Chapter 2: Economic Theories of

Entrepreneurship

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 Entrepreneurship What is It?

“Entrepreneurship is an economic
phenomenon involving a nexus of two
phenomena: the presence of lucrative
opportunities and the presence of
enterprising individuals”.

(Shane and Venkataraman, 2000, p. 218).

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 • Who are they? (Delmar, 2006)
• What they do? (Venkataraman, 1997)
• Why they do the things they do? (Davidsson, 2008)
• How they do the things they do? (Garnter, 2005)
• Where they do it? (Welter, 2011)

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 Entrepreneurs

Entrepreneur is derived from the French word entreprendre, meaning “to

undertake”.

Entrepreneurs use innovation to exploit or create change and opportunity

for the purpose of making profit. They do this by shifting economic
resources from an area of lower to an area of higher productivity,
accepting a high degree of risk and uncertainty in doing so.

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 The History of Economic Thought on
the Entrepreneur

Source:
http://aventalearning.com/content168staging/2008AmHistA/unit1/html/section_3_page_7.html
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 Revolutionaries
•How have entrepreneurs affected your life in the past 24 hours?
•Have you used your computer? (personal computers, PC software: Intel,
Microsoft, Dell, Apple)
•Have you surfed the web? (web browser – Netscape, Google, AOL)
•Have you made a purchase over the internet? (internet retailers, eBay,
PayPal)
•Have you made a mobile phone call? (cellular phone services; voice mail,
IT services)
•Have you used a hand held wireless communication device (a
‘blackberry’)? (RIM)
•Have you taken your car in for a fast oil change or MoT? (KwikFit)
•Have you taken a budget flight? (Easyjet, Ryan Air)
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 Revolutionaries cont.
•Where have you bought your clothes? Have you put on trainers (Nike,
Reebok), put on waterproof clothes (WL Gore, Timberland)?
•Have you bought a coffee? (Starbucks)
•Have you bought some DIY products? (Home Depot, B&Q)
•Have you bought any stationary? (Staples)
•Have you listened to your iPod? (Apple)
•Have you watched a 24 hours news channel? (CNN)
•Do you purchase ethically (Bodyshop)?
•Have you been to a fitness club (Fitness First, David Lloyd)?
•Have you bought a copy of ‘Big Issue’? (social entrepreneurship)

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Key Economic Schools of Thought

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 Economic Theories of
Entrepreneurship
•Capitalist – Adam •Technological
•Risk Taker – Smith, 1776, David Knowledge –
Richard Cantillion, Ricardo, 1871 Jeremy
1755 Bentham, 1838

•Capitalist –
•Risk Taker & •Economic
Amasa Walker,
Innovator – Von Change – Carl
Thunen, 1850 Menger, 1871 1866, Francis A.
Walker, 1887

•Risk Taker &

•Novel Resource Uncertainty •Innovator – •Alertness –
Combination – Avoidance – Joseph Isreal Kirzner,
Alfred Marshall, Frank Knight, Schumpeter, 1973
1920 1921 1952
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 Entrepreneurship economics is a subfield of economics that studies the behavior and decisions
of entrepreneurs, as well as the effects of those decisions on markets and economies. The field
has evolved over time, with different theories and approaches being developed to understand
the behavior of entrepreneurs and the impact of entrepreneurship on economic growth.
One early theory in entrepreneurship economics is the "opportunity cost" theory, which states
that entrepreneurs are motivated by the potential profits from a new venture, and that their
decisions are based on the opportunity cost of the resources they must invest. This theory was
first proposed by Israel Kirzner in 1973 in his book "Competition and Entrepreneurship."
Another theory is the "human capital" theory, which argues that entrepreneurs are motivated by
the potential returns on their investments in human capital, such as education and experience.
This theory was first proposed by Gary Becker in 1964 in his book "Human Capital."
A more recent theory is the "network" theory, which suggests that entrepreneurs are influenced
by their networks and relationships with other individuals and organizations. This theory was
first proposed by Scott Shane in 2000 in his book "A General Theory of Entrepreneurship."
Overall, the field of entrepreneurship economics has evolved over time to include a variety of
theories and perspectives, each offering insights into the behavior and decision-making of
entrepreneurs, and the impact of entrepreneurship on economic growth and development.

