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Entrepreneurship and Innovation: A Review of the Theory and Literatures

Kevin Shihping HuangInstitute of Technology Management

National Chiao Tung University

Hsinchu City, Taiwane-mail: kevin1003@gmail.com

Yu-Lin WangDept. of Business Administration

National Cheng Kung University

Tainan City, Taiwane-mail: ywang@mail.ncku.edu.tw

Abstract-This paper reviews entrepreneurship and innovation

literature. In addition, the core domain of entrepreneurship

literature, entrepreneurial opportunity recognition, is further

reviewed in this paper.

Keywords-entrepreneurship; innovation; entrepreneurial

opportunity recognition

I. INTRODUCTIONThe entrepreneurship literature has long been recognized

as a potential means to maintain and promote businesscompetitive advantages (Covin & Miles, 1999; Hult, Snow& Kandemir, 2003; Schoollhamer, 1982; Yamada, J, 2004).Literatures indicate that managers or entrepreneurs are often

been viewed as the key components in the entrepreneurshiptheory and models of the entrepreneurial process (Covin &Slevin, 1991). Stevenson and Gumpert (1985) state thatentrepreneurship is the trait that some people ororganizations posses but some do not. Entrepreneurs

personal traits has been widely discussed in explain

entrepreneurship, including creativity, innovativeness, risktaking, and proactivity (Covin & Slevin, 1991; Yamada,2004). Moreover, entrepreneurial organizations are those thatcan actively respond to competitors and are often the first-to-market with product innovation (Covin & Slevin, 1991).Zahra (1991) defined corporate entrepreneurship as activitiesthat can lead firms to innovate, take risk, and seizeopportunity in its markets. Covin and Miles (1999), Thatis, corporate entrepreneurship is engaged in to increasecompetitiveness through efforts aimed at the rejuvenation,renewal, and redefinition of organizations, their markets, orindustries (p. 50). In other words, entrepreneurship isdescribed as innovation.

Innovation is one of the most critical competitive

advantages of firms (Chapman & Hyland, 2004; George,Zahra, Wheatley & Khan, 2001; Hamel & Prahalad, 1994;Vakola, 2000). Vakola (2000) states that such an intangibleresource, innovation, is a kind of capital for theorganization to possess as a competitive advantage.Innovation has been broadly defined as an idea, a product or

process, system or device that is perceived to be new to anindividual, a group of people or firms, an industrial sector ora society as a whole (Rogers, 1995, p. 276). It can bedivided into three categories: product innovation, processinnovation and organizational innovation (Vakola, 2000). Asa result, this study will review some current perspectives oninnovation and entrepreneurship.

II. REVIEW OF INNOVATION LITERATURESWith the emergence of globalization, the business

environment has become more and more uncertain andcomplex. As Meyer has stated, organizations are often late torespond to the surprising environment. Unlike previous

studies, which view external environmental changes asjeopardous to organizations, Meyer (1982) has argued thatenvironmental jolts are a good opportunity for organizationsto learn to deal with crisis. That is, organizations learnlessons and make improvements by readjusting to theenvironment. Meyers (1982) study concludes that strategicvariables, such as innovativeness of market behavior,account for the most in enterprise learning under the externaldynamic environments. In other words, strategy ofinnovation plays an important role in the dynamic businessenvironment.

Meanwhile, other scholars also concerned about theinfluence of external environment on organizationcompetitive advantage. One of the streams is to examine the

external environment. Porter (1980) proposes the five forcesanalysis, which explains how industry external environmentaffects organizational developmental strategy. The fiveforce analysis consists of bargaining power of buyers,bargaining power of suppliers, threats competitors,threat of substitute product, and threats of new comers.Porter (1980) indicates that businesses can cut down costs,take differential strategy or find a niche in the market to

promote the firms competitive advantages while facingdifferent threats or bargaining power.

Other scholars question the theory of five forceanalysis. According to their perspectives, firms in the sameindustry suffer different issues in managing, and some aresuccessful in business management but some are fail,

although they face the same industry environment,competitors and threats. In other words, although enterprisesin the same industry face the same external environmentchallenges and threats, it does not mean the five forcesanalysis is the panacea of business strategy in facingchanging environment. Therefore, some scholars argue thatthe five force analysis neglects the internal differences

between each organization. They stress that each businessshould focus on their internal circumstances. This point ofview is called resource based perspective, which put stresson gathering and renewing the resources from the internal

business to form business strategy.

