THEORIES

OF
ENTREPRENEURSHI
P
 What is theory?

 A theory is a generalization that explains

a set of facts or phenomena. It is not an
absolute truth. It can be supported by
another observation or proven to
be otherwise.
 There
are sev
theorie eral
s on
entrep
reneur
Here a shi p.
re som
e of th
em:
Innovation theory

Keynesian theory

Alfred Marshall theory

Risk and uncertainty-bearing

theory
Other theories on entrepreneurship
 1.
INNOVATION
THEORY
The innovation theory on
entrepreneurship was
contributed by Joseph
Schumpeter, an Austrian
economist and political
scientist. He wrote about it
in his book, The Theory of
Economic Development.
 The innovation theory regards economic
development as the product of structural
change or innovation. Schumpeter argued that
the chances of economic development to take
place would be slim unless revolutionary
changes in the circular flow of economy would
happen. An economy without any revolutionary
changed is deemed to be static and
cannot expect any economic development.
Simply put, there will be no development
in any economic equilibrium or status quo.
 Schumpeter strongly believed that innovation
is the force that will propel the revolutionary
change. It will cause the creative destruction of
the staic mode of the economy, stir the
entrepreneurial activity, and encourage
competition.
Unless innovation takes place,
economic equilibrium or status
qou will remain.
 It becomes the primary role of the
entrepreneur to introduce innovation in any of
the following forms:
1. new product
2. new production method
3. new market
4. new supplier
5. new industry structure
 2.
KEYNESIAN
THEORY
The Keynesian theory on
entrepreneurship was
developed by John
Maynard Keynes, a British
economist. The key
concepts of the theory were
included in his book, The
General Theory of
Employment, Interest and
Money, which was
published during the Great
Depression in 1936.
the government in entrepreneural activities may not
be favorable in the future unless the short-term
problem of economic disequilibrium is finally
resolved through the active participation of the
government.
The private sector may perform well in their
entrepreneurial ventures only when the people have
enough money. However, during a period of
economic depression, money becomes scarce and the
number
of unemployed workers is high.
 It is during this time that the government must
make a strong intervention in the entrepreneurial
role played by the private sector by pouring more
money to the economy and creating more jobs and
projects for communities.
Histrory reveals that the entrepreneural endeavor
was hardly felt during the Great Depression in the
United States since entrepreneurs were reluctant to
invest for fear of having poor returns on investment.
It was government that played critical role then.
 3.
ALFRED
MARSHALL
THEORY
of Alfred Marshall, an
English economist, was
introduced in his book,
Principle of Economics . As he
strongly asserted that there
are four factors in the
production ( land, labor,
capital and organization ) of
goods and serces in the
economy, he considered
organization as the
coordinating element.
Marshall regarded the entrepreneurs as the
prime movers in the organization. They are
expected to create new commodities or
improve the existing ones. He believed that the
entrepreneurs could perform and meet
expectations only if they had a thorough
understanding of the industry where they
operated. Without the active participation of
entrepreneurs in the economy, development
will surely be slow and limited.
Marshall further suggested that an entrepreneur
must be able to foresee possible changes in the
future supply and demand pattern. He/she must
also possess the necessary skills to be an
entrepreneur. Marshall observed that though the
skills and
abilities required of an entrepreneur are
so numerous, only a few exhibited
a high degree of proficiency.
 4.
RISK AND
UNCERTAINTY-
BEARING THEORY
Knight, an American
economist,
conceptualized the risk
and uncertainty-
bearing theory of
entrepreneurship in his
book, Risk, Uncertainty
and Profit.
 By adopting some concepts of the early
economists, Knight viewed an entrepreneur
as an agent of the production process where
he/she connects the producers and teh
consumers. Knight , however, added risk-
taking as an important dimension that will
differentiate an entrepreneur from
a worker.
 Knight considered uncertainty an
imporatant factor in the production of
goods and services. He believed that the
entrepreneur must anticipate possible
random events to happen while
shouldering the risk at the same time.
The entrepreneur would be eventually
rewarded with high profits.
 5.
OTHER THEORIES
ON
ENTREPRENEURSHI
P
There are other theories
on entrepreneurship. But
it doesn't mean that they
are inferior to the
previously listed theories.
 h eor y
i calt
g eo ry
o ci o lo l t h
s ca
b er's ol ogi
We tec hn
01 l do r's
Ka eo ry
02 - fillin
g th
h eory
sg ap ss t
i n' ertne
nst e -a l
ibe i ng
Le l earn
03 Kirz n er's
04
In sociological theory, Max Waber stressed
that social cultures are the primary driving
elements of entrepreneurship. The
entrepreneur is expected to perform the role of
a good constituent by executing his/her
entrepreneural activities
in line with good customs and traditions,
religious beliefs and morals.
 02 Kaldor's technological theory
The technological theory was developed by Nicholas
Klador
who considered modern technology as an essential
factor in production. In the absence of
modern technology application in
entrepreneurship, economic development
would be slow and growth might
not be expected.
The entrepreneurs is expected to keep
abreast with modern technology and find
ways to apply the same in the
entrepreneurial endeavor. Proper
application of modern technology will
promote efficiency in the production of
goods and services.
 03 Leibenstein's gap-filling theory
In this theory, Henry Leibenstein proposed that
the primary role of entrepreneurship in any
economic
activity is to fill the existing gap.
Entrepreneurship is responsible for
recognizing trends in the markets. He/She
must extend assistance to
entrepreneurial ventures experiencing
failures and deficiencies.
04 Kirzner's learning-alertness theory
Israel Kirzner was the main proponent of this
theory.
He pointed out spontaneous learning and alertness
as the two major attributes of entrepreneurship in
any given economy. The entrepreneur must be alert
in recognizing entrepreneurial opportunities and the
ignorance of consumers as well. He/She must
immediately find appropriate remedy to
correct the error or wrong perception.
 😉
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