Measuring the benefits of entrepreneurship at different levels of analysis

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Entrepreneurship is a much celebrated phe-nomenon in many countries and economies,

not least in the Australasian context where it ispromoted as having wide-ranging benefits. Froma non-financial perspective, entrepreneurship hasbeen associated with competitive advantage andincreased productivity (Hitt, Ireland, Camp &Sexton 2001). From a financial perspective,entrepreneurship has been linked to increasedprofits, wealth creation and economic growth

(Reynolds et al. 2004). While various studieshave focussed on specific and distinct benefits ofentrepreneurship, few have considered the rangeand scope of such benefits collectively, nor havemany considered possible losses from entrepre-neurship.

With respect to the scope of benefits associatedwith entrepreneurship, a number of issues arise.First, the distinction between non-financial andfinancial benefits is often blurred, due to financial

Measuring the benefits ofentrepreneurship at different

levels of analysis

BBEELLIINNDDAA LLUUKKEESchool of Accountancy, Queensland University of Technology, Brisbane QLD, Australia

MMAARRTTIIEE--LLOOUUIISSEE VVEERRRREEYYNNNNEEThe University of Queensland, Brisbane QLD, Australia

KKAATTEE KKEEAARRIINNSSAuckland University of Technology, Auckland, New Zealand

AABBSSTTRRAACCTTThis paper presents a suggested framework for future research designs to examine the benefits ofentrepreneurship, both non-financial and financial. Based on a review of the literature and usingcontextual exemplars throughout the paper with an Australia and New Zealand focus, we identify arange of benefits from entrepreneurship at the various levels of analysis (e.g. individual, organiza-tional, national). From a non-financial perspective such benefits include independence, autonomy,competitive advantage, increased market share, employment and increased standards of living. Froma financial perspective, entrepreneurship’s benefits include enhanced remuneration or rent from rev-enue, profits, cash flow, return on investment and increases in GDP – specific financial measures tobe expressed in clear financial terms. The suggested framework represents both an initial steptowards the measurement of entrepreneurship’s financial benefits and a valuable starting point forthe development of a theory of the non-financial and financial benefits of entrepreneurship.

Keywords: entrepreneurship; non-financial and financial benefits; Australia; New Zealand

benefits being measured in non-financial termsand vice versa. By way of example, economicgrowth is often measured by the number of newbusinesses created and changing levels of unem-ployment. As such, non-financial indicators areused to capture an economic phenomenon. Sec-ond, with respect to measurement of financialbenefits, several complexities arise with respect tothe data sources and methods used. For instance,research in various areas of management (e.g.strategic planning, new business creation andsmall and medium enterprises [SMEs]) has pro-gressively examined financial performance inclear financial terms such as profitability andreturn on investment. Research in the area ofentrepreneurship, however, has predominantlyused non-financial measures as proxies for finan-cial performance. These proxies include new jobcreation (Glancey & McQuiad 2000) and theentrepreneur’s perception regarding the impor-tance of and satisfaction with profit (Covin &Slevin 1989). Given the wide-spread use of non-financial proxies for the financial benefits ofentrepreneurship, we suggest that findings tout-ing the financial benefits of entrepreneurship beinterpreted with caution.

From an Australasian perspective, the associa-tion between entrepreneurship and financial gainis particularly interesting. Researchers and policy-makers in Australia and New Zealand haveacknowledged the importance of entrepreneurialactivity and openly promoted it (Hindle &O’Connor 2005; New Zealand Government2002). International studies such as the GlobalEntrepreneurship Monitor [GEM] reports showvariations between the extent of entrepreneurialactivity in both countries (Reynolds et al. 2004);however the relationship between entrepreneurialactivity and financial benefit remains unclear.Thus, several issues arise, including the associa-tion between entrepreneurship and financial ben-efit and the research which has been and could beundertaken to support this association.

Accordingly, this paper is structured to exam-ine three central issues:

• the nature of entrepreneurship and the differ-ent levels at which its benefits can be analysed,including individual, organizational (corpo-rate, intrapreneurial and inter-organizational)and national levels;

• the benefits, both non-financial and financial,relevant to each level of analysis; and

• the specific measures of non-financial andfinancial performance relevant to each level.

Drawing examples from the Australasian con-text, this paper considers the issues relevant to anexamination of entrepreneurship’s non-financialand financial benefits at various levels of analysis.Considering the diverse range of research ques-tions relevant to the study of entrepreneurship,four boundary conditions pertinent to researchon this topic are explicated during the course ofthe paper, which concludes with a framework forfuture research to evaluate the benefits of entre-preneurship.

NNAATTUURREE OOFF EENNTTRREEPPRREENNEEUURRSSHHIIPPThe notion that entrepreneurship can be seenthrough an examination of new and small busi-nesses has been a key foundation of entrepreneur-ship literature (Cameron & Massey 2002; Covin& Slevin 1989; Glancey & McQuaid 2000).However, with the development of research in thearea of new and small business and in entrepre-neurship, there has been an increasing acceptancethat the two concepts are quite different. In par-ticular, entrepreneurship is increasingly recognisedas a process or activity applying broadly to allforms of business (Drucker 1985; Gartner 2001;Hart 2003; Low & MacMillan 1988; McMullen& Sheppard 2006; Venkataraman & Sarasvathy2001). The view of entrepreneurship as an activityis consistent with established definitions of entre-preneurship such as that put forward by Shaneand Venkataraman (2000), which refers to entre-preneurship as the discovery, evaluation andexploitation of opportunity to create future goodsand services. Similarly, Stevenson and Jarillo(1990) refer to entrepreneurship as the pursuit of

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Measuring the benefits of entrepreneurship at different levels of analysis

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opportunity regardless of the resources controlled.McMullen and Shepherd (2006) note entrepre-neurship requires action and suggest that manydifferent perspectives of entrepreneurship withinthe literature are essentially studies of action char-acterised as entrepreneurial, in various contexts.Thus, new and small businesses have subsequentlybeen acknowledged as two of many contexts inwhich entrepreneurial activity takes place.

