The process of creative construction: knowledge spillovers, entrepreneurship, and economic growth

• DOI: http://doi.org/10.1002/sej.36
• Author: M. B. Sarkar,David Audretsch,Rajshree Agarwal
• Date: 01 December 2007
• Published date: 01 December 2007

Copyright © 2008 Strategic Management Society

Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 1: 263–286 (2007)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.36

THE PROCESS OF CREATIVE CONSTRUCTION:

KNOWLEDGE SPILLOVERS, ENTREPRENEURSHIP,

AND ECONOMIC GROWTH

RAJSHREE AGARWAL,1* DAVID AUDRETSCH,2 and M. B. SARKAR3

1College of Business, University of Illinois at Urbana Champaign, Champaign,

Illinois, U.S.A.

2Max-Planck-Institut für Ökonomik, Jena, Germany and Indiana University,

Bloomington, Indiana, U.S.A.

3Department of Management, College of Business Administration, University of

Central Florida, Orlando, Florida, U.S.A.

Questioning the underlying assumptions of the process of creative destruction, we conceptual-

ize an alternative process of creative construction that may characterize the dynamics between

entrants and incumbents. We discuss the underlying mechanism of knowledge spillover strate-

gic entrepreneurship whereby knowledge investments by existing organizations, when coupled

with entrepreneurial action by individuals embedded in their context, results in new venture

creation, heterogeneity in performance, and subsequent growth in industries, regions, and

economies. The framework has implications for future research in entrepreneurship, strategy,

and economic growth. Copyright © 2008 Strategic Management Society.

INTRODUCTION

The fundamental question in the emerging fi eld of

strategic entrepreneurship is how fi rms combine

entrepreneurial action that creates new opportuni-

ties with strategic action that generates competi-

tive advantage (Hitt et al., 2002). We confront this

question by developing the creative construction

approach, which identifi es knowledge spillovers as a

key mechanism that underlies new venture formation

and development at the micro level, and economic

growth at the macro level. The development of this

framework fl ows from the recognition that although

strategy and entrepreneurship theory abounds with

Schumpeterian accounts of creative destruction and

incumbent displacement by new entrants, our under-

standing of new venture emergence and associated

externalities is less acute.

By specifying the process whereby ideas, tech-

nologies, and structures are rendered obsolete and

displaced by new and superior ones, Schumpeter’s

idea of creative destruction has become the domi-

nant framework for entrepreneurship and economic

development. The concept highlights the tension

between innovation and selection: innovations by

new fi rms unleash selection pressures on existing

fi rms. The view is particularly powerful in explain-

ing what happens as economic structures change

from within; however, it is remarkably silent with

regard to mechanisms identifying how new entrants

emerge, why the process of displacement occurs,

and whether increasing returns to knowledge invest-

ments could benefi t entrants, incumbents, and the

economy alike. We identify some implicit assump-

tions in this approach, and juxtapose these against

Keywords: entrepreneurship; economic growth; creative

destruction; knowledge spillovers

*Correspondence to: Rajshree Agarwal, University of Illinois

at Urbana Champaign, 350 Wohlers Hall, College of Business,

1206 S. Sixth St., Champaign, IL 61820, U.S.A.

E-mail: agarwalr@uiuc.edu

264 R. Agarwal, D. Audretsch, and M. B. Sarkar

Copyright © 2008 Strategic Management Society Strat. Entrepreneurship J., 1: 263–286 (2007)

DOI: 10.1002/sej

insights from accepted frameworks in the strategy

and entrepreneurship literature to describe aspects

of an emerging paradigm that we call creative con-

struction, with knowledge spillovers as the underly-

ing mechanism.

The literature that links knowledge spillovers to

entrepreneurship emphasizes that incumbent orga-

nizations are an important source of new entrants,

particularly when they underutilize the knowledge

they create (Agarwal et al., 2004; Klepper, 2007;

Klepper and Sleeper, 2005; Shane and Stuart, 2002).

