Module 8 Theories of Entrepreneurship

5/27/2018 Module 8 Theories of Entrepreneurship

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AIBSTheories of Entrepreneurship

Innovation Theory by Schumpeter & Imitating

Theory of High Achievement by McClelland

X-Efficiency Theory by Leibenstein

Theory of Profit by Knight

Theory of Social change by Everett Hagen


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Development of Entrepreneurship

Theories

Adam Smith (1776)An entrepreneur is a person

who acts as agent in transforming demand into

supply.

Jean Baptiste Say (1803) An entrepreneur is aperson who shifts resources from an area of low

productivity to higher productivity.

John Stuart Mill (1848) An entrepreneur is a

prime mover in the private enterprise. The

entrepreneur is the fourth factor of production.


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Theories

Carl Menger (1871) The entrepreneur acts as aneconomic agent who transforms resources intoproducts and services. These transformation processgives added value to the output.

Joseph Aloysius Schumpeter (1934) Theentrepreneur is an innovator. The economy movesthrough leaps and bounds because of the innovations.This process is known as creativedestruction

Alfred Marshall (1936) The process ofentrepreneurship development is evolutionary. Theentrepreneur is responsible for the evolution of soleproprietorships into a public company.


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Theories

Ibnu Khaldun (Abdul Rahman Mohamed

Khaldun) The entrepreneur is seen as a

knowledgeable individual and is instrumental in

the development of a city-state whereenterprises emerge.

David C. McLelland (1951)The entrepreneur

is a person with a high need for achievement.

This need for achievement is the foundation ofthe entrepreneurship process.


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AIBSOBJECTIVES OF ENTREPRENEURSHIP

Economic

Objectives

ProfitEarning

Productionof Goods

CreatingMarket

TechnologicalImprovement

Human

Objectives

Welfare ofEmployee

s

Satisfaction

ofConsumers

Social

Objectives

Availabilityof Goods

Supply of

Qualitygoods

Co-Operationwith

government

Creation of MoreEmployment

Utilising NaturalResources Properly

Personal

Objective

Growth

Survival

EarningPrestige

National

Objectives

HelpingNational efforts

Developmentof SmallEntrepreneur

National SelfSufficiency

Development ofSkilled

Personal


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TheEconomists

View

TheSociologists

View

ThePsychologists

View

TheAnthropologist

s View

THEORIES OF ENTREPRENEURSHIP

Four Catego r ies of

Entrepreneurship:

Entrepreneurial history is felt to

be interdisciplinary in approach and

thus, it is difficult to label

entrepreneurship as purely a theoryof economics or sociology or

psychology or a anthropology. The

concept of entrepreneurship is as old

as civilization while theories of

entrepreneurship have been evolved

from over a period of more than two

centuries.


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1). Economic Theory

Richard Cantillion (1755) was the first person to recognise the role of

entrepreneurs in economic theory. He stated that , the farmer is an entrepreneur

who promises to pay the land owner for his farm or land, a fixed sum of money

without assurance for the profit he will derive from his enterprise. Hence

entrepreneur is always at risk of bearing losses if he would unable to sell the goods

at a higher price.

J.Schumpeter (1994) added the concept of innovation to the theory of

entrepreneurship . He visulalised the entrepreneurs as the key figure in the economic

development because of his role in introducing innovations. For Schumpeter, the

ability to identify new opportunities in the market is a central entrepreneurial

activity which creates disequilibrium In the economy.

According to economists, G.F Papanek and J.R. Harris, economic

incentivesbring forward a favourable drive for entrepreneurial activities. A desire to

have more economic gain sparks the entrepreneurial instinct. Lack of incentives ,

unattractive economic polices and unfavourable market conditions tend to reduce the

vigour of entrepreneurship.


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2).Sociological Theory

Sociologists suggests that the entrepreneurship can conceptualized as asocial movements and entrepreneurs exist not only in the economy but inother spheres of society as well.

S.M Lipset argues that cultural values deeply effects entrepreneurshipand the level of economic development.

Mark Granovetter points that family ties may create an obstacle for abusinessman.

According to Hoselitz, the approach which emphasizes thetheory of deviance assumes that those who introduce changes must bedeviants since they reject the traditional elites way of doing things. Forexample , in Latin America , recent immigrants , members of minority

groups have formed a considerable section emerging business elite.A great land mark in entrepreneurial studies is represented by

study conducted at Harvard University (1948-1958). A journal of the centreExplorations in Entrepreneurial History, states that entrepreneurship shouldnot be studied by focusing on individual entrepreneur but rather by lookingenterprise . Special attention was often paid to the social relations within the

enterprise and to the relations between the enterprise and its surroundings.


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3).Psychological Theory

Joseph Schumpeter states that the entrepreneur is mainly motivated and

driven by three things:

a. The dream and the will to found a private kingdom.

b. The will to conquer.

c. The joy of creating.

J.Schumpeter formulation can be translated as:

a) the desire of power and independence ;

b) The will to succeed;

c) The satisfaction of getting things done.

d) According to him , money is not what ultimately motivates the

entrepreneur. Thus he supports the psychological theory and not the

economic theory. He asserts that what matters is the behaviour and not the

actors.


