New ventures, at their inception, face an immediate crossroads. They must select a form from a wide range of organizational design alternatives that not only allow them to achieve their goals but also allow them to access or acquire valuable and necessary resources from the external environment. Thus, the selection of the organization’s form is critical in order to garner legitimacy and sustain viability. Any structure selected may either constrain or strengthen a new venture’s ability to access and exploit such resources (Scott, 1987; Selznick, 1949). Institutional theory and, in particular, its legitimization construct may provide insight into how new ventures select one organizational form over another. Thus, two important questions must be answered: How do new ventures select their organizational forms in an effort to maximize access to life sustaining resources, and, for those new ventures blazing entirely new market paths, how does their nascent, constructed structure evoke an acceptance of legitimacy from the broader, traditional market? New ventures do not just appear; rather they are formed to exploit opportunities, whether it is a discovered opportunity or the creation of an opportunity, entrepreneurs seek to exploit competitive imperfections in the market (Alvarez and Barney, 2007). Yet new ventures in their formal structure as a firm often start long before they are officially incorporated, and indeed many of the interesting internal processes that result in an established organizational form occur before incorporation. The formation and exploitation of opportunities thus leads to the formation of organizations that are created by the entrepreneur to take advantage of the perceived opportunity. Using opportunity formation as our starting point, we attempt to offer insight into when do new ventures need forms that follow the current institutional form’s rules, governance, and structures and when do these new ventures need forms that are not imbedded in current institutions. Entrepreneurs creating new ventures rarely are able to see “the end from the beginning” (Alvarez and Barney, 2007: 15). The process of creating a new venture is enacted in an iterative process of action and reaction (Berger and Luckmann, 1967; Weick, 1979); thus, there is no end until the new venture creation has occurred. This enactment of anew venture, with the end not known at the beginning, may result in a traditional (or standard) organizational structure to exploit the opportunity.
Yet, some of these new ventures also may result in new forms—new structures that even disrupt or change established institutions as they seek to exploit the opportunity. The research question we seek to explore is how institutional theory might provide insight into the organizational structure selected by new venture firms, and also how the new organizational form obtains legitimacy for that structure and thus changes acceptable institutional norms. Below we examine how institutional forces may influence the organizational structure of new ventures in both established and new fields. Our discussion will begin with a review of institutional theory literature; how the concept of organizational structure has developed and is used in this paper; and, a definition of our use of emerging field. From that point we will discuss how institutional theory may provide an explanation of the organizational structures available to new venture firms entering into established business fields. Following the assessment of new ventures in established fields, we use institutional theory to better understand the process by which new ventures may establish an organizational structure where no institutionalized (legitimated) structure currently exists.
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(The original author: Al S. Lovvorn, Jiun-Shiu Chen
Published by Sciedu Press)
Written by: Evan Ballmer
Date Published: 07/30/2013
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A body of influential research has suggested that there is a positive association between trade openness and government size. Cameron (1978), one of the first to establish econometric evidence on the topic, noted that trade openness in 1960 was a strong predictor of the increase in government tax revenues between 1960 and 1975. He pointed out that more open countries tend to be more unionised, with collective bargaining leading to greater demand for social protection accommodated by increasing tax revenues. This pioneering version of the compensation hypothesis – by which more open countries tend to have bigger public sectors – was reappraised and further articulated by Rodrik (1998). While challenging the collective bargaining explanation, Rodrik argued that government spending might serve as an indirect insurance against external (and undiversified) risk. His most influential result was to find a positive association between government consumption and trade integration in a large sample of countries that qualifies openness both as a determinant and as a predictor of government consumption levels across countries (Rodrik, 1998; 1004). (Note 1) This conclusion would suggest a strong complementarity between markets and governments, with a more powerful role for government consumption in those economies that are subject to larger external risks.
In an influential work, Alesina and Wacziarg (1998) (henceforth AW) have challenged the Rodrik’s hypothesis, by arguing that the positive relation between openness and government size could be mediated by country size. The first reason is that country size is negatively correlated to government size, as the costs of certain (non-rival) public goods grow less than proportionally to the size of population. This is typical, for example, of infrastructures, roads, libraries (at least up to the congestion limit) and implies that the per capita cost of public goods declines in larger countries. The second reason is that country size is also negatively correlated to trade openness, as small countries have less opportunity for autarky. As argued by AW (p. 306), these two facts taken together imply that more open countries may have bigger governments.
This has cast some doubts on the existence of a Rodrik-type direct link between openness and government size. Consistently with the two hypotheses, AW – by running OLS on 1980-84 averages for the same set of countries used by Rodrik (1998) – actually find a negative relation between government consumption and population (taken as a proxy of country size) and a negative relation between trade openness and population. In both cases, the log of population exhibits a highly significant negative coefficient, and the result appears robust not only to a parsimonious specification of explanatory variables, but also to an extension of the basic model to control for possibly omitted variables.
Then, in order to capture the impact of country size on the co-variation between government consumption and trade openness, the authors move to the estimation of the basic Rodrik’s specification, where country size is not included among the explanatory variables (as in Table 1 in Rodrik, 1998) and replicate the Rodrik’s result of a positive association between government consumption and trade openness. By omitting trade openness and including country size the negative relation between country size and population is also confirmed. When including both (trade openness and country size), the positive impact of trade openness persists, that confirms the Rodrik’s result. However, AW impute this persistence to the high degree of collinearity between openness and country size. Thus, they experiment a version of the regression where variables calculated as ratios are included in levels and not in logs. In this case, the positive relation between openness and government consumption disappears, showing that the original Rodrik’s result might be driven by the omission of country size. (Note 2)
More recently, Ram (2009) (henceforth R) has challenged the outcome of AW mainly on the econometric ground. Considering 154 countries for the period 1960-2000, R shows that while pooled OLS regressions replicate the results of AW, a fixed effect estimation that takes into account cross-country heterogeneity would not lead to a significant negative co-variation of country size and either trade openness or government size (p. 213). Thus, the estimates by R would be consistent with a direct link between openness and government size along the lines suggested by Rodrik (1998), instead of being mediated by country size as argued by AW. In R, the compensation hypothesis would indeed be supported by the positive sign of trade in all specifications.
This paper sheds additional light on these issues. In particular, it will compare the results by AW and R with those obtained by an updated panel analysis in the period 1962-2009, with data taken from the Penn World Tables 7.0 (PWT) and from the World Development Indicators (WDI). We show that the sign of the relationship between government size and economic openness is not necessarily driven by country size. More importantly, the results obtained by fixed effects as in Ram (2009) show that the compensation hypothesis strictly depends on the inclusion of African countries, further weakening the general validity of the compensation hypothesis.
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(The original author: Paolo Liberati
Published by Sciedu Press)