OVERVIEW Since econorntic development varies across countries, culture may be responsible for the

variation of entrepreneurial development. Albeit, the literature is replete with attributes of successful
entrepreneurs, however, no attempt provides a systematic theory of entrepreneurial development in
relation to economic growth. Even to this day, the study of entrepreneurship remains an
underdeveloped theory. This chapter includes selected economic theories of entrepreneurship to bring
the readers directly to the most influential. The next two chapters lumped together the economic and
cultural theories taken from various the notable authors on entrepreneurship. ECONOMIC THEORIES OF
ENTREPRENEURSHIP The study of entrepreneurship is a maze of theories as they are written in different
approaches to discipline eg economics, psychology, sociology, and business management. Research
showed no converging results that define entrepreneurs, the factors that drive them, sources of survival
and success owed to small samples used, and the lack of consensus about research constructs applicable
at the individual, national, cross-cultural levels. Consequently, a systematic and unified economic theory
of entrepreneurship remains underdeveloped. It is worth noting that economic theory deals primarily
with the processes by which allocation of scarce resources helps attain the achievement of diverse
competing economic goals. Hence, the consideration of diverse goals that set off economics from other
disciplines. Many economists from 1755 to 1975 contributed

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theories of entrepreneurship, each of whos provided a different role for the entrepreneurs in society.
This module explains selected economic theories of entrepreneurship into three schools Classical,
Neoclassical, and Austrian market process. A selection of notable writers in each school of thought
provide insightful ideas. CLASSICAL THEORIES OF ENTREPRENEURSHIP The pre-classical economic
thought begins in early antiquity and proceeds through the 18" century ending before Adam Smith. It
covered the period from philosophical propositions of Aristotle to the mercantilist notion of an economy.
In this period, Cantillon's theory of entrepreneurs contributed a large part to the classical theories
particularly Adam Smith (Brewer, 1992), this module discusses entrepreneurship in the context of his
entrepreneurship theory in the late pre-classical period. Although, classical economists stressed that
function of entrepreneurs is to produce and distribute of goods putting emphasis on supply side
(Bartlett, 2008), Cantillon theorized that the purpose of entrepreneurs is bringing the demand and
supply together in the market (Parker, 2018). This module covers a brief discussion of notable theories of
entrepreneurship expounded in simple terms. RICHARD CANTILLON (1755) Richard Cantillon was the first
to detine and theorize the role of the entrepreneur. The term comes from "entrepreneur," a French word
that means "ability to take charge." Rightly, a banker and stocks speculator, he conceived entrepreneurs
as taking charge of business risk and overcoming them for profit. They are responsible for activating and
stimulating all economic activity, whereby economic success depends. In his essay, he begins by
distinguishing entrepreneurs from employees, the former with uncertain incomes and the latter with
fixed incomes (Brown and Thornton, 2013). However, the distinction between the two withers in the
final part of his essay as free and competitive forces ruling the market for goods and services and the
demand for land and labor would make everyone essentially an entrepreneur, mutually dependent upon
each other. Each takes risks and must receive an uncertain income. Cantillon's theory suggests that
without entrepreneurs taking and overcoming the risks of business ventures, economic progress would
have slowly stopped long ago. He categorized people not strictly according to their rigid social classes
but in terms of their economic functions. These economic functions included not mainly landowning and
laboring, receiving fixed incomes (rents and wages), but all entrepreneurial activities receiving uncertain
profits.

