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Theories of Entrepreneurship – Top 3 Theories

According to Eminent Authors


The entrepreneurial behaviour is likely to emerge when a society has
sufficient number of people who possess certain sociological,
psychological and economical features. Entrepreneurial behaviour is
an innovation action taking behaviour that involves various risks and
attracts good returns.
The theories of entrepreneurship development are divided into three
theories.
The brief description of each theory are as follows:
1. Psychological Theory – Entrepreneurship is a psychological process
and concept. According to this concept, psychological factors are the
primary source of entrepreneurship development. When there are
sufficient number of persons having the same psychological
characteristics in the society, then there are bright chances of
development of entrepreneurship.
2. Sociological Theory – Entrepreneurship is a sociological concept
and process. According to this concept, the sociological factors are the
secondary source of entrepreneurship development. As such, the
social factors like social attitudes, values and institutions significantly
influences the entrepreneurial supply in a society.
3. Economic Theory – According to this theory, an entrepreneur
executes all activities due to economic incentives. The main aim of this
theory is profit motive.
Theory # 1. Psychological Theories:
The entrepreneurship is termed as psychological concept and process.
According to this theory, psychological factors are the primary source
of entrepreneurship development. Few authors like Schumpeter,
McClelland, Hagen and John Kunkell have expressed their opinion
about psychological factors affecting entrepreneurship.
According to this theory, an entrepreneurship is important to emerge
when the society has sufficient supply of individuals possessing
particular psychological elements.
The main psychological theories are as follows:
(i) Joseph A. Schumpeter Theory
(ii) David C. McClelland Theory
(iii) Everret E. Hagen’s Theory
(iv) John Kunkell Theory.
The brief description of each theory are as follows:
(i) Joseph Alois Schumpeter Theory:
According to Joseph A. Schumpeter, the effective function of an entre-
preneur is to start innovation in venture. This theory is also called
innovation theory or dynamic theory. According to this theory, the
entrepreneurs emerges because of individuals having certain
psychological elements i.e., will power, self-intuitions, tolerance
capacity. The entrepreneur is a person who has creative nature.
He regarded the entrepreneurship as a catalyst who checks the static
conditions of the economy, there by initiates and thrusts a process of
economic development i.e., innovation. He carries economy to new
height of development.
This innovation includes:
1. Introduction of new goods,
2. Introduction of new methods of production,
3. Opening of a new market,
4. Discovering a new source of raw materials,
5. Carrying out a new source of an organisation.
Although, this theory also included other characteristics i.e., risk
taking, superintendence and coordination, he emphasised that these
attributes without the ability to innovate will not make an individual
as an entrepreneur.
According to him, the following characteristics that appear
in the behaviour of an entrepreneur are as follows:
1. An institutional capacity to see the things in a way which afterwards
proves to be true.
2. Energy of will and mind to overcome static habits, desires and
emotions.
3. The capacity to withstand social opposition.
According to him, an entrepreneur is an innovator who desires to earn
profit through innovation. An entrepreneur is neither technical man
nor a capitalist but simply an innovator. He introduces something new
in the economy. He is motivated by establishing his psychological
power. An entrepreneurship is formed for establishing his industrial
empire. He has burning desires for creative activities.
He makes a distinction between innovator and inventor. An inventor
discovers new methods and new material whereas an innovator is one
who utilises or applies inventions and discovers to produce better
quality goods that give greater satisfaction to customer and high profit
to entrepreneurs. In this way, an entrepreneur is an innovator.
Schumpeter made it clear that an entrepreneur doesn’t have a single
person but equal to an organisation. “What matter is the behaviour
not the actor?” He emphasised more on technological innovations
rather than on organisational innovations. “Entrepreneurs are
certainly not economic men in the theoretical sense.”
Critical Evaluation of J. A. Schumpeter Theory:
In this theory, the main theme is the innovation. He makes a
distinction between an innovator and an inventor. According to him,
an inventor discovers new methods and new materials. But an
innovator is one who applies inventions and discovers in order to
make new combination.
With the help of new combination, he produces newer and better
goods which yields satisfaction as well as profits. Schumpeter’s
concept of entrepreneurship is quite broad based. It includes not only
the independent businessmen but also executives and managers who
actually undertake innovative functions.
