The Fabric of Regional Entrepreneurship: Creating the Multiplier Effect

WORLD ENTREPRENEURSHIP FORUM
2008 EDITION
The Fabric of Regional
Entrepreneurship:
Creating the Multiplier
Effect
Sankaran Venkataraman and Saras Sarasvathy

Darden Graduate School of Business

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Introduction
There have been many stories about regional economic development in the last couple
of decades. Some of these point to drivers in history or technology, others to the geography of
industrial clusters or the geometry of network organizations, and yet others to the evolution of
organizational forms such as flexible specialization, etc. All these explanations, to a greater or
lesser degree, acknowledge the relevance and importance of entrepreneurs to the development
process. Some have argued for the existence of entrepreneurs as the prime mover of the
process; others have pointed to policy incentives that have fostered entrepreneurs in the first
place. We also offer a story with an entrepreneurial slant, but our story has a different logic to it
– we hope the difference is large enough to provoke exciting new threads in the conversation,
but not so large that we throw away insights we have collectively gleaned so far.
We are also not suggesting that our story is better or more accurate, but just that it
sheds some light on some issues that the field may not yet have considered. In a nutshell, we
will argue for governments and regions to move beyond seeing entrepreneurship as a way of
promoting jobs and creating new (mostly small) businesses and think of it instead as a mind-set
and method that all participants in regional economic development can use to contribute to the
well-being and progress of their countries and regions.
Much like the phenomenon of “organizations” and “organizing” transformed the 20th
century social landscape, it is possible that “entrepreneurship” could be seen as the
transformation agent of the 21st century. In thinking through this conceptualization of
entrepreneurship as a method available to society to solve human problems and to usher in
social and economic change, we will briefly touch upon history and theory, but our focus will
ultimately be pragmatic rather than theoretical. Throughout our exposition we will emphasize
system-level aspects– i.e. the fabric of regional entrepreneurship as a whole -- and not worry
about more familiar arguments about the individual or institutional aspects of the phenomenon.
Regional entrepreneurship: Historically speaking
There has been considerable interest in regional entrepreneurship over the last 15 years
or so - especially since the entrepreneurship-driven technological boom in the 1990s led by
Silicon Valley in the United States. Every major trend in economic development, and even
recent developments in economic scholarship, attest to the fact that entrepreneurship has
captured the imagination of people around the world. Political, university and business leaders
already treat entrepreneurship as a means to economic and social development. This insight
that entrepreneurship can lead to successful regional growth has found considerable positive
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evidence across the world – in India, Ireland, Taiwan, Israel, Korea, and Singapore, to name a
few.
In the last decade governments in many countries have made it easier for entrepreneurs
to start new businesses and found new companies. For example, according to data collected
by the Global Entrepreneurship Monitor (GEM an academic consortium of university based
experts from about 50 countries around the world), the average time taken, steps needed, and
the upfront fees and expenses to incorporate a new company has been steadily falling over the
last few years in most of the countries tracked. Further, several countries have started venture
funds and have set aside risk capital to finance entrepreneurship. University based incubators
have also been a growth industry across many countries. Furthermore, knowledge about
entrepreneurship and even technical jargon among bureaucrats has steadily increased. States
and regions within countries even compete with each other to attract new companies and to
provide a more hospitable business environment for new entrepreneurs. In the GEM data,
countries like Mexico and even Indonesia appear at the top of the list of entrepreneurial
economies – countries you would not normally associate with being very entrepreneurial.
However, it must be appreciated that when we measure entrepreneurship we usually
measure it around new business start-ups. As a result, it is easier to start a company today
than it was, say, in the eighteenth century. Yet it remains far easier to start a company than to
grow it into a transformative force in society. It is far easier to promote the start-up of
companies, but it is far more difficult to help scale individual companies or scale enough
companies to have lasting and transformational impact within the region. It is easy to provide
incentives for the creation of small businesses, but incentives do not in themselves lead to the
creation of a Google, or a Grameen Bank, a Creative Technologies in Singapore or Infosys in
India. Similarly, it is easy to set up an incubator in an area, but more difficult to create a
Bangalore or a Dublin, or a Singapore.
