module 8 theories of entrepreneurship
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Module 8 Theories of EntrepreneurshipTRANSCRIPT
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AIBSTheories of Entrepreneurship
Innovation Theory by Schumpeter & Imitating
Theory of High Achievement by McClelland
X-Efficiency Theory by Leibenstein
Theory of Profit by Knight
Theory of Social change by Everett Hagen
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Development of Entrepreneurship
Theories
Adam Smith (1776)An entrepreneur is a person
who acts as agent in transforming demand into
supply.
Jean Baptiste Say (1803) An entrepreneur is aperson who shifts resources from an area of low
productivity to higher productivity.
John Stuart Mill (1848) An entrepreneur is a
prime mover in the private enterprise. The
entrepreneur is the fourth factor of production.
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Development of Entrepreneurship
Theories
Carl Menger (1871) The entrepreneur acts as aneconomic agent who transforms resources intoproducts and services. These transformation processgives added value to the output.
Joseph Aloysius Schumpeter (1934) Theentrepreneur is an innovator. The economy movesthrough leaps and bounds because of the innovations.This process is known as creativedestruction
Alfred Marshall (1936) The process ofentrepreneurship development is evolutionary. Theentrepreneur is responsible for the evolution of soleproprietorships into a public company.
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Development of Entrepreneurship
Theories
Ibnu Khaldun (Abdul Rahman Mohamed
Khaldun) The entrepreneur is seen as a
knowledgeable individual and is instrumental in
the development of a city-state whereenterprises emerge.
David C. McLelland (1951)The entrepreneur
is a person with a high need for achievement.
This need for achievement is the foundation ofthe entrepreneurship process.
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AIBSOBJECTIVES OF ENTREPRENEURSHIP
Economic
Objectives
ProfitEarning
Productionof Goods
CreatingMarket
TechnologicalImprovement
Human
Objectives
Welfare ofEmployee
s
Satisfaction
ofConsumers
Social
Objectives
Availabilityof Goods
Supply of
Qualitygoods
Co-Operationwith
government
Creation of MoreEmployment
Utilising NaturalResources Properly
Personal
Objective
Growth
Survival
EarningPrestige
National
Objectives
HelpingNational efforts
Developmentof SmallEntrepreneur
National SelfSufficiency
Development ofSkilled
Personal
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TheEconomists
View
TheSociologists
View
ThePsychologists
View
TheAnthropologist
s View
THEORIES OF ENTREPRENEURSHIP
Four Catego r ies of
Entrepreneurship:
Entrepreneurial history is felt to
be interdisciplinary in approach and
thus, it is difficult to label
entrepreneurship as purely a theoryof economics or sociology or
psychology or a anthropology. The
concept of entrepreneurship is as old
as civilization while theories of
entrepreneurship have been evolved
from over a period of more than two
centuries.
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1). Economic Theory
Richard Cantillion (1755) was the first person to recognise the role of
entrepreneurs in economic theory. He stated that , the farmer is an entrepreneur
who promises to pay the land owner for his farm or land, a fixed sum of money
without assurance for the profit he will derive from his enterprise. Hence
entrepreneur is always at risk of bearing losses if he would unable to sell the goods
at a higher price.
J.Schumpeter (1994) added the concept of innovation to the theory of
entrepreneurship . He visulalised the entrepreneurs as the key figure in the economic
development because of his role in introducing innovations. For Schumpeter, the
ability to identify new opportunities in the market is a central entrepreneurial
activity which creates disequilibrium In the economy.
According to economists, G.F Papanek and J.R. Harris, economic
incentivesbring forward a favourable drive for entrepreneurial activities. A desire to
have more economic gain sparks the entrepreneurial instinct. Lack of incentives ,
unattractive economic polices and unfavourable market conditions tend to reduce the
vigour of entrepreneurship.
