Entrepreneurship and self-efficacy

Nascent Entrepreneurship: the Role of Self-efficacy and Counterfactual Thinking Richard Sandover

Richard Sandover Research Institute for Business and Management Manchester Metropolitan University Business School Aytoun Street Aytoun Building Manchester M1 3 GH Tel: 0161 247 3934 Fax: 0161 247 6794 r.sandover@mmu.ac.uk
Richard Sandover

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Entrepreneurship and self-efficacy

Abstract A central question of entrepreneurship research is why some, though not others, recognize, create and develop business opportunities. One research stream has focused on the characteristics of the individual, though the exploration of personality differences has produced equivocal results. More recently the field of entrepreneurial cognition has offered a fruitful research stream that attempts to answer the central question. Two areas within this merit further investigation: the belief in one’s ability to complete a task – self-efficacy, and the cognitive characteristic of counterfactual thinking (imagining outcomes or events that might have occurred if one had acted differently, or circumstances had been different). A greater understanding of these characteristics may help to explain why some people are more entrepreneurial. This research aims to address the knowledge gap concerning the characteristics discussed above in relation to nascent entrepreneurs. Although there is some empirical evidence that entrepreneurs have higher self-efficacy than nonentrepreneurs, we do not know if this is a result of their experience or whether they started out with high self-efficacy. With regard to counterfactual thinking, there has been a theoretical debate over whether this is a valuable form of cognition for entrepreneurs though insignificant empirical research. This research will address both these issues by examining self-efficacy and counterfactual thinking among nascent entrepreneurs in a specific geographical area. It is proposed to conduct a quantitative study among two groups of nascent entrepreneurs and one group of nonentrepreneurs. The findings will inform the debate within the entrepreneurial cognition field and may have implications for entrepreneurship education and training.

Keywords: entrepreneurship, self-efficacy, counterfactual thinking, opportunity recognition, opportunity development, entrepreneurial education

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Entrepreneurship and self-efficacy

Introduction

As entrepreneurship is widely considered beneficial in creating enterprises and jobs, many governments and scholars seek to encourage entrepreneurs in their quest to create new causal relationships or ‘means-ends frameworks’. Consequently, entrepreneurship research is often concerned with outcomes that may be of value to potential or practicing entrepreneurs. Research may be directed toward institutional and economic factors beneficial to creating an entrepreneurial environment, or concentrate on individual factors seen as valuable to successful venture creation and intrapreneurship. This research proposal aims to examine individual, especially cognitive factors that may contribute to successful entrepreneurship; more specifically, general self-efficacy and abilities in counterfactual thinking. Aims of the research To critically examine the theoretical and empirical literature relating to opportunity recognition/creation from a cognitive perspective. To test empirically the proposition that nascent entrepreneurs display higher levels of general self-efficacy than nonentrepreneurs. To examine empirically whether nascent entrepreneurs engage in counterfactual thinking more often than nonentrepreneurs. To contribute to the debate on how best to encourage entrepreneurship by demonstrating individual characteristics that are beneficial to potential entrepreneurs. To produce outcomes that may be of value to entrepreneurs, potential entrepreneurs, and policymakers in the design of entrepreneurial education and training. Hypotheses 1. Nascent entrepreneurs have higher levels of general self-efficacy than nonentrepreneurs. 2. Nascent entrepreneurs are more likely to engage in counterfactual thinking than nonentrepreneurs.

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Entrepreneurship and self-efficacy

