LESSON 3

THEORIES ON ENTREPRENEURSHIP

THEORY
 A generalization (general statement) that explains a set of facts or phenomena (observable fact/event).
 It is not an absolute truth.
 It can be supported by another observation or proven to be otherwise.
 The scholars who developed or contributed them mostly anchored their concepts on the economic
events which were happening at that time.
 Learn by heart the theories that you deem (consider) appropriate and applicable in your prospective
business and will support your desire to become a successful entrepreneur.
 Evaluate them and choose the theory or theories that you will believe and accept.

DEFINITION FROM OTHER SOURCES

 Theory requires experimentation under various conditions.
 A theory can be a strong one if it has a lot of evidence to back it.
 It may also be regarded as a weak theory if the amount of accuracy in its prediction is low.
 A theory may become obsolete with time and be replaced by a better one.

SEVERAL THEORIES ON ENTREPRENEURSHIP

1. INNOVATION THEORY
 Contributed by Joseph Schumpeter, and Austrian economist and political scientist.
 He wrote about the “Theory of Economic Development”.
 Regards economic development as the product of structural change or innovation.
Structural change- can be initiated by policy decisions or permanent changes in resources, population or
the society.
 Schumpeter argued that the chances for economic development to take place would be slim (strong) unless
revolutionary change is deemed (consider) to be static (stable) and cannot expect any economic
development.
 There will be no development in any economic equilibrium (supply and demand are balanced) or status
quo (the current political or social conditions).
 Schumpeter strongly believed that innovation is the force that will propel (push) the revolutionary (causing
great change in a system of government) change.
 It will cause the creative destruction of the static mode of the economy, stir the entrepreneurial activity,
and encourage competition.
 Unless innovation takes place, economic equilibrium or status quo will remain.
 It becomes the primary role of the entrepreneur to introduce innovation in any of the following forms:
1. New product
2. New production method
3. New market
4. New supplier
5. New industry structure
2. KEYNESIAN THEORY
 Developed by John Maynard Keynes, a British economist
 The key concepts of the theory were included in his book, The General Theory of Employment, Interest
and Money, which was published during the Great Depression in 1936.
 It put so much emphasis on the role of the government in entrepreneurial and economic development most
especially when the economy was experiencing depression.
 Entrepreneurial activities may not be favourable in the future unless the short-term problem of economic
disequilibrium is finally resolved through the active participation of the government.
 The private sector may perform well in their entrepreneurial ventures only when the people have
enough money.
  During a period of economic depression, money becomes scarce and the number of unemployed workers
is high.
 It is during this time that the government must make a strong intervention in the entrepreneurial role
played by the private sector by pouring more money to the economy and creating more jobs and
projects for communities.
 History reveals that the entrepreneurial endeavor was hardly felt during the Great Depression in the
United States since entrepreneurs were reluctant to me reluctant to invest for fear of having poor returns
on investment.
 It was the government that played a critical role then.
3. ALFRED MARSHAL THEORY
 Theory of Alfred Marshall, an English economist, was introduced in his book, Principles of Economics.
 He strongly asserted that there are four factors in the production (LAND, LABOR, CAPITAL, AND
ORGANIZATION) of goods and services in the economy he considered organization as the coordinating
element.
 Without the active participation of organization, the other factors of production will remain inactive in
their role for economic development.
 Marshall regarded the entrepreneurs as the prime movers in the organization.
 They are expected to create new commodities or improve the existing ones.
 He believed that the entrepreneurs could perform and meet expectations only if they had a thorough
understanding of the industry where they operated.
 Without the active participation of entrepreneurs in the economy, development will surely be slow and
limited.
 Marshall further suggested that an entrepreneur must be able to foresee possible changes in the future
supply and demand pattern.
 He/She must also possess the necessary skills to be an entrepreneur.
 Marshall observed that though the skills and abilities required of an entrepreneur are so numerous, only
a few exhibited a high degree of proficiency.
4. RISK AND UNCERTAINTY-BEARING THEORY
 Frank Hyneman Knight, an American economist, conceptualized the risk and uncertainty bearing theory of
entrepreneurship in his book, Risk, Uncertainty and Profit.
 Knight viewed an entrepreneur as an agent of the production process where he/she connects the
producers and the consumers.
 Knight, added risk-taking as an important dimension that will differentiate an entrepreneur from a
worker.
 He considered uncertainty an important factor in the production of goods and services.
 He believed that the entrepreneur must anticipate possible random events to happen while shouldering
the risk at the same time.
 The entrepreneur would be eventually rewarded with high profits.
 OTHER THEORIES ON ENTREPRENEURSHIP
1) WEBER'S SOCIOLOGICAL THEORY.
 Max Weber stressed that social cultures are the primary driving elements of entrepreneurship.
 The entrepreneur is expected to perform the role of a good constituent by executing his/her
entrepreneurial activities in line with good customs and traditions, religious beliefs, and morals.
2) KALDOR'S TECHNOLOGICAL THEORY.
 Was developed by Nicholas Kaldor who considered modern technology as an essential factor in
production.
 In the absence of modern technology application in entrepreneurship, economic development
would be slow and growth might not be expected.
 The entrepreneur is expected to keep abreast(side by side) with modern technology and find
ways to apply the same in the entrepreneurial endeavor.
 Proper application of modern technology will promote efficiency in the production of goods and
services.
3) LEIBENSTEIN'S GAP-FILLING THEORY.
 Henry Leibenstein proposed that the primary role of entrepreneurship in any economic activity is
to fill the existing gap.
 Entrepreneurship is responsible for recognizing trends in the market.
 The entrepreneur is expected to possess abilities that will connect the different markets.
 He/She must extend assistance to entrepreneurial ventures experiencing failures and
deficiencies.
4) KIRZNER'S LEARNING-ALERTNESS THEORY
 Israel Kirzner was the main proponent (supporter) of this theory.
 He pointed out spontaneous (natural/voluntary) learning and alertness as the two major
attributes of entrepreneurship in any given economy.
 The entrepreneur must be alert in recognizing entrepreneurial opportunities and the ignorance
of consumers as well.
 He/She must immediately find appropriate remedy to correct the error or wrong perception.
 Remember that there is no correct or wrong theory.
 The most important thing is that you base your business decisions not on your personal likes and
dislikes but rather on sound reason( is a reasoning that follows logic and can be easily understood
by audience) .
 LESSON SUMMARY
1. THEORY
 Is a generalization that explains a set of facts or phenomena.
 It is not an absolute truth.
 It can be supported by another observation or proven to be otherwise.

2. Some theories on entrepreneurship include the following:

a. Innovation theory
 Theory of Joseph Schumpeter considers innovation as the primary factor affecting
development,
b. Keynesian theory
 Theory of John Maynard Keynes attributes economic growth, especially during depression, to
the government.
c. Alfred Marshall theory
 Generalizes that the organization plays the most significant role among the different factors
of production.
d. Risk and uncertainty-bearing theory
 Theory of Frank Hyneman Knight states that an entrepreneur faces the risk of uncertainty in
the process of connecting the supplier and the buyer.
e. Weber's sociological theory
 Theory of Weber asserts that social cultures have significant contributions to
entrepreneurship
f. Kaldor's technological theory
 Theory of Kaldor gives importance to the advancement of technology as an element of
production.
g. Leibenstein's gap-filling theory
 The gap-filling theory of Leibenstein advocates that entrepreneurship fills the gap in any
economic activity.
h. Kirzner's learning-alertness theory
 Theory of Kirtzner focuses on learning and alertness as the primary attributes of
entrepreneurship.