Entrepreneurial Opportunity Identification:

A Motivation-based Cognitive Approach

Stephen Ko

Department of Management & Marketing Faculty of Business

The Hong Kong Polytechnic University Hong Kong SAR

China Ph: +852 2766 4061

Email: stephen.ko@polyu.edu.hk

Stephen Ko is a Teaching Fellow of entrepreneurship and strategic management at the Hong Kong Polytechnic University. He received his Ph.D. in entrepreneurship from the Faculty of Business at the Hong Kong Polytechnic University. His current research interests focus on entrepreneurship, creativity, and innovation.

i

Entrepreneurial Opportunity Identification: A Motivation-based Cognitive Approach

Abstract

Prior research has shown that cognition enables entrepreneurial opportunity identification, but a motivation-based cognitive approach, which could lead to a better understanding of what differentiates novelty-seekers from others, has received little attention in the entrepreneurship literature. Drawing from cognitive theory, this study examines the relationships among need for cognition, alertness and entrepreneurial opportunity identification in a mail survey of 197 technology-based entrepreneurs in Hong Kong, China. Results indicate that need for cognition relates positively to entrepreneurial opportunity identification, but that alertness mediates this relationship. Implications for research and practice are also discussed.

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Introduction

Entrepreneurial opportunity identification is a core attribute of entrepreneurship (Shane and

Venkataraman 2000). In recent years, there has been a vast theoretical and empirical literature

that poses the question of why some people and not others are able to identify entrepreneurial

opportunities (Baron 2004, 2006; Busenitz and Barney 1997; Gaglio 2004; Gaglio and Katz 2001;

Kaish and Gilad 1991; Krueger 2000, 2007; Mitchell et al. 2002, 2007; Ward 2004). These

studies suggest that entrepreneurial cognition enables opportunity identification. However, a

motivation-based cognitive approach, which could lead to a better understanding of what

differentiates novelty-seekers from others, has received little attention in the entrepreneurship

literature.

Drawing from cognitive theory, this study examines the relationships among need for

cognition, alertness and entrepreneurial opportunity identification. The current study suggests

that individuals with a high need for cognition are likely to “seek, acquire, think about, and

reflect back on information to make sense of stimuli, relationships and events” (Cacioppo et al.

1996, p. 198) in ways that they are more likely to identify entrepreneurial opportunity through

alertness.

This research contributes to current entrepreneurship literature by suggesting that the need

for cognition and alertness are important in understanding entrepreneurial behavior. This line of

work reemphasizes the profound influence that individual cognition exerts on entrepreneurial

opportunity identification. An empirical examination of the mediating effect of alertness also

advances existing theory by enhancing our understanding of the entrepreneurial opportunity

identification process.

Following this introduction, section two describes the theory and relevant literature. Section

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three covers the research design to test hypotheses. Section four presents the findings. Section

five discusses the results, and presents conclusions with implications for practitioners and

researchers, limitations and suggestions for future research.

Theoretical Framework and Hypotheses Development

Entrepreneurial Opportunity Identification

Shane (2003) defines an entrepreneurial opportunity as a situation in which individuals can

create a completely new means-ends framework by reassembling resources that they believe will

yield a profit. Before acting on opportunities, individuals must first identify these opportunities

(Krueger 2000; Shane and Venkataraman 2000). Shane and Venkataraman (2000) identify

entrepreneurial opportunity identification as a core attribute of entrepreneurship. Indeed, many

definitions of entrepreneurship have increasingly focused on opportunity identification as central

to understanding entrepreneurial behavior (Stevenson and Jarillo-Mossi 1986, 1990; Stevenson,

Roberts, and Grousbeck 1989; Shane and Venkataraman 2000; Stewart 1991). For example,

Kirzner (1973) suggests that entrepreneurs find and exploit opportunities by taking advantage of

economic disequilibria by knowing or recognizing things that others do not recognize. Bygrave

(1989a, 1989b) views the founding of an organization as the pursuit of an entrepreneurial

opportunity. Timmons (1994) also suggests that successful entrepreneurship can only take place

when there is a fit among entrepreneurs, opportunity identification, and the resources required to

found a firm. These theoretical perspectives all shed light on the importance of entrepreneurial

opportunity identification as a critical, first step of the entrepreneurship process (Christensen,

Madsen, and Peterson, 1994).

