Innovation, intermediation, and the nature of entrepreneurship: A historical perspective

• DOI: http://doi.org/10.1002/sej.1310
• Author: Mike Wright,Steven Toms,Nick Wilson
• Date: 01 March 2020
• Published date: 01 March 2020

SPECIAL ISSUE ARTICLE

Innovation, intermediation, and the nature of

entrepreneurship: A historical perspective

Steven Toms

1

| Nick Wilson

2

| Mike Wright

3

1

Accounting and Finance Division, Leeds

University Business School, University of

Leeds, Leeds, UK

2

Accounting and Finance Division, Leeds

University Business School, University of

Leeds, Leeds, UK

3

Centre for Management Buy-out Research,

Imperial College London, London, UK

Correspondence

Steven Toms, Professor of Accounting, Leeds

University Business School, Maurice Keyworth

Building, University of Leeds, Leeds LS2 9JT,

UK.

Email: j.s.toms@leeds.ac.uk

Research Summary:We consider two sources of innovation, technical

and financial, and examine their separate and joint impacts, through

the process of financial intermediation, on the nature of entrepreneur-

ial opportunity. These impacts are time dependent and reflect the

institutional context of entrepreneurship. As illustrations, we investi-

gate three historical episodes, ranging from the product led innova-

tions of the industrial revolution, to the closely aligned innovations of

the buyout wave of the 1980s to the more recent effects of finance

led innovation. We identify systematic underlying factors that can

cause significant differences in the entrepreneurial opportunity set.

Managerial Summary:We provide lessons from three historical

periods regarding how policy toward entrepreneurship might

ensure technical and financial innovations are successfully interme-

diated. This implies an alliance-based notion of entrepreneurship,

underpinned by enabling systems of governance and suitable insti-

tutions reduced dependence on specific individuals or generations.

A balance also should be struck to mitigate risky investment

through sharing, and specifically equalizing rights and information

between borrowers and lenders. Regulatory changes should dis-

courage capital and information hoarding and support risky lending

to asset-backed, knowledge-based industrial projects.

KEYWORDS

credit institutions, entrepreneurship, industrial revolution,

innovation, management buyouts

1|INTRODUCTION

The nature of entrepreneurial activity varies by context (Autio, Kenney, Mustar, Siegel, & Wright, 2014; Zahra &

Wright, 2011) and historical epoch (Baumol, 1990; Schumpeter, 1942). But are there systematic underlying factors

that cause such significant differences in the entrepreneurial opportunity set? Entrepreneurship is conceptualized in

strategic terms as opportunity recognition (discovered or created) and mobilization of resources to exploit

Received: 20 July 2016 Revised: 7 September 2018 Accepted: 26 November 2018 Published on: 28 January 2019

DOI: 10.1002/sej.1310

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2020;14:105–121. wileyonlinelibrary.com/journal/sej 105

opportunities. Accordingly, we present a model of strategic entrepreneurship based on the interaction of product

market innovation, financial intermediation, and financial innovation.

Following traditional entrepreneurship theory, we argue that innovations impacting product markets create new

entrepreneurial opportunities, adding that financial intermediation can facilitate or obstruct scalable exploitation of

innovation, which may be enhanced or disrupted by appropriate or inappropriate financial innovation. Intermediation

here refers to the institutional arrangements that govern the “rules of the game,”or specifically the allocation of

financial resources to investment projects and the payoffs implied, most importantly between inventor and financier.

By combining product market, or henceforward “technical,”discovery with financial intermediation, the entrepre-

neurial function creates opportunity through cooperation in individual networks or institutional alliances. Conceptu-

alized thus, entrepreneurship is necessarily a historical phenomenon, in terms of context and process.

In this formulation, financial intermediation is the key historical variable and we present cases demonstrating its differ-

ential impact on entrepreneurial opportunity. First, the early British industrial revolution (BIR) offers a case study of well-

documented technical innovation, but also significant variations in the intermediation process. These illustrate the politici za-

tion of financial intermediation, and associated entrepreneurial opportunity, and, by contrast, how financial networks are

mobilized to secure capital for industrial expansion. The second case, the development of the UK management buyout

(MBO) wave of the 1980s illustrates the positive coincidence of technical innovation and financial intermediation, creating

more radical aggregate innovation, contrasting more destructive patterns of contemporaneous entrepreneurship such as

greenmail, junk bonds, and leveraged buyouts. Third, expansion of credit markets and financial instruments, growth of infor-

mation sharing amongst lenders, “shadow banking”and “non-bank finance,”before and after the recent financial crisis, and

associated innovations including automation of lending decisions, have increased transaction cost, while potentially con-

straining entrepreneurs' ability to exploit innovations in the product markets. These illustrations provide dynamic context

to explain entrepreneurship as a historical economic variable and its relationship to economic performance.

We contribute to the conceptualization of a historical perspective on entrepreneurship as follows. First, by ana-

lyzing the interplay between technical innovation and financial intermediation we contribute to explaining the puzzle

of differing historical combinations of entrepreneurial opportunity. Second, by examining these combinations using

contrasting periodizations, and through the analysis of prevailing institutional norms, we demonstrate how historical

perspective contributes to the wider understanding of entrepreneurial opportunity. As such, we provide a model suit-

able for analyzing the context of entrepreneurship and the interplay of different types of entrepreneurial opportu-

nity. Third, we illustrate how triangulating entrepreneurial opportunity develops novel perspectives on important

turning points in British economic history.

2|CONCEPTUALIZING ENTREPRENEURSHIP

If entrepreneurship is conceptualized as opportunity recognition and resource mobilization to exploit those opportu-

nities (Autio et al., 2014), these in turn depend on two principal components that set the context of entrepreneurial

activity: technical innovation, and, through financial intermediation, matching investment requirements with suitable

financial resources. Innovation positively impacts growth, either through incremental improvements in technologyor

through more radical changes accompanied by Schumpeterian creative destruction (Beckman, Eisenhardt, Kotha,

Meyer, & Rajagopalan, 2012). In Schumpeter's model, entrepreneurs also mobilize financial resources to develop the

new technological paradigm (Schumpeter, 1934). Financial systems can similarly be a source of creativity

(Schumpeter, 1934, p. 89), and the domain of financial intermediation, as impacted by financial innovation, can be an

important source of entrepreneurial opportunity, for example, in the form of new financial instruments.

Following Schumpeter's general approach, andbuilding on Baumol (1990),we argue that productive entrepreneur-

ship supportsinnovation through successful intervention in the financialintermediation process.Accordingly, we specify

the role of finance and its relationship to innovation. Combinations of innovations, through intermediation, provide the

institutional context of entrepreneurial opportunity. Successful entrepreneurs identifying and exploiting new ideas

106 TOMS ET AL.