In the context of New Zealand, Reihana,Modlik and Sisley (2006) discuss the impor-tance of SMEs to entrepreneurship in NewZealand, noting more than 96 per cent of NewZealand organizations employ fewer than 20people, provide employment for 29 per cent ofthe population and account for more than 37per cent of the country’s economic output. ‘Thesignificance of the SME sector is a major factorin understanding the entrepreneurial environ-ment in New Zealand’ (Reihana et al. 2006: 2).Consistent, however, with the notion that entre-preneurship is neither unique nor specific tonew and small businesses (Drucker 1985), adirect association between the two conceptsseems misleading. Glancey and McQuaid(2000) acknowledge this view, noting entrepre-neurial activity within businesses of all sizes isimportant to a country’s economy. Further, theyaccept many new and small businesses do notundertake activity which is entrepreneurial innature. Hence, a focus on SMEs at the nationallevel does not provide a complete picture of thefinancial benefits from entrepreneurial activity(Glancey & McQuaid 2000; Storey 1994). Itthus seems important for scholars and policymakers in Australia and New Zealand to bear inmind that SMEs are not synonymous withentrepreneurship. Further, within New Zealand,reports by Statistics New Zealand (2003) indi-cate higher incidences of innovative activity inlarge rather than in small businesses.

Addtionally, entrepreneurship has beenexplored on multiple levels, including bold risk-taking individuals (Frederick 2004; Mintzberg1973), new and small businesses (Cameron &

Massey 1999), large organizations (Hitt et al.2001), government (Osborne & Gaebler 1992)and society (Emersen & Twersky 1999). Thus,examining entrepreneurship as an activity is whatGartner (2001: 30) refers to as the ‘elephant ofentrepreneurship’; studies of entrepreneurial activ-ity in varied and diverse contexts. Sonfield andLussier (1997: 73) support this view, noting thenexus between entrepreneurship and ‘businessactivity of all sizes’. In the context of NewZealand, Cameron and Massey (2002: iv)acknowledge ‘entrepreneurship is increasinglyrecognised as basic to all organizations’. Similarly,in the GEM Australia Report 2004, Hindle andO’Connor (2005) note business activity is a neces-sary but not sufficient condition for entrepreneur-ial activity, highlighting elements such asinnovation and growth are necessary to charac-terise business activity as entrepreneurial. Thus,the first boundary condition identified for thestudy of entrepreneurship’s benefits (Dubin 1978)is that entrepreneurship should be examined with afocus on its activity dimensions such as innovation,risk and growth, within organizations of all sizes.

EENNTTRREEPPRREENNEEUURRSSHHIIPP AATT MMUULLTTIIPPLLEELLEEVVEELLSS OOFF AANNAALLYYSSIISSThere is emerging consensus that entrepreneurialactivity takes place and thus should be examined,at various levels (e.g. individual, organizationaland national). Further, a multi-level approachprovides the opportunity to explore the benefitsof entrepreneurship at different levels of analysis,as is done below.

IInnddiivviidduuaall eennttrreepprreenneeuurrssAnalysis at this level is directed towards individualentrepreneurs – individuals who undertake activi-ty characterised by innovation, risk and growth.At the individual level, McClelland (1961) refersto an entrepreneur’s need for achievement.Minztberg (1973) refers to an entrepreneur’sdesire for control. Davidsson (2006) highlightsthe focus on non-financial objectives such asautonomy, independence and the opportunity to

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experiment resulting in positive learning out-comes, as a key focus for many individual entre-preneurs. In the context of New Zealand,Frederick and Chittock (2006) note the emphasison ‘lifestyle entrepreneurs’, who focus on attain-ing independence and freedom within the workenvironment, rather than on maximising wealth.Specifically, Frederick (2006) refers to NewZealand entrepreneurs’ focus on the ‘three Bs’:boat, beamer (BMW) and bach (holiday house),as a reflection of their priority on lifestyle objec-tives. Other non-financial benefits pursued byindividual entrepreneurs may include job security,accelerated promotion and career advancement.Such benefits may relate directly to the individualentrepreneur, as well as extend to family membersalso involved in the entrepreneurial venture.

While the pursuit of non-financial objectivesis acknowledged, there remains a clear assump-tion that financial benefit is the motivation formany entrepreneurial activities within the liter-ature, based on the theory of rational economicman (Davidsson 2006; Kirzner 1979; Schum-peter 1934). Thus, for many entrepreneurs atthe individual level, financial objectives areextremely important. Notably though, individ-ual entrepreneurs’ focus on these objectives mayvary widely and can be viewed from two per-spectives – business and personal. From a busi-ness perspective, common financial objectivesrelate to sales (Davidsson 2006) as a reflectionof commercial success and profitability (Corner2001) as a reflection of commercial viability.Given the focus on growth and expansion with-in entrepreneurship (Murphy, Trailer, & Hill1996), growth in terms of sales and profitabilitycan also be identified as key financial objectives,reflecting continued success over time. Finally,on the basis that one of the first and most sig-nificant challenges of entrepreneurship is sim-ply to survive and that one of the main causesof failure for entrepreneurs is a lack of cash flow(Lerner & Haber 2001), by implication, a fun-damental objective of entrepreneurs is to man-age cash flow as well as profit.

From a personal perspective, individual entre-preneurs may also pursue financial objectives.Reynolds et al. (2004) refer to necessity entrepre-neurs as individuals who are forced into entrepre-neurship due to financial constraints. Otherindividuals may choose an entrepreneurial pathin search of benefits such as financial security andreward through receipt of salary, bonuses andenhanced remuneration packages. Further,financial benefits such as distributions both for-mal (e.g. drawings and dividends) and informal(e.g. lifestyle subsidisation through the businesswhich may be genuine business transactions orotherwise), may also represent important finan-cial objectives for individual entrepreneurs. Thus,at the individual level of analysis, various non-financial and financial objectives exist from botha business and personal perspective.

OOrrggaanniizzaattiioonnaall lleevveell eennttrreepprreenneeuurrsshhiippAt the organizational level, entrepreneurship isalso commonly considered from two perspectives– the organization as a whole or ‘corporate entre-preneurship’ and individual business units withinan organization or ‘intrapreneurship’. For thepurposes of this paper the terms ‘organizationallevel entrepreneurship’ and ‘intrapreneurship’ areused to distinguish these perspectives and as abasis on which to consider the differences andsimilarities between the two.

