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STRATEGY
      JOURNAL OF SMALL BUSINESS




         STAKEHOLDER THEORY AND THE ENTREPRENEURIAL FIRM



                                      Ronald K. Mitchell
                                     Texas Tech University
                                    ronald.mitchell@ttu.edu

                                         Boyd Cohen
                                    Simon Fraser University
                                    boydcohen@yahoo.com

                                         ABSTRACT

This paper offers a typology suggesting a stakeholder theory of the entrepreneurial firm to
provide a new lens for entrepreneurial management. To accomplish our task we: (1)
generate from the literature a list of purported “theories of the firm”; (2) apply qualifying
criteria; (3) analyze the list according to two dimensions – stakeholder inclusion and
stakeholder equilibration strength – to categorize these theories of the firm into a typology
that reveals the gaps in the theory-of-the-firm literature ; and (4) identify research
questions for a stakeholder theory of the entrepreneurial firm that raise entrepreneurial
management issues.

                                                  stakeholders that enact revolutionary verses
             INTRODUCTION                         evolutionary change.

The purpose of this paper is to offer a           We proceed to accomplish our objectives in
typology that suggests the need for and           the following manner. First, we briefly
situates a stakeholder theory of the              present the theoretical background that gives
entrepreneurial firm such that a new lens for     rise to the opportunity for the introduction of
entrepreneurial management emerges. This          a stakeholder theory of the entrepreneurial
task is necessary because there is reason to      firm. Second, we identify a representative set
suppose that: (1) the distinctive nature of the   of theories of the firm that emerges from our
entrepreneurial firm (Venkataraman, 1997) is      review of the literature. Third, we further
directly impacted by stakeholder relation-        examine two key dimensions that we suggest
ships (Mitchell, 2002a; Stinchcombe, 1965);       will distinguish a stakeholder theory of the
(2) the contribution of stakeholders to firm      entrepreneurial firm: extent of stakeholder
value is connected to the entrepreneurial         inclusion (from broad to narrow); and level
process (Venkataraman, 2002); and that            of stakeholder equilibration strength (from
accordingly     (3) the individual-directed       weak to strong). Fourth, we review the
nature of early-stage companies makes             various implicit and explicit positions of
entrepreneurs particularly likely to create       each theory according to both dimensions
more broadly inclusive stakeholder-based          and the extent of stakeholder inclusion and
firms instead of more narrowly inclusive          stakeholder equilibration strength, situating
stockholder-based firms; and (4) the              these theories in a typology implied by these
tendency of new firms, through a higher           two constructs. Finally, we set forth some of
propensity to contain disruptive technologies     the research questions and evaluate the ever-
(Christensen, 1997), will be to mobilize          present “so what” question.
BACKGROUND                            pleasant surprise; and (4) exists in stark
For the past several years, the distinctive          contrast to the neoclassical conception of
domain of entrepreneurship research has              transacting      among         instantaneously
increasingly centered on investigation of the        optimizing actors who are exceptionally
question: “How, in the absence of current            well-informed, never commit an error, and,
markets for future goods and service, (do)           thereby, operate in instantly clearing markets
these goods and services manage to come              (Venkataraman, 2002, p.55).
into existence?” (Venkataraman, 1997,
p.120). An entrepreneurial theory of the firm        This entrepreneurial process is well-
is, therefore, expected to explain how the           characterized by Schumpeterian notions of
entrepreneur, as an individual, recognizes           creative destruction (Schumpeter, 1934) that
opportunity in an uncertain environment and,         is accomplished by the forces of both weak
by persuading relevant stakeholders to               equilibration, and strong equilibration. Weak
supply their resources, creates a firm to            equilibration forces are those that result in a
exploit such opportunity (Dew, Velamuri, &           more evolutionary – or incremental – process
Venkataraman, 2003). It follows that the             of developing new goods and services (akin
success of new firms in overcoming their             to “rebuilding a stakeholder ship plank by
liabilities of newness is strongly associated        plank while it still remains afloat”), while
with the extent and quality of stakeholder           strong equilibration forces of “stakeholder
relationships       (Stinchcombe,      1965).        innovation” result in the more revolutionary
Recognition of the importance of variations          processes of creative destruction (sinking
in extent of stakeholder inclusion suggests          “the unfair and inefficient corporate ship
“recasting the central purpose of the firm as        while evacuating all stakeholders to the
serving the interest of stockholders to one          safety of a new vessel that is better than the
where       it  serves    the   stakeholders”        old”)     (Venkataraman,      2002,      p.54).
(Venkataraman, 2002, p.54). According to             According to this logic, variations in the
this argument variations in the extent of            strength of stakeholder equilibration are also
inclusion (narrowness verses breadth) of             likely to be useful in the suggestion and
stakeholder relationships are therefore likely       situation of a stakeholder theory of the
to be of interest in the suggestion and              entrepreneurial firm.
situation of a stakeholder theory of the
entrepreneurial firm.                                Finally, by the very act of creating a firm,
                                                     entrepreneurs occupy the unique position of
Furthermore, gathering and aligning the              being most at liberty to shape stakeholder
contributions of all stakeholders to increase        relationships with respect to both stakeholder
overall firm value (Venkataraman, 2002,              inclusion and stakeholder equilibration
p.51; Vesper, 1996, p.4) is a critical part of       strength. The latitude to create a firm is
the entrepreneurial process. As distinct from        essential to the entrepreneur “because it is
mainstream conceptions of the perfectly              through the firm that the opportunity-
competitive “market process,” the term               pursuing entrepreneur can coalesce and keep
“entrepreneurial process” has come to be             the     myriad      stakeholders      together”
deliberately used by theory-of-the-firm              (Venkataraman, 2002, p.55). Thus, it is at
scholars to denote a transacting process that:       firm inception that entrepreneurs identify
(1) is at best tending toward equilibrium, but       their stakeholders and assess the relative
never really in equilibrium; (2) is populated        salience of each (Agle, Mitchell, &
by economic actors who make errors, are              Sonnenfeld, 1999; Mitchell, Agle, & Wood,
sometimes ignorant, sometimes ignorant               1997), because successful founding is
about their ignorance, sometimes brilliant           dependent upon stakeholder support
but mostly prosaic, sometimes knowingly              (Stinchcombe, 1965). Furthermore, it is at or
deceitful but mostly well-intentioned, and           near inception that start-up firms are less
boundedly rational; (3) has scope for genuine        bound by the institutional constraints of the
discovery, genuine disappointment, or                financing and the regulatory establishment

                                                 2
(for example, venture capitalist growth              management and entrepreneurship questions
norms or security regulations) or by                 from diverse lenses and has resulted in the
technological constraints (such as a                 application of many theoretical frameworks
dependence on existing technologies).                within management and entrepreneurship
Additionally, because near the time of               research. However, while perhaps hundreds
startup entrepreneurs and their firms are            of theories have been used in management
inextricably linked, it appears likely to be         and entrepreneurship research, relatively few
more difficult for them to avoid the impacts         theories are proffered as theories of the firm.
of their firm on their stakeholders and,
therefore, to be more likely to take                 In the task of reliably identifying justifiable
stakeholder relationships into full account          theories of the firm, we accept and utilize the
during the process of firm formation. Thus, it       logic developed by Dew, Velamuri, &
is not surprising that entrepreneurs have, for       Venkataraman (2003) who suggest three
example, been found to be significantly less         criteria. According to these authors, a theory
likely than managers to sacrifice personal           of the firm must be capable of addressing
ethics to attain business objectives (Bucar &        three central questions: Why do firms exist?
Hisrich, 2001) or to be more likely to take          What are the determinants of their scale and
stakeholders into account to overcome                scope? Why do certain firms persist over
liabilities of newness (Stinchcombe, 1965). It       time while others do not? Under this logic,
might, therefore, be expected that due to: (1)       theories that do not address all three
the centrality of stakeholder relationships in       questions would not be considered to be
entrepreneurial firms; (2) the unique                theories of the firm (Dew, Velamuri, &
contribution to value creation of stakeholder        Venkataraman, 2003).
equilibration in the entrepreneurial process;
and (3) the distinctive position of the              Utilizing ABI Inform, we reviewed 255 peer-
entrepreneurial firm in the organizing life          reviewed articles published between January
cycle, that the suggestion of a stakeholder          1986 and February 2003 that contained
theory of the entrepreneurial firm and its           theory-of-the-firm language. We identified
situation within the theory-of-the-firm              within that group of articles, 27 theories that
literature is warranted.                             are presented as theories of the firm (Table
                                                     1). We then examined each theory to assess
  REPRESENTATIVE THEORIES OF                         the extent to which the theory as presented
          THE FIRM                                   successfully answers the three central
                                                     qualifying questions noted above. However,
The literature presently lacks a systematic          we did not assess the extent to which the
summary of representative theories of the            proposed theories of the firm have been
firm. A more comprehensive analysis would:           received or thoroughly tested and developed
(1) sift out from the many articles using            (Grandstrand, 1998) but only their
theory-of-the-firm language, those that              comportment with the three foregoing
actually present a theory of the firm that           criteria. As reported in Table 1 (and
contains a threshold level of specification;         organized according to the analytical
(2) identify relative strength among                 dimensions articulated in the next section),
representative theories; (3) facilitate              we found 17 of the 27 theories to
comparison and contrast; and (4) identify            satisfactorily address all three questions,
gaps wherein the literature might further            thereby qualifying them for membership in a
develop. Management and entrepreneurship             set of representative theories of the firm.
research has utilized theories from decision
sciences, economics, management, socio-                    ANALYTICAL DIMENSIONS
logy, and psychology (Amit, Glosten, &
Muller, 1993). This broad range of                   In this section, we briefly summarize the
theoretical foundations enables management           analytical dimensions (extent of stakeholder
and entrepreneurship researchers to explore          inclusion; stakeholder equilibration strength)

