From Traits to Rates: An Ecological Perspective on Organizational Foundings

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FROM TRAITS TO RATES: AN ECOLOGICAL PERSPECTIVE ON ORGANIZATIONAL
FOUNDINGS
Howard E. Aldrich
Department of Sociology, University of North Carolina, Chapel Hill
Gabriele Wiedenmayer
Institute of Sociology, University of Munich
Munich, West Germany
FORTHCOMING IN: Jerome Katz and Robert Brockhaus (Eds.), Advances in
Entrepreneurship, Firm Emergence, and Growth, pp. 145-195. Vol. I, JAI Press, 1993.
ACKNOWLEDGMENTS: Helpful hints from William Barnett, Jacques Delacroix, Oystein
Frederiksen, William Gartner, Jerome Katz, Dawn Kelly, Peter Preisendoerfer, Elaine Romanelli,
Udo Staber, and David Torres were very useful, as was the research assistance of Kristin Park.
Deborah Tilley shaped the manuscript into its final, polished form.

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INTRODUCTION
Entrepreneurship involves mobilizing resources in pursuit of opportunities, resulting in
the founding of a new business. Some researchers have looked at the personal attributes of
founders, asking what makes them different from other people. We call this the "traits"
approach. Other researchers have taken a different path, focusing on the environmental
conditions -- social, economic, and political -- generating variations in the number of foundings
over time. We call this the "rates" approach. The approaches are complementary, as each draws
on different research traditions in the social sciences. The traits approach implies a micro-level
of analysis, whereas the rates approach involves a macro-evolutionary approach. In this paper,
we concentrate on the rates approach, taking an ecological perspective.
Ecologists work at three levels of analysis -- organization, population, community -- and
take a longer-term view than is typical of the social-psychological perspective behind the traits
approach. After outlining the principles of an ecological approach, we consider in more detail
three processes affecting founding rates: intra-population, inter-population, and institutional.
We write for two audiences: for people interested in entrepreneurship, we show that some
interesting research hypotheses follow from adopting an ecological approach; for people
interested in ecology, we show that a systematic application of ecological models to
entrepreneurship reveals significant gaps where further research and modeling are needed.
TRAITS AND RATES: THE OLD AND THE NEW WAYS
The classical tradition in entrepreneurship studies involved two streams: first, studies of
the personal traits, behavior, and attributes of persons who found organizations, and second, case
studies of the founding process, focusing not only on personal traits but also on the context of
start-ups.
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The first stream -- the traits approach -- focused on individual entrepreneurs'
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Romanelli (1989) noted that traditional perspectives on
entrepreneurship examined either the characteristics of
entrepreneurs or the conditions of environments that created
opportunities for entrepreneurial activity.

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personality traits, unemployment status, parents' occupations, the stages of development of a
business, etc. (e.g. Bartunek and Betters-Reed, 1987; Deivansenapathy, 1986; Linder, 1983;
Shapero, 1975; Turner, 1970; Weitzel, 1986).
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Reviewing this line of research, Cooper and
Dunkelberg (1987:12) asked "How does it happen that some people become entrepreneurs, while
most people do not. Previous researchers have reasoned that there must be something distinctive
about the background or make-up of entrepreneurs and that research should be able to illuminate
these characteristics." Many trips down this "distinctive differences" road have ended in dead
ends, however (Brockhaus, 1980; Gartner, 1988; Gartner, 1989).
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Boegenhold (1989) is an example of the second stream, as he examined the conditions
under which new firms are founded. He examined 25 formerly unemployed shipyard workers --
white and blue collar workers -- who decided to become self-employed. Through intensive case
analysis, he discovered that the route to self-employment depended upon a worker's specific mix
of social networks and personal ambitions.
By concentrating on the traits of individual entrepreneurs and their immediate situations,
rather than founding rates, the classical tradition shaped our thinking in two directions: (1) it
deflected attention away from the very volatile nature of the business population in the United
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Rather than using personal attributes, some traits' theorists
have defined entrepreneurs by their behavior (Martin, 1979).
This definition poses a daunting challenge to trait-based
research: How will we ever know entrepreneurs until after they
have made themselves known by their behaviors? The antecedents
to their behaviors might be an extremely heterogeneous set of
factors.
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Although methodological issues are not the focus of our paper,
we must mention that most of the "traits" studies are based on
small samples, drawn from unknown populations whose generality is
not clear, and limited to cross-sectional designs, thus rendering
any causal implications suspect. Many do not use multivariate
analysis which controls for age, education, sex, work experience,
etc., thus raising doubts about the significance of personality
variables which occasionally appear significant.

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States and elsewhere, and (2) it deflected attention away from the behavioral inputs and
organizational outcomes of entrepreneurship (Gartner, 1989).
First, actual start up rates are much higher than the conventional wisdom allows (Star and
Narayana, 1983), and they beg to be explained. Based on reported incorporations,
unemployment insurance files, and other indicators, we estimate that at least one million, and
possibly as many as three million, businesses are founded in the United States each year.
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Studies in other countries show similar high rates (Boegenhold, 1987; Ganguly, 1982;
Johannisson, 1988).
Second, the traits approach made researchers so enamored of their hero -- the
entrepreneur -- that they lost sight of our reason for caring about entrepreneurship. People have
cared about entrepreneurs because business founders are the "agents," following Schumpeter, of
beneficial social and economic outcomes. An entrepreneur's instrument of agency is an
organization. Ecological theory returns our attention to organizations -- not entrepreneurs or
managers -- as producers of beneficial outcomes.
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The rates approach in entrepreneurial research involves examining the contextual factors
that cause variations in rates of foundings. Over long historical periods, we often observe
alternating episodes of high founding rates and low founding rates. Within particular historical
periods, using a traits approach, we may find that personal characteristics associated with
entrepreneurial tendencies have increased or decreased. The traits approach, focusing on the
immediate situation of potential founders, is thus complementary to the rates approach, which is
interested in following rates over time.
6
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David Birch suggested this range to us in personal conversation.
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Elaine Romanelli made this point rather forcefully to us in her
written comments on this paper.
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We are not arguing that the rates approach is equivalent to an
ecological approach. Several theorists have been explicitly
interested in studying rates of entrepreneurship over time,
without using an ecological approach, such as David McClelland
(1961).

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Focusing on rates forces us into a dynamic view, as opposed to those studies which
examine the characteristics of businesses that are established and ongoing. Most articles in the
Journal of Small Business Management and the American Journal of Small Business from 1976
to 1985 focused on going concerns, not new businesses (Ireland and Van Auken, 1987).
Focusing on foundings also takes us out of the fruitless debate over whether entrepreneurs are
really different from small business owners, such as whether they are more innovative (Carland
et al., 1984). All foundings have the potential of being innovative, and such judgments are best
made after a business's survival potential has been assessed. Ronen (1988:265) argued that any
person is potentially an entrepreneur, and any entrepreneur is potentially a non-entrepreneur at
certain points in his or her life. Whether the entrepreneurially-inclined commit an
entrepreneurial act depends on whether they are free to do so. Ronen's view suggests we focus
on the opportunity structure confronting entrepreneurs.
THE ECOLOGICAL APPROACH
The ecological approach explains organizational change by focusing on the distribution of
environmental resources and the terms on which they are available. It emphasizes foundings and
disbandings as sources of population level change, although transformations are also possible
(Aldrich, 1979, Chapter 8). Ecologists downplay transformations because of their interest in
generalizing to entire populations, rather than the largest segments of them. Statistically, major
transformations are rare occurrences, taking place among the bigger, more powerful
organizations within populations. Recently, ecologists have begun to pay more empirical
attention to transformations (for example Haveman, 1990, or Kelly and Amburgey, 1990).
Changes in organizational populations reflect the operation of four generic processes:
variation, selection, retention and diffusion, and competitive struggle (Aldrich, 1979; McKelvey
and Aldrich, 1983). Any kind of change is a variation, and change begins with variations which
may be intentional or blind. Some entrepreneurs are driven by a single-mindedness of purpose as

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they attempt to adapt their plans to environmental fluctuations. Others stumble onto
opportunities and resources by chance. The higher the frequency of variations, whatever their
source, the greater the opportunities for change.
Some variations prove more beneficial than others in acquiring resources in a competitive
environment and are thus positively selected. Selection criteria are set through the operation of
market forces, competitive pressures, the logic of internal organizational structuring, conformity
to institutionalized norms, and other forces. Organizations founded through maladaptive
variations in technology, managerial incompetence, or other problematic acts are likely to draw
fewer resources from their environments and therefore are more likely to decline in performance.
Over time, populations are more apt to be characterized by the attributes of surviving
organizations than by the attributes of those that failed. Heavy selection pressures explain why
the psychological profiles and business operating practices of men and women owners, and
ethnic minority and non-minority owners, often look very similar (Cromie, 1987; Zimmer and
Aldrich, 1987).
What is preserved through retention is the technological and managerial competence that
all organizations use, collectively, to exploit the resources of their environments. For example,
the survival of a particular type of concrete-products firm is not terribly consequential to the
survival of the population as a whole, as the total population's survival depends on the total pool
of technological and managerial competencies in all concrete products firms. Variations
possessed by particular firms contribute to the total pool but do not determine its collective fate.
Of course, a single firm might develop an innovation that enhances a population's survival
chances, but that would depend on the innovation's diffusion throughout a large sector of the
population.
The competencies of populations are held by their owners, managers, and employees.
Retained variations are passed, with more or less additional variation, from surviving
organizations to those which follow, and from old to new employees and managers. Linkages
between organizations facilitate the diffusion of beneficial variations, whereas isolated