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2).Sociological Theory
Sociologists suggests that the entrepreneurship can conceptualized as asocial movements and entrepreneurs exist not only in the economy but inother spheres of society as well.
S.M Lipset argues that cultural values deeply effects entrepreneurshipand the level of economic development.
Mark Granovetter points that family ties may create an obstacle for abusinessman.
According to Hoselitz, the approach which emphasizes thetheory of deviance assumes that those who introduce changes must bedeviants since they reject the traditional elites way of doing things. Forexample , in Latin America , recent immigrants , members of minority
groups have formed a considerable section emerging business elite.A great land mark in entrepreneurial studies is represented by
study conducted at Harvard University (1948-1958). A journal of the centreExplorations in Entrepreneurial History, states that entrepreneurship shouldnot be studied by focusing on individual entrepreneur but rather by lookingenterprise . Special attention was often paid to the social relations within the
enterprise and to the relations between the enterprise and its surroundings.
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3).Psychological Theory
Joseph Schumpeter states that the entrepreneur is mainly motivated and
driven by three things:
a. The dream and the will to found a private kingdom.
b. The will to conquer.
c. The joy of creating.
J.Schumpeter formulation can be translated as:
a) the desire of power and independence ;
b) The will to succeed;
c) The satisfaction of getting things done.
d) According to him , money is not what ultimately motivates the
entrepreneur. Thus he supports the psychological theory and not the
economic theory. He asserts that what matters is the behaviour and not the
actors.
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4).Anthropological Theory
Barth on of the leading anthropologist of the world ,
states that entrepreneurial behaviour means to connect two
different spheres in the society, between which huge
discrepancy in value. Something which is cheap in one sphere
may be expensive in another.
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Each of the above theories is incomplete and none ofthem is right or wrong. Theories of entrepreneurship
are inter-disciplinary and are influenced by multitude
of factors. It is the integration of external
environment , achievement motivation, ability and
ambition which largely determines whether an
individual become an entrepreneur.
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Joseph Schumpeter
and Entrepreneurialism
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1. Background and Personal Characteristics
of Joseph Schumpeter
2. Joseph Schumpeters books
3. Entrerprenuer
4. Innovation
5. Scumpeter versus capitalism and socialism
S h t A D f d f R ti l
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Schumpeter A Defender of Rational
Capitalism
A Lawyer turned Professor atCzernowitz
Theory of economicDevelopment (1911)
Founder of the Theory ofEntrepreneurship
Theory of The Theory ofEconomic Development: Aninquiry into profits, capital,credit, interest and thebusiness cycle , 1911.
Economic Doctrine andMethod: An historical sketch,1914.
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Background and Personal Characteristics of
Joseph Schumpeter(1883-1950)
Tangled patterns wove throughout Schumpeters
early life. He was born in Moravia in 1883.
He worked in government and finance during the
1920s. He settled at Harvard University.
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Schumpeters characteristics were evident in
his actions and writings
He both dressed and wrote flamboyantly.
He was extremely well read.
He had a streak of contrariness.
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AIBSSchumpeter as a Politician and an Academic
German SocializationCommittee
Kiel School of Economists andGerman Marxists Such
Kautsky and Hilferding Brief Tenure as Austrian
Minister of Finance in 1919
President of Bank andProfessorship at Bonn
Harvard University in 1932 Mentor of Paul Samuelson
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Joseph Schumpeters books
1908, The Nature and Essence of Theoretical
Economics
1911, The Theory of Economic Development
1914, Economic Doctrine and Method 1939,Business Cycles
1942, Capitalism, Socialism, and Democracy
1954, History of Economic Analysis (published
posthumously)
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Schumpeter
Starts with neoclassical model.
Introduces entrepreneurship and innovationchange.The balanced, circular flow is disrupted.
Innovations drive business cycles and development.Innovations occur in clusters.
Innovation is followed by recession and depression, thenrecovery.
