by Dr. Daniela Pavel, Editor In Chief
published on December 29, 2020
Introduction
Researchers have at their disposal a wide range of
management theories they can utilize to analyze research topics from various
perspectives and to gain an understanding of the breadth of the topic and the
research findings. The topic of interest selected for this discussion is Entrepreneurial funding and its effects on business
growth. To gain a clear understanding of the effects of various funding
methods available to entrepreneurs on revenues and level of
internationalization, two theories have been identified and will be explored
further in this post: institutional theory and agency theory.
The
epistemology and ontology of each theory will be defined and other authors’
work applying these theories that are relevant to the topic identified earlier will
be discussed. Special emphasis will be placed on the purpose of these studies,
the pros and cons of their arguments, their evidence, their methodologies, and
their findings.
Epistemology
is the science of knowledge (Key contemporary concepts, 2003) and it is closely
correlated to critical thinking. From a critical thinking perspective,
epistemology is the science of learning everything about an unverified opinion
by asking questions from multiple angles to gain maximum knowledge on a topic
and transforming a simple opinion into a verified fact.
Ontology
refers to the philosophical study of being (Key contemporary concepts, 2003).
From a theory perspective, it questions the validity of facts and ideas
expressed and that of conclusions drawn. It also attempts to group facts
together based on similarities and differences.
Both the epistemology and ontology of a theory can be
discussed from the perspective of an author’s work.
Institutional theory
The first theory selected for the purpose of this post is the
institutional theory defined as one “that
addresses the processes used by organizations to adapt to the political,
cultural, and social demands of their environment and gain legitimacy in the
eyes of stakeholders” (Key concepts in organizational theory, 2013). The
article selected to discuss the epistemology of the institutional theory that
is related to the topic of this post is Size matters: Entrepreneurial entry and government written by
Aidis et al (2012).
Using
the institutional theory, the study explains how the institutional
characteristics of a country can influence one’s desire to become an
entrepreneur. Variables taken into account are freedom from corruption, size of
the government, and market freedom, which is identified as market supporting
institutional quality (Aidis et al, 2012). The epistemological investigation starts
by analyzing the existing literature and by correlating it with data provided
by the Global Entrepreneurship Monitor (GEM). From an ontological perspective,
the study recognizes that the existing literature does not consider the impact
of particular institutions on the choice one might make to become an
entrepreneur or not and offers as an additional epistemological investigative path
the correlation of GEM data to that provided at each country-level by other
sources. To cover both positive and negative aspects of the approach and gain a
wider knowledge and applicability of the topic selected, the study also
addresses “potential issues of multicollinearity between institutions by using
factor analysis prior to estimating our regression models” (Aidis et al, 2012,
p. 120). To ensure the validity of the study and aid in establishing the
ontology of the theory, the authors use a wide variety of indicators:
corruption, property rights, and business regulations and the size of the
state. Whereas some previous literature is accepted by the authors and
supported with new research, the validity of other studies referenced is
challenged and new research is incorporated to describe the different
perspective.
The
study results in six different estimation models of the impact institutional
characteristics have on entrepreneurial pursuits and the results change as some
variables are removed. For example, market freedom is insignificant when all 47
countries are included in the analysis; when the rich countries are removed,
market freedom is very significant. The size of the government and the freedom
from corruption are identified by the study as having the most significant
impact on entrepreneurial desire in all six models. Even after the completion
of the analysis, the authors did not accept it without doubt; they continued
their epistemological investigation from a different perspective. They
questioned whether their findings were far from the findings of similar
previous research. By continuing the literature review and closely analyzing
the variables used, they concluded that their findings are similar to those of
previous studies: access to funding is important for entrepreneurial activity
(Klapper et al, 2006), credit provision is significant once the richest
countries are removed from the analysis, existing entrepreneurs and former
business angels are more likely to start new businesses (Mickiewicz, 2005).
