The Relationship Between Intel - Capital Innovat - Competitive - Advantage 2010 PDF

Proceedings
of the
5th European Conference
on Innovation and
Entrepreneurship
Edited by
Alexandros Kakouris
Copyright The Authors, 2010. All Rights Reserved.
No reproduction, copy or transmission may be made without written permission from

the individual authors.
Papers have been double-blind peer reviewed before final submission to the
conference. Initially, paper abstracts were read and selected by the conference
panel for submission as possible papers for the conference.
Many thanks to the reviewers who helped ensure the quality of the full papers.
These Conference Proceeding have been submitted to the Thomson ISI for indexing.
Further copies of this book can be purchased from

http://academic-conferences.org/2-proceedings.htm
ISBN: 978-1-906638-73-3(CD)
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Contents
Paper Title Author(s) Page
No.
Preface vii
Conference Committee members viii
Biographies of Conference Chairs, Programme Chair, Keynote Speaker and Mini-track Chairs ix
Biographies of contributing authors xi
The Effects of Process Innovation in Logistics Zafer Acar and Ayşe Günsel 1
Service
Exploring Underlying Beliefs on Youth Chrysa Agapitou, Sofia Tampouri, Petros 10
Entrepreneurship of Higher Education Graduates Bouchoris, Nikolaos Georgopoulos and
in Greece Alexandros Kakouris
The Capitalization of Intellectual Assets: Evidence Tamir Agmon and Ido Kallir 18
From the Innovative Technology Sector in Israel
Business and Entrepreneur Characteristics Sulaiman Ainin, Yusniza Kamarulzaman, 31
influence on Business Performance of Abdul Ghani Farinda and Anna Che Azmi
Professional Small Medium Enterprises
The Relationship Between Intellectual Capital, Ali Ekber Akgün, İpek Koçoğlu, Halit 42
Innovation and Competitive Advantage Keskin, Hüseyin İnce and Salih Zeki
İmamoğlu
Towards Collaborative Open Innovation Maria Antikainen 52
Communities
Perceived Causes of Business Failure: An Zahra Arasti 61
Empirical Study of Iranian Entrepreneurs
Significance and Impact of Internet on the Reza Asghari and Steven Gedeon 70
Entrepreneurial Process: e-Entrepreneurship and
Completely Digital Entrepreneurship
The new Laws of Technological Innovation: Claire Auplat 77
Looking at the Case of Nano-Entrepreneurship
and Policy-Making
A Conceptual Model for Developing Venture Olutoye Ayodeji 86
Capital in Emerging Economies
What About a Fresh new Start? Public Opinion on Ann-Sophie Bouckaert, Ruth DeVreese and 94
Bankruptcies in Flanders Carine Smolders
Entrepreneurial Networks: The Analysis of a Tina Bratkovič, Boštjan Antončič and Alex 101
Micro-Firm Entrepreneur’s Personal Network DeNoble
Organizational Framework Conditions, Maria de Lurdes Calisto and Soumodip 112
Organizational Culture and Intrapreneurship in Sarkar
Hospitality: A Case-Study
Improving Creativity Results and its Matilde Martínez Casanovas, Francesc 121
Implementation in Organizations Using Creative Miralles, Marcos Gómez and Rafael García
Techniques Through Experiential Learning
Training
Technology Transfer Approaches for Early Stage Sérgio Casimiro Christos Ioakimidis,Sung 129
Desalinization Technologies Jae Kim, Priyanka Bakaya and Paulo
Ferrão
i
No.
Phasic Effects of R&D Subsidy on Firm Kawon Cho 139
Innovation
Business Start-up and Growth Motives of Lasandahasi de Silva 152
Entrepreneurs: A Case Study in Bradford, United
Kingdom
Bringing Enterprise Alive – Two ‘International’ Corina Edwards, Ted Sarmiento, Vicky 152
Case Studies in the Innovative use of Simulation Harte and Jim Stewart
Based Entrepreneurship Education
Opportunities in Projects and Innovative Thinking Anandasivakumar Ekambaram, Agnar 173
Johansen, Ole Jermstad and Andreas
Økland
Recycling Stock Market Using Information and Evangelos Ergen and Panayiotis Ketikidis 182
Communication Technologies: An Innovative
Service to Create a Micro-Trend for the
Environment
Entrepreneurial Intents of University Students: Irene Fafaliou 190
Evidence From Greece
Failing to Find the Business Model in the Case of Tiina Ferm and Olli Ojala 202
Mobile Direct Sales
The Importance of History for Entrepreneurial Sabrina Florkowski 209
Activities: A Regional Perspective
Resources for the Student Entrepreneur: Heather Fulford 217
Classification and Application
An Examination of Reduced Potential for Laura Galloway and Abigail Marks 223
Innovation and Enterprise in an ICT Cluster
The Relation Between Organizational Learning Parvaneh Gelard and Seyed Pooya 229
Capability and Product Innovation Performance: Mirsalehi
An Empirical Test in Iranian Organizations
The Relationship Between Strategic Leadership Parvaneh Gelard, Seyed Pooya Mirsalehi 238
and Innovation and Korosh emami saleh
From Bad to Worse? The Survival of Guanxi and Francois Goxe and Darryn Mitussis 248
Corruption in the Evolving Institutional and Legal
Context
Intermediaries in the Management Process of Susanne Gretzinger, Holger Hinz and 255
Innovation: The Case of Danish and German Wenzel Matiaske
SMEs
Technology Audit: An Empirical Study on SMEs Ayşe Günsel and Dilek Çetindamar 263
of Istanbul
An Evolutionary View of Innovation and Economic Naciba Haned 273
Performance: A Firm Level Analysis
Competent to Innovate: An Approach to Personal John Howard 282
Development to Improve Innovation Competency
in SME’s
Identifying Entrepreneurial Characteristics and Amy Hsiao 291
Opportunities in Technology Entrepreneurship
ii
No.
Radical innovation versus transformative learning: Alexandros Kakouris 299
a Kuhnian reading.
The use of Interactive new Media art in Eva Kekou 306

Education: Crossings
Innovation, Technology and Expression: Eva Kekou and Martin Riese 311
Audience and Media Art Practices-The Example
of the Vienna Underground/Third Woman Project
Regional Innovation and Competitiveness: Panayiotis Ketikidis, Sotiris Zigiaris and 317
Analysis of the Thessaloniki Metropolitan Region Nikos Zaharis
The Entrepreneurial Framework in the Greek Ioannis Kinias and Nikolaos 327
Market of Renewables Konstantopoulos
Consumer Integration: Antecedents and Sabine Kuester and Monika Schuhmacher 335
Consequences
Is Open Innovation Open? Evidence From the Mikko Laine and Bettina Maisch 345
Most Innovative Firms and the Most Valuable
Brands
Entrepreneurship, the last chance for Indogenous Catherine Léger-Jarniou and André Jaunay 352
Development?
Perceived Value of Entrepreneurship: A Study of Jun Li and Lingfei Wu 362
the Cognitive Process of Entrepreneurial Career
Decision
High-Tech Start-up Innovation in Wuxi and Yipeng Liu 371
Shanghai, PR. China Embedded in the
Institutional Environments
Design Against Other Determinants of Polish Lukasz Mamica 380
Firms Competitiveness
Open Innovation: Activating the Entrepreneurial Vassilis Mantas and Klas Eric Soderquist 387
Mindset
Do Veterans Make Significantly More Successful Martin McDermott 395
Franchisees? A Comparative Study on the Traits
of Veterans and Successful Franchisees
Literature Review
Marketing Innovation and Innovative Capability of Jacinta Moreira and Maria José Silva 403
Marketing: Study of Portuguese Firms
Are Ugandan Entrepreneurs That Insulated From Rebecca Namatovu, Samuel Dawa and 411
the Global Economy? Fiona Mulira
Promoting Service Culture in Technical Trade: Maaria Nuutinen, and Tiina Valjakka 420
Co-Learning in Roundtable Discussions
Fast Forward to a Standard Business Information Elmarie Papageorgiou and Herman de 430
System: Strategic Business Management Tool for Bruyn
Businesses in South Africa
The Role of Information and Enterprise Systems Avraam Papastathopoulos and Christina 439
in the Achievement of the Organization’s Internal Beneki
Process Innovations: Findings From an
Investigation in the USA Manufacturing Sector
iii
No.
Conceptual Fundamentals of the Long Wave Ruslan Pavlov 448
Theory and the Innovative Potential of the
Russian Economy
The new Approaches in Logistics Services Nataša Pomazalová, Zbyšek Korecki and 453
Accomplishment Samuel Antwi Darkwah
Fostering Innovation in Brazil Through Private Caio Ramalho 461
Equity and Venture Capital Public Policies
Innovation Diffusion and non-Equity Networks: Marco Remondino, Marco Pironti and 472
The Impact of Biased Perception Roberto Schiesari
Eco Innovation Practice and Romanian SMEs Valentina-Ofelia Robescu 480
Business Transfer Decisions: What Matters? Geraldine Ryan and Bernadette Power 489
Evidence From Scotland and Ireland
Banks Lending To Farmers in India Navjot Sandhu and Javed Hussain 497
SME Market Entry in Transition Economies: The Tine Schrammel 507
Potential of Cluster Initiatives to Fill Institutional
Voids
Challenges Faced by Women Refugees in Ayadurai Selvamalar 514
Initiating Entrepreneurial Ventures in a Host
Country: Case Study of UNHCR Women
Refugees in Malaysia
Innovative Approach for Forming Information Elena Serova 523
Infrastructure of a Company
Limited Absorptive Capacity, Distinct Evangelia Siachou and Anthony Ioannidis 529
Performance Outcomes: Toward a Differentiated
Performance Framework of Knowledge
Acquisition Within Knowledge Intensive Alliances
The Dynamics of Innovation Networks: The Role Jorge Simões and Maria José Silva 540
of Higher Education Institutions in Venture
Creation
Patterns in Student Business Ideas: Experience Pantoleon Skayannis, Yeoryios Stamboulis, 547
at the University of Thessaly Petros Rodakinias, Yeoryios Kaparos and
Anna Zygoura
Policy Shifts in Labour Market Liaising and Pantoleon Skayannis, Yeoryios Stamboulis, 555
Entrepreneurship in Greek Higher Education Petros Rodakinias, George Kaparos and
Anna Zygoura
Knowledge Integration: The Case of a Maria José Sousa 564
Portuguese Organization
Enforcing the Local Embedding of Enterprises by André Spithoven and Mirjam Knockaert 571
Networking Activities in Business Centres
An Attempt at Explaining the Present Economic Peter Štrukelj 580
Crisis: A Heterodox View
Pragmatism as a Philosophy for Education for Vesa Taatila 587
Entrepreneurship - Case: Laurea Business
Ventures
iv
No.
The Process of Social Innovation: Multi- Kanji Tanimoto 594
Stakeholders Perspective
Developing Indicators for Sustainable Nicole Taragola, Fleur Marchand, Joost 602
Entrepreneurship in Flemish Agriculture Dessein and Ludwig Lauwers
Research Experts’ Role in Knowledge Peter Teirlinck and André Spithoven 611
Development and Exchange in Formal Research
Cooperation
Social Networks and Social Capital Formation by Rivanda Meira Teixeira and Norma Pimenta 621
Entrepreneurs: A Multiple Case Study in the State Cirilo Ducci
o Paraná, Brazil
Development of Education and Potential Gabriela Teodorescu and Camelia Fratila 629
Opportunities for Entrepreneurship in Romania
Digital Games for Entrepreneurial Learning, Panagiotis Tragazikis, Sotiris Kirginas and 636
Innovation and Creativity: Examples and Dimitris Gouscos
Evaluation Criteria
Space Image and Entrepreneurs’ Life: Aesthetics Dun-Hou Tsai, Shao-Yi Lin and Chih-Hao 645
in Entrepreneurial Process Tsai
Social Innovations Facilitating the Quick Adoption Olavi Uusitalo 651
of eBanking in Finland
Strategic Human Resource Management Role in Daria Volchek and Kyllikki Taipale-Erävala 663
a new Business Development: A Literature
Review
Empirical Study on Commonness of Fast- Haisu Wang 672
Growing Private Enterprises in China: Study on
Listed Companies on GEM in Shenzhen Stock
Exchange
Who can be China’s Entrepreneurs? Sujuan Xie, Liang Guo and Lawrence King 680
Can Firms Without Center Technology Gain a Kiyohiro Yamazaki 692
Competitive Advantage? Case Study of Sony in
the Flat Panel TV Industry
Entrepreneurial Discovery in a Transitional Michael Zhang 700
Economy: China 1979-2009
Legal Regulation of Innovativeness can Spur Elizabeta Zirnstein, Valentina Franca and 707
Innovation Efforts Mitja Ruzzier
PhD Research 715
Network Centrality and Firm Innovation: A Social Judith Mc Knight and Nola Hewitt Dundas 717
Network Analysis of the Monaghan Furniture
Industry
IT-Related Innovation Adoption and Sedigheh Moghavvemi and Noor Akma 728
Entrepreneurship Mohd Salleh
Work in Progress 737
Innovation: A Question of Developing and Knut Aasland and Morten Hatling 739
Cultivating a Culture?
Entrepreneurship and the Equality of Chances: Anca Dodescu and Adriana Giurgiu 743
An Inter-Regional Model of Women‘s School of
Entrepreneurship
v
No.
Study Concerning the Identification and the Adriana Giurgiu and Anca Dodescu 746
Improvement of the Romanian Companies
Developing External Trade Activities’ Competitive
Advantages, for Maximizing the positive effects of
the EU accession
Innovation Platform Design Through Knowledge Dehua Ju and Beijun Shen 749
Services
Modes of Inbound Open Innovation in the Context Ilari Kaarela 752
of Dynamic Knowledge Creation
The Enhancers and Challenges of Collaborative Minna Kansola and Tiina Valjakka 758
Service Development Within Business Networks
Knowledge-Based Spatial Interventions for Charalampos Koutsoupakis 762
Economic Competitiveness: The Role of High-
Tech Innovation Clusters in Regional
Development
Impact of Knowledge Management on Innovation İbrahim Pınar and Burcu Kör 766
Entrepreneurial Learning: Practice as a Source Henk Schout and Saskia Harkema 771
for Learning and Business Success
Non-Academic Contribution 775
How “open” does your company want to be Gregor Jawecki and Michael Bartl 777
towards external creativity? Open innovation tools
and methods to access consumers’ knowledge
and creativity
vi
Preface
These proceedings represent the work of contributors to the Fifth European Conference on
Entrepreneurship and Innovation hosted this year by the National and Kapodistrian University of
Athens in Greece. The Conference Chair is Panagiotis Georgiadis, and the Programme Chair is
Alexandros Kakouris both from the Faculty of Informatics and Telecommunications, University of
Athens, Greece.
The opening keynote is given by Elena Panaritis, Panel Group, Washington DC, USA on the topic of
“Exploring social entrepreneurship”. The second day will be opened with a keynote from Amar Bhidé,
Visiting Scholar, Kennedy School of Government, Harvard University. Amar will address “Dangerous
Divergences: How Modern Finance Undermines Real Innovation”.
ECIE has grown and evolved over the past four years, but the key aim remains the opportunity for
participants to share ideas and meet the people who hold them. The scope of papers will ensure an
interesting two days. The subjects covered by the papers illustrate the wide range of topics that fall
into this important and growing area of research.
With an initial submission of 208 abstracts, after the double blind, peer review process there are 95
papers published in these Conference Proceedings. These papers represent research from Albania,
Belgium, Brazil, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Greece, India,
Iran, Ireland, Israel, Italy, Kuwait, Malaysia, Norway, Pakistan, Poland, Portugal, Romania, Russia,
Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Taiwan, The Netherlands, Turkey,
United Arab Emirates, Uganda, UK and USA.
I hope that you have an enjoyable conference.
Alexandros Kakouris, Programme Chair

Faculty of Informatics and Telecommunications
University of Athens, Greece.
September 2010
vii
Committee Members
The conference programme committee consists of key people in the entrepreneurship and innovation
community, both from the UK and overseas. The following people have confirmed their participation:
Nigel Adams, University of Buckingham, UK, Amiruddin Ahamat, Multimedia University, Malaysia,
Saleh Al-Jufout, Tafila Technical University, Jordan, Khedidja Allia, University of Science and
Technology, Algiers, Algeria; Ibrahim Al-Oqily, University of Ottawa, Canada; Senguttuvan
Annamalai, Madha Engineering College, India; Rogerio Atem De Carvalho, Instituto Federal
Fluminense, Campos, Brazil; Ashwini K Awasthi, MLSM College, India; Robert Atkinson, The
Information Technology and Innovation Foundation, Washington, USA; Claire Auplat, Imperial
College, London, UK; Alan Barrell, Centre for Enterprise Learning, University of Cambridge, UK;
Miroslav Baca, University of Zagreb, Varaždin, Croatia; Eric Bodger, University of Winchester, UK;
Benjamin Botchway, American University of Nigeria; John Bourne, Olin College, Massachussets,
USA; Sheryl Buckley, University of Johannesburg, South Africa; Luigi Buglione, Engineering.IT SpA,
Italy; Arie Buijs, Utrecht University, The Netherlands; Kevin Burt, University of Lincoln, UK; Elias
Carayannis, George Washington University, USA; Rogerio Atem De Carvalho, Instituto Federal
Fluminense, Campos, Brazil; Yanto Chandra, University of Amsterdam, The Netherlands; Paulo
Rupino Cunha, University of Coimbra, Portugal; Leo-Paul Dana, University of Canterbury, New
Zealand; Katrina Easterling, University of Winchester, UK; Maria Joao Ferreira, Universidade
Portucalense, Portugal; Heather Fulford, Aberdeen Business School, UK; Vasco Eiriz, University of
Minho, Portugal; Alea Fairchild, Vesalius College, Vrije Univ Brussels, Belgium; Burcu Felekoglu,
University of Cambridge, UK; Brendan Galbraith, University of Ulster, UK; David Gillingham, Coventry
University, UK; Andrew Goh, Interntational Management Journals, Singapore; Liang Guo, La Rochelle
Business School, France; Khaled Hamid, Virginia Commonwealth University, Richmond, USA; Saskia
Harkema, The Hague University of Applied Sciences, The Netherlands; Trish Kernan, University of
Winchester, UK; Gyeung-Min Kim, Ewha Womens University, Korea; Sam Kongwa, Walter Sisulu
University, South Africa; Codrin Kruijne, Utrecht University, The Netherlands; Kothandaraman Kumar,
Indian Institute of Management Bangalore, India; Jonathan Lean, University of Plymouth Business
School, UK; João Leitão, University of Beira Interior, Portugal; Jun Li, University of Essex, UK; Loykie
Lominé, University of Winchester, UK; Angeline Low, University of Technology Sydney, Australia;
Sam Lubbe, University of the North West, South Africa; Neil Marriott, University of Winchester, UK;
Juan Martínez, Universidad Politécnica de Cataluña, Spain; Ian McLoughlin, University of Newcastle
upon Tyne, UK; Zoran Mitrovic, e-Innovation Academy, CPUT, Cape Town, South Africa; Jens
Mueller, University of Waikato, New Zealand; Maurice Mulvenna, University of Ulster, Newtownabbey,
UK; Jan Nab, Utrecht University, The Netherlands; Desai Narasimhalu, Singapore Management
University, Singapore; Jukka Ojasalo, Laurea University of Applied Sciences, Finland; Mohand-Said
Oukil, King Fahd University of Petroleum and Minerals, Saudi Arabia; Jatin Pancholi, Middlesex
University, UK; Sean Pather, e-Innovation Academy, CPUT, South Africa; Dean Patton, University of
Southampton, UK; Catarina Ramalho, University of Lisbon, Portugal; Cheryl Rodgers, University of
Portsmouth, UK; Enrico Santarelli, University of Bologna, Italy; Simone Scagnelli, University of Turin,
Italy; Namchul Shin, Pace University, New York, USA; Dorotea Slimani, Innventia AB, Sweden; David
Smith, Nottingham Trent University, UK; Padma Srinivasan, ICFAI Business School, India; Thomas
Thijssen, University of Amsterdam, The Netherlands; Marko Torkkeli, Lappeenranta University of
Technology, Finland; George Tovstiga, Henley Business School, UK; Christopher Turner, University
of Winchester, UK; Catherine Wang, Royal Holloway, University of London, UK; Amy Hsiao, Memorial
University, Canada; Utz Weitzel, Utrecht University, The Netherlands; Charles Hofer, University of
Georgia, USA; Peter White, YTKO Ltd, Cambridge, UK; Paul Jones, University of Glamorgan, UK;
Shaker Zahra, University of Minnesota, USA
viii
Biographies of Conference Chairs, Programme Chairs and Keynote
Speakers
Conference Chair
Dr Panagiotis Georgiadis is Professor at the Faculty of Informatics and

Telecommunications of the University of Athens. He holds a B.Sc. in Physics,
M.Sc. and Ph.D. in Computer Science. He has been a regular member of the
Senate of University of Athens (1992-1994), director of the Computer Systems &
Applications Division of the Faculty (1994-1996), Secretary General for
Information Systems by the Greek Ministry of Finance (1997 - 2002) and
Secretary General of Public Administration and e-Government by the Ministry of
Interior and Decentralization (2003 - 2004). His research interests include
Innovative Entrepreneurship, Distributed Systems, Simulation and Management of Information
Systems. He has authored more than 60 scientific articles in international journals and conferences,
and he is the editor of the International Journal of Electronic Governance (IJEG).
Programme Chair
Dr Alexandros Kakouris is a part time lecturer of innovation and

entrepreneurship at the University of Athens. He received his Ph.D. in Physics
from the same university (1997) and postgraduate training on Distance Learning
from the Hellenic Open University where he served as a tutor for one academic
year. He has been a part-time professor of Space Science at the Hellenic Air
Force Academy (1995-2001) and has coordinated the Career Office of the
University of Athens from 2004 to 2008. He has written a book, articles in Physics,
Education and Entrepreneurship, and his current research interests include
experiential learning in Entrepreneurship Education.
Keynote Speakers
Elena Panaritis is an institutional economist. She spearheaded property rights

reform, particularly in Peru, while working at the World Bank. She lectures at Insead,
the Wharton School and Johns Hopkins University-SAIS. A social entrepreneur, she
now heads the investment advisory firm Panel Group, which invests in undervalued
property and provides counsel on transforming informal real estate and related public
policy. Her recent book is Prosperity Unbound: Building Property Markets with Trust
(Palgrave Macmillan, 2007).
Dr Amar Bhidé, previously the Laurence D. Glaubinger Professor of Business at

Columbia University, is currently a visiting Scholar at Kennedy School of
Government, Harvard University, USA and is writing a book on the financial crisis.
Bhidé served on the faculties of Harvard Business School (from 1988 to 2000)
and the University of Chicago's Graduate School of Business. A former Senior
Engagement Manager at McKinsey & Company and proprietary trader at E.F.
Hutton, Bhidé served on the staff of the Brady Commission which investigated the
stock market crash. Bhidé earned a DBA (1988) and an MBA with high distinction as a Baker Scholar
(1979) from Harvard. He received a B.Tech from the Indian Institute of Technology in 1977. His most
recent book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected
World, (Princeton University Press 2008) won the Association of American Publishers’ PROSE Award
for Professional and Scholarly Excellence in Business, Finance, and Management, and was in the
“Best of 2008” lists of the Economist, BusinessWeek and Barrons. Amar has been studying
entrepreneurship for more than 20 years and has written a number of books, business reviews and
other articles.
ix
Mini Track Chairs
Claire Auplat is in charge of a program which explores the relations between
institutional change and entrepreneurship in the field of new technological ventures,
with a focus on the development of nanotechnologies. Her areas of interest cover
public policy and entrepreneurial dynamics, innovation and sustainable
development. She has published widely in these areas and is a member of the
editorial board of Society and Business Review, International Journal of
Entrepreneurship and Small Business and Scandinavian Journal of Management.
Dr Heather Fulford is Reader in Entrepreneurship and Academic Director of the

Centre for Entrepreneurship at Aberdeen Business School, The Robert Gordon
University, Scotland. Her research interests include social enterprise start-up and
governance and social entrepreneurship education. She is currently lead academic
on a funded project with a social enterprise in Aberdeen. Her lecturing
commitments included postgraduate and undergraduate modules on new venture
creation.
Ina Freeman is an Associate Professor at Groupe Sup de Co, La Rochelle. Her research interests
are in the human aspects of international business and marketing including ethics and human
behaviour. She is also interested in various aspects of tertiary education including corporate
governance across national borders.
Brendan Galbraith is a lecturer in the Ulster Business School, University of

Ulster, Northern Ireland. He is the guest editor of an upcoming special issue in
the Technology Analysis and Strategic Management Journal “Managing open
innovation intermediaries in the technology transfer process” and has published
widely in academic journals. He is a principle investigator for two newly funded
FP7 open innovation-related projects – ‘MAPEeR SME’ (Making Progress and
Economic Enhancement a Reality for SMEs) [FP7-SME-2009] and PARTERRE
(Electronic Participation Tools for Spatial Planning and Territorial Development)
[ICT-PSP-2009-3bis] and is a co-founder of the TRAIL Living Lab.
Liang Guo is researcher of Groupe Sup de Co La Rochelle, a private teaching and

research institute in France. He is doing his PhD in social and political sciences at
the University of Cambridge, UK
Dr. Jun Li is a Senior Lecturer of Entrepreneurship and Innovation at University of

Essex, and Editor of Journal of Chinese Entrepreneurship published. He is a Visiting
Professor at Fudan University, Zhejiang University, Zhongnan University of Economics
and Law and Shantou University in China. He recently edited three special issues on
topics of entrepreneurship and innovation in China.
Dr Jukka Ojasalo is at Laurea University of Applied Sciences in Espoo,

Finland. He is Principal Lecturer and the Head of Master's Degree Programme.
He has earlier been Professor of Marketing at Lappeenranta University of
Technology. He has also been Professor of Marketing at Turku School of
Economics and Business Administration and the head of Marketing Program in
the Pori Unit. He is Docent (Adjunct Professor) of Professional Services
Management at Helsinki School of Economics. He is also Docent (Adjunct
Professor) of Quality Management at Helsinki University of Technology. He
completed his Ph.D. in Business Administration at the Swedish School of Economics and Business
Administration in Helsinki, Finland in 1999. He holds M.Sc. (Marketing) from University of Tampere
and M.Sc. (Software Engineering) from Tampere University of Technology.
x
Dr Renaud Redien-Collot is Professor of Entrepreneurship and Deputy Director
of Advancia, the School of Entrepreneurship of Paris Chamber of Commerce.
He founded the Masters Degree in Entrepreneurship at Advancia in 2005. He
launched the French-American Conference of Entrepreneurs (FACE) in 2007. He
is presently a member of the Board of Administration of Académie de
l'Entrepreneuriat and at the head of the Académie de l'Entrepreneuriat's network
dedicated to the development of research in the field of gender,
entrepreneurship, and innovation. Since 2008, he has been a member of the
Jury of the DELL and ICSB global Prize that rewards the most innovative SMEs for their development
of Information System. As a member of the Board of Administration of the E. Roosevelt Foundation
(1994-2000), he was in charge of several projects that have stimulated the development of
entrepreneurship education and the emergence of innovative start-ups in the USA and in Europe. He
will be the Chair of the 2010 EFMD Entrepreneurship Conference. His research interests include
minority entrepreneurship, theories of innovation, leadership and intrapreneurship, entrepreneurship
education, epistemology of the praxis in the realm of entrepreneurship, and the development of public
and private discourse about entrepreneurs and entrepreneurship.
Professor Chunlin Si is Professor of Management Science, Director of

Research Centre for Entrepreneurship and Venture Capital at Fudan University,
China, and Editor of R&D Management in China. He is also the Honorary
Professor at Zhejiang University and Changan University, China. He has
published widely in the field of entrepreneurship and innovation in China and
abroad.
Elaine Thompson is with Invest Northern Ireland (INI), prior to which she worked
as commercial manager for Smurfit Recycling and was Sales and Marketing
Director in start-up CWS Recycling, which she was a share holder. Elaine has
recently carried out empirical research on open innovation practices in UK high-
tech SMEs. Through Elaine’s role with INI, she has been involved with
programmes that support and develop collaborative networks in Northern Ireland
including Smart Grid Ireland, Global Marine Alliance and Global Wind Alliance.
Dr Sebastien Tran is the Academic Director of Groupe Sup de Co, La Rcohelle. He is a graduate of
L’Universite Paris IX Dauphine (Ph.D.). His areas of interest are Strategy, Management of People and
Organizations, and Environment. He is active in publications in this area, having published in some
international conferences, Revue Française de Gestion, and International Journal Technology
Management.
Biographies of contributing authors (in alphabetical order)

Dr. Knut Aasland is professor of engineering design at the NTNU, Norway’s leading technical
university. He teaches design methodology and supervises practical design projects as well as design
science projects. His research has focused on design methodologies for small companies and on
strategies and methods for product program development.
Abdul Ghani Farinda, is a lecturer in the Department of Marketing, Faculty of Business and
Accountancy, University of Malaya, Malaysia. Her current interest lies in the area of hospitality,
tourism and services marketing.
A.Zafer Acar is an assistant professor at the Vocational School in the Okan University (Istanbul,
Turkey). He received his Ph.D. in business management from Gebze Institute of Technology. His
research interests include strategic management, resource-based view, organizational capabilities,
competitiveness and supply chain issues.
Joy Tuoyo Adu holds a B.Eng Degree in Civil Engineering and two M.Sc Degrees in Structures and
Water resources and Environmental Engineering. She joined the Department of Civil Engineering,
Yaba College of Technology in January 1999. She is presently a trainer/facilitator in the Centre for
Entrepreneurship Development of the college.
xi
Chrysa Agapitou is Ph.D Candidate at the Business Administration Department of the University of
Piraeus, Greece. She holds bachelor degree in Business Administration from the University of
Piraeus, Greece; and Master of Science (MSc) in Information Technology Management and
Organisational Change from Lancaster University, United Kingdom. Her research interest focuses on
Strategic Management, Entrepreneurship and CRM.
Maria Antikainen is a Research Scientist in the Business and Technology Knowledge Centre at VTT.
She leads an open innovation virtual team and has been involved in various projects related to open
innovation and social media. Maria has also worked as a part-time lecturer and supervisor at
Tampere Polytechnic. Maria finished her PhD studies at the University of Tampere in March 2007.
Her doctoral thesis concerned the attraction of company online communities from the relationship
marketing perspective. She has several publications on open innovation, company online
communities and social media.
Zahra Arasti is Assistant professor, entrepreneurship faculty, university of Tehran, Iran. She has a
PhD. in management, University of Toulon, France. M. Sc in Industrial Engineering, Institute National
Polytechnic of Grenoble (INPG), France. B. Sc in Industrial Engineering, Sharif University of
technology, Tehran, Iran. Research interest: women’s entrepreneurship, entrepreneurship
environment, entrepreneurial policy, entrepreneurship education
Reza Asghari, PhD holds the first joint endowed chair of Entrepreneurship at the Technical University
of Braunschweig and Brunswick European Law School in Germany. He is also the head of the
Institute of Entrepreneurship. His research is focused on impact of information technology on
enterprise structures and entrepreneurial process.
Selvamalar Ayadurai is a Consultant Trainer with a Training & Consultancy Firm based in Malaysia
and an Adjunct Lecturer with the University of Newcastle, Australia. She is the Founder and
President of a Malaysian NGO called TECH Outreach which creates self sustainable communities
through micro credit financing and entrepreneurship development.
Olutoye Ayodeji is the Managing Consultant of Tilak Investment, Pretoria, and a postgraduate
student at Vaal University of Technology, Vandebijlpark, Gauteng, South Africa. An entrepreneur,
business consultant and seasoned academic. His research interest is in entrepreneurship
development and sport sponsorship, he’s a member of several professional and academic bodies.
Ann-Sophie Bouckaert is a scientific researcher at the Faculty of Applied Business and ICT at
University College Ghent, Belgium. She obtained a Master in Applied Economic Sciences at Ghent
University and a Master of Science in Marketing at Amsterdam University. Her research broadly
focuses on second-chance entrepreneurship.
Dilek Çetindamar is a professor at Faculty of Management in Sabancı University (İstanbul, Turkey).

She is also the director of Competitiveness Forum. She received his Ph.D. in business management
from Istanbul Technical University.. Her research interests include technology and innovation
management, urban studies, entrepreneurship and organizational behavior.
Anna Che Azmi, is a Senior Lecturer in the Department of Management Accounting and Taxation in
the Faculty of Business and Accountancy, University of Malaya, Malaysia. Her research interests lie in
the fields of International Accounting, Financial Reporting and Taxation.
Sam Dawa (BFST, MBA: Makerere) is a lecturer in Makerere University Business School. His
academic interests include entrepreneurship, organizational behavior, business ethics and business
computing.
Lasandahsi R. De Silva is a Doctoral Student at Innovation Management and Policy Division,

Manchester Business School and employed as a Graduate Teaching and Research Assistant at the
school. Simultaneously, she serves as an Associate Teaching Staff member and a Research
Assistant at the Bradford University School of Management, at which she completed her MBA with a
Distinction. Presenter – Pluriactivity, Entrepreneurship and Socio-economic Success of Farming
Households
xii
Anca Dodescu is Dean of the Faculty of Economic Sciences of the University of Oradea (further
references available on the web: www.ancadodescu.ro, http://steconomice.uoradea.ro), and Manager
(National Co-ordinator) of the Project entitled "Entrepreneurship and the Equality of Chances. An
Inter-regional Model of Women School of Entrepreneurship" (AntrES; please, visit: www.antres.ro).
Corina Edwards is responsible for entrepreneurship development at Swansea University:

extracurricular activities, graduate business support and embedding entrepreneurship. Corina has
senior management experience within her own businesses, WGIS, PNE and Shell Livewire (Shell
social investment programme) Corina worked with UK university consultants in 2001 at a Business
Symposium for HE, businesses and government in Cairo.
Anandasivakumar Ekambaram works as a research scientist at SINTEF – Technology and Society,

Productivity and Project Management, Trondheim, Norway. He obtained his doctoral degree, which
focuses on project management and knowledge transfer in organisations, from the Norwegian
University of Science and Technology (NTNU). Besides his research work, he is involved in teaching
activities at NTNU.
Evangelos Ergen holds a first degree in Business Computers from North College and a Master of
Science in Technology, Innovation & Entrepreneurship from the University of Sheffield-CITY College.
His professional experience comes mostly from the fields of Management in Education combined with
IT and Logistics.
Irene Fafaliou is an Assistant Professor in Small Business Support Policies at the Economics
Department of the University of Piraeus, Greece. She holds a PhD from Leicester University, UK. She
teaches Industrial Economics, Entrepreneurship and Innovation Management at the undergraduate
and graduate level. Her work has been published in a number of leading referred journals.
Tiina Ferm (senior lecturer, M.Sc: engineering) is a coordinator of Turku University of Applied
Sciences Living Lab for Well-being and ICT (TWICT). Her main interests are living lab approach
applied into ICT development, soft systems thinking and object- and aspect - oriented software design
methodologies particularly when applied to the fields of eDemocracy and eParticipation.
Sabrina Florkowski is a Ph.D student at the School of Management, Blekinge Institute of

Technology, Sweden and is currently beginning the second year of her studies. Her areas of interest
cover entrepreneurship, innovation and regional development
Parvaneh Gelard is an Assistant Professor and faculty member of management Islamic Azad
University south Tehran branch, has a PhD in Management Science/ Organizational behavior
management. I have many articles in the Journals and International & national Conferences about
entrepreneurship and management.
Adriana Giurgiu is Director (National Co-ordinator) of the SVACEX Project; Scientific Director of the
Research Centre on Sustainable Development and Competitiveness; Jean Monnet Professor and
Module Leader - "EU Sustainable Development and Competitiveness"; Specialist in International
Trade and European Economics; Faculty of Economic Sciences of the University of Oradea
(http://steconomice.uoradea.ro).
Francois Goxe (M.B.A, Mres Org.Sc., Msc Manag., BA Mandarin) is currently a PhD student, from
Universite Paris Dauphine. He is also a lecturer in Strategic Management, Universite Paris Dauphine.
He has been a former consultant for Western (Australian) SMEs development in the P.R. China. His
research interests include international entrepreneurship, social networks and internationalisation,
internationalisation in China, intercultural management and leadership.
Susanne Gretzinger is Assistant Professor at the University of Southern Denmark, Sønderborg. She
holds a PhD from the University of Paderborn within the field of strategic sourcing. The research
interest is within the field of "Strategic Marketing" and "Organizational Relationship Management".
Special issues are strategic sourcing, innovation management, relationship including creation of
networks and clusters.
Ayşe GÜnsel is a research assistant at Business Administration Faculty in Gebze Institute of

Technology (Kocaeli, Turkey). She received his Ph.D. in business management from Gebze Institute
xiii
of Technology. Her research interests include technology and innovation management, knowledge
management, entrepreneurship and organizational behavior.
Naciba Haned from the Faculty of Economics and Management, University Lumière, Lyon 2.
Department of Economis LEFI (Laboratory of economics and institutions). Current status is PhD
candidate in economics, Assistance Professor ESDES business school of Lyon University. Research
topics are innovation, intellectual property assets and corporate performance; corporate social
responsibility and institutional regulations.
John Howard is a senior lecturer at UCLAN in health informatics. John's research interests include
change management, competency and training needs analysis. He was the main researcher on the
development of the EQOMM, the maturity model developed by the Unit to analyse and improve equal
opportunities policies, and on the TNAMM competency development tool. He has worked with the
Czech Ministry of Health on data coding issues.
Amy Hsiao is an associate professor in the Faculty of Engineering and Applied Science at Memorial
University of Newfoundland. She heads the Masters in Engineering Management Program and is
cross-appointed with the Faculty of Business Administration. Her research focus is in the area of
strategic management, technology entrepreneurship, organizational behavior of tech-based ventures,
and materials science and engineering.
Christos Ioakimidis, (Thessaloniki, Greece), is an Assistant Professor at IST (MITPortugal) in the

field of Sustainable Energy Systems and a Visiting Scholar at MIT Energy Initiative. His research
interests are in energy modeling, economic operation of power systems, integration of renewable and
non-renewable energy systems, energy innovation/ventures and nanotechnology materials applied on
energy issues.
Gregor Jawecki is senior project manager for the company HYVE and graduate at Innsbruck
University School of Management. Both his professional as well as academic focus is on virtual
customer integration and open innovation. He has conducted projects in several industries and has
shared his experiences in both academic and non-academic conferences and journals.
Dehua Ju, a professor of CS and business school at East China University of Science and
Technology and VP of ASTI, an international software company. He served as the (Industrial)
Advisory Board member of IEEE Software for ten years, a senior member of IEEE. He is a State
Distinguished Expert in China.
Ido Kallir Ph.D. Finance - Tel Aviv University (Expected 2010) Research areas: Learning and
Convergence models, Decision making, Innovation Finance. Lecturer at the College of Management
Veteran of the Israeli high-tech sector, with more than 15 years of experience.
Yusniza Kamarulzaman, is a Senior Lecturer in the Department of Marketing in the Faculty of

Business and Accountancy, University of Malaya, Malaysia. Her research interests lie in the fields of
E-Marketing, Consumer Behaviour, Tourism Marketing and Retailing.
Eva Kekou is a researcher interested in collaborative media art practices, public space, interactive
media and psycho geography. She taught at the University of the Aegean and a number of academic
institutions in the United Kingdom. She has a multidisciplinary academic background (history of art,
political science and languages) and lived in the United States, United Kingdom, Luxembourg,
Austria, and Greece. She works upon completion of a doctoral thesis on media art practices and
audience theories.
Panayiotis Ketikidis is the Vice Principal for Research, Innovation & External Relations of CITY
College – An International Faculty of the University of Sheffield, and the Chairman of the
Management Committee & Academic Director of the Doctoral Programme at the South East
European Research Centre (SEERC). He has over 25 years of experience in management,
education, research.
Ioannis Kinias is a Mechanical Engineer at Aristotle University of Thessaloniki, Greece, and has a
MSc Engineering Management at Brunel University, UK. Also a PhD student at the University of the
Aegean-Department of Business Administration
xiv
İpek Koçoğlu is currently a MSc. student in science and technology strategies at Gebze Institute of
Technology, at the same time she works as an assistant student in Sabanci University, Turkey in a
TUBITAK (Science and Technology Research Comission) funded project. She earned her bachelor
degree in Sabanci University, in manufacturing systems engineering in 2008.
Burcu Kör received B.S. degree in Computer and Education Technology, M. A. Degree in
Management Information Systems from Bogazici University. I study my Ph.D. degree in Management
and Organization at Istanbul Universty. I work as a specialist at Bogazici University.
Charalampos Koutsoupakis graduated from the faculty of Architecture (2007) of Aristotle University
of Thessaloniki, Greece he is currently completing his MSc in Urbanism in the Delft University of
Technology, The Netherlands. His thesis project deals with ‘innovation clusters in the suburban area
of Thessaloniki’ and the paper submitted is part of his research on high-tech concentrations.
Mikko Laine, M.Sc.(Tech.), is a researcher and project manager at the Software Business Lab at
Aalto University's School of Science and Technology. He has graduated from, and is a doctoral
candidate at the Department of Industrial Engineering and Management and is pursuing his doctoral
thesis on open innovation in online communities.
Shao-Yi Lin is a PhD researcher at the Department of Business Management in National Sun Yat-
sen University. Her research interests include entrepreneurship in process view and narrative inquiry.
Several Chinese journal papers and English conference papers have been published.
Yipeng Liu is a research associate of the Institute for SME research at University of Mannheim in
Germany. He obtained B.A. from Shanghai Jiaotong University and M.Sc. from Technical University
of Munich. He was Visiting Scholar at Columbia Business School. His research interests center on
international entrepreneurship, with a focus on emerging economies.
Lukasz Mamica, Ph.D. is a senior lecturer at Cracow University of Economics (Department of Public
Economy and Administration). Author of many publications concerning the innovation policy, firms
competitiveness and design policy. He is an Editor of periodic “Innowacyjny Start” (Innovative Start).
He cooperates with Institute of Industrial Design in Warsaw.
Vassilis Mantas (Mech.Eng., MSc, MBA) is a PhD candidate at the Department of Management
Science and Technology in Athens University of Economics and Business (AUEB), researching Open
Innovation Management under the supervision of Associate Professor Klas Eric Soderquist. Currently
he is a faculty member of Mechanical Engineering Department in Halkida Technological Educational
Institute (TEI).
Matilde Martínez Casanovas is a Ph.D. candidate, Business Engineering School, La Salle, Ramon
Llull University. Psychology Degree, Barcelona University. Senior Consultant in Orbita97 Innovation
Company, consulting group specialized in developing people Innovation competencies and
implementing Innovation processes in companies. She has more than 16 years in training activities
and 9 years managing Innovation projects.
Martin McDermott is from Williams Township, PA in the United States. He is a full-time Marketing
Professor for Kaplan University. He is also pursuing a doctorate degree with a concentration in
Marketing from Argosy University. He has hosted a weekly radio show for 4 years on the topics of
entrepreneurship and franchising.
Judith McKnight is a final year PhD student in the School of Management, Queens University
Belfast. She has a first class honours degree from the same university in Business Management. Her
thesis explores the relationship between Network Structure and Firm Innovation within a high and low
technology sector.
Pooya Mirsalehi majored in mechanical engineering in B.S Course and I have got a master degree in
industrial engineering. Pooya works in the Iran Power Development Company as project control and
planning engineer.
Darryn Mitussis PGCHE, BEcon, Bcom Hons, MSc, DPhil, MA. Co-Director of Msc in International
Business, MSc Admissions Tutor (International Business), Nottingham University, Nottingham, UK.
xv
Lecturer in Marketing. Research interests include Marketing, consumption and identity; consumption
in China; rise of Chinese economy; rise of Chinese consumer.
Sedigheh Moghavvemi was born in Iran, and did her master in Iran. Her master research was about
the effect of Information technology on job creation in Iran. She is a PhD student in university of
Malaya and is working on IT-related innovation adoption and Entrepreneurship, for her thesis.
Jacinta Moreira is Ph.D. Student at the University of Beira Interior (UBI), Covilhã, Portugal. Her
academic background includes a Master’s degree in Management specialization in Marketing, UBI.
She teaches management at Polytechnic Institute of Leiria. She is a research fellow in NECE–
Research Unit in Business Science. Expertise: Marketing and Innovation.
Fiona Mulira (BBA: HONS, MBA: Makerere, MPhil: Cambridge) has seven years experience as a
Lecturer in the Human Resource Department of Makerere University Business School. She has been
involved in research endeavours ranging from human resource management, education and training
to entrepreneurship
Rebecca Namatovu. Makerere University Business School: BBA Finance, MSC, Accounting and
Finance MUK. Rebecca has eight years of experience as a lecturer in Makerere University Business
School and she has been involved in entrepreneurship research for the last seven years. She has
been part of the Global Entrepreneurship Monitor (GEM) research project since 2003 when it started
in Uganda. She is currently managing the project. She is also currently the country coordinator, of
Youth and employment: the role of entrepreneurship in African economies (YEMP.) A DANIDA funded
project that aims to analyze the role of entrepreneurship in generating youth employment in African
countries in both urban and rural areas. She has been involved in the Students’ Training for
Entrepreneurial Promotion, (STEP) where she designed module on finding starting capital.
Maaria Nuutinen, PhD (psych.), Senior Research Scientist, VTT. Since 1997 she has worked at VTT
Technical Research Centre of Finland, currently as the manager of Renewal and Development of
Organizations team. Her interest areas include human work behaviour, organisational culture,
development of methods and tools to support organisational change, particularly in industrial
companies.
Elmarie Papageorgiou is a Senior Lecturer in the School of Accountancy at the University of the
Witwatersrand in Johannesburg, South Africa. She is the Division Head and Course Co-ordinator of
Business- and Accounting Information Systems that form part of the Chartered Accountant
curriculum. Her research interests include Executive, Business and Accounting Information Systems.
Ruslan Pavlov was born on the 18th July 1978 in Moscow.:2005 – Senior Researcher (current
position), Central Economics and Mathematics Institute 2003 – Researcher, Central Economics and
Mathematics Institute. 2000 -2003 – Post-graduate courses at the Central Economics and
Mathematics Institute. Field of research: diversification of business and big cycles, social
responsibility of business.
Nataša Pomazalová, Ph.D. is lecturer at University of Defence and research assistant at the Mendel
University in Brno (CZ). Research interests include managerial education, outsourcing use in the
public sector, public contracts and social capital. She is currently member of explanatory team RTO
NATO and scientific team at Armed Forces Academy (SK). Lecturing included modules on logistics
and sociology at University of Florence, Military Academy in Serbia, Bulgaria and Slovakia.
Caio Ramalho is a researcher at GVcepe – Private Equity and Venture Capital Research Center at
FGV-EAESP where he coordinates the 2nd PE/VC Census and Economic Impact project. Before
pursuing an academic career in 2006 he worked in Private Equity and Investment Banking for 10
years.
Valentina Ofelia Robescu’s academic career started in 2006 as assistant professor, from 2009 she
has a Ph.D.. The research theme of the doctoral thesis topic of thesis research focused on
environmental management and reconstruction of polluted areas. Since 2008 is PhD student in the
field of Innovation management. Currently she is Assistant Professor of Management and Ecology
and environmental protection.
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Geraldine Ryan holds a PhD in Economics from the University of Warwick. Her principal research
interest is in the area of stock price predictability. In addition, she has published a number of pieces
on information and incentive problems in economics. She is the joint holder of IRCHSS funding
investigating SME Succession Issues in Ireland.
Navjot Sandhu,Ph.D., MBA (Finance), MA (Eng), DISM, B. Ed, BSc (Med). Lecturer in Finance.Dr.
Sandhu’s PhD topic focused upon finance gap for small and marginal farmers (SMFs) in India,
Punjab. Navjot continues to develop this niche further, with a particular focus on bank lending
decisions for SMFs, an important area of research that has potential to impact on government policy
and agricultural sector at large in developed and emerging economies. Research expertise-Financing
of SMFs and Small and Medium Enterprises (SMEs), microfinance
Ted Sarmiento has worked in the manufacturing industry, including Rolls Royce and BOC Edwards
holding commercial and technical roles. Ted also has extensive university experience working as an
academic in engineering, enterprise, management and people development and is currently Senior
Lecturer at the Business School, Leeds Metropolitan University. Ted also runs his own small business
interests.
Henk Schout MA, MCC is project manager of the Centre for Innovation & Entrepreneurship at The
Hague University of Applied Sciences. He realizes innovation projects at regional SME’s, especially in
the greenhouse horticultural industry. He co-developed a campus-wide entrepreneurship programme
for undergraduate students and does research into drivers of entrepreneurial ambition. He has a
background in corporate communication.
Tine Schrammel is a member chair of International Management at the University of Passau,

Germany, where she is enrolled as a PhD student. Currently she is working for a German
development cooperation in Southeast Europe in a project building regional networks. Her research
interests focuses on regional development and differing institutional setups.
Monika Schuhmacher received a Fulbright Scholarship at University of Mannheim and studied at the
University of North Carolina. She received her MBA in 2003 and finished her studies in Mannheim
with a Master of Science. From 2005 to 2009 she worked as research and teaching assistant at
Professor Kuester’s Department of Marketing III. She successfully finalized her dissertation project.
Monika is currently conducting postdoctoral research in the same department.
Elena Serova - PhD in Economics, Senior Lecturer, Deputy Chair of Information Technologies in
Management Department, GSOM Saint-Petersburg State University. Research Interests are
Information – technological resources of Russian Economy, Managing and Using Information System.
A Strategic Approach. Enterprise Information Systems. Marketing Information Systems. CRM.
Business Process Management, Information Management, Computer modeling for Business
Solutions.
Evangelia Siachou holds a Bachelor’s degree in International and European Studies from Panteion
University of Athens and an MSc in Industrial Relations and Personnel Management from the London
School of Economics (LSE). Recently she has completed the PhD dissertation in the field of
Knowledge Management at Athens University of Economics and Business. Her current research
interests include Knowledge Transfer and Acquisition, Business Model Innovation and Strategic
Human Resource Management.
Christopher Don Simms (M.A., University of Portsmouth) is a Senior Lecturer in Marketing and New
Product Development. He is currently studying for a PhD, which is examining the development of new
packaging within the Fast Moving Consumer Goods Industry.
Jorge Simões is Ph.D. Student at the University of Beira Interior (UBI), Covilhã, Portugal. His
academic background includes a Master’s degree in Management, Accounting and Administration
from the University of Minho (UM). He teaches management at Polytechnic Institute of Tomar. He is a
research fellow in NECE. Expertise: Entrepreneurship, Business Creation, Knowledge Management.
Pantoleon Skayannis, Architect AUTH, MA & D.Phil. Urban and Regional Studies, Sussex:
Professor of Infrastructure Policy, Director of the Research Unit of Infrastructure, Technology Policy
and Development, Department of Planning and Regional Development, University of Thessaly,
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Greece, Executive Committee of AESOP. 60 research projects and more than 100 different
publications including one book and five edited books.
Maria José Sousa is a Professor and a researcher of Knowledge and Innovation and also since 2008
I'm working as knowledge Manager in Portuguese Common Knowledge Network project (CKN). The
main activities that I have developed were the construction of the conceptual model for the
Collaborative Network and the management of the collaborative space: creation and encouragement
of discussion forums, reports, monitoring the activity of the network, contacts with members of the
network, problem solving.
Pantoleon Stamboulis received his B.Eng. Diploma in Production and Management Engineering in
1989. He holds a M.Sc. in Management of Technology (1990) and a D.Phil. in Science and
Technology Policy (1995). His research interests are: innovation and technology management and
strategy, strategic management, change management and transition policy, entrepreneurship,
entrepreneurship education and critical management studies.
Peter Štrukelj holds a Master Degree in economics at the Faculty of Economics (University of
Ljubljana, Slovenia) with the thesis Mathematization and modelling in orthodox and heterodox
economic theory. He works as a young researcher and assistant - a PhD candidate in Management
of Technologies – at the Faculty of Management Koper (University of Primorska, Slovenia).
Vesa Taatila (Ph.D.) works as a researcher, developer and supports the learning processes at
Laurea University of applied sciences. His areas of knowledge are innovation, competence and
management. Dr. Taatila has published extensively about these topics. Previously Dr. Taatila has
made a long business career in executive positions in Metso, Talent Partners and Sonera.
Kanji Tanimoto is Professor of the Graduate School of Commerce and Management, Hitotsubashi
University, Japan. His research interests include the relationship between business and society. He
has published a number of books as well as numerous papers on the Corporate Social Responsibility,
social enterprise and social innovation.
Nicole Taragola is researcher at the Social Sciences Unit of ILVO in Merelbeke, Belgium. She
graduated as M.Sc. in Agricultural Engineering at Ghent University (1987), and complemented her
education with courses in economics, research methodology, statistics and entrepreneurship
(University of Brussels). Her main research areas are: agricultural and horticultural economics and
management, ICT adoption, entrepreneurship and decision making in agricultural sustainability.
Peter Teirlinck has a PhD in applied economics at the Universiteit Antwerpen. Works as advisor at
the Belgian Science Policy Office, Unit for Production and Analysis of R&D indicators. Has been
involved in OECD and EU projects on the internationalisation of R&D and on impact assessment of
public funding for RTDI. Main research interests are on knowledge relations in innovation with
particular attention to the geographical context and policy making for RTDI with special interest in
fiscal incentives.
Rivanda Meira Teixeira is a Professor in Federal University of Sergipe, Brazil. Acquired her PhD
from Cranfield School of Management in England in 1996, with thesis on Small Business Social
Responsibility. In 2006 spent a sabbatical year in HEC, Montreal, Canada. Her main research
interests are small business and entrepreneurship.
Gabriela Teodorescu, Professor PhD to Valahia University of Targoviste, Romania. She is Head of
Department for Environmental Engineering. Also, she is Director for Research Centre of Natural
Resources and Environment. Her areas of interest cover innovation, sustainable development,
environment and entrepreneurial projects.
Olavi Uusitalo is Professor of Marketing in the Institute of Industrial Management at Tampere

University of Technology. He is Ph. D. (Econ.) from Helsinki School of Economics and M Sc. (Eng.)
from TUT. His areas of research interest are innovation management, industry changes, international
business, industrial marketing, networks and business simulations.
Tiina Valjakka, M.Sc. (Tech.), Research Scientist, VTT Technical Research Centre of Finland. She
works as a project manager, researcher and consultant at the Business and Technology Management
xviii
knowledge centre. Her interest areas include enterprise networks, inter-organisational collaboration
and network development, and business models, especially in industrial service business.
Daria Volchek, researcher in Lappeenranta University of Technology, Finland. Her educational

background include M.Sc. and B.Sc. (Management) completed in St. Petersburg State Polytechnic
University, Russia. She has a practical experience in business education area - was working in
Stockholm School of Economics. Her research interests are: strategic management, innovations in
cross-border business development, organizational capabilities, strategic human resource
management.
Haisu Wang, Professor, Ph.D. Research fields focus on industrial economics, assets valuation etc.
Published more than 100 papers in academic journals, including Reform, China Industrial Economics,
Management World and Journal of Small Business and Enterprise Development etc.. A member of
experts’ team for “International Valuation Standards” and “Chinese Valuation Standards”. Finished
two projects of National Natural Science Foundation of China.
Kiyohiro Yamazaki is a Lecturer at the Chukyo University. Before joining Chukyo University, I
graduated from the Tohoku University and received my Ph.D. from the Department of Management at
Kobe University. My research focuses on strategy and management technology of technology.
Michael Zhang (BSc Hons, MA, PhD) is Senior Lecturer at Nottingham Business School, Nottingham
Trent University. His research interest focuses on technological innovation, entrepreneurship and
economic development. Michael has published in a range of economic and management journals
including International Small Business Journal, International Journal of Technology Management,
Journal of the Asia Pacific Economy, and R&D Management.
Elizabeta Zirnstein, LLM, is a senior lecturer at Faculty of Management, University of Primorska,

Slovenia. As one of leading experts in the field of legal aspects of innovations in Slovenia she is
actively involved in several national research and consultancy projects. She is also a doctoral
candidate at Law Faculty of Ljubljana, Slovenia.

xix

xx
The Effects of Process Innovation in Logistics Service
Zafer Acar1 and Ayşe Günsel2
1
Okan University, Istanbul, Turkey
2
Gebze Institute of Technology, Kocaeli, Turkey
zafer.acar@okan.edu.tr
agnsel@gmail.com
Abstract: As a key determinant of competitiveness and economic growth, innovation is an important issue for
many industries in modern economies. Accordingly the concept of innovation becomes a topic of interest among
academicians and practitioners. There are many studies and classifications concerning innovation such as
technical, process, product and administrative. However, much of what is written about innovation focuses
generally on product innovation while underestimating the process dimensions of innovativeness. Thus it is a
great mistake to consider the concept of innovativeness only in the frame of product and high-tech issues.
Process innovativeness is also a main theme to acquire competitive advantage in many industries such as
logistics. Logistics is a basic activity in the context of value chain. It is widely acknowledged that logistics and its
sub factors are vital for utilizing business strategies successfully through distribution flexibility and
responsiveness. As a result of the blurring boundaries from local to the international and global in globalizing
economies, logistics industry today seems to be highly dynamic. Innovativeness on logistics processes appears
to be an important way to differentiate the logistics capabilities and ultimately to achieve sustainable competitive
advantage. Whether the literature abounds of evidences about the positive effects of logistics capabilities on
business performance; there are only a few studies on logistics in concept of innovation. Based on contents of
logistics and innovativeness, and in the context of process innovativeness, this paper aims to investigate the
relationships among logistic capabilities, process innovativeness and firm performance. For this purpose a survey
is conducted on 39 logistics firms from the database of Istanbul Chamber of Commerce. The collected data is
submitted to validity, reliability and exploratory factor analysis. Then we used regression analysis to explore
mutual relationships between the variables. As a result, the effects of process innovativeness on business
performance of logistic firms are revealed and the moderator role of process innovativeness on the relationship
between logistic capabilities and quantitative business performance is uncovered.
Keywords: innovativeness; capability; logistics; process innovation
1. Introduction
XXI century is witness to the rise of innovation and innovativeness as one of the main drivers of
industrial competition. Innovation becomes increasingly crucial in creating and maintaining an
organization’s competitive advantage, as well as its contributions to growth and wealth (Cunliffe,
2008: 106). In other words innovation itself is a strong competitive strategy to achieve world-class
manufacturing and servicing status and compete effectively in global markets (Prajogo et al., 2007).
Accordingly innovativeness becomes a main theme for both academics and practitioners.
Innovation is any new or improved products and processes that have been introduced to the market
or new or improved procedures used within a production process (OECD- EUROSTAT, 1997: 129). It
is a comprehensive and fundamental process initiated by a perception of a new market and/or a new
service opportunity which leads to transiting toward an increasingly quality-based competitive system
for the marketing success (Jolly, 2008; Crescenzi, 2005).
Innovativeness is the measure of the degree of newness of an innovation. Highly innovative products
or services are considered to have a high degree of newness and low innovative ones sit at the
opposite of the continuum. Technological innovations are those innovations that embody inventions
from engineering, industrial arts, applied sciences or pure sciences (Garcia and Calantone, 2002:
112). Innovative activities include all of the products, process or methods that firms create or adopt
from other firms (OECD, 2005). Thus the term innovativeness should be considered on a wide
continuum from such improvement activities to radical innovations.
Schumpeter (1911), who first presented the concept of innovation (“invention”) about a century ago,
categorized innovation into two main types as product innovation and process innovation (Almeida et
al., 2008; Wagner, 2008). This categorization is widely accepted in literature. Accordingly a
clarification of the differentiation between product innovation and process innovations is worthwhile
(Cunliffe, 2008: 106). A product innovation is the introduction of a product or service that is new or
extensively improved. This includes significant improvements in technical specifications, components
and materials, incorporated software, user friendliness or other functional characteristics (OECD,
1
Zafer Acar and Ayşe Günsel
2005). Conversely a process innovation is defined as the developments in the production process and
the way products or services are produced, including equipment, work methods, materials and work
systems. The major stimulus for process innovation is the cost effectiveness (Cunliffe, 2008: 106).
Process innovations are at the heart of the increasing the effectiveness of production process. The
benefits of the process innovations can be summarized as follows (Tirupati, 2008: 110): (1) Reduction
in process time leading to higher productivity and efficiency, (2) Reduction in set-up time and/or cost
providing flexibility and enhancing the capability to produce more variety, (3) Improvements on the
quality of output, thereby producing superior product and (4) Reduction of wastage, increase on
process yield and thereby improvement on conformance quality and product reliability.
Although the innovation definitions emphasize two main categories as product and process
innovations; much of what is written about innovation focuses on general product innovation and more
specifically on highly technological innovation. It should be a mistake to consider the concept of
innovativeness in the frame of product and high-tech issues. Innovation is one of the key capabilities
to acquire competitive advantage in many other industries such as logistics.
Logistics is defined as a primary activity in the context of value chain (Porter, 1980: 37). It is widely
acknowledged that logistics and its sub factors are vital for utilizing business strategies successfully
through distribution flexibility and responsiveness (Daugherty and Pittman 1995; Morash et al., 1996;
Lynch et al., 2000). As a result of the blurring boundaries from local to the international and global in
globalizing economies, logistics industry today seems to be highly dynamic. This dynamic and
challenging marketplace has been force the firms to differentiate their logistics capabilities.
Innovativeness on logistics processes appears to be an important way to differentiate the logistics
capabilities and ultimately to achieve sustainable competitive advantage. Even though Turkey
achieved a very strong growth in logistics with contribution of its geographical position at the across of
the continents; world wide logistics performance of Turkey is rather low with a ranking at 34th place in
World Bank Logistics Performance Index (Arvis et al., 2007). The basis of this dilemma could be
found at the innovation perspective.
The literature abounds of evidences about the positive effects of logistics capabilities on business
performance. However there are only a few studies on logistics in concept of innovation (e.g. Flint et
al., 2005; Soosay and Hyland, 2004; Wagner, 2008). Even logistics research has largely ignored the
concept of innovation in general (Flint et al., 2005), in particular we couldn’t able to find any which
takes logistics processes as a subject of process innovation. Thus we know very little about
innovation on logistics capabilities. In an effort to shed a light on this field, we built a research on
logistics processes within the innovation concept.
The theoretical basis of this paper is found in the contents of logistics and innovativeness, and in the
context of process innovation. In this framework, the purpose of this paper is to describe and analyze
the mutual relationships among process innovations, logistics capabilities and business performance
of a firm in order to achieve the competitive advantage. To reveal these relationships a survey is
conducted on firms operating in logistics industry.
The article is organized as follows. In section two, the main characteristics and the dimensions of the
process innovations, logistics capabilities are defined. This is followed by the methodology applied to
explore the hypotheses and the data analyze by SPSS 15.0 for Windows software statistical package
program. Finally, the conclusions are set out together with some recommendations for future
research.
2. Methodology
2.1 Theoretical framework

As well as many other industries innovativeness is a key capability for achieving competitive
advantage for logistics. From this point of view we empirically explore innovativeness on logistics
processes. The innovativeness on logistic processes has in fact been traditionally considered as
technological process innovativeness. Based on the existing literature, we expect a direct relationship
between logistics capabilities, process innovativeness and business performance. Accordingly, in
logistics firms;
2
H1: Logistics capabilities are positively related to qualitative business performance
H2: Logistics capabilities are positively related to quantitative business performance
H3: Process innovativeness are positively related to qualitative business performance
H4: Process innovativeness are positively related to quantitative business performance
In global, harsh and competitive business environment, it is well known that logistics capability is
essential for acquiring superior performance. On the other hand, process innovativeness affects
logistics capability as well as business performance. As a result of this innovative effect, firms
restructure their logistics processes. If these improved and restructured processes match the existing
ones; firms have the potential to gain superior performance. Conversely business could be affected
negatively. Thus, we expect that compatibility of logistics capability and process innovativeness affect
business performance. Considering its effects on business performance and logistics capabilities,
process innovativeness appears to be a moderator variable (Baron and Kenny, 1986). Accordingly;
H5: Process innovativeness positively moderates logistics capabilities - qualitative performance

relationship
H6: Process innovativeness positively moderates logistics capabilities - quantitative performance

relationship
2.2 Measurement instrument

To test the above hypotheses, multi-item scales adopted from prior studies for the measurement of
constructs were used. Each construct was measured using 5-point Likert scales ranging from
“strongly disagree” (1) to “strongly agree” (5).
Logistics capabilities scale were constructed by gathering common variables of the recent studies
(Morash et al., 1996; Fawcett et al., 1997; Lynch et al., 2000; Celuch et al., 2002; Lu and Yang, 2006)
that expose the relationship between logistics capabilities and business performance. This scale
consists of 21 items.
Process innovation scale is adapted from Wang and Ahmed’s (2004), and Projago and Sohal’s (2003)
scales. This scale composed of eleven items corresponds with Xu et al.’s (2008) criteria. According to
Xu et al. (2008: 342) process innovation should address five criteria: (1) to develop existing
technologies, (2) to renew manufacturing equipment, (3) to reorganize manufacturing processes, (4)
to determine new or improved management control systems and (5) to increase the effectiveness of
the management by simplifying the procedures.
We took into consideration the output of business performance within two factors that evaluate the
financial and growth performance of the businesses. This scale consisting of 24 items corresponds
with the business performance scales of some recent studies (Venkatraman and Ramanujan, 1986;
Baker and Sinkula, 1999; Lynch et al., 2000; Antoncic and Hisrich, 2001; Zahra et al., 2002; Chang et
al., 2003).
These scales that were used for the first time in Turkish was translated by the authors, then two
bilingual academics back-translated the instrument. Any discrepancies were rewritten to be cleared
and then back-translated once again (Brislin 1970).
2.3 Sampling and data collecting

The aim of this study is to reveal the relationships among the logistics capabilities, process
innovations and business performance. In order to test the given hypothesis a survey is conducted on
logistics firms. Using the database of Istanbul Chamber of Commerce 100 firms that have
“International Transportation Certificate” are identified as the target group of the research. We sent
the questionnaire forms with a cover letter and 197 forms returned. After faulty data input, a database
was formed from 189 clear questionnaires from 39 firms. A comparison was made between the
eliminated surveys and those chosen for analysis in terms of means, firm size, and firm age, and it
was seen that there is no difference between them in a statistical manner.
3
After gathering the data, the basic features of the data were described with statistics to provide simple
summaries about respondents. The descriptive statistics of the respondents are shown in Table 1.
According to the findings it was concluded that our sample was a group of young, educated and
dynamic people. Thus we consider this sampling will positive affect the accuracy of our research, due
to their openness to innovations.
Table 1: Descriptive statistics of the sample
Gender Age
Frequency Percent Frequency Percent Valid Percent
Male 117 61,8 20 – 29 58 30,7 35,8
Female 72 38,2 30 – 39 78 41,3 48,1
Total 189 40 – 49 23 12,2 14,2
Status 50 - + 3 1,6 1,9
Frequency Percent Total 162 85,7 100,0
Top level
22 11,6 Missing 27 14,3
manager
Middle level
42 22,5 Total 189 100,0
manager
Bottom level
31 16,2
manager
Expert 94 49,7 Tenure
Valid
Total 189 Frequency Percent
Percent
Education 1–5 34 18,0 22,7
Frequency Percent 6 – 10 53 28,0 35,3
Primary school 1 0,6 11 – 20 45 23,8 30,0
High school 49 26,1 20 - + 18 9,5 12,0
Under graduate 124 65,5 Total 150 79,4 100,0
Graduate 15 7,9 Missing 39 20,6
Total 189 Total 189 100,0
2.4 Scale validity and reliability

Before testing the given hypotheses, the validity and reliability of our scale was assessed. First, we
referred to the Cronbach’s alpha test value for reliability of the scale. The value for whole scale was
determined as 0.974, this value is quite over the recommended 0.70 threshold (Nunnally 1978;
Nunnally and Bernstein, 1994). Then, we looked at the “corrected inter-item correlations” and
“squared multiple correlations” in the item analysis stage. It was found that, except two items all of the
resulting values were 0.500 and above. Those items (P_Ino01 and P_Ino09) which had insufficient
coefficient values were put out of the scale. Thus, these findings informed us that scale is reliable.
Then, the principle factor analysis with varimax rotation was applied to identify component factors
having eigenvalues greater than one. In the data reduction procedure, those variables having a factor
load of 0.500 and above were taken into the account. This application maximizes the sum of the
variances necessary for the factors matrix (Hair et al., 1998: 110). According to the initial findings of
the principle factor analysis, three items (Perf01, Perf16, Perf17) which had not load to any of the
factors was put out of the scale.
As shown in table 2, both independent variables were separated into two sub-dimensions. We
inspected the contents of these sub-dimensions to entitle them. Two sub-dimensions of the logistics
capabilities were found to be representing customer oriented and operation oriented activities. So we
called them as Customer Oriented Logistics Capabilities (COLC) and Operation Oriented Logistics
Capabilities (OOLC). On the other it is found that the content of the sub-dimensions of the process
innovativeness was entitled as Service Oriented Process Innovativeness (SOPI) and Technology
Oriented Process Innovativeness (TOPI). The result of principle factor analysis also shows that all
items were loaded under their factorial components without any cross-loading, and have sufficient
factor loads and reliable coefficient values. This finding could indicate that our scale has
unidimensional validity (Bagozzi, and Phillips 1991).
Before examining the relationships among the factors in our research model, as one of the most
important criteria in which we would evaluate the validity of the results, the data was examined to
4
determine if it had normal distribution. For this purpose, the scale structure that was obtained with
factor analysis was evaluated with the Kolmogorov-Smirnov test, and it was seen that t values of all of
the variables were at the sufficient level for our sample (t min = 2.493; p<0.001). These findings prove
that the distribution of the data is statistically normal. Furthermore, considering the fact that the
validity and the reliability of the items we used in the research scale have been tested in previous
studies the confirmatory factor analysis procedure was not applied.
Table 2: The results of the exploratory factor analyzes
Components
Qualitative Quantitative
COLC OOLC SOPI TOPI
P. P.
LC01 ,771
LC02 ,792
LC03 ,571
LC04 ,630
LC05 ,555
LC06 ,546
LC07 ,651
LC08 ,564
LC09 ,771
LC10 ,672
LC11 ,619
LC12 ,775
LC13 ,559
LC14 ,660
LC15 ,557
LC16 ,749
LC17 ,525
LC18 ,582
LC19 ,639
LC20 ,681
LC21 ,560
P_Ino02 ,550
P_Ino03 ,542
P_Ino04 ,598
P_Ino05 ,884
P_Ino06 ,831
P_Ino07 ,741
P_Ino08 ,865
P_Ino10 ,845
P_Ino11 ,620
Perf02 ,778
Perf03 ,745
Perf04 ,605
Perf05 ,681
Perf06 ,720
Perf07 ,610
Perf08 ,579
Perf09 ,702
Perf10 ,780
Perf11 ,749
Perf12 ,788
Perf13 ,640
Perf14 ,731
Perf15 ,652
Perf18 ,773
Perf19 ,720
Perf20 ,739
Perf21 ,745
Perf22 ,721
Perf23 ,844
Perf24 ,762
Total variance extracted: 65,274; Cronbach Alfa: 0,976
5
2.5 Test of the research questions

After testing reliability and the factorial structure, correlation analysis of the research questions was
begun with the purpose of examining the mutual relationship among the factors considered in our
research model. It was determined that the four independent latent variables had a mutually positive
relationship (ρ<0.001) with each other and with business performance components (see Table 3). As
seen in the table, the most powerful relationship (r= 0.723; p<0.01) is between the qualitative and
quantitative performance factors of the business. This finding clearly shows that these two factors,
which we obtained due to principal factor analysis, merged as two sub dimensions of the business
performance.
After performing correlation analysis, we found that constructs which differed from each other as a
factor were also correlated positively and significantly (p<0.001). Table 3 shows us that the correlation
coefficients among theoretically-related constructs are higher than intercorrelation coefficients of
theoretically-unrelated constructs. These findings indicate that the measurement instrument, which we
obtained due to principle factor analysis, has convergent and discriminant validity.
After exploring the mutual relationship, the linear relationships were tested with regression analyses.
For this purpose, regression models were generated to resolve the given hypothesis. When we
evaluate our regression models according to sample size and the amount of the variables we added
to the model, it seems powerful (Hair et al., 1998: 165) and statistically significant.
Table 3: Correlation matrix
Mean S.D. 1 2 3 4 5 6
COLC 4,1238 ,59700 1,000
OOLC 4,1342 ,58530 ,694** 1,000
SOPI 3,9598 ,68204 ,512** ,558** 1,000
** **
TOPI 4,1243 ,72915 ,450 ,526 ,533** 1,000
Qualitative Perf. 4,0847 ,63818 ,647** ,624** ,502** ,507** 1,000
** ** ** **
Quantitative Perf. 4,1058 ,65950 ,652 ,614 ,492 ,443 ,723** 1,000
** p<0.01 (two tailed)
According to the results given in Table 4, we deduced that both sub dimensions of the logistics
capabilities have statistically significant direct positive effects on business performance of the firm.
So, the hypothesis1 and hypothesis2 was supported.
Table 4: The effects of logistics capabilities on business performance
B t p B t p
COLC ,288 3,790 ,000 ,511 6,189 ,000
OOLC ,557 7,342 ,000 ,293 3,548 ,000
Dependent variable: qualitative performance Dependent variable: quantitative performance
R2=65,7; F=177,975; p<0,001 R2=59,4; F=135,782; p<0,001
According to the results given in Table 5, we deduced that both sub dimensions of the process
innovations have statistically significant direct positive effects on business performance of the firm.
So, the hypothesis3 and hypothesis4 was supported.
Table 5: The effects of process innovations on business performance
B t p B t p
SOPI ,363 5,163 ,000 ,414 5,637 ,000
TOPI ,377 5,362 ,000 ,281 3,820 ,000
Dependent variable: qualitative performance Dependent variable: quantitative performance
R2=44,8; F=75,393; p<0,001 R2=39,7; F=61,355; p<0,001
Table 6 presents the results of the hierarchical regression analyses for qualitative business
performance. First, independent variables were entered, followed by the intersection variables. The
results indicate that none of the intersection variables influence significantly on qualitative business
performance. Thus hypothesis 5, the moderating effect of process innovativeness on the relationship
between logistic capabilities and qualitative business performance was not supported.
6
Table 6: Hierarchical regression results for qualitative business performance

SOPI TOPI
Model 1 Model 2 Model 3 Model 4
Basic Variables Basic
Variables
COLC ,264*** ,287*** COLC ,270*** ,298***
OOLC ,506*** ,462*** OOLC ,468*** ,446***
SOPI ,108 ,079 TOPI ,166** ,159**
Interaction variables Interaction
variables
COLC x SOPI -,047 COLC x -,175
TOPI
OOLC x SOPI -,060 OOLC x ,149
TOPI
R2 ,663 ,672 R2 ,673 ,678

∆ R2 - ,009 ∆ R2 - ,005
F 121,416 74,871 F 127,155 77,025
Table 7 represents the results of the hierarchical regression analyses for quantitative business
performance. First, independent variables were entered, followed by the intersection variables. The
results indicate that all of the intersection variables influence significantly and positively on
quantitative business performance. Thus hypothesis 6, the moderating effect of process
innovativeness on the relationship between logistic capabilities and quantitative business
performance was fully supported.
Table 7: Hierarchical regression results for quantitative business performance
SOPI TOPI
Model 1 Model 2 Model 3 Model 4
Basic Variables Basic
Variables
COLC ,477*** ,448*** COLC ,497*** ,529***
OOLC ,218* ,261** OOLC ,223* ,206*
SOPI ,156* ,163* TOPI ,130* ,145*
Interaction variables Interaction
variables
COLC x SOPI ,263* COLC x ,281*
TOPI
OOLC x SOPI ,269* OOLC x ,291*
TOPI
R2 ,607 ,619 R2 ,604 ,616

∆ R2 - ,012 ∆ R2 - ,012
F 95,225 59,337 F 93,922 58,614
3. Discussion and conclusion

Most of the innovation literature is grounded and empirical studies are completed on product
innovation and more specifically on highly technological innovation rather than process innovations.
But, there has been little knowledge about service process innovation in general, and particularly in
logistics industry. Accordingly, enhancing the innovation literature with process innovations on
logistics industry is an imperative for both scholars and practitioners.
In this study, the relationships between process innovations, logistic capabilities and business
performance are tested in logistics firms of a developing country, Turkey. The findings of the study
demonstrated that logistic capabilities and process innovations scales which are developed in
Western countries, are appropriate for an emerging economy; Turkey. Measures demonstrated high
validity and reliability.
The findings also reveal that process innovations are both positively related to both qualitative and
quantitative performance. This is again similar with the empirical studies completed in developed and
western countries such as Flint et al. (2005). However the impact of technology oriented process
innovations on quantitative performance is lower than the other relationships between process
7
innovation and performance dimensions. In order to understand this finding one should look at the
process effect mechanism. In accordance with this mechanism the effects of technological process
innovations appear on a long term so they are hard to notice on quantitative performance.
Concerning the logistics capabilities, the findings provide empirical evidence in support of the
relationships between logistics capabilities and business performance both qualitative and
quantitative. This is also similar with existing literature (e.g. Soosay and Hyland, 2004) which
underlines the logistics capabilities for business performance in general and for firms operating in
logistics industry in particular.
In addition to these findings, the results of this study show that there is a greater relationship between
logistics capabilities and qualitative business performance when there are high levels of process
innovations both technologies oriented and customer oriented. These results exactly address that
challenging marketplace force the firms to differentiate their logistics capabilities; firms differentiating,
improving and renewing their logistics capabilities on technology and customer base effectively
results with higher performance especially on financial terms such as profit, total sales or customer
base.
The findings of this study can not be taken as definite evidence because several limitations to the
study results deserve commentary. First, this study is conducted on logistics firms. Second, these
results reported here emerge from a local area; results may differ for firms located on different areas
that are operating in different cultural, environmental and political conditions. Third, the sample is
relatively small. Despite these limitations, this study provides important implications from theoretical
and practical perspectives. This study indicates that logistics capabilities and process innovations are
important elements of business performance and ultimately firm success; formulating a capability and
innovation based strategy can lead firms to great profits. It also demonstrates that formulating the
innovation strategy on customer base is more influential than formulating the innovating strategy
focusing on technology for qualitative performance. Furthermore, the analyze results show that when
there is high levels of process innovations the relationship between logistics capabilities and
qualitative performance become stronger.
In conclusion, our results indicate a significant relationship between process innovations, logistics
capabilities and business performance. Our findings also reveal that process innovations are more
important for the relationship between logistics capabilities and qualitative performance.
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9
Exploring Underlying Beliefs on Youth Entrepreneurship of
Higher Education Graduates in Greece
Chrysa Agapitou1, Sofia Tampouri1, Petros Bouchoris1, Nikolaos
Georgopoulos1 and Alexandros Kakouris2
1
University of Piraeus, Greece
2
National and Kapodistrian University of Athens, Greece
caga@unipi.gr
stampouri@unipi.gr
akakour@phys.uoa.gr
Abstract: The complex phenomenon of entrepreneurship is thought as generally divided to its exogenous and
endogenous parts. The former concerns the existing market structure which incubates entrepreneurial
opportunities while the latter concerns the human potential that habitually acts entrepreneurially. The socio-
economic environment also shapes certain beliefs of individuals about the holistic process of business venturing.
Such an obscure set of beliefs, or assumptions, underlies the frames of reference of latent or nascent
entrepreneurs, being an influential factor of their cognition during entrepreneurial education, counselling or
lifelong informal learning. An exploration of the entrepreneurial beliefs of graduates, i.e. next generation
entrepreneurs, is crucial since it is expected to depend on the local culture and economic conditions. The present
study seeks to reveal certain beliefs of Greek graduates on business venturing. A survey of consisting of a 34-
item questionnaire was conducted amongst both science and economics graduates The research methodology
falls into the Theory of Planned Behaviour and the questionnaire includes affirmatively stated opinion items
where individuals agree or disagree following a 5-item Likert scale. The items concern five major subjects of
entrepreneurial thinking: conceptualizing entrepreneurship, entrepreneurial factors, motivation, risk management
and business financing. Descriptive statistics, correlations and factor analysis are used to discuss the results for
the distinct subgroups of latent or nascent entrepreneurs compared to the normal population. The results are
contrasted to the latest GEM report for entrepreneurial activity in Greece. Gender dependencies and differences
in beliefs between science and economics graduates are also presented in order to discuss implications of the
results on entrepreneurship education and counselling.
Keywords: graduate entrepreneurship, nascent entrepreneurs, latent entrepreneurs, beliefs, entrepreneurial

motivation
1. Introduction
Entrepreneurial learning has been systematically introduced in Greek higher education for the last five
years. Besides, university career offices have built projects to promote youth entrepreneurship and to
provide counselling services to potential entrepreneurs. Traditionally, faculties of economics and
business have been closer to business venturing, however, perspectives of the European Oslo
agenda (Oslo agenda 2006) suggest entrepreneurial mindset be spread interdisciplinary. To that end,
surveys based on the first ‘educated’ graduates and first educators could provide substantial feedback
to entrepreneurial education and counselling processes.
Entrepreneurial courses in non–Business Schools are offered optionally in Greece - a case study for
informatics students at the University of Athens is given in Kakouris (2008). Moreover, there is no
entrepreneurial university in Greek higher education yet. A recent European survey (European
Commission 2008: 65) revealed that 50% of European Higher Institutes offer entrepreneurship
education. For a threshold of 25% of relevant courses in the curriculum, the vast majority of
universities above the threshold specialize in economics and business whilst in broader universities
entrepreneurship is usually a part of other courses. Thus, most entrepreneurial courses are short-term
(one or two semesters) and they are based on experiential learning and problem–solving techniques
(cf. Honig 2004; Rasmussen and Sørheim 2006). However, learning from grasping experience is
thought as a complex and time consuming procedure with equivocal results since it involves the
frames of reference of individuals who participate and demands critical thinking (Mezirow 1978; Schön
1983; Kolb 1984). In most cases, educators have to deal with beliefs, or assumptions, of graduates
during coursework. Undoubtedly, entrepreneurship is a subject that is par excellence dominated by
beliefs and conceptions. For instance, Shane (2008) addresses several issues for which data or
evidence unexpectedly contradict with what is commonly believed, or assumed, for entrepreneurship.
The involvement in youth entrepreneurship, either through teaching or counselling, provides often
interaction with nascent or ‘would–be’ entrepreneurs (Davidsson 2006). The importance of studying
10
Chrysa Agapitou et al.
nascent entrepreneurship has been recognized by Reynolds and Miller (1992) who introduced a
gestation phase for new firms. Nascent entrepreneurs differ from latent ones, which merely express
interest to start a business in the future, in that they are mentally engaged in the entrepreneurial
process, pursue identified and elaborate opportunity(ies) and have collected information and data
about for their entrepreneurial beginning (Reynolds at al. 2002). Studies of nascent entrepreneurs,
either local or global, are important for the dynamics of entrepreneurship as they provide information
about the near future of the enterprising phenomenon.
In conclusion, the aim of the present work is to explore underlying beliefs on entrepreneurship for
graduates in two different faculties: Economics and Business Administration at the university of
Piraeus and Informatics and Telecommunications at the university of Athens. In addition, overall
participants can be separated into nascent entrepreneurs, latent entrepreneurs and normal
population. Results from inter–comparisons are discussed with implications to entrepreneurship
education and counselling.
2. Theoretical framework
Although the vision of the Oslo agenda (2006) is a common European environment for
entrepreneurship education, business venturing is inevitably related to local economic conditions and
cultures. For example, the perceived economic component of social life, families, working experience
are sources that influence potential entrepreneurs towards entrepreneurial thinking. The
corresponding variety in thinking is considered beneficial for real entrepreneurship, albeit, it is an
intriguing factor that demands consideration for effective entrepreneurship education or counselling.
Global entrepreneurship is annually observed by GEM branches (IOBE for Greece,

http://www.iobe.gr). Greeks are known to be highly entrepreneurial in their “own way”. A slight decline
in entrepreneurial intention over years is also observed, similar to many developed countries (Shane
2008). Greece is now considered amongst the innovation-driven economies (Bosma and Levie 2009).
The IOBE institute (Ioannides and Tsakanikas 2009) reports that in Greece: early-stage
entrepreneurship is high due to self-employment, however “shallow” but with encouraging signals for
reduction of both necessity entrepreneurship and start-ups low in the supply chain. A remarkable
“paradox” concerns the reported high self-confidence of Greeks to start businesses (50%) with a
simultaneous high fear factor (60%). Therefore, entrepreneurship education may engage an active
role in Greece towards knowledge-intensive entrepreneurship as young graduate entrepreneurs
increase (Souitaris et al. 2007).
Given the analysis of GEM that outlines an established “reality” for Greek businessmen, an
exploration of underlying beliefs of graduates becomes essential for future enhancement of
educational methods and material. We consider beliefs about business thinking undoubtedly refer to
spontaneous conceptualization of entrepreneurship, determinants of success, entrepreneurial
motivation, fear factor and sources of finance. As ‘field of study’ has been joined to entrepreneurial
attitudes, we expect graduates from an economics faculty to differ from their science counterparts
especially in beliefs that concern market analysis and the economic environment. Beyond this
comparison that facilitates educational purposes, we expect differences between nascent and latent
entrepreneurs as the mechanism of transforming latents to nascents is inherently humanistic, replies
to real–life entrepreneurship and remains still obscure. Factors that appear in the abundant literature
as influential to the problem under consideration incorporate gender, age, work experience, family
and childhood biomes as well as prior entrepreneurship education (Davidsson 1995; Boyd and
Vozikis 1994). These factors were included in the present survey as control variables.
3. Methodology
3.1 The instrument

For the present empirical research, a 3-part questionnaire was developed. Ιt includes questions of
demographic interest (i.e., 7 control variables shown in Table 1), a scale that measures whether the
participant is a nascent or a latent entrepreneur (N1–N6) (see Appendix) and a scale (Q1–Q34)
consisting of 34 affirmatively stated opinion items where individuals agree or disagree following a 5-
item Likert scale. The last scale was constructed following the recommendations for the construction of
11
1
a Theory of Planned Behaviour (TPB-like) questionnaire (Ajzen 1991; Francis et al. 2004) and was
scheduled to collect subjective beliefs of students associated with entrepreneurship using ‘agree–disagree’
items, i.e. (1) strongly disagree, (2) disagree, (3) I am neutral (no opinion), (4) agree, (5) strongly
agree. Each item includes the detailed specification of the target belief as a reference (Ajzen and Fishbein
2005). Such beliefs shape the entrepreneurial intention identified in the second part (N1 –N6) revealing
three ‘types’ of participants: nascent entrepreneurs, latent entrepreneurs and normal population. However,
the items Qi did not explicitly distinguish normative beliefs in order to fully perform a TPB intervention (e.g.
Lange 2009). The main reason for not pursuing the TPB methodology in detail was the large number of
parameters we had to include in order to explore beliefs horizontally. As a next step, we plan to focus on
the most important beliefs and explore entrepreneurial intentions and behaviours further using TPB (cf.
Krueger and Carsrud 1993).
The 34 items, Qi, can be classified in five major categories that concern:
Understanding of the term ‘entrepreneurship’ (8 items),
Determinant parameters for successful business venturing (8 items),
Encouraging/discouraging factors and motives for entrepreneurship (6 items),
Uncertainty and risk management (6 items), and
Sources of business finance (6 items).
The question items were mixed so that each item was irrelevant to the previous one. Factor analysis
indicates that the phenomenon we refer to is intrinsically multivariate, since the 34–items cannot be
significantly reduced as 13 principal components exhibit eigenvalues greater than unity even within
the subgroups of nascent or latent entrepreneurs. The Cronbach’s alpha for the reliability of the third
scale of the instrument (Q1–Q34) was found to be 0.651 which is an acceptable value.
3.2 Procedure
The survey was implemented either in classrooms or through a corresponding online inquiry. In
addition, a large number of graduates of both Faculties were invited through e-mail lists to complete
the online questionnaire voluntarily. The nature and the purpose of the study were initially explained to
the participants and they were advised that their responses to be anonymous.
3.3 Sample
The total responses to the questionnaire were N=413. Demographic data show that Economics
(post)graduates were 183, i.e. 44.31%, while the rest were science students from Faculty of
Informatics and Telecommunications. The graduates’ sample consists of males by 56.9%. The
80.87% were graduates, 14.04% postgraduates, while the rest did not explicitly declare one of the
previous. The age range of the sample is shown in Table 2. 57.38% grew up in one of the two large
cities in Greece (Athens and Thessaloniki), 29.06% in smaller Greek cities (~50–100 thousands of
citizens) and the rest 13.56% in small towns and villages. The participants follow the demography of
Greek inhabitants. Moreover, 74.58% has had work experience while 30.75% come from families that
have owned or own business. The 45.76% had attended entrepreneurial courses or seminars – by
56% within the economics group and 37% within the science one.
4. Results
4.1 Identification of nascent and latent entrepreneurs within the sample

According to the answers to (N1–N6) questions of the instrument, we identify the following distinct
groups of participants with relative frequencies of:
22.76% for nascent entrepreneurs: who have collected information about business start-ups and
have identified one or more specific entrepreneurial opportunities,
1
Ajzen (1991) classifies beliefs into behavioural, normative and control ones. Such interacting beliefs
are thought to formulate the intention that induces an observed behaviour. The TPB model is used as
a predictor for entrepreneurial initiatives (i.e. the targeted behaviour). Presently, we explore
behavioural and control beliefs – thus we name the third part of the instrument as ‘TPB-like’.
12
23.97% for latent entrepreneurs: who indent to start a business in the future and are generally
interested in entrepreneurship or receive information about the market,
53.27% for normal population: who don’t fall in the rest groups.
The relevant data of (N1–N6) part show high reliability with a Cronbach’s alpha of 0.819. Besides,
there is only one component with eigenvalue greater than unity in the respective factor analysis. Thus,
the mean score of the Ni part shows how intentionally enterprising is each individual participant.
Correlations of the control variables and the variable (“type of intention”) of potential enterprising are
shown in Table 1.
Table 1: Control variable correlationsa (N=413)
1 2 3 4 5 6 7 8
1. Gender 1
2. Age -.083 1
3. Faculty 46.603** .187** 1
4. City of origin .116* .041 -.089 1
5. Work experience .035 -.292** 3.265 -.011 1
6. Business owing family .843 .040 2.751 -.056 .956 1
7. Entrepreneurship education 4.421* -.064 14.656** -.006 1.620 1.200 1
8. Type of intentionb .142** -.172** .080 .002 .200** .064 .262** 1
*
p < .05, **p < .01,
a
Chi square test for italics, Pearson correlation for normal fonts
b
i.e. nascent entrepreneur, latent entrepreneur, normal population
Notably, the percentage of nascent entrepreneurs has no dependency on faculty, city of origin or
parents’ business owing experience. As expected, it is gender dependent, i.e. males exhibit more
entrepreneurial intentions compared to females with a 70–30 percentage within nascent entrepreneur
group, 60–40 within latent and 50–50 within the normal population. Nascent entrepreneurs also have
working experience by 90% compared to the rest groups who have a 70% working experience. The
previous result strengthens the view that people decide to act entrepreneurially after obtaining
working experience and probably as a reaction to an unsatisfied wage career (Shane 2008). The
correlation of nascent/latent entrepreneurship with age, shown in Table 2, is in agreement with the
previous findings. During the first university years, the percentage of latent entrepreneurs exceeds the
nascent one while after the age of 25th it ceases contrary to the nascent one that remains almost
constant (~30%).
Table 2: Age range and entrepreneurial intention of the sample (N=413)
Age (years) 18-20 21-23 24-27 28 -30 31 -35 >35
Frequencies 36.80% 40.20% 16.46% 2.18% 2.18% 2.18%
Nascent entrepreneurs 15.79% 25.30% 29.41% 29.63%
Latent entrepreneurs. 19.74% 27.71% 26.47% 18.52%
Normal population 64.47% 46.99% 44.12% 51.85%
Finally, nascent entrepreneurs have attended entrepreneurial courses or seminars by 65%, latent by
50% and normal population by 35%.Present findings agree to the customary view about nascent
entrepreneurship.
4.2 Exploring certain entrepreneurial beliefs in groups

Entrepreneurial beliefs are examined through the TPB-like part of the questionnaire (Q1–Q34). The
expected (anti)correlations between repeated items were observed in general population’s data which
imply that the data are reliable. The 34-items fall within the five groups of 3.1, which seek to reveal
beliefs (or attitudes) towards: understanding entrepreneurship, parameters of entrepreneurial
success, entrepreneurial motivation, uncertainty management and business financing (see Appendix).
General findings are presented in the sequel while gender, education, faculty and entrepreneurial
intention dependencies are examined afterwards.
4.2.1 Overall description (general population data)

For the meaning of entrepreneurship, scored items (<Q1>= 2.2, <Q9>= 2.8, <Q17>= 3.7 and <Q25>=
2.8) show respectively that: there is general disagreement in that entrepreneurship concerns solely
SMEs and in that it is a career option for everyone, agreement in that is a mindset and disagreement
in that it is absolutely an act of innovation (Drucker 1985). Pearson correlations between the previous
13
items reveal a disputed conception for entrepreneurship as an act of innovation for Small–Medium
Enterprises (SMEs) (Q25 and Q1) that is possible for everyone as a career option (Q9) (r1,9=.148,
p<.01, r1,25= .164, p<.01, r9,25= .154, p<.01). In addition to the previous, entrepreneurship is also
considered as a mindset (Q17) that can be met anywhere (r9,17= .199, p<.01, r17,25= .130, p<.01 ).
Innovation is less connected to entrepreneurship by those with working experience. Finally, social
entrepreneurship is poorly understood, rather considered as a ‘marketing strategy’ of enterprises
(<Q13>= 3.73).
For a successful business venturing, items (<Q12>= 4.3, <Q26>= 3.8, <Q28>= 4.0) show high
agreement in that success: is due to the entrepreneur’s flexibility and adaptation, depends on the
market and on the entrepreneur’s organizational capability, communication skills and network
participation. These items are also positively Pearson correlated (r12,26= .258, p<.01, r12,28= .181,
p<.01, r26,28= .210, p<.01). The conception is further enriched by including: entrepreneur’s experience
as a success factor (<Q18>= 3.2, r18,28= .185, p<.01 ) and loyalty to the business plan as well
(r18,21=.120, p<.05, r21,26= .129, p<.01), although the efficiency of the business plan is generally
disputed (<Q21>= 2.7). We note that this view can be considered as ‘expected’ and we note that it
underestimates innovation and particular skills of individuals.
For risk management, items (<Q10>= 3.7, <Q16>= 3.2, <Q34>= 3.8, with r10,16= .132, p<.01, r16,34=
.116, p<.05) demonstrate that: learning from failure is the most important procedure for risk
management, failure in the first entrepreneurial attempt can lead to a subsequent success and the
fear factor shrinks due to self-confidence. Notably, the former correlation is not identified within the
nascent subgroup which reveals the latter. Thus, the group of nascent relies mostly on self–
confidence without emphasizing in learning from failure.
Cross-group item correlations (r2,3= .143, p<.01) verify that those who consider business financing an
easy process for proficient entrepreneurs (<Q3>=2.6) also consider entrepreneurship education as
less necessary since ‘the entrepreneur is born’ (<Q2>=2.0). Along with the previous, entrepreneurial
success is thought inherently intuitive (<Q6>= 2.79, r2,6= .159, p<.01) and incompatible to flexibility
and adaptation (r2,12= -.10, p<.05) disputing learning from failure (r2,10= -.098, p<.05 ). However, this
conception is minor and most of the previous correlations are not observed within latent
entrepreneurs, those who have participated entrepreneurial courses and females.
4.2.2 Gender dependencies

There is empirical evidence in literature that entrepreneurial attitudes and beliefs depend on gender.
Present data demonstrate that males are more positive to intuition as a parameter for success
(t(411)= 2.76, p<.01) in contrast to females that suggest marketing and organisational capabilities
(t(411)= -2.55, p<.05). Furthermore, females are more inclined to consider entrepreneurship both as a
mindset (t(411)= -2.05, p<.05) and as an act of innovation (t(411)= -2.32, p<.05). They also disagree
that entrepreneurs use capital of others (t(411)= 2.02, p<.05), and they emphasize on communication
skills and network participation as key factors for success (t(411)= -2.36, p<.05). Notably, the gender
differences disappear within the subgroup of those who have participated entrepreneurship education
(Marlino and Wilson 2003) except the last two conceptions which survive. The results agree with
similar empirical findings in literature (Petridou, Sarri and Kyrgidou 2009; Lange 2009). Hence,
inclination towards networking, emphasis on communication skills and business own funding can be
ascribed to female entrepreneurship.
4.2.3 Age dependencies

Age dependencies are expected in participants’ beliefs. Present study, which focuses on age groups
of Table 2, clearly separates early graduates with poor working experience and seldom
entrepreneurship education from the rest age groups of students, i.e. close to graduation,
postgraduates and alumni. Employing one-way ANOVA tests, we identified that younger participants
believe that enterprises that are closer to consumers, i.e. at the bottom of the supply chain, are more
likely to be successful (F= 6.41, p<0.01). They are also more positive to use own funds for a business
venture (F= 2.80, p<0.05) instead of bank loans (F= 2.78, p<0.05) and do not conceptualize the
entrepreneur as a person who uses other people’s capital (F= 3.61, p<0.05). Moreover, a certain
attitude that increases with age concerns intrapreneurship as not possible in the interior of large
companies due to their bureaucracy and irrelevant management (F= 6.14, p<0.01).
14
4.2.4 Field of study dependencies

Since participants are higher education graduates and alumni, we examine influences on their beliefs
that are possibly shaped by the field of study, e.g. Economics and Science. Therefore, access to
initial funds is concerned easier by the Economics graduates (t(411)= 3.05, p<.01) who also agree
more than their Science counterparts in that loyalty to a business plan is a key-factor for
entrepreneurial success (t(411)= 2.04, p<.05). However, they consider failure in the first
entrepreneurial attempt as more ‘disastrous’ (t(411)= -3.41, p<.01) and they also recognize the
significance of consultancy towards risk management (t(411)= 3.19, p<.01). Unexpectedly, science
graduates consider less than their counterparts entrepreneurship as an act of innovation for SMEs
(t(411)= 2.68, p<.01). They are also more positive towards the use of others’ funds (t(411)= -2.47,
p<.05) and to the conception that the major motive of entrepreneurship is wealth creation (t(411)= -
2.56, p<.05). Finally, science students consider more that intrapreneurship is impossible within large
companies (t(411)= -3.27, p<.01), similar to the elder group of age dependencies.
4.2.5 Entrepreneurial intention dependencies

The identification of differences in beliefs between entrepreneurially nascent, latent and normal
population is important since we are interested in understanding the mechanism of entrepreneurial
nascence. Using one-way ANOVA tests, we observed that latent entrepreneurs understand
entrepreneurship as a large companies’ activity (F= 3.70, p<0.05). Furthermore, the importance of
flexibility and adaptation (F= 7.98, p<0.01) along with communication skills and participation to
networks (F= 3.60, p<0.05) are more highlighted by nascent entrepreneurs. Finally, nascent
entrepreneurs consider more that a fail in their first attempt can be used as an experience that can
lead them to subsequent success (F= 5.30, p<0.01) and that due to self confidence, the entrepreneur
finds the way to overcome the fear factor and to operate successfully (F= 8.11, p<0.01).
5. Conclusions
The present survey focused on entrepreneurial beliefs and attitudes of Greek graduates and alumni.
Participants were either economics or science students. According to this separation, economics
graduates emphasize more on the quality of a business plan and on effective consultancy towards
uncertainty management as they don’t endorse learning from failure. This view is understood as
originating from economics studies, however, adaptation and flexibility are modern competencies of
entrepreneurs that have to be introduced in entrepreneurial courses (cf. Bhidé 2000; Kruijne 2007).
On the other hand, science students dispute more intrapreneurship as a viable procedure within large
companies. Another key-finding is that science students lack of conceptualizing entrepreneurship as
an act of innovation. Despite the emerging worldwide picture where innovation is not the dominant
driver for entrepreneurship (Shane 2008), entrepreneurial courses in Greece should focus on
knowledge-intensive firms especially in science departments. Such a direction is consistent with GEM
reports which do include Greece amongst innovation-driven economies but also note that
innovativeness has to grow more in Greek firms compared to the rest European countries.
Differences between nascent and latent entrepreneurs indicate that the former emphasize more on
self-confidence, learning from failure, communication abilities and network participation. This is an
expected attitude for the nascent group, usually summarized by ‘a reduced fear factor’ in literature
(e.g. Davidsson 2006). Notably, latent entrepreneurs are more inclined to correlate entrepreneurship
with large companies; an issue to be addressed in entrepreneurial courses and seminars. The
percentage of nascent entrepreneurs is also a function of age: with a mean age of 21 years old for the
normal population group, the latent one shows a mean of 22 y.o. and the nascent one an even
greater (23 y.o.). Thus, nascents show an increased working experience (90%). Finally, the nascent
population has participated entrepreneurial courses more than the rest and it is dominated by males.
In conclusion, we would like to note three findings emerging from the general population that concern
both entrepreneurship education and counselling in Greek universities. Firstly, the relation of
entrepreneurship to SMEs along with the role of innovation needs to be addressed further since
common beliefs and perceptions attribute business venturing primarily to large firms. Secondly, social
entrepreneurship (or social innovation) has to be clarified and be included in teaching since there is a
poor understanding and a lack of case studies about it. Finally, entrepreneurship courses need not to
over–focus on ‘static’ business plans but also to introduce adaptation and flexibility techniques.
Present results are only indicative for existing entrepreneurial attitudes and we plan to extend the
survey to more universities and faculties. Moreover, at the present time we are not able to identify
15
where the observed beliefs come from which will be a next step for our research in which full TPB
needs to be employed.
Acknowledgements
This work was financially supported by the Greek Ministry of Education and Religious Affairs through
the “Education and Lifelong Learning” programme. AK is grateful to Prof. P. Georgiadis for assisting in
data collection, comments and encouragement.
6. Appendix 1
Instrument items used in the present work:
N1 I am interested in issues related to N4 I have identified specific entrepreneurial

entrepreneurship opportunities, that I will attempt to pursue in the
future
N2 I intend to start my own business in the N5 I keep track of progression in business venturing
future
N3 I have collected information about the N6 I have a specific business idea that I intend to
process of undertaking entrepreneurial implement in the future
activity
Q1 Entrepreneurship concerns solely SMEs Q16 Failure in the first entrepreneurial attempt
consists a source of self-knowledge and can
lead to subsequent entrepreneurial attempts
Q2 Entrepreneurial education does not Q17 Entrepreneurship is considered as a mindset
crucially contribute to entrepreneurial that can be met in any working environment
success, since ‘the entrepreneur is born -
not made’
Q3 Access to business financing is an easy Q18 Experience constitutes a critical success factor
task for proficient entrepreneurs for entrepreneurship
Q6 Business success depends primarily on the Q21 Loyalty to business plan is a success factor for
intuition and creativity of the entrepreneur entrepreneurship
and secondly on his/her organizational
capabilities.
Q9 Everyone can follow a career either as an Q25 Entrepreneurship is absolutely an act of
entrepreneur or as an employee, hence innovation
entrepreneurship is a form of career
Q10 Learning from failure is the most important Q26 The entrepreneur’s organizational and
procedure for risk management marketing abilities are success factors while
success depends on the market
Q12 A successful business venturing depends Q28 Communication skills and network participation
on the entrepreneur’s flexibility and are success factors
adaptation to rapid market changes
Q13 Social entrepreneurship is a ‘marketing Q34 The fear factor shrinks due to self-confidence
strategy’ of companies
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17
The Capitalization of Intellectual Assets: Evidence From
the Innovative Technology Sector in Israel
Tamir Agmon1 and Ido Kallir2
1
Gothenburg University, Sweden; and the Graduate School of Business, the
College of Management, Israel
2
The Graduate School of Business, the College of Management, Israel
agmont@012.net.il
ikallir@gmail.com
Abstract: In today’s knowledge-based world, ideas drive growth and development. It takes a long time to turn
ideas into actual cash flows. Only by selling ideas for future goods, services and processes, can entrepreneurs
gain immediate benefit from their innovative ideas. Venture capital industry is an industry that brings together
ideas and high risk capital to generate value. In some cases, entrepreneurs and investors reside in different
countries. In this paper we show that such cases provide two types of benefits; benefits to the entrepreneurs and
the investors and benefits to the entrepreneur’s country. The first type requires the success of the technology
firms (start-ups) that attempt to realize the innovation. The second type of benefit only requires the flow of high-
risk capital from the investor’s country to the entrepreneur’s country. This national benefit has two main
components: increased wages and increased tax revenues. Israel is an example of a country that benefits
substantially from high-risk capital, imported primarily from the US via venture capital funds. We compute the
total benefit to the Israeli economy from foreign high-risk venture capital investment. We show that the foreign
investment driven benefits to the Israeli economy from wages and payroll taxes are much larger than the benefits
from successful start-up companies (“Exits”). Therefore, the government might be virtually indifferent to the start-
ups’ success rate.
Keywords: public sector, high technology, venture capital, start-ups, economic growth, value generation
1. Introduction
New ideas that lead to new products, new services and new processes for production and
communication contribute substantially to the growth of the global economy. Capital markets are an
effective way through which new ideas are transformed into value. However, a significant challenge
for these markets is the fact that innovative ideas are out of the mainstream and whose true value can
only be assessed after significant development and marketing. Naturally, entrepreneurs have higher
expectations regarding the future value of their ideas and value the ideas more than investors. This
creates difficulty in financing new and innovative ideas.
Acemoglu (2001) propose a simple but highly plausible formal model where differences in the ability
of economies to channel external funds to new firms plays a key role in explaining why some
economies experience an extended phase of depressed job creation in the wake of the arrival of a
new set of technologies while other economies can adapt faster to such a technological shock.
Acemoglu, Aghion,. and Zilibotti (2002) show that better functioning venture capital markets may
reflect this difference in the ability to channel external funds quickly and smoothly to promising new
entrepreneurs. Hubertus-Rainer and Neil (2002) analyze whether differences in venture capital
investments have explanatory power with respect to labor market performance across countries and
over time. They find inconclusive evidence about the impact of the venture capital investments on the
labor market. Hellmann, and Puri (2000) show that economies with fully developed venture capital
markets tend to be superior in these types of selection and matching activities because they are more
open to the entry of outsider entrepreneurs with new ideas. They also suggests that there may be a
tradeoff between experience on the one hand and selection as well as matching on the other hand.
Another literature domain deals with contracting between the capital holders (investors and funds)
and other stakeholder (entrepreneurs and governments). Agmon and Messica (2008) study the
prerequisites of public policy for technology innovation, especially in small- and medium size
countries. They find that the prerequisites for the formation of a viable Hi-Tech sector comprise the
following components: creating or leveraging on a local comparative advantage at the firm or sub-
sector level, importing professional high-risk capital and reducing tangible and intangible international
trade costs by forming a suitable habitat. Coval and Thakor (2005) proposes a framework for
understanding financial intermediation. They suggest a setting in which intermediaries possess no
inherent information processing or monitoring advantages. Instead, there are overly optimistic
18
Tamir Agmon and Ido Kallir
entrepreneurs who require funding from overly pessimistic investors. Coval and Thakor show that
intermediaries can arise endogenously. In such a setting, only a rational intermediary will be
sufficiently optimistic to find it worthwhile to invest in a technology for screening entrepreneurs'
projects, and yet be pessimistic enough to use this technology.. Gompers and Lerner (2001a) find that
90% of new entrepreneurial businesses that don't attract venture capital fail within three years.
Gompers and Lerner (1999, 2001b) show that four factors limit access to capital for firms: uncertainty,
asymmetric information, nature of firm assets and conditions in the financial and product markets.
Asymmetries may persist longer in high-tech firms, thus increasing the value of delaying investment
decisions. Kaplan and Stromberg (2001, 2003) directly compare the characteristics of real world
financial contracts to their counterparts in financial contracting theory. They study actual contracts
between venture capitalists and entrepreneurs. Kaplan and Stromberg (2004) also show that the
distinguishing characteristic of VC financings is that they allow VCs to separately allocate cash flow
rights, voting rights, board rights and liquidation rights. They measure and report the allocation of
these rights, focusing on the limited power of entrepreneurs. they also suggest that the actual
contracts are most consistent with contract theory as well as with screening theories.
We present the unique setting of the Venture Capital industry in Israel in section 2. On this
background, we demonstrate how financial intermediation contributes to the generation of value. In
this section we develop the main contribution of our work: The value which is generated by the
investment of venture capital funds is allocated to different stakeholders of the firms that generate the
value. There are four main groups of liabilities' holders; (a) the entrepreneurs; (b) the venture capital
funds; (c) the employees (d) the government. The first two types of liabilities are explicit, shares and
preferred shares. The other two, wages and taxes on wages, are implicit. The shareholders,
entrepreneurs and VC funds generate substantial value in those cases where the start-ups are
successful. This is relevant only for a small number of start-up companies that have received
investments from venture capital funds. The employees are paid regardless of the firm’s success. The
government collects tax from the employees of all firms as well as from the capital gains of the
successful firms. We show that income taxes are about twenty times more than capital taxes.
Therefore, the government is virtually indifferent whether the Start-Ups’ are successful or not.
In section 3 we present our empirical findings in relation to the “hidden” stakeholder- the government.
Most of the value from investment of venture capital funds in innovative start-ups accrues to the
people who are employed in the start-ups and to the government through taxes on wages. The impact
on the budget is presented and discussed in section 4 of the article. Small countries benefit from
import of high-risk capital and the ensuing investment in innovative ideas. This leads to a competition
among countries. This process is discussed in contracting terms in section 5. We suggest that if the
VC Funds are indeed sensitive strictly to the naïve product of probability and return, then given the
results of section 3, a government should provide superior R&D and legal platforms. The study ends
with a concluding section (section 6 of the article).
2. The venture capital industry in Israel
Prior to 1994, there was no VC funds industry in Israel. Israel had technology-based industry,
particularly in the defense sector, but there was no international funding of new ventures. In 1994,
the Office of the Chief Scientist (OCS) initiated a program encouraging VC investment in Israel. The
program had one innovative requirement and one innovative feature. The requirement was that Israeli
VC funds be professionally controlled by foreign VC funds which would provide at least one third of
the total investment. The feature was that the Israeli government agreed to subsidize the success of
the funds and share the risk. The program (named “Yozma”, meaning Initiative) initiated the
establishment of ten funds based on joint-ventures with international venture capital funds. The Israeli
government allocated a small budget of $100M. The US venture capital industry at the time managed
$7.5 billion. The Yozma program had noteworthy results, illustrated in table 2:
Today there are more than 80 active VC funds in Israel. Most of them are Israeli; but the investment
money is typically foreign – primarily from US institutional investors. To verify this, we survey the
portfolios of the ten largest Israeli institutional investors, which are part financiers of most innovative
projects. Out of a total investment of $45 billion only $390 million was invested by Israeli institutional
investors: less than 1% of the average portfolio.
In 2007, total gross domestic investment in Israel’s industrial sector was about $12 billion. Investment
by venture capital funds about 10% of the total investment, a very large proportion for high-risk
19
investment. VC funding has been an important part of total industrial investment every year since
1997. Israel can maintain such a high proportion of investment in high-risk new ideas only because it
is financed by foreign investors. The investment is allocated to a large number of companies. Even in
2003, a bad year for High-Technology start-ups, VC funds invested $770 million in more than 200
companies. Data for the period 1997-2009 is presented in Table 1 (see Appendix).
Venture capital funds are managed by general partners who initiate the fund and spend time and
money in raising the fund. They raise the fund primarily from institutional investors who represent and
manage savings of households. The general partners are compensated by what is known as carry-
over. The investment is done by the purchase of shares, often preferred shares. However, the shares
are divided between the investors (the limited partners who are the pessimists) and the managers of
the fund (the general partners who are the rational agents). Typically, the first 8% go to the limited
partners. The additional return above the minimum is divided in a ratio of 80:20 between the limited
partners and the general partner.. That means the general partner has to repay the principle plus the
agreed upon minimal return on the fund as a whole before getting any return. Making bad investments
is expensive to the general partner, and in this sense the general partner assumes there's a risk.
Israel is a prime example of the contribution of financial and risk intermediaries for generation of value
from intellectual assets. During the period between 1996 and 2008 venture capital funds have
invested $16,790M (Adjusted for Inflation) in 6390 young innovative firms. The assets of the
companies which have received these investments are primarily ideas (intellectual assets). The
investment of the venture capital funds in these companies comprised 69.8% of the total investment
in them. Other investors and the government have invested $7,240M in these companies to bring the
total investment in them to $24,030M. We find that almost 70% of these firms, 3957 companies, were
still active at the beginning of 2009. There has been a great difference between the median
investment in very young and seed level companies ($0.5M per investment) and the median
investment in relatively mature companies ($25M). Data on the investment by the investment round, a
measure for estimating the maturity of a company is presented in Table 3 (see Appendix). The
investment of venture capital funds in young innovative technology firms (start-ups) is divided to five
investment rounds. Investment rounds are usually determined by some milestones which are
accomplished by the start-ups during their development. The median investment in the seed round is
$500,000, and then it goes up to $2,300,000 at round 1, and $6,500,000, $12,500,000, $25,000,000
for rounds 2, 3and 4 respectively.
Many of the companies which have received investments in the earlier rounds ceased their operations
in later years; a large number of companies continue to operate, but they will never achieve the exit
stage. These companies are able to cover their operating expenses, but they do not provide any
return for the invested capital.
3. The distribution of value: Who gets what
In the case of the VC funds supported industry, we can trace the allocation of the actual payments
according to the round of investment. In the first round most of the cash flows that the firm generates
and distributes are wage payments to its labor. The investment of $16,790M by venture capital funds
in Israel in the period 1996-2008 was paid primarily to the workers in the more than 6,000 start-up
companies who were the beneficiary of the investment, and to the tax authorities in Israel by the tax
on wages. The investors may receive an overall return that exceeds their $16B investment, but that
return was paid by other investors outside Israel. It is so since the return to the original investors in the
start-ups, the limited partners in the venture capital funds, comes from an exit. Almost all the IPOs of
Israeli start-ups were in the US market, primarily in NASDAQ, or in European markets like AIM.
Almost all the acquisitions were done by non-Israeli companies. It follows that the Israeli high skilled
labor and the Israeli government are the main recipients of the value from the investment in Israeli
start-ups by US and other venture capital funds. The contribution is fully supported by non-Israeli
(primarily American) investors – first at the time of the investment, and later in the time of the exit.
In order to estimate the size of the contribution in Israel in the period between 1996 and 2008, we
have built a data base which uses for evaluating the number of employees in the companies that
received the investment. We have used a model and a classification which was developed by Signifier
Ltd. Using this information, we build a matrix of four industries in the high-technology sector: software,
hardware, Internet, and Biotech. Within each industry we distinguish between four stages of the firms,
20
corresponding to the sequential investment rounds. We have calculated the number of employees in
each of the sixteen model firms (four industries and four stages per company).
Panels A to D of Table 4 (see Appendix) show the information regarding the number of employees
per industry. The employees were divided into six classes by the average salary per position. We are
using average salary per employees for each rank in each one of the four industries. Given the large
number of firms and the great similarity among firms of the same industry/size, the aggregate salary
numbers are a good representation.
In Table 5 (see Appendix) we classify the Active Companies according to the year in which they were
established and their status: small, small-medium, medium and large.
In order to estimate the contribution to the Israeli economy of foreign venture capital backed
investments, we compute the growth of the workforce over time; compute the distribution of the
average salary per firm size and per industry; and estimate the contribution of the workforce to
consumption and to the level of direct and indirect taxes.
For estimating the growth of the workforce over time we use a variation of the logistic function:
Were is the yearly workforce parameters, is the last year on our database and is the time of
the firm’s founding. By setting the factor (equation 3.1) we ignore fluctuations in the workforce,
since we are interested in the median compensation.
We break the start-up companies to sectors: Software, Hardware, Internet and Biotech. We find that
the compensation scheme and workforce mixture differs over these clusters. Salaries in the Hardware
segment tend to be higher than average. The workforce in the Biotech segment is more “flat” (fewer
executives).
By using the classification of firms to the industries which are discussed above we compute the
workforce and salary mixture of small (10 employees), medium (50 and 100 employees) and large
(250 and above employees) companies.
We compute the average salary per firm. By applying for the actual number of years that passed
since the establishment of each firm, we get a number of annual employment years (EY).
The overall employment years are:
were is the number of firms from a specific size (as of Jan 2009) and segment established on a
year ; is a discrete number and is the segment in
which the firm is operating, such that:
=1.
The total number of “Employment Years” that was generated by venture capital backed investment in
the Israeli technology sector is roughly 660,000. Given our computation in equation 3.1, about 74,000
jobs were created by the VC industry during the years 1994-2008 (See graph 2 in the appendix).
However, we do not claim that all of these jobs were added to the market. It is obvious that some of
the high-technology sector jobs were filled by people who were already working either in the public
sector or in other sectors. Low paying jobs that were freed by those who moved to the high-
technology industry were either taken by new immigrants or exported.
We compute that the real total compensation to the employees in the venture capital backed firms,
firms that received investments in the period 1994-2008 and are active in 2009, is $40 Billion. This
money was paid by investors – primarily US and other foreign investors – through VC funds in order
21
to receive a part of the future cash flows, money that is to be generated by a large number of small
firms which are based on intellectual assets (ideas of technology entrepreneurs). Although many of
the ideas (and the start-up companies that were set up to develop them) were proved unsuccessful,
the process as a whole generates value to a large number of employees; through taxes it also
generates value to the country as a whole.
4. The budget impact: Fiscal evaluation of the industry’s impact
We now turn to our main empirical point. In the previous section we have suggested that the true
impact of the start-ups industry on the Israeli economy is a function of the process of investment,
mainly the capital import and its contribution to employment and the revenues of the government. The
expectations for exits are necessary, because this is the motive for the investment. However, the
royalties and taxes from exits are not significant; this is not the case of the personal income tax. The
Israeli tax code is continually changing over the last decade. In the past three years the average tax
rate on wages in Israel has fallen for most income levels, while in developed countries it has been
rising on average. However, for the 2% of Israeli workers who are at the highest levels of income, the
tax rate in Israel is higher than in two thirds of the countries (according to a survey by Brender, 2009)..
Since the code is complex and it mixes different taxation levels with different benefits, we use the
following plausible simplifications:
1. The inclusive taxation for a certain individual is set by
were is the tax rate per income level, is the taxed income level, is the National Insurance
rate per income level and is income level for National Insurance calculations and is the
Personal Tax Credits.
2. We use the matrices of Table 6 (see Appendix) in order to compute the salaries and quantities of
employees per firm.
3. We use the 2009 Israeli Tax Code. The monthly income taxes ranges between 1,418 NIS for a
10,000 NIS salary (~2,500 US$) and 20,609 NIS for the top 60,000 NIS (~15,000 US$) salary. The
additional National Insurance payment is 1,250 and 9,965 NIS accordingly.
Based on the data above it is possible to estimate the fiscal impact on the government budget. The
total tax collection from the start-up industry on the year 2009 is expected to reach 6.2 Billion NIS
(1.55 Billion US$). The total tax collection from the start-up industry over the period 1994-2009 in
current prices is $11.5 B.
5. Economy and VC fund contracting model
Gompers and Lerner (2001a) show that over the years venture capitalists have created nearly one
third of the total market value of all public companies in the United States. As we have pointed out
earlier in this article, venture capital cannot generate value without the ideas of the entrepreneurs,
and the entrepreneurs cannot generate value without venture capital.
Kaplan and Stromberg (2001) provide a comprehensive review of empirical findings concerning
venture finance and the agency problem; Hart (2001) provides a review of theoretical models; A topic
less discussed is the environment in which the VC funds operate. These and many other studies
focus on the relationship between the venture capitalist (and the fund) and the entrepreneurs. As it
has been shown above, there is another actor – the state in which the investment is taking place. The
interests of the state (to maximize total investment) are different from those of the venture capitalist
and the entrepreneurs. This is particularly true when the location of the entrepreneurs and the
investment is different from the location of those who provide the venture capital. More than 90% of
the venture capital in Israel is generated in foreign markets, mostly in the US. The flow of foreign
venture capital contributes substantially to the Israeli economy. Therefore, small countries which also
have the technology and the entrepreneurship might want to compete for these investments.
22
The range of actions that a country can take in order to offer a better “investment contract” varies from
actions in the geopolitical field to actions in the legal and accounting field. We focus on pure financial
terms that can be easily controlled and quantified in a model. In order to gain insights into this
process, it is useful to regard it as a game in the context of applied game theory.
We study the pure strategy subgame perfect Nash equilibrium for a two-stage game. Here there are
two types of Hosting Economies (HE) and two types of VC Funds (VCF):
1. At time 1, the two HE simultaneously make their investment condition known. The condition is a
pair defined by (ί,Ř)
2. Given the HE offers, the VCF decides to invest or not to invest. We focus on the case in which
there are two possible decisions: investing a high sum or a low sum. The calibration of the models
allows us to set L=0. The features of the solution of this game are as follows:
a. If the VCF is indifferent between investing or not, it will choose not to invest.
If the two HE offer the same terms, then the VCF will invest in each For a VCF to invest ί ≥ 0
)=E(
The specific properties of are:
These properties guarantee continuity and the existence of an optimum.
The type of the VCF is defined by . The VC can be or e.g. it can invest H or L under a state of
the world, with the following decision function
In order to keep the model aligned with the Nash Equilibrium assumptions, we assume that higher
(lower) investment levels ί do not add return, but rather decrease (increase) the utility of the VCF.
Lemma 1: In any equilibrium there are no superfluous profits.
Proof: see Appendix
The implication of Lemma 1 is that under any equilibrium, no deviation can yield strictly positive
profits. Using Lemma 1 immediately leads to the results of lemma 2:
Lemma 2: The only possible equilibrium requires
Proof: see Appendix
The equilibrium condition affects the activities of the HE. If for one fund
, then the activities of the HE will not go unnoticed by the VCF.
When we consider only situations in which each HE offers different terms, we receive the following
specific results:
Lemma 3: If the pair of HE offer the pair of _in the separating equilibrium, then
both pairs of contracts yield zero profits such that .
Proof: see Appendix
Now we turn to identifying each contract that the HE can offer. The more risk averse (low investing),
VCF will invest as little as possible:
23
Lemma 4: If equilibrium exists, the VCF with the higher will invest precisely zero ,. the
VCF accepts the same contract, just as when the HE supplies no signal on .
Proof: see Appendix
Lemma 5: If an equilibrium exists the VCF with the lower will invest , where the additional
investment satisfies the condition:
Proof: see Appendix
The series of Lemmas can be summarized by the following proposition:
Proposition 1: iff a subgame perfect Nash equilibrium exists, the VCF will make a pair of investment
decisions such that the VCF with the high will make an investment , and the VCF with the
lower will invest , where satisfies equation (5.3)
The immediate implication of the model which is presented above is that a government policy can
affect the import of venture capital to small countries, and in that way it contributes to the domestic
welfare far beyond the direct effect of the exits. The goal of the government is to make VC funds to
invest in the country as much as possible. In order to do that the government should provide
incentives which are aimed for the objective function of the fund. Since the VC funds and the host
government do not have the same objective function, there are ways to increase the investment in a
way that will increase welfare in the country.
The two-stage model is a simplification of reality. The set up and search cost that are involved in VC
investments call for a dynamic multi-period model, because the VCF will review more than one period
before making the investment decision. It is likely that the observed Ř is not a random variable, but is
based on previous observations such that:
The autoregressive factor in 5.4 is a plausible assumption. Before making a new investment, the VCF
considers the results of previous periods. Though the specific of each VCF are unknown to the HE,
the previous returns are observable. The adjustments discussed above do not change the main tenor
of the results.
6. Conclusions
The capital market is the place where future uncertain cash flow can be sold for current certain
amount of money. Innovative ideas about future products, services and processes yield current
monetary value only if there is a process of monetization in the capital market. When this process
exists, it is possible to create welfare in the country where these innovative ideas (intellectual assets)
exist by employment and taxes. This is particularly true if the producers of the ideas (entrepreneurs of
technology start-ups) reside in one country, and the buyers of the ideas are from a different country.
Israel is a prime example of this process. In the last 15 years Israel has established a new
comparative advantage, and many Israeli companies generate a new competitive advantage in the
innovative technology start-ups sector. This process has two distinct dimensions: the investors and
the entrepreneurs are both looking for the few start-ups that will accomplish an exit. It means they will
yield a very high return on the investment. These start-up companies are few, and there is no way to
identify them before the investment. Therefore, it is common in the innovative technology start-ups
sector to invest in many companies in the first round in order to get few exits. The country as a whole
benefits from the entire investment flow. Indeed, from the point of view of the Israeli economy the exits
are almost non-important, because most of the return goes to the investors – the limited partners in
the venture capital funds who reside outside Israel. The benefits to the country where the investment
takes place in come from a direct monetary effect: the direct income – wage of the workers in the
24
start-ups sector and the tax that they are paying on their wage; and the indirect effect of training
highly skilled workforce that may be employed in other sectors of the economy. For the investors and
the entrepreneurs exits are the objective; for the country where the investment takes place in, the
exits is a necessary condition to draw in the flow of investment. The investment in Israeli young
technology innovative firms, the start-up companies, by venture capital funds which are funded by
foreign investors, provides an example to a successful monetization of Israeli intellectual assets. As it
has been demonstrated by the rapid and successful development of the innovative technology start-
up sector in Israel, and measured by its contribution to employment and tax revenues, the
monetization of intellectual assets is a substantial contributing factor to growth and development.
Therefore, it makes sense to actively seek investment by venture capital funds which are funded by
foreign investors. The policy of the governments in Israel and in other similar small countries should
aim to this goal.
Appendix 1: Tables and graphs
Table 1: Investment at VC-backed companies in Israel, 1997-2007
Year Average investment No. of firms Total Raised

per firm ($US M) ($US B)
1997 0.44 204 2.2
1998 0.59 254 2.3
1999 1.01 348 2.9
2000 3.20 593 5.4
2001 1.60 488 3.3
2002 0.99 304 3.2
2003 0.77 240 3.2
2004 1.20 300 4.0
2005 1.10 355 3.1
2006 1.20 293 4.1
2007 1.20 308 3.9
2008 1.40 320 4.1
2009 0.73 220 3.0
Total 15.4 4227 3.6
Table 2: Outcome of the Yozma program (1994-2004)

Year Expected (Net) Cash Flow
1. -1
2. -2
3. -5
4. -10
5. -12
6. 20
7. 50
8. 100
9. 150
10. 190
Total 480
25
Table 3A: Median investment per investment round (figures in $US M)

Median
investment
per round
M$ 25 12.5 6.5 2.3 0.5
1996 2 3 17 54 59
1997 4 9 19 71 71
1998 3 17 37 117 81
1999 17 46 85 174 162
2000 95 113 159 326 229
2001 38 76 105 226 130
2002 25 47 76 171 142
2003 17 45 82 157 156
2004 17 59 87 200 189
2005 20 47 92 193 214
2006 39 60 80 180 235
2007 35 61 102 223 289
2008 37 63 83 128 194
Table 3B: Median investment per investment round – active firms (Q1 2009) (figures in $US M)
Median
investment
per round
M$ -
Active
firms 25 12.5 6.5 2.3 0.5
1996 2 2 6 28 19
1997 1 3 8 27 22
1998 3 10 14 42 28
1999 8 19 32 61 50
2000 32 41 66 132 76
2001 18 24 31 117 53
2002 11 21 35 92 73
2003 9 20 53 108 87
2004 12 37 58 143 131
2005 18 34 70 144 155
2006 34 46 67 155 211
2007 32 56 94 209 273
2008 37 62 79 126 190
Table 4: Panel A: Software firms workforce structure
26
Table 4: Panel B: Hardware firms workforce structure

No. of No. of No. of
No. of Employees Employees Employees
Employees
Rank Job Title 10 50 100 250
A CEO, CFO, CS 0 1 2 4
B C level ; Others 0 3 6 8
C Senior sales, Directors 2 8 20 40
T-Leaders, Senior
D Engineer 2 9 18 50
E Junior Engineers, QA 3 22 42 128
Admin.
F 3 7 12 20
Total Salary 2,124 12,108 25,056 59,160
Average Salary 212.4 242.2 250.6 236.6
Table 4: Panel C: Biotech and life sciences firms workforce structure
Table 4: Panel D: Web Applications firms workforce structure
Table 5: Breakdown of high-tech firms (originally start-ups) by size and year of establishment
27
Table 6: Panel A: Typical salaries at the high tech industry

Annual
Salary, Annual
# Job Title US$ Salary, NIS
1 CEO, CFO, CS 180,000 720,000
2 C level ; Others 120,000 480,000
3 Senior sales, Directors 90,000 360,000

T-Leaders, Senior
4 Engineer 63,000 252,000
5 Junior Engineers, QA 45,000 180,000
6 Admin. 30,000 120,000
Table 6: Panel B: Typical salaries and taxation levels (2009 Data)
Graph 1: Total accumulated remuneration per industry
Graph 2: Number of jobs created per year
28
Graph 3: Annual investment vs. number of firms receiving investments
Appendix 2: Proofs of Lemmas

Lemma 1 Proof: Let be the two set of terms chosen by the high and low
investing funds respectably. Also suppose that the two hosting economies gain from the setting a total
of one HE is making no more then . Now assume that this HE deviates and now
offer terms if it is the low return HE, or if it is the high return HE. The 1st
set of terms will attract all the low investing VC and the 2nd will attract all the investing VC. Since the
epsilon deviation can be chosen to be arbitrary small, the deviation from the initial terms can yield
profit that are close to Therefore, the initial set must be of ,
because no HE can sustain losses under equilibrium terms. Therefore, the equilibrium profits must be
zero.
Lemma 2 Proof: Suppose that there is Pooling equilibrium. The terms of such equilibrium are
From Lemma 1, we know that such equilibrium must answer the Zero profits condition.
Suppose that is offering Now, has a strictly positive deviation by offering terms
that are below the no-profit line such that .These terms attracts the high investing VC,
but not the low investing VC which will prefer the original pooling state. The result is that, profits
from the deviation and, loose from the deviation. Pooling equilibrium cannot exist.
Lemma 3 Proof: We start by assuming that . Both HE can earn strictly positive profits from any
VC that will accept these terms, either high, or low investing VC. Since Lemma 1 implies that no such
deviation can exist. Instead we assume that . Since the high investing VC chooses a
contract , then the low investing contract must lie on (or below) the high investing
VC indifference curve. Since low investing VC chooses a contract , it must lie on (or above) or
above the low investing VC indifference curve. If is offering the law return contract that is above
the indifference line then has a strictly positive deviation by offering terms that are below
the indifference curve such that These terms will be accepted by the high investing VC (but
not by the low investing VC), we must have in any (separating) equilibrium. Note that lemma
1 constrains us to “Zero profits” conditions, the only feasible conditions are and
Lemma 4 Proof: As we show in lemma 3, Now assume that the return over the low
investment is . If these terms exist, then the HE can make a strictly positive deviation by
offering terms . All the low investing VC will choose these terms, and the HE will profit from
29
any high or low investing VC that will choose to take it. This of course contradicts Lemma 1. The
result is that for zero investment, , the return must be zero as well.
Lemma 5 Proof: By lemmas 3 &4 we get that and . Additionally, if the

high investing VC is willing to accept the terms , e.g. to choose not to invest at all, it means that
is not high enough to compensate it for its additional investment. The low investing VC is
indifferent between the two set of terms so equation 5.3 holds. If the high investing VC is willing to
invest even for an arbitrary small additional return, than both HE have strictly positive deviations from
the initial terms. will attract the high investing VC, and will not change the choice of the low
investing VC. Thus, in any possible equilibrium the terms offered to the high investing VC must
be .
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30
Business and Entrepreneur Characteristics influence on
Business Performance of Professional Small Medium
Enterprises
Sulaiman Ainin, Yusniza Kamarulzaman, Abdul Ghani Farinda and Anna Che
Azmi
University of Malaya, Malaysia
ainins@um.edu.my
yusniza@um.edu.my
farinda@um.edu.my
annaazriati@um.edu.my
Abstract: This study aims to examine the determinants of business performance of Small Medium Enterprises
(SMEs) professional service businesses based in Malaysia. Specifically, the study analyses the relationships
between entrepreneur and business characteristics with business performance. Factors associated with
entrepreneur characteristics include gender, age, ethnicity, education, and working experience. While the
business characteristics examined were based on years of establishment, start-up capital, number of employees,
business’s origin and legal status. The study adopts a quantitative approach whereby a questionnaire survey was
used to gather data. The questionnaires were distributed to the owners of SMEs in Malaysia who are involved in
providing professional services in the areas of law, architecture, engineering and accounting. A total of 2,376
businesses were identified and questionnaires were distributed via the conventional mail. Despite numerous
efforts taken to improve the response rate, only three hundred and fifty three completed questionnaires were
returned. It was found that generally the respondents perceived that the business performances of their
companies were satisfactory and that they were gaining some form of financial profit. Further analysis on the
relationship between the business characteristic and business performance found that the Years of
Establishment, Business Set-Up, Number of Employees, Nature of Business, Business Ownership, Start-Up
Capital, Business Structure, Source of Capital are significant to business performance. The study also examined
the relationship between the entrepreneur characteristic and business performance and found that the gender
and age of the entrepreneur significantly affect business performance. Businesses whose owners were male
entrepreneurs and older comparatively perform better than businesses whose owners were females
entrepreneurs and younger. It is hoped that the results of this study give insights into the characteristics of
successful professional businesses, thus, assisting governments in formulating policies for the development of
these SMEs.
Keywords: business performance, professional service businesses, small medium enterprises, entrepreneur and
business characteristics
1. Introduction
The small and medium size enterprises (SMEs) play a significant role in economic and business
systems and remain the backbone of virtually every economy in both developed and developing
nations. They are generally regarded as the engine of economic growth and technological progress
(Mulhern 1995). As such many studies (Abdullah 1999; Stuti 2005) have focused on the challenges
faced by SMEs in the global business environment. A few scholars (e.g. Lin 1998; Tung and Aycan
2008; Zhang et al. 2008) have investigated key organizational success factors. In addition, research
concerning SMEs has concentrated mainly on manufacturing industries (Buzzell and Gale 1987;
Bartlett and Ghosal 1989). Enterprises such as professional services business have been neglected
and not intensively explored (Nachum 1996, De Brentani and Ragot 1996).
A service is deemed professional by nature if it depends on the expertise of the provider and the
complexity and quality of the service cannot be easily evaluated by buyers (Thakor and Kumar 2000).
There are several service sectors that fit these characteristics, including accounting, auditing, book-
keeping, engineering and architectural services, data processing and computer programming,
advertising and marketing research, business and management consultancy, and legal services
(Nachum 1996).
These professional service businesses face a more complex and crowded marketplace than ever
before (Ozer et al. 2006; Dawson and Horenkamp 2007). These businesses need to perform in order
to continue doing business and their business performance is influenced by several factors, including
entrepreneur profile, business profile, financial, technical, and marketing among others (Bryson et al.
1997; Perren 1999).
31
Sulaiman Ainin et al.
This study focuses on the relationships between the entrepreneur and business characteristics with
business performance for a sample of SME professional service businesses based in Malaysia. We
examine the factors associated with entrepreneur (gender, age, ethnicity, education, working
experience) and a number of business characteristics (years of establishment, business set-up,
number of employees, nature of business, business ownership, start-up capital, business structure,
source of capital). Business performance is measured in terms of the business’ net profit (Murphy et
al. 1996; Avlonitis et al. 2001; Chang et al. 2003).
One of the motivations for this study is that most previous studies have been conducted in developed
countries (Raunch et al. 2009). Since developing countries are expected to have dissimilar cultural
background and adopt different economic policies, it is essential to determine whether small-business
management theories and practices that have been largely developed in the West are valid in other
cultural and business contexts including non-Western contexts such as Malaysia.
The following sections discuss the literature pertaining to the area of study and the proposed research
framework. This is followed by sections on the methodology used to conduct the research and the
results of the research. Finally the conclusion is presented.
2. Literature review
The success and performance of a business can be measured in various ways. Among the selected
variables are net profit and sales growth. The literature has strongly endorsed the use of multiple
performance indicators (Cochran and Wood 1984; Ibrahim and Rue 1998).
The success, growth and performance of any business are the product of a complex mix of variables
that are both internal and external to the business (Barney 1991). This paper focuses on variables
which are considered as internal to the business i.e. the business’s characteristics and that of its
entrepreneurs. Many past studies have shown the importance of these two variables (Blackwood and
Mowl 2000; Eeden et al. 2004; Indarti and Langenberg 2004; Harris and Gibson 2006).
2.1 Business characteristic

Business characteristics comprise a number of different factors that can affect business performance
i.e. years of establishment, business’s origin, number of employees, start-up capital and legal status.
Generally, a business’s age may be associated with knowledge accumulation and experience.
Several studies (Bracker and Pearson 1986; Birley and Westhead 1990) have linked higher
performance with an increase in the years of establishment of business; while others have found
otherwise (Begley and Boyd 1988). Sutton (1997) stated that the relationship between a business’s
age and business’s performance depends on the data and estimation methods used, and that these
are the reasons for inconclusive and contradictory results.
The major barrier to the start-up of new businesses in developing economies is access to capital.
Potential entrepreneurs in developing economies regard the lack of access to capital and business
loans, and the restrictions of the financial system to be the major problems in business success
(Marsden 1992; Brush etal. 2009). A study among Vietnamese SMEs revealed that capital shortage is
the main internal limitation hindering success (Swierczek and Ha 2003).
When starting a new business, one of the many decisions that SMEs must make is the choice of legal
structure for their business. The main issues of a legal structure include the entrepreneur’s liability,
management method, business legal status, taxation requirements, and the way of capitalizing the
business. A business evaluation of risk will be reflected in the choice of legal status. It determines the
mode of financing, degree of liability, and mode of transfer of property rights. For example, in a study
of companies based in Germany, Harhoff et al. (1998) found that business with limited liability have a
higher growth rate and a larger insolvency rate.
Business size can affect business performance (Serrasqueiro and MaçÃs Nunes 2008). For example,
Hung (2006) found that business size shows a significant influence on the performance of the Large-
Size TFT-LCD Panel Industry in Taiwan.
32
2.2 Entrepreneur characteristic

Past research have focused on entrepreneur characteristics including entrepreneur’s age, gender,
previous work experience and education level as key factors affecting business success and failure
(Carter and Jones 2000; Coleman 2000; Lussier and Pfeifer 2001).
A number of studies have examined the effect of the entrepreneur’s age on the growth and
performance of the business (Frank 1988; Pakes 1998). For example, Reynolds et al. (2000) found
that individuals of middle age between 25-44 years old were the most active business persons.
Therefore, it is likely that the age of the entrepreneur could affect the performance of a business.
Studies by Matthews and Moser (1995) and Scherer et al. (1989) reported that males have a higher
preference to become entrepreneurs than females. Their results are consistent with Kolveried’s
(1996).
Many studies have found that the educational background of business entrepreneurs is linked to the
performance of their business (Peterson et al. 1983; Prahalad and Hamel 1990). Entrepreneurs that
are successful have the essential competencies in operations, finance, management, human
resources and marketing skills (ibid). Lussiers and Pfeifer (2001) also found that entrepreneurs with a
high educational level have a greater chance of successfully managing the business organization.
The working experience in organizations serving as top-level management is positively related to

business success and better business growth (Dyer and Handler 1994). Entrepreneurs with prior
managerial experience and business exposure have a greater chance of successfully managing the
business organization (Lussiers and Pfeifer 2001).
3. The conceptual framework and propositions
Based on the pertinent literature and theories presented earlier, a conceptual framework has been
developed to propose how Business and Entrepreneur Characteristics could influence Business
Performance. The hypothesized framework is developed to examine the relationship between i)
Business Characteristics and Business Performance (as suggested by Blackwood and Mowl 2000;
Eeden et al. 2004; Harris and Gibson 2006); and ii) Entrepreneur Characteristics and Business
Performance (as proposed by Carter and Jones 2000; Coleman 2000; Lussier and Pfeifer 2001). The
links are illustrated in Figure 1.
Entrepreneur Characteristics
• gender
• ethnicity
• age
• education
• working experience BUSINESS
PERFORMANCE
Business Characteristics
• years of establishment
• business set-up
• number of employees
• nature of business
• business ownership
• start-up capital
• business structure
• source of capital
Figure 1: Conceptual framework

Figure 1 suggests there are significant relationships between:
The Entrepreneur Characteristics (gender, age, ethnicity, education, and working experience) and
Business Performance
33
The Business Characteristics (years of establishment, business set-up, number of

employees, nature of business, business ownership, start-up capital, business structure, source of
capital) and Business Performance
Hence this paper seeks to test the proposed framework in the context of professional services SMEs
in Malaysia. It is worthwhile to explore whether factors associated with entrepreneur characteristics
and business characteristics would influence the business success.
4. Methodology
4.1 Research design

A questionnaire survey was used to gather data from professional services SMEs in Malaysia. It was
employed to measure the factors that describe the Business and Entrepreneur Characteristics and
determine whether the factors have influencing role to the Business Performance. A total of 14
ordinal and nominal variables were developed to measure the constructs.
The measures used were based on previous research as discussed in the earlier section. The
questionnaire contained three sections: Section A: The business‘s background (8 variables); Section
B: The entrepreneur’s background (5 variables); and Section C: The business performance construct
as the dependent variable. The items in Section A and B were measured using a mixture of multiple-
choice and open ended questions. Business performance was measured using a series of statements
describing aspects of business performance and respondents were asked to indicate how strongly
they agreed or disagreed with each statement in terms of a description of the performance of their
business on a 5 point Likert scale. In addition, the respondents were also required to state their net
profit obtained for the year 2006/2007. The data is used to analyse the relationship between business
and entrepreneur characteristics as suggested by Reijonen and Komppula (2007) and Raunch et al.
(2009).
4.2 Research samples

Based on the database and considering the parameters imposed, probability sampling was deployed.
Probability sampling takes place when the probability of the selection of each respondent is known,
and, therefore, statistical inferences on the chosen sample of SMEs in professional services can be
made. The selected respondents from the industry‘s database could represent the total population of
SMEs in professional services, and this approach also permits generalizations.
The questionnaires were distributed to the entrepreneurs of SMEs in Malaysia that are involved in
providing professional services in the areas of law, architecture, engineering and accounting. A listing
of businesses in these areas was obtained from the Malaysian SMEs directory, Professional bodies’
database and companies’ database. Respondents were chosen based on systematic sampling
technique of the database and directory obtained, i.e. every even number was chosen for the sample.
The entrepreneurs received the questionnaire via conventional mail. Follow-up such as phone calls
and e-mail reminders were made to increase the response rate.
The total number of questionnaires distributed was 2,376, which is half of the total population (Table
1). Out of this, a total of 354 were returned and used for analysis. The response rate was nearly 15%,
which is comparable with past studies using the same research approach (Kanuk and Berenson
1975).
Table 1: Distribution of SMEs in the professional services sector
Professional Services Total Number of Total Number

Total Number of SMEs
Companies Distributed
Legal 2,639 2,595 1298

Accounting 991 958 479
Architectural 730 719 360
Engineering 522 478 239
Total 4882 4750 2376
Source: SMIDEC, 2004
34
5. Findings and discussion

This section begins by describing the business characteristics of the respondents, followed by the
entrepreneurs’ characteristics. The business performance and the relationship between business and
entrepreneurs’ characteristics with business performance are then illustrated.
5.1 Business characteristics

The profile of SMEs is shown in Table 2. In general, most of the SMEs were relatively new in
business, with 43% of them established after 2001, Most of the businesses were initiated and set up
by the entrepreneurs themselves (91%) and only a few of the SMEs were taken over from family
members. As expected, the number of employees working for the SMEs was relatively small. Nearly
88% of the SMEs employed less than 20 people, while only 11% of the SMEs have between 20 to 50
employees. In terms of type of business, the distribution of sample companies was almost equal
among the 4 business sectors. As most of the SMEs were initiated by the entrepreneurs, it is no
surprise that the ownership of the SMEs was mostly sole proprietorship (58%), while 31% of the
SMEs ownership was shared with others. It shows that the motivation to start a business comes from
the entrepreneurs themselves. The net profit of the SMEs was mostly less than RM50, 000 (37%) and
another 27% of the SMEs claimed getting a higher net profit of between RM50, 000 to RM100, 000.
Most of the SMEs had a start-up capital of less than RM100, 000 (86%), while less than 5% of the
SMEs had at least RM200, 000 start-up capital. The low start-up capital is fairly plausible as the
source of capital for the SMEs was mainly from the entrepreneurs’ personal savings (88%). The
distribution of Bumiputera and non-Bumiputera companies’ status was almost even with 44% of them
Bumiputera (i.e. Malay and indigenous people) and 45% non-Bumiputera. Most of the SMEs were
located in the West region of Malaysia which includes the states Selangor and Wilayah Persekutuan
(Malaysia has 14 states). This reflects the actual SMEs’ distribution in Malaysia
5.2 Entrepreneurs characteristic

The profile of the SMEs entrepreneurs is shown in Table 3. Most of the entrepreneurs were male
(78%) with the majority of them between 34 to 44 years old (43%). This means that most of the
entrepreneurs were relatively young in age. As the sample’s SMEs were providing professional
services, most of the entrepreneurs had professional qualifications in related fields (54%). Based on
the major ethnic groups in Malaysia, the majority of SMEs are from the Malay (43.1%) and Chinese
(42.2%) ethnic groups. Most of them had some working experience. It means that the SMEs
entrepreneurs are educated and experienced in their field.
5.3 Business performance

The respondents were asked about their perception of the performance of their own business. With a
mean score of 3.30, the distribution of the overall performance was negatively skewed, which means
that most of the respondents were on the higher range. It is an indication that many of the SMEs
entrepreneurs were somewhat more than satisfied with their company’s performance. As for the net
profit, it was discovered that that more than half of the businesses acquired less than RM100, 000 in
2006/2007 (Table 4). This is considered relatively good in relation to their paid up capital whereby
more than 80 indicated their paid up capital was less than RM100,000 (Table III).
5.4 Relationship between business characteristic and business performance

The relationship between business characteristics and business performance was tested via cross
tabulation and Chi-square. Before further analysis was carried out, the five categories of net profit (as
illustrated in Table 4) were collapsed to form three categories (i.e. below RM100k; RM101k –
RM200k; above RM200k) to overcome small cell counts in the test of association. The cross
tabulations (Table 5) illustrates that most business characteristic variables have a significant
relationship with Business Performance, except for the Business set-up, Nature of Business and
Business structure. Among all the variables, Year of establishment, Size of Employees and Start-up
capital show the strongest relationship with Business Performance, which is represented by the net
profit (p<0.01). The result also indicates that there is a statistically significant relationship between the
Business Ownership and Source of Capital and Business Performance at the 5% level (p <0.05).
These results are in line with previous research. Consistent with Bracker and Pearson (1986) and
Birley and Westhead (1990), more established businesses have better business performance.
Literature such as Holtz-Eakin et al. (1994) and Åstebro and Bernhardt (2003) found a positive and
35
significant correlation between small business survival and financing from personal sources. Hung
(2006) found that bigger business perform better and Harhoff et al. (1998) found that business with
limited liability exhibit a higher growth rate. Past literature (Swierczek and Ha 2003; Indarti and
Langenberg 2004) also showed that the higher the start up capital the better the businesses’
performed. However, it has to be highlighted here that the majority of the businesses in this study
have a paid-up capital of less than RM100, 000. Despite the lower capital, it is found to be significantly
impacting the business performance.
Table 2: Business characteristics
Characteristics Category Frequency (N=353) Percent (%)

Before 1970 4 1.1
1971 to 1980 15 4.2
1981 to 1990 37 10.5
Year of establishment
1991 to 2000 130 36.8
After 2001 150 42.5
Not disclosed 17 4.8
Own set up 320 90.7
Taken over from others 22 6.2
Business set-up Taken over from family business 2 0.6
Others 5 1.4
Not disclosed 4 1.1
Less than 5 138 39.1

5 to 19 171 48.4
No. of current
20 to 50 38 10.8
employees
51 and above 5 1.4
Not disclosed 1 0.3
Legal 92 26.1
Architectural 79 22.4
Nature of business Engineering 102 28.9
Accounting 77 21.8
Others 3 0.8
Sole proprietor 204 57.8
Partnership 111 31.4
Business ownership
Limited company/corporation 29 8.2
Others 3 0.8
Not disclosed 6 1.7
Less than 100,000 305 86.4

100,001 to 200,000 33 9.3
Start-up capital
200,001 to 300,000 5 1.4
300,001 and above 5 1.4
Not disclosed 5 1.4
Bumiputera 100% 155 43.9

Non Bumiputera 100% 160 45.3
Business structure Joint venture with local business 23 6.5
Others 6 1.7
Not disclosed 9 2.5
Personal Savings 312 88.4

Loan from friends 42 11.9
Source of capital
Bank Loan/Facilities 49 13.9
Government loan 1 0.3
Government grant 1 0.3
Other sources 10 2.8
North 53 15.9
South 57 17.1
Business locations East 34 10.2
(regions) West 142 42.5
East Malaysia 48 14.4
36
Table 3: Entrepreneurs’ characteristics
Characteristics Category Frequency (N=353) Percent (%)
Male 274 77.6

Gender Female 57 16.1
Malay 152 43.1

Ethnicity
Chinese 149 42.2
Indian 19 5.4
Others 11 3.1
Under 18 1 0.3
Age 25 to 34 23 6.5
34 to 44 153 43.4
45 to 54 108 30.6
55 to 64 46 13.0
65 and above 9 2.5
Certificate 1 0.3
Educational level Diploma 4 1.1
Bachelor Degree 127 36.0
Postgraduate Degree 22 6.2
Professional Qualification 189 53.6
Others 10 2.8
Yes 342 96.9
Working experience No 7 2.0
Not disclosed 4 1.1
Table 4 2006/2007 Net profit

Item Frequency
Category Percent (%)
(N=353)
Net-profit (2006/2007) Less than 50,000 132 37.4
50,001 to 100,000 95 26.9
100,001 to 150,000 48 13.6
150,001 to 200,000 16 4.5
200,001 and above 49 13.9
Table 5: Business characteristics affecting business performance
Variables χ2 value df p-value
Year of establishment 40.83 14 0.000**
Business set-up 10.24 8 0.263
Size of employees 81.85 6 0.000**
Nature of business 15.11 8 0.057
Business ownership 19.02 8 0.015*
Start-up capital 25.99 8 0.001**
Business structure 12.65 8 0.124
Source of capital 13.42 6 0.037*
Notes: ** = highly significant at p<0.01; *=significant at p<0.05
37
5.5 Relationship between entrepreneur characteristic and business performance

The result in Table 6 shows that only entrepreneur’s Gender and Age have a significant relationship
with business’ Performance, which is at the 5% level (p<0.05). Other variables such as Ethnicity,
Education and Working Experience reveal an insignificant relationship with Business Performance.
Gender has been found to be a significant factor in most past studies (Matthews and Moser 1995);
Scherer et al. 1989; Kolveried 1996; Georgellis and Wall 2005). Male entrepreneurs tend to be more
successful than their women counterparts. One of the main reasons is because men are willing to
take more risks compared to women (Sexton and Bowman-Upton 1990). This is in line with a study by
Slovic (2000), who found that men appear to be less concerned about hazards than women in their
perceptions towards risk taking.
The age of the entrepreneur also influences business performance. Although, the literature supports
the significant influence that age has on performance, their results are mixed. Some studies (e.g.
Harada 2003) found that business success is negatively related to the entrepreneur’s age. Other
sources (e.g. Cressy 1996) found that the older the age of the entrepreneurs the more successful are
the business.
Table 6: Entrepreneurs characteristic affecting business performance
Demographic Profile χ2 value df p-value
Gender 10.04 4 0.040*
Ethnicity 5.42 8 0.712
Age 22.94 12 0.028*
Educational level 16.95 10 0.075
Working experience 2.30 4 0.680
Notes: * = significant at p<0.05

6. Conclusion and implications
The aim of this paper is to analyse the effect of business and entrepreneur characteristics on
business performance for professional business in a non-western setting. The professional
businesses were chosen as they contribute a substantial amount to the country’s Gross Domestic
Product (SMIDEC 2007). Moreover, there are only a few studies that have been conducted on
professional business, and hence this study fills a gap in the existing literature. The results of this
study give insight into the characteristics of successful professional business, thus, assisting
governments in formulating policies for the development of these SMEs.
The analysis on the relationship between the business characteristic and business performance of the
respondents found that the Year of establishment, Size of employees, Start-up capital and Source of
capital are linked to business performance. The study of the respondents also evaluated the
relationship between the entrepreneur characteristics and business performance and found that the
gender and age of the entrepreneurs influence business performance.
There are several implications of this study on policy issues related to professional SMEs. First, the
government could assist these SMEs by providing them with easier access to finance during the post
start-up stage of the business. This could be achieved by providing these entrepreneurs with access
to suitable financial advice, increased access to loan finance tailored to these SMEs and better
access to venture capital. This is important because the results show that the performance of
professional businesses depend largely on the amount of their capital and the period of business
establishment. Second, training grants should be offered to SMEs to develop the skills of the
entrepreneurs and employees. These training grants should be tailored towards the needs of
professional SMEs and be effective in delivery. This is important as the performance of these SMEs is
38
influenced by their employees and entrepreneur characteristics. Studies have also shown that training
has a positive effect on the attitudes of entrepreneurs (Bosma et al. 2008). Third, universities could be
encouraged to foster strategic relationships with the business support infrastructure of its business
community in its region. Encouraging university-based research projects with potential synergy with
the SMEs’ growth programme is one such initiative (Smallbone et al. 2002).
Finally, since SMEs’ business performance also depends on the characteristics of the entrepreneurs.
It shows the need for awareness programmes, campaigns or publicity to increase the recognition of
SMEs entrepreneurs among the highly qualified SMEs. Besides, the successful businesses also need
to play their role in attracting more about the uniqueness of SME business.
Like any other study, there are several limitations in this study. First, the study uses a survey research
method, which heavily relies on the respondents answering the questionnaires. As the questionnaires
were sent to the entrepreneurs of the SMEs using the official address of the businesses, the study
assumes that the questionnaires were actually answered by the business’ entrepreneurs themselves.
In short, the study assumes that the answers actually represent the opinion of all SMEs that were
involved in the professional services.
Second, the questionnaire used the English language in a country where this is not the main language
used. The language used in the questionnaire was fairly moderate in terms of difficulty level and the
use of difficult terminology or jargon was avoided, therefore, the study presupposes that respondents
would face no difficulties in understanding the questionnaire.
Third, the questionnaire was mostly derived from previous studies representing American and
European culture and values. Therefore, some of the questions were adapted to suit the local culture
and environment of the study. Basically the study assumes that the local culture and values would not
affect the respondents’ views or the research findings. However, the questionnaire would be able to
represent the SMEs involved in providing professional services.
This study could be further extended by including the impact of other variables such as marketing,
innovation and technical capabilities on the business performance of SMEs. It would be interesting to
observe whether SMEs would perform better if their entrepreneurs are equipped with this knowledge
or that these knowledge are outsourced. This study could also be extended to other types of
businesses such as retail, medical and manufacturing as well as large and medium sized businesses.
Acknowledgment
We would like to thank the Ministry of Higher Education, Malaysia for funding this study. This study is
part of a larger research conducted by several Malaysian institutions of higher learning.
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41
The Relationship Between Intellectual Capital, Innovation
and Competitive Advantage
Ali Ekber Akgün, İpek Koçoğlu, Halit Keskin, Hüseyin İnce and Salih Zeki
İmamoğlu
aakgün@gyte.edu.tr
ipekocoglu@su.sabanciuniv.edu
h.ince@gyte.edu.tr
keskin@gyte.edu.tr
imamoglu@gyte.edu.tr
Abstract: The main purpose of this study is to evince the influence of intellectual capital (IC), on innovation by
constructing the relationship based on the three components of (IC) namely human, organizational and relational
capital. The shift of the traditional tangible assets’ –land, facility, work force, physical and financial capital- role
considered as genuine capital, towards more subtle forms of capital creates a crucial factor for the achievement
of the competitive advantage and successful firm performance through the mediating role of innovation. Amid in
this research agenda three partial gaps have been explored: First previous works have almost exclusively
focused on the co-alignment between IC and innovation as compelled to deliver competitive advantage and firm
performance. Although a robust IC-innovation relationship appears to be plausible in the literature, a little
empirical evidence has so far been offered to support this relationship. In doing so this study investigates the
three forms of IC in the context of their impact to innovation. Second, while the relationship between innovation
and firm performance has been theoretically inspected, the relationship has not been analyzed empirically along
with the innovation’s influence on competitive advantage. Third, the paper investigates the multidimensional and
contingent gradual effect of IC on competitive advantage and firm performance through the conjunctive role of
innovation. Hence this study develops a platform through which IC will shape innovation, and progressively firm
performance and competitive advantage.
Keywords: intellectual capital, competitive advantage, firm performance, innovation
1. Introduction
In today’s competitive global market, value creating factors for companies are changing. Silvi and
Cuganesan (2006) argues, “a fundamental shift in the corporate value system, away from physical
and financial assets towards the creative exploitation of a nexus of intangible assets, quasi-assets
and competences – mainly in the form of distinctive capabilities deriving from knowledge intangibles.”
Competition is forcing many companies to accumulate intellectual assets and to use them effectively
for the purpose of producing profitable operations (Bismuth and Tojo, 2008). On the opposite of other
primary resources, knowledge does not diminish as it is used, instead it gets depth as it is used and
shared. Knowledge intensive firms rely on the management of the knowledge which will be adding
value to the knowledge workers, products and interactions (Seetharaman et al., 2004). Regarding this
new environment, characterized by increasingly global markets, dynamic, uncertain environment and
competitive conditions, companies need to be able to earn economic returns from intellectual assets,
accordingly intellectual capital is becoming a crucial factor for a firm's long-term profit and
performance in the knowledge-based economy as more and more firms identify their core
competence as invisible assets rather than visible assets (Bismuth and Tojo, 2008; Hsu and Fang,
2008; Arenas and Lavanderos, 2008). It is increasingly recognized that the performance of any
organization, is substantially dependent upon the knowledge of its employees, the application and
integration of that knowledge to the structures of the organization, and its relationships (Silvi and
Cuganesan, 2006). This trend stresses the importance of innovation as a driving factor on competitive
advantage and firm performance.
This study will contribute to the literature by proposing a theoretical model considering the relationship
of IC with innovation and improved firm performance concurrently the creation of competitive
advantage in knowledge intensive organizations. Previous studies rarely examined the connection
and relevancy of IC and innovation to enhance competitive advantage together with improved firm
performance as an indicator of successful strategic management (Guthrie and Petty, 2000; Wu et al.,
2008). The exploratory research question to start with is; “Does intellectual capital promotes the
accumulation of innovation and the achievement of sustainable competitive advantage in today’s
globally competitive market of knowledge-based economy?” Yet this relationship boosts competitive
42
Ali Ekber Akgün et al.
advantage for the organizations, shifting towards dynamic nature and mainly from production based to
the knowledge based economy (Hsu and Fang, 2008).
2. Intellectual capital and innovation
2.1 Intellectual capital

Today, IC is the subject of increasing research by both academics and practitioners (Petty and
Guthrie, 2000). Kaufmann and Schneider (2004) mentions that no unique definition for IC exists and
adds, “it is a fragile construct, which has to be continuously supported and held together by a whole
array of interrelated elements.” As there has not been solidarity upon a universal IC definition yet, it’s
essential to be familiar with the main definitions for the aim of fully comprehending IC. In order to look
at it from a broad perspective, first intangible assets need to be understood. The concept of intangible
assets constitutes an umbrella above IC. The definition of an intangible asset can be summarized as
“knowledge that can be converted into profit which help organizations generating value and
accordingly a claim to future benefits that does not have a physical or financial (a stock or a bond)
embodiment” (Lev, 2001; Sullivan, 2000).
IC is defined as the intellectual material, the sum of all the knowledge that all the employees of a
company have – knowledge, information, intellectual property and experience base and which can be
used for the creation of wealth, providing competitive advantage (Stewart, 1997; Arenas and
Lavanderos, 2008). Similiarly, Bontis (1998) considers that IC possesses intellectual attributes that
contribute to the value of a firm (Choong and Kwee, 2008). Further, IC mobilizes “things” such as
employees, customers, IT, managerial work and knowledge (Kaufmann and Schneider, 2004;
Mouritsen et al., 2004). According to International Federation of Accountants (1998) IC can be
thought of as the knowledge-based equity of a company (Tan et al., 2008). Non-accounting
researchers define “IC” as the “difference between the firm’s market value and its book value of entity”
(Edvinsson and Malone, 1997; Stewart, 1997; Sveiby, 1997).
Moreover, regarding its definitions IC can be summarized as the accumulation of all information,
knowledge, wisdom, experience, social and cultural interactions of an organization - rather than only
the employees, internalized through the structural routines, processes, systems (Kaufmann and
Schneider, 2004; Mouritsen et al., 2004) for the aim of creating an “intelligent” organization which
generates value and competitive advantage (Petty and Guthrie, 2000; Edvinsson and Malone, 1997;
Stewart, 1997) in the market.
Numerous researchers have attempted to categorize intangibles. Categorization enables to order the
systematic organization of a magnitude of possibilities into a set of class consisting of a coherent
number of items (Choong and Kwee, 2008). Sveiby was one of the pioneers in this field. His
classification to the categorization of intangibles is; employee competence, internal structure, and
external structure. The Organisation for Economic Co-operation and Development (OECD, 1999)
describes IC as “the economic value of two categories of intangible assets of a company:
organisational (structural) capital; and human capital (Guthrie and Petty, 2000). Though IC is
generally classified into three dimensions there are also studies that classify it into two or further more
into four dimensions (Edvinsson and Malone, 1997; Stewart, 1997).
In this study the categorization of IC into three sub-categories is considered as presented in Figure 1.
Human Capital; is the knowledge, experience, innovativeness, know-how, education, capabilities and
skills that are related with the employees and which are used through them within the organization
(Subramaniam and Youndt, 2005; Hsu and Fang, 2008; Cuganesan, 2005; Edvinsson and Malone,
1997; Sullivan, 1999; Seetharaman et al., 2004; Tovstiga and Tulugurova (2007).
Organizational capital dimension; is identified with technologies and supporting systems that help
employees to do their jobs and ultimately create revenues for the organization that result in corporate
wealth (Edvinsson and Malone, 1997; Kaufmann and Schneider, 2004; Isaac et al., 2009).
Organizational capital is the supportive infrastructure for human and relational capital since in the
absence of it both of the other capitals are not embedded in the organization.
Relational capital can be explained as the flow of knowledge within and to the outside of the
organization through the relational network constituted in and around the organization (Subramaniam
43
and Youndt, 2005). It includes customer relationships, license agreements, brand value, trademarks,
cooperation, relationship with customers and suppliers, firm reputation, organizational awareness,
distribution channels and customer loyalty (Cuganesan, 2005; Seetharaman et al., 2004; Kong and
Prior, 2008).
Figure 1: The categorization of IC
2.2 Innovation
Innovation allows organizations to progress parallel with the changes flourishing in the environment.
Innovation is a strategic key in responding to the new challenges of an environment full of
uncertainties (F.J. Lloréns Montes et al., 2005). For an organization, innovation would denote the
generation or adoption of novel ideas or behavior (Liao et al., 2008). In the literature the idea that
innovation is essential for firms’ long-term success and survival constituting a competitive instrument
is widely recognized (Santos-Vijande and Alvarez-Gonzalez, 2007). Authors reflect Nonaka and
Yamanouchi’s (1989) suggestions as; organizations fit to the changing conditions of the technology
and the market by diversifying and adapting, through innovation (Santos-Vijande and Alvarez-
Gonzalez, 2007). Damanpour (1991) defines innovation as; the adoption of an internally generated or
purchased device, system, policy, program, process, product, or service that is not necessarily new to
the world but specifically new for that adopting organization (Prajago and Sohal, 2001). Wu et al.
(2008) suggest that innovation is defined as an idea, a product or process, or a system that is
perceived to be new to an individual.
Innovation is a strategic option for improving the organization and making it more competitive (F.J.
Lloréns Montes et al., 2005: 1159). As it is referred to the study of Hitt et al. (1997) and Tidd (2001),
innovation is defined as the doors opening to both global and international competitive advantage
through: providing the marketplace with new or unique products/services; creating entry barriers that
provide the necessary resources to develop innovation through learning; and creating new values that
reshape the rules of competitive environment (F.J. Lloréns Montes et al., 2005: 1159).
2.3 The relationship between intellectual capital and innovation
2.3.1 Human capital and innovation

The creation and maintenance of human capital allows the organizations to develop new ideas and
innovations through better-trained, more focused staff and higher employee morale (Kong and Prior,
2008). New ideas and new innovations mean new knowledge, new inputs to organizational memory
and new sources of value generation. Kong and Prior (2008) position the words of Knight (1999) in
their study saying: “as investments are made in human capital, more competent and capable people
develop better structural capital for an organization”. Improved human capital and structural capital go
on to create more productive relational capital through the delivery of better products and services to
high-value customers .a virtuous cycle begins its upward spiral into further organizational value and
growth” (Kong and Prior, 2008). Kong and Prior (2008) present the ideas of Bontis (2002) as; human
capital is important to organizations as a source of innovation and strategic renewal. The specificity of
the knowledge possessed thus represents an important influence in the ability of the organization to
achieve and maintain higher levels of performance in front of its peers, on the grounds of its greater
44
potential to provide competitive differentiation (Silvi and Cuganesan, 2006). Knowledge innovation is
a key element in the creation of product value and economic growth in a knowledge-based economy
(Hsu and Fang, 2008). Hsu and Fang (2008) reflect that high-quality employees are the most
important competitive strategy within the knowledge economy context. These people do not
necessarily have conventional skills sets but they have the creative ability for the generation of new
knowledge, new processes, new systems.
Hypothesis 1: Human capital positively influences innovation.
2.3.2 Organizational capital and innovation

Innovation can occur in domains of product, process or organization regarding to its definition as an
idea, a product, a process or a system that is perceived to be new to an individual (Wu et al., 2008).
Hsu and Fang (2008) present organizational capital as having two dimensions namely process capital
and innovation capital. According to their study process capital supports employees and improves
productivity. Firms with strong organizational capital will create favorable conditions to benefit from
human capital and provide the realization of its potential which in turn positively influences innovation
of the organization. The knowledge is not only the creation of people by themselves. Knowledge is a
result of people’s and groups’ interaction which in the end provides the emerging of new
organizational knowledge in the network. When this differentiating knowledge is codified into routines,
rules and activity procedures the tacit knowledge becomes systematic with the use of structural
capital within the IC (Kong and Prior, 2008). Moreover, Lopez et al. (2006) focus to three main
components of organizational capital; culture, structure and organizational learning. The first
component contributes to the generation of value internally and externally. About the structure of the
organization; the main issue is that the formal structure of the organization and its external links play
an important role in innovation management and in how the competences and capabilities evolve
(Lopez et al., 2006). Reflecting, Lopez et al.’s view (2006) structure is a necessary capability for the
organizations due to its difficulty to imitate and to transfer, it is source of innovation. Organizational
learning as a source of sustainable competitive advantage, is the ability of the company to manage
and to mobilize its resources in a competitive response, and it is a key for firm adaptability, and makes
learning a combinative capability (Lopez et al., 2006). Thus organizational learning is a valuable
organizational capability, difficult to imitate, to replace, and to transfer.
Hypothesis 2: Organizational capital positively influences innovation.
2.3.3 Relational capital and innovation

Relational capital enables the links between diverse groups and organizations, while also providing a
rationale for continued inter and intra organizational relationships with a variety of stakeholders (Kong
and Prior, 2008). Huang and Chang (2008) states that trust acts as the governance mechanism of
embedded relationships. Trust exists when one party has confidence in an exchange partner’s
reliability and integrity. Business networks with high embeddedness can develop trust and support a
rich exchange of information among their members (Huang and Chang, 2008). Yet, Wu et al., (2008)
argues that relational capital links the disconnected parties and promotes the exchange of dissimilar
information. The dissimilar information exchange provides a greater heterogeneity for the organization
which means more sources of information and more sources of innovation. As it is also stated in Wu
et al.’s (2008) study; “heterogeneous resources are of great importance for innovation.” Clearly the
innovative influence of relational capital will be stronger through diversity. Furthermore, Huang and
Chang (2008) developed a framework; where “commitment” is defined as an implicit or explicit
assurance of relational continuity between exchange partners and implies a willingness to make
short-term sacrifices in the interest of longer-term benefits. Authors also argue that an embedded tie
between a manufacturer and the primary supplier provides a foundation of trust, joint problem-solving
and commitment mechanisms. These mechanisms enable joint action between partners to facilitate
incremental innovation. Yet, this will push the firm one step forward in innovativeness within its
competitors. Alliances, partnerships and other forms of inter-firm relationships have been prescribed
as effective choices for gaining, leveraging, or developing new competencies and resources (Silvi and
Cuganesan, 2006). Hence the relational capital will be able to create competitive advantage for the
firm through the establishment of a distinctive core competency in the form of relationships embedded
into organization controlled networks (Subramaniam and Youndt, 2005). Consequently the relational
capital is a catalyst of innovation as well as competitive advantage.
45
Hypothesis 3: Relational capital positively influences innovation.

3. Innovation and competitive advantage
3.1 The relationship between innovation, competitive advantage and firm

performance
Competitive advantage is mainly used to differentiate company performance in the profit-making
sector. It is a concept that means much more than the financial performance and shareholder value;
these are both a measurement at a moment in time, usually short-term. Hence the value of the firm
that is generated through the intangible assets and more specifically through the IC carries more
importance than financial profit. An independent consultant Olivia Freeman (2001) gave rise to the
issue, how to gain competitive advantage for organizations by presenting the ideas of Professor
Michael E. Porter from Harvard Business School. He explains that there are two basic types of
competitive advantage: cost leadership and differentiation. The main factors that may lead to these
two types of competitive advantage are; sustained revenue, innovation and new product
development, brand and reputation, employee relations, acquisitions and mergers (Freeman, 2001:
39). Mentioned by the Professor Porter, the differentiation is an essential aspect in the owning of
competitive advantage. But to differentiate, you need to know what you are being different from
(Freeman, 2001: 39).
There is an extensive literature that examines various enterprise-specific factors involved in creating a
position of competitive advantage for the firm, and the complex interplay between the firm’s internal
organizational factors and environmental factors. Research evidence suggests that while
environmental contexts can be influential, they do not necessarily outweigh key internal factors that
can be directly influenced by the enterprise (Hoffman et al., 2006: 140). Parallel to the influence of
innovation on competitive advantage, innovation is the most important determinant of firm
performance (Calantone et al., 2003). Innovation advantage provides firms to serve their customers
with most up-to date and innovative products and services with high quality as well as superior value.
Yet, the more value offered to the market, the more loyalty and satisfaction levels of the customers
increase (Zhou et al., 2009).
Innovation is gaining importance as a major competitive and performance improver weapon for many
organizations (Porter, 1990). Recently, knowledge-sharing with suppliers has received increasing
research attention (Huang and Chang, 2008). Manufacturers have discovered the managerial,
technological, and financial benefits that may accrue as a result of close ties with suppliers. Scholars
also agree that a substantial part of the innovation process occurs between buyers and sellers in the
supply chain (Huang and Chang, 2008). These advantages can be long lasting if the resource in
question is rare, inimitable, and non-substitutable (Hoffmann et al., 2006: 140). If the position that
resource provides is more difficult for other competitors to catch up then it means that the organization
succeeded to add the quality of longevity to that resource. The capability of innovating is a possible
way of creating such a resource. Innovation is not imitable, once imitated it turns out to be not new
anymore, it is rare because not every organization can result its research with a radical or incremental
innovation and it’s non-substitutable because it is unique and obtained as a result of efforts that are
hard to compensate (Hoffmann et al., 2006: 140).
Hypothesis 4a: Innovation positively influences competitive advantage.
Hypothesis 4b: Innovation positively influences firm performance.
According to the literature discussed Figure 2 represents the theoretical model for the relationship
between IC, innovation and competitive advantage.
4. Methodology
4.1 Data and measures

The data used to test the hypotheses are drawn from a varied spectrum of Turkey’s industries. The
sample frame of the study consisted of a range of industries including; telecommunications, computer
and electronics, communication, software, finance, manufacturing and machinery, chemical, service
technologies, food, and material industries. The initial sample consisted of 120 white collar employees
46
in 80 firms in total. For the purpose of eliminating flexibility in the survey technique which would breed
inconsistency and to provide a common understanding of the questions for each respondent the
questions are constructed by multiple choice answers. Of the 120 contacted, 92 agreed to answer the
survey. Yet, of the 92 returns, 19 were deleted due to incomplete and inconsistent information,
leaving 73 usable returns for analysis. Correspondingly, from 50 out of 80 of the firms contacted,
usable data was received for a response rate of 60.3%.
Competitive
Advantage
Intellectual
Capital
• Human Capital Innovation

• Organizational
Capital
• Relational
Capital
Firm
Performance
Figure 2: The theoretical model

The methodology consistently entails the adoption of a survey research method. A survey was
conducted to validate the proposed relationships ascribed in the hypotheses and to develop a reliable
discussion coextending with the findings attained. To test the hypotheses, well verified measures of
multi-item scales adopted from previous studies were used. All the measurement constructs were
estimated through respondents’ perceptual evaluation on a five-point Likert scale, which was
anchored by the end points of “strongly disagree” (1) to “strongly agree” (5). By using the parallel
translation method, the items were first translated into Turkish and then translated into English and
the differences were adjusted. Subsequently the suitability of the questionnaire was pre-tested by
specialists and applied a pilot test.
IC in the organizations which included human, organizational and relational capital with separate
questions, are measured using a scale consisting of 15 questions, developed validated by
Subramaniam and Youndt, (2005). In order to tap the domain of product innovation in organizations, 3
questions from the scale developed by Wang and Pervaiz (2004) are adapted. Since the literature
suggests that product innovation is the dimension predominantly influenced by IC (Hsu and Fang,
2008), the instruments regarding innovation in this study captivated the product innovation measures.
Regarding the discourse of the competitive advantage 3 questions have been identified and asked to
reflect the enterprise’s cost differentiation. In the construction phase of these questions the study
introduced by Zhou et al., (2009) is utilized. Utmost, the 7 firm performance measures captured the
customer satisfaction, firm responsiveness, return on investments and productivity of the organization.
These measures were adopted from Ellinger et al., (2002) and Akgün et al., (2007).
4.2 Measure validity and reliability

The relationships between the variables are tested through a four stage analysis using factor analysis,
reliability, correlation, regression. Data are evaluated through SPSS 13.0 statistics software. The best
fit of data observed having %73.7 of the variance explained and the skewness of the scree plot was
obtained with a principal factor analysis with varimax rotation gathered in 6 factors as expected
presented in Table 1.
Table 1: Factor analysis
Competitive
I Item Human Organizational Relational Innovation Performance
Advantage
Human 1 0.763
Human 2 0.674
Human 3 0.831
Human 4 0.789
Human 5 0.775
Human 6 0.872
Organizational 1 0.868
47
Competitive
I Item Human Organizational Relational Innovation Performance
Advantage
Relational 1 0.738
Relational 2 0.765
Relational 3 0.783
Relational 4 0.817
Relational 5 0.898
Innovation 1 0.822
Innovation 2 0.874
Innovation 3 0.811
Performance 1 0.655
Performance 2 0.7712
Performance 3 0.810
Performance 4 0.717
Performance 5 0.825
Performance 6 0.764
Performance 7 0.865
Power 1 0.737
Power 2 0.823
All reliability estimates are demonstrated in Table 2, having cronbach alphas as suggested by
Nunnally (1978) to be higher than 0.7, average variance extracted for each construct (AVE) indicating
discriminant validity which should be bigger than 0.5. Additionally, two types of tests were used in this
evaluation; Bartlett’s sphericity test which having a significance level of less than 0.05 as an indicator
that the underlying factorial structure of the data is acceptable. And the Kaiser-Meyer-Olkin (KMO)
sampling adequacy test which is recommended to exceed 0.7 is used with the result statistic of 0.687.
Table 2: Reliability and AVE
Construct Composite Reliability AVE Cronbach Alpha
1. Human Capital 0.897 0.593 0.859
2. Organizational 0.871 0.630 0.797
Capital
3. Relational Capital 0.889 0.617 0.869
4. Innovation 0.859 0.671 0.758
5. Competitive 0.904 0.577 0.879
Advantage
6. Firm Performance 0.835 0.629 0.719
Table 3 shows the means, standard deviations and correlations among all ten variables. It is seen that
all of the constructs are significantly related to each other when one-to-one correlations are
considered.
Table 3: Correlation of latent variables
Factors Mean S.D. 1 2 3 4 5 6
1. Human Capital 3.803 0.581 1.000
2. Organizational Capital 3.955 0.671 0.669 1.000
3. Relational Capital 3.956 0.641 0.638 0.621 1.000
4. Innovation 3.447 0.623 0.401 0.492 0.347 1.000
5. Competitive Advantage 3.529 0.681 0.303 0.285 0.165 0.586 1.000
6. Firm Performance 3.460 0.620 0.526 0.394 0.313 0.419 0.5 1.000
Furthermore, to test the hypotheses, we employed regression analysis and the results revealed in
Figure 3. On the regression analysis we investigated the positive relationship between intellectual
capital dimensions and innovation, innovation and firm performance as well as innovation and
competitive advantage. The sample estimates shown in Figure 3 as well as table 4, signifies the
positive relationship between the variables with %1 significance level. T-statistic values provide
evidence for the acceptance of the H2; organizational capital positively influences innovation, H4a;
innovation positively influences competitive advantage and H4b; innovation positively influences firm
performance.
48
Table 4: Regression analysis results

Construct Entire Sample Mean of Standard Error T-Statistic
Estimate Subsamples
1. HumanÆInnovation 0.120 0.189 0.128 0. 940
2. OrganizationalÆInnovation 0.398 0.374 0.166 2.398
3. Relational Æ Innovation 0.0230 0.181 0.150 0.153
4. Innovation ÆPerformance 0.586 0.607 0.087 6.722
5. Innovation Æ Competitive 0.419 0.438 0.120 3.486
Advantage
Human Capital Competitive Advantage
H1 0.120 Innovation 0.586 H4a Rsq = 0.343

Organizational Capital
0.398 H2
Rsq = 0.252 0.419 H4b Firm Performance
Relational Capital H3 0.023
Rsq = 0.176
Figure 3: Results of regression analysis.

5. Conclusion
The main purpose of this study has been to explore the relationship between IC, innovation and
competitive advantage along with firm performance. This study develops a platform through which IC
shapes the strategic management of the organizations through the role of innovation for the aim of
achieving improved firm performance and competitive advantage. Significant organizational change
can be obtained through the role of IC constituting the basis for distinctive core competency. Parallel
to Tan et al.’s (2008) statement “The key role of knowledge as a source of competitive advantage is to
produce IC in an efficient way.”
The findings of the study highlight the idea that intangible assets, mainly IC have began to be
established as a legitimate and promising pivotal factors creating innovation but in the case of the
emerging market of a developing country, Turkey the crucial role has not yet been fully emphasized.
Though the positive effect of organizational capital on innovation cannot be underestimated, the roles
of human and relational capital seem to be minimal. Yet country profile constitutes a predictive
indicator in the analysis of the results. According to a research on social values in Turkey the trust
between people is very low in Turkey which results in the direction of the personal efforts to prevent
others instead of development (Esmer, 1999). Highlighting that the literature emphasizes the power of
relational capital in creating innovation under strong trust and commitment conditions between the
parties, the situation in the case of a developing country, Turkey seems to be foreseeable. Yet human
capital is also related with the issue of trust in two ways. If the employees are not trusted enough their
contribution would be limited. Since human capital is driven by “better trained, more focused staff
having higher morale and satisfaction” to achieve innovation, if trust lacks it results in the absence of
the influencing power of human capital on innovation. Second, if employees do not trust the
organization or their managers or even to their colleagues, their performance cannot be high.
Accordingly, it’s conceived that both human and relational capital should be effectively managed for
its benefit to be extracted. Concurrently, a further area to be researched appears to be “how to
manage human capital in developing countries?” Furthermore the results of this study reveal strong
positive relationship of innovation with competitive advantage and innovation with firm performance.
Yet firm performance is more strongly influenced by innovation.
49
Like any empirical research effort, this study contains some methodological strengths and limitations.
Since the concept of IC is new for the emerging market condition of Turkey, the sample size is not
enough for generalization to all the organizations. Second, there is not a separation concerning the
size or the industry of the firms involved, accordingly the results may differ for SMEs and large sized
organizations as well as for different industries. Third, the results reported emerge from a local area;
results may differ for firms located in different areas operating in different cultural, environmental and
political conditions. Despite these limitations this study provides important implications in the context
of a developing country from theoretical and practical perspectives.
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677.
51
Towards Collaborative Open Innovation Communities
Maria Antikainen
VTT Technical Research Centre of Finland, Tampere, Finland
Tampere University of Technology (TUT), Finland
maria.antikainen@vtt.fi
Abstract: Open innovation (OI) communities have changed our conceptions of how innovation can and should
be managed and have prompted calls for new theories of innovation. OI communities with customers can act as
a source for learning and producing external ideas or even solutions to companies. As earlier studies indicate
that collective problem solving improves the quality of ideas, motivating and supporting collaboration in online OI
communities is important. This explorative study explores collaboration in online OI communities by answering
two questions. The first question considers users’ motivations to collaborate in OI communities, while the second
one explores how rewarding can be used to motivate collaboration in OI communities. The study consists of three
cases: CrowdSpirit, FellowForce and Owela. The preliminary results are based on the data gathered by
interviewing maintainers of the communities and by a questionnaire to the community members. According to the
results, the users were motivated to collaborate by interesting objectives and the concept of the community,
gaining new viewpoints from other users, obtaining better products and receiving rewards. The results also
indicate that the lack of proper tools inhibits collaboration in OI communities. Furthermore, an OI community’s
rewarding strategy should be transparent and logical. Rewarding should be based on the efforts and quality of
the work rather than on giving rewards based on the quantity of ideas or lotteries. The system should be flexible
so that rewards vary in different situations and phases of the work. The equity and democracy of the rewarding
system are important factors for OI community users. Additionally, customisability of the rewarding strategy
ensures that users can influence, on some level, the nature of the rewards they receive, and the rewards will
therefore be more valuable to everyone. This explorative study is one of the first studies of collaboration in online
OI communities. In addition to serving academia, the study provides practical knowledge on how to reward and
motivate groups of members on the web to companies and the growing number of OI intermediaries building or
planning to build innovation communities.
Keywords: online communities, open innovation, intermediaries, rewarding, collaboration, monetary, non-
monetary, tangible, intangible, recognition, motivation, case study
1. Introduction
1.1 Background of the study

OI paradigm assumes that firms can and should use external ideas as well as internal ideas, and
internal and external paths to market, as the firms look to advance their technology (Chesbrough,
2003, p xxiv). OI specifically with customers, provides interesting possibilities for companies to
improve their innovation processes. Online OI communities with customers can serve as a source for
learning and producing external ideas or even solutions for companies (Jeppesen et al. 2006;
Chesbrough 2006). To integrate customers into innovation processes in online OI communities,
companies need methods, tools, platforms and resources as well as different types of services
provided by external companies. In order to do this, companies can: 1) build their own OI
communities, 2) use existing online communities related to their products and services, such as brand
communities, 3) look for hobbyist communities, or 4) use existing communities on the web that act as
intermediaries in this field (Chesbrough 2003; von Hippel 2005; Chesbrough 2006a). The number of
online innovation market places and innovation intermediaries acting between innovators and
companies (or ‘solvers’ and ‘seekers’) has recently grown rapidly. As earlier studies indicate that
collective problem solving improves the quality of ideas (e.g., Hargadon and Beckhy 2006; Thrift
2006), it is important to motivate and support collaboration in online OI communities. It is therefore
relevant to study these issues in order to serve companies managing their own communities,
innovation intermediaries offering online OI communities as a service, and academia.
1.2 Purpose and methodology

This explorative research studies collaboration in online OI communities by addressing two questions.
The first question considers users’ motivations to collaborate in OI communities. The second question
concentrates on how rewarding can be used to motivate collaboration in OI communities. The study
consists of three cases: CrowdSpirit, FellowForce and Owela. Our research team gathered the data
by interviewing maintainers of the communities and by a questionnaire to the community members.
Semi-structured interviews with the maintainers were conducted by phone and recorded. The
52
Maria Antikainen
recordings were transcribed as notes afterwards. The data were collected March-April 2008. The
interviews each lasted approximately one hour and covered questions related to the members’
motivation factors, existing collaboration tools and methods, and future plans to support collaboration.
Also the communities’ rewarding models were discussed. In addition to the interviews, a web survey
was conducted covering themes related to collaboration and aspects related to rewarding and
motivation. One hundred of FellowForce’s top members and two hundred of CrowdSpirit’s most active
members were contacted by email and asked to participate in the survey. This plan of action was
chosen due to the wish of the maintainers instead of using a link on the web site. However, in the
Owela’s case we used the link on the web site and in aim to get more responses and the survey was
also marketed in Owela's newsletter, which was sent to its members.
2.1 Users’ motivations to collaborate in online OI communities

In this study the focus is on online OI communities where users participate in organisations’
innovation processes at some level. To encourage collaboration online OI communities offer set of
tools as well as utilise different methods, such as rewarding. The first step to knowing why users
collaborate in online communities is to understand their motivations to participate in and contribute to
online communities. Studies into why people visit, join, participate in and contribute to different kinds
of online communities have been carried out from varying perspectives. Prior literature has divided
human motivation into intrinsic and extrinsic reasons (Deci and Ryan 1985; Amabile 1996; Ryan and
Deci 2000). Motzek (2007) also stressed the impact of social motives in a person’s code of conduct
and therefore added a third category for social motives.
According to Deci and Ryan (1985), intrinsic motivation refers to situations in which a person does
something because it is inherently interesting or pleasant to do so. In contrast, extrinsic motives refer
to the consequences of a certain activity, perceiving the task itself as a means to an end (Amabile
1993). As online communities are based on the idea that members share some common interest and
purpose, social motives play an important role in sustainable online communities. Social motives can
also be seen as essential when enhancing collaboration between members. Wasko and Faraj (2000)
stated that people do not use the forum to socialise or develop personal relationships. According to
their study, giving back to the community in return for help received was by far the most cited reason
for people’s participation. Table 1 divides the closely related motivations into three main categories:
intrinsic, extrinsic and social motives. Most categories include motivation factors identified in different
kinds of communities, such as OSS, firm-hosted communities and OI communities (Antikainen &
Väätäjä 2010).
Prior research into users’ motivations to collaborate proposes that collective work with others is seen
as enriching, fun, productive, efficient and even the best way to trigger creative innovation.
Furthermore, it suggests that collaboration should be sought in order to get the most out of people’s
creativeness. The research admits, however, that it is demanding to support collaboration in an online
environment as it is already challenging to create collaboration between strangers in face-to-face
situations (Antikainen et al. 2010).
2.2 Motivation and its relationship to rewarding

Rewarding can be divided into monetary (tangible) rewarding and non-monetary (intangible)
rewarding (also called recognition). Monetary rewards include money, pay checks, fees, trophies and
awards. Non-monetary rewarding may be the member’s name in honour-roll lists or top ten lists,
granting privileges and public recognition. (Antikainen & Väätäjä 2010)
Studies in the field of psychology suggest that expected monetary rewards tend to reduce intrinsic
motivation, whereas praise and other positive verbal feedback tend to increase it (Deci 1975, and
Lepper et al. (1973). According to Reeve’s (2005) studies into rewarding and its relationship to
intrinsic motivation, extrinsic rewards for intrinsically interesting activity have a negative effect on
future intrinsic motivation. Several studies have implied that the expectancy and tangibility of the
reward reduce the intrinsic motivation when a person expects a reward for a completed task. No
widely accepted theories on the relationship between motivation and rewarding currently exist
however (Lindenberg, 2001). The simplicity of the theories on motivations and study setups
presumably cause some misinterpretations, as in real-life several motivations may exist concurrently.
53
Maria Antikainen
Table 1: Users’ motives for participating in online communities (Antikainen & Väätäjä 2010)
Users’ motives for
participating in online Authors
communities
Intrinsic motives Ideology Lakhani and Wolf 2005; Stewart
and Gosain 2006; Nov 2007
Enjoyment, fun, recreation Raymond 2001; Torvalds &
Diamond 2001; von Hippel and von
Krogh 2003; Osterloh et al. 2004;
Ridings and Gefen 2004; Lakhani
and Wolf 2005; Nov 2007
Intellectual challenges, Ridings and Gefen 2004; Lakhani
stimulation, interesting and Wolf 2005
objectives
Learning, improving skills and Wasko and Faraj 2000; Hars and
knowledge exchange Ou 2002; Wiertz and Ruyter 2007;
Antikainen 2007; Gruen et al., 2005
Extrinsic motives Firm recognition Jeppesen and Frederiksen 2006
Reputation, enhancement of Bagozzi and Dholakia 2002; Lernel

professional status and Tirole 2002; Lakhani and Wolf
2005
Sense of efficacy Constant et al. 1994; Bandura
2005
User need, influencing the Hars and Ou 2002; von Hippel
development process 2005; Lakhani and Wolf 2005;
Rewards Antikainen and Väätäjä 2008;
Wasko and Faraj 2000; Lakhani
and Wolf 2005; Harper et al. 2007;
Kittur et al. 2008
Social motives Altruism, reciprocity, care for Kollock 1999; Wasko and Faraj
the community 2000; Zeityln 2003; Nov 2007;
Wiertz and Ruyter 2007
Friendships, “hanging out Rheingold 1993; Hagel and
together” Armstrong 1997; Ridings and
Gefen 2004
Peer recognition Jeppesen and Frederiksen 2006;
Lerner and Tirole 2002
The idealised picture of online communities seems to be that the members' contribution is primarily
related to intrinsic motivation such as fun, ideology and challenges. Despite some positive results
concerning rewarding and motivation (Lakhani and Wolf 2005; Harper et al. 2008), the predominant
belief appears to be that no monetary rewards are needed and only non-monetary rewarding or
unexpected rewards would be satisfactory to members. More studies are needed in an online
community context to explore whether it is in fact a combination of intrinsic and extrinsic motivation
and the expectancy to be rewarded for work that is well done for an agreed set of rules. Even fewer
studies are available aimed at increasing users’ motivations to collaborate by rewarding.
3. Results
3.1 Case communities – brief descriptions and maintainers’ interviews
3.1.1 CrowdSpirit
CrowdSpirit (www.CrowdSpirit.com), which originated in France, focuses on electronics design. The
founders and maintainers of CrowdSpirit have built toolkits for users to submit their designs and
ideas. Similarly, CrowdSpirit includes tools for commenting on and voting for different designs.
CrowdSpirit recently changed its business model. Instead of participating in the development and
industrialisation process of the products, CrowdSpirit is now only involved in the design process. In
other words, after the design and collection of the project team, the team negotiates directly with the
manufacturers. After collecting the project team and drawing up the specifications and a marketing
plan, the project team asks for quotations for the development.
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Maria Antikainen
In CrowdSpirit, members are used to collaborate with others. They discuss and rate others’ ideas and
work together in the product design process. To be willing to collaborate, people have to be open,
have their own competitive core (more value in this field). According to CrowdSpirit’s maintainer, it is a
mistake to think that users would collaborate voluntarily.
The maintainer emphasised the importance of rewarding and, more specifically, monetary rewards as
compensation for users’ work. In the maintainer’s opinion, having fun and acquiring new viewpoints
from others are the top motivators. Furthermore, the maintainer believes that being in touch and
working with companies is motivating for the participants. Collaboration in groups is already a way of
working at CrowdSpirit. More collaborative tools such as chat are needed however. The main difficulty
is to have people in the community at the same time, as there are members all over the world. To
support collaboration, people also need information, profiles and to get to know each other, other than
just professionally.
3.1.2 FellowForce
FellowForce (http://www.FellowForce.com) is an innovation marketplace and intermediary that allows
companies to submit innovation challenges to solvers. FellowForce originated in the Netherlands and
Poland. Solvers provided suggestions (pitches) to a challenge, and the best solvers were rewarded.
FellowForce allows solvers to submit their own pitches to companies. Normally, the best pitches
matching the challenges are rewarded with money.
Collective creativity is realised in FellowForce’s “Innovate Us” functionality. Any registered participant
may submit an innovation and view the responses from other users, if this feature is turned on.
FellowForce also offers services for companies to launch their own co-creation platforms on their
websites.
FellowForce’s maintainer stated that members participate because of their curiosity: they just want to
try it out. They are also motivated by the possibility of influencing an outcome and sharing ideas with
others. FellowForce’s maintainer also added that rewarding is a solid part of a sustainable OI
community and that it is currently considering ways to enhance collaboration between members with
appropriate methods and a rewarding system.
3.1.3 Owela – open web laboratory

Owela (http://owela.vtt.fi) is a participatory web laboratory for designing digital media products and
services. Owela was developed at VTT in Finland and aims to connect users to developers and
researchers, and to promote OI. Owela offers social media tools for gathering user needs and
development ideas and collecting feedback for scenarios and prototypes.
In IdeaTube, users may participate by commenting on the descriptions and visualisations of different
situations, needs, ideas, scenarios and prototypes. In TestLab, the prototypes of future products and
services can be tested at the beta phase, and the users are expected to give feedback and
development ideas. Owela has been used as an innovation platform in research projects and studies
conducted for companies, such as usability testing of websites.
Owela’s maintainer believes that interesting objectives and appropriate tools for participation and
collaboration are central factors of user motivation. The maintainer stated that collaboration with
others is fun, nourishes creativity and that members learn from each other. It is therefore currently
developing tools and methods aimed at enhancing collaboration between members. Appropriate
monetary and non-monetary rewarding models are needed to enhance motivation and collaboration.
3.2 Survey
3.2.1 Survey respondents

There were 49 responses to our survey. Of the respondents, 45 (91%) were male. The average age
of the respondents was 37 years (avg 36.76, std 11.57, min 19, max 64). Almost half of the
respondents were members of CrowdSpirit (49%, 24 respondents), 16.3% (8 respondents) of
FellowForce, 24.5% of Owela (12 respondents) and 10.2% (5 respondents) of other online OI
communities.
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Maria Antikainen
3.2.2 Survey responses

Figure 1 shows that 75% of the respondents agreed or strongly agreed that members’ mind
collaboration was an efficient way to work. Hedonistic factors such as enjoyment and utilitarian factors
such as efficiency therefore rationalise why collaboration is the preferred way of acting in open
innovation communities.
Per cent
Figure 1: “What is important to you in an open innovation community?” N: 49, mean: 4.04, median:
4.00, std. dev.: 0.912
We also asked whether users would like to collaborate more. The result was clearly positive, as
shown in Figure 2.
Per cent
Figure 2: “What is important to you in an open innovation community?” N: 48, mean: 3.92, median:
4.00, std. dev.: 1.069
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Maria Antikainen
All of the communities emphasised the importance of collaboration in the community and were
searching for and developing new ways to collaborate.
Per cent
Figure 3: “What is your opinion on rewarding in an open innovation community?” N: 48, mean: 2.9
median: 3.00, std. dev.: 1.026
The results in Figure 3 show that rewarding everyone in the group was not seen as important.
Naturally, there are also other ways to reward collaboration. We tackled this issue in our final
question. The open question was formulated as follows: “Would you like to collaborate more with
other members of OI communities? How should groups be rewarded?”
Once again, the answers indicate that collaboration was appreciated. Both online meetings and face-
to-face meetings were suggested. Scheduled Internet sessions were seen as the preferable way to
cooperate. Acquiring different perspectives from other people was seen as the most important benefit.
For example, one of the respondents stated that he was an innovative person but not technically
skilled. He therefore appreciated cooperation with technical people.
Members also saw a challenge in rewarding every member in the project equitably. The importance of
finding the originator of the process was emphasised. One of the respondents suggested a point
system that acknowledged the input of members at different stages of development, from problem
identification to product launch.
“After launching the product, the same system would work as a royalty system that
continued to reward the original contributors while allowing a traditional retail system to
be imposed when marketing the product.”
A system in which the project leader distributes the rewards to his/her group was also suggested. The
system would be transparent so that every member’s scores were shown. This way, if the group
leader is not equitable, he may not be voted leader again. Moreover, one idea was to choose a leader
who would gain the biggest reward and all the members would then vote for the rewards.
Both kinds of rewards, monetary and recognition, were in fact seen as important. One of the
respondents suggested that companies could invite members to visit their premises.
Furthermore, obtaining some kind of response to the ideas immediately and seeing how the ideas
were further developed were emphasised in the members’ answers, as the following statement
indicates:
“If the quality of innovation produced by a group is high, that is its own reward, especially
if the innovation is tangibly put into practice.”
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One of the respondents indicated that monetary recognition should be assigned if the idea were to
become commercially exploited. Moreover, well-timed rewarding was emphasized, as the following
statement suggests:
“As the primary purpose of an innovation community is to develop new products that can
then be released into the market, it is extremely important to reward the early
contributors who develop the product to ensure the success and longevity of an
innovation community.”
3.3 Summary of findings in the context of the collective innovation process in OI

communities
3.3.1 Motivation factors to collaborate

The results show that interesting objectives and concepts motivate users to collaborate in OI
communities. One good example is hobbyist communities in which enthusiastic users can easily be
motivated to participate and collaborate. An open and constructive atmosphere also motivates users
to collaborate with others. The results show that users are willing to collaborate if they feel that they
can influence the product/service development. Users also mentioned that they collaborated to gain
new viewpoints. According to the results, users are motivated to collaborate because they consider it
an efficient way to operate. On the other hand, from the hedonistic viewpoint, users find collaboration
fun. Moreover, the sense of cooperation and community and similarity with other users also motivate
users to collaborate. Finally, the right kind of rewarding that supports collaboration is an important
motivator in the users’ eyes.
3.3.2 Important elements of the rewarding strategy

First, the rewarding strategy should be transparent and logical. In other words, users should know
why the rewards are given. Second, democracy and equity of the system are needed. Users also
want the chance to influence the distribution of the rewards, for example, by voting. Every user should
also feel that the system is fair. Third, flexibility of the strategy ensures that the nature of the rewards
can vary in different situations. In, for example, the commercialisation phase, monetary rewards may
be more significant. Intangible rewards, however, may support the aim of the fun aspect of the
community. Fourth, customisability of the rewarding strategy ensures that users can influence, on
some level, the nature of the rewards they receive and that the rewards will therefore be valuable to
everyone. Finally, active participation by the maintainers is essential to the rewarding strategy. The
results show that users want to receive feedback from the maintainers on their ideas. They also
appreciate rewards such as visiting the maintainers’ premises.
4. Discussion and conclusions
This explorative study is one of the first studies of collaboration in online OI communities presenting
some preliminary results based on the interviews and the survey. In addition to serving academia, the
study provides practical knowledge on how to reward and motivate groups of members on the web to
companies and the growing number of OI intermediaries building or planning to build innovation
communities. The study tackles two specific themes: users’ motivations to collaborate and how
rewarding can be used to motivate members to collaborate in OI communities.
Prior studies have shown that collaboration improves the quality of ideas by increasing the level of
efficiency and creativity (e.g., Hargadon and Beckhy 2006; Thrift 2006). The study brought out all
three kinds of motivation factors: intrinsic, extrinsic (Deci and Ryan 1985) and social (Motzek 2007).
Maintainers stated that the development of collaboration tools and methods is still more or less in its
infancy. They admitted that users are currently working more as individuals than as groups. As one of
the maintainers proposed, the next step would be for users to work genuinely as a group and not as
individuals. This poses further challenges for tools and methods to be used for collaborative online
innovation.
The second research question considered rewarding as a motivation factor. The importance of a well-
designed reward system to the aim of receiving benefits can be logically justified based on prior
literature. Within psychology, for example, the research by Deci (1975), Lerner and Tirole (2002) has
presented results showing that expected monetary rewards tend to reduce intrinsic motivation
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Maria Antikainen
whereas praise and other positive verbal feedback tend to increase it. In contrast, although intrinsic
motivations seem to be important in the OI communities studied, the study emphasized both types of
reward, monetary and non-monetary. The respondents to the study also gave concrete suggestions
for the different kinds of rewarding models within groups. The results show that users are willing to
collaborate for hedonistic and utilitarian reasons, and the collaboration possibilities in themselves can
therefore be regarded as a reward. Furthermore, motivation factors to collaborate can and should be
used when developing the rewarding strategy of the collaborative OI community. If, for example,
users are motivated to collaborate because of the sense of community, a reward could be a visit to
the company’s premises, as suggested in this study. Furthermore, if fun is the motivator, rewards
should somehow support this idea.
According to the results, a rewarding strategy should be transparent and logical. Rewarding should be
based on the efforts and quality of the work rather than on the quantity of ideas or lotteries. Although
users did not support the idea that everyone in the group be rewarded, they wanted to know the
reasoning behind rewarding decisions. The system should also be flexible so that rewards vary in
different situations and phases of the work. Equity and democracy of the rewarding system are
important factors for OI community users. The customisability of the rewarding strategy ensures that
users can influence, on some level, the nature of the rewards they receive, and that the rewards will
therefore valuable to everyone.
This study clearly shows the untapped possibilities that lie in developing and enhancing collaboration
in OI communities. Our interviews indicate that maintainers have recognized these possibilities at
some point and are seeking solutions to support collaboration in different ways. This study brought
out users’ motivation factors to collaborate and important elements of the rewarding strategy that can
be used together in the development of rewarding schemes in collaborative OI communities. There
are opportunities for future studies to elaborate on the similarities and differences between the factors
that determine generally appropriate rewarding strategies.
Acknowledgments
I would like to express my gratitude to Professor Saku Mäkinen at Tampere University of Technology
for his valuable comments on this article. I am also grateful to my partner in the data collection and
analysis, Heli Väätäjä, at Tampere University of Technology. I would further like to thank Ruben
Robert from FellowForce, David Lionel from CrowdSpirit, and Asta Bäck and Pirjo Näkki from
Owela/VTT for providing insightful information.
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60
Perceived Causes of Business Failure: An Empirical Study
of Iranian Entrepreneurs
Zahra Arasti
University of Tehran, Iran
arasti@ut.ac.ir
Abstract: New firms create new jobs and opportunities for social mobility, foster economic flexibility, and
contribute to competition and profitable efficiency. Business discontinuation is an important feature of dynamic
economies and entries and exits of businesses are closely connected. Our understanding of entrepreneurship will
never be complete without deep acknowledge of entrepreneurial failure. Most of the entrepreneurship literature
has focused on successful ventures, so, little is known about why ventures fail. The annual report of Global
Entrepreneurship Monitor shows that there are significant inter-country differences in SME failure rates. On the
other hand, most of researches on business failures have been done in developed countries and there is limited
knowledge on causes of business failure in other countries with different economical, political, social, and cultural
conditions. As entrepreneurship is newly developed in Iran, analysis of the entrepreneurship process, and the
causes of failures and successes, considering the economical, social, and cultural conditions of the country
would provide critical information for individual entrepreneurs, venture financiers, and government policymakers.
The purpose of this current study is to identify the main causes of business failure based on an empirical study in
Iran. Research samples are not limited by characteristics of entrepreneurs and businesses or geographical
location of businesses, in order to study more cases of unsuccessful entrepreneurs. Data gathering was done
with the help of a questionnaire implemented face-to-face in a sample of 51 failed business-owners/managers.
The results of this research point out that the main causes of business failures are due to lack of good
management , no support from banks and financial institutions, inadequate economic circumstances, and
government policies. This study also indicates differences in some causes of business failure by gender and
business sectors. These results help to better the programs, the entrepreneurship education and business skills
for entrepreneurs, as well as an effective policy to remove entrepreneurial barriers and provide a secure and
encouraging environment to entrepreneurship.
Keywords: entrepreneurship, business, failure, causes, Iran
1. Introduction
New firms create new jobs, open up opportunities for upward social mobility, foster economic
flexibility, and contribute to competition and economic efficiency (Liao et al., 2009).
Business discontinuation is an important feature of dynamic economies, and entries and exits of
businesses are closely linked (GEM, 2009). Although the failure of an individual SME will never attract
the media’s attention, the consequences of the failure of smaller companies are certainly a serious
matter for those stakeholders who are directly involved (FEE, 2004).
It is impossible to talk intelligently about a theory of entrepreneurship without first acknowledging the
pivotal role of entrepreneurial failure. Most of the entrepreneurship literature has focused on
successful ventures, as a result little is known about why ventures fail. Even less is known about how
they fail. Our understanding of entrepreneurship will never be completed until we have a clear
understanding of what caused its discontinuation. Developing a deeper understanding of new venture
failures, should provide critical information for several key stakeholders in a new venture —individual
entrepreneurs, venture financiers, and government policymakers (Liao et al., 2009).
There is a limited but growing body of knowledge on the topic of failure on which researchers can
base their investigations, especially in the small business domain. The research articles are, however,
scattered across business, management, financial, psychology, entrepreneurial and many other
journals and no proof could be found that these investigations have ever been comprehensively
reviewed. There is no specific body of science to which failure exclusively belongs (Pretorius, 2009).
The health of a firm in a highly competitive business environment is dependent upon its capability of
achieving profit and financial solvency. This means that a firm becomes unhealthy, or deteriorates to
the point where it is in danger of suffering business failure, when it loses its competence to maintain
profit and financial solvency. Business failure is not only common with new start-ups but also with
listed companies, and it can easily happen to firms of any and all sizes (Wu, 2010).
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The annual report of Global Entrepreneurship Monitor (GEM, 2009) shows that there is significant
inter-country differences in SME failure rates. On the other hand, most of the researches in business
failure have been done in developed countries and there is limited knowledge on causes of business
failure in other countries with economical, political, social, and cultural differences.
This paper aims to discuss the causes of business failure in a different context of a developing
country and it is structured as follows: section two reviews relevant research related to entrepreneurial
failure, including a wide range of factors that influence business failure. Section three details research
methodology, including sample description, measures, and statistical models. The next section
provides results. Finally, the paper is concluded with discussion and implications for future research.
It has been widely recognized that business growth and survival depend both on external and internal
factors. While most of the challenges which a business will face may be foreseeable, some will be
completely unpredictable. However, if a business is to succeed, its management must be mindful to
all matters which are likely to have a material impact on its viability and must then demonstrate skills
both in exploiting opportunities and mitigating threats (FEE, 2004). There is a vast literature review on
business failure, mostly on prediction of failure by using the financial models, but in this paper, we
focus on causes of business failure in our literature review.
2.1 Definition
The term “failure” in the Oxford English Dictionary is defined as “to become deficient, to be
inadequate”. In general, many different terminologies are related to business failure, such as firm
closures, entrepreneurial exit, dissolution, discontinuance, insolvency, organizational mortality and
bankruptcy. Normally, entrepreneurial failure is referred to as the cease of an operation for financial
reasons. Since we examined nascent entrepreneurs during the firm’s gestation process, one type of
entrepreneurial failure is the discontinuance of venturing efforts by entrepreneurs (Liao et al. 2009),
but business failure can be defined as wanting or needing to sell or liquidate to avoid losses or to pay
off creditors or general inability to make a profitable go of the business (Van Auken, 1993).
Pretorius at the end of his review of business failure definition, propose a universal definition of the
failure phenomenon- A venture fails when it involuntarily becomes unable to attract new debt or equity
funding to reverse decline; consequently, it cannot continue to operate under the current ownership
and management. Failure is the endpoint at discontinuance (bankruptcy) and when it is reached,
operations cease and judicial proceedings take effect (Pretorius, 2009).
There are problems relating to the use of various terms involved in research in business failure. In
particular, definitions of business “disappearance”, “closure”, “exit”, and “failure” are confused and
often overlapping. “Disappearance” of a business may occur because the business failed, or because
the business was acquired by or merged into another company, or because the owners voluntarily
closed it (Cardozo and Borchert, 2004). “Closure” can be categorized as the inability of the business
to survive and thus represents a discontinuation of the business. “Exit” refers to several different
meanings; it can refer to the exit of the business from trading in a specific market or from producing a
particular product. It also refers to the end of the owner’s participation in the business, as in the
search for “exit routes” by entrepreneurs wishing to sell or exit from a business (Stokes and
Blackburn, 2002). “Failure” is generally regarded as the discontinuance of the business due to the
lack of adequate financial resources (Everet and Watson, 1998), cessation of operations with loss to
creditors (Cardozo and Borchert, 2004), cessation of operations and exits the business population
because it is no longer a viable concern (Bickerdyke et al., 2000).
2.2 Causes of business failure

The causes of business failure are many and varied and may stem both from the external
environment as well as from factors internal to the business. Internal causes of business failure may
in many cases be capable of being foreseen in advance, while on the other hand some external
causes are not so predictable. In most cases, a complex mixture of causes contribute to business
failure; it is very rare for one single factor to be involved (FEE, 2004).
Earliest empirical studies on business failure, examined the role of various owners and firm
characteristics to explain business failures. The numerous characteristics shared by failed firms, are
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directly related to personal decision-based characteristics of the owner (lack of insight, inflexibility,
emphasis on technical skills, etc.), managerial deficiencies (lack of management skills and
appropriate managerial training, etc.) and financial shortcomings (no accounting background, cash
flow analysis, financial records, etc.). Many aspects of poor management are reported to be
connected to several related issues, such as poor financial circumstances, inadequate accounting
records, limited access to necessary information, and lack of good managerial advice (Van Auken,
1993). Some studies focused more on the managerial causes of failure and listed some 25 causes
and categorized them simply as poor management and concluded that this combined with the
personality traits of the owner-manager and external factors to cause failure (Berryman, 1983). A
business failure may happen as a result of poor management skills, insufficient marketing, and lack of
ability to compete with other similar businesses. It can also be the result of a domino effect caused by
business failures of suppliers or customers (Wu, 2010).
In the annual report of GEM, financial problems were cited as the reason for quitting the business by
no more than 55% of all respondents; it was cited more often by respondents in the factor- and
efficiency-driven economies (just over 50%) than innovation-driven countries (just over 40%) (GEM,
2009).
The effect of the environment depends upon the time period, geographic area, and market sector in
which the firm operates (Burns, 2001). Government and government-related policies is also an
important factor affecting business failures, and is discussed in some studies. They found that failure
rates were increased due to the heavy burden of taxation and regulation, while the growth in money
supply (higher growth decreased the failure rate) and the volume of bank lending (higher volume of
bank lending reduced the rate of business failures) as significant factors (Van Auken, 1993; Burns,
2001; Oparanma et al., 2010) They discussed the negative internal and external environmental
factors namely: pressure from competitors or new entrants, poor improvement in modern technology
and poor sales, the outbreak of pests and farm diseases, etc (Oparanma et al. 2010) .
A conceptual failure model was presented by Ooghe and Waeyaert in 2004 and it expounded the
causes of failure and the mutual relation between the general and immediate environment of the
company as external causes and the company’s management and policy as internal causes of failure
(Ooghe and De Prijcker, 2006). In this model, the causes of failure can be grouped into five interactive
aspects. These include general environment (economics, technology, foreign countries, politics, and
social factors), immediate environment (customers, suppliers, competitors, banks and credit
institutions, stockholders, and misadventure), management/entrepreneur characteristics (motivation,
qualities, skills, and personal characteristics), corporate policy (strategy and investments, commercial,
operational, personnel, finance and administration, corporate governance), and company
characteristics (size, maturity, industry, and flexibility) (Ooghe and Waeyaert, 2004). Liao has also
mentioned the effects of four groups of factors-individual characteristics of founder, resources,
structural characteristics and strategies of the firm, and environmental conditions in which a firm
operates on business failure (Liao, 2004).
The European Federation of Accountants has identified the following internal and external causes of
business failure. Accordingly, internal causes include poor management, deficit in accounting, poor
cash flow management, inappropriate sources of finance, dependency on customers or suppliers,
impending bad debt, fraud/collusion and external causes of business failure are economy,
catastrophic unpredictable events, governmental measures and international developments,
environmental protection and other regulatory requirements, bankruptcy of main customer or supplier
(FEE, 2004).
2.3 Inter-country difference

Some inter-country studies show that there are significant inter-country differences in SME failure
rates and causes of business failure. In their inter-country study of business failure in Malaysia and
Australia, Ahmed and Seed found that some reasons for business failure were given more emphasis
in one country than in the other. Australian Participants attributed their failure to reasons such as the
inability to manage large number of employees, the inability to manage the fast growing firm, and the
inability to administer large firm. This may perhaps provide an insight into why the participants
preferred to stay small in business. Malaysian participants, by contrast, highlighted softer issues such
as the lack of personal contacts and the failure to maintain close personal relationships with
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customers, providing evidence of the importance of maintaining good personal relationships with
others (Ahmed and Seed, 2009).
According to the annual report of GEM, it can be seen that business discontinuance rates are
relatively high in factor-driven economies (in Angola, for example, the reported rate is as much as
23%) and relatively low in innovation-driven economies. Among high-income countries, Norway,
United States of America, Republic of Korea, Iceland and Ireland have the highest rates of business
discontinuation. The business not being profitable on its own was the most reported financial problem.
Problems with raising finances were considerably lower in innovation-driven countries where the
“Entrepreneurial Framework Condition” and “Entrepreneurial Finance” are generally more developed.
“The opportunity to sell” and in particular “retirement” were mentioned more often in innovation-driven
countries as the most important reason to discontinue the business. Personal reasons caused around
20 – 25% of all discontinuations. Such reasons could include sickness, family, death of a business
partner, divorce, the need to finance an event such as a wedding, through sale of business assets
rather than the business itself, or simply boredom. They were more prevalent in factor- and efficiency-
driven countries (GEM, 2009).
3. Methodology
Some of the researchers have mentioned the difficulty to study the failed ventures (Liao, 2004, Bruno
et al., 1987). They argue that it is difficult to locate ventures that failed because of poor performance
and homogenous samples are hard to come by. Entrepreneurs are reticent about failure and they are
more likely to attribute failure to external causes than to internal ones. As it is extremely difficult to
obtain feedback from entrepreneurs who have experienced business failure, this approach is hardly
utilized by researchers. In this research we used this approach to obtain the feeling of failed business-
owners/ managers concerning causes of business failure.
This is a survey implemented face-to-face based on the questionnaire. In the first part, the failed
business-owners/ managers were questioned about their background, experience, education, and
family. Then a personal characteristic test examined six entrepreneurial characteristics including
tolerance of ambiguity, need for achievement, risk taking, creativity, locus of control, and
independence. The questionnaire on the personal characteristics was obtained from the
Entrepreneurship Development Institute of India and had been used many times in Iranian context
(Ahmadpour and Moghimi, 2006). The participants finally reported on their causes of business failure.
The questionnaire on causes of business failure was obtained from a previous study on causes of
business failure in Iranian context (Gholami, 2008) in which both of the two authors were involved.
This questionnaire was developed based on a literature review and interview with 13 Iranian
entrepreneurs whose businesses have failed. The validity of the questionnaire was significantly
revised by 7 experts in entrepreneurship. Reliability or internal consistency of the items within the
structure of this study was assessed by indication of Cronbach’s alpha that was 0.81 for the
questionnaire on causes of business failure. Each item in the questionnaire was accompanied by a
Likert-type scale, allowing perceived indication of the extent to which the item contributed to the
business failure. The Likert-type scale ranged from 1 (to very little extent) to 5 (to great extent).
Responses to this measure were based on perceptions of past business owners.
3.1 Sample
Sample Group is the business owner/manager who has experienced business failure and stops
his/her business activities voluntary or involuntary. Research samples are not limited in the fields of
characteristics of business and entrepreneurship, the business sector, failure phase and geographical
location of businesses, to study more cases of failed businesses.
One of the greatest barriers to research failures is finding ex-owners/ managers and businesses that
have failed. In this research, we developed our own sampling frame that sought to be as
representative as possible of the range of business failure and exit types, rather than relying on one
source, such as official receivers’ data that reflects only a limited number of types of closure. This was
derived from help of entrepreneurship M.Sc. students in our faculty who are dispersed all over the
country. A data base of 85 failed businesses was developed.
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3.2 Variables
The research variables are classified in three categories:
Characteristics of failed business-owner/ manager (age in start-up, age in failure’s time, gender,
education level, marital status, previous experience in this sector, previous entrepreneurial
experience, employment status, father in the business, welfare of family in childhood) and
personal characteristics (tolerance of ambiguity, need for achievement, risk taking, creativity,
internal locus of control and independence);
Characteristics of failed businesses (business sector, number of years in the business before
failure and, failure phase);
Causes of business failures: (non financial support from banks and financial institutions, unreal
evaluation of projects, under determination of business sectors, non consideration of market
issues, problems in product or service supply, non related experience, expertise and good work
relationships, management deficiency, cheating and fraud, substituted products or service,
government policies, non consideration of legal issues, inadequate financial circumstances,
problems of partnership and team work, lack of interest and dissatisfaction in work or work place,
negative influences by the family).
3.3 Validity and reliability

To validate the research instrument, the questionnaire on causes of business failure was significantly
revised by 7 experts in entrepreneurship. Reliability or internal consistency of the items within each
construct of this study is assessed by indication of Cronbach’s alpha that was 0.81 for the
questionnaire on causes of business failure.
3.4 Data analysis

The data arising from 51 complete questionnaires was analyzed using the Statistical Package for the
Social Science (SPSS).
4. Results
The results of this research contains four sub-sections: first, a description of sample, then the results
of Friedman’s test on causes of business failure, and finally the role of gender and business sectors
were presented in the last two sub-sections.
4.1 Sample description

Most of the respondents started their businesses at a young age (Mean: 29.7, SD= 6.39), 21.3% had
less than 25 years. In the period of business failure, they were still young (Mean= 32.9, SD= 7.01).
Only 10% was older than 45 years. 84.3% are men.
They were well educated. 51% had a Bachelor of Science degree, 17.6% had a Master of Science
degree and 3.9% had a PhD. 81.6% were married and 64.4% had related experience in the business
sector. 35.3% had entrepreneurial experience. 38.5% had father in the business.
As far as their personal characteristics, 54% of them had a low level of tolerance of ambiguity. Most of
them had a moderate or low level of independence, a need for achievement, and risk taking, but they
had a much higher sense of creativity and a high level of internal locus of control (see table 1).
The number of businesses in manufacturing and service sectors were equal (47%) and 6% were in
agriculture. 58.7% failed within 3 years, 8.7% failed after 10 years. The majority of businesses failed
in the phase of establishment and growth (see table 1).
4.2 Main causes of business failure

Given the fact that our data regarding causes of business failure is in Likert scale, we used non-
parametric Friedman analysis of variances to identify the main causes of business failure. As
indicated in the table 2, the variable differences in mean rank is significant ( (2, N=51) =105.180,
p=0.00) and table 3 illustrates the main causes of business failure.
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Zahra Arasti
Table 1: Descriptive statistics for study of Iranian failed business (n = 51)

Variables Percentage Mean SD
Characteristics of failed business-owner
manager
Age in Start-up 21.3% less than 25 years old 29.7 6.39
Age in failure time 10% more than 45 years old 32.9 7.01
Gender 84.3% male
Education level 51% B.Sc. 17.6% M.Sc. 3.9% PhD
Marital status: married 81.6%
Previous experience in this sector: yes 64.4%
Previous entrepreneurial experience: yes 35.3%
Employment status 8.9% jobless
Father in the business 38.5%
Welfare of family in childhood 18.2% very good, 59.1% moderate
Personal characteristics
Tolerance of ambiguity 54% low, 16% moderate
Need for achievement 18% low, 52% moderate
Risk taking 32% low, 36% moderate
Creativity 30% low, 14% moderate
Internal locus of control 10% low, 10% moderate
Independence 44% low, 26% moderate
Characteristics of failed Business

Business sector
Manufacturing 47%
Service 47%
Agriculture 6%
Number of years in the business before failure
Less than 3 years
Less than 5 years 58.7%
10 years and more 87%
Failure phase 8.7%
Start-up
Establishment 14.3%
Growth 38.8%
Innovation 40.8%
6.1%
Table 2: The results of Friedman test on causes of business failure
51 N
105.180 Chi-Square
14 Df
.000 Asymp. Sig.
Table 3: Main causes of business failure
Causes of business failure Mean Mean Rank
Management deficiency 3.33 10.59
Non financial support from banks and financial institutions 3.29 10.09
Inadequate economic circumstances 3.24 10.09
Government policies 3.00 9.48
Non consideration of market issue 2.92 9.18
Problems in product or service supply 2.65 8.45
Lack of interest and dissatisfaction in work or work place 2.63 8.21
Unreal evaluation of projects 2.47 7.72
Non related experience, expertise and good work relationships 2.43 7.43
Problems of partnership and team work 2.39 7.19
Under determination of business sectors 2.27 7.16
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Causes of business failure Mean Mean Rank

Substituted product or service 2.18 6.53
Negative influences by the family 2.00 6.42
Non consideration of legal issues 1.92 5.91
Cheating and fraud 1.84 5.57
4.3 Role of gender on causes of business failure

It is interesting to know whether the causes of business failure were equal for men and women in
failed business-owners/ managers. For this analysis, we used Kruskal Wallis’ test in which grouping
variable is gender of failed business owners. This difference in mean rank is significant for two causes
of business failure (see table 4).
Table 4: The results of Kruskal Wallis test (grouping variable: Gnder of failed business owner)
Non financial support from banks and Problems of partnership and team
financial institutions work
Chi-Square 5.610 5.122
Df 1 1
Asymp. Sig. .018 .024
Table 5 indicates gender difference in causes of business failure. The mean rank of “Non financial support from
banks and financial institutions” is higher for women and that of “Problem of partnership and team work” is lower
for women.
Table 5: The gender difference in mean rank for two causes of business failure
Gender of failed
Mean Rank N
business owner
43 M
23.94 Non financial support from banks and
8 F
37.06 financial institutions
51 Total
27.93 M
43 Problem of partnership and team work
15.63 F
4.4 Role of business sector on causes of business failure

To know how the difference in the business sector could influence causes of business failure, we
repeated the Kruskal Wallis Test which grouping variable is business sectors. This time the difference
in mean rank was significant for two other causes of business failure (see table 6).
Table 6: The results of Kruskal Wallis test (grouping variable: business sector)
Lack of interest and dissatisfaction in
unreal evaluation of projects
work or work place
Chi-Square 6.334 6.825
Df 2 2
Asymp. Sig. .042 .033
The difference in mean rank for three different business sectors is presented in table 7.
Table 7: The difference in mean rank of two causes of business failure for different business sectors
Mean Rank N Business sector
24 manufacturing
23.83
24 service
25.67 unreal evaluation of projects
3 agriculture
46.00
51 Total
24 manufacturing
20.88
24 service lack of interest and dissatisfaction in work
31.54
3 agriculture or work place
22.67
51 Total
5. Discussion
The results of this research indicated that the four main causes of business failures in Iran are: 1)
management deficiency, 2) non financial support from banks and financial institutions, 3) inadequate
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economic circumstances and 4) government policies. These results support previous studies on
causes of business failure concerning management deficiency (Berryman, 1983; Van Auken, 1993;
FEE, 2004; Ooghe and De Prijcker, 2006; Pretorius, 2009; Wu, 2010) lack of financial resources (Van
Auken, 1993; Everet and Watson, 1998; Ooghe and De Prijcker, 2006; GEM, 2009; Liao et al., 2009;
Wu, 2010), inadequate economic circumstances (Berryman, 1983; Burns, 2001; Liao, 2004; Ooghe
and De Prijcker, 2006;) and government policies (FEE, 2004; Oparanma et al., 2010). When taking
Iranian environment into account, entrepreneurship is not encouraged as the effect of external factors
is more severe.
The results of gender difference in causes of business failures, point out that non financial support
from banks and financial institutions, influence women more than men, while men are more
susceptible to problems in partnerships and team work. This research also point out the influence of
business sector on causes of business failure so much, that an unreal evaluation of the projects is
more severe for businesses in agriculture, than manufacturing and services. On the other hand, lack
of interest and dissatisfaction in work or work place is more important for manufacturing businesses
and less important for businesses in service sector.
6. Conclusion
Most of the entrepreneurship literature has focused on successful ventures, so, little is known about
business failure. In most cases, a complex mixture of causes contributes to business failures.
Most of the studies on business survival and failure are done in western countries, therefore, little is
known about causes of business failures in countries with cultural and governmental policy
differences, that could influence the business creation and failures. On the other hand, very limited
inter-country studies indicate the differences on causes of business failure in different contexts.
To develop a deeper understanding of new venture failures would provide critical information for
individual entrepreneurs, venture financiers, and government policymakers.
In this research we studied the influence of many internal as well as external factors in the different
contexts of developing countries by using a hard approach to obtain feedback from entrepreneurs
who have experienced business failures. Contrary to the believe that failed entrepreneurs will attribute
their failure to external causes, the respondents in this research, rank their management deficiency as
the main cause of business failure and it may be due to their high internal locus of control.
This study examined the entrepreneurial characteristics of failed business-owners/ managers and
found a low or moderate level in most of these characteristics. Influence on gender and business
sector on causes of business failure was examined too.
These results aid in the identification of problematic areas for business owners. Necessary assistance
is needed in financial management, competition and growth strategies, and most importantly, in
managerial planning areas. Training programs and business support need to focus on equipping
business practitioners with the managerial skills necessary for effective business operation.
In this study, we used an unlimited sample to study more cases of failed businesses. Future research
on a large and homogenous sample can lead to better results. Future research can study the
influence of push and pull factors that motivate people to start a business to know whether those who
enter business ventures with push factors especially those with dissatisfaction in previous jobs, are
more susceptible to failure. The inter-country study on business failure and post-failure processes is
interesting too.
References
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69
Significance and Impact of Internet on the Entrepreneurial
Process: E-Entrepreneurship and Completely Digital
Entrepreneurship
Reza Asghari1 and Steven Gedeon2
1
TU Braunschweig and Brunswick European Law School (BELS), Germany
2
Ryerson University, Toronto, Canada
r.asghari@tu-bs.de
Abstract: Much has been written about the affect of Information Technology (IT) and the internet on the Net
Economy and the rise of E-Business. E-Entrepreneurship is typically known as the process of creating these
eBusinesses. We discuss the concept of Completely Digital Entrepreneurship (CDE) where IT and the internet
not only affect the E-Business, but also the entrepreneurial process of creating the E-Business as well as the way
these eBusinesses are managed using Virtual Teams. We provide a Conceptual Framework for CDE and provide
examples of how IT and the internet affect the entire E-Business value chain during the Pre-Seed, Seed, Startup,
and Expansion phases of the entrepreneurial process. The main advantages of Completely Digital
Entrepreneurship that help newly formed eBusinesses compete with established businesses include: reduced
transaction and administration costs, increased agility, internationalization (CDE means that companies are born
global), and enhanced customer participation in the businesses’ processes. Disadvantages include difficulties
with protecting Intellectual Property, creating a corporate culture, employee loyalty, and inter-company
communication.
Keywords: e-entrepreneurship, internet start-up, web 2.0
1. Background and overview

The pace of development of Information Technologies (IT), internet use, number of internet users,
and web applications gives rise to substantial changes in the market and the relationships among
companies, customers and suppliers. The new information economy (or Net Economy) affects the
way in which firms get created and develop (Benkler, 2006).
Tremendous changes in the three following areas over the last two decades significantly affect the
way entrepreneurship takes place in the new economy. These changes are:
Internet Communication change has led to faster, cheaper, more capable and more available
communication. Ongoing improvements in bandwidth, speed, and cost mean the internet is now
virtually ubiquitous with tremendous data transfer rates at very low prices. “It is now widely
acknowledged that the Internet is fundamental to the new economy and that it has the potential to
transform the competitive landscape at both the micro- and macro-economic levels… as well as
new ways of conducting business” (Matlay, 2004).
End-Device change indicates the growing high performance of PCs and other end-devices
whereas their prices continue to strongly decrease. Moreover the devices allow additional
functions to data processing and they integrate telephony, voice and video functionalities. Smart
Phones facilitate the integration of services and functions and create the age of Mobile Business.
Apple’s recently launched iPad provides an excellent example of how a new end-device has
stimulated the creation of an entire new ecosystem of applications and content-creation
companies. Even lightbulbs and switches now can have their own IP addresses and become
intelligent edge devices. Team members can now interact anywhere and anytime with anything.
Web Applications are now created and spread faster and in new ways. The Open Source
Movement changes the way new software gets created and distributed. Social Networks change
the way messages spread and Web 2.0 stimulates the age of user-generated content and
changes the ways in which companies interact with their customers.
The above mentioned changes have transformed the way that companies conduct business from
procurement transactions to sales transactions. It changes the way customers interact with
companies – co-creating their own personalized products and services or even creating their own
content. It changes the products and services a company creates. Finally, it changes the way that
entrepreneurs conceptualize, startup, manage and grow their businesses.
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Reza Asghari and Steven Gedeon
2. Conceptual framework for Completely Digital Entrepreneurship (CDE)

“‘E-Entrepreneurship’ respectively describes the act of establishing new companies specifically in the
Net Economy” (Matlay, 2004). Kollmann (2006) created a Shell Model of the Net Economy that
describes E-Business in terms of the company transactions with the external environment through E-
Procurement, E-Shop (also known as E-Commerce) and E-Marketplace. He went on to describe the
electronic value chain in the Net Economy as consisting of 8 information-processing activities that
could be consolidated into three primary value-chain activities: information collection, information
processing, and information transfer (Kollmann, 2006).
E-Entrepreneurship is thus understood as an entrepreneurial process used to create an E-Business.

