Asset Specificity, Fungibility and Entrepreneurial Innovation: Some Mid-Range Propositions (2006)

The success of entrepreneurs depends on the inimitable nature of their activities. While asset-specificity could help in building inimitability, high levels of the same would imply that the entrepreneur would find it difficult to roll-out the asset base across the organization and by extension, to scale up the firm. However, if the entrepreneur decides on a lower level of asset-specificity, the venture itself may not take-off due to easy imitability. Some midrange propositions are stated regarding this phenomenon. How an entrepreneur deters the use of his innovations through a fungibility process where the employee in the organization is able to use the entrepreneur's specific assets but not in a position to imitate, duplicate or replicate the same once he leaves the organization. Propositions are also formulated based on size and environment of the organization. INTRODUCTION Entrepreneurship is increasingly regarded as the engine of economic growth. Most of entrepreneurship theory talks about how entrepreneurs enter a hitherto unserved niche and succeed. The success of entrepreneur depends on the inimitable nature of his activities, since the underlying assumption seems to be that existing players in the market lack the wherewithal in terms of skills, resources, capabilities or the mindsets to serve these niches. The entrepreneur at least needs to build competitive advantage that cannot be imitated unless his competitors incur substantially debilitating costs in doing so. The most important and vital way of ensuring this is by having specific assets. Asset specificity leads to superior rents. These assets could either be tangible or intangible. Such assets could pertain to both upstream activities such as production as well as downstream activities such as marketing. Another important stream of the entrepreneurship literature looks at how entrepreneurs find it difficult to grow after a certain stage, where they inevitably need to loosen the control they exercise on the organization. While most of the analysis in such research looks at the behavioral characteristics of the entrepreneur, a significant research avenue could also be the nature of asset specificity itself. Asset specificity could be due to several reasons; the stickiness of the assets added to the feet that the business startedoff as an entrepreneurial venture implies that the entrepreneur has lot of tacit knowledge and control on the use of assets. When an entrepreneur starts operations, he is typically in full control of all the processes and operations; he starts-off on a small scale. The higher the asset specificity, the more the probability of these assets being controlled tightly by the entrepreneur. As the business grows, it is imperative that other employees are also able to operate the assets optimally. It may be neither possible nor feasible for an entrepreneur to keep track of all the activities. Even if he were to retain the overall control, he needs to distribute managerial control. The asset base that led to the initial success of the organization needs to be mastered through out the organization, if the firm is to continue to be successful. However, this transfer of the asset base is not a simple task. By definition, the higher the asset specificity, the lower the fungibility. Hence, if the entrepreneur were to base his enterprise on higher levels of asset specificity, the more difficult it would be for him to expand beyond a certain point. The situation is even more pronounced when the entrepreneur opts for models like franchising. Ori the other hand, if he decides on a lower level of asset-specificity, the venture itself may not take-off due to a lack of competitive advantage. The central question of this article is concerned with the avenues entrepreneurs have to ensure that asset specificity, which helps their initial success, does not become a liability as they try to scale up. Specifically, the article looks at the dilemma between asset specificity and fungibility. …