Theories of Entrepreneurship

Theories of Entrepreneurship

Table of Contents:-

  • Theories of Entrepreneurship
  • Psychological Theories of Entrepreneurship
  • Economic Theories of Entrepreneurship
  • Opportunity-Based Theories of Entrepreneurship
  • Sociological Theories of Entrepreneurship
  • Anthropological Theories of Entrepreneurship
  • Resource-Based Theories of Entrepreneurship

Theories of Entrepreneurship

Multiple theories form the basis of the conceptual domain of entrepreneurship. These theories of entrepreneurship have origins in economics, psychology, sociology, anthropology, and management. Prominent among these theories are the following:

  1. Psychological Theories of Entrepreneurship
  2. Economic Theories of Entrepreneurship
  3. Opportunity-Based Theories of Entrepreneurship
  4. Sociological Theories of Entrepreneurship
  5. Anthropological Theories of Entrepreneurship
  6. Resource-Based Theories of Entrepreneurship
Theories of Entrepreneurship

1. Psychological Theories of Entrepreneurship

Theories of entrepreneurship that focus on the individual emphasize the mental and emotional elements that drive an individual with entrepreneurial behaviour. The key proponents of this theory include McClelland, Atkinson and Feather, Julian Rotter, and many others. Psychological trait theories of entrepreneurship state that certain attitudinal and psychological attributes differentiate entrepreneurs from non-entrepreneurs, and successful entrepreneurs from unsuccessful ones. Characteristics of individuals likely to induce and develop entrepreneurial tendencies include:

  1. An urge to pursue innovation,
  2. An intrinsic sense of control,
  3. Risk-taking capacity,
  4. Capacity to think outside the box,
  5. Capacity to withstand social pressure.

Nowadays, psychologists increasingly analyze how entrepreneurs’ personality traits and temperaments influence their behaviour in pursuing particular undertakings. There are five basic features of human character necessary for the actions of an entrepreneurial individual:

i) Extroversion: Optimistic People can easily make friends.

ii) Neuroticism: Individuals with frequent mood changes.

iii) Agreeableness: People who easily adapt to society.

iv) Conscientiousness: Focuses on obeying laws and regulations by active individuals.

v) Openness to new experiences: Human openness to knowledge resulting from experience and its further application to problem-solving.

Each of the personality traits influences the variety of entrepreneurial behaviours, particularly their risk-taking ability, sense of motivation, and internal locus of control.

Psychological Theories of Entrepreneurship: Unveiling the Role of Individual Personality Traits

The focus of this theory is on individual personality traits. Advocates of this theory believe that people with certain traits are more likely to become entrepreneurs. The need for achievement and control leads to an inclination for innovativeness, risk-taking, and acceptance of initial failures in experimentation. According to traits theorists, traits required for entrepreneurial capability are inborn. Personality traits are defined as enduring qualities that an individual displays in most situations (Coon, 2004). Entrepreneurs mostly sense opportunities, are relatively creative and have an appetite for faster learning of management skills. Locus of Control explores an individual’s perception of the reasons behind events in life (Rotter, 1966).

Entrepreneurial beliefs about the reasons for success are also explained based on the concept of locus of control orientation and varied perceptions of entrepreneurs about the reasons for their success. Success may be due to internal efforts, called internal locus of control orientation, or some external support termed external locus of control orientation. However, it has been found that business owners have a slightly higher internal locus of control than other populations. Individuals strive to achieve more and succeed (McClelland, 1961). The Achievement theory underlines the need to achieve as the underlying motivation for initiatives, and there is evidence proving linkages between achievement needs and career decisions favouring entrepreneurship (Johnson, 1990).

Types of psychological theories of entrepreneurship

Many experts believe in the Psychological theory of entrepreneurship, which stresses individual personality traits. They believe that these traits are what led to the emergence of entrepreneurs. Three of the most popular psychological theories of entrepreneurship are given below:

  • McClelland’s theory
  • Rotter Locus of control theory
  • Action regulation theory

David McClelland’s theory states that entrepreneurs are guided and motivated by three important needs: the need for affiliation, the need for power, and the need for achievement. These three needs are the most significant motivators and influencers.