From an organizational perspective, entrepre-neurship has been associated with competitiveadvantage (Ireland, Hitt, Camp, & Sexton2001), increased market share (Haber & Reichel2005), as well as increased levels of innovationand productivity (Longenecker, McKinney, &Moore 1988). Further, elements characteristic ofentrepreneurship such as innovation and growth,have been presented as pathways to product andmarket leadership (Porter 1980). Similar toentrepreneurship at the individual level, however,there is a clear focus on financial benefits at theorganizational level of analysis. References towealth creation (Ireland et al. 2001) andimproved financial performance (Lerner &

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Haber 2001; Lu & Beamish 2006; Zahra 1995)reflect attention to financial benefit at the orga-nizational level. Thus, while there are differencesbetween non-financial objectives at the individ-ual and organizational levels of analysis, financialobjectives at each level indicate clear commonali-ties. In particular, financial objectives at the orga-nizational level can be identified as commercialsuccess (revenue), commercial viability (prof-itability) and ongoing success through growth inrevenue and profits over time (Murphy et al.1996). Similar to entrepreneurial ventures at theindividual level, management of cash flowremains a fundamental task at the organizationallevel (Clarke, Maguire, & Davies 2006) and thusmay be viewed as an implicit financial objective.This is particularly relevant given that new busi-ness ventures may not generate profits in theirstart-up years thus resulting in negative cashflows. The two measures should be consideredcollectively, to evaluate the overall benefits andsustainability of such benefits.

Perhaps a distinguishing feature betweenfinancial objectives of entrepreneurship at theorganizational and individual levels, is that theindividual entrepreneur may be involved in a sin-gle entrepreneurial venture, while an organiza-tion’s entrepreneurial activity or undertaking maybe one part of otherwise established businessactivities (Davidsson 2006). Thus, while thefinancial objectives identified remain relevant atthe organizational level, they may be less crucialwithin an organization which has profits and cashflow from other activity to potentially buffer, off-set or accommodate initial losses or negative cashflows from entrepreneurial ventures.

IInnttrraapprreenneeuurrsshhiippAs noted above, intrapreneurship, or entrepre-neurial activity within a single business unit[SBU] of an organization (Pinchot 1985), hasalso been examined as a separate level of analy-sis within the entrepreneurship literature. Giventhe common context of corporate entrepreneur-ship and intrapreneurship (i.e. entrepreneurial

activity in an organizational environment),arguably similar objectives both financial andnon-financial, may be viewed as relevant toeach level. There are however, a number of dif-ferences or distinctions to be made in the con-text of intrapreneurship with respect to theresources available and the related outcomes. Byway of example, with respect to intrapreneur-ship, levels of innovation and productivity aretraced specifically to the relevant SBU, ratherthan viewed as a reflection on the organizationas a whole. Thus, while the nature of non-financial objectives such as increased levels ofinnovation remains the same, the specific tar-gets for such objectives may be determined byreference to previous activity within an individ-ual SBU, other SBUs within the organization,as well as external competitors (both SBUs andorganizations).

Similarly, with respect to the financial objec-tives of intrapreneurship, revenues, profitability,growth in revenues and profitability over timeand management of cash flow remain highly rele-vant. However, individual targets with respect tothese objectives may be determined not only byreference to prior activity and performance with-in the SBU, but also that of internal competitors(other SBUs within the organization) and exter-nal competitors. Thus, an organization’s policiesor practices for allocating funding to individualSBUs and using funds from more stable and prof-itable units to finance entrepreneurial activity inunits which may not initially be financially inde-pendent or competitive, will determine the extentto which profits and cash flow from existingSBUs are used as a buffer for new entrepreneurialventures in other SBUs.

IInntteerr--oorrggaanniizzaattiioonnaall eennttrreepprreenneeuurrsshhiippEntrepreneurial activity undertaken jointly byorganizations through networks and alliances hasgained increasing attention in recent years (Hittet al. 2001; Honig & Lampel 2000; Lechner &Dowling 2003) and is a further level of analysisfrom which entrepreneurship may be considered.

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Dyer and Singh (1998) emphasise the impor-tance of looking beyond the boundaries of anorganization and highlight the potential benefitsof organizations working together from a strate-gic perspective - a valuable source of new ideasand information; a starting point for innovationand growth. Similarly, Lechner and Dowling(2003) promote the importance of inter-organi-zational relations as a pathway for entrepreneurialactivity and growth. Benefits identified from anon-financial perspective include competitiveadvantage, shared knowledge, stronger social net-works, leveraging from and experimenting withcomplementary resources. Benefits from a finan-cial perspective include lower transaction costsand increased returns in the form of relationalrents (Dyer & Singh 1998), or entrepreneurialrelational rents.

NNaattiioonnaall ((oorr mmaaccrroo)) lleevveell eennttrreepprree--nneeuurrsshhiippDavidsson (2006) reinforces the notion of entre-preneurship as a micro level activity, but notes itsimplications extend to macro level environments.Thus, on a broader level of aggregation, entre-preneurship has been considered on a number ofmacro levels such as industries, geographicregions, societies and countries (Davidsson &Wiklund 2001). At each of these levels, the non-financial objectives of entrepreneurial activityvary widely, ranging from the creation of newproducts and markets (Schumpeter 1934), to amore efficient allocation of resources (Casson1990; Kirzner 1979), increased standards of liv-ing and the creation of value through jobs, civicleadership and hard work (Ward & Aronoff1993). With respect to the financial objectives,however, financial gain through economicgrowth (Reynolds et al. 2004) would seem toremain a central goal in each of these contexts.

