CHAPTER ONE

ENTREPRENEURSHIP AND FREE ENTERPRISE

1.2 Definition and Philosophy Entrepreneurship

Entrepreneurship is the master key of all sectors that becomes the symbol of their strength &
achievement. It gives birth to new commodities, techniques and goods, booting human progress
forward and rendering the old obsolete, leading to the extinction of whole branches of industry
and the creation of new ones. It is the use of innovation that makes many of our goods today not
only better, but also cheaper, than they were even a decade ago. This process is so powerful that
many large corporations are beginning to ask how they can use their employees ‘talents for
innovation. It is the journey of opportunity exploration and risk management to create value for
profit and/or social good. As Peter Drucker said it is a long –term search for mechanisms to create
a stable society and a stable polity that would preserve traditions of the past and yet make possible
change, indeed very rapid change in anticipation of and in responses to rapid changes in the
environment. Systematic innovation must be integral to the process of the management in all
organizations and arenas.

Entrepreneurs are the founders of today's business success through their sense of opportunity,
drive to innovate and capacity for accomplishment that have become the standard by which free
enterprise is measured. They are national assets to be cultivated, motivated and remunerated to
the greatest possible extent. They change the way we live and work through their innovations that
improve our standard of living. In addition to creating wealth from their entrepreneurial
ventures, they create jobs and contribute for prosperity of society. Thus, they are the critical
contributors to the economic growth through their innovation, research and development
effectiveness, job creation, competitiveness, productivity, and formation of new industry.

1.2.1 Definition of Entrepreneurship

Since entrepreneurs and entrepreneurship are found in all professions including agriculture,
education, medicine, research, law, architecture, engineering, social work, distribution and
government; it is very difficult and impracticable to have one best and standard definition for the
term. Although each of these arenas views entrepreneurship from field of their experiences, there
are shared notions like: better value, newness, organizing, creating, wealth, risk taking and
innovation. Thus, there are a dozen of definitions of entrepreneurship as there have been writers
on the subject and it may be fruitless and vague to use precisely one definition for all. This
doesn‘t mean all definitions are completely exclusive to each other as we said. The following
table provides a short selection of definitions that have been offered by different scholars.

Table 1.1: Some Selected Definitions of Entrepreneurship Given by Different Scholars

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No. Definition
1 A dynamic process of creating incremental wealth by assuming major risks of equity, time and
career commitment of providing the value for some product/service.
2 A process of identifying opportunities in the market place, marshaling the resources required to
exploit the opportunities for long-term gains.
3 The propensity of mind to take calculated risks with confidence to achieve a pre-determined goal.

4 It is a force of creative destruction where by established way of doing things are destroyed by the
creation of new and better ways to get things done.
5 A process of shifting economic resources out of an area of lower value in to an area of higher
yields.
6 A process of uniting/intermingling all factors of production to create better value in the product
through creative and innovative ways.
7 Carrying out of new combinations of firm organization—new products, new services, new
sources of raw material, new methods of production, new markets, new forms of organization
implying it as an innovative function which is more leadership focus than an ownership.
8 The purposeful activities of an individuals or a group of associated individuals undertaken to
initiate, maintain & aggrandize profit by production/distribution of economic products.
9 The pursuit of opportunity without regard to resources currently controlled, but constrained by
the founders‘ previous choices and industry-related experience.
10 Anticipating the future requirements of society and successfully meeting these needs with new,
creative and imaginative combinations of resources.
12 A process of creating something new with value by devoting the necessary time and effort,
assuming the accompanying financial, psychic, and social risks, and receiving the resulting
rewards of monetary and personal satisfaction and independence.

1. Schumpeter (1950), “an entrepreneur is a person who is willing and able to convert a new
idea or invention into a successful innovation”.
innovation”.
2. David McClelland (1961) described the entrepreneur as an individual primarily motivated by
an overwhelming need for achievement and strong urge to build.
3. Collins and Moore (1970) studied 150 entrepreneurs and concluded that they are tough,
pragmatic people driven by needs of independence and achievement.
4. Bird (1992) sees entrepreneurs as mercurial, that is, prone to insights, brainstorms,
deceptions, ingeniousness and resourcefulness.

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5. The term entrepreneur was derived from the French verb “enterprendre” which means “to
undertake”. The colloquial meaning of enterprendre in French is music organizer or
entertainment organizer.
6. Entrepreneurship can also be explained as a process of executing a work in a new and better
way.
7. According to Joseph A Schumpeter, “an entrepreneur is an innovator, who introduces
something new in the economy”.
1.2.2 Philosophy Entrepreneurship

The concept of entrepreneurship has undergone major changes over more than two and half
centuries. Yet the concept of entrepreneurship is not clearly put in conclusive way. As the concept
of entrepreneurship is complex in its content, it is influenced by not only economic aspects, but
also by sociological, psychological, ethical, religious and cultural values. Over the years the social
scientists have interpreted the phenomenon of entrepreneurship differently in accordance with
their perception and economic environment. It is possible to identify five stages in the evolution
of entrepreneurship as shown in the figure given below.