(ii) David C. McClelland’s Theory:
David C. McClelland has given a particular concept of
entrepreneurship. According to him, needs for high achievement is an
essential feature of entrepreneurial behaviour. According to
McClelland, “Burning desire of need for achievement attracts an
entrepreneur for activities.”
The primary basis of the development of an entrepreneurship is
achievement orientation. The capacity of becoming an entrepreneur
develops due to desire of reaching heights of excellence and specific
performance.
For achieving heights of excellence and specific performances, an
entrepreneur needs rational thinking, new combinations, deep
thinking, power etc. The achievement motive is uncalculated through
child rearing practices, which stress standards of excellences, material
warmth, self-reliance training a low, further dominance. Individuals
with high achievement motive tend to take keen interest in situation of
high risk desire for responsibility and a desire for a Concrete measure
of task performance.
His views can be expressed by means of the following points:
a. Ideological Values,
b. Family Socialisation,
c. Need for Achievement,
d. Entrepreneurial Behaviour.
The following elements which are focused by McClelland are
as follows:
a. Achievement Orientation,
b. Height of Excellence,
c. Imagination Power,
d. New Combination.
According to McClelland, needs for high achievement drives individual
towards entrepreneurial activities. High achievement need can be
developed through child rearing and schooling practices. People with
high achievement need are not motivated by monetary rewards only,
such people regard profit as a measure of success whereas people with
low achievement needs are motivated by monetary rewards.
People with a high need for achievement derive satisfaction from
achieving goals. High achievers want immediate feedback on their
power performances. He has been able to establish the desirability of
high need for achievement for entrepreneurial success in the economic
development of country.
A drive to influence others and situations. It refers to one’s desire to
influence and dominate other through use of authority. Goal’s
achievement is less important than the means by which goals are
achieved. McClelland and his associates have found that people with
high power needs have a great concern for exercising influence and
control.
McClelland theory is not free from criticism:
1. There is strong evidence to indicate from politics and religion that
adult behaviour can be moulded or drastically altered in a relatively
short time.
2. The contention that needs are permanently acquired.
Inspite of the above discussion, this theory highlights the importance
of matching the individual and the job. People with high achievement
needs success on work i.e., challenging, satisfying, stimulating and
complexing. People with low achievement needs stability security and
predictability.
Critical Evaluation of David McClelland’s Theory:
The psychological roots of entrepreneurship reveal that high
achievement orientation ensures the success of entrepreneurs. But the
empirical tools of concept used by McClelland are found to be highly
suspect.
Empirical investigation also need the following:
(1) It is necessary to create a climate to enable the children to grow
and become individuals with high achievement.
(2) It is possible to improve the performance of existing entrepreneur
through imparting proper training and education.
(iii) Everett E. Hagen’s Theory:
Everett E. Hagen has also given a particular concept about an entre-
preneurship. He has developed the theory of withdrawal of status.
Hagen says, “Entrepreneurship is a function of status withdrawal.”
“Creativeness of disadvantaged minority group is the main source of
entrepreneurship.” —Everett E. Hagen
Hagen considers “withdrawal of status respect as the trigger
mechanism of change in personality formation” as entrepreneurship
status withdrawal is the act of seeing on the part of some social group.
The origin of this concept of psychological theory of entrepreneurship
is based on Samurai community of Japan.
According to Hagen’s concept status withdrawal as fall of status of
social group is the primary cause of personality development. Hagen
identifies the following four types of events that can produce status
withdrawal and prestige fall.
(1) Displacement of valued symbols.
(2) Denigrations of status symbols with a changing distribution of
economic power.
(3) Inconsistency of status symbols with a changing distribution of
economic power.
(4) No acceptance of expected status on migration to a new society.
Hagen opined that creative innovation or change is the basic feature of
economic growth. He describes an entrepreneur as a creative problem
shooter interested in things in the practical and technological realm.
Such type of individual feels a sense of increased pleasure when facing
a problem and tolerates disorder without discomfort. In traditional
societies, position of authority are granted on the basis of status,
rather than individual ability. That is why he visualised an innovative
personality.
There are 4 responses:
(1) One who combines to work in the society but remains indifferent to
work and position is called Retreatist.
(2) One who adopts a kind of defensive behaviour and acts in the ways
accepted and approved in his society but with hopes on of improving
his position is called Ritualist.
