Theories of Entrepreneurship- 2 | CMAT Mock Test Series - CAT PDF Download

In spite of several attempts by various scholars, there is no generally accepted theory of entrepreneurship. There are different theories of entrepreneurship, based on the assumptions of various management experts. In the words of Gartner, “We in the field of entrepreneurship are unaware of the assumptions that we make, in our theoretical perspectives.”

However, different theoretical assumptions of entrepreneurship focus on three major aspects of entrepreneurship. These three aspects are the nature of opportunities, the nature of entrepreneurs, and the nature of the decision-making framework within which an entrepreneur functions. These three aspects give rise to two logical, consistent theories of entrepreneurship, namely, discovery theory and creative theory.

The two theories of entrepreneurship are as follows:

Discovery Theory

It includes Individual/Opportunity (I/O) nexus view, which lays emphasis on the identification, existence, and exploitation of opportunities and their influence of individuals. The individuals and the opportunities have influence on each other. For example, an opportunity comes into existence only when an individual identifies it, simultaneously an individual takes up the entrepreneurial activity because of the existing opportunity.

This theory approaches three assumptions in entrepreneurship, which are as follows:

a. Opportunities have an objective component and their existence does not depend on whether the individual identifies these opportunities or not.
b. Every individual is different from others. Therefore, different individual has different ability of recognizing opportunities. In addition, according to the discovery theory, individuals are always alert to the existing opportunities and this alertness is not a deliberate search, but the constant scanning of environment by individuals.
c. Risk bearing is an essential part of the entrepreneurial process. The first and second assumptions of the discovery theory also support the risk bearing condition of entrepreneurship. As per these two assumptions, individuals can only discover and avail opportunities, but cannot create opportunities. They apply a unique combination of resources, means they do things differently to bring innovation.
As there is no certainty about the success of discovered opportunity, entrepreneurs bears risks by availing opportunity on the estimated probability of its success. Thus, the discovery theory states that opportunities are objectives, individuals are unique, and entrepreneurs are risk bearers.

Creation Theory

Creation theory focuses on entrepreneurs and the creation of enterprises. Similar to the individual/opportunity nexus, the creation theory also approaches three assumptions in entrepreneurship.

The three assumptions are as follows:

a. Opportunities are subjective in nature. The creation theory also emphasizes that opportunities are created through a series of decisions to exploit a potential opportunity. This theory asserts that opportunities do not have an existence without the actions of entrepreneurs. The creation theory is opposite to I/O nexus.
The I/O model asserts that opportunities are discovered by scanning the business environment and analyzing the market and industry structure. On the other hand, the creation theory supports the view that opportunities are created by hypothesis testing and learning.
For example, consumer electronics organizations, such as Samsung, creates opportunities by developing new products, trying out those products in the market, finding out the products that are reasonably successful, and filtering the successful products and improving their marketability.
b. Opportunities are not recognized by individuals, but created by them. The creation theory suggests that entrepreneurship does not require differences in individuals, but differences in their decision making under uncertainty. According to the creation theory, an entrepreneur is someone, who organizes resources after evaluating the value of probable outcomes.
c. Individuals bear uncertainty not risk. The creation theory suggests that entrepreneurs create opportunities and act on them after estimating the probability of their success. Thus, bear uncertainty not risk.

Thus, the creative theory suggests that opportunities are subjective, individuals are ordinary, and entrepreneurs are uncertainty-bearers.

Theories of Entrepreneurship – Top 3 Theories According to Eminent Authors

The entrepreneurial behaviour is likely to emerge when a society has a sufficient number of people who possess certain sociological, psychological and economic features. Entrepreneurial behaviour is an innovative action-taking behaviour that involves various risks and attracts good returns.

The theories of entrepreneurship development are divided into three theories.

Psychological Theories

• The entrepreneurship is termed as a psychological concept and process. According to this theory, psychological factors are the primary source of entre­preneurship development. Few authors like Schumpeter, McClelland, Hagen and John Kunkell have expressed their opinion about psychological factors affecting entrepreneurship.
• According to this theory, entrepreneurship is important to emerge when the society has a sufficient supply of individuals possessing particular psychological elements.

The main psychological theories are as follows:

(i) Joseph A. Schumpeter Theory

(ii) David C. McClelland Theory

(iii) Everret E. Hagen’s Theory

(iv) John Kunkell Theory.