Rotter’s locus of control theory (formulated by Julian Rotter in 1954) believes that people are guided by their perceived locus of control among individuals. Locus of control may be internal, called internal locus of control, or it can be created through external support, termed external locus of control. Entrepreneurs are found to be guided mainly by an internal locus of control. You might be wondering what internal and external locus of control means. Let me explain it to you. People with an internal locus of control believe that they can make things happen through their actions; they are capable of doing anything or solving any problem. On the other hand, people with a high external locus of control believe that what happens in life is beyond their control, and these happenings occur because of external factors such as fate, change, etc.

Action regulation theory: Michael Frese formulated the action regulation theory. In this theory, it is believed that entrepreneurship is related to planning. An individual with a planning behaviour or attitude is more likely to be successful. Cognitive ability holds significant importance for entrepreneurs, according to this theory.

2. Economic Theories of Entrepreneurship

Economic entrepreneurship theories find their echo in the work of economist Richard Cantillon during the first half of the 1700s century. He was the first to mention enterprise. Cantillon described an entrepreneur as a human being who takes advantage of the discrepancy between supply and demand in the market of goods and services. Entrepreneurship was defined as the human capacity to recognize opportunities created by a market imbalance to generate the biggest profit possible. He suggested that entrepreneurs should buy goods where it was cheaper and sell them where it was the most expensive.

Another economist J. B. Say, defined entrepreneurship as a capacity to shift economic resources from the area of lower efficiency and lower level of profitability to a higher area. This was said to be possible due to the activity of an entrepreneur who was knowledgeable and skilled in terms of management and production process organization. Say was the first economist to underline the distinct role of an entrepreneur emphasizing their significance as an owner, organizer and manager of a company. According to him, the individual was not only a stimulus of their enterprise but also a stimulus to condition and set directions for the development of the whole economy.

Another prominent economist who contributed to economic thought is J. Schumpeter. He described entrepreneurship as actions of an individual consisting of the application of innovative undertakings, which in turn are based mainly on discovering better ways to satisfy society’s needs. J. Schumpeter argued that the innovations should be purposeful, practical, out of routine and should function as radical modifications of processes applied until then. He regards Entrepreneur as the main source of dynamism to the economy; a creative individual constantly proving to be resourceful and one who introduces new solutions to overcome the surrounding uncertainty.

One argument against economic theories is that they fail to recognize the dynamic, open nature of market systems, ignoring the unique nature of entrepreneurial activity and downplaying the diverse contexts in which entrepreneurship occurs.

Economic theories of entrepreneurship can be categorized into three different periods:

  1. Classical,
  2. Neo-classical, and
  3. Austrian market process.

Let’s briefly discuss the essence of these theories.

i) Classical Theory of Entrepreneurship

Advocates of the classical theory believed that the role of an entrepreneur is restricted to the production and distribution of market goods in a competitive marketplace. There are two noteworthy classical theories of entrepreneurship given as follows:

  1. Richard Cantillon Theory (1755)
  2. Innovation theory by Schumpeter
a) Ricard Cantillon Theory

Richard Cantillon was an Irish-French economist, regarded as the originator of the word “entrepreneur” in his work during the late seventeenth and early eighteenth centuries. He advocated that an entrepreneur is a risk-taker who conducts all exchanges (resource allocation and takes an active role in pursuing opportunities to maximize profit). He believed that entrepreneurs are not innovators as they cannot change the demand and supply trends in the market. They can only perceive the changes are intelligent enough to maximize profits and have a willingness to take risks.

b) Innovation theory by Schumpeter

The innovation theory is considered one of the most important economic theories of entrepreneurship, propounded by Joseph Schumpeter. Schumpeter underlined the key role of entrepreneurs in bringing innovation by engaging with different actors in an economic ecosystem. His ideas on the role of entrepreneurs in sustaining economic well-being have been quite influential and followed by many nations. His innovation theory is a popular theory of entrepreneurship used across countries. Many subsequent innovation models are built around his concept of the entrepreneur as the anchor of the innovation ecosystem. Schumpeter stresses that entrepreneurial creativity is a major driver of an entrepreneur’s path in a specific domain. Innovation can happen in multiple ways:

  • New distinct product or service
  • A new distinct process to produce a product or service
  • Addressing a different audience or market
  • Successfully exploring a new resource input in the production process.
  • The new business model or radically a new organization through a transformation with newer capabilities.

