Chapter 2: Economic Theories of Entrepreneurship

1. Chapter 2: Economic Theories of Entrepreneurship

2. Entrepreneurship What is It? “Entrepreneurship is an economic phenomenon involving a nexus of two phenomena: the presence of lucrative opportunities and the presence of enterprising individuals”. (Shane and Venkataraman, 2000, p. 218).

3. Who are they? (Delmar, 2006) • What they do? (Venkataraman, 1997) • Why they do the things they do? (Davidsson, 2008) • How they do the things they do? (Garnter, 2005) • Where they do it? (Welter, 2011)

4. Who are they?

5. Entrepreneurs Entrepreneur is derived from the French word entreprendre, meaning “to undertake”. Entrepreneurs use innovation to exploit or create change and opportunity for the purpose of making profit. They do this by shifting economic resources from an area of lower to an area of higher productivity, accepting a high degree of risk and uncertainty in doing so.

6. The History of Economic Thought on the Entrepreneur Source:http://aventalearning.com/content168staging/2008AmHistA/unit1/html/section_3_page_7.html

7. What is an Entrepreneur? • http://ecorner.stanford.edu/authorMaterialInfo.html?mid=400

8. Revolutionaries • How have entrepreneurs affected your life in the past 24 hours? • Have you used your computer? (personal computers, PC software: Intel, Microsoft, Dell, Apple) • Have you surfed the web? (web browser – Netscape, Google, AOL) • Have you made a purchase over the internet? (internet retailers, eBay, PayPal) • Have you made a mobile phone call? (cellular phone services; voice mail, IT services) • Have you used a hand held wireless communication device (a ‘blackberry’)? (RIM) • Have you taken your car in for a fast oil change or MoT? (KwikFit) • Have you taken a budget flight? (Easyjet, Ryan Air)

9. Revolutionaries cont. • Where have you bought your clothes? Have you put on trainers (Nike, Reebok), put on waterproof clothes (WL Gore, Timberland)? • Have you bought a coffee? (Starbucks) • Have you bought some DIY products? (Home Depot, B&Q) • Have you bought any stationary? (Staples) • Have you listened to your iPod? (Apple) • Have you watched a 24 hours news channel? (CNN) • Do you purchase ethically (Bodyshop)? • Have you been to a fitness club (Fitness First, David Lloyd)? • Have you bought a copy of ‘Big Issue’? (social entrepreneurship)

10. Key Economic Schools of Thought

11. Economic Theories of Entrepreneurship • Capitalist – Adam Smith, 1776, David Ricardo, 1871 • Technological Knowledge – Jeremy Bentham, 1838 • Risk Taker –Richard Cantillion, 1755 • Risk Taker & Innovator – Von Thunen, 1850 • Economic Change – Carl Menger, 1871 • Capitalist – Amasa Walker, 1866, Francis A. Walker, 1887 • Risk Taker & Uncertainty Avoidance – Frank Knight, 1921 • Novel Resource Combination – Alfred Marshall, 1920 • Alertness – IsrealKirzner, 1973 • Innovator – Joseph Schumpeter, 1952

12. Evolving Entrepreneurs

13. Schumpeter • Schumpeter’s entrepreneur is an innovator. • The entrepreneur brings change through the introduction of new technological processes or products. • The person who destroys the existing economic order by introducing new products and services, by creating new forms of organisation, or by exploiting new raw materials. • Creative destruction.

14. Kirzner • Entrepreneur is alert to profitable opportunities for exchange • Entrepreneur is the middle-man who facilitates exchange • Entrepreneur has additional knowledge to exploit to take advantage of profitable opportunities

15. Knight • •Calculated risk-taker • The opportunity for profit arises out of uncertainty and risk • The entrepreneur is an individual who is prepared to undertake risk and the reward - profit • Responsibility for one's own actions

16. Understanding Entrepreneurship

17. …Entrepreneurship • “An activity that involves discovery, evaluation and exploitation of opportunities to introduce new goods and services, and organize new markets, processes and raw materials through coordinating efforts of the entrepreneur that previously did not exist” (Shane, 2003: 4) • And he adds… • He adds that entrepreneurship “involves the nexus of entrepreneurial opportunities and enterprising individuals … where a situation in which a person can create a new means-ends framework for recombining resources that the entrepreneur will yield a profit” (Shane, 2003: 18).

