Theories of Entrepreneurship

This presentation throws light on the different theories of Entrepreneurship evolved over time and their critical evaluation.

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

2. Objectives To learn about various theories of entrepreneurship. Critical evaluation of theories.

3. content 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

4. content Theory of Leadership Theory of Model Personality Theory of Systematic Innovation Conclusion

5. What is Theory? A well-substantiated explanation acquired through the scientific method and repeatedly tested and confirmed through observation and experimentation.

6. Concept of Entrepreneurship 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.

7. Theories of Entrepreneurship 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

8. Theories of Entrepreneurship Theory of Leadership Theory of Model Personality Theory of Systematic Innovation

9. Economic Theory of Entrepreneurship 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

10. Economic Theory of Entrepreneurship - 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.

11. Economic Theory of Entrepreneurship 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.

12. Critical evaluation 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.

13. Sociological Theory of Entrepreneurship 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.

14. Sociological Theory of Entrepreneurship 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 .

15. Entrepreneurship Innovation Theory 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

16. Entrepreneurship Innovation Theory According to Joseph Schumpeter, a 20 th 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.

17. Entrepreneurship Innovation Theory 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.

18. Entrepreneurship Innovation Theory 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

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

20. Critical evaluation 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.

21. Psychological Theory of Entrepreneurship 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

22. Psychological Theory of Entrepreneurship - self reliance and - low father dominance

23. Theory of Achievement Motivation 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

24. Theory of Achievement Motivation 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:

25. Theory of Achievement Motivation - 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 :

26. Theory of Achievement Motivation - 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.

27. Critical evaluation 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.

28. Status Withdrawal Theory 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.

29. Status Withdrawal Theory 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

30. Status Withdrawal Theory 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.

31. Critical evaluation 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.

32. Theory of Social Change 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.

33. Critical evaluation 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.

34. Theory of Social Behaviour 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

35. Critical evaluation 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.

36. Theory of Leadership 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.

37. Critical evaluation 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 .

38. Theory of Model Personality 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.

39. Critical evaluation 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.

40. Theory of Systematic Innovation 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.

41. Theory of Systematic Innovation 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.

42. Theory of Systematic Innovation 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.

43. Critical evaluation 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.

44. Conclusion 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.

45. Thank you