intbus705 - schumpeter on family business & entrepreneurship

Exploring the relevance of Schumpeterian considerations to entrepreneurship & family business

INTBUS705 – Advanced Entrepreneurship - Assessment Two: Contextual Essay

By Jessica Maher

October, 2010

INTRODUCTION & EXECUTIVE SUMMARY TO BE ENTERED HERE AND CHANGED INTO DARK GREY TEXT

Jessica Maher | INTBUS705 Essay | October, 2010

INTBUS705 – Advanced Entrepreneurship - Assessment Two: Contextual EssayExploring the relevance of Schumpeterian considerations to entrepreneurship & family business

By Jessica 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 Zealand’s 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 is said 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 that was incredibly popular

for use as fencing wire around New Zealand’s 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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Furthermore; as Kiwi’s, we pride ourselves on being entrepreneurial and innovative,

evidence of which can be found in our fascination with the concept of the “No.8 wire”. In fact,

cited in a recent New Zealand Trade & Enterprise report, (NZTE, 2009), Frederick & Chittock

claim that Auckland is the most entrepreneurial city in the OECD, presenting just one

example of this ultimately ingrained Kiwi construct and belief as self proclaimed innovators

(New Zealand Herald, 2008; New Zealand Trade & Enterprise, 2009). The reality is that the

underlying accuracy of this claim is, to a large degree, dependent on how such constructs

are defined.

Given the significance of innovation in our economies and current markets, it seems

natural that Schumpeterian considerations of entrepreneurship should hold primary

relevance and focus. McCraw & Roberts (2007) extensively discuss the significance and

relevance of Schumpeterian economics in modern understandings of economics, prasing his

emphasis on the importance of adopting broader conceptualisations to definitions of

entreprenuership. They go so far as to label the “21st century as the century of Schumpeter”

with informal reference to theorists such as Summers & DeLong (McCraw & Roberts, 2007).

Despite the renewed populairty of Schumpeter’s models and concepts of

entrpreneurial activity within consideration of technological developments & innovation in

modern research, consideration specifically in a family business context is relatively limited.

The wide impacting influence demonstrated by ongoing focus and narrow considerations of

modern academic specialities appears to have negetively impacted understanding and

conceptualisation largely in entrepreneurship, particularly in the context of the family-

embeddedness.

Whilst ther is some considerable overlap between small byusiness and

entrepreneurship, Schumpeter emphasised the reality that not all new ventures are

entrepreneurial by nature, indicating as such that these constructs may have commonly

been confused as the same (Carland, Hoy, Boulton, & Carland, 1984, p. 76). An intial

overview of the foundations of Schumpeterian understandings of entrepreneurship, before

outling and exploring the family business context. The relevance of these separate but

overlapping considerations will then be explored, drawing out the most related and

significant factors.

This begs the question of whether typical New Zealand SMEs should be considered

“entrepreneurial family businesses” or wether many of us may have missed the importance

of Schumpeter’s innovative considerations and are infact just small businesses??

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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 assumptions which in todays

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

when Keyseianism and general equiliburm 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 (McCraw & Roberts, 2007), 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

‘Mark I’ encompasses the traditionally empahsised small firm startups, while ‘Mark 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 & Mill, 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, Hoy, Boulton, & Carland,

1984, p. 78).

Aligned and inspired by Marxist

concepts and emphasizing a

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

“profit maximisation” focus, rooted in the assumptions of achieving equilibrium. 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 we call “enterprise”; the individual whose function it is to

carry them out, we call entrepreneurs”

Schumpeter (1934), Capitalism, Socialism & Society, p74

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


possibility that entrepreneur’s 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) quotes 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

Schumpeter’s historically unrecognised ability for foresight and deepth of understanding has

not been recognised until relatively recently..

Potentially the most discussed of Schumpeter’s models of entrepreneurship was

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

agents” (Herbert & 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 Reorganisation (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,

1979 p 151).

The Family Business Context

In evidence of the need for a family-

embeddedness perspective on entrepreneurship,

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Table 2 | Family business as defined by Nicholson, Shepherd & Woods (2009)


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.575).

The sub systems of the “family unit” and the “business entity” are separately

distinguishable and relevant to one and other, however have largely been omitted from

business theory and research’ (Heck et al, 2010??, p317). 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. Raggoff

(2003) goes as far as to describe family as an ‘important source of the oxygen that 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.574). 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 unfinished

conceptualization of this interaction

(Heck & Mishra, 2008).

Are kiwi businesses mainly

family ones?

So before we consider how

entrepreneurial our multitudes of SMEs

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 Zealand’s

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

“ O n e h u n d r e d y e a r s a g o , “ b u s i n e s s ” m e a n t “ f a m i l y b u s i n e s s ” , a n d t h u s t h e a d j e c t i v e “ f a m i l y ” w a s r e d u n d a n t . I n t h e i n t e r i m , t h e t w o s o c i a l i n s t i t u t i o n s h a v e b e c o m e m o r e h i g h l y d i f f e r e n t i a t e d f r o m o n e a n d o t h e r "

A ld r i c h & C l i f f , ( 2 0 0 3 ) T h e p e r v a s i v e e f f e c t s o f f a m i l y o n e n t r e p r e n e u r s h ip : t o w a r d a f a m i l y e m b e d d n e s s e s p e r s p e c t i v e , J o u r n a l o f B u s in e s s V e n t u r i n g 1 8 ( p . 5 7 5 )

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embedded perspective, it is unclear academically as to the efficetiveness and relevance of

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

proportion of our SMEs that are indeed entrepreneurial within Schumpeterian

considerations.

