At this year’s SME Assembly Professor Saras Sarasvathy, renowned scholar, entrepreneur, and advocate for entrepreneurship as a method for building strong socio-economic communities, will deliver the Schumpeter ‘Innovation in Enterprise’ lecture . On the Promoting Enterprise portal, we also spoke to Professor Sarasvathy about Schumpeter, innovation in entrepreneurship and her theories on effectual reasoning. Read on for some valuable insights!
The Schumpeter Lecture is a prestigious event at EU SME Week. Can you briefly explain how your work in effectual reasoning aligns with Joseph Schumpeter's theories on entrepreneurship and innovation, and what insights you will bring to this year's lecture?
In the context of entrepreneurship, we tend to see Schumpeter’s main contribution in terms of his theory of creative destruction and the notion of innovation as the primary entrepreneurial function. However, Schumpeter’s work is much broader than this narrow interpretation. The growing stream of work on effectuation speaks both to the narrow theme on innovation as well as broader themes related to the evolution of technology, economy and society as a whole. At the narrow end, the effectual process has innovation built into it, even when the entrepreneur does not explicitly intend or seek to do anything innovative. At the same time, the effectual approach reshapes and cocreates the environment within with entrepreneurship happens, be it the market, the community or country. In our research, we have discovered and explicated detailed examples ranging from mundane SMEs that form the backbone of local economies to extraordinary innovations both in for-profit and social ventures, as well as the effectual cocreation of art movements, polycentric governance of water rights in complex urban settings and ways to combat natural disasters and climate change. In sum, effectuation makes Schumpeter’s ideas practicable, while at the same time, pushing beyond Schumpeter’s conclusions to take on issues relevant to the twenty-first century, especially in tackling complex, dynamic uncertainties to achieve human and societal well being and endurance.
Your research has focused on the concept of "effectual entrepreneurship." Can you give us a brief overview of what effectual reasoning is and why it's important for aspiring entrepreneurs and SMEs?
Effectual reasoning is a systematic way to make decisions and take actions in the face “true” uncertainty, when the future is not only unknown but unknowable. In other words, effectuation consists of ways of acting that do not require and/or minimize the use of predictive information. Instead of trying to predict, plan and place bets, effectuators work with things already within their control to cocreate new futures. Beginning with who they are, what they know and whom they know (bird-in-hand principle), effectual entrepreneurs invest no more than they can afford to lose (affordable loss principle) to cocreate new goals and new futures worth building (pilot-in-the-plane principle) by working with whoever wants to work with them (crazy quilt principle) as well as with completely unexpected surprises, whether good or bad (lemonade principle).
SMEs play a crucial role in the European economy. In your opinion, how can the principles of effectual reasoning benefit SMEs in terms of innovation, growth, and resilience, especially in the context of post-pandemic recovery?
The use of effectual reasoning offers two important performance implications. First, increase in the probability of innovative outcomes, irrespective of whether SMEs are doing something explicitly innovative or not. In other words, the effectual process has innovation built in as a consequence even when someone is starting and running a mundane venture. Second, decrease in the costs of failure. If and when failures happen, whether on a daily basis as an intrinsic part of building a venture or in the case of the venture itself failing, the effectual process keeps the downside within the affordable loss of the entrepreneurs and their cocreating stakeholders.
Thus, innovation and resilience are fostered simply through the practice of effectual action. Growth is a more nuanced issue when it comes to an effectual approach to building ventures. There is a Silicon Valley view of growth for growth’s sake, the idea of unicorns for example. However, the kind of growth that forms the backbone of a robust economy is not that kind of growth. In the effectual approach, the aspiration to growth is tied to endurance through a middle class of business rather than chasing improbable levels in revenues that entail unreasonable levels of funding combined with untenable levels of failure rates.
SMEs often face resource constraints. How can entrepreneurs and SME owners effectively apply your principles of effectual reasoning to make the most of limited resources and create innovative solutions in their businesses?
Two principles of effectuation, affordable loss and crazy quilt, together solve the problem of resource constraints beautifully. In fact, they transform the problem into a valuable opportunity. Here is how:
- Effectuation expands the idea of resources beyond financial resources. The bird-in-hand principle consists of three non-financial categories – who you are, what you know and who you know. And the lemonade principle offers ways to transform even negative contingencies into resources.
- Effectuation also highlights the fact that money is the ultimate middle man. By going directly to the people who have the resources money is used to buy or hire or incentivize and allowing them to cocreate the venture and even reshape the market, the crazy quilt and pilot-in-the-plane principles cut out the middle man. So lack of resources is not a barrier to effectual action. Instead it drives effectual cocreation.
- The affordable loss principle not only allows SMEs to keep their downside within their own control, it also forces them to become more creative and cocreative in growing their ventures without waiting for external funding.
As someone who has deeply studied and influenced the field of entrepreneurship, what advice would you give to policymakers and organisations participating in EU SME Week on how they can support and promote SMEs to foster entrepreneurship and economic growth in Europe?
Teach effectual entrepreneurship to everyone, the way we teach science to everyone. In other words, understand entrepreneurship as a method that everyone needs to learn and use, not only SMEs, or potential entrepreneurs. Think more carefully why we don’t teach science only to potential scientists.
Invest in teacher training for teaching effectual entrepreneurship. Currently, programs and courses in entrepreneurship proliferate with virtually no attention to what, why and how we teach. There is even less attention paid to teacher training. Yet a lot of money is being invested in program proliferation and virtually nothing in content development and rigorous teacher training. The most important thing policy makers can do is invest in the development of both of these with a view to making entrepreneurship education a core part of and fundamental to all education.
We invite you to stay updated on the event on the Promoting enterprise news portal and also via Twitter, Facebook, Instagram. LinkedIn so stay tuned. It is possible to check the photos from the event also on Promoting Enterprise | Flickr.
- Publication date
- 10 November 2023 (Last updated on: 10 November 2023)
- Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs
- Promoting Enterprise - categories
- EU SME WeekEU SME Assembly
- Promoting Enterprise - tags
- SME Assembly