Instrumental Value Theory and the Human Capital of Entrepreneurs

Eli Gimmon and Jonathan Levie

Eli Gimmon is a Lecturer at Tel-Hai Academic College, Israel and Jonathan Levie is a Reader in the Hunter Centre for
Entrepreneurship, University of Strathclyde. The authors would like to thank the two anonymous reviewers and the
editor of the Journal of Economic Issues for their comments.

Abstract:

Given the contribution of Schumpeterian entrepreneurship to technological

progress and well-being, the accuracy of investment decisions by venture capitalists is a

societal issue. Venture capitalists find the human capital of entrepreneurs difficult to assess.
This paper employs instrumental value theory to assess the value of different human capital
factors to the performance of new ventures. A meta-analysis of 29 previous empirical studies
that examined the effect of founders human capital on new venture performance suggested
that instrumental value theory holds promise as a guide for research on entrepreneurs
human capital and new venture performance. It could also help venture capitalists to make
better investment decisions, benefiting society in general.

Keywords: instrumental value theory, entrepreneurship, human capital

JEL Classification Codes: B25, B52, L26, M13, M21

In institutional economics, entrepreneurs are seen to play a critical role in the conversion of
technological progress into economic development and human well-being (McDaniel 2003;
2005; Klein 1988). Although Alfred Marshall and Thorstein Veblen recognized this in the 19 th
century, Joseph Schumpeter (1934; 1943) was the first to describe the role of innovative
entrepreneurs in the evolution of the economy in detail. Schumpeterian entrepreneurs
disrupt the status quo by introducing new and better ways of doing things. This typically
requires considerable investment of resources to succeed (see Javary 2004 for an example).
For a new venture with little internal financial reserves to draw on, this means external

funding. As Schumpeter himself pointed out, credit is primarily necessary to new

combinations (Schumpeter 1934, 70).
At the extreme end of Schumpeterian entrepreneurship are new ventures that are so
innovative and asset-poor that conventional debt finance is not appropriate. A completely
different form of funding is required, one that shares in the upside gain but also accepts the
downside risk. This is venture capital. To illustrate how unusual this form of financing is, only
around 8% of American start-up funding needs are met by venture capital (Reynolds 2007).
Of the 2 million or so start-up attempts in the United States each year, only around 800 are
invested in by venture capitalists, yet venture-capital-backed firms provide 8% of jobs in U.S.
businesses (Shane 2008). Availability of external capital, then, is a critical institutional factor
for Schumpeterian entrepreneurship.
The accuracy of venture capitalists in picking which Schumpeterian entrepreneurs to
back is a societal issue, since poor judgment will lead to a loss of the benefits that society
can reap from technological progress. Not only will society not gain from the innovations
these Schumpeterian entrepreneurs seek to introduce, but the venture capitalists will find
their sources of capital drying up as their losses induce fund managers to invest their money
elsewhere. Much decision-making in venture capital is based on intuition and herd behavior
(Zider 1998). A wide range of evidence suggests that the accuracy of venture capitalists
predictions is not high, with a small number of spectacular successes boosting the return
rates of some funds and masking a low overall hit rate in the industry (Zacharakis and
Meyer 2000). Indeed, following poor returns, investment in seed and early-stage private
sector venture capital funding has been in relative decline recently, particularly in Europe
(Jskelinen, Maula and Murray 2007). In summary, given the economic importance of
Schumpeterian entrepreneurship and its dependence on substantial equity funding,
investment choice by venture capitalists is worthy of attention, particularly given the interest
of institutional economists in value and judgment.
Venture capitalists invest based on their judgment of the human and social capital of the
entrepreneur(s), the potential in the technology and the potential in the market (Zacharakis

