Entrepreneurship

Development

Prepared and Presented By:

Dr. Shuchi Goel
Assistant Professor
DME Management School
Syllabus
 Unit 1- Introduction

1.1 The Entrepreneur: Definition, Emergence

of Entrepreneurial Class

1.2 Theories of Entrepreneurship

Entrepreneurship Development
Unit 1
1.1 The Entrepreneur: Definition,
Emergence of Entrepreneurial Class
 Suggested Readings

1. Author: Charantimath
Title of the Book: Entrepreneurship Development and Small Business Enterprises
Chapter’s Name: Entrepreneurship

2. Author: Aruna Kaulgud

Title of the Book: Entrepreneurship Management
Chapter’s Name: Introduction to Entrepreneurship
 1.1 The Entrepreneur: Definition
•The word “entrepreneur” is derived from the French verb enterprendre
(“to undertake”).
•The word was originally used to describe people who “take on the risk” or
who “undertake” a task such as starting a venture.
•Emerging economies, in particular, and global economy, in general, are
poised for accelerated growth and provide great opportunities in the
globalized and liberalized era.
•The most critical input in taking these economies to still greater heights in
the global markets would be the entrepreneurial mindset of their human
resources.
•The role of an entrepreneur would be to innovate and create economic
opportunities for others, and the role of a government and its partners
would be to create a dynamic enterprise environment and a well functioning
market so that the economy becomes inherently entrepreneurial and
innovative.
•The process of creation of a business enterprise is called entrepreneurship
•There is no single definition of entrepreneurship. However, certain
definitions of entrepreneurship cover a wider gamut and involve greater
depth to understand the term.
•Entrepreneurship basically revolves around innovation and it
should not mean inhibition or imitation.
•It mainly encompasses innovation that gives rise to an idea having potential
economic value to the prospective customer and therefore required finding
an economic organization to pool up resources to give a shape to the idea,
so as to earn profit under conditions of risk and uncertainty.
•The concept of entrepreneurship has undergone change over the
years from emphasis on ‘profits from bearing uncertainty and risk’
to ‘creation of new organization’ to ‘pursuit of opportunity
without regard to resources currently controlled, but constrained
by the founders’ previous choices and industry related experience’
.
Richard Cantilon • Entrepreneur-Non-insurable Risk Bearer

David McClleland • Person with a High Need for Achievement

Kilby • Imitates Technologies Developed by Others

Albert Shaperohas •Takes Initiative,Accepts Risk and Has an

Internal Locus of Control

Kirzner • ‘Alertness’ to New Opportunities

Schumpeter • Innovator

Peter F. Drucker •Searches for change and exploits the opportunity

•Richard Cantillon used the term entrepreneur for the first time. He
introduced the concept of risk by highlighting that an entrepreneur is one
who buys factors of production at known prices and converts these factors
into goods and services that are sold at uncertain prices, and, in the process,
assume non-insurable risk.
•Thus, entrepreneurship involves conditions of risk and uncertaint
y, wherein risk means variability of returns, implying that returns
would be fixed if there is no risk involved. For example, a business that
operates in a risk-free environment will keep thriving and growing without
bounds.
•David McClleland defined entrepreneur as a person with a high need for
achievement who is highly energetic and a moderate risk-taker.
•Kilby emphasizes the role of an entrepreneur as an imitator who does not
innovate but imitates technologies innovated by others. This works very
well and is important for developing economies.
•Albert Shaperohas defined an entrepreneur as one who takes initiative,
accepts risk of failure and has an internal locus of control. Persons with
internal locus of control believe in themselves and accept that whatever
happens to them in life is an outcome of their own efforts. They have a
belief in creating their own future through their own efforts. As against this,
people with external locus of control believe that others and external
circumstances control their destiny.
•According to Kirzner’s work (1979, 1982), first, entrepreneurship is
the ‘alertness’ to new opportunities. Entrepreneurs are alert; this is
what they are like. Second, entrepreneurship is seizing an
opportunity by taking ‘innovative actions’. Entrepreneurs innovate;
this is what they do. Alertness leads to the discovery of new
opportunities. If the opportunity discovered is a real one, the
entrepreneur acts on it. Alertness necessarily leads to innovative
actions such as finding a new venture.
•Joseph Schumpeter: Entrepreneurs are innovators, who use the
process of entrepreneurship to shatter the status quo of the existing
products and services, to set new products, new services. He describes
entrepreneurs as innovators.

