E n t r e p r e n e u r s h i p a n d t h e E c o n o m y

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ENTREPRENEURSHIP AND THE ECONOMY

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A. WHAT IS ENTREPRENEURSHIP?

Before we fully discuss concepts in the course Entrepreneurship, it is best to have a clearidea on what entrepreneurship is really all about.Entrepreneurship, in the simplest sense, refers to theability of an individual to determine and come up with the proper combation of the resources availablein his environment and transform this into an output of either goods or services, and obtain a fair profitat the price the entrepreneur sets. It. entails the activities of potting opportunities, .conceptualizingthese

ideas into business opportunities, ridentifing affa using resources in his nvironmenL and thaking use ofthes resources t6 prduce products and make profits out oI them. It also includes aset ofbehaviors,skifls and attributes conducive to the development of 1hnoatioh and creativity.

An-entrepreneur uses several factors to turn his idea into a profitable product. It would already beobvious that an entrepreneurs first investment in his business enterprise is an idea. An idea is simplysomething an entrepreneur has already conceptualizedor imagined, painting a more or less clearpicture in his mind, giving him a clear plan of action. In other words, an idea is a clear blueprint in theentrepreneurs mind.Raw materials are the basic inputs that the entrepreneur uses to come up with his products. Theseinputs come from his environment, and are usually found to be in their unprocessed or natural states.Thus, the term raw.Capital, on the other hand, refers to the buildings, machinery, equipment and tools used in the course

of production. More often than not, an entrepreneur hires laborers people directly responsible in theproduction process. The place where all of these physical factors are found is generally called a(production) plant. Having all these things allows the entrepreneur to have what he calls a businessenterprise.When these inputs are transformed into outputs or what we call as finished products, the entrepreneurnow brings these finished products to his market. A market is simply the buyers and users of theentrepreneurs product. Technically, people who buy the productare called cusomers, while people who use the product are called consumers or end-users.Before we proceed any further, let us first try to determine how entrepreneurship really evolved.


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B. ORIGINS OF ENTREPRENEURSHIP

It is not really clear where entrepreneurship began. Even though the term did originate from the French,we can suspect that entrepreneurship began even before there ias a term for it. After all, business andtrade started way before the French even evolved as a people and as a nation.Due to its elusive nature, entrepreneurship is often overlooked in Development Economics.Nonetheless, entrepreneuip is a necessary ingredient for stimulating economic growth. To achieve

successful ecdndmic development, a country must experience both economic growth and fundamentalchanges in the structure of its economy. Entrepreneurs orchestrate these transformations in societyand create new channels or economic activity and employment. Thus, all countries wishing to pursuecontinued development must encourage the sustained growth of entrepreneurship.Throughout the theoretical history of entrepreneurship, scholars from multiple disciplines in the socialsciences have had difficulty with a diverse set of interpretations and definitions to concretize thisabstract idea. Even though certain themes continually resurface throughout the history ofentrepreneurship theory, presently there is no single definition of entrepreneurship that is accepted byall economists or that is applicable in every economy in the world today.Some schools of thought on entrepreneurship suggest thaf the primary role of the entrepreneur is thatof a risk-bearer in the event of uncertainty and the lack of perfect information. These risks taken,however, are more often than not, calculated risks. Some claim that an entrepreneur will be willing to

bear the risk of a new business venture if he believes that there is a significant chance for makingreasonable profits. Although many current theories on entrepreneurship agree that there is an inherentcomponent of risk, the risk-bearer theory alone cannot explain why some individuals becomeentrepreneurs while others who are also known risk-bearers do not.


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Some other schools of thought claim that the role of the entrepreneur is that of an innovator assuggested by the original French term. However, the definition of innovation is still widely debatablesince the degree of innovation or, in some cases, a very close imitation to categorize the product as aninnovation per Se, is rather difficult to establish. Others would agree that the necessary characteristic ofthe entrepreneur is alertness or his general awareness to his environment, and no intrinsic skills, otherthan that of recognizing opportunities, are necessary.

The earliest historical accounts of entrepreneurs and entrepreneurial activities are traced to the greatadventurer Marco Polo who made the practice of selling his goods to a moneyed person with both ofthem signing a contract. He was the forerunner of a venture capitalist. While it is true that a venturecapitalist is a passive risk-taker, the merchan:t-adventurer takes on the active role of trading andbearing almost all forms of risk.In the middle ages,- entrepreneurs were described either as actors or the managers of large productionprojects using resources. Those people were called clerics people in charge of building castles andfortifications, public buildings, cathedrals,. etc.

