The literature on small entrepreneurial business networks has substantially increased ... and Monsted (1997) argue that for entrepreneurial firms running a small.
Entrepreneurial Networks The literature on small entrepreneurial business networks has substantially increased in volume during the last years. The interest has been driven both from the entrepreneurial side, where businesses inter-link rapidly and form network configurations, and from the policy side, where governments have implemented a variety of policies to encourage economic growth through self-employment and to support small businesses. The active positioning of entrepreneurial firms in the business arena coincides with building effective business relationships with customers and suppliers, with government bodies and large corporations, or with professional bodies and lead clients. This makes small firms embedded in an intricate set of business relationships, connecting local, national and international partners, government agencies, financial institutions, or consumer and professional associations. Donckels and Lambrecht (1997) define entrepreneurial networks as organized systems of relationships with customers, suppliers, and other entrepreneurs, with relatives, external consultants and other agents, or potential partners. Entrepreneurial and small business networks usually represent dispersed and heterogeneous networks with fuzzy boundaries and resource-based or role-based division of labour (Fig.1.). They comprise of autonomous agents that are linked to each other via various formal and informal contracts, who design collective strategies and share information. The network is governed by allocation of specific roles to individual members, which are inscribed in contractual relationships. The division of labour in the network stems from the specialisation and unique capabilities of individual firms, and embody resource-based inputoutput dependencies that emerge with the evolution of the network (Todeva, 2006). Fig. 1: Entrepreneurial Small Business Networks (Todeva, 2006) c o n su lta n t
BANK s u p p lie r
c u s to m e r
SM E SM E
c u s to m e r
tr a d e fa r e
G overnm ent d e p a r tm e n t
c u sto m e r
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heterogeneous dispersed type of network configuration with fuzzy boundaries role-based governance resource-based and role-based division of labour autonomous agents engaged in contract relationships
260 Electronic copy available at: http://ssrn.com/abstract=1935066
The founders of small firms usually learn their business while working at other firms, and many of their contacts evolved from this former employment. Empirical research demonstrates that for over half of the small firms, the most important customer is some large firm either in the region, or nationally, to which small firms subcontract their services (Young, Francis and Young, 1994). Such dyadic relationships are the main constituting relationships for entrepreneurial networks. Johannisson and Monsted (1997) argue that for entrepreneurial firms running a small business and being self-employed is a way of life and a source of legitimacy which goes beyond rational economic choices and behaviour. Small entrepreneurial firms use network relationships primarily to complement their own limited resources (Aldrich and Zimmer, 1986).
Four Business Attitudes Both small entrepreneurial businesses without family ties and household or family businesses are strongly concerned with economic security, business survival, maintenance, and growth (Mariussen, et.al., 1997). In addition Gray (1997) develops a three-way categorization of motives that drive business decisions in family micro-firms including "money," "lifestyle" and "safety", which are entrepreneurial motives. Overall, four business attitudes are proposed for entrepreneurial business networks: 1) survival and security attitude where relationships provide for living for the family and for the owner; 2) business-intrinsic attitudes where relationships provide satisfaction with the ownership and with the running of the business; 3) intrinsic-creative attitude where the business gives pride in creativity; 4) achievement oriented attitude where the business satisfies the need to seek new challenges. Empirical research reveals that the first type of attitudes is more typical for traditional family businesses, while the other three types are also important for independent entrepreneurial small businesses (Mariussen, et.al. 1997). Embedded entrepreneurial attitudes of business owners are towards exploring new business opportunities and growth by participation in the local community. Small businesses are more likely to choose to remain small and flexible in network configurations where the collective results go far beyond the abilities of any single company. Such networks of small entrepreneurial firms may generate together higher profits for all by gaining access to larger markets, by benefiting from economies of scale and scope, and by competing with larger firms without merging, or being acquired. Entrepreneurial networks explore business opportunities collectively and engage in a redistribution of resources and profits on a reciprocated basis, acting as a community or a collaborative formation. 261 Electronic copy available at: http://ssrn.com/abstract=1935066