Figure 1.1: Stages in the evolution of entrepreneurship

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The following are among social sciences views available on entrepreneurship.
A. Economist ‘s View
B. Sociologist ‘s View
C. Psychologist ‘s View
A. Economist’s View: Entrepreneur and entrepreneurship have been a point of interest to
economics as early as 1755. The term entrepreneur seems to have been introduced into
economics by Cantillon, but the entrepreneur was first accorded prominence by Say. It was
variously translated into English as ‗merchant ‘, ‗adventurer‘ and ‗employer‘, though the
precise meaning is ‗the undertaker of a project.‘ According to economists entrepreneurship
and economic growth will take place in those situations where particular economic conditions
are most favorable. Economic incentives are the main drive for the entrepreneurial activities.
They firmly believe that a well development market and efficient economic policies foster
entrepreneurship a big way. According to them, economic incentives are the main drive for
the entrepreneurial activities. In some cases, it is not so evident, but the person‘s inner drives
have always been associated with economic gains. Therefore, these incentives and gains are
regards as the sufficient conditions for the emergence of industrial entrepreneurship.
When an individual recognizes that the market for a product or service is out of equilibrium,
he may purchase or produce at the prevailing price and sell to those who are prepared to buy
at the highest price. They say lack of entrepreneurship is due to various kinds of market
imperfections and inefficient economic policies.
B. Sociologist’s View: Entrepreneurship is inhibited by the social system, which denies
opportunities for creative facilities: The forces of custom, values, the rigidity of status and the
district of new ideas and of the exercise of intellectual curiosity, combine to create an
atmosphere inimical to experiment and innovation. Sociologists argue that entrepreneurship is
most likely to emerge under a specific social culture. According to them social sanctions,
cultural values and role expectations are responsible for the emergence of entrepreneurship.
Social-cultural values channel economic action that gives birth to entrepreneurship.
According to Cochran the entrepreneur represents society‘s model personality. His
performance depends upon his own attitudes towards his occupation, the role expectations of
sanctioning groups and the occupational requirements of the job. Society‘s values are the most
important determinant of the attitudes and role expectation. According to Weber, religious
beliefs produce intensive exertion in occupational pursuits, the systematic ordering of means
to end, and the accumulation on assets. It is these beliefs, which generate a drive for
entrepreneurial growth. Hoselitz suggests that culturally marginal groups promote
entrepreneurship and economic development. Such groups, because of their ambiguous
position are peculiarly suited to make creative adjustments and thereby develop genuine
innovations.
C. Psychologist’s View: Among those who have stressed on the psychological aspects as
contributing to entrepreneurial success are Joseph Schumpeter, McClelland, Hagen and
Kunkal. The main focus of these theories is as follows: Schumpeter believes that

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 entrepreneurs are primarily motivated by an atavistic will to power, will to found a private
kingdom or will to conquer. According to McClelland it is the high need for achievement
which drives people towards entrepreneurial activities. This achievement motive is inculcated
through child rearing practices, which stress standards of excellence, material warmth, self-
reliance training and low father dominance. Individuals with high achievement motive tend to
take keen interest in situations of high rest, desire for responsibility and a desire for a concrete
measure of task performance. Hagen considers withdrawal of status respect as the trigger
mechanism for changes is personality formation. Status withdrawal is the perception on the
part of the members of some social group that their purposes and values on life are not
respected by groups in the society whom they respect. Hagen identifies four types of events
that coven produce status withdrawal: (a) displacement by force, (b) denigration of valued
symbols; (c) inconsistency of status symbols with a changing distribution of economic power,
and (d) non acceptance of expected status on migration to a new society. Kunkel‘s behavioral
model is concerned with the overtly expressed activities of individuals and their relations to
the previously and presently surrounding social structures and physical conditions. Behavioral
patterns in this model are determined by reinforcing and aversive stimuli present in the social
context. Hence, entrepreneurial behavior is a function of the surrounding social structure both
past and present and can be-readily influenced by the manipulative economic and social
incentives. According to Psychologists, entrepreneurship is most likely to emerge when a
society has sufficient supply of individuals possessing particular psychological characteristics.
The main characteristics are:
 An institutional capacity to see things in new way (vision)
 Energy of will and mind to overcome fixed habits of thought
 An urge to do something
 Dedication to fulfill a dream
 The capacity to withstand social opposition
 The high need for achievement

Each of the above view point is incomplete and none of them is right or wrong. Entrepreneurship
is influenced by a multitude factors and, therefore, no single factor by itself can generate
entrepreneurship. Thus, entrepreneurship is the outcome of complex and varying combination of
socio-economic, psychological and other factors. In addition to the above views, the following
also put entrepreneurship as their field of exercises.

