Chapter one: Entrepreneurship and enterprise Development

CHAPTER ONE
ENTERPRENEURSHIP AND FREE ENTERPRISE
Introduction
The concept of entrepreneurship is a complex phenomenon. Broadly, it relates to entrepreneur,
his vision and its implementation. Entrepreneurship refers to a process of action an entrepreneur
undertakes to establish his or her enterprise.
Entrepreneurship is a composite skill, the resultant of a mix of many qualities and traits. These
include imagination, readiness to take risks, ability to bring together and put to use other factors
of production, capital, labor, and land as also intangible factors such as the ability to mobilize
scientific and technological advances. Above all, entrepreneurship today is the product of team
work and the ability to create, build and work as a team. The entrepreneur is the maestro of the
business orchestra, wielding his/her baton to which the band is played.
1.1. Definitions and philosophy
Meaning of an entrepreneur and Entrepreneurship
What is an entrepreneur?
 An entrepreneur is a person who creates a business or product, manages his/her resources and
takes risks to gain a profit.
 Jean Baptiste (1816) described the entrepreneur as the agent who unites all means of production
and “who finds in the value of the products-the reestablishment of the entire capital he employs,
and the value of the wages, the interest, and rent which he pays as well as profits belonging to
himself.”
 According to Frank Knight (1921), the entrepreneur attempts to foresee and act upon changes
within markets. Knights emphasized the entrepreneur’s role in bearing the uncertainty of market
dynamics.
 A more compressive and newer definition of entrepreneur is given by Vasant Desai. He
describes the entrepreneur as “One who detects and evaluates a new situation in his environment
and directs the making of such adjustments in the economic systems as he deems necessary. He
conceives of an industrial enterprise for the purpose of, displays considerable initiative and
determination in bringing his project to fruition and in this process, performs one or more of the
following:
 perceives opportunities for profitable investments
 Explores the prospects of starting such a manufacturing entrepreneurs
 obtains necessary industrial licenses
 Arranges initial capital
 Provides personal guarantees to the financial institutions
 Promotes to meet the short falls in the capital and
 supplies technical know-how
 An entrepreneur is a person who creates a business or product, manages his or her resources, and
takes risks to gain a profit.
 From this an entrepreneur is person who has:
 The ability to see and evaluate business opportunities
 The ability to gather the necessary resources, to take advantage of opportunities and
 The ability to take risk and initiate appropriate action to ensure success.
Peter Drucker describes an entrepreneur as “someone who always searches for change, responds
to it, and exploits it as an opportunity.”
 Entrepreneurs are the instrument of change in any economy and any country.

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In summary,
Adam Smith (1776) also stressed that an entrepreneur is an individual who undertook the
formation of an organization for commercial purpose. He also said that an entrepreneur is a
person with unusual foresight who could recognize potential demand for goods and services and
so transform demand into supply.
Entrepreneurs are those who create and/or expand business through innovative combination of
resources. Distinguishing factors are that entrepreneurs have vision for growth, commitment for
constructive change, persistence to gather necessary resources, and energy to achieve unusual
results.
 Entrepreneur is a combination of the thinker and doer. He/she generates new ideas and turns
them in to business ventures.
1.2 HISTORICAL PERSPECTIVE OF ENTREPRENEURSHIP.
 The word ‘entrepreneur’ comes from the French word entreprendre, which means “to
undertake.”
 Through the ages, the concept of entrepreneurship has shown significant development and
change in terms of scope. The concept also varies from economy to economy and from period to
period.
Earliest period
 In the early period an ‘entrepreneur ‘was a merchant adventurer who signs a contract with a
money person (a form of venture capitalist) to sell his goods.
 During that time, a common contract provided a loan to the merchant-adventurer at a 22.5% rate.
 The merchant- adventurer traveled great distances to a market for the goods and played the
active role in selling the goods bearing all the physical and emotional risks.
 Finally –profits were divided with the capitalist in 1to3 ratio, the capitalists taking up to75%.

