Chapter 2: Economic Theories of
Entrepreneurship
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Entrepreneurship What is It?
“Entrepreneurship is an economic
phenomenon involving a nexus of two
phenomena: the presence of lucrative
opportunities and the presence of
enterprising individuals”.
(Shane and Venkataraman, 2000, p. 218).
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 Who are they? (Delmar, 2006)
 What they do? (Venkataraman, 1997)
 Why they do the things they do? (Davidsson, 2008)
 How they do the things they do? (Garnter, 2005)
 Where they do it? (Welter, 2011)
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Who are they?
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Entrepreneurs
Entrepreneur is derived from the French word entreprendre, meaning “to
undertake”.
Entrepreneurs use innovation to exploit or create change and opportunity
for the purpose of making profit. They do this by shifting economic
resources from an area of lower to an area of higher productivity, accepting
a high degree of risk and uncertainty in doing so.
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The History of Economic Thought on the
Entrepreneur
Source:http://aventalearning.com/content168staging/2008A
mHistA/unit1/html/section_3_page_7.html
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What is an Entrepreneur?
http://ecorner.stanford.edu/authorMat
erialInfo.html?mid=400
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Revolutionaries
•How have entrepreneurs affected your life in the past 24 hours?
•Have you used your computer? (personal computers, PC software: Intel,
Microsoft, Dell, Apple)
•Have you surfed the web? (web browser – Netscape, Google, AOL)
•Have you made a purchase over the internet? (internet retailers, eBay,
PayPal)
•Have you made a mobile phone call? (cellular phone services; voice mail,
IT services)
•Have you used a hand held wireless communication device (a
‘blackberry’)? (RIM)
•Have you taken your car in for a fast oil change or MoT? (KwikFit)
•Have you taken a budget flight? (Easyjet, Ryan Air)
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Revolutionaries cont.
•Where have you bought your clothes? Have you put on trainers (Nike,
Reebok), put on waterproof clothes (WL Gore, Timberland)?
•Have you bought a coffee? (Starbucks)
•Have you bought some DIY products? (Home Depot, B&Q)
•Have you bought any stationary? (Staples)
•Have you listened to your iPod? (Apple)
•Have you watched a 24 hours news channel? (CNN)
•Do you purchase ethically (Bodyshop)?
•Have you been to a fitness club (Fitness First, David Lloyd)?
•Have you bought a copy of ‘Big Issue’? (social entrepreneurship)
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Key Economic Schools of Thought
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Economic Theories of
Entrepreneurship
•Technological
Knowledge –
Jeremy
Bentham, 1838
•Risk Taker –
Richard
Cantillion, 1755
•Risk Taker &
Innovator – Von
Thunen, 1850
•Novel
Resource
Combination –
Alfred
Marshall, 1920
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•Economic
Change – Carl
Menger, 1871
Evolving Entrepreneurs
Date
1755
Author
Cantillon
Concept
Introduced the concept of entrepreneurs from entreprendre (‘ability to take charge')
Emphasised the ability of the entrepreneur to 'marshal’ resources in order to respond to
1803, 1817
Say
unfulfilled opportunities
Noted the ability of entrepreneurs to distinguish between 'economic goods' - those with
1871
Menger
a market or exchange value - and all others
Attributed to entrepreneurs the ability to take integrated action in the enterprise as a
1893
Ely and Hess
whole, combining roles in capital, labour, enterprise and entrepreneur
Envisioned that entrepreneurs proactively 'created' opportunity using 'innovative
1911, 1928
Schumpeter
combinations' which often included 'creative destruction' of passive or lethargic
economic markets
Suggested that entrepreneurs were concerned with 'efficiency' in economic factors by
1921
Knight
continually reducing waste, increasing savings and thereby creating value, implicitly
understanding the opportunity-risk-award relationship
Continued the Austrian tradition of analytical entrepreneurs giving them capabilities of
1948, 1952,
Hayek
discovery and action, recognising the existence of information asymmetry which they
1967
could exploit
19373, 1979,
Attributed to entrepreneurs a sense of 'alertness' to identify opportunities and exploit
Kirzner
1997, 1999
them accordingly
Attributed to entrepreneurs the capacity to 'foresee' market trends and make a timely
1974
Drucker
response
Attributed to 'judgement' ability to entrepreneurs to identify 'credible opportunities'
1975, 1984,
Shapero
depending on two critical antecedents - perceptions of 'desirability' and feasibility' from
Enterprise
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1985
both personal and social viewpoints
Schumpeter
•Schumpeter’s entrepreneur is an innovator.
•The entrepreneur brings change through the introduction of new
technological processes or products.
•The person who destroys the existing economic order by introducing new
products and services, by creating new forms of organisation, or by
exploiting new raw materials.
•Creative destruction.
