Entrepreneurship MgtSession 3: Entrepreneurship theories &

Reasons for Growth

Session planNeed for theoriesClassification of theoriesEntrepreneurship theoriesReasons for growth in entrepreneurship

Why so many theories?Growing emphasis on entrepreneurship

development for achieving economic growth & tackling problems

Demolition of the contention that entrepreneurs are born & cannot be made

Identification & development of potential entrepreneurs require careful studies from different perspectives such as economic, psychological, cultural, etc.

These theories provide a limited yet different view to understand the ‘entrepreneurial phenomenon’

Classification of entrepreneurship theories

Entrepreneurship is an evolved process. With the advancement of science and technology it has undergone metamorphosis change and emerged as a critical input for socio-economic development. Various writers have developed various theories on entrepreneurship and popularized the concept among the common people.

The theories propounded by them can be categorized as under-

Economic theories Psychological theories Sociological theories Cultural theories/ Anthropological theoriesIntegrated theories

Economic theoriesEntrepreneurship and economic development are

interdependent. Economic development takes place when a country' real rational income increases overall period of time wherein the role of entrepreneurs is an integral part

Mark Casson – The demand for entrepreneurship stems from the need to adjust to the change. The supply of entrepreneurs is limited due to scarcity of requisite personal qualities. Identifying the potential entrepreneurs is crucial.

Leibenstein – Role of an entrepreneur is A) input completion – improving the efficiency of available

resourcesB) Gap filling – arbitrage function

ECONOMIC THEORIESSchumpeter’s Theory of Innovation Schumpeter’s theory of

entrepreneurship is a pioneering work of economic development. development in his sense, implies that carrying out of new combination of entrepreneurship is basically a creative activity.

Entrepreneur is a catalyst that disrupts the stationery circular flow of the economy by innovations.

1- The introduction of new goods, that is the one with which consumers are not yet familiar, of a new quality.

2- The introduction of new method of production 3- The opening of new market 4- the conquest of new source of supply of raw material 5-The carrying out of new organization

Schumpeterian theory cont..1- Distinction between invention and innovation Schumpeter makes

a distinction between innovation and invention. Invention means creation of new things and innovation means applicable of new things onto practical use

2- emphasis on entrepreneurial function- Schumpeter has given emphasis on the role of entrepreneurial functions in economic development. in his views, development means basic transformation of the economy that is brought about by entrepreneurial functions.

3- presentation of disequilibrium situation through entrepreneurial activity-the entrepreneurial activity represents a disequilibrium situation, a dynamic phenomenon and a break from the routine or a circular flow or tendency towards equilibrium.

4- entrepreneurialism dream and the will to found a private kingdom- the motives of creating things and applying these things into practice inspire the entrepreneur to undertake innovation.

Harvard School Theory Entrepreneurship is a purposeful activity

that initiates, maintains or develops a profit oriented business in interaction with the internal situation of the business or with the economic, political & social circumstances surrounding the business.

Two activities – 1. organizational or coordination2. sensitivity to the environmental changes

Psychological TheoriesPsychological theories centre's around the psychological

characteristic so the individual in a society. Psychological characteristics affect the supply of entrepreneurs in the society.

McClelland – N-Ach theory Theory of personal resourcefulness: Kanungo & Misra: The root of entrepreneurial process can be traced to the

initiative taken by some individuals to go beyond the existing way of life.

Supply of entrepreneurship depends on two factors Cognitive function: emotions, inner feelings, thoughts,

motivationsHuman aspect: will to power, excel, achieve, change,

innovate

Psychological Theories cont..Maslow & Alderfer:Maslow’s need hierarchy theory: Human

beings have five basic levels of needs such as1. Physiological – survival needs2. Safety & security – security, stability,

insurance, etc3. Social – affiliation, belongingness4. Esteem – egoistic needs- respect,

recognition, etc5. Self actualization – realizing one’s

potential fully

Psychological Theories cont..

Alderfer’s ERG theory:1. existence needs – combination of

physiological & safety needs2. relatedness needs – social & esteem needs

which are derived from other people3. growth needs - self actualization needsFor proper development of entrepreneurship,

relatedness and growth needs are more important.

Sociological theoriesSociological Theories :Explain how

sociological factors accelerate the growth of entrepreneurs.

The forces of custom, values, the rigidity or flexibility of changing social status, acceptance of new ideas, freedom to exercise intellectual curiosity are determined by socio-cultural values which act as channels for economic action that gives birth to entrepreneurship

Theory of religious beliefs Theory of social change

Theory of religious beliefs

Weber: Religious beliefs exogenously drive entrepreneurial spirit through encouraging or discouraging intensive occupational pursuit, accumulation of assets, etc.

Few religions like hinduism, buddhism, Islam do not encourage entrepreneurship.

He emphasized that entrepreneurial energies are exogenous supplied by means of religious beliefs

Spirit of Capitalism is encouraged only when ‘Capitalism’ as an economic system in which economic freedom and private enterprise are glorified, so also the entrepreneurial culture.

Adventurous Spirit- Weber also made a distinction between spirit of capitalism and adventurous spirit. According to him, the former is influenced by the strict discipline whereas the latter is affected by free force of impulse. Entrepreneurship culture is influenced by both these factors.

Theory of Social ChangeEverett E. Hagen, in his theory of social change states how

traditional society transforms into technical advanced society

The theory states that the entrepreneur’s creativity as the key element of social transformation and economic growth.

Interrelationship among physical environment, social structure, personality and culture plays an important part in transformation of society

Economic Growth is a product of social change and political change :

According to Hagen, most of the economic theories of underdevelopment are inadequate. He rejected the idea that the solution to economic development lies in imitating western technology.