•Peter F. Drucker: An entrepreneur is one who always searches for

changes, responds to it and exploits it as an opportunity. He believes in
increasing the value and consumer satisfaction. Thus, a professional
manager who mobilises resources and allocates them to make a
commercial gain from an opportunity, is called an entrepreneur.
Enterprise:
•An entrepreneur is a person who starts an enterprise.
•The process of creation is called entrepreneurship.
•The entrepreneur is the actor and entrepreneurship is the act.
•An enterprise is the business organization that is formed and which provides
goods and services, creates jobs, contributes to national income, exports and
contributes to the overall economic development.

Entrepreneur versus Entrepreneurship:

•The term ‘entrepreneur’ is often used interchangeably with ‘entrepreneurship’ but,
conceptually, they are different, yet they are just like the two sides of a coin. Both
the terms are co-related.
•An entrepreneur is a person who bears the risks, unites various factors of
production and carries out creative innovations. He/she is an individual or one of a
group of individuals who try to create something new which is known as
innovation.
•On the contrary, entrepreneurship is the set of activities performed by an
entrepreneur. It is process of identifying opportunities in the market place
and marshalling the resources required to pursue these opportunities for
long term gains. It is the attempt to create value.
Barriers to Entrepreneurship
Why should we have some knowledge about barriers to
entrepreneurship?

We should have some knowledge about barriers to entrepreneurship

because of the following reasons:

1. An understanding of the inhibiting factors or barriers will help

prospective entrepreneurs to develop a strategy to overcome them.
2. A systematic study of the barriers will lead to a proper understanding
of the fields or areas in which they occur.
3. Once the barriers are clearly identified, the society, government and
other supporting agencies can develop effective programs to tackle the
issues to create a conducive entrepreneurial climate.
1. Environmental Barriers:-
• Non – availability of raw materials: Shortfall in the availability of raw materials in
the desired quality and quantity.
• Lack of skilled labor: Non-availability of skilled labour at reasonable cost.
• Lack of good machinery
• Lack of infrastructure: Inadequate infrastructure for manufacturing and/or to
transport the raw material to the factory.
• Lack of fund: The capital for setting up the new venture is not accessible for the
entrepreneur
•Non-availability of easy access to the market for the finished goods.
•A political environment that is characterised by instability and insecurity will
discourage entrepreneurs.
•Political policies can retard the growth of entrepreneurial ventures in a country.
•Excessive interference in the form of controls, delays etc. from the government
can discourage prospective entrepreneurs.
2. Personal Barriers:-
• Unwilling to invest money
• Lack of confidence
• Lack of motivation
• Lack of patience
• Inability to dream
3. Social Barriers
The following are the examples of barriers arising out of social
environment:
•A society putting premium on safety and security in matters of securing a
livelihood, such a value can become a strong social barrier to
entrepreneurship.
•In some societies, the business is considered as a profession of lower
hierarchy. Business people are considered inferior to office-goer, engineers,
doctors etc. Such a social response to entrepreneurs can be a big hurdle in
developing and nurturing entrepreneurs.
•Social factors such as
– insistence on conformity
– an excessive protective attitude among children during their
formative years
– discouragement to mobility
will all thwart the following essential values of entrepreneurship
– creativity
– innovative spirit
– sense of adventure.
Characteristics & Skills
Entrepreneurs are like gamblers, and like any gambler, their chances of
winning increase if they have the right cards.
Let's look at some characteristics and skills that help an entrepreneur
succeed:
1. A tolerance for risk-taking is a necessary attribute for entrepreneurs.
You can think of risk-taking as pursuing an activity even if there is a
chance of a negative consequence. Starting a business is risky, and even
more so when you're using your own money. Sometimes you can
spread the risk by convincing investors to come along on your new
venture or by forming an entrepreneurial team. But, at the end of the
day, you can't avoid risk if you are going to start a new business and
innovate.
2. Entrepreneurs also need creativity. Think about Steve Jobs and Mark
Zuckerberg; these two entrepreneurs brought innovative products to
the market that changed the way we live.
 Successful entrepreneurs innovate in one of two ways. They can bring
an entirely new product or service to the market, like the first cellular
phone. On the other hand, they can radically improve upon something
in a dramatic way, just like the iPhone changed the world of smart
phones.
3. Initiative is also required. Entrepreneurs lead. If you are not willing to
start without being pushed, your new business will never get off the
ground. For example, Eddie had an idea fresh out of college and took
the initiative to start his business venture. No one had to convince
him to act; he just acted.
4. Independence is also a paramount attribute for entrepreneurs.
Nobody holds an entrepreneur's hand, and they don't want any
hand-holding. Successful entrepreneurs must be willing to do it alone
and succeed or fail on their own effort without relying much on the
other people.
5. Entrepreneurs also need excellent problem solving skills. Successful
entrepreneurs often provide a service or good that solves a problem
for potential customers. But, problem solving doesn't stop with
product design. Running a business is all about problem solving. You
have to figure out how to start your business, how to obtain financing,
how to market your product and how to manage employees, just to
name a few problems that the average entrepreneur will encounter.
6. Organizational skills are necessary. Running a business is complex
and time consuming. Without organization skills, a business
may unintentionally break laws, productivity could fall short or it
could be unprepared for unexpected situations and problems.
Entrepreneurs need to constantly juggle and multitask because they
often wear the hats of owner, manager, accountant, and salesperson.
7. Communication is essential. Entrepreneurs must be able to
effectively communicate with potential lenders, investors, business
partners and customers. Sooner or later, most businesses will need
capital to grow. Entrepreneurs must make their pitch to lenders or
investors to get the funds needed to take their business to the next
step. And of course, if you can't convince your prospective customers of
the value of your product or service, your business is doomed to fail.
8. It also takes courage to be an entrepreneur, including the courage to
take risks that others are not willing or unable to take. As an
entrepreneur, you may be putting a comfortable, stable job or your
resources on the line to start a new business. Once your business is
operational, you'll likely have to take risks to grow and expand the
company. The ability to take wise, appropriate risks can help you
become a successful entrepreneur.
 For instance, to remain competitive and offer the latest and greatest
fitness options to your clients, you decide to buy or rent a much larger
facility. This decision not only includes financial risks, but also involves
the logistical risks of moving your business to a new location. However,
you believe the potential benefits of having enough space to serve both
existing and new customers far outweigh the fear of putting your
financial and physical resources on the line.

Benefits and Risks

Entrepreneurship can yield many substantial benefits.
•Benefits include creating your own flexible work schedule, acting as your
own boss, and having unlimited earning potential.
•On the other hand, owning a business can also put your finances and
professional future at risk. For many people, the potential rewards
outweigh the risks, making entrepreneurship an attractive opportunity.
Examples of Entrepreneurs