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organizations contribute little or nothing to future generations. Not all variations are diffused to
new organizations (because of hostility, pique, mistakes, incompetence, unwillingness to learn,
etc.), introducing a large element of uncertainty into the process.
As a particular organizational form proliferates, a competitive struggle over resources
and opportunities occurs, fueling the selection process. Sometimes opportunities are so diverse
and resources so abundant that organizational populations expand rapidly. As populations
evolve, however, or resources become scarce, shakeouts occur and competition (within the
population and between older and newer populations) increases mortality rates and lowers
founding rates, with populations stagnating or declining.
These four processes occur simultaneously rather than sequentially. At the same time as
new forms are emerging, others are being selected against. Some older forms are being retained,
and thus will compete for resources with the new forms.
Using these four principles, ecology explains how particular forms of organizations come
to exist in specific kinds of environments. A specific environment constitutes an opportunity
structure containing a resource pool uniquely suited to organizational forms that adapt to it or
help shape it. A form well-adapted to a specific environment is probably not the fittest form
imaginable, and is vulnerable to newly founded organizations with better-adapted forms.
Because we focus on foundings in this paper, variation is the most crucial process for our
purposes. However, the ecological model can also be applied to foundings themselves, when we
include the total founding process in our model, beginning with an individual's idea to found a
certain organizational form and continuing to the realized founding. In many cases, the initial
idea is not realized, partly due to unfavorable environmental conditions, e.g. high interest rates
for capital, high rents for shops, and so forth. Thus, those ideas which become selected and
retained constitute the observable variation of organizational forms (Katz and Gartner, 1988).
This winnowing process may produce sample selection bias because only successful, i.e.
realized, foundings are analyzed. We probably have to live with this problem, especially when

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analyzing long term changes, because it is very hard, if not impossible, to get data on
unsuccessful attempts to found businesses.
An ecological perspective on foundings is well-suited to examining rates of founding,
rather than the traits of founders. It is inherently dynamic in focus, emphasizes the many scales
at which social action occurs, and leads to interesting research hypotheses.
THREE EXPLANATIONS FOR CHANGES IN FOUNDING RATES
In the remainder of this paper, we concentrate mostly on founding rates at the population
level, examining conditions which affect the rate at which organizations are added to an existing
population. The origins of totally new populations require analyses at the
community/institutional level (Aldrich and Mueller, 1982; Astley, 1985), although we will have a
few things to say about it in the section on institutional processes. Typically, we cannot "see" a
new organizational population until it has begun to establish itself, at which point the population
processes discussed in this paper become relevant. Thus, for all practical purposes, most of what
we study in the entrepreneurship field today is covered in this paper.
We examine three processes: those occurring within populations, those occurring
between populations (at what can be called the community level), and those occurring in the
institutional environment. Our discussion of intra-population processes is more extensive than
the other two because most ecological research has been conducted at that level. As more
comprehensive research designs and data collection procedures are developed, we expect more
attention to the other two processes.
Throughout this chapter, we emphasize the time-dependent nature of organizational
foundings -- knowing when something occurs is as important as knowing why it occurred. What
types of organizations are founded is mostly ignored in our discussion, because that question
would take us into a more detailed examination of the information dissemination process, which
is reviewed in Romanelli (1989).
Intra-Population Processes

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Ecological research often emphasizes causes of founding that are endogenous to
populations and communities. Three logically-linked concepts appear in most research reports:
prior disbandings, prior foundings, and density. We first define density and then discuss each of
the three concepts.
Environmental resources, or an environment's carrying capacity, set a limit on population
density -- the number and/or size of organizations competing for the same resources in a limited
space. An environment's carrying capacity for a newly forming population is not known in
advance. Instead, carrying capacity is only revealed as organizations of the new form carve out
their niche in the face of competition from established forms, institutional constraints, and other
forces affecting the terms on which resources are available. In practice, this means that we only
know the carrying capacity for a new population after it has been reached and its numbers have
stabilized or shrunk. Some populations reach carrying capacity very quickly, in a few years,
whereas others take decades. In Sweden, the venture capital industry grew from a handful of
firms to over 20 and then back again to a small number in the eight years from 1982 to 1990
(personal communication, Oystein Frederiksen). By contrast, the trade association population of
the United States began in the late 19th century and only stabilized in the late 1970s.
If we make some simple assumptions about the intrinsic rate of increase (called r by
ecologists) of a population and about how carrying capacity (called K) affects intra-population
competition, we can generate an expected pattern for population growth (Aldrich, 1979:63-66).
Typically, ecologists assume growth is rapid at first, proceeding exponentially, but then it tapers
off, as the population approaches its carrying capacity.
This S-shaped pattern, then, is the result of two changing processes: founding rates and
dissolution rates. At the beginning, when density is low, and enough environmental resources
are left for exploitation, dissolution rates are low, and foundings rates are high. After a high
level of density has been reached, the processes are reversed: dissolution rates increase, and
founding rates decrease. Together, these processes lead to fewer net additions as a population
approaches the carrying capacity of its environment. Thus, an analysis of intra-population

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processes of foundings must examine foundings, dissolutions, and changes in density over time,
as well as the changes that accompany variations in density.
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Prior Dissolutions. Founding rates are constrained by dissolution rates in two ways -- one
material, one perceptual. First, some resources are tied up by existing organizations, so that
foundings only have access to them when deaths occur. Thus, previous deaths are causally prior
to births, to some extent. Many foundings are a replacement phenomenon, as disbandings create
openings in the niche which are then available for new organizations.
Second, potential founders may be frightened by high death rates. High numbers of
dissolutions are a signal, perhaps, that the population has exceeded its carrying capacity.
However, we are skeptical that most entrepreneurs invest enough resources in scanning their
environments to accurately assess true dissolution rates, and so this factor is probably of marginal
importance.
Delacroix and Carroll (1983), in their study of newspaper foundings in Ireland and
Argentina, found that levels of newspaper dissolutions in preceding years were related in a
complex fashion to subsequent levels of newspaper foundings. As deaths in the previous year
increased, newspaper foundings increased up to a point, but then as deaths increased further, the
number of foundings declined. Delacroix and Carroll argued that this curvilinear pattern resulted
from the two processes described above: (1) the dissolution of newspapers freed resources which
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The ecological model of how populations change over time is very
similar to product or industry life cycle theories used in the
business strategy literature (Murray, 1984). One difference lies
in the uses to which the model is put. Strategists ordinarily
are concerned with the normative or prescriptive implications of
changes, whereas ecologists attempt to build explanatory models.
A problem facing both groups is the difficulty of a priori
identifying stages -- in a new, changing population, observers
cannot easily spot a priori the arrival of a life cycle
transition. The dynamics of an industry's life cycle are
governed by the competitive behavior of member firms, which
create, to some extent, the dynamics of the life cycle. Unlike
strategists, ecologists treat the life cycle idea not as a
predictive tool for designing strategies, but as a useful
analytic tool.

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could subsequently be used by other entrepreneurs to found their own papers, and (2) as the
number of dissolutions increased, potential entrepreneurs received an increasingly negative
message about the wisdom of founding a newspaper. Eventually the negative interpretation of
prior deaths more than offset the positive effect of available resources.
Delacroix and Carroll's results were not replicated, however, by Carroll and Hannan
(1989) in their study of nine newspaper populations, some of which were previously studied by
Delacroix and Carroll (1983) and Carroll and Huo (1986). They found the expected curvilinear
relationship between prior deaths and foundings in only two populations, and it was only
statistically significant in one of them. In four of the populations, there was no significant effect
of prior deaths on subsequent foundings, and in the other three, the pattern of coefficients was the
opposite of that expected. In their study of trade association foundings in the United States,
Aldrich et al. (1990b) also did not replicate Delacroix and Carroll's results. They tested for the
hypothesized curvilinear relation, and found that prior trade association disbandings were not
associated with subsequent foundings.
Barnett and Amburgey (1990) found that prior deaths were negatively related to
subsequent foundings of telephone companies in Pennsylvania from 1877 to 1933. They argued
that this may have been the result of first-order autocorrelation, if unobserved factors which
increased failures also reduced foundings. Thus, their study does not support Delacroix and
Carroll's arguments. (They did not test for a curvilinear relationship between prior deaths and
foundings.) Halliday et al. (1987) also found that prior deaths had a negative effect on the
subsequent founding rate of state bar associations. They argued that "an unsuccessful founding
will depress subsequent foundings, as members of the bar become discouraged and hesitate to try
again" (Halliday et al., 1987:460).
Based on prior theorizing and research, we believe that the importance of prior deaths
differs by where a population is in its life cycle. In the early growth stage, deaths are not so
important in freeing resources. In the later stage, when carrying capacity is approached or
reached, prior deaths are very important in freeing resources for new organizations. However,

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when a population exceeds its carrying capacity, the most important effect of deaths is not to
free up resources for new organizations but instead to increase the life chances of existing
organizations.
Note the possible contradictory effects of prior deaths: they may free resources which are
then available for other entrepreneurs, but they may also negatively affect entrepreneurs'
perceptions of the likelihood that new ventures can succeed. Thus, even though resources are
available, entrepreneurs may ignore them. Though empirical support for the effect of prior
deaths on foundings is mixed, it deserves further attention in studies of other populations.
Estimating the effects of prior disbandings (and prior foundings) is difficult because of
the disjuncture between the data available and the theoretical processes posited. Over time, the
effects of disbandings -- freeing resources, changing potential entrepreneur's perceptions -- occur
nearly instantaneously. Foundings can follow disbandings by days or weeks. Over the course of
a year, the number of foundings might keep pace with the number of disbandings, resulting in no
net change in density for the year. In models with lagged terms -- such as foundings, disbandings
and density lagged one year -- such micro effects might not turn up in our results. The dismissed
micro-effects may be crucial when population processes are changing rapidly. For example,
when the number of births or deaths is extremely high within a year, the situation for
organizations founded at the beginning of that year may be completely different from those
founded at the end. This problem has not been adequately addressed in empirical studies, as
most data only provide the year of founding, rather than the precise day and month.
Prior Foundings. Just as prior disbandings have two possible effects on subsequent
foundings, so do prior foundings: perceptually, as a signal about the opportunity structure, and
materially, as a drain on available resources. First, if potential entrepreneurs learn from their
environments by imitating what others are doing, then high levels of foundings might be read as
a signal that opportunities are growing in a population. Thus, we would expect a positive
relationship between prior and subsequent foundings. Second, there are probably diminishing
returns to the positive effect of prior foundings, as resources and the pool of potential