The context of the entrepreneurial business activity involves: the attributes of the entrepreneur characteristics of the entrepreneurial venture, and the legitimation and positioning of the business (Gartner, 1985). Entrepreneurial network relationships are deeply embedded in this context, exhibiting complex rationality of decision making and strategic choices. Firm performance in entrepreneurial networks is determined by the overall network performance, constraining firms to cooperate in response to their interdependencies. Naturally the boundaries of the entrepreneurial network would be the reach of those partners and associates of individual entrepreneurs who perceive certain value in the venture. At the periphery of the network are current or potential clients and partners for economic transactions, or for exchange of ideas. The network boundaries therefore are determined very much by the legitimacy of the business and how the entrepreneur manages relationships with all stakeholders. Stakeholder theory portrays entrepreneurial networks as stakeholder networks, where the focal entrepreneurs have to manage relationships with all stakeholders. Entrepreneurs develop contacts not only in their neighbourhood, but also to firms located at a distance. Relationships of resource-sharing dominate the dynamics of inter-firm exchanges and transactions. Entrepreneurial firms exist mainly because they satisfy certain localised market demand, even though they actively construct their market space with their innovations. By emerging in a certain market space entrepreneurial firms connect to other organisations, or to individual customers. What makes them different from supply networks is that they are much closer to the customers, and therefore, much more vulnerable to changes in customer needs and consumer demand. In many cases small entrepreneurial networks exhibit the so-called ‘small-world’ phenomena, where all actors in a particular region have less then six degree of separation, or they are connected by a relational path with six steps through which each actor can reach every other one. In global industries entrepreneurial networks and small-world phenomena may emerge between born-global firms, or between small entrepreneurial firms servicing large multinational corporations. Examples of such global entrepreneurial networks are in the biotechnology and life-science sector, and in various service industries.
Small Business and Family Business The research on small-business and entrepreneurship usually does not distinguish between small business networks and family business network. What distinguishes them from family business networks (Fig. 2.) is that they rely much more on resources outside of the family and they represent dispersed type of structural network configuration. This distinction is important in order to understand the driving forces behind network formations. While small-business entrepreneurial networks are driven by self-employed agents, family business networks are 262 Electronic copy available at: http://ssrn.com/abstract=1935066
based on family employment with all subsequent aspects of risk-taking, flexibility, selffinancing, and control (Todeva, 2006). Family business networks depend on how the business is embedded within the family and the household, called by Wheelock and Oughton (1996) an ‘informal or complementary economy’. In the household economy other motivations besides economic gain operate (Rosa, et.al., 1994).
Fig. 2: Family Business Networks (Todeva, 2006)
Members of the household
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homogeneous ego-network with clear boundaries normative-based governance functional and normative division of labour family interdependence
Family business networks are usually homogeneous, where actors experience family interdependence and normative-based governance. The family norms and values determine not only the relationships within the family business, but also the relationships with partners, suppliers and customers. The division of labour is functional and normative, where embedded cultural traditions influence allocation of roles and responsibilities and decision making patterns. Networks based on small family business present Ego-centred networks with fairly clear boundary and strong family-based interdependence. Family businesses, embedded into the web of family relationships, absorb higher risk in response to uncertain employment and income opportunities. This is particularly useful to absorb shocks of economic restructuring and to assist in economic growth. Households not only can provide for themselves, but can support family members in other social and economic activities through internal redistribution of wealth. The inheritance law in a country, passing ownership rights from one generation to another, as well as various changes to fundamental institutions such as the separation of the household and the family from the firm, can be considered as the most important factors that determine the scope of the family business (Nenadic, 1993, Mingione, 1994). Interesting empirical evidence is that the inequality of labour is stronger for family business, where women who participate in the business alongside with their husbands typically play a supporting role. The classical authority relations of subordination, the use of 263
traditional technologies, and the flexible mode of mobilisation of labour within the family are all considered typical characteristics for the family business (Mariussen, et.al. 1997). The reluctance of the family to seek support from outside agencies and the determination to avoid family conflict are typical for relationships surrounding a family business. Entrepreneurial networks based on family business involve traditional socialisation of children through labour practice and intergenerational transfer of technology. The focal businesses and their networks experience occasionally periods of intergenerational change which are critical for the business development. The tradition is reproduced within these networks as a morally binding force (Mariussen, et.al. 1997). Research shows that entrepreneurs in households run their own business as a source of identity, as well as for the preservation of dignity and independence, and base their actions on traditional or patriarchal reasoning (Todeva, 2006). Family business networks naturally may evolve into entrepreneurial business networks through diversification beyond the capabilities within the family and during periods of inter-generational change when non-family members are incorporated into the strategic decision making.
