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Austrian Capital Theory and the Link Between Entrepreneurship and the Theory of the Firm

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Several writers link entrepreneurship to asset ownership, trying to incorporatethe theory of entrepreneurship into the theory of the firm. The critical link, weargue, is capital heterogeneity. Transaction cost, property rights, and resourcebasedapproaches to the firm assume that assets, both tangible and intangible,are heterogeneous; arranging these assets to minimize contractual hazards, toprovide efficient investment incentives, or to exploit competitive advantage isconceived as the prime task of economic organization. None of these approaches,however, is based on a systematic theory of capital heterogeneity. Inthis paper we outline the approach to capital developed by the Austrian schoolof economics and integrate it into an entrepreneurial theory of the firm. We refineAustrian capital theory by defining capital heterogeneity in terms of subjectivelyperceived attributes, that is, the functions, characteristics, and uses ofcapital assets. Such attributes are not given, but have to be discovered by meansof entrepreneurial action. Thinking of entrepreneurship as the organization ofheterogeneous capital provides new insights into the emergence, boundaries,and internal organization of the firm, and it suggests testable implications abouthow and where entrepreneurship is manifested.Keywords: Entrepreneurship, heterogeneous assets, judgment, ownership, firmboundaries, internal organization.JEL Codes: B53, D23, L2

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Kirsten Foss, Nicolai J. Foss, Peter G. Klein, Sandra K. Klein

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