the activity is more independent and riskier. The impact of individual enterprises on

economic growth and the regional or national labor market situation is very limited. The

second group of self-employed people, those who employ others, have a very important

influence on economic growth. They are true entrepreneurs because they not only take risks

themselves but also provide insurance and risk protection for workers. Their own activities,

and those of the people they employ, multiply regional and national products and reduce

social tensions by lowering unemployment.

As Knuth comments, this difference leads to very different conclusions. Since 1994 in

Germany, the number of self-employed people employing others has remained at a relatively

stable level of 1,800,000. In the same period, the number of self-employed without workers

increased from 1,400,000 in 1994 to almost 1,000,000 in 1994.

2,000,000 in 2003. Particularly after 2001, the growth rate became very high, mainly due to

government policies that supported new businesses with low taxes during the three years of

their activity. However, according to an analysis conducted by the Bundesregirung in 2006,

most of these entrepreneurs do not have a clear and concrete business plan. It is likely that

they started their own business out of opportunism or by accident. As a result, many of them

will never become real entrepreneurs and will eventually return to the ranks of unemployed

job seekers. The impact of self-employment on economic growth depends on the quality of

the budding entrepreneurs, and whether they employ others or only themselves. Even the

increasing number of self-employed people who employ only themselves has little impact on

employment and income growth. Many costly policies used to stimulate self-employment and

thereby reduce unemployment and increase economic growth have shown limited

effectiveness. Policy instruments should concentrate on those entrepreneurs who create jobs

for others, i.e. true entrepreneurs.

Another commonly used measure of entrepreneurship is the rate of start-ups.

Unfortunately, empirical studies do not provide clear and explicit evidence of the positive

impact of start-ups on economic growth and employment. This impact may be negative or

positive, may differ in the short and long term, may change in character depending on the

level and/or stage of economic development of a country or region.

Van Stel et al. (2005) measured entrepreneurship using the TEA - Total Entrepreneurship

Activity rate which is the percentage of new entrepreneurs and young firm business owners in

the total adult population. Their study covered 36 countries over the period 1999-2003. The

conclusion of the study is that similar TEA rates have a more positive and stronger impact on

economic growth (GDP per capita) in developed countries. This impact becomes weaker in

countries in transition (Hungary, Poland, Slovenia and China) and in developing countries, the

impact of TEA on economic growth is negative (Argentina, Brazil, Mexico, Thailand and

South Africa). There is a minimum GDP per capita threshold at which an increase in the

number of start-ups and young businesses will have a positive impact on economic growth.

Support for the hypothesis of a minimum level of GDP per capita that goes beyond the

positive impact of entrepreneurship on regional economic growth is provided by Martinez

(2005). Analyzing the Spanish regions over the period 1998-2002, he found the minimum

level of GDP per capita to be 16,076 euros. In explaining the negative impact of

entrepreneurship on economic growth in developing countries, the author points to the

absence of large firms in these countries. However, the influx of large firms will not have a

positive influence on the expansion of entrepreneurship in developing countries if it is not

supported and accompanied by an adequate level of quality of human resources. It is the

quality of entrepreneurship that is as important as the quantity of new start-ups. In many

countries and regions, it is even more important.

In another study of 79 industries in the UK in the period 1976-1979, Geroski (1998)

proved that the impact of domestic entry (new domestic producers) on productivity growth is

positive, although it diminishes over time. However, it is innovation that plays the most

important role in stimulating productivity growth. Its impact is much larger than that of

domestic entry. It seems that at the industry level, the innovation index is a better proxy of

entrepreneurship than the entry of new firms.

Quite a few studies have analyzed the effect of start-ups on employment growth or labor

productivity. In some cases there are attempts to consider entrepreneurship in a broader sense.

Audretsch and Kielbach (2005) introduce the category of entrepreneurial capital and examine

how this capital affects labor productivity in the West German region over the period 1989

and 1992. Entrepreneurial capital is the capacity of a society to generate activity

Entrepreneurship. High entrepreneurial capital will drive regional economic growth.

However, despite attempts to consider entrepreneurship as a complex phenomenon, when

measuring it, they rely on a simple start-up rate (the number of start-ups in a region relative to

its population). An interesting and valuable contribution is the authors' distinction between

urban and rural areas as well as between start-ups in all industries, in high-tech activities and

ICT industries. The final conclusions of the analysis are:

"Our estimate of the general size of entrepreneurial capital is not significantly

statistics, we cannot find a long-run impact here. It seems that

entrepreneurial capital in general has a positive direct impact on labor

productivity but not a persistent impact".

On the other hand, there is a significant and positive impact of R&D and high-tech

ICT activities on regional labor productivity growth in West Germany. This impact is four

times greater in urban and densely populated areas compared to rural areas.

Similar conclusions regarding the impact of start-ups on employment over time can be

found in the study of Acs and Armington (2004). They analyzed US firms in 1990, 1993,

1996. The main conclusion is that only firms less than 2 years old account for the entire net

employment growth and older firms, on average, lose jobs. The positive impact of new firms

on employment is particularly strong in the first two years of operation. Thereafter, the rate of

job creation declines as firms age and may even become negative. In this case, it is not the

size of the firm that matters for economic growth. It is the age of the firm that matters for

promoting growth and productivity. At the same time, this study proves that human capital,

measured in this case as the proportion of high school graduates per adult population, is

crucial for employment growth. The larger the proportion of the adult population with a high

school education, the higher the employment growth. The role of quality factors in

entrepreneurship is proven once again.

Two other studies on the relationship between new firm formation and economic

development expressed in employment growth show the role of the period when both

phenomena occur and are analyzed. Audretsch and Fritsch (2002) classified German regions

based on the presence of four growth regimes (routinized technology regime, entrepreneurial

regime, revolving door regime, and downsizing regime) and analyzed how entrepreneurship,

measured by the start-up rate, affected economic development, measured by the employment

growth rate, during the 1980s and 1990s.

The routinized regime is dominated by large stable firms and the role of small start-up

firms is unimportant and the probability of survival and growth is low. In contrast, in regions

with entrepreneurial systems, new small firms play a more important role and in some

industries they have an innovative edge. Regional growth is mainly due to the emergence of

new start-ups. However, the firm structure is less stable. Under the revolving door system, a

region has a relatively high start-up rate, but due to low innovation, regional growth is slow.

In regions under the downsizing system, there is little start-up activity, large enterprises show

a downward trend, and general economic activity in the region declines.

Based on the results of empirical studies, start-up rates had no statistically significant

impact on employment growth in the 1980s. In the 1990s, the relationship was positive and

significant - regions with higher start-up rates showed higher employment growth. This was

because the German economy had shifted to an entrepreneurial regime. However, the long-

term impact of higher start-ups is stronger than the short-term impact. The final conclusion of

the study is that there should be different approaches to regional growth and development

policy "some regions achieve relatively high growth rates by concentrating on large

established firms, while other regions achieve the same goal by focusing on new start-ups and

a more volatile firm structure", and further "Regions that have achieved high growth rates

tend to follow this path for a longer period of time. Small firms and newly established firms

may not be necessary for regional growth in the short term, but they may be the seeds of

future growth and are essential for long-term economic development".

Fritsch and Mueller (2004) also link new firm formation to underdevelopment in

Germany. The main conclusion of their study is that new firm formation can have a positive

or negative impact on employment growth, depending on the period of analysis. The impact

of entrepreneurship on economic development depends on the period of occurrence and the

measurement of that impact. Van Stel and Storey found a similar relationship in the UK where

in some periods the relationship was positive but in other cases negative. Summarizing four

studies on the relationship between new firm formation (a measure of entrepreneurship) and

economic development, expressed as employment change (in studies in the US in 1991-1999

and the UK in 1980-1998) or productivity (gross value added for Germany 1984-1992 and

value added per employee for Sweden 1975-1999) Acs and Storey (2004) write:

"In summary, there is evidence in several countries of a link between

increased new firm formation and economic development. subsequently.

However, this link did not appear in all studies. The absence of a link may

reflect measurement error in key variables. It may also reflect omitted

variable bias. But it may also be due to real differences between the

countries or periods studied. Therefore, the knowledge base is still

incomplete"

6.3 THEORETICAL MODEL OF ENDOGENOUS GROWTH:

Research on the relationship between entrepreneurship and economic growth always

refers to the endogenous growth theoretical model (Romer 1986, 1990; Schmitz 1989). In

Romer's model, it is the knowledge or human resource stock that determines the growth rate,

along with capital, labor and technology. For Schmitz, it is imitation, the process of

transferring and applying new technology, that drives growth. Entrepreneurship is an imitative

activity that spreads technology. It is up to the entrepreneur to imitate and apply knowledge.

