Theories of Entrepreneurship
For
scientist theory means relationship between facts.
Entrepreneurship has been defined differently by different writers and
thinkers. Various authors have developed various theories on entrepreneurship
and popularized the concept among the common people. The concept of
entrepreneurship is as old as civilization while the theories of
entrepreneurship have evolved from over a period of more than two centuries.
The theories of entrepreneurship can be explained from economists‟,
psychologists‟ and socialists‟ viewpoint, which are developed over a
period of time.
Entrepreneurship
has been defined differently by different writers and thinkers. Various authors
have developed various theories on entrepreneurship and popularized the concept
among the common people. The concept of entrepreneurship is as old as civilization while
the theories of entrepreneurship have evolved from over a period of more than
two centuries. The theories of entrepreneurship can be explained from economists‟,
psychologists‟ and socialists‟ viewpoint, which are developed over a
period of time.
Historical
perspective:
In early 17th
century, Richard Cantillon, an economist who is originally called
as developer of entrepreneurship coined the term „entrepreneur” and
in late 17th century, it was defined that entrepreneur bears the
risk, supervises and owns the factor of production.
Later in 1803, Jean Baptiste Say proposed that
profits earned by the entrepreneur are different from the profit earned by the
capital owner and thus differentiated between both. Later in late 18th
century distinction was further made clear between those who supply funds
and earn interests and the one who earns from entrepreneurial activities.
In 1934, Joseph
Schumpeter defines entrepreneur as an innovator and later
in 1964, Peter
Drucker defined the entrepreneur as the one who maximizes opportunities.
In 20th century,
as technology improves and globalization takes place, it‟s further stated that
entrepreneur not only has to make profits but also has to tap new markets,
develop new products and processes. Thus, entrepreneurship has taken new meanings
in this century and a lot more has to be added
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On the basis of
that entrepreneurship has been divided into five stages: There are different
opinions on the emergence of entrepreneurship which can be classified as
follows:
·
Economist‟s view
·
Socialist‟s view
·
Psychologist‟s view
·
Economist’s view
Entrepreneurship has been a topic of
interest to the economists since 1700 and term entrepreneur has been first
coined by Richard Cantillon and was popularized by James Stuart Mill in
England.
According to the economists, favourable economic
conditions are the main motivators for the entrepreneurship. Entrepreneurs like
to work in the situations which are positive for the economic growth.
G.F Papanek and J.R Harris are the firm believer
of this theory and strongly consider economic incentives as the main force of
entrepreneurial activities. Lack of entrepereneurship can be because of market
imperfections and incompetent market conditions.
Sociologist’s view:
Social system has direct or
indirect effect on the entrepreneurship. The power of customs, culture, values,
religion, and rigidity has a significant impact on the
entrepreneurs and thus helps in creativity and exposure. Researchers believe
that entrepreneurship is most likely to grow under social values and cultural
values, role expectations etc are accountable for the growth of
entrepreneurship in the country.
The theories of Max Weber, Hoselitz
and Cocharan have propounded sociological theories.
According to Max Weber, religious beliefs
generate the drive for entrepreneurship by producing specific value
orientations and thus chasing opportunities and the accumulation of assets.
According to Cochran, entrepreneurs are the role
model of the society and develop the solutions for their problems.
Individual‟s performance depends on his attitude towards his occupation and
understanding of the occupational requirement of the job.
According to Stokes socio-cultural values guide
economic deed. He put forward that personal and social opportunity and the
existence of the necessary psychological distributions may be considered as
situations for an individual‟s progress in industrial entrepreneurship.
Hoselitz
proposed that culturally marginal groups encourage entrepreneurship and
economic development. Such groups, because of their unclear position are
noticeably suited to make innovative change and thereby expand
authentic innovations.
c. Psychologist’s view:
Different psychologists have given
different psychological theories; Joseph Schumpeter, McClelland, Hagen and
Kunkal are the few names among them.
According
to them, psychological aspects have significant impact on the
entrepreneurship development.
According to Schumpeter, entrepreneurs are motivated by the will to power
and will to conquer.
According to McClelland, high need
for achievement is the prime drive for the entrepreneurship. People who have
high achievement needs can work better and they give their best to achieve the
desired performance. This achievement need can be inculcated through child
rearing practices thus helps in achieving excellence. Hagen concludes that
withdrawal of the status recognition is the main source of personality
formation. People who have lost their status from the previous groups try to
attain their status by focusing on entrepreneurship.
Theories of Entrepreneurship
Large number of the theories has been propounded till date. Following are
the few theories propounded by the eminent thinkers:
Innovation Theory by Schumpeter
Theory of High Achievement by McClelland
Leibenstein’s X-Efficiency Theory
Risk bearing theory of Knight
Max Weber’s theory of entrepreneurial growth
Hagen’s theory of entrepreneurship
Thomas Cochran’s Theory of Cultural Values
Theory of Change in Group Level Pattern
Economic theory of Entrepreneurship
Exposure Theory of Entrepreneurship
Political System Theory of Entrepreneurial Growth
Innovation Theory by Schumpeter
According to him, innovation is the key factor in entrepreneurship in
addition to risk and organizing function. He defines, Entrepreneurship as a
“creative activity” and this creation may be in the form of-Introduction of new
product with which customer is not familiar or
introduction of new quality of the existing product.