                                                 3
TABLE 1
                                                                 Representative Theories of the Firm
Theory                Purpose of Theory — The                Reason for Existence (⇒ I v. R) —      Scale & Scope (⇒ B v. N) — Scale           Persistence (⇒ I v. R) — Firms
                      purpose of this theory is to:          Firms exist:                           & Scope are determined by:                 persist because:
A-Narrow/
Incremental
Agency                Develop a theory of the ownership      As a nexus for contracting             The point at which the gross               Given strong incentives for
                        structure of the firm (Jensen &       relationships, which is also           increment in (firm) value is just          individuals to minimize agency
(Jensen &
                        Meckling, 1976: 305).                 characterized by the existence of      offset by the incremental loss             costs, given many competing
  Meckling, 1976)
                                                              divisible residual claims on the       involved in the consumption of             alternatives, and given its
                                                              assets and cash flows of the           additional fringe benefits due to          shortcomings, the corporate form
                                                              organization which can generally       (managers’) declining fractional           has survived the market test
                                                              be sold without permission of the      interest in the firm (1976: 323)           against potential alternatives
                                                              other contracting individuals                                                     (1976: 357).
                                                              (1976: 311)
Customer Value        Suggest that firms’ customer value     To satisfy the customer (1997: 164;    The customer value strategy which          They possess a customer value-
 (Slater, 1997)         should be the focus of business       and Drucker, 1973)                     dictates the size of the target            based organizational culture
                        activities and to propose a                                                  market and the value proposition           (organized around customer value
                        marketing based view of the                                                  (1997: 164)                                delivery) complemented with a
                        theory of the firm (Slater:, 1997:                                                                                      skill to learn about customers
                        162)                                                                                                                    changing needs (1997: 164)
Evolutionary          Expand our understanding of            Because a set of capabilities and      The joint action of search and             They are “selected for” within a
  (Nelson &             economic change (Nelson &             decision rules combine and evolve      selection “routines” (Nelson &             market environment, through a
  Winter, 1982)         Winter, 1982)                         based on the inheritance of            Winter, 1982)                              process of economic natural
                                                              acquired characteristics and the                                                  selection of routines (Nelson &
                                                              timely appearance of variation                                                    Winter, 1982)
                                                              under the stimulus of adversity
                                                              (Nelson & Winter, 1982).
Exchange              Construct a classical type of          To both exchange (where existing       The personal income distribution           The combination of money flows
  (Boulding,            macroeconomic distribution            assets including money are             (PID), where PID as a key                  and production processes provides
  1950)                 theory to distinguish between         circulated among various owners),      determinant of output is effected          leveraged financial incentives
                        exchange process contributions to     and to produce (where assets are       by potentially volatile financial          (Boulding, 1950; 1994: 1227)
                        wealth creation and the processes     created, destroyed, and                transfers item (T) (Boulding,
                        of production (Boulding, 1950;        accumulated) (1994: 1227)              1950; 1994: 1227)
                        Canterbery, 1994, p. 1227)
Industrial            To explain how competitive forces      Because they are portfolios of         Market structure: “ . . . certain stable   They compete effectively within an
  Organization          within an industry shape the          activities (Porter, 1984: 423)         attributes of the market that              industry (Porter, 1980)
  (Caves, 1980:         specific responses of firms within    composed of the tangible or            influence the firm’s conduct in the
  88; Porter, 1980;     that industry to the small numbers    intangible semi-fixed assets or        marketplace” including size
  Porter, 1984)         bargaining power of rivals,           skills necessary for the conduct of    (Caves 1980: 64)
                        suppliers, buyers, imitators, and     these activities in the marketplace
                        substitutes (Porter, 1980)            (Caves, 1980: 64).
Theory             Purpose of Theory — The purpose        Reason for Existence (⇒ I v. R) —       Scale & Scope (⇒ B v. N) — Scale        Persistence (⇒ I v. R) — Firms
                     of this theory is to:                 Firms exist:                             & Scope are determined by:             persist because:

Institutional      Explain how institutional forces       Because they are isomorphic with        The extent of coercive, memetic,        They are legitimate organizations
  (DiMaggio &        shape organizations (DiMaggio &       institutions and are therefore          and/ or normative isomorphism           (DiMaggio & Powell, 1983;
  Powell, 1983;      Powell, 1983; Meyer & Rowan,          legitimate organizations                (DiMaggio & Powell, 1983)               Meyer & Rowan, 1977)
  Meyer &            1977)                                 (DiMaggio & Powell, 1983)
  Rowan, 1977)

Population         Explain the forces that shape the      To produce and distribute resources     Inertial nature of firms, and the       They are “selected for” in the
  Ecology            structures of organizations over      (Hannan & Freeman, 1989: 5)              nature of the resource space,          ecology of a population due to
                     long time spans, including how                                                 including the level of resource        variations in their inertial
(Hannan &            populations of firms forms arise                                               scarcity and the tightness of niche    characteristics that are retained
  Freeman, 1989)     and decline. Population ecology                                                packing (Carroll & Hannan, 1989:       despite selection pressures related
                     theory has specific implications                                               411)                                   to legitimation and competition
                     for the nature of firms (Hannan &                                                                                     within the resource space (Carroll
                     Freeman, 1989; Carroll &                                                                                              & Hannan, 1989: 411)
                     Hannan, 1989)

Real Entity        To compare and contrast firms with     To represent the moral authority of     The outcome of its organization and     Of the existence of a moral
  (Metzger &         humans in an attempt to depict        its members. Firms, however, are        management and activities (2001:        authority; and because of the
  Dalton, 1996)      legal and philosophical firm          seen as naturally occurring beings      496)                                    collective result of decisions made
                     models (2001: 494)                    with characteristics beyond those                                               by individual persons relative to
                                                           of its members. (2001: 496)                                                     that authority (Werhane, 1985:
                                                                                                                                           46.)

Resource-based     Analyze firms from the resource side   Because the creation of new             The indivisibility of the resource      Resources are rare and non-
  (Barney, 1991;     rather than from the product side     productive services requires the        bundles that must be collected to       substitutable; and due to unique
  Penrose, 1959;     (Wernerfelt, 1984: 171)               collection of resources that results    satisfy relevant demand for             historical conditions, causal
  Wernerfelt,                                              in a firm (Penrose, 1959: 77, 85)       heterogeneous productive services       ambiguity and/ or social
  1984)                                                                                            (1959: 67, 68, 75, 77, 83)              complexity, are also imperfectly
                                                                                                                                           imitable (Barney, 1991: 105-112)

Strategic          To extend transaction-cost theory of   To create isolating mechanisms          The relative importance of              Of the differential prevention of
  (Liebeskind,       the firm to incorporate knowledge     (1996: 94). Firms are more              knowledge components to a               expropriation of knowledge, and
  1996)              in explaining the relationship        capable of isolating and protecting     firm’s strategy. If particular          the differential protection of
                     between organization and              knowledge (at lower transaction         knowledge is critical, firms will       imitation, through limiting
                     competitive advantage                 costs) than are markets.                expand their scope to bring the         observability of knowledge (1996:
                     (Liebeskind: 1996: 93).                                                       knowledge inside the firm,              94).
                                                                                                   assuming the benefits exceed the
                                                                                                   costs (1996: 103).




                                                                                     5
Theory               Purpose of Theory — The purpose        Reason for Existence (⇒ I v. R) —        Scale & Scope (⇒ B v. N) — Scale       Persistence (⇒ I v. R) — Firms
                       of this theory is to:                 Firms exist:                              & Scope are determined by:            persist because:
B-Broad/
  Incremental
Behavioral           Develop an empirically relevant,       To form coalitions of individuals in     Temporal or functional coalitions of   Because they are an adaptively
                       process-oriented, theory of           order to attain collective objectives    participants formed to make            rational system: successful
(Cyert & March,        economic decision making (Cyert       (p.28) through decision-making           decisions (1963: 27)                   adaptations to firm behavior and
  1963)                & March, 1963: 3) which predicts      processes (1963: 290)                                                           resource allocation by coalitions
                       firm behavior (1963: 19)                                                                                              (1963: 99)

Game Theory          To provide an alternative theory of    To reduce the costs of                   Qualitative changes in the reservoir   Through the recombination of
 (Kogut &              the firm which accounts for           communication and coordination of        of social knowledge available to       knowledge. Firms evolve through
 Zander, 1996)         ownership, incentives, and self-      embedded social knowledge (1996:         economic agents (1996: 503).           the opportunities and influences
                       interest (Kogut & Zander, 1996:       503)                                                                            of the external environment
                       502).                                                                                                                 (1996: 503).

Resource             Include the role of external control   Because bridging and buffering           The effectiveness of bridging and      They effectively manage resource-
  dependence           of organizations in organization      mechanisms around a technological        buffering mechanisms (Scott,           dependent power relationships
  (Pfeffer &           theory (Pfeffer & Salancik, 1978)     core create organization (Pfeffer &      1987)                                  (Pfeffer & Salancik, 1978)
  Salancik, 1978)                                            Salancik, 1978: 106, 108; Scott,
                                                             1987: 182-198).