Entrepreneurs create knowledge by learning by imitation or learning by application. These

entrepreneurial and endogenous forces have a universal character. However, neither Romer

nor Schmitz associate entrepreneurship with specific forms and measures of economic

activity. Economic growth can come from entrepreneurial activity by small, medium and large

firms, by new firms and established firms.

An alternative approach to entrepreneurship does not accept the SME paradigm. In this

approach, the size or age of the firm does not matter, although start-ups and small firms have

their role to play. Empirical studies using alternative approaches to entrepreneurship are often

conducted at the industry level. For High (2004) entrepreneurship is a complex activity

consisting of imitation and arbitrage processes. Imitators, and not just innovators, contribute

to economic growth. In seeking the profit opportunities created by innovators, imitators

allocate resources from less effective uses to more effective uses. Imitators spread new

combinations of factors of production into the industry, thereby increasing productivity.

In the diffusion process, it is not only the core innovation that counts. There are many

additional innovations that influence, through their cumulative effects, long-term economic

development. Output growth is not only the result of capital and labor inputs but also of what

is called TFP - total factor productivity. TFP is an expression of entrepreneurship. Technical

change is not exogenous. Output change is also the result of individuals and organizations

seeking economic gain through innovation: "Since the entrepreneur has the motive and means

to induce change, we are justified in considering him as an endogenous source of technical

change and as a working hypothesis, taking TFP as a measure of its magnitude" (p. 55).

High applied Haberger's definition of TFP which means "real cost reduction". This is

the value of industry output multiplied by the change in TFP. If for example the output of the

automotive industry was 10 billion USD in 2000 and TFP increased by 20% over 5 years, then

the value of real cost reduction is equal to 10 0.2 = 2 billion for the period 2000-2005. Cost

reduction is the result of entrepreneurial activity in the face of uncertainty. This

entrepreneurial activity is called EVA with High - entrepreneurial value added. Evaluation of

EVA for American industry during the period 1990-1999 showed some important

disproportions between branches.

The electronic and electrical equipment, industrial machinery and equipment,

transportation equipment and motor vehicles and equipment industries are the most

entrepreneurial industries. These industries have created the largest EVA value. Almost 90%

of EVA comes from these four industries. There are also industries with low levels of

entrepreneurship, EVA-losing industries, such as tobacco products, wood and wood products,

printing and publishing. The concentration of entrepreneurial gains in a small number of

industries determines the concentration of entrepreneurship at the regional level. That is why

the state of Delaware with the highest EVA per capita (1,400 USD) adds ten times the

entrepreneurial value of New Mexico (130 USD per capita). This difference is mainly due to

Delaware having the highest concentration of electronics and industrial equipment industries.

Entrepreneurial value added is a simple measure of entrepreneurship and its impact on

industrial output. However, it is an alternative approach to the phenomenon of

entrepreneurship taking into account its complexity. It is also important to place

entrepreneurship in the context of concrete economic activities, for example at the industry

level.

Industrial organization and its spatial location can also explain the abundance of

entrepreneurial activity at different size levels and the role of small, medium and large firms

in generating industrial growth. The semiconductor industry and the famous Silicon Valley

phenomenon are very common and classic examples of linking entrepreneurship, particularly

innovation, with small and new enterprises. However, when delving into the technological and

spatial organization of these industries, a different picture of entrepreneurship emerges

(McCann and Arita 2004).

Semiconductor production is organized in different companies, different locations, and

different stages. There are three stages of production: the silicon chip design stage where

CAD (computer-aided design) is used, the wafer stage where silicon wafers, produced by

specialist chemical companies, are subjected to lithography, and the final stage of wafer

assembly.

Small companies are mostly involved in the first stage of production and tend to be

concentrated in places like Silicon Valley. However, the semiconductor industry is largely

made up of large, vertically integrated companies that carry out the first two or even all three

stages of production. These large companies generate most of the innovation and most of the

output and employment in the semiconductor industry: "Clusters of small firms can only

materialize when the capital costs of individual investments are truly low, and can be

established through individual loans or venture capital funds. The cost of financing some first-

stage semiconductor design activities is actually modest, allowing small companies to flourish

in locations such as Silicon Valley. On the other hand, many of these activities are so costly to

bear that they are internalized into large firms. Therefore, these structural and organizational

responses were primarily driven by cost and funding issues and not by some vague notion of

information spillover".

These structural characteristics of the semiconductor industry can be found in many

other industries. Entrepreneurship is a continuous process and takes place at all stages of the

production process, whether organized in small or large enterprises: "The strict interpretation

of entrepreneurship, which focuses only on the development of small firms and spin-off firms,

should be expanded to include the dynamic and innovative role of large firms, and the

relationship between firm size, inter-firm linkages, innovation and local development".

Entrepreneurship is not just a start-up or entrepreneurial activity. Nor does

entrepreneurship have a direct impact on national or regional development. Entrepreneurship

is present at all levels and at all times in entrepreneurial activity and decision-making within

specific economic, social, spatial, institutional and organizational structures. These structures

consist of various agents that create a kind of entrepreneurial network. New small firms are a

natural and endogenous component of this network, but their impact on regional or national

economic growth is indirect, transmitted through linkages with other network components.

6.4 INTERMEDIATE LINKAGES AND ENTREPRENEURIAL NETWORKS

A survey of theoretical and empirical studies clearly shows that the effect of

entrepreneurship on economic growth is not direct. It is done through various intermediary

relationships. Our model of the entrepreneurship-economic growth relationship is derived

from the approach proposed by Wennekers and Thurik (1999) (Figure 6.1).

Despite its many advantages, the model leaves considerable room for enlarging and

developing the intermediary transmission channel of entrepreneurship's impact on economic

growth. We assume that our proposal will prove useful in the analysis of entrepreneurship-

economic growth relationship at regional and national levels, as well as for comparative

studies at those levels.

The first approach (Figure 6.2) is an illustration of a very general conception. It

includes the basic interactions, the order of certain elements, the main directions of influence.

It does not consider existing inputs or relationships that eliminate the sequence (e.g.,

environmental influences on entrepreneurs or intermediary relationships).

The environment is broadly understood as a composition of economic, social, political,

legal and cultural factors. These determine the character and dynamics of entrepreneurship.

Accept the broad definition of the entrepreneurial framework given by Wennekers and Thurik,

This model emphasizes the fundamental truth that entrepreneurship is exposed and expressed

entirely through people: individuals or teams. However, an entrepreneurial team cannot

consist of non-entrepreneurial units only. At the same time, a person (entrepreneur) can

realize his entrepreneurial function only within the framework of a specific organization

(company). It can be a small company (even one managed by one person) or a large

enterprise. However, one cannot be an entrepreneur without an enterprise. The characteristics

of an enterprise are certainly very important for the behavior of entrepreneurs as this will

create better or worse conditions for their activities. The various impacts of entrepreneurial

activities are transferred through intermediate linkages which are the vehicle of micro and

mezzo outcomes to the macro level.

By including both entrepreneurs and firms in the analysis, we assume that

that entrepreneurship affects economic growth primarily (but not exclusively) through the

SME sector. In these firms the role of the entrepreneur, who usually functions as

owner/manager, has a direct influence on their functioning and growth. Therefore, it also has

an influence on the strength of the linkages between and ultimately on the growth of the

regional and national economies. This second approach is basically the same as the one

proposed by Wennekers and Thurik. The difference occurs when we try to determine the

content of each part of the model (Figure 6.3).

Environment is described very broadly. It encompasses several general aspects of

societal culture, including ideological, macroeconomic and institutional determinants; policies

(not only economic), social context (income and property disparities, regional diversity, scope

of exclusion, social security, etc.), legal framework (primarily, but not exclusively, those that

determine the scope and rules of the economic game). This "vast environment" has an

influence on everything that happens in the economy. It shapes people's behavior and

attitudes, their value systems, etc., and also defines entrepreneurship as a cultural, social and

economic phenomenon. "Entrepreneurship is fundamentally rooted in culture, wholly shaped

by culture and in its most fundamental dimension, it boils down to the interpretation and

shaping of culture" - as D. Lavoie (1991, p. 45) puts it. According to Boulding "the success of

economic institutions depends largely on the character of the culture in which they exist, not

on the character of the institutions themselves" (1952). The importance of culture and

institutions for economic growth is also cited by Landes in his fundamental work "The Wealth

and Poverty of Nations" (1993).

