The role of social capital in the business start up and entrepreneurial development

Introduction

Social capital is an important pillar in business start-up and entrepreneurial development. It encompasses the ability by the entrepreneur to establish strategic social relationships that have a potential to be transformed into opportunities for business growth. An entrepreneur should choose cofounders wisely to ensure start-up success. Similarly, he should seek help from outsiders while at the same time endeavoring to develop strong working relationships.

Through social capital, an entrepreneur is able to establish networks that ultimately lead to entrepreneurial success. According to Cope (2005), social capital is often created through a long process that starts with personal encounters with different people. These people start by exploring affinities. Next, they identify commonality, establish congruities, and finally they discover potentials (Cope, 2005). At this point, they gain the capability for sharing social capital (Cope, 2005). The aim of this paper is to examine how social capital contributes to business start up and entrepreneurial development.

Overview of social capital: Theoretical background

Studies on social capital and its association with entrepreneurship have made immense contributions to the current understanding of start-ups are conceived, managed, and developed (Baron & Markman, 2003; Mosey, 2007; Lee, 2008). Different scholars have used different theories, approaches perspectives, and models in efforts to discuss the social capital phenomenon from different perspectives. For example, the family-perspective is based on the hypothesis that entrepreneurial abilities are based on genetic traits (Aldrich, 2003). In contrast, the process perspective is founded on three levels of variables: individual-level, group-level, and societal-level variables (Baron & Shane, 2008).

Similarly, the theoretical underpinnings of different discussions on the importance of social capital vary depending on the viewpoint adopted by the researcher. For example, for Anderson & Jack (2002), the right question to ask is on whether social capital acts as a lubricant or glue in entrepreneurial networks. In contrast, Jack (2008) argues that the entrepreneurial environment is always a socially constructed phenomenon. In this phenomenon, the entrepreneur acts as the operator while the networking process serves the role of enacting this environment (Jack, 2008).

At this point, it is imperative that this study examines the different perspectives adopted in the study of entrepreneurship. The main ones include the family perspective, the process perspective, dynamic learning perspective, and institutional perspective. The family perspective opposes the view that families and businesses are naturally separate institutions (Aldrich, 2003). According to Aldrich (2003), they are in fact inextricably intertwined. Aldrich (2003) gives the example of the long-term changes in the way roles and relations are assigned to family members in North America and how this continues to influence opportunity recognition, emergence of new entrepreneurial opportunities, resource mobilization processes, and business start-up decisions. Kellermanns & Eddleston (2006) also adopt a family perspective in their efforts to emphasize on the importance of generational involvement in bringing about corporate entrepreneurship success in family firms. Leaders of family-owned businesses are also expected to be able to recognize opportunities in the technological realm as well as to be willing to change to succeed in entrepreneurial development.

The process perspective focuses on individual-level, group-level, and societal-level variables (Baron & Shane, 2008). Individual-level variables include motives, skills, and characteristics of entrepreneurs. Group-level variables include ideas, inputs from other people, as well as meaningful interactions with customers, venture capitalists, and potential employees. Societal-level variables include economic conditions, government policies, and technology. According to this perspective, the entrepreneurial process begins when ideas for a new product or service are recognized. The entrepreneur then makes the initial decision to proceed with the efforts to exploit the opportunity. He then assembles the required resources such as information, people-related, and financial resources. This is normally followed by the actual launch of the business venture, thereby triggering a long process of building a successful business. Once the business becomes successful, rewards are harvested, at which point the founders may choose to exit the business scene (Baron & Shane, 2008).

The dynamic learning perspective is based on the view that entrepreneurship is a learning process (Cope, 2005). Young entrepreneurs are expected to learn the ropes of opportunity recognition from adults. Meanwhile, not every entrepreneur acquires entrepreneurial knowledge in this way. For some, individual learning provides most of the insights into crucial pillars of entrepreneurial success. For others, this knowledge is acquired in managerial contexts. In most cases, successful entrepreneurs gain entrepreneurial competency through a blend of these three sources of knowledge. Based on this understanding, Cope (2005) proposes three elements of the entrepreneurial learning process: dynamic temporal phases, overarching characteristics, and interrelated processes.

