Entrepreneurial Opportunity Identification: A Motivation-based Cognitive Approach

Stephen Ko Department of Management & Marketing Faculty of Business The Hong Kong Polytechnic University Hong Kong SAR China Ph: +852 2766 4061 Email: [email protected]

Stephen Ko is a Teaching Fellow of entrepreneurship and strategic management at the Hong Kong Polytechnic University. He received his Ph.D. in entrepreneurship from the Faculty of Business at the Hong Kong Polytechnic University. His current research interests focus on entrepreneurship, creativity, and innovation.

Entrepreneurial Opportunity Identification: A Motivation-based Cognitive Approach

Abstract

Prior research has shown that cognition enables entrepreneurial opportunity identification, but a motivation-based cognitive approach, which could lead to a better understanding of what differentiates novelty-seekers from others, has received little attention in the entrepreneurship literature. Drawing from cognitive theory, this study examines the relationships among need for cognition, alertness and entrepreneurial opportunity identification in a mail survey of 197 technology-based entrepreneurs in Hong Kong, China. Results indicate that need for cognition relates positively to entrepreneurial opportunity identification, but that alertness mediates this relationship. Implications for research and practice are also discussed.

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Introduction Entrepreneurial opportunity identification is a core attribute of entrepreneurship (Shane and Venkataraman 2000). In recent years, there has been a vast theoretical and empirical literature that poses the question of why some people and not others are able to identify entrepreneurial opportunities (Baron 2004, 2006; Busenitz and Barney 1997; Gaglio 2004; Gaglio and Katz 2001; Kaish and Gilad 1991; Krueger 2000, 2007; Mitchell et al. 2002, 2007; Ward 2004). These studies suggest that entrepreneurial cognition enables opportunity identification. However, a motivation-based cognitive approach, which could lead to a better understanding of what differentiates novelty-seekers from others, has received little attention in the entrepreneurship literature. Drawing from cognitive theory, this study examines the relationships among need for cognition, alertness and entrepreneurial opportunity identification. The current study suggests that individuals with a high need for cognition are likely to “seek, acquire, think about, and reflect back on information to make sense of stimuli, relationships and events” (Cacioppo et al. 1996, p. 198) in ways that they are more likely to identify entrepreneurial opportunity through alertness. This research contributes to current entrepreneurship literature by suggesting that the need for cognition and alertness are important in understanding entrepreneurial behavior. This line of work reemphasizes the profound influence that individual cognition exerts on entrepreneurial opportunity identification. An empirical examination of the mediating effect of alertness also advances existing theory by enhancing our understanding of the entrepreneurial opportunity identification process. Following this introduction, section two describes the theory and relevant literature. Section 1

three covers the research design to test hypotheses. Section four presents the findings. Section five discusses the results, and presents conclusions with implications for practitioners and researchers, limitations and suggestions for future research. Theoretical Framework and Hypotheses Development Entrepreneurial Opportunity Identification Shane (2003) defines an entrepreneurial opportunity as a situation in which individuals can create a completely new means-ends framework by reassembling resources that they believe will yield a profit. Before acting on opportunities, individuals must first identify these opportunities (Krueger 2000; Shane and Venkataraman 2000). Shane and Venkataraman (2000) identify entrepreneurial opportunity identification as a core attribute of entrepreneurship. Indeed, many definitions of entrepreneurship have increasingly focused on opportunity identification as central to understanding entrepreneurial behavior (Stevenson and Jarillo-Mossi 1986, 1990; Stevenson, Roberts, and Grousbeck 1989; Shane and Venkataraman 2000; Stewart 1991). For example, Kirzner (1973) suggests that entrepreneurs find and exploit opportunities by taking advantage of economic disequilibria by knowing or recognizing things that others do not recognize. Bygrave (1989a, 1989b) views the founding of an organization as the pursuit of an entrepreneurial opportunity. Timmons (1994) also suggests that successful entrepreneurship can only take place when there is a fit among entrepreneurs, opportunity identification, and the resources required to found a firm. These theoretical perspectives all shed light on the importance of entrepreneurial opportunity identification as a critical, first step of the entrepreneurship process (Christensen, Madsen, and Peterson, 1994). Nevertheless, given the same set of situations and opportunities, not all people can identify a given entrepreneurial opportunity (Shane 2000; Shane and Venkataraman 2000). Some people 2

