Concept and Theories of Entrepreneurship

 

The functionality of an entrepreneur is based on some established theories.

These theories cover the economic, social and psychological behaviour of an entrepreneur.

Evolution of the concept of entrepreneurship

The concept of entrepreneurship was first established in the 1700s, and the meaning has evolved ever since. Earliest Period During this period, Marco polo who was an Italian acted as a go-between. He made attempts to trade routes to the Far East. As a go-between, he had to sign a contract with a money person to sell his goods while as a merchant; he took active role in trading by bearing all the physical and emotional risks involved in the venture.

The economic theory of entrepreneurship considers the relationship between economic conditions and incentives to arrive at a risk-reward equation that informs a determination on whether or not to pursue a potential venture. This theory assumes that the entrepreneurs is the one responsible for pulling  resources, labour, materials and other assets together in order to make their value greater than before, and also introduce changes, innovations, creativity and a new order.

 

Features of Economic Theory of Entrepreneurship

• Entrepreneurship and economic growth take place when the economic conditions are favorable.

• Economic incentives are the main motivations for entrepreneurial activities.

• Economic incentives include taxation policy, industrial policy, sources of finance and raw material, infrastructure availability, investment and marketing opportunities, access to information about market conditions, technology etc.

Economic theories of entrepreneurship tend to understand business ventures in terms of an innovator purchasing several factors of a product at a bulk rate, combining them for resale at a higher rate but in the face of unknown market conditions. Economic factors that encourage or discourage entrepreneurship include:

• Taxation policy

• Industrial policy

• Easy availability of raw materials

• Easy access to finance on favorable terms

• Access to information about market conditions

• Availability of technology and infrastructure

• Marketing opportunities.

The economic theory of entrepreneurship is sub-divided into three namely; Classical theory, Neo-classical and Austrian Market Process.

 

Classical Theory

The classical theory inscribed the virtues of free trade, specialization which was a result of Britain‘s industrial revolution which took place in the mid-1700 and lasted until the 1830s. The classical movement described the role of the entrepreneur in the context of production and distribution of goods in a competitive marketplace (Say, 1803).

Classical theorists articulated three modes of production: land; capital; and labour. There have been various objections to the classical theory. These theorists failed to explain the dynamic upheaval generated by entrepreneurs of the industrial age (Murphy, Liao & Welsch, 2006).

 

Neo-classical Theory

The neo-classical model emerged from the criticisms of the classical model and indicated that economic phenomena could be relegated to instances of pure exchange, reflect an optimal ratio, and transpire in an economic system that was basically closed. The economic system consisted of exchange participants, exchange occurrences, and the impact of results of the exchange on other market actors. The importance of exchange coupled with diminishing marginal utility created enough impetus for entrepreneurship in the neoclassical movement (Murphy, Liao &Welsch, 2006).

Some criticisms were raised against the neo-classical conjectures. The first is that aggregate demand ignores the uniqueness of individual-level entrepreneurial activity. Furthermore, neither use nor exchange value reflects the future value of innovation outcomes. Thirdly, rational resource allocation does not capture the complexity of market-based systems. The fourth point raised was that, efficiency based performance does not subsume innovation and non-uniform outputs; known means/ends and perfect or semi-perfect knowledge does not describe uncertainty.

In addition, perfect competition does not allow innovation and entrepreneurial activity. The fifth point is that, it is impossible to trace all inputs and outputs in a market system. Finally, entrepreneurial activity is destructive to the order of an economic system.

 

Austrian Market Process (AMP)

These unanswered questions of the neo-classical movement led to a new movement which became known as the Austrian Market process (AMP). The AMP, a model influenced by Joseph Aloi Schumpeter (1934) concentrated on human action in the context of an economy of knowledge.

Schumpeter (1934) described entrepreneurship as a driver of market-based systems. In other words, an important function of an enterprise was to create something new which resulted in processes that served as impulses for the motion of market economy.

