1. Introduction to the Main Economic Theories of Entrepreneurship University of Bahrain College of Business Administration MGT 239: Small Business MGT 2391

2. The functional role of the entrepreneur Commonly, economic theories of entrepreneurship are reviewed on the basis of the functional role of the entrepreneur These include: The entrepreneur as a risk/uncertainty bearer The entrepreneur as an innovator The entrepreneur as arbitrageur The entrepreneur as resource coordinator MGT 2392

3. 1. The Entrepreneur as Risk/ Uncertainty Bearer Richard Cantillon (1730) is credited with making "entrepreneur" a technical term. He presented the entrepreneur as a bearer of uncertainty. In fact, Cantillon expands his definition to cover some individuals who are probably the most unlikely to be entrepreneurs. " Like Cantillon, Knight (1921) introduced the entrepreneur as a manager of uncertainty who is motivated by expected profit. Under uncertainty, decisions are made in ignorance. Actions are based on opinion rather than knowledge. It is the role of the entrepreneur to predict consumer demand and estimate the supply of products. He is an entrepreneur because he is willing to accept the uncertain results of his decision. MGT 2393

4. The Entrepreneur as Risk/ Uncertainty Bearer An important contribution of Knight is his distinction between risk and uncertainty. Risk is defined as a random event with a known distribution. On the other hand, the probability distribution associated with uncertainty is totally unknown. Uncertain events do not repeat themselves with sufficient regularity, so it is not possible to compute their probability. MGT 2394

5. 2. The Entrepreneur as Innovator Schumpeter (1934) believes innovation to be the main function of the entrepreneur. “… (1) The introduction of a new good -- that is one of which consumers are not yet familiar -- or of a new quality of a good. (2) The introduction of a new method of production, that is one not yet tested by experience... (3) The opening of a new market, that is a market into which the particular branch of manufacture the country in question has not previously entered, whether or not this market has existed before. (4) The conquest of a new source of supply of raw materials or half manufactured goods... (5) The carrying out of the new organisation or of any industry...” Thus, innovation is a radical change, it is not a slight or incremental change. MGT 2395

6. The Entrepreneur as Innovator Entrepreneurship is not only a function of an individual’s desire for profit but also a desire to satisfy personal, non-monetary needs. (….entrepreneurship is limited to those who have “... the desire to find a private kingdom, the will to conquer, the joy of creating, of getting things done, or simply exercising one’s energy and ingenuity.” (Schumpeter, 1934: 93). MGT 2396

7. 3. The Entrepreneur as Arbitrageur Kirzner (1979): entrepreneur is someone who is alert to profit opportunities and ready to exploit them. Alertness or the lack of it explains why some individuals become entrepreneurs while others don’t... Pred’s (1967) theory is similar to that of Kirzner; however, while Kirzner stresses the alertness to information, Pred emphasises the ability to make use of it. MGT 2397

8. 3.The Entrepreneur as Arbitrageur Pred argues that the quantity and quality of information held by individuals is a function of: Their geographic characteristics (place of residence and daily field of movement) Their personal attributes. (In diverse ways, “sex, age, income, education, occupation, marital status, political, religious and other affiliation MGT 2398

9. 4. The Entrepreneur as Resource Coordinator Say (1830) introduces the entrepreneur as resource allocator. entrepreneurship is a function of financial position, "connections" and various personal qualities. Smith (1976) focus is mainly on the individual characteristics of the entrepreneur. He draws a distinction between three types of entrepreneurs:  the "craftsman“  the "opportunistic"  the "boffin“ MGT 2399

10. 4. The Entrepreneur as Resource Coordinator The craftsman entrepreneur has limited and narrows education. In his prior employment job, he usually holds the most senior shop floor position of supervision. His dislike for managers makes him feel that the company is badly run he could do better if he were to run a business of his own. Once he establishes a business, he will resent outside control and is unlikely to seek external financing through loans. One of the key features of the craftsman entrepreneur is that he is not motivated towards business growth. MGT 23910

11. The Entrepreneur as Resource Coordinator The “opportunistic" entrepreneur is the opposite of the craftsman in every way. In terms of education, the opportunistic entrepreneur usually has a degree. He uses his education opportunities to gain a wide range of experience that will be useful in business. Through his employment experience, he gains a wide range of skills in areas such as marketing and administration. Once he starts a business, his experience in management gives him useful contacts which he utilises in his own business. The “opportunistic” entrepreneur is happy to raise external finance. He feels that the business world is open-ended and as such is highly motivated to achieve growth. MGT 23911