Hence, despite the risks, profits grew and are responsible for economic growth. The farmer, as an
entrepreneur, pays the fixed costs and assumes the risk of uncertain selling prices, just as the
manufacturer pays similar fixed costs and relies on an uncertain return. Like the teachers, harbers,
doctors, engineers, accountants, and market vendors are entrepreneurs Except for those who only sell
their labor or lease their land for a fixed amount (non- existent), entrepreneurs must invest money, and
since sales and selling prices are uncertain, their profits are uncertain as well. According to Cantillon, the
widespread uncertainty borne by entrepreneurs is partly the consequctice of a competitive market. In a
monopoly, the entrepreneur decides upon the prices of products and has little entrepreneurial
uncertainty Entrepreneurs face high uncertainty due to competition and must bear the risks in the real
world. Since competition and entrepreneurship go together, profits are necessarily the outcome of
successful forecasting and risk-taking and, in this sense, a monopoly. Cantillon's idea on the role of
entrepreneurs is wholly modern as it vividly describes people's liberty to engage in all business and
trades and to choose their careers and dreams into their hands, without which economies would have
reverted to feudalism. In his essay, Cantillon distinguished three functions of entrepreneurs (Brown and
Thronton, 2013). These functions include trading commodities from the villagers to the cities, from city
to villages, and producing commodities for the villages or cities. In others, entrepreneurs have two
functions, namely: trading and production. Specifically, these functions involve the creation of utilities
time, form, place, service, and possession utility. These utilities are implicit in Cantillon's theory. These
utilities include time, form, place, service, and possession utility. All these utilities create value for the
consumers and producers, without which neither production nor distribution can fully take place.
Cantillon's theory of entrepreneurship is very modern and undoubtedly comparable or probably even
better than the celebrated writings of Adam Smith and David Ricardo. At any rate, his entrepreneurship
theory remains merely a part of his many contributions to economics rather than as a method and
construction of economic theory. Five pre-classical economic theories assume the central position in
Cantillon's essay, namely: 1) the role of entrepreneurs and economic geography, 2) entrepreneurs and
labor market, 3) entrepreneurs and theory of value, 4) circular flow model, and 5) price specie flow
mechanism (Brown and Thornton, 2013). The first theory refers to the importance of the "taking charge
role of entrepreneurs, coordinating the product market (commodities and services) and resource market
(land and labor), which in turn determine the size, location, and proximity of markets. Hence, the
number of entrepreneurs depends upon the size of the town or city, while the number of entrepreneurs
depends upon the composition and size of the

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populate Heus, village de toms should be due to the where persp to meet comer dende Ass, and divane
grupe of tens gather in the same bana, la many respects, the role of con determining be, dn, the spatial
organizationrely ondere Todes, spatial vs is a relevant subject that deal with the port of guapoplo in
wesomic growth that goes beyond a national border to a borderless globatillage The woond theory drab
with the critical role of in aber au determination. The decal value of labor relies chiefly on the sierplay of
demand and apps of labon, thictroaring alone or below the "sie wage" (Chormowed wriginally Lon
Cantillon) by David Ricardo and "natural price by Adam Smith Suppor the marker vabe falls below
ednistence wage and natural price, economic boots fall heavily os the laborers In contrast, Cantillon
argued that the vahie of labor depends not just on desparel and supply but also on opportunity cost
sond risk. He demostrated that the value of skilled labor in higher than unskilled becar of the
opportunity cost of tune in lesning and preparation plas the sum of risks in the profession. Thus, the
monetary value of labor goes hand in hand with risks since the procer assunt spent on tranning and
leaming mat offet the future value of wages, which is uncertain in the future. Hence, the supply of labor
skills in a line of work is at tok. Therefore, the supply of skilled and unskilled lator must be proportionate
ta the demand. If demand exceeds supply in a particular location, the wage will fall, and some laborers
must leave to get work elsewhere or find another line of employment. Cantillon's theory of market value
of labor differs from classical demand-supply equilibriam value of wage and neoclassical marginal
productivity of labor. If the demand and supply of labor incorporate the temporal element of risk and
opportunity cost, an accurate forecast of prices and values of labor becomes a necessary instrument for
entrepreneurs in reducing business tisks. Fie instance, the future wage by discounting heconas ex post its
present value while in ceverse by compounding current value to the future. An integration of Cantillon's
theory of the importance of labor to the Smith-Ricardo model adds a more vivid description of the
realities of the market value of labor today. The third theory refers to the "intrinsic value" of goods
resulting from the second theory, considered antagonistic to moders economists. There were doubts