·
Use of new method of production which is not yet
tested
·
Opening of new market in which particular
manufacturer of the country has not yet entered
·
Conquest of new source of supplying raw material
·
New form of organization
According to Schumpeter, Entrepreneurship is innovation and can be in the
form of any product, process, method, new market etc. It brings new
technological changes into the society. He also differentiated between the
innovator and inventor.
Inventor is the one who invents some new methods, technology,
processes etc and
Innovator is the one who uses
these new inventions to offer new products in the market.
Schumpeter is the first major theorist to place the human at
the centre of the process of economic development. He is very clear
about the economic function of the entrepreneur.
According to him, entrepreneur is the major mover in economic
development with his function, to innovate or bring out new combinations.
To Schumpeter, entrepreneurs are persons who are motivated by a spirit for
power; their extraordinary characteristic being an innate capacity to choose
correct answers, energy, will and mind to conquer fixed talents of
thoughts, and a capacity to withstand social opposition.
The factors that contribute to the development of entrepreneurship would
essentially be a suitable environment in grasping the essential facts. It can
be noted that this theory‟s main figure, the “innovating
entrepreneur” has played an important role in the rise of modern capitalism.
The entrepreneur has been the prime mover – for economic development
process.
Criticism:
·
This theory seems to be one sided as
it put extreme stress on entrepreneurship only and ignores the other functions
of the entrepreneurship.
·
Applicability and success of this
theory becomes doubtful in under developed country.
Theory of High Achievement by McClelland
This theory is regarded as the most important psychological theory.
McClelland wanted to find the internal factors that motivate people to take
opportunity of the trade.
According to McClelland, a person attains three types of needs as an outcome
of one‟s life knowledge.
Three needs are:
·
Need for Achievement: A drive to excel,
advance and grow.
·
Need for Power: A drive to dominate or influence
others and situations.
·
Need for Affiliation: A drive for friendly
and close inter-personal relationships.
According to the McClelland, people who have high need for achievement have
tendency to win and excel. People who
have high need for achievement personally take the responsibility of solving
problems and will always try to be better than others. He further explained
that people with high need of achievement are more likely to succeed as
entrepreneur because it is the need for achievement that motivates and promotes
entrepreneurship.
The definite characteristics of a high achiever (entrepreneur) can be listed
as follows:
(i)
They lay down moderate realistic and achievable goals
for them.
(ii)
They take planned risks.
(iii)
They favor situations wherein they can get individual
responsibility for solving problems.
(iv)
They need actual feedback on how well they are doing.
(v)
Their need for achievement live not only for the sake
of economic rewards or social recognition rather personal achievement is
essentially more satisfying to them.
Leibenstein’s X-Efficiency Theory
The thought of x-efficiency was introduced by Harvey Leibenstein in
his paper Allocative efficiency v. “x-efficiency” in American Economic Review
1966. This theory was recently applied
to entrepreneurship and otherwise was developed for the firms in determining
the degree of inefficiencies. 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. When the input is not used
efficiently then the difference between the actual output and the maximum
attainable output is the X-efficiency. X efficiency occurs if resources are
wasted or not used at all.
Therefore, leibenstein identifies two roles for the entrepreneur:
gap filler and an input completer. Thus, if not all the inputs will be used
there will be market imperfections and entrepreneur has to fill the gaps to
correct the market imperfections. The other role is of input completer, to make
available the inputs required for the efficient outputs.
Leibenstein X- efficiency Theory
According to him there are two types of entrepreneurships.
(i) Routine entrepreneurship – deals with normal business
functions like coordinating the business activities.
(ii) Innovative entrepreneurship – wherein an entrepreneur
is innovative in his approach. It includes the activities necessary to create
an enterprise where not all the markets are well-established or clearly
defined.
Risk bearing theory of
Knight:
According to Knight, the most important feature of
entrepreneurship is Risk bearing. Some important features of the theory are:
- Risk Creates profit: As entrepreneur bears risk, therefore he earns profit.
- More Risk more Gain: Entrepreneurs face
different types of risks according to their ability and interests. This
theory states that more the risk more will be the returns.
- Profit as Reward and cost: Profit is the reward
of bearing risk. Therefore, it is also called as normal cost of production.
- Entrepreneur’s
income is uncertain: According to knight,
uncertainty is the important element of
entrepreneurship. There are two types of the risk: insurable and
non-insurable. Entrepreneur earns profit because he bears non– insurable risk which
is uncertain.
Max
Weber’s theory of entrepreneurial growth:
Max Weber believes that
religion has a large impact on the entrepreneurial development of the country
because some religion has basic faith to earn more money whereas some has less.