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Kirzner
•Entrepreneur is alert to profitable opportunities for
exchange
•Entrepreneur is the middle-man who facilitates
exchange
•Entrepreneur has additional knowledge to exploit to
take advantage of profitable opportunities
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Knight
•Calculated risk-taker
•The opportunity for profit arises out of uncertainty and risk
•The entrepreneur is an individual who is prepared to
undertake risk and the reward - profit
•Responsibility for one's own actions
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Understanding Entrepreneurship
Author
Drucker (1985)
Stevenson et al.
(1989)
Low and Macmillan
(1988)
Definition
Entrepreneurship is an act of innovation that involves endowing existing
resources with new wealth-producing capacity.
Entrepreneurship is the pursuit of an opportunity without concern for current
resources or capabilities.
Entrepreneurship is the creation of new enterprises.
Entrepreneurship is a way of thinking, reasoning and acting that is
Timmons (1997)
opportunity obsessed, holistic in approach, and leadership balanced.
Entrepreneurship research seeks to understand how opportunities to bring
into existence future goods and services are discovered, created and
Venkataraman (1997) exploited, by and whom, and with what consequences.
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…Entrepreneurship
“An activity that involves discovery, evaluation and exploitation of opportunities to
introduce new goods and services, and organize new markets, processes and raw
materials through coordinating efforts of the entrepreneur that previously did not
exist” (Shane, 2003: 4)
And he adds…
He adds that entrepreneurship “involves the nexus of entrepreneurial opportunities
and enterprising individuals … where a situation in which a person can create a
new means-ends framework for recombining resources that the entrepreneur will
yield a profit” (Shane, 2003: 18).
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Baumol ’s Three Types of
Entrepreneurship
Productive entrepreneurship is innovation leading
to wealth creation and economic development which
advances not only the individual but wider society.
Pursue a business opportunity within prevailing
institutions.
Unproductive entrepreneurship is some form of
bureaucracy that typically benefits an individual but
not necessarily society. Create contracts to
overcome institutional shortcomings e.g. lobbying;
help others avoid taxes.
Destructive entrepreneurship also benefits the
individual more than society.
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Source: Baumol, W.J. (1990) Entrepreneurship:
Productive, Unproductive and Destructive. Journal of
Political Economy, 98(5), 893-921
The Myths of Entrepreneurship
Myth 1: Entrepreneurs are doers, not thinkers
Myth 2: Entrepreneurs are born, not made
Myth 3: Entrepreneurs are always inventors
Myth 4: Entrepreneurs are academic and social misfits
Myth 5: Entrepreneurs must fit the profile
Myth 6: All entrepreneurs need is money
Myth 7: All entrepreneurs need is luck
Myth 8: Entrepreneurship is unstructured and chaotic
Myth 9: Most entrepreneurial initiatives fail
Myth 10: Entrepreneurs are extreme risk takers
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Reasons Not to be an
Entrepreneur
http://ecorner.stanford.edu/author
MaterialInfo.html?mid=2803
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Why is Entrepreneurship so
Important?
Important contributions to industrial markets:
1.Entrepreneurs play an important role in the change of technology;
2.Entrepreneurs create an additional sense of competition whilst also, providing a
mechanism for regeneration;
3.Entrepreneurs contribute to international competition via niche markets and;
4.Entrepreneurs influence in creating jobs.
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What explains this recent growth
in entrepreneurship??
•
Structural shift from manufacturing (large firm dominated) to services (small firm dominated)
•
Growth in personal, flexible, tailor-made services
•
Restructuring by large firms – focus on core activities, sub-contract non-core activities
•
Technological change
• Scientific discoveries exploited by small firms
• Production and IT technologies have reduced the role of economies of scale
•
Low cost and access to communications technology (‘the great equaliser’): access to information,
distribution (‘the long tail’)
•
Importance of human capital rather than financial capital as the basis for competitiveness
•
Consumer choice – reaction against mass produced products and services: individualism, demand for
authenticity, natural products (e.g. real ale beer) – growth in market niches
•
Deregulation of markets: e.g. in airlines, telecoms, media
•
Personal choice – ‘rebellion’, reaction against working in large impersonal organisations, want to control
own destiny
•
Availability of finance – venture capital
•
Availability of support, advice and education
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Recap – What is an entrepreneur?
Economic Approach:
Schumpeter
•
“the person who destroys the existing economic order by introducing new products and services, by creating new forms
of organization, or by exploiting new raw materials.”
•
“creative destruction”
•
the entrepreneur is a special person
•
entrepreneur is an innovator
•
develops new technology
Kirzner
•
entrepreneur is alert to profitable opportunities for exchange
•
identifies suppliers and customers and acts as an intermediary (no necessity to own resources and profit arises from
intermediary function)
•
entrepreneur has additional knowledge which is not possessed by others (the role of information is very important)
•
anyone could potentially possess the additional knowledge and be alert to opportunities for exchange and trade.