As described by Chulikavit and Rose (2003), e-Entrepreneurs differ from their traditional counterparts
in that all of their economic transactions take place online, via the internet.
If the entrepreneurial process used to create an E-Business is itself transformed by the use of IT and
takes place online, via the internet, then we have Completely Digital Entrepreneurship (CDE). CDE
not only develops digital products and sells them over a digital channel (E-Business), but Completely
Digital Entrepreneurship also includes Virtual Teams. Virtual Teams communicate primarily through
advanced IT and provide a highly efficient response to the challenges associated with the emergent
e-Economy (Barnes and Hunt, 2001). Matlay and Westhead (2005) have described the stages and
processes involved in Virtual Team formation, operation, socialization and their competitive
advantages and disadvantages. There are many examples of eBusinesses that use virtual teams,
such as Google which makes and sells digital products where the entire chain of added value
including internal collaborative transactions among teams are carried out on a virtual way. However,
for the company to qualify as a CDE, the entire company must be a virtual corporation such as
MoveOn.org, VeriFone, or TeleBiz.
Figure 1 shows a conceptual framework for Completely Digital Entrepreneurship (CDE) based on
Kollmann’s E-Business value chain in the Net Economy and modified to incorporate the concepts of
Virtual Teams and E-Entrepreneurship.
Vision – Leadership – Startup Management E-Entrepreneurship
Collaboration – Organization – Infrastructure Virtual Teams
Information Information Information

Collection Processing Transfer E-Business
Figure 1: Conceptual framework for Completely Digital Entrepreneurship (CDE)

E-Business is the internet based digitalization of business processes alongside the entire chain of
added value creation in an enterprise. In this aspect E-Business consists of all business transactions
which run or could run over a web interface. The E-Business value chain includes Information
Collection (including E-Procurement, customer design, user-generated content and market research),
Information Processing (including Supply Chain Management (SCM), Enterprise Resource Planning
(ERP), compiling digital experiences and report creation) and Information Transfer (including E-
Commerce and Customer Relationship Management (CRM)).
In this sense E-Business is tremendously more than E-Commerce. Though E-Commerce deals with
selling products and services via the internet, E-Business also includes internet based activities inside
and outside the firm to maintain the process of service and product creation, procurement activities,
external collaboration, marketing and financial management. Siemens is perhaps the largest company
in Germany that has transformed into an E-Business company using internet and intranet, mostly
based on SAP applications, to digitalize most of the company’s processes.
Virtual Teams would be a support activity in the value chain that includes all aspects of managing
human resources by means of the internet, collaboration and infrastructure.
71
E-Entrepreneurship involves the entrepreneurial process, opportunity spotting, ideation, obtaining

resources, starting up the organization, providing leadership and vision for the entire organization.
CDE provides several potential advantages over other more traditional businesses.
It reduces the transaction costs and makes business administration much cheaper. Enterprise
activities consist mostly of transfer of information among different actors and participants of the
business transaction. The digitalization and web based transfer of information has a significant
influence on cost reduction.
It increases agility by accelerating the pace of information flow and business transactions. The
time in which the firm can respond to the customer’s desires or certain markets changes can
become remarkably reduced.
The market and internal business operations get internationalized. Geographical borders lose
their influence to constrain the business activities. CDE firms are born global and source
personnel, resources, ideas, suppliers and customers internationally. Operating globally also
reinforces agility because having people in different time zones means the company can operate
around the clock.
The customers can participate more actively in the business process and can manage the entire
E-Business process, especially an eService process, by themselves. Web based services can be
booked and initiated by the customers by themselves. Online Banking transactions get initiated
and carried out by the customers themselves.
CDE does, however, potentially suffer from several drawbacks including difficulties with protecting
intellectual property, creating a strong corporate culture, employee loyalty, and the fact that face-to-
face communication has certain advantages over virtual teams.
2.1 Significance of IT and internet on e-entrepreneurship

The entrepreneurial process is an evolutionary process which gets accomplished over a set of
individual steps. In every step, IT and the internet can have a strong role to accelerate and increase
the efficiency of all individual entrepreneurial phases.
Many authors have described the entrepreneurial process in various levels of detail (e.g. Bhave,
1994; Gartner, 1995). For simplicity, the following picture shows the development process of a start-
up based on Kollmann, 2008:
Figure 2: The stages of development of start-ups

In the Pre-Seed stage the entrepreneur is still exploring the early stages of ideation and team
formation. The entrepreneur may not even be fully committed to starting up a company but may
simply be participating in various information and social networks.
In the Seed stage the idea has to be defined and the business team which will realize the idea must
be built. After that the business concept has to be formalized and documented. In this stage the
business plan will normally be written and different data searches must be completed to determine
who the competitors and customers are and how the market has developed in recent years.
In the Start-up stage the enterprise will be founded and consolidated and the product built. The
enterprise will start to grow and expand, when sales occur and market traction takes place.
IT and the Internet provide two functions in the context of the entrepreneurial process:
a) Information function and b) Transaction function.
The information function provides all activities and measurements which are necessary to provide the
entrepreneur with the proper information required. This information includes the intellectual property,
72
market potential, customers’ buying power and their socio-economic characteristics, competitors and
legal and cultural circumstances of a business idea.
The transaction function provides the realization of business transactions related to the
entrepreneurial process. This includes not just the E-Business and Virtual Team aspects of using IT
and the internet, but also includes such activities as ideation, obtaining advice, conducting surveys,
incorporating the business, registering the website and trademark, or managing the company.
In the Pre-Seed and Seed stages of the entrepreneurial process, there are plenty of measurements
and endeavors necessary to evaluate the business idea, to identify the competitors and their
strengths and weaknesses and to assess if a business idea has been already implemented
somewhere.
There are many online tools to support the entrepreneur. In the pre-seed stage, the entrepreneur has
to verify the business idea and prove if there is a “pain” among the customers (Kaplan/Warren, 2010)
which could be relieved through the new service or product.
Market research could be seen as one of the very import steps during the pre-seed and seed stages
of a startup (Martin/Matlay, 2003). To prove the viability of a market before selling products, it is
necessary to carry out an appropriate market research. It is also needed to convince investors and
potential partners. Market research provides the entrepreneur with the size and growth of the market,
its characteristics and trends. It is also the foundation of market segmentation which leads to target
marketing and to much more powerful and efficient marketing. Also the results of previously
performed market studies through business associations or universities could be gained fast and
easily. Online marketing research prevails as the most effective research concept to conduct
marketing decisions (Agrawal, et al., 2004).
To remain competitive it is not sufficient to access just local or regional knowledge. Global knowledge
can be reached via “virtual knowledge networks” (Benckler, 2006) which provides the entrepreneurs
with new ideas, innovations and technologies as well as feedback on their ideas. The virtual world
makes it possible to receive new inspiration, to share ideas and develop new entrepreneurial
concepts.
During the Startup and Expansion phases, entrepreneurs can access significant resources online
such as shareholder agreements, employee agreements, and non-disclosure agreements as well as
access government grants and startup capital. They can also communicate with existing
entrepreneurs and mentors. www.Upanrunning.entrepreneur.com, www.edconer.stanford.edu and
www.StartMeUpRyerson.com are three examples of the tremendous resources available to help
entrepreneurs through the process of starting and expanding their organizations. The weblog of Guy
Kawasaki is an example of an online entrepreneurship guideline (www.guykawasaki.com).
2.2 Virtual teams

Virtual Teams consist of geographically distributed groups or individuals who collaborate and
coordinate their activities to achieve a common goal (e.g. Matlay and Westhead, 2005). Whereas the
term can apply to an entrepreneurial team in one geographical location working with employees
scattered across the globe, CDE would normally entail the entrepreneurial team itself also being a
geographically dispersed Virtual Team.
During the Pre-Seed and Seed stages, founding team members can become aware of one another by
discovering an interesting blog, forum comment, rating, or article written by each other. Founding
team members can actively seek one another out through chat rooms, Linked In accounts, Facebook,
recruiting websites or other social networks. In many cases the founders share a common interest
and have been aware of each other for a long time prior to deciding to work directly in the formation of
a new company.
During the Startup and Expansion Phases, non-founders are often brought on board the Virtual Team
to accomplish specific tasks and these individuals or groups can be recruited in a wide variety of E-
Marketplaces or through targeted search engine research methods.
73
2.3 Information collection

Information Collection includes E-Procurement, customer design, user-generated content and market
research. This is sometimes referred to as Web 2.0 which is not a software application or technology
but an internet development in which the internet users are not the passive information consumers but
the active information producers (Meyerson, 2008). In this case there is a strong interaction
relationship among web suppliers and web customers. A series of web applications or websites like
blog, wiki, Facebook, Youtube and Twitter allow eBusinesses to spread out their marketing message
and get feedback as well as co-creation of products and services from their customers (Chaffey, D.
etal. 2009). Web 2.0 enables a new form of cooperation between enterprise and customer.
Social Networks like Facebook or Ning represent Network Wealth (Benkler, 2006) and provide start-
ups with valuable and easy access to customers, vendors and other business partners. Entrepreneurs
can generate their own sub-net which can be organized through the internet at a very low price.
Through RSS Feeds the entrepreneur can add free content to their home page, test offers and get
relevant information. The more interesting and more up-to-date the content of the web site of a Start-
up is, the higher is the probability that the customers will stay longer at the home page and ask for
services and products.
2.4 Information processing

Information Processing includes information systemization, selection, and combining as well as
Supply Chain Management (SCM), Enterprise Resource Planning (ERP), compiling digital
experiences and report creation (Kollman, 2006).
This phase of the E-Business value chain manages the internal and external processes to ensure the
running and maintenance of the entire process of producing products and services in an enterprise
(Monk/Wagner, 2006). The external processes concern the transactions among enterprise and
suppliers and internal processes include the internal order management, inventory and payments. E-
Procurement is a substantial part of ERP and contributes to reduce the costs for purchasing the input
factors which are necessary for maintaining the entire value adding process in a enterprise (Presutti,
2003). E-Procurement is used to optimize the supply chain management and to integrate the
suppliers in the production process. Start-ups have a huge advantage by using ERP to organize the
purchasing activities. The selection of the most suitable suppliers is managed via the internet. The
products and services of the selected suppliers are categorized and are available in the web based
intranet. Purchase order, purchase administration and payments get carried out via internet and
automatically.
Internet has in this case not only an information function but also a transaction function to enable the
start-ups to be connected digitally with the suppliers to carry out the entire procurement process with
a very low transaction costs and in a short time. Both aspects are however essential to enhance the
competitiveness of start-ups.
2.5 Information transfer

Information Transfer includes all aspects of E-Commerce and Customer Relationship Management
(CRM). Marketing helps the entrepreneur to maximize the company’s strengths in order to win
customers and dominate the targeted market segment. Marketing management is a process including
identifying the current, potential and best customers. Through “Market Segmentation”
(Kotler/Armstrong, 2009) they can identify target customer groups with specific demographic, social,
economic, geographic and perhaps ethnic criteria. The more exact the market segmentation is
defined and customer’s attributes are determined, the more efficient the entrepreneur can develop
effective marketing measurements to move the customers to buy and become loyal to the start-up.
Because of the internet, target market segments no longer need to segment by geographical territory
or by class or ethnicity. In many cases, target segments self-identify themselves by associating with
certain causes, websites, social networks, chat rooms, or products and services.
Online-Marketing is an appropriate instrument to communicate with the most profitable customers and
to increase marketing efficiency. It affects all marketing measurements and contributes to
74
understanding and interacting with the customers in the virtual world. Google-AdWord is a special
form of Online-Marketing which gets continuously more popular for entrepreneurs.
Marketing-Mix consisting of product, promotion, price and place has to be adapted to the
requirements of the internet. Online-Marketing enables the entrepreneurs to realize the mass
customization through which a large number of customers would be addressed in a very personal and
individual way. Dell used mass customization, also called one-to-one Marketing, to win a huge
number of customers and become the most profitable PC retailer worldwide. Customers configure
their own PC or laptop based on different technical aspects and decide on their own price.
Traditional marketing was focused on Push Marketing which aimed to push marketing messages to
the customers independent of the readiness and willingness of customers to receive the message.
Pull Marketing is more efficient than Push Marketing and the entrepreneur can start with and manage
just those customers’ marketing relationships which have a large chance to be successful. Permission
marketing includes Pull Marketing based measurements to involve the customers in the marketing
process with the target to maximize the share of wallet and to intensify the customer connection.
Helpful information and free interesting downloads which are adapted to the needs of customers
increase the attractiveness of a web site and give incentives to visit the web site again. Customer
registration on the web site and their permission to receive regular eMails and newsletters could be
mentioned as typically examples of permission marketing.
The web site of a start-up places a key role in helping to learn the desires and needs of customers
and win them over. Allowing customers to create their own Web configuration provides an individual
relationship with the customers and gives them the chance to build their own web experience.
The internet allows company-customer communication to be shaped very personally and thus
provides the startup with yet another important differentiator in which to compete against more
established companies.
3. Summary
The Conceptual Framework for Completely Digital Entrepreneurship (CDE) provides a way to
understand different sources of sustainable competitive advantage as new companies try to compete
with more established industry rivals. The power and adaptability of Information Technology (IT) and
the internet may be used to improve:
The entrepreneurial process (E-Entrepreneurship)
Communication within the firm (Virtual Teams)
The company’s value chain of business activities (E-Business)
For penetrating new markets and winning market share, start-ups have to compete with older, more
mature and established firms. The start-ups have a real chance to beat the competition when they are
faster and more innovative. CDE is an important innovation which can make start-ups more dynamic
and more efficient, reduce transaction costs, increase agility, compete internationally, and enhance
customer interaction and loyalty.
References
Agrawal A. Et Al., in: IBM Journal for research and development, VOL. 48 NO. 5/6 2004, p. 671-677
Benkler, Yochai (2006), The Wealth of Networks, How Social Production Tranforms Markets and Freedom, Yale
University Press, Yale
Bhave, M. P. (1994). "A Process Model of Entrepreneurial Venture Creation." Journal of Business Venture 9(3):
223-242.
Chaffey, D./Ellis-Chadwick, F./Mayer, R./Johnston, K. (2009), Internet Marketing, Strategy, Implementation and
Practice, Pearson Education Limitd, Essex
Chulikavit, K. and Rose, J. (2003) “E-Commerce and the Internationalisation of SMEs” in H. Etemad and R.
Wright (eds) Globalisation and Entrepreneurship: Policy and Strategy Perspectives. Cheltenham: Edward
Elgar.
Gartner, W. B. (1985) A Conceptual Framework for Describing the Phenomenon of New Venture Formation.
Academy of Management Review 10(4): 696-706.
Kaplan, Jack M. / Warren, Anthony C. (2010), Patterns of Entrepreneurship Management, John Wiley & Sons
Kollmann, T. (2006) “What is e-entrepreneurship? – fundamentals of company founding in the net economy” Int.
J. Technology Management, Vol. 33, No. 4, 322-340.
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Kollmann, T., (2008), E-Entrepreneurship: Grundlagen der Unternehmensgründung in der Net Economy, Gabler
publishing, Wiesbaden
Maass, C., (2008), E-Business Management, UTB Publishing, Stuttgart
Martin, Lynn M. / Matlay, Harry: Innovative use of the Internet in established small firms: the impact of knowledge
management and organizational learning in accessing new opportunities, in: Qualitative Market Research:
An International Journal, 2003, Volume: 6, Issue: 1, Page: 18 – 26
Matlay, H. (2004) “E-entrepreneurship and small e-business development: towards a comparative research
agenda” Journal of Small Business and Enterprise Development; Vol 11, No 3, 408-414.
Matlay, H. and Westhead, P. (2005) “Virtual Teams and the Rise of e-Entrepreneurship in Europe” International
Small Business Journal, Vol 23, No 3, 279-302.
Meyerson, M. (2008) Mastering Online Marketing, Entrepreneur Press, Canada
Monk, Ellen; Wagner, Bret (2006), Concepts in Enterprise Resource Planning (Second ed.), Boston: Thomson
Course Technology
Philip Kotler/Gary Armstrong (2009), Marketing: An Intrduction, Pearson Publishing, Essex
Presutti, William D., (2003), Supply management and e-procurement: creating value added in the supply chain,
Industrial Marketing Management, Volume 32, Issue 3, April 2003, Pages 219-226
76
The new Laws of Technological Innovation: Looking at the
Case of Nano-Entrepreneurship and Policy-Making
Claire Auplat
Advancia School of Entrepreneurship, Paris, France
c.auplat04@imperial.ac.uk
Abstract: This paper explores the emergence of new societal norms governing technological innovation. It is
based on an empirical study of the impact of nano-entrepreneurship on policy-making. Nanotechnologies refer to
the science and technologies of developing new materials and devices by working at the atomic and molecular
level, typically defined as at a scale which is inferior to 100 nanometers in at least one dimension (1nm:10 – 9
meters). At this scale, materials can present entirely new properties never observed in the natural state before.
This leads to the development of a wide range of applications in such fields as medical treatments, agro-food,
electronics, advanced manufacturing or energy. Both intrapreneurship and entrepreneurship are extremely active
in the field of nano-applications. Analysts predict that the market of manufactured products incorporating
nanotechnologies will reach a trillion euros within less than a decade, with a projected annual growth of around
20% till 2013. However, the very differences between materials in their nano- and bulk- formats that make them
of interest in new applications also suggest that these materials may interact differently with ecosystems and
living cells. This raises questions linked to the management of the unknown and of potential harms to the
environment or to human beings. Nano-entrepreneurship is therefore highly dependent on the regulatory context
which surrounds the emergence of nanotechnologies. Using a grounded theory approach and a methodology
which rests on a comparative analysis of archival sources complemented by focused interviews, the paper firstly
analyzes the specific characteristics of nano-entrepreneurship by focusing on three variables: research, patenting
and the arrival on the market of new products and services. It then examines compulsory and voluntary forms of
nano-regulation and discusses their popularity and their competitive advantage for nano-entrepreneurs. It shows
that these are also institutional entrepreneurs because the choices they make contribute to shape nano-
governance. They participate in the development of a new form of technological democracy which has the
following characteristics: it is global, it pushes back the notion of national ownership of regulatory frameworks and
it rests on benchmarks that embed sustainable development and are testable and certifiable. The findings
contribute to the new institutional theory literature as well as to the entrepreneurship literature. The potential for
generalization of the study to other sectors of innovation could mean that the findings also contribute to the
innovation and policy literature.
Keywords: innovation, nanotechnologies, regulation, governance, technological democracy
1. Introduction
The study of the links between entrepreneurship and policy-making is a fairly recent area of research.
The main stream of this research explores how government policy influences entrepreneurship. More
specifically it seeks to understand how, starting from the premise that entrepreneurship is an
important engine of growth, government policy shapes the institutional environment in which
entrepreneurial decisions are made (Audretsch et al., 2009; Hart, 2009; Minniti, 2008; Woolley &
Rottner, 2008).
Little has been said so far of the connections between entrepreneurship and policy-making by starting
from the entrepreneurial act. This paper proposes to address this gap by focusing on the influence of
nanotechnology entrepreneurship on policy-making. Doing so, it follows a theoretical approach which
has not been favoured so far. Most extent research has concentrated on the influence of policy-
making on entrepreneurship (policy → entrepreneurship) whereas this paper studies the influence of
entrepreneurship on policy-making (entrepreneurship → policy).
The field of nanotechnologies refers to products and technologies involving the manipulation of matter
-9
at the level of atoms, at the scale of the nanometre (1nm=10 m). It concerns particles which are man-
made, i.e. not present in a natural state, and which present properties that were not observed in a
natural state before. Manipulating matter at such a scale, by acting directly on the atomic structure of
particles, seems to open up endless possibilities. For some reasons which remain partially
unexplained today, when particles of a given chemical substance are at the nanometric size, they
present properties that are not observed at a larger scale. Today, nanoproducts – products containing
specific man-made nanoparticles – which are on the market include self-cleaning glass or textiles,
reinforced tyres or bumpers, cements or paints with specific properties, cosmetics, food, beverages,
wrappings, fuel additives etc. The development of nanotechnologies is recent – the first inventory of
nanoproducts on the market was released in March 2006 – but it diffuses very fast and very broadly.
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Claire Auplat
The difficulty with nanotechnologies is that it is at present extremely hard to measure or assess the
risks linked with the development of nanostructures. There are two major reasons for this. Firstly,
scientists are only beginning to develop nanostructures in a stable and measurable way and toxicity
assessment standards and protocols are still largely non-existent (United Nations Secretariat, 2009;
Wiesner et al., 2006). Secondly, nanoparticles are so small that it is very complex to trace them and
to assess their inherent risks. One speaks here of monitors as well as of modelling capacities. The
only certainties are that nanoparticles are so small that they can cross most barriers and filters
including cell barriers within living organisms, and that due to quantum effects it is still difficult to
predict their behaviour in a consistent way in many cases. There is an increasing number of safety
related studies concerning the use and development of nanotechnologies, but the results diverge
hugely (Dupuy & Roure, 2004; European Commission, 2009)
Drawing from this context, I use an historical narrative to interpret how nanotechnology
entrepreneurship, i.e. entrepreneurship based on this particular form of technological innovation,
impacts policy-making. Specifically, I address the following research question: Why and how does
nanotechnology entrepreneurship foster a new form of international governance?
2. Methodology
I use a longitudinal approach to study a phenomenon which is path-dependent in nature (David, 1985;
Liebowitz & Margolis, 1995). The research site is the field of nanotechnology R&D, industrial and
institutional operating frameworks. The methodology rests on the comparative analysis of various
archival sources complemented by focused interviews. The paper firstly analyses the characteristics
of nanotechnology entrepreneurship. It then draws a panorama of various regulatory frameworks
which are both in place and in the course of being elaborated around the development of
nanotechnologies and it discusses their respective value. Finally, it situates this change in relation to
the global evolution of the management of innovation. It concludes by explaining how this new type of
international governance corresponds to a new form of technological democracy.
3. Nano-entrepreneurship
In line with scholarly research and accepted use of the term entrepreneurship (Fayolle et al., 2006;
OECD, 1998; Shane, 2003), nano-entrepreneurship can be defined as entrepreneurship applied to
nano-based products and services. It refers to the discovery, evaluation and exploitation of business
opportunities based on nano-based goods or services. Several attempts were made to analyze or
map out nanotechnology entrepreneurship by looking at criteria like R&D intensity, patent or citation
bibliometrics, innovation clusters, or products reaching the market (Chen & Roco, 2008; Heinze,
2004; OECD, 2009; Larédo et al., 2009). Drawing from these studies, I posit that nano-
entrepreneurship has the following characteristics: it pertains to a transnational system of
governance, it is trans-technological, it is high-potential-high-risk.
Nano-entrepreneurship pertains to a transnational system of governance

Nano-entrepreneurship is research intensive (EUropean Commission, 2007; Roco, 2006). Apart
from public institutions, the largest R&D facilitators are multi-national corporations which have the
most resources. As a consequence, nano-entrepreneurship – through research and seed funding
as well as through R&D agreements – has tight links with large multi-national corporations
(MNCs) and therefore with their transnational systems of governance (Larédo et al., 2009).
More than the source of entirely new sectors of business activity, nanotechnologies tend to diffuse
in existing products and services. Indeed, nano-products are mostly used to enhance the qualities
or specific characteristics of existing products and services. This mode of diffusion does not follow
the model described by Pavitt (1984) and nano-entrepreneurship is in fact mostly intrapreneurship
(Pinchot, 1985) i.e. entrepreneurial activity within an existing organization (OECD, 2009; Larédo
et al., 2009). Again, this suggests embeddedness in the systems of governance of large
multinational companies.
Studies of nano-entrepreneurship mostly analyze the phenomenon in regional terms and all agree
that nano-entrepreneurship targeted global markets from the start (Chen et al., 2008; Nanoforum,
2004; OECD, 2009; PCAST, 2010).
Nano-entrepreneurship is trans-technological
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Claire Auplat
A study of the evolution of patent areas over the last thirty years shows that although nano-patenting
started overwhelmingly in the area of chemistry and metallurgy in the 1970s, it became fairly evenly
spread out among 5 of the 8 categories of the International Patent Classification (IPC).
(http://www.wipo.int/export/sites/www/classifications/ipc/en/guide/guide_ipc_2009.pdf accessed
August 2009)
100 X
H
90
80 X
G
H
70 E G
60 D
F F
50 E
C
40 D
C
30
B
20 B
A
10 A
0
1970 1980 1990 2000 2007
Figure 1: Evolution of nano patents:1970-2007 (source of data: Delphion (USPTO, EPO, WIPO –
PCT) own compilation)
The trans-technological feature of nanotechnology development is further illustrated by OECD’s
research (2009) on the potential for new business opportunities coming from nanotechnology
applications, and by the inventory of nanotechnology consumer products on the market developed by
the Project of Emerging Nanotechnologies (PEN). The inventory of August 2009 listed 1091 different
products produced by 485 companies located in 24 countries world-wide which fell into 8 broad
categories, from health and fitness to electronics or food and beverage.
Nano-entrepreneurship is high-potential-high-risk
Nanotechnologies can in theory affect absolutely everything since they correspond to modifications of
matter at the atomic level. This high potential is confirmed by many reports and analyses (Lux
Research Inc., 2007; OECD, 2009). Forecasts suggest a global market for nanotechnology products
in the range of USD 150-3100 billion by 2011 and the creation of some 2 million new jobs worldwide.
This high potential is associated with high risks, directly linked with the frontier nature of
nanotechnologies (Raje, 2007; Swiss Re & Hett, 2004). The phrase ‘nanotechnology risks’ covers
three different forms of risks, risks coming from nanoparticles themselves (European Commission,
2009; Wiesner et al., 2006), risks coming from public perception (Andersonet al., 2009) and risks
coming from regulation. At the moment, there is no certainty about the future aspect of
nanotechnology regulation (Bosso, 2010). This uncertainty induces risks for nanotechnology
entrepreneurs and for the nanotechnology emerging industry altogether. If regulatory frameworks
change, what was allowed at one point in time may not be so any longer, which means that
investments may become useless if what they had been designed for cannot be developed. Indeed,
the case of the development of biotechnologies showed that regulatory changes entailed shifts in
entrepreneurial activity accompanied by wealth destruction (Auplat, 2006).
The fact that nano-entrepreneurship is trans-national, trans-technological and high-potential-high-risk

has direct consequences on governance and policy-making: Regulation must be generic enough to
accommodate both the trans-national and the trans-technological natures of the diffusion of
nanotechnologies. Besides, it must send clear signals to help nano-entrepreneurs balance risks and
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potential returns. For example, insuring the nanotechnology industry is highly risky in the absence of
a well defined regulatory framework (Lloyd's, 2007; Swiss Re et al., 2004). So, nano-entrepreneurs
will seek a regulatory framework which will allow them to convince insurance companies concerned
by potential liability that it is worth insuring them. They will also have to convince customers. Users of
products containing nanomaterials – notably in the health sector – want to enjoy the benefits of new
products but are very concerned about the safety of being exposed to them (Kaiser et al., 2009). They
expect nano-products to be safe and will not tolerate disappointment (Auplat, 2008). Nano-
entrepreneurs know that they must integrate these parameters if they want their business ventures to
succeed. Their lever of action is their involvement in nano-governance. The following panorama of the
tools at their disposal and of their use of them illustrates their impact on policy-making.
4. Nano-governance: Institutionalisation and norm
There are many initiatives concerning potential normative frameworks to cover the development of
nanotechnologies (Laas & Weil, 2008). However, there were in early 2010 only two cases of specific
compulsory regulation. The first one was a municipal ordinance of the city council of Berkeley,
California, demanding a full toxological report from all facilities manufacturing nanoparticles (Berkeley
City Council, 2006). The second one was a text from the European Parliament (2009) requiring the
manufacturers of new cosmetic products containing nanomaterials to notify the European
Commission and provide certain information six months before the product was placed on the
European market.
Apart from these two examples of compulsory regulation, all other existing forms of specific
nanotechnology regulation were voluntary schemes. They could be divided into three broad
categories, voluntary reporting schemes, codes of conduct and standards.
Voluntary reporting schemes
The UK Voluntary Reporting Scheme (VRS) for Manufactured Nanomaterials was set up in
September 2006 as a temporary experiment with an expected life of two years. It was run by the
Department for Environment, Food and Rural Affairs. It asked anyone involved in the manufacture,
use or waste management of engineered nanomaterials to provide data on the materials. (DEFRA,
2008). In January 2008 the US Environmental Protection Agency launched the Nanoscale Materials
Stewardship Program (NMSP), a similar voluntary reporting scheme covering engineered nanoscale
materials manufactured or imported for commercial purposes (EPA, 2007, 2009 ).
These voluntary reporting schemes did not meet the enthusiasm of industry, and reporting averaged
10% of expectations. Interviews with industry representatives suggested that the major reason for this
failure was that when a company attempted to give an earnest report of its nanoactivities, the very
information it provided became a source of scrutiny – and sometimes criticism or concern. Companies
felt that because of the overall lack of data, the data they provided became the source of a
benchmarking of nanotechnology risk evaluation for which they were accountable because they were
the source of the data. So they considered that participation in voluntary reporting schemes in fact
increased risks for them.
Codes of conduct
These came from institutions, like the ‘Code of Conduct for Responsible Nanoscience and
Nanotechnology Research’ (European Commission, 2008), or from industry and/or civil society, like
‘Nano Risk Framework’ (Environmental Defense & DuPont, 2007), BASF’s 2007 specific code of
conduct for nanotechnologies
(http://www.responsiblenanocode.org/documents/TheResponsibleNanoCodeUpdateAnnoucement.pdf
accessed August 2007), or ‘The Responsible NanoCode’ (Royal Society, 2008). These initiatives
were designed as voluntary, principles-based guidelines establishing a consensus of what constituted
good practice in businesses across the nanotechnology value chain, from research and development
to manufacturing, distribution and retailing, so that businesses could align their processes with
emerging good practice. However, they dealt more with management practices than with the
technology risks themselves. They illustrated expected behaviours and processes, not standards of
performance, and they did not aim to be auditable standards.
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Standards
At the same time as the initiatives described above, there was a lot of activity from standardization
organisations working on nanotechnology standards. (Brunsson & Jacobsson, 2002; Djelic & Sahlin-
Andersson, 2006) already pointed that standardization was becoming a new transnational institution.
This appears particularly true in the case of nanotechnologies. It is commonly agreed that standards
“support” appropriate legislation/regulation (Phelps, 2006). However, in the nano context, regulation is
widely considered as unsatisfactory or insufficient (United Nations Secretariat, 2009), and standards
are de facto standing for it as detailed below.
On 1st April 2005, PR China became the first country in the world to establish national standards for
nano-scale materials with a list of seven items. According to ACON AG, a science and business
consultancy focusing on Asia, (http://www.hkc22.com/about.html) this gave China a competitive
advantage as these standards were expected to lay a good foundation for market access, market
regulation and proper application of nano materials globally.
Just after this, the International Organization for Standardization (ISO) launched a technical
committee on nanotechnology, ISO TC-229, in May 2005. Keeping up with these movements, the
Japanese Ministry of Economy, Trade and Industry (METI) launched a panel within the Japan
Standards Association called the Nano-Standardization Panel. It developed into the Council on
Nanotechnology Standards in Japan in September 2005 and hosted the second plenary meeting of
the ISC TC-229 in June 2006. In June 2005, PR China launched its own National Technical
Committee on nanotechnology standardization, with the approval of SAC (Standardization
Administration of the People’s Republic of China): SAC/TC 279.
By 2007, each of the projects of ISO TC 229 had been categorized into one of the technical
committees’ Working Groups (WG): WG 1- Terminology and Nomenclature; WG 2- Measurement and
Characterization; WG 3- Health, Safety, and Environment. But in October 2007, PR China’s national
standards agency SAC submitted two new work item proposals addressing specifications for
nanomaterials in terms of possible applications. In response to these newly identified needs, a new
working group on Material Specifications (WG 4) was formed in early 2008, under the convenorship of
China.
The following table illustrates the transnational character of the process of nanotechnology
standardization. Over four years, ISO meetings for Technical Committee TC 229 were convened in
eight countries, half of them in Asia. The seventh plenary session gathered over 140 representatives
from thirty-two member countries.
Table 1: The transnational character of the process of nanotechnology standardization
ISO TC229 MEETINGS

Meeting Date Place
1st plenary November 2005 United Kingdom
2nd plenary June 2006 Japan
3rd plenary December 2006 Republic of Korea
4th plenary June 2007 Germany
5th plenary December 2007 Singapore
6th plenary May 2008 France
7th plenary November 2008 PR China
8th plenary June 2009 USA
Specific tasks of ISO TC 229 include developing standards for:
Terminology and nomenclature
Metrology and instrumentation, including specifications for reference materials
Test methodologies
Modelling and simulation
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Science-based health, safety, and environmental practices

As of February 2010, 2 international standards had been published by ISO TC 229, and 38 were
under development.
The two published standards were:

ISO/TS 27687:2008. Nanotechnologies – Terminology and definitions for nano-objects –
Nanoparticle, nanofibre and nanoplate (published 11 August 2008). ISO/TS 27687:2008 listed
unambiguous terms and definitions related to particles in the field of nanotechnologies. It was
intended to facilitate communications between organizations and individuals in industry and those
who interacted with them.
ISO/TR 12885:2008. Nanotechnologies – Health and safety practices in occupational
settings relevant to nanotechnologies (published 30 September 2008). ISO/TR 12885:2008
described health and safety practices in occupational settings relevant to nanotechnologies. It
focused on the occupational manufacture and use of engineered nanomaterials.
According to the US Nanotechnology Law Report, the standards developed under WG4 were going to
have a tremendous impact on manufacturers in a wide variety of industries worldwide because they
could be used in a variety of industrial applications and consumer products (Monica, 2008). Besides,
ISO made it clear that the use of its nano standards could help companies, researchers, workers and
other people to prevent adverse health and safety consequences during the production, handling, use
and disposal of manufactured nanomaterials
(http://www.iso.org/iso/iso_catalogue/catalogue_tc/catalogue_detail.htm?csnumber=52093 , accessed
January 2009).
5. Conclusion
According to representatives of industries involved in bringing nanotechnology products to the market,
nano-entrepreneurship is under high tension (Auplat, 2008): Customers want innovation and new
products. Nano-entrepreneurs strive to satisfy them as part of their strategy to develop new business
activities. Yet they also know that if a product turns out to be damageable to people’s health or the
environment, they will have to pay the hard price for it. This fairly recent phenomenon has intensified
strongly as part of sustainable development awareness. Nano-entrepreneurs do not want repeats of
what happened with asbestos for example: US studies showed that as of 2002 over 700 000
individuals had filed asbestos lawsuits, and estimated the eventual cost of asbestos litigation between
200 and 265 billion dollars (White, 2004).
As a result, nano-entrepreneurs are increasingly acting as institutional entrepreneurs, seeking to

create new institutions or to modify existing ones to suit their purposes (Auplat, 2009b; Maguire et al.,
2004). For instance whereas until the end of the twentieth century technological emergence as well as
the management of innovation tended to be entirely driven by developed countries (Aubert, 2004),
developing countries are participating in the innovation and governance processes of
nanotechnologies at various levels. Iran, India and South Africa among others started running regular
international nanotechnology events around 2005, and the database of the consultancy Nanowerk
illustrates the generalization of this phenomenon. http://www.nanowerk.com/phpscripts/n_events.php
accessed April 2010.
As Zucker et al. pointed out in their research on the rate of regional growth of new knowledge in
nanotechnology(2006), cross-organizational collaborations and their associated flow of tacit
knowledge relate positively to knowledge growth. Likewise, by hosting these conferences, by giving a
voice to the research of their own representatives, these different nations modify the process of
institutional emergence – i.e. the birth of new institutions or the modification of existing ones – as well
as the governance of innovation.
These new developments are part of the emergence of a new form of technological democracy. Just
as democracy refers to the concept of ‘rule by the governed’, technological democracy means that the
stakeholders of a new technology are empowered to design its governance. In other words, a
traditional top down approach of regulation is no longer considered sufficient in addressing the
concerns raised by emerging technologies (Irwin et al., 2006). In the case of nanotechnologies, there
is strong disagreement whether existing regulatory frameworks can actually cover their development
(Hodge et al., 2009; United Nations Secretariat, 2009). Besides, there is no consensus on the value of
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the attempts at voluntary regulation. It seems that the voluntary reporting schemes that some
governments are trying to put in place, like the EPA’s Nanoscale Materials Stewardship Program
(NMSP) in the US or the UK Voluntary Reporting Scheme for engineered nanoscale (VRS) do not
meet industry’s approval.
In this regulatory disorder, the short term solution for all parties seems to be to turn to international
standards and certification. It would be much cheaper to use government-based frames of voluntary
reporting schemes. Indeed, the application of standards and certification is expensive because it
requires the creation and conduct of costly tests to demonstrate compliance to agreed standards or
best-practice scenarios. Yet it appears as the favoured solution, and this can be explained by several
reasons. Firstly, international standards are global, which makes them particularly well-suited to the
transnational quality of nano-entrepreneurship. They have been devised in an international manner,
and they do not ‘belong’ to any particular entity, so they are less likely than national regulations to
displease anyone. The history of technology regulation is full of stories of the difficulties stemming
from conflicting national regulatory frameworks for new technologies. The case of GMO disputes
(Blaustein, 2008) or that of stem cell research (Mariani, 2002) are only two examples of a well-known
problem. Secondly, standards are generic, and this is particularly well-suited to the trans-
technological quality of nano-entrepreneurship. Thirdly, standards are certifiable, and this gives them
a seal of expertise and objectiveness which is reassuring in light of the high-potential-high-risk quality
of nano-entrepreneurship. Even the fact that the headquarters of the ISO Central Secretariat are
located in Switzerland – the country with a tradition of neutrality – is likely to strengthen public trust by
adding to the general impression that standards are neutral. All these facts contribute to give them a
competitive advantage, especially in the specific context of the development of nanotechnologies
which combines increasing awareness of the importance of sustainable development, a lack of
information concerning potential risks associated with nanotechnologies, and regulatory confusion in
existing frameworks.
One may conclude that the development of nanotechnologies is symptomatic of a new form of
institutional dynamics where decision-making is no longer mostly top-down and developed-country-
driven as it used to be but is becoming a more complex, globalised and multi-stakeholder process. In
this new form of international governance, national decisions or roadmaps about regulatory
frameworks are superseded by new forms of international regulation which are being put into place
whether individual nation states want them or not.
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85
A Conceptual Model for Developing Venture Capital in
Emerging Economies
Olutoye Ayodeji
Tilak Investment, Pretoria, South Africa
Vaal University of Technology (VUT), Vanderbijlpark, South Africa
tilakinv@gmail.com
Abstract: Innovation, new ventures and entrepreneurship fuel the engine of the modern economy. Venture
capital (VC) has had tremendous impact on the world’s economy since the end of the Second World War. It plays
a pivotal role in the entrepreneurial process. It creates value by stimulating innovation in new ventures especially
in technology-based firms (TBFs), and sustains economic growth. This paper identifies the importance of venture
capital in entrepreneurship development, as a catalyst for innovation, technological and economic development.
The study uses an exploratory approach to gain insight into the activities of venture capitalists in emerging
economies and concludes by proposing a conceptual model for accelerating the development of their VC industry
through commercialisation of patents and intellectual property (IP). The study suggests recommendation on
policy changes that could make VC a more viable and preferred alternative to traditional debt financing, and
public funding options for entrepreneurial start-ups and expansion.
Keywords: venture capital, innovation, emerging economies, portfolio companies, model, intellectual property
1. Introduction
Innovation, new ventures and entrepreneurship provide the fuel for the engine of the modern
economy (Herbig, Golden and Dunphy 1994). The importance of these three elements cannot be
overemphasized, in view of the fact that small firms (new ventures) produce two-and-a-half times as
many innovations as large firms per employee. In addition, small entrepreneurial ventures also bring
innovation more quickly to the market place (Herbig et al. 1994).
The entrepreneur is the linchpin of innovation since he or she brings know-how –the ability to
leverage business and scientific knowledge in linking business resources like talents, technology and
capital in order to exploit opportunities. The entrepreneur’s ability to find and apply expertise in a
variety of areas (involving any and all business disciplines) can make the difference between success
and failure. As Herbig et. al. (1994) indicated, “if a society wishes to generate innovation (either low or
high technology), it’s in the society’s best interest to create an enabling environment that is conducive
to the entry and maintenance of entrepreneurs and the associated small new ventures that they
produce”.
Financial support especially equity financing for starting or expanding a company is important for
entrepreneurial ventures. As a result, the source of financing depends on where a start up sits on the
entrepreneurship spectrum. At the bottom end of the spectrum are micro entrepreneurs usually
survivalist who rely on self financing while at the top of the spectrum are the gazelles with extra
ordinary opportunities who launch their business with finance from professional venture capitalists,
strategic partners, business angels (Bygrave, Michael, Emily and Paul 2002). Standeven (1993),
predicted that “the availability of financing will become a more crucial issue for the success of new
technology” in emerging economies, in which entrepreneurs plays a dominant role, and the venture
capital industry plays a major role in the creation and development of entrepreneurial ventures that
would stimulate and sustain the necessary economic growth, create needed jobs (Vanacker 2008)
and in turn reduce unemployment.
According to Bygrave and Timmons (1992), Venture capital has had tremendous impact on the
world’s economy since the end of the Second World War, particularly in the United States and in
Europe. It also plays a catalyst role in the entrepreneurial process in terms of value creation (Bygrave
and Timmons 1992) which stimulate and sustains economic growth. It facilitates job creation and
financing of innovative products and services, thus encouraging competition.
This paper explores the role that classic or traditional venture capital plays in entrepreneurship
development via the funding of innovation and commercialization of ideas and IP. It also highlight the
importance of VC as a catalyst for technological, as well as economic development, and sustainable
growth in emerging economies in Central and Eastern Europe, Latin America, Asia and Africa. A very
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important contribution of this paper is that, it proposes a conceptual model for accelerating the
development of the VC industry in emerging economies. The proposed model is currently being
developed from the perspective of commercialisation of patents, IP and innovative ideas. It focuses
on patent and IP generated in universities and research hubs with South African as a reference point.
Although, it can be adapted in other emerging economies, with recommendation of policy changes
that can make venture Capital a more viable option and alternative for financing entrepreneurial
initiatives, innovation patents and IP as against traditional debt financing options from banks and or
public funding.
The world of business is continually transformed by science and technology, creating new forms of
products, new forms of trading and new forms of business (Heap 2008). He indicated that all
“innovation nations” have a thriving small business culture, large businesses which grow from small
by obviously having the right product for the right market but also by having access to VC, support,
infrastructural services and so on. Furthermore, a thriving economy needs innovation and enterprise
at all levels throughout all sectors which cannot be government-led, but encouraged and facilitated by
government (Heap 2008).
3. Commercialisation of innovation, and university intellectual property
According to the science as a solution report (in Wellings 2008), in the past 60 years considerable
evidence exists to support the fact that research in universities, add significant value to economy and
community which underpins government and business investment in public research. In recent years,
more emphasis is on market focused research as government, research councils and business
community have sought to make the application of ideas a significant component of the mission of
universities (Wellings 2008). This has resulted in an increasingly sophisticated focus on the
relationship between university research outputs and the creation of new products and services. Also,
many studies have presented data on the number of people involved in commercialisation, the levels
of IP activity, licensing activity, start-up company activity, the volume of research contracts and
consultancy, and skills development and transfer activity. Data show very rapid change in research
commercialisation activity in universities in developed countries (Wellings 2008) indicating that
government and funding organizations, policies encouraging greater levels of commercialisation is
taking effect (Wellings 2008). Between 2000 and 2004, external investments funds were used in the
formation of about one-third of spinout companies in the UK for instance.
Interest gap Technology Market transfer Diffusion
transfer gap gap gap
IMAGINING INCUBATING DEMONSTRATI PROMOTING SUSTAINING

NG
• Technology • Idea fully • First commercial • Marketing • Long-term income

conceived demonstrated products • Profitable market
• Concept proved • Customers involved • Development share secured
• Patent protection integrated into
sought supply chain and
marketing
towards commercialisation
Figure 1: Stages in commercialising technology (source: adapted from Jolly, and Dodgson (in
Wellings 2008)
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Olutoye Ayodeji
Universities play a major role in the national innovation system through the production of skilled
graduates and new knowledge and research applications. The outputs from most universities in terms
of commercialization projects have global applications in addition to other areas of knowledge transfer
have which have local applications since many universities have excellent links with several regional
SMEs through consultancy and graduate placement initiatives (Wellings 2008). According to him,
there exist a complex relationship between regional innovation performance and the use of IP from
universities.
Recent research on the supply of entrepreneurial finance for business growth has focused on the
venture capital industry (de Bruin and Flint-Hartle 2005; Zacharakis and Shepherd 2001). According
to Hudson (1995) the definition of venture capital has changed over the years and even varies from
firm to firm, and country to country, but it is generally understood to be capital provided to new
ventures.
4. Defining venture capital and the venture capitalist
According to Helen Soussou (in Timmons, Spinelli and Zacharakis 2004; Timmons and Spinelli 2003)
“the venture capital industry supplies capital and other resources to entrepreneurs in business with
high growth potential in hopes of achieving a high rate of return on invested funds.”
The KPMG and South African Venture Capital Association’s (SAVCA) Venture Capital and Private
Equity Industry performance Report of 2005 indicates that “private equity provides equity capital to
enterprises that are generally not quoted on a public stock exchange.” It further classified private
equity into three broad categories, namely, venture capital, development capital and buy-out funding.
Venture capital includes seed capital, startup capital and early stage capital.
Venture capitalist take equity participation through stocks, warrants, and/or convertible securities and
has an active involvement in the monitoring of each portfolio company (PFC) bringing investment,
financial planning, and business skills to the firm (Hisrich, Peters and Shepherd 2004).
The 1990 European Venture Capital Association (EVCA) year book (in Bygrave and Timmons 1992)
defines venture capitalists as organizational units or persons who can prove substantial activity in the
management of equity or quasi-equity financing for the start up and /or development of small and
medium-sized unquoted enterprises that have significant growth potential in terms of products,
technology, business concepts and services; whose main objective is long-term capital gains to
remunerate risks and who can provide active management support to investees.
Since venture capital resources are not easy to secure by entrepreneurial ideas, and most often,
exciting innovations and ideas are lost to overseas bidders from advanced industrialized nations like
the US, UK, Germany, Canada, Australia, to mention a few. This can restrict business growth in
emerging economies and prevent them from becoming a world “super power” in business, science
and technology.
In response to the above challenge facing innovative entrepreneurial ventures in emerging

economies, seed venture capital could be provided in order to keep ideas in the country and promote
a platform for fresh and new entrepreneurial ideas.
5. Patents, Intellectual Property Rights (IPRs) and venture capital financing
Previous study by Haussler, Harhoff, and Muller (2008) examined the role of patent for VC financing,
Baum and Silverman (2004); Mann and Sager (2007); Hsu and Zeidonis (2007) also showed a
positive impact of patent stock of high-technology companies on the amount of VC financing, on
valuation, and on the likelihood of attracting VC investor.
Haussler et al. (2008) concluded that there is consistent and cogent effects of companies patenting
activities on the timing of VC financing. The authors found out that, ventures with higher patent
qualities received VC faster and that patents are also important for the general VC investment
decision. Furthermore patent provide incentives for innovation while an import effect in facilitating
entry. It also conveys important information about a PFC that deserves considerable attention in the
due diligence process by venture capitalists.
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6. Innovation funding in emerging economies: The South African experience

In most, if not all emerging economies a funding gap usually exists in respect of developing
technological innovations from ‘proof-of-concept’ state to actual product or service stage that will
attract industrial co-development or venture capital resources or investment. This may result in IP
either not receiving its full potential or being lost overseas which has consequences on employment
(loss) in such countries. In response to this gap, South Africa, a classic example of an emerging
market set up The Innovation Fund (IF), an initiative of the Department of Science and Technology
(DST), in 1999. Managed by the National research foundation (NRF), it provides ‘proof-of-concept’
funding primarily via its Technology Advancement Programme (TAP), which provides Seed fund to
support technology base projects and start-up opportunities that meet prescribed quality criteria.
The IF has existed to promote the economic competitiveness of South Africa. This is undertaken by
investing in technological innovations and providing support to South Africans seeking intellectual
property protection with the aim of establishing new enterprises and the expansion of existing
industrial sectors to the benefit of all South Africans.
Specialist business units manage the main funding investments of the innovation fund. These units
service the needs of the inventors, innovators and business start-ups. They include the Research and
Development unit; Commercialisation office; and the Intellectual Property Management office (IP
support).
Also, the Innovation Fund’s Seed Fund is often used to reduce the barriers experienced by other early
stage funds to invest, especially in high risk early stage opportunities that have to do with innovation,
technology, patents and IP projects with commercialisation potentials. Thus, co-investment or
syndication through VC is strongly preferred. This should however, not compete with government
initiative, but rather, act in a synergistic way to facilitate early stage commercial take-off of projects.
7. Some previous venture capital models
Previous literature on VC is quite diverse and numerous but very few of them have proposed specific
models for developing the VC industry. Majority of the existing models have focused on the VC
investments process in relation to PFCs (Tyebjee and Bruno 1985; Bygrave and Timmons 1985; Fried
and Hisrich 1994; Pandey 1998, Klonowski 2007). These models addressed VC relationship with PFC
on a micro (firm) level. Only one, Pandey (1998) sought to address the VC industry on a macro level.
Tyebjee and Bruno (1985) proposed a five-stage model of VC investing, encompassing deal
origination; screening; evaluation; deal structuring; and post investment activities. The model explains
the complete investing process with highlights of major venture capital activities at every stage. Fried
and Hirsch (1994) extended specific activities of the earlier model by Tyebjee and Bruno (1985) by
providing more detailed description of the screening and evaluation stages. Two relevant VC models,
with particular emphasis on emerging markets were proposed by Pandey (1998) and Klonowski
(2007). While Pandey proposed a four-step (non-diagrammatic) model for the process of developing
venture capital in India namely, impetus; internal context; external context; and sustainability,
Klonowski’s model defined the venture capital process in emerging markets in terms of three basic
channels of activity: document channel, information channel, and decision channel.
Present in table 1 below, is a list of some previous venture capital models
Table 1: Venture capital models
Author Model Year
Tyebjee, T. T. & Bruno, A. A model of venture capitalist investment activity. 1984
V.
An empirical model for the flow of venture capital.
Bygrave, W. D. & Timmons 1985
J. Towards a model of Venture capital investment
decision making. 1994
Fried, V. H. & Hisrich,
A venture capital development model
1998
Pandey, I. M. The venture capital investment process in
emerging markets: evidence from Central and 2007
Klonowski, D. Eastern Europe
Source: Compiled from various journal articles
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8. Models for emerging markets versus developed countries

According to Klonowski (2007) emerging markets particularly Central and Eastern Europe region
(CEE) are more dynamic than Western countries as business plans, which form the basis of the
venture capitalists’ initial assessment of the investments are often re-written, as new opportunities
appear. Thus accepting other models would effectively omit an important part of the decision-making
process within emerging markets. Also, Hudson (1995) agreed that venture capital industry vary
around the world with each industry at different stage of their life cycle, as such, a generic model for
emerging markets that may be adapted to different countries may be relevant than those models
developed for the developed countries. For instance, studies by Klonowski (2007), and Karsai, Wright,
Dudzinski and Morovic (1998) concluded that some differences exist in the way local venture
capitalists evaluate deals across the CEE region. Karsai et al. (1998) suggested that Venture
Capitalists in Hungary and Slovakia focus more on evaluation of market opportunities while
entrepreneurial skills and a strong track record are the key focus areas for Venture Capitalists in
Poland.
9. Methodology
The research design is exploratory and involves an extensive literature review of past articles on
venture capital published in international journals, like the Journal of Business Venturing, Journal of
Emerging Markets, past conference papers, textbooks. Data was collected using secondary sources
of data collection.
10. Discussion
The discussion in this paper proposes a conceptual model (which is currently in its empirical testing
phase) for VC development in emerging economies and it follows from the theoretical framework
discussed above. A diagram of the proposed model is depicted in figure 2 (Appendix A) below.
11. A model for venture capital development in emerging markets
This model for venture capital development in emerging economies attempts to demonstrate the
various components and variables that should interact in any emerging economy, and must therefore
evaluate the influence of the various variables in the context of the environment in which it operates
with possible adaptations from one country to the other. This model has its theoretical framework
derived from various definitions of venture capital and the activities of venture capitalists, and the
commercialisation of patents and IP generated from universities and research centre. Important
elements that play major roles in the development of venture capital in an emerging economy are
depicted in figure 2 (Appendix A) and discussed below.
Venture capital firms (VCFs)- are at the heart of the VC development model and directly interact with
other components in the model. They source funds from banks, pension funds, individuals, insurance
and other financial institutions, including capital and stock market (Timmons, Spinelli and Zacharakis
2004). They provide needed funds and value-added services such as management skills
development and monitoring to portfolio companies. They in turn, take shares or other forms of equity
participation in the portfolio companies and deposit monies and have other forms of investments in
banks, and financial institutions. On the other hand, the VC firms provide research funding to
universities and research centre for VC research (into their activities) while the universities and
research centre undertake and publish research findings into VC activities in addition to providing
education, training and development for them. Finally, VCFs pay taxes and other forms of levy to
government and its agencies, as well as meeting other statutory obligations while policies that guide
the operating environment and other support framework is provided by the government and its
agencies to the VC firms.
Portfolio companies (PFCs)- or investee companies are very critical elements in this model. They
provide investment platforms for the VC firms who in addition to supplying funds to the Portfolio firms
as mentioned earlier, also provide management and marketing skills and development as well as
monitoring the portfolio companies. The portfolio companies in return, provide share ownership
opportunities and other equity participation to the VC firms. The PFCs seldom interact with
universities of technology, and other research centre and institutions of higher learning in order to
commercialise inventions, ideas and innovative products developed in such institutions. Also, they
should fund research in such institutions. Institutions of higher learning should provide platforms for
research into various activities such as product, marketing, in addition to education, training and
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development for human resource capacity building in various fields of study to support PFCs. Finally,
there should be an interaction between the PFCs, and the government and its agencies to provide
them with support framework, policies and guidelines for operating within the micro and macro
environment in return for tax payments and other statutory obligations rendered by the PFCs to the
government. It is pertinent to note that the PFCs also interact directly with banks in order to source
short and medium term debt funding to complement the VCFs financial support and engage in other
banking transactions as well as with insurance and other financial institutions for needed financial
services.
Banks and other financial institutions and funds suppliers- are also, very critical and important
components of this model since VCFs often act as financial intermediaries who source funds from
them (banks) in order to invest in PFCs. They most often, provide the funds to the VCFs which are in
turn invested in the PFCs in addition to other banking and financial services. Examples are
commercial banks, merchant banks, capital and securities market. The VCFs in turn have deposits
and other forms of short-term investments in the banks and financial institutions. The banks also,
should interact with the government on one hand by paying taxes and other levies and complying with
other statutory regulations of the government while the government, provide support framework,
policies and guidelines for operating within the micro and macro environment. On the other hand, the
banks and other financial institution and funds suppliers interact with the universities and research
centre to provide funds for research into their activities and the universities provide research outputs
for them in addition to providing education, training and development for human resources capacity
building.
Universities of technology, research centre and institutions of higher learning- provide the needed
research, education, training and development and strengthen capacity building in the VCFs, PFCs,
banks and in government institutions. But most importantly for this model, there should be
collaborative effort between them (universities where ideas, patents and IP are generated) and PFCs
who should commercialize the innovative products and ideas developed in various universities across
the country and elsewhere in the world since the PFCs are better positioned to take such inventions
and innovations to the market place. In addition, the PFCs can support the research and training
&development efforts of the universities by providing research funding for novel ideas generation
since universities are also better placed to undertake research and publish their findings which the
PFCs can take to the market place through joint collaborative efforts. It is important to note that there
is a direct and indirect relationship existing between the government and universities in terms of
funding from the government who formulate policies and establish institutional framework within which
the universities operate.
Government and its support agencies- such as department of education, department of trade and
industry, department of finance, central bank, development banks, etc. provide support framework
and other institutional support mechanisms for all the various components in the model and formulate
regulatory policies that should guide the operations of these components and set micro and macro
economic variables within the boundaries of the economy.
12. Communication
In concluding this model, it is of paramount importance to note that communication is an essential and
an integral part of the model as it constantly takes place within the model and facilitates interaction
between the various components and variables.
13. Conclusions and implications
The challenges confronting emerging economies as they move from state-controlled to capitalist
economies are obvious and quite numerous. The impact of entrepreneurial initiatives and ventures as
the engine for economic growth in any country cannot be over-emphasized. Venture capitalists act not
only as financiers, but also as business partners by lending management and marketing skills to
portfolio companies. Likewise, the positive impact of venture capital as an alternative financing option
for starting and expanding these ventures has been critical and received considerable attention in
recent years. The potential and actual impact of a healthy, well developed venture capital sub-sector
of the financial services industry, as an alternative source of fund, in emerging economies cannot be
overemphasized.
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This paper has examined the importance of venture capital in financing innovation, patents, IP and
entrepreneurial initiatives and economic development in emerging economies which include countries
in Central and Eastern Europe region (CEE), Asia, Latin America and Africa. It has also proposed a
model for developing venture capital in such economies despite the obstacles or challenges faced by
them. The contribution is important for at least three reasons.
Firstly, it focuses on developing the entire VC industry within a country, by taking a holistic view of all
the key actors or players within and outside the industry and bringing them together for sustainable
development of the industry. This is contrary to other previous models which have focused on specific
aspects of the Venture Capital process or industry.
Secondly, and most importantly, the model and this paper highlights the connection (the missing link)
between universities and research centers where ideas, innovation, patents and IP are generated and
Venture Capitalists who finance such innovation, patents and IP projects. The missing link (Portfolio
companies) could be more effective and efficient in facilitating the commercialization of such
technological innovation and IP through licensing.
Thirdly, it could serve as a springboard or the point of departure for subsequent and further venture
capital research into the commercialisation rate of university patents and IP projects through licensing
or spinouts. Since technology transfer and innovation are very important tools for technological
development which in turn is critical for sustainable economic growth and development. Long-term
economic growth can be enhanced by strengthening the link between technology transfer stations,
research hubs (universities) and portfolio companies (for commercialization) and Venture Capitalists
who finance such PFCs.
Finally, Adongo (2006) indicated that seed capital should be channeled by venture capital firms to
PFCs in order to convert academic ideas into commercial ventures.
14. Appendix A
Figure 2: A proposed model for venture capital development in emerging economies
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References
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93
What About a Fresh new Start? Public Opinion on
Bankruptcies in Flanders
Ann-Sophie Bouckaert, Ruth DeVreese and Carine Smolders
University College Ghent, Belgium
annsophie.bouckaert@hogent.be
ruth.devreese@hogent.be
carine.smolders@hogent.be
Abstract: Although authorities acknowledge the importance of entrepreneurship in the current economic climate,
the entrepreneurial activity rate in Flanders is compellingly low compared to its surrounding regions. Following
EU recommendations, reactivating failed entrepreneurs as part of the overall stimulation of entrepreneurship, has
to become one of the spearheads of any government because it is widely acknowledged that after a first failure,
restarters can be much more successful. However, in Flanders it seems that entrepreneurs who have failed, are
often not inclined to set up a new business. One of the most important thresholds is the image failed
entrepreneurs suffer. Underlying study examines several prejudice opinions among the Flemish population about
entrepreneurship and more specific about bankruptcies and second chancing. The key question in this article is:
“Do bankrupts in Flanders suffer a social stigma?”
Keywords: bankruptcy, fraudulent, failure, stigma of failure, restart
1. Introduction
World-wide a 35 percent rise in bankruptcies is expected this year alone (Euler Hermes Credit
Insurance Belgium, 19 November 2009)). Hardly a week goes by without witnessing the negative
consequences of bankruptcies. Last year in Flanders 2300 people lost their job because of a
bankruptcy. Also, the aftermath of bankruptcy for a failed entrepreneur is certainly not to be
underestimated on a personal level. Bankruptcies lead to a stress situation resulting in the
disintegration of the personal relationship in 15% of the cases (Blom, 2004). Even more, the General
Social Survey carried out in the United States found that a stunning 7,7 percent of the respondents
believe that bankruptcy is an acceptable reason for committing suicide (National Opinion Research
Center, 1972-2006). Substantial research effort has been devoted to the various possible causes and
consequences of bankruptcies (H. Ooghe & de Prijcker, 2006; H. Ooghe & Waeyaert, 2003). And
also models for predicting success and failure are sufficiently available (Altman & Narayanan, 1996;
Balcaen & Ooghe, 2004; H. Ooghe, Deloof, & Manigart, 2003) together with several theoretical
frameworks to determine why some entrepreneurs succeed while others do not (Mitchell, Mitchell, &
Smith, 2004).
This paper is concerned with any harm that rises from bankruptcies on a personal and societal level
and wants to add to the research how to attenuate the consequences. According to the Commission
of the European Communities (2007), the high costs associated with bankruptcy can be reduced if
endangered companies would be better supported and if, after a bankruptcy, restarting would be
made easier for honest and straightforward bankrupts. Restarters are defined as entrepreneurs who
failed with a business (i.e. went bankrupt) but started anew after the set-back (Metzger, 2006). Yet, it
appears that bankrupts today face several unnecessary and even irrational obstacles, trying to make
a brand new start. Next to a judicial and penal tangle there also seems to be a socio-cultural threshold
holding the restarting entrepreneur down. We need to ask ourselves, does society grants these failed
entrepreneurs a second chance?
This paper examines the view of the public opinion on bankrupt entrepreneurship and second
chancing in Flanders. It starts off with a literature overview, conducted regarding the benefits of
restarting a business, together with the issue of stigma and the dynamics of stigmatization, also
introducing the concept of bankruptcy fraud. The second part of this article briefly describes the
objective of the research and the conceptual model. The third part covers the quantitative research,
conducted to gain a grounded view of how entrepreneurial failure is conceived in Flanders. Data
collection and sample method are discussed followed by the estimation results and the impact of
socio-economic factors respectively in the second and third paragraph. The article closes with some
summarizing conclusions and indications for future research.
94
Ann-Sophie Bouckaert et al.
2. Theoretical background
Restart - “Would you like me to give you a formula for success? It’s quite simple, really.
Double your rate of failure. You are thinking of failure as the enemy of success. But it
isn’t as all. You can be discouraged by failure – or you can learn from it. So go ahead
and make mistakes. Make all you can. Because, remember, that’s where you will find
success.” Thomas J. Watson (former CEO of IBM), in (Wijdoogen, 2008)
Going bankrupt does not necessarily mean the end of an entrepreneurial career. Entrepreneurs not
only learn from success, but also a great deal from failure (Cardon & McGrath, 1999). More specific,
bankrupt entrepreneurs have obtained a lot of business experience and as a society we should strive
to benefit from this entrepreneurial experience. We should give the entrepreneur the ability to either
pass on the acquired knowledge to others (e.g. giving seminars, teaching, advising, mentoring, ...) or
to start a new business to apply the experienced learning’s. Previous research shows that the survival
rate of starters packed up with this entrepreneurial experience is higher than the survival rate of
starters without this experience (Ekanem & Wyer, 2007; Schrör, 2006). In other words, failed
entrepreneurs will set up a new business with more and better know-how. Especially if they choose to
restart in the same sector with more or less the same activities, there is a big chance that the restarter
becomes the better entrepreneur (Schrör, 2006). Restarters in this study are defined as
entrepreneurs, whose company went bankrupt, but who, after some time, have the courage to start a
new company (i.e. ‘pure’ restarters). The chronology of these events is important, because there are
many entrepreneurs who already have started a new business before the former went bankrupt and
some even deliberately let their company go bankrupt, e.g. when a company wants to get rid of its
employees in a cheap way. It is the category of pure restarters we should support as a society and
this category is also the sole scope of this study.
A research conducted by Ten Vergert & van der Weide (2001) reveals that a large majority of
restarters believes that the launch of the new company went easier at some points than the start of
the earlier company. They adopted an entirely different approach to several issues, among them
better planning, getting a second opinion and accepting professional guidance. (Ekanem & Wyer,
2007; Schrör, 2006; Vandevoort, Janssens, & Lagrou, 1989). Contrary, fast growing and high turnover
is not of primordial importance for second chance entrepreneurs. Surprisingly however, research
shows that restarted companies do get higher turnover per employee and on the long-term they even
become bigger than the previous company. Available data suggest that entrepreneurs learn from their
mistakes, makings them generally more successful the second time, demonstrating an important
learning opportunity (B&A Groep Beleidsonderzoek & - Advies, 1 May 1998; Ekanem & Wyer, 2007).
Available data on restarters in Flanders is inexistent but data from Germany shows that restarters
account for a little less than 3 percent of the entrepreneurs who went bankrupt (Metzger, 2006). This
could already indicate that bankrupt entrepreneurs face many difficulties when they want to have a
fresh start. The main difference compared to their previous company is that restarters face less
internal bottlenecks but get more external constraints (ten Vergert & van der Weide, 2001). Especially
in Europe, second chance entrepreneurs are regarded as risky business and are consequently less
likely to get financing, licensing and advice compared with general practices in the United States
(Burchell & Hughes, 2006; Damink, 2001). In the United States risk taking is encouraged and
business failure is highly tolerated, since failure is seen as a learning experience (Lee, Miller,
Hancock, & Rowen, 2000). However, it is clear that overall, negative social attitudes towards business
failure dominate in Europe (Commission of the European Communities, 2007). It seems that this
subject is due to stronger stigmatization in Europe than it is in the US. This is treated next.
Stigmatization - “A person who is stigmatized is a person whose social identity, or
membership in some social category, calls into question his or her full humanity - the
person is devalued, spoiled, or flawed in the eyes of others.” Crocker et al, 1998 in
(Heatherton, Kleck, Hebl, & Hull, 2000, p. 1)
In Europe, many consider a bankruptcy as a failure (Commission of the European Communities,
2007). Bankrupts are quickly marked as 'failed entrepreneur' or 'loser' and according to Flash
Eurobarometer, more than half of Europeans would not invest in a business that had previously failed
(European Commission, 2007).
Heatherton et al., (2000) theorized that humans possess the need for competition for survival and
reproduction among different members of the same group to survive as a group. Each group shares
95
similar beliefs about what issues to accept and which ought to be rejected by the group members. If
certain features and/or behavior of individuals are considered as threatening or impeding the effective
functioning of the group, these individuals will be stigmatized and excluded. This is exactly what
happens to the bankrupt entrepreneur.
What is yet to understand, however, is why bankrupt individuals are stigmatized in society. Efrat
(2006) argues that historically the society tends to consider some non-conformist characteristics as
more deviant than other non-conformist characteristics. He gives the example that our society is
extremely resistant to non-conformist characteristics caused by one’s own fault, because society
considers them personally responsibility for their non-conformity. The origin of the stigmatization of
bankruptcies lies to some extent in the fact that one finds that a bankruptcy is caused by the
entrepreneur his/her own fault. Instead of assigning the non-conformist acts of a bankrupt (e.g. failing
in repaying debts or applying for bankruptcy) to external factors, such as recession, inflation, lack of
welfare, natural disasters, public works, etc. this is assigned to personal mistakes, such as financial
irresponsibility, mismanagement and naivety (Efrat, 2006a). According to Efrat (2006) the
stigmatization of bankruptcy is also caused by the fact that a bankruptcy entails a certain type of
behavior that is contrary to traditional American standards of trust, reputation and judicious policy. If
an entrepreneur goes bankrupt and as a result cannot repay his debts, the public opinion perceives
this individual as being reckless, careless and deceptive. It means a violation of confidence and the
bankrupt is accused of negligent policy.
However, the stigma on bankruptcy in the United States has been falling over time (Efrat, 2006b; Fay,
Hurst, & White, 1998). Nevertheless it is widely acknowledged that there is a relatively higher stigma
attached to business failure in the European Union compared to the United States (Burchell &
Hughes, 2006; Commission of the European Communities, 2007; Peek, 2001). Indeed, a recent study
(Lambrecht & To, 2009) in Flanders demonstrates that entrepreneurs are asking for a mentality
change towards bankruptcy. Some bankrupt entrepreneurs confirm that they felt ashamed and
marked by the environment. People do not ask oneself the correct reasons for the liquidation. No
matter the cause, a bankruptcy is seen as repulsive and deceptive (Lambrecht & To, 2009).
Simultaneously with the social disapproval of bankruptcies, (as it goes with public opinion) honest and
dishonest bankrupts are often wrongly lumped together. This is why we first need to distinguish
between the two.
Bankruptcy fraud - “Bankruptcy fraud is a term which refers to the illegal exploitation of
the bankruptcy system in favor of one’s personal gains. When an individual is burdened
with a heavy debt, the recommended course of action is to file for bankruptcy protection
which leads to successful restructuring and eventual removal of debt.” (Bankruptcy
Fraud, 2006-2010)
While bankruptcy is not a crime, bankruptcy fraud is a serious crime with severe penalties. If we look
at the motivation underneath bankruptcy fraud, we can distinguish two broad categories. In the first
category of bankruptcy fraud the bankrupt entrepreneur tries to avoid to be left behind completely
destitute. For example, one could try to hide certain assets for the liquidator during the declaration
phase of the bankruptcy process or the entrepreneur tries to sell his belongings at knockdown prices
to friends and family in order to avoid creditors to claim these. The second category takes place when
the entrepreneur willingly plans and calculates his/her company to go bankrupt. Both ways of
committing bankruptcy fraud are severely punished by the court.
Often bankruptcy and fraud are directly linked, while in most cases a bankruptcy has nothing to do
with fraud (Commission of the European Communities, 2007). Even though they are spared by the
court, honest bankrupts will be considered conspicuous. By many they are considered as dubious and
unreliable, no longer trustworthy, and even lose friends and acquaintances. In Europe, the failure of a
business is perceived as a personal failure or is associated with fraud, no matter the cause
((European Commission, 2007; Commission of the European Communities, 2007). This is totally
unjustified, since in Europe fraud is only rarely (around 4 to 6%) the cause of bankruptcy (europa.eu,
February 2008). In Flanders figures about the correct proportion fraudulent bankruptcies are lacking,
but a research of our own reveals that only in 9,3 percent of the cases fraud is involved. These data
are based on the number of crimes related to bankruptcy and encompasses various crimes, such as
committing without doing something in return, not responding to the liquidator or judge, selling at a
loss, manipulating the bookkeeping, giving preference to creditors at the expense of the bankrupt’s
estate, reporting the bankruptcy too late, embezzle or hide assets and letting the bookkeeping vanish
96
into space (The Federal Police, 2010). In this study, we want to grasp how the general Flemish
population perceives bankruptcy. If it turns out that the Flemish population believes that the majority
or all bankrupt entrepreneurs are fraudulent, a fresh start becomes very hard for bankrupts.
3. Research objectives
The purpose of this study is to examine if bankrupts in Flanders suffer a social stigma. To address
this question we asked the respondents how many of all bankruptcies they consider fraudulent. Since
there exists no direct measurement method in previous literature to quantify bankruptcy stigma, we
used an indirect variable as proxy for the stigma, that is the estimation of the portion dishonest
bankrupts. That way we will ascertain if the Flemish population instantaneously associates bankrupts
with fraud and deception. Furthermore, the percentage estimated by people who are familiar with
entrepreneurship will be compared with the percentage estimated by people who are not acquainted
(see figure 1). Since we expect that familiarity with entrepreneurship decreases the estimated
percentage fraudulent bankruptcies, the main hypothesis of this paper can be put forward as follows:
“Respondents who are familiar with entrepreneurship have a lower estimation of the
percentage fraudulent bankruptcies compared to respondents who are not familiar with
entrepreneurship.”
Figure 1: The research model

4. Methodology and results
Data Collection and Sample - A quantitative survey-based research is conducted in Flanders to
assess Flemish people’s perceptions of bankruptcies and second chancing. Several companies and
organizations helped disseminating the questionnaire by putting the link to the online questionnaire on
their website or in their newsletter. During three months (November 2009 to January 2010) data was
collected from 2333 respondents between 19 and 79 years old (mean age = 40,52 year. The
proportion male / female in the sample differs not significantly (p =. 153) of a 49/51 division in the
overall Flemish population. The education level varies within the sample: 3 percent only finished
primary school, 33 percent indicates secondary education as the highest level of education, 33
percent has a Bachelor's or graduate degree and 31 percent holds a Master's degree. Economic
status is measured by asking the respondent if he/she possesses a house or not. 68 percent of the
sample appears to have an own property. 29 percent of respondents grew up in a family where mum
or dad were entrepreneurs and 15 percent of respondents are self-employed at the present.
Estimated percentage fraudulent bankruptcies - The main findings reveal that people in Flanders
are convinced that on average 31 percent of the bankruptcies are fraudulent. This finding is
staggering, since in reality only 9,3 percent of the Flemish bankruptcies are truly fraudulent. Only 9
percent of all respondents assessed the correct or a lower percentage, meaning 91 percent of
respondents are overestimating fraudulent bankruptcies. This demonstrates a big gap between
popular perception and scientific facts. What’s more, 12 percent of our respondents believe that
bankruptcies are fraudulent in more than half of the cases. Personal experiences and the media
appear to be respectively the two leading factors of an overestimation of fraudulent bankruptcies in
Flanders.
97
Socio-economic factors - The socio-economic status of the respondent appears to affect the rate.
Table 1 displays which socio-economic factors have an influence on perception of bankruptcy. First of
all, the estimation of the amount fraudulent bankruptcies tends to increase with age. Furthermore,
higher educated people perceive the proportion of fraudulent bankruptcies to be smaller than lower
educated people. Self-employed respondents estimate a smaller portion dishonest bankruptcies
compared to respondents with another profession. Gender and wealth appear to have no influence.
Familiarity with entrepreneurship – Table 1 also reports the estimation results of the impact of
familiarity with entrepreneurship on the estimated percentage fraudulent bankruptcies. Familiarity with
entrepreneurship is measured by three items. The first item verifies if the respondent grew up with a
self-employed father or mother, the second item analyses if the respondent regularly reads economic
press and the last item checks if the respondent is personally acquainted with a bankrupt
entrepreneur. The descriptive statistics show that 29 percent had entrepreneurial parents, 50 percent
regularly reads economic press and 50 percent is acquainted with a bankrupt entrepreneur. The
results of an independent sample t-test demonstrate that respondents who grew up with a self-
employed father or/and mother overestimate the percentage fraudulent bankruptcies less compared
to respondents who didn’t grew up in an entrepreneurial environment. Respondents who regularly
read economic press also estimate the percentage to be lower compared to respondents who do not
read such press. Surprisingly, people who personally know a bankrupt entrepreneur indicate more
fraud in bankruptcies than people without a bankrupt acquaintance.
Nevertheless, the hypothesis (‘Respondents who are familiar with entrepreneurship have a lower
estimation of the percentage fraudulent bankruptcies compared to respondents who are not familiar
with entrepreneurship.’) can be confirmed. There is a significant negative relationship between having
entrepreneurial parents or reading economic press and the estimated portion fraudulent bankruptcies.
In contrast, results illustrate that respondents who are familiar with bankrupt entrepreneurship have a
significant higher estimation of the proportion dishonest bankruptcies.
Table 1: Estimated percentage fraudulent bankruptcies
Socio-economic factors
Estimated % fraudulent
Variables Test values
bankruptcies
Age F(5,1849) = 2.491 p = .029 19 - 30 years old 29.2%
31 - 40 years old 30.2%
41 - 50 years old 31.5%
51 - 60 years old 33.8%
> 60 years old 33.1%
Education t(1249) = -8.400 p < .000 Higher educated 27.9 %
Lower educated 36.4 %
Profession F(5,1857) = 28.149 p = .029 Self-employed 24.6%
Management 25.5%
Employee 29.0%
Public servant 31.6%
Worker 43.6%
Non-active 33.4%
Gender t(1831) = 1.852 p = .064 Male 31.9%
Female 30.1%
Wealth t(1855) = .643 p = .520 Own property 31.2%
No own property 30.6%
H1: Familiarity with entrepreneurship
Estimated % fraudulent
Variables Test values
bankruptcies
Entrepreneurial t(1861) = -3.373 p = .001 Yes 28.5%
parents No 32.1%
Economic press t(1843) = -5.384 p < .000 Yes 28.5%
No 33.6%
Acquaintance who t(1788) = 3.363 p = .001 Yes 32.7%
went bankrupt No 29.5%
98
5. Conclusions and discussion

The average respondent makes a wrong assessment of the proportion fraudulent bankruptcies. Only
9 percent is close to or does not overestimate the correct percentage fraudulent bankruptcies, which
is extremely poor. Additionally, 12 percent of the respondents thinks that more than 50 percent of the
bankrupts are fraudulent. Self-employed and those who are more familiar with entrepreneurship
estimate the percentage to be a little lower compared to those who are not familiar with
entrepreneurship and/or have another main activity. It is striking that those who personally know a
bankrupt entrepreneur, are convinced that more bankruptcies are fraudulent, compared with people
who do not know a bankrupt. Also the people who say to rely on their own experience or on the media
overestimate the percentage.
In conclusion, the role of bankruptcies in economic life is not well understood in our society. Most
respondents have the wrong idea about bankruptcies. Logically, no positive climate can be created for
bankrupt entrepreneurs to start again. The negative image is a major drawback for a potential
restarter. The Flemish population should be made aware of the mainly non-fraudulent nature of
bankruptcies. The automatic link of bankruptcies with bad behaviour should be broken. By shifting
blame away from the bankrupt entrepreneur, over time the society will develop a more positive
perception towards the individual. That this can be done differently, is shown in the United States
where nowadays bankruptcy is rather seen as a learning process instead of a failure.
If the Flemish government wishes to develop a more supportive climate for restarters to thrive, they
should engage more vigorously in reducing the stigma of business failure. The media adores to
portray entrepreneurs in situations of failure or associates them with fraud, which all contributes to the
bankruptcy stigma. Therefore, a clear distinction between bankruptcy and fraud has to be made in
legacy and in the media as well. Additionally, stigma will not evaporate while victims of deceptive
bankruptcies are left in the lurch. The possibility of an insurance for those involved in a fraudulent
bankruptcy needs careful consideration. Furthermore, positive role models can give publicity to the
benefits of a second chance policy. Entrepreneurs who successfully engaged in second chance
entrepreneurship have to be put in the spotlights.
6. Limitations and further research
The measurement of stigma by estimating the percentage fraudulent bankruptcies, is a limitation of
the analysis but is nevertheless reasonable. The clear overestimation of the proportion fraudulent
bankruptcies demonstrates clearly that a stigma is present.
The aim of this article is to provide useful insights for further research on this matter. Because there
appears to exist a social stigma on bankruptcy in Flanders, we will conduct a second research with
the key question “Is this stigma a threshold entrepreneurs experience in setting up a new business in
Flanders”. To address this question, an extensive qualitative research will be conducted in Flanders
among a number of second chance entrepreneurs. The motives for starting afresh will be explored, as
well as the thresholds that restarters experienced in the process of starting a new business.
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Wijdoogen, M. (2008). Learning from entrepreneurial failure. VU University Amsterdam, Amsterdam.
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Entrepreneurial Networks: The Analysis of a Micro-Firm
Entrepreneur’s Personal Network
Tina Bratkovič1, Boštjan Antončič1 and Alex DeNoble2
1
University of Primorska, Koper, Slovenia
2
San Diego State University, California, USA
tina.bratkovic@fm-kp.si
bostjan.antoncic@fm-kp.si
adenoble@mail.sdsu.edu
Abstract: Social networks represent the immediate environment in which entrepreneurs are embedded, and
therefore they have a significant impact on the entrepreneurial process. In extant entrepreneurship research the
entrepreneur’s personal success and the success of their firm’s were often attributed to personal relationships or
social networks. Entrepreneurs have access to many valuable resources, information, advice and moral support
through their personal networks. In order to accurately manage the personal relations in the network, it is
important to know the structure of the network. The main focus of this study is on the structural characteristics of
a micro-firm entrepreneur’s personal network. In this study a single case analysis approach is used. The study’s
principal goal is to present an analysis of the structural characteristics of the entrepreneur’s personal network,
and each entrepreneur’s personal sub-network. The study provides significant contributions to entrepreneurship
network theory and practice. The key contribution of this research is the thorough examination of the structural
characteristics of the entrepreneur’s personal network, and the analysis of the characteristics of each
entrepreneur's personal sub-network. By knowing the network characteristics that are required for an efficient
network, the network formation process can be more successful. The findings of this research could be helpful for
entrepreneurs who are in the process of forming their personal networks as well as for entrepreneurs who want to
improve the efficacy of their personal networks.
Keywords: entrepreneurship, personal networks, resource acquisition, information acquisition, friendship, growth
1. Introduction
Social networks represent the immediate environment in which entrepreneurs are embedded, and
therefore they have a significant impact on the entrepreneurial process. They represent an important
source of support for entrepreneurs and their firms (Birley, 1985; Aldrich and Zimmer, 1986; Aldrich,
Rosen and Woodward, 1986; Johannisson, 1986; Rush, Graham and Long, 1987; Ostgaard and
Birley, 1994; Hansen and Witkowski 1995; Zhao and Aram, 1995; Witt, 2004; Partanen, Moller,
Westerlund, Rajala and Rajala, 2008 etc.). In extant entrepreneurship research the entrepreneur’s
personal success and the success of their firm’s were often attributed to personal relationships or
social networks (Aldrich and Zimmer, 1986; Larson, 1991; Coviello and Munro, 1995; Witt, 2004;
Antoncic, Ruzzier and Bratkovic, 2007).
In order to identify the impact of social networks on firm performance it is necessary to examine the
network structure of an entrepreneur’s personal network. The aim of this study is to analyze the
structural characteristics of an entrepreneur’s personal network and identify the structural
characteristics that contribute to good firm performance. On the basis of the research findings, we will
attempt to give useful advice to entrepreneurs on how to form and manage their personal networks.
A network consist of all people who are connected to each other by a certain type of relationship, and
is considered to be more than the sum of the individual connections that form the network (Aldrich
and Zimmer, 1986). Personal networks are formed from the viewpoint of a particular individual and
are therefore ego-centered networks (Dubini and Aldrich, 1991).
An important characteristic of social networks is the ability to facilitate or constrain the actions of
entrepreneurs who are embedded in social networks. The personal network may be considered the
entrepreneur’s most important resource (Johannisson, 1986). Entrepreneurs acquire through
networks an important part of resources and information for the firm’s start-up and development
(Reynolds, 1991). Entrepreneurs’ social networks can provide entrepreneurs and their firms with
information, support and access to scarce resources. Besides, networks can facilitate the
identification, collection and allocation of resources. They help entrepreneurs to see new opportunities
and obtain new knowledge.
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Tina Bratkovič et al.
Research results vary as to the impact of the entrepreneur’s personal networks on the firm’s
performance (Larson, 1991; Coviello and Munro, 1995, Hansen, 1995; Antoncic, Ruzzier and
Bratkovic, 2007). For example, in past research it was found that the resource exchange may be
faster and more successful in a network with a higher frequency of contacts within the network
members. Further, it was found a positive relationship between the first year firm growth and network
size (Hansen 1995). Smeltzer, Hook and Hutt (1991) found that strong ties contribute to the quantity
of information, but not on the quality. On the contrary, Birley (1985) found that in the initial phases of
new firm development, the entrepreneurs’ family members and friends, which are characterized as
strong ties, represent the most important source of resources, information and support. Despite the
extensive research body in the field of entrepreneurial networks, many open questions remain about
network structure and its impact on the firms’ performance. Hence, Hoang and Antoncic (2003)
stressed the need for more longitudinal and qualitative work on the impact of network structure on firm
performance.
The overall social network can be represented by different sub-networks (Brass, 1992). Based on the
type of exchange content within network members, it is possible to differentiate several types of sub-
networks. The extensive social network research has mostly focused on three sub-networks, which
are: 1) resource acquisition networks (material, financial and human resources), 2) information
acquisition networks (information, advice, ideas) and 3) friendship networks (moral support, liking). All
three sub-networks are complementary and they equally contribute to the acquirement of the
necessary resources for firm development. If a single social tie has a multiple content of exchange, it
is referred to as a multiplex tie or multiplexity. A friend can advise the entrepreneur on how to raise
money, and further offer him or her moral support and encouragement (Aldrich and Zimmer, 1986;
Larson and Starr, 1993). In this study we focused on the entrepreneur’s resource acquisition network,
information acquisition network, network of friends and the overall entrepreneur’s personal network.
The extant social network research shows that family members are very often members of
entrepreneurs’ personal networks (Birley, 1985; Anderson, Jack and Dodd, 2005; Klyver, 2007). The
entrepreneur’s relatives are considered to be the most trustworthy network members. As such, they
have an important role in family firm networking, particularly in the start-up process when informal
contacts are crucial for assembling resources (Birley, 1985). However, when the firm and its needs
grow, the entrepreneur’s formal business contacts become more important (e.g. business partners,
accountants, counselors) (Birley, 1985). Strategic decisions that are based on emotional relationships
with resource providers become more risky.
Two important network characteristics of entrepreneurs’ personal networks are density and centrality
(Antoncic et al., 2002). Density represents the connectedness of the network in which the
entrepreneur is embedded. The higher is the density the better is the exchange flow within the
network members. A better connectedness therefore leads to a more efficient network. Beside a good
connectedness, relationships based on commitment and trust contribute to a better exchange of
information and resources, and consequently contribute to the efficiency of the network. Alternatively,
the centrality of a network member shows his or her structural importance. By analyzing centrality, it is
possible to identify the most important person in the network. There is the assumption that the most
central person in the network is the most powerful, and holds a strategic position inside the network
(Wasserman and Faust 1994; Izquierdo and Hanneman, 2006). In analyzing the network structure of
entrepreneurs’ personal networks, two types of ties are significant: direct and indirect (Dubini and
Aldrich, 1991).
We assume that an efficient network is a network that provides the right resources at the right time to
the entrepreneur and their firms. By knowing the network characteristics that are required for an
efficient network, the network formation process can be more successful. Therefore, the key focus of
this research is the structure of a micro-firm entrepreneur’s ego-centered personal network and each
of the entrepreneur’s sub-networks (resource acquisition network, information acquisition network,
network of friends). A single case analysis approach was used in this study. Therefore, we analyzed
the structure of the personal network of one micro-firm entrepreneur. The main research question we
consider is “What are the structural characteristics of the entrepreneur’s personal network?” The
principal goals of the research are to present the structural characteristics of the entrepreneur’s
personal network; separately analyze the characteristics of the entrepreneur’s personal sub-networks;
and to stress the importance of the entrepreneur’s personal network for firm growth. By presenting a
thorough examination of the structural characteristics of the entrepreneur’s personal network, we aim
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to provide new knowledge about the linkage between entrepreneur’s personal network structure and
firm performance. Further, we attempt to establish bases for future research on entrepreneurs’
personal networks.
3. Methodology
3.1 Research setting

In this research, we investigated the personal network of a micro-firm entrepreneur. The firm was
established in 1994, and operates in the construction industry. The firm is a micro firm with 5
employees. On the basis of the growth rate which was 44.8 % in 2005, and the return on sales (ROS)
which amounted to 1.67 % in 2005, the firm can be classified as a high-growth firm. There were
14,052 micro firms that operated in the construction industry in 2005, while the total number of firms
operating in the construction industry was 15,043 in 2005. The characteristics of the firm that we
analyzed are presented in Table 1.
Table 1: Characteristics of the firm under investigation
Characteristics/Firm Firm MS9a
Industry Construction industry
Type of firm Micro firm
Growth 44.8%
ROS 1.67%
Number of people in the network 15
Entrepreneur’s satisfaction with profit* 4
Entrepreneur’s satisfaction with sales* 6
Entrepreneur’s general satisfaction * 5
*Scale from 0 to 7; 0 - not satisfied, 7 - very satisfied.
3.2 Data collection and analysis

This research is based on interview data collected about the entrepreneur’s ego-centered resource
acquisition network (material, financial and/or human resources), information acquisition network and
network of friends. The data collection technique used was a semi-structured questionnaire which
was already used and tested in a previous research (Antoncic, Ruzzier and Bratkovic, 2007). The
questionnaires were fulfilled in the presence of one of the researchers. The questionnaire had two
parts. In the first part, the entrepreneur was asked to list up to ten people for each personal sub-
network with whom he has had direct personal relationships and have been the most important for the
entrepreneur’s firm. The entrepreneur and these people were used as rows and columns to compose
a relationship matrix for each of the sub-networks. The entrepreneur was then asked to evaluate on a
scale from 0 (not important) to 10 (very important) each person’s importance as a resource provider,
information provider and as a friend to the entrepreneur, as well as the perceived importance of each
person for all other people in the matrix. In the second part of the questionnaire, the respondents
were also asked to provide some additional information about himself or herself, mostly demographic
data about the firm (including age, size, industry, growth), and about each resource-providing person,
including the frequency of interaction and friendship.
In order to receive additional information about the entrepreneur’s personal network we separately
analyzed each entrepreneur’s sub-network and the overall entrepreneur’s network. All four
entrepreneur’s personal networks were separately analyzed using methods of social network
analysis. First, we examined the entrepreneur’s sub-networks which include the entrepreneur, and
then we analyzed the sub-networks without the entrepreneur. We could thus find out who is the most
important person for each entrepreneur’s sub-network.
3.3 Methods of data analysis

In this research we used methods of social network analysis, which can be defined as a set of
methods for examining the structure of social relationships in a group to shed light on the informal
connections between social entities. Social network analysis is an important tool that helps
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understand the connection between patterns of interaction and business performance (Scott, 1991;
Wasserman and Faust, 1994; Ehrlich and Carboni, 2006). It is not individual entities and their
attributes that are under investigation but the relationships between them. The latter enables an
analysis of social processes resulting from relationships in the network (Martino and Spoto, 2006).
The collected data were analyzed with the program Ucinet 6 for Windows (Borgatti, Everett and
Freeman, 2002). Ucinet 6 is software used in social network analysis, and comprehends methods for
examining the structure of social relationships within a group. In order to present the research results
in a more understandable way the estimations were made with the binary type of data (and not with
data values from 0 to 10).
The estimations were made for four basic network characteristics, namely density, reachability,
centrality and clique. Density can be defined as the proportion of relations that are actually present in
the network relative to the total number of possible relations. Estimating the density of the network
represents the first step to analyze the social structure of the network under investigation. Density
gives information about how cohesive and homogeneous the network is as a whole. The higher the
density, the more connected the members in the network are (Friedkin, in Martino and Spoto, 2006).
The second measure is reachability. It is said that a member is reachable by another member when
there is a set of connections through which we can move from the ‘source’ member to the ‘target’
member. The number of intermediary members is meaningless. The third measure is centrality, which
gives us the information about the structural importance of each network member. Therefore, the
purpose of analyzing centrality is to identify the most important member in the network. The
assumption is that the most central member is the most powerful and has the most strategic position
in the network. There are different measures of point centrality that vary by the criteria used to
measure point centrality. The three approaches to measuring point centrality are based on degree,
closeness and betweenness. The approach based on the point degree supposes that members with a
higher degree, meaning that they have more direct ties, are more powerful. The reason for their
power is their autonomy in the network because they have more opportunities to get information,
more choices and are not so dependant on other members. The next approach, based on closeness,
affirms that those members who can reach other members at a shorter path distance and at the same
time are also reachable by other members at shorter path distances have more power. The third
approach is based on betweenness. The latter concept refers to being between other members and
so gives to the member who is between a pair of persons the power of being a broker of information.
They have the power to accelerate, slow down or even prevent the flow of information and resources.
Although each of these three approaches has its own measure, they all have the same aim, namely to
disclose how close the members are to the center of action in a network (Izquierdo and Hanneman,
2006). The fourth measure used in the research is clique. In social network analysis a clique is
defined as a sub-set of points in which every possible pair of points is directly connected by a line.
Each point is in a reciprocal relation with all other points in the subgraph (Scott, 1991). If the number
of points in a graph is n, then the number of lines in a clique is n (n-1). In a social network a clique
represents a group of persons in which all members know each other and have reciprocal
relationships.
In the following section research findings are presented.

4. Findings
The entrepreneur under investigation listed 15 people as members of his personal network. Nine
people are present in his resource acquisition network. These people are important resource
providers for the entrepreneur’s firm. None of the listed persons is formally connected to the
entrepreneur’s firm. One of them is a relative of the entrepreneur (Person 2). The entrepreneur listed
seven people as important information providers for him and his firm. One of them is the
entrepreneur’s wife (Person 11). There is some overlapping present in the entrepreneur’s listing of
people. Five people listed as important information providers were also listed as resource providers.
The entrepreneur named seven people as his friends. Two of them are the entrepreneur’s relatives
(Person 13, Person 15) and one is the entrepreneur’s wife (Person 11). Person 11 was named as an
information provider and as a friend. Person 7 and Person 9 were also named twice; the first time as
resource providers and the second time as friends.
No member of the entrepreneur’s network is formally connected with the firm, whereas Persons 2, 11,
13 and 15 are the entrepreneur’s relatives. The entrepreneur has the longest relationship with Person
13 and Person 15 (28 years of acquaintance). These two people are also the entrepreneur’s friends.
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4.1 Resource acquisition network

There are nine people in the entrepreneur’s resource acquisition network (see Figure 1). The
entrepreneur has the highest degree centrality (indegree=9, outdegree=9). He receives resources
from all nine people in the network, and gives resources to all members of his network. He has the
highest closeness (14.286) and betweenness centrality (15.135), which means he can reach other
people over shorter path distances. Further, his position is between many pairs of people, which give
him the power to influence the flow of resources. There are seven cliques in the entrepreneur’s
network in which the entrepreneur is always present. Both Person 1 and Person 3 are present in three
cliques. Each person in the network is reachable by all other network members. Persons 1 and 8
have the highest outdegree centrality (5) in the network without the entrepreneur. Thus, they are
important resource providers for the network. Persons 1, 2, 9 and 7 are important resource receivers
in the network in which the entrepreneur is not included (indegree=4). They receive resources from
four people. Person 1 is the most central person regarding betweenness centrality (6.777). The
highest incloseness centrality (12.174) is achieved by persons 1, 9, 7, while both Person 1 and
Person 8 have the highest outcloseness centrality (12.281). There are three cliques in the network
without the entrepreneur. The membership is mixed. Person 6 is isolated from the rest of the network.
Therefore, no one can reach Person 6, not even through another member. The density of the network
is higher in the network in which the entrepreneur is included (0.478) than in the one in which the
entrepreneur is excluded (0.347).
Figure 1: Resource acquisition network - MS9a
4.2 Information acquisition network

Seven people form the entrepreneur’s information acquisition network (see Figure 2). The
entrepreneur exchanges information with all seven members of the network. Thus, he is the most
important information receiver and provider in the network (indegree=7, outdegree=7). He has also
the highest closeness (11.111) and betweenness centrality (8.333). Three cliques have formed in the
entrepreneurs’ network. The entrepreneur and Person 9 are present in each clique. When
investigating the network without the entrepreneur, Person 8 and Person 9 have the highest
outdegree centrality (4). They are information providers for four people. At the same time, Person 9,
receiving information from five people, is also the most important information receiver (indegree=5).
Further, Person 9 has the most strategic position regarding incloseness (10) and betweenness
centrality (3.938). She has the power to influence the flow of information amongst members of the
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network. Both Person 8 and Person 9 achieve highest outcloseness centrality (9.929). Three cliques
have formed in the network in which Person 9 is always present, while Person 8 is present in two
cliques. The density is higher in the network in which the entrepreneur is included (0.571) than in the
one in which the entrepreneur is not included (0.429).
Figure 2: Information acquisition network - MS9a
4.3 Network of friends

The entrepreneur named seven people as his friends (see Figure 3). The entrepreneur and Person 9
have the highest degree centrality (7). The latter means they have reciprocal relationships with all
members of the friendship network. They also have the highest closeness (11.111) and betweenness
centrality (2.063). There are three cliques in the network. The entrepreneur and Person 9 are present
in each clique. The most reachable people are the entrepreneur and Person 7. When analyzing the
network in which the entrepreneur is not included, Person 9 has the highest degree (6), betweenness
(4.029) and closeness centrality (11.111). She has contacts with six people in the network. Person 9
is also present in all three cliques that have formed in the network. Thus, this person has a strong
influence on other network members. Each person is reachable by the other six network members.
The density is a little higher in the network in which the entrepreneur is included (0.786) than in the
one in which the entrepreneur is not included (0.714).
4.4 The overall entrepreneur’s personal network (resource acquisition network,

information acquisition network, and the network of friends)
The entrepreneur has the central position in his network (indegree=15, outdegree=15,
betweenness=54.976, incloseness=100, outcloseness=100) (see Figure 4). He interacts with all 15
network members. There are 11 cliques present in the network. The entrepreneur is present in all
cliques, while Person 9 is a member of six cliques. Since Person 2 is present in four cliques, she also
has some influence on the decision-making process in the network. The connectedness of the
network is good; each person can be reached by all other network members. The research results
show that Person 9 is the most central person in the network (indegree=9, outdegree=8,
betweenness=25.907, incloseness=31.111, outcloseness=30.435), in which the entrepreneur is not
included, although she is not connected to all network members. She is present in six out of seven
cliques that have formed in the network. All members, except Person 6 and Person 10, are reachable
by all other members. These two people, Person 6 and Person 10, are completely isolated from the
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rest of the group. The density is higher in the network in which the entrepreneur is included (0.550)
than in the one in which the entrepreneur is not present (0.4462).
Figure 3: Network of friends - MS9a
Figure 4: Resource acquisition network, information acquisition network, and the network of friends -
MS9a
The findings are summarized in Table 2. Key research findings are presented in Table 3.
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Table 2: Summary of the findings about the entrepreneur’s personal networks

Personal Sub-network Key Findings
Person 1 and Person 8 are the most important resource providers for the
network. None of them is a relative of the entrepreneur or employed by the
firm. They provide resources to five people and at the same time receive
resources from four people. Further, Person 1 is positioned between many
pair of people, which gives her the power to influence the flow of resources
Resource acquisition network within the network. She can also reach other people across shorter path
distances, which improves the communication with the network members.
Person 1 can also use her position power in three cliques that have formed
amongst the members. Person 2, who is the entrepreneur’s relative, is
present in three out of seven cliques. Thus, he also has some influence on
activities within the network.
The two most important people in this network are Person 8 and Person 9.
They neither are the entrepreneur’s relatives nor employed by the firm.
Both are important as information providers and receivers for the
Information acquisition network
entrepreneurs’ firm. Their memberships in almost all the cliques that have
formed in the network give them the power to influence the decision-
making process amongst members of the network.
The most central person is Person 9. She has direct contacts with all
network members. Further, she is present in all cliques in the network. The
Network of friends length of the acquaintance between the entrepreneur and Person 9 is 12
years. Being positioned between other network members gives her the
advantage that she can receive useful information.
The research results indicate that Person 9 is the most central person in
The overall entrepreneur’s
the overall network, which is the combination of all three of the
network (Resource and
entrepreneur’s personal sub-networks. She is present in six out of the
information acquisition network
seven cliques that are present in the network, and is directly connected
and network of friends)
with eight people.
Table 3: Key findings about the entrepreneur’s personal network
Key Findings
The entrepreneur’s personal network comprises 15 people. There are four of the entrepreneur’s relatives in
the network (person 2, 11, 15 and 15), and one of them is the entrepreneur’s wife (Person 11). None of the
network members is an employee of the entrepreneur. Persons 1, 8 and 9 are the most important people for
the entrepreneur’s firm, although none of them is the entrepreneur’s relative. Person 1 and Person 8 are the
most important resource providers, while Person 8 and Person 9 are the most important information receivers
and providers. Person 9 has reciprocal contacts with six of the entrepreneur’s friends. Further, Person 1 and
Person 9 play the role of brokers for the other network members. The research results indicate that none of
the entrepreneur’s relatives plays a crucial role in the network.
5. Discussion and conclusions
5.1 Contributions and implications

In this study the entrepreneur’s personal network was analyzed by using methods of social network
analysis. We separately analyzed each of the entrepreneur’s sub-networks (resource acquisition
network, information acquisition network, network of friends) and the overall entrepreneur’s personal
network. Structural characteristics were also analyzed for the networks in which the entrepreneur was
not included. Therefore, altogether 8 sub-networks were investigated in detail. The key contribution of
this research is the thorough examination of the structural characteristics of the entrepreneur's
personal network, and the analysis of the characteristics of each entrepreneur's personal sub-
network. The results are relevant to entrepreneurs and managers of small and micro-firms relative to
their decision-making choices on the strategic formation of their personal networks.
The analysis showed that the entrepreneur under investigation had in his personal network four
relatives, which represents almost one third of all network members (26.67 %). As a previous
research showed about one-quarter of the entrepreneurial network ties are kin (Anderson, Jack and
Dodd 2005). The entrepreneur recognized his family members as being important resource and
information providers and close friends. According to extant literature, entrepreneurs’ spouses and
family members represent a significant source of support (Birley 1985; Fitzgerald and Muske, 2002;
Stewart, 2003; De Bruin and Lewis, 2004; Anderson, Jack and Dodd 2005; Klyver 2007). Although
recognizing the relatives’ valuable support, the entrepreneur under investigation did not indicate any
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of the relatives as the most important persons in the network. The latter is somehow not surprising
since past research showed that having close relationships with crucial persons in the personal
network can have negative influences on firm growth (Antoncic, Ruzzier and Bratkovic 2007). Among
the most probable reasons for the negative influence could be the emotional involvement to which
entrepreneurs are exposed when taking strategic decisions.
Another research finding is that the entrepreneur under investigation had no employees in his
personal network. On one hand, because of the limited time for maintaining and developing social
contacts it is easier to have contacts with relatives, coworkers or employees (Verbrugge, 1979).
There are multiple bases for interaction with people with whom we share the same environment.
Therefore, having employees in the personal network can facilitate the exchange of information and
resources. On the other hand, there is evidence that having employees in the personal network can
lead to redundant and less diverse information. Entrepreneur’s employees have similar information
because they spend a lot of time working in the entrepreneur’s firm and working with the same
people. Consequently, they can provide the entrepreneur with information of a similar content and
from similar sources. In the meanwhile, people outside the entrepreneur’s firm come from different
working environments and therefore have diverse information and backgrounds that can be valuable
to the entrepreneur’s firm. According to the past research it is important to have diverse people in the
personal network which contributes to the diversity of resources (Aldrich and Zimmer 1986).
Based on the research results it may be possible to give advice to entrepreneurs leading to a more
efficient formation of their personal networks. Since it is a high-growth firm, we assume that among
the factors that contribute to good firm performance, is also the entrepreneur’s personal network and
its structural characteristics. The entrepreneur has a well connected and based on past research
relatively big personal network that comprises 15 persons (Antoncic, Ruzzier and Bratkovic, 2007). In
past research, network size was found to be important for firm growth. Hansen (1995) found a positive
relation between network size and firm growth in the first year. The research results show that among
15 network members, there are three persons that are crucial in the entrepreneur’s network. The
latter indicates that the entrepreneur’s ability to acquire resources is not solely dependent on one
single network member. Further, since none of the relatives was indicated as the most important
network members, the relationships with the most central network members are not based on
emotional involvement. The presence of emotional involvement in the existing network ties can inhibit
the development of new ties that could contribute to network diversity. On the basis of past research
and our findings, we argue that the resource acquisition process in the entrepreneur’s personal
network should not be predominantly dependent on the central role of entrepreneur’s family members.
The next important network characteristic present in the entrepreneur’s personal network is the good
network connectedness. Even when the entrepreneur is not included in his personal network, the
connectedness is still good. Only two network members remain isolated and thus unable to exchange
information and resources with other network members. When forming the personal network,
entrepreneurs and managers should pay particular attention to the level of network connectedness. A
high density leads to a better communication, a more fluent exchange of information and resources,
and thus to a more efficient network.
The findings of this research could be helpful for entrepreneurs who are in the process of forming their
personal networks as well as for entrepreneurs who want to improve the efficacy of their personal
networks. As Aldrich and Zimmer (1986) wrote long ago in their paper: “It is not just what you know,
but who you know” (p. 20).
5.2 Limitations
Some limitations of the research should be recognized. First, the in-depth analysis of the structural
characteristics of the entrepreneur’s personal network was made on one micro-firm entrepreneur,
which does not allow generalizability. Second, we operated with perceptual data, because the
collected data are the result of the entrepreneur’s estimations of the structure of his relationships
within his network. Third, we conducted a cross-sectional study and accordingly different stages in a
firm’s life cycle were not considered.
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5.3 Future research opportunities

We suggest that future research should investigate issues not covered in this study and comprehend
issues that would further contribute with new findings from this research area. Since our research is
based on perceptual data, future research directions should be toward more complete data. In future
research the views of other network members of an entrepreneur’s personal network should be
considered so as to enable a more accurate insight into the entrepreneur’s network. Future research
should also include a longitudinal research design that takes into consideration the dynamics of a
firm’s needs at different stages of its life cycle.
References
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W. (Eds.): The Art and Science of Entrepreneurship, Cambridge: Ballinger Publishing Company, pp 3-23.
Aldrich, H., Rosen, B., Woodward, W. (1986) “Social behavior and entrepreneurial networks”, in Ronstadt, R. et
al. (Eds.), Frontiers of Entrepreneurship Research, Wellesley, MA: Center for Entrepreneurial Studies, pp
239-240.
Anderson, A.R., Jack, S.L. and Dodd, S.D. (2005) “The Role of Family Members in Entrepreneurial Networks:
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Organizational Framework Conditions, Organizational
Culture and Intrapreneurship in Hospitality: A Case-Study
Maria de Lurdes Calisto1, and Soumodip Sarkar2
1
Estoril Higher Institute for Tourism and Hotel Studies; Portugal
2
University of Évora, Portugal and Center for Advanced Studies in
Management and Economics, CEFAGE-UE
lurdes.calisto@eshte.pt
soumodip@gmail.com
Abstract: The Ritz-Carlton Hotel Company is well renowned for its successful human resources practices and
famous for its motto: “We are Ladies and Gentlemen serving Ladies and Gentlemen”. What is less studied is how
the company’s culture e management practices are related to corporate entrepreneurship. In this article we will
present the case of Penha Longa, a Ritz-Carlton resort in Portugal. Based on in-depth interviews, with the
General Manager and Human Resources Manager, secondary data and in-site observation, we describe how
Penha Longa succeeds at being one of the most innovative resorts in the luxury market by establishing some
organizational framework conditions to foster entrepreneurial employee behaviour: opportunity and availability of
information; idea generation processes; simplicity and speed of decision-making; and, flow of resources to
innovative initiatives.
Keywords: corporate entrepreneurship; intrapreneurship; hospitality; innovation
1. Introduction
It is no surprise that in economies and industries characterized by consumers’ ever-changing needs
and desires, the most successful companies are those who learn continuously and react rapidly,
speeding-up their capacity to generate new business ideas and innovation. What is becoming more
relevant in the literature is that one of the ways to achieve that transformative ability is through
entrepreneurial actions from within. Businesses depend on entrepreneurial activities to survive and
thrive in competitive markets. Further, they depend on their employees to willingly engage in projects
that extend the firm in new directions (Mosen et al., 2010). In the past decades there has been a
significant interest in entrepreneurship by policy makers and managers all over the world which has
made entrepreneurship an important research topic for the academic community.
In this article we will present the case of Penha Longa, a Ritz-Carlton resort in Portugal. The Ritz-
Carlton Hotel Company is well renowned for its successful human resources practices and famous for
its motto: “We are Ladies and Gentlemen serving Ladies and Gentlemen”. What is less studied is how
the company’s culture e management practices might be related to corporate entrepreneurship. With
a descriptive purpose we used the model developed by Pittaway (2001) for hospitality firms to
interpret how Penha Longa fosters entrepreneurial behaviours. In the first section, we will present a
review of the literature in what concerns corporate entrepreneuship and its implications to the
hospitality industry. In the second section, the methodology followed in this study is presented. In the
third section, we will present Penha Longa’s case. In the last section we will present our conclusions.
2. Corporate entrepreneurship in the hospitality industry
Many authors argue that Corporate Entrepreneurship means the overall entrepreneurial orientation of
a company including its approach to innovation, risk-taking and proactiveness (Pittaway, 2001). This
intrapreneurial ability is in many organizations much more a question of culture and employee
behaviour, than it is of established research and development processes. In fact, intrapreneurship can
assume many forms, one of which consists of employee spontaneous entrepreneurial behaviours.
Services, in particular, depend on their employees’ behaviours and willingness to initiate or participate
in activities that extend the firm in new directions. Within services, the hospitality industry is probably
one of the few where individual behaviours can easily transform the customer’s experience, but there
are not many studies on how this facet of intrapreneurship is being used in the hospitality industry.
In fact as a consequence of the dynamic nature of change companies need to develop an approach
to the strategic generation, acceleration, dissemination and commercial application of innovative
ideas (Kanter, 1988). Customer needs are changing constantly and many hospitality organizations
have to adapt service delivery processes to these changing needs. Front line employees are often in
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Maria de Lurdes Calisto, and Soumodip Sarkar
a unique position to observe changing customer needs and suggest new approaches for improving
the service delivery process (Raub, 2008).
For the hospitality industry, entrepreneurial behaviour is clearly a relevant concept. Individual initiative
allows anticipation and rapid satisfaction of customer needs. It is also essential in that service failure
recovery often requires rapid action and does not always allow for explicit coordination with the
supervisor (Bitner et al., 1990). Entrepreneurial behaviours also allow for the continuous tailoring of
products and services to individual customers’ needs focusing on the customer’s lifetime value for the
company. Empowered employees are not only confident in their own competence they also perceive
a sense of self-determination with regard to their work and a sense of impact on important
organizational outcomes. As a result, they are more likely to engage in spontaneous, discretionary
activities as they feel that they can succeed in these tasks and are unlikely to be reprimanded for
taking the initiative (Raub, 2008).
Several researchers have examined the organizational antecedents that promote or impede
entrepreneurial actions. Pittaway (2001) argues that entrepreneurial behaviour occurs within existing
organisations as a natural impact of certain individuals’ inclinations but organisations can encourage
more of it by examining the barriers that prevent such behaviour. Hornsby et al. (2002) found that
there are five stable organizational antecedents for entrepreneurial behaviour: management support;
work discretion / autonomy; rewards/reinforcement; time availability; and, organizational boundaries
(outcomes expected and mechanisms for evaluating, selecting, and using innovations). Kurakto et al.
(2005) integrated knowledge about corporate entrepreneurship and middle-level managers’
behaviours to develop a conceptual integrated model. However, Hornsby et al. (2002) and Kurakto et
al. (2005) researches focus solely on middle level managers’ behaviours.
Pittaway (2001) argues that there are three principle areas that need to be considered if corporate
entrepreneurship is to be promoted and improved within existing organizations:
Cultural values of the organization and how they need to be conducive to and supportive of
entrepreneurial behaviour;
The way the organization raises the ability of its people to act in an enterprising way;
Framework conditions to promote emergence, capture and exploitation of entrepreneurial activity
once promoted.
In what concerns organizational culture, because in all service industries the “product” is largely
intangible (i.e. the value and quality of the product are determined exclusively in the mind of the
customer), the cultural values, beliefs and norms must be strong to ensure that the customer-service
employee provides the quality and value of customer experience that the customer expects and that
the organization wants to deliver.
It’s hard to train a person to think on his or her won. The way the organizations raises the ability of
people is through proper selection, strong training and the creation of the desire to satisfy a customer.
So, individual traits are also important.
The framework conditions from which new business propositions and innovative ideas emerge are
(Pittaway, 2001):
Opportunity and the availability of information: Supporting ad hoc opportunistic behaviour requires
making information collected as broadly available as possible. Information openness increases
the chance that somebody will construct it differently, use it in a new way or identify a new
opportunity that the organization was not aware of previously.
Idea generation and exploitation: Usually the process of innovation tends to be unstructured even
where the organization has attempted a systematic approach to it. Once one seeks to encourage
the organization as a whole to become more engaged in innovation the complexity expands.
Deregulation, systemic simplicity and speed of decision-making: Empowerment requires
abandoning ‘‘the traditional top down, control-oriented management model for a high involvement
or high-performance approach’’ (Bowen & Lawler, 1995). Bureaucracy (i.e. high levels of
formalization and/or centralization) has frequently been described as a negative phenomenon
undermining job satisfaction and organizational commitment and limiting innovation (Addler &
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Borys, 1996). The capacity to act and to do so quickly is inhibited by the bureaucratic
requirements of the organizations, however, some control and administrative requirement is
needed to ensure an innovation is viable and is an appropriate use of limited resources.
The flow of resources, well functioning internal capital and resource slack: Corporate
entrepreneurship also requires capacity of an organization to ensure that resources (both human
and capital) flow freely to promising projects and ideas.
3. Methodology
With a descriptive purpose, qualitative primary data was gathered through semi-structured in-depth
interviews, with the General Manager and Human Resources Director of Penha Longa. The interview
script was constructed accordingly to Pittaway’s (2001) model and suggestions. This model was
selected because it was developed specifically to explain how hospitality organizations can promote
business creation and innovation. For the different areas proposed by Pittaway (2001) here are some
examples of questions considered in our research:
Organizational culture
How do you characterize Penha Longa’s prevalent leadership style?
In general, do employees trust their leaders?
Individual traits
What is necessary for a person to work for Penha Longa?
Opportunity and the availability of information
In what way does Penha Longa collect and use information about the marketplace?
How is that information available to, and used by, employees in general?
Idea generation, exploitation and the protection of intellectual property
How does your organisation support idea generation and exploitation?
How does your organisation seek to distinguish between useful and inappropriate opportunities?
Deregulation, systemic simplicity and speed of decision-making
How would you describe the capacity and velocity of Penha Longa to act once an idea has been
developed into a viable proposal? Could you give me some examples?
In what way does your procurement system, budgetary control system and other organizational
policies facilitate or not the exploitation of new ideas by the employees?
The flow of resources, well functioning internal capital and resource slack
How do financial resources, if any, become available to promising projects/ideas?
How do human resources, if any, become available to promising projects/ideas?
The information collected in the interviews was validated through in-site observation of employee
interaction, bulletin boards, and other ways. Secondary data was gathered from company’s corporate
information to establish the company’s background and performance status.
4. Penha Longa’s corporate entrepreneurship strategy
Penha Longa 1 property is owned by Deutsche Bank and managed by The Ritz-Carlton Hotel
Company. Penha Longa Hotel Spa & Golf is one of Europe’s most luxurious resort located nearby
1
Penha Longa means literally ‘long rock’.
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Sintra, a World Heritage site, only 25 minutes from the Portuguese capital 2 . Penha Longa employs
180 people from 17 different nationalities.
Penha Longa has won several awards. In 2008 the hotel was considered the Best SME to Work in
Portugal by Exame Magazine. In 2006 it was considered Portugal’s Leading Golf Resort by the World
Travel Awards and in 2008 it was considered the Best Resort in Europe by Condé Nast Traveler
Magazine. Trip Advisor’s users rated Penha Longa as the 20th best luxury hotel in the world. The
resort’s financial results are in accordance to its national and international recognition. Excluding the
year of 2008, a year that reflected the economic crisis in Europe, Penha Longa’s revenue grew at a
two digits rate yearly, since its opening.
The hospitality industry has long known that the difference between success and failure is the
successful management of the service experience for all guests. Horst Schulze, The Ritz-Carlton
Company’s German president that ran it for almost 20 years, until 2001, knew that when leading a
luxury brand, success depends on aligning every employee with the company’s mission. Faced with
the rapid development of new hotels, Schulze created and then led the team that developed Ritz-
Carlton's Gold Standards, which include the elegant motto: "We are ladies and gentlemen serving
ladies and gentlemen." The company’s Gold Standards also included the Three Steps of Service, the
Credo, the 20 Basics and the Employee Promise (see exhibit 1). All employees were expected to
carry a card with those ideas, at all times.
In February 2001 Simon Cooper succeeded Horst Schulz as president and chief operating officer.
The brand was performing well and Cooper first had to make his mark and create trust before leading
any sort of evolution. The changes started coming in 2005. Since then The Ritz-Carlton Company has
evolved both physically and in the service perspective, much more based on local traditions. The 20
service standards were simplified to 12 service values (see exhibit 2).
At Penha Longa several stories of employee entrepreneurial behaviour are told to new employees,
like that of a parking valet that during the night found that a guest’s car had a flat tire and decided on
his own to replace it, took it to the repair shop early in the morning and paid for the service from his
2,000 Euros ‘pocket money’ 3 . When the customer woke up the next morning, he found a note from
the valet explaining what had happen and that the car was in perfect order. This guest, as many
others, had tasted a bit of what can be called the ‘wow’ experience. Penha Longa’s HR Director
explains that to foster this type of behaviour from employees the company has to “choose the right
people and remove organizational barriers”, but this takes hard work.
Without appropriate framework conditions opportunities and innovative ideas will hardly emerge and if
they do, it is unlikely that they will be exploited.
4.1 Opportunity and availability of information

Penha Longa uses several practical ways for promoting an infrastructure for raising awareness and
exploiting opportunities. The company gathers benchmark information regarding its main competitors,
every six months, and studies and surveys customers continually. This market information is
distributed throughout the organization in weekly leaders’ meetings and daily staff ‘lineups’, a
communication tactic designed to ensure all employees are on the same page. The ‘line-up’ is a 15-
minute meeting during every shift. It is both a training and communication tool, both consistent and
customized.
Daily line-ups are required of everyone, everyday. Departments schedule their own time for these
meetings, based on guest needs or other considerations. These meetings follow a weekly agenda,
which corporate officers prepare, that includes a subject of the week, a Gold Standard of the week,
and a basic of the day. In addition, the daily line-ups feature typical corporate announcements of new
policies, rewards or recognition, the sharing of best practices, and so on.
Bulletin boards all over the hotel show how seriously the company takes these line-ups. Line-ups are
not just a download of information. They should be a passionate and emotional moment that re-
2
In www.penhalonga.com accessed on Jan. 2010
3
Each employee is allowed and incentivized to spend up to 2,000 Euros to implement his idea.
115
energizes each employee for the day. Monthly, each Penha Longa’s department organizes its own
line-up where everyone in the company can learn about their work thus reducing the ‘silo’ effect.
Penha Longa also fosters in-company mobility either by job rotation or back to the floor schemes, as
well as in-chain mobility. Any worker who wishes to work in any other chain unit, anywhere in the
world, just has to apply to it, and as soon as possible his or her request will be attended.
Many companies have Customer Relationship Management systems. What Penha Longa does
however engages employees in recording information so the entire system becomes smarter about its
returning guests, especially those who stay frequently. The Ritz–Carlton database tells Penha Longa
employees what the exact preferences of its guests are, so staff can be sure that the desired items
are in the room when guests arrive. Penha Longa also asks its employees to provide information
related to service delivery. In this way employees help deliver the wow Ritz–Carlton experience by
adding useful information to the organizational information system, which helps to ensure that all the
people involved in providing the guest experience has the information they need to do their jobs in the
best possible way.
An extranet also provides the ability for any team leader to share experiences and knowledge with
one if his counterparts from a Ritz-Carlton hotel anywhere in the world whenever he or she wants to,
besides a mandatory monthly conference-call.
4.2 Idea generation and exploitation

Penha Longa succeeds in using a very simple way to foster employees’ innovative ideas, and to
collect and implement them. Basically the system has three in-coming ways. Since the company’s
culture is one of open-door, any employee is free to bring his ideas to a manager, even to the general
manager. The second way is the Idea Program, where the employee fills out a form to be appreciated
by the guidance team (top management team). In 2009 this way provided 25 ideas per trimester. For
example, this Idea Program led Penha Longa to become the first hotel in Portugal to install Nespresso
coffee machines in every room, a practice that would later become common in five stars hotels, and
to install GPS devices in its courtesy bikes because guest easily got lost in Sintra’s moutain. The third
way is the Quality Improvement Teams that meet weekly and where employees from any department
can participate.
An effective transfer of the opportunity into a realistic concept requires that the individual (or team) is
adequately rewarded, however this rewards do not always have to be monetary. Rewards and
incentives are necessary, and they may be extrinsic (i.e., pay, bonus or promotion) or intrinsic (i.e., a
feeling of achieving something worthwhile). Sometimes recognition and implementation responsibility
can be sufficient. At Penha Longa they reward employees for creating value for the company. The
importance of intrinsic motivation can be demonstrated for example in how the Conciergerie’s
employees spontaneously decided to organize a folder with all the information guests usually ask for
(restaurants, car rentals, maps, and so on) in order to make their work more efficient. The project
soon included partnerships with local restaurants and other service providers. The Conciergerie
employees understood they possessed a wealth of information about the region, demonstrated ability
to think on their own and created value for themselves, the guests and the company.
Here are some of the ideas Ritz-Carlton proudly announces as an example of its management
philosophy:
A front desk project team at The Ritz-Carlton Osaka reduced check-in time by 50 percent.
A cross-functional guest recognition database called Mystique is a company-wide tool created to
meet and anticipate repeat customers’ preferences and requirements.
Hotel Engineers from resorts and city hotels developed a system called CARE (Clean And Repair
Everything) to create the most defect-free guestrooms in the industry. Merging the deep cleaning
housekeeping processes with the engineering preventative maintenance schedule ensures that
all guestrooms are guaranteed to be defect-free every 90 days.
4.3 Deregulation, systemic simplicity and speed of decision-making

The speed at which an organization makes a decision and commits resources to an innovative project
is important but Penha Longa, as all the Ritz-Carlton Company, addresses that in a very practical
116
way. Each employee is allowed and incentivized to spend up to 2,000 Euros to implement his idea.
The financial empowerment allows staff to do whatever is necessary to enhance a guest’s stay or
recover service — without seeking the approval of a supervisor.
One the other hand, some types of formalization can in effect enable innovation. Ritz–Carlton’s
famous ‘‘Gold Standards’’ may serve as an example for this ‘‘enabling’’ type of formalization. The way
in which the Gold Standards are expressed demonstrates that formalized rules do not necessarily
have to restrict the individual margin of decision making. For instance, the Ritz–Carlton basics state
that ‘‘each employee is empowered’’ and that when employees encounter a guest with a problem or
special need they should ‘‘break away from their regular duties and address and resolve the issue.’’
Another standard stipulates that ‘‘whoever receives a complaint will own it, resolve it to the guest’s
satisfaction, and record it.’’ Employees are given great latitude to resolve problems and can even
bend rules, if necessary. In other words, rather than constraining individual initiative, the Gold
Standards may even have a liberating effect.
4.4 The flow of resources, well functioning internal capital and resource slack
One of the most interesting things about Penha Longa financial empowerment is that the company
does not include these costs on the hotels' P&L statements because it does not want them subject to
financial scrutiny by cost-conscious managers. The message they want to send to employees is, "We
trust you to do the right things”. This spending policy and feeling of ownership it creates leads to a
sense of pride and responsibility among employees, which is a critical link to customer loyalty and,
ultimately, to Penha Longa's growth and profitability. While cost cutting is inevitable in the tighter
economic cycle of 2008-2010, leadership at Penha Longa avoids a scarcity mentality.
The concept of lateral service – the requirement that all employees pitched in to help one another out,
no matter what task, can also be presented as important tool to innovative behaviour, in the way that
everyone is allowed to help a colleague implement an innovative idea.
Entrepreneurial behaviours also require human capital. At Penha Longa cross-training is available to
every employee, as well as 100 online courses and 350 Euros/person to be spent in training at the
employees choice as long as of interest to his or her job.
Finally, innovation requires time and personal effort. Penha Longa run carefully constructed work
plans and timetables so that employees are ready for the busiest hours during the day but can also
have some spare time to create.
4.5 Organizational culture

An important part of any strategy is to ensure that everything the organization and its leadership says
and does is consistent with the culture it wishes to define and support. So at Penha Longa the culture
is planned and carefully thought through to ensure that the message sent to all employees is the one
the organization really wants to send.
The cultural characteristics and leadership styles that exist in many organizations lack the support or
even prevent opportunistic entrepreneurial behaviour. This is not the case of Penha Longa.
Communication and training practices, such as the daily line-up, give life to the culture of
empowerment. Behavioural differentiation begins with core values and beliefs that engage and
motivate people, and Ritz-Carlton's are spelled out in its Gold Standards. Penha Longa creates a
strong culture with guest-centred values and manages it very carefully because they know its
importance.
Leadership at Penha Longa defines and ensures its culture. Leadership behaviours which foster an
empowered state of mind in subordinates are diametrically opposed to the top-down management
style of a highly centralized organization (Raub, 2008). Going well beyond the creation and
dissemination of credo cards, the leadership perfects a powerful process of daily conversation about
the gold standards during their line-up process. Penha Longa’s recently appointed general manager is
the first Portuguese employee to reach such a high-ranked position at the company and she
maintains a very individualized and not formal relationship with the employees, who treat her by the
first name and always feel free to step in her office and present their ideas.
117
4.6 Individual traits

Customers who come to Penha Longa pay a premium for perfection. The hotel has the tremendous
challenge to meet and exceed customer expectations. It starts with how the hotel selects employees.
Penha Longa selects the right talent and then it is more a matter of bringing it out and aligning it in the
organization. The company uses scientific interviews to understand if an individual has the necessary
behavioural traits to make him or her successful in the company. These involve recruiting people who
could make decisions and live with the results.
The recruitment process incorporates current employees, so everyone feels responsible for the
person hired and the team as a whole. Once selected, leadership orients and trains new hires not
only in operational aspects of their jobs but in the desired outcomes they want their employees to
produce for customers. Once a new hire understands those outcomes (e.g., memorable guest
experiences and customer engagement), leadership steps back and allows the front line to innovate.
This stepping back process is not only evidenced by the 2,000 Euros per-day-per-guest authority
given to every staff member but also by extensive customer service training.
Penha Longa looks for employees who exhibit "relationship extension" which is defined as their
willingness and ability to anticipate customers' needs, and who are quick in his or her thinking. First
and foremost, the person has to be confident in the sole knowledge of his or her job. But she or he
has also to have a positive attitude, has to be hospitable and empatic, quality-oriented, organized and
attentive to details.
5. Limitations of the study and conclusions
The results of this study-case cannot be generalized, not even to the hospitality industry. Quantitative
studies are needed. Other limitations arise from the fact that no employees were heard in this study
and they are at the centre of corporate entrepreneurship strategies.
This study contributes, however, towards a holistic understanding of how hospitality companies can
foster entrepreneurial behaviour, which may be of interest both to researchers and practitioners.
Corporate entrepreneurship has only recently began to stimulate significant research concentrating on
the specific topics of innovation, corporate venturing and intrapreneurship, but in our opinion The Ritz
Carlton Company had been practicing it for more than 20 years.
This entrepreneurial culture is one of the reasons why Penha Longa, as the Ritz-Carlton Hotel
Company as a whole, had become since its origins a high-performance organization in many
respects. What distinguished the people of Penha Longa, as well as all Ritz-Carlton employees, is
their passion for behaving in extraordinary ways.
Penha Longa recognizes that change is a constant and dynamic force but they also try to benefit on
the opportunities that change offers by imbedding in its infrastructure, culture and individual
behaviours the need to constantly innovate. Penha Longa calls its employees ladies and gentleman
but what we have observed during our work with the resort is that they are in fact intrapreneurs,
always searching for an opportunity to explore new ideas and exploit current activities. Penha Longa
lets employees make their own decisions about how they do their jobs. If that means leaving their
posts or authorizing a total refund—so be it. Of course, such latitude needs to be framed in the
context of particular line duties, but Penha Longa employees are encouraged to think for
themselves—and given the means to act when they see the need.
Penha Longa views itself as an elite institution (it targets the top of luxury travellers) whose mission is
to create an exceptional experience for its customers and joy and pride among its employees. It is
careful in selecting new employees, and then devotes an extraordinary amount of time to orientation
and ongoing education and training. It manages its mission and its culture in daily line-ups. It
manages details like few other organizations do, and it rewards employees for taking initiative and
solving problems.
From the overview of how Penha Longa responds to the necessary organizational framework
conditions and organizational culture to foster intrapreneurship, it is evident that developing a
corporate entrepreneurship infrastructure is far from simple. It is something planned, coordinated, and
118
the result of a carefully designed strategy, which is embodied in a management system that combines
a focus on individual guests’ needs, information technology, flexible processes and empowered
employees. By creating appropriate framework conditions that allow for both the systematic and ad
hoc identification and exploitation of opportunities organizations may be able to capture internal
initiatives and lead to substantial return and business development.
6. Appendix 1: Exhibit 1 – the Ritz-Carlton Gold Standards until 2004
7. Appendix 2: Exhibit 2 – the new Ritz-Carlton service values in 2010

Service Values: I Am Proud To Be Ritz-Carlton
1. I build strong relationships and create Ritz-Carlton guests for life.

2. I am always responsive to the expressed and unexpressed wishes and needs of our guests.
3. I am empowered to create unique, memorable and personal experiences for our guests.
4. I understand my role in achieving the Key Success Factors, embracing Community Footprints and
creating The Ritz-Carlton Mystique.
5. I continuously seek opportunities to innovate and improve The Ritz-Carlton experience.
6. I own and immediately resolve guest problems.
7. I create a work environment of teamwork and lateral service so that the needs of our guests and
each other are met.
8. I have the opportunity to continuously learn and grow.
9. I am involved in the planning of the work that affects me.
10. I am proud of my professional appearance, language and behavior.
11. I protect the privacy and security of our guests, my fellow employees and the company's
confidential information and assets.
12. I am responsible for uncompromising levels of cleanliness and creating a safe and accident-free
environment.
119
References
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Quarterly 41, 61–89.
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unfavorable incidents. Journal of Marketing 54, 71–84.
Bowen, D.E. and Lawler, E.E., (1995) Empowering service employees. Sloan Management Review 36, 73–84.
Hornsby, J.S., Kuratko, D.F., & Zahra, S.A. (2002). Middle managers’ perception of the internal environment for
corporate entrepreneurship: Assessing a measurement scale. Journal of Business Venturing, 17, 49–63.
Kanter, R.M., (1988). When a thousand flowers bloom: structural, collective, and social conditions for innovation
in organisation. Research in Organizational Behaviour 10, 169–211.
Kurakto, D. F., Ireland, R. D., Covin, J. G., Hornsby, J. S. (2005). A Model of Middle-Level Managers’
Entrepreneurial Behavior. Entrepreneurship: Theory and Practice, 29(6), 699-716.
Monsen, E., Patzelt, H. and Saxton, T. (2010). Beyond Simple Utility: Incentive Design and Trade-Offs for
Corporate Employee-Entrepreneurs. Entrepreneurship: Theory and Practice, 34(1), 105-130.
Pittaway, L., (2001). Corporate enterprise: a new reality for hospitality organizations? International Journal of
Hospitality Management 20, 379-393.
Raub, S., (2008). Does bureaucracy kill individual initiative? The impact of structure on organizational citizenship
behaviour in the hospitality industry. International Journal of Hospitality Management 27, 179-186.
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Improving Creativity Results and its Implementation in
Organizations Using Creative Techniques Through
Experiential Learning Training
Matilde Martínez Casanovas, Francesc Miralles, Marcos Gómez, and Rafael
García
Ramon Llull University, Barcelona, Spain
matimar@orbita97.com
fmiralles@salle.url.edu
marcosgomez@orbita97.com
rafaelgarcia@orbita97.com
Abstract: In this paper we investigate the application of experiential learning training in a new field and its
benefits: how experiential learning of the creative technique of brainstorming can increase idea generation
effectiveness in organizations and subsequently faster idea implementation and easier operational execution.
This paper presents a comparison between „experiential learning training‟ versus „no kind of training‟ and
„experiential learning training‟ versus „non-experiential learning training‟ of eighty five groups from different
organizations. Some groups participated in a brainstorming session in an „experiential learning training‟ through a
competency training programme, other groups participated in a brainstorming session without „any kind of
training‟ and finally the rest of the groups participated in a brainstorming session with „non-experiential learning
training‟. Team activity was recorded for further analysis and quantitative data was gathered and processed
related with, i.e. number of ideas generated and number of ideas implemented. The findings showed that learning
brainstorming through Experiential Learning training significantly increased the fluency and flexibility of ideas
generated. The results also showed an increase in the number of creative ideas implemented.
Keywords: organizational innovation, experiential learning, creative techniques, brainstorming, creativity training,
creative projects
1. Introduction
Today creativity and innovation are important for both managers and organizations. Many of these
managers aim to improve the creative production in their organizations. Leavy (Leavy, 2002) suggests
that in the last 10 years organizations have been discovering their capacity for managing creativity.
Because Organizations are interested in improving creative production, in this project we will consider
how through experiential learning (EL) employees can increase production both at the moment of
generating a great number of ideas, and when it comes to implementing projects.
In fact, businesses specializing in organizational training have started to habitually applied the didactic
methodology known as experiential training (Schön, 1992).
2. Related work
In this paper through Experiential Learning Training we gain new knowledge and we modify the way
we act in the creative phase obtaining a greater number of ideas and higher number of implemented
projects than would be usual without Experiential Learning Training.
2.1 Creativity definitions

When it comes to managing creativity there are studies from different approaches, such as creativity
considered as a characteristic of a person, as a process, as part of a context. The most typical is the
one that is considered as synonymous with a unique ability to solve problems. A problem is a situation
in which one can try to reach an objective, and it is necessary to find a way to do so.
As Guilford affirms, creativity can be learnt (Guilford, 1967). Creativity is not understood as restricted
to a few people, but instead that everybody has creative potential. From that point we deduce that
experiential learning can be useful to develop this creative potential.
The appearance of the theories of Amabile and Csikszentmihalyi, represents a new approach to
understanding creativity from different perspectives. These authors, having acquired a special
relevance in recent times, have become an obligatory reference for the topic at hand. Amabile
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Matilde Martínez Casanovas et al.
(Amabile, 1997) gives us the following definitions: “Creativity is the generation of new and useful
ideas in any field of activity and appropriate for the problems of the organization”; and defines
innovation as the “successful implementation of creative ideas inside an organization”. Therefore, for
Amabile (Amabile, 1997) organizational creativity involves creation of something of new value, be it a
useful product, a service, an idea, a procedure or a process on which the employees work in a team.
This agrees with the definitions of other authors of creativity and innovation, including Plsek (Plsek,
1997) and Gryskiewicz (Gryskiewicz, 2000). These authors define innovation (successfully applied) as
the application of creativity which includes three components: novelty, usefulness to the user and
utility in solving problems. To achieve the potential of innovation, an employee must first develop the
creative products (some of which may have been previously successfully applied to become
innovations). This is what constitutes creative output.
Seeing these definitions would give the impression that creativity is an eminently personal activity and
that therefore experiential learning would bring little to the development of creative potential.
Nevertheless, in the theory of Amabile (Amabile, 1983) we observed that stimulation of creativity in
the classroom or in the work environment would be positive for creative production. Something which
would open the doors to the utility of experiential learning because external stimulation is one of the
basis of its functioning. Along the same lines Csikszentmihalyi (Csikszentmihalyi 1988) says that
creativity is not produced in the minds of people in an isolated way, but in the interaction between
peoples‟ thoughts and a social cultural context. Csikszentmihalyi (Csikszentmihalyi, 1996), from an
integrated perspective, shows creativity as a function of three elements: field (subject, or place where
creativity occurs), domain (social group of experts) and person (who makes the creative act). These
three elements also have their protagonism in experiential learning put into practice. Both Amabile
and Csikszentmihalyi consider the field as a substantial factor. Amabile mentions it as a classroom or
work environment, and Csikszentmihalyi as the place where creativity occurs. However, the emphasis
that Csikszentmihalyi gives to domain or group of experts, does not appear in the model of Amabile,
for which the authors of this study focus on the model of Csikszentmihalyi.
2.2 Creativity measurement

One of the most argued over topics in the environment of creativity is the real possibility of its
evaluation. The forms most used by psychologists are the tests of divergent thinking, trying to
evaluate peoples‟ capacity to produce many alternative, different, and original ideas before a
particular problem (Guilford, 1950; Torrance, 1966). The main advantage is that they are very simple,
but powerful in evaluation of creativity. Fluency, flexibility and originality are principal points of view
that are taken into account in the choice and composition of the evaluation exercises of creativity.
Guilford (Guilford, 1950) introduces the term “fluency” to describe the number of ideas produced by a
person per unit of time. To evaluate this feature, the verbal tests recorded the number of responses,
and graphics tests, the number of images that the person has built. However, in practice, taking the
fluency as the sole measure of creativity is deficient because it is possible to create many ideas that
do not vary significantly and still achieve a high score of fluency.
The second measure of creativity is flexibility: it is the opposite of rigidity, immobility, the inability to
change behavior and generate new responses faced with new situations and change. Flexibility
relates the number of different categories or subjects in which the ideas generated can be grouped
(Torrance & Haensly, 2003). In practice, flexibility is more difficult to measure than fluency, because in
many cases it is not clear at what distance two different ideas should be, to be considered different
subjects or categories. In 1990 Torrance deleted the flexibility scale, since it correlated highly with
fluency (Herbert et al. 2002).
Fluency and flexibility are applicable to creativity. These outcomes can be measured directly by
examining the proposed ideas list as a solver of problems. The third measure of creativity used in
business (originality) is, paradoxically, more or less applicable to corporate management creativity.
Originality refers to the new, unique, unrepeatable and authentic. It is a measure of how strange and
idea is (Torrance & Haensly, 2003) and essentially is a measure of novelty. This amount can only be
determined in relation to the overall responses given by a normal population. As these authors sustain
this requirement of originality makes it more difficult to measure in business and therefore less useful
than the other two measures of creativity.
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In consequence, the authors will base themselves in variable fluency as a measure of creativity in this
study.
2.3 Creativity techniques: Brainstorming

Brainstorming is the most widely used and studied technique for generating creative ideas (Mullen,
Johnson and Salas, 1991) and is the one used in this work. In it there are two fundamental principles:
deferred adjudication, and quantity rather than quality. In fact there are some rules based on these
principles (Osborn, 1963) among which we highlight looking for the quantity. The more ideas we
generated, the greater the probability of finding a successful solution, which highlight its connection to
the variable fluency as a measure of creativity, which is the one used in this study.
In their work in training positive attitudes toward divergent thinking among manufacturing engineers,
Basadur, Graen, and Scandura (Basadur, Graen & Scandura 1986) found that training of work groups
promoted far superior transfer of training over training of individuals, presumably because of the
establishment of social support for divergent thinking among the work group. This is one of the
fundamental reasons why the authors have decided to introduce the technique of brainstorming, a
group technique, such as technical information used in the creative phase of experiential learning,
and additionally to compare the results with those obtained with traditional dynamic creativity in the
organization and traditional creativity trainings, which usually use the same technique of
brainstorming.
2.4 Creativity training

Several authors (de Bono, 1967, Langley, et al., 1986; Torrance, 1979) commented that creativity can
be improved through training. They claim that because of the need for companies to remain
competitive in the market by introducing new products, services and other things, there has been a
demand in the business world for ways to improve creativity which has led to the development of
courses in order to enhance creative behavior and satisfy that demand. The existence of these
creativity trainings is consistent with the definitions of creativity, according to which creativity can be
learned (Guilford, 1967). This opens the door to 'learning' the art of brainstorming and 'learning' to be
creative, which should have resulted as a result an increased quantity of ideas generated.
In terms of the interactionist model (Woodman, 1993), the availability of creativity training
programmes could be regarded as part of the contextual influences that establish or encourage an
organizational culture supportive of creative behavior. Based on this analysis, the possibility exists
that because experiential learning has a high potential to generate a positive environment to support
creative behavior, we will obtain as a result increased production of creative output.
The varied effects of creativity on the nature and quality of our lives beg a question. How can we
stimulate people‟s creative efforts? (Scott et al. 2004). In fact, a number of approaches have been
used to encourage creativity, including (a) provisioning of effective incentives, (b) acquisition of
requisite expertise, (c) effective structuring of group interactions, (d) optimization of climate and
culture, (e) identification of requisite career development experiences, and (f) training to enhance
creativity (Scott et al. 2004).
Of these interventions, training has been a preferred, if not the favored, approach for enhancing
creativity (Montouri, 1992). Both organizations and educational institutions have invested substantial
time and resources in the development and deployment of creativity training. For example, Solomon
(1990), drawing from survey data, found that 25% of the organizations employing more than 100
people offer some form of creativity training. Creativity training has been developed for occupations
ranging from marketing (Rickards & Freedman, 1979), business management (Basadur,
Wakabayashi, & Takai, 1992) and educational administration (Burstiner, 1973), to medicine (Estrada,
Isen, & Young, 1994 ) and engineering (Basadur, Graen, y Scandura, 1986). The same range of
application fields can be found particularly in experiential learning.
2.5 Creative projects

In respect to the measure of the amount of creative projects that are activated we will build on the
model of 'innovation funnel' (Dunphy, Herbig & Howes, 1996), according to which to get an idea that
can become a successful innovation it is first necessary to generate many ideas. According to the
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model of 'innovation funnel' these ideas generated through the formalization of implementation
projects will be eliminated through various stages of screening that can be simply 'stop', 'hold' or
"continue." If the ideas through their evolution as a project are consistent with the objectives, and are
not limited by available resources, they will continue to flow through the funnel (Ning & O'Sullivan,
2005).
In order that the "innovation funnel" is continuously fed by new projects, companies like Unilever run
apprenticeship programmes of creative techniques to constantly feed the funnel at its beginning with
new ideas. Since 1998, programmes have been launched by facilitating creativity and Synectics
methodology to stimulate creative thinking by making connections between aspects of the problem
and contexts outside the area of the problem (Rao, 2005). In order to measure the success of the
creativity meetings and examine their creativity trainings they came to the conclusion that creativity
sessions play an important role for two reasons: the first is that once passed through the funnel ideas
are the result of implemented projects, product proposals and other opportunities; and the second is
that creativity trainings result in a more creative approach (number of ideas) of team members
(Unilever, 2002). However, these creative sessions should not stick to the use of techniques such as
Synectics but raised brainstorming sessions involving these new techniques of creativity (Unilever,
2002). Following the philosophy of Unilever, the authors intend to demonstrate that the ideas
generated in brainstorming sessions through experiential learning more easily pass the screening
stage of "continue" through experiential learning and this helps to formalize a project to the
implementation of that idea, in contrast to the ideas generated with traditional training techniques or
dynamic creativity with any kind of training.
2.6 Experiential Learning Theory

Experiential Learning Theory (ELT) emphasizes the central role of experience in the learning process
(the ability of people to learn through direct experience), an emphasis that distinguishes ELT from
other learning theories as discussed by Dewey, Lewin and Piaget.
ELT defines learning as "the process whereby knowledge is created through the transformation of
experience. Knowledge results from the combination of grasping and transforming experience" (Kolb
1984).
EL is based on the assumption that knowledge is created through the transformation brought about by
experience. Specific experience is transferred to an abstract conceptualization, upon reflection, which
is actively tested through new experiences. This is what Kolb (Kolb, 1984) ends up calling experiential
learning cycle (Figure 1), which refines the work of other authors in this sense as Lewin (Lewin, 1951),
Dewey (Dewey, 1938) and Piaget (Piaget, 1978) It focuses on the idea that experiential learning
exists as a particular form of learning distinguished by the central role that experience plays in the
learning process.
Interest in the application of the ELT in the world of management in general has been growing in
recent years (Kolb, Boyatzis & Mainemelis, 2001), this opens the door to its particular application in
the world of creativity in business.
Although Kolb‟s learning cycle pointed to the necessity of „reflective observation‟ in order to bring the
„concrete experiencing‟ of events or experiences to the state of „abstract conceptualization‟, he said
little about the nature of reflection, or what might constitute quality reflection.
Reflection can, therefore, help us transform our knowledge and understanding, and impact on our
professional world. Within critical social science the term reflexivity is not only applicable to
professional practice, it is employed more broadly as an individual and social process (Schön, 1991).
Schön promoted reflective practice as a method of addressing the challenges of real-world practice.
Today, reflection is mentioned as a component in the conceptual framework of many teaching
education programmes (Stanford University, Georgia Southern University, CSU Northridge).
In conclusion, the authors believe that reflection is a key component of learning, although it has
received insufficient attention in the literature (Ollila, 2000). It is through reflection that practical
experience makes sense. As Kolb reminded us, learning is a continuous cycle of experience,
observation (and reflection), conceptualization and experimentation. Therefore, the authors intend to
demonstrate how learning the technique of brainstorming within an experiential learning process and
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after passing through a period of observation (and reflection) leads us to activate a larger number of
projects which trigger a dynamic of creativity without training organized by the company or the
traditional creativity trainings using the same technique.
Figure 1: Kolb, experiential learning cycle

Additionally, and based on the theory explained in ELT, to the extent that creativity can be learned
and its effectiveness is measured based on the number of ideas (fluency) generated by employees,
the authors intend to demonstrate that experiential learning, and specifically learning the technique of
brainstorming within a process of experiential learning is an effective approach to increasing the
criterion creativity fluency of the employees.
Finally, the authors suggest that learning the technique of brainstorming within an experiential
learning process leads to an increase in the generation of ideas, which in turn leads us to new
projects to implement.
3. Research hypotheses
Based on the literature review presented above the authors propose the following hypotheses:
Hypothesis 1a Experiential learning of brainstorming is better than normal brainstorming training for
generated ideas.
Hypothesis 1b Experiential learning of brainstorming is better than normal brainstorming training for
implementation of those ideas.
Hypothesis 2a Experiential learning of brainstorming is better than brainstorming sessions without

training for generated ideas.
Hypothesis 2b Experiential learning of brainstorming is better than brainstorming sessions without

training for implementation of those ideas.
Hypothesis 3a A brainstorming training session is better than brainstorming without training for
generated ideas.
Hypothesis 3b A brainstorming training session is better than brainstorming without training for
implementation of those ideas.
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4. Cases study design

Methodology, participants and settings
This paper presents a comparison between „experiential learning training‟ (ELT) versus „no kind of
training‟ (NKT) and „experiential learning training‟ (ELT) versus „non-experiential learning training‟
(TRA) of eighty five different groups from different organizations. Twenty two of the groups
participated in a brainstorming session in an „experiential learning training‟ through a competency
training programme, twenty groups participated in a brainstorming session without „any kind of
training‟ and finally forty three participated in a brainstorming session with „non-experiential learning
training‟ with two different trainers.
In all three cases, the companies‟ management was responsible for marking a target and selecting
the participants in each group; the composition was multidisciplinary with members from different
areas of the company (group sizes were homogeneous). We focus on the particular stage of ideas
generation with the technique of brainstorming, which were in all cases led by trained expert
facilitators for creativity.
In the case of TRA they first explained how the technique works, second with the help of a facilitator
and with the goal (problem to be solve) marked by the company the brainstorming session began.
In the case of NKT they first dipped into the problem to be solved, a production situation so that
everyone was familiar with the problem, second they gave similar starting data to better know the
problem and later with the help of a facilitator and with the goal marked by the company, the
brainstorming session began.
And finally, in the case of ELT, this experiential learning experience lasted for 5 weeks. All teams
were focused on specific problems, similar to problems that they have completed on a daily basis in
their organizations. The learning process followed the typical phases of problem detection, creative
idea generation (brainstorming session), solution conceptualization and implementation in order to
obtain a contrast with their typical problem solving approaches. Each group focused its attention on
small areas of problems to be solved with creative techniques and experiential learning and finally,
focused on a preferred solution. During all the process they were accompanied by expert facilitators.
In the three cases team activity was recorded for further analysis and quantitative data was gathered
and processed related with number of ideas generated and number of ideas implemented.
5. Discussion and validation
The authors have found two different lines of results. First, comparisons between ELT versus NKT
and ELT versus TRA related with the number of ideas generated and the second, comparisons
between ELT versus NKT and ELT versus TRA related with the number of new projects implemented.
The significance difference test has been used to check the difference means between the number of
ideas generated per person with ELT, NKT, and TRA cases. This test has been done with PASW
Statistics 18 using t-student test for independent samples.
The authors performed three tests to compare the means of the three possible pairs of samples. The
t-student test allows finding if there is a statistically significant difference between two samples. For
the three tests the authors used the Levene‟s test to compare the variances of each sample. All the
variances were found equal as it is shown in table 1.
Table 1: Levene‟s test significance and t-student interval for zero difference of means (95%)
Cases Levene‟s test significance t-student interval for difference of the means
(at the 95% confidence level)
ELT-NKT 0.039 3.466 – 5.985

ELT-TRA 0.013 4.406 – 6.399
NKT-TRA 0.873 -0.191 – 1.544
Based on this result, the authors applied a two-tailed t-student test for equal variances to prove if
there was statistical significant difference between the samples means at the 95% confident level.
126
For each pair of samples (see table 1), the authors found the means difference interval at the 95%
confidence level. As it is shown in table 1, the value zero (equal means) is not included in the intervals
for the comparison of the sample between the number of ideas per person generated in the ELT and
the NKT cases, and the number of ideas per person generated in the NKT and the TRA cases.
Otherwise, the value zero (equal means) is included in the interval for the number of ideas generated
per person in the ELT and the TRA cases. These results allow the authors to claim that there is a
statistically significant difference at the 95% confidence level between the mean of the ELT case and
the NKT case, and between the ELT case and the TRA case. Conversely, there is no statistically
significant difference between the sample means in the NKT and the TRA cases.
Therefore, the authors can posit that there is a statistical support to affirm that the average number of
ideas per person generated after an ELT course is greater (at the 95% confidence level) than the
average number of ideas per person in an NKT and TRA ones. Moreover, based on the results
obtained in this research work, there is no statistical significant evidence on the average of ideas per
person in NKT and TRA courses. Therefore H1a and H2a were supported, and H3a was not
supported.
In the second line of results, comparisons related with the number of new projects implemented, the
authors performed three tests to compare the means of the three possible pairs of samples. For the
three tests the authors used the Levene‟s test to compare the variances of each sample. One of the
variances was found equal, and two of the variances were found unequals as it is shown in table 2.
Table 2: Levene‟s test significance and t-student interval for zero difference of means (95%)
Cases Levene‟s test significance t-student interval for difference of the means
(at the 95% confidence level)
ELT-NKT 0.009 0.121 – 0.256

ELT-TRA 0.000 0.158 – 0.279
NKT-TRA 0.000 -0.060 – 0.001
Based on this result, the authors applied a two-tailed t-student test for equal variances in the ELT and
the NKT cases, and the authors applied a two-tailed t-student test for unequal variances in the ELT
and the TRA cases and in the TRA and the NKT cases to prove if there was statistical significant
difference between the samples means at the 95% confident level.
For each pair of samples (see table 2), the authors found the means difference interval at the 95%
confidence level. As it is shown in table 2, the value zero (equal means) is not included in the intervals
for the comparison of the sample between the number of new projects implemented per employee in
the ELT and the NKT cases, and the number of new projects implemented per employee in the ELT
and the TRA cases. Otherwise, the value zero (equal means) is included in the interval for number of
new projects implemented per employee in the TRA and the NKT cases. These results allow the
authors to claim that there is a statistically significant difference at the 95% confidence level between
the mean of the ELT case and the NKT case, and between the ELT case and the TRA case.
Conversely, there is no statistically significant difference between the sample means in the TRA and
the NKT cases.
Therefore, the authors can posit that there is a statistical support to affirm that the average number of
new projects implemented per employee generated after an ELT course is greater (at the 95%
confidence level) than the average number of new projects implemented per employee in an NKT and
TRA ones. Moreover, based on the results obtained in this research work, there is no statistical
significant evidence on the average of new projects implemented per employee in TRA and NKT
courses. Therefore H1b and H2b were supported, and H3b was not supported.
6. Conclusions
The findings showed that learning brainstorming through ELT significantly increased the fluency and
flexibility of ideas generated. The results also showed an increase in the number of creative ideas
implemented. The learning process of creativity in innovation teams is an important consideration in
innovation management. Managers can foster and sustain creativity in their organizations through
ELT and it can help to identify innovation opportunities and facilitate their implementation. Overall the
127
research suggests that learning creative techniques through experiential learning is an effective,
efficient way to increase the number of outcomes in the idea generation processes. Additionally ELT
seems to result in faster idea implementation and easier operational execution within organizations.
This suggests that EL approaches can help improve employees‟ learning time and learning
effectiveness. Importantly, brainstorming creative methods and how they are implemented is
significantly enhanced after ELT, overcoming some of the criticisms of brainstorming effectiveness
and efficiency outlined in the research previously cited above. This paper suggests the types of tools,
techniques, approaches and/or roles might be helpful in the innovation process.
7. Future research
Additional research should be developed in order to include cases with creativity techniques others
than brainstorming and a greater number of cases. The authors highlight an unexpected finding that
will be further investigated in the future. This finding is that performing a brainstorming session without
training produces more ideas than traditional brainstorming training. Now the authors are studying
whether the ideas implemented after ELT and, after the passage of time are successful ideas in
business or not.
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128
Technology Transfer Approaches for Early Stage
Desalinization Technologies
Sérgio Casimiro1, 2, Christos Ioakimidis1, 2, 3, Sung Jae Kim3, Priyanka Bakaya3,
Paulo Ferrão1, 2
1
MIT|Portugal Program, Lisbon, Portugal
2
IN+, Instituto Superior Técnico, Lisbon, Portugal
3
Massachusetts Institute of Technology, Cambridge, USA
sergio.casimiro@ist.utl.pt
christos.ioakimidis@dem.ist.utl.pt
gate@mit.edu
priyanka.bakaya@sloan.mit.edu
ferrao@ist.utl.pt
Abstract: Fresh water scarcity is one of the major challenges facing our society. Established technologies exist,
though they are still very expensive preventing them from the immediate use and possible final solution. In this
work it is analyzed an innovative technology developed at the Massachusetts Institute of Technology (MIT) for
desalination, using Ionic Concentration Polarization (ICP). Economic viability and a potential business model to
deploy this technology are described in this work. Construction of a prototype with several microchannels, and
product development are still necessary, but the adoption of the niche market for small emergency devices to
produce fresh water for boats can potentially be a successful path to deploy this technology.
Keywords: desalination, ICP, business model, early stage technology, boat
1. Introduction
´Research that creates the right technologies at the right time is critical to competitive success in
many industries. Over the long term, research into new materials, components and products provides
the fuel that can make products perform better, cost less and generate attractive profits. Yet the
promise that research holds is not the reality for many of the companies that invest in it. Development
of breakthrough technology often does not lead to breakthrough product sales, even over a very long
period, and competitors often appropriate and commercialize new technologies more nimbly than the
firms that paid to develop them´. (Christensen, 2008, 2002). This article shows the required steps of
an innovative early stage product evaluation and the possible corresponding model to be followed that
can ´capture´ the interest of the investors regarding its commercial value in the market.
It is increasingly known that the lack of fresh water is becoming a growing asset facing valorization in
many parts of the world. Historically people in several parts of the world have suffered from
inadequate access to fresh water sources, creating serious impediments to economic growth, social
development and human health (UNEP, 2008). In fact figures from 2006 show that 884 million people
worldwide are reliant on unimproved drinking water sources (WHO, 2008). Also the over exposure of
ecosystems to excessive fresh water consumption may lead to severe environmental impacts if
consumption is higher than natural renewal rates. Much of the information for this work was obtained
through direct contact with companies and professional in the desalination and Micro-Electro-
Mechanical Systems (MEMS) field.
Only in the last 50 years large scale desalination technologies were introduced. Desalinated water is
used for a variety of purposes, but the main sectors remain drinking water for communities, tourist
resorts and pure water for industry (UNEP, 2008). Desalination is currently dominated by two types of
technologies: Reverse Osmosis (RO), and Distillation (DS): Multi Stage Flash (MSF) and Multi-Effect
Distillation (MED). DS is used from large ships to large scale power plants, and RO is used in portable
watermakers to large scale power plants. RO is much less energy demanding than DS but uses
electricity only. DS has the potential to use low-grade waste heat, but still uses ~20% electricity as
energy source. Several new technologies have been developed during the last years that could
eventually compete with the well established and expensive RO and DS processes for water
desalination. Some of them have recently been under the spotlights, namely forward osmosis, carbon
nanotubes and biomimetics (Shannon, 2008).
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Sérgio Casimiro et al.
2. Current and potential niche markets for technology deployment

Several markets can be used to launch ICP technology for desalination, ranging from large scale to
small niche markets. Choosing large-scale desalination plants may be a risky path as initial
investment costs are much higher than to launch the technology for smaller applications and return
periods probably will not be smaller than 4 or 5 years. Competition is much harder with only a few
large players well established, and reliability issues that arise from scaling up this technology to such
a large scale may seriously compromise such a project.
Smaller markets may be the safest path (Shane, 2005). Examples of potentially profitable niche
markets correspond to smaller devices, having customers that are more price inelastic, less
demanding regarding energy efficiency and reliability compared to large scale desalination plants.
Having this into account, potential niche markets for small desalination devices to launch the
technology could be: 1) watermakers for boats, portable water bottles, mini desalination devices in
standard life jackets, or even the production of small desalination devices for disaster zones as
initially thought by the developers of the technology at MIT.
From the niche markets mentioned above, “pleasure marine watermarkers” or “emergency
desalination devices” shows to be the best to launch the ICP technology. The customers for these
appliances are the owners of recreational boats. A study performed by the “Ocean Navigator”
magazine in 2005, indicates that worldwide there are approximately 100.000 sailing yacht between 30
to 70 feet, 20% having a desalinator (information orally provided by Tim Queeney, editor of Ocean
Navigator).
This market was developed mainly during the last decade with the improvement of RO systems and
the automation of maintenance. ICP devices for such markets can be sold with the characteristics of
a luxury product, sales are not so much affected by economic crises and fashion trends may occur as
this technology seems more high-tech and simple than reverse osmosis (RO). Also people
owning/needing desalination systems in boats are able to pay for a different, more reliable and less
energy intensive device; different type of users are available in this niche market; and potentially ICP
maintenance is less demanding than current RO systems.
2.1 ICP Competitors for desalination on boats

The immediate direct competitors for ICP are the established marine “RO systems” and “emergency
water kits”. Costs for fresh water at the ports are normally included in rates for docking the boats, and
for the purpose of this study, it is considered as free. Therefore, accounting water production prices
only, no watermaker system will probably be able to compete with fresh water taken from land in the
near future.
2.1.1 Additional auxiliary components for ICP to work as a desalinating device

In order for the ICP technology to function as desalinating device for boats, it will need auxiliary
components (also existing in RO systems), namely:
Pre-Filtration systems (prevent clogging with particles larger than the microchannels)
Oil-to-Water Separator (ICP does not separate non-charged particles, as some hydrocarbons are)
Low pressure pumping system
Dispenser system to prevent mineral fouling
It was assumed in this study that these auxiliary components would add 1/3 to the total production
costs of the ICP technology, as an approximation (comparing the retail prices for these parts and the
retail prices of the correspondent RO systems).
3. Description of Ion Concentration Polarization (ICP) technology
It is a microfluidic chip which includes a nanojunction to create electric forces that separate any
charged species including ions and bio-particles from a source of water. With an electrical field
through perm-selective nanojunction, both negatively and positively charged species are expelled
from the nanojunction, allowing continuous separation of salts from the seawater (Kim, 2010).
130
The ICP technology for desalination is still in a very early stage. The most advanced apparatus has
one nanojunction, with an inlet flow of 20 microLiter/min, equally split into two streams (fresh water
and brine). The device operates for one hour without clogging, producing freshwater with a salinity
below 600mg/liter (the limit for freshwater). The device uses 2250 µW per hour, with a theoretical
efficiency of ~3,75Wh/Liter. Each microchannel has a cross section of 500µm x 100 µm. A prototype
is planned to be built during the next two years at MIT with 10 by 10 array of unit.
4. Technoeconomical and competition analysis of the efficiency of RO vs. ICP
Currently five players dominate the market for RO watermakers, namely: “Village Marine”, “Sea
Recovery”, “Horizon Reverse Osmosis”, “Spectra Watermakers” and “Katadyn”. Their devices for
recreational boats ranging from the smallest sizes up to medium sized yachts (~50 foot long) have
been analyzed, having outputs from +0 L/h up to 300 L/h, with prices ranging from $2000 to $11000 in
average.
Energy efficiency of ICP desalination can reach 3,75 Wh/L of fresh water produced. This value does
not include extra energy needed to pump water through the system, though theoretically it can
function with water flowing by gravity. RO systems show a great variability regarding energy efficiency
for the same outputs, as some have energy recovery systems (which is reflected in its price). The
most efficient marine RO systems uses 3,3 Wh/L, and the less efficient 37,2 Wh/L
RO total costs for the users can be breakdown into three components: 1) Installation and Investment;
2) Maintenance; 3) Energy consumption. It’s assumed that small watermakers will be installed in
small boats and vice-versa.
4.1 Parameters influencing electrical availability onboard

The habits of the boat owners take an important role in the use of the existing watermakers, and
much of it is related to power consumption, which is applicable either to the RO or ICP desalination
systems. Especially for sailing boats, the auxiliary diesel engine of the boat is normally the only
source of electricity onboard. Owners only run the auxiliary engine of the boat (in average 50HP)
between 2 to 5 hours a day, to charge batteries and have power for other essential navigation
instruments. So the actual maximum production capacity of watermakers per day is limited to much
smaller volumes than the name plate capacity.
They are generally used only in trips that last more than 2 or 3 days, as water taken from land runs
out. The size of the boat is related to the frequency that the owner will use it to make a long trip
without stops in marinas or other refilling places. Also smaller boats are used much less often for
long trips than larger boats. The strategy of watermaker owners varies. Some use small watermakers
not to replenish the whole amount of water used, but just to reduce the rate at which fresh water runs
out in the deposits, so they can finish the trip still with some water onboard. Others, specially the
owners of larger boats that use showers, washing machines and other similar luxuries onboard, tend
to make a much more intense usage of the watermaker device, running it to actually compensate the
full rate of fresh water consumption onboard. These two strategies will have implications on the:
Volume of water produced during the lifetime of the device;
Maintenance requirements (in both cases maintenance is demanding and different, changing if
the devices are used occasionally or frequently);
Size of device to be acquired.
To be able now to calculate lifetime total number of working hours and maintenance intensity,
different usages of watermaker devices were considered depending on the output range of each
device, described in table 1. These assumptions will have a direct impact on results obtained for the
RO total costs, as it directly influences estimated lifetime total costs for maintenance and energy
usage.
Membrane lifetime varies widely, depending specially if maintenance is properly done on time, and on
the type of water being filtrated. In this study it was assumed the lifetime of membranes to be the
same independently of the type of device. It was assumed that larger devices tend to be used more
often and maintenance schedules tend to be more rigorous, extending membrane lifetime. In the case
of smaller devices it was assumed that they are only used occasionally, and that maintenance would
be eventually less effective. Information on the accuracy of the assumptions regarding maintenance
131
times, and number of liters produced in average by owners of watermakers, was very hard to obtain,
as the sources of information were made through direct contact with manufacturers, retailers and
installers that gave sometimes different answers.
Only the basic costs of running a watermaker device were assumed: Cost of membrane replacement;
pre-filter elements; charcoal replacement; alkaline and acid maintenance liquids. Membrane costs
were adjusted to the size of each device in this study. Regarding cost of energy supplied onboard, it
was assumed that all boats have some sort of diesel engine with a constant efficiency of 45% for any
regime, and that electrical generators onboard have 90% efficiency. Therefore, to obtain 1 Wh, will be
needed 8,88 KJ of diesel. Each liter of diesel costs $0,79 by 2009/2010 US diesel prices (~$3 per
Gallon) (EIA, 2010) and has 38,6MJ, so to generate 1Wh, ~0,23 mL of Diesel will be need using such
a system costs of ¢0,018/Wh.
Table 1: Assumptions used to calculate lifetime total number of working hours and maintenance
intensity for boats using desalinators for different output capacities of freshwater
Watermakers output range
0 to 60 60 to 100 100 to 130

L/h L/h L/h
Operating hours
Average number of days in trips that RO are used 3 days

Number of trips per month in which RO system is used 1 2 8
Average Number of hours that the RO system works per day (if
2 hours 100 hours 300 hours
used)
RO total Lifetime (years) 15 years
Maintenance
Membrane duration (years) 3 years
Pre-Filter Elements Replacements per year 6x 8x 10x
Charcoal Replacements per year 4x
Alkaline and Acid antifouling solutions Refill per year 2x 6x 9x
4.2 Comparison of RO total costs and ICP wafer production costs

From direct contacts with the RO manufacturers and distributers, it was gathered information on each
device from the 5 brands mentioned before regarding costs of: purchase, installation, maintenance
and operation. This information is summarized in figure 1 together with the estimated production costs
for ICP devices for the same outputs. It was assumed that smaller devices will proportionally produce
less water than bigger ones throughout their lifetime, as they are used much less often, Its almost
negligible the costs with energy in smaller devices compared with the maintenance and acquisition
costs for the users.
Comparing estimated production costs of ICP and current market prices of RO, only for small water
outputs the ICP technology can be competitive, namely for devices up to 47 L/h, with productions of at
least 500 wafers/month. With an estimation of 100 wafers/month, only smaller devices up to 6 L/h
seem to have an advantage over RO. It is important to mention that ICP costs in this study do not
assume the costs of building a prototype with several microchannels, product development, testing
and costs of integration with auxiliary devices.
Production of smaller devices imply that one wafer will be enough for several devices, smoothing
setup costs impact in the cost of each device, and vice-versa for larger devices that will need several
wafers to produce fewer devices per month.
It was assumed that between RO manufacturing costs, RO manufacturing prices and RO retail prices
there would be a 20% profit margin in each step. Taking this into account, estimated manufacturing
costs of ICP and RO were compared for the initial market segments where ICP seems to have an
advantage, as it can be seen in figure 4.
132
Figure 1: ICP production estimates vs. 15 years lifetime cumulative costs of RO watermakers (retail
price, installation, maintenance and energy)
Figure 2: Comparison of ICP and RO estimated manufacturing costs (initial market segments for
watermakers)
It is possible to see that ICP technology has a bigger advantage over the very first part of the
watermakers segment for devices with outputs between 1 and 13 L/h accounting both costs
estimations obtained. These devices have manufacturing costs between $500 and $2400 as table 2
indicates. This market segment is totally dominated by the Katadyne Company. The smallest devices
not belonging to this company have outputs ranging between 22 and 32 L/h.
4.3 Sensibility analysis to costs comparison

A Sensibility analysis to production costs of equivalent ICP devices was made to the initial RO market
segment (0,9 to 13 L/h) for three different scenarios in order to access the reliability of the data
obtained.
133
Table 2: Manufacturing costs

RO Brand
Katadyn company Village
Marine
company
Output 1 L/h 5 L/h 6 L/h 13 L/h 22 L/h
(L/h)
RO Manufacturing Costs $509 $1124 $1841 $2353 $2555
Production of Costs ($): wafer + setup and $100 $507 $642 $1454 $2479
500x wafer / installation ($)
month Costs ($): $147 $743 $941 $2130 $3633
wafer + setup and installation +
auxiliary devices
Number of devices produced per 5534 1094 864 382 224
month
Production cost difference in % -71% -34% -49% -9% +42%
between ICP and RO
Production of Costs ($): wafer + setup and $212 $1074 $1360 $3078 $5249
100x wafer / installation ($)
month Costs ($): $349 $1766 $2237 $5064 $8636
wafer + setup and installation +
auxiliary devices
Number of devices produced per 1107 219 173 76 45
month
Production cost difference in % -31% +57% +22% +115% +238%
between ICP and RO
Under the first scenario if total production costs increase 25%, then ICP is still competitive for small
devices up to 6 L/h. Though, this is valid only when using the most favorable production costs
estimation of 500 wafers per month. Using the estimation of 100 wafers per month, only a cost
advantage exists for the smallest desalination device. In the second scenario, the cost of auxiliary
devices together with product development (integration of electronics, software and esthetics) would
be equal to 100% of the setup and production costs of the wafers (before was only 1/3); and setup
and production costs would be 40% higher than the estimations obtained. Under these
circumstances, only the smallest device would be profitable with ICP and with productions with 500
wafers per month. Finally in the case of the production costs being 20% lower than expected, the
smaller segment of watermakers would still be the main target for the ICP technology. Larger devices
start to be eventual targets for ICP, but due to the market price variability in these segments for
similar outputs, market penetration would probably be harder.
5. Competition analysis: emergency desalination devices
The smallest of the RO devices is specially aimed at emergency situations (Survivor 06). Apart from
RO, two types of desalination systems exist that are applicable to recreational or small sized boats,
namely: passive desalination units and marine solar still. Both options produce small amounts of
water per day, but are very cheap to acquire. Table 3 compares these devices with ICP technology,
and table 4 gives the breakdown costs for an emergency ICP desalination device and table 5 its
general specifications. Such device would have an output of 1 L/h (100 microchannels), having
coupled 6 rechargeable 9V Batteries (0,5Ah) and a 5W solar panel (20x30) cm.
Table 3: Comparison of emergency desalination devices with ICP technology
Desalination Output Retail Price Observation
method
ICP ICP 1 L/h ~$600 Estimation with 60%
(with no power source) profit margin
ICP ICP 1 L/h ~$800 between
(with power source) manufacturing cost
and retail price)
Katadyne Survivor 06 RO 0,9 L/h (40 hand ~$800 Can produce water
strokes/min) on demand, though
very physically
demanding (hand
powered).
SeaPackEmergency Forward 0,5 L/ 5h (Total ~$150 Very light, used by
134
Desalinator Osmosis output: 10 L) US army, but

produces very
sugary water.
Desalination Output Retail Price Observation
method
Solar Still Evaporation 1-4 L/day ~$150 Depends on solar
availability.
Table 4: Costs breakdown for ICP portable emergency desalination device with 1 L/h
Price of battery Price of solar Total manufacturing cost of the
Cost of the pre-filter ($)
pack ($) panel ($) device ($)
$90 $30 $50 $304
Table 5: General specifications of the ICP emergency desalination device with 1 L/h
Hours needed to
Output of solar Total estimation of the Approximation for potential Volume of
Charge the
panel (Wh) device weight (kg) the device (L)
batteries (h)
5 Wh 5 hours 3,6 kg 4L
6. Defining which class of device output to aim

The smaller market segment in the RO devices aiming emergency for boats, dominated by the
Katadyn company (the stronger competitor), seems to be the most promising one to launch the ICP
desalinaion technology. Two classes of devices stand out here: the smaller one, and truly portable
with 1 L/h of output, but totally hand powered; and the smallest electrical device available in the
market with 6 L/h output. Adaptation of the ICP technology for the niche market of portable
desalination devices with very small outputs aiming emergency situations is probably the best option
accounting that: 1) reliability issues may arise with the first ICP devices; 2) maintenance procedures
may need some upgrades through the initial phases; and 3) devices that are meant to provide a large
share of the water supply during a longer trip need to have a minimum of reliability record.
7. Cost production targets for scaling up
Analyzing the cost per wafer needed to get a breakeven with the RO prices, shows that smaller
devices can be build with much higher costs per wafer using ICP technology, than larger devices, as
figure 3 shows. It was assumed productions of 500 and 100 wafers per month, and that auxiliary
devices will add more than 1/3 of costs. Under these circumstances the impact of the wafer cost in the
final production costs, was respectively 68% and 57% (the fewer the number of wafers produced, the
higher the impact of setup and installation costs per device). This is why with larger productions,
wafer costs can be higher to achieve breakeven with RO.
Figure 3: ICP minimum wafer costs necessary to reach breakeven with RO manufacturing costs
135
8. Roll-out for boat application

The most promising product for the deployment of ICP is the emergency desalination unit which can
also be used as a continuous source of water in boats with larger power supply availability. To
produce such a product, parallelization of multiple microchannels in a single wafer is necessary to be
developed in such a way that the integration of the wafer in a simple casing allows the separation of
fresh and brine that will come out, and if possible allowing the water flow to be made by gravity only,
as limited energy will be available in case of emergency.
Still development of an automated process for the production of the nafion nanojuntion is mandatory
for the mass production.Product development, specially the integration of the ICP technology with the
auxiliary devices is needed, together with the development of an exterior design to make it look like a
robust luxury product. This is mainly the point where funding from various investors and sources (e.g.,
partnerships with established companies in the field, new venture capitals, etc) is necessary to be
explored so to be able to produce this product and technology while , the distribution channel will play
a key role in the initial deployment.
9. Roadmap and future applications
As a result of the previous technoeconomical analysis a roadmap is proposed for the deployment of
the technology and is presented in Figure 4 with its four main phases.
Phase 1: small watermakers for boats. ICP technology is a disruptive innovation, and this low
capital intensive niche market, can enable to quickly become cash flow positive;
Phase 2: medium/large marine watermakers. After proving reliability in smaller boats, move to the
larger market of the rest of the watermakers range.
Phase 3: Disaster relief. Once established credibility in the boat smaller “niche” market, it will be
much easier to achieve buy-in from military, government and NGOs for disaster relief purposes.
Hence, water desalination for disaster relief may be the second application.
Phase 4: Large-scale industrial use industry has large water desalination requirements which
currently use very capital intensive technologies. Once perfected for boats and disaster zones, it
will be ready to develop it for industrial use.
Figure 4: Roadmap for the deployment of ICP technology (iTeams, 2010)
136
10. Future steps

In this case study it was assessed the economic viability and a possible disruptive business model to
deploy on the ICP technology for desalination for the investors interests. According to well-known
authors on product innovation and management (Christensen, 2004), this case study falls into the
category of the so-call disruptive technologies. ´Disruptive technologies create growth in the industries
they penetrate or create entirely new industries through the introduction of products and accordingly
services that are dramatically cheaper, better, and more convenient. These disruptive technologies
often disrupt workforce participation by allowing technologically unsophisticated individuals (investors)
to enter and become competitive in the industrial workforce. Disruptive technologies offer a
revolutionary change in the conduct of processes or operations. Disruptive technologies can evolve
from the confluence of seemingly diverse technologies or can be a result of an entirely new
technological investigation´ (as in the present case study) (Ronald, 2003).
Small markets niches were identified as they probably are the best option to deploy this early stage
technology. The one shown to be the most promising was the market for recreational boats, existing
at least 100.000 sailing boats worldwide plus powerboats. Desalination devices can be seen as luxury
product for boats, with customers less sensitive to price, allowing sales not to be so much affected by
economic crisis. Also only during the last decade this market started to grow, having roughly only 20%
of the existing small to medium size recreational boats a desalination device. Therefore technology
shifting from existing RO devices is not an issue.
No costs of creating the initial prototype, product development and testing and costs of integration
with auxiliary devices, was assumed in this study. If we assume that the technology will reach this
initial phase, production costs estimations for ICP were calculated to manufacture desalinating
devices for boats, and a market research was performed to the direct competitors: RO watermakers
and emergency desalination kits. In this market, the segment for emergency watermaker devices is
the one where ICP can have the biggest advantage. This advantage only exists if initially large
amounts of ICP wafers are produced per month. Though, as production does not need to be
continuous as it is ordered to external companies, it allows reduced number of sales in a first phase (a
production of 6” 100 wafers per month can be used to manufacture ~1100 emergency desalination
devices with 1 L/h output).
This product seems to be viable even if estimated production and setup costs obtained during this
study increase 25% for monthly manufacturing of 6” 100 wafers. Even in the case of a 40%
production and setup costs increase, ICP is still viable for emergency devices (with a 500 wafers per
month production). One of the next most important steps is to choose the accurate strategy of
launching the ICP technology in the smaller boat market segment of emergency kits, that can allow a
company and further on the investors to cash enough money to bank further developments, as energy
efficiency improvements and production costs reductions, and reach to more competitive markets
(e.g. large scale plants).
Acknowledgments
The authors wish to thank Dr. Luis Perez-Breva, Professor Fiona Murray, Shih-Hung Chen, Wei Li,
and alumni Wendy Elliot from MIT for valuable comments. This work was supported by
SFRH/BD/44969/2008 and ERA-FENCO/0001/2008 grants from Fundação para a Ciência e a
Tecnologia (FCT), Portugal.
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138
Phasic Effects of R&D Subsidy on Firm Innovation
Kawon Cho
Science and Technology Policy Institute, Seoul, Korea
Kawoncho0@gmail.com
Abstract: R&D and innovation have emerged as crucial factors for economic growth and welfare, and
government policies designed to promote them are widely observed all over the globe. Particularly, financial
supports including direct R&D subsidies are among the most effective policy measures. Accordingly, there have
been a number of theoretical and empirical studies on effects of government R&D subsidy. In the literature,
however, the discussion has been focused on its impacts on R&D investments. This report extends the
discussion to analyze the whole procedure of firms' innovative activities: i.e., the stages of (1) participating in
innovative activities; (2) deciding investment level; (3) achieving (technological) innovation; and (4) reaping
(economic) outcomes of innovation. Utilizing the detailed information on firms' characteristics and innovative
activities of 2008 Korea Innovation Survey, effects in the four innovation stages are estimated separately by
Probit or OLS. Lastly, the results are compared with the matching estimators in each stage. The results show that
a government R&D subsidy (1) increases the probability of participating in innovative activities by 50%, (2)
increases the R&D investment level by 0.44%, (3) the probability of achieving technological innovation by
13~14%, and (4) the economic outcomes of innovation is little affected by government R&D subsidies.
Keywords: R&D subsidy, innovation, Korean innovation survey, matching estimation
1. Introduction
The increasing proportion of technological knowledge accumulation and innovation in economic
growth has led to a global phenomenon of government’s intentional support to promote firm
innovation, and the effects of these policies have been discussed theoretically and empirically.
The majority of the literature is focused on just one of the various facets of firm innovation procedure,
particularly on R&D investment. However, firms’ innovation procedure comprises of various activities
and outcomes from firm participating in innovation activities to economic outcome, and R&D level
decision is just one of the procedure decisions. Granted, R&D investment is of large importance for
firm innovation, and the biased literature reflects it, but part of the bias is the result of lack of usable
data.
The first global data project on firm innovation, the Community Innovation Survey (CIS), and
accompanying country specific innovation survey provide an opportunity to overcome the limitations
of such data. The Korean Innovation Survey (KIS) is a part of the project, and information on firm’s
R&D investment and other various product innovations, process innovations, non-technological
innovation, sales from innovation, and patents can be used with various firm characteristics.
On the other hand, recent econometric methods allow much more rigorous testing on policy effects on
innovation outcomes. Various methods have been introduced to overcome the most significant
obstacle of selection bias in policy evaluation, as well as the endogeneity issue.
Utilizing the development in data and estimation methods, this study estimates the effects of
government subsidy on firm innovation activity and procedure. Specifically, going beyond the analysis
of R&D investment in existing literature, the study estimates various effects of subsidy in different
phases of innovative activities. The four phases of innovative activities are participation decision, R&D
level decision, innovation outcome creation, and economic outcome; and the effects of subsidy are
estimated at each of the phases. Estimation methods include mainly matching estimation to minimize
endogeneity, and these results are compared with OLS or probit regression estimation results.
2. Literature
As previously mentioned, majority of the literature on R&D government subsidy, or innovation related
government policy effects is generally on the effect of government assistance on R&D investment,
analyzing whether government support crowds out R&D investment (crowing-out effect) or
additionally induce R&D investment (addivity effect).
Most notable studies are Busom (2000), Lach (2000), Wallsten (2000), Aerts & Czarnitzki (2004),
Czarnitzki & Hussinger (2004), Cerulli & Poti (2008), and Hall et. al. (2008). Many of the study results
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show that government subsidy partially crowds out public investment, but does not completely crowd
out the entire amount of the subsidy; thus, partial crowding-out effect and partial additiviy effect are
found simultaneously. Only Wallsten’s (2000) analysis showed complete crowding out effect and
claims no government assistance effect. In the studies, various econometric analysis methods have
been utilized including the Tobit model, probit model, and GMM. In particular, Aerts & Czarnitzki
(2004) uses matching estimation similar to this study.
Meanwhile, as far as we know, one of the main topics of this paper on how government assistance
policy affects “innovative activity participation” has yet to be studied. There are possibly two reasons.
First, the lack of data on firm’s innovative activity “participation” decision made the empirical study
impossible. Second, the firms receiving government assistance were already participating in
innovative activity for the most part, and even if there were any usable data, the analysis of innovative
activity participation would been difficulty due to the data structure. This study attempts to partly
resolve this issue via innovation survey and matching estimation.
Studies on the main topic of this study, government assistance and innovative outcomes, are still very
limited, but there are some studies using innovation survey results (Cerulli & Poti, 2008 and Czarnitzki
& Hussinger, 2004). They verify positive effects in general, but are still few and limited, and require
much further investigation using various data and methods.
Given the literature, this is the first study about the effects of government assistance on “innovative
activity participation” and the first to differentiate the effects of government assistance on innovation’s
various phases.
3. Theoretical discussion: Firm innovative activity’s phasic differentiation and
subsidy effects
Firm innovative activity process can be illustrated in <Figure 1> below into 4 phases: (1) innovative
activity participation decision, (2) innovative activity level decision, (3) innovative activity technological
outcome creation, specifically innovative success, and (4) innovative activity’s economic outcome
creation.
Clearly, the 4 phases are not in linear order but a simultaneous process or process requiring
feedback. Government subsidy effects can appear across all phases variously and policy evaluation
limited to the 2nd phase is likely to under-evaluate the policy effects.
Effects on innovative activity participation decision: Participation Effects
Participation effects refer to the effect of firm participating in innovative activity via the ability to access
to government subsidy after initial withdrawal. It is expected to have a positive effect based on the
following reasons. First, small firms or newly established firm that wanted to pursue innovative activity
but could not due to liquidity constraints or pressure on capital, can proceed with innovative activity
with the elimination of liquidity constraints. Second, firms that were pessimistic about innovative
activity’s future value due to high market interest rates on innovative activity cost, can participate in
innovative activity with the cost reduction effect from government subsidy.
Effects on innovative activity level: Investment Effects
Conditional on participating innovative activity, thus only for the firms that have decided on
participating, the investment effect measures the effect of government subsidy on innovative activity
level or intensity. Majority of the literature on government subsidy effects on R&D investment is
analyzing this effect. As discussed in several studies, government subsidy may have additional
1
positive effects (additivity), but it may also crowd out private investment (crowding-out). Existing
empirical studies have contradicting conclusions and are still in debate. The dominance of additivity or
crowding-out effect is likely depending on technology, market, and firm characteristics, and thus the
effects must be tested empirically.
Effects on innovative activity technological outcome: Innovation Effects
1
Lach (2000) provides a detailed discussion on crowding-out effect of government assistance.
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Conditional on innovative activity participation and given level of investment, the innovation effect
measures the effect of government subsidy on technological innovative success (research
productivity). The reasoning for such effect is based on the following. First, government subsidy and
its accompanying technological/administrative assistance may directly contribute to firm’s research
productivity. Second, stable capital inflow when receiving government subsidy reduces financial
efforts and allows firms to safely put more human resources to innovative activity. Third, innovative
projects with high probability of success, but with difficulty in raising capital due to some technological
or firm characteristic, can be pursued with government subsidy assistance. Fourth, ex-post monitoring
and evaluation process for government subsidy recipient firms provide extra incentives for innovative
efforts.
However, further innovative efforts may not result due to lack of monitoring and evaluation process or
due to moral hazard for recipient firms. For the same reasons, productivity may even be lower than
privately funded capital. Therefore, of the possible effects, 3 are positive and the last negative, and
the overall effects must be tested empirically.
Effects on innovative economic outcome: Market Effects
Given level of technological innovative success, market effect measures the effect of government
subsidy on market success based on technological outcome. First, there may be positive effects on
the market success from the marketing effect of recognition and reputation as a recipient of
government assistance. On the other hand, for the reasons aforementioned, firm’s moral hazard may
prevent positive economic outcomes. This effect must also be tested empirically.
Figure 1 below matches the 4 subsidy effects on firm’s innovative activity.
Figure 1: Government subsidy effects on different phases of firm’s innovative activity decision
4. Econometric model
Prior to introducing the econometric models, we need to discuss the major analysis issues when
empirically analyzing government subsidy. There are two main issues.
First, as a common issue when analyzing policy effects empirically, there is the endogeneity problem
in policy recipient selection or self selection. For example, if the government’s R&D subsidy focuses
on distributing to firms with high innovation outcome based on some special characteristics, part of
the finally observed differences will be attributed to the initial differences. Without proper control, all
results are attributed to policy differences. Thus, if subsidy distribution follows a ”promising firm
selection” method, there is positive bias – an over-estimation of policy effects. On the other hand, if
governments R&D subsidy favors innovation of firms with disadvantageous environment or
characteristic with respect to innovation, a “lagging firm support” method, it results in negative bias –
an under-estimation of policy effects.
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Kawon Cho
Second, (over-control issue, forthcoming)
To address these issues econometrically, this study uses a matching estimation method. The
matching estimation does not perfectly solve the selection issue, but allows comparison with as
closest as possible to a random experiment, reducing bias. (over-control issue, forthcoming)
Specifically, the nearest neighbor matching estimation allowing individuals to be used as a match
more than once, following Abadie & Imbens (2002), is applied, and STATA routine as introduced in
Abadie et. Al. (2001) is used. Estimation results differ slightly by number of matching, and empirical
analysis uses estimates based on different number of matching.
According to the previous theoretical discussion, phasic estimation equation list is as follows.
Table 1: Estimation equation list
Estimation
Explanation Estimation Method
Equation
Participation Estimation of government subsidy on innovative Comparison of probit and
Equation activity participation decision matching estimation
Given innovative activity participation, estimation of
Investment Comparison of OLS and
government subsidy effect on level of innovative
Equation matching estimation
activity, i.e., the R&D level investment
Innovation Given innovative activity level, estimation of Comparison of probit and
Equation government subsidy effect on innovative success matching estimation
Given level of innovation, estimation of government
Innovation Sales Comparison of OLS and
subsidy effect on innovation’s economic outcome, i.e,
Equation matching estimation
on innovative revenue
Participation Effects: Effects of government subsidy on innovative activity participation

decision
Prior to analyzing the effects of government subsidy on innovative activity participation via matching
estimation, a simple probit model is estimated then compared. Specifically, all firms in the sample are
estimated in the following probit model.
Pr is the operator indicating the probability of the event in the parenthesis, ACTIVE is the indicator
variable for innovative activity participation status, is the standard normal cumulative density
function, and , , are parameters to be estimated. Also, SUBSIDY is the indicator variable for
government subsidy recipient status, X is the vector of control variables of various firm characteristics
expected to affect the likelihood of receiving subsidy. Meanwhile, the goal of this study is the
matching estimation, and the SATE (Sample Average Treatment Effect) model is used using all
variables included in X. The result of the SATE is compared with the β1 from the probit estimation.
Investment Effects: Effects of government subsidy on innovative activity level
Next, innovative activity level or innovative investment level is estimated for firms participating in
innovative activity in the following OLS model.
The independent variable LNRD is the natural log value of R&D investment. For investment effect, the
SATE estimate via matching estimation is compared with the β2 from the OLS estimation.
Innovation Effects: Effects of government subsidy on technological innovative success
Estimation of subsidy effects on innovative success is also only for firms participating in innovative
activity, and product innovation status is used as the variable for technological innovation. Similarly,
the following simple probit model is used.
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INDP is the indicator variable for successful product innovation in the time period. Control variables
include R&D investment level. Thus, subsidy effect is estimated for a given level of R&D investment
level and examines only additional effects of subsidy on R&D investment’s innovative productivity. For
the innovation effect, SATE estimate via matching estimation is compared with β3. Except here, LNRD
is used also as a matching variable along with all the variables included in X.
Market Effects: Effects of government subsidy on innovative market outcome
Subsidy effect on innovative economic outcome is for firms successful in product innovation, and is
estimated through the following OLS model.
The dependent variable is the natural log value of innovative sales, and explanatory variables are the
same variables from the innovation effect estimation. For market effects, the SATE estimate via
matching estimation is compared with β4 from the OLS.
5. Data
The data used for empirical analysis is KIS2008. KIS2008 is the firm innovation survey for 2005-2008
of manufacturing firms (Korean Standard Industrial Classification (KSIC) 15-37) with more than 10
employees. The survey’s main concepts and methods follow OECD Oslo Manual (OECD/Eurostat,
2005) and fall in line with several European CIS following the similar method. Original data includes
3081 firms representing all firms, and empirical analysis uses 2852 firm after filtering for missing
observations. Table 2 shows summary statistics for main firm characteristics, government subsidy
recipient, and dependent variables such as innovative activity participation, R&D, product innovation,
and innovative sales. All statistics are for the entire sample regardless of innovative activity
participation.
Table 2: Summary statistics: Firm characteristics, R&D subsidy, firm innovation
variables mean standard deviation

SIZE 183.17 791.14
AGE 15.35 22.34
SALES 87158 617537
EXPORT 0.1010 0.2341
FDI 0.0015 0.0606
VENTURE 0.1110 0.3143
INNOBIZ 0.1475 0.3547
LAB 0.3658 0.4817
RDL 0.0394 0.0880
GROUP 0.0981 0.2975
UNION 0.1447 0.3519
PATSTOCK 23.37 327.52
SUBSIDY 0.1875 0.3903
ACTIVE 0.4891 0.5000
RD 3237.35 29107.73
INPD 0.3157 0.4649
INSALES 75315 1482408
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The firm characteristics introduced in the first panel of <Table 2> is based in 2005 2 , the beginning of
the observation period, and the definitions and units as follows.
SIZE: Firm size represented by number of employees in head count.
AGE: Variable for firm age, 2007-established year.
SALES: Firm sales in million Won.
EXPORT: Proportion of exports out of the firm’s total sales, set as 1.
FDI: Proportion of FDI out of firm’s total sales, set as 1.
VENTURE: Indicator variable for being officially designated as a venture firm by the government. The
average is 0.1110 within the sample; the proportion of firms designated as venture firm is 11.1%.
INNOBIZ: Indicator variable for being officially designated as an Innobiz firm. Firms designated as
Innobiz is 14.8% of the entire sample.
LAB: Indicator variable for continuous R&D research. Responding “by R&D institute” or “by R&D
department” on the question, “How does your firm perform R&D activities?” receives value of 1, 0
otherwise.
RDL: Proportion of R&D personnel out of all employees.
GROUP: Indicator variable for firm type. Selecting “affiliated companies of Korean conglomerate” or
“affiliated companies of foreign conglomerate” on the type of enterprise in the survey receives value of
1, responding “independent firm” receives value of 0.
UNION: Indicator variable for existence of labor unions. On average, 14.5% of the sample firms have
unions.
PATSTOCK: Cumulative number of patents indicating past innovative competence, responding to

“What is the number of registered patents at the end of 2007?”.
Government subsidy recipient status in the second panel of <Table 2> includes 2005-2007, and the
definition is as follows.
SUBSIDY: Indicator variable showing government subsidy recipient. Within the entire sample, 18.8%
received government subsidy.
The last panel of <Table 2> is the main dependent variable of interest, innovative activity , and other
related outcome variables. The time period included 2005-2007 and carries the following definition.
ACTIVE: Indicator variable showing innovative activity participation, irrespective of innovative

success. Firms answering “yes” to any of the various innovative activity including R&D receive value
of 1.
RD: R&D investment in million Won.
INPD: Indicator variable showing product innovation success. Firms answering to have produced one
or more product innovation within the observed time period receive value of 1.
INSALES: Sales from successful product innovation, in million Won.
Next, Table 3 shows the differences in firm characteristic variables when splitting the entire sample
into two groups of subsidy recipient and non-recipient firms.
2
PATSTOCK is based in 2007 by construction of the survey.
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Kawon Cho
Table 3: Firm characteristic differences between subsidy recipient and non-recipient firms
Firm Characteristics Recipient Firm Non-Recipient Firm Difference
463.03 118.61 344.43
SIZE
(71.58) (7.09) (37.40)
18.87 14.54 4.33
AGE
(0.60) (0.49) (1.07)
264538.6 46235.6 218303
SALES
(55644.46) (5829.87) (29340.28)
21.06 7.57 13.49
EXPORT
(0.013) (0.004) (0.011)
0.04 0.18 0.14
FDI
(0.0002) (0.0014) (0.0029)
29.16 6.94 22.22
VENTURE
(0.020) (0.005) (0.014)
42.06 8.45 33.60
INNOBIZ
(0.021) (0.006) (0.016)
88.03 24.70 63.33
LAB
(0.014) (0.009) (0.020)
11.29 2.24 9.04
RDL
(0.006) (0.001) (0.004)
19.25 7.63 11.62
GROUP
(0.017) (0.006) (0.014)
28.22 11.30 16.93
UNION
(0.019) (0.007) (0.017)
82.05 9.83 72.22
PATSTOCK
(27.39) (4.08) (15.65)
*All values are groups’ respective mean (standard deviation) and difference (standard error).
According the numbers, recipient firms are larger and older, have larger sales, and have higher export
proportion than non-recipient firms. Also, all variables related to innovative ability, such as VENTURE,
INNOBIZ, LAB, RDL, and PATSTOCK, are much higher on average for the recipient firms.
Lastly, the differences in innovative activity and outcome are shown in <Table 4>. In accordance with
the econometric model above, RD and INPD are restricted to innovative activity participating firms
and INSALES is restricted to product innovation successful firms.
Table 4: Differences in innovative activity and outcome between subsidy recipient and non-recipient
firms
Number of
Innovation Recipient Firm Non-Recipient Firm Difference
Observation
0.994 0.373 0.622
ACTIVE 2854
(0.075) (0.484) (0.021)
11651.89 3519.21 8132.68
RD 1396
(57204.77) (26945.26) (2269.56)
0.776 0.565 0.212
INPD 1396
(0.417) (0.496) (0.026)
194982 275451 80469
INSALES 901
(2057033) (3036294) (176054)
Foremost, the difference in likelihood of innovative activity between subsidy recipient firm and non-
recipient firm is 62.2% and R&D investment difference is 8133 million Won. The likelihood of
innovative activity for a recipient firm is nearly 100%, and among the non-recipient firms 37.3% still
participated in innovative activity. Looking at the effects of government spending on the result of
technological innovation, the difference in likelihood of innovation between subsidy recipient and non-
recipient firm is 21.2%. Meanwhile, market innovation outcome, INSALES, is actually higher for non-
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Kawon Cho
recipient firm with 80469 million Won more in innovative sales, but the difference is statistically
insignificant.
6. Results
Effects of government subsidy on innovative activity participation: Participation Effects
Analyzing the effects of government subsidy on innovative activity participation decision, innovative
activity participation variable (ACTIVE) is first regressed on receiving subsidy (SUBSIDY) via probit
estimation and is shown in <Table 5>. 3 In principle, all 2854 firms in the sample are used in the
estimation, and all firms characteristic variables from the first panel in <Table 2> are used as control
variables. However, among firm characteristic variables LAB and RDL are by definition conditional on
innovative activity participation and perfectly predict innovative activity participation (ACTIVE=1) if the
variables are not zero. Thus in the real estimation, only 1807 firms with both the variables of zero are
used, and the estimation results are restricted to firms without dedicated R&D institute or department.
Estimation results show that subsidy recipient firm is 75.5% more likely to participate in innovative
activity than a non-recipient firm. Moreover, firms with high export proportion and a large number of
patents accumulated from the past are more likely to pursue continuous innovative activity.
Table 5: Effects of government subsidy on innovative activity participation: probit estimation results
ACTIVE marginal effect p-value variable mean
SUBSIDY 0.7545809 0 0.034864
SIZE 0.0000408 0.712 50.6729
AGE 0.0000323 0.89 12.8993
LNSALES 0.0078926 0.366 8.14989
EXPORT 0.1425406 0.009 0.048094
FDI -2.163969 0.409 0.00011
VENTURE 0.1450735 0.006 0.049806
INNOBIZ 0.1746395 0.001 0.051467
GROUP 0.0053368 0.929 0.034864
UNION -0.0114787 0.814 0.05368
PATSTOCK 0.040197 0 0.746541
observed probability 0.1931378
predicted probability 0.1870934
However, the estimation results may bias the subsidy effects as aforementioned. For example,
unobservable firm characteristics such as innovative potential or management’s attitude toward
innovation may positively affect SUBSIDY and ACTIVE. These external effects all would show up as
subsidy effects in the estimation, and over-estimate the true effects. To mitigate this problem, the
following introduced the estimated results of SATE of receiving subsidy (SUBSIDY) on innovative
activity participation (ACTIVE) via matching. Firm characteristic variables are all used in the matching,
and SATE are estimated and compared for the number of matching of m=1, m=4, and m=8.
Table 6: Effects of government subsidy on innovative activity participation: matching estimation
results
outcome variable: ACTIVE treatment variable: SUBSIDY
number of matching m=1 m=4 m=8
SATE (standard error) 0.4912 (0.0418) 0.4952 (0.0398) 0.5060 (0.0394)

matching variables: SIZE AGE LNSALES EXPORT FDI VENTURE INNOBIZ LAB RDL GROUP UNION
PATSTOCK
3
All probit and OLS estimations in the study use heteroscedasticity robust estimation.
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Kawon Cho
Estimation results show receiving subsidy increase innovative activity participation by 50% on
average. Estimated SATE for number of matching m=1 is 0.4912, m=4 0.4952, and m=8 0.5060, all
within a robust range. These results are a large decrease from probit estimates of 75.5%, and the
probit estimates are likely over-estimating the subsidy effects. Matching estimation cannot completely
resolve the endogeneity issue, and may still over-estimate, but the significance of SATE estimates are
large both statistically and economically. As expected, receiving subsidy can be concluded to
positively attribute to innovative activity participation.
Effects of government subsidy on innovative investment level: Investment Effects
Analyzing the effects of government subsidy on innovative investment level, particularly R&D
investment, R&D (LNRD) is first regressed on government subsidy (SUBSIDY) via OLS estimation. In
the estimation, 1355 firms participating in innovative activity are used, and all firm characteristic
variables from <Table 2> are included and controlled for.
In <Table 7>, the estimation results show receiving subsidy increases firm’s R&D investment by
0.44%. In addition to receiving subsidy, variables generally expecting to have positive effects on R&D
investment, firm size, sales, export, FDI, designated as venture, R&D institute, and R&D employee,
are verified empirically.
Table 7: Effects of government subsidy on R&D investment: OLS estimation results
LNRD coefficient p-value
SUBSIDY 0.4383909 0
SIZE 0.0002147 0
AGE 0.005339 0.104
LNSALES 0.4838693 0
EXPORT 0.3346349 0.003
FDI 0.2848327 0
VENTURE 0.2324944 0.005
INNOBIZ -0.0549917 0.465
LAB 0.8158652 0
RDL 3.883594 0
GROUP 0.1926248 0.074
UNION -0.086616 0.379
PATSTOCK 0.0001356 0.085
constant 0.4432655 0.066
R-squared 0.6531
Next, analyzing the effects of government subsidy on innovative investment level, SATE of receiving
subsidy (SUBSIDY) on R&D investment (LNRD) is estimated via matching.
Table 8: Effects of government subsidy on R&D investment: Matching estimation results
outcome variable: LNRD treatment variable: SUBSIDY

matching variables: SIZE AGE LNSALES EXPORT FDI VENTURE INNOBIZ LAB RDL GROUP UNION
PATSTOCK
Estimation results show receiving subsidy increases R&D investment by 0.44% on average, very
similar to the simple regression analysis. However, SATE estimates are 0.3715 for number of
matching m=1, 0.4433 for m=4, and 0.4987 for m=8 such that they vary with the change in the
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Kawon Cho
number of matching. Thus, while a direct comparison with the above OLS results is difficult, the effect
of receiving subsidy on R&D investment falls in the interval of 0.37%~0.50%, and the two results can
be considered identical. Also, both estimation results are statistically very significant, concluding that
even after innovative activity participation effects, government subsidy has very positive effects on
R&D investment.
Effects of government subsidy on technological innovation success: Innovation Effects
In analyzing the effects of government subsidy on technological innovation success, represented by

product innovation, product innovation (INDP) is regressed on receiving subsidy (SUBSIDY) via probit
estimation. Of the sample, 1355 firms that participated in innovative activity are used in the estimation
and firm characteristic variables are controlled for.
Table 9: Effects of government subsidy on product innovation success: Probit estimation results
INPD marginal effect p-value variable mean
SUBSIDY 0.1234603 0 0.387454
LNRD 0.0552687 0 6.57274
SIZE 0.0000655 0.146 331.39
AGE 0.0003695 0.761 18.0472
LNSALES -0.0147883 0.228 9.78557
EXPORT -0.0294337 0.557 0.170563
FDI 0.9277971 0.377 0.003127
VENTURE 0.0139308 0.704 0.199262
INNOBIZ 0.0288261 0.389 0.276753
LAB 0.0488116 0.217 0.769742
RDL 0.0284144 0.85 0.082973
GROUP 0.0300078 0.462 0.17048
UNION -0.0195375 0.638 0.249446
PATSTOCK 0.0003329 0.205 48.91
observed probability 0.6583026
predicted probability 0.6896862
According to the results, subsidy recipient firms are 12.3% more likely to succeed in product
innovation. Moreover, effects of R&D investment are very significant as expected, increasing
likelihood of product innovation by 5.5% per 1%. After controlling for R&D investment and government
subsidy, other firm characteristics have no significance.
However, as previously examined, such estimates via simple regression analysis are likely to be
biased. To address these issues, using nearest neighbor matching method, SATE of SUBSIDY on
INDP is estimated. Matching uses all previous standard firm characteristic variables and additionally
R&D investment (LNRD).
Table 10: Effects of government subsidy on product innovation: Matching estimation results
outcome variable: INPD treatment variable: SUBSIDY

matching variables: LNRD SIZE AGE LNSALES EXPORT FDI VENTURE INNOBIZ LAB RDL GROUP UNION
PATSTOCK
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Kawon Cho
According to the matching estimation results, receiving subsidy increases likelihood of product
innovation success by 15% on average. In comparison with these estimates, probit result of 12.3%
under-estimates the effects of subsidy. Also, since statistical significance is very large, government
subsidy can be concluded to have very positive effects on firm’s product innovation success even
after the effects on phases of innovative activity participation and R&D investment.
Effects of Government Subsidy on Economic Outcome: Market Effects
To first analyze the effects of government subsidy on economic outcome in the market, natural log of
innovative sales (LNINSALES) is regressed on subsidy recipient (SUBSIDY) via OLS. In the
estimation, 882 firms successful at product innovation are used from the sample, and R&D investment
is used as a control variable.
Table 11: Effects of government subsidy on innovative sales: OLS estimation results
LNINSALES coefficient p-value
SUBSIDY -0.0884396 0.341
LNRD 0.1378081 0
SIZE 0.0000762 0.016
AGE -0.0008891 0.795
LNSALES 0.7790663 0
EXPORT -0.0495345 0.739
FDI 0.0157617 0.804
VENTURE 0.3159316 0.014
INNOBIZ -0.1034327 0.369
LAB 0.0327068 0.825
RDL 0.5851326 0.151
GROUP 0.0248826 0.851
UNION -0.1233696 0.326
PATSTOCK -0.0000482 0.438
constant -0.1209709 0.703
R-squared 0.6512
Estimation results show the difference in level of innovative sales between subsidy recipient and non-
recipient firms is not statistically significant.
The effects of government subsidy on economic innovative success are also estimated via matching.
Matching uses the previous standard firm characteristics variables and R&D investment (LNRD).
Table 12: Effects of government subsidy on innovative sales
outcome variable: LNINSALES treatment variable: SUBSIDY
SATE (standard error) -0.2191 (0.1205) -0.0982 (0.1130) -0.0692 (0.1138)

matching variables: LNRD SIZE AGE LNSALES EXPORT FDI VENTURE INNOBIZ LAB RDL GROUP UNION
PATSTOCK
Matching estimation results show government subsidy does not have any additional effects on
innovative sales in general. This is similar to the OLS estimation results, concluding that government
subsidy does not provide additional help to market activity or incentives.
The estimation results so far are summarized in <Figure 2 ~ Figure 4>. Found to be insignificant, the
market effect is not shown.
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Kawon Cho
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Probit SATE(m=1) SATE(m=4) SATE(m=8)
Figure 2: Participation effects: Probit vs. matching estimation
0.6
0.5
0.4
0.3
0.2
0.1
0
OLS SATE(m=1) SATE(m=4) SATE(m=8)
Figure 3: Investment effects: OLS vs. matching estimation
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Probit SATE(m=1) SATE(m=4) SATE(m=8)
Figure 4: Innovation effects: Probit vs. matching estimation

7. Conclusion and policy implication
This study overcomes the limitations of existing studies analyzing mainly on government subsidy
effects on R&D investment, and analyzes phase specific effects on the entire innovation procedure
from innovation activity participation decision to market outcomes. In particular, the analysis of the
150
Kawon Cho
innovation activity participation phase was not possible via existing data and estimation methods, and
this paper is the first to evaluate. Also, the paper is the first to identify government subsidy effects on
technological innovation for itself. Additionally, by controlling firm characteristics more effectively via
matching estimation, the effects of subsidy are estimated more rigorously.
The main conclusions from empirical analysis can be summarized as the following.
Receiving government subsidy increases a firm’s likelihood of participating in innovation activity
by 50% on average.
For other firm characteristics, firms with high export proportion and innovation experience are
more likely to pursue innovative activity.
For a firm participating in innovation activity, receiving government subsidy increases a firm’s
R&D investment level by 0.44% on average
Firm size, sales, export, FDI, and R&D resource also have positive impacts on R&D investment.
Given the same level of innovative investment, a government subsidy recipient firm is 15% more
likely to succeed in product innovation than a non-recipient.
Among firms that succeed in product innovation, there is no difference in innovation sales in the
market between government subsidy recipient firm and non-recipient firm.
Comparison between regression results and matching estimation results reveals that endogeneity
problem complicates the participation effects while overcontroll problem biases the estimated
innovation effects.
As noted, the effects of government support can occur in all phases of firm innovation activity
procedure, and the effects are verified via empirical studies. Hence, the effect of government subsidy
on R&D investment is only a part of the whole effect, and any policy evaluation based on it
underestimates the effects of government support. R&D investment is only relevant to firms already
participating in innovation activity and excludes participation effects. In previous studies, product
innovation, innovation sales, and other innovation variables could not be used other than R&D
investment, and innovation effects could not be evaluated.
Meanwhile, government support showed no additional effect of leading to economic outcome for a
given level of innovation in the empirical analysis. The results can be interpreted in two ways. First
part is data limitation. Specifically, since observation period has not exceeded 3 years, it could be that
the process of economic outcome has not been completely achieved. Second, it is possible that the
effects of government support do not reach economic outcomes. It would mean the commercialization
part of government support’s incentive system, the market outcome incentive and monitoring, needs
to be strengthened.
References
Abadie, A., D. Drukker, J. L. Herr, G. W. Imbens (2001), "Implementing Matching Estimator for Average
Treatment Effects in Stata," The Stata Journal, no. 1-18.
Aerts, K. and D. Czarnitzki (2004), “Using Innovation Survey Data to Evaluate R&D Policy: the Case of Belgium,"
ZEW discussion paper, downloaded from ftp://ftp.zew.de/pub/zew-docs/dp/dp0455.pdf.
Busom, I. (2000), “An empirical Evaluation of the Effects of R&D Subsidies,” Economics of Innovation and New
Technology, vol. 9. 111-148.
Cerulli, G. and B. Poti (2008), “Evaluating the Effect of Public Subsidies on firm R&D activity: an Application to
Italy Using the community Innovation Survey,” Ceris-Cnr working paper, no. 9.
Czarnitzki, D. and K. Hussinger (2004), "The Link between R&D Subsidies, R&D Spending and Technological
Performance," ZEW Discussion Paper no. 04-56, downloaded from ftp://ftp.zew.de/pub/zew-
docs/dp/dp0456.pdf.
Hall, B. H., F. Lotti and J. Mairesse (2008), "Innovation and Productivity in SMEs: Empirical Evidence for Italy,"
Small Business Economics, forthcoming. [NBER Working Paper no. 14594.]
Lach, S. (2000), "Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel," NBER Working
Paper no. 7943.
OECD/Eurostat (2005), Proposed Guidelines for Collecting and Interpreting Innovation Data ― Oslo Manual,
Paris: OECD.
Wallsten, S. J. (2000), "The Effects of Government-industry R&D Programs on Private R&D: the Case of the
Small Business Innovation Research Program," RAND Journal of Economics, vol. 31, no. 1, 82-100.
151
Business Start-up and Growth Motives of Entrepreneurs: A
Case Study in Bradford, United Kingdom
Lasandahasi de Silva
University of Manchester, UK
Lasandahasi.desilva@postgrad.mbs.ac.lk
Abstract: This study attempted to investigate start-up and growth motives of entrepreneurs who operate in small
and medium scale in Bradford, UK. Despite entrepreneurial motivation being considered as a strong predictor of
entrepreneurial outcome and success there is no consensus with respect to the nature of the effect of wide array
of motives in determining entrepreneurial outcome. Further, literature has mainly focused on investigating
entrepreneurial motivation to form new ventures and rarely did it attempt to explore whether start-up motives
change with business growth and if so, how. The reinforcement of the employment strategy of the Government
of the UK is based on premise that entrepreneurial success in a region is functionally related to achieving socio-
economic success of the country. Accordingly, if entrepreneurial activity in the UK to be encouraged, an in-depth
understanding of the entrepreneurial motivation to form and achieve the growth of business ventures in a
particular context is crucial. In-depth interviews were conducted using ‘storytelling’ approach and narrative
analysis was used for data analysis. The findings of the study revealed that each entrepreneur was motivated by
a combination of ‘pull’ and ‘push’ motives at the start-up stage and entrepreneurs were unable to identify single
overarching type of motive. Accordingly, this article questions the appropriateness of differentiating entrepreneurs
at a broader level as ‘push’ and ‘pull’ based on these two types of motives. The findings also revealed that
motivation to start a business widely varied from that of growing it where even though start-up was a combination
of ‘pull’ and ‘push’ motives growth was mainly motivated by ‘pull’ motives. This finding led to question the
appropriateness of using start-up motive as a predictor of entrepreneurial outcome since the growth and success
were determined by growth motives. Based on patterns observed between growth motives and entrepreneurial
outcomes, three types of entrepreneurs were identified. Practical implications and avenues for future research
were highlighted.
Keywords: start-up, motivation, entrepreneur, small and medium scale, business growth
1. Introduction
This paper attempted to investigate start-up and growth motives of entrepreneurs who own Small and
Medium Enterprises (SME) in Bradford, UK. Despite entrepreneurial motivation being considered as a
strong predictor of entrepreneurial outcome and success (Cassar 2007) there is no consensus with
respect to the nature of the effect of the wide array of motives in determining entrepreneurial outcome
(Baum et al 2001; Shane et al 2003). Literature mainly focused on investigating entrepreneurial
motivation to form new ventures. Rarely did it attempt to explore changes in start-up motives with
business growth even though such an in-depth understanding is considered as a pre-requisite for
cushioning entrepreneurial activity (Bhidé 2000).
There has been a recent trend to reduce motivations associated with the start-up of new businesses
to “push” and “pull” motives. (Gilad and Levine 1986). “Push” motives are the elements of necessity in
which entrepreneurs are pushed or forced to start new businesses in order to overcome negative
external forces and “pull” motives are attractive reasons as to why entrepreneurs decide to start
businesses (Gilad and Levine 1986). Based on these two types, literature has attempted to
differentiate entrepreneurs as “pull entrepreneurs” and “push entrepreneurs” (Amit and Muller 1995;
Bosma and Harding 2006; Acs 2006) in which it is assumed that entrepreneurs are significantly
motivated by one type. However, Brush (1990) argued that the situation is rarely a clear cut selection
of which type of motive (“pull” or “push”) has driven the entrepreneur where these types are often
combined. This is further supported by Tagiuri and Davis (1992) through stating that entrepreneurs
could have multiple motives rather than a single overarching type of motive. These contradictory
arguments question whether entrepreneurs are significantly motivated by one type and if not, the
validity of differentiating them as pull and push entrepreneurs.
It was also evident that mostly literature attempted to investigate start-up motives and the possible
changes of entrepreneurial motivation with the business growth rarely has been a point of
investigation. Among available literature on the growth motive, Rosa et al (2006) argued that most of
the entrepreneurs who started their businesses with the necessity/push motives are later motivated by
“pull” motives with the business growth. Littunen and Virtanen (2005) supported the above argument
and concluded that “pull” motives drive business growth. However, Kolvereid (1992) and Morris et al
152
(2006) found no relationship between the need for autonomy which is one of the “pull” motives and
business growth and Cassar (2007) even found a negative relationship.
Despite the presence of above contradictions with regards to the nature of the effect, most of the
research found that entrepreneurial intentions and desires determine entrepreneurial outcome
(Lafuente and Salas 1989). Hitherto there has been little research on how pull and push motives
combine during the entrepreneurial process to achieve a successful start-up and subsequent growth.
Accordingly, it will be interesting to investigate start-up and growth motives of entrepreneurs and if
they vary whether there is a pattern between the growth motives and entrepreneurial outcome.
As discussed, “pull” and “push” start up motives have been identified as playing a major role in the
business operation of entrepreneurs. Accordingly, in this research, these two types of motives
identified in the literature, are used as a framework to investigate business start up and growth
motives of entrepreneurs (Table 1).
Table 1: Motives of entrepreneurs – “pull” and “push”
“Push” Motives Reference
Need to earn a reasonable living Alstete 2002; Tagiuri and Davis 1992; Shane, et al 2003.
Redundancy/ unemployment Grilo and Thurik 2006; Borooah and Hart 1999
Dissatisfaction with a salaried job Alstete 2002
Blocked promotion Brockhaus and Horwitz 1986
Need for a flexible work schedule Alstete 2002
Underpaid salaried job Basu and Goswami 1999
Discrimination in the labour market Basu and Goswami 1999
economy
“Pull” Motives Reference
Need for autonomy Gelderen and Jansen 2006; Lumpkin and Dess 1996.
Need for Achievement McClelland 1961; Greenbank 2001; Komives 1972; McClelland
and Winter 1969
Need for affiliation McClelland and Burnham 1976; Barrow 1993
Need for self-esteem Sexton and Bowman 1985
The desire for wealth Hisrich et al 1996
The desire for social status Orhan and Scott 2001
Need for personal development Scheinberg and MacMillan 1988
Challenge seeking nature Feldman and Bolino 2000
Identification of opportunity Basu and Goswami 1999; Shane and Venkataraman 2000
Best use of expertise Basu and Goswami 1999
Need for creative expression Miller and Friesen 1978
Further, since there is no clear differentiation between “business start-up” and “growth” motives, in
this research business start-up motives are considered as those motivate entrepreneurs to start their
own business venture while growth motives are those motivate them to grow the business. Since it is
not possible for the researcher to define the exact time scale which differentiate “business growth” it
was decided to let the entrepreneur decide whether his/her initial motives have been changed over
the years.
This study is carried out as a case study in Bradford, UK particularly focusing on Small and Medium
Scale business operators. Accordingly, the objective is to investigate how this case provides evidence
to understand the dilemma of business start-up and growth motives of entrepreneurs. Therefore, this
research intends to investigate motives of entrepreneurs in Bradford, UK and particularly, study
whether there is any difference between start-up and growth motives of them and if so whether there
is a pattern between growth motives and entrepreneurial outcomes.
2. Methodology
Qualitative research methodology was selected as appropriate to conduct the research and it was
supplemented by quantifiable evidence. Qualitative research methods provide a holistic view of the
situation (Bogdan and Taylor 1975). The city of Bradford, situated in the Yorkshire and Humber region
of England was selected as the case for this research. The city of Bradford is the fifth largest city in
England in terms of population (approximately half a million) (Carling 2008). During the past two
decades this region has endured declining traditional industries and substantial job losses mainly in
coal mining, steel, engineering and textiles (GOYH 2007). However, the picture of the region is
153
becoming better in recent years with performance improving twice in many indicators and achieving
satisfactory improvements which is almost in par with the national average (Yorkshire Futures 2006).
Small and Medium Business Directory in the UK was used as the sampling frame. A sample of 30
entrepreneurs in Bradford was selected. In selecting the sample the representativeness was
maintained with respect to key criteria which are identified in the literature as affecting motivation of
entrepreneurs. These criteria were the sector of operation (Chell 2001), the demographic
characteristics of the entrepreneur, (Brockhaus 1982; Sexton and Bowman-Upton 1990; Feldman et
al 1991) and the scale of the business (Cooper and Dunkelberg 1981). However, it was attempted to
include a higher number of entrepreneurs who have been in the business for more than 10 years
since the objectives of this research required the identification of start-up and growth motives.
Achieving representation only based on some key criteria was decided as appropriate since statistical
generalization (as opposed to analytical generalization) is not an objective in qualitative methodology
(Ritchie and Lewis 2003). Each entrepreneur was initially contacted via the phone in order to obtain
an appointment to carry out an in-depth interview which was held at their business premise.
In-depth interviews were carried out with the entrepreneurs and these were video recorded. Segal et
al (2005) also highlighted the importance of in-depth interviews particularly to understand motives of
entrepreneurs which is a rich source of explanatory information. Two approaches were used in
literature to investigate motives of entrepreneurs namely; (a) asking entrepreneurs directly to mention
what motivated them doing business and (b) using psychometric scales to measure the extent to
which the entrepreneur has certain types of motivations (Cromie 1987). In this research it was
decided to ask the entrepreneur directly since it was required to differentiate growth motives from that
of start-up where the usage of psychometric scales does not serve this purpose unless otherwise a
longitudinal study was done to see how the motivation was changed with business growth. With
respect to “start-up” and “growth” motives, the entrepreneurs were asked to explain what made them
start the business (start-up motives) and then they were asked to state whether they feel that the
motives were changed over the years. All the entrepreneurs were with the view point that motives
were changed particularly when it comes to the decision of growing the business. Therefore, they
were asked to identify motives which made them decide to grow the business and these were
considered as “growth motives” for the purpose of research. They have further revealed that growth
motives remain more or less consistent. This made researcher decide not to use a time scale to
identify changes in growth motives at different stages of growth. Accordingly, only two types of
motives were identified as those motivated them to start a business and those motivated them to
achieve the growth.
However, asking entrepreneur directly could be bias since entrepreneurs might make their choices
based on what is considered socially acceptable, in order to create a positive image about themselves
(Johnson 1990). As a mean of avoiding potential biasness, initially, “storey telling” approach was used
where the entrepreneurs were first asked to describe the journey he/she underwent since their
schooling to date and this was followed by asking specific questions about their motives.
Subsequently, two researchers analyzed the narratives independently in order to identify their
motives. Finally, motives mentioned by them, were compared and contrasted with the analysis of the
two researchers. There was a very high level of convergence and thus it is believed that the research
findings are reliable and valid.
During the data analysis it was mainly focused on investigating business start-up and growth motives
of entrepreneurs and identifying the contribution of growth motive towards the entrepreneurial
outcome. Finally, the findings were compared with the existing literature in order to enhance
theoretical generalizability (Eisenhardt 1989).
3. Findings of the research
In this section, initially business start-up motives are discussed and subsequently how start-up
motives differ from growth motives is elaborated. Finally, it is attempted to illustrate patterns identified
in relation to growth motive and entrepreneurial outcome.
3.1 Business start-up motives of entrepreneurs

A majority of entrepreneurs (83.3%) had worked as fulltime employees before starting their own
business. Out of the entrepreneurs who worked on fulltime basis, 92% had mentioned at least one job
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related “push” motive. The entrepreneurs who had not engaged in fulltime employment before starting
the business (16.7%) were motivated by the need for earning a reasonable living and not having a
proper educational background was common to them.
Being bored with the job/ dissatisfied with the nature of the job (23.3%), the lack of opportunities for
progression in the job (23.3%), inability to receive a higher income/ being dissatisfied with receiving a
fixed salary (23.3%) and need to earn a reasonable living (16.7%) were the “push” motives
mentioned by most of the entrepreneurs. They were also motivated by “pull” motives and the
identification of an opportunity (73.3%), need for autonomy (46.7%) and the pleasure received
through the engagement in the type of work (43.3%) were the “pull” motives identified by most of the
entrepreneurs.
From the sample, 96.7% mentioned that they were motivated by both “push” and “pull” motives when
deciding to start a business. In their opinion, it was hard to say which type of motive dominated
(“push” or “pull”) since circumstances which led entrepreneurs to decide engaging in business was
shaped by a combination of both the motives. For example one of them said:
“I was not happy working full time anymore since I did not receive enough income and
independence in the job”.
This illustrated how “push” motives, his dissatisfaction with the salaried job led him deciding to start a
business. He further said:
“I was also motivated by my need to make use of my skill of repairing televisions (TV).
During that time, there was a higher demand for getting TV repaired. However, there
weren’t enough experts who possessed required skills since it was an era where
coloured TV was first introduced to the market. This was a very good opportunity for me.
In order to capitalize the opportunity I had the expertise. Further, I think need for
independence was also a reason as I believed that running my own venture would
provide me more freedom”
This illustrated how the “pull” motives, the identification of the opportunity, need for independence,
and need to make use of his skills motivated him. When he was asked to state which type of motive
had relatively higher effect, he answered:
“I cannot exactly say that. Even though I was dissatisfied with the job, I wouldn’t have left
the job if I had not identified the opportunity in the market”
This clearly illustrated how the combination of “pull” and “push” motives prevailed in the particular
circumstance motivated him to form the business. The reasoning of all the entrepreneurs (95.8%) who
were motivated by both “pull” and “push” motives followed the above stated pattern and accordingly, it
could be concluded that entrepreneurs decide to start a business as a result of being motivated by a
combination of both “pull” and “push” motives.
3.2 How growth motives of entrepreneurs differ from start-up motives?

Findings revealed that unlike business start-up, the growth was motivated only by “pull” motives.
Need for achievement (63.3%), the identification of the opportunity (46.7%), and desire for wealth
(46.7%) were identified by most of the entrepreneurs as growth motives.
For example, one of the entrepreneurs stated;

“I started a ‘Data communication’ business with 3 other employees. The size was not
changed for about 3 years. After this period, I realised that a higher level of success
could be achieved through expanding it and was able to identify a number of
opportunities to develop the business. My need to achieve the success of the business
resulted in me capitalising these perceived opportunities and developing it to a
technology based company which is now operating with more than 1000 employees. I
really enjoyed seeing the progress of the business and decided to diversify the venture.
Accordingly, I realised the ability of moving into training and other related businesses
attached to flights. As a result, I invested on this business and it has also achieved a very
high level of growth and currently it employs 60 employees. The need and my desire for
achieving business success was the major driving force for me in deciding to grow the
business”
155
Accordingly, it is clear that growth motives for him are “pull”. However, the same entrepreneur stated
that his start-up motives are the dissatisfaction with the salaried job, the need for achieving a
reasonable living and the identification of opportunity to start a data communication business.
Accordingly, it is clear that even though start-up motives were a combination of “pull” and “push”
motives, growth was mainly driven by “pull” motives. As per the findings, even though “identification of
opportunity” was a start-up motive mentioned by most of the entrepreneurs (73.3%), it was identified
as a growth motive by comparatively lower percentage of them (46.7%). The need for autonomy also
followed the same trend where it had not been considered as a major growth motive (start-up -
46.7%, growth – 13.3%).
Even though “likeness towards doing business and achieving the success” was not a motive
mentioned by them at the start-up stage, it had been considered as a growth motive by 33.3% of the
entrepreneurs. Those entrepreneurs were with the viewpoint that they were passionate about the
business and enjoyed achieving the success of the business. Further, since profit was a measure of
success they were motivated towards obtaining higher profits even though they had not identified
“desire for wealth” as a growth motive. Accordingly, both the groups who had mentioned “desire for
wealth” (50%) and “the likeness to achieve higher profits” (33.3%) as growth motives were ultimately
motivated towards increasing wealth (83.3%). Thus, it can be stated that even though desire for
wealth was not explicitly stated, in general entrepreneurs are motivated to generate wealth particularly
in the growth stage. However, it is interesting to find out that only 33.3% has considered “desire for
wealth” as a start-up motive. It should also be noted that need for self-esteem (start-up – 6.7%,
growth – 33.4%), affiliation motive (start-up – 4%, growth – 33.4%), and need for achievement (start-
up –26.7%, growth – 63.3%) had also been seen as motivations for growing the business than that of
forming the business. Since growth motives are different to that of start-up motives, it was decided to
investigate whether there are any patterns with respect to growth motive and entrepreneurial
outcome.
3.3 Growth motive and entrepreneurial outcome

For the purpose of analysis, two types of entrepreneurial outcomes are considered namely the growth
of the business venture and the desire of the entrepreneur to remain in the business. Accordingly, in
following sections of the article, patterns observed in this study with respect to the impact of growth
motive on venture growth and entrepreneur’s decision to remain in the business are discussed.
3.3.1 Growth motive and business growth

The rationale for investigating the pattern between the growth motive and business growth was the
wide variation observed within the sample with respect to the level of growth. Business growth was
measured by turnover and number of employees and accordingly, businesses were categorised into
small or medium scale. Even though the sample consists of entrepreneurs who were operating
business for a longer and more or less similar number of years it was considered as important to test
whether there is any relationship between the years of operation and scale of operation before
identifying above said pattern. Accordingly, the correlation between number of years of operation and
number of employees was tested. Turnover was not used since data was obtained as a categorical
variable with two categories only for the purpose of differentiating them to small and medium
business. Pearson Correlation (p = 0.148) being not significant led to conclude that there is no
significant correlation between the years of operation and the scale of business in the given sample.
Accordingly, it was decided to proceed to test whether there is any pattern between the scale of
operation and growth motive. When the motives were analysed, a pattern was recognized with
respect to three major growth motives and the business growth; these motives are (a) likeness
towards the type of the work they perform (b) likeness towards doing business and achieving the
business success (c) need to use the business as a vehicle to satisfy personal/family goals. Those
who have been motivated to grow the business due to the likeness towards the type of work they
performed (37%) and need to use the business as a vehicle to satisfy personal/family goals (30%)
have achieved relatively lower level of growth in comparison to those who have been motivated to
grow the business due to likeness towards doing business and achieving the business success
(33.33%).
In order to elaborate this pattern, some of the cases were selected and illustrated in the table 3.
According to the table, cases 8, 11, 17 and 7 had small scale operations even though they had been
in the business for more than 25 years. In contrast, cases 14, 21, and 24 had reached towards
156
medium scale. It was evident that the cases 8 and 11 were motivated by the “likeness towards the
type of the work they perform” and cases 17 and seven the need to satisfy personal/family goals
whereas others had been motivated by the “likeness towards doing business and achieving the
business success”. Those of cases 8 and 11 were enjoying working with machines and providing
solutions to customers which allowed them to engage in intellectually stimulating work and in turn
made them concentrated only on the business operation (working with machines). According to those
entrepreneurs, they were motivated towards achieving business growth as a way of enhancing the
opportunities for them to engage in operational aspects of the business. They believed that they may
have not taken necessary steps to increase turnover as they are satisfied with and enjoyed engaging
in operational aspects of the business. Low level of growth attained by them could further be
explained by LeBrasseur et al (2003) who stated that when the dependency of the business on the
technical expertise of the entrepreneur increases the growth and the success of the business tend to
decrease.
Cases 7 and 17 were using business as a vehicle to satisfy personal/family goals. Based on their
interpretations, reinvestments were somewhat delayed and some of them were with the view point
that spending a lot of time for the business was not a priority since they had given priority to their
family commitments. It could be stated that as a result the growth of business has not been very high.
In other cases (14, 21, 24) their desire was to achieve the success of the business in which growth of
business profit was considered as the measure of success by them. They did not have a distinct
desire towards the operational aspects of the business where in their terms business was considered
as a profit generating venture. They had dedicated the responsibility of taking care of operational
aspects of the business to other people and they were solely focusing on achieving profits.
Table 2: Growth motive and business growth
Criteria Case 8 Case 11 Case 17 Case 7
Type of business Commercial The sale and Insurance Company Garage
and Auto repair of electric
repairs motors and
auxiliary
equipment.
Growth Motive The growth Likeness towards The need to use The need to use
was driven the type of work he business as a way of business as a way
by the does (pull) satisfying their of satisfying their
customers Identification of the personal/ family (pull) personal/ family
(pull) opportunity (pull) The best use of (pull)
The desire Need to be expertise (pull) Need for self
towards the different from Achievement motive esteem (pull)
type of others (pull) (pull) Need to be
work he Self satisfaction The desire for wealth creative (pull)
does (pull) (pull) (pull)
Self esteem (pull)
Age of the entrepreneur 54 57 57 49
Number of years in the 31 25 29 26
business
Turnover <5.6M <5.6M <5.6M <5.6M
Number of employees 9 4 20 10
Scale Small scale Small scale Small scale Small Scale
Criteria Case 14 Case 21 Case 24

Type of business He developed the He developed the Housing Association
business from a back- business from TV
street garage to a group repairing and renting
of seven companies. business to large scale
Still he considered the technology company.
main business as Then diversified to
repairing and servicing aviation training and
of vehicles, issuing of trading centre,
MOT, maintenance of information services
fleets. centre and property
businesses. Currently, in
the process of
establishing nationwide
medical clinics.
157
Criteria Case 14 Case 21 Case 24

Growth Motive Achievement motive Identification of the Identification of the
(pull), Self esteem (pull) opportunity (pull) opportunity (pull), Need
Likeness towards The desire for wealth to contribute to develop
achieving the success of (pull) social capital (pull)
the business among Likeness towards Likeness towards
competitors (pull), Need building new ventures achieving the success of
to leave something for and achieving business the business (pull),
children (pull) success (pull) Need for autonomy
(pull), Challenge seeking
nature (pull)
Age of the entrepreneur 50 60 47
Years in the business 27 35 22
Turnover >5.6M >5.6M >5.6M
Number of employees 100 Aircraft– 60, Information 55
search – 120, Property –
5, Technology – 1500
(he is only a shareholder
now)
Scale Medium Scale Medium Scale Medium Scale
Accordingly, it could be concluded that the entrepreneurs who have “likeness towards doing business
and achieving the success” as a growth motive could achieve a higher level of growth in comparison
to those with “likeness towards the type of work (operational side of the business)” and “need to use
the business as a vehicle for satisfying personal/family goals” as growth motives.
3.3.2 Growth motive and entrepreneur’s decision to remain in the business

When the entrepreneurs were asked about their future plans, a clear distinction was found with
respect to their desire to remain in the business where some wanted to remain in the business as
long as possible and others wanted to retire as soon as possible. Of the sample 70% entrepreneurs
would like to remain in the business as long as possible whereas the rest was with the opinion that
they want to retire as soon as possible. Since there is a possibility of this decision to be affected by
the age of the entrepreneur (where it may be the young entrepreneurs who may have expressed the
interest to remain) before considering growth motive it was decided to test whether the age had an
impact on the decision to remain in the business. The t-test results (ρ = 0.81) indicated that there is no
significant difference between entrepreneurs’ decision to retire or remain and their age. As a result, it
was decided to proceed investigating the impact of growth motive on their decision to remain in the
business. It was evident that all the entrepreneurs who would like to remain in the business as long as
possible (70%) had mentioned either “likeness towards the type of work they perform” (52.4%) or the
“desire towards doing business and achieving the business success” (47.6%) as growth motives. In
contrast, the other group (retire as soon as possible) had mentioned none of these two motives and
they had purely considered the business as a vehicle for achieving their personal goals. The above
discussion about the patterns identified between growth motive and entrepreneurial outcome, resulted
in recognizing three types of entrepreneurs as illustrated below;
Entrepreneur Characteristics
Type
Type I Who is motivated to achieve the growth of the venture in order to satisfy personal/family
goals. It was evident that such entrepreneurs had achieved average or low level of growth
and would like to retire as soon as possible.
Type II Who is motivated to achieve the growth as a way of enhancing opportunities to engage in
the type of the work/ operational aspects of the business where the venture has a higher
dependency on the technical competencies of the founder and concentrates mainly/ only
on the success of such operational aspects. It was evident that such entrepreneurs
achieved average or low level of growth, and would like to remain in the business as long
as possible owing to likeness towards the operational aspects of the business.
Type III Who is motivated to achieve the growth due to their likeness towards doing business and
achieving the business success. It was evident that such entrepreneurs achieved the
highest level of growth and would like to remain in the business as long as possible owing
to likeness towards doing business and achieving business success (not particularly
operational aspects).
158
4. Conclusions and recommendations

The findings related to business start-up motives of entrepreneurs in Bradford, UK supported the
argument (Brush 1990; Tagiuri and Davis 1992; Cromie 1987) which states that it is the combination
of “pull” and “push” motives which inspires entrepreneurs to start their own businesses rather than
single overarching motive. This questions the appropriateness of differentiating entrepreneurs as “pull
entrepreneurs” and “push entrepreneurs” in the given context (Amit and Muller 1995). It should be
noted that the findings do not disagree with differentiating motives as “pull” and “push” but only
disagree with using it as a base to differentiate entrepreneurs as “pull” and “push” entrepreneurs.
The wide array of start-up motives mentioned by respondents in this study, supported Rosa et al
(2006) who highlighted the inappropriateness of narrowing down start-up motives of entrepreneurs to
“necessity” and “opportunity” which was the approach of GEM project (Bosma and Harding 2006).
Further, at the start-up stage, the identification of opportunity had been considered as a motive by a
majority of entrepreneurs. These entrepreneurs were simultaneously motivated by certain other
necessity motives and thus it was not possible to investigate whether it is necessity or the opportunity
had motivated them to start the business. Thus, this study concluded that such distinctions at a
broader level are not meaningful with respect to the study context of the UK and questioned the
appropriateness of applying such methods universally.
Since this research made the distinction between growth and start-up motives, it was evident that
motivations to start a business widely vary from that of growing it and the motive to grow the business
has been more or less consistent over the business growth. In spite of start-up being motivated by a
combination of “pull” and “push” motives, growth was mainly motivated by “pull” motives, which was in
par with Littunen and Virtanen (2005). The identification of the opportunity and need for autonomy
were considered as start-up motives by most of the entrepreneurs whereas considerably a lower
percentage of entrepreneurs considered these as growth motives. In contrast, need for achievement,
desire for wealth, affiliation motive, need for self-esteem, and likeness towards doing business and
achieving the business success were identified as growth motives by a higher percentage of
entrepreneurs. Entrepreneurs were motivated to generate wealth particularly in the growth stage even
though this was not a motive mentioned by most of them at the start-up stage. Accordingly, the
research questions the appropriateness of relating start-up motives to the growth and the success of
entrepreneurial ventures, since growth motives were different to start-up motives where in
entrepreneurs’ point of view, growth motives were the ones which determined the growth and success
of the business.
Three types of entrepreneurs were emerged in this study based on the patterns observed between
different growth motives and entrepreneurial outcome (the level of growth achieved by them and their
desire to remain in the business).
Acknowledgement
Author wishes to thank Dr. David Spicer, Professor Ray Oaky, Dr. Elvira Uyarra, Dr.Dimitri Gagliardi
and Professor Phil Shapira for very useful insights provided to improve the earlier drafts of this paper.
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161
Bringing Enterprise Alive – Two ‘International’ Case
Studies in the Innovative use of Simulation Based
Entrepreneurship Education
Corina Edwards1, Ted Sarmiento2, Vicky Harte2 and Jim Stewart2
1
Swansea University, UK
2
Leeds Metropolitan University, UK
c.j.edwards@swansea.ac.uk
t.sarmiento@leedsmet.ac.uk
Abstract: The European Commission report on “Entrepreneurship in Higher Education” (2008) reported that the
“benefits of entrepreneurship education are not limited to start-ups, innovative ventures and new jobs.
Entrepreneurship refers to an individual’s ability to turn ideas into action and is therefore a key competence for
all, helping young people to be more creative and self-confident in whatever they undertake.” The challenge is
therefore, how do we bring enterprise alive with limited resource in terms of both funding and staff; disparate
academic departments working in isolation; large student numbers; a combination of student apathy and student
enthusiasm; staff apathy and staff enthusiasm. This paper provides a case study in the delivery of entrepreneurial
learning in two university contexts and as such will be of value to those involved in the design and development
of such courses in higher (post 18 years) education setting. Both universities use the same business simulation
software although in different ways and both include an element of either assessed reflective learning and/or
business analysis. The first case study is taken from research-led institution Swansea University [Prifysgol
st
Abertawe], Wales and is taken from the professional skills module which is compulsory for all (1 Year)
undergraduate students in the School of Business and Economics. Students are asked to demonstrate that they
have developed a practical appreciation and basic knowledge of enterprise and entrepreneurship and an ability to
work as part of a team; problem solve; understand and respond to demands on a variety of resource issues;
make decisions and review and reflect on the impact of those decisions. The second case study is concerned
with the delivery of a module for Level 2 (2nd Year) undergraduate university students studying at the Faculty of
Business and Law, Leeds Metropolitan University, England. The module aims to ‘provide a simulated experience
of how organisations work, enabling skills and knowledge from disparate subject areas to be synthesised and
assimilated in solving relatively complex business problems.’ [Leeds Met Module Specification 2009]. Both case
study modules are placed within courses that are core to some of the most popular undergraduate programmes
of study and therefore potentially involve delivery to hundreds of students simultaneously.
Keywords: business simulation, entrepreneurship assessment, sustainable innovative teaching, embedding

entrepreneurship, entrepreneurship pedagogies, entrepreneurial learning
1. Introduction
“As educators, we face the biggest challenge and opportunity of our generation in
providing the inspiration, optimism, confidence, enterprising skills and tools which will
enable students to start or resume their lives and careers beyond university, and to
contribute to economic and social regeneration. Every student needs to be flexible,
adaptable, confident of their abilities, resourceful – in short, enterprising. Enterprising
learning is a vital capability which can help students become more self/employable in this
new era. More enterprising people are more likely to thrive in times of economic change
and uncertainty.” Rae (2009)
Further, the World Economic Forum Report (2009. p.145) “The pedagogy should be interactive,
encouraging students to experiment and experience entrepreneurship through working on case
studies, games, projects, simulations, real-life actions, internships with start-ups and other hands-on
activities that involve interaction with entrepreneurs. Schools and training programmes provide a safe
environment for encouraging students to stretch and test themselves, to experiment and develop an
understanding of risk-taking and to turn ideas into action. It is important that students have the
opportunity to experience both successes and failures – and to learn from both experiences.”
While we face these challenges as entrepreneurship educators, we need to not only stimulate our
students in to becoming ‘flexible…resourceful…enterprising’ but we need to do all of this as
educators. Staff at Swansea University, Wales and Leeds Metropolitan University, England have been
exploring the best way to address entrepreneurship education for our institutions, students and staff.
Entrepreneurship refers to “an individual’s ability to turn ideas into action” and therefore “the benefits
162
Corina Edwards et al.
of entrepreneurship education are not limited to boosting start-ups, innovative ventures and new jobs.
Entrepreneurship is a competence for all…” as stated by the European Commission (2008. p.10-11).
GEM research in 2007 showed that in Wales 78% of early stage entrepreneurs state that they are
opportunity driven rather than necessity driven entrepreneurs. That is, they start a new business to
pursue an opportunity not because they do not have any better work alternatives. This research also
‘provides clear evidence that involvement in enterprise education substantially increases the
likelihood of involvement in entrepreneurial activity’. In Wales, the approach to entrepreneurship
education has been formulated by The Entrepreneurship Action Plan for Wales (EAP) in 1999 which
led to the introduction of the Youth Enterprise and Entrepreneurship Strategy (YES). This strategy
aimed to provide a common model of entrepreneurial learning and engage entrepreneurs in
education.
This is all well and good but how can we actually do this with ever increasing student numbers and
decreasing or very limited resources. The approach described within this paper is a small part of the
entrepreneurial journey we are developing for our students at Swansea and Leeds Metropolitan
Universities. For Swansea University, it is the first phase of developing a truly embedded approach to
entrepreneurship.
2. Case study 1: Swansea University
2.1 Background
The approach at Swansea University has been to develop a number of academic modules, based on
successful and popular extra-curricular activities, in a way that builds resources for the University.
Although initial activities have been based in the School of Business and Economics as part of the
‘Academic Champions of Enterprise’ (ACE) project funded by the Welsh Assembly Government, this
is regarded as part of a benchmarking exercise aimed at creating portfolio of efficient and effective
generic resources and pedagogies for entrepreneurial learning that can be adapted to suit the needs
of different departments and schools
The first stage of this development of enterprise education and the focus of this paper is the use of
business simulation software as part of academic teaching and learning which consisted of adapting
an existing skills module so that it now included entrepreneurship. This particular module was core for
all first year Business and Economics students with a cohort of around 400+ students annually.
Entrepreneurship now accounts for 40% of the total mark for this (20 credit) module with the learning
outcome to “develop a practical appreciation and basic knowledge of enterprise and
entrepreneurship” (Module Guide, Swansea University 2009).
2.2 Teaching and learning methods

One of the first problems identified by the module team was that many students did not understand
what entrepreneurship meant or entailed and it was felt that this lack of understanding could be one of
the biggest barriers to students getting involved in such entrepreneurial activity. Entrepreneurship
education has to be explicit in order for students to appreciate their ability, attitude and development
and we wanted them to learn to identify entrepreneurial behaviour and approaches within themselves.
For this reason supporting lectures used a range of entrepreneurial role models and mapped
entrepreneurial skills and qualities across employed as well as self-employed work. Many UK
graduates work in the private, public sector jobs or SMEs (small and medium enterprises) after
graduation all of which often requires many skills closely aligned to those associated with
entrepreneurship and enterprise. Therefore the assignment was designed to require reflection on
areas such as group dynamics in decision making, allocating work load in addition to extensive
reflection on the business decisions made and their consequences. The business simulation software
selected for this module was the BETT Award (British Education and Training Technology) winning,
SimVenture. It was decided to purchase this as a potential central resource for other Departments
and Schools to use and treat our work developing the Module as benchmarking activity creating a
pedagogical framework to build upon.
163
Introducing an innovative approach to teaching proved to be problematic and this paper reports the
preliminary findings from the practitioner’s review of activity undertaken, methods, issues, solutions
and evaluation.
2.3 Evaluation of the module

Students were asked to complete an evaluation of their experience through a feedback questionnaire
and were invited to hand these in at the same time as their assignment. It was stressed that the
research questionnaire would be anonymised and would have no bearing on the marks allocated for
academic achievement. In total 319 of the 398 students who submitted assignments also completed
questionnaire. The questionnaire asked the students to respond to a number of issues based around
group working, operating the business simulation itself, practical knowledge and appreciation of
enterprise and entrepreneurship and finally the learning and teaching methods employed.
3. Results
The student profile is very similar to most UK universities.
Figure 1: First language

56% male; 41% female
54% aged 18-19; 24% 20-21; 7% were 22 and over. Data was missing for the remainder.
3.1 Group working

87% of students felt they worked well as a team with 23% of students commenting on their ability to
work as part of a team with positive comments about their team members, the importance of being
organised, good leadership, good communication, having skills that compliment each other and
everyone understanding their roles. The negative comments were mostly focused on individual team
members who, it was felt had not contributed, turned up for meetings and/or did not communicate
well.
‘It’s difficult to write a report within a team – found the report didn’t flow.’
‘I enjoyed working as a team.’
‘Maybe it could be an individual assessment as I would have liked to do it personally to
see how well I did against the other students with my own knowledge and decisions
going in to the business as decisions that were made as a group were not always what
should have happened.’
‘Extremely stressful working with a group of people you don’t know at all but obviously
very realistic’
164
3.2 The simulation

Students reported that the simulation could be difficult to understand initially, but that with sufficient
practice they generally understood the main features of the (simulated) business. Some salient
comments included:
‘After deciding what needed to be done and achieved away from the computer, the actual
process of playing the game, did not take long at all. More time taken thinking about and
planning next move than actually putting it into practice.’
‘I would have liked the simulation to have run over a longer period of time so we would
have been faced with more challenges like expanding the business, (moving to a new
premises and hiring more employees).’
‘Take more time to gather enquiries in the product and not jump straight into trying to
sell. At times our plans had to be held off a month as we hadn’t thought in advance and
applied for contracts.’
3.3 Practical knowledge and appreciation of enterprise and entrepreneurship

80% of students claimed a better understanding of business terminology and the main functional
areas of business which was further emphasised in the reflection within the business reports. Most of
which offered some level of analysis into why some of the decisions they made did not always provide
the expected resultwhich is often the case in business.
Some of the reflection related to insufficient time spent learning about a business aspect before
rushing in and making a decision. There were a number of ‘we should have done...’, ‘if we had done x
sooner’ and ‘with hindsight’ type statements. The level of understanding and reflection varied between
groups but it was clear that most had a good level of understanding about the key concepts although
many wanted the game play of the simulation to last longer. Some other salient reflections included:
‘Throughout the game I learnt and nursed my understanding of business. Also it enabled
me to apply what was thought in the classroom, enhancing and familiarizing myself
around the terms in the business world.’
‘Read the advice before making decisions for the next month.’
‘I would have liked for our group to have generated more orders and enquiries so as to
have begun making profit from the start and not incur any losses.’
‘I would have liked to expand on the amount of units we produced quicker and been
more ambitious’
3.4 Learning and teaching methods

Most students had something to say about this method of learning.
‘It was certainly more enjoyable than other assignments and provided some insight to
business.’
‘A lecture in EBG102 said “Tell me, I will forget; show me, I will remember; involve me, I
will participate.” The assignment perfectly shows the motto.’
‘Simulation engages you more with the subject and shows the significance in the
sometimes, less interesting aspects of business.’
‘It’s good to do something a bit different. Get out of the lecture hall and learn from each
others experiences and mistakes.’
‘Better because it is more practical.’
‘A much better way, just reading or receiving talks is not enough to get the feeling of what
it would actually be like.’
‘Its practical and we can see the outcome of the decisions we take.’
‘Much more interesting than for example an essay and is better than sitting in a lecture
as they have little communication.’
‘More hands-on and involving than lectures.’
165
‘I am more interested in this way rather than theoretical lectures. This game also tell us
theories when we made any mistake.’
‘As the project is done between us it is easier to understand, and also seems as we were
doing it ourselves it made it easier to understand.’
Overall around 80% of students found the game suitably challenging while 75% enjoyed the
experience and 84% of students felt the use of a simulation and independent group work provided a
‘good’ or ‘very good’ introduction to enterprise compared to lectures, notes and reading lists. Most
students (82%) reported that they had not experienced a business simulation prior to this point and of
those who had played something similar, only 6% had done so as part of a specific course.
Finally, almost 90% of students indicated a potential interest in taking a future enterprise module and
a similar percentage evidencing possible entrepreneurial intent and it was reported that there was a
34% increase in the number of students booking a place on the annual business start-up workshops
in June 2009.
3.5 Limitations to the research

It is recognised that asking students to complete a questionnaire at the same time as the written
assignment may present some issues. An alternative approach separating the two may have led to
more confidence in the students’ freedom to express themselves, perhaps at the expense of reduced
participation. It is further recognised that a two stage questionnaire to assess the students’ knowledge
level, attitude and intention prior to participating in this entrepreneurial module, and then a similar
questionnaire afterwards may reveal any changes in the population.
3.6 Conclusions
This paper focuses on the pilot academic year 2009-2010 and due to the early success experienced,
the software has since been offered to students in the Schools of Engineering and Arts with other
uses being explored by staff in different departments and partner institutions. The use of a business
simulation does not offer the full business experience but if the right simulation is selected and it is
used in the correct way, it can provide a useful introductory experience of entrepreneurship which is
both safe and challenging. This work can then be expanded to include more practice based
experiential learning in the second year following the subtle, safe and semi-experiential first year
work.
We have been very fortunate at Swansea University as the students were very enthusiastic about this
assignment and equally keen to feedback their thoughts on the whole experience. Overall the
students enjoyed using SimVenture and found it a useful learning experience.
At the start of this development the learning objective seemed very simple to develop a practical
appreciation and basic knowledge of enterprise and entrepreneurship and as such provide basic
knowledge about enterprise and entrepreneurship’ was the easiest part. The simulation, although
there were some technical difficulties initially, proved to be an effective learning tool to compliment
more traditional teaching methods. It proved an innovative but effective way of addressing the
challenge of large cohorts of students. The students learnt more through the reflective process than
was originally anticipated. Often the students did not realise exactly how much knowledge and
understanding they had acquired but it was evident in their business reports.
The Business Report proved to be a good way of assessing student progress and has been revised
into three parts to include a stronger two stage analysis of the group/ team dynamics in addition to the
written business report consisting of an overview of achievements, annual reports, final accounts and
timesheets. Statements of ownership are included with each piece of group work submitted. The
reflective elements were the most insightful component of the assignment and helped understand
business decisions, attitudes and dynamics affecting the team motivation and how people work and
interact together.
Most students seem to really engage with the use of a simulation as something different from their
other lectures. One of our biggest surprises was how open the students were to reflecting on
themselves, their skills and how the group interacted with each other. This is very refreshing and
offers great potential for development in the future. Self-awareness is a valuable tool.
166
The quality of the business reports demonstrated that students developed a greater level of
understanding than was anticipated. There was evident understanding of the different aspects within
a business and they understood the chronological order of the processes such as, the benefits of
researching the market and competitors before starting to try and sell in order to decide which
segment to target, selling points to focus on and prices to charge. Students do not necessarily
appreciate how much they are actually learning so moving forward a greater emphasis on explicit
observational reflection is useful.
The entrepreneurship section of this skills module has recently been increased and it also continues
to provide an innovative introduction to entrepreneurship to compliment the variety of other practical,
experiential learning modules that have been introduced at levels two and three as part of ongoing
developments. Some of these modules involve working with local businesses, setting up virtual
businesses, social enterprises and community projects and preparation for new business start-up on
graduation, and it can be recognised that this module can provide a useful platform to help students
progress though their university experience.
4. Case study 2: Leeds Metropolitan University
4.1 Background
The background to entrepreneurship education at Leeds Metropolitan University has been mapped
out by previous papers such as Schiener et al (2007), where is it noted that the University has been
delivering innovative education in this field for a number of years and by a variety of methods. It is
further reported that around 4% of the students are currently engaged in entrepreneurial activity i.e.
they a operating their own ‘enterprise’, either on a formal or informal basis (Robertson 2004-6).
This case study is concerned with one such teaching method, the module ‘Business Analysis and
Practice’ (BAP) which is a core module delivered for all Faculty of Business and Law Level 2 students
on some of the Universities most popular courses and is regularly delivered to some 500+ students
annually. Additionally, the module is also offered to some Carnegie (Faculty of Sport and Education)
and International (e.g. Business, Language and Erasmus) students, and these are typically around
50-100 students per year. It is for the latter cohort that a new approach was taken to pilot a new,
innovative approach to the delivery of the module in 2008-9, and repeated in 2009-10.
4.2 Teaching and learning methods

The ‘normal’ delivery of this module also uses a computer based simulation of a car manufacturing
organisation within the European car market to achieve its education aims and outcomes of providing
“a simulated experience of how organisations work enabling skills and knowledge from disparate
subject areas to be synthesised and assimilated in solving relatively complex business problems”
(BAP Module Specification 2008 Leeds Met University). In the module students are formed into
teams, each of whom is responsible for the performance of their own organisation. In many ways this
simulation achieves its educational objectives well, however there are some issues in that the current
simulation is perhaps more akin to strategic business administration as distinct from entrepreneurship
and providing an enterprise experience, and there are now alternative simulations available in the
marketplace, and it is one of these that this project tested to perhaps provide the students with an
enhanced enterprise experience.
The intention of this project was integrate the business start-up simulation package ‘SimVenture’
coupled with a more ‘problem or enquiry based learning’ (PBL or EBL) approach to individual and
group working. This was the first use of this simulation package within a taught module delivered at
Leeds Met, and as such it is was our aim to ascertain the suitability of the simulation in the teaching
environment of the University and make recommendations for the future. In order to re-design the
module to integrate the new simulation and PBL approach a small team consisting of a University
Teacher fellow (and experienced BAP tutor), a representative from the University’s Institute for
Enterprise, a former BAP student (as part of her placement year with the University) and the current
module leader all met, discussed and agreed the overall revised approach to the module delivery. The
following is an extract from the module guide for students to illustrate this new approach:
“The module will be conducted using the process of Enquiry-Based Learning (EBL)…..
The learning is developed through exploration and investigation by dealing with complex,
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‘real-life’ issues and problems. It is an active and dynamic way to learn, and connects
theory and practice. It will also help develop skills, such as enterprise and employability
skills highly valued by employers, and can be a sociable and fun way to learn.
The module will be based around a simulated business experience, with students
working in teams to achieve the learning outcomes and aims of the module. Each team
should aim to grow and develop their own business, and by mid-module have gained
sufficient knowledge of the business and the markets to write a business plan and then to
put the plan into action.
Teams will be permitted set their own organisational objectives through a Business Plan,
and their organisations will be measured against these objectives throughout the
module.” (BAP Module Guide 2010).
Assessment of the module was by means of a Business Plan ‘document’ and a presentation and
accompanying ‘Annual Report’ document providing information of company performance during the
simulation. This form of assessment is deliberately identical to the module using the ‘car industry’
simulation.
4.3 Hewlett Packard

It should be noted that due to a parallel project involving the computer manufacturer Hewlett Packard
the University has been awarded a suite of tablet notebooks without which this pilot project would not
have been possible in its current format. The University would therefore like to express its gratitude to
Hewlett Packard for their generosity in the provision of this valuable hardware. Our experience with
this initiative has been very positive and we would recommend that other educational institutions
consider applying to this project for similar such support from the company (Hewlett Packard ‘HP
Technology for Teaching Grant Initiative’ 2010).
4.4 Evaluation method

The module has been delivered for two successive years, and an evaluation has been made of the
impact on students by the University’s Institute for Enterprise. The evaluation was not designed to
compare this method of delivery with the previous, but rather the focus of the evaluation was to
assess the impact of the SIMVenture software on students and to report back on whether the financial
investment in purchasing the software had been value for money. The research design underpinning
the questionnaire was applied following a separate project undertaken by the Researchers
investigating a new approach to evaluating enterprise education curriculum in higher education
(Stewart & Harte, 2010). The approach taken to evaluate the SIMVenture module was designed by
applying the local contextual factors that are integral to the design and delivery of the actual module.
These are factors directly relating to the individual educator, the student, the university, the university
community and more importantly the subject discipline. Two key factors of context here relating to the
subject discipline are the actual module content itself and the use of the SIMVenture software to apply
the module content. Inputs from the module such as the module descriptor, learning outcomes,
learning methods and teaching inputs such as learning materials and access to university facilities
were all take into consideration when designing the questionnaire. This design resulted in the
evaluation being directly related to the module content within the subject discipline, enabling more
rigorous and useful impact on the results and thus making the evaluation more meaningful,
particularly for the individual educator. Furthermore, results from this evaluation in terms of the
student’s responses and their feedback will, we hope, prove extremely useful and real in respect to
any changes or improvements that are made as a consequence to the module content and delivery
etc. The sample size originally selected was 48 of which 38 students responded. More detail and
information on this evaluation process is available from the forthcoming report from the Institute for
Enterprise, Leeds Met.
4.5 Results
The survey asked a wide range of questions of the participants of this module, however in the
interests of conciseness only partial selected, relevant and balanced results are presented in this
paper. The complete evaluation will be made available via the University’s Institute for Enterprise web
presence in due course.
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5. Quantitative evaluation findings

The following are representative of the finding of the quantitative evaluation findings of the survey:
Question 1a: I am able to demonstrate a critical Question 1b: I am able to demonstrate a critical
understanding of the following components of a understanding of the following components of a
business: construction of a business plan business: implementation of a business plan
Question 1f: I am able to demonstrate a critical Question 1g: I am able to demonstrate a critical
understanding of the following components of a understanding of the following components of a
business: that actions have consequences business: failure to act impacts on others
Evaluation Findings (2)
Question 2j: In relation to business analysis & practice Question 2k:In relation to business analysis & practice
I am able to: understand the contribution of the I am able to: make decisions on functional areas for
functional areas to overall business performance overall business performance
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Question 2m: In relation to business analysis & Question 2p: In relation to business analysis & practice
practice I am able to: analyse company results for I am able to: construction of a company ‘Annual
evaluating company performance Report’
Evaluation Findings (3)
Question 3d: Question - Business Analysis & Question 4c - In relation to the following enterprise
Practice has enabled me to: work effectively as a skills and attributes I am able to demonstrate:
team member personal time management
Question 4c - In relation to the following enterprise Question 11c: Please rate how confident you feel you
skills and attributes I am able to demonstrate: are now to use a simulation to develop a business
confidence enterprise.
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6. Qualitative evaluation findings

In response to the open-ended question ‘Things I liked most about this module’ the following
comments from students are representative:
“I enjoyed the reliance on group work and the opportunity to work to personal skills. This
business simulation was confusing initially, but once my group were used to the system
we operated more efficiently. I found the whole process helpful though at understanding
business processes.”
“I liked the opportunity to learn about business and the way it is run. It gave me a better
understanding of what to do when owning my own business some day.”
“I like this module because I learned how important it is to look in all business and
company areas and stick them together. You have to make decisions and you see the
results. You have to be creative with your business decisions and think about the results
would they can be in the future. The programme is realistic and therefore I found it
interesting to work with and to make my first experiences with a company”
In response to the open-ended question ‘Things I liked least about this module’ the following
comments from students are representative:
“The only thing I did not like about this module was the fact that we were not able to use
the computers during the week, and i sometimes felt unable to ask the teacher
questions”
“The fact the whole module is group based. The lack of feedback and contribution from
the tutor. It meant many members of my group became stressed as we were unaware
exactly what was expected of us.”
“I thought the support for the computer simulation was too limited. I didn’t like the trial
and error process in starting the company, a result of less support, I believe.”
“I would have liked some more advice from the tutors on how the system works and on
how to write a report and a business plan.”
“Assignment time- only having a week to do a business plan and presentation- we had
problems with meeting up because people had different things for different modules and
everyone in my group worked [external paid jobs].”
7. Limitations to the research
The limitation of this research have already been mentioned elsewhere, but in summary it can be
noted that the researchers did not use this as an opportunity to ‘compare’ different modes of delivery
using different simulation programmes. In addition the sample size, while a good representation of the
module cohort, is nonetheless relatively small in number.
8. Conclusions
The responses show how the combined approach of the simulation and module content and EBL
approach has impacted positively on student learning, however we do acknowledge to an extent
these are assumptional claims, particularly as we have no prior comparisons. However, these are not
generalisations and are specific to the simulation and experience here at Leeds Metropolitan
University. Therefore, while our research approach is limited in this case, the results are still
nonetheless useful and applicable for our educators to use validly, feedback into and effect
improvements to the module.
The use of the simulation with this module appears to have increased the interest of the students in
this topic area and made the teaching and learning more engaging. This is evidenced clearly in the
qualitative data. However, despite that there are also a number of constructive comments from the
qualitative data that can be triangulated with the quantitative data which in general appear to refer to
the ‘Problem’ or ‘Enquiry’ based learning approach. It is perhaps a feature, or failing, of this approach
that if it is not more universally adopted in an institution, it can potentially leave some students feeling
vulnerable to a lack of specific information (telling them exactly what to do, when, and how to get a
good grade). That said, it is the authors’ view that for the majority of students, specific module
learning outcomes have been achieved but perhaps more satisfying is that general, higher level
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lessons and appreciation of owning, managing and growing a small business (‘entrepreneurship’?)
have been absorbed for the majority.
9. General conclusions
It can be observed from the results of these case study universities that the use of the business
simulation has indeed provided some of the experiential learning, as mentioned in the abstract and
introduction, aimed at helping “young people to be more creative and self-confident in whatever they
undertake” (European Commission 2008) and “provide a safe environment for encouraging students
to stretch and test themselves, to experiment and develop an understanding of risk-taking” (World
Economic Form 2009). Students have felt that they better understand key business concepts and
issues, and how their own actions, either in teams or alone can affect the business performance. This
kind of dynamic learning is difficult to achieve in a classroom setting, and the authors firmly believe
that the use of business simulation software packages can become one of the key tools in achieving
of entrepreneurship educational aims. The results of these two case studies can by no means indicate
that students are now accomplished in the start-up, operation and growth of a small business,
however there is a clear indication that their levels of confidence in this area will have been improved
as a direct result of this relatively short process in addition to their ability to work with a group and
independently in order to solve problems. Having now tried and tested the use of this specific
simulation software (SimVenture) the authors feel that in general the benefits of increased motivation,
participation and overall learning outweigh the costs, which have included money (in license fees),
technical issues (‘never work with animals or computers’), and to some extent minority student
disengagement, which for any teacher is always a huge disappointment.There is also a clear
indication that the use of a simulation as the basis for academic learning engages a wider number of
students. Student involvement and interest in extra-curricula activities improved and though this has
other resource implications, the excitement this approach creates among staff and students, leads to
a more cohesive approach to enterprise and entrepreneurship development within the university.
What this may mean for the longer term aspirations of this and future cohorts of students is unclear,
and a longer term study of such practice may reveal some of these effects. In both case study
universities further developments are already underway with other academic schools keen to make
good use of simulations as an academic resource for accredited learning. For both universities the
use of the simulation has proven to be a useful introduction to entrepreneurship, good student (and
staff) motivator and useful resource as part of a portfolio of innovative approaches to
entrepreneurship education. Both universities admit students from all over the world, different cultural
backgrounds and learning experience; plus, it is generally recognised that the traditional teaching
methods do not necessarily suit everybody or all subject areas. It is also important that we respond as
universities, to the changing world and experience of our students now live in. We feel that by piloting
work such as this, we are doing just that. It is the intention of the authors to use the lessons of these
pilot projects to shape and develop the modules described in this paper for future cohort while
recognising that you just cannot please all the people all the time.
References
European Commission. (2008) Entrepreneurship in Higher Education, Especially in Non-Business Studies. p.10-
11.
Hewlett Packard ‘HP Technology for Teaching Grant Initiative’ accessed at:
http://www.hp.com/hpinfo/grants/us/programs/tech_teaching/
Kolb, D. (1984) Experiential learning: Experience as the source of learning and development. Englewood Cliffs,
NJ: Prentice-Hall
National Entrepreneurship Observatory for Wales. (2007) Global Entrepreneurship Monitor. 2007 Wales
Executive Summary Report.
Rae, D. (2009) Enterprising Learning. Prospects, [Online]. Spring 09. Available at http://www.prospects.ac.uk
Accessed 12 July 2009
Robertson, M. et al (2004-6) Entrepreneurial Intentions Survey. Leeds: The Centre for Graduate
Entrepreneurship in Yorkshire, Leeds Metropolitan University.
Scheiner, C. et. al. (2007) Entrepreneurship Education in the UK and Germany – The Impact of Study Concepts
on Entrepreneurship Education Models, ISBE proceedings.
Stewart & Harte (2010) Evaluation of Enterprise Education, Institute for Enterprise Leeds Met University
(forthcoming publication).
Welsh Assembly Government. (2004) Youth Enterprise and Entrepreneurship Strategy (YES). Overview of
strategy document [Online] Available at http://www.projectdynamo.com Accessed 22 July 2009
World Economic Forum. (2009) Educating the Next Wave of Entrepreneurs. p.145.
172
Opportunities in Projects and Innovative Thinking
Anandasivakumar Ekambaram, Agnar Johansen, Ole Jermstad, and Andreas
Økland
SINTEF – Technology and Society, Trondheim, Norway
siva@sintef.no
Agnar.Johansen@sintef.no
Ole.Jermstad@sintef.no
Andreas.Okland@sintef.no
Abstract: Projects are popular work-form in the modern organisational world. They can be considered as
learning arenas, where new knowledge and solutions can be developed and applied. This paper considers an
important aspect of the concept of project, namely uncertainty. Dealing and managing with uncertainty in projects
is then looked at in connection with creativity and innovation. In order to establish the connection between
managing uncertainty in projects and innovative thinking, this paper utilises relevant organisational theories, as
well as observation and reflection on practice. Projects generally encounter uncertainty. Studies that were carried
out in Norway and England concluded that focusing on threats is the dominating aspect in managing uncertainty
in projects. Firstly, this paper tries to look at the positive side of uncertainty, i.e., opportunities. In this regard, the
paper attempts to characterise opportunities in projects – in general as well as with respect to different types of
objectives that are associated with projects. Secondly, this paper suggests ways of finding / creating
opportunities. The suggestions have two elements. They are (1) cooperation between project managers and
project owners and (2) project members’ attitudes and reflection. Cooperation between project managers and
project owners can produce a holistic understanding of projects. Attitudes point out the manner that project
members approach and deal with uncertainty (and opportunities) in projects. Thirdly, this paper tries to connect
the major concepts of this paper; connecting cooperation (between project managers and project owners), project
members’ attitudes, reflection, innovative thinking and managing uncertainty and opportunities. In addition, this
paper discusses how important it is to focus on the issue of innovation in project work and in the development of
the field of project management.
Keywords: uncertainty, opportunity, holistic understanding, attitudes, innovative thinking
1. Background
This paper is a part of one of the ongoing research studies related to the project called, “Practical
management of uncertainty viewed from the perspective of project owner” – in short, PUS-project.
Different organisations are involved in the PUS-project; including Statoil, Directorate of Public
Construction and Property Management, Norway, Telenor, Norwegian Armed Forces, Norwegian
Public Roads Administration and Norwegian National Rail Administration. PUS-project is associated
with Norwegian Center of Project Management (NSP).
2. Introduction
Uncertainty is one of the important aspects in the field of project management. Christensen et al.
(1991) defines uncertainty as the difference between currently available information and required
information when there is an effort of decision making.
Uncertainty can be seen positively or negatively; positively as opportunities to obtain better results
and negatively as threats related to obtaining worse results (Hillson, 2004; Loch et al., 2006;
Perminova et al., 2008). When it comes to managing uncertainty in projects, there has been more
focus on dealing with threats than with opportunities. Ward et al. ((2003) mention that practitioners
have a tendency to focus more on threats than on opportunities. Several research results also show
this trend (Amdahl, et al., 2008). Perhaps as a reflection of this trend, there is comparatively less
number of publications / literature on the topic of opportunities in projects.
We believe that it is relevant and important to look at opportunities – the positive outcome of
uncertainty adequately, because it can generate benefits to projects / organisations.
This paper aims to describe:

How relevant / important it is to focus adequately on opportunities in managing uncertainty in
projects: In this regard, we characterise opportunities in projects – in general as well as with
respect to different types of objectives that are associated with conducting projects, and present
relevant examples.
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Anandasivakumar Ekambaram et al.
Suggestions for identifying / creating opportunities in projects

Potential positive outcome of focusing on opportunities: We believe that creativity and innovative
thinking is closely connected to dealing with opportunities in projects – developing and facilitating
innovative solutions to improve effectiveness and efficiency of projects. This experience and
knowledge, which is obtained from dealing with uncertainty in projects, can then be applied in
wider organisational settings to obtain benefits.
3. Methodology
Our study is primarily descriptive. However, it also incorporates explorative characteristics, at least
certain extent. The manner data was obtained and looked at is of qualitative nature. The research
instruments / methods that we used are:
Interviews: Discussions were conducted at different points of time over approximately 6 months
on this topic. The discussions were primarily carried out in the form of workshops that focused
exclusively on the topic of opportunities in projects, in which representatives from different
organisations participated. The organisations belonged to sectors such as telecommunication,
construction, offshore and defence. There were 12 persons who participated in the workshops.
Discussions at the workshops were carried out with the help of sets of questions. These questions
and the following response and discussion can be considered as semi-structured, group
interviews.
Action research: Several sessions of uncertainty analysis were carried out in various projects.
One of the authors of this paper participated actively in and led / facilitated the sessions. In a
typical uncertainty analysis session, approximately 20 members from the respective organisation
take part. The participants belong to several professions / positions; for instance, project
manager, assistant project manager and construction manager. Experience form these analyses
were reflected upon in connection with the topic of opportunities in projects and used in this
paper. The uncertainty analyses were led / facilitated by this author in order to improve the
situation that the involved organisations encountered in connection with managing their projects.
These analyses can therefore be compared with action research, at least to a certain extent. In
this regard, it is relevant to look at a definition of action research. Greenwood et al. (2007, page 3)
define action research as
[…] social research carried out by a team that encompasses a professional action
researcher and the members of an organization, community, or network (“stakeholders”)
who are seeking to improve the participants’ situation.
This definition suggests the relevance of action research to our research study.
As we see it, our research methods helped us to obtain data in two different settings. Interviews can
be seen as arenas where the participants reflect on their past actions and experiences. Uncertainty
analysis sessions can be seen as arenas where the actual work is looked at while it goes on.
4. Characterising opportunities
The topic of uncertainty can be seen from various perspectives, and we would like to use the systems
perspective. We believe that systems perspective can be used to create a better understanding of the
topic that we focus on here.
4.1 Systems perspective

Systems thinking deals with an understanding of how a system functions; it deals not only with the
understanding of the individual parts of the system, but also the relationship between the parts of the
system (Senge, 1990).
A project can be considered as a unique system (one-time activity) that delivers a result-objective
within a limited period of time. Result-objective is, for instance, a building that is delivered as a result
of a construction project. This system consists of an organisation that delivers a product or a service,
and a supporting process (project management) that has the responsibility for coordinating and
managing resources, so that the result-objective will be delivered according to the time, cost and
quality that have previously been agreed upon.
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Figure 1 shows an illustration of the systems perspective in connection with our discussion on
opportunities in projects.
The system is basically instable and flexible at the start of the project, and it tries to achieve stability
and order by the help of establishing objectives, sub-objectives and plans. This will reduce uncertainty
of the system. Though the system becomes more controllable when it goes form the early phase to
the execution phase, it becomes more rigid, and the flexibility with respect to changes and adopting
new opportunities in later phases of the project therefore tends to diminish.
Before determining objectives and plans, threats do not appear, or they are not perceived; there is
only the positive side of the uncertainty, namely opportunities. Once the system defines its objectives
and assigns responsible people to accomplish the objectives, threats will be experienced. A threat for
the system can be defined as everything that can hinder the system to accomplish its objectives.
Threats
Force that influence the project as a system
System-limit
Project Ef
f ec
t
Requirement and need Result-

Result-
objective
Basic assumptions Input factors objective Effect
Product or
Product or
Business case service
service
Project management ct
Effe
Require energy and action from the project as a system

Opportunities
1st order consequences 2nd – 3rd order consequences
Time
Figure 1: Project as a system – opportunities and threats

Whether a condition in a project setting is seen as a treat or an opportunity will be based on the
stakeholders’ understanding of and association with the objectives of the system.
New opportunities can emerge at any time in a dynamic work environment. There can be internal and
external conditions (new opportunities) that the project did not consider when objectives and plans
were established. If these conditions are exploited effectively, then the project can deliver the product
/ service with the predetermined quality at a lower cost, or quicker than previously expected.
Internal conditions: Higher level of competence, effective resources / work methods, better team
development, optimal choice of technical solutions.
External conditions: Cooperation with new projects in the nearby area, which can lead the project
to save money by, for instance, common procurement; new products in the market, which can
lead the project to simplify its technical solutions.
Here are two examples that can illustrate that opportunities can appear / created during the course of
projects:
Project E18 Ostfold – a road construction project – passed through a quality assurance procedure
(QA2) with an estimation of NOK 1.25 billion. When the initial contracts came in, a new analysis
showed that the project, with a low probability, would manage to keep itself within the
predetermined frame of cost. (The analysis showed that the cost forecast was NOK 1.35 billion.)
The project carried out a process with the focus on finding potential opportunities that could
reduce cost. In the course of 4 hour time, opportunities were found to reduce the cost more than
NOK 150 million.
Project R6 – Construction of 3 government buildings – was at the phase of developing keys and
lock-systems that could deliver safe and secure solutions. This process originally included among
other things, design / project engineering, purchase and installation. But, the project participants
175
found out that there was another project that was going on primarily in connection with key and
lock-systems in government buildings. Then, the project R6 cooperated with the other project.
This cooperation produced benefit for the R6 project; for instance, reducing cost related to their
project engineering activities, and purchasing the key and lock-systems at a cheaper rate.
These examples were obtained in uncertainty analysis sessions.
The extent to which these opportunities are identified and utilised is dependent on the degree of
consideration on managing uncertainty. Active involvement, focus, energy and creative thinking are
required from the project manager or management team in order to materialize the benefits of the
opportunities.
4.2 Opportunities as 1st, 2nd and 3rd order consequences

Opportunities can produce effects and benefits for stakeholders of a project. Whether a condition in a
project setting is seen as a treat or an opportunity will be based on the stakeholders’ understanding of
and association with the objectives of the system; for example, a consequence of a project can be
seen as positive by a stakeholder, while another stakeholder views the consequence negatively.
Opportunities can be looked at with respect to different levels of consequences (cf. Figure 2)
Third order
consequences
Second order
consequences
First order
consequences
Figure 2: Opportunities are dependent on effects that they create for project stakeholders – 1st, 2nd
and 3rd order consequences
The first order consequences emerge within the framework of the execution of a project and
deliverance of the project’s result-objective. Opportunities are in this respect connected to achieving
project’s result-objective – particularly improving the result-objective.
Opportunities in terms of cost: The project can deliver more at the cost that was previously
determined, or with the predetermined quality at a lower cost.
Opportunities in terms of time: The project can deliver a predetermined product / service quicker
than planned, without increasing the cost and with the predetermined quality.
Opportunities in terms of quality: The project can deliver a concept that is better than the one
which was originally agreed upon, within the same frame of time and cost. Operational solutions
can also be considered here; for example, a project can deliver a product / service according to
the predetermined frame of time and cost, and the delivery is more optimal to operate.
The second order consequences are the effects that emerge after the project is completed. These
effects include benefits to the organisations that have been involved in the project, i.e., access to new
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markets and technology, development of new knowledge and competence within the respective
organisations, taking care of patients as a result of constructing a university hospital.
The third order consequences are broader effects of the project on the society. Opportunities in this
regard encompass establishment of new organisations and services as a result of the completion of
the project. An example here is a construction project called Snow-white project in the Finnmark
region, Norway. When the construction project was completed and operations were started, then the
surrounding environment / society has benefited from it; for instance, there were new work opportunity
for the local people, day care facilities for children, and schools.
5. Finding / creating opportunities
Dealing with opportunities (identifying and utilising opportunities) in the course of a project can be
seen in connection with the 1st, 2nd and 3rd order consequences. In this respect, how can a project
manager deals with opportunities effectively and efficiently?
5.1 Cooperation between project managers and project owners

A broader perspective is beneficial to deal with opportunities. A broader perspective can be
developed by establishing a good cooperation between project managers and project owners – a
strong involvement from project owners.
There are several definitions of the notion of project owner. We consider the following description of
the notion: A project owner has rights to and is responsible for the project. The project owner takes
the risk connected to the project’s cost and its future (Eikeland, 1999).
Project managers and project owners traditionally deal with two types of information; project
managers with detailed information (mainly projects’ internal conditions – operational), and project
owners with general / high level information (mainly, projects’ external conditions – tactical and
strategic). Establishment of a common understanding by combining and studying these two types of
information can lead the involved parties to identify / create opportunities effectively in projects.
Cooperation between project managers and project owners can generate several positive results
(though the cooperation can be challenging at times). Some positive results are:
Create better / broader understanding of the project (and opportunities) by comparing and
studying operational, tactical and strategic aspects connected to the project.
Contribute to ensure that opportunities are in tune with the project’s result-objective, effect-
st nd
objective and society-objective (1 , 2 and 3rd order of consequences).
Implement initiatives (with responsibility as well as authority) in order to identify, create and utilise
opportunities.
This situation can again be seen in connection with systems thinking; a holistic approach that is based
not only on the understanding of individual elements of a system, but also the understanding of the
connection and interaction between the elements of the system. A good cooperation between a
project manager and a project owner can produce a holistic understanding of the project, which can in
turn lead to identify / create opportunities in the project. Olsson (2007) also emphasizes the
importance of having a holistic approach in projects in order to identify and materialize opportunities.
This description of holistic understanding can be seen with respect to a discussion presented by
Steiner (1995). Quoting on Heidegger’s theories and thoughts, Steiner says that it is important to have
a total understanding when it comes to innovation. This total understanding comprises both an
understanding of the aspect that is under consideration as well as an understanding of how the
aspect is linked to other aspects in its surrounding environment. This total understanding can ensure
the intended usefulness / functionality of innovative solutions (products, work-methods, etc.).
5.2 Attitude and reflection

When project managers and other project participants have a tendency to look at uncertainty as an
undesirable situation, then they will probably miss the opportunities that the project has or can
generate. The focus on avoiding changes in projects can result in neglecting opportunities.
Exploration of opportunities requires that one has to accept imbalance now and then, and accept that
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it is not always possible to predict the future. At the start of a project, no one would have a total
understanding of what the project will achieve and deliver. This means that the project manager and
the project owner must explore and evaluate internal and external conditions, which are of dynamic
nature, through out the whole project and ensure the accomplishment of the objectives.
Effective exploration of opportunities demands a positive attitude towards uncertainty – that the world
is indeed unpredictable and uncertain. An apparent threat can incorporate hidden opportunities. The
way one looks at situations can make a difference. As the French writer Marcel Proust said,
The real voyage of discovery begins not in seeking new landscapes but in having new eyes.
The positive attitudes towards dealing with uncertainty can pose a question: Does this attitude
promote too much optimism (Flybjerg, 2007; Lovallo et at., 2003)?
However, we believe that in order to avoid too much optimism we should not abandon the avenues of
finding and creating opportunities. Being positive or optimistic does not necessarily mean that the
person is being unrealistic. This view can be compared with concepts such as positive organisational
behaviour (Luthans, 2002) and positive organisatioanl scholarship (Cameron et al., 2003), at least to
a certain extent.
If the danger of becoming unrealistic is felt significantly, then there can be a possible solution for it:
Reflecting on the current situation and continuously evaluating it.
This kind of continuous evaluation of uncertainty-elements can be done by asking fundamental

questions regarding what the project / organisation does; for example,
Why do we do that we do?
Why do we do it the way we do?
These questions are mentioned by Hammer et al. (1995) in connection with business process
reengineering (BPR). We believe that these questions can also be used in the context of reflection
and exploration that we describe here in connection with opportunities in projects.
Asking fundamental questions can lead the project / organisation to identify and utilise new
opportunities both internally and externally.
Asking fundamental questions can be seen in connection with what Schön calls the reflective
practitioner. He (Schön, 1998, page 61) says,
A practitioner’s reflection can serve as a corrective to over-learning. Through reflection,
he can surface and criticize the tacit understanding that have grown up around the
repetitive experiences of specialized practice, and can make new sense of the situation
of uncertainty or uniqueness which he may allow himself to experience.
The description mentioned above points out the possibility of new ways to approach and tackle the
situation at hand.
6. Innovative thinking
There are several ways that the term innovation can be understood. According to an introductory
article in the International Journal of Project Management,
Innovation is often used to signify something new, either a new product, service or other
output, and / or a new process and method (Guest editorial, International Journal of
Project Management, 2008, page 466).
Lenfle (2008) mentions that innovation can refer various situations, and it can be classified in different
ways. This description suggests the vastness and complexity of the term innovation. We consider
innovation as something new and creative that is intended to produce desired results.
In this paper, we look at innovation with respect to identifying and creating opportunities in projects.
We see that there is a clear connection between creativity / innovation and the topic of opportunities
in projects. It can be said that creative and innovative thinking can promote identifying and creating
opportunities in projects. In this regard, it is relevant to mention what Hillson says (2004, page 256):
178
[…] techniques designed to stimulate or support creativity and innovation are well suited
to encouraging organizations to think positively, see opportunities, and develop
strategies to capture benefits
This connection combined with the aspect of holistic understanding is depicted in Figure 3.
Holistic understanding Innovative and creative thinking

(Cooperation between project (Attitudes and reflection)
manager and project owner)
Identifying and / or creating

opportunities
Figure 3: Connection between holistic understanding, innovative thinking and opportunities in projects
There is also another way of looking at the connection between opportunities in projects and
innovation / creativity. Identifying and creating opportunities, materializing them and harvesting the
benefits of them can also encourage innovative and creative thinking in organisations.
There can be several methods / mechanisms that can be used to promote innovative / creative
thinking that can lead to identify and create opportunities in projects. Some of them are:
Brainstorming
Six hat thinking
The approach of business process reengineering
Scenario thinking
Creating artificial crises
SWOT analysis
Reward systems
These methods were applied by the organisations that have been involved in our research study on
the topic of uncertainty in projects. The respondents (participants at the workshops) emphasized the
significant role that organisational culture (attitudes, values, beliefs, etc.) plays in applying these
methods. The respondents also highlighted the importance of knowledge transfer in organisations. A
representative form an organisation that conducts construction projects mentioned that they had
learned many valuable lessons form the problems and challenges connected to one of their earlier
projects. The lessons were transformed as opportunities in the later project. Another respondent from
an organisation that belongs to the same sector mentioned that they had used worst case scenario
thinking (considering a kind of a financial disaster) as a method to come up with new understanding.
This new understanding enabled them to tackle effectively the financial crisis that took place later.
7. Reflection and concluding remarks
This paper is a part of one of the ongoing research studies related to the project “Practical
management of uncertainty viewed from the perspective of project owner” – in short, PUS-project.
The PUS-project itself is an innovative project that, among other things, aims at developing new
methods and routines with respect to managing uncertainty in projects.
179
Through our studies, we have seen that there is more focus on threats than on opportunities, when it
comes to managing uncertainty in projects. We have chosen to emphasize the focus on opportunities
– the focus that the topic of opportunities in projects deserves.
The way we look at innovation in this paper is not about conducting a pure innovative project or a
product development project. Instead, we look at the issue of managing uncertainty in projects as a
point of departure and take into account innovative thinking and holistic understanding as significant
elements that can be used to identify and create opportunities in projects. These opportunities can be
materialized in the forms of, for instance, new work methods, new organisational relationships, new
products and new services.
We adopted qualitative research method. The research instruments that we applied reflect semi-
structured, group interviews (conducted in workshops that exclusively focused on the topic of
opportunities in projects) and action research (in the form of uncertainty analyses in project
organisations). The research method / research instruments that we applied have their limitations –
possibly lack of extensiveness of the study. We did not study a particular project extensively as a
complete case study, viewing it from different perspectives through all of its phases. Conducting such
an extensive study can be future work that can shed more light on the topic of opportunities in
projects. Number of participants at the workshops may also be considered as limited. However, we
have to mention that the participants were actively involved and contributed to open and valuable
discussions.
The focus on innovation with respect to projects and managing uncertainty in projects is a relevant
theme for project management in the future.
th
There was a discussion at the 8 conference of the International Research Network of Organizing by
Projects (INROP VIII) in Brighton in September 2007 regarding the issues of the future of projects and
the link between projects and innovation. There was a paper published in the International Journal of
Project management in this regard that deals with the need to focus on the chaotic reality and creative
side of projects rather than limiting them to the narrowed frame of structure and discipline (Geraldi et
al., 2008). The paper also suggests and encourages “enhancement of maturity of project
management as a research discipline to facilitate a more comprehensive contribution to the wider
management field (ibid, page 588).
We believe that the topic of opportunity in projects can contribute to the wider management field. The
focus on opportunities can influence creating an organisational culture that promotes innovation and
creativity; uncertainty can thus be seen as a potential source of generating opportunities, not as a
condition that exclusively deals with threats. The lessons and experiences of how uncertainty is
managed in projects can be transferred / transformed in order to make positive effects on wider
organisational settings.
The research network on Rethinking Project Management funded by the UK government’s funding
agency Engineering and Physical Sciences Research Council (EPSRC) highlights the need for future
research in project management in the following directions (Guest editorial, International Journal of
Project Management, 2008, page 466):
From research on the lifecycle model of projects and project management to theories of
complexity of project management
From projects as instrumental processes to project as social processes
From product creation as the prime focus to value creation as the prime focus
From narrow conceptualization to broader conceptualization of the projects
From practitioners as trained technicians to practitioners as reflective practitioners
The topic of opportunities in projects can be compared with each of these directions to certain degree.
Our focus accepts the unpredictable, ambiguous and dynamic nature of projects that reflects
complexity of project management. Dealing with uncertainty, sharing project experiences and finding
nd rd
and creating opportunities in projects is a social process (brainstorming, etc.). Considering 2 and 3
st
order consequences in addition to the 1 order consequences with respect to finding and creating
opportunities in projects is more of a value creation process than of a mere product creation.
Focusing adequately / equally on opportunities rather than mainly on threats in uncertainty
180
management points out that this focus represents relatively a broader conceptualization of projects.
Finding and creating opportunities requires establishing a holistic understanding of projects and
engaging on reflection-on-action and reflection-in-action.
We do not claim that our paper covers all the major aspects of the topic of opportunities in projects.
We try to present a framework within the scope of this paper, mentioning relevant theories coupled
with empirical examples. Thus, we attempt to address the issues related to the aims of this paper,
mentioned earlier in Introduction. Our major intention is to stimulate discussion on the topic that can
lead to further development in both the theoretical and practical front.
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181
Recycling Stock Market Using Information and
Communication Technologies: An Innovative Service to
Create a Micro-Trend for the Environment
Evangelos Ergen1 and Panayiotis Ketikidis1
1
CITY College/International Faculty of the University of Sheffield, Thessaloniki,
Greece
2
South-East European Research Centre, Thessaloniki, Greece
ergen@ergen.gr
ketikidis@city.academic.gr
Abstract: European Commission in recent research findings regarding waste management introduced the
relation between wealth and waste. As European society has grown wealthier, it has created more waste. Each
year in the European Union, 1.3 billion tons of waste is thrown away. According to European Environment
Agency statistics, this amounts to about 3.5 tons of solid waste for every man, woman and child (European
Commission). A review made by the Organization for Economic Cooperation and Development found that
between 1990 and 1995, the amount of waste generated in Europe had increased by 10%. The same
organization estimated that by 2020, Europe could generate 45% more waste than it did in 1995 (OECD, 2006).
This paper proposes a service on recycling by bringing together technology, economy and environment. The
main idea is to establish a service which is expected to increase the recycling rates and create added value in a
region through a micro-trend. The purpose is to create a micro-trend among inhabitants trying to change the
attitude over recycling and attract them to involve in the protection of valuable resources. This research paper
investigates the acceptability and value of the proposed service among consumers as well as the potential
obstacles that might be raised on its implementation. A theoretical framework was adopted on three
complementary perspectives by integrating technology (ICT theories and practices), economy (finance and stock
markets) and environment (waste management & prevention). A cross-sectional web survey design was
employed in a global diversified sample of 100 participants (consumers, researchers, industry experts and
members of non-governmental institutes). The survey has been carried out in two phases: pilot phase and the
survey. Three types of analysis were conducted: descriptive data analysis, bivariate correlation and group
comparison. The global issue of environment’s sustainability combined to low recycling rates in the region of
European Union was strong motives for this study. The framework introduced has proven to be useful in
improving the recycling percentages in the region. Consumers are willing to participate in the new service. On the
contrary, recycling industry and local authorities might raise obstacles for the implementation, since its
introduction request changes to be made. The specific paper contributes to the recycling industry sector as well
as to other professional sectors that are involved in the recycling business.
Keywords: recycling, innovation, information and communication technologies, regional development,

environment, technology
1. Introduction
Recent studies have shown that, individuals follow a recycling behavior that is irrelevant or even
hostile to environment’s sustainability. Such behavior is multidimensional and is affected by different
socio-demographic and psychographic factors. Different roles with different causal characteristics
influence people, regarding their attitudes towards the environment (Meneses and Palacio, 2005;
Vicente and Reis, 2008). In order to affect peoples’ attitudes, there could be given a strong motive.
Such motive could be originated from the sense of reward. This is related to the meaning of adding
value to a practice, and remunerating an achievement.
According to European Union and the Sixth Environment Action Programme (European Commission)
recycling and reuse consist one of the three principles in the EU’s approach to the waste
management policies. The Committee of the Regions - part of the European Commission responsible
for the regional policies within European Union countries - has organized a series of events where a
number of significant surveys were presented, regarding the effort of finding a way of cultivating
sustainable policies for the protection both of the environment and human health. These policies
examine also the increase in the quality of life in regional level and the creation of wealth and
prosperity (European Commision, Inforegio).
As waste could be administered, it would be a challenge to recover as many of the materials as

possible through recycling. Since the reserves of raw materials are decreasing, there is a way nothing
goes wasted (Blumberg, 2005). A vast number of used products and materials have value that could
182
Evangelos Ergen and Panayiotis Ketikidis
be recovered through repair, disposition and recycling. There is “the rule of 1%” (Charles, 2006) which
is an emerging rule of thumb and suggests that if you get a group of 100 people online then one will
create content, 10 will "interact" with it (commenting or offering improvements) and the other 89 will
just view it. Micro-trends (Penn and Zalesne, 2009) are the small forces behind tomorrow's big
changes. They are based on the idea that the most powerful forces in our society are the emerging,
counterintuitive trends that are shaping tomorrow right before us.
This poses challenges and the proposed framework attempts to cultivate a scheme that could make
recycling process more attractive, trying to add value in a simple daily task, enforcing a different
attitude and turning negative impacts into positive values.
2. Technology, economy and environment
2.1 Technology
Current business trends are defined by wireless technologies, mobility trends and proximity. This
framework includes people interaction and communication as well as services that could be
developed for any use. Technology adoption, incremental changes, imitation and combination of
knowledge are some alternate ways of innovating.
Recent developments in information and communication technologies (ICT), have cultivated an

innovation friendly environment (AT&T, Westech,2005). European Commission in a recent technical
report (EU Joint Research Center) regarding the mapping of European wireless’ trends and drivers
concluded that new technologies affect people and resources through their direct pervasion in a
catalytic way. New trends in business telecommunications have caused the appreciation of their
business value and have defined a new digital business environment (Innovison Research Institute,
part I-III, 2007). The catalytic discovery was the introduction of mobility, which is applied through the
wireless communication and the mobile computing. AT&T and Orange, have already announced new
services offered to their customers relating to digital payments through their phones, replacement of
credit cards, tickets, even e-commerce solutions (Morris, 2007; AT&T Brief Report, 2007). Such key
events create market trends and define future opportunities (Source Media, 2008).
European Union focuses in the application of a cohesion policy (Commission of the European
Communities, 2008). It highlights that current era of financial crisis could be a suitable period for
investing in energy efficiency, clean technologies and environmental services. Such crises are
opportunities for behavioral changes since large group of people are involved and affected; therefore
it is easier to penetrate in their mentalities and create micro-trends.
2.2 Economy
The financial sector followed technology progress and fostered entrepreneurial initiatives. The jointure
of technology and finance gave birth to new economies. Technology helped finance to reach the other
side of Atlantic implying clearly those new economies emerged due to technological advancements
(Krugman, 2000). Globalization and technology have facilitated their invasion to daily economic life
and a set of financial tools have been developed to increase money generation. This move affected
people’s psychological biases, shaped specific types of behaviors and have directed investors in the
effects of overconfidence, socialization and familiarity(Tourani and Kirkby, 2005).
The new era has been characterized by the mobility of capitals through stock markets and “carry
trade”. Globalization has created the suitable environment for the cultivation of stock market mentality
among individuals (Aksoy et al., 2008). Learning to invest is a life-long course which may support
local communities to overcome difficult situations, especially when changes are mandated either in
economic or social level (Nofsinger, 2005). Investing leads people to start thinking by developing
mental accounting, mental budgeting and by matching costs to benefits. In such a way, they learn to
develop risk perception in the real world; they build behavioral portfolios, increase social interaction
and develop a social dynamic. Such techniques primarily improve the economic behavior of
individuals and in an extent, drain their characteristics in other sectors of life.
A local survey made in USA about recycling behavior, found that, economical benefits may be a
significant factor that affects the recycling behavior (Morgan and Hughes, 2006). In another study
about recycling and international trade theory (Kazunori, 2007) it was identified that subsidies in the
183
recycling sector are a strategy that is followed so far, and it aims to strengthen local economies and
change the direction to a higher recycling ratio. The waste costs are strictly related to the optimal
welfare rates because, through time, such costs aggravate the available resources of the community.
2.3 Environment
European Union supports the aid for environmental protection (Commision of the European
Communities, 2009) starting from waste management and going further to activities such as re-
utilization, recycling and recovery. According to “The Sixth Environment Protection Programme” waste
prevention and management is one of the four top priorities for the Community (Commision of the
European Communities, 2009). Both European Union and United States (US Protection Agency) have
set the waste reduction and recycling as crucial parts of a bigger environmental plan for the years to
come. Mass production and use of raw materials is not an endless channel (Aaron, 2008). Soon,
companies will be obliged, by the circumstances, to use only recyclable raw materials.
Innovation and innovative approaches may be the answer to the environmental protection. Reverse
logistics, modern procurement techniques, supply chain management and current recycling processes
can transform a useless product to a valuable piece (Blumberg, 2005).
A wide research made from the Organization for Economic Cooperation and Development in 2006
(OECD, 2006) presented that recycling markets face weaknesses and discrepancies considering their
primary mission. A possible re-design though could help them to overpass failures and barriers and
increase their effectiveness in terms of contribution. Alternatively traditional recycling policies and
operations could be enriched with more effective tools that take advantage of information and
communication technologies. Issues such as: (a) search and transaction costs, (b) quality of recycled
goods and (c) penetration of recycled materials in the markets, could be easily coordinated by simply
bringing together the involved parts through a communication tool. The Organization concluded that
this is a desired outcome which does not exist but is expected to be found. Furthermore, there is a
value-action gap in waste recycling which could be filled gradually by developing awareness among
targeted groups, such as young people (Chung et. al., 2007).
3. Study propositions and hypotheses
This study investigates a model that involves people in the learning process of building an investing
behavior and contributes in recycling and waste prevention. Moreover, the development of other skills
such as self-control, self-obedience and effective decision making, establishes a healthy framework
within the region that could change its progress. The intention is to ensure sustainability and provide
real tangible results in a wide supply chain by placing the end-consumer in the first link of a reverse
green network.
The initial idea and proposition is to establish a company which will administer recyclable products
(aluminum, glass, paper and plastic) by incorporating the philosophy of auctioning and using the
know-how of stock markets and investing. For the effective operation of this effort, it would be
considered necessary to depend on information and communication technologies. Participants could
be: people as end-consumers; the company which will administer the service; the companies as
traders and sellers since they sell the products; the recycling industry; the environmentalists; the
governments;
Consumers will recycle their products; companies make offers to consumers in return of their
increasing recycling participation; recyclables are sent back for reuse; recyclables are placed in an
on-line auction system and the interesting parts give their offers to receive the material; consumers
get back electronic shares analogous to their participation; the shares can be exchanged with
products in the network of participating companies; It is hypothesized that a region-based prototype
cell is created which will be supported by the regional authorities, professional associations,
participating companies and the consumers. Since the concept incorporates the philosophy of
auctioning, the service was assigned the name: “Recycling Stock Market with the use of Information
and Communication Technologies (ICT)” or simpler Recycling Stock Market (RSM).
184
4. Methodology
4.1 Method and sample selection

A cross sectional web-based survey was carried out among variety of entities, aiming to make
survey’s characteristics stronger and the results wider. In addition, another characteristic was the
diversity of the sample. A personal email was sent to the respondents inviting them to visit the web
site and participate in the survey. There were 100 participants originated from the following groups:
(1) Researchers, who have a relation with the studied fields, (2) Consumers, (3) Professionals, in
terms of technology and economy; industry experts, (4) Non-governmental institutes, in related areas
such as environmental associations. The questionnaire was designed depending on a three-pronged
strategy: (a) get feedback on a primary evaluation of the service, (b) get information on the potential
value of the idea, and (c) get information on potential obstacles.
A 37-item structured electronic questionnaire was developed. The questionnaire was available to all
respondents in order to achieve accessibility and time efficiency. Moreover, there was an on-line full
presentation of the study (http://www.ergen.gr/Recycling_Stock_Market.html).
4.2 Data collection

Data collection developed in two phases. In the first phase, the pilot, the questionnaire was distributed
in 20 participants in order to get feedback about its characteristics. The feedback was positive and the
questions considered simple and understandable, short and clear in their meanings. The
questionnaire was available, either in electronic form or in hard copy accompanied by explanatory
leaflet. The duration of this phase was one week. No serious changes in the original questionnaire
have been done, except some re-phrasing in a number of questions.
In the second phase, the final version of questionnaire was available only through the web site’s
electronic version (http://www.ergen.gr/web_survey/questionnaire.html). The duration was three (3)
weeks. An electronic invitation was sent to more than 300 potential participants in either their personal
or professional emails. The number of respondents in this phase was 80 (response rate = 26.7%).
5. Results – findings of the study (descriptive statistics)
There were 20 participants in the pilot phase. The results were adapted in the research questions: I(a)
Get feedback on how this service is evaluated (Primary Evaluation); (b)Get information on the
potential value of this idea (Value and Sustainability); (c) Get information on potential obstacles
(Barriers, Obstacles and Threats) (Appendix A, Recycling Stock Market - Technical Report, 2010)
In the survey a number of 80 questionnaires/respondents congregated from different areas of

expertise and different places of the world.
5.1 Frequencies (percentages)

Questions (Q1-Q7) of the questionnaire capture the profile of each respondent (see Appendix B in
Recycling Stock Market – Technical Report, 2010). The vast majority of participants were employed
(over 80%), and not living alone (approx. 70%). A 52% of them are married and a 90% are at least
University graduates. A 65% come from the age range of 30-49. The gender was almost balanced,
48% females - 52 males, while a 70% of the respondents declared consumers. The rest 30% were
industry experts, researchers and environmentalists. The typical profile of the respondent is the
following: male/female consumer, aged 30-49, employed and married, with high educational
background, living with others in the same household.
Questions 8 to 21 are depended to the evaluation of the service. More than 80%, of the participants,
found the idea of the new service as interesting and very interesting. Regarding the issue of potential
participation in the service, 55% claimed that would definitely participate, 25% declared that would
just participate, while a 20% were negative in the idea of participation. In both cases the positive
percentages were over 90%. Also, it may work as an initiative for people to recycle more but it is not
so sure that would change people’s attitude. There is a 30% who believes that people will not be
affected to change their routines. The same occurs with the case of living standards. There is a 44%
who believes that living standards will not be affected. Obviously, this service may benefit the region/s
where it will be applied and there is a strong sense among participants about that (over 70% positive).
185
Finally, respondents declared that RSM is a smart way to recycle (over a 92%). It is a kind of service
where people have some kind of direct tangible benefits (over a 92%), (Appendix C, Recycling Stock
Market-Technical Report, 2010).
Questions 22 to 29 are depended to the sustainability of the idea. A 43% of the respondents were not
sure that the service could create growth in the region/s that will be applied although in the previous
section a 70% were positive that could benefit the region/s. Participants do not see the service as an
economic tool but mostly as a social initiative. Moreover, they are not so sure that this could bring
income to them, only a 43% were positive about that. The penetration of the service in households
seems to be an issue. An approximate of 37% declared that there would be high or rather high
penetration while the rest bigger percentage declared adequate and not adequate. Respondents were
positive that companies will participate, if they see it as a marketing tool and an opportunity for
expansion. Environmentalists will definitely embrace the idea while there is a question mark on local
authorities, since there is a 41% who see it possible to help, there is a 25% who agrees that they will
help and there is a 34% - not low – that expect local authorities to be negative (Appendix D, Recycling
Stock Market-Technical Report, 2010).
Questions 30 to 37 are depended to the potential obstacles that are identified in this effort. A 55% of
the respondents were either moderate or pessimist regarding the implementation of idea and how
easy this could be. They have identified that obstacles will be raised by organizations, governments,
companies and experts. An approximate of 80% agreed that current market will be a possible source
of conflict. In addition the environment may not be friendly since legislation issues could be raised as
well. Among these, an approximate of 60% claimed that companies and consumers may not
participate since the conditions will not be suitable to accommodate such a service. Moreover, it is
possible for the idea to be expensive. A 20% only declared that there are no obvious benefits from
this service while on the contrary; an 80% agreed that the service has obvious benefits (Appendix E,
Recycling Stock Market-Technical Report, 2010).
5.2 Other descriptive statistics

Further to the examination of frequencies, there are a number of correlations that were examined
based in the relation of certain parameters. By applying crosstabs analysis on them there are
extracted statistics and measures of association. For example in the intention to find how the
participants have evaluated – per group – the new service (Appendix F, Recycling Stock Market-
Technical Report, 2010), it is presented that consumers are more positive comparing to
environmentalists and industry experts. In addition researchers seem to be positive and have found
the idea interesting. On the other side, consumers and environmentalists found to have less positive
opinions. In addition, the chi-square test which had a value of 0.01 proves that the difference of
opinions is not due to chance variation, which implies that each category has a different range of
opinions and depending in the specific sample we may generalize the outcomes. The chi-square test
measures the discrepancy between the observed cell counts and what we would expect if the rows
and columns were unrelated.
In Appendix G (Recycling Stock Market-Technical Report, 2010), is given the detailed analysis of
means of the values. There are included the standard deviation as well as the minimum and
maximum value that each question received accordingly. Almost in all questions (excluding 2) the
standard deviation appeared to be bigger than 1, implying that there was a distance in opinions in the
sample.
Respondents seemed to converge only in questions regarding (a) that the idea is interesting and (b)
that environmentalists will support it. The biggest deviation appeared in the last question, where it is
declared that there are no obvious benefits from the implementation of the service. Respondents
identified this fact as a possible barrier but the opinions found to be much diverted (SD 1,867).
Another significant deviation has been identified in the question about the ease of implementation of
the idea. Although it was expected a negative result in this question (SD 1,371), it seemed that there
were respondents that either believed in the implementation of it with no serious barriers or not.
Most of the results analysis, have been performed in terms of the (4) groups of participants, since it
was considered of major interest to investigate the possible different approaches, attitudes and
lifestyles of such groups.
186
5.3 Methods ANOVA and means comparison

In continuous there was an analysis performed in terms of comparing 5 different variables regarding
the service, based on the collected results. These variables were: (a) the evaluation of the service
(Q8), (b) the intention of participation (Q9), (c) the affection in living standards (Q15), (d) the benefit to
the region (Q16) and (e) the most popular characteristic of this service (smart way to recycle) (Q20).
There is a linear relationship between the groups of participants in all five questions. Since (siq.) were
less than 0.05 in all cases there are significant differences among groups in terms of the responses to
the specific questions. As this result was really interesting, the ANOVA case was applied to the whole
questionnaire using as a factor of research the group that each participant belonged to (Appendices
H- I, Recycling Stock Market-Technical Report, 2010). On the contrary, the analysis of variance
shows that there are a number of questions that have no significant differences regarding the
responses. Environmentalists will definitely embrace the idea and this is a common evaluation within
the 4 groups, although there will be raised obstacles from different parts in the effort to implement the
idea. Moreover, it is possible that both consumers and companies will avoid participating, giving the
fact of legislative issues, the conflict with the “status quo” of recycling industry and the high cost of
idea’s implementation (Appendix J, Recycling Stock Market-Technical Report, 2010).
6. Discussion of findings
The idea of Recycling Stock Market is interesting and attractive, but not easy to be implemented.
There is a positive attitude and willingness to participate and support the new service but current
situation will probably raise obstacles. This is a case of resistance to a new service which although
may be challenging is usually faced as a threat. A well-established network of companies and
organizations is difficult to be changed. Radical innovative approaches are not easily implemented
beyond the given conditions either in market or society. As an additional tool below it is given a table
where on the left side is given parts from the literature and on the right side the corresponded findings
from the study.
Findings from literature Relation with findings from the study
People follow a behavior that is irrelevant to Although a percentage of more than 70% of the
environment’s sustainability participants agreed that RSM will benefit the
Attitude is distinguished from behavior environment and will save valuable resource, there
was a 20% which declared that will not participate
while another 25% was not so sure about its
participation
There is a difference among what people perceive There is a 30% of respondent that expect non
and what actually do participation from the consumers
Whenever this is necessary we should not be afraid Over a 70% argues that industry will raise obstacles
to mandate changes trying to keep current situation unchanged
This concerns sustainability
Anything could get a price if applied innovative tools Over an 80% found RSM a smart way for recycling
that give value to its existence since there is a tangible reward
OECD presents that recycling industry suffers from An approximate 80% foresees that the new service
failures and discrepancies. A possible re-design will have conflict with recycling industry
should be considered seriously
There is a value-action gap in waste recycling which Over 70% believes that RSM could change current
could be filled by developing awareness among recycling processes. Another 60% accept that this
targeted groups service will make them increase the frequency of
recycling
Innovative community-based tools introduced by the Over a 70% agrees that RSM will benefit the region
World Bank where it will be applied
Economic benefits may be a significant factor that A 70% of the participants declared that RSM is a
affects recycling behavior smart service because you can earn money from
Subsidies in the recycling sector are a strategy that garbage
aims to strengthen local economies and change the
direction to a higher recycling ratio
Recycling sector could become a significant factor for More than 60% believe that RSM will face legislation
a region if adopt simple procedures and find minimum issues and it would be affected by the negative
obstacles from legislation and paperwork attitude from local authorities
Developing new comparative advantages in the Over 60% of the respondents see this service as a
period of crisis with the use of clean technology may game
lead to sustainable growth
187
Results from the statistical processes of pilot and full questionnaire, were used to construct the
conceptual framework of this service (Appendix K, Recycling Stock Market-Technical Report, 2010).
Study’s findings were adapted in the framework of new product development. As a result there have
been constructed (a) the Porter’s five sources model, (b) the industry attractiveness model and (c) a
SWOT analysis (Appendices L-M-N, (Recycling Stock Market-Technical Report, 2010).
7. Conclusions and recommendations
The full survey which took place in 80 participants concluded that consumers are willing to participate
and to embrace the new service. Other players of the same market as well as current industry might
raise obstacles. Recycling industry, their affiliate companies and local authorities that exploit
recyclables, are not expected to support the service.
Considering that most of the respondents were consumers, this conclusion reflects their perception.
They accepted the service as a smart way for recycling and show their care for protecting the
environment and saving valuable resources.
It is recommended to focus the survey to participants from recycling industry and local authorities. It
would be valuable to continue and investigate any other possibilities that could help this idea. It would
be an alternative to examine, with the help of industry experts, the scenario of merging the idea’s
characteristics with other existed services. In this effort, it could be an asset to include the
participating companies, since it has been proved that their power might be significant in terms of
accepting and supporting the service.
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Media, pp. 16-17.
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Long-Term Stock Market Valuation of Customer Satisfaction”, Journal of Marketing, American Marketing
Association, Vol. 72, pp. 105-122.
AT&T. “Emerging Technologies in the enterprise: A qualitative review of survey findings, WiFi, WiMax and RFID
technologies to help companies gain a competitive advantage”, http://www.pmi.it/file/whitepaper/000271.pdf
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Blumberg, F. Donald. (2005) Introduction to Management of Reverse Logistics and Closed Loop Supply Chain
Processes, CRC Press, USA, pp. 5-6.
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Community Guidelines on State Aid for Environmental Protection”, Official Journal of the European Union,
April 2008.
Commission of the European Communities. (2009) “Handbook on Community State Aid Rules for SMEs
(Including temporary state aid measures to support access to finance in the current financial and economic
crisis)”, Study Report (Part of a Commission’s proposal for the European Economy Recovery Plan).
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European Commission, Committee of the Regions, InfoRegio,
http://ec.europa.eu/regional_policy/conferences/od2008/docu_t2.cfm?nmenu=3&sub=2&smenu=271
EU Joint Research Center European Commission. “Mapping European Wireless trends and drivers: Executive
Summary”, Technical Report EUR 22250 EN.
Innovision Research & Technology plc. (2006) “Near Field Communication in the real world – part I, turning the
NFC promise into profitable, everyday applications”, 30 June 2006, White Paper, http://www.innovision-
group.com/press_view.php?newsID=50
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System on Chip (SoC) integration”, 19 April 2007, White paper, http://www.innovision-
group.com/press_view.php?newsID=60
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Volume 11 (1), pp. 1-12.
Krugman, Paul. (2000) Pop Internationalism, Massachusetts Institute of Technology, Polis Editions.
Meneses, Gonzalo Diaz and Palacio, Beerli Asuncion. (2005) “Recycling Behavior: A Multidimensional
Approach”, Journal of Environment & Behavior, Vol. 37, No. 6, pp. 837-860.
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Morgan, W. Fred and Hughes, V. Margaret. (2006) “Understanding Recycling Behavior in Kentucky: Who
recycles and why”, JOM, Issue of August 2006, pp. 32-35.
Morris, Iain. (2007) “The future is contactless, Orange says”, Journal of Telecommunications, Horizon House, p.
7.
Nofsinger, R. John. (2005) The Psychology of Investing, Second Edition, Prentice Hall, USA.
Organization for Economic Co-operation and Development. (2006) “Improving Recycling Markets”, OECD
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Penn, J. Mark and Zalesne, E. Kinnney. (2009) Microtrends: The Small Forces behind Tomorrow's Big Changes,
Twelve Publications, pp. 1-5.
Source Media. (2008) “Market Trends: Key events that could affect your business”, Journal of ISO & Agent, p 11.
Tourani-Rad, Alireza and Kirkby, Stephen. (2005) “Investigation of investors’ overconfidence, familiarity and
socialization”, Journal of Accounting & Finance, Blackwell Publishing, No 45, pp. 283-300.
US Environmental Protection Agency. “Preserving resources, preventing waste”,
http://www.epa.gov/epawaste/partnerships/wastewise/index.htm
Vicente, Paula and Reis, Elizabeth. (2008) “Factors influencing households’ participation in recycling”, Journal of
Waste Management & Research, Vol. 26, pp 140-146.
Westech Communications Inc. (2005) “Can Wi-MAX Address Your Applications?” White Paper, WiMAX Forum,
24 October 2005,
http://www.wimaxforum.org/technology/downloads/Can_WiMAX_Address_Your_Applications_final.pdf
189
Entrepreneurial Intents of University Students: Evidence
From Greece
Irene Fafaliou
University of Piraeus, Piraeus, Greece
fafaliou@unipi.gr
Abstract: Over the last thirty years or so, we have witnessed an exponential increase of the number of
entrepreneurship courses delivered in higher education institutions mainly due to claims that link relevant
education to entrepreneurship and employment creation. Current economic crisis gave further impetus to this
development which now appears to be on almost every government’s educational agenda across the world.
Despite, however, the merits of the above endeavors there is no consensus regarding the real impacts of
entrepreneurship courses with regard to the creation of new ventures. Along this line of thought, many scholars
suggest that entrepreneurship education differs from country to country and even across the same country from
one educational institution to another, mainly due to differences in learning practices and actual administrative
support. This paper seeks to add further information in this field by examining the students’ propensity towards
the creation of new ventures in an institution–specific context of certain Greek Economics and Business
University (a discipline-specific one), located in the metropolitan area of Athens. In particular, by exploring
students’ entrepreneurial attitudes and intents in terms of establising new business as well as the way they
perceive the support provided by the university environment, we try to identify the intrinsic and extrinsic factors
that nurture or hamper new ventures’ creation intents in the context of formal academic institutions. The present
research constitutes only a part of a multi-lateral academic research project on the students’ propensity towards
business foundation, initiated in 2008 by the German Centre for Entrepreneurship (ZMG), located in Mannheim,
Germany. For the present paper we conducted a structured questionnaire survey collecting data from 257
undergraduate and graduate students in the university under investigation. Based on this sample we explore
certain motivational, socio-demographic and environmental factors that might influence students’ attitudes
towards founding new business. Contrary to popular perceptions dominant in other western economies, our
results indicate that the majority of the university students surveyed are not inclined towards any startups’
creation and have no grand business foundationt ideas. Further, our findings related to socio-demographic
characteristics suggest that the propensity towards the creation of new business is statistically significant only for
factors such as the students’ prior entrepreneurial experience, their father’s entrepreneurial background and the
students’ prior experience in leadership. No environmental barriers were found to significantly affect those
students’ business establishment propensity. The paper concludes with recommendations for making
entrepreneurship education more customized to individual institutions’ and the countries’ needs, thus, more
efficient in encouraging students’ actual entrepreneurial activities.
Keywords: entrepreneurial intent, university students, experience for start-ups, university support, Greece
1. Introduction
This paper addresses the issue of students’ entrepreneurial intents and examines the role university
environments play in boosting ventures’ creation by students, thus enhancing overall countries’
competitiveness and economic growth (Birch 1979; Folster 2000; Reynolds et al. 2001; Keilbach,
Tamvada and Audretsh 2009). It is noteworthy that this case for research, targeted on students’
venturing propensity, is relatively new (Kuratko 2003; Gibb 2005; Schramm 2006; Klaper and Leger-
Jarniou 2006). Recently, it has been further reinforced by financial crises worldwide and turbulences
in labour markets (Mariotti 2009).
According to various officials in the European Union (EU) and elsewhere, the new problems in the
macroeconomics of countries brought about in the forefront of students’ employment agenda the
opportunity for an entrepreneurial career (European Commission 2007; Bosma et al. 2009; Volkmann
et al. 2009). In this respect, almost all, more or less, experienced governments, as regards their
potential in absorbing university students in entrepreneurial employment, set out a number of publicly
funded initiatives to support startups’ creation by students (see, for example, various budget reports of
the British HMTreasury since the early 2010s and ΕSPA 2007-2013 – The Greek National Strategic
Framework of Reference). Notwithstanding the contribution of such efforts, it appears that promoting
entrepreneurial policies for students is not a panacea due to a number of reasons associated with
matters such as students’ personal attributes, countries’ peculiarities, and higher education
institutions’ specific administrative and pedagogic factors. Further, it is often argued that the impact of
entrepreneurship education on students’ intentions to found new business is not clear. In particular,
this line of thought claims that earlier studies, based on cross national surveys and aggregate results,
are not able to capture any countries’ and markets’ differences as regards the benefits reaped from
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Irene Fafaliou
entrepreneurial activity due to inadequate consideration of the dual causality between the countries’
development and entrepreneurship activity (see, for example, Carree and Thurik 2009). Other
scholars suggest that entrepreneurship education differs from country to country and even more
across the same country from one educational institution to another, mainly due to differences in
learning practices and actual administrative support (Kuratko 2005; Pittaway and Cope 2007). Based
on the above realization, this paper aims to add some further information in the field by examining the
issue in a discipline-specific context of a Greek Economics and Business University, located in the
metropolitan area of Athens.
In this survey, we particularly investigate students’ understanding of a business pre-foundation

process. To this end we explore students’ entrepreneurial attitudes, perceptions and intents to
business foundation in a specific context of a Greek university. We further seek to elaborate the way
students wish to obtain support from their university environment. To our knowledge, the content of
the Greek students’ propensity for new business creation has not been explored by previous research
work. The remainder of the paper is structured as follows. Section 2 presents the survey
methodology. Section 3 performs the correlations and discusses the results of the field research and
the cocnluding section outlines policy implications, limitations of present work and propositions for
further research.
2. Research methodology
2.1 Data collection: Sample and context

The data used to empirically assess students’ propensity to found new business were collected via a
standardized questionnaire which was delivered in classrooms to a convenient sample of 257
undergraduates and graduates. In particular, the sample consisted of students who at the time of the
field research (winter semester 2009) were attending a first or a second degree course at the
University of Piraeus (UoP). The researcher approached students in four (4) undergraduate courses
(i.e. Macroeconomics, Industrial Economics I, Financial Institutions, and Entrepreneurship), which are
distributed over two academic departments out of the nine provided in total by the UoP (i.e. the
Department of Economics and the Department of Financial Management and Banking). In addition,
students from a post-graduate course (i.e. Total Quality Management – TQM), which is delivered by
the Department of Business Administration, were questioned. Before handing the questionnaire, the
researcher, who personally visited the classrooms in the university campus, explained to the students
the purpose of the survey. All students agreed to participate (N 260). Finally, 3 of the returned
questionnaires were invalid (not properly answered). The questionnaire contained 25 questions and
was based on an original version which explored 31 hypotheses and 153 variables that were
developed and extensively tested in earlier surveys undertaken by or under the auspices of the
German Centre for Entrepreneurship (for a detailed description of the hypotheses used and results
obtained, see, for example, Ruda et al. 2008; Ruda et al. 2009). The initial questionnaire was in
German; then translated into English and, finally, into Greek. In an effort to minimise the possibility of
translation bias, the questionnaire distributed to the Greek students was bilingual that is in English
and Greek (Brislin 1970).
In order to reach results regarding the impact of certain factors in the foundation propensity of the
respondents, the first part of the questionnaire, as Table 1 illustrates, examined various socio-
demographic characteristics such as undergraduate or graduate study course, number of semester
attended, gender, and age group. In addition, respondents were asked questions related to their
present status of living [alone, with other adults, with partner/spouse with or without child (-ren)], their
prior experience in leadership, and the existence or not of self-employed persons in their family or in
their broader private environment [Qs: (5), (6), (8), (9), (10)].
Table 1: Socio-demographic factors on foundation propensity
Factors
Gender
Age
Undergraduate or postgraduate study course
Number of semester
Present status of living
Prior experience in leadership
The existence or not of self-employed persons in their family or broader private environment.
191
Irene Fafaliou
In another part of the questionnaire, the respondents were presented with personal motivational
factors which might have influenced their propensity to business foundation [Qs: (2), (7)]. These
factors, known in the existing literature as the main determining psychological factors for
entrepreneurship (Hornaday and Vesper 1982), are illustrated in Table 2.
Table 2: Motivational influences on foundation propensity
Factors
Fear of unemployment
Self-actualization motives
Possibility of obtaining higher income
Flexibility of hours of work
Having power
Be one’s own boss
Realization of ideas
Risk propensity
Definition of other factors
Students were further asked to evaluate external environmental factors that prevent them from
considering new business foundation, such as the climate for new business formation in Greece and
in a few other countries or regions [in particular, (rest) Europe, North America, Latin America, China
and Russia]. Also, the respondents were asked questions related to the way they evaluate the
difficulties anticipated during the pre-foundation phase of a new venture [Qs: (1), (4)]. Table 3 shows
the pre-coded environmental factors.
Table 3: Environmental influences on foundation propensity
Factors
Evaluation of the climate for new business formation in Greece and other regions (Europe, North America,
Latin America, China and Russia)
Missing the "right" business idea
Missing the "right" foundation partner
Missing entrepreneurial qualification
Missing available time
Missing customer contacts
Missing dept capital
Know-how deficit
Own financial risk
Low turnover
Low profit
Support of family and friends
As shown in the following Table 4, students were also presented with a number of other issues
related to foundation propensity such as the desired support from the UoP. Further, students were
asked to report if they considered to found a new business (Q: 11), when they would be willing to
found it (Q: 12), the possibility of actually founding the business (Q: 13), the extent they wished to be
self-employed (on a regular or secondary basis) (Q: 14), whether they had a foundation idea (Q: 15),
the extent to which they had dealt with the topic of a business startup (Q: 16), the source where they
had already collected information from (Q: 17), the way they wanted to found new business (alone or
with others) (Q: 18), the market where they wanted to operate (Q: 19), the place of activation (Q: 20),
the anticipated time before becoming established in the market in their opinion (Q: 22), the seed
capital required (Q: 23), and whether they were willing to pay for consultation for their startup (Q: 24).
Finally, they were asked to evaluate the possibility of actually founding a new venture (Q: 25).
2.2 Statistical analysis and measures

Following data collection, statistical analysis and interpretation were performed. For all statistical
calculations SPSS version 13.0 software was used (SPSS Inc, Chicago, Il, USA). Continuous
variables are presented in the paper as mean ± standard deviation, ordered variables are presented
as median (interquartile range), and categorical variables are summarized as relative frequencies (%).
Associations between categorical variables were tested by the use of contingency tables and the
192
Irene Fafaliou
calculation of chi-square tests without the correction of continuity. Associations between ordered
variables and categorical variables were evaluated using a Mann Whitney test. A probability value of
5% was considered as statistically significant.
Table 4: Other issues related to the foundation propensity
Factors
Desired support from the University
Consideration for the formation of an enterprise
Estimated time for the foundation
Probability of founding a business in reality
Desire to be self-employed (on a regular or secondary basis)
Having foundation idea
The length responders have dealt with the topic of a business startup
The source where responders have already collected information
The way responders want to found (alone or with somebody else)
The market responders want to operate
Place of activation (at home, in the office off home, direct at the customer’s)
The length (in years) responders think to be established on the market
Needed seed capital
Pay for a business start-up consultation
Thinking about the possibility of founding enterprise
2.3 Descriptive statistics of student entrepreneurial characteristics

Table 5, below, as well as Figures 1-8, illustrates descriptive statistics of students’ entrepreneurial
characteristics. The results presented on Table 5, indicate that the majority of the participants were
female (61.5%), between 20 and 25 years (67.7%), with no foundation idea (65.5%). Also, Table 5
shows that the majority dealt with the entrepreneurship topic for less than 1 year (81.0%), had no
experience in leadership (89.1%), wanted to found the sources alone (80.0%), would pay for start-up
consultation (72.1%), and would prefer to practice their activity in office away from home (81.7%).
Further, the mean probability of founding a business was calculated to 46.4% and almost 7 years
were found to be the mean time that respondents believed they needed to become established in the
market. The most possible difficulties participants expected to face in case they started a new
enterprise were: lacking “right” foundation partner, lacking equity, lacking dept capital, know-how
deficit, low turn-over, low profit, politico-economic environment, economic situation, extensive official
channels.
Table 5: Descriptive statistics of student entrepreneurial characteristics
Variables
Gender
Female 61.5%
Male 38.5%
Age
<20 years 27.2%
20-25 years 67.7%
26-29 years 4.3%
30-35 years 0.4%
>35 years 0.4%
Number of terms
1st – 3rd 28.8%
th th
4 -6 14.0%
th
>6 51.0%
Postgraduate studies 6.2%
Foundation idea
No 65.5%
Yes 34.4%
Probability in founding (in percent)§ 46.4 ± 24.2
Difficulties concerning start up¶
Missing “right” business idea 4 (3, 5)
Missing “right” foundation partner 5 (3, 5)
Missing entrepreneurial qualification 4 (2, 5)
Missing courage 3 (0, 5)
Missing available time 3 (2, 5)
Missing customer contacts 4 (3, 5)
193
Irene Fafaliou
Missing equity 5 (4, 6)

Missing dept capital 5 (3, 6)
Know-how deficit 5 (3, 5)
Own financial risk 4 (3, 5)
Low turnover 5 (3, 5)
Low profit 5 (3, 6)
Support of family and friends 2 (0, 4)
Politico-economic environment 5 (3, 5)
Economic situation 5 (3.5, 6)
Fear of failure 3 (3, 5)
Extensive official channels 5 (3, 6)
Variables
Dealt with entrepreneurship
<1 year 81.0%
1-3 years 15.8%
>3 years 3.2%
Experience in leadership
No 89.1%
<2 years 8.2%
2-5 years 2.3%
>5 years 0.4%
How to found your sources
Alone 80.0%
Team 20.0%
Extent of self-employed work
Sideline basis 46.7%
Regular basis 53.3%
Market to operate
Local 24.5%
Regional 18.7%
National 33.1%
International 17.1%
Established on the market (in years) § 7.2 ± 5.5
Seed capital (in euros) § 156,465 ± 258,123
Pay for start-up consultation
No 27.9%
Yes 72.1%
Prefer to practice activity
At home 8.2%
In the office off home 81.7%
Direct at the customer’s 5.1%
§
Data are presented as mean ± standard deviation
¶
Data are presented as median (interquartile range)
In particular, as Figure 1 illustrates, the vast majority of the participants (75%) reported they had never
dealt with the perspective of founding an enterprise.
Figure 2 indicates that the vast majority of the participants (73.9%) evaluated as “rather adverse” the
climate for new business formation in Greece. Further, the vast majority of participants evaluated the
climate for new business formation as “rather friendly” in (rest) Europe (78.2%), North America
(65.5%) and China (72.8%).
Figure 3 indicates that almost half of the participants (55.7%) were willing to take risks whilst Figure 4
indicates that only 1.2% of participants, who were interested in the formation of a new venture, would
like to start this process within the current year. The majority of these participants would like to found
an enterprise at least 4 years later (70.9%).
194
Irene Fafaliou
9.38%
3.12%
8.98%
3.52%
None
75.00%
Foundation not yet
considered
Foundation considered,
but perhaps at a future
In preparation for
foundation
Already founded
Figure 1: How have you already dealt with the topic of the formation of an enterprise?
100% 8.60%
10.70%
90% 19.70% 20.90%
17.50% 43.2%
80% 42.60% 39.50%
70%
60%
50% 78.20%65.50%17.20%
28.70%72.80%
40% 73.90% 43.10%
30%
20% 39.60%
28.70%
10% 17.40% Cannot assess
11.10%14.90% 6.30%
0%
Rather foundation
a
a
a
e
pe
na
a
ic
di
ec
ic
si
ro
hi
friendly
er
us
er
In
re
C
Eu
Am
Am
R
G
th
tin
Rather foundation
or
La
N
adverse
Figure 2: How do you evaluate the climate for new business formation in the following
countries/regions?
60% 55.70%
50%
40%
29.00%
30%
20%
6.30% 9.00%
10%
0%
Very risk Risk Willing to Very
adverse adverse take risks willing to
take risks
Figure 3: How do you rank your risk propensity?
195
Irene Fafaliou
1.20% 4.10%
8.20%
This years
38.10%
15.60% < 1 year
< 2 years
< 3 years
< 4 years
> 4 years
32.80%
Figure 4: If interested in foundation, when you would be willing to found?

