APROACHES TO ENTREPRENEURSHIP

1. PSYCHOLOGICAL APROACH
i) David C McClelland’s Motivational Needs Theory
American David Clarence McClelland (1917-98) achieved his doctorate in psychology at Yale in
1941 and became professor at Wesleyan University. He then taught and lectured, including a
spell at Harvard from 1956, where with colleagues for twenty years he studied particularly
motivation and the achievement need. He began his McBer consultancy in 1963, helping
industry assess and train staff, and later taught at Boston University, from 1987 until his death.

McClelland is chiefly known for his work on achievement motivation, but his research interests
extended to personality and consciousness. David McClelland pioneered workplace motivational
thinking, developing achievement-based motivational theory and models, and promoted
improvements in employee assessment methods, advocating competency-based assessments and
tests, arguing them to be better than traditional IQ and personality-based tests. His ideas have
since been widely adopted in many organizations, and relate closely to the theory of Frederick
Herzberg. David McClelland is most noted for describing three types of motivational need,
which he identified in his 1961 book, The Achieving Society:
• Achievement motivation (n-ach)
• Authority/power motivation (n-pow)
• Affiliation motivation (n-affil)

The Need for Achievement (n-ach)

The n-ach person is 'achievement motivated' and therefore seeks achievement, attainment of
realistic but challenging goals, and advancement in the job. There is a strong need for feedback
as to achievement and progress, and a need for a sense of accomplishment.

McClelland contrasted achievement-motivated people with gamblers, and dispelled a common

pre-conception that n-ach 'achievement-motivated' people are big risk takers. On the contrary -
typically, achievement-motivated individuals set goals which they can influence with their effort
and ability, and as such the goal is considered to be achievable. This determined results-driven
approach is almost invariably present in the character make-up of all successful business people
and entrepreneurs.
McClelland suggested other characteristics and attitudes of achievement-motivated people:
a) Achievement is more important than material or financial reward.
b) Achieving the aim or task gives greater personal satisfaction than receiving praise or
recognition.
c) Financial reward is regarded as a measurement of success, not an end in itself.
d) Security is not prime motivator, nor is status.
e) Feedback is essential, because it enables measurement of success, not for reasons of praise or
recognition (the implication here is that feedback must be reliable, quantifiable and factual).
f) Achievement-motivated people constantly seek improvements and ways of doing things better.
g) Achievement-motivated people will logically favour jobs and responsibilities that naturally
satisfy their needs, i.e. offer flexibility and opportunity to set and achieve goals, e.g., sales and
business management, and entrepreneurial roles.
McClelland firmly believed that achievement-motivated people are generally the ones who make
things happen and get results, and that this extends to getting results through the organisation of
other people and resources, although as stated earlier, they often demand too much of their staff
because they prioritise achieving the goal above the many varied interests and needs of their
people. Are individuals born with certain characteristics that predispose them to entrepreneurial
endeavors? Is there a set of traits that can be attributed to an entrepreneurial personality? Or does
environmental context, such as early exposure to entrepreneurialism make the entrepreneur?

ii) Entrepreneurs are Born (Traits Theory)

Professor of psychology Alan Jacobwitz, holds that entrepreneurs are born, not made. Through
interviews with over 500 entrepreneurs over a three-year period, Jacobwitz observed that
entrepreneurs commonly share certain personality characteristics. These include:
• Restlessness
• Independence
• A tendency to be a loner
• Extreme self confidence
• Innovative
• Action oriented
• High on need for personal control
• Highly autonomous
Trait theories such as Jacobwitz’s suggest that entrepreneurial aptitude is static- that is, either
people are born with the related characteristics, or they are not. While the majority of theorists
supported this approach at the dawn of entrepreneurial research, some criticize that it has yet to
be empirically proven.

iii) Precipitating Events Theory (Entrepreneurs are Made)

Other researchers offer a dynamic model that suggests entrepreneurial intention is based on the
interaction between personal characteristics, perceptions, values, beliefs, background and
environment (situational context). They base this approach on a model of the entrepreneurial
event in which entrepreneurship is defined as “the pursuit of an opportunity irrespective of
existing processes.”
Unlike the traits models, this approach incorporates the influence of environment, and the notion
that entrepreneurial behavior is planned and intentional. This approach is process-focused in that
the interactions of several factors are examined in order to predict behavior. Beliefs, perceptions
and assumptions are learned within the context of a given environment (such as a business or
community). These attitudes and perceptions predict intentions, which in turn influence behavior.
Entrepreneurial intention is thus mediated in the following manner:
• Environment or event causes an individual to form perceptions, attitudes and assumptions
(consider the assumptions and beliefs that might be formed in a change oriented environment as
opposed to a static environment).
• These perceptions then translate themselves into intentions, or potential.
• Intentions or potential then are expressed through behavior.