and Shepherd 2005). One of the most difficult issues for many venture capitalists is
assessing the human capital of the founder (Levie and Gimmon 2008). Human capital
(Becker 1975) has more generally been recognized as a key success factor in new venture
performance (Stuart and Abetti 1987; Hart, Stevenson and Dial 1995). A surprising feature of
the human capital literature is that there appears to be no ex-ante method of predicting
which of the different forms of human capital commonly employed in the entrepreneurship
literature, and by investors in new ventures, might be expected to have an effect on
performance. In other words, no commonly accepted theory is routinely used to sort or
classify founders human capital factors ex-ante as relevant or irrelevant to venture
performance.
We propose the use of instrumental value theory as interpreted by J. Fagg Foster (Tool
1993a; Ranson 2008) as a tool for ex-ante prediction of the effect of different forms of
human capital on new venture performance. In this article, we test its ability to predict
performance through a meta-analysis of published empirical studies of founders human
capital and performance. We argue that the use of instrumental value theory is valid in this
case because accurate choice of Schumpeterian entrepreneurs by venture capitalists is in
the interests of society generally, not just venture capitalists.
As Baldwin Ranson (2008) has remarked with specific reference to instrumental value
theory, applicability is the final test of the correctness of theories. Although applying
instrumental value theory as an aid to ex-ante prediction might appear to violate Deweyan
principles that context is key (Dewey 1939; Gordon 1990) and that instrumental value is
dynamic (Klein 1988), we argue that by applying it in the narrow case of new venture
performance, and remaining sensitive to alternative interpretations, some degree of useful
generalization is possible. We find the instrumental criterion helpful as a way of ordering, as
a first approximation, the value of different forms of human capital to Schumpeterian
entrepreneurship, while recognizing that this approach has its critics.
This study aims to make a contribution to instrumental value theory through illustrating
its value in classifying human capital that is useful for predicting new venture performance.

This is important because there are many forms of human capital, and a classification
enables a theory-driven focus on the human capital that really matters in a particular
context. The paper also answers a call for further meta-analysis in economics (Pressman and
Montecinos 1996, 879). A third contribution is to suggest how the instrumental value
framework can guide further research in areas that have not been addressed before, for
example by separating out the instrumental and ceremonial value of social capital factors
such as reputation.

Instrumental Value Theory and New Venture Performance

Veblens recognition of the importance of technological innovation to social progress, and

how such progress can be hindered, is a central concern of institutionalism. One way in
which progress can be hindered is what Clarence Ayres (1961, 31) refers to as ceremonial
adequacy, a kind of imitation of technological adequacy. He illustrated this with the
following example: The tribal medicine man purports to be altering the course of events in
imitation of the tool activities by which technicians really do alter the course of events.
Recognizing it makes possible a clear differentiation of technological reality from ceremonial
fantasy, and so the real values from fancies, or pseudo values.
These ideas were built on by Foster and refined by Marc Tool into the notion of an
instrumental value principle, with pre-defined ends: preservation of the species (the
continuity of human life) and meritocracy (non-invidious re-creation of the community),
and means: the instrumental use of knowledge (Tool 1979, 293). As an aid to employing
this principle in analysis, Bush and Tool (2003) introduced the concepts of instrumental value
and ceremonial value. They define factors with instrumental value as tools or skills
employed in the application of evidentially warranted knowledge to problem-solving
processes. Ceremonial values provide the standards of judgment for invidious distinctions,
which prescribe status, differential privileges, and master-servant relationships, and warrant