To sum it up, we can say that innovation can be in the product, process, or services of the market offerings.

ii) Neo-classical theory of entrepreneurship

Neo-classical theorists proposed that the role of exchange in an economic engagement, along with diminishing marginal utility, creates possibilities for an entrepreneurial role (Murphy, Liao & Welsch, 2006).

iii) Austrian Market Process Theory of Entrepreneurship

This theory focuses on entrepreneurs’ actions based on their understanding and knowledge of the economy. Advocates of this theory believe that entrepreneurs respond to changes in the dynamic market to make profits. Their response to the changing market is based on their proficiency in understanding the dynamics of the market. They conduct product research and development and bring technological innovations to obtain profits. Profit-seeking entrepreneurs constantly promote the evolution of the economic structure.

3. Opportunity Based Theories of Entrepreneurship

The opportunity-based theory is championed by figures such as Peter Drucker and Howard Stevenson. Entrepreneurs excel at recognizing and seizing opportunities arising from social, technological, and cultural changes. This forms the essence of the opportunity-based theory proposed by Peter Drucker. According to Drucker, entrepreneurs do not instigate change (as asserted by the Schumpeterian or Austrian school) but rather capitalize on the opportunities that arise from changes in technology, consumer preferences, and other factors. He further contends that “the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” What becomes evident in Drucker’s opportunity framework is that entrepreneurs are more attuned to the possibilities created by change than to the problems it may present.

Stevenson expands Drucker’s opportunity-based framework to incorporate resourcefulness. He concludes that the focal point of entrepreneurial management lies in the “pursuit of opportunity without regard to resources currently controlled.”

The opportunity-based theory provides researchers with an extensive framework to explain the emergence of an entrepreneur and its determinants. Peter Drucker (1985) argues that entrepreneurs are most likely to seize opportunities arising from changes around us with economic prospects. Entrepreneurs continually search for new possibilities and problems that can be addressed through a new or better solution than the existing one. After identifying any opportunity, an entrepreneur responds with a solution depending on access to resources and capabilities (Stevenson, 1990).

Access to relevant resources, either directly or through business partners, is essential to accomplish key business activities, which are fundamental to achieving entrepreneurial business goals in the context of identified opportunities and responses designed by the entrepreneur (Alvarez & Busenitz, 2001). These key activities could include operational processes, channel requirements, or any specific relational activities envisioned by the entrepreneur to differentiate products or services for sustained growth and performance.

4. Sociologiocal Theories of Entrepreneurship

These theories revolve around various social contexts that enable the opportunities entrepreneurs leverage. Paul D. Reynolds from George Washington University highlights four such contexts: social networks, a desire for a meaningful life, ethnic identification, and socio-political environmental factors. Sociologists identify culture with the lifestyles of social groups or with the interrelations of their specific members. Culture is also defined as a system of mutual communication in a particular group and interactions between individuals that constitute it. As asserted by sociologists, thanks to culture, people were able to create their system of trust and mutual communication. The coexistence of these properties resulted in the emergence of a new culture where society was encouraged to undertake entrepreneurial activities.

The influence of culture on the conditioning of entrepreneurship was first researched by Max Weber at the beginning of the 20th century. In his work “The Protestant Ethic and the Spirit of Capitalism,” he defined the basic relations between Protestant ethics and the development of capitalistic entrepreneurship. He argued that the spirit of Protestant culture affected the individual personality traits of an entrepreneurial person, providing them with motivation for creative and innovative activities. Weber popularized the thesis that prosperity in business was a kind of God’s grace. Success was primarily conditioned by a change in attitude towards work. He argued that cultural conditioning, in this case, resulting from religious beliefs, was a source of success for an entrepreneurial individual.

Many researchers claimed that religion itself did not exert an influence on the shape of culture, which, in turn, determined entrepreneurship. The group of opponents included, among others, Hofstede (2001), who perceived culture as a constituent value of faith, norms, and laws existing in a group of people or within a community. The actions of an individual belonging to a given social group, according to Hofstede, depended mainly on national, regional, ethical, religious, or family-related values, as well as on the diversity of languages or genders. He recommended not treating culture as a process shaped by human genes but mainly as an atmosphere conducive to entrepreneurship and created by the local community.

One may, therefore, speak of the so-called entrepreneurship culture, which fulfils the following functions in a given society:

1) Integrating: Oriented towards the cooperation of individuals, enabling the reduction of costs for a given venture compared to what would be incurred by an individual acting alone.

2) Motivating: Consists of continuous motivation to seek opportunities and possibilities while solving existing problems, as well as striving for changes and success.