The brief description of each theory are as follows:

(i) Joseph Alois Schumpeter Theory:

• According to Joseph A. Schumpeter, the effective function of an entre­preneur is to start innovation in venture. This theory is also called innovation theory or dynamic theory. According to this theory, the entrepreneurs emerges because of individuals having certain psychological elements i.e., will power, self-intuitions, tolerance capacity. The entrepreneur is a person who has creative nature.
• He regarded the entrepreneurship as a catalyst who checks the static conditions of the economy, there by initiates and thrusts a process of economic development i.e., innovation. He carries economy to new height of develop­ment.

This innovation includes:
1. Introduction of new goods,
2. Introduction of new methods of production,
3. Opening of a new market,
4. Discovering a new source of raw materials,
5. Carrying out a new source of an organisation.

Although, this theory also included other characteristics i.e., risk taking, superintendence and coordination, he emphasised that these attributes without the ability to innovate will not make an individual as an entrepreneur.

According to him, the following characteristics that appear in the behaviour of an entrepreneur are as follows:

1. An institutional capacity to see the things in a way which afterwards proves to be true.
2. Energy of will and mind to overcome static habits, desires and emotions.
3. The capacity to withstand social opposition.
According to him, an entrepreneur is an innovator who desires to earn profit through innovation. An entrepreneur is neither technical man nor a capitalist but simply an innovator. He introduces something new in the economy. He is motivated by establishing his psychological power. An entre­preneurship is formed for establishing his industrial empire. He has burning desires for creative activities.
He makes a distinction between innovator and inventor. An inventor discovers new methods and new material whereas an innovator is one who utilises or applies inventions and discovers to produce better quality goods that give greater satisfaction to customer and high profit to entrepreneurs. In this way, an entrepreneur is an innovator.
Schumpeter made it clear that an entrepreneur doesn’t have a single person but equal to an organisation. “What matter is the behaviour not the actor?” He emphasised more on technological innovations rather than on orga­nisational innovations. “Entrepreneurs are certainly not economic men in the theoretical sense.”

Critical Evaluation of J. A. Schumpeter Theory:

• In this theory, the main theme is the innovation. He makes a distinction between an innovator and an inventor. According to him, an inventor discovers new methods and new materials. But an innovator is one who applies inventions and discovers in order to make new combinations.
• With the help of new combination, he pro­duces newer and better goods which yields satisfaction as well as profits. Schumpeter’s concept of entrepreneurship is quite broad-based. It includes not only the independent businessmen but also executives and managers who actually undertake innovative functions.

(ii) David C. McClelland’s Theory:

• David C. McClelland has given a particular concept of entrepreneurship. According to him, needs for high achievement is an essential feature of entrepre­neurial behaviour. According to McClelland, “Burning desire of need for achievement attracts an entrepreneur for activities.”
• The primary basis of the development of entrepreneurship is achieve­ment orientation. The capacity of becoming an entrepreneur develops due to the desire to reach heights of excellence and specific performance.
• For achieving heights of excellence and specific performances, an entre­preneur needs rational thinking, new combinations, deep thinking, power etc. The achievement motive is uncalculated through child-rearing practices, which stress standards of excellence, material warmth, self-reliance training a low, further dominance. Individuals with high achievement motives tend to take keen interest in situation of high risk desire for responsibility and a desire for a Concrete measure of task performance.

His views can be expressed by means of the following points:

a. Ideological Values,
b. Family Socialisation,
c. Need for Achievement,
d. Entrepreneurial Behaviour.

The following elements which are focused by McClelland are as follows:

a. Achievement Orientation,
b. Height of Excellence,
c. Imagination Power,
d. New Combination.
According to McClelland, need for high achievement drives individuals towards entrepreneurial activities. High achievement need can be developed through child rearing and schooling practices. People with high achievement need are not motivated by monetary rewards only, such people regard profit as a measure of success whereas people with low achievement needs are moti­vated by monetary rewards.
People with a high need for achievement derive satisfaction from achieving goals. High achievers want immediate feedback on their power performances. He has been able to establish the desirability of high need for achievement for entrepreneurial success in the economic development of the country.
A drive to influence others and situations. It refers to one’s desire to influence and dominate other through use of authority. Goal’s achievement is less important than the means by which goals are achieved. McClelland and his associates have found that people with high power needs have a great concern for exercising influence and control.

McClelland theory is not free from criticism:

1. There is strong evidence to indicate from politics and religion that adult behaviour can be moulded or drastically altered in a relatively short time.
2. The contention that needs are permanently acquired.
Inspite of the above discussion, this theory highlights the importance of matching the individual and the job. People with high achievement needs success on work i.e., challenging, satisfying, stimulating and complexing. People with low achievement needs stability security and predictability.

