The Homo agens in a Socio-Economic Context
8.3 The Sociological Context of Actors
8.3.1 Theory of Social Networks
In the previous sections, the context of human (economic) behavior was gradually introduced and the entrepreneurial specificities of actors stated. The section about cognitive psychology illustrated the determinants of knowledge diffusion; the section on social psychology went beyond the mere, technical understanding of real-world aspects and addressed the social context and its influence on agents’ evaluation of future economic developments and their subsequent behavior which, thus, results in a partially self-fulfilling process. Both, the diffusion of knowledge as well as the common evaluation of economic opportunities are substantiated by socio-economic interaction.
Social network theory will help us now to bring in the dynamics of human behavior in its social context. Thereby, we also manage to climb up the aggregation level within the model.
Wasserman and Faust (1994) summarize the basic assumptions about actors, relations and structure when doing social network analysis as follows:
• Actors and their actions are viewed as interdependent rather than independent, autonomous units.
• Relational ties (linkages) between actors are channels for transfer or “flow” of resources (either material like money, or nonmaterial, like information, political support, friendship, or respect).
• Network models focusing on individuals view the network structural environment as providing opportunities for or constraints on individual action.
• Network models conceptualize structure (whether social, economic, political, and so forth) as enduring patterns of relations among actors.73
Considering the birth of new firms, the entrepreneurial process strongly depends on such aspects. Once actors understand technology and commonly assume a high economic potential, future potential entrepreneurs might need their social network to complete the initial endowment, which is presumed to be necessary to start a business. They have to figure out how to get access to required resources74 and whether the necessary competence to combine these resources75 is available. Some of the resources and competencies can be inherent to the agent, others have to be acquired on the market (Coase (1988)). Since it is not argued on the firm level76 following Birley (1985), the pre- organization phase is to be investigated in order to stress the importance of an agent’s social network as a main source of help to obtain resources and competencies to start a business.
Granovetter (1973) provided the pioneering work on social networks. Actors’
interactions constitute the economic process. Social network theory investigates the relations, the “ties” between those actors.77 Relations may have several causal motivations. Actors exchange goods or services, or simply information, they transfer attitudes and norms, and build expectations. Thus they have a mutual influence on each other; an aspect which has already been covered above. The ties between actors are either strengthened or loosened by the level, frequency and already existing reciprocity of their relationship. The role-set78 isconstituted by direct relations between actors. Such relations will put more pressure on one’s behavior than indirect relations. Nevertheless, the scope of interaction is broader according to anthropologists who enlarge the vision of interaction to the action-set of the actor, i.e. the entirety of an aggregate of people who purposefully interact. The limits of a network, as it will be used for the model, are set by the scope and effectiveness of individuals’ behavior.79 There are several dimensions networks are differentiated by. The density of a network denotes the ratio of existing ties to all possible ties of a complete set of connections. When we look at the diffusion of less specific information/knowledge, the whole population in which that information diffuses has to be considered a(n) (information) network. This has already been modelled above:
the complexity of knowledge, absorptive capacities and the tacitness of knowledge decide over actors’ reachability80 within a network. The idea that information and communication technologies would reduce transaction costs reached almost all actors, at least within the industrialized economies. The scope of knowledge diffusion, being necessary for the actual application of such technologies, reaches by far less people, since cognitive capabilities are not evenly distributed. On top of it, entrepreneurial actions are restricted to an even smaller network, since not everybody who understands new knowledge will start a business.
The relative position of an actor within a network, his centrality, thereby plays an important role.81 The diversity of the network82 increases the possibility of innovation, the possibility to detect new combinations. While the sum of connections rises, more opportunities become obvious; with a growing network size diversity increases, whereas its density declines: the more acquaintances are made, the less actors will know each other personally. Nevertheless, those weak ties, as Granovetter calls them, are crucial for entrepreneurial behavior; a high centrality and connectivity to a diversity of actors, provide access to important resources of all kinds (human as well as financial capital, but also access to charismatic and persuasive co-founders).
Entrepreneurship 86
are hard to support from an empirical point of view, especially when the context of the social group is neglected.84 Applying the population perspective85 to look at entrepreneurship, entrepreneurial decisions are associated with a certain population and not with an isolated decision of the actor. Random mutation, variation, makes an actor an accidental entrepreneur. The actor initially does not intend to become an entrepreneur but simply slips into it. Thereby, a selection process decides over the effectiveness the “logic of internal organizational structuring”. Coordinating forces such as market competition are not under the control of the individual.86 Conclusively, the survival of a certain population depends on the retention of its overall technological and managerial competence, the preservation of the fitness criteria. With the latter, i.e. the fourth element of the evolutionary process, Aldrich and Zimmer introduce the idea of networks on a general basis.
The merit of the population approach is that it reduces the emphasis on an otherwise omnipotent economic actor, but it also reduces its focus on individual decision making.
Therefore—though following basic ideas of Aldrich and Zimmer—the interest is shifted to the basic functioning of social networks which play a role in entrepreneurial processes.
In terms of firm founding, a social network especially provides access to necessary resources. In the case agents do not have a sufficient set of endowments and, hence, need additional resources, complementary assets and competencies, they use friends and acquaintances, strong and weak ties respectively, to complete their excogitated necessary set of endowments.87 Not only does the social network provide access to additional and complementary endowment factors, they also have a crucial influence
Figure 8.9: The agent within a social
network.
on the actual entrepreneurial decision to start a venture itself.88 Suppose a single agent thinks that he is not able to start a business all by himself. Then, he has to convince others in order to be supported; he has to influence their mental model to achieve a certain behavior, whereas he that might gain even more self-esteem which reinforces his conviction. Otherwise, the lack of legitimacy within the group may prevent entrepreneurial actions and thus, a high degree of innovativeness89 might be ended by an agent’s objecting social network. A synergetic outcome of either strong or weak ties within a network can be an enhanced, and a (by the group) highly valued business idea.
In other words, a social network also functions as a catalyst to spark a venture.90
Figure 8.9 puts the social network idea into a simple graph showing actors arranged on a lattice. It depicts nine agents. Every agent has a certain amount of entrepreneurial spirit (es), human capital (hc) and venture capital (vc).91 Agents 1, 2 and 3 know each other personally. Given frequent interaction of those, strong ties are manifest, i.e. the edges persist for a longer duration. When agent 4 is considered an acquaintance of agent 3, we discuss a weak tie, a relation which is less frequent and intensive. Weak ties can stay for a longer time but might be broken up some day.92 Agent 5 is known by agent 3, at the most, via agent 4. Agent 9 is isolated from all others and cannot be reached by any information for the time being (limits of reachability). Since not all agents know each other personally, the density of the network is relatively low.
All connections, either strong or weak, are subject to change. The way they change thereby depends on the dynamics of social interaction. Therefore, in a further step, this process has to be modelled; even more so, because social interaction is the heart of the evolution of shared mental models inducing certain quasi-coordinated behaviors, which eventually lead to a specific economic structure. For this reason, the social dynamics is reduced to sketch the social network process concerning entrepreneurial behavior.