Frontiers of Entrepreneurship Research
1997 Edition

SUMMARIES

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WHY ENTREPRENEURS CREATE BUSINESSES: A UTILITY MAXIMIZING RESPONSE


SUMMARY

Names POSTER
Evan J. Douglas
Dean Shepherd

Address
L. Kellogg Graduate School of Management
Northwestern University, Leverone Hall
2001 Sheridan Road, Evanston, IL 60208-2013

Telephone Fax
847-491-3465 847-467-1777

Principal Topic
An entrepreneur chooses to create a new business where this action maximizes expected utility. Utility is a positive function of income and perhaps independence, and a negative function of work effort, risk bearing and perhaps independence. Income in turn, depends on the individual's ability to create incremental profit. While positive attitudes to work, risk and independence each seem to mitigate in favor of the individual preferring venture creation, it is the net utility from these sources, and from ability, that determines the choice between venture creation and other career alternatives.

Method
Conjoint analysis is used to subject the respondent's judgments to analysis of variance and regression at both the individual and aggregate level. The individual beta coefficients are aggregated and individual t-statistics are converted into an aggregate Z-statistic for statistical inference. The experimental survey used a 24 orthogonal fractional factorial design with 8 fully replicated profiles and 6 hold out cases. The survey also included a pre and post experiment questionnaire. Participants of the study were second year masters students at a top Mid West business school. All 48 students in an entrepreneurship and 54 students from an international management class participated in the experiment. The experiment was held at the start of the second academic year.

Major Findings
When an impending career decision maker assesses the attractiveness of a career alternative their attitudes towards the level of independence, risk and income affect that choice. The intention to become an entrepreneur is associated with the individual's attitudes towards independence and risk. Those who had a stronger intention to become an entrepreneur had a more positive attitude towards independence than those who had a weaker intention to become an entrepreneur. Those who had a stronger intention to become an entrepreneur also had a more positive attitude toward risk, i. e., a less negative attitude, than those with a weaker intention to be an entrepreneur. While the association between entrepreneurial intention and both work effort required and income were not significant the associations were in the hypothesized direction, i.e., those who has a stronger intention to become an entrepreneur tended to have a more positive attitude towards income and work effort required than those with a weaker intention to become an entrepreneur. The models of impending career decision makers' assessment of career attractiveness had both explanatory and predictive ability.

Implications
This study provides an increased understanding of the driving influences of the intention to become an entrepreneur. Utilizing this study's results, educators and government agencies can target those 'entrepreneurial intention drivers' to increase business creation in the community. While intention does not necessarily lead to business creation, this study provides a basis for further research connecting intentions to entrepreneurial actions.

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1997 Babson College All Rights Reserved
Last Updated 04/25/98