The Significance of Social Relations in Entrepreneurship - Essay Example

? Entrepreneurship inserts his/her s Department’s Entrepreneurship has traditionally been perceived as an isolated process whereby the individual organizes resources and uses them for developing the new venture. However, various theories have highlighted the role of knowing individuals and argue that entrepreneurship revolves around whom you know. These theorists argue that social networks provide privileged access to entrepreneurs to their required resources which helps them progress in the business. On the other hand, there are factors other than knowing others which contribute to successful entrepreneurship. The paper develops a critical view towards the notion of social networking and contact-building and its relationship with entrepreneurship. The significance of social relations in entrepreneurship has since long been recognized with the same being used by entrepreneurs to obtain resources and advice on starting their business. This is because the need for contacts is evident at various phases of the new business. Relationships between entrepreneurs and those who possess resources required for the startup are quintessential to the success of a new business. Although the entrepreneur possesses the competence and knowledge as well as a novel idea to run the business, complementary resources may be required. Contacts provide the resources, knowledge and/or market accessibility required for making the business idea work. Knowing individuals and organizations that operate amongst themselves broadens the resource base available to entrepreneurs for successfully running the business. Contacts that enable success of the new firm comprise the social capital and are essential components of entrepreneurial networks. The social capital, therefore, refers to the individuals who help entrepreneurs in getting things done. These contacts include, but are not limited to, individuals in the professional networks as well as friends and peers from past jobs. They form the basis of the wider entrepreneurial networks that comprise of not just individuals but clusters of companies and organizations. By increasing the size of their networks and number of contacts, entrepreneurs can get access to greater information and resources from those who are knowledgeable. Furthermore, the way in which entrepreneurs “position” themselves in the network determines the extent to which they are able to take advantage of their contacts. The aim of such positioning is to shorten the path to the contacts in order to get tasks done. Finally, members of the social network often tend to organize themselves by interacting amongst themselves which leads to the development of ‘multiplex’ ties that benefit the entrepreneur even more. Furthermore, family members too can play an important role in entrepreneurial success. In fact, they play a critical role in so far as entrepreneurship is examined in the context of family business (Rosenblatt et al., 1985). Therefore, knowing family members who have been involved in entrepreneurial business in the past is definitely an ingredient for success for family-run entrepreneurial businesses. Entrepreneurs can benefit from the unique business-specific knowledge that is possessed by their family members including parents. Most importantly, for maintaining confidentiality of the business idea, most entrepreneurs may find it easier to obtain advice and guidance from their kin rather than non-kin contacts. On the other hand, having strong family ties may inhibit entrepreneurs from accessing a much larger pool of resources and information from non-kin contacts (Birley, 1985) (Renzulli et al., 2000). It is rare to have knowledgeable individuals from all disciplines of business (such as operations, marketing, HR) in one’s family (Renzulli et al., 2000). Hence, entrepreneurs will, at various times acquire the support of their acquaintances for this purpose. However, this social network is not developed instantaneously and may take several months or even years to develop. Research further substantiates this by claiming that most entrepreneurs in the U.S have an age higher than that of employed individuals (Greve & Salaff, 2003). This is justified because seniority in life generally equates with the establishment of stronger and better contacts or personal connections. The need for contacts and personal connections tends to vary at various stages of the new venture. The creation of a new venture has been typically classified as having two major transitions. The first transition occurs when entrepreneurs have decided upon the business idea and is actively engaging in activities to achieve his/her objectives (Reynolds et al., 2004)(Semrau & Werner, 2012). In order to give birth to a business which is functional, entrepreneurs are required to develop models, forecasts, business plans , a venture team as well as legal existence (Liao & Welsch, 2005) (Carter et al., 1996). During these transitions the entrepreneur is required to have access to intangible and tangible inputs and then combine them to produce the required output (Ucbasaran et al., 2001). One major input during these transitions is the need for consultation and acquiring information from others. Typically, during the first phase of starting a business, entrepreneurs elicit the support of their closest relations or family members. In the next stage of planning, the need to enlarge one’s network of contacts is highest for entrepreneurs as well as the most time-consuming. Finally, once the business has started successfully and is up and running, entrepreneurs typically reduce the circle of people they know to include only the one’s most valuable or most important (Greve & Salaff, 2003). Therefore, although entrepreneurship has been thought of as a highly individualistic profession, the role of contacts is extremely important for the same. Entrepreneurship, has therefore, been defined as being embedded in social structures. Various economists have propagated theories regarding entrepreneurship with most of them taking a modern approach towards the same. These theorists claim that entrepreneurs operate in a social environment whereby they are responsible for the advancement and coordination of activities while operating under an economic system. Furthermore, the networks in which entrepreneurs operate tend to include both