Nevertheless, given the same set of situations and opportunities, not all people can identify

a given entrepreneurial opportunity (Shane 2000; Shane and Venkataraman 2000). Some people

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are able to identify opportunities that others overlook (Hayek 1945; Kirzner 1973). In addressing

this interesting but challenging research question as to why some people and not others are able

to identify entrepreneurial opportunities, prior studies lend support to the view that possession of

prior knowledge, social networks, and superior cognitive capabilities (Fraboni and Saltstone

1990; Gaglio and Katz 2001; Kaish and Gilad 1991; Mitchell et al. 2002; Shane 2000; Young

and Francis 1991) play an important role that helps lead individuals to notice opportunities.

In identifying entrepreneurial opportunities, prior knowledge and social networks would not

contribute much if individuals could not process the information cognitively. The cognitive

perspective suggests that everything people think, say, or do is influenced by mental processes –

the cognitive mechanism through which they acquire, store, transform and use information,

which can be invaluable to understanding why some people and not others identify opportunities

(Baron 2004, 2006).

Cognition is defined as all processes, through which sensory input is transformed, reduced,

elaborated, stored, recovered, and used (Neisser 1967). In the context of entrepreneurship, recent

research has drawn heavily upon the field of social cognition, which considers individuals to

exist within a configuration of forces impacted by two pairs of factors: the person-in-situation,

and motivation and cognition (Mitchell et al. 2007). The current study focuses on the second pair

of factors, motivation and cognition, and further develops a motivation-based cognitive model to

enhance our understanding of entrepreneurial opportunity identification, while recognizing the

importance of the person-in-situation factor.

Need for Cognition and Entrepreneurial Opportunity Identification

Cohen, Stotland and Wolfe (1955) define need for cognition as “a need to structure relevant

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situations in meaningful, integrated ways” and “a need to understand and make reasonable the

experimental world” (p. 291). Cacioppo and Petty (1982) further define the need for cognition as

a stable individual difference in people’s tendency to engage in and enjoy effortful cognitive

activity, and they develop a set of scales to measure this capability. They found that individual

variations in need for cognition fell along a bipolar continuum (from low to high).

Prior research has indicated that individuals with a high need for cognition process

information differently as compared to those with a low need for cognition (Chatterjee, Kang,

and Mishra, 2005; Hoffmann and Soyez 2010; Lee and Thorson 2009). Individuals with a high

need for cognition acquire and reflect on information to make sense of conflicting stimuli (Sojka

and Deeter-Schmelz 2008), and are able to resolve conflicts in contradictory information

(Cacioppo et al. 1996). Cacioppo et al. (1996) suggests that individuals with a high need for

cognition are more likely to perform problem-solving activities and that they enjoy thinking and

are used to seeing problems as some challenges to be solved. Cacioppo and Petty (1982) also

note that individuals with higher need for cognition are likely to consider a larger number of

possibilities and to try out alternative hypotheses to make meaningful sense of situations. Nair’s

(2000) research effort further indicates that as need for cognition increases, individuals exhibit a

greater breadth of coverage in dealing with the problem by collecting information and taking

decisions on more aspects of the complex problem. Individuals with a low need for cognition are

likely to “rely on others (e.g., celebrities and experts), cognitive heuristics, or social comparison

processes to provide this structure” (Cacioppo et al. 1996, p. 198).

The notion of need for cognition has a far-reaching effect on entrepreneurial opportunity

identification. Individuals with a high need for cognition tend to engage in thinking and

processing information effortfully, which results in more, or more accessible, information on a

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range of topics, and enables them to be more sensible in responding to those topics (Cacioppo et

al. 1996). Thus, the degree to which need for cognition affects any individual’s ability to identify

entrepreneurial opportunity is particularly relevant in understanding entrepreneurial behavior.

Hence:

H1: Need for cognition relates positively to entrepreneurial opportunity identification.

Alertness and Entrepreneurial Opportunity Identification

Kirzner (1979) defines alertness as “the ability to notice without search opportunities that

have been hitherto overlooked” (p. 148). Kirzner (1973, 1979, 1997) develops this concept and

assumed that an individual would have “his eyes and ears open to opportunities that are just

around the corner … He is alert, waiting, continually receptive to something that may turn up …

this alertness is the entrepreneurial element in human action” (Kirzner 1979: 7). Kirzner (1979)

asserts that an entrepreneur is an opportunity identifier who is capable of perceiving and

exploiting profitable opportunities whenever the market is in disequilibrium, and that

disequilibrium is the normal state of most markets. However, he also admits that individuals

exhibit some variations in alertness – only some gifted individuals are able to notice, take

advantage of, and pursue those overlooked opportunities (Kirzner 1979).