are able to identify opportunities that others overlook (Hayek 1945; Kirzner 1973). In addressing this interesting but challenging research question as to why some people and not others are able to identify entrepreneurial opportunities, prior studies lend support to the view that possession of prior knowledge, social networks, and superior cognitive capabilities (Fraboni and Saltstone 1990; Gaglio and Katz 2001; Kaish and Gilad 1991; Mitchell et al. 2002; Shane 2000; Young and Francis 1991) play an important role that helps lead individuals to notice opportunities. In identifying entrepreneurial opportunities, prior knowledge and social networks would not contribute much if individuals could not process the information cognitively. The cognitive perspective suggests that everything people think, say, or do is influenced by mental processes – the cognitive mechanism through which they acquire, store, transform and use information, which can be invaluable to understanding why some people and not others identify opportunities (Baron 2004, 2006). Cognition is defined as all processes, through which sensory input is transformed, reduced, elaborated, stored, recovered, and used (Neisser 1967). In the context of entrepreneurship, recent research has drawn heavily upon the field of social cognition, which considers individuals to exist within a configuration of forces impacted by two pairs of factors: the person-in-situation, and motivation and cognition (Mitchell et al. 2007). The current study focuses on the second pair of factors, motivation and cognition, and further develops a motivation-based cognitive model to enhance our understanding of entrepreneurial opportunity identification, while recognizing the importance of the person-in-situation factor.

Need for Cognition and Entrepreneurial Opportunity Identification Cohen, Stotland and Wolfe (1955) define need for cognition as “a need to structure relevant

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situations in meaningful, integrated ways” and “a need to understand and make reasonable the experimental world” (p. 291). Cacioppo and Petty (1982) further define the need for cognition as a stable individual difference in people’s tendency to engage in and enjoy effortful cognitive activity, and they develop a set of scales to measure this capability. They found that individual variations in need for cognition fell along a bipolar continuum (from low to high). Prior research has indicated that individuals with a high need for cognition process information differently as compared to those with a low need for cognition (Chatterjee, Kang, and Mishra, 2005; Hoffmann and Soyez 2010; Lee and Thorson 2009). Individuals with a high need for cognition acquire and reflect on information to make sense of conflicting stimuli (Sojka and Deeter-Schmelz 2008), and are able to resolve conflicts in contradictory information (Cacioppo et al. 1996). Cacioppo et al. (1996) suggests that individuals with a high need for cognition are more likely to perform problem-solving activities and that they enjoy thinking and are used to seeing problems as some challenges to be solved. Cacioppo and Petty (1982) also note that individuals with higher need for cognition are likely to consider a larger number of possibilities and to try out alternative hypotheses to make meaningful sense of situations. Nair’s (2000) research effort further indicates that as need for cognition increases, individuals exhibit a greater breadth of coverage in dealing with the problem by collecting information and taking decisions on more aspects of the complex problem. Individuals with a low need for cognition are likely to “rely on others (e.g., celebrities and experts), cognitive heuristics, or social comparison processes to provide this structure” (Cacioppo et al. 1996, p. 198). The notion of need for cognition has a far-reaching effect on entrepreneurial opportunity identification. Individuals with a high need for cognition tend to engage in thinking and processing information effortfully, which results in more, or more accessible, information on a

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range of topics, and enables them to be more sensible in responding to those topics (Cacioppo et al. 1996). Thus, the degree to which need for cognition affects any individual’s ability to identify entrepreneurial opportunity is particularly relevant in understanding entrepreneurial behavior. Hence: H1 : Need for cognition relates positively to entrepreneurial opportunity identification.