physical and social networks. However, physical networks are often supplemented with social networks. For instance, trading network available to entrepreneurs may be physical whereas the communication for dealing with trade may be social(Casson & Giusta, 2007). Physical networks comprising the physical movement of goods and services in the entrepreneur’s business is often complemented with social networks. These include business enquiries, consignments, price quotes and sales and purchase orders (Casson & Giusta, 2007). Whereas physical infrastructure such as availability of electricity, roads, buildings etc. may be a consideration for deciding on the business’s location, social infrastructure comprising of trust and interpersonal relationships is also important. Various theories have highlighted the significance of networking in business success. Most of these have highlighted the role that networking plays in motivating entrepreneurs and providing incentives for pursuing the business. Therefore, the socioeconomic environment in which entrepreneurs operate gives them an edge over rivals in terms of exploitation of economic efficiency as facilitated by their networks (Szarka, 1990). For instance, studies conducted in Zimbabwe and Kenya point to the advantage provided by personal networks in terms of preferential access to credit from suppliers (Fafchamps, 1998). Further research has differentiated between local and global networks and highlights that, while local networks are required to reduce uncertainty for the entrepreneur, globalised networks tend to provide greater information about customers, markets and technology to larger firms (Barr, 2000). Therefore, the size of the venture started by the entrepreneur greatly determines the types of individuals he/she may be required to know. It has been observed that entrepreneurs tend to face costs of transaction and learning upon entering particular industry which is dependent on the competition and technological sophistication in that industry(KRISTIANSEN, 2004). Networks allow entrepreneurs to reduce transaction costs and enhance scope for sharing information, thereby reducing costs associated with learning(KRISTIANSEN, 2004). This is particularly important in nations where financial markets are naive and laws are weak as having contacts can enable entrepreneurs secure contracts and circumvent taxation or other laws (KRISTIANSEN, 2004). Furthermore, interaction and contact-building with other entrepreneurs is just as important as it allows entrepreneurs to step into the global markets whereby they can offer new ideas and products based on their market knowledge and competitor’s ideas. Since competition has been replaced by collaboration in recent years, it is quintessential for entrepreneurs to cooperate with each other through networks rather than compete. Learning from others is a great way to compete. Various theories, such as those offered by Coleman, tend to focus on the availability of dense networks to entrepreneurs that, through the development of trust and interconnectedness, tend to facilitate the exchange of resources (Coleman, 1988). On the other hand, research has not proven yet whether larger networks necessarily translate to profitable venues for entrepreneurs. Therefore, one may infer that it is the quality of network (whom the entrepreneur knows) rather than size that matters. Also, some researchers have pointed out how the development of social networks may be a costly effort. At the very least, entrepreneurs may be required to offer compensation or other resources in return for the resources obtained from the network (Witt, 2004). Also, the process of developing network relationships is time-consuming and may lead to an opportunity cost in terms of lost effort and concentration on other endeavors required for the startup. Most importantly, the X-efficiency theory laid down by Leibenstein highlights the importance of information and knowledge within the economy for facilitating entrepreneurship (Leibenstein, 1968). The inefficiency with respect to collection, distribution and dissemination of knowledge leads to knowledge gaps between various members of a network which creates opportunities for the entrepreneur. Therefore, it may be sufficient to merely know individuals but to benefit from their knowledge. Hence, the creation of social capital is quintessential along with networking when it comes to successful entrepreneurship (Davidsson & Honig, 2003). Entrepreneurs, however, tend to exploit opportunities which they can best recognize and exploit. Entrepreneurs may develop an intuition regarding the appearance of a future opportunity by talking to people. However, it is only when entrepreneurs are given the information that they are alerted to the timing and nature of such opportunity (Casson & Giusta, 2007). On the contrary, the exploitation of opportunity is not merely attributed to his/her social circle but because he is aware of the information he is looking for and where he is most likely to get access to the same. This tacit know-how or knack is inherent in most entrepreneurs. Therefore, the significance of knowing individuals is undermined by this trait of entrepreneurs which is necessary in addition to having the right contacts. Even if the entrepreneur knows the right people to extract work and information from, it is ultimately the entrepreneur’s quality of making judgmental decisions that makes him/her successful. Successful entrepreneurs possess a distinctive perspective on the situation at hand which enables them to find unique solutions and discard some information while considering the rest. Not all entrepreneurs are able to do this as this quality largely depends on the entrepreneur’s prior experience and ability to have worked with various economic sectors. Some authors, such as Vesper, have shed light on the “strategic adaptation perspective” which describes the five critical success factors for entrepreneurs which include: the idea, technical know-how, personal contacts, physical resources and customer orders (Vesper, 1980). Hence, it is important to consider factors other than personal contacts such as the traits that these entrepreneurs possess. For instance, research has demonstrated that entrepreneurs have greater risk tolerance and tolerance for ambiguity along with the need for achievement compared to salaried managers (Mitton, 1989). Still other