Venture-Specific and Entrepreneurship-Specific Human Capital

Gimeno et al explain “Specific human capital results from education, training or experience that has a limited scope for applicability. Investments in specific human capital create value in a particular business context but do not have relevance in alternative occupations”, adding that “a measure of specific human capital is an entrepreneur’s knowledge” (1997: 757). For example, a person could have a knowledge of online marketing methods such as social media and search engine display advertising that could be helpful for working in many different sectors (i.e. general human capital). The same person could also have a specific knowledge of marketing to customers in a particular sector (e.g. computer gaming), and so his experience would be particularly valuable in starting a business in the computer gaming sector (i.e. venture-specific human capital).

Venture-specific human capital is that directly relevant to the entrepreneur’s business sector, and includes experience of the sector in which the business is located and the similarity between the entrepreneur’s new business and their previous work experience. Cooper et al (1994) using the concept, industry-specific know-how, found it was a significant determinant of both business survival and growth. They suggested that, “The experience and contacts developed in a similar business may lessen the liability of newness of a new venture, leading to less [trial and error] as the business gets started” (Cooper et al, 1994: 390). Following Gimeno et al (1997), Ucbasaran et al (2006) see venture-specific human capital in terms of precise knowledge about customers, suppliers, products and services directly relevant to the sector in which the entrepreneur’s venture is operating, which loses its value outside that

particular context. Such knowledge enables entrepreneurs to draw from existing contacts and networks.

Ucbasaran et al (2006) go further, distinguishing between the entrepreneur’s entrepreneurship-specific human capital and his/her venture-specific human capital. This they define as including the entrepreneurial capability, parental business ownership (discussed above) and business ownership experience. Entrepreneurial capability is particularly focused on the ability to recognise opportunities and devise strategies to follow them up. Here they found no difference reported by novice and habitual entrepreneurs. Ucbasaran et al (2006) investigated differences in the ways in which novice and habitual entrepreneurs exploited opportunities by measuring the tendency to purchase rather than create ventures, but found no significant differences. They then analysed the influence of business ownership experience upon the reported performance of the business and the entrepreneur, but found that neither of their hypotheses suggesting that habitual entrepreneurs would report superior business and entrepreneur performance was supported. They also point to a number of other studies (e.g. Chandler and Jansen, 1992, Westhead and Wright, 1999), “which have failed to detect a difference between novice and habitual entrepreneurs with regard to the performance of the surveyed or latest business owned” (Ucbasaran et al, 2006: 44).

The human capital literature has stressed the importance of specific human capital (e.g. Cooper et al, 1994; Ucbasaran et al, 2006). However, although some studies do correlate having specific human capital positively with improved entrepreneurial performance, the evidence is not wholly consistent (e.g. see Rauch and Rijsdijk, 2011). The young entrepreneurs in this study may or may not have had previous work experience in the sector they are starting their business in, but given their age are unlikely to have had considerable previous experience of this type. Given this is a study of young entrepreneurs starting their first main venture, they do not have previous conventional business ownership experience (i.e. they do not have entrepreneurship-specific human capital in the form usually defined). However, alternative more informal entrepreneurial experience that young people may have developed will be investigated in this study.

2.3.6 Opportunity Identification

Entrepreneurship research tends to focus on emergence, that is how a business is created. This can be seen as falling into two parts: the discovery of a business opportunity and its exploitation (Shane and Venkataraman, 2000). Gaglio and Katz (2001: 91) suggest that “understanding the opportunity identification process represents one of the core intellectual questions for the domain of entrepreneurship”. The process of uncovering a new business opportunity and selecting it as one to be followed through to start-up is referred to in several ways, for example as discovery (Shane and Venkataraman, 2000; Davidsson and Honig, 2003), and as opportunity identification (Ucbasaran et al, 2008; Shepherd and De Tienne, 2005).

The role of the entrepreneur and their human capital is often considered to be central to the business start-up process (Jones et al, 2010) at a time when the qualities of the entrepreneur and the prospects for the new business are likely to be quite uncertain (Gimeno et al, 1997). In evaluating the role of entrepreneurial knowledge and skills, attempts have been made to evaluate not only the number of business opportunities that entrepreneurs identify and pursue, but also their quality, that is their innovativeness (Shane, 2000; Fiet, 2002, Shepherd and De Tienne, 2005).

Studies have found that entrepreneurs with greater human capital do discover more opportunities (Shane and Venkataraman, 2000; Davidsson and Honig, 2003; Ucbasaran et al, 2008). However, specific human capital has greater explanatory power than general human capital in explaining the link between between opportunity identification and pursuit (Ucbasaran et al, 2008). The one element of general human capital which Ucbasaran et al (2008) found correlated with higher levels of opportunity recognition was higher levels of education. This finding has been supported by Davidsson and Honig (2003), who found that work experience had a small positive effect as well. Davidsson and Honig (2003) also found that having family members and/or close friends or neighbours who owned a business was particularly influential in the decision to start a business.

In contrast, a number of elements of specific human capital have been associated with a probability of identifying and pursuing more opportunities, including having business ownership experience and having management experience. Mosey and Wright (2007) consider the levels and types of human capital held by nascent entrepreneurs as compared to

habitual entrepreneurs. In their study they found that the type of human capital required by nascent academic entrepreneurs when setting up their businesses can be quite specific (relating to the entrepreneurial opportunity they are pursuing, the industry they are entering, etc.), and so they conclude that general assistance programmes for entrepreneurs are not very helpful. In explaining the importance of human capital in opportunity identification, prior knowledge of particular markets and a clear understanding of how to meet customer needs in those markets appear to be significant (Shane, 2000; Shepherd and De Tienne, 2005; Jones et al, 2010). Shepherd and De Tienne (2005) found that not only did prior knowledge enhance the number of opportunities identified, but that higher levels of prior knowledge about customer problems enhanced the innovativeness of those opportunities. Fiet (2002) sees entrepreneurs as using their prior knowledge as a basis from which to select and search the information channels which they have available to them. However, as Shane and Venkataraman (2000) asserted, it is not sufficient just to have information about a new business opportunity, it is also essential that the entrepreneur is able to evaluate that information to recognise that it represents a business opportunity, and to understand its possible costs and benefits. As Gaglio and Katz (2001) have pointed out, potential entrepreneurs are likely to vary in their alertness to new business opportunities. This may be due to differences in their human capital (Ucbasaran et al 2006). Finally, it is important to recognise that identifying an opportunity does not mean that it will be followed up. Human capital in the form of prior knowledge and experience makes it more likely that an opportunity will be taken, because it reduces the costs of doing so (Shane and Venkataraman, 2000). Given the limited nature of many young entrepreneurs’ prior work experience when starting their businesses, this study will consider other sources of prior knowledge and experience they use to identify their business opportunities in addition to any work experience they do have.