A noted economist and author in the 17th century, Richard Cantillon, introduced the termentrepreneur. This explains why some consider him as the father of the theory of entrepreneurship.Cantillon viewed entrepreneurs as risk-takers. He observed that merchants, farmers, craftsmen andother proprietors buy merchandise at a certain price, but sell it at an uncertain price. These people,

therefore, operate at a risk, and should receive income for taking the risks involved, separate from theincome for owning the resources.In his writings, he formally defined the entrepreneur as the agent who buys means of production atcertain prices in order to combine them into a new product. Shortly thereafter, the French economistJean Baptiste Say added to Cantillons definition by including the idea that entrepreneurs had to beleaders. Say claimed that an entrepreneur is one who brings other people together in order to build asingle productive organism.In the next century, British economists such as Adam Smith, David Ricardo, and John Stuart Mill brieflytouched on the concept of entrepreneurship, broadly referring to the English term as businessmanagement. Whereas the writings of Smith and Ricardo


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suggest that they likely undervalued the importance of entrepreneurship, Mills writings stress thesignificance of entrepreneurship for economic growth. He claimed that entrepreneurship requires noordinary skill, and he laments the fact that there is no good equivalent English word to encompass thespecific meaning of the French term entrepreneur.

Adam Smith maintained that economic development was due to a phenomenon known as. the InvisibleHand theory. According to this theory, business ventures and nations will develop to a particular

direction without necessitating the effort nor the, desire of the capitalists, thereby espousing the thoughtthat economic development is but a natural thing that comes about. This master plan of economicdevelopment was otherwise known as the Law of Nature.In the 18th century, J.B. Say distinguished between profits of entrepreneurs and profits of capital.Francis Walker, on the other hand, distinguished between individuals who supplied funds and receive,dinterests for these funds, and those who received profit from managerial capabilities.Yet another distinguished economist, Alfred Marshall, first formally recognized the necessity ofentrepreneurship for production in 1890. In his famous treatise, Principles of Economics, Marshallasserted that there are four factors of production: land, labor, capital, and organization. In later usage,organization would be replaced by the term entrepreneurship.

According to Marshall, organization is the coordinating factor in the production process which brings theother factors together. Marshall believed that entrepreneurship is the driving element behind

organization. By creatively organizing, entrepreneurs create new commodities or improve the plan ofproducing an old commodity.,To do this, Marshall believed that entrepreneurs must have a thoroughunderstanding of their industries, and they must be natural leaders. This belief is very similar to thetheory of J.B. Say. Additionally, Marshalls entrepreneurs must have the ability to foresee changes insupply and demand and be willing to act on such risky forecasts in the absence of completeinformation. Thus, the, key characteristic of entrepreneurs is their willingness to take risks.Like John Stuart Mill, Marshall suggested that the skills associated with entrepreneurship are rare andlimited in supply that entrepreneurs had no ordinary skills. Entrepreneurs should then


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possess extraordinary skills. Marshal argued that the abilities of the entrepreneur are so great and sonumerous that very few people can exhibit them all in a very high degree. He implied, however, thatpeople can be taught to acquire the abilities that are necessary to becoming an entrepreneur.Unfortunately, the opportunities for entrepreneurs are often limited by the economic environment whichsurrounds them. This would mean that an entrepreneur must make do with the current opportunities

and resources he finds in his environment. Additionally, although entrepreneurs must share some kindof common identifiable abilities, all entrepreneurs are different. Their (individual) successes depend onthe economic situations in which they attempt their endeavors.Since the time of Marshall, the concept of entrepreneurship has continued to undergo theoreticalevolution. For example, whereas Marshall believed entrepreneurship was simply the driving forcebehind organization, many economists today believe that entrepreneurship is by itself the fourth factorof production that coordinates and profitably combines the other three land, labor and capital.Unfortunately also, although many economists agree that entrepreneurship is necessary for economicgrowth and development, they continue to debate over the actual role that entrepreneurs play ingenerating growth in a nation s economy.Other economists in the innovation school of thought claim that entrepreneurs have special skills thatenable them to participate in the process of innovation. Along this line, Harvey Leibenstein claims that

the dominant and necessary characteristic of entrepreneurs is being gap-fillers. This means that theyhave the ability to perceive where the market fails to develop new products or processes that themarket demands, but which are not currently being supplied. Thus, Leib.enstein proposes thatentrepreneurs must have that rare ability to assess different market needs and demands and make upfor market failures and deficiencies.