Emphasizing the role of cultural factors in this model does not mean placing them as

the dominating factor. However, we believe that they play a major role in the relationship with

others, although their influence is often underestimated. The influence of other environmental

factors is easier to recognize and explain. Factors economic, legal, institutional and politics

determine structure of the economy, including the relationship between the SME and LE

sectors, among others. Fuller (2003), when reflecting on the future of small businesses, asks

several important questions. Some of them consider the social, cultural and institutional

context. This is important to understand regional differences in SME development. Fuller

emphasizes that small businesses are personal and therefore, in societies where personal

relationships in business transactions are important, small business units will thrive. Other

questions relate to: the personal commitment of the owner of thebusiness to thesolution of the

problems and needs of his customers; consumer attitudes towards the brand (iconic symbol)

and the personality of the individual creating the service; the importance of their personal

control over work and career; the choice between direct investment of savings in the activities

of people known to investors and institutional funds institutional funds. The structure of the

answers to these questions may be explain differences in firm structure across regions and

communities.

Some of these factors also have a direct influence on the linkages through which

community and firm activities generate macroeconomic impacts. The narrow environment in

the model is the entrepreneurial "culture". By relating it to the concept of Economic

Entrepreneurial Capital (Audretsch and Monsen 2007), we consider entrepreneurial capital to

be broader, including also elements such as diversity, competition and selection.

Entrepreneurial culture grows out of the general culture and is an integral part of it. "...in

certain situations, entrepreneurship creates its own culture. Developing this culture is

important partly because it contrasts with the bureaucratic culture, which permeates private

organizations, and partly because the culture of entrepreneurship is a part of the general

culture mature public" (Hawkins 1991). It is typical that the authors of the book cited here,

"Entrepreneurial Culture" (Berger 1991), do not attempt to define this culture. They prove,

based on the results of general and economic history, sociology, anthropology, demography,

and other social sciences that such a culture, as part of the general culture, exists and has

significance. This research helps to understand why some countries or societies develop faster

than others. Why resources that economists consider to be sources of growth are used

effectively in one place (crude oil in Norway), but not effectively in another (crude oil in

Nigeria). Why some countries cope better with resource scarcity (Japan, Thailand, South

Korea), while for others it is an insurmountable obstacle (some African countries).

Douhan and Henrekson (2007) argue that entrepreneurship adapts to the realities

generated by politically determined institutional frameworks. If the framework is not properly

constructed, then entrepreneurship, instead of being a driver of economic growth, is focused

on unproductive and destructive actions. Therefore, it can be added that these negative

actions, within a given institutional framework, will largely depend on the entrepreneurial

culture established and, at the same time, the institutional framework will have an influence

on its character and development. The importance of institutions to entrepreneurial influence

and character was previously highlighted by Baumol (1990): "The rules of the game that

determine the relative rewards of different entrepreneurial activities do change dramatically

from one time and place to another. Entrepreneurial behavior changes course from one

economy to another in ways that correspond to variations in the rules of the game. The

allocation of entrepreneurship between productive and unproductive activities, while not the

only relevant influence, can have a large impact on an economy's innovation and the rate of

diffusion of its technological inventions".

Fuller (2003, p. 319) cited above writes: "Will the regulation of society give us the

freedom to decide our own work and allow us to exchange our efforts in a flexible way? An

unregulated economy leads to crime and monopoly, so forms of 'regulated freedom' are

needed." From the point of view of the current analysis, an important aspect of entrepreneurial

culture is its influence on: the level of self-employment (division into firm owners and wage

earners); the proportion between entrepreneur-innovators and owner/managers (Wennekers

and Thurik 1999); the level of competence of both groups, learning ability, ability and

willingness to cooperate; attitudes towards risk and bankruptcy, etc. All these phenomena and

processes are also shaped by entrepreneurial culture. All these phenomena and processes are

also shaped by many other factors, such as the relationship between savings and income

achieved by the self-employed, the level of transaction costs, and so on.

One part of general culture, which is not synonymous with entrepreneurial culture, is

corporate culture. This is especially the case with companies large companies. In small and

medium-sized enterprises, this is a direct result of the entrepreneurial culture brought into the

company by the owners. In large companies, the situation looks different. The internal culture

is partly a spontaneous creation, and partly artificially constructed by their management. This

does not mean that corporate culture is built separately from the general culture. It is worth

mentioning here the common comparisons between Japanese and American companies,

Nordic and Mediterranean companies, Russian and Western European companies. One of the

best examples of the close relationship between corporate culture and general culture is the

Japanese kaizen system: "at the same time a culturally conditioned system (removing the

barrier between the culture of the organization and the culture of its environment),

undoubtedly difficult to implement in cultures other than Japan, but obviously impossible to

implement partially".

There is no doubt that the culture of large companies is a specific and highly diverse

area. Unfortunately, in most publications on entrepreneurial culture, the terms

"entrepreneurship" or "intrapreneurship" are avoided and almost never mentioned. There are,

of course, those who argue that corporate culture is the result of entrepreneurial culture and

bureaucratic culture. In contemporary multinational companies there is also a mixture of

multinational morals, customs, management traditions and personnel. Companies more and

more often try to form a homogeneous and standardized culture, which distinguishes them

from other similar companies. At the same time, they aim to make this culture beneficial to

the effectiveness of their activities, increase competitiveness and build a positive corporate

image.

Corporate culture determines, among other things, the field in which entrepreneurial

actions can be performed. It divides the inner world into managers and intrapreneurs. Within

these areas form the philosophy of action, the choice of strategy, dynamism, innovation and

the ability to take risks. Trends in management such as lean management, re-engineering,

decentralization of decisions, selection of profit centers, outsourcing, etc., aim to de-

bureaucratize large companies, making them more active, flexible and dynamic, i.e.

entrepreneurial. Therefore, there is an increasing level of acceptance of intrapreneurs, who

usually cannot be included in rigid structures and procedural paths. The desire to follow the

actions of individual entrepreneurs becomes more pronounced, as does the intention to create

greater space and possibilities for such behavior. This is called small-firm imitation

(Wennekers and Thurik 1999). In the early nineties, J. Welch, then President of General

Electric, said in a speech: "Think small! What we continue to try to do is embed the spirit of

the small company and the speed (author's note reaction) of the small company within the

framework of the large company" (Naisbitt 1995, p. 11). Dan J. Naisbitt, author of

"Megatrends" among others, adds: "We are making our business units smaller and smaller,

because we want to globalize our economy more effectively" (Naisbitt 1995, p. 11).

Intermediary linkages allow us to evaluate the extent to which the SME sector and the LE

sector contribute to economic growth.

From the point of view of a very traditional approach to economic growth, which

considers direct growth factors, we can assess this effect by stimulating employment growth

and labor productivity. This approach is justified, but not sufficient.

The most frequently used tool in entrepreneurship to drive economic growth is the

number of start-ups or birth rates. The literature on population ecology emphasizes that each

new firm represents a particular unique approach to economic activity. And heterogeneity, in

contrast to homogeneity, exerts a positive influence on economic growth (Observatory 2004,

pp. 14-15). Continuous market entry and exit, a hallmark of the SME sector, fosters

competition, drives the economy, suggesting a selection mechanism. It is assumed that any

new firm (especially when established to replace an old firm) is in some aspects better than a

liquidated firm. At the same time, as entry and exit into the economy become more diverse.

Not including these processes (entry and exit), or underestimating them is a mistake. This has

an influence on changes in employment or labor productivity. We must also consider the

competitive character of the market.

When price competition dominates (and this is more often the case in homogeneous

than heterogeneous product markets), the attractiveness of new entrants becomes smaller

(Sutton 1991) due to low expected profit levels. With regard to labor productivity, its growth

is mainly due to the introduction of innovations, which should be considered as a very

important intermediate link.

Internationalization of activities, in turn, is an indication of entering new markets, and

leaving traditional ones behind for locality SMEs. Exports are the main force of growth in

many countries. Finally, network connections, which make it possible to break down barriers

connected to small size and not achieving economies of scale. Networks, of different types

and character, are becoming an important element in the economic landscape in the field of

activity of the SME sector. Hence, the growing interest of researchers from around the world

in networks. From economic theory (Perry 1999), through management (Porter 1998), to

anthropology, cultural sciences, sociology, etc (Fukuyama 2000).

