The Role of Social Capital in Business Start-up and Entrepreneurial Development, Research Paper Example

Abstract

Business start-up ventures are key drivers of the economy, and in recent years scientists started to study and research the motivators and development paths of entrepreneurship. Surviving the first few years, achieving goals and creating values is only possible if the company develops a strong, effective social capital to build upon. The three main values within the organization are financial, human and social capital. The below paper will analyze the role of social capital in new start-ups and the correlation between developing values in the early days of doing business and success rate. The implications of social capital on effectiveness, customer relations, brand awareness, relationships with stakeholders will also be reviewed within the research. Further, the power of social capital in creating sustainability will also be assessed alongside with long-term outcomes for businesses.

I. The Importance of Social Capital in for Entrepreneurial Success

Social capital in business start-ups is one of the least discussed assets. While human and financial capitals are analyzed in depth by business experts, the innovative environment does require three different types of assets working together. Thornton (n.d.) describes the relationship between the three different capitals as a network that creates venture success. Before starting analyzing the role of the asset, he definition of social capital needs to be clarified. Simply put, the current paper will use the definition that describes a venture’s social capital as an asset originated from the entrepreneur’s network relationships. These relationships can be translated into benefits and assets, as they can deliver opportunities and support to utilize financial and human capital.

Grootaert (1998, p. 1) states that in many new businesses, the missing link to success is social capital.

Origins of Social Capital in Business Start-Ups

According to Anderson and Miller (2002, p. 18) entrepreneurship is simply a social practice. Therefore, it needs to be looked at from the social perspective first of all. An entrepreneur is the most important actor of the venture creation, and the path of the business is determined by the social structures in which the individual exists. Granovetter (1985, p. 490) states that entrepreneurial behavior is plainly constrained by social factors. The theory of social embedding relates to entrepreneurship as well, therefore, the association of the business owner to the social world needs to be analyzed.

Anderson and Miller (2002, p. 19) also confirm that the individual’s family and socialization patterns influence the future success of the venture in different ways. Having a parent who has a business can inspire the individual to become an entrepreneur. Early socialization does relate to personality development, and as it is commonly known that entrepreneurs have their specific personality traits (Woo et al. 1999, p. 32), the theory that creates a connection between early family socialization and entrepreneurship is confirmed. This also implies that a family is a provider of the human and social capital. (Anderson and Miller, 2002, p. 19) As it has also been confirmed by recent studies that social capital functions as a supportive system for utilizing human and financial capital, as a consequence, it is an asset that “is employed in the creation of human capital”. (Anderson and Miller, 2002, p. 19) As, according to Bourdieu, (1986), all three types of capitals are related and dependent on each other, the context of entrepreneurship cannot be understood without knowledge about socialization patterns.

The Role of Social Capital in Entrepreneurial Ventures

Social capital is responsible for support, attitude, personality traits, networking assets and information that is used for creating the business. No business start-ups exist in an empty space. The role of family support and links, examples, peer attitude and motivation has already been discussed in the previous chapter, however, examining the real role of social capital in the process of setting up a business is the real purpose of the current study.

Levitte (2004) researched the connection between social capital and the economic development. It has already been stated that entrepreneurship acts as one of the main drivers of the economy, therefore, Levitte’s approach is relevant to the current study. He defines social capital as a network of relationships facilitating trust, reciprocity and can be translated into norms and values. This definition does give us the indication of some of the main roles of social capital, namely: asset to create and expand a network, create trust and deliver value through positive relationships.

The impact of social capital on the success of new business ventures, however, can be direct and indirect. Therefore, this type of business start-up asset is less measurable than the other two: financial and human.

The association between networks and social capital has been examined by Smith and Lohrke (2007, p. 316). The authors examine the two types of trust created by social capital separately: affective and cognitive. The rational type of trust, based on knowledge, economic status and reports is called cognitive, and it is achieved through successful management of the business. As in the beginning of the business venture this is not present, affective trust needs to be created. Social capital is able to create this type of trust and based on personal and emotional relationships, goodwill, it can get the new venture off the ground. (Smith and Lohrke 2007, p. 317)

The entrepreneur’s network development depends on the level of trust it can create for the business. Finding the existing network ties, strengthening and expanding them is a successful way of entering a new venture using social capital. (Smith and Lohrke 2007, p. 317)

Davidsson and Honig (2003) summarizes the role of social capital in business start-ups as a tool during the discovery phase of starting a business to create trust and bonds through the identification of existing networks and help the entrepreneur find opportunities. During the exploitation phase, entrepreneurs are also able to build upon social capital, using it for evaluation of the market, opportunities, tightening associations, finding out more about the industry, market and resources available. Social capital, – as confirmed previously – has the ability to help the individual locate and utilize human and financial capital. The organization level use of social capital is based on its ability to create intra-organizational trust. (Davidsson and Honig, 2003, p. 10)

