Opportunity Discovery, Problem Solving and a Theory of the Entrepreneurial Firm

abstract When should an entrepreneur employ a market to help discover and exploit opportunities, and when should the entrepreneur create a firm to do so? If a firm is created, how should it be organized? In this paper we argue that opportunities equate to valuable problem‐solution pairings, and that opportunity discovery relates to deliberate search or recognition over this solution space. As problem complexity increases, experiential (or ‘directional’) search via trial‐and‐error provides fewer benefits, and cognitive (or ‘heuristic’) search via theorizing becomes more useful. Cognitive search, however, requires knowledge sharing, when knowledge is distributed among specialists, that is plagued by a knowledge appropriation hazard and a strategic knowledge accumulation hazard. Markets, authority‐based hierarchy, and consensus‐based hierarchy then have differential effects on the efficiency of opportunity discovery given the complexity of the associated problem. Those entrepreneurs with exceptional capabilities of opportunity recognition can efficiently adopt authority‐based governance over a wider range of complexity. We thus combine the two major modes of opportunity discovery – search and recognition – onto one framework that can explain different entrepreneurial organizational forms, resulting in an entrepreneurial theory of the firm.