3) Informative: Fulfills the role of a messenger between particular individuals. It enables trust-building and eliminates potential conflicts in a given community.

4) Innovative: Consists of numerous innovations being created and popularized in the course of activity.

The anthropological model approaches the question of entrepreneurship by placing it within the context of culture and examining how cultural forces, such as social attitudes, shape both the perceptions and behaviours of entrepreneurs. Individual ethnicity affects attitude and behaviour, and culture reflects particular ethnic, social, economic, ecological, and political complexities in individuals. Thus, cultural environments can produce attitude differences as well as differences in entrepreneurial behaviour.

Several major social factors trigger entrepreneurship opportunities (Reynolds, 1991). Social networks play a significant role as triggers as well as facilitators during various stages of the entrepreneurial lifecycle. The underlying idea is to build social relationships that enhance trust. The entrepreneur can succeed more by cultivating and maintaining trust with the intended audience of the entrepreneurial activity. Another factor that reinforces trust is perceived non-opportunism, as the audience over time understands the intention behind actions. This understanding is further strengthened with more and more experience by the users of goods or services.

Individual sociological lineage is also an essential determinant of entrepreneurship. Another dimension is based on the play of environmental factors, called population ecology, like the prevalent political influences and the influences of all kinds of business stakeholders, such as competitors, suppliers, customers, etc. In recent years, there has been a significant push for startups in India from the government, facilitated through various policy initiatives. For example, Startup India, Make-in-India, etc. Additionally, a lot of investment from startup investors is chasing good ideas for funding support. Many states and large companies in India have worked on setting up incubation and accelerator facilities.

5. Anthroplogical Theories of Entrepreneurship

Anthropologists emphasize the role of culture, including customs, origin, and beliefs of a community. This theory can explain the prevalence of orientation towards business, choosing a specific type of professional career, etc., among certain communities. In India, we have observed certain geographic belts with specific cultures where people opt for careers in defence forces, set up businesses, have a commerce orientation, or lean towards art and music.

The focus is on the cultural entrepreneurship model. Culture is a function of multiple dimensions, including socio-economic, political, and ecological factors, which further influence attitudes and subsequent intentions for entrepreneurial choices (Shane, 1994).

6. Resource-Based Theories of Entrepreneurship

Resource-based theories focus on how individuals use and control different types of resources to start entrepreneurial ventures. These resources may include:

a) Access to capital

b) The information and social networks they provide

c) Human resources in the form of skill, education, and training

d) Some intangible elements of leadership that entrepreneurs contribute as a resource.

The Resource-based theory of entrepreneurship argues that access to resources by founders plays an important role in predicting opportunity-based entrepreneurship and the subsequent growth of new ventures. This theory stresses the importance of social, financial, and human resources. Thus, access to resources enhances the individual’s ability to detect and act upon discovered opportunities, Financial, social and human capital represent three classes of theories under the resource-based entrepreneurship theories.

The resource-based theory underscores the role of various types of resources critical to the success of the entrepreneurial journey (Aldrich, 1999). The ability to mobilize necessary resources enables entrepreneurs to tap opportunities and find solutions to problems (Davidson & Honig, 2003). The resource need depends on the type of business model adopted by the entrepreneur. Asset-heavy firms may require more financial resources, whereas asset-light initiatives may need better partnerships or human resources.

An entrepreneur in the space of reverse logistics, partnering with e-commerce platforms like Amazon or Flipkart, may need more financial resources if it focuses on the disposal of returned or rejected goods. Moreover, it may require operational excellence or efficient services if it focuses on returned goods sent back to e-commerce platform sellers. However, there is sufficient evidence to show that the growth of entrepreneurs is positively associated with access to financial resources (Blanchflower et al., 2001; Clausen, 2006). Studies also indicate that in many situations, entrepreneurs in the early stages of development may not necessarily depend on accessible financial resources (Hurst & Lusardi, 2004).

Among other resources, Social Network Theory gives importance to network or social network resources, which entrepreneurs can translate into instruments for effective market penetration or competitive collaboration, leading to a sustainable entrepreneurial journey (Clausen, 2006). These theorists argue that entrepreneurs with sufficient network access can better mobilize various other resources, such as access to reliable supplies or penetration into new markets. The literature on this theory indicates that stronger social ties to resource providers facilitate the acquisition of resources and increase the likelihood of opportunity exploitation (Aldrich & Zimmer, 1986).

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