Discipline-based entrepreneurship theory categories

Biological Theories Financial Theories

Cultural Theories Managerial Theories

Discovery Theories Process Theories

Economic Theories Psychological Theories

Ethical Theories Sociological Theories

Technological Theories
 Psychological Entrepreneurship Theories
• These theories emphasize personal characteristics that define
entrepreneurship.
– Personality traits
– Need for achievement
– Locus of control
– Three other new characteristics that have been found to be
associated with entrepreneurial inclination. These are risk taking,
innovativeness, and tolerance for ambiguity.
 Personality Traits theory
Coon (2004) defines personality traits as “stable qualities that a
person shows in most situations”. In fact, explaining personality
traits means making inference from behavior.
Some of the characteristics or behaviors associated with
entrepreneurs are
– Opportunity driven (they nose around),
– Demonstrate high level of creativity and innovation,
– Show high level of management skills and business know-how.
– Optimistic, (they see the cup as half full than as half empty),
– Emotionally resilient and have mental energy,
– Hard workers,
– Show intense commitment and perseverance
 Personality Traits theory cont..
– Thrive on competitive desire to excel and win,
– Tend to be dissatisfied with the status quo and desire improvement,
– Transformational in nature,
– Life long learners and use failure as a tool and spring board.
– They also believe that they can personally make a difference, are
individuals of integrity and above all visionary.

One has the inborn quality to become an entrepreneur.

 Achievement motivation theory of entrepreneurship
(Need for achievement) nAch

• Harvard psychologist David McClelland developed the

Achievement Motivation Theory in his book entitled
The Achieving Society in 1967.
According to McClelland,
• Entrepreneurs do things in a new and better way and
make decisions under uncertainty.
• Entrepreneurs are characterized by a need for
achievement or an achievement orientation, which is
a drive to excel, advance, and grow.
• He believed that entrepreneurship is learned and
that such learning can be encouraged fruitfully.
• In light of McClelland’s view, entrepreneurs can be
divided into two types:
1. Owner entrepreneur
Quite independent
2. Employed entrepreneur
Need for achievement
• An entrepreneur is different from a creative individual. An
individual with strong motivation for achievement are
entrepreneurs, having following characteristics.
– Take personal responsibility
– Moderate Risk
– Seek feedback
– Sacrifice Small interest for the sake of Big one
 Psychological or personal theory

• Achievement motivation theory

• Motive- Acquisition theory
• Risk taking theory
• Internal-External locus of control
• Autonomy or Independence motivation theory
• Creativity or Innovation theory
• Power motivation theory
 Motive- Acquisition theory
• Revised version of McClelland’s achievement Motivation
Theory.
– Mentality and personality of people are not in born, but
flexible and change with situation.
– By frequent training and development programs an
individual thinking, mentality and attitude towards a goal
can be changed.
• Froyed criticized this, idea
– Personality could not be modified, it is acquired by birth.
• McClelland conducted study in India.
– Training and motivational support can create
entrepreneurs.
 Risk taking theory

Richard Cantilon and John Stuart Mill, introduced risk-taking theory,

which was later rectified by Economist Alfred Marshal in 1890.
– Entrepreneur should have inclination to take moderate risk and ability to
bear that risk.
– People taking a very big risk also have great responsibility, can be dubbed
as entrepreneurs. Also supported by Knight(1921).
– Entrepreneurs must have the ability to take risk. (result)
• Psychologist disagree with this view.
– Entrepreneur should bear the mentality to take risk(cause).
• Economist do not find any boundary, Psychologist always
said Entrepreneur will take moderate risk.
 Internal-External locus of control
Prof. J.D. Rotter is the originator of this theory. Human being is the product of
society and social situation determines whether a person will be externally or
internally oriented
• Internal locus of control
– Self confident, extreme belief over one’s ability and power.
• External locus of control
– Everything is out of control

Internal-External locus of control theory highlights the self-confidence of a

person, the dependency on fortune and external environment. Most of the
entrepreneur emphasized on their activities and luck equally.
 Autonomy or Independence motivation theory

• Emphasize the independent thinking of entrepreneurs. Self

confidence, self controlling and thinking independently are
psychological characteristics of entrepreneur.
 Creativity or Innovation theory

• Creative individual use their talents, thinking

ability, etc., to create something new and
with the help of various technique they bring
new idea into practice.
• Creativity related to idea orientation and
innovation. Also implementation.
 Power motivation theory

• David C. McClelland explained that desire of one to have

control over other is power.
– Personal power is related to self-interest
– Social power is related to social interest

• Leadership power is democratic while the power of

entrepreneurs is always autocratic in nature.
Entrepreneurship theories and research remain
important to the development of the
entrepreneurship field.