Knight
•
The entrepreneur is an individual who is prepared to undertake risk and the reward - profit - is the return for bearing
uncertainty and is an uninsurable risk.
•
entrepreneur is a calculated risk
•
taker
•
opportunity for profit arises out of uncertainty surrounding change
•
responsibility for one’s own actions
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Personality Approach
Need for independence
Controlling your own destiny, doing things differently, being in a situation
where you can fulfill your potential.
“I enjoy the independence of singlehandling a boat. I like controlling the elements,
making the wind and the waves and the water
work for me.”
Gerry Schwartz
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Personality Approach
Need for achievement
Achievement does not necessarily mean that money is an end itself. It may
allude to employing the 100th person, meeting the first million pound mark etc.
Internal locus of control
Believing you can exercise control over your environment and ultimately your
destiny.
You can believe in Fung Shui if you want,
but ultimately people control their own
fate.”
Li Ka Shing
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Personality Approach
Ability to live with uncertainty and take measured risks
A regular income is a requirement in any job and the cause of much upheaval
and stress. People tend to be risk averse and less willing to be risky with their
own money. In this manner managers and entrepreneurs are very different.
“It was an extremely satisfying experience. Taking
smart risks can be very gratifying.”
Reed Hastings
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Personality Approach
Opportunistic
Entrepreneurs exploits change for profit.
They seek out opportunities to make money.
“Don’t spend so much time trying to choose
the perfect opportunity, that you miss the right opportunity.”
Michael Dell
Innovative
The ability to spot opportunities and to innovative are the
most important distinguishing features of entrepreneur.
Innovation is the prime tool entrepreneurs use to create or
exploit opportunity.
Self-confident
Confident in your own judgement and ability to start up
your own business with the risks and uncertainty that they face.
Don’t confuse with some entrepreneurs being
arrogant or being delusional.
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Personality Approach
Proactive and self-motivated
Entrepreneurs are highly driven and possess determination. They are impatient,
work long hours, committed and determined to succeed. This strong drive is what
psychologists call type ‘A’ behaviour. They are highly driven by money, their goals,
success, etc.
Visionary with flair
Clear vision of what they want, how they will achieve it and when.
"Our vision is to be the world's most consumer-centric company, where customers
can come to find anything they want to buy online.“
Jeff Bezos
Great risks and uncertainty
Large amounts of capital and time are required. For example, entrepreneurs are
known to put up their homes as collateral or capital.
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Personality Approach Theories
McClelland’s (1961) The Achieving Society
•Need for Achievement
•Proactive person – lots of initiative and assertive
•Committed to aims and achieving them
Key characteristics:
•Achievement
•Calculated risk-taker
•High internal locus of control
•Creativity
•Innovative
•Need for authority
•Ambiguity tolerance
•Vision
Enterprise
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•Self-efficacy
Personality Approach Theories
Merideth et al. (1982)
The 5 core traits of entrepreneurship:
• Confidence
• Risk-taking
• Flexibility
• Achievement orientation
• Independence
Meredith, G.G., Nelson, R.E. and Neck, P.A. (1982). The Practice of
Entrepreneurship, International Labour Office, Geneva.
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Personality Approach Theories
Timmons (1994)
•
•
•
•
•
•
•
•
Some acquired traits, some innate
Need for achievement
Vision and ability to inspire
Responsibility for actions / decisions
Ambitious
Achieved personal goals / ambitions
Able to cope with failure
Creative
Timmons, J.A. (1994). New Venture Creation: Entrepreneurhsip for the 21st
Century, 4th Edition, Irwin: Chicago, IL.
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Entrepreneurial Types?
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Methodological Problems
• Characteristics are not stable and change over time.
• They require subjective judgements.
• Measures tend to ignore cultural and environmental
influences.
• The role of education, learning and training is often
overlooked.
• Issues such as age, sex, race, social class and education
can be ignored.
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Why Do Entrepreneurs Do It?
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Antecedent Factors
•
•
•
•
•
•
•
•
Family
Ethnicity
Gender
Education
Previous employment
Religion
Social group
National culture
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Situational Factors
• Employment
• Unemployment
• Immigration
• Economic opportunity
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Yet Even Still…..
Entrepreneurship in the 21st Century:
Is Still Unclear…
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Reading
Chell, E. (1985) The Entrepreneurial Personality: A Few Ghosts Laid to Rest?
International Small Business Journal, 3, 43-54.
Gartner, W.B., (1985) A conceptual framework for describing the phenomenon
of new venture creation. The Academy of Management Review, 10(4), pp.
696-706.
Hisrich, R., Langan-Fox, J. and Grant, S. (2007) Entrepreneurship Research
and Practice: A Call to Action for Psychology. American Psychologist, 6(6),
575-589.
McClelland, D.C. (1987) Characteristics of Successful Entrepreneurs. The
Journal of Creative Behavior, 21(3), 219-233.
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