Additionally, drawing from the early theories of Say and Cantillon, Leibenstein suggests thatentrepreneurs have the ability to combine various inputs into new innovations in order to satisfyunfulfilled market demand. This proposition of Leibenstein that of the determination and satisfactionof unfulfilled demands has evolved into a key component in the creation of modern-day feasibilitystudies.


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In the 19th century, Joseph Schumpeter espoused the idea that entrepreneurs are innovators anddevelopers of untried technology. This was the age wherein entrepreneurship was used synonymouslywith innovation. David McClelland maintained that productivity is dependent upon the energy levels ofpeople, and that entrepreneurs are energetic and, therefore, productive. He also espoused the idea thatentrepreneurs are moderate risk- takers.Management guru Peter Drucker emphasized the idea that entrepreneurs are people who look for and

maximize opportunities. Albert Shapiro argued that entrepreneurs take initiatives,, organize some socialand economic mechanisms and accept risks of failure.

Although many economists accept the idea that entrepreneurs are innovators, it can be difficult to applythis theory of entrepreneurship to less developed countries (LDCs). Often in LDCs, entrepreneurs arenot truly innovators in the traditional sense of the word. In many instances, the sad reality is thatinstated of innovating, theso-cal1ed entrepreneurs are fond of being copy-cats or imitators. ThePhilippines is no exemption from this observation. Creative imitation takes place when the imitatorsbetter understand how an innovation can be applied, used, or sold in their particular market niche(namely, their own countries) than do the people who actually created or discovcred the originalinnovation. Thus, the innovation process in LDCs is often that of imitating and adapting, instead of thetraditional notion of new product or process discovery and development. This phenomenon of simply.imitating has actually lessened the enthusiasm of so many to invent things and develop truly genuine

products.Throughout the evolution of entrepreneurship theory, different scholars have offered varied theories onentrepreneurship, and the entrepreneurs different and common characteristics. By combining theschools of thought cited above, one can establish a clearer understanding of entrepreneurship andeconomic development.C. EVOLUTION OF THE TERM ENTREPRENEURSHIPLet us now take a look at how this course of study evolved over the years. Below is a summary ofvarious economists view of entrepreneurship, including the year they conceptualized this view.

CONTRIBUTORAND YEAR OF

CONTRIBUTION

CONTRIBUTION TOENTREPRENEURSHIP THOUGHT

Jean Baptiste Say(1800)

Entrepreneurship refers to the shifting ofeconomic resources out of an area oflower and into higher greater yield.productivity and

Carl Menger(1871)

Entrepreneurship involves information, calculation,an and supervision.obtaining act of will and supervision.

Joseph Schumpeter(1910)

Entrepreneurship is, in its finding and promotingnew of productive factors.essence, thecombinations

Harvey Liebenstein(1970)

Entrepreneurship is the reduction of organizationalinefficiency.

Israel Kirzner(1975)

Entrepreneurship is theidentificationof marketarbitrageopportunities.

Albert Shapiro(1975)

Entrepreneurship involves a kind ofbehavior that includes initiative taking,organizing and recognizing social mechanism toturn resources and situations to practical account,and the acceptance of risks and failures.

Karl Vesper(1980)

Entrepreneurship is the dynamic process ofcreating incremental wealth.

W. Ed Mc Mullan and Entrepreneurship is the building of new growth


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Wayne A. Long (1990) organization.

Howard Stevenson(1992)

Entrepreneurship isthepursuitofopportunity beyond

theresourcescurrently under onescontrol.

JeffreyTimmons(1994)

Entrepreneurship is the ability to createand build a vision from practicallynothing.

Peter Drucker(1998)

Entrepreneurship is the process ofstarting ones own, new and smallbusiness. It is also the process ofinnovation and new venture creation

through four major dimensions individual, organizational, environmental,process aided by collaborative networksin government, education andinstitutions.

Robert Hisrisch(2001)

Entrepreneurship involves the creation process,requires the devotion of the necessary time andeffort, assumes the accompanying financial,psychic and social risks, and receives the resultingrewards of monetary and persOnal satisfactionand independence.