Thus, this model suggests that entrepreneurial characteristics not only can be learned, but also
can vary across individuals and situations.
iv) Beyond Born and Made (Venture Theory)
Other researchers take the dynamic approach to entrepreneurial behavior a step further by
declaring a model that explains sustained and repeated entrepreneurial behavior (venturing). In
essence, the model moves beyond attempting to explain why individuals initiate ventures to why
or how entrepreneurs are motivated to continue with the behavior as a career choice. They
conclude that, like the intention to act entrepreneurially, the decision to continue with behavior is
influenced by the interaction of various factors. These include:
• Individual characteristics
• Individual environment
• Business environment
• An individual’s personal goal set
• The existence of a viable business idea.
Through these interacting factors, individuals make several comparisons between their
perceptions of a probable outcome, their intended goals, intended behavior and actual outcomes.
The model predicts that:
• When the outcomes met or exceed perceived outcomes, positive behavior (continued
engagement in entrepreneurialism) is reinforced.
• It also predicts that the opposite occurs when the perceived outcomes are not met.
This model clearly incorporates psychological, behavioral and situational factors.

2. ECONOMIC APPRAOCH
Richard Cantillon (1680-1734) was the first of the major economic thinkers to define the
entrepreneur as an agent who buys means of production at certain prices to combine them into a
new product. He classified economic agents into landowners, hirelings, and entrepreneurs, and
considered the entrepreneur as the most active among these three agents, connecting the
producers with customers. Jean Baptise Say (1767-1832) improved Cantillion’s definition by
adding that the entrepreneur brings people together to build a productive item.

i) Mark Casson's Economic Theory

Mark Casson (1945- ) holds that entrepreneurship is a result of conducive economic conditions.
In his book "Entrepreneurship, an Economic theory" he states the demand for entrepreneurship
arising from the demand for change.
Economic factors that encourage or discourage entrepreneurship include:
• Taxation policy
• Industrial policy
• Easy availability of raw materials
• Easy access to finance on favorable terms
• Access to information about market conditions
• Availability of technology and infrastructure
• Marketing opportunities

ii) Joseph Schumpeter’s Innovation Theory

Joseph Schumpeter’s innovation theory of entrepreneurship (1949) holds an entrepreneur as one
having three major characteristics: innovation, foresight, and creativity. Entrepreneurship takes
place when the entrepreneur
• creates a new product
• introduces a new way to make a product
• discovers a new market for a product
• finds a new source of raw material
• finds new way of making things or organization

Schumpeter’s innovation theory however ignores the entrepreneur’s risk taking ability and
organizational skills, and place undue importance on innovation. This theory applies to large
scale businesses, but economic conditions force small entrepreneurs to imitate rather than
innovate. Other economists have added a dimension to imitating and adapting to innovation. This
entails successful imitation by adapting a product to a niche in a better way than the original
product innovators innovation.

The above theory implies carrying one of new combinations of entrepreneurship. ‘An
Entrepreneur is an innovator – who carries new combination of:
1. New goods/ services.
2. New method of production.
3. New market.
4. New source of supply of raw materials.
5. New organization.

iii) Frank Knight's Risk Bearing Theory

Frank Knight (1885-1972) first introduced the dimension of risk-taking as a central characteristic
of entrepreneurship. He adopts the theory of early economists such as Richard Cantillon and J B
Say, and adds the dimension of risk-taking. This theory considers uncertainty as a factor of
production, and holds the main function of the entrepreneur as acting in anticipation of future
events. The entrepreneur earns profit as a reward for taking such risks.

iv) Alfred Marshall’s Theory

Alfred Marshall in his Principles of Economics (1890) held land, labor, capital, and organization
as the four factors of production, and considered entrepreneurship as the driving factor that
brings these four factors together.
The characteristics of a successful entrepreneur include:
• Thorough understanding of the industry
• Good leadership skills
• Foresight on demand and supply changes and the willingness to act on such risky foresights

Success of an entrepreneur however depends not on possession of these skills, but on the
economic situations in which they attempt their endeavors.
Many economists have modified Marshall’s theory to consider the entrepreneur as the fourth
factor itself instead of organization, and which coordinates the other three factors.