about whether it represent labor valor, land value, both labor and land value, or whether it was like
Adam Smith's datinction berween market price and realistic price. Whatever that valve refers to,
Cantillon put all arguments together and defined the intrinsic value of a good as the amount and quality
of the land and labor spent to produce the good, considering thelt respective opportunity cost
(Thornton, 2007). The amount (quantity) and quality of labor and land relate to each other

populate Heus, village de toms should be due to the where persp to meet comer dende Ass, and divane
grupe of tens gather in the same bana, la many respects, the role of con determining be, dn, the spatial
organizationrely ondere Todes, spatial vs is a relevant subject that deal with the port of guapoplo in
wesomic growth that goes beyond a national border to a borderless globatillage The woond theory drab
with the critical role of in aber au determination. The decal value of labor relies chiefly on the sierplay of
demand and apps of labon, thictroaring alone or below the "sie wage" (Chormowed wriginally Lon
Cantillon) by David Ricardo and "natural price by Adam Smith Suppor the marker vabe falls below
ednistence wage and natural price, economic boots fall heavily os the laborers In contrast, Cantillon
argued that the vahie of labor depends not just on desparel and supply but also on opportunity cost
sond risk. He demostrated that the value of skilled labor in higher than unskilled becar of the
opportunity cost of tune in lesning and preparation plas the sum of risks in the profession. Thus, the
monetary value of labor goes hand in hand with risks since the procer assunt spent on tranning and
leaming mat offet the future value of wages, which is uncertain in the future. Hence, the supply of labor
skills in a line of work is at tok. Therefore, the supply of skilled and unskilled lator must be proportionate
ta the demand. If demand exceeds supply in a particular location, the wage will fall, and some laborers
must leave to get work elsewhere or find another line of employment. Cantillon's theory of market value
of labor differs from classical demand-supply equilibriam value of wage and neoclassical marginal
productivity of labor. If the demand and supply of labor incorporate the temporal element of risk and
opportunity cost, an accurate forecast of prices and values of labor becomes a necessary instrument for
entrepreneurs in reducing business tisks. Fie instance, the future wage by discounting heconas ex post its
present value while in ceverse by compounding current value to the future. An integration of Cantillon's
theory of the importance of labor to the Smith-Ricardo model adds a more vivid description of the
realities of the market value of labor today. The third theory refers to the "intrinsic value" of goods
resulting from the second theory, considered antagonistic to moders economists. There were doubts
about whether it represent labor valor, land value, both labor and land value, or whether it was like
Adam Smith's datinction berween market price and realistic price. Whatever that valve refers to,
Cantillon put all arguments together and defined the intrinsic value of a good as the amount and quality
of the land and labor spent to produce the good, considering thelt respective opportunity cost
(Thornton, 2007). The amount (quantity) and quality of labor and land relate to each other

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mutually. He argued that intrinsic value is immutable, but its market price changes according to the
"humor and fancies" of the market. In this view, the price of goods would approximate the "intrinsic
value" of goods in the long run. The long-run equilibrium between the value of land and labor and the
prices of goods speaks of what modern economists call the equi marginal principle. It is a concept in
which entrepreneurs choose a combination of land and labor to maximize the total output of the good.
Maximization of production occurs when the ratio of marginal productivity of land and labor and their
respective prices are equal and by the forces of demand and supply will equilibrate with the prices of
goods. Cantillon's Intrinsic value implies the equilibrium between production and consumption where
the cost of goods equals the value of inputs that produce them the demand and supply equilibrium. The
price-specific flow mechanism proposition has reference to David Hume (1754) and, with some
exceptions, applies to the modern theory of the quantity of money. Cantillon showed that an increase in
the volume of money has both positive and negative effects since the volume of money affects the
relative prices of goods depending on where and when money spending occurs. The modern quantity
theory of money refers only to the direct relationship between the money supply to the general price
level. Still, Cantillon's theory also relates to the sectors and the timing of money expenditure. For
instance, if large money payments happen in speculative market sectors such as the stock exchange
market, this sector, as often the case, will experience price increases ahead of other sectors than those
sectors with small payments on, say, consumer goods. This situation means that inflation and standard of
living are relative. The variation of price trends in various sectors popularly known today as barometers
of business cycles such as leading, lagging, and coincident indicators reflect the robustness of his theory.