Literature review This paper takes the field of entrepreneurship to mean the scholarly examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited (Venkataraman 1997; Shane and Venkataraman 2000; Schendel 2007). Opportunity can be defined as the creation of new value to society in part or in whole (Schendel and Hitt, 2007). Opportunity recognition is seen as a key element in the success of entrepreneurship (Stevenson 1985; Ardichvili, Cardozo et al. 2003). Consequently one focus of entrepreneurship research has been to explain why and how entrepreneurs recognize or identify opportunities (Venkataraman, 1997). Entrepreneurship research has tended to fall into one of two camps: those who focus on the individuals, their traits and abilities, and those who concentrate on the external environment and the opportunities that it generates. There is growing consensus that entrepreneurship cannot be explained solely by reference to characteristics of selected individuals independent of the situation; rather certain people respond to the situational cues of opportunities (Shane and Venkataraman, 2000). Shane, sums up the debate, “neither the environment-centric nor the individual-centric approach toward entrepreneurship is more ‘correct’ than the other. Both probably explain equal amounts of variance in entrepreneurial activity” (Shane, 2003, p.3). To bring these two strands together, Shane (2003) created a conceptual framework dubbed the “individual-opportunity nexus”. Opportunities are seen as real and independent of entrepreneurs; however it is only some individuals that perceive and act on them. Whether ‘opportunities’ are broadly, recognised/discovered or created is debateable. A range of terms is employed to identify the process including recognition, discovery, exploration, identification, finding, creation, and development. Ardichvili et al, (2003) implies that opportunities are combination of recognition and creation: “careful investigation of and sensitivity to market needs as well as an ability to spot suboptimal deployment of resources may help an entrepreneur begin to develop an opportunity….but opportunity also involves entrepreneurs’ creative work. Therefore ‘opportunity development’ rather than ‘opportunity recognition’, should be our focus”, (p106). Studies of opportunity recognition and development have focused on multiple factors and draw on a range of disciplines including management, entrepreneurship, organization theory, and marketing. A key factor influencing opportunity recognition has been dubbed entrepreneurial alertness (Kirzner 1973; Kirzner 1979): entrepreneurs are more likely to identify and exploit, or create, opportunities that others miss. A range of factors have been linked to higher levels of entrepreneurial alertness: information asymmetry and prior knowledge; social networks; personality traits (including optimism, creativity and self-efficacy); and the type of opportunity itself (Ardichvili, 2003). This research focuses on selected cognitive characteristics of entrepreneurs to elucidate why some though not others, are more likely to identify opportunities, and in many cases, start new businesses. A brief introduction to the field of entrepreneurial cognition follows.

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Entrepreneurship and self-efficacy

Entrepreneurial cognition Previous research has concentrated on what entrepreneurs identify and how they exploit it. The developing field of entrepreneurial cognition offers insights into a central question of, “how entrepreneurs think” (Mitchell, Busenitz et al. 2007). Broad psychological characteristics increase the likelihood of opportunity recognition and exploitation. Shane (2003) divides these into three groups. Firstly, aspects of personality and motives which includes extraversion, agreeableness, need for achievement, risk-taking, and independence. Secondly core self-evaluation which includes locus of control and self-efficacy. Finally, cognitive characteristics, which includes overconfidence, representativeness, and intuition. Attempts to explain why some, and not others, are entrepreneurial in terms of personal characteristics have met with only modest success (Baron 2000; Mitchell, Busenitz et al. 2002). Consequently, there has been increasing recognition of the field of entrepreneurial cognition as a critical perspective for understanding how entrepreneurs think in such a ways as to identify, create or develop opportunities, (Mitchell, et al., 2007). This paper follows Mitchell in defining entrepreneurial cognitions as, “the knowledge structures that people use to make assessments, judgements, or decisions involving opportunity evaluation, venture creation and growth. In other words, research in entrepreneurial cognition is about understanding how entrepreneurs use simplifying mental models to piece together previously unconnected information that helps them to identify and invent new products or services, and to assemble the necessary resources to start and grow businesses”, (Mitchell, et.al., 2003, p.97,author’s italics). Theoretical and empirical research data suggests that there are differences between entrepreneurs and others’ cognitions (Busenitz and Barney 1997; Baron 1998). This research focuses on two areas within the broad psychological characteristics identified by Shane (2003) above: the core self-evaluation facet of self-efficacy and the cognitive attribute of counterfactual thinking. Self-efficacy involves a belief that we can organize, act and produce given results (Bandura 1997; Chen, Greene et al. 1998). Higher levels of self-efficacy have been connected with improved work performance (Judge and Bono 2001), with starting new ventures (Markman, Balkin, and Baron, 2002), and with improved firm performance under certain conditions (Hmielski K.M., 2008). However, there has been a scarcity of research with nascent entrepreneurs and it is questionable whether entrepreneurs have high self-efficacy as a result of their business experience, or, whether their high self-efficacy led them to start new ventures in the first place. Counterfactual thinking is imaging what might have been- outcomes or events that might have occurred if someone had acted differently, or circumstances had been different. Contrasting views exist in the literature between Baron (2000) who found that entrepreneurs were less likely to engage in counterfactual thinking, and Gaglio (2004) who proposed a theoretical framework where counterfactual thinking contributed to an individual’s ability to identify new means-ends frameworks. Hence, to Gaglio, counterfactual thinking is a useful heuristic as it focuses on the causal connections that must change, and how, in order to cause a different outcome. This