In the context of Australia, Hindle andO’Connor (2005: 3) refer to entrepreneurship as

‘the most important dynamic driver of the econ-omy’, reinforcing the association between entre-preneurship and financial or economic benefit.Initiatives taken by the New Zealand Govern-ment in recent years to promote innovation andentrepreneurial activity (e.g. the New ZealandGovernment’s Growing an Innovative NewZealand (2002) programme) in order to fostereconomic development, further support thenotion of financial and economic benefit arisingfrom such activity. Direct benefits include eco-nomic growth such as increases in GDP1. Subse-quent financial benefits which may be viewed assecondary or indirect include increases in taxa-tion revenue relating to profits from entrepre-neurial activity and savings in welfare paymentsattributable to increases in employment fromentrepreneurial ventures. Thus, the benefits ofentrepreneurship, both non-financial and finan-cial, vary widely, encompassing a range of objec-tives at various levels of analysis.

Table 1 summarises the various levels of analy-sis and the potential measures (both gains andlosses) relevant to each level, described above. Inparticular, the last column of Table 1 indicatesthe diverse range of research questions relevant tothe study of entrepreneurship, highlighting theexamination of different objectives is associatedwith distinctly different research questions.Accordingly, an assessment of the benefits ofentrepreneurship should consider the relevantobjectives and benefits, both non-financial andfinancial, intended or otherwise and the level atwhich such activity is conducted.

CCrroossss lleevveell ccoommppaarriissoonn While the benefits of entrepreneurship can beconsidered and analysed on a number of differ-ent levels, consideration can also be given to thebenefits of entrepreneurship across multiple lev-els of analysis (Chen, Mathieu, & Bliese 2004).This approach reinforces the notion of entrepre-

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1 A measure which is useful, but not infallible (e.g. the Exxon Valdez oil tanker spill in Prince William Sound Alaskaactually enhanced GDP due to spending associated with the clean-up).

neurship as a micro level activity with macrolevel implications and provides a broader ormore complete view of an activity’s implications.For example, an entrepreneurial venture withinan organisation may result in increased profits atthe organisational level, but result in job losses if

processes are automated or staff are made redun-dant due to the entrepreneurial venture. Similar-ly, individuals or businesses may benefit fromprofits relating to entrepreneurial ventures whichhave a negative impact at the macro level due toadverse environmental or social implications.

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Individual • number ofopportunitiesidentified

• number ofentrepreneurialventures founded

• number ofopportunitiesexploited

• number of ventures that failed financially

• financial losses fromunsuccessful ventures

• opportunity costs ofpursuingentrepreneurial activity(e.g. stress, quality oflife)

• How are opportunitiesidentified?

• What elements assist indeveloping and exploitingopportunities?

Organizational • number of newcompetencies created

• core product yield(number of newproducts/ servicesemanating from coreproduct)

• What elements assistorganizations which conductmultiple entrepreneurialventures?

• How satisfied are organizationswith the entrepreneurial returnsrealised? What influences thelevels of satisfaction withinorganizations?

Intrapreneurial • number of newproducts or servicescreated

• revenue streamgenerated fromentrepreneurialproducts or services

• return on investmentfrom entrepreneurialprojects

• number of products/services resulting infinancial loss

• What cultural and environmentalforces assist in fosteringentrepreneurial ventures?

• What are the financial returnsfrom entrepreneurial ventures?

Inter-organizational • number of successfulentrepreneurialrelations

• value ofentrepreneurialrelational gains

• loss of reputationfrom unsuccessfulventures

• What factors support positivecases of inter-organizationalventures?

• How important are financialreturns from inter-organizationalentrepreneurial ventures? Whatare the primary objectives andbenefits realised from suchventures?

Macro(e.g. societal,national)

• number of new jobscreated throughentrepreneurialproducts/ services

• number of workersdisplaced byentrepreneurialproduct/service

• Which countries have higherlevels of entrepreneurship?

• What are the economic returnsfrom entrepreneurial activity?

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Thus, a second boundary condition for the eval-uation of entrepreneurship’s benefits is that suchbenefits should be considered at different levels andacross multiple levels of analysis, to the extent thatthe impact of such activity extends beyond a sin-gle level.

A further issue of concern is the associationbetween entrepreneurial activity and financialand economic benefits. While entrepreneurshipresearch emphasises the importance of this asso-ciation, it has predominantly been explored byusing non-financial proxies to operationalizefinancial constructs. This issue is consideredbelow, by examining research previously under-taken on the financial outcomes of entrepreneur-ship at various levels of analysis. Considerationof prior research, together with alternative per-spectives on measuring financial performance,are then used as a basis to develop a proposedframework for future research designs to exam-ine, more precisely, the non-financial and finan-cial benefits of entrepreneurship.

OOPPEEAARRTTIIOONNAALLIIZZIINNGG BBEENNEEFFIITTSSFor the purposes of measuring the financial out-comes or benefits of business activity in generaland entrepreneurship in particular, the use ofaccounting data has been both supported(Chakravarthy 1986; Murphy et al. 1996;Phillips 1998; Speed & Smith 1990) and criti-cised (Eccles 1991; Kaplan 1990; Smith 1992).Charkravarthy (1986) argues financial perform-ance measures are necessary but not sufficient.Letza (1996) contends such measures report onstewardship of money and resources rather thanon strategic (or entrepreneurial) direction and aretherefore insufficient. Dess and Robinson’s(1984) study found no significant differences inusing objective accounting measures and subjec-tive measures of performance. With respect toSMEs it has been noted that objective or finan-cial data may be unreliable, difficult to obtain(Covin & Slevin 1989) and interpret (Cooper1979). Further criticisms relate to accountingmeasures as essentially short-term and hence the

need to add non-financial measures also (e.g.Kaplan & Norton’s (1992) balanced scorecard;Kenny’s (2003) focused scorecard).

OOrrggaanniizzaattiioonnaall lleevveell

MMeeaassuurreess

A key research issue within entrepreneurship isthe explanation of variation in financial perform-ance across organizations (Kuratko, Ireland, &Hornsby 2001) and appropriate financial per-formance measures are necessary to address thisissue. Essentially, financial measures are thoseexpressed as a dollar value (e.g. sales), or calculat-ed by reference to a dollar value such as return onsales (Hamilton & Black 2000). Conversely, non-financial measures are those not directly refer-enced to nor expressed as a dollar amount (e.g.frequency or level of innovation). With respect tothe financial benefits at the organizational level,the association between entrepreneurial strategy-making processes and wealth creation for exam-ple (Dess, Lumpkin & Covin 1997; Ireland et al.2001; Smart & Conant 1994), has involvedmeasurement of financial performance (e.g. salesgrowth, profitability) wherein executives rank therelative importance of and relative satisfactionwith their organization’s performance. In thisway, relative, non-financial measures of execu-tives’ perceptions have often been used as proxiesfor financial performance measures. Arguably,however, the lack of more objective or standard-ised financial measures to replace such perceptualmeasures represents an important area for devel-opment within entrepreneurship research.