• Economic entrepreneurship theory

• Psychological entrepreneurship theory
• Sociological entrepreneurship theory
• Anthropological entrepreneurship theory
Opportunity-Based entrepreneurship theory,
• Resource-Based entrepreneurship theory.
Several theories have been put forward by scholars to explain
the field of entrepreneurship. These theories have their roots in
economics, psychology, sociology, anthropology, and
management.
Economic Entrepreneurship Theories
• The economic entrepreneurship has deep roots in the
classical and neoclassical theories ofeconomics, and the
Austrian market process (AMP). These theories explore the
economic factors thatenhance entrepreneurial behaviour.
 Classical Theory

• The classical theory extolled the virtues of free trade,

specialization, and competition (Ricardo, 1817;Smith, 1776). The
theory was the result of Britain’s industrial revolution which took
place in the mid 1700 and lasted until the 1830s.
• The classical movement described the directing role of the
entrepreneur in thecontext of production and distribution of
goods in a competitive marketplace (Say, 1803).
• Classical theorists articulated three modes of production: land;
capital; and labour.
• There have been objections to the classical theory. These theorists
failed to explain the dynamic upheaval generated by
entrepreneurs of theindustrial age (Murphy, Liao & Welsch, 2006).
Neo-classical Theory
 Entrepreneurship: A Function of Innovation
Joseph A. Schumpeter (1934), for the first time, put the human agent at the
centre of the process of economic development and assigned a critical role
to the entrepreneurship in his theory of economic development. He
considered economic development as a discrete technological change. The
process of development can be generalized by five different types of
events.
Firstly, it can be the outcome of the introduction of a new product in the
market.
Secondly, it can be the result of a new production technology.
Thirdly, it may arise on account of a new market.
Fourthly, it may be the consequence of a new source of supply.
Fifthly, it may be due to the new organisation of any industry.
According to Schumpeter development is not an automatic or spontaneous
process, but it must be deliberately and actively promoted by some agency
within the system, Schumpeter 5 called the agent who initiates the above
changes as an ‘entrepreneur’. He is the agent who provides economic
leadership that changes the initial conditions of the economy and causes
 Entrepreneurship: A Function of Group Level Pattern
• Frank W. Young was reluctant to accept the entrepreneurial characteristic
at the individual level. According to him, instead of individual, one must
find clusters which may qualify itself as entrepreneurial groups, as the
groups with higher differentiation have the capacity to react. He defined
‘reactiveness’ or ‘solidarity’ as the degree to which the members of the
group create, maintain and project a coherent definition of their situation;
and ‘differentiation’ is defined as the diversity, as opposed to coherence,
of the social meanings maintained by the group, When a group has a
higher degree of institutional and occupational diversity, relative to its
acceptance, it tends to intensify its internal communication which gives
rise to a unified definition of the situation.
• To improve their symbolic position in the larger structure they find a way
which allows mutual understanding despite the differences in the
occupation and family status. Such pressures bear not only on social,
political and theological factors but also on economic factors. Some
members of the solidarity groups excel at combining resources like labour,
capital etc. in new ways and they become entrepreneurs.
 Entrepreneurship: A function of Managerial Skills and
Leadership
• Bert F. Hoselitz (1952), states that a person who is to become an industrial entrepreneur
must have additional personality traits to those resulting from a drive to amass wealth …
In addition to being 8 motivated by the expectations of profit he must also have some
managerial abilities and more important he must have ability to lead. Hoselitz maintains
that financial skills have only a secondary consideration in entrepreneurship. According
to him, managerial skills and leadership are the important facts of entrepreneurship. To
strengthen his argument he quotes the history of French and German industrial
establishments of the early 19th century where the former were men with mechanical
skills rather than financial skills. He identifies three types of business leaderships in the
analysis of economic development of underdeveloped countries. The merchant
moneylender type, the managerial type and the entrepreneur type. The
merchant/moneylenders’ function is predominantly market oriented. The managerial
function has authoritarian orientation and the function of entrepreneurs, along with the
above two orientations calls for individuals with predominant production orientation.
Hoselitz’s analysis of entrepreneurship naturally suggests a method for the development
of entrepreneurship which depends upon allowing the maturation and development of
personalities whose predominant orientation is in the direction of productivity, working
and creation and creative integration along with the establishment of social institutions
which create a favourable environment for the establishment and existence of
independent individual enterprise.
Entrepreneurship: An Organisation Building
Function
• Frederick Harbison states that the ‘organisation building’ ability
is the most critical skill needed for the industrial development.
