Sometimes we build theory by observing phenomena and sometimes we use existing theories to explain the phenomena we observe.  I’ve been reviewing “theories of the firm” recently and am beginning to form some ideas about how these theories can be used to explain the differences between small business incubators and arts incubators, a topic I study with some intensity.  This is a blog rather than an academic paper.  As such it is a rather blunt instrument for explaining theory, but enables me to do so in short and simple terms.  Thus, put bluntly, theories of the firm are of four types:

1. Traditional theory of the firm: firms form to maximize profit
2. Transaction cost theory of the firm (Coase, Williamson): firms form to minimize transaction costs
3. Behavioral theory of the firm (March and Cyert): firms form as decision-making structures rather than for achievement of a specific goal
4. Knowledge-based theory of the firm (Grant): firms form to share specialized expert knowledge

These theories are not mutually exclusive and some view them as complementary.

If we consider a specific firm type, the incubator, we can see some distinctions in the extent to which each theory applies to business incubators versus arts incubators.  All – or at least most – incubators offer shared business services. Cooperative marketing efforts, for example, reduce marketing transaction costs for incubator clients; the transaction cost theory can be applied across incubator type.  However, the extent to which profit maximization is prioritized versus, for example, knowledge sharing varies.  According to the National Business Incubator Association, a small business incubator “aspires to have a positive impact on its community’s economic health by maximizing the success of emerging companies.”  The success of such incubators is measured in jobs created and capital attracted, reflecting specific profit maximizing goals.  The goals of arts incubators, however, may very well not be profit maximization. In fact, I’ve found that more than half of all arts incubators do not focus on profit maximization but rather on the production of art or support for specific communities.  Sharing expert knowledge, however, is an almost universal activity in arts incubators, so a knowledge-based theory of the firm applies.

As my research continues, I hope to be able to develop a clearer theory of what an arts incubator – and by extension arts entrepreneurship – IS, rather than merely decrying what it IS NOT.

[UPDATE: A theoretical framework was published in 2015: “Means and Ends: A Theory Framework for Understanding Entrepreneurship in the US Arts and Culture Sector,” Journal of Arts Management, Law, and Society, 45 (4), 227-246.]