Aidis
et al (2012) attempt to gain an understanding of the institutional
characteristics on entrepreneurial pursuits, in spite of a wide variety of
studies that analyzed the impact of one or more of the same individual
variables. Using data from the Global Entrepreneurship Monitor is one of the
pros of this analysis as it is a reliable source of cumulative data and survey
responses that provide valuable insight into specifics of entrepreneurial
landscape in different countries. The disadvantage of the evidence used is that
the data from GEM was correlated with country-level data from other sources,
not identified. Some of these sources were located in those countries where the
level of corruption had a significant impact on entrepreneurial desire, which
questions the validity of the sources used, therefore, questioning the validity
of the findings in those particular countries. The most positive argument made
by the authors was that by using GEM data, they were able to offer a wider view
of the variables influencing the pursuit of entrepreneurial ventures than the
previous studies conducted only at country-level. The disadvantage of this
argument was that some of the country-level data identified by previous studies
contributed to the results of this study, failing to maintain the independence
from previous results.
Agency theory
Agency
theory refers to the separation between ownership and control: a board of
directors will usually delegate decision-making and implementation to directors
who may not agree with the decision, but are paid for their services (Penguin,
2003). The article selected to discuss
the epistemology of the institutional theory that is related to the topic of
this post is Exploring agency
dynamics of crowdfunding in start-up capital financing written by Ley &
Weaven (2011). The agency theory is used “to investigate the necessary
agency-cost control mechanisms unique to emerging crowdfunding models” (Ley
& Weaver, 2011, p. 85). Ley & Weaver (2011) noticed the growth and
expansion of venture capitalist (VC) firms at global level; however, although
the number and size of these firms was increasing, there is still a gap in the
funding options for start-ups in the first stages, which turn these
entrepreneurs to crowdfunding. The study is performed in Australia on a small sample
of only 11 VCs who participate in early stage financing.
The
epistemological investigation, similar to the article analyzed for the
institutional theory above, starts by reviewing the existing literature on this
topic to determine the status quo and identify research questions and different
perspectives worth analyzing. By reviewing the existing literature, the authors
confirm that venture capitalists are still considered a viable funding option
for start-up entrepreneurs (Cumming, 2006) and that VC firms have grown in the
past decade both in terms of capital invested and in the number of existing
firms (Bivell, 2008). However, in spite of this growth, a funding gap was still
identified at start-up level and crowdfunding was identified and gaining ground
in Australia. To better understand the term “crowdfunding”, the authors analyze
if from the perspective of “crowdsourcing”, which was previously used in
literature, and the newly emerging social media and its connectivity power. The
purpose of the study is further defined as an investigation in the emergence of
crowdfunding and how it could effectively be adopted by start-up ventures in
the future in relation with investing VCs. The agency theory is used to analyze
the working relationship between VCs and entrepreneurs, who are identified as
the principal and agent: the VC provides the resources needed while the agent
ensures the return on investment for the principal. The ontology of the theory
leads authors to question the applicability of previous research to their
study; therefore, identifying multiple perspectives and suggesting further
research. Whereas crowdfunding is identified as a viable funding options, the
authors recognize that “crowdfunding models may require a unique set of agency
cost control mechanisms” (Ley & Weaver, 2011, p. 89), which determines the
authors to highlight the complexities of the principal-agent relationship
before and after the investment relationship starts.
The
research eleven findings were as follows: crowd composition was identified as a
factor of success when utilizing crowdfunding in early stages of development.
VCs mentioned during the interviews that having individuals on the team to
understand the market needs and deliver on market’s expectations is very important.
An initial deal screening was also identified as important to ensure that the
venture is properly managed. The VCs interviewed also concluded that deal
referrals would help eliminate the deal noise and assist in focusing on the
best quality deal when deciding on a group of investors to fund the venture.
Access to sensitive information about the venture would also be needed prior to
making an informed decision on whether to proceed with the investment or not.