Stakeholder          Describe how organizations operate     To fulfill some set of their various     The structuring and choice             They effectively manage the
  (Brenner &           and to help predict organizational    stakeholders’ needs (Brenner &           processes of the firm’s                stakeholder value matrix of the
  Cochran, 1991)       behavior (Brenner & Cochran,          Cochran, 1991: 453)                      management (Brenner & Cochran,         firm (Brenner & Cochran, 1991:
                       1991: 452)                                                                     1991: 455)                             455, 465)

Transaction          Generalize and extend transaction      Because they are bundles of              The size of the cumulated value        They economize on multi-level
  Cognition            cost economic theory to               transactions which aggregate             networks that must be assembled        transaction costs: Lower-level
  (Mitchell, 2001)     demonstrate how entrepreneurial       because together they minimize           to serve stakeholders at minimum       markets fail (thus firms form per
                       cognitions (planning, promise,        transaction costs (2001: 83)             transaction cost (2001: 88)            Coase, 1937); and higher-level
                       and competition) create new value                                                                                     aggregations (hierarchies) do not
                       at multiple levels of analysis,                                                                                       yet form (Mitchell, 2001)
                       through the reduction of cross-
                       level transaction costs (Mitchell,
                       2001)

Transaction Cost     Explain why firms form as an           To economize on transaction costs        First-order economizing                They are relatively more efficient
  Economics            alternative to the market (Coase,     through substitution at the margin        (Williamson, 1991)                    than markets (firms form when
  (Coase, 1937)        1937)                                 (Coase, 1937; Williamson, 1985)                                                 markets fail) (Coase, 1937)




                                                                                        6
Theory             Purpose of Theory — The purpose         Reason for Existence (⇒ I v. R) —      Scale & Scope (⇒ B v. N) — Scale        Persistence (⇒ I v. R) — Firms
                     of this theory is to:                  Firms exist:                            & Scope are determined by:             persist because:
C-Narrow/
  Revolutionary
Entrepreneurial    Set out a general framework within      To improve coordination by             Factors supporting entrepreneurial      Entrepreneurs monitor the
  (Casson, 1996;     which all the key questions in the     structuring information flow,           insight, e.g., level of information    environment and effect changes to
  Witt, 1998)        theory of the firm can be brought      which requires that it be endowed       synthesis (to make price and           respond to change as dictated by
                     together at once (Casson, 1996:        with legal privileges, including        production decisions), necessary       the environment (Casson, 1996)
                     55)                                    indefinite life (1996: 56)              sunk costs to permit necessary
                                                                                                    customization, level of desire to
                                                                                                    appropriate the value of profit
                                                                                                    opportunities (Casson, 1996)

D-Broad/
                                  NONE                                   NONE                                    NONE                                   NONE
  Revolutionary

Non-Theories of
 the Firm

Competence-based   Set out a general form alternative to   N/A                                    N/A                                     N/A
 (Hodgson, 1998)     contractarian (e.g., Coase)
                     theories of the firm (Hodgeson,
                     1998: 25). Competence-based
                     theories are an omnibus grouping
                     rather than a specific theory
                     (Hodgeson, 1998)

Computational      Present a framework for analyzing       N/A: This theory assumes the           A collection of information             Repetition of successful activities
 (Barr &             the information processing             existence of firms.                    processing units (2002: 345).           and recognition patterns through
 Saraceno, 2002)     (learning) behavior of firms,                                                 Optimal firm size changes as the        learning algorithms (2002: 351).
                     where firms are viewed as                                                     environment changes (2002: 346).
                     artificial neural networks (Barr,
                     2002: 345).

Economic           Use business history, in particular     To bring together producers and        The attainment of sustained             They provide protection from
  Development        the contractual choices made by        investors in response to incomplete    capabilities (1998: 70)                 economic holdup (1998: 70)
  (Lamoreaux,        19th-century entrepreneurs to          contracts and market power (1998:
  1998)              organize their businesses, to          70)
                     reflect on the nature of the firm
                     (1998: 66)




                                                                                     7
Theory                Purpose of Theory — The purpose          Reason for Existence (⇒ I v. R) —         Scale & Scope (⇒ B v. N) —Scale       Persistence (⇒ I v. R) — Firms
                        of this theory is to:                   Firms exist:                               & Scope are determined by:           persist because:

Knowledge-Based       Explain knowledge creation, sharing      Knowledge-based view does not             What the firm makes and what it       Combinative capabilities in the
 (Kogut &               and transfer within a firm (Kogut       explain why firms exist in lieu of        buys (1992: 385)                      creation of difficult to codify and
 Zander, 1992)          & Zander, 1992: 383)                    opportunism or moral hazard (Foss,                                              highly complex embedded
                                                                1996)                                                                           knowledge (1992: 385-388).
Managerial            Describe a “new” organizational          N/A: This theory assumes the              The clustering of roles amongst       They successfully decentralize
 (Bartlett &            form characterized by radical           existence of firms.                       three distinct organizational         decision making and renew
 Ghoshal, 1993)         decentralization in the creation of                                               groups (front-line, middle            continuously while establishing
                        self-contained units and frontline                                                management, and top                   stabilizing mechanisms which
                        entrepreneurship (Bartlett &                                                      management) which work across         reduce complexity and guide
                        Ghoshal, 1993).                                                                   decentralized units (1993: 41)        action (1993: 36)
Neoinstitutional      To provide an explanation of             To attain constrained profit              N/A: Does not address firm            The use of alternative decision
 (Furubotn, 2001)       management decision making              maximization (2001: 151).                 boundaries.                           making (without knowledge of
                        where profit maximization is not                                                                                        optimal solutions) to attain profits
                        cost-effective given transaction                                                                                        through efficiency relative to
                        costs and bounded rationality                                                                                           industry competitors (2001: 144).
                        (Furubotn, 2001: 143)
Neoclassical          Justify laissez-faire economics          It is only for the sake of profit that    N/A: Neoclassical economics has no    They are important actors in
 (Smith, 1937)          (Lerner, 1937: viii) with respect to      any man employs capital in the          positive theory to determine the      markets (1976: 306)
                        firm activity that is motivated by        support of industry (Smith, 1937:       bounds of the firm (Coase, 1937;
                        profit seeking and is guided by an        423). However, this is a theory of      1963: 15)
                        invisible hand (Smith, 1937: 423).        markets in which firms are
                                                                  important actors (Jensen &
                                                                  Meckling, 1976: 306); profit
                                                                  maximization is one of many goals
                                                                  or not a goal at all (Cyert & March,
                                                                  1963: 8)
Political (Muller &   To define the role of outside            N/A: This theory assumes the              N/A: Inside versus outside            They reduce rent-seeking costs
  Warneryd, 2001)       ownership in minimizing the risk          existence of firms (2001: 527)          ownership is not associated with      through optimal level of outside
                        of opportunistic behavior arising                                                 scale and scope.                      ownership (2001: 529)
                        from imperfect formal
                        enforcement (Muller & Warneryd,
                        2001: 527)
Property Rights       To predict the acquisition of assets     N/A: This theory assumes the              The assets owned by the firm (1986:   They identify the optimal ownership
  (Grossman &           by one firm from another and to         existence of firms (1986: 692)            692)                                  structure to minimize loss due to
  Hart, 1986)           explain the costs and benefits of                                                                                       investment distortions (1986:
                        integration (1986: 695).                                                                                                710).
Resource-learning     To suggest a theory that integrates      N/A: This theory assumes the              Bundles of unique resources           Of the accumulation of unique and
  (Mahoney,             constructs from resource-based,         existence of firms.                       (Mahoney, 1995)                       valuable resources through the
  1995)                 dynamic capabilities, and learning                                                                                      development of competitive
                        theory (1995: 91).                                                                                                      mental models (1995: 97).


                                                                                           8
Journal of Small Business Strategy                             Vol. 17, No. 1 Spring/Summer 2006
that we have utilized to create a typology            holders (Quadrant D). Could this analysis
(Figure 1) that situates identified theories of       presage recognition of the emergence of a
the firm relative to the foregoing dimensions.        new type of entrepreneurial firm?
                                                      Extent of Stakeholder Inclusion
Interestingly, in our analysis we noticed that
the scale and scope theory-of-the-firm
                                                      The scale and scope theory-of-the-firm
criterion (Table 1 – column 4) speaks to the
                                                      criterion in the definition of a firm defines
extent of inclusion or exclusion of
                                                      the extent of inclusion or exclusion of
stakeholders; and we also noticed that the
                                                      stakeholders. Extent of stakeholder inclusion
existence and persistence theory-of-the-firm
                                                      can be conceptualized as being broad (to
criteria (Table 1 – columns 3 and 5) speak to
                                                      include a great many stakeholders) or as
equilibration strength. An examination of the
                                                      being narrow (to exclude most potential
map created using these criteria (Figure 1)
                                                      stakeholders, leaving a very limited set of
suggests that a stakeholder theory of the
                                                      actual stakeholders). In the stakeholder
entrepreneurial firm might fill in an under-
                                                      literature, the broad definitions attempt to
researched area of theory development,
                                                      specify the empirical reality that virtually
thereby, fulfilling a needed function in the
                                                      anyone can affect or be affected by an
theory-of-the-firm literature which, as more
                                                      organization’s actions, while the narrow
fully explained in the final section, would
                                                      definitions attempt to specify the pragmatic
explain firms with broadly inclusive/
                                                      reality that firms simply cannot attend to all
revolutionary (strong equilibration) stake-

                         Figure 1 - A Theory of the firm Typology

                                                           Stakeholder Inclusion



                                                      NARROW                       BROAD



                                                      C                             D
       Stakeholder     REVOLUTIONARY
                                            Narrow/Revolutionary: 1        Broad/Revolutionary: 0
       Equilibration
         Strength
                                                      A                              B
                          INCREMENTAL
                                            Narrow/Incremental: 10          Broad/Incremental: 6



actual or potential claims and must,therefore,        Stakeholder Equilibration Strength
employ some prioritizing system to limit the
extent of inclusion in the firm (Mitchell et          Both the existence and persistence theory-of-
al., 1997, p.854). As anchor points in our            the-firm criteria may be used to define the
analysis we have used, at the broad end of            strength of stakeholder equilibration in the
the spectrum, Freeman’s (1984) definition of          definition of a firm. Accordingly, stake-
stakeholders, which includes “any group or            holder equilibration strength is defined to be
individual who can affect or is affected by           the degree of impact that stakeholder actions
the achievement of the organization’s                 have upon the existence and persistence of a
objectives” (Freeman, 1984, p.46). As an              firm. The level of stakeholder equilibration
anchor point for the narrow end, we have              strength is relevant to an examination of
used Clarkson’s (1995) definition of primary          theories of the firm that seeks to situate a
stakeholders: those without whose contin-             stakeholder theory of the entrepreneurial
uing participation the firm cannot survive as         firm, because the role of the entrepreneur in
a going concern (Clarkson, 1995, p.106).              relationship to stakeholders is catalytic:

                                                  9
Journal of Small Business Strategy                               Vol. 17, No. 1 Spring/Summer 2006
entrepreneurs recruit stakeholders to create           interpretation. Discussion continued until we
new combinations of resources to produce               were able to reach agreement for how to
new value (Schumpeter, 1934). Weak                     situate each of the 17 theories of the firm
equilibration entrepreneurial processes occur          within the 2 x 2 framework suggested by the
all the time in a market economy, where                analytical dimensions utilized. The results of
entrepreneurs merely realize or conjecture             this analysis are presented as the first four
(either through genuine insight and                    sections 1 in Table 1, and are also reported in
knowledge, or through mere luck) that some             Figure 1. Based on the foregoing two
resources are underutilized in their current           dimensions, we identified the four distinct
occupation (i.e., there is disequilibrium) and         theory-of-the-firm quadrants shown. A brief
recombine them – through incremental                   description of each quadrant follows, which
adjustments to existing stakeholder relation-          presents a sample theory from each
ships – into a potentially more useful and             quadrant. 2
fruitful combination (Venkataraman, 2002).
Strong        stakeholder         equilibration        Quadrant A
entrepreneurial processes take place where
the distribution of value to its creators              Theories considered to be both narrow in
becomes so inequitable under normal market             their orientation towards stakeholder
conditions that a change is necessary in the           inclusion, and incremental with respect to
economic order – through the revolution of             stakeholder equilibration strength appear in
creative destruction (Schumpeter, 1934)                quadrant A. As Figure 1 indicates, the
engineered by entrepreneurs who effectuate,            majority of the theories of the firm under
in reality, (Sarasvathy, 2001) the unfailing           consideration (10 of 17) fall into this
power of innovations in goods and services             category, and include (in alphabetical order):
to produce among relevant stakeholders the             agency, customer value, evolutionary,
insistence upon change (Venkataraman,                  exchange,        industrial      organization,
2002). In either case (weak or strong), the            institutional, population ecology, real entity,
nature of the entrepreneur/stakeholder                 resource-based, and strategic theories of the
interface affects the existence and                    firm. Theories in this quadrant tend to be
persistence of the firm.                               focused on the most constricted set of
                                                       conditions, by which we mean exclusive
Implied Typology                                       verses inclusive, and constrained to explain
                                                       only incremental change.
In our analysis, we sought to gain a seminal
view of each of the theories of the firm               For example, agency theory appears to
included therein by reviewing the first                belong in this quadrant because, with respect
introduction or an influential publication of          to stakeholder inclusion, agency theory is
the theory, as well as (where helpful)                 primarily concerned with principal/owner
subsequently published research utilizing or           and agent relationships that are manifest in a
critiquing the respective theories. We, as             firm boundary (for purposes of the theory)
authors, then engaged in a series of                   that is tightly focused. As reported in Table
analytical    discussions     regarding     the        1, Jensen and Meckling (1976, p.323)
“plotting” of each of the theories of the firm         suggest that firm scale and scope, as
across the two foregoing analytical
dimensions (Figure 1). Each author                     1
                                                                  The fifth section of Table 1 contains the
presented his own interpretation of the                ten theories that did not qualify in our analysis
theory’s relationship to the dimensions based          under all three criteria.
on the review of the relevant publications for         2
                                                                 The reader is invited to further utilize
each theory. When a disagreement arose, the            Table 1 as a means to more fully elaborate each
authors redoubled their dialog, each                   quadrant.
explaining     the    rationale    for    their

                                                  10
Journal of Small Business Strategy                               Vol. 17, No. 1 Spring/Summer 2006
considered by agency theory, is bounded by              boundaries but efficiency (Williamson 1985)
firm ownership: “set at the point at which the          and is, therefore, applicable to the
gross increment in (firm) value is just offset          coordination and alignment of activities
by the incremental loss involved in the                 amongst a wide range of stakeholders in the
consumption of additional fringe benefits               economic system. Nevertheless, TCE
due to (managers’) declining fractional                 specifies only incremental stakeholder
interest in the firm,” which we take to imply           equilibration strength because, according to
a narrow set of firm stakeholders. With                 TCE, stakeholders exert relatively little
respect to stakeholder equilibration strength,          direct influence on the firm but, instead, have
agency theory describes how agents of a firm            incremental impacts as various stakeholders
act on behalf of the owner depending upon               influence the costs of transactions that are
the proper alignment of incentives. Incentive           manifest in substitutions at the margin
alignments are fundamentally incremental in             (Coase, 1937). According to TCE theory,
their equilibration strength because they are a         substitution at the margin consists of the
nexus for contracting relationships that is             transaction-by-transaction replacement of
characterized by the existence of divisible             hierarchy for market that occurs “at the
residual claims on the assets and cash flows            margin” (in an incremental manner based
of the organization that can generally be sold          upon the most miniscule efficiency
without permission of the other contracting             advantages), such that society becomes “not
individuals (p.311). Furthermore, given                 an organization, but an organism” (Coase,
strong incentives for individuals to minimize           p.387) - by its organic nature destroyed by
agency costs, the many competing                        verses nourished by a strong equilibration
alternatives and the shortcomings of the                process.
corporate form, the corporate form has
survived the market test against potential              Quadrant C
alternatives (p.357), indicating a low
susceptibility     to    strong    stakeholder          Theories focused on only a narrow set of
equilibrating forces, and a greater likelihood          stakeholders but with a revolutionary view of
that a weak-equilibration characterization is           stakeholder equilibration strength fall into
most apt.                                               Quadrant C. We were only able to identify
                                                        one theory of the firm that appears to belong
Quadrant B                                              in this quadrant. This theory, the
                                                        entrepreneurial theory of the firm, claims to
Theories of the firm which are broad in their           set out a general framework within which all
inclusion of stakeholders but remain                    the key questions in the theory of the firm
incremental in their stakeholder equilibration          can be integrated (Casson, 1996; Witt, 1998).
strength, appear in quadrant B (Figure 1).
Six theories of the firm appear to fit into this        However, somewhat surprisingly, we were
quadrant and include: behavioral, game,                 constrained to assess the entrepreneurial
resource        dependence,        stakeholder,         theory of the firm to be narrow in its
transaction cognition, and transaction cost             stakeholder inclusion because – as suggested
economic theories of the firm. Transaction              in Table 1 – it appears to only be focused on
cost economics (TCE) provides an example                a narrow set of environmental actors that can
of theories of the firm that reside in quadrant         have a direct impact on the firm: those
B.                                                      stakeholders implicated in generating and
                                                        informing entrepreneurial insight (Casson,
As noted in Table 1, TCE is broad in its                1996). This is in contrast to theories which
inclusion of stakeholders due to the nature of          consider a broader set of internal and
the    first-order   economizing      process           external stakeholders, such as stakeholder
motivating transaction cost economizing                 theory (and other such theories appearing in
(Williamson, 1991) which knows few                      Quadrant B). Yet the entrepreneurial theory

                                                   11
Journal of Small Business Strategy                             Vol. 17, No. 1 Spring/Summer 2006
of the firm does have a revolutionary                 In our present assessment, we observe that
orientation towards stakeholder equilibration         presently extant theories mainly explain
strength, suggesting that stakeholders                firms that form to manage incremental
external to the firm (e.g., environmental             changes in the value creation process, which
forces that dictate responses to change) bring        occur over some continuum of a relatively
to bear the full power of the environment on          narrow to somewhat broad level of
a firm that is reflexively adaptable: to              stakeholder inclusion. Stakeholder theory
reformulate itself to achieve indefinite life,        (Brenner & Cochran, 1991; Freeman, 1984;
thus, being subject to and responsive to              Mitchell et al. 1997) has developed to
strong equilibrating forces.                          manage the inclusiveness dimension. What is
                                                      missing within the stakeholder theory-of-the-
Quadrant D                                            firm literature is theory that explains broadly
                                                      inclusive firm formation that is also
Theories of the firm which have a broad               revolutionary in nature. Such phenomena do
view of stakeholder inclusion and a                   exist, such as firms that produce so-called
revolutionary        orientation       towards        disruptive technologies (Christensen, 1997).
stakeholder equilibration would be included           The intended purpose of a stakeholder theory
in Quadrant D. However, as indicated in               of the entrepreneurial firm then would be to
Figure 1, we found no theories of the firm            advance theory that addresses the three
that appeared to be likely inhabitants of this        requisite dimensions in our analysis: the
quadrant. Accordingly, we observe that                emergence, growth/size, and persistence of
given the lack of theoretical development             broadly inclusive, revolutionary firms
associated with a combined orientation                (Figure 1, Quadrant D).
toward revolutionary equilibration strength
and a broad view of stakeholder inclusion,            Reason for Firm Existence
there appears to be a need for such a theory.
In the following section we inquire about the         A stakeholder theory of the entrepreneurial
outlines of a potential theory that would fill        firm would explain why broadly inclusive
this gap in the literature – what we term a           revolutionary firms might be expected to
stakeholder theory of the entrepreneurial             exist in the first place. Theoretical
firm – which we hope will address the                 justification abounds for firms that are
deficiency in the extant theories of the firm.        incremental in their equilibration strength
                                                      (Table 1; Figure 1, Quadrants A & B). We
                                                      wonder at the paucity of theories of the firm
TOWARD A STAKEHOLDER THEORY
                                                      that possess revolutionary equilibration
 OF THE ENTREPRENEURIAL FIRM
                                                      strength. We are hopeful, in highlighting this
                                                      paucity, that we will draw research attention
Purpose of a Stakeholder Theory of the                to the investigation of such questions as: Are
Entrepreneurial Firm                                  the forces in play so powerful that firms, as
                                                      we know them, are simply inadequate to
As illustrated in Figure 1 (which plots the           contain the socioeconomic energy generated?
typology suggested by our analysis in Table           Are all entrepreneurial firms to be considered
1), the theory-of-the-firm literature is              to be revolutionary or are there both
missing broad/revolutionary theories of the           incremental and revolutionary types of firms,
firm (Figure 1, Quadrant D). In this section          necessitating theory that explains each and
of the paper, we suggest that a stakeholder           the distinction between them? Are there,
theory of the entrepreneurial firm might fill         within the coordination, bridging/buffering,
this void. We therefore inquire: What                 decision-making, economizing, and other
purposes would such a theory serve that               reasons for firm existence, those theories
extant theories do not serve?                         with a logic sufficiently compelling to
                                                      explain the reasons for broad/revolutionary