 Marxist Philosophers: see entrepreneurship as an exploitative adventure, representing

all that is negative in capitalism.
 Corporate Managers: view entrepreneurship as a process of owning and running small
business. For them entrepreneurs lack the potential skill for corporate management.
 Management Specialists: view entrepreneurship as a process of acquiring managerial
skills through education and training.

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  Politicians: consider entrepreneurship as a process of being committed to implement the
political regulations and rules of their leading party.
Process of entrepreneurship includes five critical elements.
 The ability to perceive an opportunity.
 The ability to commercialize the perceived opportunity i.e. innovation
 The ability to pursue it on a sustainable basis.
 The ability to pursue it through systematic means.
 The acceptance of risk or failure.

1.3 Historical Development of Entrepreneurship

Early in the 18th century, the French term entrepreneur was first used to describe a ―gobetween‖
or a ―between-taker.‖ Richard Cantillon, a noted economist and renowned author in the 1700s, is
regarded by many as the originator of the term entrepreneur. He used the term to refer to a person
who took an active risk-bearing role in pursuing opportunities. Late in the 18th century, the
concept of entrepreneurship was expanded to include not only the bearing of risks but also the
planning, supervising, organizing, and even owning the factors of production. The 19 th century
was a fertile time for entrepreneurial activity because technological advances during the industrial
revolution provided the impetus for continued inventions and innovations. Then, toward the end
of the 19th century, the concept of entrepreneurship changed slightly again to distinguish between
those who supplied funds and earned interest and those who profited from entrepreneurial
abilities.

During the early part of the 20th century, entrepreneurship was still believed to be distinct and
different from the management of organizations. However, in the mid-1930s the concept of
entrepreneurship expanded. That‘s when economist Schumpeter proposed that entrepreneurship
involved innovations and untried technologies or what he called creative destruction, which is
defined as the process whereby existing products, processes, ideas, and businesses are replaced
with better ones. He believed that through the process of creative destruction, old and outdated
approaches and products were replaced with better ones. Through the destruction of the old came
the creation of the new. Entrepreneurs were the ones who took the breakthrough ideas and
innovations into the marketplace.

Late 20th century, Peter Drucker‘s contention indicates that entrepreneurship involves maximizing
opportunities. Drucker is a well -known and prolific writer on a wide variety of management
issues. What Drucker‘s perspective added to the concept of entrepreneurship is that entrepreneurs
recognize and act on opportunities. He proposed that entrepreneurship doesn‘t just happen out of
the blue but arises in response to what the entrepreneur sees as untapped and undeveloped

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opportunities. He said, ―Entrepreneurship is neither a science nor an art. It is a practice. It has a
knowledge base. Knowledge in entrepreneurship is a means to an end. Indeed what constitutes
knowledge in practice is largely defined by the ends; that is, by the practice. Entrepreneurs help
in intensifying competition, with the help of technology they master in increasing
productivity and thus contributing in the development of the country, followed by economic
growth. Because of entrepreneurship is a key for economic growth, different programs are
designed on it from training to PhD specializations. In general, its history is still being written
today. In the early years of the twenty-first century, researchers continue to study entrepreneurs
and entrepreneurship thought as a fashionable topic.

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 Fig 1.2 Historical development of entrepreneurship

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1.4 Characteristics of Entrepreneurs

Fundamentally, entrepreneurship is a human creative act, involved building a team of people with
complementary skills and talents. These people (entrepreneurs /actors) are one of the most
important factors in the economic development of a nation. And there have been hundreds of
definitions in dozens of books given by different scholars and some of them are as following. An
entrepreneur is:

 A decision maker whose entire role arises out of his alertness to hitherto unnoticed
opportunities.
 One who uses available resources in a novel way.
 One who is action oriented, highly motivated and takes risk to achieve goals.
 Person who has the ability to see and evaluate business opportunities, the ability to gather
resources to take advantage of them; and the ability to initiate action to ensure success.
 Someone who always searches for change, responds to it, and exploits it as an opportunity.
 A dynamic agent of change and catalyst who transform increasingly the physical, natural and
human resources into correspondingly production possibilities.
 A person, who tries to create something new, organizes production and undertakes risks and
handles economic uncertainty involved in enterprise.
 An economic man who tries to maximize his profits by innovation, involve problem solving
and gets satisfaction from using his capabilities on attacking problems.
 Who combines innovativeness, readiness to take risk, sensing opportunities, identifying and
mobilizing potential resources, concern for excellence, and who is persistent in achieving the
goal?
Characteristics of Entrepreneurs
Initiative, Perceiving Opportunitie ,Persistence, Information Gathering ,Concern for Quality
,Commitment, Efficiency, Planning, Decision Maker & Problem Solver, Self-Confidence,
Experience, Self-Critical, Risk Taker, Creative & Innovative, Leadership Ability, Desire for
Independence
Role Within the Economy

