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Entrepreneurship Theories

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Some of the important theories of entrepreneurship are:

  1. Economic theory of entrepreneurship
  2. Sociological theory of entrepreneurship
  3. Psychological theory of entrepreneurship
  4. Harvard school theory of entrepreneurship
  5. Leibenstein’s x-efficiency theory of entrepreneurship
  6. Dynamic entrepreneurship innovation theory
  7. Theory of high achievement of entrepreneurship
  8. Theory of change of entrepreneurship
  9. Theory of profit of entrepreneurship
  10. Theory of adjustment of price of entrepreneurship
  11. Theory of market of entrepreneurship
  12. Theory of social change of entrepreneurship
  13. Theory of entrepreneurial supply of entrepreneurship
  14. Trait theory of entrepreneurship
  15. Theory of cultural values of entrepreneurship

Theories of Entrepreneurship

The following theories of entrepreneurship enunciated by the social scientists from time to time are briefly discussed below:

  1. An Economic Theory
  2. Leibenstein’s X-efficiency Theory
  3. Dynamic Entrepreneurship Innovation Theory
  4. Harvard School Theory
  5. Theory of High Achievement
  6. Theory of Change
  7. Theory of Profit
  8. Theory of Adjustment of Price
  9. Theory of Market
  10. Theory of Social Change
  11. Theory of Entrepreneurial Supply
  12. Theory of Personal Resourcefulness
  13. Theory of Cultural Values

1. An Economic Theory:

Mark Casson, in his book, The Entrepreneur — An Economic Theory, presented a functional definition of the entrepreneur and considered why the entrepreneurial function is so valuable. He emphasised that the demand for entrepreneurship stems from the need to adjust to change, and that the supply of entrepreneurship is limited firstly, by the scarcity of the requisite personal qualities, and secondly, by the difficulty of identifying them when they are available.

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He suggested that there are four main qualities which are crucial for a successful entrepreneur of which one — imagination — is almost entirely innate. The other three qualities may be enhanced. The problems encountered in screening for these qualities, and in enhancing the ones that are deficient, have a number of important implications for the development of a successful entrepreneurial career.

2. Leibenstein’s X-Efficiency Theory:

This theory, originally developed for another purpose, has recently been applied to analyse the role of the entrepreneur. Basically, X-efficiency is the degree of inefficiency in the use of resources within the firm: it measures the extent to which the firm fails to realise its productive potential.

For a given set of inputs, productive potential is identified with the point on the Neoclassical production frontier. X-efficiency arises either because the firm’s resources are used in the wrong way or because they are wasted, that is, not used at all.

Leibenstein identifies two main roles for their entrepreneur. The first role is input completion, which involves making available inputs that improve the efficiency of existing production methods or facilitate the introduction of new ones. The role of the entrepreneur is to improve the flow of information in the market.

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The second role, gap filling, is closely asking to the arbitrage function emphasised by Kirzner Leibenstein provides a very vivid description of gap filling, visualising the economy as a net made up of nodes and pathways.

3. Innovation Theory of Entrepreneurship (Schumpeter Theory of Entrepreneurship)

A dynamic theory of entrepreneurship was first advocated by Schumpeter (1949) who considered entrepreneurship as the catalyst that disrupts the stationary circular flow of the economy and thereby initiates and sustains the process of development. Embarking upon ‘new combinations’ of the factors of production — which he succinctly terms innovation — the entrepreneur activates the economy to a new level of development.

The concept of innovation and its corollary development embraces five functions – (i) Introduction of a new good, (ii) Introduction of a new method of production, (iii) Opening of a new market, (iv) Conquest of a new source of supply of raw materials and (v) Carrying out of a new organisation of any industry.

Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of innovation included the elements of risk taking, superintendence and coordination. However, Schumpeter stressed the fact that these attributes unaccompanied by the ability to innovate would not be sufficient to account for entrepreneurship.

4. Harvard School Theory:

According to the Harvard School entrepreneurship comprises any purposeful activity that initiates, maintains or develops a profit-oriented business in interaction with the internal situation of the business or with the economic, political and social circumstances surrounding the business. This approach emphasised two types of activities – the organisation or coordination activity, and the sensitivity to the environmental characteristics that affect decision making.