(3) One who forms a rebellion and attempts to establish a new society
is called Reformist.
(4) A creative individual who is likely to be an entrepreneur is called
Innovator.
Innovation requires creative and such creative individuals cause
economic growth. Whenever there is a withdrawal of status respect, it
would give rise to birth of innovation of a creative individual who is
likely to be an entrepreneur.
Critical Evaluation of E. Hagen’s Theory:
This theory acts as distinction between entrepreneurship and
intrapreneurship. There are different factors within the organisation
which motivate the executives and professionals to do some innovative
behaviour leading to new product and services.
Actually, they are not governed by status withdrawal. The theory only
suggests that the people who had enjoyed social standing at some
stage in their histories fall into a retreatist phase with an urge to
regain the lost status and emerge as an entrepreneurship personality.
(iv) John H. Kunkel’s Theory:
John H. Kunkel has also given a particular concept about
entrepreneurship. He has presented a theory of entrepreneurial
behaviour in connection to the development of entrepreneurship.
Kunkel’s theory is concerned with the expressed activities of
individuals and their relations to the previous and present
surroundings, social structures, physical conditions and behavioural
patterns determined by reinforcing and opposing present in the
context.
Hence, entrepreneurial behaviour is a function of surrounding and
social structures, both past and present and can be readily influenced
by the manipulative economic and social incentives.
Kunkel, “The supply and development of an entrepreneur depends
upon the existence and extensiveness of four structure i.e., limitation
structure, demand structure, opportunity structure, and labour
structure.”
He has given stress on the following four types of structure
for the development of entrepreneurship:
1. Demand structure,
2. Opportunity structure,
3. Labour structure,
4. Limitation structure.
The description of each point is given as follows:
1. Demand Structure- The demand structure is of economic nature.
This structure is changing day by day according to economic progress
and government policies. The behaviour of individual can be made
enterprising by affecting the main elements of demand structure.
2. Opportunity structure- The opportunity structure is formed by
combination of supply of capital, managerial and technical skill
production methods, labour and market, training opportunity
establishment of an enterprise and conducting different activities.
3. Labour structure- The labour structure is directed by several factors
such as source of livelihood, traditional outlook and life ambitions.
The quality of labour influences the emergence and growth of
entrepreneurship. Rather than capital intensive, labour intensive will
serve our interest in a better manner. The problem of labour
immobility can be solved by providing infrastructural facilities
including efficient transportation wherever an entrepreneurship is
promoted.
4. Limitation structure- We can say that the limitation structure is
social and cultural. This structure affect the development of an
entrepreneur.
Critical Evaluation of Kunkel Theory:
The theory assumes the ideal structures for the supply of
entrepreneur. But generally there is discrepancy between objectives,
structures and the actual incidence of entrepreneurs. It is due to the
fact that there are inadequate or incorrect perception. In practice,
entrepreneurship is also governed by the specific combination of
circumstances which are generally not available in the environment.
At last but not the least, we conclude that all the authors i.e., J. A.
Schumpeter, David C. McClelland, Everett E. Hagen and John H.
Kunkel have given their own opinion on concept of psychological
theory of entrepreneurship. This theory presents the certain
psychological motives that are responsible for the evolution of
entrepreneurship.
Schumpeter’s theory is one of the most important concepts of entre-
preneurship which is richer and relevant. He has laid emphasis on
innovativeness or creativity of an individual which makes him an
entrepreneur.
McClelland theory has numerous practical implications. The person
with high need achievement needs great concern for exercising
influence and control.
Hagen’s theory laid more stress on technological changes which is the
result as individual’s creativity. His concept depended upon
withdrawal of status.
John H. Kunkel theory laid more stress on types of structure i.e.,
demand, opportunity, labour and limitation. All the structure affects
development of an entrepreneur.
The main point which is focussed on all the theories is on the
individual and his personality inference by environment factors in
general and internal values in particulars.
Theory # 2. Sociological Theory:
The supporters of sociological theory says that the entrepreneurial
activities is affected from social status hierarchy and values.
Individuals’ position, tradition, cultural values, mobility and social
status etc. are thoroughly effected to entrepreneurship development.
The sociological theories depend on this concept.