Middle ages
 During this time the term entrepreneur was given to both an actor and a person who run large
production projects.
 This individual did not take any risk but simply administered the project using the resources
provided by the government of the country.
 Also in the early 1600s, the French men who organized and led military expeditions were called
“entrepreneurs.”
17th and 18th century
 The view of an entrepreneur as a risk taker was developed. (17th century).The typical
entrepreneur entered in to a contract with the government to perform a service or to supply
specific products at a fixed contract price bearing the risk of loss in the case of price escalations.
 In the 18th century, the industrialization taking place all over the world led to the clear
separation of the entrepreneur from the capital provider.
19th and 20th century (late 19th and early 20th century)
 Entrepreneurs were often viewed as managers and form economic points of view. In the mid-
1900s the connection of innovation with entrepreneur emerged
Defining entrepreneurship:
What is an entrepreneurship?
As early as 1730, Richard Cantillon defined entrepreneurship as self-employment of any sort.
Entrepreneurs buy goods at certain prices in the present and sell at uncertain prices in the future.
The entrepreneurs bear uncertainty.

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 The dynamic process of creating incremental wealth ….Robert Ronsadt.

 This wealth is created by individuals who assume major risks in terms of equity, time and or
career commitments of providing value for some products or services.
 The product or services by may or may not be new or unique but value must somehow be infused
by the entrepreneur by securing and allocating the necessary skills and resources.
 Entrepreneurship is indeed the process of creating and building something of from practically
nothing. It involves the definition, creation, and distribution of value and benefits to individuals,
groups, organizations and society at large.
Entrepreneur and Entrepreneurship:
 The term ‘entrepreneur’ is often used interchangeably with ‘entrepreneurship’ but conceptually;
they are different just like the two sides of a coin. The differences are as follows:
 Entrepreneur Entrepreneurship
 Refers to a person Refers to a process
 Able to visualize Vision
 Creator Creation
 Organizer Organization
 Innovator Innovation.
 Decision Maker Decision
 Leader Leadership
 Motivator Motivation
 Programmer Action
 Risk Taker Risk Taking
 Communicator Communication
 Administrator Administration
Manager and Entrepreneur
There are a number of similarities and ambiguities between manager and entrepreneur; and of
course, in most small-scale businesses both refer to the same person. However, each of the two
concepts is distinct from the other. The major differences between manager and entrepreneur are
shown in the following table.
Manager Entrepreneur
 Management is a profession, which, in  Entrepreneurship is not a profession; rather, it is a
principle, can be learnt by formal education style of life – a tradition. It is not easy to learn it.
and/or practice.  The entrepreneur is the full risk taker. He or she is the
 The manager is not necessarily the full risk creator of the business.
taker of the business; he or she might be hired  Entrepreneurs' activity seeks change by exploiting
personnel like any of the other employees. opportunities.
 Managers tend to be custodial; prefer to stick to  They look at their business growth over a long period
prove ways of doing business. of time.
 Managers are more oriented to the achievement  Entrepreneurs put their own personal finance at risk
of short-term goals. and they accept risk as part of the entrepreneurial
 They are rewarded by minimizing risk and process.
avoiding failure.  They are directly involved in their organization's
 They tend to delegate tasks and supervise those operational activities.
workers performing the task.