Gaglio and Katz (2001), drawing on the work of Kirzner (1973, 1979), argue that some

people are better than others at seeing relationships and patterns in information, and integrating

any new information into their existing schema (or mental framework) by creating new causal

links in their mind, all of which facilitate entrepreneurial opportunity identification. Individuals

create their own schemas, which represent their cumulative experiences, learning, feelings and

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meanings that they have encountered, constructed, or imagined about a specific domain (Fiske

and Taylor 1991).

The schema content and structure for a domain is individualistic in terms of its content

(Levine, Resnick, and Higgins 1993), degree of complexity (Markus and Zajonc 1985), and the

number of cross-referenced links to other schemas (Fiske and Taylor 1991). Baron (2006) further

suggests that some individuals possess cognitive frameworks that facilitate the connection of

dots among environmental changes, market trends, and customer niches. Such frameworks,

which involve alertness and perceived connections, result in entrepreneurial opportunity

identification (Busenitz and Arthurs 2007; Mitchell et al. 2007). Hence,

H2: Alertness relates positively to entrepreneurial opportunity identification.

Prior studies have shown that individuals with a higher need for cognition can recall greater

amounts of information to which they have been exposed (Cacioppo, Petty, and Morris 1983;

Heslin and Johnson 1992; Lassiter, Briggs, and Bowman 1991). Individuals who immerse

themselves in cognitive efforts are more likely alert to some cues that would trigger

identification of entrepreneurial opportunities because the content and complexity of a schema of

any individuals depend on the intensity and quality of their efforts in learning about the domain

(Gaglio 1997). Individuals with a high level of alertness are able to recognize facts and linkages

that result in entrepreneurial opportunities that others would not recognize. Hence,

H2a: Alertness mediates the relationship between need for cognition and

entrepreneurial opportunity identification.

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Methods

Sample and Procedure

The sample for this study was randomly drawn from the database of the Census and

Statistics Department of the government of Hong Kong using industries with the Standard

Industrial Classification (SIC) codes that are characterized by a high percentage of

technology-based firms. Questionnaires were sent to 2,435 entrepreneurs in these industries, with

two follow-up reminders to enhance the response rate. 197 addresses were found to be outdated,

which reduced the number of entrepreneurs contacted to 2,238. After three mailings, a total of

223 completed questionnaires were received, representing a 10.0% response rate for the

entrepreneurs contacted.

Because the target respondents in this study were entrepreneurs, 26 cases were identified as

non-entrepreneurs and therefore removed from subsequent analyses. As a result, usable

responses were received from 197 entrepreneurs, representing an effective response rate of 8.9

per cent. This response rate was considered acceptable for this type of research when compared

with other mail surveys conducted in Hong Kong SAR (Harzing 1997). Late-wave analyses were

conducted to evaluate non-response bias (Fowler 1993). Results indicated that late respondents

did not differ significantly from the early ones in terms of demographic characteristics. The

questionnaire used in the survey was initially developed in English and then translated into

Chinese, and then back translated to English to ensure consistency.

Measures

Need for cognition, the independent variable, was assessed from a modified scale originally

developed by Cacioppo, Petty and Kao (1984). Sample items were “I like to have the

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responsibility of handling a situation that requires a lot of thinking,” “I usually end up

deliberating about issues even when they do not affect me personally,” and “thinking is not my

idea of fun” (reverse scored). Items were rated on a seven-point Likert scale ranging from “very

much like me” (7) to “not at all like me” (1). The ten items measuring need for cognition were

subject to an exploratory factor analysis. This resulted in a one-factor solution with eigenvalue

more than one. This one-factor model accounted for 58.8% of the total variance. The

standardized alpha of this scale was .92.