                                                 12
Journal of Small Business Strategy                             Vol. 17, No. 1 Spring/Summer 2006
firms? Attention to these questions will              persistence of the phenomenon, is there a
contribute to a better understanding of               place in the theory-of-the-firm literature for
reasons for these firms’ existence.                   such broadly inclusive, revolutionary but
                                                      provisional systems (BIRPS)?
Scale & Scope
                                                                     DISCUSSION
A stakeholder theory of the entrepreneurial
firm would also explain the scale and scope           Stakeholder thinking is essential in business.
of a broadly inclusive revolutionary firm.            And knowing who or what really counts
This is an issue at present because, in its           (Mitchell, et al., 1997) does matter. In this
initial conceptualization, Schumpeterian              paper, we use two dimensions of counting:
entrepreneurship (the notion that new                 (1) making a stakeholder mistake that can
combinations follow processes of creative             tear apart a business – the equilibration
destruction) is applied to entrepreneurs as           problem; and (2) making a stakeholder
individuals, not to firms/organizations               mistake that can impair a business for lack of
(Schumpeter, 1934). Progress toward the               support – the inclusion problem.
specification of a broad/revolutionary theory
of the firm should explicitly lay out why and         The “so what?” implications of this type of
how organizations might become implicated             analysis indicates that we can use these two
in processes of revolutionary creative                dimensions to create a means to interpret a
destruction, especially since it is commonly          great many proposals for: (1) why firms
expected that most organizations will do just         come into existence in the first place; (2)
the opposite in the face of the emergence of          how big they grow; and (3) when they
disruptive technologies (Christensen, 1997).          become obsolete and fail to persist.
Scale and scope dynamics are also an issue
because the motivation for stockholders               As practitioners in the arena of small
(narrow) verses stakeholders (broad) has              business and entrepreneurship, having this
traditionally been financial. Thus, a credible        analytical framework available to us would
reason for broad inclusion and the motive             make it possible to see ourselves from
purpose for such inclusion must be identified         multiple viewpoints and, thereby, better
and has only recently begun to be explored            understand the kinds of decisions that are
(Mitchell, 2002b).                                    truly important. So-called “theories of the
                                                      firm” have been a topic of discussion among
Persistence                                           thoughtful practitioners for many decades for
                                                      just this reason: to answer the why, how, and
Lastly, a stakeholder theory of the                   when questions noted in the previous
entrepreneurial firm would explain the                paragraph. While not every theory applies to
persistence of a broadly inclusive                    every business, it is not unreasonable for
revolutionary firm. Even should we accept as          low-change businesses in narrowly defined
given the reasons for existence and for the           niches to utilize the theory-lenses in Figure 1
bounding of scale and scope, we would not             – Block A and for lower-change businesses
have answered the question: Why couldn’t              in broadly defined niches to view themselves
the broadly inclusive/revolutionary firm              through the theory-lenses in Figure 1 – Block
simply be a transitory form that regularly            B. Perhaps of greater import is for people in
precedes or is commonly attendant to the              businesses who are in high-change, broadly
entrepreneurial event? If so, is such an              inclusive settings to be aware that there is
explanation, no matter how ably it explains           very little research and documented
existence, scale, and scope, really never is          understanding of this situation and to see this
destined to be a theory of the firm because it        as a potential opportunity to explore the
does not explain persistence? Furthermore,            ways to incorporate stakeholders more
even if an argument can be made for the

                                                 13
Journal of Small Business Strategy                            Vol. 17, No. 1 Spring/Summer 2006
broadly to better deal with high change and                  society theory and research.
great uncertainty.                                           Proceedings of the International
                                                             Association for Business and
Thus, the purpose of this paper has been to                  Society, 449-467.
suggest the need for and to situate a
stakeholder theory of the entrepreneurial            Bucar, B. & Hisrich, R. (2001). Ethics of
firm such that a new lens for entrepreneurial                business managers vs. entrepre-
management emerges. It is our hope that our                  neurs. Journal of Developmental
analysis, and the questions that arise there-                Entrepreneurship, 6(1), 59-82.
from, have been sufficiently stimulating and         Canterbery, (1994). Boulding’s T, Kaleckian
persuasive to instigate investigations that                  power, and Minsky’s fragility
address the under-researched areas we                        hypothesis. Journal of Economic
identified.                                                  Issues, 28(4), 1227-1248.

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                                                16

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Stakeholder theory and_the_entrepreneurial_firm