According to him entrepreneurship means the skill to build an
organization. Harbison spots the crux of the entrepreneurship
in his ability to ‘multiply himself’ by effectively delegating
responsibilities to others. Unlike Schumpeter, Harbison’s
entrepreneur is not an innovator but an ‘organisation builder’
who must be able to harness the new ideas of different
innovators to the rest of the organization. Such persons are not
always the men with ideas or men who try new combinations
of resources but they may simply be good leaders and excellent
administrators.
 Entrepreneurship: A Function of High
Achievement
• McClelland (1961), like Hoselitz, ascribes the innovative characteristics to entrepreneurial role.
Entrepreneurial role, by definition, involves doing things in a new and better way. A business man,
who simply behaves in traditional ways is not an entrepreneur Moreover, entrepreneurial role
appears to call for decision making under uncertainty. If there is no significant uncertainty and the
action involves applying known and predictable results, than entrepreneurship is not an all
involved. McClelland, like others, identified two characteristics of entrepreneurship. Firstly, ‘doing
things in a new and better way’. This is synonymous with the innovative characteristic given by
Schumpeter, and secondly, ‘decision making under certainty’, i.e. risk as identified by Cantillon.
McClelland’s major contribution lies in extending our understanding of causal sequence of
entrepreneurial behaviour. McClelland’s theory can be looked as a development of Weber’s
“Protestant ethic” when he implicitly introduced the concept of need for achievement as a
psychological motive. McClelland, more explicitly, emphasized the need for achievement or
achievement orientation as the most directly relevant factor for explaining economic behaviour.
This motive is defined as a tendency to service for success in situations involving an evaluation of
one’s performance in relation to some standard of excellence. Persons with high achievement
would take 11 moderate risks. They would not behave traditionally (no risk) as they are not likely to
get any satisfaction from the accomplishment of the task nor like gamblers (extreme risk) when the
probability of failure and personal dissatisfaction is more. The high achievement is associated with
better performance at tasks which require some imagination, mental manipulation or new ways of
putting things together, and such people do better at non-routine task that require some degree of
initiative or even inventiveness.
 McClelland has postulated the following
characteristics of entrepreneurship:
• I. Entrepreneurial Role Behaviour (a) Moderate risk
taking as a skill not chance decisiveness. (b) Energetic
and/or novel instrumental activities. (c) Individual
responsibility. (d) Knowledge of results of decision-
Money as a measure of results. (e) Anticipated future
possibilities. (f) Organisational skills.
• II. Interest in entrepreneurial occupations as a function
of their prestige and riskiness.
• III. Entrepreneurial status in various countries. (a)
Contrasted with other occupational statuses. (b)
Differentiated by entrepreneurial success.
 Entrepreneurship: ‘Input-Completing’ and
‘Gap-Filling’ Function
Liebenstein (1968) distinguishes two broad types of entrepreneurial activity. First, that
“routine” entrepreneurship is associated with the managerial function of the business.
Second, the “new type” entrepreneurship which is basically of Schumpeterian type.
He identified “gap-filling” as an important characteristic attributable to
entrepreneurship. In economic theory the production function is considered to be well
defined and completely known. But the theory is silent about the keeper of the
knowledge of production function. Where and to whom in the firm this knowledge is
supposed to be available is never stated. In reality there exist larger gaps of knowledge
about the production function. There are many deficiencies so far as the production
function is concerned. It is the entrepreneurial function to make up the deficiencies or
to fill the gaps. These gaps arise because all the inputs in the production function
cannot be marketed because some inputs like motivation, leadership, etc. are vague in
their nature and whose output is undermined. This “gap-filling” activity gives rise to a
most important entrepreneurial function, namely “inputcompleting.” He has to marshal
all the inputs to realize final products.
 Entrepreneurship: A Function of ‘Status
Withdrawal’
• Everett Hagen (1962), while describing the process of change in any society as
the transition to economic growth searched for the causes of the transition. He
states that the transition to economic growth has been very gradual and
typically occupies a period of several generations. He observes that growth has
been led not by individuals randomly distributed throughout a society but
disproportionately by individuals from some distinctive group. He identifies
‘creative innovation’ or ‘change’ as the fundamental characteristic of economic
growth. Hagen, after analyzing the traditional societies, maintains that the
positions of authority are granted in such societies not on the basis of
individual ‘ability’ but on the basis of his ‘status’. Thus structure is
characterized by typical ‘authoritarian’ personality. In contrast, Hagen,
visualizes in “innovational” personality. Hagen’s concept of innovation involves
both arriving at a new mental concept and transmitting that concept into
material form. Again, innovation requires creativity and such creative
individuals cause economic growth.
 Entrepreneurship: A Function of Social,