theorists have highlighted the presence of an internal locus of control and risk-taking ability as a key feature of entrepreneurs starting a business. This is true because the entrepreneurs must come to terms with the fact that ultimately his/her investment will suffer if the business does not make a profit. Even though contacts can help reduce this risk, it is the entrepreneur’s emotional strength and control that enables him/her to survive through tough business times. Greater tolerance for ambiguity also results in the creation of successful entrepreneurship. This can be explained by the example of Richard Branson who, initially created Virgin Atlantic as an airline and later diversified into unrelated business lines such as music, entertainment, travel and entrepreneurship which carried high risk. Therefore, it is not surprising that literature has highlighted on the need for traits such as charismatic personality, self-confidence and perseverance as requirements for effective venture management. These personal qualities can even compensate for lack of funds. Some small businesses fail to flourish simply because of lack of talent. Hence, if an entrepreneur has a lot of finance, strong contacts and a sound business idea it is unlikely that the business will flourish unless the entrepreneur possesses tacit knowledge or the knack of doing business. In some cases this may be innate or hereditary whereas in others it may be acquired through education and training. Another critical success factor pertains to management support towards development of small businesses. It is no wonder that organizations such as the Small Business Administration (SBA) in U.S have been set up to provide funding and access to resources to such entrepreneurs. In this case, networks may take a backseat because the government provides access to important data and helps in the development of “business incubators” by providing support such as tax exemption. Furthermore, special economic zones may be developed by governments to encourage entrepreneurial activity in countries. However, governments are no longer restricting themselves to the provision of financial incentives and have gone as far as offering social platforms for entrepreneurs in order to help them succeed. It is not uncommon to find public-private partnerships for the development of knowledge initiatives for entrepreneurs. All this provides entrepreneurs with far greater pool of resources and support than they would have achieved alone with their own personal contacts. Perhaps a more interesting observation has been made by theorists who have come up with the concept of venture community. These theorists argue that individuals or groups of individuals that assess proposals for new ventures develop the ability of differentiating between winning and losing proposals over time. Venture teams that are experienced tend to enhance the performance of venture firms. Furthermore, the product or service being offered by the entrepreneurial start-up is critical to its success. For instance, research has shown that ventures that have been successful have targeted market segments that have a high concentration of customers and that the product offered to such segments is technologically superior which guarantees it a competitive edge. Similarly, other factors responsible for successful entrepreneurship have been identified. These include the extent to which the business has been kept aloof from its rivals and the degree to which customers demand the product being offered and have demonstrated commitment to purchasing it. On the other hand, it may be argued that the list of critical success factors for entrepreneurship cannot be generalized for all entrepreneurs. This is because ventures differ in terms of their structure, the industry in which they are entering and the market entry strategy being adopted. As per this view, researchers have suggested that the characteristics of the entrepreneur bear little impact upon the venture’s performance as opposed to the relationship between the venture’s strategy and the industry structure which has strong effect on performance of the start-up. To sum up, it is safe to conclude that doing business successfully is not merely about whom you know as factors other than social networking and personal contacts are important. This is where the role of the government becomes important which, through its physical and monetary support, enables ventures to flourish compared to those that do not have access to such support. Nevertheless, the role of knowing individuals, particularly family members with prior entrepreneurial experience, cannot be undermined. Social contacts play a critical role in providing resources and advice for charting the course of the venture. Most importantly, the role of family members becomes critical where the business idea has not yet been disclosed to the market and the entrepreneur wishes to seek advice regarding the feasibility of the idea which is yet to remain confidential. Perhaps, one of the most interesting aspects of this research was the discovery that the mix of success factors for entrepreneurship cannot be generalized for all. Furthermore, it has been intriguing to find out that governments have not started extending greater support for development of social networks for entrepreneurs rather than their traditional role of providing finance and resources. Overall, this research has provided me with a broader perspective on the ingredients for entrepreneurial success rather than my traditional bird’s eye view of the same. I have been able to acknowledge the significance of knowing the right individuals to have access to information as well as the need to offer a product or service that will actually be purchased by the customer. References Barr, A., 2000. Social Capital and Technical Information Flows in the Ghanaian Manufacturing Sector. Oxford Economic Papers, 52(3), pp.529-59. Birley, S., 1985. The role of networks in the entrepreneurial process. Journal of Business Venturing, 1(1), pp.107-17. Carter, N.M., Gartner, W.B. & Reynolds, P.D., 1996. Exploring Start-Up Event Sequences. Journal of Business Venturing, 11(3), pp.151-65. Casson, M. & Giusta, M.D., 2007. Entrepreneurship and Social Capital: Analysing the Impact of Social Networks on Entrepreneurial Activity from a Rational Action Perspective. 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