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Exploring the relevance ofSchumpeterian considerations to
entrepreneurship & family business
INTBUS705 Advanced Entrepreneurship -
AssessmentTwo:Contextual Essay
By Jessica Maher
October, 2010
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Jessica Maher | INTBUS705 Essay | October, 2010
Maher,J(2010)Exploringth
erelevanceofSchumpeterianconsiderationstoentrepreneurship&familybusiness,Univ
ersityofAuckland
2
INTRODUCTION & EXECUTIVE SUMMARY TO BE ENTERED HERE
AND CHANGED INTO DARK GREY TEXT
INTBUS705 Advanced Entrepreneurship - AssessmentTwo:Contextual Essay
Exploring the relevance of Schumpeterianconsiderations
toentrepreneurship & familybusinessByJessica Maher
Given the widely accepted adolescence or youth characterisation to the field of
entrepreneurship (de Bruin & Lewis, 2004, p. 638) the variance and difference in what is
widely accepted to be defining entrepreneurial may come as a surprise to one whom was not
familiar with the field. There is increasing evidence that traditional constructs and models of
business, by its very nature, assumed the element of familiness as a contextual relevant
social structure to be intertwined and as such have an influence and inpact on each other.A
theoretical framework for entrepreneurship in a family business context is difficult to define,
due at least in part, to the lack of conceptual frameworks agreed upon in either field (Craig &
Lindsay, 2002). Despite this, the significance of considering family business and
entrepreneurship, particularly in a New
Zealand setting, is unavoidable.
Involvement of family is widely
accepted in our local business contexts,
where it is not uncommon to find situations
where whole families are deeply small
business enterprises (Department of Labour, 2004). In fact, Nicholson, Shepherd & Woods
(2009) explicitly state that the foundations of New Zealands business landscape are built on
successful family businesses (p1). Attempting to avoid entering into extensive debate as to
the exact defines of what success consists of for family businesses in its entirity, it is
assumed that at least one element of such success on some level relates to achieving
growth and/or innovation.
Kiwis are famous for their ingenuity and self-sufficiency. It issaid that Kiwis can create amazing things all they need is a
piece of Number 8 wire.No 8 wire is a certain gauge of wire thatwas incredibly popular for use as fencing wire around New
Zealands many farms. Because No. 8 wire was widely available,it was used for a variety of tasks,and it has become a symbol of
kiwi adaptability.(retreived from http:www.newzealand.com)
Kiwis' & "No 8 Wire"
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Jessica Maher | INTBUS705 Essay | October, 2010
Maher,J(2010)Exploringth
erelevanceofSchumpeterianconsiderationstoentrepreneurship&familybusiness,Univ
ersityofAuckland
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An Introduction to Schumpeterian Entrepreneurship
Not only can Schumpeter hold claim as one of the founding fathers of
entrepreneurship, but he continues to hold increasing elevance in modern society and
academia. Whilst many of his concepts and models featured assumptionswhich in todays
context, seem apparent and obvious, it important to remember that this was written at a time
when Keyseianism and general e uiliburm theory firmly dominated the fields of research &
academia (Spencer & Kirchhoff, 2). In fact, almost characteristically, Schumpeter was a
theorist and academic whom was ahead of his time ( cCraw & oberts, 200 ), By
identifying the lack of balance and perspective, the absence of innovation altered
Schumpeter, alought may not directly, to the inappropriately static and simplistic elements of
the research and theorist around him.
Describing the difference between the inherent risk associated with ownership, and the
role of innovative combiner characteristic to the entrepreneur, Schumpeter further discussed
the various types of entrpreneurs. Describing two types of entrepreneurs; he describes
ark I encompasses the traditionally empahsised small firm startups, while ark II
represents entrepreneurship within large established firms. The relevance of these ideas
continues to have increasing significance as studies of entrepreneurship are forced to be
broadened with changes in our societies (for example, consider the inclusion of social,
ethnic and corporate entrepreneurship in this particular paper).
Schumpeter believed that at the core of entrepreneurship there was innovatiuon.
Whilst the earliest conceptualisations of economics (such as Cantillion & ill, as cited in
Carland et al, 200) defined entreprneuership with an assumption of risk, Schumpeter
furthered this concept; by perciving elements of risk bearing as an intrinsic element of
ownership, Schumpeter argued that entrepreneurs, as the combiners of resources and
opportunity, were not always the owners and as a result discredited the risk bearing
propensity as an entrepreneurial trait
(Carland, oy, Boulton, & Carland,
1984, p. 8).
