LESSON

Theories •
on Entrepreneurship
shou ld be able to
. I n the learner
f this esso '
At the end ° trepreneurs hip and
. theories on en .
1. identify some . n entrepreneurship.
f the theories o
2. cite the importance o

NATURE AND CONCEPT

A theory is a generalization that explains a set of facts or phenomena. _It is not an absolute
truth. It can be supported by another observation or proven to be otherwise.
In the process of evaluating the soundness and logic of various entrepreneurship theories,
remember that the scholars who developed or contributed them mostly anchored their concepts
on the economic events which were happening at that time. Learn by heart the theories that
you deem appropriate and applicable in your prospective business and will support your
desire to become a successful entrepreneur. Evaluate them and choose the theory or theories
that you will believe and accept. In other words, there is no right or wrong answer.
There are several theories on entrepreneurship. Here are some of them.
1. Innovationtheory
2. Keynesian theory
3. Alfred Marshall theory
4. Risk and uncertainty-bearing theory
5. Other theories on entrepreneurship

Chapter 1 I Understanding Ent

repren eurship

I
INNOVATI O N T HEO RY
. t·on theory on cn lrl'fJrc ncurshi p was contributed by Joseph Schumpeter,
The mnova 1 . . • .
. conomist and no lili rn l sci l'nl isl. He w rote about 1t m h1s book, The Theory of
an Austrian e r-
Economic Development .
The innovation theory regards economi c de velopment as the product of structural change
or innovation. Schu m.peter argu ed that the chances for economic development to take place
would be slim unless revolution ary changes in the circular flow of economy would happen.
An economy with<?u t any revolutionary change is deemed to be static and cannot expect
any economic development. Simply put, there will be no development in any economic
equilibrium or status quo.
Schumpeter strongly believed that innovation is the force that will propel the revolutionary
change. It will cause the creative destruction of the static mode of the economy, stir the
entrepreneurial activity, and encourage con1petition. Unless innovation takes place, economic
equilibrium or status quo will remain.
It becomes the primary role of the entrepreneur to introduce innovation in any of the
following forms:
1. new product

2. new production method

3. new market
4. new supplier

5. new industry structure

Will you consider the innovation theory as one of your guiding posts in your
j<Jurney as an entrepreneur?

KEY NESIAN THEORY

. ":11e Keynesian theory on entrepreneurship was developed by John Maynard Keynes, a
Bntish economist. The key concepts of the theory were included in his book, The General
~ory of Employment, Interes t and Money, which was published during the Great Depression
m 1936.

The theory put so m uch emphasis on the role of the government in entrepreneurial and
economic development, m.o st especially when the economy was experiencing dep ression. It
sugge 5t s that entrep reneurial activities may not be favorable in the future unless the short-
term problem of econom ic disequilibrium is finally resolved through the active participation
of the government.

Lesson 3 I Theorie~ on Entrepreneurship

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d a critical role t e n.
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pt)(,r rt'turns on im 'L'SI nwnt. It was t ,e gov . h.
K ian theory of entrepreneurs ip?
Are _11011 going to consider tlte tenets of the eynes

ALFRE D MARSHAL THEO RY

English economist, w as in troduced
The entrepreneurship theory of Alfred Marsh a11' an f f t • h
• · 1 ted that there are our ac ors 1n t e
in hi~ book, Principles of Economics. As he strong Y asser . . h
· · ) f ods and services 1n t e economy
production (land, labor, capital, and orgaruzatlon o go . . . . '
· d . · 1
he considered organization as the coor matmg e emen ·
t Without the active parhc1pat10n of
or0'anization
0
the other factors of production will remain inactive in their role for economic
I

de\'elopment.
_Marshall regarded the entrepreneurs as the prime movers in the organization. They
are expected to create new commodities or improve the existing ones. He believ ed that the
entrepreneurs could perform and meet expectations only if they had a th orou gh
unders tanding of the industry where they operated. Without the activ e participation of
entrepreneurs in the economy, development will surely be slow and limited.
Marshall further suggested that an entrepreneur must be able to foresee possible changes
in the future supply and demand pattern. He/She must also possess the necessary skills to
be an entrepreneur. Marshall observed that though the skills and abilities required of an
entrepreneur are so numerous, only a few exhibited a high degree of proficiency.
Wi ll your entrepreneuria l drive be influenced by t he entrepreneurs hi theo
of A lfred M arshal? · p ry