The next challenge in entrepreneurship – both theoretically and practically – is for
regions and states to move from promoting entrepreneurship to creating a vibrant
entrepreneurial economy that can produce region-changing (or perhaps even world changing)
companies. This transition from the logic of creating companies to nurturing a fabric of
entrepreneurship is akin to moving from - to use that evocative phrase of Napoleon – “from a
nation of shopkeepers” to a society of entrepreneurs (in the broadest sense of the word). Just
as building an enduring pottery company in eighteenth century England entailed the
construction of an entire socio-political ecology, so does the making of an enduring high-growth
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company today require the weaving of a comprehensive fabric of regional entrepreneurship. Let
us undertake a thought experiment to illustrate this notion before we build it into a workable
thesis.
Entrepreneurship as a system-level phenomenon: Two time travel tales
When John Wesley, founder of the most successful religious movement (Methodism) in
eighteenth-century Britain visited the potteries of Burslem in 1760, he had to travel on non-
existent roads and had to endure being pelted with mud during his sermon by local inhabitants
who could only be described as brutal and vicious. Revisiting the same place in 1781, he wrote
in his diary (Smiles, 1894: 325): 1781, March 8th. I returned to Burslem. How is the whole face
of this country changed in about twenty years! Since which, inhabitants have continually flowed
in from every side. Hence the wilderness is literally become a fruitful field. Houses, villages,
towns, have sprung up: and the country is not more improved than the people. The word of God
has had free course among them; sinners are daily awakened and converted to God, and
believers grown in the knowledge of Christ. In the evening the house was filled with people, and
with the presence of God. This constrained me to extend the service a good deal longer than I
am accustomed to do. Both Wesley and historians point to the achievements of the
entrepreneur Josiah Wedgwood as the prime mover in this remarkable transformation. Born in
a humble family of potters in Burslem, Wedgwood not only built a pottery company that lasted
over 200 hundred years, he created a brand that is part of bridal registries today. He also built
roads and canals, lobbied the British Parliament to pass Acts favorable to his region, counted
luminaries such as James Watt, Mathew Boulton and Sir William Hamilton among his friends
and became a Fellow of the Royal Society for his invention of the pyrometer and for other
scientific papers. Wedgwood also figured out for himself the nuances of variable cost
accounting and designed numerous business process innovations including the predecessor to
the punch-clock that helped transform worker-behavior .
More recently, Thomas Friedman (2005: 3) describes his travels in The World is Flat: No
one ever gave me directions like these before on a golf course: “Aim at either Microsoft or IBM.”
I was standing on the first tee on the KGA Golf Course in downtown Bangalore, in southern
India, where my playing partner pointed to two shiny glass buildings off in the distance, just
behind the first green. The Goldman Sachs building wasn’t done yet, otherwise he could have
pointed that out and made it a threesome. HP and Texas Instruments had their offices on the
back nine, along the tenth hole. Friedman (2005: 5-6) also describes his visit to one company
at the center of twenty-first century Bangalore: The Infosys campus is reached by a pockmarked
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road, with sacred cows, horse-drawn carts, and motorized rickshaws all jostling alongside our
vans. Once you enter the gates of Infosys, though, you are in a different world. A massive
resort-sized swimming pool nestles amid boulders and manicured lawns, adjacent to a huge
putting green. There are multiple restaurants and a fabulous health club. Glass-and-steel
buildings seem to sprout up like weeds each week. In some of those buildings, Infosys
employees are writing specific software programs for American or European companies; in
others, they are running the back rooms of various American- and European-based
multinationals – everything from computer maintenance to specific research projects to
answering customer calls routed there from all over the world. The explanation this time around,
however, is not based on the achievements of any one heroic entrepreneur, but instead on the
flattening of the earth through technology, education and the socio-political development of an
entrepreneurial culture based on free market principles – at least in those pockets of almost
renaissance-like regional prosperity that have sprouted in various unlikely locations around the
world.