Due diligence and its implementation was identified as a 5th
finding, whereas endowment of the crowd’s contractual rights to an external
party was the 6th finding of the study. Board representation in
crowdfunding models was the 7th finding of the study as it would
assist in disseminating information fast to the agent. The remaining findings
of the study were: external intermediary engagement in value-adding activities
with portfolio companies, applicability of crowdfunding models for ventures
with a limited economic life, use of exit options in crowdfunding, and
contribution of crowdfunding to the innovation process.
The
most significant pro of the study is not assuming that the relationship between
VCs and entrepreneurs is one of strict collaborating. The use of the agency
theory proves that this is a principal-agent relationship in which VCs take
control and direct the entrepreneur in decision-making processes. The con of
the arguments provided is not analyzing the relationship between VCs and
entrepreneurs taking into account the fair amount of control entrepreneurs
should have based on the ownership level of the opportunity and personal
finance investment.
Conclusion
Scholars have at their disposal a
wide range of management theories they can utilize to analyze research topics
from various perspectives and to gain an understanding of the breadth of the
topic and the research findings. The
first theory selected for the purpose of this post is the institutional theory the
study explains how the institutional characteristics of a country can influence
one’s desire to become an entrepreneur. The study results in six different
estimation models of the impact institutional characteristics have on
entrepreneurial pursuits and the results change as some variables are removed.
Aidis et al (2012) attempt to gain an understanding of the institutional
characteristics on entrepreneurial pursuits, in spite of a wide variety of
studies that analyzed the impact of one or more of the same individual
variables.
Agency theory refers to
the separation between ownership and control: a board of directors will usually
delegate decision-making and implementation to directors who may not agree with
the decision, but are paid for their services (Penguin, 2003).
The epistemological investigation, similar to the article analyzed for the
institutional theory above, starts by reviewing the existing literature on this
topic to determine the status quo and identify research questions and different
perspectives worth analyzing.
The study resulted in eleven significant
findings that open the doors for further research on the topic of
entrepreneurial funding, their advantages and disadvantages, and needed
framework needed to succeed.
References:
Agency theory. (2003). In The new Penguin business
dictionary. London, United Kingdom: Penguin. Retrieved from http://library.capella.edu/login?url=http://search.credoreference.com.library.capella.edu/content/entry/penguinbus/agency_theory/0
Aidis, R., Estrin, S., & Mickiewicz, T. M. (2012).
Size matters: Entrepreneurial entry and government. Small Business
Economics, 39(1), 119-139. doi:http://dx.doi.org/10.1007/s11187-010-9299-y
Bivell, V. (2008). Australian venture capital guide
2008. In A Hallmark Editions Publication
, ed. Herbert, A. Milsons Point.
Cumming, D.J. (2006). The determinants of venture
capital portfolio size: Empirical evidence. Journal
of Business, 79(3), 1083-1126.
Epistemology. (2003). In Key contemporary concepts.
London, United Kingdom: Sage UK. Retrieved from http://library.capella.edu/login?url=http://search.credoreference.com.library.capella.edu/content/entry/sageukcc/epistemology/0
Institutional theory. (2013). In SAGE key concepts: Key concepts in
organization theory. London, United Kingdom: Sage UK. Retrieved from http://library.capella.edu/login?url=http://search.credoreference.com.library.capella.edu/content/entry/sageukot/institutional_theory/0
Klapper, L., Laeven, L., & Rajan, R. (2006). Entry
regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82, 591–629.
Ley, A., & Weaven, S. (2011). Exploring agency
dynamics of crowdfunding in start-up capital financing. Academy of
Entrepreneurship Journal, 17(1), 85.
Mickiewicz, T. (2005). Economic transition in central
Europe and the commonwealth of independent states. Houndmills: Palgrave
Macmillan.
Ontology. (2003). In Key contemporary concepts.
London, United Kingdom: Sage UK. Retrieved from http://library.capella.edu/login?url=http://search.credoreference.com.library.capella.edu/content/entry/sageukcc/ontology/0
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