Aligned and inspired by arxist
concepts and emphasizing a
sociological element to economics, Schumpeter recognized the limitations to the economic
profit maximisation focus, rooted in the assumptions of achieving e uilibrium.Contrary to
the common economic assumption that the only course of rational action is profit
maximisation, Schumpeter (1911, 1934 & 1942) considered the contextual potential &
[t]he carrying out of new combinations wecallenterprise; the individual whosefunction it is to carry them out, we call
entrepreneurs
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possibility that entrepreneurs objectives may sit outside this.Goss (2005) emphaises the
significane influence and relevance of sociology and other principles of the multidisiplinary
approach taken by Schumpeter; consierable ciscuss emphasied in discribing of the
bounded rationality. evident in models,
Discussing entrepreneurial characteristics, Goss (2005) uotes Schumpeter arguing
the case for considering bounded rationality; he explained that (an individuals)wants must
be taken with reference to the group which the individual thinks of when deciding his course
of action (Schumpeter J. A., 1934, p. 91). This particular concept has continued to gain
increasing valance and significance given our current and future contexts and resulting
changes in technology, business and broader conceptualisations of, what is increasing
becoming the conceptualised socio-economic contexts . Demonstrated understandings of
Schumpeters historically unrecognised ability for foresight and deepth of understanding has
not been recognised until relatively recently..
Potentially the most discussed of Schumpeters models of entrepreneurship was
founded in his conceptual assumption that the role of entrepreneurs to be creative change
agents ( erbert & Link, 1989). Schumpeter viewed the entrepreneur as the cause (persona
causa) of economic development and the mechanism of economic change. Acting as a
disruptive force, Schumpeter refered to this process as creative distruction. Schumpeter
described entrepreneurial behavior as a functional role in the economic development model,
distinguishing it as a special type of human activity which differs from general economic
behavior and allocative design making (Endres & Woods, 2010).Schumpeter outlined four
characteristic processes of entrepreneurs in his 1934 book, which was later extended to also
include Industrial eorganisation (shown in Table 1).
life cycle model -Fundamental to his
model, Schumpeter emphasised the significance
of each full business life cycle being
characterized by a specific innovation (Kisch,
19 9 p 151).
The Family Business Context
In evidence of the need for a family-
embeddedness perspective on entrepreneurship,
Schumpeter's categoriesoutlined entended to defineentrepreneurial activities &
highlight criteria forclassification
Table 1 | Schumpeter (1934): outlines 5Categories of entrepreneurial behavior
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Maher,J(2010)Exploringth
erelevanceofSchumpeterianconsiderationstoentrepreneurship&familybusiness,Univ
ersityofAuckland
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Aldrich & Cliff (2003) describe a historical reality where the word family in business was
made reduendant due to the acceptedness of them as the standard format and wide
recognition of the twos inextrinicsly linked natures (p.5 5).
The sub systems of the family unit and the business entity are separatelydistinguishable and relevant to one and other, however have largely been omitted from
business theory and research ( eck et al, 2010??, p31 ).Craig & Lindsay (2002) state that
definitions and models of entrepreneurship do not differentiate between family and non-
family firms (p. 419).
Despite this, there are also
wide and extensive
examples and evidence of
the importance of family to
entreprenuership. aggoff
(2003) goes as far as to describe family as an important source of the oxygenthat fuels the
fire of entrepreneurship (p.561). While the majority of theorists may have over looked the
influence of the intrinsicly entertwined reality that family and business are integrated, Aldrich
& Cliff (2003) suggests this is an understandable oversight (p.5 4).The fragementation and
differentation experienced in many fields of academia has directly resulted in narrow
definition of entrepreneurship. Focus has been imbalanced to the singularity attentiveness to
the business dimension, providing
simplistic and unfinishedconceptualization of this interaction
( eck & ishra, 2008).
Are kiwi businesses mainly
family ones?
So before we consider how
entrepreneurial our multitudes of S Es
are, we need to reach agreement
about what defines and makes a family bus?
Nicholson, Shepherd & Woods (2009) definition provides rather inclusive criteria,
arguably surpassing other theoretical definitions by the critical inclusion of the leaderships
perspective of the classification as a consideration (p1).