the exercise of power by one social class over another (Bush 1987, 129). In other words,
factors with ceremonial value are defined as status symbols or labels.
Instrumental value theory in application, as proposed by Tool, has been criticized as
ambiguous (Samuels 1995, 99), and as little more than value judgment based on two
desirable conditions, when other equally desirable conditions might have been chosen
instead (Gordon 1990). In turn, these criticisms have been refuted by Tool (1990) with the
argument that the criteria of instrumental value theory are neither absolute nor eternal; they
are normative objects of inquiry. Tool regarded the instrumental value principle a product of
inquiry and subject to revision or abandonment by further inquiry. It has no standing except
as a construct for inquiry and as a tool for analysis and judgment. Its relevance is repeatedly
tested by its incorporation in, and guidance of, inquiry and its use as a judgmental standard
in problem solving . . . It is derived exclusively from the experience continuum of people
and . . . it articulates what often has historically been meant by progress, reform, or
betterment (1110). Supporting this view, Bush has noted that a particular activity or
behavior may have either instrumental or ceremonial significance, or sometimes it may
possess both ceremonial and instrumental significance (Bush 1987).
While the argument over the validity of the Bush/Tool approach to instrumental value
theory has never been satisfactorily resolved, there is general agreement that what is
instrumental in one context might be ceremonial in another. Thus, value judgments are
context-dependent. For any particular context, a judgment that an attribute is ceremonial or
instrumental is continually subject to review as the priorities and knowledge of society
changes. This should not prevent the application of instrumental value theory, but rather it
makes any conclusions tentative and subject to review. For our purposes, the principal merit
of the value dichotomy is that it forces us to ask what is the instrumental value of this
characteristic, and not accept the face validity, so to speak, of a label. Instrumental value
theory has been applied to a range of economic issues, including pricing in the international
petroleum industry (Tool 1993b), the granting of intellectual property rights to innovators

(Adkisson 2004), timber resource use in Maine (Welcomer and Haggerty 2007), and
government and household deficits (Todorova 2007).
Few attempts have been made to link institutional economics to non-cognitive human
capital, that is, personal human resources rather than personality resources. One of these is
Figart (2003), who examines institutional policies that provide non-invidious employment.
While the original focus of Veblen (1899), appropriate to his time, is invidious distinctions
between the leisure classes and the working classes, Deborah Figart elaborated on
ceremonial distinctions based on gender, race-ethnicity, class identity, nationality, or sexual
preferences. She employed the instrumental value theory to seek greater understanding of
human capital development.
A second example, from the field of entrepreneurship (Gimmon 2006), explores how
investors appeared to invest in entrepreneurs who did not have the relevant knowledge and
experience of growing a new venture, but did have high credentials and awards from
academia. These academic credentials did not predict subsequent performance, when
relevant knowledge and experience (which did predict subsequent performance) were
controlled for.
This paper employs instrumental value theory to assess the value of different human
capital resources1 of venture founders in terms of their likely effect on subsequent venture
performance. In other words, we use instrumental value theory as a thinking device to work
through the likely effect of different types of human capital on new firm performance. We
then test whether this method is better than chance (the simplest alternative means) by
conducting a meta-analysis of different studies of human capital and new venture
performance. This represents our attempt at an instrumental evaluation, or an assessment of
the effectiveness of the instrument used to achieve the purpose relative to some alternative
means (Gordon 1990). Using this theory we can posit that any specific type of founders
human capital has instrumental value if it contains the means and abilities for enhancing
performance of the founders venture.

Bush and Tools concept of ceremonial value is worth defining in this context. If a
particular type of founders human capital does not contain the means and abilities for
enhancing performance of the founders venture, but is nevertheless used in practice as a
measure of human capital, and expected by third parties in society such as financial
investors to influence performance, then in the Bush/Tool formulation of instrumental value
that characteristic has ceremonial value.
While ceremonial criteria are generally seen in the institutionalist tradition as invidious
from a societal perspective, John Meyer and Brian Rowan (1977, 351) suggested that

(c)eremonial criteria of worth . . . are useful to organizations: they legitimate

organizations with internal participants, stockholders, the public, and the state . . .
The incorporation of structures with high ceremonial value, such as those reflecting
the latest expert thinking or those with the most prestige, makes the credit position
of an organization more favorable. Loans, donations, or investments are more easily
obtained.