Regional entrepreneurship: Tempus and Hora
Theoretically speaking, it is difficult to attribute such regional terra-forming merely to
individual genius or even to policy initiatives and directed incentives. Something more
fundamental appears to be at work here – a type of specialization in key entrepreneurial
activities that evokes Adam Smith?s pin factory and Herbert Simon?s architecture of complexity,
albeit in a newly incarnated version that has exciting possibilities for our intellectual endeavor in
this essay.
Division of labor is an old concept – yet its rebirth seems imminent in the future history of
regional entrepreneurship. In conventional business corporations, specialization typically
encompasses sales, finance, accounting, marketing, operations, information systems, and the
like. Or it might take the form of value chain specialization involving both upstream and
downstream activities. One of the great co-evolutions of the industrial revolution was the parallel
organizational structural evolution along functional lines, which allowed specialization and
speeded up growth as well as industrial and technological innovations. It also increased the
fundamental capacity of organizations and regions to grow. As George Stigler, an eminent
economist of an earlier era and a Nobel Prize winner pointed out: “the division of labor is not a
quaint practice of eighteenth-century pin factories; it is a fundamental principle of economic
organization” (Stigler, 1951: 193).
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But Stigler also pointed out that the division of labor so essential for growth is limited by
the size of the “market” – or for our purposes the size of the entrepreneurial sector. Without a
large enough entrepreneurial activity, it is difficult for specialization within the entrepreneurial
sector – hence division of labor to occur. This in turn will limit growth. Thus we have a
conundrum: without growth to a large enough size we will not have specialization. Without
specialization, growth to a large enough size will be limited. The hallmark of a primitive or
nascent entrepreneurial region is that the founding entrepreneur or entrepreneurial team
provides many of the required skills for building and growing a company from founding to impact
– the entrepreneurial sector is vertically integrated within the founding entrepreneurial team.
These skills are concentrated in a small number of people or communities who learn these
processes as they go along (or come from a small, intertwined, and highly networked
community). Often the identity of the venture firm is tied up with the founding two or three
members, as in the case of Wedgwood and Bentley. And as Wedgwood realized, when these
skills are not present systemically or systematically within the local economy, it takes heroic
efforts to grow them from scratch. Although heroic entrepreneurs such as Wedgwood in
England, Hershey in Pennsylvania, and Kirloskar in India have time and again worked to weave
the fabric of entrepreneurial specialization and regional development beyond functional
specialization in the conventional sense, their efforts are yet to be generalized into our
understanding and practice of developmental economics. Specialization in primitive or nascent
entrepreneurial societies continues to be more along functional or disciplinary lines, not along
the lines necessary for taking an idea to market or to fabricate new markets from existing
resources and resourcefulness. This concentration of core but diverse skills necessary for
building an enterprise in the hands of a few people fundamentally affects the ability or a region
to grow rapidly, and turns into a vicious cycle: small markets means that specialization cannot
occur, lack of specialization limits the growth of the market.
To illustrate this idea of specialization leading to faster evolution of a system let us turn
to yet another Nobel Prize winning economist, the late Herbert Simon and his concept of the
architecture of complexity (Simon, 1962). In his seminal essay on the topic, Simon showed that
complex systems would evolve from simple systems more rapidly if there are stable
intermediate forms than if there are not. He illustrates this with a simple parable, which I will
use here.
“There once were two watchmakers, named Hora and Tempus, who manufactured very
fine watches. Both of them were very highly regarded, and the phones in their workshops rang
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frequently – new customers were constantly calling them. However, Hora prospered, while
Tempus became poorer and poorer and finally lost his shop. What was the reason? It is worth
reproducing Simon?s evocative reasoning extensively: “The watches the men made consisted
of about 1,000 parts each. Tempus had so constructed his that if he had one partly assembled
and had to put it down – to answer the phone, say – it immediately fell to pieces and had to be
reassembled from the elements. The better the customers liked his watches, the more they
phoned him and the more difficult it became for him to find enough uninterrupted time to finish
the watch.