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D. CONTRIBUTIONS OF ENTREPRENEURSHIP TO THE ECONOMYEntrepreneurship employs the various resources present in the economy. Many of these resourcestend to be unutilized and unmaximized. Entrepreneurs, therefore, make productive use of otherwisenon-productive resources.Entrepreneurs need manpower for their business operations. They provide employment opportunities tovarious individuals. Note that when these entrepreneurs hire people, they also bear the burden of

providing training for these individuals. Professional growth and skills enhancement are also importantcontributions of entrepreneurs.It is said that entrepreneurship is the backbone of the economy. Contrary to popular belief, it is thesmall and medium enterprises that make up the great bulk of the Gross Domestic Product (DP) of acountry. Economists estimate that 50-80% of the GDP of most countries actually comes - from SMEs. Ithas been found out through international research that entrepreneurs tend to multiply during times ofeconomic slumps and recessions. This is particularly true in Southeast Asia. If people lose employmentopportunities due to economic slowdowns, business would be a logical choice for livelihood.

A fourth contribution of entrepreneurs is in their ability to innovate goods and services. The root of theword entrepreneur means to innovate, and this is precisely what entrepreneurs bring to society. Theymake life more comfortable and convenient for us. They make products more accessible and easier touse.

A fifth contribution of entrepreneurs is their ability to gain international popularity and prestige for theircountry. This is true especially when these entrepreneurs are already able to export their products oreven bring their businesses abroad. The entrepreneurs country of origin becomes known whileallowing t-he country to earn income via stronger currencies.

A sixth important contribution of entrepreneurs is their willingness to take risks, risks that society willotherwise be hesitant to take. These people accumulate great learning experiences, which may bepassed on to other businesspeople through seminars, workshops, speaking engagements and others.


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Although a lot of people dont recognize it, entrepreneurs also profoundly inspire budding and potentialentrepreneurs. It is said that only a master can produce a master; likewise, only businesspeople canteach others to venture into business. Successful entrepreneurs become paragons for otherentrepreneurs, potential or actual.E. SOCIO-ECONOMIC BENEFITS FROM ENTREPRENEURSHIP

The following is a summary of the various socio-economic benefits derived from the pursuit ofentrepreneurship: Promotes self-help and employmentMobilizes capital Provides taxes to economy+ Empowers individual Enhances national identity and pride+ Enhances competitive consciousness+ Improves quality of life Enhances equitable distribution of income and wealthF. CATEGORIES OF SMALL AND MEDIUM ENTERPRISES (SMEs)

Any business activity or enterprise engaged in commerce or industry, agribusiness and services

whether a single proprietorship, partnership, corporation or cooperative inclusive of those arisingfrom loans but exclusive of the land in which the particular business entitys office is located, plant andequipment are situated must have the following values in order to be categorized under the followingcategories. The other category of small and medium enterprises is that which categorizes themaccording to the size of their labor force or the total number of employees. These categories are statedherein below:


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IN TERMS OF CAPITALIZATION:

SMALL AND MEDIUM ENTERPRISE CATEGORY & AMOUNT OF CAPITALIZATION

Micro Enterprise less than Php 3 Million

Small Enterprise from Php 3 Million to Php 15 Million

Medium Enterprise from Php 15 Million to 100 Million

Large Enterprise Php 100 Million and above

IN TERMS OF EMPLOYMENT SIZE:SMALL AND MEDIUM ENTERPRISE CATEGORY & AMOUNT OFCAPITALIZATION

Micro Enterprise less than 10 employees

SMALL AND MEDIUM ENTERPRISE CATEGORY & AMOUNT OFCAPITALIZATION

Small Enterprise from 10 employees to 100 employees

Medium Enterprise from 100 employees to 500 employees

Large Enterprise 500 employees and above


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G- BARRIERS TO GROWTH OF PHILIPPINE SMEsOver the years, the following have been determined to be themajor reasons why entrepreneurship has not really developed in thecountry: Poor access to finance+ Obsolete technology

+ Low productivity+ Lack of skills upgrading+ Lack of information. Inability to make entrepreneurial transition Poor linkage among small, medium and large industries + Inappropriate locationManagement incompetence Poor market access+ Lack of infrastructure+ Bureaucratic/cumbersome procedures+ Severe global competitionH. IMPORTANCE & BENEFITS OF SMALL BUSINESSES TODAY

Havmg been able to identify the important contributions ofentrepreneurship to the economy, let us now delimit our discussion tothe importance and consequent benefits of small businesses today.The small business sector continues to create many of the new ideas and innovations that futuregenerations tend to take for granted. Small businesses and schools offering courses for smU businessdevelopment and management become the seedbed Of


