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While Schumpeter, Kirzner, Cantillon, Knight, and Mises are frequently cited in the contemporary entrepreneurship literature in economics and management, much of this literature takes, implicitly, an occupational or structural approach to entrepreneurship. Any relationship to the classic functional contributions is inspirational, not substantive.

The most important exception is the literature in management and organization theory on opportunity discovery or opportunity identification, or what Shane (2003) calls the "individual–opportunity nexus." Opportunity identification involves not only technical skills like financial analysis and market research, but also less tangible forms of creativity, team building, problem solving, and leadership (Long and McMullan, 1984; Hills, Lumpkin, and Singh, 1997; Hindle, 2004). While value can, of course, be created not only by starting new activities but also by improving the operation of existing activities, research in opportunity identification tends to emphasize new activities. These could include creating a new firm or starting a new business arrangement, introducing a new product or service, or developing a new method of production. As summarized by Shane (2003, pp. 4–5),

Entrepreneurship is an activity that involves the discovery, evaluation, and exploitation of opportunities to introduce new goods and services, ways of organizing, markets, process, and raw materials through organizing efforts that previously had not existed (Venkataraman, 1997; Shane and Venkataraman, 2000). Given this definition, the academic field of entrepreneurship incorporates, in its domain, explanations for why, when, and how entrepreneurial opportunities exist; the sources of those opportunities and the forms that they take; the processes of opportunity discovery and evaluation; the acquisition of resources for the exploitation of these opportunities; the act of opportunity exploitation; why, when, and how some individuals and not others discover, evaluate, gather resources for, and exploit opportunities; the strategies used to pursue opportunities; and the organizing efforts to exploit them. (Shane and Venkataraman, 2000)

This conception is admirably broad, incorporating not only opportunity discovery, but also the processes by which opportunities are pursued and exploited. What unifies these varied aspects of the entrepreneurial function is the concept of the opportunity. The discovery and (potential) exploitation of opportunities is proposed as the unit of analysis for entrepreneurship research. But what exactly are opportunities? How are they best characterized? How much explicit characterization is necessary for applied research in entrepreneurial organization and strategy?

Opportunities: Objective or Subjective?

Shane and Venkataraman (2000, p. 220) define entrepreneurial opportunities as "those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production." These opportunities are treated as objective phenomena, though their existence is not known by all agents. Shane and Venkataraman also distinguish entrepreneurial opportunities from profit opportunities more generally. While the latter reflect opportunities to create value by enhancing the efficiency of producing existing goods, services, and processes, the former includes value creation through "the very perception of the means-ends framework" itself (Kirzner, 1973, p. 33). Shane and Venkataraman seem to have in mind the distinction between activities that can be modeled as solutions to well-specified optimization problems — what Kirzner (1973) calls "Robbinsian maximizing" — and those for which no existing model, or decision rule, is available.

However, Shane and Venkataraman appear to misunderstand Kirzner (and the Austrians more generally) on this point. In a world of Knightian uncertainty, all profit opportunities involve decisions for which no well-specified maximization problem is available. Kirzner does not mean that some economic decisions really are the result of Robbinsian maximizing, while others reflect discovery. Instead, Kirzner is simply contrasting two methodological constructions for the analysis of human action.

More generally, the opportunity-identification literature seeks to build a positive research program by operationalizing the concept of alertness. How is alertness manifested in action? How do we recognize it empirically? Can we distinguish discovery from systematic search? As summarized by Gaglio and Katz (2001, p. 96),

Almost all of the initial empirical investigations of alertness have focused on the means by which an individual might literally notice without search. For example, Kaish and Gilad (1991) interpret this as having an aptitude to position oneself in the flow of information so that the probability of encountering opportunities without a deliberate search for a specific opportunity is maximized. Therefore, in their operational measures of alertness, they asked founders to recall: (a) the amount of time and effort exerted in generating an information flow; (b) the selection of information sources for generating an information flow; and (c) the cues inherent in information that signal the presence of an opportunity. From this data the authors deduced: (d) the quantity of information in the flow and (e) the breadth and diversity of information in the flow. Their results conform to expectations in some ways but also reveal some unexpected patterns. Compared to the sample of corporate executives, the sample of new venture founders do appear to spend more time generating an information flow and do seem more likely to use unconventional sources of information. Interestingly, the founders do seem more attentive to risk cues rather than to market potential cues. However, the data also reveal that only inexperienced or unsuccessful founders engage in such intense information collection efforts. Successful founders actually behave more like the sample of corporate executives. Cooper et al. (1995) found a similar pattern of results in their survey of 1100 firms although Busenitz (1996), in an altered replication of Kaish and Gilad's survey, did not. Indeed Busenitz found few significant differences between corporate managers and new venture founders. In addition, validity checks of the survey measures yielded low reliability scores, which led the author to conclude that future research in alertness required improved theoretical and operational precision.