The economic school of entrepreneurship considers the relationship between economic conditions and incentives in order to arrive at a risk-reward equation that informs a determination on whether or not to pursue a potential venture. The school saw an entrepreneur as a merchant, adventurer and an employer. The school was able to state the underlining economic factors that can lead to the growth or decline of an entrepreneurial venture amongst such are taxation policy, exchange rate and so on. The economic school is also subdivided into the classical school, neo-classical and Austrian process market which serves an addition to the general framework.

 

Psychological theories of Entrepreneurship

Psychological theory of entrepreneurship identifies traits, motives and personalities as the major factors that infuse the entrepreneurial spirit in an individual. The theory emphasizes personal characteristics that define entrepreneurship. Personality traits, need for achievement and locus of control are found to be associated with entrepreneurial inclination. The psychological theory which focuses on personality factors, believes that entrepreneurs have unique values and attitude towards work and life. Psychological attributes differentiate entrepreneurs from non-entrepreneurs, and successful entrepreneurs from unsuccessful ones.

The psychological theories are:

i. Personality trait

ii. Need for achievement

iii. Locus of control

iv. Psychodynamic model

v. Risk taking propensity.

 

Personality Trait

According to the personality trait theory (2004), Personality trait is defined as stable qualities that a person shows in most situations. Personality traits are the enduring inborn qualities or potentials of the individual that naturally make him/her an entrepreneur. Some of the traits which entrepreneur exhibits include vision, enthusiastic, optimistic, flexible, open mindedness, and versatility amongst others.

 

Need for achievement model

The need for achievement theory was propounded by McClelland (1961). The theory explained that human beings have a need to succeed, accomplish, excel or achieve. Entrepreneurs are usually driven by this need to achieve and excel. This theory states that people desire to achieve something for their inner feeling of accomplishment.

Observation/Criticisms:

This theory has been criticized as a result of the following:

i. The theory is contradictory and has limited evidence

ii. It has no direction for causality

iii. The theory is more applicable to the western culture where personal achievement is more appreciated as compared to other culture

iv. It is limited only to business people while other people also show that behaviour.

Locus of Control

Locus of control was first introduced by Julian Rotter in the 1950s. Rotter (1966) refers to Locus of Control as an individual‘s perception about the underlying main causes of events in his/her life. Locus of control orientation is a belief about whether the outcomes of our actions are contingent on what we do (internal control orientation) or on events outside our personal control (external control orientation). Entrepreneur‘s success comes from his/her own abilities and also support from outside. This theory states that there is a degree to which one believes that he/she is in control of one‘s destiny. This can either be internal or external locus of control.

Internal Locus of Control:

Individuals with an internal locus of control believe that they are able to control life events

 

External locus of control:

Individual with an external locus of control believe that life's events are the result of external factors, such as chance, luck or fate.

 

Observation/Criticism

• This theory correlates to the need for achievement theory (n-ach). Individuals with internal locus of control people are the ones who are interested in need for achievement than the externals.

• Directions of causality i.e. people tend to work harder when getting success thus have internal locus of control.

• Culture and belief system; i.e. there are societies which their belief system make them more externals (for example, those who believe that God will do everything for them).

• Being internal is not always the best (An individual cannot always be in-charge of everything such as weather and other peoples ‘behaviour).

• Locus of control (LOC) has negative influence on entrepreneurial inclination.

 

Psycho-dynamic Model

This model was propounded by Kets de Vries. The model is concerned with how people tend to be self-employed and become successful because of their ―troubled childhood. In troubled childhood, children tend to be abused, with low self-esteem, and lack of confidence. Therefore, an individual growing in such an environment does have reserved wishes towards those in control.

 

Observations/criticism:

1. This theory explains the behaviour of extreme category of people leaving out the rest.

2. Some people with similar background do not show innovative rebelliousness. Some tend to be criminals and/or drug addicts or alcoholics.

 

Risk Taking

This theory contends about one‘s willingness to accept risk. People who are more likely to accept risk and taking chances are more likely of being self-employed than those who do not take risk.