The list of intermediary linkages mentioned above is by no means exhaustive. It

includes those most frequently mentioned in the literature, although certain authors usually

only mention those linkages that are - for some reason - most important to them. Therefore, it

is difficult to assume that there could be one complete and generally accepted list of

intermediary linkages. For example Acs (1996) and Audretsch and Monsen (2007) emphasize

the role of SMEs as a source of innovation, a stimulus for the evolution of economic

structures, creators of new workplaces and also as "agents of entrepreneurial change".

Entrepreneurship networks are another approach to the relationship between

entrepreneurship and economic growth that takes into account the complexity of

interconnections between all types of economic actors. The concept of entrepreneurial

networks and its empirical verification was proposed by Guzman and Santos (2006) using the

example of the province of Seville in Spain. An entrepreneurial network is a complete

approach to entrepreneurship, containing both quantitative and qualitative factors that

determine entrepreneurial activity and its effectiveness. In Guzman and Santos' model, there

are five quantitative characteristics of a region's entrepreneurial network: enterprise size,

density, sectoral structure, geographic structure at the regional level, and external capital

penetration. The qualitative elements of this network are: location of firm properties,

functional and production dependencies, quality of human resources, capacity for cooperation,

capacity for innovation and development, and quality of management.

Each of these quantitative and qualitative factors can influence development

region in both positive and negative ways. The dominance of micro and small enterprises in

the region creates some positive characteristics (flexibility in adapting to changing market

conditions) but also some negative characteristics (reduced propensity to export and

innovate). Large firms are more likely to cover fixed costs, spread risk, and invest in R&D.

Sectoral structure is important for the backward and forward linkages between economic

sectors that - through intermediate linkages and effects - influence economic growth. In

general, manufacturing firms generate more linkages than services. Industrial production is

more complex than service production and creates more outsourcing activities. For industry, it

matters whether the firm has a high, medium or low level of technology and is in services -

either traditional or knowledge-based.

The geographical structure defines different entrepreneurial zones with different properties

similar. A region may have a strong center-periphery configuration of economic activity or

may have a more atomistic structure. External investment, both national and foreign, is a very

important development factor. External capital participation at the regional level is often more

important in large firms. In contrast, in small countries, local capital tends to dominate.

The qualitative elements of entrepreneurial networks are as important as the

quantitative elements. However, for most qualitative characteristics of entrepreneurship, there

are no official statistics. To obtain qualitative data, it is necessary to survey a representative

sample of firms.

The location of a company's property is one of the qualitative elements of a regional

network. When the headquarters of a company is located outside the region, some strategic

decisions may not be in line with the interests of the region. The regional economy will be

more secure if the company's decision-making center is located in the region. Functional

dependence or independence is another qualitative factor. It refers to the firm's position in the

production chain. The large number of distribution companies selling products originating

from outside the region indicates that the regional market is primarily a regional market place

for external companies. Such networks have serious consequences for value-added and job

creation in the region.

Other types of dependencies are related to the production process. Number of input

suppliers

or buyers of output may be few and concentrated, or large and dispersed. Strong productive

dependence on suppliers or clients leads to higher enterprise risk and vulnerability. The

degree of production dependence is higher in small firms, whose development and even

existence are highly dependent on the policies of leading firms. Entrepreneurial networks are

weakened when a region is dominated by small firms with high production dependence.

Capacity for cooperation and innovation is another aspect of entrepreneurial network

quality. The more cooperative relationships a firm has, the better market position it has and

the more information about suppliers and clients it obtains. Innovation activities are essential

for competitiveness and regional network development.

Human resource quality and management quality have an influence on entrepreneurial

networks. Ability, experience and education all determine the quality level of human

resources that enter the production process as inputs and determine the quality of

management.

Statistical analysis of quantitative and qualitative elements, evaluated on the basis of a

survey of 400 enterprises, shows that the low level of GDP per capita in the Seville region is

due to weak entrepreneurial networks. The weakness of this network is due to the relatively

high dependence of the enterprises on the external economy, both national and international.

The first is dependence on property. Decision-making centers and properties of large

enterprises are located outside the region. Functional and production dependencies are also

strong.

Many Sevilian companies concentrate their purchases and sales in other Spanish or

foreign regions, as well as on a limited number of suppliers and clients. The Seville region is

mainly a market for products coming from other regions. Nevertheless, in recent years the

Seville economy has achieved high growth in income and employment. However, this growth

is mainly due to large companies, especially from the modern sector. The contribution of

SMEs and micro-enterprises is less important. Thus, the economic growth of the region is

generally created by industries and services with a high degree of functional and production

interdependence. This feature of the entrepreneurial network makes the long-term economic

development of the Seville region fragile.

EXISTING NETWORKS AND ENTREPRENEURSHIP

7.1 THE ORGANIZATION IS GONE, THE PLACE REMAINS:

Any discourse on networks and entrepreneurship must be positioned within the

ongoing debates on each concept. Over the past few decades, network analysis has

transformed from a statistical technique for mapping complex social structures to a way to

investigate common linkages and social entanglements in economic activity. Networks as a

resource in academic discourse have changed from something that disadvantaged

communities need as a support structure to a common way to increase the competitive

strength and flexibility of firms and organizations through collaboration. Now at the dawn of

the new millennium, networks as precursors and containers of social capital are of particular

interest and networks as processes are given priority in scientific inquiry (Parkhe et al., 2006).

In contrast, entrepreneurship has changed from being associated with economic change,

gradual due to market vigilance, or radical as a result of technological innovation, to creative

organizing, which is widely associated with social and economic change. The perspective on

(creative) organizing reflects a relational view, that is, people are more concerned with what

happens between people and organizations than with what happens within them.

The two phenomena underlying the notions of 'networking' and 'entrepreneurship' are

now widely discussed in academic and public discourse on economic and social development

at the organizational level as well as at the local, regional, national and international levels. In

the context of the European Union, for example, supporting programs related to

entrepreneurship as both an economic and social activity is common. In Sweden, the lead

agency for industrial development associates entrepreneurship with social and cultural

activities as well as economic activities, both in terms of goals and means. Joining forces in

networks, often referred to as 'partnerships', as a common way to create development, is

considered commonplace in almost all policy areas, both in Sweden and in the EU.

In the local/regional environment, there were several forerunners who had a general

and strong interest in networking and entrepreneurship. Gnosjö is a successful industrial

region in southern Sweden, famous for its entrepreneurial spirit. In the 1990s, this made it the

most economically successful region in Sweden. Research starting in the 1970s ascribed this

achievement to the dense and well-documented personal networks between the many owner-

managers of local firms (Johannisson 1983). At the same time, Italian researchers studying

similar phenomena produced a more qualitative picture of industrial parks as providers of

social and institutional ties for small-scale business activities. In this way they qualified

Marshall's coopetition narrative as a difficult phenomenon understood that can only be found

'in the air'. Compare for example Becattini (1990). These explanations, combined with the fact

that contemporary research on spatial development uses images, such as 'learning territories'

(e.g. Maskell and Malmberg 1999) and local clusters, that underestimate place-bound

collaboration, encourage further investigation into the interface between networks and

entrepreneurship.

While most contemporary researchers agree that entrepreneurship is about creatively

organizing people and resources based on opportunities, scholars differ in terms of how

opportunities are identified/developed and how rational the venture process is. While Shane

and Venkataraman (2000) and Shane (2003) argue that opportunities exist only to be

identified and exploited by vigilant individuals, other scholars such as Sarasvathy (2001)

argue that what is later institutionalized as a new firm is the result of an experimental

enactment process. Larson and Starr (1993) and Johannisson (2000b) ascribe the venture to

the personal networks of its initiators. A dyadic personal relationship that stems from mutual

sympathy, is based on shared values and is emotionally charged. Individual ties and the

network as a whole develop over time. This network image of business creation invites an

understanding of the entrepreneurial career as a series of overlapping ventures integrated

through slowly emerging personal networks. Given that most entrepreneurs build

geographically concentrated networks (Johannisson 2000b), the dynamics of the

entrepreneurial outlook become closely linked to place. At the same time, the relationship of

the 'personal community' to which each individual belongs (Wellman 1982) is becoming

increasingly global. Networks embody the idea of a glocal (business) world.