Figure 5, below, shows that more than half of the participants reported that income, high income and
the realization of their own ideas were very relevant factors regarding their decision to found their own
enterprise. A considerable percent of participants stated that the way out of unemployment (16.0%),
self-actualization (11.9%), prestige (16.3%), flexible hours of work (18.5%), having power (24.3%), be
one’s own boss (12.5%), and the realization of their own ideas (7.1%) were non-relevant factors.
100%
36.40%
90% 37.50%
32.20%
80% 34.80% 43.50% 45.30%
70% 58.00%
66.90% Very relevant
78.50% 66.70%
60%
Relevant
50% 38.80%
41.70%
40% 48.0% 42.60% Non-relevant
43.90% 35.90%
30%
34.10% Very non-
20% 25.00% relevant
31.10% 24.30%
16.30% 18.50% 12.50%
10% 16.0% 20.70%11.90%
7.10%
0%
2.00%
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Figure 5: How important are/would be the following aspects concerning your self-employment
decision?
Figure 6 indicates that 27.2% of the participants reported they had not collected information from the
pre-coded sources. Further, internet appeared to be the most popular source for information collection
(43.6%), followed by the preference for friends (26.8%), relatives (23.0%), college/university (21.0%)
and literature (13.2%).
Figure 7 indicates that the fathers of 58.4% of the participants were self-employed, whereas Figure 8
shows that the majority of the participants wanted to found a business in commerce (45.1%).
196
Irene Fafaliou
50%
43.60%
45%
40%
35%
30% 27.20% 26.80%
23.00%
25% 21.00%
20%
13.20%
15%
6.60% 6.60% 8.90%
10% 5.10% 3.90% 5.80%
3.50% 1.90% 0.40%
5% 3.10% 1.90% 0.40%
0.80%
0%
nd try
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Figure 6: Where have you already collected information?
5.40%
31.90% No
Mother
Father
58.40%
Other person
14.40%
Figure 7: Is anyone in your private environment a self-employed person?
12.10%
7.00%
45.10%
Commerce
Consulting
31.10% Information Technology
Other
Figure 8: In which sector do you want to found a business?
197
Irene Fafaliou
3. Correlations and results of the survey

Table 6 illustrates the results related to the motivational influences on foundation propensity. It was
observed that participants who considered the “pursuit of self-actualization” as a “non-relevant/very
non-relevant” factor concerning their self-employment decision and those who ranked their “risk
propensity” as “very risk averse/risk averse” were statistically significant (were more likely to have
never dealt with the perspective of the formation of an enterprise) compared to those who considered
that the “pursuit of the self-actualization” factor is “relevant/very relevant” and those who were “willing
to take risks/very willing to take risks”, respectively.
Table 6: Motivational influences on foundation propensity
Foundation propensity
None or other
foundation not yet
considered
Fear of unemployment
Non-relevant/very non-relevant 68.2% 31.8% *
Relevant/very relevant 80.6% 19.4%
Desideratum of Autonomy
Non-relevant/very non-relevant 85.1% 14.9%
Pursuit of self-actualization
**
Aspiration to realize own ideas
Desire for flexible working time
Matter of prestige
Possibility of obtaining higher income
Risk propensity
Very risk averse/risk averse 85.4% 14.6% **
Willing to take risks/very willing to take risks 74.5% 25.5%
***, **, and * indicate significance at the 1, 5 and 10 percent levels respectively
As regards the impact of the socio-demographic characteristics, it was found that participants “without
any entrepreneurial background”, “without father entrepreneurial background” and those “with no
experience in leadership” were statistically significant (more likely to have “never dealt with the
perspective of the formation of an enterprise") compared to their counterparts (see Table 7). The rest
socio-demographic characteristics appeared to have no influence on students’ foundation propensity.
Table 7: Socio-demographic influences on foundation propensity
None or other
foundation not yet
considered
Gender
Female 82.3% 17.7% *
Male 72.4% 27.6%
Age
<20 years old 75.7% 24.3%
20-25 years old 79.8% 20.2%
>26 years old 76.9% 23.1%
Number of terms
1st – 3rd semester 77.0% 23.0%
th th
4 – 6 semester 71.4% 28.6%
th
>6 semester 80.9% 19.1%
Postgraduate studies 81.3% 18.8%
198
Irene Fafaliou
None or other
foundation not yet
considered
No entrepreneurial background
No 69.8% 30.2% ***
Yes 84.7% 15.3%
Mother entrepreneurial background
No 80.4% 19.6% *
Yes 67.6% 32.4%
Father entrepreneurial background
No 84.6% 15.4% ***
Yes 65.4% 34.65
Other persons entrepreneurial background
No 78.5% 21.5%
Yes 78.6% 21.4%
Experience in leadership
No 81.6% 18.4%
***
< 2 years 52.4% 47.6%
>2 years 57.1% 42.9%
Study course
Macroeconomics 77.0% 23.0%
Industrial Economics I 80.0% 20.0%
Financial Institutions 84.5% 15.5%
Entrepreneurship 67.5% 32.5%
Total Quality Management (TQM) 81.3% 18.8%
Regarding the impact of the environmental barriers on students’ foundation propensity, it was found
that no barrier effects were statistically significant to the foundation propensity (see Table 8).
Table 8: Environmental barrier influences on foundation propensity
None or other
foundation not
yet considered
Prospect of problems concerning credit capital 5 (3, 5) 5 (4, 6)
*
acquisition
Estimation of financial risk 4 (3, 5) 4 (3, 5)
Disposability of equity 5 (4, 6) 5 (4, 6)
Attitude towards the market condition 5 (4, 6) 5 (3, 6)
Sales expectancy 5 (3, 5) 5 (3, 5)
Fear of failure 4 (3, 5) 3 (2, 5) *
Assessment of bureaucratic hassle 5 (3, 6) 5 (4, 6) **
Stance over available entrepreneurial qualifications 4 (3, 5) 3 (2, 5)
Evaluation of existing know-how 4 (3, 5) 5 (3, 5)

Appraisal of lacking customer contacts 4 (2, 5) 4 (3, 5)
Expected difficulties in locating appropriate foundation 5 (3, 5) 5 (3, 5)
partners
Valuation of non-existence of adequate business 4 (3, 5) 4 (3, 5)
ideas
Opinion about the politico-economic environment 5 (3, 5) 5 (3, 5)
Rating of the availability of courage 3 (1, 5) 2 (0, 5)
Finally, Table 9 presents the median (interquartile range) degree of difficulty regarding the anticipation
for an adequate business idea, speculation concerning available entrepreneurial qualifications, and
feature characteristic of fear of failure for female and male students separately. It was observed that
the degree of difficulty was higher among females compared to males in all factors.
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Irene Fafaliou
Table 9: Gender influence on special difficulty factors

Gender p-value
Female Male
Anticipation of the existence of adequate business 4 (3, 5) 3 (2, 5) 0.005
idea
Speculation concerning available entrepreneurial 4 (3, 5) 3 (2, 5) 0.038
qualifications
Feature characteristic of fear of failure 4 (3, 5) 3 (2, 5) 0.009
4. Conclusion and suggestions
In this paper we sought to investigate the business foundation propensity and other related factors of
a sample of 257 Greek students who attended classes in a specific university. Our study indicates that
by contrast to the findings of earlier studies undertaken in university environments in other countries,
as for example in Germany and Portugal (Ruda et al. 2008; Gery et al. 2008), the majority of the
Greek university students surveyed are not inclined towards startups creation (the mean probability of
founding a new business was calculated to 46.4%) and have no grand business foundation ideas
(65.5 % reported having no idea for business foundation). Further, this study’s findings related to
socio-demographic characteristics suggest that students’ propensity towards new business creation is
statistically significant only for factors related to students’ prior entrepreneurial experience, their
father’s entrepreneurial background, and students’ prior experience in leadership. No environmental
barriers were found to significantly affect those students’ foundation propensity. It is important to note
that in some cases the surveyed students could not even realize their actual needs regarding the pre-
foundation stages of a new venture creation. This indicates even more the respondents’ knowledge
and skill deficit concerning their entering into the entrepreneurial terrain.
Doing this survey, our intention was not to generalize results or to provide “one-fits-for-all” recipes. By
contrast, our aim was to reveal the role of a context-specific research and the importance of
customized longitudinal studies in examining students new venture propensity. The pessimistic results
derived from the present survey clearly indicate that the investigated university needs to strengthen its
efforts to systematically help students better understand entrepreneurial operations, realize their
hidden talents, and recognize the prospects for self venturing. At a first stage, this can be achieved
through further promotion of the entrepreneurship courses across all nine departments of the UoP.
Yet, this might not be enough. Given that entrepreneurship propensity appears to be higher for
students with prior experience in venturing or in those from an entrepreneurial family background,
action teaching and learning experiences seem to be required in addition. Such efforts demand the
development of life-long entrepreneurial institutions set up by the university itself such as
entrepreneurship labs, venturing incubators and counselling services provided by one-stop-shops. To
this end, a great role can be played by government officials who need to realise that policy-inputs
related to enhancing youth entrepreneurship should be conceptualised and implemented with proper
collaboration with higher education institutions.
Despite this study’s limitations, due to the small number of our sample population and the short time-
period of investigation, hopefully, this paper will act as an additional platform for generating further
discussion on entrepreneurship educational needs within and across the Greek universities in
collaboration with government officials and social networks’ initiatives aiming at promoting the creation
of dynamic start-ups by students themselves. This, however, requires further targeted research. For
this reason the paper’s author continues to explore the field hoping to cover such deficits by tracking
longitudinal trends of students’ venturing intents and determining differences or similarities over
various periods of investigation.
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201
Failing to Find the Business Model in the Case of Mobile
Direct Sales
Tiina Ferm and Olli Ojala
Turku University of Applied Sciences, Faculty of Telecommunication and e-
Business, Turku, Finland
Tiina.ferm@turkuamk.fi
olli.ojala@turkuamk.fi
Abstract: Mobile Direct Sales (MDS) was a pilot case in an EU funded integrated project
Collaboration@Rural (C@R) implemented in Åboland the Turku Archipelago Living Lab. The aim of
the MDS case was to develop tools for local producers and entrepreneurs in the Archipelago area in
the South west Finland. Three cycles of prototypes were co-developed with the local producers. The
originally identified needs were fulfilled and the C@R goals were reached. Nevertheless, the project
did not proceed to the commercialization phase due to the lack of a viable business model for
producers to employ. This paper discusses the software developer’s point of view on the reasons of
the failure to identify the business model early enough in the project to be able to implement it.
Additionally it compares the results on a parallel case in the C@R project - eDemocracy Toolbox
(eDT), which introduced systematic use of video conferencing in local administration and local
government. The two cases used Living Lab methodology which is assumed to be more efficient in
capturing the actual users’ needs in real life environments and use situations than traditional methods.
Both cases were also considered to be both a success and a failure depending on the point of view.
Keywords: Living lab, Collaboration@Rural, social software engineering, requirements engineering,

test-driven software development, business process modelling
1. Introduction
This paper presents some of the lessons learned on using Living Lab methodology from a software
developer’s point of view based on two pilot cases implemented in Åboland the Turku Archipelago
Living Lab. The cases were a part of an EU funded project Collaboration@Rural (C@R) project (2006
– 2009) of the IST programme in the European Commission’s 6th Framework Programme for
Collaborative Working Environments. The C@R had seven regional Living Labs around Europe and
South-Africa. The Finnish pilot in the bilingual (Finnish and Swedish) archipelago area in South west
Finland executed two Living Lab pilot cases during the C@R project. Mobile Direct Sales (MDS) was
aimed to help local producers in their direct sales businesses by extending their business models into
the Internet and mobile phones. Parallel case eDemocracy Toolbox (eDT) concentrated on finding
modern mobile and Internet based tools for distributing municipal decision making into several
physical locations. The pilot cases were a joint effort were Åboland acted as a coordinator Helsinki
School of Economics as a research partner and Turku University of Applied Sciences as a software
development partner.
In this paper we first take a look at the theoretical frameworks of software engineering and Living Lab
methodology and their relevance in the C@R case. Next the C@R pilot Åboland and the two cases it
implemented are described in more detail. And finally a summary on the experiences and lessons
learned is presented along with the suggestions in the future work.
The main lesson learned is not to forget the traditional system development methods but to combine
them with the Living Lab methods especially in the requirements engineering phase. Both pilots used
the Living Lab methodology and the challenges and the lessons learned concerning the Living Lab
methodology were shared. From the developer’s point of view the biggest challenge was the Living
Lab approach view on the users as the experts in their own actions and environment. Particularly this
fragmented expertise raised questions on whether the user needs and, consequently, the system
requirements were sufficiently captured. This was especially the concern in the case of MDS, which
failed to proceed in the commercialization phase as was expected in the beginning of the project. The
concern was shared in the eDT case but the reasons of it's failure to proceed to commercialization
were different.
202
Software engineering is a field of engineering to produce increasingly complex systems (Avrilionis,
2009). Social software engineering views system development as a community-driven creation,
management and deployment process (Hammouda, 2008). It has been long recognized that in order
to find better ideas all those affected by the system (Mumford, 1995) particularly the users at the
customer interface (Earl, 1989) should be involved in the development process. Regardless of the
methodology used in the system development the objective is to determine what is relevant and will
improve business performance (Edwards, 1991) by introducing a change (Helton, 1995; Avison,
1995) and what is the value of the system to each stakeholder (Godowski, 2005). ICT can support
business process (Davenport, 1990) (re)design by enabling new structures with the use of modelling,
simulations and automating (parts of) processes (Eliëns, 2000). The specifications are seldom built at
once. They are usually reviewed several times prior the implementation in order to ensure that all
business use cases and their value to all stakeholders have been discovered, prioritized and conflicts
resolved (Robertson, 2006).
Living Lab approach has been widely used in software development since the 1990s (Følstad, 2008).
It can be defined as a set of development and testing methodologies (Schumacher, 2007), a user-
system interaction research infrastructure (Markopoulos, 2000) and an everyday life user context for
information gathering (Luojus 2008). The distinguishing factor in Living Lab approach is the user
interaction and it is assumed that Living Lab is more efficient to capture the actual users’ needs in real
life environments and use situations than traditional software engineering methods (Eriksson, 2005).
The cyclic develop-test-and-evaluate Living Lab approach employs rapid development methods, such
as prototyping, to design better user interfaces; reduce the risk on developing the wrong product by
engaging the end-users into early discussion on the desired requirements; and to decrease the
development time (Scott, 1995). Test-driven software development (Beck, 2002), which is often used
in conjunction with agile software development methods (Astels, 2003), is a process where tests are
created before or together with coding in short, rapid iterations (Vu, 2009; Wirfs-Brock, 2009). Test-
driven development aims to clarify requirements during the early development phases. Tests that are
co-defined with the users and specify the desired behaviour of the system can be used as acceptance
tests (Ricca, 2009) to clarify the requirements.
From the software development point of view both MDS and eDT were cyclical rapid development
projects that used Living Lab approach as a context to gather user information and find out user
needs to transform them into system requirements. MDS case went through three cycles of business
process modelling, prototyping and testing aiming for a product to support existing businesses. In
contrast eDT case concentrated on work process modelling, prototyping and testing aiming for a full
specification, including technology independent acceptance tests, of the modelled system.
Living labs can be viewed against the wider context of innovation frameworks. Shaffers (2010, p. 31)
presents the frameworks relevant to C@R. Particularly relevant to MDS were work systems and
action research cycles of diagnosis, action planning, implementation, evaluation and learning. In the
case of eDT the most relevant frameworks were information systems design, soft systems theory and
work systems since the focus on eDT was to induce change in work processes with the help of
technology. The C@R project used a common framework to integrate software development into
action research and implement cyclic development (Schaffers 2010, pp. 38-41). The two cases
described in this paper followed the common framework of C@R but had a slightly different way to
implement the Living Lab methodology in their cyclic system development process. The differences
were mainly due to the different focus on the projects. The biggest differences were the way users
were found and involved in the development work and the type of users' expertise.
3. The Finnish pilot and Living Lab cases
Åboland, the Finnish pilot in the C@R project, has a long experience in implementing Living Lab
projects. In the C@R its role as a partner was to define, find, select and commit the users and other
stakeholders into MDS and eDT cases. The types of user involvement consisted of several
approaches to real life experimentation ranging from ethnographic observation to group interviews in
connection with experimentation in real life settings, to video recordings and to large scale testing.
203
3.1 Åboland
Åboland the Turku Archipelago Living Lab resides geographically in the South west Finland. It
consists of 20 000 islands with 15 500 inhabitants. Åboland is governed by the local regional
development agency Region Åboland. In 2006 there were five municipalities in the region but aligned
with the national trend of restructuring the local level governance in Finland the small municipalities in
the archipelago area merged into one town of Väståboland in 2009. Demographically the archipelago
area does not differ from the rest of the Finland apart from the bilingualism (Finnish and Swedish).
The area has a good coverage on both wired and wireless broadband services in the islands
inhabited regularly around the year. Tourism during the summer is an important source of livelihood
and a good part of the producers in the islands earn their living from direct sales to tourists. The
tourism is concentrated around the roads and ferries in and between islands. The nature in the
archipelago is fragile. There is a contradictory need to both preserve the environment by reducing the
unnecessary travelling and at the same time increase the attractiveness of the area as a place to visit
and live. This has led the regional development agency to seek new ways to find solutions to the
problems of the area. One such example is the adoption of Living Lab methodology in the regional
development and in fact the Turku Archipelago Living Lab joined the European Network of Living
Labs (ENoLL) in the first wave 2006. It has hosted several Living Lab projects and spread the Living
Lab ideology and practices in the area. As a result a network of Living Labs, ArchipeLabo, which
enables the co-operation between the Turku Archipelago Living Lab, the entrepreneurs and public
actors in the mainland of Southwest Finland, was formed during the latter part of 2009.
3.2 Case MDS

Mobile Direct Sales (MDS) was a pilot case in an EU funded integrated project Collaboration@Rural
(C@R) implemented in Åboland the Turku Archipelago Living Lab. The aim of the MDS case was to
help local producers and entrepreneurs in their direct sales businesses by developing tools to help
them in extending their business models into the Internet and mobile phones. The fundamental
assumption was that the tourists would like to buy locally produced fresh products such as potatoes,
tomatoes and carrots in advance using their mobile phones and then just pick up the goods on their
way to the next ferry. Three cycles of prototypes were co-developed together with the local producers.
The originally identified needs were fulfilled and yet the project did not proceed to the
commercialization phase as expected due to the lack of a viable business model to the producers.
The existing direct sales models employed by the local producers in the Archipelago of South west
Finland had four elements in common; off-line customer interface, limited cross-selling, cash-only
transactions and high seasonal variations. The physical selling points, manned or unmanned, of
individual producers' were dedicated mostly to their own products. There were hardly any cross-
selling of other producers' products. Each producer also had other business models such as selling in
batches to local shops or joint selling points in local market places. The producers used computerized
systems to control the plant growth and handle the basic banking and other administrative tasks.
Each producer involved in the MDS case was a fluent user of the applications he/she needed. They
also had wired broadband connections at home. Each producer was using at least one mobile phone
at a regular basis. The idea of MDS – offer possibility to buy produce using mobile phones was a
result of discussions between regional developers, tourist information officers and researchers.
Parallel to this a variety of services and products emerged into the Finnish mobile markets such as
possibility to buy a bus ticket, parking space or a fishing license using a text message (SMS). The
rapid spread of 3G coverage also enabled the use of web-stores with mobile phones in populated
areas.
The key requirements for the system were identified to be low initial cost, low maintenance costs,
compatibility with the Open SOA architecture defined and employed in the C@R project user friendly
interfaces and re-use of existing open source solutions. The users were selected among local
entrepreneurs by the regional development agency based on the criteria of previous willingness to
participate in development work. The potential users were invited to an informal development session
and the first non-functional prototype was introduced to them as an opening for discussion. Three
iterative cycles of improved prototypes, tests and discussions yielded the final prototype that had five
modules; SMS interface for placing orders (buyer), SMS interface to acknowledge the order and send
a confirmation of the delivery to the selling point (seller), stock management (web-store) and mobile
web-interfaces for buyer and seller.
204
Mobile payment was not included in the system for several reasons. Some selling points were
unmanned and the buying was based on trust. There was no mechanism to guarantee that the
ordered and paid for goods truly were available in the selling point – an off-line customer might have
bought and taken the same products bought by another customer via SMS. The goods could not be
marked as “for on-line buyers only”. The price of paying via SMS would have been around 0,50
€/payment which was considered too high when the average purchase was in a range of 5 – 20 €.
The variations of prices lead to complex and difficult transactions which were against the original
requirements of the system.
In the final evaluation phase interviews and discussions with the involved entrepreneurs revealed that
the initial motivation to participate in the project had been the expectation to reach new customers.
Other benefits were recognized: improved customer service, ability to estimate more accurately the
daily demand of products without visiting the selling points, having the same computerized model of
operation in the selling of goods as with other sides of the business and possibility to be present in the
Internet. However, there was a general feeling of disappointment among the producers since no new
customers were reached and a considerable amount of hours had been spent in the project without
any compensation. The users who had tested the buying procedure expressed general interest
towards the system but did not want to use the system as such. They were willing to re-test the
system if there were added features such as mobile payment, possibility to collect a shopping cart
including several products from several producers and pick the delivered goods from one selected
point. These features would have required a logistic system and some party that would have taken
care on the physical side of the logistics. A viable payment model would have required a contract with
a mobile service operator to reduce the cost of SMS per payment. And usability of the payment would
have needed a schema of one or limited amount of fixed priced products or product combinations.
Additionally there was no party interested in maintaining the server side of the system after the pilot
case was closed. The testing platform had been provided by Turku University of Applied Sciences
(TUAS) but the commercialization of such a platform was not in line with TUAS strategies.
The results of the project did not meet the initial true needs of the users. The critical needs of all
relevant stakeholders had not been fully recognized during the requirement definition phases in the
cyclic development process. Some critical factors had been identified during the development phase,
but could not be solved within the time limit of the project. MDS involved the real end-users in their
real life situations and was able to capture the needs concerning the immediate existing business
models but not the needs to change or renew them. The users were too involved in their existing
businesses and had no pressing urgent need to neither expand nor change them. Visionary ideas
past the immediate practical issues could not be fully captured and implemented. Some of the
guidelines of the systems were also specified prior the invitation to the users to join in. The first mock-
up was built based on existing models and it might have guided the direction of the first discussions
with users. There were no look-out-of-the-box sessions to force the team of developers, researchers
and entrepreneurs to look beyond the existing world.
Nevertheless, the needs of the project were satisfied from the funding and administration point of
views: actions were planned, executed and reported. From the C@R project management point of
view the MDS case was a success.
3.3 Case eDT

The eDemocracy Toolbox (eDT) case was executed parallel to MDS in Åboland the Turku
Archipelago Living Lab. The aims of eDT were to reduce travelling and enhance municipal democracy
with the systematic use of video conferencing in decision making. At the beginning of the project
(2006) the legislation in Finland only allowed physical attendance in decision making municipal
meetings but that was changed and starting from the 1.1.2009 virtual attendance was allowed. The
Finnish Local Government Act (365/1995) and its change (1068/2008) defined three minimum
requirements for the implementation of virtual meeting: all participants faces had to be reliably
recognized by all other participants, in case of video connection breakdown the complete meeting had
to be stopped and there had to be an agreement in the municipal administration level on the terms of
allowing virtual participation. The fundamental assumption behind eDT was that there already existed
one fit-for-all-meeting-types system suitable for municipal meeting procedures. The eDT project was
to explore the available solutions and select one. The municipalities involved in the project were to get
the product for free since they would have been the first Finnish municipal users and thus reference
205
customers. And had such a system not existed it would have been easy enough to develop and the
municipalities could have sold the new product to other municipalities.
Users involved in the project ranged from the legal and ICT experts in The Finnish Association of
Municipalities presenting conceptual knowledge to several mayors and politicians bringing in the
practical knowledge on conducting municipal meetings. There were also users from the municipalities
ICT departments and a town secretary involved. The users were selected and invited in by one of the
mayors involved in the project. The users did not receive any compensation on participation since it
was considered to be part of their duties as civil servants or good publicity for the politicians.
The first phase of eDT included a market research on existing video conferencing solutions and
modelling an official decision making meeting process based on legislation, meeting procedure guides
and recommendations. A mock-up was developed in order to test that the modelling process had
reached correct results. The mock-up was tested using a script from an example meeting consisting
of five different fundamental scenarios ranging from non-existent discussion to voting, election and
discussion on every topic. The script and the scenarios were then used to test the existing video
conferencing solutions. The result of the first phase showed that the practical meeting procedure was
more complex than what the written guides such as Robert's Rules of Order (Kennedy, 1997)
indicated. The products already in the market could have been customized to support the municipal
meeting procedure but none of them was ready to be used at that moment. Consequently, the next
two cycles involved the intertwined processes of defining, building, testing and further defining
prototypes with users. The prototypes did not include video but an empty window with text “here
comes the video” in order to avoid distraction and to help the users to concentrate on meeting
procedures when testing the functional features of the prototypes. The final prototype included all the
features, apart from video, needed to support the execution of a meeting (user roles (chairman,
secretary, councilman, civil servant, citizen), asking permission to speak or comment, count attendees
and show the result and political map, election, voting and generating protocol and minutes).
The final prototype did not proceed to the commercialization phase for numerous reasons: the coding
was not of product quality; the networking procedures did not include any security measures; the user
interfaces were deliberately left in a crude level to help users to concentrate on developing the
functional properties; and video connection was not implemented in the prototype. The amount of
work involved in building a product based on the final prototype would have been the same as if the
product would have been written from scratch and there were no resources in the project to do that.
And furthermore there already were several products that could have been customized to fulfil the
needs of municipal meetings. The result of eDT was a set of technology independent specifications
and tests meant to be used in the public procurement process to define what are the features required
from a video conferencing solution and how to test them. Thus the technology providers will be able to
pre-customize their products prior to offering them.
From the C@R project management point of view the eDT project was a failure since some of the
initial goals were not reached. Final prototype was not a commercial product. The resulting technology
independent test set proved to be difficult to understand. During the eDT project the results and
findings were openly discussed with all possible technology providers in order to help them to
customize their products. The users in eDT case were not in any position to negotiate possible
discounts to municipalities nor to make any decisions on purchasing products on behalf of the
municipalities.
4. Conclusions and future work
There are many lessons to be learned from the C@R project and the Finnish pilots. Living lab is more
than a methodology and therefore evaluating the results and outcomes only from software
development point of view is a limited one. The main lesson from the software developer's point of
view is that for a project to be successful it is not enough to transfer existing business models or work
procedures into electronic form. The success or failure can and should be measured from various
perspectives.
The Living Lab approach and the participation of the real life users in their own home environments
are not enough to guarantee that the critical needs and requirements are truly captured. There should
be an evaluation mechanism (requirements evaluator, outsider expert, project board, critical
evaluation workshop) to ensure that the captured needs are the critical ones; that the involved users
206
bring broad enough views into the project; and that the expectations of each stakeholder are both
known and that they are realistic. Furthermore there should be a “user” that represents non-human
parts of the system (interfaces to other systems, environment, legislation, database management
system) or the requirements and restrictions that are not user specific.
The C@R project lasted three years and during that time some unexpected development occurred in
the Turku Archipelago. Municipal environment went through a major change causing structural
reorganization in Finnish C@R pilot cases. EDT that started in a small municipality of Houtskär with
626 inhabitants was finalized in the archipelago town of Väståboland with 15 000 inhabitants. The
local regional development agency Region Åboland closed down its operations and, consequently,
the coordinator of the Finnish pilot was changed to be the Helsinki School of Economics. On top of
this almost all of the project personnel was changed causing an interruption in project information.
The lesson learned from this is that a there should be a change management plan prepared in a
project plan.
Some of the expectations on the developer team proved to be too high. The ICT -infrastructure in the
archipelago proved to be more vulnerable to shorter and longer break-outs than expected which lead
to mistrust to network services on both the developer and user sides. Coverage of wireless and 3G
networks proved to advance slower than expected in scarcely populated areas of islands. Acute
breakdown in wired data and electric networks took days or several weeks to repair. One such case
occurred during major MDS testing session when all mobile telephone and data services suffered
from total black out.
New innovations and viable C@R spin-offs are currently in planning phase and the work continues in
EU, national and regional levels. The business model needed to enable the MDS has already been a
subject of discussions between the producers, researchers, developers and a local entrepreneur
association. Because of the limited time frame – the end of C@R project – the work with the model
has not advanced. Within C@R some models (infopreneur model in South-Africa and Homokhati co-
operative logistic model in Hungary (Shaffers, 2010)) were developed and tested. Those models
should be further explored and their feasibility and suitability into local Finnish environment should be
studied.
Acknowledgments
We wish to acknowledge all the Finnish partners in the C@R project (FP6-2005-IST-2-034921), co-
funded by the European Commission under the Information Society Technologies (IST) Priority within
the 6th Framework Programme.
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208
The Importance of History for Entrepreneurial Activities: A
Regional Perspective
Sabrina Florkowski
Blekinge Institute of Technology, Sweden
sfl@bth.se
Abstract In this conceptual paper, the concept of path dependency is used as an interpretive lens to examine the
relationship between entrepreneurship and regional development. A critical review of the path dependency
literature showed that the concept needs to be complemented first to fit the purpose of this paper. Three
suggestions have been made. By using path dependency as an interpretive lens, five interrelated propositions
could be made addressing the suggested complements. First, discussing entrepreneurship in a regional context,
three different dimensions of path dependency should be taken into consideration: the technological, cognitive
and social dimension. So far the cognitive and social dimension of path dependency has been neglected.
Second, entrepreneurial activities form a regional path which is linked to the industries within the region. Third,
there are two different types of entrepreneurship, namely radical and related entrepreneurship. Fourth, the same
types of entrepreneurship will trigger different regional development processes depending on the specific
situation of the region. Fifth, entrepreneurs who possess new information from outside the region will more likely
alter the path of the region.
Keywords: path dependency, entrepreneurship, regional development, innovation
1. Introduction
"Bernard of Chartres used to say that we are like dwarfs on the shoulders of giants, so
that we can see more than they, and things at a greater distance, not by virtue of any
sharpness of sight on our part, or any physical distinction, but because we are carried
high and raised up by their giant size." (John of Salisbury 1159)
Studying regional development, two general types of explanation can be identified for why regions
develop as they do. The first explanation relates to the emergence of innovative activities carried out
by radical entrepreneurs that may transform the society and economy. In regional development
literature, this is referred to as impressive stories of renewal and change, where regions have
changed from old and heavily industrialized regions to modern high tech poles, examples being
Teesside in Northeast of England (Hodson 2008), the Öresund Region in Denmark and Sweden
(Lundquist and Winther 2006) and the Rhine-Ruhr area in Germany (Knapp 1998).
The other type of explanation is related to path dependency, where present developments build on
past decisions and activities (Hudson 2004, Berndt 1998, Krugman 1992). In apparent contrast to the
first explanation, path dependency is often seen as negative constraints for future development where
some regions continue to develop along established regional trajectories and ultimately result in lock-
ins. In this perspective, regions may be caught in destructive path dependency processes and only by
breaking free from their constraining past they can change their declining path. This type of regional
development process is characterized by a lack of radical entrepreneurs.
This paper challenges the general way of dichotomizing between entrepreneurship and path
dependency as two opposing concepts in regional development. Rather, the author postulates that
these concepts are related to each other and it will be argued that such a view can provide a better
understanding of the regional development processes. An important building block for the theoretical
discussion is the idea that even such disruptive activities as revolutions are never really discontinuous
as informal constraints are imbedded in societies (North 1990). Thus, entrepreneurs, may it be single
persons or in teams, can create new regional paths, but they are also to some extent related to
existing patterns and behavior in the region. This paper contributes to literature and research on
entrepreneurship and regional development in the following way. The paper builds a conceptual
framework for a more actor-centered view of regional development. The concept of path dependency
will be used as a means to link entrepreneurship and regional development. As a starting point, a
critical review of the concept of path dependency needs to be conducted to address the following
questions: how is the concept understood so far and how does the concept need to be developed
further to create a better understanding of the relation between entrepreneurship and regional
development for the purpose of this paper? After that, the concept can be used to emphasize the link
between entrepreneurship and regional development. First, entrepreneurship should be understood
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Sabrina Florkowski
as an evolutionary process stressing the importance to include context, process and outcome.
Second, there are two different types of entrepreneurship which need to be discussed in a regional
context: radical entrepreneurship initiates new regional development trajectories, while related
entrepreneurship follows the established trajectories. Third, it will be discussed how entrepreneurship
is embedded in existing regional knowledge structures. The importance of prior knowledge for the
initiation of new development trajectories is emphasized. In this paper entrepreneurship should be
understood as the identification of new business opportunities and the development of new products
or services to commercialize such opportunities (Shane 2003). Following this definition, the aspect of
new firm creation is no requirement. This definition was chosen precisely because of the importance
of inter-corporate networks for the innovation process. Furthermore, a certain kind of entrepreneur is
in the center of attention, namely technological entrepreneurs because their activities represent one
important way to create new regional development trajectories.
The rest of the paper is structured as follows. Section 2 present the general assumptions on path
dependency in the literature and make a short discussion on three potential extensions of the concept
in alignment with the purpose of this paper. In section 3, five propositions are put forward. The first
two propositions address the potential extensions of the path dependency concept with
entrepreneurship in the focus. The other three propositions focus on the relation of entrepreneurship
and regional development. The last section discusses some implications and concludes with a short
discussion.
2. Critical review of the path dependency concept
Path dependency is a recognized concept in many disciplines and is thus used in many different
contexts (see Martin and Sunley 2006 for an in-depth overview). Within social science, the work of
David (1985), Arthur (1989, 1994) and North (1990) are the most prominent references. The concept
was introduced in economics to explain technology adaption processes and industry evolution (David
1985, Arthur 1989). A critical literature review was conducted. After an extensive review, several
regional development papers dealing with path dependency were selected for a further review. The
selection criteria were the focus on the economic development of a region and the number of
citations. The review suggests that the concept needs to be complemented for the purpose of this
paper. Three suggestions have been made.
First, table 1 shows several more or less precise descriptions of path dependency within regional
development papers. The concept is often understood as ‘future development is reflected by history’.
It should be noted that beside these rather vague descriptions, no further conceptualization is offered
in most of the papers. Often path dependency is mentioned in the title as a catch phrase, but not
further addressed in the paper (e.g. Shapira and Youtie 2008). There is no consistent way of defining
the concept which might limit the knowledge accumulation about the concept as the definitions do not
relate to each other. It is often not perfectly clear what the actual path is, why some historical events
are more important than others and to what extent they can influence present decisions. For their
research questions this approach might be perfectly adequate, but for the purpose of this paper the
actual path needs to be identified. Therefore:
Possible complement 1: The context of path dependency should be clearly conceptualized in the
context of regional development
Second, within regional development literature, most of the articles dealing with path dependency are
limited to technological development of a single product or industry either within a specific region or
across several regions (Martin and Sunley 2006). Thus, as suggested in table 1, most regional
development papers dealing with path dependency address the technological dimension and focus on
the development trajectories of technologies. They are process rather than actor-centered oriented
meaning that the evolutional path of the technology is described, while the actors, such as
entrepreneurs, are often not included. Hassink (2005) takes a more comprehensive approach by
addressing also the institutional context, but also this paper is process oriented. If entrepreneurial
activities are discussed within the framework of path dependency, such a single, technological
dimension is too limited. Entrepreneurs are embedded in culture which is broader than the
technological view. Furthermore, entrepreneurs are often biased by experiences and prior knowledge
(Shane 2000) which are not expressed in a technological dimension alone. Therefore:
Possible complement 2: The technological dimension of path dependency needs to be extended
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Sabrina Florkowski
Table 1: Definition of path dependency in selected regional development papers
Dimension Description of the concept Type of paper

Shapira and Technology Regions maintain technological leadership through Industry case
Youtie (2008) early entry and positional lock-in. p191 study
Schienstock Technology Technological choices made in the past influence National case
(2007) subsequent choices. p93 study
Martin and Technology Inability to shake free of the own h istory. p399 Conceptualizat ion
Sunley (2006)
Hassink Co mprehensive The importance of history and institutional context Regional case
(2005) for reg ional develop ment explaining the decline of studies
industrial areas. p522
Essletzbichler Technology The dependence of technology on past and existing Industry case
and Winther knowledge tends to move firms, regions and study
(1999) co u n t ries alo n g rela t iv ely we ll -d ef in e d
technological trajectories. p179
Kenney and Technology Small events or historical accidents can be critical Regional cluster
Burg (1999) triggers that enable one region to become the center study
of a particular type of economic activ ity. p70
Meyer-Stamer Technology It is an attempt to explain the rationality of behavior Regional cluster
(1998) that at first sight might appear irrational if one study
assumes utility maximizing behavior. p 1496
Third, in path dependency literature, the concept is often described as one explanation for
technological lock-ins eventually resulting in stagnation and decline. In order to be innovative, the
path needs to be broken. How path dependency is perceived depends very much on the perspective
of the entrepreneur. For example, within industries, path dependency is one pre-requisite for the
accumulation of relevant knowledge and experience, while people from outside this industry might
perceive the development along the same technological trajectories as very restricted. Evidence has
been presented suggesting that prior related knowledge increases the likelihood to initiate successful
economic activities (Boschma and Iammarino 2009, Frenken, van Oort and Verburg 2007). It should
be avoided to classify path dependency right at the beginning as either positive or negative. It
depends very much upon the observer and the specific situation. Therefore:
Possible complement 3: Path dependency should be perceived as a neutral process which is open to
different perceptions
Several propositions will be put forward in the following chapter exploring the link between
entrepreneurial activities and regional development through the interpretive lens of path dependency.
These propositions are connected to the possible complements which have been presented above.
3. Entrepreneurship as a regional process
Entrepreneurs are economic actors who are an important source for job creation and economic
growth (Audretsch and Keilbach 2004, Birch 1979). As agents of change, entrepreneurs may stir up
the obsolete economic and institutional structure with their actions. This ‘big man theory’ does not
seem to correspond with the recent discussions about innovation processes (Schienstock 2007). Most
innovations are a process involving a wide network of different actors (Freeman 2001, Johannisson
1998). Knowledge and experience from different fields need to be combined into one innovation,
making it difficult for one individual entrepreneur to initiate a new development path alone.
When illustrating path dependency, the path is often described as a linear trajectory with certain
alterations (Martin and Sunley 2006). One has to keep in mind that the path is identified in retrospect
by the researcher. Looking back in time, researchers rationalize and include only those events which
they think have formed and altered the path. Thus, the included events are occurring in a certain
sequence and are in linear relation to each other as shown in figure 1(a). The time horizon plays on
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Sabrina Florkowski
important role when identifying the path in retrospective. There is a time delay between the
entrepreneurial activity and the alteration of the regional path. It might be difficult to identify this
particular path-altering event for several reasons: the activity might be hidden by the process and/or
the path alternation needs to be attributed to several activities. This ties in to the understanding that
entrepreneurship is a collective phenomenon.
Path dependency illustrated as
(a) linear trajectory (b) accumulation of events
Develop- Develop-
ment ment
Time
Time
Figure 1: Altered illustration of a technological path
For the purpose of this paper however, a path should rather be perceived as an accumulation of
different events which form along certain directions as shown in figure 1(b). This means that there is
not only the focus on some events, which the researcher thinks are the most important ones. All
events need to be considered as their interactions lead to the importance of some events. Events are
hereby understood as entrepreneurial activities such as the commercialization of new business
opportunities. Each entrepreneurial activity has the potential to open up new directions and
opportunities.
Entrepreneurial activities play an important role for the regional development. A solely technological
discussion is too limited, if the regional development path in relation to entrepreneurship should be
discussed. Regions house more than just technological trajectories.
REGION
Technology
dimension
Cognitive Social
dimension dimension
FIRM ENTRE-
PRENEUR
Figure 2: Different dimensions of path dependency

Figure 2 illustrates why it is important to include different dimensions of path dependency. Including
entrepreneurship, the technological dimension alone is not sufficient to explain regional development.
It is important to understand that each entrepreneur is embedded in culture and is biased in order to
cope with uncertainties when commercializing a new business opportunity; meaning that the
entrepreneurs rely on experiences and prior knowledge. Thus, three interrelated dimensions of path
dependency need to be identified. First, there is the technological path dependency which is closely
linked to the development of a technology. As seen in table 1, most research has been focused solely
on this dimension. Second, there is the cognitive path dependency about how we know the world.
This refers to the mental models rooted in the person’s experiences and behavior. Such cognitive
path dependency can be seen in the development of the disk drive industry (Christensen 1997).
Christensen concludes that the large disk drive companies failed not because of the lack of
knowledge to produce smaller disk drive units, but because they did not see the use of producing
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smaller units. The third dimension is the social path dependency. This dimension refers to the culture
of a region. Differences in business cultures were described in the comparative analysis of Silicon
Valley and Route 128 (Saxenian 1996). While risk-taking was glorified and business failure socially
accepted by the entrepreneurs in Silicon Valley, stability and company loyalty were valued by the
entrepreneurs at Route 128. These two regions had totally different attitudes towards
entrepreneurship. Such cognitive and social differences suggest that path dependency should not just
be limited to a technological dimension when discussing entrepreneurship in a regional context.
Therefore:
Proposition 1: In studies of entrepreneurship in a regional context, technological, social and cognitive

dimensions of path dependency should be taken into consideration
Past activities should be discussed in relation to the three dimensions of regional path dependency.
The regional path is one possible manifestation of the combination of the three dimensions. But how
can a regional path be defined? The region itself is no actor and can not initiate actions. But a region
consists of many actors such as entrepreneurs, politicians and organizations; all of which can initiate
actions. For the purpose of this paper, the regional path is closely connected to the economic
activities within the region. The simplest case to analyze would be a region which has only one single
industry. The path of this industry would then be considered to be equivalent to the regional path. A
region however houses multiple industries which may or may not be related. To simplify this complex
situation, the path of the most dominant industry could be identified suppressing less dominant
business activities. Such an approach would neglect an important aspect of path dependency: small
events can alter the path development. Thus, all the business activities within a region should be
taken into consideration when identifying the path of the region. The question remains: how can a
regional path be defined, if the region houses multiple, related and unrelated industries with different
development paths? One possibility is to deviate from the idea that there is only one regional path.
Each industry can have technologies which are completely unrelated with technologies of the other
industries in the region. It seems impossible to unite then into one regional path. But this approach
would not serve the purpose of this paper as it would not be possible to alter the path of the region but
more paths would be added.
A second option is suggested: to deviate from the narrow understanding to link the regional path to
the technology trajectories of the regional industries. The regional development path depends not only
on the paths of the different industries but also on the interactions between them and the regional
actors. All this needs to be discussed in relation to the proposed three dimensions of regional path
dependency. Some activities are of larger importance than others and it can be assumed that some
activities are more related to the regional path than others. The introduction of a new technology can
lead to new industry emergence in the region and is therefore less related to the current regional
economic profile, while entrepreneurs imitating successful entrepreneurial activities of other regional
entrepreneurs are closely related. Path dependency can be seen as a selection process in the sense
of specialization. Smaller regions are usually more specialized than larger ones. In this light, the path
of the region is highly influenced by the economic specialization of the regional industries. Therefore:
Proposition 2: Entrepreneurial activities form a regional path which is linked to the industries within the
region
As stated above, the focus in this paper lies on ‘technological’ entrepreneurs. With the regional
development in the center of attention, innovation in this paper means new to the region. A product,
service or technology can be new to the region although it has already been introduced in the global
market quite a while ago. According to this understanding, entrepreneurs can have two different roles:
their activities can either be of radical or of related nature; always in relation to the regional path.
Radical activities should be understood as activities initiated outside established regional trajectories.
Such activities would be initiated by the Schumpeterian entrepreneur. Related activities on the other
hand follow established regional trajectories and are initiated by the Kirznerian entrepreneur.
Schumpeterian entrepreneurs are ‘innovative and break away from existing knowledge’, while the
Kirznerian entrepreneur are ‘not very innovative and replicate existing knowledge’ (Shane 2003,
p.21). Conclusively, it is not enough to set off just any innovative activities to alter the path; the
activities also need to lie outside established trajectories. Therefore:
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Sabrina Florkowski
Proposition 3: There are different types of entrepreneurship: Related entrepreneurship will be along
established trajectories, while radical entrepreneurship will alter the path
Precisely because there are different types of entrepreneurship in relation to the regional path, the
concept of path dependency should be perceived in general as neutral. If path dependency can
initiate new regional development trajectories or leads to a decline of the regional economy depends
very much on the type of entrepreneurship and the specific regional situation. Furthermore, different
stakeholders do not perceive the same processes in the same way, but they relate differently to the
path dependency process. The pre-determined negative perception of path dependency in the
literature is therefore unsuitable.
Table 2: Different types of entrepreneurship and regional process
Type of entre- Regional process

preneurship
Declining industry Emerging industry
Related
Stagnation/Decline Support
entrepreneurship
Radical
Renewal Disturbance
entrepreneurship
Table 2 shows how the same type of entrepreneurship can lead to quite different regional
development processes depending on the specific situation of the region. If the region houses
predominantly declining matured industries, related entrepreneurship will not alter the path and the
regional economy will stagnate or decline. Path dependency is generally linked to such a lock-ins.
Under the same circumstances, radical entrepreneurial activities on the other hand will generate new
ideas and initiate new development trajectories. This will lead eventually to a renewal of the regional
economy. If the region however houses emerging industries, related entrepreneurial activities are
needed to support the new industry genesis. Under these circumstances, related entrepreneurship
will support the development of a dominant design and enable the commercialization of inventions.
Under the same circumstances, radical entrepreneurship can be of some disturbance for the
development of the new industry, as it can hinder the development of a dominant design. Aldrich and
Fiol (1994) suggested for example that emerging industries should avoid competing designs and by
that eliminate confusion and uncertainty for potential stakeholders. It is important to be aware of the
specific situation of the region and the different types of entrepreneurship. Therefore:
Proposition 4: Different types of entrepreneurship have different effects on regional development
The question which appears in this context is under which circumstances the different types of
entrepreneurship emerge. The different types could be linked to new knowledge entering the region.
As new knowledge should be understood any experience and any knowledge, may it be tacit or
explicit. This new knowledge can enter the region in three different ways: through the migration of
entrepreneurs and employees, through information exchange of global networks or through research
activities within the region. Migrating entrepreneurs or employees should be understood as persons
moving between different regions of the same or different countries. In entrepreneurship literature, it is
suggested that the social networks of entrepreneurs are mainly of local nature (Hess 2004, Sorenson
2003) and that knowledge spillovers are geographically bounded (Audretsch and Feldman 1996).
Despite this geographical limitation of knowledge, entrepreneurs are considered to be highly mobile
individuals (Godley 2007) and recent research suggests that knowledge can overcome long
geographical distances (Saxenian 2006). Migrating entrepreneurs come from different institutional
backgrounds and possess different knowledge. Thus, entrepreneurs will introduce new knowledge to
the region they are moving to. For two reasons it is more likely that the migrants rather than local
entrepreneurs will initiate radical entrepreneurial activities. First, the migrants are not aware of the
technological, cognitive and social path of the region. Second, they possess more likely knowledge
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which is new to the region. But also global networks are a source of new knowledge. Companies,
especially high-tech companies, are often involved in such global networks (Cooke 2004). While the
local entrepreneurs can perceive new knowledge through such global networks, they might be more
restricted as they are embedded in regional practices, institutions and culture. Nonetheless, new
introduced knowledge will potentially stir up the regional practices. Therefore:
Proposition 5: Entrepreneurs who possess new knowledge from outside the region will be more likely
to alter the path of the region
4. Implication and discussion
The concept of path dependency was used as an interpretive lens to exploring the link between
entrepreneurial activities and regional development. Path dependency contributed in three ways to
such a study of entrepreneurship. First, the evolutionary aspect of entrepreneurship was emphasized
moving away from the big man theory to a perspective where entrepreneurial activities are seen as an
accumulation of events including cooperation, context and outcome. It is therefore important to
consider different, interrelated dimensions of path dependency. Second, different kinds of
entrepreneurship were proposed. Related entrepreneurship will be in line with path dependency, while
radical entrepreneurship will alter the path. It is therefore important not only to distinguish between
non-innovative entrepreneurial activities and innovative entrepreneurial activities, but also to
distinguish two different types of innovative entrepreneurial activities. What type of entrepreneurship
triggers which regional process is very much dependent on the regional characteristics. It can be
stated that both types are needed for the regional development. Third, it was discussed how
entrepreneurship is embedded in the existing knowledge structures of the region. On one side,
entrepreneurs rely on prior knowledge. On the other side, new knowledge might enable the
entrepreneurs to use their prior knowledge in new business opportunities.
Entrepreneurs are of course not thinking in terms of related or radical entrepreneurship. Activities are
initiated where business opportunities are identified. They are generally not concerned with which
regional development processes are triggered through their own actions. Nonetheless, the activities of
each have some impact on others. Identifying relevant activities in retrospect might cause some
difficulties for the researcher. It needs to be decided which activities were of importance and which
activities were of higher importance than others. There might be such a large number of activities
going on that it is difficult, if not impossible, to identify the important ones. Especially when a company
fails, it is difficult to see the importance of their former activities. Shockley Semiconductor for example
failed soon after its establishment, but was still very important for the future development of the
semiconductor industry in Silicon Valley (Holbrook et al 2000). At the time it is impossible to predict
which current activity is of most significance for the future regional development. It can however help
to understand the different processes occurring within a region.
Each region has a unique development and houses unique pre-requisites for the future development.
Furthermore, each entrepreneur relies on prior knowledge and experience for future decisions. Their
actions depend, to different degrees, on the regional composition of knowledge and the industrial
structure. This makes it very difficult, if not impossible to imitate the same processes somewhere else.
One might say that the region has special competitive advantages, if this prior knowledge and the
unique regional composition can be used to initiate new trajectories.
This is what the introducing quote suggests; that entrepreneurs can ‘stand on the shoulders of giants’
by using prior information and knowledge embedded in the regional infrastructure to identify new
business opportunities which can be outside of the established regional trajectories. The challenge for
the entrepreneur is not to seek for ‘complete’ novelties. New, innovative paths can rather be found
through a creative combination of resources that already exist in the region.
The aim of this paper was a conceptual one. Through the path dependency perspective,
entrepreneurship was discussed in a regional context and several propositions were presented.
Future research will address the propositions through a set of in-depth-case studies, which will
contribute to a better understanding of regional development processes.
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216
Resources for the Student Entrepreneur: Classification
and Application
Heather Fulford
Robert Gordon University, Aberdeen, UK
h.fulford@rgu.ac.uk
Abstract: Student entrepreneurs today have at their disposal a vast array of both online and offline resources
which they can draw upon when generating business ideas, screening and evaluating business opportunities,
formulating written business plans, and preparing investor pitches. These resources present the entrepreneurship
educator at university level with a pool of support and examples which, if used carefully and thoughtfully, can
become invaluable vehicles for illustrating and conveying some of the key messages of both entrepreneurial
theory and practice. The purpose of this paper is to provide an overview and classification of the principal
resources available for use in university entrepreneurship programmes, and to indicate ways in which resources
can be applied and integrated into the university entrepreneurship curriculum to aid and enhance student
learning.
Keywords: Entrepreneurship education; entrepreneurship educator; online resources; business advice; business
plan
1. Introduction: Enterprise and entrepreneurship education

Today, perhaps more so than in any previous age, there is widespread recognition in government, the
business community and beyond, that small firms make a significant contribution to the health and
stability of a nation's economy. In the UK this can be evidenced in part by the emphasis that
politicians have placed in recent years on developing an “enterprise culture”, aiming to transform the
UK into the “best environment for business with ever more positive attitudes towards enterprise”,
through stimulating “entrepreneurial activity” and encouraging the formation of “entrepreneurial
mindsets” (HM Treasury, 2004). To this end, various initiatives have been launched, and strategies
formulated, to promote and encourage enterprise education in schools, particularly in secondary
schools. As Barrow (2006) has noted, the result has been that entrepreneurship, “once the
prerogative of the brave or foolhardy” is now “on the cusp of becoming a near compulsory part of
school education, in the United Kingdom”. The focus of such education is typically on creative
thinking, idea generation, risk-taking, and the practical application of business knowledge, all
underpinned by an emphasis on fostering a “can do” attitude among students. Reports evaluating
enterprise education initiatives in schools suggest that much has been achieved, but equally that
much more could be done to foster entrepreneurial activity among young people (see for example, for
England: Ofsted Report “Developing Enterprising Young People”, 2005; and for Scotland: HMIE
Report “Improving Enterprise in Education”, 2008).
At university level, as Jack and Anderson (2001) have noted, the call to produce graduates who have
undertaken programmes in entrepreneurship education comes not only from governments, but also
from businesses, as well as from the students themselves. Certainly, if the numbers of students
selecting entrepreneurship electives in universities are anything to go by, then demand for provision in
this aspect of the curriculum appears to be on the increase. This is likely to be fuelled in part by a
growing acceptance that the notion of a “job for life” is now long gone; and perhaps too it can be
partially explained by prevailing economic uncertainties. However, it seems possible also that the
current widespread media attention received by entrepreneurship in general, and by entrepreneurs in
particular, could be playing some part in driving this current enthusiasm among students for
entrepreneurship education, causing them to recognise that setting up their own business could be a
realistic option upon graduation. UK television programmes such as the BBC’s “Dragons’ Den” now
present entrepreneurship as a form of popular entertainment. The autobiographies of leading
entrepreneurs today regularly grace the bestseller shelves in bookshops, bestowing celebrity status
on their authors. It is not simply the entrepreneurs’ businesses and their products or services that
have become household names through this media exposure, but also the entrepreneurs behind
those businesses have now become characters familiar to the general public. These days, perhaps
more than ever before, it seems that everyone can claim to know an entrepreneur! In addition, there is
a burgeoning array of online entrepreneurial resources, including websites devoted to business start
up advice, business planning checklists and toolkits, entrepreneurial discussion fora, and so on.
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The purpose of this paper is to provide an overview and classification of the principal resources
available for use in university entrepreneurship programmes, and to discuss ways in which the
increasing array of entrepreneurship resources can be used to good effect in a learning and teaching
environment in order to develop entrepreneurial skills within our students, encouraging them to
question practice, examine theory, and to reflect and think critically at each stage of their own
entrepreneurial journeys. In order to set the scene, the paper begins by stating some initial
assumptions regarding the design and nature of entrepreneurship teaching at university level.
2. University entrepreneurship programmes
Leaving to one side the already well-documented debate about whether entrepreneurs are born or
made (a succinct summary of which can be found in Robinson, 1990), and operating on the
assumption that aspects, at least, of entrepreneurship can indeed be taught, it is important to
establish here what entrepreneurship education at university level is designed to achieve. As Jack
and Anderson (2001) suggest, our focus as entrepreneurship academics should not be on
establishing a “production line for the creation of low value SMEs”, but rather on developing “higher
level skills and nurturing analytic ability” (2001:333). This implies “developing knowledge about
entrepreneurship”, rather than concentrating solely on “mechanistic business start up training”
(2001:242). In other words, emphasis should be placed on “providing the theoretical and conceptual
frameworks which underpin entrepreneurship” (Hynes, 1996:10), such as the theories associated with
entrepreneurial personality, the entrepreneurial process, idea generation, innovation, small firm
success, small firm growth, and small business management. To this end, Jack and Anderson (2001)
argue for a combined focus in university entrepreneurship education on both “enterprise
management”, comprising essentially a “functional role” (the “science” of entrepreneurship), as well as
on “enterprise creation”, which by contrast, comprises an essentially “creative role” (the “art” of
entrepreneurship). In short, in terms employed by Burch (1986), attention needs to be paid in
university entrepreneurship education both to the “risk-taking” elements of enterprise development, as
well as to the “caretaking” elements of day-to-day small business management.
To achieve this, a combination of “formal” and “informal” methods will typically be employed (Hynes,
1996). Among the formal will be lectures, seminars and guided reading; and among the informal,
there will be case study analyses, visits to companies, team projects, and business simulations (1996:
10-11), presentations and discussions with guest entrepreneurs, and networking activities (Jack and
Anderson, 2001:348).
In essence then, a learning and teaching environment needs to be created in which the following five
elements are nurtured and encouraged to flourish among the students: inspiration, aspiration,
emulation, experimentation and evaluation. Brief details of each of these elements are provided in
Table I below.
Table 1: Pedagogical elements in university entrepreneurship programmes
Pedagogical element Details
Inspiration Creative thinking; idea generation; opportunity recognition
Aspiration Goal and objective setting; business planning; competitiveness;

determination to succeed; ambition fostering; developing a ‘can do’ attitude
Emulation Direct observation of existing practice; learning from others through case
studies; role modelling; mentoring; fostering a ‘can do too’ attitude
Experimentation Venture creation projects; pitch preparation; business plan competitions;

application and testing of theory in own practice
Evaluation Critical analysis of theory; examination of, and reflection on, theory in practice
in existing businesses; review of business start up and business planning
advice
The output from such a learning environment should be graduates who “can usefully apply theory in a
variety of contexts” (Jack and Anderson, 2001:242), are capable of identifying business opportunities,
and who possess the “skills necessary to capitalize on and manage” those opportunities (Hynes,
1996:11-12), and are thus “equipped for an entrepreneurial career” (Jack and Anderson, 2001:242).
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Heather Fulford
One of the key challenges for the entrepreneurship teacher seeking to create a learning and teaching
environment in which graduates like this are shaped and formed is that of being able to discern from
among the ever-widening range of resources which will best support and underpin his/her
entrepreneurship programme. The remainder of this paper explores some of the more recent
resources and considers how they can usefully be integrated into university entrepreneurship
programmes.
3. Resource classification
The pedagogical elements of the entrepreneurship learning and teaching environment summarised
above can be usefully employed as a basis for categorising or classifying entrepreneurship resources.
This resource classification is illustrated below.
Table 2: Entrepreneurship resources
Pedagogical Resources
element
Inspiration Creative thinking; idea generation; opportunity recognition
Lateral thinking exercises; ideas, inventions and innovations websites; idea generation
tools; Patent Office websites.
Aspiration Business planning; competition; fostering a ‘can do’ attitude
Venture creation and business planning competitions; enterprise challenges; personal

development plans and planning tools.
Emulation Role modelling; fostering a ‘can do too’ attitude
Mentors; case studies; guest entrepreneurs/speakers; visits to entrepreneurial firms;

autobiographies and biographies of entrepreneurs; stories of success and failure; media
broadcasts about business start-ups and/or wannabe entrepreneurs.
Experimentation Venture creation projects; pitches; business plan formulation
Business start-up advice websites; government agency websites (taxation, legislation);

bank and finance organisation websites (start-up funding); business support agency
websites; online business plan templates and financial planning tools.
Evaluation Reflection on, and review of theory in practice
Academic journal articles; official reports; case studies.
4. Implications and applications

There is a plethora of resources available for students studying entrepreneurship today, particularly a
growing array of online resources, such as websites offering free information and advice on
entrepreneurship and business start up issues. These provide ready access to online business
planning tools, business plan templates, business opportunity profiles, start up finance planning tools,
advice on business structure and legal entities, and much more. Often such websites are the first port
of call for students seeking support for their essay assignments, or wanting direction and suggestions
during their new venture creation projects. The advantage of this ready access to online business
start up information is that students can consult it in their own time without having to approach
business advice organisations directly for appointments. One disadvantage, however, is that whilst
some of these websites are, of course, authoritative and contain high-quality, reliable information (the
sites run by government advice agencies, business support organisations and financial institutions
constitute good examples here), others unfortunately are of more dubious provenance, and their web
content can prove to be somewhat less reliable. The challenge facing the students is to distinguish
between the high quality sites and those of lesser quality.
Given the variance in quality of entrepreneurship and business start up web content, the role of the
university entrepreneurship teacher must, therefore, essentially become that of guide or navigator,
urging students always to question the authority of sources consulted, to evaluate carefully the
information found, and to crosscheck online information against reputable and reliable sources and
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Heather Fulford
resources. To this end, experience suggests that time spent at the outset of an entrepreneurship
module providing students with an overview of available quality resources is time well spent.
Particularly valuable are in-class activities and assignments, during which students can apply their
critical thinking and evaluative skills by comparing and contrasting the business start up advice
offered on various websites.
As a further means of steering students through the maze of online entrepreneurship resources, a
portal (denoted The Entrepreneur’s Resource Centre) of links to recommended entrepreneurship and
business start up websites has been created at Aberdeen Business School (see Figure 1).
The Entrepreneur’s Resource Centre
Enter Resource Centre
Created by: Dr. Heather Fulford, Academic Director and Reader in Entrepreneurship,
Centre for Entrepreneurship, Aberdeen Business School, Robert Gordon University
Figure 1: The entrepreneur's resource centre

This resource portal has been made available to students undertaking entrepreneurship modules at
both undergraduate and postgraduate levels. The web links in the resource portal have been
organised into a number of sections (e.g. market research and marketing, business finance,
intellectual property, export and international, legal issues, and so on – see Figure 2). Its division into
sections helps remind students of the various aspects and issues they will need to address in their
own business start up projects (the experimentation element). Furthermore, through the resource
portal’s online feedback system, students are encouraged to suggest additional web links for
inclusion, and to comment on the usefulness of the links already listed. This again represents a
means of stimulating evaluation and reflection. A key advantage of the resource portal is that it
provides a structured point of departure for students’ Internet search activities during their new
venture creation projects and reflective essays on aspects of entrepreneurial theory.
The fact that the seventh series of The BBC Dragons’ Den programme is currently running suggests
that entrepreneurship as entertainment continues to be popular in the UK. Certainly, informal - and
often student-initiated - discussions in entrepreneurship classes seem to indicate that many students
are avid followers of such broadcasts: the classic catastrophic pitches; the flawed products; the
seemingly bizarre business ideas; the business planning errors; the financial miscalculations; and
indeed in some cases, the Dragons’ failure to spot a business opportunity with good potential for
success, all seem to be lodged permanently in students’ memories, and often provide them with much
cause for amusement.
The vivid incidents and cases from the TV show provide excellent starting points for thought-
provoking debate and careful reflection in a university entrepreneurship classroom setting. As we
encourage students to see beyond the entertainment element of such broadcasts, there is scope for
using the individual cases to examine fundamental issues in entrepreneurship. For example, business
opportunity recognition (the inspiration element) can be considered through analysis of the business
ideas presented by the budding entrepreneurs appearing on the TV show. Furthermore, the
personalities and backgrounds of both the Dragons and the entrepreneurs entering the Den often
prove to be models for students to relate to and to learn from (the aspiration and emulation elements),
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Heather Fulford
spurring them on to take risks and develop their own business propositions. As students embark on
their own new venture creation projects in our modules (the experimentation element), there is much
they can draw on from the business proposals that have appeared on Dragons’ Den – from both the
successful and the less successful. For instance, they can glean much about market research
techniques, marketing strategies, approaches to networking, finance raising, and presenting financial
data. Similarly, still focussing on the experimentation element, when it comes to presenting business
propositions, the pitches seen in Dragons’ Den can be used as learning tools for what to do and what
not to do, and for discussing the types of feedback and criticism likely to be received during pitches to
potential financial backers, and for understanding how to respond to that feedback. Moreover, the
cases seen in the Den provide a rich source of examples for evaluating and reflecting on
entrepreneurial theory, whether that be aspects of entrepreneurial process, personality or strategy.
Resources
Business Business Market Research Business

Start Up Plans & Marketing Finance
Intellectual Running a Export & Local

Property Small Business International Information
Useful Training & Social Innovation &

Organisations Networking Entrepreneurship Creativity
Legal Academic Magazines &

Textbooks
Issues Journals Newspapers
Radio & TV
Programmes
Feedback
Figure 2: The resource centre section overview

From the student perspective, perhaps what is particularly appealing and engaging about the
Dragons’ Den cases is that the would-be entrepreneurs appearing on the show are just ordinary
people drawn from all walks of life, not wealthy business tycoons with celebrity status. This can help
spur the students on with their ideas and help foster a “can do too” attitude among them. Looked at
from the academic’s perspective, the fact that Dragons’ Den cases are so familiar to, and popular
with, the students is highly advantageous: the student-initiated discussions that revolve round these
cases seem to come to life in ways that perhaps more conventional textbook-type cases can never
do. Used thoughtfully then, these cases from the Dragons’ Den and other similar broadcasts bring to
the university entrepreneurship classroom, a vibrancy and dynamism, and are arguably a gift to the
entrepreneurship academic.
Although perhaps not featuring on conventional academic reading lists, the autobiographies of leading
contemporary entrepreneurs can arguably form valuable supplementary reading material in both
undergraduate and postgraduate entrepreneurship modules. Through the stories of the lives of such
entrepreneurs, students have ready access to readable accounts of how entrepreneurs think, how
they cope with failure, how aspects of the so-called ‘dark side of entrepreneurship’ (see Ket de Vries,
1985) manifest themselves in their lives, the levels of commitment and effort required to achieve
success, personal sacrifices that sometimes have to be made, and so on. Such accounts can provide
useful “hooks” in classroom discussions on aspects of entrepreneurship theory, and can help students
both to apply and to critique aspects of entrepreneurial theory. Once more, the role of the
entrepreneurship teacher here is to act as guide, steering the student to look beyond a mere good
rags-to-riches type story, to understand the lessons the entrepreneurs learned on their
entrepreneurial journeys (the aspiration and emulation elements), such as how they dealt with failures
and setbacks, and the processes they followed to set up their business ventures. As a tool for helping
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Heather Fulford
students to understand what it really takes to be an entrepreneur, and to “get inside” the minds of
entrepreneurs, these real-life stories can be invaluable.
Encouraging students to select even just one such autobiography (perhaps one written by their own
entrepreneurial “hero”) can prove good preparation for their quizzing and questioning of the guest
entrepreneurs (our local heroes!) that we bring to the entrepreneurship classroom to share their
experiences and wisdom.
5. Concluding remarks
Used in conjunction with perhaps more conventional entrepreneurship learning and teaching
resources, the current range of online resources and entertainment-oriented entrepreneurship cases
present the entrepreneurship academic with a vast pool of examples which, if used carefully, can
become invaluable vehicles for conveying some of the key messages of entrepreneurial theory and
practice. The challenge for the entrepreneurship academic is to keep examining this pool to identify
and draw out the important pedagogical elements of inspiration, aspiration, emulation,
experimentation and evaluation to be found in the many and varied examples contained within it, and
to capitalise on those examples in order to transform the students into critical and discerning
consumers of online entrepreneurship resources and entrepreneurship entertainment, and through
that to grow their entrepreneurial knowledge and skills. Viewing available resources in the light of the
five-part classification (inspiration, aspiration, emulation, experimentation and evaluation) should
enable entrepreneurship educators to plan their application of resources effectively and to be able to
guide students carefully through the range of possible resources.
References
Barrow, C. (2006) “The complete small business guide: a sourcebook for new and small businesses”. 8th edition.
Chichester: Capstone.
Burch, J. G. (1986) “Profiling the entrepreneur”. Business Horizons, September-October 1986. pp. 13-16
HM Treasury (2004) Creating an enterprise culture – Advancing enterprise: Britain in a global economy.
Discussion Paper. Available at: www.hm-treasury.gov.uk
HMIE (2008) Improving enterprise in education. February 2008. Available at www.hmie.gov.uk
Hynes, B. (1996) “Entrepreneurship education and training – introducing entrepreneurship into non-business
disciplines”. Journal of European Industrial Training. Vol. 20 (8). pp. 10-17
Jack, S. L. and Anderson, A. R. (2001) “Entrepreneurship education within the enterprise culture: producing
reflective practitioners”. In Enterprise and Learning, Selected papers from the Second Enterprise and
Learning Conference, Aberdeen 1998. Eds. A. R. Anderson and S. L. Jack. Aberdeen: Centre for
Entrepreneurship, University of Aberdeen. pp. 331-358
Ket de Vries, M. F. R. (1985) “The dark side of entrepreneurship”. Harvard Business Review. Nov. –Dec. 1985.
pp. 160-167
Ofsted (2005) Developing enterprising young people: Features of the successful implementation of enterprise
education at Key Stage 4. HMI 2460. November 2005. Available at www.ofsted.gov.uk
Robinson, D. (1990) The naked entrepreneur. London: Kogan Page Ltd.
222
An Examination of Reduced Potential for Innovation and
Enterprise in an ICT Cluster
Laura Galloway and Abigail Marks
Heriot-Watt University, Edinburgh, UK
l.galloway@hw.ac.uk
Abstract: The paper identifies the potential for enterprise and new venture creation problems in the ICT industry
in Scotland due to the withdrawal of several large multi-national firms. Marks and Huzzard (2010) identify two
core competencies associated with innovation and competitiveness in the ICT sector: vocational skills and
employability skills. Employability skills are advocated as key to generating innovation and enterprise in
organisations, and consequently they are often called enterprise skills, implying the anticipation of new firms as
an integral part of developing a competitive knowledge economy. Skills development post education has
traditionally been within large firms in the ICT industry, but the majority of large firms withdrew from Scotland just
under a decade ago. Remaining SMEs have maintained their position in the market by creating one or two core
products, or providing developmental services to larger organisations. New graduates are lacking in
employability/enterprise skills which are not being developed by smaller employers. This has led to a skills
stagnation and ultimately sector stagnation. For entrepreneurship to be facilitated or indeed to flourish, theory
relates that a dynamic, healthy sector with a diversity of players and participants is necessary. The withdrawal of
the large firms from Scotland may have removed a vital part of the enterprise process.
Keywords: large firms, enterprise, ICT, small firms
1. Aims and introduction

Governments are amongst the main contributors to the rhetoric about the value potential within high-
tech industries as these are seen as key to improving competitiveness within industries and nationally
(DTI, 2002; Rosa, 2003; Lasch, et al., 2007). Small firms increasingly are regarded as of high
importance (Keogh, 2002; Klapper, 2004), and particularly those in knowledge-intensive industries
because they are seen to have “the capability to generate innovations that may be the basis of high
growth firms” (Zacharakis, et al, 1999:32; also Lasch, et al., 2007). One of the over-riding
characteristics of high-technology sectors is that they “rely on continuous improvement and
innovation” to maintain competitiveness (Mohannak, 2007, p. 237). The current paper seeks to build
on the work of one of the authors on the effect of the departure of large firms from the ICT industry
sector in Scotland (Marks and Huzzard, 2010). Following McQuaid (2002, p. 909) the ICT industry is
taken to include “knowledge, creative, e-commerce industries, and wider technology, media and
telecommunications developments”. In particular in this paper, the implications of this for the small
firms sector and entrepreneurship within the ICT industry in Scotland are considered, particularly in
terms of sustainability and development of the industry.
2. ICT knowledge and skills
Various authors such as Gray (2006), Mohannak (2007) and Marks and Huzzard (2010) identify two
core competencies associated with innovation and competitiveness in technology sectors, namely,
vocational or technical skills and employability or enterprise skills. For the ICT sector the former refers
to vocational ICT skills obtained via higher education qualification in most (but not all) cases.
2.1 Vocational ICT skills

Vocational ICT skills refers to high-level skills in ICT technologies, i.e., those practiced by people at
the high-end and cutting edge of the technologies themselves. As such, innovation and
entrepreneurship are considered by many, including policy-makers, to be strong potentials. In the UK,
as elsewhere, a focus on technology education especially at the higher levels has been a considered
response to the challenge to equip people with appropriate ICT skills and knowledge and populate the
UK’s economy with those who are able to practice these skills, for example through Higher Education
and through bodies such as e-skills UK, the employer/government-operated body working to ensure
globally competitive quality technology skills. From the entrepreneurship perspective there is much
assumption on the part of governments that in facilitating these high-end skills that have the potential
to prompt innovation, that business and industry growth will emerge (Lasch, et al., 2007). While it is
useful to note the spectacular success of some people in this domain with little or no educational
background in the discipline, such as Bill Gates, the vast majority of those who have created and
developed ICT technologies in all kinds of organisations that have gone on to generate global markets
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are those who have studied ICT as a vocational discipline in higher education (Berryman, 1988).
Indeed, despite the status of the high-profile founder, the Microsoft brand is underpinned by a very
highly-qualified ICT workforce. This is true also of owners in the small firms sector: in his empirical
study of 1500 small firms Gray (2006, p. 352) finds that “the owners with technical and vocational
qualifications…appear to be the most growth oriented”.
2.2 Employability skills and enterprise

In the globally competitive knowledge-based economy, employability skills are advocated as the key
to generating innovativeness and enterprise. In this context they are often called enterprise skills, and
this latter nomenclature implies the potential and anticipation of new firms and the creation of new
industries as an integral part of developing a competitive knowledge economy. While hard to quantify
(Bridges, 1994), employability skills are commonly cited as those that “cut horizontally across all
industries and vertically across all jobs from entry level to chief executive officer” (Sherer and Eadie,
1987: 16), including collecting, analysing and organising information, communicating ideas and
information, planning and organising activities, working with others in teams, using mathematical
ideas and techniques, solving problems, and using technology. Similarly, Marks and Scholarios
(2007) found that customer-facing skills were seen as increasingly essential for effective employment
in the ICT sector. When the term ‘enterprise skills’ is applied the same skills are invoked, but include
also specific business skills such as financial planning, market analysis, business or project planning,
and strategy (Kirby, 1992; Gorman et al 1997; Bechard and Toulouse, 1998). Indeed, in the UK at
least, in the higher education context it is a strategic priority that “graduates have the right skills to
equip them for a lifetime in a fast changing working environment” (DfES, 2003). Education institutions’
response to this has seen an increase in the Business and Enterprise education delivered to those in
high-tech disciplines (as discussed in Galloway and Keogh, 2006) whereupon technical education is
combined with some measure of dissemination of other skills, attributes or traits. Such skills, attributes
or traits are, in effect, add-on components or generic employability skills to vocational or technical
skills and include also such things as dependability, responsibility and positive attitudes towards work
and relatively recent research has identified these also as being highly valued by employers, across
occupational groups and work contexts (Cotton, 2001), professional institutes in the high-tech sectors
(Galloway and Keogh, 2006), and at the same time being promoted by governments as those relevant
and necessary for buoyant enterprise activity and entrepreneurship (DfES, 2003).
Cotton (2001) argues that the requisite skills, attributes and traits associated with employability and
enterprise, although deemed to be learnable, are most often acquired on-the-job rather than in formal
classroom settings. Post-education, the UK government advocates ongoing employability/enterprise
skills development through ‘lifelong learning’. At a policy level therefore, there is a presumed
delegating of responsibility for employability/enterprise skills development to employees and
employers (Stråth, 2000; Garsten and Jacobsson, 2004). The apparent rationale for prioritisation of
employability or enterprise skills development is based on creating advantageous conditions for the
agents of industry – the workers and the potential and realised business creators. In fact in Scotland,
the Scottish Government paper Healthy Working Lives (2009) describes employability as ‘all the
things that enable people to increase their chances of getting a job, staying in, and progressing further
in work’. However, more critical approaches have questioned whether employers actually deliver what
employees genuinely need in terms of employability (Marks and Scholarios, 2008). What is (certainly
advocated to be) good for the development of the agents of an industry is good also for the industry
itself however (Hallier, 2009), and it is industry development and subsequent global competitiveness
that has the potential to add value to industries and employment in modern knowledge economies.
3. Knowledge and skills in the small firms sector
The combination of technical and enterprise skills is critical to the development of high-tech industries,
and both require to be invoked for maximum advantage to firms and to industries. This is echoed by
governments, for example, in its Strategic Framework the UK government claims that “scientific and
technical knowledge needs to be combined with other forms of expertise, such as knowledge of
markets and customer needs to create innovative new products and services” (DTI, 2001). While
development of knowledge and skills for both of these ‘sides’ of business enhancement has long been
observed and facilitated in the large organisation context, there is still little scope for it in the small
firms sector due to the constraints of relative resource disadvantage and lack of economies of scale
and this has been reported innumerable times within the literature (e.g., Smallbone, et al. 2000; Gray,
2006; Mohannak, 2007). Within the small firms sector there is still a strong requirement for both of
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these types of skills and knowledge though. For example, Gray (2006) finds that those small firms that
innovate in terms of both technology/product-oriented and management/marketing-oriented functions
are more likely than those firms with single-innovation focus or no innovation to experience sustained
growth. In order to perform these innovations, a firm must have the appropriate skills and knowledge
within it and these can only be obtained by affording ongoing skills development or recruiting suitable
qualified and experienced personnel.
The Bolton Report (1971) identified a need for policy intervention on the lack of ability of the small
firms sector to provide appropriate skills development and training. Nearly 40 years later little has
been accomplished to improve the training gap (Matlay, 2000) despite having been increasingly
clearly articulated as a need by small firms researchers (e.g., Storey, 1994; Smallbone, et al., 2000).
Despite this, as empirical evidence bears out, there is substantial contribution from the small firms
sector in terms of innovation and growth within the ICT industry. Various authors identify that small
firms’ skills and knowledge are borne from a variety of sources, including the large organisations and
large firms sectors, especially when firms are located in geographic clusters and form part of
extended networks and supply chains within the cluster (e.g., Mohannak, 2007; Lasch, et al., 2007).
Gray (2006, p. 350-1) articulates three main sources of requisite skills and knowledge for application
and enhancement in small firms:
Value chain linkages between SMEs and larger organisations, private and public, through cluster
and network participation in many cases
Labour market movements of staff between large and small firms throughout careers
“Blocked career spur to entrepreneurship” (p.351) whereupon staff leave large firms to start their
own enterprises.
Thus, for small firms the reality is that in terms of knowledge and skills, large organisations, including
large private firms, provide an essential service either through their (often contractual) dealings with
smaller firms and the dissemination of knowledge through supply chains (also Mohannak, 2007), or
by providing training and skills development to personnel who migrate into the small firms sector.
Indeed, in terms of ongoing technological competence, as Gray (2006, p. 350) points out, “most R&D,
especially large budget and longer-term R&D, is conducted in large organisations” including large
private firms. Thus, while formal qualifications are almost a prerequisite for the ICT industry, as with
any high-tech sector (Berryman, 1988) additional and ongoing in-employment training and experience
is critical (Cotton, 2001; Lasch, et al., 2007) and demonstrably effective in terms of value-adding are
both vocational/technical and enterprise skills development. This is substantiated by many of the
professional Institutes in the technology and engineering professions in the UK as both the Science
Council (2006) and the Engineering Council (2005) require graduates to undergo further training for
Chartered status in many instances. In the case of the latter (which includes those specialising in
electronics and electrical engineering, a common source of ICT specialism) this is through UK-SPEC
(Standards for Professional Engineering Competence). UK-SPEC provides technical objectives, and
in equal number, specific business and personal objectives, including “experience of and abilities
in…creativity, innovation, project management, business planning, market research, team work, and
commercial feasibility testing” (Galloway and Keogh, 2006).
4. The ICT sector in Scotland
For nearly twenty years, Scottish national and regional government has placed a strong focus not only
on the development of ICT skills for the population but also on the development of the computing and
technology sector as a priority for economic growth. It was anticipated in the early 1990s that the ICT
industry would expand to such an extent, that the cluster of technology companies located in the
central belt of Scotland was awarded the glamorous label of ‘Silicon Glen’. At its most successful, the
ICT market in Scotland represented about 2 per cent of the work market (Carrie, 1999). Most of the
world players were in attendance in Scotland’s electronics industry and by the end of the 1990s
almost half of the PCs sold in Europe were assembled there (Colecchia, 2001). The five main facilities
in this cluster included NEC and Motorola who were the word’s second and largest fabricators after
Intel. The strategy of the Government and Scottish Executive was to encourage inward investment of
these predominantly foreign owned technology companies. However, the majority of these large firms
withdrew from Scotland after the burst of the dot.com bubble just under a decade ago. This had a
substantial impact on the economy more generally, and the ICT sector specifically. The remaining
large organisations downsized substantially. Yet, the change in the sector also allowed the spawning
of new, smaller companies, often formed as offshoots from the now, defunct larger companies or as a
225
product of venture capitalists funding some of the casualties of the dot.com bubble. In 2008,
ScotlandIS (the trade body for the ICT industry in Scotland), reported that SMEs formed 81% of ICT
organisations in Scotland and in 2009 this had increased to 84%. Over three quarters of ICT
companies in Scotland have less than 35 employees (Scottish Technology Industry Survey, 2009).
These small organisations have developed or maintained their position in the market by creating one
or two core ‘safe’ products which they continually refine and update or provide development services
to larger organisations. And it is these smaller organisations who have provided the mainstay of the
60,000 IT professionals employed in Scotland (e-skills UK, 2008).
Marks and Huzzard (2010) identify a two-fold outcome of the departure of large, often multi-national
companies from Scotland: not only has it devastated the ICT economy but also damaged the skills
base available in Scotland. These organisations were essential for the training of new graduates. But,
even the graduates themselves seem to be reducing in number: from Scottish Government data
(www.scotland.gov.uk) we know that there is a substantial decrease in first and postgraduate degree
entry figures over the period 1996-2005. More worrying perhaps, is that there has been a substantial
fall in those with IT-related degrees entering professional IT work. e-skills UK (2008) report that the
largest percentage decrease in first degree entry figures over the period 1996-2005 was in
Engineering and Technology (-12%) and in postgraduate entry in the same time period was in
Computing Science (-42%) and Engineering and Technology (-45%). UCAS reported that the number
of Scottish residents studying ICT based subjects at university has fallen by 50% between 2001 and
2006. These patterns reflect trends in England and the rest of Europe (Scholarios et al., 2008).
Recent research on the ICT sector (e.g. Ramsay, 1999; Barrett, 2004; Baldry et al., 2007) found the
industry dominated by men in their mid to late twenties. Amongst the four SMEs studied in their
qualitative investigation of the sector in Scotland, Marks and Huzzard (2010) found conversely that
where the industry was dominated by men in their mid to late twenties, these same young men now in
their mid thirties to mid forties, are not being followed by either younger men or women.
Notwithstanding the lower number of ICT graduates, those that are were regarded as lacking
employability or enterprise skills and since, typically for small firms, skills training is not commonly
formally provided and resourced by the employers in the study, the outlook for attaining these skills
amongst graduates is limited in Scotland. Marks and Huzzard (2010) conclude that since “the sector
is not open for those straight out of education” Scotland is experiencing “some degree of
technological stagnation”. In terms of innovation and entrepreneurship within the small firms in the
Scottish IT sector, there is still much demand for skilled and experienced ICT workers, presumably to
add value to the firms: Scotland IS’s annual technology survey (2009) found that experienced
developers were seen as the most business critical and in the most demand. Conversely, Marks and
Huzzard (2010) found that the opportunity for developing these companies with young graduates was
limited due to the lack of availability of graduates within Scotland, and the limited training resources
available within these organisations.
5. The effects on enterprise
McQuaid (2002, p. 916) maintains that business growth and innovation activity in small (and large
firms) is fostered best where there is dynamic industry comprising “entrepreneurial skills, skilled
workers, market knowledge and networks from declining firms to growing firms within the same
region”. He claims that “this fermentation, or creation and development of ideas and firms, within the
economy can help sustain it and avoid its stagnation” (ibid). Gray (2006, p. 347) concurs, adding that
within high-tech networks the most successful small firms are those with “higher levels of absorptive
capacity” i.e., those most active in terms of cooperation and knowledge exchange opportunities with
the other network participants. Regional clustering is further advocated as being good for
entrepreneurship and small firms in that it goes some way to overcome the resource constraints
typical of the small firms sector in terms of accessing knowledge and skills. These clusters critically
have to comprise a diversity of firms, however, where a value chain that depends on different
competencies and activities can be developed. Put another way, each participant in a high-tech
cluster has a role to play: large firms and other research organisations will benefit from the flexibility
and tailoring associated with the small firms sector; the small firms sector can reap the advantages of
access to skills and knowledge exchange from the larger organisations; and from either of these
sources entrepreneurship in the form of business growth and innovation or new venture creation can
emerge. Changes to the environment, whereupon larger organisations withdraw for example, can
render the network vastly changed and as a result to survive the small firm has to adapt to function
within the limits of its own core competencies (Mohannak, 2007). Since much of the small firms sector
comprises service-based activity (Lasch, et al., 2007), the departure of large firms can destroy some
226
small firms within the network, and particularly within supply chains, as the large firm may have been
the main customer. From an international perspective, when a high-tech industry moves on as a result
of technology innovation and development globally, over the longer period the implications of this for a
regional cluster are concerning.
Entrepreneurship in the ICT industry is borne of the application of enterprise and vocational skills
combined to identify and act on market opportunities presented by technological advancement and
industry diversification. The extensive rhetoric about the knowledge-based enterprise economy
reflects this. For example, recently the UK government has embraced the concept of an enterprise
economy, recognising that ‘entrepreneurial skills and motivation are central to the dynamism of a
commercial society’ (Gavron, et al. 1998). In line with the theoretical idea that “the capacity of small
firms to be innovative depends on whether they are placed in a stimulating environment that
encourages firms to network and cooperate with each other over innovation” (Mohannak, 2007, p.
238), in their study of employability and the effects of the withdrawal of many large ICT firms from
Scotland, Marks and Huzzard (2010) found that “the companies that remained within the sector
provided services or relatively ‘safe’ product ranges” and they observed stagnation occurring within
the sector. Despite this stagnation, skills requirements are still essentially at a high level: employment
opportunities are there for those with existing skills and a portfolio of experience. The sector is not
open for those straight out of education or those wishing to transfer or update their skills, however.
Employees interviewed by Marks and Huzzard saw job security as more important than opportunities
for acquiring new employability skills suggesting that for these workers, employment is of greater
significance than employability. This is opposite to the enterprise agenda. As noted, since small firms
in high-tech industries often exist as service providers to large firms, some small firms will have died
as a result of the large firms’ departure. Equally, with no large firms to service, opportunities to start
new service firms are removed (Lasch, et al., 2007). Additionally, the critical overlap between
employability and enterprise skills and the capacity for these types of skills to foster innovation and
entrepreneurship is central to the dynamic nature of economic development. The stagnation found by
Marks and Huzzard (2010) in Scotland was attributed by them to “skill stagnation within the industry”
caused by structural change as a result of the large firms withdrawing. If enterprise and innovation in
the high-tech sectors are critical to global competitiveness the high-tech industries must have the
capacity to disseminate knowledge and skills and to engage the younger and more recently qualified
in order to provide them with stimulating post-qualification experience and training from which some
will emerge as entrepreneurial drivers. Empirical data demonstrates the importance of this: Gray
(2006) finds from his sample of 1500 that (relative to the rest of the sample) younger SME owners
with high-tech qualifications and post-education experience were the most growth- and innovation-
oriented. In short, it is the generation post-qualification and equipped with post-experience training
and development in vocational and employability/enterprise skills who are most likely to spot
opportunities and who drive subsequent innovation in high-tech industries, including ICT.
6. Conclusions
The effects of employability/enterprise skills on industries underpinned by high level vocational or
technical skills are reported throughout the literature as highly valuable in terms of increasing
innovation, growth and industrial competitiveness. Not only are those equipped with both types of
skills and knowledge assets to the organisations they work in, but they also comprise the pool from
which founders of new ventures focused on developing new innovations in the industry might emerge.
Large firms have been the traditional first and early career destination for many newly qualified ICT
professionals and it is in the large firms that further vocational and enterprise/employability skills have
been developed, most often via both training opportunities and experience. With the withdrawal of the
large firms, Scotland has lost a vital element in the dynamic that creates enterprise and
entrepreneurship in the ICT industry. Without intervention the future of the sector in Scotland
therefore looks very bleak.
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The Relation Between Organizational Learning Capability
and Product Innovation Performance: An Empirical Test in
Iranian Organizations
Parvaneh Gelard and Seyed Pooya Mirsalehi
Azad University – South Tehran branch, Iran
p_gelard@yahoo.com
Pouya.mirsalehi@gmail.com
Abstract: This paper assesses the relation between organizational learning capability and product innovation
performance in Iranian companies. We consider organizational learning capability as a function of seven
dimensions or mechanisms: open environment and experimentation, risk taking, interaction with the external
environment, distribution and sharing of internal knowledge, system thinking, ongoing training and participative
decision making. The impact of these mechanisms on product innovation performance is also analyzed. We used
correlation and linear regression to test our research hypotheses on a data set from food, medicine and cosmetic
industries of Iran. Results support our conceptual model and underline the importance that learning has for
innovation performance.
Keywords: organizational learning capability, product innovation
1. Introduction
Innovation has become an important factor in company performance and survival as a result of the
evolution of the competitive environment. Balachandra and Friar (1997) consider that the successful
introduction of new products is the lifeblood of most organizations. The importance of product
innovation for good long-term company results is now widely recognized and has been extensively
reported in the literature (Capon et al. 1992; Lemon and Sahota 2004; Montalvo 2006). Innovation
consists of successfully implementing creative ideas within an organization (Amabile et al. 1996), and
is therefore closely related to organizational learning. Innovation is conceived as an individual and
collective learning process that aims to find new ways of solving problems. As a result, innovation
seems to depend on the company’s capability to learn through which new knowledge is developed,
distributed and used. Organizational learning is the process by which organizations learn. Learning is
any change in the organization’s models that maintains or improves performance (Dibella et al. 1996).
We understand organizational learning capability (OLC) as a bundle of tangible and intangible
resources or skills the firm uses to achieve new forms of competitive advantage. These skills enable
the process of organizational learning. Literature (Nevis et al. 1995; Hult and Ferrell 1997; Je´rez-
Gomez et al. 2005) has revealed that learning can be promoted and guided when certain conditions
or characteristics are available. Jerez-Gomez et al. (2005) have stated that the capacity to learn has
been considered a key index of an organization’s effectiveness and potential to innovate (in Alegre
and Chiva 2008: 2).
Prior research suggests that organizational learning affects product innovation performance.
Wheelwright and Clark (1992) suggest that learning plays a determinant role in new product
development projects because it allows new products to be adapted to changing environmental
factors, such as customer demand uncertainty, technological developments or competitive turbulence.
Recently, Hult et al. (2004) pointed out that if a firm is supposed to be innovative, management must
devise organizational features that embody a clear learning orientation. However, this link needs a
wider and more comprehensive analysis, including the main characteristics that foster organizational
learning (in Alegre and Chiva 2008: 2). Calantone et al. (2002) defined a firm’s learning orientation as
the organizational activities of creating and using knowledge to enhance competitive advantage. Their
study underscored the importance of learning orientation and linked it with innovation. However,
Calantone et al. (2002) emphasized that more empirical work in this direction was imperative.
Recently, Alegre and Chiva (2008) carried out an analysis on the effect of OLC on product innovation
performance in Spain tile and Ceramic industry. They proposed five essential facilitating factors for
OLC: experimentation, risk taking, interaction with the external environment, dialogue and
participative decision making. Their research revealed that promoting OLC has positive effect on
product innovation performance. The aim of this paper is to assess the contribution OLC makes to
product innovation performance in Iranian companies. We carried out a survey that examined OLC
and product innovation performance in Iranian food, medicine and cosmetics producing firms. We
used correlation and regression tests to test research hypotheses.
229
2.1 OLC
The OLC concept (Dibella et al., 1996; Goh and Richards, 1997; Hult and Ferrell, 1997; Yeung et al.,
1999; Je´rez-Go´mez et al., 2005) stresses the importance that facilitators have for organizational
learning. These facilitators have traditionally been outlined by both the learning organization and the
organizational learning literature. The learning organization or prescriptive literature mainly focuses on
the development of normative models for the creation of a learning organization. This literature
describes a set of actions that ensures learning capability: effective generation of ideas by
implementing a set of practices such as experimentation, continuous improvement, teamwork and
group problem-solving, observing what others do, or participative decision making. Although most of
the OLC measurement proposals and analyses of their dimensions have mainly focused on the
learning organization research, the organizational learning literature has also studied the
organizational learning facilitating factors. Chiva (2004) analyzes both literatures in order to determine
the facilitating factors of organizational learning. Based on this comprehensive analysis, Chiva et al.
(2007) developed an OLC measurement instrument that understands OLC as a multidimensional
concept, the dimensions of which are: experimentation, risk taking, interaction with the external
environment, dialogue and participative decision making. On the one hand, these five dimensions are
essential enablers of the organizational learning process. On the other hand, they represent the OLC
of a particular firm. This conceptualization of OLC also takes into account that organizational learning
can be either internal or external. According to Bierly and Chakrabarti (1996), firms should achieve an
adequate balance between internal and external learning that best fits their resource configuration
and strategic objectives. Internal learning occurs when members of the organization generate and
distribute new knowledge inside the firm; it depends mainly on organizational culture factors such as
participative decision making or management style (Lemon and Sahota, 2004). External learning
occurs when new knowledge comes from outside the firm and is then transferred throughout the
organization; it is chiefly a result of the firm’s absorptive capacity, its ability to identify, assimilate and
exploit knowledge from the environment (Lane et al., 2006).
Open environment and Experimentation is defined as the extent to which new ideas and
suggestions are attended to and treated sympathetically. Experimentation involves trying out new
ideas, being curious about how things work, or carrying out changes in work processes (Nevis et al.,
1995). It involves the search for innovative solutions to problems based on the possible use of distinct
methods and procedures. (in Alegre and Chiva 2008: 3)
Risk taking can be understood as the tolerance of ambiguity, uncertainty, and errors. Hedberg (1981)
emphasizes the importance of designing environments that assume risk taking and accept mistakes
because such environments facilitate organizational learning. Kouzes and Posner (1987) stress that
the key to opening up business opportunities lies in learning from the successes and mistakes that
arise from risk taking. Sitkin (1996) states that acceptance of failure is a necessary element for
effective organizational learning.
We define interaction with the external environment as the extent of the relationships that a firm
maintains in its immediate environment. Environmental characteristics play an important role in
learning, and their influence on organizational learning has been studied by a number of researchers
(Bapuji and Crossan, 2004), both from the market perspective and from the technology perspective.
Relations and connections with the environment are very important since the organization attempts to
simultaneously evolve with its changing environment. In this vein, Hedberg (1981) considers the
environment as the prime mover of organizational learning.
Distribution and sharing internal knowledge is defined as a sustained collective inquiry into the
processes, assumptions, and certainties that compose everyday experience (in Alegre and Chiva
2008: 3). Schein (1993) considers dialogue as a basic process for building a common understanding
in that it allows one to see the hidden meanings of words, first by seeing such hidden meanings in our
own communication. In short, the literature understands dialogue to be vitally important to
organizational learning (in Alegre and Chiva 2008: 3).
Participative decision making refers to the level of influence that employees have in the decision-
making process (Cotton et al., 1988). Organizations implement participative decision making to
230
benefit from the motivational effects of increased employee involvement, job satisfaction and
organizational commitment. The literature considers participative decision making as one of the
aspects that can facilitate learning (in Alegre and Chiva 2008: 3).
Ongoing training: Nevis et al. (1995), consider continuous and increasing commitment towards
training in all levels of organization and clear support for employees’ progress as one of the facilitating
factors of organizational learning. Gomez et al. (2005), by reviewing organizational learning literature
concluded that ongoing training increases organizational learning capability because it has positive
effect on all dimensions of organizational learning capability.
System thinking is a conceptual framework which can show a clearer perspective of the whole
organization and improves employees’ understanding of internal interactions between phenomena
and forming consequences of actions (Rezaian 2001). Peter Senge (1990) knows system thinking as
one of the important and influential factors which can promote learning in organizations and lead them
to become learning organizations.
2.2 Firm product innovation performance

Product innovation consists of successfully exploiting new knowledge (Amabile et al., 1996).
Therefore it implies two conditions: novelty and use. Product innovation is a process that includes the
technical design, R&D, manufacturing, management and commercial activities involved in the
marketing of a new (or improved) product. Following Alegre et al. (2006), we have conceived product
innovation performance as a construct with two different dimensions: innovation effectiveness and
innovation efficiency. Innovation effectiveness reflects the degree of success of an innovation. On the
other hand, innovation efficiency reflects the effort made to achieve that degree of success. These
two dimensions of product innovation performance are consistent with previous literature
(Wheelwright and Clark, 1992; Barczak, 1995; Griffin, 1997; OECD-Eurostat, 1997; Valle and Avella,
2003). The measurement scale used by Alegre et al. (2006) for product innovation performance was
tested in the context of biotechnology firms. Because it is a recent scale, further empirical testing of
this scale in a different industrial setting would represent a contribution to the literature.
2.3 OLC and product innovation performance

Innovation implies the generation and implementation of new ideas, processes or products. The
organizational learning process consists of acquisition, dissemination and use of knowledge, and is
thereby closely related to product innovation performance (Lemon and Sahota, 2004). We have
conceptualized OLC as the skills or characteristics that facilitate the organizational learning process:
the creation, dissemination and use of knowledge. We propose OLC as a function of seven
dimensions: open environment and experimentation, risk taking, interaction with the external
environment, distribution and sharing internal knowledge, participative decision making, ongoing
training and system thinking. The literature shows a positive association between the OLC dimensions
and product innovation. According to Thomke (2001), experimentation is a basic learning mechanism
for a company to innovate: the development of a new product requires a number of experiments to
test market and technology issues. New ideas and proposals represent the starting point of innovation
(in Alegre and Chiva 2008: 3). Risk taking is necessary for the generation of new ideas (Amabile et
al., 1996), and should therefore be tolerated in order to promote innovation. Learning also occurs
through organizational interaction with the external environment. Customer demand uncertainty,
technological developments and competitive turbulence are crucial environmental factors that need to
be monitored and analyzed (Calantone et al., 2002). External learning deriving from alliances and
networks (Chang, 2003; Chipika and Wilson, 2006); technology transfers (Edmondson et al., 2003) or
R&D collaboration with universities and research institutes (Pedler et al., 1997; Azagra-Caro et al.,
2006) might be a critical factor in the successful undertaking of innovation projects. Hence, interaction
with the external environment represents another significant learning mechanism for innovation
(Brown and Eisenhardt, 1995).
Team member diversity, openness to ideas and encouragement of communication make up the
dialogue dimension. This learning mechanism may have a positive impact on innovation by exposing
individuals to a greater variety of unusual ideas (Amabile et al., 1996) and by increasing internal
group cohesion and co-ordination (Brown and Eisenhardt, 1995). Participative decision making
increases involvement and the commitment to innovate (Damanpour, 1991). When members of a
group are encouraged to learn and to develop new ideas, and are able to influence group decisions,
231
the group is more innovative. Hence, we expect a positive, substantial, and significant link between
OLC and product innovation performance.
3. Methodology
3.1 Research variables

In this research, Organizational Learning Capability (OLC) and Product Innovation Performance (PIP)
are main variables while OLC is the independent variable and PIP is dependent variable.
3.2 Research hypotheses
3.2.1 Main hypothesis

There is a positive relation between OLC and PIP.
3.2.2 Secondary hypotheses

There is a meaningful relation between Open environment and Experimentation and PIP.
There is a meaningful relation between Risk taking and PIP.
There is a meaningful relation between Interaction with external environment and PIP.
There is a meaningful relation between Distribution and sharing internal knowledge and PIP.
There is a meaningful relation between Participative decision making and PIP.
There is a meaningful relation between ongoing training and PIP.
There is a meaningful relation between System thinking and PIP.
3.3 Conceptual model
Figure 1: Conceptual model of the research
232
3.4 Data collection

In order to test our hypotheses, we needed to choose an industry or industries in which innovative
behavior is significant. In Iran, most of the companies import technology from developed countries
and their production is not based on research and design, and this mainly takes place in auto
industry. However, in some industries like food, medicine and cosmetics, conditions are better,
companies have a real competition in developing new products, and innovative behavior is
significantly available. Since our research area was confined to Tehran province, we were in lack of
enough companies from one industry and decided to focus on three industries. So, in order to identify
innovative organizations, we assessed the information published by ministry of industries of Iran
aiming to find firms which have active R&D departments and also we considered the companies
which had received any awards in entrepreneurship or innovation festivals recently. At the end, a list
of companies in which the questionnaires could be distributed was prepared.
3.5 Measurement scales
3.5.1 OLC measurement scale

We studied different researches conducted by researchers in the field of organizational learning and
organizational learning capability from 1980 to present and the OLC measurement scales which have
been used by them. We found the OLC measurement scale developed by Chiva et al. (2007), the
most useful one. So it was taken as a base for our measurement scale and by adding two other
factors and questions we tried to complete it and customize it for using in our country. According to
the conceptualization of Chiva’s scale OLC consists of the skills and characteristics that enable an
organization to learn. We considered seven factors as the essential dimensions of OLC. These
dimensions are open environment and experimentation, risk taking, interaction with external
environment, distribution of internal knowledge, participative decision making, ongoing training and
system thinking. The OLC measurement scale was applied using a 5-point Likert Scale, when 1
represented total disagreement and 5, total agreement.
3.5.2 Product innovation performance measurement scale

Alegre et al. (2006) recently proposed and tested a measurement scale for product innovation
performance in the context of biotechnology firms and also they applied their measurement scale in
another research (2008) in which they assessed the impact of OLC on product innovation
performance in the ceramic tile industry of Italy and Spain. Product innovation performance in our
research was conceptualized as a two dimensional concept which can be best described by
innovation effectiveness and innovation efficiency. Therefore we used Alegre’s measurement scale
with making a little changes in the questions and the number of given answers. The product
innovation performance measurement scale was applied using a 5-point Likert scale, when one
represented much worse performance than competitors did and 5, much better performance.
3.5.3 Psychometric properties of measurement scales

The psychometric properties of the measurement scales were assessed including reliability and
content validity. In order to test the validity of the questionnaire a pre-test was carried out in two
companies to assure that the questionnaire items were fully understandable for the people who fill in
them. So we asked about ten managers to fill in the questionnaires. Then we had interviews with all of
them to hear their opinions about the questions and answers and the compatibility of the questions
with features of their industry. At the end, we consulted with some experts and management
consultants to assure that our measurement scale has enough validity. Scale reliability has been
evaluated by means of the Cronbach’s alpha coefficient. Cronbach’s alpha was calculated for OLC
measurement scale, product innovation performance measurement scale and each part of them
separately.
4. Results
4.1 Test of research hypotheses

In order to assess the relation between variables, first we used correlation test. Table 1 shows the
values of correlation between OLC and PIP and the relation between factors of OLC and PIP. As it is
shown in this table, the value of correlation for OLC and PIP is 0.603, which shows a strong relation
233
between them. Likewise, the value of correlation between factors of OLC and PIP shows that there is
a strong relation between three factors, ongoing training, system thinking and open environment and
experimentation and PIP and average relation between risk taking, interaction with external
environment, distribution of internal knowledge and participative decision making and PIP.
Table 1: Results of correlation test for research variables
Correlation with
Product innovation performance
OLC 0.603
Open environment and Experimentation 0.630
Risk taking 0.320
interaction with the external environment 0.448
Distribution and sharing internal knowledge 0.459
Participative decision making 0.490
Ongoing training 0.522
System thinking 0.604
For more accurate assessment, we decided to do regression test for the relation of the factors of OLC
and PIP. So for each factor we considered two hypotheses, H0 and H1. H0 states that there is no
significant relation between the assessed factor and PIP while H1 states that there is a significant
relation between assessed OLC factor and PIP. In order to test these hypotheses, regression test was
done for all of seven factors and results are shown in table 2. In all of these regression tests, H0 was
rejected and H1 was proved to be true.
So the main hypothesis of this research which is the existence of meaningful and positive relation
between organizational learning capability and product innovation performance is approved.
Table 2: Results of regression test for research variables
Standard Significance
Variable B t
error level
Constant
1.500 0.236 6.369 0.000
value
OLC
Coefficient of
0.642 0.078 8.273 0.000
X
Constant
1.759 0.193 9.132 0.000
Open environment and value
Experimentation Coefficient of
0.522 0.059 8.876 0.000
X
Constant
2.537 0.239 10.630 0.000
value
Risk taking
Coefficient of
0.308 0.83 3.700 0.000
X
Constant
2.136 0.237 9.017 0.000
interaction with the external value
environment Coefficient of
0.402 0.073 5.489 0.000
X
Constant
2.117 0.233 9.079 0.000
Distribution and sharing internal value
knowledge Coefficient of
0.389 0.069 5.666 0.000
X
Constant
2.164 0.209 10.369 0.000
value
Participative decision making
Coefficient of
0.458 0.074 6.164 0.000
X
Constant
2.075 0.206 10.095 0.000
value
Ongoing training
Coefficient of
0.456 0.068 6.711 0.000
X
Constant
1.850 0.195 9.502 0.000
value
System thinking
Coefficient of
0.535 0.064 8.303 0.000
X
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5. Conclusion
The results of this research showed that nowadays in Iran, small and medium businesses and firms
have adopted innovation as the main goal of their activities to survive in competitive market. In recent
decades, Iran was faced with economic changes and assessed firms, which mainly were small and
newly founded, in order to compete with other domestic and foreign competitors, had to launch new
products with higher efficiency and quality and lower price. So offering new ideas and launching
innovative products and services was the only opportunity for these firms to survive and reach to
success. In light of this necessity, these firms started to develop learning capabilities to become able
to offer continuous innovations.
Also it was demonstrated by the results that there is a meaningful relation between OLC and product
innovation performance. The assessed firms by developing the OLC factors managed to enhance
organizational learning and prepare themselves for efficient and effective innovation. These firms, not
only have improved their organizational learning capability via internal factors such as distribution of
internal knowledge among managers and employees, creating an open an convenient atmosphere for
testing new ideas, ongoing training by conducting educational courses and entrepreneurship for
managers and employees, participative decision making and team work with systemic view, but also
with creating effective communicational networks such as taking advantage of IT, communicating with
universities, attending domestic and international fairs, national entrepreneurship festivals, have taken
effective steps for providing resources (informational, technological, financial,…), communication with
customers and distribution of knowledge.
Alegre and Chiva’s research (2008) confirms the results of this research. One of the considerable
points of this study which has been gained by the output of Freedman analysis of variance test, is that
the three factors: distribution of internal knowledge, open environment and experimentation and
interaction with external environment have had higher priority among the seven factors in raising
organizational learning of Iranian firms.
According to prior studies, entrepreneurs and innovators are generally moderate risk takers and do
not except high-risk conditions. Iranian entrepreneurs have similar characteristics and by taking
reasonable risks, lead their organizations towards fundamental changes. Also on-the-job training in
Iran still has not found its place among managers and employees and although in recent years,
innovative and entrepreneur firms have had movements towards having continuous and preplanned
programs for training, there is still a long way to go in this field. On the other hand regarding cultural
and social conditions of Iran and according to Hofstede studies (1980) tendency to individual activities
is higher than group or team activities. Therefore, participative decision making is less important in
OLC factors like risk taking and ongoing training.
6. Suggestions
Regarding the results of field research, we can see that there are three items, which have the most
effect on growth of product innovation performance:
Open environment and experimentation
Distribution and sharing internal knowledge
System thinking
So, in order to enhance innovation performance in studied companies and generally in assessed
industries, more attention to strategies of OLC improvement is needed and here are some practical
suggestions for improving the above factors in them.
1. Open environment and experimentation

a) Employees should receive support and encouragement from their managers when they
propose new ideas or make suggestions so that this approach turns into a culture in the
organization. So, setting a powerful suggestions system would be an effective movement towards
this goal.
b). Management should create this idea in employees’ minds that in case of new ideas encounter
to failure, there is no punishment and failures are considered as opportunities for learning.
2. System thinking
235
a). Management should implement strategic planning projects in collaboration with employees
and considering their opinions.
b). Management should assure that all employees have a clear perspective from mission and
goals of their organization.
c). Managers should provide an interactive atmosphere in organization so that all departments
and units collaborate with each other to achieve aims of the company.
3. Distribution and sharing internal knowledge
a). Personal or team mistakes and errors should be discussed in all levels because it can lead to
emergence of a new insight in employees’ minds.
b). It should be possible for employees to talk with each other about new ideas, plans and
activities which can be useful and effective for their organization.
c). One of the best methods which can facilitate distribution of internal knowledge is setting and
arranging work teams with members of different skills and from different departmens.
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The Relationship Between Strategic Leadership and
Innovation
Parvaneh Gelard, Seyed Pooya Mirsalehi and Korosh emami saleh
Islamic Azad university, Tehran, Iran
gelard@yahoo.com
pouya.mirsalehi@gmail.com
k.emamisaleh@gmail.com
Abstract: Innovation is created in organizations through implementation of innovative and new ideas resulted
from individual or organizational learning. Organizational innovation thus involves exploratory as well as
exploitative innovation. Prior theoretical studies show that explorative and exploitative innovations are related to
the quality of strategic leadership in terms of transformational and transactional respectively. This research
considers how transformational and transactional leadership behaviors affect two kinds of aforementioned
innovations. In this study, data was collected via questionnaires from some Iranian innovative organizations. The
data were analyzed and a model was developed. Our results show that transformational leaders may achieve
exploratory innovation through developing new knowledge or new products. On the other hand, transactional
leaders rely on extension of existing knowledge to accomplish exploitative innovation.
Keywords: exploitative innovation, explorative innovation, transformational leadership, transactional leadership,

organizational learning
1. Introduction
Intense global competition has resulted in an increasingly complex and unpredictable business
environment where markets can transform themselves almost instantaneously. Many firms that once
prospered are now unable to keep up. Amidst all of this turbulence, an organization’s capacity to learn
may be its only sustainable competitive advantage (De Geus, 1988; Stata 1989) which lead to
innovation.
Wick and León (1993) put it clearer by warning managers that organizations must either ‘learn or die’.
In other word, an organization should be innovative or die. Stata (1989) mentioned that Organizational
learning is the principal process by which innovation occurs. Mills and Friesen (1992) state that a
learning organization sustains innovation with the immediate goals of improving quality, enhancing
customer or supplier relationships, or more effectively executing business strategy, and the ultimate
objective of sustaining profitability. Innovation has also been categorized as the discovery of
something completely new (often referred to as radical innovations) and an improvement effort of
something that already exists (often referred to as incremental innovations). James March referred to
the two categories as the ‘‘exploration of new possibilities and the exploitation of old certainties,’’
respectively. Organizations are constantly required to monitor both their exploitative and exploratory
activities in increasingly uncertain and competitive environments.
However, of paramount importance is having the right type of leadership to drive the innovation
process efficiently and effectively. Unique leadership capabilities are the hallmark of firms that are
able to manage different types of innovative activities successfully. In addition, leading innovation
remains one of the most challenging aspects for contemporary leaders. There are two distinct but
interrelated ideal types of strategic leadership: transactional and transformational. So, the
comprehensive relationship between strategic leadership and two kinds of innovation is important.
There have been many studies on leadership and several works on innovation. There have been
many reviews of the organizational learning and innovation literature, including Argyris and Schön
(1978, 1996), Crossan et al. (1995), Daft and Huber (1987), Easterby-Smith (1997), Fiol and Lyles
(1985), Huber (1991), Levitt and March (1988), and Shrivastava (1983). Crossan et al. (1999)
proposed a comprehensive framework of organizational learning that seeks to integrate and extend
previous organizational learning research. Surprisingly, there has been very little done to address the
link between leadership and innovation. In this paper, we investigate two different leadership styles
focusing on transformational-transactional leadership behavior and the underlying linkages between
these leadership styles and different innovation processes and activities. Therefore, our goal is to
demonstrate that different leadership styles may foster distinct innovative activities such as
exploitation and exploration.
238
Parvaneh Gelard et al.
The research question that guides our study is:
What is the relationship between transformational strategic leadership and exploratory innovation?
What is the relationship between transactional strategic leadership and exploitative innovation?
In what follows, we first clarify these concepts and then discuss two types of innovation: exploitative
and explorative.
2. Theory and hypotheses
In developing our definitions, we build on the 4I framework of organizational learning (Crossan et al.,
1999). This framework associates exploration with a feed-forward learning process supporting
novelty: Individuals develop new ideas through intuition and interpretation, integrate their ideas into
the knowledge resources of their teams, and then institutionalize the knowledge into the firm.
Exploitation is associated with a feedback learning process supporting continuity: Firm knowledge
resources (captured in procedures and best practices) are transferred to individuals and teams
(Crossan et al., 1999). We apply this framework to the experience of work teams in acquisitions.
Exploration is the active search by team members for ideas that are new to the combined
organization; these ideas are shared and institutionalized into their teams and the newly formed
organization. Exploitation is the use by team members of knowledge available within the integrated
organization on an “as is” basis or with incremental revision, through methods such as the adoption of
best practices and standard procedures.
Burns (1978) was the first author to contrast ‘‘transforming’’ and transactional leadership.
Transactional leadership involves an exchange relationship between leaders and followers such that
followers receive wages or prestige for complying with a leader’s wishes. Transactional leadership
encompasses contingent reward and management-by-exception.
Specific types of innovative capabilities are: exploitation and exploration. Exploitative innovation is
based on intensive search, which means experimentation along an existing knowledge dimension.
Exploration is rooted in extensive search that pursues potential new knowledge (March, 1991).
Exploitative innovation improves the methods or materials used to achieve the firm’s objectives of
profitability and satisfying customer needs. In contrast, exploratory technological innovation involves
novel methods or materials that are derived either from a completely different knowledge base or from
a recombination of parts of the firms’ established knowledge base with a new stream of knowledge
(Freeman and Soete, 1997).
Another point to note about these prior studies is that few have gone beyond the relational aspects of
transformational behaviors. Although leaders oftentimes promote creative thoughts and encourage
innovation by interacting with followers (e.g., challenging their long-held assumptions regarding their
work approaches), CEOs may influence innovation in yet other ways. In particular, Upper Echelons
Theory posits that “organizational outcomes – both strategies and effectiveness – are reflections of
the values and cognitive bases of powerful actors in the organization.” (Hambrick & Mason 1984) In
other words, leaders in the upper echelons of an organization influence organizational performance
directly through their characteristics and behaviors and indirectly through the strategic choices they
make. As the top executive and a “powerful actor,” the CEO is in a unique situation to determine the
organization's strategies in responding to the challenges of the environment, and CEOs with
transformational leadership are likely to choose strategies that are change- and growth-oriented in
nature. Thus, we specify the following hypothesis:
2.1 Leadership for exploitative innovation

Drastic changes in structural, cultural, and operational elements make the firm especially susceptible
to these liabilities. These changes originate as a result of the innovations derived from the firm’s
exploration processes. The more radical the innovations identified from exploration, the more serious
the disruption to ongoing activities taking place in the firm to exploit current competitive advantages.
The changes that innovations, particularly radical innovations, mandate typically encounter opposition
because of structural inertia (Hannan & Freeman 1984), psychological investment in a particular
strategy (Milliken & Lant 1991), general uncertainty of the future environment (Weitzel & Jonsson,
1989), and the substantial costs associated with such a transition (Miller & Friesen, 1980). Therefore,
239
many established firms remain close to their routines of competitive success, exploiting technologies
that are familiar, mature, and have a similar underlying knowledge base (Ahuja & Lampert, 2001).
Hence:
H1. Transactional leadership will lead to exploitative innovation.
2.2 Leadership for exploratory innovation

On the other hand, transformational leaders motivate followers to achieve performance beyond
expectations. Much of the work on leadership stresses the importance of so-called ‘transformational
leadership’ (Bass BM 1997, Partington D 2000). Transformational leadership is a concept that has
come to prominence in the last two decades, and is also associated with terms such as ‘visionary’ and
‘charismatic’ leadership, e.g. (Bryman A 1996, Grint K1997). Collectively, Bryman (Bryman A 1996)
labeled these ‘new leadership styles’ to distinguish them from other prominent models of leadership
that emphasize leader characteristics, leader behaviors or a contingency perspective.
By transforming followers’ attitudes, beliefs, and values as opposed to simply gaining compliance
(Bass, 1985; Yukl, 1999a, 1999b). Bass identified a number of subdimensions of transformational
leadership including charisma (which was later renamed idealized influence), inspirational motivation,
intellectual stimulation, and individualized consideration (Bass, 1985, 1998; Bass & Avolio, 1993).
Followers identify with the charismatic leaders’ aspirations and want to emulate the leaders. Shamir,
House, and Arthur (1993), Conger and Kanungo (1988, 1998), Kanungo and Mendonca (1996)
conceive of the same components as all falling under the category of charismatic leadership.
Leaders who have transformational behaviors are able to realign their followers' values and norms,
promote both personal and organizational changes, and help followers to exceed their initial
performance expectations (e.g., House & Shamir,1993; Jung & Avolio, 2000. See Mumford et al.,
2002 for a review). By and large, some studies have focused on leadership and outcomes at
individual or organizational subunit levels using experimental settings and/or subjective measures of
creativity (e.g., subjective supervisor ratings). For example, Sosik, Avolio, & Kahai (1997) found that
as compared to other leadership types, transformational leadership was more effective at
encouraging followers to think “out of the box” and to adopt generative and exploratory thinking
processes that yielded more creative ideas and solutions. Keller (1992) discovered that
transformational leadership displayed by project team leaders in a large R&D organization improved
team performance. Shin & Zhou (2003) studied 290 employees and their supervisors from 46 Korean
companies, and found a positive relation between transformational leadership and follower creativity.
While Jung et al. (2003) did consider the link between CEO transformational leadership and
organizational innovativeness, the authors were emphatic that their exploratory study needed
validation.
Transformational leadership is associated with strong personal identification with the leader, the
creation of a shared vision of the future, and a relationship between leaders and followers based on
far more than just the simple exchange of rewards for compliance. Transformational leaders define
the need for change, create new visions, mobilize commitment to these visions and transform
individual followers and even organizations (Bass BM 1997, Bass BM 1985). The ability of the leader
to articulate an attractive vision of a possible future is a core element of transformational leadership.
Such leaders display charisma and self-confidence. Transformational leadership contains four
components: charisma or idealized influence (attributed or behavioral), inspirational motivation,
intellectual stimulation, and individualized consideration (Bass, 1985, 1998; Bass & Avolio, 1993).
The exploration process involves the set of activities through which firms seek to recognize new ideas
and opportunities that serve as the foundation for future sources of competitive advantage. Creativity,
experimentation, and a broad search of knowledge stocks beyond what is captured in the firm’s
existing competencies are examples of the activities that are a part of the exploration process (March,
1991).
Hence:
H2: Transformational leadership will lead to exploratory innovation.
240
3. Conceptual framework
Fig. 1 presents our conceptual model. In the aforementioned paragraphs we discussed that, first, how
transformational leadership influences exploratory innovation, second, how transactional leadership
behaviors are associated with exploitative innovation.
Figure 1: Conceptual framework

4.1 Data collection and sample

The present study employs a questionnaire survey approach to collect data for testing the validity of
the model and research hypotheses. Variables in the questionnaire include background information,
strategic leadership behaviors and innovation. All independent and dependent variables require
seven-point Likert style responses ranging from “strongly disagree” to “strongly agree”. The
population of the research is 10 Iranian firms. These firms were selected by “Iranian Entrepreneurship
collection”, this collection is represented by Ministry of labor and social affairs of Islamic Republic of
Iran every year .These firms have qualifications as follows:
Innovation
At least two years from establishment
Working in service and industrial activities
This study uses a stratified random sampling method to select 4 firms. 450 questionnaires was
distributed and request the questionnaires to be completed by top executives (i.e. Presidents, Vice-
Presidents, Directors, or General Managers) and employees who are familiar with the topic of this
study. Of the 200 returned questionnaires, 4 are incomplete. The remaining 196 valid and complete
questionnaires are for the quantitative analysis. The characteristic of samples are shown in table 1.
Table 1: Characteristics of samples
Number Number of
Number of sample Age of firm Field of activity
of personnel managers
Sample 1 6 years service 609 47
Sample 2 4years service 565 46
Sample 3 7 years industrial 495 49
Sample 4 5 years industrial 642 58
This study checks the possibility of normality by One-Sample Kolmogorov-Smirnov Test. All variables
were normal. Then, we calculate the correlation and find out that exploratory innovation has
significant relationship with transformational leadership and exploitative innovation has significant
relationship with transactional leadership using Pearson correlation. Prior to the administration of the
questionnaires, all questions were translated in Persian and then back-translated in English to ensure
that the Persian version of the questionnaire captured the same constructs as the English version.
4.2 Measures
4.2.1 Exploratory and exploitative innovation performance

Exploratory or exploitative innovation consists of seven items which are listed in appendix A. The
items for these three scales were measured on a seven-point scale, anchored by 1=strongly disagree
241
and 7=strongly agree. The measure for exploratory innovation was adopted from Jansen et al. (2006).
The six-item scale for exploratory innovation (α=0.83) captured the extent to which branches depart
from existing knowledge and pursue radical innovations for emerging customers or markets. In the
context of financial services, exploratory innovation has been associated with developing
fundamentally new loan structures and contingent contracts (Uzzi & Lancaster, 2003). A six-item
scale (α=0.79) measured firm-level exploitative innovation (Jansen et al., 2006) and captured the
extent to which branches build upon existing knowledge and pursue incremental innovations that
meet the needs of existing customers (Abernathy & Clark, 1985; Benner & Tushman, 2003; Smith &
Tushman, 2005). Prior research on financial services has related exploitative innovation to aggressive
lending, shopping the market and increasing efficiency (Uzzi & Lancaster, 2003). Correlation
coefficient and linear regression replicated the intended relationship between variables.
4.2.2 Strategic leadership

Top managers provide us the way that they lead their organizations. The data for transformational
and transactional leadership behaviors of the executive directors were collected through multiple
senior team members per branch. Each senior team member rated the items on leadership behaviors
for his or her executive director on a 7-point scale with 1=‘strongly disagree’ and 7=‘strongly agree’.
Transformational leadership was assessed by senior team members' response to twenty items of the
Multifactor Leadership Questionnaire (Bass & Avolio, 1995). The four dimensions of transformational
leadership consist of four items for intellectual stimulation, inspirational motivation, individualized
consideration, and eight items for idealized influence. Transactional leadership style was measured
with seven items from the Multifactor Leadership Questionnaire (Bass & Avolio, 1995). Following
previous practice (e.g., Ensley et al., 2006; Epitropaki & Martin, 2005; Lowe, Kroeck, &
Sivasubramaniam, 1996; Waldman et al., 2001) we used the scales of contingent reward behavior
(four items) and active management by exception behavior to measure transactional leadership (three
items). We averaged the items to create composite indexes for transformational (α=0.82) and
transactional leadership (α=0.78).
5. Analysis and results
The hypotheses were tested using regression analysis. We have 2 variables in each regression. We
ran regression models with each independent variable with dependent variable in each regression.
Tables 2,3 summarizes the results of the statistical analysis for correlation and Table 4,5,6 shows
regression tables and it analysis for the relationship between Transactional Leadership and
Exploitative Innovation. And, Table 7,8,9 demonstrate the model summary, ANOVA and regression
coefficient. It is seen that the transformational leadership behaviors lead to exploratory innovation
(p<0.01, Pearson Correlation=0.508, Y=0.533X+1.870) and exploitative innovation is the result of
transactional leadership behaviors (p<0.01, Pearson Correlation=0.458, Y=0.324X+3.332). Since we
need both kind of innovations in Iran for enhancement, we should train leaders with both
transformational and transactional leadership behaviors to be innovative which transformational
leaders can play important roles in organizational development. They can make use of process
observation and many of the techniques of and improved understanding of group learning. In addition,
transactional leadership is defined as emphasizing the transaction or exchange of something of value
the leader possesses or controls that the employee wants in return for his/her services. In other
words, this leadership style is based on the assumption that followers are motivated through a system
of rewards and punishment.
Table 2: Correlation between transformational leadership and exploratory innovation
Transformational Exploratory
leadership Innovation
Transformational Leadership Pearson Correlation 1 .508**
Sig. (2-tailed) .000
N 196 196
Exploratory Innovation Pearson Correlation .508** 1
N 196 196
**. Correlation is significant at the 0.01 level (2-tailed).
242
Table 3: Correlation between transactional leadership and exploitative innovation

Transactional Exploitative
Leadership Innovation
Transactional Leadership Pearson Correlation 1 .458**
N 196 196
Exploitative Innovation Pearson Correlation .458** 1
N 196 196
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4: Correlation test between transactional leadership and exploitative innovation
Adjusted R Std. Error of the
Model R R Square Square Estimate Durbin-Watson
1 .458a .210 .206 .69868 1.383
a. Predictors: (Constant), Transactional Leadership
b. Dependent Variable: Exploitative Innovation
Table 5: The results of ANOVA test for transactional leadership and exploitative innovation
Model Sum of Squares df Mean Square F Sig.
1 Regression 25.154 1 25.154 51.529 .000a
Residual 94.702 194 .488
Total 119.856 195
Table 6: The results of regression test for transactional leadership and exploitative innovation
Unstandardized Coefficients Standardized Coefficients
Model t Sig.
B Std. Error Beta
(Constant) 3.332 .219 15.251 .000
1 Transactional
.324 .045 .458 7.178 .000
Leadership
Table 7: Model summary for transformational leadership and exploratory innovation

Adjusted R Std. Error of the
Model R R Square Durbin-Watson
Square Estimate
1 .508a .258 .254 .99443 1.466
Table 8: The results of ANOVA test for transformational leadership and exploratory innovation
Model Sum of Squares df Mean Square F Sig.
Regression 66.614 1 66.614 67.363 .000a
1 Residual 191.845 194 .989
Total 258.460 195
a. Predictors: (Constant), Transformational Leadership
b. Dependent Variable: Exploratory Innovation
Table 9: The result of regression test for transformational leadership and exploratory innovation
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 1.870 .330 5.664 .000
Transformational Leadership .533 .065 .508 8.207 .000
243
Figure 2: Gathered data for the relation of transformational leadership and exploratory innovation
Figure 3: Gathered data for the relation of transactional leadership and exploitative innovation
Leadership plays a vital role in fostering innovation outcomes in organizations. However, because of
the different processes and activities involved in innovation efforts, a ‘‘one size fits all’’ leadership
approach may not be appropriate. In this paper, we have explored two different leadership behaviors
(e.g. transformational and transactional leadership) and their effects on two areas of innovation
efforts. Innovation processes involve the conceptualization of an idea (the creative process) and the
development of the idea (the implementation process). Innovation can also be said to involve
exploratory activities (creation of something new with radical outcomes) and exploitative activities
(improving on existing things). We find that:
244
Transformational leadership style will be more appropriate for exploratory innovation activities, while
the transactional leadership style will be more appropriate for exploitative innovation activities.
As previous studies have revealed, in uncertain condition generally transformational leaders try to use
opportunities in their organizations and create fundamental changes and consequently exploratory
innovation (Jansen et al. 2009). The results of this research showed that assessed firms which were
in uncertain economic condition of recent years, could survive in global competitive market when the
employees were affected by charismatic character of their leaders and leaders could make
fundamental changes in their firm using crisis management, risk taking, flexibility and creativity. These
entrepreneur leaders by adopting transformational leadership style have developed the resources of
exploratory innovation in one of the production, market or structure fields and maintained their
competitive advantages. These leaders after stabilizing economic condition of their firm and when
government started to help entrepreneurs by supportive policies, started to improve their products and
services. They did it by changing their leadership style from transformational to transactional and
used methods like TQM, ISO9000 and 6σ. Also by exploiting performance assessment methods,
compensation and rewarding, training and interaction with employees they have increased their
efficiency and now they are known as some of the successful firms of Iran.
This paper has implications for the leadership of innovation efforts at different levels within an
organization. An awareness of the need to utilize different leadership styles to lead different
innovation processes and activities is important. For example, a transformational leader must
recognize the need to focus more on the transactional aspect of leadership style than the
transformational leadership style to direct innovation efforts in the implementation stage.
The study also has implications for training, job allocation and recruitment and selection in
organizations. A transformational leader that is expected to lead innovation efforts at the
implementation stage can be exposed to or trained in the transactional leadership style. Where this is
not practicable, the transformational leader may be supported by a leader who has more of the
transactional leadership skills. From the results gotten from this research we could get benefits from
transformational leaders in those parts of an organization that needs exploratory innovation (creation
of some things with radical outcome). On the other hand, we could build a training segment in the
organization to equip our managers by the need of exploratory and exploitative innovation in our
organization. For example in R&D department that its function is to create some things with radical
outcome, it is better to use transformational leaders in that sector. As James March put it,
organizations must strive to achieve a balance between exploratory and exploitative innovation
activities. Similarly, a right mix of transformational and transactional leadership is required in
organizations to achieve successful outcomes in innovation processes and activities.
7. Limitations and suggestion
In this study we had some limitation such as:
We could not obtain brief structural and organizational information, because of the hard
competition between Iranian organizations.
In Iran we don’t have brief information about entrepreneur organizations. Because of this lack of
information we were urged to contact “The Iranian entrepreneurship collection” knowing that all of
Iranian entrepreneurial organizations haven’t registered in this collection.
Cost limitation influenced our study because we were not supported by any firm or organization.
Our study presents a first step toward uncovering leadership behaviors for developing exploratory and
exploitative innovation. our study focuses on leadership behaviors as they relate to exploratory and
exploitative innovation, additional organizational and top-management characteristics may contribute
to exploratory and exploitative innovation. We suggest for future research may include additional
antecedents of both types of innovation, such as organizational form, social networks .our study
represents a significant step in leadership and innovation. In response to calls for research on
managing exploratory and exploitative innovation within organizations, our study examines how
strategic leaders contribute to the development of different types of innovations. futher research may
also incorporate multiple levels of analysis and examine organizational-level as well as top
management team-level antecedents. Investigating such combined or moderating effects would
further enhance our understanding of how organizations pursue exploratory and exploitative
innovation. Although our study provides new insights how leadership behaviors are related to
245
pursuing exploratory and exploitative innovation, it does not address how they are triggered to change
levels of exploratory and exploitative innovation. Hence, it would be useful to conduct in-depth case
studies to better understand how change efforts are initiated and exploratory and exploitative
strategies are changed over time.
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From Bad to Worse? The Survival of Guanxi and
Corruption in the Evolving Institutional and Legal Context
Francois Goxe ¹ and Darryn Mitussis²
¹DRM-CREPA, Universite Paris-Dauphine, Paris, France
²Nottingham University Business School, UK
francois.goxe@dauphine.fr
darryn.mitussis@nottingham.ac.uk
Abstract: Recent history has not favoured China with a stable legal and regulatory environment. Instead,
personal connections – guanxi – enabled individuals and their networks access to support and resources. As the
clarity of laws improves, functioning markets established and mechanisms for enforcement developed, a
decrease in relationship practices and an increase in impersonal, bureaucratic interactions should occur, the
latter enabling transactions at lower cost than ones mediated by time-consuming social relations. The Chinese
legal system has supposedly improved and difficulties of doing business should logically have decreased.
However, some studies as well as the empirical evidence presented herein suggest that this might not have
happened. This study extends extant research to see if this has happened by exploring the resilience of relational
practices to the formalising institutional system. Specifically, extant theory and empirical evidence from the
institutional and guanxi literatures are employed to investigate one research question: how has the evolution of
the institutional and legal context affected guanxi practices? Our research methods were exploratory and
qualitative, conducted among long-standing foreign and Chinese business managers in China. To enhance
validity, data were collected through multiple sources: non-participant observation, semi-structured interviews and
internal documents. Systematic content analysis was performed in a thematic way with qualitative research
software. The data supports recent observations suggesting that the business environment has become more
difficult and that network and gift-giving practices are both required and perhaps transforming into something
altogether less pleasant. Five themes emerge from our research: 1) relationship practices continue, 2) in a
changed legal and moral context; 3) as a result, the emphasis of the practices has changed; 4) institutional
change and moral collapse provide exploitation opportunities; and 5) a fallacious orientalism drives the inter-
cultural management industry. Our paper contributes to the emerging understanding of China's transition,
particularly with respect to the formal and informal institutions governing the overlap between economic and
social behaviour. From a theoretical perspective, it augments the institutional literature on China. From an
empirical perspective, it provides a rare in-depth qualitative description and analysis of perceptions of Chinese
business practices from Chinese and foreign managers. For practice, it provides insights to managers as to how
relationships with Chinese partners should be considered and developed.
Keywords: guanxi, social relationships, institutional and legal environment, China
1. Institutional development and theory versus practice

Recent history has not favoured China with a stable legal and regulatory environment and personal
connections and relational practices have provided compensatory support, protection and resources
(Xin and Pearce, 1996). Because of these difficulties, gift giving and the reciprocal exchange of
favours, guanxi (关系) practices have been prevalent in China among family members as well as
business partners or in dealing with political authorities (Steidlmeier, 1999). Such practices are
commonly associated with bribery and corruption (Rocca, 1992) or, at least, “a set of ethical priorities
that differs from the Western norm” (Wright et al., 2002: 157). However, care must be taken not to
assume that these distinctions are not present in Chinese consciousness. Steidlmeier (1999), for
example, argues that the Chinese themselves are well aware of differences between corruption and
guanxi that foreigners might fail to notice. For Steidlmeier, moral judgments can only be made once
the social meaning of actions are understood given their necessity and underlying intention.
The Chinese government has worked hard to move Chinese society from a moral economy to a
legalistic one. The clarity of laws has improved, functioning markets established and mechanisms for
enforcement have been developed. These changed circumstances should engender a decrease in
relationship practices and an increase in bureaucratic ones (Guthrie, 1998), the latter enabling
transactions at lower cost (Williamson, 1975).
However, signs that improvements might not be happening include corruption cases facing even
prominent companies such as Danone and Coca Cola. Danone eventually lost a long-running dispute
against its Chinese joint venture partner (NYT, 06/12/2007). At Coca-Cola, a bottling plant employee
was accused of taking $1.5 million in bribes (NYT, 09/13/2009).
248
Francois Goxe and Darryn Mitussis
NGO research also supports the conclusion that relationship practices and guanxi are not waning.
Transparency International ranked the PRC 79th in 2009, 72nd in 2008 and 2007, 70th in 2006,
suggesting that the country is not improving its relative performance. Finally, academic research (e.g.,
Yang, 2002; Li et al., 2008) as well as our observations support the same conclusion.
Given that conceptually driven expectations of changes in practices seem to be at odds with press
accounts, NGO reports and empirical academic work, our study extends extant research by exploring
the resilience or adaptation of relational practices to a more developed legal environment. Specifically,
extant theory and empirical evidence from the institutional and guanxi literatures are employed to
investigate one research question: how has the evolution of the institutional and legal context affected
guanxi practices?
2. Data gathering in a complex and sensitive environment
The evolution of Chinese relational practices and its impact on foreign firms’ development is an
emergent and controversial subject and, as such, requires an exploratory research strategy (Yin,
1989; Eisenhardt, 1989), rather than one seeking to test existing models. Ours was grounded in the
tradition of Glaser and Strauss (1967) and drawing on Eisenhardt’s (1989) interpretative methodology.
For richness and validity our data was a large set of informing engagements with relevant actors and
supporting documents. Respondents were selected through a mixed position-and-name-generator
approach (French-Chinese trade associations compiled by the French Chamber of Commerce in
China and French Foreign Office). Approximately 50 hours of interviews were conducted with 30
managers and entrepreneurs (25 European, 5 Chinese). All informants worked for European firms in
China or intermediary organisations in France or the PRC. Interviews occurred between September
2007 and July 2008. Where possible dyadic relations were investigated, with the foreign business
practitioners and their Chinese counterparts interviewed.
To further enhance validity, data were also collected through multiple sources: non-participant
observation, semi-structured interviews and internal documents. A substantial corpus of company
documents, press reports and other relevant material was collected and archived. Systematic
thematic content analysis was performed on all the material above using NVivo.
The following questions were used to structure the interviews:
1a) What role do social relationships / networks play in the establishment and development of
your enterprise in China?
1b) For entrepreneurs / managers with extent experience in China (5 years or more), has this role
evolved since you first arrived? Why (not)?
2a) What are the main obstacles to do business in China?
2b) To what extent can social relationships or networks contribute to overcoming these
obstacles?
The interviews were recorded and transcribed, where permitted, or detailed notes were taken and a
note of record produced immediately. Content analysis was performed thematically, each interview
considered independently, before crossing data in order to identify similarities. Interview materials and
additional documents were coded into categories derived from the literature but also emerging from
fieldwork. Consequently, in the manner of grounded theory, the categories, their linkages and
relationships, were further developed in a process of data combing and analysis.
Each informant is anonymously identified along three dimensions represented by the following codes:
Nationality (French [FR] or Chinese [CH]) / Job or position (Entrepreneur [ENT] / Manager in charge
of internationalisation [M] / Consultant or internationalisation Agent [CA]) / Years of experience in
China or working with China (French respondents only). When respondents occupied different
positions, they are listed in reverse chronological order (e.g. CA-ENT-M: respondent started as a
Manager then created a company and is now a consultant).
3. Sentimentality and friendship, payment for service and confidence tricks
Five themes emerge from our interviews and document research: 1) relationship practices continue;
2) they continue in a changed legal and moral context; 3) as a result, the emphasis of the practices
249
has changed; 4) institutional change and moral collapse provide exploitation opportunities; and 5) a
fallacious orientalism drives the inter-cultural management industry.
3.1 Continuing relationship practices

All respondents recognised that relational practices remain prevalent in China. All used the term
guanxi to describe them, but used the term differently. The focus varied from guanxi being a natural
and unproblematic part of demonstrating sentiment and friendship through a payment for subverting
or circumventing systems and processes to something akin to a confidence trick.
Where the practices did occur, many informants acknowledged that they are common among SMEs in
their home countries and that the practice in SMEs reflects the personal nature of SME management
and inter-SME relationships. Moreover, most informants provided a nuanced interpretation of social
relations and noted that the line between gift-giving, dining and other favour-exchanging practices
designed to build and maintain good social relationships and under-table practices has faded. Many
respondents recognised that the nature and value of the gifts as well as the period of exchange can
be good indicators to distinguish friendship-building moves from corruption. The former used to
consist of exchanging small gifts that were symbolic in value rather than ‘showering’ the other party
with lavish presents. Expatriates returning to China could, for instance, offer bottles of wine,
chocolates, books, etc. In return, Chinese managers would not miss to offer local delicacies, artefacts,
etc. Similar presents could be exchanged during the Chinese New Year. The consequence for such
good relationships would be the reciprocal expectation for assistance in solving minor problems
related to living and working in China.
“At times XXX gave me a hand in changing my F Visa (business) into a C visa (work) or
dealing with the landlord. I invited him for dinner, brought him some French books back
from France, helped him prepare his application for MBA programs... It was never a
matter of money [...] building a relationship as anyone would anywhere...” (FR/ENT/10).
On the other hand, corruption is typically associated with money and expensive gifts in exchange for
favours, and is transactional rather than relational.
“The problem starts when you ‘exchange’ hong bao (red envelopes). I say ‘exchange’ but
it is rather in one direction, the Chinese never gave me any! Officially, that is part of
Chinese tradition, parents give money to their children and employers are supposed to
do the same thing to employees for New Year, you know that. After all, that’s not much
different from our year-end bonus... The problem starts when you’re asked a hong bao
because Mr. X suggests that in exchange he could get you that document you need or
help you find ...” (FR/ENT-CA/35+).
Not all gift giving was seen to be valuable, either to build and demonstrate sentiment or to subvert
rules and systems. Sometimes, it appears, that gift giving was simply part of an overselling of
usefulness (at best) or a confidence trick (at worst).
“Anyway, people claim to have lots of contacts, to know lots of people who can help but
eventually that’s bogus. If you give in once, you enter a never-ending process where
there’s always someone to help in exchange for something and the end results are often
quite different from what was initially promised...” (FR/ENT/12).
3.2 Changing legal and moral context

Our informants made two important observations about the context in which they practiced their
business, in relation to systems and institutions and in relation to individual and collective morality and
ambition.
First, there was a strong sense from informants that in its current state, the legal and other institutional
arrangements are in uncomfortable flux. This state is one in where the markets do not function to
ensure allocative efficiency but the legal arrangements to temper them are not in place or are not
enforced. Similarly, the evolving legal system grants more property rights than before, but does not
guarantee that those rights are clear and well protected.
“Until now, people still fail to understand that... People believe that Deng Xiaoping has
turned China to capitalism but ... (China) is now facing a kind of historical aporia [...] with
250
a hybrid system that is hard to define as it is simultaneously and dictatorially marked by

socialism, communism and capitalism” (FR/CA/15+).
Interestingly, some informants identified part of the problem as one of taxonomy or analysis for
outsiders. Specifically, the problem being that change has been more rapid than the capacity to
document and analyse the emergent economic and social arrangements. This state could be used not
just by Chinese who might take advantage of foreigners’ ignorance, but also by foreign consultants
and scholars.
“This (Chinese legal and economic) system is part of a larger one, a coding system that
used to be incomprehensible. The problem is that we continue to describe China with a
vocabulary or a few images [...] that are no longer relevant but are still presented as such
by some people” (FR/CA/15+).
Second, informants suggested that the social ethos in China has changed to be more individualistic. A
Chinese manager who worked for a European multinational in China, now an independent
entrepreneur, illustrates this change:
“Like almost all others (Chinese managers members of an association of Chinese
engineers in France), I used to live comfortably, peacefully, in a large group where the
emphasis was obviously on collective performance (the company’s performance). But I
felt the need to change [...], to create my own business. [...] I have the impression that in
that company I had responsibilities but I felt I could not bring out the specific
competences I have and succeed on my own. [...] I think that’s what is important in life”
(CN/ENT-M).
The new ethos is short-term and profit oriented. By contrast, social practices that were used to
compensate for poor or hostile institutions are now used for personal enrichment, making them both
more blatant and more difficult to defend in ethical and moral terms.
I knew some people who used to be top officials ... the former generation. The ones that
took part to the Long March ... who were probably more nationalist (patriotic) than
communist ... [People] who had a culture, a quality that was far superior to those of the
generation I know now ... These old crocodiles were adapted to their environment. They
are exotic now but they still have principles ... the young crocodiles may look more
familiar but they are far more dangerous, they feel they can eat anyone” (FR/CA/15+).
3.3 Changing nature of relationship practices

Given the observations of the changing nature of the business context, it is unsurprising that there
was a strong sense, especially from long standing foreign business practitioners in China, that
relationship practices have evolved concomitant with the economic and social reforms. Indeed, extant
research demonstrates that new international ventures face the liability of foreignness (Hymer 1976),
and the liabilities of newness and small size (Stinchcombe 1965) suggesting that entering markets
that are literally ‘exotic’ requires specific resources (Oviatt and McDougall 1994) that may be acquired
indirectly, through network ties (Coviello & Munro, 1997; Chetty & Blankenburg Holm, 2000).
Informants thought that the changing institutional context did not render relational practices
unnecessary but shifted the focus of relationship practices or transformed the nature of gift giving. The
shift occurred when new laws and institutions simplified and made more transparent particular
practices. For example, Wholly Foreign Owned Enterprises (WFOE) Laws mean that relationships are
not needed to legally establish a business, but might remain necessary operationally. The
transformation of the nature of gift giving emerges not from gifting as part of a social practice but,
rather, as a way for the Chinese to extract more economic capital from their foreign partners without
any sense of reciprocity or mutual obligation.
“in the past] one could really create a network. Relationships used to turn into friendship
ties, we were old friends, you know the expression lao pengyou ... Nowadays it is rather
‘well, ok, we are willing to help you but you’ll have to pay.’ ... There is a lot of corruption,
despite all those campaigns ... I have worked there since 1972 and these anti-corruption
campaigns have always been around... Then, how come that one cannot sign a real
estate contract without paying a bribe? It is rather monstrous ... Before, this only
251
happened in relation to contracts. This has always existed. In order to sign a major
contract, all our clients would tell us that we had to ‘shower’ them, to grease their palms.
Now, let’s say you face some difficulty... The other day, we had a client that was facing a
difficulty: one tried to cancel his business licence because he supposedly had changed
his corporate status or something else ... We contacted someone in the administration
who immediately responded ... ‘ok but what’s in it for me.’ ... However, a major issue with
the Chinese legal system that has always existed is the law courts. Foreign lawyers have
no right to plead therefore they have to cooperate with local lawyers and a few years
ago, as soon as we had a litigation, the lawyer would tell us, ‘well then how much shall
we give to the magistrate?’ ... The local government that employs [the magistrates] tells
them ‘listen, well, be flexible,’ and anyway no matter what you’ll be paid, the local
government is [the magistrate’s] employer, [their] salary, [their] social position depends
on it. We face this situation everyday. It is evolving because there is now some real
education emerging for magistrates but as long as they are paid by local governments
there will be no independent justice” (FR/CA-M/35+).
In the story above, informants saw social network practices not as intrinsically Chinese but as
practices that reflect the financial and institutional access constraints typically found by SMEs
everywhere. Given that broad understanding of cause and response, our informants thought that the
business context had become more challenging and, consequently, the nature of the response to the
circumstances also changed. Specifically, the uncertainty has created opportunities for exploitative
behaviour.
3.4 Institutional transition, getting rich and moral collapse

There are three key reasons why network and corrupt practices might have increased. First, the move
from a moral economy to a legalistic one, brought about by deliberate government policy to modernise
laws and legal practices, has transition costs. The notion of social costs of transition will be familiar to
readers of post communist literature (e.g., Blanchard, 1997; Izyumov, 2010). All transitions impose
costs including failure, risk and uncertainty of change, learning costs, and so forth (Nee, 1989). Under
such circumstances, the ruthless can profit from the ignorance and risk avoidance behaviour of others
and informants’ observations reflected such experiences. Second, the transition to a society in which
“To get rich is glorious” and where “a few people get rich first” may diminish traditional practices that
regulated economic and social behaviour. The emergence of surplus capital and the ready availability
of commodities means that strategies of developing face and binding social and economic interests to
increase the likelihood of access to resources are less relevant. In their stead, as informants noted, an
environment in which transactional approaches to acquiring and granting access to resources is
emerging. These dilemmas are exacerbated by the long history of macro-economic and social turmoil
in China. Every generation for the last 150 years has faced significant change; there are no stories or
templates of stability, let alone ones that serve to highlight the value of good behaviour in a legalistic
economy (Walder, 1995). Third, informants’ experiences highlighted that the legal system is far from
an effective facilitator of transparent and predictable bureaucracies and markets (e.g., Williamson,
1975).
Lying at the heart of this transition is the real possibility that things are getting worse because Chinese
ethos (moral economy) is disappearing. Guanxi development relies on a decision-making and
behavioural process shaped by both the Chinese ethos defined earlier and institutional and legal
constraints. The traditional Chinese ethos that emphasizes values such as face, trust and loyalty,
formerly encouraged and maintained individuals propensity to accept requests for favours and,
consequently, ask for reciprocation. It also morally framed such exchanges in a weak legal and
institutional environment (nature, value/amount of the exchange). As some (e.g. Guthrie, 1998) argue
that the significance of guanxi should be conversely proportional to institutional and legal pressure
and, as the Chinese legal system has supposedly improved, guanxi should logically disappear.
However, our research shows that laws are still loosely enforced and that the Chinese ethos is
disappearing, eventually creating more opportunities for gift-giving and corruption practices.
In the new environment we see a decreasing importance of face (脸- lian or 面子-mianzi) and
decreasing respect for age and hierarchy, both of which are important means of economic and social
regulation in a moral economy. Within this transitional space a number of dilemmas emerge for
economic and social actors, including the trade-off between strong and weak interpersonal ties,
252
between previous experiences and new learning of guanxi and in the resolution or not of conflicting
obligations between inner and outer guanxi circles. The concentration of wealth and attention on the
one child policy’s little emperors may be playing a role in slowing the transition between the two types
of economic and social regulation. While the resolution of the dilemmas is personal, there is a real
possibility that the there will emerge the belief that to have the face of a rich man is better than to be
rich in face. In short, the earlier moral economy is giving way but an alternative legalistic one is not yet
fully developed, creating spaces for exploitation of the lack of regulation.
3.5 Orientalism and the inter-cultural management industries

Two approaches can be distinguished in the research and discourse on Chinese management and
development (Barney and Zhang, 2009). On the one hand, Chinese theories of management create
explanations for the existence of unique Chinese phenomena and the persistence of a Chinese ethos.
This type of theory is often propagated by Chinese scholars and intercultural consultants. On the
other hand, theories of Chinese management explain management in China drawing on theory
developed elsewhere and simply applied to the Chinese context. The former seems to have gained
dominance in both the academic and managerial fields. Based upon our observations and analyses,
we believe this dominance encourages some backward behaviours by orientalising them (i.e., by
defining business and institutional phenomena as uniquely Chinese). Concepts such as guanxi and
‘face’ that have been professed and learned for more than two decades (e.g., Hwang, 1987) are now
often taken for granted. The dominant managerial discourse carries ideologies informing social and
cultural representations of contemporary society and the kind of social relationships that are expected
inside business organisations and between them (Coronada, 2005). According to this discourse,
guanxi practices shall not be interpreted as corruption but respected as genuine indigenous practices
that would often be misunderstood by Western managers and scholars for lack of cultural knowledge
and sensitivity. Given this, canny individuals emphasise a cultural gap to justify cross-cultural advice
and intermediary services to foreign companies. It therefore appears that some individuals benefit
from defending cultural heuristics created decades ago with culturalist and post-colonial studies
reinforcing commercial interest and contemporary Chinese nationalism. Other political and economic
implications can also be considered, namely the idea of an alternative Chinese model for
development and the renewal – or evolution – of (Afro-) “Asianism” and negotiated ethnicity for
business development (Goxe, 2009).
4. Limitations
To an extent all findings will be an artefact of their framing theory, common sense, received wisdom
and consequent method choices (Kuhn, 1970). To overcome difficulties of research in emerging
economies (see Sekaran, 1983) and particularly responses biases, cultural biases such as the
“courtesy” or “hospitality bias” and the “sucker bias” (Mitchell, 1969), trust-based relationships with
interviewees and triangulation of data were used. Given the care taken with method, and the extent
that our data match those reported in the press, NGO reports and empirical academic work, they are
a robust basis for consideration of economic and social change in China. Two strands of potentially
informative research emerge from the material above. The first strand of research should attempt to
develop methods to more tightly define and quantify the nature of relationships practices to identify
trends. The historical nature of this question means that until such methods are developed, we must
rely on perceptions of the past. New methods that might be appropriate include social network
analysis to study the frequency and nature of social encounters and the exchanges that happen within
them. Some of this work has already been undertaken in China (e.g., Bian, 1994) but a broad
exploration of change has not emerged. The second strand of research should investigate the issue of
orientalism by scholars, consultants, agents and managers when dealing with China. As noted above,
it is quite rational for them to make their area of expertise more exotic and esoteric than it actually is
to justify their existence (and charges).
5. Conclusion
Despite the claim that relational practices associated with corruption are fading in the PRC, in
particular due to the positive evolution of the legal system, our data suggest that such is not the case.
On the contrary, we provide some reasons, evidence and consequences for this: the fading of
traditional Chinese ethos, systemic problems aggravated or created by economic reforms that
increase uncertainty and actions and discourse from economic and academic commentators who
benefit from the existing rationalisations. Our paper contributes to the emerging understanding of
China’s transition, particularly with respect to the formal and informal institutions governing the
253
overlap between economic and social behaviour. From a theoretical perspective, it augments the
institutional literature on China. From an empirical perspective, it provides qualitative description and
analysis of perceptions of Chinese business practices from Chinese and foreign managers. Extant
literature emphasises the fact that relational practices are, first, based on a Chinese ethos defined by
collectivism, norms of reciprocity, face work, trust, etc. We observe that this ethos has evolved toward
more individualism and less concern for extended networks and values of face. Previous research
also claims that relational practices (and their illicit consequences) were made possible and profitable
by institutional uncertainty. We observe that, contrary to claims, uncertainty still prevails because laws
remain unevenly enforced. We show that both Chinese and foreign players (entrepreneurs,
managers, consultants, officials) can benefit from such uneven law enforcement and relational
practices, or at least perceptions of them, and therefore tend to maintain this state of play.
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254
Intermediaries in the Management Process of Innovation:
The Case of Danish and German SMEs
Susanne Gretzinger1, Holger Hinz2 and Wenzel Matiaske3
1
University of Southern Denmark, Denmark
2
University of Flensburg, Germany
3
Helmut-Schmidt-University Hamburg, Germany
sug@sam.sdu.dk
hinz@uni-flensburg.de
matiaske@hsu-hh.de
Abstract: Information is a critical resource in innovation processes. SMEs are therefore advised to draw on con-
sulting in innovation processes, as they cannot ensure the necessary information flow internally due to lesser re-
sources. From the strategic point of view, the involvement of intermediaries is accompanied by the risk of losing
specific knowledge to the business environment. But the other way around: To neglect the integration of consul-
tancies could mean a deficit in the process of information management. Based on an empirical comparative study
of Danish and German SMEs – Danish companies utilize public as well as private consulting services more often
– determinants of the usage of business consultancies in innovation processes are explored. One important im-
plication of the paper is, that the consulting system has difficulties in reaching smaller SMEs and should be modi-
fied to reach SMEs much better.
Keywords: SMEs, consultancies, innovation, network
1. The role of consultancies, customers and suppliers in the process of inno-

vation
In organization theory it is agreed that consultancies, whether public or private, institutionally take on
the role of an intermediary. Consultants communicate information on structure and strategy from one
business to the next and thereby ensure the formation of relatively homogeneous organization popu-
lations and the alignment of organizations’ phenotype, respectively. Hannan/Freeman (1984), the
principal agents of the population ecology approach, and DiMaggio/Powell (1983), from the perspec-
tive of the competing research program of neo-institutionalism, agree on that. Thus DiMaggio/Powell
(1983: 151) write about the role of business consultancies: “Models [of organizations, the authors]
maybe diffused unintentionally, indirectly through employee transfer or turnover, or explicitly by or-
ganizations such as consulting firms or industry trade associations. Even innovation can be ac-
counted for by organizational modeling.” With regard to innovation processes Wu et al. (2009) and
Wolpert (2002) work out the dissemination of best practices via consultancies, whose role they corre-
spondingly characterize as “innovation intermediation”.
The risk of knowledge outflow to a competitor in the consulting process to the detriment of one’s own
business is, however, not as high as it might seem at first sight. Consultants do not practice industrial
espionage in order to deliver blueprints specifically and synchronously from one company to another.
Although consultants are chosen because of their experience with problems similar to the client’s, this
experience will, however, hardly solve the client’s problem as exactly as the proverbial missing link.
The experience brought in by the consultant from – usually previous - other consulting processes first
needs to be mutually interpreted, understood and adapted. So even if organization theory proves ig-
norant towards the clause of client protection in contracts with consulting firms and fuels mistrust,
practitioners have good reasons – due to the asynchrony of information transfer, as well as the lack of
specificity, which goes along with the need for interpretation of the practical consulting knowledge – to
trust consulting firms from time to time in the case of innovation processes. They also count on it that
the potential gain in experience is opposed to a merely small risk of the unwanted transfer of know-
how (Glückler/Armbrüster, 2006; Wu et. al., 2009).
However, companies rather trust consultants than their remaining organizational environment: apart
from those spectacular cases where hiring a consulting firm serves the legitimization and defence of
decisions that were already taken and where it needs to be announced that a certain consulting firm is
engaged in-house, only little is disclosed about the utilization and benefit of consulting. Perhaps com-
panies do not want to convey the fatal signal of their weakness. It is therefore not surprising that so
far only few studies are available on the particularities of innovation consulting.
255
Susanne Gretzinger et al.
A central empirical finding from Glückler and Armbrüster (2003: 289-290) states that the involvement
of consultancies is accompanied by a high level of uncertainty. This uncertainty results from a lack of
sanction mechanisms on the part of the client, in order to defend themselves against the outflow of
innovation knowledge. Also Wu et al. (2009: 3) state, based on in-depth-interviews, that in an innova-
tion consulting process an outflow of knowledge from the enterprise receiving advisory services can
be expected. While these authors share also the general scepticism of organization theory towards
consulting firms as intermediaries, Hislop (2002) arrives at a more differentiated assessment in his
theoretical analysis of the relationship structure between company and consulting firm. With reference
to innovation consulting, on which we focus here, he writes: “Interactive innovation, however, involves
disparate social communities, which can have very different systems of meaning. Relying on embed-
ded client-consultant relations, at least to some extent, appears to provide a way of lessening the dif-
ficulties of the knowledge sharing that is required in such interactive innovation process” (Hislop,
2002: 669). According to that, the above mentioned need for interpretation of the knowledge that is
transferred in innovation consulting processes is mainly based on the relative closeness of social cir-
cles, between which consultancies build their bridges – to put it in network-analytical terminology. But
even if consulting firms succeed in creating trust to their clients for these reasons – Hislop (2002: 665)
talks about “swift trust” – a risk of knowledge outflow remains on the part of the clients: it is the con-
sultants’ business to collect and process practical knowledge obtained in consulting processes.
Summarizing these thoughts and findings of empirical studies, it can be noted that the consultancies’
task of processing general information and practical knowledge from other consulting processes im-
plies the risk of diffusion of company-specific knowledge for the clients in innovation consulting.
Hence, consulting firms build bridges between information pools or are – in the previously introduced
network-analytical terminology – weak ties from their clients’ point of view. Apart from consultants, di-
rect business partners, i.e. customers and suppliers, are considered important partners in the innova-
tion process (Brockhoff 2003, von Hippel 1978). Companies take up customer wishes or supplier in-
formation and use them as a starting point for their product or process innovations. In this regard
there are generally two options: the companies carry out the process alone or they cooperate with
their customers or suppliers in the process of the innovation. The first constellation is not relevant for
further analysis. Companies that innovate based on information from the business environment do
risk an indirect outflow of information via e.g. staff changing to competitors, but they are not in danger
of losing know-how that is relevant for the innovation in the relationship with customers or suppliers.
However, this risk exists if cooperative relationships are entered in the innovation process.
Independent of the legal arrangements in these cooperative relationships, i.e. from merely implicit or
formal contracts up to joint ventures, they are a constellation of mutually specific investments (Wil-
liamson 1985) or a combination of resources (Coleman 1974), which imposes the risk of loss on both
parties. Therefore, customers or suppliers, as well as the innovating focal business, have in such rela-
tionships an interest in shielding off third parties from the innovation process (Afuah/Bahram 1995, 75;
Reichwald/Piller 2005, 9). Following this argumentation, we hereafter consider direct contacts in the
business environment as strong ties in the terminology of network analysis.
Another interesting aspect regarding the involvement of consultancies and/or customers and suppliers
in the innovation process are the differences in the international comparison. There is evidence that
weak ties are used far more in Scandinavian countries than in other European countries (Poulfelt et.
al. 1994, Brodbeck et. al. 2000). But “weak ties” and “strong ties” alone are not the solely decisive fac-
tor for innovation success. Initially they are rather part of the relevant resources which are used. In
order to have a reference point as to which role “weak” and “strong ties” play in the total innovation
process, the next section looks generally at the management of resources in the innovation process.
2. Management and cooperation in the process of innovation
Relationships embedded in “strong ties” or “weak ties” are supporting the focal enterprise with knowl-
edge, which is a central variable in the process of creative destruction and implementation of new
combinations of production factors, as Schumpeter described the process of innovation (Schumpeter
2006). Schumpeter’s elements in the definition of the innovation process clearly show that the rela-
tionship to intermediaries is not just important because they support the focal enterprise in the proc-
ess of recombining resources. How to prevent the loss of strategic information and therewith of the
competitive edge has to be discussed through the lens of strategic resource management.
256
Strategic management refers to a number of central theoretical frames to discuss how to foster the
strategic position of the enterprises best. In this study the reference point is the research dependence
approach (RDA) (Pfeffer/Salancik 1978), which seems to be particularly suitable for a number of rea-
sons. Not only is the RDA considered theoretically well developed and empirically sound (Nienhüser
2008), but it is also specialized in the question of external relations of organizations as in our case to
consultancies, customers and suppliers in the process of innovation. Following the criticism of the
contingency approach, which has long dominated organizational theory, Pfeffer/Salancik (1978, see
also Aldrich/Pfeffer, 1976) fall back on a power-theoretic argument (Emerson 1962) in order to clarify
which situational determinants govern the behavior of organizations. With this theoretical foundation
they provide a meta-criterion that limits the arbitrariness of situational influencing factors and explains
why the environment has an influence: The resource dependency of the organization is the basis of
external exertion of influence. As opposed to other resource-oriented approaches, resources are here
defined not only as input but also as output factors, i.e. the access to pre-product markets can be
considered as a resource, just like the one to the final sales market.
External control can be exercised by those actors that control resources which are significant for the
organization’s effectiveness. The level of the organization’s demand determines how powerful the
partner is: the greater the interest of the focal organization in resources that are under the control of
an external actor, the greater the power and also the influence of just this external player on the focal
organization. This argument entails, furthermore, that the better the external actor manages to mo-
nopolize the interesting resources, the more influence he can exert. Conversely: The more difficult it is
for the focal organization to obtain the interesting resources outside the relation to the external actor,
the greater his power in the focal organization. It is particularly useful for the influence on the organi-
zation if the external player controls resources that are vital for the focal organization. In this case,
Pfeffer/Salancik (1978) talk about critical resources.
A suitable frame of reference for assessing the interests of businesses in an innovation process is in
our context the relational view of the firm (RV) (Dyer/Singh 1998). In extension of the better known re-
source based view of the firm (RBV) (Wernerfelt 1984), which focuses on individual businesses and
their core competencies, the RV identifies the relevance of networks for the companies’ resources
and for generating a competitive advantage. Just like the RBV, the RV is so far predominantly phe-
nomenologically or normatively oriented (Duscheck 2004; Freiling 2008). However, the descriptive in-
tegration of business networks, competitive markets and core competencies of the individual busi-
nesses is here sufficient to derive specific constellations of interests. To explain these we refer back
to the power-theoretic argumentation of the RDA. To sum up: Trust and control over critical resources
(core-competences) in the process of innovation are the main impact factors explaining the usage of
weak versus strong ties. Against this background we state the following hypothesis:
Hypothesis 1: The better a business is equipped with resources, the more likely it is that consulting
services are used in the innovation process.
Hypothesis 2: The better the contractual agreement of the consulting service, the more likely it is that
consulting will be utilized in the innovation process.
Hypothesis 3: The stronger the trust in the consulting system, the more likely it is that consulting will
be utilized in the innovation process.
Hypothesis 4: The more important the innovations for the business, the less likely it is that consulting
will be utilized in the innovation process.
3. Methods
3.1 Data base and measures

The data set of this study is based on a postal (Denmark) and a telephone (Germany) survey on the
innovation behavior of SMEs and on the utilization of the consulting system in both countries. In both
countries two surveys were conducted: one in businesses, the other in public and private organiza-
tions offering innovation consulting services. According to the focus of this study only the business da-
ta are used here.
257
The population of SMEs was limited by the target criteria location, size and industry. On the Danish
side, businesses from Jutland and Funen were included, while it was SMEs from the federal states of
Mecklenburg-Western Pomerania, Hamburg and Schleswig-Holstein in northern Germany. Busi-
nesses from the population do not employ less than 5 and not more than 500 members of staff and
are from the goods-producing industry. Both partial surveys were carried out based on random sam-
ples. The return rate of the postal survey in western Denmark was roughly 12%. In Germany, ap-
proximately 31% of the interviews with businesses from northern Germany could be used. Only mem-
bers of executive management were interviewed.
Table 1 lists the operationalizations of the variables that were used in the hypotheses. In the survey
we asked in detail about cooperation in the innovation process. One series of questions dealt in gen-
eral with the cooperation, the last innovation process in the past three years being the anchor point.
Two other series asked in more detail about the last successful resp. unsuccessful innovation in the
time period. Strong ties with cooperation partners in the innovation process are operationalized into
relations to customers and suppliers. The tie-groups are usually mentioned jointly in the underlying
multiple answer (r = .40). In total 52.8% of the businesses cooperated solely with customers and sup-
pliers in the innovation process. Accordingly, cooperation with public or private consultants are sub-
sumed as weak ties. Apart from a few exceptions, these businesses have both strong and weak ties.
The two consulting categories correlate with r = .31. In total 34.3% of the enterprises did not enter any
partnership in the last innovation process. With 14.7% Danish SMEs utilized weak ties slightly more
often in the innovation process than the German SMEs, where public or private consultancies were
used in only 11.3% of the cases.
Table 1: Measures
name of variable operationalisation
“strong tie” Cooperation with customers and suppliers in the innovation process
“weak tie” Cooperation with public or private consultants in the innovation

process
size Number of employees
contract 1) Was the partner subjected to specific test criteria before entering
the cooperation? (yes/no)
2) Was a contractually binding agreement entered with the partner?
(yes/no)
3) Was the partner subjected to specific test criteria after the comple-
tion of the cooperation? (yes/no)
trust 1) Does your partner trust you? (4 fully, 1 not at all)

2) Do you trust your partner? (4 fully, 1 not at all)
Hauschildt-Schlaak index Novelty of the innovation

(Likert scale, 7 items, Cronbach’s α = .91/.95)
The variables regarding the contractual agreement and trust in the partner in the innovation process
are obtained through questions which describe the relation with the cooperation partner in more de-
tail. We surveyed whether the partner was checked by the SME ex ante or ex post with specific crite-
ria and whether there was an explicit contractual relationship with the partner in the innovation proc-
ess. Furthermore, the trust relationship was reciprocally surveyed in self-assessment and the
expected third-party assessment. This item set was subjected to a principal component analysis and
was rotated orthogonally. As a result we receive two independent components, one of which depicts
predominantly the contractual agreement, the other the trust relationship with the partner.
Another item set, which is known as the Hauschildt-Schlaak index, measures the degree of novelty of
the innovation for the company. The items refer to the applied technology, channels of distribution,
suppliers and production, the culture and structure of the organization and marketing costs (Hau-
schildt/Schlaak 2001). To determine an anchor point for this scale, the interviewees were first asked
to describe in an open answer both the most successful and the least successful product innovation
of the past three years. For each of these innovations, if available, we obtained the Hauschildt-
Schlaak index. The reliability of the scale is remarkably high, with = .91 for successful innovations
and = .95 for the unsuccessful innovations.
258
4. Results
Binary logit estimations are applied for the modeling. Target variable in all models is the utilization of
weak ties in dummy coding 1
Corresponding to the hypotheses we developed, the models successively take on the variables for
business size as proxy for resource equipment, the indices for contractual agreements and trust be-
tween the cooperation partners as well as the country in dummy coding (0 = DK, 1 = D). Extended
models with additional control variables will not be reported here, as the variables of organization de-
mography, which have so far been considered, do not lead to findings that are fundamentally differ-
ent.
Table 2 reports the findings for the last innovation process in the past three years. The table shows
the marginal effects, as those allow a direct interpretation of the direction and impact of effect. The
signs of the marginal effects show the predictor’s direction of effect, i.e. a positive sign indicates that
the risk of the SME entering weak relations in the innovation process rises with a marginal increase of
the independent variable. Along these lines it applies to the country dummy that the direction of effect
needs to be interpreted with regard to the reference value – here Denmark. Therefore a negative sign
implies that Danish SMEs will rather build up ties with consultancies than German businesses.
The results show that the model estimates are altogether significant throughout the analysis, but that
explanatory contributions for the SMEs’ decision behavior are, however, low. Pseudo R² values are
between 3% and just above 6%. The variance explanation can hereby almost solely be referred back
to the variables size and country. Compliant with the hypotheses, a better resource equipment of the
business, represented here by business size, is accompanied by a greater usage of the consulting
system. The variables of contractual agreement and trust in strong cooperation relations to customers
and suppliers, which are significant from a theory perspective, do not influence the utilization of con-
sulting in the innovation process according to these analyses. This holds also true if the consulting
system is not analyzed as a single unit with regard to the target variable, but separately for public and
private consultancies. In contrast, the differentiated analysis shows clearly that the significantly higher
utilization of the consulting system in Denmark can be referred back to the more frequent involvement
of private consultancies in the innovation process. In this respect, German SMEs are comparatively
reserved, as already mentioned in the description of the data.
Similar results can be recorded for the analyses of the most and least successful innovation of the
past three years, which is compiled in Tables 3 and 4. First of all, it should be noted that nearly all
SMEs that generally reported an innovation in the relevant time period also had a successful innova-
tion. In contrast, a less successful innovation can only be found in roughly half of the SMEs with inno-
vations.
As before, we successively extend our base model by the variables size, contract, trust and the
dummy for the differentiation of the countries. Contrary to Hypothesis 4, the relevance of the innova-
tion process, measured with the Hauschildt-Schlaak index, does not change the usage pattern of the
consulting system by SMEs. Only in a differentiated analysis we do find a significantly higher utiliza-
tion of public consulting institutions in the case of less successful innovations. Spontaneously, this ef-
fect could be interpreted in such a way that in innovation processes which are important but where
success is jeopardized, public consultancies are called in as friends in need. However, this single
finding should not be overrated. For the country dummy, on the other hand, we find a familiar pattern.
In contrast to German businesses, Danish SMEs utilize the consulting systems significantly more of-
ten. In the case of less successful innovations this only holds true for private consultancies, though,
and not anymore for the consulting system in general.
1 Cooperation partners could be organized according to a Guttman scale or a Mokken scale ordered by the risk of loosing
knowledge in the process of innovation with "no cooperation" (step 1), "customer/suppliers" (step 2), and "public/private con-
sultants" (step 3). Technically speaking the items form a perfect Guttman scale, if we exclude six cases which only report weak
cooperation ties and not also strong ties. With regard to Hypotheses 2 and 3, the remaining dataset corresponds exactly to the
argumentation that was developed here. Only SMEs that have close relations to their partners in the cooperation process will
also enter the risk of additional weak relations. Therefore, the available data can already be assessed as an indication for the
conclusiveness of the presented arguments regarding the utilization of weak ties. The Guttman scale can be used as inde-
pendent variable in ordinal regression models. The results of these models do not differ substantially from the common binary
logistic models which are reported here
259
Table 2: All enterprises, probability of utilization of “strong” vs. “weak” ties

(1) (2) (3) (4) (5) (6)
predictors basic model + contract + + + + private
trust country public con- consult
sult
*** *** *** *** *** ***
size 0.0467 0.0487 0.0489 0.0511 0.0255 0.0380
(0.0010) (0.0012) (0.0012) (0.0006) (0.0020) (0.0029)
contract - -0.0262 -0.0263 -0.0361 -0.0144 -0.0148
(0.2500) (0.2480) (0.1170) (0.3010) (0.4630)
trust - - 0.0086 0.0127 -0.0031 -0.0002
(0.7080) (0.5760) (0.8170) (0.9910)
** ***
country - - - -0.1020 -0.0109 -0.1140
(0.0273) (0.7000) (0.0036)
*** *** *** *** *** ***
constant -0.3990 0.4050 -0.4060 -0.3540 -0.2490 -0.2910
(0.0000) (0.00000) (0.0000) (0.0000) (0.0000) (0.0000)
n 323 288 288 288 288 288
LL -154.24 -135.75 -135.75 -133.29 -72.61 -113.71
p 0.0010 0.0015 0.0044 0.0013 0.0151 0.0021
R2 0.0323 0.0432 0.0437 0.0605 0.0657 0.0633
Logit: Marginal effects for all SMEs with at least one innovation and cooperation
partners. Probability p in brackets.
***
p<0.01, **p<0.05, *p<0.1
Table 3: (Enterprises with successful innovation), probability of utilization of “strong” vs. “weak” ties
(1) (2) (3) (4) (5) (6)
predictors basic model + contract + + country + + private
trust public con- consult
sult
size 0.0445*** 0.0422*** 0.0421*** 0.0446*** 0.0257*** 0.0325***
(0.0043) (0.0090) (0.0093) (0.0052) (0.0021) (0.0161)
Hauschildt- 0.0012 -0.0044 -0.0046 -0.0028 -0.0056 0.0013
Schlaak (0.8760) (0.5820) (0.5640) (0.7220) (0.2400) (0.8500)
contract - -0.0322 -0.0322 -0.0426* -0.0201 -0.0154
(0.2070) (0.2060) (0.0951) (0.1630) (0.4860)
trust - - -0.0057 0.0003 -0.0077 -0.0089
(0.8180) (0.9910) (0.5800) (0.6700)
country - - - -0.121*** -0.0136 -0.136***
(0.0137) (0.6310) (0.0011)
constant -0.402*** -0.332*** -0.329*** -0.290*** -0.181** -0.277***
(0.0000) (0.0026) (0.0031) (0.0082) (0.0104) (0.0038)
n 284 257 257 257 257 257
LL -139.86 -123.58 -123.56 -120.59 -64.32 -101.79
p 0.0165 0.0252 0.0520 0.0084 0.0145 0.0051
R2 0.0271 0.0348 0.0350 0.0582 0.0846 0.0696
Logit: Marginal effects for all SMEs with a successful innovation and cooperation partners. Probability p in
brackets.
***
p<0.01, **p<0.05, *p<0.1
Table 4: Enterprises with less successful innovation probability of utilzation of “strong” vs “weak” ties
(1) (2) (3) (4) (5) (6)
predictors basic + con- + + coun- + +
model tract trust try public private
consult consult
** *** ** *** *** ***
size 0.0671 0.0616 0.0610 0.0608 0.0297 0.0410
* *
(0.0022) (0.0025) (0.0163) (0.0088)
(0.0007 (0.0026
) )
Hauschildt-Schlaak 0.0062 0.0071 0.0069 0.0079 0.0096* 0.0030
(0.4750 (0.4280) (0.4400 (0.3790) (0.0774) (0.6810)
) )
contract - -0.0174 -0.0175 -0.0330 -0.0023 -0.0147

(0.5880) (0.5840 (0.3260) (0.9190) (0.5860)
)
260
(1) (2) (3) (4) (5) (6)

predictors basic + con- + + coun- + +
model tract trust try public private
consult consult
trust - - 0.0080 -0.0030 0.0214 -0.0343
(0.8030 (0.9250) (0.3140) (0.1710)
)
**
country - - - -0.0928 -0.0104 -0.1160
(0.1720) (0.8130) (0.0357)
*** *** *** *** *** ***

constant -0.541 -0.534 -0.530 -0.498 -0.392 -0.345
(0.0000 (0.0000) (0.0000 (0.0000) (0.0000) (0.0007)
) )
observations 174 161 161 161 161 161
LL -85.43 -77.54 -77.51 -76.58 -47.70 -60.47
p 0.0023 0.0104 0.0235 0.0236 0.0752 0.0085
R2 0.0645 0.0657 0.0660 0.0773 0.0846 0.1081
Logit: Marginal effects for all SMEs with less successful innovation and cooperation partners. Probability p in
brackets
*** ** *
p<0.01, p<0.05, p<0.1
5. Discussion
In general SMEs in an innovation process use by far rather the strong ties to customers and suppliers
to initiate and enforce innovations than the weak ties to the consulting system. From the perspective
of resource-oriented strategic management this cooperation behavior in the innovation process is co-
herent, as knowledge of potential or concrete innovations might diffuse via the weak ties and possibly
drift to competitors. The study we present here also shows this decision behavior empirically: Both
Danish and German SMEs utilize the strong ties much more than the weak ties when choosing the
cooperation partners in the innovation process. In order to improve the utilization of the consulting
system, a deeper understanding of the SMEs’ cooperation behavior is essential. Here we argue with
reference to the RDA that organizations will generally try to strengthen their external relations to other
actors to avoid power dependencies and the influence associated with that. As a result, SMEs will
only use the weak ties of the consulting system if they can control them or if they see a chance of
evading power dependencies by using the consulting system. Based on the data that were used, it is
almost exclusively the first case that can be observed empirically: generally SMEs will only build rela-
tions to the consulting system if they have strong cooperation relations at the same time. In contrast, it
is only in exceptional cases that relations to the consulting system are recorded if there are no strong
cooperation relations at the same time.
Based on the RDA a number of arguments were developed to provide a better explanation for the
strategic management of the relationship to intermediaries and other cooperations partners in the
process of innovation. The first assumption is that the supervision of external relations depends on
the resource equipment of the organization, i.e. larger organizations should rather see themselves as
being able to enter weak relations than comparatively smaller businesses. While this hypothesis is
well confirmed, the more specific hypotheses are not confirmed in the same way. The argumentation
that those SMEs that cannot secure their strong cooperation relations with formal (test criteria or con-
tracts) or informal (mutual trust) control mechanisms will rather enter weak ties is not supported by the
261
data analyses presented here. It is rather the mere presence of strong cooperation relations that will
suffice to enter also weak relations. Neither is our further argumentation that the novelty and the un-
certainty of the innovation process that is linked to it influence the cooperation behavior confirmed by
the multivariate analysis. Comparing Denmark and Germany, however, the results of the multivariate
analysis show that Danish SMEs utilize the consulting system, especially private consultancies, com-
paratively more often than German SMEs.
6. Implications
Practically these findings imply that the consulting system has difficulties in reaching smaller SMEs.
This means that a considerable effort is required from public consultancies in particular to support in-
novations in SMEs. Based on this study it could not be clarified to which extent the decision behavior
of SMEs indicates how the consulting system might be improved in other ways. This implies a need
for research, as the conditions under which SMEs would wish for and would utilize consulting need to
be clarified. To answer these questions a more differentiated argumentation might be necessary
which also deals directly with the relations between SMEs and consultancies, not only indirectly with
the cooperation relations with other partners. This argumentation was tailored to the research strategy
of secondary analysis that was pursued here and which also accounts for part of the limits of this
study. Certainly, the response to more profound questions requires another, extended database
which provides more information about the behavior of SMEs in the innovation process and the utili-
zation of the consulting system.
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262
Technology Audit: An Empirical Study on SMEs of Istanbul
Ayşe Günsel1 and Dilek Çetindamar2
1
2
Sabancı University, Istanbul, Turkey
agunsel@gyte.edu.tr
dilek@sabanciuniv.edu
Abstract: Technology, as being identified by Porter (1998), is one of five forces that drive industry competition.
Firms have to face the fact that they should innovate by using advanced technologies for their survival.
Accordingly evaluating the technological strengths and weaknesses becomes an imperative for both academics
and practitioners. However traditional performance audits are biased against technological innovation. This gap
results in a new type of performance measurement model called “Technology Audit”. Technology audit is an
analysis performed to identify the strengths and weaknesses of the technological assets of an organization and to
evaluate the opportunities and threats from which potential for international competitiveness arises. The
instrument of technology audit can provide a sound basis for policy making for both small and medium sized firms
(SMEs) and big firms. Here the term SME has a vital importance. SMEs account for more than 80 percent of
jobs in developing countries. The economists claim that economic activity moves away from large firms to SMEs
and so their survival and growth becomes very important. This empirical study tries to describe the technology
audit process and with a comprehensive literature review and conduct a technology audit on SMEs located in
Istanbul. Even though it has been widely accepted that the SMEs that survive are important sources of innovation
and contribute to a large proportion of growth at the economy-wide level there has been little study done of the
innovative behavior of SMEs in general and of the innovative behavior of SMEs in developing countries in
particular. Based on a survey conducted on 53 manufacturing SMEs, we found that there is i-) a medium level of
awareness considering the importance of technology and innovation within SMEs of Istanbul, ii-) a deficiency in
networking and collaboration, 3-) lack of university industry collaboration and 4-) economic insufficiencies for
funding innovative activities in Istanbul.
Keywords: technology, innovation, technology assessment, technology audit, Istanbul
1. Introduction
Today’s globalized and hypercompetitive business environment emphasizes the essential role
technological innovation plays in economic development especially for the catching up economies
more than ever (Wu, 2007). Since firms in late-industrializing countries are late entrants into the world
economy, they have to follow a specific technological ‘catch-up’ strategy whereby they need to
develop several capabilities in order to copy the experience of the high-income economies in building
innovation systems and infrastructure (Berger and Diez, 2006; Varblane et al., 2007). Thus it
becomes imperative for academicians, policy makers and practitioners to evaluate the technological
performance at firm level. (Janes and Dolinsek, 2007). This results with a new type of performance
measurement model called “Technology Assessment/Audit”.
Technology audit is an analysis performed to identify the strengths and weaknesses of the
technological assets of a firm (e.g. Garcia and Arreola, 1996; Janes and Dolinsek, 2000; Chiesa et al,,
1996), a city (Wu, 2007) or a region (Amuah, 1996) to evaluate the opportunities and threats from
which potential for international competitiveness arises. From a technological point of view the
instrument of technology assessment appears to be a sound basis for policy making for both small
and medium sized firms (SMEs) and big firms (Bross, 1999).
The purpose of this paper is to describe technology audit process with a comprehensive literature
review and conduct a technology audit on SMEs located in Istanbul. Even though it has been widely
accepted that the SMEs that survive are important sources of innovation and contribute to a large
proportion of growth at the economy-wide level there has been little study done of the innovative
behavior of SMEs in general and of the innovative behavior of SMEs in developing countries in
particular. Moreover we couldn’t find any examples which examine a technological assessment of
SMEs in Istanbul. Accordingly based on the audit tool of Bessant, Rush and Hobday (2000) and
Chiesa et al (1996), we have conducted a survey measuring the technologic indicators such as
technology sources, innovation expenditures, innovativeness, sources of their innovative ideas and
innovative areas. We expect that the results of this study will provide a great deal of knowledge about
technological strengths and trends of SMEs of Istanbul which can serve as a guide for policy makers
and firm managers from a technological point of view.
263
Ayşe Günsel and Dilek Çetindamar
2. Theoretical background
2.1 Catching up economies

Since firms in late-industrializing countries are late entrants into the world economy, they have to
pursue a specific ‘catch-up’ strategy, whereby they need to develop several capabilities in order to
copy the experience of the high-income economies in building innovation systems and infrastructure
(Berger and Diez, 2006; Varblane, 2007). Bross (1999) addresses that the process of catching up in
Central and Eastem European Countries (CEECs) needs to be based on a long-term strategy for
economic growth. For example concerning the problem of Germany catching up with England and for
underdeveloped countries (as the German states then were in relation to England), List advocated a
broad range of long-term policies designed to make possible or to accelerate industrialization and
economic growth. Most of these policies were concerned with learning about new technology and
applying it and many of them were applied in catching-up countries over the next century and a half
(Freeman, 2001).
Perez and Soete (1988) states that science and technology infrastructure needed for effective catch-
up. They showed that even the costs of imitation could be rather high in the absence of an
infrastructure which is taken for granted in mature industrialized countries. Even more important, they
address that these costs would vary systematically at different stages of evolution of a product or a
technology (Freeman, 2001). Thus in order to assure a continuous catching-up, developing countries
should develop their own technologic infrastructure and capabilities (Almeida et al., 2008).
Accordingly sustained economic growth in catching up economies highly depends on a radical

technologic and innovation oriented restructuring. As importance of technology and innovations has
been realized by more and more researchers (Varblane, 2007); the role technology and innovations
on long-term economic success of catch-up economies has become an important subject. This
increasing importance results with the rise of technology audits. Technology audit is an important
instrument for guiding policy makers in designing proper strategies for shaping science and
technology policies in this process. Technology audits are an essential tools for supporting Innovation
Strategies, by getting an understanding of the technological needs of organizations (Bross, 1999).
More specifically, a technology audit must make it possible to characterize the needs of SMEs and
large firms to the innovation management from different points of view (Jakubavičius and Vilys, 2008).
Here the term SME has a vital importance. SMEs account for more than 80 percent of jobs in
developing countries. The economists claim that economic activity moves away from large firms to
SMEs and so their survival and growth becomes very important (Carrie and Tuhrik, 1998). SMEs that
do innovate successfully increase their chances of survival and growth. But the behavior of SMEs can
vary substantially. Some small firms survive by competing in a market niche, while others pursue
more radical innovations (Jong and Marsili, 2006; Bross, 1999). Accordinly a technology audit must
make it possible to characterize mainly the needs of SMEs to the innovation management from
different points of view (Jakubavičius and Vilys, 2008).
2.2 Technology assessment

The technology assessment has the purpose of improving society's possibilities and future plans for
deciding about the paths of technology and the diffusion of technology into society (Khalil, 2000). It
aims to provide knowledge and orientation for acting and decision-making concerning technology and
its implementation in society by (Fleischer and Grunwald, 2007):
Providing information about the consequences of technology;
Assisting society in the evaluation of this information;
Initiating and promoting societal communication about technology and
Working out action strategies.
In literature review we met many studies concerning technology assessment and audit process. For
example the technology audit model (TAM), developed by Garcia and Arreola in 1996, is supportive in
sense of determining current technological status, surviving areas of opportunity, and taking
advantage of the strongest capabilities of a firm (Khalil 2000). This audit model is based on six main
categories: i-) Technological environment, ii-) Technologies categorization, iii-) Markets and
competitors, iv-)Innovation process, v-)Value-added functions, and vi-) Acquisition and exploitation of
264
technology. By using this model Janes and Dolinsek (2007), had conducted an internal technology
audit on more than twenty Slovenian service and manufacturing companies. On the other hand
Amuah (1996) has made a technology audit concerning South Africa's public and private science and
technology system. It is national level audit in which technologies, skills, R&D equipments, R&D
outputs and infrastructure is assessed in order to come to a coherent appreciation of the forces that
are likely to shape the long-term future of South Africa's competitiveness.
Chiesa et al. (1996), states that continuous improvement lays emphasis not only on innovation
performance, but also on the processes with which these innovations are developed and exploit. The
foundation of their audit methodology is a process model of technical innovation. The model
addresses the managerial processes and the organizational mechanisms through which innovation is
performed. Chiesa et al.`s (1996) model identifies four core processes: concept generation, product
development, process innovation, and technology acquisition. There are three enabling processes
supporting these core processes: the deployment of human and financial resources, the effective use
of appropriate systems and tools, and senior management leadership and direction. The outcome
from these core and enabling processes is performance in terms of innovation and competitiveness in
the marketplace.
On the other hand Chapelet and Tovsigata (1998), underlines the importance of managing
technological platforms for sustainable competitive advantage. Managing technological platforms
includes;
Aligning their technology strategy with their overall business strategy;
Continually structuring and building their portfolio of technological capabilities;
Maintaining effective measures for protecting their intellectual assets; and
Continually scanning their environment for new sources of technology.
The assessment process presented in their paper draws on previous work in the literature which
describes the positioning of a firm’s current technological state in the context of its overall strategy. In
particular, this involves the inventorying of technological assets, evaluating the competitive impact as
well as maturity of various technologies, and analyzing the firm’s technology portfolio (Chapelet and
Tovsigata, 1998).
Nystrom (2000), defines the innovative capability audit instrument as a method developed to assess
the center's specific innovative capabilities. Nystrom (2000) uses three main area as resources,
strategy formulation and implementation and nine audit criteria that address the center's resources,
strategy formulation and implementation:1. Equipment and labs, 2. Personnel 3. Access to
information, 4. Internal strengths, 5. Awareness of events, 6. Recognize importance, 7. Organization,
8. Culture, and 9. Communication
Fleischer and Grunwald (2007), considers technology as of major importance for the sustainability of
mankind’s development and technology audit as an instrument used to exploit the advantages and
opportunities of technology. According to Fleischer and Grunwald (2007), technology audit is a
contribution to shaping technology – not at the level of engineering but at the level of shaping societal
framework conditions for technology development like public funding of new technologies, influencing
the conditions of successful diffusion of innovations, and regulatory issues. It is also an “early
warning” against possible side-effects and risks of innovative developments, for example elaborating
on the operationalisation of the “precautionary principle” in specific cases. And lastly Fleischer and
Grunwald (2007), state that technology audit is an innovation-oriented activity to recognize potentials
and benefits of new technologies at early stages of the development, and to explore strategies to
optimally exhaust and harvest those chances (Fleischer and Grunwald, 2007).
In another study at international level, Jolly (2008) compared the Chinese and European technological
systems by a two dimensional frame work as ‘‘the company’s technological competitiveness’’ and ‘‘the
attractiveness determinants of the technology’’ Conducting on a audit on 82 Chinese and 372
European firms this study resulted with the fact that the Chinese and European firms were not so
different from the technological perspective
In literature review, we met an interesting audit study conducted on city level. Wu (2007), states that
strategies for enhancing research and innovation capabilities have come to occupy a more important
265
position in China’s development. A series of ambitious initiatives have been launched to enhance the
country’s technological capabilities and reform the national innovation system. As the leading
production center, and China’s economic locomotive, Shanghai is attempting to increase its edge over
other cities and regions through a “high road” based on efficiency enhancement and innovation.
Accordingly Wu (2007), applied the technology audit process at city level on Shanghai.
Indeed cities were always important since the beginning of civilization. Even though Adam Smith’s
book was entitled “The Wealth of Nations” and his main concern was to investigate “the different
progress of opulence in different nations”, he nonetheless included a long discussion part of “The rise
and progress of cities and towns since the fall of the Roman Empire” (Freeman, 2001). Globalization
and restructuring for global competitiveness have affected the social and spatial changes in large
cities. The major cities all over the world are now facing pressures to reorganize the impacts of
policies for competitiveness and integration with the global economy on their socio-spatial structures
(Eraydın, 2008). Accordingly city level assessment and audit studies become more and more popular.
Considering the fact that these assessment models are both firm level studies and they are suitable
for developing countries such as Korea we took the papers of Chiesa et al. (1996) and Bessant et al.
(2000) studies as a basis for out technology assessment model to conduct a technology assessment
of SMEs of Istanbul. Moreover this assessment tool emphasizes the technological capabilities of
firms. This is consistent with the dominant idea that technology and innovation performance is closely
related to the development of technological capabilities for firms especially in developing countries.
2.3 Istanbul
Istanbul is the biggest city of Turkey in terms of economic development and urban population growth.
(Berkoz and Eyüboğlu, 2007). Istanbul has always been the centre of the national economy and an
important international node within a large hinterland extending from Eastern Europe to the Middle
East and from the Black Sea region towards central Asia. Istanbul is ranked in 29th place among the
important cities of the world (Derudder et al., 2009). Also, in terms of its metropolitan position, Istanbul
has a significant role in the world markets’ accessibility to wealthy raw material resources of the
region from the Balkans to Middle East (Berkoz and Eyüboğlu, 2007).
Istanbul is also the capital of high education in Turkey. Out of 100 universities in Turkey, 27 of them
are located in Istanbul and each year new universities are established (YÖK, 2009). Almost all high
quality universities in terms of research and development are among these universities.
Istanbul also hosts a number of well-functioning technology development centers and incubators as
well as the existence of high education institutions. In 2009, there are twenty technology development
centers in Turkey and five of these centers are located in Istanbul around universities namely
Bosporus University Technology Development Center, Fatih University Technology Development
Center, Istanbul Technical University Technology Development Center, Istanbul University
Technology Development Center and Yıldız Technical University Technology Development Center.
Furthermore 3 of 18 incubators are located in Istanbul: ITU Arı Technocity, Istanbul University
Technology and Innovation Center and Yıldız Technical University and Innovation Center (Elitaş et
al., 2007).
In terms patents applications and the number of patents issued, Istanbul ranks first as shown in table
3. The nearest city to Istanbul’s patent performance is Ankara but there is a huge gap.
Table 1: Patent numbers, 2008
City Patent application % Issued patents %
Istanbul 1057 47 187 55
Ankara 269 12 33 10
İzmir 122 5 25 7
Bursa 119 5 16 5
Konya 69 3 8 2
Turkey Total 2268 100 337 100
Source: Adapted from Turkish Patent Institute, 2009
Without any doubt Istanbul outperforms other cities in Turkey. Already the leading production,
commercial and financial center, such as Shanghai, Istanbul is economic and technological
locomotive of Turkey. Hence we decided to run our technology audit on Istanbul.
266
3. Technology assessment of Istanbul

The technology audit presented here is based on a survey adopted from the firm level studies of
Bessant et al. (2000) and Chiesa et al. (1996). Our survey is composed of three parts. First part aims
to demonstrate the characteristics of our sample (shown in table 2). Second part involves the
organizational issues such as the firms in our sample have a new product department or they have
training programs for their employees. Finally the third part is related directly with the innovativeness
of SMEs.
In Turkey, due to “Regulation about the Definition, Characteristics and Classifying of the Small and
Medium Sized Businesses,” firms which employ fewer than 250 employees are called SMEs (TR
Prime Ministry, 2005). This classification also matches with the classification of the Commission of
European Communities (2003). Such companies hold 14.35 percent of the manufacturing sector in
the Turkish economy. Hence our survey is conducted on SMEs located in Istanbul operating in
manufacturing industry. The initial sample consisted of 200 SMEs, from the records of Istanbul
Chamber of Commerce. Of the 200 firms contacted, 140 agreed to work with this study. Of the 140
firms that agreed to participate, 53 firms completed our questionnaires. Thus, usable data for our
analysis is the 53 SMEs. Table 2 demonstrates the characteristics of our sample.
Table 2: Characteristics of the sample
Frequency Percent
Firm age
1-5 years 6 11,3
6-10 years 2 3,8
11-20 years 17 32,1
21-40 years 23 43,4
41 and more 5 9,4
Total 53 100,0
Firm definition
Independent firm 49 92,5
Almost independent subsidiary company 1 1,9
Dependent subsidiary company 3 5,7
Total 53 100,0
Number of staff
5-49 30 56,6
50-149 13 24,5
150-250 10 18,9
Total 53 100,0
Total volume of sales (1.000 TL = 675$)

< 50 2 3,8
50-75 11 20,7
75-125 2 3,8
125-250 4 7,5
>250 34 64,2
Total 53 100,0
In the second part of our audit tool, we asked questions about firm activities. A summary of the key
issues related with the firm innovativeness is shown on table 3. According to the results 71,7% of our
firms have training programs for their employees while 28,3% have not. Moreover t 77,4 %of our
sample has export activities while 20,8 %do not. When the respondents are asked about using their
trade marks in export, the answered that 49,1% of the respondents use their own mark, 32% percent
use their customers’ mark and 18,9% of them export with using both their own and customers` mark.
We also asked our respondents if they have a new product development unit or not. According to the
answers %48,1 of our sample have a new product development unit while 32,5 %have not. We also
inquired if our sample firms do have any projects funded by Small and Medium Enterprises
Development Organization (KOSGEB), European Union (EU), The Scientific and Technological
Research Council of Turkey (TÜBİTAK) or Technology Development Foundation of Turkey (TTGV)?
The results show that almost half of the firms have a project funded by institutions or organizations
such as KOSGEB, EU, TÜBİTAK, or TTGV
267
Table 3: Organizational activities of the sample

Frequency Percent
Training programs
Yes 38 71,7
No 15 28,3
Total 53 100,0
Export
Yes 41 77,4
No 12 22,6
Total 53 100,0
Whose trade mark in export

Own 26 49,1
Customer’s 17 32
Both 10 18,9
Total 53 100,0
A new product development unit

Yes 32 60,4
No 21 39,6
Total 53 100
Any project funded by KOSGEB, EU, TÜBİTAK or TTGV?

Yes 20 40,1
No 33 60,9
Total 53 100
The third part of the technology audit investigates the attitudes of firms towards innovation, their
innovative potential and future plans. Initially SMEs were asked to inform about their registered
patents, trademarks, designs and utility models. As shown in Figure 1, more than the half of our firm
never had a registered patent, design or a utility model. This ratio only differs for registered
trademarks. Sixteen firms had registered patents 1-5; one firm had 10-25 and again only one had
registered patents more than 25. Our SMEs were just only better in registered trademarks which
emphasize marketing than innovativeness.
>25
10 -25
utility models
5 -10 registered marks
registered desings
registered patents
1 -5
0 5 10 15 20 25 30 35 40
Figure 1: Technology sources

Figure 2 illustrates the technology sources SMEs of both internally and externally. As might be
expected, the frequently sourced types of technology appear to be internal r&d or a npd unit, skilled
268
personnel and key employees and buying new equipments respectively. Interestingly we found that;
licensing, contracting, joint projects and collaborations and technology transferring from subsidiaries
were all scoring as low, which is based on the reality that our SMEs do not have a collaborative
culture and networking.
other
skilled personel and key employess
buying new equipment
licensing
no
contracts with r&d firms yes
joint r&d projects and collaborations
technology from a subsidiary
Internal r&d or a npd unit
0 10 20 30 40 50 60
Figure 2: Sources of technology

As Figure 3 highlights, it was found that the most frequently utilized sources of innovative ideas for the
SMEs in Istanbul are customers, management and r&d or a npd unit respectively. This result is
comprehensive with the literature as the technology push-market pull mechanism on technology
development process. Just we see that the management is also such an important innovative source
in SMEs. Interestingly universities score such a low degree. This addresses the deficiency of
university industry collaboration within the city.
others
consultants
universities
marketing
suppliers
no
management yes
competitors
manufacturing
customers
r&d or a npd unit
0 10 20 30 40 50
Figure 3: Sources of innovative ideas
269
Figure 4 shows the r&d and other innovation expenditures of SMEs as a ratio of total sales. Almost
the half of SMEs earmarks a budget as %1-4 of the total sales. Moreover there are many firms
without any budget for such activities. This shows that there is still an economic deficiency concerning
the innovation process in SMEs in Istanbul.
>50 %
25-49 %
10-24 %
Seri 1
5-9 %
1-4 %
0 5 10 15 20 25 30
Figure 4: Innovation and r&d expenditures as a ratio of sales

As demonstrated in the previous figure, there is a significant monetary deficiency concerning
innovative activities in SMEs. As a developing country it is necessary take another point of view.
Indeed there may be another funding opportunities for innovativeness. Figure 5 shows that SMEs in
our sample derive benefit from banks, KOSGEB, TUBİTAK, EU funds and other sources as well as
their equity capitals for their innovation budget
other
TUBİTAK
KOSGEB
no
yes
EU funds
banks
equity capitals
0 10 20 30 40 50 60
Figure 5: Funding for Innovative and R&D activities

Figure 6 highlights the future plans of the SMEs. As shown in the figure; overall effectiveness, product
development and product quality enhancement appears to be priority tasks respectively. On the other
hand IT, innovativeness, human resource development, R&D and marketing have medium scores.
270
Again we notice that SMEs in our sample are not concerned about mergers, partnership, alliances
and networking. Surprisingly growth appeared to have one of the lowest scores.
other
foreign partnership
Innovativeness
mergers
Strategic alliances
Growth
IT
no
product quality enhancement
yes
human resource development
product development
overall effectiveness
r&d
marketing
technologic renewal
0 5 10 15 20 25 30 35 40 45 50
Figure 6: Future plans

4. Conclusion
In a global world in which the waves of globalization have forced the introduction of strategies to
enhance innovativeness and competitiveness; technology and technological innovations seems to
have the potential to significantly enhance competitiveness of firms. Accordingly specific tools for
assessing technological innovative capability such as technology audit become an issue of concern
for academics, politicians and practitioners.
Following Wu (2007), our paper is based on a technology audit on Istanbul. Considering the
importance of SMEs in general and in developing countries in particular we have chosen to run our
audit through a survey on SMEs. The results of our survey can be summarized as follows: 1-)
Considering the fact more than half of the SMEs in our sample has a unit for new product
development (a “unit” not an “R&D” department), and again approximately half of them uses this unit
as a source of technology and innovative ideas; there is a medium level awareness concerning
technology and technological innovations in SMEs of Istanbul, 2-) SMEs in Istanbul suffer from a
deficiency in networking; individually they are good at transferring knowledge from R&D units, skilled
personnel or customers however they are not successful at composing strategic alliances and
partnership relations. 3-) Moreover universities do not appear to be an important technology and
innovation source for industry; university industry collaboration does not exist in Istanbul 4-) There are
economic insufficiencies for funding innovative activities, but SMEs try to close this gap with external
financing resources such as banks, EU funds and KOSGEB.
5. Discussion
The results of this study have demonstrated the strengths, weakness, and trends of SMEs of Istanbul
from a technological point of view. In light of these findings an appropriate and feasible strategy for
SMEs of Istanbul could be to follow a two-complementary/mixing strategy: First, there should be
systematic efforts for creating a collaborative culture. Indeed innovations are not generated just by
individuals, organizations and institutions but also by complex patterns of interactions between them
these complex patterns interdependencies result with a new concept called innovation systems.
Networking and collaboration with other local firms and organizations have always played a major role
271
in economic theories. However, such linkages are also becoming a global phenomenon named as
innovation systems. Moreover university-industry relationships should also be improved.
Second; considering the economic insufficiencies of SMEs in developing countries there would be
more regulations concerning the funding of innovative activities and R&D in SMEs. Building an
effective innovation system would also serve this purpose by decreasing the costs of knowledge and
technology transfer and R&D activities. So, the long term strategy appears to be setting up an
Innovation System for Istanbul. This seems a challenging task but Istanbul deserves to be in the list of
top cities where technology and innovation will be the core.
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272
An Evolutionary View of Innovation and Economic
Performance: A Firm Level Analysis
Naciba Haned
LEFI and ESDES, Lyon University, Lyon, France
Nhaned@ish-lyon.cnrs.fr
Abstract. It is rather consensual that firm growth driven by financial long run profits seeking, depending on
market structures and how firms adapt to it thanks to their productive resources (Penrose, 1959; Nelson and
Winter, 1982; Teece, 2006). However, some differences emerge when it comes to the origin of the productive
resources that raise growth. Considering an industrial market structure, evolutionary approaches describe
innovations as a source in favour of the emergence of “path dependencies” (because of lock-in effects and sub-
optimal behaviours on the market and inside organisations) affecting innovativeness inside organisations. In fact,
even minor exogenous shocks may affect the occurrence of a particular path, changing the structure of a given
competitive model. This paper examines with two-stage least squares method economic performance’s impact
on the persistent dynamics of innovation inside the French industry using two waves of community surveys
starting from 2002. It appears that the more firm growth raises (at upper quantiles), the more innovativeness
increases, and rises above the medium rate when the productive opportunity of the firm is not limited within the
studied period.
Keywords: innovation, capabilities, complementary assets, economic performance, two stage least squares
1. Introduction
There are no rules in terms of predicting if an innovation investment would get more benefit in a firm.
In fact, the central issue for empirical studies on the economic returns of innovation is to identify and
analyze the determinants of superior performance. The theoretical framework supports this view, but
empirical results on this dynamic are mixed since innovation is more complex in actual facts.
Previous empirical findings shed light on first scientific or technological progress (empirically, it can be
considered regardless of the source of the invention), as the successful introduction on the market of
the new product, process or organizational innovation, that allows an enterprise to ignore market and
industry conditions to grow and gain market shares to the detriment of less innovative enterprises. In
fact, being given different levels of competitiveness of firms, building a project of innovation without
considering a loss of value once the product is put on the market is not possible, being given the
complexity of the innovation process. Supporting this methodology, some empirical investigations
controlling for other factors additionally to R&D confirm that the R&D performance link is unclear and
not straightforward (Schankerman, 1981; Cuneo and Mairesse, 1984; 1985; 1988; Griliches and
Mairesse, 1984; Hall and Mairesse, 1995). Nevertheless, this conception of an innovation narrows the
possibilities of accounting for innovativeness and particularly its inputs.
The Schumpeterian vision of economics permeates the entire economics innovation framework, in
which innovation remains considered to be as a key success factor for economic performance in the
long term. In this framework, a successful innovation is seen as the positive outcome of a dynamic
process with many feedback circuits (Rosenberg, 1986). More precisely, technological wherewithal
improvements depend on a successful combination of firm specific capabilities (Teece and al., 1997;
Zollo et Winter, 2002) and industrial contexts (Metcalfe, 1995). The baseline characteristics in this
framework is opposed in many features to the analyses economic agents’ evolution with bounded
rationality, as agents are not profit optimizers but profit seekers (Simon, 1961).
Moreover, as R&D increases, companies do not always appropriate the results of R&D efforts in order
to increase corporate performance (Griliches, 1979) especially in highly competitive markets. Most of
the investigations measure only partially the effect of innovation on productivity (Griliches, 1995),
putting forward technological opportunities at the center of R&D incentives (Dosi, 1988).
In this sense, the Penrosian and evolutionary theory of growth of the firm sheds light on the fact that
firms have the ability to allocate resources in productive resources, drawing this capacity from its
organization (Penrose,1959). As a consequence, intangibles are a very important feature to develop
such a capability. Hence, innovation inputs are the same that innovation outputs meaning that new
resources for the development of new process and product innovation earning resources and all
structures to access new knowledge and know-how.
273
Naciba Haned
The aim of this paper is to contribute in the analysis of the two-way relationship between innovation
and persistent corporate performance using a longitudinal data set which matches data from
innovation surveys and annual survey that provide data on companies’ accounts from 2002 to 2006.
The rest of the paper is organized as follows: the second section highlights a background dressing the
characteristics of the innovation process, and the dynamics of the innovation output, and the second
one gives a description of the data set. Finally the third and the fourth section present the model and
explore the results.
2. The persistence of innovative performance: A conceptual framework
2.1 The technological capacity of firms

The seminal work of Schumpeter emphasizes vital issues in the innovation process as its costly, risky
and uncertain nature, and the importance of appropriability of the economic benefits of innovation in a
large sense. In this framework the successful innovation is described as the introduction of
technological advance at the origin of profit generation rather than qualifying innovative activities in
the large sense as a performance (Schumpeter, 1934). However, there are no conclusive analyses on
the determinants of innovation for firms. Also, even in perfect competitive conditions, firms are
disadvantaged because of the constraint the nature of modern industries creates. Thus, firms have to
be endowed with increasingly sophisticated specific and technological competences ones in order to
meet the nature of modern industries (Schumpeter, 1950).
2.1.1 The uncertainty of innovation resources

"Innovative" companies that have engaged and R&D effort, or that allocate resources for innovation
support a much higher risk than "imitators", because their projects are not always successful. In fact, it
is difficult for an investor to select "good" R&D projects because R&D investments lead to long term
profitability, because R&D investments are risky and their results is uncertain (Stiglitz and Weiss,
1981).
However, there are factors having an impact on the probability of success of a given innovation
project. We come back hence to the first Schumpeter hypothesis (1942) who stated that in a world of
increasing competition, innovation activities increase more than proportionally with firm size.
Therefore, we can identify the set of factors that are likely to influence the decision to engage in
innovation activities and those that impinge on the probability of success of an innovation.
2.1.2 Internal resources for innovation

The existence of firm specific resources (Penrose, 1959; Nelson and Winter, 1982) and the use of
external resources (Pisano, 1990) have an impact on the technological capacity of the firm, meaning
the propensity to innovate. Firm specific assets (as R&D or business intelligence for modest firms) are
at the core of the development of such capacity (Klein, Crawford et Murphy, 1978; Williamson and
Riordan, 1999). Actually, innovation follows the strengths of a firm; meaning using its internal
capabilities to survive “internal process of development leading to cumulative movements” (Penrose,
1959, p.1). The capabilities are presumed to be key resources personnel that act as a team outside of
which effectiveness of decisions is reduced. These practices rely on tacit forms of knowledge that can
be easily transmitted because of their experiential nature. The latter criterion allows the mobilization of
fundamental competences for the renewal of the base of knowledge notably the process of
technological paradigms (Dosi, 1982). As each company uses knowledge as a free and non exclusive
good, trajectories and also conflicting aims in the paradigm itself, that creates a need for codification,
in turn generating new forms of processes, because the need of transfer is created by its own tacit
form (Polanyi, 1962; Schutz, 1962). Consequently, changes in the knowledge and know-how bases
imply significant discontinuities in the ways that knowledge is generated and economically exploited.
In such circumstances, as the path of performances broadens, the heterogeneity of firm regarding the
diversity of innovation performances is no longer a temporary situation in the tradition of Knight
(1921). To narrow the analysis towards the frame of evolutionary dynamics, we consider that
innovations are no longer linear but sequential and developed through evolutionary learning complex
processes with many feedback circuits. In fact, specific decisions emerge from routinized search
methods -as rules of thumb pouce- are described in the framework of the Darwinian metaphor
(Metcalfe, 2008). These routines also known as “the best it knows and can do”, include not only
operating rules as regard with production and supply factors for production but also strategic and
investment rules aiming at decision-making. They are considered as a repository of knowledge and
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skills with an ability to replicate, even when no effort is provided by the firm (Nelson and Winter, 1982;
Nelson, 1995). Within this framework, innovations are described as not linear but sequential and
developed through evolutionary learning complex processes with many feedback circuits: “Search
and selection are simultaneous, interacting aspects of the evolutionary process: the same prices that
provide selection feedback also influence the directions of search. Through the joint action of search
and selection, the firms evolve over time, with the condition of the industry in each period bearing the
seeds of its conditions in the following period” (Nelson and Winter, 1982).
2.1.3 External resources for innovation

In addition to their eventual R&D activities (or more modestly business intelligence), companies use
external knowledge by either purchasing licenses or attracting relevant skills for business services as
collaboration activities altogether dropping transaction costs.
These complementary assets are also important even for leaders (or first movers) since they involve
the use of external knowledge sources (Pisano, 1990). That is the case of licensing or he
decentralization of R&D (Cassiman and Veugelers, 2006; Arora et Gambardella, 1994); or
collaborating with other firms (D’Aspremont et Jacquemin, 1988) or research institutes (Cohen,
Nelson and Walsh; 2002).
That is the case of licensing or he decentralization of R&D (Cassiman and Veugelers, 2006; Arora et
Gambardella, 1994); or collaborating with other firms (D’Aspremont et Jacquemin, 1988) or research
institutes (Cohen, Nelson and Walsh; 2002).
In this context, organizations with high innovation capabilities seize more important technological
opportunities. These same companies easily increase their innovation capacity because it is
incremental (Clark and Griliches, 1984). And large firms have a higher propensity to innovate in
opposition to small ones. In this sense, empirical studies show the importance of market power and
firm size for innovation (Cohen and Levin, 1989), but their results shed light on conflicting and overall
undermined evidences (Scherer, 1992; Cohen, 1995). In fact, these studies are constrained by the
use of cross-sectional data and consequently use rather input oriented indicators of innovation as
R&D, which account for the early stages of the innovation profits that lead to rather uncertain flows of
results.
The literature on the determinants of innovations also considers the dichotomy created by industrial
dynamics, as technology push and demand-pull. Technology pushed innovation activities are impulse
by the race to innovate based on the environment selection criteria (Scherer, 1982; Coombs and al.,
1987). Whereas demand pulled ones acknowledges are stimulated by other factors on the demand
side increasing the incentives of innovation production and similarly R&D expenditures (Schmookler,
1962, 1966).
2.2 Innovation rewards

Incentives for innovation have traditionally been linked to competition, especially in the
Schumpeterian tradition. Firms compete in the market for products, in part, by becoming more
effective in their production processes (i.e., by innovating) and thereby gain market power. The
appropriability of new knowledge meets difficulties.
2.2.1 The economic profitability of innovations

Some empirical studies linking innovation to corporate performance concentrate either the
persistence of innovation “success breeds success” (Mansfield, 1968; Peters, 2005; Duguet et
Manjon, 2002 ; Raymond et al., 2006); or emphasise the importance R&D for productivity (Crépon et
al., 1998), or financial results (Roberts, 2001).
The other set of studies explore the allocation of resources (Mairesse and Griliches, 1983; Griliches,
1986), entry and exit (Geroski, 1995, Caves 1998). Whereas others empirical studies analyze the
underlying factors of productivity growth - as technology (Mairesse and Sassenou, 1981; Hall and
Mairesse, 1995) or human capital (Crépon, Duguet, Mairesse, 1998).
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According to this argument, it is the final stage of innovation that must be explored, especially when it
allows at the same time to measure the impact with the flows of economic performance that are
generated by a successful innovation.
For example, results from innovation French survey data find a positive link between innovation
output and R&D spending, whereas firm size has no impact (Crépon and al., 1998). Also, a number of
empirical studies acknowledged for the impact other firm specific indicators as financial capability
(essentially cash flow) which results shed light on a rather weak (Mairesse and al., 1999) or no effect
at all (Heshmati and Lööf, 2006) of financial performance on the propensity to innovate.
Since the product is successfully brought onto the market, and imitators begin to enter the market,
innovators are no leaders (Teece, 1987). The economic value of assets depends on the crucial issue
of “appropriability” and opportunities on the market.
Because intellectual property deposits raise the economic value of assets and similarly innovation
rents. Then, many empirical studies, in particular the “Yale survey” of Levin et al. (1987) and, more
recently, Cohen and Al (2000) suggest that the first mean of protecting innovations is not patenting
but rather other ways such as the secrecy or first mover advantage according as the industrial sector.
2.2.2 Satisficing and the generation of knowledge

The coordination of the actors and factors on the market is not always optimal for innovation outputs
(Arrow, 1962), more especially as the output of innovation is uncertain.
In fact, as the coordination of actors and factors on the market is not always optimal (Arrow, 1962),
resulting in uncertain flows of outcomes especially being given the uncertainty of innovation output
whatever the amount of the initial investment is. Since novelty is not predictable (cannot affect a
probability to each eventuality), it is not possible to insure its outputs (no risk mutualisation); which is
possible for risky investments through insurance premiums (Knight, 1921). In this sense the
Schumpeterian vision puts forward a dynamic rather than static efficiency, where the reward from a
successful innovation a superior value for a given expenditure, and confers to the firm market power
and growth, at the expense of non innovating firms.
Contemporary theorising abandons the idea of the Marshalian quasi-rent in favour of competitive
strength and viability of a company that depends on "core competences" and its relations with its
customers and suppliers. These assets are represented as "a set of technological skills differentiated,
complementary assets and routines that are the basis of competitive capacity of an undertaking in a
particular activity" (Dosi, Teece et Winter, 1990).
As individuals (An individual can be an organization, a legal entity or even an institution and makes
research according to its own features (Penrose, 1959; Hodgson, 1993) are “profit seekers” instead of
“profit optimisers”, the first stage of this mechanism is characterised by the introduction of a
successful innovation on the market, in turn giving birth to new markets and/ or new companies. At
this stage innovators are leaders that benefit from monopolistic rents, yielding supernormal profits.
That how creative destruction proceeds, and may yield to a transitory but not necessarily persistent
profits as imitators enter the market.
This measure problem is acknowledged in empirical studies that explore the impact of a large range
of firm-specific and industry specific factors on innovation output.
An innovation is not necessarily introduced on the market even if R&D is made, if it is the case, the
impact on economic performance is weak, but the impact on corporate performance is high, by the
introduction of new knowledge.
3. Model and empirical specifications
Before describing the econometric model, we examine the data set and the principal indicators
explored in the empirical analysis. The aim of this section is to emphasize the proxies constructed on
the basis of not only CIS data but also other data basis provided by INSEE (The French public
Institute of Statistics), and to describe the methodological problems we had to cope with.
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3.1 Data set and variables

Our empirical study is based on a longitudinal data set obtained by merging two waves of Community
Innovation Surveys (hereafter CIS) : CIS4 (2002-2004) and CIS2006 (2004-2006). The specific
architecture of innovation surveys requires some clarifications, as for it contains different types of
variables on innovative and non-innovative industrial and service firms.
These surveys gather the same information on a three time span period, and are conducted at regular
intervals: CIS4 (2002-2004) was conducted in 2005 and CIS2006 (2004-2006) in 2007.
The first part of surveys provides general information on companies, as their main activity, size and
turnover; if the company is part of a group or not, and also the localisation of its most significant
market.
Then, the second parts of surveys are related to the introduction of product and process innovations
and R&D expenditures (Internal and external sources, equipments and materials).
The first period (2002-2004) is covered by CIS4, which results are decomposed in basic information
(as activity, turnover, employees, geographical situation, etc…) and various aspects of innovation
activity (products and process innovation, R&D expenditures, intramural and extramural R&D,
knowledge acquisition, factors hampering innovation, etc…).
Most of the data is qualitative, which means that to obtain results on innovation performance
over time, we have to match CIS data with other data, by using accounting data.
In this sense, to obtain financial information on our sample data, we have to use annual enterprise
surveys (2002-2006) conducted by Sessi, the Ministry of Agriculture (for IAA) and INSEE in industry
for gathering information regarding the main firm economic indicators (staffing, value added,
investment, profitability, and so on).
The resulting sample from merging all the data sets result in 2354 companies in the manufacturing
tool industry, expressed by the NACE two digit level in the European classification of activities (Table
1), with 20 or more employees.
Table 1: Sample by industry
Nace % sample % Innovating firms % Non innovating firms
Industry
Food/Tobacco 15-16 15,1 7,1 8
Textile 17-19 8,2 2,9 5,3
Wood/paper/printing 20-22 10,8 3,7 7,1
Chemicals 23-24 10,6 6,6 4
Plastic/Rubber 25 4,7 2,8 1,9
Glass/ceramic 26 5,6 2,8 2,8
Metals 27-28 8,4 4,4 4
Machinery 29 7,3 5,3 2
Electrical and electronic
engineering 30-33 12 8,2 3,8
Vehicles 34-35 11,9 5,9 6
Furniture/recycling 36-37 5,4 1,8 3,6
We can consider that there are two main segments: the first one includes low-tech markets with, say
a weak percentage of innovation product put on the market: textile (2,9 %,), wood paper and printing
(3,7 %), plastic and rubber (2,8 %), glass and ceramic (2,8 %), Metals (4,4 %), furniture and recycling
(1,8 %). Whereas the second one includes high-tech markets as chemicals (); electrical and electronic
engineering (8,2 %) and vehicles (5,9 %).
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3.2 The econometric analysis

The main constraint of our empirical work arises from innovation the complexity of the process arising
from an idea and evolves to output. We acknowledge for this complexity using not a unique relation
between the innovation effort and economic performance. In order to fulfil this goal we introduce
several factors that interact to identify the origin of innovations in a first step, and then we capture the
interrelationship between various indicators.
3.2.1 The dependent variable: the efficiency of innovation

We model the efficiency of innovation to assess the feedback loop between innovations and
economic performance, this model explains firm's sales growth between 2004 and 2006 with several
independent variables proper to institutional and organisational features companies have adjust to.
We will use a multivariate regression with one time lag starting from 2004 up to 2006 (see figure 1).
Our model aims at testing the hypotheses of the two stage mechanism previously described: the first
one aims at determining the propensity for a firm to innovate for our sample (n=2354).
Yi = β 0 + β 1 X i + β 2 SIZE i + β 3 TRAIN i + β 4 RDINTi + β 5 RDEXTi + β 6 COOPi + u i (1)
Where Yi is the estimated performance measure in our study (growth of sales in the turnover
compared to industry between 2004 and 2006).
Xi is the percentage of innovative products in the sales turnover in logarithms for i=1,..., n. It
expresses the technological capability of the firm. If the percentage of sales in the turnover of
innovative products is positive for a given firm, i, it means that it has a high technological capability.
This technological capability can be enhanced by several factors that we explained in the analytical
framework; including innovation inputs as size (SIZE). We also include internal capabilities for
innovations as training (TRAIN); internal and external R&D (RDINT, RDEXT), and also take into
account cooperation (COOP).
The second stage aims at the intensity of innovation outputs depending on firm resources, and
industry related features. Finally we measure to what extent our dynamic loop works in actual facts.
These links materialize into a simultaneous system of equations, to connect innovation output to
innovation input, and in the same time, accounts for the selectivity biases (Johansson and Lööf, 2008,
2009).
Figure 1: The “super-modularity of the innovation process” inspired from Crépon et al. (1998)
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The method of instrumental variables operates into two steps. First, the innovation variable is
substituted X is substituted because it is endogenous. We expect to get little correlated results by
choosing instrumental variables for X estimation.
As X is correlated with the error term in equation 1, consequently, the second part of the model is
formulated as an instrumental variables equation, partly uncorrelated to ui in order to estimate
innovation output and the model comes as follows:
X i = α 0 + α 1 Perf i + α 2 SIZE i + α 3 RDINX i + α 4 RDEX i + α 5 PDINT + α 6 PDEXTi + α 5 DUMIND i + ν i (2)
Xi is estimated by the following explanatory variables:
Perfi is past performance measured as sales growth rate compared between the years 2002 and
2004. Most of empirical studies have found a positive correlation between financial capability
(generally expressed by cash flow, see Mueller, 1967) and a strong R&D intensity (Cohen, 1995).
Size in 2004 because the incentive to innovate should increase when the company grows according
to the Schumpeterian view of innovation dynamics.
Financial resources for innovation in 2004: internal R&D expenditures (RDINX) and external ones
(RDEX) even if most of firms finance innovation by internal funds because of hazard situations
(Stiglitz and Weiss, 1981).
We also control for other variables related to knowledge and scientific resources used between 2002
and 2004 because there is a lag period for which investments should be effective. Therefore, we
include firm specific resources that is to say internal (product developed by the enterprise: PDINT),
and external knowledge (PDEXT).
3.2.2 Estimating economic performance with two stages least squares

The third stage of our model is the estimation of innovation output in 2004 (equation 1) using
instruments related to innovation inputs, and then we include it in equation (2); we obtain equation (3):
ˆ + β SIZE + β TRAIN + β RDINT + β RDEXT + β COOP + u

Yi = β0 + β1X (3)
i 2 i 3 i 4 i 5 i 6 i i
ˆ ) and by a set of exogenous variables

As for equation 3; it is estimated by the innovation output ( X
(uncorrelated with the error term) explaining growth of turnover compared to industrial activity:
Firm size in 2006 is measured by the total number of employees in logarithms (SIZE06);
Two sets of dummy variables indicating the technological or innovative capabilities (Dosi, 1988) used
between 2004 and 2006: internal ones (Train0406 which stands for training; RDINT0406 which stands
for internal R&D); and external ones (RDext0406 which stands for external knowledge appropriated
by the firm, and coop0406 which stands for cooperation);
Several dummy variables for industry (DUMIND), and innovation protections.
In order to measure the effect the protection of innovation rents, we use several measures, because
lagged effects of intellectual property rights assets are captured effects while taking into account
patent, trademarks, and designs deposits for two periods (2002-2006); but secrecy is also important:
in the first estimation (“model 1” in table 2), we include only two measure globally including patent,
designs, trademarks, and copyright deposits (Leg0206). But the lack of data induced a binary
proceeding for these variables whilst in the literature they are usually estimated with count data
models. Indeed, there is a biases in data because there is a strong value innovations products and
much of low value innovations because few activities are really protected from the imitation and much
would remain unprotected from appropriation mechanisms (Duguet and Lelarge 2004).This must be
taken into account in analyses of the influence of patents on downstream changes in economic
performance parameters (Griliches 1979; Jaffe 1986); consequently we also include secrecy,
complexity of design and lead-time (Strat0206). We also account separately for these results by
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introducing a variable for each type of protection (pat stands for patents, desg stands for designs, tdm
stands for designs, cp for copyrights, sct for secrecy, tech for lead-time); we call it “model 2” (see
table 2).
4. Results and discussion
4.1 First results

Our intuition about the positive relationship between economic performance and technological
capability over time is confirmed. We obtain approximately the same results for model 1 and model 2,
but surprisingly, intellectual property rights do not have the expected effects. In fact, only patents are
significant in the model two, with a positive coefficient of 0.53; while the legal and strategic protections
of innovations- considered as a whole- are not significant. Moreover, corporate performance strongly
varies according to industrial sectors, with strongest rates are recorded for some high-tech industries.
In accordance with the Schumpeterian point of view of innovation, size has a positive impact on
economic performance via R&D intensity in our case. Innovation output and internal resources for
innovation are always significant with higher rates in the case of internal R&D and training. That
supposes correlations between internal factors enhancing innovation effort and its output. In fact, we
can observe in this sense that the estimated output of innovation is significant (-0,92) but has that the
coefficient is less important that the one for internal R&D resources (-0,82). The capacities of the firm
to adapt internal and external technologies play an important part in the incentives to implement
innovative projects. As for external resources do not have any effect on economic performance, and
the same results are observable for active cooperation. Nevertheless, innovation protections have a
positive effect on the growth rate of the turnover, which is an interesting result, since patents
encapsulate the information on the innovation process. In fact, having a patent can be interpreted in
two complementary ways: first, it means that the firm has succeeded in the process of introducing a
product on the market. But it also can be interpreted as the innovation output.
4.2 Discussion
Table 2: Dependent variable: Growth rate of the turnover compared to industry
Parameter estimates Parameter estimates
Model 1 Model 2
Variables
Innovation output estimation Parameter estimates Parameter estimates
-0,92** -0,98**
X̂ (0,013) (0,011)
1,05*** 1,02***
SIZE06
(<.0001) (<.0001)
Internal innovative capability Parameter estimates Parameter estimates
0,30* 0,29*
TRAIN0406
(0,096) (0,10)
Parameter estimates Parameter estimates
Model 1 Model 2
-0,82** -0,73***
RDINT0406
(0,05) (0,088)
External resources innovation Parameter estimates Parameter estimates
-0,05 -0,05
RDEXT0406
(0,775) (0,792)
0,05 0,05
COOP0406
(0,798) (0,788)
Innovation protection Parameter estimates Parameter estimates
0,05
Leg0206 /
(0,798)
0,05
Strat0206 /
(0,798)
0,53**
PAT /
(0,034)
R-Square 0,50 0,49
Adj R-Sq 0,48 0,47
*** Significant at 1 % level, ** Significant at 5 % level, * Significant at 10 % level; Parameter (pvalue)
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We had to cope with some methodological difficulties. In particular, a lot of firms prefer secret, early
movers’ advantages or other means identified by the Yale survey for protecting the rents from
innovation. These firms may be as effective as others. We cope with this difficulty by an appropriate
choice of the sectors forming the sample on the one hand, and the use of firm answers from CIS4 and
CIS5 on the other. Secondly, there is a likely loop, a circular relationship (“a cumulative causation”),
between fir complementary assets and firm growth. In fact the reverse causation from economic
growth to investments in IP assets is equally relevant: only the firms with a high growth have a
threshold level of profitability for funding an IP department, a persistent flow of investment in R&D,
and so on. It will be important to keep in mind that when we will run estimations. One mean for
bypassing this difficulty might be to put temporal lags between the variables and estimate quantiles in
order to capture the correct effects we want. The last limitations would be the fact we could not get
long times series. We will carry out only cross section estimations. For this reason we have to define
the specifications of our main variables carefully in order to isolate the effects due to sectoral
environments on firm growth (for instance running regressions on the differences with the sectoral
mean). It will be possible to control for these issues by using a random effects model with a seemingly
unrelated regression to capture the effects of time lags.
It seems that we have to take into account the dichotomy between product and process innovations to
limit the selection biases that can be involved in the two steps process of innovation output on the
performance of R&D in the same tradition of Mansfield work (Mairesse and Mohnen, 2004),
particularly by reassessing the importance of R&D for innovation statistics.
References
Arora, A. and A. Gambardella (1994), “Evaluating technological information and utilizing it,”
Journal of Economic Behavior and Organization, 24, pp. 91-114.
Cohen WM, Klepper S. (1996) “Firm size and the nature of innovation within industries: the case of product and
process R&D”, Review of economics and statistics, Vol 78, No. 2, pp 232–43.
Cohen, W.M., Nelson, R.R., Walsh, J.P. (2000) “Protecting Their Intellectual Assets: Appropriability Conditions
and Why U.S. Manufacturing Firms Patent (or Not)”, NBER Working Paper No. 7552.
Crépon B., Duguet, E., Mairesse J. (1998) “Research, innovation and productivity: an econometric analysis at the
firm level”, Economics of Innovation and New Technology, Vol 7, No. 2, pp.115-158.
Cassiman, B. and R. Veugelers (2006), “In Search of Complementarity in Innovation Strategy:
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Metcalfe, J.S (1995) "Technology Systems and Technology Policy in an Evolutionary Framework," Cambridge
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Press.
Penrose, ED. (1959) The Theory of the Growth of the Firm, Oxford University Press: New York.
Pisano G., “The R&D Boundaries of the Firm: An Empirical Analysis”, Administrative Science Quarterly, n° 35,
1990, p. 153-176.
Teece D, Pisano G,Shuen A. (1997), “Dynamic capabilities and strategic management”, Strategic management
journal, Vol 18, No. 7.
Teece, David, J. (2006) “Reflections on profiting from innovation”, Research Policy, Vol. 35, pp 1131-1146.
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Science, Vol. 13, No. 3, pp.339-353.
281
Competent to Innovate: An Approach to Personal
Development to Improve Innovation Competency in SME’s
John Howard
University of Central Lancashire, Preston, UK
jhoward1@uclan.ac.uk
Abstract: This paper builds upon earlier work presented at ECIE in 2009 by Howard and Gillies. The Excellence
in Innovation Framework (EiI) is a Maturity Model framework for organisational development and change
management to enable SMEs to assess their current capability in innovation in order to maximise the return on
their investments and prioritise developments in organisational processes encapsulated within an on-line tool
which is available to SMEs via the Internet. The paper describes the theoretical basis for a competency
framework applied as part of an overall change management approach which identifies competency and
development needs for individuals within the organisation based on both their role and the maturity of the
organisation determined by assessment against the maturity model. Competency is assessed against
performance levels which identify the individual’s degree of skill or proficiency in relation to each identified
competency item. Once development needs have been identified these can then be addressed in learning and
development programmes tailored to the specific needs of the individual with re-assessment of competency
producing an evaluation of the effectiveness of the learning.
Keywords: innovation, small medium-sized enterprise (SME), competency, maturity model, education, training
1. Setting and objectives

This paper builds upon this earlier work presented at ECIE in 2009 by Howard and Gillies and is part
of the Knowledge to Innovate initiative (K2i) by the Northwest Regional Development Agency in
response to the Regional Economic Strategy (2006) as part of the delivery against Transformational
Action 12 to develop higher added value activity through innovation.
The EiI has been well received; however, it is apparent that change within business processes cannot
bring about desired change in the absence of staff that are competent to work within those processes.
In earlier work the author, in collaboration, developed the EiI to

Enable participating SMEs to assess their own capability for innovation
Enable participating SMEs to identify their development priorities for improving the capability for
innovation
Enable the K2i programme to measure the capability of participating SMEs for innovation
Enable the K2i programme to identify the development priorities for improving the capability for
innovation of participating SMEs
The missing element from this approach is the staff working within the organisation. The Maturity
Model focused on developing the organisation without explicitly considering the development of
individuals within that organisation. The purpose of this paper is to advance the earlier work by
addressing this “human” aspect of the organisation. The innovation process is not complete without
connections being made at the level of skills, functions, technologies, commercial production, markets
and other organisations (Mitra, 1999). Thus there is a need for a model and associated tools which
will allow an SME to identify and address the knowledge, skills and attitudes of staff for innovation.
This paper outlines such an approach.
2. Theoretical approach
2.1 Maturity modelling the organisation

The Excellence in Innovation framework is based upon principles first expressed in the Capability
Maturity Model (Humphrey et al, 1989) and developed for other domains by the authors (eg Gillies
and Howard, 2003, 2007). In November 1986, the US Government asked the Software Engineering
Institute (SEI) to provide the federal government with a method for assessing the capability of their
software contractors. A key part of the approach was an emphasis upon improvement, which
contrasted sharply with other models of the time such as ISO9000, AQAP and BS5750.
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The SEI capability maturity model (CMM) (Paulk et al, 1993a, 1993b; SEI, 1995) is defined as a five-
level framework for how an organisation matures its software processes from ad hoc, chaotic
processes to mature, disciplined software processes. The maturity model approach provides a
paradigm within which domain-specific frameworks can be deployed to assist the capability
development of small social and commercial enterprises.
The CMM has become an international standard in its field, and has spawned a whole range of
“maturity models” mostly in software related areas, including the IT Service Capability Maturity Model,
(Niessink and van Vliet, 1999) and other models aimed at project management and security. There is
also an international standard, (ISO, 2008) which is based upon a similar maturity model approach.
2.2 The excellence in innovation framework – a maturity model approach

The EiI developed for Knowledge to Innovate (Knowledge to Innovate, 2009), assesses capability for
innovation across seven dimensions: Collaboration, Environment, Finance, Knowledge, Senior
Management, Risk, and Staff assessed against five maturity levels:
1. Commitment,
2. Putting a process in place,
3. Monitoring activity,
4. SMART goals and improving performance, and
5. Continuously improving performance.
2.3 Competency development – the performance ladder

There is some literature from the domain which sees learning as fundamentally an individual construct
(e.g. Simon, 1991; Grant, 1996). However the general tendency in the business literature has been to
consider learning as an organisational rather than an individual concept. This collective view of
learning is compounded by the external locus assigned to “knowledge” in such an approach (Mitra,
2000). Lam (2004) acknowledges the individual role but argues that “both individuals and
organisations are learning entities. All learning activities however, take place in a social context, and it
is the nature and boundaries of the context that make a difference to learning outcomes”. She thus
stresses the collective and social element of learning as being the dominant factor.
Whilst this “organisational” perspective on learning may have some merits, it does tend to assume
collective learning does not necessarily involve a learning process in the individuals who make up the
social system of the organisation. It would seem self evident that, at its core, “learning” is a process
that occurs within an individual; to move the focus of consideration away from this locus risks a
fundamental misinterpretation of the processes involved. Kelly (1986) neatly summarised the various
educational perspectives from the literature. Firstly; rationalist epistemology which offers certainty of
knowledge and values leading to a simple transmission of the known from one generation to the next.
The second is that of pragmatism; where education is essentially a process, with the focus on the
“how” of learning as opposed to the “what” with an implied consensus on shared values. Finally Kelly
suggests a third perspective, that of “New Directions”, where many of the pragmatist assumptions are
maintained but the pragmatic view of universally agreed values is dismissed as the imposition of the
views of society’s dominant groupings. Instead the focus is on the promotion of diversity of
approaches. Given a need to develop innovation competency in SME’s this final perspective would
seem to offer a sound theoretical base with its emphasis on diversity.
It was probably McClelland (1973) who first introduced the concept of competence as a measure of
performance as opposed to academic ability of knowledge retention. Since then there has been much
work (e.g.; Boyatzis, 1982; Spencer and Spencer, 1993) which has attempted to use this concept as a
theoretical underpinning for performance enhancement in the workplace. Simpson argues that
“enthusiasm for this approach to competency has waned somewhat, due in part to the growing
confusion about what the word actually means” (Simpson, 2002, p53). She also proposes that the
concept of competency at the level of the individual is only weakly theorised and offers a competency
framework for knowledge management incorporating 3 distinct dimensions; Knowing Why, Knowing
How and Knowing Whom. Of these Simpson suggests that the knowing how dimension most easily
fits into existing models of competency, however she does not refer to earlier work by Benner or
Dreyfus and Dreyfus. These authors seem to provide not only a sound theoretical basis for, but
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definition of, the concept of competency and how it can be used to improve performance, in this case
performance in Innovation. Benner’s approach, building on that of Dreyfus and Dreyfus, incorporates
all three dimensions described by Simpson.
Benner (1984) has outlined an adaptation of the Dreyfus model of skill acquisition (Dreyfus and
Dreyfus, 1980) applied to nursing. Benner’s model outlines a number of stages on the way to
becoming a skilled practitioner based upon three aspects of overall performance. Firstly, a shift in
paradigms from abstract rules to life experiences as the basis for behaviour. Secondly a change in
perception of situations; from a collection of disparate equal parts to a complete entity in which some
parts have more relevance or importance than others. Thirdly the move from “detached observer” to
“involved performer”. Within this framework there are five stages through which the student will pass
on their way from a novice to becoming an expert. This scale of performance is adapted to provide
the basis for the performance rating scale used in this model. See Table 1.
Using this model, skilled performance is neither a measure of outcome, nor behaviour, but an
amalgam of both, and includes the way in which the individual processes information before acting,
and the way in which they act to achieve a desired outcome.
There is an old saying relating to a room full of monkeys with a typewriter and their ability, given long
enough to produce a copy of Shakespeare’s “Hamlet”. Whilst this may, or may not, be true it does
highlight the idea that high quality outputs are not always the result of expert or skilled performance;
rather they may be due to blind luck. Anyone, of reasonable intelligence and ability could, given a set
of detailed enough instructions, undertake a range of highly complex activities achieving a desired
output. This would not make them an expert. This is the level of performance described by Benner as
Level 1 – Novice. Behaviour is dictated by adherence to context-free rules. The learner’s actions are
guided to provide achievement of a task. However performance is also constrained by these same
rules as no account is taken of the relative importance of different components within the situation.
Table 1: Six levels of performance ladder (after Benner, 1984)
Level Designation Description
Unskilled /Not The individual is unable to perform this skill even under instruction or the skill is
0
Relevant not required in this role
The individual has little or no experience in this aspect. Able to perform only under
1 Novice
close instruction or guidance.
The individual has some experience in this aspect and is able to perform with
2 Learner minimal day-to-day supervision but still requires regular instruction or guidance as
new situations arise.
The individual performs in this aspect regularly and is able to work effectively,
3 Competent without supervision, on a day-to-day basis, but may need occasional instruction,
guidance or support when confronted with unusual situations.
Skilful in this aspect. The individual has a wealth of experience and functions with
4 Proficient
only managerial supervision. Is capable of demonstrating this aspect to others
Highly skilful in this aspect with several years experience. The individual has an
5 Expert intuitive grasp of the aspect and requires no supervision other than clinical
governance. Acts as a mentor and innovator in this aspect.
As an Expert, the individual has passed beyond the need for what Benner refers to as “analytic
principle” and is now able to adapt their actions. They no longer need to follow a list of instructions or
cognitively refer each situation to the archive of past experience for comparison; their actions are now
performed from an intuitive grasp of a situation.
However, a fundamental problem with the Benner model is that an individual’s performance is not of
necessity uniform in all aspects of their role. As the model is situational and experientially based,
performance in disparate areas will necessarily be at different levels depending on theoretical
knowledge and previous experience of the individual.
In order to address this, the performance rating scale used relates, not to the whole individual, as is
the case in Benner’s work, but to selected facets of performance expertise against each competency
item.
The author has previously used this approach in a number of settings including the innovation of
electronic patient records in a health care context (Department of Health: 1998, 2001). Traditionally
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the clinical record of a patient has consisted of pieces of paper with markings upon them with a
coloured dye, hand writing. These marks being placed on the paper by those dealing with the patient
as a record of their patients care.
This system required a series of skills from health care practitioners in order for them to access the
information within this record or to add new information to it. These information management skills we
commonly refer to as reading and writing. Whilst the clinical record was held as streaks of vegetable
dye on dried out wood pulp these skills were appropriate, vital and all that was required, in addition to
the obvious requirement for appropriate clinical or management skills. Once the clinical record is held
as a series of digital bytes on a computer these clinicians and anyone else involved with the patients
care, require new skills in order to record patient data, and most importantly leverage that data so as
to make decisions on the highest quality of information.
3. Competent to innovate framework (C2I) – integrating competency with
maturity
It is clear that, in order to reap practical management and administrative benefits, including
competitive advantage, there is a need not only for the appropriate technology, systems and
processes to be in place, but also to have staff available to operate these with an appropriate level of
skill. (Storey et al, 2002)
Performance of skills can be viewed in a variety of ways. Bentley (1996) outlines two performance
paradigms. Firstly, as a measurement of how well people are doing the things that they do; this is the
competency based or process approach. Secondly, by disregarding the way in which things are done
and simply looking at the outcomes. This is the output-focused or product approach to performance
management. It is however possible to conceive of a model of performance which bridges these
paradigms including what the individual brings to the situation, their skills with what they achieve, the
output.
As new functionality is implemented, and new processes initiated, the skills requirements of various
roles change. Thus. in order to maximize the value from investments a model for the identification of
training needs is required which not only takes account of the persons role and the skills required for
that role, but also the level of innovation maturity of the organization. For example, there is little value
to be gained by training secretaries in e-mail when the organization uses carrier pigeons for its
internal communications.
The competency items contained in the C2I framework are derived from those identified by the
implementation team as being those which are required if staff are to have the capacity to innovate.
The items are derived from National Occupational Standards (NOS) which are widely used in both the
public and private sector within the UK as a standard for the knowledge, skills and attitudes which
may be required in given workplaces and industry sectors. For C2I the NOSs were chosen from the
UK Management Standards Centre’s framework (MSC, 2008). These were then mapped to the
Maturity Dimensions for EiI to ensure all aspects of Innovation were appropriately addressed. These
are shown in Table 2.
Table 2: NOS derived competency items mapped to EiI maturity dimensions
Collaboration,
MSC NOS A3 Personal networks
MSC NOS D17 Collaborative relationships with other organisations
MSC NOS F9 Market and customer understanding
Environment,
MSC NOS B2 Operational environment mapping
Finance,
MSC NOS E1 Budget Management
MSC NOS E3 Financing
Knowledge,
MSC NOS E11 Communication
MSC NOS E14 Team support
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MSC NOS D7 Provide learning opportunities for colleagues

MSC NOS C1 Encourage innovation in your team
MSC NOS C2 Encourage innovation in your area of responsibility
MSC NOS E12 Manage knowledge in your area of responsibility
MSC NOS E13 Promote knowledge management in your organisation
Senior Management,
MSC NOS B8 Legal, regulatory, ethical and social requirements
MSC NOS B9 Organisational culture development
MSC NOS C3 Promoting innovation
MSC NOS C4 Change Leadership
Risk,
MSC NOS B10 Risk management
Staff
MSC NOS C6 Change implementation
MSC NOS D8 Staff support
MSC NOS D9 Team building and management
MSC NOS D10 Conflict management
MSC NOS F16 Product / Marketing
A model combining the performance ladder outlined previously, with the innovation maturity of the
organization was then developed. Firstly a two-dimensional competency matrix with competency
items along one axis and professional roles on the other axis is constructed.
Each intersecting cell holding the performance required for that combination of role and competency
item. This is the level of performance assigned to that particular combination of role and skill. (See
figure 1).
Figure 1: Horizontal cross section of C2I matrix

When innovation maturity is added, as a third axis the single layer matrix becomes a six-layer matrix
with each layer representing the maturity of the organisation as determined by an Excellence in
Innovation Maturity audit. Figure 2 shows an overview of this matrix; whilst figure 3 shows a cross
section, identifying the different performance levels required by a Managing Director in a variety of
competencies at increasing levels of EiI maturity.
As the SME matures its innovation capability, by utilising the EiI model, the skill levels required by
each different role within the company will vary. Normally the performance level required will increase.
However there may well be some instances where, for example role diversification with new staff
being taken on, may actually lead to a decrease in the required performance level for an individual as
that functions passes to a new member of staff. The model also allows for the addition and removal of
competency items from the list of those currently required by the SME. In this way the competencies
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and performance required by each role may be constantly updated and revised in the light of change
whilst retaining the history of each individual’s competency development and the history of the role
specifications required on a given date.
Figure 2: Overview of C2I matrix
Figure 3: Vertical cross section of C2I matrix

In order to understand the model fully it is probably simplest to “walk-through” the process of
identifying an individual’s training and development needs and then explore how these can be met.
Firstly the SME undertakes an EiI audit of its Innovation maturity. The SME could manage this
process by an internal audit however experience has shown that the approach is most effective when
used by an external facilitator / mentor. Once the EiI level is assessed the software selects the
performance level required by their role, at the current level of maturity for their company, from the C2I
matrix. Effectively the appropriate row is “pulled” from the appropriate layer of the C2I matrix so that
there is a row of performance levels relating to the individuals role in a number of skills. These act as
a benchmark against which performance can be assessed. Individual workers are then assessed
against these benchmarks to identify any gap in performance and thus identify training needs. This
assessment may be performed in a number of ways, including self-assessment. The preferred
methodology, in most settings, is through a consultation process where the manager and the
individual gather information from colleagues before jointly completing the assessment. This provides
a triangulation of performance measures from the individual, the manager and objective output data.
The results then form the basis of the individual personal development plan. They are also utilized by
both the SME and the Development Agency to manage training for the coming year.
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Whilst the author’s preferred scale is that derived from Benner and outlined in table 1, the
fundamental matrix model and software is equally applicable using any other performance-rating
scale, such as that described by Boydell and Leary (1996) that uses a scale of 7 modes to describe
an individual’s performance level.
4. Education to improve innovation competency
Once a gap between the required skill level and the benchmark standard for an individual has been
identified, a means must be found of addressing this need in order to help the individual move to the
performance level required. It should be remembered that we are not simply concerned with outcome,
nor with the behaviour undertaken, but the expertise with which the skill is performed to produce the
desired outcome. Thus both process and product methodologies are embraced.
Central to the model are the links to educational resources associated with each competency item
and the various skill levels. The resources selected being dependent on the individuals’ current skill
level, the level required of them, the competency in question and the maturity of the SME as
assessed by the EiI level.
Once an individual’s assessment has been undertaken the software will search for the educational
resources associated with that competency and level to allow a bespoke educational programme to
be designed based upon the identified needs. These resources may vary from a peer in another
company within a cluster (European Cluster Alliance, 2009), through a library reference, a URL on the
internet containing appropriate information or activities, to study days or full educational programmes.
This is possible because every individual’s needs are so highly specified by the system. Education
and training provided can thus be focused on real needs. In addition the effectiveness of development
activity can be measured by a re-assessment of the individual thus producing a pre and post training
comparison to assess training effectiveness.
Following on from the educational or training input a reassessment of the competency in the
workplace is repeated. This allows for a Kirkpatrick (1959) level 3 evaluation of the application of the
learning in terms of work place performance. Indeed if the educational input is mapped to
organisational goals and objectives this data may well be useful in any Kirkpatrick level 4 evaluation;
essentially the effect on the “bottom line” for the SME.
5. Application
As part of the academic evaluation of the initial work, the development and implementation of the
Excellence in Innovation Framework, a small Delphi type study was conducted with the
implementation team. From this a number of issues were raised which fed into the development of the
competency framework described here. A number of points were identified which are presented as
advantages and disadvantages of the approach below.
5.1 Advantages
1. In isolation the EiI maturity model approach addresses only one of the two key components of the
organisations capacity to innovate: the structural, environmental and process aspects of the
organisational entity. There is also a fundamental need for an approach to address the human
elements. This approach provides a clear and simple framework for staff development which links the
required knowledge, skills and attitudes of the level of maturity of the systems, policies and
procedures of the SME within which they work.
2. The approach allows business supporting entities such as Clusters and Regional Development
Agencies to identify needs across a geographical area and analyse those needs to enable the
development of appropriate education and training which would not be possible if the SME was left to
its own devices.
3. The clearest message to come from the implementation team was that in those SMEs where the
staffs opinions and ideas were really valued the culture of innovation was almost palpable and was
followed by clear improvements in the maturity of the organisation within the EiI model. The
consideration of individual learning and development as being of equal value to the organisation as
more structural considerations such as policies and procedures means that the staff are not only
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allowed but encouraged to question everything they do producing a synergy of cultural change
enhancing innovation.
5.2 Disadvantages
1. Additional complexity. One of the key barriers to the implementation of this approach which was
highlighted by the implementation team was the size of the SME. In those SME’s where the workforce
was under 10-15 staff it was observed that the use of the underlying maturity model for innovation
was of limited value in new and micro businesses where the business felt there was simply insufficient
time for such activity with all energies being focused on survival.
2. Clearly the use of this approach requires an investment in time from the SME. Where the SME is
still at an early stage in its growth it may well be that there is simply not the time and energy available
to undertake such strategic activities no matter how important they are for long term growth. This
additional workload can be minimised by the use of mentors and facilitators working for support
agencies such as the Northwest Development Agency.
3. Finally, the implementation team found examples of SMEs which this approach would simply not
work for. These could be characterised as those where the entrepreneur adopted an alpha male
approach and would not allow staff the freedom to question any decisions. In such SMEs it was felt
that neither the Excellence in Innovation or a Competent to Innovate framework would be of value but
such organisations would seem to have a limited life expectancy anyway.
6. Summary
This model offers a simple, yet effective, tool for managing the changing competency requirements of
staff within an SME attempting to develop its innovation capability. The synergistic effect offered by
the bringing together of process maturity (EiI) and competency (C2I) is potentially huge. By using the
maturity of the SME in a given change process, both current and prospective, as the basis for
development need assessment of staff, education and training provision is focused on the areas
actually needed at any given time in order to support the change process. By individual assessment
against the competency framework, customized learning plans can be provided for each worker which
gives them not simply a list of the things they fail to do adequately. Instead it points them to the
resources they require in order to help them develop their skills to those that are now required of
them. The role of a supporting network such as that offered by the cluster concept and the
development agency system in the UK regions.
Acknowledgements
The author gratefully acknowledges the input of K2i staff, notably Bea Acton and Geoff Birkett and the
support of the North West Development Agency for the original work.
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290
Identifying Entrepreneurial Characteristics and
Opportunities in Technology Entrepreneurship
Amy Hsiao
Memorial University of Newfoundland, St. John’s, Canada
amy.hsiao@mun.ca
Abstract: This paper examines the unique characteristics and context of engineers-turned-entrepreneurs. In
terms of the innovation process, this research analyzes the advantages and disadvantages of a technology-push
strategy versus a market-pull strategy for innovation in two ways, i.e. by primary data gathered from engineering
students and by discussing two case vignettes of new ventures founded by engineers-turned-entrepreneurs in
Newfoundland, Canada. The two industries include video gaming software and artisan craft beer. From this
analysis, it is proposed that potential product or business opportunities are identified and pursued uniquely by
engineers-turned-entrepreneurs, the information processing styles of engineers-turned-entrepreneurs are unique
to the current literature addressing entrepreneurial attributes, and the knowledge environment that these
engineers-turned-entrepreneurs typically incubate in is highly conducive to the success of their new ventures.
The paper also explores how engineers-turned-entrepreneurs recognize and manage the weaknesses in their
approach to innovation and entrepreneurship, with the main shortcomings being a lack of marketing expertise
and a feeble assessment of demand conditions. Under the premise of being inventors who are pursuing the idea
of “following their dreams”, the research proposes that engineers-turned-entrepreneurs do not put enough focus
on “fitting” their invention into the lifestyle, well-being, or habits of potential customers. The research discusses
how knowledge conditions in the environment that engineers-turned-entrepreneurs typically develop in can
facilitate a better understanding of market demand and customer fit. Technological innovation and
entrepreneurial effort should be matched with customer understanding and attractive demand, and this can be
accomplished with the unique perspective that engineers bring to entrepreneurship.
Keywords: technology, strategy, marketing, opportunity, engineering
1. Introduction
Newfoundland and Labrador (NL) has traditionally based its economic development on the
exploitation and export of its natural resources. In the past several years, the rich history, landscape,
and culture of the province have been successfully marketed to adventure tourists and worldly
travelers. The image of its “pristine locale” has encouraged entrepreneurs from the province to pursue
business ventures extending beyond its remote surroundings to the regional, national, and
international marketplace. In many ways, the province has also built upon its historical reputation of
technological innovation, where St. John’s was the location of the first transatlantic wireless
transmission by Guglielmo Marconi at Cabot Tower on Signal Hill in December 1901. Newfoundland
and Labrador has been a quiet hub of engineering-based small and medium enterprises (SMEs) that
have not only competed globally but also successfully in the industries of special importance to the
province, i.e. the Energy, Information, Natural Resources, and Oil and Gas sectors. Many of the
SMEs have been spin-offs or offshoots founded by engineering alumni or faculty from the only
comprehensive university in the province, Memorial University of Newfoundland (MUN). As such,
MUN has served as an effective “locus of innovation” for the incubation of ideas to product (Etzkowitz,
2003). Memorial University has six entrepreneurial incubation facilities on campus and a Campus
Incubation Consortium (CIC) that promotes open communication and coordination among the six
facilities. Each facility has a specific mission that targets the small business potential of a subset of
the larger campus community; however all of the six facilities share the general mission of
entrepreneurship development and support to students on campus. The six facilities are listed below
with a brief description of their functions:
Enthuzium provides incubation space and technical mentorship to student entrepreneurs for the
pre-commercialization development of engineering-based research. Enthuzium is based in the
Faculty of Engineering and Applied Science.
The P.J. Gardiner Centre provides professional development and practical training short-courses
for entrepreneurs and is based in the Faculty of Business Administration
Launch Pad provides incubation space and expert advice from its in-house business advisory
board to student entrepreneurs and is Canada's first student-run entrepreneurial incubation
centre. Launch Pad is associated with the Students in Free Enterprise (SIFE) organization in the
Faculty of Business Administration.
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Amy Hsiao
The Ocean Technology Enterprise Centre is associated with the Institute for Ocean Technology
established in St. John’s by the National Research Council (NRC) to provide ocean technology
companies to develop their technology and business opportunities in a collaborative and
supportive environment.
The Industrial Research Assistance Program (IRAP) also established by the NRC provides a
range of both technical and business oriented advisory services as well as potential financial
support to growth-oriented Canadian small- and medium-sized enterprises. IRAP offices are
located at Memorial University.
The Genesis Centre provides a wide range of resources and services to knowledge-based
businesses and entrepreneurs in high-growth enterprises. Its goal is to prepare selected clients
and their business ideas to become “investor ready”.
The next two case vignettes present how entrepreneurship stems from having an engineering
perspective, that is of seeking technology-push opportunities to apply (1) a process, (2) a highly
technical skill, (3) advanced research. These vignettes also examine how a market-pull strategy
eventually infused with strong engineering perspectives to facilitate venture success.
2. Newfoundland Beer Company
Newfoundland Beer Company 1 (NBC) is an independent brewing company focused on producing
quality beers for the mainstream and specialty markets. Established fourteen years ago by two
mechanical engineering graduates of MUN, the company has developed local recognition for its
quality brands by using creative marketing, focusing on functionality, and embracing a company
culture that reflects its brands. The company currently brews nine proprietary brands of beer to meet
these two segments of the market: a traditional ale, a cream ale, a lager, a light lager, a honey brown,
a light honey brown, an iceberg beer, a 7% alcohol-content beer, and a cloudberry-flavored beer. The
company consistently focuses its marketing on its relationship with the province, such as branding
beer labels in honor of historic events, i.e. Leif Ericson’s historic voyage to North America and the
great fire of 1982 in downtown St. John’s, and using words such as “local, independent, yours”.
Although this marketing success was initially intentional, the founders’ original approach was that of
setting up a process before deciding upon a product. Prior to founding NBC, the two engineers-
turned-entrepreneurs discussed the possibility of developing a manufacturing enterprise in NL that
would create new jobs in the province and address an emerging customer trend. Without a decided
product, they considered the feasibility of manufacturing specialty items, ranging from clothing to beer.
Through their involvement in the offshore oil industry, they had traveled extensively throughout North
America and observed an upsurge in brewing activity, not only in the increase in the number of
breweries across the continent, but in the positive customer response to the beers that these new
breweries were producing. Soon afterwards, they commissioned the development of a feasibility study
to assess the potential of establishing a brewery in NL and thus founded NBC in 1996.
Set near the mouth of the harbour in Quidi Vidi Village in St. John’s, NBC’s state-of-the-art brewing
facility is a former seafood plant. The brewery has a brew master, who oversees all of the malt-based
brewing operations and together the company emphasizes key ingredients, a quality process and
product, and craftsmanship. On its tenth anniversary, the company prepared a new brand of premium
beer to launch into the national and international markets. NBC named this new brand “Iceberg Beer”,
having received the registered trademark from the Canadian Intellectual Property Office (CIPO) on the
name “Iceberg Beer” and the phrases, “Ice Aged” and “Ice Cap”. This first step to trademark the new
brand was strategically significant for the company. While the application to register the “Iceberg
Beer” trademark was being processed, the executive team used those two years to iteratively conduct
market research and improve the marketing plan for this new brand. Five-hundred cases were sent to
local point-of-sale licensed establishments for feedback on the taste, look, and color of the beer and
the packaging. When the trademark was successfully registered to NBC in October of 2006, the
company produced another batch of 500 cases to send to focus groups for feedback. The packaging
and promotion of Iceberg Beer focused on beer brewed from “clear, cool, glacial water from pristine
icebergs”, with the label and casing reflecting this image. While the placement of “Iceberg Beer” is in
the premium-priced, low-volume segment of the beer market, it is still within reach of the “majority”
customer who wants a “hand-selected” sense of quality and uniqueness. Nonetheless, as the
president and co-founder reflects, “The focus on operations and functionality was easy and natural for
1
Name of company changed to maintain confidentiality.
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an engineer like me, but understanding marketing required a sense of the abstract that I was not used
to.”
3. Simple Source Solutions
Simple Source Solutions 2 (SSS) was founded by three computer engineering graduates of Memorial
University of Newfoundland in early 2007. The company is a software developer of fun and original
games using advanced real-time technology, and its initial launch is a multi-player space shooter
game product that features a unique, immersive game-play experience based on animation and
simulation of physical motion. The company not only grew out of one of the founders’ undergraduate
capstone research projects, but a personal love of video games by all three founders who are highly
skilled computer engineers. Since 2008, SSS has been a Genesis Centre client, having its physical
location within Genesis Centre space and working closely with its business analysts and an appointed
advisory board. With little entrepreneurial experience to start with, the three founders have benefited
from the incubation centre’s provision of external expertise and gained vital knowledge on running a
business. SSS has found that being part of the Genesis Centre has put them essentially at the hub of
a very well-connected network of fellow technology-based entrepreneurs. As such, they have added a
business developer and a 3-D graphic artist to their executive team and launched the beta version of
their first product. In the realm of receiving and asking for trusted advice among entrepreneurs, there
is significant discussion suggesting that if entrepreneurs of small innovation-based firms can
commercialize new products with relatively few obstacles, then they will tend to downgrade the value
of having external advisors (Mazzarol and Reboud, 2006). Instead, the entrepreneurs would place
greater importance on their own attitudes, orientation, and intuition towards the innovation and on the
views and feedback from their leading customers. As a result, less emphasis is placed on the value of
“best practices”, expert knowledge from the field, and identifying and garnering feedback from other
stakeholders. In this case, however, it is seen that while the three engineers-turned-entrepreneurs are
confident, and desire to bank on their technical skills, they are also approach the process of starting a
venture with a practical, engineering perspective:
On Risk Management: “As a small start-up preparing to release our first product, this is the most
crucial time to have all the help we can get. Our team is discovering the many aspects of running
a business and selling a product for the first time. Being watched and guided by others who have
been through the process before helps us avoid many pitfalls and dangers we would otherwise
have to learn from the hard way.”
On Following ‘Best Practices”: “The board members provide both inspiration and security. As a
new entrepreneur, it is important to see the success of others so you don't get lost or discouraged
in the day-to-day grind. Additionally, having your important decisions reviewed by others with
such extensive experience is comforting, since you know they won't let you make any major
mistakes.”
On Recognizing and Using Others’ Expertise: “The most important lesson I have learned from the
board so far is that while entrepreneurs are often required to wear many hats, they can't wear
them all at the same time. Running a business takes a broad range skill sets, and you can't do it
all yourself: you need the help of other people. A carpenter can construct a house, and probably
even has a working knowledge of how to wire the home for electricity. Given enough time, the
carpenter could probably do both tasks, but since the carpenter's specialty is building, the wiring
will take much longer than it would be for an electrician, and it can not be done in parallel with the
construction since it is done by a single person. Seeking the expertise and assistance of others
who are familiar with a particular field is essential in completing a job in a timely manner.” ---SSS
founder
4. Analysis
Two out of the three SSS founders also enrolled in a new engineering elective offered to
upperclassmen entitled “Business Planning and Strategy in an Entrepreneurial Environment”. The
course focused on strategic planning and management of technology-driven enterprises in the early
stages of development and provided an overview of the functional activities of a new venture, such as
operations, accounting, marketing, and organizational behavior. A key objective of the course was to
focus on the engineer as an entrepreneur, such that engineering students are encouraged to combine
and apply their creativity and technical knowledge to developing a business strategy for a technology-
based idea. They were also encouraged to practice their leadership and teamwork skills through in-
2
Name of company changed to maintain confidentiality.
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class projects and short-term group projects. The course utilized case studies, lectures, videos, and
discussion of current news topics to expose students to a spectrum of issues and challenges faced in
a real entrepreneurial environment. Presentations by local entrepreneurs allowed the students to
dialogue and network with these guest lecturers, who were also key players in the local
entrepreneurial community. Students working in small teams were required to develop a feasibility
study of their own business idea as a term project for the course. A survey was conducted of the
students in this course, as well as of a senior design project course in Electrical and Computer
Engineering, over a period of three years. The survey was given at the beginning of the course to
assess the students’ initial thoughts on entrepreneurship and asked three questions:
(1) Define what “entrepreneurship” means to you?
(2) Why do you think people become entrepreneurs?
(3) What entrepreneurial qualities do you think you possess?
A total of 120 responses were received. It should also be noted that 100% of the engineering students
surveyed responded “yes” to the question, “do you believe that engineers would make good
entrepreneurs?”, and eighty percent (80%) surveyed replied “yes” to “have you ever thought of
starting your own business?” Figure 1 shows the results to the first question, indicating that the
primary definition for “entrepreneurship” as defined by the engineering students surveyed was taking
advantage of “an opportunity to bring your own idea to market”.
Figure 1: Definition of entrepreneurship

Figure 2 shows the results of the second question, indicating that the two primary reasons people
become entrepreneurs is to (1) be their own boss and (2) achieve financial gains. This result is
interesting as although the first reason is validated by other research findings, statistical data has
shown that on average, an entrepreneur who continues a business for 10 years makes sixty-five
percent (65%) of the value of the real earnings that he or she would have made in a previous
employment situation, including stock ownership returns on the new company (Barringer and Ireland,
2008).
Figure 3 shows the responses for the third question, indicating that the engineering students valued
their ability to interact and work in teams as the primary attribute of entrepreneurial ability. It is
interesting to note also that attributes such as being hard-working, having the ability to work
independently, the ability to think practically and rationally, and the ability to think creatively follow. It
can be argued that these characteristics also reflect the qualities of an engineer, especially in that
thinking rationally and creatively are balanced. The attributes of being an inventor and having a sense
of what people want, i.e. “market sense” are suggestive of both the technology-push and market-pull
strategies in the commercialization of innovative products. As a few respondents observed,
“I think that I do a good job of analyzing situations critically, and therefore may excel in
the identification of potential opportunities in a given market. These opportunities may not
be obvious to some.”
“I like challenges; I am able to work independently as well as within a group. I am willing
to put in extra work to be my own boss.”
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Amy Hsiao
“I am interested in and observant of the world around me. Entrepreneurs often see a
need for a product or a niche market opportunity before anyone else, and use this to
capitalize on an opportunity for a business venture.”
Figure 2: Reasons for becoming an entrepreneur

These responses imply that by using well-trained technical skills to create new processes, new
materials, new applications, or new improvements to everyday life, the engineer-turned-entrepreneur
could reach a technology strategy that would create, capture and deliver perceived value to the
customer or end-user.
Figure 3: What entrepreneurial qualities do you possess?