Interestingly, an examination of researchexpounding the financial benefits of entrepre-neurship reveals a distinct lack of financial meas-ures. Of the 51 studies on entrepreneurshipexamined by Murphy et al. (1996), 75 per centrelied on primary (non-financial) data sources, 29per cent used secondary data sources and only sixper cent incorporated both. The high reliance onprimary, non-financial source data in the field ofentrepreneurship is consistent with findings con-

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firming the scarce use of relevant secondarysources (Chandler & Jansen 1992; Sapienza,Smith & Gannon 1988). Lumpkin and Dess(1996) add to the debate, stating that perform-ance constructs which are not multi-dimensionalmay result in theory building which is mislead-ing. Lubatkin and Shrieves (1986) rationalise thisissue by noting different disciplines often study asingle activity from fundamentally different per-spectives and acknowledge that managementstudies have taken more of a conceptual ratherthan empirical approach in evaluating perform-ance. As acknowledged in numerous studies inaccounting and finance, however, the importanceof accounting measures as systematic, relativelymore objective and informative performancemeasures has long been established and has notlost relevance (Malina & Selto 2004; Mitton2006; Paquette 2005; Widener 2006). Thus, thevalue of accounting data suggests a need forfuture entrepreneurship research to address thisgap.

In the context of research on new and smallbusinesses, studies have begun to examine finan-cial performance using multiple financial meas-ures such as sales growth and profitability(Amason, Shrader, & Tompson 2006), returns onassets, equity and invested capital (Ebben &Johnson 2005), revenue and profitability (Lerner& Haber 2001), EVA and market value added(Chen & Lin 2006). Within entrepreneurshipresearch, however, very little focus has been givento an examination of financial performance insystematic, derivable or replicable financial terms.Studies by Zahra (1991) and Morris and Sexton(1996) are among the few studies to broach thisarea of research within entrepreneurship, butnon-financial indicators, used as proxies forfinancial measures, remain the predominantmeasures of entrepreneurial benefits.

The challenge of establishing the financialbenefits of entrepreneurship in financial or objec-tive terms gives rise to several issues. As noted byMurphy et al. (1996), all data sources, bothfinancial and non-financial, have some degree of

subjectivity. Thus, a distinction between objectiveand subjective or ‘soft’ data (Ittner & Larcker1998) is problematic. While various studies havemade a distinction between the two (Brush &Vanderwerf 1992; Venkatraman & Ramanujam1986), Murphy et al. (1996) suggest it is better todistinguish between primary (interview and ques-tionnaire) and secondary (archival) data. Hence,financial measures based on independently audit-ed financial statements may be viewed as valuablesecondary data with, in principle, limited subjec-tivity, implicit validity and externally certifiedreliability.

DDaattaa SSoouurrcceessIn the context of research on SMEs, Naman andSlevin (1993) adopt a perceptual approach tomeasuring financial performance. They use exec-utives’ assessments of importance and satisfactionwith financial results. They do attempt to verifythese perceptual measures by also gatheringfinancial data such as revenues, but the reliabilityof this financial data can be questioned since it isself-reported by the executives. With respect toresearch on business owners, Anna, Chandler,Jansen and Mero (1999) acknowledged theimportance of financial data by requesting self-report data on sales over three years, but foundthat most participants did not respond. Theseauthors also reported requesting sales data in theform of broad categories as a ‘back-up’. Thus,while the importance of financial measures isrecognised, the associated difficulties in accessingsuch data are also noted. In view of these difficul-ties, numerous studies on SMEs, new businessesand entrepreneurship have relied on self-reportfinancial measures using ordinal scales (Hartenian& Godmunson 2000; Lerner & Haber 2001; Lu& Beamish 2006), referring to prior studieswhich support this approach as an acceptablesubstitute for financial measures (Dess & Robin-son 1984; Geringer & Herbert 1999).

Regarding the organizational level or corporateentrepreneurship (Zahra 1991; Zahra 1995;Zahra & Garvis 2000) and new business (Zahra

& Bogner 1999), developments have been madetowards improving measures of financial per-formance. Zahra (1995) uses self-report data forfinancial measures such as sales to assets ratio andreturn on investment [ROI] and then verifiesthese measures for a subset of organizations usingsecondary financial data. Similarly, studies byZahra and Bogner (1999) and Zahra and Garvis(2000) use self-report data for financial measuressuch as return on assets [ROA], return on equity[ROE] and ROI, which are also verified for asubset of organizations based on secondary finan-cial data. As noted by Zahra and Bogner (1999),however, the verification of financial data for onlya subset of organizations warrants cautious inter-pretation of the results.

Research in the context of corporate entrepre-neurship (Burt 1978; Vozikis, Bruton, Prasad &Merikas 1999; Zahra 1991), strategic planning(Robinson & Pearce 1983) and SMEs (Randoy& Goel 2003), has begun to address the lack ofclear financial measures. Hence, an examinationof financial performance in terms of earnings pershare [EPS], ROI, ROA and ROE has beenundertaken in a limited number of studies, usingsecondary audited financial data. Randoy andGoel (2003) go further to incorporate slightlymore complex measures such as a organization’sQ value (an alternative to Tobin’s Q), to reflectthe value of the organization. Specifically, theycalculate Q as the ratio of the market value of theorganisation (measured as the sum of the marketvalue of equity and the book value of total liabili-ties) to the book (accounting) value of totalassets. Vozikis et al. (1999) suggest the use ofadditional value created. Stern, Stewart andChew (1995) promote the use of economic valueadded [EVA], emphasising the notion of incre-mental increases in value.