RISK AND UNCERTAINTY-BEARIN G THEO RY

Frank Hyneman Kn ight A .
. , , an mencan economist 1· .
bearing theory of entrcp reneurshi in l . . , conceptua ized th e nsk and uncertainty-
. p 11s book, Rzsk, Uncertainty and Prof°it .
B\' ad opt1ntr s 1 'J' ·
· o t me concepts of th , · .
an agent of ti1 " . c ear1y economists Kn· ht . d
. t' production process wl• . / ' ig v1ewe an entrepren eur as ·
Knight h , .,cie 11e she com1 t h
' 0\-vever, added ri sk-tak· . ec s t e producers and the con sumers.
entreprene f mg as an rmporta11 t d '
ur rom a worker. imen sion that will d ifferen tiate an

Chapter 1 / Understanding Entrepreneurship

 Knight consid ered unce rta inly a n im portan t foclo r in Lh e p rod uc ti on of goods and services .
He believed tha t the e ntre pre ne ur mu s t a nti cipa te poss ib le random events to h app en while
should ering the ri s k a t the sa me li me. T he ent rep re ne ur w ould be e ve ntu a lly rewarded w ith
hi gh profits .
Do you consider the rislc-uncerf-aint-y bearing t heory of entrepreneurship
applicable to you as .future cnt-rcpreneur?

OTHER TH EO RI ES ON ENTR EPRE NE URSHIP

There are other theories on entrepreneurship. This does not mean, however, that they are
inferior to the previously listed theories.
l. Weber's sociological theory. In sociological theory, Max Weber stressed that social
cultures are the primary driving elements of entrepreneurship. The entrepreneur is
expected to perform the role of a good constituent by executing his/her entrepreneurial
activities in line with good customs and traditions, religious beliefs, and morals.
2. Kaldor's technological theory. The technological theory was developed by Nicholas
Kaldor who considered modern technology as an essential factor in production.
In the absence of modern technology application in entrepreneurship, economic
development would be ·slow and growth might not be expected. The entrepreneur is
expected to keep abreast with modern technology and find ways to apply the same in
the entrepreneurial endeavor. Proper application of modern technology will promote
efficiency in the production of goods and services.
3. Leibenstein's gap-filling theory. In . this theory on entrepreneurship, H em y
Leibenstein proposed that the primary role of entrepreneurship in any economic
activity is to fill the existing gap. Entrepreneurship is responsible for recognizing
trends in the market. The entrepreneur is expected to possess abilities that will connect
the different markets. He/She must extend assistance to entrepreneurial ventures
experiencing failures and deficiencies.
4. Kirzner's learning-alertness theory. Israel.Kirzner was the main proponent of this
. theory. He pointed out spontaneous learning and alertness as the two m ajor attributes
of entrepreneurship in any given economy. The entrepreneur must be alert in
recognizing entrepreneurial opportunities and the ignorance. of consumers as well.
He/She must immediately find appropriate remedy to correct the error or wrong
perception.

Which of these theories do you consider fitting to your dream of becoming a

successful entrepreneur?

lesson 3 I Theories on Entrepreneurship

 I
Remember that there is no correct or wrong theory. Regard less of th e entre preneur.ship
theory that you choose, the most important thi ng is th at you base y o ur bu sin ess d ecisions not
on your personal likes and dislikes but rather on so und reason.
I
LESSON SUMMAR\'
. . th t explains . a set o f facts
. or phen omena . It
1. A theory is a genera I1zahona b ther observation or
is not an absolute truth. It can be supp orted Y ano
proven to be otherwise. .
2. Some theories on entrepreneurs h 1.P me
• Iu de the following:
. of Joseph Schumpeter
a. Innovation theory. The innovat10n theor~ t' development.
considers innovation as the primary factor a ec ing
. theory of John Maynard
b. Keynesian theory. The Keynesian . Keynes
h
. d ·
attributes economic growth, especia 11Y unn g depress10n, to t e
government.
c. Alfred Marshall theory. The Alfred •Marshall theory generalizes that
the orgamzat10n · ·t·1cant role among the different
· · plays th e most s1gm
factors of production.
d. Risk and uncertainty-bearing theory. The risk-uncertainty bearing
- theory of Frank Hyneman Knight states that an entrepreneur faces the
risk of uncertainty in the process of connecting the supplier and the buyer.
e. Weber's sociological theory. The sociological theory of Weber asserts
that social cultures have significant contributions to entrepreneurship.
f. Kaldor's technological theory. The technological theory of Kaldor
gives importance to the advancement of technology as an element of
production.

g. Leibenstein's gap-filling theory. The gap-filling theory of Leibenstein

advocates that entrepreneurship fills the gap . . . . .
. in any economic activity.
h. Kuzner's learning-alertness theory Th 1 .
Kirtzner focuses on learning and ale~tne:s earn1ng-~lertness theory of
entrepreneurship. . as th e primary attributes of

Chapter 1 / Understanding Entrepreneurship