5. Discussion
From the survey results, it can be proposed that potential product or business opportunities may be
identified and pursued uniquely by engineers-turned-entrepreneurs, especially those that bring
inventions and research ideas to market as profitable products. The caveat for engineers-turned-
entrepreneurs, as depicted in both case vignettes, is to recognize the perceived trade-offs that
technological innovation demands. Table 1 presents a few examples of these trade-offs.
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Table 1: Technology-push entrepreneurship and perceived trade-offs
Innovation What Engineer-Entrepreneurs What Consumers Think Will be Lost or

Think Will Be Gained Traded
Electric cars Reduced pollution and Ease of refueling and long-distance

dependence on oil travel
E-books Portability and ease of use The cozy reading experience (flipping
pages, etc.)
Screw-top wine bottles Recyclable materials and better The elegance of the experience,
preservation of wine historical use of cork
Movie Rentals by Mail/Online Slim-lined distribution network of Loss of spontaneity, e-commerce

wide selection using IT security, identity protection
This perceived trade-off may lead to a multiplied effect, such that a conflict arises between what
consumers are not willing to part with and what entrepreneurs view as new products vital to a better
life experience. When consumers overweigh the incumbent product’s benefits by a factor of three and
innovators-entrepreneurs overweigh the new product’s benefits by three, a nine-times (9x) effect is
created (Gourville, 2006). This is because consumers are usually skeptical about a new product’s
performance, unable to see the need for it, satisfied with the existing product, and quick to see what
they already own as the status quo. Thus a market-pull strategy that creates, captures, and delivers
value will be a “smash hit” only when a significant product change occurs (i.e. technological
innovation created by engineer-entrepreneurs) that requires little to no change in habit or behavior for
the consumer. Assuming a strategy of technology-push, in which the engineer-entrepreneur is
convinced the innovative product works and has an application that would replace the existing product
and serve as a benchmark for future advancements, may result in a lost opportunity.
The existing research on individual and environmental determinants of entrepreneurship focuses on

social and economic reasons, many of which are applicable to NL and at MUN. These reasons
include employment opportunities, overcoming a sense of being marginalized by the majority of
society, industry characteristics, and geographic setting (Cuervo, 2005). The emergence of the
university technology transfer phenomenon, the evolution of the role of the university in governmental
innovation systems, and the role of the university in economic development has caused a growth in
research on the purpose, nature, and effects of university participation in community outreach,
engineering education, and entrepreneurial innovation. The term “entrepreneurial university” was first
coined by Etzkowitz in 1998 to describe the case of MIT as the reference example and other
universities that have proven critical to regional economic development (Yusof and Jain, 2010).
There is extensive research literature on the characteristics, information processing habits, and
learning styles of engineers. Using Kolb’s cycle of learning, the primary information processing styles
of engineers are abstract conceptualization and active experimentation. That is, engineers tend to be
what Kolb categorizes as “convergers”, who like to consider practical application of ideas, enjoy
solving puzzles and answering specific questions, believe in a structured process in achieving the
“best solution or the “single right answer”, and are action- and design-oriented (Kolb, 1976). For the
engineer-turned-entrepreneur, this can be seen in the NBC case vignette, in which believing a
manufacturing facility will be successful, gathering information that brewing and bottling beer would be
feasible, and pursuing the idea experimentally until it is brought to successful fruition. In the case of
SSS, the founders recognized their weakness of being comfortable only in active experimentation,
where they would constantly be in software development, so they welcomed the challenging
perspective that their advisory board offered in order to keep them progressing and in check. While
engineers are prone to evaluate situations and ready to offer decisions or opinions, Kolb suggests
that all four components, including concrete experience and reflective observation, should be used to
complement the engineer’s preferred learning styles of abstract conceptualization and active
experimentation, for the most enhanced information processing experience. Kolb suggests also that
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entrepreneurs exhibit active experimentation and concrete experience, by which they are
accommodating, more intuitive, and accept a trial-and-error approach. In both the case vignettes and
the survey responses, while “achieving a sense of accomplishment” and “putting plans into action”
appear as reasons for becoming an entrepreneur, “intuition” and “adaptable to change” are not
mentioned in any of the responses. On the other hand, engineers tend to be risk averse risk-takers,
such that if they are to adapt to change or to pursue a challenge, they will take the rational approach
of using “best practices” and knowledge gained from others’ experiences.
Strategic networking with other firms within a new venture’s industry can also enhance the
innovativeness of the firms (De Propis, 2000). A well-connected strategic support network could
enhance the new venture’s market position, help to defend against competitors, and enable the start-
up to secure a competitive strategy. However, despite the apparent benefits associated with
establishing a good strategic support network, it is common for entrepreneurs to not have an external
network of advisors or a process to evaluate external political, economic, technological, regulatory,
and social (PESTEL) factors. Thus, entrepreneurs often learn by trial and error instead of via “best
practices” (Jay and Schaper, 2003). The Genesis Centre at MUN has graduated over 20 new
technology-based ventures over the last 10 years, 80% of which have been founded by a student or
faculty member at MUN, and all of which have benefited from a well-connected network. Thus, the
incubation centre has facilitated engineers-turned-entrepreneurs not to have to “go it alone” and
provided them an opportunity to position themselves as larger than they are, within the network, in the
early stages of their venture’s development.
6. Conclusion
The knowledge environment that engineers-turned-entrepreneurs typically incubate in is highly
conducive to the success of their new ventures. Engineers tend to work in conditions that encourage
and facilitate innovation, creativity, and individual and corporate entrepreneurship. By working within
incubation centres, universities, R&D organizations, and governmental agencies, technology-based
innovation can be better matched with customer-driven opportunities. By becoming entrepreneurs,
engineers typically achieve a better understanding of market demand and customer fit as they see
their invention start from idea to finished product. As the president of NBC noted, it is an iterative
process. As the founder of SSS noted,
“When discussing the importance of getting customer feedback, an advisor reminded us
that we are not developing a product for ourselves; we are developing it for our
customers. If the product is not what the customer wants, then it's not very good, and it's
not going to sell. The board eloquently summed it up by saying, “We're developing the
World's game,” meaning the customers should be the ones who decide what the game is
and what it isn't. Our ideas are a framework, but the customers should fill in the blanks.”
Market
Product
Figure 4: Identifying entrepreneurial characteristics and opportunities in engineer-led new ventures

Figure 4 shows that the unique perspective that engineers bring to entrepreneurship include the
personal (engineering and entrepreneurial) qualities of the engineer-turned-entrepreneur, the
technical approach he or she uses to gather information from external stakeholders and evaluate
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external factors, and the involvement of a “locus of innovation”. This paper demonstrates that this
perspective must be matched with an understanding of the market such that customer demand and
relationship management are utilized in order for opportunities to be fully realized. As shown from the
case vignettes and the survey responses, engineers can be successful in entrepreneurial
opportunities when they use their technical skills and when they can recognize that they require non-
technical skills that they do not yet possess.
References
Barringer, B.R. and Ireland, R.D. (2008) Entrepreneurship: Successfully Launching New ventures, 2nd Edition.
Pearson Prentice Hall: New Jersey.
Cuervo, A. (2005) “Individual and Environmental Determinants of Entrepreneurship,” International
Entrepreneurship and Management Journal, 1:293‐311.
DePropis, L. (2000) “Innovation and Inter-firm Cooperation: The Case of the West Midlands,” Economics,
Innovation and New Technology, 9, 421-446.
Etzkowitz, H. (2003) “Research Groups as ‘Quasi-Firms’: The Invention of the Entrepreneurial University,”
Research Policy, 32, 109-121.
Gourville, J. (2006) “Eager Sellers & Stony Buyers”, Harvard Business Review, 98-106.
Jay, L. and Schaper, M. (2003) “Which Advisers Do Micro-Firms Use? Some Australian Evidence,” Journal of
Small Business & Enterprise, 10(2), 136-143.
Kolb, D. (1976) “Management and the Learning Process,” California Management Review, XVII (3), 21-31.
Mazzarol, T. and Reboud, S. (2006) “The Strategic Decision Making of Entrepreneurs Within Small High
Innovator Firms,” International Entrepreneurship and Management Journal, 2:261-280.
Yusof, M. and Jain, K.K. (2010) “Categories of University‐Level Entrepreneurship: A Literature Survey,”
International Entrepreneurship and Management Journal, Springer Science, Volume 6, Number 1, 81-96.
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Radical innovation versus transformative learning: a
Kuhnian reading.
Alexandros Kakouris1.2
1
Career Office, National and Kapodistrian University of Athens, Athens, Greece
2
Faculty of Informatics and Telecommunications, National and Kapodistrian
University of Athens, Athens, Greece
akakour@phys.uoa.gr
Abstract: It is widely accepted in literature that radical innovation challenges contemporary industries. Given the
spectacular scientific achievements of the twentieth century, the potential of radical innovation inspires
entrepreneurs in new product, services or processes development. Modern innovation has become more
complex since it embodies marketing and organizational innovations in its original technological content. Notably,
the definition of innovation has been broadened in the latest Oslo manual in order to meet and measure the way
that modern enterprises or individuals innovate. At the same time, innovative entrepreneurship education and
innovation management expands in both formal and informal learning. It is well documented by agencies in
governmental reports that the impact of entrepreneurial courses depends on new and innovative teaching
methods introduced in courses. Since attendees of such courses are have personal assumptions or beliefs about
the complex phenomenon of business venturing, transformative learning offers an efficient, yet poorly exploited,
approach towards introducing innovative entrepreneurship in classes.
The present paper aims to discuss the two different concepts of radical innovation and transformative learning
under the same Kuhnian perspective. We argue that despite their unrelated nature, both concepts involve a
Kuhnian core-process based on “discontinuities”, similar to epistemological paradigm shifts. Key similarities,
differences and difficulties are discussed while the innovator, or the innovating organization, is contrasted to the
educator that follows transformative methods. Furthermore, the relevance of different aspects or types of
innovation and those of entrepreneurial learning to radical innovation and transformative learning are examined.
Implications in entrepreneurship education of a possible common understanding are presented in order to
suggest embedment of educational elements in teaching that trigger transformations and thus, openness of
participants in entrepreneurial learning.
Keywords: radical innovation, transformative learning, paradigm shift, Kuhnian theory, entrepreneurial education
1. Introduction
Kuhn’s (1962) original work for the evolution of science through revolutions, elaborated in his book
entitled “The structure of scientific revolutions”, has been one of the most influential 20th–century
essays in history and philosophy of science. Kuhnian theory implies inevitable discontinuities, i.e.
revolutions, once anomalies appear in a paradigm, i.e. a consensual scientific perception, that lead to
a crisis resolvable only by adoption of a new paradigm. The paradigm shift cannot be a cumulative
process in its own time despite its usually gradual presentation in the post–revolution period. Early
Schumpeterian ideas on innovation, expressed more than thirty years earlier (Schumpeter 1934), are
described very much alike paradigm shifts. Such ventures, emerging from technological
breakthroughs, constitute radical innovations. Thus, radical innovation is often presented in Kuhnian
terms of paradigm shift in literature.
In the study of entrepreneurship, Cope and Watts (2000) explore the process of entrepreneurial
learning in personal and business development. The authors examined the outcomes of critical
events (or episodes) as powerful sources of learning experiences. The appearance of such episodes
in narratives has also been pointed out by Rae and Carswell (2000, 2001). Cope (2003, 2005)
discusses the meta–cognitive nature of learning that emanates from critical events since it affects
“habits of mind” or “beliefs/points of view”, both terms introduced by Mezirow (1978) in his adult
education theory of transformative learning. As an entrepreneur learns from experience (cf. Minniti &
Bygrave 2001, Politis 2005), critical events stimulate reflection, i.e. thinking on own thoughts, similar
to the double-loop procedure in organizational learning (Argyris and Schön 1978) and to the way that
practitioners operate and learn (Schön 1983). Thus, Cope and Watts (2000) suggest nature of critical
events be further studied and transformative learning be exploited in the study of entrepreneurship.
Meanwhile, diffusion of European entrepreneurship education, followed the Oslo agenda (2006),
encourages innovative teaching in the field. Corresponding courses are found interdisciplinary in
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almost 50 percent of European higher institutes. Most of them are short-term or parts of other courses
(European Commission 2008). Given the particularities of the subject (e.g. Fiet 2000, Pittaway and
Cope 2007), courses’ impact on graduates is closely related to innovative and effective teaching. For
a further development of this type of education, a necessity for trainers’ training employment has been
discussed in Kakouris (2007). Not limited to trainers, transformative learning methods may enrich the
experiential character of modules as they primarily focus on participants’ beliefs. For instance, Shane
(2008) addresses several such assumptions about entrepreneurship which contradict to facts or data.
Concerning Greek students, Agapitou et al. (2010) present empirical results on underlying beliefs
about entrepreneurship in the present volume. Expedient teaching should deal with attendees’ beliefs
and we argue that, to our knowledge, transformative learning has not been adequately exploited in
that direction so far.
The present conceptual article aims to juxtapose radical innovation and transformative learning from a
Kuhnian perspective. The Kuhnian character of the former was already mentioned while Mezirow
refers, in his introductory note of “Learning as transformation” (Mezirow and associates 2000), an
early influence from the concept of Kuhnian paradigm. Such a comparison especially aims to
contribute to a common comprehension and adoption of transformative learning in entrepreneurial
education. Furthermore, it attempts for a pursuit of radicalism in innovation as the recent meaning of
the term has been extended (OECD 2005) to increase its humanistic content compared to the
technological one.
2. Concepts of discontinuous innovation and learning
2.1 2.1 Radical innovation

Innovation as a means of economic development and growth appeared in the work of Schumpeter
(1934). The Schumpeterian innovation is radical since it displaces the market equilibrium under a
creative destruction mechanism. Radical innovation may also open new markets and is accompanied
by rapid economic growth. It was initially attributed to technology breakthroughs emerging from
applied scientific research in accordance to a linear model of innovation (Godin 2006). Radical
innovation is unpredictable and exhibits an inherent “human side” (O'Connor and McDermott 2004)
that concerns either the innovator, i.e. the founder of a new firm, or potential employees in large firms
that adopt innovation management. Innovation, either product/service or process, has been
traditionally assumed as a matter of technology. However, the latest definition in the Oslo manual
(OECD 2005) incorporates marketing innovation and organizational innovation; both closely related to
human capital. Therefore, more practically and especially for measurement purposes, radical
innovation can be defined as: “a project with the potential to produce one or more of the following: an
entirely new set of performance features; improvements in known performance features of five times
or greater; or a significant (30 percent or greater) reduction in cost” (Leifer et al. 2000: 5). Compared
th
to the outcomes of the great inventions of 20 century, there is need for radical innovations in
contemporary business venturing. However, large companies exhibit resistance in following proper
opportunities due to the high risk associated with radical innovation.
Limiting the discussion to technological innovation, radical innovation is also referred as

“discontinuous” contrary to the incremental one. Similar to its progenitor (i.e. scientific research)
discontinuities in technology appear during scientific revolutions as described by Kuhn (1962). A
customary schematic view of a radical innovation is illustrated in Figure 1. The grey plot shows the
evolvement of technology in accordance to the Kuhnian structure of scientific revolutions (SSR).
“Normal” technology (coming from the Kuhnian normal science) evolves incrementally before and
after a crisis period where the old paradigm is suddenly replaced by the new one, denoted by the
“jump” in the diagram. The black plot illustrates the curve of a product that is based on the specific
technology. Product curves (1 and 2) are sigmoid due to diffusion of innovation (Rogers 1962). In the
appearance of the new technology (i.e. the new paradigm) the product manufacturer has to consider
the adoption of radical innovation. Such an adoption will change both the technology of the product
and the business model of the firm. However, an adherence in the old technology will gradually lead
to a sales decay, i.e. curve 1 will continue in dotted curve 3. Under the adoption of innovation, curve 2
initiates a new business cycle for the advanced product. The way that curves 1 and 2 coexist during
the “technology–shift” period is not unique. It depends on the decisions of the manufacturing firm or its
competitors who will exploit the new technology. Evidently, the transition from curve 1 to 2 is
considered discontinuous. Innovation during phases 1 and 2 is incremental.
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Alexandros Kakouris
Figure 1: A schematic representation of radical innovation.
Critique on the emergence of radical innovation in the market and the feasibility of a plot similar to
Figure 1, has been provided by Rosenberg (1976). The author argues that there is lack of examples
of radical Schumpeterian innovation since new technologies enter the market gradually due to
commercialization procedures. He also notes that even for exceptionally radical new combinations,
the propagation in market demands progressive modification and adaptation to suit submarkets.
Studying the innovation process in microcomputers, Bhidé (2000) provides additional evidence for
gradual deployment of innovation. The author explains the way that small and large firms innovate in
a complementary way. Initially, the innovation originates stochastic with many small innovative firms
competing in the new technology. In a later stage, as some firms grow or as large firms adopt the
innovation it becomes strategic focusing on the long–term outcomes. Because large firms avoid
“cannibalizing” their existing customers they insert new technologies gradually in the market and in a
more predictable way. Inadequate financing of a new technology can also be another restrictive factor
for its fast diffusion in the market. Thus, the emergence of discontinuous innovation is questionable in
accordance to market observations. Kuhn (1962: 138) addresses the historical presentation of a
paradigm shift in the post–revolution phase. The argument pertains to the rewriting of history by
authorities in a linear manner which follows the pedagogy of textbooks. He notably refers in chapter
XI of his essay entitled “The invisibility of revolutions”: “… No wonder that textbooks and the historical
tradition they imply have to be rewritten after each scientific revolution. And no wondered that, as they
are rewritten, science once again comes to seem largely cumulative...”. In conclusion, radical
innovation in technological context can be considered inherently discontinuous, however, it needs
thorough research to be identified.
2.2 Transformative learning (Mezirow 1978, 1991, 2000)

The way that an entity (person or organization) learns is far from being clear. Due to a holistic
consideration of learning, a human response on facts and external evidence is more educationally
consistent and reliable than the organizational one which may suffer from misconceptions of internal
roles of groups, poor collaboration, deficient communication, etc. But even ordinary learning can be
either formative or transformative. The former is considered continuous (incremental) coming from
formal sources in contrast to the latter that includes “discontinuities” during critical events or
“episodes”. In adulthood, the person possesses an established frame of reference that not only
includes knowledge but also beliefs (or assumptions), values, attitudes and feelings. Due to his tend
for self-awareness and efficient response in problem-solving, the adult person is able to (re)consider
his own beliefs critically; a process known as critical self-reflection. Mezirow introduced transformative
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learning in a constructivist ground, i.e. learning corresponds with meaning–making of an individual (for
reviews see Taylor 2007, Kitchenham 2008). He suggests that a frame of reference includes both
“habits of mind” (meaning–making) and “points of view” (beliefs). From the view of psychology, Kegan
(2000) discusses Mezirow’s transformation as an epistemological change. The frame of reference that
undergoes transformation not only changes the formation of meaning but also reforms the meaning–
forming. The author concludes that the later meta–process may be further viewed under the
constructive developmental theory. Apparently, transformative learning is a higher order process to be
further deployed.
The question we raise in the present work is “how consistent with the pattern of Figure 1 is
transformative learning?”. Transformation begins with a personal “disordering dilemma” which is an
unstructured event dominated by emotions. Such events, often traumatic, were described by Cope
and Watts (2000) for the entrepreneurs they interviewed. The dichotomy that a person confronts
during critical events echoes the interpretation of Figure 1. The transition from one frame of reference
to another is not at all an incremental process since the new frame is incompatible to its pre–existing
one. Transformation is also an irreversible process that dramatically changes the inherent meaning–
structure (the “epistemology”) of the person accompanied with large scale changes in his behavior
and motivation. Besides, a mandatory and also confirmatory consequence of a transformation is
action undertaking, i.e. transformative learning is not a passive process. However, it would be
interesting to examine how people describe such transformations, or critical events, after a period. It is
possible for them to eliminate annoying details from their memories in a way similar to Kuhn’s
description for post-revolution narrations of paradigm shifts. In such a case, the transformation may
look like cumulative in later stages, however, further research is needed towards that direction.
Conclusively, we consider transformative learning as a discontinuous process viable during
unstructured critical events.
In order to employ transformative learning educational techniques, a broad definition of

entrepreneurship is needed. It should not be considered as a mere business start-up but as an
individual’s mindset able to overcome uncertainties, cope with fear factor and creatively transform
opportunities it into promising enterprises. Hence, innovative entrepreneurship is a field that can be
facilitated by transformative learning.
3. Innovation and learning under a Kuhnian framework

The brief presentation of radical innovation and transformative learning in the preceding section
revealed two certain commonalities between the two concepts: undertaking action (moving forward) to
the “unknown” and fear tolerance. Hence, resistance to such changes is always present, for various
specific reasons, and has been clearly annotated by Schumpeter, Kuhn and Mezirow. The inherent
irreversibility of both processes claims robust decision making and self–confidence related to the
individuals’ personal attributes and idiosyncrasies. Noteworthily, descriptions of scientific paradigm
shifts, radical innovations and transformative learning focus on human factor. Successful innovators
become famous and role models whilst the situation in innovating organizations is more complicated.
As a corollary to the analysis so far, the Kuhnian core of radical innovation and transformative
learning has been disclosed. A metaphorical match of Kuhnian paradigm with technology and frame
of reference enables the common juxtaposition of five phases, shown in Table 1, in which each
individual process can be decomposed.
The pre–paradigm phase in Kuhnian approach is dominated by competing, incomplete and

incompatible scientific theories with no general consensus. This phase can be parallelized with the
innovative business idea elaboration and learning in childhood respectively. The innovator gathers
information and data relative to a specific opportunity without a predominant decision about the
technology and business model he will use. Similarly, children learn from various formal sources of
authority without a fully developed and consistent set of beliefs, values and attitudes. As they grow to
adults, they shape own frames of reference and pursue formative learning. This is an incremental
process where meaning is formed under their habits of mind while their points of view reflect their own
assumptions. This is the second phase of Table 1 corresponding to Kuhnian scientific paradigm which
allows cumulative normal science to develop. In the same phase, innovation is incremental as shown
by curve (1) in Figure 1 and utilizes both a specific technology and a concrete business model for the
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innovating firm. A certain commonality during this phase is the clarity of paradigm / technology / frame
and the rigid rules that imposes on problem solving / business model / learning.
Table 1: Kuhnian juxtaposition of radical innovation and transformative learning
Phase Radical innovation Kuhnian theory of SSR Transformative learning

interpretation theory
I Business idea elaboration Pre-paradigm phase Learning in childhood
Old frame of reference

II Old technology and business Old paradigm phase – well established “habits of
model – normal science mind” and beliefs
– formative learning
III Old technology and business Crisis or “anomaly” phase Critical event or “episode”
model inefficiencies – unsolved problems – problematic situation
– emergence of new – appearance and – disordering dilemma
technology competition of new theories
IV Critical reflection and/or
Adoption of both: Paradigm shift self–reflection
– new technology and – Scientific revolution – transformation (reframing)
– new business model – transformative learning
V New technology and model New paradigm phase New frame of reference
– new business cycle – post revolution phase – formative learning
– new markets – normal science
According to Kuhn, a phase of crisis (III in Table 1) emerges when irresolvable problems stand for a
long time. In such a case the paradigm blurs, new competitive theories appear whilst the imposed
rules in problem solving loosen. Accordingly, a critical event creates a disordering dilemma when an
individual has to practically respond in a problematic situation. As meaning becomes less clear, a
possible solution requires holistic consideration of the underlying frame of reference. The same critical
phase for radical innovation pertains to its driver. The emergence of a new, incompatible and
advanced technology enforces existing firms to innovate. This is a supply-driven approach whilst a
demand-driven possibility is not ruled out whereas specific customer needs stand for long time
creating a promising potential market. A response to crisis (phase IV) comes through the paradigm
shift. The old paradigm is not rejected until replaced by the new one. The new paradigm is
incompatible with the previous, solves the standing problem(s) and poses novel predictions.
Discontinuity lies in phase (IV) in which cumulative progress arising from the old paradigm is not
possible. Kuhn describes the transition as a gestalt switch or as a Darwinian natural choice.
Transformative learning also refers to phase (IV). The individual employs critical self-reflection,
transforms his frame of reference and proceeds to action through the new meaning that emerges from
his transformed frame. Solution to the problematic situation that created the crisis is then possible
through reframing. Finally, the adoption of radical innovation proceeds in a similar manner. Such an
adoption demands simultaneous alteration of technology and business model of the enterprise.
Evidently, it is a costly and uncertain procedure that probably inspires individual entrepreneurs but
also puzzles large companies.
Finally, phase (V) pertains to the post–revolution situation which is analogous to phase (II). Normal
science proceeds under the new paradigm, formative learning evolves in accordance to the
transformed frame of reference and the innovative firm enters a new business cycle provoking the
existing and possible new markets. A further discussion may concern the remark of Kuhn that “…
Revolution concerns those who are affected; outsiders see it as a normal developmental process…”
and study the way that innovators or adult learners present their past experience about the phase of
crisis. This may lead to a better identification, isolation and quantification of such phenomena.
4. Conclusions
Present work discussed the different but “Kuhnianly” correspondent concepts of radical innovation
and transformative learning. Under a metaphorical matching of technology – paradigm – frame of
reference, five discrete phases of radical innovation – scientific – learning evolution were illustrated in
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common. This is not a new result since technology results from applied scientific research (see for
instance Wonglimpiyarat 2010) whilst transformative learning theory has been influenced in its early
stage by the Kuhnian perspective (Mezirow and associates 2000, Kitchenham 2008). However, the
present pattern may facilitate both educators and practitioners to envisage either advanced learning
methods or contemporary topics to be taught in order to enhance innovative entrepreneurship
education.
In the study of entrepreneurship, Cope (2005) suggests the adoption of a “learning lens” is needed.
Such a “lens” needs to include the theory of transformative learning since critical events of
entrepreneurs constitute particularly rich sources for experiential learning. The present approach aims
to intimate this type of learning in an articulate way to researchers familiar to innovation and science.
Furthermore, the concept of innovation (OECD 2005) has become more humanistic including its
marketing and organizational sub–types. Thus, radical or discontinuous innovation has to be
reconsidered in a less technological context. But even discussed as pure technological, radical
innovation may remain obscure for a series of reasons (cf. Bhidé 2000) that are beyond the scope of
this article. Thus, innovation measurements have become more complicated and need clarifying
definitions and rigorous research in order to be accurate. We believe that the present work contributes
in this direction.
Finally, innovative entrepreneurship education is based on experiential learning (Kolb 1984). Relevant
courses exploit learning by doing focused on business planning (e.g. Garavan and O’Cinneide
1994a,b, Hynes 1996, Honig, 2004, Rasmussen and Sørheim 2006, Smith et al. 2006).
Transformative learning offers techniques that can enrich critical reflection and deal with socio–
cultural beliefs or assumptions of graduates in order to advance the content and the impact of the
relevant, short–term courses. Such techniques are poorly exploited so far and they will be especially
important in the provision of entrepreneurial training through lifelong learning.
Acknowledgements
This work was financially supported by the Greek Ministry of Education and Religious Affairs through
the “Education and Lifelong Learning” programme.
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The use of Interactive new Media art in Education:
Crossings
Eva Kekou
Panteion University, Athens Greece
ekekou@syros.aegean.gr
Abstract: Interactive media facilitates communication and transmission of information between human and
computer. Interactivity plays an important role as it changes passive viewer into an active one. Nowadays,
interactive media are used in education because they help student become more active and critical. Interactive
media have reshaped the traditional relationship between teacher-learner and the way they interact with each
other. As classroom needs, change rapidly, the demand that new teaching methods are used, urges. Through
interactive media projects the student has the opportunity to challenge oneself in a diverse, complex, multicultural
environment. At the same time, the student/participant can get familiar with the new technologies and think about
diverse topics through an innovative approach In this context, interactive media art projects can be used to
encourage students/participants/audience to express themselves about current issues, notions in an entertaining
way. Interactive media art projects are the output of multidisciplinary academic approach and they reflect the
complexity of the society we live in. The media art project ‘Crossings’ is chosen as an example of interactive work
which can be used in the education. ‘Crossings installation’ is an interactive educational tool for
people/students/participants of varying ages, teaching tolerance of others from different religious texts. The
interactive tool allows students to play a game exploring the relative similarities of sacred texts. Participants learn
by their own experience and can evaluate why they chose specific texts and how different religions relate to each
other. The project encourages people/students/ participants to interact, gives some information about religious
texts and makes people think about differences and conflicts. It can be the base for a discussion in a classroom
or an after workshop event at a museum. It also encourages further research and it suggests how to approach a
difficult topic like religion in a multi cultural and globalised world. The same concept can be used to engage
participants with a number of topics.
Keywords: interactive media, education, art
1. Introduction
Interactive media art changes the passive viewer into an active one. The individual is empowered to
intervene, like a participant in a computer game, altering actions. More recently, interactive technology
is being used as an educational tool expanding personal, cultural, and educational research.
Interactive schooling changes the relationship between pupil and teacher; it is a complex form of
human/computer interaction that encourages 'intelligent' and intellectual dialogues. Installation-based
art involves the spectator in various ways, allowing the participant mobility to navigate the
environment, sometimes interacting with smart texts and/or interfacing with visual input. In the case of
participatory art, an audience can influence the course of a performance, while Interactive art involves
the viewers as a medium to produce meaning in order to determine the outcome. Interactive art is
used in education as a means of expanding conceptual knowledge and it is widely used as a «hands
on approach».
Digital cultures are transforming the nature of research, communication and art, while they introduce
new ways of interactive education. New media and computer generated interactive teaching have
revolutionized the traditional relationship between teacher-learner and the way they interact with each
other. The teacher is no longer a conveyor of knowledge, but rather a coordinator, moderator and
partner, who can advise about using new software. They can also discover how cultural perceptions
are formed by the overt and covert assimilation of interpreted data, learning with a self-reflective
learning process, allowing information to be simultaneously compared and analyzed.
In order to explore how new media applications are used in education to promote cultural studies, we
will use the example of the Crossings interactive art installation. Furthermore we aim to explore in this
paper how audience responds to such applications and how the use can contribute to education. The
Crossings installation is an interactive educational tool for people/students of varying ages, teaching
tolerance of others from different religious backgrounds. The interactive tool allows students to play a
game exploring the relative similarities of sacred texts. The custom software incorporates a database
of over 4,500 keyword frequency tagged texts. Projected words (topics) are selected to explore and
moved along lines on a whiteboard wall with an infrared wand, revealing multi-perspective non-trivial
relative searches of scripture content. The installation is achieved through the use of a Mac Mini
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computer with two video outputs, two video projectors, and an infrared tracking camera that activates
participant selections on a whiteboard wall.
http://nyartprojects.com/Crossings_video2/N_Yankowitz_CROSSINGS_Video2_2009.mov
2. Technological evolution and its contribution to educational revolution
There have been many technological dawns in the last 30 years, during which the desktop computer
and the Internet have been developed; but there have been similar dawns throughout the 20th
Century. These technological changes have also affected the domain of education. In fact, there is
debate in the instructional design literature about whether there are any unique attributes of media
that can promote improved learning.
«Rapid advances in information technology and easy access to the Internet are reshaping educational
institutions by providing new learning environments and new ways to teach Web based technologies,
modes that are not possible in a face-to-face situation».
(http://home.ubalt.edu/ntsbarsh/interactive.htm). Modern, Web-based learning provides the means for
fundamentally changing the way in which instruction is delivered to students: animation, video,
narrative and written text.
There has been a recognized fact that the need for educational new media has also facilitated new
possibilities in learning and have contributed in making the learner/audience more involving and
active. Furthermore, new media has realized interactivity between instructor and learning subject. It
enables distance learning, stimulates critical thinking while the virtual class learning maximizes
participation and web based technology can be used in a more interactive way by the instructor.
3. Theories of learning and everyday practices of learning
3.1 How do students learn at their best?

Social constructivism views each learner as a unique individual with unique needs and backgrounds.
The learner is also seen as complex and multidimensional. Social constructivism not only
acknowledges the uniqueness and complexity of the learner, but actually encourages, utilizes and
rewards it as an integral part of the learning process (Wertsch,1997).The interactive media education,
as stated by Von Glasersfeld (1989) emphasizes that learners construct their own understanding and
that they do not simply mirror and reflect what they read. Learners look for meaning and will try to find
regularity and order in the events of the world, even in the absence of full or complete information.
According to Von Glasersfeld (1989), sustaining motivation to learn is strongly dependent on the
learner’s confidence in his or her potential for learning. These feelings of competence and belief in
potential to solve new problems are derived from first-hand experience and mastery of problems in
the past and are much more powerful than any external acknowledgment and motivation
(Prawat.1994). This links up with Vygotsky’s "zone of proximal learning" (Vygotsky.1978) where
learners are challenged within close proximity to, yet slightly above, their current level of development.
According to the social constructivist approach, instructors have to adapt to the role of facilitators and
not teachers (Bauersfeld.1995). The emphasis thus turns away from the instructor and the content
and towards the learner (Gamoran.1998). A hands on theory of learning is established by interactive
media. Vygotsky (1978) further claimed that instruction is good only when it proceeds ahead of
development. Then it awakens and rouses to life an entire set of functions which are in the stage of
maturing, which lie in the zone of proximal development. It is in this way that instruction plays an
extremely important role in development.
Some constructivists argue that "learning by doing" enhances learning. Critics of this instructional
strategy argue that little empirical evidence exists to support this statement, given novice learners
(Kirschner.2006). Sweller and his colleagues argue that novices do not possess the underlying mental
models, or "schemas" necessary for "learning by doing" (Sweller. 1988). Mayer (2004) argues that not
all teaching techniques based on constructivism are efficient or effective for all learners. He describes
this inappropriate use of constructivism as the "constructivist teaching fallacy".
In fact, there are many pedagogies that leverage constructivist theory. Most approaches that have
grown from constructivism suggest that learning is accomplished best using a hands-on approach.
Learners learn by experimentation and not by being told what will happen. They are left to make their
own inferences, discoveries and conclusions. It also emphasizes that learning is not an "all or nothing"
process but that students learn the new information that is presented to them by building upon
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knowledge that they already possess. Teachers will find that since the students build upon already
existing knowledge, when they are called upon to retrieve the new information, they may make errors.
This is known as “reconstruction error”: when we fill in the gaps of our understanding with logical,
though incorrect thoughts.(Wertsch.1997)
Social constructivism encourages the learner to arrive at his or her version of the truth, influenced by
his or her background, culture or embedded worldview. Historical developments and symbol systems
such as language, logic, and mathematical systems, are inherited to the learner as a member of a
particular culture and these are learned throughout the learner's life. This also stresses the
importance of the nature of the learner's social interaction with knowledgeable members of the
society. Without the social interaction with other more knowledgeable people, it is impossible to
acquire social meaning of important symbol systems and learn how to utilize them. From the social
constructivist viewpoint, it is thus important to take into account the background and culture of the
learner throughout the learning process, as this background also helps to shape the knowledge and
truth that the learner creates, discovers and attains in the learning process (Wertsch.1997).
Although all children follow the cognitive development stages as these are described by Piaget, the
age that students reach each stage varies substantially. Individual learning has always been
considered an important requirement for education. While nowadays some new parameters were
added, students should acquire collaborative and self-learning abilities. The various advantages of
using ICT in education have been explained by Garyfallidou and Ioannidis. Seen from a technical
point of view, «ICT education starts being implemented with a sequence of well-designed web-pages
or some lines of code. Seen from an educational viewpoint, ICT education is a rapidly changing field
because technology changes extremely fast and this results to changes in ICT education.»
(Christodoulou.2008).Research undertaken over a decade ago should now be considered obsolete
because new computers are so much different from previous ones. For example screen analysis,
quicker processors, much better internet connection speed, e-learning environments and now
inexpensive haptic devices and streaming media delivery.
3.2 Constructionism theory and its application through new technology

Constructionism is an approach to learning based on constructivism developed by Seymour Papert
and his colleagues at MIT in Cambridge, Massachusetts. Papert had worked with Piaget at the latter's
Institute in Geneva. He promoted Piaget’s theory and he relates educational process with new
technology and media. Emphasis is put on learning rather on teaching. The notion is based on words
construct and constructionism which both hint at two facets: one playful and one serious. Paper
eventually named the theory constructionism (Papert.1970). It included everything associated with
Piaget's constructivism, but went beyond it to assert that constructivist learning happens especially
well when people are engaged in constructing a product, something external to themselves such as a
sand castle, a machine, a computer program or a book. This approach is greatly facilitated by the
ready availability of powerful constructing applications on personal computers (Papert.1991).
Promoters of the use of computers in education see an increasing need for students to develop skills
in Multimedia literacy.
3.3 The use of new media in learning

The enterprise culture is founded on the premise that entrepreneurship is the engine that drives the
economy. One aspect of this cultural pervasion is the increase in the numbers of educational
institutions teaching entrepreneurship courses. In this new area of entrepreneurship and innovation
theory, a number of projects which apply constructionism theory and encourage learning through new
technologies are promoted.
The use of new media makes the pupils more active – also in thinking.says Jutta Heimann-Feldhoff,
who introduced new media and computer-generated interactive teaching at the Bornheim Europa
School in 2005, changing its educational scheme. The prevailing concept, provided by Jutta Heimann-
Feldhoff’s work re: interactive schooling, promulgates that pupil and teacher enter a completely new
working relationship with "interactive schooling": one with as little chalk-and-talk teaching as possible
and with lasting learning success. The teacher is no longer a conveyor of knowledge, but rather a
coordinator, moderator and partner, who can give the pupil a good tip about how to use new software
(http://www.goethe.de/wis/fut/bko/en3491216.htm). New media are more intensively used in
education as means of introducing new ideas in a pluralistic world.
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4. Crossings
The interactive media art project Crossings is a piece of work which can be also used for educational
purposes. It engages it audiences with issues of interaction, participation and critical thinking. It was
selected to show case how innovative work can be used to encourage people to become engaged
with new issues of the modern world such as: globalisation, religious conflicts and a multicultural
society. It was also selected as it embraces hands on approach and uses new technology as a link to
traditional engagement with religious texts in a new approach.
(http://www.nyartprojects.com/crossings/#Project_description )
The Crossings installation is an interactive educational tool for people/students of varying ages,
teaching tolerance of others from different religious backgrounds. The interactive tool allows students
to play a game exploring the relative similarities of sacred texts. The classroom installation is
achieved through the use of a MacMini computer with two video outputs, two video projectors and an
infrared tracking camera that activates participant selections on a whiteboard wall. Students can also
discover how cultural perceptions are formed by overt and covert assimilation of interpreted data.
They ultimately learn about tolerance/intolerance of difference. The idea is being created at the E
mobile art project which took place in Athens (2008), Rovaniemi (2008) and Vienna (2009) and it was
initiated by Nina Yankowitz. Barry Holden, Pia Tikka, Peter Koger and Mauri Kaipainen
(http://www.media.uoa.gr/~charitos/emobilart/exhibition_gr/crossings.html) The piece has been
exhibited at Thessaloniki, Biennale (May 2009).
(http://www.thessalonikibiennale.gr/artistdtl.php?lang=el&art_id=540&byear=2009). This concept can
be expanded to access myriad multi-dimensional databases for exploring a variety of subjects.
5. Project description
A projection of an abstracted multi faith cathedral rotates slowly on an exterior entry wall while people
enter a virtual religious space. Visitors walk on a mosaic floor projection of patterns used in cathedrals
and temples around the globe and hear scriptures being read in various languages over a sound track
of electronically altered voices. Participants are instructed to choose words (topics) to explore with an
infrared wand. They move and place words along lines to adjust relative importance that the Old
Testament, New Testament, Buddhist texts, Hindu texts and the Quran articulate. Simultaneously,
texts are observed on the adjacent wall, displaying respective results and onto the space search
engine is discovering in the database. Afterwards, participants can save and retrieve their text
selections to learn from which religions their colour-coded texts originated. They can choose to print
and autograph their se-lections by clicking on the save button to receive a code number for revealing
some text results at a dedicated web site. (interview with the artist Nina Yankowitz, 20/05/2009).
6. Project interactivity
A database of over 4,500 keyword frequency tagged texts is incorporated within the custom designed
software. Participants are invited to prioritize dimensions of scripture content and instructed to select
(words) topics to explore with an infrared wand. They slide them along lines on a whiteboard wall,
leaving each along six horizontal lines at location(s), assigning more or less weight to selected topics.
For example, extreme left (0%) to extreme right (100%). As words are moving, the onto space multi-
perspective search engine is simultaneously displaying relative importance scriptures provide,
deriving from vertically searching (e.g. bottom to top) word placements. The searches are non-trivial
data because every change to the positioning of words immediately reflects a new order of
perspectives. The installation is achieved through the use of a Mac Minicomputer with two video
outputs, two video projectors and an infrared tracking camera that activates participants selections on
a whiteboard wall (notes from the artist 20/05/2009). This artistic project collects different religious
texts without questioning them but making the viewer participant make a choice of texts who on some
criterion; random, subconscious or reasoning, will question his choices and will think further about the
texts and choices he made. This piece is transmitting issues of a globalised world where religions and
different cultures and mentalities are called to co-habit and co-exist. Thus the work is political in terms
of trying to see the differences in the eye of positivism which views, despite the differences some
common viewpoints and philosophies and does not provide for answers but asks the participants to
become an active subject and challenge his/her own choices.
7. Relational theory
The piece has been linked with the theory of relational art. Relational arts claims itself taking its
theoretical horizon «the realm of human interactions and its social context’’ (Bourriaud. 2002). The
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piece can be viewed differently by participants from different cultural backgrounds and religions. Louis
Althussser takes as its «point of departure for the world contingency, which has no pre existing origin
or sense, nor reason which might allot it a purpose» (Bourriaud. 2002). In a way, «the world and its
interpretation is a forever re-enacted game, in relation to its function, in other words in relation to the
players and the system which they construct and criticize’ (Bourriaud. 2002). The world and its
interpretation is subject to the own experiences and human interrelations. Like any other social arena,
the art world is essentially realisational insofar as it presents a «system of differential positions»
through which it can be read. Pierre Bourdie regards the «art world as space of objective relations
between positions» (Bourriaud.2002). In other words, a microcosm defined by power plays and
struggles whereby producers strive to preserve or transform it. This is also the way that Crossings
look at religious texts, diversity and its interconnection.
8. Conclusion
The use of interactive media in education and specifically in the arts stimulates free thinking and
creativity while it encourages engagement with new technology. Interactivity is a notion widely
criticized in the art, as the context in which interaction between viewer, participant and the art are
constructed and to an extent give certain possibilities of interaction. In the above mentioned project
the notion of interactivity is not further challenged as it does not create an open ended relationship.
Texts are preselected it can therefore be appropriate as an educational tool for proper ages and
students. Crossings can be used at school or at a museum workshop for educational purposes. The
specific project suggests a way of approaching religion in a globalised and multicultural society The
same concept can be used to engage participants with other topics. As above theories have proved
out, hands on learning are more beneficial and involving. Participants learn by their own experience
and can evaluate why they chose specific texts and how different religions relate to each other.
Interactive media – taken the example of crossings – can be used to engage audience, participants
and learners with a number of topics. Furthermore different media art projects can be used for
different ages and ideas accordingly. They can easily promote ideas and issues in a globalised and
mobilized learning environment. Innovation is about applying ideas in life and promoting them
according to the social context and the frame where they are developed. Innovation is important in
education, especially in a world where the freedom of mind and ideas should be prerogative.
References
Bauersfeld H. (1995) Language games in the mathematics classroom. Their function and their effects In P. Cobb
& H. Bauersfled (Eds).The Emergence of Mathematical meanings: Interaction in the classroom cultures
(pp.176-180) Hildsack, Lawrence Erlkabaum
Bourriaud N. (2002) Relational art, les presses du reel, Paris.
Christodoulou D., Garyfallidou M., Ioannidis G.and Papatheodorou T.,(2008) “Interactive education based on
haptic technologies and educational technologies and educational testing of an innovative system»,
International Journal of Emerging Technologies in learning(iJet),Vol 3,(2). Pp12-14
Derry, S. (1999) A fish called peer learning: searching for common themes in A.N.O. Donnell &A. Kind (Eds)
Gamoran A., Secada ,.Marrett .A (1998) The organizational context of teaching and learning: Changing
theoretical perspectives in Halliman, M.T. (Eds) Handbook of Sociology of Education.
Glaserfeld Von E.. (1989) Cognition, construction of knowledge and teaching, Synthese 80(1). 121-140
Mayer, R. (2004). «Should there be a three strikes rule against pure discovery?» The case for guided methods of
instruction. American Psychologist, 59(1), pp.14-19
Papert S. (1971) Teaching children thinking,Cambridge, MA:MIT Artificial Intelligence Lab, Memo no247,:Logo
Memo(2),Massachusetts Institute of Technology.
Papert S. and Harel C. (1991) Situating constructionism, Ablex publishing Corporation, New York.
Prawat R. and Folden R. (1994) «Philosophical perspectives on constructivist news of learning.» Educational
Psychology, 29, pp. 37-48
Sweller J. (1998) «Cognitive architecture and instructional design». Educational Psychology Review (10) pp.251-
296
Vygotsky L. (1978) Interaction between Learning and development in Mind in Society (Trans. M. Cole)
Cambridge,MA. Harvard University
Wertsch J.(1997) Socio cultural Studies of Mind, Cambridge University Press
Kirscher, P. and Clark R. (2006) Why minimal guidance during instruction does not work: An analysis of the
failure of constructivism, discovery problem based, experiential and Inquiry based Teaching ,Educational
Psychologist 41(2),pp.75-77
http://home.ubalt.edu/ntsbarsh/interactive.htm (accessed 22/3/10)
http://www.goethe.de/wis/fut/bko/en3491216.htm (accessed 22/3/2010)
http://www.media.uoa.gr/~charitos/emobilart/exhibition_gr/crossings.html (accessed 22/3/2010)
http://www.goethe.de/wis/fut/bko/en3491216.htm (accesssed 25/03./2010)
http://www.nyartprojects.com/crossings/#Project_description (accessed 30/03/2010)
310
Innovation, Technology and Expression: Audience and
Media Art Practices-The Example of the Vienna
Underground/Third Woman Project
Eva Kekou1 and Martin Rieser2
1
Panteion University, Athens, Greece
2
De Montfort University, Leicester, UK
ekekou@syros.aegean.gr
mrieser@dmu.ac.uk
Abstract: This paper examines the implications for audience participation in increasingly complex art and
technology collaborations. Three artist/scientist modes of engagement are outlined: Interactivity, interdisciplinary
collaboration and new modes engagement. The development of audience engagement is also described and
deconstructed, using a recent example of cross-disciplinary art practice mixing genres and working over national
boundaries, as part of the EmobilArt workshop.
Keywords: interactivity, media art, collaboration, audience, innovation
1. Introduction
Since the mid-1960s, a new movement towards collaboration between art and technology has been
growing all over the world, in a strikingly simultaneous fashion. From the 1970s through to the 1980s,
this movement gradually shifted into the digital media arena, due to the huge expansion in computer
technology. Since then, its major creative trend - enhancing the collaboration between art, science,
and technology - has become even stronger. It has appealed powerfully to society, in the context of a
globalized environment, as a considerable form of cultural contribution to art, in an age of mobility and
collaboration.
Since the beginning of the 1980s, the introduction of cheap and effective digital media technology has
given us the potential to make this integration feasible. By using such media technology as a bridging
tool, we now have new opportunities to make the collaboration between art and science easier. For
these reasons, particularly over the past 20 years, ambitious artists and engineers, interested in
artistic expression, have started to create innovative artistic works based on such integration. Radical
new forms of media art have been recently created, particularly by exploiting the unique character of
digital media, which spans traditional art genres or categories. Given such an environment, new
initiatives to establish joint media art and design schools or media science and art institutions are in
progress around the globe.
As Itsuo Sakane argues, in such artworks the status of the viewer has begun to oscillate wildly
between a number of discrete and sometimes contradictory modes of engagement:
It is true that media art no longer tries to represent utopias, but to construct true spaces.
It negotiates open relations that are not pre-established. By encouraging open ended
participation and encouraging the viewer/participant to become rather active and
involved. The status of the viewer alternates between that of a passive consumer and
that of a witness and associate, a client, a guest, a co-producer and a protagonist.
(Sakane, 2003)
Sakane identifies how such artefacts can create unique breathing spaces in mass-media ecology,
where new modes of social collaboration and interaction can be constructed:
Artists create by their works relational space and time, inter-human experiences that try
to shake off the constraints of the ideology of mass communications, they are in a sense
spaces where we can elaborate alternative forms of sociability, critical moments and
models of constructed conviviality. (ibid)
The fragmentary nature of such experiences is the inheritance of a new generation, well versed in the
multimodal and discontinuous nature of digital communications:
It is, however, obvious that the fate of the new man of the future-oriented manifestos and
the calls for a better world with a vacant possession is well and truly gone: utopia is now
experienced as a day to day subjectivity, in the real time of concrete and deliberately
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Eva Kekou and Martin Rieser
fragmentary experiments. The artwork now looks like a social interstice in which these
experiences and these new life possibilities prove to be possible. The artworks of the
1990s and 2000s transform the viewer into a neighbour or a direct interlocutor. It is
precisely this generation’s attitude towards communication that allows it to be defined in
relation to previous generations. They also place the emphasis more on communication
and tactility. (ibid)
How these new roles and modes of interaction can be explored through a collaborative and
multidisciplinary new media artwork is the subject of this paper, drawing in depth on the experience of
creating the Third Woman project as part of the EmobilArt, European media art workshop initiative in
2008-9.
Sakane also explores the playful and accessible nature of new media works and their ability to
generate new forms of audience and audience engagement. His contention has been vividly
endorsed by the recent exhibition DECODE at the Victoria and Albert Museum where many
thousands discovered the joys of interactive art in a major museum context:
An interesting aspect of the newer type of media art is that it appeals to more people
easily, from kids to the elderly, compared to the sophisticated conceptual artworks that
are often found in contemporary arts today due to its easy interactivity with our human
senses. It sometimes stimulates the aesthetic sensibility and the basic curiosity of the
human mind, and even expands the ordinary senses within daily life. It also gives the
audience a sense of self-appreciation of the ability of the human mind, because the
member of the audience him/herself is able to become involved in a new creative
process through such interaction with the installation work. It broadens our
consciousness toward a new way of understanding about our senses and the relation
between art and technology. (ibid)
Whilst many interactive works are transparently easy to 'decode' as to their mode of interaction, the
complexity of digital media technologies requires artists to form teams of specialised experts
integrating their contributions. Studies on interdisciplinary collaborations in organizational and
scientific research-and-development teams have revealed that three processes are common to both
new media artists and researchers: developing Interactivity, cross-disciplinary collaboration and
exploring new modes of engagement.
2. Interactivity
If we look at the first of these defining characteristics, although interactivity does not seem to be a
notion introduced by the media art itself, it has been a major part of its expression, as Duchamp
makes clear in his lecture 1957 on creative art, Media Art wants to create an active subject, one who
will be empowered by the experience of physical or symbolic participation:
The hope is that the newly emancipated subjects of participation will find themselves able
to determine their own social and political reality. An aesthetic of participation therefore
derives legitimacy from a desired caused a relationship between the experience of a
work of art and individual collective agency. (Duchamp, 1957)
This form of interactivity is clearly not simply the pressing of buttons to make something happen, it is
implicitly about collective agency, and embedded in it are challenges to social and political structures
and hegemonies.
Collaborative creativity or therefore understood both to emerge from and to a produce a
more positive and non-hierarchical social model. The third issue involves a perceived
crisis in community and collective responsibility. This concern takes its lead from a
tradition of Marxist thought that indicts the alienating and isolating effects of Capitalism.
(Ibid)
This implies a radical art, ready to challenge and renew social collaborations and responsibilities. This
is very different as a model to works, which rehearse novel technical interaction for its own sake.
3. Interdisciplinary collaboration
George Legrady is an artist programmer with a foot in both the scientific and artistic communities. He
clearly identifies the collaborative necessities engendered by such complex projects:
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The technology of digital media technologies requires artists to form teams of specialized
experts integrating their contributions. Communication, co-ordination and knowledge
sharing significantly influence the effectiveness of collaborative media art
projects.(Legrady, 2006)
Collaborative production is hardly new, (witness the film industry), but with larger-scale new media
works, the complexity demands complex integration and may result in a form of emergence, where
the final artefact is substantially different from any individual artist's vision:
Interdisciplinary teamwork has become increasingly common in industrial and knowledge
development, and most recently in the field of digital media art practice where the
complexity of technology has caused a shift from individual art production to team-based
work. The complexity of most projects demand diverse forms of expertise, something that
is acquired over time through experience. To realize a project it is therefore necessary to
distribute the needed knowledge across many specialists integrated through a
collaborative process. It is also hoped that bringing together expert knowledge from
diverse domains in these teams may result in synergetic effects where the whole
becomes something different than the sum of its parts. (ibid)
The collaboration of diverse artists based on different time zones and countries has in itself an aspect
of innovation-as new technology has only just facilitated such kinds of collaborative practices between
artists, who can exchange ideas and practises only through new communication media and without
the need for real-time meetings.
4. A case study
All of these issues, and particularly the new nature of collaborative audience engagement are best
explored through a deconstruction of a recent artwork, which also matched the fundamental
processes of production and consumption outlined above. It is useful as an exemplar of collaborative
process and adaptation to a variety of exhibition contexts and culturally diverse audiences.
Vienna Underground’s The Third Woman <www.dmu.ac.uk/Third_Woman> is a complex interactive

media art project. It is the outcome of collaborative work between artists from diverse academic and
artistic backgrounds, whose contribution has led to the realisation of an ambitious project. The Vienna
Underground project became interwoven with a number of smaller projects in a baroque complexity. It
is a project where art and expression meet with technology and performance. The project has, to
date, been realised thanks to the contribution of a variety of specialisms including: film studies,
biology, music/composition, performing arts, fashion and textiles, locative media, wearable
technologies and affective computing. Furthermore, pressing contemporary social issues are
embedded to this project, such as migration, globalisation and terrorist crime. It promotes the
innovative character of new media art and its expression, and encourages the participation of the
audience. Issues such as interactivity between project and participants, audience, semiology and
signs in the project, play an immediate role in the analysis by the viewer/participant. The project is
realized through the function of new technological devices such as code reading and affective
computing.
5. Overview
The Third Woman is an interactive mobile film game, performance, and installation, which gradually
reveals layers of a contemporary film drama through mobile phones and screens. The project
emerged from the initiative of a team of digital artists who gathered together at EmobilArt workshop in
May 2008 in Athens. EmobilArt was a European founded series of workshops, which also took place
in Vienna and Rovaniemi. The result of this collaboration between the thirty-three digital artists was
shown at The Art Biennale in Thessaloniki, Greece, and in Katowice in Poland. The Third Woman has
additionally been shown in Bath in the UK, and is scheduled for Xian, China during the Digital Art
Weeks Festival.
The idea of The Third Woman was based initially on the theme “Passage’. It was created around the
Viennese-based artist Nita Tandon's wish to create a cinematic project for Viennese U-bahn spaces.
Anna Dimitriu (UK), Cliona Harmey (Eire), Margarete Charmente (Switzerland), Martin Rieser (UK),
Barry Roshto (U.S/Germany), Pia Tikka (Finland), and Nina Yankowitz (USA), joined with Tandon’s
proposal. Inspired by the Vienna based film-noir The Third Man (directed by Carol Reed 1949), it
developed under the direction of Martin Rieser as a multi-faceted mobile film game.
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6. New modes of engagement

Part of our contention is this new media artwork developed new modes of engagement in audiences
and that these can be categorised and generalised in four ways:
1. Symbolic/Semiotic: The symbolic impact of the technological artefact. Its deeper meanings, and
the fears and anxieties aroused in the public.
2. Interventionist: The physical intervention through performative practice in public space, and the
tensions created by the use of technology.
3. Collaborative: The collaborative imperative built into the structure of the work and into the
modes of its consumption.
4. Augmented: The relation between the virtual space and the real spaces of participation- and
the tensions engendered.
7. Symbolic
It is worth describing in detail the symbolic impact of this technological artefact, and the deeper
meanings of the work and the fears and anxieties aroused in the public. The initial EmobilArt theme
“passage” was interpreted as a place of transmission, which in the particular Viennese context of The
Third Man referred to illegal post war black market activities. The city of Vienna that Graham Green’s
script has assigned as a totemic post-war limnal space between the East and West now reflected the
tensions of globalisation. As in the The Third Man, where the underground trade in penicillin by the
Harry Lime character caused the death of innocent people, so did the practise of the modern healer
Lara Line in The Third Woman, when she accidentally releases the smuggled apocryphal biomaterial
‘Miasma’. The word ‘Miasma’ refers to the mythic phenomenon of bad air, which in the historical city
of Vienna was blamed for causing the plague. Along with Miasma, ubiquitous microbiological code is
woven into The Third Woman project and its modes of participation.
This was also reflected at the project launch venue, as the Vienna Kunsthalle, which happened to be
located on top of the world’s first modern sewer system, the site of the original Third Man sewer
chase. Embedded in an era of multi-cultural communities, conflicts, and fear of terrorism, the project
relates to issues such as illegal migration and the black economy, familiar as the 'underground' worlds
of modern cities. In the Third Woman film game, the Viennese underground system symbolises these
invisible worlds, and it can be similarly mapped as a conceptual layer onto each future exhibition
location, determining the spatial distribution of the transferable game elements in any chosen city.
8. Collaboration: The film game installation
The participants were invited to engage in the piece using personal mobiles as interaction devices.
The game framework was designed so that the user, by inference from obscure text messages
received in their mobiles or revealed within their film sequences, could detect the QR codes
embedded to their environment. The QR codes would trigger the next film sequence to be displayed
either on the mobile phones or alternatively on the installation screens. The mode of engagement for
this was best done collaboratively, and the audience would search for clues and try to sequence the
clips as a group, particularly in Bath where the forensic theme of the installation encouraged such
interaction. This was implemented by means of the Wi-Fi set up at the venue. With a smart phone the
visitor could display the next film scene via number codes, or in camera readable barcodes. The
Finnish software architect Rasmus Vuori implemented the software that managed the film game
installation and projection screens and the mobile communication.
The second aspect to this was that ultimately the audience was to become an unconscious filter for
the multiple versions of the content. Already aiming at future incarnations, the film game software was
structured to allow the emotional enactment of the participants in the movie experience. In practice,
this means an enactive media system, in which data from the mobile phone’s accelerometer and
heart and skin sensors could be interpreted in terms of psychophysiology–based emotion theories
and allowed to control the narrative flow. (Tikka, 2008) Growing towards a self-organising systemic
approach characterized by feedback and allowed to control the narrative flow. Growing towards a self-
organic systemic approach, characterized by feedback and self-organization, the Vienna
Underground group continues this development, faithful to the original spirit of Code and the organic
underground life and flora of Vienna.
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While QR codes (also known as Datamatrix codes as a general term, these are 2D readable bar
codes for mobile phones.) have been used in other projects, they have not been integrated to the
level of this project and have tended to only link to static web pages. Through triggering video on
mobiles and screens they unlocked a potential for simple interfacing and audience empowerment.
The Third Woman can claim to be the first interactive film drama to employ these means and so to
extend the concept into a full integration of the codes in graphic objects and costumes beyond their
crude cues on T-shirts and documents. Throughout both film and performance, prints and
embroideries of QR codes were employed. The cutting-edge nature of the project lay not so much in
the use of this technology alone, but the integrated manner in which it was employed through the
project.
9. Performance and intervention
Vienna Underground’s Third Woman is locative media performance based game with accompanying
generative music elements. The game was a re-visioning of the film The Third Man, but the work also
alludes to the history of Plague and contagion in Vienna. There are links between the locations in the
film and the old plague pits as well as references to “Miasma”, literally ‘bad air’, which was blamed for
causing the disease. Famously the Viennese street musician “Lieber Augustin” fell in to a plague pit
when drunk and survived the ordeal, his experience inspired a famous nursery rhyme, the Austrian
equivalent of the British “Ring o’ Roses”.
Anna Dumitriu, an artist working with biological media, cultured bacteria from the air in Vienna and did
a biochemical work-up to ascertain the seven digit Analytical Profile Index codes of the organisms, in
order to identify them. Dumitriu sampled Arthrobacter sp, Kocuria rosea and Micrococcus luteus. A
musical theme was then generated combining the “Lieber Austin” tune and the API codes of the
bacteria, using an algorithm by sound artist Barry Roshto. This extended themes in Dumitriu’s work
involving the history of Plague, as well as previous collaborations with sound artists to generate
bacteria music.
In addition Roshto and Harmey created wearable sound sensors for performances in public space,
described below:
“Well originally we had long poles, but Margarete (Charmante) was keen to have whips in
the performance and also little wire baskets that Cliona (Harmey) made (They were the
Electromagnetic sensors I mentioned.) Basically they were sensing and sonifying the
electromagnetic fields. Anything electrical produces one, and to a lesser extent even we
do. It's how that silly Kirlian photography that the hippies think is photographing their
auras works too (but don't mention that or you'll get into a tricky situation with the
audience)."
<http://web.mac.com/annadumitriu/NF/Vienna_Underground.html )>
Dumitriu was also responsible for co-ordinating the performance/intervention elements of the project.
This took place in The Kunsthalle Project Space in Vienna on 19th February 2009 and involved Hilde
Fuchs, Ulli Klepalski and Valerie Kattenfeld. (see project website)
The strong reactions by the U-Bahn public to the use of the “sniffers’, mounted on whips to sweep the
station for electromagnetic fields, led to some profoundly anxious reactions. People either assumed a
bomb or radiation leak. The body-mounted speakers emitted threatening squeaks and hisses when
the whips encountered a field. The symbolic import of this was that radiation is inimical to bacterial
growth, hence the sound artists could be seen as clearing a safe path through the story space, which
happened at that juncture to be the U-Bahn station.
10. Installation and intervention
Nita Tandon and Daniel and Tom Wisser’s text based work “Double Entendre” was developed firstly
as an intervention in the Vienna U-bahn spaces by examining the coded mutation of languages
between German and English, where shared words can have ambiguous or very different meanings
in the two languages, and subsequently in collaboration with the performance team for the Kunsthalle
Project Space, into spoken word improvisations.
Vienna Underground was also shown in Thessaloniki at The State Museum of Contemporary Art
Warehouse B1 from May 20th - June 10th 2009. Here there was an opportunity to create an
315
installation of forensic objects related to the criminal investigation which features in the film content -
this was later extended into three police incident rooms in the incarnation in shown in Bath in July
2009.
11. Augmentation
Augmentation allows an audience to map two different realities into the same space. This was really
the essence of the piece and it made real play in Vienna with the sites of the Third Man Film and the
coincidence of the physical reality and the mythic dimensions of the sewers and the U-bahn, however
this notion was extended by the use of graphic devices such as police ‘wanted’ and ‘missing’ posters,
anti-terrorist warnings and medical and substance hazard sacks, marked buckets and warnings which
were distributed across the gaming area. This interweaving of convincing artefacts with the moveable
locations of the project game and performance, constantly kept the audience slightly off-balance,
doing double-takes on the mixed realities with which they were confronted at every turn. The blurring
of boundaries and the way texts could suddenly appear on phones and large screens were integrative
in intent and effect, and revealed an extra twist in the plot to those that paid sufficient attention.
12. Conclusion
We took the Vienna Underground as a typical example of collaboration in the media arts, as it
includes diverse notions of art and technology and invites the viewers to become active and involved,
as well as strongly encouraging interpretation of the signs and semiotics of the project narrative.
While it takes its thematic from current notions and topics, and is based on traditional narrative tropes,
it transcribes them into a globalised environment, where the combination of art and technology raise
current topics of mobility, immigration and bio- terror.
Complex media art projects demand the input of diverse academic and artistic skills. As a sequence,
the Vienna Underground project has been developed through the insight and input from people whose
background is mixed and but were all aiming at encouraging active audience participation. In a
globalised world of mobility and ideas exchange, the collaboration between artists from different
backgrounds and perspectives seems to be required, both by the demands of the technology itself
and by the increasingly globalised pressures which affect our lives.
References
Duchamp, Marcel The Creative Act 1957 lecture (published in Art News, no. 4, New York, 1957).
Interview with Anna Dumitriu 2010 (Available
at:<http://web.mac.com/annadumitriu/NF/Vienna_Underground.html> )(accessed 10/05/10)
Legrady and Steinheider:Interdisciplinary Collaboration in Digital Media Arts: A Psychological Perspective on the
Production Process, August 2004, Vol. 37, No. 4, Pages 315-321 (Posted Online March 13, 2006.)
<www.ioct.dmu.ac.uk/Third_Woman > (accessed 10/05/10)
Leonardo Transactions <http://www.leonardo-transactions.com/announcements/>(accessed 10/05/10)
Sakane, Itsuo, "Toward the Innovative Collaboration Between Art and Science: The Task in the Age of Media
Culture through Case Studies in the Contemporary Field of Media Arts," vr, pp.159, IEEE Virtual Reality
Conference 2003 (VR 2003)
Tikka, Pia Enactive Cinema: Simulatorium Eisensteinense Aalto University 2008
316
Regional Innovation and Competitiveness: Analysis of the
Thessaloniki Metropolitan Region
Panayiotis Ketikidis1, 3, Sotiris Zigiaris2 and Nikos Zaharis3
1
CITY College – International Faculty of the University of Sheffield,
Thessaloniki, Greece
2
Aristotle University of Thessaloniki, Greece
3
South East European Research Centre (SEERC), Thessaloniki, Greece
ketikidis@city.academic.gr
sotzig@urenio.org
nzaharis@seerc.org
Abstract: The importance of innovation and knowledge-based policies in restructuring economies and increasing
their competitiveness has repeatedly drawn the attention of policy makers and stakeholders. Regional policy is no
exception to this trend. This paper attempts to map the demand and supply of Research and Development (R&D)
in the metropolitan region of Thessaloniki and to draw a knowledge model that demonstrates the flow of
knowledge in the region and the process of knowledge diffusion using the triple helix approach to depict the
current situation and future dynamic emphasising issues that policy makers face. It analyzes Central Macedonia
(CM) and East Macedonia and Thrace (EMTH) regional systems of knowledge flow and innovation, illustrating
the institutional architecture and infrastructure associated with these systems. The data for this research was
collected through in depth literature review and a number of in-depth interviews. Semi-structured face-to-face
interviews were held with several key personnel within the research institutes, intermediaries and policy makers
and triangulated with additional available information. The findings of this paper point to the conclusion that
knowledge transfer is a priority and a starting point for regional initiatives regarding the increase in investment in
R&D and innovative actions. The interest expressed by local agents to invest in knowledge transfer activities
positively indicated the changing regional innovation environment. This optimism originates in a set of policy
recommendations for the increase in knowledge investments, which were previously discussed widely in public
and had been accepted as regional policy priorities by all local actors. The specific paper contributes to
identifying and assessing knowledge assets and flows, as well as interactions of SMEs with support
organizations, in the regions of CM and EMTH of Greece, and accordingly provides policy recommendations for
the future economic development in the region.
Keywords: Innovation and regional development, innovation policy, research and development policies,
knowledge economy, northern Greece
1. Introduction
The global importance of the concept of competitiveness has increased rapidly in recent years.
Regions are increasingly seen as essential parts of the global society (Lundvall, 2007). Innovation
evolved as part of sustainable development (Cooke, 2007) and became a driver of the
competitiveness within the regions (Arundel et al, 2007). It was the early research of Porter (1990)
that first defined national competitiveness as an outcome of a nation’s ability to innovate in order to
achieve, or maintain, an advantageous position over other nations in a number of key industrial
sectors. According to Storper “area competitiveness” – at both national and regional level - is the
capability of an economy to attract and maintain firms with stable or rising market shares in an activity,
while maintaining stable or increasing standards of living for those who participate in it (Storper,
1997). Competitiveness involves the upgrading and economic development of all places together,
rather than the improvement of one place at the expense of another. In addition, the knowledge-base
of economies is an important measure of the creative capacity and investment in innovation, as well
as its propensity to achieve competitive advantage in technologically leading-edge and growing
activities and sectors. Innovation is now recognised as a key ingredient and as one of the main
prerequisites of sustainable development of regions, nations, sectors and firms.
There are different conceptualizations on innovation systems: National Innovation Systems (NISs)
(Porter, 1990; Lundvall, 1992), Regional Innovation Systems (RIS) (Cooke et al., 1997), Sectoral
Innovation Systems (Breschi and Malebra, 1997) and Technological Systems (Carlsson, 1995). The
importance of Regional Innovative Systems (RIS) in the economic development of regions has been
posited by a number of authors (Niosi, 2008; Cooke, 2007; Vigier, 2007, Ketikidis et al., 2010) and
examples of regional excellence have been identified around the world (Pellegrin, 2007; Freeman,
2002). The concept of Regional Innovation System (RIS) has been the central goal of the European
technology and innovation policy. This concept is considered to contribute to the Lisbon strategy by
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Panayiotis Ketikidis et al.
enhancing European regional competitiveness (RC) (Bruijn and Lagednik, 2005). The literature
suggests that RIS possesses two sides: the supply side and the demand side (Cooke, 2007;
Laurentis, 2006; Harmaakorpi, 2006). The supply side includes institutional sources of knowledge
generation and institutions accountable for the preparation of qualified labour (Cooke, 2007). The
demand side incorporates the productive systems, companies that apply the scientific output of the
supply side (Laurentis, 2006).
The main objective of this paper is to identify and assess knowledge assets and flows, as well as
interactions of SMEs with support organizations, in Northern Greece, and accordingly provide policy
recommendations for the future economic development in the region. The paper is structured as
follows. The following section briefly outlines the important role of innovation and regional innovation
policies as a driving force of economic development in knowledge-driven economies. This is followed
by a conceptualisation of the competitiveness of Central Macedonia (CM) and East Macedonia-
Thrace (EMTH) regions, set within the context of existing available indicators. Finally, the final two
sections focus on the methodology used, an interpretation of the data gathered and generated,
resulting in some concluding remarks concerning policy interventions.
2. Innovation in the knowledge-driven economy
Early work by Thurow (1993) determined that it is primarily knowledge-based industries within which a
nation need specialise in order to obtain a word-class standard of living for its citizens.
Knowledge-driven economy is “one in which the generation and the exploitation of knowledge has
come to play the predominant part in the creation of wealth. It is not simply about pushing back the
frontiers of knowledge; it is also about the more effective use and exploitation of all types of
knowledge in all manner of economic activity” (p. 53) (EC, 2003)
According to EC (2004), the major transformations in the current economies which have been brought
by the knowledge driver are the following:
Breakthroughs in information and communication technologies have decreased costs of
knowledge activities, for instance, costs of knowledge transfer;
Knowledge is becoming a commodity. It is produced, bought and sold to a degree that has been
never seen before;
Interconnectivity among knowledge agents has deployed substantially (p.35).
The emergence of knowledge-based economy, where knowledge is the basic strategic resource to
achieve growth, defines the new era in development and growth. Thus, economic development
strongly depends on the country’s ability to foster an environment that supports innovations and
usage of new technologies in knowledge driven economy (KDE) (Niosi, 2008; Asheim, 2007).
Globalisation is a difficult challenge for all regions which also offers developmental opportunities for
those capable for designing appropriate policies to grasp them.
2.1 Regional innovation policy and policy implications

Komninos and Tsamis (2008) state that from a policy perspective understanding innovation as a
systemic process has important implications for policy-makers and for identifying effective innovation
policy measures. There is an increasing interest among regional state authorities to the Regional
Competitiveness (RC) and Regional Innovative Capability (RIC) of their regions linked to the local
firms’ capabilities to innovate (Cook and Memedovic, 2003). One of the major functions of the policy-
maker is to decrease uncertainty by providing information, to govern conflicts and to give incentives.
These may be determined as the “universal” mission of policy-maker (Edquist, 2000). Regional
Innovation Policies (RIP) are supposed to consider all economic players of Regional Innovation
Systems (RIS) (Sanz-Mendez and Cruz-Castro, 2005).
According to Andersson and Karlsson (2004), in order to enhance RIS, RIP should include such
measures as:
Develop regional knowledge providers and link the companies to external knowledge sources;
Attract skilled labour and promote the education of labour;
318
Develop an institution responsible for scanning markets and technologies for regionally important
clusters;
Promote interaction and collaboration between firms, knowledge institution and governmental
institutions;
Promote recurrent contact between businessmen, developed more formal and planned
networking;
Secure the supply of venture capital (p. 78).
3. Description of the Thessaloniki metropolitan region
The region of CM dominates the regional economic outlook in all respects mostly due to Thessaloniki
and its key role as a regional economic communications and research and development hub.
Thessaloniki is the second largest city in Greece with population over one million in its metropolitan
region. Unlike much of the northern Greece, Thessaloniki metropolitan region has an economic
structure dominated by manufacturing and services rather than agriculture. On the other hand the
region of EMTH is far less developed despite significant progress that has been taken place over the
last decade, particularly in Thrace.
3.1 Competitiveness
The competitiveness of the economy of CM and EMTH regions lags behind the national average. The
high unemployment rates are a key issue that at least for the region of EMTH is related to low
productivity and the same applies for most parts of CM, if Thessaloniki was to be excluded. The weak
economic structure, linked to traditional sectors with low knowledge intensity and less efficient human
and physical capital deployment are the key factors. The key competitiveness policy tool for CM and
EMTH are the Regional Operating Plans (ROP), implemented via the respective regional authorities.
The ROPs are the tools for regional economic planning that lay out the strategies and for each region
over a six- year period (currently 2007-2013). The key stakeholders involved in policies relating to
Research and Development (R&D) investment are the National Government (ministries of Economy
and Development and General Secretariat for Research and Technology), the Regional Authorities of
CM and EMTH as well as the General Secretariat of Macedonia and Thrace.
3.2 Innovation and R&D

Greece and its innovation system placed at the very bottom for all 13 Greek regions (NUTS2) of the
relative rankings of 203 regions with only the capital of Attica having a relatively good performance
(86th) (Hollanders, 2006). Business sector expenditures on R&D are continuously less than 30% of
total R&D expenditures, at around 15% of the respective EU average (EUROSTAT, 2005). According
to the innovation survey (CIS-4), among the firms with some form of innovative activity, around half
engaged in intramural R&D and 30% on a continuous basis (EUROSTAT, 2007). This poor
performance of the Greek innovation system is replicated at regional and sectoral level.The area of
Northern Greece shows a low share of the private sector as a financier of research technology and
development (RTD) and a very low share of financing that flows from the private sector to public RTD
performers (less than 7% of private funds) and vice-versa. On the other hand, the public sector
predominates with almost 70% of financing if higher education and public companies are included.
Private companies also receive only 3,8% of their RTD financing from the public sector. In the
services sector there are 3,2 RTD employees per 100 while in manufacturing only 1,5 making the
latter responsible for the country’s lower ranking.
The main weakness of the region lies in the very low level of R&D employment by the corporate
sector, which is very small both in relation to the national average and the EU average. The marked
exception is R&D employment in the higher education sector, which for the case of CM is even above
the EU average (1,6 vs. 1,4 per million inhabitants). According to Komninos and Tsamis (2008) public
sector and especially universities have maintained a rather negative attitude towards direct
cooperation and funding of R&D activities by the private sector. They focus on basic research activity
that in many cases does not fit with the needs of the market.
319
4. Analysis and discussion of key findings
4.1 Methodology
The guiding theoretical and conceptual framework was the triple helix model, which draws on
relationships and interaction between academic institutions, governmental agencies and
organizations, and the industry, including knowledge transfer intermediary organisations. For this
purpose a triangulation method was used to integrate information on several economic drives from
past empirical research, analysis of existing statistical data for SMEs in the target geographical area,
as well as interviews with representatives from Universities, research laboratories, research centres,
intermediaries and policy makers. The economic drives of interest included competitiveness,
innovation and research and development (R&D); knowledge demand and supply; knowledge flows
and networks; academia networks; financing of the knowledge economy; and future policy
approaches. Following the integration of existing data on these drivers, the strengths and weaknesses
were identified, and policy recommendations for future development were made in relation to the key
components of the triple helix model. All the information collected was aggregated on a technical
report (MIRIAD, 2008).
4.2 Knowledge transfer and flow

Overall, there is currently an evidence gap of the type of transferring occurring, its density and
frequency, as well the flow directions. A key finding as developed in MIRIAD (2008) is that the triple-
helix interaction is reliant on a group of intermediaries that are not very well connected or interfaced.
From the whole conceptualisation the following is apparent for the regions of CM and EMTH
considered together:
Government – key policymakers are the GSRT within the Ministry of Development at national
level and the Regional Authorities of CM and EMTH at regional.
Business – SME dominated regional economy with low levels of R&D investment and knowledge
commercialisation.
Higher Education – large-scale knowledge creation appears mainly restricted to a small number
of higher education institutions. The cases of the Thessaloniki Technology Park (TTP) / The
Centre for Research & Technology Hellas (CERTH) and Urban and Regional Innovation
Research Unit (URENIO) show that there is significant potential for intermediation in synergy with
Higher Education, provided that the proper institutional arrangements were in place.
Government-Higher Education Interface - key linkages between higher education and
government either lack coordination and decisive initiative or are limited at both national and
regional level.
Higher Education-Business Interaction– little evidence of direct knowledge transfer and even
less of reverse transfer. Intermediaries act as key facilitators, with the government and EC being
the key funder. Even though, there has been a rapid increase in the number of knowledge
transfer intermediaries the process is at a relatively early stage. There is a lack of intermediaries
servicing higher education institutes with the main focus being instead on the corporate sector.
Government-Business Interaction - connections between government and the business
community with regards to R&D are limited at both national and regional levels or lack of decisive
initiatives.
4.3 Summary of recommendations

The question that has dominated our engagement with various experts and institutions was the
following: Does the critical-mass present in terms of physical and human resources and infrastructure
include entrepreneurial acumen/culture and financial resources adequate to drive the RTD outlook to
a higher level? Hence, the priority issue seems to be the creation of a critical-mass for RTD (stock of
know-how) in terms of infrastructure, engagement of capable skills, entrepreneurial spirit and
imaginative policy leadership that will put into use the combined resources effectively making
innovation a self-sustaining process that will allow for its faster evolution.
In Figure 1, the triple helix model of the region of Northern Greece is presented along with the policy
recommendations aiming to improve weak linkages of the regional innovation system. Each
320
recommendation aims to strengthen weak relative linkages of the regional triple helix model. High
priority has been given to the weakest link among higher education R&D and the private sector.
Figure 1: Triple helix flow model: Central Macedonia and East Macedonia-Thrace
Recommendation 1 – [RC1] Rationale
Identify new areas in between The low productivity and performance of traditional
traditional sectors where innovation sectors of the region prompt for the identification
can flourish, capitalizing in new of areas where traditional sectors could expand
technologies and shifting to new their activities, capitalizing on new technological
activities. Raising the interest of advancements. For example, traditional sectors
traditional sectors would be a such as construction could cooperate with the
challenge though, since it also relates automation high tech sector to produce “smart
to RTD and innovation awareness and house” products.
culture.
Recommendation 2 - [RC2] Rationale
This recommendation applies mainly to The region of Northern Greece, even though it is
the region of EMTH: Capitalize on the not highly rated in R&D performance presents a
Science and Technology Legislature to high concentration of R&D infrastructures around
improve R&D infrastructure by creating the metropolitan area of Thessaloniki. The region
a science and technology park and of EMTH must also follow in infrastructures to
relative institutes related to the R&D equalize inequalities within the area of Northern
locally advanced areas, since the Greece and also to capitalize on the excellences
region presents high scientific skills, that it presents, such as the research results of the
e.g. Biotechnology. The regional policy Biotechnology Department of The University
should be directed in creating a critical Hospital of Alexandroupoli.
mass of R&D resources in selected
research areas.
321
Create an interregional R&D The strengths of the regions’ favourable

investment committee for Northern environment, adequate supply of scientific
Greece, including R&D actors from personnel, existence of regional funds, increasing
Institutes, Universities, Public and attitude toward R&D investment by the private
Private organizations. This committee sector must be coordinated and organized from a
should be linked to the National widely participated body of R&D actors and
Committee for Research and business organizations, aiming to minimize the
Technology. It must highlight the gap between R&D and the business world.
importance of also including
representatives from the private
organizations and intermediaries, than
just academics and researchers.
Promote cultural awareness of The high level of unemployment among young

innovation and entrepreneurship, scientists indicates the low level of utilization of
especially within the community of the human scientific resources within the regional
young generation of scientists and the innovation system. The uncertainty of the financial
future R&D human capital including environment directs them to seek secure
high school students. This culture employment in the public sector. Young scientists
enhancement should be directed must capitalize on the benefits and the hospitable
toward entrepreneurship and environment of the region to create innovative
innovation. start-ups. Also younger generations, such as high
school students must be infused with the benefits
of entrepreneurial skills.
Increase R&D investment by private The low performance of the region in private R&D
organizations outside the higher spending and patent creation indicates the
education system, by building inefficiency of the higher education driven R&D
infrastructures and providing incentives system. Furthermore, the creation of the area of
so that large scale business critical mass of private sector R&D activities points
organizations move their R&D towards the potential for regional growth and
activities into the region. The region increase in the investment basis of the local
must implement investment policies, economy.
marketing techniques, human capital
and infrastructure availability, including
financial incentives so large scale
corporations will benefit from relocating
their R&D departments in the region.
Capitalize on the fluent scientific The high level of scientific knowledge and human
resources of the higher education resources concentrated within the limits of the
system by promoting synergies in higher education system must flow outside the
transfer of know-how with private borders of the universities enriching the start-up
organizations. Regional incentives repository for new business ideas and
should be created for the transfer of technological innovation in the area.
R&D personnel from the universities to
industry and vice versa.
322
Develop new regional metrics that Whilst R&D expenditure continues to be an

incorporate a holistic means of important measure of innovation and the
measuring investment in knowledge. conversion to a knowledge-based economy, it is
These indicators should measure the limited due to its relative inapplicability to growing
qualitative, “fact finding”, aspects of the service-based sectors.
regional R&D performance by utilising
surveys inside the regional
organizations instead of statistical
approaches.
Enhance the knowledge economy by The isolated higher education R&D system and
building science parks, where higher the unfavourable environment for innovation
education R&D is bound to find commercialisation within the universities must find
applications and meet business a hospitable environment to experiment the
demand for knowledge application of these results to the market needs.
Enhance life long learning activities The high level of unemployment among unskilled
within the social structures of the workers requires immediate actions enriching the
region upgrading in a continuous basis human capacity skills of the region.
the human capacity of the region.
Existing quality of training curricula and
services and structures should be
adopted to serve long term learning
action plans instead of partial
vocational programmes.
Enhance clustering support policies The clustering efforts in the region and generally in
related to R&D activities among R&D the country were not adequately supported by a
researchers and targeted business methodological approach that could bring together
sectors, strengthening the role of different sectors and activities into joined R&D
intermediaries in the cluster building activities. The support policies and the role of
process. intermediaries are important elements missing
from these unsuccessful clustering measures.
Implement awareness raising policies The extremely low performance of the region
and support mechanisms for the regarding IPR management indicates the low level
organizations in the private and public of R&D activities. Enhancing the value of IPRs by
sector on the importance of Intellectual raising awareness and providing supporting
Property Rights (IPRs) in securing mechanisms for IPRs, is an effective policy to
financial stability and future increase the R&D capacity of the region.
prospective, strengthening their R&D
orientation, focusing on universities
and R&D centres.
Implement policies to increase the Although innovation actors have a profound need
inwards information flows from regional for knowledge creation, they rely mostly on
323
researchers and R&D institutes to local sources external to the region. This fact weakens
innovation actors. the opportunity to transform knowledge into
regional R&D activities.
Increase and highlight regional R&D The low level of interaction among R&D
corporate demand bringing together organizations and the business world requires the
private organizations and the R&D fulfilment of demand driven R&D processes. The
actors. Policies must include proactive demand stimulates R&D performers to target their
measures inside the business activities into applicable and commercial areas.
organizations to identify and match
R&D demand to the regional supply.
Such policies could include post-
doctoral internships and incentives for
building internal R&D departments.
Improve commercialisation of R&D The effort towards the commercialisation of R&D

results setting marketing support results is a long-term attitude changing process
mechanisms and consulting services and is problematic within the region and
to R&D performers. countrywide. This attitude is not assisted by the
current environment and commercialisation
structures of the higher education systems, which
fosters most of the R&D activities. Synergies must
be achieved with capable marketing support
organizations to promote R&D commercialisation.
Initiate a dialogue for IPRs ownership A major obstacle in the R&D collaboration efforts
within the region clarifying the question is the unclear status of IPR ownership within the
of “who is the proprietor?” in case of higher education system. Private organizations are
collaborative projects between reluctant to engage in collaborative R&D projects
Universities and the private sector. and invest in a not well-defined and complex IPR
management status.
Identify the main corporate actors with Since the business environment of the region is
R&D potentials and involve them into dominated by small and medium size businesses,
cooperative activities to increase the the few corporate leaders must be utilised to raise
regional level of R&D spending R&D capacity. Smaller businesses could cluster
around these corporate leaders.
Recommendation 17- [RC17] Rationale
Initiate a foresight exercise with a wide The low level of interaction of the regional
network of participants including innovation system creates a diversified view of the
intermediaries, to achieve a common directions that R&D efforts and resources should
understanding, as far as, the long take. The divergence of interests that each actor
terms aims of R&D investment has within the system should be eliminated and
regarding technologies, sectors and efforts should be directed to common long term
clustering prospectives. objectives set by the foresight exercise.
324
5. Conclusions
In the past, knowledge and R&D investment policies and strategies have focused either on stimulating
transfers/spill-overs or on facilitating knowledge absorption. However, it is clear that successful
strategy building must take account of both simultaneously. The aim of this study was to integrate
both these aspects, so as to remove the supply and demand-side barriers associated with knowledge
and R&D transfer, absorption, and investment. In essence, knowledge and R&D investment is a
function of a region’s ability to transfer, spill-over and absorb knowledge. In general, policy makers, in
addition to specific policy targets regarding R&D spending, are aiming to stimulate demand for RTD
from the corporate sector of the economy by improving its sectoral allocation, stimulating supply of
RTD through the reorganization of the tertiary education and research system, opening up to global
research networks and building domestic R&D capacity infrastructure.
In terms of future policy directions, it appears that research performers believe that ‘Creating better
networks that link companies with universities and other R&D performing organisations’ together with
‘Making more R&D finance available to companies enabling them to become involved further in R&D
and knowledge related activities’ should form the core policy issues. Significant importance is also
attached to the creation of start up companies, attraction of high value foreign investment and an
improved system of business support and advice. This result shows the increasing awareness of
research performers in the need to address corporate requirements through stronger links between
companies and R&D performing organizations (MIRIAD, 2008).
This study has capitalized on all available statistical data sources in the analytical process and
validated the qualitative analysis results using an interview process with main regional actors. Since,
statistical data sources had covered different chronological periods and had significant differences in
the analytical approaches used, the derived strengths and weaknesses concluded from the statistical
analysis are aligned with the conclusions of the regarding strengths, weaknesses and policy
directions. The repetition of statistical performance rating does not support adequately policy makers
towards measures required at systemic level to strengthen system performance. Although the
approach to integrate specific policy recommendations to the triple helix links is a valuable policy
analysis outcome, the research does not identify specific system faults.
Future directions of research must take the systemic analysis into account by using models like the
Interaction, Intension, and Indicator (3I) analytical framework (Zygiaris, 2009) to relate the derived
policy recommendations to specific innovation system faults. Thus, policy makers could be provided
with necessary systemic performance rating to address measures to related system actors aiming to
improve system performance. In turn, the derived policy recommendations must be analysed further
to the extent of applying them at regional system level. This analytical process must be redefined in
terms of the actors involved in each recommendation and the measures need to be taken at the
system level.
Acknowledgements
The authors are grateful to South East European Research Centre researchers that participated to
the project as well as to the European Commission’s Regions of Knowledge 2 initiatives for funding
the project entitled ‘Managing and Infusing Research Investment and Development (MIRIAD).
Another word of gratitude to all project partners that contributed to the MIRIAD project
(www.miriad.org).
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The Entrepreneurial Framework in the Greek Market of
Renewables
Ioannis Kinias and Nikolaos Konstantopoulos
University of the Aegean, Chios, Greece
ikinias@ba.aegean.gr
nconsta@aegean.gr
Abstract: The development of the renewable energy is a key priority of the European Union policy. By 2020,
renewable energy should account for 20% of the EU's final energy consumption. E.U. has set a national goal for
Greece, which is 18% share of renewable in final consumption of electricity in the country in 2020. To achieve
this objective, the EU Member States define support measures and criteria for harmonized the renewable
policies, such as simplifying licensing procedures, ensure connectivity to networks, support renewable energy
investments, guaranteed sale price / kWh. Despite these measures and policies, the productivity in this sector is
very low in Greece and far away from its targets. The three areas, where the most important problems identified,
are: a) The licensing system. b) The networks. c) The incomplete zoning - regional planning for renewable
projects. In order to investigate, this entrepreneurial environment and its diseases, we have made this qualitative
research. The first goal is to highlight these diseases as well as to identify some other individual problems.
Continuously, we try to consider the strategy that these enterprises apply in order to face them. The survey was
carried out in three particular directions: a) at executives of large and smaller companies doing business in all
renewable energy technologies, b) at executives of companies that manufacture equipment for renewable energy
technologies and construct renewable energy projects in Greece and c) at executives of ministries and
institutions that supervise the market. The survey performed by the method of interviews and its results were
analyzed. The results of this research will form the basis for a future quantitative research. This will be carried out
by the questionnaire method for almost all companies that deal with the field of Renewable Energy Sources
(RES) in Greece.
Keywords: renewable energy market, entrepreneurial activity, qualitative research
1. Introduction
Unfortunately, the last 15 years, a lot of changes have become in laws and ministerial decisions
relative with the market of renewable energy in Greece. Therefore, the big problem that exists in that
market is clear. The main problems concerning the development of the RES market are located in the
licensing process, in the networks of transport of electric energy and in the land-planning framework.
Greece allocates the most complicated, time-consuming and bureaucratic licensing arrangement. The
jurisdiction of institutions which are involved in the licensing process is not clarified. Moreover, the
level of administration that is responsible for any process is not clear, and in the case where more by
one levels are involved, there is not a co-ordination between them. Very important point also is the
duration of these procedures. The deadlines that are described by the law are not followed by the
institutions, so there are big delays in the projects. Finally, it cannot be ignored the important delay
that comes about due to the juridical entanglements.
One of the biggest problem that the political leadership is called to face today is the subject of
networks, which does not suffice in order to integrate the Renewable Energy Sources (RES) in the
energy mix, as well as to absorb their produced energy according to the national objective.
Finally, the lack of a completed land and regional planning for the RES is absolutely obvious. There is
not any plan which can recommend, with scientific criteria, the points of installation of RES projects as
well as their biggest possible density and force.
There is a wide literature concerning the entrepreneurship. This literature covers many different
aspects of the entrepreneurial activity, from the investor’s background to the financing of their
projects.
As for the entrepreneurs background, Warneryd et al.(1987), characteristically, found that better
educated individuals are more likely to be involved in entrepreneurial activity. Moreover, in that
direction, there are many studies (Lentz and Laband, 1990; Hout and Rosen, 2000; Dunn and Holtz-
327
Eakin, 2000; Fairlie and Robb, 2003) that have analyzed the effect of family background on the
decision to become self-employed.
A very important field in the literature also refers to the obstacles that any investor can face in his
entrepreneurial activity. There are many studies concerning the administrative burdens, the
governmental restrictions and the regulations. Characteristically, Krauss και Stahlecker (2001), and
Κlapper et al. (2004) demonstrated that the bureaucratic regulations and the administrative burdens
have a significant effect on the level of entrepreneurial activity.
Moreover, there are many studies concerning the role of financing in the entrepreneurship. In that
area, Holtz-Eakin et al. (1994) have explored the issue οf whether liquidity constraints prevent entry
into entrepreneurial activity. Moreover, the importance of liquidity constraints and access to capital is
also supported by the empirical evidence presented by Blanchflower and Oswald (1998), and Guiso
et al. (2002). This fact confirms the study of Evans and Leighton (1989), according which, the
individuals with greater assets is more likely το switch into self-employment. Others select to wait for
the subsidy and the result is the delay of the investment. In that direction, Fazzari, Hubbard και
Peterson (1998), note that the liquidity constraints become bigger as the company’s size is reduced.
Finally, there are many interesting studies according to the companies’ size as well as their specific
advantages in a market or in a specific area. According to Audretsch, (1995) the “developmental
advantage” of the smaller and newcomer companies compared with the bigger, is more intense in the
technology industry. Krugman (1991), also, clearly notes that the entrepreneurial activity is more
concentrated in areas that exhibit a regional advantage. Many articles of Sutton (1997), Caves (1998)
and Geroski (1995), assemble the results of researches that examine the relation between the size of
a company and its enlargement. However, the correlation between the firm size and its growth is
something ambiguous in the European reality. While certain studies have not realised the existence of
any systematic relation between to the size and the growth (Wagner, 1992), there are others which
have realised a positive effect (Burgel, Murray, Fier, Licht and Nerlinger, 1998).
3. Methodology
3.1 Interviews
The survey was carried out in three particular directions:
a) at executives of large and smaller companies doing business in all renewable energy
technologies,
b) at executives of companies that manufacture equipment for renewable energy technologies
and construct renewable energy projects in Greece and
c) at executives of ministries and institutions that supervise the market.
The survey performed by the method of interviews. The interviews were carried out in 12 executives
as follows:
3 householders of photovoltaic parks,
2 companies that deal with wind power parks,
2 companies that deal with hydroelectric projects,
1 from the biggest groups that supply equipment for wind power parks,
The vice-president of the biggest association of companies which produce energy from renewable
energy,
The general secretary of the association of companies which produce energy with photovoltaic
parks,
The former general secretary of the ministry of Energy, and
The president of the biggest scientific organisation that deals with the wind energy in Greece.
These interviews were supported by certain groups of questions which are differentiated between the
companies and the institutions.
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3.2 Companies
In the first section of our research, we tried to examine the background of these companies. We ask
several questions concerning the installed power, their entrepreneurial background, the main reasons
that led them in this activity, as well as about the plan of their future investments.
In the second section, we tried to examine the general objectives and the strategy of these
companies. We asked them, how they are developed in the market, what are their objectives, what
are the most important problems in the sector of renewable, as well as for the processes of beginning
and operation of their enterprises. In this section, our goal is to investigate how these companies
strategically react in each problem that they face.
In the third section, we tried to see how the companies are comprehended the entrepreneurial
occasions, the collaborations, the competition, the investments for the acquisition of know-how, the
turn in another technology of renewable.
In the next section, we tried to examine their behaviour in the exogenous factors of the market. We
ask them if there are obstacles outside from the sector, if the legislation, the public administration, the
bureaucracy, the corruptness, the land-planning and the networks constitute obstacles and
consequently how they face these obstacles.
In the next section we tried to check the company’s position, generally in the market. We asked them,
if the competition is set up in healthy bases or it is problematic, if networks of collaboration exist in the
market, if the collaboration with their suppliers is satisfactory, if they participate in associations or
chambers for a common representation of their interests.
In the last section of our research, we tried to examine the internal structure of companies and their
behaviour. We asked them if they are satisfied from the structure and the organisation of their
companies as well as from their human resources and if they intend to change certain structures or
processes in their companies.
3.3 Independent institutions of the market

In this section of the research we tried to investigate the legislative framework, the role of the
independent institutions RAE (Regulatory Authority for Energy) and DESMIE (Hellenic Transmission
System Operator) and generally the whole process which is necessary to be followed for the final
operation of a renewable project.
Moreover, we tried to see how these institutions face the enterprises. We asked them which count as
the most important problems that the companies face, what opportunities exist in the market, what
administrative models exist in the market and what is the role of the credit institutions, the taxation
and the public administration in the market.
4. The research outcomes
4.1 Entrepreneurial background - incentives

In regard of companies’ entrepreneurial background, we can see that the first which deal with
renewable were the engineers. This fact confirms the relation between educational level and the
propensity to become someone an entrepreneur.
They knew the subject from the technical perspective and they also saw the investment future.
Afterwards, many other investors entered in the market as well as big groups of companies which
now dominate the market. Therefore there is all the range of companies from personals to
multinational corporations.
General speaking, we can see that there is a discrimination. Some of them invest in wind power
projects, some others in photovoltaic projects and some others in the hydroelectric factories.
Unfortunately, we do not meet often a wide portfolio, mainly due to the scale of the investments.
The photovoltaic projects are more attractive because these require simple technologies as well as
these are more accessible as investments. The wind power parks require a serious power not only
329
from the financial aspect but also from the side of know-how, in order to deal someone with these
projects.
Many companies were established, in order to grow in the renewable market mainly in photovoltaic
and hydroelectric projects.
Some others deal with renewable projects as a parallel entrepreneurial process. These companies
continue their past professional family activity till the renewable investments become economically
efficient.
On the other hand, there are big investors which want to invest in a growing market, mainly in the
wind power energy. These can also make strategic alliances with foreigners as well as to hold the
project’s delay.
Concerning the incentives, some investors recognised, very fast, a high IRR that reached the 10%
and certain times touched upon the 20%. It was a very attractive incentive which did not been
recognised by all. For this reason those that entered first had the bigger profit. In the Greek market,
the risks were “cancelled” by the state initially through not only the subsidies but mainly through the
feed in tariff. Therefore we had guaranteed product, price and market.
It is important that the practice of the occasional entrepreneurship appears in the photovoltaic
projects. On the other hand in the wind power such where big investments were necessary, nothing
could be occasional.
However the basic incentive was the economic profit, in the case of hydroelectric projects the profit
does not result only from the energy but also from the parallel actions that be required by the
intervention in the natural environment (irrigation works, forest fire protection works, etc).
Finally, the basic incentive for the equipment suppliers was their intro into the Greek market. Some of
them may finance some projects in the case where these are in danger or in the case where their
competitors want to gain the project. However, all of them agree that their main activity is to
manufacture the equipment and they do not want to create any sense of competition to the other
investors.
4.2 The major problems of the market

Concerning the analysis of the market’s problems, it is clear the complex, time consuming and
bureaucratic licensing system. The responsibilities of agencies and authorities, involved in the
licensing process, are not clear and the coordination of them is almost nonexistent. Undoubtedly, the
national regulating frame may be the most difficult in the Europe. Therefore, we may have the world
record for the licensing process that reaches the 6-7 years.
The most important cause for this problem is the spare of laws, the frequent changes of laws and the
breaking to pieces of the jurisdiction from the public institutions. It is incredible the time that is needed
for the licensing of a project due to several authorities that want to play the role of the “decision
maker” either the law give to them that responsibility or no.
Very characteristic is the case of the “exception” licence, for the photovoltaic parks up to 100 Kw.
Especially regarding this licence, it would be followed a very simple process. However this became
very difficult. The law determines the timetable in the process of RAE, but however this is not
followed. In the same direction the environmental licensing process is something simple. However,
the bureaucracy that exists today in Greece falls behind all the progress of the projects.
Another very important problem is the incomplete land-planning frame, the forest’s map and more
generally the ownership condition of ground in the Greek territory. It is clear the lack of the land
planning which could describe what allowed to be built and where.
An additional technical reason is that the networks for high voltage are clearly not sufficient to
integrate the renewable into the energy balance and to absorb the generated energy, especially near
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the places with a high wind potential. However, in our case we had a very big lack of infrastructures in
these areas.
Another problem constitutes the delay in the payment of subsidies. While the first subsidies had been
given very fast, nowadays the payment of subsidies delays considerably. Therefore, there is a major
problem for the financing of the projects. Moreover, a lot of financing applications have been
accumulated in the Ministry of Finance. Although, many of them have been selected for financing,
several delays in their administrative approval create delays in whole the investment for more of one
year.
A very important problem is also the decisions of highest court of law, which stop projects in very
mature phases, even with installed machines that it means enormous damage for the investors.
One still important problem that was detected is the “strange” role that certain local environmental
organizations have, sometimes for its own profit. These organizations with the cover of the protection
of environment create conditions of non-transparency coordination, not only with the local society but
also with the investor.
In that direction, it is clear what an interlocutor says characteristically for the corruptness “It is said
that the Urban Planning authorities and the Inland Revenues Service are the most corrupted services.
We have to deal with both of them”.
Consequently, we can understand that an important risk exists in the process till the park’s operation.
Undoubtedly all these time-consuming processes have also a big cost.
Therefore, all this structure of the Greek state creates an entrepreneurial impasse and naturally it
cannot give entrepreneurial opportunities. The most characteristic example for the unacceptable
enterprising environment constitutes the absence of foreign investment capitals in the Greek market
of renewable.
4.3 The strategies against the problems

The strategy that the companies follow in order to face all these problems, vary according to their size
and the technology which they apply.
Big companies in the sector of wind power energy invest in the big legal services, with big expenses
in trials and legal processes. The outcome of that process is a large amount of fees for many peoples
that work aimlessly. Therefore there is a big input and a small output. Undoubtedly, the result in this
case is profitable but no relative with the invested capital.
The only one reason that big technical companies survive in the sector of RES and more specific in
the wind power industry is their previous experience in complicated projects not only from the
technical perspective but also from the side of their coordination with the bureaucratic public services.
It is clear that only the Greeks can fulfil these exhausting processes in the public services.
Some other companies, in the area of wind power just suffer this situation with patience, stress and
uncertainty. So, a bad investment climate is created generally for Greece.
Moreover, there are other companies that they do not react legally because they have also other
projects in process. In that case, they do not want to generate an absolute disagreement with the
services, in order to reduce the risk of the rest of their projects.
The strategy of the hydroelectric power companies’ is quite different. They do not follow the legal path
but they believe that the better way is a properly designed project. A completed plan can easily
convince the service to approve it. If there are “clouds” in the project the service reacts and so the
delays begin.
The hydroelectric industries face with the same way the local communities. Their objective is to set
the local communities as partners not only in the project’s profit but also in the project’s design. They
try to approach the municipalities with diplomacy and an attitude of co-operation. So, in the case
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where some municipalities do not have network of water supply or asphalt roadway, they can provide
these as compensatory profits.
On the other hand, in the case of the photovoltaic parks, the strategic reaction is depended on the
personal fight as well as on the attendance and the assertion in the ministries. Although, there are
some of them that have follow the legal path.
Concerning the delays in the subsidies of the investments there are two strategies. Some companies
select to support the investments by their own capitals and they hope to take the subsidy back
afterwards. Finally, regarding with the behaviour of the local communities, the investors in the
photovoltaic parks try to erase the fear of them, with printed material and continuous communication.
4.4 New markets - competition – co-operations – trade associations

Relatively with the entry in the other technologies of renewable, there are different approaches among
the companies. Firstly, concerning the large companies of wind energy, most of them remain in their
initial choice. However, there are some group of companies that try also to enter in the market of the
photovoltaic parks as well as in the hydroelectric energy, via purchasing of smaller specialised
companies.
As for the companies that are activated in the hydroelectric energy, we can see that they do not
examine any entrance in other technology of RES. They just remain in the manufacturing and the
operation of hydroelectric units. Very basic reason for this choice is the economy of scale and the
necessary capitals for a wind power park for example. In the same direction, the companies of
photovoltaic parks do not plan any move in other markets mainly due to the enormous cost of the
other technologies.
Concerning the competition, we can see that it was keen from the time when RAE began to give initial
permissions for RES projects. When this process became more complicated the competition was
decreased. Some companies had as main objective to accumulate many “initial permissions” and not
to realise projects.
However, executives of many companies, beliefs that there is still enough space in Greece as from
the perspective of geography. The investments maybe will have problems in the future mainly due to
the network’s capacity.
According to another point of view, it is clear that since that the market is not healthy so the
competition could not be healthy. There are many transactions of “initial permissions” or fully licensed
projects but just few projects really be constructed. Consequently, we would say that it is a market in
pending.
Undoubtedly, the competition needs a right regulating frame with a powerful monitoring. Moreover,
the entrepreneurs ought to deal with the advance of their project and not with the blocking of other
investor’s projects. Moreover, it is clear that it would be essential for the companies to hold a rich
portfolio of projects in several technologies of RES.
As for the collaborations, some companies could see this possibility in the level of a specific project.
Moreover, they could see positively their participation among others in the funding of a project in the
case that it has not ensured financing. Undoubtedly, the capital and the know-how are crucial
characteristics for a good collaborator.
Concerning the investor’s activity through their “trade associations”, the companies of wind energy
have the main role because they are the strongest and more powerful players in the market. These
associations try through the contact with the ministries and the responsible institutions to resolve
problems.
The companies that are activated in the hydroelectric industry have been integrated in the other
associations. They tried an autonomous existence in the past, but their small population does not
allow something such this.
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Finally, the companies of the photovoltaic parks have created their own associations for their
representation, due to their big population. Through these associations, their voice can be heard and
some “doors” can open for their problem’s solution.
4.5 The role of institutional organisations

By referring the role of institutional organisations, RAE and DESMIE, there is a common opinion that
they operate better than anyone else Greek public service. However, some point out that these
organisations do not have the dream for the RES, since they see the RES just as necessary evil, and
not as a golden opportunity for the development of the country.
More specifically, RAE which is the system regulator has made a lot of important steps and therefore
it has covered all the diachronic insufficiencies of ministry of Energy. On the other hand, DESMIE is
by far the most completely organised organisations in Greece, with a perfect know-how and a very
good labour environment.
4.6 Companies’ structure and organisation

Concerning the human resources as well as the companies’ structure, most executives of the big
companies stressed that they are generally pleased. However, some of them noted that sometimes
there is not an efficient level of professionalism as well as that there is not a specialised technical
resource in Greece.
The small companies of photovoltaic parks employ just a person for the monitoring of the park and
usually they have a co-operation with an electrician for an emergency situation. Usually the
contractors of the park undertake the maintenance of the park since they have the know how in order
to face any problem.
5. Conclusion
From the previous analysis, very important conclusions result that confirms the literature in the most
fields.
First of all, concerning the companies’ background, we can see that the majority of the investors are
companies with a plenty technological know-how as well as a wealthy financial background.
Undoubtedly, there is a differentiation in the companies’ background, in their field of expertise, as well
as in how they are activated in the market of RES. Therefore, we have firstly some big groups of
companies with mainly constructional background which have entered in the renewable energy
sector, investing in several projects. Their goal is to control a big piece of this market. They mainly
deal with wind power parks but often they try to extend their portfolio investing in other technologies.
Moreover, there are other big companies that are activated in the wind power industry as well as
certain smaller with main object the hydroelectric energy.
Finally the biggest population of companies exist in the field of photovoltaic parks. In that market,
there are mainly small technical companies or independent investors that try to invest in a parallel
enterprising activity.
Continuously, as for their financial power, it is clear that the behaviour of all the above mentioned
“entrepreneurs” differs considerably and it is influenced by the size of the companies as well as by the
power and capital which they allocate. The previous analysis and its results prove that the liquidity of
the companies as well as the supporting financial policies and mechanisms which are applied in the
market play a significant role in the renewable energy market.
Finally, a major factor that can affect the entrepreneurial activity in the market of RES is the
administrative obstacles of the Greek public sector. The references of the literature concerning the
administrative burdens are fully confirmed by the time-consuming licensing process, the bureaucratic
public administration, and the lack of land-planning for the installation of RES projects.
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This research gave us an initial estimate of this “infant” market’s behaviour. Our goal is to confirm our
findings through a quantitative research, which we plan to realise almost in the entire market of
renewable energy sources.
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BioReegion Rhine-Neckar Triangle,” Small Business Economics, 17, 143-153.
Krugman, P., 1991, “Globalization and the Inequality of Nations”, The Quarterly Journal of Economics.
Lentz, and D.N. Laband, 1990, “Entrepreneurial success and occupational inheritance among proprietors”,
Canadian Journal of Economics.
Oswald, AJ., 1998, “What makes an entrepreneur?”, Journal of labor Economics.
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and David J. Storey (eds.), Employment in the Small Firm and the labour Market, London: Routledge.
Sutton, John, 1997, “Gibrat’s legacy”, Journal of Economic Literature, 35, 40-59
Wagner, Joachim, 1992, “Firm Size, Firm Growth, and Persistence of Chance: Testing Gibrat’s Law with
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Consumer Integration: Antecedents and Consequences
Sabine Kuester and Monika Schuhmacher
University of Mannheim, Germany
skuester@staffmail.uni-mannheim.de
schuhmacher@bwl.uni-mannheim.de
Abstract: Continuous development of new products and innovations remain an imperative for companies’ long-
term success. Future success increasingly depends on a company’s ability to acquire external knowledge and to
use it for new product development (NPD). Consumers are recognized as the most important source of external
knowledge. For firms to tap into this knowledge they need to integrate consumers in NPD. Research in consumer
integration (CI) has previously focused on customer integration in B2B. Recently, an empirical base is developing
regarding CI in a B2C-context, but so far this research focuses mostly on single industry contexts such as the
leisure industry. Further research is needed to fully understand important antecedents and outcomes of CI in
consumer goods industries using cross-sectional data. We propose a conceptual model that investigates different
potential company-related and process-related antecedents of CI. Based on an extended literature review, we
focus on the following antecedents: consumer orientation, competitor orientation as well as interfunctional
coordination. On the basis of qualitative interviews with managers from consumer goods industries we also
consider additional factors: the dependence on retailers and the incentive system of managers. It is also of
interest to investigate how CI impacts new product success. So far, research on CI shows a positive effect on
new product success. However, based on the transaction cost theory we propose an inverted U-shaped
relationship between CI and new product success. Following recent literature on new product success we
measure it as a second-order formative construct. Altogether, we test the hypotheses with data from 205 firms
spanning multiple B2C industries. The empirical findings show that a very important antecedent of CI intensity is
consumer orientation. Furthermore, the incentive system of managers involved in NPD must depend on the new
product success. The more the incentive system is based on new product success, the more are consumers
integrated in NPD. In addition, consumers are integrated more intensively the more companies depend on
retailers. We find that CI intensity shows an inverted U-shaped effect on new product success.
Keywords: new product development, transaction cost theory, consumer integration
1. Introduction
Innovations provide companies with critical growth opportunities. Bringing out successful new
products is still a challenge especially in B2C companies. Future success increasingly depends on a
company’s ability to acquire external knowledge and to use it for NPD. Knowledge integration can
endow firms with collective learning ability which combines past and new knowledge (Iansiti and Clark
1994) and for firms to tap into this knowledge they need to integrate consumers in NPD (Piller and
Walcher 2006). Even though managers as well as researchers agree upon the importance of
consumer integration (CI) in NPD, companies still lack in external knowledge exploitation.
Over the last two decades there has been an increasing interest in the role of consumers in NPD
(Franke, von Hippel and Schreier 2006; von Hippel 1986). However, the majority of research on
customer integration was conducted in a B2B context (e.g. Gruner and Homburg 2000; Shaw 1985;
Parkinson 1982). Research has pointed to the need to examine CI also in slow and fast moving B2C
industries (Prahalad and Ramaswamy 2004). Recently, an empirical base has been developing
regarding the design of CI in a B2C context. This research has predominantly focused on the question
whether consumers are able to provide valuable information for NPD (e.g. Morrison, Roberts and von
Hippel 2000; Shah 2000). Overall, the research to date indicates that CI has a positive impact on new
product success. In addition, the focus of research on CI in the B2C context is primarily on single
industry contexts (e.g. Schreier and Prügel 2008; Franke, von Hippel and Schreier 2006; Shah 2000)
and on the design of CI (e.g. Füller, Jawecki and Mühlbacher 2007; Franke, von Hippel and Schreier
2006; Prandelli, Verona and Raccagni 2006). So far, there is no research which examines
antecedents of the intensity of CI in NPD. In addition to identifying key antecedents of CI in B2C we
are also interested in investigating consequences of CI.
With this paper we intend to contribute to the existing literature by analyzing whether and to what
extent company-related and process-related antecedents influence the intensity of CI in NPD of B2C
companies. Furthermore, we investigate how the intensity of CI impacts new product success of a
company. Therefore, we first develop a conceptual framework based on the transaction cost theory
and on empirical findings of innovation success research. Subsequently, we derive hypotheses
regarding the impact of antecedents and consequences of CI intensity. Next, we describe our
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research design to test the hypotheses followed by a presentation and discussion of the results.
Finally, we interpret our findings, delineate implications for NPD, and point to further research
opportunities.
2. Conceptual development and hypotheses
Based on the literature review and interviews with 19 experts from the B2C industry we focused on
the following antecedents: three facets of market orientation, which are customer orientation (here, in
the context of B2C industries referred to as consumer orientation), competitor orientation, and
interfunctional coordination (Narver and Slater 1990) as well as the incentive system for employees
and the dependence on retailers. Our conceptual model is depicted in Figure 1.
Consumer H1: +
orientation
Competitor H2: -
orientation
H3: + Consumer New

Interfunctiona H6:
integration product
l coordination intensity success
Incentive
system H4: +
Dependence H5: +
on retailers
Figure 1: Conceptual model
2.1 Antecedents of consumer integration in NPD

Overall, market orientation can be described by concentrating actions on multiple market participants
in order to achieve a competitive advantage (Kohli and Jaworski 1990; Narver and Slater 1990). An
important link of this relationship is creativity (Im and Workman 2004). Market orientation implies for
example the knowledge exploitation of competitor and market trends, which in turn enhances the
creativity in NPD. Thus, market orientation results in specific creative activities and behaviors. In line
with this, Slater and Narver (1998) advocate that market orientation means to concentrate company
activities, and thus NPD, on the explicit as well as latent needs of their consumers. In order to
systematically discover them, B2C companies need to integrate consumers in their NPD.
Hence, based on these findings, we assume that the different market orientation facets, impact the
intensity of CI in NPD.
2.1.1 Consumer orientation

One of the main reasons for high failure rates of consumer goods is the lack of both market analysis
and consumer orientation (Cooper 2001). The aim of consumer orientation is the fulfillment of
individual consumer needs and expectations (Dean and Bowen 1994). For Schneider and Bowen
(1995), CI entails the commitment of the company to consumers so that consumers and the company
ultimately share values and long-term strategies. In order to achieve this, companies need to cultivate
direct consumer contacts, collect information from consumers about their needs and use this
information to develop new products. Following the market pull approach, the main stimuli for NPD
come from the market, i.e., from consumers. On this basis, companies open up their NPD to
consumers.
H1: The stronger the consumer orientation the more intensively consumers are integrated in NPD.
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2.1.2 Competitor orientation

Narver and Slater (1990) indicate that the creation of a superior consumer value is not possible
without competitor orientation. Following the understanding by Kohli and Jaworski (1990), the
processing of information about the competition is of major importance. In this line, they emphasize
the relevance of analyzing competitive activities and their impact on consumer behavior (Kohli and
Jaworski 1990). So far, despite the relevance of competitor orientation there is little research on its
phenomenon.
The orientation towards competitors and their new product portfolio provides companies with a source
of important information for developing new products (Lukas and Ferrell 2000), because this allows
indirect learning from the experimentation of competitors. This orientation implies to observe
competitors and to use them for benchmarking. Out of this, companies can follow different innovation
strategies, e.g., me-too or a follower strategy (Lukas and Ferrell 2000). By observing competitors’
market conduct and learning from their successes, a competitor-oriented company is better able to
judge which new products will meet consumer needs and expectations (Dean and Bowen 1994), so
that external knowledge exploitation involving consumers will be less necessary and needed.
H2: The stronger the competitor orientation, the less intensively consumers are integrated in NPD.
2.1.3 Interfunctional coordination

When working together with different departments, what is especially the case in NPD, the effective
interfunctional coordination is of major importance (Gruner and Homburg 2000). Overall, NPD is an
interdisciplinary process mainly among marketing, production, and R&D (Maidique and Zirger 1985).
In order to manage this process effectively, departments must interact, exchange information, and
collaborate closely (Griffin and Hauser 1996).
The most important motive for a close connection between departments when developing new
products is the understanding of consumer needs and to use this information for effective solutions to
these needs (Zirger and Maidique 1990). As a result, NPD teams with members from different
departments should be capable to develop new products which better meet consumer expectations
and needs (Dean and Bowen 1994). Due to the motive for a close connection between different
departments to understand consumer needs we propose that interaction barriers between
departments not only influence negatively the communication (Zirger and Maidique 1990), but also
the CI in NPD.
H3: The stronger the interfunctional coordination, the more intensively consumer are integrated in
NPD.
2.1.4 Incentive system

Top managers not only have to provide company goals and strategies but also support NPD through
the allocation of resources (Cooper and Edgett 2004). One way to show this top-management support
of NPD is to design the incentive system of employees accordingly. Hence, we focus on outcome-
based rewarding, that ties in an employee’s incentives to the outcome of the new product projects.
The use of incentives to motivate a certain behavior is rooted in motivation research (Amabile 1993).
For the purpose of this study, the incentives are of interest that motivate employees to innovate.
There is little research regarding the impact of incentives on the participation in NPD (e.g. Sarin and
Mahajan 2001). Based on the conviction that people do everything for a certain reason we propose
for NPD, that monetary incentives stimulate performance. If a better solution is honored financially,
employees make a stronger effort (Camerer and Hogarth 1999).
In NPD top management rewards employees’ efforts to generate, for example, new product ideas
(Hanna et al. 1995). Ideas for new products are easier to obtain, the more profoundly consumer
needs are understood. Therefore, we expect that employees highly motivated via NPD-specific
incentive systems will integrate consumers more intensively in order to obtain critical external
information.
H4: The stronger the incentive system is based on NPD, the more intensively consumers are
integrated in NPD.
337
2.1.5 Dependence on retailers

In B2C, the supply tends to addresses an anonymous mass market (Sheth, Sisodia, and Sharma,
2000). NPD normally addresses aggregated demand and, thus, mostly results in standardized
products. Consumer goods are characterized by long distribution channels due to indirect, multi-step
distribution implying rather low, indirect contact with customers. Because the sale is via retailers, B2C
companies only have little knowledge about the needs and wants of their customers (Ernst, Soll, and
Spann, 2004). Information on customer needs, but also on customer complaints, normally is received
by retailers and is more difficult to obtain by the manufacturer (Urban and Hauser, 1993). Regarding
innovation-relevant information consumer goods companies have complained about retailers’
unwillingness to share this information (Hansen and Raabe, 1991). The quality of information transfer
is also likely to deteriorate with increasing length of the distribution channel. An integration of
customers in NPD is one strategy to overcome information deficits arising in these settings.
In addition, the competition for shelf space is strong (Thomassen, Lincoln, and Aconis, 2009). B2C
companies depend on retailers to list their products. Thus, it is necessary for the company to identify
customer needs and to meet these needs with new products in order to produce a market pull effect.
This market pull effect will then force retailers to list the manufacturer’s new products (Luo, Kannan,
and Ratchford, 2007). Thus, in B2C settings direct customer knowledge acquisition seems to be
necessary and important. We, therefore, expect that dependence on retailers determines the intensity
of customer integration in NPD.
H5: The stronger the dependence on retailers, the more intensively consumers are integrated in NPD.
2.2 Consequence of consumer integration in NPD

Based on previous research on innovation success factors (e.g., Rothwell 1972; Maidique and Zirger
1985), factors which relate to knowledge about consumers turn out to be new product success
factors. Thus, successful NPD calls for an intensive CI in NPD. However, compared to other studies
(e.g. Lilien et al. 2002; Gruner and Homburg 2000) we expect that CI only exerts a positive impact up
to a certain point. Based on the transaction cost theory we propose an inverted-U shaped relationship
between the CI intensity and new product success. Transaction cost theory explains the complexity of
transactions mainly based on uncertainty and specifity (Williamson 1975). For CI this implies, that
with increasing specifity and uncertainty market transactions become more and more
disadvantageous compared to the hybrid transaction (Heide and John 1990). Thus, the tendency to
integrate consumers increases as well. However, with further increasing uncertainty and specificity,
the CI as a cooperation form becomes less advantageous compared to a hierarchical transaction.
This means, that the more consumers are integrated the stronger becomes e.g. the specificity of that
transaction and thus, the less advantageous is the CI. Hence, based on the transaction cost theory
we propose an inverted U-shaped relationship between CI and new product success.
H6: The impact of consumer integration intensity on new product success is best described by an
inverted U-shaped curve, i.e., new product success is highest when consumer integration is
moderately intensive as compared to when consumer integration intensity is low or high.
3. Methods
3.1 Sample and data collection

To reach a cross-section sample of medium and large companies, we sampled from the population of
consumer goods companies from Germany, Switzerland, and Austria based on the number of
employees and revenues. Using a commercial company database we identified 562 contact persons
(R&D, product, and marketing managers) in companies relevant for our study by using a stratified
random sample (stratification by industry type and revenue). We contacted these marketing, product,
and R&D managers by phone in order to inform them about our research objectives and to solicit their
participation. Managers who integrated consumers in NPD, who showed an interest in the study, and
who agreed to participate were sent the questionnaire together with detailed instructions. A follow-up
to all non-respondents was conducted six weeks later.
Overall, we obtained 205 usable questionnaires, corresponding to an effective response rate of

36.5%. A test for non-response bias indicates that there seems to be no non-response bias in our
data. The final sample size consists of R&D managers (25%), product managers (29%), marketing
338
managers (30%), and members of the board of directors (16%). Overall, 58.5% of the respondents
came from the slow moving and 41.5% from the fast moving B2C industry. Regarding company size
the companies were medium and large sized. In addition, to ensure data quality, we established
checks on respondents’ knowledge of the company and NPD issues.
3.2 Measures
Existing scales were used wherever possible, and different steps were undertaken to develop the
measures for the new construct of our conceptual model (Churchill 1979). First, a review of the
relevant and extant NPD and consumer behavior literature was conducted identifying a pool of items
for each of the constructs. Second, in-depth interviews with 19 innovation and marketing managers
from the consumer goods industry were conducted; first, to gain a better understanding of CI in NPD
and second, to find out what drives the intensity of CI in NPD. Third, on the basis of the literature
review and the in-depth interviews items were generated which pertain to the domain of each
construct as closely as possible (Churchill 1979). Fourth, a list of constructs and corresponding
measurement items were submitted to a panel of nine academic experts on NPD research for critical
evaluation and face validation. The final questionnaire was constructed based on those items judged
to have high consistency and face validity. Fifth, the final questionnaire was pretested to ensure
understandability and measurement quality using 27 innovation and marketing managers. Based on
the feedback from the participants, two items had to be rephrased.
All items were assessed on seven-point Likert scales anchored 1 = ‘I strongly agree’ to 7 = ‘I strongly
disagree’. As we focus on strategic aspects of NPD and management in general, we collected the
data at the company level. As a result the survey addressed new product endeavors which were
representative for the respective companies and which also showed variability with regard to
innovativeness and success levels. Overall, CI intensity as well as the antecedents of CI were
measured reflectively, whereas new product success was measured formatively. We analyzed all
constructs as well as the relations between the latent variables with partial least squares (PLS)
structural equation modeling (Ringle, Wende and Will 2005). As a component-based method, PLS
allows the use of formative as well as reflective measures (Chin and Newsted 1999), which is the
case in our model. The complete scales are included in the appendix.
3.3 Factor analyses

Reliability measures revealed very good results for all reflective constructs, since Cronbach alphas
ranged from .754 for consumer orientation to .938 for CI intensity. The average variance extracted
(AVE) is greater than .50 for all constructs and the composite reliability ranged from .804 for economic
success to .951 for CI intensity. The reliability evaluation of formative measures is different from the
one for reflective measures (Anderson and Gerbing, 1991). First, external validity needs to be
assessed. In our study, we ensured external validity via the expert interviews (N=36: nine academic
experts on NPD research and 27 innovation and marketing managers). In addition, to secure for
indicator relevance, the weight of each item on the respective factor should be significant. This was
the case for the economic success (indicator weight = .728, t-value = 1.718, p < .05) as well as the
quality success (indicator weight = .766, t-value = 1.897, p < .05).
3.4 Data analysis and results

As hypothesized, consumer orientation shows a strong positive impact on CI intensity (β = .335, t =
5.046) (H1). Furthermore, we found a negative effect of competitor orientation on CI intensity,
however, this is only significant at p<.1 (β = -.091, t = 1.352) (H2). The third component of market
orientation, interfunctional coordination, shows a positive impact on CI intensity as hypothesized,
again only at p<.1 (β = .080, t = 1.400) (H3). In addition, the two constructs, that were included on the
basis of expert interviews, show both a significant positive impact on CI intensity. The construct
incentive system shows a significant positive effect on CI intensity (β = .177, t = 3.267) (H4). Our
variable dependence on retailers equally has a significant positive effect on CI intensity (β = .142, t =
2.858) (H5).
This is the first study, that could show a significant inverted u-shaped effect of CI intensity on new
product success (β1 = -.025, t = .253; β2 = -.200, t = 1.938) (H6). To a certain degree it is very
important to integrate consumers in the development of new products. Hence, the intensity of CI
should reach a certain level. However, beyond moderate levels of CI intensity uncertainty and
339
specificity will influence the efficiency of this transactional form negatively. This means, that the more
consumers are integrated the stronger becomes e.g. the specificity of that transaction and thus, the
less advantageous is the CI. In this light, integrating consumers in good measure will help the
innovating company to reduce failure rates of their B2C innovations (Henkel and von Hippel, 2005).
We list the path coefficients and t-values of the effects in Table 1.
Table 1: Path analysis and beta-coefficients (t-values in parentheses)
Beta-
Path coefficient
(t-value)
.335
Consumer orientation Æ CI intensity
(5.046)***
-.091
Competitor orientation Æ CI intensity
(1.352)*
Interfunctional coordination Æ CI intensity .080 (1.400)*
.177
Incentive system Æ CI intensity
(3.267)***
.142
Dependence on retailers Æ CI intensity
(2.858)***
CI intensity Æ New products’ success -.025a (.253)
*p<.1, **p<.05, ***p<.01; aA significant inverted u-shaped effect was found, β = -.200
(1.938)**
4. Discussion and managerial implications

This article represents the first work identifying antecedents and consequences of CI intensity and
testing their relevance in an empirical study in the customer goods industry. To test our conceptual
model we garnered data from 205 managers involved in NPD in mid- to large-sized B2C companies.
Based on innovation success literature as well as transaction cost theory we developed a conceptual
framework of five possible strategic antecedents of CI intensity (consumer orientation, competitor
orientation, interfunctional coordination, incentive system, and dependence on retailers). Of these five
potential antecedents, the impact of the retailer dependence was never studied before in the realm of
new product research.
Overall, we could show that companies can increase their new products’ success by increasing the CI
intensity to a certain extent. B2C companies can increase the intensity of CI in NPD by influencing
certain strategic management characteristics. It has been found that strong consumer orientation
boosts the integration of consumers in NPD. Our results show that a strong orientation of the
incentive system on NPD leads to more intense CI. This indicates that incentive systems for
employees should be based on the success of NPD projects. In doing so, the so called ‘not-invented-
here’ syndrome can be overcome (Enkel, Kausch and Gassmann 2005). In addition, consumers are
integrated more intensively, the more the company depends on retailers. This is due to the fact that
B2C companies only have little knowledge about the needs and wants of their consumers (Ernst, Soll
and Spann 2004). Thus, the dependence on retailers results in companies’ need to integrate
consumers more actively in their NPD. This could be shown for the first time in this study.
In addition, our findings disclose that CI intensity has an inverted U-shaped effect on new product
success. Because NPD is very specific to the respective NPD project, we see that CI is an important
organizational option to choose when developing new products. To a certain degree it is very
important to integrate consumers in the development of new consumer goods. Hence, the intensity of
CI should reach a certain level. However, beyond moderate levels of CI intensity uncertainty and
specificity will influence the efficiency of this transactional form negatively. This means, that the more
consumers are integrated the stronger becomes e.g. the specificity of that transaction and thus, the
less advantageous is the CI. In this light, integrating consumers in good measure will help the
innovating company to reduce failure rates of their B2C innovations (Henkel and von Hippel 2005).
5. Limitations and further research
The present study is subject to a number of limitations. For the measurement of new product success
we chose a formative measurement approach. This represents a key contribution of this paper. In the
340
analyses of antecedents and consequences of CI intensity using the same market research
instrument a potential common method bias cannot be ruled out. To test for this problem, we
performed the Harman’s one-factor test on the items (Podsakoff and Organ 1986). The results of a
principal components factor analysis show eight factors with an eigenvalue greater than 1. These
factors account for 71% of the total variance. Because many factors emerged from the factor analysis
and because the first factor accounted for only 21% of the total variance, common method bias does
not appear to exist (Menon et al. 1999, p.31).
Second, when measuring success, subjective or objective data can be utilized. In general the
collection based on subjective evaluations is critical. However, Song and Parry (1997) show high
correlations between subjective and objective success measures of new product success. In addition,
subjective measurements of new product success are used because objective data from different
industries are not comparable. This is based on different accounting principles. Hence, an objective,
comparable measurement is very difficult to achieve and subjective measurements enable a
comparison between different industries (Frishammar and Hörte 2005).
6. Appendix 1: Measurement and item reliability
Indicator AVE Cronbach Composite
Construct name and measurement item reliability Alpha Reliability
Consumer integration intensity
.
(adapted from Gruner and Homburg, 2000)
..764
In NPD… .938 .951
…, consumers participate intensively. .820
…, consumers are integrated heavily. .823
…, consumers work together intensively. .841
…, there are several meetings with consumers. .747
…, a large number of different consumers is integrated. .608
…, consumers are integrated over a long period. .700
Consumer orientation
(adapted from Deshpandé, Farley, and Webster, 1993; Narver .
and Slater, 1990) ..660
.754 .844
Regarding our customers…
…we collect information systematically & regularly. .565
…we quickly know about radical changes (e.g. changing
.722
customer needs).
...our employees spent time to share information with other
.592
departments.
…we react promptly, if something important happens. .525
Competitor orientation
(adapted from Narver and Slater (1990); Jaworski and Kohli .
(1993) ..793
.796 .844
Regarding our competitors…
…we collect information systematically & regularly. .503
…we quickly know about radical changes (e.g. competitive
.626
strategies).
...our employees spent time to share information with other
.509
departments.
…we react promptly, if something important happens. .706
Interfunctional coordination
.
(adapted from Ernst, 2002; Kahn, 1996)
..622
Different departments… .847 .891
…try to reach objectives together. .641
…have a good understanding of each other. .790
…collaborate also informally. .668
…share ideas, information and resources. .671
341
…share the same vision of the company. .630

…work together as a team. .836
Construct name and measurement item Indicator AVE Cronbach Composite
reliability Alpha Reliability
Incentive system
(adapted from Page, 1993)
.743 .913 .935
The incentive system for our employees, which actively push
new product projects,…
…consists of components depending on new product
.725
success.
…supports and rewards active participation in NPD. .829
…is strongly based on output factors like new product
.787
success.
…supports individual creativity. .697
Dependence on retailers .710 .866 .907
We depend on information by retailers on customer needs. .824
Retailers have market information, which is important to us. .746
Retailers influence, which market participants receive relevant
.658
information.
It is mainly retailers who have market information that is
.610
important to us.
Economic success .684 .827 .804
(adapted from Atuahene-Gima, 1995)
Compared to competitors’ new products…
…our new products reached the targeted profit goals. .581
…the ROI of our products was satisfactory. .986
Quality success
(adapted from Clark and Fujimoto, 1991; Crawford, 2007) .836 .827 .910
Compared to competitors’ new products…
…our new products were technically more effective. .729
…our new products persuaded based on their functionality. .943
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344
Is Open Innovation Open? Evidence From the Most
Innovative Firms and the Most Valuable Brands
Mikko Laine1 and Bettina Maisch2
1
Aalto University School of Science and Technology, Espoo, Finland; and
Stanford University, USA
2
University of St. Gallen, Switzerland and Stanford University, USA
mikko.laine@tkk.fi
bettina.maisch@unisg.ch
Abstract: Due to the constantly developing technologies on the Internet, it is becoming both easier and more
common for customers to express their opinions and ideas online. A natural channel for this ongoing dialogue is
social media and online communities. Open innovation has been coined as the principle where firms may
embrace these inputs from customers and involve them in the innovation processes of the firm. Open innovation
is formally defined as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation,
and expand the markets for external use of innovation, respectively”. Logically, to find examples of these
principles and to observe the forefront of open innovation, one could assume that the firms that are considered
the most innovative and the brands that are considered the most valuable would posses these qualities.
However, are these firms actually embracing the notion of open innovation, and if so, in what way? In this paper
we explore how firms incorporate open innovation principles online. Specifically, our research question is: “How
are the most innovative firms and the most valuable brands allowing innovation inflow from end-users on the
Internet?” To tackle this research question, we use an exploratory research design where the websites of the
firms are examined in detail. We use BusinessWeek’s lists from 2009 of the 50 most innovative firms and the 50
most valuable brands to derive the sample of firms under investigation. This results in 75 analyzed cases, as
some appear on both lists. The sample includes business-to-business as well as business-to-consumer
firms/brands. We only examine the international, English-language sites, or US-sites of the firms. The inquiry
follows a defined observation protocol, which includes recording the input possibilities for innovation as well as
the online community or social media efforts on the websites. The main finding of the study is that the use of
open innovation principles over the Internet or in social media and online communities is still relatively limited.
Furthermore, although some of the firms have adopted these principles, the way for users to communicate their
ideas to the firms remain underutilized with a few exceptions. Results of this study can help practitioners depict
the current state of open innovation and to direct their efforts accordingly. Academically, our study contributes to
the developing discussion on open innovation, and the results raise the question of whether open innovation is, in
fact, necessary for firms to still remain innovative. There are several limitations to this study. The main limitation
is that the most innovative firms are often very large and multinational, and therefore often have multiple
websites, e.g. for each country, and these country sites may have very different content than the ones that were
studied. In addition, separate sites may be launched for short marketing campaigns, or for specific products, that
could be used for these activities. We suggest that future studies should be directed toward confronting these
limitations, and to identify the firms and their characteristics that in fact do use open innovation aggressively.
Keywords: open innovation, co-creation of innovation, user participation, online community, social media
1. Introduction
Innovations are crucial for firms to survive in the competitive marketplace (Katila and Ahuja 2002;
Cohen and Levinthal 1990; Dosi 1982). An innovation is traditionally defined as “a process that begins
with an invention, proceeds with the development of the invention, and results in the introduction of a
new product, process or service to the marketplace” (Edwards and Gordon 1984, p. 1). Furthermore,
innovations can bring about new or improved business processes or organizational practices for a
firm. These innovations have traditionally been achieved by conducting research and development
(R&D) activities within the firm.
However, with the ever-tightening and globalized competition it is becoming harder if not impossible
for firms to thrive with merely firm internal R&D. Dominant factors in affecting this trend are the
mobility of knowledge workers and availability of private venture capital (Chesbrough 2003b).
Following from this, new ideas and concepts for innovation have emerged that would continue
providing firms with competitive advantage. One of these important emerging concepts is open
innovation. Open innovation can be formally defined as “the use of purposive inflows and outflows of
knowledge to accelerate internal innovation, and expand the markets for external use of innovation”
(Chesbrough 2006, p. 1). In open innovation, the boundaries of the firm become permeable,
incorporating the flows of information with other relevant stakeholders.
345
Mikko Laine and Bettina Maisch
Relating closely to these trends, the constantly developing technologies on the Internet have made it
both easier and more common for users to express their opinions and ideas online. A natural channel
for this ongoing dialogue is online communities and social media. New and unconventional ideas can
stem from this end-user dialogue that are closer to the heart of the market and customer, and more
closely represent their needs. Firms are starting to recognize this growing potential and have started
various forms of engagement. Logically, to find examples and to observe the forefront of engaging
users through open innovation, one could assume that the firms that are considered the most
innovative and the brands that are considered the most valuable would posses these qualities.
However, are these firms actually embracing these aspects of open innovation, and if so, in what
way?
In this paper we investigate how existing firms incorporate open innovation principles online.
Specifically, our research question is: “How are the most innovative firms and the most valuable
brands allowing innovation inflow from end-users on the Internet?”
The rest of the paper is structured as follows. First, in Section 2 we explore the related literature.
Section 3 presents the applied methodology, and Section 4 explains our findings along with the
study’s limitations. Finally, Section 5 ends the paper with concluding remarks and directions for future
research.
2. Background
2.1 Open innovation

Open innovation is a recent concept that was coined in 2003 by Chesbrough (2003a; 2003b). It
maintains that firms are not able to keep up with innovation anymore by just upholding their internal
R&D activities. Indeed, incumbents struggle to keep up with the competition which includes small
firms with seemingly no internal R&D (Chesbrough 2003b; Gassman 2006). Rather, a combination is
needed including firm internal processes as well as the utilization of outside resources. Successful
innovation must therefore be achieved by networking with other stakeholders. Open innovation is
formally defined as “the use of purposive inflows and outflows of knowledge to accelerate internal
innovation, and expand the markets for external use of innovation, respectively. [This paradigm]
assumes that firms can and should use external ideas as well as internal ideas, and internal and
external paths to market, as they look to advance their technology.” (Chesbrough 2006, p. 1). While
the outflow of knowledge concerns bringing ideas to market, selling intellectual property (IP) and
multiplying technology by transferring ideas to the outside environment, the inflow involves integrating
outside stakeholders to enrich the firm’s knowledge base (Enkel, Gassman and Chesbrough 2009).
The stakeholders and channels can include, for example, suppliers, universities, even competitors
and especially end-users.
Other, related works have also introduced views of adopting additional, external sources for
innovation, in particular the users (von Hippel 1988; von Hippel 2001; West and Lakhani 2008).
Specifically, the so-called lead users as the source of innovation have been the focus of one research
stream (von Hippel 1986). Furthermore, related concepts such as customer co-creation of value
(Prahalad and Ramaswamy 2000; 2004) and crowdsourcing (Howe 2004) have touched upon similar
issues.
Previous studies on open innovation have still largely been case studies (cf. Dahlander and
Magnusson 2005) or based on anecdotal evidence, thus pointing to the infancy of this particular
research area (Edmondson and McManus 2007). However, the amount of quantitative studies has
slowly been rising (cf. Jeppesen and Frederiksen 2006; van de Vrande et al. 2009). The quantitative
studies on open innovation have mostly examined the various channels for open innovation by
aggregating them into a combined breadth of innovation search construct (Laursen and Salter 2006;
Leiponen and Helfat 2010). Studies concentrating on a specific channel for open innovation are
deemed scarce and needed (Laursen and Salter 2006). Although there has been a growing amount of
literature on open innovation in general, the literature is yet relatively scarce concerning (open)
innovation in the specific channel of online communities (Laine 2009), although it can constitute an
important external source for innovation (Dahlander, Frederiksen and Rullani 2008). The few studies
that have been made have mainly considered the phenomenon in open source software (OSS)
communities (Dahlander and Wallin 2006).
346
Firms have, indeed, started to utilize the principles of open innovation in their innovation activities.
However, no thorough, up to date and large-scale investigation has been conducted on the open
innovation practices of firms. In this paper we attempt to bring evidence to this gap, but in the scope
of this paper we focus distinctively on the inbound flow of information from end-users to a firm
emerging from the channels of the Internet and related online communities.
2.2 Online communities and social media

Virtual (online) community as a concept has been around from 1993 when it was introduced by
Rheingold (1993). Still, researchers have mostly approached the phenomenon due to mere
fascination and have not thus paid careful attention to defining the concept (West and Lakhani 2008).
New and popular terms in general – such as online communities and social media – often gain a
buzzword status and are used without exactly knowing what the terms mean. This results in
interchangeable and incorrect use of the terms and in general confusion. Resulting from this, there is
still no common agreement on the definition of a virtual community in the extant literature (Leimeister
and Krcmar 2004). In addition, various naming and typing conventions for this same concept have
been used interchangeably (Preece 2000; Miller, Fabian and Lin 2009).
Here we use one of the most popular names “online community” to denote this concept. Furthermore,
in the scope of this paper, we define an online community from a sociological perspective by adding
the word virtual to Hillery’s (1955) definition of a (conventional) community. Therefore, an online
community is (1) a group of people who (2) share social interaction and (3) some common ties among
themselves and the other members of the group and (4) who share the same virtual space for at least
part of the time. The virtual space can in practice be, for example, a web forum or a virtual world.
Similarly, social media is a very recent and popular phenomenon, and thus still lacks a formal
definition (Xiang and Gretzel 2010) also due to the aforementioned buzzword-status, even though
attempts at defining it have been made (Kim, Jeong and Lee 2010). In the context of this paper, we
define social media from the premise of conventional media. Media, often also referred to as the mass
media, are the tools and channels to relay information and data (content), where the content is
generated centrally and broadcast to the media’s consumers. Social media can then be defined as
the tools and channels to relay content mainly generated by the consumers themselves. People
engaging in social media form social networks and online communities amongst themselves. Some
authors make a distinction between social networking websites (e.g. Facebook) and social media
websites (e.g. YouTube) (cf. Kim, Jeong and Lee 2010). Conversely, we feel this distinction to be
superficial, as these holistic services regularly exhibit characteristics and functionalities of both
categories.
3. Methodology
3.1 Sample
In order to answer the research question, we use an exploratory research design where the websites
of firms are examined in detail. To derive the sample of firms under investigation, we use
BusinessWeek’s lists from 2009 of the 50 most innovative firms (BusinessWeek 2009a) and the 100
most valuable brands (BusinessWeek 2009c). BusinessWeek is a weekly business magazine based
in US with a circulation of over 900 000. We chose BusinessWeek’s lists as the source of firms to
investigate because the lists are widely recognized, have a long history and explain their methodology
of compilation well. As an example, the top 5 firms from the most innovative firms’ list include Apple,
Google, Toyota Motor, Microsoft and Nintendo. Similarly, the top 5 firms from the most valuable
brands’ list include Coca-Cola, IBM, Microsoft, GE and Nokia. We selected the first 50 brands from
the list of the 100 most valuable brands for analysis in order to select an equal amount of firms from
both lists. Combining these lists results in 75 analyzable cases, as 25 firms appear on both lists. The
most valuable brands most often equal to firms of the same name. In the few cases that the brand is
actually a product (such as Gilette from Procter & Gamble) we analyze the brand website rather than
the firm website. The sample includes business-to-business as well as business-to-consumer
firms/brands, and several of them are active on both fronts.
BusinessWeek’s ranking of the 50 most innovative companies of 2009 is based on a survey by

Boston Consulting Group (BCG). A 20-question questionnaire was sent in December 2008 to senior
executives around the world. 2700 answers were received, and the respondents anonymously named
347
firms that consistently offer inventive products, customer experiences, business models or processes.
Self-votes were discarded. BCG factored in financial performances, and the final list weighs the
survey results 80%, stock returns 10%, three-year revenue growth 5% and three-year margin growth
5%. (BusinessWeek 2009b)
BusinessWeek’s ranking of the 100 most valuable brands of 2009 is formed with Interbrand. First of
all, a brand must derive at least a third of its earnings from outside its home country. It must also be
recognizable beyond its base of customers, and have publicly available marketing and financial data.
Brand value is valued on the basis of how much the brand is likely to earn for the firm in the future.
Interbrand uses analysts’ projections, firm financial documents, and its own qualitative and
quantitative analysis to arrive at a net present value of those earnings. The brand values are based
on data collected during the 12 months prior to June 30, 2009. (BusinessWeek 2009d)
3.2 Data collection and analysis

To collect the data from the firms under investigation, the websites of the firms are examined in detail.
We only investigate the international, English-language sites, or US-sites of the firms. The web
addresses (URLs) of these websites are usually of the form www.firmname.com. End-users can
intuitively type this address into their web browsers or the address can often be easily found as the
first search result of web search engines. Our inquiry follows a predefined observation protocol. After
accessing the main website of the firm, we search and record the input possibilities for users’
innovation initiatives as well as the online community or social media efforts on these websites. Here,
the latter are both recorded under the same category of “online community”. In addition, we calculate
how many mouse-clicks it takes to get from the main website to the place for user input.
4.1 Findings
The key findings of the study are presented in Table 1. The study shows that approximately one third
(26 of 75) of the analyzed firms follow an open innovation approach on their website, allowing for end-
users to get involved in the innovation process of the firm. About a quarter of the analyzed firms (19 of
75) have an online community on their website.
Table 1: Dataset and key findings
Total dataset 75 firms and brands
Open innovation approach on website 26 (34,7%) of the firms and brands
12 as a part of the corporate website
14 as a separate website
Online community on website 19 (25,3%) of the firms and brands
The majority of the firms that follow an open innovation approach are technology firms (15 of 26 firms)
in the fields of consumer electronics (Sony), Internet (Google, Facebook, eBay), telecommunication
(Vodafone, Nokia), and soft- and hardware (Apple, Microsoft, IBM, Hewlett-Packard (HP), Infosys,
SAP, Dell and Oracle). An explanation for this result could be that these firms’ products are already
closely related to the technical “domain” of the Internet and thus they have easier and closer relations
to their users and communities online. As an example, technology firms are often open to work with
external software developers and to use their own online platforms to integrate them.
Great variety of form and intensity of involvement possibilities for the end-users can be observed
between the investigated websites. Manufacturers such as GE, Ford and Johnson & Johnson merely
enable the submission of ideas. In contrast, there are implementations that allow for an intensive
interaction with and among stakeholders such as HP’s and IBM’s solutions, and especially Dell’s
IdeaStorm:
“[IdeaStorm is an] idea platform for submitting, discussing, voting ideas and checking
what’s going on with your ideas”.
Of the 26 firms that follow an open innovation approach, 12 firms have an area for collaboration or the
possibility for submission of ideas on the corporate website itself, and 14 firms have a separate
innovation management or open innovation website that could be found through the main website.
Firms that build their own platforms for idea and innovation management are, for example, HP, Nokia
and Procter & Gamble with their well-known platform Connect + Develop.
348
The inquiry shows that information about possibilities to submit ideas or to get involved in the
innovation management process is not, in fact, very easily or intuitively found on many of the
websites. A site visitor has to click up to five different levels until the particular page shows up. Only 6
firms, including Virgin, Facebook, eBay, American Express, Kellogg and Dell offer on the main entry
website a direct link for integration and collaboration. For example, on Kellogg’s homepage there is a
menu item named “Great Ideas”, where users are asked for great ideas as well as great innovations:
“Have a Great Innovation? Do you have a new product that’s partially or fully developed
and could be ready to launch quickly? A business collaboration to propose? A patented
food, packaging or processing technology or other intellectual property that may have
application for Kellogg? If so, tell us about your Great Innovation here”.
Two-thirds (49 of 75) of the investigated firms are not offering any open innovation possibilities for
end-users on their websites. For example, McDonald’s categorically chooses to reject external ideas:
“Thank you for your interest to share an idea for a product or service that you believe
would be beneficial to McDonald’s. Please know, however, that it is McDonald’s
company's policy not to consider unsolicited ideas from anyone other than our corporate
employees, franchise owners and dedicated suppliers”.
Half (13 of 26) of the firms that follow an open innovation approach also offer an online community on
their website (Apple, Microsoft, IBM, HP, Nokia, Intel, Virgin, Facebook, eBay, SAP, L’Oreal, Dell and
Oracle). Here also the actors are primarily technology firms except for Virgin and L’Oreal. One
explanation for this could be that the strategy to build an online community is more efficient than to
involve their external developers in the product development and innovation management process.
With this approach the firms are able to organize and bundle their online community activities. For
example, IBM offers an online community called My community spaces for interaction on various
topics and products, such as enterprise content management (ECM) or the IBM Tivoli software.
In total, approximately one quarter (19 of 75) of the investigated firms offer an online community on
their website. Some of these online communities (Toyota, Disney, Nintendo and Southwest Airlines)
are what have been traditional called brand communities in which customers should be connected
closer to the brand and/or firm. In exchange, customers can benefit for their participation and activities
in these communities like in the Toyota Owners Club:
“Become a MyToyota member to take advantage of exclusive access to owner
information, discounts, and benefits”.
A surprising majority (13 of 19) of the identified online communities are using their potential for an
open innovation approach. Again, firms that pursue both an online community as well as an open
innovation approach on their websites are mostly from the technology sector (11 of 19) (IBM,
Microsoft, Nokia, Intel, HP, Apple, Oracle, SAP, Dell, eBay and Facebook). These online community
platforms facilitate exchange between firms, customers and developers as well as specifically help in
collecting ideas as in the case of the developer community Forum Nokia. Other firms e.g. HP and
SAP are using their online communities also as a part of their customer care and support. The
advantage of this approach is that the community itself often takes a big part in answering questions
and assisting with problems (Lakhani and von Hippel 2003).
The main finding thus is that the use of open innovation principles over the Internet and related online
communities for end-users is still relatively limited, especially considering the special sample of
studied firms. Furthermore, although some of the firms have adopted these principles, the way for
users to communicate their ideas to the firms remain underutilized with a few exceptions. Our findings
may help practitioners depict the current state of open innovation more clearly and to direct their
efforts accordingly. Academically, our study contributes to the developing discussion on open
innovation and online communities, and the results raise the question of whether open innovation is,
in fact, necessary for firms to remain innovative.
4.2 Limitations
There are several obvious limitations to this study. One of the main limitations is that the most
innovative firms are often very large and multinational, and therefore often have multiple websites,
e.g. for each country they operate in. These different websites may have very different content
depending on the country, and may thus differ from the US-websites that were studied. In addition,
completely separate websites may be launched for short marketing campaigns, or for specific
349
products. These websites could be used for open innovation activities but were not included in our
analyses unless they were linked from the main website under investigation. The websites were
browsed by intuition by the researchers, and thus human errors are likely to have occurred in noticing
the links to the sought areas. However, it may be argued that if these were not found by this
considerable effort, a normal consumer might have trouble finding them as well.
Because the present study only concentrated on the inbound flow of information of open innovation
stemming from the Internet and online communities, it cannot state whether the studied firms
generally pursue open innovation principles in other channels. Therefore, for example, some firms
that do not allow users on their website to submit ideas or innovations may, however, engage in
various other open innovation collaborations with e.g. their suppliers or external research institutes.
5. Conclusions
In this paper we have explored how firms incorporate open innovation principles online. Drawing upon
BusinessWeek’s lists of the 50 most innovative companies and the 100 most valuable brands for
2009 we investigated the websites of 75 firms to find out if and how these innovative firms have
adopted the open innovation approach. We find that this approach is not yet in wide use, although
some firms seem to be on its forefront. In addition, the scope in which users are involved in these
processes varies greatly from simple submission of ideas to the use of extensive innovation platforms.
However, the question arises whether adopting open innovation from users is in fact as critical as it is
argued to be as many firms seem to be able to be on the top of these lists without using open
innovation practices. This study contributes to the research streams on open innovation and online
communities by offering a practical account on innovative firms’ adoption of open innovation and
online community practices for end-users.
Future studies should be directed toward confronting the several aforementioned limitations of the
study, toward enlarging the used dataset and following these firms over time. In particular, future
investigations should clarify if and in which forms open innovation approach firms are following in
other possible knowledge sources and channels. Furthermore, a lucrative avenue for future studies
would be to clarify the process of firms in practice to search, select and adopt innovations from their
open innovation activities.
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351
Entrepreneurship, The Last Chance for Endogenous
Development?
Catherine Léger-Jarniou and André Jaunay
Université Paris-Dauphine, France
catherine.leger-jarniou@dauphine.fr
jaunay@iledefrance.fr
Abstract: The "new economic geography" that first appeared in the 1990s suggests that local endogenous
potential can foster economic development. Policy-makers are advised to create a positive business climate by
using new growth factors such as knowledge, confidence and cooperation networks combined with old factors
(land, capital, labour) in order to promote the hidden potential of certain areas. Furthermore, international
organizations (OECD, European Council, World Bank, IMF) have also registered this approach in their
programmes. However, results to date have been relatively inconclusive. For Jouen (2007), the capitalization and
implementation of successful experience remains problematic because it relies on the personalities of the
proponents. Thus, regions are variously receptive, while return on investment is extremely low in the long term. In
addition, people are often reluctant to get organized.
Our paper analyzes the actual ‘endogenous’ tools related to the specific entrepreneurship topic, and indicates
that these objections have not been confirmed. We verify the existence of both efficient and transferable models
to support entrepreneurship (in response to market failures, to enhance resources, etc.), We take an in-depth
look at two specific tools, namely business angel networks and loans on trust1 in a specific region of France.
For these tools to be effective, it is important to clarify the methods of implementation, including seeking
explanations for their qualities, presumed common to such models: i.e. locally built and appropriate with local
‘pacts’, and ‘meshing’ various resources, including peer learning. Last but not least, we want to investigate the
possibility of including these tools in regional public policies with significant results.
Keywords: entrepreneurship, policy-making, endogenous tools, business angels, loan on trust
1. Introduction
The “new economic geography” described by Krugman (1991) and Porter (1998) explores the
mechanisms behind the modelling of the spatial economy. It advocates qualitative intervention by the
public authorities to mobilise internal resources in order to create a business development climate by:
incorporating new growth factors (knowledge, trust, network cooperation, organisational
investment),
combining traditional factors differently (land, capital, work),
and exposing the hidden potential in areas consequently transformed into economic assets.
However, outcomes do not appear to support this position which Jouen (2007) considers as
marginalised. According to her, it is difficult to capitalise on and reproduce best practices as each is
specific, depending on its context and the personality of the promoter. In addition, investments are not
very effective and outcomes are only recorded in the long term. Finally, the populations do not seem
very receptive and are thus little inclined to get organised.
However, these objections appear to be neither supported, nor of a nature to proscribe this approach.
In effect, the latter may prove realistic providing the realties specific to endogenous business start-up
and development support tools are carefully analysed. By endogenous tools, we mean those that
mobilise internal resources and are locally controlled.
Our aim is to demonstrate that by mobilising such tools, it is possible to make a region more learning-
oriented and close-knit, with multiple interactions, in other words, a “learning region.” For Florida
(1995) “learning regions function as collectors and repositories of knowledge and ideas, and provide
an underlying environment or infrastructures which facilitate the flow of knowledge, ideas and
learning.”
1
A “loan on trust” is awarded by associations which manage the loan funds without requiring any guarantees other than an
agreement to pay the loan back (on the borrower’s honour) to the people managing the association. The loans are also
interest-free.
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This study looks at two specific tools designed to support high potential business projects conducted
in a specific geographical area, namely, the region in and around Paris known as Ile-de-France,
during the critical start-up stages. These tools are loans on trust of the “Réseau Entreprendre”
network kind, and business angel networks. Both examples are representative of a set of tried and
tested entrepreneurial support tools, whose success has led to their adoption by national and
international associations and federations.
We make the following hypotheses regarding these tools:

H.1 – these tools are transferable providing they have been developed in an ‘ascendant’ manner
to promote their adoption by civil society
H.2 - the effectiveness of these tools relies firstly on the inclusion of entrepreneurial learning
specificities, especially peer learning, and secondly, on the number and diversity of their members
and their external relations.
Our main aim is to demonstrate that efficient tools rely on existing endogenous models, they are
transferable, and they can effectively fit in with existing public policies. In the Ile-de-France region,
where cooperation and interaction between actors from different sectors (researchers, financiers,
entrepreneurs…) was initially poor, these tools are increasing in number, promoting interaction and
trust, and leading to increasingly encouraging entrepreneurial outcomes. The potential economic and
social advantages that could result from more systematic public take-up of these tools are
considerable.
Ile-de-France region
First region in France (2007 figures):
11.5 millions inhabitants,
30% of GDP,
45% of French research,
Coordinates economic development at regional level since decentralisation at the beginning
of the 1980s,
680,000 firms,
75,000 start-ups,
5,178,000 people employed
Impact of loans on trust and Business angels

In 2009, on 340 demands for loans on trust, 102 have been presented to a selection
committee and 85 have been helped.
For business angels networks, the figures are respectively 1154, 576 and 102.
A study shows that, two years after receiving a loan on trust or the participation of a business
angel , these start-ups have a turnover 300.000€ and more, half of them shows benefits, a
quarter of them export and they employ more people than the other companies (Insee).
The present study marks the first stage of a thesis, which is why this paper focuses firstly on the
literature review and secondly on presenting the hypotheses and the research methodology.
2. Review of the literature
Our literature review explores the notion of ‘territory’ and the role of the region. We also look at the
conditions that lead it to become a ‘learning’ region, with a particular focus on networks. Finally, we
explore the notions of entrepreneurial learning and peer learning.
1. The region is a key element in the globalised business sector. The quality of its social relations and
structures has a strong impact on its immaterial resources (competencies, know-how and
qualifications, as well as on its way of doing things and behaving, on trust, network cooperation, etc.).
The latter factors determine the ‘learning’ character of the region which, according to Maillat (2006),
ultimately enables it to retain its competitive advantages.
The notion of learning region reflects a new economic concept that centres on knowledge and
learning, supplementing the concept of innovative milieu which focuses on the innovation process.
353
Aydalot (1985) describes innovation as both a process of interactions and the space in which this
process takes place. He introduces the concept of “innovative milieu”, in other words, a regional
socio-economic system which manages to develop and disseminate innovation through its local and
extra-local network interaction.
Maillat (2006) recalls the formula by Lundval and Johnson’s (1994) that “knowledge is the
fundamental resource in our contemporary economy and learning is the most important process.” This
leads us to privilege an economic approach based on learning and change processes rather than
resource allocation mechanisms.
Material factors or resources (money, material goods) is a relative concept, determined both by the
returns expected from these resources (de Soto, 2005) and the degree of control displayed by the
regions and the actors concerned. This is confirmed in developing countries by the distinction made
between “l’argent chaud”, or funding that comes from within the region, and “l’argent froid”, or funding
from outside the region (Gelinas, 1994). The first is acquired through sweat and relentless work and is
subject to tight management, while the second may well be frittered away.
A region’s capacity to be a ‘learning region’ therefore plays a vital role. Some processes appear to
help a region to become a learning region and to remain one. Naturally, this does not mean
introducing a training policy at regional level, but rather, indicates how a region can join the
globalisation process by introducing various, regionally-based learning processes. Be it individually or
in the context of a firm, at institutional or network level, each actor constantly interacts with his or her
direct or indirect environment. This interaction progressively evolves since each stakeholder is a
‘learner’ in an experience-based situation within the environment in question (Maillat, 2006). The
interaction features 3 kinds of process, namely, the introduction of innovation, the regionalisation of
firms, and complex learning processes. The ‘learning economy’ paradigm considers the economy as a
process involving communication and cumulative causality rather than a system of equilibrium. The
institutional framework (regulations, customs, trust) plays a vital role.
Five pivotal learning processes can be identified in the literature:

The first is the interactive learning process whereby the knowledge required for a smooth-running
productive system is held by each of the stakeholders individually (individuals, firms, institutions)
and is integrated and shared. The actors privilege horizontal relations through two types of
network, ‘trade networks’ and ‘knowledge networks’. The transmission of tacit knowledge requires
prolonged contact between the holder and the learner (Journé, 1996, 13), developed in a non-
commercial and regional framework.
The second is the institutional learning process that promotes the need to adapt to changes in
formal and informal institutions threatened by inertia.
The third is the organisational learning process whereby a newcomer to an organisation
understands and assimilates the role assigned to him or her.
The fourth is the learning by learning process, in other words, improving one’s learning-related
skills: the more you learn the more you develop your own ability to assimilate as well as the
techniques required and the desire for learning.
The fifth is learning by doing (Gibb, 1992), which is essential in entrepreneurship.
Learning ability thus fits into a relational system where the production systems, the conventions and
the networks are all vital.
The production systems are areas that link technology, markets, productive capital, know-how,
technological culture and representations (Crevoisier and Maillat, 1989). The nature, intensity and
organisation of relationships are decisive for considering a production system as regional. The latter is
based on a concept that may be either functional (hierarchy, verticality, non integration in the region)
or regional (firms organised horizontally in networks (Maillat, 1998)).
As the innovative milieu theory showed, the concept of the ‘Learning region’ and the management of
regional production systems imply a simultaneous process of interaction and learning (Maillat, 1998).
The rules and conventions are equally decisive. Dupuy et al. (2007) identified regions “of
354
specification” that combine geographical proximity, in other words interactions between stakeholders
and organisations (major groups, networks…), and institutional proximity based on the adhesion of
stakeholders to rules and regulations and, in some situations, to a shared system of representations.
Becattini (1992) describes the Marshallian district as a socio-economic concept with a specific set of
characteristics: osmosis between the different actors, a system of common values, a local credit
system, an ‘industrial atmosphere’ and dynamic interaction processes between various internal and
external stakeholders.
The economic relations are ‘embedded’, fitting into close-knit networks of interpersonal and social
relations (“economy of conventions”). Coordination between individuals, especially in complex
organisations, may reflect other systems than market forms, such as regulations (in the sense
adopted by Giddens, 1984), conventions and collective cognitive measures.
Networks play a central role in these processes. According to Curien (2003), they allow non market
relations to be embraced and given shape, and they accompany the era of “cognitive capitalism” by
providing informational goods with specific characteristics. They have two main characteristics, in
other words, they favour a specific form of consumption, that of informational goods which, like public
goods, circumvent the rules of rarity and thus of traditional forms of trade. Nonetheless, those who
transmit information can continue to use it, reflecting a club-like effect. Each member’s usefulness is
reinforced by the presence of the other members.
Julien (2007) distinguishes between personal, business and informational networks. He notes that the
third category may be the largest and the most diverse.
A network’s qualities depend on its size and its position (central or not), and the diversity, the density
and availability of its members. In addition, several studies have shown that the more firms use them,
the more the latter benefit from the opportunities (Sing et coll. 1999), are innovative and fit into the
knowledge economy (Rueff, 2002). The paradoxical importance of weak links correlates with
Granovetter’s observations (1985), which are not usually taken under consideration, strong links often
seem to be more crucial. Granovetter’s view is interesting in our case in order to find if our tools can
generate weak and strong links.
Larson and Starr (1993) identified 3 stages of entrepreneurial networking. In the first stage, the
2
entrepreneur identifies useful contacts. In the second stage, one-way relations are transformed into
reciprocal links. The third stage is that of consolidation, and increased complexity and broadening of
relations. Davidsson and Honig (2003) identify the major role played by social capital in business
success during the initial start-up stages. The information obtained focuses on recognising
opportunities, effective resources and, finally, the market, the competition and technology, and all the
tacit, unwritten knowledge such as the reputation of certain suppliers or customers. Finally, a network
should not be too big, otherwise it runs the risk of generating ‘noise’, incomprehension and doubt.
Friedman (1978) calculated the optimal number at 15 members.
In successful SMEs, we observe “informational catalysers” that play an important role (Vaghely, Julien
and Cyr, 2007) as they facilitate the dissemination of information, especially tacit information. In
addition, they have a holistic approach to informational analysis and synthesize this information for
the entrepreneur.
Among the networks, those which give access to venture capital are crucial, as in Silicon Valley
(Ferrary M. 2004), for example. They have 4 informal functions (Ferrary M. 2009) as:
actors in innovative project selection,
actors in collective learning and the dissemination of entrepreneurial knowledge,
actors in the social embedding of entrepreneurs,
Julien highlights the fact that the one-stop shop is not only “impossible because of the enormous divergences
2
between the entrepreneur’s needs and the objectives of the respondents, but goes against the need to learn so
as to better choose (know them) these links and subsequently exploit them according to their capacities. The only
way to reduce learning time is… to find an interlocutor… who will determine the course of action.”
355
actors that signal the quality of start ups.

Another network is that of the business angels. Anderson and Miller (2003) argue that local financial
capital is better than capital without local roots because it combines involvement and consultancy with
the purely financial resource. Another advantage of business angels is the relationship they develop
with business leaders. The quality of such relationships can help them to avoid traditional
manager/owner situations and agency fees (Certhoux, Zenou, 2006).
However, the role of financiers is debateable. In effect, by distracting entrepreneurs from their search
for the most economically viable funding (turnover) through the search for external funds, venture
capital can make entrepreneurs less effective in their market and cause them to lose control of the
firm (see “Entrepreneurs Commons” in the EU and France2). The low percentage of firms that have
benefited from venture capital in the great American successes of the last 20 years (15%) adds
weight to this point.
Furthermore, business founders, particularly innovative business founders, are at the heart of a
knowledge acquisition mechanism that is not limited to a ‘network’, and provides collective learning
opportunities (Hatchuel et al., 2002).
Kirzner identified entrepreneurs’ dynamic contribution as they create new opportunities via the
discovery and exploitation of new ways to make a profit. They thus generate cumulative and self-
perpetuating innovative impacts (Dujardin, 2006).
The role of social capital in economic performance is also underscored (Gallois, 2006), while
Pecqueur (2004) identified the notion of “regional capital” that measures the successful coordination
of stakeholders.
The contribution of endogenous economic development and its tools in the emergence of learning
regions consequently appears crucial.
2. Entrepreneurial learning is highly specific and traditional forms of teaching are poorly adapted to it.
Starting a company is not a linear process arising from a hypothetical deductive logic but is more of
an induction process (Fayolle and Verzat, 2009). It involves action learning, or learning by doing, a
process that requires experimentation, and helping entrepreneurs to increase their confidence in
certain projects to subsequently improve their stock of knowledge (Minniti and Bygrave, 2001).
However, as experiential learning requirements change over time, learning input needs to be flexible
(Politis, 2005).
In addition, budding entrepreneurs are generally not looking for step-by-step guidance, but prefer to
be actors of their own learning. They want to appropriate the knowledge, methods and tools and, of
course, the decisions. They want “to learn by learning” (Gibb, 1992). Here, we touch on the paradox
of entrepreneurial training and support initiatives (Léger-Jarniou, 2008), which should not only respect
the autonomy, desire, and independence of business founders, but should also influence them.
The most oft-cited reason for not turning to professional structures for support is not the difficulty in
accessing information or believing they are not eligible, but rather the wish to avoid getting involved in
unsuitable or discouraging situations. This often means turning instead to ‘non-dedicated’
professionals (family, chartered accountants, consultants…) with whom a more personal or traditional
business relationship develops that is considered less invasive. Léger-Jarniou also notes the
extremely diverse nature of entrepreneurial support requirements which, linked to their progressive
evolution, justify the use of flexible and collective forms of action.
This is one of the bases of peer support (Jaouen et al. 2005). The case of Voiles d’Oc, which
featured exceptional proximity between the ‘supporter’ and the ‘supported’ as they worked in the
same sector and had an almost subsidiary-like relationship, shows that this exchange “facilitates the
development of trust, better understanding… and social and cognitive proximity.” The nature of the
relationship which developed justifies the outcomes: both parties get something out of it in a win-win,
well-balanced relationship with shared trust. Furthermore, the community of practice (Wenger, 1998)
appears well-adapted to the demands of entrepreneurial learning. It is a group which focuses on the
social and relational nature of knowledge, interacts and learns together, builds relations, and in this
2
Groups of entrepreneurs looking for alternatives to venture capital by sharing their know-how and experience, and their
borrowing capacity
356
way develops a feeling of belonging and of mutual engagement.
The importance of endogenous economic development in the emergence of learning regions, and the
specificities and challenges of entrepreneurship calls for close public attention.
3. The literature review incites us to think about the possibility of public action along the lines of
endogenous development. This supposes, firstly, the capacity for public policies to act on immaterial
factors and, secondly, the transferability of these entrepreneurial support models.
Approaches such as games theory and information asymmetry show that the market does not
guarantee the economic optimum. Cahuc (1998) highlights the fact that in response, this would imply
“highly sophisticated maximising behaviours that lead to the signing of highly complex, or even
impossible, contracts which do not correspond to practice as the economic agents are unable to
foresee all the possibilities.”
However, the very idea of public intervention in favour of local development and its determinants can
be debateable at times.
Algan and Cahuc (2007) argue that empirical studies fail to identify a systematic link between taking
part in partnerships and mutual trust. They highlight the importance of largely national underlying
determinants of trust in France (non-universal social rules, antitrust laws, safeguarding of career
paths, social dialogue). Public subsidies given to partnerships do not guarantee positive outcomes in
terms of level of trust, as they may lead to arbitrary risks, corruption and suspicion. Public intervention
by way of clusters or local productive systems has also been challenged (Duranton, 2008). Firstly, the
effective transferability of these models remains unproven. Van der Linde (2003) identified only one
successful cluster creation (Hinshu in Taiwan) developed via a public support policy. Secondly, it
supposes public authorities choosing priorities for the future (in terms of sectors of activity, regional
areas and projects) without real theoretical justification or experience, and to the detriment of an
approach that is simply favourable to the deployment of actors. Finally, public intervention ignores the
need to combine different kinds of resources. Ferrary (2009) regretfully notes that French public
policies fail to take venture capital and its informal functions into account.
For Gibert (2009), the expression “public management” is an oxymoron as it combines two words, one
of which is to do with business (“of the house” according to the etymology), and the other with public
business.
Local development policies often seem to be marked by copy-cat behaviour, attachment to the status
quo and short-sightedness, and so non-respect for standard rules of rationality. This position can be
explained by the existence of psychological factors that Wirtz (2008) called “bias” in his study on best
practices; bias which leads to the dissemination of non relevant models.
The study by Rallet and Torre (2001) indicates that public polices that try to match spontaneous
networks with institutional networks in a same area do not always achieve their goals. It is difficult to
create cross-sector relations between different kinds of actors engaged in cooperation that needs to
be developed in the long term. The impact of geographical proximity is not always positive.
Trust, on the other hand, appears to be an ingredient that the stakeholders and economic developers
may have a hold over.
Respect for universal anthropological rules may provide an explanation for the potential for two distant
actors, reputed to have different cultures and to be in competition (Nissan and Renault) to develop a
direct relationship. The theory of giving developed by Marcel Mauss (1950 a) and Claude Lévi-
Strauss (1967) can also help us to understand the trust-building process (Gomez, Korine, Masclef,
2003).
As trust is transitive, the introduction of standards, rules and institutions that guarantee the quality of
the producer, the intermediary or the goods exchanged allows trust to be developed between
business players who do not know one another (Mangematin et al. 2003).
During the economic transition phases (Peyrefitte, 1995), we can observe the importance of civic pact
communities (Putnam et al., 1993). These are defined by the links between equal actors that foster
357
exchange and reciprocity (opposition between the north and south of Italy where communities are
marked by hierarchy, exploitation and corruption that does little to encourage risk-taking).
According to Bernoux (2010), change “is the result of a combination of 3 root factors: the
environment, the institutions and the actors.” He underlines the importance of appropriation,
cooperation, and perception of the legitimate character of changes for actors.
Experience has thus shown that, under certain conditions, proactive initiatives may have a strong
impact on determinant development factors that constitute immaterial factors in particular.
3. Methodology
Our aim is to study the performance of the tools known as “business angel networks” and “ loans on
trust.”
Business angel networks

1. definition and mode of intervention: these are partnership platforms that put individual investors in
touch with entrepreneurs looking for venture capital, particularly in the initial start-up and
development stages of a business. These networks help entrepreneurs to gain access to funding,
providing expertise and access to relational networks. They also train investors who, generally
speaking, were not business angels beforehand. Most networks are generalist and locally based.
However, specialized networks dedicated to specific activity sectors or specific categories of
investors (alumni, women, etc.) are also developing.
2. results: in 2009, business angels from 13 networks, supported by the Ile-de-France area, funded
110 businesses for a total of 14 million Euros. They provide businesses with support services
even before investing in a firm, giving advice and network support free of charge. To estimate the
leverage effect, this contribution should be compared to the annual public support received by the
networks, worth around €110,000 (regional council).
3. emergence and transferability: a local governance network model, first developed at the
beginning of the 1990s in the UK, quickly spread to the rest of Europe, supported by the French
and European public authorities. Almost all the networks are members of the ‘France Angels’
federation and share a common code of deontology. ‘France Angels’ is affiliated to two
international organisations, the European EBAN and the international WBAN.
Loans on trust from the “Réseau Entreprendre” network

1. definition and mode of intervention: these are local associations comprising experienced
entrepreneurs that form a strong source of technical, relational and financial backing for high
potential ventures which benefit from sponsoring, entrepreneurial clubs and loans on trust. These
loans on trust are awarded without guarantees from funds provided by entrepreneurs and public
institutions.
2. results: around a hundred projects are financed annually in the Ile-de-France area (average loan
worth €30,000. 5 years after their creation, they had created an average of 10 jobs per enterprise,
with a survival rate of around 85%).
3. emergence and transferability: this model was first developed in 1986 in the north of France. It
gradually spread, and today counts 39 associations in France. The model is now found in
Belgium, Italy, Tunisia and Lebanon. All the associations share the same values of free services
and reciprocity. They are grouped under a French entrepreneurial network umbrella organisation
and an international structure, the “ Réseau Entreprendre International” Network.”
Our paper seeks to demonstrate that ‘endogenous’ capacities can really exist, underpinned by two
conditions:
- the capacity to mobilise diverse resources, some of which may be latent. They can be
measured by identifying these active entrepreneurship resources (financial, technical,
relational) and investigating whether the latter were latent only before the intervention of the
tools. They may be individual resources, in other words, entrepreneurs who become
sponsors, or simply peers within a network of entrepreneurs, and managers and business
leaders (whether working or not) who become business angels. Or they may be collective
resources, such as alumni networks that become business angel networks.
358
- the tool’s real monitoring by civil society. This can be verified by examining their governance.
Entities that define the tools’ strategic orientations are, in effect, made up of volunteers. If
employees are hired, they apply these orientations.
After defining the tools and their characteristics, our study looks at their effectiveness, efficiency and
transferability. The study adopts three specific methods.
Firstly, the tools’ effectiveness is analysed statistically. Among other things, we look at data on the
number, sustainability and annual evolutions of the businesses supported.
Secondly, a qualitative study will be conducted based on the networks and businesses supported.
This will allow variations in the confidence and cooperation perceived by the various actors impacted
by these tools to be measured.
Efficiency may be measured via the financial leverage effects, particularly by comparing the public
effort made to support these tools and the funds obtained by the firm.
Thirdly, studying transferability involves checking its effective reproduction and measuring these
occurrences.
However, the main thrust of the research will naturally be on checking the hypotheses relative to the
constitutive principles of the tools.
This implies defining the underlying principles based on the following hypotheses:
these tools are transferable due to the ‘ascendant’ character of their construction and the extent
of their appropriation by civil society,
the effectiveness of these tools lies, on the one hand, in their inclusion of entrepreneurial learning
specificities, in particular peer learning and, on the other hand, on the number and diversity of
their members and their external ties.
This set of principles will allow us to build an analytical framework that will help us to qualify new types
of tools.
It will then be relatively easy to demonstrate that the tools studied meet these conditions. We could
also study whether the non-respect of one principle or another compromises the effectiveness and/or
the transferability of tools. Based on these findings, we could also draw more general conclusions by
deduction. However, this would only be a first stage of proof, unless it could be demonstrated that
these principles are necessary and sufficient to always produce the same results.
However, this first level appears incomplete. In effect, we should also study the issue of the inclusion
of tools in public policies with respect to both institutions and tools.
The public authorities no longer appear as the only conveyers of general interest. Other actors,
including the private sector, also help to define it. They must develop a relationship with each of the
tools and promote synergies between them. In the Ile-de-France, for example, it is already possible to
observe the creation of “meta-networks”, or platforms that create a set of regional synergies between
these tools.
These interventions imply changes to the administration, otherwise used in unilateral type relations. In
effect, the present model must develop a sustainable partnership with the tools. It must also respect
the timeframes and modes of construction of these tools. Premature financial support, for example,
may jeopardize the mobilisation of civil society required for these tools to work.
Lastly, the tools themselves may find it difficult to maintain their own operating principles over the
course of their development. It is sometimes easier for them to obtain a subsidy than to convince
private actors to provide support, giving rise to a risk of bureaucratisation.
4. Conclusion
In conclusion, this study aims to prove that it is possible for public authorities to develop regional
economic development programs based on endogenous development processes. These programs
could/must be useful if they respect the fundamentals of these tools in order to create interactions
359
between actors of a region. The prevailing patterns identified in the tools themselves, and in the
relations between the tools, will allow us to identify which rules to respect.
This study also aims to prove that these financial tools are much more than a financial help; they
could offer social capital and an access to needed resources.
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Perceived Value of Entrepreneurship: A Study of the
Cognitive Process of Entrepreneurial Career Decision
Jun Li1 and Lingfei Wu2
1
University of Essex, Southend on Sea, UK
2
Shanghai Normal University, China
junli@essex.ac.uk
Abstract: The purpose of this paper is to address the question of ‘why some people choose to be an
entrepreneur?’ We proposed a new construct of perceived value of entrepreneurship to explain the formation of
entrepreneurial intention. Building on the concept of value perception from the marketing literature, we
conceptualized the perceived value of entrepreneurship in benefit-sacrifice components and empirically tested the
argument that entrepreneurship-related career decision-making is a cognitive process in which entrepreneurial
intention results from a cognitive trade-off between perceived benefits and perceived sacrifices.
Keywords: perceived value, perceived benefits, perceived sacrifices, entrepreneurial intention
1. Introduction
Why do some people choose to become an entrepreneur? This question cannot easily be answered
without taking into account the complexity of human nature based on previous experience, abilities and
intentions to act. As far as entrepreneurial intentions are concerned, three strands of argument about
the antecedents of entrepreneurial intentions can be identified in the literature. The economic approach
from the perspective of the expected utility theory treats the labour supply of entrepreneurs as an
occupational choice between entrepreneurship and paid employment and has associated
entrepreneurial intentions with such factors as pecuniary benefits, attitude towards risk, occupational
switching costs and borrowing constraints (Parker, 2008). The social and cultural approach regards
entrepreneurial behaviour as being influenced by a rich set of factors from the social environment (Light
and Siegel, 2008). The psychological approach has pinpointed a few distinct traits of entrepreneurs,
such as need for achievement, risk-taking propensity, locus of control, over-optimism, and desire for
autonomy, as an explanation but it is criticized for its inconsistency, the static nature of entrepreneurial
characteristics, obsolescence of theory and American bias (Delmar, 2000). The literature in more recent
studies from a cognitive theory perspective has since moved on to examine perceived behavioural
control and perceived self-efficacy as predictors of intentions.
The development of theories from the above-mentioned perspectives has improved our understanding
of what has driven people’s perception and behavioural change. Yet, the economic approach focuses
too much on expected monetary value on the event’s probability of occurrence. In light of this, expected
value is an estimation of the future condition on the basis of the consequence of a decision. But
entrepreneurship is a complex and dynamic process (Korunka et al., 2003). From the entrepreneur’s
point of view, its value is not only reflected on the final pecuniary gains, but also non-pecuniary gains in
the entrepreneurial process.
The social dimension of entrepreneurship rightly argues that individuals will only activate their
entrepreneurial potential if they are exposed to a favourable socialization process and gain social
support. The problem with this approach is its scope of investigation is very broad and important
predictors of intentions are difficult to pin down.
Cognitive models now focus more on how people think and react than on who they are. Studies in this
line tend to combine experience, abilities and intentions together to explain behavioural change and
thus they conclude that change can be induced by the enhancement of knowledge and feeling in
respect of personal experience, experience by observing others, social persuasion, and reduction of
negative emotions towards the behaviour (Bandura, 1995).
This article offers a novel perspective in the strand of cognitive model to examine the formation of
entrepreneurial intention. We draw the concept of perceived value from the marketing literature and
develop a framework to argue that formation of entrepreneurial intentions is impacted by people’s
perceived value of entrepreneurship and that perceived value is the result of a cognitive trade-off
between perceived benefits and perceived sacrifices. In the marketing literature, perceived value has
proven an important predictor of purchase decision (Jen & Hu, 2003; Patterson & Spreng, 1997).
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Jun Li and Lingfei Wu
According to Zeithaml (1988), the consumer’s overall assessment of the utility of a product/service is
based on the get dimension and the give dimension. We argue that the nature of entrepreneurial
decision shares some similarity to purchase decision for the reasons that a) much of entrepreneurial
activity is intentionally planned behaviour; b) starting a business is a kind of career choice; and c)
career-related decision is a cognitive process in which beliefs, attitudes and intentions evolve (Krueger
et al., 2000). Accordingly, application of perceived value to entrepreneurial behaviour arguably offers
important new insight into entrepreneurial decisions.
This paper is organized as follows. After the introduction, we elaborate the concept of perceived value
and its application in the context of entrepreneurship and explain the conceptual framework that include
the dimensions of perceived benefits and perceived sacrifices of entrepreneurship. This is followed by
an explanation of the research methods, including data collection and sample, measurement of
constructs, and statistical analysis. We then present the results from estimations of the measurement
model and structural model and discuss the findings of the research. In the final section, we conclude
the research and discuss the managerial implications.
2. Perceived value and entrepreneurial activity
A review of the relevant literature reveals the intrinsic consistency between the nature of perceived
value and the nature of entrepreneurial activity.
Firstly, perceived value means an interaction between a subject (consumer or customer) and an object
(product or service) (Holbrook, 1999; Payne & Holt, 2001). Such kind of value depends on the
consumer/customer’s perception rather than value objectively provided by the seller. Similarly,
entrepreneurship process is a dialogue between the individual and the entrepreneurial opportunity
(Bruyat & Julien, 2001). Once an individual begins the process of establishing a new venture, the
mission will place constraints on the individual too.
Secondly, perceived value is relative in a sense as it varies between customers, between cultures, and
at different situations (Sánchez et al., 2006). Zeithaml (1988) argued that for different customers the
components of perceived value might be differentially weighted and even the same person will perceive
the same product totally differently among various contexts. From the perspective of structuration
theory, formation of entrepreneurial intention is also relative because on one hand opportunities do not
exit as singular phenomenon but are idiosyncratic to the individual due to differences in their capability,
knowledge and characteristics; on the other hand the same individual will have different cognition of
entrepreneurial opportunity as the time-space changes (Sarason et al., 2006).
Finally, Sánchez-Fernandez & Iniesta-Bonillo (2007) stated that the nature of value is preferential,
perceptual and cognitive-affective. Baron & Ward (2004) argued that entrepreneurs generally have
arrangement cognitions - thoughts and mental frameworks concerning the resources, relationships, and
assets needed to engage in entrepreneurial activity; willingness cognitions - thoughts and mental
frameworks that support commitment to starting a new venture; and ability cognitions - thoughts and
mental frameworks concerning the skills, knowledge and capacities needed to create a new venture.
Forbes (2005) also pointed out that the psychological and affective states of an individual will have
impact on his or her decision of entrepreneurship through the effects of entrepreneurial self-efficacy.
Based on the above debate, though entrepreneurial activity is not provided by suppliers like products or
services, the exchange of something of value in return for something of greater value is also the core of
entrepreneurial decision. From the view of individuals’ subjectivity and entrepreneurial opportunities’
dependence on economic and social environment, the theory of perceived value can offer the means by
which to explore the decision process of why some people made certain choices in creation of new
venture.
We define perceived value of entrepreneurship in accordance with Monroe (1979) and Zeithaml
(1988)’s definition as:
At any time and circumstances, the individual’s overall assessment of entrepreneurship
based on perceptions of what is received and what is given while starting a new venture.
This definition highlights the holistic, interactive and dynamic characteristics of perceived value of
entrepreneurship. It also suggests that the perceived value of entrepreneurship is a higher order
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construct that comprises two components, namely perceived benefits and perceived sacrifices (Ledden
et al., 2007).
The theoretically grounded model presented in Fig. 1 forms the conceptual framework of the
dimensions of perceived value of entrepreneurship. A brief explanation of the dimensions of the two
components of value follows:
Figure 1: The research model of perceived value of entrepreneurship

Perceived Benefits of Entrepreneurship
Perceived benefits of entrepreneurship comprise five dimensions which were adapted from Sheth et al.
(1991)’s five value model because of its wide application in diverse spectrum of disciplines such as
economics, sociology, psychology and consumer behavior (Ledden et al., 2007) and its
correspondence with entrepreneurship research.
Emotional Value (EMV): In the entrepreneurship context, EMV is feelings and/or affective states
aroused from entrepreneurial activity. If taking entrepreneurial action could meet the emotional
need of the individual, the emotional value of entrepreneurship will be high and the individual will
have more intention to start a new venture. Shane et al. (2003) argued that “passionate, selfish love
of the work” is the central motive that encourages people to build an organization and make it
profitable. Also according to “affective events theory”, events at work cause positive or negative
affective state in employees that, in turn, presage attitudinal states and behavioral responses
(Ashkanasy & Daus, 2002).
Economic Value (ECV): In the entrepreneurship context, ECV refers to economic benefits obtained
from running a new business. Whether to craftsmen entrepreneurs or opportunistic entrepreneurs,
commercial profits of a new venture are an important factor to the decision of entrepreneurship. For
the former, profits will bring them money to live on; for the latter, the higher the profits, the more
worth seizing the entrepreneurial opportunity.
Social Value (SV): Social value represents the benefits derived through inter-personal/group
interactions. In the entrepreneurship context, this value can be related to the social status received
from being an entrepreneur or the benefits from building specific social network. Entrepreneurs are
not autonomous actors separated from the society (Aldrich & Zimmer, 1986). Their social skills can
be improved through the process of entrepreneurship.
Epistemic value (EPV): EPV refers to the benefits derived through the entrepreneurial activity’s
ability to arouse curiosity, provide novelty and satisfy are desire for knowledge. The environment for
entrepreneurship is an open environment, where the problems that the entrepreneurs will meet are
real-time and exogenous. It is impossible for entrepreneurs to have perfect structural knowledge
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and ready ends-means frame to solve those problems. So the entrepreneurs will never expect what
they will learn in the process of entrepreneurship.
Self-Actualization value (SAV): SAV relates to the value that entrepreneurs’ potentiality and
ambitions can be realized through entrepreneurial activity. Many researches indicate that money is
not a critical factor for most of the entrepreneurs especially those high-tech entrepreneurs.
Individuals who prefer to run their own business feel such a career will bring more exciting work
experience (eg. a feeling of accomplishment, working independently, originality and creativity, and
supervising others) than working for an organization (Brenner et al., 1991). Corman et al. (1988)
also supports this view, observing that 90% high-tech entrepreneurs place great importance of
being able to not only solve research problems but to develop their technical applications as the
primary motivator for their entrepreneurial activity.
Perceived Sacrifices of Entrepreneurship
The concept of the perceived sacrifices of entrepreneurship comprises both monetary and
non-monetary considerations (Ledden et al., 2007).
Monetary sacrifice (MS): MS represents the sacrifices made in monetary terms, for example in the
entrepreneurship context MS can be related to the initial fixed cost, R & D cost, labor cost etc;
Non-monetary sacrifice (NMS): NMS accounts for sacrifices made in non-pecuniary terms such as
time, energy, effort, health, etc. Examples include entrepreneurs will spend more time at work than
those employees.
Based on the conceptual framework, we propose the following hypotheses:
Hypothesis 1: There is a positive relationship between perceived benefits of entrepreneurship and

perceived value of entrepreneurship. (H1).
Hypothesis 2: There is a negative relationship between perceived sacrifices of entrepreneurship and

perceived value of entrepreneurship. (H2).
3. Methods

The hypotheses were tested on data collected in China and the target population was university
students in Shanghai, Zhejiang province and Hubei province. Self-completion questionnaires were
distributed to the university students in the class. Respondents returned their completed questionnaires
at the end of the class. Of a total of 553 questionnaires handed out, 478 completed questionnaires were
returned, giving a response rate of 86.4%. After deletion of 63 unqualified questionnaires, 415 usable
questionnaires were used for this research.
We checked the presence of common method variance in respect of perceived benefit and perceived
sacrifice measures separately using Harmon’s one factor test (Podsakoff & Organ, 1986). The results
show that seven factors with eigenvalues greater than one were extracted from all the measures in this
study. The first five factors with respect to perceived benefit construct accounted for 61% of variance
and the last two factors in respect of perceived sacrifice construct accounted for 56% of variance. The
first factor accounted for 29% for the perceived benefit construct and 32% for the perceived sacrifice
construct. Since no single factor accounted for most of the variance, this suggests that the results were
not due to common method variance.
3.2 Measurement of constructs

On the basis of literature review we generated 37 items to measure the constructs. Prior to data
collection, we invited eight students in a pilot exploratory qualitative study to respond to the
questionnaire on a seven-point Likert type scale, ranging from strongly disagree (1) to strongly agree
(7). Respondents were asked to comment on the appropriateness and relevance of any item in the
questionnaire. Necessary modifications of the questionnaire were made afterwards. We also invited
seven expert judges (all faculty members with expertise in marketing and entrepreneurship) to refine
and edit the initial items for content validity. The judges were given the operational definition of
perceived value of entrepreneurship and its dimensions of economic value, social value, emotional
value, epistemic value, self-actualization value, monetary sacrifices and non-monetary sacrifices.
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Consistent with Zaichowsky (1985) and Lee and Crompton (1992), each judge was asked to score each
of the 37 items as either 1 (for “clearly representative”), 2 (for “somewhat representative”) or 3 (for “not
representative”) of the perceived value of entrepreneurship constructs. The result indicated the validity
of the initial items. We further examined the coefficient alpha and plotted the item-to-total scale
correlations for each dimension as recommended by Churchill (1979). After this, all 37 items were
retained.
The credibility of variables were tested, and the lowest reliability coefficient of Cronbach’s α was 0.717,
meeting the minimum acceptable scale (0.70) (De Vaus, 2002). This suggests a “high” or “good”
reliability. In order to test the reliability of the scale, “Cronbach α” coefficient was investigated. The
results are displayed in Table 1.
Table 1: Reliability analysis of sub-scales and overall scale
Reliability Perceived benefits of Perceived sacrifices of Perceived value of
coefficients entrepreneurship sub-scale entrepreneurship sub-scale entrepreneurship scale
Cronbach α 0.889 0.717 0.875
The reliability coefficients of the two sub-scales are 0.889 and 0.717, which are greater than 0.07; the
reliability coefficient of the overall scale is 0.875, which is greater than 0.08. Utilizing the criteria set for
the current analysis, this suggests that each of the items is reliably measuring their respective
constructs.
3.3 Statistical analysis

We test the conceptual model using method of structural equation modelling (SEM). SEM integrates
multivariate regression, path analysis and confirmative factor analysis and can be used to explain
relations between one or more independent variables and one or more dependent variables. Data were
analysed using the AMOS structural equation modeling software. Following Anderson and Gerbing’s
(1988) suggestion, we examined the measurement and structural model in separate steps. First, the
measurement model was analysed to test the adequacy of the hypothesized factor structure for all
variables. Second, a structural model representing the hypothesized structural relationships between
latent and measured variables was evaluated.
In estimation, we divided the sample of 415 valid respondents into two groups. One group of 198
respondents was used to evaluate the measurement model, and the whole 415 samples were used to
evaluate the structural model. To evaluate both the measurements and structural models, we followed
Hou et al (2004) to examine six indices of model fit. These indices are the χ2/df statistics,
Goodness-of-fit index (GFI), Adjusted goodness-of-fit index (AGFI), the Tucker-Lewis index (TLI), the
comparative fit index (CFI), and root mean square error of approximation (RMSEA). The recommended
fit indices of the measurement model are χ2/df <2; GFI>0.900; AGFI>0.800; TLI > 0.900; and CFI >
0.900; and 0.05 < RMSEA < 0.08.
4. Results
4.1 Measurement model estimation and fit

The measurement model included all of the indicators items for perceived benefits and perceived
sacrifices of entrepreneurship. The evaluation was conducted separately for the two sub-scales using
198 sub-samples. The fit indices of the measurement model for the perceived benefits of
entrepreneurship sub-scale are χ2 = 482, df = 262, χ2/df = 1.84, GFI = 0.84, AGFI = 0.80, TLI = 0.88, CFI
= 0.90, RMSEA = 0.07. Since the CFI and TLI fit indices for perceived benefits of entrepreneurship
sub-scale are close to 0.9 and the RMSEA scores are less than 0.1, the results suggest that the model
is good fit of the data (Bentler & Chou, 1987).
Upon estimation of the measurement model for perceived sacrifices of entrepreneurship sub-scale, the
good fit indices of model (PS_1) suggested that the hypothesised measurement model does not fit the
data well. According to the modification suggestion provided by AMOS software, we modified the model
by deleting the non-economic sacrifce item in respect of impact on physical condition but the good fit
indices of model PS_2 has not improved far enough to satisfy the criteria. We modified the model again
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by adding a link between items in respect of emotional problem and family problem and the good fit
indices of model PS_3 suggests that the model fits the data well (Table 2).
Table 2: Goodness of fit indices: Perceived sacrifices of entrepreneurship confirmatory factor analyses
Model χ2 df χ2/df GFI AGFI TLI CFI RMSEA
PS_1 134.928 27 4.997 0.862 0.771 0.761 0.821 0.142
PS_2 64.896 20 3.245 0.917 0.850 0.878 0.913 0.107
PS_3 50.486 19 2.657 0.939 0.885 0.910 0.939 0.092
4.2 Structural model estimation and fit

The second step in the analysis was to run the structural model depicting the hypothesised relationships
between constructs. The structural model contained all of the indicator items which for constructs of
perceived benefits, perceived sacrifices, and perceived value of entrepreneurship. We specified paths
from perceived benefits and perceived sacrifices of entrepreneurship to perceived value of
entrepreneurship. Upon estimation of the model, a goof fit indices were obtained: χ2 = 1291, df = 577,
χ2/df = 2.24, GFI = 0.85, AGFI = 0.82, TLI = 0.86, CFI = 0.87, RMSEA = 0.06. According to Bentler &
Chou (1987), despite that the CFI and TLI good fit indices for the structural model are close to but not
greater than 0.9, it is acceptable for such a complex model including nine latent variables and 36
observable variables.
Information in Table 3 indicates that all pathways are highly significant and consequently confirms that
proposed conceptualisation of PB, PS and PVE.
Table 3: Testing for higher order constructs
Constructs and items Regression weights Standardized loadings t-Value
Perceived value
gain more through start-up (Set to 1)
starting my own business is worthwhile 1.546 .130 ***
getting good value for my giving 1.290 .109 ***
Emotional value
desire for innovation (Set to 1)
need for achievement and sense of pride .941 .079 ***
enjoyment 1.047 .086 ***
adventurous spirit 1.062 .092 ***
never feel shame .719 .108 ***
Economic value
present value of my future income (Set to 1)
assets accumulation 1.109 .090 ***
work on my own time .464 .086 ***
job security .397 .076 ***
Social value
sense of social responsibility (Set to 1)
bigger social network 1.052 .122 ***
attention from more people 1.116 .137 ***
social status 1.022 .134 ***
Epistemic value
broader knowledge (Set to 1)
professional knowledge .839 .075 ***
curiosity about entrepreneurship .898 .088 ***
additional experience .940 .065 ***
Knowledge application .887 .084 ***
engagement in learning new knowledge .897 .073 ***
creating my own talents 1.282 .215 ***
Achievement of continued progress .930 .069 ***
improving innovative and creative ability .880 .070 ***
Self-actualisation value
supervising others (Set to 1)
leading to success of an enterprise 1.479 .155 ***
dream fulfillment 1.292 .135 ***
Economic sacrifice
Salary (Set to 1)
367
Constructs and items Regression weights Standardized loadings t-Value

Personal assets .978 .178 ***
Opportunity cost 1.355 .249 ***
Working hour 1.692 .288 ***
Risk 1.452 .246 ***
Non-economic sacrifice
Emotional problem (Set to 1)
Family problem 1.521 .126 ***
Health problem 1.385 .111 ***
Note: *** p<0.001.
Table 4 shows model parameters and p-values. The resutls show that there is a positive and statistically
significant relationship between perceived benefits of entrepreneurship and perceived value of
entrepreneurship. Hence, we accept hypothesis H1. There is also a negative and statistically significant
relationship between non-economic sacrifices and perceived value of entrepreneurship. The
relationship between economic sacrifices and perceived value of entrepreneurship is negative as
expected but not statistically significant. Hence, hypothesis H2 is partially accepted.
Table 4: Model parameters and p-values
Hypotheses Parameter estimate p-value
H1: PA Æ PVE 0.556 0.000
H2: ES Æ PVE -0.032 0.519
H2: NES Æ PVE -0.169 0.000
5. Discussion
Our purpose of this study was to investigate whether individuals who see a high trade-off between
perceived benefits and perceived sacrifices of entrepreneurship will vlaue entrepreneurship more highly
and thus are more likely to become an entrepreneur. In view of all indicator items for perceived benefits
of entrepreneurship, our structural modeling evidence suggests that social value and epistemic value
are the strongest determinants of PBE. This is not surprising as the entrepreneurship embeddedness
theory contends that entrepreneurship is an iterative process between the social and cultural
environment and individual’s entrepreneurial actions. Entrepreneurs are embedded in certain social
and cultural context in which they are impacted by social values, norms, and social networks;
entrepreneurs meanwhile are the catalyst for change in the social and cultural enveironment
surrounding them through their pursuit of change and innovation. Evidence of knowldege application
and learning appears to support Djankov et al.’s (2004) survey of Russian entrepreneurs and
non-entrepreneurs that entrepreneurs move more frequently from one occupation to another, thereby
having a broader set of skills, greater confidence and a greater tendency to explore new avenues.
In comparison, evidence of our model suggests that economic value is the least significant factor in
account of perceived benefits of entrepreneurship. That is, entrepreneurs may not be motivated
primarily by pecuniary incentives; they can be attracted by non-pecuniary benefits such as autonomy,
independence, and self-fulfillment. This supports recent studies that provide evidence that
entrepreneurs forgo finanical benefits in order to engage in entrepreneurship (Moskowitz and
Vissing-Jorgensen (2002) and Kerins et al. (2004).
With regards all indicator items for perceived sacrifices of entrepreneurship, a statistically significant
relationship between PSE and PVE cannot be established. This suggests that in the context of this
study graduates do not consider economic sacrifices in terms of salary, personal assets, opportunity
cost, working hours and risk a barrier to starting up a business. The explanation reflects the fact that
graduates are at the start of their career ladder, receiving lower salary and having few personal savings
and assets, thereby having a low opportunity cost in pursui of entreprneeurship. They are young,
energetic, and optimistic with what they can achieve. Therefore, they are willing and able to work hard
and take chance in order to fulfil their dreams.
On the contrary, non-economic sacrfices appear to have significant influence on how they perceive
entrepreneurship. The non-economic sacrifice items in decending significance in relation to perceived
value of entrepreneurship are family concern, emotional problem, and impact on health. This suggests
368
that graduates are more concerned about the impacts their entrepreneurial actions will have on their
families, their relationships with partners and close friends.
Results demonstrated a valid and reliable scale for measuring perceived value of entrepreneurship,
which contains two sub-scales: Perceived benefits of entrepreneurship and perceived sacrifices of
entrepreneurship. The sub-scale of perceived benefits of entrepreneurship consists of five interrelated,
but unique dimensions: Emotional value, social value, economic value, epistemic value and
self-actualization value. The sub-scale of perceived sacrifices of entrepreneurship consists of two
dimensions: Monetary sacrifice and non-monetary sacrifice.
All good fit indices of both the measurement model and structural model confirmed that the models fit
the data well and that all of the resultant standardized path coefficients were found to significantly
(p<0.01) for the two sub-scales assist in the prediction of their assigned factors.
In order to confirm the reliability of the seven factors for the two sub-scales, composed reliability scores
for each of the factors were computed. All reliability scores for the samples were deemed acceptable,
suggesting that each of the factors were reliably measuring their respective constructs.
Results of our structural model confirm that perceived benefits of entrepreneurship have positive and
statistically significant effect on perceived value of entrepreneurship and that perceived sacrifices of
entrepreneurship in terms of non-economic sacrifices have negative and statistically significant effect
on perceived value of entrepreneurship. Our research suggests that perceived value of
entrepreneurship is a higher order construct that comprises two components, namely benefits and
sacrifices. The scale demonstrated that individuals access entrepreneurial activity, not just in economic
factors, but also in terms of the emotional factors, social factors and so on. On the contrary, economic
value has the least impact on perceived benefits of entrepreneurship; perceived sacrifices of
entrepreneurship in terms of economic sacrifices are found to have negative and statistically
insignificant effect on perceived value of entrepreneurship.
Recognition of the importance of different dimensions of perceived value of entrepreneurship should

enable policy makers and educators to develop more sophisticated incentives. Our results show the
great importance of social and epistemic value on individual’s willingness to create new venture. This
has substantial implications for practitioners. Consultants and advisors can provide people with more
fresh knowledge and help them enlarge their social networks to increase their perception of social and
epistemic value. Policy makers can create a healthy culture environment to encourage people dare to
innovate.
While the current methods were thorough, the study was limited to a specific context of university
students. More research is necessary to determine how generalizeable the scale is for other
demographic groups. It is also recommended that future research examine the redundancy of the items
in the scale. Further, it is possible that potential dimensions of perceived value of entrepreneurship were
not identified in the final instrument. Thus, it is suggested that future research examine the potential
addition of factors and items.
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370
High-Tech Start-up Innovation in Wuxi and Shanghai, PR.
China Embedded in the Institutional Environments
Yipeng Liu
University of Mannheim, Germany
liu@ifm.uni-mannheim.de
Abstract: What are the special characteristics of High-tech start up innovation in China? Amid the continuous
transformation of institutions in China and the Chinese government’s urgent call for innovation, how does the
institutional environment influence the High-tech start-up innovation? Because of ineffective enforcement of
property rights, entrepreneurs have to acquire political protection or depend on informal norms, such as Guanxi.
However, what are the special characteristics of Guanxi of High-tech start-ups to local regulators in influencing
the innovation activities? The nature of the research questions of this study suggests case studies are the
preferred research method. Our sample selection is not random. We adopt the purposive case selection
approach. This approach enables us to choose the most appropriate cases for the comparative study. Data
collections are mainly via the contacts and networks of the author and through local High-tech parks
administration officers. This research focuses on private Chinese High-tech start-ups in the ICT sector. We
conducted semi-structured field interviews with CEOs from High-tech start-ups, High-tech park managers and
governmental officials from government-owned venture capital fund between August/September 2009 and
December 2009 in Shanghai and Wuxi. The interview languages were Mandarin Chinese, English and German.
Based on case-study qualitative analysis, several propositions are drawn from different theoretical perspectives,
namely political economy theory, institutional theory and social capital theory. An integrative framework is
proposed to understand the Chinese High-tech start-up innovation. We hope to shed some light on
understanding the special properties and the influencing factors for High-tech start-up innovation in China.
Keywords: innovation; high-tech start-up; china; institutional environment; Guanxi; entrepreneurship
1. Introduction
Innovation in Chinese High-tech start-ups is to our knowledge not yet well studied from the
perspective of institutional environment. It is argued that most management science theories are built
largely from the developed economies (Peng et al, 2008). Given the importance of institutional
environment and the growing interests in emerging economies, it is important to distinguish the
institutional settings (Robins & Lin, 2000). Emerging economies, such as China, undergo profound
institutional transformation and provide exciting research places for management science research
(Wan, 2005).
Both formal laws and regulations as well as informal norms and values are collectively known as an
institutional framework (North, 1990). We adopt the institutional environment that entrepreneurs
operate in – political, legal, and cultural - a broader definition by Global Entrepreneurship Monitor
(Bosma & Harding, 2006). There is little institution theory research on local start-ups in emerging
economies (Wright et al, 2005). A recent study reveals that software companies in Hangzhou have
innovation capabilities under uncertain institutional environments (Greeven, 2009).
The gap in understanding the special characteristics in the High-tech start-ups innovation from the
institutional perspective triggers this research study. Research focus lies in: what are the special
characteristics of High-tech start-up innovation in China? How does institutional environment
influence the High-tech start-up innovation? What are the institutional incentives and constraints for
the High-tech start-up innovation activities?
Our contributions are threefold. Firstly, we draw from political economy theory to investigate the role
played by the local governments for High-tech entrepreneurship using a comparative approach for
Wuxi and Shanghai. Secondly, the possible mechanisms to overcome the regulatory framework
weakness and to moderate the institutional voids for High-tech start-ups are discussed. Thirdly, the
role of Guanxi, both positively and negatively, for High-tech entrepreneurship is analyzed.
This article is structured as follows: firstly, we start with a literature review from different theoretical
perspectives. Secondly, sample, data collection and research methodologies are described, followed
by the results consisting of propositions and an integrative conceptual framework. A discussion on
implications, limitations, and future research directions concludes this paper.
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Yipeng Liu
2. Theoretical backgrounds
The theoretical backgrounds are laid out by reviewing the literature from political economy theory,
institutional theory, and social capital theory referring to relevant research questions.
2.1 Political economy theory

Political economists stated that the interactions between businesses and governments involve
complex, dynamic, and interdependent processes during which governments craft the rules which
businesses must follow, whereas businesses can reciprocally contribute efforts to shape the
governmental policies (Boddewyn & Brewer, 1994). Government creates legislations to regulate the
economy, frames the competitive environment, and establishes a regulatory environment in which
business is conducted (Henisz, 2000). At the same time, governments seek to maximize social
welfare, which is contingent on efficiency and social considerations.
From the political economy viewpoint, it is argued that institutional escapism and governmental
promotion are logically complementary with each other to offset the disadvantages of emerging
market enterprises in global competition (Luo, et al, 2010). It is beneficial to disentangle the roles
played by government and the institutional environment. This approach helps to solve the paradox
stemming from two seemingly separated strands, institutional inefficiency and government push.
Xu (2009) emphasized the special constellation of institutional arrangements in China, namely the
regionally decentralized authoritarian system. It is argued that appointing political authorities centrally
and delegating the rights for regional economic development decentrelly propelled China’s rapid
economic development. Given the particular governance structure and regional differences, how do
the regional economic policies in Shanghai and Wuxi influence High-tech entrepreneurship
differently?
2.2 Institutional theory

Institutional theory (Scott, 1995; DiMaggio & Powell, 1983) argues ‘institutional isomorphism’ as the
driver of mimetic behavior that leads to similar practices. They claim the convergence effect: either
organizational forms of firms in an industry or strategies tend to converge to similar formulations
under an institutional environment. These research streams are based on relatively stable institutional
environment, albeit the institutional environment can change over a longer period of time.
Rapid changes in institutional environments in the transition economies can stimulate new ideas,
actions and consequences. The key characteristics of change in transition economies is the shift in
national institutions from central planning to market competition, exemplified by the value and norm
changes toward privatization, organizational transformation, and foreign direct investment (Hoskisson
et al., 2000; Peng, 2003).
In China profound institutional transformations occurred over the last three decades.
Entrepreneurship in China went through a tremendous paradigm shift. In the Mao era, private
entrepreneurship was a political taboo (Guiheux, 2006; Peng, 2004). According to Kschetri (2007),
China recently earned a reputation as one of the world’s most entrepreneur-friendly countries.
Therefore, there is a need to investigate how the institutional environment and transformation
influence High-tech entrepreneurship in emerging economies. It is argued that China currently
undergoes the early stage of market transition (Yang & Li, 2008). During this stage, the lagged
development of institutions and the presence of legal and regulatory ambiguities may lead to a chaotic
environment where unethical behaviors, frauds, and agency problems are likely to emerge,
constraining a healthy development of entrepreneurship. What are the major factors which promote or
demote High-tech start-up to pursue innovation activities? What are the mechanisms to moderate
these institution challenges?
2.3 Social capital theory

A social network is a set of actors who are connected to one another through relations. With regards
to social capital, social network scholars focus on the structure of social networks and take the
structure as an important indicator that social capital exists (Burt, 1997; Coleman, 1990). A study on
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Yipeng Liu
the effect of structural holes under Chinese context argues that brokers may not fit with the
collectivistic values of China (Xiao & Tsui, 2007). We depart from social networks structure viewpoint
but to explore social capital as a resource and its impact on firm innovation activities.
As a resource, social capital has positive impacts on product innovation (Tasi & Ghoshal, 1998).
Social capital in the Chinese context often refers to the social phenomenon called Guanxi. Guanxi
promotes personal trust (Farth et al. 1998) and enhances firm performance (Peng & Luo, 2000). A
study of venture capital in China reveals that social capital of entrepreneurs has enhancing effects on
investment decisions of venture capitalists (Batjargal & Liu, 2004). Entrepreneurs spend time and
energy in forming Guanxi and building ties with officials (Yang, 2002). How does the Guanxi influence
the innovation activities for High-tech start-ups in China?
An exploratory approach is adopted for this study due to the limited volume of existing scholarship in
this field and the purpose of exploring new phenomena in a new setting (Eisenhardt, 1989; Glaser
and Strauss, 1967). The main objective is to develop a new framework using an inductive approach.
The nature of the research questions suggests case studies are the preferred research method
(Eisenhardt, 1989; Yin, 2003). We conducted in-depth interviews with CEOs from Chinese High-tech
start-ups from different High-tech parks in Wuxi and Shanghai based on semi-structured interviews. In
addition, governmental officials are interviewed to obtain more observations from different
perspectives. The interviews ranged from one to two hours. The interviews were tape recorded and
transcribed. Interviews were structured and analyzed using software tool ATLAS.ti.
3.1 Case selection and the sample

Case selection is a key factor when developing theories based on case study research. The concept
of population is crucial, because the population defines the set of entities from which the research
sample is to be drawn. To provide greater focus the following criteria for case selection are fulfilled:
Private Chinese High-tech start-ups in the ICT sector
Firms are registered as local private Chinese firms
Company ages are from 1 to 4 years old
Actively involved in product innovation
Our sample selection is not random. Aligned with the argument by Seawright and Gering (2008), we
adopt the purposive case selection approach. This approach enables us to choose the most
appropriate cases for the comparative study. With the purpose of comparing High-tech start-ups in
Wuxi and Shanghai, we use the most similar cases (Miller, 1872) of the case selection techniques in
selecting our cases. The selection principles in terms of similarity for the two High-tech parks are:
The development phase of these High-tech parks, e.g. the founding year
Infrastructure and services provided by the High-tech parks
The characteristics of the firms (e.g. High-tech start-ups) in the High-tech parks
We choose two representative settings, which are Zizhu High-tech Park in Shanghai, and the Wuxi
(National) Industrial Design Park which locates most of the 530 firms. However, the ownership of the
High-tech parks is different. Officially established in March 2006, Zizhu High-tech Park is run by a
consortium of local government, universities and third-party developers as a business entity. As a
pure entity of the Wuxi government, many 530 firms are located in the Wuxi (National) Industrial
Design Park, whereas 530 Plan was installed in April 2006 as an instrument to attract overseas
Chinese entrepreneurs to found their companies in Wuxi.
The service offerings from these two High-tech Parks to Start-ups are similar, including information
(esp. industry policy/ government policy) brokerage, coaching/ free seminar, free of charge office
usage for first 3 years, and seed capital (optional).
3.2 Data collections

Data collections are mainly via the contacts and networks of the author and through local High-tech
parks administration offices. As acknowledged by scholars (Gao, 2003) on China study, the
accessibility of interview partners played a key role in the selection of cases.
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Yipeng Liu
We conducted semi-structured field interviews between August/September 2009 and December

2009. The interview languages were Mandarin Chinese, English and German. When the interviews
were conducted in Mandarin Chinese and German, the interview protocols were translated to English
before analysis. The semi- structured interview questions were developed by a Chinese researcher in
Germany with the support from a German researcher and a senior Chinese researcher in China. Until
this phase, qualitative interviews with nine High-tech start ups and two interviews with governmental
officials were conducted in Shanghai and Wuxi (Table 1).
We reviewed our interview protocols carefully until we identified the propositions that represented and
summarized the data. The replication logic assists in taking multiple cases to build an understanding
of a relatively new domain and in supplying direct application of the information (Yin, 2003).
4. Results
The qualitative analysis along three theoretical lenses resulted in three domains: regional political
economy differences, institutional voids and Guanxi as a resource. Each of these domains is
discussed below and an integrative framework is proposed connecting these three domains.
4.1 Regional political economy differences

The regulatory framework differs in different regions. Local governments have different priorities on
economic structure and development. As one of the mainly chosen location for world 500 companies’
headquarters in China, the regulatory framework in Shanghai is developed better than elsewhere in
China. However, the priority of local government is to attract world 500 companies not entrepreneurs.
On the other hand, Wuxi government determines to adjust the economic structure to promote High-
tech entrepreneurship via hands-on governmental direct involvement.
The properties of the two High-tech parks manifest the differences. The Zizhu High-tech park mainly
functions like a business entity which is a project undertaken by the Zizhu Group. The third-party
developer uses the land for High-tech park project, whereas only part of the land is used for High-tech
parks and the other parts are used as commercial purpose, such as commercial buildings. The policy
incentives from government encourage third-party developers to engage in developing High-tech park
projects.
By contrast, Wuxi government installed 530 Plan with the purpose of targeting merely at advanced
overseas Chinese entrepreneurs. Only those who gathered professional experiences are eligible to
apply for this program. One criterion is that entrepreneurs should bring advanced technology or
product with them to found the companies. A branded policy is called “San Ge Yi Bai” policy (three
times one hundred), namely 1 million RMB seed capital (100 Wan RMB in Chinese), 100 square
meters team office space, and subsidies for a 100 square meters apartment.
Five firms in our sample are 530 firms. Many founders with Dr.-Ing Degrees from Germany applied for
530 Plan. The innovative product /solutions are the key criteria to get approval from these founders’
perspectives.
One founder claims:

Because I can bring the wireless sensor technology back and am confident that there will
be a huge market potential for applications, I wanted to found the company. 530 is
deterministic for me to make the final decision and help me to overcome many start-up
difficulties, such as office, apartment and, of course, the capital.
Moreover, the implementation of supportive policy from the government has been approved by real
examples, such as the Suntech Power IPO success story. One CEO confirms:
We chose Wuxi, because Suntech has set up a role model. We know what can happen.
Actually, the whole 530 Plan is built around Suntech as example. This model works for
the local government and it attracts us to come.
Different regional economic policies on High-tech entrepreneurship vary. The Wuxi government
regards promoting High-tech entrepreneurship as the strategic priority for upgrading regional
economy structure. Hence, we posit the following:
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Yipeng Liu
Proposition 1a: The relative less developed region (e.g. Wuxi) can more positively influence High-
tech start-ups to undertake innovation activities
Governments are actively involved in the go-to-market phase of High-tech start-ups. The Chinese
market is driven by relative short-term benefits. The lack of early adopters for innovative products
discourages product innovation. To reduce the risk exposure for High-tech start-up innovation,
government purchases the innovative products, even if they are not completely finished, to offset the
market reluctance for start-up product innovation.
Moreover, governmental officials have political incentives to promote firms with their authority. They
are inclined to promote the firms proactively for the sake of name recognition of the firm. The success
of High-tech start-ups can be regarded as political achievements for their political careers.
One founder tells:

Our first innovative product is only possible in the partnership with local firemen
department. Governmental officials introduced us to them. The fact that the wireless
sensor technology used in smoke detection was triggered by discussion with people from
firemen department. That helps us to innovate on demand.
Hence, we propose that
Proposition 1b: Government as first adopter complements the market reluctance and slowness to
pull the High-tech start-ups product innovation
During the analysis one theme that overseas networks, such as the connections to the firms from the
developed economies, emerged as an important factor for high-tech start-ups innovation. This special
characteristic can be attributed to the national relative less-developed innovation status compared to
the developed economies (Liu & White, 2001). High-tech start-ups in emerging economies are
inclined to utilize overseas connections, either jointly develop products or localize the existing
products. Innovation time and development risk are two important factors for High-tech start-ups for
innovation activities. By using networks to firms from the developed economies, innovation time can
be enormously shorted and the development risk can be largely reduced.
One CEO from webgame firm says,

“Innovation in online business is important. But it costs your money and has high risk. We
import the concept of webgame or browser game to China as the first one. We innovate
in a way that we translate and localize the products from abroad first. We actively look for
partners to localize their products.”
Governmental program particularly invites overseas Chinese to return with innovative technology and
product. It is a prerequisite for entrepreneurs to apply for various benefits and obtain governmental
support. One park manager says:
“We highly welcome Chinese oversees return and make a new successful career in our
park. We also encourage them staying contact with abroad. They do not need to
investigate 100% of their time here [China]. Linking to abroad is important.”
We therefore posit the following:
Proposition 2a: The networks and connections to the firms from developed economies positively
influence the innovation activities occur in Chinese local High-tech start-ups
Proposition 2b: The returnees from overseas Chinese community intensify the linkage to
developed economies with regard to innovative technology and product
4.2 Institutional voids

The institutional voids denote the lack of institutions or the ineffective enforcement of laws or
regulations. In China because of ineffective enforcement of property rights, entrepreneurs have to
acquire political protection or depend on informal norms.
Three themes were identified as major institutional voids during our observations and analysis, which
hinder the High-tech start-up to pursue innovation activities:
Weak protection of IP rights
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Yipeng Liu
Contract failures
Lack of human capital
Due to inefficiency from the existing institutional environment, the numerous High-tech parks fostered
by the government are intermediaries to overcome the institutional inefficiency. China has more than
six thousand industrial parks and 58 national-level science parks (Cai, et al, 2007). The prolific growth
of High-tech parks on the regional level can be attributed to China’s special governance structure as
argued by Xu (2009).
Patent applications are encouraged by the government, implying the governments commitment to
improve the IP protection. One founder tells:
“In the parks, they encourage us to apply for patents, and they will cover the application
fees. With patents, we can apply for other research funds on district, city, or even
national level.”
Contract failure is circumvented by relational contracting protected through repeated interactions or
putting buffers into contracts. Labour markets are very fluid, hiring and firing takes place extensively.
It is observed that finding the right talent is a key challenge faced by High-tech start-ups. Although
high-tech parks assist in recruiting talent, the education system was put into question. One CEO says:
“I have to find people with creative ideas. Innovation and work hard and midnight school
working. No one in china. Because of the school. All the educated graduate students, or
undergraduates, all not so motivated… It is [a] very problem, very big problem for me. I
cannot get good persons.”
Hence, we posit the following:
Proposition 3: Institutional voids might be moderated by using High-tech parks as intermediaries
to facilitate High-tech start-ups to pursue innovation activities
4.3 Guanxi as resource

In emerging economies, the rules and regulations often can be interpreted differently by different
people. In China, interpersonal relationships are ubiquitous that the whole society is structured around
webs of social relationships which are embedded in Guanxi. Guanxi is argued as a substitute for
formal institutional support in private owned companies (Xin & Pearce, 1996).
The institutional environment in emerging economies, such as formal law, regulation and
enforcement, is not as strong as that in the developed economies, thus Guanxi can help to moderate
the institutional voids.
One CEO tells,

“Guanxi helps us to develop the innovative products. The content of one new product
contains sensible words in 1960s-70s China. We don’t know that beforehand. Due to the
good relationship with local content regulation watchdog, we got the call and changed the
content immediately, so we did not pay penalty fees.”
However, the social capital to local regulators can become liability to start-ups to some extent. Since
the local governmental officials prefer to exhibit their political achievements, they commonly invite
start-up founders to participate conferences, to give talks, to share experience. Since the time is a
scare resource for High-tech start-ups, the distraction and disproportional allocation of time can be
detrimental for the management team to grow the venture.
Under the institutional environment and dynamics of Guanxi, we argue that Chinese High-tech start-
ups operate in a society that social capital can better off the innovation activities but also place
potential liability to the firms.
Based on observations and case study, we arrive at

Proposition 4a: Social capital of firms, such as connections to local regulators, reduces the risk
exposure for High-tech start-ups’ innovation
Proposition 4b: Guanxi can protect innovation by moderating institutional voids, such as the
ineffective enforcement of intellectual property rights
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Yipeng Liu
Proposition 4c: Benefits for High-tech start-up innovation derived from building up Guanxi of firms
to local regulators outweigh the associated potential liabilities
Based on case-study qualitative research, an integrative conceptual framework (Figure 1) is proposed
to understand the special characteristics of Chinese High-tech start-up innovation. We argue that the
government direct and indirect involvements may facilitate High-tech start-up to pursue innovation
activities. Both Guanxi and intermediary might moderate the institutional voids which hinder the High-
tech start-up innovation activities. Networks to firms from developed economy may accelerate the
indigenous High-tech start-up innovation in China.
Figure 1: An integrative conceptual framework on High-tech start-up innovation

5. Discussion
5.1 Implications
The government active role signals her strong determination to push innovation at the firm-level,
hoping to enhance the national-level innovation in the future. They create a stimulus and innovation-
friendly environment. It might contribute to the paradigm shift from “Made in China” to “Create in
China”. Since the policy support on the regional level has a relative short history, the outcomes
deserve further investigations. Even within Shanghai or Wuxi there are huge differences, e.g.
infrastructural incentives are different of different High-tech parks and management styles are
different. Hence, information gathering of entrepreneurs is costly. However, the competitions between
the regions can lead to efforts by officials to improve the regulatory framework for entrepreneurs.
Managerial implications for SMEs from developed economies can be forming partnership with
Chinese local High-tech start-ups and utilize them as a platform to enter the Chinese market.
Moreover, SMEs from developed economies should consider the local regional political economy for
selecting locations. Relative less developed region might offer SMEs from developed economies
better business opportunities and lower their entry barriers given the existence of local High-tech
entrepreneurs and their willingness to collaborate. For overseas Chinese entrepreneurs, if they can
bring advance technology to China, they are presented with the opportunity to make a career as High-
tech entrepreneur instead of being employed.
5.2 Limitations and future research directions

Limitations of this research include: 1) it covers only parts of the Shanghai and Wuxi; 2) general
industry sector ICT is considered without further sub-sector analysis. The further research calls for a
quantitative analysis, such as structured survey to validate the propositions and proposed framework.
Some further propositions might be drawn from each different stages of a start-up. We plan to monitor
the further development of these High-tech start-ups, measure the innovation performance, and
conduct a longitudinal study. There can be a comparative study between Chinese High-tech start-ups
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Yipeng Liu
and German High-tech companies on innovation to compare the characteristics associated with one
developing economy and one developed economy.
6. Conclusions
The innovation is recognized as an important driver for society improvement. This study tries to fill the
gap in understandings of innovation in emerging economies and profile the institutional environment
where firm-level High-tech start-up innovation takes place. Based on political economy theory,
institutional theory, and social capital theory, propositions and an integrative conceptual framework
are proposed to understand the characteristics of High-tech start-up innovation in Wuxi and Shanghai,
PR China. Albeit the regulatory frameworks and institutional environments are under transitions in
China, utilization of intermediaries and Guanxi might moderate the institutional voids which hinder
High-tech start-ups pursing innovation activities. In addition, networks to firms from developed
economy may benefit both indigenous High-tech start-ups in China and SMEs from developed
economy. We hope this study shed some light on understanding the special characteristics of High-
tech start-up innovation in China.
7. Appendix 1
Table 1: Eleven qualitative interviews conducted in august/september 2009 and in december 2009 in
Shanghai and Wuxi City
Interviewee Company industry Data (dd/mm/yy) Venue Length (hour)
CEO Dr.-Ing ICT: wireless sensor 28/08/2009 CEO home in 2
design house in Wuxi Shanghai (530 firm)
CEO ICT: mobile software 04/09/2009 CEO office at 2
developer in Shanghai Shanghai Zizu
Science-based park,
Shanghai
CEO ICT: webgame service 07/09/2009 CEO office at 1.5
provider in Shanghai Zhangjiang High-tech
park, Shanghai
CEO, Dr.-Ing ICT: financial service 09/09/2009 CEO office at Wuxi 1
software developer in (National) Industrial
Wuxi Design Park, Wuxi
(530 firm)
CEO, Ph.D ICT: image 10/12/2009 CEO office at 1
identification solution Shanghai Zizu
provider Sciende-based park,
Shanghai
CEO ICT application for 10/12/2009 CEO office at 1
industrial automation Shanghai Zizu
Science-based park,
Shanghai
CEO, Ph.D ICT application for 11/12/2009 CEO office at Wuxi 1
robot automation (National) Industrial
Design Park, Wuxi
(530 firm)
CEO, Dr.-Ing ICT: wireless sensor 11/12/2009 CEO office at Wuxi 1
application and (National) Industrial
creativity lab for Design Park, Wuxi
children (530 firm)
CEO, Dr.-Ing ICT: communication 21/12/2009 CEO office at Wuxi 1
solution for optimizing iPark (530 firm)
building energy
consumption
High- tech Park Wuxi (National) 11/12/2009 Wuxi (National) 1
manager Industrial Design Park Industrial Design Park
Investment Shanghai Yangpu 16/12/2009 Shanghai Yangpu 1
manager Technology Business Technology Business
Incubator Incubator
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379
Design Against Other Determinants of Polish Firms
Competitiveness
Lukasz Mamica
Cracow University of Economics, Poland
mamical@uek.krakow.pl
Abstract: The role of design in creating competitiveness for products has recently increased. The competition
between cheap labour cost countries has a positive impact on this process in well developed states. Polish
industry is growing relatively well in comparison to others during the global economic crises. The production is
still playing an important role in GDP structure in this country. The article presents some results of the research
designed by the author for Institute of Industrial Design in Warsaw of 280 production firms in Poland. The
research was conducted from October 2009 until January 2010 by using personal interviews with firms
representatives. Firms were categorized into two groups from the perspective of their design activity: passive and
active. The research shows the structure of determinants, which, according to representatives of these firms,
allow them to increase the innovativeness of their products. The most important factor was analyzed as access to
the finance resources (average mark 3,62 in five points scale, where 1 is not important at all and 5 the most
important). The second place was determined to be employment of specialist (average mark 3,41). What is
interesting is that the cooperation with designer was ranked at third place with mark 3,30 in this scale (11
determinants were proposed for selection). Determinants of products competitiveness, which were characterized
as relatively unimportant, were the establishment of cooperation with R&D unit (average mark 2,73) and the
establishment of cooperation with universities (2,56). The following categories of firms were covered in the
research: clothing/textiles and shoes, furniture and furnishings, household goods and computer equipment,
transport equipment, ceramics and glassware, sports articles, and lighting. The research showed that firms,
which were categorized in the group design leaders are more active in export activity. The position of design
activity in firms was characterized by their representatives as having important or key roles by ¾ of the total
group. More than half of the firms pointed at an increase in the role of design in recent years. This role was
observed by firms as an especially important factor for clients satisfaction, and later for the image of the firm and
its competitiveness, increase of profits and communication with clients. The article presents relations between the
scale of the firm and turnovers versus opinions about determinants of products innovativeness.
Keywords: design, competitiveness, innovation
1. Economical aspects of design

Design has three major impacts on firms competitiveness. The first is connected with the lower costs
of production and the second with an increase in the value of the product in the clients opinion due to
its visual attractiveness. The third impact of design refers to higher functionality achieved by
ergonomic solutions. A special kind of innovation is design-driven innovation, which can be defined as
“an innovation in which the novelty of a message and of a design language prevails over the novelty
of functionality and technology” (Verganti 2003 p. 36). One of the most known example of the impact
of design on workers effectiveness was done by Taylor, who distributed different shapes of blades
and measured the results achieved by using them (Taylor 1911). Design for a long time was only
connected with ornamentals and the value of them was determined by the time needed to make them
and materials used. This approach began to change at the beginning of the 20th century. Loos in his
essay „Ornament and Crime” wrote that „the evolution of culture is synonymous with the removal of
ornament from objects of daily use” (Loos 1908 [2002] p. 30]. According to him ornament was a
symbol of lost human work and capital. The economical value of design was described at the end of
the 19th century by Dresser, who was called the first industrial designer. He pointed out that the
beauty has a commercial value and wrote „we may even say that art can lend to an object a value
greater than that of the material of which it consists, even when the object is formed of precious
matter, such as rare marbles, scarce woods, or silver or gold” (Dresser 1873, p. 1). Tradition of design
can be used for increasing competitiveness at the national level. A good example of transforming it
into mass production is in the Italian industry. Aspers (2010) has shown in his research how branch of
fashion design in this country uses design for upgrading their offer. Design, marketing and ability to
benefit from the network of suppliers are the core competencies of Italian firm Benetton with
headquarter in Treviso. Firms can use also the fact that clients undertake decisions about buying a
product by choosing goods, which suit to already possessed objects (Forty 1986). This phenomena
was later developed as a concept of ensemble (Holbrook and Anand 1992).
Hertenstein and Platt (2001) have done a research dedicated to measuring the impact of design on
economic results of firms. It showed that firms, which design was evaluated as high quality have
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better economic conditions. The British Design Council conducted research concerning the impact of
design on the market value of firms, which used it. It showed that the difference between design-
aware firms and the others is not just marginal – their share prices have outrun key stock market
indices by a full 200 per cent (Design Council 2005). The research done by British Design Council
showed that in businesses, where design is integral to operations, over three quarters declared that
they they’ve increased their competitiveness and turnover through design (Design Council 2006).
Similar results were concluded by research in New Zealand, which showed that 67% of exporters
declared that design is a key factor of achieving success in business and in 80% of firms claimed it
supported the creation of added value in their firms (Walton and Duncan 2003). The research done by
Design Council showed that firms, which see design as integral don’t need to compete on price as
much as others (Design Council 2006). Two thirds of firms, which don’t use design compete mainly on
prices while in firms where design is integral only less than half do. In another research (Bruce and
Whitehead 1988) marketing managers confirmed the leading role of design, where 60% of
respondents indicated design as the most important determinant of new product performance.
Product competitiveness can be increased also by high quality package design. The package design
can also play an informative role for clients regarding the price of the product. The research of the role
of package in price expectancy showed dependences in this field (Orth et al. 2010). This research
was done by comparing different bottles of wine. Also Holbrook (1987) distinguished visualizing
consumers who appreciate visual design elements and use them as important determinant of their
demand. The design is an integral element of the whole process of product development, which leads
to market success. The research of management of technology confirmed that communication among
manufacturing, marketing, engineering, production and R&D provide good condition for economic
success of the product (Hise et al. 1999). Cooper and Kleinschmidt (1987) in their research found
synergy, both marketing and technical, as a crucial factors for the sales success. They stressed that
definition and early, predevelopment activities are the most important steps in the new products
development process, where product design was an important determinant of commercial success.
Research done in the Polish region of Malopolska showed that firms expect public support in creating
the institution responsible for design (Mamica 2008).
2. Methodology of research
The questionnaire research was done in Poland using the techniques of direct interviews with
managers of 280 firms (middle and big with employment over 10 workers). The total number of such
firms in Poland in 2009 was 194 319. The research was conducted from October 2009 until January
2010 by using personal interviews with firms representatives. Firms were categorized into two groups
from the perspective of their design activity: passive and active. The following categories of firms were
covered in the research: clothing/textiles and shoes, furniture and furnishings, household goods and
computer equipment, transport equipment, ceramics and glassware, sports articles, and lighting. The
methodology of research was prepared by Mamica and was financed within the framework of the
European Union’s Operational Program for Economic Innovation. The name of the whole project
realised by the Institute of Industrial Design was Design Your Profit (D+Y+P), which aim is to improve
the competitiveness of Polish companies through design (process and product innovation). Firms
were categorized into two categories: active and passive from the design point of view. Firms that
design passively are such, which fulfil at least one of the following parameters:
Do not employ a designer who has an education background in this field or do not cooperate with
a firm, which offers services connected with design,
The number of new products, in which new design was used, located at the market within last 3
years was not higher than 2,
The number of new products located at the market during last 3 years, which were prepared using
own projects were less than 2,
All new products located at the market within last 3 years were only based on projects given by
other firms or foreign partners.
Firms that design actively are such, which fulfil together all the following parameters:
Employ a designer who has an education background in this field or cooperate with a firm, which
offers services connected with design,
The number of new products, in which new design was used, located at the market within last 3
years was higher than 2,
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Lukasz Mamica
The number of new products located at the market during last 3 years, which were prepared using
own projects were higher than 2,
All new products located at the market within last 3 years were only based on own projects.
3. The role of design in Polish firms
Most of firms included in the research treat the role of design as key or important (76%). In the group
of firms active from a design point of view such opinion was declared by 95% of businesses. 22% of
firms declared that design is of little importance or not important at all. The key role of design was
relatively often declared by firms from the group of furniture and furnishings (32%) and ceramics and
glassware (29%). Bigger firms more often declare the key role of design than smaller ones. The firms
declare what kind of description illustrate best the position of design in their business. Every fourth
firm pointed that using design is a natural tool of management and has the strategic role for firms
development (27%). Almost the same part of firms (26%) declared that during the work on new
products design is indispensable but not the main element of this process. Over ¼ of firm
representatives gave an opinion that design is something that is systematically used by them.
Strategic role of design in firms is declared much more by businesses that design actively (39%).
Almost half of the researched group (42%) of firms declared that the role of design in Poland is
increasing. Firms which exist longer on the market agree with this tendency more often.
4. The impact of design on firms development
Only 1% of firms declared that design is an activity, which is not worth investing in. Most of the firms
representatives (70%) treat design as a profitable activity, among those ¼ declared that it is definitely
profitable (in the group of firms that design actively such convenience is declared by 40%). Opinions
about the worth of investment in design are especially more popular in branches such as ceramics
and glassware (84%), household goods and computer equipment (76%) and furniture and furnishings
(72%). What is interesting is that, the lowest level of convenience about profitability of investment in
design is declared by firms from the branch of clothing/textiles and shoes. It could be partly explained
by high competition of Far East producers of clothes and difficulties in protecting patterns legally.
Managers of researched firms were asked to give their opinions concerning the influence of design on
different aspects of their activity (Figure 1). Important role of design was declared in the field of clients
satisfaction (51%), image of the firm (46%), firms competitiveness, (44%), profits increase (38%) and
communication with clients (38%). Firms relatively small estimate the influence of design at increase
of employment in firms (16%) and increase of export (21%).
client s
51%
sat isf act ion
image of t he
46%
f irm
f irms
44%
compet it iveness
increase of
38%
prof it s
communicat ion
38%
wit h client s
general f irms
36%
development
incease of
34%
t urnovers
incxrease of
31%
market share
impelement ing
30%
or improving
development of
29%
new market s
increase of
28%
product iveness
increase of
21%
export
increase of
16%
employment
Figure 1: Opinions of firms managers about the influence of design during last 12 months on different
aspects of firms functions. N=280
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Lukasz Mamica
Managers of firms were asked to give their opinion about factors, which determine the sales of their
products (Figure 2). According to them the most important determinants were the high quality of
products and on the second place the price after adjusting the product to the clients needs. Over half
of companies declare that good design in largely or to a very large degree influence their sales level.
Firms that design actively more often that others are convinced to such opinion (73% comparing to
38% in the case of passive firms).
hi gh qua l i t y 75%
atr acti ve
72%
pr i c e
a dj us t i ng t o
71%
c l i e nt s
good
60%
di s t r i but i on
ot he r f a c t or s 60%
good de s i gn 53%
l oy a l i t y t o t he
53%
br a nd
a c t i v i t y of
46%
c o mp e t i t i o n
good
44%
a d v e r t i s e me n t
Figure 2: Opinions of researched firms managers concerning the influence of the following factors on
the level of products sale (percentage of answers “high” and “very high” degree)
Good design is treated as an important factor, which determines the sales level of products much
more by firms than by branches: ceramics and glassware, clothing/textiles and shoes and furniture
and furnishings. The research also touched on the problem of increasing the products value by using
good design (Figure 3). Over 1/3rd of active design firm managers
(36%) declared that good design increases the product value by more than 16%. But at the same time
10% of them do not see any impact of design on the products value. Added value of design higher
than 40% of products price was declared by 2% of firms managers.
0% 10 %
t o 5% 16 %
6 - 10 % 19 %
11- 15 % 13 %
16 - 2 0 % 13 %
2 1- 2 5 % 5%
26- 30% 3%
3 1- 4 0 % 3%
ov e r 4 0 % 2%
no opi ni on 17 %
Figure 3: Opinions of firm managers concerning an estimation of increasing the products value by
using good design
Added value of design is especially declared as high in the branch of ceramics and glassware. At the
same time 17% of firm representatives could have not estimated the impact of design on products
value. This was the signal that there was no well-developed methodology, which allows the
measurement of such an impact. The lowest impact of design was declared by mangers of firms in
branches such as transport equipment, household goods and computer equipment.
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Lukasz Mamica
5. Factors which allow the increase of the innovation level of firm products
Among the factors which allow firms to increase innovativeness of their products (Table 1) the highest
rank was awarded to the financial factor (3,62 in 5 points scale). At the same time almost 1/5 of firms
gave this factor their highest ranking. The second place was given to the factor employment of the
high quality specialist (rank 3,41). What is important is the the estimation of the role of design is
relatively high - at the third place with average rank 3,3. Other important determinants of products
innovativeness were: establishment of cooperation with other firms (rank 3,22), pro-innovation culture
of organisation (3,19) and employment of well prepared graduates of universities (3,15). Parameters
which were listed by firms managers as having a low impact on products innovativeness were
institutions responsible for creating innovations. Establishment of cooperation with R&D unit (2,73)
and cooperation with university (2,56) were treated by firm managers as factors having the lowest
impact on the innovativeness of their firms products. Over ¼ of respondents declared that cooperation
with university has definitely no impact on mentioned product innovativeness.
Table 1: The percentage of answers relating to marks given by firms managers to different factors
which determine products innovativeness (where 1 means no impact at all and 5 means
very high impact)
determinants of creation products innovativeness mark of the factor
1 2 3 4 5 average
mark
finances 7,9 6,1 25,7 36,8 23,6 3,62
employment of high quality specialist 10,0 12,9 25,0 30,7 21,4 3,41
cooperation with designer 11,1 13,2 29,6 27,1 18,9 3,3
cooperation with other firms 10,7 12,5 32,1 33,6 11,1 3,22
pro-innovation culture of organization 8,6 13,9 38,9 26,8 11,8 3,19
employment of well prepared graduates of universities 11,8 16,1 32,1 25,7 14,3 3,15
market research 13,6 17,1 28,9 27,9 12,5 3,09
achieving grants for R&D activity 17,5 16,4 31,1 19,6 15,4 2,99
employment well prepared graduates of secondary schools 16,8 19,3 33,9 22,9 7,1 2,84
cooperation with R&D unit 21,1 25,0 23,2 21,4 9,3 2,73
cooperation with universities 26,4 23,9 25,7 15,4 8,6 2,56
Dynamics of firm turnovers has an impact on their declaration concerning the role of factors, which
determine the innovation level of their products. Firms, which dynamics of turnovers in the last 3 years
was increasing gave a much higher mark to the role of market research (average mark is higher about
0,84 points) than firms, whose turnover in this period decreased. Their estimation of the role of
cooperation with designer is also higher than in the second mentioned group (about 0,71 points).
Detailed information about described relations are presented in the Table 2. Marks declared by firms
are statistically different in case of such determinants as cooperation with designer (p =,0579) and
market research (p =,0032).
Table 2: Relation between marks of factors which determine products innovativeness and dynamics
of firms turnovers. N=280
dynamics of turnovers
determinants of creation products more or less increased decrease no average

innovativeness the same d answe
r
cooperation with R&D unit 2,71 2,81 2,52 2,73 2,73
cooperation with universities 2,5 2,54 2,44 2,97 2,56
employment of high quality specialists 3,27 3,55 3,44 3,5 3,41
cooperation with other firms 3,16 3,35 3,32 2,97 3,22
employment of well prepared graduates 3,07 3,26 3,12 3,13 3,15
of universities
employment well prepared graduate of 2,78 2,86 3 2,93 2,84
secondary school
cooperation with designer 3,26 3,43 2,72 3,5 3,3
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Lukasz Mamica
dynamics of turnovers
determinants of creation products more or less increased decrease no average

innovativeness the same d answe
r
achieving grants for R&D activity 2,93 3,06 2,72 3,23 2,99
market research 3 3,39 2,56 2,93 3,09
pro-innovation culture of organization 3,07 3,3 3,24 3,33 3,19
finances 3,57 3,74 3,64 3,43 3,62
The size of the firm also has an impact on their declaration of the role of factors, which determine the
innovation level of their products (Table 3). Big firms, which employ over 250 workers appreciate the
role of employment well prepared graduate of university much more. Average mark declared by them
to this factor is about 0,9 points higher than in the case of small firms. Bigger firms comparing to small
ones give higher importance to the factor of employment of high quality specialist (marks higher by
0,83 points). Also cooperation with designer is treated by them as a more important factor which
determines the innovation level of their products (mark higher by 0,52 points than those declared by
small firms). Middle sized firms appreciate the role of achieving grants for R&D activity more than
small firms (mark higher by 0,46 points).
Table 3: Relation between marks of factors which determine products innovativeness and size of the
firm (employment) N=280
determinants of creation products innovativeness the size of the firm (level of employment)
dynamics of turnovers big (250 and middle (50 small (10 - 49) total
more) - 249)
cooperation with R&D unit 3,29 2,77 2,66 2,73
cooperation with universities 3 2,84 2,41 2,56
employment of high quality specialists 4,18 3,38 3,35 3,41
cooperation with other firms 3,59 3,15 3,21 3,22
employment of well prepared graduates of 3,94 3,25 3,04 3,15
universities
employment of well prepared graduates of 2,65 2,89 2,84 2,84
secondary schools
cooperation with designer 3,71 3,47 3,19 3,3
achieving grants for R&D activity 3,29 3,3 2,84 2,99
market research 3,53 3,19 3,01 3,09
pro-innovation culture of organization 3,41 3,27 3,14 3,19
finances (for example access to credits) 3,76 3,58 3,63 3,62
6. Conclusion
Much research was done throughout different countries confirming the positive impact of design on
firm competitiveness. Results of research done in Poland at the turn of 2009 and 2010 have been
presented in this article. They show a high level of understanding in regards to the role of design by
Polish production firms (for 76% of them the role of design was key or important). Most firm
representatives (70%) treat design as a profitable activity. Positive impact of design is declared in the
field of client satisfaction (51%), image of the firm (46%) and firm competitiveness. Among factors
which allow firms to increase innovativeness of their products the highest rank was awarded to the
financial factor, the second place was given to the factor employment the high quality specialist and
third to design. Marks declared by firms are statistically different in case of such determinant as
cooperation with designer. Over 1/3rd of active design firm managers (36%) declared that good
design increases the product value by more than 16%. The dynamics of firm turnovers has an impact
on their declaration about the role of factors, which determine the innovation level of their products.
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386
Open Innovation: Activating the Entrepreneurial Mindset
Vassilis Mantas and Klas Eric Soderquist
Athens University of Economics and Business, Greece
vmantas@aueb.gr
soderq@aueb.gr
Abstract: Extant research on Open Innovation (OI) reflects the importance given to how established firms shift
towards the new paradigm of OI in order to enhance innovation. OI, by definition, is a game for two, at least: One
firm that seeks to acquire knowledge, and a pairing party that supplies the knowledge. Knowledge is referred to
broadly to denote either explicit codified knowledge in the form of a concept or a business model, or knowledge
embedded in technologies and products. The majority of the extant research focuses on the firms engaged in OI
seeking external knowledge to reap innovation benefits and build competitive advantage. This counts for the one
side of the coin. Research on the knowledge suppliers acting in OI is scarce. Limited as well is the examination of
the role and the setup context provided by Web-Based Intermediaries (WBIs). In this changing landscape of the
innovation game, 'new' demands, which seem to re-unite innovation and entrepreneurship in a Schumpeterian
logic, can be identified. More precisely, OI drives a need for enhanced entrepreneurial mindset, broad opportunity
seeking behavior coupled to a strong strategic alignment with innovation objectives. We find theoretical support
for such an approach in the literature on strategic entrepreneurship (SE), which we briefly review and link to the
OI context. Initial approach to this inquiry is to explore a particular OI practice, namely the operation of WBIs. We
examine secondary data coming from WBIs to gain insights about how firms both seek and provide solutions
through these service providers. We identify areas of conformance to theory and discuss issues raised due to
idiosyncrasies of OI practice via WBIs. Indeed, WBIs seem to provide a breeding ground for the applied
implementation of several of the much researched but still largely theoretical concepts of OI and SE. WBIs
nurture the opportunity side of the innovation process, smoothening out the problem of information idiosyncrasy
that entrepreneurs encounter. Simultaneously, the exploitation side is also reinforced as the WBIs environment
provides the means to leverage unutilized knowledge in new collaborative schemes. Issues for further research
are identified and discussed.
Keywords: open innovation, entrepreneurship, strategic entrepreneurship, entrepreneurial mindset
1. Introduction
Innovations may come in the form of products, services, processes or business models. Inventions
that pass the stage to the market qualify as innovations while those novel concepts and ideas that do
not just remain inventions with no effect in economic life. Entrepreneurs' core mission is to materialize
the transformation of inventions into innovations and introduce them in the marketplace (Schumpeter,
1939). Hence, put a little differently, the Schumpeterian entrepreneur is the innovator (Hébert and
Link, 2006). Schumpeter’s work, that develops these notions in depth, is the foundation of most
research in both innovation and entrepreneurship (Fagerberg and Verspagen, 2009, Schildt, et al.,
2006). Schumpeter was referring to entrepreneurs as the “new men setting up new firms” but it was
also acknowledged by him and subsequent scholars that “old firms” have important roles to play in the
innovation game (Methe, et al., 1996). Actually, the quest of established firms to renew themselves
through innovation and, thus, maintain a sustainable competitive advantage, has become a hot topic
in the strategic management and innovation management literatures. A recent important and rapidly
expanding strand of this research relates to open innovation (OI). OI refers to the setting where the
focal company strives for innovation within and through the open market by purposefully seeking to
tap into available knowledge residing outside its boundaries, while simultaneously allowing for own
unused knowledge to outflow and to be exploited by third parties (Chesbrough, 2003).
Most of the research on OI relates to how the firms’ processes, structures and strategies enable it to
reap innovation benefits from engaging in OI practices. In the present work we adopt a different
perspective by attempting to focus on OI practice via web-based intermediaries (WBIs) and shedding
light on the roles of knowledge suppliers, particularly small research firms and individuals. Based on
this exploratory desk investigation of WBIs in OI, we argue that a new distinct domain of
entrepreneurial activation seems to be emerging, which raises a series of issues that confront or
expand the topics of extant research in entrepreneurship.
The remainder of the paper is organized as follows. We first review influential scholarly work on OI
and entrepreneurship. We then present the role of WBIs in OI practice and consequently highlight the
particularities of entrepreneurship in OI. Finally we discuss potential issues for future research.
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2.1 Towards Open Innovation

The way firms innovate has been a major preoccupation of scholars for years. Rothwell is one of the
leading contributors to the understanding of the evolution of innovation process in firms from his
conceptualization of five different generations of innovation models having appeared after the Second
World War. The first generation model was an expression of the business practice in 1950s and up to
60s where ‘more R&D in’ resulted in ‘more successful products out’, termed as ‘technology push’
model (Rothwell, 1994). During the next decade, the gravitational point of the process shifted from the
‘technology supply side’ to the ‘market demand side’ and hence a second generation of innovation
model has emerged, characterizing a ‘market pull’ model. During 1970s to mid-80s scholars
consistently focused their research on innovation processes and have shown that ‘technology-push’
and ‘market-need’ models were two extremes and atypical examples of a more general form of
innovation model, where ‘technological capabilities’ and ‘market needs’ were coupled together. From
these advances in the conceptualization of innovation emerged the coupling innovation model. The
next fourth generation model is characterized by activities integration and parallel development and
focuses in early integration of suppliers in the new product development process while at the same
time integrating the activities of different in-house departments, who work on the project in parallel.
The fifth generation model is distinct due to the following features: greater overall organizational and
systems integration, including external networking; flatter and more flexible organizational structures,
including devolved decision making; fully developed internal databases; electronically assisted
product development; effective external electronic linkages (Rothwell, 1994).
The fifth model, according to Rothwell, shows that companies do no longer solely innovate within their
own boundaries relying exclusively on their own resources, but seek complementary assets and risk
sharing with other firms. As the knowledge base of industries evolved, both in a complex and
expanding pattern, and the sources of expertise become more widely dispersed, the locus of
innovation was to be found in networks of learning, rather than in individual firms (Powell, et al.,
1996).
This gradual shift of innovation practicing, from an autonomous to a more collaborative mode of
operation, evolved in parallel with the development of information and communication technologies
(ICT) and the related accelerating technological change. This new innovation practice was explicitly
put forth by professor Chesbrough when he termed the new innovation business model as Open
Innovation (OI) (Chesbrough, 2003). As he puts it:
Open Innovation means that valuable ideas can come from inside or outside the
company and can go to market from inside or outside the company as well. This
approach places external ideas and external paths to market on the same level of
importance as that reserved for internal ideas and paths to market during the Closed
Innovation era.
Though the emergence of OI was first to be found in multinational big companies of the high tech
sector later research has demonstrated that the tide has taken over also small and medium firms
across various industry sectors (Chesbrough and Crowther, 2006).
In an attempt to further specify the operation of OI, Gassmann and Enkel have delineated the OI
process as a set of three differentiated core archetype processes (Gassmann and Enkel, 2004),
namely the outside-in process, the inside-out process and the coupled process, figure 1. Companies
engaged in OI may focus on either of these three core processes.
As OI frames a new model of innovation, several issues for research are raised. The processes,
structures and strategies of the firms embarking on OI are the main areas of research on OI. In
contrast the main concern of this paper are the effects of OI on entrepreneurship, either as a domain
of action for individuals and small start-ups seeking opportunities or as a manifestation of strategic
entrepreneurship mandates for corporations. The questions we like to raise and partially answer in the
present work are:
Is the OI paradigm a new domain for entrepreneurship activity?
Is the OI practice a means to activate entrepreneurial mindset in large corporations?
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Figure 1: Three archetypes of open innovation processes, source: (Gassman and Enkel, 2004)
We turn to examine the theoretical background of these concepts in the next section before
attempting to answer arguably these questions.
2.2 Entrepreneurship and entrepreneurial mindset

Entrepreneurship is defined as the discovery, evaluation, and exploitation of future goods and
services (Venkataraman, 1997). The field of entrepreneurship involves the study of sources of
opportunities, the processes of discovery, evaluation, and exploitation of opportunities, and the set of
individuals who discover, evaluate, and exploit them (Shane and Venkataraman, 2000).
Entrepreneurial opportunities are defined as situations in which new goods, services, raw materials,
markets and organizing methods can be introduced through the formation of new means, ends, or
means-ends relationships. The sources of opportunities may be associated with asymmetries on
information and beliefs or on exogenous shifts of information accountable to government,
demographic changes and to the creation of new knowledge (Eckhardt and Shane, 2003). Research
has shown that opportunity recognition, rather than rent seeking, is the central trait of entrepreneurs,
and this is attributed to prior particular knowledge developed either through education or work
experience. But prior knowledge is not enough, cognitive properties are necessary to value the
situation and see new means-ends relationships (Shane, 2000).
Entrepreneurship studies relate not only to individuals and start-ups but also to large corporations.
Thus the notions of corporate entrepreneurship and strategic entrepreneurship have been developed
in the literatures (Ireland, et al., 2009, Ketchen, et al., 2007). Strategic entrepreneurship (SE) is the
cross section of strategic management and entrepreneurial behavior. SE consists of a mix of
entrepreneurial and strategic imperatives that managers and organizations need to combine. These
include on the one hand entrepreneurial mindset, entrepreneurial culture and leadership, and, on the
other, strategic management of organizational resources and capabilities, which leads to enhanced
creativity and innovation outcomes (Ireland et al, 2003).
Central to SE is the concept of entrepreneurial mindset (EM). EM is a growth oriented perspective,

through which individuals promote flexibility, creativity, continuous innovation and renewal.
Constitutes of EM are entrepreneurial opportunities, entrepreneurial alertness, real options, and an
entrepreneurial framework. Opportunities and the recognition of them have been discussed at the
beginning of this section so we continue on with the rest components of EM. Entrepreneurial alertness
denotes the willingness and readiness of entrepreneurs to pursue opportunities, as soon as they are
recognized, with passion, discipline, and commitment. Real options logic helps entrepreneurs and
firms to cope with the uncertainties inherent in opportunities identification and pursuit. Optional and
not obligated allocation of resources on a portfolio of entrepreneurial opportunities minimizes risk and
waste of resources while increases the likelihood to engage in the most valuable projects.
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Entrepreneurial framework is conducive for EM to flourish. An entrepreneurial framework includes

actions such as setting goals, establishing an opportunity register, and determining the timing
associated with launching the strategy required to exploit an entrepreneurial opportunity. Setting goals
serves as a navigator for all parties that engage in opportunities pursuit and an opportunity register is
used as a storefront of potential opportunities. Timing of opportunities exploitation is about the
strategy to chose either to become a first mover or second mover actor, depended to idiosyncratic
issues of the actor (Ireland, et al., 2003).
Ketchen et al. (Ketchen, et al., 2007) have argued that both small and large firms are disadvantaged
to fully engaged in SE alone and that collaborative innovation among them can bridge the gap and
provide a SE ‘package’ beneficial for both. Four different theoretical perspectives are used to support
their arguments namely, network theory, learning theory, resource-based theory, and real options
theory. Network theory supports that relational capacity development and looseness of ties among the
members are antecedents of innovation outcome. Organizational learning process is delineated
across four key dimensions: knowledge acquisition, information distribution and interpretation and
organizational memory. Large firms can provide economies of scale in information processing and
time-tested solutions embedded in organizational memory as routines. Small firms can provide the
specialized knowledge needed to identify trends early and the lack of routines may assist for novel
approaches. Resources developed within networks are more difficult to imitate due to complex nature
and causal ambiguity but on the other hand there is an implicit replication risk when sharing strategic
resources with others. As large firms possess a plethora of resources they are in the position to
discriminately deploy resources within the network while small firms should be obliged to deploy their
full bundle of resources. A tendency of the small firms to protect valuable resources will restrict the
free flow of knowledge and limit the potential for innovation. Taking a real options perspective, large
firms should develop a portfolio of small investments of potential innovative projects while small firms
should manage their options bearing in mind the inherent limitations for large investments in
innovation projects, which are irreversible in nature (Ketchen, et al., 2007).
Considering the above theoretical background it seems interesting to investigate if and how EM is
activated and consequently how SE may experienced in the frame of OI settings. Focusing on the
modes of interaction for OI among small and medium sized enterprises and between small firms and
larger innovation players, particularly important seem to be the networking and connectivity function of
web based intermediaries. Indeed, a particular setting of open innovation practice is actualized
through web based intermediaries (WBIs). WBIs are firms that have set up an internet site to facilitate
open innovation. ICT advancement, particularly the internet web, was the catalyst for open innovation
to flourish (Dodgson, et al., 2006). Pioneering companies like P&G, IBM and Eli Lilly have supported
the initial formation of web platforms to accommodate wide publication of innovation requests and
receive responses from a global pool of inventors.
The wide adoption of open innovation models has led to the proliferation of WBIs. Their role is vital as
they provide the necessary communication path for firms to implement the archetype sub-processes
of OI process (Huston and Sakkab, 2006). According to a study this intermediary function has yet
limited success in relation to the technology transactions initiated and in comparison to the initial
expectations (Lichtenthaler and Ernst, 2008), actually this study is the only one to our knowledge that
examines the effectiveness of WBIs in OI. Our objective in the present paper is to explore the domain
of WBIs in OI in order to paint a picture of the landscape and identify implications for ΟΙ research and
practice. In the following we explain the approach of our desk research, present our findings and
discuss potential implications.
3. Some evidence about the operation of OI intermediaries
Today, there are several web sites acting as OI intermediaries, the most known are listed in table 1.
The core service of these sites is to provide virtual space for solution seekers and solution providers
to meet and exchange knowledge. There are several variations in the content and the context of each
web site in an attempt to differentiate each among others. Limitations of this paper length do not allow
for an in-depth listing and review. Representatively we mention that WBIs offer the web space to list
technologies for sell or purchase, contest-like challenge requests featuring winning awards for the
solution providers, and challenges for common societal good. Moreover large firms operate and
maintain their own open innovation sites as ideas submission sites, see for example
www.pgconnectdevelop.com of Procter & Gamble or www.innovatewithkraft.com of Kraft.
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OI through WBIs is one particular setting featuring open and worldwide access to any potential actor.
Findings from secondary data available on WBIs web pages, presented in the next section, will lead
us to show how the entrepreneurial mindset is activated in this particular OI setting and how
entrepreneurship function is affected.
Table 1: Limited list of web-based OI intermediaries (data presented in the main text are from
mentioned web sites available online as of March 2010)
WBIs
www.yet2.com
www.ninesigma.com
www.innocentive.com
www.ideaconnection.com
www.yourencore.com
3.1 Solution seekers

According to an online benchmark survey (December 2008 – January 2009) undertaken by
Ninesigma.com among companies that have embraced OI practices, half of the surveyed firms
believe that they are operating at the early stages of adoption of OI and about 40% at an optimizing
stage. Half of the optimizing status firms report revenues in excess of $10 billion per year while the
majority of firms with less than $10 billion belong to the early stages group. Reported use of
intermediaries and the top three OI practices among these two groups is presented in table 2. The
main current focus of OI practices for all companies is new product development. Companies value
external partnerships as very important while more increased influence of external partnerships is
projected for the next five years. Accordingly, the percentage of new products with elements
originating outside the company shows a steady increase for the years ahead. Among all the
companies the top three outcomes of OI practices reported are:
Increase in the richness of their technology portfolio (77%)
Ability to find non-core competencies (66.7%)
Increased R&D productivity (58.3%)
Responses on an open-ended question about other benefits due to OI experience fell within the
categories:
Shift in mindset or culture
New connections made
Improved reputation
Faster time to market
A tool to cause better internal alignment
Table 2: Excerpt of ninesigma.com benchmark survey results
Optimizing Companies Early stages companies
Stage of OI adoption 40% 49%
Use of OI intermediaries 64% 35%
Top three OI practices Scouting (92%), Supplier co-innovation (77%),
Supplier co-innovation (82%), University co-innovation (69%),
University co-innovation (80%) Scouting (65%)
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Further, solution seekers find WBIs to be a useful platform to facilitate OI practices and support the
process of transforming business models to more open configurations. The following excerpts from
yet.com are indicative.
"yet2.com will change my business model. We will use this access to the world of
available technology to bring new products to market."
Joseph A. Miller, Chief Science & Technology Officer, DuPont
"The current technology transfer process is seriously limited by the difficulty licensors and
licensees have in identifying one another. In addition, providers must incur significant
expense and time determining deal-making potential. yet2.com overcomes these
barriers."
Theo Grigoriou, President, AlliedSignal Technologies, Inc.
3.2 Solution providers

Many of the solution seeking companies also act as solution providers. The following company
comment in yet2.com site is representative.
"SAIC currently leverages technologies created in one field to solve problems or develop
commercial opportunities in another. We look forward to accessing yet2.com both as a
provider and purchaser of technology."
Joseph Daniele, senior vice president, Intellectual Property and Technology
Commercialization at SAIC
But there are also individual inventors and small-medium firms who engage in OI to exploit their
technologies and inventions. Yet2.com for example asserts that its client base consists of about half
the Global 1000 firms, along with hundreds of small-to-medium enterprises. About 120.000 individuals
involved with OI visit its global marketplace website annually in search of new technologies.
Moreover we find web pages devoted to individuals ‘winners of the year’ exhibiting their expertise
background and qualifications with some small interviews posted as well. In some cases there is even
more active participation by inventors who participate in associated blogs. The majority of these
exhibited solution providers are individuals with high qualifications (PhDs and MScs) or small scientific
firms and research labs. Interesting for example is the fact that in innocentive.com solvers represent
175 countries across the globe.
Some solvers’ quotes from ninesigma.com are indicative.

