The private governance of entrepreneurship: An institutional approach to entrepreneurial discovery

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Abstract: This thesis develops and applies an institutional governance approach to the economic problem of entrepreneurial discovery of market opportunities. In doing so it expands understanding of one of the fundamental drivers of economic growth, innovation, and contributes both to institutional economics and entrepreneurial theory. This thesis applies the analytical approaches and theories of institutional mainline economics—including transaction cost economics, entrepreneurial theory, common pool resource management and new comparative political economy—to analyse the governance choices of entrepreneurs in the earliest stages of entrepreneurial discovery. Early stage entrepreneurs face an economic problem of coordinating non-price information about future market opportunities with others, under uncertainty, with non-zero transaction costs. This new contract-theoretic approach to the innovation problem does not emphasise a market failure of a misallocation of investment to innovation activities, but rather emphasises the entrepreneurial problem of the governance of knowledge under uncertainty to discover actionable market opportunities. The main proposition is that it may be transaction cost economising for an early stage entrepreneur to privately self-govern opportunity discovery in polycentric hybrids called innovation commons. This theoretical development is applied to the cases of hackerspaces and the hybrid organisations coalescing around blockchain technology. The role of innovation commons also has implications for the political economy of the institutions of innovation policy. As such, this dissertation has three structural parts—theoretical development, application and political economy—that converge on the theme of the private collective action governance of entrepreneurial discovery.

The first part of the thesis theoretically develops a transaction cost economics approach to entrepreneurial discovery of market opportunities. My first contribution is to shift the conventional choice-theoretic market failure analysis of the innovation problem—which focuses on allocation and investment of innovation resources—to a contract-theoretic analysis, which focuses on the entrepreneur and the transaction costs they face (Chapter 2). In the earliest stages of entrepreneurial discovery the primary economic problem facing the entrepreneur is coordinating distributed, uncertain and non-price information to reveal actionable market opportunities. This is the economic problem of the proto-entrepreneur, who must first define market opportunities prior to acting or exploiting them. Given the information proto-entrepreneurs require to solve their economic problem is distributed about the economy in the minds of others, and that coordinating this information faces non-zero transaction costs, the proto-entrepreneurial innovation problem is primarily a comparative institutional governance problem. Further, given that the structure of transaction costs shifts throughout an innovation trajectory—as the economic problem moves from one of discovering opportunities to exploiting those opportunities—so too may the economising governance structure. While proto-entrepreneurs begin with high levels of structural uncertainty and low levels of perceived asset specificity, as they begin to solve their economic problems and market opportunities become clearer, their level of structural uncertainty falls and the potential for opportunism over quasi-rents increases—that is, there is an entrepreneurial fundamental transformation.

The second contribution is to introduce and define a potential transaction cost economising governance solution to these earliest stages of the proto-entrepreneurial problem (Chapter 3). Through the logic of transaction cost economics and the common pool resource management literature, the innovation commons are introduced as polycentric collective action governance structures where proto-entrepreneurs coordinate distributed and uncertain information to whittle away uncertainty over potential market opportunities. The theoretical characteristics of these innovation commons were jointly developed with Professor Jason Potts, and are predicted to be transaction cost economising in the beginning of new industries and technologies, where structural entrepreneurial uncertainty is highest. This new type of innovation commons is compared to existing physical and knowledge commons, revealing several unique institutional behavioural characteristics. Innovation commons are predicted to only be transaction cost economising for a temporary period of time because they process uncertainty and in doing so their success may instigate their decline into other institutions of firms and markets. This also implies that innovation commons are complementary to the other institutions of innovation at later stages in an innovation trajectory, rather than only being substitutes to them. Further, an innovation commons is not an economy-wide phenomenon, but is rather likely to emerge around new technologies and industries, where there are potential gains from trade of non-price coordination with other proto-entrepreneurs.

The second part of the thesis applies this theory to the private governance of entrepreneurial resources within hackerspaces, and in the polycentric innovation commons around blockchain technology. These analyses demonstrate that proto-entrepreneurs are privately governing early stage entrepreneurial resources under collectively developed governance structures. The first application is to a type of small social organisation where individuals tinker and experiment with new technologies, called hackerspaces (Chapter 4). An analysis of secondary data of the governance of hackerspaces reveals micro-institutional mechanisms including graduated social ostracism, costly signalling to facilitate ordering, reputation-based coordination, and nested hierarchies of rules. The analysis also reveals that hackers are at least temporarily choosing to secede from other institutions of innovation, including innovation policy, to solve their economic problem through private governance rules. The second application is to the nascent but potentially general technology, blockchain (Chapter 5). Analysis of secondary data reveals a diverse range of collaborative private governance structures being used to discover the uses for blockchain, including hack-a-thons, embassies and conferences. These diverse blockchain innovation commons are compared across multiple institutional dimensions including the autonomy to coordinate with others and how goals are set. Further, a higher order institutional explanation for the emergence of blockchain innovation commons is also proposed (Chapter 6). Entrepreneurs can apply blockchains either by integrating them within the existing territorial institutions of government, or blockchains can be used as a technology for political exit (i.e. crypto-secession). This latter process of crypto-secession creates a new decentralised society called the crypto-economy. Applying the insights from new development economics, the core problem facing blockchain proto-entrepreneurs seeking to crypto-secede is to coordinate non-price information about the institutional complementarities of blockchains to develop the ‘protective-tier’ institutions of the crypto-economy. Unlike in territorial nation states, where the discovery and development process could theoretically be undertaken by planners in governments, the development process for the crypto-economy must be entirely privately governed by entrepreneurs. This understanding strengthens the link between entrepreneurship and economic development and growth, and provides a higher order explanation of blockchain innovation commons as examples of private economic development.

The third part of the thesis develops a new theoretical framework of subjective political economy, and then applies the framework to understand the political economy of the institutions of innovation. Together with Chris Berg, the first contribution is to extend the institutional possibility frontier (IPF) framework to incorporate the notion of Austrian subjective costs (Chapter 7). This new subjective political economy framework introduces subjective preferences and costs into the institutional choice over the trade-off between the dictatorship and disorder costs of institutions. Subjectively perceived institutional costs imply that each individual holds their own space of cost minimising institutions—that is, the IPF is disaggregated to the level of economic problems and individuals. This subjective political economy framework demonstrates the choice by the proto-entrepreneur to govern their economic problem within polycentric innovation commons. The institutional choice to enter the polycentric innovation commons reveals a perception of the transaction cost minimising point with the IPF space. This understanding also has implications for the scope and application of the institutions of innovation and innovation policy. First, privately governed innovation commons suggest a subjective systematic overweighting of the costs of disorder in the study of the institutions of innovation. Second, the institutions of innovation must themselves be understood as the product of a discovery process over subjective costs, framed through the ideas and rhetoric of individuals. Third, the private governance of innovation outside of the scope of innovation policy speaks to the entanglement of the innovation system, and demonstrates the need for the principle of robustness.

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