Alertness, the mediator, was assessed from a modified scale originally developed by Kaish

and Gilad (1991). Sample item included “while going about day-to-day activities, I still try to

explore new business ideas.” Items were rated on a seven-point Likert scale ranging from “very

much like me” (7) to “not at all like me” (1). The three items measuring alertness were subject to

an exploratory factor analysis. This resulted in a one-factor solution with eigenvalue more than

one. This one-factor model accounted for 82.7% of the total variance. The standardized alpha of

this scale was .90.

Entrepreneurial opportunity identification, the dependent variable, was based on the product

term of (1) average number of business ideas each month, (2) percentage of these business ideas

considered novel or innovative, (3) percentage of these novel or innovative ideas considered

feasible and desirable. The final fraction number was regarded as an index measure of

opportunities identified. The natural log transformation of this index was performed and used in

subsequent regression analyses accordingly in order to linearize the relationships between the

independent and dependent variables (Cohen and Cohen, 1975).

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Years of industry experience (mean = 17 years, s.d. = 10.4 years) and number of firms

previously founded (mean = 1.3 firms, s.d. = 1.4 firms) were entered first in the hierarchical

regression analyses as control variables.

Results

Table 1 presents the means, standard deviations, and “pairwise” correlations of the

constructs. Hypotheses were tested using hierarchical regression analyses by first introducing

into the equation the block of control variables, followed by the independent and mediating

variables. Table 2a (Model 1) shows that venture experience is positively and statistically

significant in the initial regression model (β = .21, p < .05). To examine hypotheses 1 and 2, need

for cognition and alertness were entered into the equations respectively (Models 2 and 3).

Results indicate that need for cognition and alertness produce positive and statistically significant

effects on the number of entrepreneurial opportunities identified (β = .28, p < .01; β = .34, p

< .001) respectively. The findings support hypothesis 1, suggesting that need for cognition

relates positively to entrepreneurial opportunity identification. The research findings also support

hypothesis 2, indicating that alertness relates positively to entrepreneurial opportunity

identification.

__________________________

Insert Table 1 about here __________________________ __________________________

Insert Table 2a about here

__________________________

Following the procedure outlined in Baron and Kenny (1986), the results provides support

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for a fully mediated model (Hypothesis 2a). The findings show that need for cognition is a

significant predictor of the number of entrepreneurial opportunities identified (Table 2a, Model 2)

and alertness (Table 2b, Model 2), and alertness is a significant predictor of the number of

entrepreneurial opportunities identified (Table 2a, Model 3). However, the presence of alertness

significantly reduces the size and significance of need for cognition to entrepreneurial

opportunity identification (from β = .28, p < .01 to β = .15, n.s.) (Table 2a, Model 4). Thus,

alertness mediates the relationship between need for cognition and entrepreneurial opportunity

identification. This finding supports hypothesis 2a.

__________________________

Insert Table 2b about here

__________________________

Discussion and Conclusion

The findings of this research support the notion that need for cognition relates positively to

entrepreneurial opportunity identification, but that alertness mediates this relationship. Need for

cognition appears to be a necessary but insufficient condition for identifying entrepreneurial

opportunities. This suggests that entrepreneurs who engage in cognitive activities may not

necessarily notice entrepreneurial opportunities unless they are alert to cues that would trigger

identification of entrepreneurial opportunities.

Need for cognition serves to activate the recall memory of “dots” to which individuals have

been exposed, and heightens the propensity to connect these “dots” (Baron 2006). Alertness

further predisposes individuals to make good judgments about changes and/or information cues

that result in entrepreneurial opportunity identification. Those with a high level of alertness are

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quicker to detect signals from which they could infer a more complete picture, and most

importantly, they are more likely to see the commercial potential of entrepreneurial opportunities

that others are not capable of noticing (Gaglio 2004). This insight helps explain why some

individuals appear capable of identifying entrepreneurial opportunity while those with similar

capabilities and backgrounds are not capable of so doing.

Both entrepreneurs and researchers with substantial interests in entrepreneurial opportunity

identification may benefit from this research. Specifically, this research suggests that

entrepreneurs need to immerse themselves in cognitive activities in ways to “seek, acquire, think

about, and reflect back on information to make sense of stimuli, relationships and events”

(Cacioppo et al. 1996, p. 198). This activation of cognitive preparedness would heighten the

propensity of alertness, resulting in entrepreneurial opportunity identification. This also serves as

a potentially useful avenue for training entrepreneurs and students to be more proficient at

entrepreneurial opportunity identification. Equipping them with wider and richer exposure, more

off-duty time, and mind-mapping exercises might well prove helpful. From a corporate

entrepreneurship perspective, appropriate policies (e.g., employee diversity, encouraging

sensible risks, allowing mistakes, off-duty time, incentives, etc.), training programs and

hassle-free work environment should be in place to foster an employee’s need for cognition and

alertness, leading to entrepreneurial opportunity identification.