•Bill Gates, founder of Microsoft. There are probably not many people that
have not been touched by one of his products, such as Microsoft Windows,
Microsoft Office and Internet Explorer.
•Steve Jobs, co-founder of Apple computers, which produces Macs, iPods
and iPhones, as well as Apple TV.
•Mark Zuckerberg, the founder of Facebook.
•Pierre Omidyar, founder of eBay.
•Arianna Huffington, founder of the Huffington Post, a well-known online
news site.
•Caterina Fake, co-founder of Flikr, which hosts images and videos on the
Internet.
Common Forms of Entrepreneurship
There are four forms of entrepreneurship:
1. Small Business Entrepreneurship
•There are many small businesses today. If a person were to become a small
business entrepreneur, he would typically hire local employees and family members
to run his own business, and would likely only produce very small profits.
•Small business entrepreneurs often just operate to make ends meet and not to
make huge profits and become a multi-million dollar business.
•It's common for small business entrepreneurs to fund their company with the help
of family and friends. This is because getting an investor or financial banker is hard
to do when the company is small and may seem unattractive to the large investor.
•Some examples of small business entrepreneurship include small local grocery
stores or hair salons.
2. Scalable Startup Entrepreneurship
•This type of entrepreneurship allows for growth.
•Those that fall into this form start a company with the idea that their new product
or service will make an impact on a large scale.
• Scalable startup entrepreneurial companies are able to gain investments from
venture capitalists and often look to hire top notch employees with great skills.
•Once the entrepreneur finds a business model that can grow, they attract more
financial backing to expand.
•Examples of popular scalable startup entrepreneurship can be found in Silicon
Valley.
3. Large Company Entrepreneurship
•Unlike other forms of entrepreneurship, large company entrepreneurship is bigger
in size and offers new products to meet the needs of their customers.
•In order to maintain the business, large company entrepreneurship needs to
understand how the needs of customers change.
•They need to be able to incorporate any new technology that has evolved.
•And, they need to be aware of their competition so that they can make products
that are equally attractive to win over customers from other companies.
•The idea is to constantly offer products that are innovative and exciting so that
customers continue to come back.
•An example of large company entrepreneurship is Domino's.
4. Social Entrepreneurship
•The last form to consider is a social entrepreneurship.
•Social entrepreneurship seeks to bring about positive change for the world.
•They want to make products that can solve problems and crises and make their
community and world a better place.
•Social entrepreneurship has a mission to fulfill and are often innovative in finding
funding and resources for their product.
•They want to make a difference and are not motivated by profits.
•Example- Muhammad Yunus (founder of Grameen Bank).
The four major forms of entrepreneurship include:

1. Small business entrepreneurship, which is one that makes little profit and
is often your local small family store.

2. Scalable startup entrepreneurship, which are those that grow and expand
with venture capitalists.

3. Large company entrepreneurship, which are those businesses that adapt

to the needs of customer and technological changes by creating new products.

4. Social entrepreneurship, which aim at changing the world by helping to

solve crises and problems.
Intrapreneurship vs. Entrepreneurship
What Is an Entrepreneur?

•An entrepreneur is someone who has created a business or idea from the
ground up.
•They alone make the decisions for the creation and execution of that business, and
they make the proceeds from it as well.
•If you were the one opening the college-town bookstore, you would be
responsible for going to the bank with the plan in hand, asking for a business loan.
• You would then need to find a suitable space for the business, hire the employees,
buy the books and other products, etc.
•Once the business is up and running, you can chose to run and manage it yourself
or hire someone to do this for you.
•No matter how you execute it, you will make all the money that comes in from
the book purchases, and must pay your staff and bills yourself.
What Is an Intrapreneur?
•Although the name is similar to entrepreneurship, intrapreneurship is very
different.
•An intrapreneur is hired into a company to execute the responsibilities of an
entrepreneur, but at the request of the business.
•In other words, the intrapreneur may be employed to open a business, market a
product, or even create a new and innovative business model, but all as an
employee of the umbrella company.

Similarities
•Entrepreneurs and intrapreneurs both operate from the same basic mindset: They
are innovators and creators of new ideas and products.
•Both positions suit people who like to take the lead and are independent thinkers
and workers.
Differences:
•The main difference has to do with risk taking. An intrapreneur does not have to
take the same personal risks as an entrepreneur. They can learn the ropes and
become creative and innovative, but within a safer and more controlled framework.
An entrepreneur is willing to take a leap - and a financial risk - to create a new
business.