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Investor and Entrepreneurs

"Entrepreneur" and "investor" are overlapping but not identical terms. Generally all
entrepreneurs are investors while not all investors are entrepreneurs for the following major
reasons.
Investors Entrepreneurs
 They are people who invest their money on  They are people who invest not only their money but
a business (businesses) also their idea, time, physical & mental energy, and,
 They are profit and/or other forms of utility of course, their own life on business.
maximizes.  They are opportunity maximizes, spiritual satisfaction
 They do not necessarily maintain strong hunters.
physical and/or spiritual attachment with  They maintain very strong physical and spiritual
their business. An investor may simply be a attachment with their business and the company.
company, shareholder, who knows very Often, they are the owners and the managers of their
little about the business and/or the company. firms. They closely follow (often lead) the day-to-
 They are not necessarily risk-takers. day activities of the firm.
Keeping money in banks or purchasing  They are necessarily risk-takers. Getting financial
government bonds with the aim of earning benefits without being actively involved in the
interest, for example, makes one or investor creation of wealth will not make one an entrepreneur.
(a financial investors)  They are necessarily job-creators. At the minimum,
 They are not necessarily job-creators an entrepreneur creates a job for himself or herself.
(consider the above examples on financial  They are innovators. Duplicating or copying without
investment) any change will not make one an entrepreneur. Each
 They may duplicate or copy things done by entrepreneur is distinct one way or another.
others. Establishing the most common type  "Entrepreneur" refers to individuals, not to
of business, say opening a kiosk, will a organizations, groups of organizations or the state.
make one an investor. Existence of corporate entrepreneurship often
 They are an organization, a group of referred to, as "Entrepreneurship" is debatable; and if
organizations, and even the state can be (and it exists, it must be substantially different type of ER.
often are) investor.

1.2 Entrepreneurial Competencies

Competencies refer to underlying characteristics of a person which results in effective or
superior performance in a job. The following are major competencies that contribute towards top
performance.
1. Initiative – taking action beyond job requirements or the demand for the situation. Doing things
before being asked or forced by the events. Acts to extend the business in to new areas, product
or service.

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2. Assess and acts on opportunities – looks forward and take action on opportunities ( business,
educational or personal growth) seizes unusual opportunities to obtain financing equipment,
land, workspace or assistance.
3. Persistence- takes repeated action to overcome obstacle.
4. Information seeking- take action to get information to help reach objectives or clarify problems.
a. Does personal research on how to provide a product or service.
b. Consults experts for business or technical advice.
c. Seeks information or asks question to clarify what is wanted or needed.
d. Use information network to obtain useful information.
5. Concern for high quality of work-Doing things that meet or beat existing standards of excellence.
6. Commitment to work contract- place the highest priority on getting a job completed.
7. Efficiency oriented- finds ways to do things faster with fewer resources or at lower sources or at
a lower cost.
8. Systematic planning- plans by breaking a large task down in to subtasks. Develops plans that
anticipate obstacles. Evaluate alternatives. Take a logical and systematic approach to activities.
9. Problem solving- generates new ideas or innovations sometimes. Switches to an alternative
strategy to reach a goal.
10. Self-confidence- has a strong belief in self and own abilities. Does something that he says risky.
Sticks with own ability to complete a task or meet a challenge.
11. Assertiveness - confronts problems and issues with others directly tell others what they have to
do and disciplines those failing to perform as expected.
12. Persuasion – Successfully persuade others. Convince someone to buy a product or service.
Convince someone to provide financing. Convinces someone to do something else that he would
like that person to do.
13. Use of influential strategies: Use of variety of strategies to affect others. Acts to develop business
contacts. Uses influential peoples as agent to accomplish objectives. Selectively limits the
information given to others.
14. Monitoring: personally supervises all aspects of a project.
15. Concern for employee welfare: Take positive action in response to employees’ personal concern
and improving the welfare of the employees.
All the above competencies are instrumental to make a person successful entrepreneur.
Types of entrepreneurs
There are various ways by which entrepreneurs have been classified:-
1) Based on the type of business
a. Business entrepreneurs
These are individuals who conceive an idea for a new product or service and then create a
business to materialize their idea in to reality. They tap both production and marketing resources
in their search to develop a new business opportunity. They may setup a big establishment or a
small business unit. They are called small business entrepreneurs when found in small business
units such as advertising readymade garments, etc.
b. Trade entrepreneur is one who undertakes trading activities but not concerned with the
manufacturing work.
c. Industrial entrepreneur is essentially a manufacturer who identifies the potential needs of
customers and tailors a product/service to meet the marketing need.
d. Corporate entrepreneur is an individual who plans develop and manages a corporate body.
Corporate is a separate legal entity.

