SME Management - What Can We Learn from Entrepreneurship Theory?

20 Pages Posted: 7 May 2007

See all articles by Jörg Freiling

Jörg Freiling

University of Bremen - Faculty of Business Studies and Economics


Small business is often regarded as entrepreneurship-driven. There are many reasons for this, e.g.: (1) The entrepreneur as a person plays a much more vital role than in large firms and (2) entrepreneurial spirit is not weakened by considerable hierarchies and can more easily pervade the firm. Welsh & White's (1981) statement on the differences between small and big business seems to apply. Management research, in particular in the area of small business, is by now not sufficiently linked with entrepreneurship theory. However, entrepreneurship theory offers a lot regarding the evolutionary management of SMEs. It is the intention of this conceptual and theory-based paper to scrutinize this linkage and to identify useful insights for the management of SMEs. Entrepreneurship theory is not a homogenous body. We can find research streams in economic theory and in other disciplines as well (e.g. Baum et al., 2007). For the purpose of delineation, this paper deals with the economic theory of entrepreneurship which builds on a long tradition (e.g. the seminal work of Cantillon 1755, for a historical overview: Hébert & Link 1988). This paper intends to identify those parts of entrepreneurship research which help to recognize those entrepreneurial functions being relevant to understand and structure the managerial challenges of the small business and to develop a managerial framework rooted in entrepreneurship theory.

To this end, the paper starts with a literature review identifying the most important strands of entrepreneurship research concerning entrepreneurial functions. The different approaches are scrutinized in order to assess their relevance to SME management.

The paper concludes that a multi-functional approach fits the managerial challenges of the small business best. Based on market process theory an integrated model is developed that addresses all the relevant functions in a commensurable way regarding the fundamental assumptions, the cause and effect structures and the underlying reasoning. The model developed builds on the work of Barreto (1989) and Schneider (1987). It responds to the challenges of system renewal, system exploitation, and system protection as anchor points being particularly relevant to SME management. As a part of the integrated model, the execution of the following functions contribute to coping with the managerial challenges: (1) the innovation function regarding system renewal, (2) the coordination function (internally) and the market-making function (externally) concerning system exploitation, and (3) the risk management function with regard to system protection.

A causal model, developed within the scope of the paper, proposes that the situation-specific mix of the entrepreneurial functions explains the entrepreneurial performance of the firm which explains the strategic and financial performance of the small firm. By the help of this model, it is possible to identify managerial challenges connected with the execution of the respective functions as well as the management of a specific situation the small firm is in.

Keywords: SME, Entrepreneurship theory, entrepreneurial functions

JEL Classification: M13, M21

Suggested Citation

Freiling, Jörg, SME Management - What Can We Learn from Entrepreneurship Theory?. Available at SSRN: or

Jörg Freiling (Contact Author)

University of Bremen - Faculty of Business Studies and Economics ( email )

Wilhelm-Herbst-Str. 5
Bremen, D-28359
++49 421 218 66870 (Phone)
++49 421 218 66902 (Fax)


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