The main sociological theories are as follows:
i. Frank W. Young Theory
ii. B.F. Hoselitz Theory
iii. Max Weber Theory
iv. Cochran Theory
v. Stocke’s Theory.
The description of each theory are as follows:
i. Frank W. Young Model/Theory:
Frank W. Young is not the supporter of role of individual in entre-
preneurship development. They think that only group entrepreneurs
have the capacity of extension of entrepreneurial activities due to the
character of capacity to react. He believes on the concept of
changeable society.
A group comes in reactive status when the following circumstances
happen at one attempt.
a. When group experiences minority situation in society.
b. When group do not make approach upto effective social machinery.
c. When group is having sound and more institutional resources rather
than other groups.
Overall, when a group sees their lower positional conditions &
experience, they grow an entrepreneurial tendency due to reactive
capacity. According to this theory, set of supporting instructions are
the primary determinant factors of entrepreneurship development.
ii. B. F. Hoselitz Theory:
According to Hoselitz, “The development of industrial entrepreneur is
based on only which type of society are there.”
a. Social process is not static.
b. Sufficient employment pattern is available.
c. Encourage to entrepreneurs for personality development.
Hoeslitz says, “Culturally marginal groups plays an important role in
encouraging the economic development of any nation.”
He think that the marginal persons are more able in making creative
adjustment in changed situations and during the adjustment process
they make efforts in bringing real innovations in social behaviour. In
addition to this, he emphasised on development of personal qualities
for entrepreneurial development.
According to Hoselitz, “Managerial skill and leadership qualities are
important factors for entrepreneurship. Besides this, education,
training, social values, behaviour and social behaviour/institutions
play a crucial role in personality development.”
Highlighted Points:
i. Entrepreneurship development is based on social progress and
employment patterns.
ii. Personality development is an essential quality for
entrepreneurship development.
iii. Culturally marginal groups are important characters for
development process.
iv. Marginal groups are having the ability of innovation.
v. Managerial ability and leadership quality is must for
entrepreneurship development.
iii. Max Weber Theory:
According to Weber, “A person who lives in which community, religion
and follows the conventions and religious values.”
All these things completely affect by their professional life, energy,
livelihood and enthusiasm.
In other words, Max Weber is connected with the emergence and
success of entrepreneurs with social ethical values systems. He also
associated the entrepreneurship development with protestants and
other non-convents.
According to him, non-convents groups are those groups who gives
pressure on capitalism, money rationality and thinking. They were
almost successful in creating entrepreneurs, wealth collection,
technology, capital formation and economic development.
“The modern economic development is explained to a greater extent,
by the social factors as discussed in the foregoing lines. This becomes
more prominently evident when we contrast the Indian culture with
that of the western of particularly of the American culture. Even if we
contrast the different sub cultures within the same larger society, the
story of economic development is explained.”
Weber says that the religious beliefs and moral values are basically
affected to people’s attitude, view trust and thinking pattern and
people’s selected occupational pursuits as per earlier things.
Highlighted Points:
i. Entrepreneurship development is based on Protestants.
ii. Selection of occupation pursuits is effected from religious and social
values.
iii. Religious and moral values are effected to people’s attitude,
thinking power.
iv. Cochran Theory:
According to Cochran’s, ‘cultural values, role expectation and social
acceptance plays prominent role in entrepreneurship development
and entrepreneur is a model of personality.”
The success of an entrepreneur is basically affected from the
following factors:
i. The social attitude of the person towards his occupation.
ii. The role expectations of the sanctioning group.
iii. The operational requirements of the job.
Thus, the social attitude of the person and the role expectations are
determined by the society’s values as well as sanctioning groups that
determine the success and failure of entrepreneurship. Overall entre-
preneurship development is associated with social environment.
At last but not the least, we conclude that all the authors i.e., Frank
Young, B. F. Hoselitz, Max Weber, Cochran has given their own
opinion on the concept of sociological theory. All the theories depend
upon the social factors.
Frank Young’s theory says about the concept of changeable society.
Reactive status transforms the group into an entrepreneur.
B. F. Hoselitz has given the importance to social factor. Under this
theory, the marginal persons are more able in making creative
adjustment in changed situations.
Max Weber theory says that those persons who are related with
religious, community etc., follow the rules and regulations of that
community only.