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Another exposition of the Harvard tradition is that of Leibenstein (1968) who emphasised activities such as searching and evaluating economic opportunities, mobilising resources necessary for the production process, connecting different markets and creating or expanding the firm.

Despite its stress on the human factor in the production system, the Harvard tradition never explicitly challenged the equilibrium-obsessed orthodox economic theory. This was challenged by the neo-Austrian School who argued that disequilibrium, rather than equilibrium, was the likely scenario and as such, entrepreneurs operate under fairly uncertain circumstances. The essence of entrepreneurship consists in the alertness of market participants to profit opportunities.

A typical entrepreneur, according to Kizner (1979) is the arbitrageur, the person who discovers opportunity at low prices and sells the same items at high prices because of inter-temporal and inter-spatial demands.

5. Mcclelland Theory of Entrepreneurship:

McClelland identified two characteristics of entrepreneurship, namely, doing things in a new and better way and ‘decision-making under uncertainty.’ He stressed the need for achievement or achievement orientation as the most directly relevant factor for explaining economic behaviour. This motive is defined as the tendency to strive for success in situations involving an evaluation of one’s performance in relation to some standard of excellence.

People having a high need for achievement are more likely to succeed as entrepreneurs. McClelland explains the entrepreneur’s interest in profits in terms of a need for achievement. People with high achievement (N-Ach) are not influenced by money rewards as compared to people with low achievement. The latter types are prepared to work harder for money or such other external incentives. On the contrary, profit is merely a measure of success and competency for people with high achievement needs.

6.Theory of Change:

Young conducted the Thematic Apperception Test (TAT) on a group of entrepreneurs. The test revealed the tendency to describe the situation as a problem to be solved, an awareness of pragmatic effort required, confidence in their own ability, to solve the problem and a tendency to take the viewpoint of each individual in turn and analyse the situation as he might see it before suggesting an outcome.

Young’s theory is a theory of change based on society’s incorporation of reactive subgroups.

A group becomes reactive when the following three conditions coincide:

  1. When a group experiences low status recognition;
  2. When denied of access to important social networks; and
  3. When the group has better institutional resources than other groups in the society at the same level.

7. Theory of Profit:

Knight identifies the entrepreneur as a recipient of pure profit. Pure profit, according to him, with regard to the entrepreneur, is bearing the costs of uncertainty. He identifies uncertainty with a situation where the probabilities of alternative outcomes cannot be determined either by a priori reasoning or by statistical inference. A priori reasoning is simply irrelevant to economic situations involving a unique event.

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Knight argues that business uncertainty can be reduced through ‘consolidation.’ Consolidation is to uncertainty what insurance is to risk; it is a method of reducing total uncertainty by pooling individual instances. The elasticity of the supply of self-confidence is the single most important determinant of the level of profit and the number of entrepreneurs.

8. Theory of Adjustment of Price:

For Kirzner, the adjustment of price is the main role of the entrepreneur. If the wrong price prevails in the market, then an opportunity for profit is created somewhere in the market if a frustrated buyer or seller is willing, respectively, to pay a higher price or accept a lower one. Then, again, if different prices prevail in the same market, there is scope for profitable arbitrage between the two segments of the market.

According to Kirzner, alertness to disequilibrium is the distinguishing characteristic of an entrepreneur. Alertness enables some individuals to intervene in the market by changing the price while other individuals simply respond by changing their buying and selling plans in lieu of the new price.

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Kirzner further maintains that the primary role of economic theory is to explain behaviour in terms of purposeful human action, and to consider to what extent purposeful human actions can interact to produce unexpected outcomes. To pursue the analysis of entrepreneurship further would be to go beyond the limits of the agenda of this piece. Anyone who believes that the entrepreneur is predictable has an incentive to himself intervene in the market process, and so become an entrepreneur.

To Kirzner, this provides a satisfactory basis for asserting the inherent unpredictability of the entrepreneur. It suggests that no predictor can be anything but an entrepreneur, and so makes a predictive theory of entrepreneurship impossible.