In entrepreneurship research in general and in (entrepreneurial) networks in particular

there is a call for research that studies relationships and networks as processes. While there

have been some attempts to qualitatively map how relationships develop in entrepreneurial

environments (compare, for example, Hite 2005; Larson 1992), there is a general lack of

reflexivity regarding the ontological and epistemological foundations for process studies. Chia

(1995) proposes an 'ontology of becoming' for studying organized activity. Adopting such a

worldview means that ongoing change is natural. This provides an appropriate context for

investigating entrepreneurship and networks as phenomena associated with emergence. In

such a worldview, ongoing dialog/relationships result in 'reality' as a socially negotiated

construction. Such a relational understanding of the world has previously been used for

theorizing in organization studies in general and in entrepreneurship research in particular.

A relational view that reflects the ontology of being offers an appropriate basis for the

conceptualization and design of related empirical investigations into entrepreneurship as a

networked and spatial phenomenon. Structuring different approaches to the study of Morgan's

(1980) organization suggests that alternative conceptualizations, models, that may occur

within a particular paradigm are best handled as 'metaphors'. This proposition underscores

that theory is an imaginative construction as well as the result of analytical reasoning. What

appears to be the best way to understand a phenomenon then becomes dependent on the

researcher's worldview that reflects explicitly stated ontological and epistemological

assumptions, combined with preferences generated by the researcher's personal career. The

chosen metaphor or conceptual framework in turn determines what type of empirical

investigation can be designed and carried out. Again there is no straight path to follow and

consequently Morgan refers to this methodological quest as 'puzzle solving'. This puzzle

obviously becomes very challenging when the creative process is studied. Van de Ven and

Poole (2005) provide an alternative ontologically and epistemologically grounded model for

researching change in existing organizations, yet the entrepreneurial process is clearly about

genuine change.

The research challenge taken up here is to conceptually and empirically illustrate how

entrepreneurship can be presented as a spatially networked phenomenon. In the next section,

the notion of 'organizing context' is introduced as a metaphorical construct that recognizes the

socially embedded and fluid nature of local business activity. A methodological bug for

researching embedded business communities as relational constructs is proposed. The

empirical trajectory of modeling these network processes is in Sect, used as a basis for further

conceptualization of locality as the domicile of collective entrepreneurship. The final section

reflects on the reported modeling and methodological puzzle solving and, in addition to

suggestions for further research, also provides brief comments on the implications for

practice, public policy, and individual and collective local initiatives.

7.2 EMBEDDED NETWORK ORGANIZATION:

Considering entrepreneurship as the basis of community development means

recognizing diversity in a region. It includes spontaneous personal relationships which means

that other capabilities besides human rational thought, such as emotions and intuition, are

recognized as means to project human beings. Shared commitment and the spontaneity and

immediacy that accompany personal relationships empower people to try out ideas that arise

in others in a permissive atmosphere that encourages learning. Thus, if the local community is

approached as a relational space that recognizes the 'benefits' of transactions (and not just the

costs), multiple sources of diversity will emerge, and as a result, its potential as an arena for

entrepreneurial processes becomes visible. Individual initiatives are encouraged to evolve into

collective efforts that use the social embeddedness offered by the local environment as a

foundation for global ventures. Treating locality as this kind of potential is not new but is

reflected in different conceptualizations, ranging from industrial parks to 'innovative

neighborhoods' and 'Triple Helices'. But these metaphorical constructions all have a bias

towards resource production/management and (technological) innovation. Nevertheless, it is

necessary a concept that gives attention to entrepreneurship as creative organizing and social

projection. Hence, the notion of locality as an 'organizing context' (OC) (for adventurous

processes) is introduced. A number of features are ascribed to OC:

1. OC is an interactively enacted shared reality, which, being historically and culturally

embedded, manifests and reforms itself through face-to-face exchanges. In as much as OC

members participate in everyday local life, they gain the overview necessary to make use

of the various opportunities and resources that OC collectively generates.

2. In OCs, the physical, social and mental spaces occupied by OC members largely coincide,

cf. Hernes (2003). That is, OCs emerge as sanctuaries for the reproduction of local values

and patterns of behavior as well as translators of external influences into improved local

knowledge and practices. The result is diverse and evolving collective identities and

complex communities of practice (Wenger 1998).

3. OC offers its members 'ontological security' (Giddens 1991), that is, a sense of meaning.

The sense of confidence created will open up a 'potential space' (Winnicott 1971) that OC

members can use to acknowledge their creativity and practice their play.

4. OC has the potential to self-organize, which means that its ability to deal with challenges

is secret, hidden in the 'loose coupled' interactions between its members, which are

autonomous and interdependent. Casual encounters and spontaneous (inter)action create a

unique and evolving OC development path.

5. In OC, the language of public discourse and concrete actions does not require

interpretation, so the context is deeply rooted in everyday local life. Visionary ideas are

aligned with concrete steps that encourage decisive (inter)action. Cf. Eccles and Nohria

(1992).

6. In OC different forms of control, such as premise control, action control and output

control coexist. Historically established values and norms qualify premise control, while

physical, technological and social proximity establish action control and facilitate output

control.

7. As illustrated in Figure 7.1 below, the environment of the OC as identified by its members

is collectively 'defined' (Weick 1995; cf. also Smircich and Stubbart 1985) as is the OC

itself. The boundary between the OC and its environment remains unclear and varies

depending on the problem being addressed.

8. OC makes it clear that entrepreneurship is a truly collective phenomenon - it is their social

embeddedness that gives both individual and group companies success.

9. OC offers a take-off arena for a common 'glocal' strategy that incorporates action

and (inter)global and local reflection.

Environment:

The OIC should not simply be thought of as an 'arena' that its members use as a casual

meeting place or where policymakers try out various endeavors. Using the vocabulary

proposed by Brunsson and Sahlin-Andersson (2000) the organizing context appears as a

(spatial) organization complete with purpose, structure and identity. However, the purpose of

the organizing context is more integrated in shared norms rather than explicitly stated, its

structure is organic and networked rather than formal and hierarchical, and its identity is

embedded in local stories rather than publicly stated. Local economic development in this

perspective would take place in places where local knowledge is shared, recognized and used

for general social creativity, for example, not only for organizing in markets but also for

moving into different community settings.

A core concept in creating a vocabulary that can describe the relational processes that

shape the organizing context is the idea of 'personal networks'. The relationships practiced by

business actors mean that social and business interests have merged in individual ties resulting

in (social) identity, legitimacy and resources (Johannisson 2000b). When dense personal

networks occur, the entire local business network is filled with shared values and common

concerns stemming from a shared local history. This creates a collective identity and

uniqueness that is difficult to replicate and thus creates regional competitiveness (Maskell et

al., l998; Maskell and Malmberg 1999; Storper l995).

A vocabulary related to embeddedness is needed to describe the different layers of

social embeddedness, ranging from those reflected in personal ties to the interaction between

economic and social forces in a region at large. As Figure 7.2 suggests, first of all, it is

important to distinguish between what is meant here as substantive or systemic

embeddedness. The first notion of embeddedness reflects the content and the second

represents the structure of social embeddedness in economic activity. Substantive

embeddedness means that the origin and basis of exchange is not only calculative but also

ideological and/or genuine (Sjöstrand 1992).

See also Zukin and DiMaggio (1990) who outline the nature of economic activity and

the cultural and societal framework in which firms act. Larson (1992) and Uzzi (1996) use

trust as a generic mechanism of (social) embeddedness in vertical supplier networks.

Systemic embeddedness refers to the overall structure of relationships that link

economic actors and further actors, for example in local/regional clusters. Such entanglements

place individual actors in different positions, some more central, some more marginal, within

the overall network. A favorable position usually means that many other actors in the network

need the favored actor to become (or remain) connected. Typically entrepreneurs seek

positions that can bridge 'structural holes' in the relevant network (Burt 1992; Gulati and

Gargulio 1999). Granovetter (1985) was explicitly concerned with what we here call systemic

embeddedness and he later distinguished between relational and structural embeddedness.

'Relational' embeddedness to his mind refers to the ties that individuals have with other agents

(i.e., what can be referred to as 'egocentric' networks, cf., e.g., Johannisson 2000b), whereas

'structural' embeddedness denotes the aggregate impact on the subject of all, direct and

indirect, such relationships in the context in question. Rowel et al. (2000) found, partly

confirming Uzzi (1997), that structural embeddedness, i.e. the mutual indirect dependency,

increasing access to resources within an existing direct relationship but not increasing further

opportunities.

