THEORIES OF ENTREPRENEURSHIP

Theories of entrepreneurship are prepositions that help us understand, explain, predict and
influence entrepreneurship. A consistent universal theory does not exist in entrepreneurship, but
rather it consists of different approaches including economic, psychology, socio-cultural
Consider 3 categories of Entrepreneurship Theories: Economic, Sociological and Psychological

Economic Theory
According to the theory,
 Entrepreneurship and economic development are interdependent and Entrepreneurship
greatly contributes to economic development
 Economic development takes place when a country' real national income increases over a
period of time wherein entrepreneurship is key.
 Entrepreneurial functions are directed towards the materialistic objective of profit
maximization although its foundations may be social, psychological, ethical or patriotic
 Economic incentives are the main motivators for entrepreneurial activities. The person’s
inner drive is always associated with economic gains and hence the incentives and gains are
regarded as sufficient conditions for the emergence of industrial entrepreneurship
 Entrepreneurship and economic growth take place when the economic conditions are
favourable
 Economic scholars argue that entrepreneurship flourishes in countries where particular
economic and noneconomic conditions are most favourable. In these countries, people are
motivated to maximize various rewards such as profits. Therefore, entrepreneurship emerges,
and economic growth and development results. On the other hand, if economic and
noneconomic conditions are not favourable, entrepreneurship dries up and the country's
economy stagnates
 Entrepreneurship development in a particular country largely depends upon economic policy,
programmes and economic environment of that country.
 Lack of vigorous entrepreneurial initiatives is due to unfavourable economic conditions,
various kinds of market imperfection and inefficient policy making
Economic factors include-
 Financial Resources – Finance is the lifeline of businesses- accessibility, cost affects the
growth of entrepreneurship,- good banking, availability of credit facilities
 Infrastructural facilities – Entrepreneurship development requires certain infrastructure like
power, communication, transportation, technical information. Availability of infrastructure,
 efficiency and cost affects the development of entrepreneurship, Access to market information,
availability of technology
 Availability of material and know how - Entrepreneurship is encouraged if there is adequate
supply of materials and know-how. Technical knowhow is essential for innovation
 Labour conditions – Availability of labour, the quality of the labour force influences the growth
of entrepreneurship
 Market – The size and composition of the market greatly influences entrepreneurship. Market
size will affect demand, while composition influences competition- Existence of a strong
market
 Support system – These include financial and commercial institutions, research and training,
consultancy services, Business development services, and ancillary industry.
 Government Policy – Government policy affects the availability of resources, the market,
entrepreneurship development, taxation, trade, business environment, Ease of forming a
Business entity, Favourable taxation policy
 Demographics – a population that creates demand, has the purchasing power
Other factors include
 Availability of factors of production -access to sources finance, premises, labour
 Strong Investment propensities – Investors have a good chance to make profits and
entrepreneurs exploit this opportunity
 Investment and marketing opportunities
 Strong property rights
 Limited tariffs

JOSEPH SCHUMPETER
Schumpeter’s theory of entrepreneurship is a pioneering work of economic development.
He is one of the proponents of the economic theory of entrepreneurship. According to him,
Entrepreneurship is a creative activity of doing things that are not generally done in the ordinary
course of business through innovation

Schumpeterian theory of entrepreneurship has the following features-

1- Distinction between invention and innovation
Schumpeter makes a distinction between innovation and invention. Invention means creation
of new things and innovation means application of new things onto practical use
An inventor produces ideas whereas an innovator implements them
An inventor is more concerned with his technical work of invention whereas an innovator
converts the technical work into economic performance
2- Emphasis on entrepreneurial function in economic development- emphasizes 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.
According to him an entrepreneur is an economic change agent, whereas development requires
basic changes and hence it is the entrepreneur who carries out the required changes.
Entrepreneurial growth brings economic growth
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.
 Schumpeter’s views are relevant particularly to developing countries where innovations need
to be encouraged