  • 1. STRATEGY JOURNAL OF SMALL BUSINESS STAKEHOLDER THEORY AND THE ENTREPRENEURIAL FIRM Ronald K. Mitchell Texas Tech University ronald.mitchell@ttu.edu Boyd Cohen Simon Fraser University boydcohen@yahoo.com ABSTRACT This paper offers a typology suggesting a stakeholder theory of the entrepreneurial firm to provide a new lens for entrepreneurial management. To accomplish our task we: (1) generate from the literature a list of purported “theories of the firm”; (2) apply qualifying criteria; (3) analyze the list according to two dimensions – stakeholder inclusion and stakeholder equilibration strength – to categorize these theories of the firm into a typology that reveals the gaps in the theory-of-the-firm literature ; and (4) identify research questions for a stakeholder theory of the entrepreneurial firm that raise entrepreneurial management issues. stakeholders that enact revolutionary verses INTRODUCTION evolutionary change. The purpose of this paper is to offer a We proceed to accomplish our objectives in typology that suggests the need for and the following manner. First, we briefly situates a stakeholder theory of the present the theoretical background that gives entrepreneurial firm such that a new lens for rise to the opportunity for the introduction of entrepreneurial management emerges. This a stakeholder theory of the entrepreneurial task is necessary because there is reason to firm. Second, we identify a representative set suppose that: (1) the distinctive nature of the of theories of the firm that emerges from our entrepreneurial firm (Venkataraman, 1997) is review of the literature. Third, we further directly impacted by stakeholder relation- examine two key dimensions that we suggest ships (Mitchell, 2002a; Stinchcombe, 1965); will distinguish a stakeholder theory of the (2) the contribution of stakeholders to firm entrepreneurial firm: extent of stakeholder value is connected to the entrepreneurial inclusion (from broad to narrow); and level process (Venkataraman, 2002); and that of stakeholder equilibration strength (from accordingly (3) the individual-directed weak to strong). Fourth, we review the nature of early-stage companies makes various implicit and explicit positions of entrepreneurs particularly likely to create each theory according to both dimensions more broadly inclusive stakeholder-based and the extent of stakeholder inclusion and firms instead of more narrowly inclusive stakeholder equilibration strength, situating stockholder-based firms; and (4) the these theories in a typology implied by these tendency of new firms, through a higher two constructs. Finally, we set forth some of propensity to contain disruptive technologies the research questions and evaluate the ever- (Christensen, 1997), will be to mobilize present “so what” question.
  • 2. BACKGROUND pleasant surprise; and (4) exists in stark For the past several years, the distinctive contrast to the neoclassical conception of domain of entrepreneurship research has transacting among instantaneously increasingly centered on investigation of the optimizing actors who are exceptionally question: “How, in the absence of current well-informed, never commit an error, and, markets for future goods and service, (do) thereby, operate in instantly clearing markets these goods and services manage to come (Venkataraman, 2002, p.55). into existence?” (Venkataraman, 1997, p.120). An entrepreneurial theory of the firm This entrepreneurial process is well- is, therefore, expected to explain how the characterized by Schumpeterian notions of entrepreneur, as an individual, recognizes creative destruction (Schumpeter, 1934) that opportunity in an uncertain environment and, is accomplished by the forces of both weak by persuading relevant stakeholders to equilibration, and strong equilibration. Weak supply their resources, creates a firm to equilibration forces are those that result in a exploit such opportunity (Dew, Velamuri, & more evolutionary – or incremental – process Venkataraman, 2003). It follows that the of developing new goods and services (akin success of new firms in overcoming their to “rebuilding a stakeholder ship plank by liabilities of newness is strongly associated plank while it still remains afloat”), while with the extent and quality of stakeholder strong equilibration forces of “stakeholder relationships (Stinchcombe, 1965). innovation” result in the more revolutionary Recognition of the importance of variations processes of creative destruction (sinking in extent of stakeholder inclusion suggests “the unfair and inefficient corporate ship “recasting the central purpose of the firm as while evacuating all stakeholders to the serving the interest of stockholders to one safety of a new vessel that is better than the where it serves the stakeholders” old”) (Venkataraman, 2002, p.54). (Venkataraman, 2002, p.54). According to According to this logic, variations in the this argument variations in the extent of strength of stakeholder equilibration are also inclusion (narrowness verses breadth) of likely to be useful in the suggestion and stakeholder relationships are therefore likely situation of a stakeholder theory of the to be of interest in the suggestion and entrepreneurial firm. situation of a stakeholder theory of the entrepreneurial firm. Finally, by the very act of creating a firm, entrepreneurs occupy the unique position of Furthermore, gathering and aligning the being most at liberty to shape stakeholder contributions of all stakeholders to increase relationships with respect to both stakeholder overall firm value (Venkataraman, 2002, inclusion and stakeholder equilibration p.51; Vesper, 1996, p.4) is a critical part of strength. The latitude to create a firm is the entrepreneurial process. As distinct from essential to the entrepreneur “because it is mainstream conceptions of the perfectly through the firm that the opportunity- competitive “market process,” the term pursuing entrepreneur can coalesce and keep “entrepreneurial process” has come to be the myriad stakeholders together” deliberately used by theory-of-the-firm (Venkataraman, 2002, p.55). Thus, it is at scholars to denote a transacting process that: firm inception that entrepreneurs identify (1) is at best tending toward equilibrium, but their stakeholders and assess the relative never really in equilibrium; (2) is populated salience of each (Agle, Mitchell, & by economic actors who make errors, are Sonnenfeld, 1999; Mitchell, Agle, & Wood, sometimes ignorant, sometimes ignorant 1997), because successful founding is about their ignorance, sometimes brilliant dependent upon stakeholder support but mostly prosaic, sometimes knowingly (Stinchcombe, 1965). Furthermore, it is at or deceitful but mostly well-intentioned, and near inception that start-up firms are less boundedly rational; (3) has scope for genuine bound by the institutional constraints of the discovery, genuine disappointment, or financing and the regulatory establishment 2
  • 3. (for example, venture capitalist growth management and entrepreneurship questions norms or security regulations) or by from diverse lenses and has resulted in the technological constraints (such as a application of many theoretical frameworks dependence on existing technologies). within management and entrepreneurship Additionally, because near the time of research. However, while perhaps hundreds startup entrepreneurs and their firms are of theories have been used in management inextricably linked, it appears likely to be and entrepreneurship research, relatively few more difficult for them to avoid the impacts theories are proffered as theories of the firm. of their firm on their stakeholders and, therefore, to be more likely to take In the task of reliably identifying justifiable stakeholder relationships into full account theories of the firm, we accept and utilize the during the process of firm formation. Thus, it logic developed by Dew, Velamuri, & is not surprising that entrepreneurs have, for Venkataraman (2003) who suggest three example, been found to be significantly less criteria. According to these authors, a theory likely than managers to sacrifice personal of the firm must be capable of addressing ethics to attain business objectives (Bucar & three central questions: Why do firms exist? Hisrich, 2001) or to be more likely to take What are the determinants of their scale and stakeholders into account to overcome scope? Why do certain firms persist over liabilities of newness (Stinchcombe, 1965). It time while others do not? Under this logic, might, therefore, be expected that due to: (1) theories that do not address all three the centrality of stakeholder relationships in questions would not be considered to be entrepreneurial firms; (2) the unique theories of the firm (Dew, Velamuri, & contribution to value creation of stakeholder Venkataraman, 2003). equilibration in the entrepreneurial process; and (3) the distinctive position of the Utilizing ABI Inform, we reviewed 255 peer- entrepreneurial firm in the organizing life reviewed articles published between January cycle, that the suggestion of a stakeholder 1986 and February 2003 that contained theory of the entrepreneurial firm and its theory-of-the-firm language. We identified situation within the theory-of-the-firm within that group of articles, 27 theories that literature is warranted. are presented as theories of the firm (Table 1). We then examined each theory to assess REPRESENTATIVE THEORIES OF the extent to which the theory as presented THE FIRM successfully answers the three central qualifying questions noted above. However, The literature presently lacks a systematic we did not assess the extent to which the summary of representative theories of the proposed theories of the firm have been firm. A more comprehensive analysis would: received or thoroughly tested and developed (1) sift out from the many articles using (Grandstrand, 1998) but only their theory-of-the-firm language, those that comportment with the three foregoing actually present a theory of the firm that criteria. As reported in Table 1 (and contains a threshold level of specification; organized according to the analytical (2) identify relative strength among dimensions articulated in the next section), representative theories; (3) facilitate we found 17 of the 27 theories to comparison and contrast; and (4) identify satisfactorily address all three questions, gaps wherein the literature might further thereby qualifying them for membership in a develop. Management and entrepreneurship set of representative theories of the firm. research has utilized theories from decision sciences, economics, management, socio- ANALYTICAL DIMENSIONS logy, and psychology (Amit, Glosten, & Muller, 1993). This broad range of In this section, we briefly summarize the theoretical foundations enables management analytical dimensions (extent of stakeholder and entrepreneurship researchers to explore inclusion; stakeholder equilibration strength) 3
  • 4. TABLE 1 Representative Theories of the Firm Theory Purpose of Theory — The Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms purpose of this theory is to: Firms exist: & Scope are determined by: persist because: A-Narrow/ Incremental Agency Develop a theory of the ownership As a nexus for contracting The point at which the gross Given strong incentives for structure of the firm (Jensen & relationships, which is also increment in (firm) value is just individuals to minimize agency (Jensen & Meckling, 1976: 305). characterized by the existence of offset by the incremental loss costs, given many competing Meckling, 1976) divisible residual claims on the involved in the consumption of alternatives, and given its assets and cash flows of the additional fringe benefits due to shortcomings, the corporate form organization which can generally (managers’) declining fractional has survived the market test be sold without permission of the interest in the firm (1976: 323) against potential alternatives other contracting individuals (1976: 357). (1976: 311) Customer Value Suggest that firms’ customer value To satisfy the customer (1997: 164; The customer value strategy which They possess a customer value- (Slater, 1997) should be the focus of business and Drucker, 1973) dictates the size of the target based organizational culture activities and to propose a market and the value proposition (organized around customer value marketing based view of the (1997: 164) delivery) complemented with a theory of the firm (Slater:, 1997: skill to learn about customers 162) changing needs (1997: 164) Evolutionary Expand our understanding of Because a set of capabilities and The joint action of search and They are “selected for” within a (Nelson & economic change (Nelson & decision rules combine and evolve selection “routines” (Nelson & market environment, through a Winter, 1982) Winter, 1982) based on the inheritance of Winter, 1982) process of economic natural acquired characteristics and the selection of routines (Nelson & timely appearance of variation Winter, 1982) under the stimulus of adversity (Nelson & Winter, 1982). Exchange Construct a classical type of To both exchange (where existing The personal income distribution The combination of money flows (Boulding, macroeconomic distribution assets including money are (PID), where PID as a key and production processes provides 1950) theory to distinguish between circulated among various owners), determinant of output is effected leveraged financial incentives exchange process contributions to and to produce (where assets are by potentially volatile financial (Boulding, 1950; 1994: 1227) wealth creation and the processes created, destroyed, and transfers item (T) (Boulding, of production (Boulding, 1950; accumulated) (1994: 1227) 1950; 1994: 1227) Canterbery, 1994, p. 1227) Industrial To explain how competitive forces Because they are portfolios of Market structure: “ . . . certain stable They compete effectively within an Organization within an industry shape the activities (Porter, 1984: 423) attributes of the market that industry (Porter, 1980) (Caves, 1980: specific responses of firms within composed of the tangible or influence the firm’s conduct in the 88; Porter, 1980; that industry to the small numbers intangible semi-fixed assets or marketplace” including size Porter, 1984) bargaining power of rivals, skills necessary for the conduct of (Caves 1980: 64) suppliers, buyers, imitators, and these activities in the marketplace substitutes (Porter, 1980) (Caves, 1980: 64).