This study also reemphasizes the centrality of individual cognition to entrepreneurial

opportunity identification. It extends the current state of entrepreneurship research by using a

motivation-based cognitive approach, which could lead to a better understanding of what

differentiates novelty-seekers from others in identifying more entrepreneurial opportunities

through alertness. Studying the role of need for cognition and alertness in the context of

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entrepreneurial opportunity identification has the potential to extend cognitive theory in the

entrepreneurship domain.

This stream of research is in line with the growing interest of scholars in recognizing

cognition as the critical element driving entrepreneurial action (Mitchell et al. 2004, 2007). This

study prompts a fruitful development of research and debate that further substantiates existing

theories of cognition, entrepreneurial opportunities identification, and entrepreneurship in

general. For example, a research effort designed to identify and understand the cognitive

structure that lies beneath how entrepreneurs structure their dots that are readily connected in a

novel way (Baron 2006; Krueger 2007) would dramatically add to our understanding of

opportunity identification.

Readers should be aware of certain limitations when interpreting the results of the study.

One should also be careful not to over-interpret the results with regard to causality because the

causal model was estimated using cross-sectional data in this study. Future research should

establish the causal claim that need for cognition relates positively to alertness, which heightens

the propensity of identifying more entrepreneurial opportunities. To this end, field experiments

and longitudinal research designs might be applied. Such designs may be more conclusive about

the causal linkages among the constructs.

One cannot entirely rule out the possibility that common method bias may have augmented

the relationships between constructs because self-report measures were used in this research

(Podsakoff, MacKenzie, Lee, and Podsakoff 2003). The relationships among the predictor (need

for cognition), mediator (alertness), and outcome (entrepreneurial opportunity identification)

may include common method variance because this study measured each of these constructs

from only one source (the entrepreneur), which means the answer to one item may influence the

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answers to others. These associations could therefore be attributed to a response bias on the part

of the entrepreneur.

To address the common method bias, this study conducted a Harmon’s (1960) single-factor

test. Results show that no single factor emerges from factor analysis, although Podsakoff,

MacKenzie, Lee and Podsakoff (2003) suggest the absence of a single factor may not necessarily

mean that the measures are free of common method variance. Nevertheless, a key informant

approach is appropriate in entrepreneurship research because entrepreneurs are more competent

and knowledgeable to report the information of interest in this study (Kumar, Stern, and

Anderson 1993). Moreover, given a single-blind research technique to measure need for

cognition and alertness, it seems unlikely that respondents could structure their responses (Doty,

Glick, and Huber 1993). Thus, the likelihood of common method variance is relatively small in

this study.

The third limitation is concerned with the generalizability of results. In this study, the

sample consisted of only technology-based entrepreneurs. Need for cognition and alertness might

vary with industries. It may also be intriguing to compare entrepreneurs with non-entrepreneurs

as to whether they differ from each other in need for cognition and alertness.

The findings of this study points to several new research agendas. A motivation-based

cognitive approach to predict entrepreneurial opportunity identification implies that future

research should focus on the factors (e.g., regulatory pressure, competitive dynamics, etc.) that

potentially necessitate need for cognition and alertness while considering other contextual and

personal factors (e.g., social networks, prior knowledge, etc.). All this contributes to a more

complete picture of understanding entrepreneurial opportunity identification (Ardichvili,

Cardozo, and Ray 2003).

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Another promising research agenda is to examine collective cognition at the founding or top

management team level (West 2007). For example, what is optimal size and composition of the

team that enables collective cognition to identify more entrepreneurial opportunities? What is the

dynamics and mechanism underlying collective cognition in relation to entrepreneurial

opportunity identification? All this helps contribute to our understanding of what differentiates

novelty-seekers from others at both the team and firm levels.

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FIGURE 1 A Motivation-based Cognitive Model of Entrepreneurial Opportunity Identification

Need for Cognition Alertness Entrepreneurial Opportunity Identification

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