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 Evolving Entrepreneurs
Date Author Concept
1755 Cantillon Introduced the concept of entrepreneurs from entreprendre (‘ability to take charge')
Emphasised the ability of the entrepreneur to 'marshal’ resources in order to respond to
1803, 1817 Say
unfulfilled opportunities
Noted the ability of entrepreneurs to distinguish between 'economic goods' - those with a market
1871 Menger
or exchange value - and all others
Attributed to entrepreneurs the ability to take integrated action in the enterprise as a whole,
1893 Ely and Hess
combining roles in capital, labour, enterprise and entrepreneur

Envisioned that entrepreneurs proactively 'created' opportunity using 'innovative combinations'

1911, 1928 Schumpeter
which often included 'creative destruction' of passive or lethargic economic markets

Suggested that entrepreneurs were concerned with 'efficiency' in economic factors by

1921 Knight continually reducing waste, increasing savings and thereby creating value, implicitly
understanding the opportunity-risk-award relationship

1948, 1952, Continued the Austrian tradition of analytical entrepreneurs giving them capabilities of discovery
Hayek
1967 and action, recognising the existence of information asymmetry which they could exploit

1973, 1979, Attributed to entrepreneurs a sense of 'alertness' to identify opportunities and exploit them
Kirzner
1997, 1999 accordingly

1974 Drucker Attributed to entrepreneurs the capacity to 'foresee' market trends and make a timely response

Attributed to 'judgement' ability to entrepreneurs to identify 'credible opportunities' depending on

1975, 1984,
Shapero two critical antecedents - perceptions of 'desirability' and feasibility' from both personal and
1985
social viewpoints
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 Schumpeter

•Schumpeter’s entrepreneur is an innovator.

•The entrepreneur brings change through the introduction of new
technological processes or products.
•The person who destroys the existing economic order by introducing new
products and services, by creating new forms of organisation, or by
exploiting new raw materials.
•Creative destruction.

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 Kirzner

•Entrepreneur is alert to profitable opportunities for

exchange
•Entrepreneur is the middle-man who facilitates
exchange
•Entrepreneur has additional knowledge to exploit to
take advantage of profitable opportunities

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 Knight

•Calculated risk-taker
•The opportunity for profit arises out of uncertainty and risk
•The entrepreneur is an individual who is prepared to
undertake risk and the reward - profit
•Responsibility for one's own actions

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 Understanding
Entrepreneurship
Author Definition
Entrepreneurship is an act of innovation that involves endowing existing
Drucker (1985) resources with new wealth-producing capacity.
Entrepreneurship is the pursuit of an opportunity without concern for current
Stevenson et al. (1989) resources or capabilities.
Low and Macmillan
(1988) Entrepreneurship is the creation of new enterprises.
Entrepreneurship is a way of thinking, reasoning and acting that is opportunity
Timmons (1997) obsessed, holistic in approach, and leadership balanced.
Entrepreneurship research seeks to understand how opportunities to bring into
existence future goods and services are discovered, created and exploited, by
Venkataraman (1997) and whom, and with what consequences.

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 …Entrepreneurship
“An activity that involves discovery, evaluation and exploitation of opportunities to
introduce new goods and services, and organize new markets, processes and raw
materials through coordinating efforts of the entrepreneur that previously did not
exist” (Shane, 2003: 4)

And he adds…

He adds that entrepreneurship “involves the nexus of entrepreneurial opportunities

and enterprising individuals … where a situation in which a person can create a
new means-ends framework for recombining resources that the entrepreneur will
yield a profit” (Shane, 2003: 18).

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 Baumol ’s Three Types of
Entrepreneurship
Productive entrepreneurship is innovation leading
to wealth creation and economic development which
advances not only the individual but wider society.
Pursue a business opportunity within prevailing
institutions.