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4).Anthropological Theory

Barth on of the leading anthropologist of the world ,

states that entrepreneurial behaviour means to connect two

different spheres in the society, between which huge

discrepancy in value. Something which is cheap in one sphere

may be expensive in another.


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Each of the above theories is incomplete and none ofthem is right or wrong. Theories of entrepreneurship

are inter-disciplinary and are influenced by multitude

of factors. It is the integration of external

environment , achievement motivation, ability and

ambition which largely determines whether an

individual become an entrepreneur.


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Joseph Schumpeter

and Entrepreneurialism


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1. Background and Personal Characteristics

of Joseph Schumpeter

2. Joseph Schumpeters books

3. Entrerprenuer

4. Innovation

5. Scumpeter versus capitalism and socialism

S h t A D f d f R ti l


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Schumpeter A Defender of Rational

Capitalism

A Lawyer turned Professor atCzernowitz

Theory of economicDevelopment (1911)

Founder of the Theory ofEntrepreneurship

Theory of The Theory ofEconomic Development: Aninquiry into profits, capital,credit, interest and thebusiness cycle , 1911.

Economic Doctrine andMethod: An historical sketch,1914.


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Background and Personal Characteristics of

Joseph Schumpeter(1883-1950)

Tangled patterns wove throughout Schumpeters

early life. He was born in Moravia in 1883.

He worked in government and finance during the

1920s. He settled at Harvard University.


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Schumpeters characteristics were evident in

his actions and writings

He both dressed and wrote flamboyantly.

He was extremely well read.

He had a streak of contrariness.


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AIBSSchumpeter as a Politician and an Academic

German SocializationCommittee

Kiel School of Economists andGerman Marxists Such

Kautsky and Hilferding Brief Tenure as Austrian

Minister of Finance in 1919

President of Bank andProfessorship at Bonn

Harvard University in 1932 Mentor of Paul Samuelson


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Joseph Schumpeters books

1908, The Nature and Essence of Theoretical

Economics

1911, The Theory of Economic Development

1914, Economic Doctrine and Method 1939,Business Cycles

1942, Capitalism, Socialism, and Democracy

1954, History of Economic Analysis (published

posthumously)


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Schumpeter

Starts with neoclassical model.

Introduces entrepreneurship and innovationchange.The balanced, circular flow is disrupted.

Innovations drive business cycles and development.Innovations occur in clusters.

Innovation is followed by recession and depression, thenrecovery.


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AIBSDavid McClelland

1917-1998

Boston University

Harvard

Achievement

motivation

Need to achieve

nAch


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AIBSWrite a story based on questions:

Who is the person?

What is happening?

What led up to situation? What is being thought

or wanted?

What will happen? What will be done?


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AIBSStory content with high nAch

Main character

Ambitious

Making plans to forge

ahead

Attempting to reach a

goal


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AIBSStories low in nAch

Main character

Yielding to pressure

Failing in endeavors

Avoiding

responsibility

M Cl ll d A hi t M ti ti


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McClellands Achievement Motivation

Theory

McClelland and colleagues studied the

behavioral effects of three needs

Need for Achievement

Need for Power

Need for Affiliation

Emphasized the Need for Achievement,

although they investigated all three needs



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Theory (Cont.)

Product of an impressive long-running

research program

Controversy over measurement methods

Recent study shows the validity of different

measures



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Theory (Cont.)

Strong need for achievement people

Take responsibility for results of behavior

Willing to take calculated risks

Set moderate achievement goals Prefer to set performance standards for

themselves

Prefer non routine tasks to routineassignments

Welcome feedback about how well they aredoing



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Theory (Cont.)

Acquire the Need for Achievement through

socialization to cultural values

Presence of Need for Achievement

themes in folklore, mythology, art

Need for Achievement societies had high

levels of economic development


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Theory (Cont.)

Strong Need for Power people

Focuses on "controlling the means ofinfluencing the behavior of another person

Having strong effects on other people Means of influence: anything available to the

person to control the behavior of another

Actively searches for means of influence

Example: use superior-subordinate relationship

or external rewards to control the behavior of another



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Theory (Cont.)

Two ways of expressing the Need for

Power

Dominance, physical aggression, exploitation

View situations from a win-lose perspective

Must win and the other party must lose

Did not feel such power behavior resulted in

the type of leadership required byorganizations

McClellands Achie ement Moti ation


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Theory (Cont.)


Power (cont.)

Persuasion and interpersonal influence

Tries to arouse confidence in those he or she

wants to influence

Clarifies groups goals and persuades members to

achieve those goals

Emphasizes group members ability to reach goals



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McClelland s Achievement Motivation

Theory (Cont.)


Power (cont.) Tries to develop a competence belief in group

members McClelland felt this type of power behavior

characterized effective leaders in organizations



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Theory (Cont.)