The Benefits Associated with Social Capital

Social capital affects economic outcomes in many ways, according to Grootaert (1998, p. 3). The three main areas where social capital can have an impact on the economy are “growth, equity and poverty alleviation”. (Grootaert, 1998, p. 3). Human capital is suitable for creating a supportive environment for information sharing. This relates to getting the word out there about the new start-up and information gained from peers and business support agencies, friends and role models about different aspects of entrepreneurship. Social capital also supports start-up businesses in the coordination of activities. It limits the possibilities for opportunistic and uncoordinated behavior taking place in the beginning of the business venture. It also supports collective decision-making, which can be extremely useful for those entrepreneurs who have no previous experience in starting up and running a business. (Grootaert, 1998, p. 8)

Rahmani and Homayenikfar (2011) summarize the current theories associated with the social aspects of entrepreneurship, as well as the benefits delivered by social capital. They determine social capital as a result of interaction based on the person’s social competence. (p. 180) Social competence indicates that the entrepreneur possesses political skills, interpersonal influence and the capability to lead and control, network building skills and sincerity. These capabilities are able to create a competitive advantage for a start-up business by developing social capital. The framework developed by the authors concludes that social capital and social competence are interdependent and are able to support a start-up business in the discovery of the opportunity, decision-making, exploitation and resource acquisition. The individual’s potential absorptive capacity to gain necessary knowledge and skills and assimilate the knowledge, as well as the realized absorptive capacity are also determined by social capital and social competence. (p. 182.) The knowledge and skills gained with the support of the entrepreneur’s social competence and social capital then translate into innovation performance.

While there are several benefits associated with a venture’s social capital, Levitte (2004, p. 47) concludes that the risks and costs need to be taken into consideration as well. Quoting some researchers, the author states that social capital can be abused and used to gain support for cases which are not theoretically grounded. This, for example, can be true in the case of political activities and lobbies. Social capital should not be used as a policy tool, according to the research, however, its benefits for a new business are unquestionable.

Fornoni, Arribas and Vila (2012) examined the relationship between social capital and business performance. They found that the most significant benefit of networks and social capital for start-ups in developing countries like Argentina is the access to information. Without a network (personal and professional), an individual would have problems with locating the information needed to success in business. This access to networks is supported by Western European governments, like the United Kingdom, where social networking and regional business exchange information is made available for small business owners. However, in the Argentinian case, the entrepreneur needs to focus on improving and extending social capital in order to gain insight into business issues and achieve the level of knowledge needed for completing different start-up tasks. Four different hypotheses were examined within the study, and the following statements were confirmed by the results of the research:

a, The entrepreneur’s social capital facilitates their access to finance in the structural, relational and resources dimension.

b, Social capital of the entrepreneur helps them access finance in the structural and relational dimensions.

c, Access to production is facilitated by the entrepreneur’s social capital in the structural and resources dimensions.

d, Access to information is supported by social capital in the relational and resources dimensions.

As a summary of the above literature review, it is evident that social capital and the entrepreneur’s social capabilities to create a network and gain knowledge, support, advice is crucial in creating a successful business. The benefits cannot always be translated into figures, however, when measuring results, it is evident that the success of a start-up business is dependent on its connections. Without having a support network and a social capital, a business is unable to gain information, exchange and test ideas, research the market and communicate with the target market. The learning capabilities, growth and even marketing results can be influenced by the social capabilities of the person. As entrepreneurs have a specific personality trait, it is important that they build upon their existing networks, strengths and interests when creating a network that is suitable for communication, interaction and support. This way new businesses can utilize financial and human capital more effectively, increasing the chance of success in the future.

Social Capital and Sustainability

Latip and Smyrnios (2012) talk about the role of social capital in the new business’ capabilities to create a long-term asset and a value system that can be attractive for customers. Integrating a vision and mission into the new business idea is an effective way of creating a network initially consisting of like-minded businesses. Value-creation in the 21^st Century should be approached seriously by new and existing businesses, (Latim and Smyrnios, 2012, p. 159) and organizational innovation that is related to sustainability and sustainable growth is an effective way of planning a new venture. Therefore, while developing long term values and assets, a new business can plan its sustainable innovative production or service according to government initiatives and take part in networking based on common values and objectives. A good example for sustainable start-ups is social enterprises, currently supported by governments. Social entrepreneurs start with a vision to create a better world for a group of people and build their network upon the common goals and objectives.