This positive research program misses, however, the point of Kirzner's metaphor of entrepreneurial alertness: namely, that it is only a metaphor. Kirzner's aim is not to characterize entrepreneurship per se, but to explain the tendency for markets to clear. In the Kirznerian system, opportunities are (exogenous) arbitrage opportunities and nothing more. Entrepreneurship itself serves a purely instrumental function; it is the means by which Kirzner explains market clearing. Of course, arbitrage opportunities cannot exist in a perfectly competitive general-equilibrium model, so Kirzner's framework assumes the presence of competitive imperfections, to use the language of strategic factor markets (Barney, 1986; Alvarez and Barney, 2004).

Beyond specifying general-disequilibrium conditions, however, Kirzner offers no theory of how opportunities come to be identified, who identifies them, and so on; identification itself is a black box. The claim is simply that outside the Arrow–Debreu world, in which all knowledge is effectively parameterized, opportunities for disequilibrium profit exist and tend to be discovered and exploited. In short, what Kirzner calls "entrepreneurial discovery" is simply that which causes markets to equilibrate.

Contemporary entrepreneurship scholars, considering whether opportunities are objective or subjective (McMullen and Shepherd, 2006; Companys and McMullen, 2007), note that Kirzner tends to treat them as objective. Again, this is true, but misses the point. Kirzner is not making an ontological claim about the nature of profit opportunities per se — not claiming, in other words, that opportunities are, in some fundamental sense, objective — but merely using the concept of objective, exogenously given, but not yet discovered opportunities as a device for explaining the tendency of markets to clear.

The Knightian perspective also treats entrepreneurship as an instrumental construct, used here to decompose business income into two constituent elements — interest and profit. Interest is a reward for forgoing present consumption, is determined by the relative time preferences of borrowers and lenders, and would exist even in a world of certainty. Profit, by contrast, is a reward for anticipating the uncertain future more accurately than others (e.g., purchasing factors of production at market prices below the eventual selling price of the product), and exists only in a world of true uncertainty. In such a world, given that production takes time, entrepreneurs will earn either profits or losses based on the differences between factor prices paid and product prices received.

For Knight, in other words, opportunities do not exist, just waiting to be discovered (and hence, by definition, exploited). Rather, entrepreneurs invest resources based on their expectations of future consumer demands and market conditions, investments that may or may not yield positive returns. Here the focus is not on opportunities, but on investment and uncertainty. Expectations about the future are inherently subjective and, under conditions of uncertainty rather than risk, constitute judgments that are not themselves modelable.

Put differently, subjectivism implies that opportunities do not exist in an objective sense. Hence, a research program based on formalizing and studying empirically the cognitive or psychological processes leading individuals to discover opportunities captures only a limited aspect of the entrepreneurial process. Opportunities for entrepreneurial gain are, thus, inherently subjective — they do not exist until profits are realized. Entrepreneurship research may be able to realize higher marginal returns by focusing on entrepreneurial action, rather than its presumed antecedents.

Alvarez and Barney (2007) argue that entrepreneurial objectives, characteristics, and decision making differ systematically, depending on whether opportunities are modeled as discovered or created. In the "discovery approach," for example, entrepreneurial actions are responses to exogenous shocks, while in the "creation approach," such actions are endogenous. Discovery entrepreneurs focus on predicting systematic risks, formulating complete and stable strategies, and procuring capital from external sources. Creation entrepreneurs, by contrast, appreciate iterative, inductive, incremental decision making, are comfortable with emergent and flexible strategies, and tend to rely on internal finance.

The approach proposed here is close to Alvarez and Barney's creation approach, but differs in that it places greater emphasis on the ex post processes of resource assembly and personnel management rather than the ex ante processes of cognition, expectations formation, and business planning. Moreover, Alvarez and Barney write as if "discovery settings" and "creation settings" are actual business environments within which entrepreneurs operate. Some entrepreneurs really do discover exogenously created profit opportunities, while others have to work creatively to establish them.