Political, and Economic Structur
• Kunkel (1970) has put forth a theory of entrepreneurial
supply. Kunkel has elaborated a behaviouristic model of
entrepreneurship. The students of economic history have
repeatedly pointed out that entrepreneurs are not equally
distributed in the population, minorities (religious, ethnic,
migrated, displaced elites) have provided most of the
entrepreneurial talent. But all the minorities are not
important sources of entrepreneurship. Therefore, Kunkel
argues that the marginality does not guarantee
entrepreneurship. There must be some additional
significant factors at work.
 John Kunkel states that the industrial entrepreneurship depends
upon four structures which are found within a society or community :
• (a) Limitation Structure: The entrepreneur is viewed as the most important “deviant” individual in
economic development and the major determinant which causes such a deviance is a social structure
which restricts the behavioural pattern of a population segment. The society limits specific activities to
members of particular subcultures. This limitation structure affects all the members of a society.
• (b) Demand Structure: The limitation structure is basically social and cultural but the demand structure is
mainly economic. The demand structure is not static and changes with economic progress and
government policies. Demand structure can be improved by providing material rewards. Such rewards are
necessary to lay the foundation for future social gains. In short, by manipulating certain selected
components of the demand structure, behaviour of people can be shaped in an entrepreneurial way.
• (c) Opportunity Structure: This structure is necessary to increase the probability of entrepreneurial
activity. The opportunity structure constitutes the availability of capital, management and technological
skills, information concerning production methods, labour and markets, opportunity to learn directly or
through imitation, and all the activities associated with the effective planning and successful operation of
industrial enterprises.
• (d) Labour Structure: Kunkel separates supply competent and willing labour from the opportunity
structure. He argues that the labour supply cannot be viewed on par with the supply of other material
conditions like capital. He states that labour means “men” and is a function of several variables. The
supply of factory labour is governed by available alternative means of livelihood, traditionalism, and
expectations of life.
 Entrepreneurship: A Function of Religious
Beliefs
• Religion and its impact on enterprising culture was first analysed by Max Weber in the
Western context. According to Weber the “spirit of capitalism” is a set of attitudes
towards the acquisition of money and the activities involved in it. Max Weber also
draws a line of demarcation between the “spirit of capitalism” and “adventurous
spirit”. The “spirit of capitalism” is subjected to a strict discipline which is quite
incompatible with giving free rein to impulse. Weber states that this “spirit of
capitalism” cannot generate in itself where widely spread mental attitude favourable
to capitalism is absent and according to him the “protestant ethic” provides this
mental attitude. Max Weber extended his analysis to Indian conditions. According to
him the “spirit of capitalism” was absent in religious belief system of Hinduism. The
Weberian approach presumes that (a) there is a single system of Hindu value, (b) that
the Indian community internalized those values and translated them to day-to-day
behaviour and (c) these values remained immune to and insulated against external
pressures and change. Number of social scientists from West supported this theory. It
was in the interest of the colonial power to accept this theory and encouraged it to
help the growth of European entrepreneurship in India.
 INNOVATION AND ENTREPRENEURSHIP
Innovation is one of the It is a key function in the
underlying dimensions of entrepreneurial process.
entrepreneurship. Without innovation, an
entrepreneur cannot survive in
the modern competitive
business world.
Entrepreneurship is a creative
and innovative response to the
environment and an ability to
recognize, initiate and exploit
an economic opportunity. An
entrepreneur is an innovator
who introduces who introduces
something new in an economy.
As per the Schumpeter’s view, a
person becomes an
entrepreneur only when he or
she is engaged in innovation
 RISKS INVOLVED WITH ENTREPRENEURSHIP
Entrepreneurship involves the following types of risks.
1) FINANCIAL RISK: The entrepreneurship has to invest money in the
enterprise on the expectation of getting in return sufficient profits
along with the investment. He may get attractive income or he may
get only limited income. Sometimes he may incur losses.
2) PERSONAL RISK: Starting a new venture uses much of the
entrepreneur’s energy and time .He or she has to sacrifice the
pleasures attached to family and social life.
3) CARRIER RISK: This risk may be caused by a number of reasons
such as leaving a successful career to start a new business or the
potential of failure causing damage to professional reputation.
4) PSYCHOLOGICAL RISK: Psychological risk is the mental agonies an
entrepreneur bears while organizing and running a business
venturesome entrepreneurs who have suffered financial
catastrophes have been unable to bounce back.
 BARRIERS TO ENTREPRENEURSHIP
Entrepreneurial development is very slow in under developed and developing
countries. This is due to the presence of several factors. Gunnar Myrdal pointed out
that Asian societies lack entrepreneurship not because they lack money or raw