Critical Evaluation of David McClelland’s Theory:

The psychological roots of entrepreneurship reveal that high achievement orientation ensures the success of entrepreneurs. But the empirical tools of concept used by McClelland are found to be highly suspect.

Empirical investigation also need the following:

(1) It is necessary to create a climate to enable the children to grow and become individuals with high achievement.
(2) It is possible to improve the performance of existing entrepreneur through imparting proper training and education.

(iii) Everett E. Hagen’s Theory:
Everett E. Hagen has also given a particular concept about an entre­preneurship. He has developed the theory of withdrawal of status. Hagen says, “Entrepreneurship is a function of status withdrawal.”“Creativeness of disadvantaged minority group is the main source of entrepreneurship.” —Everett E. Hagen
Hagen considers “withdrawal of status respect as the trigger mechanism of change in personality formation” as entrepreneurship status withdrawal is the act of seeing on the part of some social group. The origin of this concept of psychological theory of entrepreneurship is based on Samurai community of Japan.
According to Hagen’s concept status withdrawal as fall of status of social group is the primary cause of personality development. Hagen identifies the following four types of events that can produce status withdrawal and prestige fall.
(1) Displacement of valued symbols.
(2) Denigrations of status symbols with a changing distribution of economic power.
(3) Inconsistency of status symbols with a changing distribution of economic power.
(4) No acceptance of expected status on migration to a new society.
Hagen opined that creative innovation or change is the basic feature of economic growth. He describes an entrepreneur as a creative problem shooter interested in things in the practical and technological realm. Such type of individual feels a sense of increased pleasure when facing a problem and tolerates disorder without discomfort. In traditional societies, position of authority are granted on the basis of status, rather than individual ability. That is why he visualised an innovative personality.

There are 4 responses:

(1) One who combines to work in the society but remains indifferent to work and position is called Retreatist.
(2) One who adopts a kind of defensive behaviour and acts in the ways accepted and approved in his society but with hopes on of improving his position is called Ritualist.
(3) One who forms a rebellion and attempts to establish a new society is called Reformist.
(4) A creative individual who is likely to be an entrepreneur is called Innovator.
Innovation requires creative and such creative individuals cause economic growth. Whenever there is a withdrawal of status respect, it would give rise to birth of innovation of a creative individual who is likely to be an entrepreneur.

Critical Evaluation of E. Hagen’s Theory:

• This theory acts as dis­tinction between entrepreneurship and intrapreneurship. There are different factors within the organisation which motivate the executives and professionals to do some innovative behaviour leading to new product and services.
• Actually, they are not governed by status withdrawal. The theory only suggests that the people who had enjoyed social standing at some stage in their histories fall into a retreatist phase with an urge to regain the lost status and emerge as an entrepreneurship personality.

(iv) John H. Kunkel’s Theory:

• John H. Kunkel has also given a particular concept about entrepreneurship. He has presented a theory of entrepreneurial behaviour in connection to the development of entrepreneurship. Kunkel’s theory is concerned with the expressed activities of individuals and their relations to the previous and present surroundings, social structures, physical conditions and behavioural patterns determined by reinforcing and opposing present in the context.
• Hence, entrepreneurial behaviour is a function of surrounding and social struc­tures, both past and present and can be readily influenced by the manipulative economic and social incentives.
• Kunkel, “The supply and development of an entrepreneur depends upon the existence and extensiveness of four structure i.e., limitation structure, demand structure, opportunity structure, and labour structure.”

He has given stress on the following four types of structure for the deve­lopment of entrepreneurship:

1. Demand structure,
2. Opportunity structure,
3. Labour structure,
4. Limitation structure.

The description of each point is given as follows:

1. Demand Structure- The demand structure is of economic nature. This structure is changing day by day according to economic progress and govern­ment policies. The behaviour of individual can be made enterprising by affect­ing the main elements of demand structure.
2. Opportunity structure- The opportunity structure is formed by combination of supply of capital, managerial and technical skill production methods, labour and market, training opportunity establishment of an enterprise and conducting different activities.
3. Labour structure- The labour structure is directed by several factors such as source of livelihood, traditional outlook and life ambitions.
The quality of labour influences the emergence and growth of entrepreneurship. Rather than capital intensive, labour intensive will serve our interest in a better manner. The problem of labour immobility can be solved by providing infrastructural facilities including efficient transportation wherever an entrepreneurship is promoted.
4. Limitation structure- We can say that the limitation structure is social and cultural. This structure affect the development of an entrepreneur.