18. Baumol ’s Three Types of Entrepreneurship Productive entrepreneurship is innovation leading to wealth creation and economic development which advances not only the individual but wider society. Pursue a business opportunity within prevailing institutions. Unproductive entrepreneurship is some form of bureaucracy that typically benefits an individual but not necessarily society. Create contracts to overcome institutional shortcomings e.g. lobbying; help others avoid taxes. Destructive entrepreneurship also benefits the individual more than society. Source: Baumol, W.J. (1990) Entrepreneurship: Productive, Unproductive and Destructive. Journal of Political Economy, 98(5), 893-921

19. The Myths of Entrepreneurship Myth 1: Entrepreneurs are doers, not thinkers Myth 2: Entrepreneurs are born, not made Myth 3: Entrepreneurs are always inventors Myth 4: Entrepreneurs are academic and social misfits Myth 5: Entrepreneurs must fit the profile Myth 6: All entrepreneurs need is money Myth 7: All entrepreneurs need is luck Myth 8: Entrepreneurship is unstructured and chaotic Myth 9: Most entrepreneurial initiatives fail Myth 10: Entrepreneurs are extreme risk takers

20. Reasons Not to be an Entrepreneur http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2803

21. Why is Entrepreneurship so Important? • Important contributions to industrial markets: • Entrepreneurs play an important role in the change of technology; • Entrepreneurs create an additional sense of competition whilst also, providing a mechanism for regeneration; • Entrepreneurs contribute to international competition via niche markets and; • Entrepreneurs influence in creating jobs.

22. What explains this recent growth in entrepreneurship?? • Structural shift from manufacturing (large firm dominated) to services (small firm dominated) • Growth in personal, flexible, tailor-made services • Restructuring by large firms – focus on core activities, sub-contract non-core activities • Technological change • Scientific discoveries exploited by small firms • Production and IT technologies have reduced the role of economies of scale • Low cost and access to communications technology (‘the great equaliser’): access to information, distribution (‘the long tail’) • Importance of human capital rather than financial capital as the basis for competitiveness • Consumer choice – reaction against mass produced products and services: individualism, demand for authenticity, natural products (e.g. real ale beer) – growth in market niches • Deregulation of markets: e.g. in airlines, telecoms, media • Personal choice – ‘rebellion’, reaction against working in large impersonal organisations, want to control own destiny • Availability of finance – venture capital • Availability of support, advice and education

23. Recap – What is an entrepreneur? • Economic Approach: • Schumpeter • “the person who destroys the existing economic order by introducing new products and services, by creating new forms of organization, or by exploiting new raw materials.” • “creative destruction” • the entrepreneur is a special person • entrepreneur is an innovator • develops new technology • Kirzner • entrepreneur is alert to profitable opportunities for exchange • identifies suppliers and customers and acts as an intermediary (no necessity to own resources and profit arises from intermediary function) • entrepreneur has additional knowledge which is not possessed by others (the role of information is very important) • anyone could potentially possess the additional knowledge and be alert to opportunities for exchange and trade. • Knight • The entrepreneur is an individual who is prepared to undertake risk and the reward - profit - is the return for bearing uncertainty and is an uninsurable risk. • entrepreneur is a calculated risk • taker • opportunity for profit arises out of uncertainty surrounding change • responsibility for one’s own actions

24. Personality Approach • Need for independence • Controlling your own destiny, doing things differently, being in a situation where you can fulfill your potential. • “I enjoy the independence of single- handling a boat. I like controlling the elements, making the wind and the waves and the water work for me.” • Gerry Schwartz

