CHAPTER-1

Concept and Theories of

entrepreneurship
 Meaning And Definition Of
Entrepreneur

An entrepreneur is someone who has idea

and who works to create a product or
service that people will buy, as well as an
organization to support that effort.
An entrepreneur takes on most of the risk
and initiative for their new business.
Importance
Creation of job opportunities
Creation of new businesses
Innovation
Leads to better standards of living
Supports research and development
Creation of national wealth
Characteristics of successful
entrepreneur
Creativity
Risk taking
Passion
Planning
Knowledge
Social skills
Leadership
Types of Entrepreneur

1) According to functional
Characteristics
 Innovative Entrepreneur
 Adoptive Entrepreneur
 Fabian Entrepreneur
 Drone Entrepreneur
2) According to the types of business
 Business Entrepreneur
 Trading Entrepreneur
 Industrial Entrepreneur
 Corporate Entrepreneur
 Agriculture Entrepreneur
 Retail Entrepreneur
 Service Entrepreneur
3) According to technology used
Technical Entrepreneur
Non-Technical Entrepreneur
Professional Entrepreneur

4) According to Growth
Growth Entrepreneur
Super Growth Entrepreneur

5) According to Area
Urban Area
Rural Area
6) According to Gender
Men Entrepreneur
Women Entrepreneur

7) According to level of Motivation

Pure Entrepreneur
Induced Entrepreneur

8) According to capital Ownership

Private Entrepreneur
State Entrepreneur
Joint Entrepreneur
9) According to the Entrepreneurial
Activity
Novice Entrepreneur
Serial Entrepreneur
Portfolio Entrepreneur
Skill Requirement of an Entrepreneur

1)Administration skills
2)Financial knowhow
3)Vision and leadership skills
4)Conflict and consensus management skills
i)Emotional conflict/Affective conflict
ii) Cognitive conflict
5)Interpersonal skills
6)Communication skills
i)Writing skills
ii) Speaking skills
iii) Listening skills
7)Problem solving skills
8) Technical skills
Problem faced by Entrepreneur
Unethical and unsupportive business
environment
Lack of business opportunities
Lack of entrepreneurial capacity
Inadequate entrepreneurship training
Lack of business experience
Fear of failure
Risk avoidance
 Points of Entrepreneur Manager
comparison
Meaning A person who creates an An individual who takes the
enterprise, by taking responsibility of controlling
financial risk in order to get and administering the
profit. organization.

Focus Business start up Ongoing operation

Primary Achievement Power
motivation
Approach to task Informal Formal

Status Owner Employee

Reward Profit Salary
Management One man show Management team
style
Dependency Independent Depend on entrepreneur

Thinking Free thinker Within scope of business

Concept of Entrepreneurship
“Entrepreneurship is the process
of developing, organizing and
running a new business.”
Entrepreneurship is the act
of creating a business or bearing
all the risks with the hope of
making a profit.
The more modern entrepreneurship
definition is also about transforming
the world by solving big problems like
bringing about social change or
creating an innovative product that
challenges the existing condition of
how we live our lives on a daily basis.
 Myth of Entrepreneurship
1. Entrepreneurs Don’t Have A Personal Life 
2. Business People Don’t Have A Boss
3. Entrepreneurs Are Rich 
4. Entrepreneurs Take Extreme Risks 
5. Entrepreneurs Think Only About Money
6. There Is No Business Without A Unique Idea
7. Entrepreneurs Should Always Trust Their Guts 
8. Entrepreneurs Are Born, Not Made 
Role of Entrepreneurship
Wealth creation and sharing
Create Jobs
Balanced regional development
GDP and per capita income
Standard of living
Export
Community development
THEORIES OF ENTREPRENEURSHIP

1) Sociological Theories
2) Economical Theories
3) Cultural Theories
4) Psychological Theories
 (1) Sociological Theories
Max Weber's theory of religious
belief
Thomas Cochran's theory of
entrepreneurial supply
E.E Hagen’s theory of social change
Frank young’s theory of group level
pattern
Max Weber's theory of religious belief