Whilst we have clearly established that the a significant proportion of New Zealands
small to medium enterprises likely demonstrate potnetial for characterisation within a family
To be a family business, the followingcriteria is required to be filled:
At least two members from the same family (immediateor extended) contribute to the operations of thebusiness, and;
At least 50% of business is owned by two members ofthe same family, and;
The CEO/Managing Director views this business as
Table 2 | Family business as defined by
Nicholson, Shepherd & Woods (2009)
One hundred years ago, business meantfamily business,and thus the adjective family was redundant. In the interim,the two social institutions have become more high lydifferentiated from one and other"
Aldrich & Cliff, (2003) The pervasive effects of family on entrepreneurship: toward a
family embeddnesses perspective, Journal of Business Venturing 18 (p. 575)
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embeddedperspective, it i sunclearacademicallyas to theefficetivenessandrelevanceof
our self proclaimed) levels of innovativeness or discussion as to the representative
proportion of our SMEs that are indeed entrepreneurial within Schumpeterian
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behavious and activitires. Lumpkin et al ) describe the ongoing debate at the point
where these two fields of family business and innovati on intersect. hile some suggest
family business can potentially encourage an environment that fosters entrepreneurial
activity, others suggest it increases risk aversion and causes reluctance to innovate and
createchange de Bruin & Lewis, )(Lumpkin) . espite theirseperatedevolutionalong
different paths, their are obvious overlaps between r esearch in family business and
entrepreneurship; Raggoff (2003) identidies three important foci whicharecommonaccross
them; theprimary focusonbusinessesas themost important system, tendancy toconsider
simular dimensions of business under examination and the focus on time dimensions or
stages(p. 0).
Schumpeters model of entrepreneurship specifically focuses at a fundamental level
aroundconceptsof innovationandchange.
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Indeed Schumpeter in his work, simplistically and briefly addressed the issue of t he
familyconstruct. Hisbook, Entrepreneurexpressesaview that the familyunit canbe thought
ofasasingleentity for thepurposesofsocial theory, in that benefitsaremaximi ed for thefamily as a whole rather than any single individual (Knudsen & Becker, p. 219).
Schumpeters concepts related to bounded rationality have particular relevance in family
business where the objectives of the organi ation may further differ from contemporary
formsoforgani ation.
Even more relevant today, Schumpeter argued that the concepts of the capitalist
approach continue to be perpetuated by a focus on individualistic and short term gain
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Maher,J(2010)Exploringth
erelevanceofSchumpeterianconsiderationstoentrepreneurship&familybusiness,Univ
ersityofAuckland
8
Two Real
Processes
Tendencytowards
circular flow
Change ineconomic
routine or data
Twotheoretical
apparatus
Statics
Dynamics
Two types
of conduct
Management
Entrepreneurship
Table 3 | Schumpeters theory reduced to three elementary& corresponding pairs by Herbert & Link (1989)
(Schumpeter J. A., 1942). Aligned with a ark I construct of entrepreneurship, the
importance of the role played by the family is to support, founded and grow ( eck, oy,
Poutziouris, & Steier, 2008).
Cre ative distruction may initial be associated with conflicting to family busines, but oncloser inspection, evidence of inclusive considerationsmade by Schumpeter are evident. In
his extended discussion and conceptualisations of the construct of creative distruction
process he is upted saying they can be along side not only over the top niche markets
as part of progression of innovation and market change, such as that of the individual
technology devices used for playing music. Aligned with Schs concept that the innovation
process creates a disturbance on the standard flow of the economy, it is expected his
emphasis on the dimension of time would have been interpreted as more specifically, an
distruction of the market e ualimibrum in the marrow limits of the economic models of his
day.
True to the cyclical nature emphasised in his models and adding the inclusion of the
time dimension as an element of such constructs, the relevance and inherent assumption
that family, just like any other social structure or construct (for example ; organisation,
culture etc) are critical contingency
providing much broader applications
of these fundamentally
Schumpeterian understandings.
erbert & Link (1989) reduced
Schumpeters theory to three
elementary & corresponding pairs
with the entrepreneurial elements
represented by the process of
change in economic routine or data
and emphasis on dynamic
theorertical models.
