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Exploring the relevance ofSchumpeterian considerations to

entrepreneurship & family business

INTBUS705 Advanced Entrepreneurship -

AssessmentTwo:Contextual Essay

By Jessica Maher

October, 2010


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Jessica Maher | INTBUS705 Essay | October, 2010

Maher,J(2010)Exploringth

erelevanceofSchumpeterianconsiderationstoentrepreneurship&familybusiness,Univ

ersityofAuckland

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INTRODUCTION & EXECUTIVE SUMMARY TO BE ENTERED HERE

AND CHANGED INTO DARK GREY TEXT

INTBUS705 Advanced Entrepreneurship - AssessmentTwo:Contextual Essay

Exploring the relevance of Schumpeterianconsiderations

toentrepreneurship & familybusinessByJessica Maher

Given the widely accepted adolescence or youth characterisation to the field of

entrepreneurship (de Bruin & Lewis, 2004, p. 638) the variance and difference in what is

widely accepted to be defining entrepreneurial may come as a surprise to one whom was not

familiar with the field. There is increasing evidence that traditional constructs and models of

business, by its very nature, assumed the element of familiness as a contextual relevant

social structure to be intertwined and as such have an influence and inpact on each other.A

theoretical framework for entrepreneurship in a family business context is difficult to define,

due at least in part, to the lack of conceptual frameworks agreed upon in either field (Craig &

Lindsay, 2002). Despite this, the significance of considering family business and

entrepreneurship, particularly in a New

Zealand setting, is unavoidable.

Involvement of family is widely

accepted in our local business contexts,

where it is not uncommon to find situations

where whole families are deeply small

business enterprises (Department of Labour, 2004). In fact, Nicholson, Shepherd & Woods

(2009) explicitly state that the foundations of New Zealands business landscape are built on

successful family businesses (p1). Attempting to avoid entering into extensive debate as to

the exact defines of what success consists of for family businesses in its entirity, it is

assumed that at least one element of such success on some level relates to achieving

growth and/or innovation.

Kiwis are famous for their ingenuity and self-sufficiency. It issaid that Kiwis can create amazing things all they need is a

piece of Number 8 wire.No 8 wire is a certain gauge of wire thatwas incredibly popular for use as fencing wire around New

Zealands many farms. Because No. 8 wire was widely available,it was used for a variety of tasks,and it has become a symbol of

kiwi adaptability.(retreived from http:www.newzealand.com)

Kiwis' & "No 8 Wire"


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An Introduction to Schumpeterian Entrepreneurship

Not only can Schumpeter hold claim as one of the founding fathers of

entrepreneurship, but he continues to hold increasing elevance in modern society and

academia. Whilst many of his concepts and models featured assumptionswhich in todays

context, seem apparent and obvious, it important to remember that this was written at a time

when Keyseianism and general e uiliburm theory firmly dominated the fields of research &

academia (Spencer & Kirchhoff, 2). In fact, almost characteristically, Schumpeter was a

theorist and academic whom was ahead of his time ( cCraw & oberts, 200 ), By

identifying the lack of balance and perspective, the absence of innovation altered

Schumpeter, alought may not directly, to the inappropriately static and simplistic elements of

the research and theorist around him.

Describing the difference between the inherent risk associated with ownership, and the

role of innovative combiner characteristic to the entrepreneur, Schumpeter further discussed

the various types of entrpreneurs. Describing two types of entrepreneurs; he describes

ark I encompasses the traditionally empahsised small firm startups, while ark II

represents entrepreneurship within large established firms. The relevance of these ideas

continues to have increasing significance as studies of entrepreneurship are forced to be

broadened with changes in our societies (for example, consider the inclusion of social,

ethnic and corporate entrepreneurship in this particular paper).

Schumpeter believed that at the core of entrepreneurship there was innovatiuon.

Whilst the earliest conceptualisations of economics (such as Cantillion & ill, as cited in

Carland et al, 200) defined entreprneuership with an assumption of risk, Schumpeter

furthered this concept; by perciving elements of risk bearing as an intrinsic element of

ownership, Schumpeter argued that entrepreneurs, as the combiners of resources and

opportunity, were not always the owners and as a result discredited the risk bearing

propensity as an entrepreneurial trait

(Carland, oy, Boulton, & Carland,

1984, p. 8).

