How Entrepreneurs' Knowledge and Network Ties Relate to the Number of Employees in New SMEs

Abstract

Knowledge is central to entrepreneurship when explaining successful venturing. However, little is known about how a founder's knowledge and their network ties relate to the number of workers in early‐stage small and medium‐sized enterprises (SMEs). This study draws on the knowledge‐based view and social network theory to examine 174 new SME founders. Findings suggest a positive relationship between the comprehensiveness of an entrepreneur's knowledge set and the number of workers. In addition, the number of network ties positively moderates the relationship between the entrepreneur's knowledge set and the number of employees. Network tie knowledge heterogeneity was not significantly related to the number of employees in new SMEs.

Notes

1 Although hiring employees is a critical resource for new ventures, entrepreneurs must be cautious not to hire superfluous workers that do not contribute meaningfully to venture development. Instead, in an effort to keep to keep costs at a minimum, employees should be hired when they help create additional value for the venture. We would like to thank an anonymous reviewer for this point.

2 In making this point, we do not exclude the idea that employees' knowledge can contribute to venture development. However, following recent research on the resource‐ and knowledge‐based views we take the perspective that the founder's knowledge is particularly critical during early venture development (cf. Alvarez and Busenitz 2001; Chrisman et al. 2005; Gilbert et al. 2006; West and Noel 2009).

3 While Chrisman et al. (2005) found a positive relationship they also noted a point of diminishing returns for entrepreneurs who spent too much time with SBDC counselors and firm performance 5–9 years after launch.

4 This is very similar to what network researchers examine in terms total network size, which refers to the focal actor's total number of contacts regardless of the purpose for or type of relationship. Following prior research examining entrepreneur's network ties during early stages of venture development (cf. Greve and Salaff 2003; Renzulli et al. 2000), we restrict our examination to the number of network ties with whom the entrepreneur interacts for business‐relevant purposes. This has also been referred to as the entrepreneur's discussion network.

5 The state of Florida was also chosen as the location for the sample as it has incurred an above‐average unemployment rate at 9.6 percent (U.S. Bureau of Labor Statistics 2009), therefore providing a more stringent test of our hypotheses.

6 A secondary reason, Florida was chosen for the sample is because it is one of the most diverse states in the U.S. both in terms of the number of foreign‐born members of the population and in terms of the ethnic and racial diversity prevalent in the state. According to the U.S. Census Bureau, as of 2008 Florida had the largest population of foreign‐born members of any of the U.S. states, and it had the 3rd highest Hispanic population in the U.S., the 2nd highest black/African American population, the 10th highest American Indian/Alaskan population, the 8th highest Asian population, the 7th highest Pacific Islander, and the 4th highest number of residents representing mixed races in the United States.

7 These were removed as there could be something systematically different about those filing for multiple incorporations in the same month when compared to the population of entrepreneurs.

8 While this suggests no difference across respondents and nonrespondents, given that 146 of the 150 attempted were unable to be located, the results should be interpreted with caution when generalizing them. However, because first‐year firm failure rates range between 20–50 percent (Watson and Everett 1996), the four firms are likely representative of the population of nonrespondents. Moreover, if 20–50 percent of the firms sampled were out of business then this study's effective response rate was much higher than the reported 10.32 percent.

Additional information

Notes on contributors

Diane Sullivan

1.

Diane M. Sullivan is an assistant professor at the University of Dayton.

Matthew Marvel

2.

Mathew R. Marvel is an assistant professor at Western Kentucky University.