Social Capital and Entrepreneurship: The creation of “public good” and enterprise success.
Updated: Oct 31, 2018
Entrepreneurship has the capacity to create significant benefits for business owners, communities and countries. The question of whether they are excludable or non-excludable however depends to a large degree on a number of social and institutional factors (moderating variables) that create an environment in which entrepreneurship is allowed to either flourish or die. We examine the impact of these moderating variables on the capacity of entrepreneurship to create public good and the extent to which these public goods are excludable or non-excludable. We suggest that aspiring entrepreneurs should deliberately make themselves aware of these intangible elements of an environment that will act as either head winds or tail winds for their new ventures and allow them to better prepare for long term success.
Let us begin with some key definitions.
A public good, according to the economist Paul Samuels (1954) is one which when used by one person does not prevent the use and full utility of another. Public goods are also non-excludable, that is they are available to all. A good example of a public good provided in nature is air. The use of air through breathing by one human does not in any way restrict the breathing of air by another. Air is present everywhere in nature and generally available to all. You may create an environment in which air is made excludable by placing persons in a sealed room with a static supply of air; breathing by one immediately reduces the amount of oxygen available to the other.
Entrepreneurship is an in-exhaustible resource as it is born out of the endless ability of human beings to creatively and profitably find solutions to each other’s needs. While the creation of a specific new venture by one individual in a small community may restrict that specific business opportunity for another in that same community, it does not reduce the level of creativity or opportunities to generate income in other ways. In fact, successful new ventures tend to have at their core innovations that increase, not reduce, the level of entrepreneurial opportunities available to all.
No one person or group has a monopoly on entrepreneurship, and as such it is non-excludable. That said, there are moderating variables that affect the pervasiveness of entrepreneurship in any social system. These factors include among other things, the proclivity for persons to form groups to pursue shared interest (Olson 1971), the capabilities of communities to communicate and collaborate (Daubon and Saunders 2002), the structure and strength of institutions & the role played by government policy in harmonizing activities (Ostrom 2005), the nature of formal trading arrangements between states (Cho 2008) and the nature of the competitive environment (Porter 1990). With the exception of competition, all the other factors are elements of social capital. It is the level of social capital which determines the non- excludable nature of entrepreneurship within a particular local, national or regional context.
Making the connections:
Starting businesses in environments with appropriate levels of social capital is fundamentally important to the viability and sustainability of these new ventures. The level of social capital can determine whether or not the benefits of entrepreneurship may be readily seen as beneficial to a few, or beneficial to all. In communities where trust within a group is strong, but weak between groups, the benefits of entrepreneurship are restricted. In such a scenario the benefits are excludable and sub-optimized. On the other hand, in situations where trust among groups is high and the ability to concert is high, the benefits are shared (non-excludable) and optimized.
Entrepreneurship by its very nature ensures that communities learn to work together for economic development over time. A key point of note however is that different environments possess differing levels of social capital at any given point in time. Entrepreneurs intent on long term success are therefore encouraged to include an assessment of the level of social capital present in the target market as part of the due diligence and business planning process to increase the probability of desired outcomes.
Markers of social capital deficits are often imperceptible at the start of the enterprise, but significant hurdles to performance when you are up and running.
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Daubon, Ramon E, and Harold H Saunders. 2002. "Operationalizing Social Capital: A Strategy to Enhance Communities' "Capacity to Concert"." International Studies Perspectives 176-191.
Mahizhnan, Arun. 1999. "Smart Cities: The Singapore case." Cities 13-18.
North, Douglas C. 2005. "Institutions and the Process of Economic Change." Management International 1-7.
Olson, Mancur. 1971. THE LOGIC OF COLLECTIVE ACTION Public Good and the Theory of Groups. Cambridge Massachusetts: Harvard University Press.
Ostrom, Elinor. 2005. Understanding Institutional Diversity. New Jersey: Princeton University Press.
Porter, Michael E. 1990. "The Competitive Advantage of Nations." Harvard Business Review 73-91.
Shane, Scott. 2009. "Why encouraging more people to become entreprenuers is bad public policy." Small Business Econ 141-149.