Critical Evaluation of Kunkel Theory:

• The theory assumes the ideal structures for the supply of entrepreneur. But generally there is discrepancy between objectives, structures and the actual incidence of entrepreneurs. It is due to the fact that there are inadequate or incorrect perception. In practice, entrepreneurship is also governed by the specific combination of circumstances which are generally not available in the environment.
• At last but not the least, we conclude that all the authors i.e., J. A. Schumpeter, David C. McClelland, Everett E. Hagen and John H. Kunkel have given their own opinion on concept of psychological theory of entrepreneurship. This theory presents the certain psychological motives that are responsible for the evolution of entrepreneurship.
• Schumpeter’s theory is one of the most important concepts of entre­preneurship which is richer and relevant. He has laid emphasis on innovativeness or creativity of an individual which makes him an entrepreneur.
• McClelland theory has numerous practical implications. The person with high need achievement needs great concern for exercising influence and control.
• Hagen’s theory laid more stress on technological changes which is the result as individual’s creativity. His concept depended upon withdrawal of status.
• John H. Kunkel theory laid more stress on types of structure i.e., demand, opportunity, labour and limitation. All the structure affects development of an entrepreneur.
• The main point which is focussed on all the theories is on the individual and his personality inference by environment factors in general and internal values in particulars.

Sociological Theory

The supporters of sociological theory says that the entrepreneurial activities is affected from social status hierarchy and values. Individuals’ position, tradition, cultural values, mobility and social status etc. are thoroughly effected to entrepreneurship development. The sociological theories depend on this concept.

The main sociological theories are as follows:
i. Frank W. Young Theory
ii. B.F. Hoselitz Theory
iii. Max Weber Theory
iv. Cochran Theory
v. Stocke’s Theory.

The description of each theory are as follows:

i. Frank W. Young Model/Theory:

Frank W. Young is not the supporter of role of individual in entre­preneurship development. They think that only group entrepreneurs have the capacity of extension of entrepreneurial activities due to the character of capacity to react. He believes on the concept of changeable society.
A group comes in reactive status when the following circumstances happen at one attempt.
a. When group experiences minority situation in society.
b. When group do not make approach upto effective social machinery.
c. When group is having sound and more institutional resources rather than other groups.
Overall, when a group sees their lower positional conditions & experience, they grow an entrepreneurial tendency due to reactive capacity. According to this theory, set of supporting instructions are the primary determinant factors of entrepreneurship development.

ii. B. F. Hoselitz Theory:
According to Hoselitz, “The development of industrial entrepreneur is based on only which type of society are there.”
a. Social process is not static.
b. Sufficient employment pattern is available.
c. Encourage to entrepreneurs for personality development.
Hoeslitz says, “Culturally marginal groups plays an important role in encouraging the economic development of any nation.”
He think that the marginal persons are more able in making creative adjustment in changed situations and during the adjustment process they make efforts in bringing real innovations in social behaviour. In addition to this, he emphasised on development of personal qualities for entrepreneurial develop­ment.
According to Hoselitz, “Managerial skill and leadership qualities are important factors for entrepreneurship. Besides this, education, training, social values, behaviour and social behaviour/institutions play a crucial role in personality development.”

Highlighted Points:

i. Entrepreneurship development is based on social progress and employment patterns.
ii. Personality development is an essential quality for entrepreneurship development.
iii. Culturally marginal groups are important characters for development process.
iv. Marginal groups are having the ability of innovation.
v. Managerial ability and leadership quality is must for entrepreneurship development.

iii. Max Weber Theory:

According to Weber, “A person who lives in which community, religion and follows the conventions and religious values.”
All these things completely affect by their professional life, energy, livelihood and enthusiasm.
In other words, Max Weber is connected with the emergence and success of entrepreneurs with social ethical values systems. He also associated the entre­preneurship development with protestants and other non-convents.
According to him, non-convents groups are those groups who gives pressure on capitalism, money rationality and thinking. They were almost successful in creating entrepreneurs, wealth collection, technology, capital for­mation and economic development.
“The modern economic development is explained to a greater extent, by the social factors as discussed in the foregoing lines. This becomes more prominently evident when we contrast the Indian culture with that of the western of particularly of the American culture. Even if we contrast the different sub cultures within the same larger society, the story of economic development is explained.”
Weber says that the religious beliefs and moral values are basically affected to people’s attitude, view trust and thinking pattern and people’s selected occupational pursuits as per earlier things.