Aligned and inspired by arxist

concepts and emphasizing a

sociological element to economics, Schumpeter recognized the limitations to the economic

profit maximisation focus, rooted in the assumptions of achieving e uilibrium.Contrary to

the common economic assumption that the only course of rational action is profit

maximisation, Schumpeter (1911, 1934 & 1942) considered the contextual potential &

[t]he carrying out of new combinations wecallenterprise; the individual whosefunction it is to carry them out, we call

entrepreneurs


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possibility that entrepreneurs objectives may sit outside this.Goss (2005) emphaises the

significane influence and relevance of sociology and other principles of the multidisiplinary

approach taken by Schumpeter; consierable ciscuss emphasied in discribing of the

bounded rationality. evident in models,

Discussing entrepreneurial characteristics, Goss (2005) uotes Schumpeter arguing

the case for considering bounded rationality; he explained that (an individuals)wants must

be taken with reference to the group which the individual thinks of when deciding his course

of action (Schumpeter J. A., 1934, p. 91). This particular concept has continued to gain

increasing valance and significance given our current and future contexts and resulting

changes in technology, business and broader conceptualisations of, what is increasing

becoming the conceptualised socio-economic contexts . Demonstrated understandings of

Schumpeters historically unrecognised ability for foresight and deepth of understanding has

not been recognised until relatively recently..

Potentially the most discussed of Schumpeters models of entrepreneurship was

founded in his conceptual assumption that the role of entrepreneurs to be creative change

agents ( erbert & Link, 1989). Schumpeter viewed the entrepreneur as the cause (persona

causa) of economic development and the mechanism of economic change. Acting as a

disruptive force, Schumpeter refered to this process as creative distruction. Schumpeter

described entrepreneurial behavior as a functional role in the economic development model,

distinguishing it as a special type of human activity which differs from general economic

behavior and allocative design making (Endres & Woods, 2010).Schumpeter outlined four

characteristic processes of entrepreneurs in his 1934 book, which was later extended to also

include Industrial eorganisation (shown in Table 1).

life cycle model -Fundamental to his

model, Schumpeter emphasised the significance

of each full business life cycle being

characterized by a specific innovation (Kisch,

19 9 p 151).

The Family Business Context

In evidence of the need for a family-

embeddedness perspective on entrepreneurship,

Schumpeter's categoriesoutlined entended to defineentrepreneurial activities &

highlight criteria forclassification

Table 1 | Schumpeter (1934): outlines 5Categories of entrepreneurial behavior


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Aldrich & Cliff (2003) describe a historical reality where the word family in business was

made reduendant due to the acceptedness of them as the standard format and wide

recognition of the twos inextrinicsly linked natures (p.5 5).

The sub systems of the family unit and the business entity are separatelydistinguishable and relevant to one and other, however have largely been omitted from

business theory and research ( eck et al, 2010??, p31 ).Craig & Lindsay (2002) state that

definitions and models of entrepreneurship do not differentiate between family and non-

family firms (p. 419).

Despite this, there are also

wide and extensive

examples and evidence of

the importance of family to

entreprenuership. aggoff

(2003) goes as far as to describe family as an important source of the oxygenthat fuels the

fire of entrepreneurship (p.561). While the majority of theorists may have over looked the

influence of the intrinsicly entertwined reality that family and business are integrated, Aldrich

& Cliff (2003) suggests this is an understandable oversight (p.5 4).The fragementation and

differentation experienced in many fields of academia has directly resulted in narrow

definition of entrepreneurship. Focus has been imbalanced to the singularity attentiveness to

the business dimension, providing

simplistic and unfinishedconceptualization of this interaction

( eck & ishra, 2008).

Are kiwi businesses mainly

family ones?

So before we consider how

entrepreneurial our multitudes of S Es

are, we need to reach agreement

about what defines and makes a family bus?

Nicholson, Shepherd & Woods (2009) definition provides rather inclusive criteria,

arguably surpassing other theoretical definitions by the critical inclusion of the leaderships

perspective of the classification as a consideration (p1).