• An entrepreneur is an independent position, while an intrapreneur is dependent

on an employer.

•Intrapreneurs are responsible to the company where they work, whereas

entrepreneurs are responsible for the company they created.

•Intrapreneurs have to defer to their umbrella company for decision-making, while

entrepreneurs only have themselves to depend on when making important
decisions.
•Intrapreneurs will not have control over the money that can be spent on the new
venture, and must ask their employer for money. Entrepreneurs have full control
over how much is spent and on what, and may rely on loans from banks and other
lenders.

•Intrapreneurs do not make proceeds from the business; instead, they are paid a
salary by the company that hired them. Entrepreneurs make only the proceeds
from their business and must also pay salaries to any employees.

•Intrapreneurs do not only create new business and products, they create new
processes. Entrepreneurs are likely to focus on businesses and products.

•Intrapreneurs do not take on any personal financial risk from their business.
Entrepreneurs, on the other hand, take on all the risk. If the business fails, they lose
their source of income.

•Intrapreneurs always stand to lose their position, even if their new idea flourishes.
In contrast, entrepreneurs will only benefit from a successful idea or business.
Emergence of Entrepreneurial
Class
•The concept of entrepreneurship has evolved with a degree of complexity
that has emerged over a period of time.

Earliest Period • Concept of a Merchant and a Capitalist

Middle Ages • Concept of Cleric- One Who Oversees

and Manages Projects
17th Century • Projects Concept of Risk

18th Century • Concept of Capital Provider

19th and 20th • Concept of Risk and Profit and Innovator

Centuries

Concept of Creative Destruction. Disruptive

21st Century Technology Mindset and Entrepreneurial
Learning
Earliest Period:
•During the earliest period, it was more by way of a merchant and a
capitalist, wherein the merchant used to be an adventurer who played a key
role in trading, taking physical and emotional risks.
•The returns without taking much risk used to be disproportionately
shared by the capitalist.

Middle Ages:
•The term ‘entrepreneur’ underwent a change in the Middle Ages (5th to 15
th Century), when it was described as a manager of a large construction

project.
•The entrepreneur did not take any risk but mainly managed the project
using the given resources in the best possible manner.
•Thus, a typical entrepreneur in the Middle Ages can be classified as the
cleric- a person overseeing and managing a great architectural work.
17th Century:
•In the 17th century, the concept of risk associated with entrepreneurial
activity emerged.
•In this era, entrepreneurs were mainly individuals who used to enter into
a contract at a fixed price with the government to deliver a particular
product or service or execute a project.
•The resultant outcome of delivering as per contractual terms used to be
commensurate with the effectiveness and efficiency with which they had
performed the job.
• It is in this era that Richard Cantillon, a well-known English economist,
developed one of the first definitions of entrepreneur- a risk-taker because
merchants, farmers, craftsmen and other sole proprietors buy at a certain
price and sell at an uncertain price, therefore operating at a risk.
•Thus, the concept of risk got ingrained with entrepreneurship.
18th Century:

•In this 18th century, for the first time, the role of a capital provider was
differentiated from that of one who needed capital.

•This led to a clear distinction between an entrepreneur and a capital

provider-banker, money lender, angel investor and the present-day venture
capitalist.

•One key reason for this differentiation arose because of industrialization,

which resulted in the development of many inventions.

•Invention of the steam engine resulted in industrial revolution (1769). It

changed small scale production to large scale production.
•Due to this Industrial Revolution, the Agrarian society in Europe got
transformed into industrial society.
•The European society was mainly dominated by Artisans and
Peasants and they witnessed large scale production. A group of
people mainly traders took risk for large scale production and
they were called ‘Entrepreneurs’.
•Due to large scale production, the Entrepreneurs had surplus available
with them.They needed market to get their product absorbed.
•As Britain had colonies all over the world, they marketed their products
to other countries.This is how Entrepreneurship originated.