Hagen’s theory of social changeAccording to Hagen entrepreneur is a creative personality

who is interested in accelerating the change and is driven by

achievement motivationHagen tried to explain why this achievement motivation

(explained by McClelland)varies between societies and their classes and strata.

In traditional societies the status of individuals is fixed. Children learn to act according to established norms.

If by external influences a new group gains power, the status of the old elite is challenged and weakened. The insecurity and frustration leads to changed behaviour which has consequences on the family structure.

Children tend to become dissatisfied with the society and readily accept new values. In time, they become innovative personalities.

These persons may become dominant groups causing economic development.

Historic shift as a factor of initiating changeEntrepreneurial growth has been very gradual and may or

may not occur in the same generation but it is more likely to be an intergeneration change.

Historic shift is the crucial force which has brought about social change which leads to the emergence of entrepreneurial class from different castes and communities.

The forces of disruption against the stability of traditional society should be powerful to have creative personalities.

Class relations change with different stages of development such as feudal society (landlords & tenants), capitalist society (capitalists & workers), etc.

Disadvantaged or minority group is mostly the source of entrepreneurship. Withdrawal of status is the causal factor for emergence of creative personality.

Hence, Hagen’s creative personality is the a mixture of Schumpeter’s innovation and McClelland's high need for achievement.

CULTURAL THEORIESAdvocates of cultural theories point out that entrepreneurship is

the product of culture. Entrepreneurial talents come from cultural values and cultural

system embedded into the cultural environment. Hoeselitz’s Theory :Hoeselitz explains that the supply of

entrepreneurship is governed by cultural factors, and culturally minority groups are the spark-plugs of entrepreneurial and economic development.

In many countries, entrepreneurs have emerged from a particular socio-economic class.

He emphasized the role of culturally marginally groups like Jews and the Greeks in medieval Europe, the Chinese in South Africa and Indian in east Africa in promoting economic development.

Cultural theories cont..Thomas Cohram:Cultural values, role expectations & role sanctions

play an imp role in process of entrepreneurship development.

Entrepreneurs are seen as representing society’s ‘model’ personality rather than as deviant or super normal individuals.

It is moulded by prevailing child rearing practices, educational practices & culture.

Entrepreneurs own attitude towards his occupation and the role expectations held by sanctioning groups are determined by society’s values.

DRUCKER ON ENTREPRENEURSHIPPeter F. Drucker: an entrepreneur is one who always searches

for change, responds to it and exploits it as an opportunity.” He laid emphasis on two important factors – innovation and

resource- that led to emergence of entrepreneurship. Innovation is the real hub of entrepreneurship which creates

resource. A thing is regarded as resource when its economic value is recognized.

Entrepreneurship is not confined to big businesses and economic institutions, it is equally important to small business and non-economic institutions.

Entrepreneurship behavior rather than personality trait is more important to enhance entrepreneurship

The foundation of entrepreneurship lies in concept and theory rather than in intuition.

Drucker contd…Thus, Drucker has given his views that “an

entrepreneur need not be a capitalist or an owner. A banker who mobilizes other’s money and allocates it in areas of higher yield is very much an entrepreneur though he is not the owner of the money.

Integrated approachUdai Pareek and T.V.Rao: Few sequential

propositions lead to entrepreneurship:1. Need for motive – main thrust behind action2. long term involvement & reinforcement in action3. Resources – cognition, social & material inputs4. Socio-political system which reinforces the

individual needs to establish, develop, maintain or expand his business activity

This approach tries to synthesize psychological & sociological theories.

Summary of different theoriesTheories Content

Casson (Economic) Need for bringing out change

Leibenstein (economic) Gap filling

Harvard (economic) Purposeful & profit oriented activity

Schumpeter (economic) Innovations

McClelland (psychological) Need for achievement

Maslow & Alderfer(psychological)

Need hierarchy

Weber (social) Religion

Hegen Social change & disadvantaged groups

Cochran (cultural) Role expectations & social sanctions

Hoselitz Cultural factors

Drucker Innovations

Pareek & Rao Integrated approach

Reasons for the growth of entrepreneurship

Change in industry structure: concentration on core competencies

Lower entry barriersTechnological development shifting towards

bigger role to small firmsDeregulation & privatizationFormation of new business communities (eg

alibaba.com)Increasing demand for variety, special needsGrowth of service sectorIncreasing flow of information

Reasons for the growth of entrepreneurship

Easier access to resourcesEntrepreneurial educationStrengthening of IPRChanging image of entrepreneur in societyRising dissatisfaction at jobRecognition of small firms’ role in job

creationRecognition that large organizations are not

conducive to self-actualizationIncrease in media coverage

The Future of EntrepreneurshipCommon aspects of entrepreneurship

Risk TakingCreativityIndependenceRewards

Increased interest in entrepreneurship:

The Future of EntrepreneurshipSome Entrepreneurship courses have been

started by universitiesEntrepreneurship cells to incubate new

businesses are coming upGovernment support:

Creating Infrastructure (roads, communication, power)Tax breaks (e.g. Small scale industry units)

Motivation and public support through media and support groups

Within large organizations Intrapreneurship is coming up as a way to retain talent and spur innovation as well as develop new businesses to deal with hyper-competition

Promotion & Dev of EntreStimulatory activities:Entrepreneurial educationPlanned publicity about b opportunitiesIdentification of potential entrepreneursMotivational training to new entreHelp & guidance in selective products ,

etc.Provision of techno-economic informationCreating entrepreneurial forumsRecognition to entrepreneurs