Whilst we have clearly established that the a significant proportion of New Zealands

small to medium enterprises likely demonstrate potnetial for characterisation within a family

To be a family business, the followingcriteria is required to be filled:

At least two members from the same family (immediateor extended) contribute to the operations of thebusiness, and;

At least 50% of business is owned by two members ofthe same family, and;

The CEO/Managing Director views this business as

Table 2 | Family business as defined by

Nicholson, Shepherd & Woods (2009)

One hundred years ago, business meantfamily business,and thus the adjective family was redundant. In the interim,the two social institutions have become more high lydifferentiated from one and other"

Aldrich & Cliff, (2003) The pervasive effects of family on entrepreneurship: toward a

family embeddnesses perspective, Journal of Business Venturing 18 (p. 575)


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embeddedperspective, it i sunclearacademicallyas to theefficetivenessandrelevanceof

our self proclaimed) levels of innovativeness or discussion as to the representative

proportion of our SMEs that are indeed entrepreneurial within Schumpeterian

considerations.

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It isunclearas to theeffectivrenessof the familydynamics influenceonentrepeneurial

behavious and activitires. Lumpkin et al ) describe the ongoing debate at the point

where these two fields of family business and innovati on intersect. hile some suggest

family business can potentially encourage an environment that fosters entrepreneurial

activity, others suggest it increases risk aversion and causes reluctance to innovate and

createchange de Bruin & Lewis, )(Lumpkin) . espite theirseperatedevolutionalong

different paths, their are obvious overlaps between r esearch in family business and

entrepreneurship; Raggoff (2003) identidies three important foci whicharecommonaccross

them; theprimary focusonbusinessesas themost important system, tendancy toconsider

simular dimensions of business under examination and the focus on time dimensions or

stages(p. 0).

Schumpeters model of entrepreneurship specifically focuses at a fundamental level

aroundconceptsof innovationandchange.

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Indeed Schumpeter in his work, simplistically and briefly addressed the issue of t he

familyconstruct. Hisbook, Entrepreneurexpressesaview that the familyunit canbe thought

ofasasingleentity for thepurposesofsocial theory, in that benefitsaremaximi ed for thefamily as a whole rather than any single individual (Knudsen & Becker, p. 219).

Schumpeters concepts related to bounded rationality have particular relevance in family

business where the objectives of the organi ation may further differ from contemporary

formsoforgani ation.

Even more relevant today, Schumpeter argued that the concepts of the capitalist

approach continue to be perpetuated by a focus on individualistic and short term gain


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Two Real

Processes

Tendencytowards

circular flow

Change ineconomic

routine or data

Twotheoretical

apparatus

Statics

Dynamics

Two types

of conduct

Management

Entrepreneurship

Table 3 | Schumpeters theory reduced to three elementary& corresponding pairs by Herbert & Link (1989)

(Schumpeter J. A., 1942). Aligned with a ark I construct of entrepreneurship, the

importance of the role played by the family is to support, founded and grow ( eck, oy,

Poutziouris, & Steier, 2008).

Cre ative distruction may initial be associated with conflicting to family busines, but oncloser inspection, evidence of inclusive considerationsmade by Schumpeter are evident. In

his extended discussion and conceptualisations of the construct of creative distruction

process he is upted saying they can be along side not only over the top niche markets

as part of progression of innovation and market change, such as that of the individual

technology devices used for playing music. Aligned with Schs concept that the innovation

process creates a disturbance on the standard flow of the economy, it is expected his

emphasis on the dimension of time would have been interpreted as more specifically, an

distruction of the market e ualimibrum in the marrow limits of the economic models of his

day.

True to the cyclical nature emphasised in his models and adding the inclusion of the

time dimension as an element of such constructs, the relevance and inherent assumption

that family, just like any other social structure or construct (for example ; organisation,

culture etc) are critical contingency

providing much broader applications

of these fundamentally

Schumpeterian understandings.

erbert & Link (1989) reduced

Schumpeters theory to three

elementary & corresponding pairs

with the entrepreneurial elements

represented by the process of

change in economic routine or data

and emphasis on dynamic

theorertical models.

PROCESSES:CONSIDERINGPERSPECTIVE & THECYCLICALNATURE OF INNOVATION

Initial assumptions would suggest that Schumpeterian considerations of the innovation

process; whereby the new is born out of the old- a term he coined, the process of creative

destruction suggests that the family culture and environment fosters innovation within family


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businesses, which aligns with Schumpeters belief in an organic model of economics in

whicheffectivechangecomes fromwithin (Betta, ones, & Latham, 2010) .

