Session 3: Entrepreneurship theories & Reasons for
Growth
Session plan
 Need for theories
 Classification of theories
 Entrepreneurship theories
 Reasons 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
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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
underEconomic theories
Psychological theories
Sociological theories
Cultural theories/ Anthropological theories
Integrated theories
Economic theories
 Entrepreneurship and economic development are
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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
resources
B) Gap filling – arbitrage function
ECONOMIC THEORIES
 Schumpeter’s Theory of Innovation Schumpeter’s theory of
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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 kingdomthe 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 coordination
 2. sensitivity to the environmental changes
Psychological Theories
 Psychological theories centre's around the psychological
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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,
motivations
Human aspect: will to power, excel, achieve, change, innovate
Psychological Theories cont..
 Maslow & Alderfer:
 Maslow’s need hierarchy theory: Human beings have
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five basic levels of needs such as
1. Physiological – survival needs
2. Safety & security – security, stability, insurance, etc
3. Social – affiliation, belongingness
4. Esteem – egoistic needs- respect, recognition, etc
5. Self actualization – realizing one’s potential fully
Psychological Theories cont..
 Alderfer’s ERG theory:
 1. existence needs – combination of physiological &
safety needs
 2. relatedness needs – social & esteem needs which are
derived from other people
 3. growth needs - self actualization needs
 For proper development of entrepreneurship,
relatedness and growth needs are more important.
Sociological theories
 Sociological 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
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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 Change
 Everett E. Hagen, in his theory of social change states how
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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 change
 According to Hagen entrepreneur is a creative personality who is
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interested in accelerating the change and is driven by achievement
motivation
Hagen 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 change
 Entrepreneurial growth has been very gradual and may or may not
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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 THEORIES
 Advocates of cultural theories point out that entrepreneurship is
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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 ENTREPRENEURSHIP
 Peter F. Drucker: an entrepreneur is one who always searches for
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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 approach
 Udai Pareek and T.V.Rao: Few sequential propositions
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lead to entrepreneurship:
1. Need for motive – main thrust behind action
2. long term involvement & reinforcement in action
3. Resources – cognition, social & material inputs
4. 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 theories
Theories
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 barriers
 Technological development shifting towards
bigger role to small firms
 Deregulation & privatization
 Formation of new business communities (eg
alibaba.com)
 Increasing demand for variety, special needs
 Growth of service sector
 Increasing flow of information
Reasons for the growth of entrepreneurship
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Easier access to resources
Entrepreneurial education
Strengthening of IPR
Changing image of entrepreneur in society
Rising dissatisfaction at job
Recognition of small firms’ role in job creation
Recognition that large organizations are not conducive
to self-actualization
 Increase in media coverage
The Future of Entrepreneurship
 Common aspects of entrepreneurship
 Risk Taking
 Creativity
 Independence
 Rewards
 Increased interest in entrepreneurship:
The Future of Entrepreneurship
 Some Entrepreneurship courses have been started by
universities
 Entrepreneurship cells to incubate new businesses are
coming up
 Government 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 Entre
 Stimulatory activities:
 Entrepreneurial education
 Planned publicity about b opportunities
 Identification of potential entrepreneurs
 Motivational training to new entre
 Help & guidance in selective products , etc.
 Provision of techno-economic information
 Creating entrepreneurial forums
 Recognition to entrepreneurs