Entrepreneurship and Firm Boundaries: The Theory of "A "Firm
In this paper, we consider how a better understanding of entrepreneurial activities can help explain how firm and industry boundaries change over time and how a more comprehensive understanding of boundary setting can explain where entrepreneurial activities are directed. We start from the premise that while entrepreneurs believe themselves to have superior ideas in one or multiple parts of the value chain, they are characteristically short of cash, and of the ability to convince others to provide it. This premise motivates a simple model in which the entrepreneur has a value-adding set of ideas for 'upstream' and 'downstream' parts of a value chain, as well as for the ways to make these two parts of the value chain work better when joined under unitary control. Assuming that the entrepreneur's objective is to maximize her wealth, we observe that even in the presence of transactional risks or other factors that might make integration preferable to specialization, initial scope depends also on relatively unexplored factors such as (a) how severe the entrepreneur's cash constraint is, and (b) how much value the entrepreneur's ideas add at each part of the value chain. Entrepreneurs will focus on the areas that provide the maximum profit yield per available cash - a criterion which implies that scope choices depend on cash availability and the depth of the demand for the new idea along the value chain. We also note that entrepreneurs make money not only from the operating profits of their firms, but also from the appreciation of the assets the firm has accumulated. This consideration can change the optimal choice of the firms' boundaries, as entrepreneurs must be sensitive to choosing the segment that will enable them to benefit not only in terms of profit, but also in terms of asset appreciation. We propose that, in the entrepreneurial context especially, it is helpful to focus on the multiple considerations affecting the choice of boundaries for 'a' firm - the context faced by an individual entrepreneur - rather than on generic considerations affecting 'the' (representative) firm. Scope choices reflect the entrepreneur's own theory of 'how to make money'. Copyright Blackwell Publishing Ltd 2007.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 44 (2007)
Issue (Month): 7 (November)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2380|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=00022-2380|
When requesting a correction, please mention this item's handle: RePEc:bla:jomstd:v:44:y:2007:i:7:p:1213-1241. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.