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tomorrows products and daily convenience. It is said that all big enterprises come from smallbeginnings.Small businesses contribute to the Gross National Product (GNP) of a country and meet local needsthat many of the national producers do not offer. Local producers and suppliers of services form a greatpart in the day-to-day activities of every community be it a small town or a large municipality.Furthermore, it is the vibrance of the local economy that continues to draw investors into an area, and

encourage local people to stay and contribute to the communitys productivity. When the local economy is not vibrant, people tend to emigrate into cities and metropolitan areas or,worse, to other countries. Having a strong local economy allows a more distributed growth anddevelopment in a country.Needless to say, the presence of micro-enterprises and small busiiesses contribute to the revenues oflocal communities.The more enterprises there are, the more transactions and government revenues are generated.With regard to the benefits of being small, small businesses survive and prosper for many differentreasons:> Small businesses develop more personal relationships. Big businesses and corporation tend to beimpersonal to their markets. This may be explained by the fact that corporations have their ownpersonalities. Personal relationships allow customers to have a more human contact with products

and producers. This face-to-face interaction of business transactions provides better information forcustomers, allows quicker feedback for businesses, and appeals to the inherent need of customers fora personal touch, especially among Filipino consumers. In the long-run, this person-to-personinteraction is important in building and keeping customer loyalty.> Relatively low overhead costs. Due to their small scale of operation, small businesses have loweroverheads to cover. They can operate in small premises with low heating and lighting costs, and onlylimited rent and rates to pay. In many cases, production plants are found in the residential areas ofentrepreneurs themselves. Cheaper, or even free., labor may be


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derived from members of the household or the community. Low costs can then be passed on toconsumers as low prices.> Catering to limited or niche markets. Big businesses, due to their scale of operations, have to achieveeconomies of scale to recover costs and investments. This would mean producing greater quantities tobe cost-efficient. However, producing great quantities means selling in big quantities. It is thereforelogical for big businesses to sell products to big market segments that have more or less similar

characteristics. Small businesses, on the other hand, cannot compete with their bigger brothers inindustry, so they instead cater to the special needs of individuals that do not share the samecharacteristics as those of the bigger markets. This is true for people who would like to receive specialcare (e.g. health and -body care, barbershops and salons), buy products with specialized (oftenpersonalized) designs (e.g. clothes, furniture), demand special ingredients (e.g. made-to-order cakes,catering), or even ask for personalized items (e.g. jewelry).Quicker response to trends and situations. Large firms tend to be slower in reacting to changes in theirenvironment and changes in the economy due to their sizeable investments. Their actions largelydepend upon several people, such as Board of Directors and corporate officers who consUme muchtime in implementing strategic decisions. Small businesses, on the other hand, take relatively less timein deciding, and require less resources in implementing decisions. For many businesses that thrive ontrends, they can offer the product in demand at a faster rate (e.g. clothing, telecommunication

accessories, entertainment paraphernalia). In instances of economic recessions, smaller businessmenare more adaptable and quicker to change lines of businesses in response to signals sent by theeconomy. This is largely due to their smaller capital and smaller enterprises.I. CHALLENGES FOR SMALL BUSINESSESBeing small does have some disadvantages.Running an enterprise on your own involves hard work and having to make most decisions on yourown. Usually, the time involved in running an enterprise exceeds the time needed in working


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for an employer (i.e. 8 hours). In fact, businesses are open duringholidays and, in many instances, even on holy days.It is rather difficult to achieve economies of scale and be cost-efficient when capitalization and otherresources are not abundant. This could mean more manual labor exhausted in producing productsrather than the use of machines and equipment. Errors in production and non-conformity to qualitystandards of some products are bound to occur, adding to operational costs.

Discounts in terms of buying raw materials are also limited for a small business that tends to buy insmalier quantities.Furthermore, if these raw materials are not abundant in the immediate environment of the entrepreneur,the costs of transporting these materials from their distant sources, or the costs of locking for viablesubstitute add to operational costs.

Another key limitation of small businesses is their inability to employ specialists or highly skilledlaborers in their enterprises. Consequently, quality and productivity will be affected. The need fortraining these laborers and consequent costs is a prime consideration for the entrepreneur in terms ofthe quality and range of products he wants to offer to his clients.Better technology and better information (or production processes) may not necessarily be readilyavailable for small enterprises, unlike their bigger counterparts who can afford to buy newer equipment,and to maintain a research and development department.

Access to greater financing presents yet another formidable challenge to entrepreneurs. Unlikecorporations which can easily increase capitalization by increasing offered shares of stocks, manysmall entrepreneurs rely on their own pockets for funding, their immediate family, relatives and friendsall of which add up to a mere fraction of the capital of big businesses.These challenges, needless to say, would imply that althoughentrepreneurship is worth pursuing either as a course or as a way oflivelihood, it remains largely not for the fainthearted.


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