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entrepreneurs are exhausted at very high levels of foundings. Thus, research should find a
curvilinear relationship between prior and subsequent foundings, with prior foundings having a
positive impact at low levels of foundings but then little or no effect at high levels.
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Delacroix and Carroll (1983) reported a curvilinear relationship between prior
organizational births and subsequent foundings for newspapers (although the effect was not very
strong), as did Hannan and Freeman (1987) for unions. Staber (1989) reported significant
curvilinear effects for two of the three populations of cooperatives he examined in Atlantic
Canada. Carroll and Hannan (1989) found support for a curvilinear relationship in five of the
eight newspaper populations they tested, but not in three others. Barnett and Amburgey (1990)
found that prior foundings of telephone companies were positively associated with subsequent
foundings, but they attributed their results to first-order autocorrelation, and they did not test for
a curvilinear relationship.
9
Aldrich et al. (1990b) tested for a curvilinear relationship in their
8
Empirically, a curvilinear relation could be specified in
several ways. For example, prior births could be modelled via a
logarithmic transformation. Or, prior births could be modelled
via a quadratic specification of the effects of prior foundings,
with expectations of a positive linear and negative squared term
if the hypothesis is correct, as in the case of prior deaths. As
William Barnett, Kenneth Bollen and Catherine Zimmer pointed out
to us in personal communications, we must be especially careful
about inferring much from quadratic lagged effects of births and
deaths. In many cases, these specifications merely amplify
outliers. This is especially true for lagged births, which are
ordinarily Poisson distributed. In a Poisson distribution, most
years have few (if any) births, while a handful of years have a
very large number of births. Results that depend on squaring
such a skewed distribution are almost surely driven by a few
"outlier" years.
9
A first-order autocorrelation could arise if some underlying
factor, common to both time periods, was left out of the
statistical model. For example, resource availability may have
been high in both periods but not measured properly in the model.
Or, some third, unmeasured force may be stimulating entrepreneurs
into action, such as a change in economic values. In that case,
entrepreneurs are not responding to prior births, but rather to
the common sensibility underlying their own and the earlier time
period.

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study of trade association foundings, but the linear term was not statistically significant. Only the
squared term was significant, and it was negative, with its effect being felt at a level of foundings
that was reached only once in this century. Thus, they rejected the hypothesis that prior
foundings were an important influence on subsequent foundings in the trade association
population.
These results provide only limited support for the position that prior foundings affect
subsequent foundings. Very high levels of foundings tie up resources, many of which cannot be
replenished quickly. We would expect the resource-consuming effect of prior foundings to be
insignificant at lower levels of foundings, but then to become stronger until at some level it
exerts a strong negative effect on subsequent foundings. Untangling the two interpretations of
prior foundings -- as a symbol to entrepreneurs of potential opportunities and as an indication of
already-committed resources -- is not an easy task, and prior research has not done so. For
example, lagged foundings can only capture crowding due to births overshooting an
environment's capacity if density is left out of the statistical model, or if old organizations do not
crowd the environment as much as brand new ones.
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Also, whether potential entrepreneurs are
clever or resourceful enough to closely monitor prior foundings is an open question.
Density Dependence. "Density dependence" refers to the dependence of several
fundamental population processes on the size of the population itself. This model, originally
developed by Hannan (1986), assumes that density reflects two underlying processes:
legitimation and competition. Increasing organizational density at the beginning of a new form
(greater numbers of organizations within a population) has several consequences which lead to
an increase in foundings: rising legitimacy and institutionalization of an organizational form;
spreading availability of knowledge and skills necessary to generate a viable organization,
especially through spin-offs; and, the possibility of collective action. Later, at high levels of
10
We are indebted to William Barnett (personal communication) for
this observation.

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density, factors inhibiting foundings become dominant: diminishing returns and smaller
potential gains realized from foundings as competitors become more numerous; and, increasing
concentration in some populations, as barriers to entry emerge. Considered jointly, these
processes led Hannan (1986) to predict a non-monotonic, inverse U-shaped pattern between
organizational density and the rate of foundings.
In early ecological studies, density was measured only by the number of organizations in
a population, modeled by a linear and quadratic term for density.
11
Subsequently, ecologists
realized that the total size of all organizations, as well as the size distribution of organizations
within the population, also was consequential (Barnett and Amburgey, 1990). So far, only a few
ecologists have measured population mass -- the aggregate size of all organizations in a
population (Barnett and Amburgey, 1990; Delacroix et al., 1989; Hannan and Freeman, 1989;
and Swaminathan and Carroll, 1990).
12
Carroll et al. (1989), in their study of German and
American breweries, have also measured total size by introducing total beer production per year.
11
Evidence for the effects of prior births, deaths, and density
has been inconsistent. One important reason for the inconsistent
findings may lie in the specification of the effects as linear
and quadratic terms, resulting in multicollinearity. The problem
of multicollinearity arises when two independent variables are
highly correlated. (For example, computations in two of our own
data sets showed that the correlations between the linear and
quadratic terms of prior births, deaths, and density fluctuated
around .90.) As a consequence, estimated coefficients of density
may turn out to be unstable, or, as other researchers have
reported, it may be difficult to obtain convergent estimates of
density's effects, especially when the number of cases is low.
For example, Carroll and Hannan's (1989) failing to find support
for density dependence for small newspaper populations might be
due to multicollinearity.
12
For example, Barnett and Amburgey (1990) studied telephone
companies, and measured total mass by the total number of
subscribers of all existing companies in a given year. By
including total number of competitors in the same equation with
this measure of mass, Barnett and Amburgey (1990) thus controlled
for the average size of organizations in the population. Hannan
and Freeman (1989) discussed their rationale for focusing on
numbers of unions, rather than unions weighted by size.

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Their results were ambiguous: beer production did not show a significant effect on founding
rates of German breweries. For American breweries, the higher the beer production, the lower
the rate of foundings, probably due to rising economies of scale.
Populations in which all organizations are roughly the same size may have very different
competitive dynamics than those with a small number of large organizations and many smaller
ones. Ecologists have studied the impact of average organizational size but no studies have
included measures of the size distribution within a population. Industrial concentration ratios are
an obvious first place to start, but such information is rarely available for the time period and
scale over which ecological data has been collected.
One issue in studying the effect of density is the scale at which it should be measured.
Several lines of argument suggest that it is useful to disaggregate the overall density of a
population into smaller components. Some organizations compete at a local level, some at a
regional level, and others at a national level. For example, Swaminathan and Wiedenmayer
(forthcoming) addressed this issue in their study of the mortality rates of Bavarian breweries by
replicating their analysis at the national, state, and city levels. Carroll and Hannan (1989:536)
failed to find evidence for density dependence in small cities' newspaper organization
disbandings and argued that local density may not be the proper measure of the scale of
competitive interdependence, because local areas can easily be penetrated by newspapers from
outside their areas. Perhaps they would have obtained better results by taking into account
competition on a wider scale -- using a regional or state level analysis.
Carroll's (1985) resource partitioning model of niche segmentation also implies that
investigators should take care in measuring density. Competition within a population may be
fragmented if some forms focus their fitness on specialized niches within their environments.
Thus, a measure of overall density might not really capture the competitive forces facing
organizations within sub-populations.
In the next section, we explore in greater detail what is meant by "legitimacy" or the
taken-for-granted nature of an organizational form. We also provide additional explanations for

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population growth, such as entrepreneurial work settings and social networks. We further
investigate how increasing density might depress rates of founding. We then point out how
different organizational forms at different stages of density can proliferate. We conclude this
section by discussing some factors which affect a population's development, but which are rather
independent of density.
Facilitative Effects of Increasing Density. Some forms of organization must fight for
legitimacy when they first appear, because they challenge established organizations or
institutions. The first newspaper editor in the United States was jailed (Delacroix and Carroll,
1983), and early labor unions were crushed by aggressive employers (Hannan and Freeman,
1987). Early forms of trade associations were tainted with the anti-competitive aura of their
predecessors -- cartels and other collectivities that attempted to restrict competition -- and had to
prove themselves to skeptical potential members, as well (Aldrich et al., 1990a). Early life-
insurance companies were seen as illegitimate in the United States, because they transformed the
sacred event of death into a vulgar commodity (Zelizer, 1978). Early automobile manufacturers
in New England almost always began with under-capitalized firms, as established financial
institutions would not risk their assets on such an unproven product, with no clear market. As
the prevalence of these forms increased, however, they gradually assumed a taken-for-granted
nature, characteristic of all institutions, and successive cohorts of founders had an easier time.
Delacroix et al. (1989) argued that most business organizations in modern capitalist
societies do not face a legitimacy problem, as that issue was settled when private property rights
were institutionalized. Zucker (1989) speculated that legitimacy for many new forms of
organization should be thought of as "yes or no" rather than "more or less," with the legitimacy
issue confronted and dealt with early in a population's history. Either argument suggests that
density is not closely associated with legitimacy. Both arguments imply that if founding rates
within a population change as density changes, some factor other than legitimacy must be
responsible.

17
Support for the density dependent argument has been marshalled by Carroll and Hannan
(1989:535) in their study of nine populations of newspapers: "For all nine populations, density
has the predicted nonmonotonic effect...the estimated coefficients of the first-order terms are
positive and those of the second-order terms negative."
13
Six of the nine pairs of coefficients
were statistically significant. These results held when other intra-population processes -- prior
foundings and dissolutions -- were controlled. Aldrich et al. (1990b) also found support for the
density dependence argument in their study of trade associations, with foundings initially
increasing as density increased but then decreasing at higher densities. The substantive effect of
density was important but modest, as the positive multiplier of the founding rate never exceeded
2.0. Wholey et al. (1990) found support for the curvilinear effect of density on entry into the
population of health maintenance organizations in the U.S. The effect persisted even when
measures of competitive effects, market saturation and concentration, institutional effects, ability
of incumbents to resist entry, and state regulations were entered into their analyses.
Halliday et al. (1987) did not have density explicitly in their model of bar association
foundings, but they did discover a very strong upward trend in founding rates as the population
grew. Founding rates in 1900 were ten times those of 1880, for example, and the trend was not
explained by increases in the population of lawyers.
In their study of telephone company foundings in Pennsylvania, Barnett and Amburgey
(1990) measured density in two ways: number of companies and aggregate size -- measured by
total subscribers -- of all companies. The net effect of number of companies was negative
throughout the observed range in their population, indicating only competitive, not cooperative,
effects. However, the net effect of aggregate size was positive, and thus Barnett and Amburgey
concluded that larger organizations increased the founding rate of new organizations. Because
the number of organizations produces competitive effects, regardless of their sizes, Barnett and
13
Two of the populations -- Argentina and Ireland -- were
previously reported on in Delacroix and Carroll (1983).

