Professional Documents
Culture Documents
Manuscript 1077
DOI: 10.1515/2157-5665.1077
©2012 De Gruyter. All rights reserved.
What Did Stinchcombe Really Mean?
Designing Research to Test the Liability of
Newness among New Ventures
Howard E. Aldrich and Tiantian Yang
Abstract
Despite decades of research since Stinchcombe’s original essay on the liability of newness,
questions remain regarding the forms and the causes of emerging organizations’ liabilities.
Stinchcombe argued that newly-founded organizations face complex challenges that limit their
viability, including managing relationships among strangers, assembling required resources
quickly, and coping with difficult environments. In the 1980s researchers began investigating
whether the liability of newness really was, in fact, a universal principle. However, we believe
that researchers have never properly tested Stinchcombe’s original propositions because they have
mostly focused on registered new firms rather than emergent ones. Lacking a clear theoretical
framework that explains emerging organizations’ liabilities, the field of entrepreneurship has
ignored Stinchcombe’s emphasis on emerging organizations. Research on emerging organizations
needs to pay more attention to the pragmatic tasks that nascent entrepreneurs cope with and the
activities that they undertake to accomplish these tasks. In addition to a systematic conceptual
framework, future research on the “liability of newness” also requires a suitable research design and
appropriate statistical procedures. Were investigators to follow the suggestions we have offered,
we believe that scholars would gain a better understanding of the conditions under which some
emerging organizations are more likely than others to survive.
KEYWORDS: liability of newness, new business, survival, new venture, start-up, failure rate
Author Notes: For their helpful comments, we wish to thank participants at presentations given
at the Booth School of Business, University of Chicago; Sloan School of Management, MIT; the
Desautels Faculty of Management, McGill University; the Keller School, Princeton University; and
the Robert Smith School of Business, University of Maryland. We thank Arthur Stinchcombe for
his encouragement of this project.
As always, Ramona Kay Zachary and Chandra Mishra were of immense help in helping us focus
our argument.
Aldrich and Yang: What Did Stinchcombe Really Mean?
INTRODUCTION
STINCHCOMBE’S PROPOSITION
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negotiating favorable terms with suppliers, and so on. Coase and Wang (2011:3)
made a similar point in their plea for more study of the industrial structure of
production, noting that "product development is inevitably an open-ended and
unpredictable process." They argued that the serendipitous and trial and error
nature of innovation in the process of production “make it difficult to study within
the conceptual framework of mainstream economics,” and that most newly
established firms “fail and disappear” (Coase and Wang 2011:2).
Stinchcombe focused heavily on workforce characteristics, pointing out
that employees of emerging organizations must learn new roles, with
entrepreneurs having to either rely on skills that were learned elsewhere or else
gamble that employees could learn new skills quickly. He noted that generalized
skills are important but that norms and attitudes are even more important. He
argued that the liability of newness is greatly reduced when entrepreneurs have
access to a disciplined and responsible workforce and can draw on social routines
letting workers exercise initiative. In this respect, family-based businesses often
have an advantage (Casson 1982). Stinchcombe pointed to market and industry
characteristics that limit the viability of emerging organizations. Emerging
organizations typically start small and must win customers away from established
organizations, overcoming established loyalties. That task is made doubly
difficult if existing organizations are more efficient users of resources than new
firms. They might employ a technology with significant returns to scale or they
may control a critical resource or have access to wealth that gives them an
absolute advantage over new entrants. Government regulations are often slanted
in favor of the forms and practices of existing organizations, although
deregulation has substantially changed the environment for emerging
organizations since the 1960s, when Stinchcombe offered his propositions. His
essay painted a compelling picture of the steep challenges facing emerging
ventures.
As framed, his argument would seem to require a research design that
captures aspiring entrepreneurs in the process of constructing emerging
organizations, rather than entrepreneurs running already established
organizations. Similarly, Zachary and Mishra (2011) noted the importance of
placing entrepreneurship within a social context in designing research on new
ventures. Based on Stinchcombe’s depiction of the dilemmas facing entrepreneurs
trying to recruit and mold a new workforce, for example, we would expect
researchers to focus on the early days of a venture’s life, before organizational
roles are clearly established and when organizational routines are still incoherent.
Similarly, we would expect an appropriate study design to capture the period
during which entrepreneurs are negotiating with suppliers over the terms on
which resources will be made available to them and not on the later periods when
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their established firms have more options available. So, what have investigators
actually done?