II. Conclusion: Entrepreneurship Reviewed

In order to become a successful entrepreneur, one needs to tick several boxes. This is the statement that comes into my mind after reviewing the course material and the lessons learned. I have also learned that indeed businesses are the main drivers of the economy, therefore, they need to be supported. Every new business venture starts with a great idea, however, not all great ideas can be translated into a successful venture. The personality traits, socialization patterns, motivations and attitudes of entrepreneurs determine the success of the business.

I have learned that an entrepreneur should learn to spot opportunities before others and execute the plan after careful consideration of the options. There are different forms opportunities can present themselves for a person, however, most successful entrepreneurs proactively seek them instead of waiting for them to arise. The personality of the entrepreneur needs to reflect the economic situation and the opportunities. Sarasvathy (2008) confirms that the re is a close relationship between entrepreneurial opportunities and the ability to create a competitive advantage within a new business.

The main characteristics of a successful entrepreneur were also summarized during the lessons, and I have studied the different criteria associated with start-up success, such as inner motivation, opportunistic approach, (creating opportunities instead of searching them), planning skills, execution of ideas and a methodical approach.

Next, I learned about the importance of starting up with a strong human, social and financial capital and found out that the three of these start-up assets are closely interrelated and can act as a driver to create value for the business, the entrepreneur and develop a competitive advantage. Knowledge, expertise, exchange of ideas and funding are all necessary for developing a business plan that is sustainable and executable, matching the needs of the market.

I have also learned that a good idea is never enough to create a successful business. There is a need for an opportunity analysis, a feasibility test, market research and evaluation, as well as knowledge about the related regulations and policies. The planning of the venture is just as important as the idea the business originates from. An idea that might seem perfect at first sight might not go through a feasibility test or there would be no demand for the new service on the market. The entrepreneur needs to focus on creating an innovative product or service that is in demand, delivers value and is profitable enough to create a basis for a business. Further, the development of a unique selling point is also necessary in order to effectively communicate the values and ideas of the new business venture.

During the lessons I also realized that a business cannot exist in a vacuum, therefore there is a need for interaction, building and expanding social capital, participating in discussions in order to gain insight into the market conditions, techniques, customer preferences and regulations.

Researching entrepreneurship and the related theories is extremely useful when planning a new venture and developing a strategy for market entrance. The course provides both theoretical and practical approaches for students to help them understand the main success factors of the most important driver of the economy: entrepreneurship.

References

Anderson, A. R., Miller, C. J. (2002) “Class matters”: human and social capital in the entrepreneurial process. Journal of Socio-Economics 32 (2003) 17–36

Bourdieu, P. (1986) The forms of capital. In: Richardson, J.G. (Ed.), Handbook of Theory and Research for the Sociology of Education. Greenwood Press, New York.

Davidsson,P. and Honig,B., (2003) The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing, Vol. 18 (3), pp 301-331

Fornoni, M., Arribas, I., Vila, J. (2012) An entrepreneur’s social capital and performance. The role of access to information in the Argentinean case. Discussion Papers in Economic Behavior. 7/12

Grootaert, C. (1998) Social capital: the missing link? Social Capital Initiative Working Paper 3.

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Granovetter, M., 1985. Economic action and social structure: the problem of embeddedness. American Journal of Sociology 91, 481–510.

Latip, H., Smyrnios, K. (2012) Social capital and entrepreneurship: building a national entrepreneurial capacity for sustainable development. 2012 International Conference on Economics, Business and Marketing Management. IPEDR vol.29 (2012)

Levitte, Y. /(2004) Bonding social capital in entrepreneurial developing communities – survival networks or barriers? Cornell University IRL Collection.

Rahmani, Z., Homayenikfar, L. (2011) The interplay of social aspects of entrepreneurship, absorptive capacity and innovation performance: a conceptual framework. 2010 International Conference on Business and Economics. IACSIT Press, Kuala Lumpur, Malaysia

Saras D. Sarasvathy (2008) Effectuation: elements of entrepreneurial expertise. University of Virginia Publication.

Smith, D. A., Lohrke, F. T. (2007) Entrepreneurial network development: Trusting in the process. Elsevier Inc.

Thornton, P. (n.d.) The value of social capital in starting new ventures. The Duke Entrepreneurship Manual: A Resource for Entrepreneurs. Retrieved from:

Woo, C. Y., Folta, T., and Cooper, A. C. (1992). Entrepreneurial search: alternative theories of behavior. In N. C. Churchill, S. Birley, W. D. Bygrave, D. F. Muzyka, C. Wahlbin, and W. E. Wetzel (Eds.) Frontiers in Entrepreneurship Research 1992, Wellesley, Massachusetts: Babson College, 31-41.