Max Weber advocated a sociological

explanation for the growth of entrepreneurship
in his theory of social change.
He belief that entrepreneurial cultures are
influenced by religion.
The religious belief and ethical value
associated with the society plays a important
role in determining the entrepreneurial culture.
In this theory spirit of capitalism is a
fundamental concept.
Capitalism refers to the economic system
where market forces of demand and
supply are allowed to play freely.
As economic freedom and privet
enterprises are promoted in capitalism.
Spirit of capitalism promotes the
entrepreneur to engage in entrepreneurial
activity and earn more and more profits.
Another associated concept was that of
adventurous spirit which refers to influence
and promotes entrepreneurism.
Weber felt that the belief system of
Hinduism didn’t encourage entrepreneurship.
The Hinduism didn’t belief the spirit of
capitalism and was obstacle in the promotion
of entrepreneurship.
 Weber was of the opinion that protestant
ethic provided the mental attitude in a
society that promotes spirit of capitalism and
favors entrepreneurship.
(protestant ethic : a person whose duty to
achieve success through hard work.)
The rate of industrial growth depends
upon the values belief by the religion of
the society.
The protestants has advanced at a faster
rate in establishing capitalism in Europe
owning to the value system accept by
protestant ethic.
 This theory has been challenged criticized by
researches:
The theory is based on unrealistic and invalid
assumption.
The theory has been found empirically invalid.
Max weber has been criticized by many sociologists
on his view on Hinduism and entrepreneurship. The
rapid expansion of entrepreneurship in India in the
post independence period disproves that Hinduism
is averse to the spirit of capitalism.
The view on protestant ethics were also not
completely correct. capitalism has flourished in
regions where protestant ethics is not present.
Thomas Cochran's theory of
entrepreneurial supply

The theory advocated by Thomas Cochran.

The main focus of this theory is on the
sociological aspect of entrepreneurial supply.
Sociological aspect means that it focuses on
the society in which we are living.
According to him the problem of economic
development is non-economic in nature.
That non economic factor are, factors which
are related to cultural value, role expectation
and social approval.
They are the key elements that determine that
supply of entrepreneur.
Following are the basic element of Thomas
Cochran’s theory:
Entrepreneur as a society’s model personality.
Social conditioning as a basis of model personality.
Role expectation and entrepreneurial role.
The way of raising and schooling.
Dynamic of entrepreneur.
E.E Hagen’s theory of social change

This theory was given by E.E Hegan.

So, this theory states that a continuing
technical progress can transform the
traditional society.
The theory attention on entrepreneur
creativity as the key element of social
transformation and economic change.
The features of these theories are:
Presentation of the general model of the
society.
Economic growth as a product of social
change and political change.
Rejection of follower’s problems.
Historical shift as a factor of a initiating
change.
Frank young’s theory of group level pattern

Frank young defines entrepreneurs as that the

entrepreneur characteristics are found in
small groups where in individuals develop as
entrepreneur.
Every group has an individual who has that
kind of qualities.
Frank young arrived at the group level pattern
behavior entrepreneur based on his studies
knows as Thematic Appreciation Test (TAT)
on groups of entrepreneurs.
 (2) Economic theories
Schumpeter’s theory of innovation
Leibenstein’s theory X efficiency
Mark casson’s theory
Papanek and Haris theory
Harvard school theory
M. kirzner’s theory
David McClenlland ’s theory of
achievement
Knight theory of profit
Schumpeter’s theory of innovation

