Theories of Entrepreneurship

Presented By –
Mayank Vashishth and Mohit Dubey
Semester III (MBA – M52)
MONIRBA, University of Allahabad

 To learn about various theories of
entrepreneurship.
 Critical evaluation of theories.

 What is Theory?
 Concept of Entrepreneurship
 Theories of Entrepreneurship
 Economic Theory of Entrepreneurship
 Sociological Theory of Entrepreneurship
 Entrepreneurship Innovation Theory
 Psychological Theory of Entrepreneurship
 Theory of Achievement Motivation
 Status Withdrawal Theory
 Theory of Social Change
 Theory of Social Behaviour

 Theory of Leadership
 Theory of Model Personality
 Theory of Systematic Innovation
 Conclusion

 A well-substantiated explanation acquired
through the scientific method and repeatedly
tested and confirmed through observation
and experimentation.

 Entrepreneurship is defined as:
- The act of being an entrepreneur.
 That is, an Entrepreneur is one
- who undertakes innovations, finance and
business activities
- in an effort to transform innovations into
economic goods or services.

 The Economic Theory
 The Sociological Theory
 Entrepreneurship Innovation Theory
 Psychological Theory
 Theory of Achievement
Motivation/Achievement Theory
- The Kakinada Experiment.
 Status Withdrawal Theory
 Theory of Social Change
 Theory of Social Behaviour

 Theory of Leadership
 Theory of Model Personality
 Theory of Systematic Innovation

 Entrepreneurship and economic growth takes
place when economic conditions are
favourable.
 Economic incentives are the main
motivators.
 Economic incentives include:
- The taxation policy
- Industrial policy
- Sources of Finance and Raw Material
- Infrastructure Availability

- Investment and Marketing Opportunities
- Access to Information
a. Market Conditions
b. Technology etc.
 Richard Cantillon, an Irish French Economist
viewed
- Entrepreneurs as an agent who buys
factors of production at certain prices in
order to combine them with a view to selling
it at uncertain prices in future.

 He illustrated farmer as an entrepreneur,
who pays out contractual incomes to the
landlords and labourers, which are certain
while sells his crops at a price, which is
uncertain.
 Entrepreneur as a Risk Taker.

 According to William J. Baumol, the
economic theory has failed to provide a
satisfactory analysis of either the role of
entrepreneurship or its supply.
 Traditional model treat the entrepreneurial
function like a managerial function.

 Entrepreneurship is likely to get a boost in a
particular social culture.
 The (entrepreneurial) behaviour of
individuals in a society is influenced by:
- Society’s values,
- Religious beliefs,
- Customs,
- Taboos, etc.
 The entrepreneur merely performs a role as
per the expectations of the society.

 As per Jean Baptiste say, an aristocratic
Industrialist
- Entrepreneur combines land of one,
labour of another and the capital of yet
another to produce a product.
- By selling the product he pays interest on
the capital, rent on land and wages to
labourers and what remains is profit.
 First time distinction between the capitalist
as the financer and the entrepreneur as the
organiser.

 Theory was promoted by Joseph Schumpeter.
 Entrepreneurship is Innovation.
 This theory ignores earlier two abilities,
which were till then considered key for an
entrepreneur:
- Organising Abilities
- Risk Taking Abilities

 According to Joseph Schumpeter, a 20th
century Austrian Economist
- An entrepreneur is a person who is willing
and able to convert a new idea or invention
into a successful innovation.
 Entrepreneurship resulted in new industries,
even though it entailed combining the
existing inputs in a new way.

 Schumpeter’s example of innovation was the
combination of a steam engine with wagon-
cart, to produce the horseless carriage.
 In this case the Innovation, the car, was
transformational. But it did not require the
development of a new technology.
 Merely the application of existing
technologies in a novel manner was
entrepreneurial.

Entrepreneurship and Innovation
 An entrepreneur innovates when
- Introduces a new product
example: Virgin Galactic
- Introduces a new production method
example: Line production system in food
by MacDonald’s
- Open up a new market
example: The Blue Ocean Strategy

- Finding new source of raw material
supply
example: moving from coal to petroleum
to nuclear energy sources.
- Introduces a new organisation in any
industry.

 Distinction between innovator and inventor.
 Entrepreneurs – economic development.
 Development requires basic changes –
entrepreneurs do the changes.
 Limitations :
- innovative functions required, ignores risk
taking, organising aspect.
- most vigorous type of enterprise
- excludes individuals operating established
business
- assumes entrepreneurs as large scale business
man.

 Entrepreneurship gets boost when society has
sufficient supply of individuals with
necessary psychological characteristics.
 These psychological characteristics include:
- Need for Achievement,
- A vision Foresight,
- Ability to face opposition.
 These characteristics are formed
- during the individual’s upbringing
- by high standards of excellence

- self reliance and
- low father dominance

 David McClelland identified:
- Need for Achievement
- Need for Affiliation
- Need for Power
 As the basis of entrepreneurial personality,
he emphasized
- The importance of achievement
motivation
- Through which, entrepreneur fulfills:
a. Economic and Social Development

 The Need for Achievement was found highest
among Entrepreneurs through an experiment.
The Kakinada Experiment
 Conducted by McClelland in America, Mexico
and India (Kakinada)
 Young adults were selected and put through
a 3 months training to induce achievement
motivation.
 In the course content:

- Trainees asked to control their thinking
and be positive
- Trainees imagined themselves in need of
challenges and success and to set achievable
goals.
- imitate their role models
 Positive impact on performance
 Traditional beliefs do not inhibit
 McClelland identified two characteristics of
entreprenurship:

- Doing things in a new and better way
- Decision making under uncertainty
 Stressed that people with High Achievement
Orientation (Need to Succeed) are more
likely to become entrepreneurs.
- People are not influenced by money or
external incentives.
- Profits are only a measure of success and
competency.