Cochran theory says that the entrepreneur is the model personality of
the society.
Theory # 3. Economic Theory of Entrepreneurship:
According to this theory, an entrepreneur executes all activities due to
economic incentives. The supporters of this theory, profit motive is the
prime driving force that change an individual into an entrepreneur. As
such an entrepreneur emerges due to incentives and economic profit.
According to J.R. Harris and G. F. Papanek, “The inner drive of a man
is associated with economic gains, which drive him into economic
activities. Therefore, they regard economic gains as a pre-condition for
the supply of entrepreneurs.”
Thus, the desire of increasing actual income and economic gains exist
in any type of society. This tendency creates the spirit of economic
development. They believe that the economic incentive is the basic
condition of entrepreneurship.
According to Kirzner, “A typical entrepreneur is the arbitras, the
person who discovers opportunities, the person who discovers
opportunities at low prices and sells the same at high prices because of
intertemporary and inter- partial demand.”
It means that an entrepreneur finds those situations in which he can
earn profit by producing goods at low cost or purchasing goods at less
prices and sell those goods at higher prices in market, he will take all
possible steps and tend to act. No doubt, he is a seeker of profitable
opportunities.
Overall this theory emphasises on economic gains and economic
incentives which emerge the entrepreneurial class in a society.

Theories of Entrepreneurship – 4 Important Theories:


Cultural Theories, Economic Theories, Psychological
Theories and Sociological Theories
“He loves practice without theory is like the sailor who boards ship
without a rudder and compass and never knows where he may case.” –
Leonardo Da Vinci
There are four factors of production i.e., land, labour, capital and
organization. Organization is the coordinating factor that brings
together the other three factors and entrepreneurship is the element
that powers and strengthens the organization. Many of the economists
believe that entrepreneurship is itself the fourth factors of production
that is the most important in driving a successful economy.
Entrepreneurs are defined by their risk taking abilities and their
intentions to fill in the void because of the existing lack of knowledge
about a product. According to them, the entrepreneur ventures are
carried out where there is a gap in the development of a product. The
entrepreneurs work to fill the gap by introducing something that
increases the effectiveness of the already existing product.
The field of entrepreneurship continues to struggle with the
development of a modern theory of entrepreneurship. In the past 20
years development of the current theories of entrepreneurship have
centered on either opportunity recognition or the individual
entrepreneur.
At the same time many theoretical insights have come from
economics, including a rediscovery of the work of Schumpeter.
However because there is a lack of clarity about the theoretical
assumptions that entrepreneurship scholars use in their work,
assumptions from both individual opportunity recognition and
economics, have been used as if they are interchangeable. This lack of
theoretical distinction has hampered theory development in the field
of entrepreneurship.
Throughout the theoretical history of entrepreneurship, scholars from
multiple disciplines in the social sciences have grappled with a diverse
set of interpretations and definitions to conceptualize this abstract
idea. Entrepreneurship is an evolved thing. With the advancement of
science and technology it has undergone metamorphosis change and
emerged as a critical input for socio-economic development.
Various writers have developed variety theories on entrepreneurship
and popularized the concept among the common people. The theories
of entrepreneurship that are propounded by many eminent theorists
have been grouped under four categories.
They are:
I. Cultural Theories:
1. Theory of Imitating – Hoselitz
2. Theory of Social Culture – Stokes
II. Economic Theories:
1. Theory of Functional Behaviour – Casson
2. Theory of Economic Incentives – Papanek and Harris
3. Theory of Adjustment of Price – Kirzner
4. Theory of X-Efficiency-Leibenstein
5. Theory of Innovations-Schumpeter
6. Theory of Harvard School
7. Theory of High Achievement – McClelland
8. Theory of Profit-Knight
9. Theory of Market Equilibrium-Hayek
III. Psychological Theories:
1. Theory of Psychology-Kunkal
2. Theory of Personal Resourcefulness
IV. Sociological Theories:
1. Theory of Entrepreneurial Supply – Cochran
2. Theory of Religious Belief – Weber
3. Theory of Social Change – Hagen
I. Cultural Theories:
Cultural theories pointed out that entrepreneurship is the product of
the culture. Entrepreneurial talents come from cultural values and
cultural systems embedded into the cultural environment.