2. Sociological Theories
 Theories are based on religious beliefs, social values and cultural values and try to explain
how these factors affect the growth of entrepreneurs
 According to these theories, some sociological factors accelerate the growth of the
entrepreneur and entrepreneurship is likely to get a boost in a particular social culture.
Society’s values, religious beliefs, customs, taboos influence the behaviour of individuals in
a society. This is because society’s values, religious beliefs, customs, taboos influence the
behaviour of individuals in a society. Society’s values are the most important determinant of
the attitudes and role expectations

SOCIAL FACTORS
 Accordingly, what molds a person to be an entrepreneur are the sociological and
environmental factors during childhood, at school, personal experience in adult life at college
and job environments, mobility, occupation and support from family?
 Social factors include Family, role models and close association, system of norms and values
within a social setting, social group to which one belongs- the degree of approval and value
for entrepreneurship, one’s occupation and work environment, social status- aspiration for
some given level of social status catapults some people to become entrepreneurs; Education,
qualification- entrepreneurial education, sensitization leads to more people to become
entrepreneurs
 Nature of behaviour in the social context encourages individuals in dealing with problems or
opportunities
 Sociologists consider the entrepreneur as a role performer corresponding to the role expected
by the society. These wishes of the society are expressed through customs, taboos, rewards,
attitudes.
According to John Kunkeil one of the proponents of this theory, Entrepreneurial behaviour is a
function of surrounding social structure, past and present which can be influenced by economic
and social incentives

Some Sociological theories that start from ethnic identification try to explain entrepreneurship as
a process where the individual's sociological (disadvantageous) background is one of the decisive
"Push" factors to become an entrepreneur making the entrepreneur rather than the organization as
the unit of analysis for entrepreneurship

Cultural Theories-
According to these theories, entrepreneurship is a product of culture as entrepreneurial talents
come from cultural values and cultural systems embedded into the cultural environment. Culture
is closely related with acceptable values and human behaviour and includes acceptable laws and
morals, knowledge.
According to Hoselitz one of the proponents of the theory, the supply of entrepreneurship is
governed by cultural factors and culturally minority groups have also been known as the spark
plugs of entrepreneurial development
In many countries, entrepreneurs have emerged from a particular socio-economic class. Some
cultures encourage entrepreneurship while others encourage dependency

Religious Beliefs
Max Weber Theory of Religious Beliefs
Max Weber has propounded the theory of religious belief. According to him, entrepreneurism is
a function of religious beliefs and the impact of religion shapes the entrepreneurial culture.
Entrepreneurial growth is dependent on ethical values that are based on religious beliefs
He emphasized that entrepreneurial energies are exogenous supplied by means of religious
beliefs.

He made a distinction between the spirits of capitalism

1- Spirit of Capitalism- in the theory, he highlights the spirit of capitalism –an economic system
in which economic freedom and private enterprise are glorified, as well as the entrepreneurial
culture.
2- Adventurous Spirit- Weber also made a distinction between spirit of capitalism and
adventurous spirit. According to him, capitalism is influenced by the strict discipline whereas
the adventurous spirit is affected by free force of impulse.
Entrepreneurship culture is influenced by both the capitalism and adventurous spirit.
3. Protestant ethic- according to Max Weber the spirit of capitalism can be grown only when the
mental attitude in the society is favourable to capitalism
According to Weber, the Protestant religion was a precondition for capitalistic development
for two reasons:
1- Protestant ethics led to a sober life style which, instead of advocating affluence, reinvested the
proceeds.
2- As well, it is the basis of rationalism and goal achievement behaviour.
While a value system which motivates economic development can hardly be limited to
Protestantism Weber's stress on values and the resulting motivation influenced later thought.

Psychological Theories
Psychological theories such as those developed by McClelland pay attention to personal traits,
motives and incentives of an individual. McClelland concluded that entrepreneurs have a strong
need for achievement. Entrepreneurship gets a boost when a society has sufficient supply of
individuals with necessary psychological characteristics

The psychological characteristics include

 need for achievement,

 need for autonomy and power,
 personal motives,
 a vision or foresight,
 ability to face opposition.
These characteristics are formed during the individual’s upbringing with stress on standards of
excellence, self reliance and low father dominance.