Thus, while studies in other areas of manage-ment and to a lesser extent, entrepreneurship,have gradually moved towards the use of financialmeasures in evaluating financial performance, anumber of difficulties have also been noted.Smart and Conant (1994) highlight obstacles in

using financial measures at the organizationallevel with SMEs in particular, including lack ofpublicly available data, limited access to financialdata within small organizations and associatedsensitivities of small business owners in releasingsuch data. These difficulties partly explain thelarge number of studies which have relied on self-report data, an approach viewed as subjective(Murphy et al. 1996) and crude (Davidsson2006). With respect to the use of secondaryfinancial data, however, risks have also been iden-tified in analysing data among different organiza-tions which may not be directly comparable dueto the use of distinctly different accounting meth-ods (Smith 1992). While research which uses self-report data verified with financial data may bepresented as having enhanced validity (Zahra1995), arguably it is also subject to the limita-tions inherent to each data source, noted above.Last, in the context of studies referencing finan-cial performance to clear financial measures, thereis a trade-off between the use of more advancedfinancial measures such as Q, EVA (Stern et al.1995) and additional value created (Vozikis et al.1999) and the understandability and familiarityof such measures for researchers and practitionersin non accounting and finance disciplines.

NNaattiioonnaall lleevveell

MMeeaassuurreess

With respect to the financial benefits of entrepre-neurship at a national or societal level, entrepre-neurship research has focussed on employmentstatistics and new job creation within differentindustry segments, thereby measuring financialbenefits with non-financial proxies. Timmons(1999) examines the importance of entrepreneur-ship in the context of small and large organiza-tions by reference to employment rates, notingFortune 500 companies accounted for 20 percent of employment within the United States in1980. By the late 1990s, this figure had decreasedto seven per cent of employment. During thistime new business represented 77 per cent of new

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jobs created, while Fortune 500 companies lostfive million jobs. Thus the economic benefits ofentrepreneurship are presented by drawing adirect association between entrepreneurship andnew job creation. Glancey and McQuaid (2000)present a similar analysis of organizations in theUnited States, European Union and the UnitedKingdom, reinforcing the association betweenentrepreneurial activity, new businesses and newjob creation.

Also at the national level, the GEM study(Reynolds et al. 2004) is increasingly recognisedas a key reference in measuring entrepreneurialactivity in part perhaps, due to the extensivescope of the research which involves an annualreport of entrepreneurial activity across approxi-mately 40 countries. While the GEM ExecutiveReport for 2003 (Reynolds et al. 2004) refers toentrepreneurship as one of the most dynamicforces shaping the economic landscape, it alsoacknowledges the lack of understanding on entre-preneurship. Specifically the GEM survey intendsto measure the difference in entrepreneurial activ-ity between countries and uncover factors andpolicies which both influence and contribute tothe level of such activity. However, criticismsregarding the design of the GEM study and asso-ciated research methods (Hindle 2006;McLauchlan 2004) suggest it has not yet evolvedto address the intended purpose. The GEM Exec-utive Report for 2003 (Reynolds et al. 2004) forexample, uses data on individuals who areinvolved in business start-ups (including thosewho intend to start a business) and owner-man-agers of young businesses as a measure of entre-preneurial activity. However, the underlyingassumption that new business creation and newbusiness owner-managers are necessarily entrepre-neurial gives rise to concern. While subsequentGEM studies (Acs, Arenius, Hay & Minniti2005; Minniti, Bygrave & Autio 2006) consideraspects more characteristic of entrepreneurialactivity (e.g. innovation and growth potential),further concerns relate to the subjective views ofrandomly selected interviewees regarding self-

assessment of these elements within their person-al business activities and work environment(Davidsson 2006). Thus, the inherent relianceupon interviewees’ judgement and self-awarenessgives rise to concerns regarding both reliabilityand generalisability.

In the context of Australia, Hindle andO’Connor (2005) suggest a number of reasonsfor Australia’s low rate of entrepreneurial activitywithin GEM studies, including social and cultur-al norms and Australia’s education system whichunderlies these norms. Specifically Hindle andO’Connor refer to Australia’s mediocre ranking asa reflection of Australians’ preference for a com-fortable rather than challenging lifestyle and theprevalence of the ‘tall poppy’ syndrome (i.e. areluctance to stand out from the crowd due tosuccess or achievement, or admire others whohave done so).

With respect to GEM report findings in gen-eral, however, Hindle (2006) suggests GEMreports provide a very comprehensive measure ofnew business creation, under the rather mislead-ing guise of an entrepreneurial measure. Thus, adistinction is again made between entrepreneur-ship and new business creation. Such inconsisten-cies are relevant to numerous studies on SMEsand new business creation referred to as studies ofentrepreneurship (Lu & Beamish 2006; Randoy& Goel 2003) and further highlight the absenceof clear financial measures as a basis to supportthe association between entrepreneurship andwealth creation at the national level. Accordingly,the third boundary condition of a framework forfuture research is such that an association betweenentrepreneurship and financial benefit requires anexamination of entrepreneurial activity and therelated outcomes by reference to clear financial meas-ures, rather than relying on non-financial surrogatesor proxies.

GGaaiinnss aanndd lloosssseessAnother issue regarding the measurement ofbenefits from entrepreneurship is the extent towhich losses are included in measures of benefits

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such that net increases in benefits are reported asopposed to gross increases. An example of whythis is an issue can be seen when consideringbusiness survival rates. While survival ratesreported in the literature vary (Altman 1983;Cooper, Woo & Dunkelberg 1989), any rate ofsurvival less than 100 per cent suggests statisticsare misleading, unless determined by referenceto both new business creation and closure. Simi-larly, an evaluation of entrepreneurship’s finan-cial and economic benefits in the context ofemployment statistics should also be referencedto both job creation and loss within entrepre-neurial ventures.

The distortion of statistics tracing the bene-fits of entrepreneurship to new and small busi-ness is outlined by Davis, Haltiwanger andSchuh (1996), who refer to the size and distri-bution fallacy as an important issue in the evalu-ation of studies addressing the benefits ofentrepreneurship. These sentiments are echoedby Storey (1994 2006) who concludes thatmany entrepreneurship studies provide littlebasis on which to support a clear associationbetween entrepreneurship and financial or eco-nomic benefit. Rather, a relationship betweenentrepreneurship and economic growth tracedsolely to new organizations may actually revealeconomic disruption through job loss andunemployment, rather than economic stabilityand growth - consistent with the notion of cre-ative destruction (Schumpeter 1934).