"NineSigma provides us a great opportunity to present our innovations to Global 1000
companies and work with them to solve their technology challenges. The Request
process provides a unique opportunity to engage companies based on their specific R&D
directions. These are timely connections that are very difficult to form otherwise. We
have come to rely on NineSigma as a valuable channel for new opportunities that we
otherwise would not have known about."
Jon Dettling, North American Director for Ecointesys, a Swiss-based environmental life-
cycle assessment provider
"The obvious benefit of working with NineSigma is that we got a substantial contract.
($1.8M USD, initial stage contract with a Fortune 50 NineSigma client). We also received
a contract to do some development work to drive the technology forward…we anticipate
that we will work with this client through two additional stages to get to manufacturing."
Alexander Gosling, Director, Invetech Pty Ltd., Australia
Also interesting are the following quotes from an interview with Dr. Lakhani, Professor at Harvard
Business School, who follows the growth of innocentive.com and studies the effectiveness of the
problem solving process. We also found that InnoCentive solvers were motivated as much by intrinsic
motivation factors (learning, joy of problem solving, intellectual challenge etc) as they were by winning
the award money….
In our survey we asked the Solvers if the problem they created a solution for [was] inside their field of
expertise, at the boundary of their field of expertise or outside their field of expertise. The regression
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results showed that the further the Solvers rated the problem was from their own field of expertise the
more likely they were to have solved the problem!...
3.3 Discussion
WBIs activity serve as a vast storefront of entrepreneurial opportunities accessible for every potential
entrepreneur. For example, we could count 460 active technological requests in yet2.com and 128
active challenges in innocentive.com, while there are 5527 listings of available technologies for
exploitation in yet2.com only (all numbers refer to March 10, 2010). Eckhardt and Shane proposed an
opportunity-based perspective of entrepreneurship (Eckhardt and Shane, 2003). They argue that it is
the possession of idiosyncratic information that leads to the existence and identification of
entrepreneurial opportunities. It seems that in OI practice, via WBIs, this idiosyncratic nature of
opportunity is diminishing, as when firms posting out requests for solutions or presenting available
technologies for sale, they eventually present an opportunity. Conversely, ignorance of the world of
WBIs might be fatal for opportunity recognition.
Arguably then, the cognitive perspective of entrepreneurs to recognize opportunities becomes even
more important as opportunities through WBIs become more accessible to a large number of
(potential) entrepreneurs. As theory suggests prior knowledge is not enough for opportunities
recognition, cognitive properties are necessary to value the situation and see new means-ends
relationships. This is supported by the finding that ‘the further the solvers rated the problem from their
own field of expertise, the more likely they were to have solved the problem’. Moreover, the
convenience provided by the WBIs to pursue an opportunity is a catalyst for entrepreneurial activity.
Though a response to an open challenge or an expression of interest to acquire an available
technology should not be registered as an entrepreneurial venture, nevertheless it is the first
necessary step for a venture to come alive. As mentioned above, Invetech Pty ltd from Australia at
ninesigma.com developed a working relation with a Fortune 50 company.
The first key component of an entrepreneurial mindset, i.e., entrepreneurial opportunities, is more
than apparent in OI practice. Available data out of this desk research are not enough to evaluate
entrepreneurial alertness. Longitudinal in-depth data are needed to evaluate the passion, discipline
and commitment needed to pursue an opportunity. Engaging in OI through WBIs serves as an option
for further engagement in innovation journeys which demands low initial investments and decreased
degree of commitment for both solution seekers and providers considering also the feature to
participate anonymously. And, finally, WBIs serve as an entrepreneurial framework as they compose
a vast opportunity registry while goals are either been set implicitly when the prospective deal is the
desired target or explicitly when winning awards are in place for challenges. Timing here relates to a
different perspective than the one originally suggested in theory but is still a critical element. On the
one side most challenges are open for submissions for a certain period of time, and on the other side
implicit competition calls for timely response to available for sale technologies which are posted with
no time limits.
We find some support that SE can be achieved too through WBIs, in the duality form suggested by
Ketchen et al, where large and small firms innovate together to bridge the gap associated with their
disproportionate organizational size. First evidence to support this argument comes from the
ninesigma.com survey stating that ‘new connections made’ are among the top benefits reported out of
OI practice. Obviously, new connections lead to strategic network resources that become valuable
and difficult to imitate while survey results suggest that this will be of increased importance for future
new product development endeavors. Such a common resource base is obviously valuable for both
large and small firms. The top three outcomes of OI practice: ‘increased richness of tech portfolio’,
‘ability to find non-core competencies’, and ‘increased R&D productivity’, imply that learning comes
out as an implicit but important benefit of OI engagement. Finally the engagement in OI through WBIs
to be considered as a practical example of real options perspective has been already highlighted
above. From the above brief analysis, it seems relevant to suggest that OI practice through WBIs
indeed is a breeding domain for entrepreneurial activity. Through participation in WBIs EM is activated
and SE is achieved within the duality of large and small firms. Further research is needed in order to
investigate these phenomena in more depth. Specifically, we suggest the following questions for
further investigation:
The potential for entrepreneurial activity and innovation, activated by networking and learning
effects, seems great when the world of WBIs is analyzed theoretically. What, however, are the
393
measurable innovation impacts from collaborations originating in connections established through

WBIs, and how do these initially virtual relationships evolve to enable full exploitation of the
opportunities being seized?
It seems that via engagement in OI large firms are making use of small firms’ or individuals’
knowledge. To what extend will this be equally beneficial for both? Any such study should not
take into account only monetary factors but also intangible assets valuation such as reputation,
brand name, customer base, etc.
What are the implications of OI expansion for innovation and entrepreneurship policy makers? OI
is about activating unutilized knowledge and dispersing creative resources. Wealth is produced by
achieving new uses of knowledge. On an aggregated level, as long as combined existing
knowledge is used and transformed in new knowledge, the overall sum is positive. But at the level
of national economies further examination is needed to reveal if OI hinders or fosters small
ventures growth. It might be the case that small firms grow up as more opportunities become
available. In contrast it could be revealed a step-back from venturing when small firms or
individuals supply their inventions to be used by established large firms. If this step-back becomes
the dominant logic then entrepreneurial activity of small firms and individuals might be lost and
consequently start-ups growth will diminish. This is something that might have tremendous
implications in the distribution of the wealth around the globe and should puzzle policy makers.
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Do Veterans Make Significantly More Successful
Franchisees? A Comparative Study on the Traits of
Veterans and Successful Franchisees Literature Review
Martin McDermott
Argosy University, USA
mmcdermott@kaplan.edu
Abstract: Franchising has played a huge role in the United States and throughout the world. It is a big part of a
nation’s economy and creates millions of jobs. Even with its long history, success and popularity, franchisors
most frequent problem is finding qualified franchisees for their system. Franchisors seek special traits in their
candidates. The right match can produce significant results while a bad choice in a prospective franchisee can
lead to many problems down the road. The purpose of this research is to seek if veterans or those that have
served in the military make significantly more successful franchisees than those that didn’t serve in the armed
forces. It seeks to identify if veterans possess the ideal traits that franchisors seek on a higher level than
nonveterans. Ideal traits of franchisees and characteristics of veterans were identified to learn the similarities and
differences of both groups. Several quantitative and qualitative studies were reviewed in both groups. One study
showed military that served in combat were three times more likely to become an entrepreneur than his
counterpart who did not serve in a combat unit. Some theories show risk taking as a relationship between
entrepreneurship and serving in combat. Other studies suggest that many serving in the military face
preretirement anxiety. The average age of retirement from the military is 45 years old. Some of the commonalities
discovered among franchisees and veterans in the literature review include discipline, highly cooperative, risk
taking, training, the ability to follow a system and national affiliation.
Keywords franchisees, veterans
1. Introduction
Even with the increase and popularity of franchising throughout the world, selecting qualified
franchisees has been franchisors most frequent problem (Lewis and Hancock, 1963, cited in Wattel,
1969 and Saraogi, 2009). The right selection of a prospective franchisee can generate favorable
results for the franchisor and franchisee. A bad choice in a prospective franchisee can lead to ongoing
problems for the franchisor (Justin & Judd, 1989 cited in Saraogi, 2009). The International Franchise
Association (IFA) also shows franchisors are most concerned about franchise recruitment and
selection more than any other dilemma (IFA cited in Wattel, 1969). Franchisees are characterized as
an essential component in successful franchise chains (Michael & Combs, 2008).
2. Franchising
Research has shown there is not just one definition about franchising. Franchising can be described
as a contractual privilege granted by an organization or individual to another organization or individual
(Bain, 1986 cited in Withane, 1991). It is also defined as a license from the owner (the franchisor) of a
trademark or service allowing the user (the franchisee) to sell a product or service under that name
following the system created by the franchisor (Norback & Norback, 1982 cited in Withane, 1991).
Franchising is also described as a method of distribution used by businesses to expand (Justis and
Judd citied in Withane, 1991). Franchising is a strategy that permits an agent to exclusively market a
brand in a specified geographical location for a specific time period (Kaufman & Dant, 1995). Finally,
Saraogi (2009) describes franchising as a long-term relationship.
3. Importance of study
Franchising plays an important part in today’s economy (Michael & Combs, 2008). According to the
World Franchise Council, there are over 1,500 systems franchising, representing more than three
quarters of a million franchisees and employing almost 18 million workers in the United States. Over
14% of the jobs in the United States labor force represents a franchise related job, which produces
over $506 billion of the United States payroll in the private sector, generating a total economic output
in excess of $1.53 trillion (Dant, Perrigot & Cliquet, 2006: Reynolds, 2004 cited in Dant, 2008).
The best way for franchisors to obtain quality service is through strong working relationships with their
franchisees. These strong associations will lead to an increase in motivation and socialize the
franchisee within the business philosophy of the franchisor (Dant, Li & Wortzel, cited in Dant, 2009).
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Martin McDermott
4. Military
Not including the public education system, the military is the biggest institutionalized provider of
training in the United States (Bryant & Wilhite, 1990). Military service is defined as the experience of
individuals and is a predecessor of their ultimate post-military careers as civilians. Service in the
military is a total experience that can significantly affect one’s personality, goals, aspirations, skills and
direction in career (Avrahami & Lerner, 2003).
Several studies have been taken on the transition of military to civilian life. Higate’s (2001) research
focuses on the opportunities military experience provides or shuts down in the transition to life as a
civilian. The military is a “total institution” characterized by training and discipline that differ according
to the demands of the military organization (Higate, 2001).
5. Traits of ideal franchisees
5.1 Introduction
To select qualified franchisees has been franchisors most common dilemma (Lewis and Hancock,
1963, cited in Wattel, 1969 and Saraogi, 2009). The right selection of a prospective franchisee can
generate favorable results for the franchisor and franchisee. A bad choice in a prospective franchisee
can lead to continuing problems for the franchisor (Justin & Judd, 1989 cited in Saraogi, 2009).
5.2 Building a predictive model of franchise performance

A large body of the literature review came from “Exploring Franchisor Franchisee Relationships:
Building a Predictive Model of Franchisee Performance” by Anil Saraogi (2009).
Saraogi’s (2009) research focuses on a predictive model franchisors can use to determine the
performance of future franchisees. Two research variables used to address this study are expected
behaviors from an ideal franchisee and franchisee selection criteria. Saraogi included a combination
of research tools in this study. First, exploratory interviews were conducted with five franchisors on
their selection criteria. This exploratory study also used demographic and attitudinal variables. Some
of the demographics included examples like age, gender, marital status and education. The main
research tool was a questionnaire. For example, Sarogi (2009) used a sample size of 150 franchisees
that are the franchise outlet owners and are responsible for the franchise. He references a study from
Roscoe (1975) supporting this size to be accurate. He also references Tabachnick and Fidell (2001)
that propose a meaningful multiple regression; the sample size N must be greater than 50+8m (m
being the independent variables).
The study found that demographics alone are not reliable predictors on the behavior of franchisees.
However, the study did show that demographics combined with attitudinal variables are better
predictors. Saraogi believes that a franchisor’s perspective of the franchisee would be an opportunity
for a future study.
5.3 Traits of franchisees

A number of studies have shown the qualities franchisors desire in an ideal franchisee. Because
franchising is defined as a system created by the franchisor (Norback & Norback, 1982 cited in
Withane, 1991), they seek certain characteristics in their franchisees. Earlier research specifies a
franchisee needs less creativity, less planning ability and be less competitive compared with an
entrepreneur (Wattel, 1969). While owning a franchise shows similarities to entrepreneurship, the
word ‘entrepreneur’ has a different meaning compared to a franchisee. Gartner (1985) defines
entrepreneurship as creating a new company (Gartner, 1985 cited in Avrahami & Lerner, 2003).
Similar research shows there is an entrepreneurial spirit among franchisees (Kaufmann & Dant,
2005). Many franchisees view their business as independent of the franchisor (Stanworth cited in
Kaufmann & Dant, 2005).
Wattel’s (1969) qualitative study shows franchisees need a cooperative personality including the
capability and enthusiasm to follow the decisions, procedures and daily practices created by the
franchisor. In support of Wattel’s findings, cooperation, satisfaction, avoiding conflict and
nonindulgence in opportunism has been documented as ideal behavioral traits of successful
franchisees to achieve long-term superior performance (Hing, 1995, Dahlstrom & Nyggard, 1999,
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Martin McDermott
Fenwick & Strombom, 1998 cited in Saraogi, 2003). Conflict is described as the opposite of
cooperation.
A review of literature discusses a well-known sports goods franchise based in New Zealand
concluded that franchisees illustrating a high level of entrepreneurship and previous managerial
experience perform inadequately on the reduced conflict scale which was previously described an
ideal trait of a franchisee. Thus prospective franchisees with some or no managerial experience could
be a better fit for franchising and cause less conflict (Fenwick and Strombomb, 1998 cited in Saraogi,
2009). This study shows there is some empirical data that anticipated behaviors from franchisees like
satisfaction and reduced conflict can be controlled by choosing franchisees with ideal attitudes and
traits (Saraogi, 2009). Several other studies support satisfaction as an ideal trait of a franchisee (Hing,
1995 cited in Saraogi).
Trainability and being teachable are other traits listed of an ideal franchisee. Wattel’s (1969) research
shows this could be an area that is overlooked by franchisors in their process to screen new
franchisees. Past educational performance should not be a factor in trainability. Emphasis should be
placed more on an individual’s desire for learning now. Trainability should not be associated with I.Q.
The literature review reveals a diversity of opinions on ideal traits. Some franchisors place their
highest franchisee selection criteria on education, past experience, financial situation, health and
personality (Tatham, 1972 cited in Saraogi, 2009). In this case, personality is simply defined as the
ability to meet people and gain respect.
Discipline, trust, action oriented, goal oriented, commitment and a low risk threshold were also
identified as traits of ideal franchisees (Poe, 1990 cited in Saraogi). A low risk threshold is in contrast
to Withane’s (1991) study that risk taking was most important to the success of a franchise. This may
be attributed to Withane’s study taking place in Canada where laws about franchising are not as strict
as the United States. Without government regulation, there would be a higher degree of risk in
franchising. Some of Withane’s (1991) conclusions also support Poe on the characteristic of risk. In a
survey of reasons why franchisees joined a franchise compared to starting their own independent
business, 60% of the respondents stated there was less risk involved than opening an independent
business. Thirty-five percent joined because of the start-up support, which would include training. In
another study, franchisor support was also considered to be the most important reason one would buy
a franchise (Hough’s, 1986 cited in Kaufmann & Stanworth 1995). Trust is an important trait in
referring to Saraogi’s (2009) definition of franchising as a relationship. One study showed that
franchisees like the fact they can run their businesses independently, receive help when needed, and
liked they were joining a proven system (Baron and Schmidt, 1991, cited in Elango and Fried, 1997).
Several researchers have found that previous business owners in the United States ranked
“established brand name” and “lower cost of development ” as the most important advantages of
being a franchisee, while those individuals with no background of self-employment ranked
“independence and training” as the most important elements (Peterson & Dant, 1990).
In a similar study, British franchisees identified “national affiliation” (affiliation with a nationally known
trademark) as the most important motive someone would by a franchise (Stanworth, 1977 cited in
Kaufmann and Stanworth 1995).
In conclusion, over a dozen traits were listed from a combination of studies on ideal franchisees.
Some of them were discipline, cooperation, satisfaction in following a system, trainability and trust.
Getting to know prospective franchisees is in the best interest of the franchisor. A bad choice in a
prospective franchisee can lead to ongoing problems for the franchisor (Justin & Judd, 1989 cited in
Saraogi, 2009).
5.4 Traits of military veterans

Several researchers trained in social sciences describe the military as providing an environment
described as a bridge, which helps connect someone in the military transition to civilian life (Browning,
Lopreato and Poston, 1973 as cited in Bryant and Wilhite, 1990). The military experience focuses on
building key traits such as punctuality, discipline, and general communication skills. An outcome of
these traits is the possibility that military experience is of little use in the civilian workplace, which
could lead to a veteran with fewer skills and lower income (Bryant and Wilhite, 1990).
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Martin McDermott
6. The effect of combat service and military rank on entrepreneurial careers

A large part of the literature review on the military came from the study, “The Effect of Combat Service
and Military Rank on Entrepreneurial Careers: The Case of Israeli MBA Graduates” (Avrahami &
Lerner, 2003 ). This empirical study is among the first to examine the effect of military service patterns
on the choice of entrepreneurship as a career path. The study indicates a relationship of leadership
positions in the military to entrepreneurship. Even though their study takes place in Israel where
serving in the military is required, it still presents an opportunity to examine the link between military
and entrepreneurship as well as some of the key traits produced by military. The dependent variable
in this study is entrepreneurship as a career while the independent variable is military service. The
study showed military that served in a combat unit are three times more likely to become an
entrepreneur than his counterpart who did not serve in a combat unit (Avrahami & Lerner’s 2003). The
study also found the Israeli Defense Force spends a significant amount of time training new enlistees.
In addition, they provide a wide range of technological skills (Avrahami & Lerner, 2003).
7. Branch of military
Bryant and Wilhite (1990) examine the benefits of military training using civilian wages as the
dependent variable. Their findings suggest military training exerts a positive influence on civilian
wages depending on the service. Additional research suggests the branch of military services is also
a factor. A veteran of the Army, Navy or Marine Corps will not do as well for income compared to a
veteran from the Air Force. Research and development skills acquired in the military accounts for the
increased development in the hi-tech sector of entrepreneurial start-ups (Sokolov, 1999 as cited in
Avrahami & Lerner, 2003). Combat units are where enlistees learn their training in leadership. Traits
gained by combat units are risk taking, adaptation, taking initiative, team building, mutual support and
self-efficacy (Dvir, 1998 & Gal, 1986 cited in Avrahami & Lerner, 2003).
8. Occupational and institutional theory
Military service can be perceived as alternating between two concepts called institutional and
occupational theory (Cotton & Moskos, 1988, Sorensen, 1994 cited in Avrahami & Lerner, 2003).
These two theories are not mutually exclusive (Faris, cited in Avrahami & Lerner, 2003). The
difference is in the enlistee’s intentions in serving in the military as simply an occupation or an
institution (Faris, 1981, cited in Avrahami & Lerner, 2003). Service to an institution needs commitment
to the organization (Janowitz, 1977: Stahl, Roger & McNichols, 1981 cited in Avrahami & Lerner,
2003). Avrahami & Lerner’s (2003) theory is military service has long-range effects on its enlistees.
Serving as an officer in the military resembles an institutional service. An American sample of the
National Longitudinal Survey similarly found there is evidence of skills transferring from military
training to civilian employment (Magnum and Ball, 1987 cited in Avrahami & Lerner, 2003).
Similar studies found service in the military was a big influence in changing the direction of men’s lives
during the Great Depression (Elder & Hareven, 2003 cited in Avrahami & Lerner, 2003). In addition, it
stated that military service promoted independence, broadened knowledge, experience and greater
access to educational work-life achievements, peer equality and comradeship. Avrahami & Lerner’s
(2003) research shows there are several arguments on military turning to entrepreneurship based on
institutional versus occupational theory. The study emphasizes that military service fosters discipline,
conformity, and bureaucratic behavior, all of which are the direct opposite of entrepreneurial behavior.
In addition, occupational theory is seen more as individualistic which appears more likely to lead to
entrepreneurship. However, based on social capitalization and leadership theory, they argue
institutional types of military service may also lead to entrepreneurship. Leadership theory suggests
that the military invests a tremendous amount of effort in leadership training with command positions
and officer ranks. Leadership training is important in preparing enlistees for combat (Avrahami &
Lerner, 2003).
A number of studies link entrepreneurship with risk taking (McClelland, 1961, 1965; Forlani, and
Mullins, 2000 cited n Avrahami & Lerner, 2003). Risk taking may contribute to explaining the
relationship between combat service and a career in entrepreneurship as both activities involve risk
(Avrahami & Lerner, 2003).
9. Retirement from the military
Spiegle and Shultz (2003) researched the transferability of skills on naval officers and addressed how
military and civilian retirement differs. Several other studies have concluded that retirement from the
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Martin McDermott
armed forces differs from the civilian sector (Backus, 1981; DeRenzo, 1990; Dunning & Biderman,
1973; Kilpatrick & Kilpatrick 1979; McNeil & Giffen 1965, 1967;McNeil, Lecca & Wright, 1983 cited in
Spiegel and Shultz, 2003). Civilian retirement is based on age while retirement from the military is
based on the duration of service. Military are entitled to retire after 20 years of service not considering
age. The typical officer leaves the military at age 45 (Kilpatrick & Kilpatrick, 1979; McNeil & Griffin,
1967 cited in Spiegel and Shultz, 2003). A similar study pointed out a possible consequence of this
scenario is fathers joining their children to find an identity via career choice (Shaw, 1987, cited in
Spiegel & Shultz, 2003). Another variation among military and civilian retirement is on the structure of
the two systems. The military environment can be categorized as a closed social-system (Kilpatrick &
Kilpatrick, 1979; McNeil & Griffin, 1967 cited in Spiegel & Schultz, 2003). Some theories suggest that
many serving in the military have preretirement anxiety. This can be over come by planning at least
twelve months preceding retirement (McNeil, 1983 cited in Spiegel and Shultz, 2003). Age is an
important issue in retiring from the military. Members may have a more difficult time finding a job by
delaying their retirement from the military (McNeil, 1983 cited in Spiegel & Shultz, 2003).
In conclusion, research shows that the branch and amount of time served all play a critical part in the
characteristics acquired from the military. It also has an impact on the switch from the armed forces to
civilian life.
10. Commonalities of franchisees and military traits
10.1 Discipline
One of the traits mentioned in both categories was discipline. Appendix B shows a diagram on
commonalities of franchisees and military. Higate’s (2001) research describes the military as a “total
institution” characterized by training and discipline that differ according to the demands of the military
organization. In the review of literature, discipline, trust, action oriented, goal oriented, and
commitment were also identified as traits of ideal franchisees (Poe, 1990 cited in Saraogi). Similarly,
the experience of the military life focuses on building key traits such as punctuality, discipline, and
general communication skills (Bryant and Wilhite, 1990).
10.2 Risk taking

The review of literature also showed risk taking was also a commonality between franchisees and
veterans. One of the traits produced by combat units is risk taking (Dvir, 1998 & Gal, 1986 cited in
Avrahami & Lerner, 2003). Many studies link entrepreneurship with risk taking (McClelland, 1961,
1965; Forlani, and Mullins, 2000 cited in Avrahami & Lerner, 2003). Risk taking may contribute to
explaining the relationship between combat service and a career in entrepreneurship as both activities
involve risk (Avrahami & Lerner, 2003). Avrahami & Lerner’s (2003) findings did show a respondent
who served in a combat unit is three times more likely to become an entrepreneur than his
counterpart who did not serve in a combat unit. Their explanation goes back to institutional theory
versus occupational theory in military service. Institutional theory has a higher commitment, mission
and motivation than occupational. Withane’s (1991) findings similarly show that risk taking was most
important to the success of a franchisee.
10.3 Training
Much of the literature review emphasized the magnitude of training that goes into the military. Another
commonality between ideal franchisees and veterans is openness to training. The literature review
showed the importance of training in franchising. Similarly the military invest an amount of effort in
leadership training with command positions and officer ranks. Leadership training is important in
preparing enlistees for combat (Avrahami & Lerner, 2003). The military is described as a “total
institution” characterized by training and discipline that differ according to the demands of the military
organization (Higate, 2001).
11. System
Both franchising and military are characterized as a system. For example, franchising is defined as a
license from the owner (the franchisor) of a trademark or service allowing the user (the franchisee) to
sell a product or service under that name following the system created by the franchisor (Norback &
Norback, 1982 cited in Withane, 1991). The military environment can be classified as a closed social-
system (Kilpatrick & Kilpatrick, 1979; McNeil & Griffin, 1967 cited in Spiegel & Schultz, 2003).
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Martin McDermott
According to earlier research, Wattel (1969) shows franchisees need a highly cooperative personality
including the ability and willingness to follow the decisions, policies and daily routines created by the
franchisor. Both organizations need to follow policies. For example, a franchisee needs to gain
personal satisfaction from following the policies created by the franchisor (Wattel, 1969).
11.1 National affiliation

National affiliation is another possible commonality between franchising and the military. In the review
of literature, British franchisees identified “national affiliation” (affiliation with a nationally known
trademark) as the most important reason someone would by a franchise (Stanworth, 1977 cited in
Kaufmann and Stanworth 1995). In a study of U.S. franchisees, Peterson and Dant (1990) found that
previous business owners ranked “national brand name” as a reason to purchase a franchise.
12. Hypotheses
There are several hypotheses that can be drawn from the literature review. Presently, the central
hypothesis and other hypotheses are the following: The Central Hypothesis - Veterans make
significantly more successful franchisees than nonveterans. Hypothesis 2 – Null Hypothesis -
Veterans do not significantly make more successful franchisees than nonveterans.
13. Conclusions
This study is important for several reasons. Franchising is a big contributor to the United States
economy. According to the World Franchise Council, there are over 1,500 systems franchising,
representing more than three quarters of a million franchisees and employing almost 18 million
workers in the United States. The selection of qualified franchisees has been franchisors most
frequent problem (Lewis and Hancock, 1963, cited in Wattel, 1969 and Saraogi, 2009). The right
selection of a franchisee candidate can generate favorable results for the franchisor and franchisee. A
bad choice in franchisee candidates can lead to ongoing problems for the franchisor (Justin & Judd,
1989 cited in Saraogi, 2009). Some of the commonalities discovered among franchisees and veterans
in the literature review include discipline, highly cooperative, risk taking, training, the ability to follow a
system and national affiliation. These commonalities don’t suggest veterans would make better
franchisees but does show additional research should be made on the topic.
If hypothesis number one proves to be valid, than franchising can be a benefit to veterans and
veterans can be a benefit to franchising. Several studies suggest that many serving in the military
have preretirement anxiety. This can be overcome by planning at least twelve months before
retirement (McNeil, 1983 cited in Spiegel and Shultz, 2003). The typical officer leaves the military at
age 45 (Kilpatrick & Kilpatrick, 1979; McNeil & Griffin, 1967 cited in Spiegel and Shultz, 2003).
Members may have a more difficult time finding a job by delaying their retirement from the military
(McNeil, 1983 cited in Spiegel & Shultz, 2003). Age is an important factor in retiring from the military.
Franchising might be an alternative to veterans retiring from the military. Prospective franchisees with
some or no managerial experience could be a better fit for franchising and cause less conflict
(Fenwick and Strombomb, 1998 cited in Saraogi, 2009).
14. Weaknesses in research
Several studies referenced in the literature review take place in other countries. For example,
Avrahami and Lerner’s (2003) study took place in Israel. Even though their study takes place in Israel
where serving in the military is required, it still presents opportunity to examine the link between
military and entrepreneurship as well as some of the key traits produced by military. Similarly,
Saraogi’s (2009) research took place in India and Withane’s (1991) study in Canada. Both could have
an impact because the laws regarding franchising in other countries are different, yet the concept of
franchising is still the same.
15. Gaps In research
The literature review reveals a diversity of opinions on ideal traits of franchisees. Some franchisors
place their highest franchisee selection criteria on education, past experience, financial situation,
health and personality (Tatham, 1972 cited in Saraogi, 2009). In contrast, Wattel’s study states that
past educational performance should not be a factor in trainability. Emphasis should be placed more
on an individual’s present desire for learning. Trainability should not be associated with I.Q. Discipline,
action-oriented, trust, goal-oriented, commitment and a low risk threshold were also identified as traits
of ideal franchisees (Poe, 1990 cited in Saraogi). A low risk threshold is in contrast to Withane’s
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Martin McDermott
(1991) study that risk taking was most important to the success of a franchise. This may be attributed
to Withane’s study taking place in Canada where laws about franchising are not as strict as the United
States. Without government regulation, there would be a higher degree of risk in franchising.
16. Recommendations for future studies
The literature shows that the branch of military, rank and time served has an impact on retirement
options and traits acquired. A focus on a specific branch could be useful. Combs research referenced
Porter (1980) who believes confining the study to a single franchise category controls for industry
specific factors that affect competitive conditions. Finally, Avrahami and Lerner (2003) suggest further
research to explore the relationships between military service and willingness to take risks.
17. Appendix A – key terms
Conflict - The opposite of cooperation (Saraogi, 2009)
Entrepreneurship – the creation a new company (Gartner, 1985 cited in Avrahami & Lerner).
Franchising - A license from the owner (the franchisor) of a trademark or service allowing the user
(the franchisee) to sell a product or service under that name following the system created by the
franchisor (Norback & Norback, 1982 cited in Withane, 1991).
Military service - The experience of individuals and is a predecessor of their ultimate post-military
careers as civilians (Avrahami & Lerner, 2003).
18. Appendix B – common traits of franchisees and veterans
Franchisees Veterans
Discipline Discipline
In the review of literature, discipline, trust, action Higate’s (2001) research describes the military as a
oriented, goal oriented, and commitment were also “total institution” characterized by training and
identified as traits of ideal franchisees (Poe, 1990 discipline that differ according to the demands of the
cited in Saraogi). military organization.
The experience of the military life focuses on building
key traits such as punctuality, discipline, and general
communication skills (Bryant and Wilhite, 1990).
Risk Taking Risk Taking
Withane’s (1991) findings similarly shows that risk
taking was most important to the success of a One of the traits produced by combat units is risk
franchisee. taking (Dvir, 1998 & Gal, 1986 cited in Avrahami &
Lerner, 2003).
National Affiliation National Affiliation
In the review of literature, British franchisees National affiliation is another possible commonality
identified “national affiliation” (affiliation with a between franchising and the military.
nationally known trademark) as the most important
reason someone would buy a franchise
(Stanworth, 1977 cited in Kaufmann and Stanworth
1995).
Training Training
Another commonality between ideal franchisees The military is described as a “total institution”
and veterans is openness to training. The literature characterized by training and discipline that differ
review showed the importance of training in according to the demands of the military organization
franchising. (Higate, 2001)
The military invest an amount of effort in leadership
training with command positions and officer ranks.
Leadership training is important in preparing enlistees
for combat (Avrahami & Lerner, 2003).
System System
Franchising is defined as a license from the owner The military environment can be classified as a closed
(the franchisor) of a trademark or service allowing social-system (Kilpatrick & Kilpatrick, 1979; McNeil &
the user (the franchisee) to sell a product or Griffin, 1967 cited in Spiegel & Schultz, 2003)
service under that name following the system
created by the franchisor (Norback & Norback,
1982 cited in Withane, 1991).
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Martin McDermott
19. Appendix C - keywords

The primary database used in this research was EBSCO Host. The main keywords were use in the
following combination: franchising and veterans, military and entrepreneurship, characteristics and
franchisees, veterans and characteristics, veterans and entrepreneurs, veterans, business and
franchisees.
References
Avrahami, Y., Lerner, M. (2003). The Effect of Combat Service and Military Rank on Entrepreneurial Careers:
The Case of Israeli MBA Graduates. Journal of Political and Military Sociology, 31(1) 97-118.
Bryant, R., Wilhite, A. (1990). Military Experience and Training Effect on Civilian Wages. Applied Economics, 22
69-81.
Dant, R. (2008). A Futuristic Research Agenda for the Field of Franchising. Journal of Small Business
Management, 46(1) 91-98.
Elango, B., Fried, V. (1997). Franchising Research: A literature Review and Synthesis. Journal of Small Business
Management. 35(3) 68-81.
Higate, P. (2001). Theorizing Continuity: From Military to Civilian Life. Armed Forces & Society, 27(3) 443-460.
Kaufmann, P., Dant, R. (1995). Franchising: Contemporary Issues and Research. Journal of Public Policy &
Marketing.
Kaufmann, P., Stanworth, J. (1995). The Decision to Purchase a Franchise: A Study of Prospective Franchisees.
Journal of Small Business Management, 33(4), 22-33.
Michael, S., Combs, J. (2008). Entrepreneurial Failure: The Case of Franchisees. Journal of Small Business
Management, 16(1) 73-90.
Saraogi, A. (2009). Exploring Franchisor Franchisee Relationship: Building a Predictive Model of Franchisee
Performance. Vision – The Journal of Business Perspective, 13(1), 31-58.
Spiegel, P., Shultz, K., (2003). The Influence of Preretirement Planning and Transferability of Skills on Naval
Officers’ Retirement Satisfaction and Adjustment. Military Retirement Adjustment, 15(4) 285-307.
Wattel, H. (1969). Are Franchisors Realistic and Successful in Their Selection of Franchisees? Journal of
Retailing, 44(4), 44-68.
Withane, S. (1991). Franchising and Franchisee Behavior: An Examination of Opinions, Personal Characteristics,
and Motives of Canadian Franchisee Entrepreneurs. Journal of Small Business Management, 29(1) 22-29.
402
Marketing Innovation and Innovative Capability of
Marketing: Study of Portuguese Firms
Jacinta Moreira1 and Maria José Silva2
1
Polytechnic Institute of Leiria, and NECE, Covilhã, Portugal
2
University of Beira Interior (UBI), and NECE, Covilhã, Portugal
jacinta.moreira@estg.ipleiria.pt
msilva@ubi.pt
Abstract: The present article aims at identifying and analyzing factors that boost the innovative capability of
marketing, in the scope of the Portuguese firms. Innovative capability of marketing considered while innovation in
design and packing of goods, services and innovation in the sales and distribution methods. Starting from this
purpose, a theoretical frame is considered from which the characterization of marketing innovation is part, as well
as its underlying determinants. On the literature basis several hypothesis of research are formulated which are
tested using the secondary data authorized by the Observatory of Science and Higher Education belonging to the
4th Community Innovation Survey (CIS 4), supervised EUROSTAT. The method to be used will be the logistic
regression model. The obtained results show that the R&D activities, regarding internal R&D activities, acquisition
of machinery, equipment and software, knowledge and accomplishment of other procedures, and the factor
marketing activities, influence firms to innovate in marketing
Keywords: innovation, marketing innovation, innovative capability, CIS
1. Introduction
Due to the increase of the globalization of economic activities, of the gradual integration of markets
and the continuous evolution of consumer’s needs and desires, firms are faced with new challenges
that try to innovate more and more, above all in marketing. As such, marketing innovation is seen as a
determinative factor of the firm’s success, making it one of the largest phenomena with greatest
interest, nowadays.
The present study has as its main aim to identify and analyze the factors that boost the firm’s
innovative capability of marketing, focusing its analysis on the study of industrial and commercial firms
and on Portuguese services. The innovative capability of firm’s marketing is considered in this study
while innovation in design and packing of goods, services and innovation in the Sales and distribution
methods.
To empirically test the formulated hypotheses, regarding each factor, secondary data given by the
OCES – “Observatório da Ciência e do Ensino Superior” (Observatory of Science and Higher
Education) pertaining to the 4th Community Innovation Survey (CIS 4), supervised by EUROSTAT.
The logistic regression models are applied in the obtained data.
The study is structured as followed: in point two, regarding relevant literature on the topic of marketing
innovation, a conceptual model is proposed and the hypotheses to be empirically tested in the
statistical model are formulated. In point three the sample is defined, the variables used in the
empirical study are described and presented and the logistic regression model is presented. The final
considerations are presented in the last point and further research is suggested.
Marketing innovation has come to register an increasing theoretical and empirical interest throughout
the past few years. The concept of marketing innovation can assume innumerable forms such as,
new products of success, more creative marketing programs, new selling techniques and better
performances (Atuahene-Gima, 1996; Chou, 2009).
According to CIS 4 (2005), marketing innovation consists on the elaboration of a new concept or
strategy of marketing, different from the existing marketing methods in the firm, therefore not having
been used previously, contemplating alterations in design or in the packing of the product, in the
distribution and promotion of products, in the price policy, which make it possible to increase the
introduction of goods and services of the firm in current or new markets market.
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Jacinta Moreira and Maria José Silva
Heunks (1998) and Shergill and Nargundkar (2005) define marketing innovation as an innovation in
the programs or methods of marketing, including the three marketing Ps: product, price, promotion
and distribution. Harms et al. (2002) consider innovation as a new element of the marketing-mix,
capable to promote new and obvious advantages for the firm which, in accordance with Chou (2009),
comprises the main element of differentiation and performance superiority.
According to the proposed definitions, it is verified that marketing innovation is considered of main
importance when understanding what consumers look for, where a new product or service is
developed for a certain market, and where the potential value and the growth of this market
determines the success of the product or service (Trienekens et al., 2008).
According to Kim and Mauborgne (1997) marketing innovation, can occur in three distinct levels: (i)
level of the product, corresponding to the physical product; (II) level of the service, sustained in
sources such as maintenance, support service given to the purchaser, guarantee and training given to
deliverers and retailers; (III) level of the delivery, which includes logistic and the means used for the
delivery of the product to the purchaser. These aspects, on one hand, explain to a great extent the
performance of firms, since it is the value of innovation throughout different levels that establishes the
difference among organizations of high and low growth and, on the other hand, it shows a clear
relation between innovations, the marketing intention and the role of the purchaser/consumer.
In this scope, and in accordance with Waarts (2005), the main marketing task consists of creating an
innovative source of supply, based on these needs. Maciariello (2009) also relates that the great aim
of the innovation consists of the creation of new markets for the organization, regarding that new
expectations are promoted; new standards and new ways of satisfaction of the aimed market are
established. In this sense, Drucker (1999) refers that the first intention of marketing in the scope of
innovation, is not only to sell, but above all to understand the consumer, for which the marketing
concept must mainly focus on the determination of the consumer’s needs, desires and on the
promotion of its satisfaction in the long term.
From the projects presented by the authors, it is inferred that the innovations constitute the basis for
firm and the market success, thus for Harms al. (2002), the lasting and sustainable growth of the
economy can only take place if the firms have new products and services to offer constantly, for which
investments in R&D should be promoted
On this regard, marketing innovation can be extremely relevant in the development of future markets,
even if it is necessary to respect two essential requirements: direct contact of the firm with the
customer and orientation towards competition. Concerning the first aspect, customers are with no
doubt, the pivot elements when testing a new product or service, for which the satisfaction shown
beforehand determines the firm’s strategic planning. In what refers to positioning and due to the
constant market change, its importance must permanently increase, since companies that contribute
with constructive solutions manage to expand the success to other markets (Harms et al., 2002).
In short, the ability to generate a variety of new products and services successfully and to find new
forms of communicating and distributing them, is vital for many organizations, since the sustainability
of marketing activities is an essential factor so they can adapt to the market and the immediate
changes, to new technologies and anticipate their competitor’s moves.
In view of the studied conceptual frame and despite the marketing innovation is a very recent area,
there are some concerns on behalf of the authors in identifying and defining determinative factors of
marketing innovation, part of the internal and external resources of the organization. Concerning the
first situation, studies carried out by Waarts (2005) and Maciariello (2009), identify, as essential
factors of marketing innovation, the degree of incorporated technology and the developed marketing
activities. In what refers to external factors, Drucker (1999) and Harms et al. (2002) consider the
analysis of market opportunities, understood as R&D activities, as the main determinant of the firm’s
marketing innovative capability.
The clarifying factors of marketing innovation are not depleted in the factors mentioned here.
However, intending to analyze the process of marketing innovation at a firm level and considering the
literature review set forth in this study, factors related to technology, R&D and marketing activities,
considering that these factors affect in an integrated way and as a form of interactions, the firm’s
404
innovative marketing. The factors that will be studied in this survey are the result of 4th Community
Innovation Survey (CIS 4), namely: Technological Capacity, Marketing Activities and R&D Activities.
This activities cover the: Intramural R&D, Extramural R&D, Acquisition of machinery, equipment and
software, Acquisition of other external knowledge, Training and Other procedures.
The importance of the technological capability, while knowledge, necessary skills and abilities to
assimilate, adapt or modify the existing technologies or the development of new technologies, is
demonstrated in studies developed by Romijn and Albaladejo (2002), Silva and Leitão (2009) and
Guijarro et al. (2009). According to authors, the technological capability will be higher if the firms have
more qualifications in terms of qualified human resources and training, having therefore a positive and
significant effect in innovation. According to what is demonstrated the following hypothesis is
established:
H1: Technological capacity is positively related to the propensity of the firm to innovate in marketing
R&D and innovation activities estimate the conception and development of new products, services or
processes, or the improvement of the existing ones (CIS 4, 2005), thus considering the creativity of
the firm and being, therefore, much related to marketing innovation. Taking in account the 4th
Community Innovation Survey, the following can be part of R&D activities: (i) accomplishment of
internal R&D activities; (ii) internal acquisition of R&D; (iii) acquisition of machinery, and software, (iv)
acquisition of other external knowledge, (v) other procedures.
Taking in account the accomplishment of internal R&D activities by the firm, they respect the entire
creative work developed to increase knowledge, as well as the use of this knowledge in new products
and processes (CIS 4, 2005). In accordance with Masso and Vahter (2008), Frenz and Ietto-Gillies
(2009) and Silva et al. (2010), the bigger the investment in this type of activities is, the greater the
probability of the firm to develop innovation. According to what is demonstrated the following
hypothesis is established:
H2a: The accomplishment of internal R&D activities are positively related to the propensity of the firm
to innovate in marketing
The external acquisition of R&D considers R&D activities, equally creative and with the intention to
increase the firm’s internal knowledge but which are performed externally by other R&D public or
private companies or institutions, (CIS 4, 2005). In accordance with Chesbrough (2003), the external
sources of knowledge have a very important role in the innovation of the firm, being therefore
associated to its performance. Frenz and Ietto-Gillies (2009) and Harris and Li (2009) conclude in
their study that external R&D acquisition is positively related to innovation in the firm. According to
what is demonstrated the following hypothesis is established:
H2b: The external acquisition of R&D is positively related to the propensity of the firm to innovate in
marketing.
According to Youtie (2006), any type of innovation, either in the product, in the process, organizational
or of marketing, considers in its implementation the acquisition of machinery, equipment, computers
or software. For the author, the acquisition of these types of goods are directly related to the benefits
of innovation, visible through the quality and variety of goods, market quotes, increase of the capacity
and productive flexibility, as well as, time reduction in delivery of products and services. According to
what is demonstrated the following hypothesis is established:
H2c: The acquisition of machinery, equipment, computers and software is positively related to the
propensity of the firm to innovate in marketing.
The acquisition of other external knowledge, specifically related to patent rights, non patented
innovations, know-how, etc. (CIS 4, 2005), constitute an indicator that has a strong influence on
innovation, such as referred by Millot (2009) and Silva et al. (2010). According to Millot (2009), this
type of particular knowledge is positively related to the innovation. This association is particularly high
in industrial sectors, guided towards intensive knowledge and to high technology. According to what is
demonstrated the following hypothesis is established:
405
H2d: The acquisition of other external knowledge is positively related to the propensity of the firm to
innovate in marketing.
Finally, still considered as activities of R&D and innovation, the remaining procedures and techniques
that, not having been contemplated previously, are also useful to the development of products and
new or improved processes, eventually related to the perfectioning of the experience, techniques and
know-how of the firm, thus indicating the following hypothesis:
H2e: The accomplishment of procedures and technical preparation is positively related to the
propensity of the firm to innovate in marketing.
The importance of marketing activities in the innovative process of the firm is shown in studies carried
out by Kim and Mauborgne (1997), Trienekens et al., (2008), Chou (2009) and Silva et al. (2010).
Marketing activities of are orientated towards the introduction of new products or products significantly
improved in the market, contributing towards the differentiation of the firm, noting that activities guided
mainly by the study of the revealed market needs have a crucial role in the innovative process of the
firm. According to the interest of this variable in the context of marketing innovation, the following
hypothesis is established:
H3: Firms that promote marketing activities present a bigger propensity to innovate in marketing than
other firms.
The hypotheses formulated here were empirically tested having in account the research design which
is presented as followed.
3. Research design
In this point the population study was chosen, therefore corresponding to Portuguese firms. The data
gathering methods were defined and finally, the method of data analysis was chosen: The logistic
regression model.
3.1 Data presentation: Population and sample

The data used in this research was gathered by the OCES, in collaboration with INE - Instituto
Nacional de Estatística (National Study of Statistics), through the 4th Community Innovation Survey.
The data was collected between June and November 2005, although it refers to the period that goes
from 2002 to 2004.
The population included in the analysis includes all the industrial Portuguese firms, of retail and
services with at least 5 workers, regarding economic activities (CAE) 11, 14 a 37, 40, 41, 51, 52, 55,
60 a 67 e 72 a 74 (CAE – Rev.2.1, 2003), which includes a total of 22 749 firms registered in FGUE –.
The sample was provided by INE, on the basis of the methodological specifications imposed by the
EUROSTAT, where a sample comprised of 7 079 firms is initially extracted from the population,
having later been corrected to 6 243 companies. Considering the firms of the corrected sample, they
answered correctly to the survey, in accordance with the norms defined by EUROSTAT, 4 643 firms
considering this, the final sample.
Thus, Portuguese firms will be considered as innovative in marketing, if during the period of 2002 to
2004, they introduced marketing innovation, related (i) with alterations in design or the packing of a
good and/or service or (II) with the new or significantly improved sales or distribution methods.
3.2 Variables
The innovative marketing capacity is taken from the verified marketing information, being considered
as a dependent variable. This dimension is presented as a dichotomy based on binary data: it
assumes value “0” for firms that did not innovate and value “1” for those that innovated. With respect
to the independent variables, they are represented by the technological capacity, R&D and marketing
activities. This research only took the firm in account if it set forth any of these activities, it also
considered itself as a dichotomy variable based on binary data: it takes value “1” when it developed
innovation activities and value “0” otherwise.
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Similarly to other studies, (Silva and Leitão, 2009; Silva et al., 2010) a control variable was used in
this research, linked to entrepreneurial characteristics: firm dimension. Two variables were created to
measure the firm dimension: (1) small and average firm: the 5 to 249 workers and (2) large firm: with
250 or more workers.
3.3 Method: Logistic regression model

It was verified from the theoretical literature review and the proposed conceptual model that the
innovative marketing capacity is a complex phenomenon influenced by several factors. Given the
necessity to explore the relations between those factors and the marketing innovative capacity, there
is a more specific intention to study the statistical relation of a dependant variable in relation to more
than one explanatory variable; the Logit Model was chosen to be used. It was also verified that this
model has been widely used in the empirical analyzed studies, thus presenting itself as an
appropriate analytical technique for the proposed conceptual model, since it includes several
independent variables, presented as follows.
IM = β0 +β1Form + β2aID_i + β2bID_e + β2cAq_mes + β2dAq_c + β2eOp + β3Act_mkg + β4Dim + εi
Where: IM= Marketing Innovation; εi = Residual; β = Coefficients; Form = Training; ID_i = Intramural
R&D; ID_e = Extramural R&D; Aq_mes = Acquisition of machinery, equipment and software; Aq_c =
Acquisition of other external knowledge; Op = Other procedures; Act_mkg = Marketing Activities; Dim
= dimension firm.
Latter the logistic regression model was used with the Community Innovation Survey data, aiming at
results which are presented and discussed as follows:
4. Data analysis
In this phase of the research, logistic regression models were used with the Community Innovation
Survey data, therefore testing the proposed model. Wald statistics was used as test statistics to
analyze the behavior of the variables and the adjustment quality of the proposed model. The results of
the logistic regression for the Model of Marketing Innovation are presented in table 1.
Table 1: Logic regression models’ results for marketing innovation
Model A Model B Model C
Paramete Paramet Paramete S.E Wal Sig. Exp
Models r er r d (B)
Estimator Estimato Estimator
r
Technological Capacity 0,001
Intramural (in-house) R&D 0,386 0,409 0,371 0,113 10,8 0,001 1,450
Extramural R&D 0,070 44
Acquisition of machinery, eq. software 0,341 0,348 0,382 0,110 0,001 1,465
Acquisition of other external 0,466 0,482 0,374 0,125 12,0 0,003 1,453
knowledge 0,467 0,468 0, 447 0,113 25 0,000 1,563
Marketing activities 1,569 1,574 1,581 0,107 8,92 0,000 4,858
7
15,6
14
216,
915
Dimension firm 0,204 0,129 2,50 0,114 1,226
2
Constant -2,099 -2,099 -2,335 0,152 234, 0,000 0,097
469
Model Summary
Correct predict (%) 81,9
Qui-square 779,276 0,000
Log likelihood 3573,572
Number of cases 4114
The results of the logistic regression for the model show that not all parameter estimates of the
regression are statistically significant at a level of 5%. Regarding the adjustment quality of the final
model (Model C), the results show that the predictive capability of the model is of 81, 9% which result
407
from the comparison between values, the response variables predicted by the model and the
observers. The statistics of the qui-square test has a value of 779,276 with a proof associated value
of test 0,000. The statistics of the log-likelihood, with the value of 3573,572, corroborates the
significance of the global model. This last model results from the introduction of the control variable in
Model B, in view of analyzing the robustness and consistency of the explanatory variables.
The influence of the technological capacity in the firm’s capability to innovate in marketing is tested in
the H1 hypothesis. The technological capacity is measured through the participation in training
activities. In accordance with the literature review, training is seen as an essential condition for firm’s
innovation, allowing an increase of the gathered knowledge and an improvement in the technological
domain. Thus, internal or external training of the firm’s staff is considered a training activity with the
aim of promoting development and the introduction of new or improved products or processes in the
(CIS 4, 2005). However, as shown by the results of the model, the technological capacity explanatory
variable has no statistical significance, therefore is not able to confirm the H1 hypothesis.
The H2a hypothesis related to the R&D activities aims at testing the effect of R&D activities, internally
throughout the firm, in the firm’s capacity to innovate in the service. According to the model results, it
is confirmed that the development of internal R&D activities throughout the firm has a positive and
significant influence in the firm’s capacity to innovate in marketing, as indicated in the proof value
associated to the variable (0,371). In this way, it is verified that the firms that put forth this type of
activities present advantages in marketing innovating, comparatively to the remaining firms; certified
by the value associated to the marginal effects in the variable (1,450), corroborating the results
reached by Masso and Vahter’s (2008) studies, Frenz and Ietto-Gillies (2009) and Silva et al. (2010).
The H2b hypothesis is aimed at studying empirically if the acquisition of R&D activities to other firms,
private or public R&D firms or intuitions is related to the capacity of the firm to innovate in marketing.
However, results show that the external acquisition variable of R&D does not have statistical
significance in the model, for which nothing can be derived from relatively to the effect of this factor.
However, the results disclose that the external acquisition variable has no significance in the model,
for which nothing can be concluded regarding this factor.
The H2c hypothesis associates the capacity of the firm to innovate in marketing with the acquisition of
machinery, equipment, software with the design of the production of goods or services or for the
implementation of new or improved processes. Through the results of the model, it is verified that the
acquisition of machinery, equipment and software have a positive and significant effect in innovative
capability of marketing (0,382). Such strengthens the conclusions of studies carried out by Youtie
(2006) e Silva et al. (2010). Considering the associated marginal effects, they have an advantage of
1,465 in developing marketing innovation than other firms. With effect, the acquisition of machinery,
equipment and software is positively related to the capacity of the firm to innovate in marketing.
The H2d hypothesis relates the capacity of the firm to innovate in marketing with the acquisition of
other knowledge such as patent rights, inventions, know-how, among others. Through the results of
the model, it is concluded that this variable has statistical significance, thus, firms that acquire
knowledge externally present advantages in marketing innovation in relation to those that do not carry
out this type of acquisition in the following up of its activities, as demonstrated by the studies of Millot
(2009) and Silva et al. (2010). Also analyzing the parameters of the model, it is verified that the
acquisition of external knowledge has a positive and significant influence in innovative capability of
marketing (0,374) and, simultaneously, endows firms with an advantage in innovating at the level of
this dimension 1,453 times superior, in relation to firms that do not acquire this type of market inputs.
In this way, H2d hypothesis is confirmed.
The H2e hypothesis intends to empirically test the relation between the accomplishment of
procedures, the preparation of techniques and the capacity of the firm to innovate in marketing. The
results of the model show that the accomplishment of procedures and preparation of techniques by
firms have a positive and significant effect on the marketing innovation; having the variable an
associate parameter estimate of 0,447. It is believed that firms carrying through procedures and
preparation techniques; besides this, they present an advantage of 1,563 in marketing innovating in.
The H2e hypothesis is therefore confirmed.
408
The last hypothesis of this model associates the development of marketing activities with the capacity
of the FIRM to innovate in marketing, in order to test if, in fact, there is any type of relation between
these two variables. When facing the results of the model, it is verified that the development of
marketing activities has associated a positive and significant effect on the innovative capability of
marketing, which is proved by estimate of the explanatory variable (1,581). Therefore firms carrying
out marketing activities are more prone to innovate in marketing than other companies, having,
inclusively, an advantage of 4,858 in developing marketing innovations as opposed to the remaining
ones. According to what is demonstrated the following H3 hypothesis is established.
5. Conclusions
The aim of the present study was to identify and analyze the determinate factors of the innovative
capability of marketing in Portuguese firms, based on the theoretical revision and considering a set of
elements that may affect marketing innovation and, consequently, the entrepreneurial innovative
capacity. In order to increase the understanding of marketing innovation and identifying its main
determinants, several hypotheses of research were formulated based on the literature review about
the topic.
A set of boost factors regarding the innovative capability of marketing were distinguished in this study,
which had been on the basis of the empirically tested formulated hypothesis: technological capability,
activities of R&D marketing.
The results of the model indicate that firms carrying out internal R&D or marketing activities or that
carry out another type of procedures guided towards innovation have greater propensity to innovate in
marketing than other firms. In a similar way, firms that also acquire machinery, equipment or software
or even other external knowledge, present advantages in marketing innovating. In accordance with
the obtained results such practices present positive and significant effects in innovative capability of
marketing; thus, the bigger the financial investments in acquisition of machinery, equipment and
software, R&D activities, in acquisition of external knowledge, in marketing activities and other
procedures, the bigger the propensity of firms to innovate in marketing.
The main contribution of this research consisted on the study of marketing innovation, which is not
thoroughly explored in the literature, as well as the determinative factors of the innovative capability of
marketing in Portuguese firms, consequently looking forward to increase the understanding on the
topic. The research proposed an empirical study based on the logit model, aiming at the analysis of
the set of selected effects of explanatory variables on the innovative capability of marketing in the
Portuguese firms.
The main limitations of this study result from restrictions of obtained data, since the CIS 4 results were
not totally authorized, such as the level of education of the firm’s workers’. A longitudinal study,
considering the data of CIS 6, in order to evaluate the trends in the scope of the marketing innovation
in the Portuguese context was also not possible.
In order to allow new empirical evidences on marketing innovation, a repetition of the empirical study
was proposed with data from other European countries where the 4th Community Innovation Survey
took place. On the other hand, it is important to complete the study with data from CIS 6, in order to
allow marketing innovation analysis in a broader time horizon, or still, to repeat the research simply
considering that data, consequently gathering information which is more up-to-date and allows the
analysis of evolutive trends in marketing innovation developed by firms.
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410
Are Ugandan Entrepreneurs That Insulated From the
Global Economy?
Rebecca Namatovu, Samuel Dawa and Fiona Mulira
Makerere University Business School, Kampala, Uganda
rybekaz@yahoo.com
samdawa@gmail.com
fmulira@yahoo.com
Abstract: Objectives: The study focused on the following objectives; to determine the effect of the global
economic crisis on the entrepreneurial environment in Uganda. To compare entrepreneurs’ perceptions of the
entrepreneurial environment in the other factor driven economies with those of entrepreneurs in Uganda during
the last twelve months. Factor driven economies are described as those countries with low levels of economic
development, with a typically large agricultural sector, which provides subsistence for the majority of the
population who mostly still live in the countryside. They include Uganda, Venezuela, Saudi Arabia, Kingdom of
Tonga, Yemen, Jamaica, Guatemala, Algeria Lebanon, Syria and West bank and Gaza strip Methodology: Data
is derived from the Global Entrepreneurship Monitor survey which uses a multi stage random sampling. It was
conducted in all four regions of Uganda; with a sample size of 2091 adults (18-64years). Similar data collection
was done in the other factor driven economies. The findings of the study show that although the Total
Entrepreneurial Activity (TEA), in Uganda has improved albeit not significantly since 2004 to 2009 when a similar
study was done, 35.91% of the Ugandans believed that starting a business during the economic crisis was more
difficult than it was a year ago. This figure however is lower than the 42% average of the other factor driven
economies. Furthermore, 35.66% of the Ugandans believed that growing a business this year was more difficult
than it was a year ago which in comparison is lower than the 43% average of the other factor driven economies.
Only 47% of Ugandan entrepreneurs in comparison to 65% of other factor driven economies believe that there
are fewer business opportunities. 52% and 42% respectively, of the established businesses owners in Uganda
believed that starting and growing a business this year was more difficult than it was a year ago. All these are
below the factor driven economy’s average. In summary Ugandan entrepreneurs unlike their counter parts in
other factor driven economies perceive a lower negative effect of the crisis to their entrepreneurial effort.
Keywords: entrepreneurship, global economic crisis, Uganda, factor driven economies, total entrepreneurial
activity
1. Background
Globalization which has been thought to bear the potential to elevate the quality of life through
increasing reach for organizations both big and small to markets and raw materials (Sachs 2005;
Friedman 2006) has yielded a fair amount of discontent / disproportionate mix of good and evil as
evidenced by the 2002 riots in Seattle (Stiglitz 2002) and the China miracle (Friedman 2006).
Since the financial crisis spilled over from the US and hit Europe with full force in September 2008,
the effects of the crisis have become increasingly felt also in developing and emerging countries. The
global economic crisis which is described as an economic problem characterised by contraction of
liquidity in the global credit markets and banking system, has already affected remittance flows from
industrialised to developing countries, an important source of income for many countries (ODI 2008).
The financial sector has been the hardest hit and subsequently the reverberations spread to
practically all sectors in every economy. With liquidity drying up and financial institutions around the
world being under stress and withdrawing funds from wherever they can to remain liquid, it has
become difficult if not impossible for many countries to refinance themselves in international financial
markets (CNN World News 2 April 2010).
The uncertainty of the current global economic situation is unprecedented, as shown by the frequent
downward, revisions in global forecasts of growth and trade by both official and independent sources
(Kryticous 2009). These effects continue to be felt to date with news of the US economy continuing to
shed and dismal economic growth in several countries the world over. The International Labour
Organization’s (ILO) Global Employment Trends 2009 report estimated an increase in the global
unemployed in the range of 18 to 30 million people by the end of 2009, with more than 50 million
forecasted to lose their jobs in a worst case scenario (ILO 2009).
On the other hand, developing economies like Uganda that have relatively under developed financial
systems that are not well integrated with international markets just may have been shielded from the
411
Rebecca Namatovu et al.
vagaries of this downturn. The governor of the central bank in Uganda at a speech on 24th September
2008 stated that Uganda would not be affected by the economic crisis (Mutebile 2008). This despite
announcements by development partners that they would be cutting back on aid and data emerging
showing that remittances from Ugandans living in the diaspora were dropping dramatically
(Ssewanyana & Bategeka 2010). These remittances make up a large amount of seed money for
entrepreneurial ventures in Uganda while development aid is used for key infrastructural development
in the road and energy sectors, both of which are key in entrepreneurial development.
The recession in the developed world contributed significantly to low demand for Uganda’s traditional
export commodities, especially coffee, fish and flowers. Despite this, Uganda reaped significant
benefits from informal cross-border trade (ICBT), especially in non-traditional exports such as maize,
beans and manufactured goods, including cement and steel products. Trade especially with post
conflict nations in the great lakes region which include Southern Sudan, Eastern DRC, Rwanda and
Burundi thrived.
The dual structure of Ugandan private sector which is made up of a small number of large enterprises
mostly foreign owned and a large number of small enterprises, mainly informal making up almost 70%
of all enterprises (Islam 2009) may have been of an advantage because of non-dependence on global
finance or international markets.
Although, Uganda has maintained an impressive economic growth rate of above 7% it is still below
the projected 8.9% and revenue collections did drop by 120bn/= from pre-crisis levels. Therefore with
a burgeoning public sector and a small number of large firms coupled with a very high population
growth rate of almost 7%, it is imperative that the Ugandan entrepreneur seizes his/her destiny to
survive. This is especially so in a country with poor social services and failing infrastructure.
1.1 Objectives of this study were;

To determine the effect of the global economic crisis on the entrepreneurial environment in
Uganda
To compare the entrepreneurs’ perceptions of the entrepreneurial environment in the other factor
driven economies with those of entrepreneurs in Uganda during the last twelve months.
2.1 To determine the effect of the global economic crisis on the entrepreneurial
environment in Uganda
Walter Canon’s (1915) theory of acute stress response states that animals will fight or flee in
situations of uncertainty. This theory informs the debate on entrepreneurship in times of crisis with
several companies ceasing to exist e.g. Lehman Brothers.
Financial sectors in sub-Saharan Africa are vulnerable to several risks that could still unfold in this
crisis period. However, unlike in developed economies, there has been no systemic banking crisis in
sub-Saharan Africa. Commercial banks and other financial institutions here so far remain largely
sound. Cross-border banking system linkages are minimal; there is less exposure to complex financial
products, and financial systems are not well integrated with other global financial markets (IMF 2009).
Therefore, it can be deduced from Schumpeter’s (1934) missive on creative destruction that
entrepreneurship replaces obsolete economic activities by innovation, thus creating new and better
products to help overcome recession. This could partly explain the effect of the world economic crisis
on different economies with those in the western world suffering because of saturated inefficient
enterprises that needed to be weeded out.
The world’s leading entrepreneurs are a diverse group but in the broad array of their experiences are
commonalities – a willingness to suffer doubt and potential failure (Ernst & Young 2009). And so the
occurrence of an economic crisis serves as such an opportunity for would be entrepreneurs to shine.
Periods of economic challenge can drive entrepreneurs to sharpen their focus on the services they
offer; to determine how to stand out from the competition, and review what is absolutely necessary in
the budget (Ernst & Young 2009).
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Barlett (2008) states that economic crises provide good opportunities for enterprises; through strategic
acquisitions and hiring of talented employees released by downsizing companies. He agrees with
Ernst & Young (2009) that the current crisis offers the same opportunities based on evidence that
upturns in 1945, 1990 and 2001 were driven by creative destruction of private enterprise.
The global financial crisis has caused a considerable slowdown in most developed countries. Stock
markets suffered losing up to 50% of their value in Europe, Asia and the US (Shah, 2009). Investment
banks like Lehman Brothers collapsed, stimulus packages were drawn up involving more than a
trillion US dollars, and interest rates were cut to almost 0% in the US and the EU. Many developing
countries' economies continued to grow albeit at rates lower than previously forecasted (India – 8%,
China – 9%, Russia – 7%) (Te Velde 2008). Many countries in sub-Saharan Africa enjoyed robust
economic growth in recent years that strengthened their balance sheets. Sound economic policies
were an important factor, as was the favorable external environment and increased external support
in the form of debt relief and higher inflows (IMF 2009).
Nevertheless the economic downturn could affect the developing world through reduced remittances,
FDI, aid and other official cash flows (IMF 2009; ADB 2009). Te Velde (2008) singled out countries
with the following characteristics as being at the greatest risk: countries with exports to crisis affected
countries, countries whose exports have very high income elasticity’s, countries dependent on
remittances, FDI, countries with weakly regulated markets for securities, countries with high
government deficits and dependent on aid.
It has been argued though, that remittances and aid are not conducive to entrepreneurship or private
sector development and reduce labor supply. These have been framed as “disincentive effects” or
“crowding-out effects”. On the other hand, there is also evidence that remittances can support private
sector development (Demirgüc – Kunt, Klapper and Panos 2009). On the other hand, Hurst and
Lusardi (in Paulson & Townsend, 2005) find no evidence that entrepreneurial activity (in the U.S.) is
affected by financial constraints.
Crises create opportunities for entrepreneurship. For example, more than half of the companies on
the 2009 Fortune 500 list were launched during a recession or bear market (Leigh 2010). “Tough
economic times do generate more innovative ideas because you have people who are fleeing the
corporate environment and branching out on their own,” says Michael Peck, Managing Partner for
Open Prairie Ventures. “When people are forced into the marketplace through layoffs or economic
disruption, that’s when you tend to see an entrepreneurial spirit emerge (Ernst & Young 2009).
However, crises also stifle growth of entrepreneurial ventures and start-ups through unavailability of
credit. With banks short of capital and wary of risk, it’s not easy to find funding for new ventures.
When the downturn depresses the returns on past investment, it gets harder to rally shareholders
behind new projects (Ernst & Young 2009). The inadequate performance of financial markets can
lead to the limited entry of new firms, low production in the firms on hand, and greater financial
constraints for small and medium enterprises. (Paulson & Townsend 2005)
As companies across all sectors of the world’s economies announce losses and job cuts,
entrepreneurship has become one of the most viable and most potentially long term rewarding
employment for workers already made redundant by this desperate situation. From small-scale
enterprises to large conglomerates and banking institutions, companies have been forced to make
employees redundant; announcing restructuring strategies and more cost efficient processes in the
wake of the global economic crisis. With job security almost nonexistent and the unemployment rates
steadily increasing, entrepreneurship is fast becoming the only form of potentially gratifying
employment available to employees who suddenly find themselves on the firing line. However, while
some recently made redundant workers create self employment out of their lifelong dreams, the
monetary insecurity and self liability may prove daunting to the new entrepreneur (Kasanda 2009).
At a time when entire economies and industries are reeling from the financial crisis, business leaders
are struggling to balance the near-term needs of survival with the long-term demand to find new
sources of growth. Never has the need to innovate and be entrepreneurial been more urgent. A large
body of academic research and real-world business experience has established a clear connection
between entrepreneurship, innovation and economic growth. By developing new products and
413
services, revamping organizational processes or adopting fresh approaches to partnerships,

companies can take advantage of the downturn to transform their businesses (Ernst & Young 2009).
In light of the poor economic conditions in developing countries, entrepreneurial activity is showing
some positive signs, according to the Global Entrepreneurship Monitor (GEM) and its 2008 report. It is
assumed that during this economic down turn, the small and medium size enterprise sector (SME)
can play a significant role in the growth of the country; they serve by creating new job opportunities,
and have the potential to respond to the changes in environment in the global context (OECD Summit
2008).
2.2 Entrepreneurs perception of the entrepreneurial environment during the global

economic crisis
Anna and Robert (2005) divided the general entrepreneurs into three groups, “Pre-crisis; crisis and
Post-crisis businesses” and found that not only the business performances were affected during that
pre-crisis period but also the ‘crisis’ and ‘post-crisis’ groups were less willing to start up a business
with considerable capital.
On the other hand, considering the role of Entrepreneurship in the crisis, Won (2007) states that due
to its ability of innovation and growth of investment, entrepreneurship is able to play a vital role in the
current financial scenario by creating job opportunities and economic growth. Barlett (2008) states
that economic crisis and “downturns” provides good opportunities for medium sized enterprises; they
can “undertake counter-cyclical moves that strengthen their competitive position; Lean enterprise
campaigns; strategic acquisitions; hiring of talented employees released by downsizing companies”
and etc; He further stated that current crisis offers the same opportunities. However, small firms are
facing tightened credit term in contemporary financial conditions; moreover the entrepreneurs are
showing noteworthy concern about access over credit (Shahzad et al. 2009).
Msoka (2009) summarises entrepreneurs’ perceptions by stating that the current global economic
crisis has two interpretations to the entrepreneurs. First it is a challenge because of reduced
opportunities. Reduced opportunities mean that more and more entrepreneurs will be taken out of
business and hence they will have problems in getting jobs and or starting new businesses. This has
a larger implication in the society as a whole.
Secondly it is an opportunity for them to rethink about some of the assumptions and decision frames
made earlier. Although economic crisis is a challenge that reduces opportunities to entrepreneurs,
ideally it can be taken as an additional business challenge that entrepreneurs have to take onboard
and hence overcome. That is push for innovation and creativeness, look for better ways of getting
capital, mobilize people to start spending with confidence, surviving the crisis and finally expanding
their business.
3. Methodology
The sample was drawn from that of the Global Entrepreneurship Monitor (GEM) 2009, a research
consortium dedicated to understanding the relationship between entrepreneurship and economic
development. The sample involved 11 developing countries, referred to as factor driven economies in
the GEM country classifications. This classification is based on GDP per capita and the extent to
which countries are factor driven in terms of the shares of exports of primary good in total export.
They are primarily extractive in nature (Bosma and Levie 2010). They include Algeria, Guatemala,
Jamaica, Lebanon, Saudi Arabia, Syria, Kingdom of Tonga, Uganda, Venezuela, West Bank and
Gaza strip and Yemen. It is from these 11 countries that a sample of over 20,000 adults was drawn.
An adult population survey that measures the entrepreneurial behavior and attitudes of the adult
working age (18-64 years old) was conducted using structured questionnaire. This instrument was
tested and showed significant results of reliability. The instrument was translated into the different
languages of the participating countries to ensure that bias based language was eliminated.
Respondents were selected using stratified random sampling and face to face interviews were used
to collect data in all the countries except Saudi Arabia where telephone interviews were used.
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3.1 Effect of the global economic crisis on the entrepreneurial environment in

Uganda
Uganda’s Total early stage Entrepreneurial Activity, which is a measure of the level of
entrepreneurship in a country based on Global Entrepreneurship Monitor studies, has steadily
increased over the years, from 29.2% in 2003 to 31.2 in 2004 and 33.6% in 2009. This implies that
out of ten Ugandans, three will start a business venture.
Table 1 shows the entrepreneurs’ perceptions of opportunities in the crisis era. It revealed that only
5.7% of the entrepreneurs perceived more opportunities, 46.4% perceived about the same
opportunities and 47.3% perceived fewer opportunities.
Table 1: Entrepreneurs’ perceptions of the change in opportunities during the global economic crisis
period in the different regions of Uganda
Region More Business About Same Less opportunities
Opportunities opportunities
Central 5.9 44.9 49.8
Eastern 8.7 27.5 65.2
Northern 7.0 36.8 45.6
Western 3.2 63.5 34.1

Total 5.7 46.4 47.3
3.2 Entrepreneurs’ perceptions of the entrepreneurial environment in Uganda in

comparison to other factor driven economies in the past twelve months
As shown in figure 1, the levels of Entrepreneurship in Uganda are higher than those of other factor
driven countries as shown in the figure.
Figure 1: A graphic presentation of the total early stage entrepreneurial activity in factor driven
economies
415
Figure 2: Perception of factor driven economies’ entrepreneurs on how difficult it is to start a business
in the global economic crisis compared to a year ago
Entrepreneurs at different stages (start up (nascent) businesses and established businesses) in the
different countries were asked about their perception of how difficult it was to start a business in the
global economic crisis compared to a year ago. In most Factor Driven Economies (FDE) the
difference in perception based on the stage of entrepreneurship was worth noting with the majority of
the countries having established business owners perceiving more difficulty than the nascent
business owners. In Tonga, the nascent entrepreneurs perceived higher levels of difficulty compared
to the established business owners. In Uganda, although the nascent entrepreneurs also perceived
higher difficulty it was a negligible difference between the two. This implies that for the Ugandan
entrepreneur the stage of entrepreneurship does not affect the perceptions of the entrepreneur.
Figure 3: Perception of factor driven economies’ entrepreneurs on how difficult it is to grow a

business in the global economic crisis compared to a year ago
The nascent entrepreneurs and established business owners in the different countries were asked
about their perception of how difficult it was to grow a business in the global economic crisis
compared to a year ago. It was found that the established business owners perceived higher levels of
difficulty compared to the nascent entrepreneurs, in all countries except Yemen and Guatemala
where the reverse holds. The difference between the perceptions of the two types of entrepreneurs in
416
Uganda, like it is for most countries is negligible, except in Syria and Yemen. This implies that when it
gets to growth of the business the stage of entrepreneurship may not affect the perceptions one has
on the entrepreneurial environment.
Figure 4: Perception of factor driven economies’ entrepreneurs on if there are fewer opportunities in
the global economic crisis compared to a year ago
The entrepreneurs were asked if they perceived fewer opportunities during the global economic crisis
compared to a year ago and it was revealed that in Uganda, the established business owners
perceived fewer business opportunities during the global economic crisis compared to a year ago,
than the nascent entrepreneurs. This was the case for most other factor driven economies’
entrepreneurs except those from Saudi Arabia and Yemen where the reverse holds. The differences
in perception amongst the various countries are in the range of 10% and below except Saudi Arabia
and Guatemala with ranges of 30% and 50% respectively. This implies that in most countries the
stage of entrepreneurship will not greatly affect the entrepreneur’s ability to perceive the available
opportunities
4. Discussion of findings
There are different theories about the nature of crisis entrepreneurship; some researchers posit that
crises diminish entrepreneurship while others argue that crises birth innovative entrepreneurship. At
the peak of the global economic crisis many economies crumbled and as a result many jobs were lost,
and levels of disposable income tremendously reduced (CNN World News April 2010). Such
conditions have been argued to motivate entrepreneurship. Venture capitalists agree that the
entrepreneurial floodgates open wider during economic declines. “Tough economic times do generate
more innovative ideas because you have people who are fleeing the corporate environment and
branching out on their own “When people are forced into the marketplace through layoffs or economic
disruption, that’s when you tend to see an entrepreneurial spirit emerge. Entrepreneurs are, by
nature, innovative. So during recessions, you see more entrepreneurship and therefore more
innovation.” (Ernst & Young 2009).
Others believe crises birth necessity entrepreneurship, as stated by Msoka (2009) the economic crisis
affects entrepreneurs by increasing the level of risk and in this case a known risk which has a
challenge. Rather than taking a risk, people make informed decisions to deal with a pre-known crisis,
reduce spending, and reduce credit, change life styles and consumption patterns. All of which affect
the total entrepreneurial activities. In our discussion, we undertake the latter theorists’ belief that
417
crises birth necessity entrepreneurship. The environment in most developing economies like Uganda
is born of insufficient systems that push people into entrepreneurship. (Walter et al. 2003)
In Uganda the level of entrepreneurship has not been altered significantly, it has continued to grow
steadily; this may be because the harshness of the environment is not a key influence to
entrepreneurial activity in times of crisis. For instance in many developing countries, entrepreneurs
have long been constrained by access to credit. The lack of well defined property rights/land titling
which limits their ability to use their real estate assets as collateral for loans. As Hernando De Soto
has pointed out, this lack of effective land title in developing countries means that the assets of poor
and middle class households are 'dead' capital. As a result, declines in the value of land in developing
countries may not have a large effect on entrepreneurs' ability to borrow. If this turns out to be true
(and there is not a banking crisis in emerging markets), then it may lead to a small decrease in wealth
inequalities between countries, to the extent that it is entrepreneurs in advanced countries that are
more disproportionately impacted.
Furthermore, many of the events in the aftermaths of the economic crisis were conditions/situations
not new in the Ugandan economy, the unemployment levels in Uganda have gradually grown to 3.5%,
the GDP per capita in Uganda is at 14.5 billion dollars (UBOS 2009), the ordeal of inaccessible or un
affordable credit facilities has continued in the country and some regions that has been subjected to
civil war conflict over the last two decades. It should therefore come as no surprise that there was no
major change in the entrepreneurial activity of Ugandans.
On the other hand it is other factors such as cultural support and individual perception that influence
the nature of entrepreneurship in Uganda. Therefore to test this assumption we run Pearson’s
correlation with a 0.01 significance level, for the Total early stage entrepreneurship (TEA), cultural
support for entrepreneurship index (CSEI) and individual perception to entrepreneurship index (IPEI)
and we found there’s a significant positive correlation between TEA and CSEI (r= 0.83, sig, 0.001)and
IPEI ( r= 0.81, sig.0.001). A positive and significant relationship also exists between CSEI and IPEI
(r=0.110, sig, 0.000). A linear regression further shows that beta r square = 0.039 sig (0.131) and
beta r square=0.064 Sig (0.012) respectively. The r square between CSEI and IPEI is 0.110 sig
(0.000)
This implies that TEA levels are influenced by culture and individual perceptions and that the
individual perceptions are dependent on the cultural support one receives. In Uganda, the
entrepreneurial energies are more geared toward the person’s survival and not the contribution to the
economy. And the society has facilitated that by supporting all entrepreneurial efforts that crop up.
In Uganda, regardless of the stage of the entrepreneur (start up or established business), their
perception of the ease with which each individual can start or grow a business in crisis time did not
differ greatly which is not the case for other factor driven economies where significant differences
were observed in perceptions on the difficulty of starting a business. This implies that when
international organizations are drafting policies to improve entrepreneurship then a one size fit all
policy cannot not be adequate for the entire factor driven economies, as entrepreneurs perceptions
may differ.
Ugandan entrepreneurs are not insulated from the crisis per se; it is just that the rest of the world has
experienced the conditions that the Ugandan entrepreneurs have cogently thrived in over the years. It
is only normal for entrepreneurs in other environmental circumstances to change in stamina during a
crisis and for the Ugandan entrepreneurs to continue working on their ventures uninterrupted in a
crisis such as this.
5. Conclusion and recommendations
In conclusion Ugandan entrepreneurs being insulated from the economic crisis, the country misses
out on the opportunities for innovation. Therefore full integration of Uganda’s economy into the global
market is of essence. Eric Parker (2008) in his book, "Run your own Business and make lots of
Money," summed it up perfectly, ‘Far from allowing these developments to cause them anxiety, those
who are blessed with entrepreneurial spirit will recognize this new world order for what it really is,
namely the emergence of untold opportunities that are there for the taking.’ Now is the time for policy-
makers and business leaders to focus on the long term — by identifying, supporting and inspiring
entrepreneurs and innovators at all levels of the economy, in every market. During a global economic
418
crisis innovation needs help. The creative process is stunted whenever ideas, capital or talent can’t
move freely. Without public or private sector funding and support, even the best ideas can fail — and
in this daunting economic environment, failure has grave consequences. Governments and business
owners must do everything they can to nurture and stimulate creative thinking across organizations,
teams and processes. Global economic recovery depends on it. Business sectors should be given
independence and autonomy by Government in order to nurture and protect one of their most
important engines of economic growth: entrepreneurs (Ernst & Young 2009). Therefore in spite of the
economic crisis, Governments should develop well thought out policies that encourage
entrepreneurship and increased innovation.
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419
Promoting Service Culture in Technical Trade: Co-Learning
in Roundtable Discussions
Maaria Nuutinen, and Tiina Valjakka
VTT Technical Research Centre of Finland, Espoo, Finland
maaria.nuutinen@vtt.fi
tiina.valjakka@vtt.fi
Abstract: This paper aims to present empirical results from a study focusing on challenges faced by technical
trade companies when targeting growth in the service business. A further aim is to present lessons learned from
facilitating co-learning in the roundtable work of companies. Roundtable working was used as a tool for
companies to develop and share their ideas and experiences, benchmark and discuss service business
development. The study was conducted within the context of the roundtable process started in May 2009 and
ending in May 2010. Six persons from six companies participated in roundtable sessions. The data consists of
observations and dialog memos in meetings, particular exercises and “homework” prepared by researchers,
completed by company participants and discussed together in the group. As a facilitators and service business
researchers we applied an approach we have developed for evaluating service culture and capability in
manufacturing companies aimed at growth in service business. The method is aimed at enhancing analysis of the
present situation in a company, common learning, service innovations and supporting cultural change. The
results can be summarised into four key points. Firstly, the effect of the economic recession on challenges
expressed by the members was significant and present in almost every discussion. Secondly, the effect of
current organisational culture was evident not only in the limitations and possibilities of the development but also
in the opinions of the roundtable members. Thirdly, the group members view of roundtable working were mainly
positive, though some negative issues were also recognised. Finally, the group dynamics is a very sensitive
subject and in this case, there were common motives to learn from each other and strong shared concern over
the economic situation that united the group. We also recognised several supportive features as well as some
inhibitory features for co-learning and cultural change and formulated some tentative general principles of how to
enhance the overcoming of challenges in the transformation from product-oriented culture towards service-
oriented culture in technical trade.
Keywords: service culture, technical trade, co-learning
1. Introduction
Technical trade is a special line of business consisting of companies that are importers and dealers of
machinery, technical equipment and materials. Technical traders typically represent several brand
owners and manufacturers, and their customers are other businesses in various fields. There are
pressures from both sides to offer more services: the manufacturers expect services to strengthen
their brands and customers expect planning, logistics, installation, training, maintenance etc. services
to support their business. Technical traders are to find their business and role in this challenging and
rather limited operating space. The Finnish Technical Traders Association set up a project that aims
at new service innovations and profitable service business. One of the methods is roundtable working
as a tool for companies to develop and share their ideas and experiences, benchmark and discuss
service business development.
One of the concerns was that growth in service business is hindered by present organisational
culture, i.e. values and conception of work held by personnel. To overcome this challenge, a particular
roundtable group focusing on the issue was established. This paper is based on that roundtable work
where we acted as facilitators. We were interested in what those challenges related to organisational
culture are and how overcoming them can be supported by roundtable working.
Within organisational culture research, there are two conflicting paradigms: culture as a metaphor and
culture as a factor (Seeck 2008). The latter considers culture as something that can be changed in
accordance with the aims of a single group – for example, managers. There is a strong aim to
develop tools for changing and managing culture within this trend, whereas the former – culture as a
metaphor – aims to explain organisation through psychological and social processes rather than
develop tools for supporting business. Reiman and Oedewald (2002, 2004) have developed an
approach which strongly aims at producing practical benefits but also strives to explain organisation.
The approach does not try to directly affect culture by managerial programs but rather increase the
organisation’s awareness of its present culture and its possible positive and negative features as
related to the practical objectives. They have defined organisational culture as a solution created by
an organisation for the demands set by the core task (Reiman and Oedewald 2002, p. 27). The term
420
core task refers to “the shared objectives and the outcome-critical content of work that should be
taken into account by the actors in their task performances for maintaining an appropriate interaction
with the environment.” (Norros 2004, p. 17.). Their approach is, however, developed within the
context of safety-critical organisations such as nuclear power plants or hospitals, but it is generally
applicable for the service business context.
The service culture concept is broadly used in the traditional customer service industry, e.g. in hotels
and restaurants, tourism, the retail trade and heath care. Typically, the service culture concept refers
to those attitudes and behaviour that are present in a customer-serving event. There are several
reasons why these approaches may not be applicable in this context. Firstly, services in the technical
trade industry are “business-to-business”. Secondly, they are strongly based on technical competence
and expertise. Thirdly, the problem of organisational culture highlighted by technical trade is related
not only to the customer relationship but to the whole ‘mindset’ of the organisation. Technical trade is
inherently close to the manufacturing industry: thus, the services offered are similar to industrial
services. Several authors have expressed fundamental differences between ‘traditional’ product
selling or manufacturing business and the industrial service business – for example, in strategic
planning, development offering, pricing and required competence (Grönroos 2007, 2009; Oliva and
Kallenberg, 2003; Gebauer et al., 2005; Kalliokoski et al., 2003; Brax, 2005). These differences can
cause many contradictions and conflicts and also thereby hinder the targeted growth in the service
business.
There is a visible trend of technical trade companies attempting to become more service and
customer oriented. The results of the transformation efforts from products to services often fail to
meet expectations. One reason is that the companies fail to comprehend that the service business
calls for also a new business model. Based on our previous case-study (Valjakka and Apilo, 2009),
we showed through the cases that transforming the product business into service business calls for a
business model radically different from their previous one(s), i.e. business model innovation. In the
case companies, the transformation lasted from two to ten years, and the product-oriented and
service-oriented models coexist and evolve. The reasons behind the long transitions times are the
problems created by conflicting business logics and the difficulties to withdraw from the product-
oriented organisational culture.
Christian Grönroos (2009, p. 502; see also Auguste 2006) has summarised three reasons as to why
the whole organisation should transform into a service company where manufacturing and service
operations combine into one business. These are: customers are confused by several types of
varying operating logics, successful service business can cannibalise the strong image of product
business, and when there is conflict between two different cultures the older and stronger culture
tends to win. Grönroos focused on the manufacturing company, but the same principles also apply to
technical traders. We approached the challenge of the technical trade as a transformation from
product-oriented culture towards service-oriented culture. As facilitators and service business
researchers, we applied an approach we have developed for evaluating service culture and capability
in manufacturing companies aimed at growth in the service business.
This paper aims to present empirical results from a study focusing on challenges faced by technical
trade companies when targeting growth in the service business. A further aim is to present lessons
learned from facilitating co-learning in the roundtable work of companies. At the end of the paper, we
shall discuss the findings and formulate some tentative general principles of how to enhance the
overcoming of challenges in the transformation from product-oriented culture towards service-oriented
culture in technical trade.
2. Methodology
The approach for evaluating service culture and capability originally developed for manufacturing
companies is presented next. The approach is aimed at enhancing analysis of the present situation in
a company, common learning, service innovations and supporting cultural change. Then, we will
shortly describe our way to facilitate roundtable work. The method of facilitating is based on the
experience from similar exercises with manufacturing and other technical trade companies.
421
2.1 The service culture and capability approach

Our approach is based on related frameworks of Contextual Analysis of Organisational Culture
(Reiman and Oedewald, 2002; Reiman and Oedewald, 2004; also based on Schein, 2004/1985) and
Core Task –analysis (e.g. Norros, 2004; Nuutinen, 2005; Norros and Nuutinen, 2002). We defined the
key concepts of our approach on the basis of the above definitions of the core task and organisational
culture.
The industrial service culture concept can be defined as an organisation’s learned manner of
responding to perceived changes in the demands of the core task when aiming at developing the
service business. Industrial service culture manifests in:
Service capability (how the demands of a new service-related core task are recognized and taken
into account)
Experienced and ideal values within the work community and with customers
Work motivational factors: sense of meaningfulness, match between requirements and available
resources, and the sense of having control over one’s work.
Industrial service capability consists of commonly developed operational, cognitive (and cultural)
solutions which manifest themselves in four elements:
1. Understanding of service business
2. Service business management practices
3. Development practices of service business and services
4. Customer relations. (Nuutinen and Lappalainen 2009 and 2010).
In each of the elements, the aimed transition is defined on the general level (see Figure 1). The idea
is that this is further defined according to the context and the company in question. The frame
provides five basic elements with criteria of assessing the change from a technology- and product-
oriented organisation towards a (more) customer- and service business-oriented organisation.
Elements are overlapping and interconnected and should be analysed multilevelly in the target
organisation. In Figure 1, +/- describe essential features of this transition as related to each element.
More specific steps of the development path for each element – in other words, the evaluation criteria
– are always defined contextually. This general framework and the element-specific examples which
describe typical conceptions or characterises of practises at various phases of the transition were
utilised in the roundtable work and in our analysis of the challenges faced by the technical trade.
Figure 1: Targeted transition and elements of service culture and capability (based on Nuutinen and
Lappalainen 2010)
422
Our approach has also been affected by several other theoretical backgrounds: organisational
capabilities (e.g. Teece et al., 1997; Schreyögg and Kliesch, 2007); service quality (e.g. Edvardsson
and Olsson, 1996) and service management (e.g. Normann, 2002; Gebauer et al., 2005; 2006;
Gebauer and Fleisch, 2007; Oliva and Kallenberg, 2003).
2.2 The roundtable working method and data

The study was conducted within the context of the roundtable process started in May 2009 and
ending in May 2010. Six persons from six companies participated in roundtable sessions. The
process of co-learning in the roundtable work was facilitated by several methods. The methods are
described in Figure 2 and Table 1. The most important one was benchmarking. The roundtable
members were encouraged to share their own practices and situation and compare it with the others.
Furthermore, examples from other companies’ experiences from developing their service business
were utilised as well as the previously mentioned characterisation of service culture and capability.
Last meeting. 1st meeting.
Conclusions, process reflection Introduction, setting common goals and creating
and further development conceptual understanding
Pre-homework
Pre-homework
Homework
Homework Servicebusiness
Service businessobjectives
objectives
Developmentplan
Development plan
Current organisational
Current organisational
culture:what
culture: whatsupports
supports/ /
conflicts with the service
conflicts with the service
5th meeting business
business
Combining the elements of service MeetingAgenda:
Agenda:
culture and capability Meeting
• •Current
Currentissues
issues
• •Host
Hostcompany
company 2nd meeting
servicecase:
service case: Deepening the analysis of the current
Homework: discussion, ideation,
discussion, ideation, situation and targeted transformation
Homework: benchmarking and
Toassess
To assessthe
thecurrent
currentstate
state benchmarking and
of elements (each company analysis
analysis
of elements (each company
separately)
separately) • •presentation
presentation
Homework
• •homework
homework Homework
Evaluatingtransformation:
transformation:
Evaluating
1. Business environment
1. Business environment
andcompetition
and competition
4th meeting
Industry level assessment 2.2. Business
Businessmodel
modelandand
earning logic
earning logic
3.3. Customer
Customerrelationships
relationships
4. Collaboration
4. Collaboration
3rd meeting
Homework
Homework Organisational culture and the 5.5. Management
Managementstrategy
strategy
Service business customers and practices
Service business and practices
roadmap:questions
roadmap: questions
and commentsrelated
and comments related
to technical trade
to technical trade
Figure 2: The facilitating methods

We reflected on the roundtable working from three perspectives. Firstly, we intended to recognise
features that supported or inhibited learning and co-learning. Secondly, we consider the group
members’ views of roundtable work. Finally, we examined group dynamics and the members’
individual motives. The points are presented as based on our own observations and the expressed
opinions of the members, the comparisons with the other ongoing roundtables and the data collected
and analysed. The data consists of observations and dialog memos in seven meetings (lasting
approximately three hours each), particular exercises and “homework” prepared by researchers,
completed by company participants and discussed together in the group.
3. Results
3.1 Challenges faced by technical trade companies

The technical trade companies faced several challenges in targeting growth in the service business.
The business environment was changing and competition was becoming harder and more global. The
members listed various objectives of service business development: e.g. covering the company’s
fixed costs in every market situation, the competitive advantage based on advanced and high quality
423
services, increasing customer commitment, being an attractive partner to do business with, improving
predictability through planned cooperation with customers, selling solutions with high added value,
creating win-win situations, the co-development of the customer’s business, and partnership with
customers. Also, overcoming negative effects caused by the present trend to move production to
cheaper countries was mentioned.
Table 1: Main themes and contents of the roundtable meetings
Main themes and contents of the roundtable meetings
1st meeting Introduction, setting common goals and creating conceptual understanding
Service culture basics
Examples of conflicts in service business development
Basic principles supporting 1) the cultural transformation from a product to service-
oriented organisation and 2) defining the elements of the transformation targeted
Questions supporting assessment of the current situation
2nd meeting Deepening the analysis of the current situation and targeted transformation
Linking service culture to the core task of the organisation
Comparison and examples from various studies, examples of results
Expanding: diverse definitions of the service business and service company
3rd meeting Organisational culture and the customers
Adding customer view to the analysis, customer needs and readiness
Service as a comprehensive approach
Comparison of the stated situation and the change required
4th meeting Industry level assessment
Trends and future of technical trade and linked industries
Learning from others: analysed case example from the technology industry
5th meeting Combining the elements of service culture and capability
Understanding the service business
Service business management practices
Development practices of the service business and services
Customer relations
Last meeting Conclusions, process reflection and further development
The group members hold different opinions on how service business development affects or is related
to present business models and logics. Some of the members considered that radical change is
needed and that it is a critical prerequisite for service business growth, whereas the others saw that
no fundamental change is required, since every business area or function should be individually
profitable. The radical change was considered to require considerable learning and renouncement –
as well as a big cultural change inside the organisation as well as within the customer’s organisation.
The main challenge is to get from the present situation to one where the objectives can be reached.
Tables 2 to 4 summarise the state of the current culture and gives examples of the recognised
challenges, according to approach.
Table 2: State of the service capability and culture as well as examples of challenges
Elements State of the current capability and culture Examples of challenges
Strong product-oriented culture, service Strong product-selling corporate culture
oriented culture developing How to change the traditional way of
The importance of the service business is thinking where service is a supportive
more broadly understood because of the function of selling
economic recession How to change operations from a traditional
1. Service culture and new core task
Customers are highly valued but there are “buy/sell thinking” model to a real customer-
contradictions within one’s own centric one
organisation with regard to the best way of Strong technical orientation among
approaching customers personnel, weaker customer service
Service personnel is still somewhat under- orientation
valued within one’s own organisation Selling services is regarded as strange
The source of work motivation is highly Fear of pricing services: the costs are
related to selling and the technical hidden into the product price and are
superiority of products and related forgotten when giving a discount
expertise
New competence demands can cause fear
and dissatisfaction among personnel
424
Table 3: State of the capability and culture as well as examples of challenges
Developing particular and company-specific Utilising Finnish technical trade benefits

understanding of service business and overcoming disadvantages
2. Understanding of service business
Knowledge of service business potentials in How to prove benefits and total benefit
one’s own business environment is based on offered solutions and raise
growing, but there are still some unsolved customers’ interest in them?
contradictions between “services as added How to find the “blue ocean” – areas where
and value-added services” competition is small?
Basic knowledge on how to develop Redefining the role of one’s own company
prerequisites for realisation of the potentials and recognition of the potentials and
Risk for service paradox still high: risk that possibilities
pricing services does not become How to make services profitable?
sustainable but costs would increase if Reach the sufficient volume of service
services were still “freebies” operations
An even workload for various service
workers
How to unite the selling of products and the
selling of service contracts?
Management practices which aim to Making the new strategy clear and easy to
remove barriers and create new communicate
connections Implementation of the new customer-
3. Service business management practices
The goals are set on the general level, the oriented strategy
implementation and its methods are under Support from upper managers: commitment
consideration and strong leadership
Contradictions and unfavourable nature of Replace old ITC systems which are
rewarding and ITC systems have been compatible with services
recognised, but new systems are still under How to manage change?
development How to recognise genuine will and the
Initiatives or practices that promote ability to change?
cooperation – e.g. in meeting, information How to know the change is going in the
sharing and communication practices – right direction?
exist How to communicate and measure the
Customer promises, prices, customer targeted results?
segments, etc., are under consideration, Updating indicators according to new
but challenges to balance between general business models and strategy
guidelines and local and customer-specific How to create a professional service
needs organisation?
Different opinions among managers How to manage, recognise or recruit strong
concerning resources and prioritisation individuals to enhance the transition?
Development of services under The change both in inner and outer
service business and services
4. Development practices of
development operations: the need for new competences

Recognised need for utilising customer and teamwork
information more deeply, but Renewing capability too slow, too little
responsibilities could be unclear support from corporate interests
Typically, the current products are not Overly restricted resources for development
questioned as part of solutions offered to Productisation of services
the customers: finding a customer for the How to make service selling easier?
product (instead of finding a product for the How to promote change from a product
customers) is still prevalent seller to a seller of solutions and services?
Competence needs to understand various
platforms
During the roundtable work, the technical trade – as well as almost all other industries – were subject
to the dramatic impacts of the economic recession. The recession hit the participating companies at
different times and with varying force. From the cultural point of view, the positive effect was that the
need for service development was more broadly understood within the companies. However, the
recession restricted the space and resources for development – e.g. in some of the companies part of
the personnel were temporarily dismissed. In bad times, there is a possibility to awaken the need for
change, but the opposite is also common – i.e. the old culture gets even stronger when all are worried
about losing their jobs.
425
Table 4: State of the capability and culture as well as examples of challenges
Searching for deeper customer-relations Traditionally buyers are interested only in

A product + service brad reached or under price
development The customers are used to the traditional
Part of the customers are ready to pay and situation, but the atmosphere is changing
expect services Customer demands are turning towards
Broader understanding of customers’ ease and convenience in owning and
5. Customer relations
processes is under development maintaining as well as the overall efficiency

Development of new ways to guide of investments
customers to use services e.g. in order to Deepening the customer relationship;
free personnel resources for further clearing benefits to the both parties
development Weak customer loyalty
The customer relations elements affect the Improving a brand as a service provider
other elements Broad customer interface; cooperation
partners in various parts of the customers’
organisation
Fostering the courage to discuss with
professionals of the customer
Cooperation between experts in creating
offers to customers
The current organisational culture restricted the possibilities to develop the service business in two
ways in the participating companies. Firstly, the product-oriented culture hinders the key person’s
efforts to develop the service business and success of the development acts. The group members
told examples from situations when the targeted changes caused resistance amongst personnel as
well as some examples when managers have expressed doubts and acted in a counter-productive
manner. Secondly, visions, possible solutions and development aims of the organisations are strongly
based on the current culture. The managers and developers should be aware of how radical ideas
could be understood, accepted and regarded as feasible with available personnel rooted in the
current culture. The managers and developers are part of the culture themselves and thus it also has
strong impact their own thinking. Finally, the members’ own thinking and envisaging were also
restricted by the current culture. Sometimes during roundtable working there were signs of some quite
strong explanations as to why something in the development is, in that particular company, either very
difficult or totally impossible, reflecting the broader discourse of the organisation. This kind of
reasoning could be so self-evident to the member of the culture that normally they even do not call it
into question. This was evident on occasions when someone proposed a different way to approach
the other’s challenge and the first response was more or less denying. After further discussions,
however, the respondent usually adopted the new idea or at least began considering it.
3.2 Lessons learned from facilitating co-learning and enhancing transformation from
a product-oriented culture towards a service-oriented culture
We recognised several features of roundtable working that were interpreted to support co-learning,
but also some which were interpreted as inhibitory. The supportive features were:
Common goal: develop service business and overcome challenges related to old organisational
culture
The possibility to compare one’s own situation with others: finding similarities and differences
deepened the understanding of one’s own situation and adopting solutions developed by the
others, e.g. free resources for development by utilising the Internet and self-service in the selling
of spare parts
Rotation of emphasis on each company’s situation at a time: this offered the possibility to focus
and thus went deeply enough into the common analysis of the company’s circumstances.
Getting direct and practical advice from the others: e.g. how to contact customers
Adoption of common frames of reference: theoretical presentations of service culture and
capability offered new shared concepts to discuss and analyse one’s own and others’ situations.
Offered examples from different companies and sources of information: this supported widening
the point of view and also illustrated the experimental nature of service development.
426
‘Homework’ enhanced preparation and enriched discussions

Various analysis tools deepened the analysis of one’s own situation and offered a shared frame
for comparisons
Open and trusting atmosphere
Discharging negative emotions and frustration related to service development, resistance to
change and the economic recession
The inhibitory features were:
The recession dominated the discussions and also affected the possibilities of realising the
service business development plans, turning emphasis to survival rather than innovation.
Participating companies differed in many significant features: this made learning from the others
more difficult and also offered excuses not to change one’s own opinion (related to the difficulties
of breaking out of the present culture)
Activity to participate declined from the beginning: There may be several reasons for that: e.g. the
first signs of an economic boom beginning changed priorities or interest declined after one’s own
company has been at the focus
Occasional negative and cynical attitudes expressed by the members: the freedom to develop
service business in their own organisation differed among the members and this perhaps
sometimes discredited the aims.
The group members’ views as expressed of roundtable working were mostly positive. For example,
the possibility to share experiences and get feedback on one’s own development ideas was prized.
Moreover, merely sharing concerns and doubts was regarded as valuable: the managers do not have
many who understand their situation. There were also individual and situational differences
concerning the opinions. Those meetings where the focus was on one’s own organisation were
considered the most useful. The individuals’ motives seemed to be mostly related to getting help for
one’s own situation, which is, of course, quite natural. However, this occasionally caused
disturbances in the group dynamics when someone lost his/her interest and either ignored or
withdrew from discussion.
4. Conclusions
4.1 Discussion of the results

The results can be summarised into four key points. Firstly, the effect of the economic recession on
challenges expressed by the members was significant and present in almost every discussion. From
the cultural point of view there are negative as well as positive implications in service development.
Secondly, the effect of current organisational culture was evident not only in the limitations and
possibilities of the development but also in the opinions of the roundtable members, which is, of
course, natural since they are part of the culture themselves. Thirdly, the group members view of
roundtable working were mainly positive, though some negative issues were also recognised. Finally,
the group dynamics is a very sensitive subject and can be negatively affected if the members of the
roundtable work do not share more than individual motives. In this case, there were also common
motives to learn from each other and strong shared concern over the economic situation that united
the group.
Did roundtable working promote co-learning and cultural change? We recognised several supportive
features as well as some inhibitory features in the roundtable work. Furthermore, the group members
challenged each others’ thinking and thereby helped each other to think creatively and step outside
the current culture of which they are a part. Cultural change in general takes a long time. Clear
changes in the elements of service culture and capability could not be expected during a few months
of work. However, some members clearly indicated that they had gained insight into the problem.
This study was based on the data collected as a kind of secondary task and no videos or voice
recordings were made. Our primary task was to facilitate roundtable working and ensure co-learning.
This definitely affected the validity of the findings and reliability of our study. However, we ensured the
quality of online notes by changing roles: when the one was acting in a role of facilitator the other was
in the role of researcher taking notes. In addition, the homework, members’ presentations and various
exercises offered rich data. However, the evaluation results concerning the state of the service
427
capability and culture are only tentative, as they are based on the individual members’ own opinions
of the companies expressed in homework or discussions. This study is a form of practitioner research
and being part of the process always makes it difficult to evaluate it. We reflected on the facilitation
process both during the process and at its end. The reflection at the end of the process made it
possible to look at it from a broader perspective and to also evaluate our reactions during the process
when our emphasis was primarily on the task at hand.
Our approach was based on the studies we had made on manufacturing companies aiming at the
development of service business. It provided an applicable frame for analysing the situation in
technical trade. It also acted as a stepping stone – as a concept, method or group of people borrowed
from another context or a set of questions in order to help see things differently, from a different point
of view (see Virkkunen 2010 and Kim and Mauborgne 1997). However, there are some differences
between these areas of industry. One of the main differences is that the need for change relationship
does not only concern the customers but also the manufacturers and brand owners. The needed
change can be characterised also as follows: from finding customers for products towards finding
products for customers. This also changes the relationship and balance of power between the traders
and manufacturers. These differences and their exact effects on our model of the targeted
transformations and their characteristics require further studies.
4.2 General principles of how to enhance overcoming challenges in transformation

As a conclusion, on the basis of this study and our earlier studies on change management and
cultural change we formulated some tentative general principles on how to enhance overcoming
challenges in the transformation from the product-oriented to service-oriented culture in technical
trade (Nuutinen and Lappalainen 2010, Nuutinen and Lappalainen 2009, Nuutinen et al. 2007). The
principles are as follows:
The motive for change should be clear and clearly communicated throughout the organisation
The seeking of the new core task and new working object can be supported by pilots and the
acceptance of failures
The transition can be supported by analysing the present situation, contradictions and decisions
against a gradually sharpening frame of reference in the practices targeted.
Changes in customer relationship practises can be used in creating pressure for cultural change
Building capability to handle business discontinuations and irregularities support transformation
Interaction with others supports seeing the big picture, industry-level cultural changes and
potential for further collaboration
Utilising various forums and platforms of shared knowledge support the development service
business
Change requires time and resources: be persistent!
We are now planning a research project particularly focusing on technical trade and the cultural
transformation needed there in order to enhance service business development. The above principles
will be tested and re-defined in the study.
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Fast Forward to a Standard Business Information System:
Strategic Business Management Tool for Businesses in
South Africa
Elmarie Papageorgiou1 and Herman de Bruyn2
1
University of the Witwatersrand, Johannesburg, South Africa
2
University of Johannesburg, South Africa
Elmarie.Papageorgiou@wits.ac.za
hdebruyn@uj.ac.za
Abstract: Over the past few years different ways of accessing information and computer resources available to
users have increased dramatically. Therefore South African businesses are forced to keep abreast of their
international counterparts to compete internationally. Currently traditional Executive Information Systems (EISs)
provide information to executives and top management, but the need exists to expand EISs to other decision-
makers, problem-solvers and users in business. This in turn means that a need exists for innovation and fast
forwarding to a standard Business Information System (BIS). The BIS is used as a strategic business
management tool that: focuses on an information system that is in a standard format to enable users to access
information quickly, is user-friendly, is interactive and includes the global business environment. Users need
systems that provide them with access to diverse types of information in order to make decisions, to solve
problems and to be competitive. Businesses have chosen information technology to provide relevant and
accurate information to users. The study is an exploratory study and the research methods are of a quantitative
and qualitative nature. The data was acquired through distributing a questionnaire via e-mail to 334 listed
Johannesburg Stock Exchange (JSE) companies and conducting interviews with top management and users of
EISs. The research questions investigated were to establish what traditional EISs offered in order to identify
unmet needs to determine the need for a standard BIS, and to establish a BIS that would ensure sustainable
strategic competitiveness for businesses. In addressing these problems both these systems were compared
along several dimensions which were derived from the definitions, characteristics, capabilities and functions. The
value of the study explains that the trend has increasingly shifted towards employee empowerment and decision-
making at all levels of the businesses. The findings of the study concludes that companies which operates in a
traditional EIS environment are continually forced to fast forward from a traditional EIS to a standard BIS in an
ever-changing digital environment in order to ensure a competitive strategy. This changing environment requires
businesses to adapt to this ‘new’ environment to exploit opportunities to their advantage. The results of the
questionnaire indicated that nearly 60% of the respondents have an EIS or planning to implement an EIS of
which 50% proposed a standard BIS for all businesses. Reasons for implementing a standard BIS varied: it is an
excellent management tool which makes use of standard tools and built-in features, critical for real-time decision-
making, familiar to users in businesses, a competitive edge for competitors and it is not the technology that
matters but how the information is used. In conclusion it can be stated that a strategic business management
tool, a standard BIS, was introduced to support the evidence gathered.
Keywords: business information system, competitive advantage, executive information system, strategic
management, system innovation
1. Introduction and background

The development of Information Technology in the last few years has had a great impact and effect
on the vast majority of South Africans. Top management, executives and senior managers cannot
only have an impact on the setting of standards of the relevant information, but in addition they can
also make it available to other users in a standard format by using a standard BIS.
Sawy (1989:57) states that “…practitioners and academics spent the last ten years bringing out the
characteristics that distinguish the varieties of information systems, which often resulted in a hair-
splitting exercise.” Therefore some references used in this exploratory study are older than ten years
as these consulted references include all available references to investigate the study to its full extent
to incorporate the history and literature of EISs and also to compare the thoughts of older studies that
are still valid and trustworthy to the digital era today.
2. Research questions and research objective
The research questions investigated were to establish what traditional EISs offered to identify unmet
needs to determine the need for a standard BIS, and to establish a BIS that would ensure sustainable
strategic competitiveness for businesses.
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Elmarie Papageorgiou and Herman de Bruyn
The main objective of the study is to explore to what extent strategic value can be created to fast
forward to a standard business information system to replace the traditional executive information
system in order to enhance sustainability and strategic competitiveness. The objective demands the
investigation of the standard BIS to determine the strategic value to offer to the business in order to
enhance sustainability and strategic competitiveness, improve decision-making, address unmet needs
of the different interest groups, minimise problems and solve problems effectively and efficiently. The
objective is to gather internal and external information from the external environment in order to
present the data in such a way that it is meaningful to all BIS users. Users need to be committed,
encouraged and use the system on a daily basis.
3. Literature study
A literature study investigates the EIS and the BIS as both of these systems were compared along
several dimensions which were derived from the definitions, characteristics, capabilities and functions.
Based on the literature study, Table 1 and Table 2 summarise the study of authors’ views in respect
of EISs and comparing the traditional EIS with the standard BIS. From these summarised tables the
summary and arguments are used to evaluate and introduce a standard BIS. Table 1 contains quotes
or portions of quotes that relate to different authors’ views in comparing a new EIS with a traditional
EIS. Table 2 compares the traditional EIS and standard BIS along several dimensions which are
derived from the definitions, characteristics, capabilities and functions of these two systems (Turban,
1993:406). The most important dimensions from Table 1 and 2 are that a standard BIS focuses on an
information system that is in a standard format to enable users to access information quickly, is user-
friendly and interactive, includes the global business environment and is available as a standard
package. Users need systems that provide them with access to diverse types of information in order
to take decisions, to solve problems and to compete with competitors. Businesses have chosen
information technology to provide relevant and accurate information to top management and
executives. Currently the traditional EIS provides information that is only available to executives and
top management, but the need exists to expand EISs to other decision-makers, problem-solvers and
other users in the business. Examination of the two tables resulted in that the traditional EIS supports
only executives, but the tendency of authors was to include everyone in their research as traditionally
EISs being referred to as: ‘everyone’s information system’, ‘everybody’s information system’ or
‘enterprise-wide information system’.
Table 1: Authors’ views in respect of EISs
Quotes or Portion of quotes Comparison to Traditional Author
EIS
“Most successful EIS today are available in consistent detail EIS is developed for Martin et al.
to all levels in an organisation” executives only (1994)
“…emphasis on competitive information has become so Name changes as Martin et al.
important in the last few years that many organisations call information technology (2005)
their EISs business intelligent systems or competitive changes
intelligence systems.”
“…not only for ‘business people’, but is relevant to every EIS does not include every Nieman and
person in society…” user Bennett (2002)
“…information technology is no longer a business resource; EIS does not include a Browning
it has become the business environment…” business environment (1990)
“…EIS as technology for information delivery for all business EIS does not include all Volonino et al.
end users”. users (1995)
“…as to whether an EIS is an information system for Management decision to Volonino et al.
executives or for everyone.” include executives or (1995)
everyone
“EIS spreading to middle-level management and other users. EIS does not include Palvia et al.
Sometimes, these systems are called second-generation EIS middle-level management (1996)
or EIS II”.
“…EIS being referred to as ‘everyone information systems’ or EIS does not include Frolick and
‘enterprise-wide’ EIS” everyone Robichaux
(1995)
“…will label EISs that are global in scope as Global EISs.” As businesses become Palvia et al.
global EIS needs to include (1996)
global information
“…EISs tend to be expensive to build.” Every EIS is different Watson et al.
(1995)
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Table 2: A comparison between a traditional EIS and standard BIS

Dimension Traditional EIS Standard BIS
Focus Status Access Standard Format
Typical users CEO, Executives, Top Executives, Top Management, Senior Managers,
served Management and Senior Middle Managers, Other Users, Professionals,
Managers Investors and Outside Users
Environment Micro, Market and Macro Micro, Market, Macro, Business, Digital and Global
Impetus Expediency Standardise

Type of information Internal and External as Internal, External as required by all users and
required by executives Global
Logical flow of Instant access, Drill down Standard format with instant access, Drill down
information facilities and Summarised facilities, and Summarised information in a standard
information supported by detail format and supported by detail information
information
Principal use Tracking and control Standardise and Quick access
User-friendliness A must The core of the BIS
Maintenance IS specialists IS specialists and Non-IS professionals
Hardware Distributed system Distributed system, PC as required, wireless and
electronic application
Software Interactive, easy access to Standard software package, Interactive, quick and
multiple databases, online easy access, online access, multiple databases,
access and complex linkages wireless applications, linkages to internal and
external databases
Accessible to Only Top management and To all users
users executives
Web Technology Can add Web technology as Includes all digital and electronic information
required by executives
The driving force behind the BIS is threefold: the structure, the drive to formulate a structure that is
acceptable to all users to use BISs as a tool to analyse their businesses; the content, the drive
towards pressure from competitors, potential investors and stakeholders to ensure all information is in
a standard format that is easy accessible; and the strategic value, as information software technology
improves in a digital environment, top management and executives must utilise the ‘new’ technology
available for strategic decision making and managing daily business activities in order to remain
competitive. Figure 1 illustrates a general framework of a standard BIS. Internal and external data are
retrieved and stored in the business’s database. Both these sources are then transformed into a
standard format available for all EIS-users.
Figure 1: General framework of a standard BIS

The traditional “…EISs were originally developed for CEOs and others at the top, ... Vice-Presidents
and Middle Managers use these systems even more extensively than top executives” (Nord & Nord,
1995:102). The traditional EIS seems ‘old-fashioned’ and ‘out-dated’ that refers mainly to executives
and therefore the need exists to introduce a standard BIS that caters for all EIS-users and other
potential users. Therefore according to Frolick and Robichaux (1995:157) the increased EIS usage
led to the EIS being referred to as “…everyone’s information system or enterprise-wide…” EIS that
includes all users. As information software technology improves in a digital environment, management
must utilise the ‘new’ technology available for strategic decision making and managing daily business
activities in order to remain competitive.
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4. Research methodology and data collection

The research study uses a mixed method design that is quantitative and qualitative in nature. The
study investigates the literature study to provide a theoretical basis to construct questionnaires and to
conduct interviews. This research is an exploratory research and can be used to explore the reasons
for particular practices (Ryan, Scapens & Theobald, 2002:144). The exploratory research “…not only
identifies new technologies, but just as importantly, it is aimed at discovering those technologies
which address real business or consumer needs.” (Hair, Babin, Money & Samouel, 2003:58). The
exploratory research does not start with a specific problem as the approach of the study is to find a
problem to test (Welman & Kruger, 2001:12).
A questionnaire with a cover letter was e-mailed to CEOs, CFOs, FDs, MDs, directors and other top
management executives of 334 listed JSE companies. Eleven structured interviews were conducted
as a result of the outcomes of the questionnaires to clarify the need to collect in-depth information
from top management, executives and other users regarding their company’s EIS status.
5. Findings of the study
Sixty five listed JSE companies responded to the questionnaire, a response rate of 19.5%. Some of
the addressees responded to the sender’s e-mail via e-mail that they were unable to respond to the
survey due to the following reasons:
Due to time restrictions and management commitments;
Travelling overseas;
Restructuring of their company;
Company policy not to participate in surveys as surveys are received almost daily and to make
exceptions would be unfair;
Hectic schedule and high priority meetings;
Preparing annual strategy conference and board meetings;
Not able to take part in the survey with no specific reason;
As a consequence of too many requests to participate in questionnaires;
Heavy workloads;
Has no EIS and sent e-mail directly back to sender;
Companies immediately responded via e-mail as e-mail notifications were automatically
generated by their company’s system;
Anti-spam to only accept e-mails from confirmed addresses if the e-mails content are distrustful,
so the e-mails were suspended by the system;
Not relevant to their business; and
Out of office replies.
All the listed JSE companies that responded to the questionnaire and/or participated in interviews
represent eight of twelve industries. A variety of other industries responded to the questionnaire
and/or interviews, sectors such as: Property, Construction, Manufacturing, Retail,
Telecommunications, and Leisure and Entertainment. Each company has been investigated and
analysed as an entity. It can be concluded that there are similarities between companies irrespective
of the different industries regarding their ‘information system’ or EIS.
Questions in the questionnaire refer to the research objectives of the study to establish what
traditional EISs offer and to determine the unmet needs of interest groups in order to formulate and
structure a standard BIS. Open-ended questions contribute to the strategic value of EIS through the
input from respondents regarding their valuable experiences of EISs and the benefit of investing in
EISs.
5.1 Quantitative results

Basic frequency tables were used to present the results of the questionnaire regarding the features,
responsibilities, number of employees, main users of an EIS to name a few. Tables include
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participating companies with EIS, companies with no EIS or companies that have or plan to
implement an EIS in the near future. The results of the questionnaire are presented in tabular format
in Table 3 to 8.
The respondents providing the data hold a variety of education levels. Most of the respondents have
an honours degree, masters degree or a degree. Thus, the overall results are considered to be
representative of respondents with an honours degree, 33.9% and a masters degree, 24.6%. The
mixing of personnel with different skills and qualifications are included in top management since 11%
of the respondents are Chartered Accountants which increase the financial skills among executives
forming part of their top management team.
The survey data from the questionnaires provides useful insights of JSE listed firms who have already
implemented EISs and who are interested in implementing EISs in the future. The data confirmed as
per Table 3, that there is a growing interest in EISs since there are currently 38.5% companies who
have implemented EISs and another 20% of the respondents had confirmed that they would
implement EISs, a total of 58.5%.
Table 3: Companies with EISs
Companies with EISs Frequency Valid Percent
Yes 25 38.5
No plan to implement 13 20.0
No 27 41.5
Total 65 100.0
None of the forty respondents that do not have an EIS previously had an EIS. The uncertainty could
exist around the concept of EISs and other related ‘information systems’ are not surprising as
executive support in South Africa only emerged in the early 1990’s. No formal measures of previous
EISs studies were available to compare the implementation and the abandonment of EISs.
In Table 4 the JSE listed companies were categorised into five categories, very small, small, medium,
large and extra large as per the number of employees. The size of the company and the existence of
an EIS were compared to determine if an association exists.
Table 4: Association between the size of the company in five categories and the existence of an EIS
Number of Have EIS
Employees/ Size of Yes No Total
the Company
% within Number % within Number % within Number
Count Count Count
of Employees of Employees of Employees
Less than 50 1 10.0% 9 90.0% 10 100.0%
50-100 0 0.0% 5 100.0% 5 100.0%
100-1000 5 26.3% 14 73.7% 19 100.0%
1000-2500 2 40.0% 3 60.0% 5 100.0%
More than 2500 17 65.4% 9 34.6% 26 100.0%
Total 25 38.5% 40 61.5% 65 100.0%
A Pearson Chi-square test for independence was conducted to determine whether the size of a
company is related as to whether the company has an EIS. The proportion of large companies (more
than 2500) that have implemented an EIS (65.4%) is significantly different from the proportion of both;
small (less than 100) companies and medium (100 to 2500) companies (χ²(2) = 15.245, ρ< 001). The
magnitude of the association was moderate (Cramer’s V: 0.484). The practical value of the test
determines that larger companies have the tendency to have an EIS in relation to smaller companies.
Table 5 indicates that the number of users is higher for larger companies with more than five hundred
users that access EISs. The two very small categories do not necessarily indicate that these users
represent small companies but consist of a mix between small and larger companies.
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Table 5: Number of users accessing the complete EISs

Number of users
Frequency Valid Percent
accessing the complete EISs
26-50 7 28.0
51-75 5 20.0
76-100 2 8.0
101-200 3 12.0
201-500 2 8.0
501+ 6 24.0
Total 25 100.0
No EIS 40
Total 65
Table 6 shows the percentage of companies who have personnel from various positions and
disciplines. This mixing of users creates an environment of different skills. Although EISs are intended
for more senior managers it is interesting to note all levels participate substantially. In some
companies the technical skills are provided by the programmers and developers of information
systems and the business skills are provided by the executives who work closely with the
programmers and the developers.
Table 6: Main users of EISs
Main users of EISs Marked
Count Percentage
Executive 22 33.8%
CEO 17 26.2%
Accountant 15 23.1%
Manager 13 20.0%
MIS 10 15.4%
Other: Regional Sales Managers, Area Sales Managers, Sales Consultants. 3 4.6%
In Table 7 fourteen respondents confirmed that their companies would support a proposal to propose
a standard EIS for all companies that have an EIS and eighteen companies with no EISs responded
positively to a proposed standard EIS. In summary thirty two companies responded that nearly 50%
would support a proposal to propose standard EIS of all the companies.
Table 7: Would you propose a standard EIS for all companies?
Would you propose a standard EIS for all companies? Frequency Valid Percent
Yes: Companies with and without EIS 32 49.2%
No: Companies with EIS 11 16.9%
No: Companies without EIS 22 33.9%
Total 65 100%
In Table 8 reasons were provided as to why companies would propose a standard EIS for all
companies.
Table 8: Reasons why companies would propose a standard EIS for all companies?
Benefits that are to the benefit of the company.
Cannot make decisions without.
Critical for real time decision making.
Don’t re-invent, use standard tools and use built-in features.
Each has unique needs.
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Reasons why would you propose a standard EIS for all companies?
Excellent management tool.
Fast efficient and cost effective way of implementation.
For large JSE listed companies, good communication tool and informative for all staff in certain areas.
It’s not the technology that matters but how the information is used.
It helps the executive team run the business.
Make business easier.
Standardisation and familiarity for use.
The efficiency of information and aid to decision making.
The EIS should be standard for all the core parts of the organisation and other parts could be given some
latitude.
To be market leaders and have a competitive edge on competitors.
Top to bottom alignment.
In Figure 2 a new variable was created that consists of companies with an EIS that have proposed a
standard EIS and companies that plan to implement an EIS and that will accept a standard EIS.
Figure 2: Creating a new variable

As per Figure 2 a new variable was created to determine how many companies proposed a standard
EIS. Nineteen companies (50.0%) proposed a standard EIS.
5.2 Qualitative results

Face-to-face interviews are armed with a list of structured questions to the interviewees. Apart from
the interviewing, other data was gathered by observation, document studies and annual reports.
All the respondents to the questionnaires were categorised into three groups. The stratification of the
different interview groups and the number of companies interviewed were as follows:
Group 1: Companies with EISs – 5 Companies
Group 2: Companies with no EISs – 4 Companies
Group 3: Companies plan to implement EISs in the future or have already implemented an EIS
since the questionnaires were submitted – 2 Companies
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Eleven executives and upper level management across all the listed JSE companies were
interviewed. The names of the companies were not disclosed for confidentiality purposes. The results
of the interviews are presented in tabular format in three tables per group in Annexure A.
5.2.1 Group 1 – results of companies with EISs

Five executives of listed JSE companies with an EIS were randomly selected to be interviewed to
determine how EISs are utilised and used in their companies. A successful EIS provides the
executive with the necessary real-time information that is needed in decision making and solving
problems under time pressure. The EIS is a trusted source of information for companies in Group1.
All the companies had different software options for their EIS. All the companies have used EISs for
five years plus. The number of users accessing EISs varied from twenty six to over five hundred users
with the majority of users being in the range of twenty six to fifty users.
The question was asked would you propose a standard EIS for all companies and why. Two
companies responded that they would propose a standard EIS if the CSFs are the same, if the EIS is
industry specific, has easy access, is cost effective, improves delivery of instant information and to get
use to seeing data presented in a particular way that reduces interpretation time. Three companies
responded negatively due to each company has a unique value proposition, to interpret their own
information and has a different infrastructure. All the companies confirmed that they would like to
change the content and structure of their existing EIS by automatisation and standardisation of all the
divisions; quick and immediate access for management; access to multiple benchmarking, the
compatibility of historical/legacy systems and automation at all levels of the company.
5.2.2 Group 2 – results of companies with no EISs

Four executives of listed JSE companies that do not have an EIS were randomly selected to be
interviewed to determine how alternative information systems are utilised and used in their companies
for the benefit of the business. It was confirmed in the interviews that there was no benefit of adopting
an EIS technology and that it has no impact on the selling of the product/service of the business. The
CEO of Company 2A believes that the current systems are sufficient as the main purpose of the
company is to produce goods rather than needing more data. The main reason for not considering an
EIS were: high cost, ‘own’ information system is sufficient but not as sophisticated as defined, other
ways of collecting information like meetings, interaction with staff and reports, company is diversified
and EIS can only work if all the underlying data into the EIS is regularly updated and interfaces are
co-ordinated.
Three of the four companies did not propose a standard information system for their company
because it allows staff to be entrepreneurs; the company is diversified and the company is using their
own informal EIS. One company agreed to a standard information system if the underlying processing
is similar. Only one company would prefer to change the structure and content of their existing
information system as there are too many subsystems.
5.2.3 Group 3 – results of companies plan to implement EISs or have already implemented an EIS
since the questionnaires were submitted
Two executives of listed JSE companies that plan to implement an EIS were randomly selected to be
interviewed to determine how EISs were implemented or how companies plan to implement EISs in
the future. Both companies concluded that the EIS will improve the following; the immediate
availability of information, the drill down to transaction level, a system that is user-friendly, to decrease
the working days substantially to produce consolidated Group results and increase the strategic value
for decision making and immediate problem solving. Both companies agreed to propose a standard
EIS, Company 3A states that accounting systems and other activities need to standardise for easy
access and consolidations and Company 3B proposes a standard EIS that is Industry and Sector
specific.
6. Conclusion
The trend fast forwarded towards employee empowerment and decision-making at all levels of the
business as in many cases businesses need to create a specialised information system to address
the needs of management, executives and other decision-makers. The results of the questionnaire
indicated that 50% of the companies propose a standard BIS which creates and adds strategic value
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in companies. From the interviews five of the interviewees confirm to propose a standard BIS as a
strategic business tool for their businesses.
The type of information required by executives and top management is directly related to the level of
management and the degree of structure in the decisions they deal with. The higher the level of
management in the business, the more unstructured the decisions become. Top management and
executives require summarised, ad hoc and external information in order to take decisions and solve
problems to create a competitive advantage and thereafter proceed towards more detailed
information. Subsequently, lower levels of management are less involved in making decisions and
solving problems that influence the business directly. Lower levels of management require detailed,
internal, pre-defined information and are involved in capturing all first level information for the
business.
An environmental analysis, in which a traditional EIS is operating, is discussed to determine the

relationship and the interaction between the business and its environment. Therefore as these
environments change, top management and executives are continually forced to adjust to these
changes, ensuring a competitive strategy, for example the transformation of traditional businesses
into digital businesses in an ever-changing digital environment. This changing environment requires
the business to adapt to this ‘new’ environment for a standard BIS in order to exploit opportunities to
the advantage of the business.
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The Role of Information and Enterprise Systems in the
Achievement of the Organization’s Internal Process
Innovations: Findings From an Investigation in the USA
Manufacturing Sector
Avraam Papastathopoulos and Christina Beneki
Technological Educational Institution of Ionian Islands, Cephalonia, Greece
apapast@hotmail.com
benekic@teiion.gr
Abstract: Enterprise Application Systems (EAS) and Information Application Systems (IAS) can significantly
impact on the market-oriented aspects of products and services as well as on the manufacturing processes,
working practices, management practices and innovation achievements. In order to deepen the knowledge and
further advance theory, this paper seeks to explore the role of EAS and IAS to for the achievement of innovations
in the context of the internal processes in the USA manufacturing firms. This multipurpose study initially
examines if there is a relationship between specific EAS (ERP, SCM and CRM) and internal process innovations
(IPI) capability while it investigates the possible association between specific IAS (PLM and CAD) and
innovations developed in the internal processes of the firm. The second purpose of this study focuses on the
measurement of the nature and the strength of the relationships resulting from the calculation of relevant odds
ratio. The examination of the association between variables and its hypotheses are tested in the context of an
empirical study of a multi-industry sample of the USA manufacturing firms. Our data were picked from the ‘e-
Business Survey 2007’. This survey was part of the "e-Business Watch", a service launched in 2007 and
provided by empirical GmbH to the European Commission, Enterprise and Industry Directorate General, in co-
operation with renowned international partners. 300 Interviews were conducted in the USA manufacturing firms
from August to October 2007, with the use of computer-aided telephone interview (CATI) technology. The
questionnaire contained about 70 questions and focused on three manufacturing sectors ‘Chemical, rubber and
plastics’, ‘Steel’ and ‘Furniture’. The results of the study indicate that a direct positive relationship exists between
ERP, SCM, PLM and CAD on the one hand and the innovations achieved in the internal business processes in
the USA manufacturing firms on the other. Furthermore, no significant contribution was found to the innovations
achieved in the internal business processes by CRM systems. It is believed that the results, as validated
empirically in this study, will provide useful guidelines to the manufacturing firms for launching or improving their
goods or services. Finally, it is hoped that this exploratory research has laid the foundation for further
examination of the contribution of EAS and IAS in the innovation activity of the manufacturing firms. Future
studies should be able to replicate the process in more sectors and information and communication technologies.
Keywords: innovation, ERP, CRM, SCM, PLM, CAD, manufacturing sector
1. Introduction
The last twenty years the value and the importance of enterprise and information systems (ES and IS)
has become increasingly decisive and ubiquitous in all organizational processes. Technology exerts
an important impact on social and financial innovation and development (of societies and economies)
since a long time ago. The Global Information Technology Report 2006–2007 makes its appearance
at a critical juncture as far as the impact of ICT on the world economy is concerned. There is growing
evidence that ICT is driving innovation by allowing creative thinking and responsive problem-solving
to provide the promise of unprecedented opportunities for all (Dutta and Mia, 2007). The rapid
deployment of the internet and the corporate databases in the 1980s and 1990s accelerated this
process of modifications to enterprises’ internal and external environment. This new ‘technology-
driven’ situation and its possible evolution provide abundant new challenges in all functional areas
across the enterprise (Carneiro, A. 2006).
Taking into consideration the resource based view of the firm (Barney, 1991), successful innovation
may be dependent on the presence of other organization specific skills and capabilities, like the
implementation of Information and Communication Technologies (ICT). According to Lee (2000), ICT
made a direct impact on process innovation in an organizational setting by facilitating inter-
organizational links. ICT-enabled inter-organizational integration and collaboration enhances the
innovation capabilities of companies by providing opportunities for shared learning, transfer of
technical knowledge and resource exchange. The most obvious benefit of information integration with
the help of ICT is the optimization of the value chain in order to eliminate the so-called “bullwhip
effect”, that is to say how small variations in intermediate and final demand levels along a supply
chain can add up to significant disturbances and disruptions (European Commission, 2008: 25).
439
Other, less obvious consequences for firms’ innovativeness include the creation of communication
infrastructures, which facilitate the production networks or enable partners to align the incentives of
multiple players by creating joint business units or teams managing the same tasks (McAfee, 2006:
25).
While there is an extensive body of literature on innovation activities of the firms, there is scant
research on the relationship between internal process innovations (for example for producing or
supplying goods or services) and Information and Communication Technologies. In addition, the
existing studies are fragmented and provide incomplete explanations for the ICTs that enable the
introduction of new innovations which may significantly improve the firm’s internal processes. The
majority of innovation studies have been primarily focused on the stimulating effect of innovation to a
firm’s growth (Coad and Rao, 2008, Wolff and Pett 2006), the impact of innovation on a firm’s
performance (Dibrel et. al. 2008, Verhees and Meulenberg, 2004), the effect of innovation on the
survival of firms as a whole (Cefis and Marsili, 2006; Buddelmeyer et al. 2006) and the development
of competitive advantages (Lewis et al. 2002). However, there are still doubts regarding the use of
ICTs and the achievement of firm’s internal process innovations; with this way, our study provides
distinguishing contributions to the existing literature in the following ways. Firstly, this study
determines if there is a relationship between specific ES (ERP, SCM and CRM) and internal process
innovations development as well as it examines if there is an association between specific Information
systems (DMS, 3D and CAD) and innovations developed in the internal processes of the firm. The
second major contribution of the current study is that it describes the strength of these relationships
and calculates the odds for manufacturing firms to develop an IPI by adopting the above systems in
relation to the ones that finally do not resort to these particular systems.
The paper is organized as follows. First of all, we underpin our formal hypotheses with a discussion
stemming from the relevant theory and prior research conclusions. Secondly, we present a discussion
of the methodological issues regarding survey development, sampling and data collection. Thirdly, the
results of our research are followed not only by an analysis, but also by relevant interpretations. The
last section contains a discussion on these findings as well as our conclusions, while a discussion on
the limitations of our research and its implications for further future research is also included.
2. Theory review and hypothesis development
2.1 Innovation
Innovation is something of a buzzword. Considering that it has been perceived as the cornerstone for
achievement in the business sector of the 21st century, large and small organizations have begun to
re-evaluate their products, their services and their operations in an attempt to develop a culture of
innovation. This re-examination of organizational purpose is due to a recognition that developing a
culture of innovation within the organization is the best insurance that an organization can have of
longevity in the new environment of fast-moving and competitive market (European Commission,
2004: 19).
Based on the literature, the initiatives of innovation and ICT are complementary (Dibrel et. al. 2008).
ICTs transform the process of replicating business innovations across organizations (Brynjolfsson et
al., 2006). Traditionally, deploying business innovation on a larger scale proved to be time-consuming
and required considerable involvement of resources and employees. Today, ICTs allow companies to
embed business innovations and then implement them across the organization at a much smaller cost
than before without compromising on quality. Every location or unit implements and follows all steps
of the new process in a way specified in the software design (European Commission, 2008).
In the following sections, we present the relative conceptual framework of the relationship between
ICTs (EAS and IAS) and IPI capability, which leads to the development of our ten hypotheses.
2.2 ERP and internal process innovation capability

The research on ERP in the last millennium reveals that it offers a wide variety of different benefits to
firms. Rajagopal (2002) found six constructs related to ERP implementation: investment decisions,
benefit analysis, cost analysis, choice of appropriate technology, choice of vendor or brand and
suitability of innovation for the firm. While Seddon et al., (2003: 79) divides the firm benefits into five
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groups, operational benefits, managerial benefits, strategic benefits, IT infrastructure benefits and
organizational benefits.
In relation to innovations-enabled by ERP, a study conducted by Buonanno, G. et. al. (2005) argues
that the large companies making use of an ERP system expect a wider extent of business
transformation (business process reengineering and business network redesign), while SMEs always
schedule a limited organizational change in the case of ERP adoption; thus, they seem not to
consider ERP systems as a keystone for organizational innovation. These findings were generally
supported by the study of Raymond and Uwizeyemungu (2007), although the latter study also
identified that only the SMEs with a greater production and innovation capacity are more likely to
adopt ERP systems.
Taking into account the arguments stated above, we can formulate the following hypotheses:
H1a: ERP adoption is positively related to the development of innovations in the internal processes of
the manufacturing firms.
H1b: Firms that adopt ERP systems are more likely to develop IPI in relation to those that do not.
2.3 SCM and internal process innovation capability

SCM has become one of the most fundamental new business concepts. Global competition and
outsourcing have caused the fragmentation of the supply chain, and supply chain excellence is now a
prerequisite for competitive advantage (Christopher, 1998); it is also commonly argued that present
day competition aims at the extension of to extend the internal business processes into the supply
chain and thus at the development of an integrated supply chain (Vaaland and Heide, 2007).
SCM systems integrate topics from manufacturing operations, purchasing, transportation, and
physical distribution into a unified innovation project. Successful initiatives coordinate and integrate all
of these activities into a unified process. They embrace and link all of the partners in the chain. In
addition to the departments within the organization, these partners include vendors, carriers, third-
party companies and information systems providers (European Commission, 2004: 74).
The potential benefits of SCM include product and delivery process quality such as shorter delivery
times, more reliable delivery promises, fewer schedule disruptions, cost savings (for example,
significant reductions in inventories) and risk reductions (Christopher, 1998; Bask and Juga, 2001).
Furthermore, integration of processes in the supply chain can also enhance the ability to leverage its
scalable competences, for instance, the enforcement of innovative product design and radical process
innovation and the access of complementary partner assets (Arend and Wisner, 2005).
These previous studies lead to our second hypothesis:
H2a: SCM adoption is positively related to the development of innovations in the internal processes of
H2b: Firms that adopt SCM systems are more likely to develop IPI in relation to those that do not.
2.4 CRM and internal process innovation capability

CRM is a tool designed to integrate and automate management of all client-facing tasks in order to
help build and retain their loyalty. CRM refers to the utilization of extensive strategies and engineering
to find, obtain, and cultivate advantaged customers, and hence maintain long-term partnerships (Sin
et al., 2005). It is based on the recognition that not all customers should be treated the same way. In
practice, companies adopting CRM technology have the ability to sustain significant competitive
advantages by delivering value added services that respond to their customer’s changing needs and
preferences (Peltier et al., 2006; Zahay et al., 2004).
Recently, the literature has begun to link the practice of CRM with the development of innovation
capability. Ramani and Kumar (2008) suggested that using CRM to engage in creating, maintaining,
and fostering useful customer relationships along with maintaining long-term partnerships are
important strategic elements for developing innovation capability. Intensive interaction between
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manufacturers and customers encourage customers to provide valuable suggestions for product
development (Droge et al., 2004). Therefore, manufacturers who receive important information from
customers are able to increase their innovation capability by meeting the needs of a targeted market
(Ru-Jen Lin et al. 2009).
Finally, there is a growing consensus in the literature that the adoption of CRM technology is likely to
be crucial when market conditions are characterized by high uncertainty and firms are attempting to
gain competitive advantages through innovation (Papastathopoulou et al., 2007; Wang and Ang,
2004; McGee and Sawyerr, 2003).
In view of the foregoing studies, H3 is formulated as follows:
H3a: CRM adoption is positively related to the development of innovations in the internal processes of
H3b: Firms that adopt CRM systems are more likely to develop IPI in relation to those that do not.
2.5 PLM and internal process innovation capability

PLM is the process of managing the entire lifecycle of a product from its conception, through design
and manufacture, to service and disposal. PLM is a set of capabilities that enable an enterprise to
effectively and efficiently innovate and manage its products and related services throughout the entire
business lifecycle (Dutta and Wolowicz, 2005). In today's highly competitive global markets,
companies must meet the increasing demands of customers to rapidly and continually improve their
products and services (Stark, J. 2004).
Based on the literature, many benefits derive from the adoption of PLM. According to Møller, C.
(2005), PLM enables enterprises to introduce innovative and profitable products to the market in a
more effective fashion, especially in the evolving e-business environment. Furthermore, PLM enables
extended enterprises to harness their innovation process through the effective management of the full
product definition lifecycle. Finally, PLM is a strategic business approach to empower the business, to
enable product and process innovation, and enhance both top and bottom line business performance
(CIMdata, 2002).
These points yield the following hypothesis:
H4a: PLM adoption is positively related to the development of innovations in the internal processes of
H4b: Firms that adopt PLM systems are more likely to develop IPI in relation to those that do not.
2.6 CAD and internal process innovation capability

Nowadays, the design process of new products has to focus on a lot more than the simply optimizing
of the design and development process, according to the required functional specifications. Present-
day product design has to take into account a range of external factors, such as customer
requirements, quality, optimization of manufacturing costs and controls, environmental impact before
and after manufacture, product disassembly, re-use and recycling, safety, hygiene, ergonomic factors
and more (European Commission, 2004: 110).
CAD has been a dominant design process technology as it enables the digitalization of design
features (Su and Chen, 2003). Because of its digitalizing capability, during the recent years, the scope
of CAD gets extends towards other technologies like computer aided manufacturing (CAM) and rapid
prototyping (RP). This implies that CAD features are so portable that they are adopted for the
manufacturing of the prototypes and products (Vinodh et al., 2008).
The literature identifies a variety of technical and strategic factors that induced the design process
technologies adoption. Firstly, help of new products meet the specifications related to customer
needs, quality, price, manufacturing, recycling, etc. Secondly, reduce development costs and time
necessary for commercialization. Thirdly, co-ordinate and schedule the activities involved in the
design and development of products within the entire set of activities, taking into account time, tasks,
442
resources and manufacturing all in the context of the company. Finally, integrate the above objectives
into a development strategy in line with company abilities (European Commission, 2004: 111).
Based on this logic, we propose the following hypothesis:
H5a: CAD adoption is positively related to the development of innovations in the internal processes of
H5b: Firms that adopt CAD systems are more likely to develop IPI in relation to those that do not.
3. Methodology
3.1 Instrument development

In order to address the preceding research questions, we used data from the ‘Sectoral e-Business
Survey 2007’. This global survey is part of the “e-Business Watch”, a service launched in 2007 and
provided by empirical GmbH to the European Commission, Enterprise and Industry Directorate
General, in co-operation with renowned international partners (European Commission and the
Sectoral e-Business Watch, 2007) while it was presented as a Confidentialized Unit Record File. The
key objective of the e-Business Watch is to gather information about the usage of ICT and their
application to the electronic business in companies, in order to derive indicators on industrial sector
level. The e-Business Survey 2007, which was the fifth survey after those of 2002, 2003, 2005 and
2006, had a scope of 5,325 telephone interviews with decision-makers from five industry sectors (3
manufacturing and 2 retail sectors) in nine EU countries and the USA. In our study, the raw data were
gathered from manufacturing Small and Medium-sized Enterprises (SMEs) and Large Companies
(LC) in USA and were defined on the basis of the NAICS classification.
At this point, it is critical to say that we were led to investigate the U.S manufacturing sector, as it
remains a vital part of the U.S. economy. The manufacturing sector supported 14 million jobs in 2007,
or about 10.1% of the total employment. Furthermore, manufacturing industries are also responsible
for a significant share of U.S. economic production, generating $1.6 trillion in GDP in 2006 (12.2% of
total U.S. GDP). Due to the fact that manufacturing firms also use as inputs commodities and services
worth trillions of dollars, the sector is responsible for an even bigger share of total output. The U.S.
manufacturing had gross output 1 of $4.5 trillion in 2005, and it is by far the most important sector of
the U.S. economy in terms of total output (U.S. Bureau of Economic Analysis 20081).

The sample drawn (for each sector) was a random sample of companies from the respective sector
population in the USA and the sampling source chosen was Dunhill International List Co., Inc. This
sampling source was used, because Dunhill has supplied such lists for us in the past for similar
studies and they resulted in a relatively high percentage of resulting connections, accurate names and
telephone numbers, etc.
As in 2005 and 2006, the survey considered only companies that used computers. For the first time, a
cut-off was introduced with regard to company size; in our case, only companies with at least 10
employees were interviewed. Evidence from previous surveys shows that computer use can be
expected to be 99% or more in all sectors among medium-sized and large firms.
Due to stratified sampling, the sample size in each size-band is not proportional to the population
numbers. If proportional allocation had been used, the sample sizes in the 250+ size-band would
have been extremely small, not allowing any reasonable presentation of results. Thus, weighting is
required so that results adequately reflect the structure and distribution of enterprises in the
population of the respective sector or geographic area. The “e-Business Watch Survey 2007” applies
two different weighting schemes: weighting by employment and by the number of enterprises.
The final allocation of our sample (n=300) according to industry sector and company size is illustrated
as follows (Table 1):
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Table 1: Distribution of interviews by firm size and industry sectors

Company size in size-classes
not available
from Total
10-49 50-249 250-999 1000+
database
(address)
Chemical, Count 49 41 2 7 1 100
Rubber and
% within: Survey 49,0% 41,0% 2,0% 7,0% 1,0% 100,0%
Plastics
Sector
Steel Count 48 42 9 1 0 100
Survey
Sectors % within: Survey 48,0% 42,0% 9,0% 1,0% ,0% 100,0%
Sector
Furniture Count 39 53 6 2 0 100
% within: Survey 39,0% 53,0% 6,0% 2,0% ,0% 100,0%
Sector
Count 136 136 17 10 1 300
Total % within: Survey 45,3% 45,3% 5,7% 3,3% ,3% 100,0%
Sector
3.3 Data analysis

In order to examine the relationship among IPI capability of firms and the adoption of ICTs, as well as
the nature and strength of these relationships, Chi-square tests and odds ratio calculations have been
carried out along with the aforementioned procedures.
Although chi-square tests cannot describe the nature and strength of the relationship between two
categorical variables, it can indicate whether there is an association between two categorical
variables. According to Mosteller (1968), the odds ratio (OR) is a measure of effect size, describing
the strength of association or non-independence between two binary data values. The OR is the ratio
of the odds of an event occurring in one group to the odds of it occurring in another group, or to a
sample-based estimate of that ratio. In our case, the OR was used to calculate the odds for a firm to
develop its IPI from the adoption of ERP, SCM, CRM, PLM and CAD systems in relation to those that
do not adopt these systems.
Finally, given the objectives of the research, the dependent variable is relative to firm innovation
performance in a specific period. More specifically, respondents were asked to indicate with a “yes” or
“no” response if during the past 12 months, their company has introduced any new internal processes
or has significantly improved the existent ones (for example for producing or supplying goods or
services). The independent variables ERP, SCM, CRM, PLM and CAD adoption are dichotomous
variables that take value 0 when the firm declares the system’s adoption; otherwise their values are 1.
The raw data were coded and analyzed using the SPSS 17.0.
4. Findings
As seen in Table 2, it can be verified that there is a statistically significant association between:
ERP Adoption & IPI capability (with p-value of 0.021 for chi-square test and p-value of 0.031 for
Yates' chi-square test).
SCM Adoption & IPI capability (with p-value of 0.014 for chi-square test and p-value of 0.021 for
PLM Adoption & IPI capability (with p-value of 0.019 for chi-square test and p-value of 0.034 for
Yates' chi-square test) and
CAD Adoption & IPI capability (with p-value of 0.002 for chi-square test and p-value of 0.003 for
To test the above relationships two measures were used, chi-square test and Yates' chi-square test.
Yates' correction is an arbitrary, conservative adjustment to chi-square. It is only applied to 2 by 2
tables. Some authors also apply it to all 2 by 2 tables since the correction gives a better
approximation to the binomial distribution. Yates' correction is conservative in the sense of making it
444
more difficult to establish significance. Some statisticians claim that this leads to a better estimate of
the observed significance level, but the claim is disputed (Norusis, 2008). Both tests confirm the
relationships postulated in H1a, H2a, H4a and H5a, as all the related p-values are less than the
traditional threshold of 0.05. The same tests are used to test H3a. H3a’s postulation that ‘CRM
adoption is positively related to the development of innovations in the internal processes of the
manufacturing firms’ is not confirmed (both p-values are more than 0.05). In all above tests, there is
no violation of the basic rule for using chi-square test (the expected values in each cell be greater
than 1 and that most cells have expected values greater than 5 (Norusis, 2008).
As previously stated, the odds ratio measurements were used to test H1b, H2b, H3b, H4b, and H5b.
The calculations of the odds ratio produce some interesting results (table 2). Let’s take a closer look.
The first odds ratio being 1.942 means that firms which have adopted an ERP system have 1.9 times
the odds to develop an IPI in relation to those that have not adopted an ERP system. The second
odds ratio being 2.003 means that firms which have adopted a SCM system have 2 times the odds to
develop an IPI in relation to those that have not adopted an SCM system. Similarly, the firms which
have adopted a PLM system have 2.6 times the odds to develop an IPI in relation to those that have
not adopted a PLM system. Lastly, the firms which have adopted a CAD system have 2.4 times the
odds to develop an IPI in relation to those that have not adopted a CAD system. All of these odds are
greater than the one indicating that the event (development of an IPI from the adoption of enterprise
and information systems) is more likely to happen than not. In other words, the odds of the ERP
adopters to achieve an innovation into their internal processes are 94.2% more than the odds of the
non-adopters, the odds of the SCM adopters to achieve an IPI are 100.3% more than the odds of the
non-adopters. Likewise, the odds of the PLM adopters to achieve an innovation into their internal
processes are 158.6% more than the odds of the non-adopters and the odds of the CAD adopters to
achieve an IPI are 140% more than the odds of the non-adopters. These results confirm H1b, H2b,
H4b, and H5b (H3b is not included as there is no statistically significant association between the two
variables), while they also make it possible to conclude that the adoption of ERP, SCM, PLM and
CAD systems contribute to the improvement of the innovativeness of U.S manufacturing firms. In
contrast, the contribution of CRM systems appears weak.
Table 2: Chi-squares tests & odds ratio
Asymp. Sig 95% Confidence Interval
Value Df (2-sided) Lower Upper
Pearson Chi-Square 5.354 1 0.021
Continuity Correction 4.681 1 0.031
ERP Adoption
N of Valid Cases 276
Odds Ratio 1.942 1.102 3.423
SCM Adoption
Odds Ratio 2.003 1.144 3.506
CRM Adoption
Odds Ratio There is no a statistically
significant association between the
two variables
PLM Adoption
Odds Ratio 2.586 1.143 5.852
CAD Adoption
Odds Ratio 2.400 1.364 4.223

The results of this study shed several interesting insights about ICT-related innovations for the U.S
manufacturing firms. Firstly, the adoptions of ERP and SCM undoubtedly have a positive and
significant effect on the firm’s capability to develop internal process innovations. Secondly, this study
brought to light that both PLM and CAD systems are strongly linked to IPI capability of U.S.
445
manufacturing firms. Thirdly, the odds ratio calculations reveal that the manufacturing firms which
adopt ERP, SCM, PLM and CAD technologies have considerable priority over the firms that have not.
Lastly, the data also revealed a surprising “non-result.” CRM does not have a positive and significant
effect on internal process innovation capability. This is a very interesting point and our finding appear
to support contentions by Ru-Jen Lin et al. (2009) that CRM does not contribute to all types of
innovation capability, which clearly indicates the need for applying other mechanisms, such as
supplier integration, to form a complete innovation program. For instance, customer involvement does
not significantly contribute to process and administration innovations. Perhaps, firms should rely on
suppliers to develop these two particular innovation capabilities. The finding that EAS and IAS boost
internal process innovations, suggests that it may be in the firm’s best interest to invest in ICT, even
when the technology is not directly tied to a specific type of innovation. It appears that a failure by
manufacturing firms to invest in appropriate ICTs makes them slower to acquire necessary innovation
capabilities than other manufacturing firms and thus less able to respond to changing managerial and
competitive market needs. The internal process innovations are closely related to the renewal and
enlargement of the range of products, the establishment of new, improved methods of production,
supply and distribution, and, the introduction of major changes in management techniques and
strategic planning. In this context, the improved ability of a firm to achieve internal process innovations
can change the nature of business competition.
From our results, we can conclude that firms, which are able to understand the significance of ICTs,
enhance their relative innovation capability. In contrast, a failure to invest in ICTs can cause a firm to
be unable to support its innovation initiatives. Perhaps, a lack of investment in ICTs over time may
render the firm incapable of meeting customer requirements. The implementation of ERP, SCM, PLM
and CAD systems are increasingly recognized as means for developing innovation capability and
providing a lasting competitive advantage. This work is not free from limitations. Taken that the
findings in this study are based on the U.S manufacturing firms, they cannot be generalized to
manufacturing firms in other countries. The analytical investigation of associations has been
approached from an American point of view. Thus, the interpretation and utilization of the research
findings should be thoroughly scrutinized. In terms of future research, it would be interesting to
examine ICT adoption and IPI capability in other sectors such as trading firms in order to examine if
the potential differences exist. Other business sectors may exhibit different forms of behavior. It would
also be of value to carry out this research in other countries that share similar industry infrastructure.
Hence, further comparative research is needed to replicate the results found in this study.
Acknowledgements
The authors wish to express their sincere appreciation to the European Commission and the Sectoral
e-Business Watch for supplying the raw data sets of their e-Business Surveys (2002, 2003, 2005,
2006, 2007). These valuable raw data sets help the authors to develop the ideas put forward here.
The author's are grateful for the publisher's generous permission to use the raw data sets.
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Conceptual Fundamentals of the Long Wave Theory and
the Innovative Potential of the Russian Economy
Ruslan Pavlov
Central Economics and Mathematics Institute, Russian Academy of Sciences,
Moscow, Russia
pavlovru@mail.ru
Abstract: Some aspects of innovative development in terms of the long wave concept are studied in this paper.
The stage of the sixth long wave, which is reached by the United States as the leader of the nanotechnological
development, is specified. The innovative potential of Russia in the area of nanotechnologies is estimated.
Keywords: big cycles, long waves, economic development, financial crisis, nanotechnologies, innovation
1. Introduction
Addressing the long wave concept has become a very fashionable phenomenon recently, caused not
only by the situation formed in Russia as well as worldwide, but also by the arising necessity of
seeking the theories explaining such a phenomenon as the financial crisis and its consequences. The
very theory of long waves which appeared in the twenties of the last century presents the attempt to
find out and explain the cyclic character of the economic development. The conceptual fundamentals
of this theory are ambiguous, as its methodological fundamentals have undergone essential changes
during its long evolution. Initially the approach of the founder of this theory Nicholas Kondratiev was in
terms of the Marxist’ concepts. Then some new schools of thought within this theory, which treated
this phenomenon from absolutely different standpoints, emerged. Nowadays we can say that two
major streams of thought have shaped. The first one is mutually agreed to be called the investment
stream, as it is based on the main ideas of Kondratiev’s concept and the innovative one, which is
based on the idea of priority of innovations as a basic mechanism of the long wave dynamics,
according to Joseph Shumpeter’s approach. It is impossible to combine these two streams, because
of the conceptual differences between them, but nevertheless they present two major aspects of the
long wave theory. Underestimating one of them may lead to the inaccuracy in an analysis of the
dynamics of economic development in context of the long wave changes. Though the tendency
towards adopting the innovative approach of this theory becomes to dominate in some discussions
concerning the problem of strategy of economic development. Admitting the high importance of the
investment aspect of the theory enables us to investigate such a complex phenomenon as the long
waves not only in terms of the innovative development, but also in terms of the development of the
financial market, which can be cyclic in its nature, as some evidence shows. This fact allows us to find
out the degree of development of the new long wave and specify the basic mechanisms of its growth.
The attempt to specify the stage of development of the nanoindustry as a technological basis of the
new long wave within the context of the investment approach is made in this paper. We should
investigate the experience of the United States as the leader in the process of development of
nanotechnologies in the world. We should also specify the innovative potential of Russia which is
going to take an active part in the development of nanotechnologies, comparing it with that of the
United States and those of some European countries.
2. Stock market as an indicator of the long wave dynamics
The cyclic character of the long wave dynamics can express, in particular, in the change of the
investor preferences at the stock market, which results in the leaving some of the assets, relating to
the traditional sectors, for the assets of the forthcoming wave sectors. This tendency seems to be
clear especially during the period of rise of the high-tech sector (see fig.1).
Such tendency is demonstrated by the chart of comparison between the dynamics of transactions of
mergers and acquisitions in all basic sectors of the US economy and the dynamics of acquisitions of
the high-tech companies, the share of which is growing in accordance with the common trend. It
means that the share of deals connected with the high tech sector increases in the total amount of
mergers and acquisitions by the end of the nineties of the last century (see figure 2) and according to
the periodization of C. Perez (Perez, 2005), the peak of mergers and acquisitions in the high-tech
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industries happens at the stage of installation of the fifth long wave and its transition to the stage of
deployment.
Figure 1: Dynamics of NASDAQ COMPOSITE and DJIA in 1977-1980
Figure 2: Percentage of high-tech deals in total amount of deals in 1981-2003

The period of the most active growth of mergers and acquisitions suggests the increasing of the
struggle for getting market shares between different companies and according to the periodization of
C. Perez and L. Soete (Perez, Soete, 1988), this stage relates to stage III, when the intensity of
competition between the established firms increases and it is possible to develop the improving
innovations as means of competition struggle.
3. National nanotechnological initiative of the USA and the innovative
potential of the Russian economy
Nowadays in a number of countries the governmental expenditures connected with the support of
nanotechnological R&D have been increasing. As we can see from Table 1, the investments in the
development of nanotechnologies were increasing steadily since 1997 till 2004.
The leading positions of the USA can be explained by their successive strategy of achieving
competitive advantages in this field. The National Nanotechnological Initiative of the USA is financed
by major ministries, agencies and private companies. According to this strategy, four generations of
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nanoproduction should appear consequently until 2020. The first generation (2000-2005) is known as
“passive nanostructures”, or nanopowders, which may be put into different materials such as
polymers, ceramics, metals, medicines, cosmetics, food and other consumer goods. Now hundreds of
items in which the presence of such nanopowders can be found, are produced in the USA. Thus, the
first generation has already been producing. The second generation (2005–2010), which is called
“active nanostructures” implies the production of nanobiotechnologies, neuroelectronic interphases,
nanoelectromechanic systems etc. The third generation (2010–2015), which is proposed to be a
system of nanosystems, or a manageable self-assembling of nanosystems, three-dimensional
networks, nanorobots, etc., is still being developed by the researchers. And at last, the fourth
generation, which is called “molecular nanosystems» (2015–2020), or molecular devices, atomic
design, exists only as a concept.
Table 1: Dynamics of budget investments in nanotechnological R&D during the period 1997-2004 (in
billions of dollars)
Country/amount 1997 1998 1999 2000 2001 2002 2003 2004
of financing
USA 116 140 165 270 422 604 710 1600
EU 126 140 165 200 270 400 1085 1300
Japan 70 - - 245 465 650 - -
The results of realization of this program are staggering. Table 2 shows that according to the
distribution of the total amount of registered patents in the world, the USA could be referred to as the
leader in the process of nanotechnological development.
Table 2: Total number of registered patents in the area of nanotechnologies during the period 2005-
2007
Category In total USA EU China Japan South Russia
Korea
Nanopowders 3389 1649 794 46 340 164 9
Nanocomposites 2237 1301 399 15 204 110 6
Nanocells 2070 1005 426 26 258 136 11
Nanoelectronics 1054 585 195 6 102 51 10
Nanostructures 1875 993 389 23 223 67 19
Nanophotonics and 241 128 39 7 15 23 11
spintronics
Bio- and 670 337 142 3 90 21 0
nanosensors
Nanomanipulators 102 67 16 0 3 1 4
and nanoinstruments
As was mentioned above, the dynamics of the long waves can be expressed in the process of
mergers and acquisitions. This process is not so active, as the stage of the new wave can be
characterized as the stage of installation, using the periodization of C. Perez. But we can say that the
nanoindustry has already seen two big nanomergers in its history. We mean the merger between
Nanometrics Incorporated and August Technology Corporation and the merger between Carbon
Nanotechnologies and C Sixty. The reasons announced for these mergers are the R&D synergies
and new channels to market and Patent Portfolios. All are good reasons to merge. As some
observers say, “we will see more mergers as technology based companies learn that it takes more
than a killer application to win market share” (Barns, 2005).
As we can see, the United States could be referred to as the leader in all the basic positions of
research, and the lag in the development of the Russian nanoproduction is quite significant, but this
fact does not imply that it has the low level of its innovative potential in this area, as the data on its
patents and inventions covering the period from 1999 to 2009 give us the evidence about far more
impressive results (see Table 3 for details).
It is known that during the recent decade in the area of nanotechnologies 4668 patents of inventions
were given to the Russian and foreign applicants. Among them 1932 patents of the Russian
applicants and 1432 patents of foreign ones are in force. The successful experience of the United
States can be explained by the system of Public-Private Partnership (PPP) and the effective strategy
in choosing the priorities of development of nanotechnological production. The activity of the
Nanosystem Institute, which is situated in the area of the University of California, is financed at the
expense of the means assigned by the government of California and the investments of large
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corporations, such as HP, Intel, BASF and Abraxis BioScience. Nanostart AG is considered to be one
of the largest corporations in the industry. It combines successfully the function of an expert and that
of an investor, due to which the intensity of its production increases. The aim of the company is to
keep up with the technological revolution and to shape it in some way. That is why it is not only
engaged in the nanotecnological production, but it is also a large investor for the ambitious
enterprises, which are engaged in such kind of production. Being provided with the capital and know-
how of Nanostart AG, these enterprises get the ability to change the positions on the markets due to
their innovative nanotechnologies. The situation in Russia is quite different from that. The Russian
Corporation of Nanotechnologies (RUSNANO) was established in 2007 to support the
nanotechnological development in Russia. To accomplish this task, RUSNANO co-invests in the
nanotechnology projects which present to be valuable in terms of social benefit and long-term
prospects. RUSNANO participates in building nanotechnology infrastructure, which includes the
nanotechnology centers of excellence, business incubators and early stage investment funds.
RUSNANO provides scientific and educational programs that are required for its investment projects
to succeed, and also supports the popularization of nanoscience and nanotechnology. RUSNANO
selects promising spheres for investment based on longer-term foresight created by the leading
Russian and world experts. One can’t help, but mention that this corporation acts as a co-investor
under a very complicated system of control and expertise. As V.Ye. Dementiev (Dementiev, 2008)
points out, the functions of organizing the expert works performs the Ministry of Science. Thus the
body being controlled is organizing the activity of its controller. Also the mix of functions of control and
management is expressed at the level of the Kurchatov Institute, which won the tender to be the main
centre coordinating R&D projects in nanotechnology in Russia.
Table 3: The dynamics of patenting the inventions in the area of nanotechnologies in the Russian
Federation during the period from 1999 to 2008
Total amount of patents of

Total the Russian patent holders
amount of being in effect Amount of patents of the
Total amount
Year patents foreign patent holders being in
of patents
being in effect
effect Natural
Legal persons
persons
1999 342 133 10 50 73
2000 289 117 15 50 52
2001 256 115 17 53 45
2002 323 184 14 78
92
2003 493 312 37 124 151
2004 510 344 36 141 167
2005 438 341 36 145 160
2006 577 458 53 175 230
2007 584 508 56 201
251
2008 856 852 110 275
467
In total 4668 3364 384 1548 1432
4. In conclusion
As some experts say, the process of nanomergers can be under way in future, when the technology
based companies realize that it takes more than mere a killer application to win market share. As was
shown above, the peak of mergers and acquisitions usually falls on the period of transition from the
stage of installation to the stage of deployment of the long wave. Thus the third phase of the long
wave, which is known as the phase of an early growth, according to the periodization of C. Perez and
L. Soete, is expressed definitely in the growth of mergers and acquisitions, which lasted until 2000.
Such situation is not inherent to the nanoindustry of the United States. Thus in terms of the
investment approach, the United States are at the stage of early growth, as this stage is characterized
by the beginning of the mass production of new items. In Russia nanoindustry is actually at the stage
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of formation, so the support of the state and the experience of the advanced countries become very
crucial for its shaping. Also the problem of creating the institute of independent expertise becomes
very urgent. It should be an institute with the participance of foreign and Russian leading experts in
this field, acting in compliance with the standards of international law.
References
Barns S. (2005) Another Nanomerger Announced, http://nanopundit.blogspot.com/2005/01/another-nanomerger-
anounced.html.
Dementiev V.Ye. (2008) “Institutionalniye usloviya formirovaniya v Rossii novogo telhnologicheskogo uklada,”
Teoriya i praktika institutsionalnykh preobrazovaniy v Rossii, Vol. 11, Moscow, CEMI RAS.
Perez C. (2005) Respecialisation and the Deployment of the ICT Paradigm. An essay on the present challenges
of globalization, [online],
http://www.carlotaperez.org/papers/PEREZ_Respecialization_and_ICTparadigm.pdf.
Perez C. and Soete L. (1988) Catching up in Technology: Entry Barriers and Windows of Opportunity / Technical
Change and Economic Theory. New York: Pinter Publishers, 1988.
Zorn D., Dobbin F (2003). Too Many Chiefs? How Financial Markets Reshaped the American Firm, [online],
http://www.konstanz.de/ssf-conference/Zorn-Dobbin.pdf.
452
The new Approaches in Logistics Services
Accomplishment
Nataša Pomazalová1, Zbyšek Korecki1 and Samuel Antwi Darkwah2
1
University of Defence, Brno, Czech Republic
2
Mendel University in Brno, Czech Republic
natasa.pomazalova@unob.cz
zbysek.korecki@unob.cz
darkwah@mendelu.cz
Abstract: The primary modes of transportation available to the Czech National Movement Coordination Centre
are trucks, rails or air. Comparison between price levels of different modes of transport is very debatably due to
strategic distances and places where the Army of the Czech Republic (ACR) Units are deployed for foreign
operations. Nowadays, strategic distances, relatively low host national support level and military operational
excellence is becoming even more essential for a defence department’s ability to drive greater military logistics
management value through outsourcing and knowledge innovation. Based on the findings the requirements of
the transport and movement knowledge are continuously increasing. The development of knowledge potential of
military specialists – graduated students in the future to be more oriented to proffesional knowledge.
Keywords: logistics services, military transport, commercial transport, education
1. Introduction
Today's modern armed forces increasingly rely on a broad range of outsourcing options to drive
efficiencies and greater military core processes. Those areas such as logistics support, transportation,
and security could be accomplished through military or commercial subjects. The Armed Forces of the
Czech Republic (ACR) ongoing research into the characteristics of high-performance supply chain
management continues to identify outsourcing as a critical capability of the top performers across
defined services. Achieving advantage through outsourcing is not easy and has great influence on
legal framework, Czech Republic’s defence sector structure and competency.
The authors have accomplished research in Transport Intelligence (TI) and Military Supply Chain
Management (MSCM) that has simplified the world global transport and logistics services, and they
have confirmed that Transport and Logistics Service Providers need to implement cost saving
measures and make operational efficiencies in response to the economic climate [cf. STADTLER, H.
and KILGER, Ch. 2000]. The military logistics environment of transport and private companies provide
transport services are characterized by high competitiveness, innovative press, what could be
advantage for military end users in the deployment area.
Units of ACR participate in multinational military operations under the North Atlantic Treaty
Organization (NATO), the European Union (EU) and the Organization of the United Nation, as part of
the Czech Republic’s realization of its political – military ambition. From 2004 – 2008 197 supply
transports were realized. The total value of these operations was 47, 991, 644 Czech crowns (CZK)
[Tabloid Financial Transport Expenses in Years 2002–2006, 2007]. The already conducted research
during period 2004 – 2008 dealt with 197 accomplished supply transports.
2. Research approach
Development of outsourcing initiatives in the supply during foreign operation in the area of
deployment is based on strategic and operational targets of military department. In strategic level the
objective is to prepare political solutions and framework for consider new and innovation trends or
usage of materials, technologies or services streams within cooperation with commercial
organizations. Operational level solves partial innovations of process and management of them.
The overall approach concept of the thematic section Support of effective sources allocation of the
institutional research project of Faculty of Economics and Management (FEM) University of Defence
is to empower decision making process for save expenditures and to achieve high capabilities of end
users in the units of ACR in the deployment areas and innovation of sector of services in new
conditions of European integrated market of research project of Faculty of Business and Economics
(FBE) Mendel university.
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Nataša Pomazalová et al.
The research question – How to innovate core military processes and outsourcing of transport
services and related knowledge in the environment of foreign operations? – was approached from
both theoretical and empirical background. The objective of this paper is presented an approach to
usage commercial subjects as transport services to meet military requirements. Innovation aspects
and transmission of ideas from case studies in specific area of foreign mission is approached to the
knowledge of graduated students. Military transport operations were studied of the available
secondary data and interpreted. The educational study is conducted by means of a survey. The
empirical evidence has been collected from selected departments of the Ministry of Defence and from
research of Logistics Department of FEM and FBE.
3. Concept of the military mission supply transport
With regards to transport expenses, the ACR spent almost 47 991 644 CZK during the period 2004 –
2008 for periodic supplies to the Units located in the Kosovo area. Road transport is mostly used in
Europe due to extensive net work within the community. As a result it is easier for road transport
companies to transport goods and service at cheaper prices and comparative prices and are also able
to make deliveries to their final destination in time and in good quality. Rail transport forms a
significant volume of the total freight in the ACR. Due to the volume of goods normally carried by one
train make rail transport more cost efficient [Development Concept of the Transport Supply System in
the Armed Forces of the Czech Republic 2006].
The combination of road, rail and air mode of transportation is used between Distribution Centre
Pardubice (port of embarkation) and road, rail and air or sea port of debarkation. The following has to
be realized for onward movement to the final destination, see Figure 1. Modal selection is a critical
management issue, see Figure 2. It effects how fast, effectively and efficiently the product will flow
thought supply chain. Named modes provide basic services from initial point to delivery point but are
able to fulfill customer’s requirement in the different manners [COYLE 2009]. The nowadays concept
is based on an easily connecting of Distribution Centre as a central platform and port of debarkation.
The main issue of this central platform is costs saving related to the use of the central platform. The
Distribution Centre is the central supply point and is responsible for receiving, accounting and
distribution of supplies.
The transportation and delivery of materials is undertaken by civil operators – commercial

organizations with special license issued by the MoD to deliver such materials to their final
th
destination, (further only “contract carrier”) or 14 Logistics Support Brigade capacity.
Outsourcing and the trading electronic support system
In the framework of ACR, National Movement Coordination Center (NMCC) as a responsible body for
movement transport accomplishment, has to be used the trading electronic support system (SEPO)
based on public contract law. SEPO is a MoD electronic tool for acquisition of property, services and
buildings operations via public tender small extent in sense of public procurement law.
To be specific, public tender is dealing with acquisition of property and services with prices between 5
thousand CZK to 2 millions CZK and buildings operations tender the price is between 15 thousand
CZK to 6 millions CZK without value added tax. The advantages of the trading electronic support
system are characterized by:
Independent check – in to SEPO,
Provider solution about delivery commodities,
Automatically reports circulation about new public tender in selected commodities,
Unlimited access registered providers to all public tenders realized via SEPO,
Possibility of echo checking tender procedures.
Based on public competition of public procurement law official select the most effective transport
mode provided by commotional companies in the deployment area. The main problem of outsourcing
transport companies is based on current concept of organizational platform mainly focuses on the
selection and evaluation of suppliers in the specifics conditions in the deployment area and quality, or
limited character of transport services or free capacities necessary for rapid connection. As standard
of the transport services from the offer is the best combination of price, time and quality of services.
454
Reception, S tagin g & O nwa r d AP OE

M ov em ent ( RSO M) SP O E
P ro ce dures B ases on hom e

SEA terr itory (G reyl and)
A IR
A PO D
S P OD
M arshal li ng
A re a
S taging
Ar e a
Final d es ti nation
Figure 1: Performing of Reception, Staging, and Onward Movement (RSOM) - example

Criteria Road Rail Air
Accessibility 1 2 3
Transit time 3 3 1
Reliability 3 3 2
Security 3 3 4
Cost 2 2 4
Transport criteria comparison matrix: from 1 (the best), to 4 (the worst)

Figure 2: The performance rating of nodes
According to Figure 3 the Joint Operations Centre of the Ministry of Defence of the Czech Republic
(JOC), as a Force user (see Fig. 2), is a ministerial management authority for the deployment of
Czech military forces on foreign NATO, EU, UN and Organization for Security and Cooperation in
Europe (OSCE) missions and operations and their command, as well as for crisis management
operations involving the participation of the Armed Forces of the Czech Republic. The JOC is a
military executive body for managing the crisis management process. In accordance with
governmental decree No. 33/1999, the JOC supports activities of the Central Crisis Management Staff
of the Czech Republic. This Staff, as a non-permanent body, is formed of deputy ministers of the
1
Czech government and heads of major national institutions .
Figure 3: The structure of the Army of the Czech Republic
1
Ministry of Defence and Armed Forces of the Czech Republic. Http://www.army.cz/scripts/detail.php?id=7210 [online]. 2010.
Prague : 2010, 09.01. 2010. Ministry of Defence and Armed Forces of the Czech Republic. WWW:
<http://www.army.cz/scripts/detail.php?id=7210>.
455
Other participated structures in the framework of the ACR are the Join Forces and the Support
Service headquarters. The responsibility of the named organizational structures is described as:
The Joint Forces of the Czech Republic, as a Force provider, are designed to establish, train, and
rotate task forces/contingents that are designated to accomplish tactical or operational objectives,
both inside the Czech Republic and abroad, and to perform other tasks within the Czech Republic
as required by law 2 .
The Support Forces, as a support provider, are designed to ensure personnel, logistic and
medical support for combat forces together with other affiliated spheres of activities such as
regional military commands and military bands 3 .
The main body in the Support Forces structure responsible for accomplishing transport and
movement is NMCC. The NMCC tasks are defined as:
Supports contractual freight and passenger transport using all types of means of transport;
Negotiates transport of oversized and dangerous cargoes;
Makes contracts for an international transport of personnel, technique and ACR material using all
types of transportation with civilian freighters;
Arranges cooperation between freighters and military units during loading and off-loading;
Monitors and evaluates all ACR movements and transports;
Monitors and evaluates condition of roads and provides information about them;
Provides assistance during accidents and crisis situations 24 hours per day;
Ensures activities within the scope of NATO ADAMS;
Monitors cross country flights and landing of foreign armed forces on the CR territory.
Legend:
supply realization
required supply task
Figure 4: Framework of transportation activities – * Military resources
2
Prague : 2010, 09. l01. 2010. Ministry of Defence and Armed Forces of the Czech Republic. WWW:
3
Prague : 2010, 09. 01. 2010. Ministry of Defence and Armed Forces of the Czech Republic. WWW:
456
The Join Operation Centre (see Figure 4) is a managing body with competence to ensure the
realization of the supply requirements and NMCC is responsible body for planning, organization and
realization of the transport services.
4. The transportation during KFOR supply
As an example of routine and outsource transportation during KFOR supply is a case study. Since
2004 the mission located in Kosovo territory has been supplied via road and rail transport mode.
Regular rail transport is used mostly for food supply in two weeks period. The road transport is used
for other material types based on mission commander request. The ACR is using partly commercial
companies together with military capability. The main reason for military organizational structures is
usage to train solders in long distances of transport in the international environment. Following
numbers of transport has been realized from 2004 to 2009, see Figure 5.
Figure 5: The routine transport to KFOR in the period 2004 - 2008

Military transport accomplishment
During year 2008, 14th Logistics Support Brigade as a executive body of multinational logistics
support, realized 9 road transports in total amount 2 321 930 CZK.
The way of realization via 14th Logistics Support Brigade is based on T 815 Multilift with trailer PV
18LP. The named trailers are determined for containers and heavy vehicles transport. Based on
procedures every transport is accompanied by VW transporter vehicle due to possible transport
problems. The expenses are counted as external duty trip expenses and vehicle running expenses
are paid by sending units. [Technical order for Realization Supply Transport KFOR mission 2006]
Commercial transport realization
The food and material transport to Kosovo territory was realized via commercial companies based on
a basic contract between MoD and K+M, company via SEPO as a separate transaction. Based on
named basic contract, the company realized materiel transport in 6 transaction in an amount
1 521 165 CZK. The four realized transport used a shorter way through Serbia.
The food transportation was realized in 23 transaction and total amount was 2 695 180 CZK. The
responsible officials were realized via SEPO 5 transactions in order to transport military vehicles with
amount 2 226 750 CZK a personnel transport was realized in 8 transaction in total amount 413 105
CZK.
Contractual relations have been developed due to the concentration on military core capabilities on
outsourcing of transport from various companies. This case have been important for lessons learnt
and finding best practices in contractual relations to suppliers, third party logistic or providers of
services. As a result, the perspective has been extended to military supply chains that represent all
organizations involved in distributing a product from supply up to the end users.
457
5. The logistic support accomplishment and ACR transformation

In the ACR organizational structure are several levels of transport specialists during ACR
transformation Alliance requests started from logistic division to battalion levels. Transport specialists
are responsible for accomplished national and international movement and transport and usage of
Alliance IT transport system. This system consists on Allied Deployment and Movement System
(ADAMS), Effective Visibility Execution (EVE), Coalition Reception, Staging and Onward Movement
(CORSOM) and is main planning tool for transport and movement. With regards to age and ranks
structure the new graduates profile accentuate pretension to study module – economy of the military
transport, see Figure 6. The rank structure in the logistics branches in the framework of the ACR
depends on ACR transformation processes.
Non-
Senior Warrant commissioned
Officers Total
officers officers officers
(NCOs)
General logistics 10 70 486 95 661
Quartermaster logistics 3 20 80 255 358
Transportation logistics 15 29 69 26 139
Accommodation logistics 14 30 82 91 217

Total 42 149 717 467 1375
Figure 6: The rank structure in the logistics branches in the framework of the ACR
Due to relatively small number of the economy of the military transport students and their future
enlistment in the framework of the ACR, based on the ACR transformation processes, the authors
had only small number of graduates. Nevertheless due to future course of the transport specialists
and due to predicted change in personnel composition of transport specialists, the authors had
relevant and corresponding information in order to realized research. The research was realized by
comparison with evaluation during education and working outcomes after enlistment.
The research team used “The General Logistics Assessment Tests” (GLAT). The main aim of GLAT
usage was to obtain comprehensive survey about graduates’ knowledge. The testing of knowledge
was basic information for the Logistics department to adjust theoretical and practical parts of
educational content. The first Economy of the military transport module graduates in academic year
2007/2008.
Based on guided discussion with transport official in the framework of the ACR and The Support
Command Headquarters has been stated, the Economy of the military transport graduates reached
required knowledge in basic positions earlier about 6 months compare with logistics modules
graduates. The result of GLAT is presented in Figure 7. The military transport graduates knowledge
level was based on label evaluation 0 – 100. The label of a quality evaluation: 1 best – 5 worst. The
potential of the usage of lessons learnt for improving practical (professional) knowledge of students is
relevant to contractual relations and reinforce of core military capabilities on early evaluation of ideas.
6. Findings and conclusion
In this paper is presented an approach to usage commercial subjects as transport service providers to
meet military requirements in risk conditions of foreign operation. The need of transmission of ideas
from case studies in specific area of foreign mission and organise end user oriented solutions is
highlighted. The results showed not only strengths and weaknesses of knowledge based on case
study, but also points out knowledge gaps of final year students. The key sense of case study for
military usage is to reduction of expenditures and also processing of cooperation with the commercial
organizations based on public contracting in complex of transport services in the next time. The usage
of lessons learnt for innovation of knowledge of students for understanding the role of participation of
private firms for achieving goals of the mission is assumed on this base much more attractive for both
parties than it is nowadays. In addition the platform for efficiency increasing of planning and allocation
of resources is expected. Such interaction between local transport companies and units in the
deployment area in solution transportation needs would enable optimalization of transport process
and also saving of transaction costs. Next research will be aimed to opening the innovation
458
processes [PISANO and VERGANTI, 2008] and create models of these processes in the specific
environment of collaboration of military and commercial subjects.
Figure 7: The interrogatory results

The primary mission of ACR is to ensure military defence of the Czech territorial integrity and to
accomplish the international treaty obligations of the Czech Republic on joint defence through
peacekeeping operations in regions of instability or conflicts. The main tasks of ACR military
operations are targeted towards rescue and humanitarian missions.
Transport and movement in the framework of the world network become to be dynamic and
developing area with critical sense to supply chain. The transport and movement is not only one of the
most expensive logistics activities, but has also decision meaning to military end state achievement.
The task to deliver goods in time and quality to the final destination is crucial for military end-state
accomplishment and based on ACR experiences the outsourcing usage of transport is one of the
possible solutions for MoD. The authors predicted based on results, that outsourcing implementation
in the MoD in the area of transport and movement is going to be developed. The intermodal
transportation service is expected to use two or three mode of transportation in order to arrive at the
final destination.
Based on findings the educational process in the logistics and special in the transport areas has to be
developed due to Alliance IT transport system. According to findings in GLAT the future development
in study programme could be targets towards daily IT system using in order to increasing practical
knowledge via training. Following areas brought new experiences and helped to adjust study
program. New reaccreditation of study programme includes findings in these important areas:
The level of transport system knowledge.
The level of documentation and Standard operation procedures knowledge
The level of IT knowledge
The level of language skills knowledge.
The level of ability to accept new finding.
The practical experiences of materiel manipulation.
Based on interrogatory result the research team will deal with findings to improve practical knowledge
by close cooperation with NMCC in order to intensify graduates knowledge and practical experiences.
Acknowledgement
The paper has arisen within the thematic section Support of effective sources allocation
of the research project of Faculty of Economics and Management (FEM) of the University of Defence
(UoD) in Brno (Czech Republic).
459
The paper has arisen within the thematic section of the research project of Faculty of Business and
Economics (FBE) Mendel University in Brno (Czech Republic) MSM 6215648904 „Czech economy in
the process of integration and globalization and the development of agrarian sector and sector of
services in new conditions of European integrated market“.
Reference
Analysis Financial Expenses Supply Transport KFOR mission in year 2006. Reference number: 388-3/2007-
3818. Stará Boleslav: Logistics and Medical Support Directorate. 25th January 2007.
Coyle E, John J., et al. Supply Chain management A logistics perspective : Transportation - Managing the Flow
of the Supply Chain . In COYLE, John J., et al. Supply Chain management A logistics perspective :
Transportation - Managing the Flow of the Supply Chain . Penn State University : Cengage learning, Inc.,
2009. Accessed from WWW:
<http://books.google.cz/books?id=TbuZnzcXGysC&printsec=frontcover&dq=supply+chain+management+a
+logistics+perspective&source=bl&ots=HFZkCAqQba&sig=OuFelVVkdIJRdkiF14hX7y_A_8k&hl=cs&ei=VM
K8S_q4N5-
HOLTI4PYH&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAYQ6AEwAA#v=onepage&q&f=false>.
Development Concept of the Transport Supply System in the Armed Forces of the Czech Republic. Reference
number: 6008-36/2005/DP-3042. Prague: Support Policy Division Ministry of Defence, 2006. 9 s + 10/18
appendix.
Ministry of Defence and Armed Forces of the Czech Republic. Http://www.army.cz/scripts/detail.php?id=7210
[online]. 2010. Prague : 2010, 09.01. 2010. Ministry of Defence and Armed Forces of the Czech Republic.
WWW: <http://www.army.cz/scripts/detail.php?id=7210>.
[online]. 2010. Prague : 2010, 09. l01. 2010. Ministry of Defence and Armed Forces of the Czech Republic.
[online]. 2010. Prague : 2010, 09. 01. 2010. Ministry of Defence and Armed Forces of the Czech Republic.
Technical order for Realization Supply Transport KFOR mission. Reference number: 322-60-01/2006-3818. Stará
Boleslav: Logistics and Medical Support Directorate, Centre of military transport. 3rd October 2006.
Pisano G. P. and Verganti R., 2008. Which Kind of Collaboration Is Right for You? Harvard Business Review,
December, pp. 1-9
Stadtler, H. and Kilger, Ch. 2000. Supply Chain Management and Advanced Planning - Concepts, Models,
Software and Case Studies, Springer Verlag, Berlin, Heidelberg, New York.
Tabloid Financial Transport Expenses in Year 2002–2006. [Internal documentation]. Prague: Support Policy
Division Ministry of Defence, Military Transport Department. 2007.
460
Fostering Innovation in Brazil Through Private Equity and
Venture Capital Public Policies
Caio Ramalho
GVcepe – Private Equity and Venture Capital Research Center at FGV-EAESP,
São Paulo, Brazil
caio.ramalho@fgv.br
Abstract: It is well documented the positive impact of the Private Equity and Venture Capital (PE/VC) industry on
the creation and development of highly successful innovative companies in a few countries, mainly in the United
States. PE/VC firms provide not only capital to startups and small and medium enterprises (SMEs) that usually
have financing gap, especially in emerging markets, but also strategic resources that enable these enterprises to
commercialize innovation. As consequence, government incentive and nurture of local PE/VC industries would
be expected in emerging economies due to innovation’s importance to economic growth. This paper aims to
identify if the Brazilian government has supported local PE/VC industry throughout the years in order to foster
favorable conditions to creating and developing successful innovative businesses. It also analyzes Brazil’s main
public policies towards PE/VC and if they encompass all the three stages of its cycle – fundraising, investing and
exiting. I conducted an empirical research which collected primary data from a sample of 127 PE/VC firms (90%
of the population) operating in Brazil as of June, 2008. All firms answered a web-based questionnaire that
collected quantitative data regarding their investment vehicles, portfolio companies, investments and exits. I
compared the data obtained from the survey with the main local governmental PE/VC support programs. First, I
confirmed the hypothesis that the Brazilian government has been using the PE/VC industry as a public policy
towards entrepreneurship and innovation. Second, I identified that although PE/VC public policies in Brazil are
mostly concentrated in fundraising phase, they have been able to positively impact the whole cycle. Third, it
became clear that the Brazilian government became more concerned about Seed and Venture Capital (VC) Early
stages due to their importance to the entire PE/VC value chain. As consequence, I conclude that those public
policies have been very important to build a dynamic and strong local PE/VC industry, whose committed capital
grew 50% per year between 2005 and 2008 to achieve US$27 billion, which invested US$ 11 billion, which
employs 1,400 professionals (75% with post-graduate degrees) and maintains 482 portfolio companies, mostly
SMEs. In addition, PE/VC-backed companies represented one third of the Initial Public Offerings (IPOs) that
occurred in Brazil between 2004 and 2008 (approximately US$15 billion).
Keywords: innovation, private equity, venture capital, public policy, entrepreneurship
1. Introduction
Throughout the years, innovation has been a key factor in world’s economic growth due to the
increase in companies’ productivity (Schumpeter, 1934) and it has affected all the five forces that
govern competition in any industry (Porter, 1979). In the United States, startups and SMEs creation
has leveraged and empowered its economic development and competitiveness (Gompers 1994;
Porter 1990).
The ability to combine resources (human, technology, capital, information, natural, etc) to innovate is
a very important competence that is needed in order to gain competitive advantage. However,
regardless their importance to the economy, startups and SMEs usually don’t have access to proper
resources needed to commercialize innovation, especially during their initial stage of lifecycle
(Gompers, 1994; Pacheco and Spritzer, 2009). In emerging markets this framework is highlighted,
and according to Andreassi and Siqueira (2006) lack of financing is one of startups’ main mortality
reasons in Brazil compared to developed countries. The ability to combine resources (financial,
human, technology, information, natural, etc) to innovate is critical to blossom, develop competitive
advantage, grow fast and survive.
PE/VC presents a very interesting alternative to address this issue, especially to companies without
historical financial statements (i.e. startups) or companies without tangibles assets that could be used
as bank loans’ guarantees (Sahlman, 1990). Not to mention that PE/VC firms provide not only capital
but also assist the entrepreneurs on the decision making process in order to build successful
businesses (Gorman and Sahlman, 1989). According to IHS Global Insight (2009), PE/VC-backed
companies generated around US$3 trillion in revenue (21% of the GDP) and employed over 12 million
people in the United States in 2008. EVCA (2002) shows the PE/VC positive economic impact of
PE/VC on companies’ creation and growth.
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Caio Ramalho
The business environment for PE/VC in Brazil has evolved in a consistent fashion over the last few
years. According to EIU/LAVCA (2008) that qualifies the PE/VC environment in the region by
identifying the positive and negative aspects for generating business within the industry in each
country, Brazil jumped from 59 to 75 points in the ranking out of a possible 100 in only three years
(2005 to 2008). The development and consolidation of the PE/VC environment in Brazil over the
period in question is also pointed out by EMPEA/Coller Capital (2009) that rank the country as the
second most attractive emerging market for PE/VC investment over the next years.
The main challenge of any company is to achieve and sustain competitive advantage by developing
dynamic capabilities that will modify or leverage its core competences based on the right resources.
The ability to combine these appropriate resources (human, technology, capital, information, natural,
etc) is a very important competence to innovate and to gain competitive advantage. (Porter 1979;
Barney 1986; Prahalad and Hamel 1989; Hamel and Prahalad 1993; Teece and Pisano 1994;
Mahoney 1995; Teece et al 1997; Bartlett and Ghoshal 2002).
Christensen and Overdorf (2000) identify three factors that affect companies’ innovation: resources,
processes and values. Hardagon and Sutton (2000) state that innovative companies hire people with
complementary skills and backgrounds, and that innovation is easily fostered if the right incentives
and rewards are given to people. Through PE/VC it is possible to boost companies’ growth compared
to their peers (Hellman and Puri 2000; Engel 2002) which allow them to become more profitable
(Sahlman 1990) throughout innovations.
According to Gompers (1994), Gompers and Lerner (2002) and Metrick (2007), PE/VC provides
capital to finance innovation, especially high-risk but potentially high-reward projects. In fact, it has
supported the creation and development of many of highly successful new revolutionary enterprises in
the Human History, like Google, Microsoft, Netscape, Apple, eBay, Amazon, Sun Microsystems,
Genentech, Yahoo, Intel, amongst others (Bygrave and Timmons, 1992; Gompers and Lerner,
2001b). Notwithstanding it is mainly associated with high-risk, potentially high-reward, leading edge
technological projects, PE/VC industry has also backed a large number of innovative ‘traditional’
service companies, such as Staples, Starbucks, FedEx, Home Depot and TCBY - The Country's Best
Yogurt (Gompers, 1994; Gompers and Lerner, 2001b; Gompers and Lerner, 2002; Metrick, 2007).
Further relating to the subject, PE/VC investments benefit startups and SMEs that normally have
difficult to access ordinary financing, especially in emerging markets, due to their lack of tangible
assets to use as collateral, heavy reliance on research & development (R&D) and human resources,
operating losses for many years, and lower survivorship rates compared to more mature companies
(Premus 1985; Gompers, 1994; Gompers and Lerner 2001a; Gompers and Lerner 2001b; Hall 2002;
Smith and Smith 2002; Leeds 2003). Different from bank loans and short term debts, PE/VC will share
upside and downside risks with the entrepreneur by taking an equity stake in the company and
becoming a partner committed to its strong and sustainable growth (Engel, 2002; Gompers, 1994).
Notwithstanding the importance of the money provided by PE/VC firms the invested companies also
benefit from a whole package of strategic non-financial resources that helps build successful
enterprises and foster the blossom and development of highly innovative startups and SMEs:
monitoring and performance tools, management professionalization, compensation arrangements,
board of directors, budget structure, well established and high level networking, mentoring and advice
to entrepreneurs, etc (Gorman and Sahlman 1989; Dotzler 2001; Gompers and Lerner, 2001b;
Gompers and Lerner 2002; Keuschnigg, 2009). According to Bloom, Sadun and Van Reenen (2009),
on average PE/VC-backed enterprises are better managed than non-PE/VC backed ones.
Sorensen (2007) suggests that PE/VC invests primarily in entrepreneurial innovative companies and it
also has substantial impact on development of new technologies and Premus (1985) demonstrates
that PE/VC and technological innovation growths are correlated. Kortum and Lerner (2001) show that
PE/VC-backed companies are involved in important innovations based on patent amount in the U.S.,
while Bowonder and Mani (2002) show the impact of PE/VC on financing innovation in India, and
Tykova (2000) demonstrates a positive relation between patents creation and PE/VC investments in
Germany.
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According to Keuschnigg (2009) policy makers have been fostering favorable conditions through
PE/VC to creating businesses. Gompers (1994) remembers the importance of the changes in the
1979 Employee Retirement Income Security Act (ERISA) and the consequent increase of pension
funds’ commitments to PE/VC in the U.S. Hirukawa and Ueda (2008) highlight the Yozma program in
Israel and the Small Business Investment Company (SBIC) in the U.S., while Lerner (2002) agrees
that government is highly interested on fostering innovation and support the PE/VC activity is a
natural way to accomplish that goal.
Gompers (1994) concludes that promoting an efficient PE/VC industry should be the goal of any
administration, although Brander, Du and Hellmann (2010) provide evidence that an extensive
government support (or even a null support) doesn’t maximize value creation and innovation benefits,
and that moderate public activity in PE/VC has the strongest performance.
3. Methodology
I conducted an empirical research which collected primary data from a sample of 127 PE/VC firms
(90% of the population) operating in Brazil as of June, 2008, independently of whether they have a
local presence (office) and/or an investment vehicle already formed and operating. In other words, all
PE/VC firms already defined and structured as such, even if they are still in the process of fundraising,
were included in the PE/VC industry population. In addition, those PE/VC organizations that informed
that are no longer operating in the industry, those that are still not actively looking for business in
Brazil and/or that don’t consider themselves managers of PE/VC investment vehicles were not
considered in the population.
With these conditions and exclusions, each one of the 127 PE/VC firms filled out a web-based
questionnaire which consisted of several questions related to five topics: a) General registration data
for the PE/VC organizations (ex. name, profile, category, origin); b) Investment vehicles (ex. name,
legal structure, creation date, investor profiles, sector focus, stage focus, investments size); c)
Portfolio companies; d) Investments and exits; and e) Fundraising prospects. All PE/VC firms
answered a questionnaire that supplied quantitative data regarding investment vehicles, portfolio
companies, investments and exits.
The information and statistics about PE/VC-related governmental programs were requested directly
from the government agencies by e-mail and obtained from several public sources. IPOs information
was collected from BM&F Bovespa stock exchange using the Economatica software, in addition to
from the Brazilian Security Exchange Commission (CVM) database. CVM’s database was also used
to double-check and validate some information provided by the PE/VC firms.
Supported on the extensive literature I assumed that PE/VC fosters innovation and highly impact
entrepreneurship. As consequence, I considered whether public policies are effectively used to foster
PE/VC in Brazil they have positive externalities on innovation in the country. As such, the work
consists in an exploratory analysis of the Brazilian PE/VC public policies based on all the information
gathered regarding the local PE/VC environment. Then I cross-checked and compared the compiled
data obtained from the survey with the main local government PE/VC support programs based on the
three stages of the PE/VC cycle – fundraising; investing; and exiting – described by Gompers and
Lerner (2002).
4. Main findings
The main objective is to identify whether the Brazilian government has been supporting local PE/VC
industry as a public policy towards innovation.
4.1 Fundraising
Over the last few years, driven by global liquidity and the strong growth of domestic economic
indicators, the Brazilian PE/VC industry has gone through a very significant evolution. The growth of
total committed capital has been impressive averaging 53.4% per year since 2004 to reach US$26.65
billion (1.7% of GDP) by June 2008.
Approximately US$9 billion was brought in by 52 of the 67 PE/VC firms that began operating from
2005 on and US$12 billion by 26 of the 60 PE/VC firms that began operating in Brazil between 1981
and 2004. As of June 2008, 15 PE/VC firms were still in the process of raising its first time fund.
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30.00
26.65
25.00
23.09
21.00
20.00 19.36
15.91
15.00 14.02
13.30
10.00
8.13
5.96
4.95 5.02 4.70 4.79
5.00 3.71
-
1999 2000 2001 2002 2003 2004 * 2005 ** 2006 ** Mar, Jun, Sep, Dec, Mar, Jun,
2007 2007 2007 2007 2008 2008
* Reviews the previews number for the Brazilian PE/VC market.
** Considers the PE/VC firms that have left the market.

Figure 1: Evolution of committed capital allocated in Brazil (US$ billion)
4.1.1 The Brazilian Government as General Partner (GP)

Notwithstanding the impressive increase of the Brazilian PE/VC industry, public sector’s role
structured as a PE/VC firm is not quantitative significant as the industry is characterized by
independent general partners. The Brazilian Development Bank (BNDES) and the Brazilian Federal
Loan and Saving Bank (CEF) are the only two state-owned PE/VC firm with a combined committed
capital of US$0.5 billion (2% of the total).
Figure 2: Committed capital by PE/VC firms category

BNDES was created in 1952 and its investments in PE/VC are reminiscent of the 1980s when direct
investments were prevalent, being one of the first Brazilian PE/VC firms. In the 1990s, BNDES took
the first step toward outsourcing its PE/VC portfolios but it has never abandoned its role as PE/VC
firm through direct investments.
CEF’s role as GP is more recent than BNDES’. It started in 2008 as a public policy to invest in
infrastructure using sources from the Unemployment Guarantee Fund (FGTS). Like BNDES, CEF not
only is allowed to make direct investments as a typical PE/VC firm, but also can work as a limited
partner and commit capital to third parties PE/VC firms.
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4.1.2 Government as Limited Partners (LPs)

Brazilian public sector’s participation as investor has been very important for the promotion and
development of the Brazilian PE/VC industry. Since the 90’s BNDES has invested in 33 investment
vehicles (7 already fully divested) from 23 PE/VC firms, totaling US$ 2.5 billion in capital
commitments. Recently, BNDES launched a program to support seed capital called CRIATEC and
chose a PE/VC firm to manage it. The CRIATED fund amounts US$ 60 million of which 80% from
BNDES and 20% from Northeast Bank of Brazil (BNB), another state-owned institution, to invest in
over 50 startups and small enterprises in the next 4-5 years.
The perception that innovative startups and SMEs couldn’t find adequate mechanisms to finance their
growth in the traditional credit system led the Brazilian Innovation Agency (FINEP), in partnership with
the Inter-American Development Bank (IDB), created the INOVAR program in 2000 and INOVAR
SEMENTE (to focus on seed capital) program in 2006. These two programs not only include FINEP
and IDB but also another 13 investors, mostly local pension funds. From 2001 to June 2008, FINEP
committed more than US$130 million in 16 investment vehicles, of which 13 under INOVAR and 3
under INOVAR SEMENTE, from 10 PE/VC firms. FINEP commits up to 20% of the total resources
approved for an investment vehicle under INOVAR program and 40% under INOVAR SEMENTE
program.
The Brazilian Micro and Small Business Support Service (SEBRAE) is another government agency
that invests in PE/VC. SEBRAE was created in 1972 to foster entrepreneurship and promote the
development of SMEs in Brazil. It has also supported the INOVAR program since the beginning and
from 1999 to 2004 it committed capital to 8 PE/VC investment vehicles.
On total the Brazilian government has invested in more than 40 investment vehicles from 28 local
PE/VC firms. It corresponds to 20% of total investment vehicles and PE/VC firms in the Brazilian
market as of June 2008.
In addition to government agencies and state-owned banks capital commitments to PE/VC, the public
policy is also present on pension funds’ PE/VC investments. The largest Brazilian pension funds are
those from state-owned companies and as consequence they suffer political influence and key-
managers appointments directly by the government or indirectly throughout their sponsor state-owned
companies.
Table 1: Brazilian pension funds total assets ranking
US$
Pension Fund Name % Sponsor Company Type
Billion
PREVI 82.3 30% Banco do Brasil State-Owned
PETROS 24.8 9% Petrobras State-Owned
FUNCEF 20.1 7% CEF State-Owned
Fundação CESP 9.4 3% CESP State-Owned
VALIA 6,3 2% Vale do Rio Doce Private (*)
ITAUBANCO 5.8 2% Itaú Bank Private
SISTEL 5.7 2% Several telecom companies (former Telebrás) Private (*)
CENTRUS 5.5 2% The Brazilian Central Bank State-Owned
BANESPREV 5.4 2% Banespa Private (*)
FORLUZ 4.3 2% CEMIG State-Owned
REAL GRANDEZA 3.7 1% FURNAS State-Owned
FAPES 3.2 1% BNDES State-Owned
Fundação COPEL 2.8 1% COPEL State-Owned
Cx. Emp. Usiminas 2.5 1% USIMINAS Private (*)
POSTALIS 2.5 1% The Brazilian Post and Telegraph Corporation State-Owned
Another 354 Pension
87.5 32% - -
Funds
TOTAL 271.7 100% - -
* Privatized companies
Source: ABRAPP (2008) / Author’s analysis
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Capital commitments in PE/VC by pension funds amount USD 7.2 billion in Brazil (27% of total). I
estimate that 20 to 30 pension funds have capital commitments in PE/VC that total US$ 6.4 billion, the
equivalent of 3.0% of total pension fund’s assets and 0.4% of the GDP.
* Includes individuals and other types of investors not listed under the other options.
Figure 3: Breakdown of committed capital by investor type
4.1.3 Regulation
The CVM rule number 209 which created Fundos Mútuos de Investimentos em Empresas
Emergentes (FMIEEs) in 1994 and CVM rule 391 which created Fundos de Investimentos em
Participações (FIPs) in 2003 were conceived to deal with the absence of the concept of limited
partnership in the Brazilian legislation.
Likewise ERISA in the U.S, the CVM rule 391 clarified and regulated the Brazilian pension funds
PE/VC investments. Due to this regulation, the relative participation of pension funds in new funds
reached 50%, close to the level of 58% reached during the privatization era.
70%
60%
50%
40%
30%
20%
10%
0%
95
95
96
97
98
99
00
01
02
03
04
05
06
07
8
'0
19
19
19
19
19
19
20
20
20
20
20
20
20
20
1H
e
or
ef
B
OBS: Sample size of 112 vehicles with committed capital of USD18.1 billion.
Figure 4: Pension funds stake in committed capital per investment vehicle vintage
The investment vehicles created under the CVM regulation went from 23% in 2004 to 39% of capital
commitments by June 30, 2008 and represented 40% of all PE/VC investment vehicles. This legal
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Caio Ramalho
structure currently predominates in the industry, which shows the success of the institutional model
created by the CVM in 2003 (CVM 391 – FIPs).
PE/VC Organization
Partners
4%
Others*
24%
Private Companies Pension Funds

6% 49%
Banks
11%
Government
6%
Figure 5: Breakdown of committed capital by investor type
4.2 Investing
The great diversity of economic sectors constitutes an important aspect of the business model of the
PE/VC industry. The 481 portfolio companies cover 26 industries and more than 40 sub-industries.
Table 2: Portfolio companies (June 2008)
BNDES as Sponsored by Sponsored by Total Industry
Industries PE/VC firm BNDES (1) FINEP (1) (2) Portfolio
Units % Units % Units % Units %
IT 13 33% 21 33% 13 42% 109 23%
Industrial Goods 9 23% 6 9% 5 16% 61 13%
Real Estate - - 1 2% - - 60 12%
Communication - - 2 3% 1 3% 32 7%
Energy - - 10 16% - - 29 6%
Agribusiness 1 3% 4 6% 1 3% 21 4%
Financial Services - - - - - - 20 4%
Biotech 6 15% 4 6% 4 13% 20 4%
Retail - - 1 2% - - 19 4%
Food and Beverage 5 13% 1 2% - - 17 4%
Medicine 2 5% 3 5% 3 10% 15 3%
Telecom 4 10% 2 3% 3 10% 13 3%
Transportation - - 5 8% - - 13 3%
Logistics - - 1 2% - - 12 2%
Education - - - - - - 9 2%
Others - - 3 5% 1 3% 31 6%
TOTAL 40 100% 64 100% 31 100% 481 100%
(1) Includes 12 companies (5 IT, 3 Industrial Goods) invested by 6 vehicles co-invested with FINEP.
(2) INOVAR and INOVAR SEMENTE programs.
BNDES and FINEP together account, directly and indirectly, for 26% of total industry’s portfolio
companies. It is very impressive, especially considering that in Brazil the LPs have active influence in
the investment committees. In addition, BNDES and FINEP have a stronger presence in highly
innovative (IT, Biotech, Medicine) and strategic/infrastructure (Food, Energy, Telecom,
Transportation) industries than the rest of the Brazilian PE/VC sector.
A total of 51% of the industry’s portfolio companies are more mature companies, 43% are Private
Equity – Expansion and 8% are Private – Later Stage, but there also is a considerable volume of
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Caio Ramalho
business in Venture Capital (34%) with the greatest emphasis on the Early Stage (17%). This denotes
an important concentration on the intermediate stage of entrepreneurial development.
Venture Capital
Startup
Public Traded
12%
15%
Venture Capital
Seed
5%
Private Equity
Later Stage
8%
Venture Capital
Early Stage
17%
Private Equity
Expansion
43%
OBS: Considers the sample of 462 companies that reported their current stage of development (out of
a total of 481 companies).
Figure 6: Portfolio company stages (as of June 30, 2008)
There is a considerable volume of business in Venture Capital (34%) with the greatest emphasis on
the Early Stage (17%), in addition to 43% of Private Equity Expansion, mostly medium size
companies. This denotes an important concentration on the initial and intermediate stages of
entrepreneurial development guaranteeing the consolidation of the links that permit sustained industry
growth over the long term.
4.2.1 Generating deal flow

As a further support to the development of the PE/VC industry, FINEP organized several Forums
under the INOVAR and INOVAR SEMENTE programs, with the objective of building the innovative
entrepreneurial spirit of startups and SMEs, preparing them for receiving PE/VC investment.
Since their creation, the FINEP Forums have supported a total of 243 innovative highly
entrepreneurial companies: 162 in Venture Forum (focused on SMEs), 21 in the IPO Forum (aimed at
innovative companies with the potential to be listed on the stock market), and 60 in the Seed Forum
(focused on startups and seed capital). It is clear that FINEP’s efforts with INOVAR and INOVAR
SEMENTE together with the FINEP Forums have helped develop an entrepreneurial culture in the
Brazilian PE/VC industry over the past few years and nurture a deal flow to the PE/VC industry.
4.3 Exiting
There were 111 exits (total and partial) totaling US$2 billion over the period from 2005 and June
2008, of which 31% from venture capital and 50% from private equity stages.Trade sales represented
around 1/3 of the total number of exits in the industry over this period, while sales in the stock market
represented 50% of the total quantity (whether they were through IPOs and divestitures due to them
or sales of PIPEs.
IPOs are considered exits’ pot of gold for PE/VC investments worldwide; however it didn’t constitute a
viable alternative in Brazil during the 1980s and 1990s because of the volatile macroeconomic
environment and high interest rates that prevailed in the country during this period. This is why few
companies looked to the stock market for long term financing in Brazil, and consequently, the IPO
market passed through a ‘nuclear winter” period.
Nevertheless, with the improvement in the macroeconomic scenario and the increase in global
liquidity, along with the reduction of interest rates, the stock market stood out again as an alternative
long term investment. In fact, in the beginning of 2004 the Brazilian stock market took on a new
momentum with the wave of IPOs set off by the exits from PE/VC organizations. From 2004 to June
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2008, 110 IPOs were taken to market raising US$ 53.3 billion, of which 39 companies had received
PE/VC investments prior to their public offering.
Trade Sale
22%
Write-off / Write-
down IPOs and Secondary
5% Public Sales*
54%
Buyback
19%
* Includes IPOs and secondary sales between funds.

OBS: Considers total and partial exits.
Figure 7: Number of exits by type (January 2005 to June 2008)
50 47
45
40
35
30
25
20 17
14
15 12
10
5 5
4
5 2
3
1
0
2004 2005 2006 2007 1H'08
PE/VC-Backed IPOs Non PE/VC-Backed IPOs
Source: Bovespa / Author’s analysis

Figure 8: Number of IPOs
The total amount of money raised by companies that received PE/VC investments reached US$ 16.4
billion from primary and secondary offerings, equivalent to 31% of the total volume of IPOs made
during this period. Between May 2004 and June 2008, companies that received PE/VC investments
had an average return of 17.3% as opposed to 1.5% for the companies that did not receive PE/VC
investments, with 67% of the returns being positive for those that had received PE/VC investments
and 40% being positive for those that had not.
5. Conclusions
The PE/VC industry has been responsible for the creation and development of extremely successful
technological businesses like Google, Microsoft, Netscape, eBay, Amazon, Yahoo, Intel and
Genetech worldwide. Not to mention that it has also supported non-tech, but also highly innovative,
‘traditional’ companies such as Staples, Starbucks, FedEx and HomeDepot. PE/VC provides not only
capital to the enterprises but also strategic resources that allow the invested companies to
differentiate and pursue a competitive advantage against its peers showing an impressive level of not
only technological but also process, management and product innovations.
Due to its entrepreneurial vocation, several governments worldwide have elected the PE/VC as a key
public policy toward innovation and entrepreneurship. Many have failed, but some succeeded as
noted by Lerner (2009). Using public policies to foster PE/VC can be a disastrous waste of time and
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money, not to mention the real possibility to ruin any potential entrepreneurial and innovative
initiatives. In emerging markets, this dilemma becomes even more dramatic since PE/VC can offer the
only sustainable alternative to the financing gap faced by startups and SMEs. This is also the
challenge for Brazil.
I confirmed the hypothesis that the Brazilian government has been using the PE/VC industry as a
public policy towards innovation and high impact entrepreneurship. It is an established and partially
coordinated national effort that accelerated in the 2000’s leveraged by the economic stabilization and
growth of Brazil. Two governmental institutions (BNDES and FINEP) are the main promoters of this
policy with important implications to the whole PE/VC value chain.
I identified that the Brazilian PE/VC public policies are mostly concentrated in fundraising phase;
however it has an enormous impact over the investing and exiting phases. Through BNDES, FINEP
and SEBRAE, the Brazilian government has supported an impressive percentage of PE/VC firms, all
local players. In addition, the government is also present in PE/VC through the state-owned pension
funds that become one of industry’s leading investors. Notwithstanding its role as LP and GP, the
government also impacted the fundraising phase as it regulates the local PE/VC industry through
CVM. All the local investment vehicles under CVM rule 209 or 391 must be registered at CVM
likewise a stock market investment fund. Nevertheless, it became clear that the Brazilian government
through BNDES and FINEP became more supportive to seed capital fundraising due to its importance
to the whole PE/VC value chain. The next natural move should be a new CVM rule to specifically
benefit the seed capital.
The investing phase is highly influenced by the fundraising public policies. BNDES and FINEP
together account for a significant portion of the PE/VC industry portfolio. It is even more significant
since the LPs have board seats on the investment committee in Brazil. Another interesting finding is
that BNDES and FINEP portfolios have a stronger participation in highly innovative and
strategic/infrastructure industries compared to the rest of the Brazilian PE/VC sector.
It is notorious the remarkable positive effect of the Brazilian public policies toward PE/VC since some
PE/VC-backed innovative enterprises have arise in the country in the past few years like Submarino,
DHC Outsourcing, Akwan, Allelyx, Buscapé, Lupatech, Bematech, Mandic BBS, GOL and DASA, just
to mention a few, and were successfully sold by PE/VC firms. As consequence, from 2004 and June
of 2008 around one third of IPOs in Brazil were PE/VC-backed companies (US$ 16.4 billion) which
presents evidence that public policy oriented to the PE/VC cycle first stage has also produced a
positive effect on the last (exiting) phase.
Notwithstanding the positive impact of the PE/VC public policies presented until now in Brazil, it is
very important that the government considers the present framework as a temporary solution to an
emerging PE/VC industry. The goal of the Brazilian PE/VC government should be strengthen the
private institutions through the whole cycle in order to achieve the economic equilibrium and assure
the long term sustainability of the local PE/VC market.
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Innovation Diffusion and non-Equity Networks: The Impact
of Biased Perception
Marco Remondino, Marco Pironti and Roberto Schiesari
University of Turin, Torino, Italy
remond@di.unito.it
pironti@di.unito.it
schiesari@econ.unito.it
Abstract: Non-equity organizations, e.g.: consortiums in various juridical forms, are one of the most widely
spread ways for setting up formalized collaborations among enterprises that aim to share resources and results,
with the goal of reaching economies of scale - both financial and related to knowledge. A simulation model is
described and implemented, based on computational agents, with the purpose of representing non-equity
collaboration dynamics among small and medium enterprises (SMEs). We show that innovation diffusion, under
optimal conditions, leads to clusters creation and link strengthening, starting from non-equity networks. After
showing this, the concept of biased perception is introduced. We show that proper perception of the benefits
granted by the adoption of an innovation is a crucial element in order to understand its circulation potential and its
growth rate.
Keywords: negative conjuncture, collaboration, delayed perception, enterprise strategic management
1. Crisis and collaboration

External shocks, negative conjuncture, periods of crisis are known to often constitute turning points
for enterprises. On the one hand, managers urge to revise their business model, in order to adapt it to
the changes of the external environment and of the competitive scenario. On the other hand,
exogenous shocks usually affect collaboration with other players on the market. Such strategies as
outsourcing, consortia, joint-ventures, during a crisis, can be used to face the lower financial
resources available for the enterprises. Though, if the shock is subtle, sometimes enterprises don’t
promptly react, due to distorted or delayed human perception. In this paper we show, by means of a
computational model, that even a small percentage of slow-reacting (or biased) enterprises can
determine a sub-optimal aggregate behavior when facing a negative exogenous conjuncture. During
the periods of crisis, be it both sector-based or systemic, especially if extended over time, enterprises
tend to modify their approach to collaborative forms, even if not in univocal ways. The crisis makes it
evident for the enterprises the urge to revise their business model in order to adapt it to the changes
of the external environment and of the competitive scenario. The negative conjuncture, in fact, doesn’t
involve, in the majority of cases, just a reduction of demand or of the availability of the factors of
production (among which the financial capital becomes a very relevant resource), but also a
modification – sometimes a deep one – of the variables influencing competitiveness and profitability of
the enterprise. Business management has to face the changes induced by the new scenario, by
acting in an effective and well-timed way, both on strategy and on business processes. One of the
main factors influencing strategic change [22] is indeed the lack of results induced by the crisis.
Business processes are reengineered, in order to regain efficiency and effectiveness, both to reduce
costs and to get financial resources back and to increase the differentiation of products and services
and adapt them to the renewed needs of current and potential customers.
The impact on processes may happen by accelerating actions of progressive but continuous
improvement, also by using some benchmarking techniques and increasing the outsourcing. If deeper
modifications are needed, the management decides for a complete reengineering, in order to reach a
significant improvement in the results of the enterprise [10]. The crisis, be it real or perceived as such,
has an important role as an agent of change, even if it's the only motivation for starting a
reengineering process [5]. According to [9] the drive is to be found in "crisis that will not go away";
crisis thus often weights upon collaborative processes among the enterprises, undermining the
certainties that usually are created during expansion periods and can push enterprises to be
excessively self-referring. The need of reducing costs, in particular the fixed ones, in order to face the
reduction of business volumes, is often an important stimulus to look for - or to accelerate -
collaborative forms for sharing resources and material and immaterial investments (both vertical - with
suppliers - and horizontal - through consortia and bilateral deals).
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Marco Remondino et al.
Strategic outsourcing, consortia for cost and investment sharing, joint-ventures, are all techniques and
forms that, during a crisis, can be used in a pervasive way to face also the lower financial resources
available for the enterprises that, having to change for not succumbing, reduce the diffidence that
during a positive period would increase their resilience and rigidity towards collaborative forms.
An example can be from the automotive sector, where the sharing of flatcars, gears, engines usually
gets more evident during the period of crisis, in order to share investments, thus reducing the
individual breakeven point.
In order to find new market openings and to motivate buying processes, innovation gets more and
more crucial, and enterprises that sometimes try to enlarge their offering have to balance the need to
invest in R&D with the few available financial resources. Collaborative forms can be an important
answer also through forms of knowledge-sharing.
These conditions take firms to face an important strategic dilemma. On one hand, exploiting existing
competencies may provide short-term success, although competence exploration can become a
hindrance to the firm’s long term viability by stifling the exploration of new competencies and the
development new resources [7]. On the other hand, deploying resource combinations as a form of
external exploration search inherently mitigates the risk of failure by making the new combination
perform in ways that firms in the mainstream market already value, while deploying resource
combination as a form of internal exploration may dramatically enlarge the set of all possible
deployments that are within someone’s ability and means to execute, increase the number of
productive possibilities, and enable new market application to emerge [5]. The growth and
development of a firm depend, therefore, on its ability to develop new capabilities and resources and
introduce them in the market [3]. The crisis would seem to be an incentive to forms of collaboration,
more or less structured, among enterprises. Notwithstanding, during periods of crisis, many forms of
collaboration loose intensity and effectiveness.
In particular those collaborative relations based on activity featuring a higher degree of risk - e.g.
those requiring higher investments or with a longer period of return on investment - are the most
affected ones. Many enterprises, when facing the need of gaining their profitability and financial
resources back in the short term - also due to problems linked with financial constraints - significantly
reduce their investments towards activities, often carried on in a collaborative form with other
enterprises or research facilities, for which they don't perceive a return on investment, or they
consider it as a risky or a too long a term one. Focus on short term effect versus long term strategic
vision impact on managerial perceptions in collaboration structuring, changing the bias of alliance
structure based on their perceptions of relational risk and performance risk. In other cases, during a
period of crisis, the conflicts among partners can be enhanced, due to the subdivision of the
contributions or of the results provided by the collaboration. This approach could, in the medium term,
be dangerous and penalize future competitiveness, since the excess of risk aversion or a strategic
approach which is too oriented to the short term (the so called short-termism) limits the capacity of
building and support any distinctive competitive advantage. During the periods of crisis in particular,
the possibility is built for an enterprise to take opportunities that will have great value during the next
positive cycle; this is done also by strengthening collaborative links, allowing to increase its
knowledge capital, that's a fundamental driver for competition.
The financial system, by using proper politics and tools, can play an effective and important role to
avoid that any difficulty could induce enterprises - in particular the most fragile ones - to scatter what
they realized. Another element that could influence in a negative way the propensity to collaborate is
the increased competition, typical of the periods of negative circumstances, during which the
enterprises tend to widen their competitive space, thus increasing the probability of conflicts.
Researchers have posited a variety of behaviors that will occur within organizations faced with crisis.
The threat-rigidity effect hypothesizes that in response to crisis, communication complexity is reduced,
power and influence become centralized, and concern for efficiency increases, leading to
conservation of resources and greater behavioral rigidity in organizations. [19] has also posited that
“centralization is a likely outcome of organizational threats and crises, which provides a rationale for
legitimately reasserting claims to centralized control”. Individuals may also underestimate the extent to
which their own behavior contributes negatively to an organizational crisis, thus reducing their
flexibility of response [14]. The rapid pace of technological development and increased globalization
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of the marketplace are creating a new competitive environment in which competing only with one's
own resources has come to mean abandoning opportunities and resources available from others. As
a result, the formation of strategic alliances, defined as voluntary inter-firm co-operative
arrangements, has become a noteworthy trend in recent years. In search of the so-called
“collaborative advantage,” many firms are finding their performance and survival increasingly
dependent on their collective activities with other firms. In this context, the role played by managerial
perceptions in alliance structuring is crucial. A fair number of scholars have studied strategic decision-
making in alliances, typically aiming at understanding the perceptions and decision contexts that form
the basis of the partners' decisions. The essence of this approach lies in the prominent role assigned
to decision-makers in the alliance-making process. Alliance decision-makers are no longer assumed
as completely rational — rather, they are believed to have limitations in reasoning capacity. Our
contribution focus on the decision-makers' perceptions regarding alliances. Ring and Van de Ven
suggest that a perception of high-risk/high-trust prompts companies to prefer relational contracts —
that is, strategic alliances. Anderson et al. propose that firms' perceptions of interdependencies
greatly affect their need for co-operation. Also, Cullen et al. found that perceptions of satisfactory joint
venture performance enhanced the partners' commitment to the alliance. Managerial perceptions are
considered a key ingredient in strategic decision-making. Decision-makers have been found to react
to a situation based on their perceptions of a change of the environment, as a pre or post crisis
period. Compared to the traditional industrial organization economics approach to strategy formulation
— which relies exclusively on the objective environment — the managerial perceptions view helps
capture the essence of the decision process. Although a relatively low correlation between the
“objective” and the “perceived” environment has been reported, theorists tend to agree that it is the
“perceived” environment that is most relevant to the process of making strategic decisions. However,
few studies have paid sufficient attention to the connection between the objective environment and
managerial perceptions. In the model we built, we follow the systemic approach [1, 12].
2. Organizational culture
Generally, collaboration among competing firms may occur in many ways. Some examples are joint
use of complex technological or marketing processes, bundling products or setting standards.
Collaboration typically requires sharing information and know how, as well as resources.
In the literature collaboration problems are usually studied with the help of methods from
microeconomics and game theory. It turns out that the most important factors affecting the usefulness
of collaboration are the following ones:
Market structure. If perfect competition prevails collaboration is of limited use. No single firm or
proper subsets of firms may influence market prices and/or quantities. In a monopolistic
environment there obviously is no room for collaboration. Consequently, the interesting market
structure is an oligopoly. Depending on the kind of products offered and the way an equilibrium is
obtained, price or quantity setting oligopolies may be distinguished.
Product relationship. Products offered may be substitutes or complements. In general, we would
expect that products of competing firms are substitutes. Product differentiation, however, allows to
vary the degree of possible substitution.
Distribution of knowledge and ability. The distribution of knowledge and ability is closely related to
the possibility of generating sustaining competitive advantages [4]. If a firm has specific
knowledge or specific abilities that competitors do not have it may use these skills to outperform
competing firms.
Kind and degree of uncertainty faced by competing firms. Basically we may distinguish
uncertainty with respect to common or private variables. As an example consider demand
parameters. They are called common or public variables since they directly affect profits but are
not firm specific. On the other hand variable costs are an example of private variables [11]. They
are firm specific. Of course, knowledge of rival’s variable costs may affect a firms own decisions
since it may predict rival’s behavior more precisely.
Risk preferences of competing firms. It is assumed that decision makers are risk averse. Hence
they will not maximize expected profits as if they were risk neutral but expected utility of profits.
The results obtained depend on the assumptions made about the factors identified above. They
partially differ or even contradict each other. The analysis presented in this paper is carried on with
the help of a microeconomic model based on game theory. The basic assumption is that collaboration
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occurs through knowledge and information sharing, common information collection and/or
interpretation. In order to share information, knowledge and know-how, collaborative technology is
usually applied.
Joint application development and joint use of resulting information systems, as well as inter-
organizational information systems in general are typically covered by such an analysis. Joint
application development bundles development capabilities in an effort to reduce development costs.
Typically specific know how and information is shared between the cooperating development
partners. Hence, in case of competing developers, it is necessary to compare the benefits associated
with reduced costs to possible disadvantages faced by disclosing information and know how. In this
paper we will assume that information is shared via temporary joint. Note, that in our context
collaboration may be characterized as being pre-competitive. It should not be mixed up with collusion
which may be legally restricted or even forbidden. A formal model will be developed in the sequel.
Techniques from game theory allow to solve the corresponding optimization problems. The model will
be analyzed in a simple setting in order to be able to derive closed-form solutions which may be
handled more conveniently. Hence, it seems natural to assume that a rational company maximizes its
expected profits. The compensation of such managers is very often tied to profits. This fact, as well as
possible opportunistic behavior and asymmetric information, suggest that managers behave more or
less risk averse [15]. Consequently, expected utility of profits is maximized instead of expected profits.
3. Learning from experience
Learning from reinforcements has received substantial attention as a mechanism for robots and other
computer systems to learn tasks without external supervision.
The agent typically receives a positive payoff from the environment after it achieves a particular goal,
or, even simpler, when a performed action gives good results. In the same way, it receives a negative
(or null) payoff when the action (or set of actions) performed brings to a failure. By performing many
actions overtime (trial and error technique), the agents can compute the expected values (EV) for
each action. According to [22] this paradigm turns values into behavioral patterns; in fact, each time
an action will need to be performed, its EV, will be considered and compared with the EVs of other
possible actions, thus determining the agent’s behavior, which is not wired into the agent itself, but
self adapting to the system in which it operates. Most RL algorithms are about coordination in multi
agents systems, defined as the ability of two or more agents to jointly reach a consensus over which
actions to perform in an environment. In these cases, an algorithm derived from the classic Q-
Learning technique [23] can be used. The EV for an action – EV(a) – is simply updated every time the
action is performed, according to the following, reported by Kapetanakis and Kundenko:
(1)
Where 0<λ<1 is the learning rate and p is the payoff received every time that action a is performed.
This is particularly suitable for simulating multi stage games [8], in which agents must coordinate to
get the highest possible aggregate payoff. For example, given a scenario with two agents (A and B),
each of them endowed with two possible actions a1,a2 and b1,b2 respectively, the agents will get a
payoff, based on a payoff matrix, according to the combination of performed actions. For instance, if
a1 and b1 are performed at the same time, both agents will get a positive payoff, while for all the
other combinations they will receive a negative reward. Modifications of the (1) have been introduced
to make the converging process faster and more efficient under these conditions.
ABS applied to social system is not necessarily about coordination among agents and convergence to
the optimal behavior, especially when focusing on the aggregate level; it’s often more important to
have a realistic behavior for the agents, in the sense that it should replicate, as much as possible, that
of real individuals. The aforementioned RL algorithm analytically evaluates the best action based on
historical data, i.e.: the EV of the action itself, over time. This makes the agent perfectly rational, since
it will evaluate, every time he has to perform it, the best possible action found till then. If this is very
useful for computational problems where convergence to an optimal behavior is important, it’s not
realistic when applied to a simulation of a social system. In this kind of systems, learning should keep
into account the human factor, in the shape of perception biases, preferences, prejudice, external
influences and so on. When a human (or an organization driven by humans) faces an alternative, the
past results, though important for evaluation, are just one of the many components behind the action
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selection process. As an example we could think of the innovation adoption process; while a
technological innovation could provide money savings and improved life style, it often spreads much
slower than it should. This is due mainly to the resistance to innovation, typical of many human
beings. If the humans worked in the same way as expressed with equation (1), then an innovation
bringing even the smallest saving should be adopted immediately. Another effective example is to be
found in social systems; when deciding which action to perform, humans are usually biased by the
opinion of their neighbors (e.g.: friends, colleagues, ad so on). This means that their individual
experience is important, but not the only driver behind the action to perform, while other variables are
considered and should be introduced in the evaluation process, when dealing with a simulation of a
social system, in order to improve the realism of the model and to focus on aggregate results.
Traditional learning models can't represent individualities in a social system, or else they represented
all of them in the same way – i.e.: as focused and rational agents; since they ignore many other
aspects of behavior that influence how humans make decisions in real life, these models do not
accurately represent real users in social contexts.
3.1 Ego biased learning

While discussing the cognitive link among preferences and choices is definitely beyond the purpose of
this work, it’s important to notice that it’s commonly accepted that the mentioned aspects are strictly
linked among them. The link is actually bi-directional (Chen, 2008), meaning that human preferences
influence choices, but in turn the performed actions (consequent to choices) can change original
preferences. As stated in Sharot et al. (2009): “…past preferences and present choices determine
attitudes of preferring things and making decisions in the future about such pleasurable things as
cars, expensive gifts, and vacation spots”. Even if preferences can be modified according to the
outcome of past actions (and this is well represented by the RL algorithms described before), humans
can keep an emotional part driving them to prefer a certain action over another one, even when the
latter has proven better than the former. Some of these can be simply wired into the DNA, or could
have formed in many years and thus being hardly modifiable. A bias is defined as “a particular
tendency or inclination, esp. one that prevents unprejudiced consideration of a question; prejudice”
(www.dictionary.com).
That’s the point behind learning: human aren’t machines, able to analytically evaluate all the aspects
of a problem and, above all, the payoff deriving from an action is filtered by their own perception bias.
There’s more than just a self-updating function for evaluating actions and in the following a formal
reinforcement learning method is presented which keeps into consideration a possible bias towards a
particular action, which, to some extents, make it preferable to another one that has analytically
proven better through the trial and error period. Ego Biased Learning allows to keep this personal
factor into consideration, when applying a RL paradigm to agents.
4. Empirical results
Some experiments were performed in order to test EBL concepts. The agents involved in the
simulation can perform two possible actions, and . The agents in the simulation randomly meet
at each turn (one to one) and perform an action according to their EV. A payoff matrix is used. Where
is the payoff originated when both agents perform (both of enterprises don’t want establish a
collaboration), is the payoff given to the agents when one of them performs and the other one
performs and so on (only one of them want to establish a collaboration). Usually and are
set at the same value, for coherency. If corss-strategies are the same and based on collaboration,
pay off is maximum. For each time-step in the simulation, the number of agents performing
and are sampled and represented on a graph. The first baseline experiment reproduces the
classical RL equation (1), i.e.: with both and equal to 0. 100 agents are used, with a learning
rate ( ) set to 0.2. The payoff matrix used for the experiment is in Table 1 Action is clearly
favored by the matrix, and coordination, in the form of performing the same action, is rewarded, while
miscoordination punished.
Table 1: Payoff matrix from experiment 1
1 -1
-1 2
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In the first experiment, 50 agents start performing action and 50 agents start performing action
. The results are depicted in figure 1; convergence is subtle and stable.
In the second experiment, a small bias towards action is introduced for fifty agents ( = 0.1),
while the payoff matrix remains the same as in previous experiment.
Agents do not have a bias, but all start playing action ; this will be different in the following
experiments, where unbiased agents will start performing a random action. The results are quite
interesting, and depicted in figure 2. In this example it has been chosen to have all the rational agents
(the straight line) starting from the favored action ( ) so to show that, even so, it is enough to have
one half of the agents acting not completely rationally to make the system go towards the sub-optimal
action ( ).
Figure 1: Baseline experiment

In fact, even if action is clearly favored by the payoff matrix, after taking an initial lead in agents’
preferences, all the population moves towards action . This is due to the resilience of biased
agents in changing their mind; doing this way, the other 50 non-biased agents find more and more
partners performing action , and thus, if they perform they get a negative payoff. In this way, in
order to gain something, since they are not biased, they are forced to move towards the sub-optimal
action , preferred by the biased agents. In order to give a social explanation of this, we can think to
the fact that often the wiser persons adapt themselves to the more obstinate ones, when they
necessarily have to deal with them, even if the outcome is not the optimal one, just not to lose more.
This is evident when the wiser persons are the minority, or in an equal number.
.
Figure 2: Introducing 50% biased agents
At this point we wonder how many “rotten apples” (i.e.: biased agents) are needed to ruin the entire
barrel (i.e.: turn away all the agents from the optimal convergence), given the same payoff matrix.
477
With a series of ceteris paribus experiments, we found the critical division to be 20/80; the results are
shown in figure 3. The unbiased agents now start by performing a random action, in order to probe for
the best move, and then adapt themselves on the basis of their perceptions. On the other hand, the
biased agents start by performing action .
Figure 3: 20% biased agents

In this way the agents performing , both biased and un-biased ones, when they meet an agent
performing get a negative bias. Even if the optimal combination would be , once again the
equilibrium is found on the suboptimal joint action, which is . Till now the advantage of
performing join action over was evident (payoff 2 vs 1) but not huge; in the next
experiment, a new payoff matrix is used, in the joint action is rewarded 3, instead of 2. The
purpose is investigating how much the previous threshold would increase under these hypotheses.
The empirical finding is 25/75, and the convergence is again extremely fast, and much similar to the
previous experiment. Even a bigger advantage for the optimal action is soon nullified by the presence
of just 25% biased agents, when penalty for miscoordination exists. This explains why sometimes
suboptimal actions (or non-best products) become the most spread and common. In the real world,
marketing could be able to bias a part of the population, and a good distribution or other politics for
the suboptimal product/service could act as a penalty for unbiased players when interacting with
biased ones. The following experiment investigates the case with no penalty for miscoordination. To
explore the differences with experiment 1, twenty biased agents were employed, out of 100. The
results are less extreme: a part of the agents succeed in performing the optimal action; though, many
unbiased agents are dragged along by the biased ones, to the suboptimal action. Numerically
speaking, about 50% of unbiased agents become supporter of the suboptimal action, even if the
biased agents are a small part of the population (20%). This shows that penalty for miscoordination is
important, but not crucial, for averting the majority of the population from the best possible choice.
5. Conclusion
In this work, we highlight the crucial role played by managerial perceptions in collaboration structuring.
Specifically, we proposed a model that aims to explain the choice of alliance structure based on their
perceptions of relational risk and performance risk, and the overall objective is to minimize the total
risk. The literature on the strategic alliance structuring process does not provide an adequate view of
the role of decision-makers in that process, especially about how alliance partners form their structural
preferences. Given the critical role of structure in alliance management, the decision-making process
regarding the choice of an appropriate alliance structure deserves particular research attention. We
propose a model of strategic alliance structuring that has managerial risk perception as its core.
While individual preferences are very important as a bias factor for learning and action selection,
when dealing with social systems, in which many entities operate at the same time and are usually
connected over a network, other factors should be kept into consideration, when dealing with learning.
In particular, in response to crisis, communication complexity is reduced, power and influence become
centralized, and concern for efficiency increases, leading to conservation of resources and greater
behavioral rigidity in organizations. Ego biased learning is formally presented as a way to analytically
model these situations and create computational models to evaluate the influence of a distorted
perception due to Environmental crisis. The basic case, in which only two categories of agents are
478
involved, and only two actions are possible (collaboration or not) is analyzed in the work. That’s to
show the basic equations and explore the results, when varying the parameters. Some simulations
are run, and the results are studied, showing how, even a small part of the population, with a
negligible bias towards a particular action, can affect the convergence of the whole population. This
shows how personal biases are important in social systems, where agents must coordinate or
interact. If we look at things from a managerial/sociologic point of view, we have the following
explanation. The experiments show that few players potentially adverse to exchange information in a
system, are enough for all the players to stop exchanging. This happens because the higher risk
aversion of these operators brings all the others to the idea that carrying on collaborative strategies is
a potential dispersion of resources. In fact, whenever a collaborative player crosses a non-
collaborative one, they both evaluate the possible business, but after that the non-collaborative player
denies it. From this, the penalty for miscoordination. A collaborative rational agent, after meeting
some non-collaborative ones, changes her mind as well, since each time she loses some resources.
Then, she becomes non-collaborative as well, unless she finds many collaborative players in a row. In
other terms, to avoid a refusal after trying to collaborate, which is something that waste time and
resources, also potentially collaborative agents will start to immediately refuse the possibility of a
cooperation. By doing this, they won't gain as much as they would through collaboration, but they
won't also risk to lose resources. The whole system thus settles on the sub-optimal equilibrium, in
which no player collaborates.
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Eco Innovation Practice and Romanian SMEs
Valentina-Ofelia Robescu
Doctoral School of University Valahia of Targoviste, Romania
robescuo@yahoo.com
Abstract: According to European Commission figures, more than 99% of all European businesses are SMEs.
They provide two out of three of all private-sector jobs and contribute to more than half of the total value-added
created by businesses in the EU. Moreover, SMEs are the true backbone of the European economy, being
primarily responsible for wealth and economic growth, in addition to their key role in innovation and R&D. All
these enterprising companies are trying to find their niche in the economy and respond to needs in society. But,
while they are creative and dynamic, their size is such that their market influence is very small. The creativity and
dynamism of SMEs means they have a crucial role to play in this area - both as eco-innovators and as recipients
of green technologies. Eco-innovation is key to supporting our society over the next 50 years and to minimize the
gap between environmental pressures and a standard of living with which we will feel comfortable in our society.
Technology will have to bridge that gap and the development of that technology involves eco-innovation in
products, processes and – increasingly – services, much provided by SMEs. This paper is an examination of the
role of SMEs as agents for eco-innovation and market transformation in Romania. We tried to show the
importance of policy and the role of eco-innovation in these times of crises.
Keywords: eco-innovation, Romania, small and medium sized enterprises, economic crisis
1. Introduction
Innovation is “the implementation of a new or significantly improved product (good or service), or
process, a new marketing method, or a new organisational method in business practices, workplace
organisation or external relations" (OECD 2005). Such a definition is neutral in the sense that it does
not determine the content or the direction of change (Rennings 2000).
The term environmental innovation, or shortly ‘eco-innovation’, relates to innovations aiming at a

decreased negative influence of innovations on the natural environment. There is no generally
accepted definition of eco-innovation. Various definitions have been proposed in the literature for
example Rennings 2000, ZEW 2001, CML et al. 2008, Andersen 2008, UNU-MERIT et al. 2008.
In a recent study (OECD 2008a), when asked about whether they saw any difference between
innovation in general and environmental innovation, many companies interviewed considered there
were none. Most companies considered that all their innovations consider environmental
considerations, even when environmental improvements are not the main objective of their research
and innovation efforts. Indeed, many environmental innovations combine an environmental benefit
with a benefit for the firm or user (OECD 2008a). In this context, the motivation to eco-innovate is to
benefit from the return on investment in the innovative technology, which reduces material inputs in
the production process (e.g. primary resources, energy).
2. Metodology
The research in this paper is based on the consultation of relevant literature and journal articles
containing studies on innovation and eco-innovation processes, research and technological
development especially for the theoretical part. Studies on the development of economic theories of
economic growth are considered and a large number of studies on the concept of national eco-
innovation system, eco-innovation models (linear, systemic) and eco-innovation policy perspectives.
The empirical research is based on diverse sources of information. Thus beside relevant literature and
journal articles, there is the need to contain, analyze and compare data from European and national
surveys, reports and statistics and also information provided by national policy programs and
strategies. Moreover, in order to complete the information from the official sources and to gain a
greater insight into the characteristics of the Romanian SMEs and the influence of it on eco-innovation
system, secondary sources of information are used such as interviews and electronic correspondence
with experts and professionals, data collected from specialized electronic forum of discussions and
participation at national and international conferences organized on relevant topics for this paper.
Data collection for this research was conducted via three mediums: interviews, observations and
documentation analysis. In order to establish how SMEs may influence the eco/innovation and market
transformation in Romania.
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Different types and levels of eco-innovation Innovation plays a key role in moving manufacturing
industries towards sustainable production, and the evolution of sustainable manufacturing initiatives
has been facilitated by eco-innovation. As those initiatives advance, the process of their
implementation becomes increasingly complex and industries need to adopt an approach that can
integrate the various elements of eco-innovation to leverage the maximum environmental benefits.
2.1 Types of eco-innovation

The different types of eco-innovations can generally be grouped into three main categories;
Process;
Product;
System innovations.
Process Innovations: a process innovation is the implementation of a new or significantly improved
production or delivery method. Production-integrated environmental management (PIUS) captures
manifold approaches of process innovation. ‘Organizational’ innovation (which can also fall into the
category of process innovation) can describe the implementation of a new organizational method in
the firm’s business practices, workplace organization or external relations. Such innovation is closely
linked to learning and education (Bleischwitz 2003; Davenport, Bruce, 2002; Easterby-Smith, Araujo,
Burgoyne 1999; Lane, Bachmann 2002). An organization’s innovativeness and advanced learning
processes are widely based on identical elements. A final aspect of process innovation includes
‚marketing’ innovations (product design, packaging, product placement, promotion) such as eco-
labelling.
Product Innovations: product eco-innovations include any novel and significantly improved product or
service, produced in a way that means its overall impact on the environment is minimized. This,
however, usually implies risks for the company since customers need to be convinced to purchase the
new product. Adding services to selling a product also can be categorized here.
System innovations: this type of innovation does not only refer to technological systems, but also to
radical and disruptive technologies that alter the market conditions (such as hydrogen and fuel cells)
as well as all types of system changes such as industrial, societal or behavioural changes.
2.2 Levels of eco-innovation

The ECO-DRIVE study (CML et al. 2008) suggests that eco-innovation should be analysed on three
levels:
Micro (product or service, process, company);
Meso (sector, supply chain, region, product system/service system); and
Macro (economy-wide: nation, economic blocks, global).
It is argued that “in analysing eco-innovation it is essential to distinguish between the micro level
‘where the real things happen’, and the also very real meso and ultimately macro level, where
outcomes may be quite different from singled out micro developments, not only in terms of economic
growth and decoupling” (CML et al.2008). The study gives an example of adding 230 volt plugs in a
train, which from the micro level perspective is bad for environmental performance of the train
(increased energy use) and increases costs. However, it may make professional travellers change
from plane to train on short to medium distances (meso-level change). In such an approach, the
essence of eco-innovation is about the relative reconfiguration of product qualities in order to achieve
a higher-order change. The environmental benefit is due to a change of consumer behaviour rather
then due to the objective technological improvements of a product.
Equally, Schmidt-Bleek (2008) argues that the eco-innovations should be assessed taking into
account systemic consequences of their applications. He gives an example of introducing self-
cleaning surfaces (micro-level change), which can contribute to the elimination of cleaning needs thus
saving water, detergents and energy (meso- and systemic change). In this context, the major
efficiency gains (or innovation benefits) are realised during the product utilisation phase and not
during the micro-level production process. These two examples, although diverse, show that in the
case of micro-level innovative improvements can lead to a higher-level, positive or negative, change
481
in eco-efficiency. The analysis limited to a micro-level (or a product) does not allow understanding the
actual eco-innovative qualities of the changes. Therefore, a higher– or a systems- level of assessment
is needed to better understand the effects of eco-innovation (Horbach 2005, CML et al 2008, Schmidt-
Bleek 2008).
Eco-innovation means all forms of innovation reducing environmental impacts and / or optimizing the
use of resources throughout the lifecycle of related activities.
In the field of materials recycling:
Improved sorting processes for waste materials such as construction, industrial, household,
electrical and electronic waste;
Eco-friendly design and production of high quality consumer goods, innovative recycling
processes;
Business innovations that strengthen the competitiveness of the recycling industries.
In the building & construction sector:
Construction products and related processes that reduce consumption of resources, embodied
carbon and production of by-product wastes;
More environmentally friendly construction materials and innovative manufacturing processes.
In the food & drink sector:
Here it’s about the innovative products including packaging methods and material that reduce
environmental impact and maximise the use of raw materials in the food sector;
Cleaner and more efficient processing of food and drink products so as to reduce waste and
increase material recycling and recovery;
Improved efficiency water management processes that reduce the use of water across the food &
drink supply chain;
Innovative products, processes and services reducing environmental impacts of consumption
including packaging, distribution and purchasing decisions.
In the area of greening business & 'smart' purchasing:
Innovative products that will decrease environmental impacts and use less resources;
Services facilitating a better match between supply and demand of eco-innovative solutions and
helping eco-innovation into the market;
Substitution of materials with reduced environmental impacts and higher resource efficiency (e.g.
bio-based products), substitution of scarce materials and increased use of secondary raw
material; greening of production and clean production processes, including industrial symbiosis;
Gradual innovation by introducing re-manufacturing mechanisms and innovative repairing
services.
2.3 Innovation policy and eco-innovation

The underlying rationale of innovation policy is to improve the competitiveness of the economy and,
consequently, to contribute to higher economic growth and employment. Defined in this way
innovation policy does not give any specific preference to deploying measures, which aim at more
environmentally and socially sustainable development. Even if environmental concerns are identified
in policy papers or work programmes, in practice they do not override the underlying objective of the
policy that is economic growth.
Innovation policy supporting eco-innovation is de facto ‘third generation’ innovation policy. An intrinsic
element in formulating such a policy is not to focus only on the short-term needs of economic growth,
but also a long-term sustainable development. Hence, eco-innovation is working towards enhancing
competitiveness of enterprises, but in doing so, it seeks to avoid negative side effects for the natural
environment’ complying with the limits’ to resources, recognises that technology alone cannot be a
solution to the problem of sustainability and integrates the (often neglected) dimension of final
consumption.
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Innovation policy needs to focus on system innovations to help in ‘complying with the limits’ as it
involves both the environmental and social dimension. Such an approach integrates the notion of
limited resources and social sustainability, explicitly relating a set of social and environmental goals
and the norms of economic (market) activity.
From a innovation systems perspective, innovation policy may, however, choose to achieve its aim by
supporting a number of indirect beneficiaries, whether these be financial organisations (seed capital
funds, etc), innovation and business support services, cluster management partnerships, knowledge
transfer structures in universities, public research organisations, etc. The overall objective of the
innovation policy is to raise the competitiveness of the enterprises and thus to contribute to the
economic performance of the economy.
Figure 1: Positioning innovation policy

The natural policy ‘neighbours’ of innovation policy are typically science and technology policy and, on
the other side, industrial and entrepreneurship policies. To simplify whereas innovation policy is
mainly focusing on knowledge exploitation and diffusion, science and technology policy is occupied
with knowledge generation (see Figure 1) (Technopolis, 2008a).
3.1 SMEs, economic crisis and innovation in Romania

Economic crisis effects in Romania The growth strategy adopted in the country over the last
decade or so, based primarily on consumer spending, foreign direct investment (FDI) and capital
inflows, and not on an innovation-based approach, started to manifest its downside, leaving the
country highly exposed to the financial crisis. According to the European Commission's overview of
progress in the implementation of Lisbon Strategy reforms in Member States in 2008 (European
Commission, 2009), Romania's demand-driven boom has come at the expense of rising external
imbalances and an overheating economy, making the economy more vulnerable to the impact of the
international financial crisis.
Growing labor shortages, an expansionary fiscal policy with no credible and predictable medium-term
framework, non-restrictive fiscal and public wage policies hampering competitiveness, rapid increases
in household borrowing, as well as a sudden increase in inflation since August 2007 after a long
period of successful disinflation, all have affected the economy (European Commission, 2008).
Foreign capital inflows to the country declined considerably because of the global credit crunch and
many multinational banks introduced better credit standards for foreign companies active in Romania
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over local firms. Increasing bank interests have drastically reduced consumer spending and the
lending activity in foreign currency for many companies.
The economic crisis has had pervasive effects across all economic sectors, resulting in a slowing
down of the gross domestic product (GDP) and a growing unemployment rate, especially in private
firms in construction, road transport and chemical industries, extraction of crude oil and natural gas.
Large firms have been hit but, even more dramatically, so have small and medium-sized enterprises
(SMEs), which account for 98.6% in industry and constructions, and 99.9% in trade and other services
(National Institute of Statistics, 2007).
The number of SMEs bankruptcies doubled in the first half of 2009 compared to the same period of
2008, particularly in trade, construction and real estate, and similar effects have also been reported
for start-ups. The rising unemployment rate created labour market imbalances that are difficult to
correct in the short to medium-term due to labour shortages and large migratory outflows, skill
obsolescence, low adult participation in education and training, lack of basic skills amongst young
people, resulting primarily from weaknesses in the education system and inefficient active labour
market policies.
As a consequence of the economic crisis, gross expenditure on research and development (GERD)
was cut to only 0.18% of the GDP in January 2009 instead of the foreseen 0.89%. Following strong
protests from the scientific community, it was supplemented one month later with approximately EUR
148 million, reaching 0.27% of the GDP (approximately EUR 430 million, 1 EUR = 4.2 RON), but still
remained significantly lower than the 2008 GERD level. This severe cut in public research,
development and innovation (RDI) funding annihilates the encouraging signs of a slight recovery of
the Romanian RDI after a few years of improved funding, especially in regards to the attraction of
human resources for RDI and enhancing public-private partnerships, which are some of the key
weaknesses of the system.
According to the European Innovation Scoreboard (EIS) 2009, Romania's innovation performance is
well below the EU-27 average, ranking third to last among the EU-27 countries, with a value of the
Summary Innovation Index (SII) of 0.277. However, the SII growth rate of 6.9% relative to 2007 is one
of the highest of all countries, making Romania one of the growth leaders among the Catching-up
countries. Relative strengths, compared to the country's average performance, are in 'Innovators' and
'Economic effects' while relative weaknesses are in 'Finance and support' and 'Throughputs'. Over the
past five years, 'Finance and support' and 'Throughputs' have been the main drivers of the
improvement in innovation performance, in particular as a result from strong growth in Public research
and development (R&D) expenditures (18.0%), Private credit (17.4%), Broadband access by firms
(24.3%), Community trademarks (36.0%) and Community designs (44.3%). However, Venture capital
(3-year average) remains virtually inexistent and progressing at a low pace (3.5%). Performance in
Firm investments, Linkages & entrepreneurship and Innovators has increased very slowly too.
Economic crisis effects on the development and competitiveness of SMEs A survey conducted
in April 2009 by the National Council of SMEs in Romania in all the eight development regions of the
country (10) revealed that half of Romanian SMEs have been very 'catastrophically' or 'very highly'
affected by the economic crisis, while only 2% declared they had not been affected at all. The poor
involvement of the state in the management of the economic crisis and the ineffectiveness of the
government's anti-crisis measures was a major finding of the survey. Of the respondents, 80%
considered that the anti-crisis measures with a specific focus on SMEs were not satisfactory, 13%
found them satisfactory and only 1% found them good. Over half of the respondents didn't know how
to obtain state aid for SMEs, so it was not surprising that only 4% of the surveyed firms stated they
had benefited from state aid since the beginning of 2008, although 70% stated they needed state aid
to a large and a very large extent. The maximum level of state aid that can be granted to SMEs was
also an issue of discontent, as Romania had not increased the amount from EUR 200 000 to EUR
500 000 as had the rest of the EU.
Indeed, the situation of SMEs is dramatic: the number of SME bankruptcies doubled in the first half of
2009 compared to the same 2008period, with the most affected sectors being trade, construction and
real estate. Similar effects have also been reported for start-ups, who are most vulnerable due to their
relatively lower turnover and limited resources for surviving a downturn.
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The main causes for the decline include:

Reduced access to credit and cash flow problems (an estimated 30% decline in bank lending to
SMEs, which prevented their development and reduced their solvency);
Financial blockages created by unpaid debts of the state to the private sector and of private firms
facing financial deficits;
Declining exports, internal demand and investments, sudden rises in the price of raw materials,
energy and food, significant depreciation of the national currency and variations of the exchange
rate.
A 'psychological effect' has also been observed, inhibiting the investments planned or ongoing in
SMEs.
In addition, other causes of the Romanian SMEs' problems are the non-sustainability of the economy,
excessive social measures, the vulnerability of the Romanian Stock Exchange, the lack of protection
measures for domestic capital, and the lack of information among entrepreneurs.
Economic crisis effects on RDI (Research, Development and Innovation) The drastic cuts in
public funding of RDI have been reflected in the main financial instruments coordinated by the
National Authority for Scientific Research (NASR), such as the programmers of the 2007-13 National
RDI Plan. The consequences of these cuts are complex and annihilate the encouraging signs of a
slight recovery for Romanian RDI after a few years of improved funding, especially in regards to the
attraction of human resources for RDI and enhancing the public-private partnerships, which are some
of the key weaknesses of the system.
Challenge: Increase the innovative potential of enterprises, particularly SMEs.
This challenge is reflected by very low values of BERD (relatively stable level at 20% to 22% of the
EU-27 average over the last five years, 0% growth), Venture capital (3-year average) (ranging
between 0.9% and 7.4% of the EU-27 average over the last five years, 3.5% growth), SMEs
innovating in-house (2.6% growth), Innovative SMEs cooperating with others (0.6% growth), Firm
renewal (SMEs entries + exits) (-0.1% growth), Public-private co-publications (2-year average) (6.4%
growth), Product/process innovators (SMEs) (2.1% growth), Employment in medium-high/high-tech
manufacturing (1.6% growth), knowledge-intensive services exports (2.3% growth) and new-to-market
sales (-9.2% growth).
3.2 Overcoming barriers to SMEs in eco-innovation

In recent years, the share of SMEs in the total population of active firms has increased, as a
combined effect of restructuring processes in large companies and market opportunities arising from
the economic boom. Although the entrepreneurial spirit is relatively well developed in the country,
SMEs need more and better economic instruction and knowledge of market potential, especially in the
services area.
The innovative capacity, however, remains very low both in SMEs and in large firms. According to the
National Institute of Statistics (2009), the number of innovative enterprises in industry and services
has only slightly increased in recent years, from 17% in 2000-02 to 19.9% in 2002-04 (the latest
available years). In the 2002-04 period, the share of non-innovative enterprises decreased slightly,
from 83% in 2000-02 to 80.1% in 2002-04, but the values remain very high. Only 19.7% of the
innovative enterprises could be considered as successful innovators and only 13.3% were both
product and process innovators. SMEs accounted for the largest part of innovative companies
(86.02%).
Small and medium sized enterprises (SMEs) have a crucial place in eco-innovation, both as
innovators and as recipients of green technologies. Their creativity and dynamism can play a key role
in developing the environmental technologies and services necessary to bridge the gap between
economic development and environmental sustainability.
SME entrepreneurs face many barriers to achieving rapid commercial exploitation of their
environmental innovations. These include the high costs of research and development and the
difficulty of obtaining finance, particularly in view of the widely-held perception that eco-innovations
485
represent higher commercial risks compared with other innovations. Moreover, despite their creativity,
the size of SMEs means their market influence is limited and the capacity to develop new products
restricted.
A recent study of the National Institute of Statistics (2008) shows that both SMEs and large firms
share similar barriers to innovation, especially in terms of lack of external funding and qualified
personnel (see table 1).
Table 1: Barriers for eco-innovation in SMEs
Innovation barriers/Size class Innovation barriers for Innovation barriers
non-innovating firms for innovating firms
Small firms Market domination by Lack of own funding
established firms Lack of external funding
Lack of qualified funding High innovation costs
Lack of external funding Market domination
High innovation costs by established firms
Medium-sized and large firms Lack of external funding
Market domination by
established firms
Lack of qualified personnel
Source: National Institute of Statistics: 2008
The biggest challenges facing SMEs in eco-innovation relate to the time and cost needed for an
innovation to penetrate the market. The high cost of developing an eco-innovation without access to
finance can cause an SME to fall at the first hurdle. Finding such finance can often be difficult,
particularly when eco-innovations are viewed as ‘riskier’ then conventional investments. Such
perceptions are often influenced by the longer term investment returns associated with eco-
innovation.
According to the 2008 FUNDATEC study, there is also a lack of understanding of the technologies by
financial institutions. Technology developers need to communicate clearly to counter banks’ rigid risk
assessments. Europe also needs an integrated approach to mobilize funding instruments in favor of
eco-innovation. And financial innovation is necessary with customized instruments to finance low-
carbon and resource-efficient technology deployment.
Obtaining access to new markets is a real challenge for SMEs. There are a number of instruments
promoting such new markets – such as green public procurement. Public authorities and large
enterprises can influence environmental, sustainable and social performance and it is possible to
create markets through dynamic standard setting. Limited market coverage means also that SMEs
have to find new partnerships and new networks for identifying what society needs in products and
processes and for cross-border co-operation in bringing products to market.
While less controlled than large companies, SMEs are also becoming increasingly a focus of
environmental regulation. Even if the effects of individual companies are relatively low, the large
number of such firms can result in a high overall impact. A lack of documentation makes SME
targeted regulation particularly difficult. Two EU laws that do affect SMEs are REACH – covering
registration and use of chemicals – and eco-design rules for improving the environmental
performance of energy related products.
The EU has already taken action to help remove barriers facing eco-innovation SMEs. The
Competitiveness and Innovation framework Programme’s (CIP) Eco-Innovation initiative supports the
first application and market uptake of innovations developed by SMEs. The CIP Entrepreneurship and
Innovation Programme (EIP) seek to support all types of innovation and SMEs (figure 2).
Romania's innovation performance remains, however, very weak compared to other EU countries.
Romania is part of the ‘catching–up’ group of countries, displaying on the one hand a positive
economic trend based predominantly on low cost labour and low value-added exports, and on the
other, a low level of innovation infrastructure and mechanisms, which are still at an early development
stage and do not contribute significantly to economic growth.
486
Figure 2: EU programmes on eco-innovation

Most innovation indicators illustrate this ‘catching-up’ trend, except for ICT expenditure, tertiary
education, business R&D and EPO patents. Most notable are three indicators that are higher than
EU-25 average: non-technological change in SMEs, new-to-market products, and ICT expenditure.
The trends of main innovation indicators show high strengths for lifelong learning, public R&D
expenditure (mainly related to the government commitment to gradually increase the level of public
R&D funding to 1% of the GDP until 2007), EPO hi-tech patents and USPTO patents, and a moderate
strength for S&E graduates. High and very high weaknesses are recorded for EPO patents and
business R&D (related to the low innovative potential of Romanian firms, the strong tendency to
import foreign technology and equipment, a low demand for domestic R&D and a predominant
orientation towards trade and services)
The innovative profile of Romanian firms is still very low: over 80% of non-innovator firms, next to
approximately 10% of intermittent innovator firms and a small percentage of strategic innovator,
adopter and modifier firms. Innovative firms account for less than a fifth of the country’s total number
of active firms and workforce, and for about 42% of the total turnover of active firms. Innovative firms
are predominantly SMEs (83.4%) and operate mainly in industry (73%), while the rest are active in
services (trade, real estate, transport and communications).
This situation is to a large extent the result of a very low level of public funding of innovation, with only
10% of innovative firms receiving funding, and very low levels of innovation expenditures, which don't
exceed 3% of innovative firms’ turnover. Although significant progress has been made in order to
foster the weak innovation culture in the country, further measures are needed to increase application
of R&D results by business and to turn innovation into a driver of national competitiveness.
4. Conclusion
Performance of SMEs in Romania is affected mainly by structural difficulties such as lack of skills and
labor market rigidities, which affects matching of demand and supply of labor, market failures in
research, training and innovation, as well as a general lack of entrepreneurial spirit, which has been
described by the Austrian economist Schumpeter as “Unternehmergeist” (Schumpeter, J., 1942).
Entrepreneurs and their willingness to take risks are fundamental in determining economic cycles, as
they bring about innovation, create new companies and drive non-competitive ones aside in a process
of “creative destruction”. In the area of finance, there are certain segments of SME which face
financing gaps such as micro companies or sole proprietorships, companies which have to be
transferred or passed on from one generation to the next and start-ups without credit history.
However, SME entrepreneurs face many barriers to achieving rapid commercial exploitation of their
environmental innovations. These include the high costs of research and development and the
difficulty of obtaining finance, particularly in view of the widely-held perception that eco-innovations
487
represent higher commercial risks compared with other innovations. Moreover, despite their creativity,
the size of SMEs means their market influence is limited and the capacity to develop new products
restricted.
The biggest challenges facing SMEs in eco-innovation relate to the time and cost needed for an
innovation to penetrate the market. The high cost of developing an eco-innovation without access to
finance can cause an SME to fall at the first hurdle. Finding such finance can often be difficult,
particularly when eco-innovations are viewed as ‘riskier’ then conventional investments. Such
perceptions are often influenced by the longer term investment returns associated with eco-
innovation.
Environmental management tools and general organizational changes and improvements are relevant
triggers for eco-innovation; since they help to reduce, the information deficits to detect cost saving
potentials (specifically material and energy) that are also an important driving force of eco-innovation.
In this context, an environmentally oriented innovation policy has not only to regard traditional
instruments like the improvement of the technological capabilities of a firm but also the coordination
with soft environmental policy instruments like the introduction of environmental management.
References
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and Innovation, June 17-20, 2008.
Bleischwitz, R. (2003) Cognitive and Institutional Perspectives of Eco-Efficiency, in: Ecological Economics, 46:
453 – 467.
CML, PSI, CSM (2008) ECO-DRIVE: A framework for measuring eco-innovation: typology of indicators based on
causal chains, Final Report, FP6-2005-SSP-5-A
Davenport, E., Bruce, I.(2002) Innovation, Knowledge Management and the Use of Space: Questioning
Assumptions About Non-traditional Office Work, in: Journal of Information Science, Vol. 28, Nr. 3, S. 225–
230.
Easterby-Smith, M., Araujo, L., Burgoyne J. (Eds) (1999) Organizational Learning and the Learning Organization.
Developments in Theory and Practice, London; u.a.:Sage.
Fundetec (2008) Comparison and Assessment of Funding Schemes for the Development of New Activities and
Investments in Environmental Technologies. Fundetec Consortium.
Horbach, Jens (2005) Methodological aspects of an indicator system for sustainable innovation, in: Jens Horbach
(ed.) Indicator systems for sustainable innovation, Physica, Heidelberg 2005.
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Lane, C., Bachmann, R. (Ed) (2002): Trust within and between Organizations. Conceptual Issues and Empirical
Applications, Oxford: Oxford University Press.
OECD (2005a) Oslo Manual, 3rd edition, Paris.
OECD (2005b) Trade that benefits the Environment and Development: Opening markets of environmental goods
and services, OECD, Paris.
OECD (2005c) Governance of innovation systems, OECD, Paris 2005.
OECD (2008a) Environmental innovation and global markets, Working Party on Global and Structural Policies,
ENV/EPOC/GSP(2007)2/FINAL, Paris.
OECD (2008b) OECD Environmental Outlook to 2030, Paris.
Rennings, K. (2000) Redefining Innovation – Eco-Innovation Research and the Contribution from Ecological
Economics, Ecological Economics 32, 319 – 332.
Schmidt-Bleek F. (2008) Future beyond climatic change, A Position Paper, Factor 10 Institute.
Schumpeter, J. (1942). Capitalism, Socialism and democracy.
Technopolis (2008a) Sectoral Innovation Systems: the Policy Landscape in the EU25: Final Report.
UNU-MERIT, ZEW, RISO, ICL, LEIA (2008) MEI – Measuring Eco-Innovation, Draft Final Report (March 2008).
ZEW (coord) (2001) The Impact of Clean Production on Employment in Europe – An Analysis using Surveys and
Case Studies (IMPRESS), Draft Final Report of Contract No: SOE-1-CT-98-1106.
488
Business Transfer Decisions; What Matters? Evidence
From Scotland and Ireland
Geraldine Ryan and Bernadette Power
University College Cork, Ireland
g.ryan@ucc.ie
b.power@ucc.ie
Abstract: There comes a time when entrepreneurs of small firms choose, or are forced, to retire. This decision
gives rise to a business transfer decision, where the entrepreneur must decide whether to transfer the business
to a family member, sell the business, or shut down the business and dispose of its assets. While the choice of
succession mode is a key business decision, which impacts on the long run survival and profitability of the firm
and the region in which it is located, very little is known about what factors influence the entrepreneurs’ transfer
choice. In this paper, we explore how firm and regional specific characteristics impact on the entrepreneur’s
expectations for his/her business transfer decision. Using evidence collected on Scottish (N=63) and Irish
(N=211) entrepreneurs expected exit choices we find evidence that the age of the firm, the size of the firm, the
location of the firm and the motives of the entrepreneur play an important role in the transfer decision.
Keywords: entrepreneur, exit, succession, business transfer failure, small firms
1. Introduction
Small firms are quickly becoming the driving force of the modern economy (Audretsch and Thurik
2000). Similar to all European countries, most firms in Ireland and Scotland are small firms; 87.3% of
Irish firms and 97.8% of firms in Scotland employ less than 50 people. At the start of 2006, small firms
accounted 56% of employment and approximately 25% of the turnover in Ireland (CSO 2008), while
small and medium-sized enterprises together accounted for 61% of employment and 56% of turnover
in Scotland (ONS 2008). 1 Today, the owner-managers of many of these small firms have a similar
concern – they are getting older. The European Commission currently estimates that one third of
Europe’s entrepreneurs will withdraw from their businesses over the next ten years. It is estimated
that up to 690,000 enterprises, providing 2.8 million jobs, will have to be transferred to new owners
every year (European Commission 2006). 2 This is a particular concern for Scotland as 71% of
business owners are currently forty-five or older (ONS 2008). As the average-age of these
entrepreneurs continues to rise, many will choose to, or be required to retire. 3 In doing so they must
decide whether to transfer their business to a family member, sell their business (using either a trade-
sale or a management buyout), or shutdown their business and dispose of its assets. While this exit
choice is a key business decision, which impacts on the long run survival and profitability of the firm
and the region in which it is located, very little is known about what factors influence it. In an attempt
to fill this gap in the literature this paper examines some of the factors that may influence the
entrepreneurs’ decision.
Each failed business transfer results in job losses and a reduction in economic growth. For this
reason it is important that governments, academics and business consultants’ work together to put
supports in place to facilitate business transfer. Using a multinomial probit model and data collected
for Irish and Scottish long-lived small firms we examine how factors such as the age, size, profitability
and location of the firm impact on the entrepreneurs’ exit choice. In short, we find that business
owners who run older firms, less profitable firms, firms without family employees and firms located in
rural areas expect to shutdown their business and dispose of their assets on retirement. These factors
threaten to increase the number of failed business transfers particularly if the entrepreneur’s
expectations are accurate and if these condition their behaviour (see Bagozzi et al., 1989).
Briefly, our ideas are developed as follows: Section 2 locates our hypotheses in the extant literature.
Section 3 discusses the primary source data and key variables used to test our hypotheses. Section 4
outlines the multinomial probit model and reports our results. Finally, Section 5 presents some
conclusions.
1
This is similar across the EU-27 where SMEs represent 99.8 % of all enterprises in the non-financial business economy,
employing two thirds of the workforce (67.4 %) and generating 57.7 % of total value added (Eurostat 2006)
2
This includes 300,000 SMEs with employees and 310,000 one-man companies (European Commission 2003)
3
One-third of businesses are estimated to be vulnerable to age-related transfer failure in the United Kingdom (Martin et al.
2002), up to fifteen percent in Germany, one quarter in the Netherlands, and Austria (see evidence cited in Small Business
Service 2004).
489
2. Theoretical issues and hypothesis specification

Little is known about what determines the entrepreneur’s exit choice (e.g. trade-sale, family
succession, employee buyout, asset disposal). Previous research has primarily examined
intergenerational succession in family businesses (see Diwisch, Voithofer and Weiss 2009; Bjuggren
and Sund 2002; Dyck et al. 2002). However, while traditionally, small firms like those in our sample
would have passed to a family member, today we need to explore a wider set of exit strategies as the
proportion of firms being taken over by family members is decreasing (Small Business Service
2004). 4 This Section summarises what we know about the factors which influence the entrepreneurs
expected exit choice. These factors can be broken into two areas, firm-specific factors (i.e. age of the
firm, the quality of the firm, the existence of a succession plan, the entrepreneurs intentions for the
firm, the level of family involvement in the firm, the size of the firm) and regional-specific factors (i.e.,
entrepreneurial talent of the region in which the firm is located, location of the firm – i.e. urban/rural/in
a cluster).
With regards to the age of the firm we hypothesise that the older the business, the more likely the
entrepreneur expects a failed business transfer. We base this claim on the liability of old age
hypothesis (Caves 1998), which argues that the adaptability of older firms is limited. They cannot
anticipate or react adequately to changing economic circumstances and therefore they are more likely
to fail to transfer than younger firms.
We can measure the quality of the firm in two ways, first, we can look at the potential growth and
profitable opportunities of the firm and second, we can look at whether the firm was successfully
transferred in the past. In terms of measuring growth and profitability, buyers regularly use specific
criteria (e.g. revenue) to judge the quality of the business (see Cressy and Olofsson 1997). However,
due to information asymmetries between buyers and the small firm entrepreneurs the buyer is often
only willing to pay a low price. This can reduce the exit choices available to the entrepreneur as s/he
may receive a higher price from the disposal of the business. As this conditions the expectations of
the entrepreneur, it is likely that only entrepreneurs who believe they can signal the quality of their
business to an outsider would realistically expect to sell their business. If a firm was successfully
transferred in the past, particularly to a third party, then this is likely to condition the entrepreneur’s
expectations about the size of the expected market for the business and therefore the likely success
of a future business transfer (see Power and Ryan 2007).
With the aging of business owners come many inherent risks. These risks can be mitigated with
succession planning. Succession planning, unlike some other forms of business planning, requires a
formal and structured approach. There is some consensus that succession must be anticipated long
in advance, and managed as a planned process (Dyck et al. 2002; Sharma et al. 2001). Lansberg
(1988) identified the lack of succession planning as one of the most important reasons why first-
generation family firms do not survive their founders. Therefore, our third hypothesis examines
whether the existence of a succession plan impacts on an entrepreneurs exit choice. The existence of
a succession plan is likely to be associated with the entrepreneurs’ intentions for their
business.Bagozzi et al. (1989) argue that intentions are the best single predictor of planned
behaviour. We argue that the personal intentions and values of the entrepreneur can influence how
vigorously the entrepreneur grows his firm and hence can influence the exit choices considered by
him. Therefore we hypothesise that the personal intentions of the entrepreneur for his business at
start-up influence his expected likely exit choice.
Generally, it is argued that firms should stay in the family if this is the most profitable transition
alternative (see Bjuggren and Sund 2002). One reason for inter-generational succession is knowledge
idiosyncrasy (i.e. trade secrets transferred through family members). Founders generally prefer to
hand over their business to a family member rather than a professional manager (Kimberly and
Kellermans 2007). As a result, we hypothesise that family involvement in a firm reduces the likelihood
of business transfer failure. If there are no family members involved in the business then the
availability of suitable candidates within the firm conditions the entrepreneur’s expectations about his
choice of endgame (see Small Business Service 2004). For this reason we hypothesise that the
4
Studies of family business succession, in Germany, Austria and the Netherlands, have found that the proportion of businesses
passed on to the next generation is steadily falling, implying another source of growth in commercial market transfers (Small
Business Service 2004).
490
higher the number of employees in the firm the lower the likelihood of business transfer failure as the
greater the number of employees in firm, the larger the number of potential buyers for the firm.
If no family members work in the firm, and the firm has no suitable and willing employees then the
entrepreneur must look to the surrounding region. The level of entrepreneurial talent (Markley 2006)
in a region, measured by the number of businesses per resident, may condition the entrepreneurs’
expectations about the likelihood of this solution to his/her succession problem. Thus, we argue the
greater the entrepreneurial talent in a region the lower the probability of a business transfer failure.
Similarly the literature on localization economies suggests that the local or regional availability of a
skilled labour pool specific to the industry may benefit the business, as knowledge is embodied in
workers (Porter 1990). Consequently we hypothesise that the higher the related skilled labour share
in the region where the firm is located the less likely the entrepreneur expects a failed business
transfer. Finally, it is likely that many benefits accrue to a firm which is located in or near large urban
centres. These benefits might include the availability of a general labour supply, efficient transport and
communications infrastructure and a range of business services, and they may facilitate business
innovation (Gordan and McCann 2005). Our final hypothesis argues that the further the business is
located from a large urban centre the more likely family succession.
The discussion above indicates the complexity of the decisions facing the entrepreneur regarding his
retirement from the firm and following this, the continued operation of the firm. The probability of
business transfer failure is high, as family succession is no longer a foregone conclusion (European
Commission 2006). The difficulty in finding a buyer, who is willing to pay a fair price for the business,
raises the probability of business transfer failure.
3. Data
The data used to investigate influences on the entrepreneur’s expectations for its end-game strategy
was obtained from a mixture of primary and secondary data sources. Face-to-face interviews with 63
mature small firms in Scotland (conduced between October 2001 and February 2002) and telephone
interviews with 211 mature businesses in Ireland (conducted between October 2008 and January
2009) gathered data on factors influencing the entrepreneur’s expected end-game strategy. All firms
in the sample are at least 10 yrs old. The sample of firms interviewed provides a good representation
of the relevant populations of small firms in Scotland and Ireland. Almost all sectors and geographic
regions are represented.
Summary statistics and the definitions of each of the key variables used in formally investigating
influences on the entrepreneur’s expectations for his/her exit choice are displayed in Table 1. Of
those interviewed in Ireland, 47.6% expect to sell their business, 36.8% expect to pass their business
to a family member, while 15.6% expect to shutdown their business and dispose of its assets. The
corresponding figures for Scotland are 68.3% for business sale, 20.6% for family succession, 20.6%
for MBO and 11.1% for asset disposal.
The average age of the Irish firms in the sample is 44 years; median age 30 years (i.e. one
generation), thus, many of these firms are facing or have faced the threat of age related transfer
failure. The average age of the firms expected to be transferred to family members is significantly
older [51 years, p-value<0.1] than all other potential endgames and the average age of the firms
expected to be sold [34 years, p-value<0.01] is significantly younger, see Table 1. In Ireland there is
also a significant difference in the average sales across expected exit options [F statistic = 3.583, p-
value<0.05]. Specifically, we find that the average sales of firms expected to be transferred to family is
significantly greater [p-value<0.05] than all other potential endgames. We find no evidence that the
existence of an exit plan, or the fact that the firm may have transferred in the past, play any role in the
entrepreneurs exit choice. However, we do find evidence that the entrepreneurs intentions for the
business at start-up are significantly different across exit choices [F statistic = 3.295, p-value<0.05].In
particular those who intend to transfer to family had more non-pecuniary motives at start-up (e.g. to
provide the entrepreneurs with employment, to have a business to pass onto family members)
whereas entrepreneurs who intend to sell their business had more pecuniary motives (e.g. to
generate a high level of return, to sell on the business etc.). Irish entrepreneurs who intend to
shutdown their firm on retirement tend to have smaller firms [P-value<0.1] than those intending to sell
their firms or pass their firm to a family member. Not surprisingly, those intending to transfer the
business to a family member tend to have greater family involvement in the firm and those intending
to sell their business tend to have less family involvement. Finally, while there are no regional
491
disparities in Ireland in terms entrepreneurial talent or urbanisation there are significant differences in
relation to the availability of related skilled labour. Here, those intending to transfer to family tend to be
located in regions with a significantly lower related skilled labour share [p-value<0.01], while
entrepreneur intending to sell their firm tend to be located in regions with a higher level of related
skilled labour [p-value<0.01].
Table 1: Descriptive statistics by expected mode of exit
Variable N F(3, N-4) Expected Mode of Exit
Ireland
Disposal Other Family Other Sell Other
Expected exit
211 15.6% 84.4% 36.8% 63.2% 47.6% 52.4%
choice(%)
Years tradinga 207 4.478** 54.82 41.88 51.96* 39.10 33.97*** 52.80
Turnoverb 210 3.583** 3.15 3.82 4.22** 3.43 3.52 3.90
Previous exitd 206 1.835 0.43 0.36 0.43 0.33 0.30 0.43
Succession plane 210 0.919 0.42 0.48 0.43 0.50 0.52 0.43
Entrepreneurial
f 192 3.295** 3.80 3.98 3.39** 4.25 4.39** 3.52
mindset
Employeesg 204 1.030 4.87*** 11.46 11.25 10.03 11.62 9.33
Family involvementh 210 22.779*** 0.45 0.53 0.79*** 0.36 0.33*** 0.69
Businesses per
i 211 0.657 0.06 0.06 0.06 0.06 0.06 0.06
resident
Distance to nearest
j 211 0.613 77.53 67.95 69.08 69.67 67.10 71.61
city
Skilled labour
207 8.579*** 7.87 8.29 6.53*** 9.17 9.60*** 6.94
sharek
Scotland
Disposal Other Family Other Sell Other
Expected exit
11.1% 20.6% 68.3%
choice(%)
Years tradinga 63 1.408 43.33 24.39 11.44 24.83 23.53 30.25
Turnoverc 63 2.191 318333 898571 325000*** 1022826 1071776*** 323750
Previous exitd 63 2.505* 1.00 1.23 0.62* 1.39 1.42* 0.69
Succession plane 63 5.035** 0.33 0.46 0.77* 0.37 0.37 0.69
Entrepreneurial
f 63 1.704 3.00 4.43 3.38 4.63 4.74 3.31
mindset
Employeesg 63 2.425* 3.17 14.70 6.38*** 16.29 17.21*** 5.78
Family involvementh 58 0.923 0.33 0.29 0.41 0.26 0.25 0.40
Businesses per
i 58 4.647** 0.04** 0.02 0.03* 0.02 0.02*** 0.03
resident
Distance to nearest
j 63 5.313*** 26.86 29.71 56.48** 21.96 21.62** 50.02
city
Skilled labour
58 0.868 9.78 12.07 10.98 12.22 12.41 10.74
sharek
Notes: ***significant at p-value less than 0.1
**significant at p-value less than 0.05
*significant at p-value less than 0.01

a
Years that the business was in operation
b
Categorial variable: 1= under 200,000; 2=€200,000 - €500,000, 3=€500,000 - €1 million,
4=€1million - €2 million, 5=€2million - €5 million, 6=Over €5 million, 7= refused
c
Actual turnover at the time of interview in 2001/2002
d
Categorical variable: 1= previous exit; 0 = otherwise
e
Categorical variable: 1= Exit plan; 0 = otherwise
f
Categorical variable: entrepreneurial intentions for the business at start-up, range to 10; values
closer to 1 represented more non pecuniary motives and values closer to 10 represented more
pecuniary motives
492
g
Number of fulltime equivalent employees
h
Categorial variable: 1= Family involvement; 0 = otherwise
I Number of firms registered for V.A.T. in that region divided by population
j
Miles from nearest City
k
Percentage of total regional employment in the same sector as the responding business
Turning to Scotland, here the average age of the firms in our sample is slightly younger at 25 years.
Businesses expected to be transferred onto family members also have a significantly lower turnover
in comparison with that of other expected endgames. This could be because these firms have a
greater incentive to grow the assets of the business. As expected those intending to sell their
businesses are have a significantly higher turnover than all other expected exit choices. These firms
are therefore more likely to be able to signal their quality to the market. We also find that previous exit
is significant. Entrepreneurs who intend to transfer to family tend to own businesses that have not
transferred in the past while many of those who intend to sell their business are operating businesses
which have previously transferred. We find no significant difference in the entrepreneurial intentions at
start-up for the different expected exit choices, nor is their any difference in the level of family
involvement. There is a significant difference in the average number of employees employed in the
business by expected endgame [F statistic = 2.425, P-value<0.1]. In particular, family businesses
tend to be smaller in size while firms intended to be sold tend to be significantly larger in size. Looking
at the regional variables we find that entrepreneurs who intend to transfer their firm to a family
member are likely to be operating firms in more rural locations, while those intending to sell their
business tend to be located much closer to cities. Finally, turning to the level of entrepreneurial talent
in a region, we see that the average number of businesses per resident in the region was significantly
higher for entrepreneurs who expected their businesses to be transferred to family members and for
those who expect to close their business while it was significantly lower for businesses expected to be
sold illustrating the influence of regional characteristics on the entrepreneurs exit choice. The higher
the stock of businesses per resident per region may indicate that there are few opportunities for paid
employment in the region. This increases the likelihood of expected endgames such as family
succession and firm closure.
4. Empirical results
This Section tests empirically the hypotheses identified in Section 2 using data gathered in face–to-
face interviews with entrepreneurs in Scotland and telephone interviews with entrepreneurs in Ireland.
A multinomial probit estimation technique where the entrepreneurs exit choice is represented as a
decision among unordered alternatives is adopted to examine variation across exit choices, see
Power and Ryan (2007).In this estimation, entrepreneur i’s utility from choosing endgame j, Uij (i=
1,….n; j=1…p) is a function of attributes of the firm, region and stochastic error, a typical
representation is: Uij = β ' X ij + α' j Z i + ε ij where Xij is a vector of firm specific measures and Zi is a vector
of regional characteristics. We seek to estimate β and αj and their standard errors. The multinomial
probit estimations results are presented in Table 2. The associated reference category is family
succession. This exit choice was chosen as the reference category since more is known about this
exit choice than the other modes of exit.
Table 2: Results of multinomial probit
Ireland Scotland
Asset Disposal Sell Asset Disposal Sell
Years trading -0.0005 -0.0104* 0.2276** 0.0027
Turnover -0.1681* -0.1017 0.7185 -0.2137
Previous exit 0.0274 0.1399 -9.6806* 4.6645***
Succession plan 0.3952 0.8091*** -1.3586 -1.3608
Entrepreneurial mindset 0.0693 0.1158* 1.3150** 0.8755
Family Involvement -1.4634* -1.7565* -3.0057* -4.7083*
# of employees -0.0281 0.0005 -0.4121 0.3125**
Businesses per resident -36.769** -17.416 -11.761 4.9092
Distance to nearest city 0.0059 0.0024 -0.0369* -0.0600***
Skilled labour share 0.0274 0.0740** 0.0413 -0.0061
493
Note: Reference category: Family Succession
*** significant at p-value less than 0.1
** significant at p-value less than 0.05
* significant at p-value less than 0.01
We begin by examining the six firm-specific hypotheses. Our first hypothesis examines the age of the
firm and based on the findings in the literature we argue that the older the business the more likely the
entrepreneur expects a failed business transfer. In Ireland we find that entrepreneurs who expect to
sell their business are significantly younger than those firms intended to be transferred to family
members, whereas in Scotland those that expect to shutdown their business own significantly older
firms than those firm intended to be transferred to family. Thus, there is some evidence to support our
hypothesis.
Next we examine the quality of the business where we hypothesised that (1) entrepreneurs who
expect to sell their business to a third party are likely to have higher growth and profitability prior to
business transfer and (2) if the business was successfully transferred in the past, the entrepreneur is
less likely to expect a failed business transfer. We find evidence to support the hypothesis with
respect to valuation in Ireland where the coefficient on turnover is negative and significant indicating
that the firms which are likely to shutdown are less valuable than firms intended to be transferred to a
third party (i.e. family member, insider or outsider). In Scotland we find that entrepreneurs who believe
that they are unlikely to find a buyer for their business are less likely to have been transferred in the
past in comparison to the firms of entrepreneurs who intend to pass their business onto their
offspring. By contrast, the coefficient on previous exit is positive and significant for entrepreneurs who
expect to sell their firm to outsiders or to employees. This certainly provides evidence that in Scotland
positive experiences in the past are likely to condition expectations for positive outcomes in the future.
Thus, we have evidence to support our claim that the quality of the business matters.
Our third hypothesis argues that if the business has a succession plan then the entrepreneur is less
likely to expect a failed business transfer. Only in Ireland do we find evidence that those intending to
sell their business are more likely to have a succession plan. We also find tentative evidence in
support of the hypothesis that the personal intentions of the entrepreneur for his business, at the time
of start-up, influence his expected likely endgame. The coefficient on entrepreneurial intentions is
positive and significant for those who intend to sell in Ireland and those who intend to shutdown the
business and dispose of the assets in Scotland. It seems that entrepreneurs who expect to either
dispose of their assets or sell their business have a higher probability of having had more pecuniary
intentions for their firms when they started them than firms expected to be transferred to family
members.
We find strong support for the hypothesis that family businesses are more likely to remain in the
family than to be sold or shutdown. We also find some support for the hypothesis that the higher the
number of employees the more likely the entrepreneur will transfer the business to an employee. This
is certainly evident in Scotland where entrepreneurs who expect to sell their business to employees
have a significantly higher probability of being larger in size than entrepreneurs who intend to pass on
their business to a family member. In Ireland we find a positive, but insignificant sign on this variable.
Turning to the regional variables and the level of entrepreneurial talent in the region in which the firm
is located, here we hypothesise that the higher the level of entrepreneurial talent in the region the less
likely the entrepreneur expects a failed business transfer. In Ireland entrepreneurs who expect to
dispose of the assets of the business on their retirement have a significantly lower probability of
having a high level of entrepreneurial talent in the region in which they are located. It is likely that
these firms are located in more urban environments and they are likely to be more niche or lifestyle
type businesses where the human capital of the entrepreneur is integral to the survival of the
business. This effect is not evident in Scotland, however, in Scotland we find evidence that firms
intending to shutdown and firms intending to sell are more likely (than family firms) to be located close
to urban centres. While those intending to sell in Ireland are not located significantly closer to urban
centres than family firms, we find evidence that they are more likely to be located in an area with a
high percentage of similar businesses (i.e. in a cluster).
494
5. Conclusions
Business transfer failure is an international phenomenon (see for example Austria: Mandl 2004;
Belgium: Leroy et al. 2007; Canada: Picard and Bruce 2006; Netherlands: van Teeffelen 2005; UK:
Martin et al. 2002; US: Wennberg et al. 2009). The failure of business succession presents a potential
threat to the survival of SMEs and therefore to output and employment growth. Unfortunately, demand
for firms by individuals is restricted by a widespread preference for start-up over purchase of a going
concern. More than six out of ten potential entrepreneurs in the Netherlands would rather start their
own business than buy one (Morris 2005). Similar evidence for the United Kingdom finds that three-
quarters of entrepreneurs start a business from scratch rather than take over an exiting firm (Small
Business Survey 2005). These findings help to explain why demand for firms is considerably below
supply (West 2004; Meijaard 2005). With substantial numbers of small businesses for sale, and
relatively few potential buyers, purchasers can cherry-pick the best firms on the market. This tends to
work against many businesses seeking to transfer ownership (Voithofer 2002).
Much of the extant literature on business transfer concentrates on intra-family succession, even
though only a minority (and falling) share of transfers occur via this route (e.g. 30% in the USA, 22%
in the Netherlands) (van Teeffelen et al. 2005; Howorth et al. 2004). If the market is indeed found to
function ineffectively, this presents an additional problem, as it may send discouraging messages
about the prospects of eventual exit to those considering start up. Interestingly non-family succession
in SMEs appears to be more favourable to economic development and growth, although the actual
transfer process itself tends to be more complicated and prone to failure (Geerts et al. 2004).
To date very little is known in the literature about what characteristics influence an entrepreneurs’
choice of exit route. This paper attempts to address this void. In Ireland we find that entrepreneurs
who expect to sell their business are more likely to own younger firms; they are more likely to have
succession plans in place; and they are more likely to have had pecuniary motives when they started
the firm (comparisons are with family firms). They are also less likely to have family members working
in the firm and they are more likely to be located in a cluster.In Scotland the entrepreneurs who intend
to sell their business are more likely to own older and larger firms. Similar to the Irish case these
entrepreneurs are more likely to have had pecuniary motives when they stated the firm and they are
less likely to have family members involved in the firm. These firms are also more likely to have
transferred in the past and they are more likely to be located in/near urban regions.
Turning to those who intend to close their business and dispose of the assets we see that in Ireland
these firms are less likely to have higher sales turnover when compared to family firms. They are also
less likely to employ family members and are more likely to be located in urban regions. Scottish firms
which intend to shutdown, on the other hand, are more likely to be older than family firms. Similar to
the Irish firms they are also more likely to be in/near urban regions and less likely to have family
members employed. In addition they are less likely to have been transferred in the past when
compared to firms which are likely to transfer to family members.
Rising numbers of failed business transfers pose a particular problem for several European countries
as the age distribution of business owners rises. The declining proportion of firms being taken over by
family members aggravates this problem. In fact, relatively younger non family firms believe that a
trade sale is their most likely exit strategy. These firms are more profit orientated and located in
vibrant regions. Further research needs to examine what actions governments could undertake to
preserve the value tied up in these well established firms.
Acknowledgements
This research has been undertaken with the generous support of Enterprise Ireland who funded the
collection of the data for Scotland and Irish Research Council for Humanities and Social Sciences
(IRCHSS) who are currently instrumental in enabling us to further promote this research agenda. We
would like to thank the many owner managers who gave generously of their time enabling us to
collect the high quality data.
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496
Banks Lending To Farmers in India
Navjot Sandhu and Javed Hussain
Birmingham City Business School, UK
Navjot.Sandhu@bcu.ac.uk
Javed.Hussain@bcu.ac.uk
Abstract: Purpose: The paper seeks to investigate the access to finance for small marginal farmers in India and
examines how bank managers make lending decisions to farmers. Context: The study builds on the findings of
the UK SMEs access to finance (Deakins and Hussain, 1993; Fletcher, 1995). This empirical study is unique in
that it examines a sector that has not been examined in the literature. This research examines the unique
structural characteristics of farmers (borrowers) and banks (lenders) and focuses upon the differences in SMEs
studies which have examined commercial businesses and the specific needs, experiences of farmers and banks.
In specific, the paper examines the Indian farming context, banks dedicated to farming sector, commercial banks
engaged in lending to farmers. Findings: Findings of survey carried out with loan officers and farmers suggest
Indian farming sector is a complex and multidimensional sector that is supported by private and public sector due
to its national importance. Financial lending structures depend upon several non-quantifiable factors (cultural,
caste, family size, education) and relational bank lending practices are prominent in bank’s lending decisions.
Such practices have an adverse impact on bankable loan applications and gives rise to moral hazards. Relational
banking and recommendations through word of mouth minimises default rate but there is no evidence to suggest
it minimises information asymmetry. Subjectivity in decision making persist, which is compounded through
underdevelopment of financial markets for small farmers and gives rise to financial exclusion and negatively
impacts on economic growth. There is evidence of banks relying on the qualitative factors when making lending
decisions but excessive reliance on collateral is also evidenced to minimise adverse outcome and limiting
potential economic prosperity. Methodology: A qualitative approach is employed, involving in-depth, face to face
questionnaires amongst 185 farmers (demand side), and 42 financial institutions (supply side), located in Punjab,
India. The questionnaires and semi-structured interviews were carried out on one to one basis and in focus
groups.
Keywords: relational lending, farmers, SMEs, bank finance, collateral
1. Introduction
In current competitive era, the ongoing process of globalisation has influenced all sectors of the
economy including the agriculture sector and small and marginal farmers (Lennart, 2005; Malhan and
Rao, 2007). In most developing economies agriculture continues to be the most important sector of
the economy, accounting for the biggest proportion of employment. Like industry, in the agriculture
sector continues upgrade technologies to increase the productivity (Malhan and Rao, 2007). Whilst
globalisation has accelerated the need for knowledge intensive work performance in all sectors of
economy and agricultural sector is not an exception but masses in rural areas lack access to
information and finance that adversely impacts on their productivity and well being (Lennart, 2005).
The paper focuses on banks’ lending practices to farmers in Indian Punjab and examines the impact
of finance gap for small and marginal farmers. The emerging evidence suggests poor farmers
financial service needs are not met due to systematic problems in the functioning of financial sector
(Duggal and Singhal, 2002). Imperfections in financial sector have adverse impact on the efficient
functioning and performance of agricultural sector limiting potential economic and financial prosperity.
Moreover, this research paper addresses the issue of financial exclusion of small and marginal
farmers. The literature relating to entrepreneurship in the West and in India tends to concentrate on
commercial and manufacturing sector of the economy. There is no comprehensive empirical study
that examines the characteristics and motivation of small and marginal farmers and their access to
finance. To examine the issues of finance, this study explores the relationship between the key
characteristics such as age, education, size of land holdings, gender, caste and family structures and
their impact on the growth and efficient operation of the farms.
2. Banks lending structure
Agricultural investment has always been acknowledged as important to accelerate agricultural
development specifically and the economy in general. Thus while recognising the importance of
agriculture sector in India’s development, the Government and the Reserve bank of India created a
broad- based institutional framework to cater the increasing credit requirements of the agriculture
sector. The evolution of institutional credit to agriculture could be broadly classified into four distinct
phases: 1904-1969 [predominance of co-operatives and setting up of Reserve Bank of India (RBI)],
497
1969-1975 [nationalisation of commercial banks and setting up of Regional Rural Banks (RRBs)],
1975-1990 [setting up of National Bank for Agriculture and Rural Development (NABARD)], and from
1991 onwards (financial sector reforms). Thus the rural credit architecture consisted basically of
cooperatives, commercial banks and regional rural banks. Although multi-agency approach was
envisaged to cater to the diverse credit needs and benefit the rural people by giving a wide choice of
the agencies to avail credit. While in reality, the rural clientele hardly enjoyed the benefits of the
approach as the system suffered from many deficiencies (Satyasai, 2008; Golait, 2007).
These structural and operational framework changes facilitated the process of institutionalization and
regulation of the rural financial market in India to some extent but the informal sector remained
unregulated yet it is the major provider of finance as the Commercial Banks were not meeting the
needs and requirements of the small and marginal farmers, while the cooperatives, on the other hand,
lacked resources to meet the demand. To fill the finance gap in the agriculture sector, in 1975 the
Regional Rural Banks was set up to meet credit needs of marginal farmers. According to Burgess and
Pande (2003), these dedicated lending institutions served the farmers well but there remained major
issues related to assessing loans applications for the marginal farmers, which were not able to
provide collateral. This research paper examines the traditional bank loan sanctioning protocol, what
implications this has for the agriculture sector.
3. Traditional or conventional models of agricultural lending
The mode of accessing finance from formal as well as informal financial sources has been
diagrammatically represented in Model I, which has been developed by the author from the
observations and literature review.
Farmers’ Characteristics
y Farming operations
y Credit needs
Formal Financial Institutions
Loan Characteristics
y Purpose
yAmount
Credit Evaluation
Credit Terms
yAmount
yInterest
yCollateral
y Other terms and
conditions
Yes No
Money
Figure 1: Model I-formal finance model for Punjabi farmers
498
Model I describes the formal financial system for Punjabi farmers. It illustrates that how farmers
approach banks to obtain credit in order to fulfil their needs. However, for banks the main requirement
is collateral, while there are certain other formalities which need to be completed before loans are
sanctioned. Thus those farmers who have collateral and comply with all the required formalities to the
bank can obtain credit from formal financial institutions. Formal financial institutions do not lend
money to uncollateralized (landless and tenants only) and undercollateralized (small and marginal
farmers) borrowers. Therefore this excluded segment of farmers has to approach informal sources of
finance to fulfil their credit requirements. The informal financial sources comprise friends, relatives,
and moneylenders, although currently the appearance of traditional moneylenders has changed to
one which is also engaged in some other line of business, cultivation or trade (Gill, 2003). The
moneylender may be a landlord (who finances his tenants and workers engaged on land), a trader,
commission agent or arthiya (who finances the cultivator only to obtain exclusive rights to purchase
his crop); or he may be an input dealer/ shopkeeper (who lends money on the condition that inputs for
cultivation be purchased only from him).
4. Research sample and methodology
Researchers investigating the relationship between financial institutions and businesses have mostly
employed qualitative methodology in the UK (Deakins and Hussain, 1991:1992; Butler and Durkin
1998; Hussain and Zang, 2005; Hussain and Martin, 2005) to investigate the issues related to both. In
case of banks lending to farmers in India, it is observed that there are various non-empirical factors
that have implications on a bank’s lending decisions. Therefore, to address this issue, it is also
proposed to use qualitative approach for this study. The study was conducted in Indian Punjab. A
sample of five districts namely Gurdaspur, Amritsar, Jalandhar, Nawanshahr and Patiala was chosen;
from these districts 185 farmers (demand side) were selected. The sample of farmers for the current
research has been identified from the government’s records kept by the each village’s land revenue
collector (Patwari). The sample of farmers (shown in Table 1) was stratified into five size groups
according to the size of the holding: marginal (less than 1 acre), small (1-2 acres), medium (2-4
acres), large (4-10 acres) and very large (10 acres and above).
Table 1: An overview of the sample of farmers selected from five districts
Categories Districts
Amritsar Gurdaspur Jalandhar Nawanshahr Patiala
1
Marginal 7 7 3 3 5
2
Small 5 7 6 6 10
3
Medium 8 3 7 6 7
4
Large 8 10 4 10 6
5
Very Large 11 11 15 10 10
Total 39 38 35 35 38
In selecting financial institutions (supply side), only those banks were approached which provide loans
to the agricultural sector, namely commercial banks (public and private), co-operative societies and
co-operative banks. As mentioned earlier, there are 1,706 institutions, including 942 commercial
banks, in Punjab. The state is also served by a network of 635 branches of the Punjab State
Cooperative Bank (Gill et al., 2006). It is not possible to survey the entire population of agricultural
lending banks in Punjab due to the time, logistical and financial constraints of this study. Therefore, a
sample of 50 bank managers was selected. For this study only rural and semi urban branches of
these banks were approached, as the urban branches do not have agricultural portfolios and hence
do not lend money to farmers for their agricultural needs. Therefore, for the farmers as well as banks,
an attempt was made to include a range of respondents, so that different variables (such as age,
education, gender, caste, size of landholdings and loan size) could be compared effectively. The
study made use of primary data obtained through questionnaires supplemented with semi-structure
interviews and focus groups. Data covering socio-economic characteristics such as age, caste, farm
size, farming experience with credit use, amount of loan obtained, et cetera were elicited from the
respondents. Data collected were analyzed using statistical tools mainly means and percentages.
1
Less than 1 acre
2
1-2 acres
3
2-4 acres
4
4-10 acres
5
10 acres and above
499
Both samples of bank managers and farmers were selected on the basis of convenient sampling, to
represent the composition of the farmers’ population within the region. We are aware of the limitations
of the study and would advise generalisations of results emerging from the qualitative research that
involve a small sample of respondents chosen from a restricted area (five districts) of Indian Punjab.
5. Findings
5.1 Lending practices of Banks for farmers (Characteristics of Lenders)

There is no evidence that banks use uniform lending criteria. Co-operative banks provide loans to
their members only, while there are no such membership criteria for public and private sector banks.
Public and private banks provide loans to those customers who fulfil their lending criteria, possess
sufficient collateral and are able to provide all the documents. However, the current consumers of
financial services (CCFS) from cooperative banks and societies are farmers with land ownership
equal to or greater than one acre but not landless and marginal farmers (summarised in Table 2).
Therefore, landless and marginal farmers cannot gain society membership, hence cannot obtain
loans. Sharecroppers and tenant farmers could have conditional access to loans from cooperative
banks and societies; that is, societies are prepared to give loans to tenant farmers or sharecroppers
when they have land ownership of more than one acre. Thus in other words, owner-cum-tenant
farmers and owner-cum sharecroppers can access loans from cooperative institutions but not tenants
only and sharecroppers only.
Table 2: Farmers’ access to finance from different financial service providers
FSP CCFS (Access) Condtl. Access Exclusion
Coop.B&S. Members =>1Acre Sharecroppers, OCT* Landless, MF*
Pub. Banks L=>1Acre Kins,Sharecroppers,Tenant Landless

Pvt. Banks L=>2Acres Sharecroppers Tenant, Kin, SMFs*
FSP Financial Service Providers

CCFS Current Consumers of Financial Services
Condtl. Access Conditional Access
Coop.B&S Cooperative Banks & Societies
Kin Farmer’s kins
L Land
L=>1 Acre Land equal to or greater than one acre
L=>2 Acres Land equal to or greater than two acres
MF Marginal Farmers
Pub. Banks Public Bank
Pvt. Banks Private Banks
OCT Owner-cum-tenant
SMFs Small and Marginal farmers
Source: Data Analysis
Nevertheless, tenants and sharecroppers only could have conditional access to credit from public
banks because they consider tenants as risky clients. Therefore the following documents need to be
supplied for collateral purposes such as:
They own some land in addition to leased land
The land owner gives a guarantee and pledges his property as collateral
Tenant and sharecroppers provide a cultivation deed
Similarly, farmers’ kins can access credit when their father provides guarantees or pledges his
property, whereas private banks do not provide loans to either of them (tenant only, sharecropper only
and farmers’ kins). This shows that private banks are more risk averse than public and cooperative
banks. Moreover, in order to obtain loans from private banks, farmers should have land equal to or
more than two acres. Therefore, only medium and large farmers can access credit from private banks.
Hence the analysis (summarised in Table 2) of financial service providers illustrates the exclusion of
landless, marginal and tenant only farmers from the agricultural loan provision provided by co-
operative banks and societies; the absence of loan facilities for landless farmers from public banks
500
and moreover, the elimination of small and marginal farmers, tenant only, sharecroppers only and
farmers’ kins from the agricultural lending portfolio of private banks. Thus in other words, it suggests
that it is the institutional exclusion of tenants, farmers’ kins, sharecroppers and small and marginal
farmers’ rather than self-exclusion, as they are unable to provide the required collateral. What is
happening to deal with such exclusion?
This excluded segment (tenants, farmers’ kins, sharecroppers and SMFs) does have not much choice
apart from approaching informal financial institutions for loans. Nevertheless, it remains the case
therefore that formal institutional credit provision in India now accounts for just 27 percent of total
cultivator debt (Throat et al., 2006) and it could reduce further, while on the contrary, informal lenders
could increase as they account for 45 percent of the rural lending and the trend is continuously on the
rise (Vaidyanathan, 2006). Table 2 shows that the majority of farmers are approaching informal
private lenders such as moneylenders, friends, relatives, landlords and commission agents. It has
already been discussed in chapters five and six that informal lenders are not only outreaching and
serving the underprivileged but also medium and large farmers, whilst formal institutions have been
unable to internalize lending to the poor (Throat, 2006). Thus this incapability and incongruity of the
formal financial institutions to reach the poor can be questioned. Although the importance of the rural
economy across the world has been well documented in literature (Moore, 1954; Metcalf, 1962;
Crosson, 1975; Timberg et al., 1984; Bouman, 1989; Bolnick, 1992; Schrader, 1994; Patole et al.,
2002; Sharma et al., 2003; Siyongwana, 2004; Seibel, 2005; Nadan, 2005), what is happening to
make credit work for these rural poor especially those who have been excluded or neglected from the
loan provision?
There is evidence that farmers have been approaching the informal moneylenders during the
th st
medieval period (beginning of the 13 century until now that 21 century) to meet land revenue
demands, subsistence needs between harvests and for social expenditures and litigation (Habib,
1964). The reasons for approaching informal lenders have not changed; those personal needs which
take farmers to the doorsteps of informal lenders still prevail. However, why informal agents still serve
the masses even in the 21st century is thought provoking. The question must arise as to why such
practices persist when there is a developed capital market and financial institutions. Is it desirable that
this legacy continue for the coming decades? Why have the formal financial institutions failed to break
down these customs and manage to gain customers’ confidence? What is strategically missing from
the banks’ approach? Why cannot formal financial institutions see the rural poor as a business
opportunity, as informal agents have always seen them? All these issues need to be addressed.
According to formal institutions, informal lenders are at an advantage as they have tacit knowledge by
residing close to villagers and are free of the bureaucratic layers of formal creditors; these private
lenders can meet demand in a quick and flexible manner (Varghese, 2004). Despite concerted efforts
by formal financial institutions, the informal moneylenders have still vigorously outsmarted them in
their reach to the poor by their dynamic management skills and social networks, such as by using
socially responsible lending practices (Garg et al., 2007). Hence to take advantage of informal agents,
policymakers are planning to start bank-moneylender credit linkage in India (Ghate, 1992:1998;
Varghese, 2004 and Garg et al., 2007). This linkage could help to reduce transaction costs, moral
hazards and adverse selection of projects. Now the questions arise- will this linkage be beneficial for
the small and marginal farmers? Are banks ready to take the risk of sanctioning loans to everyone
(marginal, small, landless, tenants, sharecroppers) without collateral? If banks do not provide loans
without security then what implications does this have for farmers? Moreover, what will be the benefits
of starting such linkages? On the other hand, would the bank-moneylender credit linkages have
implications for informal agents or not; the question arises, would these informal agents like to
function according to banks guidelines? The informal agents could be cynical about this approach.
Thus would they like to lose their identity and agree to act as puppets in the hands of formal
institutions or government? Or on what terms and conditions will moneylenders willingly participate in
linkages? It is not necessary that all moneylenders should be educated, hence how are banks going
to communicate with them?
5.2 Characteristics of the farmers (borrowers)

The results of socio-economic characteristics of farmers is summarised in Table 3. The average age
of farmers is between 31-60 years which indicates that Punjabi farmers involved in farming are young
to middle aged hence it to their productive age. The financial institutions might be willing to give loan
to young and dynamic farmers who are more likely to adopt innovative technologies in farming rather
501
than the older farmer. Table 3 also shows the Punjabi agriculture is dominated by one community,
which is the Jat. The sample supports the generally held belief that farming is a male dominated
profession and this fact is illustrated in our findings.
Table 3: Summary statistics of selected socio-economic characteristics of farmers
Variables Values (in %)
Average Age (years) 31-60 (85%)
Caste (in %) Jat (90%)
Gender
Male 94%
Female 6%
Educational Level (in %)

Below Matriculation 44%
Matriculation 31%
Graduate 5%
Technical Diploma holder 3%
Post graduate 2%
Sources of Finance (in %)

Formal Financial Institutions 17%
Informal Financial Institutions 33%
Both 24%
None 26%
Source: Data Analysis
The results obtained also show that education is an issue amongst the farming community. The
educational attainment of farmers is very low. It has been perceived that farmers consider education
inconsequential for agriculture. Nevertheless, this perception is a major drawback and lack of
education is one cause of farmers’ suffering, as lack of education results in a lack of awareness about
the introduction of modern technology, high yielding varieties of seeds, and selection of appropriate
loan provisions among the farmers. Furthermore, it could also be seen from Table 3 that informal or
non-institutional sources is the major source of loans to farmers the major reason is inefficiency of
farmers to provide collateral to obtain loan from the financial institutions. Moreover, farmers
emphasised factors such as the bureaucratic and procedural formalities required, patronage,
arbitrariness and the corrupt practices pursued by the officials of formal financial institutions.
5.3 Banks’ perceptions about farmers

Bank managers perceive that each farmer has different requirements and hence loan usage. The
large farmers need money for expansion and development purposes while small farmers do not have
enough money, even to fulfil basic requirements, hence they need loans for consumption purposes.
The main constraint experienced by small and marginal farmers is that they are often in debt to
private moneylenders. They need credit to carry out current farm operations. Small farmers require a
credit package covering production, investment and consumption credits, and if necessary credit for
redemption of prior debts. Such packages are not available to them in the formal credit markets. Now
the question arises- why should banks pay farmers to pay off private lenders? The explanation for this
could be that to get farmers out of the clutches of informal lenders banks need to provide funds for the
redemption of previous debts. Moreover, Bank managers give importance to caste, social status and
gender. There is evidence that banks overlook farmers with limited ownership rights. 26 percent of
banks managers mentioned that they do accept women’s savings (deposit) in the bank and gold and
other assets as collateral, while the remaining 74 percent do not consider women’s savings (deposit)
as collateral. 81 percent of banks reported that female farmers do not need to provide special
formalities and guarantees, although the remaining 19 percent suggested that they need a guarantee
from husband, blood relation, village head or all of them. The survey results shows that banks do not
offer special schemes for rural females and they only mentioned Self-Help Groups, whereas urban
women can obtain loans to finance small businesses such as beauty parlours, boutiques and others.
However, urban women are not involved in farming. Thus banks provide loans to urban female
entrepreneurs but offer nothing for the rural female agripreneurs, which illustrates the difference
between theory and practice. Banks seek additional information from the tenant farmers such as proof
of cultivation rights, thus they ask for a gaurdauri, affidavit, cultivation deed, third party guarantee,
502
landowners’ guarantee, witness of guarantor, and security of two guarantors apart from other regular
loan formalities. Most tenants are either landless or marginal and small landholders. The small size of
their landholdings makes it difficult for the marginal and small farms to become viable economic units,
hence they augment their operational area through tenancy or leasing-in land. The bigger farmers
also enter into such arrangements to cut down on the management costs of hired labour. Tenancy is
not documented and is based on verbal contracts of cost- and crop-sharing which have implications
for obtaining credit from the formal financial institutions. 71 percent of bank managers reported that
farmers use the loan for the same purpose as stated on the application form, while 29 percent stated
that farmers used loans for unproductive (personal consumption) purposes. The main reasons for
loan leakage are extravagant expenditure on social ceremonies, wrong project selection, less income
from agriculture and inadequate credit. The major reasons for low loan recovery are wilful defaults (31
percent of bank managers) and loan payments write offs (21 percent of bank managers). It has been
observed that while the reason behind the default was poverty, in the case of the poor farmers it was
wilful default or unproductive use in case of the large farmers.
5.4 Factors influencing lending decisions

The performance of loan contracts determines the profitability and stability of financial institutions, and
screening the loan applications is a key process in minimising credit default risk. Before making any
credit decision, credit analysis (the assessment of the financial history and backgrounds of the
borrowers) is essential for the screening process. The results suggest that there is a direct correlation
between good past track record, collateral, good land quality and land size to access loans from the
financial institutions. But equally interesting results emerged regarding the role and significance of
qualitative factors on decision making. Though not directly comparable, the findings corroborate with
Hussain et al.,’s (2006) findings for SMEs in the context of China, which suggests that cultural factors
have an affect upon businesses’ approach to banks (demand side).
According to bank managers, various non empirical (cultural, caste, education) factors do not have
implications on a bank’s lending decisions. While non-empirical issues aroused many debates with all
the respondents, the discussions will be limited to the ways in which experiences of these factors
impact on decision making. However, from this discussion it could also be acknowledged that there
are controversial attitudes on the influence or role of non-empirical factors on the lending process.
Nevertheless, it is quite clear that the relationship between bank and borrower has an influence on the
availability of credit. These findings of the lender-borrower relationship and its influence on the lending
decision corroborates with previous findings (Petersen and Rajan, 1994; Berger and Udell, 1995).
Thus according to banks managers, two non-empirical factors, namely family status and personal
relationship with the bank manager, act as facilitator (medium) to obtain a loan from the bank;
therefore these factors could be considered as indirect factors effecting the decision making process.
However in reality, do these factors act as a facilitator or mode of service facilitation? The results
obtained do not support the facilitation role of these factors in financial institutions. From the results
we may infer that financial institutions are not serving the needs of farmers. In reality, from the results
the exploitation of farmers by formal financial institutions can be inferred. Now the question arises if
banks are using a systematic approach. If so, then why do farmers need influence or money to get a
loan sanctioned from banks? The analysis supports the hypothesis that money and contacts
(personal relationship with bank manager or political leader) play a major role in obtaining loans from
the banks, but SMFs are disadvantaged in this process.
6. Discussion
A number of important results have emerged from the qualitative and quantitative research study on
small and marginal farmers’ financing in Indian Punjab. This study shows that the small and marginal
farmers in India encounter financial barriers when accessing bank finance. They have limited access
to bank finance and there appears to be very low utilisation of bank finance by them as the banks
perceive them as risky clients. However, banks are not ready to provide risk capital. The small and
marginal farmers expect banks to share risk and provide unsecured loans, something banks are
reluctant to do. Consequently, small and marginal farmers rely on family, close associate networks
and moneylenders, especially arthiyas. These findings corroborate those of Hussain and Matlay
(2007) in the UK context for ethnic minority owner managers and their businesses. In the case of
Punjabi small and marginal farmers, personal and informal sources of finance remain significant
because they are excluded from the formal financial sector due to their inability to provide required
503
collateral. Even after the nationalization of banks, the credit needs of landless, small and marginal
farmers, tenants and agricultural labourers have not been acknowledged by the institutional sources.
This research suggests that when accessing bank finance, information asymmetry is a major issue for
Indian banks where farmers, especially small and marginal ones, have limited relationships with
banks and are generally conservative when providing financial information. Information asymmetry
and underdevelopment of financial markets for small farmers has led to financial exclusion and a
negative impact on economic development.
The study confirms that small entrepreneurs, whether they are farmers or businesses, in developed
countries like the UK or developing countries such as India, do encounter financial constraints;
although the nature of the constraints is different. However the key difference in the case of India and
referring back to traditional bank lending protocol (Model I) is that in addition to collateral, social
status, caste and family background play an important role, variables that are considered to be
insignificant when banks make lending decisions in the UK. Thus in conclusion, India is an agrarian
economy which is shifting its paradigm from agriculture to the knowledge based service sector. The
agriculture sector is still of strategic importance, especially for states such as the Punjab which is a
major producer of the country’s grain. To improve the productivity and modernise the small and
marginal farmers, the banking sector needs encouragement (for example, loan guarantee schemes).
Hence Indian Punjab has to exploit flexibility and innovation by encouraging financial institutions to be
proactive and develop financial products and provide services that would facilitate easy access to
finance by small and marginal farmers.
Conclusion
This research paper explored the relationship between financial institutions and farmers. The analysis
suggests that there are varieties of regulatory inadequacies and hindrances for the efficient delivery of
finance to farmers, which may be attributed to a combination of factors. From the banks’ perspective,
serving the SMFs and tenant farmers is not cost effective. Loan sizes are often small and there are
too many compliance imposed by the government which adversely contribute towards finance gap for
the farmers. From the rural borrower’s perspective, banks do not provide conveniently accessible and
flexible products and services. To summarise, the in-depth analysis suggested that there is a finance
gap for SMFs and marginal farmers. Formal institutions have complex, lengthy and time consuming
procedures to access bank finance which are further complicated by complex government legislation.
Therefore farmers have to depend upon informal sources of finance which are expensive and
unregulated. The study reports that those farmers who borrowed from formal institutions experienced
improvement in their economic conditions and farming productivity improved too through improved
utilisation of technology investment in fixed assets, employment and the net farm earnings of the
borrower farmers.
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SME Market Entry in Transition Economies: The Potential
of Cluster Initiatives to Fill Institutional Voids
Tine Schrammel
University of Passau, Germany
Tine.Schrammel@googlemail.com
Abstract: Transition economies are potential new markets for companies in well-developed market economies
and vice versa, but trade between these two institutional setups seems costly. Whereas larger companies can
surpass institutional differences to offset higher transaction costs, SMEs are constrained by their limited stock of
resources. However, transition economies rely heavily on SMEs to improve their trade balance and foster
economic development. On a conceptual level, this article analyzes whether a cluster in a transition economy,
through the services it provides, has the potential to reduce transaction costs for SMEs entering the institutional
environment. To explain the extensive transaction costs in trade, the concept of institutional voids, which
emphasizes missing intermediary institutions in emerging countries, is transferred to the situation in transition
economies. A review of two literature streams serves to draw hypotheses for possible modes of entry for SMEs in
such institutional environments. International strategy literature suggests the establishment of wholly-owned
subsidiaries as an entry mode in environments with institutional voids, whereas the literature on business groups
focuses on transaction-cost-reducing modes for companies situated within such an environment. As a result, the
article suggests that a cluster initiative in the transition economy can fill certain institutional voids, since the
cluster management functions as an intermediary and reduces search and initiation costs for both trading
partners. The article contributes to the literature on the concept of institutional voids, transferring it to the context
of transition economies and elaborating a link to the cluster concept.
Keywords: SMEs, institutional voids, transition economies, cluster, transaction costs
1. Introduction
In the frame of economic integration, transition economies are potential new markets for companies
situated in well-developed market economies and vice versa, but trade between these two institutional
setups seems costly. In Southeast-Europe, SMEs are the cornerstones of these economies that are -
in the shadow of the economic crises - under pressure to improve their trade balance. Whereas larger
companies can overcome institutional differences to offset higher transaction costs, SMEs are
constrained by their limited stock of resources. There is a diverse literature on market entry modes
and some on market entry in transition economies. However, most of it is rather concerned with
solutions for MNE instead of focusing on the majority of market actors in these countries: the SMEs.
However, an SME from a West-European country faces severe difficulties if it wishes to trade with a
SME from a transition economy in Southeast-Europe. The differences in institutional environments
routed in different historical developments entail high or prohibitive transaction costs. On a conceptual
level, this article analyzes whether a cluster in a transition economy, through the services it provides,
has the potential to reduce transaction costs for SMEs. To explain the extensive transaction costs in
trade between companies of the two systems, the concept of institutional voids, which emphasizes
missing intermediary institutions in emerging countries, is transferred to the situation in transition
economies. A review of two literature streams serves to draw hypotheses for possible modes of
cooperation for SMEs. International strategy literature suggests the establishment of wholly-owned
subsidiaries as an entry mode in environments with institutional voids, whereas the literature on
business groups focuses on transaction cost-reducing modes for companies situated within such an
environment. As a result, the article suggests that a cluster in the transition economy can fill certain
institutional voids since the cluster services fulfill an intermediary function to reduce search- and
initiation costs for both trading partners.
2. Institutional voids
The analysis of trade between two actors based in differing institutional setups demands a theoretical
basis that takes the omnipresent role of institutions into consideration. According to North (1990)
“institutions determined the performance of economies” (North 1990), implicating that the key to
superior economic performance are efficient institutions. Efficient institutions are those that solve the
problems of measurement and enforcement connected to transactions at the lowest possible
transaction costs. As institutions evolve as rationality surrogates, the complexity of such institution
varies, depending on the complexity of the transaction they are supposed to simplify, which in turn
depends on the specialization and the valuable attributes that must be measured and enforced in the
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course of the transaction. Since the evolvement of institutions is path dependent, the institutional
environment differs between countries, societies and regions. Some institutional setups are
considered more efficient than others (North 1994; Williamson 1996).
Ricart et al. (2004) offer the concept of ‘institutional voids’ to transform North’s observations to a
microeconomic level. Institutional voids represent lacks in the institutional environment and “occur
when specialized intermediaries are absent”. They define intermediaries as “economic entities that
insert themselves between a potential buyer and a potential seller in attempt to bring them together by
reducing potential transaction costs.” (Ricart et al. 2004). Thus, intermediaries are specific kinds of
institutions that act as rationality surrogates in transactions in which transaction costs are high or even
prohibitive. The authors name three concrete functions of specialized intermediaries: (1) guaranteeing
contracts, (2) providing specialized information and (3) facilitating the search for trading partners.
Khanna and Palepu (2003) add two more functions of intermediaries; that of (4) capital provision and
of (5) searching for talent. Stulper (1996) also acknowledges the uncertainty and search-cost
reduction function of intermediaries as well as the information providing function in an environment
with asymmetric information. Mair and Marti (2009) broaden the definition of institutional voids by
describing them as “situations where institutional arrangements that support markets are absent,
weak, or fail to accomplish the role expected of them”, hence including normative and cultural
columns. Thus, besides missing intermediaries, they include situations where the intermediary is in
place but not properly functioning in the framework of ‘institutional voids’.
Ricart et al. (2004) proclaim new frontiers in international strategy research. They differentiate
between within-country institutional voids and cross-country voids. The former refers to challenges
that arise due to the lack of specialized intermediaries; the latter refers to specific institutions
necessary for cross-border trade, such as border dispute resolution mechanisms and differences in
cultures, practices and standards. The authors mention the value added by multinationals in the face
of cross-border institutional voids, but only elaborate examples on it rather than a general theory.
Nevertheless, they mingle two different types of institutional voids that differ intensively. Some
examples stated refer to specialized cross-border trade institutions such as cross-border resolution
mechanisms. These are institutions generally needed in all cross-border trade, and voids arise due to
their absence or weak presence. The second group of examples refers to institutional voids that arise
due to different institutional setups between the two trading countries, such as different cultures,
languages or different accounting standards. Therefore, if the institutional setups between the two
trading countries are very similar, this group of voids will hardly appear, where as the first group
might. Besides describing these examples of institutional voids, the authors only mention the potential
of multinationals to internalize some of the tasks of specialized intermediaries. (Ricart et al. 2004)
Figure 1: Hierarchy of institutional voids (source: own illustration based on Ricart et al. 2004)
Institutional voids occur more frequently in weaker or less-developed institutional environments.
Whereas “well-functioning, market economies rely on deep pools of specialized intermediaries in
product, labor and capital markets, poorer countries – ‘emerging markets’ - are characterized by
‘institutional voids.” (Khanna 2002) These emerging economies are characterized by different market
failures on financial-, labor-, and capital markets. Examples range from weak corporate governance
and difficult to enforce security regulations in general to specific issues such as missing or not fully -
evolved venture capital structures and financial press (Khanna, Palepu, 2000).
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In emerging countries, these voids are due to changes in the institutional context. Most literatures
describe changes such as “massive privatization of state-owned firms” (Khanna, Palepu 2000) and
removal of market entry barriers on the way to capitalize the economy. There are various reasons for
the development of institutional voids, such as laws restricting the evolvement of intermediaries or
actors not knowing why intermediaries are necessary or how they work. Part of this development is
rooted in the monitoring gap that evolves during drastic changes in the formal institutional setup.
While privatizing companies, the state withdraws from its monitoring functions on specific business
and reduces its function of monitoring the economy. However, the economy does not have sufficient
resources to fill these gaps immediately (Khanna, Palepu 2000).
Literature referring to institutional voids describes only situations in emerging countries. Yet, the
circumstances are similar in transition economies, which face rapid institutional change from a
centrally planned economy to a market economy. As such, the institutional environment becomes
unstable per se (Meyer 2001). Therefore, weak institutional setups, especially for enforcing property
and intellectual property rights, effective competition policies and trade regulations are repeatedly
reported for transition economies (Ketels et al. 2006). However, the historical background is different
and so are the cultural and behavioral norms. Furthermore, as development and the institutional base
within transition economies vary, so does the extent of institutional voids (Van Ees, Bachmann 2006).
Besides these insufficient formal institutions, informal institutions differ from those of developed
market economies. One of the crucial pionts is the lack of extended trust. (Raiser et al. 2003) As
institutional change is path dependent and the centrally planned economy entails high reliablity on
personal trust, most social ties in transition economies are still based on old networks and personal
trust. Without formal safeguard mechanisms, trust between the economic actors becomes of higher
importance than in environments with safguards such as enforcable property rights. Thus, economic
interaction is likely to remain static with well-known counterparts (Van Ees, Bachmann 2006). Another
crucial aspect is human capital. In contrast to many emerging or developing economies, the void in
transition economies does not lie in the education of the economic actors per se, but rather in the
(tacit) knowledge on the rules and functioning of market economy. Planned economies provided little
incentives to invest resources in high-quality production or consumer satisfaction. This learning
process for price setting, competition mechanisms, consumer preferences, etc. increases the cost of
negotiating and contracting (Meyer 2001).
Actors from well-developed market economies that wish to trade with counterparts in the transition
economy face a general lack of information on with whom to trade, how to trade and which formal
rules are in force and apply. Depending on the state of transition, private and public actors are
inexperienced to varying degrees, judicial systems and thus property rights are only weakly protected,
entailing higher transaction costs in trade (Meyer 2001).
3. Literature review: SME market entry in transition economies
The literature on market entry is plenty and diverse, however, most streams ignore either restrictions
on SMEs or on transition economies. First, the international strategy literature is reviewed; the second
field of literature shifts the point of view to the companies situated within environments of institutional
voids and their measures to cope with them. The literature on SME market entry is integrated in both
sections. Nevertheless, in respect to the quantity of the literature available, the literature review in this
section is more selective than complete. (Werner 2002)
Enright (2002) proposes a comprehensive framework to analyze a company’s possibilities when

entering a new institutional environment. The author proposes that the activity-, the resource- and the
knowledge-based view (ARK) of the firm is equally important and needs to be considered jointly.
Enright then transfers this approach to the analysis of the location, emphasizing that the ARK of the
firm and the location specific ARK must be considered for researching a firm’s strategic options when
entering a new institutional setup. Enright’s approach is related to the eclectic paradigm described by
Dunning (2002). He proposes a paradigm for analyzing MNE activities containing the issues of
ownership, location and internationalization (OLI). Dunning’s ownership advantage basically refers to
what Enright calls the ARK of the firm. Secondly, Dunning emphasizes the role of the location specific
advantage, this time in line with Enright’s ARK of the location. Even though the described frameworks
are concerned with analyzing strategy options for companies entering an institutional setup different
from their home country, none of them highlight the challenges brought up by the exact difficulties.
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The paradigms are instead a general framework than a specific mode to analyze market entry in
environments of institutional voids.
Khanna & Palepu (2003) analyze the role of MNEs in cross-border trade with environments with
institutional voids in more detail, explaining how a multinational internalizes the tasks of a specialized
intermediary. They use the example of a multinational in shoemaking to elaborate how it fills in for
missing intermediaries. In the company’s home market specialized intermediaries are available, but
the production is conducted in emerging countries as the product is labor intensive. The MNE acts as
a surrogate mechanism for lacking specialized intermediaries at several stages in the value chain, i.e.
on the first stage, the multinational fulfills the task of a market research intermediary in providing the
shoemakers with the necessary market information on consumer tastes in developed markets
(Khanna, Palepu 2003). Thus, the literature suggests for cases where institutional voids are severe to
enter as a MNE as this can, due to its large amount of resources, internalize some of the tasks of the
missing specialized intermediaries.
Literature on SME internationalization is limited (Brouthers, Nakos 2004). Fillis (2001) provides an
extensive overview on SME internationalization research, aiming at capturing the status quo of the
knowledge. However, none of the approaches he reviews research the effects of the institutional
setup of the prospective host country on the SME performance and choice of entry mode. Brouthers
et al. (1996) provide an interesting approach in transferring Dunning’s eclectic framework to the SME
context. They measure the location advantage with four variables. The variable labeled “cultural
differences” refers to differences in the institutional framework as the authors do measure the
differences in legal-, political- and social structure, as well as in culture and the economic system
between the country of the SME going abroad and the respective host country. Their findings indicate
that if a SME enters a market with an institutional setup very different from its home institutional
environment, the SME generally prefers a market form rather than a hierarchy mode of governance.
The literature on business groups in emerging markets analyzes how economic actors deal with
institutional voids in their working environment, thus within-country institutional voids. Definitions of
business groups vary as its understanding varies between countries. Khanna and Rivkin (2001)
provide a definition stating it “is a set of firms which, though legally independent, are bound together
by a constellation of formal and informal ties and are accustomed to taking coordinated action”.
One example is that of venture capital provision. In many emerging and transition economies, creditor
protection is poor since contract enforcement is difficult, financial disclosure requirements are limited
and capital acquisition is limited. However, income diversity is high, meaning that there are individuals
and institutions exist with necessary capital. A business group either has such individuals affiliated or
it can function as a security mechanism by putting the whole group’s reputation at stake when
acquiring capital (Khanna, Rivkin 2001). The business group similarly steps in for weak contract
enforcement mechanisms and risk-sharing possibilities. Further studies could show that membership
improves financial performance and productivity (Keister 1998). Korean business groups have
created efficient structures for management talent. Labor immobility due to lack of information, non-
credible certification mechanisms and prohibitive training costs was overcome through rotation
schemes within the group (Khanna, Palepu 1997).
Jansson & Sandberg (2008) claim to combine SME internationalization with the industrial network
theory. They state correctly that foreign market networks can function as entry nodes. They
acknowledge institutional differences and mention the supportive function of intermediaries to
overcome these voids. However, in their empirical part, they only observe tryads and dyads, which
are far from resembling networks. The authors mention institutional difficulties and, that an exporting
firm loses the opportunity to gain market knowledge if it uses an intermediary. However, they do not
provide detail on the institutional difficulties and the reasons behind these or on networks of more
than three actors.
Meyer and Skak (2002) highlight that when entering an institutional setup very different from the home
market country-specific knowledge becomes crucial. They claim that the availability of this country-
specific knowledge is crucial and additionally difficult to posses for SMEs since they cannot spread
their costs. However, they refer to business networks in the home country consisting of companies
that have the crucial country specific knowledge. They could show the positive effects of country
specific knowledge sharing in home market business networks. However, their empiric is based only
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on Danish and Austrian SMEs entering Russia, and thus may simply not be transferable to a wider
field.
4. Clusters as entry modes for SMEs in environments of institutional voids
The literature review could not reveal a transaction cost-reducing entry mode for SMEs entering
environments of institutional voids. According to the literature, either the resources of a multinational
from outside the environment or the resources combined by a business group inside the environment
can fill such voids. However, an SME from a West-European country wishing to trade with an SME in
Southeast-Europe has neither the resources of a multinational nor the contacts for engaging informal
business groups within the host country. Yet, since a business group is a relatively informal, closed
network, to which it is difficult to obtain contacts, a more formal network within the environment of
institutional voids could be an entry node for the West-European SMEs, performing similar surrogate
mechanisms as the business group does.
As SMEs generally prefer a market form rather than a hierarchy when entering transition economies
(Brouthers et al. 1996), a network, which is more formal and open than a business group is needed.
The cluster approach fits this description. Clusters are geographic concentrations of companies from
one and related industries (Maskell 2001). These actors “are interlinked on the base of business-
related commonalities and complementarities and derive economic advantages from that” (Fromhold-
Eisebith, Eisebith, 2004). Clusters are critical to competition of single firms, since they increase
productivity, enhance innovation and stimulate new businesses (Porter, 1998). Lublinski, (2003)
summarizes the advantages of clusters as Marshallian externalities such as labor pooling,
accessibility to intermediary goods and tacit knowledge spillover, Porterian market advantages such
as demanding costumers, rivalry and complementaries, and transportation and transaction costs
advantages under which he also subsumes trust. Jungwirth et al. (2010), as well as Scheer and von
Zallinger (2007), highlight the importance of the nature of these services. Only services that are
directed at specific voids encountered by the companies generate incentives to participate in the
cluster.
Through an extensive survey on Bavarian cluster initiatives Jungwirth et al. (2009) elaborate a list of
services a cluster provides. The list is concurrent with others in the literature; however, Fromhold-
Eisebith and Eisebith (2004) highlight the task of linking firms to universities and R&D institutions, as
a crucial aspect for SMEs, since they lack the necessary resources to build their own R&D
departments. Scheer and von Zallinger (2007) add “access to (venture) capital” to the list; again a
service especially relevant for SMEs. Combining these with the five functions of intermediaries stated
earlier by Ricart et al. (2004) and Khanna and Palepu (2003) leads to table nr. 1.
Table 1: Cluster services as functions of intermediaries
Functions of intermediaries Cluster Services
Contract guarantor Consultancy for cooperation contracts
Providing specialized information Establishing new communication structures
Public relations and regional marketing
Foreign trade promotion
Spreading information through the internet and fairs
Technology scouting
Organizing conferences
Facilitating partner search Launching and coordinating cooperative projects
Organizing cooperation platforms
Initiating contacts between cluster actors
Support cooperation between firms and regional
universities and R&D organizations
Talent search Personnel procurement
Providing qualification measures for employees
Capital provision Encouraging new business formations
Support in writing grant proposals
Access to (venture) capital
(Source: Own illustration based on Jungwirth et al. (2009); Fromhold-Eisebith, Eisebith (2004);
Scheer, von Zallinger (2007); Ricart et al. (2004) and Khanna, Palepu (2003))
Thus, the services a cluster provides can be allocated to the five major functions of intermediaries
identified in the literature. Thus, our baseline proposition is: Cluster services fulfill intermediary
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functions. If they do, than – following Ricart et al.’s (2004) logic - these services should also fill
institutional voids. Therefore, the differentiation of Ricart et al. (2004) on within-country and cross-
country institutional voids is of help. Within-country voids refer to missing intermediaries in the country
in question. Thus, the void is not specific to the trade itself. What is specific to the situation is that
certain voids will occur in the transition country to which the SME from the market economy is not
accustomed to, which then leads to higher transaction cost of trade. Talent search i.e. becomes
difficult for the West-European SME if he does not know the educational system and which university
provides which quality of education. The cluster steps in as an intermediary, providing specialized and
for the West-European SME evaluable training, thus filling the void. The information provision function
of the cluster is similar. The West-European SME needs information on the market it aims trading
with. If information provision institutions, i.e. market research institutions, are not in place or if the
information is not sufficient, the SME faces high or prohibitive transaction costs. Again, the cluster has
the potential to fill this void by providing the demanded information. Similar scenarios can be imagined
for the other functions summarized in table one. Thus, we conclude that cluster services, in fulfilling
intermediary functions, fill certain within-country institutional voids.
If the above proposition is valid, showing that (1) cluster services fulfill intermediary functions and (2)
it has the potential to fill certain institutional voids then market entry for SMEs from market economies
into transition economies through clusters comes – ceteris paribus - at lower transaction costs.
However, Ricart et al. (2004) mention a second group of voids. As stated earlier, cross-border voids
are differentiated in cross-border institutional issues and issues that concern differing formal and
informal institutions in the trading countries per se. The first type concerns trade regulations between
the countries and would observe a void if i.e. border resolution mechanisms are not properly in place.
For the first category, the cluster has only limited abilities to fill the void through information provision
services. The cluster possibly cannot fill the void if trade regulations are not in place or insufficient as
these issues are generally dealt with on a high political level. The existence of the second sub-type is
not a void itself. The void occurs if no “translating” mechanisms are in place, such as proper language
translation, information on different informal standards or mechanisms to make i.e. different
accounting standards comparable. The second type of cross-border can be filled by the cluster
initiative, however, presumably at generally higher costs than a within-country void, as it demands
additional structures. The services the cluster provides that fill within-country voids are generic tasks
of a cluster. The services a cluster would provide to fill this second type of cross-border voids are
additional services only interesting for its members that like to engage in international trade. Such
services can be summoned as translating services. Thus, it can be assumed, that to fill cross-border
institutional voids, which arise due to different institutional setups, entails higher costs for the cluster
than filling within-country institutional voids.
Thus, there are two main conclusions. First, if cluster services do fill institutional voids and thus
reduce transaction costs, businesses placed in the environment with the institutional voids have a
clear participation incentive. Furthermore, companies from other institutional setups have an obvious
entry point in these markets. Second, these observations offer clear insights for the cluster
management. In order to generate participation incentives and even members that are willing to pay
for this membership, the development of services, targeted at filling institutional voids is necessary.
The management might even consider providing specialized services that aim at filling cross-border
voids, such as a translation mechanism for accounting standards, in order to generate higher benefits
from reduced transaction costs of trade for their members.
5. Discussion and limitations
The paper aimed at elaborating a market entry mode for SMEs from well developed market
economies entering a transition economy at lower transaction costs. The first section showed that the
concept of institutional voids is not only applicable for emerging countries, but for transition countries
as well. Even though, the institutional voids developed out of different historical events, the voids are
similar. A literature review showed, that the contributions in the field do not offer solutions for SME to
cope with institutional voids. As a result, the article suggests that a cluster in the transition economy
can fill certain institutional voids, since the cluster management functions as an intermediary and thus
reduces search- and initiation costs for both trading partners. The article contributes to the literature
on the concept of institutional voids transferring it to the context of transition economies and
elaborating a link to the cluster concept. However, the paper is limited to a literature approach and a
conceptualization, which calls for empirical justification. The article limits itself to the specific context
of SMEs from a market economy trading with a SME from a transition economy. The authors have
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primarily the European context in mind, and the transferability to other contexts is questionable.
Furthermore, other aspects of clusters that possibly lead to a reduction of institutional voids where
neglected, such as signaling and screening mechanism that can potentially increase the reputation of
its members. The sustainability has neither been given attention. The voids in transition economies
are due to the transition process and will eventually be tackled by the state. These neglected issues
call for further research.
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513
Challenges Faced by Women Refugees in Initiating
Entrepreneurial Ventures in a Host Country: Case Study of
UNHCR Women Refugees in Malaysia
Ayadurai Selvamalar
CB Consultancy & Training, Petaling Jaya, Malaysia
drmalar@cbconsultancy.com.my
Abstract: As of December 2009, 80,000 refugees and asylum-seekers have been documented by the Office of
the United Nations High Commissioner for Refugees in Kuala Lumpur, Malaysia and of this, 35% are refugee
women. As Malaysia is not a signatory to the 1951 Convention, refugees and asylum-seekers in Malaysia are
considered to be “illegal” and are subjected to arrest, detention and deportation. They live in constant fear and
often prefer to make themselves invisible, living in unsafe and dangerous places that are overcrowded and lack
proper ventilation, sanitation and hygiene. This research paper addresses two major challenges faced by women
refugees in Malaysia; firstly, challenges faced as a refugee in a host country, and secondly, challenges faced in
initiating an entrepreneurial venture in an adverse environment. The paper focuses on four main research
objectives: i) reasons why the women refugees chose Malaysia as their host country; ii) challenges faced by the
women refugees in Malaysia; iii) challenges faced in initiating their entrepreneurial ventures; and iv) skills they
require to succeed in their entrepreneurial ventures. Five community groups were identified for the purposes of
the study, namely, the Myanmar Muslims, Rohingyas of Myanmar, Sri Lankans, Somalis and Afghans.
Exploratory research in the form of in-depth interviews was conducted with a minimum of 2 sample groups of
each community group. The women in this study were given micro-credit financing not exceeding USD 600.00
using the concept of the Grameen Banking System to initiate small home-based businesses under an initiative by
the UNHCR in partnership with a Malaysian NGO. Whilst much research has been conducted on women
entrepreneurs, there has been minimal research on entrepreneurship by women refugees. This study aims to
highlight the plight of women refugees in initiating entrepreneurial ventures in Malaysia.
Keywords: women refugees, women entrepreneurs, UNHCR, entrepreneurial ventures, micro-credit financing
1. Introduction
The 1951 United Nations Convention Relating to the Status of Refugees is the only universal
document governing the treatment of refugees by states in whose territories the refugees are found.
Some 136 states have acceded to the Convention and its Protocol, the most important parts of which
are its definition of “refugee” and its prohibition against refoulement (Young, 1998). Malaysia is not a
signatory to the 1951 Convention and has no national law stipulating the rights of refugees in her
country, yet every year, Malaysia receives thousands of refugees from Myanmar, Sri Lanka, Somalia,
Afghanistan and Iraq. Malaysia hosts some 90,000 refugees and asylum-seekers, 90 per cent of
whom are from Myanmar. Other significant refugee populations originate from Afghanistan, Iraq,
Somalia and Sri Lanka. There is currently no legislative or administrative framework for dealing with
refugees. By law, refugees are not distinguished from undocumented migrants. They are therefore
vulnerable to arrest for immigration offences, and may be subject to detention, prosecution, whipping
and deportation. In the absence of a national administrative framework, UNHCR conducts all activities
related to the reception, registration, documentation and status determination of asylum-seekers and
refugees. Since refugees and asylum-seekers have no access to sustainable livelihoods or formal
education, UNHCR runs a limited number of humanitarian support programmes for them, in
cooperation with its NGO partners. As of January 2009, there were approximately 46, 700 persons of
concerns registered with UNHCR Malaysia. Many remain unregistered and if the registered number is
taken into account, the figure could be estimated to exceed 100 000. Among those registered, 34%
(16 032) are women. Out of this 16 032 women, 87% (13 893) are from Myanmar, 561 are from
Indonesia, 452 are from Sri Lanka, 286 are from Somalia, 230 from Afghanistan and 216 from Iraq.
There are “others” from 26 different countries and they too are registered with the UNHCR in
Malaysia. Women in particular face grave challenges in this environment where they are not allowed
to work, have no legal protection and legal status, are extremely vulnerable to violence and
exploitation, have the dual task of balancing family and work life, whilst conforming to the restrictions
imposed by their husbands. The focus of this study will be on “women refugees” and will not include
“asylum seekers.” This study looks at women refugees who were given an opportunity to develop
small business ventures and entrepreneurial ventures by the UNHCR through a refugee development
programme called the “Livelihood Development Programme” in collaboration with a local NGO, TECH
Outreach, in Malaysia. The study will look at the plight of the women refugees in this country and the
challenges faced by them in initiating entrepreneurial ventures in a ‘hostile’ environment. There has
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been extensive research on entrepreneurial initiatives by women entrepreneurs in urban and rural
settings worldwide but there has been very little research on entrepreneurial initiatives by women
refugees in host countries. The few studies that have been done have focused on training and
capacity building of women refugees in Angola, Mozambique and Kenya. Hence, there is a “lacuna”
that needs to be addressed as in looking at entrepreneurial behavior of women refugees in the Asia
Pacific Region.
2. Research objectives
This study will focus on four main areas of interest in understanding the plight and challenges faced
by women refugees in Malaysia, namely, i) reasons why the women refugees chose Malaysia as their
host country; ii) challenges faced by the women refugees in Malaysia; iii) challenges faced in initiating
their entrepreneurial ventures; and iv) skills they require to succeed in their entrepreneurial ventures.
The research will only look at five refugee communities in Malaysia: the Myanmar Muslims and
Rohingyas (the largest community group in Malaysia), the Sri Lankans, Afghans and Somalis. These
five community groups form the largest percentage of women refugees in the country registered with
the UNHCR in Malaysia.
3. Review of the literature
At the end of 2007, there were roughly 11.4 million refugees around the world that were under the
responsibility of the UNHCR. This is the largest number of refugees seen in the past six years and
continues the upward trend started in 2006. At the end of 2007, the Asia Pacific Region had 27.6% of
the 11.4 million refugees under the mandate of UNHCR. The Middle East and North Africa region had
27.4%; the rest of Africa had 23.5%, followed by Europe 16.3% and the Americas 5.2%. In 2007,
Pakistan hosted the largest number of refugees and people in refugee-like situations with over 2
million residing in that country, followed by Syria (over 1.8 million) and Iran (approximately 964 000).
In 2007 the largest country of origin for refugees was Afghanistan (3.1 million), with Iraq as the next
largest (2.3 million), followed by Colombia, Sudan, Somalia and then Burundi. The data available
showed that roughly half of the population of concern were female. About 44% of the population of
concern, for which data is available, were children under the age of 18 and about 10% were under the
age of five, available at http://www.hreoc.gov.au/racial_discrimination/face_facts/chap3.html
th
(accessed on 28 March 2010). The number of refugees worldwide is alarming but the number of
refugees and asylum seekers that are allowed ‘entry’ into developed nations has been decreasing
over the years. Since 2001, the number of asylum seekers in the West has halved, with a decrease of
10 percent from 2005 to 2006. The decreasing number of asylum seekers reflects the trend that rich
countries increase their efforts to build walls to keep people out. These include both visible, physical
walls, and less visible barriers of tougher visa laws and penalties for airlines who carry people without
proper identification (Oivind Fjeldstad, 2007). Portes and Rumbaut (1990) suggested that for
refugees/asylees, the U.S., and other MNCs should be willing to absorb a fair share of the displaced
persons in relation to their resources and humanitarian, rather than political advisements. This clearly
indicates that Western nations take less responsibility for the world’s refugees and refugees are
forced to target developing countries like Thailand, Malaysia and Indonesia. Although Malaysia has
no resettlement programme for refugees, she continues to accept refugees based on humanitarian
grounds and in doing so is faced with socio-cultural problems brought about by foreign refugees and
the added responsibility of housing them, providing them with medical aid, protection issues and the
increased administrative issues. The Flyktningregnskapet 2007 report prepared by the Norwegian
Refugee Council on the global refugee situation has identified a list of ten ignored displacement
situations that deserves greater attention. The list of the ignored IDP (Internally Displaced People)
situations includes Burma (Myanmar), Colombia, the Central African republic, DO Congo, Somalia,
India, Iraq, Russia (Chechnya), Sudan and Uganda (Oivind Fjeldstad, 2007). Of these ten countries,
four community groups are present in significant numbers in Malaysia, namely, Myanmar, Somalia,
Iraq and Sudan. This study however looks at communities from 4 countries only, as in, Myanmar, Sri
Lanka, Somalia and Afghanistan, reason being, these are the four largest refugee community groups
where entrepreneurial initiatives have been established by the UNHCR in Malaysia. The definition of a
refugee in Article 1 of the Convention is a person who “owing to well-founded fear of being persecuted
for reasons of race, religion, nationality, membership of a particular social group or political opinion, is
outside the country of his nationality and is unable, or owing to such fear, is unwilling to avail himself
of the protection of that country...” (Young, 1998). Refugees should also not be confused with asylum
seekers – the two terms have different legal definitions. An asylum seeker is a person who has left
their country of origin, has applied for recognition as a refugee in another country, and is awaiting a
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decision on their application. This study will only focus on UNHCR refugees registered with the
UNHCR Office in Malaysia and will not take into consideration asylum seekers.
The European Commission Report (2008) defines “ethnic entrepreneurship” as businesses connected
to a certain immigrant group, functioning on a closed basis and dependent on a certain community
(including workers, suppliers and clients). Therefore, “immigrant entrepreneurship” is seen as a
broader concept that also includes businesses that target non-ethnic clients and that function in the
open economy (as opposed to the closed market defined by the immigrant community). In Malaysia,
under the initiative of the UNHCR and the Local NGO implementing the Livelihood Programme for
women refugees, the transition from ethnic entrepreneurship to immigrant entrepreneurship is already
taking place where the women refugees are encouraged to target non-ethnic clients as in Malaysians
for the sales of their products and services. This has opened up the market for the refugee
communities to a large extent. However, the percentage of refugee communities integrating with the
local community is limited and seen in the range of less than twenty percent. The EC Report (2008)
also states that migrant and ethnic minority entrepreneurship as highly heterogeneous topics, as can
be seen in the Malaysian experience where the four different communities in the study hold different
proclivities for certain economic factors. Just like how the Italians and Greeks in Germany are likely to
engage in the food sector, the Myanmar Muslim/Rohingya and Sri Lankan communities engage in the
food sector. Turks in Germany will often engage in the retail trade which is comparable to the Somalis
in Malaysia who engage in trading of clothing, cosmetics, accessories and jewellery. The Afghans in
Malaysia are more inclined to baking and sewing whilst the Myanmar Muslims/Rohingyas are more
inclined to selling vegetables and fish in the market and petty trading in their housing locations. The
refugee communities in Malaysia use entrepreneurship as a “survival strategy” or “economic lifeboat,”
that is, as a last ditch alternative to unemployment as stated by Valdez (2002). The EC Report (2008)
indicated that entrepreneurship and self-employment in ethnic communities are higher than the
national averages, however the various restrictions that these businesses face hamper their growth
and prevent them from realizing their full potential. The EC Report (2008) recommended that migrant
and ethnic minority entrepreneurs be developed on basic business skills and given assistance mostly
in the very early phases of the business.
Myanmar Refugees in Malaysia
The Malaysian government says there are about 25,644 Myanmar asylum-seekers in the country but
refugee groups believe the real figure is more than double that. The majority are Rohingya Muslims
from Myanmar's Rakhine state while the rest are Christian Chins, Karens and Shan, available at
http://afp.google.com/article/ALeqM5hvKbHpJQTABShovTAT050Sn5VkLQ/ (accessed on 28 March
2010). The Myanmar Muslims and Rohingyas make up the largest refugee community in Malaysia
with 87% (13893) of the refugee women in Malaysia from Myanmar. Those from Indonesia consist the
second largest group (561), followed by Sri Lankans (452), Somalis (286), Afghans (230) and Iraqis
(216). These women refugees are the ones registered with the UNHCR. Many remain unregistered
with the total number of refugees in Malaysia estimated to exceed 100 000. The ethnic Chin
constitutes the largest group in Myanmar women refugee population constituting 43%, followed by the
Rohingyas constituting 31%, and Myanmar Muslims constituting 12%. As refugees remain
unrecognized by the Malaysian Government, they live in constant fear of raids, arrest and detention.
Afghan Refugees in Malaysia
For more than 20 years, Afghanistan has produced the world's largest refugee group ever, at times as
high as 6.2 million persons. Currently numbering 2.6 million, Afghan refugees are still the largest
displaced population in the world. Over 1 million Afghan refugees live in 203 officially recognized
refugee "villages" in Pakistan, available at http://www.afghanwomensmission.org/background/
(accessed on 28 March 2010). There are approximately 230 Afghan women refugees in Malaysia.
Many of these women are homemakers with a fair number being involved in small businesses like
carpet weaving, yoghurt making, tailoring, and a small percentage hold part-time jobs and do odd jobs
in urban areas.
Somali Refugees in Malaysia
There are an estimated 1.4 million internally displaced people in Somalia while nearly 570,000
Somalis live as refugees in neighboring countries, available at http://www.unhcr.org/4bbf3af49.html/
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(accessed on 11 April 2010). Fleeing civil war and poverty, Somalis make their way to neighboring
countries for refuge. Malaysia is host country to 286 women refugees, many of whom are involved in
trading in goods imported from the Middle East. The Somali refugees are a relatively new arrival in
Malaysia with 92% staying in Malaysia for less than 2 years.
Sri Lankan Refugees in Malaysia
Thirty years of civil war in Sri Lanka has driven many Tamils out of their country in search of a safer
ground in Europe, Canada, Australia, India and South East Asia. Most of the Sri Lankan refugees in
Malaysia (92%) entered Malaysia after 2005 when the situation in their country started to deteriorate
as the ceasefire came to an end. 72% of the Sri Lankan refugees in Malaysia have been staying in
Malaysia for less than 2 years. At present, there are approximately 452 Sri Lankan women refugees in
Malaysia but the numbers increase every month as more Sri Lankans leave their country in search of
a safe haven.
Women Refugees and Entrepreneurship
Ongoing violence and instability in some parts of the world force increasing numbers of people to flee
their homes and seek refuge in safe countries. Kelleher (2007) stated that refugee children and men
rely on the refugee women for return to normal life within their own community. In this context, women
refugees need to be given a platform on which they can build a better future. The ILO (Internal Labour
Organisation) and UNHCR (United Nations High Commission for Refugees) through a technical
cooperation partnership have facilitated the implementation of various activities through capacity
building for women refugees. This involves the creation of the right conditions for starting various
income generating activities and this forms the central focus of this study. However, scholarly articles
on the efforts of the ILO-UNHCR partnership has been limited and for the purposes of this study,
reference is made to the entrepreneurship development programme of women refugees in Angola
and Mozambique. The ILO-UNHCR partnership has successfully empowered women refugees in
these two countries by establishing sustainable economic ventures to increase the self-sufficiency of
women and girls through agricultural, income-generating, micro-finance and educational activities.
The efforts by the IRC (International Rescue Committee) in Kenya in initiating community-funded
schemes based on the Grameen Bank Model is also analysed to enlighten us on efforts taken to help
women refugees initiate entrepreneurial ventures in the Kakuma Refugee Camp in Kenya.
Lumbala N’Guimbo is one of the nine administrative centres in Moxico province, Angola that is
currently receiving most of the returnees from neighbouring Zambia (ILO, 2006). Women are involved
in business. Some operate their ventures as family businesses while others run them individually.
Most of the activities that are run by women include the buying and selling of consumables bought
from nearby Lusaka. In addition to business activities, fishing is also practiced. There are also
activities run in cooperation with men. In Sacacuhu area, for example, an association composed of
both men and women is engaged in horticulture and apiculture (ILO, 2006). The ILO-UNHCR
partnership had introduced the concept of micro-credit and savings to facilitate the move towards
sustainability and to help eliminate dependency especially on humanitarian organizations. The women
were also introduced to basic business concepts in order to facilitate running of individual businesses
and the overall management of the community development centre by the women.
A similar initiative was executed in the Marratane Camp in Nampula Province in Mozambique where
the main objective of the ILO-UNHCR partnership was the socio-economic empowerment of the
women of the refugee community (ILO, 2004). The economic mapping revealed that many of the
refugees were involved in numerous economic activities, including trade, manufacturing and
processing, agriculture and livestock farming and services. Problem areas identified were a general
lack of entrepreneurship skills and a lack of financing due to high loan default rates in the past. The
analysis of gender relations showed that due to the traditional gender roles, characterized by a high
degree of inequality between women and men, the women in general are not involved in
entrepreneurship or other income-generating activities. The men initially reacted negatively to the fact
that the programme was originally targeted at women only. Training sessions were thus held to
enhance the residents’ awareness of gender issues and to bring about a change in the residents’
negative attitudes towards women’s entrepreneurship and economic empowerment (ILO, 2004). The
focus of the project was on developing the target group’s entrepreneurship skills. At the end of the
training, the women elaborated business plans. In order to secure family support for the future
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Ayadurai Selvamalar
business activities, efforts were made to include the husbands of the women participants in the
training programme.
Kakuma is one of the two refugee camps (the other one being Dadaab) where the government of
Kenya is relocating all the refugee population previously spread out in camps throughout the country.
Women make up about 40 percent of the camp's population and 60 percent of the heads of
households. The International Rescue Committee (IRC) runs a community-funded scheme based on
the Grameen Bank credit model. The project covers about 200 groups of whom 90 percent are all
female. Under the camp's micro-enterprise development project a number of business skills training
programmes are run, including courses in advanced business training, business skills formation and
business management. While IRC has placed special attention on women's participation, their course
participation rates have been extremely low (around 1.3 percent). This is despite the fact that they
make up around 90 percent of those with loans. The women's development programme (WDP) was
set up by LWF (Lutheran World Federation) after it realised that most women did not participate in a
large number of the activities in the camp. The WDP is aimed at empowering women through capacity
building and leadership training, skills development, and income-generation programmes. Capacity
building and the development of leadership skills are stated priorities of this programme. Yet it is its
weakest point as no specific activities had been designed to help women acquire those skills or to
identify women leaders within each group.
Entrepreneurial ethnic groups are thought to use their ethnic networks to mobilize resources and
opportunities which in turn contribute to their above-average rates of business ownership (Light and
Bonacich, 1988; Portes and Bach, 1985; Waldinger et.al.,1990) as stated in Valdez (2002). Hence,
ethnic entrepreneurship is facilitated by resource mobilisation based on ethnicity. That is, ethnic
membership is regarded as an essential factor in shaping the entrepreneurial outcomes of ethnic
groups in the United States. Understanding the relationship between ethnicity and enterprise is
important because entrepreneurship among ethnic minorities is associated with socioeconomic
mobility (Light, 1984; Logan, Alba and McNulty, 1994; Nice and Sanders, 1985; Portes and Bach,
1985; Portes and Zhou, 1992; Sanders and Nee, 1987; Sanders and Nee, 1996; Waldinger, 1986;
Waldinger et. al., 1990) as stated in Valdez (2002). According to Valdez (2002), entrepreneurs who
engage successfully in relationships based on market exchange, will have superior entrepreneurial
outcomes. However, entrepreneurs who engage in such relationships are already themselves likely to
be well-integrated in the market. The ability to accumulate capital from market exchange relationships,
that is, economic institutions such as banks or investment firms or even personal savings, suggests a
strong market position, since such leading institutions do so based on the belief that their investment
will generate a profitable return (Valdez, 2002).
A template was developed to be used as a format for the in-depth interviews and the information in
the template addressed the research objectives and problem statement. The in-depth interviews will
address both quantitative and qualitative information and focused on five main areas, namely, the
women’s personal information, their challenges as a woman refugee in Malaysia, assistance provided
by the UNHCR and Government of Malaysia for refugees in Malaysia, challenges they face in
initiating entrepreneurial ventures in Malaysia and skills they need to succeed in their entrepreneurial
ventures.
5. Sampling and data collection
A total of 51 women were interviewed. These 51 women comprised of 23 women from the Myanmar
Muslim and Rohingya community from Myanmar (Burma), 4 women from the Afghan community, 12
women from the Somali community and 12 women from the Sri Lankan community. In-depth
interviews were conducted with each community There were 5 groups of the Myanmar
Muslim/Rohingya community, 1 group of the Afghan community, 2 groups of the Somali community
and 2 groups of the Sri Lankan community. These women were interviewed with the assistance of
UNHCR Interpreters as most of them did not understand English and each question on the
questionnaire had to be interpreted to help them answer the question accurately. Each interview took
60 minutes to 90 minutes to complete.
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6. Data analysis and interpretation of findings

The Myanmar Muslims and Rohingyas were grouped together and treated as one community as they
were both from Myanmar, just from different parts of Myanmar, but their issues were seen to be
almost identical. These five community groups were from a group of women who had been identified
by the UNHCR to receive funding for income generation activity under the “Livelihood Development
Programme” by the UNHCR. Since the objective of the research was to identify the challenges faced
by UNHCR women refugees in initialing entrepreneurial ventures, this sample population was an
appropriate and representative sample group.
Myanmar Muslims & Rohingyas from Myanmar (Burma)
In-depth interviews were conducted with 5 groups of Myanmar Muslim and Rohingya women
refugees. There were 23 women in total. Their ages ranged from 23 to 55 and they came to Malaysia
from Myanmar during 1999 to 2009. Their reasons for coming to Malaysia were many, with the most
significant reasons being discrimination by Myanmar authorities in Myanmar and political/ethnic
persecution in their country.
Afghans
Only 1 in-depth interview was conducted with a group of 4 Afghan women. The reason why there was
only 1 group was because amongst the 5 community groups, there was least participation from the
Afghan community. The women’s ages ranged from 24 to 46 and they came to Malaysia from Iran
during 2007 to 2009 due to war in their country.
Somalis
Two Somali groups with a total of 12 women were interviewed for this research. Their ages ranged
from 23 to 55 and they came to Malaysia during 2006 to 2008 due to civil war in their country.
Sri Lankans
Two Sri Lankan groups with 12 women in total were interviewed for this research. Their ages ranged
from 23 to 44 and they came to Malaysia during 2007 to 2009 due to an ethnic war in Sri Lanka.
Reasons Myanmar Muslims/Rohingyas Afghans Somalis Sri Lankans
arranged in
order of
priority
1 Nearest country Easy to come Only country No need for an Entry
to Malaysia that allowed Visa
legally them in without
a Visa
2 Malaysia allowed them to survive Easy to get a Muslim country No need to waste
Visa time trying to gain
entry into the country
3 Malaysia is a Muslim country Easy to enter
Malaysia
4 Relatives in Malaysia They were told it was
easy to secure a
UNHCR Card in
Malaysia
5 Cannot stay long in Thailand
which was their first point of entry,
so they came to Malaysia
Figure 1: On the question as to why they chose Malaysia as a host country
Ease of entry into Malaysia seemed to be the primary reason why the refugees chose Malaysia as a
choice of host country. All four communities shared similar reasons and stated that the proximity to
Malaysia, the ease of entry which did not require an entry visa and the possibility of a legal entry
made them choose Malaysia as a host country.
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Ayadurai Selvamalar
Myanmar Muslims / Afghans Somalis Sri Lankans

Rohingyas
Refugees cannot No stable life No housing (the Harassment by police and
work (No. 1 No. 1 challenge) immigration (No. 1
challenge) challenge)
Harassment by police Financial problems – have to No work permit Medical aid – double charge
(No. 2 challenge) take care of children but for foreigners
cannot work
Have to pay back the No work permit No job Have to wait 1 to 2 years for
Agent the UNHCR Card
No legal status Resettlement pending No opportunities Children cannot go to a
normal Government school
Self-Protection Have to work and do
business secretly
Gangsters extort Cannot work (No. 2
money challenge)
No guarantee for High transport costs
permanent residence
in Malaysia
No money Language is a barrier
Children cannot go to No housing
a normal Government
school
Do not understand the Unreliable future in
language Malaysia
Arrested for doing discrimination
business and selling
products
Figure 2: On the question as to the challenges faced by women refugees in Malaysia
Their illegal status which led to their inability to work or conduct a business was their greatest
challenge as a refugee. The Myanmar Muslims’/Rohingyas’ three greatest challenges were their
inability to seek employment, the harassment by the Malaysian police, and the fact that they had to
pay back the agent who had facilitated their trip to Malaysia. The Afghans’ greatest challenge was the
unstable life they experienced in Malaysia in terms of no employment, no schools for the children, no
access to medical treatment, financial problems in supporting their families and their inability to work.
The Somalis’ greatest challenges were their inability to work in Malaysia, lack of opportunities for
survival and lack of housing for their community. The Sri Lankan community found the harassment by
the Malaysian police a big challenge, including lack of medical aid, lack of education for their children
and the long time period they had to wait for a UNHCR Identity Card and resettlement status. Hence,
the challenges were similar amongst all the four communities, they just differed in priority.
Myanmar Muslims/Rohingyas Afghans (4 women) Somalis (12 Sri Lankans (12 women)
(23 women) women)
Safety / security problem Language Single No money because of that
(No. 1 challenge) mother relationship problems between
husband and wife
They stay in “black areas” Cannot work No facilities Harassment by police
hence not safe and security is for women
a problem
Fear for daughters’ safety No one to take care of Health Have to take care of their
their children if the issues children, so cannot do odd jobs
women go to work
No future for children in safety No friends and family in
Malaysia Malaysia
Communal living Have to handle everything on
their own
No freedom to move around Scared that husbands who go
out to work will get arrested
No freedom to move around
freely
Mo medical facilities
Figure 3: On the question as to the challenges faced by women refugees “as a woman” in Malaysia
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Ayadurai Selvamalar
Safety and security was their greatest challenge as a woman in this country. There have been cases
of sexual harassment and gender based violence in the communities and this has been a constant
fear for the women. These communities lived in unsafe areas and they feared for the safety of their
women and young daughters.
Myanmar Muslims/ Afghans Somalis Sri Lankans
Rohingyas
Marketing their products Financial help (No. 1 Repaying the loan Financial help (No. 1 challenge)
and services (No.1 challenge) that they borrowed
challenge)
Investment funds (No. 2 Communication Language
challenge)
Manpower Work permit to start Transportation
business
Technical knowledge Language Licenses required to operate
business legally (No. 2 challenge)
Skills Marketing the products and
services
Legal status Don’t know where to find
customers
Ability to move around
freely
Don’t know how to
produce high quality
products
Figure 4: On the question on challenges they foresee in starting small businesses
The women identified two major challenges in initiating small businesses: i) financial assistance; and
ii) marketing their products and services. The other challenges, in no particular order of priority,
included a) communication, b) language, c) legal status, d) technical knowledge and e) licenses and
work permits. These women have their individual skills and capabilities which can be developed to
help them initiate small entrepreneurial ventures. Initiatives such as the ILO-UNHCR partnership in
building capacity of women in entrepreneurship development, if initiated in Malaysia amongst the
women refugees, can help develop a vibrant entrepreneurial community which will help them sustain
themselves and their families through economic empowerment.
Myanmar Muslims/ Afghans Somalis Sri Lankans
Rohingyas
Marketing knowledge Proficiency in English Technical Marketing knowledge
language knowledge
Confidence Product skills Hard work Understanding the Malaysian ways
and taste
Product skills (No. 1 Motivation Quality control
skill)
Communication skills Communication skills
Accounting skills Manpower
Management skills
Proficiency in English
language
Figure 5: On the question as to what skills they needed to succeed in an entrepreneurial venture
The women identified five main skills that they needed in order to succeed in their entrepreneurial
ventures: i) marketing knowledge; ii) product skills; iii) English language proficiency; iv)
communication skills; and v) soft skills like confidence, motivation and hard work. Most of these
women did not have a formal education, let alone a tertiary education. Hence, their knowledge on
starting a small business, growing a market, looking into the quality of a product or service,
accounting and budgeting were all new areas of concern for them. These women need to be “hand-
held” to help them make their entrepreneurial ventures a success. They need mentors and coaches to
see them succeed in their businesses.
7. Discussion
The 51 women refugees interviewed gave a good reflection of the state of women refugees in
Malaysia from two different perspectives, namely, a) from a “refugee” point of view, and b) as a
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Ayadurai Selvamalar
women refugee initiating an entrepreneurial venture in a host country. The greatest challenge the
women faced as a refugee in Malaysia was their illegal status which prevented them from being
legally employed or legally operate a business venture of their own. These women felt that if the
government of Malaysia could give them legal status and allow them to work and run their own
businesses, they may want to stay permanently in Malaysia and not seek resettlement in a developed
country. They expressed anger, disappointment and frustration that Malaysia had allowed them entry
into the country and allowed the UNHCR to give them the UNHCR refugee status but had not allowed
them to work or start their own businesses. This deprived them of living a normal life in Malaysia and
they had to live a life of fear and despondency because of their illegal status. To make ends meet,
they had to start businesses within their homes on a small scale, take up part-time employment and
do odd jobs. They identified two major challenges in initiating small businesses, namely, financial
assistance as in capital for starting a business and secondly, support for marketing their products and
services. The women had no knowledge on how to market their products and they needed training on
marketing skills and selling techniques to help them approach the Malaysian community and not
confine their businesses to within their own communities.
8. Conclusion
The women refugees in Malaysia are an asset to the country if they are given legal status and allowed
to initiate entrepreneurial ventures. These women have somewhat successfully managed to sustain
their household income and take care of their husbands and children by working ‘illegally’ and running
their small businesses quietly within their homes. Like all migrant communities, these women too have
the entrepreneurial spirit within them, and given the opportunity to operate legally, they will be very
successful in entrepreneurship if they are closely guided as in the ILO-UNHCR partnership initiative in
Angola and Mozambique where the women were trained on capacity building and entrepreneurship
development. Despite the restrictions and security threats that they face on a day to day basis, these
women have successfully initiated entrepreneurial ventures. They may not have the skills and
knowledge but they have the initiative to start small businesses to support themselves and their
families. They are willing to try any venture that the UNHCR is willing to train them on. A structured
capacity building programme on entrepreneurship development must be initiated by the UNHCR to
hand hold these women refugees to transform them into self sustainable communities. The women
refugees must be empowered as refugee children and men rely on the refugee women for return to
normal life within their own community.
References
Ban, Megumi. (2010) Refugee Women in Malaysia, Community Development Unit, UNHCR Malaysia
European Commission, Enterprise and Industry Directorate-General (2008) Supporting Entrepreneurial Diversity
in Europe – Ethnic Minority Entrepreneurship/Migrant Entrepreneurship: Conclusions and
Recommendations of the European Commission’s Network “Ethnic Minority Businesses.” Brussels,
ENTR.E.1./TJ D (2008), Belgium.
Final Report to the European Commission, DG Enterprise (2000) Young Entrepreneurs, Women Entrepreneurs,
Co-Entrepreneurs and Ethnic Minority Entrepreneurs in the European Union and Central and Eastern
Europe, Centre for Enterprise and Economic Development Research (CEEDR), Middlesex University
Business School, UK.
Fjeldstad, O. (2007) More People Forced to Flee, (Online) Available: http://www.nrc.no/?did=9179113 (16 March
2010)
Gill-Branion, Sarah A. (1999) A Review on Alejandro Portes and Ruben G. Rumbaut, Immigrant America: A
Portrait. Illinois State University, US.
Nyagabona, N. (2004) Report on training and capacity building of female refugees, edited by ILO’s WEDGE
team, SEED in association with ILO/CRISIS, International Labour Office, Geneva
Sande, R. J. (2004). Building Entrepreneurial Capacity for Returnee and Refugee Women in Angola and
Mozambique, International Labour Office, Geneva
Tapia, E. (1999) Refugee Women: A Kenya Case Study, (Online), Available:
http://www.freeplayfoundation.org/news_index_Somali_Refugees.html (25 March 2010)
The Afghan Women’s Mission – Background (2006). Available:
http://www.afghanwomensmission.org/background (28 March 2010)
UNHCR - The UN Refugee Agency Available: http://www.unhcr.org/cgi-bin/texis/vtx/home (11 April 2010)
Valdez, Zulema (2002) Ethnic Entrepreneurship: Ethnicity and the Economy in Enterprise, The Centre for
Comparative Immigration Studies, University of California, San Diego
Young, Margaret (1998) Refugee Protection: The International Context, Government of Canada, Law and
Government Division, November 1991, Revised September 1998. Available: http://dsp-
psd.pwgsc.gc.ca/Collection-R/LoPBdP/BP/bp280-e.htm (25 March 2010)
522
Innovative Approach for Forming Information
Infrastructure of a Company
Elena Serova
St. Petersburg State University, Russia
serovah@gmail.com
Abstract: Companies applying Information Communication Technologies (ICT) are paying more and more
attention to the ability to build and develop Information Infrastructure. They can succeed in carrying out their
development strategies by following modern trends, adding intellectual information tools to management systems
and creating an adaptive information infrastructure. This theoretical research studies the role of information
infrastructure in management and the major aspects of forming information infrastructure. This issue is
undoubtedly important for more and more companies facing the necessity to improve information infrastructure
and recognizing their need for modern Information and Communication Technologies and approaches. This
research aims at analyzing applicability and adaptability of the customer relationship management (CRM) and
Multi-Agent technologies for forming comprehensive external information infrastructure for companies with
growing clientele. Thus, the research should study the concept of adaptive infrastructure, its modern
technologies, and construction of external adaptive information infrastructure. Companies’ profits are growing
with both cost and management optimization, and more clients brought by client-oriented strategies. It is an
international information infrastructure development trend that the CRM technology is getting more and more
popular, and companies are allowing customers to form their requirements on their own. Yet, customer
relationship management systems are most often built on standard solutions based on CRM module as
connection tool between the Enterprise Resource Planning (ERP) system and external environment. CRM
technologies in their essence cannot be a comprehensive tool to form information infrastructure of a company
developing information interactions in the external environment. That is why it seems very interesting and
perspective to study how external information infrastructure can be built to organize comprehensive client
networks with the widely used CRM technology along with a rare but perspective Multi-Agent Systems (MAS)
approach. This area is as of yet understudied, however it is developing quickly.
Keywords: management, information and communication technologies, information infrastructure
1. Introduction
In the modern economy, Information Communication Technologies are in fact an integral part of
cutting-edge operations, logistics and communications management systems. They add to the
globalization of business by providing quick access to employees worldwide at low cost, as well as
coordinating global interaction between companies at different links of the value-adding chain
(Katkalo, 2006: 400).
It is not that ICT simply increase efficiency of a company’s operations, they can be considered a
significant intangible asset. Their successful integration in the company’s information structure would
provide an optimum effect.
IT development makes it vital to create new information infrastructure management models. Many
professionals agree that business processes can be managed much more efficiently by using a
service-oriented model based on automatically controlling complex networks and systems, finding
new devices and forecasting conflicts.
Information infrastructure is based on Information Communication Technologies that should

continuously develop along with the company, dynamically and adequately react to changes in the
environment. It can help information infrastructure become a competitiveness factor to achieve the
best results.
2. Information infrastructure and its role in business activities
An information infrastructure consists of the physical facilities, services, and management that support
all shared computing resources in an organization. There are five major components of the
infrastructure: (1) computer hardware, (2) software, (3) networks and communication facilities
(including the Internet and intranet), (4) databases and workers, and (5) information management
personnel. Infrastructures include these resources as well as their integration, operation,
documentation, maintenance, and management (Turban et al., 2008: 56).
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Elena Serova
Thus, the concept of information infrastructure is completely different from that of information system
architecture (ISA), the latter being “a concept defining model, structure, functions and relationship of
information system components”. Information system architecture consists of four layers: business,
system, technical, and operation architecture.
Information infrastructure should meet the company’s business demand, be formed according to the
mission and developed along or even ahead of business processes.
The major management aspects supported by information infrastructure are:

Information support for management decision making;
Automation and optimization of operations;
Efficient use of information;
Mutual integration of information subsystems;
Relations with customers and suppliers;
Entering new markets.
A developed internal information infrastructure can mostly be found at quality-oriented manufacturing
enterprises. However, creating it is a technical and technological challenge.
Unlike the internal infrastructure, creating an external one is primarily a strategic, social and
organizational challenge. An external infrastructure is more dynamic, flexible, spontaneous, risky and
unpredictable. This can be found more often at service or trade enterprises. As a rule, they have a
wide clientele, which makes CRM issues essential for them.
3. Forming information infrastructure: Major aspects
There are three major aspects of the external information infrastructure: strategic, social and
organizational.
Forming information infrastructure, a company should take into account the following:
First is the strategic development direction based on the industry and its impact on the society.
Then a technological solution is defined to achieve the goals set. The strategic aspect of external
information infrastructure makes its formation a comprehensive, long-term development strategy
rather than just automation of certain specific business processes or resolving current operational
issues. One of the company’s major strategy development directions can be client-oriented
approach carried out with CRM technologies.
Second is the social aspect of how external information infrastructure enables its use by the
company’s employees and helps influence clients—both actual and potential—and the whole
society as a consumer of the company’s products and services. A simple and clear example can
be offered by such well-known companies as IBM, Oracle, or Microsoft. Their products have
deeply penetrated society, which makes information infrastructure social. In other words, it is a
socio-infrastructure.
Finally, the organizational aspect of external information infrastructure corresponds to a high
degree to the strategic and social ones (e.g., responsibility to employees for decisions made) and
makes the infrastructure an integral link in the chain of the company’s relationship with its
employees and the society.
For top and mid-level managers, information infrastructure should increase business efficiency,
ensure decision-making reliability and create efficient communications with suppliers and customers,
implement and use information systems and information and communication technologies, organize a
system of information services and maximize ROI (Return On Investment). For operational transaction
level employees, an efficient information system should ensure constant access to corporate and
personal information needed, real-time interaction with databases and applications (divisions’ portals,
intranet), mobile access and convenience.
As a rule, creating an ICT-based information infrastructure includes the following activities:

Organizational (defining development rules, responsibilities, financing, document structures);
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Elena Serova
Technological (choosing design tools, installing software, organizing routing, security and
support);
Technical (buying, installing and maintaining hardware and equipment);
Professional (trainings for employees).
4. Adaptive information infrastructure
Dynamically developing a company’s success depends on the ability to adapt its information
infrastructure.
Adaptive infrastructure is a methodology to create a more flexible and rational, customizable

infrastructure that allows organizations of any size to react promptly to market and information flow
changes.
A company’s information infrastructure should contribute to the development of the corporate

information system and integration of new applications and IT solutions without radical changes.
Changes to the information system should not necessitate the rebuilding or fundamentally altering the
company’s infrastructure. There should be an opportunity to use the existing information technology
resources (ITR) to maximum efficiency. (Kazantsev et al., 2007: 258) defines ITR as a set of elements
of information and communication technologies that are acquired, adapted and used in operational
activities by organizations, institutions and households.
The concept of adaptive information infrastructure is closely related to the Adaptive Enterprise
concept. This provides an opportunity to build a flexible IT infrastructure adaptable to constantly
changing business problems based on the virtualization, Grid and SOA (Service-Oriented
Architecture) technologies.
Adaptive Enterprise concept synchronizes business and IT and uses the enterprise’s information
infrastructure quickly and easily to support business solutions.
The Adaptive Enterprise concept ensures:

Automated intellectual management of all distributed infrastructure components of an information
system—servers and data storage systems;
High reliability and readiness of infrastructure;
Dynamic optimization and redistribution of the system’s computing resources.
Adaptive Enterprise is based on four ground principles: simplicity, standardization, modularity and
integration. Infrastructure simplicity means fewer IT elements in information infrastructure and allows
for easy modification for any purposes. Standardization ensures interaction with any infrastructure
with standard technologies, processes, interfaces and reusable elements. Modularity adequately
reflects changes to an element throughout the network. Finally, integration supposes creating
dynamic links between business and IT, organizing links between applications and processes, and
interaction between everything.
For the last decade, IT companies have developed and are offering their concepts of dynamic and
flexible information infrastructure. A leading developer in this area is Hewlett-Packard (HP). HP’s
Adaptive Enterprise concept is a strategy, an architecture and a new perspective on how enterprises
can use computer systems. It supposes creating an infrastructure that integrates hardware and
software tools and services to achieve the best results by ensuring higher adaptability to the IT
environment. Such infrastructure consists of management hardware and software that support
intellectual management functions and client services. This concept is supported by strategic
partnership with such industry leaders as Microsoft, BEA, Siebel, Oracle, PeopleSoft, SAP, and Cisco
Systems. The Adaptive Enterprise strategy allows for dynamically reacting to market changes, fully
meeting customers’ demands, reducing expenses and optimizing IT infrastructure for future use.
Analyzing IT vendors’ offers, the ability to adapt which appears today to be a defining mechanism
deeply penetrating all business processes. It is not only the information infrastructure; it is also
management and administration structures that should be adaptive.
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Elena Serova
5. Contemporary solutions for forming information infrastructure of a

company
As mentioned above, services- and sales-oriented companies with developed client networks feature
a developed external information infrastructure. CRM (Customer Relationship Management)
technologies are commonly believed to be the most appropriate for such enterprises. Yet,
manufacturing enterprises are also interested in selling their products and can use such technologies
as well, although resource planning and quality improvement naturally are of a high priority. CRM’s
major task is to increase efficiency of business processes aimed at attracting and retaining
customers: marketing, sales, service and maintenance. Implementing a client-oriented enterprise
strategy, CRM should not be considered simply a tool set. This because software is just one of the
components. First of all, CRM concept implementation is a systemic approach to organizing a
company’s operations. To increase business efficiency by implementing a CRM system, the company
should start with analyzing and, if needed, reengineering its business processes. A developed CRM
system may include various modules and use information from other applications and databases the
company has. Yet, each customer’s value is maximized mostly by three marketing strategy elements:
organizing a system of integrated marketing communication channels; developing demand stimulation
programs; and creating products according to customers’ needs. Thus, a CRM system’s most
important technological components are subsystems to interact with customers and monitor current
operations, as well as product databases and analytic modules. One of the major trends in the CRM
concept development is that most CRM products are being considered an additional element to the
enterprise information infrastructure, integrated in it, and to fulfill a certain function. Another important
point is that CRM should not be approached as simply an IT implementation project. Underestimating
the role of correctly organized business processes and altered cultural environment unavoidably fails
the implementation. The company should investigate what needs to be done to bring business
processes in compliance with CRM principles (Serova, 2009a: 305).
Thus, CRM is an intermediate technology between companies and their customers that helps improve
the external information infrastructure. With CRM, the following steps to form a client network
management system can be made and simplified:
Maintaining an extended client database with a history of contacts that allows for classifying and
grouping customers;
Getting sales statistics, reports, and sales history;
Interactive customer support, giving them access to certain information they need;
Opportunity to work with customers grouped by region, industry, etc.; work jointly with remote or
regional divisions;
Managing relations with potential clients: collecting initial information, distributing contacts
between employees, and monitoring efficiency of initial contact sources.
It is an international information infrastructure development trend that the CRM technology is getting
more and more popular. Yet, customer relationship management systems are most often built on
standard solutions based on CRM modules as connection tools between the ERP system and
external environment. CRM technologies in their essence cannot be a comprehensive tool to form
information infrastructure of a company developing information interactions in the external
environment. That is why it seems very interesting and perspective to study how external information
infrastructure can be built to organize comprehensive client networks with the widely used CRM
technology along with a rare but perspective MAS approach.
Multi-agent systems as systems of distributed artificial intelligence have the following advantages:
They speed up task fulfillment by parallelism and save the volume of data transmitted by passing
high-level partial solutions to other agents;
They are flexible by using agents of various capacity to carry out a task dynamically in
cooperation;
They are reliable by passing functions from agents unable to carry out a task to other ones.
MAS integration into a company structure can bring the following results:
An information system specifically adapted to the enterprise’s needs.
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Elena Serova
More flexibility and ability to adapt to the external environment, especially in uncertainty.
Ability to search and get unorthodox solutions.
Confirmation of suppositions that previously lacked information.
Faster decision-making when modeling negotiations.
Finding and resolving potential conflicts of interests in both external and internal environment.
More reliable decisions made owing to the agents’ ability to pass functions to one another and
redistribute responsibilities, which is not always possible in real life.
Optimized access to information for all employees.
Major advantages of the multi-agent approach relate to the economic mechanisms of self-
organization and evolution that become powerful efficiency drivers and ensure enterprise’s stable
development and prosperity. Based on the multi-agent approach, a brand-new intellectual data
analysis can be created, open and flexibly adaptive to solve problems, and can be deeply integrated
in other systems. Big companies can see advantages to the multi-agent approach such as: faster
problem solving, less data transmission by passing high-level partial solutions to other agents, faster
agreements and order placements. Distributed companies find primary advantages in improved
supply, supervision and coordination of remote divisions and structures. Companies with wide and
quickly changing varieties of products can flexibly react to clients’ changing preferences and foresee
periodic changes. Service companies can preserve their experience of interaction and problem
solutions with MAS technologies.
Methodologies of the client-oriented approach to organization of company operations and the multi-
agent approach can be integrated. In other words, CRM strategy can be carried out with multi-agent
systems (Serova, 2009b: 132):
To simulate and forecast clients’ behaviour, both returning and potential ones’;
To coordinate dealers and remote divisions with a multi-agent system;
To automate and improve the Customer Support process within the CRM concept;
To preserve knowledge and skills of marketing and sales specialists in the relevant agents’
databases;
To develop an integrated multi-agent Internet portal for agents to keep users’ personal contents;
To create a search agent to monitor outside information;
To organize a distance-learning portal.
Interestingly enough, experts note that CRM systems are most efficiently applied, among others, by
high-tech and distribution companies. At the same time, distribution and new high-tech services are
leading in using multi-agent systems. The CRM and MAS technologies can be mutually
complementary. Both of them offer a certain specific approach to structuring business operations
rather than just automating certain single processes. Thus, Multi-Agent Systems are a radical concept
that starts an era of network organizations with intellectual robots’ collective interaction by offering to
switch from powerful centralized systems to fully decentralized ones, with hierarchical structure
replaced with network organization, rigid bureaucratic “from top to bottom” management (based on
bosses’ commands for subordinates) with negotiations, and planning with flexible agreements. As a
result, production volumes, profitability, competitiveness and mobility are growing. The CRM
technology also offers a flexible approach to building the whole company’s business. The CRM
methodology should not be considered just a concept of interaction with clients; it is rather a system
that helps build a long-term client-oriented business.
6. Conclusion
Businesses and ITC are more and more closely interrelated. Using Information and Communication
Technologies in management, including computer modeling methods and intellectual information
tools, is a key driver of business efficiency. They do this by: helping improve quality of products and
services, save labour and material costs, increase productivity, and improve production management.
Development of companies’ external information infrastructure and improvement of customer relations
management are growing in importance, with intellectual information technologies developing.
527
Elena Serova
It is no less important that the ability to adapt and hybrid architectures are becoming essential when
building information infrastructure. The suggested approach to building the external information
infrastructure for a company with a developed client network, based on joint possibilities of the CRM
technology and multi-agent approach, is neither the only one possible nor the most efficient one.
Based on the methodologies and mechanisms of the system described, one can find ways to
integrate them, although it would not be appropriate to presume the integration full.
A company can successfully implement its development strategy by relying on these modern trends,
adding intellectual information tools to the CRM, and creating a hybrid adaptive external infrastructure
based on the multi-agent approach.
References
Katkalo, V.S. (2006) Evolutsia teorii strategicheskogo upravlenia (Strategic management theory evolution), St.
Petersburg University Publishing House, St. Petersburg.
Kazantsev, A.K.,Serova, E.G., Serova, L.S., Rudenko, E.A. (2007) Informatsionno-tekhnologicheskie resursy
rossiyskoy ekonomiki (Information technology resources of Russia’s economy), St. Petersburg University
Publishing House, St. Petersburg.
Kleyner, G.B. (2008) Strategiya predpriyatiya (Enterprise strategy), Delo Publishers, Moscow.
Kouchtch, S.P. (2002) “Setevoy podkhod v marketinge: rossiysky opyt (Network approach in marketing: Russia’s
experience)”. SpbSU Vestnik, series “Management”, Vol. 1, No. 8, pp. 81-107.
Kumar, V., Reinartz, Werner J. (2006) Customer relationship management: a databased approach, John Wiley &
Sons, Hoboken.
Payne, Adrian. (2006) Handbook of CRM: achieving excellence in customer management, Elsevier, Amsterdam.
Pearlson Keri E., Saunders Carol S. (2006) Managing and Using Information Systems. A Strategic Approach.
Third Edition, John Wiley & Sons, USA.
Rainer R., Turban E., Potter Richard E. (2006) Introduction to Information Systems: Supporting and Transforming
Business, John Wiley, USA.
Serova E.G. (2009a) “CRM Concept and its place in General Strategy of Company Development”, Proceeding of
the IV Scientific-practical conference “Modern Management: problems and prospects”, St. Petersburg State
University of Engineering and Economics, St. Petersburg, Russia, April, pp. 301–306.
Serova E.G. (2009b) “The role of Multi-agent Approach in Building Information Infrastructure for a Modern
Company and Carrying Out Management Tasks”, International book series “Information Science and
Computing”, Intelligent Information and Engineering Systems, Vol.3, pp. 130-136.
Serova E.G. (2008) “Modern Approaches of Computer Modeling for Business-tasks decision” Proceedings of the
Ninth All-Russian symposium “Strategic Planning and Evolution of Enterprises”, CEMI RAS, Moscow, April,
pp. 154–156.
Turban, E., Leidner, D., McLean, E., Wetherbe, J. (2008) Information technologies for Management.
Transforming Organization in the Digital Economy, John Wiley, New York.
White, Terry. (2004) What business really wants from IT: a collaborative guide for senior business and IT
managers, Elsevier, London.
528
Limited Absorptive Capacity, Distinct Performance
Outcomes: Toward a Differentiated Performance
Framework of Knowledge Acquisition Within Knowledge
Intensive Alliances
Evangelia Siachou and Anthony Ioannidis
Athens University of Economics and Business, Athens, Greece
siachou@aueb.gr
ai@aueb.gr
Abstract: The valuable contribution of knowledge acquired in an alliance and its relationship with performance
outcomes, in terms of growth, innovation rate and survival, has already been investigated by management
scholars (Grant and Baden-Fuller, 2004; Inkpen and Beamish, 1997). Additionally, the relative existing literature
illustrates numerous empirical studies which point out the role of absorptive capacity in organizational
performance outcomes, for instance, in terms of innovation development (Cohen and Levinthal, 1990; Lane and
Lubatkin, 1999; Rocha, 1999; Stock et al., 2001). However, prior literature lacks evidence, firstly, to support
factors which may obstruct the beneficial outcomes for an organization which implements knowledge that is
externally derived and, secondly, to distinguish between different dimensions of performance i.e. between those
that are positively affected by the incoming knowledge and the ones which are negatively affected. We develop a
differentiated performance framework of knowledge acquisition within strategic alliances, which supports that an
organization’s limited absorptive capacity has distinct performance outcomes. The hypothesized relationships
supported by this framework are better illustrated in the case of company services (knowledge seekers) which
are in great need of obtaining new knowledge in order to develop business model innovations in new dynamic
sectors in which they did not do business in the past. Hence, knowledge seekers form strategic alliances with
organizations which possess the necessary knowledge. In a study of 109 business model innovations of Mobile
Virtual Network Operators (MVNOs) we find that the limited absorptive capacity that business model innovations
manifest may impair the benefits of the knowledge acquisition, thus decreasing their business and management
performance. In contrast, the limited absorptive capacity of business model innovations has no impact on their
economic performance. These outcomes may challenge the claim that the limited absorptive capacity of an
organization which acquires knowledge from its strategic partner(s) negatively affects all of its performance
dimensions. Indeed, a micro-foundation is provided to understand why and how a limited absorptive capacity is
not an obstacle to a service company’s ability to survive in dynamic environments in which it did not operate
previously.
Keywords: absorptive capacity, business model innovation, knowledge acquisition, strategic alliances,
organizational performance
1. Introduction
Seeking knowledge from outside an organization’s boundaries has become one of the principal
activities for the majority of organizations which are in great need of obtaining and using new
knowledge in order to effectively and economically develop new products (product innovation), apply
new methods of delivering services (service innovation) and/or redefine an existing product, service or
process (business model innovation), aiming at the further maximization of their business
(Chesbrough and Rosenbloom, 2002; Damanpour, 1991; Davenport et al., 1996;). Both scholars and
practitioners have simultaneously supported conceptually and proved empirically that the acquisition
of knowledge external to the organization has a direct and positive effect on an organization’s overall
performance outcomes (Ancona and Caldwell, 1992; Inkpen and Dinur, 1998; Hansen, 2002;; Lu et
al., 2006; Zander and Kogut, 1995). By acquiring knowledge sourced outside organizations’
boundaries, they obtain considerations for, elaborations on, and modifications to the existing
knowledge that broadens and adds considerable value to the ongoing growth of knowledge. Thus,
organizations have the opportunity to allocate, assimilate, and effectively use the amounts of the
necessary knowledge they previously lacked in order to innovate.
Although the ability to gain access to and allocate external knowledge often promises organizational
success (as it has been found to improve organizational performance), the implementation of
knowledge acquired from outside may lead to the opposite effect and as Haas and Hansen (2005)
posited out “… may hurt organizations”. A plausible explanation could be the tendency within some
organizations to obtain knowledge sourced outside unquestioningly, combined with a failure to subject
incoming knowledge to sufficiently rigorous analysis (Becker, 2001). In addition, factors such as the
lack or limited absorptive capacity often do not ensure effective knowledge implementation. The
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relative existing literature illustrates numerous empirical studies which point out the significance of
absorptive capacity on organizations attempts to innovate, supporting that organizations which lack
the ability to effectively absorb new knowledge perform poorly (Cohen and Levinthal, 1990; Lane and
Lubatkin, 1999; Rocha, 1999; Stock et al., 2001).
In an attempt to add new considerations concerning factors which may obstruct the beneficial
outcomes for an organization utilizing knowledge that is externally derived but also aiming to expand
this prior work, a differentiated performance perspective framework has been developed. In this
framework, the limited absorptive capacity exhibited by organizations which acquire external
knowledge is viewed as a relational factor able to impair the beneficial outcomes that the incoming
knowledge may add to their performance. The framework distinguishes between different dimensions
of performance i.e. between those that are positively affected by the incoming knowledge and the
ones which are negatively affected. Relationships of that kind are empirically tested, thus offering
research evidence which, in practice, may aid considerations for new perspectives of the acquisition
of knowledge that is externally derived.
2. The conceptual framework
Drawing upon the existing empirical and conceptual work and aiming to expand this prior research,
this differentiated performance perspective framework identifies the role of limited absorptive capacity
as a relational factor which moderates the beneficial impact of externally acquired knowledge (both in
its codified and non-codified type) on an organization’s performance by distinguishing between
different dimensions of performance.
More specifically, along the lines of prior research on knowledge management, firstly, it is supported
that the acquisition of knowledge sourced outside an organization’s boundaries has a positive direct
effect on organizational performance. This could further mean that the incoming knowledge is found
to be a driving force for innovation thus enabling organizations which are in great need of obtaining
new knowledge to undertake innovative actions (i.e. to implement new business model innovations)
even in sectors in which they have not previously operated ((Ancona and Caldwell, 1992; Inkpen and
Dinur, 1998; Lu et al., 2006; Zander and Kogut, 1995). Secondly, it is supported that the limited
absorptive capacity (or in some cases the lack of it) exhibited by organizations which need to acquire
new knowledge could moderate the direct positive relationship between knowledge and performance
and thus issues concerning the potential negative effects of the incoming knowledge on an
organization’s performance are addressed. Thirdly, the formation of strategic alliances is recognized
as an external knowledge source available to organizations which seek to obtain new knowledge in
order to expand their businesses by implementing new business model innovations. The latter could
be a venture that occurs as an outcome of the formation of strategic alliances between organizations
which possess the necessary knowledge (knowledge keepers) and those which are eager to acquire
it (knowledge seekers).
In an attempt to expand this prior work, the differentiated performance framework of knowledge
acquisition within strategic alliances is implemented which supports that an organization’s limited
absorptive capacity affects its performance dimensions (namely, business, management and
economic) in different ways. More specifically, the external knowledge that is externally derived is a
valuable asset for an organization which, in the case to be examined, enables the creation of
business model innovation. Such innovative actions enable also the organization to increase its
performance. However, the lack or limited absorptive capacity which is often performed by
organizations which wish to operate in new sectors (in which they do not previously operated as
discussed above) suspends the increase of the organizational performance which is examined by its
three performance dimensions (business, management and economic)
This rationale is conceptualized in the framework presented below (Figure 1) providing new research
hypotheses for empirical examination. The value of the particular research hypotheses is that they
investigate the different effects that the various types of external knowledge (i.e. codified and non-
codified) may have -each one separately- on the three performance dimensions, taking the Mobile
Virtual Network Operators (MVNOs) as a case study.
530
2.1 Case selection

The case to be examined builds on the need of company services (often with brand recognition) to
maximize their business by effectively and economically achieving business model innovation. To do
so, the aforementioned companies, which play the role of knowledge seekers, need to obtain, among
other things, specific knowledge (either codified or non-codified) possessed by other organizations
which are leaders in the specific domains (e.g. mobile telecoms) and which play the role of knowledge
keepers operating in attractive environments. In practice, knowledge seekers lacking such knowledge
seek to secure alliances with knowledge keepers in order to embrace the knowledge required.
This case is better exemplified though company services which do not belong to the telecom industry
(i.e. non-telecom brands such as airline companies): Although they do not possess knowledge in the
telecommunication sector, they seek to gain access to the mobile telecom industry by securing
alliances with host operators (i.e. the companies that own a telecommunication network, the Mobile
Network Operators (MNOs)), namely the keepers of the knowledge needed. These alliances lead to
the formation of a service innovation which in the specific case takes the form of a Mobile Virtual
Network Operator (MVNO).
Figure 1: The differentiated performance perspective

3. Research schema
3.1 Research hypotheses
3.1.1 External knowledge acquisition (codified and non-codified)

Along the lines of existing empirical work on knowledge acquisition within strategic alliances, we
estimate that the acquisition of external knowledge is a determinative factor for an organization’s
innovative actions which, in the case examined, result in the creation of business model innovations.
Thus, in this paper it is supported that the knowledge that is acquired within strategic alliances, firstly,
enables the creation of business model innovation and, secondly, increases their business,
management and economic performance. The rationale behind this is summarized in the following
hypotheses:
H1: The acquisition of external knowledge within a strategic alliance enables the creation of
business model innovation.
H2: The acquisition of external codified knowledge within a strategic alliance enables the creation
of business model innovation.
H3: The acquisition of external non-codified knowledge within a strategic alliance enables the
creation of business model innovation.
business model innovation and increases its business performance.
531
business model innovation and increases its management performance. .
business model innovation and increases its economic performance.
Equal hypotheses (whose validity is discussed below) have also been developed to estimate the
effect of external codified as well as non- codified knowledge on the three distinct performance
dimensions. .
3.1.2 Limited absorptive capacity

Along the lines of prior research on absorptive capacity, this paper acknowledges that an
organization’s ability to absorb new knowledge contributes to innovation adoption and learning and,
therefore, to increased performance outcomes. Hence, it is estimated that the effective exploitation of
the incoming knowledge follows in the wake of the organization’s ability to absorb the knowledge that
is externally derived. However, business models which come about from the formation of strategic
alliances (between company services targeting at expanding their business actions in new sectors
and organizations which possess the required knowledge in this domain) lack or exhibit limited
absorptive capacity. In this case, the limited absorptive capacity (or the lack of it), as a relational factor
to organizational performance, negatively moderates the direct relationship between knowledge
(codified and non-codified) that is transferred between the strategic partners and the organizational
performance. Such an implication is summarized in a sequence of hypotheses worded thus:
H7: The acquisition of external knowledge in a strategic alliance suspends the increase of
business performance of business model innovations which exhibit limited absorptive capacity.
management performance of business model innovations which exhibit limited absorptive capacity.
economic performance of business model innovations which exhibit limited absorptive capacity.
Since this study tests the different effects that the various types of external knowledge (i.e. codified
and non-codified) may have -each one separately- on the three performance dimensions, equal
hypotheses have also been developed concerning the relationship between the codified and non-
codified knowledge and the three dimensions of business models’ performance respectively. .
3.2 Methodology
3.2.1 Sample and procedure

The sample of this study includes 109 MVNOs operating across Europe. A survey approach was used
to measure the different moderating effects of limited absorptive capacity on the three distinct
dimensions of performance, i.e. business, management and economic. A questionnaire was e-mailed
to the top management team of MVNOs (when CEOs were unavailable) using the ‘key contacts’
sampling technique (Goll and Rasheed, 2005). To estimate the sample representation the chi-
squared method was applied for the calculation of distribution as to the basic metre of different
business models of MVNOs. It was found that a sample category was analogically distributed in the
entire population. The different models which are included in the entire population and the
corresponding models which are included in the sample are not statistically dependent (p>0.5) and
consequently the sample representation could be (statistically) supported.
3.2.2 Scale development and measures

The proposed theoretical framework is tested through several scales which are developed using the
Schwab (1980) methodology. The process of scale development is completed in three stages which
are related to Likert’s three steps (Likert, 1969) and include item generation, scale development and
scale evaluation. The outcome of the particular procedure is a 7-point Likert scale used to measure
each variable under examination separately while the number of items depends on the variable’s
532
individual measurement. However, no scale was constructed with fewer than three items (Cronbach
and Meehl, 1995)
Specifically, the external knowledge acquired was measured based on a 6-item scale first proposed
by Jantunen (2006). Similarly, for the variables of external codified and non-codified knowledge two
separate 6-item scales were developed, adopting items from Haas and Hansen (2005), von Hippel
and Tyre (1995) and Zander and Kogut (1995). The measurement of business model innovation was
based on the conceptualization of Chesbrough and Roserbloom (2002) i.e. a 5-point scale adjusted to
the sector of telecoms. The moderating variable of absorptive capacity of MVNOs was measured
through its four dimensions (i.e. acquisition, assimilation, transformation, exploitation) as they have
previously been proposed by Zahra and George (2002). Specifically, a 20-item scale was used to
measure the extent to which specific activities undertaken by MVNOs enable them to acquire,
assimilate, transform and exploit knowledge that is externally derived based on the scale which was
first offered by Jansen et al (2005). Organizational performance variable is measured using the three-
dimension approach offered by Lyles and Salk (2005). That is to say, the variable of organizational
performance is divided into three sub-variables: business, management and economic performance.
Business and management performance are each measured on a 4-item scale using subjective
indicators, whilst economic performance is measured on a 3-item scale using objective indicators.
There are also measurements for variables such as perceived usefulness of knowledge, business
model innovation’s types and types of strategic alliances (e.g. negotiated agreement, purchase
contract, multi-branding).
3.2.3 Scale evaluation

All scales are tested for their reliability and validity. Specifically, to test the reliability of the proposed
scales, the internal consistency of each scale is measured by calculating Cronbach’s alpha
(Cronbach, 1951). A strong alpha value of 0.80 is estimated for each proposed scale, rendering them
acceptable without any changes (Table 1). To further ensure the internal consistency of the proposed
scales, the convergence validity of each scale is also calculated. The composite reliability values
range from 0.81 to 0.99 (Table 1) which indicate acceptability of the measures (Chin, 1998).
Table 1: Descriptive statistics at survey’s contracts
Construct Number of Mean* Standard Alpha Composite Difference between
items deviation* Reliability CR and Alpha
(CR)
External 6 0.84 0.00
Knowledge 5.41 1.17
Acquisition 0.84
External 6
Codified 3.76 1.54
Knowledge 0.95 0.95 0,00
External Non- 6
Codified 3.68 1.56
Knowledge 0.94 0.94 0.00
Business Model 5 0.93 0.00
5.70 1.06
Innovation 0.93
Absorptive 20 0.87 0.89 0.02
4.69 1.05
Capacity
Performance’s
dimensions
Business 4 5.34 1.28 0.92 0.99 0.07
Management 4 4.91 1.15 0.90 0.99 0.09
*Means and standard deviations of perceptual scales are expressed on a seven-point scale metric.
The validity of the proposed scales is assessed through content and construct validity. Specifically,
the content validity is, firstly, secured by interviewing key informants in the context of the pilot test of
the research instrument using the Total Design Method (Dillman, 1978). To validate the construct of
the proposed scales (construct validity) an exploratory factor analysis is conducted (Carmines and
Zeller, 1979; Churchill, 1987). The results of the principal components analysis with varimax rotation
indicate that the proposed multi-item scales are held together to a satisfactory extent (Table 2). For
the correctness of the Exploratory Factor Analysis results, a Confirmatory Factor Analysis is also
conducted (Joreskog, 1969),
533
Table 2: Factor analysis results for external knowledge acquisition and absorptive capacity
Factor 2
External Knowledge Factor 1 Periodical Knowledge Communalities
Acquisition Routine Knowledge Activities Activities
Item
Assessment of the know-how possessed
.911 .633
by the capital
The basis of the development activities is
.827 .562
the examination of marketing needs
Active observation and adoption of the
.777 .922
best practices in the telecoms
Weakly economic information gathering
on company’s operation and operational .599 .858
environment
Monthly economic information gathering
on company’s operation and operational .924 .760
environment
Annually economic information gathering
company’s operation and operational . .918 .834
environment
Eigenvalues 3.366 1.203
Explained variance 42,674 33,477
Kaiser-Meyer-Olkin .571
Absorptive Capacity Factor 1 Factor 2 Factor 3 Factor 4
Item Acquisition Assimilation Transformation Assimilation Communalities
Understanding of the
new opportunities to
.867 ,800
serve their customers
quickly
Consideration of the
consequences of .
.787
changing market ,804
demands
Prompt recognition of
the usefulness of new
external knowledge to .776 ,825
the existing
knowledge integration
Existence of clear
division of roles and .769 . .897
responsibilities
Prompt analysis and
interpretation of
.732 . .884
changing market
demands
Clarification of the
way that daily
.616 .704
activities should be
performed
The consequences of
market trends and
new product .911 .700
development are
discussed
Frequent interaction
.
between employees .816
.812
of two partners
Frequent interaction
with the host
operators aiming at .796 .742
new knowledge
acquisition
Industry information
collection through .677 .784
informal means
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Factor 2
External Knowledge Factor 1 Periodical Knowledge Communalities
Acquisition Routine Knowledge Activities Activities
Employees realise the
opportunities for the
company brought .920 .894
about by new external
knowledge
Practical experience
and information
.916 .721
sharing among
employees
Considerations of
better exploitation of
.821 .757
new acquired
knowledge
New products and
services are easily .839 .798
implemented
Existence of a
common language
.798 .734
concerning products
and services
Prompt recognition of
shifts in the telecom .648 .766
market
Eigenvalues 7.346 2.582 2.076 1.679
Explained variance 25.352 18.943 10.051 9.541
Kaiser-Meyer-Olkin .694
3.3 Analysis and results

The main analysis focuses on the moderating effects of limited absorptive capacity on the three
distinct dimensions of business model innovation performance. Besides the moderating effects, the
interdependence between two variables is assessed using Pearson’s correlation coefficient (r), taking
the value of 0.5 as acceptable (Meyer and Goes, 1988). Specifically, Hypothesis 1, 2 and 3, which
relate to the direct and positive effect of the acquisition of external knowledge (codified and non-
codified) on the creation of business model innovation, are tested through the calculation of Pearson’s
correlation coefficient (r). The results indicate that there is a significant relationship between the
external knowledge and the business model innovation (r=0.80, DF=107, p<0.001) and consequently
support the argument that the acquisition of external knowledge leads to the creation of business
model innovation. However, no support is found for Hypotheses 2 and 3. In each of these two cases
the two distinct types of knowledge are not significantly correlated with the business model innovation,
since the correlation coefficient r is not in the vicinity of acceptable value of moderate correlation (0.46
and 0.38 respectively).
To test the variables with significant causes or effects on the correlation between two other variables,
the analysis of Structural Equation Model is conducted. To calculate the effects, the maximum
likelihood estimations were used. Evidence suggests that direct effect of the acquisition of external
knowledge on business performance is estimated at 0.42 whilst the direct effect of the variable of
business model innovation on business performance is estimated at 0.38. Taking into consideration
the effect of business model innovation on business performance, which is by nature symmetrical (its
reverse is also valid), the total effect of business model innovation on business performance stands at
0.71 (0.42*0.79+0.38) (Figure 2). Consequently, the acquisition of external knowledge increases the
business performance of business models (in practice it almost doubles it).
Accordingly, evidence also supports that the acquisition of external knowledge has a positive total
effect on management performance, taking the variable of business model innovation as a mediator
(Figure 3).
535
ebusper
,57
Business
Performance
,42
,62
Knowledge ,38
eknacq
Acquisition
,79
Business
Model
Innovation
Figure 2: Structural equation model: external knowledge acquisition => business model innovation =>
business performance
ebp
,54
Management
Performance
,15
,62
External ,62
eacq Knowledge
Acquisition
,79
Business
Model
Innovation
Figure 3: Structural equation model: external knowledge acquisition => business model innovation =>
management performance
In contrast, evidence suggests that the external knowledge acquisition does not have the same effect
on the economic performance when the mediation effect of the business model innovation is also
calculated. The direct effect of external knowledge acquisition on economic performance (without
taking into consideration other variables) is -0.42, whilst the direct effect of business model innovation
on economic performance is 0.78. Taking into consideration the effect of business model innovation
on economic performance, which is by nature symmetrical (its reverse is also valid), the total effect of
business model innovation on economic performance stands at -0.45 (Figure _). Consequently, the
acquisition of external knowledge has not a positive effect on economic performance taking the
variable of businesses model innovation as a mediator. Based on the aforementioned analysis,
Hypotheses 4 and 5 are supported, whilst no support is found for Hypothesis 6. It is also worth
mentioning that the different types of external knowledge – codified and non-codified - on their own
are not able to create business model innovations and thus further increase their performance.
The moderating role of absorptive capacity in the relationship between the acquisition of external
knowledge and the performance outcomes is tested with Hierarchical Multiple Regression Analysis.
536
As it has already been mentioned, evidence supports that the acquisition of external knowledge is a
positive predictor variable for the business and management performance of business models without
taking into consideration other variables (Beta=0.43 and 0.51, p<0.05 respectively). However, when
the variable of absorptive capacity is taken into consideration the aforementioned positive
relationships are moderated (Beta=-0.92 and -1,43, p<0.05). However, evidence does not support any
effect between the acquisition of external knowledge and economic performance, taking into
consideration the variable of absorptive capacity as a moderator, which furthermore means that these
relationships are not statistically significant. The results are summarised in Table 3 and support
Hypotheses 7 and 8, whilst no support is found for Hypothesis 9.
Table 3: Predictor variables regressed on performance
Model 1 Model 2 Model 3
Business Management Economic
Performance Performance Performance
B Std. Beta B Std. Beta B Std. Beta

Erro Error Error
r
Block 1 Block 1
External External External
Knowledg Knowledg Knowledge
e 0.51 Acquisition 0.26*
e 0,36 0.07 0.43* 0.31 0.07 0.16 0.06
Acquisition * *
Acquisitio
n
Block 2 Block 2 Block 2
External External External
Knowledg Codified Non
- Knowledg
-
e 0.23 -0.26 -0.72 0.19 Codified 0.15 0.21 0.25
0.22 e 0.97 Knowledge
Acquisitio
n Acquisition Acquisition
Absorptiv Absorptiv Absorptive
e e Capacity*
Capacity* - Capacity* - External 0.01*
0.08 0.03 0.15 0.03 1,43*
0.01 0.03
External 0.92* External Knowledge *
Knowledg Knowledg
e e
* p<0.001; standardized regression coefficient reported
** non statistically significant
Evidence also suggests that the types of strategic alliances are significantly correlated with the
various business model innovations types of MVNOs (x2=77.17, DF=10, p<0.001).
4. Discussion
The main finding of this study is that the limited capacity, exhibited by MVNOs, to absorb knowledge
from their strategic partners negatively affects two out of three performance outcomes –i.e. business
and management performance, not economic - since the acquisition of external knowledge is not
found to be a negative predictor variable for the performance of business model innovation in this
case. Without underestimating the value of new knowledge acquired within strategic alliances, the
significance of absorptive capacity for an organization in terms of the acquisition, assimilation,
transformation and exploitation of new knowledge sourced outside their boundaries is also
recognised. Evidence of this study empirically support that the limited absorptive capacity exhibited by
organizations which are seeking to obtain new knowledge prevents them from the effective and
valuable utilization of the incoming knowledge even if they have access to sources of the necessary
knowledge, as is the case with the strategic alliance examined in this study. Concerning the
moderating effects on business performance, it could be supported that MVNOs are not able to
recognise the value of knowledge possessed by the knowledge keepers which is related to
undertaken activities aiming to increase the business volume, to make profit and/or to achieve
planned goals. Similarly, concerning the moderating effects on management performance, it could be
supported that what is rendered difficult is the assimilation of the incoming knowledge in order for the
negotiation and the decision making skills of those employed at MVNOs to be improved.
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Apart form the aforementioned research implication, this study also provides empirical evidence which
verifies relationships supported by prior work on knowledge management. Specifically, in the
examined case the acquisition of external knowledge enables the creation of business model
innovation, incurred by the formation of strategic alliances between those who possess specific
knowledge and those who seek it, in order to maximise their business in new sectors in which they
have not previously operated and equally increase their performance outcomes. Nevertheless, the
acquisition of external knowledge affects the business and management performance positively, while
it does not have the same impact on the economic performance of MVNOs. A plausible explanation
could be the fact that other factors, related to the internal environment of MVNOs, could be
determinative for their economic performance. Additionally, it is suggested that an increase in the
economic performance of MVNOs (e.g. in terms of number of subscribers, or ARPU) might result from
other practices and techniques, such as the loyalty of customers in the brand of the service company
which form the strategic alliance with the host operator (i.e. Mobile Network Operator). Related factors
should also be examined in order to offer a general suggestion regarding the relationship between
external knowledge acquisition and economic performance. Since this study has also looked into the
relationship between the different MVNOs models (e.g. Full MVNOs, Enhanced Service Providers,
Service Providers, Resellers) and their economic performance, it could be supported that different
types of business model innovations could affect the economic performance in different ways, based
on the fact that certain types of MVNOs are dependent on the host operator (in our case the
knowledge keeper organization) and, consequently, the actions undertaken by the latter might affect
the economic performance of MVNOs.
The acquisition of either codified or non-codified knowledge alone, though, does not have the same
effect on the creation of business model innovation and, consequently, no increase has been noticed
on their performance dimensions. This evidence supports what Polanyi (1966) first supported
concerning the interdependence of tacit and explicit knowledge i.e. that explicit knowledge operates
as the required cognitive background in order for the tacit knowledge to be developed and interpreted.
Concerning the various types of strategic alliances which have developed between knowledge
seekers and knowledge keepers (e.g. alliances, joint ventures, negotiated agreements, purchase
contract, multi branding), evidence suggests that they have a different effect on the various types of
business model innovations which are offered by MVNOs. This further means that the type of
strategic alliance which characterises the collaboration between knowledge seekers and knowledge
keepers might affect the performance dimensions.
In this study a differentiated performance perspective has been developed which supports the
moderating effects of absorptive capacity on the three distinct dimensions of business model
innovation performance, namely, business, management and economic. The review of the existing
empirical work, as well as the consideration of the theoretical linkages in the field of knowledge
management, has not revealed extensive research concerning the different effects that the limited
absorptive capacity exhibited by business models may have on their performance dimensions.
Research evidence of this study empirically exemplifies that the limited absorptive capacity which the
business models of MVNOs exhibit impair the beneficial outcomes of external knowledge acquisition
on their business and management performance, whilst no similar effect has been noticed for the
economic performance. These suggestions, to some extent, alter the definitive estimation supported
by existing literature that an organization which lacks or exhibits limited absorptive capacity is not in a
position to achieve beneficial outcomes when acquiring new knowledge within a strategic alliance,
and thus increase its performance in its holistic view. In contrast, its economic performance is not
affected by the lack or limited absorptive capacity that it exhibits. The research scheme developed
has, to some extent, achieved these objectives but also allows room and offers implications for future
research in order to enable the generalization of the existing estimations.
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539
The Dynamics of Innovation Networks: The Role of Higher
Education Institutions in Venture Creation
Jorge Simões1 and Maria José Silva2
1
Polytechnic Institute of Tomar, Portugal
2
University of Beira Interior (UBI), NECE Covilhã, Portugal
jorgesimoess@gmail.com
msilva@ubi.pt
Abstract: This research aims to analyse whether venture creation is stimulated by higher education institutions
through innovation networks. The literature review makes use of the current approaches of reference to the
creation of ventures and models of innovation networks. The theoretical approach developed supports the basic
idea of the importance of innovation networks in the process of venture creation, since they allow weaknesses to
be covered and positive aspects to be strengthened, and consequently influence the process of venture creation.
Primary data are used in the analyses. To collect data, a questionnaire was completed by nascent entrepreneurs
belonging to HEIs, obtaining 255 answers. The results obtained, through the empirical analysis made, show that
cooperation and development of relationships with other agents in the innovation network emerge as the principal
way HEIs stimulate venture creation, and the results also show that the attitude of the HEI towards venture
creation influences the nascent entrepreneurs’ decision to go ahead with the process of creating a venture. As for
identification of the factors facilitating venture creation supported in innovation networks, the principal ones are
network actors and organizational resources. Furthermore, determining, identifying and analyzing the obstacles
to venture creation supported in innovation networks, we find that the main factors are knowledge and location.
The main conclusions of this thesis highlight the relevance of the HEI in the phenomenon of venture creation,
when it is inserted in an innovation network.
Keywords: new venture creation, innovation networks, higher education institutions, nascent entrepreneurs
1. Introduction
In today’s world of intense globalization and fierce competition, new venture creation contributes to
introduction in the business sector of new technologies, new products/services and new forms of
organization, and is shown to be one of the fundamental factors for economic growth, job creation,
market efficiency, renewal of economic structure and spread of innovation, as well as for ventures’
and countries’ improved global competitiveness (Birch 1981 1987, Phillips and Kirchhoff 1989, Acs
and Audretsch 1990, Hamermesh 1993, Reynolds et al. 1995, Wennekers and Thurik 1999,
Bednarzik 2000, Keister 2000). In parallel, we find that innovation networks, besides allowing reduced
uncertainties through cooperation among agents, aim to produce and share knowledge and scarce
resources, share costs and risks, and obtain gains in efficiency due to division of work, among other
benefits (Camagni 1991, Yeung 1994, Cassiman and Veugelers 2002, Felman et al. 2006,
Braunerhjelm 2008, Weber and Khademian 2008). In these innovation networks, higher education
institutions (HEI) play an important part, since they allow stimulation and spread of the various
contributions offered by the network, not only locally and regionally but also nationally and globally
(Felman et al. 2006, Audretsch and Phillips 2007, Braunerhjelm 2008).
In the current economic climate faced by various countries in the European Union in general, and
Portugal in particular, and given current rates of unemployment1, which have been increasing
recently, stimulating entrepreneurialism able to lead to venture creation, seems to be one of the
measures that can make a contribution to minimizing economic and social problems which have hit
the country in recent years. Therefore, in the Portuguese context, it becomes fundamental to analyze
the factors that can contribute to promoting venture creation. More investigations are needed to study
the factors stimulating and restricting the venture creation process.
This research aims to analyze whether venture creation is stimulated by higher education institutions
through innovation networks. The central question for investigation is the following: What is the role of
HEIs in venture creation within innovation networks? To answer this question, investigation
hypotheses are formulated to be tested empirically. These hypotheses are related to two specific
objectives, namely: (i) to identify the attitudes of HEIs towards venture creation, analyzing the best
1 th
According to data from INE(National Institute of Statistics),4 trimester of 2009 indicated 10,1% (http://www.ine.pt accessed
on 15/03/2010)
540
Jorge Simões and Maria José Silva
ways to stimulate venture creation from HEIs set in innovation networks (ii) to identify the factors
facilitating venture creation.
The paper is structured as follows: the next section reviews the literature on venture creation
associated with innovation networks. In the same section, the investigation hypotheses are formulated
regarding the specific objectives presented. The following section describes the investigation
methodology used to test the hypotheses. In section four, the results are presented and discussed.
Finally, the fifth section presents final conclusions, and future investigations to be developed on this
topic are suggested.
In network research, the last two decades revealed a new interconnected phenomenon:
entrepreneurship (Hoang and Antoncic 2003, Woollard et al. 2007). Concerning network contents,
inter-personal and inter-organizational relationships are seen as the means by which actors gain
access to a variety of resources, including knowledge, helped by other actors (Hoang and Antoncic
2003). Consequently, HEIs will be an important source of knowledge. When competitiveness was
based on routine tasks, HEIs played an important social, political and cultural role, but in economic
terms, they played a less direct role, concerning mainly the training of future venture collaborators
(Audretsch and Phillips 2007). However, as competitiveness became dependent on knowledge, ideas
and creativity, HEIs became crucial for economic development, giving rise to the concept of
entrepreneurial universities (Clark 1998 2004, Van Vught 1999, Audretsch and Phillips 2007). In this
connection, HEIs emerge as central actors in a knowledge-based economy, with the expectation that
they play an active part in promoting innovation and technological change (Bramwell and Wolfe,
2008).
In this context, entrepreneurial universities are found to be actors belonging to an innovation network
made up of diverse actors, where government and public policies will have a relevant role. For HEIs
to be able to spread their knowledge as actors, they must be inserted in innovation networks, but how
can they stimulate the spread of knowledge and venture creation?
Therefore, innovation networks can bring key benefits for venture creation, such as:
Network contents (Krackhardt and Stern 1988, Hoang and Antoncic 2003, Marouf 2007);
Network management (Granovetter 1973, Nelson 1989, Marouf 2007, Huang and Chang 2008);
Network structure (Granovetter 1973, Nelson 1989, Marouf 2007, Huang and Chang 2008).
These three components emerge as key elements in models aiming to explain innovation networks
that develop entrepreneurial activities, just as the network’s impact on the results of these activities.
The entrepreneurial process, according to (Shane and Venkataraman 2000), consists of distinctive
activities, such as identification of opportunities, mobilization of resources and creation of an
organization. It follows that HEIs will be understood as actors par excellence to integrate an
innovation network, since they possess teaching staff and various units of investigation that can help
venture start-ups, young entrepreneurs, to identify opportunities, mobilize resources and create an
organization (Smith 2003, Eiriz 2005, Felman et al. 2006, Braunerhjelm 2008, Huang and Chang
2008, Weber and Khademian 2008).
Therefore, the process of developing an innovation network, at the initial creation stage, will
surprisingly be related to the characteristics of the entrepreneurs (Hoang and Antoncic 2003).
Consequently, when the entrepreneurs develop the business plan, this will be of high quality, since by
belonging to an innovation network, they will be able to incorporate its benefits. So the closer the
contacts between the various network actors, the higher the quality of information.
The concept of entrepreneurial universities emerged with Etzkowitz, in 1983, describing the
institutions that perform a critical role in regional economic development (Clark 2004, Muller 2006,
Audretsch and Phillips 2007, Woollard et al. 2007, Veciana 2006, 2008, Bramwell and Wolfe 2008).
The term of entrepreneurial universities, always involved in an innovation network, was adopted by
academics and politicians to describe HEIs that carried out this mission (Clark 1998 2004, Van Vught
1999, Huggins et al. 2008). Development of an entrepreneurial culture can be seen as an essential
mechanism for HEIs to become effectively involved in economic development, Etzkowitz and
541
Leydersdorf (2000) having described the evolution of tripartite relationships between HEIs, industry
and government through the Triple Helix III model (Bercovitz and Feldman 2006), emphasizing the
relevance of the relationship between HEIs and industry, stating that this relationship reveals the
importance of HEIs for the regional system of innovation, this form being the basis for economic
development.
The relevance of the entrepreneurial university is shown by being inserted in an innovation network,
since it stimulates contributions at the local, regional and even national level. With this direction, HEIs
make a key contribution, generating new ideas and knowledge in the basic disciplines that are the
traditional nucleus of HEIs. When the demand for knowledge and practical applications increased,
programs were created which were applied and adapted to the world of work. A crucial distinction
between those applied programs and basis disciplines is the trainer’s orientation towards making a
contribution to society beyond the walls of the HEI. To be sustainable over time, applied programs
require a demand and interest outside the HEI. On one hand, their development and evolution are
typically formed by society’s needs and interests; on the other, the evolution and development of
basic disciplines tend to be molded and influenced by the disciplines themselves (evolution of
knowledge) (Audretsch and Phillips 2007, Woollard et al. 2007).
However, not even the addition of applied investigation and professional education generates
sufficient spillovers from the source of knowledge – the HEI – to commercialize the increased
generation of innovations in regional and national economies. Investment in traditional subjects and
applied programs is not enough. In an effort to penetrate the knowledge filter and ease the spillover of
generated knowledge and ideas from the HEI, a third area was developed, representing the
mechanisms for transferring knowledge and technology created in the HEI, such as technology units,
incubators and centers of investigation in HEIs. These units have mechanisms that aim to facilitate
the spillover of internal knowledge to the outside (Woollard et al. 2007, Veciana 2006, 2008).
As referred to above, knowledge spillovers are the way of transferring knowledge directly or indirectly
from one party to another (Malecki 1985, Deeds et al. 1997, Gilbert et al. 2008). Spillovers are
generated by institutions that have innovative activities and are valid because these activities provide
knowledge that is new and relevant for the institution receiving it (Malecki 1985, Deeds et al. 1997,
Gilbert et al. 2008). Therefore, HEIs will transfer the knowledge they create, through an innovation
network, but will also receive knowledge and innovation generated by the various actors making up
that network.
In this connection, the conceptual investigation model aims to determine the main factors influencing
the creation of ventures, stimulated by HEIs within innovation networks. Figure 1, contemplates the
dependent variable of venture creation and a set of explanatory (independent) variables, referring to
HEIs and innovation networks. The variables associated with HEIs and innovation networks are
related to the relationships HEIs maintain with existing organizations, with the knowledge they have
available, with the training supply they offer, and the forms and activities that stimulate venture
creation which are used in HEIs.
Independent variable Dependent

variable
HEIs and Innovation Networks
External relationships
Training supply Venture
Forms and activities Creation
Factors of knowledge
Figure 1: Conceptual model

From the literature review, a set of hypotheses are formed to be tested empirically.
Concerning the attitude of HEIs having an influence on venture creation, the HEI makes a key
contribution, generating new ideas and knowledge in basic disciplines that are the traditional nucleus
of HEIs. This investigation aims to identify if the training supply provided by HEIs influences venture
creation. Therefore, the following hypotheses are presented:
542
Hypothesis 1: Short courses influence venture creation positively;
Hypothesis 2: The place the nascent entrepreneur is educated has a positive influence on selection of
the institution to provide training about venture creation.
It should be noted, however, that in a knowledge and information society, the people best prepared to
create and grow ventures based on new technology, and therefore with high added value, able to
compete internationally and create well-paid employment, are those who are technically best
prepared and motivated (Cristóbal 2006, Braunerhjelm 2008). In this connection, (Cox and Taylor
2006, Bramwell and Wolfe 2008), agree that entrepreneurship is one of the most important factors for
future economic development. In parallel, the aim is to identify and analyze the best forms used by
HEIs to encourage venture creation within innovation networks, and so the following hypotheses are
presented for investigation:
Hypothesis 3: HEI cooperation with other organizations influences venture creation positively;
Hypothesis 4: Scientific investigation developed in HEIs influences venture creation positively;
Hypothesis 5: Training given in the field of entrepreneurship influences venture creation positively.
3. Research design

The data used were gathered from a questionnaire, which made a survey of nascent entrepreneurs
from HEIs in the state sector. It contemplates, therefore, potential entrepreneurs, i.e. people who are
interested in starting a new business, who hope to be the owner of a new business or part of it, and
who have been active in trying to start up a new business in the last 12 months (Wagner, 2004).
In this investigation, the population is all nascent entrepreneurs from universities and polytechnics in
the state sector. It is therefore made up of individuals who participated, of their own free will, in events
with a view to venture creation and development of entrepreneurial initiatives, namely: competitions
(Empreenda'09, PoliEmpreende 6th Edition and START 2009) and technologically-based
entrepreneurship courses (CEBT and CEBCT).
The population is composed of 834 participants, to whom questionnaires were sent and later
completed by the respondents, the total number of questionnaires received being 255, representing a
reply rate of 31%. Consequently, the sample error obtained can be calculated according to (Hair et al.
1998). After calculation, the sample error obtained in this investigation was 5,2%.
3.2 Description and data characterization

This study is a guide to allow higher education institutions to identify and analyze the possible
relationships between the nature of HEI actions and new venture creation. This research aims to
determine the factors that have an influence on stimulation of venture creation by higher education
institutions through innovation networks. Therefore, the aim is firstly to analyze if HEIs encourage
venture creation through relationships developed between the actors of HEIs and innovation
networks, and secondly, the factors that facilitate venture creation.
In this study, creation of new ventures is measured from the information gathered about nascent
entrepreneurs’ intentions to create a new venture or develop a project within an existing venture, this
being considered the dependent variable. Regarding the independent variables, these are
represented by the best ways to stimulate venture creation (Table 1) and by the factors within HEIs
that facilitate venture creation (Table 2).
4. Analysis and discussion of the results
The majority of respondents are male, with the majority in the sub-system of polytechnic education
presenting an age-group between 20 and 30, while in university education this presents an age-group
between 20 and 35. In this connection, according to (Kim et al. 2003 and Wagner 2004), the age of
543
nascent entrepreneurs is related to expectations of return on investment, together with their academic
qualifications, aversion to risk and the characteristics of the region where they live.
It can be summarized that the respondents, whatever the sub-system of higher education, in most
cases have a first degree, the majority belonging to the scientific domains of Economics/Business and
Engineering (around 91% of respondents). Another characteristic of respondents is that they do not
have previous experience of venture creation or in the sector of activity where they develop the
business initiative and have not previously carried out management functions. Another finding of the
investigation into general aspects of the respondents is that they would pay for specific training, but
their opinion is that this should be included free of charge in academic studies.
The data obtained from the questionnaire were subjected to the statistical treatment of factor analysis.
Considering the aim to identify the attitude of the HEI towards venture creation, the best ways to
stimulate venture creation from HEIs within innovation networks were analyzed. The factor analysis
using principal component analysis and varimax rotation with the Kaiser– Meyer – Olkin KMO (0,80)
method Bartlett Test of Sphericity =631,879 and significance < 0,001, providing support for
convergent validity. From data analysis, three factors were identified, in which the variables were
grouped as follows (Table 1):
Table 1: The best ways to stimulate venture creation
Factor 1 Factor 2
Factor 3
Variable Cooperation and Scientific
Training
development research
Partnerships with HEIs 0,781
Post-graduate courses 0,743
Masters 0,663
Organizations 0,628
Partnerships with businesses 0,601
Conferences and seminars 0,775
Spreading awareness through articles 0,737
Publication of pedagogical material 0,714
Entrepreneurship courses 0,833
Competitions 0,735
Subjects included in degree courses 0,572
We find that cooperation and development, which cover various forms of cooperation with other
organizations and consultancy, are believed to be the best way, as they reach a wide public and will
be an excellent way for HEIs to encourage entrepreneurial activities.
Concerning the objective of identifying what facilitates venture creation, the data obtained from factor
analysis allowed identification of two factors (Table 2), where the variables are grouped as follows:
Table 2: Reasons for choosing the importance of factors that facilitate venture creation
Factor 1 Factor 2
Variable Network Organizational
actors resources
Training provided by professionals in the business sector 0,772
Participation/proximity of the school to organizations related to
0,656
entrepreneurship
Services provided to the community 0,718
Information, orientation and accompaniment provided by bodies existing in
0,667
the school (OTIC, GAPI; among others)
Training given by teaching staff 0,586
The factor analysis using principal component analysis and varimax rotation with the Kaiser– Meyer –
Olkin KMO (0,54) method, Bartlett Test of Sphericity = 93,994 and significance < 0,001, providing
support for convergent validity.
We find the factor identified as network actors was identified by nascent entrepreneurs as the most
important.
544
5. Conclusions
The main objective of this investigation is to identify the factors that influence the capacity of HEIs to
stimulate venture creation through innovation networks. Based on the theoretical review of the
literature, it was found that venture creation is influenced by a vast and complex number of factors,
which are not dealt with exhaustively in this study. However, a set of internal and external factors of
HEIs stood out as being able to influence venture creation within innovation networks. By analyzing
the contribution of each of these factors to the phenomenon of venture creation in HEIs, it was found
that the variables associated with HEIs and innovation networks are connected to the relationships
HEIs form with existing organizations, with the knowledge they have available, with the training they
provide, and with the forms and activities that stimulate venture creation and which they use. The
conceptual model presented proposes that the characteristics of HEIs influence venture creation
through innovation networks.
The principal results obtained with factor analysis took into consideration the previously mentioned
objectives of the organizations.
As for identifying the attitude of the HEI towards venture creation, based on identification of the best
ways to create ventures; we can conclude that cooperation and development are understood as the
best way for HEIs to encourage entrepreneurial activities. From the factors assumed by the
respondents, it was curious that they consider scientific investigation a better way to encourage
entrepreneurial activities than training, a situation which will probably have to do with the demands of
the market to guarantee the creation and development of new businesses by nascent entrepreneurs.
Regarding the objective of identifying what facilitates venture creation, the nascent entrepreneurs
selected the factor identified as network actors as the most important, as this has variables, as the
very name indicates, that incentivize and dynamize the diverse elements integrating the innovation
network, promoting the share of knowledge and supporting nascent entrepreneurs at the various
stages of venture creation.
From careful analysis of previous results, it is possible to detect some limitations in the study carried
out. Certainly, the main limitation of this investigation derives from the subjects for study being only
entrepreneurs participating in the selected competitions and training courses. Regarding suggestions
for future investigations related to venture creation, it could be important in other investigations to
make a careful analysis of the various ventures formed and which institutions stimulated their
creation.
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Patterns in Student Business Ideas: Experience at the
University of Thessaly
Pantoleon Skayannis, Yeoryios Stamboulis, Petros Rodakinias, Yeoryios
Kaparos and Anna Zygoura
University of Thessaly, Volos, Greece
leonska@uth.gr
ystambou@uth.gr
prod@uth.gr
george.kaparos@gmail.com
azygoura@uth.gr
Abstract: Since 2003, drawing funds from the Operational Programme on Education and Initial Vocational
Training, education in entrepreneurship and innovation was (uniformly) introduced into non-economic Schools
and Departments in Greek Higher Education Institutions. Entrepreneurship education was introduced in the form
of a Programme, which involved entrepreneurship courses, as well as related support activities (e.g. mentoring,
production site visits etc.). One such (interdepartmental) Programme commenced in 2003 in the University of
Thessaly and is currently at its 7th year of operation. Business ideas proposals were an integral part of the
Programme and, over the course of time, more than 350 business ideas were submitted (in either idea proposal
form or business plan form) by University of Thessaly students participating in the Programme. The purpose of
this paper is to examine those business ideas, using descriptive statistics methods, in order to determine and
identify patterns regarding the subject and the quality of the proposed business ideas. At the same time, an
attempt is made to correlate any emerging patterns to a variety of factors, such as (but not limited to) field of
studies, student team number of participants and synthesis, main instructors background, maturity of the
Programme etc. The identified patterns and correlated factors can be extremely helpful in determining successful
practices or failures in the implementation of entrepreneurship education endeavours and allow for improvements
in the approach of students coming from different fields of study. Additionally, differences between the students’
perception of entrepreneurship and actual entrepreneurial practices may be revealed.
Keywords: entrepreneurship education, student business plans
1. Introduction
It has become a common perception for policy makers in recent years that entrepreneurial activity has
a positive effect in the economy as a whole and that, an increase in entrepreneurship can be
achieved through education and entrepreneurship education in particular (European Commission,
2006). As a result, entrepreneurship education is promoted and implemented into education curricula
in most European member countries (European Commission, 2006) and the United States (Kuratko,
2005).
Entrepreneurship skills may be acquired (entrepreneurs are rather made than born); experience often
plays a significant role in the development of entrepreneurial skills, but many of these skills can also
be developed and refined through entrepreneurship education and training (Oosterbeek, van Praag
&IJsselstein, 2008 and Mitra & Matlay, 2004). Still, while this may be obvious to entrepreneurship
educators, it seems that only very recently is this view shared by students and the educational
community in general (Hindle, 2007).
As a result, the number of entrepreneurship programs at colleges and universities in Europe, the
United States and other countries is increasing steadily and many institutions now host
entrepreneurship centers and offer relevant courses and programmes (Harris, Gibson, Taylor & Mick,
2008 and Kuratko, 2005).
From the student perspective, it appears that entrepreneurship education enjoys increasing appeal to
them. More and more students are interested in entrepreneurship regardless of their fields of study,
viewing entrepreneurship courses and programmes as serving long-term career goals (Streeter,
Jaquette and Hovis, 2002). Students seem to understand the value of acquiring entrepreneurial skills
as well as their importance in their future careers, whether these careers are in the private sector (as
entrepreneurs or employees), in the public sector, or in non-profit organizations.
Regardless of future career plans, increasing numbers of students began to realize the importance of
being able to think from an entrepreneurial point of view. Students see value in learning what is taught
547
Pantoleon Skayannis et al.
in entrepreneurship courses: opportunity recognition, leadership, brainstorming techniques,

teamwork, and creative problem-solving. These skills will enable them to be flexible and agile in their
future workplace. For students coming from different fields of study, entrepreneurship education can
help to bridge the gap between theory and practice (Streeter, Jaquette and Hovis, 2002). At some
institutions, an entrepreneurship program consists of drawing students from business and non-
business fields in order to create diversity. In other cases emphasis is put on a specific field, providing
knowledge and skills relevant to the field itself.
As several studies and evaluations regarding the impact of entrepreneurship education courses and
programmes have shown, the results are generally positive. In most cases it was found that students
developed a more positive attitude toward entrepreneurship after participation in a relevant
programme and variables such as gender, business exposure, work experience, field of studies,
grade expected, or degree requirements seem to make little difference.
Entrepreneurship education programmes have allowed many students to acquire basic

entrepreneurial skills and form a more positive attitude towards new venture creation.
Entrepreneurship education promotes venture creation because entrepreneurship knowledge and
skills strengthen motivation to create a new venture (Lee, Lim, Pathak, Chang & Li, 2006), by
boosting self confidence (in terms of necessary knowledge to start new ventures) and improving the
perceptions of students toward the feasibility of their business ideas and allow for a more positive
entrepreneurial mindset. Below we present and comment on the experience of the entrepreneurship
programme running at the University of Thessaly since 2003.
2. Entrepreneurship education programmes in Greece: Experience at the
University of Thessaly
Entrepreneurship education programmes in Higher Education Institutions in Greece commenced in
2003, through a programme titled ““Encouragement of entrepreneurial activities, innovative
applications and elective courses for students”. The Programme was funded by the Operational
Programme for Higher Education and Initial Vocational Training (part of the European Community
Support Framework). Its main focus was the development of courses on entrepreneurship and
innovative activity, which aimed to provide the students with the opportunity of learning basic
principles on entrepreneurship.
The Programme “Encouragement of entrepreneurial activities, innovative applications and elective

courses for students of the University of Thessaly” was awarded to the University of Thessaly by the
Hellenic Ministry of Education and it was implemented in two phases (2003-2005 and 2005-2008).
During the implementation of the Programme, two courses, titled “Introduction to Entrepreneurship”
and “Development of Business plans”, were offered to the students of 12 departments of the
University of Thessaly, including the School of Engineering, the School of Agricultural Sciences, the
School of Human Sciences and the Department of Biochemistry and Biotechnology. The courses
were designed for the students to develop basic entrepreneurship skills, immerse further in aspects
particular to their field of studies and provide them with “real world” practice through interaction with
the entrepreneurial community. Those two courses still offered in the University of Thessaly as part of
the activities of the newly established Innovation and Entrepreneurship Unit of the University of
Thessaly.
More specifically, the course “Introduction to Entrepreneurship is taught during the winter semester.
The objective of this course is for the students to familiarize themselves with the reality of modern
enterprises (particularly the Small to medium-sized and Family Enterprises) and the modern tools of
management and to acquire basic entrepreneurial knowledge and culture. During the course,
students form teams in order to develop business ideas. The students have the opportunity to develop
business plans based on their ideas during the spring semester in the course “Development of
Business Plans”. Its main objective is to provide the students with knowledge on the development of
successful and complete business plans. In the development of their business plans students also
have the opportunity to benefit from the advisory guidance and support of members of the
entrepreneurial community.
In addition to taught courses, the following activities are realized:
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Case studies particular to the field of studies of the students, referring to real problems and real
enterprise stories of real enterprises are developed which are presented to and discussed with
the students.
There is full use of the possibilities offered by new technologies for the creation of virtual
enterprises with the possibilities of games and the simulation of real entrepreneurial situations, in
the sense of learning laboratories and virtual worlds.
The students come to close contact with entrepreneurs, by paying visits to companies and by
being consulted by established entrepreneurs or company managers (mentoring) to assist them in
the business plans which are part of their assignments. For this reason, there has been a broad
collaboration with the business community (Associations, Chambers of Commerce, etc.).
3. Data description
As mentioned before, the pool of business plans to draw from exceeded a number of 350. For this
paper, a total of 172 business plans were selected. The selection criteria had mainly to do with
comparability and quality issues. More specifically, as the amount of information was crucial for
comparability purposes, only complete business plans were selected. Business plans that did not
contain all necessary data, or focused only on the business idea, or on specific products and services,
were left out. For the same reason, business plans that were graded with a grade lower than 5 were
also left out.
This selection left a sample of 172 business plans that contain the same range of information and are
comparable in relation to the selected variables. These business plans were conducted using very
much the same guidelines for all years included in the dataset and were evaluated and graded using
similar criteria by a relatively unchanged team (the Programme teaching support team). The variables
selected for the statistic analysis are:
Business sector in which the proposed enterprises described in the business plans are active.
The categorisation was based on the high level SNA/ISIC from the NACE rev.2 coding, using the
main activity stated for each case. A total of 26 categories (out of 38 possible) emerged.
Grade of the business plans. As mentioned before, only business plans with a grade of 5 or
higher were used. This is the final grade that was awarded to the business plans after the final
exams of corresponding semesters.
Technology level. Three technology level categories were used (low, medium or high),
depending on the technology level utilised in the production and provision of products and
services, as described in the business plans.
Market range. Again, three possible categories were used, namely local, national and
international markets. Plans were categorised depending on their stated target markets.
Budget. Only the initial investment budget was used for this variable, as it was stated in each
plan.
Number of employees. For this variable, the number of estimated employees at full operation
was used.
Number of team participants. The number of students forming each team, as was recorded at
the corresponding final exams.
Gender diversification. Five categories were used for this variable according to gender variation
in the teams’ synthesis. The categories used are: male only, male “dominated”, male and female
in equal numbers, female “dominated” and female only.
Background diversification. This variable states whether a team was comprised from students
from a single Department, from two different Departments or from three or more Departments.
Background dominance. In cases of teams with students coming from more than one
Department, this variable was used to determine which Department was dominant (in terms of
participant numbers) in each team.
Year of instruction. The year in which the course corresponding to each business plan was
taught.
Main Instructors Background. The main instructor or instructors background (academic,
business or both) on the year each business plan was conducted.
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Main Instructors Business Exposure. The main instructor or instructors business exposure
(low, medium or high) on the year each business plan was conducted. This variable was
determined according to each instructor’s real life business experience.
4. General observations
Examining the entire dataset, a number of observations can be made. In regards to the type of
business, in a total of 26 categories (out of 38 NACE rev. 2 categories), almost half of the business
plans fall into four categories, summing up to approximately 43% of the total. These categories are:
accommodation and food service activities (12,7 %), arts, entertainment and recreation (10,98%), IT
and other information services (9.83%) and wholesale and retail trade (9,83%). All other categories
fall way behind, with percentages ranging from 0,5% to 5,2%. A significant part of the preference of
the students to certain categories may be attributed to their academic background. For example, the
high percentage of IT and other information services can, to a high degree, be attributed to the
extensive participation of students from the Department of Computer & Communication Engineering
in the Programme. Others categories, such as health care services and agriculture, forestry and
fishing, can also be directly linked to students from specific departments (Department of Biochemistry
and Biotechnology and School of Agricultural Sciences). On the opposite side, students seem to be
highly motivated by their everyday need and interests when developing business ideas, leading to a
high number of business plans in the categories of accommodation and food services and arts,
entertainment and recreation (see Table1).
Table 1: Proposed enterprises categorised by NACE rev.2
Type of Business Frequency %
Accommodation and food service activities 22 12,72
Arts, entertainment and recreation 19 10,98
IT and other information services 17 9,83
Wholesale and retail trade, repair of motor vehicles and motorcycles 17 9,83
Administrative and support service activities 9 5,20
Agriculture, forestry and fishing 9 5,20
Human health services 9 5,20
Publishing, audiovisual and broadcasting activities 8 4,62
Transportation and storage 8 4,62
Legal, accounting, management, architecture, engineering, technical testing and
analysis activities 7 4,05
Other professional, scientific and technical activities 6 3,47
Telecommunications 6 3,47
Education 5 2,89
Water supply, sewerage, waste management and remediation 5 2,89
Electricity, gas, steam and air-conditioning supply 3 1,73
Manufacture of food products, beverages and tobacco products 3 1,73
Manufacture of rubber and plastics products, and other non-metallic mineral products 3 1,73
Other services 3 1,73
Residential care and social work activities 3 1,73
Construction 2 1,16
Manufacture of computer, electronic and optical products 2 1,16
Other manufacturing, and repair and installation of machinery and equipment 2 1,16
Real estate activities* 2 1,16
Type of Business Frequency %
Financial and insurance activities 1 0,58
Manufacture of chemicals and chemical products 1 0,58
Manufacture of pharmaceuticals, medicinal chemical and botanical products 1 0,58
Source: processed by authors
550
In an attempt to compare the distribution of the types of business proposed in the students’ business
plans and the number of actual enterprises operating in the country, using the same type of business
categories, some interesting observations can be made (see Figure 1).
Figure 1: Type of businesses (percentage) in the country and the proposed business plans (source:
National Statistical Service of Greece and processed by authors)
Although, for the most part, there seem to be similarities between the distributions of the enterprises
operating in the country and the enterprises proposed in student business plans, there are also some
significant differences. At a more general level, it is obvious that enterprises from the tertiary sector
dominate in both cases, while primary and secondary sector enterprises fall far behind.
In a more detailed examination, categories such as Accommodation and food service activities,
Transportation and storage, Professional, administration and support services and Other professional,
scientific and technical activities show very similar percentages. But in categories such as Agriculture,
forestry and fishing, Manufacturing, Wholesale and retail trade, Construction, Telecommunications,
Education and Health and social care services, significant differences may be observed. In all above
cases, except Manufacturing and Construction, the percentages in the case of the students’ business
plans are greater than those of the country. The greatest differences can be observed in the
Wholesale and retail trade and Construction categories.
Regarding student performance, grades were awarded on a scale from 1 to 10. It must me noted
however, that only business plans that were graded with a 5 or higher were included in the dataset,
resulting in a relatively high grade average (7.9).
Looking at the technology level described in the business plans, it can be noted that the vast majority
of the enterprises proposed utilise low or medium level technology. High tech enterprises are very
scarce, suggesting that students are either unfamiliar with new technological advancements and the
competitive advantages they offer, or unable to handle technology use and transfer issues.
As far as market range is concerned, most proposed enterprises target local (56.6%) or national
markets (36.9%). Enterprises targeting international markets are very few, amounting to 6.3%. This is
not unexpected, as students tend to not stray away from what they are familiar with, choosing as their
base of operations and target market their area of origin or studies in most cases.
551
Gender wise, 32.3% of the teams is comprised by male students only, while 9.2% is comprised by
female students only. At the same time, 21.9% of the teams are male dominated and 19.65% are
female dominated. 16.7% of the teams have an equal number of male and female participants. It is
interesting to note that, even though the percentage of male and female students participating in the
Programme is relatively even, exclusively male student teams or male student dominated teams
account for 54.3% of total, while exclusively female student teams or female student dominated teams
account for 28.9% of total.
In relation to the teams’ background diversification, 74% of the teams are comprised from students
studying in the same Department, 24.8% from students studying in two different Departments and
only 1.2% from students studying in three different Departments. Despite the fact that
interdepartmental teams were encouraged from the beginning of the Programme implementation,
students avoided forming interdepartmental teams, mainly due to constraints to time management
and coordination (e.g. Department timetables and locations), and a stated preference to working with
people they are familiar with. It must also be noted that for students from Departments located outside
the city of Volos (where cources were tought) it was even harder to form interdepartmental teams also
contributed to the high number of mono departmental teams.
The distribution of the student teams according to Department of study shows that 40% of the teams
were comprised or “dominated” by students from the Department of Computer & Communication
Engineering. This corresponds directly to the high degree of participation of students from that
Department in the Programme. Teams that are comprised or “dominated” by students from the
Department of Economic Studies follow in the second place, with a percentage of 20.8. The
Departments corresponding to the lowest number of teams are the Departments of Veterinary
Sciences, which participated for only the first two years in the Programme, the Departments of the
School of Human Sciences and the Department of Civil Engineering, which is the only Engineering
Department with extremely low participation (see Table 2).
Table 2: Student teams distribution according to department
Department Frequency %
Department Of Computer & Communication Engineering 69 39,88
Department of Economics 36 20,81
Department of Architecture Engineering 20 11,56
Departments of the School of Agriculture 10 5,78
Department of Planning and Regional Development 10 5,78
Department of Biochemistry and Biotechnology 7 4,05
Department of Mechanical Engineering 8 4,63
Department of Veterinary Science 7 4,05
Departments of the School of Human Sciences 5 2,89
Department of Civil Engineering 1 0,58
Students seem to consider entrepreneurial activities to belong almost exclusively to the private sector,
as extremely few business plans proposed enterprises that did not belong in the private sector (e.g. in
the social sector or public-private partnerships).
5. Further observations from specific data subsets
While no significant correlations among variables in the dataset could be determined, a more detailed
examination of data subsets can provide with interesting information. These subsets follow roughly
the same distribution patterns as the entire dataset, but significant differences can be spotted in
specific variables and averages. The subsets that are more thoroughly examined are:
Business plan grades
To examine the characteristics presented by business plans depending on their awarded grade, we
have divided them in three categories: business plans with grades 5 and 6 (low grade), with grades 7
and 8 (medium grade) and with grades 9 and 10 (high grade).
552
Most business plans with a grade of 9 or 10 belong to the IT and other information services and the
wholesale and retail trade categories, which were also at the top in the entire dataset. Regarding the
technology level, however, the percentage of high tech utilising enterprises in the plans graded with 9
or 10 is almost double than the corresponding percentage of the entire dataset. The same applies for
market range, with plans targeting international markets reaching 11.1% (still low, but double the
6.3% for the entire dataset). The average budget of these plans is, also, greater than the total
average. All other variables show little differentiation in respect to the total dataset. Both goups of
business plans with grades of 5 to 6 with 7 to 8 score lower than the total average on the technology
level, market range and budget variables.
Technology Level
In regards to the technology intensity of business plans, examining the characteristics of the business
plans that were marked as high tech, some interesting observations may be made. Those plans were
highly graded, with an average grade of 9.1, more than one grade higher than the total average (7.9).
These plans target mostly national and international markets, significantly differing from the overall
pattern of targeting local markets. Their average budget is slightly higher than the total average
budget,and were developed mainly by mono departmental, male dominated student teams, with
students from the Department of Computers and Communication Engineering at a higher percentage
than is found in the entire dataset (68.1% as opposed to 39.8%).
Background diversification (single department teams vs. mixed department teams)
A more detailed examination of the characteristics of single department teams and mixed department
teams show very little differentiation in all examined variables. Mixed department teams have a
slightly higher grade average, market range average and budget average. They also tend to be larger
and more balanced in terms of gender.
Gender diversification
A more detailed examination of the characteristics of exclusively male or male “dominated” teams and
exclusively female or female “dominated” teams show very little differentiation in almost all examined
variables. Exclusively female or female “dominated” teams have a slightly higher grade average,
lower technology level and market range average and significantly lower budget average. They also
tend to be larger and more balanced in terms of gender.
Small and very small enterprises (budget lower than 50.000€)
Looking at the characteristics of business plans in which the proposed enterprises are very small
enterprises (less than 50.000€ budget and 10 or less employees), we see that their average grade
(8.0) is slightly higher than the average grade and their technology level and market range average is
very close to the total average.
Business plan ambition (as defined by budget and market range)
Business plans with high budgets (more than 1,000,000€) and targeting at least national markets,
were considered as moderately ambitious. A closer look at their characteristics shows that their
average grade is slightly higher than the total average grade; their technology level average is
significantly higher that the total average and a budget average that is five times the total budget
average. The student teams that conducted these plans were mainly mono departmental and quite
balanced in terms of gender.
Business plan ambition (as defined by technology level and market range)
Business plans with high technology level and targeting international markets, were considered as
more ambitious. A closer look at their characteristics shows that their average grade is significantly
higher than the total average grade (9.8 as opposed to 7.9); their budget average that is higher than
the total budget average, but includes both the highest proposed budget and one of the lowest
proposed budgets. The student teams that conducted these plans were equally mono departmental
and multi departmental and more male “dominated” in terms of gender.
553
6. Conclusions and discussion

Despite the fact that no significant correlations were discovered between the variables used, there
were still some interesting observations to be made. The key points that emerged from the analysis of
the used data can be summarized as follows:
Students seem to prefer certain types of businesses, a fact that can in part be attributed to their
department of study and in another part to the influence of entrepreneurial activity trends in the
country. A comparison between the sectoral distribution of enterprises in Greece and those proposed
by student business plans shows many similarities, as well as some expected differences.
Student performance does not seem to be affected by field of studies, gender, or team synthesis.
Students from the Department of Economic Studies or from Engineering Departments do not appear
to systematically perform better or worse. An explanation for this perhaps can be traced to the
transdisciplinary nature of the implemented Programme, which is designed to offer the same basic set
of skills and knowledge to all participating students. Also, multi-department teams did not perform
better or worse than single-department teams (as far as business plan grades are concerned).
However they tended to have more high-tech, internationally oriented, ambitious proposals. This last
point might be attributed to the better blend of skills and knowledge. In general, more ambitious plans
achieved higher grades, but this might be attributed to a bias in assessment.
In terms of entrepreneurial ambition and innovative thinking, students tend to be fall short, with few
student teams exploiting new technological advances, targeting large or foreign markets or opting for
high risk ventures. They generally choose familiar locations as a base of operation and target market
for their entrepreneurial activities and choose activities relative to their field of studies.
Our findings have confirmed the main issues in entrepreneurial attitudes, which also form key issues
in the agenda of entrepreneurship education. Lack of aspirations and ambition - attributable to low self
esteem and poor self confidence - is endemic in the behavior of students. This is probably
exacerbated by the parochial mindset dominant in domestic economic and cultural life. One other
factor not discussed here but dominant in everyday activities of the programme is the struggle against
established perceptions of entrepreneurship as essentially bloodsucking, profiteering line of work.
This finding has already affected our practice in the current season: student teams are explicitly
discouraged to pursue ventures of limited ambition. At the same time there has been a greater shift
during the first-introductory course of the programme towards cultivating creativity and searching skills
(seeking and diagnosing social needs). In subsequent years we consider making explicit the
assessment bias towards ambitious (in terms of technology and market reach) venture plans.
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Policy Shifts in Labour Market Liaising and
Entrepreneurship in Greek Higher Education
Pantoleon Skayannis, Yeoryios Stamboulis, Petros Rodakinias, George
Kaparos, and Anna Zygoura
University of Thessaly, Volos, Greece
leonska@uth.gr
ystambou@uth.gr
prod@uth.gr
george.kaparos@gmail.com
azygoura@uth.gr
Abstract: In the early 2000, funded by the Operational Programme on Education and Initial Vocational Training,
education in entrepreneurship and innovation was introduced into non-economic Schools and Departments in
Greek Higher Education Institutions. At approximately the same time, higher education career offices and student
internship programmes (practicum) were independently funded by the same Operational Programme. Despite the
fact that all these initiatives shared common goals and objectives, mainly to strengthen the link between Higher
Education Institutions and the labour market and facilitate their graduates’ transition to it, there was no
coordination or synergy between them. After two Operational Programme cycles, there is a major shift on the way
entrepreneurship education and connection to the labour market initiatives in Higher Education Institutions will be
realised. This paper examines this shift, as it is demonstrated in the new Operational Programme funding, in an
attempt to determine its nature and the main factors that lead to it. This shift was by and large based on a
research study commissioned by the Ministry of Education, Lifelong Learning and Religious Affairs 1 to the
Research Unit of Infrastructure, Technology Policy and Development (RUITPD), University of Thessaly, and was
carried out by the authors of this paper. Drawing data from evaluation studies and a the proposals of this study
on the planning and implementation of entrepreneurship education, career offices and student internship
programmes in Greek Higher Education, the paper examines the evolution of the implementation of the above
mentioned initiatives and their internal efficacy (in Higher Education Institutions) and external networking (with the
labour market), as well as the problems faced by higher education graduates entering the labour market.
Emphasis is put on the characteristics of the recent changes which involve both scope and organisational issues,
and an account on what is anticipated with the proposed shift is given.
Keywords: entrepreneurship education, policy shift, labour market liaising
1. Introduction
As entrepreneurship education has been recognised to be a crucial factor in fostering entrepreneurial
attitude and has become widely accepted that many aspects of entrepreneurship can be taught
(Kuratko, 2005), entrepreneurship education has grown dramatically throughout the United States,
Europe and other parts of the world. This growth can be detected in the increasing number of
entrepreneurship courses and programmes offered in Higher Education Institutions (HEIs).
Approaches to entrepreneurship education vary from offering single courses in starting a new
business, product development or business plan preparation to integrated curricula that include a
multitude of subjects, such as marketing and finance (Charney & Libecap, 2003).
Entrepreneurship education can help students’ identify and evaluate opportunities and provides them
with the necessary skills and knowledge to take advantage of them. At the same time it offers
knowledge in business disciplines such as marketing and management that non-business students
would not have the opportunity to acquire otherwise (Chang & Sung, 2009). Entrepreneurship
education’s value, however, in entrepreneurial growth and, consequently, in economic growth, lies
more in fostering entrepreneurship spirit in students and cultivating more positive attitudes towards
the undertaking of entrepreneurial activities (Tzeremes & Skayannis, 2009).
The increase in entrepreneurship courses and programmes has also been driven by student demand,
with more and more students seeking to obtain skills needed for a constantly changing and diversified
business environment. Students are looking for courses and programmes that teach practical skills for
starting and operating enterprises (Jones & English, 2004).
1 For simplicity reasons, where appropriate, the Ministry of Education, Lifelong Learning and Religious Affairs will be referred to
as Ministry of Education.
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The appeal entrepreneurship education holds for an increasing number of students, can be attributed
to several reasons. Most entrepreneurship courses and programmes allow for combining different
disciplines. Entrepreneurship’s interdisciplinary nature makes entrepreneurship education a more
enriching and rewarding experience. It also provides skills and knowledge that can improve students’
employment prospects, by encouraging them to start their own business or by improving their skills
and, as a result, their chances in the employment market. Additionally, entrepreneurship education
creates and strengthens links between Higher Education Institutions and the entrepreneurial
community. And, as entrepreneurship education generally is outside traditional discipline boundaries,
it allows for experimentation and adaptability (Charney & Libecap, 2003).
Entrepreneurship education has been present in Higher Education Institutions in the U.S. for more
than fifty years. Harvard University was the first University to offer a graduate course in
entrepreneurship in 1948, with Harvard Business School following soon after. In recent years,
entrepreneurship courses are offered at most universities across the United States. In Europe, a
substantial growth in entrepreneurship education can only be seen in the last ten years (Wilson &
Kramer, 2008). However, the importance of entrepreneurship education has been recognised and
stressed in several important European policy documents and the need to take further steps to
integrate entrepreneurship in higher education has been pointed out.
2. European policies
The Lisbon 2000 European Council Summit decided for the improvement of EU’s competitiveness
visualizing the EU becoming by 2010 “the most competitive and dynamic economy in the world,
based on knowledge and experience, able to achieve sustainable economic development with more
and more qualitative employment positions and stronger social cohesion”. Promoting
entrepreneurship was among the policies planned for the achievement of these targets. Five axes
were devised to this end; the fostering of entrepreneurial spirit – especially via education – was one of
them.
In the Lisbon framework the need to develop entrepreneurial spirit via the educational systems of the
member states aiming to improve competitiveness and to fight unemployment was stressed and was
promoted through a series of EU policy documents and initiatives. An important one was “Education
and Training 2010”, where entrepreneurship is defined as one of the eight ‘basic competencies” that
an individual must develop before leaving compulsory education.
In 2005, the revision of the Lisbon Strategy was decided and the strategy was revamped into
“Strategy for development and employment”. The vision was the achievement of a stronger and
sustainable economic progress and the creation of more and better employment positions. For the
achievement of the goals of the new Lisbon strategy, the restructuring of education systems was
necessary, as well as the inclusion of entrepreneurship as a separate and autonomous “field” in the
member states’ educational institutes curricula.
In March 2006, the Announcement of the European Economic and Social Committee for the
implementation of the Programme entitled “Promotion of entrepreneurial culture via education and
learning” (COM(2006) 33 final), laid the foundations for the development of a systematic strategy of
entrepreneurship in education. In the Announcement, the importance of the development of
entrepreneurial culture among young people was stressed, irrespective of the fact whether or not they
will become entrepreneurs. It is also pointed out that educational systems can decisively contribute to
successfully facing the challenges of entrepreneurship in the EU.
3. Graduate employment in Greece
According to 2008 Eurostat data, youth unemployment (under 25) was in Greece among the highest,
not only in the Eurozone but among EU-27 as well. Greece was also first in unemployment of higher
education graduates among the EU-27 despite the fact that the average of unemployment in Greece
had been reduced and that Greece had a lower than average percentage of degree holders than EU-
27.
In the 2007 report on the Lisbon strategy (EU, 2007) it is stressed that “one in three HEI graduates in
Greece is unemployed, the unemployment among HEI graduates reached 30% during 2006, a rate
which is more than double of the 14% average in the EU, and that Greece is the only country where
unemployment indices deteriorate at the time when the educational level improves”.
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All the above are expected to deteriorate further, because of the recent economic crisis (2008-2010),
and even more with the special crisis in Greece regarding the public sectors debt (13.6%) and public
deficit (115% of GDP) for 2009 (Eurostat, April 2010). The measures taken by the Greek government
to face the crisis are expected to further increase general unemployment and youth unemployment in
particular during the coming years.
The main reasons of the diachronic high youth unemployment are on the one hand the lack of
correspondence between the formal capabilities gained in education and the real needs of the labour
market and on the other the lack of employment experience. In addition, the is a question of numbers
and inflexibility, namely: the number of students admitted each year by university departments is
determined by the Ministry of Education and not by the relevant departments, thus it cannot flexibly
adjust to the labour market. The system of entry to the universities very often leads students to
register for studies which are their least favoured options. If these students do not develop an interest
during their years of study, frustration may lead to less motivation for a job related to their studies.
Another element that can contribute to the explanation of the reasons for the high unemployment
rates of HEI graduates is the impressive preference of the graduates for public sector employment.
Yet the public sector can only absorb a finite number of new employees, and is expected to shrink in
the future, especially in the frame of the said crisis and the measures that have been taken during the
spring of 2010.
In the same framework, it is characteristic that (according to research of the HEI and HTEI) a small
number of students and graduates declare the intention to get involved into entrepreneurial activities,
or to start their own new businesses. The wage reductions in the public sector introduced during
spring 2010, will probably lead to reduced attractiveness of the public sector. However, if the prospect
of employment in the private sector, either as waged labour, or as entrepreneurial activity does not
become attractive, the public sector will continue to be more attractive due to the job security it offers.
The switch to socially useful and sustainable entrepreneurship supported by modern perceptions
related to innovation and appropriate background knowledge and education could provide a
significant way out of the crisis for the Greek economy in the medium term. Hence, the critical
challenge for policy is the generation of a new culture where creativity, challenge and self-respect rise
to the top of social values. This can take place in a society where there is a shared sense of direction,
coupled with a general move to an age of high expectations.
4. Entrepreneurship education in higher education institutions in Greece
The policies of Greek governments fall in the framework above and are harmonised with the basic EU
strategy. The connection of the educational system with entrepreneurship comprises one of the most
important problems in the case of Greece. Despite the fact that the problem is dispersed throughout
all three education levels, it is particularly expressed at the level of higher education that does not
offer students neither any knowledge nor any familiarisation with the prospect of pursuing an
entrepreneurial career.
As a result of EU policies, during recent years, policies targeting at the promotion of a closer linkage
between higher education and labour market have been introduced, including the proportion of
entrepreneurship. Such policies appear in most Operational Programmes and were included in
various sectoral policies in varying degrees.
The main expression of the Greek policy for the connection of the labour market with higher education
via the promotion of entrepreneurship was a) among the activities implemented through the
Operational Programme for Education and Initial Vocational Training II of the third Community
Support Framework (CSF) and b) in the programming of the Operational Programme for Education
and Life Long Learning that is funded by the fourth CSF.
In the frame of the Operational Programme for Education and Initial Vocational Training II (EPEAEK
II), HEIs implemented programmes that attempted to link students with the labour market through the
Career Offices as well as with the encouragement and promotion of the entrepreneurial activity
through the teaching of courses on entrepreneurship, accompanied with complementary activities.
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The goal of these programmes was the provision of any possible support to the HEI students,
especially those coming from the applied sciences, for the development of their entrepreneurial spirit
so that they could be capable to create their own businesses adapted to the requirements of modern
economies. Their aim was to equip the students/graduates with the capacity to allow their active
participation in the labour market, not just by occupying existing employment positions, but by
creating new, using the experience they will have gained during their study period (Ministry of
Education, Lifelong Learning and Religious Affairs, 2007).
5. Current status on entrepreneurship education in higher education institutions
Since 2002 important activities for the promotion of entrepreneurship, have been materialised in the
EPEAEK II framework. These are:
Encouragement of entrepreneurial activities, innovative applications and elective courses;
Entrepreneurial activities through the Career Offices;
Organisation of the Annual Pan-Hellenic competition for the development of innovative and
pioneering business plans.
Encouragement of entrepreneurial activities, innovative applications and elective courses
The materialisation of the Programme took place during two phases and it was financed by EPEAEK
II of the third CSF. Phase A covered the period 2002-2005 and phase B 2005-2008. Twenty eight
HEIs from the whole of Greece participated. This Programme comprised the first systematic effort to
promote entrepreneurship and entrepreneurial spirit in Higher education, by means of placing elective
courses among curricula in all institutions and in particular in schools or departments that traditionally
do not offer any courses related to entrepreneurial knowledge and competencies.
The projects implemented by the 28 participating institutions included a series of common activities,
because of the structure of the tender. In this sense, all projects included activities such as: teaching
of elective courses, production of educational material, visits to firms and organisations, seminars
from entrepreneurs and firm managers, creation of virtual enterprises, case studies development,
mentoring, and publicising and promotion activities.
Overall, a large number of students participated, although the participation of students was not very
high in all cases. It is important however, that even though the penetration in Departments and
Schools besides those related to Economics and Business was relatively small, it was for the first time
that activities for the promotion of entrepreneurship were introduced in these Departments and
Schools.
Entrepreneurial activities through Career Offices
In parallel with the materialisation of the above Programme a series of other activities were
implemented by the HEI Career Offices with the participation of 30 HEIs in the country. The activity
plans of these Programmes were based on a series of common activities that included: services for
the support of entrepreneurial activities, sensitizing, publicizing and diffusion of results activities,
publications, training of managers, sensitizing of students and networking.
The number of beneficiaries at the national level was high, whereas all Career Offices did not display
the same level of achievement. In addition, even though penetration in the HEI Departments was
satisfactory as far as the number of Departments was concerned, the response among the students
of those Departments was not similar (Acronymo Meletitiki Ltd., 2007).
Organisation of the Annual Pan-Hellenic competition for the development of innovative and pioneering
business plans
The Programme “Organisation of the Annual Pan-Hellenic competition for the development of
innovative and pioneering business plans” was implemented from 2003 to 2006 and concerned the
organisation of competitions for ideas and plans from students and student. The activities carried out
for its materialisation included planning and organisation of competitions, the creation of a Pan-
Hellenic network of cooperating agents, the creation of promotion and advertisement material, the
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setting up of a group of mentors and educators, and the organization of educational and instructive
meetings.
Even though the number of those participating in the competitions could be judged as satisfactory
(Acronymo Meletitiki Ltd., 2007), the diffusion of the project results was limited both at the level of
institutions and geographically. The majority of participants originated from a wide range of Institutions
all over Greece, but the majority of beneficiaries from the side activities of the project originated from
the institution that materialised the project.
Taking into account the facts concerning the above activities, our research reached the following
conclusions:
The activities comprise the first systematic effort to introduce entrepreneurial activities in Higher
Education with the participation of the majority of HEIs. Despite the fact that there were a series of
activities that were defined to a large extent by the tender, having in addition very concrete directions
for the materialisation of the Programme, there were significant differentiations in materialisation.
These were due to different approaches as far as the total structures of the Programmes implemented
are concerned and of the method and process of implementation of the various activities. However, in
all institutions, and irrespective of the manner the various activities were implemented, emphasis was
put rather on the fostering of entrepreneurial spirit than on the founding and management of new
firms.
There was a relatively limited (number of students, etc) but first time penetration of activities for the
promotion of entrepreneurship in Departments besides those related to Economics and Business.
This has been an important step towards the development of entrepreneurial spirit in subjects and
specialisations where, traditionally, entrepreneurship did not constitute a subject dealt with.
The results – at least the quantitative – from the materialisation of activities are encouraging, in spite
of the identified differences in the performance of institutions. In the majority of activities, the targets
set were achieved to a large extent, as it is pointed out in the evaluation that took place (Acronymo
Meletitiki Ltd., 2007). However, the fact that there were deviations in the efficacy and the achievement
of targets indicates the need for the location and diffusion of good practices.
It is important that a valuable stock of experience, know how, educational assets and human
recourses was created. This can be valorised in the near future and at the same time allows for the
development of creative and critical competencies in the frame of ambitious activities.
Another important fact is the opening of HEIs to the entrepreneurial community through the
development of a broad networking with firms and agents, thus contributing to the implementation of
the target of linking educational institutions with the labour market. As shown by the large number of
cooperation between HEIs and firms, the response of firms was significant. However, as our research
has detected, often these collaborations were occasional as in most cases were based on personal
contacts and acquaintances and not on an institutional, systematic and precisely determined
cooperation framework. A corresponding problem existed for the case of organisations and agents.
The implementation of the above programmes reveals significant policy problems, influencing both
the efficacious materialisation and the future viability of such interventions, as can be surmised from
the aforementioned evaluation study (Acronymo Meletitiki Ltd., 2007). In particular, our research has
highlighted the fact that within the same institution (HEI or THEI) the various programmes were
implemented by different structures and/or persons without any central co-ordination and practically
no development of a communication mechanism and diffusion of information was taking place
between the various structures. This led to overlaps as far as the activities undertaken are concerned,
resulting into a waste of resources, and a lack of single representation of institutions especially
regarding the development of networking with the entrepreneurial community. It also led to facing
common problems in different ways, especially due to lack of common philosophy and strategy,
therefore to the lack of any concrete institutional policy.
Very important was also from the part of HEIs’ administrations the lack of recognition of the necessity
to place these activities under the regular institutional functions. This created unfavourable conditions
regarding the viability of entrepreneurial activities in the institutions after the completion of the
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Programmes. It is very characteristic that even the Career Offices – that are already institutionalised
structures – significantly limited their activity or even stopped to offer their services after the
termination of the third CSF.
In parallel, by examining the relation between institutions became obvious that there was a lack of
horizontal networking of all institutions that implemented such programmes. Such networking could
have secured a better support of institutions at the national level, the undertaking of initiatives
concerning all institutions (e.g. training of educators), the diffusion of results and good practices and
the restructuring of strategy at the national level. Exemptions have been the entrepreneurship
activities of the Career Offices which were placed under the Horizontal Support Activity of the Career
Offices.
However, despite the problems and difficulties and the variation in the achievement of targets
between institutions, the materialisation of entrepreneurship related programmes significantly
contributed to the promotion of entrepreneurship and the fostering of entrepreneurial spirit among
students (Acronymo Meletitiki Ltd., 2007), as it made the issue and the problems known for the first
time to a broader academic audience.
6. Policy shift in entrepreneurship education and labour market liaising
In the frame of the new Operational Programme for Education and Lifelong Learning (EPEAEK), the
policy for interconnecting higher education with the labour market, through the promotion of
entrepreneurship, is defined in the priority axes concerning the “upgrading of initial vocational training
systems and vocational education and linking of education and labour market”.
In particular, the specific objectives refer to the more efficient linkage at all levels of the educational
system with the labour market, through the implementation of relevant actions. More specifically, with
regard to higher education, this linkage is pursued through actions involving the promotion of
students’ entrepreneurial spirit, the upgrade of student internship programmes and the
extension/upgrade of Career Office services (Ministry of Education, Lifelong Learning and Religious
Affairs, 2008).
In the new Operational Programme, a restructuring of the strategy to achieve desired goals was
sought. Taking under consideration previous experience, through a series of processes – such as
extensive consultation and deliberation with high standing university officials across Greece and
summits (organised by the Ministry of Education) of HEI and THEI Rectors and Presidents – our
research study proposed a new policy approach which was adopted by the Ministry and on the basis
of which the new calls for the related subjects of the new Operational Programmes were based. This
approach regards, at its core, the cohesive and comprehensive treatment of the issue of linking higher
education with the labour market, from the side of Higher Education Institutions.
For the first time, entrepreneurship, labour market liaising and student internship activities are
integrated in a single programme, aiming at a single cohesive proposal from every Higher Education
Institution, in which the Institute’s strategy will be formulated. The organisation, coordination and
supervision of this strategy will be undertaken by a new structure, called Bureau of Employment and
Career (BEC), which will be established in all HEIs in the country. At the same time, an Innovation
and Entrepreneurship Unit and a Student Internship Office will also be established in order to
concentrate and coordinate entrepreneurship and student internship activities correspondingly. These
structures, alongside Career Offices which are already established in HEIs, are put under the
supervision of BEC, which will coordinate, monitor and evaluate all of the activities implemented by
the relevant structures.
The Bureau of Employment and Career, a structure that did not exist in any HEI before, constitutes an
attempt to evolve and streamline the structures related to student career and employment in HEIs and
to link, coordinate and harmonise their activities in to order improve and maximize their results. With
BEC, the aim is to achieve the improvement of management and coordination, the amplification of
synergy, the exploitation of scale economies, the expansion and enhancement of networking with
educational institutions, the labour market and other organisations (especially organisations related to
employment and entrepreneurship), and, ultimately, to save resources for the implementation of
labour market liaising activities (RUITPD, 2008).
560
The Role of BEC is to conceive the vision, to formulate the strategy, to process and implement the
policies of HEIs for creating links with the labour market and for graduate employment, to coordinate
the structures and activities under its supervision, to ensure the viability of these structures and, to a
large extend, to exist as the main gateway that connects HEIs with the labour market (RUITPD,
2008).
The establishment of the Innovation and Entrepreneurship Unit aims at developing a clear and
cohesive strategy in an attempt to gather, coordinate and upgrade all entrepreneurship services
offered by HEIs and include them in a broader and more robust overall strategy. In this context, the
Innovation and Entrepreneurship Unit implements actions such as the teaching of entrepreneurship
courses and the support of student entrepreneurial activities – a service which Career Offices
provided in the past – as well as new actions such as entrepreneurship seminars and summer
schools.
The Career Office facilitates student and graduate access to the labour market, through the provision
of services related to information, consulting and guidance in matters of employment, curricula and
career prospects. In the new Operational Programme, emphasis is put on the enhancement of
networking and contacts of the Career Office, which, in cooperation with BEC, is expected to evolve
into a central node in the interconnection and networking of HEIs with employment promotion
organisations and the labour market in general.
The Student Internship Office will undertake the task of coordinating the student internship activities of
different Departments in all Institutions, in order to expand the range and improve the efficiency of
relevant provided services.
Figure 1: Internal and external links of the bureau of employment and career (source: RUITPD, 2008)
7. Expected results
The broad introduction of entrepreneurship education in HEIs constitutes one of the most important
innovations in higher education in regards to the economy, economic growth and the professional
career of graduates. While substantial results would require the passing of an extended time period, it
561
is the beginning of implanting the notion and the culture of entrepreneurship in the whole of higher
education (RUITPD, 2008).
According to our RUITPD research study, the expected results related to the activities of the
aforementioned structures will be the:
Development and improvement of innovative and entrepreneurial skills and professional culture of
students.
Encouragement of creative (self)employment and undertaking of entrepreneurial activities and
provision of alternative employment perspectives, promoting public sector decongestion.
Improvement of graduate employment prospects and, consequently, reduction of waiting time for
entering the labour market.
Enhancement of economy competitiveness, through the improvement of scientific and executive
skills of graduates employed in the public and private sectors.
Student satisfaction improvement regarding their employment prospects and professional
careers.
Reinforcement of HEIs, through cooperation and networking with enterprises, agencies and
organisations.
Enhancement of HEIs’ knowledge and perception of the labour market – and the economy in
general – at local, regional and national level and improvement of their adaptability to current
trends and demands.
This integration into a cohesive framework, which will be monitored and coordinated by a central
structure, will help to ensure the maximum possible synergy among relevant actions, as well as
increased effectiveness, inclusion of interested actors in planning and decision making, amplification
of outcome diffusion, enhancement of networking and saving of resources. This will be achieved
through systematic coordination and monitoring, joint planning and the formulation and
implementation of a cohesive strategy with regard to student career, student employment and labour
market liaising (RUITPD, 2008).
The design of a cohesive framework by itself encompasses the concept of a grid of actions, which will
eventually become an inextricable and integral part of HEIs’ activities. At the same time, seeking
alternate sources of funding and insuring the viability of the relevant structure -, goals which will most
likely be achieved through external networking - will be greatly facilitated.
The involvement of actors in HEIs at different levels (students, faculty members, academic and
administration staff, etc.) but, also, of agencies, organisations and enterprises, through deliberation
and publicity and dissemination activities, aims at incorporating the issue of linking higher education
with the labour market to the overall HEIs’ strategy, as well as at developing intensive, systematic and
efficient networking with local societies and the entrepreneurial community.
In addition, we expect the visibility of relevant actions to be significantly enhanced, both inside and
outside HEIs. Inside the Institutions, information dissemination and publicity will be facilitated by
targeted and cohesive publicity activities. In terms of the external environment, the Institutions’ brand
name will be amplified, since a structure which will act as a ‘one-stop-shop’ for interacting with the
labour market will be established,
8. Conclusions
Entrepreneurship education has gone through an extended period of experimentation and searching.
This period has been characterised by the passive adjustment to - alignment with the European
agenda. This passive behaviour has to a large degree extended to the implementation sphere. The
implementation of various programmes by the beneficiary educational institutions has been
fragmented, seldom being part of a coherent policy formed by them. Actions and programmes have
gained in visibility and publicity, students have been involved, yet there is still a sense of run of the
mill mentality and a deficit in engaging the minds of the broader academic community. Despite their
operational success, the projects implemented have in general been rather lacking in innovativeness
and drive. There is still a long way to go towards enacting an active entrepreneurial culture in the
broader context of HEIs. The design of the latest round of programmes, owed to a great extent to a
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research studty conducted by the authors of this paper (RUITPD, 2008), has sought to enhance both
the operational effectiveness and the cultural impact of these programmes, without imposing great
discontinuities that would result in delays due to organisational inertia and adjustment.
In an effort to enhance coherence, effectiveness and visibility a major innovation in this latest
programme has been the invitation to institutions to integrate their distinct activities within a single
operational unit, without forcing extreme changes in operational and divisional boundaries. The main
aims have been to achieve coordination, development of shared mentalities, higher visibility within the
academic community and one-stop-shop access to the academic community for social partners.
However, the real success of the newly designed programmes will depend on a series of factors, the
most important of which are the following: Enthusiastic implementation by the HEI authorities, not
simply sticking to the letter of the programmes but devoting parts of their own resources in order to
take further initiatives in the spirit of the programmes. Refinement of the programme targets according
to educational disciplines in order to formulate HEI policies for entrepreneurship and for the access of
graduates to the labour market. Broad diffusion of information about the activities of the programmes
and of the underlying concepts and policies to the whole of the academic community and further on
commitment of the academic community for the support of the programmes.
This diffusion should also spread to the ‘external’ world. The activities of the HEIs should be well
known to society and should be able to achieve a high social acceptance. The fact that Universities
deal with issues of entrepreneurship should be granted to them as a positive and socially useful
development.
Especially in the current period of economic crisis which in Greece is amplified by the internal
economic problems, a switch of the younger generation to entrepreneurship, especially of the
innovative kind, besides putting into perspective the decongestion of the public sector and the better
access to the labour market, could add to HEIs’ credibility and could provide a significant healthy
answer to the problems of competitiveness of the Greek economy.
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Tzeremes, N. & Skayannis, P. (2009), “International Experience in Entrepreneurship Education”, Market Without
Frontiers, Vol. 15, Issue 1, Institute of International Economic Relations, Greece (in Greek).
Wilson, K. & Kramer, M. (2008), “Chapter 5: Entrepreneurship Education in Europe”, Entrepreneurship and
Higher Education, Chapter 5, OECD.
563
Knowledge Integration: The Case of a Portuguese
Organization
Maria José Sousa
IDEFE/ISEG – Universidade Técnica de Lisboa, Portugal
mjdcsousa@gmail.com
Abstract: Knowledge integration is one of most critical factors for organizations competiveness, but also a critical
factor because the constraints of knowledge nature. Sharing knowledge and effectively integrate it in organization
practices and processes seems to be a very powerful strategy and at the same time a very difficult achievement.
This research focuses on how knowledge is integrated within the work processes. The purpose is hence to
describe and analyze how knowledge is integrated in a Portuguese organization and all the implicit constraints,
supported in an intensive case study. A main result of the research is that knowledge integration became part of
the strategy of competitiveness of the organization for the last decade and to implement it they have developed a
culture of knowledge and mechanisms that facilitate the sharing and the integration of knowledge in day-by-day
work practices.
Keywords: knowledge integration, organization, action research
1. Introduction
Knowledge has been studied by different schools of thought - Organizational Theory, Industrial
Economics, Management and Innovation Management. In the literature we can find some authors of
reference like Prusak and Davenport (2000) for whom "Knowledge is a mix of experience, values,
contextual information, insights and provide a mental framework that helps to evaluate and
incorporate new experiences and information."
Polanyi (1958) another important author links knowledge to action; he states that "knowledge is the
ability to act" and Nonaka and Takeuchi (1997) explain that knowledge is created by the flow of
information associated with beliefs and commitments of those who possess it.
From the analysis of these concepts emerge the idea that knowledge enables organizations to
achieve their successes, keep them on the market and increase their competitiveness and Coulson
(2002) reinforces this idea by stating that today's organizations do not compete in terms of products,
services or technology, but in terms of knowledge, processes and values.
Moreover there are several authors who distinguish two dimensions of knowledge: tacit and explicit
knowledge (Alwis & Hartmann, 2008, Nonaka & Takeuchi, 1995). Tacit knowledge is personal,
unique, and hard to capture, reproduce, encode, and share / transfer - this knowledge can also be
assigned to individual knowledge. On the other hand, explicit knowledge can be easily codified,
systematized and converted into words, numbers or symbols. It is possible to be captured, shared,
transferred, stored - made available to be consulted and reused. This kind of knowledge can be
assigned to organizational knowledge. More importantly, Alwis & Hartmann (2008) refer that tacit and
explicit knowledge are complementary. Therefore both types of knowledge are essential to the
knowledge creation process.
Analyzing all the conceptualization around Knowledge we assumed in our research, as a main idea,
that the share of explicit knowledge cannot be separated from a process of understanding, needing
the individual’s tacit knowledge to complete the share. Explicit and tacit knowledge was studied as
two inseparable assets, because in our assumption explicit knowledge needs a tacit understanding of
the language in which explicit knowledge is structured.
However knowledge produced and carried by individuals only reaches its full potential to create
economic value when it is embodied in organizational routines, that is, when it has been converted
into organizational knowledge.
2. Sharing and integrating knowledge
To share knowledge organizations have a tendency to invest in information technology rather than in
developing social relationships, and not many have attempted the cultural and organizational
transformation needed to promote knowledge transmission and circulation.
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Maria José Sousa
The integration of employee’s tacit knowledge in the reorganization of work routines and embed their
knowledge into new products and services can lead to sustained competitive advantage. However,
this kind of knowledge is carried in the heads of individuals and the dilemma is how it can be
embedded in organizational routines to fully maximize its utility.
Information technology is part of the essential infrastructure of knowledge sharing, but it is not
sufficient because knowledge involves thinking, an activity that only human beings are able to do.
Extensive literature provides several examples of organizations skilful for knowledge sharing (Zairi &
Whymark, 2000), but most of these case studies do not fully explore why these organizations were
successful at this endeavor. To fully understand how to grow this capability, it is probably necessary
to understand what factors tend to affect knowledge sharing. The literature within the knowledge
domain provided the following five factors that might influence the knowledge sharing process:
Relational channels, frequency and depth of two-way human-to-human contact (Rulke, Zaheer, &
Anderson, 2000)
Partner similarity, degree of similarity (i.e., interests, background or education) between
individuals (Almeida & Kogut, 1999; Darr & Kurtzberg, 2000)
Depreciation, loss of knowledge after the share (Argote, Beckman, & Epple, 1990; Darr, Argote, &
Epple, 1995)
Organizational self-knowledge, what individuals know and use (Rulke, Zaheer, & Anderson, 2000)
Divergence of interests and congruency of individual and organizational goals (Alchian &
Demsetz, 1972; Jensen & Meckling, 1976; Donaldson, 1990).
Knowledge is assumed by several authors (Drucker, 1988; Nonaka, 1991; Morey & Frangioso, 1997;
Zwass, 1999; Argote & Ingram, 2000; Argote, Ingram, Levine, & Moreland, 2000; Davenport &
Prusak, 2000; Lahti & Beyerlein, 2000; Rulke, Zaheer & Anderson, 2000) as the organization’s best
sustainable source of competitive advantage. Nevertheless, organizations have to integrate it the
work activities to become more innovative and implement successful organizational changes.
3. The research methodology
To accomplish the empirical work their knowledge integration processes were studied using Action
Research methodology and the main technique to collect data was group recall sessions with all
levels of employees of the organization.
Action research (AR) was the applied methodology for this study because we didn´t want to
discovered generalizations, but contextual findings and rich insights and AR allows a deeper analysis
and a different understanding of complex organizational problems (Sousa, 2009).
Data was collected through interviews to top management and group recall techniques, which were
also used to knowledge sharing among the researcher and the organizational actors.
The group recall technique can be framed in social research and the process is similar to focus group
process. It gives the researcher the opportunity to hear detailed revelations about people’s thoughts,
ideas, and experiences. It has potential to illuminate workers’ contrasting opinions and experiences
and to help them getting to know better the organization, and sharing with colleagues their
experiences and work practices.
The combined contributions of participants in the group recall might point up new directions and
questions changing the trajectory of the session. There is then potential for the researcher to explore
their remembrances allowing space for participants to articulate their own ideas.
The practical issues of group recall sessions are mainly the logistics of getting all participants together
at the same time in the same room, prepared to talk on the same subject and the concerns that some
contributions might become lost in the wider debate.
One main constrain about the use of this technique is the danger of censoring: individuals hold back
the contributions they wish to make, conforming instead to an apparent consensus or to the opinions
of a self-appointed “expert” within the group. Another concern is the possibility for participants to
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exaggerate their accounts in order to “impress” others. However, and because several participants
could belong to the same work unit, this was unlikely to happen since the other members of the group
would function as a control elements.
3.1 Research design

The main goal of this research was to analyze the perceptions of organizational actors regarding
knowledge integration in the company activities, processes and practices. The research was
conducted in one Portuguese company from 2006 to 2007 and involved operators, technicians and
managers in separate group recall sessions where they shared experiences, ideas and gave
suggestions about the knowledge sharing and integration processes.
Five employees participated in each group recall session - totalizing 30 persons from the company.
For data analysis we used analysis grids based on employee’s quotations and also in a questionnaire
applied to all participants of group recall sessions. We did not want to found out percentages or
values and it was not our goal to make any kind of measures, but to understand the processes for
knowledge sharing and integration in the company.
4. Knowledge integration - results from the research
New knowledge is an important element for workers to examine and adapt to new practices or
processes in their own workplaces. However, there is a limited perception of the usefulness of that
knowledge. Sharing new knowledge that was acquired through a review, a conference, a training
session or in another process is not yet an easy process in many organizations.
With this case study we tried to answer a main research question:
How to promote the internalization of the new knowledge used in the organization?
4.1 Integration of new knowledge and its effective use in everyday work
The integration capacity can be measured using the degree of workers’ ability to perform different
tasks, together with the rotation degree between workers and the organization of specific training.
Most organizations have difficulties in integrating knowledge that workers acquire from training
processes. However, Department Managers of the studied company explained that the training plan is
made with several criterions and one of them is that workers must receive training related to their job,
making the application of the new knowledge easier and immediate.
“The new knowledge is integrated in the job description. If the knowledge is acquired
during training, we want it to be applied in the field. Also, the introduction of a new
technology involves the development of new knowledge that is crucial for the production.
For instance, maintenance is a good example because new machines or equipment
need new knowledge so that workers can be trained to answer to problems when they
occur. Therefore, they have special training needs in several technical issues, which are
always applied in the field.” (Group recall – Department Managers)
On the other hand, it’s important to integrate all the knowledge related to Engineering, Maintenance
and Production because it’s always needed to solve emergent problems.
“Every machine with some kind of problem needs urgent reparation and the employees
have to use their technical knowledge and experience to deal with the situation.” (Group
recall – Department Managers)
4.2 Incorporation of new knowledge into new products, services and processes
Environments created inside organizations generate the conditions that can either encourage or
diminish knowledge application and integration when creating new and improved product and
services.
“We are always improving our products and processes and most Operators follow the
changes and accept them. However, in the beginning they assumed a suspicious attitude
about it. Later on we normally proved that the change was better. For example: the two
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boxes’ system. Each workstation had only one box until we introduced another box.
Operators showed some resistance, but today no one can work differently.
Today there is almost no resistance to change because we are always changing, and
workers participate actively in all the changes. They understand that the changes
improved their work.” (Group recall – Production Managers)
Sometimes the innovations are developed due to clients’ demand:
“We have standard products but sometimes we make changes ordered by our clients.
It’s not always possible to answer to clients’ demands because we have norms and rules
that we have to follow.” (Group recall – Technicians)
As an innovative organization, this company gives a great importance to R&D having a department
with 50 workers with several types of knowledge.
“In our business it is important to innovate, and I&D Department is always developing
new functionalities and products. Some of these products and functionalities are not put
into practice because they are too expensive or because, at that moment, it is not
interesting for the organization. This is all documented and can be used in another
moment of the company’s life.” (Group recall – Department Managers)
Technicians and Operators think that R&D Department is very shut off. Although it integrates workers
from different nationalities, they view it as “different world”. Most researchers are new in the
organization and they are still in a learning process and it will take those 2 to 3 years until they can
start producing visible results.
“I&D is a polar area of development in our group.” (Group recall – Technicians)
We don’t know what they are working on. Sometimes they come to the plant to make
some kind of experiment, but we ask ourselves why do we need so many workers in I&D
and what are they doing.” (Operator from Production)
Knowledge application requires integration of different organizational knowledge areas and the
integration of different and highly specialized knowledge related to the product or service delivery
system.
“When we implement an innovation, it is not just the R&D Department that is involved,
but also Production, Engineering and Quality. All these areas have specific knowledge
that is important for the product development.” (Group recall – Department Managers)
Knowledge integration may lead to higher innovation levels, but sometimes the innovation is not
successfully implemented and the knowledge itself is not necessarily applicable.
“Sometimes the innovation doesn’t work, but we continue on trying - R&D Department
are always in a process of creating innovations. ‘The error is a learning process’. As we
know, a great deal of innovations is developed based on trial and error. The important
thing is that this is a very important process of learning.” (Group recall – Department
Managers)
When innovations based on tacit knowledge are successfully implemented, they are more effective in
creating a sustainable competitive advantage than innovations based on explicit knowledge, since
these are more difficult for competitors to imitate. Tacit knowledge is more inimitable because it
cannot be articulated clearly to others and requires personal experience. Competitors have difficulty in
interpreting tacit knowledge without active participation in its development, implementation or
operation.
Even within the organization, tacit knowledge transfer and integration is conditioned by its complexity
and because there are factors depending on the source/receiver of knowledge that affects knowledge
integration.
“What makes employees share and use shared knowledge is the communication
between supervisors and employees. These activities can be beneficial and can help the
job performance” (Group recall – Department Managers)
Therefore, it is necessary to develop new techniques that improve knowledge communication and
integration by providing new forms of knowledge sharing through workers’ relationship.
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Maria José Sousa
4.3 Implementing practices from other organizations

Corporations have always had some process of synthesizing their experience and integrating it with
knowledge acquired from outside sources (e.g. inventions, purchased patents). A corporation
acquires knowledge after years of experience in such areas as manufacturing, sales, and services.
This cumulative experience from different departments, together with information gathered from
outside sources, can be integrated and new practices or processes can be implemented in order to
increase productivity.
They visits others organizations (both within the Group and external organizations) and copy their
practices whenever it seems important to improve their quality and productivity, specially practices
from the Group.
Operators point out the fact that all new practices and production process were inspired from other
organizations.
“When we think it’s important to implement other practices we do it, for instance our main
principles are inspired in the Toyota Production System.” (Group recall – Operators)
Production Managers point out the organizational advanced stage of the company, despite the fact
that there is always room for implementing new practices from external origins, especially from
Universities.
There is always somebody that brings new ideas to the organization. For instance, the
I&D Department has been recruiting people from the University.” (Group recall –
Production Managers)
Other important aspect is the integration of knowledge and practices from other departments of the
company.
“Each department has specific rules and procedures, and different ways to solve
problems. Good practices can be copied and implemented from one department to
another and the mobility has that goal – people in a mobility scheme carry good practices
from one place to another.
My experience is an example. I was a customer of the department where I am now, and
when I arrived at this department, I had already identified what was done unnecessarily.
But knowing the problems thoroughly has many positive and negative points.
This type of attitude is not always understood – identifying negative points in a situation
or trying to improve something that seems to work alright is a very difficult process.
People who can adapt more easily to change can develop themselves; people that are
resistant to change aren’t rewarded by the organization.” (Group recall – Middle
Managers)
5. Arguments and findings
The collection of evidence in the case study carried out helped to identify ways of integrating
knowledge through the implementation of knowledge sharing routines and promotion of collaborative
activities in systematic transfer processes, including problem-solving routines and participation in
improvement, quality and maintenance projects.
Each member of the company contributes actively to the creation, sharing and integration of
knowledge:
Managers assumes a proactive attitude reflected in actions and activities that influence
knowledge sharing among workers, especially through the communication spaces, where they
can discuss all issues related to organization.
Middle Managers adjust and integrate individual knowledge into rules and procedures, in real
time, in order to be applied by operators.
Technicians promote social interaction among operators and try to involve them in all changes,
leading them to share their knowledge.
Operators integrate new knowledge created and also share their own knowledge with co-workers
when they develop activities and also when they try to solve problems.
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Maria José Sousa
The findings of this research helped to realize that all the members of the company - Managers,
Middle Managers, Technicians and Operators - have similar perspectives on the processes of
creating, sharing and integration of knowledge in organizational processes.
6. Conclusions
It was identified an emerging culture of knowledge that promotes the creation and sharing of
knowledge among all employees in this organization and also the recognition of the importance, for
the organization competitiveness, of the process of integration of knowledge in day-by-day practices.
In that context managers and employees work together for the same goals and with intent to use and
integrate their knowledge in new practices, services and products.
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570
Enforcing the Local Embedding of Enterprises by
Networking Activities in Business Centres
André Spithoven1 and Mirjam Knockaert2
1
Vrije Universiteit Brussel and Belgian Science Policy Office, Belgium
2
University of Ghent, Belgium and University of Oslo, Norway
aspitje@yahoo.com
Abstract: The paper provides insights in the effects of networking activities of tenants located in business
centres. These tenants are deemed to contribute to the local or regional economy by means of their
performances in terms of generating employment and turnover. Drawing of a sample of tenants, and confronting
them with a matched sample of firms not located in a business centre, assesses the networking possibilities that
business centres are said to offer. Because business centres are part of the policy toolbox of local and regional
actors their initiatives aimed at stimulating entrepreneurship are included. The results demonstrate that the critical
mass of tenants in business centres is too small to exert a significant effect on the local or regional economy.
Policy agencies at local or regional level can see in the creation of business centres at best a supporting role to
counter unemployment.
Keywords: business centres, tenants, networking activities
1. Introduction
Business centres are firm friendly environments which are created to offer physical spaces in the form
of flexible offices; an array of support services which reduce starting costs (e.g. furniture, telephone
systems, ICT); reduced monthly overhead and low flexible rents. Business centres originated in the
United States in 1959 in New York (Aerts et al., 2007). In most economies, and in the past few years,
business centres have morphed from business accommodation facilities into local or regional
development instruments. The concept of modern day business centres dates from the 1980s which
were plagued by economic downturns.
Nowadays, business centres are created to stimulate the formation of new businesses and, through
generating employment and value added, contribute to the local economy (Carree and Thurik, 2003,
Chan and Lau, 2005). At the same time entrepreneurship is rather weak in several countries and
regions. Public policy, especially at local and regional level, is directed to remedy this lack of
entrepreneurship. Business centres are commonly the result of private public partnerships. The public
sector is represented through local or regional development agencies; the private sector is
represented through the involvement of local lead companies and banks. Business centres seldom
envisage highbrow technical activity but aims to lower the barrier to start a business. At the same time
it is recognised that new businesses need to be open toward external sources (Chesbrough, 2003).
This research uses evidence from the Flemish region which is located in the North of Belgium. The
Flemish region is characterised as being a knowledge based economy in which knowledge itself
functions as a production factor (Lorentzen, 2008). Knowledge, however, is for a large part tacitly
embodied in people (Beerepoot, 2008) and flows largely through networks. The business centres
offering high expectations to stimulate local growth are, therefore, the ones in which networking play
an extensive role (Hansen et al., 2000). In spite of the attention devoted to business centres, only a
small number of studies have focused on the link between networking activities of tenants on
business centres and their performances; which is extraordinary given the focus of business centres
as local employment initiatives.
Two tendencies justify an interest in business centres. First, knowledge externalities or spillovers are
increasingly important for businesses. This evolution necessitates the development of social capital of
firms and requires the build up of extensive networking relations. Since these networking activities
have become an element of attractiveness of business centres, their study is warranted. Second, the
tendency of internationalisation rests on the interrelations between local embedded firms in business
centres and their relations with the outside world (Cabus and Vanhaverbeke, 2006). Because of the
local and regional specificities in which business centres operate, their roles differ according to
different regions (Atherthon and Price, 2008). Although business centres have been studied in the
past the aspect of networking has not yet been empirically tested.
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André Spithoven and Mirjam Knockaert
This study provides insights in the following research question. Do tenants’ networking activities affect
the performance of these tenants and hence contribute to the local economy? By studying the
performance of tenants and non-tenants the role of business centres in generating employment and
turnover is highlighted.
The next section reviews the theoretical background. Section three discusses the datasets, presents
the variables and focuses on the characteristics of business centres. Section four shows two models
that track the impact of business centres. In section five conclusions are drawn from the research and
some limitations are put forward.
2. Literature review and theoretical background
Nascent entrepreneurial activity is stimulated by the provision of business centres that integrate
several financial, advisory and infrastructure services that are offered to its tenants. To nurture
business formation it was deemed necessary to create specialised environments that accounted for
the endogenous development of the local economy (Hoy et al., 1991). These local benefits of
business centres stem from their support in growth of nascent industries; the creation of new jobs,
and also as a means to reduce potential brain drain in depressed areas (Brown et al., 1995; Pleschak,
1997). Business centres enhance the probability of new small firms to survive by offering an array of
services that have beneficial effects on their development (Sherrod, 1999). Research demonstrated
that businesses that originated in specialised business centres have better performance indicators –
such as turnover, employment, net profits, net value – than firms that have not (Frenkel et al., 2008).
Businesses in supported environments are found to have higher survival rates (Hannon and Chaplin,
2003).
Extensive literature review on business centres showed that the academic literature hardly refers to
business centres as such. The literature on similar initiatives such as incubators is quite extensive,
with researchers focussing on the activities that incubators engage in (Autio and Klöfsten, 1998),
incubator performance (Udell, 1990; Mian, 1997), the function of the incubator within the environment
(Bollingtoft and Ulhoi, 2005) and the performance/survival of incubates (e.g. Colombo and Delmastro,
2002; Stuaret and Abetti, 1987). Since the focus is on business centres, it is important to position
these business centres against other initiatives to stimulate networking activities. The European
Commission (2002) reported an overview of different structures that support the growth of small firms
and presents the following typology of business incubators (Figure 1).
Multi purpose Business and Technology

High business innovation centre
incubator centre
Managed Business centre Innovation

Medium workshop centre
Science park Business park Industrial estate

Low
Technology
Low Medium High level
Figure 1: Position of the business centre (source: European Commission (2002))

Figure 1 illustrates that business centres are subgroups of incubators with a medium level of
technology and a medium to high level of management support. They provide hosting to, mostly,
young and dynamic firms to which they offer management support. Many researchers documented
572
the role of incubators, be it taking a relatively descriptive and a-theoretical approach (Bollingtoft and
Ulhoi, 2005). Bollingtoft and Ulhoi (2005) indicate that “business incubator” has become an umbrella
term for any organisation that provides access to affordable office space and shared administrative
services (Allen and McCluskey, 1990).
Networking activities in business centres cover two complementary roles. First, business centres are
created by stakeholders to enhance local growth engines or cluster-type growth coalitions. In an era
of globalisation, the local environment is said to be a key ingredient in economic policy (Cooke, 2005;
Florida, 2005). Second, business centres offer an array of support activities to their tenant firms,
including network possibilities.
Although it is recognised that one of the roles of business centres is the stimulation and nurturing of
network development involving the tenants (Allen and McCluskey,1990; Bollingtoft and Ulhoi, 2005),
little is known about how effective this network stimulation is in relation to the tenants’ performance.
Given the importance of networks for a start-up company (Gulati, 1998; Anand and Khanna, 2000;
Kale et al., 2002; Walter et al., 2006), this research aims at filling the gap in understanding of tenant
performance and the role of business centres in network development, using the insights offered by
social capital theory. Adler and Kwon (2002) define ‘social capital’ as the goodwill that is engendered
by the fabric of social relations and that can be mobilised to facilitate action. The existence of social
capital creates a nurturing environment by encouraging and strengthening social relations. Building on
social capital theory offers a framework to focus on the importance of externalities stemming from
sources from outside the tenant start-up company. These externalities are vital for its survival and
growth, making the embedding in social relations an absolute must for start-ups. In this contribution
we use the deliberate actions of start-ups to undertake networking activities as a proxy of social
capital (Kaufman and Schwartz, 2008). This renders the existence of network relationships a central
issue. These relationships are, then, related to the development and performance of start-up
companies.
In a network economy the entrepreneurial logic is determined by replacing internal economies of

scale by external economic benefits. Externalities stem from economies of agglomeration and
economies of networking (Cabus and Vanhaverbeke, 2006). A developed network economy implies a
growing number of relations between businesses and other organisations (Engstrand and Ahlander,
2008). These relations are influenced by the proximity of the economic actors involved (Illeris, 1994).
The resulting reduction of transaction costs is frequently cited as a major driver behind the
maintenance of network relations.
Van Dinteren et al. (1994) demonstrate that economies of agglomeration are especially relevant in the
case of business services. The geographical proximity and economic benefits are a precondition to
offer highly specialised services. Illeris (1994) maintains that face-to-face contacts are very important
in the case of management support such as juridical advice, software services, accountants, etc.,
because of the simultaneous presence of all this expertise. This is precisely the case in business
centres.
Disillusionment with large companies and the lack of opportunities for attracting inward investment
has given prominence to an endogenous development approach in local and regional development.
Local authorities respond to the mounting social and economic pressures against the background of
fiscal restraint and generally non-interventionist policies. Local policies to attract or stimulate
entrepreneurial activities can be found in certain initiatives that are used in the Flemish region or the
existence of services offered by organisations created to stimulate entrepreneurship. These initiatives
cover the use of coaching by ‘godfather’ firms; networking by organisations of employers or self-
employed; sector federations; Flemish public agency of entrepreneurs; and other local initiatives.
3. Data collection and description
Although the public sector is involved in providing favourable framework conditions that stimulate new
business formation, business centres in the Flemish region are not limited to the public domain. In
total 92 business centres where identified by the Flemish administration and 39 of them received
subsidies (Vereertbrugghen and Knockaert, 2009). In the Flemish region a special programme is
active consisting of 28 public business centres initiatives. Both public and private business centres
pass in review because their function in relation to the assumed benefit for the local economy is
similar.
573
Gathering the data for the research consists of a two-stage collection process. All data were collected
in the Flemish region in the North of Belgium over the period 2008-2009. First, the business centres
were asked to provide a list of their tenants and twenty-four business centres were ready to
cooperate. In addition, the websites of non participating business centres was screened to
complement the tenants’ list. This resulted in a total sample of 252 tenants, whose CEOs were
contacted by e-mail and subsequently by telephone to fill out an online questionnaire. A total of 85
complete responses were received. Second, the tenants were matched to non-tenants. Matched non-
tenants resided in the same region (at NUTS 3 level), operated in the same sector (using ISIC
classification), belonged to the same age group and size (based on total assets) range as the tenants.
Fifty-two of the matched non-tenants agreed to participate in the survey.
3.1 Key characteristics of business centres

Key figures (Vereertbrugghen and Knockaert, 2009) on the sample of business centres demonstrate
that these are relatively small players in the local economy. On average, they have a turnover of
about 380,000 € (median 296,000 €) and an employment of 3.55 full time equivalents. The majority of
business centres employ three or less persons. All business centres provide office space and some of
them also offer storage space in which case the division is 50-50. The average rental space of a
business centre is 2,500 square meter. Even though firms in the Flemish region struggle for space,
the current average occupation rate is 78%. Since firms are not supposed to initiate a prolonged stay
in the centres, their turnover rate is assumed high. An average stay of tenants on a business centre is
between three to four years.
As noted, business centres are created by public authorities and private stakeholders. The
stakeholder ownership affects their mission. Earlier findings (Vereertbrugghen and Knockaert, 2009)
reported that supporting growing firms; promoting entrepreneurship; stimulating the local economy;
and creating employment are the most important missions of these centres. The choice of these
missions can, at least partially, be explained by the fact that 80% of the business centres include a
public shareholder. This makes these centres predominant examples of public-private partnerships.
Only one fifth of the centres in the sample have exclusively private shareholders.
There is considerable variety in business centres because they represent a response to a number of
problems and opportunities. Business centres are generally projects that are to promote enterprise
creation and contribute to their development. Enterprises might be created in industrial closure areas
in an attempt to generate alternative employment. Alternatively, business centres have been
motivated by the desire to re-use old and redundant buildings or to promote innovatory forms of
management and co-operation between tenant businesses. Business centres are focussed on
housing small firms and start-ups. Some centres involve some specialisation and include the
following: seed-bed business centres; innovation centres; technology centres; design studios etc.
Business centres offer a variety of services and facilities (Aerts et al., 2007). These are property
services (furniture; cleaning; lighting; security; waste disposal etc.); office services (reception;
secretarial services; ICT-facilities etc.); business services (accountancy; counselling etc.); and
communal services (conference rooms; restaurant or canteen; exhibition areas etc.). Most of these
services are provided by the management of the business centre, but some of them (e.g. restaurant
or book-keeping) are left to a tenant firm. There are differences between the centres in charging for
these services. Some elements, such as property services or basic office services, are included in the
rent. Other services are charged according to their use. Especially business services are related to
networking and relational exchanges (Bennett and Robson, 1999). The centre-advisor and the tenant-
client need to be engaged in close information exchanges, which are facilitated by the proximity within
the centre.
3.2 Measures and methods

Dependent variables. Two variables capture the performance of firms: the evolution in employment
and turnover. The respondents categorise the development of these variables in the past three years:
decreased, stabilised or increased. Hence our dependent variables are ordered categories. Location
on or off a business centre was measured as a dummy (0/1) variable.
Control variables. Five control variables are suggested by the literature: firm age captures the
experience to form network relations (Bennett and Robson, 1999; Andreosso-O’Callaghan and
574
Lenihan, 2008; Kaufman and Schwartz, 2008); group membership reflects the ‘internal’ network with
the parent/daughter (Cabus and Vanhaverbeke, 2006; Andreosso-O’Callaghan and Lenihan, 2008;
Kaufman and Schwartz, 2008); engagement in (regional) initiatives directed to fostering
entrepreneurship or networking (Bennett and Robson, 1999; McEvily and Marcus, 2005; Engstrand
and Ahlander, 2008); location of the firm in a business centre; existence of R&D activities (Kaufman
and Schwartz, 2008); and the size of the firm in terms of employment (Kaufman and Schwartz, 2008;
Glaeser et al., 2009).
Network variables. The first set of network activities making up social capital consist of four
components: coordination activities, relational skills, partner knowledge, and internal communication
(Walter et al., 2006). Coordination activities are activities that connect the firm to its partners and
incorporate the predominant individual relations in a network. Relational skills relate to communication
skills; conflict management skills; cooperativeness; extraversion etc. The structured and organised
gathering of information on the upstream and downstream partners of the firm and its competitors is
defined as partner knowledge. This information shapes the exchange routines and governance
structures with partners. Internal communication points to the need to connect their external network
internally in the firm. Assimilating and disseminating updated information on partners to the relevant
departments in the firm helps to stimulate efficiency by avoiding duplication of processes and to
benefit from learning within partnerships.
The second set of network variables acknowledge that learning from connecting to other firms is an
important aim of networking (Wynarczyk and Raine, 2005; Walter et al., 2006; Atherthon and Price,
2008; Staber, 2008). Three different aspects pass in review (McEvily and Marcus, 2005): the
application of existing methods; the sourcing of new ideas; and the amelioration of methods. The
partners’ location in the network was investigated by asking firms if partners are local, regional,
national or international (OECD, 2005; Lorentzen, 2008). But since, in a small region like the Flemish
one, these notions might be somewhat forced, we also asked the location of their partners in terms of
physical distance (Cabus and Vanhaverbeke, 2006).
4. Results and analysis
In the first model the performance indicators are the change in employment and turnover. Table 1
considers four ordered logit models because the dependent variable results from a classification by
the respondents of firms if their employment and turnover had decreased, stabilised or increased in
the past three years (Bennett and Robson, 1999).
Table 1: Impacts on employment and turnover dynamics – ordered logit regression
Dependent variable Employment change Change in turnover
Base model Networking Base model Networking
(i) (ii) (iii) (iv)
Business centres 0.807 0.601 0.242 -0.266
(0.406)** (0.518) (0.466) (0.595)
Age of firm -0.057 -0.052 -0.042 -0.051
(0.021)*** (0.030)* (0.020)** (0.030)*
Size of firm 2.949 2.640 1.812 2.394
(0.703)*** (0.800)*** (0.786)** (1.120)**
Group membership -0.152 -0.599 -0.386 -0.983
(0.702) (0.841) (0.588) (0.748)
Initiatives 1.433 1.389 0.620 .0671
(0.437)*** (0.575)** (0.473) 0.590
Coordination -0.349 0.016
(0.364) (0.309)
Relational skills 0.355 0.567
(0.274) (0.282)**
Partner knowledge -0.011 0.039
(0.301) (0.301)
Internal communication 0.428 0.095
(0.191)** (0.234)
Observations 105 81 102 78
Wald statistic 36.69*** 50.57*** 7.89 17.61**
McFadden R² 17.67 24.47 5.92 15.51
Notes: standard errors are in brackets; *,**,*** denote statistical significance at 10%, 5% and 1%.
575
Table 1 shows that, apart from group membership, all control variables are statistical significant in
affecting employment change. But this influence varies. If the firm is young or located in a business
centre, the impact on the change in employment is negative, suggesting that young tenant firms
contribute less than large non-tenant firms to employment. Firms relying on entrepreneurial initiatives
by the public or private sector, however, show a positive impact on employment change. The size of
the firms positively relates to employment change.
The picture is somewhat altered when considering turnover change. Location in business centres or
local/regional entrepreneurial initiatives have no impact. The size of the firms influences turnover
positively. Significance on age shows older firms having a positive impact on the change of turnover
because they might have established a market, although this significance is reduced.
The independent variables characterising networking activities are shown in model (ii) with respect to
their impact on the change in firm-level employment. Some of the effects of control variables have
been reduced (age and initiatives/associations), but the effect of being located in a business centre
disappears. Networking has taken over the influence on the change in employment, especially the
aspect covering internal communication. Hence, assimilation and dissemination of information on
partners within the firm is statistically significant.
Including the set of network activities, in model (iv), demonstrates that the relational skills are
important when it comes to stimulate a positive change in turnover: communication skills, empathy
and extraversion are beneficial characteristics to enhance turnover. The fact of being located in a
business centre is has no impact (and, although insignificant, the estimate is even negative).
Summarised, the impact of being on a business centre proved positive in the case of employment
measure, but did not yield significant results in the case of turnover pointing to their immature status.
The size of the firms, and the fact that they participated to initiatives related to external networking led
to positive employment effects (again the impact on turnover proved insignificant). Bringing in the
aspects of networking capabilities, as prescribed by Walter et al. (2006), it was shown that internal
communication yielded a positive impact in the case of employment; whereas this positive impact was
restricted to relational skills in the case of turnover.
The second model looks at the probability for a firm to locate on a business centre. Table 2 highlights
elements that are relevant for firms to be located in a business centre. The dependent variable states
whether firms are located in a business centre of not. This binary variable implies that a probit
regression is appropriate. Four models are considered. Again we focus on the role of the dynamics in
terms of employment and turnover. To evaluate the impact of networking activities in a broad sense,
we first consider a base model with all the control variables and, second, include the elements that
pertain to networking. Table 2 summarises the estimates of the four models.
Table 2: Impacts of business centre location – probit regression
Business centre location (yes/no)
Dependent variable Employment change Turnover change
(v) (vi) (vii) (viii)
Employment change 0.343 0.291
(0.211) (0.255)
Turnover change 0.170 -0.005
(0.208) (0.262)
Age 0.003 0.006 -0.000 0.002
(0.015) (0.017) (0.015) (0.017)
Size -0.981 -0.941 -0.807 -0.724
(0.377)*** (0.424)** (0.360)** (0.409)*
Group membership 0.784 0.715 0.680 0.643
(0.374)** (0.448) (0.377)* (0.434)
R&D activities 0.229 0.287 0.220 0.280
(0.092)** (0.121)** (0.092)** (0.126)**
Learning from other firms
* Application of methods 0.741 0.793
(0.209)*** (0.217)***
* Ideas on new methods -0.030 -0.155
(0.153) (0.168)
576
Business centre location (yes/no)

Dependent variable Employment change Turnover change
(v) (vi) (vii) (viii)
* Amelioration of methods -0.605 -0.504
(0.186)*** (0.188)***
Partner location
* Distance (in area type) -0.446 -0.500
(0.332) (0.332)
* Distance (in km) 0.606 0.649
(0.286)** (0.291)**
Constant -1.191 -2.030 -0.779 -1.391
(0.540)** (0.999)** (0.569) (1.048)
Observations 99 87 96 84
Wald statistic 17.11*** 32.09*** 13.38** 29.17***
McFadden R² 12.06 26.58 9.73 25.47
Note: Standard errors in brackets
Model (v) looks at the impact of employment change and other control variables on the probability to
locate in a business centre. It is found that smaller firms often look for locations in business centres.
The fact that group membership is statistical significant indicates that many firms in business centres
are not independent entities, but belong to Flemish, Belgian and international groups. If tenants are
firms stemming from international groups, this finding is somewhat at odds with the argument that
business centres stimulate or reinforce local or regional endogenous growth. However, no additional
information on the location of the parent group is available. Perhaps business centres attract tenant
subsidiaries – and stimulate employment, turnover and hence growth potential – for other reasons,
such as the presence of a local or regional knowledge base. This hypothesis meshes with the finding
that firms that are active in business centres are active in R&D, pointing to the fact that these smaller
firms are directed to more innovative activities. But it takes time for these kinds of firms to launch a
product that sells in the market.
By including networking activities, the control variables in model (vi) only change with respect to group
membership. The variables capturing network aspects: learning and location of partners show some
significant elements. The probability of being located in a business centre is higher in the case a firm
learns how to apply methods used by other firms. Where these ‘teacher’ firms are located is unclear,
but since the impact of group membership disappears it is suggested that these ‘teacher’ firms are
part of the group. The amelioration of methods, on the other hand, shows a negative impact on
probability to be located in a business centre. The distance of the partners in kilometre has a
significantly positive impact on the probability of being located in a business centre: firms that choose
for a business centre location often have partners that are located farther away. In conjunction with
the disappearance of the significance of group membership this might imply that business centres
often act as local hubs for multilocational or multinational groups. The finding is, however, in line with
the insights on the network economy as a hub-and-spoke type of territorial organisation (Cabus and
Vanhaverbeke, 2006)
With respect of the change in turnover that is considered in model (vii) and model (viii) there are no
real differences with employment, save that the statistical strength of the estimates is reduced.
In sum, especially small R&D active firms belonging to a group opt for a location in a business centre.
Since R&D activities require firms to develop networking capabilities, the choice for a business centre
might be beneficial. Firms in business centres are typically said to be start-ups. This implies that they
have to be open or learn from others (McEvily and Marcus, 2005). Hence the screening for elements
of vicarious learning demonstrated that firms are open to learn from similar companies.
Overall these findings lend further support to the view that business centres can play a facilitating role
in networks relations for tenants. It was demonstrated that network relations are made up of different
aspects and these have different impacts on performance measures. The implication is that local and
regional policy makers have to take these aspects into account when setting up or assessing the role
of business centres. But, in our view, the evidence is still far from convincing. This meshes with other
research on the topic (Kaufmann and Schwartz, 2008).
577
5. Conclusions and limitations