Highlighted Points:

i. Entrepreneurship development is based on Protestants.
ii. Selection of occupation pursuits is effected from religious and social values.
iii. Religious and moral values are effected to people’s attitude, thinking power.
iv. Cochran Theory:
According to Cochran’s, ‘cultural values, role expectation and social acceptance plays prominent role in entrepreneurship development and entre­preneur is a model of personality.”

The success of an entrepreneur is basically affected from the following factors:

i. The social attitude of the person towards his occupation.
ii. The role expectations of the sanctioning group.
iii. The operational requirements of the job.

Thus, the social attitude of the person and the role expectations are deter­mined by the society’s values as well as sanctioning groups that determine the success and failure of entrepreneurship. Overall entre­preneurship development is associated with social environment.
At last but not the least, we conclude that all the authors i.e., Frank Young, B. F. Hoselitz, Max Weber, Cochran has given their own opinion on the concept of sociological theory. All the theories depend upon the social factors.
Frank Young’s theory says about the concept of changeable society. Reactive status transforms the group into an entrepreneur.
B. F. Hoselitz has given the importance to social factor. Under this theory, the marginal persons are more able in making creative adjustment in changed situations.
Max Weber theory says that those persons who are related with religious, community etc., follow the rules and regulations of that community only.
Cochran theory says that the entrepreneur is the model personality of the society.

Economic Theory of Entrepreneurship

According to this theory, an entrepreneur executes all activities due to economic incentives. The supporters of this theory, profit motive is the prime driving force that change an individual into an entrepreneur. As such an entre­preneur emerges due to incentives and economic profit.
According to J.R. Harris and G. F. Papanek, “The inner drive of a man is associated with economic gains, which drive him into economic activities. Therefore, they regard econo­mic gains as a pre-condition for the supply of entrepreneurs.”
Thus, the desire of increasing actual income and economic gains exist in any type of society. This tendency creates the spirit of economic development. They believe that the economic incentive is the basic condition of entrepreneurship.
According to Kirzner, “A typical entrepreneur is the arbitras, the person who discovers opportunities, the person who discovers opportunities at low prices and sells the same at high prices because of intertemporary and inter- partial demand.”
It means that an entrepreneur finds those situations in which he can earn profit by producing goods at low cost or purchasing goods at less prices and sell those goods at higher prices in market, he will take all possible steps and tend to act. No doubt, he is a seeker of profitable opportunities.
Overall this theory emphasises on economic gains and economic incent­ives which emerge the entrepreneurial class in a society.

Theories of Entrepreneurship – 4 Important Theories: Cultural Theories, Economic Theories, Psychological Theories and Sociological Theories

• “He loves practice without theory is like the sailor who boards ship without a rudder and compass and never knows where he may case.” – Leonardo Da Vinci
• There are four factors of production i.e., land, labour, capital and organization. Organization is the coordinating factor that brings together the other three factors and entrepreneurship is the element that powers and strengthens the organization. Many of the economists believe that entrepreneurship is itself the fourth factors of production that is the most important in driving a successful economy.
• Entrepreneurs are defined by their risk taking abilities and their intentions to fill in the void because of the existing lack of knowledge about a product. According to them, the entrepreneur ventures are carried out where there is a gap in the development of a product. The entrepreneurs work to fill the gap by introducing something that increases the effectiveness of the already existing product.
• The field of entrepreneurship continues to struggle with the development of a modern theory of entrepreneurship. In the past 20 years development of the current theories of entrepreneurship have centered on either opportunity recognition or the individual entrepreneur.
• At the same time many theoretical insights have come from economics, including a rediscovery of the work of Schumpeter. However because there is a lack of clarity about the theoretical assumptions that entrepreneurship scholars use in their work, assumptions from both individual opportunity recognition and economics, have been used as if they are interchangeable. This lack of theoretical distinction has hampered theory development in the field of entrepreneurship.
• Throughout the theoretical history of entrepreneurship, scholars from multiple disciplines in the social sciences have grappled with a diverse set of interpretations and definitions to conceptualize this abstract idea. Entrepreneurship is an evolved thing. With the advancement of science and technology it has undergone metamorphosis change and emerged as a critical input for socio-economic development.
• Various writers have developed variety theories on entrepreneurship and popularized the concept among the common people. The theories of entrepreneurship that are propounded by many eminent theorists have been grouped under four categories.