Several researchers (Davidsson 2006; Gimeno,Folta, Cooper & Woo 1997) present a counter-argument on the issue of business closures, ques-tioning the validity of survival rates as a measureof successful performance, given that not all busi-ness closures represent failure. Specifically Davids-son (2006) notes business closures may beattributable to a deliberate choice arising frommore attractive employment opportunities, merg-ers, acquisitions and changes in the identity ofindividual organizations. Thus Davidsson (2006)argues that failure rates or business closures areover-reported within the literature. Gimeno et al.

(1997) refer to business closures in other situa-tions which may not necessarily represent financialfailure. These situations include entrepreneurs’disappointment with business ownership, an indi-vidual and personal threshold of ‘acceptable per-formance’ and an unwillingness to accept a level ofsuccess below that threshold. Such issues andimplications are relevant at the individual, organi-zation and national (or broader) level of analysis.

Research by Headd (2003) on a sample ofbusiness closures in the United States revealsmost closures did not result in substantial job orfinancial loss (referred to as loss of capital lessthan US$50,000). While the existence of suchcases is acknowledged, incidents involving signifi-cant job and financial loss (for all stakeholders)cannot be overlooked. Further, even seeminglyinsignificant cases of financial loss may havebroader and more significant implications. Byway of example, in determining whether $50,000is a significant amount for an individual to lose,consideration should be given to each individual’soverall financial position (Berry & Jarvis 2006).Similarly, in determining the significance of anyimpact on the economy, a number of variableswould need to be considered including the fre-quency of closures, the extended financial impli-cations for suppliers, other creditors both public(e.g. taxation authorities) and private, as well asother stakeholders (e.g. requirement for financialassistance such as government welfare after clo-sure of the business). Hence, a balanced examina-tion of this issue requires consideration of theactual losses, both minor and significant, in clearfinancial terms.

In the context of New Zealand, Reihana et al.(2006) refer to the significant contribution oforganizations with five or fewer employees(accounting for 10 per cent of employment and20 per cent of economic output). Referring to thesame data, however, the New Zealand Ministry ofEconomic Development [MED] notes that whilethis sector of the economy has created the great-est number of jobs within New Zealand from2000 to 2004, these jobs have also been the

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greatest contributor to employment reduction(MED 2005) due to the low survival rate oforganizations within this sector. With respect toAustralia, Peter Reith (1999) Minister forEmployment, Workplace Relations and SmallBusiness, refers to small business as the engineroom of the Australian economy. However, Park-er (2000) highlights that while statistics indicatesmall organizations account for approximately 60per cent of employment in Australia and are thegreatest contributor to employment growth,wages in small Australian organizations are signif-icantly lower than are those in large organizations(approximately 20 per cent less) and employmentstatistics include a high percentage of casualemployees (40 per cent of employment in organi-zations with less than 10 employees). Thus, theissue of validity again surfaces within researchlinking entrepreneurship and financial or eco-nomic benefits.

Turning to individual cases of entrepreneurialactivity, incidences of financial gain have beenwidely promoted (Cameron & Massey 2002;Gaynor 2006). Yet while cases of successfulentrepreneurship have been recognised for theirfinancial gains, equally notable are cases ofentrepreneurial activity resulting in financial loss(Dess et al. 1997). Thus, the assumption thatentrepreneurial activity creates financial benefitwithout corresponding losses is not valid and anevaluation of the financial and economic impli-cations of entrepreneurship requires due consid-eration of both gains and losses arising fromentrepreneurial activity. Accordingly, a fourthboundary condition is that both financial gainsand losses must be considered, in establishing arelationship between entrepreneurship and finan-cial benefit within and among the individual,organizational and national levels of analysis.Thus, we recommend consideration of bothpositive and negative outcomes from entrepre-neurial activity at each level of analysis andacross the various levels.

To conclude on operationalizing benefits, anumber of issues have been identified with

respect to the selection of appropriate measuresof benefits and sources of data, for studies exam-ining the financial benefits of entrepreneurship.As noted by Davidsson (2006), the research datamust be appropriately matched to the researchquestion. We thus suggest that a study of execu-tive’s satisfaction with profits, for example, pro-vides valuable insight into satisfaction levelsrather than profits. Further, the choice of appro-priate measures and data sources within entrepre-neurship studies directly impacts on the validityof the related research findings and is particularlyimportant given the early stages of entrepreneur-ship research.

PPRROOPPOOSSEEDD FFRRAAMMEEWWOORRKK FFOORRAASSSSEESSSSIINNGG TTHHEE BBEENNEEFFIITTSS OOFFEENNTTRREEPPRREENNUUEERRSSHHIIPPThe question of how future research designs maybegin to quantify the financial benefits of entre-preneurship at each level of analysis can be guidedby the boundary conditions specified in thispaper. It has been argued that entrepreneurship isbest viewed as an activity relevant to all forms ofbusiness, the objectives of which are both finan-cial and non-financial. The reader is referred toTable 1 again for a detailed summary of howentrepreneurship can be investigated as an activityacross the multiple levels of analysis presented inthe current article. While the financial outcomesof entrepreneurship may involve gains or losses,measurement of those outcomes in direct finan-cial terms, as opposed to non-financial proxies, isnecessary to substantiate the financial benefits ofentrepreneurial activity. Such measurementsshould include examination of several financialindicators incorporating secondary (audited)accounting data, where possible. Such data poten-tially balances utility and understandability offindings for both researchers and practitioners. Tofurther articulate our point regarding the finan-cial and non-financial benefits of entrepreneur-ship and how these may be investigated withinthe proposed framework of boundary conditions,we present Table 2.