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e. Agricultural entrepreneurs are those entrepreneurs who undertake agricultural activities as

raising and marketing of crops, fertilizers and other inputs of agriculture.
2) Based on motivation
Motivation is the force that influences the effort of the entrepreneur to achieve his/her objective.
Based on motivation entrepreneur can be classified as:
a.Pure entrepreneur: an individual who is motivated by psychological and economic rewards.
b. Induced entrepreneur: is one who is induced to take up an entrepreneurial task due to the
policy measures of the government that provides assistance, incentives and necessary overhead
facilities to start a venture.
c. Motivated entrepreneurs: they come in to being because of the possibility of making and
marketing some new product/service for the use of the customers.
d. Spontaneous entrepreneur: entrepreneurs start their business out of their natural talents.

Entrepreneurial role, venture and style

Types of entrepreneurial role
a. Founders /pure/ entrepreneurs
These are those who initiate business on the basis of new or improved products/services. They
are individuals who bring new firms in to existence by surveying the market, raising funds etc. .
Generally managers provide
b. General Managers
As new firms become well established, founders become less of innovators and more
administrators. General Managers involves the operation of successful business firms. They
manage the week to week and month to month production, marketing and financial function of
enterprise. The distinction between founders and General Managers is often hazy.
c. Franchises
Franchises differ from General Managers in the degree of their independence. Because of the
constraints and guidance provided by contractual relations with franchising organizations,
franchisees function as limited entrepreneurs.
Types of Entrepreneurial Ventures
Marginal Firms
It is a small firm which provides insignificant profit to its owners. It provides a profit return that
does little more than compensating them for the time. Some examples are very small dry
cleaners, beauty shops, repair shops and others.
Attractive small companies
They offer substantial reward to their owner. These are strong segment of small business. ‘The
good’ firms which can provide rewarding carriers even to well-educated young people.
High potential ventures
These are firms that have great prospect for growth. Frequently these are also high-technology
ventures. At the time of the firms founding the owners often anticipate rapid growth, a possible
merger or going public with in a few year.
Types of entrepreneurial styles
Because of varied backgrounds, entrepreneurs display great variations in their styles of doing
business.
Craftsman entrepreneur
This is a person who starts business with primarily technical skills and little business knowledge
and lack good communication skill. Characteristics of such entrepreneurs are:

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 They are paternalistic

 They are reluctant to delegate authority
 Use few 1 or 2) capital sources.
 They define marketing strategy in terms of the traditional price quantity company reputation.
 Their sales efforts are primarily personal.
Opportunistic entrepreneur
This refers to person who has supplemented technical education by studying such non-technical
subjects as economics, English, law etc, characteristics.
1.3 Motivation for starting a business
Some of the reasons for the difficulties in classifying those involved in small business
management are the wide variety of motives for their involvement in small firms. The reason for
small business/firm formation can be divided in to “pull” and “push” influences.
Pull factors
Some individuals are attracted towards small business ownership by positive motives such as a
specific idea which they are convinced with work “pull” motives include:
≠ desire for independence
≠ desire to extract the opportunity
≠ Turning a hobby by previous work experience in to a business
≠ Financial incentives
Push factors
Many people are pushed in to finding a new enterprise by a variety factors including:
o Redundancy- when other employment opportunities are low
o Unemployment
o Disagreement with previous employer
Barriers to entrepreneurship
i. Environmental barriers
This includes raw material, labor, machinery, land and building
ii. Financial barrier
iii. Personal barrier:This includes lack of confidence, lack of motivation, lack of patience and
sense of pride.
iv. Societal barrier
1.4 Role of Entrepreneurship in Economic Development
 Plays a vital role in economic development. The economic development largely depends on
human recourses.
 Serve as the catalysts in the process of industrialization and economic growth.
 Rate of economic growth (progress) of nation depends upon its rate of innovation –depends upon
the distribution of entrepreneurial talent in the population ………Joseph Schumpeter.
 Technical progress alone cannot lead to economic development, unless technological
breakthrough is put to economic use by entrepreneurs-who organizes and put to use capital, labor
and technology.
 The entrepreneur is the key to the creation of new enterprises that energize the economic and
rejuvenate the established enterprises that make up the economic structure.
 Entrepreneurs initiate and sustain the process of economic development in the following ways:
1. Capital formation: Entrepreneurs mobilizes the idle savings of the public through the issue
of industrial securities. Investment of public saving in industry results in productive utilization of