The watches that Hora made were no less complex than those of Tempus. But he had
designed them so that he could put together subassemblies of about ten elements each. Ten of
these subassemblies, again, could be put together into a larger sub-assembly; and a system of
ten of the latter subassemblies constituted the whole watch. Hence, when Hora had to put
down a partly assembled watch to answer the phone, he lost only a small part of his work, and
he assembled his watches in only a fraction of the man-hours it took Tempus” (Simon, 1962:
470).
With some simple quantitative calculations and using small probabilities of failure at the
sub-system level, Simon showed that a system made of stable sub-assemblies grew
exponentially faster than systems made up of individual elements. Further, Simon argued that
the stable sub-assemblies were required to have a property that he labeled “nearly
decomposable units” – a unit of subassembly that if decomposed further would not allow the
system to grow any faster, and if any larger, would not provide the maximum leverage for
growth – that is, it would be less efficient. He showed persuasively that “the effect of the
existence of stable intermediate forms exercises a powerful force on the evolution of complex
forms” from simple systems (Simon, 1962: 472).
In our example, we can easily make some substitutions to grasp the significance of
Simon?s idea for the evolution of entrepreneurial systems: think of watches as new venture
firms, Hora and Tempus as two alternative regional entrepreneurial systems – one where all the
skills necessary for creation and growth are concentrated in the founding entrepreneurs
(Tempus) and the other (Hora) where a variety of professionals and others specialize in different
skills necessary for creating substantial and enduring markets -- the phone interruptions as
venture failures, and sub-assemblies or intermediate forms that have the property of nearly
decomposable systems, as the numerous entrepreneurial sub-specializations ranging from
business plan consultants, prototype producers, and lawyers drafting innovative partnership
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agreements to voice coaches helping Indian call center employees to develop accents
understandable by Americans and founders of bowling alleys and pizza/tattoo parlors who help
attract and keep creative young people in the region concerned. The bottom line is that the
existence of stable entrepreneurial sub-specializations will have a profound effect on the
evolution of nascent entrepreneurial systems into more sophisticated wealth producing systems.
Entrepreneurial specialization: From Tempus to Hora and the multiplier effect
Entrepreneurial specialization is subtly different from functional or value chain
specialization. It is specialization that occurs in the process of taking a nascent, cognitive idea
from an “original mind” through various stages and gates to the creation and growth of a new
market. Entrepreneurial specialization is organized around creating a market (for the first time)
and is different from the normal production and maintenance activity once the firm becomes a
going concern.1 It is specialization that routinizes the creative act. A growing firm, especially
one that is creating its own market category, generates novelty all along its life cycle. It creates
new problems that require inventiveness all around it, not merely in formulating and
implementing its core business model. For example, just as Wedgwood had to invent the
punch-clock system, entrepreneurs and their stakeholders through the years have helped invent
insurance contracts, hostage policies, gay health care benefits, varieties of risk capital and
partnership contracts, not to mention an enormous variety of training programs ranging from the
very concept of “management science” (funded through Ford at CMU) to „baristas? in Starbucks
and faux-Americans in a variety of call centers around the world. The reach of entrepreneurial
innovation extends to cultural transformations too – be it the Kirloskar Brothers working with
social reformers to change agricultural practices in India or Mohammed Yunus overcoming the
Bangladeshi taboo preventing women from handling money.
Entrepreneurial specialization, therefore, goes beyond entrepreneurs and begins to
encompass their political, legal, social and even cultural environments. In the wake of major
entrepreneurship-fueled regional development, a variety of specialists begin to emerge and
thrive – be they investors, lawyers, accounting firms, commercial artists and psychiatrists, or as
Richard Florida points out in relation to Silicon Valley, tattoo parlors and nouveau cuisine
restaurants (Florida, 2002). Specialization occurs not only along traditional functional lines such
as marketing, finance and human resources, but also along specific entrepreneurial activities

1 It is an interesting theoretical and empirical question as to what are the components of
entrepreneurial specialization.
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such as idea generation, proof of concept, proto-typing, concept testing, term sheet design, firm
creation, market entry, brand design, business plan writing, capital raising of all varieties - seed
capital, risk capital, growth capital, private placement; business development, growth
management, franchise development, IPO logistics, business exit brokering and so on. A
simple point to note here is that entrepreneurial law is not the same as business law,
entrepreneurial specialization is not functional (management) specialization, and an
entrepreneurial economy is not simply a subset of the more familiar corporate economy.