Alertness and Entrepreneurial Opportunity Identification Kirzner (1979) defines alertness as “the ability to notice without search opportunities that have been hitherto overlooked” (p. 148). Kirzner (1973, 1979, 1997) develops this concept and assumed that an individual would have “his eyes and ears open to opportunities that are just around the corner … He is alert, waiting, continually receptive to something that may turn up … this alertness is the entrepreneurial element in human action” (Kirzner 1979: 7). Kirzner (1979) asserts that an entrepreneur is an opportunity identifier who is capable of perceiving and exploiting profitable opportunities whenever the market is in disequilibrium, and that disequilibrium is the normal state of most markets. However, he also admits that individuals exhibit some variations in alertness – only some gifted individuals are able to notice, take advantage of, and pursue those overlooked opportunities (Kirzner 1979). Gaglio and Katz (2001), drawing on the work of Kirzner (1973, 1979), argue that some people are better than others at seeing relationships and patterns in information, and integrating any new information into their existing schema (or mental framework) by creating new causal links in their mind, all of which facilitate entrepreneurial opportunity identification. Individuals create their own schemas, which represent their cumulative experiences, learning, feelings and

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meanings that they have encountered, constructed, or imagined about a specific domain (Fiske and Taylor 1991). The schema content and structure for a domain is individualistic in terms of its content (Levine, Resnick, and Higgins 1993), degree of complexity (Markus and Zajonc 1985), and the number of cross-referenced links to other schemas (Fiske and Taylor 1991). Baron (2006) further suggests that some individuals possess cognitive frameworks that facilitate the connection of dots among environmental changes, market trends, and customer niches. Such frameworks, which involve alertness and perceived connections, result in entrepreneurial opportunity identification (Busenitz and Arthurs 2007; Mitchell et al. 2007). Hence, H2 : Alertness relates positively to entrepreneurial opportunity identification.

Prior studies have shown that individuals with a higher need for cognition can recall greater amounts of information to which they have been exposed (Cacioppo, Petty, and Morris 1983; Heslin and Johnson 1992; Lassiter, Briggs, and Bowman 1991). Individuals who immerse themselves in cognitive efforts are more likely alert to some cues that would trigger identification of entrepreneurial opportunities because the content and complexity of a schema of any individuals depend on the intensity and quality of their efforts in learning about the domain (Gaglio 1997). Individuals with a high level of alertness are able to recognize facts and linkages that result in entrepreneurial opportunities that others would not recognize. Hence, H2a : Alertness mediates the relationship between need for cognition and entrepreneurial opportunity identification.

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Methods Sample and Procedure The sample for this study was randomly drawn from the database of the Census and Statistics Department of the government of Hong Kong using industries with the Standard Industrial Classification (SIC) codes that are characterized by a high percentage of technology-based firms. Questionnaires were sent to 2,435 entrepreneurs in these industries, with two follow-up reminders to enhance the response rate. 197 addresses were found to be outdated, which reduced the number of entrepreneurs contacted to 2,238. After three mailings, a total of 223 completed questionnaires were received, representing a 10.0% response rate for the entrepreneurs contacted. Because the target respondents in this study were entrepreneurs, 26 cases were identified as non-entrepreneurs and therefore removed from subsequent analyses. As a result, usable responses were received from 197 entrepreneurs, representing an effective response rate of 8.9 per cent. This response rate was considered acceptable for this type of research when compared with other mail surveys conducted in Hong Kong SAR (Harzing 1997). Late-wave analyses were conducted to evaluate non-response bias (Fowler 1993). Results indicated that late respondents did not differ significantly from the early ones in terms of demographic characteristics. The questionnaire used in the survey was initially developed in English and then translated into Chinese, and then back translated to English to ensure consistency. Measures Need for cognition, the independent variable, was assessed from a modified scale originally developed by Cacioppo, Petty and Kao (1984). Sample items were “I like to have the

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responsibility of handling a situation that requires a lot of thinking,” “I usually end up deliberating about issues even when they do not affect me personally,” and “thinking is not my idea of fun” (reverse scored). Items were rated on a seven-point Likert scale ranging from “very much like me” (7) to “not at all like me” (1). The ten items measuring need for cognition were subject to an exploratory factor analysis. This resulted in a one-factor solution with eigenvalue more than one. This one-factor model accounted for 58.8% of the total variance. The standardized alpha of this scale was .92. Alertness, the mediator, was assessed from a modified scale originally developed by Kaish and Gilad (1991). Sample item included “while going about day-to-day activities, I still try to explore new business ideas.” Items were rated on a seven-point Likert scale ranging from “very much like me” (7) to “not at all like me” (1). The three items measuring alertness were subject to an exploratory factor analysis. This resulted in a one-factor solution with eigenvalue more than one. This one-factor model accounted for 82.7% of the total variance. The standardized alpha of this scale was .90. Entrepreneurial opportunity identification, the dependent variable, was based on the product term of (1) average number of business ideas each month, (2) percentage of these business ideas considered novel or innovative, (3) percentage of these novel or innovative ideas considered feasible and desirable. The final fraction number was regarded as an index measure of opportunities identified. The natural log transformation of this index was performed and used in subsequent regression analyses accordingly in order to linearize the relationships between the independent and dependent variables (Cohen and Cohen, 1975).