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Barney (1986) has demonstrated the importance ofresources of firms. Later, Barney (1991) summarized twomain streams of strategic analysis. One is Porters (1980)five forces analysis model, and the other is resource-basedview. Resource-based view claims that firms integrate theresources and reconfigure them. Based on the resourced-

based view, Hamel and Prahalad (1991) pointed out thatorganizations or businesses must develop core competence tomaintain competitive advantages in the highly competitiveworld. Hamel and Prahalad (1994) define core competenceas in defining core competencies, managers must workvery hard to abstract away from the particular productconfiguration in which the competence is currentlyembedded, and image how the competence might be appliedin new product areas(p. 227) That is to say, resources-base

perspective is closely connected with the term productinnovation. This proposed study adopts Coven and Miles(1990) definition of innovation introduction of a new

product, process, technology, system, technique, resources,or capability to the firm or its markets. (p. 49). Innovationcan be divided into three categories: product innovation,

process innovation and organizational innovation (Vokola,2000). Beside Hamel and Prahalad, scholars examine theterm of product innovation based on resourced-based views.They argue that product innovation is a dynamic capabilityof an organizations core competence that enables the firm torenew and reconfigure resources (Dougherty, 1995;Eisenhardt & Martins, 2000; Leonard-Barton, 1992).

III. REVIEW OF ENTREPRENEURSHIP LITERATURESSchumpeter (1936), the father of entrepreneurship theory,

points out that entrepreneurship is the way to innovation.Stevenson and Gumpert (1985) further indicate thatinnovation is the heart of entrepreneurship (p.85).Therefore, entrepreneurship is viewed as a prime source ofinnovation and competitive advantage. In addition, Hult,Snow and Kandemir (2003) had pointed out that theconceptual of innovation is closely connected toentrepreneurship. Hult, Snow and Kandemir (2003) hadmeasured cultural competitiveness by four dimensions,entrepreneurship, innovativeness, market orientation, andorganizational learning. Cultural competitiveness wasdefined as the ability that organization can detect and fill thegap between what markets really desire and whatorganizations currently offer (Hult, Snow & Kandemir,

2003). In other words, cultural competitiveness can beviewed as the process of entrepreneurial opportunityrecognition, which means the ability to discoveropportunities in new markets. Among these four factors,entrepreneurship was examined as the most critical factor indeveloping market-based culture. Since entrepreneurship wasthe most influential in building cultural competitiveness,entrepreneurship activities are important to new marketrecognition and discover.

In the past, entrepreneurship has been mainly discussedwithin new venture creation process. Since managers orentrepreneurs are often described as the key component ofthe entrepreneurship process, studies in entrepreneurshipfield have focused on the issues of entrepreneurs (Covin &

Slevin, 1991). Covin and Slevin (1991) further point out thatcorporate entrepreneurship has emerged as a new trend in theentrepreneurship field. Burgelman (1984) defines corporateentrepreneurship as, extending the firms domain ofcompetence and corresponding opportunity set throughinternally generated new resource combinations (p. 154).The definition of corporate entrepreneurship reveals tworelated issues: resource-based and entrepreneurialopportunity. In other words, entrepreneurship ischaracterized by strategic renewal, innovation and venturingorientation, such as first-to-market with new product offeringand research and development (Covin & Slevin, 1991). Thatis, the study of entrepreneurship is closely connected withthe innovation performance and organizational-level strategy.

Stevenson and Gumpert (1985) point out thatopportunities identification is the heart of entrepreneurship.Shane and Venkataraman (2000) argue that to haveentrepreneurship, entrepreneurial opportunities are the firstthing that individuals must have. They point out that the termentrepreneurship is closely connected with entrepreneurialopportunity in the entrepreneurship study review. WhatShane and Venkataraman (2000) indicate is the same as whatBusenitz et al. (2003) propose. Busenitz et al. have (2003)reviewed past studies from 1985 to 1999, and suggest thatthe domain of entrepreneurship research contains severalconceptual categories. These conceptual categories interactwith each other, and one of important categories is the termof opportunities. Gaglio and Katz (2001) indicate thatopportunity identification process is the most fundamentalissue in understanding entrepreneurial behaviors. Ardichvili,Cardozo and Ray (2003) state that entrepreneurialopportunity identification or recognition is the critical

process in entrepreneurship activities. Entrepreneurshipresearch agenda is to investigate the relations betweenentrepreneurs and entrepreneurial opportunity identificationand development. Therefore, entrepreneurial opportunityrecognition is a requisite perspective in investigatingentrepreneurship study.

