n°18 - April 2017
LABEX ENTREPRENDREpublications
ENTREPRENEURIAL INNOVATION: THE ROLE OF COGNITION
Entrepreneurship is about recognizing opportunities and being able to seize them. Entrepreneurs are indeed the key actors in this process of venture creation. They are responsible, among other things, for generating new ideas for products or services, recognizing business opportunities for those ideas, and obtaining the resources needed for implementing them through the creation of a new venture, product or service.Cognition is among the most influential factors that have been proven to explain the differences concerning decision-making and behaviour between entrepreneurs and non-entrepreneurs (Baron, 2004; Mitchell et al., 2002). Cognition influences the way individuals perceive, interpret and transform information. Thus, it has a strong impact on the ability to recognize opportunities, on the willingness to exploit them and on the final decision to implement them and create a venture (Baron, 2004, 2007; Shane, 2003; Simon et al., 2000).Building on an experimental study with 70 early-stage entrepreneurs, this issue of Labex Entreprendre Publications1 aims at understanding the role of cognitive and behavioural factors in the process of entrepreneurial innovation.*innovation Entrepreneurship research Success
1. LabEx Entreprendre received government funding through the Agence Nationale de la Recherche under the “Investissements d’Avenir” program; reference: ANR-10-LABX-11-01.
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ENTREPRENEURIAL INNOVATION: THE ROLE OF COGNITIONAll innovation begins with creative ideas and innovation doesn’t occur if individuals do not perceive an opportunity to innovate (Krueger, 2000). However, we often see two situations: creative ideas, even those that are highly original, that do not find a place on the market, and creative ideas, even though they have high market potential, that are never implemented. The concrete tasks of an entrepreneur vary greatly, depending on the stage of the project. We can represent entrepreneurial innovation as a multistage process comprising three main activities (although these can be broken down more finely) (see Figure 1):
1. Idea Generation: Cette activité correspond à la génération d’idées avec comme but la résolution d’un problème, le comblement d’un «gap» dans le marché et/ou la réponse à un besoin identifié (ou pas). L’entrepreneur doit comprendre le monde extérieur, avoir une pensée divergente et un comportement d’exploration.
2. Opportunity Evaluation: The entrepreneur has to evaluate the potential of the idea and identify whether there is or not an opportunity that he can pursue. The entrepreneur has to identify those opportunities for which he or she is willing to invest skills, time, effort and money This evaluation includes tasks such as concept testing, market analysis, financial forecast, organizational assessment, business model development, among others.
3. Implementing innovation: Here, the entrepreneur must decide to act upon the idea/opportunity and gather the resources needed to implement it, knowing (or not) that perhaps things will not go exactly as he planned. At this stage, the entrepreneur has to deal with the market itself and adapt his plan, strategy and resources to the expectations and behavior of the market. The implementation stage includes tasks such as recruiting team members, engaging investors,
convincing potential customers, finding suppliers and partners and prototype perfecting, among others.
These activities require different skills, mental processes and behavior that sometimes might even be opposing. Moreover, the process does not follow a linear path, but is rather dynamic and interactive process that are constantly adjusting through an ongoing re-evaluation and evolution in time and space (Messeghem & Sammut, 2011): the initial idea is frequently revisited, the economic model re-examined, and so on.
Our results show that entrepreneur’s creativity is a strong predictor of his or her capabilities to implement an innovation, and that his/her ability to evaluate opportunities enhances this relationship and facilitates the passage from creativity to innovation.
OVERCONFIDENCE, RISK-TAKING AND INNOVATIONIn this work, we examine different types of overconfident judgments (Bessière & Pouget, 2012) and their impact on the various activities involved in an entrepreneurial project. We specifically study the impact of confidence on own skills (self-efficacy), perspectives (optimism), and accuracy of predictions (Overconfidence stricto sensu, measured through the so-called «calibration» tests), on entrepreneur’s ability to innovate and create a venture. Our results show
CREATIVE IDEAGENERATION
IMPLEMENTATIONOF CREATIVE IDEAS
OPPORTUNITYEVALUATION
Figure 1: Entrepreneurial innovation
WHAT IS OVERCONFIDENCE?
Overconfidence refers to an extreme certainty a person holds in the validity, or correctness, of their beliefs, knowledge, perceptions, predictions, judgments, or decisions. This extreme confidence might be i) on his own skills to successfully perform an activity (self-efficacy) ii) in the occurrence of positive outcomes (optimism) and/or iii) in the quality of a prediction or own knowledge (Overconfidence stricto sensu).
LABEX ENTREPRENDRE publications
that the entrepreneur’s ability to innovate is influenced by overconfidence and risk-taking, but especially that their effects - their direction and intensity - depend on the nature of the activity performed.
First, we show that optimism has a dual and contrary effect on innovation depending on the stage of the project: positive for creativity but negative for the evaluation of opportunities and therefor for the implementation of an innovation.
Second, overconfidence (stricto sensu) improves entrepreneur’s ability to evaluate opportunities and to implement innovations. It also contributes to creativity but with less intensity. The entrepreneurs who are most innovating show 52% more overconfidence than their less innovating counterparts.
Also, a positive attitude toward risk fosters creativity, the ability to evaluate opportunities and the ability to implement innovations. The entrepreneurs who are most innovating are 10% less risk averse than their less innovating counterparts.