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Years of industry experience (mean = 17 years, s.d. = 10.4 years) and number of firms previously founded (mean = 1.3 firms, s.d. = 1.4 firms) were entered first in the hierarchical regression analyses as control variables.

Results Table 1 presents the means, standard deviations, and “pairwise” correlations of the constructs. Hypotheses were tested using hierarchical regression analyses by first introducing into the equation the block of control variables, followed by the independent and mediating variables. Table 2a (Model 1) shows that venture experience is positively and statistically significant in the initial regression model (β = .21, p < .05). To examine hypotheses 1 and 2, need for cognition and alertness were entered into the equations respectively (Models 2 and 3). Results indicate that need for cognition and alertness produce positive and statistically significant effects on the number of entrepreneurial opportunities identified (β = .28, p < .01; β = .34, p < .001) respectively. The findings support hypothesis 1, suggesting that need for cognition relates positively to entrepreneurial opportunity identification. The research findings also support hypothesis 2, indicating that alertness relates positively to entrepreneurial opportunity identification. __________________________ Insert Table 1 about here __________________________ __________________________ Insert Table 2a about here __________________________

Following the procedure outlined in Baron and Kenny (1986), the results provides support 9

for a fully mediated model (Hypothesis 2a). The findings show that need for cognition is a significant predictor of the number of entrepreneurial opportunities identified (Table 2a, Model 2) and alertness (Table 2b, Model 2), and alertness is a significant predictor of the number of entrepreneurial opportunities identified (Table 2a, Model 3). However, the presence of alertness significantly reduces the size and significance of need for cognition to entrepreneurial opportunity identification (from β = .28, p < .01 to β = .15, n.s.) (Table 2a, Model 4). Thus, alertness mediates the relationship between need for cognition and entrepreneurial opportunity identification. This finding supports hypothesis 2a.

__________________________ Insert Table 2b about here __________________________ Discussion and Conclusion The findings of this research support the notion that need for cognition relates positively to entrepreneurial opportunity identification, but that alertness mediates this relationship. Need for cognition appears to be a necessary but insufficient condition for identifying entrepreneurial opportunities. This suggests that entrepreneurs who engage in cognitive activities may not necessarily notice entrepreneurial opportunities unless they are alert to cues that would trigger identification of entrepreneurial opportunities. Need for cognition serves to activate the recall memory of “dots” to which individuals have been exposed, and heightens the propensity to connect these “dots” (Baron 2006). Alertness further predisposes individuals to make good judgments about changes and/or information cues that result in entrepreneurial opportunity identification. Those with a high level of alertness are

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quicker to detect signals from which they could infer a more complete picture, and most importantly, they are more likely to see the commercial potential of entrepreneurial opportunities that others are not capable of noticing (Gaglio 2004). This insight helps explain why some individuals appear capable of identifying entrepreneurial opportunity while those with similar capabilities and backgrounds are not capable of so doing. Both entrepreneurs and researchers with substantial interests in entrepreneurial opportunity identification may benefit from this research. Specifically, this research suggests that entrepreneurs need to immerse themselves in cognitive activities in ways to “seek, acquire, think about, and reflect back on information to make sense of stimuli, relationships and events” (Cacioppo et al. 1996, p. 198). This activation of cognitive preparedness would heighten the propensity of alertness, resulting in entrepreneurial opportunity identification. This also serves as a potentially useful avenue for training entrepreneurs and students to be more proficient at entrepreneurial opportunity identification. Equipping them with wider and richer exposure, more off-duty time, and mind-mapping exercises might well prove helpful. From a corporate entrepreneurship perspective, appropriate policies (e.g., employee diversity, encouraging sensible risks, allowing mistakes, off-duty time, incentives, etc.), training programs and hassle-free work environment should be in place to foster an employee’s need for cognition and alertness, leading to entrepreneurial opportunity identification. This study also reemphasizes the centrality of individual cognition to entrepreneurial opportunity identification. It extends the current state of entrepreneurship research by using a motivation-based cognitive approach, which could lead to a better understanding of what differentiates novelty-seekers from others in identifying more entrepreneurial opportunities through alertness. Studying the role of need for cognition and alertness in the context of