18
Amburgey (1990) suggested that competition is occurring within fairly heterogeneous, localized
niches. Larger organizations, net of the number of organizations in the population, may produce
the mutualistic effects observed because they structure the environment in ways that provide
opportunities for small organizations.
More studies of business organizations are needed to clarify the extent to which the
observed relation between density and foundings is due to legitimacy or some other factors. For
the moment, other interpretations of the association between founding rates and density -- such as
those below -- must be considered.
Entrepreneurial Work Settings. Increases in density mean an increase in the number of
work sites and thus an increase in the number of workers -- or members, for non-business
organizations -- with knowledge of a population. In this section, we explore the consequences of
increases in work settings for founding rates. Our guiding principle is that increasing density
facilitates the formation of organizations which split or spin-off from already established
organizations.
We use the concept of "spin-offs" in a generic sense, including not only businesses which
are assisted in their founding with capital and other resources from a parent firm, but also any
businesses started by one or more individuals who have previously worked in the industry
(Garvin, 1983; Romanelli, 1989:217). Many workers in an industry leave to start their own
business, and firms spawning such new firms have been called "incubators" by Hart and Denison
(1987). Freeman (1983) called the process "organizationally induced entrepreneurship." In
addition to these unintended spin-offs, existing firms occasionally deliberately create new
businesses as a way of entering a new market, developing a new product, or spreading risks. In
West Germany, firms above a certain number of workers are subject to Federal regulations
regarding workers' participation, and so some firms avoid this by setting up new firms.
Meyerhoefer (1982) found that almost one-third of the 263 large firms in his West German
sample had started another firm between 1975 and 1980.

19
Early in a population's history, knowledge of effective forms is limited. Potential
entrepreneurs may hesitate to found an organization if they are uncertain of how to construct it,
and no "blueprints" are easily available. "In such situations, existing organizations are the only
training grounds for organization builders" (Hannan and Freeman, 1987:918). The greater the
number of organizations of a given form, and the larger the average size of the organizations, the
greater the number of potential entrepreneurs being trained. Accordingly, as a population grows,
founding rates ought to increase -- within the limits of carrying capacity -- because a growing
number of founders are being trained.
In firms with internal labor markets, ceilings on intra-organizational mobility due to the
size of upper cohorts may promote entrepreneurship. An example of increasing opportunities for
entrepreneurship has been observed in the early stages of a population's expansion (Brittain and
Freeman, 1980). As businesses grow, they hire many workers who are in the early stages of their
careers, and eventually the youngest cohorts of such workers bump up against the cohorts
immediately above them, who are also fairly young. Younger workers, in their attempts to make
sense of their organizational experiences and plan their careers, realize that their chances for
moving up rapidly in a company with such young age structures are fairly low, and therefore
some leave to join newly founded businesses, or even create their own. So, population growth
fuels the organizational formation process, to the extent that workers interpret slow intra-firm
promotions in a fast-growing industry as a signal to look elsewhere for opportunities. For
example, "annual job turnover in Silicon Valley has been about 30 percent" (Larsen and Rogers,
1988:108), in part because workers perceived more rapid career progress outside of their original
employers' firms.
Another source of spin-offs arises from relations between employees and lead users,
which may alert employees to bottlenecks, gaps, or other problems with effective uses of their
firm's products/services (Von Hippel, 1986). Employees can either report these problems to the
firm, or use the information to strike out on their own. For this reason, Garvin (1983) argued that
spin-offs are more common in the early stages of an industry. Information and startup

20
advantages are available to employees in established firms at a time when constraints on
population size are low. "The current employer provides individuals with the ability to attract
resources and knowledge about where to allocate those resources. He also provides models for
organizing new firms (both positive examples to be emulated and negative examples to be
avoided)" (Freeman, 1983:33).
Knowledge of entrepreneurial opportunities is differentially distributed within
organizations, and thus certain work settings are more likely to generate foundings than other
(Romanelli, 1989:218). Knowing peoples' work unit may tell us not only if they will attempt a
founding, but also which forms of organizations they are likely to create, given the information
they have available. Romanelli (1989) suggested examining four types of "filters" on the
information and incentives available to potential entrepreneurs: organizational subunits,
occupational communities, factors unique to a population, and factors unique to a community of
populations.
The knowledge gained and contacts made in their previous job provide opportunities for
employees to capitalize on, but they also constrain employees' search for opportunities and the
strategies of organizations they found (Boeker, 1988; Freeman, 1986; Romanelli, 1989). Some
research shows that owners tend to set up businesses in product or service lines similar to those
in which they previously worked, and to serve some of the same customers they dealt with as
employees. Labor market theories of human capital investments by workers (Becker, 1975)
stress the investment employees have made in their industry-specific knowledge. If we assume
even minimal rationality, employees do not want to lose their early investments in human capital
by starting something totally new.
Cooper and Dunkelberg (1987) studied 890 members of the National Federation of
Independent Businesses and found that 39 percent were in the same product/service line, and
another 27 percent were in a similar line. About 17 percent were serving the same customers
they had dealt with as employees, and another 44 percent were serving similar customers.
Johannisson (1988) defined "extra-preneurs" as former employees who founded businesses that

21
served the same customers as their former employers. In their research on innovative high
technology businesses in West Germany, Picot et al. (1989) found that most founders had
previous work experiences in their own industrial sector.
Boeker (1988) examined the backgrounds of 51 founders of merchant semiconductor
firms and the strategies they adopted when they founded their firms. He found that the
organizing strategy of their former firm did not affect the founders' strategies -- first mover, fast-
follower, low-cost producer, or niche producer -- but that an entrepreneur's functional
background and training made a substantial difference. Founders from an R & D background
were more likely to use a first-mover strategy, those from a manufacturing background were
more likely to use a low-cost strategy, and those from marketing and sales were more likely to
use a "niche" strategy.
Copying existing forms can be dangerous for entrepreneurs if the copying occurs across
national boundaries. In Sweden, entrepreneurs in the venture capital industry first looked to
California's Silicon Valley for effective modes of organizing their firms. Almost all of the
imitators' firms failed, and survivors and subsequent founders developed a distinctive Swedish
approach, which proved more successful.
The possibly constraining effects of founding a business via the spin-off process might
explain Kemelgor's (1985) very puzzling results. He studied 218 people who left firms
employing 250 workers or more -- which he called "incubators" -- to start their own businesses.
He found the highest rate of survival among owners founding businesses in non-related fields,
with the difference especially pronounced after five years. As no controls or statistical tests were
used, we cannot make too much of these results. We might speculate, however, that given the
size of the incubator firms, the foundings in a related field were mostly occurring when the
population had reached carrying capacity, when survival chances would be lower than in earlier
stages. Perhaps those founding firms in non-related fields recognized the futility of competing in
an already packed environment. By contrast, Cooper and Bruno (1977) found that high-

22
technology firms founded in the Silicon Valley during the 1960s had lower chances of
dissolution if they were similar to their parent firms, although the difference was not great.
Social Networks. Denser populations result in more frequent contacts between
organizations using a new form and outsiders. If learning is contact contingent, then more
learning should occur in dense environments, up to a point.
14
Therefore, we would expect the
number of organizations formed by persons not employed in the form to also increase with
increasing density.
Social networks change over time, as density increases, in ways that facilitate some
entrepreneurs breaking through scale barriers that previously blocked their entry into the
population. Entrepreneurs may succeed on a small scale in their local environments early in the
life of a population, as they can carve out a niche through manipulating their local contacts
(Robben, 1984). When they reach the limits of their local environment, and wish to expand into
larger areas, they confront significant institutional barriers if their form of organization has not
yet achieved wide-spread legitimacy. When dominant elites and institutions have gained enough
experience with a new form to accept it, entrepreneurs who were confined to small-scale local
operations may now break through to found sizeable enterprises.
In some populations, increasing density leads to successful collective action to stabilize
and dampen somewhat competitive forces, through tactics such as price leadership and design
standards. Small numbers of population members hamper attempts at coordinated action,
whereas a larger population produces economies of scale in political and legal action (Hannan
and Freeman, 1989). To the extent that potential entrepreneurs read such conditions as raising
their chances of successfully copying an effective form, they may be encouraged to found a new
organization.
14
We are indebted to Jerome Katz (personal conversation) for this
observation, taken from statistical learning theory.