In the institutional perspective, scholars focus on the origins of entrepreneurial practices as well as how they become established via diffusion and legitimacy (Lounsbury, 2007). Lounsbury (2007) recognizes to main strands of institutional development relating to entrepreneurship. In the first strand, scholars examine the actions of a single actor or a small number of actors who have made significant contributions to the contemporary understanding of entrepreneurship by setting up successful start-ups that greatly shaped the rise of new institutions. The second strand examines how emergent, multilevel activities continue to provide a foundation for the establishment of a new practice in the world of entrepreneurship. In this case, it is assumed that a new trend has emerged whereby multiple actors continue to interactively bring about change.

The role of social capital in the business start up and entrepreneurial development

Social capital is a crucial ingredient for success in the world of entrepreneurship. In the face of numerous challenges, intense competition, uncertainty, and a risky business environment, entrepreneurs always rely first and foremost on human relationships for success (Haynie, 2010). Entrepreneurs thrive in an environment of effective networks that act as breeding grounds for start-ups as well as opportunities for entrepreneurial development. Without social capital, it becomes impossible for these networks to take up a definite structure (Anderson & Jack, 2002). Similarly, social capital acts as a lubricant that entrepreneurs use to facilitate the operation of different networks (Anderson & Jack, 2002). It may be impossible to attach a definite value to social capital since it is not a tangible thing but a process. As a process, social capital contains crucial relational and structural aspects that should always be maintained at all times for success to be achieved in the process of entrepreneurial development.

Networks are always going through transformation all the time (Jack, 2008). Therefore, entrepreneurs should undertake regular assessments of structural and relational aspects of social capital to ensure that they are in tandem with the changing networks. By adopting a temporal perspective, one can gain a better understanding of patterns relating to continuity of networks. According to Jack (2008), networks should not be viewed merely as an extension of the asset base of an entrepreneurial activity. Rather, they should be viewed as a product of social construction of the environment in which the entrepreneurial activity is being undertaken.

According to Liao (2003), social capital as an asset is always embedded in relationships that exist in the context of individuals, networks, societies, and communities. Liao (2003) points out that relational, structural, and cognitive aspects of social capital are of utmost importance in technology-intensive start-ups. In Liao’s (2003) view, technology-based start-ups tend to portray subtle differences from non-technology based start-ups in terms of how they make use of social capital. For instance, technology-based entrepreneurs are likely to derive more benefits from relational embeddedness. This essentially means that chances of success in such ventures are higher when more of non-redundant information is exchanged in a freer manner (Liao, 2003).

In social capital theory, actors are expected to be able to extract benefits from social networks, structures, and memberships (Schroeter, 2008; Anderson & Jack, 2002; Steyaert, 2007). Social networks are typically accessed through family relations, organizational relationships, and community-based memberships (Kellermanns & Eddleston, 2006). They supplement the effects of one’s education, professional qualifications, working experience, and financial capital. Social capital encompasses different dimensions, with individual and organizational levels playing a critical role in its overall effectiveness. This multidimensionality is reflected in the broad definitions available in literature. Instead of focusing too much on a concise definition, most researchers emphasize on the need to establish a precise link between existing definitions and the usage of this concept in real-life operational contexts.

Through social capital, entrepreneurs get an opportunity to engage in social exchange in the process of setting up and developing new ventures (Haynie, 2010). This way, the new ventures become an integral component of the communities in which they are situated. When an entrepreneur receives information on the best location for a new venture, a social exchange may be said to have occurred. The same case applies when an individual successfully solicits for a business loan from his brother. These are just examples of meaningful social ties that mean a lot to entrepreneurs in their day-to-day efforts to achieve success through business start-ups.

Social capital enhances internal organizational trust (Zhao, 2009). Whenever actors bond and bridge external networks, opportunities are created for resource mobilization (Zhao, 2006). Trust acts as a major source of strength in efforts to accumulate social capital. In an environment where numerous business threats exist, every serious entrepreneur recognizes the need to belong to as many social networks as possible. These social networks provide a bond that prevents closely knit organizations from breaking apart (Liao, 2003).

