ENTRPRENEURSHIP THEORIES

By
Sylvia Aarakit
 Introduction
• Various theories have been advanced to
explain;

• How entrepreneurs act (i.e. what it is they do);

• What happens when entrepreneurs act (i.e.
what are the outcomes of their actions)
• Why people choose to act as entrepreneurs
(i.e., what motivates them to be
entrepreneurs).
• Traditionally, there are three theories that
explain the concept of entrepreneurship:

• Economic
• Social
• Psychological
 ECONOMIC THEORY
• There are diverse opinions in economics about
the nature of entrepreneurship and whether it
exists in a dynamic, static or turbulent
economic system.

• The majority of economic approaches attempt

to explain how entrepreneurship works and
the function it serves in the economic system.
• Three approaches explain the
entrepreneurship in this theory i.e.
 Equilibrium approach
• This approach seeks to identify fundamental
“laws” to explain the economic system, and
assume that there are general principles
explaining society
• In this approach the “firm” represents its own
“reality”, which is independent of the
motivations, rationality and fallibility,
associated with individuals.
 cont...
• The market conditions are stable
• Every thing in the market is known
• It considers only the forces of dd and ss
• Neglects entrepreneurial action
• Thus entrepreneurship can’t co-exist with this
assumption since it requires rule violeting
behaviour
 Disequilibrium Approach
• These theorists do not attempt to construct
equilibrium models of the economic system
based on general principles but sought
explanations based on observations of
experience.
• That equilibrium doesnot occur in the “real”
economy
 Cont....
• They suggest that there are opportunities for
profit within economic systems because of
inequalities between supply and demand
• Thus entrepreneurial actions are designed to
exploit these opportunities, driving economic
systems towards equilibrium.
• Kirzner (1973) argued that the role of an
entrepreneur is to exploit information
asymmetries in the markets in order to bring
the markets to eventual equilibrium.
 Cont...
• The approach allows for human influence over
economic structures, recognizing the limits of
knowledge, information and expecting greater
unknown disequilibrating forces to impact on
economic systems in unexpected ways.
Revolution-equilibrium Approach
• Joseph Schumpeter (1934) developed a rule-breaking
theory of economics in which he described a creative
destruction of industrial cycles.
• Disruption is the normal state of a healthy, vibrant
economy helping to move the economy from one
state of equilibrium to another.
• Creative destruction", initiates and sustains the
process of development, and is what
entrepreneurship does
 Cont...
• The key function of the “entrepreneur” is to
innovate; conceptualizing human action at the
individual rather than the collective level.
• Schumpeter moves away from equilibrium
theories by arguing that creative destruction
involves periods of stability in economic
systems followed by periods of
transformation, within which he places the
entrepreneurial function.
 Motivation to act
• How the entrepreneur acts at a given time
and place depends heavily on the reward
structure in the economy or the prevailing
rules of the game that govern the payoff” to
entrepreneurship
• People choose entrepreneurship if the total
utility they expect to derive (via income,
independence, risk bearing, work effort, and
perquisites), is greater than from their best
employment option.
 SOCIOLOGICAL THEORIES
• Sociological theories try to explain
entrepreneurial behaviour as a function of the
person and environmental conditions or the
reality individuals live in.

• The nature of populations influences the

distribution of resources and indirectly shapes
entrepreneurial processes.
• Sociologist view environmental factors (that
include culture, networks, access to capital,
mobility, and government policies) as key in
fostering entrepreneurship.
• Sociological models that explain
entrepreneurship include;
• The social development (capital, transport,
education facilities etc)
• The Demographics (family background, birth
order, role model, marital status, age,
educational level of parents and self, socio-
economic status, previous work experience
and work habits)
• Socio–cultural values (value attached to
innovation, risk taking, entrepreneurship, hard
work and independence, the scorn associated
with failure and error, and reactions to change
in a society)
• Social learning through socialization (role
models)
• Social Networking
• The human capital perspective (education
level, experience, exposure etc)
• Environmental Dimensions (political,
technological aspects, natural resource
endowment)
• Entrepreneurial environment refers to those
environmental attributes that have an impact
on entrepreneurial behavior and that interact
with the entrepreneurial process.
• It has both affective and rational factors
• Affective factors - are attributes of the social
environment that include social identification,
role models, and social norm.
• Rational factors - refer to rational and
calculating thinking of individuals, and include
financial expectations, perceived opportunity,
and perceived availability of resources
 PSYCHOLOGICAL THEORIES
• Psychological theories associate
entrepreneurial tendencies to the individual’s
personality, mental and physical make-up

• This theory argues that entrepreneurs are

born!
 Two approaches
• The Traits approach which suggests that
Individuals with certain characteristics always
find the path to entrepreneurship regardless
of the environmental conditions.
• The cognitive Theory suggests that
entrepreneurial success is closely related to
the way entrepreneurs perceive information,
think and process knowledge, this
distinguishing entrepreneurs from other
persons.
• Examples of cognitive mechanisms include;
• Alertness
• The planning fallacy - a tendency to assume
that one can accomplish more in a given
period of time than is actually justified.
• Overconfidence - the tendency to
underestimate our lack of knowledge or to
think that we know more than we really do.
• Self-efficacy - cognitive conviction in one’s
capabilities to perform
Entrepreneurial schools of thought

•Environment
•Financial
•Displacement
Macro

•Traits
Micro •Venture opportunity
•Strategic formulation
Myths surrounding entrepreneurship
• Entrepreneurs are doers not thinkers
• Entrepreneurs are born not made
• Entrepreneurs are always inventors
• Entrepreneurs are academic and social misfits
• Entreprenuers must fit the profile
• All entrepreneurs need money
• All entrepreneurs need is luck
• Entrepreneurship is unstructured & chaotic
• Most entreprenurial initiatives fail
• Entrepreneurs are extreme risk takers....the
Gamblers
 EXERCISE

• Using the theories discussed

above, identify and explain the
characteristics of entrepreneurs.