23
Collective action, such as by trade associations, may increase founding rates. Aggressive
collective actions by small groups of owners may smooth the way for subsequent founders. For
example, a small group of business owners succeeded in expanding the use of coal as a fuel in
the Northwest in the late 19th century by "monopolizing the market, apportioning the business
among a limited number of people, maintaining prices, profit margins, and profit flow, thereby
establishing a reputation of dependability for the fuel and a source of risk capital for further
investment in the industry" (Albrow, 1976:179). However, collective action may be delayed by
strong competition in a population, thus limiting the population's overall development. For
example, German brewing trade associations were not founded until strong competition and
concentration had developed in the industry (Hartl, 1912). Their aim was to protect existing
breweries, and thus they did not encourage foundings, although they could not set up legal
barriers to entry.
Inhibiting Effects of Increasing Density. Eventually, increasing density exacerbates
competitive forces to such an extent that founding rates are depressed. "The more numerous the
competitors, the smaller the potential gains from founding an organization (and the bigger the
cost to potential competitors) at a given level of demand for products and services" (Hannan and
Freeman, 1987:918). When a population approaches carrying capacity, several negative effects
become apparent, including a reluctance of investors to fund new organizations, and a dwindling
supply of potential organizers, customers, and suppliers. Hannan and Freeman (1989:136) noted
that competition may be direct or indirect within a population. For example, two small
organizations which are located far away from each other do not compete directly for market
shares, but compete indirectly through increased demand for resources, thus raising the prices for
resources.
Collective action by competitors may also inhibit potential entrepreneurs from attempting
foundings. Classic industrial organization writings identify numerous barriers to entry in mature
industries that depress founding rates. For examples, tacit agreements on market sharing, price
leadership which keeps profits too low to encourage outsiders, and other oligopolistic practices

24
may discourage potential entrepreneurs. These factors are treated extensively in industrial
organization and industrial economics texts, and so we do not review them.
Density Effects and Favored Forms. In our discussion so far, we have treated foundings
as a homogeneous, unvarying population, whereas close observation shows a great deal of
complexity and variation (Gartner, 1985). Heterogeneity in the population of new organizations
is not captured very well now in our empirical models, but some promising concepts have been
developed in ecology. We include some examples in this section to demonstrate the possible
ways in which differences in organizational forms can be taken into account.
The kinds of organizations that are founded and prosper differ over time, varying by
where a population is in its life cycle. Ecologists have identified two dimensions of forms that
vary with density: r vs. K strategists, and specialists vs. generalists (Brittain and Freeman, 1980;
Lambkin and Day, 1989). The r vs. K distinction is based on the kinds of organizations that do
well in the early as opposed to the late stages of population density, with r-strategists favored
early and K-strategists favored late. Organizations following an r-strategy reproduce rapidly and
move quickly to obtain the resources available when carrying capacity is under-exploited, using
their "first-mover" advantage.
15
K-strategists, by contrast, do well when a population is near its
carrying capacity, and selection is based on efficient use of resources, rather than quickness
(Brittain and Freeman, 1980:312). K-strategists outcompete r-strategists if they are in the same
niche, and so r-strategists are typically replaced by K-strategists as a population matures.
16
15
"Minimalist" organizations resemble r strategists in their
ability to move quickly, because they have low administrative
overhead, but no theorist has suggested that their foundings are
linked to population density. See Halliday et al. (1987) for a
discussion of the minimalist concept, and Aldrich et al. (1990b)
for an analysis of minimalist foundings.
16
Astley and Fombrun (1987:175) argued that r and K strategists
occupy different niches and are thus insulated from competition
with each other, but others see them as often competing for the
same resources (Brittain and Wholey, 1988).

25
The specialist vs. generalist distinction (Hannan and Freeman, 1977) is based on the
breadth of the niche occupied by organizations, on the assumption that organizations sacrifice
some degree of competitive edge when they spread their fitness over a wide as opposed to a
narrow niche. Specialists concentrate their fitness in a narrow band, and do exceptionally well
when the environment is within that band, outcompeting generalists. Generalists, by contrast,
spread their fitness over a wider range of their environments, doing better than specialists when
environments vary across diverse states with some degree of uncertainty. To the extent that
widely differing states of the environment pose very different demands on organizations,
specialists will lose out to the generalists that maintain the capacity to compete in several
different environmental states, as opposed to the specialists' single state.
The two dimensions of r vs. K and specialist vs. generalist may be combined to produce
4 distinct form types: r-specialists, r-generalists, K-specialists, and K-generalists. Boeker
(1988), using this four-part typology in a study of merchant semi-conductor firm foundings,
found strong effects of population stage and form type. The organizations that did well initially
were r-specialists, which were favored because of their rapid reproduction rate and mobility, thus
gaining first-mover advantages. K-strategists were favored later -- first K-generalists and then
K-specialists -- because they were best adapted to populations near their carrying capacity.
Lambkin and Day (1989) elaborated upon Brittain and Freeman (1980) and Brittain and
Wholey (1988) in proposing a generic developmental pattern of forms within different
population densities. Early in the life of a population, when a niche is first open, the pioneers are
likely to be r-specialists which multiply and move quickly. After an early period of
development, so-called "early followers" can gain a large market share by being more efficient
(and powerful) than r-specialists. Such early followers are likely to be K-generalists: divisions,
subsidiaries, or other dependent units of established firms, as well as new firms. Some
polymorphs may also emerge -- organizations which pursue specialist and generalist strategies
simultaneously, at great expense in overhead. Later, K-specialists, with small market shares, can
survive on the stable, narrow niches left to them by the K-generalists.

26
Weitzel (1986) found that most startups in retail trade in West Germany in the early
1980s were specialists, pushed into narrow niches by big department store chains and other
dominant retail firms. Some new retail firms were r-specialists, such as those in the seasonal and
leisure time industries. Shops selling sports articles and souvenirs can be founded and disbanded
fairly quickly, as entrepreneurs take advantage of transitory opportunities. Others were K-
specialists, such as snack bars, tobacco shops, and newspaper kiosks.
The automobile manufacturing industry provides an excellent historical example of r- and
K-strategists. Between 1890 and 1920, over 500 businesses were founded in New England to
produce automobiles. Most made only a few cars, and even the most successful ones made only
a few hundred cars. When Henry Ford was making 1000 cars a day in 1916, Stanley Steamer
was making not many more than that per year. Many of the New England manufacturers moved
into the niche by capitalizing on the experience they had accumulated making bicycles, sewing
machines, carriages, or precision equipment.
These new firms were small, used handicraft technology, and had low overheads. They
changed their products and processes quickly -- some started with steam engines and then
changed to gasoline engines, and others experimented with electric power before choosing
gasoline. Ultimately, all lost out to the K-strategists who followed, because they could not
transform themselves from low-volume, flexible firms into a form that could compete with the
Henry Fords of the world.
17
Carroll (1985), in objecting to Porter's (1980) and Hannan and Freeman's (1977)
implications that a single strategy is optimal for each industry stage, argued that generalism and
specialism not only coexist, but are fundamentally interrelated. Through resource partitioning,
successful generalists create the conditions which promote successful specialists, because the
generalists' broad appeal to multiple market segments leaves open many small, specialized
17
For an excellent historical presentation of the automobile
industry in New England, we recommend the Museum of
Transportation in Brookline, Massachusetts.

27
niches. Generalists also stabilize the market by their visibility and fairly predictable actions. In a
sense, too much success by generalists undermines their own position. Carroll predicted that the
higher the concentration is for generalists, the better the chances for specialists, because in a
concentrated market the total market shares of generalists are smaller than in unconcentrated
markets. Thus, concentration opens niches for specialists. Carroll illustrated his argument with
examples from the brewing, newspaper, music recording, and book publishing industries.
We would expect some K-generalists to be fairly large, and their size could have an effect
on subsequent foundings. For example, the size distribution of organizations in the population
may affect the founding rate through its effect on spin-offs, according to a study of
manufacturing firms in Northern England. Johnson and Cathcart (1979) found that the larger the
employer, the lower the proportion of new founders spun off.
18
However, we have already noted
other arguments suggesting that increasing size raises the pool of potential founders and thus the
founding rate.
Density-Independent Processes. Some intra-population forces affect foundings
throughout the life of the population, and are thus independent of population density. Job-
changing and technological innovation are not dependent upon a population's age, and may have
an effect on founding rates.
19
Generally, rates of job changing and movement of workers between different employers
in the U.S. are very high. For example, "55 percent of all jobs held in the United States [between
1965 and 1970] had new workers in this five year period" (Stewman, 1988:192-193). This
aggregate figure resulted from workers who had changed into a new job plus workers entering
18
Johnson and Cathcart's results must be taken as extremely
tentative, as they looked only at new incorporations, not all
foundings, and looked only at manufacturing firms in the North of
England, with no data on the individual firms.
19
It is conceivable that major technological innovations are more
numerous at the beginning of a new form, and thus induce its
growth. One example is the German brewing industry. More
research is needed on this question.

28
the labor force for the first time. This high level of normal turnover opens up many opportunities
for workers to explore the prospects of self-employment. Workers who move through many
firms over their careers have an opportunity to learn a broad range of skills that might be useful
in starting their own businesses.
"Traits" studies often report on what entrepreneurs said about their previous job, finding
many were apparently dissatisfied (Stoner and Fry, 1982). However, normal job turnover is high
enough to obviate any concern for what pushed people out of their previous jobs into
entrepreneurship.
Innovation, especially technology-based innovation, is often linked to entrepreneurship
and business foundings. However, most innovations are competence-enhancing rather than
competence-destroying (Schmookler, 1962; Tushman and Anderson, 1986) and can thus be
adopted by existing organizations. Competence-enhancing innovations are order of magnitude
improvements in price/performance that build on existing know-how within a product/service
class, such as the change from mechanical to electric typewriters, and they do not make old skills
obsolete. Readily transferable technologies, not needing costly adaptations, probably make it
easier for workers with entrepreneurial ambitions to capitalize on competence-enhancing
discontinuities and leave to found their own businesses.
By contrast, competence-destroying innovations require new skills, abilities, and
knowledge in the development and production of a product/service. They fundamentally alter the
set of relevant competencies required of an organization, such as the transformation from
machine tools operated by skilled craftsmen to numerically controlled machine tools.
Tushman and Anderson (1986) hypothesized that technological changes within a product
class are characterized by long periods of incremental change, punctuated by discontinuities. The
discontinuities may either be competence-enhancing or competence-destroying, with the latter
most likely to be initiated by new firms. In their study of the mini-computer, airlines, and cement
industries, they expected that competence-enhancing discontinuities would be associated with
fewer entries and more exits, and that the opposite pattern would prevail for competence-

29
destroying innovations. Their expectations were supported for competence-enhancing but not for
competence-destroying innovations: entries relative to exits were quite high after the innovations,
but not as high as prior to them.
Truly competence-destroying discontinuities probably require, by definition, new
populations of organizations to produce or implement the new product, service, or process. We
need many more large-scale studies, of diverse industries, to observe how frequently such
discontinuities affect founding rates in established populations.
We also need studies which have organization-specific measures of technology so that we
can determine which technologically-oriented firms do better (or worse) during periods of
technological reorientation. Because of data limitations, Tushman and Anderson (1986) were
forced to treat technological change as exogenous -- they did not have organization-level data --
whereas Barnett and Amburgey (1990) were able to treat it as endogenous, given their firm-
specific data. If the distribution of technologies changes in a population as it grows or declines,
then technical innovation should be analyzed as a population-endogenous process with density-
dependence models.
Summary. Prior foundings and dissolutions, rising density, and several factors not
associated with density are key events in the history of an organizational population. Some
events free resources, whereas others stimulate entrepreneurial imaginations. Other events -- such
as job changing -- simply shuffle resources in quasi-random ways, creating the possibilities that
resources will be combined in novel ways.
Linking organizational forms to stages in population growth reveals a bias in much of the
current literature on entrepreneurship. The ecological model implies that most foundings will be
r-specialists, but much of the literature -- especially that on entrepreneurial strategy -- deals with
K-generalists and K-specialists. This bias arises because investigators have not taken account of
where the organizations studied fall in a population's life cycle, and because researchers have
concentrated on large, successful firms. We need more studies of r-specialists during their
formative years, early in a population's life cycle.

