2.Theories of Entrepreneurship

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Theories of

Entrepreneurship1


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Theories

1) RICHARD CANTILLON2) MARK CASSON’S ECONOMIC THEORY3) LEIBENSTIEN’S X-EFFICIENCY THEORY4) HARVARD SCHOOL THEORY

5) HAGEN’S THEORY OF SOCIAL CHANGE6) KIRZNER’S THEORY OF ADJUSTMENT OF PRICE7) KUNKEL’S THEORY OF ENTREPRENEURIAL

SUPPLY

8) JOSEPH SCHUMPETER’S INNOVATION THEORY9) DAVID McCLELLAND’S THEORY OF

MOTIVATION

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Richard Cantillion

• Richard Cantillion (1755) – the firstperson to recognise the role of anentrepreneur in economic theory.

• “The farmer is an entrepreneur

who promises to pay the landowner for his farm or land, afixed sum of money withoutassurance for the profit he willderive from his enterprise”.

• Hence entrepreneur is always at risk ofbearing losses if he is unable to sell thegoods at a higher price.

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Theories

1) RICHARD CANTILLON2) MARK CASSON’S ECONOMIC THEORY3) LEIBENSTIEN’S X-EFFICIENCY THEORY4) HARVARD SCHOOL THEORY


SUPPLY


MOTIVATION

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An Economic Theory

•

Mark Casson is a professor of Economics• “The Entrepreneur – An Economic Theory”(1945)

• Demand for entrepreneurship stems from:

– Need to adjust to change

• Supply of entrepreneurship is limited by:

– Scarcity of the requisite personal qualities

– Difficulty of identifying them when they areavailable

• Four major qualities which are crucial forsuccessful entrepreneur are:

– Imagination (innate)

– judgemental

– Self confident

– persuasive

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• Economic factors that encourage or

discourage entrepreneurship include: – Taxation policy

– Industrial policy

– Easy availability of raw materials

– Easy access to finance

– Access to information on markets

– Available technology and infrastructure

– Market opportunities

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Theories

1) RICHARD CANTILLON2) MARK CASSON3) LEIBENSTIEN’S X-EFFICIENCY THEORY4) HARVARD SCHOOL THEORY


SUPPLY


MOTIVATION

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LEIBENSTEIN’SX – EFFECIENCY THEORY

• Harvey Leibenstein (1922-1994)propounded the theory of X-efficiencywhich is popularly called Gap FillingTheory.

• According to Leibenstein,

entrepreneurial functions aredetermined by the X-efficiency whichmeans the degree of inefficiency on theuse of resources within the firm.

• He identifies two main roles for theentrepreneur: – Input completion (improve efficiency of

existing production methods orintroduce new ones)

– Gap filling (allocative efficiency)

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Theories



SUPPLY

8) JOSEPH SCHUMPETER’S INNOVATION THEORY9) DAVID McCLELLAND’S THEORY OFMOTIVATION

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HARVARD SCHOOL THEORY

• Harvard School Contemplated thatentrepreneurship involves any

deliberate activity that initiates,

maintains and grows a profit-oriented enterprise for production

or distribution of economic goods

or services, in interaction withinternal and external forces.

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• Features of Harvard School Theory

• Internal Forces: These forces refer to the internal qualities of theindividual such as intelligence, skill, knowledge experience,

intuition, exposure, etc.• These forces influence the entrepreneurial activities of an

individual to a great extent.

• External Forces: These forces refer to the economic ,political, social,cultural and legal factors which influence origin and growth of

entrepreneurship in an economy.• Emphasis on two types of Entrepreneurial activities

1. Organization or coordination activity:

Entrepreneurial functions like organization and combination ofresources for creating viable enterprises

2. Sensitivity to environmental factors that affect decision making

The responsiveness to the environmental condition that influencesdecision making function

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Theories



SUPPLY


MOTIVATION

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HAGEN’S THEORY OFSOCIAL CHANGE

• Everett Hagen (1964)• “Theory of Social Change: How economic growth

begins”• Creative personality characterised by high

need of achievement, order and autonomy• Withdrawal of status triggers changes in

personality• Factors responsible for withdrawal of status:

–Displacement of a traditional elite group

– Changing distribution of economic power – Non-acceptance of expected status on migration

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Theories


5) HAGEN’S THEORY OF SOCIAL CHANGE6) KIRZNER’S THEORY OF ADJUSTMENT OF

PRICE7) KUNKEL’S THEORY OF ENTREPRENEURIAL

SUPPLY8) JOSEPH SCHUMPETER’S INNOVATION THEORY9) DAVID McCLELLAND’S THEORY OF

MOTIVATION

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THEORY OFADJUSTMENT OF PRICE

– KIRZNER (2006)• Adjustment of Price:• The chief role of entrepreneur is based upon the

adjustment of price in the market.• The buyer may pay higher price or seller may accept a

lower price, which gives rise to opportunities for profit.•

Further if different prices prevail in the same market,there in an opportunity for profitable arbitragebetween two segments.

