THEORY OF ENTREPRENEURSHIP CHAPTER 1 THEORY OF ENTREPRENEURSHIP

Objectives The objectives of this chapter are: To introduce students to the theory of entrepreneurship To introduce students on the key dimensions of entrepreneurship namely the need for achievement, locus of control, risk taking propensity and entrepreneurial characteristics and trait

Learning Outcomes At the end of this chapter, students should be able to: understand the principles and theory of entrepreneurship adapt and adopt entrepreneurial culture in their life gain a better understanding of the concept of the need for achievement, locus of control and risk taking propensity as key dimensions of entrepreneurship in managing a business organization

Who is an entrepreneur? There is no consistent definition of the term “entrepreneur” and what entrepreneurship is all about (Kuratko & Hodgetts, 2001). Entrepreneur can be defined from a functional approach based on what an entrepreneur does or an indicative approach based on his characteristics and attributes. Depending on how an entrepreneur is defined, he can be different persons wearing different hats.

Entrepreneurs: Definition from Research Literatures Richard Cantillon introduced the word ‘entreprende’ in his essay ‘Essai sur la nature du commerce’ in 1755. It is a French word which means ‘to do something’ (Swedberg, 2000) or ‘to undertake the risk of new ventures’ (Kuratko & Hodgetts, 2001). Entrepreneur is the middleman who buys at a lower price and sells higher (Blaug, 2000).

Entrepreneur/Entrepreneurship: Definition from Research Literatures Adam Smith (1776) widened the scope of entrepreneurship to include the task of forming an organization for commercial purposes. He described the dynamism of the personality of an ‘enterpriser’ such as the ability to foresee potential through changes in the economy and to take advantage of the opportunities thereby created.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Jean Babtiste Say (1803) saw entrepreneurs as individuals with certain competencies who can influence society by forming enterprises and likewise were influenced by society to recognize needs and fulfil them through skilful management of resources.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Joseph Schumpeter believed entrepreneurship plays a crucial role in triggering economic development. Schumpeter (1934) defined development as the exercising of new combinations of productive factors. Such efforts may result in the introduction of a new product or a new method of production, the opening of a new market or the finding of a new source of the inputs supply or the establishment of a new organization.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Schumpeter argues that a person is an entrepreneur only when he/she actually carries out new combinations but loses that character as soon as he/she has built up his/her business and settles down to run it. An entrepreneur is a sociologically distinct individual who is a creative and resourceful innovator as well as an agent of change.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) According to Frank Knight (1921), entrepreneurs are distinguishable from non-entrepreneurs based on their willingness to bear the cost of uncertainty. In return for this willingness, the entrepreneur will be rewarded with profit—the residual income left after all necessary payments have been made.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Von Mises defined entrepreneurship as human action ‘seen from the aspect of the uncertainty inherent in every action’ (Mises, 1949). The entrepreneur is seen as an active individual whose action is always speculative. For Mises (2000), entrepreneurship mainly consists of decision-making activities particularly pertaining to production.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Mises also made a distinction between entrepreneurship and management. He believes that entrepreneurship involves greater responsibility, with the entrepreneur performing a more crucial role than the manager. In performing his/her role the entrepreneur is motivated by the desire to make profits and acquire wealth.

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) For Kirzner, (1973) an entrepreneur is an alert individual who responds to the opportunities that already exist but which are yet to be organized as a business. Kirzner’s entrepreneurs are described as being passive in comparison with Schumpeter’s entrepreneur who is a source of innovative ideas for triggering economic development (Herbert & Link, 1982).

Entrepreneur/Entrepreneurship: Definition from Research Literatures (cont.) Kirzner (1973) asserts that entrepreneurship activity is always competitive and that competition is always entrepreneurial. A competitive market process is crucial for the entrepreneurial activity to develop. Kirzner (1973) acknowledges that entrepreneurship does involve a risk-taking propensity.

Individual Characteristics of an Entrepreneur While some scholars focus their research on the economic function of entrepreneurship, others have concentrated their works on the personal characteristics of entrepreneurs. Brockhaus (1982) identifies three attributes that are consistently associated with entrepreneurial behaviour: the need for achievement, the internal locus of control and a risk-taking propensity.

Individual Characteristics of an Entrepreneur (cont.) The need for achievement is a personal attribute associated with the expectation of doing something better over others and/or the individual’s earlier accomplishment (Hansemark, 2003). It is believed that the individuals who score highly on the need for achievement would have a strong desire for success and are consequently more likely to behave entrepreneurially (Othman, Ghazali & Ong, 2005). This argument is supported in a study by Beugelsdijk and Noorderhaven (2004) which shows that entrepreneurs generally have higher needs for achievement.

Individual Characteristics of an Entrepreneur (cont.) ‘Locus of control’ is a belief or disbelief that one can control or influence the environment in which one is found. Rotter (1966) hypothesizes that individuals with internal locus of control are more likely to strive for achievement than those with external locus of control.

Individual Characteristics of an Entrepreneur (cont.) This is because individuals with internal locus of control believe that they can make things happen as they are able to control and influence the environment around them. In contrast, individuals with external locus of control do not believe they can do this. People with internal locus of control are more likely to be entrepreneurial than those with external locus of control (Beugelsdijk & Noorderhaven, 2005).

Individual Characteristics of an Entrepreneur (cont.) Individuals with higher propensities for risk-taking are believed to be more likely to be involved in entrepreneurial activities. This is not surprising as entrepreneurship has long been associated with risk-taking (Cantillon, 1755; Knight, 1921). Empirical evidence also supports the view that risk-taking propensity serves as one of the attributes which influences entrepreneurial success and performance (Beugelsdijk & Noorderhaven, 2005).

Individual Characteristics of an Entrepreneur (cont.) Personal entrepreneurial competencies (PEC) In 1985, McClelland with McBer & Co, had developed a measuring instrument to measure the personal entrepreneurial competencies (PEC) or inclinations among successful entrepreneurs in Malawi, India and Ecuador.

Individual Characteristics of an Entrepreneur (cont.) These personal entrepreneurial competencies can shed some light on the personality and character of the successful entrepreneurs. However, it is not exhaustive and the instrument is not a ‘one size fits all’ tool.