While this may be true for the organization, it is not true for society in general. Once
performance becomes disconnected from means and abilities, and becomes dependent on
ceremonial, tribute-paying, and rent-seeking, then productive entrepreneurship becomes
unproductive (Baumol 1990) and the provision of resources such as venture capital to the
entrepreneurial function becomes needlessly inefficient from a societal perspective.
In summary, instrumental value theory would appear to be a useful tool to identify which
human capital factors might affect new venture performance and which might not.

A Test of Instrumental Value Theory

As Foster pointed out, the building of a generalization and the process of verification
through application [are] not separate, nor can either exist without the other (Foster 2007,

88). In this spirit, a meta-analysis of previous empirical studies of human capital and venture
performance was conducted to assess the value of instrumental value theory in classifying
ex-ante the instrumental value of different forms of founders human capital. Meta-analyses
are still relatively rare in the economic literature, despite Steven Pressman and Veronica
Montecinos (1996, 879) call for meta-analysis as a way of breaking down barriers between
different schools of thought and extracting further understanding from existing empirical
work. Meta-analysis is a set of statistical procedures designed to accumulate results across
independent studies that address a related set of research questions (Hunter, Schmidt and
Jackson 1982). The accumulation of results across different studies provides more accurate
representation of the population relationship than is provided by individual study estimators.
Meta analysis derives generalization and practical simplicity from studies that are not the
same by ignoring distinctions among the studies that make no important difference (Glass,
McGaw and Smith 1981).
We identified 12 different human capital factors of new ventures founders that had been
proposed in previous empirical studies as affecting the performance of their ventures. We
then used instrumental value theory to classify each factor as having instrumental value or
not in this context. After this, we noted the extent to which each of these factors actually
predicted venture performance in those studies. We expected the founders human capital
factors that were classified ex-ante as having instrumental value to positively affect venture
performance and the founders human capital factors that were classified ex-ante as not
having instrumental value to have no effect on venture performance. Finally, we tested the
outcomes using a statistical test to confirm that the difference in proportions of factors
judged ex ante to be instrumental or not and factors found ex post to affect performance or
not were not due to chance. This methodology ensured that we would not succumb to
tautology, in other words that we would not define our constructs on the basis of outcomes.

Founders Human Capital Resources

Following an extensive literature search, we reviewed 29 empirical studies of new venture

performance that included human capital variables. These studies represent all significant,
cited, empirical work on the relationship between founders human capital and new venture
performance up to early 2007. The reviewed studies are (by chronological order of year of
publication): Rothwell et al. (1974); Cooper and Bruno (1977); Maidique and Hayes (1984);
Maidique (1986); Stuart and Abetti (1987); Goslin (1987); Perry, Meredith and Cunnington
(1988); Dubini (1990); Bruderl, Preisendorfer and Zeigler (1992); Reynolds (1993); Cooper,
Gimeno-Gascon and Woo (1994); Lussier (1995; Lussier and Pfeifer 2001); Yusuf (1995); Hart,
Stevenson and Dial (1995); Bamford, Dean and McDougall (1996); Low and Abrahamson
(1997); Gartner, Star and Bhat (1998); Gadenne (1998); Shepherd, Douglas and Shanley
(2000); Baum, Locke and Smith (2001); Shane and Stuart (2002); Kakati (2003); Florin
Lubatkin and Schulze (2003); Brown and Hanlon (2004); Lee and Lee (2004); Schwartz,
Harms, and Grieshuber (2005); Lee and Chang (2005), Gimmon (2006), Hsu (2007).
These studies tested the performance of new ventures as measured by monetary
indicators (such as growth of sales profits), or by market share, or if these kinds of indicators
were premature then performance was indicated by survival versus discontinuity of the
venture. All of these criteria for performance are commonly used in the literature of
entrepreneurship as measures of venture performance; each has flaws and no one measure
has emerged as the best measure of performance for new ventures. Most of the studies used
quantitative techniques to analyze the data, which was either primary data of a chosen
sample or secondary data. A human capital factor was considered to affect venture
performance if multivariate statistical analysis showed an independent (that is, controlling
for other factors) association with a p value of .05 or less, a cutoff value that is commonly
used in the social sciences to identify associations that are highly likely (in a statistical
sense) to be systematic. The 29 studies covered a wide range of industry sectors in
developed economies, and over one third of the cohorts (11) were in high technology
sectors.