Two problems have hindered the realization of a suitable research design for
studying the liability of newness among emerging businesses. First, rather than
capturing organizations as they emerge during the initial startup process, most
empirical studies have sampled young organizations that have already been
through their early organizing periods. Second, rather than tracking startup
activities on a timely and fine-grained basis to capture the immediate and ongoing
difficulties faced by founders, almost all studies have relied on administrative
records that chunk their data collection into yearly periods. We take up the two
issues in turn.
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widely used government databases include only businesses that hire at least one
employee working full time, thus excluding businesses without employees
(Aldrich and Ruef 2006; Reynolds and Curtin 2009). The vast majority of new
businesses do not have employees when they begin, but some do subsequently
add them. Data sets based solely on businesses with employees will thus miss the
early and possibly more vulnerable period in the lives of new firms when they
must rely solely upon the labor of their founders and family members.
To the extent that investigators rely upon registration data, they will miss
emerging organizations that did not survive long enough to be registered and were
thus omitted from the sample. Studying young organizations instead of emergent
ones may not capture the actual magnitude of “the liability of newness” that was
implied in Stinchcombe’s original essay. If selection pressures are strongest on
newly founded organizations, examining only established young organizations
will not allow researchers to discover the extent to which emerging organizations
muddle through precarious early periods. Studying only registered organizations
also poses problems for testing hypotheses regarding the causal mechanisms that
explain the “liability of newness.” For example, because resources are scarce for
emerging organizations and they lack customers and suppliers, a small amount of
financial capital and customer support might be more important for them than for
established ones.
The data collection schedule for most research on organizational survival has not
matched the actual periodicity of life in emergent organizations. Because most
researchers have relied upon sampling lists derived from registration records and
administrative sources, they have had to use timetables established by others,
rather than one more suited to the question posed by Stinchcombe. Thus, whereas
threats to organizational survival vary widely in the time window afforded
founders to meet them, most research has stuck resolutely to a yearly data
collection schedule, giving investigators no information about what has occurred
in the interval between observations.
Consider the periodicity of many common activities involved in founding
a new business. Entrepreneurs trying to raise capital from outside sources will
have many meetings to attend and documents to prepare. If the business has a
loan, then payments are probably scheduled on a monthly basis. If it has a payroll
to meet, then the payroll cycle is probably on a weekly basis. If it has hired
employees, then it is also filing quarterly unemployment and payroll taxes. If it is
a business that relies upon periodic replenishment of its inventory, then there will
be deliveries to manage and until the schedule is routinized, managing logistics
will be a daily time-consuming process. Businesses that have seasonal swings in
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their sales, as is true in some parts of the retail and service sectors, will have to
plan for substantial variability in revenues and expenses over the course of a year.
When information on businesses is obtained from records collected on a
yearly basis, especially when it does not involve a survey of business owners,
almost all of the variability we have described will be lost. Because the officials
who keep administrative records typically have no interest in businesses that have
vanished in the interval between reporting dates, information on businesses that
exited – – for whatever reason – – could be as much as a year behind the actual
date they exited. If an inability to keep up with a weekly or monthly rhythm in
key events puts new firms at risk of failing, investigators relying upon yearly
registration data will simply be blind to that fact.
Entrepreneurship scholars have learned a great deal about the problems facing
new ventures over the past decades and the "liability of newness" principle is
widely accepted. However, the empirical literature purporting to test it is more
correctly viewed as conveying a sense of the liability facing newly established
firms, rather than emerging firms. We believe that improvements in three areas
could provide entrepreneurship scholars with a more accurate picture of the
dynamics surrounding the liabilities facing entrepreneurs: concepts more
appropriately tuned to the rhythm and pacing of startup processes, data collected
more frequently from entrepreneurs early in the founding process, and the use of
statistics more appropriate for such data.
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Two complementary kinds of research designs hold promise for shedding light on
the early organizing problems identified by Stinchcombe: multi-wave panel
studies using representative samples in which nascent entrepreneurs are
repeatedly interviewed about their activities, and intensive fieldwork and
ethnographic studies of nascent entrepreneurs in the early days of a startup.