  • 5. Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because: Institutional Explain how institutional forces Because they are isomorphic with The extent of coercive, memetic, They are legitimate organizations (DiMaggio & shape organizations (DiMaggio & institutions and are therefore and/ or normative isomorphism (DiMaggio & Powell, 1983; Powell, 1983; Powell, 1983; Meyer & Rowan, legitimate organizations (DiMaggio & Powell, 1983) Meyer & Rowan, 1977) Meyer & 1977) (DiMaggio & Powell, 1983) Rowan, 1977) Population Explain the forces that shape the To produce and distribute resources Inertial nature of firms, and the They are “selected for” in the Ecology structures of organizations over (Hannan & Freeman, 1989: 5) nature of the resource space, ecology of a population due to long time spans, including how including the level of resource variations in their inertial (Hannan & populations of firms forms arise scarcity and the tightness of niche characteristics that are retained Freeman, 1989) and decline. Population ecology packing (Carroll & Hannan, 1989: despite selection pressures related theory has specific implications 411) to legitimation and competition for the nature of firms (Hannan & within the resource space (Carroll Freeman, 1989; Carroll & & Hannan, 1989: 411) Hannan, 1989) Real Entity To compare and contrast firms with To represent the moral authority of The outcome of its organization and Of the existence of a moral (Metzger & humans in an attempt to depict its members. Firms, however, are management and activities (2001: authority; and because of the Dalton, 1996) legal and philosophical firm seen as naturally occurring beings 496) collective result of decisions made models (2001: 494) with characteristics beyond those by individual persons relative to of its members. (2001: 496) that authority (Werhane, 1985: 46.) Resource-based Analyze firms from the resource side Because the creation of new The indivisibility of the resource Resources are rare and non- (Barney, 1991; rather than from the product side productive services requires the bundles that must be collected to substitutable; and due to unique Penrose, 1959; (Wernerfelt, 1984: 171) collection of resources that results satisfy relevant demand for historical conditions, causal Wernerfelt, in a firm (Penrose, 1959: 77, 85) heterogeneous productive services ambiguity and/ or social 1984) (1959: 67, 68, 75, 77, 83) complexity, are also imperfectly imitable (Barney, 1991: 105-112) Strategic To extend transaction-cost theory of To create isolating mechanisms The relative importance of Of the differential prevention of (Liebeskind, the firm to incorporate knowledge (1996: 94). Firms are more knowledge components to a expropriation of knowledge, and 1996) in explaining the relationship capable of isolating and protecting firm’s strategy. If particular the differential protection of between organization and knowledge (at lower transaction knowledge is critical, firms will imitation, through limiting competitive advantage costs) than are markets. expand their scope to bring the observability of knowledge (1996: (Liebeskind: 1996: 93). knowledge inside the firm, 94). assuming the benefits exceed the costs (1996: 103). 5
  • 6. Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because: B-Broad/ Incremental Behavioral Develop an empirically relevant, To form coalitions of individuals in Temporal or functional coalitions of Because they are an adaptively process-oriented, theory of order to attain collective objectives participants formed to make rational system: successful (Cyert & March, economic decision making (Cyert (p.28) through decision-making decisions (1963: 27) adaptations to firm behavior and 1963) & March, 1963: 3) which predicts processes (1963: 290) resource allocation by coalitions firm behavior (1963: 19) (1963: 99) Game Theory To provide an alternative theory of To reduce the costs of Qualitative changes in the reservoir Through the recombination of (Kogut & the firm which accounts for communication and coordination of of social knowledge available to knowledge. Firms evolve through Zander, 1996) ownership, incentives, and self- embedded social knowledge (1996: economic agents (1996: 503). the opportunities and influences interest (Kogut & Zander, 1996: 503) of the external environment 502). (1996: 503). Resource Include the role of external control Because bridging and buffering The effectiveness of bridging and They effectively manage resource- dependence of organizations in organization mechanisms around a technological buffering mechanisms (Scott, dependent power relationships (Pfeffer & theory (Pfeffer & Salancik, 1978) core create organization (Pfeffer & 1987) (Pfeffer & Salancik, 1978) Salancik, 1978) Salancik, 1978: 106, 108; Scott, 1987: 182-198). Stakeholder Describe how organizations operate To fulfill some set of their various The structuring and choice They effectively manage the (Brenner & and to help predict organizational stakeholders’ needs (Brenner & processes of the firm’s stakeholder value matrix of the Cochran, 1991) behavior (Brenner & Cochran, Cochran, 1991: 453) management (Brenner & Cochran, firm (Brenner & Cochran, 1991: 1991: 452) 1991: 455) 455, 465) Transaction Generalize and extend transaction Because they are bundles of The size of the cumulated value They economize on multi-level Cognition cost economic theory to transactions which aggregate networks that must be assembled transaction costs: Lower-level (Mitchell, 2001) demonstrate how entrepreneurial because together they minimize to serve stakeholders at minimum markets fail (thus firms form per cognitions (planning, promise, transaction costs (2001: 83) transaction cost (2001: 88) Coase, 1937); and higher-level and competition) create new value aggregations (hierarchies) do not at multiple levels of analysis, yet form (Mitchell, 2001) through the reduction of cross- level transaction costs (Mitchell, 2001) Transaction Cost Explain why firms form as an To economize on transaction costs First-order economizing They are relatively more efficient Economics alternative to the market (Coase, through substitution at the margin (Williamson, 1991) than markets (firms form when (Coase, 1937) 1937) (Coase, 1937; Williamson, 1985) markets fail) (Coase, 1937) 6
  • 7. Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because: C-Narrow/ Revolutionary Entrepreneurial Set out a general framework within To improve coordination by Factors supporting entrepreneurial Entrepreneurs monitor the (Casson, 1996; which all the key questions in the structuring information flow, insight, e.g., level of information environment and effect changes to Witt, 1998) theory of the firm can be brought which requires that it be endowed synthesis (to make price and respond to change as dictated by together at once (Casson, 1996: with legal privileges, including production decisions), necessary the environment (Casson, 1996) 55) indefinite life (1996: 56) sunk costs to permit necessary customization, level of desire to appropriate the value of profit opportunities (Casson, 1996) D-Broad/ NONE NONE NONE NONE Revolutionary Non-Theories of the Firm Competence-based Set out a general form alternative to N/A N/A N/A (Hodgson, 1998) contractarian (e.g., Coase) theories of the firm (Hodgeson, 1998: 25). Competence-based theories are an omnibus grouping rather than a specific theory (Hodgeson, 1998) Computational Present a framework for analyzing N/A: This theory assumes the A collection of information Repetition of successful activities (Barr & the information processing existence of firms. processing units (2002: 345). and recognition patterns through Saraceno, 2002) (learning) behavior of firms, Optimal firm size changes as the learning algorithms (2002: 351). where firms are viewed as environment changes (2002: 346). artificial neural networks (Barr, 2002: 345). Economic Use business history, in particular To bring together producers and The attainment of sustained They provide protection from Development the contractual choices made by investors in response to incomplete capabilities (1998: 70) economic holdup (1998: 70) (Lamoreaux, 19th-century entrepreneurs to contracts and market power (1998: 1998) organize their businesses, to 70) reflect on the nature of the firm (1998: 66) 7
  • 8. Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) —Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because: Knowledge-Based Explain knowledge creation, sharing Knowledge-based view does not What the firm makes and what it Combinative capabilities in the (Kogut & and transfer within a firm (Kogut explain why firms exist in lieu of buys (1992: 385) creation of difficult to codify and Zander, 1992) & Zander, 1992: 383) opportunism or moral hazard (Foss, highly complex embedded 1996) knowledge (1992: 385-388). Managerial Describe a “new” organizational N/A: This theory assumes the The clustering of roles amongst They successfully decentralize (Bartlett & form characterized by radical existence of firms. three distinct organizational decision making and renew Ghoshal, 1993) decentralization in the creation of groups (front-line, middle continuously while establishing self-contained units and frontline management, and top stabilizing mechanisms which entrepreneurship (Bartlett & management) which work across reduce complexity and guide Ghoshal, 1993). decentralized units (1993: 41) action (1993: 36) Neoinstitutional To provide an explanation of To attain constrained profit N/A: Does not address firm The use of alternative decision (Furubotn, 2001) management decision making maximization (2001: 151). boundaries. making (without knowledge of where profit maximization is not optimal solutions) to attain profits cost-effective given transaction through efficiency relative to costs and bounded rationality industry competitors (2001: 144). (Furubotn, 2001: 143) Neoclassical Justify laissez-faire economics It is only for the sake of profit that N/A: Neoclassical economics has no They are important actors in (Smith, 1937) (Lerner, 1937: viii) with respect to any man employs capital in the positive theory to determine the markets (1976: 306) firm activity that is motivated by support of industry (Smith, 1937: bounds of the firm (Coase, 1937; profit seeking and is guided by an 423). However, this is a theory of 1963: 15) invisible hand (Smith, 1937: 423). markets in which firms are important actors (Jensen & Meckling, 1976: 306); profit maximization is one of many goals or not a goal at all (Cyert & March, 1963: 8) Political (Muller & To define the role of outside N/A: This theory assumes the N/A: Inside versus outside They reduce rent-seeking costs Warneryd, 2001) ownership in minimizing the risk existence of firms (2001: 527) ownership is not associated with through optimal level of outside of opportunistic behavior arising scale and scope. ownership (2001: 529) from imperfect formal enforcement (Muller & Warneryd, 2001: 527) Property Rights To predict the acquisition of assets N/A: This theory assumes the The assets owned by the firm (1986: They identify the optimal ownership (Grossman & by one firm from another and to existence of firms (1986: 692) 692) structure to minimize loss due to Hart, 1986) explain the costs and benefits of investment distortions (1986: integration (1986: 695). 710). Resource-learning To suggest a theory that integrates N/A: This theory assumes the Bundles of unique resources Of the accumulation of unique and (Mahoney, constructs from resource-based, existence of firms. (Mahoney, 1995) valuable resources through the 1995) dynamic capabilities, and learning development of competitive theory (1995: 91). mental models (1995: 97). 8
  • 9. Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006 that we have utilized to create a typology holders (Quadrant D). Could this analysis (Figure 1) that situates identified theories of presage recognition of the emergence of a the firm relative to the foregoing dimensions. new type of entrepreneurial firm? Extent of Stakeholder Inclusion Interestingly, in our analysis we noticed that the scale and scope theory-of-the-firm The scale and scope theory-of-the-firm criterion (Table 1 – column 4) speaks to the criterion in the definition of a firm defines extent of inclusion or exclusion of the extent of inclusion or exclusion of stakeholders; and we also noticed that the stakeholders. Extent of stakeholder inclusion existence and persistence theory-of-the-firm can be conceptualized as being broad (to criteria (Table 1 – columns 3 and 5) speak to include a great many stakeholders) or as equilibration strength. An examination of the being narrow (to exclude most potential map created using these criteria (Figure 1) stakeholders, leaving a very limited set of suggests that a stakeholder theory of the actual stakeholders). In the stakeholder entrepreneurial firm might fill in an under- literature, the broad definitions attempt to researched area of theory development, specify the empirical reality that virtually thereby, fulfilling a needed function in the anyone can affect or be affected by an theory-of-the-firm literature which, as more organization’s actions, while the narrow fully explained in the final section, would definitions attempt to specify the pragmatic explain firms with broadly inclusive/ reality that firms simply cannot attend to all revolutionary (strong equilibration) stake- Figure 1 - A Theory of the firm Typology Stakeholder Inclusion NARROW BROAD C D Stakeholder REVOLUTIONARY Narrow/Revolutionary: 1 Broad/Revolutionary: 0 Equilibration Strength A B INCREMENTAL Narrow/Incremental: 10 Broad/Incremental: 6 actual or potential claims and must,therefore, Stakeholder Equilibration Strength employ some prioritizing system to limit the extent of inclusion in the firm (Mitchell et Both the existence and persistence theory-of- al., 1997, p.854). As anchor points in our the-firm criteria may be used to define the analysis we have used, at the broad end of strength of stakeholder equilibration in the the spectrum, Freeman’s (1984) definition of definition of a firm. Accordingly, stake- stakeholders, which includes “any group or holder equilibration strength is defined to be individual who can affect or is affected by the degree of impact that stakeholder actions the achievement of the organization’s have upon the existence and persistence of a objectives” (Freeman, 1984, p.46). As an firm. The level of stakeholder equilibration anchor point for the narrow end, we have strength is relevant to an examination of used Clarkson’s (1995) definition of primary theories of the firm that seeks to situate a stakeholders: those without whose contin- stakeholder theory of the entrepreneurial uing participation the firm cannot survive as firm, because the role of the entrepreneur in a going concern (Clarkson, 1995, p.106). relationship to stakeholders is catalytic: 9