PROCESSES:CONSIDERINGPERSPECTIVE & THECYCLICALNATURE OF INNOVATION
Initial assumptions would suggest that Schumpeterian considerations of the innovation
process; whereby the new is born out of the old- a term he coined, the process of creative
destruction suggests that the family culture and environment fosters innovation within family
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businesses, which aligns with Schumpeters belief in an organic model of economics in
whicheffectivechangecomes fromwithin (Betta, ones, & Latham, 2010) .
For example, aligned with the creative destru ction concept, Schumpeter describes
innovationasarebirthof opportunity, wherebyaprocessof newdevelopments render theold obsolete and non-viable. his is incongruent to the aims of family business, whereby
considerationsof thecollaborativeordi rectivenaturecanalsodemonstratecomplementary
conceptsand trends. (Niedermeyeret al).
Schumpeter identified threecyclesofvarying timeorientation(40month Kitchin, 7-8
year ugler, and 0 year Kondratieff) which are all subject to four different stages;
prosperity, recession, depression and recovery. Although all businesses struggle with
Schumpeters inevitablebusiness lifecycle, family -owned firmshavesomespecial burdens.
Family firms frequently pride themselves on their loyalty to emp loyees and their strongculture and traditions Both practices can create resistance to change, however (Ward,
1997).
DYNAM u Cv
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x TIME & TIMEw
RIENTATION
he influenceandconsiderationof the time dynamicwithinentrepreneurial models is
of particular relevance to Schumpeterianunderstandingsof economics. Ina discussion of
time orientation, Lumpkin, Brigham & Moss (2010) descrive conflicting perspectives with
suggestions that such familyembedde dcontexts fosterentrepenreuenrial activities, opposed
to theories that the risk adverse nature, typical to family business, create a reluctance to
innovateandslowspeedofchange(p241). .. Many familybusinesses featurea long term
orientationandre searchsuggests theenterprisesassociatedwithsuchorientations, coupled
withaspirationsofgrowth, oftendemonstratestrongerperformances (Lumpkin, Brigham, &
Moss, 2010).
Whilst not explicitly addressed in this context, S chumpeters understandings of the
businesscycleembrace thesignificanceof timeorientationwith itscyclical nature. Whilst
the focus isagaindetractedon the influenceandeffect of familinesson theentrepreneurial
process, thesutlelyof Schumpeterscontextuallyradical constructsandmodels inherent in
thisoverlaphavebeenrepeatedmisinterpretatedbysubsequent Schumpeterianacademis.
Schumpeterian understangings of entrepeneruership emphaised the inappropriateness of
thestaticconsiderations ofeconomicspoluarinhisday. escribing Schumpetersconcept of
creativedistruction , Kisch(1979)claims that ina familybusinesscontext, such innovation
is increasinglyproblematic. Understandably, the insight gainedsincesuch time, particularly
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within technological advances, was something Kisch (1979) appears to have struggled to
fullyconceptualise.
In some cases, the focus on creating intergenerational legacies encourages an
incrediblyprolonged time framewithinwhichriskandopportunityare assessed. (Lumpkinetal, 2010). Perspectives inflyuencedby longivety
CONDUCT: CONIDERING
TEWART
HIP & THERELEVANCEOF AGENCY THEORY
he timeorientationof family firms is just oneexampleofhow theycansubstantially
differ from the standard principle: agent organi ations which typically have a shorter term
orientation. heemotional integrationand investment into familybusinessesoftenaddsan
additional layer of complexity to entrepreneurial considerations. Central to many
understandingsofeconomicsandbusiness, wecan find indicationsofagency theorywhich
indicates the potential divergence between the goals of individuals (agents) and owners
(principles)(Zahra, Hayton, Neubaum, ibrell, & Craig, 2008) . Contray to this, anorientation
ofstewartship isrelevant to the familybusinesscontext as it allows for thepossibilityofgoal
congruencebetweenownersandmanagers(Zahara, et al., 2008).
Because of the mutual interdependence inherent to the family unit, the concept of
stewardship naturally applies. his is considerably relevant within the discussions of the
stewartship concept, given the ongoing debate as to the true entrepreeneurial ability of
familybusinesses.
Discussion and Conclusions
POSSIBLEEXTENSIONS
Given the narrowly focused require
ents for this particular review, a number of areas have
been briefly considered or touched upon without further expansion. Given the relevance
and fundamentally intrinsic significance of the study of both family business and
entrepreneurship in a New Zealand context, therecould be potential for valuable insights or
understandings to be drawn or uncovered in further specified investigation and
consideration.
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