The Context of Entrepreneurial Judgment: Organizations, Markets, and Institutions

AuthorNicolai J. Foss,Christian Bjørnskov,Peter G. Klein
DOIhttp://doi.org/10.1111/joms.12428
Published date01 September 2019
Date01 September 2019
© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies
The Context of Entrepreneurial Judgment:
Organizations, Markets, and Institutions
Nicolai J. Fossa, Peter G. Kleinb and Christian Bjørnskovc
aBocconi Unive rsity; bBaylor Universit y; cAarhus University
ABST RACT The economics and manag ement literatures pay increa sing attention to the
technological, compet itive, and institutional envi ronment for entrepreneurship. However, less
is known about how context inf luences the judgment of entrepreneurs. Focusing on the
emerging judgment-based approa ch to entrepreneurship, we argue that economics ca n say
much about how the organizationa l, market, and institutional context s hapes entrepreneurial
judgment. We describe entrepreneurs a s individuals who deploy scarce, heterogeneous re-
sources to serv ice customer preferences at a profit. Bec ause of uncertai nty, this process is
essentially e xperimental, and context inf luences the experimental process . Thus, entrepreneurs
will seek to de sign the internal organi zation of the firm so that it faci litates internal experimen-
tation. Moreover, the market or task envi ronment determines the need for experimentation
(e.g., how fast do consumer preferences change, how does technology evolve, which a ssets are
available at which term s, etc.). Finally, the inst itutional environment inf luences, for example,
the transac tion costs of acquiring and divest ing assets as fir ms adjust their boundaries through
ongoing commer cial experiment ation.
Keywo rds: entrepreneurs hip, institutions, jud gment, organizat ional structure, u ncertainty
INTRODUCTION
The field of entrepreneurship emerged from economics. The f irst systematic work on
entrepreneurship was an economics treat ise (Cantillon, 1755); the classic works on entre-
preneurship theory come from economics (Baumol, 1990; Casson, 1982; Kirzner, 1973;
Knight, 1921; Mises, 1949; Schumpeter, 1911); and economics continues to inform en-
trepreneurship research in f undamental ways. Within economics, research on entrepre-
neurship as occupational choice has been t hriving for some time (Evans and Jovanovic,
1989; Lazear, 2004; Parker, 2004). In management research, several contemporary
Journal of Man agement Studi es 56:6 September 2019
doi:10. 1111/jo ms. 1242 8
Address for re prints: Nicola i J. Foss, iCRIOS-Dep artment of Management and Technolog y, Bocconi
University, Via G. Roentg en, 1 - 20136 Milan , Italy (Nicolai.foss @unibocconi.it).
119 8 N. J. Foss et al.
© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies
streams are built on economics concepts and t heories: the opportunity discovery (or
‘individual-opportunity nexus’) view (Shane and Venkatara man, 2000; Shane, 2003)
builds on Kirzner (1973), the judgment-based approach (Foss and Klein, 2012) builds on
Knight (1921), the creation view (Alvarez and Ba rney, 2004) builds on Shackle (1972),
and the effectuation view (Sarasvathy, 2001, 2008) build on Simon (1955).
Unfortunately, in some approaches based on economics, entrepreneurship is treated
as highly abstract and decontextualized, removed from its institutional, social, political,
and cultural macro context (Bjørnskov and Foss, 2016; Bradley and Klein, 2016). Also,
while entrepreneurial behaviour is typically manifested in firms and firms are, as it were,
tools of entrepreneurs, entrepreneurship theory and the theory of the fir m are rarely
integrated (Foss and Klein, 2005, 2012). Has the reliance on economic concepts, frame-
works, and models rendered large parts of the entrepreneurship literature too sterile?
We think the reverse is true. While parts of entrepreneurship research may have ne-
glected context, putting the main emphasis on what Thornton (1999) calls ‘supply-side
factors,’ this is not because it relies too heavily on economics, but rather because it has
missed some critical insights from economic theory and application. Although econo-
mists have traditionally been less concerned with the drivers of entrepreneurship than
with its consequences, an economics-based approach addresses context in interesting and
potentially novel ways. In our discussion below we follow the conventional management
distinctions between the market or ‘task’ environment and the ‘macro’ environment of
the relevant organization (see also Johns, 2006). The former refers to the suppliers, cus-
tomers, and other actors with whom the focal organization has transactions, while the
latter is essentially what economists call the ‘institutional environment’ (North, 1990).
Moreover, to the extent that entrepreneurship is conceptualized as existing inside firms,
there is also an intra-firm or organizational context to consider. However, there are many
gaps in the understanding of these context aspects in contemporary entrepreneurship
research in management, and there is no unified view of the role of the context(s) for
entrepreneurship.
We argue that economics research on industrial organization and contracting has
much to offer to the understanding of the task environment, and that institutional eco-
nomics can inform the understanding of how the macro context influences the incidence
and type of entrepreneurship in the economy (e.g., Bowen and Clerq, 2008). Unlike
most management research, which focuses on individual- and firm-level heterogeneity,
economists tend to take individual and firm characteristics as given and look for differ-
ences in incentives and constraints to explain outcomes. Ultimately, entrepreneurship is
a multi-level phenomenon (Thornton, 1999; Bjørnskov and Foss, 2016; Nikolaev et al.,
2017), and greater attention to relevant context and cross-level mechanisms that link
entrepreneurship and context can help advance entrepreneurship research.
We address context from the perspective of the judgment-based approach on en-
trepreneurship that we have developed over the last ten years or so (Foss and Klein,
2005, 2012, 2015), drawing on the work of classical writers such as Knight (1921), Mises
(1949) and Casson (1982). While based on economics, the JBA is very different from
the contemporary (labour) economics approach to entrepreneurship which focuses on
entrepreneurship as a kind of occupational choice in a general-equilibrium setting. It

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