An economic model of strategic entrepreneurship

• DOI: http://doi.org/10.1002/sej.1319
• Author: Randall Westgren,Robert Wuebker
• Date: 01 December 2019
• Published date: 01 December 2019

RESEARCH ARTICLE

An economic model of strategic entrepreneurship

Randall Westgren

1

| Robert Wuebker

2

1

Division of Applied Social Sciences,

University of Missouri, Columbia, Missouri

2

David Eccles School of Business, University

of Utah, Salt Lake City, Utah

Correspondence

Robert Wuebker, David Eccles School of

Business, University of Utah, 1645 East

Campus Center Drive, Salt Lake City, UT

84112-9304.

Email: robert.wuebker@eccles.utah.edu

Abstract

Research Summary:How do new entrantscreate and capture

value in established industries? Starting from the foundations

of neoclassical economics, we model entrepreneurial entry

and competition as occurring simultaneously in production

technology space and product attribute space. Our model's

central feature is to disaggregate entrepreneurial rents into

four components: arbitrage, innovation, organization, and

uncertainty-bearing. This permits us to model the nature of

value creation from a common analytical platform, and to

measure value capture as a set of distinct rent streams avail-

able to multiple stakeholders over time.

Managerial Summary:Although there is broad consensus

that the essence of entrepreneurship is the creation and

capture of new value, both scholars and practitioners have

struggled to connect this basic exhortation to the entrepre-

neurial process. This paper argues that returns to entrepre-

neurial action can be generated through four main

mechanisms: innovation, uncertainty-bearing, new business

models, or inter-industry arbitrage—either uniquely, or in

combination. Examining these mechanisms for value crea-

tion together reveals implications for how best to organize

and manage the entrepreneurial process so that that returns

to entrepreneurial action can be appropriated equitably.

KEYWORDS

economic history, entrepreneurial rents, entrepreneurship,

strategic entrepreneurship, value creation

Received: 18 March 2015 Revised: 19 September 2018 Accepted: 12 November 2018 Published on: 6 May 2019

DOI: 10.1002/sej.1319

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:507–528. wileyonlinelibrary.com/journal/sej 507

Introduction

In recent years, the fields of strategy and entrepreneurship have converged on a question of mutual interest: the ori-

gin of economic value (Hitt, Ireland, Camp, & Sexton, 2001; Hitt, Ireland, Sirmon, & Trahms, 2011; Ketchen, Ireland, &

Snow, 2007). Strategic theories often begin by assuming the existence of product and/or factor market imperfec-

tions that result in the economic rents available for firms to capture (Barney, 1986). Over time, strategy has devel-

oped a rich conceptual literature exploring how firms organize to capture those rents. In entrepreneurship, early

work also assumed the existence of product and/or factor market imperfections, re-framing them as opportunities

that alert, engaged actors could spot and exploit (Shane & Venkataraman, 2000). More recently, a growing body of

work in entrepreneurship focuses attention on situations where entrepreneurs endogenously create opportunities

(Alvarez & Barney, 2007; Sarasvathy, 2001; Zahra, 2008) and subsequently attempt to capture a portion of the rents

generated through action (e.g., Alvarez, 2007; Alvarez & Barney, 2004; Alvarez, Young, & Woolley, 2015;

Klein, 2008).

However, despite growing interest in the relationship between value creation and appropriation in both strategy

and entrepreneurship, our understanding of these processes and the rents associated with them remain relatively

undertheorized. For example, while entrepreneurship acknowledges the existence of different types of opportunity

(Alvarez, Barney, & Anderson, 2013), much less attention has been paid to the types and sources of rents appropria-

ble by entrepreneurs (Alvarez & Barney, 2004). And although strategy has long acknowledged the importance of

entrepreneurship (e.g., Barney, 1991; Rumelt, Schendel, & Teece, 1994) and the distinctiveness of the entrepreneur-

ial rent (e.g. Mahoney & Pandian, 1992; Peteraf, 1993; Rumelt, 1987), some have noted that the mechanisms under-

pinning the origins of the entrepreneurial rent remain murky and have elided operationalization (Klein, 2008; Klein,

Barney, & Foss, 2012), which has in turn created challenges for cumulative theory development (Amit, Glosten, &

Muller, 1993; Baker & Pollock, 2007; Nickerson & Zenger, 2004).

This paper takes a fresh look at value creation in entrepreneurial settings. We develop a model of strategic entre-

preneurship grounded in neoclassical economics and previous work in strategy built on that foundation

(e.g., Barney & Ouchi, 1986; Hesterly, Liebeskind, & Zenger, 1990; Rumelt et al., 1994). We take inspiration from

existing theories of rent creation and capture, many of which are based on formal models (e.g., Adegbesan, 2009;

Gans & Ryall, 2017; Lippman & Rumelt, 2003; MacDonald & Ryall, 2004) and contribute to a growing literature

employing analytic models and simulation exploring the dynamics of value creation and capture (e.g., Adner &

Zemsky, 2006; Bylund, 2015; Grahovac & Miller, 2009; Keyhani, Lévesque, & Madhok, 2015; Mauer, Wuebker,

Schlüter, & Brettel, 2018; Ross & Westgren, 2006).

Although our approach draws from, and contributes to, these conversations, we depart from previous work in

two notable ways. First, we observe that other models of economic returns to entrepreneurial activity analyze only

one of several potential economic functions of the entrepreneur, and then map returns to entrepreneurial action to

that single function (an important exception is Keyhani et al. (2015), where returns to Kirznerian discovery and

Schumpeterian creation are jointly considered using a game-theoretic setup). Second—and perhaps as a byproduct of

this tendency to select a single descriptor of the entrepreneurial function—most previous work treats economic

returns to entrepreneurial action as one homogenous type—the entrepreneurial rent—and does not consider the

implications of a more fine-grained distinction (i.e., entrepreneurial rents). In contrast, this paper models the entrepre-

neurial rent as a collection of distinct rent streams which we associate with four types of entrepreneurial action: arbi-

trage (Kirzner); organization (Coase, Casson); innovation (Schumpeter); and uncertainty-bearing (Knight), and

analyzes them jointly. One advantage to leveraging the foundations of neoclassical economics (and the rich history

of strategic theories built on that foundation) is that this approach makes opportunities for integration and cumula-

tive theory development possible, analogous to the analysis of strategic rents in Mahoney and Qian (2013).

Our formal model of entrepreneurial entry begins with denotation of a multidimensional strategy space in which

rivals compete in product attribute sub-space and in production technology sub-space. We then model entry into strat-

egy space occupied by incumbents. Revenues are captured by the innovating new entrant engaged in strategic

508 WESTGREN AND WUEBKER