v) Israel Kirtzner’s Theory

Israel Kirzner (1935- ) hold spontaneous learning and alertness two major characteristics of
entrepreneurship and entrepreneurship is the transformation of spontaneous learning to conscious
knowledge, motivated by the prospects of some gain. Kirzner considers the alertness to
recognize opportunity more characteristic than innovation in defining entrepreneurship. The
entrepreneur either remedies ignorance or corrects errors of the customers.
His entrepreneurship model holds:
1. The entrepreneur subconsciously discovering an opportunity to earn money by buying
resources or producing a good, and selling it
2. Entrepreneur financing the venture by borrowing money from a capitalist.
3. Entrepreneur using the funds for his entrepreneurial venture
4. Entrepreneur paying back the capitalist, including interest, and retaining the "pure
entrepreneurial profit.”

vi) Leibenstein’s Theory of Entrepreneurship

Harvey Leibenstein (1922-1994) consider entrepreneur as gap-fillers. The three traits of
entrepreneurship include:
1. Recognizing market trends
2. Develop new goods or processes in demands but not in supply
3. Determining profitable activities
Entrepreneurs have the special ability to connect different markets and make up for market
failures and deficiencies.

vii) Peter Drucker’s Theory of Entrepreneurship

Peter Drucker (1909-2005) holds innovation, resources, and an entrepreneurial behavior as the
keys to entrepreneurship. According to him entrepreneurship involves

a. increase in value or satisfaction to the customer from the resource

b. creation of new values
c. combination of existing materials or resources in a new productive combination

Entrepreneurship in Economic Theory

Let us take a closer look at how the figure of the entrepreneur is treated in economic theory. We
have a surprise in store. Astonishingly, in the literature of economics the entrepreneur has been
largely left out. Entrepreneurship is an important and, until recently, sadly neglected subject,
says Mark Casson (1990, p.XIII), who could be called the rediscoverer of the entrepreneurial
figure.

In the past ten years, research has taken a new direction, bringing out the separate and distinct
function of the entrepreneur in contrast to that of the manager. Why is so much emphasis placed
on this difference? Because it is about a quality all of its own, something new. The essence of
entrepreneurship is being different says Casson. What is so different here? The manager, one
could argue, must operate under normal conditions and in routine business, while for successful
entrepreneurship exactly the opposite qualities are needed. The entrepreneur is not the capitalist,
either, a distinction that goes back to J. B. Say and which was taken up by Joseph Schumpeter
(quoted from the 1993 edition, p. 217), the classic economic reference for entrepreneurial
behaviour. This distinction is significant, since the two functions have been repeatedly treated, in
non-specialist literature but to some extent in the history of economics as well, as if they were
one and the same. The difference can be otherwise expressed in a current bon mot: “The
entrepreneur creates jobs, the capitalist opens them up. The entrepreneur has an idea, founds a
business, employs people. The capitalist has money, buys into an enterprise and tries to increase
the return on his capital. He rationalizes or closes unproductive parts of the business, thereby
tending to make employees redundant.

Schumpeter, too, describes the entrepreneur as forsaking well-trodden paths to open up new
territory and as turning (believe it or not!) dreams into reality. Schumpeter puts the stress on
innovation, not on the invention. The entrepreneurial function consists not of inventing things,
but rather of bringing knowledge to life and into the market. Schumpeter himself assumes that
with innovation existing structures are destroyed. He saw the markets, realistically viewed, as
dominated by oligopolies. Competition, and with it a more efficient allocation of resources,
arises only through the invasion of these markets by new entrepreneurs, who destroy the existing
market equilibrium with their innovations. This mechanism has been taken into economic
discourse and is termed creative destruction.

Hans Hinterhuber (1992) points out a special relationship between the entrepreneurial vision and
the person: entrepreneurial ideas, he says, are an expression of one´s own life and professional
experience. He even speaks of the feeling of a mission. This sense of mission must be present to
set free the energies needed to market a product successfully. The author gives several examples
of some entrepreneurial ideas that have marked our society more than others, because their
originator had an idea in the Platonic sense and were imbued with a sense of mission: Gottlieb
Duttweiler in Switzerland, with his idea of breaking down traditional commercial structures and
offering products much cheaper, especially to poorer population groups, or Steven Jobs and
Stephen Wozniak, with their vision of democratizing the computer. Interesting, too, the
indication that entrepreneurial vision is an idea of sweeping, classic simplicity. Going along with
this is a sense of reality: ideas by themselves do not yet constitute vision. A sense of reality
means seeing things as they are, not as one wishes them to be.

And finally the ability to withdraw from reality: the highhanded creation of new basic conditions
which redefine the rules of the game. In the American literature, this latter is often described
thus: The entrepreneur has to put the odds in his favour, even if and especially if founders of
enterprises when first presenting their ideas often cannot make them comprehensible.

3. SOCIOLOGICAL APPROACH
i) Max Weber’s Sociological Theory
The sociological theory entrepreneurship holds social cultures as the driving force of
entrepreneurship. The entrepreneur becomes a role performer in conformity with the role
expectations of the society, and such role expectations base on religious beliefs, taboos, and
customs.