IV. REVIEW OF ENTREPRENEURIAL OPPORTUNITYRECOGNITION

A. The core knowledge about entrepreneurial opportunityrecognition

In Zahras (1991) study, three antecedents of corporate

entrepreneurship are developed, external environment, grandstrategy, and organizational related variables. Externalenvironment not only offer new opportunity but alsoreinforce organization to be adaptive and innovative (Meyer,1982; Zahra, 1991). In addition, external environment servesvariety of resources for new product development, such assuppliers, competitors, customers, distributors, alliances

partners, universities and so on (Dixon, 1992; Huber, 1991;Salter & Narver, 1995; Zahra, 1991). Opportunities emergefrom dynamic environment and industry change. Further,new niches and markets are developed by shift or changefrom social, technological, economic and politicalenvironment (Zahra, 1991). That is, entrepreneurial

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opportunity recognition is one of the corporateentrepreneurship activities.

Stevenson and Gumpert (1985) propose thatentrepreneurs opportunity is influenced by the two factorsmanagers opportunity matrix. One is the extent ofmanagers desire future state, such as change and growth,and the other is the managers own self-perceived power andability to realize goals. They stress that sometimesentrepreneurs might not necessary desire to have

breakthrough innovation. As a result, entrepreneurs usuallyupon the existing resources and technology with slightlyrepackage it to develop a new market or accommodate thenewly perceived market segment. That is to say, whatopportunities bring to the so called innovation is theactivity of reconfigure the resources in organization, which isthe spiritual of resource-based theory. Also Steven andGumpert (1985) indicate that well planned systems mightretard the new opportunity start in organizations. Sinceopportunities do not always being perceived at the beginningof plans and projects, formal planning is not benefit toorganizational adaptability. Daft and Huber (1987) point outthat the low equivocality of external information tends tomake the organizational structure become traditional

bureaucracy. In short, Steven and Gumpert (1985) provide abroad concept that factors might influence entrepreneurialopportunity recognition. However, Steven and Gumpert(1985) lack of empirical study in examining it.

Steven and Gumpert (1985) point out the followingexternal pressures, which stimulate opportunity recognition,including technology, consumer economics, social valuesand political action and regulatory standards. That is, howmanagers perceive external environment changes haveimpact on the organizational development (Daft & Weick,1984; Meyer, 1982; Steven & Gumpert, 1985). Gaglio andKatz (2001) from a psychological perspective also argue thatentrepreneurial alertness influence the opportunityidentification process. It is the psychological scheme ofalertness that decides individuals perception of opportunitiesand interpretation of external stimulus. Unfortunately, peopletend to resist to changing because of the uncertainty and costof investment in innovation and pursuing opportunities.Moreover, most traditional measurement criteria, such assale of growth rate is depended on the usage of existingresources (Steven & Gumpert, 1985). Therefore, peoplewithout extremely external jolt and strong entrepreneurship

characteristics are unlikely to pursue new opportunity.However, Gaglio and Katz (2001) and Steven andGumpert (1985) did not mention about prior knowledge intheir study about entrepreneurs perception and discovery ofopportunities. Shane and Venkataraman (2000) suggest thatinformation corridors and cognitive properties are two mainfactors that determine whether entrepreneurs discover

particular opportunities. These two factors, informationcorridors and cognitive properties, can be explained in Shane(2000)s empirical study Shane (2000) provides strongevidence in the case study, which concludes that priorknowledge and experiences are the antecedents ofentrepreneurial opportunity recognition. Both informationcorridors and cognitive properties put emphasis on mental

schemas, which frames individuals recognition of newopportunities. The information individuals possess can beviewed as ones prior knowledge and experiences. Thecognitive properties in valuing opportunities are dependenton the prior information one possesses.

Ardichvili, Cardozo and Ray (2003) have constructed atheoretical model and propose propositions that influencesentrepreneurial opportunity recognition process. Thetheoretical model comprises five factors affecting the core

process of entrepreneurial opportunity recognition, such asentrepreneurial alertness, information asymmetry and priorknowledge, social network, personality traits, and types ofopportunity itself. Among the personality traits, optimism,self-efficacy, and creativity are referred. The personalitytraits are similar to traditional entrepreneurship study, whichfocus on the roles and function of entrepreneurs (Yamada,2004). Orwa (2003)extends Ardichvili, Cardozo and Rays(2003) theoretical framework, and uses qualitative design toexamine the factors influence entrepreneurial opportunityrecognition.