Entrepreneurial Family Businesses?

It is unclear as to the effectivreness of the family dynamics influence on entrepeneurial

behavious and activitires. Lumpkin et al (2010) describe the ongoing debate at the point

where these two fields of family business and innovation intersect. While 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

create change (de Bruin & Lewis, 2004)(Lumpkin). Despite their seperated evolution along

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

entrepreneurship; Raggoff (2003) identidies three important foci which are common accross

them; the primary focus on businesses as the most important system, tendancy to consider

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

stages (p.560).

Schumpeter’s model of entrepreneurship specifically focuses at a fundamental level

around concepts of innovation and change.

Schumpeterian Entrepreneurship in the Family Context

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

family construct. His book, Entrepreneur expresses a view that the family unit can be thought

of as a single entity for the purposes of social theory, in that benefits are maximized for the

family as a whole rather than any single individual (Knudsen & Becker, p. 219).

Schumpeter’s concepts related to “bounded rationality” have particular relevance in family

business where the objectives of the organization may further differ from contemporary

forms of organization.

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


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

importance of the role played by the family is to support, founded and grow (Heck, Hoy,

Poutziouris, & Steier, 2008).

Creqative distruction may initial be associated with conflicting to family busines, but on

closer inspection, evidence of inclusive considerations made by Schumpeter are evident. In

his extended discussion and conceptualisations of the construct of “creative distruction

process” he is qupted 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 Sch’s 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 equalimibrum 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.

Herbert & Link (1989) reduced

Schumpeter’s 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: CONSIDERING PERSPECTIVE & THE CYCLICAL NATURE 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 Schumpeter’s belief in an organic model of economics in

which effective change comes from within (Betta, Jones, & Latham, 2010).

For example, aligned with the “creative destruction” concept, Schumpeter describes

innovation as a rebirth of opportunity, whereby a process of new developments render the

old obsolete and non-viable. This is incongruent to the aims of family business, whereby

considerations of the collaborative or directive nature can also demonstrate complementary

concepts and trends. (Niedermeyer et al).

Schumpeter identified three cycles of varying time orientation (40 month – Kitchin, 7-8

year – Jugler, and 50 year – Kondratieff) which are all subject to four different stages;

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

Schumpeter’s inevitable business life cycle, family-owned firms have some special burdens.

Family firms frequently pride themselves on their loyalty to employees and their strong

culture and traditions Both practices can create resistance to change, however (Ward,

1997).

DYNAMICS: CONSIDERING THE INFLUENCE OF “TIME” & TIME ORIENTATION

The influence and consideration of the “time” dynamic within entrepreneurial models is

of particular relevance to Schumpeterian understandings of economics. In a discussion of

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

suggestions that such family embedded contexts foster entrepenreuenrial activities, opposed

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

innovate and slow speed of change (p 241). .. Many family businesses feature a long term

orientation and research suggests the enterprises associated with such orientations, coupled

with aspirations of growth, often demonstrate stronger performances (Lumpkin, Brigham, &

Moss, 2010).

Whilst not explicitly addressed in this context, Schumpeter’s understandings of the

“business cycle” embrace the significance of time orientation with its cyclical nature. Whilst

the focus is again detracted on the influence and effect of familiness on the entrepreneurial

process, the sutlely of Schumpeter’s contextually radical constructs and models inherent in

this overlap have been repeated misinterpretated by subsequent Schumpeterian academis.

Schumpeterian understangings of entrepeneruership emphaised the inappropriateness of

the static considerations of economics poluar in his day. Describing Schumpeter’s concept of

“creative distruction”, Kisch (1979) claims that in a family business context, such innovation

is increasingly problematic. Understandably, the insight gained since such time, particularly 9


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

fully conceptualise.

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

incredibly prolonged time frame within which risk and opportunity are assessed. (Lumpkin et

al, 2010). Perspectives inflyuenced by longivety

CONDUCT: CONSIDERING STEWARTSHIP & THE RELEVANCE OF AGENCY THEORY

The time orientation of family firms is just one example of how they can substantially

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

orientation. The emotional integration and investment into family businesses often adds an

additional layer of complexity to entrepreneurial considerations. Central to many

understandings of economics and business, we can find indications of agency theory which

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

(principles) (Zahra, Hayton, Neubaum, Dibrell, & Craig, 2008). Contray to this, an orientation

of stewartship is relevant to the family business context as it allows for the possibility of goal

congruence between owners and managers (Zahara, et al., 2008).

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

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

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

family businesses.

Discussion and Conclusions

POSSIBLE EXTENSIONS

Given the narrowly focused requirements 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, there could be potential for valuable insights or understandings to be drawn or uncovered in further specified investigation and consideration.

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