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What is Entrepreneurship? A Look at Theory

written by: N Nayab•edited by: Rebecca Scudder•updated: 8/27/2011

People use the terms "entrepreneur" and "entrepreneurship" interchangeably. The entrepreneur is the person who starts his own business. The exact definition of "entrepreneurship" still remains a vague concept, though various entrepreneurship theories have defined the concept.

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    Early Theories of Entrepreneurship

    Entrepreneurship Theories Richard Cantillon (1680-1734) was the first of the major economic thinkers to define the entrepreneur as an agent who buys means of production at certain prices to combine them into a new product. He classified economic agents into landowners, hirelings, and entrepreneurs, and considered the entrepreneur as the most active among these three agents, connecting the producers with customers.

    Jean Baptise Say (1767-1832) improved Cantillion’s definition by adding that the entrepreneur brings people together to build a productive item.

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    Frank Knight's Risk Bearing Theory

    Frank Knight (1885-1972) first introduced the dimension of risk-taking as a central characteristic of entrepreneurship. He adopts the theory of early economists such as Richard Cantillon and J B Say, and adds the dimension of risk-taking.

    This theory considers uncertanity as a factor of production, and holds the main function of the entrepreneur as acting in anticipation of future events. The entrepreneur earns profit as a reward for taking such risks.

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    Alfred Marshall’s Theory of Entrepreneurship

    Alfred Marshall in his Principles of Economics (1890) held land, labor, capital, and organization as the four factors of production, and considered entrepreneurship as the driving factor that brings these four factors together.

    The characteristics of a successful entrepreneur include:

    • thorough understanding of the industry
    • good leadership skills
    • foresight on demand and supply changes and the willingness to act on such risky foresights

    Success of an entrepreneur however depends not on possession of these skills, but on the economic situations in which they attempt their endeavors.

    Many economists have modified Marshall’s theory to consider the entrepreneur as the fourth factor itself instead of organization, and which coordinates the other three factors.

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    Max Weber’s Sociological Theory

    The sociological theory entrepreneurship holds social cultures as the driving force of entrepreneurship. The entrepreneur becomes a role performer in conformity with the role expectations of the society, and such role expectations base on religious beliefs, taboos, and customs.

    Max Weber (1864-1920) held religion as the major driver of entrepreneurship, and stressed on the spirit of capitalism, which highlights economic freedom and private enterprise. Capitalism thrives under the protestant work ethic that harps on these values. The right combination of discipline and an adventurous free-spirit define the successful entrepreneur.

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    Mark Casson's Economic Theory

    Mark Casson (1945-) holds that entrepreneurship is a result of conducive economic conditions.

    In his book "Entrepreneurship, an Economic theory" he states the demand for entrepreneurship arising from the demand for change.

    Economic factors that encourage or discourage entrepreneurship include:

    • taxation policy
    • industrial policy
    • easy availability of raw materials
    • easy access to finance on favorable terms
    • access to information about market conditions
    • availability of technology and infrastructure
    • marketing opportunities

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    Joseph Schumpeter’s Innovation Theory

    Joseph Schumpeter’s innovation theory of entrepreneurship (1949) holds an entrepreneur as one having three major characteristics: innovation, foresight, and creativity. Entrepreneurship takes place when the entrepreneur

    • creates a new product
    • introduces a new way to make a product
    • discovers a new market for a product
    • finds a new source of raw material
    • finds new way of making things or organization

    Schumpeter’s innovation theory however ignores the entrepreneur’s risk taking ability and organizational skills, and place undue importance on innovation. This theory applies to large-scale businesses, but economic conditions force small entrepreneurs to imitate rather than innovate.

    Other economists have added a dimension to imitating and adapting to innovation. This entails successful imitation by adapting a product to a niche in a better way than the original product innovators innovation

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    Israel Kirtzner’s Theory of Entrepreneurship

    Israel Kirzner (1935-) hold spontaneous learning and alertness two major characteristics of entrepreneurship, and entrepreneurship is the transformation of spontaneous learning to conscious knowledge, motivated by the prospects of some gain.

    Kirzner considers the alertness to recognize opportunity more characteristic than innovation in defining entrepreneurship. The entrepreneur either remedies ignorance or corrects errors of the customers.

    His entrepreneurship model holds:

    1. The entrepreneur subconsciously discovering an opportunity to earn money by buying resources or producing a good, and selling it
    2. Entrepreneur Financing the venture by borrowing money from a capitalist.
    3. Entrepreneur using the funds for his entrepreneurial venture
    4. Entrepreneur paying back the capitalist, including interest, and retaining the "pure entrepreneurial profit."

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    Leibenstein’s Theory of Entrepreneurship

    Harvey Leibenstein (1922-1994) consider entrepreneur as gap-fillers. The three traits of entrepreneurship include:

    1. recognizing market trends
    2. develop new goods or processes in demands but not in supply
    3. determining profitable activities

    Entrepreneurs have the special ability to connect different markets and make up for market failures and deficiencies.

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    McClelland’s Theory of Achievement Motivation

    McClellands Theory of Achievement Motivation hold that people have three motives for accomplishing things: the need for achievement, need for affiliation, and need for power. Need for achievement and need for power drive entrepreneurship.

    David McClelland (1917-1988) considers entrepreneurs as people who do things in a better way and makes decisions in times of uncertainty. The dream to achieve big things overpowers monetary or other external incentives.

    McClelland’s experiment reveled that traditional beliefs do not inhibit an entrepreneur, and that it is possible to internalize the motivation required for achievement orientation through training.

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    Peter Drucker’s Theory of Entrepreneurship

    Entrepreneurship Theories Peter Drucker (1909-2005) holds innovation, resources, and an entrepreneurial behavior as the keys to entrepreneurship. According to him entrepreneurship involves

    1. increase in value or satisfaction to the customer from the resource
    2. creation of new values
    3. combination of existing materials or resources in a new productive combination

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    What theories do you think explain entrepreneurial drive?

    An analysis of various entrepreneurship theories reveal while what economists differ on the force that drives entrepreneurs or the central characteristics of entrepreneurship, they remain unanimous that entrepreneurship is a distinct concept and a central factor of the economic activity.

    Let us know which you think is the theory that best covers entrepreneurial motivation?