The Downside of Social Capital in New Industry Creation

Abstract

In this article we develop and test the hypothesis that social capital, defined as a regional characteristic, discourages entrepreneurship in a new and contested industry. The argument follows the logic that high levels of social capital reinforce conformity in values and ideas, and inhibit deviant entrepreneurial activity. Once an industry becomes more legitimized—as a result of an increase in the number of firms present in a region—social capital becomes less restrictive on entrepreneurship and can even have a positive effect on the subsequent number of firms founded in a region. We find evidence for our thesis using data on 1,684 firm entries in the US video game industry for the period 1972–2007.