Unproductive entrepreneurship is some form of

bureaucracy that typically benefits an individual but
not necessarily society. Create contracts to
overcome institutional shortcomings e.g. lobbying;
help others avoid taxes.

Destructive entrepreneurship also benefits the Source: Baumol, W.J. (1990) Entrepreneurship:
Productive, Unproductive and Destructive. Journal of
individual more than society. Political Economy, 98(5), 893-921

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 The Myths of Entrepreneurship
Myth 1: Entrepreneurs are doers, not thinkers

Myth 2: Entrepreneurs are born, not made

Myth 3: Entrepreneurs are always inventors

Myth 4: Entrepreneurs are academic and social misfits

Myth 5: Entrepreneurs must fit the profile

Myth 6: All entrepreneurs need is money

Myth 7: All entrepreneurs need is luck

Myth 8: Entrepreneurship is unstructured and chaotic

Myth 9: Most entrepreneurial initiatives fail

Myth 10: Entrepreneurs are extreme risk takers

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 Why is Entrepreneurship so
Important?

Important contributions to industrial markets:

1. Entrepreneurs play an important role in the change of technology;

2. Entrepreneurs create an additional sense of competition whilst also, providing a
mechanism for regeneration;
3. Entrepreneurs contribute to international competition via niche markets and;
4. Entrepreneurs influence in creating jobs.

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 What explains this recent
growth in entrepreneurship??
• Structural shift from manufacturing (large firm dominated) to services (small firm dominated)
• Growth in personal, flexible, tailor-made services
• Restructuring by large firms – focus on core activities, sub-contract non-core activities
• Technological change
• Scientific discoveries exploited by small firms
• Production and IT technologies have reduced the role of economies of scale
• Low cost and access to communications technology (‘the great equaliser’): access to information,
distribution (‘the long tail’)
• Importance of human capital rather than financial capital as the basis for competitiveness
• Consumer choice – reaction against mass produced products and services: individualism, demand for
authenticity, natural products (e.g. real ale beer) – growth in market niches
• Deregulation of markets: e.g. in airlines, telecoms, media
• Personal choice – ‘rebellion’, reaction against working in large impersonal organisations, want to
control own destiny
• Availability of finance – venture capital
•Enterprise Concepts
Availability
and Issuesof support,
© Goodfellow advice
Publishers 2016and education
 Recap – What is an entrepreneur?
Economic Approach:

Schumpeter
•“the person who destroys the existing economic order by introducing new products and services, by creating new forms of
organization, or by exploiting new raw materials.”
•“creative destruction”
•the entrepreneur is a special person
•entrepreneur is an innovator
•develops new technology

Kirzner
•entrepreneur is alert to profitable opportunities for exchange
•identifies suppliers and customers and acts as an intermediary (no necessity to own resources and profit arises from
intermediary function)
•entrepreneur has additional knowledge which is not possessed by others (the role of information is very important)
•anyone could potentially possess the additional knowledge and be alert to opportunities for exchange and trade.

Knight
•The entrepreneur is an individual who is prepared to undertake risk and the reward - profit - is the return for bearing
uncertainty and is an uninsurable risk.
•entrepreneur is a calculated risk
•taker
•opportunity for profit arises out of uncertainty surrounding change
•responsibility for one’s own actions
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 Personality Approach
Need for independence

Controlling your own destiny, doing things differently, being in a situation

where you can fulfill your potential.

“I enjoy the independence of single- handling a boat. I

like controlling the elements, making the wind and the waves and
the water work for me.”
Gerry Schwartz

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 Personality Approach
Need for achievement

Achievement does not necessarily mean that money is an end itself. It may
allude to employing the 100th person, meeting the first million pound mark
etc.

Internal locus of control

Believing you can exercise control over your environment and ultimately your
destiny.