Research in the inter-organizational field suggests that institutionalization

explain similarities between organizations (DiMaggio and Powell 1983). Institutions impose

rules of the game and reduce uncertainty in economic exchange (North 1990). Institutional

influences can be formal or informal and concern the business system as well as the

surrounding environment. Through Halinen and Törnroos (1998) we recognize that in

addition to business-to-business networks, relationships with economic institutions and social

associations are becoming increasingly important, providing additional resources for

legitimacy.

Institutional embeddedness builds collective entrepreneurial capabilities by

developing, producing and marketing goods, services and knowledge (Johannisson 2000b;

Rowel et al., 2000; Van de Ven 1993). Interconnected ties suggest that firms may share

meeting points with other actors in networks created by economic and social associations

(Galaskiewicz et al., 1985). A unique feature of localized firm networks is their attachment to

an environment that also accommodates economic and social institutions (Araujo and Easton

1996; Becattini 1988). This statement invites the existence of indirect networks, where such

institutions bridge firms that may still be disconnected in the business system. This type of

network, and the notion associated with institutional embeddedness, is proposed to make use

of the unique features of the territorial context for business activity.

Local business communities may be largely populated by small family businesses

where the owner-manager symbolizes the firm. This suggests that business leaders dominate

the firm's external relationships and that the individual and firm levels of analysis can be

merged into one (Johannisson 2000b). Using the definitions of 'substantive' and 'systemic'

entanglements, we identify three layers of networks: first-level entanglements (firm-to-firm

relationships), second-level entanglements (firm relationships with social and economic

institutions) and third-level entanglements. (firms indirectly linked through social and

economic institutions). This last one we call the 'holistic' network as it includes ties that can

only be considered by studying the locality, the organizing context, as a whole, including

business/enterprise actors and economic/social institutions, both direct and indirect links.

It is important to underline that the overly positive image of embeddedness, and its

implications from the point of view of individual firms, is a result of our focus on

embeddedness as an organizational phenomenon that benefits entrepreneurship. However, as

argued by Granovetter (1985) embeddedness means that agents can be easily exploited by

those who abuse their trust. In addition, embeddedness means that social control is strong and

opportunistic behavior spreads quickly. The community created by embeddedness may not

only contain resource relationships but also distribution: You are expected to share prosperity.

Local ties that are too strong can create lock-in, which can be bad for the business community

(Grabher l993). The integration of firms and (economic) institutions also generates tensions

that may be beneficial or detrimental to both individual firms and the context at large. As

indicated, industrial discourse presents coopetition, i.e. local collaboration as well as

competition, which is a constructive tension as it keeps local firms on their toes when facing

global competitors. However, different values and reasons for action between firms and

institutions can give rise to potentially destructive tensions that erode spontaneous networks

between firms themselves (Johannisson 2000a).

7.3 NETWORK ANALYSIS AS PUZZLE SOLVING:

The understanding of reality as truly relational, which is evident in the notion of the

organizing context, clearly adopts (social) constructionism as a basic paradigmatic view and

gives due attention to its emergence. Qualitative approaches, including narrative and

interactive research, i.e. close-up studies, are needed to capture the detailed creative processes

that shape emerging business ventures and the organizing context as a socio-economic

environment. However, the need to use quantitative techniques remains as these techniques

provide legitimacy in academia as well as in different communities of practice. Graph analytic

approaches can be used to map the complexity of contextual networks and comparative-static

analysis of relationship patterns to show changes over time. Before the methodology is

outlined, the complexity and potential ascribed to the organizing context as a relational

construct should be illustrated.

It is easy to underestimate the difference between a relational stance and a view in

which the population of firms is considered unconnected, isolated, and collectively appears

only as an agglomerate where the average of firm variables is used to map the entire

population. A clear example will illustrate this difference in terms of complexity and

diversity. Imagine a group of 73 people/companies whose actions must be coordinated. Given

a maximum subordinate span of control/number of subcontractors of eight, a three-level

hierarchical structure containing 72 asymmetric relationships would be sufficient to produce a

(hierarchical) order capable of carrying out routine operations in an organization or

production system. However, if self-organized creative processes, which require variation, are

to be promoted, then no a priori orders should be accepted. This means that the potential for

horizontal, vertical or lateral relationships is known.

Diversity then increases dramatically as 73 people, by building a complete business

organization/community network, theoretically create 2,628 (73 x (73-1)/2) symmetrical and

reciprocal dyadic relationships. No further comment is needed on the difference in complexity

(and potential dynamics) between 73 completely disconnected agents in the 'ideal'

(neoclassical) market, a hierarchy of 72 undirected order channels and a community of 2,628

exchange relationships.

The complexity of the relational approach multiplies when the varying content of each

potential relationship between firms or between firms and institutions according to the model

in Figure 7.2 is considered. This appendix presents the operationalization of the network set

that has been used to map socially embedded local firm clusters when investigating various

business communities in Sweden. See Johannisson et al. (2002). To measure first-order

embeddedness, local firm leaders were provided with a complete list of local firms and asked

to indicate their relationships with each other and their leaders in nine different sets/types of

relationships. Thus, the business network data provide information on directional and

asymmetric relationships. To measure second- and third-order embeddedness, businesses were

asked to mark the relationships they had established on a list that included economic

institutions (eight sets) and social associations (five sets). Adopting this methodology meant

that an overall data set would be created that included nine single-stranded adjacency matrices

concerning business-to-business relationships, eight matrices concerning business-to-

economic-institution relationships, and five matrices relating to business-to-economic-

association relationships. To identify symmetrical, i.e. reciprocal, relationships, all owner-

managers as well as representatives of all economic/social organizations had to be

approached. These data were studied graph-analytically, cf. Borgatti et al. (1999).

Referring to Granovetter's (1973) terminology, single stranded links can be referred to

as 'weak' links. Symmetrical single-stranded relationships, for example, intertwine into multi-

stranded ties of varying strength. According to Attachment, a friendship tie means that

'acquaintance' and 'talk' strands coincide, a personal-business relationship is joined by

'friendship' and 'commercial' strands, while a complex tie intertwines 'friendship', 'commercial'

and 'professional/problem solving' strands.

To identify and quantify the relationship between firms and economic/social

institutions, a two-mode network analysis can be applied (Wasserman and Faust 1994). This

means an adjacency matrix where the rows indicate firms and the columns indicate economic

or social institutions. This type of relationship is defined in the research so far as being

unidirectional (asymmetric) in that it flows only from actors in one group (the business

community) to actors in the other two groups, but not reversed.

Holistic networks and third-level entanglements are here associated with the potential

for shared networks provided by the three networks: business/business, business/economic

institutions, business/social associations. Such complex networks include, for example,

situations where businesses are not directly connected but share membership in the same

social association. Attachment to the third order is therefore truly institutional in nature as it

signifies that without institutions, a large number of businesses/enterprises would remain

disconnected.

Repeated quantitative network studies have been conducted in Swedish industrial

areas since the 1970s (Johannisson 1983) and graphical analysis techniques have been applied

since the early years 1990s (see for example Johannisson et al., 1994; Johannisson et al.,

2002). Empirical findings from the three contexts show that organically built industrial parks

have much denser networks than induced science parks, but less dense networks than small

business communities specializing in one industry (furniture). Business pathways are most

prevalent in industrial parks, while 'professional/problem solving' pathways are most

prevalent in science parks. However, the share of 'complex' ties (see above) is the same in all

three contexts. Additional research on the personal network dynamics of young entrepreneurs

in science parks shows that the way they relate over time becomes more business-oriented

(Johannisson 1998).

Methodological specifications required by various economic activities in the

organizing contexts, such as industrial parks or science parks, still leave a number of questions

unanswered. For example, how realistic is the assumption that reciprocal relationships reflect

balanced exchanges with respect to agents' power? This may be the case in the Swedish

context, where the model and its operationalization were developed, but it is very different in

other national cultures that have a different set of 'work-related values' (Hofstede 1980).

Parallel research in an industrial region (Rafaela) in a national environment that in all four

dimensions according to Hofsted contrasts with the Swedish culture - the Argentine culture -

shows that ties are more often asymmetrical due to, for example, differences in company size

and related factors. The culturally sensitive reflection of the methodology used invites a

conceptual review to improve our understanding of locality as a context for organizing

entrepreneurship.