They are:

I. Cultural Theories:

1. Theory of Imitating – Hoselitz
2. Theory of Social Culture – Stokes

II. Economic Theories:

1. Theory of Functional Behaviour – Casson
2. Theory of Economic Incentives – Papanek and Harris
3. Theory of Adjustment of Price – Kirzner
4. Theory of X-Efficiency-Leibenstein
5. Theory of Innovations-Schumpeter
6. Theory of Harvard School
7. Theory of High Achievement – McClelland
8. Theory of Profit-Knight
9. Theory of Market Equilibrium-Hayek

III. Psychological Theories:

1. Theory of Psychology-Kunkal
2. Theory of Personal Resourcefulness

IV. Sociological Theories:

1. Theory of Entrepreneurial Supply – Cochran
2. Theory of Religious Belief – Weber
3. Theory of Social Change – Hagen

I. Cultural Theories:

Cultural theories pointed out that entrepreneurship is the product of the culture. Entrepreneurial talents come from cultural values and cultural systems embedded into the cultural environment.

This theory supports two other theories i.e.:

1. Hoselitz theory and

2. Stokes theory.

1. Theory of Imitating:

• According to Bert F. Hoselitz’s theory, supply of entrepreneurship is governed by cultural factors and culturally minority groups are the spark-plugs of entrepreneurial and economic development. In many countries, entrepreneurs have emerged from a particular socio-economic class. Hoselitz reveals that in several countries entrepreneurial talents are found in persons having particular socio-economic background.
• He emphasized the role of culturally marginally groups like Jews and the Greeks in medieval Europe, the Chinese in South Africa and Indians in East Africa in promoting economic developments. Further he has emphasized on the theory through examples of Christians contributes to entrepreneurship in Lebanon, Halai Memon industrialists in Pakistan and Marwaris in India.

2. Theory of Social Culture:

According to David Stoke’s theory, entrepreneurship is likely to emerge under specific social sanctions, social culture and economic action. According to Stokes, personal and societal opportunities and the presence of requisite psychological distributions may be seen as conditions for an individual movement to get changed into industrial entrepreneurship.

II. Economic Theories:

• According to these theories, entrepreneurship and economic growth take place when the economic conditions are favourable. Economic development takes place when a country is real rational income increases overall period of time wherein the role of entrepreneurs is an integral part.
• Economic incentives are the main motivators for entrepreneurial activities. Economic incentives include taxation policy, industrial policy, sources of finance and raw materials, infrastructure availability, investment and marketing opportunities, access to information about market conditions, technology etc.

1. Theory of Functional Behaviour:

• According to Mark Christopher Casson theories, entrepreneurship can provide a synthetic theory of the business firm that provides an integrated framework for many partial theories of the firm. His theory deals with the functional behavior of entrepreneur and his qualities which are crucial for his success.
• Drawing on an institutional approach to entrepreneurship, it is argued that economic insights can combine with managerial perspectives to clarify and synthesize many strategic issues of firms. Four dimensions of environmental shock lead to different forms of entrepreneurship that leads, in turn, to different sizes and structures for firms.
• Entrepreneurs create firms that identify and monitor sources of volatility and channel information to key decision makers in the firm; entrepreneurial firms are located at nodes of information networks. The standard rational action model of neoclassical economics is generalized to an uncertain world of volatility and differential access to information, which generates differing perceptions of the business environment.

2. Theory of Economic Incentives:

According to G.F.Papanek and J.R.Harris Theory, economic incentives are the integral factors that have induced entrepreneurial initiatives. Main features of this theory are- (i) Economic incentives, (ii) Link between economic gains and the inner urge and (iii) Economic gain.

3. Theory of Adjustment of Price:

According to M. Kirzner, the chief role of entrepreneur is based upon the adjustment of price in the market. The buyer may pay higher price or seller may accept a lower price, which gives rise to opportunities for profit. Further if different prices prevail in the same market, there in an opportunity for profitable arbitrage between two segments.

4. Theory of X-Efficiency:

• Harvey Leibenstein propounded the theory of X-efficiency which is popularly called Gap Filling Theory. According to Leibenstein, entrepreneurial functions are determined by the X-efficiency which means the degree of inefficiency on the use of resources within the firm.
• It includes routine entrepreneur, new entrepreneurship, and twin roles of entrepreneur, gap filling, input completing and X-efficiency factor. An example of Leibenstein’s Thoery is Lalu Prasad Yadav, who is an entrepreneur for Indian Railways. He had turned around the Indian Railways by improving efficiency and innovation.