material but because of theirattitudes . These barriers to entrepreneurship

are classified into three as follows:
A. ENVIRONMENTAL BARRIERS Following are the important environmental barriers to
entrepreneurship:
1) Non-Availability of Raw Material: - Non-availability of raw materials especially
during peak season is one of the obstacles inhibiting entrepreneurship. This leads to
competition for raw material.
2) Lack of Skilled Labour: - This is the most important resource in any organization.
Unfortunately, desired manpower may not be available in an organization. This is
either due to the lack of skilled labour or due to lack of committed or loyal employees
in the organization.
3) Lack of Good Machinery: - Good machines are required for the production of
goods, because of rapid technological developments, machines become obsolete very
soon. Small entrepreneurs find it difficult to get large amount of cash for installing
modern machinery.
 BARRIERS TO ENTREPRENEURSHIP
• 4) Lack of Infrastructure: - Lack of infrastructure facilities is a
major barrier to the growth of entrepreneurship particularly in
under developed and developing economies. The infrastructural
facilities include land and building, adequate and cheap power,
proper transportation, water and drainage facilities etc.
• 5) Lack of Fund: - There are various methods by which an
entrepreneur arranges for funds, e.g., own savings, borrowings
from friends and relatives, banks and other financial institutions.
Many people do not enter into entrepreneurial activities because
of lack of funds.
• 6) Other Environmental Barriers: - Lack of business education,
Lack of motivation from government, corruption in
administration, high cost of production etc. are the other
environmental barriers that inhibit the growth of
entrepreneurship in underdeveloped countries.
 BARRIERS TO ENTREPRENEURSHIP

• B. PERSONAL BARRIERS Personal barrier are those barriers

that are caused by emotional blocks of an individual. Some of
the personal barriers may be outlined as below:
• 1) Unwillingness to Invest Money: - Even though people have
money, still they do not come in entrepreneurship. They are
not willing to take the risk of investing money in business.
• 2) Lack of Confidence: - Many people thing that they lack
what it takes to become an entrepreneur. They feel that they
could not master all the skills. Thus most people are reluctant
to become entrepreneurs.
• 3) Lack of Motivation: - When an individual starts a new
venture, he is filled with enthusiasm and drive to achieve
success. But when he faces the challenges of real business or
bears loss, or his ideas don’t work, he loses interest or
motivation.
 BARRIERS TO ENTREPRENEURSHIP

• 4) Lack of Patience: - The desire to achieve

success in the first attempt or to become rich
very soon is the prime motivating factor of
modern youth. When such dreams do not come
true , they lose interest. This gradually drives to
fail in business.
• 5) Inability to Dream: - Entrepreneurs, who are
short on vision or become satisfied with what
they achieve, sometimes lose interest in further
expansion/growth of business.
 BARRIERS TO ENTREPRENEURSHIP

• C. SOCIAL BARRIERS The social attitude inhibits many

people even from thinking of starting a business. The
important social barriers are as follows.
• 1) Low Status: - The society things that entrepreneurs
are the people who exploit the society. Thus the
attitude of the society towards entrepreneurs is not
positive.
• 2) Custom and Tradition of People: - Most people
want a real job. Even parents who are entrepreneurs
wouldn’t like their children to be entrepreneurs. Thus
lack of support from society and family hinder the
growth of entrepreneurs.