This theory supports two other theories i.e.:
1. Hoselitz theory and
2. Stokes theory.
1. Theory of Imitating:
According to Bert F. Hoselitz’s theory, supply of entrepreneurship is
governed by cultural factors and culturally minority groups are the
spark-plugs of entrepreneurial and economic development. In many
countries, entrepreneurs have emerged from a particular socio-
economic class. Hoselitz reveals that in several countries
entrepreneurial talents are found in persons having particular socio-
economic background.
He emphasized the role of culturally marginally groups like Jews and
the Greeks in medieval Europe, the Chinese in South Africa and
Indians in East Africa in promoting economic developments. Further
he has emphasized on the theory through examples of Christians
contributes to entrepreneurship in Lebanon, Halai Memon
industrialists in Pakistan and Marwaris in India.
2. Theory of Social Culture:
According to David Stoke’s theory, entrepreneurship is likely to
emerge under specific social sanctions, social culture and economic
action. According to Stokes, personal and societal opportunities and
the presence of requisite psychological distributions may be seen as
conditions for an individual movement to get changed into industrial
entrepreneurship.
II. Economic Theories:
According to these theories, entrepreneurship and economic growth
take place when the economic conditions are favourable. Economic
development takes place when a country is real rational income
increases overall period of time wherein the role of entrepreneurs is an
integral part.
Economic incentives are the main motivators for entrepreneurial
activities. Economic incentives include taxation policy, industrial
policy, sources of finance and raw materials, infrastructure
availability, investment and marketing opportunities, access to
information about market conditions, technology etc.
1. Theory of Functional Behaviour:
According to Mark Christopher Casson theories, entrepreneurship can
provide a synthetic theory of the business firm that provides an
integrated framework for many partial theories of the firm. His theory
deals with the functional behavior of entrepreneur and his qualities
which are crucial for his success.
Drawing on an institutional approach to entrepreneurship, it is argued
that economic insights can combine with managerial perspectives to
clarify and synthesize many strategic issues of firms. Four dimensions
of environmental shock lead to different forms of entrepreneurship
that leads, in turn, to different sizes and structures for firms.
Entrepreneurs create firms that identify and monitor sources of
volatility and channel information to key decision makers in the firm;
entrepreneurial firms are located at nodes of information networks.
The standard rational action model of neoclassical economics is
generalized to an uncertain world of volatility and differential access
to information, which generates differing perceptions of the business
environment.
2. Theory of Economic Incentives:
According to G.F.Papanek and J.R.Harris Theory, economic incentives
are the integral factors that have induced entrepreneurial initiatives.
Main features of this theory are- (i) Economic incentives, (ii) Link
between economic gains and the inner urge and (iii) Economic gain.
3. Theory of Adjustment of Price:
According to M. Kirzner, the chief role of entrepreneur is based upon
the adjustment of price in the market. The buyer may pay higher price
or seller may accept a lower price, which gives rise to opportunities for
profit. Further if different prices prevail in the same market, there in
an opportunity for profitable arbitrage between two segments.
4. Theory of X-Efficiency:
Harvey Leibenstein propounded the theory of X-efficiency which is
popularly called Gap Filling Theory. According to Leibenstein,
entrepreneurial functions are determined by the X-efficiency which
means the degree of inefficiency on the use of resources within the
firm.
It includes routine entrepreneur, new entrepreneurship, and twin
roles of entrepreneur, gap filling, input completing and X-efficiency
factor. An example of Leibenstein’s Thoery is Lalu Prasad Yadav, who
is an entrepreneur for Indian Railways. He had turned around the
Indian Railways by improving efficiency and innovation.
5. Theory of Innovation:
This theory is developed by Joseph Schumpeter, who believes that
entrepreneur helps the process of development in an economy.
Schumpeter’s theory of entrepreneurship is a pioneering work of
economic development. Development in his sense implies that
carrying out of new combinations of entrepreneurship is basically a
creative activity. According to Schumpeter an entrepreneur is one who
perceives the opportunities to innovate, i.e., to carry out new
combinations of enterprises. He says that an entrepreneur is one who
is innovative, creative and has a foresight.
According to him, innovation occurs when the
entrepreneur:
i. Introduces a new product
ii. Introduces a new methods of production
iii. Opens new market
iv. Conquests of new source of supply of raw material
v. Carrying out new organization.
