7 Theories of Entrepreneurship
Shivani Mahajan
1. Learning Outcome
After completing this module students will be able to:
i. Understand the concept of Theories
ii. Understand the Historical perspective of Theories
iii. Understand the different theories propounded
2. Introduction
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.
3. 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.
3.1 Different perspectives on the emergence of Entrepreneurship
The concept of entrepreneurship is old back and has come through number of years with major changes over time but the concept of entrepreneurship is not clear and has become complex. Over the years different thinkers have interpreted the concept according to their perception and environment. 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:
a. Economist‟s view
b. Socialist‟s view
c. Psychologist‟s view
a. 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.
b. 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. Kunkel proposed a behavior pattern model theory and is concerned with the explicitly expressed activities of humans and their relationships with the previous and present surroundings and the physical conditions.
According to him behavior patterns can be formed by the stimuli exists in the present and past working conditions and also because of the social and economic incentives. According to the psychologists, when a society has the sufficient supply of the individuals having specified psychological characteristics, then there will be more chances of the existence of entrepreneurship.
The main characteristics are:
- an institutional ability to look at the things in new way (vision),
- energy of determination and intellect to overcome fixed behavior of thoughts,
- a push to do something,
- an urge to fulfill a dream,
- ability to resist social conflict; and
- high need for achievement.
(Source: https://ecestudy.files.wordpress.com/2015/02/theories-of-entrepreneurship.pdf)
Each of the above view is different and not any of the view is right or wrong. Entrepreneur can be influenced by the multiple factors and no single factor can enhance entrepreneuship. There can be large number of social, economic and psychological factors which can influence the entrepreneur.
4. Theories of Entrepreneurship
Large number of the theories has been propounded till date. Following are the few theories propounded by the eminent thinkers:
4.1. Innovation Theory by Schumpeter
4.2. Theory of High Achievement by McClelland
4.3. Leibenstein’s X-Efficiency Theory
4.4. Risk bearing theory of Knight
4.5. Max Weber’s theory of entrepreneurial growth
4.6. Hagen’s theory of entrepreneurship
4.7. Thomas Cochran’s Theory of Cultural Values
4.8. Theory of Change in Group Level Pattern
4.9. Economic theory of Entrepreneurship
4.10. Exposure Theory of Entrepreneurship
4.11. Political System Theory of Entrepreneurial Growth
4.1. 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.
4.2. 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.
4.3. 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
(source: https://ecestudy.files.wordpress.com/2015/02/theories-of-entrepreneurship.pdf) According to him there are two types of entrepreneurship.
(i) Routine entrepreneurship – deals with normal business functions like co-ordinating 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.
4.4. 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.
4.5. 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.
4.6. 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.
4.7. 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.
4.8. 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.
4.9. 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.
4.10. 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.
Exposure Theory of Entrepreneurship
(source: https://ecestudy.files.wordpress.com/2015/02/theories-of-entrepreneurship.pdf)
4.11. 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.
Political System Theory of Entrepreneurial Growth
(Source: https://ecestudy.files.wordpress.com/2015/02/theories-of-entrepreneurship.pdf)
5. 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.