These indicators help investors detect significant shifts in the market, measure current market
conditions, and forecast market trends. Cantillon further showed that as domestic prices increase
(localized inflation), entrepreneurs would change their production structure to address the changing
pattern of demand. These structural changes known as "Cantillon Effects" cause changes in the money
supply and cause changes in relative prices of goods. An increase in the prices of goods causes people to
import goods and export gold since gold was an international medium of payment. Consequently, the
importation of gold causes domestic prices to fall and, in the long run, brings the domestic money supply
into equilibrium with the foreign money supply. Since entrepreneurs change their plans according to the
money supply, the country needs to make policies through a price-specific flow mechanism to stabilize
the money supply to avoid unfavorable economic effects. Cantillon's price-specific flow mechanism has
limitations in modern international trade. First, it does not apply to the present capital flows of the

country since today's international payshent uses the convertibility of local currency int the dollar, not
the fised mint value of gold. In this sense, capital flows (capital and corren account of the balance of
payments) could be larger than the balance of trade (commonlay oe merchandise tradel. Second, the
theory did not explain the effect of interest rates in the banking sector that affects capital flows in and
out of the country. Cantilloer's circular flow model is essentially accurate. As a child of his generation, be
conceived that everyone depends on property owners (land or capital ownership). However, workers do
not just serve the property owners hat also each other, a mutual interdependence between the property
class and laborers. Cantillon developed a circular flow model where entrepreneurs are responsible for
bringing all goods and services from different but mutually interdependent classes of people together. It
is important to note that the circular flow would grind to a halt without this mutual intendependence.
Thanks to entrepreneurs responsible for making the distribution of incomes and expenditures
functionally dependent upos entrepreneurial decisions across the population. Although property owners
are the source of wealth to stimulate economic activities, they depend upon the people who will carry
out their demands. The role of supervisors (managers) of farms and workers is to act as proxy
entrepreneurs to satisfy the demands of property owners (Foss et al., 2017) Through competition, risk,
and uncertainty, everyone becomes an entrepreneur, some get rics while others remain poor or go
bankrupt (Cantillon, 1931). He used the farmer as an example of an entrepreneur. "The farmer is an
entrepreneur who promises to pay the property owner, for his farm or land, a fixed sum of money
without the assurance of the profit he will derive from this enterprise. The farmer-entrepreneur hires
and supervises labor and buys goods from other entrepreneurs. Cantillon described the entrepreneur as
someone who mes "judgment" without foreseeing which product will pay the best price depending on
the forces of supply and demand. Cantillon also specified that the entrepreneurs, as the owner of an
enterprise, operate under uncertainty and adjust to changes in the prices in the market. Changes in the
demand for property cause entrepreneurs of all kinds to respond according to the profit and loss
framework and regulate the flow back to equilibrium. The price mechanism that regulates Cantillon's
circular flow is similar to Adam Smith's model of the "invisible hand" that drives entrepreneurs to control
the flow of goods within the economy (Thornton, 2009). Cantillon is one of the few economists cited by
Adam Smith. The latter directly influenced a large part of his celebrated economic theory of freedom of
enterprise, although Adam Smith advanced well beyond the scope of Cantillon (Brewer, 1992).