5. Theory of Innovation:

This theory is developed by Joseph Schumpeter, who believes that entrepreneur helps the process of development in an economy. Schumpeter’s theory of entrepreneurship is a pioneering work of economic development. Development in his sense implies that carrying out of new combinations of entrepreneurship is basically a creative activity. According to Schumpeter an entrepreneur is one who perceives the opportunities to innovate, i.e., to carry out new combinations of enterprises. He says that an entrepreneur is one who is innovative, creative and has a foresight.

According to him, innovation occurs when the entrepreneur:

i. Introduces a new product
ii. Introduces a new methods of production
iii. Opens new market
iv. Conquests of new source of supply of raw material
v. Carrying out new organization.
The theory emphasizes on innovation, ignoring the risk taking and organizing abilities of an entrepreneur. Schumpeter’s entrepreneur is a large scale businessman, who is rarely found in developing countries, where entrepreneurs are small scale businessmen who need to imitate rather than innovate.

In view of the above, Schumpeterian theory of entrepreneurship has got the following features:

(i) Distinction between invention and innovation – Schumpeter makes a distinction between innovation and invention. Invention means creation of new things and innovation means application of new things onto practical use.
(ii) Emphasis on entrepreneurial function – Schumpeter has given emphasis on the role or entrepreneurial functions in economic development. In his views development means basic transformation of the economy that is brought about by entrepreneurial functions.
(iii) Presentation of disequilibrium situation through entrepreneurial activity – The entrepreneurial activity represents a disequilibrium situation, a dynamic phenomenon and a break from the routine or a circular flow towards equilibrium.

Critical Evaluation:

Schumpeter’s theory of innovation is criticized on the following ground:

i. The theory has the scope of entrepreneurism in the sense that it has included the individual businessman along with the directors and managers of the company.
ii. Schumpeter’s innovating entrepreneurs represents the enterprise with the R&D and innovative character. But developing countries lack these characters.
iii. The theory emphasizes on innovation and excludes the risk taking and organizing aspects.
iv. Schumpeter’s entrepreneurs are large scale businessman who introduces new technology, method of production.
v. Schumpeter remained silent about as to why some economists had more entrepreneurial talent than others.
However, despite the above criticisms, this theory is regarded as one of the best theories in the history of entrepreneurial development.

6. Theory of Harvard School:

• Harvard school contemplated that entrepreneurship involves any deliberate activity that initiates, maintains and grows a profit-oriented enterprise for production or distribution of economic goods or services, which is inconsistent with internal and external forces. Internal forces refer to the internal qualities of the individual such as intelligence, skill, knowledge experience, intuition, exposure, etc.
• These forces influence the entrepreneurial activities of an individual to a great extent. On the other hand external forces refer to the economic, political, social, cultural and legal factors which influence origin and growth of entrepreneurship in an economy.
• This theory emphasizes on two types of entrepreneurial activities i.e.- (i) Entrepreneurial functions like organization and combination of resources for creating viable enterprises, and (ii) The responsiveness to the environmental condition that influences decision making function besides the above mentioned activities.

Harvard School also emphasizes on following points:

i. To search and evaluate economic opportunities,
ii. To master the process of mobilizing resources to accomplish the goal,
iii. To interconnect the different market segments for creating an absolutely ideal marketing environment,
iv. To create or expand the firm or business enterprise,

7. Theory of High Achievement:

This theory is developed by David McClelland.

According to him entrepreneurship has been identified with two characteristics such as:

(i) Doing things in a new and better way, and
(ii) Decision making under uncertainty.
He stressed that people with high achievement oriented (need to succeed) were more likely to become entrepreneurs. Such people are not influenced by money or external incentives. They consider profit to be a measure of success and competence.

According to McClelland, a person has three types of needs at any given time, which are:

(i) Need for achievement (get success with one’s one efforts)
(ii) Need for power (to dominate, influence others)
(iii) Need for affiliation (maintain friendly relations with others)

8. Theory of Profit:

This theory is developed by Knight, Frank H. He points out that entrepreneurs are specialized group of persons who bears risk and deals with uncertainty. Main features of this theory are pure profit, situation of uncertainty, risk bearing capability, guarantee of specified sum, identification of socio economic and psychological factors, use of consolidation techniques to reduce business risks.

9. Theory of Market Equilibrium:

According to Hayek, the absence of entrepreneurs in Neo-classical economics is intimately associated with the assumption of market equilibrium. The elasticity of bank credit causes a disparity between the natural and market rate of interest. According to this theory, the postulate presupposes the fact that there is no need for further information to modify the decision.