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style of thinking, it is argued, is valuable if entrepreneurs are to fulfil their aim of creating innovative products, services and processes. This research aims to explore the features of entrepreneurial cognition identified above. Relatively high self-efficacy has been linked to successful entrepreneurs, though with counterfactual thinking there is little empirical evidence to suggest this is the case. The research aims to address a gap in the entrepreneurial cognition literature by examining these features amongst nascent entrepreneurs. Methodology It is proposed that the research on self-efficacy and counterfactual thinking will involve a quantitative study focusing on a set of nascent entrepreneurs who are in the process of setting up, or considering setting up a new business venture. The results will be compared with a match sample of nonentrepreneurs. It is proposed to use an MMU Business School ‘Innospace’ sample of approximately 30 nascent entrepreneurs (new business start-ups that have been given space and support in an ‘incubator’ environment ). A match sample would be managers e.g. those taking the MBA programme. A further group of 30 entrepreneurs will be a randomly selected from the East Manchester Regeneration area where potential entrepreneurs are awarded start-up grants after a screening process conducted by the business development division of the regeneration authority. By choosing these distinct cohorts, two engaged in entrepreneurial activity and the other in managerial development, we can have confidence in the validity and reliability of group membership. Control variables would include age, sex and education. A questionnaire would employ a general self-efficacy scale that measures the construct in terms of what the participant believes they can do under different conditions with whatever skills they posses. This is adapted from widely used measures of self-efficacy and has been successfully employed and validated by previous research (Markman et al., 2002; Maurer and Pierce, 1998; Chen, Gully, Eden, 2001; Eden, Aviram, 1993). Participants are asked to self-assess on eight questions using a 7-point Likert type scale. Individuals will also be asked on a sevenpoint scale the frequency which they engaged in counterfactual thinking (explained in different terms). This method has successfully been used by Baron (1999). The questionnaire is included as Appendix 1 (the ‘General Self-efficacy’ and ‘Counterfactual thinking’ headings would be removed in the implementation). A pilot stage would test validity and reliability of the research instrument. Variables would be subjected to significance testing using applicable computer software such as SPSS. Expected Contribution to knowledge The research would provide empirical evidence to test the hypothesis that nascent entrepreneurs exhibit higher levels of general self-efficacy and engage in more counterfactual thinking, than nonentrepreneurs.

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Self-efficacy has been shown to be high among experienced entrepreneurs and to be related to entrepreneurship, work performance and firm performance. However, studies on nascent or novice entrepreneurs are insignificant in this field and the proposed research may help to answer the question of whether self-efficacy exists at the outset of an entrepreneur’s career, or whether it develops as a result of business success. If high self-efficacy exists at the outset of an entrepreneur’s career, then this may add to our knowledge of why some though not others take advantage of business opportunities. The research will provide empirical evidence of whether counterfactual thinking is more often a feature of nascent entrepreneurs’ thinking style compared with nonentrepreneurs. This will make a contribution to the debate between Baron (1999) and Gaglio (2004) about whether counterfactual thinking is more common amongst entrepreneurs in general. If this is the case, it may also contribute to explaining why some, and not others, recognize or create opportunities. If results on both of these personal attributes prove the hypotheses correct then this may have implications for entrepreneurship education. If nascent entrepreneurs have high self-efficacy and/or engage in more counterfactual thinking, then it would suggest that these are not attributes developed as a result of business success (which may be the case with previous studies), but attributes linked to an entrepreneurial inclination. In this case building self-efficacy, and teaching counterfactual thinking may be valuable elements in entrepreneurial training or education programmes. Further theoretical developments may be possible, if for example, there proved to be a correlation between self-efficacy and counterfactual thinking. Limitations With the samples for this research being relatively small and selected from one UK geographic region, the generalizability of the results will be low. The research instrument asks participants to self- identify their characteristics and there may be an element of social desirability in scoring higher personal competences. Nascent entrepreneurs may or may not display high self-efficacy and engage in counterfactual thinking, however this would not sanction a claim to likely entrepreneurial success as causation cannot be determined. Further research involving a longitudinal study would be required. Work Plan Year 1 Literature review, clarify research proposal Year 2 Methodology plan, review, limitations. Identify samples, collect data. Year 3, 4 Data analysis, write up findings, conclusions. Relate to previous research, identify areas for future research. Bibliography
Ardichvili, A., R. Cardozo, et al. (2003). "A theory of entrepreneurial opportunity identification and development." Journal of Business Venturing 18(1): 105. Bandura, A. (1997). Self-efficacy: the Exercise of Control. New York, W.H.Freeman.