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NEO-CLASSICAL THEORY OF ENTREPRENEURS The neo-classical theory of entrepreneurs contradicted the

classical model based on the proposition that the value of goods does not depend solely on the cost of
production (apply side) but also on the demand side of a cloved economy. Equilibriom demand and
supply determine prices as well as economic growth. Neoclassical economists give importance to the
principle of diminishing marginal utility that drives entrepreneurial engagement. From a neoclassical
perspective, entrepreneurs must consider the decreasing satisfaction of consumers as more units of a
good are consumed. The production method is direct instead of a roundabout assuming that
entrepreneurs know consumers' demands before producing goods. This knowledge consists of the
demand for the product or service across population segments or socio-economic-demographic
characteristics of consumers. Alfred Marshall's (1949) contribution emphasized that demand and supply
determine the price and output. He theorized the interplay of demand and supply to reach equilibrium,
however failed to explain how profit occurs at equilibrium (Bula, 2012). He examined the fundamental
entrepreneurial functions, proceeds to establish an enterprise, and extended to entrepreneurial motives,
personal characteristics, and the justification of profit as a special reward. His theory presents a realistic
view of the entrepreneur, which incorporates demand and supply factors into a unified body of
knowledge. In contrast to Schurupeter, Marshall stressed that the contribution of a considerable number
of small entrepreneurs in a state of partial equilibrium leads to economic progress. This situation is
because fundamental markets characterize relevant elements such as product differentiation and
advertising, varying demand elasticity owed to varied customer preferences across cultures, and various
products and services. In Marshall's analysis, the focus is to sustain the equilibrium, and only when
markets become too competitive that profit becomes zero, leading producers to innovate (Bula, 2012;
Karayiannis, 2009). Marshall focuses on sustaining entrepreneurial innovation by product differentiation
in contrast to Schumpeter's view of the entrepreneur as the mainspring of innovation, creating
disequilibrium. In Marshallian theory, the entrepreneur possesses perfect knowledge of purely
competitive markets (Grebel et al., 2001). An entrepreneur could predict changes in production and
what the consumer prefers. Hence, entrepreneurs can see new opportunities for supplying new goods or
services (Davidson &c Wilkins, 2001). In the Marshallian view, an entrepreneur is a risk-taker. However,
critics of the Marshallian approach pointed out as it failed to explicitly explain what attracts an
entrepreneur in a business that gives zero profits (Bula, 2012).

Frank Knight (1921) was the first to specify entrepreneurship function under pure uncertainty and
extend this uncertainty within a general equilibrium system. To eliminate the problem of indecision,
Knight assumes that producers and consumers have perfect knowledge. Take note thit pure uncertainty
differs from predictable risk. The former is the most pervasive fact of everyday life with unknown
alternative outcomes. Hence, the accurate decision of cost and benefits is inaccessible. The latter has at
least some probability of alternative products and is measurable by a statistical distribution. Hedging and
arbitrage minimize risks while the outcomes of uncertainty cannot. How then can the general
equilibrium system function with the prevalence uncertainty? On this question, Knight argued that
entrepreneurs assume uncertainty-bearing ventures and are responsible for restoring equilibrium Only
entrepreneurs, no other actors, can make such a decision in the face of uncertainty, Since entrepreneurs
have the distinctise uncertainty-bearing ability to make such decisions. Some individuals have a more
remarkable foresight than others do, and those with the most significant amount of foresight achieve
high-level decision-making. These individuals are entrepreneurs, and they are not merely managers of
routine administrative tasks. Entrepreneurs are strategic decision-makers who generate profits by their
actions in deploying resources to optimal effect in an uncertain economic environment. In addition,
entrepreneurs make worthy strategic decisions to generate pure profits in the long run. Pure profits are
gains after deduction of all implicit or opportunity costs borne by the organization, including salaries of
managers and capitalists. Knight also distinguished between entrepreneurs and managers in terms of
uncertainty bearing. Managers do not handle uncertainty as entrepreneurs do, the same is true with