9. Theory of Market Equilibrium:

Hayek’s main contribution to entrepreneurial theory is to point out that the absence of entrepreneurs in Neo-classical economics is intimately associated with the assumption of market equilibrium. According to Hayek, the equilibrium postulate is equivalent to a postulate of full information; not full information in the sense of a complete information theory about every conceivable thing, but full information in the sense that no further information is needed in order to modify anyone’s decisions.

For him, the empirical content of economics relates to the process of adjustment towards an equilibrium. This process involves the acquisition and communication of knowledge. He visualises a world in which there is a continuous process of discovery. Markets help people to communicate their discoveries to others and learn of discoveries, thereby moving towards a sale of equilibrium.

10. Hagen’s Theory of Social Change:

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Everett Hagen, in his work “Theory of Social Change, How Economic Growth Begins” (1964), dictates on its psychological explanation. His creative personality is an individual characterised by a high need for achievement, order and autonomy. He views the entrepreneur as a creative problem solver interested in things in the practical and technological realm, and driven by a duty to achieve.

Hagen considers the withdrawal of status, of respect, as the trigger mechanism for changes in personality formation. Status withdrawal occurs when members of some social group perceive that their purposes and values in life are not respected by the groups in the society they respect, and whose esteem they value.

Hagen postulates four types of events which can produce status withdrawal:

  1. Displacement of a traditional elite group from its previous status by another traditional supply physical force.
  2. Denigration of valued symbols through some change in the attitude of the superior group.
  3. Inconsistency of status symbols with a changing distribution of economic power.
  4. Non-acceptance of expected status on migration to a new society.

11.Theory of Entrepreneurial Supply:

Another theory of entrepreneurial supply is the Behaviourist Model propounded and elaborated by John Kunkal in 1965. His behavioural model is concerned with the overtly expressed activities of individuals and their relations to both past and present, and surrounding social structures and physical conditions.

The determinants of an individual’s activities are to be found largely in the conditioning procedures, both deliberate and accidental, to which he has been subjected in the past and in the sets of reinforcing and discriminating stimuli which have become part of his behavioural claims and are part of the present social context.

The selected elements of the social environment are amenable to change. Kunkel’s theory is based upon experimental psychology, identifying sociological variables as the determinants of entrepreneurial supply.

12. Trait Theory of Entrepreneurship: 

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The root of the entrepreneurial process can be traced to the initiative taken by some individuals to go beyond the existing way of life. The emphasis is on initiative rather than reaction, although events in the environment may have provided the trigger for the person to express initiative. This aspect seems to have been subsumed within ‘innovation’ which has been studied more as the ‘change’ or ‘newness’ associated with the term rather than ‘proactiveness.’

This tendency to take initiative has been approached from different directions at various stages in the development of theory in entrepreneurship. For instance, Bygrave and Hofer (1991) talk of the importance of human volition, Carland et al. (1984) define an entrepreneur as one who ‘establishes’ an organisation, or Schumpeter (1949) talks of the agent who consciously disturbs the stationary process to take it in a new direction. They all reflect on the primacy of individual initiative.

Studies of entrepreneurial traits related to this aspect of behaviour, such as internal focus of control, capability to take personal risks and positive approach to work and problems, without excessive fear of culture, seeming from strong belief in favourable future — all lend to a strong sense of personal resourcefulness through which entrepreneurs take up and deal with non-routine tasks and situations.

Hence, ‘personal resourcefulness’ in the context of this paper is the belief in one’s own capability for initiating actions directed towards creation and growth of enterprises. Such an initiating process requires cognitively mediated self-regulations of internal feelings and emotions, thought and actions as suggested by Kanungo and Misra (1992).

The theory of personal resourcefulness has got the following implications as far as the supply of entrepreneurs is concerned in the society:

a. Cognitive Function:

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The present theory presupposes the activities undertaken by the individuals who require cognitively mediated behaviour like emotions, sentiments, inner feelings, thoughts and actions. In these situations, entrepreneurs are fully apprised of the situation and knowledge which is shaded by risk and motivational involvement.

b. Human Aspects of Psychology:

Different authors have given their different opinions on human aspects of psychology.

Entrepreneurship is influenced by the following traits:

  1. Will to power
  2. Will to conquer
  3. Will to excel
  4. Will to achieve
  5. Will to change
  6. Will to innovate.

Thus, studies examining non-economic factors have brought out the fact that mere provisions of economic inputs may not itself guarantee success in entrepreneurial ventures, organisational and psychological factors also still remain a subject of further investigation.