1. Role of Entrepreneurs as Innovator in Economic Growth

Entrepreneurship development is getting a position of great importance for tackling ever growing
problem of unemployment due to rapid population growth. The last decades experienced the
growth of a large number of small entrepreneurs where the number of innovating entrepreneurs is
less than the imitating entrepreneurs that lags countries behind the fierce competition of
globalization. Therefore, to cope up with the international order and the dynamism of the society,
an entrepreneur ‘s role as an innovator is of prime importance. Schumpeter says entrepreneurs
are basically innovators who introduce new combinations of means of production. This new

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combination included both utilization of used and unused means of production. As innovator,
they force the potentially profitable opportunities to exploit it. They are risk bearer, problem
shooter, and get satisfaction in confronting problems.

As innovator, entrepreneurs perform the following activities.

A. Bringing about new combination: Introduction of new products, new technique of

production, opening up new markets, and conquest of new source of supply of needed inputs.
B. Making use of potential technical knowledge for continuous technological progress:
Continuous technological progress will spearhead towards innovation. Entrepreneurs depends
up on the following two important things to achieve economic rewards:
 The existence of technical knowledge in order to produce new products
 The power of dispersal over factors of production in the form of credit
However, innovation results in steady increase in total output and per capita output since
historically diminishing returns does not operate in case of technological progress. So, innovation
is an important tool of economic development.

C. Emphasizing on purposeful and systematic innovation: Drucker emphasized on role of

entrepreneurs as innovator. He pointed out that purposeful and systematic innovation begins
with analysis of opportunities and successful innovation should aim at leadership. This
quality is one of the most crucial attributes of the entrepreneur to bring about economic
development.
D. Implementation of mechanical skills: earlier entrepreneurs were sons of middle-class
parents and came from ranks of artisan, laborers, cottagers who had worked with their hands
and had mechanical skill than commercial and financial. They contributed for industrial
establishments of Germany, France and England. Gradually, technological innovation and
creativity played the crucial role in encouraging entrepreneurship and economic
development. Innovations give rise to utilization of innovative talents which initiates and
improve the economic growth in the following ways:
 Improvement in per capita income
 Increase in capital formation
 Employment opportunity generation
 Balanced growth
 Improvement in living standards
 Backward and forward linkages
 Economic independencies
 Technological advancements
 Establishment of new form organization  Development of entrepreneurial
competency

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2. Role of Entrepreneur In Generation of Employment Opportunities
Entrepreneurs play a significant role in generation of employment opportunity. As we all
know, it is a purposeful activity indulged in initiating, stimulating, promoting and
maintaining economic activities for the production and distribution of goods and services, the
person behind these economic activities is, therefore, a crucial factor as well as an integral
component of socio-economic transformation. The development strategy of developing
countries highly confronts two important problems-unemployment and poverty of the
masses. These problems can be effectively minimized by activating the latent human
potentials through entrepreneurship. This leads to the creation of self-employment and wage
employment avenues for large number of people.
For reduction of unemployment, entrepreneurship in small and micro industries both in
manufacturing and service sectors is imperatively needed. Thus, role of entrepreneurs and its
significances in generation of employment opportunities can be depicted as follows:
A. Establishing micro and small-scale enterprises: this perceived as a powerful medium
to address several socio-economic issues and the chief among them is generation of
employment opportunities for millions. In developing countries where the population
growth high and job employment is limited, the role of entrepreneur is very much
significant. Entrepreneurial development gives rise to economic independences through
self- employment. Thus, creation of MSEs can lead to creation of both self-employment
and wage employment that reduces impact of unemployment on the economy of a
country.
B. Giving emphasize upon village and cottage, hand craft industries: uplifting of
economically backward sections of a society can be made possible if selfemployment
opportunities can be provided at the grass root level. To make this people in backward
and remote regions beneficiaries, different governments designed different tools mainly
focusing on creating entrepreneurial attitude in the society that helps them how to add
values on their products and create linkage with buyers.
C. Utilizing the surplus labor force in industrial activities: Developing countries like our,
which mainly depends on agriculture that is characterized by seasonal production, a large
number of productive man power remain idle relatively about 4 months when the season
cannot allow them to do and when the work is sluggish. Disgusting unemployment is the
chronic phenomena in agriculture wherein more people work in a field that actually
required. So the surplus labor force is transferred and utilized by the entrepreneurs in
non-farm sector activities where the work is labor intensive in nature.
D. Employment argument: it is worth to mention employment argument favoring the
growth of MSEs and the role of entrepreneurs in accelerating this growth. The principle
of self-employment is like a successful democracy as that of self-government. In addition
to this, entrepreneurs attract different individuals who become hired employee but
gradually graduated as self-employee and progressively go turn by turn.