Information is a critical resource that is best obtained through social networks (Greve, 2003). Many business start-ups fail simply because their founders lack access to accurate, reliable, and timely information on dynamics of the business environments, impending changes in government policy, or technical aspects of day-to-day operations within the business organization (Maurer, 2006). In technology-related start-ups, for example, social networks can greatly enhance the process of assembling the most talented pool of innovators (Mair, 2006).

In  the world of entrepreneurship, it matters a lot the kind of relationships that one maintains (Davidsson & Honig, 2003). All relationships are not equally important; some are critical to the survival of the venture while others may not make any meaningful contribution to the overall wellbeing of the business. However, due to the uncertainty that forever lurks in the business world, even the weakest of relationships are worth maintaining. According to Liao (2005), such weak ties help an entrepreneur gain access to information that would otherwise be inaccessible or very costly to locate. These ties also serve as useful sources of links between individuals and organizations (Hoang, 2003). They provide numerous interfaces for social exchanges that may prove to be very meaningful in future (Baron, 2000).

Business start-ups and nascent firms are particularly in dire need of social capital in efforts to leverage on their existing capabilities and to continue excelling in the realm of opportunity recognition (Brush, 2002). Whereas strong social ties are a source of a sense of security and consistency in terms of access to resources, weak ties, for example membership in a union or association, are useful in efforts to maintain synergies within different activities that make up the entrepreneurial development process (Renzulli, 2000).

At the start-up level, entrepreneurs spend a lot of time and resources identifying networks, strengthening social ties, and trying to make them operational in a business context (Tötterman, 2005). They engage in many group activities with the hope that these efforts will translate into meaningful social relationships (Krueger, 2000). Such entrepreneurs tend to be endeavoring to abide by the process approach to entrepreneurship, whereby the process of social capital build-up is typically synonymous with that of entrepreneurial development (Thompson, 2000). Indeed, for most business start-ups, social capital tends to grow at a rate that is more or less proportionate to that of the overall growth of the entrepreneurial venture (Anderson, 2003; Stam, 2008).

In conclusion, entrepreneurs who choose to launch business start-ups must be ready to go through the discovery process that lasts throughout entrepreneurial development process. They must seek exposure to different world views and ideas with a view to provide them with a wide frame of reference in their efforts to nurture the new idea or venture. They must form a habit of making decisions based on honest advice and friendships. It is in the context of such a habit that social capital thrives. Through such efforts, the entrepreneur gains access to numerous personal networks that provide numerous intangible resources.

Personal reflection statement

As I reflect on the activities that yielded this report, I can only marvel at the abundance of literature available on the subject of entrepreneurship. I have never encountered a subject with such a wealth of information especially in the form of scholarly journal articles. Many scholars have sought to provide a theoretical framework for the study of entrepreneurship. I found it fascinating that the theoretical framework that each scholar provided tended to vary depending on the perspective he adopted. However, this is not to say that there are as many theoretical foundations as the number of entrepreneurship scholars. I noted that in many instances, several scholars have chosen to expound on the same theoretical foundation, approach, or model. Based on this knowledge, I now appreciate the importance of the build-up, systematic process through which academic discourse develops. This systematic approach to academic inquiry has enabled me gain a lot of knowledge regarding the importance of social capital in business start-up and entrepreneurial development.

Of all the theoretical approaches discussed in this paper, I find the process approach to be the most useful. Through an analysis of this approach, I came to realize that social capital is not a tangible asset but an ongoing process. I learnt that as social capital grows, so does the entrepreneurial development process. I also learnt that as a multidimensional process, social capital encompasses both strong and weak ties, each of which has a unique role to play in a business start-up. The ability to appreciate and promote this multidimensionality is a critical trait for every entrepreneur. Have understood these issues, I feel that I am in a good position not only to excel in the discipline of entrepreneurship but also become a successful entrepreneur.

Trust……………………..……………………..……………………..……………………..……………………..……………………..

 

 

References

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