Academic journal article Entrepreneurship: Theory and Practice

Agency and Governance in Strategic Entrepreneurship

Academic journal article Entrepreneurship: Theory and Practice

Agency and Governance in Strategic Entrepreneurship

Article excerpt

This paper aims to highlight the opportunity to contribute to our understanding of strategic entrepreneurship by exploring the construct through the lens of agency theory. In particular, we claim a fundamental link between a new venture's control of critical resources and the distribution of equity between the principal and agent. According to agency theory, assigning top executives ownership in the firm provides arrangements that are compatible with the incentives of the owners of the firm. This paper suggests that agency theory has special relevance when considered in a strategic entrepreneurship context. This is because the function of managers in entrepreneurial new ventures is fundamentally different from their counterparts in large established, incumbent corporations. While both types of managers have to provide managerial and organizational expertise, managers in entrepreneurial new ventures have an additional function that is essential to the competitive advantage and performance of the new venture--providing knowledge and human capital, which, in many cases, is intrinsically linked to the capital resources of the new venture. Our framework is tested using patent ownership as a proxy for both relationship-specific investments and indispensable human capital of the top manager of the new venture. The empirical results support the main hypotheses posited by the entrepreneurial governance model. In particular, patent ownership of the top manager significantly increases the percentage of equity held, while the number of patents held by the firm significantly decreases the percentage of ownership.

Introduction

Strategic entrepreneurship involves simultaneous opportunity-seeking (i.e., entrepreneurial) and advantage-seeking (i.e., strategic) behaviors (Ireland, Hitt, & Sirmon, 2003). As the introduction to this special issue suggests, strategic entrepreneurship includes those "organizationally consequential" innovations, "representing the means through which opportunity is capitalized upon" while "in pursuit of competitive advantage." The innovations made possible by strategic entrepreneurship are manifest in either the basis by which a firm differentiates itself competitively from its industry rivals or changes from the firm' s past organizational structure and/or business model. In the case of the latter, a new firm's transition from a private to a public equity structure by means of an initial public offering (IPO) constitutes a setting rife with strategic entrepreneurship implications (Certo, Covin, Daily, & Dalton, 2001). (1)

Among the implications is the ownership and control of valuable resources used in pursuit of a given opportunity. As Ireland et al. (2003) contend, much of the firm's ability to seek opportunity and competitive advantage depends largely on the resources owned or controlled by the firm and the capacity to manage them effectively. In fact, in addition to an entrepreneurial mindset, entrepreneurial culture, and entrepreneurial leadership, "managing organizational resources provides the foundation for the firm's opportunity-seeking and advantage-seeking behaviors (Ireland et al., p. 967, emphasis added). We have no dispute with this perspective, and accept, as Mosakowski (2002) suggests, that a unique strength of strategic entrepreneurship is the firm's ability to develop new advantage-granting resources through an entrepreneurial process.

We are instead intrigued by the premise that a firm may need to control resources it does not own. A pivotal question that arises is how, and with what implications for strategic entrepreneurship does a firm gain control over resources owned by others? In this vein, we confine our focus to those cases in which individuals within a new firm--the chief executive in particular--own the key resources the firm seeks to control. This is particularly relevant for strategic entrepreneurship in which the top executive is expected to provide inputs (e. …

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