For example- Thomas Edison, who pioneered many inventions resulting

in development of new technologies, was unable to finance his inventions
himself. Therefore, he raised capital from private sources to perform his
experiments in the fields of electricity and chemistry. Edison was a capital
user, i.e., an entrepreneur , and not a capital provider, i.e. a venture capitalist
.
19th and 20th Centuries:
•In the later part of the 19th and the early 20th centuries, entrepreneurs
without being distinguished from managers were looked at from an
economic perspective.
•It was only in the middle of the 20th century that the concept of
an entrepreneur as an innovator was established.

21st Century:
•In the 21st century, the challenges for entrepreneurs have become far more
complicated because of fast-changing business environment.
•The term ‘entrepreneurship’ is getting more closely associated with
creative destruction, disruptive technologies mindset and entrepreneurial
leadership.
•Creative destruction, as highlighted in Capitalism, Socialism and Democracy
by Schumpeter (1975), was used to describe the process of transformation
that accompanies radical innovation.
•Creative destruction provides a new insight into business entities to
remain competitive and maintain excellence, requiring adoption of dynamic
strategies of discontinuity and creative destruction.
1.2 Theories of Entrepreneurship
 Suggested Readings
1. Author: Charantimath
Title of the Book: Entrepreneurship Development and Small Business
Enterprises
Chapter’s Name: Entrepreneurship