7.4 ORGANIZATION AS A SOCIO-ECONOMIC CONSTRUCT

Given the potential of place as the domicile of entrepreneurial processes, the above

conceptual and methodological elaboration has limited itself to the locality as a business

environment with diverse institutional and national environments.

However, any community is a social construction that is historically embedded and

locally cultural. 'Culture' is certainly a concept that encompasses many more interpretations

than the one adopted by Hofstede. In addition, cultures vary from country to country. Thus, in

Figure 7.3, institutional embeddedness is resolved by local/regional culture, to the exclusion

of more distant cultural layers.

To open up a broader cultural discourse on networks and entrepreneurship in a spatial

perspective, three pairs of contrasting/complementary concepts are introduced in Figure 7.4

below. These may reflect the contemporary public discourse on local and regional economic

development. The three dimensions concern the dominant living arrangements in a locality

(place), the general outlook of people in the locality/region, and the critical competencies

needed to realize emerging ideas. The aspect of living arrangements juxtaposes rural and

urban ways of life. This dichotomy in our minds is closely related to Tönnies' (1965)

distinction between 'Gemeinshaft' and 'Gesellshaft'. In the first case, strong bonds stemming

from mechanistic solidarity create a sense of community including generalized and delayed

reciprocity that connects people and results in strong informal institutions. Usually this way of

life is associated with rural, even suburban areas. In contrast, ties to urban living arrangements

are weak and asymmetrical as people specialize professionally. Informal institutions are

replaced by formal structures that aim to keep egoism at bay.

A 'local' outlook means a great concern for established traditions which implies that the

search for ideas and ways to deal with challenges is localized centripetal. In the language of

different spaces (physical, social and mental) outlined above, the local view is practiced in the

context of organizing where the three spaces, due to their different proximities, overlap. In

contrast, the 'global' view means that the mental and social spaces of the local community, its

members, individual as well as collective, are indefinite and (therefore) quite separate. People

with a global outlook are mostly involved in long-distance networks and are guided by values

and norms that are only partially in line with those of the place where they live.

The third aspect, that of 'competence', as we have seen, ranges from focused to

complex. 'Focused' competence here means facing challenges with capabilities that have been

generated by the personal and social experiences that individuals have as members of a

community of practice. As such, focused does not (necessarily) mean trivial, standardized

knowledge, but rather refers to the insights that a reflective practitioner brings to the table.

When focused competencies are at their best, they will appear in embodied and intuitive

quality expertise, superior to formal knowledge and analytical reasoning. Complex

competencies arise from the ability to combine insights from different areas of knowledge,

which implies that the knowledge base used is constantly being revised. Complex

competencies are usually associated with advanced science-based inventions, but can also be

found in the arts and humanities in general. Design is a field that combines aesthetics and

science to produce unique competencies. The emerging experiential economy generally

invites continuous reconfiguration in line with advances in science and art.

The two circular profiles in Figure 7.4 summarize the proposed vocabulary into two

contrasting understandings of local/regional development. The inner circular profile,

according to the more inconspicuous public discourse, produces rural communities with views

constrained by fixed local norms and strong networks and whose competencies are tied to

traditions that limit the knowledge base to a few areas. But this view does not only extend to

disadvantaged communities on the periphery. Prosperous industrialized regions apply a

similar logic (Becattini 1990; Johannisson and Wigren 2006). The contrasting picture, the

outward profile, reflects the dominant prescription for economic growth and development in

contemporary societies, developed by most policymakers and researchers in the field. This

view is associated with a globalized view of firms, institutions and politicians promoting

complex systems of innovation within a global frame of reference, systems that clearly can

only be accommodated by urban living environments.

It is important to point out that the outer and inner profiles in Figure 7.4 are introduced

as opposing ideal images, worthy of further conceptualization and subsequent empirical study.

The two circles reveal prejudices and wishful thinking that expresses a contrasting ideology,

i.e. a value-laden framework for action, and not just as a thought in opposition to illusory

neutrality. The outer circle, built from the views of the dominant coalition in contemporary

society, represents the functional logic brought about by formal financial capital, preferably

academic, knowledge and financial capital. As this logic evolves based on centrifugal forces

that resist any confinement, it articulates a threat to a particular place. In contrast, the inner

profile stems from the belief that any sustainable initiative must be taken from within and

below to create uniqueness and survival (Hjorth and Johannisson 2003). Such a territorial

logic brings together centripetal forces, including the belief that collective action requires

multidimensional proximity both socially, mentally and physically.

But wishful thinking does not always materialize. Common discursive constructs such

as notions of 'Triple Helix' and 'innovation systems' rarely succeed in achieving targeted

coordination of the intended interest groups. Urban environments may provide many arenas

where human encounters spark creativity, but segmentation, for example within local

academic communities, often hinders the building of complex competencies. Rural areas are

also not just places for handicrafts and people who hold traditional values as indicated by their

inner profile. Community entrepreneurship, which is urgently needed for the revitalization of

declining Western regions as well as in developing countries, also benefits from tacit

knowledge derived from experience and social learning as well as the immediacy of collective

action that local and rural communities can accommodate, cf. Katz and Steyaert (2004). The

proposed dichotomies and their interrelationships that make up each of the circles in Figure

7.4 are constantly being revised as a result of dialogue between adherents, emphasizing them

as indigenous ideologies. In the vocabulary of French philosopher Deleuze, it is more

productive to see each pair of dual concepts as a 'contrariety', signifying two different yet

similar images. The vitality of a region is built on the awareness of keeping both (extreme)

images alive in discursive practices and ongoing embodiment. Talking about 'rural', 'local' and

'focused' without (also) considering the opposition between 'urban', 'global' and 'complex' does

not make sense. Therefore, we propose the notion of a 'virtual' logic for mindsets and

associated (inter)action repertoires that embed the conceptual contrast of 'functional' and

'territorial' logics and their associated centrifugal and centripetal forces. Her virtual logic

suggests that local practices constructively use tensions between rural/urban, local/global, and

complex/focused competences to drive and sustain change. The notion of the 'virtual' invites

us to question what is taken for granted, for example that (global) marginality and centrality

are destined to reflect the divide between rural and urban. Communication and information

technology (CIT)

emerged as a common tool to realize a new world beyond borders.

The (institutional) context will determine how contrasting logics interactively organize

people's thoughts and actions. Even if the urban fabric of life can rationalize the existence of

science parks as greenhouses for entrepreneurs, the fact that this Swedish reserve for

academic researchers is labeled a 'science village' reveals a culture derived from a rural way

of life. . On the other hand, development programs based on urban values, financed by the EU

and national agencies, have encroached on many small rural businesses. Constructive tensions

also arise in the field of competence where techniques such as CAD qualify product

development processes derived from hands-on experience. Technology and innovation

systems and related matters in turn require a broader experimental approach to be able to

address the interdependencies generated by technology and innovation itself. The notion of

'building blocks' (Dahmén 1988; Eliasson and Eliasson 2006; Johansson 2001) provides an

analytical framework that recognizes the need for learning by doing and interacting.

The proposed conceptualization of virtual logic requires a methodology that can guide

an empirical investigation into the complexities and dynamics created by the parallel

operation of territorial and functional logic. There are different ways to approach this

challenge. One option is to critically examine the inclusion/exclusion pressures that occur in

society as a collective network. More recent research on the same industrial area that has

inspired the conceptualization reported above, on the one hand shows that women and

immigrants are not invited into business networks, on the other hand formal competencies,

complex urban values and practices, as well as a view of the global as a basis for intensifying

internationalization are brought to society (Johannisson and Wigren 2006).

Trade-off

between

contextual

networks and

company

performance

Number of local relationships

Figure 7.5. Domain for Enterprise Perspective Contextual Network

The second way is to use patterns in network practices to identify awareness of the

need to combine the two logics. Iterative graph analysis studies, comparative synchronic

research across multiple locations and comparative-static diachronic research in the same

communities over time, providing learning for individual companies and local partnerships as

well as for society at large. These findings are summarized in Figures 7.5 and 7.6.

Figure 7.5 shows that entrepreneurs and enterprises, in order to benefit from the local

context, must achieve a minimum local network so that legitimacy is gained and access to

collective local resources is secured through direct and indirect networks in the community.