• Alertness to disequilibrium as a distinguishingcharacteristic:

• Alertness to disequilibrium enables the entrepreneur tointervene in the market by changing the price.

• Other individuals simply respond by changing theirbuying and selling plans in lieu of the new price

• Thus, economy in purchase and profitable selling resultsin economic gain

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Theories



SUPPLY


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THEORY OF ENTREPRENEURIALSUPPLY – KUNKEL

• BEHAVIOURIST MODEL – JOHN KUNKEL(1965)• According to him, psychological and

sociological variables are the main determinantsfor the emergence of entrepreneurs.• Individual activities are related to both past and

present and surrounding social structuresand physical conditions

• Determinants of individual activities are both: – Deliberate – Accidental

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• According to him, Entrepreneurship can be

dependent upon the following structures inthe economy:

• Demand Structure

•

Limitation Structure (barriers)• Labour Structure

• Opportunity structure

• His model is based upon experimentalpsychology, identifying sociologicalvariables as the determinants ofentrepreneurial supply.

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Theories



SUPPLY

8) JOSEPH SCHUMPETER’S INNOVATIONTHEORY9) DAVID McCLELLAND’S THEORY OF

MOTIVATION

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Schumpeter’s

InnovationTheory

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• Joseph Schumpeter (1949)• “Dynamic Entrepreneurship

Innovation Theory”• Entrepreneurship is a creative activity of

doing things that are generally not done inthe ordinary course of business


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• Five Point Theory:- – Creates a new product/new quality of

product

– Introduces a new method of production

– Discovers a new market

– Finds a new source of raw material

–

Finds new way of making things/breaking up of monopoly

• Inventor and innovator - difference

• Entrepreneur – change agent

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Criticisms:• The theory ignores organising skills

• Innovations are routine

• Large scale entrepreneur not possiblesince beginning

• Lack of Capital and skilled labour,imperfect markets results in SSIs

• Not applicable in LDCs

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Theories



SUPPLY


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Th f Hi h


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Theory of HighAchievement (1953)• “NEED FOR ACHIEVEMENT”

• Three types of motivational needs – Achievement Motivation (n-ach)

Seeks achievement attainment of

realistic but challenging goals

advancement in the job

– Authority/power Motivation (n-pow)need to be influential effective

and make an impact. Strong need

to lead and ideas to prevail

–

Affiliation Motivation (n-affil)need for friendly relationships

motivated interactions with other

people. TEAM PLAYERS

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• Mix and combination of all these qualities• Need for achievement is the most important need

which can be used effectively for economic

progress.• This is developed in the family itself.• McClelland’s views on entrepreneurship:

– “Entrepreneurs are made, not born”

•

Through Entrepreneurship developmentprogrammes• Two characteristics:-

– Doing things in a new and better way

– Decision making under uncertainty

• Get a KICK out of winning or solving a difficultproblem than money

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Key points:1) RICHARD CANTILLON

(Entrepreneur is the RISK BEARER and heis not the supplier of capital)

2) MARK CASSON (Entrepreneurship is a result of conducive

economic conditions. 4 qualities-imagination, judgemental,

confident, persuasive)

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3) LEIBENSTIEN’S X-EFFICIENCYTHEORY

(X-efficiency is the degree of inefficiencyin the use of resources within the firm: itmeasures the extent to which the firm fails

to realise its productive potential)4) HARVARD SCHOOL THEORY

(Purposeful activity which initiates,

maintains and grows an enterprise ininteraction with internal and externalenvironment)

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5) HAGEN’S THEORY OF SOCIALCHANGE

(An entrepreneur is a creative problem-solver interested in things in practicaland technological realm driven by dutyto achieve.

Withdrawal of status triggers changesin personality)

6) KIRZNER’S THEORY OFADJUSTMENT OF PRICE

(Entrepreneur is the ARBITRAGEURwho makes profit due to differences inthe prices prevailing in the market)

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7) KUNKEL’S THEORY OFENTREPRENEURIAL SUPPLY

(Individuals exhibit Entrepreneurialbehavior on the basis of theirpsychological and sociological

environment)8) JOSEPH SCHUMPETER’S

INNOVATION THEORY

(Innovation is the only key to economicprogress)

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9) DAVID McCLELLAND’S THEORY OFMOTIVATION

(Intense, prolonged and repeated effortsto accomplish something difficult)

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2.Theories of Entrepreneurship

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