Academic journal article Journal of Small Business Management

How Entrepreneurs' Knowledge and Network Ties Relate to the Number of Employees in New SMEs

Academic journal article Journal of Small Business Management

How Entrepreneurs' Knowledge and Network Ties Relate to the Number of Employees in New SMEs

Article excerpt

Knowledge is central to entrepreneurship when explaining successful venturing. However, little is known about bow a founder's knowledge and their network ties relate to the number of workers in early-stage small and medium-sized enterprises (SMEs). This study draws on the knowledge based view and social network theory to examine 174 new SME founders. Findings suggest a positive relationship between the comprehensiveness of an entrepreneur's knowledge set and the number of workers. In addition, the number of network ties positively moderates the relationship between the entrepreneur's knowledge set and the number of employees. Network tie knowledge heterogeneity was not significantly related to the number of employees in new SMEs.

Introduction

Shane (2008) recently reported that of the nearly 579,000 firms that were started in the United States between 1989 and 2003, only 10 percent had five employees or more. Other prior research efforts have reported similar findings, suggesting that most firms are relatively small (cf. Aldrich and Ruef 2006). Despite this fact--that most U.S. firms are quite small--the impact these firms have on the U.S. and global economies is substantial. According to U.S. Census Bureau (2006), small and medium-sized enterprises (SMEs) (defined as companies with fewer than 500 workers) make up nearly 99.6 percent of all employers in the United States and they employ more than 50 percent of the total U.S. workforce. In addition, highlighting their global impact, 97 percent of all U.S. exporters are SMEs (U.S. Commerce Department's Export Database 2007).

Unfortunately, the recent global economic downturn has threatened the workforce as a whole and the U.S. labor force has been relatively more damaged than other countries' (Quarterly EU Labour Market Review 2008). As of May 2009, the U.S. unemployment rate reached a 26-year high at 9.4 percent and although large U.S. firms seem to be taking the brunt of the employment losses, SMEs are not immune (U.S. Bureau of Labor Statistics 2009). Because of the substantial role SMEs play in U.S. labor force, understanding factors that relate to the number of workers U.S. SMEs employ is critical, particularly in light of the recent economic and unemployment struggles faced by the United States.

The purpose of this paper is to examine factors that relate to the number of workers employed by early-stage SMEs within the United States. The firms we examine are SMEs to the extent that they employ fewer than 500 workers (Heneman, Tansky, and Camp 2000; United States Department of Labor 2008). In addition, because we are interested in early-stage phenomena, the firms we examine launched exactly 1 year prior to our study. In this study, we investigate two factors believed to be theoretically and practically useful for explaining outcomes associated with new SMEs--the founding entrepreneur's knowledge and characteristics of the entrepreneur's network ties (cf. Davidsson and Honig 2003; Marvel and Lumpkin 2007; Ozgen and Baron 2007).

Specifically, we develop and test several hypotheses related to the entrepreneur's knowledge and network tie characteristics in early venture development. Drawing from the resource-based view (Barney 1991; Penrose 1959) and the knowledge-based view (Conner and Prahalad 1996; Grant 1996), we assert knowledge is a necessary resource for new ventures. Following the premise that knowledge is a strategically important resource that can form the basis for a new venture's competitive advantage (Conner and Prahalad 1996; Grant 1996), we propose that business-relevant knowledge possessed by the entrepreneur may relate to desirable outcomes like employing workers during the early stages of venture development. Throughout the paper, we discuss an entrepreneur's knowledge set in reference to this idea.

Similarly, because social processes are often crucial for acquiring and/or exploiting knowledge (Kogut and Zander 1992), characteristics of an entrepreneur's network ties may also be important relative to desirable early-stage venture outcomes. …

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