As I read Knight and Kirzner, by contrast, both the discovery and creation perspectives are purely metaphorical concepts (useful for the economist or management theorist), not frameworks for entrepreneurial decision making itself. This suggests that opportunities are best characterized neither as discovered nor created, but imagined. The creation metaphor implies that profit opportunities, once the entrepreneur has conceived or established them, come into being objectively, like a work of art. Creation implies that something is created. There is no uncertainty about its existence or characteristics (though, of course, its market value may not be known until later). By contrast, the concept of opportunity imagination emphasizes that gains (and losses) do not come into being objectively until entrepreneurial action is complete (i.e., until final goods and services have been produced and sold).

Moreover, explaining entrepreneurial loss is awkward using both discovery and creation language. In Kirzner's formulation, for example, the worst that can happen to an entrepreneur is the failure to discover an existing profit opportunity. Entrepreneurs either earn profits or break even, but it is unclear how they suffer losses. Kirzner (1997) claims that entrepreneurs can earn losses when they misread market conditions. "Entrepreneurial boldness and imagination can lead to pure entrepreneurial losses as well as to pure profit. Mistaken actions by entrepreneurs mean that they have misread the market, possibly pushing price and output constellations in directions not equilibrative" (Kirzner, 1997, p. 72).

But even this formulation makes it clear that it is mistaken actions — not mistaken discoveries — that lead to loss. Misreading market conditions leads to losses only if the entrepreneur has invested resources in a project based on this misreading. It is the failure to anticipate future market conditions correctly that causes the loss. It seems obscure to describe this as erroneous discovery, rather than unsuccessful uncertainty bearing.

Likewise, realized entrepreneurial losses do not fit naturally within a creation framework. Alvarez and Barney (2007) emphasize that "creation entrepreneurs" do take into account potential losses, the "acceptable losses" described by Sarasvathy (2001). "[A]n entrepreneur engages in entrepreneurial actions when the total losses that can be created by such activities are not too large" (Alvarez and Barney, 2007, p. 19). However, when those losses are realized, it seems more straightforward to think in terms of mistaken beliefs about the future — expected prices and sales revenues that did not, in fact, materialize — than the "disappearance" of an opportunity that was previously created. Entrepreneurs do not, in other words, create the future, they imagine it, and their imagination can be wrong as often as it is right.

Opportunities as a Black Box

Confusion over the nature of opportunities is increasingly recognized. As noted by McMullen, Plummer, and Acs (2007, p. 273),

a good portion of the research to date has focused on the discovery, exploitation, and consequences thereof without much attention to the nature and source of opportunity itself. Although some researchers argue that the subjective or socially constructed nature of opportunity makes it impossible to separate opportunity from the individual, others contend that opportunity is as an objective construct visible to or created by the knowledgeable or attuned entrepreneur. Either way, a set of weakly held assumptions about the nature and sources of opportunity appear to dominate much of the discussion in the literature.

Do we need a precise definition of opportunities to move forward? Can one do entrepreneurship research without specifying what, exactly, entrepreneurial opportunities are? Can we treat opportunities as a black box, much as we treat other concepts in management, such as culture, leadership, routines, capabilities, and the like (Abell, Felin, and Foss, 2008)?

One approach is to focus not on what opportunities are, but what opportunities do. Opportunities, in this sense, are treated as a latent construct that is manifested in entrepreneurial action — investment, creating new organizations, bringing products to market, and so on. A direct analogy can be drawn to the economist's notion of preferences. Economic theory (with the exception of behavioral economics, discussed later) takes agents' preferences as a given and derives implications for choice. The economist does not care what preferences "are," ontologically, but simply postulates their existence and draws inferences about their characteristics as needed to explain particular kinds of economic behavior. Empirically, this approach can be operationalized by treating entrepreneurship as a latent variable in a structural-equations framework (Xue and Klein, 2010).

By treating opportunities as a latent construct, this approach sidesteps the problem of defining opportunities as objective or subjective, real or imagined, and so on. The formation of entrepreneurial beliefs is treated as a potentially interesting psychological problem, but not part of the economic analysis of entrepreneurship. It also avoids thorny questions about whether alertness or judgment is simply luck (Demsetz, 1983), a kind of intuition (Dane and Pratt, 2007), or something else entirely.