Strong Need for Affiliationpeople

Focuses on "establishing, maintaining, and

restoring positive affective relations with

others" Want close, warm interpersonal relationships

Seek the approval of others, especially those

about whom they care Like other people, want other people to like

them, and want to be in the company of

others



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Theory (Cont.)

Need for achievement and behavior

Money: important to both high and low

achievers, but for different reasons

High achiever wants concrete feedback aboutperformance

Making a profit, or receiving a bonus, is a

statement about success or failure

Symbol of success and feedback about jobperformance



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Theory (Cont.)

Need for achievement and behavior (cont.) High achiever wants a challenging job and

responsibility for work

Want to feel successful at doing something overwhich they have control



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Theory (Cont.)

Need for achievement and behavior (cont.)

Low achiever views monetary reward as an

end in itself

Get increased performance from low Need forAchievement person by rewarding with money



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Theory (Cont.)

Managers and executives usually have a

stronger Need for Achievement than

people in other occupations

Evidence points to strong Need for

Achievement as an entrepreneur

characteristic

Nature of Need for Achievement behaviorfits well with such role demands



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Theory (Cont.)

Need for Achievement and Need for

Power: some relationships

Strong Need for Achievement person

Task centered

Future oriented

Performs to internal standard of excellence



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Theory (Cont.)


Power: some relationships (cont.)

Strong Need for Power person

Draws attention

Risk taking

Present oriented

Assesses situations for change potential



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Theory (Cont.)


Power: some relationships (cont.)

Both types of people important for successful

organizations

Strong Need for Achievement managers keep

an organization going

Strong Need for Power people bring dramaticchange and innovation


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AIBSX-Efficiency Theory

Harvey Leibenstein (1966) originated X-

inefficiencyas a concept to cover non-

allocative inefficiencies in an organization.

X-inefficiency was a counterpart totechnical inefficiency and was to capture

organizational or motivational inefficiency.


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AIBSX-efficiency Theory

Leibenstein summarized h is theory as fol lows:

Firms generally operate within rather than on their

production frontiers. As such, their output is not

maximized and their costs per unit are generally not

minimized. Innovations are generally not introduced

when it is optimal to do so. Less output is not

necessarily associated with more desired leisure. The

price of the product can have an influence on the cost of

production.


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AIBSTheory of Profit by Knight

Risk and Uncertainty-bearing theory of profit byKnight

What is Risk and Uncertainty?

Entrepreneurs have to undertake the work

of production under conditions of uncertainty.

They have to make estimates of the future

conditions regarding demand for the product and

other factors in advance and these affect theirfuture price and costs In view of their estimates

and anticipations, they make contracts with the

suppliers of factors of production in advance at

fixed rates of remuneration.


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Now these contracts are no doubt based on anticipations

about the future conditions.Between the time of contracts

and the time of the sale proceeds many changes may

take place which may upsets anticipations for better or

for wo rse.

Knight distinguishes between risk and uncertainty. Acc

to him, risks inherent in any business are of two kinds:

1)Insurable

2)Non-Insurable


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AIBSInsurable Risks

Insurable risks are those risks which can be

calculated statistically and thus insured with an

insurance company.These in turn are of two

types: a) Risk of loss of assets, resulting from natural

factors like fire,flood,etc

b) Risk of theft, robbery etc.

By paying insurance premium these risks can be

taken care of by the entrepreneur.


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AIBSNon-Insurable Risks

There are certain risks which have to be borne by theentrepreneur himself as these cannot be insured against

These non-Insurable risks are:

1)Competition Risks: These are the risks arising from the

policy changes of the rivals, which include thingslike changes in price, product line ,advertisement

expenditure, etc. For i.e change in prices of coke pet

bottle made Pepsi also to change their prices.

2)Risks of market condition: Whole or major part of the

business sector in an economy may enter a phase of

recession or a boom, thus effecting the firm adversely or

favorably. Like India business sector was hit by

recession in 2008-09.


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3) Risks of technological changes :This is also called risk ofobsolescence which grows with advancement of an

economy. These risks arise from the possibility of newly

installed machinery becoming obsolete with the

discovery of new and more economical processes

of production.

4) Risks of public policy: Government policy regarding

business undergoes a change over time, some of which

cannot be predicted precisely. These policies changes

may relate to price control, foreign trade policy,corporate taxation etc. These non-insurable risks are

called uncertaint ies by knight. According to him ,the

term r isk should be applied only to insurable r isks

.


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Acc to Knight, the most significant function of anentrepreneur is to bear r isk and uncertainty which is

rewarded by Profi t.

He says that different rates of profit earned by different

firms in the same industry reflect the differences in theircapabilities of bearing risk and uncertainty.

Weaknesses of KnightsTheory:

Actually uncertainty-bearing is not the only determinant

of profit.Ability of the businessmen to mould demand in the

market in favor of his commodity, innovative ability etc

are also equally important for the emergence of profit.


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Some Critics go on to point out that a monopoly

producer earns profit even without beating

uncertainty.

Thus according to this theory

Profits are the result of market frictions and

imperfections.

They exist because of disequilibrium and imperfect

competition.

Module 8 Theories of Entrepreneurship

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