Joseph Schumpeter propounded the well

known innovation theory of
entrepreneurship.
He believed that entrepreneurs by
introducing an innovation and takes the
economy to a new level of development.
Innovation of entrepreneurs are
responsible for the rapid economic
development of any country.
Taking about innovation, he referred to new
combinations of the factors of production,
Schumpeter had assigned the role of innovator
to the entrepreneur, who is not a man of
ordinary managerial ability, but one who
introduce something entirely new.
Innovation could involve any of the following:
 Innovation of new product
 Innovation in novel method or process
 The opening up of a new market
 Find new sources of supply of raw material
 innovation in management
Schumpeter had differentiated between
invention and innovation.
Invention refers to creation of new
material and innovation refers to
application of new material into practical
use in industry.
They enjoy creating and getting things
done.
These “ innovating entrepreneur ” has
played an important role in the rise of
modern capitalism.
Criticism:
The theory over highlighted on innovative
functions of entrepreneur. It ignored the
organizing aspect of entrepreneur.
Schumpeter had completely ignored the
risk-taking function of the entrepreneur ,
which cannot be ignored. Whenever an
entrepreneur develops a new combination
of factor of production, there is enough
risk involved.
The theory is more applicable in
developed countries only. In developing
countries there is a lack of innovative
entrepreneurs.
The theory does not provide the
explanation as to why few countries have
more entrepreneurship talent than others.
Leibenstein’s theory X efficiency
Harvey Leibenstein propounded the
theory of X-efficiency which is popularly
called Gap Filling theory.
X-efficiency theory states that a greater
amount of product market competition
will pressure firm member to produce
with more effort so that firm is producing
closer to their frontiers.
X- efficiency means that it is possible for a
firm to increase their output without any
change in input or decrease costs without any
change in output.
X-efficiency can be increased through:
 Better management
 Better organization
 A moderate amount of pressure from the
market to increase effort
Mark Casson’s theory
Mark Casson was a famous economist,
propounded a theory on entrepreneurship.
He makes the comment that there is no
proper definition of what the word
entrepreneurship means.
Economist have avoid the control of this
term to other disciplines like psychology,
sociology and other sciences.
The theory of Casson looks at what the
entrepreneur does and the attributes that
differentiate him from other.
The main content of this theory is:
 The relationship between demand and
supply
 The traits of an entrpreneur.
Papanek and Haris theory
Entrepreneur and economic growth takes
place when economic condition are favorable.
Economic incentive includes:
 The taxation policy
 Industrial policy
 Sources of finance and raw material
 Infrastructure availability
 Investment and marketing opportunities.
 Access to information.
Critics:
The economic theory has failed to
provide a satisfactory analysis of either
the role of entrepreneurship or its supply.
Traditional model treat the
entrepreneurial function like a managerial
function.
Harvard school theory