Having an idea is the easy part. Most people have ideas, but transforming an idea into a
lasting venture or a thriving new market can be a brutally difficult process; the lack of a variety of
specialists can throttle the founding process and stunt growth. In a Tempus model of regional
economic development, the economy has to rely on the heroism of the rare individual
entrepreneur to haggle, hustle and haul the intermediaries into existence. In a Hora model,
however, the ground is strewn with a thousand seedlings each of which finds and winds its way
into an interdependent ecology that can sustain and nourish a variety of new ventures and
markets at least some of which will grow large and strong and provide needed shade for the
more fragile seedlings. As early as 1944, the discerning Mr. Frederic Terman (ex president of
Stanford University credited by many as the founder of Silicon Valley) observed, “I have learned
a tremendous amount, for I had never before realized the amount of work required to make a
device ready for manufacture after one had a good working model, such as number of drawings,
the amount of detailed design that is involved to turn out a good job, the problems of how to get
stuff to meet specifications, testing and standardization problems, etc.” And he had not even
mentioned key words such as incorporation, hiring, equity sharing, market development, client
relations, nurturing a creative class and on and on and on…
Rapid evolution from a nascent entrepreneurial region to a more sophisticated one will
likely see an evolution from functional lines to business development lines and to novelty
generation in both. Further, founding entrepreneurs and their stakeholders will be able to enlist
the services of the various specialists with the greatest ease during the evolution of the venture,
as the market for such specialists would exist. Thus, we would see the flowering of markets for
business plan writers, fund raisers, CEOs, technologists, growth specialists, IPO experts,
contract experts, incorporation experts – each of whom will know self-contained bits of know-
how (minimum decomposable units) on what it takes to create an enduring company and
thriving new markets. While no single person may have all the knowledge, the system has
sufficient numbers of specialists in each area to make both the specialists and the system
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prosper in a symbiotic way. In short, the various elements of the entrepreneurial function will be
chopped up and out-sourced. Redundant elements in one part of the function will provide vital
support to other parts so the system will achieve a certain level of robustness to the coming and
going of talented founding teams. And independent new intermediate specializations will be
developed in an inter-dependent fashion – these will enable new combinations into product-
market assemblies and regional economic development. It is when the elements of the
entrepreneurial function gets out-sourced from an individual one-stop integrated entrepreneur
that the region acquires what we have termed the fabric of entrepreneurship that is able to
create the multiplier effect of Hora.
Weaving the fabric: Locus of specialization

So where might such specialization most likely occur? We offer a variety of conjectures
on the locus of such entrepreneurial specialization. Specialization is more likely to occur in
locations that (a) have idea producing and knowledge producing centers; (b) are urban and
have technological, artistic, or professional hot spots; and (c) possess cultures that are tolerant
of “deviant” ideas and behavior and are highly tolerant of “failure”; and (d) where the purpose of
entrepreneurship education is to promote a culture of specialization rather than for producing
entrepreneurs.
New knowledge is usually embodied in places such as universities, laboratories, centers
of art and theater, and other idea producing focal points. New ideas are the crucibles of
entrepreneurial opportunities. Such ideas can be in the sciences, the arts, theater and so forth.
It is important to produce new knowledge – their source, origin or discipline does not matter.
Idea centers attract youth. Youth has a more favorable attitude towards and capacity for
novelty and risk. Their tolerances for setbacks are also much higher. Further, they have no
pre-conceived notions about what is right or wrong, what is a good idea or bad, what is risky or
safe. They have less fear of losing because they have less to lose (lower opportunity cost) and
even if they lose they have time on their side to make up the losses. Youth is not burdened by
history, indeed deviating from history is considered a virtue. They have a desire to fashion their
own futures rather than pursue their parents? legacy.
Idea centers embody pluralistic knowledge – so important for synthetic experience – new
ideas often originate at the intersection of disciplinary boundaries and are not to be found in
silos. People in knowledge producing centers are used to working across boundaries and are
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