Upon reviewing these 29 studies, we classified all their tested individual variables that
measured different aspects of founders human capital into as few types as possible by
comparing the definitions of the variables. We preserved the original terminology used in the
literature as far as possible. This resulted in 12 different types being identified. These 12
founders human capital factors are (in alphabetical order) as follows:

1.

Academic titles (doctor or professor)

2.

Age

3.

Education

4.

Entrepreneurial mind-set this is a commonly used term in the literature for a wide
range of entrepreneurial personality, culture and sense factor constructs.

5.

Ethnicity

6.

Founders team compatibility

7.

Gender

8.

General management experience

9.

Industry-related experience

10. Learning ability

11. Parent(s) were entrepreneurs
12. Start-up experience

Next, using instrumental value theory, we categorized these 12 human capital factors as
having instrumental value or not having instrumental value in the context of new venture
performance. Instrumental value relates to tools and skills that are employed in the
application of knowledge to problem-solving processes (Bush 1983, 37). These tools and
skills are resources containing the required means and abilities for achieving the goals or
leading to the desired results. Instrumental value is rooted in causal comprehension of
events and consequences (OHara and Tool 1998, 7). Contextualizing this general definition,
human capital factors having instrumental value would be those that are applied in problem-

solving processes containing the means and abilities for enhancing venture performance,
which are those tools and skills containing the required means and abilities for achieving the
founders goals for the new venture. Looked at in this way, the factors listed above that
possess these qualities are easily identifiable. They are those that denote relevant skills,
knowledge or experience, such as prior industry experience, management experience, startup experience (provided learning had taken place), founding team compatibility (this would
facilitate the application of relevant experience and knowledge of different team members),
learning ability (since venture creation is an iterative process) and perhaps aspects of
education, and entrepreneurial mind-set, where relevant. We labeled these as having
instrumental value, and following the theory we predicted that all of these should have
positively affected venture performance in all empirical studies.
All other factors were classified by default as not having instrumental value. As pointed
out by Bush and Tool, certain characteristics of individuals have no instrumental value but
may nevertheless be valued by society. This can result in a misallocation of resources, a
central concern of instrumental value theorists (Tool 1993b). We note that some of these
non-instrumental factors, which Bush and Tool might label ceremonial by virtue of their
value by society, might correlate weakly with certain instrumental factors, such as relevant
experience or social capital (Honig, Lerner and Raban 2006; Baron and Markman 2000). If the
effects of these underlying factors of instrumental value are not controlled for in assessment
of human capital, these ceremonial factors might be interpreted by others (including
providers of finance and researchers) as signals of instrumental value.
As an example, education might be measured using metrics of instrumental value, for
example training in a relevant technology or management skill, or with a proxy measure,
such as academic title, which might well have no instrumental value independent of its
association with education. Parents were entrepreneurs may be a weak proxy for
entrepreneurial mindset or industry, general management, or start-up experience. Age is
often used as a proxy for experience, ability, and physical condition (Cooper and GimenoGascon 1992). However, youth can have high ceremonial value in some societies and old age

10

can have high ceremonial value in others. Gender can transmit very different ceremonial
messages in different cultures, as well as being a weak proxy for experience (Lerner, Brush
and Hisrich 1997; Carter et al. 2007). These examples serve to illustrate the value of
instrumental value theory in sharpening value judgment. With instrumental value theory, the
dangers of proxy measures are revealed.
In summary, the founders human resources employed in previous studies of new
venture performance that we considered to have instrumental value are (in alphabetical
order):

education;

entrepreneurial

mind-set;

founders

team

compatibility;

general

management experience; industry related experience; learning ability; and start-up

experience. Those considered as not having instrumental value were: academic titles; age;
ethnicity, gender; and parents were entrepreneurs. Our next step was to identify which
factors significantly enhanced new venture performance in all the studies in the metaanalysis, and to analyze any patterns that emerged from a comparison of instrumental and
non-instrumental factors. The results of this analysis are reported in the next section.