He calls them „spirit of capitalism‟ which can be enhanced in the country if
there will be favourable attitude towards capitalism in the country. It is the
religious beliefs that develop the sense of capitalism in the individual which
generates the feeling of occupational chase and the addition of assets. This
theory states that Hinduism, Buddhism and Islam do not encourage
entrepreneurship which was criticized by various sociologists.
Max Weber’s Theory
This theory was criticized by many researchers, as it was
based on the invalid assumptions like:
(a) There is a single system of Hindu value.
(b) The Indian people learn those values and
translate them to their every day behaviour, and
(c) These values remained resistant to and protected
against external pressures and change.
The quick growth of entrepreneurship in India since
independence shows that Hinduism is not averse to the spirit of capitalism and
to adventurous spirit but some researchers has accepted this theory
but it was not universally accepted.
Hagen’s theory of
entrepreneurship
Hagen‟s has propounded a theory of withdrawal of status
respect. According to him, withdrawal of status respect leads to the
entrepreneurship. It occurs when the member in the group perceive that their
efforts and purposes in the life are not valued by the other members. He
proposed four events which can lead to status withdrawal:
- Displacement of a conventional best group from its earlier status
by another conventional supply physical force.
- Defamation of valued
symbols through some change in the attitude of the superior group
- Inconsistency of status
symbols with a changing‟ distribution of economic power.
- Acceptance of expected
status on migration to a new society.
He further stated that
withdrawal of the status respect would give rise to following:
(a) Innovator: An
entrepreneur who is innovative and try to attain his objectives set by himself
(b) Retreatist: Entrepreneur who
keeps on working in society but remains apathetic to his work or status.
(c) Ritualist: One who works as
per the rules of the society but has no hope in the improvement in his status.
(d) Reformist: One who is a
revolting and tries to carry new ways of working and develops new society.
Hagen developed this
theory from the case of samurai community of Japan who were deprived of the
high status they were enjoying and thus gave rise to many entrepreneurs as they
want to gain their lost prestige.
Thomas Cochran’s Theory of Cultural Values
According to him,
entrepreneurs are not super normal powers but are the role models of the
society. The key magnitude in
this theory is cultural values, role expectations
and social sanctions. Entrepreneur’s performance is
influenced by the three factors:
- own attitudes towards his occupation,
- the role expectations
held by sanctioning groups,
- and the operational
requirements of the job.
Society‟s values are the main determinant
of the first two factors and the changes over the time in different variables
like population; technology etc will impose change in role expectations by
generating new operational needs.
Theory of Change in Group Level Pattern:
This theory of change is
propounded by Young. He conducted a Thematic Appreciation Test (TAT) on group
of entrepreneurs. This test revealed that entrepreneurs has the ability to
define the solution to the problem, awareness of the efforts required, confidence
in their own ability and ability to analyse the situation before decision
making. 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:
- When the group has better institutional resources
than the other groups of the society at the same level
- When the group experiences low status respect.
- When deprived of access to important social
networks.
Economic
theory of Entrepreneurship
This theory was
propounded by Papanek and Harris. According to them if economic incentives are
available in the country then there will be entrepreneurship. Economists
believe that entrepreneurship and economic growth exists where economic
conditions are favourable to the business environment. There are large numbers
of economic factors which helps in upgrade or degrade entrepreneurship in a
country. Following are the factors:
(a) The
availability of bank credit
(b) High capital
formation with a good flow of savings and investments
(c) Supply for
loanable funds with a lower rate of interest.
(d) Increased
demand for consumer goods and services
(e) Availability
of productive resources.
(f) Efficient
economic policies like fiscal and monetary policies
(g) Communication
and transportation facilities
It is further
strengthened by the fact that Marwaris and Vaishyas are everywhere in the
country but only Gujarati Marwaris and Vaishyas leads in businesses because
Gujarat has a more favourable economic conditions. Thus, it is concluded that
favourable business environment has impact on entrepreneurial growth.
Exposure Theory of
Entrepreneurship
This theory states that exposure to new ideas and
opportunities leads to innovation and creativity thus creates a new enterprise.
An Individual‟s education, cultural values, motivation, economic factors, need
for achievement, religious beliefs and risk bearing capacity helps in
exposing him/her towards the new ideas and opportunities and thus leading to
innovation and creativity. Innovation is the most important factor
entrepreneurship.
Political System Theory of Entrepreneurial
Growth
This theory states that
favourable political environment has an impact on the entrepreneurial growth
because stable political system creates infrastructure, promotes policies and
encourage people towards entrepreneurship. Commitment in the political system creates a favourable business environment
and enhances creative and entrepreneurial ability which leads to the
entrepreneurial growth in the country.
Summary
Many theorists have
propounded large number
of theories over the period of time but every theorist has a different view
which explains the concept of entrepreneurship according to their own
perception. This various approaches of entrepreneurship make the concept
unclear because different views of economist‟s, socialist‟s and psychologist‟s
view. So, there is a need of a summarized and comprehensive theory which covers
all the aspects of entrepreneurship.
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