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3. Role Of Entrepreneur in Complementing and Supplementing Economic Growth
The rate of economic progress of a country depends on largely up on its rate of innovation,
which in turn depends on entrepreneurial talents. Technological development cannot alone
bring about economic growth unless they are put in to practical uses. Economic development
and growth of a country depends to a great extent up on effective entrepreneurship.
Entrepreneurs play a crucial role for the creation of new small enterprises that energizes the
economic structure. Through constant creativity, new entrepreneurs assure a strong economy
and rising national income. Thus, the role entrepreneurs are important as it is not only
complementing but also supplements the economic growth of a country. To be clearer,
entrepreneurs initiate, increase and sustain the economic growth in the following ways:
 Generation of Employment: they generate employment both direct and indirect through
establishment of small-scale businesses. These enterprises are conspicuous enough to
create large volume of employment and as a result of which unemployment is reduced.
They create temporary and permanent employment at relatively small capital and with
easier access.
 Capital formation: is the most important element for economic growth. It is always
necessary to step up the rate of capital formation so that the economy accumulates a large
stock of machines, tools, equipment which can be geared in to production by entrepreneur.
Besides, capital formation in the economy can be brought about by the formation and
upgrading of skills of human capital in terms of knowledge and skills which can be utilized
to raise the level of productivity whereby economic growth can be accelerated.
 Increase in per capita income: economic growth is measured in terms of a sustained
increase in real per capita income over a period of time. It is the entrepreneurial
communities who complement and supplement the economic growth in increasing the per
capita income and Net National Product of the country by identifying and establishing
profitable business ventures.
 Improvement in physical quality of life: entrepreneurs supplement the economic growth
in enhancing the physical quality of life. This implies that increase in life expectancy and
increase in literacy. Establishment of enterprise leads to increase in employment avenues
both directly and indirectly. Consequently, poverty is alleviated and per capita income
grows. This results in improving the physical quality of life which is an indicator of the
economic growth.
 Improvement in standard of living: Entrepreneurs establish different types of enterprises
so as to improve the standard of living of the masses. They produce innovative and modern
gadgets in a variety of designs and patterns manufactured by the entrepreneurs make the
life of each individual easier. In this way, entrepreneurs complement the standard of living
and economic well-being of the people.
 Growth of infrastructure facilities: Entrepreneurs play a major role in the growth of
infrastructural facilities such as roads, bridges, buildings, factories, etc. which are the

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 cornerstones of economic growth. Establishment of factories and industries in a particular
locality presupposes the growth of infrastructural facilities.
 Economic independence: entrepreneurship helps the country in achieving economic
independence. In other words, national self-reliance can be ensured due to the growth of
entrepreneurship. In augmenting the indigenous technologies and their uses in massive way
in small scale enterprises, dependence on foreign technologies can be avoided.
Entrepreneurs can also export their goods and commodities and thereby earn the scarce
foreign exchange for the country. Hence entrepreneurs, act as agents of economic growth.
 Backward and forward linkages: entrepreneurs initiate change in the economy by way of
forward and backward linkages. Establishment of the giant unit generates several ancillary
industries on one hand and several other industries which grow by utilizing the raw
materials and bye products produced by the mother plant on the other. In this way,
entrepreneurs, supplement the economic growth.
4. Role of Entrepreneur in Bringing Social Stability and Balanced Regional Development
In every country, entrepreneur is considered as valuable human resources. The responsibility
of social stability lies on his shoulders. Entrepreneurs, as a catalyst of change, try to bring
about social stability in the following ways:
 Absorption of workforce in industries: establishment of MSEs units by the entrepreneurs
leads to absorption of a large number of workforces at relatively small capital cost and
ensures social stability.
 Alleviation of poverty: entrepreneurs help in alleviating poverty by reducing
unemployment through creation of large number of jobs by way of setting of small and tiny
units. Thus, social stability is maintained.
 Glorification of self-help: enterprises creation glorifies the maxim of self-help. Selfhelp is
the best help because it is a binding factor to unite family, clan, village, community, etc.
and thus, ensures stability is maintained.
 Checking expansion of monopolies: small scale enterprises help to bring about social
stability by diffusing prosperity and by checking the expansion of monopolies.
 Equitable distribution of income: small scale entrepreneurs explore business
opportunities in both rural and urban areas, thereby leading to equitable distribution of
income and wealth in the society. This gives rise to reduction in social instability between
rural and urban sectors.
 Creation of social infrastructures: entrepreneurs facilitates economic development and
social stability through creation of social infrastructures like schools, colleges, health care
centers, vocational institutes, banking and insurance facilities, roads and buildings etc.
consequent upon establishment of industries.
 Empowerment of women through enterprises: women entrepreneurs are the prime
movers of women empowerment. Empowerment through enterprises involves access to
resources, markets, actual ownership and active control. These things lead to equity and
equality among men and women and act as a lever for social stability.