Variables Shaping Composition The behaviour of small entrepreneurial firms and their strategic decisions and choices to interlink with other business partners depend on a number of environmental factors. Among these are: demographic specificities of the region; the local culture and the support from local institutions; regional structure of the economy in terms of leading companies that build the local pool of skills; professional and business links with leading employers in the region; the level of entrepreneurial education; the number of years running a business of their own; the industry sector; the size of the firm; and the growth orientation of the firm (Young, et al., 1994, Donckels and Lambrecht, 1997, Johannisson and Monsted, 1997). Such environmental factors shape the structure of entrepreneurial networks and the content of relationships in it. Overall the structure and composition of entrepreneurial networks is affected by cultural and institutional variables. Research has revealed that the networks of Chinese entrepreneurs are smaller in size, denser in structure, and more homogeneous in composition compared to networks of Russian entrepreneurs (Batjargal, 2005). The same research has revealed also that dyadic relationships are stronger and interpersonal trust is greater in China than in Russia. In addition, research reveals that trust and social capital evolve over the process of interacting in networks and changes under the influence of affective and cognitive ties between entrepreneurs (Smith and Lohrke, 2008). Much of the empirical research on success and performance of entrepreneurial networks has not produced significant results and conclusions (Witt, 2004). The main reasons 264
behind such a state of the field are problems with using appropriate theoretical indicators and variables, or acknowledging the most important factors that effect network formation and performance. Entrepreneurial networks are simultaneously affected by a complex set of factors such as: the attributes of the founders; their interpersonal contacts and personal networks; their attitude and experience in networking; various form of financial, organisational and institutional support; and a multitude of environmental factors – posing a challenge to empirical investigations.
See Also: Economic Networks, Business Networks, Social Capital, Embeddedness, Small World Emanuela Todeva, University of Surrey Further Readings Aldrich, H., and Zimmer, C. (1986) ‘Entrepreneurship Through Social Networks’, in D. Sexton and R. Smilor (eds.) The Art and Science of Entrepreneurship, New York: Ballinger, pp. 3-23. Batjargal, B. (2005) ‘Comparative Social Capital: Networks of Entrepreneurs and Investors in China & Russia’, William Davidson Institute Working Paper Number 783, July 2005 Donckels, R. and Lambrecht, J. (1997) ‘The Network Position of Small Businesses: An Explanatory Models’, Journal of Small Business Management, Milwaukee, (Apr.), 35(2): 13-25. Gartner, W. (1985) ‘A conceptual framework for describing the phenomenon of new venture creation’, Academy of Management Review, 10(4), pp. 696-706. Gray, C. (1997) ‘Managing Entrepreneurial Growth: A Question of Control?’, in D. Deakin, P. Jennings, and C. Mason (eds.) Entrepreneurship in the Nineties, 18-29, London: Paul Chapman. Johannisson, B. and Monsted, M. (1997) ‘Contextualising Entrepreneurial Networks‘, International Studies of Management and Organisation, 27(3): 109-137. Mariussen, A., Wheelock, J. and Baines, S. (1997) ‘The Family Business Tradition in Britain and Norway’, International Studies of Management and Organization, White Plains, Fall 1997, 27:3, 64-85. Mingione, E. (1994) ‘Life Strategies and Social Economies in the Post-Fordist Age’, International Journal of Urban and Regional Research, 18(1): 24-45. Nenadic, S. (1993) ‘The Small Firm in Victorian Britain’, Business History, 35(4): 17-43. Rosa, P., Hamilton, D., Carter, S., and Burns, H. (1994) ‘The Impact of Gender on Small Business Management: Preliminary Findings of a British Study’, International Small Business Journal, 3: 25-32. Smith, D. and Lohrke, F. (2008) ‘Entrepreneurial Network Development: Trusting in the Process’, Journal of Business Research, 61: 315–322 Todeva, E. (2006) Business Networks: Strategy and Structure, New York: Taylor & Francis. Wheelock J., and Oughton, E. (1996) ‘The Household as a Focus for Research’, Journal of Economic Issues, 30(1): 143-159. Witt, P. (2004) ‘Entrepreneurs’ Networks and the Success of Start-ups’, Entrepreneurship and Regional Development, 16, September (2004), 391–412. Young, R., Francis, J., and. Young, C. (1994) ‘Small Manufacturing Firms and Regional Business Networks’, Economic Development Quarterly, February, 1994, 8(1): 77-82. 265
