Responses to dependence: A social exchange model of employment practices in entrepreneurial firms

The literature on entrepreneurial firms often presents an image of a powerful entrepreneur or a team, leading the business forward while beholden to some assortment of major customers, regulators, suppliers, and perhaps venture capitalists or other creditors. The image of entrepreneurship seldom includes the contingent connection between entrepreneurial success and the roles played by key early employees.; This study focuses on the dependence of entrepreneurs on early employees. My overall hypothesis is that experiences of dependence on key early employees are important influences on the development of employment practices in entrepreneurial firms, and on firm level outcomes associated with employment practices. This paper conceptualizes small young firms as malleable, and argues that differences in entrepreneurs' perceptions of dependence, causal attributions, and response strategies have important outcomes that can be measured at the level of the firm.; I deduce a series of propositions by combining power-dependence theory with resource dependence theory and transaction cost economics. The propositions predict changes in the criteria by which employees are selected, the timing of new hires, how new hires are recruited, the distribution of skills and jobs as firms grow, how employee behavior is monitored and shaped, and whether incumbent employees feel they are being treated fairly. I avoid an overly-rationalistic image of entrepreneurial behavior by drawing on recent developments in social exchange theory, and on emerging ideas regarding ambivalence. I predict that both trust toward employees and fear of opportunism emerge independently of strategic or rational decision-making processes.; The propositions are tested using a sample of 83 technology-intensive entrepreneurial firms in the Research Triangle and greater Charlotte areas of North Carolina. Most of the propositions are supported, and several are supported very strongly. I also provide suggestive evidence of patterns of emotionally charged normative judgments toward employees on whom entrepreneurs are dependent. This study has important implications for the early strategic management of employment practices in entrepreneurial firms.