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  Supply of qualitative goods and services: entrepreneurs can bring about quality goods
and services to the people. They manufacture both consumers ‘and producer‘s goods to
meet the ever-growing demand which emerges due to population pressure.
The role of entrepreneur is paramount importance in bringing about balanced regional
development. The following points justify this role of the entrepreneur:

 Setting up industries in rural and backward areas

 Establishing agro industry-based industries to coordinate the dispersal process and
development of agriculture
 Utilizing indigenous technology for creation of enterprises on backward areas
 Developing handcraft and cottage industries sector for eliminating regional imbalance
and to bring about balanced regional development
 Establishing industries in rural and backward regions and availing concessional finance,
investment subsidy, transport subsidy, etc. provided by the government to reduce
disparity.
5. Role of Entrepreneur in Export Promotion and Import Substitution

Entrepreneurs play a great role in export promotion through the following activities.

 Minimization of dependence on imports from abroad through manufacturing

consumer and capital goods within the country
 Exploration of new markets by any possibilities of finding from abroad and creating
conducive environment.
 Foreign exchange earnings through the growth of MSEs that gives rises in production of
goods in high quality and sending to the country where their comparative advantage
becomes high.
 Lessening the burden of debt servicing
 Harnessing the available resources of natural and human resources engaged in different
fields and bear comparative advantage
 Export hand craft items that are rarely available at abroad
Also entrepreneurs contribute highly for import substitutions where it gives the opportunity of
expansion of domestic production and replacement of the imports, mainly capital goods. This can
be done by the entrepreneurs who encourage use of indigenous technology and reduction in
dependence on technical know-how from abroad.
Entrepreneurs‘ role in in import substitution can be viewed mainly from the following angles:

 To achieve self-reliance in production of as many as goods as possible  To save

foreign exchange for import of goods.

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1.6 Entrepreneurship, Creativity and Innovation

Entrepreneurial secret for creating value is creativity and innovation. Entrepreneurship is the
result of a disciplined, systematic process of applying creativity and innovation to needs and
opportunities in the marketplace. It involves applying exposed strategies to new ideas and new
insights to create a product or a service that satisfies customers ‘needs or solves their problems.
Creativity and innovation has a unique connotation.

1.6.1 Creativity

Creativity is the ability to bring something new into existence. It emphasizes the “ability,” not
the’ “activity,” of bringing something new into existence. A person may therefore conceive of
something new and envision how it will be useful, but not necessarily take the necessary action
to make it a reality. In this fiercely competitive, globalized sphere, creativity is not only an
important source for building a competitive advantage, but it is also a necessity for survival.
When developing creative solutions to modern problems, entrepreneurs must go beyond merely
relying on what has worked in the past. Ideas usually evolve through a creative process whereby
imaginative people germinate ideas, nurture them, and develop them successfully.

Creativity is marked by the ability to create, bring into existence, to invent into a new form, to
produce through imaginative skill, to make to bring into existence something new.
Creativity is not ability to create out of nothing (only God can do that), but the ability
to generate new ideas by combining, changing, or reapplying existing ideas. Some creative
ideas are astonishing and brilliant, while others are just simple, good practical ideas that no one
seems to have thought, of yet. Creativity is also an attitude, the ability to accept change and
newness, a willingness to play with ideas and possibilities, a flexibility of outlook, the habit of
enjoying the good, while looking for ways to improve it. Every idea is a product of thinking
and every product is the manifestation of idea naked in a thinker ‘s mind. These are people who
see problems as opportunities to improve and do something new or something better,
people who keep these two vital questions on their mind. ―What can I do to make things
better, or what can I do to make better things? This is the product of thinking. The celebrated
discoveries of man are not accidents. The minds of men/women were engaged in creative
thinking to deliver the visible products we enjoy today.