capitalists, although they may benefit from entrepreneurs' uncertainty-bearing actions. Knight also
distinguished between self-employed and paid individuals, and the former bear more uncertainty as
they aim for higher income than the latter. In the same way, a higher level of profits motivates
entrepreneurs. A modern corporate business organization has a way of reducing it by spreading the risks
against uncertainty across many individuals by the law of averages. On a large scale, the capital
corporation operates efficiently and profitably. A more significant portion of it comes from the top of the
hierarchy of stockholders for their uncertainty bearing Entrepreneurial income is pare profit. This is not a
contractual income in the same way as a manager's salary. In this respect, entrepreneurship entails an
element of monopoly. Firms that consistently earn profits
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over and above the average level in their markets because they have better entrepreneurs This elensent
of monopoly is beneficial to the economy because there could be no economic equilibrium as
uncertainty would prevail without it. It is, therefore, uncertainty via monopoly that creates profit The
neoclassical economic model has several limitations. The most obvious is the assumption of rational
behavior that ignores the reality of the vulnerability of people to irrational behavior in maximizing utility
and profit (Thaler and Sunstein, 2008). In real- world selfish maximization of utility or profit are not the
only goal of an individual or firm. The desire for maximum utility or profit also consists of altruistic goals
such as empathy (Cory, 2006). In addition, it is overly dependent on mathematical models that do not
adequately explain the actual normative interdependence of people within an economy neither
verifiable nor testable. AUSTRIAN MARKET PROCESS THEORY OF ENTREPRENEURSHIP (AMP) Austrian
school, taken as a whole, uses verbal logic of a priori thinking in contrast to classical and neoclassical
schools, which use data and mathematical models to prove their point objectively. The Austrian school
rejects the universal application of any economic theory. Prices are subjective as an individual's
preference to buy or not to buy a particular good is subjective. In comparison, the classical school of
economics holds that objective costs of production determine prices. In contrast, the neoclassical school
emphasizes that demand and supply equilibrium determine prices (Bula 2012). The Austrian school
emphasizes subjective factors that determine production costs according to the value of alternative uses
of scarce resources. Entrepreneurs play a pivotal role in the Austrian view of the economy. The
entrepreneur is the active agent in the economy who uses the information available from prices and
interest rates. They exercise judgment of expected future costs and conditions, make alternative
economic plans, and bear the risk of an uncertain future by taking ultimate responsibility for the success
or failure of the chosen strategy. The Austrian view of the entrepreneur includes not just innovators and
inventors but also business owners and investors of all kinds. Austrian economics argued that
entrepreneurs could seek and communicate knowledge throughout a market system via price
information and are responsible for innovation, satisfying market needs, and changing the system-wide
structure. Entrepreneurs know

how to create now goods or services became they are better informed and reap- profits Entrepereses
use koowledge because it will prossde e individually defined commoner beoefin. According to AMP,
entrepreneurs find se profitable to one knowledge to generate now sonomic salat, consistent with the
three main conceptualizations of Kirzner (1973) The first is an arbitraging market in which opportunities
emerge for a given moscket ther other matkets may overlook specific opportunities. The second was
alertness to profit making opportunities, in which entrepreneurs discover an entrepreneurial advantage.
The third conceptualization followed Say' Say's (1803) and Schumpeter's (1934) propositions that
ownership is distinct from entreprenesashig. The latter does not require ownershop of resources but an
idea that adds value to uncertainty and risk (Knigha, 1921). These conceptualizations show that every
opportunity is unique, and therefore previous activity is unusable to predict outcomes reliably. The AMP
model is not without criticism. The first criticism is that matket systems are not purely competitive but
can involve antagonistic cooperation, the second is that resource monopolies hinder competition and
entrepreneurship. Thirdly, fraud, deception, and tax controls also contribute to marker system activity.