  • 10. Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006 entrepreneurs recruit stakeholders to create interpretation. Discussion continued until we new combinations of resources to produce were able to reach agreement for how to new value (Schumpeter, 1934). Weak situate each of the 17 theories of the firm equilibration entrepreneurial processes occur within the 2 x 2 framework suggested by the all the time in a market economy, where analytical dimensions utilized. The results of entrepreneurs merely realize or conjecture this analysis are presented as the first four (either through genuine insight and sections 1 in Table 1, and are also reported in knowledge, or through mere luck) that some Figure 1. Based on the foregoing two resources are underutilized in their current dimensions, we identified the four distinct occupation (i.e., there is disequilibrium) and theory-of-the-firm quadrants shown. A brief recombine them – through incremental description of each quadrant follows, which adjustments to existing stakeholder relation- presents a sample theory from each ships – into a potentially more useful and quadrant. 2 fruitful combination (Venkataraman, 2002). Strong stakeholder equilibration Quadrant A entrepreneurial processes take place where the distribution of value to its creators Theories considered to be both narrow in becomes so inequitable under normal market their orientation towards stakeholder conditions that a change is necessary in the inclusion, and incremental with respect to economic order – through the revolution of stakeholder equilibration strength appear in creative destruction (Schumpeter, 1934) quadrant A. As Figure 1 indicates, the engineered by entrepreneurs who effectuate, majority of the theories of the firm under in reality, (Sarasvathy, 2001) the unfailing consideration (10 of 17) fall into this power of innovations in goods and services category, and include (in alphabetical order): to produce among relevant stakeholders the agency, customer value, evolutionary, insistence upon change (Venkataraman, exchange, industrial organization, 2002). In either case (weak or strong), the institutional, population ecology, real entity, nature of the entrepreneur/stakeholder resource-based, and strategic theories of the interface affects the existence and firm. Theories in this quadrant tend to be persistence of the firm. focused on the most constricted set of conditions, by which we mean exclusive Implied Typology verses inclusive, and constrained to explain only incremental change. In our analysis, we sought to gain a seminal view of each of the theories of the firm For example, agency theory appears to included therein by reviewing the first belong in this quadrant because, with respect introduction or an influential publication of to stakeholder inclusion, agency theory is the theory, as well as (where helpful) primarily concerned with principal/owner subsequently published research utilizing or and agent relationships that are manifest in a critiquing the respective theories. We, as firm boundary (for purposes of the theory) authors, then engaged in a series of that is tightly focused. As reported in Table analytical discussions regarding the 1, Jensen and Meckling (1976, p.323) “plotting” of each of the theories of the firm suggest that firm scale and scope, as across the two foregoing analytical dimensions (Figure 1). Each author 1 The fifth section of Table 1 contains the presented his own interpretation of the ten theories that did not qualify in our analysis theory’s relationship to the dimensions based under all three criteria. on the review of the relevant publications for 2 The reader is invited to further utilize each theory. When a disagreement arose, the Table 1 as a means to more fully elaborate each authors redoubled their dialog, each quadrant. explaining the rationale for their 10
  • 11. Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006 considered by agency theory, is bounded by boundaries but efficiency (Williamson 1985) firm ownership: “set at the point at which the and is, therefore, applicable to the gross increment in (firm) value is just offset coordination and alignment of activities by the incremental loss involved in the amongst a wide range of stakeholders in the consumption of additional fringe benefits economic system. Nevertheless, TCE due to (managers’) declining fractional specifies only incremental stakeholder interest in the firm,” which we take to imply equilibration strength because, according to a narrow set of firm stakeholders. With TCE, stakeholders exert relatively little respect to stakeholder equilibration strength, direct influence on the firm but, instead, have agency theory describes how agents of a firm incremental impacts as various stakeholders act on behalf of the owner depending upon influence the costs of transactions that are the proper alignment of incentives. Incentive manifest in substitutions at the margin alignments are fundamentally incremental in (Coase, 1937). According to TCE theory, their equilibration strength because they are a substitution at the margin consists of the nexus for contracting relationships that is transaction-by-transaction replacement of characterized by the existence of divisible hierarchy for market that occurs “at the residual claims on the assets and cash flows margin” (in an incremental manner based of the organization that can generally be sold upon the most miniscule efficiency without permission of the other contracting advantages), such that society becomes “not individuals (p.311). Furthermore, given an organization, but an organism” (Coase, strong incentives for individuals to minimize p.387) - by its organic nature destroyed by agency costs, the many competing verses nourished by a strong equilibration alternatives and the shortcomings of the process. corporate form, the corporate form has survived the market test against potential Quadrant C alternatives (p.357), indicating a low susceptibility to strong stakeholder Theories focused on only a narrow set of equilibrating forces, and a greater likelihood stakeholders but with a revolutionary view of that a weak-equilibration characterization is stakeholder equilibration strength fall into most apt. Quadrant C. We were only able to identify one theory of the firm that appears to belong Quadrant B in this quadrant. This theory, the entrepreneurial theory of the firm, claims to Theories of the firm which are broad in their set out a general framework within which all inclusion of stakeholders but remain the key questions in the theory of the firm incremental in their stakeholder equilibration can be integrated (Casson, 1996; Witt, 1998). strength, appear in quadrant B (Figure 1). Six theories of the firm appear to fit into this However, somewhat surprisingly, we were quadrant and include: behavioral, game, constrained to assess the entrepreneurial resource dependence, stakeholder, theory of the firm to be narrow in its transaction cognition, and transaction cost stakeholder inclusion because – as suggested economic theories of the firm. Transaction in Table 1 – it appears to only be focused on cost economics (TCE) provides an example a narrow set of environmental actors that can of theories of the firm that reside in quadrant have a direct impact on the firm: those B. stakeholders implicated in generating and informing entrepreneurial insight (Casson, As noted in Table 1, TCE is broad in its 1996). This is in contrast to theories which inclusion of stakeholders due to the nature of consider a broader set of internal and the first-order economizing process external stakeholders, such as stakeholder motivating transaction cost economizing theory (and other such theories appearing in (Williamson, 1991) which knows few Quadrant B). Yet the entrepreneurial theory 11
  • 12. Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006 of the firm does have a revolutionary In our present assessment, we observe that orientation towards stakeholder equilibration presently extant theories mainly explain strength, suggesting that stakeholders firms that form to manage incremental external to the firm (e.g., environmental changes in the value creation process, which forces that dictate responses to change) bring occur over some continuum of a relatively to bear the full power of the environment on narrow to somewhat broad level of a firm that is reflexively adaptable: to stakeholder inclusion. Stakeholder theory reformulate itself to achieve indefinite life, (Brenner & Cochran, 1991; Freeman, 1984; thus, being subject to and responsive to Mitchell et al. 1997) has developed to strong equilibrating forces. manage the inclusiveness dimension. What is missing within the stakeholder theory-of-the- Quadrant D firm literature is theory that explains broadly inclusive firm formation that is also Theories of the firm which have a broad revolutionary in nature. Such phenomena do view of stakeholder inclusion and a exist, such as firms that produce so-called revolutionary orientation towards disruptive technologies (Christensen, 1997). stakeholder equilibration would be included The intended purpose of a stakeholder theory in Quadrant D. However, as indicated in of the entrepreneurial firm then would be to Figure 1, we found no theories of the firm advance theory that addresses the three that appeared to be likely inhabitants of this requisite dimensions in our analysis: the quadrant. Accordingly, we observe that emergence, growth/size, and persistence of given the lack of theoretical development broadly inclusive, revolutionary firms associated with a combined orientation (Figure 1, Quadrant D). toward revolutionary equilibration strength and a broad view of stakeholder inclusion, Reason for Firm Existence there appears to be a need for such a theory. In the following section we inquire about the A stakeholder theory of the entrepreneurial outlines of a potential theory that would fill firm would explain why broadly inclusive this gap in the literature – what we term a revolutionary firms might be expected to stakeholder theory of the entrepreneurial exist in the first place. Theoretical firm – which we hope will address the justification abounds for firms that are deficiency in the extant theories of the firm. incremental in their equilibration strength (Table 1; Figure 1, Quadrants A & B). We wonder at the paucity of theories of the firm TOWARD A STAKEHOLDER THEORY that possess revolutionary equilibration OF THE ENTREPRENEURIAL FIRM strength. We are hopeful, in highlighting this paucity, that we will draw research attention Purpose of a Stakeholder Theory of the to the investigation of such questions as: Are Entrepreneurial Firm the forces in play so powerful that firms, as we know them, are simply inadequate to As illustrated in Figure 1 (which plots the contain the socioeconomic energy generated? typology suggested by our analysis in Table Are all entrepreneurial firms to be considered 1), the theory-of-the-firm literature is to be revolutionary or are there both missing broad/revolutionary theories of the incremental and revolutionary types of firms, firm (Figure 1, Quadrant D). In this section necessitating theory that explains each and of the paper, we suggest that a stakeholder the distinction between them? Are there, theory of the entrepreneurial firm might fill within the coordination, bridging/buffering, this void. We therefore inquire: What decision-making, economizing, and other purposes would such a theory serve that reasons for firm existence, those theories extant theories do not serve? with a logic sufficiently compelling to explain the reasons for broad/revolutionary 12
  • 13. Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006 firms? Attention to these questions will persistence of the phenomenon, is there a contribute to a better understanding of place in the theory-of-the-firm literature for reasons for these firms’ existence. such broadly inclusive, revolutionary but provisional systems (BIRPS)? Scale & Scope DISCUSSION A stakeholder theory of the entrepreneurial firm would also explain the scale and scope Stakeholder thinking is essential in business. of a broadly inclusive revolutionary firm. And knowing who or what really counts This is an issue at present because, in its (Mitchell, et al., 1997) does matter. In this initial conceptualization, Schumpeterian paper, we use two dimensions of counting: entrepreneurship (the notion that new (1) making a stakeholder mistake that can combinations follow processes of creative tear apart a business – the equilibration destruction) is applied to entrepreneurs as problem; and (2) making a stakeholder individuals, not to firms/organizations mistake that can impair a business for lack of (Schumpeter, 1934). Progress toward the support – the inclusion problem. specification of a broad/revolutionary theory of the firm should explicitly lay out why and The “so what?” implications of this type of how organizations might become implicated analysis indicates that we can use these two in processes of revolutionary creative dimensions to create a means to interpret a destruction, especially since it is commonly great many proposals for: (1) why firms expected that most organizations will do just come into existence in the first place; (2) the opposite in the face of the emergence of how big they grow; and (3) when they disruptive technologies (Christensen, 1997). become obsolete and fail to persist. Scale and scope dynamics are also an issue because the motivation for stockholders As practitioners in the arena of small (narrow) verses stakeholders (broad) has business and entrepreneurship, having this traditionally been financial. Thus, a credible analytical framework available to us would reason for broad inclusion and the motive make it possible to see ourselves from purpose for such inclusion must be identified multiple viewpoints and, thereby, better and has only recently begun to be explored understand the kinds of decisions that are (Mitchell, 2002b). truly important. So-called “theories of the firm” have been a topic of discussion among Persistence thoughtful practitioners for many decades for just this reason: to answer the why, how, and Lastly, a stakeholder theory of the when questions noted in the previous entrepreneurial firm would explain the paragraph. While not every theory applies to persistence of a broadly inclusive every business, it is not unreasonable for revolutionary firm. Even should we accept as low-change businesses in narrowly defined given the reasons for existence and for the niches to utilize the theory-lenses in Figure 1 bounding of scale and scope, we would not – Block A and for lower-change businesses have answered the question: Why couldn’t in broadly defined niches to view themselves the broadly inclusive/revolutionary firm through the theory-lenses in Figure 1 – Block simply be a transitory form that regularly B. Perhaps of greater import is for people in precedes or is commonly attendant to the businesses who are in high-change, broadly entrepreneurial event? If so, is such an inclusive settings to be aware that there is explanation, no matter how ably it explains very little research and documented existence, scale, and scope, really never is understanding of this situation and to see this destined to be a theory of the firm because it as a potential opportunity to explore the does not explain persistence? Furthermore, ways to incorporate stakeholders more even if an argument can be made for the 13
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