This research aimed at understanding whether business centres are contributing to the local
economy. The question, however, receives no clear answer when looking at the results. First, the
centres, and especially the critical mass of young and small tenants in these centres, are too small to
exert a significant impact on the local or regional economy. When business centres are publicly
funded, it can reasonably be expected that they are created to foster impulses for an innovative
process which has to be sustained by complementary policy instruments. Creating a centre can
initiate local economic cooperation between local authorities, financial institutions, universities, and
private enterprises. In this case centres introduce market led aspects in economic policy; which differs
from the subsidy orientated policy instruments that are often used by local or regional agents.
Second, because our data are cross sectional in nature, we have no information on the performances
of firms after they left the business centre. The research on the impact of business centres might
benefit from selecting several case studies to highlight the idiosyncratic development paths of firms in
centres. In the case of the contribution business centres to the local economy, it has to be
acknowledged that the existence of business centres will not solve all problems of economic
downturns and eradicate local unemployment.
Based on the literature it was established that networking is a complex process. Nascent
entrepreneurs already lack important managerial and business experience. Hence the business
centre is potentially an important public support instrument in supplying the framework in which
networking can take root. This is especially the case for firms in which the entrepreneur lacks
experience and when firms are active in economic activities where the level of cooperation is weak.
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579
An Attempt at Explaining the Present Economic Crisis: A
Heterodox View
Peter Štrukelj
peter.strukelj@fm-kp.si
Abstract: The most important economic issue for the leaders of the world’s economically most powerful states is
how to restore economic growth in their economies. The central point, around which the present global society
circulates, a goal, for which everybody makes his effort and contributes his share (GDP growth), exactly that
does not come to existence now. From the 2nd quarter of 2008 to the 3rd quarter of 2009, GDP in OECD
significantly and constantly decreased (in developing countries, GDP growth has decreased significantly in 2009
compared to 2008). In 2009, international trade (exports of commodities, private capital flows and foreign direct
investments) has globally decreased. Many worlds largest companies have booked huge or even record sales
and profit losses, and have consequentially reduced their costs still more, dismissed many employees and put on
halt parts of their production. From the end of 2007 until now, growth of real average wages has been constantly
decreasing globally, the number of working poor is increasing, the number of unemployed people is globally
st
increasing (in OECD constantly from the 1 quarter of 2008 until now). And finally, the number of people, living in
(extreme) poverty, is globally increasing. The purpose of the paper is to propose a rather different, heterodox
explanation of why GDP, trade, profits, wages, employment have been globally decreasing and why poverty has
been globally increasing between the 2nd quarter of 2008 and the 3rd quarter of 2009. I try to explain these facts
by deriving the present state of global economy (crisis) from the principles of the present global economy. I
therefore try to prove that the crisis necessarily follows from the way the present global economy functions. I
argue that the reason for the crisis is the fundamental contradiction between the purpose of companies
(increasing profits) and necessary ways, in which companies try to increase profits.
Keywords: global economy, GDP growth, profits, credits, employment, poverty
1. Introduction
The most important economic issue for the leaders of the world’s economically most powerful states
is how to restore economic growth in their economies. USA president Barack Obama’s central focus
is on stimulating economic recovery and helping America emerge a stronger and more prosperous
nation. President of the European Commission José Barroso stated that the priority of the EU is to
restore (sustainable and equitable) economic growth. The central point, around which the present
global society circulates, a goal, for which everybody endeavours, makes his effort and contributes his
share (restoring companies’ profits, GDP growth), exactly that does not come to existence now – in
2009, profits have generally decreased, globally GDP does not grow. The fact that in 2009, profits
have not increased, that GDP has not grown, this fact is in the present global society considered as a
general disaster, that demands real changes (reforms) in economic policy of states worldwide. Let us
first consider what is the real state of the present global economy as shown by empirical data.
2. The real state of the present global economy – empirical data
The most important data, that are available to us, show the following state of the present global
economy.
In the group of OECD countries, GDP constantly decreased from the 2nd quarter of 2008 to the 1st
quarter of 2009. This was the biggest fall of GDP growth in OECD, since OECD began collecting and
publishing data on GDP in 1960. GDP growth in the 1st quarter of 2009 was – 2.2 %, while GDP
growth in the 2nd quarter of 2009 was 0.0 %. In the 1st quarter of 2009, for example, Germany had –
3.5 % GDP growth, USA had – 1.6 % GDP growth, Japan had – 3.3 % GDP growth, the group of
economically most powerful states G-7 had – 2.2 % GDP growth (OECD 2009a). Between 1998 and
2008, the average annual GDP growth in OECD was + 2.3 % (OECD 2009b). EU 27 group expects –
4.0 % GDP growth in 2009 (Eurostat 2009a). GDP growth in developing countries is expected to be
less than 2 % in 2009 – growth in 2008 was 8 % (The World Bank 2009b).
From December 2008 to August 2009, exports of commodities in OECD decreased – exports growth
was negative. In following months, negative exports growth is expected in biggest OECD countries
(OECD 2009e). In developing countries, exports are decreasing. Private capital flows are expected to
decrease from 1 trillion $ in 2007 to 530 billion $ in 2009. From the 3rd quarter of 2008 to the 2nd
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quarter of 2009, foreign direct investments and short-term credits decreased globally. Global trade in
2009 is expected to decrease (for 10 %) – for the first time since 1982 (The World Bank 2009b).
From the 2nd quarter of 2008 to the 3rd quarter of 2009, many worlds largest companies (in all
economic sectors) sold significantly less of their commodities as these companies had planned and
expected. In the same period, profits of these companies also decreased significantly. Companies
reacted to large sales decreases and to huge profit losses by rapidly reducing their costs, by
dismissing many employees and by putting on halt parts of their production.
For about half of 35 countries, for which data on wages are available, ILO concluded that in the 1st
quarter of 2009, real monthly wages in these countries decreased compared to average wages in
2008. For a sample of 52 countries, for which data on wages are available, ILO concluded that growth
of real average wages in an average country in this sample decreased from 1.4 % in 2007 to 1.4 % in
2008. Between 1996 and 2008, labour productivity in OECD constantly increased – on average 1.9 %
annually (OECD 2009d). Among ten G-20 countries, for which data on wages are available, growth of
real average wages in an average country in this group decreased from 1 % in 2007 to 0.2 % in 2008.
ILO expects that the global real wages growth will continue to decrease in 2009 (ILO 2009a).1
From the 1st quarter of 2008 to the 2nd quarter of 2009, unemployment in OECD constantly increased
– from 5.68 % to 8.31 % (OECD 2009c). From October 2008 to September 2009, unemployment in
EU 27 also constantly increased – from 7.3 % to 9.2 % (Eurostat 2009b). The International Labour
Office expects dramatic increase in unemployment. ‘In 2009, the proportion of people in vulnerable
employment – either contributing family workers or own-account workers who are less likely to benefit
from safety nets that guard against loss of incomes during economic hardship – could increase
considerably, in the worst case to reach 53% of the employed population’ (ILO 2009b).
ILO reports that in 2009, 200 million workers, mostly in developing countries, could be in extreme
poverty because of decrease in GDP growth, decrease in profits of companies, decrease in
production and decrease in real wages. ILO expects that in 2009, the number of working poor –
people who do not earn enough so that their families would get more than 2 $ US per person per day
(poverty limit) – may increase to 1.4 billion (ILO 2009b). The World Bank expects that ‘as many as 90
million more people will be living in extreme poverty, on less than $1.25 a day, by the end of 2010’
(The World Bank 2009a). Developing countries have recently also experienced food and fuel crises
which have caused millions of people to be in poverty and hunger – between 130 and 155 million
people are in extreme poverty, according to the World Bank’s estimates. Another 44 million children
are malnourished. Decrease in credits and GDP growth will decrease government revenues and their
investments into education, health and gender goals, as well as the infrastructure expenditures
needed to increase GDP growth. Each 1 % decrease in GDP growth could trap another 20 million
people in poverty (The World Bank 2009b).
The most important data on the state of the present global economy thus show, that:
nd rd
From the 2 quarter of 2008 to the 3 quarter of 2009, GDP in OECD significantly and constantly
decreased (in developing countries, GDP growth has decreased significantly in 2009 compared to
2008),
In 2009, international trade (exports of commodities, private capital flows and foreign direct
investments) has globally decreased,
In 2009, many worlds largest companies have booked huge or even record sales and profit
losses, and have consequentially reduced their costs still more, dismissed many employees and
put on halt parts of their production,
From the end of 2007 until now, growth of real average wages has been constantly decreasing
globally,
The number of working poor is increasing,
st
The number of unemployed people is globally increasing (in OECD constantly from the 1 quarter
of 2008 until now),
The number of people, living in (extreme) poverty, is globally increasing.
These are facts. The purpose of the next chapter is to propose an explanation of these facts, that is,
to argue why this is happening.
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Peter Štrukelj
3. Explanation of the empirical data
3.1 How companies increase profits

In the present global economy, the fundamental and predominating purpose of companies and their
state and private owners is to unconditionally, constantly and limitlessly increase profits, measured in
monetary units = make more money out of invested money as much as possible. Companies have
other goals as well – for example, customer satisfaction, care for employees, protection of natural
environment, social responsibility. However, all these other goals are subordinated (they are only
means) to the fundamental goal of making profits. In the present global economy, there are also some
institutions, whose main purpose is not to increase profits. However, existence and functioning of
these institutions depend on how well companies (both in the financial as well as in the real sector)
increase profits and how well GDP therefore grows in a particular state or group of states. For non-
profit institutions, as well as for profit institutions, money is the decisive means of operating, since the
great majority of people today lives in a money–profit economy.
Companies increase profits by trying to sell as much of their commodities as possible on the market
for the highest price as possible, while in producing commodities, companies try to minimize as much
as possible all the costs, that are necessary for producing these commodities (see GegenStandpunkt
1983).
Companies increase profits by competing (enforcing themselves) on the market against other
companies, whose purpose is also to increase their profits. This market competition/struggle forces
companies into unconditional and constant development and use of more productive (new) tools and
processes. A company that first starts using more productive tools and processes is the first to start
reducing its production costs. Because of reduced production costs, this company then offers and
sells its commodities on the market at a lower price than its immediate competitors. This company
thereby forces its competitors out of the market. And because of increased sales (increased market
share), this company increases profits. However, when its competitors start using the same or even
more productive tools and processes as well, then the comparative cost (and consequentially price)
advantage of this company disappears and its profits thereby decrease. This market competition
constantly causes reduction of prices of commodities, that are produced and offered/sold on the
market by companies. But this constant forcing to reduce prices of commodities, that are sold by
companies, is in contradiction with the fundamental purpose of companies – that is, increasing profits.
Companies increase profits by unconditionally and constantly investing more and more money in
development and use of more productive means of production, in order to make bigger (or at least the
same) profits compared to previous productivity levels. However, each productivity level in companies
is only a starting point for achieving next levels of still greater productivity. Cost and productivity
competition between companies thus, on one hand, increases the amount of money, that companies
invest into increasing of productivity, while on the other hand, increasing of productivity reduces prices
of commodities on the market. But this is in contradiction with the fundamental purpose of companies
– that is, increasing profits.
Companies increase profits by unconditionally and constantly inventing, developing, producing, and
offering/selling new or improved commodities on the market. Market competition forces companies
into unconditional and constant invention and development of new or improved commodities. New or
improved commodities can be a consequence of development and use of new and more productive
tools and processes, and vice versa, new or improved commodities can cause development and use
of new and more productive tools and processes. A company that first starts selling new or much
improved commodities on the market, sells these commodities at a higher price than older and lower-
quality commodities, and because of higher price (value added) of new or much improved
commodities, this company increases profits. However, when its competitors start selling the same or
even more improved commodities as well, then the comparative newness and quality advantage of
this company disappears. Market competition then forces companies to increase their productivity still
more and thus lower prices of these new or much improved commodities. The result is that
companies constantly sell new or much improved commodities (for development of which more and
more invested money is necessary) at the same price as commodities that were produced and sold at
the previous lower levels of newness, quality and productivity. But this is in contradiction with the
fundamental purpose of companies – that is, increasing profits.
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Companies increase profits by making labour that is necessary for producing commodities more
productive and cheaper by means of unconditional and constant development and use of more
productive (new) tools and processes. By increasing productivity of tools and processes, companies
need less and less workers for producing the same amount of commodities and companies therefore
dismiss redundant workers, because tools and processes are more productive. Companies try to
motivate those workers that remain and continue working in companies to constantly increase their
productivity – to make more and more commodities in the same amount of time, and for the same
wage. By constant increasing of productivity of their means of production, companies thus decrease
their labour costs (wages) by employing less and less workers and by producing more and more
commodities with the same amount of workers. This implies that there is less and less labour included
in a commodity unit and that companies save more and more money on the paid labour. By
decreasing their labour costs (wages), companies thereby also decrease their production costs.
Increasing of productivity of means of production thus decreases labour share in produced
commodities, it decreases working time, it decreases wage labour that is delivered in a company.
However, this delivered labour is the measure of monetary wealth – this labour is substance of prices
and profits. And this implies that unconditional and constant increasing of productivity of means of
production unconditionally and constantly reduces the source (wage labour) of commodity prices and
consequentially profits. But this is in contradiction with the fundamental purpose of companies – that
is, increasing profits.
Companies increase profits by decreasing labour costs (wages) in relation to monetary value, that is
produced by workers in companies. The amount of money that workers receive as a wage for
producing commodities in companies, is always less than the amount of money that companies
receive by selling commodities on the market (monetary value that is being made by wage workers).
Workers can therefore never buy all commodities that were produced by workers in companies.
Purchasing power of workers is always less than a monetary value of commodities on the market.
Workers’ wages do not therefore increase profits of companies. And companies increase profits by
decreasing labour costs (wages). But this is in contradiction with the fundamental purpose of
companies – that is, increasing profits.
Companies increase profits by selling more and more commodities on the market. However,
conditions of selling commodities on the market are not the same as conditions of producing
commodities in companies. Conditions of selling commodities on the market are determined (limited)
in relation to relative size of a market for particular commodities and in relation to solvent needs
(purchasing power). Conditions of producing commodities in companies, however, are determined
(limited) by availability of materials and energy sources and by productivity of tools, processes and
labour. Unconditional and constant increasing of productivity of means of production in companies
implies that workers in companies produce more and more commodities, whereby companies (based
on market analyses) anticipate and expect profitable selling of these commodities on the market.
Companies calculate their profits in advance – profits are already calculated in production of
commodities in companies, companies exactly plan their future profits. Companies also have middle-
term plans on how future profits will be reinvested. Companies anticipate and expect increasing
amount of sales, whereby they do not consider limitations of purchasing power (solvent needs).
Companies try to profitably exploit a purchasing power that exists, but companies do this in such a
way, as if this purchasing power was unlimited. In their production and selling of commodities,
companies always presuppose that there is a purchasing power that can buy more and more
commodities that are being offered on the market by companies. However, since companies buy
commodities from their suppliers and pay off wages to their workers, companies themselves create
purchasing power. And companies create purchasing power by trying to extort as lowest prices of
commodities as possible by their suppliers and by paying off as lowest wages as possible to their
workers. Companies thereby reduce purchasing power, for which companies always presuppose, that
it exists on the market in a sufficient (unlimited) quantity, and upon which their profits depend. But this
companies’ reduction of purchasing power is in contradiction with the fundamental purpose of
companies – that is increasing profits (see GegenStandpunkt 1983, 1992).
3.2 Credits – their general lack triggers an economic crisis

Increasing of companies’ profits thus includes a contradiction between the fundamental purpose of
companies (increasing profits, measured in monetary units) and necessary ways, in which companies
try to increase profits (market competition forces companies to operate in this way) – these ways are
necessarily forcing profits to decrease. However, despite competitors on the market and despite
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limited purchasing power, companies still increase profits. Despite the contradiction between the
purpose of increasing profits and ways, in which companies try to increase profits, companies still
increase profits. But how is this possible? Companies increase profits by using credits (money, which
is not owned by a company, but is only borrowed from banks, states, other companies, other
institutions or individuals, or, companies issue new shares, through which they get additional money
for investments) as a means of increasing productivity of means of production and labour, as a means
of developing new or improved commodities and as a means of increasing the amount of sold
commodities. And at the same time, credits also function as a means of increasing purchasing power
(solvent needs) of companies, workers, states and other institutions. By using credits, companies thus
on one hand increase demand for commodities, they increase productivity of means of production and
labour still faster, they develop new or improved commodities, and they produce still more
commodities. By using credits, buyers of commodities on the other hand also increase demand for
commodities – they buy still more commodities. Credits therefore temporarily increase companies’
profits. However, borrowing money as one of the means of competing against other companies on the
market and as the decisive means of increasing companies’ profits does not resolve and eliminate the
fundamental contradiction between the purpose of companies (increasing profits) and ways, in which
companies try to increase profits. The reason for the fact that credits do not resolve the fundamental
contradiction is that the purpose of institutions (mostly states and banks) and individuals who lend
money is the same as the fundamental purpose of companies who borrow money – that is, making
more money out of invested money as much as possible. Lending money to companies functions in
such a way, that by borrowing money, companies temporarily avoid consequences of the fundamental
contradiction between increasing companies’ profits and ways, in which companies try to increase
profits. And because the purpose of lending money is also to increase profits, it is necessarily so that
lenders of money in a particular moment claim repayment of principal and interests. And when
general claim for profitable repayment of loans appears, it becomes evident that the contradiction
between increasing profits and necessary ways, in which companies try to increase profits, is still in
force. Credits are therefore the decisive means of increasing companies’ profits, while general lack of
credits triggers/executes necessary consequences of the fundamental contradiction between
increasing companies’ profits and ways, in which companies try to increase profits (see Decker 2002;
Dozekal 2009). A consequence of this contradiction is that companies have produced and offered on
the market too much commodities, which cannot be profitably sold. Thus, a consequence of this
contradiction is that there is not enough purchasing power, which could buy all commodities on the
market and could thereby increase companies’ profits. This implies that there remain unsold
commodities which pile up in stores and warehouses (some of commodities thereby lose their use
value). This further implies that companies’ profits really start to decrease. However, this does not
mean that each and every company books losses (there are and really can be few companies and
individuals who actually make profits in a time of general decreasing of profits and trade – just as
there are and really can be few companies who go bankrupt in a time of general increasing of profits,
in a time of GDP growth). And when companies' profits generally start to decrease, companies then
decrease prices of their unsold commodities in order to sell them, and thereby to compensate for
some of the costs that were necessary for production and marketing of these commodities. When
some commodities then still remain unsold (because of the insufficient purchasing power), companies
never simply give these commodities to people that might need these commodities, but do not have
enough money to buy them.
A consequence of decreasing of companies’ profits is that companies reduce their production costs
still more and as fast as possible, which means, that they put halt on parts of their production, they
decrease workers’ wages, they dismiss some workers and they lower prices of suppliers’ commodities
still more. Companies do that, in order to increase profits again. The fundamental and predominating
purpose of companies (increasing profits) is necessarily always present – when profits actually
increase as well as when profits actually decrease. A consequence of decreasing of companies’
profits is also that some companies actually go bankrupt and disappear from the market. General lack
of credits therefore executes consequences of the fundamental contradiction between increasing
profits and ways, in which companies try to increase profits, but general lack of credits is not the
reason for decreasing of companies’ profits. The reason for decreasing of companies’ profits is really
the fundamental contradiction between increasing profits and ways, in which companies try to
increase profits.
And when enough companies go bankrupt and disappear from the market, when labour prices
(wages) and prices of suppliers’ commodities are low enough, when enough new credits are
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Peter Štrukelj
available, and when the state (institution that enforces and provides conditions for increasing of
companies’ profits for the purpose of achieving GDP growth) with its economic measures sufficiently
increases demand for companies’ commodities, so when conditions for increasing of companies'
profits appear again, then by getting new credits companies start again investing in new production
capabilities, employing additional workers, increasing productivity of their means of production,
developing new or improved commodities, increasing the amount of produced commodities, and
consequentially increasing sales of their commodities and thereby increasing profits, until lending
money to companies and buyers stops again, when it becomes evident again, that the fundamental
contradiction between increasing profits and ways, in which companies try to increase profits, is still in
force.
3.3 From bankruptcies in the USA to the present economic crisis

In September/October 2008, large banks in the USA started to go bankrupt, values of assests of
American banks significantly decreased, values of shares on American stock exchanges significantly
decreased. Consequentially, values of assets of European banks and values of shares on European
stock exchanges also decreased. Values of assets of many investment funds decreased. Decrease in
value of assets in financial sector caused general lack of credits for companies. Because of the
inability of companies as well as buyers of their commodities (other companies, workers, other
institutions) to get new loans, the fundamental contradiction broke out, which is necessarily always
present in this global economy. Because there were not enough new credits available, commodities
that companies offered on the market remained unsold. It became evident that companies had
produced too much commodities, which could not be profitably sold. A consequence of this was that
profits of (worlds largest) companies started to decrease significantly. Companies reacted to this by
rapidly starting to reduce production costs – putting halt on parts of their production, decreasing
wages of workers, dismissing some workers (poverty has increased), lowering prices of suppliers’
commodities. Some companies simply went bankrupt because of the inability to get new or additional
loans. And finally, because of increasingly expensive loans and because of reduced amount of
available loans, production globally decreased, and consequentially international trade and GDP
(growth) worldwide also decreased. What happens now is that by lending (or simply giving) money to
banks and other institutions, states try to increase the amount of money, which is available for lending
to companies and to buyers of companies’ commodities, in order to restore conditions for increasing
companies’ profits (some states also decrease taxes or increase public demand).
3.4 The necessity of contradiction in making profits

The contradiction between the fundamental purpose of companies (increasing profits) and ways, in
which companies try to increase profits, is in the present global economy necessarily and always
present. Companies cannot increase their profits other than by unconditionally and constantly
increasing productivity of their means of production and labour, by increasing the amount of
commodities, offered on the market, by lowering prices of commodities, offered on the market, by
constantly developing new or improved commodities, by reducing labour costs (wages) and by
lowering prices of suppliers’ commodities (suppliers themselves do exactly the same as companies to
which they sell their commodities). Market competition/struggle constantly forces companies to do
that. And finally, market competition forces companies that their fundamental purpose is increasing
profits, because only by (potentially) increasing profits can companies get credits, by means of which
they constantly increase productivity of their means of production and labour (and develop new or
improved commodities), through which they compete against their competitors on the market, and
2
which ensures them survival on the market.
4. Conclusions
The most important data, that are available to us, show that since October 2008, there was a global
decrease in GDP, trade, profits, wages, employment and global increase in poverty. I tried to
explained these facts (data) by proving that the state of the present global economy necessarily
follows from the principles/laws of the present global economy. I argued that the reason for profits,
trade, wages, employment decrease and poverty increase is the fundamental contradiction between
the fundamental and predominating purpose of companies (increasing profits) and ways, in which
companies try to increase profits (lowering prices of suppliers’ commodities, increasing productivity of
means of production and labour, reducing labour costs, developing new or improved commodities,
increasing the amount of commodities offered/sold on the market, lowering prices of commodities
offered on the market). Companies temporarily avoid consequences of this fundamental contradiction
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Peter Štrukelj
by using credits as the decisive means of increasing profits. And when the moment of general claim
for repaying principal and interests necessarily appears, it becomes evident that the fundamental
contradiction is still in force. Market competition forces companies to increase profits in ways, which
are contradictory to the main goal of companies – increasing profits. Market competition also forces
companies that their fundamental and predominating purpose is increasing profits.
The real state of the present global economy is that there are too many sources of wealth and too
many people (from the viewpoint of companies) at the same time. The present global society suffers
because there are, not not enough, but ''too many'' sources of wealth and commodities, measured
against the purpose of private owners of these ''too many'' – and that is, to profitably use these
sources of wealth and these commodities.
Acknowledgements
I would like to thank Matija Ukmar and Mitja Zorko for their thoughtful and constructive comments on
earlier drafts of this paper.
References
Decker, P. (2002) “Krise 1 , [online], TeachIn – Nürnberg, http://www.farberot.de/.
Dozekal, E. (2009) “Die Krise der ‘Realwirtschaft’ – bringt die Kritik der kapitalistischen Produktionsweise zur
Anschauung , [online], 17 June 2009, Frankfurt, http://www.contradictio.de/blog/archives/1572.
Eurostat (2009a) “Real GDP growth rate - Growth rate of GDP volume - percentage change on previous year ,
[online],
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsieb020.
Eurostat (2009b) “Harmonised unemployment rate by gender - total - % (SA) , [online],
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=teilm020&tableSelection=1&
plugin=1.
GegenStandpunkt (1983) Die Konkurrenz der Kapitalisten, GegenStandpunkt Verlag, München.
GegenStandpunkt (1992) “Gründe und Besonderheiten der gegenwärtigen Weltwirtschaftskrise , [online],
http://www.fortunecity.com/meltingpot/navarino/823/texte/wirtschaft/krise4-92.html.
ILO (2009a) “ILO says economic crisis eroding real wages for second year running. Press
release, 3 November 2009 , [online],
http://www.ilo.org/global/About_the_ILO/Media_and_public_information/Press_releases/lang--
en/WCMS_116503/index.htm.
ILO (2009b) “Unemployment, working poor and vulnerable employment to increase
dramatically due to global economic crisis. Press release, 28 January 2009, ILO News , [online],
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en/WCMS_101462/index.htm.
OECD (2009a) “Key Short-Term Economic Indicators: Quarterly National Accounts (GDP
Constant Prices). Stat Extracts , [online], http://stats.oecd.org/index.aspx.
OECD (2009b) “OECD in Figures 2009. Economy: Economic Growth and Performance , [online],
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OECD (2009c) “Key Short-Term Economic Indicators: Harmonised Unemployment Rate. Stat
Extracts , [online], http://stats.oecd.org/index.aspx.
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OECD (2009e) “Key Short-Term Economic Indicators: International Trade. Stat Extracts , [online],
http://stats.oecd.org/index.aspx.
The World Bank (2009a) “Economic Crisis Roundup: Recovery Emerging, But Not Yet for All. News &
Broadcast , [online],
http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22335223~pagePK:64257043~piPK:
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586
Pragmatism as a Philosophy for Education for
Entrepreneurship - Case: Laurea Business Ventures
Vesa Taatila
Laurea University of Applied Sciences, Espoo, Finland
vesa.taatila@laurea.fi
Abstract: Pedagogical solutions used in a university are built on foundations of an educational philosophy. The
learning results are to a great extent based on the tools and pedagogic approaches used. The article firstly
discusses about the use of pragmatism as the basis of education for entrepreneurship. Based on the theoretical
discussion, a case-presentation of Laurea Business Ventures as an example of use of pragmatic philosophy of
education for entrepreneurship is provided. The case is analyzed in the framework of pragmatism and some
concrete implications are provided.
Keywords: pedagogy, entrepreneurship, philosophy, pragmatism
1. Introduction
There is a constant need for new entrepreneurs that will revolutionize the products, services and life-
styles in our society (see, for example, EU 2003, Schumpeter 1926). Due to complexities in modern
technology and business processes they need to be well-educated to increase the odds to create
successful ventures (Taatila 2010). Entrepreneurs with an academic background are more often
innovative, use modern business models and base their ventures on the use of new technology
(Pajarinen, Rouvinen and Ylä-Anttila 2006). Academic education offers students a chance to see the
latest developments in their selected field, thus allowing them a clearer view on how to implement
them into a business in the future (Minniti and Lévesque 2008). Thus higher education should provide
the students with high-level of competence in pursuing a successful business venture.
Unfortunately the situation is far from perfect. Only about 24% of university students in EU-region
have access to any education on entrepreneurship. The more focused the subject branch is the less
likelihood there is of a student acquiring entrepreneurial skills. The competence and time allocated by
academic staff to entrepreneurial education is inadequate. (European Survey on Higher Education
Institutions 2008).
The key problem in the lack of entrepreneurial orientation in universities is that the entrepreneurial
skills differ greatly from the subjects taught within academic branches. The competencies that make a
successful entrepreneur come from a wide spectrum. Already Schumpeter (1926) listed that most
important competencies of successful entrepreneurs are innovation, creativity and risk taking. Covin
and Slevin (1989) included creativity in innovation and then added a third element, proactivity, to the
list. In the same vein Wickham (2006) stated that entrepreneurs are creative, seek and discover
niches for market innovations, bear risks, are growth oriented and are driven to maximize profit or
investors’ returns. For a more detailed discussion about entrepreneurial skills, see Taatila (2010).
The referenced studies agree that entrepreneurial competencies are often psychological or social
skills, not skills specific to a business or academic branch. If one thinks about a normal university
curriculum it is very difficult to find these types of skills in course descriptions. Still there is ample
evidence about successful academic pedagogical approaches to produce academic entrepreneurship
(e.g. Collins, Smith and Hannon 2006, Henry et al. 2003, 2005a, 2005b, Platt 2004, Saurio 2003,
Taatila 2010). These studies stress the importance of learning in concrete business projects in order
to inculcate the required working skills and attitudes within students.
The goal is clear (EU 2003). Tools are available. Successful examples have been provided. Why,
then, there is so little action?
Ardalan (2008) has shown that differences in the underlying philosophies of education lead to major
differences in educational practices in universities. Pedagogical methodologies, the course goals and
contents are affected by differences in basic assumptions about the role of a university and teaching
practices. Whether a lecturer sees her task mainly as providing students with the latest facts of the
world or to guide them in growing as individuals is not a question worth neglecting. Since this
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underlying core of a university effects all of the actions taken, what, then, should be the philosophical
foundation on which education for entrepreneurship should be built?
2. Pragmatism as a philosophy of education for entrepreneurship
There are numerous ways to dissect the social world we live in. Burrell & Morgan (1979) have
presented an interpretive paradigm of social sciences. According to it the social world is an ever-
changing place which can be constantly improved with no fixed, universal laws affecting all social
behaviour (Burrell & Morgan 1979). An actor within interpretive paradigm interprets situations, but
knows that the rules she finds are situational, not universal. Thus the goal is not to seek any ultimate
blueprint, but ‘‘rather to secure both long and short-term goods in future experience.’’ (Hildebrand
2003, 73). According to the interpretive paradigm the goals of education are not to give students facts
about the way of the world, but let them “learn the process of discovery and self-sufficiency as much
as the facts that are discovered”. This type of pedagogical philosophy is often defined as pragmatism
and it is mainly used in very practically-oriented learning situations, where competence of applying
knowledge is most favoured. (Ardalan 2008, 20).
Education for entrepreneurship is by definition very praxis-oriented. The goal is to turn students into
successful entrepreneurs, to be able to cope with constantly evolving surroundings; increase their
competence to innovate, take risks and act proactively (Covin and Slevin 1989). The situations
change constantly and the important skills for entrepreneurial actors are application and
implementation. To a great extent, this will require interpretation of situations and the skills and
knowledge required to operate successfully within them. Thus it seems that pragmatism would be a
favoured philosophy of education for entrepreneurship.
Pragmatism (Dewey 1929; James 1907; Peirce 1992, 1998) is an action-oriented philosophy of
science. It studies the link between action and truth, practice and theory. Pragmatism can be
described as “the doctrine that reality possesses practical character” (Dewey 1931, 31). For a
pragmatist, the world is a set of practical actions that are born from thinking. Thinking and doing are
two sides of the same coin. Action requires thinking, and ”thinking is a mental activity: it is a doing”
(Peters 2007, 356).
There is no universal truth in pragmatism – extreme pragmatist sees truth as relative and reality as
probabilistic (Ardalan 2008, Haack 1976). Fendt et al. (2008, 478) conclude that more important than
truth are beliefs. Do we believe and ultimately act on our belief. Only action makes a fact relevant,
pure “scientific truth” that has no relevant application is not interesting to a pragmatist (Miettinen 2006,
391). Pragmatist philosophy exists in real world, where change is constantly taking place, and man is
an active agent and conductor of transformations, either by thought or by action. Things of reality only
become known when they interact with human (Dewey 1925/1988, 14).
This is a very typical situation for an entrepreneur. A lot of decisions have to be made and not enough
data can always be collected before making these decisions. What becomes more important is the
entrepreneur’s belief about the state of things. Does she believe in something and is she willing to act
on her belief? It is quite possible that there is multitude of possible actions but the entrepreneur is only
able to choose one of them. In the end of the day, the contents of the decision may not be important,
however. It is possible to reach the same results via numerous different paths, and the important thing
was doing something, anything, to advance. As Covin and Slevin (1989) have shown, successful
entrepreneurs are more proactive than the general population, more willing to act “on a hunch” and
make some practical interventions to their situations.
Learning is in a central position within a pragmatic framework. Since pragmatism aims at translating
useful knowledge of real-life problems into action, the people must constantly acquire new knowledge
and skills to better cope with the situation. The goal of learning is to create constantly new
competence to fit the contemporary situation, or in Dewey’s words: “Instead of reproducing current
habits, better habits shall be formed, and thus the future adult society can be an improvement of their
own (Parker 2003, xviii). Learning begins by answering to why and what should one learn, and what
the learning will be used for (Ardalan 2008). The pragmatic approach to education critiques strongly
the transmission-type teaching. According to Dewey, the real educative process is created by
development and growth that takes place in intelligent inquiries of the environment (Seltzer-Kelly
2008, 293-294). The teaching was not based on the subject per se, but on making students learn to
use proper methods, and think and act on their own initiative based on the results they discovered.
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Again this approach strongly favours learning for entrepreneurship. If a successful entrepreneur is
indeed risk-taking, innovative and proactive person (Covin & Slevin 1989), she must be willing to take
her faith into her own hands. An entrepreneur should be capable to find out enough information about
things to act on them, i.e. she has to have the competence for continuous learning and changing of
habits if so required. Putting students constantly in situations where they need to cope with constantly
changing requirements of the surrounding environments and focusing their attention on how to gather
the required facts and acting on them is more likely to create entrepreneurial activity than being
lectured about changing nature of the world.
Being a teacher in a pragmatic situation requires numerous skills. A teacher should master the
subject well enough, be able to focus on the individual growth of the students, and further be able to
guide learning in open situations to solve problems with no fixed amount of variables (Seltzer-Kelly
2008, 299). For Dewey, the teacher’s job is constant interactive intervention to contemporary
problems with and by the students in order to to cultivate them (Seltzer-Kelly 2008, 299). Thus a
teacher must have very strong pedagogical skills. A variety of different learning methods as well as
their situational variations must be mastered. ”Only knowledge of the principles upon which all
methods are based can free the teacher from dependence upon the educational nostrums which are
recommended like patent medicines, as panaceas for all educational ills” (McLellan and Dewey 1908,
10).
The most important individual in a pragmatic learning process is the student. Learning takes place
only within. No amount of support, instructions and facts can force her to learn if she opposes
learning. According to pragmatism the student must be placed within the situation to personally
experience the problems, goals and limitations. She then imposes a meaningful framework on the
unruliness of the case facts, searches for the key pieces of data and distinguishes central facts from
peripheral ones. Student organizes often internally incoherent data and arrives at a reasonable
recommendation for action. She expresses her views, feelings, reactions, attitudes, and prejudices
which are reinforced or rejected by their colleagues. All this gives the students an “opportunity to re-
evaluate and re-appraise their recommendation, character, and personality” (Ardalan 2008, 28).
The teacher-student –relationship of pragmatism supports also education for entrepreneurship. As

mentioned earlier, an entrepreneur must be able to make up her own decisions and take the iniative.
She must see herself in a central role in any process she is acting on; an entrepreneur is not a
puppet-on-a-string, at least in her own mind. If a potential future entrepreneur is taught to rely on
some higher intelligence (like a teacher) and not rely on her own thinking, is she more or less likely to
be able to put herself in the central role also in her entrepreneurial endeavour than the one who has
learnt to trust her own actions? This is of course not to say that an entrepreneur should not listen to
experts, far from it. However, the entrepreneur is in the end the one who makes a personal decision
based on the knowledge available at the time. If she would take action without having a personal
understanding on the situation, trusting blindly to orders given by other people, would she be able to
make required changes during the project? Would she have the personal passion to push the project
through the difficulties?
The previous discussion has presented some aspects of pragmatism that favour its use as the
foundation of education for entrepreneurship. The action-oriented learning in real-life situations, giving
the students the tools to create her own view of the situation, continuous learning and putting the
student into the heart of the learning process are all basic building blocks of pragmatism. They also
give the students competencies required from successful entrepreneurs. However, despite its
practical nature, pragmatism, as any other philosophical approach, only offers some vague views and
advice on the actions that should to be taken. In a proper pragmatic view they only become true if put
into action as a practical set of steps taken in a real-life situation. A case-study must be provided.
3. Case description: Laurea business ventures
Laurea University of Applied Sciences has selected a pragmatism-based approach, Learning-by-
Developing, as its pedagogical approach (Laurea 2007). Raij (2000, 2003, 2007) has shown that in
order to become an expert of a pragmatic situation one has to integrate knowledge, understanding
and doing into competence to work autonomously in developing real-life situations, which
requirements have ben embedded into the core thinking of LbD. LbD is based on five principles: i)
authenticity, ii) partnership, iii) experiencing, iv) investigative approach, and v) creativity (Fränti and
Pirinen 2006, Laurea 2006, 2007, Raij 2006, 2007).
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LbD can be considered to be a very pragmatic approach to university education, focussed on giving
the students appropriate tools to succeed in constantly evolving daily situations (Taatila and Raij, in
review). Thus Laurea University of Applied Sciences has offered different types of entrepreneurial
learning environments based on LbD-approach since 2005 (Taatila 2006, 2007, 2008, Taatila and
Vyakarnam 2008).
Currently the most advanced LbD-based learning environment for entrepreneurship in Laurea is
Laurea Business Ventures (LBV). It has been established in 2008 as a learning programme of
entrepreneurship and business development. The annual take in is officially 70 students for Finnish-
and English-speaking programmes and so far there have been several transfer students per annum.
In the core of learning in LBV is the new competence-based curriculum. It defines the learning
objectives in eight subject areas and that the learning takes always place in authentic development
projects. Thus there are no exams, lecture series and learning modules in LBV. Evaluation is based
on competence presented in development projects.
For each subject area three competence levels are defined: doer (10 cr), applier (doer+20 cr) and
developer (applier->). Students must show competence defined in the curriculum at least on doer
level in each substance area, thus the size of obligatory learning objectives is 80 credits. For a degree
of 210 credits, after obligatory thesis and job placement a student can aim 85 credits into the direction
of their own interest. For example, there are students who have invested all of the free credits into
sales and CRM –projects. Since they can also participate in job placements into these types of tasks
and write their thesis accordingly, they are capable of developing themselves a very high-level
competence in the subject. However, a majority of the students opt to disperse their credits more
widely, acquiring practical knowledge in several fields. (Laurea 2008)
The role of a ”teacher” is quite different to traditional university lecturer. LBV’s teachers are titled
mentors and their main task is the guidance of practical student projects. A mentor is a facilitator and
partner for students and in relation to the project its developer and researcher. The idea is to give
space for students, facilitate their knowledge construction processes in relation to practical
experiments and give tools and develop them together with students and through all the processes to
be involved in assessing the achievements of students’ learning outcomes (Taatila and Raij, in
review). In addition to support the students get from staff mentors there is also peer-support from
more advanced students as well as mentors of working life.
LBV has created a situation where the students really have to take responsibility of their own learning.
If a student cannot find an appropriate project or show required level of competence she will not get
credits. Thus the students either have to learn to sell their competence to existing organizations or
create their own businesses or business ideas.
Competence evaluation is based on skills presented during the projects as well as in after action
reviews. Evaluation in LBV is a development-oriented co-operational process between the students,
staff mentors and working like representatives. Most typical method is to have a formal after action
review during which the students present their project and its results as well as their learning
objectives and results. These are reviewed in comparison to the learning objectives defined in the
curriculum. In the end the amount of credits and grade are agreed on.
So far the results of LBV have been promising. Currently there are at least seven start-ups that are
directly connected to LBV. In addition there are also tens of businesses planned and analyzed in
order to find out about their feasibility. Interestingly, despite numerous prior estimations, no more
resources per credit unit has been needed in LBV than in a traditional teacher-led learning
environment. When the unit was formed there were serious doubts that mentoring and guiding will
require substantially more time per student than teaching in a lecture-setting. Naturally the student
spends now less time with a staff member. In a lecture-course a student may spend 40 hours on
lectures, thus seeing the teacher and having a theoretical possibility for interaction. In a typical project
with the same amount of credits a mentor may spend only 8 hours with the student. However, is time
on a lecture really interactive? In several cases a teacher could be substituted with a video and
students with tape recorders. While 8 hours is obviously less than 40 hours, one should also think
about the quality of time spent together. A mentor is fully focused on the problem at hand, discussing
a particular case much deeper than is possible in lecture setting.
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For the students, the most positive aspect has been the focus on learning, not on teaching. Authentic
projects have made learning a very concrete project where students can see the results of their
actions immediately. The students have also considered that the increased amount of responsibility
has supported their growing into professionals. Personal mentoring is also a positive aspect even
though there have been several cases where more guidance would have been expected. Interestingly
the most negative part has been the lack of lectures. The students would like to use this tool for
knowledge acquisition more than it is available. The amount of responsibility is also sometimes
considered over-whelming, specially with younger and foreign students to whom the whole working
surrounding is a new experience.
For the staff it has been a good possibility to focus guidance into a relatively small number of
students. Evaluation that is based on authentic projects and their results has also been quite simple –
it has given a good understanding of the students’ ability to apply their knowledge. LBV also forces
the teachers to learn constantly. They cannot use the same slides year after year but have to live in
constant interaction with the surrounding business environment. This last aspect is also sometimes
considered as negative. There is no escape from the front-line; mentors have to be always on the
edge of their knowledge. This situation is strengthened by the situation that the staff has no personal
working spaces but they share two open offices with the students. Also planning of the work has been
more difficult when there is no administrative structure to base it on. However, this has not become a
major problem due to good level of trust between staff and management.
The best part of LBV to the external partners has been the ability to get project workers immediately,
without the time-limits defined by administrative learning modules. The students have also been very
motivated. This has been ensured by making student to acquire their own projects – they know that if
they perform poorly they have shut down a door of a possible future employer. The students have
also worked quite entrepreneurially, showing a lot of responsibility. Most of the results have been
good though some areas of competence have been lacking, putting the students into projects that go
over their heads. There have also been some areas where it has been difficult to find student.
Generally speaking, basic sales projects are difficult to staff sine the students want to focus more on
business development and management activities.
4. Discussion
Comparing the theoretical discussion about pragmatism as a philosophy of education for
entrepreneurship and LBV’s approach it is easy to see the similarities. LBV uses only authentic
development projects as its vehicle of learning. All of the projects are action-oriented, giving the
students a personal learning experience about the case. The students are required to network to get
the projects and then build the “tools” (theory and a project plan on how to apply it in the particular
situation) personally. They are provided with guidance both on the process of developing projects and
the subject of the project, if required. However, even the guidance is aimed at making the students to
gather the data themselves, not to giving them the final solution as seen by the mentor.
LBV shows that it is possible to build a pragmatic learning environment for entrepreneurship. The
results (administrative, learning and number of new business ventures) so far have been very
promising and show that a pragmatic learning environment functions well in an academic setting.
There are naturally several similar cases around the world in the field of education for
entrepreneurship (e.g. Henry et al. 2003, 2005a, 2005b). Many of these are also very pragmatic,
aimed at developing practical capabilities of their participants.
Since there I are numerous examples of successful learning environments for entrepreneurship, it is
worth repeating the question mentioned in the introduction. The goal is clear (EU 2003). Tools are
available. Successful examples have been provided. Why, then, there is so little action?
The key challenge in adopting a new educational philosophy is that it requires changes both in the
institutional processes and in the operational patterns of staff (Ardalan 2003). In a pragmatic
university, whether aiming at basic or applied research, a lecturer turns into mentor and facilitator,
spending her time outside of the podiums. As she becomes a facilitator of learning processes she has
to give the focal position to her partner, a student. The ripples that these changes make within
institutes of higher education can grow high and force a whole university to reconsider its reason for
existence. However, despite the challenges it creates, the author wishes that the readers dare to take
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their view in this matter into careful consideration and then act on it – according to best pragmatic
recommendations.
It is also an interesting question to widen this discussion outside education for entrepreneurship:
whether pragmatic approaches could be used also in other areas of university education. If education
in some curricula, like teachers’ or physicians’, is mainly aimed at creating graduates who in the
majority of cases will work in some practical professions and not become basic researchers, should
they consider the underlying assumptions on educational philosophy as well? This change is already
taking place in several traditional academic organizations (see, f. ex. Kivinen and Ristelä 2001,
Nowotny, Scott and Gibbons 2001, Chisholm 2000), and should take place even more widely. If the
education is generally provided for something instead of about something, should we pay more
attention to the methods that will provide the learner with the competence to cope in the situation the
education is for?
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593
The Process of Social Innovation: Multi-Stakeholders
Perspective
Kanji Tanimoto
Hitotsubashi University, Tokyo, Japan
k.tanimoto@srv.cc.hit-u.ac.jp
Abstract: This paper focuses on the process of how social innovation is created. Recent years have seen the
increasing emergence of social entrepreneurs, who are expected, as social innovators, to tackle social problems
and change society. There have been many case studies on and research about social enterprises and
entrepreneurs. However, few studies have been made about social innovation in comparison to the vast volume of
research into business innovation. A numbers of studies focused on a single charismatic social entrepreneur
concentrate on the description of his/her success story, with little attention paid to the process of social innovation.
Most social innovation is not created by a single entrepreneur. There is a need for research into how social
entrepreneurs encounter collaborative stakeholders, and how they bring about social innovation through unique
ideas. Business innovation studies have shifted focus from the closed process of creating innovation within an
organization to the open process: now, many studies argue that customers and users play an important role in
creating innovation. In the case of social innovation, it is created not only by entrepreneurs and producers alone,
but by various related stakeholders as well as customers and users. The social entrepreneur identifies social
problems, gets ideas and resources, and creates social innovation in collaboration with related stakeholders. This
paper tries to clarify this process through a case study of the Hokkaido Green Fund (HGF), an environmental
NGO. HGF has introduced the first community wind energy business to Japan. This system, built by the local
community, is not the primary innovation but a secondary/derivative innovation. It is not easy to transplant social
innovation created in another area or country to a new location. In the process of introducing and creating the
system, entrepreneur has been supported by and collaborated with related stakeholders, and has had an impact
on the social system. This paper tries to present a new perspective for the analysis of the social innovation
process, from the viewpoint of multi-stakeholders.
Keywords: social innovation, multi-stakeholders, derivative innovation, collaboration
1. Introduction
Social entrepreneurs have been emerging and expected as new social innovators. They have tackled
various social problems such as welfare, community development, environment, and cooperation with
developing countries through business activities rather than volunteer activities. Social enterprises are
expected to provide new innovative business models in social fields, able to respond to a variety of
social needs in the local and global communities, to which conventional schemes are not able to
respond.
The roles and potential of social entrepreneurs have been spotlighted by media and academia alike
recently, and studies on social entrepreneurship have been increasing. There are already many case
studies and theoretical studies on social enterprises and entrepreneurs. However, in comparison with
the vast volume of studies on business innovation, there is a dearth of academic research on how
social innovation is created. The purpose of this paper is to clarify the process of social innovation.
Although some characteristics of social innovation are similar to business innovation, others are rather
different. It is true that some of the concepts and frameworks found in studies on business innovation
are adaptable to social innovation. However, social innovation displays many unique characteristics,
primarily because social enterprises have a mission with a double bottom line: to achieve social
performance as well as economic performance.
Now, we define the concept of social enterprise and social entrepreneur. The Office of the Third Sector
of UK Government defines social enterprise as follow: a social enterprise is a business with primarily
social objectives whose surpluses are principally reinvested for the purpose of the business or in the
community, rather than being driven by the need to maximise profit for shareholders and owners. The
same office defines a social entrepreneur as a person driven by a desire to change society. This
definition focuses on the social dimension of a social entrepreneur. Dees and Anderson (2006) insist
that a social entrepreneur plays the role of a change agent in the social sector by adopting a mission to
create and sustain social venture. They concentrate on those social entrepreneurs who carry out
innovations that blend methods from the worlds of business and of philanthropy to create social value.
This definition focuses on the innovative dimension of a social entrepreneur.
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Kanji Tanimoto
The concept and the corporate form of social enterprises vary from country to country (Kerlin 2006),
depending on social context and the maturity of the civil society concerned. The following are integral
and indispensable factors of social enterprise: 1) Social mission: to have a clear mission of tackling
social challenge(s) and facilitating social change. Social enterprise can operate its business only by
receiving support from stakeholders. 2) Social business: to create a new comprehensive business
model to realize its social mission. It is difficult for social enterprises to venture into the social field with
no chance to make profit, but their purpose remains focused on the creation of new social value rather
than the maximisation of profit for shareholders and owners. 3) Social innovation: to develop new
social goods and services, and unique systems to address social problems. It is also important that the
social business prompts the realization of new social values. It is no easy task to connect the
realization of social mission and the performance of profitable business. It is social innovation itself that
connects these two factors.
2. Social innovation
2.1 Social innovation theory

Aiming to change society and making business work well are not actions that are linked automatically.
Social entrepreneurs who are able to connect both and to develop unique activities in the process are
creating innovation. Social entrepreneurs are not necessarily required to create new technologies,
materials or product innovation, but to develop new schemes and unique business models.
Innovation is generally defined as that which introduces something new, makes changes in anything
established. Innovation of economic activity means innovation which brings economic effects. Drucker
(1985) points out that entrepreneurs create something new and something different and change or
transmute values. This idea also applies to social entrepreneurs. Muglan et al. (2007a) think of social
innovation as the development and implementation of new ideas (products, services and models) to
meet social needs. This paper defines social innovation as innovation which creates new social values
through businesses which tackle social problems with a view to their resolution.
Studies on social innovation have been popular these past few years. In comparison to the vast
volume of research on business innovation, however, there is a remarkable dearth of academic
research that looks at how social innovation is created and analyses the process of social innovation.
Mulgan et al. (2007a) have argued that “the competitive pressures that drive innovation in commercial
markets are blunted or absent in the social field”, but the situation has been changing rapidly. Growing
global attention and the boom on social entrepreneurs have intensified the research being carried out
on social entrepreneurs and their innovative activities.
There are a variety of discussions on social innovation, ranging from innovative political and welfare
systems through macro-institutional change (Hämäläinen et al. 2007) to innovative business models
by social entrepreneurs. Drucker (1985) argues that social innovation includes not only technology but
also frameworks of insurance and healthcare which have a huge impact on society. He analyses
innovation strategies of public-service institutions (government agencies, universities, hospitals,
non-profit organisations in the community) as well as business and new ventures. He explains the
main features and policies of social innovation by public-service institutions, but does not analyse how
the social innovation itself is created. This paper focuses on innovative business activities by social
entrepreneurs, not on innovation by public institutions on the macro level. There are some studies
which discuss new movements, led by entrepreneurs, which are tackling social problems. For
example, Westley et al. (2006) analyse the innovative approaches of various players, including
government, NPOs, volunteer groups, financial groups and business corporations, regarding social
subjects including HIV/AIDS in the community, crime prevention, and support for the disabled. Mulgan
et al. (2007a) examine the characteristics of the different approaches shown by various players,
including NPOs, government, markets, movements, academia and social businesses, regarding fair
trade, hospices, correspondence courses, open universities and Wikipedia. These studies deal with
political and social issues at the community level and analyse the structural mechanism of reform and
the meaning of social innovation; they are not, however, necessarily focused on business schemes.
Studies focused on the social innovation of social enterprises are increasingly common. Dees (1998)
defines social enterprise as being located in the centre of two points on a linear scale: the purely
charitable and the purely commercial. Social entrepreneurs, who can be called change agents, seek
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out opportunities to improve society, to create new social values. They consider social innovation as
their fundamental resources; new and better ways of serving their social mission (Dees et al., 2001).
They regard social entrepreneurs as promoting innovation which matches their social business and
philanthropic activities in order to create social value. Dees et al. (2001) mainly research the strategic
management of social innovation, however, and not the process of social innovation.
Discussion on how to make social innovation work has been led by a study by Mulgan et al. (2007b).
They point out that “the successful growth of social innovations depends on effective demand and
effective supply coming together”, and that “innovations often begin with simple ideas and insights,
which may ultimately originate from many different sources including social entrepreneurs,
bureaucrats, frontline staff, service users, observers or volunteers”. Moreover they suggest that the
“diffusion of an idea” is the key point in developing more effective social innovation. Social enterprises
need “effective strategies” (choices about supporters and organisational form) and “learning and
adaptation”. They insist that the key issue is how to connect ‘pull factors’ coming from government and
the community to ‘push factors’ coming from those who have ideas. As they put it, “the combination of
‘effective supply’ and ‘effective demand’ results in innovations that simultaneously achieve social
impact and prove to be financially sustainable”. They explain the mechanism of social innovation from
the viewpoint of demand and supply, but do not clarify the process of how social entrepreneurs create
social innovation.
Westley et al. (2006) assert that the idea of complexity explains the process of how social innovation is
created within the interactions of various movements and how it changes society. They suggest that
“relationship is a key to understanding and engaging with the complex dynamics of social innovation”
and that “for social innovation to succeed, everyone involved plays a role. As sift, everyone--funders,
policy makers, social innovators, volunteers, evaluators--is affected. It is what happens between
people, organisations, communities and parts of systems that matters ‘in the between’ of
relationships”. This idea, which considers social innovation as being in a dynamic relationship with
stakeholders, is thought-provoking for our research. However, their perspective of complexity remains
nothing more than an idea, and they do not go on to explain the mechanism and process of social
innovation.
Christensen et al. (2006) refer to disruptive innovation for social change as “catalytic innovation”:
“What’s required is expanded support for organisations that are approaching social-sector problems in
a fundamentally new way and creating scalable, sustainable, systems-changing solutions.” Here,
innovation presents a new possibility to under-served people whose needs have not been met in areas
with insufficient social services. They pick up some cases, such as low-cost medical insurance and
affordable education programs, e-learning at secondary schools, community colleges, and
micro-lending systems, made available to people who otherwise would have limited or no access to
educational opportunities. However, they also don’t explain the processes behind the birth and
development of social innovation.
As we’ve seen, social innovation is already being considered from a variety of perspectives. The
specific purpose of this paper, however, is to clarify the processes by which social innovation is
created.
2.2 The creation of social innovation

This section considers the basic framework of how to analyse the process of social innovation. The
primary questions here are where, and by whom, is social innovation created?
Business innovation studies have focused on whether innovation is created within the organisation
(research and development division, project team) or outside the organisation (user/customer,
collaboration with other actors), as well as whether innovation is created in a closed or an open
process (Chesbrough 2003).
In researching the process of social innovation as it addresses social problems, studies on user-led
innovation and user/producer co-created innovation are useful, rather than those which concentrate on
producer-led innovation. For example, Ogawa (2000) explains user innovation in terms of a “Sticky
Information Hypothesis” (where the costs of sticky innovation-related information would have an
impact on the locus of innovation) inspired by von Hippel (1994). Ogawa (2006) also explains that
innovation-generating collaborative activities between the producer and the user are competitive. Von
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Kanji Tanimoto
Hippel (2005) points out that the user’s ability and environments to generate innovation are developed,
not by the producers who are the providers of products and services in various areas. Prahalad et al.
(2004) focus on the process of value creation by consumer-company interactions. With the global
spread of the internet, consumers now have access to a large volume of information and are able to
create online communities and new values beyond conventional geographic and social boundaries.
Consumers become committed to interactions and co-creations with firms.
Up until now, studies on social enterprise have primarily concentrated on case studies, entrepreneur
history studies and management studies. Few have focused on how social innovation is created and
how it changes society, or on the discovery of the processes involved in social change. In general,
studies have focused on a single charismatic entrepreneur, describing his or her success story. Not all
social innovation, however, is produced by a single entrepreneur.
How are social entrepreneurs finding out about social problems, creating business schemes with
unique ideas and resources, and diffusing them? In many cases, social innovation is created not only
with users and customers, but in collaboration with various stakeholders. As the case of the Hokkaido
Green Fund, considered in the next section, social innovation is created through an open relationship
with stakeholders and a collaborative process with them. The focus of this research is to analyse the
relationship between the entrepreneur(s) and stakeholders, and the dynamic process of creating social
innovation.
This point relates to the suggestion of Matsushima and Takahashi (2007) that a new perspective is
necessary to clarify the dynamic process in which the institutional entrepreneur comes to have
relational rules with various actors. This is closely linked to the idea that the “paradox of embedded
agency” should be deciphered; which explains that, as they come to have the cause and the
opportunity, entrepreneurs try to gain resources in order to change a certain system, while being
embedded in that system. The key point is to understand the process of how entrepreneurs create
innovation and introduce possibilities for social change from their relationship with various
stakeholders.
3. Social innovation in the Hokkaido Green Fund
When a social entrepreneur recognizes a social problem and starts a new social business targeting it,
he or she thereby creates a relationship with various stakeholders and collaborates with them. This
section reviews this process in the context of a case in Japan: the first community wind energy
business, built by the Hokkaido Green Fund (HGF) in collaboration with local people and
organisations. The following content is based on several interviews with HGF members and HGF
internal documents.
3.1 The identification of social issues

The Hokkaido Green Fund, an environmental NGO, was established in Sapporo City, Japan, in July
1999 (Chairperson: Sakae Sugiyama; Director-General: Toru Suzuki). Its purpose is to enable citizen
to play a positive role in creating energy innovation themselves, without being limited to conducting an
anti-nuclear power plant movement. The starting point, however, can be traced back to an anti-nuclear
movement, the “Good-Bye Nuclear Group”, started in 1988, of which Suzuki used to be the group
leader. It consisted of members mainly of the Seikatsu-Club Consumer’s Cooperative Union Hokkaido,
of which Sugiyama used to be Chairperson from 1986 to 1998. The movement was triggered when
Sugiyama and the members of the Cooperative Union encountered radioactively-contaminated
vegetables, the contamination having been caused by the nuclear meltdown at the power station in
Chernobyl. And the members learned the limitations of their efforts when they were not able to prevent
the construction of nuclear power plants in Tomari, Hokkaido, as planned by the Hokkaido Electric
Power Co. After this set-back, they began to refer to alternative business-styled movements in Europe,
and remodelled the basic strategies of their activity on ‘a style of movement incorporating practical
business, and a business style incorporating a sustainable movement’. Then, they stepped up efforts
to establish a community wind energy business.
At that time, wind-powered electricity businesses established through citizen-led initiatives were
already popular in Europe. The activities of HGF did not represent the first innovation in this field,
although they were unprecedented in Japan. Back then, Japan’s policy on electric power was rigid,
and electric power companies dominated the electricity market in each region. Although free access to
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the electricity market was granted in 1995, the entry of citizens into that market was not seen until the
HGF was established. They were passionate about creating a new model to change the rigid energy
policy. Redlich (1951) describes original and unprecedented innovation as “primary innovation”, and
innovation which has been produced elsewhere but is introduced into a new area as “derivative
innovation”. It is not easy to transplant a foreign model into one’s own country and make it succeed,
because of differences in social structure, resources and value. Imitation of an established model
alone will rarely lead to the successful introduction of innovation. In order to realise derivative
innovation, various skills and efforts are needed to adapt the innovation appropriately to each country.
3.2 Collaboration with stakeholders

While looking at the possibility of generating electricity through natural energy, before establishing the
HGF, Sugiyama and Suzuki learned about the green electricity tariff scheme, which has proved
popular in the U.S., from Prof. Koichi Hasegawa of Tohoku University. They also found out about
several cases of wind energy businesses owned by local communities in Denmark from Tetsuya Iida,
Director of the Institute for Sustainable Energy Policies. This information helped them to form more
concrete ideas, leading them to consider the possibility of running a wind energy business in Japan
with reference to preceding cases. First, they introduced a green electricity tariff scheme in
cooperation with the Hokkaido Electric Power Co., researched some well-developed cases of
community wind energy projects in Europe, and then began to set up a business plan for installing
wind turbines and selling the electricity generated by civic hand.
By the end of 1999, Hokkaido Electric Power Co. announced that they would be purchasing natural
energy for the remainder of the period ending March 2001. The HGF Board of Directors was forced to
make a quick decision committing to starting the business, saying “we cannot tell when the next
opportunity will come”. Fundraising presented a severe problem for the HGF, since approximately 200
million yen (approximately 2 million dollar) is needed to purchase and install a single wind turbine. In
the first instance, the collection of such an amount of donations would have been entirely impossible
for them. A further problem was that of the institutional restriction applied to non-profit organisations,
not being able to receive investment from the market. After hard negotiations with Hokkaido banks,
they finally received a response from North Pacific Bank: they would lend the HGF 140 million yen
provided it established a new business corporation, clarified its accountability and raised 60 million yen
on its own.
HGF then decided to establish a business corporation for fundraising in the market (to develop their
business through a combination of two different styles of organisations: a nonprofit organisation and a
company corporation).They met Hiroyuki Kawai, an attorney and the founder of Sakura Kyodo Law
Offices, who had an interest in this business and provided the HGF with advice and legal support in
establishing the corporation (Kawai later became the auditor of the Natural Energy Community Fund
Ltd., which was established later by the HGF). In February 2001, Hokkaido Citizens’ Wind Power Co.
Ltd was officially launched, with 14 stockholders (13 individuals, 1 corporation=HGF), and Toru Suzuki,
who had been a leader of the business plan, was appointed President. The company has a council
system with three members, President Toru Suzuki, Vice-President Sakae Sugiyama, and Yotaro
Kashiwa (the representative of Anti-Nuclear Citizens’ Group), having right of representation.
Anonymous union investment to the company’s business was adopted to raise capital. Starting in
December 2000, by asking for an investment of 500,000 yen per contribution, the HGF was able to
collect investment totaling around 100 million yen in the first month alone. In Sapporo City, a voluntarily
project, entitled the “Community Wind Power Supporter Group”, was also organised. This group asked
for investments of minimum 50,000 yen per contribution, and established a system whereby up to 10
smaller units of contribution could be combined to make up the minimum total, thereby making it easier
to contribute with fewer funds. They succeeded in collecting 5 million yen in the three months from May
to July. The movement was accelerated by such support networks, and was able to gain public
acceptance and support from the community in a short period. By September 2001, the total amount
raised stood at 156.5 million yen collected from 212 persons and 17 corporations, and the total
business fund totalled 166.5 million yen, with the extra 10 million yen coming from the green energy
tariff system and donations from labour unions. The HGF also received a loan of approximately 70
million yen from North Pacific Bank, and Japan’s first community-run wind turbine was finally installed
in Hamatonbetsu-cho, Hokkaido, in September 2001 (Generator: 990kw, annual output: 2.6millionkw).
This business was supported by many people and organisations. In starting HFG, they gained the full
cooperation of Hokkaido NPO Centre. Toshio Hori, at that time Director of the Electric Business
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Kanji Tanimoto
Division of Tomen Power Japan Ltd, cooperated positively with HGF including making suggestions for
appropriate site locations, research and technical advice on the installation of wind turbines. Akira
Otani, another employee of Tomen Power Japan, later joined the HGF and played a core role in the
development and management of the business. Figure 1 charts the relationships amongst the related
stakeholders.
・Prof. Hasegawa, Sakura North Tomen Power Japan Ltd.

Kyodo Law Pacific
Tohoku Univ. Offices Bank, Ltd.
・Mr. Iida, Director
of Institute for Ideas, Loan Outsourcing of
Advice Advice Management/Advice
Sustainable
Energy Policies
Support
Seikatsu Hokkaido Hokkaido Hokkaido Electric
Club Green Fund Citizens’ Wind Power Co., Inc.
Consumer’s Power Co., Ltd
Cooperative Green Power
Tariff System
Union
Electric Power
Sales Contract
Support 支援 Donation, Support Investment
支援
Hokkaido NPO ・Citizens,
Centre Labor unions
・NPO Hokkaido ・Community Volunteer-based relation
Promotional wind power Business-based relation
Forum supporters
Figure 1: Hokkaido Green Fund and its stakeholders

There were two major factors that explain why cooperative activities and investment fundraising were
successful in this case: 1) the public’s awareness of and negative attitude towards nuclear power, and
2) the public’s expectations for the first community wind energy business in Japan. The success of this
community wind energy business owes much to its many sponsors and supporters. In this project,
stakeholders with various purposes have come together to collaborate on the basis of value sharing
through common experiences. It appears to be a major factor of social innovation that stakeholders
share a common experience, here taking part in establishing the community wind energy business.
Social innovation with a correlation of stakeholder interest can change social value. A questionnaire,
carried out on investors in community wind energy by Iida et al. (2003), shows that many of the
respondents were passionate about wanting to be part of solving local environmental/energy issues.
One resident of the village where the wind turbine was installed stated: “we are now proud of the wind,
which until now has only been a distraction to us”. After the success of the first installation, a second
wind turbine was constructed based on the experience and systems of the first one. This in turn
encouraged people in other areas to construct more community wind energy plants, indicating that the
innovation has begun to diffuse to other areas. Later, in February 2003, the HGF established the
Natural Energy Community Fund Ltd. to build a new network of development and support for
community wind power. The HGF has entered the second stage of its business, and this scheme of
running community-based wind power projects is expected to develop throughout other areas in
Japan.
The HGF case shows that there is a correlated relationship between related stakeholders who share
experiences in the process of creating social innovation in a local area. Inspired by a certain social
mission, social entrepreneurs source diverse ideas and resources from stakeholders, and then
collaborate to start a business. In clarifying this relationship, we find that there exists a structure which
can be deemed a “Social Innovation Cluster” in the area. This cluster is defined as an organisational
accumulation that includes social enterprises, support organisations, funding agencies, universities
and research institutions. By building cooperative relationships in a cluster, new social businesses are
born and they generate and provide innovative social solutions and social values. The Social
Innovation Cluster has similarities to the Industrial Cluster, but it also has its own unique
characteristics; it is more flexible and more community-rooted. The basic characteristics are
cross-section, interaction with its community, and open access.
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Kanji Tanimoto
Social enterprises affect stakeholders through their business activities, at the same time, it is
impossible for them to exist without being accepted by those stakeholders. Stakeholders recognise
and come to learn about social issues from their business activities. New social value can be realised
through purchasing and supporting of goods and services provided by social enterprises with a social
message. People who encounter the message will experience increased awareness of and concern for
social issues. They will come to recognise significant social problems, share their values and then
become involved with community and social problem-based activities. In other words, social value is
realised through peoples’ experience and practice. In the case of the HGF, people who have been
inspired by the HGF’s activities have experienced making an investment in social business, witnessing
the installation process of the wind turbine, and recognising its social impact via reportage by the mass
media. Furthermore, their environmental consciousness has been gradually changing throughout
these experiences; they have developed an interest in other environmental issues, or altered their
behaviour to save more energy, or come to participate in social programs on environment.
This can be described as similar to the style of “experience innovation” proposed by Prahalad et al.
(2004). Figure 2 describes this process of social innovation.
Social Entre- Collabora- Develop- Expansion Changes Diffusion

preneur: tive Rela- ment of of Market of Social of Social
Recognition tionship Social Interest Relation- Value
of Social with Stake- Business ship and
Problems holders System
・New social goods and services ・Presentation of a new social value

・New social business scheme ・Support from the marketplace
(one yen/$ = one vote)
Figure 2: The process of social innovation

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Chesbrough, H. (2003) Open Innovation: The New Imperative for Creating and Profiting from
Technology, Harvard Business School Press, Boston.
Christensen, C. M., Baumann, H., Ruggles, R. and Sadtler, T. M. (2006) “Disruptive Innovation for Social
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Dees, J. G. (1998) “Enterprising Nonprofits”, Harvard Business Review, Vol.76, No.1, pp.55-66.
Dees, J. G., Emerson J., and Economy. P. (2001) Enterprising Nonprofits, John Wiley & Sons, Inc., New York.
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Practice and Thought”, Research on Social Entrepreneurship, ARNOVA Occasional Paper Series1-3,
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Ducker, P. F. (1985) Innovation and Entrepreneurship, Harper & Row Publishers, Inc., New York.
Hämäläinen, T. J. and Heiskala R. (eds.) (2007) Social Innovations, Institutional Change and Economic
Performance: Making Sense of Structural Adjustment Processes in Industrial Sectors, Regions and
Societies, Edward Elgar Publishing Ltd., Northampton.
Iida, T., Maruyama, K., Kasuya, I., Suzuki, T., and Hasegawa, K. (2003) “Shiminshutai gata no Energy Seisaku ni
kansuru Kenkyu [Research on the Energy Policy by Citizen’s Initiative]”, Research Institute for Consumer
Affairs, [online], http://www.ge-aomori.or.jp/activity/coop_report.pdf
Kerlin, J.A. (2006) “Social Enterprise in the United States and Abroad: Learning From Our differences”, Research
on Social Entrepreneurship, ARNOVA Occasional Paper Series1-3, pp.105-126.
Matsushima, N. and Takahasi, T. (2007) “SeidotekiKigyoka no GainenKitei: Umekomareta Agency no Paradox ni
taisuru Rironteki Kousatsu [Concept of Institutional Entrepreneur: theoritical study on the paradox of
embeded-agency]”, Discussion Paper, Vol.48, Kobe University, Kobe.
Mulgan, G., Ali, R., Halkett, R. and Sanders, B. (2007a) “In and Out of Sync: The Challenge of Growing Social
Innovations” NESTA, London.
Mulgan, G., Tucker, S., Ali, R. and Sanders, B. (2007b) “Social Innovation: What It Is, Why It Matters and How It
can be Accelerated”, Skoll Centre Oxford Said Business School, Oxford.
Ogawa, S. (2000) Innovation no Hassei Riron [The Locus of Innovation], Chikura-shobo, Tokyo.
Ogawa, S. (2006) Kyôsoteki Kyôso Riron [Competitive Co-Creation], Hakuto-shobo, Tokyo.
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Prahalad, C.K. and Ramaswamy, V. (2004) The Future of Competition: Co-Creating Unique Value With
Customers, Harvard Business School Press, Boston.
Redlich, F. (1951) “Innovation in Business: A Systematic Presentation”, American Journal of Economics and
Sociology, Vol.10, No.3, pp.285-291.
Rogers, E. M. (2003) Diffusion of Innovation, Fifth Edition, Free Press, New York.
Von Hippel, E. (1994) “Sticky Information and the Locus of Problem Solving: Implications for Innovation”,
Management Science, Vol.40, No.4, pp.429-439.
Von Hippel, E. (2005) Democratizing Innovation. The MIT Press, Cambridge.
Westley, F., Zimmerman, B. and Patton, M. (2006) Getting to Maybe: How the World is Changed, Random House
of Canada Ltd., Toronto.
601
Developing Indicators for Sustainable Entrepreneurship in
Flemish Agriculture
Nicole Taragola, Fleur Marchand, Joost Dessein and Ludwig Lauwers
Institute for Agricultural and Fisheries Research, Belgium
nicole.taragola@ilvo.vlaanderen.be
fleur.marchand@ilvo.vlaanderen.be
joost.dessein@ilvo.vlaanderen.be
ludwig.lauwers@ilvo.vlaanderen.be
Abstract: Current Flemish (and European) policy makers encourage the sustainable development of farming, in
which a balance between People, Planet and Profit is required. As craftsmanship alone will no longer be enough
to integrate these divergent aspects, farmers need to develop entrepreneurial and managerial skills. For this
reason, complementary to the economic, ecological and social aspects, sustainable entrepreneurship and
management is seen as an extra pillar in the indicator based Monitoring Tool for Integrated Farm Sustainability
(MOTIFS) and needs to be addressed profoundly. However, the concepts of sustainable entrepreneurship and
management are multidimensional and therefore difficult to grasp. In the current paper following research
question is addressed “Which themes can be identified for assessing and/or stimulating sustainable
entrepreneurship/management of Flemish farmers?”. First, viewpoints on entrepreneurship, management and
sustainable development were explored with a literature review and expert consultation, resulting in a preliminary
framework of themes. Although in most cases indicators for sustainable development are developed by experts,
the participation of stakeholders is essential if the indicators need to be locally relevant, practicable and
accepted. Accordingly, a “multistakeholder” approach was used involving 24 local stakeholders related to
Flemish agriculture. They generated several aspects of sustainable entrepreneurship and management during a
brainstorm session. These aspects were then clustered by means of an interactive group process, making use of
the preliminary framework of themes determined in the first stage of the research. After evaluation and adaptation
of the preliminary framework by the stakeholder group the definitive themes were determined. At last, a
prioritization process was performed by asking each stakeholder to assign weights to the several themes. As a
result top priority was assigned to the following themes (i) Vision/strategy and (ii)
Planning/organization/control/evaluation, followed by the topics (iii) Networking/cooperation, (iv) Risk
management, (v) Opportunity recognition and realization/pro-activeness, (vi) Searching and learning behaviour,
(vii) Innovation and Craftsmanship (viii). The results indicate that the participating stakeholders attach a higher
importance to management aspects (vision/strategy, management processes, risk management) than to
entrepreneurial aspects (opportunity recognition and realization/pro-activeness, innovation and risk taking) and
craftsmanship in order to stimulate sustainability in Flemish agriculture. During further research, indicators for
each of the themes will be developed and applied at farm level, allowing to increase the understanding of their
influence on the economic, ecological and social performance at farm level.
Keywords: entrepreneurship, management, craftsmanship, integrated sustainability, indicators, agriculture
1. Introduction
Today’s farmers are faced with several external and internal developments. Important external
developments include the price fluctuations of inputs and outputs, changes in the Common
Agricultural Policy (CAP) with reduced subsidies, changing governmental regulations, the increasing
focus on environmentally and socially responsible production, animal welfare, etc. Internal
developments include the increasing scale of farms, the growing importance of diversification
(processing, direct marketing, etc.), the need for increased efficiency, cooperation, etc. The recent
reforms of European agricultural policy (CAP) represented a major change. The new CAP intends to
promote a sustainable market-oriented agriculture, which is in conformance with the wishes of
society. According to the last Eurobarometer (Directorate-General for Agriculture and Rural
Development, 2010), the main priority for the CAP should be ensuring agricultural products that are of
good quality, healthy and safe. Ensuring reasonable food prices, protecting the environment and
ensuring a fair standard of living for farmers are also given a high position on the public agenda.
Sustainable agricultural development requires sustainable entrepreneurship/management. Important

questions are: “When is a farm sustainable?” and “When is entrepreneurship/management
sustainable?” According to the Brundtland definition “Sustainable development is development that
meets the needs of the present without compromising the ability of future generations to meet their
own needs” (WCED, 1987). Although this definition has gained its place in the vision, mission and
strategy of many companies, organizations and governments, putting this theoretical concept in
practice often proves to be very difficult – also in agriculture. To many, sustainable development
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Nicole Taragola et al.
seeks to place social and environmental objectives on equal footing with economic objectives (the so-
called ‘triple bottom line’, Elkington, 1998).
Frequently, indicator-based monitoring tools are applied for sustainability assessments, also in
agriculture. However, many indicators focus on a rather restricted number of sustainability aspects
such as economy or ecology. In order to stimulate sustainable development in Flemish agriculture
currently an indicator-based monitoring tool for integrated sustainability (MOTIFS) is developed (Meul
et al., 2008). MOTIFS is based on the equality of economic, ecological and social sustainability
dimensions, and this equality is inherently built into the system.
As craftsmanship alone will no longer be enough to integrate these divergent aspects, farmers need
to develop entrepreneurial and managerial skills (see figure 1). In the role of craftsman the farmer
controls the biological processes and the production on the farm. The farmer as a manager is
responsible for planning, organizing, directing and controlling the business processes of the farm. As
entrepreneur the farmer creates the conditions within which the craftsman and the manager operate.
In this function, opportunity recognition and exploitation is important. In short, entrepreneurship is
“doing the right things”, whereas management is “doing the things right” (Verstegen and Lans, 2006).
Figure 1: The farmer as craftsman, manager and entrepreneur

Entrepreneurship is increasingly being recognized as a significant conduit for bringing about a
transformation to sustainable products and processes, with numerous high-profile thinkers advocating
entrepreneurship as a panacea for many social and environmental concerns (Coman, 2008; Hall et
al., 2010). As illustrated in figure 2, sustainable entrepreneurship is a key driver for economic,
ecological and social sustainability.
For this reason, complementary to the economic, ecological and social aspects, sustainable
entrepreneurship and management is seen as an extra pillar in MOTIFS and needs to be addressed
profoundly. However, the concepts of sustainable entrepreneurship and management are
multidimensional and therefore difficult to grasp.
In the current paper following research question is addressed “Which themes can be identified for
assessing and/or stimulating sustainable entrepreneurship/management of Flemish farmers?”
603
Figure 2: Sustainable entrepreneurship as a driver of economic, ecological and social sustainability

2. Methodology
First, viewpoints on entrepreneurship, management and sustainable development were explored with
a literature review and expert consultation, resulting in a preliminary framework of themes. Although in
most cases indicators for sustainable development are developed by experts, the participation of
stakeholders is essential if the indicators need to be locally relevant, practicable and accepted.
Accordingly, in April 2009, a focus group was organized involving 24 local stakeholders related to
Flemish agriculture. These stakeholders were private and governmental advisors (both technical and
economic), bank consultants, representatives of agricultural organizations, training agents, public
authorities, researchers, as well as farmers themselves.
The term focus group is applied to a situation in which the researcher/interviewer asks very specific
questions about a topic after having already completed considerable research (Merton, 1987). A focus
group is a group interview, which is essentially a qualitative gathering technique that relies upon the
systematic questioning of several individuals simultaneously (Denzin and Lincoln, 2000). Focus
groups, or group interviews are “a way of listening to people and learning from them”. They have
some advantages over individual interviews: They are relatively inexpensive to conduct and often
produce rich data that are cumulative and elaborative; they can be stimulating for respondents, aiding
recall; and the format is flexible. Compared with individual interviews, the clear advantage of focus
groups is that they make it possible for researchers to observe the interactive processes occurring
among participants.
During the focus group the Metaplan technique, developed by Wolfgang and Eberhard Schnelle, was
used as a facilitation method. This technique is a proven methodology for results-oriented work with
groups (Noordik and Blijsie, 2008). Following steps were followed:
Program introduction: Presentation of the rationale, objectives, agenda and research question:
“Which aspects/themes can be identified for assessing and/or stimulating sustainable
entrepreneurship/management of Flemish farmers?”.
Brainstorm session: The 24 stakeholders were divided into 4 subgroups of 6 persons. By
breaking larger groups into smaller ones, the involvement of all participants is maximized. In each
group a facilitator ensured that good communication, cooperation and high levels of
understanding were achieved. A co-facilitator was responsible for data recording and was
also asked to make a table diagram and write down the ideas that came out of the group.
604
In each subgroup the brainstorm session started with a short introduction of the stakeholders and
communication of the rules by the facilitator. The stakeholders were asked to brainstorm on the
research question. The brainstorm method is a semi-structured creative group activity in order to
generate as many ideas as possible on a certain subject. The idea behind brainstorming is, that a
group of people can achieve a higher level of creativity than the sum of the participants
separately. During the brainstorm session participants were encouraged to come up with as much
ideas as possible. First they were asked to visualize the different aspects of sustainable
entrepreneurship/management on post-its through self-made drawings. Visualization is a strong
method because it claims other skills compared to the traditional methods, and images can tell
more than thousand words (Noordik and Blijsie, 2008). The drawings of the stakeholders were
used as input for a group discussion and further idea generation. After the idea generation in each
of the 4 subgroups, each subgroup assigned one person to stay behind as reporter of the results,
while the rest of the group rotated to other subgroups. In the new subgroup they had the chance
to review and comment the ideas generated during the previous brainstorm session, and to add
new ideas.
Literature injection and interactive clustering process: The preliminary framework of themes,
resulting from literature exploration and expert consultation, was written on a flow chart and
presented to the stakeholders. During the following interactive clustering process, this preliminary
framework was used as a basis for clustering the ideas coming out of the brainstorm session.
This process allowed to evaluate and adapt the preliminary framework, and to define the definitive
themes.
Prioritization of the themes: Each stakeholder was given 5 self-adhesive dots, and asked to stick
dots on themes they considered to be the most important. They were allowed to stick more than
one dot on a single theme. The priorities of the themes were determined by counting the number
of dots or votes assigned to each theme, and calculating the corresponding percentage or weight.
3. Results
As a result of the literature review and the focus group discussions priority was assigned to following
themes (between brackets the weights assigned by the stakeholders):
Vision/strategy (weight: 23%)
In strategy research, the importance of strategic management concepts are recognized to hold the
potential to lead to business success. Although many definitions of the basic concepts exist in
scientific literature, the scheme of Zuckerman (2000) gives some clarification (see figure 3).
Figure 3: Definitions of strategic management concepts (Zuckerman, 2000)
605
The vision statement is the cornerstone of the strategic plan and it provides the reference point for
strategy development (how to achieve the vision) and for goals, objectives, and actions, that are
components of the future vision. Vision is the desired future position of a company (Raynor, 1998).
Both mission and vision statements address the future, but there are key differences between the two.
The mission statement is timeless, whereas the vision statement is time bound, referring to a
particular point in the future. Mission is the organization’s most fundamental reason for existence
(Collins and Porras, 1996) The mission statement states the organization’s broad purpose – why it
exists – whereas the vision statement refers to key organization characteristics that will be
accentuated by that purpose.
Planning/implementation/control (weight: 23%)
Planning, implementation and control are considered to be the three basic functions of management
(Kay et al., 2007; Boehlje and Eidman, 1994). The other functions can be easily included as sub-
functions under one of these three. Figure 4 is a flow chart which summarizes the management
process utilizing these three functions.
Figure 4: Management flow chart based on the management process theory (Kay et al., 2007)
Planning : The planning function contains a number of steps, including the identification and definition
of the problem, acquiring the initial information, and identifying alternative solutions. There are both
short-run (operational and tactical) and long-term (strategic) plans and planning procedures. Planning
may be taken place for a number of problems at the same time (Boehlje and Eidman, 1994). Planning
is a continual process as new problems and opportunities arise and as new information becomes
available from outside or within the system. New information obtained from the control function and
feed back into the planning stage is an important feature of the complete system.
Implementation : Once the planning process is completed, the best alternative must be selected and
action taken, to place the plan into operation. There may be resources to purchase, lease, or
reorganize, details to be worked out, and work schedules to be organized.
Control : The control function consists of two related tasks: (i) recording information and (ii) analyzing
this information to identify problems and to take corrective action. The dashed line in figure 4
represents the continual flow of information from the control function back to planning. Without some
feedback procedure, the information obtained by the control system is of no use in making corrections
606
to the existing plan or improving future plans. A good control system requires an accurate record-
keeping system and the ability to use it.
Networking/cooperation (weight: 11 %)
In recent years the network construct has been used widely in entrepreneurship research, as a means
by which researchers can study the entrepreneur in his/her environmental context. A number of
studies confirm the important and varied role that networks play in influencing the entrepreneurial
processes and outcomes (e.g., Aldrich and Zimmer, 1986; Birley, 1985; Diederen et al., 2000;
Donckels and Lambrecht, 1997; Granovetter, 1983; Hitt et al., 2001, 2002; Hoang and Antoncic,
2003; O’Donnel et al., 2001; Street and Cameron, 2007). According to Hoang and Antoncic (2003)
following three components emerge as key elements in models that seek to explain the impact of
networks on entrepreneurial outcomes: the content of the relationships, the governance of these
relationships and the structure or pattern that emerges from the crosscutting ties.
Entrepreneurial networks are generally categorized as either inter-organisational networks or personal

networks (Ostgaard and Birley, 1996; Szarka, 1990). With regard to network content, interpersonal
and interorganizational relationships are viewed as the media through which actors gain access to
information, resources, markets, technologies, etc. (Gulati et al., 2000). Trust between partners is
often cited as a critical element of network exchange that in turn enhances the quality of the resource
flows (Lorenzoni and Lipparini, 1999). Network structure is defined as the pattern of direct and indirect
ties between actors. A general proposition is that actors’ differential positioning within a network
structure has an important impact on resource flows, and hence, on entrepreneurial outcomes.
Network size and centrality measure the amount of resources an actor can access. Granovetter’s
(1983) notion of weak ties, in particular, describes the extent to which actors can gain access to new
information and ideas through ties that lie outside of their immediate cluster of contacts.
Risk management (weight: 11%)
Originally the theme “Risk” was written on the flow chart, but this was changed to “Risk management”
following the group discussion with the stakeholders. “Taking risks” is one of the dimensions of the
concept “Entrepreneurial Orientation” (Covin and Slevin, 1991). However, the literature is not
consistent with respect to opinions on risk attitude of entrepreneurs; both positive and negative
relations are reported. Entrepreneurs are often characterized as risk-takers, and more likely to be
involved in riskier events. However, it is hard to show that entrepreneurs differ in their risk-taking
attitude from the general public (Brockhaus, 1982). A possible explanation for an involvement in
riskier events could be that entrepreneurs evaluate business opportunities in a more
positive/optimistic way compared to others (Palich and Bagby, 1995). Jonassen and Grabowski
(1993) found the preference to risk-taking to be related to locus of control. People with internal locus
of control believe that they can control events that affect them and, as a consequence, correlate to
risk-takers. So the fact that entrepreneurs are involved in riskier events might be determined by the
risk perception of the entrepreneurs rather than their risk-taking attitude.
Opportunity recognition and realization/pro-activeness (weight: 9 %)
Entrepreneurship is an activity that involves the discovery, creation and exploitation of opportunities
aimed at the introduction of new goods and services, new ways of organizing, or new processes
(Shane and Venkataraman, 2000). An opportunity is defined as the chance to meet a market need
through a creative combination of resources to deliver superior value (Schumpeter, 1934). Miles and
Snow (1978) identify firms as “prospectors” when they continually look for opportunities and lead in
responses towards changing contexts. Covin and Slevin (1991) and Lumpkin and Dess (1996) draw
on Miles and Snow (1978) to define pro-activity as part of the concept of “Entrepreneurial Orientation”,
highlighting the need to take initiatives or introduce new practices or products ahead of competitors.
Pro-activeness may yield both advantages, as well as considerable hurdles. On the one hand,
engaging in the active and anticipatory search for new opportunities may yield first mover advantages.
First movers may be more able to capitalize on the market opportunities identified: “by exploiting
asymmetries in the marketplace, the first mover can capture unusually high profits and can get a head
start in establishing brand reputation” (Lumpkin and Dess, 1996). On the other hand, pro-active firms
may also bear the risks and costs of uncertain and experimental endeavors that imitating firms may
subsequently copy without having had to bear these risks and costs.
607
Innovation (weight: 9 %)
Innovativeness is a characteristic that is often mentioned as being the distinguishing factor between
entrepreneurs and non-entrepreneurs (Van Dijk and Thurik, 1995). Innovation is an important source
for creating competitive advantage (Grant, 1998). According to Rogers (1995) an innovation is an
idea, practice or object that is perceived as new by an individual or other unit of adoption. Innovators
are venturesome, obsessed with trying out new ideas, search for information outside the social
system, are cosmopolitan, understand complex technical knowledge, and must cope with a high
degree of uncertainty about the innovation at the time of adoption. Important is that the innovator must
be willing to accept an occasional setback when a new idea proves unsuccessful, as inevitably
happens. Control of substantial financial resources is helpful in absorbing the possible losses from an
unprofitable innovation. Although an innovator may not be respected by other members of a local
system, the innovator plays a gate-keeping role in the flow of new ideas into a system.
According to Gartner (1990) innovation is not a sufficient condition for entrepreneurship; the outcomes
of entrepreneurship must also taken into account. These are characterized by the realization of profit
and added value. Also Drucker (1985) defines entrepreneurship as “an act of innovation that involves
adding a new wealth-producing capacity to existing resources”.
Searching and learning behaviour (weight: 9 %)
Learning and the possibility to learn are at the heart of entrepreneurial processes. Learning influences
the opportunity recognition processes (Baron and Ensley, 2006) and the development of competence,
systems and cultures necessary to sustain innovative practices (Spicer and Sadler-Smith, 2006). The
importance of entrepreneurial learning is clearly reflected in the increase in studies on the topic
(Cope, 2005). According to Simons and Ruijters (2001) work-related learning involves “elaboration”
(elaborating on work competences by learning from and in practice), “expansion” (expanding on
theoretical knowledge and insight by learning explicitly from and in research) and “externalization”
(building on practical and theoretical insights, and contributing to the development of the organization
and the profession).
Craftsmanship (weight: 9 %)
Although “Craftsmanship” was not written as a separate theme on the flow chart, some stakeholders
insisted that “Craftsmanship” is still important in agriculture, and should not be omitted. Craftsmanship
is the concrete capacity to optimize production results per object of labour (per cow, per unit of land,
per fruit tree, etc.) both in the short term and in the long term (Bolhuis and Van der Ploeg, 1985/1988).
Productivity and product quality are top priority. According to de Wolf et al. (2004) the craftsman
makes efficient use of inputs, and is focused on optimal crop growth, preventing problems with pests,
weeds, diseases and water surplus or drought.
The integration of a literature review and expert consultation with a focus group of stakeholders
proves to be a suitable method to develop locally relevant and practicable indicators for sustainable
entrepreneurship/management in Flemish agriculture.
The results indicate that the participating stakeholders attach a higher importance to management
aspects than to entrepreneurial aspects and craftsmanship in order to stimulate sustainability in
Flemish agriculture. Top priority is assigned to “Vision/strategy” and “Planning/evaluation/control”,
which are mainly management themes, recognized to hold the potential to lead to business success.
“Networking/cooperation” is also an important theme. Network content and network government as
well as structure of the network relations play an important role in influencing the entrepreneurial
processes and outcomes. Although “Risk taking” is one of the dimensions of the concept
“Entrepreneurial Orientation” often referred to in literature (Covin and Slevin, 1991), the participating
stakeholders prefer to put emphasis on “Risk management” instead of “Risk taking”. It is a fact that
the literature is not consistent with respect to opinions on risk attitude of entrepreneurs; both positive
and negative relations with business performance are reported. Whether risk-taking is favourable or
not is determined by the industry in which the entrepreneur is involved. In an industry where cost
control is the key to survival, which is the case in many agricultural industries, experimentation and
risk-taking may create a counter-productive income stream because this search incurs immediate
608
costs while payoffs are uncertain and long term in nature. Taking risks under these conditions may
harm the enterprise’s performance in the short term and could ultimately threaten the survival of the
enterprise (Chatterjee et al., 2003).
According to the participating stakeholders the themes “Opportunity recognition and realization/pro-
activeness”, “Innovation” and “Searching and learning behaviour”, are less important than the above
mentioned themes. Engaging in active search for new opportunities may yield first mover advantages,
but pro-active firms may also bear the risks and costs of uncertain and experimental endeavors that
imitating firms may subsequently copy without having had to bear these risks and costs. This is also
the case for innovating firms, who must be willing to accept an occasional setback when a new idea
proves unsuccessful.
The same low weight is assigned to the theme “Craftsmanship”. However, according to some of the
participating stakeholders this theme should not be omitted.
During further research, indicators for each of the themes will be developed and applied at farm level,
allowing to increase the understanding of their influence on the economic, ecological and social
performance at farm level.
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Research Experts’ Role in Knowledge Development and
Exchange in Formal Research Cooperation
Peter Teirlinck and André Spithoven
Belgian Science Policy Office and Vrije Universiteit Brussel, Belgium
Peter.Teirlinck@belspo.be
André.Spithoven@belspo.be
Abstract: The literature on ‘distributed’ and ‘open’ innovation emphasizes the need for enterprises to exchange
external knowledge in order to perform R&D and to innovate. This paper focuses on research partnerships as a
way to do so. More particularly, a distinction is made between the development and the exchange of in house
knowledge in formal research cooperation agreements. Learning efficiency in absorbing external knowledge,
reduction of outgoing spillovers, and access to tacit knowledge and know-how are main drivers for research
cooperation and are largely related to capabilities in terms of internal R&D employment. Using micro-level data
provided by the OECD business R&D survey for Belgium, insights are offered in the way R&D personnel
qualifications and occupations are related to knowledge generation in R&D collaboration. More specifically, it is
demonstrated that both the occupational positions and the level of education of R&D managers and researchers
are positively related to knowledge development and knowledge exchange in formal R&D collaboration
agreements. Moreover, in terms of absorptive capacity it is found that patent registration and innovative outputs
are positively related to the propensity to engage in knowledge development in R&D collaboration, but not to the
engagement of knowledge exchange in R&D collaboration.
Keywords: R&D collaboration, knowledge development, knowledge exchange, R&D personnel skills, absorptive
capacity
1. Introduction
In addition to labour and capital, knowledge has become an important production factor. Knowledge
can be codified or tacit. If codified, knowledge can be traded on a specialised market, provided that it
is standardised and fairly priced. Tacit knowledge remains embodied in the minds of people, and is
part and parcel of their skills. These skills are either the result of their formal educational training or
have been acquired en route during their job.
The literature on ‘distributed’ or ‘open’ innovation emphasizes the need for enterprises to co-depend
on external knowledge in order to perform research and to innovate. One way to do so is by means of
research cooperation. Firms are, therefore, engaging in formal research collaboration agreements.
Such a research cooperation may improve the learning efficiency in absorbing external knowledge,
thereby increasing the impact on innovative performance of incoming spillovers. It may, at the same
time, also provide a mechanism to reduce outgoing spillovers, by helping to internalize them. In order
to allow co-operative agreements, a sufficient degree of knowledge appropriability is required to
reduce free-rider behaviour by outsiders. Second, research co-operation may give access to tacit
knowledge and know-how, which does not spill over and cannot easily be contracted through market
transactions. Third, research partnerships allow exploiting economies of scale and scope in both
research and development, hereby reducing innovation costs. And in the same vain, they help to
share risks.
The focus of our research is on knowledge development – in terms of the generation or creation of
new knowledge – and the exchange of internally developed knowledge within formal research
cooperation agreements. A central feature is the particular role played by the qualification and
occupation of the firm’s internal R&D personnel. To our knowledge this aspect of research has not
received much attention. This can be partly explained because the topic of absorptive capacity in
firms is usually concentrated on the monetary dimension of R&D intensity.
The novelty of the paper lies in the combination of three elements. First, it reviews the importance of
research experts or managers in R&D projects in relation to external linkages in the form of research
cooperation. Second, within research cooperation a distinction is made between the development of
knowledge and the exchange of in house developed knowledge. Third, the empirical analysis relates
the appropriability and commercialisation of knowledge in terms of patenting and product innovation
to research cooperation (and as such also indirectly to the efforts done by R&D personnel).
611
Section 2 provides a brief literature overview on research cooperation and the importance of the
qualification and occupation of internal R&D personnel and develops the research questions. The
database and descriptive information on research cooperation and R&D personnel are presented in
Section 3. Section 4 provides an empirical analysis on the relationship between knowledge exchange
and development in research cooperation and R&D personnel qualification and occupation and
Section 5 presents the conclusions of the paper.
2. Literature review and hypothesis
Because of the public good nature of new knowledge and the related problem of appropriatiblity (cf.
Cohen and Levinthal 1989) firms’ incentives to invest in R&D tend to be distorted. This causes firms to
‘under invest’ in R&D because they can not entirely internalize the social returns of their private efforts
in the presence of R&D spillovers. In addition to government intervention (mainly by means of tax
incentives and direct subsidies) to stimulate engagement in R&D, ex ante R&D cooperation is a
means to internalize R&D spillovers and to reduce wasteful duplication of R&D efforts and to distribute
risk and fixed costs among participants (cf. Jacquemin 1988).
Apart from the element of market failure, the increasing complexity, budgets and risks related to
innovation are important drivers for companies to use external knowledge (e.g. through research
cooperation) to complement their in-house innovative activities. This influences the innovation
strategies of firms and innovation becomes increasingly ‘distributed’ over various partners (von Hippel
1988) and ‘open’ in the sense that firms adapt their business model in favour of R&D activities and
technical change that take place outside the firm (Chesbrough 2003), and has important implications
in terms of dealing with external knowledge relations for innovation management (Chesbrough et al.
2006). From a distributed or open innovation perspective not only knowledge development within a
research cooperation contributes to the internal R&D efforts, but also the exchange (within a
cooperation agreement) of knowledge developed on the base of internal R&D are important and
should be seen in relation to each other (see also e.g. Cohen and Levinthal 1990; Arora and
Gambardella 1994; Veugelers and Cassiman 1999; Chiesa 2001; Coombs et al. 2003)).
As such, knowledge development and exchange in research cooperation form part of the active and
effective management of valuable knowledge which is considered a core competency for
strengthening the competitive advantage of an organisation (see e.g. Wong and Aspinwall 2004).
Evolutionary economics stress the impact of changing firm boundaries on the dynamic capabilities of
the firm, and hence on its ability to integrate, build and reconfigure internal and external competencies
to address changing environments (Teece et al. 1997). Cassiman and Veugelers (2006) found that
firms combining internal and external R&D strategies for innovation show superior innovative
performance. It also turns out that large, resourceful firms have a higher propensity to combine both
strategies (Veugelers and Cassiman 1999).
It is widely accepted that access to external technology, in combination with the presence of internal
R&D necessary to absorb external knowledge (Cohen and Levinthal 1990), allows firms to improve
the performance of internal R&D efforts (Cassiman and Veugelers 2006). In addition, internal R&D
enables firms to translate external knowledge into innovation opportunities and outsourced R&D
facilitates spillovers from outside the network to the firm’s specific knowledge base (Audretsch et al.
1996).The most important component reflecting internal R&D is internal R&D employment. Whereas
IT solutions can efficiently facilitate codified knowledge access and utilisation, tacit knowledge sharing
and transformation is decided by people-to-people interactions (Gold et al. 2001). Despite its
importance, most of the economic literature focuses on R&D expenditures and disregards R&D
employment characteristics when dealing with external knowledge relations within formal research
cooperation agreements.
From the perspective of organisational absorptive capacity (Jacobides and Billinger 2006) and the
resource-based view emphasizing the need to innovate on the development and accumulation of
specialised internal capabilities, a first set of hypotheses can be formulated as follows:
Hypothesis 1a: The higher the share of a firm’s internal R&D experts/managers the higher the
propensity to develop knowledge within a cooperation agreement.
612
Hypothesis 1b: The higher the share of a firm’s internal R&D experts/managers the higher the
propensity to exchange knowledge based on internal R&D activities within a cooperation
agreement.
Based on the insights from literature we expect a positive relationship between research employment
and the development and exchange of in house developed knowledge within research cooperation
agreements, since firms with high levels of absorptive capacity are found to be more open to external
R&D because the expert staff enables them to access wider networks (Rosenberg 1990). At the same
time, knowledge intensive small firms are found to be less likely involved in this kind of activity
because they often rely on the exploitation of new ideas. Given the danger they face from leakage of
their ideas, they limit the nature and scope of their external interaction (Laursen and Salter 2006).
Also the development and especially the exchange of in house developed knowledge in research
cooperation, can not be seen totally independent from the issues of intellectual property and
knowledge commercialisation. In this respect, the knowledge cycle is found to present an evolution
from knowledge creation and collection, knowledge sharing and distribution to final knowledge
application and transformation (Wang and Ariguzo 2004). Further, the increasing challenges and
uncertainties in the business environment drive organisations to pay more attention to the productivity
of knowledge assets. Good knowledge management can accelerate the information flow and
enhances integration of knowledge, innovation and creativity in the organisation, or, in other words,
enhances knowledge exploitation. To achieve this ideal, a well-developed knowledge management
system should not only take advantage of the IT solutions but also of cultural change, rewards and an
execution team (Malhotra 2003), and pays considerable attention to knowledge exchange by means
of ex-post R&D cooperation through patents and licensing (cf. Katz and Ordover 1990).
These views are shared by an extensive literature on firm strategies and their relation to technology
and/or innovation strategies that has developed over the past decade. The literature shows that
internal competences, sourcing technology, leadership or follower strategies, managing assets
complementary to innovation, and protection of intellectual property turn out to be important.
Increasingly managing external relationships with universities, start-up companies etc. are part of the
‘new industrial ecology’ (Coombs and Georghiou 2002).
As pointed out, little empirical evidence exists on the relation between R&D employment and
knowledge development and exchange in research cooperation. However, since this topic is in line
with studies investigating the impact of technological change on the composition of employment we
can rely on evidence in this broader context. Kahn (2000) reveals that technological standardisation
reduces the importance of firm-specific knowledge, as standardisation reduces the specificity of
internal skills and induces convergence of firm-specific skills to general skills over time. Pianta (2004)
studied - at macro level - the impact of technological innovation on the quality of jobs by looking at the
relative importance of high-skilled and low-skilled jobs and found the diffusion of technologies to have
a strong skill bias effect in favour of high-skilled jobs. Tarabusi (1997) also found a trend towards skill
upgrading, but revealed that the effects on qualifications depend on the importance of the nature of
technology and the context in which technological changes are embedded. The latter finding seems
supportive of the management literature highlighting the importance of the organisational context for
changes in the skill composition of employment and leads to our second set of research hypotheses:
Hypothesis 2a: The higher the share of highly skilled internal R&D experts/managers, the
higher the propensity to develop knowledge within a cooperation agreement.
Hypothesis R2b: The higher the share of highly skilled internal R&D experts/managers, the
higher the propensity to exchange knowledge based on internal R&D activities within a
cooperation agreement.
Again, a priori, we expect a positive relationship between educational levels and knowledge
development and exchange in research cooperation since educational levels are assumed to facilitate
the detection and management of relevant external knowledge flows (OECD 2008). Especially
doctorate holders, possessing knowledge bordering at the frontier of science and technology, are
supposed to be receptive to upstream research performed at universities or public research centres
providing basic (and applied) research and the management of it (Sauermann and Cohen 2008).
613
3. Data description
The analysis is based on an inventory of private enterprises that perform R&D on a regular basis in
Belgium. The data are provided by the OECD biannual business R&D survey organised in 2008 and
contains detailed information on R&D personnel for the year 2007 and information on research
cooperation agreements for the period 2006-2007. The target population of R&D active firms in
Belgium in the period 2006-2007 consists of 1947 private enterprises. Due to both unit and item non-
response in the R&D survey only 551 firms revealed detailed information on R&D (personnel data,
cooperation agreements, and protection mechanisms).
The variables of interest are knowledge development and exchange in research cooperation
agreements and the presence and qualification of research experts/managers. Based on the Frascati
Manual (OECD 2002), total R&D personnel includes all persons employed directly on R&D, as well as
those providing direct services such as R&D managers, administrators and clerical staff. Researchers
(experts and managers) are professionals engaged in the conception or creation of new knowledge,
products, processes, methods and systems, as well as in the management of these projects.
Technicians and equivalent staff are persons whose main tasks require technical knowledge and
experience in one or more fields of engineering, physical and life sciences, or social sciences and
humanities. They participate in R&D by performing scientific and technical tasks involving the
application of concepts and operational methods, normally under the supervision of researchers.
Equivalent staff performs the corresponding R&D tasks under the supervision of researchers in social
sciences and humanities. Other supporting staff includes skilled and unskilled craftsmen, secretarial
and clerical staff participating in R&D projects or directly associated with such projects. For the level
of qualification (education) a distinction can be made between: PhD holders; holders of master
diploma; holders of a bachelor diploma; and holders of a diploma with other qualifications (OECD
2002).
Table 1 describes the dataset by means of the variables considered in the analysis, their mean values
and standard deviation.
Table 1: Explanatory variables for knowledge development and exchange in research cooperation
and the way they are measured (N=551)
Variable acronym Variable description Mean St.
Dev.
Dependent variables
COOP_DEV = 1 if the firm developed knowledge used 0.42 0.49
for internal R&D in the framework of a research
COOP_DEV cooperation in the period 2006-2007; 0 otherwise
COOP_EXCH = 1 if the firm exchanged knowledge 0.39 0.49
based on internal R&D in the framework of a research
COOP_EXCH cooperation in the period 2006-2007; 0 otherwise
Independent variables – research

experts/managers
Share of R&D experts/managers in total firm 0.17 0.25
R&D_MAN_EXP_INT employment
Share of R&D experts/managers in firm R&D 0.64 0.30
R&D_MAN_EXP_RDSHARE employment
R&D_MAN_EXP_PhDSHARE Share of PhD holders in R&D experts/managers 0.20 0.33
R&D_MAN_EXP_MASTERSHARE Share of masters in R&D experts/managers 0.62 0.39

R&D_MAN_EXP_BACHSHARE Share of bachelors in R&D experts/managers 0.13 0.27
R&D_MAN_EXP_OTHERSHARE Share of other diplomas in R&D experts/managers 0.05 0.18
Independent variables – other

R&D characteristics
R&D_PERS Total R&D personnel in full time equivalents 20.3 64.0
R&D_LAB R&D_LAB = 1 if the firm has a separate research lab 0.66 0.48
Share of research expenditures in internal R&D 0.55 0.35
RESEARCH expenditures
614
Variable acronym Variable description Mean St.

Dev.
Share of R&D employment (in full time equivalents) in 0.25 0.30
R&D_INT average firm employment
Share of R&D outsourcing budget in total (internal and 0.11 0.18
R&D_OUT outsourced) firm R&D budgets
Independent variables –
knowledge protection
INNOPROD = 1 if the firm had product innovations in 0.85 0.36
INNOPROD the period 2006-2007; 0 otherwise
PATACQ = 1 if the firm purchased patents, licences or 0.16 0.36
other intellectual property rights in the period 2006-
PATACQ 2007; 0 otherwise
PATREG = 1 if the firm launched patent registration 0.28 0.45
PATREG demands in the period 2006-2007; 0 otherwise
PATEARN = 1 if the firm sold patents, licences or other 0.14 0.35
intellectual property rights in the period 2006-2007; 0
PATEARN otherwise
Control variables
Industry dummy for ‘continuous process’ (a variety of
production activities such as metallurgical process
industries – metals and building materials – and 0.21 0.41
chemical process industries – textiles and paper, food
SECTOR_CP and tobacco); 0 otherwise
Industry dummy for ‘complex systems’ (i.e. combination 0.02 0.15

of mechanical, electrical and transportation
technologies. It includes motor vehicles and other
SECTOR_CS transport equipment);
0.08 0.27
Industry dummy for ‘fundamental process’ (i.e.
associated with chemistry-based technologies and is
SECTOR_FP mainly oriented towards process innovation);
0.21 0.41
Industry dummy for ‘product engineering’ (i.e. use
mechanical engineering technologies, within areas
SECTOR_PE such as machinery, equipment and instruments);
0.11 0.32
Industry dummy for ‘science based’ (i.e.
pharmaceuticals, computers and other information
SECTOR_SB processing equipment, electronics, and 0.32 0.47
telecommunication equipment);
Industry dummy for ‘knowledge intensive services’ (i.e.

SECTOR_KI which includes telecommunications, computer services 0.05 0.20
and technical business services);
Industry dummy for ‘other services’ (i.e. activities in

SECTOR_OS other services than KI);
Average firm employment expressed in full time 219.0 585.9

SIZE equivalents
GROUP Binary variable = 1 if the firm belongs to a group 0.57 0.50
Notes: Sectors are derived from the Marsili-Verspagen (2002) classification. Reference year 2007
unless otherwise mentioned.
Five groups of variables are considered: dependent variables (related to knowledge diffusion in
cooperation); independent variables related to research experts/managers; other R&D related
variables; knowledge protection variables; and general firm characteristics as control variables.
615
For the first group, the dependent variables related to the development and exchange of knowledge in
research cooperation, it can be noted that within research cooperation, over two-fifth of the R&D
active firms develop knowledge useful for internal R&D and close to two-fifth of the R&D active firms
exchange knowledge based on internal R&D activities.
Concerning the independent variables of main interest, i.e. those related to the presence and
qualification of research experts/managers, it turns out that close to two-third of the R&D personnel
are experts or managers of which one-fifth are PhD holders (one-fifth). In terms of share in the total
firm employment, this category of R&D personnel represents 17%.
For the broader R&D characteristics, on average, one-fourth of firm employment is engaged in R&D
activities representing over 20 full time R&D personnel equivalents and close to two-thirds of the R&D
active firms have a separate R&D lab.
Regarding knowledge production, 85% of the firms are engaged in product innovation and one sixth
of the firms traded patents, licences or other intellectual property rights in the period 2006-2007.
Almost one third of the R&D active firms in the sample launched a patent registration demand in the
period under consideration.
In terms of the control variables, an R&D active firm has on average 219 employees, in one third of
the cases belongs to the knowledge intensive services, in over half of the cases is part of a group,
devotes 55% of its R&D budgets to research, and has a budget for R&D outsourcing that represents
over 10% of the total R&D budget (i.e. internal and outsourced R&D budgets).
As can be seen from the standard deviations reported in Table 1, large differences exist between
firms. Therefore it can be misleading to put too much emphasis on the profile of the ‘average’ R&D
active firm. Moreover, the analysis of the R&D active population is faced with a large number of firms
for which for one or more variables information is missing. Therefore, in Table 2 we briefly address the
representativeness of the selected sample (limited to the variables for which we have information for
the entire population of R&D active firms). From the Table it turns out that the firms in the sample
have a higher internal R&D employment and R&D employment intensity. General firm characteristics
in terms of size and sector of activity and R&D outsourcing intensity are no biased in the selected
sample.
Table 2: Comparison of firms included and excluded in the estimation – mean values and significance
of the difference between means
Firms with full data R&D active firms with missing data
(N = 551) (N=1396)
SIZE 219.0 184.8
R&D_PERS 20.3* 13.1
R&D_INT 0.25* 0.20
R&D_OUT 0.11 0.11
SECTOR_CP° 0.21 0.23

SECTOR_CS° 0.02 0.02
SECTOR_FP° 0.08 0.07
SECTOR_PE° 0.21 0.23
SECTOR_SB° 0.11 0.08
SECTOR_KI° 0.32 0.29
SECTOR_OS
° 0.05 0.08
Notes: Signiciant difference between group means (at 5% level); A chi-square test including all
sectors at the same time revealed no significant differences (at 5% level) in terms of sector
distribution between firms in the selected sample and those excluded from the analysis.
4. Empirics
A high (0.65) significantly positively correlation is found between knowledge development and
knowledge exchange in research cooperation. Therefore, we make use of a bivariate probit model to
investigate the relation between the relative importance of the presence and qualifications of research
616
experts/managers and firm decision’s (i) to develop technological knowledge within a cooperation
agreement which influences the firm’s internal R&D activities or (ii) to exchange knowledge that has
been developed in internal R&D activities in formal research cooperation. The model can be
expressed as follows:
COOP_DEV = X.ß1 + R&D_MAN_EXP_INT.ß2 + R&D_MAN_EXP_RDSHARE.ß3 +

R&D_MAN_EXP_QUAL. ß4 + ε1
COOP_EXCH = X.ß5 + R&D_MAN_EXP_INT.ß6 + R&D_MAN_EXP_RDSHARE.ß7 +

R&D_MAN_EXP_QUAL. ß8 + ε2
Where: X denotes the control variables (general firm characteristics), the research related set of
explanatory variables and the knowledge protection variables as presented in Table 1. ‘QUAL’ refers
to the levels of qualification.
In order to consider the robustness of the model we first estimate a (‘base’) model including the
overall R&D personnel intensity disregarding the presence and qualification of the research
experts/managers. The latter variables are included in the ‘detailed model’. Following Veugelers
(1997), along with the research expert/managers related variables, we include the variable ‘R&D-LAB’
which provides information on the way R&D activities are organised within the firm (in a formal lab
versus more informally internally distributed).
Table 3: Bivariate probit model relating the presence and qualification of research experts/ managers
to knowledge exchange and development in research cooperation
Base Model Full Model
Dependent variable COOP_DEV COOP_EXCH COOP_ DEV COOP_EXC
H
Constant -1.10 (-3.11)*** -1.28 (-3.58)*** -1.56 (- -1.63(-
3.08))*** 2.85)***
SECTOR_CP -.69 (-2.39)* -.47 (-1.64) -.65 (-2.19)* -.44 (-1.49)

SECTOR_CS .04 (.08) .04 (.08) .07 (.15) .13 (.27)
SECTOR_FP -.04 (-.12) .13 (.41) -.12 (-.36) .11 (.34)
SECTOR_PE -.47 (-1.67)° -.31 (-1.08) -.45 (-1.55) -.24 (-.83)
SECTOR_SB -.38 (-1.24) .12 (.39) -.39 (-1.26) .15 (.49)
SECTOR_KI -.38 (-1.33) -.08 (-.29) -.39 (-1.33) .03 (.10)
lnSIZE .18 (3.94)*** .14 (3.11)*** .19 (3.88)*** .10 (2.20)*
GROUP -.18 (-1.28) .02 (.12) -.19 (-1.38) .01 (.05)
INNOPROD .32 (1.90)° .16 (.97) .36 (2.05)* .11 (.65)

PATACQ .38 (2.45)* .21 (1.28) .38 (2.39)* .18 (1.13)
PATREG .32 (2.35)* .19 (1.38) .26 (1.92)° .13 (.96)
PATEARN -.04 (-.23) .29 (1.75)° -.08 (-.46) .24 (1.47)
RESEARCH -.07 (-.44) .07 (.45) -.09 (-.54) .28 (.17)

R&D_OUT .95 (2.87)** .53 (1.74)° .94 (2.86)** .50 (1.59)
R&D_INT .93 (3.49)*** 1.07 (4.15)***
R&D_MAN_EXP_INT 1.25 (3.75)*** 1.15 (3.55)***

R&D_MAN_EXP_RDSHARE -.16 (-.73) -.43 (-1.91)°
R&D_MAN_EXP_PhDSHARE .73 (1.91)° .78 (1.75)°
R&D_MAN_EXP_MASTERSHARE .52 (1.49) .64 (1.51)
R&D_MAN_EXP_BACHSHARE -.09 (-.23) .51 (1.06)
R&D_LAB .12 (.94) .37 (2.85)**
RHO 0.85 *** 0.85 ***
Wald chi² test 125.32 *** 141.84 ***

No. observations 551 551
Notes: Reference categories: SECTOR_OS (other services). The z-values appear between brackets
(two-tailed tests); and the symbols °, *, **, *** denote the significance at 10%, 5%, 1% and 0.1% level.
617
In terms of general firm characteristics, in the base model, firms active in ‘continuous processes’ are
less likely to be involved in knowledge development in research cooperation. To a lesser extent (10%
significance level) this is also the case for firms classified in product engineering. Concerning firm
size, there is a highly significant positive both with the development and exchange in knowledge in
research cooperation (in line with the findings by Veugelers and Cassiman 1999). Of course, R&D
cooperation is not a goal in itself but rather one measure among many for attaining innovation
objectives, e.g. by establishing relationships with third parties to help enter a company in a new area
of technology. From this perspective, it is not surprising to find a positive relation between product
innovation, patent acquisition and registration for knowledge development in research cooperation. In
terms of knowledge exchange a positive relation can be identified with patent earnings. As for
research characteristics, R&D outsourcing is positively related to knowledge development and to a
lesser extent also to knowledge exchange. This is supported by the fact that research cooperation is
only one means to improve innovation in a distributed or open innovation model. No differences exist
between research versus development activities. Finally, in the base model, R&D intensity (R&D
personnel as a share of total firm employment) is highly significantly related in a positive way to both
knowledge development and knowledge exchange in research cooperation.
These findings and robustness for general and broader R&D and knowledge protection related
variables form a solid background for the interpretation of the variables related to research
expert/managers. Based on the outcomes in Table 3 and related to the research questions, it turns
out that the share of research managers/experts in total firm employment positively influences the
propensity to develop and to exchange knowledge in research cooperation. This supports the
resource-based and the organisational absorptive capacity views emphasizing the need for a
sufficient internal R&D capacity to assimilate and commercialise external knowledge. However, when
considering the share of research experts/managers in the total R&D personnel, there is no significant
association with the development of knowledge in research cooperation and the relation with
knowledge exchange in research cooperation becomes significantly negative. In other words, the
higher the share of research managers/experts in the R&D personnel, the lower the propensity of
knowledge exchange based on research cooperation. This could be related to the highly significant
positive relation between knowledge exchange in cooperation and a more formal organisation of R&D
activities in R&D laboratories.
When we look at the requirements in terms of formal qualification of research experts/managers, it

turns out that the involvement of PhD holders in research increases the propensity of being engaged
both in knowledge exchange and development in research cooperation (although only at 10%
significance level).
5. Conclusions
This paper started from the observation that the theoretical and empirical literature on external
knowledge relations mainly focuses on research expenditures. However, knowledge development and
exchange is generally accepted to be highly related to human resources. To address part of this gap,
the empirical analysis here presented investigates the relation between the presence and relative
importance of research experts/managers and their formal qualifications and the propensity to engage
in knowledge development and exchange in research cooperation.
The analysis is based on the OECD bi-annual business R&D survey for Belgium for the years 2006-
2007 and includes firms active in R&D on a (quasi-) permanent basis. The analysis proved somewhat
biased towards firms with a higher number of R&D personnel and with a higher share of R&D
personnel in the overall firm employment.
Two research questions have been put forward. The first one relates the presence and relative
importance of research experts/managers to knowledge development and exchange in research
cooperation. In line with the resource-based views and the literature on organisational absorptive
capacity, the share of research managers/experts in total firm employment influences the propensity
to exchange and to develop knowledge in research cooperation positively. However, when
considering the share of research experts/managers in the total R&D personnel, there is no significant
association with the development of knowledge in research cooperation and the relation with the
exchange of knowledge in research cooperation becomes significantly negative. In other words, the
higher the share of research managers/experts in the R&D personnel, the lower the propensity to
engage in exchange of knowledge based on research cooperation. This could be related to larger
618
opportunities for commercialisation of knowledge developed within a cooperation agreement. Also, it

seems to be supported by the highly significant positive relation between knowledge exchange in
cooperation and the formal organisation of R&D activities in an R&D laboratory.
The second research question investigated the relation between the formal qualification level of
research experts/managers and knowledge exchange and development in research cooperation. The
involvement of PhD holders in research turned out to increase the propensity of being engaged both
in knowledge development and exchange in research cooperation agreements. This also could be
related to a higher probability of commercialising research results. However, also differences in
networking between PhD holders and other education levels for research experts/managers could
help to explain this finding. The latter remains unclear and further investigation is needed.
Ways for further refinement of the analysis are a distinction in cooperation by type of partner.
Moreover, it would be interesting to look at the effects of research cooperation as it is not an end in
itself but rather one measure among many for attaining innovation objectives. For this a longitudinal
analysis would be more appropriate. Also a further distinction could be made between research
experts and research managers.
Finally, from a policy perspective the results show that knowledge development and exchange in
research cooperation can be stimulated by public authorities by influencing the qualifications and
occupations of R&D personnel. From this perspective it will be interesting to investigate the effects of
the recently introduced tax credit measure in Belgium for R&D personnel holding a master or PhD
diploma in a scientific domain. By restricting tax credits to high-qualified R&D workers there could be
a change in the composition of the R&D personnel and indirectly and in the longer run in the
propensity to knowledge development and exchange in research cooperation.
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Social Networks and Social Capital Formation by
Entrepreneurs: A Multiple Case Study in the State o
Paraná, Brazil
Rivanda Meira Teixeira1, Norma Pimenta Cirilo Ducci2
1
Federal University of Sergipe, Brazil
2
Federal University of Paraná, Brazil
rivandateixeira@terra.com.br
norma@onda.com.br
Abstract: This study has as an objective to understand how social networks are used by entrepreneurs in the
construction of their social capital during the stages of business foundation and growth. Specifically it analyzes
what types of social networks are developed by entrepreneurs and what resources are accessed through these
relationships that contribute to business creation and development. Attention is paid not only to the tangible
resources, but also to resources considered as social, physical and financial. The main contribution of this study
is to assist entrepreneurs understand the practical contributions of social networks for developing social capital.
A qualitative study of multiples cases was carried out in three companies, each one belonging to a different
industry sector, situated in the northern region of the state of Paraná in Brazil. Data was collected through semi-
structured interviews with entrepreneurs as well as through observation and document analysis. Analytical
categories, such as types of social networks, were delineated as formal and informal. The formal type, for
example, includes professionals like accountants, bank managers, lawyers, and consultants. The informal type of
network consists of family, friends, colleagues and employees. Another analytical category was the type of
resources, which was divided into other sub-categories such as social, physical and financial resources. Data
was analyzed by using content analysis and the three cases were described individually and comparatively. The
results of the study suggest that in the creation and development phases, entrepreneurs’ social networks granted
access to different resources that meaningfully influenced their trajectory and the results achieved. It was
observed that the relationships evolved and became more involved when the entrepreneurs had the opportunity
to show that that they could be reliable. Furthermore, considering the idea that social capital is beneficial and
can be derived from social networks, it is logical to state that the different resources accessed by the
entrepreneurs of this study contributed to the formation of their social capital.
Keywords: social networks; entrepreneurial social networks; social capital
1. Introduction
New businesses are created when entrepreneurs are motivated by access to resources and discover
new business opportunities. Therefore, from the outset, the social network stands out as a very
important factor for owners of businesses. However, developing relationships is not only important for
founding a company or for success; relationships also have an impact on the ongoing development of
a company.
If the social network of entrepreneurs helps to achieve goals, i.e., when social networks that are
constructed through formal and informal contacts help entrepreneurs achieve their objectives, these
networks are their social capital (Burt, 1992; Putnam, 1995). Lin (2001) claims that the notion of
social capital as an investment in social relationship expects a return; in this way, social capital is
seen as a benefit that might be derived from social networks. The author also views social capital as a
set of tangible or virtual resources that actors gain through the social structure, facilitating the
achievement of their goals.
Birley (1985) points out that the entrepreneur depends not only on physical and financial resources to
undertake a new business or to make it grow, but also depends on advice, opinions, trust and
business contacts. According to this author, the social capital that exists in relationships between
people, i.e., in the entrepreneurial social network, can be viewed as capital because it helps to make
inroads by providing and multiplying the number of possibilities that result from the knowledge or
information of people in the network, minimizing risks and maximizing opportunities.
The main research question of this study how social networks are used by entrepreneurs in the
formation of social capital and development of new businesses in towns in the north of Paraná State,
Brazil?. Other two questions are also placed: What types of social networks are used by
entrepreneurs in the formation of social capital? How these social networks can be influential when it
621
Rivanda Meira Teixeira and Norma Pimenta Cirilo Ducci
comes to obtaining financial, physical and social resources in the creation and development of these
businesses?
The intention of this study is to make a theoretical contribution through the use of social network and
social capital concepts in the context of companies located in a particular Brazilian region. The study
is also intended to help entrepreneurs understand the development of their social network in the
formation of social capital, which may be helpful in achieving their goals or success.
2. Entrepreneurial social networks
The popular image of the entrepreneur as a solitary figure who overcomes obstacles and steers clear
of danger does not in fact exist. In the economic domain, the formation of chains of friendship and
mutual trust between entrepreneurs and individuals is commonplace (Ostgaard; Birley, 1994) during
the development of economic activities in a determined sector, region or country. During
conversations and informal contacts, entrepreneurs exchange information about business
opportunities, request opinions about market trends and give their opinions about the social and
economic reality of their country or region. In some business decisions, the influence of peers or the
social network is clearly visible.
The literature on entrepreneurial networks shows that they are positively related to organizational
performance or, to be more specific, the beginning of a new business, its survival and future growth
are dependent on these networks. As is the case with entrepreneurism, defining entrepreneurial
networks is no easy task. Entrepreneurial networks are defined as relationships and contacts between
entrepreneurs and other people. These contacts provide means of recognizing opportunities and
obtaining resources, in addition to facilitating the use of other resources that are potential sources of
competitive advantage (Birley, 1985).
The starting point for the study of entrepreneurism through social networks is the relationship or
transaction between two people (Aldrich; Reese; Dubini, 1989). Social network theory is related to
entrepreneurism as an entrepreneurial process, through which entrepreneurs seek opportunities
without taking into account the resources that they currently control, involving the grouping of scarce
resources from their relationship networks (Birley; Cromie, 1988).
According to Birley and Cromie (1988), the social network theory is based on two basic premises.
First of all, the entrepreneurial process involves the grouping of scarce resources in the environment;
secondly, the resources are usually obtained through the personal network of the entrepreneurs.
Thus, new businesses are created as a result of motivated entrepreneurs, who find niches of
opportunity and gain access to resources. Entrepreneurs often require information, capital, skill and
work to begin new business activities. They hold many of these resources themselves, but normally
complement their resources, whether physical or otherwise, by getting in touch with other individuals,
seeking help from friends, family, acquaintances and other people outside their social circle (Birley,
1985; Aldrich; Zimmer, 1986).
The purpose of these contacts is not only to obtain economic resources for starting a business but
also to seek support for the idea of the business, advice and information and social and emotional
support in order to constitute the business (Johannisson, 1998; Barnir; Smith, 2002). Johannisson
(1990, p. 3) points out that: “Some of these resources may provide direct solutions to operational
problems, while others increase the legitimacy of the company in the market and indirectly provide
access to the resources required in the drive for economic goals”; thus, the social network of the
entrepreneur is strategically the most significant resource of the company.
As Greve and Salaff (2003) state the access the resources depends on different phases of an
enterprise. These authors had carried through a study and had considered in three phases for starting
a new business: opportunity discovery, identification of motivation; planning and the establishment of
the enterprise. The process to mobilize relationships to have access resources is dynamic and
therefore, it tends to vary throughout the development of business (Lichenstein; Brush, 2001, apud
Vasconcelos et al., 2006). Thus, also considering entrepreneurship as an evolutionary process this
study will taken into account two phases as the stages defined in Vasconcelos et al. (2006): the
creation and the phase of development of new businesses.
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Generally speaking it is suggested that in the creation and the development of new businesses, the
entrepreneurs tend to mobilize its social networks to have access to resources and to transform
business-oriented vision and plans into reality (Birley, 1985; Aldrich; Zimmer, 1986; Johannisson,
1998, 2000). In a way entrepreneurs are relatively dependents of its personal relations to get scarce
resources (Aldrich; Zimmer, 1986; Hansen, 1995) that many times are not acquired easily.
3. Social capital
To Putnam (1995, p. 67) characteristics of a social organization such as trust, norms and networks
that facilitate coordination and cooperation for mutual benefit are their social capital. However, in
more recent works, Putnam (2000) referred to trust as the result of social capital defined as social
networks and associated reciprocal norms. He distinguishes this as a “good and simple” narrow
definition in contrast with a broader definition that includes aspects of culture, beliefs and institutions.
It should be noted that theoreticians have disagreed about the definition and interpretation of the term
social capital. Putnam and Bourdieu have two different concepts of social capital. According to
Putnam (2000), capital is a set of resources possessed by the group, while in the opinion of Bourdieu
(1986) it is a consequence of social relations that is perceived by those involved in abstracto. Thus, it
can be transformed by them into another form of capital. Both Bourdieu (1986) and Putnam (2000)
use the group as an analysis level in their arguments that groups collectively increase the chances of
their members through social capital. Lin (2001), in turn, uses the individual as an analysis unit to
argue that social capital is an instrument for business and that it works like investments in human
capital.
Burt (1992) elaborates on the considerations of Granovetter (1973) concerning “weak links” and
seeks to conceive of an economic competition model based on the social relationship structure and
the concept of “structural holes”, in which social capital is a result of a network in which people can
make connections between unconnected segments. These connections are more similar to a social
capital bridge and facilitate easy and rapid access to different information and knowledge segments
between the technical and social frontiers.
The relationships between social actors are among the studies on social capital, and social network
approaches are used to operationalize empirical studies of social capital (Borgatti; Foster, 2003). The
main idea of the concept of social capital is that the social network (e.g., families, friends and
acquaintances) is of value (Putnam, 2000). Social capital is produced by the social relationship
structure and can be mobilized to facilitate actions (Adler; Kwon, 2002), with its adaptation being an
important characteristic, so much so that one type of social network can be used frequently for
different purposes.
4. Methodology
Because of its proposal, this study could be classified as qualitative because it will take into account a
dynamic relationship between the real world and the subject, without requiring statistical methods and
techniques. The research strategy adopted for this study is the case study because it enables
understanding of the phenomenon as a whole and in depth. When the study involves two or more
people, two or more organizations, it may be considered a multiple case study. According to
Eisenhardt (1991, p. 620), different cases often emphasize the complementary aspects of the
phenomenon. By examining individual patterns, the researcher is able to see a more complete
theoretical picture. For Yin (2001), replication logic is the predominant logic of multiple case studies,
like that used in multiple experiments.
For this study, a semi-structured interview script was used, giving the interviewee more leeway and
flexibility in his opinions. Interviews were conducted with entrepreneurs who were partners of selected
companies, the interviews lasting two hours on average. The interviews were held in July and August,
2008. Although the interviewees constitutte an essential source of information for the case study, Yin
(2001) recommends corroborating the data obtained with other sources of information. Therefore,
document analysis was also used as a source of evidence. The physical installations of the
companies were observed, along with their staff and operational functions. Some of the documents
used in this study were administrative documents, reports and company files, in addition to
information about these institutions that is available in published sources such as newspapers and
online reports.
623
The two towns that were chosen are in the north of Paraná State, Brazil: Cornélio Procópio, with
48,427 residents and Cambará, 45 km from Cornélio Procópio, with a population of 24,902. The first
choice was Cornélio Procópio, but since one of the companies chosen has its head office in
Cambará, the latter town was also included.
The first case is that of Escola Técnica de Enfermagem (Technical Nursing School), a small company
founded in Cornélio Procópio in 1999, with eighteen employees, including the entrepreneur, who has
a degree in nursing. The second is a software development company pre-incubated at the
technological hotel of the UTFPR (Federal Technical University of Paraná State) on the Cornélio
Procópio campus, that was established by undergraduate students of the Computer Systems
Technology course in 2004 and currently employs thirty people. The third case is a travel agency,
established in 2001 by husband and wife team, Reinaldo and Leomara, with five employees and
located in Cambará, with a branch in Cornélio Procópio.
In this study, the constitutive definition of social capital is based on the assumption that the social
network (e.g., family, friends and acquaintances) is of value (Putnam, 2000). Social Capital is
therefore generated by the tissue of social relationships and can be mobilized to facilitate actions
(Adler; Kwon, 2002). It is in this sense that in this study social capital is understood as content
included in interactions that constitute social connections or links, which can be accumulated,
strengthening a determined contact. Operationally, in this study social capital should be understood
from how social networks are used to create value that helps to achieve the goals of entrepreneurs.
Entrepreneurial networks are defined as relationships and contacts between entrepreneurs and other
people. These contacts supply the means to recognize opportunities, obtain resources and also
facilitate the use of other resources that are potential sources of competitive advantage (Barnir;
Smith, 2002; Birley, 1985; Li, 2004).
Analytical categories, such as types of social networks, were delineated as formal and informal. The
formal type, for example, includes professionals such as accountants, bank managers, lawyers and
consultants. The informal type of network consists of family, friends, colleagues and employees.
Another analytical category was the type of resources, which were divided into other sub-categories
such as social, physical and financial resources.
5. Comparative case analysis
The cases are analyzed comparatively during the creation and development stages of the business
trying to answer the research questions: What types of social networks are used by entrepreneurs in
the formation of social capital? How these social networks can be influential when it comes to
obtaining financial, physical and social resources in the creation and development of the businesses?
5.1 Types of social networks

The social networks were analyzed in the stages of creation and development of the business were
delineated as informal and formal.
5.1.1 Informal networks

The relevance of contacts outside the family was seen in the case of the entrepreneur at the Florence
School, when she told how her friendship with one of the doctors she worked with strengthened and
influenced her learning and led her to identify a new business opportunity. In the case of ForLogic,
when the business was being created, Jeison and Diogo worked with two friends, students at the
UTFPR, which led to the creation of the software company partnership. In the development stage,
they established contacts with other companies and professional colleagues at APL Tecnológica.
Meanwhile, in the case of the Laram Travel Agency, what stood out were the contacts made by the
entrepreneurs with former colleagues from the bank and with employees of tour operators, who
provided them with essential information to help them understand the sector and the business. Some
of these contacts became very frequent and became strong links.
In the case of ForLogic, the initial idea for the business to be created by the two partners, Jeison and
Diogo, was somewhat vague, and when they met their other two classmates during a trip offered by
the Technological Hotel, they exchanged ideas, knowledge and experiences, forming a partnership
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and determining which direction the business should take. It is important to point out that in the
creation phase, the roles of the manager of the incubator, the ombudsman of the university and the
accountant were of utmost importance because they always offered the entrepreneurs other
resources such as advice and moral, motivational and emotional support that was necessary in the
early days of the business for its development. This support was also extended into the business
development stage, when these contacts proved to be instrumental once again. The coordinator is
seen today as a friend and adviser, who always supported the business in times of difficulty and
despondency. The accountant and ombudsman are also seen as friends and advisers, keys to the
success of the company.
5.1.2 Formal networks

As for the formal networks, what stood out were the relationships with government bodies (town hall,
health departments and the education departments at both town and state level) that were formed by
the entrepreneurs at the Florence School and ForLogic.
One important example is that the entrepreneur at the Florence School was employed by municipal
governments in the region, with the Santa Casa hospital and its partner hospitals during the creation
of the new business. Later, in the development stage, the fact that the entrepreneur had worked as
the health secretary for the town helped her broaden the number of formal and informal relationships.
ForLogic, was incubated at the Technological Hotel of the UTFPR, and the fact that this university
was involved in the process facilitated access to contacts and helped maintain these relationships. In
the case of Laram Turismo, there were some very important formal contacts with tour operators and
agencies.
5.2 Resources obtained

The resources were analyzed on the stage of creation and development in three categories: social,
physical and financial resources
5.2.1 Social resources

In the case of the Florence School, what stands out is the relationship with the Santa Casa hospital,
which led to the project being approved by the board of directors, thus opening the Santa Casa’s
doors as a training ground for the school. The project was presented to the mayor of the town and he
in turn became a partner in the entrepreneur’s new business.
At ForLogic, the relationship with the incubator project’s coordinator, who provided space for the
entrepreneurs in the technological sector, was important because he provided them with space even
though their project was not the one chosen by the committee. Another long-lasting relationship was
with the accountant, who was hired to formalize the company and then later became an advisor on
other matters, going so far as to work without pay. At the Laram Travel Agency, the most important
contact in the early stages was the frequent contact with an employee at the CVC operator, who
taught the entrepreneurs some aspects of the business.
At the Florence School, Alexsandra’s experience with her team of professionals enabled her to
identify which competences were lacking led her to view the business opportunity of creating her own
nursing school. Furthermore, thanks to her contact with a radiologist friend, she began to gain
qualifications to create a new course in this field at her school. At ForLogic, when the entrepreneurs
joined the Information Technology Local Production Group in Londrina during the development stage,
the relationships they forged with other members provided them with an opportunity to exchange
experiences, information, learn about the current trends in technological innovation and access new
businesses. In the case of Laram, the business opportunity was perceived through the identification of
their own needs during a trip and later through people with whom the entrepreneurs were in contact,
their relationship network.
In the case of ForLogic, clients were recommended by the coordinator of the Technological Hotel
project and by the relationship manager of the Incubator. Thanks to another contact from a professor
at the university, the entrepreneurs were able to win over another client, the Sicoob Cooperative, with
whom they continue to conduct business. Specifically in the development phase, another important
recommendation was made by a mother-in-law to provide services for a school.
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In the case of Laram, in the creation stage, thanks to a recommendation made by the Lions Club, the
company was able to develop a new package tour for groups, organized by different clients who
would later remain loyal to the travel agency. However, at the Florence School, new clients were not
found as directly as they were by the other companies; the entrepreneur could not recall any
particular contact that forwarded new clients to her.
It is worth paying special attention to the hiring of the teaching staff at the Florence School. The
entrepreneur contacted some friends who worked in the profession and invited them to join her. One
of these was a friend from her university days. When it came to hiring staff at ForLogic, professors at
the university recommended students of theirs to become trainees at the company and the partners
also suggested people to be hired, people who had been their classmates at the university. In the
case of Laram, people were recommended by partners and relatives, people who would become
secretaries, drivers and other functionaries in the two business phases.
When it came to training at exhibitions and in workshops, the entrepreneurs at ForLogic and Laram
highlighted the resources accessed in the two business phases. In the case of ForLogic, these
resources were provided in both phases by the UTFPR coordinator and in most cases offered either
free of charge or in the form of an easy payment plan. The entrepreneurs at both companies reported
that they built a relationship web during many of the courses they attended with other participants and
which resulted in a great deal of useful information for developing their business.
At the Florence School, when the entrepreneur visited another model technical school, or when she
made contacts with former teachers, she developed ideas that made the creation of her school viable
and helped her build a successful business. In the development phase, thanks to suggestions from
some doctor friends, she decided to create a nursing school. As for the software company, it is also
important to mention the role of the accountant who, initially hired to do their books, became a
business consultant for the company, offering support, advice and help with a number of matters
concerning the company. In the case of Laram, it is worth mentioning the relationship that the
company had with the employee of the CVC operator, who provided support in a number of activities
involving hiring and also gave advice on prices and taxes for tour packages, an important step in the
company’s development.
The work carried out by Alexsandra resulted in the Santa Casa opening its doors to trainees from the
school and the town hall supporting her, offering further resources. What is important here is the trust
that the Santa Casa placed in the company and the recognition of the entrepreneur’s work and the
seriousness of her school.
One of the results has to do with the social status, trust and legitimization resources. In the case of
ForLogic, although the project for the first client did not provide a significant financial return, it did
contribute to the professional growth of the team and furthered their reputation as software
developers. It is worth mentioning that the software that was developed was recommended as a
project to be submitted to the CNPq (National Council of Technological and Scientific Development),
which increased the possibility of new business. At Laram, this resource was also important during
the development phase when the company received a special status from the CVC operator, which
boosted its reputation in the eyes of clients in the town and surrounding area.
5.2.2 Physical resources

The entrepreneurs found the property to establish their businesses through personal contacts. In the
start-up stage, ForLogic was successful in being accommodated at the Technological Hotel for a time
and then rented an office in the city center. In the development phase, it maintained this resource until
being invited to use the Incubator.
In the case of Laram Turismo, the excellent location of their agency in the early stage was important,
but in the development stage they moved to a more strategic location in Cornélio Procópio, which was
essential in order to consolidate the business. The Florence School, in the early stage, was
established in a building in a good location, but in the development stage the entrepreneur, thanks to
her contacts, managed to acquire a more strategic point that led to her investing in the property. As
for other physical resources such as furniture, equipment, medication and books, more focus was
placed on these aspects at the Florence School as the entrepreneur was able to obtain them more
easily thanks to her network of contacts.
626
5.2.3 Financial resources

During the creation phase, the Florence School raised a financial loan from Santa Casa, while Laram
raised a bank loan. At ForLogic, financial resources were provided by the CNPq in the form of
scholarships for training workers, in two stages. Florence and ForLogic obtained other forms of
financial support such as rent-free property for a certain time, municipal tax exemption and discounts
from suppliers. At ForLogic, this financial support continues until today. The company does not have
to pay rent, electricity and telephone bills. Laram has almost always supported itself financially but
has obtained support through special negotiations for packages and privileges (free hotel rooms,
tours, etc.) from suppliers.
6. Conclusions
In the three cases analyzed it was observed the influence of informal and formal networks in both the
business creation and development. Regarding the informal networks, no support from the family
was observed and more emphasis being placed on the support of friends, colleagues and teachers. In
relation to formal networks, in the cases under study, it was perceived that formal relationships were
formed more intensely by ForLogic and the Florence School. In the case of ForLogic, its creation is
closely tied to a government agency and was the first company to be incubated.
Regarding the resources it was observed in the three cases that social resources were the most
important in both the creation and development business phases. They were influential to approving
projects, getting advices, finding employees, training and getting social status, trust and legitimization
of the business.
The Interest in the study of entrepreneur relationship networks is nothing new; however, the theme
concerning the adoption of social capital as a result of social relationships between the entrepreneur
and other people is innovative in studies of entrepreneurism in Brazil. This study is an effort to
understand, based on a multiple case study, how social networks are used by entrepreneurs to obtain
resources, influencing the construction of social capital in the creation and development phases of
new businesses. It is worth remembering that social capital in this study was understood as the use of
social networks to help achieve the aims of entrepreneurs.
Borges (2007) defends the notion that the basic idea of the concept of social capital lies in the fact
that personal relationships can act as a source of resources and support and, furthermore, points out
some of the main contribution of social capital in the process of creating business: information and
advice, technological knowledge, formations, business occasions, ideas, recruitment of partners and
employees, identification of clients and suppliers. Thus, it could be said that through the analyses
conducted in the three cases reported in this study the different resources accessed by the
entrepreneurs were of substantial aid in forming their social capital.
It was also seen that the relationships that were established evolved and became stronger as the
entrepreneurs were able to prove their reliability. According to Aldrich and Dubini (1991), trust is the
basic element that determines the strength of connections in the network and the permanence of ties,
reducing risks for all parties. When he accesses a contact in his network, the entrepreneur is making
an exchange and thus uses his social capital, which results in a debt that is expected to be paid in like
kind.
The results of the case analyses suggest that by maintaining a formal or informal relationship
network, the entrepreneurs were able to access different resources and information. Therefore, it
could be argued that the different resources accessed by the entrepreneurs in this study helped them
to form their social capital.
There was no intention in this study of closing the argument but rather to raise some questions about
the role of social networks in the formation of social capital. This study showed that it is important to
invest in the formation of social networks, encouraging interaction that leads to trust between the
entrepreneur and his network. Agencies and institutions that provide support for small and medium
size companies can encourage contact with other businessmen to form a relationship web and help
them to develop their social competences.
627
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Development of Education and Potential Opportunities for
Entrepreneurship in Romania
Gabriela Teodorescu and Camelia Fratila
Valahia University of Targoviste, Romania
theo_0200@yahoo.com
cami_fratila@yahoo.com
Abstract: It is important to linking students with the business community. That means completing theory with
practical: action-oriented instruction, applied learning, hands-on experiences, business leaders, community
supporters. In this way we help the student elaborate the essential parts of a business plan as well as techniques
of presenting to investors. Also, students will learn best practices of Entrepreneurial Leadership to develop
opportunities to create strategies and implementation in for profit or non-profit ventures. The development of
entrepreneurial education and specific programs in Romania will give students a solid understanding and
knowledge of the potential opportunities in entrepreneurship from micro-enterprise in different areas and family
businesses to high growth ventures and corporate entrepreneurship. We have to implement the specific
objectives as: diversify the financial sources for financing the university activities; deployment and extent of
university periphery: research centres, training facilities, scientific park, adjacent activities (industrial contacts,
research contracts, IP department, PR etc.); stimulate the academic staff; enabling an integrated entrepreneurial
culture (use of performance indicators, rewards for success, adequate internal and external advertising). Second
paper objective is to build a sustainable partnership between universities from South Muntenia region and its
most distressed communities that adds civic capacity to communities, strengthens the mission of universities,
and provides a powerful context in which to train students to become non-profit leaders and social entrepreneurs
who can assume leadership roles across South Muntenia. The results of this study can increase the knowledge
about entrepreneurial paths followed by Romanian individuals. Also, we can attract the interest of academia
researchers to demonstrate that increasing the level of entrepreneurial activity we have positive influence on
employment generation and on economic growth in Romania. We can say that we view education as an
investment. Finally, they will have the opportunity to apply their skills toward a specific concept, while non-
business students will learn how to develop a business plan within their own field of study.
Keywords: entrepreneurship education, innovation, partnership, regional policies, strategy
1. Introduction
For Entrepreneurial education development needs to bring together institutional efforts and can be a
subject for educational research.
Defining entrepreneurship is not an easy task. There are many definitions of entrepreneurship:
Entrepreneurship refers to an individual’s ability to turn ideas into action. It includes
creativity, innovation and risk taking, as well as the ability to plan and manage projects in
order to achieve objectives. This supports everyone in day-to-day life at home and in
society, makes employees more aware of the context of their work and better able to
seize opportunities, and provides a foundation for entrepreneurs establishing a social or
commercial activity.(Commission Communication “Fostering entrepreneurial mindsets
through education and learning”.COM(2006) 33 final).
The paper proposes to solve two major objectives for development of entrepreneurial education in
Valahia University and also in South Muntenia Region:
First objective is to implement the specific measures for entrepreneurial education at technical
universities elaborating a strategy and an action plan for teaching and research in entrepreneurship.
We will start to offer an introduction to entrepreneurship and self-employment to all undergraduate

students during their first year. For that we need to adapt the programmes and courses to this target
groups. In Valahia University are around 400 students from technical specializations can start to
prepare their ability in manage projects. Of course it is necessary to make entrepreneurship education
accessible to all students as innovative business ideas may arise from technical, scientific or creative
studies.
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Also, it is necessary to develop the mobility of teachers and researchers between higher education
institutions and Business area. It is important to involve the professors interested in teaching and
supporting this kind of initiative.
The second paper objectives is to build a sustainable partnership between universities from South
Muntenia region and its most distressed communities that adds civic capacity to communities,
strengthens the mission of universities, and provides a powerful context in which to train students to
become non-profit leaders and social entrepreneurs who can assume leadership roles across South
Muntenia. These objectives are included in an Entrepreneurship Project and that aims are to develop
resources to support the embedding of entrepreneurial skills in the curriculum.
The South Region Muntenia, and not only this area, but generally, Romania on the whole, needs a
realistic view on its economical and social development, in the next decades. To define a strategy for
sustainable development, the population represents the main element. This requires the straightness
of the demographical system in Romania.
From old times, the Dambovita county has been crossed by many important commercial roads which
developed along Arges ,Dambovita and Ialomita rivers connecting Transilvania and the South of the
Valahia Region.
After the Second World War the Dambovita County, re-established after 1968, has been intensively
industrialized, a lot of “industrial platforms” being build in Targoviste.
The Dambovita County has a major contribution to the development of the Romanian culture.
Important personalities were born and run their activity here and contributed to the dispersing of the
Romanian written language. In Targoviste was established the first printing machine and first books in
Romanian language were printed here.
Several important nationwide economic units-stainless steel, alloyed steel, lamps machines and
equipment refrigerators and freezers secure the further development of the Dambovita County’s
industry. The small and medium–sized enterprises sector is well represented, having different profiles:
metallic constructions, textile and ready-made-clothes industry, chemical industry, wood processing
and furniture industry. By the end of 2006 there were 9,970 trading companies and 6,482 private
entrepreneurs registered.
In Romania is no general framework or any other kind of guidance in the Ministry of Education for
entrepreneurial education at technical universities. In the absence of such a framework, individual
universities have developed entrepreneurial education and there were professors interested in
teaching and supporting this kind of initiative.
So, we can say the Valahia University combines academic tradition with innovation in a new form of
organization of the whole educational process. The teaching of entrepreneurship has yet to be
sufficiently integrated into university curricula - indeed it is necessary to make entrepreneurship
education accessible to all students as innovative business ideas may arise from technical, scientific
or creative studies.
As a result, entrepreneurship education becomes very important in order to prevent and solve all the
problems that can appear in a modern firm. The entrepreneurship involves competences in solving
conflicts, rising productivity and creating an adequate social climate in any company.
The importance and the benefits of entrepreneurship education are not limited to start-ups, innovative
ventures, clusters and new jobs. Entrepreneurship education prepare an individual’s ability to change
ideas into action having a specific competence and helping young people to be more creative and
self-confident in their actions.
The achievement of the objectives will help us to implement the specific measures for enterprenourial
education:
Set up a strategy and an action plan for teaching and research in entrepreneurship, embedding
practice-based activities, and for new venture start-ups and spin-offs;
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Offer an introduction to entrepreneurship and self-employment to all undergraduate students

during their first year. In addition, give all students the opportunity to attend seminars and lectures
in this area;
Training students in the skills they need to set up a business;
Developing students entrepreneurial ability. Graduates’ start-up is one of a range of possible
outcomes;
Create business associations could help to get their members more involved in teaching
entrepreneurship at educational establishments;
Adapting the programmes and courses to different target groups (by level: undergraduate,
graduate, post-graduate, PhD; by field of study: economics/business, scientific/technical studies,
humanities, arts & design, etc.);
Development of mobility of teachers and researchers between higher education institutions and
Business area;
Also, the universities can create an entrepreneurship education department, which would serve as an
entrepreneurial hub within the institution and spread the teaching of entrepreneurship across all other
departments; set up incentive systems to motivate and reward faculty staff in supporting students
interested in entrepreneurship, and acknowledge the academic value of research and activities in the
entrepreneurial field; award academic credits for practical work on enterprise projects outside the
established courses.
Start-up is one of important possible outcomes for the paper objectives achievement. The way to
success is to teach students about new sources of self-employment and convince them that being a
businessman is the way of entering the labour market.
The courses or programme proposed should be precisely defined. While the creation of graduate
start-ups is therefore a desirable outcome, it should not be forgotten that entrepreneurship is also
about successfully managing innovation and growth. In existing business and entrepreneurship
programmes very often only the start-up aspect is considered, while the skills and knowledge needed
to manage the growth phase of a small business are neglected. In this sense, there is in general
terms a need for a shift in the focus of entrepreneurship education programmes and courses across
Europe.
Also, to motivate students from other fields in dealing with economic subjects and entrepreneurship,
the best way is by presenting examples from the relevant technical area. The focus should be on the
essential connections and practical aspects, having regard to the particular target group of students.
Courses and practical activities about entrepreneurship for all categories of students have to provide
basic business skills and raise awareness of entrepreneurship as a potential career option.
The demand for learning about entrepreneurship is increasing. For this reason, the primary purpose
of entrepreneurship education in univerities should to develop entrepreneurial capacities.
2. Material and methods
Entrepreneurship involves innovation and economic growth. It can play an important role in finding
solutions to the challenges facing civilization. In Romania it’s important to consolidate existing
knowledge and good practices in entrepreneurship education on the development of innovative new
tools form and delivery methods. This development can be discussed on the global, regional, national
and local levels and implemented with the involvement of key stakeholders.
The universities role is very important. The future entrepreneurs have to learn what they need to
develop ideas into successful businesses, and how to increase entrepreneurial opportunities in their
corporations, institutions, and regions The universities have to improve the education about
technology transfer system, entrepreneurial educational programs, and entrepreneurial network, to
help entrepreneurs, corporate venturing executives, and others involved in entrepreneurial
environments.
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In south Muntenia region where developed some programs designed for aspiring entrepreneurs,
corporate venture officers, and persons who would like to develop or strengthen a climate of
entrepreneurship in their corporations, universities, and regions. The entrepreneurs are encouraged
to attend the program together with university staff or development professionals from their region. It
enables new ideas, novel approaches, and innovative technologies to reach the marketplace.
In this program we have integrated the most valuable entrepreneurship and project management
theories and tried to provide an action-oriented approach to the subject through the use of examples,
and study cases.
Creating a balance between theory and practice, we hope the students will benefit from both
perspectives. The comprehensive collection of concepts and applications provides the necessary
tools for success in starting and growing an enterprise.
It is important to train potential autonomous and creative entrepreneurs, as students, that will create
and manage their own employments. They need more practical training about life, resources
management and businesses (Gibb, 1993). Gibb (2002) arguments that the most useful way for
defining Entrepreneurship, in a educational context, must be done in terms of its expressed behaviour
throughout certain Entrepreneur’s attributes and skills to create and manage projects.
One of the second important things is development of clusters.
Clusters may work in conjunction with local, state offices, universities and community colleges.
Business clusters fuel the region’s economy, and they are the best focus for economic development
efforts. Clusters are groups of companies and institutions co-located in a specific geographic region
and linked by interdependencies in providing a related group of products and/or services (Porter,
1996). Clusters differ in many dimensions: the type of products and services they produce, the
locational dynamics they are subject to, their stage of development, and the business environment
that surrounds them, to name a few. Clusters are differentiated by their specialization in a particular
stage of their field’s value chain, by their focus on specific geographic areas, or by targeting selected
customer needs or market segments.
The base for cluster development can be the existence of initial institutions, such as companies or
universities, which over time act as an anchor for the cluster spinning-off new businesses and
attracting the investment from companies outside the region.
Clusters are of interest for economic development professionals and company executives because
the conceptual thinking strongly suggests that they affect performance.
The best way to increase Romania’s economic competitiveness is to enhance innovative activities, to
create an interaction between public and private institutions such as universities, vocational schools,
research centres and enterprises. Creating technological laboratories that can be used by companies
(and universities) that do not have the necessary resources to test and develop new products can
both fill an important gap in the prospects for technical innovation of SMEs and to promote
cooperation between companies and research centres.
Valahia University of Targoviste wishes to become a valid and competitive actor in the international
world of learning, through entrepreneurial education. As nations develop, they progress in terms of
their characteristic competitive advantage and modes of competing.
From this point of view the Valahia Universiy of Targoviste Entrepreneurship propose to develop a
project and the objective is to build a sustainable partnership between universities from South
Muntenia region and economic communities.
We consider that the major step to improve the entrepreneurial education in the course of educational
process is to develop the ability to carry out a basic research, an applied research and an application-
derived research. Admission to the program is highly competitive. It is open to current student and
graduate students from universities across the South Muntenia Region.
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For practices, students will work individually and in project teams comprised of business students
working with non-business students to create a business idea and strategic plan. Business students
will have the opportunity to apply their skills toward a specific concept, while non-business students
will learn how to develop a business plan within their own field of study.
Finally, some of our graduates will start their own businesses. Others use their entrepreneurial
creativity in larger, established companies.
The expected results of the proposed objectives are:

Enhance a sustainable growth of Romanian universities;
Increase awareness towards the three functions of the university: education, research and
community deserve;
To provide an opportunity for students to explore their problem-solving styles and allow them to
experience the interactivity in this process.
To create the opportunity for students to meet and interact with successful entrepreneurs in the
South Muntenia Region community.
The specific objectives are:
Diversify the financial sources for financing the university activities;
Deployment and extent of university periphery: research centres, training facilities, scientific park,
adjacent activities (industrial contacts, research contracts, IP department, PR etc.);
Stimulate the academic staff;
Enabling an integrated entrepreneurial culture (use of performance indicators, rewards for
success, adequate internal and external advertising);
The pilot actions of the programme are:
A. Deployment of student’s entrepreneurial abilities:

Identification of students with strong potential and ideas (educated, focused, determined, with
strong potential and good communicators);
Development of business skills (marketing, management, accounting, business management);
Development of business plans;
Matchmaking with investors business angels;
Creation of proposals for financing valorisation of knowledge;
Incubating and accelerating business services;
Continuous follow-up;
Elaboration of best practices;
Continuous improvement of the process.
B. Set-up of a Centre for cooperation with social and economic environment;
C. Set-up of Intellectual Property Department;
Another new measure is to build the capacities of Romanian institutions in implementing the business
incubators project. To build national and local capacity means to ensure sustainability of local
business development efforts and initiatives.
The generic term of Business Incubator - is used to define a various number of organisations that,
sustain the entrepreneurs to develop their business ideas for starting and developing a new
enterprise. It is a local or regional partnership structure, which offers different services to the SMEs, in
advantageous conditions, especially for the introduction of innovative processes in the industries.
The expected impact of the network of business incubators to be created and made operational in
Romania:
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Establishing and developing innovative SMEs, able to efficiently utilize the existing resources and
to become financially independent after their graduation;
Developing an efficient business infrastructure, able to face the competition strains;
Increasing the number of jobs and economic development in the target areas;
This concept is considered as the principal instrument for the regional development. The Business
Incubators manages and offers to the entrepreneurs various facilities to sustain the creation and
development of the new business.
An entrepreneurial economy, whether on the national, regional or community level, differs significantly
from a non-entrepreneurial economy in many aspects, not only by its economic structure and its
economic capacity, but also by the social vitality and quality of life which it offers with a consequent
attractiveness to people.
Economic vitality of a country is with no doubt a necessary condition for social vitality. Without it other
important factors that make living attractive in certain areas, such as education, health, social
services, housing, transport facilities, flow of information and so on, cannot be developed and
sustained in the area in the long run. Development of entrepreneurs and of entrepreneurship can be
stimulated through a set of supporting institutions and through deliberate innovative action which
stimulates changes and fully supports capable individuals or business teams.
3. Conclusions
Successful economic development is a process of successive upgrading.
Behind each of the success stories of entrepreneurship there is usually some sort of institutional
support. Besides individual or group entrepreneurial initiative the enabling environment supporting
these initiatives is important.
Two things are involved simultaneously: propensity to start an entrepreneurial venture and skills to
run the venture successfully.
Entrepreneurial education in Romania needs to combine the academic tradition with innovation in a
new form of organization, to meet all the academic requirements of the curricula and the economical
requirements. Its necessary to make entrepreneurship development programs more effective by
imparting relevant education focusing on developing entrepreneurial competencies, skills in identifying
a viable business opportunity & preparing business plan, knowledge on how to mobilise resources
and manage an enterprise.
The Entrepreneurship Project aims are to develop resources to support the embedding of
entrepreneurial skills in the curriculum. The main outcomes of the university project are:
Development of models and strategies, identification and selection of the potential entrepreneurs,
monitoring and follow-up,
Development of skills and behavioural training: entrepreneurial motivation and competencies,
problem-solving, counselling and communication,
Resource building: procedures and formalities in setting up new enterprises, incentives and
benefits for entrepreneurs,
Curriculum development, procedures involved in initiating, planning, implementing and evaluating
entrepreneurial curriculum,
Business Opportunity Identification.
For positive results, the following training methods will be adopted:
Lecture-cum-discussion, case studies, role-plays and simulation exercises.
Interaction with experts in Entrepreneurship Development, curriculum development and
opportunity guidance, and with successful entrepreneurs for practical insights.
Study visits to institutions and small enterprises.
Group work and practice sessions.
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The entrepreneurial project results will show the personal capacity: knowledge, skills, aptitude, and
motivation.
An understanding of factors influencing entrepreneurial education in Romania is important for creating

the new opportunities for students and encouraging them to involve in entrepreneurial activity.
Since the research aim was to design a model for entrepreneurial education system, is important to
increase student’s technical and scientific ability, to obtain job vacancies and create a new business
or job, coordinating and adapting of these educations with the requirements of production sectors,
service sectors, etc
In all universities it is necessary to provide practical training in entrepreneurship to their students, to

make them more aware of the benefits of entrepreneurship and to address the factors that impact on
developing entrepreneurial education.
We can attract the interest of academia researchers to demonstrate that increasing the level of
entrepreneurial activity we have positive influence on employment generation and on economic
growth in Romania.
Acknowledgements
Thanks to the Research Centre for Natural Resources and Environment for technical assistance and
scietifically advice.
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entrepreneurial mindsets through education and learning”.COM(2006) 33 final
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Parker, S.C.(2006).The Economics of Entrepreneurship, London, Edward Edgar Publishing Ltd.
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Porter, M. E., Council on Competitiveness, and Monitor Group, (2001), Clusters ofInnovation Initiative: Regional
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Sexton, D.L.and, N.B. Bowman.(1984). Entrepreneurship education suggestions for increasing effectiveness,
Journal of Small Business Management
635
Digital Games for Entrepreneurial Learning, Innovation and
Creativity: Examples and Evaluation Criteria
Panagiotis Tragazikis, Sotiris Kirginas and Dimitris Gouscos
University of Athens, Greece
ptragaz@sch.gr
kirginas@sch.gr
gouscos@media.uoa.gr
Abstract: This paper introduces (a) some good examples of digital games freely available on the web that can
be used as educational tools supporting entrepreneurship, innovation and creativity skills, as well as (b) an
evaluation framework for identifying such examples. To this end, in the first part of the paper, indicative examples
will be provided for digital games purposed for entertainment and/or learning, drawn from the broad array of
online available business games. In the second part of the paper, the examples provided will be evaluated along
three dimensions: a generic dimension related to digital-games based learning (DGBL) aspects; and two more
specific dimensions, focused on the innovation/creativity and entrepreneurship skills that can be encouraged (and
gradually exercised and learnt) through gameplay. The final objective of this evaluation is twofold: firstly, to locate
similarities, differences, strengths and weaknesses of the games currently available, that can help identify
specific needs for digital games-based entrepreneurial learning material; and secondly, to provide a set of
findings and issues that need to be considered while developing (or re-purposing) digital games for
entrepreneurial learning.
Keywords digital games-based learning (DGBL), games-based teaching, evaluation of digital games for learning,
entrepreneurial learning, innovation and creativity skills
1. Introduction
As has been shown in Digital Games-Based Learning (DGBL) research, successful integration of
digital games in educational activities advances at a rather slow pace. Such efforts seem to meet
difficulties even (sometimes, even more) if games are explicitly designed for educational purposes.
Furthermore, barriers may be increased when attempting to plan instructional activities on the basis of
commercial games.
These problems are generally to be expected, since instructors are not traditionally familiar with
methods including games in everyday practice. However, an increasing number of organizations are
willing to incorporate videogames as instructional tools into their training programs, which gives rise to
a need for good examples of educationally integrated games.
In the field of entrepreneurship, innovation and creativity a number of digital games have been
implemented for educational purposes. This study aims at presenting good examples of such games
offered online at zero or marginal cost, and evaluated in order to identify similarities, differences and
restrictions in their usage as educational tools. Additionally, the features against which these games
are evaluated, together with evaluation results, can also serve as the basis of checklists for
developing (or re-purposing) digital games for innovation, creativity and entrepreneurship learning.
2. Games in support of entrepreneurial learning, innovation and creativity
A presentation of digital games follows that have selected for their gameplay quality as well as their
potential to be used in educational settings as tools stimulating creativity, innovation and
entrepreneurial skills.
2.1 PDA Sim (offline, infotainment, simulation game)

[http://forio.com/pdasim.htm]
The player acts as CEO of Handheld Corporation which manufactures hand-held computers based on
the Palm OS. The player’s goal is to maximize cumulative profit for three models over four years.
There are three learning objectives for PDA Sim: how to manage a portfolio of products across
multiple product lifecycles, how to use financial data to make pricing and product line decisions and
how player’s decisions can have consequences for many years into the future. The graphic
environment seems to be rather simple and the game does not support sound. The game lacks
innovation features but it gives the opportunity to adopt an experimental attitude and realize why
636
Panagiotis Tragazikis et al.
some commercial strategies are appropriate. It provides a simple tutorial, whereas problem solving
focuses on manipulating financial and market information to see how products are manufactured and
then make decisions about pricing, R&D and eventual product discontinuation. As a feedback players
can view a summary of how they did every year.
2.2 IndustryPlayer (online, edutainment, simulation game)

[http://www.industryplayer.com ]
The player acts as a virtual entrepreneur in control of a globally operating industry holding. In real-
time, players competes against fellow players from around the world for profits and market share. The
game provides clear goals: to gain the highest market share and wealth possible. The graphic
environment is 2-D and information is given by speaking avatars. There are 10 game levels with 84
turns each except Level 1 (tutorial level) which has 24 turns. Players are always able to identify their
score/status and current goal. The game provides immediate feedback for user actions and save
game capability. This multiplayer game simulates most aspects of entrepreneurship, from strategy,
investment and finance to the interactions with competitors, workforce, consumers and banks, thus
supporting creativity and innovation and giving the opportunity to adopt an experimental attitude and
realize why some commercial strategies are appropriate. A chat facility allows players to discuss
strategies, the game and free topics with their colleagues and opponents during gameplay. Players
lacking knowledge about entrepreneurship would find this game difficult.
2.3 Simunomics Game (offline, edutainment, metaphor game)

[http://www.simunomics.com ]
This game is basically designed to increase students’ awareness in entrepreneurship through

decision-making based on textual information. Players have almost complete control; they can choose
their buildings, products, partners, prices and locations. However, they have a board of directors to
account to, and every move they make must be to the company's best interest. The game has rules
that must be obeyed at all times and provides a tutorial. The graphic environment seems to be rather
simple and the game does not support sound. It lacks innovation features but it gives the opportunity
to adopt an experimental attitude and realize why some commercial strategies are appropriate under
specific conditions.
2.4 Gazillionaire III (online, edutainment, simulation game)

[http://www.lavamind.com/gaz.html ]
This game allows up to eight student "companies" to compete against each other as they buy and
trade goods in a simulated intergalactic business environment. Competition motivates students to
think about the fundamentals such as overhead costs, profit margins, capitalization, compound
interest, and a number of other advanced economic concepts by translating these abstract principles
into concrete examples. These concepts are presented in a simple, easy to understand structure with
very little jargon or other unnecessary impediments. The game shows students that they can work
through complicated scenarios and develop new problem solving skills without relying on textbook
explanations and formulas. It offers an on-line teacher’s center (http://www.gazillionaire.com) where
lesson plans, curriculum, and informal notes on integrating the game into the classroom are shared by
educators from across the globe. There are 6 different levels (Tutorial, Novice, Beginner,
Intermediate, Expert, Master). The first level helps players to get familiar with the game. The game
provides immediate feedback for user actions and save game capability. It is also available in an
offline version to present some basic entrepreneurship concepts to secondary school students.
2.5 The Small Business Game (online, edutainment, simulation game)

[http://www.sport4life.biz ]
The Small Business Game is a Flash-based online game environment, where students learn how to
run a sports retail store based on retailing football club merchandise. In the process they experience
the start-up and management of a business, learning from both their mistakes and successes. The
game includes curriculum-linked resources for use in Commerce, English, Mathematics and Social
subjects. Through this game students learn what it is like to manage a small business, what works in
637
a business as well as what does not, and they are able to experiment with different strategies and
tactics to see the impact of their decisions. The game provides a 3-D interface and easy gameplay,
with no need for training. It is an appropriate game for exposing secondary school students to
entrepreneurship concepts.
2.6 Get Security (offline, edutainment, simulation game)

[http://game.mea-i.org/games/GetSecurity/src ]
The player acts as a virtual entrepreneur in control of an events management business. The game
consists of 2 virtual days, each of which has 4 scenes that lasts 10 minutes each. For each
successfully completed task players win points that turn into money (“moints”). The game provides a
beautiful interface and easy gameplay, with no training required. Information is given by speaking
avatars or by email. The game provides immediate feedback for user actions and a save game
capability. There are three possible gameplay versions: versions A and B have pre-set attributes and
start with a small number of 'moints' deposited in the bank; alternatively, players can customise
version C and choose the attributes they think will be useful in the game. It is an appropriate game for
exposing secondary school students to entrepreneurship concepts.
2.7 Boss In Game (infotainment, simulation game)

[http://www.bossingame.com ]
BossInGame is an online business game where participants manage a virtual company in a simulated
environment and competing with other players. Actually BossInGame has a growing community of
more than 4,200 international players who are already competing with their online virtual businesses.
It helps participants to learn economic concepts and develop managerial soft skills and teamwork by
using an intuitive online tool which puts the participant in the role of the CEO of a virtual company.
Participants in BossInGame manage the R&D, Manufacturing, Logistics, Sales, Marketing and
Finance departments. It works as an 8-rounds competition where all teams start with the same
company under the same conditions. The captain of the company must enter online the decisions for
the next round before the limit date. Once that date arrives, the market is simulated and results are
returned. With this information, it's time to take the new decisions for the next round and so on. There
are 2 types of competitions: player vs. computer and player vs. humans. The game supports creativity
and innovation and gives the opportunity to adopt an experimental attitude and realize why some
commercial strategies are appropriate under specific conditions. It provides a simple tutorial; whereas
the interface seems rather simple and there is no sound support. Players without knowledge about
entrepreneurship would find this game difficult.
2.8 Road to Riches (offline, infotainment, metaphor game)

[http://www.terragame.com/downloadable/business/road_to_riches ]
A game offering emotional engagement based on a story about players competing with their former
boss in truck fleet and money manipulation. It is basically a time management game with money-
based decisions. Gameplay is simple and text-based information is easy to handle. The daily account
balance offers 8 areas of evaluation and players can have information about their company, trucks
and drivers. The game does not include innovation features and problem solving focuses on
manipulating time and trucks. The game allows to speed up or pause action and offers a tutorial. The
sounds indicate certain actions and support player in game engagement. All in all, this game covers
some basic entrepreneurship concepts.
2.9 Virtual U (offline, edutaiment, simulation game)

[http://virtual-u.org ]
This game is designed to improve university administration skills, offering five different scenarios and
3 levels of difficulty. The objective is to manage a university according to decisions and get
information from a serious amount of indexes related with the university’s economic and scientific
reserve. Rich text-based information reveals a highly edutainment and simulation game. Different
scenarios can support different learning styles in a way that allows players to adopt a problem and
consider solving it according to their personal tactics. Potential scenarios include “play better”,
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“allocate new money”, “teach better”, “improve research performance” and “win games”, each
scenario involving the player with different tasks. Players can modify strategy and financing for each
university department, according to detailed information provided in the game. There are two types of
score (trustee daily score and overall score), as well as an indicator about university deficit. The score
approach creates the basis for player engagement and strategic planning. The game can support
creativity by an innovative strategic growth plan and by the multidimensional information evaluated to
formulate a successful strategic plan. It provides a 4-years’ timeframe for basic project. The graphic
environment seems to be rather old-fashioned and sound support is simple. A flash-based tutorial is
available.
2.10 Coca-Cola Enterprises (online, infotainment, metaphor game)

[http://www.cokeeducation.co.uk/game ]
This game is basically designed to increase kids’ awareness in entrepreneurship through decision-
making based on textual information, supported in some cases with speaking avatars. The game
focuses on the refreshments market with major decisions related to product, price and place. It can
work like a propaganda game simulating these three areas. Promotion of entrepreneurship skills can
be questioned as the game itself leads players to the right decision. Although creativity and innovation
are not supported so strongly, the game gives the opportunity to adopt experimental an attitude and
realize why some strategies are adequate in the completive refreshments commerce. Players can
increase game speed and the reward system contains messages for position upgrade in the
company, as well as a certificate from the company upon the end of a successful game.
2.11 The McDonalds Game (online, advergame, simulation game)

[http://www.123-games.net/games/the-mcdonalds-game ]
This game is targeted at young players but can be played by everybody. Players act like managers
responsible for manipulating the complex procedure of production, management and marketing of the
company. What is important during gameplay is to be aware for every company department and opt
for the best decisions. A tutorial is available, graphics and sound are simple and player engagement
results from the challenge to get decisions balance various factors like deforestation, waste, crazy
cows, hormones, organic material manipulation, target groups, worker claims and others. The game
can be considered as oriented towards entrepreneurship as it provides lots of information to formulate
a management plan, although it lacks innovation features.
2.12 Crazy Factory (edutainment, metaphor game)

[http://www.terragame.com/downloadable/business/crazy_factory ]
The player becomes owner of a derelict factory with a certain budget and develops business learning
the main aspects in marketing, sales, administration, production and research. Players have to
choose among three product alternatives, each resulting in a considerable variety of combinations.
The game provides some interesting dimensions for success, such as employee motivation, as well
as tactics such as spy sabotage or sue against competitors. It includes 9 campaigns and 10 missions,
all quite challenging. The graphics environment is advanced and attracts players interest, whereas
sound also contributes to player engagement. Game design incorporates some innovation features
and a serious amount of entrepreneurship characteristics, offering a successful business as reward.
2.13 Get Marketing (online, infotainment, simulation game)

[http://www.scottishmarketingcommunity.com/play-the-game ]
The game is based on the concept of marketing circle. According to customer needs players choose a
product and make decisions to increase sales. This is a text-based game. Players find themselves in
an office environment, choose their plans (product, place, price, production) according to information
provided and get yearly financial results as a feedback. Game reward is an image of the player’s new
car (a funny one when results are poor), as well as a printable report of the achievements. Although
graphics design is poor the game itself can be considerably good for educational purposes. The game
does not promote innovation characteristics but exposes players to the basic elements of marketing.
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2.14 Tycoon Online (online, edutainment, simulation game)

[http://www.worldonlinegames.com/play-game/274/tycoon-online ]
This text-based game engages players offering the possibility to create a company and compete with
others. The information for strategic design comes from five sections: economy, bank, stock
exchange, market and players company. Additional links lead to information about the player
community, whereas players can contact each other through blogs and forums. Each round lasts for
thirty minutes and players are stopped from the game when a round ends, or when the company goes
bankrupt, or in case three weeks pass without logging in. All players start over when a new round
starts and this is the time to build a new company. An award system gives the player email
information about success, savings and growth. A bonus is provided for company achievements,
together with the opportunity to become a gold member (acquired at a small cost). In that case
additional information and facilities are available such as company logo, company blog, customizable
avatar, capability to modify employee names and looks, drop-down quick info box, graphs, the ability
to lead a team and others. The game focuses on entrepreneurship related with selling basic goods. A
number of innovation features and a lot of business areas are implemented in the game, whereas
players’ interaction increases engagement during gameplay.
3. Evaluation framework
The games presented above have been evaluated using a framework that encompasses key aspects
of three dimensions: (i) digital games-based learning, (ii) innovation and creativity features as well as
(iii) entrepreneurship skills.
The framework’s DGBL dimension focuses on three game-related areas:

Structural elements such as fun, playability characteristics (reward system, player feedback,
problem solving etc), storytelling and graphics
Educational orientation, dependent on the way that the game adopts pedagogy in its structure;
aspects like motivation, accuracy, learning topics, support for different learning styles, existence
of tutorials and sandbox and others influence the educational orientation of a game
A classification according to serious games taxonomies, in order to clarify a game’s scope of
educational effectiveness.
Creativity is strongly related to innovation, defined in the literature as a procedure for creating ideas
that can support innovative action or offer the starting point for an innovative activity. Innovation, on
the other hand, is considered as a combination of certain actions to place a new product in an existing
market, having to do with customer desires, technology capabilities as well as product viability in the
marketplace. As far as entrepreneurship is concerned an operational definition has been adopted,
focusing on the associated skills (e.g. risk taking, pressure management etc.) that can be gradually
exercised and learnt during gameplay, based on player interaction with the digital games as well as
on player-to-player interaction and collaboration.
The detailed aspects of the DGBL, innovation-creativity and entrepreneurship dimensions of this
evaluation framework have been drawn from the relevant literature (see bibliographical references)
and are elaborated in Table 1, whereas a number of evaluation findings along these dimensions are
described in the following.
3.1 Digital games-based learning

Findings
As can be seen from the games evaluated in table 1, edutainment, simulation and offline games with
2-D graphics are dominant. In most cases the player has no avatar representation, whereas basic or
more sophisticated economic tools constitute the game “weapons”. Reward systems are based on
performance- or money-related scores, or simulate the rewards currently existing within companies.
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Table 1: Major dimensions and detailed aspects of the framework for evaluating digital games for
learning entrepreneurial skills (as adapted from the literature, see bibliographical
references)
DGBL Innovation -Creativity Entrepreneurship
Gameplay Innovation optimism

profit orientation
fun product-technology type of actions-management
tension-emotional engage process goal orientation- action
rules management orientation
reward system or a combination need for achievement-desire
targets what is desirable to use to succeed
action expected what is possible with the locus of control
feedback technology risk taking
adaptive procedure what is viable in the marketplace values- morality
success could be age
challenges and emotional radical (completely new product) autonomy aggression
conflicts differentiated (same product new independence
problem Solving placement) leadership
multiplayer kaizen (continuous evolution) self-confidence
hero-“weapons” perseverance energy level
storytelling Creativity innovative tendencies
graphics-programming risk property
educational orientation sources risk preference
motivation to learn talent recognition
accuracy energy benevolence
intuitive interfaces method pressure
structure machiavellianism
Design based on system rigidity
pedagogy person government regulation
team orientation to excellence
support different learning target innovative skills
styles culture organizes
adopting a variety of ideas
identities engagement
distinguish the problems risk
easily freedom
information on demand humor
and in time
tutorial (simplified) or A method for challenge
sandbox manipulation
Serious Games divergence

postponement of criticism
advergames to increase quantity
awareness beyond the logic
edutainment focused on we build all together
education ideas
infotainment focused on convergence
Information management
propaganda to adopt ideas evaluation
metaphors representations selection of proposals
of real world choose
simulations & microcosms
games used like an
experimental lab
tools for personal evolution
or therapeutic matters
In more simple games, challenge emerges from gameplay speed, combined with immediate feedback
and/or actions happening simultaneously. More complicated games and/or games demanding former
knowledge, on the other hand, allow challenge to emerge from feedback on economic indexes and
options for actions and decisions in quest of specific results.
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Finally offline games were found to typically support business simulations, whereas online games
operate as metaphors, supporting representations of a wide range of real world entrepreneurship
issues.
All in all, the games presented above are considered to be interesting examples that can fairly support
the instructional process. Some of them are explicitly designed for educational purposes, whereas all
of them need to be used according to some instructional plan. The following specific issues with
respect to their potential for effectively achieving game-based learning are identified.
Issues
Issue #1: Many of the games are text-based, thus not supporting different learning styles. On the
other hand, games offering various scenarios allow players to undertake different roles. In that
way lack of support for different learning styles can be overcome, by adopting a role interesting
for the player.
Issue #2: Some of the games are designed for special target groups such as school students,
giving rise to two issues; knowledge required for gameplay must be fair and explicitly stated,
whereas game design needs to facilitate acquisition of this knowledge through tutorials or
sandboxes (areas allowing to practice gameplay without consequences). Many games offer some
form of tutorial but there is an almost complete absence of sandbox facilities. Offering some
sandbox feature could be quite helpful for players, especially in text-based games.
Issue #3: Feedback is offered immediately in some cases, whereas in others it appears after the
end of the round; this last feature implies that the player may feel isolated from game evolution
during gameplay, which should be avoided in the authors’ view.
Issue #4: In a few cases players are able to choose difficulty levels. This is an important adaptivity
feature and should be possible in all games.
Issue #5: Sound, speech and graphics were found to be generally poor for most of the
applications evaluated, and for text-based games in particular. This testifies a shortage of
contemporary game design standards that could better support different learning styles.
3.2 Innovation and creativity

Findings
From the games evaluated above, those available online or offering the possibility to play offline
together with others seem to support innovation and creativity more effectively.
Generally speaking, the capability for in-game creation of new products seems to be seriously
restricted at the level of game design for offline single-player games. Such restrictions can lead the
player through a certain “winning” path, which however does not promote innovation and creativity.
Online multiplayer games (e.g. IndustryPlayer, Tycoon Online) or games with a variety of scenarios
(e.g. Virtual U, Gazillionare III), on the other hand, seem to be able to better support innovation and
creativity, due to a mixture of different ideas and great amounts of information that players have to
deal with. Even in these games, however, the spectrum of product options mostly encompasses
ordinary products with global markets and gives no opportunity for completely new ideas to compete.
What is more, in some cases design characteristics seem to be far from innovative.
Issues
Issue #6: In the authors’ view, a game design tool is needed that can encourage new product
creation on the basis of built-in game features for innovation and creativity. Such a tools could
make feasible in-game market action based on player experience for completely new products
and ideas.
3.3 Entrepreneurship
Findings
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In the domain of entrepreneurship, online games and games supporting multiple scenarios seem to
come closer to the issues and skills of real-world entrepreneurship. In multiplayer online games in
particular, players perceive that action is indeed taking place in a real-world domain. The rest of the
games approach parts of the reality, and could operate as instructional tools for more specific
entrepreneurship topics.
Different types of risk, goal orientation and action orientation, pressure and recognition through
rewards are present in most of the games evaluated.
The most important issue in most cases is for players to evaluate the rich text-based information
available in-game, and/or to derive information from supporting facilities like blogs, help and web
links. As already mentioned, however, text-based information does not support all learning styles,
even more so in games with poor graphics and sound; such games seem to be designed and work
mostly for learners that already have some core knowledge available.
Issues
Issue #7: Product, price and place management have been observed as the themes where most
of the games focus. Themes like government regulation, morality and quality of staff are scarcely
included in the game plot and mechanics. Players are often given the impression that they keep
sitting in an office, reading reports and getting decisions, a picture more or less related with
traditional management which may be good for basic educational purposes but still frames the
players’ perceptions in traditional norms.
A variety of digital games on- and offline available free or at a small cost exist nowadays which
support mainly entrepreneurship (especially speaking for multiplayer, online and multiple scenarios
games) and up to an extent creativity and innovation skills. As most of the games evaluated above
show, games dealing with entrepreneurship skills can be used by everyone whereas games requiring
previous knowledge mainly focus on students and formal education.
Text-based information presented in tables was found to be the most common means for player
feedback. This implies, however, that most of the games do not support different learning styles.
As a general rule, games try to recreate real-life aspects but in most with a somewhat poor design.
What is more, the fantasy element of game design cannot be enhanced through realistic storytelling.
If player engagement is left to occur only on the basis of real-life cases, potential immersion is
jeopardized.
Themes like staff characteristics, government regulations, morality, pressure teams, world matters
and environment are generally absent in management decisions. Still, these areas could be crucial for
management decision making.
All games can be used like an experimental lab but only for a few games this experimentation attitude
is indeed supported through gameplay. In most of the cases there are specific correct management
actions that players are required to detect.
Finally, reward systems are generally based on real-life rewards and fall short of surprise bonuses.
On the basis of the use of the games mentioned above on learning outcomes, objectives such as the
improvement of knowledge acquisition and cognitive skills (problem solving, decision making,
situational awareness), affective skills and attitudes as well as teamwork skills (communication,
cooperation and negotiation) could stand out as a direction of further research. In order to achieve
these outcomes, motivating gameplay mechanisms as well as game environments that promote
interactivity and immersion seem to be indispensable. What is more, factors like the relevance of the
information and tasks provided in-game, the relation of different game types to knowledge acquisition
and attitude change, as well as in-game stress levels can be further evaluated, both independently
and in combination with gender preferences and player expertise. All the above need to be
contextualized within a more general approach, that considers game-based learning as enveloped
into blended instructional processes based on well structured collaborative role-playing scenarios
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created around digital games, namely an approach that integrates games-based learning with games-
based teaching for entrepreneurship, innovation and creativity.
As a practical consequence of this analysis it can be concluded that the research agenda of
implementing digital games to support creativity, innovation and entrepreneurship should focus, as a
priority, on improving:
Playability (e.g. through visual information on demand based on simple or more complicated
details)
Surprise challenges (e.g. being faced with a sudden strike)
Additional management challenges (e.g. product casualties)
Differentiated reward systems (e.g. information gained according to results, bonus funds for new
product investments or evolution of existing product)
Special game features (e.g. differentiation between game types and knowledge acquisition, stress
levels)
Fictive storytelling (e.g. actions occurring in ways different from the usual real world norms)
Enriched social aspects, as well as
Overall games-based teaching processes where the games can effectively fit.
All in all, these enhancements could result in environments that actively encourage fruitful and
multidimensional approaches and increase player participation and learning.
References
Csikszentmihalyi, M. (1975) Beyond boredom and anxiety: The experience of play in work and games. San
Francisco
De Freitas, S. (2006) Learning in Immersive worlds. A review of game-based learning (prepared for the JISC e-
Learning Programme)
Deakins, D. & Freel, M. (2007) Entrepreneurship. Kritiki Publications, Athens
Gee, J. P. (2004) What videogames have to teach us about learning and literacy? London: Palgrave Macmillan
Malone, T. W. (1982) Heuristics for Designing Enjoyable User Interfaces: Lessons from Computer Games
Malone, T. W. (1990) What Makes Games Fun to Learn? Heuristics for designing instructional computer games
Michaelidis, D. (2007) The Art of Innovation - Integrating Creativity in Organisations. Performa Productions
Petrakis, P. (2007) The Entrepreneurship, Athens.
Pivec P. (2009) Game Based Learning or Game Based Teaching? Becta, http://www.becta.org
Prensky, M. (2001) Digital games-based learning. New York: McGraw-Hill
Shane S. (2003) A general theory of entrepreneurship: the individual-opportunity nexus. Edward Elgar Publishing
Wouters, P., Spek, E., (2009) Oostendrop, H. Current Prctices in Serious Game Research: A review from
Learning Outcomes Perspective. Chapter XIV, Game Based Learning. Advance Myths for Multi-Sensors
Human Computer Interfaces. Technics and effective practices. Conolly, T. Stanfield, M. Boyle, L. IGI Global
644
Space Image and Entrepreneurs’ Life: Aesthetics in
Entrepreneurial Process
Dun-Hou Tsai, Shao-Yi Lin and Chih-Hao Tsai
National Sun Yat-sen University, Taiwan
dhtsai@bm.nsysu.edu.tw
d964010001@student.nsysu.edu.tw
d964010007@student.nsysu.edu.tw
Abstract: This paper intends to illustrate the entrepreneurial process through portraying changing spaces, which
was ignored in mainstream researches. In this paper, the realistic space refers to both the building and interior
design, while the metaphysic space refers to the image of entrepreneurs’ life style. Combining the
phenomenological inquiry and researchers’ observation, we analysis four cases of Bed & Breakfast(B&B) in
Kenting, Taiwan. Kenting is a famous sightseeing location in Taiwan by its gorgeous beach and tropical scenery,
where clusters a few high-priced and designed B&Bs. We conclude three findings in this paper. First,
entrepreneurial process is initialed by an unfamiliar experience from space. Kenting as an innovative space triggers
entrepreneurs’ imagination to escape from former ill-fitting condition and create a dream house as solution.
Second, B&B entrepreneurs build up an inimitable space as realization of their unique imagination. Each of their
dream houses represents a distinctive image which is referred to their ideal life or personal aesthetic feeling. It also
influences how they receive guests. Third, entrepreneurial process reveals a transformation of life, revealing a new
possibility of entrepreneurship except economics (profits orientation) and social (resource orientation)
explanations. These entrepreneurs endeavor to make their lives into an oeuvre, an aesthetics practice from out of
existed ones. In conclusion, we suggest an aesthetic perspective in entrepreneurship inspired by Foucault’s
“aesthetics of existence”. Following Foucault’s philosophy, entrepreneurial process involves ”care of the self” and
represents as a “technology of the self”, which may open a novel point of view to entrepreneurship.
Keywords: entrepreneurial process, phenomenology, aesthetic
1. Introduction
Process has become the focus of entrepreneurial research since Gartner’s initiation, studying what
entrepreneurs did and how they acted in entrepreneurship (Gartner, 1988, 2008). Process may be a key
point to distinguish entrepreneurial and managerial behaviors. However, what is the force driving
entrepreneurs’ action splitting from managerial thinking? What is the power triggering their desire to
start up something? In past literature of entrepreneurship, these questions were discussed in
economics with profit-pursuit or risk aversion but failed in differentiating entrepreneurs and managers.
Other explanations attempt to puzzle it in psychological terms such as trait theory, or behavioral
theories such as motive and achievement. However, the former had little agreements in essential traits
and the later lacked deep insights with these problems (Bann, 2009). These disappointed results show
a possibility that we cannot probe the essence of this force in direct observations and interpretation of
entrepreneurial behavior. We may need a new reference in puzzling entrepreneurial process since it
refuses to be caught in a straight way. Space is our approach to answer the question in this paper.
This paper defines ‘space’ as a place where everyday practice happened. It could be an embodied
space or a metaphysical space. The realistic space refers to both the B&B building with it interior design
and environment around it, while the metaphysic space refers to the image of entrepreneurs’ life style.
We try to identify what and how the space transformed as if the entrepreneurial process changed.
Under the transformation of space, the force which makes entrepreneur entrepreneurial appears itself.
Besides, this paper attempts to search a descriptive and interpretive understanding to entrepreneurial
process rather than apply the existed concept such as motivation and opportunity. In entrepreneurship
research, motive was regarded as socio-economic orientation of entrepreneurship and usually related
to achievement (Sagie & Elizur, 1999; Hessels, Galderen & Thurik, 2008). Discussion about opportunity
is more popular in research. Opportunity is described as an economics condition (Sarasvathy et al,
2003) or alertness in cognition theory (Kirzner, 1979; Venkataraman, 1997; Ucbasara, Westhead,
Wright, 2001). However, these terminologies more or less imply social or economic meanings. Since we
intend to develop a different knowing beyond existed knowledge, abandon of these concepts would be
an evil necessary.
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2. Research field: B&Bs in Kenting, Taiwan

B&Bs indicate the small and self-owned establishment offering only bed and breakfast. This commercial
activity differs from operating hotel or hostel by low pricing and involvement of hosts who usually lives
with quests. Nevertheless, B&Bs industry in Taiwan, specifically referring to designed B&Bs, develops
an unique business model nowadays, Designed B&Bs generally locate in tourism attractions with
characteristic construction and high quality interior design. Designed B&Bs label themselves with
different themes such as rural, aboriginal, or outlandish. With beautiful scenery with backdrop, designed
B&Bs can charge higher price than commons ones ranged from 100 to 200 Eurodollars per night.
Though the price is almost equivalent to some five-star hotel in Taiwan, designed B&Bs still retain
several feature of common B&Bs like involvement of hosts. That is why customers take them as B&B as
ever.
Usually Designed B&Bs form a cluster around tourism attraction. Take our research field Kenting as
example. There are over 400 B&Bs in Kenting. Kenting, in broad sense covering the peninsula area in
southern Taiwan, is famous for its gorgeous beach and tropical scenery. Part area of this land is
legislated as national park and reserved from advanced development. Commercial activities are limited
in specific areas, where cluster a few designed B&Bs.
Browsing near 200 websites of designed B&Bs, four entrepreneurs were chosen by their public praise
and customers feedback on internet. We interviewed four B&Bs entrepreneurs (B1, B2, B2, B4) in
Kenting. B1 inherited an old hostel from family. He quitted his former job as an interior designer in urban
and moved back to reconstruct the dilapidated house as a designed B&B. B2 retired from journalist and
bought friend’s house to start up his own B&B. B3 was an interior designer and artist, building up B&B
with several friends for fun. B4 had worked as model and TV-actor in big city but chosen to move to
Kenting due to love of surfing. Though all of our informants are male, they operated B&B with wives
except B3. Three of four informants (B1, B3, B4) aged under 40. The only exception was B2 aging over
60.
3. Methodology: Phenomenological inquiry
We adopt phenomenological inquiry as methodology for descriptive and interpretive understanding.
Phenomenological inquiry is to study lived experience in context and interpret meanings of it (Burglund,
2007). It is powerful to disclose inner experience and obtain an essential insight (Cope, 2005). In this
paper, we selected four designed B&B entrepreneurs by purpose sampling. All the interviews were
conducted from August, 2008 to March, 2009. Each of them lasted 60 to 90 minutes. Except the four
B&B entrepreneurs, we also interviewed several hotel managers in Kenting as comparison. The texts of
hotel managers were used only as our background knowledge of tourism industry in Kenting but not
shown in this paper. Further, we performed another two observations of the four designed B&Bs during
summer of 2009.
The steps of phenomenological inquiry in this paper mainly follow Burglund’s instruction (Burglund,
2007). First, we texted all the scripts of interview, then organized an interpretive team. The team
composed of authors of this paper and a MBA student met once a week. The team worked on defining
meaning unit at the beginning. Then forming similar meaning units as descriptive concepts and
grouping related concepts into categorize. So far all the analyses were conducted in Husserl approach
as Burglund claimed. Later analyses involving Heidegger’s interpretive approach were handed to the
three author of this paper. Based on the work of interpretive team, we condensed several concepts into
factors. Streaming these factors, we concluded three findings of this paper. Generally, most analyses
were implemented as Burglund suggested (see Burglund, 2007). Only in the last two steps had we
changed Burglund’s instruction by embracing theory, in order to increase the dialogue with present
researches.
4. Findings
Based on phenomenological inquiry, we have three findings in the study of B&B entrepreneurial
process.
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4.1 Entrepreneurial process is initialed by an unfamiliar experience

Almost every informant mentioned his experience of past busy life. Two of our informants, B1 and B4,
had ever worked in Taipei, the metropolis of Taiwan, who highlighted the cold and detached life style in
Taipei.
“The cause is work. Working in Taipei is toilsome……I had to work over ten hours every
day. I had no time to accompany my family. My life seemed full of work but short of
fun.”(B1, 2:25-3:4-6)
“My last work was model and actor. That was a life…dominated by booking agent or
producer. You were controlled by others. But now I control myself.”(B4, 24:5-7)
The past experience of ill-fitting may be the impetus of entrepreneurship (Bann, 2009). However,
ill-fitting cannot fully explain the happening of entrepreneurship. Entrepreneurial process is not initiated
by only the stress of past unpleasantness. What happened in Kenting? Why these people find a
possibility of entrepreneurship in Kenting? We find that Kenting created a unique experience to them.
Fine weather in Kenting is the first feature mentioned by our informants. Besides, the clear blue sky is
also impressive to them:
“Ern…I like Kenting’s…weather……I don’t know…it is comfortable to see the environment.
Yes, the environment.”(B3:12, 6&12)
“I like Kenting’s weather. See, it is 12 or 13 centigrade in Taipei, but now I wear singlet
here. Yes, that is the difference.”(B4, 6:11-12)
“I have no idea either. Watching this sky just makes me…cheerful and bright.”(B4, 38:15)
“In the beginning, my friends and I just want to have a space for ourselves. That is …the
space allowing us relax. We went to Kenting frequently at first, have drink…thus it is
like…like that we can relieve the pressure and tension from work place. It is very
comfortable…have some food then back to work, or have coffee on the beach, very easy.”
(B3, 3:7-10)
It is fine climate and bright environment that make people easy and relax. Kenting offers a place
allowing people escaping from high pressure. It also changes people’s behaviors. People live with slow
pace and become open and easy-going.
“It is hard to meet a friend in Taipei due to distant relationship. I find it is common in big city.
Nevertheless, in such tourism attraction, there is no more distance between people. I
prefer this kind of interaction, sincere one…I mean there is no intriguing against each
other.”(B4, 6:14-16)
“The most impressive event to me is even though those customers had not met each other
before checking because they came from different cities, soon after that they barbecued
together. Hence Kenting impresses me the most is making friends easily. Everyone
relaxes here, so they go together…yeah, they don’t know each other, but they can have
barbecue dinner together. Right, I think it is very special to me.”(B4. 6:1-5)
“The pace is slow here. I retired from mass media, and it was a fast-moving and
high-pressure style. I faced time pressure every day, the pressure of deadline. It was
pressure (to me). Here the pace is slow, relatively slow.”(B2, 14:3-6)
We argue that Kenting as an innovative space offers a novel experience to B&B entrepreneurs. It is an
unfamiliar and strange style comparing to their former life. It is such an unusual sense inspires them and
triggers entrepreneurial process. Take the informant B3 as example, who was an interior designer and
started up B&B with his artist friends:
“I went to Kenting frequently due to my work, and I became passionate to this place at that
time. Since my passion was initiated, I was wondering if I should own a private space here?
At beginning, I didn’t intend to operate a B&B, just wanted to have comfortable and relax
space for myself. Then…Kenting is perfect, with blue sky and tropical atmosphere, the
climate and environment allow people relax.”(B3, 1:26)
“An opportunity came to us then. We planned to start up a…emm, furniture store in
southern pacific style. Next the store also a land was put to lease. So we have an idea to
change the space. The space could be a B&B as well as a showcase of our furniture. Even
it could be a piece of our work.”(B3, 2:7)
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Thus we conclude the first finding that entrepreneurial process is initialed by an unfamiliar experience.
An innovative space is a catalyst in process by offering a different sense to entrepreneurs and inspiring
their passion to dream. Our informants saw a possibility to new life, so they were willing to conduct an
entrepreneurial process and to be B&B entrepreneurs.
4.2 Space represents an image of ideal life and personal aesthetic feeling
It is evident that past ill-fitting and present innovative experiences enable people to pursuit a better life
and transform them to be entrepreneurs. In our study of B&B entrepreneurship, we also discover an
interesting phenomenon that B&B entrepreneurs intend to construct their house as a dream land
reflecting their ideal life. In B&B entrepreneurship, the designed B&B, their dream houses, prove the
reaction and solution to former life.
Our informant B2 yearned for a vigorous life after retirement. He understood that it was impossible to
keep children beside him all the time because they had their own life. Thus he desired to meet different
people and live as a family. His B&B was designed an open space without partition in order to let guests,
especially children, run and play freely in the house. It also shapes a unique reception, treating guests
as family:
“My B&B is family style, if you want to categorize it.” (B2, 4:5-7)
“How I run B&B is that, I never treated you as a customer since you stepped in my house.
You know what I am saying? I treat you as my friend, my family.”(B2, 37:5-7)
“Our breakfast is not ready-made. We cook it at once when guests require. That is why we
are bustling (in the morning)…… Cold food is distasteful. Our guests always praise us nice
and sweet. Because they feel comfortable, we would like to do it.”(B2, 24:22-25:3-4)
Therefore, profit is not main purpose to B&B entrepreneurs. The houses are constructed and designed
for an ideal life rather than moneymaking:
“We can live in this house if our B&B business was not successful. In this way, we don’t feel
pressure mainly, no pressure at all. I don’t know how other hosts run their B&Bs. Maybe it
is because that we don’t grant any loan, all the funding comes from us. (For this reason,)
we run B&B without pressure. We don’t mind whether it is profitable or not.”(B2, 17:24-27)
Other designed B&Bs reflect their personal sensibility to the place. The designed B&B of B4 was
constructed all in white, representing his personal aesthetic feeling to Kenting:
“I feel white building matches this environment best. Yeah, I think the natural environment
is extremely wonderful, so the color of building is unnecessary to compete with the nature.
I wish my house harmonizes with the nature.”(B4, 2:20-25)
On the contrary, informant B3 prefer strong colors such as red, yellow, green and blue to represent his
aesthetic feeling to Kenting, expressing his perception to the tropical scenery:
“We thought of environment in designing, and tried to harmonize (our B&B) within it. For
example, it is tropical area with some characteristics of Austronesia, so we will look for
some elements such as tropical plants to represent the atmosphere of Austronesia.”(B3,
4:15-17)
“So we adopted rough style (of interior design). The only requirement is to match the
natural feeling and plus a few artistry and fun.”(B3, 4:10-12)
Designed B&B is not only the representation of entrepreneurs’ ideal life and personal sensibility.
Moreover, it becomes a piece of work. Our B&B entrepreneur B3 respected its meaning of an art work
rather than a business place.
“If you calculate it in moneymaking, our business model which main purpose is to have fun
is not economic at all. But for us, if we take it as a piece of work, it makes us fun and then
your guests also feel nice and delightful. So, it depends what you want.”(B3, 11:4-6)
As remark above, we argue that B&B entrepreneurs actualize their dream life in their constructions.
Entrepreneurs materialize and embody their dream instead of only dreaming a dream. It is evident in
design of B&B representing entrepreneurs’ dream that the capability of execution distinguish
entrepreneur and non-entrepreneur. Further, B&B entrepreneurs’ dream houses reveal a pursuit of
ideal life and a personal aesthetic feeling, which removes from conventional understanding of
entrepreneurship.
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4.3 Transformation of life as feedback in entrepreneurial process

We can argue that entrepreneurial process of B&Bs involves in a pursuit of life based on the first and
second findings. They initiate entrepreneurial process for a better life, and the transformation of life as
feedback as well.
Informant B1 considered B&B business allowed him to develop personal interests, especially in
off-season:
“In Kenting, I have more time to do what I want to. I love painting. I painted 2 or 3 days a
week…...A college nearby had canvas course, so I went to the class.”(B1, 8:1-4)
Informant B4 mentioned his change like from boy to man:
“My biggest difference is the cultivation of responsibility. I was a baby before constructing
this B&B. I think it is like parenting. You won’t be mature unless you are someone’s parent.
It is because you were not in parenting condition—you won’t be responsible without that
condition. You build up a house, involving the birth of this house, and then you feel
responsible. I find my biggest transformation is growing from boy to man. Right, because I
feel responsible. I have to…I have to protect this place.”(B4, 5:12-19)
Change of life even causes one of our B&B entrepreneurs thinking of artist Paul Gauguin life. He found
himself emancipated in Kenting as like Gauguin was emancipated in Tahiti:
“Painting job enables me to know Gauguin’s life. Have you heard of Gauguin? He was a
famous artist. He had been in Tahiti! He left civilized society and plunged into the wild for
his art. Tahiti Island and our Kenting are similar in their grounds, colors, and
primitiveness……Gauguin became open there…He took the wrap of time off and walked
into the wild……(It is like that) many girls who wear a lot in city but undress themselves in
Kenting. In Kenting you will be emancipated.”
The feeling of emancipation precisely probes the essence of B&B entrepreneurship. B&B entrepreneurs
look for an emancipation of life so entrepreneurship provides a mean to liberate them. Rindova, Barry &
Keychen, Jr. (2009) argued that wealth, resource or achievement are not the only explanation for
entrepreneurship, but change the self and the world disclose a new possibility to entrepreneurship.
Indeed entrepreneurs of designed B&Bs endeavor in elimination of restriction as Rindova, Barry &
Keychen, Jr. put it. In our study, entrepreneurial process turns into an emancipation process as well.
The nature of emancipation emerges in what entrepreneurs perceive in Kenting and how they construct
their dream houses. As the result, transformation of life returns in entrepreneurial process as feedback
to emancipation.
5. Discussion
Research on Kenting B&B entrepreneurship manifests an orientation of life and entrepreneurs self. It
discards the abstract and conventional concepts like opportunity or motive, and shift to a descriptive
and interpretive understanding experience in entrepreneurial process. AS a result, a specific
experience with image of ideal life is created, revealing a new encounter of everyday life. This paper
departures ‘a managerial form of entrepreneurship’ (Hjorth, 2004) serving for conventional organization
theory and economic discourse and locate entrepreneurship into everyday life consisting entrepreneur
him/herself and others. Thus entrepreneurship blossoms into a process how an entrepreneur ‘care of
the self’ in Foucault’s words. ‘Care of the self’ coexists with a subject’s entire life, concerning the relation
of self to self. It asks subject to devote him/herself to him/herself (Foucault, 1982: 247-248). ‘Care of the
self’ differs from ‘need of achievement’; rather, it concerns more in subjectification, a formation of who I
am as well as who I want to be as Foucault’s words (Foucault, 1982). In Kenting research, B&B
entrepreneurs introduce this subjectification into their entrepreneurial process and finally project their
ideal type in space. Thus, entrepreneurship, rather than dedicating to a business as organization theory
and economics claimed, becomes an unique process of subjectification, concerning what and how an
entrepreneur create a new form of life. From the first beginning, we have left entrepreneurship away
common understandings and turned into a creative process.
In this research, entrepreneurship of Kenting B&B is realized as an experienced process, reflecting how
an entrepreneur perceived an unfamiliar feeling and recognized it as a new possibility in his/her life.
This creative process should be singular to each other as we can find different B&B styles in our case.
Here, entrepreneurship as a creative process unrolls an aesthetic understanding, or ‘art of
living/aesthetics of existence’ in Foucault’s words. Foucault advocated an ‘art of living/aesthetics of
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existence’ inspired from Greek philosophy. It referred to a practice of ‘making one’s life a work—a
beautiful and good work’ (Foucault, 1982: 424). It occurs in physical elements such as B&B’s
construction and interior design but also in efforts to change entrepreneurs’ life. Thus entrepreneurship
in B&B case is closer to a practice of ‘making one’s life a work.’ Rather than developing an innovative
technology or business model, B&B entrepreneurs much more intend to creative a singular style
consisting the personal experience of the world like ‘harmonizing the environment’ or ‘family reception.’
Unique style becomes the feature and specific mark of each B&B, which is the biggest attraction to
customers. People not only consume a comfortable room and careful service, but also a new form of
lifestyle. It is the real attraction in Kenting designed B&B.
In the lens of aesthetics, entrepreneurship involves personal perception and lived experience. It
changes our focus from process of starting an organization to process of ‘care of the self’ or
subjectification. As Rindova, Barry & Keychen, Jr. (2009) mentioned, entrepreneurial process, or
entrepreneuring, consists of emancipation of life in essence. We conclude that our finding 1 and 3 refer
to ‘care of the self’, while finding 2 reveals the style of life. In the understanding of entrepreneurship as
creative process, this paper demonstrates a more clear idea to realize entrepreneuring, an ‘art of living’
or ‘aesthetics of existence’ in Foucauldian understanding. Through the observation of space and
aesthetic, the ingredients in entrepreneurial process especially the ‘self’ and ‘style’ become much more
evident and recognizable. We believe that with ‘aesthetics of existence’ can enrich and deepen the
understanding on entrepreneurial process, especially for the process which involves emancipation.
Moreover, aesthetics as a perspective may emancipate the existing boundaries of entrepreneurship
research.
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650
Social Innovations Facilitating the Quick Adoption of
eBanking in Finland
Olavi Uusitalo
Tampere University of Technology, Finland
olavi.uusitalo@tut.fi
Abstract: The aim of this paper is to study the development and success of Internet-banking in Finland. The
focus will be on two social innovations that have played a major role in the digitalisation of the Finnish banking
industry. The evolution of Internet banking will be studied by looking at the changes in payment systems provided
by the banks: how did we get from paying our bills over-the-counter to modern day on-line services. The paper is
empirical in nature and it has qualitative research approach. The development in electronic commerce is often
illustrated with a cube having three dimensions: the product, the agent and the process. Usually the digital
process is the last missing dimension but in this case it is the one starting the entire process. The first social
innovation took place in the 1960 when employers started paying wages directly to employees’ bank accounts
using digital data transmission based payment systems. The banks started to develop their virtual processes and
products which, with the help of on-line technology, lead to the introduction of bank cards and PC-banking in
1975-1984. In the late 1980s a large number of private companies and institutions had on-line technology and
thanks to the liberal human resource policy the employees were allowed and even encouraged to use the
computers for their own purposes. This way many people were introduced to PC-banking at a time when it was
still fairly rare to have a computer at home. This was the second social innovation. In 1995 there were 260 000
households and entrepreneurs using PC-banking, which means one computer on-line for every 19 people. This
gave the customers the freedom to pay their bills whenever they wanted but, compared to the on-line banking we
know now, they were tied to a one particular computer signed up for the task. The Internet provided the missing
dimension, the virtual agent. At this point the Finnish banks as well as their customers had plenty of experience
and knowledge of digital banking and the whole country was able to shift easily to Internet banking and
customers were able to pay their bill whenever they wanted, wherever they wanted.
Keywords: social innovation, dimensions in eCommerce, eBanking, adoption
1. Introduction
This paper studies the successful development of Internet banking in Finland. The term eBanking will
be used for Internet banking in the following text. The main emphasis is on two major social
innovations which have had a great impact on the evolution of the Finnish banking industry. Social
innovation as a concept has received little attention and it can be defined as a generation and
implementation of new ideas about social relationships and social organization (Mumford 2002,
Heiskala, 2007). Banking industry will be analyzed through the payment systems provided to the
customer. The study is based on interviews and secondary material in the field.
The paper is divided into six sections. The first being introduction, Theoretical base (2.) addresses the
key elements of this study i.e. social innovation (Drucker 1985 and Pol and Ville 2009), trends in the
electronic commerce (Choi et. al., 1997), issues in technology and innovation management (Foster
1986, Anderson and Tushman 1990, Tushman and Rosenkopf 1992 and Moore 1995). Research
methodology (3.) is discussed. Evolution of the Finnish electronic banking (4.) illustrates the era
before the Internet. Analysis (5) portraits the success factors in the electronic banking. In Conclusion
(6) the author discusses the possibilities to generalise the success factors to other countries. The
author also discusses the applicability of longitudinal and cross sectional approaches in causal
studies and also makes some managerial implications and suggestions for future research.
The main objective of the present research is to find out reasons for the early success of eBanking in
Finland. The author also has twenty years of experience in longitudinal and causal studies on the
impacts of technological changes on industry structures. The studies in question are on flat glass
industry (Uusitalo 1995, Uusitalo and Mikkola 2010), cement industry (Uusitalo 2000), and food
industry (Uusitalo and Gronhaug 1998).
There are eight ways to pay bills (Bank of Finland 1993): 1) the bill payment in an envelope, 2) the
automatic teller machine (ATM), 3) over the counter, 4) as a direct debit, 5) by telephone, 6) with the
bank card, 7) with PC banking (on-line or as a batch process) and 8) over the Internet.
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2. Theoretical base
Social innovations, in terms of development of various institutions like schools, banks, and working
environments, were far more difficult to achieve than technological innovations. Technology can be
imported at low cost in other areas and with a minimum of cultural risk. Institutions, by contrast, need
cultural roots to grow and prosper (Drucker 1985). “Innovation” is defined as an economic or social
rather than technological term and “social innovation” as a change in the value and satisfaction
obtained by the consumer from an existing resource combined in a new way (Drucker 1985). Social
innovation should increase the quality of life or quantity of life or both among consumers. The
container for transportation is a good example of a social innovation. Thanks to it loading and
unloading time for ship was reduced dramatically. The container combined the existing technology in
a new way. Almost all innovations seem to create economic value for the creator. Thus, the term
business innovation is introduced. Business innovation and social innovation overlap almost totally
meaning that there is little room for real social innovation. (Pol and Ville 2009)
Trends in the electronic commerce are illustrated by a cube (Figure 1) having three dimensions: the
agent (the marketing channel), the product and the process (Choi et. al. 1997). Every dimension has
a continuum from the physical properties to the digital ones.
Figure 1: Trends in electronic commerce

Another way to illustrate technological development is the S-curve (Figure 2) which shows the
relationship between the effort put into improving a product or a process and the results one gets
back from that particular investment. At the beginning the progress is very slow until more learning of
key knowledge creates progress. Finally, there is saturation in the performance of technology. The S-
curve sets the limit to a particular technology. S-curves usually come in pairs and the gap between
them represents a technological discontinuity. (Foster 1986)
Performance
Discontinuity
Effort (funds)
Figure 2: S-curves almost always appear in pairs
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Technical progress in an industry usually consists of long periods of incremental change (Figure 3). A
technological discontinuity inaugurates an era of ferment in which competition among variations of the
original breakthrough ends with the selection of a single dominant design of the new technology. The
era of ferment has two processes: the design competition and the technological substitution. The
incremental evolution of this standard design goes on until a new discontinuous technological change
will come. (Anderson and Tushman, 1990) A competence-enhancing technological discontinuity permits
the transfer of knowledge while a competence-destroying one does not (Tushman and Anderson, 1986).
Figure 3: The cyclical model of technological change

Technology is as systems composed of component and linking technologies. The more complex the
product is, the more subsystems exist, the greater the number of internal and external interfaces
becomes and the greater the technical and contextual uncertainty is. Thus, while the technical system
itself may suggest logical evolutionary paths, as the system gains complexity, nontechnical forces
weigh more heavily on the process of technological evolution (Figure 4). The greater these
uncertainties are, the greater the intrusion of socio-political dynamics in the evolution of a particular
technology becomes. (Tushman and Rosenkopf, 1992)
Figure 4: Toward sociology of technology

Innovators (Rogers 1983) or technology enthusiasts (Moore 1995) in the early market use new
technology when ever it is available. Early adopters or visionaries are true revolutionaries. The chasm
is between early market and main street. Early majority or pragmatists make the bulk, but they do not
love technology for its own sake. They believe in evolution, not in revolution. Early majority or people
entering the bowling alley (Figure 5) adopt innovation only after proven value added. This group
believes in strong references from people they trust (Moore 1995).
As summary of this literature review the framework is illustrated in Figure 6. Foster’s (1987) S-curves
form the basis for the framework. The changes will be analysed with the help of sociology of
technology (Tushman and Rosenkopf, 1992). After a technological change a dominant design will
probably emerge (Anderson and Tushman, 1990). In an open type of innovation where several
stakeholders are involved the social innovation, in which all stakeholders will benefit (Hämäläinen,
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Olavi Uusitalo
2009) may be helpful. A competence enhancing technological change (Tushman and Anderson,
1986) will be easier to adapt by target groups. The bowling alley (Moore, 1995) increases our
understanding of the changes, as well. Technological changes taken place during the evolution of the
Finnish banking industry will be analysed with this framework on the axis of the Choi et. al.’s (1997)
cube.
Figure 5: Bowling alley market development
Sociology of technology
Performance
Social innovation
Competence
enhancing
Discontinuity
S-curves
Bowling alley
Effort (funds)
Figure 6: The theoretical frame for analysing technological changes
3. Research method
The purpose of the present research was to determine the impact of social innovations on the
success of the Finnish eBanking. For this task we have to understand the effects of technological
changes on the industry structure and the complexities involved in the diffusion of new technologies.
A longitudinal, historical and contextual case study suits best for this kind of a causal study. A
contextual and historical perspective should be adopted for research on processes of change
(Pettigrew 1985).
The important advantage of a single case study is the depth of the analysis, both in terms of the number
of factors studied and sources of information used (Yin, 1984). It is the best way to get a holistic picture
and understanding of the research problem. Qualitative inquiry is highly appropriate in studying
processes because depicting a process requires detailed description (Patton 1990: 95). An overview of
the industry should be gained first and only then the focus on the specifics (Porter 1980). He also
stresses the value of in-depth industry histories in understanding industry environments and identifying
firms' strategic interactions on a longitudinal basis. Descriptions are central to the generation of insight
(Pettigrew, 1990). As in any research approach, the case study has its limitations. One concern is the
lack of rigor in case study research. The methods of analysis are not well-formulated in the use of
qualitative data (Miles, 1979). Case study research is very time-consuming and results in a massive
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amounts documentation the handling of which requires special skills (Yin, 1984). Case studies also
provide very little basis for scientific generalisation.
In the study of the impact of social innovations on eBanking is operationalised by measuring only the
diffusion of different payment methods. This is because, the payment systems are such well
developed that the evolution of them is worth studying. The results of the present study may be used
in analysing the development of payment systems in other countries.
There are several ways to pay bills: First, one can bay bill immediately at the shop, hotel or some
other place by either by cash, bank card or credit card. Provided that the retail outlet has an EFFPOS
terminal (providing digital transmissions) the two last transactions are in digital form. Second, the
customer may pay the bill received from the service provider several ways (Appendix 1). S/he can go
to the bank and pay it by cash or debit from own account. The bill can be aid in an envelope. These
three transactions require physical work and thus they are not digital. Direct debit, the use of
telephone, ATM and terminal services (PC banking, the Internet or mobile) are digital transactions.
These belong to electronic banking.
The payment methods are listed in Table 1. Bank and credit cards have a joint column. First, the
information of the technology, introduction and the process needed are provided. Only over the
counter services and bill payment in an envelope require physical processes. The positioning of new
services from the user’s point of view is important to recognize. PC banking taught users the freedom
of time and place (bills could be paid any time and either at home or work). Internet banking provided
again new features, such as e-mail and eCommerce. The freedom of place was increased since the
user could use all computers having the Internet connection.
Table 1: Comparison of payment methods
Feature Bank Enve- Card ATM Direct Phone PC- Internet WAP
office lope debit bank banking banking
Introduced 1982? 1980 1989 1980 1982 SYP 1984 1996 2000
Technology digit. phone PC/mod +internet +mobile

phone
Process/ + + + + + + +
digital EFTPOS
No time
+ + + + + + +
dependent
No place
++ + + + ++ ++
dependent
Speed distance distance ++ distance ++ + ++ ++ ++
No computer
dependent + +
Electronic sign + +
E-commerce + +
E-mail + +
Validity has three types: construct, internal and external. Construct validity refers to the establishment
of appropriate operational measures for the concepts being studied (Yin, 1984). The analysis of the
operationalisation process of this study was divided into two parts: 1) an evaluation of the
competence of the present author and 2) the quality of the data sources. For studying technological
changes in process technology my engineering background (power electronics and automation)
provides me a consistent approach to the empirical material. All my previous studies in industry
evolutions provided an excellent basis for a longitudinal study.
To improve the validity the author used the triangulation methods (Pettigrew 1990) to construct case
studies from a variety of information sources: interviews, company histories, industry studies,
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business periodicals, books written by businessmen, trade journals, company correspondence,

academic journals, and news clippings from the mass media.
Interviews of ten people from the Finnish Bankers’ Association and two banks were carried out in
2001. Uusitalo’s (2001) report was circulated among banking people in the early 2000s. By 2006 the
author acted an opponent for Lähteenmäki’s (2006) dissertation. Several intensive histories (among
others Aromäki 1995, Hiilamo 1995, Pietilä 1995, Tilli 1996 and Vihola 2000) were read. Articles in
Trade Journals, Business Periodicals and Business Books were used, as well. The account of the
evolution of the banking technology in (1960)- 1990- 2000 was based on a review of issues of the
banking periodical for the period 1990-2000. The annual reports of a local bank (1980-2000) were
also studied. Articles from business periodicals provided management’s view. Archival records (i.e.
industry statistics) were also used. Qualitative data were supplemented by quantitative data. The
Finnish Bankers’ Association provided abundant amount of statistical data for constructing the
development of the payment methods in Finland.
Moreover the author himself has made his own remarks on the development of the payment methods.
In the late 1960s and the early 1970s the first wages were paid on hand. Later on banks provided the
cheques, the envelopes for the bill payment, the bank card, the credit card and PC-banking. The
author started to use PC banking in 1992 and switched to the Internet banking in 2009. By following
his three children (now ages of 25, 30 and 32) the author was able to track also how young people
used the bank services in the 1990s.
4. The evolution of the Finnish banking industry
The evolution of the Finnish banking industry is illustrated with the help of Choi et. al.’s (1997) cube
(see Figure 1). It seems that the first one, virtual agent has been the most challenging for banks.
Postal and bank giros were taken in use in 1939 and 1942, respectively (see Appendix 2). The great
change in banking was the moment when employers started to pay wages and salaries directly to
banks. The solution for handling this large number of customers was a computer introduced in 1960.
Electronic data transmission of wages and salaries is itself a digital product. Thus, banks started to
develop both virtual product and virtual process in the 1960s. More over they also started to build the
content, payment methods, for the coming Internet. SYP (the predecessor of Nordea) opened the first
on line connections in Finland in 1975. By 1980 all bank branches in Finland had on-line connection
to the central computer.
Consumers were offered cheques in the late 1960s. In 1971 automatic cash withdrawal machines
without on-line connections were tested without success in Helsinki. One important innovation in
developing both the digital product and process was the reference bank giro in the 1970s.
Luottokunta, a company representing credit card companies brought Visa credit card to Finland in
1979 (Hirvonen et. al., 1993). The bank card was introduced in 1980. First, both credit and bank,
required labour work. The EFTPOS system for retail outlets made the card transactions digital. In the
meanwhile the first PC banking connections were opened in 1984 providing a digital agent with both
digital product and processes. However, the number of PCs was limited. At the end of 1980s ATM for
bill payment was introduced. This let people pay bills without queuing in banks, but they still had to go
to ATMs. All agents so far were created by the banks themselves.
The banks and the central bank co-operated well in creating the digital transactions. In 1972-1978 the
POLM (Banks’ On-Line Data Communications System) agreement was signed by all banks (Vihola
2000). Sometimes the new agents such as ATMs (both for cash withdrawals and bill payments)
created competitive advantages for banks. Then, of course, co-operation was not possible. For
instance, it took 14 years until the main banks formed a joint system and company (OTTO) for cash
withdrawals.
For the companies and institutions banking connections were well developed in the late 1980s. The
liberal human resource policy of the Finnish employers’ let employees to use PC banking at work.
Employees of the city council and governmental institutions were allowed to use working time and
PCs for handling their bank transactions. The banks trained employees (Vehviläinen 1993). Credit
cards, which also provide a digital product for banks, were adopted late in Finland. This gave room for
PC banking in the early 1990s. In 1995 in the country of 5 million inhabitants 260000 households and
thousands of entrepreneurs used PC banking (The Finnish Bankers’ Association 1996) (Figure 7).
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Figure 7: Data links between customer and bank

PC banking gave people freedom from place and time. The family room became a bank. Earlier bills
were paid either by direct debit or by bill payments in an envelope. Often they got stuck somewhere
and bills were late. Now payments could be scheduled and typed in for one year ahead. (Vehviläinen
1993). Appendix 1 lists the costs for bills payments in 1993. In 1989, a joint project between banks for
developing a general data network, TELMO (TELematic MUltiservice) started. The aim was to
develop a network for digital services between banks, insurance companies and consumers.
(Hirvonen et al. 1993).
5. Analysis
The evolution of the Finnish banking industry is done by the technological changes on the axes of the
Choi et. al. (1997) (see Figure 8). Since the virtualization (digitalization, which means less manual
work within banks) started with the dimension of the process, in the cube the x-axis is the process. In
1959 the first computer was introduced in the banking industry. This was the starting point in the
process axis. In the early 1960s a radical social change took place in banking when employers started
paying wages and salaries into employees’ bank account. This change involved several stakeholders
such as employers, banks, government, trade unions etc. The social, organisational and political
influences were enormous as Tushman and Rosenkopf (1992) suggested this kind of changes. This
social innovation (1. Social innovation, see Figure 8) helped both the diffusion of digitalization of the
banking process and the development of digitalized products. This episode was important in many
senses. First, banks had now large amount of consumers as customers which require improvements
in processes, products and agents. This needed the digital form of transactions. Second, the banks
and large employers started co-operation and they became emphatic to each other regarding to the
banking transactions of the employees. Later on In the 1980s banks provided personal services in
large factories or offices to collect payments in envelops.
The coming (technological) changes in the product axis, such as cheques, bank card, envelope and
ATMs were competence enhancing (Tushman and Anderson, 1986). This meant that the new
introduced payment methods were built on the earlier ones. It was not difficult for users to jump on the
next s-curve (Foster 1987). The new payment methods provide better service (less visits to banks,
lower costs) for consumers, the users. In the process axis banks tried to reduces manual work by
standardising the interface with consumers. The agent, the third axis of the cube, emerged via on/off-
line corporate networks, bank card and ATM networks.
By the early 1990s the number PC both privately and company owned had increased. Also the on-line
bank connection of the companies had risen in Finland. PC banking provided freedom of place and
time. The operation was, however, tied to a particular computer by the bank. The employers also saw
these advantages of PC banking. Soon employers let employees to use their equipment (PCs) and
on-lines in working hours (2. Social innovation, see Figure 8). This was a response to bank, which
took the personal service to factories and offices.
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Olavi Uusitalo
The users of PC banking were the for-runners for the Internet banking. They had learnt the freedom of
time and place already there. As we saw, in 1995 there were already 260 000 PC-banking customers.
The share of digital transactions rose from 24 in 1986 to 73 per cent in 1995. The OKO Group started
Internet banking in January 1996 and Merita one year later. For instance, in 1995 in bill payments
total of 611 million transactions were made (The Finnish Bankers’ Association 1996, Appendix 3). By
excluding Batch file transfer transactions (235 million for corporate customers) we have 376 million
transactions for consumers, 57 per cent (213 million transactions) of which were already under
electronic banking (see Figure 8) by the definition of Choi et. al. (1997).
Virtual
product e-banking
Payment
method
PC banking
ATM
Virtual
Agent
The Internet
Envelope
TELMO? Use of PC at work
Bank
Card 2. Social innovation
Traditional
Cheques banking ATM network
Bank Card network
On / off-line corporate networks
Virtual
First Wages and PC banking PATU Process
computer salaries to bank
in 1959 1. Social innovation ATM Digitalization
Figure 8: The analysis of the evolution of the Finnish banking industry

Banks planned well the switch from PC banking to the Internet. In 1993-1995 they backed PC
banking. At the early 1996 the Internet was launched. The Finnish banks were well prepared to jump
from the lower S-curve (Forster 1986) to the higher one. The users of PC banking were a good target
group. They had already learnt the use of computer and the freedom of the place and the time. The
positioning of the Internet banking was appropriate. Moreover, employers provided the Internet
connection probably to the most of the users of Internet banking. The users of PC banking formed
clearly the first bowling pin (Moore’s 1995). Because of long tradition in the digital products and
processes the Internet services had a clear content. People have to pay bills. This is the other
direction, the same content with new segments, in the bowling alley (Moore 1995, Figure 5). However
this content was not attractive for all consumers. There was no content for the largest user of the
Internet, for youths. Young people let their parents pay their few bills.
All digital channel technologies except the Internet had been developed by the Finnish banks. Again,
the Internet was a competitive enhancing technological change (Tushman and Anderson 1986), since
digital products and digital processes developed by banks could be used with the new agent. Thus, all
the efforts put in the digitalization of the product, the process and the agent within 1960 – 1995 helped
the launch of the Internet. No bank was any more dependent on other banks in their consumer
businesses since the Internet as a universal net required no critical mass. It took 14 years until the
banks in Finland managed to create a joint company, OTTO, to handle bank card withdrawals in
1994. Cost savings and the Finnish bank crisis forced banks to create OTTO. By 1990 banks had the
TELMO project to create a information network for consumers. The aim of the TELMO project was the
same as the MINITEL system had in France. However, the Internet made the project obsolete by
providing the banks the missing virtual agent. The Internet seemed to have been a gift from the
heaven for the Finnish banks.
It seems that two social innovations have had great impact on the decades lasting switch from
traditional banking first to virtual banking (PC-banking to limited audience) and then to eBanking. The
658
Olavi Uusitalo
change has followed the logic of change illustrated by Tushman and Rosenkopf (1992) (see
framework, Figure 6) helped by the social innovation.
6. Conclusion
All dimensions (Figure 1) in the cube (Choi et. al. 1997) were well virtualized by 1996 for the launch of
the Internet banking. In 1995 the share of digital transactions was 73 per cent. The cube suited well
for analysing the evolution of electronic banking and, thus the impacts of social innovations. However,
as we saw the dimensions appeared in a different order (Figure 9). The digital process (x-axis) was
first developed thanks to the first social innovation, wages to banks. The product (y-axis) was
digitalised next. The agent (z-axis) was the most challenging for banks. Usually the product and the
processes were not at all virtualized when the Internet was introduced. Thus, the Finnish banking
sector provides a fascinating exception. Some of the processes (x-axis) and products (y-axis) were
virtual indeed well before the introduction of the Internet.
Figure 9: The Dimension of the Finnish eBanking

Several times the digital process has caused problem in the e-business. The order of dimensions
identified in the eBanking might have helped in some of these cases. The company could have
concentrated first on the process properly before entering blindly to the e-business.
The longitudinal research approach in causal studies is extremely important. The rich longitudinal
data makes it possible to apply properly several technology and innovation management concepts
(Foster 1996 and Anderson and Tushman 1990).
The launch of the Internet banking preceded many other changes in the Finnish banking sector
(Appendix 2). Bank giros were invented in 1939. Employers started to pay salaries and wages via
banks in the 1960s. The on-line connection between banks and branches was developed in the
1970s. The reference bank giro came in the 1970s, as well. The bank security standard (PATU) was
developed in the 1990s. All these and some other non-mentioned changes or events have made the
Finnish banking sector unique. Because of the differences in the adoption of the credit and bank
cards and the uniqueness of the Finnish banking industry all generalisations (especially to the US
where the extensive and traditional use of credit cards caused the failure of PC banking) of the
diffusion of the Internet banking must be made with an extra care.
There are a couple of ideas for further studies. First, the Finnish insurance industry has not been
successful in adopting the Internet as its agent. It would be interesting to make a comparative study of
the evolution of the e-insurance and the eBanking. Second, this study focused on the social
innovations in the long lasting evolution of the electronic banking in Finland. Probably the adoption of
the Internet banking has been different in the Baltic Countries such as Estonia because they have not
had long traditions in the electronic banking. It would be also interesting to study whether long
traditions in the electronic banking were a burden for the Finnish banks.
659
Olavi Uusitalo
7. Appendix 1: The usual charges of payments (KultaYV, 2/1993:15)
8. Appendix 2: Developments in services and data links (Hirvonen et.al.

1993:90)
DEVELOPMENT IN BANKING TECHNOLOGY
* Automatia / OTTO1)
* joint POLT-ATM network
* ATMs for payments of bills
* linking of Postipankki’s and STS-Bank’s
ATMs to the commercial banks’ ATM
network
* cooperative and savings bank’s ATM
network
* commercial bank’s ATM network
* foreign transactions linked to the SWIFT network
* cash dispenser experiment
* branches’ on-line experiment
* first bank computer
1950s 1960s 1970s 1980s 1990s
Payment and payment instrument services

postal and bank giro (1939 and 1942)
* wages and salaries direct to bank accounts
* cheque
* reference bank giro
* bank card
* bank barcode 1)
* common bank giro 1)
Data-processing services for customers’ systems
* recurrent payments and bill payment services
* on-line corporate customer terminal services
* corporate off-line transfer services
* home terminal services
* EFTPOS terminal services
* initial phase of TELMO
* TITO, statements as vouchers 1)
1) source: Kontkanen (1996:175-176)
* PATU, bank security standard 1)
DEVELOPMENT IN CUSTOMER SERVICES
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Olavi Uusitalo
9. Appendix 3: Bill payment transactions (The Finnish Bankers’ Association)
Bill payment transactios (total)
800
700
600
Slips and cheques
500
EFTPOS transactions
M illion tra nsa c tions
400 Batch file transfer

transactions
Data connections
300 (private customers)
Bill payment ATMs
200 Paper based

transactions
100
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
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662
Strategic Human Resource Management Role in a new
Business Development: A Literature Review
Daria Volchek and Kyllikki Taipale-Erävala
Lappeenranta University of Technology, Finland
Daria.Volchek@lut.fi
Kyllikki.Taipale-Eravala@lut.fi
Abstract: During the last three decades, the development of strategic human resource management (SHRM) as
a field of study has been supported by research conducted from different angles and perspectives (Lengnick-Hall
et al. 2009). This scientific discourse continues to provide an ongoing discussion on the necessity of the human
resource manager’s involvement in the decision making process at the strategic level of a company.
Nevertheless, no structured information on SHRM opportunities supporting re-direction of companies into new
business or the implementation of new and innovative business ideas was found. This review summarises the
state-of-the-art approaches defining the SHRM’s opportunities to influence new business development. The
research question of this review is: How can strategic human resource management help to solve the challenges
of new business development? In order to answer the research question publications from the academic journals
and books fundamental in the subject area were reviewed. All relevant theoretical and empirical studies available
were compared and analyzed, providing the propositions for further research. The review was conducted in order
to structure the existing knowledge at the intersection of SHRM and new business development. A narrower view
has been taken with SHRM’s distinctive characteristics in small and medium-sized enterprises (SMEs).
Keywords: strategic human resource management (SHRM), knowledge based view, new business
development, innovation, SME
1. Introduction
Strategic human resource management as a field of study is supported by research conducted from
different angles and perspectives (Lengnick-Hall et al. 2009). There is an ongoing discussion
investigating the necessity, influence and effectiveness of human resource management’s
involvement in the decision making process at the strategic level.
A great extent of previous research suggests that organizations adopting a particular strategy require
human resource management (HRM) practices that are different from those required by organizations
adopting alternative strategies (Delery and Doty 1996). On the other hand, different employee skills,
knowledge and policies existing in the company are required to implement different strategies (Lado
and Wilson 1994; Becker and Gerhart 1996). Presumably this refers to different HRM practices that
can influence these employee characteristics (Jimenez-Jimenez and Sanz-Valle 2005). In the
literature, there is particular interest in the question of SHRM’s influence on different business
strategies, particularly those supporting new business development. In this review, we are going to
focus on the innovative view of NBD. No limitation regarding the type of innovations was
implemented.
The competitive and continuously changing situation of the market forces many firms to choose
innovation as a strategy to improve flexibility, competitive position and performance (Jimenez-
Jimenez and Sanz-Valle 2005). Despite the type of the innovation a firm develops, certain conditions
for successful fulfilment are required. Literature highlights strategy, organizational design,
management, style and HRM as the determining factors in the firm’s innovative behaviour (Jimenez-
Jimenez and Sanz-Valle 2005). Thus, it is not surprising that a significant amount of the studies
investigating the connection and causality between HRM in the organization and its innovation
perspective has been conducted during the last decade (Laursen 2002; Allani and Bayad 2003;
Laursen and Foss 2003; Scarbrough 2003; Jimenez-Jimenez and Sanz-Valle 2005; Shipton et al.
2006; Beugelsdijk 2008; Chen and Huang 2009). Both behavioural (Katz and Kahn 1978; Jackson
and Schuler 1995) and knowledge management approaches (Hedlund 1994; Nonaka and Takeuchi
1995; Leonard-Barton and Sensiper 1998; Forrester 2000; Darroch and McNaugton 2002) defend the
importance of HRM to a company’s innovation strategy.
Despite numerous studies investigating the link between SHRM and innovation strategy, no
structured information on SHRM’s and innovation strategy alignment was found. Hence, by the means
of this review we aim to structure and analyse state-of-the-art knowledge of SHRM’s role in new
business development and in particular, in supporting organizational innovation strategy. We are
663
interested in focusing our attention on the specific differences of that role in SMEs and thus, propose
directions for further research.
To accomplish the review of the SHRM’s role in NBD, all relevant and available publications were
collected from international academic journals and the most influential books in the area. First, based
on the several criteria, such as the journal’s impact factor and references in previous research, six
journals were chosen for the analysis: Academy of Management Review, Academy of Management
Journal, MIS Quarterly, Strategic Management Journal, International Journal of Human Resource
Management and Human Resource Management. After choosing the literature sources, the search
terms were established, such as SHRM, HRM, new business development, new business, innovation
strategy, innovation, organizational change and SME. The articles were collected by means of several
electronic databases: EBSCO, Elsevier, Emerald and Scirus.
This paper provides an overview of the theoretical concepts and empirical explanations of the link
between SHRM and innovation strategy. The existing theories are described by the universalistic,
contingency and configurational approaches. The causality of innovation strategy and HRM practices
is discussed and followed by the definition of positively influencing HRM practices. The role of
knowledge management in relation to HRM practices and innovation performance is highlighted.
Moreover the narrower view has been taken of the SHRM’s distinctive characteristics that influence
SME innovativeness.
2. SHRM and new business development: Review of previous research
There are several definitions of the term ‘SHRM’; it could be considered as an outcome (Wright and
Snell 1991; Wright and McMahan 1992), a process (Ulrich and Lake 1991; Bamberger and
Meshoulam 2000), or a combination of process and outcome (Truss and Gratton, 1994). This last
approach seems to be the most representative one in the context of this paper. According to Truss
and Gratton SHRM is defined as “a linkage of HR functions with strategic goals and organizational
objectives to improve business performance and cultivate an organizational culture that fosters
innovation and flexibility” (Truss and Gratton, 1994, p.663). We would agree with that definition within
the framework of this review.
2.1 Theoretical approaches: Universalistic, contingency and configurational

Three conceptual prospects found in the literature aim to find and describe the link between SHRM
and company’s performance: universalistic, contingency and configurational. Numerous researchers
debate about the utilization of SHRM using these three existing theories.
2.1.1 Universalistic approach

The universalistic approach provides a perspective on the so-called HR “best practices”, which tend to
be similar despite the size, industry, or business strategy of the organization (Arthur 1994; Delery and
Doty 1996). Universalistic scholars consider that SHRM has a positive influence on firm performance
(Martell and Carroll 1995) and is assumed to help firms improve their human resources cost benefits,
promote operating efficiency, increase innovation and revolution ability, and increase organizational
performance benefits (Dyer 1983).
According to universalistic approach, SHRM has been also considered as an efficient function that
copes with environmental changes (Cook and Ferris 1986). Gomez-Mejia et al. (1995) claim that
SHRM changes passivity into initiative, transmits organizational goals clearly and encourages the
involvement of linemanagers, thus benefits the company directly and indirectly (Chang and Huang
2005). Basing their argument on population ecology theory.Welbourne and Andrews (1996) believe
that SHRM has a positive effect on firm performance.
2.1.2 Contingency approach

Unlike the universalistic perspective, the contingency approach proposes the study of SHRM in
connection with a specific organizational and environmental context. Contingency arguments imply
interactions rather than the simple linear relationships involved in the universalistic perspective
(Venkatraman 1989).The contingency perspective argues that the relationship between independent
and dependent variables differs when the contingency variable is added (Chang and Huang 2005).
Most of the studies in that approach relate to the meaning of internal and external fit and the means of
664
their achievement, for example the fit of HR practices and different organizational and environmental
factors. Schuler and Jackson (1987) investigated how certain HRM practices are consistent with
different strategic positions and related to firm performance; Werbel and Demarie (2001) described
the effects of person-environment fit, and Beechler and Yang (1994) examined the effect of local
environment, unions, resource dependency and integration, administrative heritage and competency.
2.1.3 Configurational approach

In comparison with the two previous approaches, the configurational theory provides the most
complex and holistic view on SHRM-performance linkage. Miller (1989) defines configurations as
architecture made up of multiple (non-linear) and interactive bonds between strategic elements and
“bundles” of HRM practices. Allani and Bayad (2003) propose the allocation of four strategic
configurations defining the interaction between HR strategy and business strategy: expansion,
development, productivity and repositioning.
This theory extends previous contingency theory research and conceptualization by including
performance as the main focus behind organization design activities. Delery and Doty (1996) explain
that the configurational approach incorporates the “assumption of equifinality” - principle that in an
open system, the given end state can be reached by many potential means. They state that by
applying multiple unique configurations, maximum performance could be reached.
2.2 Question of priority: Innovation strategy vs. HRM practices

According to literature, HRM is considered to be one of the key elements for the success of innovation
(Jimenez-Jimenez and Sanz-Valle 2005; Shipton et al. 2005; Shipton et al. 2006). Nevertheless, the
authors do not agree whether it is the innovation strategy of the company that determines the HRM
practices used to support that strategy or visa versa; the company’s HRM practices could influence
the redirection of the organisation into new business. Several scholars consider HRM as a dependant
variable and conclude that they cannot prove the causality of the relationship, suggesting the
importance of analyzing this question (Damanpour 1991; Chew and Chong 1999). Number of
empirical research was conducted to support one of the two existing assumptions.
2.3 HRM practices that support innovation strategy: Isolated, bound, system
There is a fundamental SHRM assumption that the firm’s performance is directly related to the set of
SHRM practices that firms have in place (MacDuffie 1995; Huselid, Jackson and Schuler 1997).
Researchers define the SHRM as either a number of individual practices or their “bundles” (Delery
and Doty 1996; Tzafrir 2006; Razouk and Bayad 2009). Razouk and Bayad describe SHRM as a
“construction of a coherent system of mobilizing HR practices which ensures the co-operation of
employees through a higher implication level, in order to increase firm’s economic and social
performance” (Razouk and Bayad, 2009, p.79). The other view of the interconnection between SHRM
practices is a ‘system’ view. In that situation, the authors describe the set of interdependent practices
relevant for the particular kind of organizational strategy, for example, Miles and Snow’s “market
system model” (1984) or Schuler and Jackson’s “internal system model” (1987).
Based on the contingent perspective approach to the relationship between innovation and HRM, it
could be stated that there are no best HR practices, because in order to be effective, HR practices
must be consistent with other aspects of the organisation, specifically its strategy (Miles and Snow
1984; Schuler and Jackson 1987; Peck 1994; Raghuram and Arvey 1994; Wright et al. 1995; Purcell
1999; Jimenez-Jimenez and Sanz- Valle 2005). Thus the most suitable and effective HRM practices
for firms trying to develop competitive advantage based on innovation will differ from those suitable for
firms seeking a competitive advantage in other areas. (Jimenez-Jimenez and Sanz-Valle 2005)
2.3.1 Isolated HRM practices

One of the approaches of handling the applied HRM practices in the organization in literature is their
treatment as isolated elements separately influencing the innovation strategy (Damanpour 1991;
Raghuram and Arvey 1994; Mabey and Salaman 1995; Laursen 2002; Laursen and Foss 2003;
Shipton et al. 2005; Shipton 2006). Among those practices we found the following: recruitment (R),
training (T), career pathing (CP), performance appraisal (PA), compensation system application (CS),
665
job enrichment (JE), external (EC) and internal (IC) communication, contingent payment (CPm),
induction (I), exploratory learning (EL), team work (TW), and employment security (ES).
Most of the practices listed have an isolated positive effect on the innovation strategy. The practices
describing those elements (T, PA, CPm, I) influence the innovation strategy positively when combined
with EL practice (Shipton 2006). No significant correlation has been found between contingent reward
and either product or technological innovation.
2.3.2 “Bundles” approach of HRM practices

Another approach in handling the HRM practices in the organization also exists; the so-called
“bundles” of interrelated and internally consistent HRM practices are being built in order to support the
organizational strategy. These “bundles” are considered to be superior to isolated practices but the
structure of these “bundles” tends to vary depending on particular research.
There are a number of researchers supporting this approach who agree that the combinations or
bundles of HRM practices are hierarchically higher than any of the individual HRM practices of which
any specific bundle consists (Huselid 1995; MacDuffie 1995; Ichniowski et al. 1997; Perry-Smith and
Blum 2000).
What remains unclear is the structure of such bundles. Stavrou and Brewster (2005) provided a
structure of SHRM bundles and the HRM practices they include. These authors were investigating the
linkage between SHRM bundles and business performance and concluded that training, share-
options, assessment, profit-sharing, group-bonus and merit-pay bundles have a positive effect and a
‘reduction in force’ (RIF) bundle has negative effect.
Using the bundle approach to the HRM practices treatment Guest et al. (2004) determined that
innovation requires a specific combination of bound HR practices. In that case, a performance
appraisal, possibly linked to aspects of goal-setting and feedback plays a central role. The authors
state that job design and teamwork have an impact on innovation within the workforce, highlighting
the importance of an opportunity to participate.
2.3.3 Systems approach of HRM practices

The third perspective on the HRM practices view is the systems approach. It includes a
comprehensive set of elements aimed at supporting a certain kind of organizational strategy or effect
on organizational performance. In a simplified form, the system could be viewed as a combination of
bundles. The system of SHRM practices also provides a synergistic effect as effectively as the
bundles do.
The systems approach seems to be the most holistic perspective of the three practices presented
(Miles and Snow 1984; Schuler and Jackson 1987; Peck 1994; Mabey and Salaman 1995; Beatty and
Schneier 1997; Michie and Sheehan 1999; Sheppeck and Militello 2000; Laursen 2002; Laursen and
Foss 2003 and some others).
The components of each system continue to be dependant. For example, in the “market type system”
proposed by Miles and Snow (1984) and “internal system” proposed by Schuler and Jackson (1987),
the authors partly focus on opposing components that support innovative organizations, for example
external or internal recruitment, limited or broad training, little career ladders or broad career paths,
low or high employee participation respectively.
Except for these two well-known models the number of empirical studies conducted supports both of
the controversy systems (Peck 1994; Michie and Sheehan 1999; Laursen 2002; Laursen and Foss
2003). Mabey and Salaman (1995), Beatty and Schneier (1997) and Sheppeck and Militello (2000)
proposed systems similar to that of Schuler and Jackson (1987).
2.4 The role of knowledge management in relation to HRM practices and innovation
performance
Knowledge management’s role is linked to organization success in business. The relationships
among SHRD practices, organizational learning, and HRD outcomes are seen as a valuable
666
contribution to the scientific discussion (Tseng and McLean 2008). Organizational learning is
considered to be a part of a knowledge management concept (Maier 2001). Being influenced by
SHRD practices, organizational learning affects the development of key organizational capabilities
and enhances HRD outcomes related to SHRD practices (Tseng and McLean 2008). It could be seen
as one of the ways to respond to increasingly competitive market conditions by managing knowledge
assets in more effective ways (Sadler-Smith et al. 2001).
Organisational learning is important for product innovation (Nonaka and Takeuchi 1995; Heffner and
Sharif 2008). The knowledge embodied in technological innovations is a strategic resource for
organisations in all areas of human endeavour. The most competitive organisations are those that can
learn to learn – to incorporate learning processes, including knowledge creation, into everyday
operations and management. The converting knowledge from tacit to explicit forms, especially
technologically embodied forms (tools, skills, facts and methods that are the knowledge-in-use within
organisations) are stressed (Heffner and Sharif 2008). In the process of innovation, HRM and
knowledge management capacity have critical roles (Chen and Huang 2009).
SHRD has the responsibility of providing strategies, training and development opportunities to help
organizations and their employees achieve their business goals. SHRD practices influenced by
learning provide organizations with key capabilities that enhance their HRD outcomes related to
SHRD practices (Tseng and McLean 2008). Strategic HR practices have a beneficial effect on
innovation performance through capacity in knowledge acquisition, sharing, and application (Chen
and Huang 2009).
Based on the assumption that new businesses face a capability gap and the necessity to acquire,
share and apply new knowledge, different HRM strategies could be implemented to facilitate
development. Wright and Snell (1991) provide a human resource strategy/activity matrix, which
includes such strategies as competence acquisition, utilization retention and displacement.
Knowledge management could be seen as a method in which SHRM has the important role of setting
the goals of business development. By different means of knowledge management, especially by
organisational learning, goals can be achieved successfully.
3. SHRM in SMEs
3.1 The current state of research

Research on SHRM in SMEs still remains underdeveloped (Hosnby and Kuratko 2003; Mayson and
Barrett 2006; Razouk and Bayad 2009). Most of the studies investigating the implementation and
influence of SHRM in SMEs have been carried out in the United States of America (Heneman et al.
2000). Heneman et al. state that “in taking an international perspective, care would need to be taken
to ensure that what works in one culture applies to another culture” (Heneman et al. 2000, p. 22).
Nevertheless, there are some recent studies aimed at the intensification of HRM practices in SMEs
(Bacon and Hoque 2005; Razouk and Bayad 2009).
Some authors mention that research on SHRM issues in SMEs can shed light on the role of HRM in
small and entrepreneurial companies in general. Mayson and Barrett (2006) also consider that
practices such as recruitment, retention and deployment deserve the particular attention of all small
firms and are magnified in start up and highly innovative ventures. As stated by the same authors,
small firm owner-managers who miss knowledge about benefits of a more strategic approach to HRM,
are likely to opt for short term, cost effective solutions to their current HRM issues. Thus, the SHRM
practices in SMEs stay mostly informal (Bacon and Hoque 2005; Mayson and Barrett 2006).
Among the few conducted studies regarding SHRM in SMEs, Liouville and Bayad (1998) investigated
the link between such SHRM practises as education and training, empowerment, communication,
employee participation, personal promotion and career management, working condition
improvements, and performance of 300 SME manufactures. The result of the study shows that SHRM
in SMEs is established more effectively than technical HRM, and SHRM practises have a positive
effect on an SME’s performance.
Razouk and Bayad (2009) studying SHRM in French SMEs came to the conclusion that at least in
France, the intermediate cluster between strategic and administrative HRM called “hybrid HRM” is
appearing. The authors think that there could be several factors influencing the hybridization of the
667
system, for example, the influence of coercive power exerted by external actors or cultural values.
The conclusion of the study states that adoption of SHRM practices is more important in the case of
SMEs subjected to strong environmental constrains.
Despite the opinion of some research, the form and practices of SHRM in SMEs tend to have
differences in comparison with large companies. However, there is research by Golhar and
Deshpande (1997), which revealed the similarities between HRM practices of manufacturing SMEs
and those of larger firms. Among such practices was internal recruitment, which was not considered
as a practice supporting innovation development based on the review of previous research (Miles and
Snow 1984; Schuler and Jackson 1987). Nevertheless, the research focuses mostly on administrative
HRM rather than its strategic approach. The analyzed sample consisted of Canadian companies; this
aspect of country and cultural belonging should also be taken into account in connection to SHRM
issues, particularly in SMEs.
3.2 Support of innovation strategy

Following the statement that SHRM has a positive influence on innovation performance when applied
in larger companies, we can suggest the investigation of the same influence regarding SMEs. It is
most likely that due to workforce skill-mix, unionization and strong customer orientation, the set of
strategic HRM practices would vary from the one used in larger companies. Nevertheless, despite the
huge number of research analysing the practices of large companies, there is still no agreement
between research of which practices in particular lead the company to better innovation performance.
Alternatively, Fabi et. al.’s (2009) proposition that “the strategic choices in terms of product innovation,
market expansion or network extention in SMEs must be inter-linked with the development of their
HRM practices” (pg. 7) supports our position on the importance of the topic and the necessity for
further research.
3.3 Industrial approach

As a lack of research investigating the influence of SHRM in SMEs exists, no previous discussions
about the industrial aspects of such an influence were found. Despite we assume that there is a
necessity to control industry-specific SHRM effects. The implemented practices or system could vary
depending on its applicability in a particular sector of industry.
Following previous research (not directly connected to the area of our review), we could mention that
the discussion of industry-level factors effect on HRM in large companies has a long history. The
research in public and private sectors was conducted (Molnar and Rogers 1976), in industries
characterized by high and low stability or change (Barlett and Ghoshal 1990) and the others.
Jackson and Schuler (1995) state that although industry characteristics are not yet widely
incorporated into research paradigms they may have far-reaching implications for HRM. Hofstede
(1991) compares industries with national cultures as within both of them meanings are constructed,
effectiveness is defined, and behaviours are evaluated.
4. Conclusions and propositions
Despite the angle of the theoretical view on the topic of SHRM (resourced-based view, behavioural
perspective or knowledge-based view) a positive correlation between SHRM implementation and new
business development could be found.
The approaches used to find and investigate the link between SHRM and innovation strategy have
mostly been quantitative. Empirical research has been conducted in different countries, investigating
HRM practices, their combinations or coherent systems that benefit or do not have any effect on new
business development. In general, the conducted research can hardly be called homogeneous, but
what the scholars agree on is that such HRM practices as the use of external sources of recruitment,
performance appraisals and incentives have a positive influence on innovation strategy.
The conducted research operates within the frames of three theoretical approaches – universalistic,
contingency and configurational. All of them utilize the strategic view of HRM and aim to explain its
connection with organizational performance. On the same theoretical basis, a number of studies have
668
been conducted to investigate the SHRM and innovation performance linkage. Nevertheless the
attention paid to this linkage is quite low yet.
An important aspect, which has not been highlighted in previous works on the links between SHRM
and NBD, is the recognition of business opportunities. Despite a sufficient amount of research on
SHRM’s influence on NBD, scholars have the conceptual question of whether it is SHRM that
determines the applied HRM practices supporting innovation strategy or it is the HRM practices that
influence the redirection of the organisation into new business. The answer to that question still
remains unclear.
If the connection of SHRM’s influence on NBD has had an intensive contingent research perspective
during the last decade, the research on the application of this influence in SMEs still remains quite
small. The analyses conducted on the SME’s particularities from an SHRM point of view were
accomplished mostly in North America. Razouk and Bayad (2009) are trying to explain this tendency
through cultural specifics and provide one of the most recent studies investigating the use of SHRM in
French SMEs. Thus we propose the necessity of further research of this phenomenon in Europe.
Based on the lack of research at the intersection of SHRM and NBD and their implementation in
SMEs, we suggest further investigation of that combination. Taking into account different countries
and industry environments, it would be beneficial to have a broader vision of the phenomenon. Both
quantitative and qualitative approaches are suggested in order to provide not only statistical
evaluations, but also qualitative explanations of the linkage. Finally, the cultural aspects influencing
the phenomenon should be considered important as well.
Despite its contribution to the accumulation of generic knowledge on the link between SHRM and
NBD, this study may be improved and extended by the means of further investigation of the particular
areas. From our point of view, cross-boarder aspects, peculiarities of SME internationalization and
opportunities provided by the utilization of SHRM practices in the case of investigating an innovation
network including SMEs could be researched more thoroughly.
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Empirical Study on Commonness of Fast-Growing Private
Enterprises in China: Study on Listed Companies on GEM
in Shenzhen Stock Exchange
Haisu Wang
Zhongnan University of Economics and Law, Wuhan, China
whaisu@163.net
Abstract: The total number and occupation ratio to Gross Domestic Product (GDP) of private-owned and
private-holding enterprises have already become the important parts of Chinese economy after thirty years since
the economic reform was implemented and lots of large enterprises, Huawei, Alibaba and Xiwang Group as
examples, have become the benchmarking in respective industries. However, the trend which is characterized by
the phenomenon that the state advances and the private sector retreats in China has also developed . Shandong
Steel Group holding the share of Rizhao Steel Company and the government of Shanxi Province encouraging
state-owned coal mine enterprises to purchase the private ones are two typical examples. The historical position
and development anticipation of private enterprises have received high attention from both the theoretical circle
and business world. This paper aims to conclude the basic characteristics of fast-growing private enterprises by
conducting empirical research on listed companies on growth enterprise market (GEM) in Shenzhen Stock
Exchange, emphasize the necessity for existence and development of such enterprises. At the same time, this
paper is written to provide suggestions to the Chinese government to reconsider these enterprises and adjust
relevant policies to create a more competitive environment for enterprises with different ownerships and different
scales.
Keywords: China, private enterprise, fast-growing
1. Introduction
There are two periods named pre-transition and post-transition in the economic reform in China. The
pre-transition period lasted from 1978 to 2008 during which the Chinese government carried out three
measures to guide the reform in public-owned enterprises. The first measure cultivated and improved
the market resource allocation mechanism by helping the enterprises which are out of government
system to launch reform. And this trial established the reform target for the traditional public-owned
enterprises. The emergence of township enterprises and private enterprises on the one hand helped to
form the competitive pattern, accelerate social wealth and created employment opportunity, and on the
other hand forced thousands of traditional public-owned enterprises which had already lost the market,
taken heavy burden and suffered from laggard system to implement market-oriented reform. The
second measure wholly advanced the system transform of mid-small state-owned enterprises by
“partial hemorrhagic shock”. Because the Chinese government chose to reform in a progressive mode,
the Chinese society possessed certain elasticity which was characterized by one family multiple
systems. Therefore, the ownership policy of Chinese enterprises adjusted to the request of pluralistic
history and the Chinese economy was able to possess reform-oriented resources and development
space created by market reservation time. Thousands of mid-small state-owned enterprises and urban
and rural collective enterprises had finished the reform whose main content were property rights
transfer and identity transformation. Take Wuhan City for example, more than 2000 state-owned
enterprises had finished transition from 2000 to 2003 with 250000 employees realizing identity
transformation. The third measure helped the large state-owned enterprises to go listed so as to
th
promote the entire competitive capacity of such kind of enterprises. Since the beginning of the 21
century, with the deepening of the market economy and improvement of management situation many
state-owned enterprises have gone listed successively. The typical representatives include Petro-China
and Industrial and Commercial Bank of China. Those enterprises were separated from burden,
restructured and invested with capital and have become members of fortune top 500 as the leading
enterprises in their respective industries in the world.
The above mentioned measures bring changes which are characterized by qualitative change and
mutation to the Chinese economic structure. As far as the enterprise ownership is concerned, private
enterprises contribute wholly to the number of enterprises, GDP and employment opportunity and
become a part which cannot be ignored in the economic development in China.
However, the global financial crisis caused by American sub-prime mortgage loan crisis made China
enter a new period functioned by the features of post-WTO (World Trade Organization) period,
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Haisu Wang
post-crisis period and post-transition period, therefore the infant Chinese private enterprises are forced
to encounter the unprecedented hard situation. Firstly, a large number of export-oriented mid-small
private enterprises are trapped into production and management predicament because of the reducing
of export, RMB appreciation and growing trade protectionism. Secondly, the phenomenon of
overcapacity and environment deterioration existing in certain industries urges more state-owned
enterprises to quicken the pace to reorganize private enterprises. Shandong Steel Group purchasing
Rizhao Steel Company and Shanxi Province encouraging the state-owned coal mines to purchase
private coal mines are two cases in point which exert influential effects. As a result, the existence value
of private enterprises becomes doubtful. Thirdly, because the 4000 billion yuan (the yuan is a
denomination of the RMB) investment is preferential to be made to state-owned economy private
enterprises will lose more opportunities in the new round of structure adjustment, and their financial
environment is deteriorating. All the above reasons request the Chinese private enterprises to adjust
themselves to realize transition for the second time.
In October 2009, after years of preparation, the Chinese government officially approved GEM in
Shenzhen Stock Exchange. Up to the end of December in 2009, GEM has covered 42 enterprises, 40 of
which are private enterprises and only 2 are state-holding ones. At the same time the local private
enterprises take up majority of the enterprises which are preparing to go listed on GEM. This
phenomenon indicates that the Chinese private enterprises are trying to make good use of the
opportunity to finance directly and change their fates. This paper wishes to discuss the commonness
of the fast-growing group of private enterprises by choosing typical enterprises on GEM and provide
reference to the those enterprises to help them realize healthy development. The reasons why we
decide to choose samples on GEM are as follows: Firstly they are fast growing enterprises which are
worthy of investment and preferred by capital market. Secondly they show certain kind of homoplasy
both in regional location and industrial preference development motivation can be concluded. Thirdly,
the prospectuses of these enterprises could provide comparable and inferable information which
guarantees the attainable data for the research.
2. The release effects of intangible assets in private enterprises
Up to the end of the year of 2008, the number of private enterprises which were registered had reached
6.6million. The number of private enterprises from the year of 2002 to 2006 had realized double digit
growth which was a direct result from the stimulus and driving effectiveness of healthily developing
national economy and its indispensable components. Conclusively, there are three important resources
for private enterprises, namely state-owned enterprises, urban and rural collective enterprises and
individual industrial and commercial units. From the years of 1998 to 2003, the number of state-owned
enterprises and collective enterprises remarkably reduced because of the accelerating ownership
reform of public-owned enterprises all over China number of state-owned enterprises had decreased to
approximately 50% which demonstrates that the number of private enterprises grew while the
public-owned enterprises dropped during the same time.
Table 1: The number and growth rate of private enterprises from the year of 2002 to 2008 (unit: million,
1
%)
Year Number of private enterprises Growth rate
2002 263.83 20
2003 328.72 24.6
2004 402.41 22.4
2005 471.95 17.3
2006 544.14 15.3
2007 603.05 10.8
2008 657.42 9.0
The private enterprises which have high correlation with the reform of public-owned units are the
principal part of Chinese private enterprises. There are three ways for the enterprises and institutions
which are determined to reform to transfer into private enterprises. The first way is to realize transition
wholly and this choice is suited for the public-owned enterprises. The representatives of such kind
include Powerleader Science & Technology Co., Ltd (stock cod: 300023) and Shanghai China-science
Electric (Group) Co. (stock code: 300035). The second way is through the second venture of technology
1
Data source: 2008 Chinese Private Economy Development Situation Analysis Report; www. china.com.cn/news.
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Haisu Wang
and management elites of the state-owned enterprises in similar areas, Shanghai Bestway Marine
Engineering Design Co., Ltd (stock code: 300008) and Gansu Water-Saving Co., Ltd (stock code:
300021) are tow examples. Wang Dong, the actual controller of Gansu Water-Saving Co., Ltd used to
serve as manager of Hydropower Engineering Service Company in Jiuquan City and factory director of
Water-Saving Irrigation Material Plant. The third way for enterprises and institutions to be transferred
into private ones is to bring in the strategic investors who will help to form private-holding enterprises
with diversified ownership. Huitian Adhesive Enterprise CO., LTD (stock code: 300041) is an enterprise
which chose to follow this way. It is reformed from Xiangfan Adhesion Technology Research Institute
which was a state-owned institution. It is the investment from Dapeng Venture and Capital Company
that fasten its pace to go listed.
By studying the typical enterprises on GEM, we can conclude that the indirect release of stocking
intangible assets contributes significantly to the growth of such enterprises.
In the first place, the stocking intangible assets may exert influence to the sustained operation of the
reforming enterprises. Some private enterprises are formed by certain reform process such as property
right transfer and identity compensation. Due to the constraint of market transition and defect of system
design, the intangible assets were usually transferred to private owners without payment or with very
low price before the enterprises were reformed. The gradual capitalization of such assets advanced the
enterprises to grow in a fast way after reform. Take Anhui Anke Biotechnology (Group) Co., Ltd (stock
code: 300009) for example. In the year of 2008 before the company went listed, its products named
recombinant human interferon and recombinant human growth hormone had already become the tops
in the Chinese market share ranking, and one of its brands Yuliangqing had been registered as one of
the Chinese historical brands.
In the second place, the stocking intangible assets may exert influence to the newly established private
enterprises. Some private enterprises are founded by capable elites who worked in the state-owned
and collective enterprises. The development of such kind of enterprises depends on the prerequisite
that the intangible assets owned by the former enterprises have already realized privatization which
could not be restricted substantively. SIASUN Robot &Automation Co., Ltd (stock code: 300024) is the
domestic industry leader which is successfully return technology into engineering, product and industry.
The current board chairman Wang Tianran used to work as director in Shenyang Automation Institute
before the company was established and many senior managers were key personnel in the same
institute. The development of this company is related to the former state-owned enterprise’s substantive
privatization of the intangible assets.
In the third place, the stocking intangible assets may influence private enterprises to improve business
operation. Such enterprises can solve the bottleneck problem of lack of elites during the fast-growing
period by attracting the specialized talents from state-owned enterprises. Zuo Xinju, the manager of
Tech Department in Hubei Dinglong Chemical Co., Ltd (stock code: 300054) used to work as a
workshop operator, then a chemical analyst in Wuhan Dye Plant, the director of Wuhan Dye Research
Institute and the director of Technological Development Monitoring Center successively. Duan Cheng,
the technical manager in EVE Energy Co., Ltd (stock code: 300014) has been working in the primary
lithium battery manufacturing industry for more than thirty years. He used to work in State-Owned 752
Plants and was responsible for the R&D and manufacturing projects.
There are three reasons to explain why the stocking intangible assets could be effectively released after
the enterprises are reformed. The first reason is that modern enterprises have a basic attribute that they
consume tangible assets to form intangible ones. Enterprises’ core competences are determined by
those intangible assets which are highly correlated with the production and operation history of
enterprises. However, because of it is complicated to identify the intangible assets, the property right of
the intangible assets are usually not defined before the reform of enterprises is implemented. Their
substantive preservation in the enterprises after reforming becomes a base to realize self release. The
second reason is that the relationship between enterprises will gradually become interpersonal
relationship between them with time goes by. No matter whether there are any limitations of existing
noncompetitive clauses and contracts, the intangible assets will always be privatized strongly or weakly,
obviously or ambiguously, and this will become a cause for the release of intangible assets. The third
reason is that the deepening process of the market economy leads to certain kinds of special functions,
such as discovering, estimating and adding value to the intangible assets. The cases in which the
foreign enterprises have to acquire intangible assets from the Chinese sides at some price when
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Haisu Wang
merger and acquisition activities are carried out in China prove the possibility to release historical value
accumulation.
By comparing statistical data between the enterprises on GEM and in the main-board, we find that the
former’s earnings over the same period are obviously higher than those of the latter’s and the above
phenomenon remains the same when the possible speculative factor is eliminated. The result at least
indicates that the capital market have the functions to discover the value of stocking intangible assets in
those fast-growing private enterprises.
Table 2: The comparison between the PEs of some enterprises on GEM and those of comparable
a-share enterprises in the year of 2009 2 (unit: %)
Enterprises on GEM PE Comparable A-Share Enterprises PE
Qingdao TGOOD Electric Co., Ltd. 52.76 San Bian Science & Technology Co.，Ltd. 37.55
Beijing Ultrapower Software Co., Ltd. 68.8 Bright Oceans Inter-Telecom Corporation 24.63
Lepu Medical Technology (Beijing) Jiansu Yuyue Medical Equipment & Supply Co.,
59.56 40.27
Co., Ltd. Ltd.
NanFang Ventilator Co., Ltd. 46.24 Xiangtan Electric Manufacturing Co., Ltd. 33.79
Beijing Toread Outdoor Products Shanghai Metersbonwe Fashion & Accessories
53.1 29.54
Co., Ltd. Co., Ltd.
Chongqing Lummy Pharmaceutical
47.83 Chongqing Huapont Pharm Co., Ltd. 32.15
Co., Ltd.
Beijing Lanxum Technology Co., Ltd. 51.49 Beijing Shiji Information Technology Co., Ltd. 36.29
The above analysis provides us with at least two enlightenments:
Firstly, it is necessary to re-understand management buyout (MBO) in the public-owned enterprises’

reform when the phenomenon that intangible assets can be invisibly privatized with time goes by is
considered. Three assumptions should be met when MBO is implemented in enterprises. The first
assumption is the scale assumption. The enterprises suited to MBO are generally mid-small economic
organizations. The second assumption is the profit assumption. The profit-making history, structure and
expectation will all together influence the enterprises to implement MBO. The third assumption is the
experience assumption. It is important that managers have been working for the enterprises for a long
time, and have contributed significantly and this will help such enterprises to make MBO implementation
realized. The explanation why we suppose MBO will bring more advantages than disadvantages is that
the non-MBO reform mode sometimes will lead to the brain drain in enterprises which could bring away
the critical intangible assets accumulated by years and leave the enterprises in predicament.
Secondly, it is important to do correlation research between the stocking intangible assets and bank
loan to create new financing mode on the consideration that the capacity of GEM is limited and cannot
satisfy the financing request of numerous mid-small private enterprises. Except for patents and trade
marks, the intangible assets accumulated by years in Chinese private enterprises are mostly
unconventional intangible assets including quantifications, customer relationships and labors. Although
the GEM will help the enterprises to release their stocking intangible assts, the defects of accounting
system make it difficult to recognize the assets and meanwhile the limited capacity of GEM fails to meet
the financing needs of millions of private enterprises. Therefore it is necessary to try for the intangible
assets collateral loan. The first reason for the trial is that when the enterprises which own core intangible
assets search for the bank loan, they do it consciously based on the effective demand of market.
Therefore those enterprises show their self-incentive system to redeem the core intangible assets and
self-restraint system to bind other assets to participate in the credit and debt activities. The second
reason for the trial is that the banks also have the demand to explore such business to firstly “lock in” the
excellent clients, secondly create new financial product and thirdly optimize the function of risk
management.
3. The excavation effects of preferential policy on private enterprises
Through the study of companies listed on the GEM, we find that many companies have fully enjoyed the
government policies in different periods during the economic transition, and the preferential government
policy plays an important role in composition of their assets. The preferential government policies which
2
Data source: WIND; Research Institute of Century Securities
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Haisu Wang
directly focus on private enterprises are not common, and even existing, they are still difficult to realize.
The best example is the regulation on promoting the development of mid-small enterprises made by
Chinese government, and it was much cry and little wool. Therefore, private enterprises with rapid
growth usually get the effects of policies by follow-up ways.
Firstly, they get policy support by establishing Chinese-foreign joint ventures. In the eighties of the last
century, the <Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures> was
issued and implemented by China aiming at introducing foreign investment, importing advanced
technology and improving management. Therefore preferential policies of tariff reduction and
exemption on income tax were provided to such enterprises. Some private enterprises actively seek for
foreign cooperation, establish joint ventures, and attain their primitive accumulation by getting
competitive advantages from preferential policies. As a joint venture enterprise, Qingdao TGOOD
Electric Co., Ltd. (stock code: 300001) had ever enjoyed the preferential policy of “exemption and half
reduction on income tax”. It is exempted from income tax in the years of 2005 and 2006 and the
practical executed income tax rates were 7.5%, 12.5%, 12.5% respectively in the year of 2007, 2008
and 2009. Among this, the amount of income tax benefits in the year of 2006 accounted for 32.64% of
the company’s net profits. Though these policies will be exited in order, Chinese-foreign joint ventures
will get national treatment and the foreign investment in some private enterprises are withdrawing as
well, the historical contribution of policies have already given these companies preemptive advantages.
Secondly, they strive for preferential policies by expanding exports. Over the past three decades,
China’s export has witnessed a rapid development, with the proportion of import and export to GDP
keeping increasing, to which the private enterprises contribute a lot. The reasons why these enterprises
can outstand in the exporting industry are as follows: firstly, it is related to the export industrial structure.
For example, some private enterprises have the comparative advantages in the labor-intensive
export-oriented manufacturing industry. Secondly, when compared with the products sold in domestic
market private enterprises whose main products are for export aim can strive for subsidy and export tax
rebates from government. According to the policies, the refunded VATs of last four years of Dingli
Communications Corp., Ltd.(stock code: 300050) were 2.2785 million yuan, 4.2348 million yuan,
5.9561 million yuan and 14.9618 million yuan respectively.
Thirdly, they try for preferential policies by entering emerging industries. The companies listed on GEM
have a developing trend of agglomeration of high and new technology industry zones and high and new
technology industries. In the first place, the policies of Chinese government have been changed from
ownership-oriented to industry-oriented, the land use policy of high-tech development zones and the
income tax incentives of high-tech companies are very attractive. In the second place, in order to
promote independent innovation, both the central and local governments have invested large amount of
research fund, supporting the R&D activities of companies. Many companies listed on GEM realized
strategic rising under the integrative action of these policies. Take Beijing Origin Water Technology Co.,
Ltd. (stock code: 300070) for exmaple. The special fund to support industry development from
Zhongguancun Science Park even reached 5 million yuan in the year of 2008.
Last but not least, they find development opportunities by using the gap of policies. Private enterprises
listed on GEM is only a very small part of private companies in China, their growth patterns may not fully
reflect the growth path of large scale private companies which lead the development trend of Chinese
private companies. Hence, we also need to see that the rapid growth of some large scale private
enterprises is also related to the policy gap which exists in transition economy. Firstly, certain real
estate enterprises take advantage of the regulation gap of state-owned enterprise reform policy, attain
the state-owned assets including the land-use right at very low prices and finish their primitive
accumulation. Secondly, some manufacturing enterprises, especially private companies which grow
rapidly in steel and metallurgy industries, often take advantage of the development impulses of local
governments and break the bottom lines of policies by using rural collective land and entering the
nationally limited industries, which lead to the reality of large scale and high intensity of development.
The above analysis suggests that private enterprises with rapid growth in China usually have strong
ability to excavate policies and analyze them rationally. When the government decides to make policies
to direct the development of such enterprises, it should also prevent them from taking advantage of
preferential policies and elude the external diseconomy brought by limited policies.
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Haisu Wang
Firstly, the policy-oriented economic development by government is the re-configuration of public

resources and the active response from enterprises helps to enhance the continuous development of
the economy. The phenomenon that private enterprises seek policy support indicates not only that
government is overcoming the inertia of traditional ownership discrimination system but also that the
quick reactive mechanism the private enterprises are born with can increase the policy implementation
effectiveness of the government. Recently, the Chinese government has put forward the policy to allow
the private enterprises to invest in more areas, and we believe that private enterprises with strategic
vision can have the possibility to find new opportunities.
Secondly, policy may change with time, places and conditions. Private enterprises should advance with
times in policy response system. The hypernormal development pattern of taking advantage of
regulation gap, eluding policy regulation and sacrificing environment quality which happened in the past
has come to an end. Private enterprises show different response patterns and response intensity to the
government policy in transition economy according to their ownerships, industry difference,
geographical layouts and scale characteristics and therefore make different response results. We
should establish “government-enterprise-market” interactive system based on rational participation to
improve the private enterprises’ self-organizing, self-incentive, self-adjustment and self-control abilities
in this process.
4. The agglomeration effects of the inherent advantages of the private
enterprises
Chinese private enterprises have the competitive advantages from running outside. As the first market
players, the Chinese private enterprises have already made absolute competitive advantages
compared to state-owned enterprises in many aspects through the institutional innovation, such as
discovering the opportunities in the market, attaining market resources, establishing commercial mode,
accelerating independent innovation, and improving economic efficiency while they are lack of the
advantages of other enterprises which are running in system. We can get the conclusion through the
research on typical enterprise on GEM. Firstly, these enterprises can find rare space for the sustainable
development in the chaotic market. In the first place, they get the ascendancy in the segment market to
make the scale economy to the highest level. In the second place, they choose the customers who have
a strong capability in payment, and make a stable relationship with each other. In the third place, most
of them prefer to enter the industries which are encouraged by government from which they can get a
long-term support. They are able to receive a pretty good return on investment and attention from the
investors as well. The representatives of companies which hold the leading positions in typical
sub-sectors listed on GEM can be showed as follows:
3
Table 3: Leaders in segment market
Stock Code Enterprise Segment Position
The leading enterprise of Chinese outdoor
300005 Beijing Toread Outdoor Products Co., Ltd.
products industry
The leading enterprise of Chinese gas detection
300007 Henan Hanwei Electronics Co., Ltd.
instrumentation industry
The Chinese largest sub-lithium battery supplier
300014 EVE Energy Co., Ltd.
and it ranks 5 in the world
Gifore Agricultural Machinery Chain Co., The leading enterprise in Chinese circulation
300022
Ltd. field of agricultural Machinery
Guangzhou Improve Medical Instruments The leading enterprise of Chinese Vacuum blood
300030
Co., Ltd. collection system industry
The leading enterprise of Chinese medium
300062 Fujian Cee Installations Co., Ltd.
voltage cable accessories industry
The leading enterprise of clean energy
Beijing SJ Environmental Protection and
300072 technology in Petroleum and petrochemical
New Material Co., Ltd.
fields
Secondly, these enterprises already have the independent innovation capacity and Intangible assets in
technology with strong practicality. In the first place, most of these enterprises are in high technology
industry which is encouraged to develop by the government and can achieve the IPO due to their
capacity to master the key technology in specific areas. In the second place, the technology they
developed can be used maturely and receive the acceptance from their clients. In the third place, they
3
Data source: each company’s prospectus.
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Haisu Wang
have already established organizations and systems for sustainable research and development to
update and upgrade the technology. The Netac Technology Co.，Ltd.（stock code: 300042） is a good
example. It has got crucial technology and consummate R&D organization and structure in flash
memory applications and mobile storage technology. It even formed “patent pools” which enables the
enterprise to innovate and upgrade continuously.
Table 4: Patent situation of Netac 4
item patents has got Patents is applying

79 (55 from Chinese
patent 220
mainland )
Netac Technology Co.， 8 (6 from Chinese
Utility model 0
mainland)
Ltd.（stock code:300042
29 (29 from Chinese
design 1
） mainland)
total 116 221
Thirdly, these enterprises have relatively stable management teams with rational structures. In the first
place, most of the top management in these enterprises have work experience in state-owned
enterprises, therefore they have very rare experience in management and social resources. Qingdao
TGOOD Electric Co., Ltd. （stock code: 300001）is a representative enterprise. YuDexiang, as the
chairman of it, had ever served as the general manager in Hebei Power Technology Development
Company. Its deputy general manager Qu Dongming had ever been the scheduling officer in Hebei
National Power Automation Equipment Co., Ltd; and Mr. Liu Zhongli, another deputy general manager
had ever worked in Shijiazhuang High-Voltage Switch Factory as deputy chief engineer, and he was
also once the technical director in Hebei National Power Automation Equipment Co., Ltd. In the second
place, their research team is composed with various professionals, such as the expert from national
academic institution, elite who study abroad, and graduates from national universities. Beijing
Originwater Technology Co., Ltd. (stock code: 300070) is a high-tech environmental protection
enterprise which was found by returnees. It focuses on the development and application of sewage
treatment and reuse technology. Mr. Wen Jianping, as the chairman and manage director, is a senior
engineer. He got his master degree in Central South Forestry University and doctor degree of
engineering in University of New South Wales, Australia. He had ever served as the deputy director in
national sewage reusing research center. The deputy chairman and manage director Liu Zhenguo used
to be a manager in agricultural water department of Beijing Water Conservancy Bureau and was also
once the senior deputy engineer director in Beijing soil and water conservation workstation. And Mr. He
Yuanping is the master of finance in New Zealand's Victoria University. In the third place, their
management team has a long-term team work which makes an effective incentive and constraint
mechanism. SIASUN Robot &Automation Co., Ltd is a company which was established mainly by
Shenyang Automation Institute together with Shenyang Torch High-Tech Industry Development Center
and Chinese Academy of Sciences (Shenyang Branch). It has a management team with academician of
Chinese Academy of Engineering Wang Tianran and doctoral supervisor Qu Daokui as the core. There
are 382 engineers in the company including one academician of Chinese Academy of Engineering, 3
persons who enjoy special allowance granted by the State Council, 3 doctoral supervisors, 9
researchers and 47 Senior Engineers.
Therefore, we believe that successful private enterprises often acquire functions of integrating and
optimizing internal mechanism. We need to reconsider the effect of private enterprises in the
development of China. Firstly, private enterprises, along with the transition of economy, have
experienced the development from being unregulated to being regulated. When most private
enterprises were trapped into the trouble of expanding and surviving, some private enterprises which
succeeded to integrate internal and external resources still realized rapid growth. It is the internal
mechanism of such private enterprises which was adapted to the market that played a crucial role in this
phenomenon. Secondly, private enterprises have grown into the key component of economy in China,
though there are still obvious system deficiencies in these enterprises, they have already found the
space to grow and expand in various areas of the economy and the society and the public respond
actively to this. Last but not least, private enterprises should learn that they need to keep reforming
systems and improving mechanisms so that their business could last long.
4
Data source: each company’s prospectus.
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Haisu Wang
5. Conclusion
The social and economic conditions of China in post-transition period have changed greatly; therefore
private enterprises with rapid growth become the backbones in many industries. We suggest the
Chinese government to clear and define the existing basic characteristics and main functions of such
enterprises and improve its service-oriented functions.
References
Aitor Lacuesta, Omar Licandro, Teresa Molina and Luis A. Puch (2009), “Innovation, Tangible and Intangible
Investments and the Value of Spanish Firms”, Documento de Trabajo, April, pp.1-43.
Fukao, K., S. Hamagata, T. Miyagawa, and K. Tonogi (2007), “Intangible Investment in Japan: Measurement and
Contribution to Economic Growth,” RIETI Discussion Paper Series, 07-E-034.
Jonathan, D. D. (2000), “Corporate transformation without a crisis,” The McKinsey Quarterly, New York, April,
pp.117-127.
Tomer, J. F. (2002), “Intangible Factors in the Eastern European Transition: A Socio-Economic Analysis”,
Post-Communist Economies, Volume 14, Issue 4 December, pp.421-444.
V Belak, M Bašić, and M Kolaković (2003), “Role of Intangible Assets in the Process of Transition Towards New
st
Economy of the 21 Century”, 5th International Conference Enterprise in Transition / Zlatan Reić (ed). - Split:
Faculty of Economics, University of Split, pp.465-468.
679
Who can be China’s Entrepreneurs?
Sujuan Xie1, Liang Guo1, 2 and Lawrence King1
1
University of Cambridge, UK
2
Groupe Sup de Co La Rochelle, France
Sx213@cam.ac.uk
guol@esc-larochelle.fr
Lk285@cam.ac.uk
Abstract: The power of entrepreneurs not only affects capitalist economies but also effects emerging economies
such as China. Entrepreneurs are the main strength contributed to the spurring private sectors and to the
flourishing market forces by creating jobs, supplying consumer goods, mobilizing savings, and breaking up the
monopolies of state firms. This article mobilises different social theories and examines the different determinants of
China’s entrepreneurship with the national sampling survey data set of the 2003 China General Social Survey. The
results of the Binary Logistic Regressions support psychological supply-side, sociological and organisational
perspectives. However, the results of pooled analysis indicate that psychological traits cannot account for
entrepreneurship. Instead, the sociological and organisational perspectives (i.e. unemployment, social learning,
and social network), framing their analyses in terms of interaction between individual and his or her social contexts,
promise to advance our understanding in the field and offer greater explanatory purchase over China’s
entrepreneurship.
Keywords: China, entrepreneur, supply-side, demand-side, logistic regression, China general social survey
1. Introduction
The development of entrepreneurship in China has played a significant role in China’s economic
growth. Before the 1978 reform, pre-existing private entrepreneurship already had experienced
tremendous development. For example, village officials in some rural regions had already started their
businesses in the mid 1970s, some even before the Cultural Revolution ended (Yang 2007, p.11).
Although During the economic reform era, the influence of China’s entrepreneurs on the economic
system expanded significantly. They were the main strength contributed to the spurring private sectors
and to the flourishing market forces by creating jobs, supplying consumer goods, mobilizing savings,
and breaking up the monopolies of state firms (McMillan and Woodruff, 2002; Tsai, 2002). The rising of
the entrepreneurship force in transition China raise one question on who can be China’s entrepreneurs.
To this question, different disciplines have different research angles. For example, psychologists pay
heed to the individual characteristics of entrepreneurs (e.g. Djankove et al. 2005, p.1); sociologists are
concerned more about the effects of the attributes of social group, and institutional environments such
as economic, political and legal institutions (e.g. Abrami 2004, Yang 2007); and, current business
schools focus on “how” questions of entrepreneurs, such as how they capture the opportunities to start
businesses (e.g. Yang 2007, p.26)
Although each of the three disciplines respectively has greatly contributed to the research on
determinants of entrepreneurship, little work investigates each of these factors taking the other into
account (Djankov et al. 2005, p.2). Inspired by Djankov et al (2005) and based on a China General
Social Survey (2003), this article tries to analyse multi-factors influencing individuals to become
entrepreneurs.
In this article, we first review the literature of current theoretical frameworks and research results form
psychology, sociology, and business schools. Three theoretical frameworks have been established for
our empirical studies of the determinants of entrepreneurship in China, namely individual
characteristics perspectives, sociological thesis, and opportunity thesis. Based on the selected
theoretical frameworks, we introduce the factors to be analyzed for our study. Secondly, the data and
research design are described. The 2003 China General Social Survey designed to examine social
changes in contemporary China allows us to collect reliable and valid variables to conduct the
empirical research. We employed the Binary Logistic Regressions and discussed analysis results in
Section four. Finally, the implications of this research and the limitations are discussed.
2. Literature review and theoretical frameworks
The first perspective is discussed mainly by psychologists. This school focuses on special types of
individuals who create entrepreneurship. In particular, research is focused on entrepreneurs’
psychological traits and backgrounds that differentiate with non-entrepreneurs (Thornton 1999, p.22).
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Sujuan Xie et al.
Such research has examined individuals' need for achievement, locus of control, risk-taking propensity,
problem-solving style and innovativeness, leadership style, values, and socialization experience (e.g.
Brockhaus and Horwitz 1986, Sharver and Scott 1991).
Attributes of social group and various institutions have been generally discussed as sociological
variables. Sociologists have examined the relation of attributes of culture (e.g. Shane 1993), social
class, and ethnic group (e.g. Aldrich and Waldinger 1990). The other sociological approach is to study
entrepreneurs through investigating larger contexts, such as firms, organizations, industries, markets,
political and social conditions. Theoretical frameworks developed under this approach include
sociological embeddedness perspective (e.g. Granovetter 1985), social capital theory (Lin et al, 2001),
ecological and institutional perspectives (e.g. Greenfield and Strickon 1981), and integrating
frameworks (e.g. Thornton 1999).
Opportunity thesis are emphasized greatly by business schools, which differs from the other two
frameworks in that it focuses on the existence, discovery, and exploitation of opportunities to create
new ventures. Therefore, the analysis under this thesis mainly includes issues such as the sources of
opportunities, the processes of discovery, evaluation, and exploitation of opportunities (Shane and
Venkataraman 2000).
Applying those approaches to China’s empirical studies, scholars have demonstrated diverse research
results. On the thesis of personal traits, empirical studies of China’s entrepreneurs examined how
entrepreneurs differ from non-entrepreneurs in their attitudes toward education, risks, their work-leisure
preferences and motivations of entrepreneurship (e.g. Yueh 2007, Mulvenon 2002, Pistrui et al. 2001).
.In terms of social group attributes, a variety of dimensions of entrepreneurship have been analyzed.
For instance, Mckhann (2008), based on the analysis of ethnic group, explores how emerging Nuosu (a
minority ethnic group located in west China) entrepreneurs differ from their Han (the dominant majority
ethnic group of China) counterparts working in the same areas when they try to create new ventures.
Focusing on larger contexts to analyze China’s entrepreneurs, the social institution thesis investigates
the influence of the social changes of Chinese society on entrepreneurship (e.g. Liao and Sohmen
2001); the economic institution thesis focuses on China’s economic transition and its affects (e.g. Nee
1992, 1996); and the political institution thesis examines the relation of political connection with the
determinants of entrepreneurship (e.g. Gold 2001, Fan et al 2007). Developing under management
frameworks, many empirical studies on China’s entrepreneurs have focused on the question of how
they discover different business opportunities and grab them in order to develop their new ventures.
Attentions are more paid on the negative side of China’s hybrid economy and to analyze how those
people succeed (e.g. Li et al 2006, Yang 2004).
Although each of those approaches and theses discussed above analyzes thoroughly the
determinants of entrepreneurship, they fail to take into different factors into account (Djankov et al.
2005, p.2). Inspired by Thornton (1999) and Djankov et al’s (2005) efforts of combine different
disciplines to answer the question of who can be China’s entrepreneurs, this article aims to analyze
multi-factors that influence individuals to become entrepreneurs on the basis of the three perspectives
reviewed above.
Factors examined in this article can be grouped into four categories. The first one is based on
psychological perspective, including individual’s characteristics. Inspired by Shaver and Scott (1991),
the factors in this category will examine whether China’s entrepreneurs have attitudes and background
that differentiate them from non-entrepreneurs.
The second category examines the employment and status factors that may influence the determinants
of entrepreneurship. Entrepreneurs are more likely to have experienced being laid-off. This can be
explained by the social changes during the economic reform era (Hu 1999). Based on these factors, our
analysis below has examined whether the unemployment experience and pressure from family and
friends may force the unemployed people to start their own business. In addition, the effects of social
and economic status have also examined. The third category is designed under the frameworks of the
institutional thesis to investigate how institutional factors affect the decision of entrepreneurship.
Institutional factors can be seen as “role models” that can help individuals form career preferences
(Scherer, Adams, Carley, and Wiebe 1989). Li et al. (2006) and Djankov et al. (2006) concur that
entrepreneurship is more likely if the entrepreneur has friends or family who were entrepreneurs, for
they play an active role in enterprise formation and development in China. Moreover, entrepreneurs are
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Sujuan Xie et al.
found to rely on family members and/or fiends both to establish and develop their enterprises (Pistrui et
al. 2001). Social network, an important institutional factor in China, has been embedded in various
institutions, smoothing entrepreneurs’ economic activities through easing financial constraints and
providing needed contacts for operating a business in a partially marketised environment (Li et al. 2006,
Fong and Chen 2007, Yueh, 2007). Following institution theses, the last category is designed to
examine whether individual’s social network has impact on entrepreneurship.
3. Empirical studies
3.1 The Data

We used the national sampling survey data set, which is original and collected in urban China based on
the 2003 China General Social Survey (CGSS 2003), a survey conducted by the China Renmin
University and the Hong Kong University of Science and Technology. The survey employed a
four-stage cluster sampling and the total sample size included in this article is 4,734 urban individuals
from eight cities around China. The detailed information on ethnic background, family background,
personal traits, social life and career experience, and attitudes allow for estimations of different factors
influencing individuals to become entrepreneurs. The distribution of sample is shown in Table 1.
Table 1: Distribution of sample
Age Non-Entrepreneur Entrepreneur Total
Women <25 349 13 362
% 14.70 11.61 14.57
26~35 500 40 540
% 21.07 35.71 21.73
36~45 656 43 699
% 27.64 38.39 28.12
46~55 463 14 477
% 19.51 12.5 19.19
>56 405 2 407
% 17.07 1.78 16.37
Total 2373 112 2485
X²(4)=33.64, % 100 100 100
P<0.01
Men <25 368 16 384
% 17.52 11.18 17.11
26~35 407 45 452
% 19.38 31.46 20.15
36~45 523 57 580
% 24.90 39.86 25.85
46~55 415 19 434
% 19.76 13.28 19.34
>56 387 6 393
% 18.42 4.19 17.52
Total 2100 143 2243
X²(4)=42.81 % 100 100 100
P<0.01
3.2 Research design

We first conducted a comparison between entrepreneurs and non-entrepreneurs to understand how
they different in education level, membership of the Chinese communist party, social and economic
status. In order to further examine the determinants of China’s entrepreneurs, we used the Binary
Logistic Regression model to investigate to what extent each factor influences the chance to become
entrepreneur.
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Sujuan Xie et al.
The dependent variable is whether or not the respondent is entrepreneur in 2003. Herein there is no
difference in “entrepreneurs” and “self-employment people”. As mentioned above, all independent
variables are grouped into four categories and listed in Table 2 in Appendix 1.
4. Analyses and discussions
4.1 Descriptive analysis

As shall be seen from Table 1, most China’s women and men entrepreneurs are at the age of 26 to 45
(74.1% and 71.32% respectively), significantly older than the non-entrepreneur population. The
correlations between variables are summarized in Table 3 in Appendix. Almost all independent
variables are significantly correlated to the dependent variable except the dummy variable that whether
the respondent has served in the Chinese army. The results of the independent sample t-tests are
shown in Table 4 in Appendix. The means of all variables except the one of former military service are
significantly different between entrepreneurs and non-entrepreneurs.
4.2 Binary logistic regressions

To further assess the influence of each factors, we conducted a series of binary logistic regressions.
The reason to choose the logistic regression is three-fold: 1) the predictor variables of this study are a
mix of continuous and categorical variables, 2) it makes no assumptions about the distributions of the
predictor variables; and 3) the dependent variable is dichotomous.
Model 1 assesses the effects of supply-side factors. From Table 5 in Appendix, we can see a positive
attitude toward private economy has the strongest effect on the probability of being entrepreneur
(0.075, p<0.01). Men are more likely to start his own business than women, as the coefficient of sex is
significantly positive (0.034, p<0.01). The effects of prior job satisfaction and of age are not significant.
The attitude toward personal capability to accumulate wealth (0.009, p<0.05), the attitude toward
entrepreneurs (0.006, p<0.01), and the desire for money (0.006, p<0.01) are all positive related to the
dependent variable, echoing prior studies (e.g. Mulvenon 2002, Djankov et al. 2005, Guiheux 2007).
However, it seems that the higher education level one has, the less possibility that he or she becomes
an entrepreneur (-0.02, p<0.01). The years of working experience also reduces the chance of
self-employment (-0.0003, p<0.05). This is consistent with some self-employment studies on human
capital (e.g. Liao and Sohmen 2001). However, there are literatures demonstrating the significant role of
education level for rural entrepreneurs in China (e.g. Mohapatra et al. 2007, Grove 2008 ) and for
entrepreneurs in particular sectors such as techniques (Wright et al. 2008). Moreover, indicators of
human capital as “special skills obtained” and “certain classes undertaken” and entrepreneurial
education are largely discussed as realization of the important role of education in entrepreneurship
(e.g. Liao and Sohmen 2001, Davidsson and Honig 2003, Yueh 2007). Whether or not there will be a
change in the effects of educational level need a long-term observation. Djankov et al. (2005) point out
that entrepreneurs often show a strong motivation and greed, and most of they are motivated by the
need for independent-based achievement and continuous learning around a family focus (Pistrui et al.
2001)
Model 2 examines the effects of employment and status factors. Firstly, experiencing unemployment
promotes entrepreneurship (0.092, p<0.01). This is consistent with other research about the
determinants of unemployment on becoming entrepreneurs (e.g. Yueh 2007). The pressures from
friends and family when the respondent was unemployed do not influence the decision of
self-employment. Secondly, the higher the economic status is, the more chance one becomes
entrepreneur (0.007, p<0.01). However, the higher the social status is, the less chance to be
entrepreneurs (-0.004, p<0.01). The seeming controversy between these two factors can be explained
by social group thesis. In China, being cadres or government officers are often described as high social
status, and individuals who possess these positions are less likely to become entrepreneurs because
there is more risks being entrepreneurs than being a cadre (Yueh, 2007).Finally, the effect of sex
remains positive (0.027, p<0.01). The negative influence of age becomes significant. Considering that
age is positively correlated to the economic status (0.124, p<0.01), we suggest that younger individual
with higher economic status is more likely to become entrepreneur.
Model 3 includes three social learning factors. Having self-employment history has very a strong impact
on the decision of being entrepreneur (0.048, p<0.01), followed by the experience of working at private
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companies before (0.039, p<0.01). Surprisingly, exposure to self-employed family members has no
significant effect on one’s decision of entrepreneurship. The effect of sex is consistently positive (0.078,
p<0.01). The impact of age is significantly negative (-0.017, p<0.01). This indicates that younger
individual is more likely to learn from his or her exposure to self-employment and to become
entrepreneur.
Model 4 focuses on the social network factors. Not having party membership increases the chance to
become entrepreneur (0.108, p<0.01). The individuals used to work as civil servant (-0.039, p<0.01) or
at state-owned enterprise (-0.014, p<0.01) are less likely to choose self-employment. The finding is
consistent with other social network research in China (e.g. Zhang et al. 2006, Fong and Chen 2007,
Yueh, 2007). The positive effect of sex suggests that male with less social network resource is more
likely to start own business. The effect of age becomes positive in Model 4, indicating that older people
with less social network resource are more likely to be entrepreneurs.
Model 5 pools all factors together. Self-employment history has the strongest effect (0.555, p<0.01),
following by unemployment experience (0.272, p<0.01). Worked at private companies (0.182, p<0.01)
and having self-employment family members (0.041, p<0.05) are positively related to the dependent
variable. Interestingly, the effects of “worked as civil servant” and of “worked at SOEs” become
significantly positive. From the correlation matrix, we can see that “worked as civil servant” is negatively
correlated to unemployment experience (-0.169, p<0.01), “worked at private companies” (-0.152,
p<0.01) and self-employment history (-0.072, p<0.01). Likewise, “worked at SOEs” is negatively
correlated to “worked at private companies” (-0.231, p<0.01), self-employment history (-0.088, p<0.01),
and self-employed family members (-0.045, p<0.01). The individual effects of these correlated variables
also become stronger in Model 5. This, we believe the interactions turned the effects of “worked as civil
servant” and of “worked at SOEs” from negative to positive. This implies that, for the individuals who
used to work as civil servant or at SOEs, they are more likely become entrepreneurs if they have
experienced unemployment or exposed to entrepreneurship (i.e. the three factors of social learning).
The -2 Log Likelihood (-2LL) statistic of each model measures how poorly the model predicts the
decisions -- the smaller the statistic the better the model. The values of -2LL of all these five models are
smaller than that of the model only with intercept. However, Model 5 has the lowest value, indicating
that this model is better than any other model in explaining China’s entrepreneurship. The Chi-Square
test of this change on -2LL verify whether adding the independent variables to the model has
significantly increased our ability to predict the decisions made by our subjects. The results are all
significant (see the last row of Table 5), suggesting that the explanatory factors significantly help us
explain the variance of the dependent variable.
5. Conclusion
This article mobilises different social theories and examines the different determinants of China’s
entrepreneurship. The regression results of each category support psychological supply-side,
sociological and organisational perspectives. However, the results of pooled analysis (i.e. Model 5)
indicate that psychological traits cannot account for entrepreneurship. Instead, the sociological and
organisational perspectives (i.e. unemployment, social learning, and social network), framing their
analyses in terms of interaction between individual and his or her social contexts, promise to advance
our understanding in the field and offer greater explanatory purchase over China’s entrepreneurship.
The generalisation of our findings should be linked to three major limits. Firstly, only urban individuals
were investigated in the CGSS 2003. What hold true in cities may be different in villages, given there are
huge social and economical gaps between urban and rural areas in China. Secondly, due to time
constraints, we had to exclude the demand-side factors, such as economic growth, taxation,
entrepreneurial finance services. Finally, organisational and spatial factors were not addressed. As
Aldrich (1992) states, in order for us to generalize about entrepreneurs, we need to study individuals;
and in order to generalize about new ventures, we need to study organizations. In future studies, we
shall develop an integrative framework including the effects of individual-level traits, organisational and
market-level variables, and population-level characteristics in a multi-level model.
Acknowledgement
The first author sincerely acknowledges the helps of Prof. Sally Church of Cambridge University and
the supports of the Dept. of sociology of Cambridge University. All errors belong to us only.
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Sujuan Xie et al.
6. Appendix 1
Table 2: All independent variables grouped into four categories
Category Variables Explanation Value
Whether the
Respondent is 1 for self-employment,
1.Entrepreneur or Not
self-employment or not 0 for otherwise
in 2003
1 for below 25, 2 for
2.Age Rang Age of respondent 26-35,3 for 36-45, 4 for
46-55, 5 for above 55
3.Sex Sex of respondent 1 for man, 0 for woman
0 for illiteracy, 1 for
primary school, 2 for
middle school, 3 for
Education level of
Individual Characteristics 4.Education high school, 4 for
respondent
college, 5 for
Bachelor’s degree, 6
for Graduate degree.
Number of years since
5.Years of Working Years=2003-the year
the respondent’s first
Experience of his/her first job.
job
How successful the A scale from 0
6.Attitude towards
respondent thinks to be (unsuccessful) to 4
Entrepreneur
an entrepreneur. (very successful)
Whether the
respondent believes
7.Attitude towards private economy
1 for yes, 0 for no.
Private Economy contributes the most to
the recent
development of China
The level of importance A scale from 0
8.Attitude towards
of personal capability (unimportant at all) to 6
Personal Capability
to accumulate wealth (very important)
The respondent’s The average level of
9.Job Satisfaction average satisfaction on satisfaction on all prior
prior jobs jobs.
A scale from 0 (not
The respondent’s
10.Desire for Money desire at all) to 6 (very
desire for money
desire)
Whether the
11.Unemployment respondent has
Employment: 1 for yes, 0 for no.
Experience experienced
unemployment
Whether the
respondent feels
12.Family Pressure on
pressure from family 1 for yes, 0 for no.
Unemployment
member during
unemployment
Whether the
13.Friends Pressure respondent feels
on Unemployment pressure from friends
during unemployment
The self-report of the
A scale from 0 (very
14.Social Status respondent’s social
low) to 10 (very high)
status
The self-report of the
A scale from 0 (very
15.Economic Status respondent’s economic
low) to 10 (very high)
status
Whether the
16.Worked at Private
Social Learning: respondent has worked 1 for yes, 0 for no.
Company
at private companies
Whether the
17.Self-employment
respondent has been 1 for yes, 0 for no.
Experience
self-employed
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Sujuan Xie et al.
Category Variables Explanation Value

Whether the
18.Family Member respondent has
Self-employment self-employed family
member
Whether the 0 for having
19.Member of Chinese
Social Network: respondent is member membership, 1 for
Communist Party
of the Party otherwise.
Whether the
20.Served in the
respondent was 1 for yes, 0 for no.
military
militant
Whether the
21.Civil Servant respondent was civil 1 for yes, 0 for no.
servant
22.Worked at State Whether the
Owned respondent has worked 1 for yes, 0 for no.
Enterprises(SOEs) at SOEs
The average cadre
rank of the respondent
The average cadre
23. Cadre Rank when he or she was
rank
civil servant or worked
at SOEs
The average cadre
rank of the
24. Cadre Rank of respondent’s family The average cadre
Family Members members who are civil rank
servants or work at
SOEs
Table 3: Correlation matrix1
#
of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1.
-.06
2.
8**
.040 -0.00
3
** 4
-.07 -.333* .104*
4.
0** * *
-.10 .923* -.357*
5. .035*
8** * *
.081 -.124* .040* .055* -.109*
6.
** * * * *
.085 -.053* -0.00 -0.02 -.067* .107*
7.
** * 9 1 * *
.049 -.170* -0.00 .109* -.141* .123* .053*
8.
** * 4 * * * *
-.03 .301* .047* .082* .244* -.040* -0.01
9. 0.002
1* * * * * * 6
.069 -0.01 -0.00 -.111* -0.02 .059* .051* .040* -.099*
10
** 5 4 * 1 * * * *
.102 -0.00 -.044* -.159* -.071* .044* -.045* -.198* .142*
11 0.013
** 5 * * * * * * *
.045 -0.00 -.047* -0.01 0.00 -.073* .244*
12 .032* 0 0.017 .036*
** 6 * 7 7 * *
.064 -.066* -0.02 -0.00 0.02 -.038* -.073* .062* .311* .294*
13 0.007 .033*
** * 3 1 4 * * * * *
-.03 .224* 0.00 .127* .169* -.117* -.228* -.100* -.117*
14 0.009 0.003 0.02 0.012
1* * 4 * * * * * *
.041 .124* .182* -0.01 -0.00 .104* .271* -.102* -.279* -.086* -.121* .623*
15 .034* 0.002
** * * 7 5 * * * * * * *
.485 -.171* -.043* -.238* .056* .078* .068* -0.01 .066*
16 0.007 -.035* .037* .037* 0.027 0.015
** * * * * * * 8 *
.792 -.038* -.091* -.075* .057* .110* .043* .062* .038* -0.01
17 0.019 -.032* 0.024 .029* .038*
** * * * * * * * * 6
.130 -0.00 -0.02 -.060* -0.02 -0.01 -0.01
18 -0.02 .033* 0.008 0.004 0.015 .035* 0.019 0.006
** 6 5 * 2 2 8
.074 -.209* -.125* -.216* -.194* .066* .057* -.217* .127* .130* -.144* -.170*
19 0.027 0.019 0.019
** * * * * * * * * * * *
-0.0 .062* .109* .060* -0.01 -0.00 -.043* .054* -0.01 -0.00 .039*
20 0.021 -.034* -.035* 0.028
22 * * * 1 1 * * 7 6 *
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Sujuan Xie et al.
#
of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
-.08 .148* .042* .289* .059* -.047* -.030 -0.00 .229* -.098* -.169* -.040* -.050* .206* .262*
21
1** * * * * * * 2 * * * * * * *
-.03 .328* -0.02 -.275* .246* -0.00 -.087* .109* .053* .280* .067* .093* -.137* -.045*
22 -.036*
8** * 4 * * 6 * * * * * * * *
-.06 .214* .122* .219* .202* -0.01 -.038 -0.01 .293* -.081* -.147* -.053* .181* .197*
23 -.037*
4** * * * * 9 * 2 * * * * * *
24 -.04 -0.00 -.070* .197* -0.00 .168* -.082* -.065* -.046* .112* .125*
-.038* -.029* 0.006 -.035*
. 1** 1 * * 5 * * * * * *
1: the names of variables are listed in Table 2.