The fourth is that private and state firms are different, but both can be entrepreneurial, and the fifth is
that entrepreneurship can occur in non market social siraations without competition. Empirical studies
by Acs and Audretsch (1988) rejected the Schumpeterian argument that innovation requites economies
of scale. The criticisms of the AMP have given impetus to recent explanations from psychology, sociology,
and business management JOSEPH ALOIS SCHUMPETER (1934) While Cantillon defined entrepreneurs as
risk-bearing and profit-oriented types of people, Schumpeter expanded the idea of risk-bearing with
innovation. Both authors are similar as they essentially emphasize the importance of the supply side. The
big difference is that Cantillon emphasizes bringing supply and demand closer, as evident in his circular
flow model. On the other hand, Schumpeter emphasizes the supply side via innovation. The idea of
innovation existed before Joseph Schumpeter, but his theory on entrepreneur-driven innovation was
probably even more influential. According to him, consumer preferences are passive and do not change
automatically. It means that they cannot be the cause of economic change. In his theory of economic
development (Schumpeter, 1934), he described development as a historical process of structural
changes driven mainly by innovation. To be precise, entrepreneurs are responsible for innovation, that is,
the adoption of new things or ways of doing things and the abandonment of the old ones,

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He classified the historical process of change into five types (Schumpeter, 1934) 1. Introducing a new
product or a new kind of an existing product: 2. Application of new methods of production or sales of a
product (unknown in the industry 3. Opening of a new branch of the industry, 4. Acquiring new sources
of supply of raw material or semi-finished goods, 5. New industry structure such as creating or
destroying a monopoly position. Schumpeter argued that in a competitive environment, anyone seeking
profits must innovate. Through innovation, entrepreneurs can employ factors of production in many
productive ways to gain profit (Schumpeter, 1934). It is competition, innovation, and profit that set the
underlying forces of the economy (Porter and Stern, 1999, Hanush and Pyka, 2007). He described
innovation in his book Capitalism, Socialism and Democracy (Schumpeter, 1942) as a "process of
industrial mutation, constantly revolutionizes the economic structure from within, incessantly destroying
the old one, incessantly creating a new one, primarily driven by innovation (Schumpeter, 1912, 1939,
1943). In terms of how and when innovation has real economic effects, he divided the innovation
process into four phasesc invention, innovation, diffusion, and imitation (Burton- Jones, 1999). According
to Schumpeter, the invention phase or the basic innovation has less impact, while the ditfusion and
imitation process have a much greater influence on the state of an economy. The macroeconomic effects
of any basic innovation are hardly noticed in the short term or even longer. Hence, economic growth is
not due to the discovery of basic innovation but rather the diffusion of basic innovation when imitators
begin to realize the profit potential of the new product or process and start investing heavily in that
technology (Freeman, 1987), In addition, Schumpeter argued that invention does not lead automatically
to execution (Schumpeter, 1939). This idea emphasizes that innovation does not solely by itself
adequately lead to implementation. The entrepreneur with a strong character and influence leads to the
implementation (Schumpeter, 1912). In this sense, it is not the power of ideas but the ability that gets
things done. Hence, his popular by-words "creative destruction" argued it as the essence of capitalism
(Schumpeter, 1942). In his business cycle theory, Schumpeter argued that the process change is non-
stationary as "creative destruction" is ever-evolving such that capitalism cannot be a stationary economy
(Schumpeter, 1943). According to him, innovations are responsible for economic growth
and the "entrepreneur" plays a central role as an innovator. In this Theory of Economic Development, he
described that the entrepreneur's primary function is to allocate existing resources to "new uses and
new combinations." One of his most enduring contributions was his idea that entrepreneurship is a
unique factor of production and the rate social input that makes economic history evolve. In other
words, as a prime mover of the development of the economy, an entrepreneur's innovation is behind
this catalyst of change. According to Schumpeter, the typical characteristics of entrepreneurs are
intelligence, alertness, energy, and determination (Schumpeter 1942). Entrepreneurship is essentially the
actualization of innovation. However, it excludes the four complementary functions of the invention;
riske taking, error correction, and administration, which in Schumpeter's economics of innovation are
separate, distinctive, and non-entrepreneurial in nature. There are several limitations of Schumpeter's
theory of innovation. For example, he emphasizes those innovators are the only factor responsible for
economic fluctuations in a capitalistic system. Innovative activities can occur even in ordinary business
activity and require no special agent to carry on such activity. The innovator-entrepreneur is adaptable
and can overcome all sorts of difficulties. Still, he may not be capable of adjusting to social and political
changes in his actual social and political life. Economic growth does not depend solely on the personality
of the innovator but also on the non-economic factors as well. Moreover, his concept of circular flow
applies only to a stationary state where production costs equilibrate with the prices of goods. Therefore,
it is not in tune with the development process as a dynamic and accumulative process. Financing
innovation is through bank credits, while development is dependent on credit creation, which is
contingent upon the level of national savings. Lastly, his theory does not apply to developing economies
where marginal propensity to save and labor productivity is low.