The theory emphasizes on innovation, ignoring the risk taking and
organizing abilities of an entrepreneur. Schumpeter’s entrepreneur is
a large scale businessman, who is rarely found in developing countries,
where entrepreneurs are small scale businessmen who need to imitate
rather than innovate.
In view of the above, Schumpeterian theory of
entrepreneurship has got the following features:
(i) 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.
(ii) Emphasis on entrepreneurial function – Schumpeter has given
emphasis on the role or entrepreneurial functions in economic
development. In his views development means basic transformation of
the economy that is brought about by entrepreneurial functions.
(iii) 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 towards equilibrium.
Critical Evaluation:
Schumpeter’s theory of innovation is criticized on the
following ground:
i. The theory has the scope of entrepreneurism in the sense that it has
included the individual businessman along with the directors and
managers of the company.
ii. Schumpeter’s innovating entrepreneurs represents the enterprise
with the R&D and innovative character. But developing countries lack
these characters.
iii. The theory emphasizes on innovation and excludes the risk taking
and organizing aspects.
iv. Schumpeter’s entrepreneurs are large scale businessman who
introduces new technology, method of production.
v. Schumpeter remained silent about as to why some economists had
more entrepreneurial talent than others.
However, despite the above criticisms, this theory is regarded as one
of the best theories in the history of entrepreneurial development.
6. Theory of Harvard School:
Harvard school contemplated that entrepreneurship involves any
deliberate activity that initiates, maintains and grows a profit-oriented
enterprise for production or distribution of economic goods or
services, which is inconsistent with internal and external forces.
Internal forces refer to the internal qualities of the individual such as
intelligence, skill, knowledge experience, intuition, exposure, etc.
These forces influence the entrepreneurial activities of an individual to
a great extent. On the other hand external forces refer to the economic,
political, social, cultural and legal factors which influence origin and
growth of entrepreneurship in an economy.
This theory emphasizes on two types of entrepreneurial activities i.e.-
(i) Entrepreneurial functions like organization and combination of
resources for creating viable enterprises, and (ii) The responsiveness
to the environmental condition that influences decision making
function besides the above mentioned activities.
Harvard School also emphasizes on following points:
i. To search and evaluate economic opportunities,
ii. To master the process of mobilizing resources to accomplish the
goal,
iii. To interconnect the different market segments for creating an
absolutely ideal marketing environment,
iv. To create or expand the firm or business enterprise,
7. Theory of High Achievement:
This theory is developed by David McClelland.
According to him entrepreneurship has been identified with
two characteristics such as:
(i) Doing things in a new and better way, and
(ii) Decision making under uncertainty.
He stressed that people with high achievement oriented (need to
succeed) were more likely to become entrepreneurs. Such people are
not influenced by money or external incentives. They consider profit to
be a measure of success and competence.
According to McClelland, a person has three types of needs
at any given time, which are:
(i) Need for achievement (get success with one’s one efforts)
(ii) Need for power (to dominate, influence others)
(iii) Need for affiliation (maintain friendly relations with others)
8. Theory of Profit:
This theory is developed by Knight, Frank H. He points out that
entrepreneurs are specialized group of persons who bears risk and
deals with uncertainty. Main features of this theory are pure profit,
situation of uncertainty, risk bearing capability, guarantee of specified
sum, identification of socio economic and psychological factors, use of
consolidation techniques to reduce business risks.
9. Theory of Market Equilibrium:
According to Hayek, the absence of entrepreneurs in Neo-classical
economics is intimately associated with the assumption of market
equilibrium. The elasticity of bank credit causes a disparity between
the natural and market rate of interest. According to this theory, the
postulate presupposes the fact that there is no need for further
information to modify the decision.
III. Psychological Theories:
Entrepreneurship gets a boost when society has sufficient supply of
individuals with necessary psychological characteristics. The
psychological characteristics include need for high achievement, a
vision or foresight and ability to face opposition. These characteristics
are formed during the individual’s upbringing which stress on
standards of excellence, self-reliance and low father dominance.
1. Theory of Psychology:
This theory is developed by John H. Kunkel. According to him
psychological and sociological variables are the main determinants for
the emergence of entrepreneurs. According to him, entrepreneurship
can be dependent upon the following structures in the economy, i.e.-
(i) Demand Structure (ii) Limitation Structure (iii) Labor Structure
and (iv) Opportunity structure.
