Necessity entrepreneurship and industry choice in new firm creation

• Author: Marc Gruber,Argyro (Iro) Nikiforou,John C. Dencker
• Date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3075
• Published date: 01 December 2019

RESEARCH ARTICLE

Necessity entrepreneurship and industry choice in

new firm creation

Argyro (Iro) Nikiforou

1

| John C. Dencker

2

| Marc Gruber

3

1

Centre for Technology Entrepreneurship, Technical University of Denmark, Lyngby, Denmark

2

D'Amore-McKim School of Business, Northeastern University, Boston, Massachusetts

3

College of Management of Technology, Ecole Polytechnique Fédérale de Lausanne, Lausanne, Switzerland

Correspondence

Argyro (Iro) Nikiforou, Technical

University of Denmark, Centre for

Technology Entrepreneurship,

Produktionstorvet 426, 125, 2800 Kgs.

Lyngby, Denmark.

Email: argnik@dtu.dk

Abstract

Research Summary:Research on necessity entrepreneur-

ship has generated important insights, yet it views neces-

sity entrepreneurs in developed countries as one

encompassing group of unemployed individuals—ignoring

that the level of need is not uniform but instead increases

with time spent in unemployment. We begin to unpack the

role of unemployment duration in necessity entrepreneur-

ship by asking how it affects one of the most fundamental

decisions in start-ups: “what business should I be in?”

Analyzing primary data on 576 necessity entrepreneurs

combined with three secondary data sets, we find that

unemployment duration affects whether ventures are

launched in “home”or in external industries, and moder-

ates the extent to which founders' industry experience and

the attractiveness of external opportunities relative to those

in the “home”industry shape industry choice.

Managerial Summary:Necessity entrepreneurs—individuals

who create new firms because they have no other options

for work—represent a substantial proportion of world-wide

entrepreneurial activity, and, in developed countries, often

come from the ranks of the unemployed. We analyze these

entrepreneurs by answering the question “what business

should I be in?,”a fundamental strategic decision that

Received: 1 October 2016 Revised: 13 June 2019 Accepted: 5 July 2019 Published on: 22 August 2019

DOI: 10.1002/smj.3075

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in

any medium, provided the original work is properly cited.

© 2019 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd.

Strat Mgmt J. 2019;40:2165–2190. wileyonlinelibrary.com/journal/smj 2165

founders make. Our findings reveal that duration in unem-

ployment is a key, hitherto unexamined factor that system-

atically affects the industry-choice decision in startups.

Moreover, we find that duration of unemployment moder-

ates the founder's industry experience and the attractive-

ness of external opportunities relative to those in the

“home”industry, with a markedly different picture for the

long-term unemployed—suggesting the need for custom-

ized government policies for formerly unemployed

entrepreneurs.

KEYWORDS

early-stage strategic choices, founders, industry choice, necessity

entrepreneurship, new firm strategy

1|INTRODUCTION

Necessity entrepreneurs—individuals who create new firms because they find “themselves with no

other options for work than self-employment”(Acs, 2006, p. 98)—represent a substantial proportion

of entrepreneurial activity around the world, accounting for more than half of all entrepreneurs in

developing countries, and roughly one-fifth in developed countries (Global Entrepreneurship Moni-

tor, 2017; Vivarelli, 2013). Although a general appreciation of necessity entrepreneurship and its out-

comes is evident in the literature (cf. Caliendo & Kritikos, 2010; Dencker, Bacq, Gruber, & Haas, in

press), a closer inspection of this work indicates that research has focused mostly on bottom-of-the-

pyramid individuals in the developing world (Brewer & Gibson, 2014). It would, however, be desir-

able to improve our knowledge of necessity entrepreneurship in developed countries—where neces-

sity entrepreneurs often come from the ranks of the unemployed—because such findings would

allow a clear comparison with the vast literature on opportunity entrepreneurship, and could reveal

boundary conditions of existing theoretical insights.

From a conceptual perspective, the current framing of necessity entrepreneurship lumps necessity

entrepreneurs into one encompassing group of unemployed individuals (e.g., Global Entrepreneur-

ship Monitor, 2017; ILO, 2012). This predominant approach thus ignores that the level of need will

increase the longer an individual is unemployed, and renders researchers blind to differences that an

individual's level of need may have on his or her organizational-level decisions. Arguably, at the

beginning of an unemployment spell, necessity entrepreneurs may not be much different from

employee entrepreneurs (Agarwal, Echambadi, Franco, & Sarkar, 2004; Campbell, Ganco, Franco, &

Agarwal, 2012; Gambardella, Ganco, & Honoré, 2014; Ganco, 2013). As unemployment spells

increase in length, however, individuals will experience greater levels of need: not only will they feel

increasingly distressed as unemployment deprives them of key psychological needs that employment

fulfills (Paul & Moser, 2009), but they will also be pressured by the depreciation of their financial,

human and social capital (Storey, 1991). Hence, an important implication is that necessity entrepre-

neurs who are short-term unemployed will likely behave in ways similar to opportunity entrepreneurs

when setting up their firms, whereas the long-term unemployed are likely to behave in considerably

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