 High achievement orientation ensures the
success of entrepreneurs.
 It is necessary to create a climate to enable
children to grow to become individuals with
high n-achievement.
 It is possible to improve the performance of
existing entrepreneurs through imparting
proper training and education.

 E. Hagen
 This theory provides that a class which lost
its previous prestige or a minority group
tends to show aggressive entrepreneurial
drive.
 If a group feels that their values and status
are not respected by society, they turn to
innovation to get respect of society.
 Entrepreneurship is a function of status
withdrawal.

 Four events which can produce status
withdrawal :
- Displacement of a traditional elite group
by physical force.
- Denigration of values, symbols due to
change in attitude of superior class
- Inconsistency of static symbol due to
change in economic power
- Non-acceptance of expected status on
migration to a new society

 Entrepreneur as a creative problem shooter.
 Hagen visualized an innovative personality.
- Retreatist
- Ritualist
- Reformist
- Innovator
 Innovation requires creativity and such
creative individuals cause economic growth.

 Distinguish between entrepreneurship and
intra-preneurship.
 There are various factors which motivate
executives and professionals to do innovative
behaviour not governed by status
withdrawal.
 Presupposes long term perspective for
entrepreneurial growth, but it does not
happen in India.

 Max Weber – Ethical value system
 Protestant ethic and the spirit of capitalism
 Religion and its impact on entrepreneurial culture.
 Weber opined that spirit of rapid industrial growth
depends upon
- Rationalized technology
- acquisition of money
- rational use of money for productivity
- Multiplication of money
 These elements depend upon specific value
orientation of individuals generated by ethical
values.

 Invalid assumptions :
- single system of hindu value.
- indian community internalised those values
and translated them in day to day behaviour.
- these values remained immune to and
insulated against external pressures and
change.
 Further studies show that hinduism is not
averse to the spirit of capitalism and to
adventurous spirit.

 Kunkel presents a behavioral model
 Supply of entrepreneurs is a function of
social, political and economic structure.
 Individuals perform various activities of
which some are accepted by society while
others are not.
 Four structures in society :
- Limitation Structure
- Demand Structure
- Opportunity Structure
- Labour Structure

 Theory assumes ideal structures for supply of
entrepreneurs.
 There is discrepancy between objectives,
structures and actual incidence of
entrepreneurs.
 Entrepreneurship is also governed by specific
combinations of circumstances which are
generally not available in the environment.

 Hoselitz – entrepreneurship is a function of
managerial skill and leadership.
 Ability to lead and manage.
 Social conditions should ensure the
development of enterprise-oriented
personalities.
 Hoselitz emphasized on the role of culturally
marginal groups.

 Marginal men or women enjoying an
ambiguous cultural and social position having
no bondage of tradition to inhibit them from
entrepreneurial development.
 But there are certain economic and political
factors also which encourage the people to
initiate entrepreneurial behaviour.

 The theory of Cocharn is a sociological
theory of entrepreneurial supply.
 Cocharn emphasises cultural values, role
expectation and social sanctions as the key
element .
 Entrepreneurs performance is influenced by :
- his attitude towards his occupation
- role expectation held by sanctioning
groups
- operational requirements of the job
 Society’s values – most important for attitude
and role expectation.

 The theory deals with only social factors.
 Profit is an important factor for encouraging
entrepreneurs to assume risky behaviour.
 Need for achievement starts from profit
making process.
 Entrepreneur is expected to perform
managerial functions.
 But theory fails to incorporate all these
requirements.

 Prof. Drucker – developed the theory.
 “Systematic innovation consists in the
purposeful and organised search for changes
and in the systematic analysis of the
opportunities such changes might offer for
economic or social innovation.”
 Systematic innovation means seven sources
for innovative opportunity.
 The first four sources lie within the
enterprise.

 These four source areas are :
1. The unexpected – the unexpected
success, the unexpected failure, the
unexpected outside event ;
2. The incongruity – between reality as it
actually is and reality as it is assumed to be
or ought to be ;
3. Innovation based on process need ;
4. Changes in industry structure or market
structure that catch every one unaware.

 The second set of sources for innovative
opportunity, a set of three involves changes
outside the enterprise of industry :
- Demographics (Population changes) ;
- Changes in perception, mood and
meaning ;
- New knowledge, both scientific and non-
scientific.
 Lines between these seven source areas of
innovative opportunities are blurred, and
considerable overlap between them.

 Quite comprehensive theory.
 Entrepreneur is required to identify different
sources of change.
 Coordinate these changes with opportunities
available in environment.
 Reliability and predictability of seven
sources.

 Entrepreneurship is a multidisciplinary area.
 Governed by human factors – ever changing
society pursuing simultaneously
- economic objectives
- social objectives
- psychological objectives
 Theory of Entrepreneurship is woven into :
- sociological, cultural, psychological,
political and managerial fiber.
 With them it forms a economic web.

Theories of Entrepreneurship

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