Beginning with the premise that fundamental problems of economic
development are non-economic, he emphasizes on the cultural values,
role expectation and social sanctions as the key elements that
determine the supply of entrepreneurs. As a society’s model
personality, entrepreneur is neither a supernormal individual nor a
deviant person but is a role model of the society representing model
personality.
Model personality as a derivative of social conditioning, the role is
partly shaped by the model personality that is a derivative of social
conditioning of his generation. Further, innovation and invention go
together with the type of conditioning in the society.
Role expectations and entrepreneurial role: Primary cultural factor
operating on the personality of the executive and the defining of his
role by those involved must accommodate to some degree to the
necessities of the operation to be carried out.
2. Theory of Personal Resourcefulness:
According to this theory, the root of entrepreneurial process can be
traced to the initiative taken by some individuals to go beyond the
existing way of life. The emphasis is on initiative rather than reaction,
although events in the environment may have provided the trigger for
the person to express initiative. This aspect seems to have been
subsumed within ‘innovation’ which has been studied more as the
‘change’ or ‘newness’ associated with the term rather ‘pro-activeness’.
IV. Sociological Theory:
Entrepreneurship is likely to get a boost in a particular social culture.
Society’s values, religious beliefs, customs, taboos etc., influence the
behaviour of individual’s in a society. The entrepreneur is a role
performer according to the role expectations by the society.
1. Theory of Entrepreneurial Supply:
Thomas Cochran emphasizes on the cultural values, role expectation
and social sanctions as the key elements that determine the supply of
entrepreneurs.
2. Theory of Religious Belief:
Max Weber has propounded the theory of religious belief. According
to him, entrepreneurism is a function of religious beliefs and impact of
religion shapes the entrepreneurial culture. He emphasized that
entrepreneurial energies are exogenous supplied by means of religious
beliefs.
The important elements of Weber’s theory are described
further:
i. Spirit of capitalism – In the Webbrian theory, spirit of capitalism is
highlighted. We all know that capitalism is an economic system in
which economic freedom and private enterprise are glorified, so also
the entrepreneurial culture.
ii. Adventurous spirit – Webber also made a distinction between spirit
of capitalism and adventurous spirit. According to him, the former is
influenced by the strict discipline whereas the latter is affected by free
force of impulse. Entrepreneurship culture is influenced by both these
factors.
iii. Protestant ethic – According to Max Webber the spirit of capitalism
can be grown only when the mental attitude in the society is
favourable to capitalism
iv. Inducement of profit – Webber introduced the new businessman
into the picture of tranquil routine. The spirit of capitalism
intertwined with the motive of profit resulting in creation of greater
number of business enterprises.
3. Theory of Social Change:
This theory is developed by Everett E. Hagen. It explains how a
traditional society becomes one in which continuing technical progress
takes place. It exhorts certain elements which presume the
entrepreneur’s creativity as the key element of social transformation
and economic growth. It reveals a general model of the society which
considers interrelationship among physical environment, social
culture, personality etc.
According to Hagen, most of the economic theories of
underdevelopment are inadequate. Hagen insisted that the follower’s
syndrome on the part of the entrepreneur is discouraged. This is
because the technology is an integral part of socio cultural-complex,
and super-imposition of the same into different socio-cultural set-up
may not deliver the goods.
The Kakinada Experiment:
Conducted by McClelland in America, Mexico and Mumbai. Under
this experiment, young adults were selected and put through a three
month training programme. The training aimed at inducing the
achievement motivation.
The course contents were:
i. Trainees were asked to control their thinking and talk to themselves,
positively.
ii. They imagined themselves in need of challenges and success for
which they had to set planned and achievable goals.
iii. They strived to get concrete and frequent feedback
iv. They tried to imitate their role models those who performed well.
Conclusions of the Experiment:
(i) Traditional beliefs do not inhibit an entrepreneur
(ii) Suitable training can provide necessary motivation to an
entrepreneur.
(iii) The achievement motivation had a positive impact on the
performance of the participants.
It was the Kakinada experiment that made people realize the
importance of EDP, (Entrepreneurial Development Programme), to
induce motivation and competence in young, prospective
entrepreneurs.