Meanwhile, Ozgen (2003) examines factors inentrepreneurial opportunity recognition process from three

perspectives, environmental context, social context andpersonal context in a quantitative study. Underenvironmental context, information flow perspective has

been discussed. Ozgen (2003) points out that knowledgeacquisition plays a critical role in creating opportunity.Ozgen explains that accessing to industry related informationcould update individuals knowledge base, and gain insightsin recognizing new opportunities. Ozgens (2003) empiricalstudy shows that entrepreneurs who are actively exposed toinformation flow related to industry are positively inrecognizing entrepreneurial opportunity recognition.

Ozgen (2003) defined the social perspective asinterpersonal network, includes weak-tie network, strong-tienetwork and mentors. She proposes that strong-tie network,weak-tie network and mentors are positive to entrepreneurialopportunity recognition process, which correspond with thestudy of Ardichvili, Cardozo and Ray (2003) and Orwa(2003). As for the personal traits factors, Ozgen (2003) takescognitive perspective and divides it into two dimensions,including self-efficacy and schemes. Self-efficacy is thesame as one of Ardichvili, Cardozo and Rays (2003)

personality traits. Prior knowledge is examined as one factorhaving impact on the mental process of scheme. In other

words, prior knowledge shapes the individuals mentalprocess in organizing information and identifyinginformation relevant to existing scheme. Prior knowledgecontains prior work experiences and education training. Theconcept of scheme is the same as Shanes (2000) andArdichvili, Cardozo and Rays (2003) study. Hence, priorknowledge and experiences had been discussed mostfrequently in studying factors influencing entrepreneurialopportunity recognition.

B. Entrepreneurial opportunity recognition and innovationDanneels (2002) has examined five high-tech firms

product innovation process, and points out that a firmscompetencies related to technology and customer

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information are necessities for product innovation. Danneels(2002) stresses that the creation of new products requires thecombination of potential customers and potential technology.In other words, product innovation needs a firms resourcesrelated to current technology and customers. Shane (2000)indicates that technological advances and changes lead tonew markets or new materials exploration and exploitation.Shane (2000) has explored eight enterprises through in-depthcase studies and states that entrepreneurial opportunityrecognition means the entrepreneurs have the ability torecognize new knowledge to exploit new products andtechnology, including knowledge of markets, knowledge ofways to serve markets, knowledge of customer problems,and knowledge of technology. Therefore, entrepreneurialopportunity recognition may lead to better deciphering andunderstanding of the new knowledge or technology forinnovation.

However, entrepreneurs easily fail to identify andrecognize the possible opportunities for new processes, new

products, new markets, or new process creations. Kirzner(1973) indicates that the distribution of information insociety influence the discovery of entrepreneurialopportunities. In other words, although technology changesgenerate a range of opportunities, not every entrepreneur isable to discover these opportunities. Venkataraman (1997)

proposes that opportunities do not appear in a well-packagedinformational form. That is, the process of discoveringopportunities depends on peoples ability and willingness tosearch for. External pressures, for example, technologychanging, stimulates opportunity recognition. Nevertheless,

people might not able or unwilling to pay attention to it, andleads to lost the opportunity (Stevenson & Gumpert, 1985).In short, some people cannot discover particularentrepreneurial opportunities. Only those who recognize thatthe opportunities exist and value them can they then earn

profits from these new opportunities (Ardichvili, Cardozo &Ray, 2003; Shane, 2000; Shane & Venkataraman, 2000). Asthe result, the factors that influence entrepreneurialopportunities recognition and identification have beendiscussed by scholars from different perspectives.

V. DISCUSSIONThe proposed research would contribute by advancing

the innovation, entrepreneurship and entrepreneurial

opportunity recognition literatures. From a pragmaticperspective, performance improvement, such as innovation,at the individual, group, and organization levels is becominga critical imperative in organizations. Human resourcedevelopment professionals are being increasingly challengedto help develop performance improvement infrastructures.Therefore, understanding how to maximize such processesmay enable human resource professionals to engage at morestrategic levels to promote performance improvement.Additionally, these literatures and body of knowledge

provide invaluable leverage for further innovative strategic inHRD organizational performances.

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