You can believe in Fung Shui if you want, but

ultimately people control their own fate.”
Li Ka Shing
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 Personality Approach
Ability to live with uncertainty and take measured risks

A regular income is a requirement in any job and the cause of much upheaval
and stress. People tend to be risk averse and less willing to be risky with their
own money. In this manner managers and entrepreneurs are very different.

“It was an extremely satisfying experience. Taking smart

risks can be very gratifying.”

Reed Hastings

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 Personality Approach
Opportunistic

Entrepreneurs exploits change for profit.

They seek out opportunities to make money.

“Don’t spend so much time trying to choose

the perfect opportunity, that you miss the right opportunity.”
Michael Dell
Innovative

The ability to spot opportunities and to innovative are the

most important distinguishing features of entrepreneur.
Innovation is the prime tool entrepreneurs use to create or
exploit opportunity.

Self-confident

Confident in your own judgement and ability to start up

your own business with the risks and uncertainty that they face.
Don’t confuse with some entrepreneurs being
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arrogant or being delusional.
 Personality Approach
Proactive and self-motivated

Entrepreneurs are highly driven and possess determination. They are impatient,
work long hours, committed and determined to succeed. This strong drive is what
psychologists call type ‘A’ behaviour. They are highly driven by money, their goals,
success, etc.

Visionary with flair

Clear vision of what they want, how they will achieve it and when.

"Our vision is to be the world's most consumer-centric company, where customers

can come to find anything they want to buy online.“
Jeff Bezos
Great risks and uncertainty
Large amounts of capital and time are required. For example, entrepreneurs are
known to put up their homes as collateral or capital.
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 Personality Approach Theories
McClelland’s (1961) The Achieving Society

•Need for Achievement

•Proactive person – lots of initiative and assertive
•Committed to aims and achieving them
Key characteristics:

•Achievement
•Calculated risk-taker
•High internal locus of control
•Creativity
•Innovative
•Need for authority
•Ambiguity tolerance
•Vision
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•Self-efficacy
 Personality Approach Theories
Merideth et al. (1982)

The 5 core traits of entrepreneurship:

•Confidence
•Risk-taking
•Flexibility
•Achievement orientation
•Independence

Meredith, G.G., Nelson, R.E. and Neck, P.A. (1982). The Practice of
Entrepreneurship, International Labour Office, Geneva.
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 Personality Approach Theories
Timmons (1994)

•Some acquired traits, some innate

•Need for achievement
•Vision and ability to inspire
•Responsibility for actions / decisions
•Ambitious
•Achieved personal goals / ambitions
•Able to cope with failure
•Creative

Timmons, J.A. (1994). New Venture Creation: Entrepreneurhsip for the

21st Century, 4th Edition, Irwin: Chicago, IL.
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 Entrepreneurial Types?

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 Methodological Problems

• Characteristics are not stable and change over time.

• They require subjective judgements.
• Measures tend to ignore cultural and environmental
influences.
• The role of education, learning and training is often
overlooked.
• Issues such as age, sex, race, social class and education
can be ignored.

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 Why Do Entrepreneurs Do It?

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 Antecedent Factors

• Family
• Ethnicity
• Gender
• Education
• Previous employment
• Religion
• Social group
• National culture

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 Situational Factors

• Employment
• Unemployment
• Immigration
• Economic opportunity

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 Yet Even Still…..

Entrepreneurship in the 21st Century:

Is Still Unclear…

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 Reading
Chell, E. (1985) The Entrepreneurial Personality: A Few Ghosts Laid to
Rest? International Small Business Journal, 3, 43-54.

Gartner, W.B., (1985) A conceptual framework for describing the

phenomenon of new venture creation. The Academy of Management
Review, 10(4), pp. 696-706.
Hisrich, R., Langan-Fox, J. and Grant, S. (2007) Entrepreneurship Research
and Practice: A Call to Action for Psychology. American Psychologist, 6(6),
575-589.

McClelland, D.C. (1987) Characteristics of Successful Entrepreneurs. The

Journal of Creative Behavior, 21(3), 219-233.

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