Table 4: Comparisons between entrepreneurs and non-entrepreneurs (independent sample t-test)
Variable Group Mean S.D. Difference (T-test)
Age Rang Entrepreneur 2.63 0.95 Yes
Non-Entrepreneur 3.03 1.32
Sex Entrepreneur 0.56 0.50 Yes
Education Level Entrepreneur 2.45 0.93 Yes
Work Experience Entrepreneur 20.10 9.52 Yes
Atti Entrepreneur Entrepreneur 2.39 1.36 Yes
Atti Private Eco Entrepreneur 0.16 0.36 Yes
Atti Capability Entrepreneur 2.22 0.82 Yes
Job Satisfaction Entrepreneur 1.38 0.97 Yes
Desire for Money Entrepreneur 1.09 1.24 Yes
Unemployment Entrepreneur 0.39 0.49 Yes
Family Pressure Entrepreneur 0.07 0.25 Yes
Friends Pressure Entrepreneur 0.04 0.19 Yes
Social Status Entrepreneur 4.77 2.01 Yes
Economic Status Entrepreneur 4.82 2.02 Yes
Worked at Private Entrepreneur 1.88 1.08 Yes
Selfemployment Exp Entrepreneur 1.76 0.99 Yes
Family Selfemployment Entrepreneur 0.51 1.01 Yes
Party Member Entrepreneur 1.94 0.23 Yes
Military Entrepreneur 0.01 0.08 No
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Sujuan Xie et al.
Variable Group Mean S.D. Difference (T-test)

Civil Servant Entrepreneur 0.10 0.31 Yes
Worked at SOE Entrepreneur 0.54 0.50 Yes
Cadre Rank Entrepreneur 0.06 0.33 Yes
Family Cadre Rank Entrepreneur 0.52 2.37 Yes
Table 5: Results of binary logistic regressions

Variables Model 1 Model 2 Model 3 Model 4 Model 5
Intercept -1.331** -2.794** -4.451** -3.484** -6.234**
(0.363) (0.256) (0.350) (0.616) (1.455)
Age -0.015 -0.011** -0.017** 0.005* -0.050
(0.138) (0.058) (0.104) (0.059) (0.302)
Sex 0.034** 0.027** 0.078* 0.038** 0.102*
(0.134) (0.133) (0.237) (0.136) (0.275)
Supply-Side
Educational Level -0.020** -0.018
(0.068) (0.152)
Working Experience -0.0003* -0.002**
(0.014) (0.034)
AttiEntrepreneur 0.006** 0.006
(0.052) (0.104)
AttiPrivateEco 0.075** -0.221
(0.194) (0.478)
AttiCapability 0.009* 0.006
(0.082) (0.167)
Job Satisfaction -0.002 -0.001
(0.069) (0.166)
Desire for Money 0.006** 0.008
(0.056) (0.114)
Employment
Unemployment 0.092** 0.272**
(0.155) (0.298)
Family Pressure 0.080 0.083
(0.309) (0.553)
Friends Pressure 0.019 -0.002
(0.386) (0.679)
Social Status -0.004** -0.008
(0.042) (0.087)
Economic Status 0.007** 0.005
(0.042) (0.086)
Social Learning
Worked at Private 0.039** 0.182**
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Sujuan Xie et al.
Variables Model 1 Model 2 Model 3 Model 4 Model 5

(0.121) (0.217)
Self-employment History 0.482** 0.555**
(0.226) (0.247)
Family Self-employment -0.003 0.041*
(0.183) (0.177)
Social Network
Party Member 0.108* 0.050
(0.291) (0.515)
Militant -0.375 0.037
(0.821) (0.942)
CivilServant -0.039** 0.124**
(0.097) (0.242)
WorkedatSOE -0.014** 0.121**
(0.050) (0.194)
CadreRank -0.029 0.084
(0.265) (0.339)
FamilyCadreRank -0.002 -0.004*
(0.049) (0.057)
-2LL 1734.667 1821.148 641.501 1741.058 488.70
X2 test of -2LL 19.584(8)* 13.942(8)+ 22.373(8)** 38.821(8)** 23.919(8)**
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691
Can Firms Without Center Technology Gain a Competitive
Advantage? Case Study of Sony in the Flat Panel TV
Industry
Kiyohiro Yamazaki
Chukyo University, Nagoya, Japan
kiyohiro@hotmail.com
Abstract: The purpose of this study is to examine how a firm without the center technology can gain a competitive
advantage. This study examines the case study of Sony in the flat panel TV industry. Sony did not own the panel
device factory and not make by itself, and procured it from external firms. In its product development, Sony could
develop the low cost TV and design oriented TV. As a result, this paper points out Sony gains the two advantages,
economic advantage and organizational advantage.
Keywords: company without center technology, economic advantage, organizational advantage, flat panel
television, Sony
1. Introduction
Numerous attempts have been made by scholars (e.g., Wernerfelt, 1984; Barney, 1991) to demonstrate
that management resources are different across individual firms, and each company’s resources are a
source of competitive advantage. This Resource-Based View of the company (RBV) approach notes
that this heterogeneity of resources and abilities leads to the differentiation of products and services.
Prahalad and Hamel’s (1990) study of company-specific management resources maintained that
heterogeneity is important and advantageous for competing firms if the resources cannot easily be
imitated by other firms. Competitors quickly obtain resources that can be easily imitated (Barney, 1991).
Therefore, resource heterogeneity requires ambiguous causality (Itami, 1987; McEvily and
Chakravarthy, 2002), path dependency (Nelson and Winter, 1982), and legal and systematic protection
(Rumelt, 1984).
Other researchers have argued that resources should not be freely transferred to other firms (Dierickx
and Cool, 1989; Peteraf, 1993). Ambiguous causality and path dependency make market trade in
resources difficult.
Previous researchers have argued that the possession of the core resource hinders competitive
advantage (Levitt and March, 1988), while management resources generate it. Leonard-Barton (1995)
studied the core capability as one source of a company’s competitive advantage, but found that this
capability is not versatile and can be a burden to the company if it does not generate competitiveness.
The company’s corporate activity becomes inflexible, and the core capability becomes a core limitation.
A great deal of attention has been paid to the fact that current firms with core resources and capabilities
gain the competitive advantage. However, the reasons firms without core resources and capabilities
also have competitive strength have not been studied in academic research. Discussion has focused on
cases where firms with the core technology build competitive advantage and those where the
possession of the core technology hinders the competitive advantage of firms. However, researchers
have not sufficiently discussed the factors that enable firms without the core technology to enhance
competition.
From a practical perspective, we can identify industries where firms without a core technology have
recently demonstrated strength by obtaining core devices after they have been sufficiently modularized
(Ulrich, 1995; Baldwin and Clark, 2000). The most important addition to what we have said about firms
without core technology is the formation of the global innovation network (Dedrick, Kraemer and Linden,
2008; Linden, Kraemer and Dedrick, 2009) that enables firms to cooperate with international partners to
create new values. Thereby, firms without core technology can develop excellent products and gain a
competitive advantage via the global supply chain in industries formerly dominated by firms that owned
core technologies. Using Sony in the flat screen television industry as the focus of analysis, this study
describes the means by which firms that do not own core technologies become competitive. The study
clarifies the process by which Sony, despite lacking flat display panel technology, developed
competitively successful models.
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Kiyohiro Yamazaki
For the purposes of this study, center technology is defined as a resource for designing and producing
core devices. The elemental technology constituting a product is roughly divided into center technology
and peripheral technology 1 categories. Center technology 2 is a technology that satisfies two
requirements. The first requirement is that it must perform the “basic function” provided by a product.
Second, when each company enters the market, its center technology is recognized as the technology
composing the primary part of the product, and the entire industry agrees upon this center technology.
The recognition subject is the set of manufacturers, and the timing for recognizing the center technology
is the introduction stage in the industry. It is technology that continuously develops and improves the
products’ function level. In contrast, the peripheral technology is defined as the technology for all
devices except the center device.
2. Case study
In this section, Sony is the case of a company without the center technology in the flat panel TV
industry. The data for this case study are derived from interviews with Sony 3 , several publications, and
announcements from other firms and device makers.
2.1 Ownership of each company’s center technology

Technology for panel devices is important because it can be said that the history of flat panel TV
development is the same as the history of panel development, which is fundamental to displaying an
image, the basic function of the television. During the R&D stage, several firms and research
laboratories were working to develop a panel device to improve the flat panel TV. As per the flat panel
TV industry’s consensus 4 , reducing the thickness of the panel and improving its performance were
recognized as a center technological development task for product differentiation 5 . This study,
therefore, assumes that the panel device is the center technology for the flat panel TV industry.
Most of the firms that promoted the development of flat panel TV industry and produced tube televisions
have also developed technology for LCD and plasma TVs, as they were the next generation
technologies that replaced the tube television in the 1990’s. It was Fujitsu, Hitachi, Pioneer, NEC,
Panasonic, and others that commercialized the plasma TV. Overseas manufacturers, such as LG and
Samsung were also instrumental in the development of the plasma TV. These firms keep their plasma
panel factories separately.
Firms with LCD display factories, such as Sharp, Hitachi and Panasonic have developed the LCD TV.
Other firms like Samsung, LG, and Philips also make LCD TVs, while Taiwanese manufacturers like
AUO and CMO have gained the competitive advantage as liquid crystal panel manufacturers. However,
firms like Sony, Toshiba, Mitsubishi, and Pioneer do not have panel device technology, and since Sony
lacks both the liquid crystal panel and the plasma panel technologies, we focus on Sony’s product
development in this study.
1
This definition of center technology cannot necessarily be applied to all industries. There are industries where center
technology does not apply, such as the apparel industry, and reexamining this issue in such industries is necessary. However,
this study.
2
There is a difference between the center technology and the core technology. The core technology that Prahalad and Hamel
(1990) and Leonard-Barton (1995) examined is a technology that is unique to the company and has multiple uses with several
products. Therefore, identifying the center technology is different from each company’s respective core technologies. The
center technology in this study is determined in accordance with product features and a specific technology in one product,
regardless of the company’s intention. Thus, the center technology is defined as a unique technology agreed upon by the entire
industry. The performance level of the product’s basic function does not often meet the customer demand standards during the
development or the introductory periods of the industry, and the biggest development task is for market expansion
(Christensen, 1997). The product then becomes an improvement of the function level of the center technology. Therefore, if
the definition of the core technology is used, it is highly likely that all firms entering the market have some technologies, and
discussing firms without considering their technologies is difficult.efinition is effective in the industry examined in this study.
3
We interviewed Sony five times. (Interview 1) Interview with two persons at the Sony TV business headquarters product
planning, part FTV product planning department, from 10 AM to 11 AM, November 1, 2007. (Interview 2) The interview with
two persons at the Sony quality project room, from 11 AM to 12:30 PM, the same day. (Interview 3) Interview with one person
at Sony TV business headquarters, FTV business department, from 2 PM to 3 PM, the same day. (Interview 4) Interview with
one person, Sony television business headquarters, FTV business department, from 9 PM to 11 PM, February 25, 2008.
(Interview 5).Interview with one person, Sony television business headquarters, FTV business department from 9:30 AM to 11
AM, March 4, 2008
4
Interview3.
5
Interview3.
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Kiyohiro Yamazaki
Table 1: Ownership of center technology in flat panel TV firms

LCD panel device LCD TV Plasma panel device Plasma TV
Sony × → △ (Samsung) ○ × ○ →×
Toshiba ○ (+Pa/H) → × ○ × ×
Panasonic ○ (+T/H) ○ ○ ○
Hitachi ○ （＋T/Pa） ○ ○ (+F)→ ○ ○
Mitsubishi × ○ × ×
Sharp ○ ○ × ○ →×
Pioneer × × ○ →× ○
Samsung ○ ○ ○ ○
LG ○ (+Ph) ○ ○ ○
Phillips ○ (+LG) ○ × ○
AUO ○ ○ × ×
CMO ○ ○ × ×
Panel device ○ : own, △ : joint concern, × : not own TV ○ develop, × : not develop
It is thought that product development influences decision-making and action taken by the flat panel TV
industry; therefore, I would like to review Sony’s activities before they entered the flat panel TV industry.
Sony produced a tape-recorder in 1950, a transistor radio in 1955, and the first transistor television in
the world in 1960. They developed the Trinitron color television and put it on the market in 1968. Later
innovative products included the beta method VTR, the Walkman CD player, the eight-millimeter
camcorder, and the PlayStation (a family game machine).
The ideas behind the development of these products were to develop an original product based on new
technology, to miniaturize, to decrease product weight, and to create an excellent design. The product
mindset formed in Sony through the development of these products was “originality, compactness, and
design.” Throughout its history, Sony has also built up high-density surface-mounting technology and
design knowledge.
2.2 Flat panel TV developments in Sony

Fujitsu had concentrated on developing the plasma television, as Sharp did with the LCD TV, and they
released their products to rapidly become popular alternatives to the tube television. This led to Sony
being shut out of the growing flat panel TV market.
However, even without panel device technology, Sony was developing products that supported its
features. The first of the four characteristics of the flat panel TV was its low cost. A product with the
same performance had been produced as a cheaper television by procuring a low-cost panel. Second,
they have many variations, including different screen sizes and features, which Sony developed by
procuring various panels. Third, they combine two or more technological systems. Sony developed a
product with two or more technological systems, such as LCD and plasma TVs. Fourth, flat panel TVs
are differentiated by factors other than the display panel, such as excellent exterior design. Next, we
analyze how Sony developed these four product features without owning the panel device technology.
2.3 Flexibility in panel device procurement and TV development

It was said that the panel would account for about 60–70% of the cost of materials for the plasma and
the LCD TV, making the panel’s quality a major factor for controlling the TV’s cost competitiveness.
Sony procured plasma panels from Pioneer, Fujitsu-Hitachi, NEC, and Samsung SDI 6 (Table2), based
in part on cost. The size to which the plasma panel could be cut changed with each generation of the
technology, and the efficiency in each generation was different. Sony’s policy was to purchase the panel
from any company, according to the specifications, and selected high quality panels at a cost that was
good but higher than the average cost of earlier models from Sharp, LG Philips LCD, AUO, CMO, and
Samsung. Another selection criterion was the panel’s characteristics. Since each panel manufacturer’s
6
The Panel Policy Planning Office division procured the panels until 2005 (Interview 2), and thereafter the panel purchasing
was done by the operations division.
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Kiyohiro Yamazaki
technology had different strengths 7 , Sony could easily achieve the desired product specification by
procuring the panel closest to it from its manufacturer. Developing products of various types became
possible by choosing panels of various sizes and other characteristics from two or more manufacturers.
In addition to buying a ready-made panel, Sony would also modify it to create an original panel 8 . For
instance, by improving only the driver of the plasma panel, but not the sound or the step expression,
only Sony’s variation of the product was enhanced. The advantages to procuring both plasma and LCD
panels were to develop both kinds of televisions, so that Sony could then respond to technology and
market changes by procuring the necessary panels externally.
Table 2: Sony procurement method of panel development (~2005)
Sharp pioneer
domestics
Hitachi Fujitsu-Hitachi
Sony
Panasonic+Toshiba NEC
Sanyo Panasonic
LG+Phillips LG
overseas
Samsung Samsung SDI
AMO
CMO
However, buying only externally developed panels was not necessarily a positive strategy. For
example, when the flat panel TV market expanded rapidly, the demand rapidly began to exceed the
supply, and Sony lost reliable LCD panel makers from 2004 through the first half of 2005 because they
could not control the amount of the panels available externally, and they could not produce them
in-house.
Sony had expected a substantial change in balance to the demand-and-supply for flat panel TVs to take
several years due to the rapid market expansion. In order to adapt to the situation Sony converted to the
policy of LCD panel production, but since Sony had developed neither knowledge nor the skills
necessary for LCD panel manufacturing in-house, and the load of capital investment was heavy, they
found it difficult to start up the LCD production line. Therefore, Sony was left with realistic choices such
as to partnership with, invest in, or purchase an existing LCD panel manufacturer. Sony negotiated
concurrently with two or more LCD panel manufacturers and chose the established path of joint
manufacturing (S-LCD) with Samsung. The basic technologies in the LCD panel of S-LCD were all
Samsung’s technologies, and it cost about $2 billion for Sony to secure the stability, quality, and
low-cost of the panel supply. S-LCD manufacturing and shipping operations began in April, 2005. Sony
decided to withdraw from the plasma TV market in 2005 when they started S-LCD Corporation. Before
that, the LCD TV and the plasma TV were divided at the boundary of the 37-inch panel. Therefore, with
the capability to develop two or more technological systems, Sony could manufacture both big and
small screen TVs, and thus target a wider consumer market.
Sony took good advantage of mass production by having cooperated in S-LCD with Samsung, which
9
was the world’s largest LCD panel manufacturer . On one hand, the higher quantity of panels it
produced with the consolidated equipment, the lower the cost of a panel became, and since S-LCD
accounted for about 30–40% of the global market share, it enjoyed high economies of scale, which
contributed to lowering the cost of the product. On the other hand, the post-processing in S-LCD
enabled differentiation by adding Sony’s innovations to Samsung’s 10 . The image quality was branded
“Picture by Sony,” and the “Sony panel” was developed. Many large-scale, medium, and thin panels
were developed.
7
The brightness of Pioneer’s panel was high in the large size plasma panel, while the Fujitsu-Hitachi panel’s strength was in
low power consumption.
8
Interviews 2 and 3.
9
Interviews 1, 2, and 3.
10
Interviews 1 and 3.
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Kiyohiro Yamazaki
In addition to S-LCD, Sony has also been procuring panels from Taiwanese panel manufacturers such
as AUO, CMO, and CPT, which depended upon the features offered by each manufacturer’s panel 11 .
Sony’s strategy enables them to select low-cost panels while meeting changes in market demand
without having a large shortfall resulting in any given product based upon the panel supply from S-LCD
alone. Typically, Taiwanese manufactured small panels are cheaper than S-LCD’s 12 , so Sony buys
Taiwanese manufacturers’ small panels for the cost-based competitive advantage, and medium and
large panels from S-LCD. Sony’s unique panel is made in cooperation with a Taiwanese manufacturer,
who provides the specifications of the cell from which Sony then develops the T-Controller, resulting in
Sony’s unique panel. Thus, Sony’s strategy achieves low-cost panel production in two ways: mass
production by sharing the initial process of panel production in S-LCD with Samsung and procuring
low-cost panels from several Taiwanese manufacturers. The Sony strategy also provides flexibility and
diversity of products through two tactics: S-LCD’s separate post-processing to create Sony panels that
are different from Samsung’s, and procuring their newest large and medium panels from S-LCD while
buying small panels from Taiwanese manufacturers. Table 3 shows Sony’s panel procurement
approach since founding S-LCD.
Table 3: Sony procurement approach of panel development (2005~)
Sharp pioneer
domestics
Hitachi Fujitsu-Hitachi
Sony
Panasonic+Toshiba NEC
Sanyo Panasonic
S-LCD LG
overseas
Samsung SDI
Samsung
AMO
CMO
LG+Phillips
2.4 Product development with different competing factors

Sony competes on other product differentiation factors in addition to panel size and performance. It has
developed high quality, innovative designs for flat panel TVs, such as the floating design, in which the
bezel around the screen appears transparent, giving the illusion of the display to be floating in an art
frame of a consistent width. This innovation creates a sharp finish that takes advantage of the luster of
the metal and glass flakes to make the color change slightly.
Sony focuses on developing televisions with innovative and advanced designs in order to keep ahead of
other firms, even though many firms in the flat panel TV market are now also attempting innovative
designs. In Sony, advanced design has become a high priority in product development 13 .
Since it was difficult to improve the display quality beyond those of rival firms without owning the panel
device technology, Sony concentrated on the design. Initially, Sony’s design was inferior, and it could
not claim that the basic performance of the plasma and LCD TV image quality was better that that of the
tube television (Table4). Therefore, firms with the panel device technology worked on improving the
performance of the panel. Pioneer’s plasma panel was noted for its high technology, and panel
performance became the differentiator of each company’s image quality. This situation left Sony, which
purchased panels from the technology owners, to differentiate its products on design elements other
than the panel.
Sony tried to match their flat panel TV’s features to changes in consumers’ criteria. Consumers buy
plasma and LCD TVs on criteria other than thinness, low price, or even the image quality, as all
11
Interview 1.
12
Interview 4.
13
Interview 5.
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Kiyohiro Yamazaki
manufacturers’ displays had become good enough to satisfy them. Therefore, as the importance of
other factors increased, Sony paid increasing attention to their design.
Table 4: Comparison of TV technological systems (around 2000)
CRT TV PDP TV LCD TV
enlargement △ ◎ ×
thin and light × ◎ ◎
high-definition images ◎ ○ △
wide viewing angle ○ ○ △
low power consumption △ × △

◎ : Best, ○ : Better, △ : Good, × : Not Good
3. The logic of firms without center technology

As mentioned earlier, Sony developed four kinds of products with distinctive features—low-cost
products, products with diverse features, products with different technological systems, and products
that involve other competing factors. Through this approach, Sony obtains two advantages, low-cost
production and post-production diversity and flexibility to meet market demands, and produces
successfully competitive products.
3.1 Two advantages of a company without center technology

The Sony case demonstrates the two advantages for firms that lack center technology. First, they have
the flexibility to respond quickly to environmental changes at low costs. This paper considers such
flexibility an economic advantage. Second, organizational advantage demonstrates a company’s own
strong point without organizational restriction.
This study attempts to clarify the mechanism of the strength of the company without center technology
by examining these advantages.
The economic advantage relates to the financial side of the company and indicates advantages inside
the company when it builds relationships with external sources to reduce costs. The advantages of firms
without center technology go beyond mere cost reduction and include organizational advantage in
firms’ systematic activities of decision making and organizational behavior.
3.2 Sony’s economic advantage

Sony procured the panel device from external sources because it did not own the panel device
technology for plasma and LCD flat panel TVs. In so doing, Sony could select the most appropriate
panel for product specification among several manufacturers at the lowest cost through competitive
bidding for their business.
In the plasma panel market, each manufacturer had a different price within each size of the panel. Sony
compared the panel costs of the plasma manufacturers to develop a low-cost TV by procuring a
relatively cheaper panel. Among LCD panel manufacturers’ comparative costs, Sony bought the panel
with the highest cost–performance through competitive bidding.
To develop products with feature variations, Sony made the best use of the size and the features of the
panels of each manufacturer while choosing the lowest cost panel with the specified features. It
procured LCD panels from two or more manufacturers, such as LG Philips, AUO, CMO, and Samsung.
Sony expanded its LCD TV line by procuring different screen size panels from different
14
manufacturers .
14
Interview 1.
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Kiyohiro Yamazaki
In addition to external procurement, Sony invested in a joint factory with Samsung in 2005 from which it
also obtained LCD panels. Sony achieved economies of scale by sharing the first part of the panel
manufacturing process in the S-LCD factory in cooperation with Samsung, which greatly reduced the
cost of the panels. With each company performing separate post-processing, Sony’s final LCD panels
could be different from Samsung’s.
Sony developed TVs with two technological systems by procuring the plasma LCD panels from several
manufacturers. Both technological systems were procured only after the survival domain was
determined by the screen size, the TV was then developed and a wide consumer market was targeted.
Thus, technological flexibility becomes an economic advantage for avoiding market uncertainty. Sony
achieves even greater flexibility by quickly procuring panels with the newest technology at the lowest
cost by switching manufacturers and installing new functions in the panel based on the new panel’s
additional capabilities.
Sony also changed their procurement method. At first, they procured the plasma LCD panels only from
external manufacturers. The investment with Samsung in the joint S-LCD factory allowed Sony to
procure panels manufactured there, as well. Thus, Sony gained the greatest possible economic
advantage from flexibility in purchasing the lowest cost panel with the best technology in any screen
size to meet market demands through concurrent external and S-LDC procurement options.
Technological developments and market trends drove Sony to stop purchasing plasma panels and
concentrate on the development of the LCD TV. Other factors in this decision were that Sony had
neither the internal staff nor equipment for plasma panel production and its sunk cost was low.
Thus, we see the full range of economic advantages for a company without the center
technology—lower cost and higher flexibility in critical elements of technology selection and design
enhancements, which allows them to meet rapidly changing market demands.
3.3 Sony’s organizational advantage

Since Sony does not own the panel device technology, it is difficult to differentiate its products on the
performance of the panel. This limitation increases the intensity of a company’s search for other
differentiators (March and Simon, 1958) and improves the likelihood of its developing distinctive
features.
In Sony’s search for product differentiators, it chose the design of features other than panel
performance, which is determined by the internal technology. Previously, Sony had accumulated
knowledge about internal product design, but in flat panel TV development, the designer is registered in
a separate design center section.
In order to differentiate LCD TVs with features unique to Sony, they had to change the prioritization of
product features. However, such a game-changing decision does not happen automatically, but
requires the impetus of a certain level of organizational tension. Sony’s success in the CRT TV market
generated high expectations for the flat panel TV business that followed it. These expectations grew as
the LCD screen became the center of digital AV equipment, and was thus considered crucial for digital
consumer electronics producers. In the face of strong competition among manufacturers, Sony’s flat
panel TV product development had a high target.
The apparent conflict between Sony’s high production target and its lack of panel device technology
created the necessary organizational tension to trigger innovative thought and decision-making. As the
product planner thinks that he should make some kind of change and carries the sense of crisis, he
engages others to share the sense of crisis as much as possible and so innovative product designs
15
were developed . Thus, Sony generated the psychological energy that drove them to adopt the
strategy of focusing their flat panel TV differentiation on product design.
4. Conclusion and future research
In this study, I focused to two advantages—economic and organizational—based on the analysis of
Sony’s case as it sought the advantages held by firms without the center technology.
15
Interview 5.
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Kiyohiro Yamazaki
The economic advantage results from the flexibility obtained without the center technology, which had
been identified by the early research. This study then found that wide selection in procurement means
that such firms can choose the highest-performance center technology product from several options
and switch easily among manufacturers for low-cost and flexible response to both technical and market
demand changes in a highly competitive environment.
This study also found another advantage of firms without center technology—organizational advantage.
Such a company has trouble in differentiating their products from other firms’ products due to the lack of
center technology. Therefore, the company needs to try to offer the customer new value by creating a
different concept, and uses the organizational tension to spur innovative product development. A
company without center technology makes the best use of these two advantages and develops the
most innovative product.
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699
Entrepreneurial Discovery in a Transitional Economy:
China 1979-2009
Michael Zhang
Nottingham Trent University, UK
michael.zhang@ntu.ac.uk
Abstract: In this paper I discuss two research issues emerging in the field of entrepreneurship research. On the
one hand, some scholars in mature and market-based economies begin to pay attention to theory building in
entrepreneurship research. On the other hand, empirical evidence of entrepreneurial activities has been
increasingly observed and analysed in transition economies such as China. Previous research has mainly
focused on institutional analysis of entrepreneurial phenomena with particular emphasis on institutional and
cultural factors. Little attention, however, has been paid to the dynamics of institutions and culture, which are
influenced by the process of entrepreneurial discovery. Adopting the Austrian theoretical perspective, I will
analyse institutional reforms in relation to the emergence and development of entrepreneurial activities during
China’s transition from a centrally-planned to a market-based economy. Using mainly secondary data and
findings from prior research I contend that we can achieve a better understanding of the market process in China
in the past three decades through the lens of entrepreneurial discovery. In so doing we can overcome the
deficiency inherent in the institutional analysis of entrepreneurship in China where environment-strategy-
performance framework is adopted. Instead, I propose a framework of opportunity-resource-capability which
places entrepreneurial cognition-motivation-action at the centre. By the very definition and nature of a transition
economy, market process can hardly reach equilibrium state. Neither entrepreneurial actors nor institutional
actors have the capacity or ability to acquire the necessary knowledge to equilibrate market process. It is the
process of competition for scarce resources rather than profit maximisation that drives the rapid growth and
development of the private sector in China, which in turn fulfilled the unanticipated result of privatisation. The
proposed opportunity-resource-capability framework is complementary to, rather than replacement of, the
environment-strategy-performance framework. Further, the framework increases the explanatory power of
analysing the dynamics of both entrepreneurial and market processes. Institutions, both market and regulatory,
are being developed and become mature during this dynamic process. After thirty years of economic reforms,
market mechanisms in China are still underdeveloped. Ambiguity in the regulatory regime in relation to
entrepreneurial behaviour and activities causes uncertainty in the business environment which can impede
entrepreneurial growth and development. Yet, it is the dynamic process of entrepreneurial discovery that
augments innovation and efficiency of entrepreneurial activities which will have impact on innovations of
institutions and culture.
Keywords: entrepreneurship, discovery, institution, resources, dynamic capabilities, China
1. Introduction
‘As MIT political scientist and China expert Ed Steinfeld says, "China [is] one of the most
entrepreneurial places on earth." Perhaps this observation doesn't surprise you, given
what's been happening to the Chinese economy in recent years. But you might not
recognize how widespread entrepreneurship is in China, or why the country is so full of
entrepreneurs.’ (Shane, 2010)
Economic growth and development in China during the past three decades or so has changed China
beyond many keen observers’ recognition. Enterprise reforms have also transformed the nature and
composition of industrial system from one dominated by state-owned enterprises (SOEs) to one
comprising various forms of enterprises. Shane notes that In China the rate of self-employment is
51.2% as against a rate of 7.2% for the US (OECD in Shane, 2010). Bosma and Levie (2010) note
that China scored high in terms of not only early-stage entrepreneurial activity (TEA=18.8) but also
established business ownership rate (EBO=17.2) (GEM 2009 Report, 2010: 21).
What are the factors that underlie the high rates of entrepreneurial activities in China? Is China’s
business environment favourable for entrepreneurial activities? Previous research has shown that the
lack of market-supporting institutions in China impeded the formation of new businesses (Chow and
Fung, 1996; Tan, 2002). Recent years have not seen fundamental changes in China’s institutional
environment for entrepreneurial activities. Referring to the World Bank's Doing Business 2010 Report,
th
Shane (2010) argues that starting a business is relatively difficult in China. The U.S. ranks 8 while
st
China ranks 151 out of 183 surveyed countries in terms of the easiness of starting a business. Some
researchers examined cultural factors and found that Confucianism has a positive impact on
entrepreneurial activities in Chinese culture (Hofstede and Bond, 1988). However, whereas Confucian
culture had significant influence on entrepreneurship amongst overseas Chinese outside mainland
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China, it had been ferociously attacked by the communist regime under Mao’s control during the
period of Cultural Revolution (1966-1976). As a result, entrepreneurial activities had been limited and
reduced to almost nonexistence before economic reform began in late 1978 (Tan, 2002).
Research by Li et al. (2006) clearly shows the revival of entrepreneurship when in late 1978 a group
of farmers in a southern China village initiated an entrepreneurial action of dividing up the collective
land and letting the households to farm the individual lots. In a business environment which was still
hostile to entrepreneurial activities such an initiative bore a great risk of being punished with the
possibility of facing jail sentences. Nonetheless, the unbearable suffering and the desire to escape
from absolute poverty motivated the farmers to take the risk. This was a time coincident with China’s
official inception of economic reform and government had not yet formulated any policies regarding
entrepreneurial activities. It is clear that the farmers’ entrepreneurial decision and action was not
influenced by institutional factors. Nor can we argue that cultural factors had any positive impact in the
aftermath of the Cultural Revolution. There is little empirical evidence to reveal whether the farmers
had deep-seated beliefs in Confucian culture. The farmers’ decision and action was a typical case of
necessity-based entrepreneurial activities as defined by GEM. According to GEM Report (2007)
Chinese entrepreneurs are mainly motivated by the desire to make money. Steinfeld comments that
‘Chinese entrepreneurs, whether because of cultural or other factors, have consistently proven willing
to establish businesses in a number of high-risk, deeply unstable environments’ (Steinfeld in Shane,
2010).
In a short span of thirty years during China’s transition, there has been a transformation of
entrepreneurship and entrepreneurial activities in China from being one of the least entrepreneurial to
the most entrepreneurial places in the world. This transformation of entrepreneurship took place in
light of relatively slow-paced institutional reforms. Adopting the framework of environment-strategy-
performance some researchers offer interesting findings on Chinese entrepreneurs’ risk-taking
behaviour and ascribed it to the harsh business environment (Tsang, 1996; Tan, 2002). This exercise
of finding correlations between the environment and strategy is hardly convincing given the observed
time lag between the changes in entrepreneurial behaviour and institutional settings. The institutional
framework failed to examine the influence of emerging entrepreneurship and entrepreneurial activities
on China’s changing business environment and culture.
To fill this research gap I will in this paper focus on the dynamics of institutional and cultural change
which is influenced by the process of entrepreneurial discovery. The paper is structured in four
sections. In the next section I will discuss the deficiency inherent in the institutional analysis of
entrepreneurship and introduce the Austrian entrepreneurship theory of entrepreneurial discovery. In
contrast to the environment-strategy-performance framework, I propose a framework of opportunity-
resource-capability which places entrepreneurial cognition-motivation-action at the centre. Using
mainly secondary data and findings from prior research I will show in Section 3 what entrepreneurs
did in pursuit of their discovery journey. In conclusion I will discuss how we can achieve a better
understanding of the market process in China in the past three decades through the lens of
entrepreneurial discovery. In addition, practical policy implications and the potential of the proposed
conceptual framework for future empirical research will be addressed.
2. Entrepreneurial discovery
The contribution of entrepreneurship and entrepreneurial activities to economic growth and wealth
creation has received worldwide recognition in recent decades (Kor, Mahoney and Michael, 2007).
There is little doubt that entrepreneurship and innovation are the engines of market economies
(Mises, 1949; Schumpeter, 1934). Therefore, until recently it has been primarily in mature market-
based economies in the West that entrepreneurship research has been conducted. Moreover, in
terms of theoretical development of entrepreneurship study one dominant approach has been
arguably neoclassic economics the tenet of which is competitive market equilibrium (Kirzner, 1997).
Researchers from other disciplines also contributed to entrepreneurship research but there is a lack of
coherent theoretical conceptual framework (Shane and Venkataraman, 2000). Some scholars begin
to build entrepreneurship theories or to further develop established theories from other approaches
and disciplines than the mainstream neoclassic economics (Chiles et al., 2007, 2010; Zahra, 2006).
Of particular importance to this paper is the contribution the Austrian school made to the theoretical
development of entrepreneurship research. In stark contrast to neoclassic economics, the Austrian
approach views a market economy as a dynamic process characterised by market disequilibrium.
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Michael Zhang
The revival of the Austrian approach not only is timely for theoretical development in the field of
entrepreneurship in mature market economies, but it also has insightful implications for transition
economies. The very definition of transition economies imply that in those economies markets are at
present underdeveloped and are still developing. In other words, those economies are undergoing
transition processes. The market process, rather than a static market as it were given, is at the core of
Austrian approach (Kirzner, 1997). This dynamic market process is viewed as tending toward the path
of equilibrium but hardly maintaining at the static state. The state of market equilibrating process
requires that entrepreneurs constantly acquire necessary information and knowledge for investment
and resource allocation (Hayek, 1948: 46). Equally important during the market process is the need
for imaginative and profit-seeking [speculative] entrepreneurial actions to drive the process (Mises,
1949). These two principal elements form Kirzner’s theory of entrepreneurial discovery.
Chiles et al. (2007: 468) summarised the concepts of this disequilibrium market process as a
combination of “entrepreneurs’ action and interaction in time, [and] market participants’ limited and
ever-changing knowledge”. The action of discovering opportunities needs a prerequisite of prior
knowledge (Shane, 2000). Shane’s study focuses on the moderating role of prior knowledge in the
process of entrepreneurial discovery which comprises technological invention, opportunity recognition
and approach to exploitation. Prior knowledge is acquired through learning of explicit and implicit
knowledge and accumulated in individual or collective cognitive frameworks. Furthermore,
entrepreneurs need motivation to take risks with perceived uncertainty. The level of perceived
uncertainty can be different due to the deference in individual judgement of the possible opportunity
for profit (McMullen and Shepherd, 2006). Therefore I reformulate Shane’s framework into three
processes of cognition (opportunity recognition), motivation (willingness to take risk) and action.
The above framework can be readily linked to environment factors of opportunity and resources. Kor
et al.’s (2007) argue that Penrose’s (1959) resource-based view regards market demand as an
endogenous factor of the entrepreneurial function. They quote Penrose (1959: 85) “There is a close
relation between the various kinds of resources with which a firm works and the development of the
ideas, experiences, and knowledge of its managers, and entrepreneurs”. To exploit the potential profit
the idiosyncratic resources may yield entrepreneurs need to develop dynamic capabilities of
deploying, reconfiguring and integrating resources (Teece et al., 1997; Zahra et al., 2006). Therefore,
I propose the second set of concepts: opportunities, resources and capabilities.
Needless to say, the context in which Austrian scholars study market process is capitalist market
economies. But in his discussion of the practical implications of the theory of entrepreneurial
discovery Kirzner (1997) identified the potential application of the theory to the study of centrally-
planned economies. He criticised the fundamental flaws of rational planning under centrally-planned
regimes. However, he paid little attention to the potential application of the theory in transition
economies that are undergoing dynamic market processes from centrally-planned to market-based
systems. McMillan and Woodruff (2002: 153) contend that ‘setting up a business, risky anywhere, is
especially risky in an economy undergoing deep reform’ due largely to volatile prices, unfair
competition from monopolistic state-owned enterprises, and lack of loan services from the state-
owned banks. Yet entrepreneurial activities throve in some transition economies such as China (Li et
al. 2006; Shane, 2010). Theoretically, I argue that transition economies offer an ideal place to test the
theory of entrepreneurial discovery. And I will use the framework proposed above to discuss
entrepreneurial activities of discovery.
3. Entrepreneurial discovery in China 1979-2009
At the outset of the economic reform the Chinese government had hardly any clear ideas about the
ways in which the market mechanism was to be introduced (Nolan and Ash, 1995; Perkins, 1994).
Reforms started in the agriculture sector in late 1978 with the experimentation and implementation of
the ‘household responsibility system’. People’s communes under the centrally-planned systems were
partially dismantled while farmers were allocated certain private land to produce crops. Li et al. (2006)
provide empirical evidence of how the revival of entrepreneurship started in earnest in November
1978. It all began when a group of farmers in Xiao Gang, a small village in Anhui province in southern
China, initiated an entrepreneurial action of dividing up the collective land and letting the households
to farm the individual lots. The farmers did so not because they recognised business opportunities
made possible by the institutional reforms at the time. It was a time when business environment was
still hostile to entrepreneurial activities and the farmers knew well they faced great uncertainty. They
made the decision and risked their life to implement the action because they were motivated simply
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by the desire to escape from absolute poverty. Local government officials in Xiao Gang village
supported farmers’ initiative without formal communications with the central government. In a sense
the local government officials were also taking opportunities and facing risks. A year later agricultural
output achieved an astonishing result: grain production equalled the total of previous five years. Only
at this time did the local government officials reported to the central government and used the
evidence to lobby the central government to formulate and implement the market-based agricultural
policy of household responsibility systems. This is arguably the first entrepreneurial initiative in a post-
reform era that manifests the proactive role of entrepreneurs to discover and create opportunities to
facilitate market-building processes. In the following years farmers also engaged in entrepreneurial
activities in local industries. As a consequence, local industries proliferated. The explosive growth of
town-and-village enterprises (TVEs) was attributable to the expansion of regional rural and urban
economy that has subsequently had significant impact on the non-state sector. In 1978 non-state
enterprises accounted for only 22.4 percent of total gross industrial output. After 15 years of reform,
the share of the non-state sector grew to 53 percent in 1993 (China Statistical Yearbook, 1997).
Another decade later that indicator increased to 62.5 percent in 2003 (China Statistical Yearbook,
2005).
Similar to the ‘household responsibility system’ implemented in the agriculture sector, the reform in
the SOEs started with the experimentation of a ‘contract responsibility system’. In contrast to the
success of the reforms in the agriculture sector, central government failed a series of reform
packages to reform state-owned enterprises due largely to the ambiguity associated with property
rights of the SOEs under concern and the complex nature of industrial management system (Sachs
and Woo, 2001). Out of the plan, some entrepreneurs began to experiment with forming private
enterprises. Kao (1993: 31) described how Beijing Stone Group grew from a small entrepreneurial
startup in 1984 to a large company by 1989. It “started in a two-room office that was formerly a
collective's vegetable shop, grew much larger than any enterprise in the People's Republic of China
during the 1980s. It included more than 40 companies, from computer equipment manufacturers to
CAD product designers to technical typesetters - with subsidiaries in various parts of the People's
Republic, as well as in Hong Kong, Australia, Japan, and the United States.” Beijing Stone Group’s
growth and expansion came to an abrupt end in 1989 after the founder and CEO fled China because
of his involvement in the student democratic movement. Beijing Stone Group’s entrepreneurial
experiment, albeit short-lived, demonstrated that entrepreneurs had been able to create market
demands at the time when the government institutions were still debating the issues of privatisation of
SOEs in order to reduce the degree of central planning. As Kao (1993) noted the reasons causing
Beijing Stone Group’s immature end were more political than economic. In other words, seeking and
securing institutional support should be part of entrepreneurial discovery processes as aptly
delineated above by our first example.
This point can be further explained in the development of Lenovo. Also established in Beijing in 1984
by eleven electronics engineers with a fund of RMB 200,000 yuan (some $25,000) from China’s
Academy of Science, by 1988 Legend (Lenovo’s predecessor) was incorporated as a listed company
in Hong Kong. In December 2004 Lenovo acquired IBM’s PC division with $1.75 billion. Lenovo’s
spectacular growth to certain extent relied on institutional support by the government. In many other
cases, however, government industrial policies impeded entrepreneurial activities. The development
of China’s first private carmaker, Geely, illustrates an entrepreneurship-driven market process.
The automotive industry has been regarded by the Chinese government as one of the six strategic
sectors. The sector was so important to the national economy that the government formulated China’s
first industrial policy in 1994 (Zhang, 2001). The policy stipulated that only the big three and the small
three automotive manufacturers, all SOEs, were allowed to compete in the industry. In such hostile
market environment for private firms, Geely’s founder made a decision to manufacture the first Geely
car in 1998 without a national license (Li et al., 2006). In the following years Geely’s founder lobbied
for his license with local and central governments, which came to fruition in November 2001 when the
central government granted Geely a national license. Consequently by April 2004 fifteen private car
manufacturers entered the sector. Geely has recently made another news headline when it acquired
Volvo on 28 March 2010 with $1.8 billion (The Economist, 2010). In comparison to China’s big three
and small three Geely’s remarkable entrepreneurial action should have surprised not only foreign
carmakers and governments but also Chinese government and state-owned carmakers.
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Michael Zhang
Market building processes in a post-reform China were not only initiated and facilitated by indigenous
Chinese entrepreneurs but also helped by foreign entrepreneurs. The impressive performance of the
non-state sector has been partially supported by the introduction of foreign entrepreneurial skills with
the inflow of foreign capital. During the early years of reform, foreign loans accounted for a large
proportion of the total foreign capital inflow. From 1979 to 1983, foreign loans accounted for 81
percent of China’s total utilisation of foreign capital, while foreign direct investment (FDI) for only 12
percent. In 1984 foreign direct investment rose to 47 percent of total foreign capital inflow which in
turn accounted for a mere 1.8 percent of China’s gross domestic production (GDP). 1992 saw a sharp
rise of the utilisation of FDI which comprised more than 57 percent of total foreign capital inflow. As a
result of this effort to attract foreign investment, the amount of utilised FDI was 37.5 billion US dollars
in 1995, which accounted for 78 percent of total foreign capital inflow and 8.7 percent of China’s GDP
(China Statistical Yearbook, 1997, 2005).
More recently, great numbers of foreign firms including many large multinational enterprises (MNEs)
have established themselves in the Chinese market. Investment by those MNEs, especially in the
form of joint ventures, helped Chinese indigenous firms to gain technical competences and
management skills. Of more importance is the increase of MNEs’ R&D activities in China. It is
reported that by the end of 2004 some 700 R&D centres had been established in China by MNEs (Liu
and Buck, 2007).
McMillan and Woodruff (2002) report that the rapid emergency of TVEs ‘surprised’ Chinese leaders
as they did not foresee those new entrants and entrepreneurial startups’ great contribution to and
influence on the Chinese economy. Unlike state-owned enterprises those collectively owned
enterprises (COEs) were “vaguely defined cooperatives without a well-defined ownership structure.
There is no equivalent organizational structure similar to COEs in Western economies” (Chow and
Fung, 1996: 489). During transition, especially in the early years, SOEs exercised monopolistic power
to prevent new entrants of entrepreneurial firms. Echoing Perkins (1994) McMillan and Woodruff
(2002) argue that neither the government leaders in the former centrally-planned economies nor
scholars from the market-based economies in the West anticipated the role played by
entrepreneurship in the process of economic transition.
This is the environment in which entrepreneurship revived and thrived in China during the past three
decades. The entrepreneurial activities reported in the preceding section form a recognisable pattern
which fits well in the proposed framework of interaction between cognition-motivation-action and
opportunity-resources-capabilities. The business environment in a transition China has never been as
adequately defined as in a market economy. The uncertain environment offered more opportunities
for motivated entrepreneurs as they took the risks to exploit potential profits. They did so with a
judgment that ambiguous policy regimes could not effectively regulate their actions. Motivated by the
desire to escape poverty and accumulate resources and wealth their actions drove the transition
process from central planning to market function. They overcame the disadvantages of social status
and business legitimacy with the actions of lobbying and persuasion (Li et al., 2006). Gradually they
developed dynamic capabilities of using resources to realise the potential profits opportunities offered.
In a number of cases it was their entrepreneurial initiatives that provided convincing evidence for the
governments, both local and central, to reform the existing policies which had impeded the market
process.
The central role played by entrepreneurship in China’s remarkable growth and innovation has been
gradually yet steadily recognised by the governments, especially the central government, as well as
the general public. The relaxation and even liberalisation of government industrial policies manifest
the change. More importantly, increasing number of people in China regard entrepreneurship and
entrepreneurial activities as positive achievement rather than illegitimate behaviour, as Shane
indicates that the rate of self-employment is 51.2% in China as against a rate of 7.2% for the US
(OECD in Shane, 2010). Enterprise reforms have transformed the nature and composition of
industrial system from one dominated by state-owned enterprises to one comprising various forms of
enterprises. To a large extent, the rapid development of non-state sector has partially achieved the
aims of privatisation without following the orthodox prescription of a full-scale privatisation. Therefore,
I contend that the efficacy of entrepreneurship and entrepreneurial discovery had greater impact on
the changes of both institutions and culture than the influence of the latter on the former.
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Michael Zhang
There are a number of practical implications in order for future policy and research. First, adopting the
Austrian approach, especially the theory of entrepreneurial discovery, we can achieve a better
understanding the workings of market process in general and that in a transitional economy in
particular.
Secondly, policymakers in China can adopt a more proactive approach to encouraging

entrepreneurship by monitoring entrepreneurial activities and subsequently formulate pertinent
policies for innovations in institution, organisation, and technology.
Thirdly, potential entrepreneurs and policymakers alike outside China need to view the revival and
proliferation of entrepreneurial activities through the lens of entrepreneurial discovery which
addresses primarily the issues of dynamic market process, which is not only useful for analysing
transition economies, but also appropriate for market economies in developed economies.
Finally, in this paper I discussed a conceptual framework which needs further development and
refinement. Given the potential to apply the framework to empirical research I will aim to conduct
empirical work to collect evidence and data to test the concepts and constructs. Intricately linked to
entrepreneurial discovery is the learning process where market process is connected with
entrepreneurial process. Uhlenbruck et al., (2003) argue that the transition economies in general and
China’s experience in particular can be best described as learning processes. Jefferson and Rawski
(1994: 65) also aptly describe China’s transition and enterprise reform as a learning experience that
“followed an evolutionary path marked by frequent shifts of directions and ad hoc responses to
unanticipated outcomes”.
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706
Legal Regulation of Innovativeness can Spur Innovation
Efforts
Elizabeta Zirnstein, Valentina Franca and Mitja Ruzzier
elizabeta.zirnstein@fm-kp.si
valentina.franca@fm-kp.si
mitja.ruzzier@fm-kp.si
Abstract : The large majority of innovations protected by intellectual property in today’s world are created within
the framework of an employment relationship. Faced with the necessity for firms to innovate, there is the problem
of encouragement of innovation. This paper examines whether legal regulation of innovativeness can encourage
or discourage employees to innovate. In Europe, some basic rules regarding the employee inventions are
stipulated already by the state anticipating to set up encouraging surroundings for creation of new ideas and
findings; others are adopted by companies themselves in the forms of different internal regulations and within the
frames of contractual regulation of relationships. Both set of rules try to fairly and efficiently share the benefits of
employee’s innovativeness. On the state level, the legislation regarding employee inventions refers mainly on
three viewpoints: (1) which innovation results made by employees may be legally protected with intellectual
property (IP) rights, (2) who is the owner of such results (especially if they are protectable with IP rights) and (3) if
the owner is not the employed inventor, should he be rewarded for his creative endeavor. On the company level,
the regulation of innovativeness in employment relationship refers mainly to the question of rewards for employee
inventions. The first view (protection of employee inventions) has already been widely discussed among scholars,
while the empirical work regarding the regulation of ownership and rewards for innovation results made in the
course of employment is rather poor. Therefore, the focus of this paper is essentially on the second view. The
central issue of this paper is the effect of national and company regulation on ownership and rewards for
employee inventions on innovation performance. The question is how states and companies should regulate the
ownership of results of employee innovativeness and compensation system in order to encourage innovation. To
answer this question, we conducted a qualitative research among Slovenian companies. The results show that
companies are aware of the importance of rewards for innovation, but approach this issue in different ways.
Some companies support tighter regulation of rewards through regulations and other internal acts and
agreements between them and employees or their representatives, others approach it more spontaneously. All
agree though, that the regulation at the state level does not spur innovativeness enough.
Keywords: employee inventions, employment relationship, remuneration, legal regulation
1. Introduction
Innovation is vital for long term growth of organizations. In most industrialized countries, the vast
majority of inventions and other creative developments are made by employees. In terms of figures,
approximately 90 % of all domestic patent applications, based on the number of granted patents, are
employee inventions (Trimborn 2009, 1).
Even though at first site innovation does not relate to order, but instead to creativeness and free spirit,
this is not always true. Innovation may be disordered process; however, it has to be carried out in an
orderly manner. From the legal point of view, this orderly manner is two-folded: at the state level and
at the level of a company. The states can encourage innovation in many different ways: through
education system, government-sponsored research, investment etc, but also through legal
institutions, such as intellectual property rights. Patent system was designed to encourage and
incentivize innovation, even if its net effects are still much in dispute (see Nordhaus 1969, Scherer
and Ross 1990, Grandstrand 1999, Maskus 2000, Teece 2002). Not only patents, also other
intellectual property rights and their enforcement have been an important theme in the institutional
analysis of innovation (Hall and Rosenberg 2010). As the question of legal protection of innovation
results has been widely dealt with in professional and scientific literature, this paper is focused on
other questions, which are close linked up with this, however not much attention has been paid to
them yet. The first is the question of ownership of employment innovation results. The second is the
question of rewards for the employed inventors for their creative endeavor.
The state encourages innovation by granting property right to the innovator, if the legal requirements
are met. The essence of intellectual property right is foremost in the fact that its holder has the
exclusive right to produce, use and dispose with such protected creation; at the same time the state
sets out requirements, under which the public has the right to access these creations. In this paper,
our first question focuses on the dilemma, who may be entitled to this (potentially) exclusive right: an
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Elizabeta Zirnstein et al.
employee or his/her employer. If the owner of such results is the employee, this entitlement
represents a strong incentive to innovate and of course this employee does not need to be
additionally awarded. On the other hand, if the employer has the ownership over the innovation
results, the question arises whether the employee should be entitled to some kind of compensation in
a form of a special reward. In addition to this, since the employee already receives a salary for his/her
work, is a special reward even appropriate?
The paper first describes the rules on ownership over the innovation results, made in the course of
employment. This is followed by the analysis of legal regulation of rewards on the state and company
level. Legal aspects of rewarding are upgraded with basic human resource management premises.
The last part deals with the presentation of the key findings related to innovation rewards, which are
based on the qualitative research performed among the Slovenian companies.
2. The ownership of employment innovation results
2.1 The state of positive law in EU and worldwide

The question of ownership on innovations made in the course of employment is regulated differently
from country to country. In some countries the principles that determine the rights and obligations
between the employer and employed inventor follow the creator doctrine, while in others labor law
principles (work for hire doctrine) prevails. In countries that start from labor law principles (e.g. France,
China, Czech Republic, Sweden, Spain, Great Britain, Russian Federation), the employer is the
owner of innovations made by his employees. In other countries, e.g. Germany, Canada, Japan and
Denmark, which recognize the intellectual property principles in this regard, the right over an
employee invention belongs to the employed inventor. However it can be noted that in most of those
countries, the law also stipulates that employers can obtain this right by effect of a contract; moreover
in some countries (e.g. Germany, Japan), the employer has the right to get the ownership attributed to
him.
There are also countries where the law is providing that the attribution of the rights on creations is
done to the employer automatically, but if he does not exert this right, in particular in field of patents,
the employee that carried out the invention becomes the owner of the right (e.g. Bulgaria). In other
countries (e.g. Japan) the innovation owner is the employee; however the employer is a holder of a
special and non exclusive right without royalty payment (Burger 2005). Lastly, in some countries (e.g.
United States) there are no special legal provisions on the treatment of employee inventions. Court
decisions are by no means uniform and can vary from state to state. Basically the rules regarding the
assignment of inventions by the employee to the employer are to be regulated to a very large extent
through contractual agreements (Reitzle, Butenschön and Bergmann 2007, 84).
Before moving to Slovene legislation on employee inventions it is worth mentioning that there are
some opinions in the theory that tend to favor co-ownership of innovation (Manso 2006).
2.2 Slovene legislation

The legal relationship between employer and employee regarding technical innovations is regulated in
The Act on Employment Relationship Inventions. The Act on Copyright and Related Rights contains
provisions on legal relationship between employer and employee regarding copyright, models and
design. Detailed regulations of topographies created by employees are contained in Act on the
Protection of the Topography of the Semiconductor circuits.
The legal framework governing relations between employers and employees in Slovenia follows the
basic principles of intellectual property law. On the basis of inventor principle and creator doctrine, the
rights belong originally to the inventor/author. However The Act on Employment Relationship
Inventions sets out the obligation of employee to immediately inform employer in writing about the
invention he made (Article 5). The employer is entitled, based on this information, to decide to claim
the employee invention (Article 6). The employer becomes the owner of the work-related invention
based on such claim; the employee, on the other side, is entitled to a reasonable obligatory
compensation for this claim (Article 15 and 16). The Act on Copyright and Related Rights stipulates
that copyrights and rights regarding new designs of products are by law exclusively assigned to the
employer, but only for the period of ten years from the completion of the work (Article 101). The
agreement, concluded by the employee (author) and the employer, may stipulate otherwise (Article
708
101). On the expiration of the term of ten years the material copyrights revert to the author –
employee, but the employer has a preemption right: he may claim a new exclusive assignment of
these rights. In this case, however, the employer shall pay an adequate remuneration.
The relationship between employer and employee regarding other innovations, e.g. technical
improvements, suggestions and similar are not regulated by positive law. However such relationship
can be regulated contractually, in the form of collective agreements, employment agreements and
other agreements. The basic question in this regard is the question of whether and how to regulate
the employer – employee relationship in cases of such inventions. Should the employee be rewarded
for such inventions, which form of reward is the most appropriate, should the company enact special
regulation regarding the reward system etc. All these questions and problems are dealt with in the
following.
3. Rewards for innovation
3.1 General observations

Employee reward is about how people are rewarded in accordance to their value to the organization
(Armstrong 2002, 3). For the purpose of this paper the term ‘reward’ includes foremost rewards for
special work-related efforts, which employees receive in addition to the salary. The term
“compensation” is often used as an alternative to “pay” or “remuneration.
Firstly, it should be noted that there is an important difference between reward systems for innovation
from the standard employee’s remuneration. While the standard compensation systems focus on
rewarding effort, stress, goal achievement an/or employee’s successes, rewards for innovations
include the aspect of encouragement for the research, which means greater tolerance (or even
rewarding) of mistakes, which occur in the process of research and creation (Manso 2006).
Companies may apply different forms of rewards for innovation, among which a division into financial
and non-financial rewards often occurs (Armstrong 2002, 8). Financial rewards comprise, in addition
to money and shares, also of different kinds of gifts (golden watches, art works, mobile phones), gifts
for family members (toys, trips, books), services (massage, beauty salons, car wash), free time,
trainings and similar. Also immaterial rewards are efficient: oral and written praise, thank-you letters,
placards, publicly rewarded acknowledgments, taking part in important meetings or shows, taking
place in the company adds and others (Nelson 1994).
Work achievement is a function of both, material and immaterial rewards. There is no ideal pattern for
the reward system (Armstrong 2002, 10). However, it has to be recognized that regardless of proven
positive influence of immaterial rewards on motivation of employees, giving away only these kind of
rewards without any changes made to the salary does not reach a positive response in the long run.
The most effective is a combination of both: the higher the expected or actual rewards for innovation
the grater the motivation of the innovator to innovate.
In addition to different forms of rewards, a variety of methods or programs of rewarding should be

stressed out. It concerns the division into formal programs, in which the rules are set in advance (and
the value of the rewards is usually higher), and into in-formal programs with spontaneous rewarding,
which can be used by the leaders on all levels. The manner of rewarding is very important in formal
programs; usually it is carried out on public shows, while in the case of in-formal programs the
decision with regard to the manner of rewarding is in the sphere of a leader.
There are many factors influencing the choice of an appropriate reward system and the choice of
rewards; among others also the size of a company is important (Zenger and Lazzarini 2004).
Rewarding in bigger companies is usually more rigid; smaller companies, on the other side, may
afford more flexibility. On the other hand, bigger companies are able to afford easier to spend money
for research and development more easily. A very important factor of rewarding innovation is also
applicable tax regulative. Namely, the tendency of the companies to give away such rewards often
depends on the stimulation offered by the tax environment. In doing so, modern principles of taxation
should be regarded.
In any case the compensation systems should be enough motivational to encourage an employee to
be innovative as well as to inform his employer about his innovations. Namely, an employee might not
709
even report an innovation, which is not compensated with any reward or might not inform employer
about it, regardless of the aforementioned legal regulation. From this point of view the reward for
innovation is actually encouragement for the employee to notice the employer about the innovation he
made.
3.2 Legislation regarding rewards for innovation

Countries have differentiated regulations regarding the remuneration of inventions made during
employment (for an overview of the law regarding the law on remuneration of employee inventions in
57 important industrial countries see Fabry and Trimborn 2007). The main question regarding the
legal regulation of rewards for innovation is, whether such rewards are obligatory by the law.
Legislation in this matter varies from country to country; actually it is in this field that the greatest
disparities are currently observed in the world (AIPPI 2004). Some national laws provide employees
with a right to compensation in return for the transfer of rights over the creation to their employers,
whilst other left this issue to be contractually agreed by employment or other agreement. In Canada
and Australia no particular compensation is added to the wages due under the terms of the law. In
United States the employee has no legal claim to remuneration; this can be stipulated only by contract
(Reitzle, Butenschön and Bergmann 2007, 84). In Great Britain, remuneration for the invention
belonging to the employer is to be paid to the employee only if the employer has derived an
outstanding benefit from it. On the other hand most other European countries know the obligatory
character of such compensation (AIPPI 2004, 4). This is also the case in Japan and China. However
there are big differences in how the compensation is calculated and for which type of innovation is
due.
There has been a long standing debate, mainly in Germany, but also in other countries, whether such
regulation that imposes the duty to reward inventive employees really creates proper incentives for
ingenuity and invention. The majority of inventors views such regulation positively (Harhoff and Hoisl
2007, 1161). This is also the case in Slovenia.
The Slovene Act on Employment Relationship Inventions sets out the obligation of financial rewards
only for the patentable inventions, as they contribute to the greatest extent to the increase of the
companies’ competition ability and consequently of the national economy itself. The Slovene law
clearly sets out the employer’s obligation to always reward the employee for inventions that can be
protected by patent (articles 15 and 16). Rewards for other innovations (e.g. new shape of a product,
minor technological improvements etc.) are not regulated in any special law provision. Criteria and
amount of rewards can be stipulated autonomously either in collective agreements or in other
employers’ internal (company) regulations, in which other forms of encouragement for innovation are
usually included. Collective agreements mostly provide that an employer shall pay the employee a
special reward for innovation, the amount of which is related mainly to the economic benefit and
amounts to certain percentage of the annual net economic benefit (from one to ten percent). In
addition to financial royalties a payment in the form of company shares may be made, different
programs of employee participation in profits may apply and similar.
3.3 Internal regulations of companies and agreements between companies and their
employees
In most countries where the law imposes the duty to reward inventive employees, only minimal
standards of protection of employees as well as employers’ rights are established. Therefore, the
employer and employee may decide on a different amount of compensation, determine ownership on
innovation apart and differently than foreseen in legislation, agree on additional obligations of either of
a party and similar. It is of course best to settle all discrepancies from the legal stipulated solutions in
written in order to avoid later disagreements and also difficult proving of the agreed content. It should
be noted that the employees’ cooperation in the process of dealing with the innovation is crucial,
especially when applying for the patent. This cooperation can be secured also by the amount of
compensation, which may be motivational for an employee. Should this not be the case, it may
happen that the employee studies legislation instead of inventing; on the other hand, the employer
studies the technical documentation of the invention and tries to clarify the solutions that are
contained within.
The employers may foresee adequate mechanisms for encouraging innovation through an
appropriate compensation system also in their internal acts. Especially in bigger companies the
710
procedure of dealing with inventions and compensation system are very often regulated in great detail
in some internal regulation. When drafting company regulation regarding employees’ inventions,
some basic rules and principles should be followed. A manner of proposing ideas should be as simple
as possible or else it works inhibitory. Proceedings of collecting, assessing and implementing ideas
should be swift. Data collection on special application forms for innovations, which a company may
already have and which are not inevitably necessary, is time consuming and redundant. An efficient
system of reciprocal communication between employees and employers should be set up.
Compensation rules should be clear, simple; rewards should be awarded regularly up-to-date (and
not with several months or a yearly delay).
4. Experience of the companies in Slovenia with regard to employees’
rewards for innovations
4.1 Empirical research

From the analysis of the national legislation on employees’ rewards for innovation it is evident that, to
great extend, this field is left open to autonomous regulation on the level of a company as well as on
the individual level between an employer and an individual employee. Consequently, different ways of
solving and different solutions of an effective employees’ compensation system for innovation are
expected in practice. The key question of the presented research was whether and how do the
companies in Slovenia reward employees’ inventions.
With regard to the choice of methodology we have decided for a qualitative method. Therefore,
practical experiences are based on 11 interviews, conducted with the human resources managers or
company directors. The interviews were conducted by two-person teams; an interview lasted on
average half an hour. All the interviews were recorded and then transcribed. Questions of the
interviews were opened and the form of an interview half-structured. This approach was chosen as
appropriate since the questions required some time for reflection from the interviewed person and the
responses had to be explained in details. Half-structure interview also offers certain degree of
flexibility, since it allows deeper understanding of the opinions of the person being interviewed, which
is not possible with the classical questionnaires (Easterby-Smith, Thorpe and Lowe 2001). Thus, data
collected with interviews represents primary data, which have been analyzed with a classical method
of constant comparing (Glaser and Strauss 1967). Firstly an analysis of the interview transcripts and
coding of citations from the responses to the questions was made. Then certain parts of data were
compared within an individual interview. Then the cross-case comparison was made. This was
followed by result coding and comparison. In this way we obtained a levy of themes, which inductively
derive from the collected data and which determine characteristics of innovation incentives in the
companies in Slovenia.
The research included 11 Slovene companies of different sizes and activities. Participating companies
have their registered seat in five different regions. The interviews were executed in the period from 15
January to 15 February 2008. Since the participation in the research was anonymous, companies are
represented by letters A through J and all participants are mentioned in masculine form.
4.2 Defining innovation

In theory there are many definitions of innovation; thus, there is not just one accurate definition. In
most interviews the participants revealed the problem of missing company definition of the term
innovation. Without this definition they are not able to build the planned compensation system. The
participant from the company G remarks that “the question what should an innovation or novelty be is
the key. What are the criteria, based on which it is assessed and how will we know, when certain
individual is entitled to a reward? Some employees have been doing certain activities for the past 20
years…then somebody comes, writes it down and demands money for the innovation.” With regard to
the definition of innovation it is not so important whether the definition matches with all of the literature
and theory in the field. The most important is that all employees within an organization agree on it and
understand it in the same way. The experience of the company I can be presented as an example of
good practice. In this company they invited an acknowledged academic to the company and the entire
upper management spent several hours with him just to answer what are innovations and to consider
several aspects of the definition of innovation. “Some thought that this is a work obligation of
employees, some that it is not, and again others that they would do it and some others that it is not
711
important and similarly. When we cleared that out, the thing worked,” explains the participant from the
company I.
In some companies, the term innovation is very narrowly understood in sense that only patentable
inventions are “the real inventions”. Certainly, some economic branches offer wider possibilities for
development of innovation as e.g. chemicals and chemical products production, production of
telecommunication machinery and equipment and engines and machine production. However if a
company is not active in such branch, this does not mean it cannot be innovative. The participant from
the company B says that “innovation starts when you do your work in a shorter time with the same
quality and amount of work. We are not looking for big ideas in order to find bigger innovations. We
are focused on how each person could do it better by himself/herself.... already setting-up such
processes is innovative.” It is important to recognize that innovation is not bound only to production or
to some solution. “Innovation can be found also in the way we work and what are the processes like,”
explains the participant from the company D.
4.3 Company regulations and contracts with employees

In the beginning the companies ask themselves whether to regulate compensation system for
innovation in a (special) company regulation or not. Almost a half of participating companies is of the
opinion that not having a special “internal” regulation is not acceptable. Interesting case is the
company A, in which there has been a regulation on rewards for innovation effective for the last three
years. The regulation itself is regarded as well placed, because it specifically determines definitions of
innovation, invention, minor technical improvements, useful proposals etc and it also regulates the
procedure for the application of the innovation. “However, such system has not attracted enough
employees to actually change something in this field,” they say in the company A. The problem is in
the expectations of the employees. “Because there were no major innovations, which would entitle to
high amounts, the employees received lower amounts. The notion spread out all over the company
that it is not worth applying beneficial novelties for such small amounts,” explains the representative of
the company A. Similar opinion is shared by the company G, which stressed out that the regulation
itself does not bring innovation, but the entire system has to be nurtured, maintained and the
employees’ responses have to be regarded. Therefore, this system needs to be tied up together and
integrated into the entire compensation system.
A much perfected system of regulations and procedures is placed in the company H. Different
procedures are provided for different types of inventions. A special commission decides for each
invention whether to claim it or not. In doing so, they take into account especially the effects of the
invention in practice. On the other hand some companies are cautious, because they are afraid that
such formal regulations could endanger their informality and flexibility. “When we talk about this, we
often remind ourselves how much we care about our flexibility and informal contacts. We all are used
to this. There were some suggestions to regulate the rewards for innovations, but this has not been a
priority so far,” is explained by a participant from the company E. Similar experience is gathered in the
company D, in which they replaced originally more formal system by an informal one, because the
latter one is much more appropriate for the way they work.
The middle road was taken by the company B. They do not have a “permanent” regulation on rewards
for innovation, but they adopt it for each project separately. When a company tenders certain project,
which includes rewards for innovation (usually every two years), they prepare a special brochure,
which includes project requirements, the manner of gathering ideas, selection and the rewards itself.
Even more informal are in the company C, in which heads of every department can forward a
proposal to reward the innovative employee. The management of the company has then an absolute
discretion to decide whether to grant the reward or not.
4.4 Opinion with regard to legislation

Most of the participating companies are convinced that the legislation in the field of rewards for
innovation is not encouraging. In their opinion, the main reason for that are (high) tax burdens for the
financial rewards, paid to the employees. This is discouraging for the companies as well as for the
employees. In the company I they think that there will be much more innovation once the people’s
minds change and this change cannot be done by enacting company regulations. Nevertheless, they
support tax reliefs for the research, trainings and similar. The company D is pleased that the
712
legislation has provided for certain definitions and has made their work easier; however, on the other
hand it is also very discouraging with regard to payment of the rewards.
The representative in the company G is of the opinion that the Slovenian legislation in this field is
comparable with other legislations in European countries and does not deviate in any way. “Based on
European and global practice and tradition it is appropriate that the employer is the owner of the
innovation, when the employee makes the innovation with employer’s means, at his premises and
with his money. Besides, the price of an employee, which makes an important innovation, may rise
considerably on the market, which is also a part of his payment.”
4.5 Stimulating innovation and reward choice

How to respond to a challenge, presented by the participant from the company I: “Just a tenth of the
employees is innovative, others not. This is the biggest problem. When you see, what kind of houses
they build for themselves, of what they are capable of, you ask yourself how you could bring that to
the company ... obviously the employee has the ability to be creative, so the challenge is just how to
encourage him/her to implement that in the company ...”. More than a half of participants are of
opinion that the question of rewards for innovation has to be resolved as a whole. Partial solutions as
well as “late” accessions have not brought good results. A pattern that it is easier to build innovation
right from the start was shown through all these conversation. When employees are used to certain
way of work, this way is very difficult to change. The companies not dealing with innovation so
systematically yet are planning to deal with this issue in the near future, however they do not realize
that this is the tricky part: postponing for too long can present great problems, which would not
happen, if innovation was important in the company right from the start. Thus, it does not make sense
to postpone implementation of compensation systems for innovation for too long.
In the company C they are of the opinion that rewards are just one aspect of encouraging innovation.
Thus, financial effect is important, but only to some extent. From there on also other factors have an
important role. In addition to financial rewards also different non-financial rewards are important.
Nevertheless, innovation does not depend only on rewards. Almost all participating companies agree
that innovation in the company is part of companies’ organizational culture and values.
Experience of the companies whether innovation is encouraged more by financial or non-financial

rewards or both are very different. In the company A they stress out that most of their employees
have lower degree of education and are relatively less paid, thus “they wish or they tend to wish to get
financial rewards. In certain point they value everything through money.” Now, company A is before
an interesting dilemma. Because the expectations of employees were very high, the employees were
disappointed when they received the rewards. Thus they think the effort is not worth, if paid so little. “I
had a feeling that the entire system works discouraging, because the employees had willingness to do
something, but it was not worth the effort to pull through the entire procedure of application for the
money they received,” explains a participant from the company A. Also in the company I they are
thinking about raising the financial rewards.
The amount of financial rewards is fixed in different ways. In companies G and I they have fixed
financial rewards for useful proposals in the amounts from 20 to 60 EUR. On the contrary, in the
company A and H they calculate financial benefits for each proposal and based on this the employee
receives the reward. In other companies a special commission usually decides on the amount of the
reward based on benefits of the proposal and expected financial effects. How to measure these
effects often presents an additional problem. Almost all participants stressed out also the problem of
high tax burdens imposed on such payments. The employees are often disappointed because they
expect a lot, but then get very little.
The participating companies have also non – financial reward schemes. Special non-financial
rewards for innovation are given away in one third of the companies. The employees in these
companies are rewarded separately for their innovative activity; they are rewarded in a form of a
special trip, lunch with the board of directors, they appear in company advertisements, they take part
to different training programs and similar. In company with its headquarters in the center of a big city,
the most popular employee innovation reward that is granted for one month is a parking place in front
of the main entrance (and right next to the parking place of the director). The companies that do not
foresee any special rewards for innovation mostly reward within the framework of regular
compensation systems.
713
5. Conclusion
It is difficult to imagine development of the companies or of the entire economy without innovation.
Thus, it is the obligation of the state as well as individual companies to encourage and to motivate the
employees in different ways to be more innovative. The analysis of national laws regarding ownership
an rewards for employee inventions shows that legislation in this matter varies from country to
country. Some national laws provide employees with a right to compensation in return for the transfer
of rights to their employers, whilst some others don’t address this question at all.
Based on the executed qualitative research in the companies in Slovenia it can be concluded that
companies think that rewards are an important tool for fostering innovation within a company.
However they approach this issue in different ways. Some companies support tighter regulation of
these rewards through national law or at least company internal regulations or agreements between
them and employees. In other companies they think that the approach to this question should be
informal, spontaneous and that rewards for employee inventions should not be regulated with any
binding rules. All agree though, that the regulation at the state level does not spur employees’
innovativeness enough and that the law should at least provide tax redemptions for rewards for
employee inventions.
In our opinion, the compensation system should not be just the implementation of certain rules. It
should be a tool, mechanism, instrument in the hands of the company management. In eyes of
employees it is also the most understandable information about what is really important for the
company and what are its fundamental values.
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PhD
Research
Papers
715

716
Network Centrality and Firm Innovation: A Social Network
Analysis of the Monaghan Furniture Industry
Judith Mc Knight; and Nola Hewitt Dundas
School of Management, Queens University, Belfast, Northern Ireland
jmcknight06@qub.ac.uk
nm.hewitt@qub.ac.uk
Abstract: This research seeks to empirically explore the relationship between the network positions assumed by
firms and their capacity for innovation. Using social network analysis techniques this paper examines the effect of
network centrality in inter-firm networks on the innovation performance of small firms. Looking at a network of
furniture manufacturers, this paper provides a unique insight into the innovation and networking activities of firms
within a low technology sector. In addition this paper explores the factors affecting the position a firm assumes
within a network. The paper finds some evidence indicating a relationship between network centrality; firm size;
strategy and absorptive capacity. The paper also finds evidence of a positive correlation between network degree
centrality and firm innovation.
Keywords: Innovation; Networking; Social Network Analysis; Low Technology Sector
1. Introduction
In recent years the innovation process has been described as being multi-directional and iterative,
involving multiple actors (Evangelista, 2000; Tether, 2005; Hewitt-Dundas, 2009). In this paper we
focus on networking in a mature low technology sector. We examine the position of individual firms in
the network and examine why some firms are more ‘networked’ than others, why this may be the case
and the implications of this on innovation performance.
Lee et al. (2010) argue that small and medium enterprises (SMEs) use non-internal sources of
knowledge for innovation to a greater extent than large firms. External knowledge sourcing and
cooperation may enhance and extend SME’s resources and technological competences (Edwards et
al 2005; Rothwell, 1991). Despite the potential benefits of cooperation, the evidence suggests that
SMEs are less likely than larger firms to engage in inter-firm cooperation for innovation (Roper and
Hewitt-Dundas, 2005). The reasons proposed for this, include a greater inability to identify appropriate
partners and a sub-optimum knowledge base with which to absorb external knowledge (Mowery et al.,
1996; Lane et al., 2001). While much of this research has emanated from research on one-to-one
links, little attention has been paid to the structure of the innovation network.
The main concern in this paper is therefore in examining the network structure of a low-tech sector,
that is, furniture manufacturing which is dominated by SMEs and has faced significant technological
and market challenges in recent years. We address two questions, namely can the position of
individual firms, as defined by their degree of centrality, be explained in terms of their structural
characteristics or by their absorptive capacity. Secondly, is there a positive relationship between the
position of firms in a network and their innovation performance?
In the next section we discuss the importance of network structure for innovation and how the position
assumed in a network may be influenced by firm’s structural characteristics and their absorptive
capacity. In section 3 we then outline the mixed methods approach used in this research. In section
4 we then present and discuss the key findings from the research, profiling the position of individual
firms within this sector, the determinants of this network position and finally the extent to which this
position influences innovation performance. We then conclude the paper and highlight some
implications from the research.
2. Literature Review
The importance and benefits of networking in terms of improved innovation performance have been
well documented within the literature (Pittaway et al. 2004; Nieto et al 2007). At present much of the
research has tended to focus on the outcomes and benefits that firms experience as a result of
networking. What has been less well developed is the issue of network structure and the various
717
Judith Mc Knight and Nola Hewitt Dundas
benefits that different network positions bestow on those present within the network and the impact of
such benefits on firm innovation (Pittaway et al. 2004; Srivastava and Gnyawali 2009).
Social network theory considers how the structural properties of a network influence the behaviour of
those present within the network (Burt 1992; Borgatti et al. 2009) with firm’s outcomes and future
performance depending, in part, on its network position (Borgatti et al. 2009; Cross et al. 2004).
Focussing on the issue of network centrality this paper examines the effect of assuming a central
position within a formal and informal communication network of furniture manufacturers. Centrality is
calculated using a measure of degree centrality, a simple count of the number of other firms within the
network that are in direct contact with the focal unit (Freeman 1978; McDowell and Voelker 2008). A
review of the current literature suggests that formal and informal network ties may affect firm
innovation differently (Ritter and Gemünden 2003; Johnson et al. 1994). Therefore to try and examine
this further this investigation will examine both formal and informal communication present within this
low technology network.
2.1 Determinants of Network Position

Network theorists have devoted much more attention to the consequences of network centrality than
the characteristics that are associated with the central players within the network (Klein et al. 2004;
Borgatti & Foster, 2003). This research focuses on this issue, identifying and analysing potential
factors that may explain a firm’s assumption of a central network position.
Firm specific characteristics such as the size and age of the firm are often considered in research
attempting to explain the network positions of firms (Boschma et al. 2007; Banaszak-Hol et al. 1998;
Park and Luo 2001). According to the literature, larger firms tend to assume the most central network
positions (Banaszak-Hol et al. 1998; van Stelle 2002). For instance, Boschma et al. (2007) found
empirical evidence demonstrating a significant relationship between firm size and network position
with larger firms being significantly more networked than their smaller counterparts. In terms of why
this may be the case, Hanna and Walsh (2002) propose that smaller firms may opt out of developing
network relationships in favour of safe guarding their limited stock of knowledge; skills; and expertise.
In addition, smaller firms also demonstrate a greater inability to identify appropriate partners with
whom beneficial relations may be established. Coupled with a sub-optimum knowledge base with
which to absorb external knowledge, smaller firms are therefore less likely to develop network
relations and thus assume central network positions than their larger counterparts (Mowery et al.
1996; Lane et al., 2001). This leads to our first proposition:
Proposition 1: Larger firms will assume a more central position in the furniture network.
Research has also explored the age of the firm as an explanatory factor of network centrality. One
argument is that more established firms are more likely to assume the central positions within a
network as a direct result of their experience within the market. The more market experience a firm
possesses, the greater its capabilities and the more desirable it will be as a network partner. For
instance, Klein et al. (2004) found that age was significantly and positively related to network
centrality with the older actors assuming the most central network positions. Older firms with longer
experience in the market are therefore more likely to assume more central network positions as other
network members seek to gain access to their knowledge and expertise (Milanov et al. 2008). In
addition, older firms may have developed a greater number of relationships with other network
partners by virtue of the length of time they have spent within the network itself. In contrast, Boschma
et al. (2007) found that a firm’s age had no effect on the current position of footwear firms in the
Barletta region. However, looking at the data for firm characteristics it is possible that no effect was
found between age and network centrality because most of the firms within the network were
relatively young. Our second proposition is therefore:
Proposition 2: Older firms will assume the most central positions in the furniture network.
Defined as the firm’s ability “to recognize the value of new, external knowledge, assimilate it, and
apply it to commercial ends” (Cohen and Levinthal 1990, p. 128) a firm’s absorptive capacity is also
likely to affect the network position it assumes (Tsai 2001; Walker 1995). Firms with higher levels of
absorptive capacity are better able to identify and respond to opportunities for linkage formation (Tsai
2001; Ibarra 1993). With greater absorptive capacity, a firm can monitor the network in which it
operates more effectively and develop a greater number of relations that are beneficial for the firm
and its innovation performance (Cohen and Levinthal 1990). Examining interorganisational alliances,
Walker (1995) finds that firms with a higher absorptive capacity will develop a greater number of
718
successful relationships with other firms. In explanation, firms with a high absorptive capacity are
better able to sense new external knowledge and establish the relationships necessary to internalise
this knowledge to the benefit of the firm (Walker 1995; Teece 1998). Given that this paper explores
the networking and innovation activities of low technology firms, it is likely that absorptive capacity will
be less explicate with the competence of the workforce; their experience; and time spent in the
industry being more indicative of the firms absorptive capacity, hence:
Proposition 3: Higher levels of absorptive capacity are associated with more central positions in the
furniture network.
The strategy of the firm may also affect the network position it assumes. Firms that regard networking
as strategically important are more likely to develop a greater number of relations within a network
(Brass et al. 2004; Mehra et al. 2001). Research supporting this suggestion finds that firms which
regard networking as being of strategic importance for the firm and its innovation performance, are
more likely to assume central positions within a network structure (Klein et al. 2004). On the other
hand firms that adopt a more independent and self-reliant approach, place less strategic significance
on external networking. In such instances research finds that these firms are less likely to form
network relationships and thus assume a central position within the network structure (Lee and Tsang
2001; Klein et al. 2004). This leads to our final proposition:
Proposition 4: Firm’s that identify networking as part of their business strategy will assume a more
central position in the furniture network.
2.2 Network Centrality and its Effect on Innovation

To examine the effects of network centrality on firm innovation, this paper will focus on the ways in
which a central network position helps firms within the furniture network overcome barriers to
innovation development. One of the greatest barriers to innovation is access to resources (Srivastava
and Gnyawali 2009; Barney 1991). In order to innovate firms require access to resources such as
machinery, materials, as well as technological knowledge and information (Haythornwaite1996).
Inadequate resource access often inhibits firm innovation, especially within SME’s (Barney 1991;
Grant 1991). Network theory suggests that firms can potentially improve their innovation performance
by tapping into resources available outside of the organisation through networking and inter-firm
relations. Empirical research clearly indicates that many firms are often motivated to participate in
networks as a means of overcoming this barrier and obtaining access to resources needed for
innovation (Pittaway et al. 2004; Tsai 2001). However, as the literature highlights, a firm’s ability to
access such external resources is highly contingent upon the position that they assume within the
network (Tsai 2001; Granovetter 1983).
Firms assuming central network positions have better access to external resources and knowledge
than firms in more peripheral positions (Tsai 2001; Gilsing et al. 2006; Haythornthwaite 1996). Central
firms are connected to a greater number of other firms, each possessing their own set of resources
and capabilities that could be tapped into (Tsai 2001; Haythornthwaite 1996). Relating this to
innovation, firms which are more central within their networks possess greater access to external
resources and knowledge required for innovation and so are likely to demonstrate a higher level of
innovation activity than firms assuming less central positions (Borgatti et al. 2009; and Tsai 2001). For
instance, Boschma and ter Wal (2007) find, without exception, firms in the centre of a network
structure excel in innovation as opposed to those more isolated firms.
Another barrier to innovation is a firm’s inability to recognise and respond to opportunities for
innovation development (Tsai 2001; Noori et al. 2009). Firms with a low level of absorptive capacity
are often limited in terms of the degree to which they are able to monitor their external environment
and recognise opportunities for innovation. External networking can also assist firms in overcoming
this barrier and enhancing organizational learning (Lane et al, 2001). As the firm interacts and
exchanges knowledge with other firms in the network, the identification of innovation opportunities
may become easier, with network relations helping the firm keep an eye on the market and
responding accordingly (Lettl et al. 2008). The more central the firm within a network, the greater the
number of other firms to whom it is connected thus placing it in a better position to recognise and
respond to new market opportunities in the form of innovation activity.
719
Based on these arguments it is proposed that a central network position is likely to assist a firm in
overcoming the barriers to innovation. With such barriers eased these firms are more likely to
innovate and so:
Proposition 5: Increased network centrality will be positively associated with increased innovation
activity at the level of the firm.
3. Methodology
The furniture sector in Monaghan is a mature low-tech sector, characterised by a low level of research
and development expenses (Hirsch-Kreinsen 2008). In total the sector consists of 33 firms involved in
hard furnishings; soft furnishings; or fitted furniture (Jacobson and Mottiar 2002). At its peak, after the
two largest cities (Dublin and Cork) Monaghan’s wooden furniture sector accounted for the largest
concentration of timber and wooden furniture firms throughout Ireland until the mid 1990’s (Mottiar
and Ingle 2007).
The research comprised two stages of investigation. The first was the collection and social network
analysis (SNA) of relational data obtained via postal survey. The overall response rate was 67%
which is considered acceptable for the purposes of this investigation (Stork and Richards 1992;
Corteville and Sun 2009; Hamre and Vidgen 2008). Non-response bias was conducted through non-
response testing. These tests found no significant relationship between respondents and non-
respondents based on firm age; size; and innovation activity.
Once analysed, results from the SNA were used to select the firms to be interviewed in the second
stage of the investigation. The network centrality measures were calculated using UCINET 6 software
(Borgatti, Everett and Freeman 2002). Graphical visualisations of the formal and informal
communication networks were also created using the programme NetDraw (Figure 1 and 2).
Correlation tests were conducted to examine the relationship between firm innovation and network
centrality. In total eight interviews were conducted and the owner manager was interviewed in each
firm.
Figure 1: Formal communication among furniture manufacturers in Monaghan: Innovation activity = %

Sales Intensity
720
Figure 2: Informal communication among furniture manufacturers in Monaghan: Innovation activity =

% Sales Intensity
3.1 Measures
Variable Name Description Mean S.D.
Size The size of the firm based on average number 11.0 12.9
employed at the time of the questionnaire (full time
equivalent)
Age Measured looking at the year in which the firm was 24 14.2
established. Reference year 2009 (years)
Absorptive Capacity The competence of the workforce; their experience - -
and time spent working in the industry
Innovation intensity [% sales The total proportion of firm sales accounted for by 40.5% 34.1
intensity] new or improved products introduced in the previous
3 years (percentage)
Formal Communication Planned interaction among firms i.e. scheduled - -
business related meetings; and membership of
established business associations.
Informal Communication Unplanned interaction between firms in more informal - -
settings such as a restaurant or public house
Formal Degree Centrality The number of others within the formal 10 6
communication network that the actor has direct
contact with.
Informal Degree Centrality The number of others within the informal 8 6
communication network that the actor has direct
contact with.
721
4. Findings
4.1 Network Structure of the Monaghan Furniture Network

Figures 1 and 2 present an overview of the formal and informal communication network structures
present within the Monaghan furniture network. Looking at the graphs it is apparent that most of the
firms engage in some degree of formal and informal communication within the furniture network. The
overall density of the formal communication network is 0.173, indicating that 17.3% of the possible
direct network ties within the formal communication network structure are effective. With a slightly
lower density score of 0.152, 15.2% of the possible direct network ties that could be present within the
informal communication network structure have been realized.
Looking at existing research it is evident that both of these density scores are quite low, indicating that
the formal and informal communication networks present within Monaghan are sparse and the
furniture firms only loosely connected to one another (Burt 1992; Provan and Sebastian 1998; and
Zaheer and Bell 2005). For instance, when investigating network effectiveness Provan and Sebastian
(1998) refer to one network as being of low density with a score of 10.1%. Similarly Borgatti and
Everett (1997) calculated a density measure of 18% and stated that such a score would normally
suggest a fairly sparse network structure. In light of this it is evident that the communication networks
present among the furniture manufacturers in Monaghan lack interconnectedness, with a great
number of potential network ties remaining unrealized.
The centrality scores for each of the firms within the furniture network are also presented in Table 1.
Firm 126, 113, and 127 assume the three most central positions within the formal communication
network. With no direct formal communication ties with any other firm, firm 115 and 119 assume the
most peripheral positions. Within the informal communication network firm 120 assumes the most
central position followed by firm 111 and 131.
Table 1: Degree centrality scores for the formal and informal communication network
Company Formal Informal

101 9 2
102 15 13
103 4 2
104 6 5
105 14 8
106 8 5
107 7 5
108 13 8
109 16 14
111 18 18
112 11 8
113 19 13
114 1 2
115 0 1
116 14 12
117 3 3
118 3 2
119 0 1
120 11 22
121 3 2
122 8 8
123 12 9
124 17 16
126 21 5
127 19 15
128 14 12
722
Company Formal Informal

129 13 10
130 2 7
131 17 18
132 1 0
133 4 5
134 10 8
135 15 15
4.2 Determinants of Network Position

This paper proposed that larger organisations would assume the most central positions within the
furniture network. Looking at the two communication networks firm 126 and 120 assume the most
central positions in each. In terms of size both firms employed 15 members of staff at the time of the
questionnaire. In comparison to the other firms within the network, these firms are relatively large in
size with more than half of the network employing no more than 10 members of staff. Further
exploration of the data finds that the most peripheral firms within both communication networks are
those with the fewest employees. In terms of explaining this relationship it may be the case that
networking is not a strategic priority for these smaller organisations or they may not have the
absorptive capacity necessary to identify and establish beneficial relations within the network.
The second proposition was that older firms would assume the most central positions in the furniture
network. In terms of age, at the time of the questionnaire the average age of a furniture firm in
Monaghan was twenty four years. Contrary to the predicted relationship, the most central positions
within both the formal and informal furniture networks were not assumed by the oldest firms. For
instance, of the three firms assuming the most central positions in the formal communication network,
the average age was 11 years. However within the informal communication network the central firms
were much older with an average age of 32. It was not surprising that the central firms within the
informal communication network were older as the longer the firm has been established the more time
it will have had to develop informal or social relationships with other members of the network. With a
history of 48 years in the industry, firm 124 described how over the years they have built up a plethora
of informal and social relations with many firms within the furniture network:
“There are loads of other guys in the county. You might know some of them socially and that is
another advantage of a small community...It’s just a friendship thing really.”
The absence of a relationship between network centrality in the formal communication network and
the age of the firm is similar to other research results. For instance, when examining knowledge
networks in Southern Italy, Boschma (2007) also found a firm’s age to have no effect. However in the
case of the informal communication network it appears as though the proposition is upheld with older
organisations assuming the most central positions within the structure.
Looking at the issue of absorptive capacity and measuring it in terms of the highest qualification
possessed by members of staff, the data fails to support the proposition that absorptive capacity is
positively related to network centrality. Exploring the data further and measuring absorptive capacity
in terms of workforce competence rather than formal training and education, a different picture begins
to emerge. Most of the firms within the furniture network are small family businesses, recruiting
employees on an apprenticeship scheme. As a result much of the training and education received by
employees tends to be on the job. The interview data supports this suggestion and reveals that many
of the more central firms within the network structure have employees that are extremely skilled;
competent and experienced in their roles and have received a great degree of training within the firm
itself. For instance firm 126 stated:
“The staff are both very experienced and very skilful at what they do. I have some ones there that I
trained, that came in as young apprentice upholsterers...I feel I can train them for what is being done
within the business, better than anyone else.
Firm 126 also provided an example of how the firms absorptive capacity helped develop beneficial
relations within the formal communication network. Using his skills and experience within the furniture
industry, one employee recognised and responded to a commercial and networking opportunity. With
723
an increasing amount of fabric going to waste, the employee approached the owner manager and
suggested the formation of a relationship with another upholsterer (firm 129) to reduce such wastage.
As the owner manager recalled:
“One lad come to me there and he said to me would you not think about doing a simple fireside chair
where we can use up fabric?”
“So I made contact with a girl...the owner of [firm 129] and I was asking her about it... So she actually
sent me a chair last week and we made it up for a customer who was looking for a chair and we sent
it out”
In this instance it is evident that the high absorptive capacity present within firm 126 enabled the firm
to recognise opportunities for the development of formal relationships within the furniture network.
Overall, the data supports the proposition finding a relationship between network centrality and
absorptive capacity.
Finally, the last proposition was concerned with firm strategy as a factor affecting network centrality.
An analysis of the interview data indicates that many of those firms located in the most central
network positions also regarded networking as being of strategic importance for the firm and its
innovation performance. The most notable evidence of this comes from an interview with firm 127.
Firm 127 appears to place great emphasis on networking externally, setting up a formal furniture
association in Monaghan to encourage interaction and collaboration among furniture manufacturers
within the region. In this instance it seems as though the strategic importance placed on networking
played a significant role in this firm’s assumption of a central network position, possibly resulting in the
creation of many relationships within the furniture network. As the owner manager stated:
“Yes I started up the Monaghan furniture association and maybe for that reason I would be regarded
highly.”
In contrast, looking at the interview data for the firm 115, an isolate within the formal communication
network structure and peripheral in the informal network, a clear reluctance to engage in inter-firm
networking is evident. For instance when asked why they do not network with other members of the
furniture network, firm 115 stated:
“We would know them, some of them...we would see no reason to contact them... It’s something that
never appealed to me.”
For firm 115 networking does not appear to be of strategic importance with the firm adopting a more
self-reliant approach to external networking. After looking at the interview data it is apparent that in
this instance the assumption of a central network position may be influenced by the strategic
importance placed on inter-firm networking, with the most central network positions being assumed by
the firms with networking as part of their business strategy.
4.3 Network Centrality and its Effect on Innovation

Correlation tests indicate the presence of a significant relationship between network centrality and firm
innovation. More specifically, the results suggest a positive correlation between the number of formal
and informal communication ties maintained by a firm and its innovation activity. Figures 1 and 2
graphically demonstrate this positive relationship with many of the “High innovation” firms assuming
positions that are towards the centre of the network structure.
As discussed earlier in the paper, better access to resources and knowledge is often listed as a factor
explaining the relationship between network centrality and innovation activity. Through the interviews
it was possible to see to what degree access to external resources and information may explain
higher levels of innovation among central firms within the networks. Looking at the interview data it is
apparent that those firms assuming central positions within the communication networks have good
access to resources that exist externally. For instance, when questioned about resource sharing
within the network, firm 126 and 127 both indicated that they could contact several other members of
the network should they need a particular resource such as fabrics or components required for
specific product developments.
724
As firm 124 stated when asked about sharing resources and information:
“Yeah that goes on. We would have often had guys down here who would have used our machines
that did not have a machine of their own, to do a specific task and we would have said yeah no
problem.”
“If there was something that I needed to get of some of the other guys I would have no problem
getting it.”
In terms of accessing information, firm 127 stated that in the past they have acquired a great deal of
information from other network members that has assisted the successful development of firm
innovations. Firm 126 recounted similar benefits stating:
“[For instance] There is a guy up the road here who has a factory...and he would have specifically
helped me with a few things...He would have showed me ways he was doing things or he’d have
invited me up to his factory and I’d have saw how he was doing things so yeah certainly, I can learn
from what he was doing.”
From the interview data it is also apparent that assuming a central network position improves a firm’s
ability to monitor and gather information on the market. With a greater number of contacts within the
network the central firm can remain abreast of changes and as a result be in a better position to
identify opportunities for innovation. This point was made by firm 127 when discussing the benefits of
being well connected within the furniture network. By networking with other furniture manufacturers
firm 127 was able to identify, target and make contact with new customer groups, something which
would not have been possible if they were located in a more peripheral network position.
As firm 127 stated:
“For example [firm124] or [129] would have invited a customer [to the furniture show] and would have
introduced that customer and said there’s [firm 127] have you seen his product or whatever and
maybe said something nice and maybe done some business you know... It was a great form of
networking.”
5. Conclusions
The results presented in this paper reveal some interesting findings regarding the relationship
between networking and innovation within a low-tech furniture network. Looking at the factors
explaining the network positions assumed by firms, the research found evidence indicating a
relationship between network centrality and firm size. The relationship between network centrality and
firm age was also partially supported with older firms in the informal communication network assuming
the central positions. The same relationship was not found to exist in the formal communication
network structure. Absorptive capacity and firm strategy were also found to be important with central
network positions being assumed by firms with a high level of absorptive capacity and a strategic
approach to networking. In terms of network centrality and innovation performance, correlation tests
indicated the presence of a significant and positive correlation between network centrality and firm
innovation. Interview data provided evidence indicating that network centrality provided firms with
greater access to resources and information required for innovation. In addition greater connectivity
within the network placed the more central firms in a better position to identify market opportunities
and innovate in response.
A limitation of this research was the small sample size. The decision to select a network with a small
population was motivated by the high rate of response required for the effective conduct of SNA
(Huisman 2009; Kossinets 2006; Newman 2009). Had the sample size been any bigger the response
rate of 67% that was achieved would not have been possible. Given that this research was focused
on the investigation of inter-firm relations, it was beyond the scope of this paper to discuss the other
relations maintained by firms within the furniture network. In the future it might be of interest to
examine in greater depth these other relationships and the benefits that each provide in terms of
assisting the firms innovation activities. Taking this paper forward, it is the intention of the researchers
to replicate the investigation among a high-tech network, more specifically a group of firms involved in
725
the production of film; television and animation. In response to a lack of comparative research in the
field of innovation, replicating this investigation will provide important insights into the importance of
networking and the assumption of a central network position for firms operating in both a high and low
technology sector.
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IT-Related Innovation Adoption and Entrepreneurship
Sedigheh Moghavvemi and Noor Akma Mohd Salleh
University of Malaya, Kuala Lumpur, Malaysia
moghavvemi_2006@yahoo.com
akmasalleh@um.edu.my
Abstract: Researchers in information system area use different theory and model to explain how information
technologies make changes in society and organization and how these changes are connected to economic
growth. One of the popular theories in this context is Unified theory of acceptance and use of technology, UTAUT
(Venkatesh et al 2003). One of the base theories that Venkatesh et al integrated to make UTAUT is the theory of
planned behavior (TPB). This is the famous theory in entrepreneurship as well. Krueger and Braezel integrated
Shapero model and theory of planned behavior and made the model of entrepreneurial potential (1994). Review
of Unified theory of acceptance and use of technology (UTAUT) and Model of entrepreneurial potential, indicate
that both theory focus on individual intention to take action. UTAUT is concern about the characteristics of
innovation and Model of entrepreneurial potential focuses on individual characteristic. Thus, we have integrated
these two theories together to make a more robust theory that can measure dimensions of individual perception
and technological characteristics. The main purpose of this research is to develop new model that is able to
measure different dimension of technology acceptance and overcome UTAUT limitations. With integrating
(UTAUT) and Model of entrepreneurial potential, we are able to measure entrepreneurial intention toward use of
IT-related innovation, and measure technology acceptance in different context. We consider perceived
desirability and perceived feasibility (as individual perception), and effort expectancy, performance expectancy,
facilitating condition (as innovation and environmental characteristics) toward intention and use of technology.
We added credibility as new mediating variable, and precipitating factors as moderating that affects the
relationship between intention and use of the technology to overcome UTAUT limitation. This is an ongoing
research and at this stage we are mainly developing a theoretical argument and methodology that is currently in
the process of being tested.
Keywords: entrepreneurship, IT related-innovation, IT-adoption, UTAUT model, entrepreneurial potential model
1. Introduction
Innovations are considered central to economic growth and can be a source of sustained competitive
advantage to firms (Damanpour & wischnevsky, 2006). The application of IT stimulates innovation in
all possible fields (Dierckx, 1998). Since technological innovations have become an integral part of
the world economy, a source of competitive advantage, and economic growth, predicting acceptance
of these products has become a major goal of many information systems,IS, researchers and industry
(Kulviwat et al,2009). IS innovation adoption is multidimentional; it is influenced by factors within
several dimensions, such as environmental or contextual factors, characteristic of individuals and
organizations, and characteristics and attributes of the innovation (Roger,1995; Tornatzky and
Fleischer,1990; Damanpour 2006). The decision of whether an individual or organization will adopt a
particular innovation has motivated a great deal of research across multiple disciplines. Most
researchers believe that the decision to adopt or not to adopt an innovation can be a one-time event.
But, the adoption process is not a single event and the route that lead to one’s decision does not take
place in the vacuum. Beliefs and attitudes are formed over time,which in turn may influence decision
(Straub,2009).
In recent years, there has been an increasing interest in the issue of entrepreneur and
entrepreneurship both in academia and practice. This interest is due to the importance of
entrepreneurial activity for economic growth in the new global economy (Spencer et al,2008).
Entrepreneurial activity is recognized as a fundamental construct of technological progress, business
expansion, and wealth creation. In addition entrepreneurial activity is considered as a major
contributor to new job creation (Zampetakis, 2008).The entrepreneurship process uses numerous
innovations (such as information system (IS)) as sources of opportunities for new ventures creation
thus, failure to adopt IS innovation can be detrimental to entrepreneurs (Collins, 2007).
In order to advance knowledge and produce tools that are useful in practice, it has become necessary
to establish framework that will generate more productive empirical result. Prior IS research focuses
on adoption behavior of innovative IS by organizations and ultimately the individual end users
adoption behavior (e.g., Chau and Hu, 2002; Venkatesh and Davis, 2000; Gallivan, 2001; Gefen and
Straub, 2000; Karahanna et al., 1999). Often within entrepreneurs, many of the decisions are made
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by an individual (e.g., the owner). Hence, the organizational decisions are intertwined with individual
perceptions and attitude (Lee and Runge, 2001; Van Akkeren and Cavage, 1999).
This paper aims at extending the theory development of the adoption of innovative IS. This paper
uses unified theory of acceptance and usage of technology (UTAUT) model (Venkatesh et al,2003) as
a base theory and integrate it with entrepreneurial potential model (Krueger&brazeal,1994) to explain
the IS adoption behavior by entrepreneurs as these model are intentional models, and are developed
from theory of Planned behavior. UTAUT model considers innovation characteristics and
environmental factors in predicting intentional behavior, whereas the entrepreneurial potential model
considers individual characteristics. With concern to UTAUT limitation that exist between the intention
and usage behavior, combining these two models enables a coherent and consistent explanation for
interpreting and understanding the innovative IS adoption behavior by entrepreneurs that possess
both organizational and individual perceptions and attitude. The proposed theoretical model is
developed to provide a comprehensive understanding of the determinants that affect the adoption and
utilization of innovative IS among entrepreneurs.
The remainder of this paper is structured as follows. Section 2 provides an overview of theoretical
foundations upon which the research model is developed (i.e., UTAUT and entrepreneurial potential
model). Section 3 discusses the integrative theoretical framework and hypotheses development.
2. Entrepreneurial intention model
There are growing body of literature with some models that try to explain the entrepreneurship
phenomenon. Review of the entrepreneurial literature show that majority of intention models in
entrepreneural context are largely focus on the pre-entrepreneural event and argue that both
individual and situational variables are important to determine entrepreneural intentions
(Bird,1988;Shapero,1982;Zampetakis,2008). Intention is the single best predictor of any planned
behavior including entrepreneurship (Krueger, 2000). Entrepreneural intentions are aimed at either
creating a new venture or ,creating a new values in the existing venture.
There are six main models developed in the field of entrepreneur intentions. They includes the
Entrepreneural Event Model (Shapero,1982), the Theory of Planned Behavior (Ajzen,1991),
Entrepreneural Attitude Orientation(Robinson,Stimpson,Huefner,&Hunt,1991), Intentional Basic
Model(Krueger& Carsrud,1993),Entrepreneural Potential Model (Krueger &Brazeal,1994) and
Davidsson model(Davidson, 1995)
The first model was the Entrepreneural Event Model,SEE(Shapero,1982).Shapero model assumes
that inertia guide human behavior untill something interupts or displaces that inertia. According to this
theory, business creation can be considerd as an event that can be explained with the interaction
between initiatives,abilities,management,realtive autonomy and risk(Guerrero et al,2008). The
premise is that the decision to perform an entrepreneural activity requires a pre-existing attitude
toward the activity as desirable and feasible ,as well as propensity ot act on opportunity( shapero
1982;Krueger & Brazeal,1994;Krueger 2000,1994,1993;Mhango,2006).
Theory of planned behavior(TPB) introduced by Ajzen is part of the large family of intentional models.
It was developed and empirically tested within the broder domain of social cognition and self-
regulation,and have been used to try to explain the emergence of entrepreneural behavior. Krueger
and Carsrud (1993) made Ajzen’s (1991) model compatible with other theoritical framework,especially
that of Shapero and Sokol(1982), and applied the theory of planned behavior to the filed of
entrepreneurship(Fayolle et al. ,2006). Based on this theory intention to perform a specific behavior
directly depends on the subject’s attitudes toward the behavior, subjective norms and perceived
behavioral control , which is quit similar to self-efficacy and to perceived
feasibility(Shapero&Sokol,1982,Linan&chen2009;Guerrero et al,2008). At the same time , Robinson
et al.(1991) generated the entrepreneural attitude orientation scale and explain attitude prediction
through four different sub scales(achievement,self-esteem, personal control,and innovation),and three
type of reactions (affective, cognitive or conative)(Paramond,2004;Tan,
long&Robinson,1996;Guerrero et al.2008).
Krueger (1993) examined the relationship between attitudes and entrepreneural intention, and
analysed the effect of exogeneous influence, attitude and intention.Theory of planned behavior and
shapero’s model of intrepreneural event overlap in some part and largely consistent with each other
729
(Kruger et al.2000). Both models contain aspect of self-efficacy and the desirability of the behavior.
Entrepreneurial Event focuses more on the individual by including a measure of individual’s
proactiveness,while TPB focuses more on the environmental contex by including the social support
for the behavior(Shook&Bratianu,2008). Thus, in 1994, Krueger&Brazeal define the entrepreneural
potential model based on the Shapero(1982) and Ajzen(1991) and emphasize the constructs of
perceived venture desirability and perceived venture feasibility, integrating in the conceptualization of
these constructs, concepts from both models(Grant,1996; veciana et al,2005; Guerrero et al
2008;Coduras et al ,2008;Krueger 2000;1994,). Krueger et al.(2000)contrasted the TPB model with
shapero model(1982)of entrepreneural event and found support for both models
(Drnovesk&Erikson,2005).
This model is one of the latest robust models that we identify since it is integrated by the two most
relevant antecedant’s models: Theory of Planned Behavior(Ajzen,1991) and Theory of Entrepreneural
Events(Shapero, 1982). Krueger & Brazeal model(1994) take a social psychology perspective on how
to test the notion of entrepreneural potential and is a “process-based, theory-driven micro model with
macro consequences” (Veciana et al,2005).This model explain that an entrepreneural event requires
the potential to start a business. It is defined on three critical constructs, perceived desirability
(attitude and social norms), perceived feasibility (self-efficacy) and propensity to act (stable personal
characteristics)(Guerrero,et al ,2008). Credibility require that the behavior will be both desirable and
feasible , and these antecedent affect the intentions toward the behavior.This model explain that
although the individual perceives the new venture creation desirable and feasible, and therefore
credible,she/he has not finally the intention to realize the new venture if the precipitating event is
lacking(Coduras et al.,2008;Veciana et al.,2005). Perceived desirability in this model have two
componants of the theory of planned behavior: attitude toward the act and social norms. Perceived
desirability is defined as the degree of attraction an individual perceives towards a specific behavior,
such as becoming an entrepreneur”. Perceived feasibility defined as the perception regarding their
own capacity to carry out a specific behavior (becoming entrepreneurs). It contains self-efficacy and
behavioral control. Shapero defined propensity to act as personal disposition to act on one’s
decisions, and it’s reflect volitional aspects of intentions (I will do it).Thus, it conceptualized as a stable
personality characteristic and it was closely related to locus of control. Krueger (2000) defines
precipitating factors as certain exogenous variables that can serve to facilitate or ‘precipitate’ the
realization of intention into behavior. This factor concludes the perceptions of resource availability and
personal propensity to act on opportunities (being fired or being offered a big contract, facing the
fortieth birthday) (Shapero, 1982; Krueger&Brazeal, 1994; Stopford & Baden-Fuller, 1994; Krueger,
2000) (Figure1).
Figure 1: Entrepreneurial potential model

In 1995, Davidson’s introduced model that tested an economic-psychological pull of factors that
influence individuals’s intention to go into business.
From the reviews of the intention model used to predict entrepreneur intention, this study adopt the
literature review, we proposed to support our investigation based on Krueger and Brazeal’s
model(1994).This model consist of two independent variable that measure individual characteristics
that we can add them to UTAUT model to measure individual dimension. With respect to UTAUT
limitation, we need some moderating variable between behavioral intention and usage behavior to
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overcome UTAUT limitation. We can use credibility as new mediating variable in the new model.Thus,
by integrating entrepreneurial potential model and UTAUT model we make a new model that is able to
measure different dimention of technology acceptance and overcome the UTAUT limitation.
UNIFIED THEORY OF ACCEPTANCE AND USE OF TECHNOLOGY
For the past decades research on IT acceptance and use has been carried out quite actively,and
several models have been developed. Theories have been proposed, specially out of information
sciences literature, to predict computer use through personal factors (Straub, 2009). One of the more
recent theories, (UTAUT) proposed by Venkatesh et al. provides a more complete picture of the
acceptance process than any previous model had been able to do. A unified model formulated based
on conceptual and empirical similarities across eight models(theory of reason action, Technology
acceptance model, The Motivational Model, Combined TAM and TPB, Model of PC Utilization, The
Innovation Diffusion Theory ,and Social Cognitive Theory) which integrates all constructs ,and can
explain variance in IT behavioral intention and use behavior(Venkatesh et al,2003).
Theory of reason action(TRA) has been considered to be one of the most important and influential
theories on human behavior. TRA proposed based on social psychology ,and has two core construct:
attitude toward behavior ,and subjective norm. Based on the TRA, Davis proposed the Technology
acceptance model(TAM) which argue that user’s intent of use and behavior to use new information
system is determined by perceived usefulness and ease of use. The main goal for TAM is to find what
causes people to reject or accept information technology and predict IT acceptance and usage on the
job. In 2000, Venkatesh and Davis, introduced TAM2 by adding subjective norm to the TAM. In the
case of mandatory usage subjective norm has direct effect on intention to use. Davis et al. 1992
employed motivation theory to explain how people respond in different contexts. Davis et al., 1992,
found that, in the context of information technology extrinsic and intrinsic motivations are key drivers
for individuals’ intention to use the technology.
TRA does not consider the impact of control factors. Realizing the limitation of TRA, Ajzen added
perceived behavioral control, to the theory of reason action and developed the theory of planned
behavior (TPB), to account for situations in which an individual lacks substantial control over the
target behavior. Since then, TPB has been successfully applied to explain the individual process of
acceptance and usage in different contexts, including technology adoption (Ajzen & Schifter, 1985;
Ajzen, 1991; Wang et al, 2007).
Theory of planned behavior suggests the measurement of perceived behavioral control that defined
as the person’s belief related to “how easy or difficult the performance of the behavior is likely to be”
(Ajzen & Madden, 1986; Armida, 2008).
Combined TAM and TPB (C-TAM-TPB) is a hybrid model that integrated the predictors of TPB with
perceived usefulness from TAM to look for the factors with more impact (Mathieson, 1991; Taylor &
Todd, 1995; Wang, 2007). Thompson et al., 1991, proposed The Model of PC Utilization (MPCU) that
consists of six construct to predict PC utilization based on the Triandis (1977) theory of human
behavior (Wang, 2007). Innovation Diffusion Theory was developed by Rogers in 1962 and since then
IDT is used to study a variety of innovations in different fields. In 1991, Moore and Benbasat adapted
the properties of IDT and refined the set of constructs that could be used to explore with information
technology innovations. In 1977, Bandura proposed Social Cognitive Theory (SCT), which is one of
the most accepted theories of human behavior. Compeau and Higgins (1995) applied and extended
SCT to the context of computer utilization.
To form a unified model for understanding technology acceptance, the more salient characteristics of
the eight models were brought together. Venkatesh et al. (2003) conducted an empirical study to
compare the eight competing models and then proposed UTAUT after reviewing eight IT adoption
theories to address the limitation of previous model. UTAUT postulates that four core constructs act
as determinants of behavioral intention and usage behavior, and up to four moderators of key
relationships. UTAUT construct include, performance expectancy, effort expectancy, social influence
and facilitating conditions that determine behavioral intention, or use behavior. Gender, age,
experience and voluntariness of use have moderating effects in the acceptance of IT. The UTAUT
model was able to explain 69% of intention to use technology acceptance, while other models
731
explained approximately 17% to 53% of the variance in use of various information technologies
(Venkatesh et al, 2003) (Figure2).
3. Critic on UTAUT model
Review of the literature show that although UTAUT is a robust model and many researchers validate it
in different context, there is some limitation about the model: Based on well-established theories in IS
and social psychology, behavioral intention mediate the influence of various belief and external
variables on behavior and is an important predictor of behavior, however it has three limitations. First
behavioral intention is a reflection of an individual’s internal schema of beliefs. Behavioral intention
does not represent the external factors that can affect the performance of a behavior. Thus, the role of
external variable that can potentially impede or facilitate the performance of a behavior is not fully
captured by behavioral intention (it does not fully consider all possible external factors in facilitating
condition construct as an external factors). Second, behavioral intention has weak predictive and
explanatory ability to deal with uncertainty and unforeseen events between the time the intention is
formed and the behavior is performed. In the face of new information, an individual belief and
consequently their behavioral intention can change. Various internal and external stimuli can change
the provisional intention drastically over time, rendering behavioral intention, inaccurate, unstable and
less predictive of behavior. Third, behavioral intention has weak ability to predict behaviors that are
not completely within an individual volitional control(Venkatesh et al., 2008).
Figure 2: Unified Theory of Acceptance and Use of Technology (UTAUT) adapted from Venkatesh et
al. (2003)
4. Innovation
Innovation has been defined from different perspectives, and studied in many disciplines. In a broad
way, an innovation can be any new idea to a population. Innovation is defined as the creation or
adoption of new idea. In all discipline, ’newness’ is a property in all definition of innovation, and is a
relative term (Damanpour, 2006; Lee &Runge, 20010. Roger (1995) define an innovation as “an idea,
practice or object that is perceived a new by an individual or other unit of adoption”. The perception of
novelty is important, and it does not matter if the idea, practice, or object is abjectly new (Straub,
2009; Frambach&Schillewaert, 2002). An innovation can consider new to an individual adopter, a
group or team, an organization, an industry, and newness is a property of innovation with respect to
the field’s level of analysis. The adoption of innovation means that the innovation is new to the
adopting unit (Damanpour, 2006). At the organizational level, it involves adoption of an idea, new
product, service, process, technology, policy, structure or behavior that is new to the organization
adopting it (Damanpour, 2006; Lyytinen et al, 2003; Roger and Shomaker 1971).
732
The innovation literature is voluminous and diverse, Swanson and Ramiller (2004) are defining IT
innovation, in process terms, as the pursuit of IT applications new to an organization. Their view
oriented around how IT comes to be applied in novel ways. An information technology innovation can
be defined as an innovation in digital and communications technology and their applications
(Swanson 1994). IT innovations involve only a technological component-change in software and
hardware that are new to an industry or adopters-that often augmented with complementary
organizational innovations including new form of cognition, meaning, work process, business process,
or organizational structure.
The present study develops a research framework by integrating the UTAUT model and
entrepreneurial potential model to predict intention to use IT-related innovation by entrepreneurs in
their business. The clearest parallels between the two models can be drawn by comparing the
elements of their respective underlying theories, theory of reason action and theory of planned
behavior. Entrepreneurial potential model and UTAUT model focus on intention, and when UTAUT
test pre adoption, and talked about the innovation characteristics, entrepreneurial potential model
measure pre-entrepreneurial event, and argue that both individual and situational variables are
important to determine entrepreneural intentions.With integrating these two models we will measure
both dimention: individual perception and innovation characteristics. Social influence in UTAUT is
most compatible with subjective norm that come to perceived desirability in entrepreneural potential
model. Therefore we eliminated social influence from UTAUT and test it in perceived desirability. With
this factors we can also test attitude toward intention. Self efficacy is comparible with perceived
feasibility in entrepreneural potential model. We add precipitating factors as a moderator between
intention and usage behavior. Thus, the role of external variable that can potentially impede or
facilitate behavior can be captured by precipitating factors. Precipitating factors has two construct,
propensity to act and precipitating event’s which moderate the relationship between intention and
usage behavior. Our target behavior related to the use of IT-related innovation in general and not to
any application or specific system. Integrating these two models, and overcoming UTAUT limitation by
adding new moderating variable and applying these models to the study of entrepreneurship and IT-
related innovation adoption in a developing country such as Malaysia will expand the understanding
of the robustness in explaining acceptance and use. The basic UTAUT model consists of several
construct that are hypothesized to relate to the intention to use IT. In turn intentions to use IT predict
IT use (Figure3).
Figure 3: Integrated model of Unified theory of acceptance and use of technology and entrepreneurial
potential model
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6. Methodology
The survey is in progress and contained a number of questions that were designed to capture
information about the constructs in the research model. The questions that measured performance
expectancy ,effort expectancy ,facilitating conditions, and intention to use IT-related innovation
construct are adopted from Venkatesh et al .(2003). For measuring usage behavior we use questions
from Venkatesh et al.(2008). To suit the context of the study, some words have been modified (e.g.
“system” is changed to IT-related innovation) accordingly. The question that measured perceived
desirability, perceived feasibility, propensity to act and precipitating factors adopted from
Krueger(1993),and Krueger ,Reilly, and Carsrud (2000). Likert scales (1-7) ranging from ‘extremely
agree’ to ‘extremely disagree’ was used for all construct items except for item that measuring uses
behavior in the first part.
This model will be empirically validated using survey data. Random samples of entrepreneurs that are
owner of the SMEs, or manager of the company in Kuala Lumpur, Malaysia are targeted for sampling.
We choose manager or owner of the company because most influential people affecting innovation
and change in organizations are top managers (Damanpour, 2006) from the sample we choose sub
sample that include the entrepreneurs that their work related to information technology and they use
IT-related technology.
7. Conclusion
To study entrepreneur’s usage behavior in Malaysia, we have proposed integrated model that
measure environmental, innovation and individual dimension. The proposed theoretical model is
developed to provide a comprehensive understanding of the determinants that affect the adoption and
utilization of innovative IS within entrepreneurs. This study aims at extending the theory development
of the adoption of IT-related innovation. This study uses unified theory of acceptance and usage of
technology (UTAUT) model (Venkatesh et al,2003) as a base theory and integrate it with
entrepreneurial potential model (Krueger&brazeal,1994) to explain the IS adoption behavior by
entrepreneurs. Combining these two models enables a coherent and consistent explanation for
interpreting and understanding the innovative IS adoption behavior by entrepreneurs that possess
both organizational and individual perceptions and attitude. We found that Unified theory of
acceptance and use of technology (UTAUT) is concern with the characteristics of innovation and
model of entrepreneurial potential is focused on individual characteristic. Both of these models are
considered in this study because both are intentional models, and are derived from Theory of Planned
Behavior (TPB). Thus, with integrating these two theories together we can make a more robust theory
that can measure dimensions of individual perception and technological characteristics. We
recommend that perceived feasibility and perceived desirability should be included in UTAUT model
to test individual dimension. With concern to UTAUT limitation Venkatesh et al (2008), to overcome
these limitations we added the precipitating factors as moderator in UTAUT model to improve the
relationship between behavior intention and usage behavior. This theory can be used in
entrepreneurial and technology acceptance context. For entrepreneurship context this theory
considers the characteristic of technology that they need to use in their job or to start a new business.
The argument for the integrative model of UTAUT and model of entrepreneurial potential is that both
of these theories focus on individual intention to take action. Thus, integrating these two theories
together will provide robust and parsimonious model that capture the causal flow between innovation
factors, environmental factors and individual factors in predicting intentional behavior.
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Work
in
Progress
Papers
737

738
Innovation: A Question of Developing and Cultivating a
Culture?
Knut Aasland1 and Morten Hatling2
1
NTNU Trondheim, Norway
2
SINTEF Technology and Society, Trondheim, Norway
knut.e.aasland@ntnu.no
morten.hatling@sintef.no
Abstract: In order to stimulate innovativeness in companies, the company culture can be a key factor. This paper
introduces a project which goes into companies to study their culture and find out which factors are promoting
and which are blocking innovation. It is a work in progress, and no results are available yet, but one initial
company case is advancing, and more are being planned.
Keywords: improving innovativeness, cultural aspects, action research
1. Introduction
Most product areas see ever increasing competition. One of the consequences of this is ever
increasing demand for renewal. It could be new products, but price pressure also means need for new
processes. For customers, this is positive; is that it means ever better products at ever better prices.
For the product suppliers, the manufacturers, however, it represents a challenge. They have to
undertake continuous improvement and development of both products and processes whether they
want to or not.
Innovation is an ability to renew that can go through all departments in a company. We often think of
product development, but it is equally important in production and other processes in the company.
We see innovativeness as an ability to always seek and see possibilities for new solutions, and to
implement them.
Companies are struggling to be more innovative. But to be an innovative company that continuously
develops new products, concepts, solutions and processes requires more than competent employees,
good methodology and sufficient resources. Innovation does not simply occur or take place in a
vacuum. Innovativeness is not some simple technique that can be introduced by management or
bought from a supplier or consultant; it seems to have a lot to do with culture, values, incentives,
knowledge, management philosophy, and even communication style and office interiors. Therefore,
innovation should not be considered detached from other activities in the company. Every company
has a development history that can reveal both strengths and shortcomings concerning current
innovation capability.
When we work with companies, we observe differences in the company internal culture, and we also
see that some companies are more innovative than others, or at least are perceived to be so. What is
this correlation between the two? And how can knowledge about it help companies develop towards
more innovation?
In a project aiming at increased innovation in Norwegian industry, we want to look at the cultural
aspects of innovation, and find out if company culture is a key to increased innovation. If company
culture is essential, we must understand more of what it is, and we should find out how it could be
changed or developed to improve innovation in the company. For this purpose, we work with a small
group of small and medium size enterprises, that all share a desire for increased innovation. We want
to go into the development history of the companies, and find out what hampers development, thus
making it possible to change some factors and promote improvement. A hypothesis is that many of
these factors may be relevant for many of the companies (Madan 2000).
Examples of issues of interest concerning development project:

How to achieve sufficient momentum and execution power in each stage of the development
process, from idea generation to implementation.
How to attain management support and strategic foundation in the process.
739
Knut Aasland and Morten Hatling
How to allocate sufficient resources (time and people) and appropriate staffing.
How to create motivation and commitment to the process.
How to achieve collaboration between participants with different educational background and
personal experiences.
How to ensure involvement of relevant stakeholders such as suppliers, customers, production and
management at the right time in the process.
What are good decision-making processes for choosing between several good alternative
solutions, in situations characterized by uncertainty and disagreement?
What structures and incentives support (creative) flow throughout the entire project?
What are good tools and methods to evaluate the quality of the solutions throughout the
development process?
Our hypothesis is that these factors are part of what could be described as the undefined “DNA” of
innovation. In our project we deal with these issues of interest for several specific development
projects. This implies that we are engaged in ongoing development projects in the companies. We
follow these projects closely and propose measures to strengthen the innovation processes while in
progress, for example: Methods to promote idea generation, tools for concept evaluation, as well as
methods for executing and implementing solutions.
In addition, we have opted to study narratives of nationally and internationally well-known companies
with an innovative label attached to them. We will thereby try and see what cultural factors have
influenced their innovativeness, and also to try and learn from stories of their development. We then
have taken this knowledge and applied it to the companies in our project. Furthermore, we have
identified hindrances – that is elements of culture, belief and knowledge – which block development of
a culture for innovation. And we have identified drivers – mechanisms which promote it. We take
available methods and techniques and apply them, to see if this changes the culture of the company
in the desirable direction. Then we try to educate champions within the companies, so that the project
will not be a short-lived stunt, but an ongoing process. We will then see if this can change the culture
in the company, resulting in improved innovation (Balsano 2008).
2. Culture for innovation
We try to answer two questions in this project: What characterizes a culture for innovation? And which
techniques can show positive effects in making a company more innovative?
2.1 Characteristics
So far, we have not been able to verify any characteristics of a culture for innovation. We have a list of
factors that we want to check out, but these may well prove wrong. So far, they include:
Willingness to take risks
Acceptance of failure
Delegation of power
Employee participation
Openness for ideas
Lack of hierarchy in the company
Target-oriented management
Acceptance of “craziness”
Inquisitiveness
Job security
Which of these will prove to be of importance, if any, are yet to be seen.
2.2 Techniques
The techniques we are checking out can be subdivided in 3 groups: peer techniques, agile techniques
and a special technique concerned with area usage.
740
2.2.1 Peer techniques

Among the peer techniques, we have so far tested (Bygdås et al 2009):
Peer assist/peer resist
Groupie
Unplugged
2.2.2 Agile techniques

A movement has arisen over the last years to simplify and de-bureaucratize design and development.
It is usually referred to as lean product development or agile development. Characteristic of these
techniques is that they focus on results and customer value, and not on methods and tools (Morgan
and Liker 2006).
2.2.3 Area use

We have convinced the company to set aside a project area, a big open room with lots of wall space,
where project groups can gather and post all important issues on the walls in order to make them
transparent to all relevant people. This is inspired by Toyota’s Obeya (Morgan and Liker 2006).
2.3 Management role

We have found that the explicit and outspoken support of the company CEO at Teeness has been a
major factor in instigating real change. In a company with a lot of team spirit, management thrust
seems to win over initial skepticism from employees (Hurley 1995).
3. Case study: Teeness
Teeness is a small manufacturer of tools to the mechanical industry. 10 years ago it was a sturdy,
solid, but not very innovative company. They had made a major innovation 15 years earlier, and had
lived well of that patented technology since. Their turnover was mostly from products more than 5
years old. They identified lack of innovation as the foremost threat to their future. They tried to
stimulate innovation, and have been largely successful. Other Norwegian companies today see them
as innovative.
They are, however, not satisfied. They feel that the potential is much larger than what they have
exploited. They also know that considerable turnover comes from products where the patent will
expire in a few years. They therefore need new products based on new technology.
To achieve sufficient insight into a specific company to illuminate the issues outlined above close
cooperation between the researchers and the company is essential. In addition, the company should
be willing to reflect on their own practice. Specifically we gather histories that describe previous
innovation experiences and relate these histories to the current project. We gather histories by being
present at significant meeting points, observing and interviewing both individuals and groups. When
measures to advance the innovation process can be taken, we will organize and facilitate the event.
One tool is “Peer Resist” where a broad board of stakeholders, both internal and external experts is
invited to evaluate and contribute to the development of the solutions and the overall project.
In the early phase of the project we focused on early stages of development processes. It is essential
that this stage is carried out in a good manner to achieve project success. Generally, if we fail to
involve, engage and motivate the right people in this stage, there will often be problems later in the
project.
In order to convey experiences and insights from this research work – that also have relevance for
other companies – we produce web-based learning histories composed of film from interviews and
observations, images and text.
Learning histories is a method originally developed at MIT that SINTEF has refined and improved
through a number of research projects. Research projects on innovation often result in checklists of
“best practice” for development projects. On the contrary, the purpose of learning histories is to
identify and illustrate important barriers, dilemmas, and paradoxes that reoccur in different
741
development projects, and propose how a company can handle these situations through systematic
discussions and reflection (Levin and Klev 2002).
4. Results, further plans
In 2010 we will recruit more NORMAN companies to the Innovation Culture demonstrator, in addition
to expand the focus to later stages in development process.
The plan for the project is to recruit more companies into the project. The experience from Teeness
will be used to plan the actions in the other companies. By the diversity of the companies, we hope to
identify generic drivers and blockers to innovation. The methods that are being tested at Teeness, will
be applied and adapted in the other companies. After that, we can draw some conclusions on the
influence of these methods on the innovativeness of the company.
Acknowledgement
This research is done within the CRI Norman research programme, sponsored by the Norwegian
research council.
References
Balsano, T., Goodrich, N., Lee, R., Miley, J., Morse, T. and Roberts, D. (2008) Identify your innovation enablers
and inhibitors, Research-Technology Management, vol 51, no 6, pp 23-33
Bygdås, A.L., Lundberg, M and Rudningen, G. (2009) Studying Organisational Creativity in Everyday Practices –
mysteries, methods and multiplicities, Proceedings of the 25th EGOS Colloquium, Barcelona 2009.
Hurley, R. (1995) Group culture and its effect on innovative productivity, Journal of Engineering and Technology
Management, vol 12, pp 57-75
Levin, M. and Klev, R. (2002) Forandring som praksis - læring og utvikling i organisasjoner, Fagbokforlaget, Oslo
[in Norwegian]
Madan, P. (2000) Creating the culture for innovation, Proceedings of the 2000 IEEE International Conference on
Management of Innovation and Technology, ICMIT 2000, ISBN 0-7803-6652-2, IEEE, Singapore.
Morgan, J.M. and Liker, J.K. (2006) The Toyota Product Development System – Integrating People, Process, and
Technology, Productivity Press, New York.
742
Entrepreneurship and the Equality of Chances: An Inter-
Regional Model of Women School of Entrepreneurship
Anca Dodescu and Adriana Giurgiu
University of Oradea, Romania
adodescu@uoradea.ro
agiurgiu@uoradea.ro
Abstract: The project entitled: Entrepreneurship and the Equality of Chances. An Inter-regional Model of Women
School of Entrepreneurship, financed by the European Social Fund with an amount of over 3.5 million Euros, is
the first strategic project in the field of human resources development in Romania that promotes female
entrepreneurship. The covering area of the project is the Western part of Romania, and includes Maramureş,
Satu-Mare, Bihor, Arad, Timiş, Caraş Severin Counties, being implemented by partner universities from each of
these counties. The general objective is to promote the equality of chances in the field of entrepreneurship, by
stimulating the implication of women, especially those coming from rural areas, to initiate and develop their own
business in the context of sustainable development of their communities. As initial result of the project, a Women
School of Entrepreneurship, consisting of 6 territorial, 24 local and 72 rural centres, along the Western part of
Romania, was set up, giving the 1800 women composing the target group of the project, the opportunity to
acquire entrepreneurial skills in the same place where they leave, by using Action Learning as an educational
method. Besides the entrepreneurial training, the project develops a number of innovative activities such as: the
elaboration of two packages of didactic supports especially designed for the women’ needs, with pronounced
original character, elaborated by an inter-regional team of specialists from the partner universities in both printed
and in e-learning format, and entitled: Training for Trainers of professional competences, and The School of
Entrepreneurship - Module I – Business start-up, respectively, Module II – Business development; the elaboration
of the economic diagnoses of the 6 counties involved, by the same inter-regional research team, and thereafter,
their integration in the training process, in order to facilitate the identification of business ideas according to the
development potential of the counties taken into consideration, and the real possibilities for development of the
SMEs’ sector; the development of some specific methods designed to create the data base selection, and to
monitor the project’s target groups, including a set of focused questionnaires; the development of a specific
research activity, having female entrepreneurship in the Western part of Romania as main subject. The project
development results in: creating an inter-regional educational research, training and communication network;
creating an inter-regional data base on female entrepreneurship; generating an inter-regional model of Women
School of Entrepreneurship based on Action Learning, as a replicable model, adaptable to other areas;
elaborating 1800 business plans addressed to the development needs and specific priorities of the inter-regional
area envisaged. By putting into practice, with the support of the project, 50% of the resulted business plans, will
lead to the increase of the density of the SMEs sector, to the creation of direct and indirect workplaces, to the
decrease of poverty, to the regional development, to the promotion of female entrepreneurship, and definitively,
to positive changes in the lives of all those 1800 women from the Western part of Romania.
Keywords: female entrepreneurship and chance equity; entrepreneurial innovative learning and teaching in
higher education; business start-up and/or development; action learning, regional development
1. Introduction
The project entitled: Entrepreneurship and the Equality of Chances. An Inter-regional Model of
Women School of Entrepreneurship, is the first Romanian strategic project financed by the European
Social that promotes female entrepreneurship. The general objective is to promote the equality of
chances in the field of entrepreneurship, by stimulating the implication of women, especially those
coming from rural areas, to initiate and develop their own business in the context of sustainable
development of their communities. The covering area of the project is the Western part of Romania,
and includes Maramureş, Satu-Mare, Bihor, Arad, Timiş, Caraş Severin Counties, being implemented
by six partner universities from each of these counties. The project’s relevance, contribution and
originality in the field of entrepreneurship are highlighted from entrepreneurial innovative learning and
teaching methods developed mixed with a parallel research focused on chance equity and regional
development.
2. Methodology of implementation
Starting from the large accepted premise, that the gender gap in entrepreneurship varies considerably
from country to country influenced by different culture and customs regarding female participation in
economic activity (The Global Entrepreneurship Monitor - GEM 2007, 2008, 2009), but a gender gap
definitively exists (Report on Women and Entrepreneurship - GEM 2007) with respect to new venture
creation and business ownership (Parker 2009); the current project wishes to tackle the following
743
weaknesses identified in Romania, generally: limited entrepreneurial culture; low level of adults’
participation to continuous education and formation; the high percentage of the population employed
in agriculture, especially in the sustenance agriculture, the low density of the SMEs and of the
reduced entrepreneurial spirit, especially among women. The following critical aspects identified
among women, based on several studies made by the National Agency for the Equality of
Opportunities (n.t.) (ANES), which has done more than 1000 interviews in January-February 2008,
including in the Western part of Romania, are representative: more than 50% of women are
employed, the level of payment being very low, with a monthly income average of between 0-1000 lei
(approx. 233 Euros) in the rural area and 500-1000 lei in the urban area; the percentage of female –
managers is very low – only 3-10%; moreover, approximately 1/3 of the women in the rural area
declare that they do not use any information means, except the TV, that they rarely read written press
and that they never use the Internet. In the researched area, the percentage of the women interested
in information referring to setting up a business, both in the rural and in the urban areas, is up to 50%,
even 70% in the urban area of Arad County (ANES 2008).
Therefore, the project is addressed to a overall target group of 1800 women wishing to set up (1440
women from urban and rural area) or develop (288 SME female managers from urban area) their own
business or to become trainers in the entrepreneurship field (72 women, students in Economics,
which will be trained and who will benefit from job as trainers for rural area, in the project).
All the activities of the project are taking place “in the mirror” in all six counties from the inter-regional
area. The duration of the project is of 2 years, starting in January 2009. In the first 6 months stage,
there have been prepared by the project’s inter-regional team the theoretical support, the economic
diagnoses of the counties involved, the data base for the selection of target groups. Also, 6 territorial
centres have been organized (in the cities, county capitals, at the partner universities), 4 local centres
assigned to each territorial centre (in small and medium towns), and 3 rural centres assigned to each
th
local centre (in parishes). From the 7 month, for 6 months, the training takes place in the territorial
centres, 2 themes a month, scheduled on Fridays – a course during which an expert is invited, a well-
known and respected female entrepreneur for the subject in discussion, willing to share to other
women her own experience and success story; actually, the “telling a story” method is used, the idea
being inspired from the results of the studies showing that the entrepreneurial impulse of Romanian
women is strongly influenced by “models”, by the familiarity, the sharing of the experience with
women considered successful (CEBR, 2007), and on Saturday – applications and discussions on
working sets, using the Action Learning method (Dodescu, Barker, Brihan, Giurgiu 2004) which
stimulate the women to talk freely, based on the theoretical support, to share the practical experience
and, taking into account that the working sets are mixed, containing women from with different
entrepreneurial experience, learning with and from each other. The method had been previously
successfully used in a Phare project (Dodescu, Barker, Giurgiu 2004). At the end of the training
activity, there is the evaluation, in the contest “My Business Plan”, the awards consisting in sums of
money minimum necessary to effectively set up a business according to the business plan. In the
th th
same way, starting with the 13 month, for 6 months, and starting with the 19 month, for 3 months,
the training will take place at the local, respectively rural centres. The last 3 months are dedicated to
the evaluation, monitoring and dissemination of the results, including the inter-regional award
ceremony and the launch of the research volume “Female Entrepreneurship in the Western Part of
Romania”.
3. Results and future developments
As initial result of the project, a Women School of Entrepreneurship, consisting of 6 territorial, 24 local
and 72 rural centres, along the Western part of Romania, was set up. Besides the entrepreneurial
training, the project develops a number of innovative activities such as: the elaboration of two
packages of didactic supports especially designed for encouraging female entrepreneurship in the
Western part of Romania, with pronounced original character, elaborated in both printed and in e-
learning format, and entitled: The School of Entrepreneurship - Module I – Business start-up,
respectively, Module II – Business development and Training for Trainers of professional
competences in Entrepreneurship; the elaboration of the economic diagnoses of the counties
involved, and thereafter, their integration in the training process, in order to facilitate the identification
of business ideas according to the local development potential; the development of some specific
methods designed to create the data base selection, and to monitor the project’s target groups,
including a set of focused questionnaires; the development of a specific research activity, having
female entrepreneurship in the Western part of Romania as main subject. The project development
744
results in: creating an inter-regional educational research, training and communication network and an
inter-regional data base on female entrepreneurship that pave the way for future research projects
(Casson, Yeung, Basu, Wadeson, 2006); generating an inter-regional model of Women School of
Entrepreneurship based on Action Learning, that allows the replication on other target groups, and in
other geographical areas; elaborating 1800 business plans and putting into practice, with the support
of the project, 50% of it, that lead to the increase of the density of the SMEs sector, to the creation of
direct and indirect workplaces, to the decrease of poverty, to the regional development, to the
promotion of female entrepreneurship, and definitively, to positive changes in the lives of all those
1800 women from the Western part of Romania.
Acknowledgments
The project “Entrepreneurship and the Equality of Chances. An Inter-regional Model of Women
School of Entrepreneurship”, is financed by the European Social Fund – Investing in People! contract:
POSDRU/9/3.1/S/5, Value: 12,500,104.00 lei (approx. 3,000,000 Euros), Duration: 2 years (2009-
2010), Coordinator: Faculty of Economics, University of Oradea, Romania; website: www.antres.ro.
References
Allen, E., Elam, A., Langowitz, N., Dean, M. - Report on Women and Entrepreneurship, Global Entrepreneurship
Monitor (GEM) 2007, [online], GEM website, www.gemconsortium.org
Bosma, N., Levie, J. with contributions from Bygrave, D. W., Justo, R., Lepoutre, J. and Terjesen, S., Global
Entrepreneurship Monitor, 2009 Global Report, [online], GEM website, www.gemconsortium.org
Casson, M., Yeung, B., Basu, A. and Wadeson, N. (2006) The Oxford Handbook of Entrepreneurship, Brush,
Candida G. (2006) Women entrepreneurs: a research overview, Oxford University Press, pp 611-625.
Dodescu, A. (coord.), Barker, A., Brihan, A., Giurgiu A. (2004) Ghid practic Action Learning (Action Learning
Practical Guide), University of Oradea Publishing House, Oradea.
Dodescu, A. (coord.), Barker, A. , Giurgiu A. (2004) Un nou model de şcoală antreprenorială în domeniul
resurselor umane (A New Model of School of Entrepreneurship in the field of Human Resources
Development), University of Oradea Publishing House, Oradea.
Driga, O., Lafuente, E. (2007) “Antreprenoriatul Feminin in Romania: Caracteristici personale si efectul
variabilelor socio-culturale” (Female Entrepreneurship in Romania: Personal Characteristics and the effect
of socio-cultural variables), Centre for Entrepreneurship & Business Research (CEBR), CEBR working
paper, series WP 02/2007, [online], CBR website, www.kfacts.com
Parker, Simon C. (2009) The Economics of Entrepreneurship, Cambridge University Press, Cambridge.
Romanian National Agency for the Equality of Opportunities Studies, January-February 2008, [online], ANES
website, www.anes.ro
745
Study Concerning the Identification and the Improvement
of the Romanian Companies Developing External Trade
Activities’ Competitive Advantages, for Maximizing the
positive effects of the EU accession
Adriana Giurgiu and Anca Dodescu
University of Oradea, Romania
agiurgiu@uoradea.ro
adodescu@uoradea.ro
Abstract: “Study concerning the identification and the improvement of the Romanian companies developing
external trade activities’ competitive advantages, for maximizing the positive effects of the EU accession”
(acronym: SVACEX) is a project financed by the National Centre for Programme Management – CNMP of
Romania, by Programme 4 – Partnerships in the priority fields in the framework of preparing a future FP 7
project, with an amount of approx. 530.000.00 Euros, for pursuing advance research in the field of new
managerial, marketing and entrepreneurial methods for organizational competitiveness, in order to establish
strategies and to capitalize the competitive advantages of the firms. The project is meant to build a better
collaboration between the researchers in the field of economics and international business (including the main
partners in the project: University of Oradea – The Research Centre for Competition and Sustainable
Development - CCCDD, ASE – Faculty of International Relations and The Romanian Academy National Institute
for Economic Research - INCE), the Romanian authorities responsible for the drawing up and carrying out of the
foreign trade policy (Foreign Trade Office through Romanian Centre for Trade and Investment - CRPCIS) and the
corporate bodies, in order to establish and capitalize the competitive advantages of the Romanian companies
with foreign trade activity (which represents the target group of the SVACEX project’s beneficiaries), as a result of
our country’s adhering to the European Union, in order to maximize the positive effects of the newly-created
opportunities on the Romanian business environment and the corporate bodies performing foreign trade and
inter-community production activity and to identify thus new strategies and solutions regarding the reduction of
Romania’s commercial deficit, emphasizing the way in which Romania can involve the effects determined by
foreign trade economic growth. Taking into consideration the fact that SMEs play an essential role in the
European economy, representing a source of entrepreneurial abilities, innovation and creation of work places, the
project has in view the drawing up of a study regarding the identification and capitalization of the competitive
advantages of the Romanian companies with export activity, in order to maximize the benefits of Romania’s
adhering to the EU. In this view, the 5 phases were suggested for the implementation of this project. The project
will have therefore as a result a strategy meant to capitalize the competitive advantages of the Romanian foreign
trade resulted from our country’s adhering to the EU, for the further use of the interested entrepreneurs.
Keywords: international entrepreneurship; internationalization strategy; competitive advantages; EU

competitiveness; Romanian external trade
1. Introduction
The performances of the European integration make some researchers of the world economy to state
that European Union represents the first institutional construction – which might resemble a “regional
state” built of many “states” - which will constitute the political structure at the end of the 21st century,
the EU influence being beyond present time and space” (Howorth 2007). Trade development
represents an opportunity for economic growth of each country or region, being in fact, the key of
European Union economic competition which linked its development to the Common Trade Policy.
The SVACEX project has in view the creation of the conditions and the frame necessary to a better
collaboration between the researchers in the field of international economic relations, specialized on
problems regarding foreign trade and European economic integration. the authorities and/or units of
the Romanian public administration responsible for the drawing up and carrying out of the policy in the
field of foreign trade and through CRPCIS, the corporate bodies, in order to establish and capitalize
the competitive advantages of the Romanian companies with foreign trade activity (which represents
the target group of the project’s beneficiaries), as a result of our country’s adhering to the European
Union, in order to maximize the positive effects of the newly-created opportunities on the Romanian
business environment and the corporate bodies performing foreign trade and inter-community
production activity and to identify thus new strategies and solutions regarding the reduction of
Romania’s commercial deficit, emphasizing the way in which Romanian entrepreneurs can involve the
economic growth effects that the foreign trade determines in an economy.
746
2. Methodology of project’s implementation

The general perception of the European Union is rapidly changing as a result of the vertiginous
evolution of the events and factors affecting its development, generating subsequently a multitude of
problems referring to the foreign trade and the Single Market, agricultural and competition policy, to
the financial market and the Monetary Union, social and regional cohesion problems etc. (Dodescu,
Giurgiu 2008). This argument has served as a bench mark to identify the aspects which will be more
profoundly analyzed during our current research: Romania’s commercial policy as compared to joint
commercial policy and its defining elements, the evolution of the Romanian commercial exchanges on
the global relation, and also on the relation with the European Union, ending with the analysis of the
perspectives of the Romanian inter- and extra-community trade, which will take us to the
accomplishment of a strategy meant to capitalize the competitive advantages of the Romanian
companies with foreign trade activity, characterized by originality and complexity, and which should
be implemented by the Romanian firms with foreign trade activity, in order to maximize the positive
effects of adhering to the European Union.
Starting, therefore, from the premises mentioned above and dealing with a very complex and profuse
research theme due to the concepts involved by its objective and substantiated analysis, the project
will build a strategy which does not exist yet in our country (Giurgiu 2008).
This strategy requires an empirical analysis on groups, subgroups and even products making the
object of the Romanian commercial exchanges which is correlated with the potential export/import
countries which can provide a superior capitalization of the competitive advantages of the Romanian
companies, taking into account the assembly of commercial policies measures adopted at the EU
level, resulting thus an extremely substantiated and rigorous source of information, which will be used
by all the factors involved in the foreign trade, and especially, will be capitalized for the growth and
development of the entrepreneurs performing external commercial exchanges, thus making our study
very complex and profuse without equivalent at the level of Romania. The project will result in a model
of study of the problems had in view, a model which, once updated, will be used permanently,
contributing this way to the maximization of the positive commercial effects of Romania’s adhering to
the EU. The importance, novelty and innovative character of this project’s theme are therefore even
higher as the Romanian specialty literature contains only partial approaches as compared to that
proposed by SVACEX. The resulted model of analysis proposed by the project is built on the
calculation of several indicators attentively selected (i.e. the opening degree, foreign trade multiplier,
inter-branch trade indicator, comparative advantage indicator, indicators regarding the dynamics of
the exchanges with foreign countries, the method of volume indicators in doing comparison, indicators
of unitary values and elasticity values, exchange ratio and coverage degree, indicators of economic
trade exchanges concentration, indicators of trade specialization: the indicator of Revealed
Comparative Advantage, Michaely indicator, Lafay indicator, Grubel-Loyd inter-branch trade indicator
etc.) (Balassa 1965, 1982; Feenstra 2004; Porter 1986, 1990).
The main strategy of the SVACEX project started in October 2008, with the creation of the partners’
consortium including specialized partners in all the fields of economic research necessary to achieve
the objectives and who are unfurling the following phases/activities:
Phase I – Documentary studies regarding the identification of the potential competitive advantages of
the Romanian foreign trade, as well as the possibilities to capitalize them in the context of Romania’s
integration to the EU – ended in January 2009.
Phase II – Identification of the competitive advantages of the foreign trade of the EU, of interest from
the point of view of the real potential they have in the maximization of the positive effects of
Romania’s adhering to the EU. The general and specific analysis of the results emphasized – ended
in December 2009.
Phase III – Establishment of competitive advantages of Romanian companies with foreign trade
activity in order to maximize the positive effects as a result of Romania’s adhering to the EU.
Phase IV - Determination of the optimal variants to capitalize the competitive advantages of the
Romanian companies with foreign trade activity, varying with the results determined in the previous
phases and the establishment of the foreign trade strategy in order to maximize the positive effects of
Romania’s adhering to the EU.
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Phase V - Demonstration of the functionality and unity of the strategy drawn up and dissemination of
the results – will result in the capitalization and development of the competitive advantages of the
Romanian companies’ exports; the development of knowledge and promotion of knowledge transfer
and results of the scientific research in the activity of the firms involved in the field of foreign trade.
3. Present accomplishments and expected results
As initial results of the project, we have accomplished some theoretical and empirical studies and
data bases, the list of products with competitive advantages in the Romanian foreign trade in the
period 1990-2008; 1 study of national interest regarding the evolution of the Romanian foreign trade
and of EU in the 1990-2008 period and the competitive advantages registered in this period; a
compact and uniform data base regarding the evolution of the Romanian foreign trade and that of the
EU in 1990-2008 period; more than 15 articles published in specialty journals; the list with common
products with competitive advantages in Romania and EU’s foreign trade; 2 workshops of the project
partners; approximately 84 national mobilities; 2 Intermediary Research Reports etc.
The main results estimated for next phases are as follows: 1 study of national interest regarding the
impact of Romania’s adhering to the EU on the commercial policy and the Romanian foreign trade; 1
specialty book: Strategy to capitalize the competitive advantages of the Romanian companies with
foreign trade activity, in order to maximize the positive effects of Romania’s adhering to the EU;
minimum 30 articles published; 1 public necessity study of national interest; 1 national interest
strategy; 1 international conference to disseminate the results of the project; advertising and
dissemination materials; 1 PC7 project proposal; minimum 3 permanent jobs; support and speciality
consultancy for at least 200 Romanian entrepreneurs with external trade activities.
4. In conclusion
We do consider this paper to be of high interest, because SVACEX project will develop a new
scientific product, with high added value, capitalized in an innovative strategy with large practical
applicability for Romanian entrepreneurs and international partners, and replicable by other new EU
member states.
References
Balassa, B. (1965) Trade Liberalization and Revealed Comparative Advantage, The Manchester School of
Economic and Social Sciences, vol.32, no.2, pp. 99-123
Balassa, B. (1982) Exports and Economic Growth, Journal of Development Economics, 5, pp. 181-189
Dodescu, A. and Giurgiu, A. (2008) Economia integrarii europene (Economics of the European Integration),
University of Oradea Publishing House, Oradea.
Feenstra, Robert C. (2004) Advanced International Trade: Theory and Evidence, Princeton University Press,
Princeton
Giurgiu, A. (2008) Comertul intraeuropean. O noua perspectiva asupra comertului exterior al Romaniei (Intra-
European Trade. A New Perpective onto the External Trade of Romania), Economica Publishing House,
Bucharest.
Howorth, J. (2007) The International Impact of European Integration. Key Events, Players and Trends, Foreign
and Commonwealth Office, London, March, pp. 24
Porter, Michael E. (1986) Competition in Global Industries, Harvard Business School, Press, Boston, Mass.
Porter, Michael E. (1990) The Competitive Advantage of Nations, Macmillan Press LTD
748
Innovation Platform Design Through Knowledge Services
Dehua Ju1 and Beijun Shen2
1
Application Solutions & Technologies, Inc. (ASTI), China
2
Shanghai Jiaotong University, China
asti-gm@online.sh.cn
bjshen@sjtu.edu.cn
Abstract: Consummating innovation service platforms to foster innovative enterprises and talents has been listed
as a main task in China’s Technological Innovation Project. A novel solution is proposed in this paper, based on a
knowledge service approach to support knowledge-base innovation. Knowledge services provide an ICT-enabled
open accessible environment for on-demand knowledge acquisition. The BOKs-based rich knowledge resources
repository supports one-stop service for innovation across multiple domains. Innovation knowledge services are
also provided as an innovative guide and tools for knowledge workers, innovation champions and CxOs being
involved in innovation activities, including innovation management, innovation methods, entrepreneurship, new
product development etc. Innovation services are required to cover all level of DIKW framework
(Data-Information-Knowledge-Wisdom) to avoid loss anything in lower level. Besides the resource layer, a
networking layer is provided for building CoPs and CoIs for collaborative learning and innovation. It is an open
innovation platform in which solution seekers can post their issue to find wisdom of crowds and the system provides
online assistance for solvers and ideas searching. Then a collaborative innovation network can be formed
dependent on attributes of the problem issue. It can either be a volunteer-based community just motivated with a
common interest, or a bidding-based knowledge marketplace for crowdsourcing. Knowledge services are looked
as a principle infrastructure to promote intellectual capital and continuous innovation in knowledge economy. A pilot
development project is underway and has made significant progress. At Shanghai we have collected and
developed a set of BOKs in innovation, software engineering, IT, and modern services domains, including New
Product Development BOK, CTO BOK and CIO certificate program etc.
Keyword: knowledge service, open innovation, wisdom of crowds, CoP/CoI, body of knowledge (BOK)
1. Introduction
Consummating innovation service platforms to foster innovative enterprises and talents has been listed
as a main task in China’s Technological Innovation Project (SIPO 2009). A novel solution is proposed in
this paper, based on a knowledge service approach.
The main design philosophy is rather simple: Innovation should put people first. Knowledge services are
used to provide a knowledge-based innovation (Anand 2007) system and create an ICT-enabled open
accessible environment for on-demand knowledge acquisition by knowledge workers, innovation
champions and entrepreneurs.
2. Knowledge service platform
The knowledge service platform proposed has a five layer framework (Figure 1) with open knowledge
principles for high accessibility and scalability.
Context Layer
Knowledge Service Layer
Knowledge Resource Layer
Knowledge Organization Layer
Knowledge Support Layer
Figure 1: Knowledge service platform

The focal point in knowledge services is its contents design. A BOK-based strategy is proposed in the
organization of knowledge resources to avoid the knowledge lost in unorganized and scattered
information. To do so, participation of domain experts and a team of professional knowledge service
workers are demanded. For the purpose of innovation support, both innovation and industry-specific
professional knowledge are required to be incorporated. As Peter Drucker said: “Innovation is the
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Dehua Ju and Beijun Shen
specific tool of entrepreneurs, …It is capable of being presented as a discipline, capable of being
learned, capable of being practiced”, so far we have collected and developed 19 BOKs related to
innovation, including: New Product Development BOK (NPDBOK), Innovation methods, Creativity
techniques, Entrepreneurship, Innovation and knowledge management, CTO/CIO BOK etc. and
BOK-guided systematic collection of knowledge resources have also been underway in parallel.
At the knowledge service layer, 7 main functions are identified and also referred as “Seven Centers”,
they are:
Information Center;
eLearning Center;
Knowledge Resources Center;
Consulting Center;
Communities Center;
Wisdom Center and
Innovation Center.
The information center is used to inform emerging opportunities, market trends and latest technology
progress and so on. The e-Learning center collects and reuses existing knowledge assets developed to
be shared over a more wide scope, which are also useful as a quick entry or area roadmap for most new
comers. The knowledge resources center is very similar to the web of knowledge for which the user
likes entering a specialized reading room with very rich collections and can learn anything what he/she
wants. Multi-domains knowledge repository can provide one-stop on-demand knowledge services for
intradisciplinary talents.
The consulting center has capability to provide so-called ‘On-the-Job Learning’ or ‘Contextual
Learning’, a more interesting and valuable learning platform. It looks like a teacher, expert, master or
knowledge base always accompanying you, providing online and real-time assistance. More important
is that it can promote the construction of Community of Inquiry (CoI), especially the Community of
Practice (CoP) – to formulate a communities center. It is really an open system and community. Even in
the case of no satisfied answer from the system, the requester still can call on a ‘SOS’ help via internet
from other CoP members, including e-mentors/e-coaches as well as peer practitioners. This platform
will be a participatory web supported by web 2.0 technology, facilitating knowledge and experiences
sharing and promoting collaborative learning and working (CSCL/CSCW). Each member is not only a
learner, but also a contributor which will recommend new knowledge contents and experiences as well
as the feedback for system improvement. At final the platform can act as a gathering point of social
networks for most entrepreneurs and knowledge workers.
3. From knowledge service to innovation service
Although knowledge-based innovation is premature until all the needed knowledge can be provided, a
good innovation service platform should not stop only at static level of knowledge services. Two steps
can go forward in this direction: one is to elevate the knowledge to wisdom level in the ‘DIKW’ pyramid
through knowledge synthesis. Another is to facilitate the knowledge application.
Even the wisdom cannot be acquired like knowledge, the mindset of wisdom can be cultivated by story
telling, teaching of wisdom principles, wisdom coaching and sharing, as well as the crowds wisdom
platform. All these services recommended would be the main functions of our wisdom center.
The proposed innovation center will adopt the open innovation (Chesbrough 2003) or Innovation 2.0
model, based on the existing social networks (CoP/CoI) built by our knowledge services. It will be
designed as a crowdsourcing platform to support the WFGM (Want-Find-Get-Manage) process.
Any seeker (individual or institute) can issue their problems or challenges to the platform to look for
creative solvers – from knowledge search to talents search! Then a collaborative innovation network
can be formed dependent on attributes of the problem issue. It can either be a volunteer-based
community just motivated with a common interest, or a bidding-based knowledge marketplace for
crowdsourcing.
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Dehua Ju and Beijun Shen
Context COPs Entrepreneurs K-Workers Institutes
Social Crowdsourcing Knowledge Open Inno.

Networks Platform Market Interface
Service
Innovation Center
Resource Domain KR Innovation KR Think Tank
Figure 2: The innovation center

In the Figure 2, we have shown a schematic framework of the innovation center, which act as an
innovation intermediary like the Exnovate platform (http://www.exnovate.org/). It is very crucial for the
design of a successful open innovation platform to keep a balance between inbound and outbound
dimensions, as indicated by Ulrich Lichtenthaler (2009). It will be a discovery challenge for advancing
knowledge services from know-what/-how to know-who/-where.
4. Prototype system being developed
The development of knowledge service platforms is a massive system engineering.
Facing with high pressing of professional talents shortage in China, we tried to find an alternative
solution beyond formal schooling education only. A pilot project was initialed to develop prototype
knowledge service systems as our conceptual experiment and validation.
Besides the collection efforts of BOKs and knowledge resources, we have also developed abundant
training materials in the innovation domain, including new product development, innovation &
entrepreneurship, CTO training program, innovation management, knowledge management, strategy
management, TRIZ-based innovation methods and creativity techniques etc. – 22 modules, 338 hours
and 8710 .ppt pages in total. A parallel effort in developing knowledge services for specific industries
have also been launched with the ‘first thing first’ principle, these are: software, IT and service
outsourcing industry. After years efforts, in the four main domains mentioned above, we have so far
gathered 132 associated BOKs in total.
5. Conclusion
Knowledge service (KS) is considered as a key component and essential infrastructure of knowledge
society, which can also be used as a measure for developing knowledge-based innovation system. In
this paper we have proposed a novel design framework for the innovation service platform. Although
many ideas and features are not totally new, our contribution is to integrate them into a unified KS
framework to embody a ‘5C’ combination of e-Knowledge, i.e. Content, Context, Community,
Connection and Computer-supported Collaboration, which greatly enhances the value of knowledge
services. By applying the RPV Innovation Theory (Christensen 1997), the knowledge services can be
looked as an IT enabled process which transforms knowledge resources into real value in knowledge
society, including development of human/wisdom/entrepreneurship capital, knowledge worker
productivity, bridging knowledge divides, building of CoPs and learning organizations, causing
continuous innovation and sustainable economic growth in the knowledge society.
References
Anand, N., Gardner, H. and Morris, T. (2007) Knowledge-based Innovation: Emergence and Embedding of New
Practice Areas in Management Consulting Firms, Academy of Management Journal, Vol. 50, No. 2, pp.
406–428. http://phd.london.edu/HGardner/assets/documents/Anand_Gardner_Morris_AMJ_2007(1).pdf
Chesbrough, H.W. (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology,
Harvard Business Press.
Christensen, C. (1997) The Innovator’s Dilemma, Boston: Harvard Business School Press.
SIPO (2009) General Implementing Plan for the State Technological Innovation Project [online]
http://www.sipo.gov.cn/sipo_English/specialtopic/IPManual/200908/t20090820_473125.html
Lichtenthaler, U. (2009) Outbound Open Innovation and its Effect on Firm Performance: Examining Environmental
Influences, R&D Management, Vol.39, No.4, pp. 317-330.
751
Modes of Inbound Open Innovation in the Context of
Dynamic Knowledge Creation
Ilari Kaarela
VTT Technical Research Centre of Finland, Espoo, Finland
ilari.kaarela@vtt.fi
Abstract: Knowledge and its management have been studied extensively in the last decades from many
aspects, including the dynamic creation process (Nonaka et al., 2000), the nature of knowledge (Nonaka, 1994)
and the knowledge boundaries and boundary objects (Carlile, 2002; Carlile & Rebentisch, 2003). Indeed, the
existence (Grant, 1996) and structure (Birkinshaw et al., 2002) of companies have suggestively been explained
by the facilitation capability for knowledge accumulation and integration they provide. The innovation processes
are dynamic processes that create knowledge through activities that integrate information from multiple sources
and transform it into a commercially feasible innovation. This phenomenon, often called open innovation
(Chesbrough, 2003), has been paid notable attention on in current organizational research (West et al., 2006).
The ability of a company to absorb external knowledge is limited by their current level of expertise (Cohen &
Levinthal, 1990), their existing contact network and the limited resource of managerial attention (Laursen &
Salter, 2006; Ocasio, 1997). Thus, companies have a need to prioritize the acquired knowledge and the explored
sources. Also, the political nature of pragmatic, interorganizational knowledge creation must not be overlooked
(Swan & Scarborough, 2005; Carlile, 2004). This paper aims at describing the logic in which these decisions can
be made. The study is primarily conceptual, and aims at explaining why the selected modes of interaction and the
type of partners the companies resort to in their information acquisition processes have strong path
dependencies. Three case interviews are briefly introduced to exemplify our preliminary findings.
Keywords: open innovation, knowledge creation, knowledge boundaries
1. Introduction
Knowledge required for decision-making and innovation activities is dispersed among individuals in
organizations (Becker, 2001). Knowledge is created across functions (Carlile, 2002; Carlile &
Rebentisch, 2003) and even among organizations (Chesbrough, 2003). The dialogical nature of
knowledge creation in organizations is widely accepted (Tsoukas, 2009; Bechky, 2003). Semi-
isolation of intraorganizational groups is beneficial for organizations as they allow heterogeneity of
ideas and belief sets (Fang et al., 2010). Also, diverse knowledge increases the variation of co-
operation results (Taylor & Greve, 2006). Semi-permanent contacts to other organizations could
produce even more prominent effects.
2. Previous research
New knowledge is created in a dynamic process in organizations (Nonaka et al., 2000) that are
formed to make use of the knowledge dispersed among individuals (Grant, 1996; Becker, 2001).
Furthermore, in current business environments the knowledge possessed by an organization is rarely
sufficient. Instead, organizations gather knowledge from external sources to enhance knowledge
accumulation (Chesbrough, 2003).
2.1 Knowledge creation in organizations

Knowledge is created within organizations in continuous spiral-like processes (Nonaka, 1994). Tacit
knowledge in organizations possessed by individuals is moved on to others in a process called
socialization, coded to explicit knowledge through externalization, combined with other explicit
knowledge, and transformed to tacit knowledge in a process called internalization (Nonaka et al.,
2000). Nonaka (1994) calls this the socialization-externalization-combination-internalization process –
or SECI process in short. The actors in this process must share a context for knowledge creation.
Nonaka et al. (2000) use the concept of ba for a specific space and time of knowledge creation and
communication that also includes the social, historical and cultural context of interaction.
Knowledge boundaries that exist between individuals, functional groups, or organizations are
important in knowledge processing (Carlile, 2004). According to Carlile (2002; 2004) knowledge and
related boundaries between functions can be analyzed from three perspectives: syntactic, semantic
and pragmatic, as illustrated in Figure 1. Syntactic knowledge is readily transferred between
communicators, and semantic needs special care in communication in order to be understood
correctly. Pragmatic view takes into account the complex social environment in which knowledge is
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Ilari Kaarela
exchanged, developed and used. Actors can misunderstand not only the message, but also the goals
and effects of the interaction. (Carlile, 2004)
Figure 1: An integrated framework for managing knowledge across boundaries (Carlile, 2004)
Individuals’ and organizations’ actions at knowledge boundaries are limited and defined by boundary
objects (Carlile, 2004). These are tools that are used to process and communicate knowledge at
knowledge boundaries. Boundary objects have to be conscientiously generated for new boundaries
(Gkeredakis & Samiotis, 2006), and their types vary depending on the boundary type at hand (Carlile,
2002). Boundary objects are used in transforming the knowledge to create a collective solution
(Carlile, 2002).
2.2 Knowledge creation in interorganizational networks

Although knowledge can be created inside an organization, it is increasingly common that it is created
outside or at the boundaries with the help of external sources or partners (Chesbrough, 2003). In this
paper we incorporate the different sources under one concept from an unrelated context. Tui is a
concept developed by Bertol Brecht in his unfinished Tui-Novel in the mid-1930s, and refers to an
intellectual that sells knowledge as a commodity. Political undertones aside, we use this neologism as
an expression for an individual or organization that shares knowledge. Sharing knowledge is bound to
carry benefits, either financial or strategic, to both the receiver and the tui. Thus, shared knowledge is
always sold. Tuism is a cynical way of viewing open innovation – it leaves no room for altruistic
knowledge sharing communities.
Knowledge needs of companies vary greatly. Tui are multifarious: companies exploit end-user,
customer and supplier information and R&D partnerships, universities and research organizations,
consultants and patent databases in their innovation activities. Organizations must decide which
sources are followed continuously, and which focused on in some particular knowledge creation
processes.
Knowledge vision sets the direction of the dynamic process in which knowledge is created within
organizations (Nonaka et al., 2000). As in the case of closed knowledge creation process, open
knowledge creation process needs vision. As part of this vision, network contact portfolio sets the
balance of wide and deep ties of the organization (Simard & West, 2006). Relying on the current
business partners may result in trustworthy relationships, but also easily strengthens existing
viewpoints creating redundant knowledge.
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Ilari Kaarela
The bottleneck of information integration is between organizations. Carlile (2004) explained that the
integration of knowledge at a pragmatic knowledge boundary within an organization requires
negotiations, as changes to existing knowledge affect the operations of the interacting functions, and
raise other, political issues (Swan & Scarborough, 2005). These negotiations gain more importance in
interorganizational context.
3. Preliminary findings
We present exemplary findings from three case companies. Company A is a medium-sized company
supplying semiconductors to electronics industry, company B a large company in heavy machinery
industry, and company C a bakery company. The contextual factors affecting the openness of these
companies are notable but in the interviews of R&D managers of each company we noticed important
similarities. Selected statements from the interviews are presented in Table 1.
Table 1: Selected quotations from the interviews in the case companies
Current external exploration in the company

Quotations Clarifications
“We have tight and lasting contacts also outside our

Formal contacts to key business contacts are not enough to
customer base, but they are more personal; our
sustain a creative environment for business renewal.
employees interact with people from other organisations.”
Informal contacts as interorganizational links are

“These [personal] contacts may change, when for
troublesome, but they add to the understanding of the
example a professor at a university retires – in this sense
organization, and provide external information that extends
the continuity of such contacts may be uncertain.”
beyond the ad-hoc needs.
Company A
”We plan to further develop it [our contact network], but Even sustaining existing contact networks is costly and time-
we have to keep in mind that the wider the network, the consuming, but absolutely necessary. The quality of the
more expensive it is to maintain.” contacts is crucial.
"Our customers are often fierce competitors with each Issues of interorganizational trust easily arise in situations
other - we have to be very careful in keeping the where the number of players is relatively limited and the
confidential things confidential." appropriability of the innovation results is low.
Traditionally the R&D investment has been relatively low

"It is challenging to develop a new innovation culture, as
compared to turnover. Also, the R&D work has been
the industry is traditionally so conservative."
securely closed. Changes take time.
Customers are very conservative, and the life-cycle of the

“Even though customers inhibit innovation, they and their offerings is exceendigly long - they are wary of sudden
Company B needs do change – we have to be there in time to offer innovations and radical solutions. Eventually they will,
our new views to bring additional value to the customer.” however, require new solutions to their problems and
develop new needs.
Highly customized products are not cost-effective. Even the
"Our goal is that our products are standard that can be results of co-developed innovation results are almost never
sold to all potential customers." non-exclusive. This limits knowledge co-creation possibilities
with customers considerably.
”Deeper partnerships are becoming more and more

Organizations are wary of companies that interact closely
important, but we’ve had some conflicts in commercial
with their competitors. Trust issues and other conflicts of
partnerships, when we’ve co-operated with two
interest easily arise.
competing companies.”
Innovations are rarely patentable, and the tacit knowledge

"In the beginning of co-operative projects it is often
co-created in co-operative projects is impossible to price.
difficult to estimate the end results, their appropriability
Often only basic research is conducted in such projects,
and value."
whereas application ideas are kept strictly secret.
Company C
”There is open information exchange with colleague The bakery companies are traditionally relatively local, as is
companies, for example from Britain, that are in the same the competition. Thus, global co-operation in innovation
industry, but due to geographical distance cannot activities is less prone to trust issues than in other, more
compete in the same markets.” global industries.
“The lack of information is never the cause of trouble; the An excess of information flows into the company from the
problem lies in ingesting, absorbing and refining the mother company, science world and suppliers. It is difficult
information.” to recognize what is relevant.
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Ilari Kaarela
The companies discussed their external exploration underlining political issues. Company A
emphasized disagreements arising from partnering with competing companies simultaneously, and
trouble related to the short lifecycle of informal contacts to fellow organizations. Company B
complained that the conservativeness of customers limits the renewal of their innovation culture.
Customers also demand an unrealistic level exclusivity. Company C claimed that low appropriability of
innovations and trust issues result in basic research co-operation, whereas applicative research is
done in-house. They also named the same problem of competing partners as company A. It seems
that especially pragmatic boundary capabilities are relevant in interorganizational innovation activities.
All interviewees stress conflicts of interest and difficulties of agreeing on innovation results.
We propose that these challenges are related to pragmatic boundaries and insufficient ba between
the actors. The companies have repeatedly failed to find a common goal with their tui. The solutions
have been reactive rather than proactive. More attention should be paid in creating common meaning
and context.
4. Implications
Tui can enhance knowledge creation in organizations in multiple ways: by providing new inputs or
perspectives and facilitating co-operation with other tui. Knowledge asset enhancing tui are used to
widen the organizational base knowledge. Ba tui act as intermediaries between an organization and
other tui. They build common context, take part in defining the problem, connect problem solvers to
appropriate problems, help overcome uncertainty, and maintain online communities.
Tui can also take part in the actual SECI process in various ways: they can provide inputs for market
or technological foresight or specifications or act in direct research roles. Clearly, alternate modes of
interaction function optimally in different SECI phases, as their inputs and outputs vary. Roughly,
socialization and externalization require co-operative interaction, whereas combination and
internalization phases can be aided with acquisitive measures.
In summary, there are three types of tui, presented in Figure 2: ba tui, knowledge asset enhancing tui
and SECI tui. These classifications are not specific, as some sources can act in multiple tui roles even
during a single innovation process. Especially SECI tui offer quick variation of external sources in
knowledge creation processes; they are often activated to solve problems ad hoc. Ba tui can also be
exploited fairly quickly, but knowledge asset enhancing tui require time and consideration to function.
A rough tui classification is shown in Table 2.
Figure 2: External tui in knowledge creation processes (modified from Nonaka et al., 2000)
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Ilari Kaarela
It is important to recognize the conflicts of interest that naturally reside in interorganizational

relationships. As organizations never interact without an agenda, the pragmatic view of knowledge co-
creation is usually natural. However, organizational boundary types vary. Ultimately, the interplay of
ba (Nonaka et al., 2000), and the positive effects of a common meaning (Swan & Scarborough,
2005), will solve these problems.
Table 2: Different types of tui, their primary uses and the main problems related in utilizing them
Useful for Examples of Tui Boundary types Typical challenges
creating boundary objects, agreeing on the
intermediaries, online community
sustaining platforms of semantic, problem at hand,
Ba Tui providers, consultants, workshops,
interaction, increasing the pragmatic understanding each
conferences
number of contacts other's motives
informal and personal contacts to
increasing the available sustaining the relevant
universities and research
Knowledge asset enhancing Tui knowledge base, increasing pragmatic contacts, time and
organizations, purchasing licenses or
indirect absorptive capacity resource issues
patents from other companies
motivating participants,
receiving hidden messages customers and end-users in online semantic,
Tui for Socialising recognizing the
and mapping latent needs communities and direct contacts pragmatic
prevailing trends
systemizing knowledge into motivating the experts

research organizations, universities, syntactic,
Tui for Externalising documentable form for storage, of the tacit knowledge
suppliers, consultants pragmatic
reuse and sharing for documentation work
SECI Tui
reducing the risk of overlaps in studies, publications, (patent) recognizing the most
Tui for Combining research, finding synergy in databases, acquired patents and syntactic relevant pieces of
research work licenses information
syntactic, fitting theoretical

Tui for Internalising turning theory into practice consultants, workshops, conferences semantic, frameworks into own
pragmatic organizational needs
Hafkesbrink and Schroll (2010) suggest a framework of organizational capabilities related to open
innovation dividing them into organizational readiness, collaborative capabilities and absorptive
capabilities (Hafkesbrink & Schroll, 2010). They are conceptually comparable to Carlile’s (2004)
pragmatic, semantic and syntactic boundary capabilities, respectively, in interorganizational context.
Path dependencies constrain organizations’ access to external knowledge by both limiting absorptive
capacity and available set of viable contacts (Teece et al., 1997; Cohen & Levinthal, 1990). Familiar
contacts may result in a high level of redundancy of knowledge in existing network relationships
(Simard & West, 2006). Choi & Lee (2002) suggest that the internal knowledge strategy should be
aligned dynamically to fit the knowledge creation process at hand; whereas Birkinshaw et al. (2002)
see knowledge an organization handles as a contingency variable that predicts how the organization
is structured. It is reasonable to assume that also the external knowledge strategy, including the
selection of appropriate tui and modes of interaction, is shaped with respect to the nature of
knowledge and the related boundaries.
5. Conclusion
Companies make knowledge acquisition decisions based on availability of knowledge, the politics
inherently included in interorganizational dealings, and the nature of knowledge. Depending on the
problem, different tui in different knowledge creation process phases are activated. The unique
interorganizational boundary to each tui is considered regarding the ba and boundary objects
available. Co-creational openness is more likely to produce a common meaning for the information
exchange.
Actors process knowledge in their common context with suitable boundary objects. The set of network
contacts is adjusted to the nature of business and size of the company, as these define the
knowledge needs. The modes of interaction in these relations depend not only on process phase and
type of knowledge, but also on other contextual factors that create conflicts of interest between
organizations resulting in pragmatic boundaries.
References
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on a Production Floor. Organization Science, Vol. 14, No. 3, pp. 312-330.
Becker, M.C. (2001). Managing Dispersed Knowledge: Organizational Problems, Managerial Strategies, And
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757
The Enhancers and Challenges of Collaborative Service
Development Within Business Networks
Minna Kansola1 and Tiina Valjakka2
1
VTT Technical Research Centre of Finland, Tampere, Finland
2
VTT Technical Research Centre of Finland, Helsinki, Finland
minna.kansola@vtt.fi
tiina.valjakka@vtt.fi
Abstract: The purpose of this paper is to indicate the enhancers and challenges related to collaborative service
development within business networks. We discuss whether the enhancers and challenges the companies face
are similar to those found in previous research. The methodology used is a multiple case study of collaborative
service development projects. The empirical data is collected from two case-study companies that combine the
resources of multiple intra- and inter-organizational actors. These two companies represent large conglomerates
that have expanded through acquisitions. We contribute to the service innovation research by increasing
understanding of the nature of networked service development in B-to-B networks.
Keywords: service innovation, service development, B-to-B network
1. Introduction
New service development is considered a major competitive factor in the service industry (e.g.
Fitzsimmons et al., 1998). Nowadays, new ideas and innovations are developed in networks
consisting of employees, customers, collaborators and partners (Cooper and Edgett, 2007).
According to Syson and Perks (2004), organizations can reap value from applying a network
approach to new service development but the defining characteristics of services i.e. intangibility,
inseparability, perishability and heterogeneity, create difficulties in doing so. The concept of network
can be defined in several ways but the main components of a network are typically listed as in the
ARA model: actors, resources and activities (Hakansson 1982).
2. Literature review: Collaborative service development
2.1 Service development: A network perspective

Much research has focused on the development of tangible goods rather than intangible services
(Edvardsson & Olsson 1996). The same focus has been seen in network perspective studies (Hart
1995). Services are developed and consumed as a process with multiple actors and a network
approach is valuable in identifying appropriate relationships. According to Björk and Magnusson
(2009), the network connectivity and the quality of the innovation ideas have a clear interrelationship.
To increase the proportion of high-quality innovative ideas, there is a need for a certain degree of
interrelationship and the possibility of interaction should be supported and facilitated. Spender (1996)
has captured the interrelationship between communication and innovative ideas by stating that the
ideas are created by individuals but knowledge of individuals is a result of their interaction with others.
2.2 The enhancers of collaborative service development

One of the major enhancers of collaborative service development within networks is combined
resources (Biemans 1995). Combining resources across organizational boundaries makes it possible
to provide unique and differentiated services. Creating ongoing network relationships provides the
companies with competitive advantage which is difficult to imitate and reduces barriers to co-
operation (Syson and Perks 2004).
Other enhancers of collaborative service development are the possibilities to add value for the
customer, provide cost savings and flexibility. Collaborative service development within networks
enables companies to be one step ahead in supporting customer needs and developing new service
concepts (Hakanen and Koivisto 2010). New service development within a network has been shown
to reduce the risk and costs of product development (Biemans 1992). Shostack (1984) has stated that
the successful development of a service requires involvement from customers and from both the ‘front
office’ (customer contact) and the ‘back office’ (operations) of service companies since service
production and delivery are closely integrated.
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Minna Kansola and Tiina Valjakka
2.3 The challenges of collaborative service development

According to previous research, the major challenges in utilizing a network approach for service
development are taking the customer into consideration in the service innovation process and the lack
of systematic models and methods in organizing and managing new service development. Typically,
service development takes place in interaction with customers, and there are several actors in contact
with the customer. Therefore, one challenge is to get everyone within the network aware of the
essential customer information. (Everett and Borgatti, 2005). Another challenge is to actually utilize
customer information when developing new services. There remains a lack of collaboration models
and methods to be used in organizing and managing service development within networks (Hakanen
and Koivisto 2010).
In their research, Kelly & Storey (2000) identified a large number of barriers which inhibit new service
development success and grouped them under six main themes; information technology, lack of
development resources, lack of knowledge, skills, capabilities and standard development processes.
These enhancers and challenges mentioned above are gathered together and presented in table 1.
Table 1: The enhancers and challenges of collaborative service development within networks found
in previous research
Enhancers Challenges
+ combined resources - taking the customer into consideration
+ value added for the customer - the lack of systematic models and methods
+ reducing the risks - uneven data transmission within the network
+ reducing the costs - the lack of development resources
+ flexibility - the lack of knowledge, skills and capabilities
+ combinition of external and internal capabilities
+ new services developed within a network are
harder to imitate
3. Service development within networks in action
3.1 Research questions and methods

This study aims to indicate the enhancers and challenges related to collaborative service
development within networks. The research strategy employed in this paper is a qualitative multiple
case study. Two cases were selected to enable the study of service development projects that
combine the resources and knowledge of many intra- and inter-organizational units. We concentrated
on large conglomerates that have expanded through acquisitions. The main data collection method
was qualitative in-depth interviewing. Interviews were conducted within the companies and units
participating in the service development project studied.
3.2 Empirical findings

The empirical findings are based on two cases. Case company A and case company B are briefly
described in table 2.
Table 2: Company case-study descriptions
Case company A Case company B
Company Engineering consultancy offering Service integrator offering services in the energy
description services for several sectors, mainly and telecommunications industries and the
public sector manufacturing sector
Main services Technical design, consulting, expert Solutions for energy data management,
services production, and delivery of energy and data
Over the past 5 years, acquisitions and customer activities have transformed the organization, the
services provided and their development in the case-study companies. The development projects
have become more complex and require more collaboration between different units and technical
759
areas. Customers are now seen as the more important part of the service development process and
the companies have also established new development organizations.
The enhancers and challengers of collaborative service development are similar in case companies.
The main enhancers of the service development are nominated development organizations with a
wide variety of competencies inside the company and a clear customer orientation. Case company A
has nominated a three-person R&D organization to take responsibility for the service development
and it has adopted a software tool for managing new development ideas. Case company B has a new
development team to take responsibility for service development and also customer-specific teams
creating offerings for specific key customers. Both case-study companies are large companies which
imply a wide range of expertise inside the company to develop services. Both companies also have
motivated personnel to develop services. The third important enhancer of service development is
customer orientation. In case-study companies, development projects are carried out in co-operation
with the clients.
The main challenge to service development these companies face is that the designated
organizations are still quite modest. A few individuals cannot be responsible for the entire service
development. Other important challenges are related to time, information transfer and the tools and
methods to be used in service development. Development work still happens in many parts of the
organization without others knowing what is under development. The tools and methods to be used in
service development are also new and are not implemented at different levels of the organization. The
main enhancers and challenges to collaborative service development within company A are
represented in table 3 and within company B in table 4.
Table 3: The enhancers and challenges of collaborative service development within company A´s
network
+ nominated R&D organisation - R&D organisation is limited in size
+ basic process for innovation is in order - opearations to develop services not yet stable
+ good communicative organisation culture - time management
+ customer orientation - project work´s limitations and demands
+ determination to develop services - marketing outside expertise not in use
+ wide range of expertise inside the company - limited innovativeness dispite the wish to
+ good possibilities to join competencies eg. develop services
young and experts, different units - service development diverged at different
organisational levels
Table 4: The enhancers and challenges of collaborative service development within company B´s
network
+ big company - operations to develop services not yet stable
+ customer orientation - limited resources in developing new services
+ interaction within the company - small development team
+ wide range of expertise inside the company - internal development process does not function
+ will to develop services - releasing resources for development work
+ good customers who let the company to - excessive protection of own action
develop services in tandem with them - time management
- development work is not sufficiently integrated nor
transparent
4. Conclusions
In theory and practice the enhancers and challenges of collaborative service development are both
convergent and divergent. The convergent and important challenge is the data transfer and
knowledge sharing within the network. A convergent enhancer for one is combined resources.
Especially the wide range of expertise within the network was considered to be an important enhancer
in service development. So the knowledge, skills and capabilities within the network would appear to
be shifted from challenges into enhancers but the uneven transfer of the information seems to be the
barrier to utilizing them. The lack of systematic methods and models is not seen as a challenge in our
760
interviews as in previous research. The challenge is still their use and usability. Another divergence
between the previous research and our interviews is customer orientation. Taking customers into
consideration in the development process is seen as a clear enhancer in our interviews. This might be
due to the fact that clear customer orientation is rather new to the companies and at this stage they
are gaining results rapidly. In our interviews no interviewee mentioned either reducing risks and/or the
costs or the difficulty of imitation as enhancers of collaborative service development as in previous
research. These are maybe more implicit motivators for service development.
Both case-study companies have realized the importance of service development and the benefits of
network in the development process. The main enhancers for service development within networks
are combined resources and taking customers into account. In these case-study companies, the
organization is the network since they are both large and diversified conglomerates. At the moment,
designated R&D organizations developing processes for service development are great enhancers
but the methods are not yet stable. The main challenge, in addition to the use of methods and
models, is uneven transfer of the information within the network.
References
Biemans, W. G. (1995) ‘Internal and external networks in product development: a case for integration’, in Bruce,
M. and Biemans, W. (Eds) Product Development Meeting in Challenge of the Design Marketing Interface,
Chichester: John Wiley.
Björk, J. & Magnusson, M. (2009) ‘Where Do Good Ideas Come From? Exploring the Influence of Network
Connectivity on Innovation Idea Quality’, Journal of product development and management, Vol. 26, pp.
662-670.
Cooper, R. G. and Edgett, S. J. (2007) Generating Breakthrough New Product Ideas: Feeding the Innovation
Funnel. Ancaster, ON: Product Development Institute.
Edvardsson, B. and Olsson, J. (1996) ‘Key concepts for new service development’, The Services Industries
Journal, Vol. 16, No. 2, pp. 140-164.
Everett, M. G. and Borgatti, S. P. (2005) ‘The Centrality of Groups and Classes’, Journal of Mathematical
Sociology, Vol. 23, No. 3, pp. 181-201.
Fitzsimmons, J. A., Noh, J. & Thies, E. (1998) “Purchasing business services”, The Journal of Business &
Industrial Marketing, Vol. 13 No. 4, pp. 370-380.
Hakanen, T. & Koivisto, T. (2010). ’Vuorovaikutteinen palvelukehitys verkostossa’ in Hyötyläinen, R. & Nuutinen,
M. (Ed) Mahdollisuuksien kenttä – Palveluliiketoiminta ja vuorovaikutteinen johtaminen, Helsinki:
Teknologiateollisuus ry. 243 p.
Hakansson, H. (Ed.) (1982) International Marketing and Purchasing of Industrial Goods: An Interaction Approach,
Hart, S. (1995) ‘Where we’ve been and where we’re going in new product development research’, in Bruce, M.
and Biemans, W. (Eds) Product Development: Meeting the Challenge of the Design-Marketing Interface,
Kelly, D. & Storey, C. (2000) ‘New Service development’, International Journal of Service Industry Management,
Vol. 11 No. 1, pp.45-62.
Shostack, G. L. (1984) ‘Designing services that deliver’, Harvard Business Review. Vol. 62 No. 1, pp. 133-139.
Spender, J. C. (1996) ‘Making Knowledge the Basis of a Dynamic Theory of the Firm’, Strategic Management
Journal, Vol. 17, pp. 45-62. (Special Issue).
Syson, F. & Perks, H. (2004) ‘New service development: a network perspective’, Journal of Services Marketing,
Vol. 18, No. 4, pp. 255-266.
761
Knowledge-Based Spatial Interventions for Economic
Competitiveness: The Role of High-Tech Innovation
Clusters in Regional Development
Charalampos Koutsoupakis
Delft University of Technology, The Netherlands
michael_aggelos@hotmail.com
Abstract: Innovation and knowledge-based development have become interconnected in the last decades, due
to the globalizing economy and the developments in the information and communication technologies (ICT).
High-tech clusters have appeared on the outskirts of cities or elsewhere promoting innovation and supporting
cooperation between research and development (R&D) companies and educational institutions. Moreover,
incubators offer assistance to start-up firms providing space and the means to enter the entrepreneurial network.
Planning for clusters is not a simple task, as there is a variety of requirements to be developed. The success
recipe for a dynamic high-tech centre is a mix of education, industrial research, entrepreneurship and availability
of risk capital. Recent strategies for high-tech clusters reveal diverse course of actions depending on the specific
characteristics of the region and emphasizing on the need for specialization of the technology focus.
Keywords: competitiveness; knowledge economy, high-tech clusters
1. Introduction
The interest on the contribution of technology in the development of cities began in the early 1980s,
with investigations on economic geography on industrial districts. These complexes revealed a
number of parameters, with technological innovation being a fixed reference point, in the planning of
regions and with rapid progress both in the field of theory (regional innovation systems, innovation
regions, smart cities) and urban and regional policy (Komninos, 2006). This paper explores these
developments which have taken the form of knowledge clusters; defined areas to host research-
based and hi-tech companies. Nevertheless, such developments are not guaranteed to succeed, as a
complex mix of requirements has to be present.
What are the spatial and functional prerequisites for a high-tech cluster to be attractive both for
companies and people and succeed in its goal for economic improvement? The method used to reach
conclusions regarding this matter is literature review and the objective is to form a working tool, based
on certain criteria, for future projects. Journals used refer to case studies, thus pointing to tangible
conclusions used as a basis. Firstly, the relationship between innovation and knowledge-based
development is described, followed by reference to the importance of innovation and high technology.
Afterwards, the spatial characteristics of high-tech clusters are examined before analyzing some
aspects of successful examples, indicating relative research methods and finally reaching results.
2. Innovation and knowledge-based development
The way the more recent advances in ICT are impacting on the contemporary city is not entirely
evident. However, it is clear that they have modified the layout of modern economies. The importance
of the network is highlighted in the core of these advancements, as enterprises and businesses aim
towards becoming part of it. Values regarded as key characteristics for their success are the capacity
to develop, manage and transfer knowledge and the cooperation with other businesses.
Strategies supporting knowledge-based industries are becoming popular as it is believed they

“contribute to regional economic success by providing rapid employment growth, relatively high-
paying jobs, multiplier effects, and diversification of the local economy through new firm creation and
startup activities” (Mayer 2007, p.33). Furthermore, institutions that promote knowledge, as well as
adequate number of skilled people are critical. The outcome for the cities is the constant increase in
regional inequality, since they struggle to be linked to international and global networks to stay
innovative (Anttiroiko 2004). As Knight (1995) pinpoints, the actors involved for strategies towards
knowledge-based development have to take advantage of the city’s own resources, in order to build
on existing strengths and opportunities. The geographical distribution of high-level knowledge
resources will play an important role in the future developing cities.
In this technological era where fast information transfer, distance work and network-based
organizations are possible, there is the phenomenon that ‘knowledge intensive firms and jobs seem to
762
concentrate in certain geographical areas’ (Anttiroiko 2004, p.292). He mentions that sectors with
R&D focus have a stronger tendency to agglomerate than others. It is clear that this phenomenon
takes place in core metropolitan regions as there are more favorable conditions compared to more
peripheral areas. Such conditions include the availability of skilled workers, the proximity to the market
and the need for face-to-face contacts and collaboration in teams (Simmie 1998).
2.1 The importance of high technology in innovation

Key element for the success of modern economies is innovation, particularly technological innovation
that determines the degree of competitiveness and productivity. It is essential to recognize that high-
technology businesses play an important role on the growth of regional economies, since it works as
an indicator of the process of growth in a knowledge-based economy. Nonetheless, some clarification
is needed regarding what sectors these high-technology industries cover. As Anttiroiko (2004, p.293)
outlines, they refer to “leading edge technologies requiring high R&D input and a high level of
expertise” such as pharmaceuticals, electronics, biotechnology and aerospace.
One aspect of innovation management is the clustering of the business, production research and
education at one physical location, in order to support relationships between their interests taking
advantage of governmental incentives. Except providing space and infrastructure, the concept also
includes centers for housing business incubation and facilities for training and exhibitions (Nur 2005).
The phenomenon of clustering was applied in many regions, as it is a competent bet for economic
success enhancing stability and driving growth. Their number continues to grow since the concept is
“adopted as an important economic development tool and as an integrated part from the national or
regional innovation system” (Nur 2005, p.298).
3. High-tech clusters and general spatial features
High-tech clusters are defined as industrial places that bring together institutions, labor, and finance;
they are developed by the private sector or public private partnership and are supported by
governments. These areas are occupied mostly by companies that produce IT based products as well
as universities and research institutes (Nur 2005, Anttiroiko 2004) However, they are expensive
projects and their success depends on availability of different set of factors from local to national level.
Nonetheless, they are considered a strong tool in the international and national competition between
cities and regions.
Most attempts to categorize high-tech concentrations (Anttiroiko 2004, Castells & Hall 1994,
Komninos 2006) are focusing on the size of the development and the existence of specific facilities.
Many names were suggested, such as science/research/technology park, technopole/technopolis or
innovation centre/zone, incubators etc. Although there are some differences, these terms are often
used as equal, while such concentrations often take the form of a campus-like park. The sites about
to host such mega-projects should fulfill some criteria that can be summarized as follows.
Firstly, the location is significant for the cluster. The proximity to major transportation infrastructures
such as airports, highways and public transportation are elements for success. The majority of high-
tech clusters are situated within cities or outside at a short distance. Non-urban clusters also have
specific focus of research such as agro-food and crop technologies. (Anttiroiko 2004)
Secondly, the knowledge resources play an important role as they promote information networks, as
well as a quality workforce (Nur 2005, Komninos 2006, Anttiroiko 2004). Technology transfer is
necessary so as to enhance the relationship between R&D. These resources are formed by public
and private research labs, technological incubators, science parks. A significant number of clusters
are located within a university campus or on land belonging to a university. Nevertheless as Mayer
(2007, p.49) describes, “(…) the role of the university is varied and ranges from strong proactive
engagement to weak and primarily reactive involvement”.
Furthermore, business infrastructure such as industrial associations, chambers of commerce,

development agencies, can sustain this kind of background. Financial opportunities and incentives
like governmental funding for training/research and tax exemptions respectively are included.
Additionally, business incubation is used as a tool to accelerate the growth and success of
entrepreneurial companies (Nur 2005, Komninos 2006, Anttiroiko 2004). It provides start-up firms with
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the expertise, management assistance, access to financing as well as office services and equipment.
The goal is to produce successful firms that can stand alone.
Moreover, human resources like skilled labor, scientists, technicians from universities, are also
needed. For this class to be attracted a quality of services is expected to be provided; for instance
high quality residential areas, recreational and educational facilities (Nur 2005, Anttiroiko 2004).
Lastly, the need for attractiveness should be met by a reduced cost of doing business as well as by a
picturesque landscape and basic facilities. The ambience can involve a variety of scenes combined
with stimulating cultural activities in the surroundings that entertain a well-educated workforce (Nur
2005, Anttiroiko 2004). Environmental quality is significant for the cluster’s image and its
attractiveness.
3.1 Successful high-tech concentrations

As Castells and Hall (1994) point out, there is no formula of being the next Silicon Valley. Its success
is based on “the build-up of relationships, informal norms of mutual trust and cooperation, the
exchange of information among entrepreneurs and scientists and the creation of a consensus toward
the goal of creating a technopolis.” However some requirements for having a sound basis are
(Anttiroiko 2004; Castells & Hall 1994; Nur 2005):
Land, infrastructure
Capital formation, investments
Innovation, entrepreneurship and technological change
Human resources
Institutional context, support systems
Nevertheless, the importance of the location should not be overlooked. It should be able to provide a
quality of living environment as well as the ingredients for knowledge work. To this end, the spatial
features, mentioned above, can be used as an evaluation tool pointing to strategic locations to situate
high-tech clusters, while case studies offer the opportunity to identify elements missing from an area.
The success of a high-tech concentration can be measured by indicators such as the number of
awards received, the patents it obtains, the extent of commercialization of its products as well as the
range and types of technology-based industries it attracts. It should also be mentioned that two
determinants for the growth of the cluster is the technological and institutional environment as well as
the industrial specialization of the firms. The latter is suggested to coincide with the existing thematic,
which can be identified by mapping high-level knowledge resources through field studies.
4. Conclusions
The advancements in ICT and the formation of the global economy gave way to the creation of high-
tech centers. Major objective is to stimulate innovation and generate economic benefits by assisting
knowledge-based firms and knowledge-intensive activities. Types may vary from the high density of
an urban setting (knowledge parks, science cities) to the smaller research parks and finally to the
microenvironments as small-scale business incubators. Specific characteristics recognized include
location criteria, scientific, technological, business and physical infrastructure as well as quality of
services, human resources and the need for attractiveness.
Moreover the development should be supported by an existing knowledge and industrial base that will
be able to provide the means for a successful high tech development while the specialization of the
technology is regarded crucial. The above mentioned characteristics can constitute evaluation criteria
that together with the mapping of firms’ specialization indicate areas for further research. Lastly,
planning for clusters, though a complex process, has to take into consideration the fact that it is an
expensive project, looking on the long-term perspective, something which does not ensure success.
References
Anttiroiko, A.-V. (2004) Editorial: global competition of high-tech centres. Int. J. Technology Management, 28,
289-323.
Castells, M. & Hall, P. G. (1994) Technopoles of the world : the making of twenty-first-century industrial
complexes, London, Routledge.
764
Knight, R. V. (1995) Knowledge-based development: policy and planning implications for cities. Urban studies,
32, 225-260.
Komninos, N. (2006) The architecture of intelligent cities: Integrating human, collective and artificial intelligence to
enhance knowledge and innovation. 2nd International Conference on Intelligent Environments. Athens:
Institution of Engineering and Technology.
Mayer, H. (2007) What is the role of the university in creating a high-technology region? Journal of Urban
Technology, 14, 33-58.
Nur, Y. (2005) International cooperation in high-tech clusters development. in: COMMITTEE, U.-W. P. S., ed.
Workshop on Science City Governance: Science City Development and Management, 2005 Daejeon
Metropolitan City, Korea. 297-310.
Simmie, J. (1998) Innovation in the hi-tech knowledge economy of a core metropolitan region. Journal of Urban
Technology, 5, 79-98.
765
Impact of Knowledge Management on Innovation
İbrahim Pınar1 and Burcu Kör2
1
İstanbul University, Turkey
2
Boğaziçi University, Istanbul, Turkey
ipinar@istanbul.edu.tr
burcu.kor@boun.edu.tr
Abstract: Effective knowledge management and innovative outcomes are both the strongest sources of
competencies and competitiveness for organizations. Knowledge management plays the role of capturing
organizations’ collective expertise, and it plays an important role in enhancing innovation involvement of
organizational members. This study examines the relationship between effective knowledge management
processes and organizational innovation performance. Furthermore, it tries to set a model figuring out the
mediating effects of organizational innovativeness between knowledge management processes and innovation
performance. The major research method followed in this study is a comprehensive literature review,
supplemented by analysis of data which was collected through surveys. The results of the research show that
knowledge management processes are positively related to innovation performance. Additionally, the results
provide evidence that innovativeness plays a mediating role between knowledge management and innovation
performance.
Keywords: innovation, knowledge management application process, knowledge management acquisition

process
1. Introduction
Today’s business environment is faced with a rapid technological change and an extensive
competitive pressure. In recent years, organizations need to manage, generate and modify
knowledge in order to maintain their capability of innovation. Knowledge management (KM)
processes has been considered an effective and efficient means of successful innovation (Lin & Lee,
2005). In addition, Plessis (2007) indicates that KM is supporting innovations by the help of
generating new ideas and exploitation of the organization’s thinking power. Additionally, organizations
gain competitive advantage through conceptualizing and managing process innovation (Nonaka
&Takeuchi, 1995). More and more studies have paid attention to the relationship between KM and
innovation (Li et al., 2009; Chen & Huang, 2009; Huang & Li, 2009).
2. Research background and hypothesıs
2.1 KM and innovation

According to Chen et al. (2004), innovation refers to the introduction of a new combination of the
essential factors of production into the production system. In this study, organizational innovation is
considered to have two dimensions which are administrative and technical innovation.
KM capacity is critical factor for retaining innovation. Knowledge acquisition and application processes
are dimensions of KM capacity construct (Gold et al, 2001). Moreover, administrative and technical
innovations require concerted effort and experience in recognizing and capturing new knowledge
(Drucker, 1993). Thus, the following hypotheses are formulated:
H1a: KM acquisition process will be positively related to administrative innovation.
H1b: KM acquisition process will be positively related to technical innovation.
New product development and innovation require the application and combination of specialized
knowledge inputs from many different areas (Chen & Huang, 2009). Hence, the following hypotheses
are formulated:
H1c: KM application process will be positively related to administrative innovation.
H1d: KM application process will be positively related to technical innovation.
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İbrahim Pınar and Burcu Kör
2.2 Innovativeness
In this study, innovativeness is considered to have three dimensions which are product-market,
process and behavioral innovativeness.
Firms’ innovativeness is a basic cultural feature to recognize the importance of innovation in the
organizational strategy and it acts as predecessor of the innovation effort (Leticia & Ignacio, 2007).
Accordingly, the following hypotheses are proposed:
H2a: Process innovativeness will be positively related to administrative innovation.
H2b: Behavioral innovativeness will be positively related to administrative innovation.
H2c: Product-market innovativeness will be positively related to administrative innovation.
H2d: Process innovativeness will be positively related to technical innovation.
H2e: Behavioral innovativeness will be positively related to technical innovation.
H2f: Product-market innovativeness will be positively related to technical innovation.
Knowledge management processes are positively related to the innovativeness (Tan et al., 2008).
Therefore, the following hypotheses are offered:
H3a: KM acquisition process will be positively related to process innovativeness.
H3b: KM acquisition process will be positively related to behavioral innovativeness.
H3c: KM acquisition process will be positively related to product-market innovativeness.
H3d: KM application process will be positively related to process innovativeness.
H3e: KM application process will be positively related to behavioral innovativeness.
H3f: KM application process will be positively related to product-market innovativeness.
This study also argues that innovativeness play a mediating role in the relationship between
knowledge management processes and innovation performance. This study, therefore, proposes the
following hypothesis:
H4: Innovativeness mediates the relationship between KM processes and innovation performance.
3. Research methodologies

This study employs a questionnaire survey approach to collect data to test inferred hypotheses
empirically. Variables in the questionnaire include background information, knowledge management
capacity, innovativeness, and innovation performance. In the study, five-point Likert scale (1 totally
disagree to 5 totally agree) was used. The firms in the study were chosen from the companies listed in
Istanbul Chamber of Industry’s top 500 industrial enterprises, service and high-tech sectors in Turkey.
113 questionnaires were returned, 92 were complete. The usable response rate was 82%.
3.2 Measures
KM capacity is assessed with twelve items adapted from the concept of Gold et al. (2001), Lin and
Lee (2005), Chen and Huang (2009) and Huang and Li (2009). In this study, KM processes is
measured as two constructs including knowledge acquisition and application. This study examines the
dimensionality of KM, innovation and innovativeness measures by conducting principal components
of factor analysis with varimax rotation. For the sample consisting of 92 observations, minimum
acceptable factor loading is 0.60. The results support two factors of KM with eigenvalues greater than
1 and explain 62.88% of the variance. The Cronbach's alpha coefficients in parentheses, which are
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indicating the internal consistency reliability of the measures in the factors, are both above the
suggested value of 0.70 (Hair et al., 1998). The KM application process includes six items (α=0.897)
and KM acquisition process includes four items (α=0.718).
Innovation performance is measured using two constructs with a total of seven items: administrative
innovation and technical innovation, derived from those proposed by Huang and Li (2009) and Lin and
Lee (2005). The results support two factors of innovation performance that have eigenvalues greater
than 1 and explain 85.33% of the variance. The administrative factor includes three items (α=0.945)
and the technical factor consists of three items (α=0.866).
Dimensions of innovativeness are adapted from Wang and Ahmed (2004), which are process,
behavioral and product-market innovativeness. The results support three factors of innovativeness
that have eigenvalues greater than 1 and explain 69.23% of the variance. Process innovativeness
includes four items (α=0.771), market-product innovativeness includes five items (α=0.864) and
behavior innovativeness includes six factors (α=0.918).
All measures of reliability are above recommended minimum standard of 0.70. Thus, we conclude that
the measures utilize in the study demonstrate internal consistency.
3.3 Analysis and results

This study attempts to understand the relationships among knowledge management capacity,
organizational innovativeness and innovation performance. Table A1 displays the means, standard
deviations of variables and their correlations.
The effects KM capacity on the innovation performance are both significant at the p<0.01 level as
shown in Table 1 (R2 =0.484, and 0.186). Hence, Hypotheses 1a to 1d are supported.
Table 1: Regression analysis of the effects KM capacity on the innovation performance
Adm.Inn. Tech.Inn.
KMApplication .647** .315**
KMAcquisition .258** .295**
R2 .484 .186
F 41.696** 10.151**
n=92(two-tailed test). Standardized coefficients are reported. *p<0.05, **p<0.01.
The effects of organizational innovativeness on the innovation performance are both significant at the
p<0.01 level as shown in Table 2 (R2 =0.384, and 0.303). Therefore, Hypotheses 2a to 2f are
supported.
Table 2: Results of regression analysis of the effects innovativeness on the innovation performance
Adm.Inn. Tech.Inn.
Process Inn. .428** .322**

Behavioral Inn. .342** .284**
Product-Market Inn. .290** .344**
R2 .384 .303
F 18.315** 12.745**
The effects of knowledge management processes on the dimensions of organizational

innovativeness, are both significant at the p<0.01 level as shown in Table 3 (R2 =0.227, 0.109, and
0.261, respectively). Coefficients of KM application process are positive and significant for process
(p<0.01), behavioral (p<0.01) and product-market innovativeness (p<0.05). Moreover, coefficients of
KM acquisition process are positive and significant for behavioral (p<0.01) and product-market
innovativeness (p<0.05); however, coefficients of KM acquisition process are not significant for
process innovativeness. Accordingly, the results support Hypotheses 3b to 3f, and Hypothesis 3a is
rejected.
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Table 3: Results of regression analysis of the effects KM processes on the innovativeness

ProcessInn. Product-Mar.Inn. Beh.Inn.
KMApp .450** .242* .425**
KMAcq .158 .226* .284**
R2 .227 .109 .261
F 13.054** 5.463** 15.688**
This study follows Baron and Kenny (1986) procedure to analyze the mediating effect of
organizational innovativeness between KM capacity and innovation performance. As shown in Table
4, organizational innovativeness significantly reduces the effects of KM capacity factors on the
dependent variable, most of them to non-significance. Thus, organizational innovativeness plays a
mediating role between KM capacity and innovation performance, supporting the mediation effect in
Hypothesis 4.
Table 4: Results of regression analysis for mediating effect
Adm.Inn. Tech.Inn.
KMApp. .506** -.018
KMAcq. .180* .096
ProcessInn. .173 .315**
BehavioralInn. .077 .265*
Product-Market.Inn. .127 .327**
R2 .510 .312
F 17.885** 7.793**
4. Conclusions
In the study, a conceptual model is developed for examining the role of innovativeness in KM capacity
and innovation performance. The results of this study indicate that KM capacity is positively related to
organizational innovativeness and innovation performance. The findings are consistent with the
researches by Huang and Li (2009) and Chen and Huang (2009), which indicate that KM capacity is
important source of innovation performance. Furthermore, the findings show support for the mediating
effect of organizational innovativeness between KM capacity and innovation performance.
According to Darroch (2005), KM processes would positively affect innovation. Through managing
knowledge effectively, organizations can promote not only the development of organizational
innovativeness, but also enhancing the innovation performance. Therefore, KM processes has been
considered an effective and efficient means of successful innovation.
There are also some limitations in this study, since only two types of KM capabilities and innovation
performance, and three types of innovativeness are examined. In future studies, the other types can
be studied. Moreover, individuals’ responses are assumed as indicators of KM capacity,
innovativeness and innovation performance of organizations. To alleviate this limitation, the samples
have been chosen from executives and employees who are familiar with the topic to complete the
questionnaire. In addition, the study has been administered only in a Turkish context. A comparative
study may be recommended to researchers who wish to study across different cultures to eliminate
potential cultural limitation. Furthermore, an increased sample size and wide range of sectors may
have benefits such a research.
References
Baron R.M. & Kenny D.A. (1986). The moderator–mediator variable distinction in social psychological research:
conceptual, strategic, and statistical considerations. J Pers Soc Psychol, 51(6).
Chen, C.J. & Huang, J.W. (2009). Strategic human resource practices and innovation performance-The
mediating role of knowledge management capacity. Journal of Business Research, 62, 104–114.
Chen, J., Zhaohui, Z .& Xie, H.Y. (2004). Measuring intellectual capital. Journal of Intellectual Capital, 5 (1), 195-
212.
Darroch, J. (2005). Knowledge management, innovation, and firm performance. Journal of Knowledge
Management, 9( 3), 101-115.
Drucker, P. (1993). Post-Capitalist Society. Butterworth-Heineman, New York, NY.
769
Gold, A.H., Malhotra, A. & Segars, A.H. (2001). Knowledge management: an organizational capabilities
perspective. Journal of Management Information Systems, 18(1), 185-214.
Hair Jr JF, Anderson RE, Tatham RC & Black WC. Multivariate Data Analysis. Upper Saddle River, NJ: Prentice-
Hall; 1998.
Huang, J.W.& Li, Y. H. (2009). The mediating effect of knowledge management on social interaction and
innovation performance. International Journal of Manpower, 30(3), 285 – 301.
Leticia, M. & Ignacio, L. (2007). Innovativeness and organizational innovation in total quality oriented firms: The
moderating role of market turbulence. Technovation, 27(9), 514-532.
Li, Y.& Liu,X. , Wang, L., Li M. & Guo H. (2009). How Entrepreneurial Orientation Moderates the Effects of
Knowledge Management on Innovation. Systems Research and Behavioral Science Syst. Res., 26, 645-
660.
Lin, H.&Lee G. (2005). Impact of organizational learning and knowledge management factors on e-business
adoption. Management Decision, 43(2), 171-188.
Nonaka, I. & Takeuchi, H. (1995). The Knowledge Creating Company. Oxford University Press, Oxford.
Plessis, M. (2007). The role of knowledge management in innovation. Journal of Knowledge Management, 11(4),
20 – 29.
Tan, I., Xin, Y., Ojanen, V. & Chai, K. (2008). Exploring the Relationship between Innovativeness and the Stages
of Knowledge Management in Technology and Engineering Consultancies in Singapore. Proceedings of the
2008 IEEE ICMIT, 917-922
Wang, C.L., & Ahmed, P.K. (2004). The development and validation of the organisational innovativeness
construct using confirmatory factor analysis. European Journal of Innovation Management, 7(4), 303-313.
5. Appendix 1
Table A1: Means, standard deviations, and correlations of research dimensions.
M SD 1 2 3 4 5 6 7
KMAp 3.46 .78
KMAc 3.51 .61 .54*
BeInn 3.65 .82 .66* .58*
M-P.In 3.48 .78 .57* .47* .67*
Pr.Inn. 3.53 .71 .66* .46* .67* .60*
A.Inn 3.33 .93 .78* .55* .65* .63* .71*
T.Inn 3.71 .75 .64* .51* .63* .65* .70* .71*
n=92. *Correlation is significant at the 0.01 level (2-tailed).
770
Entrepreneurial Learning: Practice as a Source for
Learning and Business Success
Henk Schout and Saskia Harkema
The Hague University of Applied Sciences, The Netherlands
h.j.schout@hhs.nl
s.j.m.harkema@hhs.nl
Abstract: Entrepreneurship stands high on the political European agenda. Its meaning is twofold:
entrepreneurship as a career opportunity, or as a competency. Following the statement made in Europe, national
governments have defined an urgent need to stimulate entrepreneurial talent and motivate students to become
entrepreneurs to start and develop new businesses that will generate employment and create economic and
social wealth. Developing entrepreneurship education and training initiatives is one way of helping to achieve this
goal. According to the European commission (2008), the teaching of entrepreneurship is not yet sufficiently
integrated in higher education institutions' curricula. So the real challenge is to build campus-wide, inter-
disciplinary approaches, making entrepreneurship education accessible to all students. At The Hague University
of Applied Sciences we develop programs to stimulate entrepreneurship. The question is: to what extent do these
programs contribute towards the development of entrepreneurial competencies, in other words: can
entrepreneurship be taught? And furthermore, to what extent do the programs contribute to the success of new
start-ups by students that followed our programs? Over the last five years time more than 200 students have
taken part in three different electives developed in our centre. Some of the findings of our research are that
students indeed develop entrepreneurial competencies (Harkema & Schout, 2008). This can partly be attributed
to the pedagogical concept underlying the programs. The next step is to determine whether the acquired
competencies developed in the program among students that have set up their own business, help them in their
business and are accountable for their business success. In this paper we report on the preliminary findings of
our research among a sample group of alumni that have followed different programs and set up their own
business.
Keywords: entrepreneurship, education, practice, business success
1. Innovation and entrepreneurship

Since the Lisbon Council, entrepreneurship has taken centre stage in Europe. In line with these
developments the European Commission (2005) adopted the following definition of entrepreneurship:
‘Entrepreneurship is the ability to put ideas into action. It encompasses creativity, innovation and risk
taking, as well as the ability to plan and conduct projects to realize objectives’.
In a more recent report the European Commission (2010) is targeting priorities of smart, sustainable
and inclusive growth. The Commission is putting forward seven flagship initiatives to catalyse
progress under each priority theme. Among these are the "Innovation Union" and “Youth on the Move”
to improve framework conditions for research and innovation so as to ensure that innovative ideas
can be turned into products and services that create growth and jobs and to enhance the performance
of education systems and to facilitate the entry of young people to the labour market.
With these priorities in mind it is becomes apparent that national governments are investing in
entrepreneurial behaviour and paying attention to stimulating innovation. In a survey carried out by
the Dutch Ministry of Economic Affairs a picture emerges of The Netherlands as lagging behind when
it comes to starting a company, whereby start-ups of students coming directly from an educational
institution score even worse (Van der Sijde et al, 2008).
In their turn educational institutes should stimulate, rather than constrain entrepreneurial and
innovative behaviour. It is a challenge to change the self-concept and self-esteem of students
(Heikkilä, 2006) as well as their behaviour and give them tools to have a fair chance of becoming an
entrepreneur or an intrapreneur at an existing firm.
The Centre for Innovation & Entrepreneurship of The Hague University of Applied Sciences, has
taken up this challenge. In our view the need for continuous change and renewal (innovation) as the
central issue in entrepreneurship does not only relate to timely deployment of new technological
applications, it also requires rethinking and reworking internal processes – the innovation of strategy,
policy, marketing and distribution, the organisation and its management. Consequently,
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entrepreneurship and innovation are not regarded as the exclusive responsibility of the independent
entrepreneur. Equal demands need to be met by individual employees in larger organisations.
On the assumption that entrepreneurship is not per definition an innate characteristic, but that it can
be taught, the Centre for Innovation & Entrepreneurship has developed various elective courses
aimed at developing entrepreneurial and innovative competencies. Competencies are defined as a
combination of knowledge, problem solving skills and individual attributes deployed in a situational
context. The attributes and skills refer to the capability to deal with problems and solve them and in
the process find solutions to achieve the defined objectives. Success in this sense is the ability to
meet one’s own objectives. As to the students also a number of steps were taken. Participating in the
entrepreneurship electives requires motivation on behalf of the student to become active as an
innovative entrepreneur. The decision to enrol has to fit with the student’s personal development plan
and be additional to his major programme. To this end a specially devised psychological test and an
intake interview are held to identify problem areas and help set targets.
In setting up the electives we adopt a learner-centred approach. According to McCombs (1997) the
focus in a learner-centred approach is on individual learners' experiences, perspectives, backgrounds,
talents, interests, capacities, and needs. She defines learner-centred, from a research-based
perspective, as a foundation for clarifying what is needed to create positive learning contexts to
increase the likelihood that more students will experience success.
For our students we create a learning environment that facilitates the exploration of meaning.
Students should be given frequent opportunities to confront new information and experiences in their
search for meaning and understanding. Those opportunities should not be provided in a passive
receptive form by merely giving information. New meaning and understanding should be acquired
through a process of personal discovery. These methods should be tuned to the individual and
adapted to the learner’s own style and pace of learning.
2. Research design and preliminary findings
Until recently, there was a notable lack of reliable data on the effects of education on innovative
entrepreneurial behaviour. Therefore, we started longitudinal research to assess more precisely
whether effects can be measured on the development of individual entrepreneurial competencies that
can be attributed to the pedagogical approach or other aspects related to the programme.
Our empirical research is both quantitative and qualitative. Students take a psychological test at the
start of their first elective (feasibility study) and one on completion of the second elective (business
plan). These tests are specially developed for our Centre in collaboration with locally based
psychological consultant Kuiper & Partners. The tests focus on five personal characteristics:
Interpersonal sensitivity
Ability to influence
Perseverance
Sense of performance
Self-confidence
These full-day tests measure a vast amount of individual character traits such as self-esteem,
sincerity, dominance, vulnerability and fear.
In addition to these tests, semi-structured interviews are held to elicit student perceptions on the
educational method and pedagogical approach and perceptions on their own development in personal
ambition and commitment to create added value.
Four small groups of students were included in the research (n=51) and took the psychological tests
before and after both their elective programmes. We measured the variance of the individual scores
on the five personal characteristics (see Figure 1).
Four out of five characteristics show an increase in scores. Self-confidence and interpersonal
sensitivity show a significant improvement as does the ability to influence. It is noteworthy that
students show a slight decrease in perseverance.
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Variance in personal com petencies before and after Electives I & E
interpersonal sensitivity
ability to influence
perseverence
sense of performance
self-confidence
-1,00 0,00 1,00 2,00 3,00 4,00 5,00 6,00 7,00 8,00
score
Figure 1: Variance in personal competencies before and after two electives innovation and
entrepreneurship
Self-confidence is perceived as the most important characteristic by 42% of the students in the
research, whereas 30% of the respondents indicate that perseverance is most important. Students
perceive the characteristic ability to influence as least important.
Furthermore, the student interviews indicate that from the means of support they get personal
coaching is appreciated most at 83% and that results are successful at 72%. In order to improve our
pedagogical model of student-centred learning using a constructivist approach, we analysed the
psychological test scores trying to elicit indicators of entrepreneurship ambition.
2
In a single stepwise regression analysis (PIN=.05, POUT=.10, Sig.= .095, Adj. R = .587) we found
that self-discipline, vulnerability, self-esteem and fear are the most significant positive predictors of
entrepreneurial ambition. On the other hand a sense of depression appears to be the most negative
indicator of entrepreneurial ambition. Striking as a second negative indicator is a sense of sincerity
(see Fig. 2).
Indicators of Entrepreneurial Ambition
self-esteem
complacency
injustice
authority
extravercy
manipulative
self-discipline
sincerity
energy
dominance
socialibility
cordiality
vulnerability
depression
fear
-0,40 -0,20 0,00 0,20 0,40 0,60 0,80

Stand. Beta coefficients
Figure 2: Indicators of entrepreneurial ambition
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Based on the outcome of our research, we suggest that coaching students in the development of
these positive indicators of entrepreneurship ambition and in helping them try to overcome the
negative predictors will noticeably improve their success in entrepreneurship.
3. Learning and business success
A short survey among 70 alumni of the entrepreneurship elective shows that 20 have indeed started
their own business. For half of those the enterprise serves as their main source of income. Ten
entrepreneurs employ personnel, 7 of those have between 1-5 employees and 3 have more than 5
employees.
For those who did not start their own company the main reason was that they finished the elective
before actually graduating from their major programme. This meant they spend their time graduating
first, before actually taking up entrepreneurship. Twelve percent indicate they wish to start within the
year, whereas 44% hope to start in 1 to 5 years.
As these alumni only started their business one or two years ago it is too soon to give an indication of
business success. However, overall student satisfaction with this elective programme is high at
96,3%. This would suggest that teaching entrepreneurship through these electives is successful.
There are those that contend that entrepreneurship cannot be taught, but is mostly inherited. One of
the main issues in teaching entrepreneurship is the question what competencies students need to
acquire. We regard competencies as a mixture of skills, attitude and knowledge and especially focus
on the problem-solving abilities of students: how do they deal with a problem they encounter?
During the introductory period most students indicate they are ill-at-ease with their newly found
freedom of self-centred learning activities. They struggle with what they view as lack in direction and
as a consequence they have the feeling they lose momentum. Some are insecure about what criteria
are set to assess their deliverables. This shows how students are conditioned to work in an
instruction-based environment.
Many students showed a lack in discipline in producing progress and status reports. This has to do
with the fact that in a learner-centred approach students are responsible for their own learning
trajectory.
The emphasis in the programme lies on developing a personal vision on entrepreneurship and
innovation. The purpose is for students to learn to reflect on their own role and take their own
strengths and weaknesses as a starting point in their learning trajectory.
References
European Commission (2005) Proposal for a Recommendation of the European Parliament and of the Council on
key competences for lifelong learning, Brussels
European Commission (2008) Entrepreneurship in Higher Education, Especially in Non-Business Students,
Brussels
European Commission (2010) EUROPE 2020 A strategy for smart, sustainable and inclusive growth, Brussels
Harkema S.J.M., Schout H.J. (2008) “A case of incorporating student-centred learning in innovation and
entrepreneurship education”, European Journal of Higher Education, Vol. 43 (4), pp. 513-526
Heikkilä, M. (2006) The self-concept, the self-esteem and the sense of life control as the determinants of the
intrapreneurship, Jyväskylä: University of Jyväskylä.
McCombs, B. L., & Whisler, J. S. (1997). The learner-centred classroom and school: Strategies for increasing
student motivation and achievement. San Francisco: Jossey-Bass.
Sijde, P. van der, McGowan, P., Kirby, D. (2008) Guest editors’ introduction to the special issue: The
entrepreneurial spirit in higher education and academic entrepreneurship. Industry & Higher Education, Vol
22 (1), 3-8.
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Practitioner
Papers
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How “open” does your Company want to be Towards
External Creativity? Open Innovation Tools and Methods to
Access Consumers’ Knowledge and Creativity
Gregor Jawecki and Michael Bartl
HYVEAG, Munich, Germany
gregor.jawecki@hyve.de
michael.bartl@hyve.de
Abstract: “Open innovation” has become to a frequently used key word in both academia and practice. It refers
to companies which transcend their organizational boundaries to access external source of knowledge, skills, and
capabilities. In particular the integration of consumers into new product development has received a lot of
attention lately.
The integration of consumers in different parts of the innovation process can take a variety of forms, ranging from
pure observational approaches on one side, to freely accessible innovation communities on the other. In this
presentation two approaches to integrate consumers into new product development are discussed in detail:
Netnography and Innovation Communities. Both methods are illustrated by means of selected cases and success
stories. Netnography (Kozinets 1999, 2002) is a qualitative, interpretive research approach to analyze the
communication of consumers in online communities. Netnography enables to immerse into consumers’ product-
related dialogue and gather unbiased insights into preferences, wishes and ideas. The example of a leading
global supplier of fragrances and flavorings which aimed to identify new business opportunities in the field of
“citrus beverages” illustrates the method’s applicability. The case shows how Netnography, including a qualitative
analysis of more than 600 consumer statements, led to 6 distinctive consumer insight which were then translated
into new product solutions.
The case of the Enlightened-Swarovski Elements Watch Design Contest illustrates the implementation of an
“Innovation Community” for co-creation and collaborative innovation. The goal of this online contest was to
generate new and innovative designs for wristwatches with applied gemstones. During a period of 8 weeks,
1,650 participants from all over the world registered on the platform to showcase their talent and submit their
designs. In total, they created more than 2,000 wristwatches and a worldwide buzz for the company.
The two practical examples illustrate the broad spectrum of tools and methods that are available for an
integration of consumers. In both cases the “level of openness” differs. In the first case users’ ideas and product-
related expertise are passively observed and the company does not reveal itself as doing research. In the second
example the company communicates the specific innovation task to all creative individuals worldwide and invites
them to become active co-developers.
In sum, the presentation shows that companies may decide on the appropriate “level of openness” depending on
the phase of the innovation process, the product, and IP considerations among other factors. However, the
success of open innovation depends not only on methodological expertise to search and acquire users’
collaborative input but also on organizational routines to digest and assimilate this external input. Altogether this
implies the need to think of open innovation as a strategic program of continuous user collaboration.
Keywords: Open innovation, creativity, netnography, innovation community
Since the turn of the millennium many companies have undergone a radical change in innovation
strategy by opening up their innovation processes to external stakeholders (Chesbrough 2003; von
Hippel 2005). Henry Chesbrough, who introduced the term “Open Innovation”, defines it as “a
paradigm that assumes that firms can and should use external ideas as well as internal ideas, and
internal and external paths to market, as the firms look to advance their technology.” (Chesbrough
2003). Recently, in particular the integration of consumers into the innovation process has received a
lot of attention by practitioners and scholars alike. The special focus on consumers is driven among
others by three developments. First, consumers have access to as much information and knowledge
as never before. Examples like Wikipedia are well known but almost every week new websites
provide access to even more information. For instance, www.academicearth.org nowadays offers
individuals from all over the world the possibility to watch videos of lectures and courses of the leading
US universities. Second, consumers are increasingly networked due to the rise of social media
platforms such Facebook, Twitter, Xing or YouTube. Third, creative consumers are both willing and
capable to engage in user innovation and contribute to a firm’s new product development. One
popular example is the “Harley-Owners-Group” www.hog.com. Members of this online community
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dedicated to Harley Davidson motorcycles discuss and demonstrate concepts for individualized
motorbikes and accessories and the producer Harley Davidson later includes the users’ ideas in the
development process (McWilliam 2000).
Given their creativeness, skills and energy to innovate, it seems natural that nowadays consumers are
not only asked to contribute information on their wants, needs and product requirements. Rather, they
are invited to bring in their creativity and problem solving skills and become actively involved in all
parts of the innovation process, e.g. to generate and evaluate new product ideas, to elaborate a
detailed concept, to select or individualize the preferred virtual prototype or to test and experience
new product features (Prahalad and Ramaswamy 2004; Sawhney and Prandelli 2000).
The integration of consumers in different parts of the innovation process can take a variety of forms,
ranging from pure observational approaches on one side, to freely accessible innovation communities
which address creative individuals from all over the world on the other. In between these two
extremes other approaches can be found, such as Co-Creation Tools. Figure 1 gives a classification
of methods that can be applied for the integration of consumers.
Figure 1: Classification of methods

In the following, one case for Netnography (as form of observational research) and one for Innovation
Communities will be introduced briefly.
Netnography has its origin in ethnography (Arnould and Wallendorf 1994). It uses information publicly
available on the Internet to immerse into consumers’ product-related dialogue and to gather unbiased
insights into preferences, wishes and ideas. It is mainly used to gain “grounded knowledge” (Glaser
and Strauss 1967) concerning a specific research question.
A leading global supplier of fragrances and flavorings aimed to gather insights into the field of citrus
beverages. In more detail, the goal was to find out how consumers perceive citrus in beverages, what
associations they have, and whether there are special occasions or consumption situations that are
linked to citrus taste beverages.
In total, Netnographic analysis identified more than 100 online communities in which consumers
discuss citrus tastes and beverages. Besides communities dedicated to beverages and food per se,
also communities related to health, dieting, sports and traveling showed to be valuable sources of
discussions related to the research field. After the identification and selection of relevant platforms,
more than 600 lengthy consumer statements which focused on one or several aspects of the research
questions were subject to qualitative analyses. In the end, the company was able to elaborate six
distinctive consumer insights, one of them named “I love homemade”. “I love homemade” refers to the
high number of consumers who produce their own citrus lemonades as it reminds them of their happy
childhood, they connect it to taking care and doing something good, and see it as a possibility to use
the type and amount of sweetener they prefer. The six consumer insights were then translated into
product concepts for new citrus beverages.
The case of the Enlightened-Swarovski Elements Watch Design Contest illustrates the
implementation of an “Innovation Community” for co-creation and collaborative innovation. The goal of
this online contest was to identify consumer preferences regarding wristwatches with applied
gemstones and generate innovative ideas in the field. The design contest was open for designers
(e.g. design students) from all over the world but also for people who are generally interested in
watches, gemstones and related topics. In a period of only 8 weeks, more than 1,650 participants
778
joined the community to showcase their talent and submit their designs. In total, they created over
2,000 watches in different segments ranging from classic to sporty and from abstract to realistic.
Participants uploaded own avatars and pictures and evaluated the configured as well as the freely
created designs either with short or more elaborate evaluations. Community members placed 147,000
gemstones, made more than 6,000 evaluations and contributed 1,750 qualitative comments. Driven
by joint innovation a lively community evolved across cultural boundaries. The contest spread from
Austria to the US and created buzz in countries such as China, India, Russia, Turkey and Iran. With
the design-contest customer preferences regarding wristwatches with applied gemstones could be
identified and Swarovski got insights into trends and innovative ideas. The designs of the best artists
where presented at "Baselworld", the largest watch fair worldwide, and are currently realized.
The two practical examples illustrate the broad spectrum of tools and methods that are available for
an integration of consumers. In both cases the “level of openness” differs. In the first case users’
ideas and product-related expertise are passively observed and the company does not reveal itself as
doing research. In the second example the company communicates the specific innovation task to all
creative individuals worldwide and invites them to become active co-developers. The question which
degree of opening up the innovation process is recommendable for a company depends on a variety
of factors, such as the stage in the innovation process or considerations with regard to nondisclosure
and IP. Besides methodological expertise to search and acquire users’ collaborative input, to benefit
of open innovation activities to the full extent companies should also consider the synergies that can
be drawn between projects. This implies to think of open innovation more as a strategic program
rather than as a “just in time” outsourcing of innovation tasks. An open innovation program is
characterized by a continuous collaborative relationship with users consisting of various interactions
along the innovation process. As Prahalad and Ramaswamy state: "The future of competition,
however, lies in an altogether new approach of value creation, based on an individual-centered co-
creation of value between consumers and companies." (Prahalad and Ramaswamy 2004).
1. References:
Arnould, E., and Wallendorf, M. (1994) “Market-oriented ethnography: Interpretation building and marketing
strategy formulation”, Journal of Marketing Research, 31 (November), pp. 484-504.
Chesbrough, H. (2003) The era of open innovation, MIT Sloan Management Review, Spring 2003 (35-41.
Glaser, B., & Strauss, A. (1967) The discovery of grounded theory, New York: de Gruyter.
Kozinets, R. (1999) “E-tribalized marketing?: The strategic implications of virtual communities of consumption”,
European Management Journal, 17 (3), pp. 252-64.
Kozinets, R. (2002) “The field behind the screen: Using netnography for marketing research in online
communications”, Journal of Marketing Research, 39 (1), pp. 61-72.
McWilliam, G. (2000) “Building strong brands through online communities”, Sloan Management Review, 41 (13),
43-54.
Prahalad, C. K., & Ramaswamy, V. (2004) The future of competition: Co-creating unique value with customers,
Boston, MA: Harvard Business School Press.
Sawhney, M., and Prandelli, E. (2000) “Communities of creation: Managing distributed innovation in turbulent
markets”, California Management Review, 42 (4), 24-54.
von Hippel, E. (2005) Democratizing innovation, Cambridge, MA: MIT Press.
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Published by Academic Publishing Limited

The use of Interactive new Media art in Eva Kekou 306

Eco Innovation Practice and Romanian SMEs Valentina-Ofelia Robescu 480

I hope that you have an enjoyable conference.

Alexandros Kakouris, Programme Chair

Dr Panagiotis Georgiadis is Professor at the Faculty of Informatics and

Dr Alexandros Kakouris is a part time lecturer of innovation and

Elena Panaritis is an institutional economist. She spearheaded property rights

Dr Amar Bhidé, previously the Laurence D. Glaubinger Professor of Business at

Dr Heather Fulford is Reader in Entrepreneurship and Academic Director of the

Brendan Galbraith is a lecturer in the Ulster Business School, University of

Liang Guo is researcher of Groupe Sup de Co La Rochelle, a private teaching and

Dr. Jun Li is a Senior Lecturer of Entrepreneurship and Innovation at University of

Dr Jukka Ojasalo is at Laurea University of Applied Sciences in Espoo,

Professor Chunlin Si is Professor of Management Science, Director of

Biographies of contributing authors (in alphabetical order)

Dilek Çetindamar is a professor at Faculty of Management in Sabancı University (İstanbul, Turkey).

Lasandahsi R. De Silva is a Doctoral Student at Innovation Management and Policy Division,

Corina Edwards is responsible for entrepreneurship development at Swansea University:

Anandasivakumar Ekambaram works as a research scientist at SINTEF – Technology and Society,

Sabrina Florkowski is a Ph.D student at the School of Management, Blekinge Institute of

Ayşe GÜnsel is a research assistant at Business Administration Faculty in Gebze Institute of

Christos Ioakimidis, (Thessaloniki, Greece), is an Assistant Professor at IST (MITPortugal) in the

Yusniza Kamarulzaman, is a Senior Lecturer in the Department of Marketing in the Faculty of

Tine Schrammel is a member chair of International Management at the University of Passau,

Olavi Uusitalo is Professor of Marketing in the Institute of Industrial Management at Tampere

Daria Volchek, researcher in Lappeenranta University of Technology, Finland. Her educational

Elizabeta Zirnstein, LLM, is a senior lecturer at Faculty of Management, University of Primorska,

Keywords: innovativeness; capability; logistics; process innovation

2.1 Theoretical framework

H1: Logistics capabilities are positively related to qualitative business performance

H2: Logistics capabilities are positively related to quantitative business performance

H3: Process innovativeness are positively related to qualitative business performance

H4: Process innovativeness are positively related to quantitative business performance

H5: Process innovativeness positively moderates logistics capabilities - qualitative performance

H6: Process innovativeness positively moderates logistics capabilities - quantitative performance

2.2 Measurement instrument

2.3 Sampling and data collecting

2.4 Scale validity and reliability

2.5 Test of the research questions

Table 6: Hierarchical regression results for qualitative business performance

R2 ,663 ,672 R2 ,673 ,678

R2 ,607 ,619 R2 ,604 ,616

3. Discussion and conclusion

Keywords: graduate entrepreneurship, nascent entrepreneurs, latent entrepreneurs, beliefs, entrepreneurial

Global entrepreneurship is annually observed by GEM branches (IOBE for Greece,

3.1 The instrument

4.1 Identification of nascent and latent entrepreneurs within the sample

4.2 Exploring certain entrepreneurial beliefs in groups

4.2.1 Overall description (general population data)

4.2.2 Gender dependencies

4.2.3 Age dependencies

4.2.4 Field of study dependencies

4.2.5 Entrepreneurial intention dependencies

N1 I am interested in issues related to N4 I have identified specific entrepreneurial

1. The inclusive taxation for a certain individual is set by

The specific properties of are:

These properties guarantee continuity and the existence of an optimum.

Proof: see Appendix

Lemma 2: The only possible equilibrium requires

The Business Characteristics (years of establishment, business set-up, number of