Results

Table 1 cross-tabulates the factors and studies used in the meta-analysis and for each study,
the table shows whether each factor was measured and if so whether it was found to
significantly enhance new venture performance.

Insert Table 1 about here

As Table 1 shows, only half of these factors have been tested by more than a handful of
studies, and only two of these, education and founding team compatibility, show
overwhelming consensus on an effect. We return to the issue of model specification below.
Table 2 presents the pattern of ex-ante classification of human capital using instrumental
value theory and ex-post classification of those human capital factors that enhanced

11

performance and those that did not. Meta-analysis of the findings of the 29 previous
empirical studies tends to support our a-priori classification. Of the total of 85 tests of
independent effects of one of these factors on performance, 69 were on factors we classified
ex-ante as instrumental, and 16 were on factors we classified ex-ante as not instrumental. Of
the 69 tests on instrumental factors, 53 were significant and 16 were not, a ratio of 3.3:1. Of
the 16 tests on non-instrumental factors, 8 were significant and 8 were not, a ratio of 1:1.

Insert Table 2 about here

In all, over three-quarters of the tests on instrumental value factors showed significant
independent effects, while only half of the tests on non-instrumental value factors showed
significant independent effects.
A statistical chi-square test of all significant and non-significant factors in the 29
previous studies confirmed that the probability of finding this pattern due to chance,
assuming the tests were all independent, was 0.0318, or around 3 in 100. This is within the p
< .05 cut-off traditionally deemed in the social sciences as evidence of a systematic
association between variables when employing statistical tests. This test assumes
independence of observations (in this case, each test of an independent effect counts as one
observation). Our test violates this assumption since each observation is nested in one of 29
different multivariate analyses, each of which in turn varies by number of factors and
number of non-human capital factor control variables employed. Another option would be to
choose a series of comparisons of one instrumental factor and one non-instrumental factor at
random, test for significance, repeat, and test the pattern that emerges. A series of ten such
tests using a table of random numbers and Fishers exact test drew ten successive nonsignificant results. This does not support the case that using instrumental value theory would
produce a better than chance prediction ex-ante.
This result prompted us to reflect the patterns in Table 2 back on the patterns in Table 1.
We found that every study that tested for effects of non-instrumental factors failed to test all

12

instrumental factors with which these non-instrumental factors might reasonably be

expected to correlate weakly. In other words, the independent effects or separate influences
of the factors we classified as non-instrumental were not fully revealed by these studies. For
example, the Reynolds 1993 study measures gender effects without measuring management
experience. It finds gender to have a significant effect. The Cooper, Gimeno-Gascon, and
Woo 1994 study, Lussier 1995 study and Lussier and Pfeifer 2001 study measure parental
effects without measuring start-up experience. They find parental effects to be significant.
The Schwartz, Harms, and Grieshuber 2005 study finds age and gender to be significant
factors, but it only includes two out of the seven instrumental value factors in its model.
While it is not possible to know what the results of these studies would have been had
they measured all 12 human capital factors instead of some of them, instrumental value
theory would lead us to suggest that at least some of the significant results for noninstrumental value factors may be due to non-measurement of weakly correlating
instrumental factors.
In Table 2, the non-instrumental factor with the greatest proportion of significant to nonsignificant studies is gender. The effect of gender on venture performance has been much
studied. Possible explanations for womens apparent lower rate of success in growing new
businesses include gender differences in choice of industry, a lower average quantity of
industry, management and start-up experience due to different labor market experiences
associated with gendered family responsibilities, and different socialization experiences of
males and females resulting in a lower quantity and/or quality of instrumental social capital
among female entrepreneurs (Lerner, Brush and Hisrich 1997; Manolova et al. 2007).
Although gender discrimination by lenders has also been suggested as a cause (Cooper,
Gimeno-Gascon and Woo 1994, 389), studies suggest that the independent effect of the
gender of loan applicants is modest (Carter et al. 2007). Again, this literature suggests that
had researchers controlled for instrumental factors, thereby measuring the independent
effects of factors we classified as non-instrumental, their results for non-instrumental factors
might have been different.