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AIBSDavid McClelland
1917-1998
Boston University
Harvard
Achievement
motivation
Need to achieve
nAch
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AIBSWrite a story based on questions:
Who is the person?
What is happening?
What led up to situation? What is being thought
or wanted?
What will happen? What will be done?
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AIBSStory content with high nAch
Main character
Ambitious
Making plans to forge
ahead
Attempting to reach a
goal
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AIBSStories low in nAch
Main character
Yielding to pressure
Failing in endeavors
Avoiding
responsibility
M Cl ll d A hi t M ti ti
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McClellands Achievement Motivation
Theory
McClelland and colleagues studied the
behavioral effects of three needs
Need for Achievement
Need for Power
Need for Affiliation
Emphasized the Need for Achievement,
although they investigated all three needs
M Cl ll d A hi t M ti ti
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McClellands Achievement Motivation
Theory (Cont.)
Product of an impressive long-running
research program
Controversy over measurement methods
Recent study shows the validity of different
measures
M Cl ll d A hi t M ti ti
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McClellands Achievement Motivation
Theory (Cont.)
Strong need for achievement people
Take responsibility for results of behavior
Willing to take calculated risks
Set moderate achievement goals Prefer to set performance standards for
themselves
Prefer non routine tasks to routineassignments
Welcome feedback about how well they aredoing
M Cl ll d A hi t M ti ti
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McClellands Achievement Motivation
Theory (Cont.)
Acquire the Need for Achievement through
socialization to cultural values
Presence of Need for Achievement
themes in folklore, mythology, art
Need for Achievement societies had high
levels of economic development
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McClellands Achievement Motivation
Theory (Cont.)
Strong Need for Power people
Focuses on "controlling the means ofinfluencing the behavior of another person
Having strong effects on other people Means of influence: anything available to the
person to control the behavior of another
Actively searches for means of influence
Example: use superior-subordinate relationship
or external rewards to control the behavior of another
M Cl ll d A hi t M ti ti
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McClellands Achievement Motivation
Theory (Cont.)
Two ways of expressing the Need for
Power
Dominance, physical aggression, exploitation
View situations from a win-lose perspective
Must win and the other party must lose
Did not feel such power behavior resulted in
the type of leadership required byorganizations
McClellands Achie ement Moti ation
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McClellands Achievement Motivation
Theory (Cont.)
Two ways of expressing the Need for
Power (cont.)
Persuasion and interpersonal influence
Tries to arouse confidence in those he or she
wants to influence
Clarifies groups goals and persuades members to
achieve those goals
Emphasizes group members ability to reach goals
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Two ways of expressing the Need for
Power (cont.) Tries to develop a competence belief in group
members McClelland felt this type of power behavior
characterized effective leaders in organizations
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Strong Need for Affiliationpeople
Focuses on "establishing, maintaining, and
restoring positive affective relations with
others" Want close, warm interpersonal relationships
Seek the approval of others, especially those
about whom they care Like other people, want other people to like
them, and want to be in the company of
others
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for achievement and behavior
Money: important to both high and low
achievers, but for different reasons
High achiever wants concrete feedback aboutperformance
Making a profit, or receiving a bonus, is a
statement about success or failure
Symbol of success and feedback about jobperformance
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for achievement and behavior (cont.) High achiever wants a challenging job and
responsibility for work
Want to feel successful at doing something overwhich they have control
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for achievement and behavior (cont.)
Low achiever views monetary reward as an
end in itself
Get increased performance from low Need forAchievement person by rewarding with money
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Managers and executives usually have a
stronger Need for Achievement than
people in other occupations
Evidence points to strong Need for
Achievement as an entrepreneur
characteristic
Nature of Need for Achievement behaviorfits well with such role demands
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for Achievement and Need for
Power: some relationships
Strong Need for Achievement person
Task centered
Future oriented
Performs to internal standard of excellence
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for Achievement and Need for
Power: some relationships (cont.)