30
Although the number of empirical ecological studies of foundings is not large, a common
finding is evident: intra-population processes have had the most consistently significant effects
on foundings of all processes studied. Three implications follow. First, ecologists must pay
more attention to conceptualizing and measuring carrying capacity for diverse populations,
because it sets the context within which intra-population processes are played out. Second,
traditional research on "organization-environment" relations has taken much too global a view of
environments, and thus missed the significant effects that other organizations have on population
processes. Third, more effort has been devoted to measuring intra-population processes than
inter-population processes, and future research should seek more balanced research designs.
Inter-Population Processes: Community Level
Hawley's (1950) classic statement on human ecology emphasized community succession,
as inter-dependent populations are sorted out by processes of competition, domination, and
differentiation (see Astley and Fombrun, 1987). Analytically, a series of "stages" may be
distinguished, but in practice, community succession is on-going and many different processes
are occurring simultaneously. Within populations, competition pushes organizations toward
adopting similar forms, eventually resulting in greater homogeneity. Across populations,
dominant populations drive others into positions of subordination and ancillary roles, resulting in
community-level differentiation.
Classic industrial evolution models, such as Stigler (1951), argued that vertical
disintegration -- with increasing specialization up and down-stream -- occurs as markets expand.
Thus, we would expect specialists to emerge in populations after some early period of expansion.
Or, perhaps it is better to say, new populations to emerge. Ecological theory, by contrast, has
focused more on horizontal relations -- competitive interdependence -- and so has relatively
neglected developments in symbiotic relations and inter-population dynamics, with a few
exceptions, which we point out below.
Types of Relations Between Populations. Ecologists distinguish between six forms of
interaction between populations (Brittain and Wholey, 1988:200; cf. Astley and Fombrun, 1987).

31
The impact one population has on another may be positive, negative, or inconsequential. For
ease of illustration, consider a community with two populations, A and B, and the six possible
relations between them:
1. (-,-) Full competition: the presence of A or B suppresses the other's growth. E.g.,
competition for land between incompatible uses, such as salvage yards and shopping
malls, or competition between voluntary associations for members from the same socio-
demographic groups (McPherson, 1983).
2. (-,0) Partial competition: A's growth rate is decreased in the presence of B, but B's is
unaffected. E.g., "corner store" grocery specialists vs. full-line supermarkets.
3. (+,-) Predatory competition: A expands at the expense of B. E.g., video stores vs.
cinemas.
4. (0,0) Neutrality: A and B do not affect one another, and growth in one has no effect on
growth in the other. E.g., changes in the number of chicken ranches should not affect the
number of semi-conductor firms.
5. (+,0) Commensalism: A benefits from the presence of B, but B is unaffected by the
presence of A. Population B supplements population A, but not vice-versa. E.g., small
specialty food shops, such as bakeries or flower shops, in the vicinity of a supermarket.
6. (+,+) Symbiosis: both A and B benefit from presence of each other. (Both
commensalism and symbiosis are called mutualism by ecologists.) The two populations
complement one another. E.g., hardware stores and lumber yards.
The ecological and institutional approaches diverge in the extent to which they emphasize
competitive versus cooperative behavior between organizations and populations of organizations.
An ecological approach takes seriously the institutional argument that networks bind widely-
dispersed organizations together (Zucker, 1986), although so far most attention has been directed

32
toward competition (relations 1-3 above) rather than cooperation (relations 4-6 above) through
networks.
20
By contrast, institutional theory, in focusing on taken-for-granted aspects of reality and
conformity to them, emphasizes mutualism or cooperation, rather than competition. Mutualism,
like competition, may be diffuse as well as direct (Barnett and Carroll, 1987). Zucker (1986), for
example, presented an extremely detailed historical account of the transformation of the U.S.
economic system, in which she stressed the creation of an active market for institutionally-based
trust. She stressed the spread of institutional mechanisms that produce trust and the extent to
which modern economic life takes such mechanisms for granted, the "external world known in
common."
In the previous section, on intra-population processes, we discussed the direct
competition that occurs between organizations in the same population (mutually supportive
action may also occur in the same population). In the listing of relations, above, indirect, or
diffuse, competition occurs between organizations in different populations. Some indirect
competition is between populations that are struggling for the same niche, but other forms are
more diffuse. For example, many organizations in different populations seek college graduates
as white collar workers, and are thus competing with thousands of other organizations.
In this sense, every organization added to the community of populations has a small,
perhaps almost infinitesimal, effect on every other organization.
21
Small individual effects can
20
Some commensalistic and symbiotic relationships are quite
complex, as in this example: "...the `home entertainment'
business system, comprised of motion picture studios, magazine
publishers, television networks, video-cassette recorder
manufacturers, and cable system operators, among others, finds
itself increasingly interdependent with the `information-
processing' business system consisting of computer firms,
telephone companies, wire services, satellite operators, and
teletext services, among others. Together these two business
systems form a wider telecommunications community, encompassing
multiple, interdependent sectors of industry" (Astley and
Fombrun, 1987:168).

33
cumulate into sizable collective effects, of course. Barnett's (Barnett and Carroll, 1987; Barnett
and Amburgey, 1990) research on telephone companies has found that small firms -- taken
individually -- consistently have the smallest effects on other firms. However, taken at the
population level, they consistently have the strongest effects because of their greater numbers.
Some inter-population effects are negative, such as for workers, capital, or members.
Other effects are positive, such as organizations that create technological breakthroughs
benefiting others, or organizations that train workers who subsequently disperse to other sites.
One population can even initiate the development of another population; for example, car
manufacturers gave rise to their supply industry. Such positive interdependencies -- identified as
relations 5 and 6, above -- are a link between ecology and the institutional perspective.
Several recent empirical studies have examined inter-population relations as they affect
organizational foundings. Marrett (1980) examined the organizational context within which
medical societies composed of women physicians were founded between 1890 and 1900 in the
United States. She examined the effects of prior church organizations, private benevolent
institutions, women's clubs, state and district medical societies, and local regular --
predominantly male -- medical societies on the numbers of women's medical societies. Only the
effect of local regular societies was significant, as she found no commensalistic or symbiotic
relations with other populations.
22
By contrast, Halliday et al. (1987) found that employment in
professional services raised the founding rate of state bar associations. They speculated that
wide-spread employment in professional services makes professional associations more
21
We am indebted to Michael Hannan (personal conversation) for
this idea.
22
Marrett's analysis was not of founding rates, but only of the
numbers of associations present, and the analysis did not control
for the timing of events or use multivariate techniques, because
the sample size was so small. Thus, we should use caution in
interpreting her results.

34
"available for emulation and encourages the diffusion of experience about the pragmatics of
organizational methods and strategies" (Halliday et al., 1987:466).
Delacroix and Solt (1988) examined the expansion in the niche for domestic American
wineries that resulted from a growth in wine imports. They argued that foreign imports, rather
than crowding out American producers, actually made novel products acceptable to consumers,
whetting their appetites for table wines rather than fortified wines. One result was an increase in
foundings of domestic wineries. They did not examine the impact of increasing domestic
consumption on foreign producers, so we do not know whether this is a case of commensalism or
symbiosis.
Hannan and Freeman (1987), in their study of labor union foundings, discovered a
relation of partial competition between industrial and craft unions. Once industrial unions
became numerous in the United States (around 50 or so), they suppressed the rate of formation of
craft unions. However, craft union density had no apparent effect on industrial union
foundings.
23
Hannan and Freeman's result might also be due to a long term trend from craft to
industrial production in many industries. With industrial organizations replacing craft, the
"demand" for industrial unions will rise, whereas the "demand" for craft unions will decline.
Hannan and Freeman do not control for this possible trend -- their periods only control for union
history and economic development in general.
Staber (1989) examined relations between three forms of cooperatives in Atlantic
Canada, and found some commensalistic and some symbiotic effects, but no significant
2
0
The pattern of results is complex, and readers are urged to
consult the original text for a complete exposition of results.
Hannan and Freeman (1987) found that surges in foundings of
industrial unions were associated with an increased founding rate
for craft unions, but there are two competing explanations for
this result which they do not test: either industrial union
organizers contributed something to craft union organizers that
helped them (an unlikely occurrence) or some unmeasured factor --
such as more favorable political conditions for unions --
positively affected them both in the same time period.