The graph also shows that there are limitations to the additional social and human resources

that can be provided by local enterprises and other local institutions. This means that the

increasing trade-off between local networks and business performance declines after the

minimum level of integration is reached. The opportunity cost of time spent on

local/contextual networking becomes very high when compared to the benefits of global

networking. Empirical research confirms that small business managers in generous contexts

balance local and global networks (Johannisson et al., 1994).

In Figure 7.6 the unit of analysis is the (business) community at large. The model

proposes that, in order for contextual networks to become a collective force, associated with

collective entrepreneurship, two conditions must be met. First, to provide creative variety, a

minimum of firms/institutions that are (potentially) involved in the network is required.

Second, a minimum of integration is required in terms of network density to establish shared

norms and practices that meet the demands of collective action. In the so-called 'potential

space for spontaneous development', both of these requirements are met. In such spaces the

process of self-organization is triggered, which means that beneficial changes will be

implemented and harmful changes will be mitigated. The empirical research confirms that the

industrial areas under study offer potential spaces for collective entrepreneurship. Science

parks usually offer the required diversity, but lack the minimum cohesiveness, while formerly

one- company towns seeking revitalization may be successful in integrating new and

emerging businesses, but have difficulty in creating the required diversity.

While the term 'cluster' is usually associated with a comprehensive network of local

firms (and institutions), such local collectives typically encompass different constellations,

often with overlapping memberships. Such constellations or strategic clusters can be identified

through different channels. One option is to identify formal and contractual agreements

regarding collaboration, and another is to look for common patterns of dyadic relationships

that apply to identifying informal groups. An important proposed characteristic of dynamic

and innovating groups is that they are, like the organizing context in general, balanced not

only in terms of diversity and cohesiveness but also in terms of external orientation. High

diversity means additional capabilities among group members and collective absorption

capacity, while strong cohesiveness means close coordination of shared resources and

knowledge. External orientation, which complements internal collaboration, ensures openness

to the world outside the context. In empirical studies of industrial parks and science

departments, these four 'strategic groups' are identified by combining formal network analysis

(intra-group similarity according to 'structural equivalence' measures) and heuristics

(Johannisson et al., 1994). The organically formed and organized industrial parks reported

four strategic groups, all ranking similarly in terms of diversity, cohesiveness, and external

orientation. While all groups scored close to average in terms of cohesiveness and external

orientation, they were all above average in terms of diversity. This reflects the concern to

encourage diversity in a context where two local industries dominate (light engineering and

plastics). In the induced context, the science park, the three strategic groups identified were

much more heterogeneous from each other in terms of diversity and cohesiveness and on

average less externally oriented than the industrial park group.

The further conceptualization of local networks and entrepreneurship offered in this

section confirms the similarities between structural features and the creative organizing

processes initiated and executed. The modeling also reveals some weaknesses of organizing

contexts in both urban and rural settings. Such weaknesses include, for example, limitations in

the construction of rational and deliberate organizing contexts as they are largely the result of

unsolicited encounters and subsequent spontaneous exchanges. A related weakness is that it

takes a long time to build an organizing context, while support to individual enterprises may

yield quick results - but not sustainable development.

7.5 IMPLICATIONS FOR RESEARCH, PRACTICE AND POLICY:

As the structure of the book itself suggests a link between the two research fields of

networking and entrepreneurship frequented by academics and practitioners alike, it calls for a

dialogue between conceptual elaboration and methodological/empirical exploration. This

should come as no surprise given that the concepts espoused, having long been exploited by

many constituencies as attractive metaphors, risk ending up being mere platitudes. Certainly

further research is needed to substantiate clever notions such as 'global village' and 'born

global' and theorize the interdependence between digital and personal networks.

At the turn of the millennium, in an increasingly globalized world, most of the

The challenges posed by ICT advances call into question traditional industrial parks as role

models for local and regional development. Some of these challenges, they argue, can only be

overcome by inviting large international firms into the local business community, i.e. firms

that have sufficient resources to build and maintain global brands, see for example Carbonara

(2002). But the need for increased concentration of local business activities does not mean

that the equally important local variety is abandoned. Again the relational view is productive,

suggesting that (complementary) spin-offs can add diversity and conserve existing

entrepreneurial energy. A complementary spin-off means that the founder of the new firm

retains a personal relationship with the previous firm, usually as a supplier. Such a

collaborative arrangement implies that the newborn firm already has customers that provide

orders and legitimacy that in turn bridge further market relationships. In the literature, venture

career entry is referred to as 'extrapreneurship' (Johnsson and Hägg 1987). This model in

Sweden is mainly used to help redundant personnel to co-create new jobs, however the

extrapreneurship model can also be adopted as an integral part of an offensive strategy to

uphold the local entrepreneurial spirit as this means increasing the number of links with the

community as well as the number of enterprises and thus moving the community into a

potential space for spontaneous development according to Figure 7.6.

Although hierarchies and network markets are usually considered as mutually

exclusive extremes, e.g. Sjöstrand (1992), the notion of 'heterarchy' proposes an

(inter)organizational form that combines markets and networks. Originally developed by

Hedlund and Rolander (1990) in a corporate setting, Grabher (2001) applies it to clusters of

producer service firms in urban areas. One of the features of heterarchy is that the leadership

of the collective changes according to the challenges they have to face, and the continuous

dialogue among its members promotes learning and maintains vigilance. As a heterarchical

way of organizing, it facilitates self-organization and realizes collective entrepreneurship.

The proposed frameworks, whether considering territorial, functional or virtual logics,

while accommodating entrepreneurial processes, are quite static. It is implicitly assumed that

network structures are permanent and strong ties are privileged. However, the proposed

vocabulary can easily be extended to include temporary groups that emerge for example at

international trade fairs. They can also serve as an organizing context as their members often

know each other well. This in turn creates an atmosphere that offers a quick sense of trust, i.e.

the result of meeting strangers who can instantly create strong new relationships due to the

matching 'personal chemistry', cf. Meyerson et al. (1996). Meyerson et al. (1996).

Apply lessons from the conceptual and methodological explanations in this paper

into concrete (public) measures aimed at energizing a locality means that relationships and

networks as supporting components of the context should be targeted, rather than individual

(economic) agents. Given their unique social embeddedness, there is no one common way to

increase business activity. Therefore, support to existing small businesses should not be aimed

at individual companies, but at the relationships between these companies and other (local)

stakeholders. As shown, these relationships are much more powerful in creating change. It

would be a waste of energy if companies in need had to be first dissolved, then refurbished

and then rebuilt. Another reason for a relationship-oriented support strategy is that measures

that address the social texture in which enterprises are located can and should be organized

into structures that generate self-help assistance, which contributes to a process of mutual

learning. Collaborating with other communities also enables small communities to achieve the

diversity necessary for take-off. Thus, when the opening phase in local/regional development

is enacted, a sustainable 'polylogue' arena can form as a harbor for local and global ventures

(Hjorth and Johannisson 2003). For this to happen, locality as a physical space must recognize

the need for a global outlook in mental space as well as the unlimited potential of

connectedness in social space. And conversely, policymakers and their academic allies must

pay sufficient attention to the day-to-day activities of core businesses.

Chapter enrichment

Operational Definition of Network Strands:

The following annexes include operational definitions adopted from single ties in

networks of business-to-business associations, business-to-economic institutions, and

business-to-social associations.

Business to Business Networking

Strand

Operationalization

Awareness

The company and its operations are known

Acquaintance

CEO or anyone in the senior management and board of directors of

the company

personally known

Talk

Face-to-face or telephone meetings were held with senior

management of the company during the last 30 days. The

conversation should have lasted at least 5 minutes and

concerned matters other than

weather

Commercial

Some business (regarding goods and/or services) has been

transacted

(including borrowing, lending, and bartering) with the company

during the last 9 months

Professional

Company staff are approached if a dodgy issue arises or

challenging

Joint development

project

Over the past 3 years there have been partnerships involving

companies and aim for joint development, e.g. of technology or

markets

Provide contacts

business

The company has been recommended to have business contacts that

already exists, e.g. customers or suppliers

Receiving contact

business

The company has mediated new business contacts, e.g. customers

or new suppliers

Children's

schoolmates

child

One-class management children at school

ENT 305_ASU_ASSIGNMENT_WEEK 2_THE RELATIONSHIP BETWEEN ENTREPRENEURSHIP AND ECONOMIC GROWTH

Students also viewed