First, multi-wave survey-based panel studies of emerging organizations
have already shown their worth and could be employed more extensively to study
the liability of newness. In such studies, researchers track startup attempts from
the point when nascent entrepreneurs begin actively working on their new
ventures (Katz and Gartner 1988). In contrast to yearly historical records, a panel
design allows investigators to collect information on entrepreneurial activities and
critical events occurring on a relatively smaller time scale. Accordingly, we
believe that investigators should trace emerging organizations from the very
beginning. In addition, information from founders needs to be collected at fairly
frequent intervals in follow-up observations to capture not only the long term but
also the short term difficulties that founders face (Hannan and Tuma 1979).
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method is linking people's words to their actions. For example, Cramton (1993)
combined extensive use of archival information with fieldwork to uncover the
underlying story of a business founding and the transformations it went through as
it passed from one generation to the next. Pentland (2011) pointed out that
ethnographic studies of the performative side of routines -- what people do as they
carry out their jobs -- have shed light on the importance of repetition and
experience. Such studies thus permit analysts to integrate the ostensive aspects of
routines with the performative, comparing words with deeds. We see great
promise in the possibility that some entrepreneurship researchers might take up
the challenge of studying nascent entrepreneurs engaged in startup processes.
Ethnography can tell us what humans are doing, at the micro level, and when
coupled with data on rhythm and pacing, it allows us to link entrepreneurs’
actions to the special problems faced by emerging organizations.
When organizations come under observation after they have existed for a certain
length of period, investigators face a statistical problem called “left-truncation.”
Some researchers have noticed that studies of established organizations are often
left-truncated because yearly records are only available many years after these
organizations began (Hannan et al. 1998). The actual origin time of being at risk
of failure for organizations is the time when organizations are initiated by nascent
entrepreneurs. The left-truncation problem facing researchers intending to test the
“liability of newness” hypothesis arises because there is a time lag between when
nascent entrepreneurs initiated their new businesses and when new ventures enter
into the study’s observations. For example, left truncation was built into PSED I
and II’s designs, given that they included nascent entrepreneurs who were
working on start-ups but had not achieved substantial revenue at the date of the
screening interview. This method of selection means that all of start-ups had
already been exposed to the risk of quitting for a certain period (depending on
when they started) when they came under observation. Using this research design,
it is logically impossible for any PSED sample units to have abandoned their
start-ups before the date of screening interviews with them. If they had quit at any
point before the date of the screening interview, they could not have been selected
into the sample.
Left-truncated data are incomplete and include many resilient subjects.
The longer the period during which start-ups have been exposed to the risk of
quitting before they come under observation, the greater the possibility that they
over-represent the robust cases. By contrast, the most fragile cases are quickly
selected out and investigators never observe them. As a result, if investigators do
not control for left-truncation, they will over-estimate the survival function
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because they will have left out the cases terminated earlier than when their
observation starts. Fortunately, statistical procedures are available that allow
investigators to take account of left truncation in building hazard models. In a
previous paper, we have described these models and how to apply them (Yang
and Aldrich 2012).
CONCLUSION
Stinchcombe was undoubtedly right, but his ideas need to be properly tested. We
have argued that most research invoking the concept of the "liability of newness"
has actually focused on organizations that have already gone through the
emergent phase which most concerned Stinchcombe. Research designs based on
publicly registered firms include mostly hardy survivors, not the kinds of
emerging organizations on which Stinchcombe based his propositions.
Despite decades of research since Stinchcombe’s original essay, questions
remain regarding the forms and the causes of emerging organizations’ liabilities.
Lacking a clear theoretical framework that explains emerging organization’s
liabilities, the field of entrepreneurship has ignored Stinchcombe’s emphasis on
emerging organizations. Much of Stinchcombe’s argument regarding emerging
organizations emphasizes the difficulties confronting founders. Thus, future
research on emerging organizations needs to pay more attention to the pragmatic
tasks that nascent entrepreneurs cope with and the activities that they undertake to
accomplish these tasks. In addition to a systematic conceptual framework, future
research on the “liability of newness” also requires a suitable research design and
appropriate statistical procedures. We have called for more explicit attention to
the timing of entrepreneurial activities, focusing on the rhythm and pacing of
change in emerging organizations and connecting activities to contexts.
Ethnographic research would allow researchers to capture the micro level
processes as they unfold in real time, whereas multivariate statistical models of
the liability of newness could be built using multi-wave survey research with
representative samples of emerging organizations. Were investigators to follow
the suggestions we have offered, we believe that scholars would gain a better
understanding of the conditions under which some emerging organizations are
more likely to survive than others.
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