25. Personality Approach Need for achievement Achievement does not necessarily mean that money is an end itself. It may allude to employing the 100th person, meeting the first million pound mark etc. Internal locus of control Believing you can exercise control over your environment and ultimately your destiny. You can believe in Fung Shui if you want, but ultimately people control their own fate.” Li KaShing

26. Personality Approach • Ability to live with uncertainty and take measured risks • A regular income is a requirement in any job and the cause of much upheaval and stress. People tend to be risk averse and less willing to be risky with their own money. In this manner managers and entrepreneurs are very different. • “It was an extremely satisfying experience. Taking smart risks can be very gratifying.” • Reed Hastings

27. Personality Approach Opportunistic Entrepreneurs exploits change for profit. They seek out opportunities to make money. “Don’t spend so much time trying to choose the perfect opportunity, that you miss the right opportunity.” Michael Dell Innovative The ability to spot opportunities and to innovative are the most important distinguishing features of entrepreneur. Innovation is the prime tool entrepreneurs use to create or exploit opportunity. Self-confident Confident in your own judgement and ability to start up your own business with the risks and uncertainty that they face. Don’t confuse with some entrepreneurs being arrogant or being delusional.

28. Personality Approach Proactive and self-motivated Entrepreneurs are highly driven and possess determination. They are impatient, work long hours, committed and determined to succeed. This strong drive is what psychologists call type ‘A’ behaviour. They are highly driven by money, their goals, success, etc. Visionary with flair Clear vision of what they want, how they will achieve it and when. "Our vision is to be the world's most consumer-centric company, where customers can come to find anything they want to buy online.“ Jeff Bezos Great risks and uncertainty Large amounts of capital and time are required. For example, entrepreneurs are known to put up their homes as collateral or capital.

29. Personality Approach Theories • McClelland’s (1961) The Achieving Society • Need for Achievement • Proactive person – lots of initiative and assertive • Committed to aims and achieving them • Key characteristics: • Achievement • Calculated risk-taker • High internal locus of control • Creativity • Innovative • Need for authority • Ambiguity tolerance • Vision • Self-efficacy

30. Personality Approach Theories • Merideth et al. (1982) • The 5 core traits of entrepreneurship: • Confidence • Risk-taking • Flexibility • Achievement orientation • Independence • Meredith, G.G., Nelson, R.E. and Neck, P.A. (1982). The Practice of Entrepreneurship, International Labour Office, Geneva.

31. Personality Approach Theories • Timmons (1994) • Some acquired traits, some innate • Need for achievement • Vision and ability to inspire • Responsibility for actions / decisions • Ambitious • Achieved personal goals / ambitions • Able to cope with failure • Creative • Timmons, J.A. (1994). New Venture Creation: Entrepreneurhsip for the 21st Century, 4th Edition, Irwin: Chicago, IL.

32. Entrepreneurial Types?

33. Methodological Problems • Characteristics are not stable and change over time. • They require subjective judgements. • Measures tend to ignore cultural and environmental influences. • The role of education, learning and training is often overlooked. • Issues such as age, sex, race, social class and education can be ignored.

34. Why Do Entrepreneurs Do It?

35. Antecedent Factors • Family • Ethnicity • Gender • Education • Previous employment • Religion • Social group • National culture

36. Situational Factors • Employment • Unemployment • Immigration • Economic opportunity

37. Yet Even Still….. Entrepreneurship in the 21st Century: Is Still Unclear…

38. Reading • Chell, E. (1985) The Entrepreneurial Personality: A Few Ghosts Laid to Rest? International Small Business Journal, 3, 43-54. • Gartner, W.B., (1985) A conceptual framework for describing the phenomenon of new venture creation. The Academy of Management Review, 10(4), pp. 696-706. • Hisrich, R., Langan-Fox, J. and Grant, S. (2007) Entrepreneurship Research and Practice: A Call to Action for Psychology. American Psychologist, 6(6), 575-589. • McClelland, D.C. (1987) Characteristics of Successful Entrepreneurs. The Journal of Creative Behavior, 21(3), 219-233.