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Baron, R. A. (1998). "Cognitive mechanisms in entrepreneurship: Why and when." Journal of Business Venturing 13(4): 275. Baron, R. A. (1999). "Counterfactual Thinking and Venture Formation: The Potential Effects of Thinking About `What Might have Been’." Journal of Business Venturing 15(1): 79. Busenitz, L. W. and J. B. Barney (1997). "Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making." Journal of Business Venturing 12(1): 9-30. Chen, C. C., P. G. Greene, et al. (1998). "Does entrepreneurial self-efficacy distinguish entrepreneurs from managers?" Journal of Business Venturing 13(4): 295-316. Chen, G., S. M. Gully, et al. (2001). "Validation of a New General Self-Efficacy Scale." Organizational Research Methods 4(1). Gaglio, C. M. (2004). "The Role of Mental Simulations and Counterfactual Thinking in the Opportunity Identification Process." Entrepreneurship: Theory & Practice 28(6): 533-552. Hmielski KM, B. R. (2008). "When does entrepreneurial self-efficacy enhance versus reduce firm performance?" Strategic Entrepreneurship Journal 2: 57-72. Judge, T. A. and J. E. Bono (2001). "Relationship of Core Self-Evaluations Traits. Self-Esteem, Generalized Self-Efficacy, Locus of Control, and Emotional Stability With Job Satisfaction and Job Performance: A Meta-Analysis." Journal of Applied Psychology 86(1): 80-92. Kirzner, I. M. (1973). Competition and entrepreneurship, Chicago, London: University of Chicago Press. Kirzner, I. M. (1979). Perception, Opportunity and Profit: Studies in the theory of entrepreneurship, University of Chicago Press, Chigago, IL. Markman, G. D., D. B. Balkin, et al. (2002). "Inventors and New Venture Formation: The Effects of General Self-Efficacy and Regretful Thinking." Entrepreneurship: Theory & Practice 27(2): 149. Mitchell, R. K., L. Busenitz, et al. (2002). "Toward a Theory of Entrepreneurial Cognition: Rethinking the People Side of Entrepreneurship Research." Entrepreneurship: Theory & Practice 27(2): 93. Mitchell, R. K., L. W. Busenitz, et al. (2007). "The Central Question in Entrepreneurial Cognition Research 2007." Entrepreneurship: Theory & Practice 31(1): 1-27. Schendel, D., and Hitt, M.A., (2007). “Introduction to Volume1." Strategic Entrepreneurship Journal 1: 1-6. Shane, S. and S. Venkataraman (2000). "The Promise of Entrepreneurship as a Field Of Research." Academy of Management Review 25(1): 217-226. Stevenson, H., Roberts, M.J.,Grousbeck, H. (1985). New Business Ventures and the Entrepreneur. Homewood, IL., Irwin. Venkataraman, S. (1997). The distinctive domain of entrepreneurship research: An editor’s perspective. Advances in entrepreneurship, firm emergence, and growth. J. K. a. R. B. (Eds.). Greenwich,CT, JAI Press. Vol 3: pp 119-138.

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Appendix 1 General Self-Efficacy Scale Please indicate the extent to which you agree with each of the following statements (circle one number for each item). Strongly Disagree = 1 2 3 4 5 6 7 = Strongly Agree 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1. I am strong enough to overcome life’s struggles 2. At root, I am a weak person 3. I can handle the situations that life brings 4. I’m usually an unsuccessful person 5. I often feel that there is nothing I can do well 6. I feel competent to deal effectively with the real world 7. I often think I’m a failure 8. I usually feel I can handle the typical problems that come to life

Counterfactual thinking Please indicate on the following scale how often you imagine the possibility that things might have turned out differently in various situations if you had acted differently, or circumstances had been different: Rarely = 1 2 3 4 5 6 7 = Often

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