Entry thresholds in the entrepreneurial process

Brian Thomas McCann, Purdue University

Abstract

The first essay builds upon economic theories of entrepreneurship that view the decision to engage in entrepreneurship as a career choice and contends that entry into the entrepreneurial process only occurs when expected performance exceeds an unobserved, individual-specific entry threshold. Using a sample drawn from the Panel Study of Entrepreneurial Dynamics, I theoretically extend the threshold perspective and apply an empirical approach new to the entrepreneurial entry literature to investigate the determinants of the choice to initially pursue an entrepreneurial opportunity. Prior work focusing on factors associated with the likelihood of entry can only indicate when expected performance exceeds the threshold (and what factors are associated with this condition). In contrast, by estimating the impact of human capital, financial capital, and motivations on both expected performance and the unobserved threshold, this research better indicates why thresholds are exceeded and entry occurs. The second essay investigates how the determinants of threshold-based decision making change during the evaluation stage of the entrepreneurial process. In contrast to much of the prior literature that views the decision to pursue an entrepreneurial opportunity as a one-time dichotomous choice, I contend that both performance expectations and perceptions of uncertainty, two key constituent elements of the decision, are likely to be revised as entrepreneurs investigate entrepreneurial opportunities. As such, this research provides a broader view of the evaluation stage of the entrepreneurial process, arguing that it consists of more than just the gathering of resources by fully committed entrepreneurs. Using the Panel Study of Entrepreneurial Dynamics, a nationally representative dataset of US adults working to start new businesses, I demonstrate that entrepreneurs' expectations of financial performance and perceptions of environmental uncertainty undergo significant changes as they work to establish their new ventures, consistent with a learning view of the process. The degree of these changes is influenced by entrepreneurs' information gathering activities. I find little evidence, however, that the main effect of information gathering activities is moderated by either ex ante novelty/uncertainty or the prior knowledge of the entrepreneur. The final essay examines the role of thresholds in the decision to exploit an entrepreneurial opportunity by launching a new venture. Applying the threshold model only to the initial entry decision leaves us with an incomplete picture of how threshold-based decision making affects the decision to engage in entrepreneurship. It is an empirical fact that not all of those who initially identify an opportunity will eventually launch a business. Some will achieve launch, others will give up on the opportunity, and some will remain stuck in the process. Thus, to more fully understand the determinants of entrepreneurial behavior, we need to examine both the determinants of initial entry as well as the determinants of launch. Using a sample drawn from the Panel Study of Entrepreneurial Dynamics II, I theoretically extend the threshold perspective and investigate the determinants of the choice of whether to exploit an entrepreneurial opportunity through the launch of a new venture. In contrast to approaches that relate potential determinants to the likelihood of launch, use of the threshold model provides a better understanding of why those determinants might have a relationship to launch probability. I examine how objective measures of opportunity risk, gestation tasks completed, and entrepreneurial motivations influence expected entrepreneurial performance and launch thresholds.

Degree

Ph.D.

Advisors

Folta, Purdue University.

Subject Area

Entrepreneurship|Management

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