13

Conclusion

In this study, instrumental value theory was employed to provide better assessment of
founders human capital and to facilitate a deeper understanding of the contribution of
founders personal resources to venture performance. The usefulness of the theory in
addressing the research questions posed is demonstrated by the correct prediction of 72% of
associations between different forms of human capital and performance in a meta-analysis of
29 empirical studies. Secondly, it suggests that those studies that found significant effects
for factors we classified ex-ante as non-instrumental may have done so because of underspecification of their models. We conclude that much better specification of models is
required if empirical research on human capital and new venture performance is to progress.
The classification should also be of value to investors as they seek to assess the human
capital of founders. Some founders may wish to offset weaknesses in their instrumental
human capital by displaying high levels of ceremonial capital. As a specific example, one
could imagine a scenario where an entrepreneur who does not have the relevant knowledge
and experience of growing a new high technology venture would present his high credentials
and awards in different fields in order to convince investors he is capable of growing a
successful new venture. Time-poor investors can be tempted to take assessment shortcuts,
such as assuming that a high technology new venture founder with an academic title has the
necessary technical experience without actually checking this (Levie and Gimmon 2008).
Utilizing instrumental value theory could help investors to better predict new venture
performance. For example, when a Boston Venture Capitalist says entrepreneurs from
Ottawa get attention (Mason, Cooper and Harrison 2002, 274), he is using the founders
origin as a proxy for attributes related to their human and social capital. Instrumental value
theory would guide financial investors to check founders human and social capital more
directly.

14

Finally, the use of instrumental value theory in this context would benefit society, by
directing resources more accurately to founders with high instrumental human capital. This
would increase the rate of Schumpeterian entrepreneurship and, as a result, technological
progress.

Limitations and Further Research

In this article we considered only human capital factors and not social capital factors. Further
work could address this issue. Instrumental value theory would classify social capital that is
employed in new venture creation and management as instrumental. However, it warns us
that, just as in the case of human capital, the use of status symbols as proxies for social
capital could misallocate resources. For example, scientist-founders can bring reputation to
the venture (Murray 2004), and reputation influences investors (Harrison, Cooper and Mason
2004). Certain commonly used measures of reputation in business, such as the perceived
prestige of the founders alma mater in the United States, honors such as a Nobel Prize in the
United States or a knighthood in the United Kingdom, or army rank such as a retired general
in Israel, appear from an instrumental value theory perspective to be ceremonial in nature;
they may or may not correlate with instrumental factors such as the quality of the founders
social network or technical skills. As Peteraf (1993, 187) has pointed out, a brilliant Nobel
Prize winning scientist may be a unique resource, ( . . . but . . . m)anagers should ask
themselves if his productivity has to do, in part, with the specific team of researchers of
which he is a part. We suggest further research could apply the theory of instrumental value
to founders social capital and tease out the ceremonial value of reputation from its
instrumental value. We predict that if the instrumental factors of human and social capital
are fully controlled, the ceremonial nature of status symbols will in turn be fully revealed.

Note

15

1.

We employ the term resource in the same way as resource-based theory employs it as something potentially
valuable to the firm and which might contribute to its competitive advantage (Alvarez and Busenitz 2001, 756).

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