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nation resources. Rate of capital formation increases which is essential for rapid economic
growth. Thus, an entrepreneur is the creator of the wealth.
2. Improvement in per capita income: Entrepreneurs locate and exploit opportunities. They
convert the talent and idle resources like land, labor, and capital in to national income and wealth
in the form of goods and services. They help to increases Net National Product and per capita
income in the country, which are important yardsticks for measuring economic growth.
3. Generation of employment: Entrepreneurs generates employment both directly and
indirectly. Directly, self-employment as an entrepreneur offers the way for independent and
honorably life. Indirectly, by setting up large and small- scale business units they offer jobs to
millions. Thus entrepreneurship helps to reduce the unemployment problem in the country.
4. Balanced regional development: Entrepreneurs in the public and private sectors help to
regional disparities in economic development. They set up industries in back ward areas to avail
of the various concessions and subsidies offered by the central and state governments.
5. Improving in living standards: Production of goods on mass scale and manufacture of
handcrafts, etc in the scale sector help to improve the standard of life of a common man. These
offer goods or lower costs and increase in consumption.
6. Economic independence: Entrepreneurship is essential for national self-reliance. Business
men export goods and services on a large scale and thereby earn the scarce foreign exchange for
the country.
7. Agents role: Entrepreneurs are aptly called ‘agents of change’ Entrepreneurs act as catalyst or
agent of economic development by perceiving opportunities and putting them into action.
Entrepreneurs, seizing opportunities, set-up business undertakings and industries and thereby
make economic transformation. Thus economic development is an effect for which
entrepreneurship is the cause.
8. Role of innovation: Innovation is a key to entrepreneurship. Innovation implies the
commercial application of an invention. Entrepreneurs have contributed many innovations in
developing new products and in the existing products and services.
9. Imitating role: Entrepreneurs in developing countries take the role of “Imitators “who
generally copy the innovations introduced by the “innovative “entrepreneurs of the developed
countries. Imitative entrepreneurship seems to be the best medicine for under developed
countries to overcome their entrepreneurial ills and bring about substantial economic
development. Entrepreneurship has the potential of transforming underdeveloped economies to
developed economies.
1.5 Innovation, creativity, and entrepreneurship.
Innovation
 Innovation is the successor of creativity. Innovation can be defined as the successful exploitation
of new ideas –incorporating new technology, design, and best practice-the key business process
that enables business to compete effectively.
 Innovation is process of doing new things. It is more than just a good idea. Ideas have little value
unless they are converted in to a useful products or services.
 Innovation is a tool which the small scale- industry can exploit.
Creativity
 The process of developing an original product, service or idea that makes a socially recognized
contribution. Hence creativity is the ability to bring something new into existence. Entrepreneurs
bring new ideas for setting up/running new business ventures. An entrepreneur who is creative
and brings her/his ideas in to reality turns to be successful in business.

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Are creative persons born or made?

Creativity, Innovation and Entrepreneurship: The linkage.
 Innovation is different from invention. An invention is discovery of new methods and new
materials, whereas innovation is utilization of inventions to produce new better quality of
products that give greater satisfaction to the consumer and higher profits to the entrepreneur.

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