Economic Theory of Entrepreneurship

In economic analysis, entrepreneurial functions are supposed to be directed towards the materialistic objective of maximisation though its foundation may be of a high order such as social, patriotic, spiritual or psychological. Mark Casson, in his book “The Entrepreneur-An Economic Theory” presented a functional definition of the entrepreneur and considered why the entrepreneur function is so valuable.

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He emphasised that the demand for entrepreneurship stems from the need to adjust to change and that the scarcity of the requisite personal qualities, and secondly, by the difficulty of identifying them when they are available. According to G. F. Papanek and J. R. Harris, economic activities are the main drive for entrepreneurial activities. In some cases, it is not so evident, but the person’s inner drives have always been associated with economic gains.

These incentives and gains are therefore regarded as sufficient conditions for emergence of industrial entrepreneurship. There is a lack of entrepreneurship due to various kinds of imperfections in the market and inefficient economic policies. When an individual recognizes that the market for a product or service is out of equilibrium, he may purchase or produce at the prevailing price and sell to those who are prepared to buy at the highest price. They are not ‘risk-focused’; but ‘opportunity-focused.’


Sociological Theory of Entrepreneurship

Sociologists argue that entrepreneurship is most likely to emerge under a specific social culture. According to them, social sanctions, cultural values and role expectations are responsible for the emergence of entrepreneurship. Sociologists consider the entrepreneur as a role performer corresponding to the role expected by the society.

According to Cochran the entrepreneur represents society’s model personality. His performance depends upon his own attitudes towards his occupation, the role expectations of sanctioning groups and the occupational requirements of the job. Society’s values are the most important determinant of the attitudes and role expectations.

According to Horelitz, culturally marginal groups promote entrepreneurship and economic development. Such groups, because of their ambiguous position, are peculiarly suited to make creative adjustments and thereby develop genuine innovations.

According to Derossi, Co-ordination at every stage-inception, maintenance and expansion is the function of an entrepreneur.

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Flaria thinks that entrepreneur needs two qualities:

a. Optimistic outlook:

There is a possibility of change, the environment can be mastered and he himself can introduce the required change. He finds difficulties, challenging and stimulating; he thrives on them.

b. Dynamic:

In a shared dynamic industry, new problems are seized upon as opportunities for testing one’s own capabilities.


Psychological Theory of Entrepreneurship

Among psychologists, Frank Young describes an entrepreneur as a change-agent. According to the advocates of this theory, entrepreneurship is most likely to emerge when a society has sufficient supply of individuals possessing particular psychological characteristics.

K. L. Sharma maintains that entrepreneurs are men with qualities of leadership in solving persistent professional problems; but those persons likewise demonstrate eagerness to seize unusual opportunities.

Uday Pareek and T.V. Rao describes entrepreneurship as a creative and innovative response to the environment. The entrepreneur is goal-oriented rather than means-oriented.

Schumpeter believes that entrepreneurs are primarily motivated by an atavistic will to power, will to found a private kingdom or will to conquer.

Individuals with higher achievement motives tend to take keen interest in situations of high risk, desire for responsibility and a desire for a concrete measure of task performance.


Conclusion 

Development in any walk of life has always depended, to some degree, on individual qualities of entrepreneurship. Every theorist has looked at the entrepreneur and entrepreneurship on the basis of this perception, and therefore, can, at best, provide only a limited view of entrepreneurial phenomenon. No view is right or wrong, or more or less; in fact, the various factors which cause the emergence of entrepreneurship are interlocking mutually dependent and usually reinforcing.

Entrepreneurship is influenced by a multitude of factors and therefore, no single factor by itself can generate entrepreneurship. Entrepreneurship is the outcome of a complex and varying combination of social-economic, psychological and other factors. It can be noticed that economic, political and legal factors can be quickly manipulated to make the environment conducive to the emergence of entrepreneurship. On the other hand, sociological and psychological factors take a sufficiently long time to change. It is the ambition that electrifies man’s action. The common saying—aimless life is a goalless game—emphasises the importance of ambition in life.


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