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entrepreneurial opportunity identification has the potential to extend cognitive theory in the entrepreneurship domain. This stream of research is in line with the growing interest of scholars in recognizing cognition as the critical element driving entrepreneurial action (Mitchell et al. 2004, 2007). This study prompts a fruitful development of research and debate that further substantiates existing theories of cognition, entrepreneurial opportunities identification, and entrepreneurship in general. For example, a research effort designed to identify and understand the cognitive structure that lies beneath how entrepreneurs structure their dots that are readily connected in a novel way (Baron 2006; Krueger 2007) would dramatically add to our understanding of opportunity identification. Readers should be aware of certain limitations when interpreting the results of the study. One should also be careful not to over-interpret the results with regard to causality because the causal model was estimated using cross-sectional data in this study. Future research should establish the causal claim that need for cognition relates positively to alertness, which heightens the propensity of identifying more entrepreneurial opportunities. To this end, field experiments and longitudinal research designs might be applied. Such designs may be more conclusive about the causal linkages among the constructs. One cannot entirely rule out the possibility that common method bias may have augmented the relationships between constructs because self-report measures were used in this research (Podsakoff, MacKenzie, Lee, and Podsakoff 2003). The relationships among the predictor (need for cognition), mediator (alertness), and outcome (entrepreneurial opportunity identification) may include common method variance because this study measured each of these constructs from only one source (the entrepreneur), which means the answer to one item may influence the

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answers to others. These associations could therefore be attributed to a response bias on the part of the entrepreneur. To address the common method bias, this study conducted a Harmon’s (1960) single-factor test. Results show that no single factor emerges from factor analysis, although Podsakoff, MacKenzie, Lee and Podsakoff (2003) suggest the absence of a single factor may not necessarily mean that the measures are free of common method variance. Nevertheless, a key informant approach is appropriate in entrepreneurship research because entrepreneurs are more competent and knowledgeable to report the information of interest in this study (Kumar, Stern, and Anderson 1993). Moreover, given a single-blind research technique to measure need for cognition and alertness, it seems unlikely that respondents could structure their responses (Doty, Glick, and Huber 1993). Thus, the likelihood of common method variance is relatively small in this study. The third limitation is concerned with the generalizability of results. In this study, the sample consisted of only technology-based entrepreneurs. Need for cognition and alertness might vary with industries. It may also be intriguing to compare entrepreneurs with non-entrepreneurs as to whether they differ from each other in need for cognition and alertness. The findings of this study points to several new research agendas. A motivation-based cognitive approach to predict entrepreneurial opportunity identification implies that future research should focus on the factors (e.g., regulatory pressure, competitive dynamics, etc.) that potentially necessitate need for cognition and alertness while considering other contextual and personal factors (e.g., social networks, prior knowledge, etc.). All this contributes to a more complete picture of understanding entrepreneurial opportunity identification (Ardichvili, Cardozo, and Ray 2003).

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Another promising research agenda is to examine collective cognition at the founding or top management team level (West 2007). For example, what is optimal size and composition of the team that enables collective cognition to identify more entrepreneurial opportunities? What is the dynamics and mechanism underlying collective cognition in relation to entrepreneurial opportunity identification? All this helps contribute to our understanding of what differentiates novelty-seekers from others at both the team and firm levels.

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FIGURE 1 A Motivation-based Cognitive Model of Entrepreneurial Opportunity Identification

Need for Cognition

Alertness

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Entrepreneurial Opportunity Identification

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opportunity identification. An empirical examination of the mediating effect of alertness also. advances existing theory by enhancing our understanding of the entrepreneurial opportunity. identification process. Following this introduction, section two describes the theory and relevant literature. Section. Page 3 of 25. 56.pdf.

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