Observations/Criticism:

i. People tend to say that ―they take the profit and pass the risk to someone else.

ii. People who take risks normally take a ―calculated risk and do not gamble.

iii. People who are success in business are moderate risk takers.

iv. Risk is not only a financial loss, but also image loss or loss of relationship with other people in the society.

Sociological Theory of Entrepreneurship

The sociological theory is the third of the major entrepreneurship theories. Sociological enterprise focuses on the social context. Reynolds (1991) has identified four social contexts that relates to entrepreneurial opportunity.

i. The social networks: The social network focuses on building social relationships and bonds that promote trust and not opportunism. In other words, the entrepreneur should not take undue advantage of people in order to be successful.

ii. The life course stage: This involves analyzing the life situations and characteristic of individuals who has decided to become an entrepreneur. The experiences of people influences their thought and action which motivates them to do something meaningful with their lives.

iii. The ethnic identification: One‘s sociological background is one of the decisive ―pushǁ factors to become an entrepreneur. iv. The population ecology. Environmental factors play a vital role in the survival of businesses. The political system, government legislation, customers, employees and competition are some of the environmental factors that have an effect on the survival of new venture or the success of the entrepreneur.

 

Assumptions of the Sociological theory of entrepreneurship

• Entrepreneurship is likely to get a boost in a particular social culture

• Society‘s values, religious beliefs, customs, taboos influences the behaviour of individuals in a society

• The entrepreneur is a role performer according to the role expectations by the society

 

Social marginality model

This theory suggests that individuals who recognize a strong level of incongruence between their personal attributes and the role they hold in society will be motivated to change or reconstruct their social reality. Some individuals may reconstruct their reality by changing careers, employers, or result to self -employment. Marginal men are referred as individuals who are less included or integrated in their society.

Marginal men are usually not completely part of the society of their adoption as such; they are free of the restrictions imposed by the value system governing the society. At the same time, having left their own society, they are no longer constrained by its dominant values. This situation brings about the development of unconventional patterns of behaviour, which increases their propensity to become entrepreneurs.

Observations/Criticism

 i. Marginality is not an adequate explanation for the over-representation of certain people in entrepreneurship carriers e.g. Hispanics and Africans are underrepresented in entrepreneurship despite them being marginal.

ii. Aggressiveness and co-operation is an attribute in which marginal people tend to have.

 

Ethnicity

An ethnic origin of a person is said to influence the choice between paid employment and self-employment as well as performance in self-employment. Evidence of over-representation of certain ethnic groups in business carriers abounds throughout the world. The ethnic groups often quoted in the literature as being overrepresented in entrepreneurship include Ibos in Nigeria, Kikuyus in Kenya and Chagga in Tanzania. All of these are spread in different parts of their countries in which they over-represented in entrepreneurial careers. To this extent, they are less integrated in the societies in which they work and therefore less likely to be constrained by dominant values shared either by their own ethnic group or by their hosts.

Observations/Criticism

 It has been found that, even members of these groups (Ibo, Kikuyu and Chagga) who have remained in their homelands are quite active in entrepreneurship. Therefore their cultures must have influenced their entrepreneurial behaviour rather than ethnicity.

 

Inter-Generational Inheritance of Enterprise Culture

This theory asserts that entrepreneurial practice is largely inherited. Consequently, offspring‘s of entrepreneurial parents are more likely to become entrepreneurs and more successful as compared to others. A strong grounding in business and ownership ethic at an early age is a very vital tool and powerful driving force for children as they choose their future careers. An individual who grows up around a family that runs and own a business is likely to benefit from the skills, accumulated experiences and networks of existing firm. Such an individual will have better access to advice, credit, established markets and sources of inputs.

Observations/ Criticisms:

Several studies supports this theory, however studies on female entrepreneurship found that most of them were first generation entrepreneurs and none of their parents have been running their own business. Other studies also found that there is no significant difference between entrepreneurs and managers in terms of having self-employed parents. However this is the most supported sociological model.

 

Critique of Sociological Studies of Entrepreneur

Sociologists’ approach is seen to be mono-casual and fails to generalize the theory to explain the reasons all those who belong to their chosen classes.