2. Author: Aruna Kaulgud

Title of the Book: Entrepreneurship Management
Chapter’s Name: Introduction to Entrepreneurship
1.2 Theories of Entrepreneurship
•How an entrepreneur is perceived and defined by society has changed
several ties over the last few centuries.
•The word entrepreneur originally stems from French and, literally
translated, means someone who undertakes a task.
•An early example of an entrepreneur is Marco Polo, who attempted to
establish trade routes from Venice to the Far East.
•In Europe, during the Middle Ages, the term entrepreneur was used to
describe a person who managed large production projects, such as
someone in charge of great architectural works, such as castles, public
buildings, abbeys, and cathedrals, etc.
•Later, in seventeenth-century Europe, an entrepreneur began to be
regarded as a person bearing risks of profit or loss in a fixed contract with
the government.
The theories of entrepreneurship as enunciated by social scientists from
time to time include:
1. Richard Cantillon
2. Adam Smith
3. Jean-Baptiste Say
4. Francis Walker
5. Joseph Schumpeter
6. Need for Achievement Theory of McClelland
7. Leibenstein’s X-efficiency Theory
8. Risk Bearing Theory of Knight
Theories:
1. Richard Cantillon-
• Richard Cantillon, a noted Irish-French economist, developed one of
the early theories of entrepreneurship. In his book, Essay on the Nature
of Trade in General (1730), he argued that entrepreneurs made
conscious decisions about resource allocations, seeking higher yields
for their money and other investments.
• Cantillon divided society into two major classes- fixed income earners
and non-fixed income earners.
• He viewed entrepreneurs as non-fixed income earners with known
costs of production but uncertain incomes (as they must depend on
the market and the demand for their products), and therefore
operating at a risk.
2. Adam Smith-
• In 1776,Adam Smith published ‘An Inquiry into the Nature and
Causes of the Wealth of Nations’, where he stated that an entrepreneur
has all the knowledge necessary to become a great merchant, and is
hindered from becoming one only by insufficient capital.
•Adam Smith argued that in order to create an effective capitalist system,
individuals must pursue both selfish and social interests.
• He introduced the concepts of liberal and entrepreneurial capitalism.
3. Jean-Baptiste Say-
•He (born in 1767) believed that entrepreneurs behaved with exceptional
insight to fulfil society’s needs through the process of taking risks.
•Say defined an entrepreneur as a person able to recognize opportunities
and manage them effectively.
•He also differentiated the person bearing risk- the entrepreneur- from the
one supplying the capital- the venture capitalist.
•Inventors like Thomas Edison and Eli Whitney developed new technologies
for commercial use but were unable to finance their projects themselves.
•So, as entrepreneurs they used capital provided by venture capitalists.
• A venture capitalist was viewed as a professional money manager who
made investments from a pool of equity in order to obtain a high rate of
return on the investment.
4. Francis Walker-
•Francis Walker, in ‘The Wages Question: A Treatise on Wages and the
Wages Class’, published in 1876, distinguished between those who supplied
funds and received interest, and entrepreneurs, i.e. those who made a
profit through managerial capabilities.
•He defined an entrepreneur as one who is endowed with more than
average capacity to organize and coordinate factors of production like land,
labour, capital and enterprise.
•. According to him, an entrepreneur is a pioneer, a leader, and a
captain of the firm. Hence, any profit that the firm makes
depends on his efficiency and superior talent.
5. Joseph Schumpeter-
•In the late-nineteenth and early-twentieth century, entrepreneurs were
frequently not distinguished from managers and were viewed mostly from
an economic perspective.
• In the middle of the 20th century the notion of an entrepreneur as an
innovator, an individual developing something unique, was established.
•Joseph Schumpeter (1883-1950) in his work ‘The Theory of Economic
Development’ extended the concept of entrepreneurship to include the
importance of innovation.
• In his words, “the function of entrepreneurs is to reform or revolutionize
the pattern of production by exploiting an invention or, more generally, an
untried technological possibility for producing a new commodity or
producing an old one in a new way, by opening up a new source of supply
of materials or a new outlet for products, by reorganizing an industry and
so on. This [entrepreneurial] function does not essentially consist in
inventing anything or otherwise creating the conditions which the
 enterprise exploits. It consists in getting the job done.”
•The Schumpeterian view of an entrepreneur is that of an innovator playing
the role of a dynamic businessman, often adding material growth to
economic development.
•Joseph Schumpeter proposed that entrepreneurship involved innovations
and untried technologies or what he called creative destruction, which
is defined as the process whereby existing products, processes, ideas, and
businesses are replaced with better ones.
•Schumpeter believed that through the process of creative destruction, old
and outdated approaches and products were replaced with better ones.
•Through the destruction of the old came the creation of the new.
•He also believed that entrepreneurs were the driving forces
behind this process of creative destruction.
•They were the ones who took the breakthrough ideas and innovations
into the marketplace.
•Schumpeter’s description of the process of creative destruction served to
highlight further the important role that innovation plays in
entrepreneurship.
6. Need for Achievement Theory of McClelland:
• According to McClelland the characteristics of entrepreneur have two
features - first doing things in a new and better way and second
decision making under uncertainty.
• McClelland emphasises achievement orientation as most important
factor for entrepreneurs.
• Individuals with high. achievement orientation are not influenced by
considerations of money or any other external incentives.