OVERCONFIDENCE, RISK-TAKING AND THE DECISION TO START A BUSINESS At this point, our study cannot draw conclusions about the ability of an innovative individual to “take the leap” and actually create a business. On the basis of an innovating idea, the individual must decide to implement it and then launch it on the market. This requires not only the technical development of a product/service to meet future needs and the assessment of commercial success, but also the willingness to create a company out of that innovation.
Starting and running a new business requires a set of skills that innovative individuals (e.g., in technological fields) may not have or think they do not have. This can be an obstacle for making the decision to take the next step and “embark on the adventure” (Angel Ferrero & Bessière, 2016). Thus, the question remains: Why do some innovative individuals decide to start their own ventures while others do not?
To address this question we conducted a second study2 with 124 innovative individuals coming from a similar technological environment, of which 76 have launch their business through an academic spinoff and 48 did not. The results show that a high tolerance and willingness to take risks and high confidence in one’s skills and capabilities (self-efficacy) are crucial for the transition from the laboratory to the startup.3
100 %
90 %
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10 %
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OpportunityEvaluation
81%
71%
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52%
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76% 77%
82%84%
Creativity Overconfidence RiskAversion Optimism Self-efficacy
Less innovating entrepreneursMore innovating
Entrepreneurs’ profiles
An individual’s risk-taking behavior goes beyond a simple attitude. It is influenced by perceptions and interpretations of risks, and it depends on the context (Weber, Blais, & Betz, 2002).
2. This study was conducted within the framework of a research program dedicated to the Observatory of Researcher-Business Creators of LabEx Entreprendre. A part of the data was derived from a study examining the growth curve of incubated companies at LRI, published in 2012 by LabEx Entreprendre (Labex Entreprendre, 2012).
3. The set of findings from this study was published as an article in the Journal of Enterprising Culture Volume 24, Numéro 2 DOI: 10.1142/S0218495816500059.
LABEX ENTREPRENDRE publications
RECOMMENDATIONS FOR THE ACTORSOF THE ENTREPRENEURIAL ECOSYSTEML
1. Take the cognitive dimension into account to best foster entrepreneurial behavior and innovation Our results show that the interaction among cognitive factors exerts a strong influence on individual innovation by fostering (or not) the evaluation and exploitation of new ideas. A practical corollary of this work is its contribution to building greater awareness of the concrete effects and implications of these cognitive mechanisms. A better understanding of their potentially positive and negative effects on entrepreneurial activities will help drive the transformation of a creative ideas into a viable innovations and successful entrepreneurial projects.
2. Promote a culture of risk-taking by stimulating and recognizing self-confidence, but with moderation Overconfidence and risk tolerance are likely to offset uncertainty, information asymmetry and the lack of resources, which characterize the challenge of innovating and creating a business.But too much self-confidence and risk-taking can have a negative effect on business creation. For example, «being too optimistic» produces inefficiencies because it might lead to the pursuit of opportunities whose perspectives have been overvalued. Similarly, overconfidence lead to a greater capability to act but other studies have shown that it can hamper new business growth because overconfident individuals tend to disregard external information and prefer to act according to their own beliefs. 3. Learn to adapt and strategically use cognitive mechanismsThe mere awareness of the role of cognitive factors can be a powerful means for stimulating positive effects or correcting their potential excesses. Thus, understanding how entrepreneurs learn to adapt their behavior and to use their cognitive mechanisms strategically could be the key to a better understanding entreprenerial action and innovation.
Study participants: Maria Claudia Angel Ferrero and Véronique Bessière. They thank the entrepreneurs who participated in the study, as well as the organizations within the entrepreneurial ecosystem who contributed to it.
ReferencesAngel Ferrero, M. C., & Bessière, V. 2016. From Lab to Venture: Cognitive Factors Influencing Researchers’ Decision to Start a Venture. Journal of Enterprising Culture, 24(2): 101–131.
Baron, R. A. 2004. The cognitive perspective: a valuable tool for answering entrepreneurship’s basic “why” questions. Journal of Business Venturing, 19(2): 221–239.
Baron, R. A. 2007. Behavioral and cognitive factors in entrepreneurship: entrepreneurs as the active element in new venture creation. Strategic Entrepreneurship Journal, 1(1–2): 167–182.
Bessière, V., & Pouget, J. 2012. Excès de confiance et création d’entreprise : une synthèse des approches cognitives, Finance, Contrôle, Stratégie, 15(4): 1-19. http://fcs.revues.org/1209.
Krueger, N., F. 2000. The cognitive infrastructure of opportunity emergence. Entrepreneurship Theory and Practice, 25(3): 5–23.
Labex Entreprendre. 2012. Analyse de la trajectoire de développement des entreprises incubées à LRI: 176. Montpellier, France.
Messeghem, K., & Sammut, S. 2011. L’entrepreneuriat. Éditions EMS.
Mitchell, R. K., Busenitz, L., Lant, T., McDougall, P. P., Morse, E. A., et al. 2002. Toward a Theory of Entrepreneurial Cognition: Rethinking the People Side of Entrepreneurship Research. Entrepreneurship Theory and Practice, 27(2): 93–104.
Weber, E. U., Blais, A.-R., & Betz, N. E. 2002. A domain-specific risk-attitude scale: measuring risk perceptions and risk behaviors. Journal of Behavioral Decision Making, 15(4): 263–290.
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