35
competitive effects. Increasing density of worker cooperatives had a positive effect on the
foundings of marketing cooperatives, the density of marketing cooperatives was positively
associated with increased foundings of consumer cooperatives, and consumer cooperative density
had a slight positive effect on foundings of worker cooperatives. All other cross-population
relations were insignificant.
Two ecological studies of inter-population processes have measured niche overlap
between populations, but neither examined its effect on foundings. McPherson (1983) examined
competition for members between voluntary associations in Omaha, Nebraska, by measuring the
extent to which they competed for persons with similar ages, occupations, sex, and education.
He examined the actual distribution of organizational members along these four dimensions, and
defined K as the number of potential members with such characteristics in the community. By
making assumptions about the system being in equilibrium, McPherson could estimate the extent
to which voluntary associations were in competition with each other for the same types of
members.
24
Dimmick and Rothenbuhler (1984) carried out a similar sort of exercise in
examining competition between newspapers, radio and television for advertising revenues.
Sources of Capital. To the extent that capital is obtained from formal sources, such as
banks and venture capitalists, it represents an inter-population relationship. Studies show that
formal sources are just not very important in explaining founding rates, even for technology
based organizations (Hart and Denison, 1987; but for an exception, see Delacroix and Solt,
1988). Most entrepreneurs use more informal sources of funding, with their own savings and
that of their families being the most important (Zimmer and Aldrich, 1987). Formal sources of
capital are more important for explaining growth rates than they are for explaining foundings.
Venture capitalists, and other investors, are probably as important for the mediating role
they play in spreading knowledge of effective forms as for their role in funding start-ups (Larsen
24
McPherson is continuing this line of research by trying to
estimate the dynamics of competition, as the population of people
and associations changes (McPherson, 1989).

36
and Rogers, 1988). "Venture capital firms invest their money largely on the basis of the potential
value of an entrepreneur's idea, a collateral that conventional bankers consider worthless" (Larsen
and Rogers, 1988:108). With this commitment to a very risky idea, venture capitalists have a
stake in making sure a young firm has excellent managerial, marketing, and financial talent, as
well as innovative researchers.
The absence of a developed venture capital market can make life hazardous for other
financing organizations that attempt to fulfill their function. In Norway, banks provided large
amounts of capital to new businesses between 1984 and 1987, raising the start-up rate to a very
high level. (This was also a period of very high institutional support for entrepreneurship in
Norway.) Many were financed completely by banks with debt, not equity, financing. The banks,
because they were unfamiliar with start-ups, had no developed procedures for assessing the credit
worthiness of those whom they funded. A majority of the start-ups quickly went bankrupt,
causing very high losses for the banks (Reve, 1990). In Sweden, with government
encouragement, venture capital firms in the 1980s were created by insurance companies which
had no prior experience with such forms, and most failed.
Community Succession. Succession in organizational communities refers to the process
by which declining populations of organizations are replaced by others. The process may take
decades before its effects are visible, and even then, contemporary observers may ignore a
community's past. Botkin's (1988) description of the various populations occupying the Route
128 region of Massachusetts over three centuries is an important lesson for people infatuated
with only its recent history. Populations have come and gone with regularity. "New England's
ice economy, for example, lasted from 1620 to nearly 1870, whaling and the China trade from
1720 to 1880, and textiles and shoes from 1840 to 1940" (Botkin, 1988:118). High technology
blossomed in 1957, with the founding of Digital Equipment Corporation and growth in that
sector continued for several decades, but the bloom may soon be off the rose because of the
impact of foreign competition.

37
Botkin (1988) argued that three lessons could be drawn from the history of Route 128.
First, while business populations rose and fell -- The Boston Ice Company, Waltham Watch, and
United Shoe Machinery -- the financial institutions, banks, and universities -- Harvard, MIT,
State Street Bank -- of the region remained. Second, the succession process took years,
unfolding on a different time scale than transitory government policies. Third, "high tech is no
more stable or unstable than ice, whaling, or shoes" (Botkin, 1988:123). Institutional processes
dominated the evolution of Route 128, a topic that is taken up in the next section.
Community studies often focus on areal organizational fields (Scott, 1987:122), but few
have systematically followed a population of organizations over time to document organizational
succession. Studies of linkages that develop among similar or diverse organizations located
within the same community or region are typically static, not dynamic, and so we have few
accounts of community-level population succession (Galaskiewicz, 1979; Warren, 1973).
Summary. Competitive relations between populations may depress founding rates, but
full competition is only one of at least six possible inter-population relations. Some populations
actually facilitate foundings in other populations, a phenomenon deserving more study that it has
heretofore received in the entrepreneurship literature. Some populations serve as information
channels between populations, such as the role played by venture capitalists in Silicon Valley,
whereas others train workers who then disperse to other populations.
Modelling community-level change is notoriously difficult, and most analyses are either
confined to two-population interactions or qualitative descriptions. Such analyses will require
team work between multiple investigators, and a long-term commitment to building a database.
Institutional Processes
In addition to processes occurring within and between populations of organizations, many
time-dependent processes which affect foundings are taking place in the environment. Some are
dramatic, one-of-a-kind historical events which are earth-shattering in their implications. Others
are mundane, repetitive events which no one notices but whose cumulative effects are
substantial. Institutional factors include: politics and governmental policies, spatial complexes,

38
capital sources, culture, and other events specific to particular periods in history. We discuss
each of these in the following section.
Institutional factors may unfold on a different time scale than intra-population processes,
passing unnoticed by participants whose gaze is fixed on the here and now. For example, Robins
(1987), in his critique of transactions-cost theory, argued that analysts often confuse the social
and political conditions existing at a given time and place, and the economic/organizational
processes unfolding within that socio-political framework. To understand the big picture, we
must pay attention to how the larger socio-political framework evolved. Thus, in criticizing the
priority Chandler (1977) and Williamson (1981) gave to transactions-cost economizing, Robins
argued that the history of the 19th century is not primarily a story of hierarchy displacing
markets, but rather a story of social and political centralization creating the conditions making
large-scale commerce and manufacturing possible. The changes which Chandler (1977)
described were only possible because of changes in the institutional context of big business, such
as those described by Zucker (1986).
Theorizing about the evolution of organizational environments has been hampered by the
differences in scale between studies of societal evolution and population-level changes.
Research on social evolution typically covers centuries, rather than decades, and thus linking
findings from societal and population level research can be difficult. Nonetheless, some progress
is being made. Kieser (1989), for example, has written of the evolution of evolutionary selection
mechanisms, focusing especially on cultural evolution. He pointed out that organizations are a
relatively recent form of social organization, emerging in a distinctive historical period.
Politics and Governmental Policies. Political turbulence is important because it may
disrupt established ties between organizations and resources, freeing resources for use by new
organizations (Carroll et al., 1988; Stinchcombe, 1965). For example, the final step in the
economic unification of the European Economic Community in 1992 will have major effects on
organizations' life chances, removing the last major barriers to trans-European marketing of
goods and services. Existing organizations are organized to operate within a single national

39
space, or across national boundaries. But, they are not necessarily prepared to deal with larger,
multi-national spaces with no formal boundaries. Therefore, we can expect the new conditions to
promote the founding of new forms of organizations.
25
Even stronger effects can be expected
from the reshuffling of the economies of the formerly socialist Eastern European countries in the
early 1990s, including the rise of many new populations.
Delacroix and Carroll (1983) found that newspaper foundings increased during periods of
political turmoil, and not only because more politically-oriented newspapers were formed then.
Turmoil seemed to increase the foundings of all types of newspapers. Carroll and Huo
(1986:851-853) replicated this finding in their study of newspaper foundings in the San Francisco
Bay Area, as political turmoil had a substantial effect on the foundings of all types of papers, not
just political ones.
26
Deregulation of the airline industry substantially raised the founding rate of U.S. airlines
at the end of the 1970s (Kelly, 1988). The airline population is also an example of a rather short
cycle of development. Carrying capacity has been reached within a few years of the deregulation
event, resulting in increased rates of disbandings, acquisitions, and market concentration. West
Germany, as well as other Western European countries, still has a heavily regulated economy,
with rather monopolized markets for scheduled flights. However, in the early 1990s, West
Germany will deregulate its airline industry as well, and thus founding rates may well increase.
Government policies may encourage, through enhanced legitimacy, demand stimulation,
or even direct subsidies, the formation of new forms of organization. Tucker et al. (1990) found
that the foundings of voluntary social service organizations in the Toronto area increased during
the period when the provincial government provided additional funding to that sector. Hannan
25
Jacques Delacroix (personal communication) suggested this as one
possible consequence of European economic integration.
26
Regional labor unrest, by contrast, decreased foundings, perhaps
by raising barriers to entry for new firms (Carroll and Huo,
1986:851).

40
and Freeman (1987), in their study of unions, discovered that union founding rates dropped
sharply after the merger of the AFL and CIO in 1955. However, somewhat surprisingly, the
founding rate for industrial unions did not change significantly as a result of the passage of the
Wagner Act in 1935, which gave extensive legal protection to union organizing activities.
Staber (1989) found that favorable government tax policies had a strong positive effect on
foundings of three different types of cooperatives in Atlantic Canada. By contrast, economic
recessions had no significant effect on foundings. Similarly, Delacroix and Carroll (1983)
discovered that economic variables had no significant effects on newspaper foundings, and
neither did regularly scheduled national elections. Carroll and Huo (1986) also found that
economic conditions (recessions, number of business failures) were not related to newspaper
foundings. Aldrich et al. (1990b) found that the enactment of the National Industrial Recovery
Act in the United States substantially raised the founding rate of business interest associations,
although the effect was short-lived.
To the extent that governments' macro-economic policies affect unemployment rates, they
indirectly affect business foundings. A number of studies have reported a positive association
between levels of unemployment and numbers of foundings. For example, Carroll et al. (1989)
found that the increases in unemployment in Germany raised brewery founding rates, although in
the United States, no statistically significant effect was found. Johnson (1986) and Storey (1982)
investigated the association between unemployment rates, economic growth, and foundings for
England. Boegenhold and Staber (1990) examined the effects of the unemployment rates and the
GNP growth rates on the rates of business founding in ten OECD countries between the early
1950s and 1987. For most countries, they found a significant positive relationship between
unemployment rates and rates of business foundings. The effects of GNP growth rates were less
consistent, but they generally indicated a lower rate of foundings as economic conditions
improved.
27
27
In working with aggregate data, analysts must always be wary of
committing an ecological fallacy. For example, rising
unemployment may be associated with rising self-employment not