The Unit of Analysis

As explained earlier, the opportunity-creation approach proposed by Alvarez and Barney (2007) differs in important ways from the opportunity-discovery approach. The creation approach treats opportunities as the result of entrepreneurial action. Opportunities do not exist objectively, ex ante, but are created, ex nihilo, as entrepreneurs act based on their subjective beliefs. "Creation opportunities are social constructions that do not exist independent of the entrepreneur's perceptions" (Alvarez and Barney, 2007, p. 15). In this sense, the creation approach sounds like the imagination approach described here. Still, like the discovery approach, the creation approach makes the opportunity the unit of analysis. How entrepreneurs create opportunities, and how they subsequently seek to exploit those opportunities, is the focus of the research program.

At one level, the distinction between opportunity creation and opportunity imagination seems semantic. Both hold that entrepreneurs act based on their beliefs about future gains and losses, rather than reacting to objective, exogenously given opportunities for profit. There are some ontological and epistemological differences, however. The creation approach is grounded in a social constructivist view of action (Alvarez and Barney, 2007). It holds that the market itself is a social construction, and that realized gains and losses are, in part, subjective. The imagination approach described here is, in this sense, less subjectivist than the creation approach. It is tied closely to Mises's (1912; 1920) concept of monetary calculation, in which realized gains and losses are objective and quantifiable, and used to filter (or select) the quality of entrepreneurial expectations and beliefs. It is compatible with a range of ontological positions, from evolutionary realism to critical realism (Lawson, 1997; Mäki, 1996) to Misesian praxeology (Mises, 1949).

An alternative way to frame a subjectivist approach to entrepreneurship, emphasizing uncertainty and the passage of time, is to drop the concept of "opportunity" altogether. If opportunities are inherently subjective and we treat them as a black box, then the unit of analysis should not be opportunities, but rather some action — in Knightian terms, the assembly of resources in the present in anticipation of (uncertain) receipts in the future. Again, the analogy with preferences in microeconomic theory is clear: the unit of analysis in consumer theory is not preferences, but consumption, while in neoclassical production theory, the unit of analysis is not the production function, but some decision variable.

One could also view opportunities and actions as distinct — but complementary — aspects of the entrepreneurial process. To use Alvarez and Barney's (2007) terminology, the discovery perspective treats actions as responses to opportunities, while the creation perspective treats opportunities as the result of action. By contrast, the perspective outlined here treats opportunities as a superfluous concept, once action is taken into account. Opportunities exist only as manifested in action, and are neither its cause nor consequence of action. Hence, we can dispense with the very notion of opportunities itself and focus on the actions that entrepreneurs take and the results of those actions.

One way to capture the Knightian concept of entrepreneurial action is Casson and Wadeson's (2007) notion of "projects." A project is a stock of resources committed to particular activities for a specified period of time. Project benefits are uncertain, and are realized only after projects are completed. Casson and Wadeson (2007) model the set of potential projects as a given, defining opportunities as potential projects that have not yet been chosen. As in the discovery-process perspective, the set of opportunities is fixed. However, as Casson and Wadeson point out, the assumption of fixed "project possibility sets" is a modeling convenience, made necessary by their particular theory of project selection.

More generally, the use of projects as the unit of analysis is consistent with either the discovery or creation perspective. Focusing on projects, rather than opportunities, implies an emphasis on the actions that generate profits and losses. It suggests that entrepreneurship research should focus on the execution of business plans. In this sense, entrepreneurship is closely linked to finance — not simply "entrepreneurial finance" that studies venture funding and firm formation, but the more general problem of project finance under (true) uncertainty. Not only venture capital, but also public equity and debt, are entrepreneurial instruments in this perspective.

Capital budgeting is also a form of entrepreneurial decision making. Of course contemporary finance theory focuses primarily on equilibrium models of resource allocation under conditions of risk, not Knightian uncertainty, so entrepreneurship theory cannot be simply a reframing of modern finance theory. Instead, a financiers-as-entrepreneurs approach treats investors not as passive suppliers of capital to decision-making firms, but as the locus of economic decision making itself, as economic agents who experiment with resource combinations (chapter 3 above), develop and exploit network ties (Meyer, 2000), manage and govern subordinates (Kaplan and Strömberg, 2003), and the like.