Thus, creativity is a process by which a symbolic domain in the culture is changed. It is

the ability to make or otherwise bring into existences something new, whether a new solution to
a problem, a new method or device, or a new artistic object or form. It focuses on new and
useful. It is the act of seeing things that everyone around us sees while making connections that
no one else has made. To do successfully, the entrepreneur and enterprise should know where
this firm is going and how the firm will get there. This is turn requires a clear definition of the
company‘s business which will enable it to continually adopt operations to the realities of the
marketplace, ‗the very corner stone of survival and growth.‖

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Various labels have been applied to stages in the creative process, but most social scientists agree
on five stages. In each stage, a creative individual behaves differently to move an idea from the
seed stage of germination to verification, and behavior varies greatly among individuals and their
ideas. Bolton and Thompson (2000) associate invention closely with creativity but link it with
entrepreneurship if the invention is to become a commercial opportunity to be exploited.
‗Creativity is the starting point whether it is associated with invention or opportunity spotting.
This creativity is turned to practical reality (a product, for example) through innovation.
Entrepreneurship then sets that innovation in the context of an enterprise (the actual business),
which is something of recognized value.’ Creativity and innovation need the entrepreneurial
context to become a business reality - supported by a certain mix of talents and temperaments
and based on appropriate knowledge and skills.
Recognition of
Idea (Idea
Generation) is
the base stage
of new idea.

Verifictcation
and Rationalizing the
validartion that idea through
the idea has concioussearch for
value knowlege

Making the idea Fantasize/Incubation

feasible by with assimilationof
illumination/ relevantinformation
realizationof idea

Fig1.3: The Creative Process

The Principles of Creativity

People become more creative when they feel motivated primarily by the interest, satisfaction, and
challenge of the situation and not by external pressures. The passion and interest indicates a
person‘s internal desire to do something unique to show case himself or herself; the person‘s
sense of challenge, or a drive to crack a problem that no one else has been able to
solve. Within every individual, creativity is a function of three components {Expertise+ Creative
thinking skills +Motivation}.

Expertise encompasses everything that a person knows and can do in the broad domain of his or
her work- knowledge and technical ability. Creative thinking refers to how you approach
problems and solutions- the capacity to put existing ideas together in new combinations. The

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skill itself depends quite a bit on personality as well as on how a person thinks and works.
Expertise and creative thinking are the entrepreneur‘s raw materials or natural resources.
Motivation is the drive and desire to do something, an inner passion and interest. When
people are intrinsically motivated, they engage in their work for the challenge and enjoyment of
it. The work itself is motivating. People will be most creative when they feel motivated
primarily by the interest, satisfaction and the challenge of the work itself-―the labor of
love‖, love of the work- ―the enjoyment of seeing and searching for an outstanding solution – a
break through.

1.6.2 Innovation

Innovation is the process of doing new things. Simply having a great new idea is not enough;
transforming the idea into a tangible product, service or business venture is the essential next
step. Innovation, therefore, is the transformation of creative ideas into useful applications, but
creativity is a prerequisite to innovation. Entrepreneurship requires business owners to be bold
enough to try their new ideas, flexible enough to throw aside those that do not work, and wise
enough to learn about what will work based on their observations of what did not. Entrepreneurs
develop new ideas and, from their ideas, establish new enterprises that add value to society.
Creative thinking has become a core business skill, and entrepreneurs lead the way in developing
and applying that skill. In fact, creativity and innovation often lie at the heart of small
companies‘ ability to compete successfully with their larger rival.

If creativity is the seed that inspires entrepreneurship, innovation is the process of

entrepreneurship. This was Schumpeter‘s conclusion when he wrote about the economic
foundations of free enterprise and entrepreneurship. According to him innovation does not
happen as a random event. The entrepreneur initiates change and generates new opportunities.
Until imitators force prices and costs into conformity, the innovator is able to reap profits and
disturb equilibrium‘. However, innovation is more likely to result from elaborating on the
present, from putting old things together in new ways, or from taking something away to create
something simpler or better. Innovation is the specific tool of entrepreneurs, the means by which
they exploit change as an opportunity for a different business or a different service. It is capable
of being presented as a discipline, capable of being learned and capable of being practiced.
Entrepreneurs need to search purposefully for the sources of innovation, the changes and their
symptoms that indicate opportunities for successful innovation. And they need to know and to
apply the principles of successful innovation. Innovation can be practiced systematically. Firms
that practice innovation systematically search for change then carefully evaluate its potential for
an economic or social return. Change provides the opportunity for innovation to make an
economic return. Also innovation as other define is ‗the means to break away from established
patterns‘, in other words doing things really differently. Therefore, simply introducing a new
product or service that has customer‘s willing to buy it, is not necessarily innovation. Innovations
have to break the mood of how things are done.

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The innovation can, of course, be of varying degrees of uniqueness. Most innovations introduced
to the market are ordinary innovations, that is, with little uniqueness or technology. As expected,
there are fewer technological innovations and breakthrough innovations with the number of
actual innovations decreasing as the technology involved increases. Regardless of its level of
uniqueness or technology, each innovation evolves into and develops toward commercialization
through one of three mechanisms: the government, intrapreneurship or entrepreneurship.

The Elements of Innovation

It is the presence of innovation that distinguishes the entrepreneur from others. Innovation,
must therefore, increase competitiveness through efforts aimed at the rejuvenation, renewal,
and redefinition of organizations, their markets or industries.