For example, aligned with the creative destru ction concept, Schumpeter describes

innovationasarebirthof opportunity, wherebyaprocessof newdevelopments render theold obsolete and non-viable. his is incongruent to the aims of family business, whereby

considerationsof thecollaborativeordi rectivenaturecanalsodemonstratecomplementary

conceptsand trends. (Niedermeyeret al).

Schumpeter identified threecyclesofvarying timeorientation(40month Kitchin, 7-8

year ugler, and 0 year Kondratieff) which are all subject to four different stages;

prosperity, recession, depression and recovery. Although all businesses struggle with

Schumpeters inevitablebusiness lifecycle, family -owned firmshavesomespecial burdens.

Family firms frequently pride themselves on their loyalty to emp loyees and their strongculture and traditions Both practices can create resistance to change, however (Ward,

1997).

DYNAM u Cv

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u DERING THEIN x LUENCEw

x TIME & TIMEw

RIENTATION

he influenceandconsiderationof the time dynamicwithinentrepreneurial models is

of particular relevance to Schumpeterianunderstandingsof economics. Ina discussion of

time orientation, Lumpkin, Brigham & Moss (2010) descrive conflicting perspectives with

suggestions that such familyembedde dcontexts fosterentrepenreuenrial activities, opposed

to theories that the risk adverse nature, typical to family business, create a reluctance to

innovateandslowspeedofchange(p241). .. Many familybusinesses featurea long term

orientationandre searchsuggests theenterprisesassociatedwithsuchorientations, coupled

withaspirationsofgrowth, oftendemonstratestrongerperformances (Lumpkin, Brigham, &

Moss, 2010).

Whilst not explicitly addressed in this context, S chumpeters understandings of the

businesscycleembrace thesignificanceof timeorientationwith itscyclical nature. Whilst

the focus isagaindetractedon the influenceandeffect of familinesson theentrepreneurial

process, thesutlelyof Schumpeterscontextuallyradical constructsandmodels inherent in

thisoverlaphavebeenrepeatedmisinterpretatedbysubsequent Schumpeterianacademis.

Schumpeterian understangings of entrepeneruership emphaised the inappropriateness of

thestaticconsiderations ofeconomicspoluarinhisday. escribing Schumpetersconcept of

creativedistruction , Kisch(1979)claims that ina familybusinesscontext, such innovation

is increasinglyproblematic. Understandably, the insight gainedsincesuch time, particularly


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within technological advances, was something Kisch (1979) appears to have struggled to

fullyconceptualise.

In some cases, the focus on creating intergenerational legacies encourages an

incrediblyprolonged time framewithinwhichriskandopportunityare assessed. (Lumpkinetal, 2010). Perspectives inflyuencedby longivety

CONDUCT: CONIDERING

TEWART

HIP & THERELEVANCEOF AGENCY THEORY

he timeorientationof family firms is just oneexampleofhow theycansubstantially

differ from the standard principle: agent organi ations which typically have a shorter term

orientation. heemotional integrationand investment into familybusinessesoftenaddsan

additional layer of complexity to entrepreneurial considerations. Central to many

understandingsofeconomicsandbusiness, wecan find indicationsofagency theorywhich

indicates the potential divergence between the goals of individuals (agents) and owners

(principles)(Zahra, Hayton, Neubaum, ibrell, & Craig, 2008) . Contray to this, anorientation

ofstewartship isrelevant to the familybusinesscontext as it allows for thepossibilityofgoal

congruencebetweenownersandmanagers(Zahara, et al., 2008).

Because of the mutual interdependence inherent to the family unit, the concept of

stewardship naturally applies. his is considerably relevant within the discussions of the

stewartship concept, given the ongoing debate as to the true entrepreeneurial ability of

familybusinesses.

Discussion and Conclusions

POSSIBLEEXTENSIONS

Given the narrowly focused require

ents for this particular review, a number of areas have

been briefly considered or touched upon without further expansion. Given the relevance

and fundamentally intrinsic significance of the study of both family business and

entrepreneurship in a New Zealand context, therecould be potential for valuable insights or

understandings to be drawn or uncovered in further specified investigation and

consideration.


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Stewartship. Entrepreneurship Theory& Practise , 1035-

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