III. Psychological Theories:

Entrepreneurship gets a boost when society has sufficient supply of individuals with necessary psychological characteristics. The psychological characteristics include need for high achievement, a vision or foresight and ability to face opposition. These characteristics are formed during the individual’s upbringing which stress on standards of excellence, self-reliance and low father dominance.

1. Theory of Psychology:

• This theory is developed by John H. Kunkel. According to him psychological and sociological variables are the main determinants for the emergence of entrepreneurs. According to him, entrepreneurship can be dependent upon the following structures in the economy, i.e.- (i) Demand Structure (ii) Limitation Structure (iii) Labor Structure and (iv) Opportunity structure.
• Beginning with the premise that fundamental problems of economic development are non-economic, he emphasizes on the cultural values, role expectation and social sanctions as the key elements that determine the supply of entrepreneurs. As a society’s model personality, entrepreneur is neither a supernormal individual nor a deviant person but is a role model of the society representing model personality.
• Model personality as a derivative of social conditioning, the role is partly shaped by the model personality that is a derivative of social conditioning of his generation. Further, innovation and invention go together with the type of conditioning in the society.
• Role expectations and entrepreneurial role: Primary cultural factor operating on the personality of the executive and the defining of his role by those involved must accommodate to some degree to the necessities of the operation to be carried out.

2. Theory of Personal Resourcefulness:

According to this theory, the root of entrepreneurial process can be traced to the initiative taken by some individuals to go beyond the existing way of life. The emphasis is on initiative rather than reaction, although events in the environment may have provided the trigger for the person to express initiative. This aspect seems to have been subsumed within ‘innovation’ which has been studied more as the ‘change’ or ‘newness’ associated with the term rather ‘pro-activeness’.

IV. Sociological Theory:

Entrepreneurship is likely to get a boost in a particular social culture. Society’s values, religious beliefs, customs, taboos etc., influence the behaviour of individual’s in a society. The entrepreneur is a role performer according to the role expectations by the society.

1. Theory of Entrepreneurial Supply:

Thomas Cochran emphasizes on the cultural values, role expectation and social sanctions as the key elements that determine the supply of entrepreneurs.

2. Theory of Religious Belief:

Max Weber has propounded the theory of religious belief. According to him, entrepreneurism is a function of religious beliefs and impact of religion shapes the entrepreneurial culture. He emphasized that entrepreneurial energies are exogenous supplied by means of religious beliefs.

The important elements of Weber’s theory are described further:

i. Spirit of capitalism – In the Webbrian theory, spirit of capitalism is highlighted. We all know that capitalism is an economic system in which economic freedom and private enterprise are glorified, so also the entrepreneurial culture.
ii. Adventurous spirit – Webber also made a distinction between spirit of capitalism and adventurous spirit. According to him, the former is influenced by the strict discipline whereas the latter is affected by free force of impulse. Entrepreneurship culture is influenced by both these factors.
iii. Protestant ethic – According to Max Webber the spirit of capitalism can be grown only when the mental attitude in the society is favourable to capitalism
iv. Inducement of profit – Webber introduced the new businessman into the picture of tranquil routine. The spirit of capitalism intertwined with the motive of profit resulting in creation of greater number of business enterprises.

3. Theory of Social Change:

• This theory is developed by Everett E. Hagen. It explains how a traditional society becomes one in which continuing technical progress takes place. It exhorts certain elements which presume the entrepreneur’s creativity as the key element of social transformation and economic growth. It reveals a general model of the society which considers interrelationship among physical environment, social culture, personality etc.
• According to Hagen, most of the economic theories of underdevelopment are inadequate. Hagen insisted that the follower’s syndrome on the part of the entrepreneur is discouraged. This is because the technology is an integral part of socio cultural-complex, and super-imposition of the same into different socio-cultural set-up may not deliver the goods.

The Kakinada Experiment:

Conducted by McClelland in America, Mexico and Mumbai. Under this experiment, young adults were selected and put through a three month training programme. The training aimed at inducing the achievement motivation.

The course contents were:
i. Trainees were asked to control their thinking and talk to themselves, positively.
ii. They imagined themselves in need of challenges and success for which they had to set planned and achievable goals.
iii. They strived to get concrete and frequent feedback
iv. They tried to imitate their role models those who performed well.

Conclusions of the Experiment:

(i) Traditional beliefs do not inhibit an entrepreneur
(ii) Suitable training can provide necessary motivation to an entrepreneur.
(iii) The achievement motivation had a positive impact on the performance of the participants.
It was the Kakinada experiment that made people realize the importance of EDP, (Entrepreneurial Development Programme), to induce motivation and competence in young, prospective entrepreneurs.