41
The U.S. government has been especially active in trying to promote new technology
based firms, as in the semi-conductor industry. Early customers for semi-conductors were
mainly government agencies (Brittain and Freeman, 1980). In Germany, government support for
high technology businesses has encouraged foundings, beginning in the 1980s (Boegenhold,
1987). For example, foundings of science and technology parks by public institutions, such as
communities and governments, as well as private investors, increased in the 1980s. Loans were
provided to high technology companies at especially low interest rates, and research grants from
the Ministry of Research and Technology facilitated start-ups.
Government policies in Latin America provide an illustration of the constraints on
business foundings which governments can impose (de Soto, 1989). De Soto argued that Latin
American law discourages entrepreneurship and does not allow for popular participation in
government. Even though there is enormous entrepreneurial energy in the populations of Latin
American countries, the legal system suppresses it. For example, the Instituto Libertad y
Democracia in Peru calculated that street vendors have to wait an average of 12 years from the
time when they decide to build a market or commercial center until they can actually do so. Nine
years and 8 months of this time are spent complying with bureaucratic regulations and the
remaining 2 years and 4 months is spent on organizing the business itself.
Spatial Complexes: Location and the Spatial Dimension of Founding Rates. For a
perspective grounded in human ecology, the ecological analysis of organizations has had
surprising little to say, so far, about location-based factors affecting foundings. The most
aggressive claims about the importance of location have come from researchers studying
technology-based organizations. Such claims have been in evidence since at least the 1960s, as
in Mahar and Coddington's (1965) advice to communities wishing to promote "scientific
because persons who are unemployed themselves become self-
employed, but rather because high unemployment rates make it more
difficult for people to get jobs which match their abilities and
aspirations.

42
complexes." Bruno and Tyebjee (1982) reviewed 17 research papers which had examined
environmental variables with a possible effect on new venture creation, but they made no attempt
to weight the 12 factors they identified nor to assess the level of empirical support for each across
the studies.
Hart and Denison (1987) developed a very complex, interactive model of how an area
spawns new technology-based organizations, focusing on rates of founding produced by sets of
interdependent factors: technical resources, incubator organizations, group and organizational
processes, and entrepreneurial characteristics. Their model is so complex that it is hard to
envision how it might be tested with available data, but it does highlight some critical factors for
future research.
If start-up rates do differ across areas, the differences need not be very great to be worthy
of analysis. Rates of founding may differ by only a few percent a year across areas, but
cumulated over many years, these small differences eventually make a substantial difference.
Most new businesses are homegrown, rather than founded by migrants. Summarizing
their own research and that of others, Cooper and Dunkelberg (1987:19) noted that people
usually start businesses where they already reside: "The percentage of new companies started
which involved at least one founder who was already working in the area was 90 percent in Palo
Alto, 90 percent in Austin, and 90 percent in England." Pennings (1982) found little support for
the hypothesis that quality of life factors affected firm foundings in 70 metropolitan areas, as
only 4 of 15 tested coefficients were significant in the hypothesized direction.
28
Educational institutions are often identified as sources of ideas and entrepreneurs. Some
writers emphasize the "spin-offs" that occur as scientists leave universities to found their own
firms, but careful study shows the rate is quite low (McQueen and Wallmark, 1982). For the
28
Pennings' study was cross-sectional, not longitudinal, and so he
could not examine rates of business founding. He used global
factor analysis derived scores to measure "quality of life," and
his strongest result was that larger populations of firms
generate larger numbers of foundings than smaller populations.

43
three universities McQueen and Wallmark examined, only about 1 percent of the universities'
scientists left to form companies each year (cf. Rogers, 1986).
Other important features of local environments often cited as affecting founding rates or
the success of new ventures are the number of private, public, or nonprofit research laboratories;
supportive attitudes by local elites, politicians, workers; and a good transportation infrastructure:
highways, airports, trains, buses, etc.; and the structure of social networks (Aldrich and Zimmer,
1986; Hoover, 1948; Thompson, 1965; Vernon, 1960). Clearly, some communities respond
differently to historical trends than others. Youngstown, Ohio, which was economically
devastated by the closing of its steel mills, has not recovered, whereas Provo, Utah, which had
steel and copper firm closings, has bounced back. However, we have few comparative large
scale studies which have documented the extent to which community characteristics affect
foundings (Birch, 1987).
Culture. An interpretive approach may provide a link between research on rates of
founding and research on processes of founding (Aldrich, forthcoming). Rates of founding are
affected by exogenous social, political, and economic conditions. Processes of founding depend
on how actors interpret the macro-level, external conditions. Schultz's (1980:443) definition of
entrepreneurship reflects this view, albeit unwittingly: the demand for entrepreneurship "is a
function of disequilibria. Human agents who perceive and evaluate such disequilibria with a
view of deciding whether or not it is worthwhile for them to reallocate their resources, including
their allocation of their own time, are entrepreneurs."
More research is needed on how societal norms affecting potential entrepreneurs'
interpretations of economic opportunities change over time. In Japan, the nature of economic
activity had to be re-defined before entrepreneurial activity became legitimate in the eyes of the
public. Merchants and capitalists struggled for legitimacy and public respect after the Meiji
restoration in the mid-19th century. They finally succeeded by identifying the interests of big
business with those of the nation. "The traditional Japanese disdain for business was overcome
by making industrialization synonymous with the esteemed value of public service in the face of

44
foreign economic competition. The alien corporate form of organization was made palatable by
characterizing it as a family group which attracted traditional loyalties" (Hirschmeier, 1970:13).
In 19th century America, early life insurance companies' attempts to place a financial
value on human life were rejected (Zelizer, 1978). Life was defined as sacred and above
financial relationships. However, a host of social and economic changes -- especially the spread
of notions of economic risk and speculation -- led people to a growing awareness of the
economic value of life and death, and legitimated the life insurance industry. The
commercialization of death did not remove all the rituals associated with death, as the sacred
symbols associated with disposal of the dead were taken advantage of by the funeral home
industry to secure its niche (Torres, 1988). Changes in the norms regarding acceptable ways to
meet future spouses led to an increase in the number of marriage bureaus in Upper-Bavaria and
Munich during the last few years.
29
Changing values placed on participatory democracy, worker cooperation, and individual
autonomy produced a wave of foundings of alternative organizations in the United States in the
1960s (Rothschild, 1979). Recent evidence indicates the idea of worker ownership is still alive,
although it is more likely to take the form of employee stock ownership plans [ESOPs] in
mainstream companies (Russell, 1985). ESOPs were made possible, in turn, by changes in
government policy regarding the investments allowed for employees' retirement funds.
Similarly, in Germany, the rise of the ecological movement and spiritualism in the past two
decades generated an alternative sector that includes health food shops and fortune tellers
(Boegenhold, 1987).
Educational Institutions and the Media. In her examination of forces promoting diversity
within organization populations and communities, Romanelli (1989) identified several
institutional factors that may influence founding rates, as well as the creation of new forms of
29
This information is based on an oral report by a member of the
Munich and Upper-Bavarian Chamber of Commerce.

45
organizations. Educational institutions create and help spread information about dominant
competencies. Universities, research institutes, and associated programs not only conduct
research but also train persons who are able to exploit the latest research products. Educational
institutions also "formalize and centralize information by establishing courses and degree
programs that train students in basic competences. Once technologies are understood, and
stabilized and identifiable jobs (e.g., computer engineer) emerge in industry, colleges and
universities take over much of the training of skilled personnel" (Romanelli, 1989:230). To the
extent that a generalized competency underlies organizational foundings, the growth of national
educational systems spurs founding rates. To the extent that specific competencies underlie
particular populations, the spread of educational institutions may increase the diversity of
organizational communities.
Mass and specialized media -- television, magazines, journals, newsletters, and
newspapers -- disseminate information within and between populations. Information diffusion
increases the likelihood that potential entrepreneurs will recognize opportunities for combining
old resources in new ways, or at least recognize opportunities in already existing populations.
Summary. Institutional forces probably have their greatest impact when a new form of
organization is emerging, constraining and imprinting the new form in distinctive ways
(Stinchcombe, 1965). Once established, foundings within an organizational population respond
more to intra- and inter-population processes than to institutional forces. Institutional processes,
however, are what give shape to organizational forms, transforming initial differences that may
have emerged by chance into differences with significant social consequences (Hannan and
Freeman, 1986). Thus, researchers studying entrepreneurship need to keep in mind the larger
social forces which are the context for organizational foundings. Because institutional contexts
vary so widely, hypotheses about institutional effects are best developed within the framework of
each specific research project.
CONCLUSIONS

46
Replacing the "traits" approach to entrepreneurship with a "rates" approach, using an
ecological perspective, highlights the salience of organizations as the key component of
environments. Foundings of new organizations are highly dependent upon the events
experienced by already existing organizations in a population and in the larger community of
populations. Intra-population processes -- prior foundings, dissolutions, density, and factors
associated with density -- structure the environment into which foundings are born. Inter-
population processes -- the nature of relations between populations, whether competing or
cooperating, and actions by dominant organizations -- affect the distribution of resources in the
environment and the terms on which they are available to entrepreneurs. Institutional factors --
government policies, political events, cultural norms, and so on -- shape the macro-context
within which other processes occur.
A rates approach also highlights the time-dependent nature of organizational foundings.
Foundings occur within a space-time context in which the order of events is a critical part of the
process. History matters, at the community as well as the population level. The traits approach,
while telling us about the social-psychological features of the founding process, has blurred the
environmental context within which entrepreneurs must interpret and make sense of their actions.
Adding an historical, substantive context to our investigations provides a more comprehensive
understanding of why entrepreneurs behave as they do.
For practitioners, an ecological approach provides a rich set of concepts for organizing
knowledge about the environment of foundings. Knowing how appropriate forms -- r, K,
specialist, generalist -- vary over a population's life cycle, and how they are linked to population
density, adds one more guideline which entrepreneurs can use in making decisions about
foundings.
The methodological demands of the rates approach are daunting: not only must we
collect comprehensive data on founding events, but also on other major events in the society and
on their ordering in time. Our dependence on cross-sectional sample surveys will be difficult to
break, but it will be worth it.

47

48
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