Academic journal article Journal of Small Business Management

New Firm Formation: A Dynamic Capability Perspective*

Academic journal article Journal of Small Business Management

New Firm Formation: A Dynamic Capability Perspective*

Article excerpt

This paper applies the dynamic capability framework to the new firm formation process. Specifically, this paper argues that new firm formation is a specific process that has been the subject of substantial empirical research. This paper also provides empirical evidence that shows that a common set of gestation activities exists for successful nascent entrepreneurs, that market dynamism affects the complexity and characteristics of the new firm formation process, and that learning negatively impacts new firm formation success for nascent entrepreneurs operating in highly dynamic markets. By positioning the new firm formation process as a dynamic capability, the rationale behind the execution of specific gestation activities to acquire and/or to reconfigure those resources most critical to emerging organizations can be understood better.

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Introduction

There is a wealth of evidence to suggest that new, small firms grow faster (Evans 1987a; Wagner 1994; Cabral, 1995; Tether and Massini 1998; Brixy and Kohaut, 1999), create more net jobs (Robson, Gallagher, and Daly 1993; Kirchhoff 1994; Hart and Oulton 1999), distribute wealth more effectively (Schumpeter 1942), and innovate more (Futures Group 1984; Chakrabarti 1991) than large firms. As such, entrepreneurial firms are argued to be the true drivers of economic growth. Nevertheless, the literature also suggests that many new firms fail (Evans 1987b; Kirch-hoff 1994; Mata 1994; Wagner 1994). Thus, if entrepreneurial firms are so vital to the economy, yet are plagued by high hazard rates, a greater understanding of the process by which new firms are formed is essential (Aldrich and Martinez 2001).

Despite the benefits and hazards associated with new firms, to date there have been surprisingly few studies that have examined the new firm formation process, defined as "the process that takes place between the intention to start a business and making the first sale" (Gatewood, Shaver, and Gartner 1995, p. 380). This process is initiated by a nascent entrepreneur, or "someone who initiates serious activities that are intended to culminate in a viable business startup" (Aldrich 2000, p. 77). These activities in which the nascent entrepreneur engages, or gestation activities, are actions taken in order to develop a business structure and operational procedures for the purposes of creating a new firm (Reynolds and White 1997). Surprisingly, as Reynolds and White (1997) observe, "How individuals create new firms is one of the least understood features of modern societies" (p. 39). Although several scholars have examined this process (Reynolds and Miller 1992; Gatewood, Shaver, and Gartner 1995; Carter, Gartner, and Reynolds 1996) and have reached some consensus regarding which activities are important in forming a successful new firm, they have not identified why these activities are important.

In response to the lack of theoretical understanding of this process, this paper will apply the dynamic capability perspective, an extension of the resource-based view (RBV) of the firm, to the process of new firm formation. This paper suggests that by considering gestation activities as functional components of the larger process of new firm formation, the manner in which entrepreneurs acquire and exploit resources may be understood better. Thus, the new firm formation process may be considered a dynamic capability, defined as the "organizational and strategic routines by which firms achieve new resource combinations" (Eisenhardt and Martin 2000, p. 1107). However, whereas dynamic capabilities typically are thought of as processes executed at the firm level, the dynamic capability of new firm formation is argued here to be a process executed at the individual level. As such, the dynamic capability of new firm formation, if it exists, may signify the best way for nascent entrepreneurs to create new firms.

Literature Review

Three noteworthy empirical analyses of new firm formation stand out in the literature. …

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