The following are elements of innovation:

 Challenge  Completion  Basic values

 Customer focus  Contemplation  Innovation values
 Creativity  Culture  Context
 Communication  Leadership
 Collaboration  People
Drucker’s Five Principles of Innovation

1. Purposeful, systematic innovation begins with the analysis of the opportunities. It begins
with thinking through the sources of innovative opportunities.
2. Innovation is both conceptual and perceptual. Successful innovators look at figures, and
they look at people. They work out analytically what the innovation has to be to satisfy an
opportunity. And then they go out and look at the customers, the users, to see what their
expectations, their values, their needs are.
3. An innovation, to be effective, has to be simple and focused. It should do only one thing,
otherwise, it confuses. All effective innovations are breathtakingly simple. Indeed, the
greatest praise an innovation can receive is for people to say: ‗This is obvious. Why didn‘t I
think of it?‘
4. Effective innovations start small. They try to do one specific thing.
5. A successful innovation aims at leadership [within a given market or industry]. If an
innovation does not aim at leadership from the beginning, it is unlikely to be innovative
enough, and therefore unlikely to be capable of establishing itself.

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Drucker’s Seven Opportunities for Innovation

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 or as it ought
to be
3. Innovation based on process need—perfecting a process that already exists, replacing a link
that is weak, or supplying a link that‘s missing
4. Changes in industry structure or market structure that catch everyone unawares‖
5. Demographics—changes in a population ‘s size, age, composition, educational level,
employment status, or income
6. Changes in perception‖—when the customer goes from seeing the glass as half empty to
seeing it as half full
7. New knowledge—and not just technical or scientific breakthroughs, but the innovative use
of this knowledge to create a new product or service.

Difference of Innovation and Creativity

Thus, as we have said earlier, innovation means ―doing new things or the doing of things that
is already being done in a new way.‖ It includes new processes of production, introduction of
new products, and creation of new markets, discovery of a new and better form of industrial
organization. It is the process of doing new things. It is important to recognize the innovation
more focus on action not conceiving new ideas only. It is adding something new to an existing
product or process. The product or process has already been created from scratch and
has worked reasonably well. When it is changed so that it works better or fulfills a
different need, then there is innovation on what already exists. Innovation is the successful
exploitation of new ideas. All innovation begins with creative ideas. Creativity is the starting
point for innovation. Creativity is however necessary but not sufficient condition for
innovation. Innovation is the implantation of creative inspiration. When people have passed
through the Realization and Validation stages of creativity process, they may have become
inventors, but they are not yet innovators. The following figure shows the difference between
creativity and innovation.

To innovate effectively, therefore, requires insight into customers and markets, into what is
possible and what is not, and into how to make things happen. To exploit an innovation
successfully requires strength of personal character, managerial ability and often money, which
bring us back to the central role of the entrepreneur.

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 Creativity Creating something new Results in new Knowlege

Transformation of an Results in products,

Innovation idea and resources in to services, processes and
useful way market places

Fig.1.4: Difference between creativity and innovation

1.6.3 Entrepreneurship

Creativity and innovation are at the heart of the spirit of enterprise. It means striving to
perform activities differently or to perform different activities it enables the entrepreneur to
deliver a unique mix of value. Thus, the value of creativity and innovation is to provide a
gateway for smart entrepreneurship through actively searching for opportunities either to do new
things or to do existing things in extraordinary ways. Since innovation is the tool of
entrepreneurship, on the other hand it demands creativity. Entrepreneurship is beyond starting a
new business including the whole process whereby individuals become aware of the
opportunities that exist to empower themselves, develop ideas, and take personal responsibility
and initiative. This instills the enterprise culture into the individuals incorporating
resourcefulness, initiative, drive, imagination, enthusiasm, zest, dash, ambition, energy, vitality,
boldness, daring, audacity, courage, get up and go. Entrepreneurship, therefore, encompasses
all the productive functions that are not rewarded immediately by regular wages, interest and
rent and non-routine human labor. It is actually, the functions of seeking investment, production
opportunity, organizing an enterprise to undertake new production process, raising capital,
hiring labor, allocating resources, and creating new enterprises. Sometimes enterprises that are
creative and ready to launch their news products, tempted in getting fund needed for their
creativity.

Now a days, creativity and innovation are a strategic priority in many organizations. In this
competitive environment it requires them to be distinct and meet customer needs with better or
never products. The organization that is not creative and innovative cannot survive in the market
place. Thus, entrepreneurs and enterprises are continuously creative and innovative to remain
relevant to the customers, which is the purpose of every business. Generally, entrepreneurship is
the vehicle that drives and driven by creativity and innovation. Innovation creates new demand
and entrepreneurship brings the innovation to the market.

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