According to the Harvard school,

entrepreneurship comprises any
purposeful activity that initiates,
maintains or develops a profit oriented
business.
The main point of the theory are as
follow:
 Internal forces:
Inner traits of individual like his
knowledge, beliefs thought process, skill
level, experience etc.
 External forces:
These involve to the political, social,
economics, legal and cultural factor which
have a big impact on the entrepreneur’s
environment.
M. kirzner’s theory
The adjustment of price theory was given
by the popular economist, Israel Kirzner.
He says that successful entrepreneur are
always careful of opportunities in the
market and on the lookout to take
advantage of the same.
The main point of the theory are as follow:
 Adjustment of price
 Alertness to disequilibrium
The chief role of entrepreneur is based
upon the adjustment of the price in the
market. He states that wrong price in the
market may reduce the profit of
entrepreneur.
David McClelland’s theory of
achievement
David McClelland a professor of
psychology at Harvard university, along
with his team members did detailed
studies on human needs.
He identified three types of needs which
are capable of motivating persons
I. Need for achievement(n/ACH)
II. Need for power(n/PWR)
III. Need for affiliation(n/AFF)
Need for achievement
From his research, McClelland concluded
that the desire for achievement is not
same for all- some have low degree of
desire for achievement, whereas some
others have a high degree of desire for
achievement.
He has identified the following 4 features
of high achievers:
Setting of moderately difficult goals
 High achievers prefers to set moderately
difficult goal for themselves and take
moderately risky decision.
 They try to improve their performance as
compared to past achievements.
Assuming personal responsibility for
results
 High achievers assumes personal
responsibility for achieving the goal.
 Little desire for material rewards
 They put their maximum focus on the
goal, not in expectation of monetary
rewards.
 Achievement itself is reward
feedback on their performance
 Higher achievers desire immediate and
specific feedback frequently on their
performance so as to gain confidence and
rectify(correct) the mistake.
Need for power
Need for power refers to the desire for
having control over other people and
events.
The need for power may differ person to
person – a person having ‘almost no
desire for power’ or to a person for whom
‘power is everything’.
Person with high power try to capture the
source of power.
Power may prove a boon or bane for an
organization depending upon its nature of
use.
It used positively, it may make a person a
very successful manager.
If power is used in negative form, it may
make a person dictator, who is unwilling
to listen other.
Need for affiliation
This need to a person’s desire to interact
with others, mix with them and make
friends.
Like other need, this need may also be in
different degrees in different persons.
Persons with high need for affiliation try
to change themselves and behave the way
it is desired by the persons whom they
want to make friends
Such persons help others in every
possible way.
They like attending social gatherings and
respect others sentiments.
They prefer co-operative environment
rather than competitive one.
Knight’s theory of profit
Frank H. knight in his book risk,
uncertainty and profit regards profit of the
entrepreneur as the reward of bearing
non- insurable risks and uncertainties.
Entrepreneurship is genuinely associated
with risk bearing.
Knight had identify risk into insurable
risk and non- insurable risks.
There are certain risks that are measurable
and the probability of such risk can be
statistically estimated and hence such
risks can be insured.
Example of insurable risks include theft
of commodities, fire in the enterprise,
accidental death etc.
On the other hand, there are certain risks
which cannot be calculated. The
probability of their occurrence cannot be
statistically find out.
These risk are non insurable, prof.
Knight opined that the profit is the reward
for bearing the non- insurable risks and
uncertainties.
Uncertainty- bearing is one of the most
vital function in a economy.
The entrepreneur bear the uncertainty
involved in the enterprise.
In a state of competitive economy, where
there is no risk every entrepreneur will
have a minimum supply price.
The existence of uncertainty tends to raise
the minimum supply price. The
entrepreneur expect a level of profit for
bearing the uncertainty.
The silent points of knight’s theory
include:
 According to the theory, entrepreneur
bearing the uncertainty to earns pure profit.
 The theory suggests that the more risky the
nature of enterprise, the higher level of
profit earned by the entrepreneurs.
The reward of the entrepreneur is
uncertain entrepreneur guarantees interest
to lender of capital, wages to workers and
rent to the landlord.
The level of uncertainty in business can
be reduced by applying the technique of
fusion.
 (3)Cultural Theories

Hoselitz’s Theory
Stoke’s Theory
Hoselitz’s Theory
Hoselitz’s sociocultural theory is based on the
assumption that every individual is present with
social and cultural power.
According to him, entrepreneurs can be
developed where society is well developed.
The basis of hoselitz is derived from the
following viewpoint:
 Marginal man hypothesis
 The importance of marginal and leadership
skills.
 Involvement of specific social classes.
Stoke’s Theory
Stoke emphasizes that entrepreneurship
emerges under particular economic action,
social culture and social sanctions.
He believed that economic actions are
directed by socio-cultural values.(beliefs,
habits that influenced our everyday
behaviour)
(4) Psychological theories
Theory of personal resourcefulness
Entrepreneurial supply theory
Theory of personal resourcefulness

Personal resourcefulness is the belief in

one’s own capability for initiating actions
directed towards creation and growth of
enterprise.
It emphasize on initiative rather than
reaction.
Entrepreneurial supply theory

John H. kunkal advocated the theory of

entrepreneurship supply.
According to him, psychological &
sociological variables are the main
determinants for the emergence of
entrepreneurs.
 Entrepreneurism can be dependent upon
the following structures in the economy.
 Demand structure
 Limitation structure
 Labor structure
 Opportunity structure
Demand structure
It indicate economic demand with relation to
change in economic development &
government policies.
Limitation structure
It is originally socio-cultural in characteristic.
In this structure, entrepreneur is regarded as
the most strange individual in the society&
that’s why the society restricts specific
activities that influence all member in the
society.
Labor structure
It refers to the supply of skilled & willing labor.
The structure is governed by a large number of
factors such as available job alternatives,
mobility of labor etc.
Opportunity structure
It is the most important structure governing the
supply of entrepreneurs.
The structure refers to the technological &
managerial skills, information about techniques
of production, market structure & supply of
capital.