Building on this work, we identify the endogeneity

of entrepreneurial opportunities and action, and the

intriguing possibility that knowledge can be lever-

aged back to incumbents as spillins from entrants.

In doing so, we relate knowledge investments to a

virtuous cycle of growth at multiple levels. Posit-

ing this cycle as one of creative construction, we

suggest that in the face of the strategic manage-

ment of knowledge spillovers across incumbents and

entrants alike, displacement and value destruction

are less likely as an outcome, as is growth of both

entrants and incumbents in a virtuous loop of value

creation. In doing so, we discuss how the process of

creative destruction is but one end of the continuum;

with the other end representing a process of creative

construction—a process wherein entrants benefi t

from new knowledge created by incumbent organi-

zations that may otherwise be left unexploited, but

where such knowledge spillovers do not necessarily

result in the destruction of incumbents. As entrants

build on knowledge and networks developed by

incumbent organizations to create new novel com-

binations that in a Schumpeterian sense causes the

destruction of lesser entities, reverse fl ows from

entrants to incumbents can lead to a dynamic process

of growth, and thereby a win-win scenario where

the positive externalities of knowledge spillovers

are highlighted in the process of both value creation

and appropriation.

In identifying knowledge spillover-based strate-

gic entrepreneurship (KSSE) as the key mechanism

behind the process of creative construction, we

make three central arguments. First, in the context

of entrepreneurship literature, we identify the sym-

biotic relationship between individuals (potential

founders who are employees) and their knowledge

environments, and contend that entrepreneurial

opportunities, instead of being exogenously avail-

able, are endogenously created through knowledge

investments. Second, by highlighting that the cocre-

ators of knowledge (incumbent organizations and the

individuals who work for them) may each be able to

appropriate the value, we contribute to the strategy

literature by linking the genesis of fi rm capabilities

to performance, and identifying existing boundaries

to value appropriation. Further, due to the intriguing

possibility that knowledge spillins can be strategi-

cally managed, we discuss how incumbents may

effectively benefi t from knowledge spillovers that

originate from entrants, and in the process enhance

their own competitiveness.

Third, we connect new venture origin, entrant, and

incumbent performance, and regional and industry

growth through the cycle of creative construction.

Our contribution to the macroeconomic growth liter-

ature is, thus, in identifying two endogenous mech-

anisms—incumbents’ knowledge investments and

subsequent entrepreneurial venturing—that enable

knowledge spillovers and value creation. In con-

trast to existing growth models that assume passiv-

ity in human action and/or exogenous technological

advances, we emphasize the need for entrepreneurial

action in both generation and appropriation of value

and, thus, macro-level growth. Importantly, we

contribute to all three literature streams by drawing

attention to the intersection of different units of

analyses, since the process of creative construction

is enabled when entrepreneurial individuals choose

to build on extant knowledge to innovate and found

new fi rms that contribute to macro-level growth by

becoming hotbeds of further entrepreneurial activity

themselves.

The article proceeds in the following manner: we

fi rst provide a brief review of the process of creative

destruction. We then develop the knowledge spill-

overs view of strategic entrepreneurship (KSSE) by

linking the endogenous creation of opportunities to

new fi rm formation due to the intersection of entre-

preneurship and knowledge spillovers. The mech-

anism of KSSE, we argue, underlies the process

of creative construction, where linkages to extant

knowledge translate, through the founders, to fi rm

level capabilities, growth, and competitive advan-

tage. We proceed to link the process of creative

construction to regional- and industry-level growth,

since spillover benefi ts of the initial knowledge

investments are reaped due to strategic entrepre-

neurship. We then discuss how our work integrates

parallel literature streams that have typically focused

on different units of analyses, and contribute to

each as a result. The integrative model also sheds

light on important research gaps that need to be

addressed, and our fi nal section is a call for additional