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FFIINNAANNCCIIAALL AANNDD NNOONN--FFIINNAANNCCIIAALLBBEENNEEFFIITTSS

TThhee iinnddiivviidduuaall aanndd oorrggaanniizzaattiioonnaall lleevveellss

From an individual and organizational perspec-tive, an examination of revenues and profits aris-ing from entrepreneurial activity, together withgrowth in revenues and growth in profits over anumber of years (Davidsson 2006) provides auseful measure of commercial success and com-mercial viability, indicating financial performanceand progress from a longitudinal perspective.Similarly, examination of cash flows from entre-preneurial activity provides an important andobjective measure of the cash resources generated,reflecting financial viability of the activity (Clarkeet al. 2006; Pizzini 2006). As noted previously,this measure is particularly relevant in the contextof entrepreneurial organizations, given that inad-equate cash flow is a common cause of failure(Cameron & Massey 1999).

While actual numbers for revenue, profit andcash flow, together with growth in each measureare valuable indicators of commercial success andviability, consideration of these numbers in termsof the funds invested in an entrepreneurial activi-ty should also be considered to provide relative

measures of success which can be comparedacross entrepreneurial ventures both large andsmall, at each level of analysis (Capon, Farley &Hoenig 1990). Thus, measures such as ROI(profit divided by funds invested) and CFROI(cash returns divided by funds invested) providevaluable insight into success in relative termsthrough consideration of the financial returns ofan activity, relative to the funds employed. Fur-ther, such measures provide useful comparativesbetween alternatives such as entrepreneurial andnon-entrepreneurial activities. Thus, a researchapproach incorporating these measures representsa valuable starting point to evaluate the financialbenefits of entrepreneurial activity at the individ-ual and organizational levels.

TThhee nnaattiioonnaall lleevveellWith respect to the financial benefits of entrepre-neurial activity at the national (or broader) level,measurement of the financial benefits within acountry’s economy, or within a specific marketsegment or sector (e.g. industry sector, regionalmarket, or societal group) could be used as a basisto project the aggregate economic benefits indirect terms such as revenues and profits, growthin revenues and profits over time and return oninvestment in terms of profit (ROI) and cash flow

332255

TTAABBLLEE 22:: NNOONN--FFIINNAANNCCIIAALL AANNDD FFIINNAANNCCIIAALL MMEEAASSUURREESS AATT DDIIFFFFEERREENNTT LLEEVVEELLSS OOFF AANNAALLYYSSIISS

MMaaccrroo IInnttrraa-- OOrrggaann-- IInntteerr-- ((ee..gg.. ssoocciieettaall,,

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NNoonn--ffiinnaanncciiaallmmeeaassuurreess

Gains/(losses)

• satisfactionwithobjectivessuch asautonomy,need forachievement

• number ofsuccessfulventures

• number ofpositivelearningexperiences

• growth inemployeenumbers

• growth inresourcebase

• number ofsuccessfulrelations

• number ofpositivelearningexperiences

• standards ofliving

• employmentrates

FFiinnaanncciiaallmmeeaassuurreess

Gains/(losses)

• revenues • profits• wealth

creation• ROI• CFROI

• GDP• increases in

taxationrevenue

• welfaresavings

(CFROI). Further, with respect to the broadereconomic benefits of entrepreneurial activity,consideration could also be given to indirect orsecondary measures such as increases in tax rev-enue due to entrepreneurial activity and profitsand decreases in welfare costs resulting fromincreases in employment (Davidsson, Lindmark& Olofsson 1995). Table 2 summarises the non-financial and financial measures relevant to entre-preneurship at the different levels of analysis.

CCOONNCCLLUUSSIIOONNAn examination of the literature on the potentialbenefits of entrepreneurship indicates such bene-fits are significant in both number and scope.However, few studies have focused on the bene-fits beyond a single level of analysis and consid-ered the net benefits across multiple levels ofanalysis. Entrepreneurship research at the individ-ual, organizational and the national level refers tothe association between entrepreneurship andfinancial benefit, yet a review of such researchindicates the need to progress beyond researchmethodologies and findings focused on non-financial measures.

The framework proposed in the current articlerepresents an initial step towards a theory ofentrepreneurship’s non-financial and financialbenefits. Four important boundary conditionswere noted as a basis for the study of entrepre-neurship. First, entrepreneurship should be stud-ied with a focus on its activity dimensions such asinnovation, risk and growth, within businesses ofall sizes. Second, the benefits of entrepreneurshipshould be considered at different levels of analysisand across multiple levels where appropriate.Third, both gains and losses must be consideredin establishing a relationship between entrepre-neurship and financial benefits at the individual,organisational and macro levels of analysis. Last,an association between entrepreneurship andfinancial benefit requires an examination of entre-preneurial activity and the related outcomes byreference to clear financial measures rather thanrelying on non-financial surrogates or proxies.

Moreover, we offer the framework as a valu-able starting point for the development of afinancial theory of entrepreneurship – a topic onwhich much has been written, but little has beenestablished. Consideration of relevant financialmeasures fundamental to accounting, provides abasis for the development of a framework (as pre-sented in Table 2) to begin to quantify the finan-cial benefits of entrepreneurship at each level ofanalysis. This framework offers the advantages ofstandardised measures which reflect commercialobjectives and outcomes in clear financial terms,both absolute and relative, allowing for compara-bility across different levels of analysis – individu-als, organizations, economies – both large andsmall.

While the benefits of entrepreneurial activityare widely accepted within the literature, there isconsiderable scope for research examining thesebenefits across multiple levels of analysis and veri-fying financial benefits in clear financial terms.Establishing a clear association between theseconcepts provides important insights forresearchers, practitioners and policy-makers, seek-ing enhanced understandings, improved financialreturns and more progressive economies. Whilesuch objectives are highly relevant to Australasianbusinesses and economies, they are clearly notunique to that region. Thus an examination ofthese issues in the context of Australia and NewZealand can provide lessons transferable else-where. Further, tracing entrepreneurial activitiesto non-financial and financial outcomes (bothgains and losses) provides an important startingpoint to identify the underlying variables attrib-utable to such outcomes and the foundations fora theory of the non-financial and financial bene-fits of entrepreneurship.

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Received 29 September 2006 Accepted 31 July 2007

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Measuring the benefits of entrepreneurship at different levels of analysis

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