Max Weber (1864-1920) held religion as the major driver of entrepreneurship, and stressed on
the spirit of capitalism, which highlights economic freedom and private enterprise. Capitalism
thrives under the protestant work ethic that harps on these values. The right combination of
discipline and an adventurous free-spirit define the successful entrepreneur.

Salient features of his theory are:

1. Spirit of Capitalism is highlighted
2. Adventurous spirit facilitate taking risk
3. Protestant ethic embodying rebellion is conducive
4. Inducement of profit is the criterion

4. CULTURAL/ANTHROPOLOGICAL APPROACH
i) Hoselitzs Theory
1. He explains that the supply of Entrepreneurship is governed by cultural factors & culturally
minority groups are the spark – plugs of entrepreneurial economic development. Marginal men-
Reservoir of entrepreneurial development. Ambiguous positions from a cultural or social
statement make them creative.
2. Emphasis on skills- Who possess extra-ordinary skills. Function of managerial additional
personal traits & leadership skills. Additional personal traits. Exportation of profit Ability to
lend.
3. Contribution of social classes- Socio-economic economic background of specific classes
makes them entrepreneurs.

WHAT IS LOCUS OF CONTROL?

Within psychology, Locus of Control is considered to be an important aspect of personality. The
concept was developed originally Julian Rotter in the 1950s (Rotter, 1966). Locus of Control
refers to an individual's perception about the underlying main causes of event in his/her life. Or,
more simply: Do you believe that your destiny is controlled by yourself or by external forces
(such as fate, god, or powerful others)? The full name Rotter gave the construct was Locus of
Control of Reinforcement. In giving it this name, Rotter was bridging behavioral and cognitive
psychology. Rotter's view was that behavior was largely guided by "reinforcements" (rewards
and punishments) and that through contingencies such as rewards and punishments, individuals
come to hold beliefs about what causes their actions. These beliefs, in turn, guide what kinds of
attitudes and behaviors people adopt. This understanding of Locus of Control is consistent, for
example, with Philip Zimbardo (a famous psychologist): A locus of control orientation is a belief
about whether the outcomes of our actions are contingent on what we do (internal control
orientation) or on events outside our personal control (external control orientation)." (Zimbardo,
1985, p. 275) Thus, locus of control is conceptualized as referring to a one-dimensional
continuum, ranging from external to internal:

External Locus of Control

Individual believes that his/her behavior is guided by fate, luck, or other external circumstances

Internal Locus of Control

Individual believes that his/her behavior is guided by his/her personal decisions and efforts.
Is an internal locus of control desirable? In general, it seems to be psychologically healthy to
perceive that one has control over those things which one is capable of influencing. In simplistic
terms, a more internal locus of control is generally seen as desirable. Having an Internal locus of
control can also be referred to as "self-agency", "personal control", "self determination", etc.
Research has found the following trends:
• Males tend to be more internal than females
• As people get older they tend to become more internal
• People higher up in organizational structures tend to be more internal. However, it’s important
to warn people against lapsing in the overly simplistic view notion that internal is good and
external is bad (two legs good, four legs bad?). There are important subtleties and complexities
to be considered. For example:
• Internals can be psychologically unhealthy and unstable. An internal orientation usually needs
to be matched by competence, self-efficacy and opportunity so that the person is able to
successfully experience the sense of personal control and responsibility. Overly internal people
who lack competence, efficacy and opportunity can become neurotic, anxious and depressed. In
other words, internals need to have a realistic sense of their circle of influence in order to
experience 'success'.
• Externals can lead easy-going, relaxed, happy lives. Despite these cautions, psychological
research has found that people with a more internal locus of control seem to be better off, e.g.,
they tend to be more achievement oriented and to get better paid jobs. However, thought
regarding causality is needed here too. Do environmental circumstances (such as privilege and
disadvantage) cause LOC beliefs or do the beliefs cause the situation?

Locus of Control
Entrepreneurs tend to have a strong internal locus of control. Locus of control is a concept
defining whether a person believes he/she is in control of his/her future or someone else is in
control of it. For example, we all know people who believe they have no control over their lives.
They believe that what happens to them is dictated by outside forces. People who feel they are
victims of outside forces have an external locus of control – “it’s not my fault this happened to
me.” By contrast, entrepreneurs have a very strong internal locus of control. They believe their
future is determined by the choices they make.

Control of their Future

Entrepreneurs want to be self-directed. They want to be in control of their activities. This is
linked to the “locus of control” discussion above. Entrepreneurs often don’t fit well in traditional
employment positions. They don’t want to be told what to do. Entrepreneurs know what they
want to do and how to do it.