• Profit and incentives are merely yardsticks of measurement of success
of entrepreneurs with high achievement orientation.
• People with high achievement (N-Ach) are not influenced by money
rewards as compared to people with low achievement.
• The latter types are prepared to work harder for money or such
other external incentives.
• On the contrary, profit is merely a measure of success and
competency for people with high achievement need.
• Professor David McClelland, in his book ‘The Achieving
Society,’ has propounded a theory based on his research that
entrepreneurship ultimately depends on motivation.
• It is the need for achievement (N-Ach), the sense of doing
and getting things done, that promote entrepreneurship.
• According to him, N-Ach is a relatively stable personality characteristic
rooted in experiences in middle childhood through family socialisation
and child-learning practices which stress standards of excellence,
material warmth, self-reliance training and low father dominance.
• According to him a person acquires three types of needs as a result of
one’s life experience.These three needs are:
i. Need for Achievement:A drive to excel, advance and grow.
ii. Need for Power: A drive to dominate or influence others and
situations.
iii. Need for Affiliation: A drive for friendly and close inter-personal
relationships.
• McClelland found that certain societies tended to produce a large
percentage of people with high achievement.
• He pointed out that individuals, indeed whole societies that possess
N-ach will have higher levels of economic well-being than those that
do not.
• McClelland’s work indicated that there are five major components to
the N-ach trait: (a) responsibility for problem solving, (b) setting goals,
(c) reaching goals through one’s own effort, (d) the need for and use
of feedback, and (e) a preference for moderate levels of risk-taking.
•The individual with high levels of need achievement is a potential
entrepreneur.
•The specific characteristics of a high achiever (entrepreneur) can be
summarized as follows:
(i) They set moderate realistic and attainable goals for them.
(ii) They take calculated risks.
(iii) They prefer situations wherein they can take personal responsibility
for solving problems.
(iv) They need concrete feedback on how well they are doing.
(v) Their need for achievement exist not merely for the sake of economic
rewards or social recognition rather personal accomplishment is
intrinsically more satisfying to them.
•According to McClelland, motivation, abilities and congenial
environment, all combine to promote entrepreneurship.
•Since entrepreneurial motivation and abilities are long run sociological
issues; he opined it is better to make political, social and economic
environments congenial for the growth of entrepreneurship in
underdeveloped countries.
7. Leibenstein’s X-Efficiency Theory:
• Basically, X-efficiency is the degree of inefficiency in the use of
resources within the firm: it measures the extent to which the firm
fails to realise its productive potential.
• According to Leibenstein, when an input is not used effectively the
difference between the actual output and the maximum output
attributable to that input is a measure of the degree of X-efficiency.
• X-efficiency arises either because the firm’s resources are used in the
wrong way or because they are wasted, that is, not used at all.
•Leibenstein identifies two main roles for the entrepreneur:
(i) a gapfiller and (ii) an input completer.
• These functions arise from the basic assumptions of X-efficiency
theory.
• Thus it is clear that “if not all factors of production are marketed or if
there are imperfections in markets, the entrepreneur has to fill the
gaps in the market. To put the enterprise in motion, the entrepreneur
should fill enough of gaps.”
• The second role is input completion, which involves making available
inputs that improve the efficiency of existing production methods or
facilitate the introduction of new ones. The role of the entrepreneur is
to improve the flow of information in the market.
Figure 1: Leibenstein X- efficiency Theory
•According to him there are two types of entrepreneurship.
(i) Routine entrepreneurship – deals with normal business functions
like co-ordinating the business activities.
(ii) Innovative entrepreneurship – wherein an entrepreneur is
innovative in his approach. It includes the activities necessary to
create an enterprise where not all the markets are well-established
or clearly defined.
8. Risk Bearing Theory of Knight:
• A key element of entrepreneurship is risk bearing.
• Prof. Knight and John Stuart Mill saw risk-bearing as the important
function of entrepreneurs.
•Some important features of this theory are as follows:
1. Risk creates Profit: According to the risk-bearing theory, the
entrepreneur earns profits because he undertakes risks.
2. More Risk More Gain: The degree of risk varies in different
industries. Entrepreneurs undertake different degrees of risk according
to their ability and inclination. The risk theory proposes that the more
risky the nature of business, the greater must be the profit earned by
it.
3. Profit as Reward and Cost: Profit is the reward of entrepreneur for
assuming risks. Hence, it is also treated as a part of the normal cost of
production.
4. Entrepreneur’s Income is Uncertain: He identifies uncertainty
with a situation where the probabilities of alterative outcomes cannot
be determined either by a priori reasoning or by statistical inference. A
priori reasoning is simply irrelevant to economic situation involving a
unique event.
• This theory summarizes that profit is the reward of an
entrepreneur effort which arises for bearing non insurable risks
and uncertainties and the amount of profit earned depends upon
the degree of uncertainty bearing.
•Knight argues that business enterprises can reduce the level of
uncertainty can be through ‘consolidation’.
•Consolidation is to uncertainty is what insurance is to risk; it is a method
of reducing total uncertainty by pooling individual instance.
•The elasticity of the supply of self confidence is the single most important
determinant of the level of profit and the number of entrepreneurs.