A growing number of studies is finding that social capital can contribute to entrepreneurial success. Pull apart the data, though, and some of the results seem to contradict each other. So does social capital help? And what kind, and in what circumstances?
Wouter Stam, Souren Arzlanian and Tom Elfring tackled these questions by doing a “meta-analysis” of 61 independent samples that looked at the social capital-performance link in the small firm context. They found overall solid support for the performance benefits of entrepreneurs’ social capital, but also teased out the kinds of network relationships that were most effective in different circumstances.
“Social capital is embedded in the personal networks of entrepreneurs – those of family members, friends and business contacts. These ties are critical to the development of small firms,” they said.
“Compared to executives in large firms, entrepreneurs in small firms are more directly involved in daily firm operations, they have greater discretion in decision-making, and they more frequently perform key boundary-spanning roles. Their social capital may thus importantly influence small firm performance.”
They considered three key types of social capital – strength of ties, gaps in networks, and network diversity– and aligned these with conditions that might moderate the effects of social capital – whether a firm was young or old, low- or high-tech, or in an emerging or established economy.
The strength of ties concerns the frequency and closeness of interactions with others and they can offer interesting trade-offs. Strong ties increase the willingness and ability of network contacts to provide needed resources, but they also require a lot of effort to maintain. Weak ties, on the other hand, provide access to more novel information because they are more likely to connect the entrepreneur to people from distant social circles.
Gaps in networks, or “structural holes”, are the lack of direct relations between the entrepreneur’s contacts. This provides an opportunity for the entrepreneur to bridge ties between otherwise unconnected others, and increase access to resources. In contrast, a closed network generates trust and social support from members.
Diversity rather obviously refers to the extent to which an entrepreneur is connected to a wide range of individuals and organizations located in different positions or industries.
Overall, the study confirmed that social capital creates value for small firms. “The observed effect sizes are comparable to those for personality traits and substantially greater than the impact of human capital on performance,” the authors found. In particular, “weak ties, structural holes and network diversity were all positively related to performance.”
However, not all types of social capital had the same performance implications. Weak ties had a significantly smaller impact on performance than structural holes, while neither was as significant as network diversity. It thus appears that small firms benefit most when entrepreneurs form sparse networks to a wide range of actors, which offer greater opportunities to access and recombine diverse resources.
The authors also found that the optimal type of social capital varied across different types of small firms. New firms benefited more from networks with structural holes and weak ties, while older firms performed better when ties are dense and strong. Structural holes and network diversity were also more advantageous in high-tech industries than in low-tech ones. And weak ties and network diversity yielded stronger effects in established economies, whereas strong ties mattered more in emerging economies.
“For entrepreneurs, the results clearly indicate the importance of cultivating personal networks rich in bridging social capital, but also reveal that distinct networking strategies are needed at different points in time and different industries and countries.
“For researchers, rather than continuing to pit different dimensions of social capital in a ‘horse race’ to see which one is more beneficial, it would appear more productive in future to further develop a contingency theory of social capital in the small firm context.”