Strong Need for Power person
Draws attention
Risk taking
Present oriented
Assesses situations for change potential
McClellands Achievement Motivation
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McClelland s Achievement Motivation
Theory (Cont.)
Need for Achievement and Need for
Power: some relationships (cont.)
Both types of people important for successful
organizations
Strong Need for Achievement managers keep
an organization going
Strong Need for Power people bring dramaticchange and innovation
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AIBSX-Efficiency Theory
Harvey Leibenstein (1966) originated X-
inefficiencyas a concept to cover non-
allocative inefficiencies in an organization.
X-inefficiency was a counterpart totechnical inefficiency and was to capture
organizational or motivational inefficiency.
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AIBSX-efficiency Theory
Leibenstein summarized h is theory as fol lows:
Firms generally operate within rather than on their
production frontiers. As such, their output is not
maximized and their costs per unit are generally not
minimized. Innovations are generally not introduced
when it is optimal to do so. Less output is not
necessarily associated with more desired leisure. The
price of the product can have an influence on the cost of
production.
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AIBSTheory of Profit by Knight
Risk and Uncertainty-bearing theory of profit byKnight
What is Risk and Uncertainty?
Entrepreneurs have to undertake the work
of production under conditions of uncertainty.
They have to make estimates of the future
conditions regarding demand for the product and
other factors in advance and these affect theirfuture price and costs In view of their estimates
and anticipations, they make contracts with the
suppliers of factors of production in advance at
fixed rates of remuneration.
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Now these contracts are no doubt based on anticipations
about the future conditions.Between the time of contracts
and the time of the sale proceeds many changes may
take place which may upsets anticipations for better or
for wo rse.
Knight distinguishes between risk and uncertainty. Acc
to him, risks inherent in any business are of two kinds:
1)Insurable
2)Non-Insurable
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AIBSInsurable Risks
Insurable risks are those risks which can be
calculated statistically and thus insured with an
insurance company.These in turn are of two
types: a) Risk of loss of assets, resulting from natural
factors like fire,flood,etc
b) Risk of theft, robbery etc.
By paying insurance premium these risks can be
taken care of by the entrepreneur.
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AIBSNon-Insurable Risks
There are certain risks which have to be borne by theentrepreneur himself as these cannot be insured against
These non-Insurable risks are:
1)Competition Risks: These are the risks arising from the
policy changes of the rivals, which include thingslike changes in price, product line ,advertisement
expenditure, etc. For i.e change in prices of coke pet
bottle made Pepsi also to change their prices.
2)Risks of market condition: Whole or major part of the
business sector in an economy may enter a phase of
recession or a boom, thus effecting the firm adversely or
favorably. Like India business sector was hit by
recession in 2008-09.
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3) Risks of technological changes :This is also called risk ofobsolescence which grows with advancement of an
economy. These risks arise from the possibility of newly
installed machinery becoming obsolete with the
discovery of new and more economical processes
of production.
4) Risks of public policy: Government policy regarding
business undergoes a change over time, some of which
cannot be predicted precisely. These policies changes
may relate to price control, foreign trade policy,corporate taxation etc. These non-insurable risks are
called uncertaint ies by knight. According to him ,the
term r isk should be applied only to insurable r isks
.
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Acc to Knight, the most significant function of anentrepreneur is to bear r isk and uncertainty which is
rewarded by Profi t.
He says that different rates of profit earned by different
firms in the same industry reflect the differences in theircapabilities of bearing risk and uncertainty.
Weaknesses of KnightsTheory:
Actually uncertainty-bearing is not the only determinant
of profit.Ability of the businessmen to mould demand in the
market in favor of his commodity, innovative ability etc
are also equally important for the emergence of profit.
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Some Critics go on to point out that a monopoly
producer earns profit even without beating
uncertainty.
Thus according to this theory
Profits are the result of market frictions and
imperfections.
They exist because of disequilibrium and imperfect
competition.