THEORIES ON ENTREPRENEURSHIP Flashcards
a generalization that explains a set of facts or phenomena.
theory
What are the 4 main theories of entrepreneurship?
INNOVATION THEORY,
KEYNESIAN THEORY, ALFRED MARSHAL THEORY ,
y was propounded by Joseph A. Schumpeter. According to Schumpeter,
entrepreneur is basically an innovator and innovator is one who introduces new
combinations.
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 discoveries in order to make now
combinations. With the help of these new combinations, he produces newer and better
goods which yield satisfaction as well as profits.
An individual is an entrepreneur only when he actually carries out new combinations and
ceases to be an entrepreneur the moment, he settles down to running the established
business.
INNOVATION THEORY:
Innovation can be introduced in any of the following forms:
New product- the introduction of new good / service which the customers are not yet
familiar.
b. New production method-the introduction of a new method of production that leads to
quality and increases output. New method of production refers to a novel process not yet
been used in manufacturing and commercial production. This may increase the
productivity and lower cost of production.
c. New market- The opening of a new market i.e., a market into which the particular
business has not previously entered. The discovery of a new market means a new
market which may have existed before but was not entered by the enterprise for
commercial purposes.
d. New supplier- The conquest of a new source of supply of raw materials or semi-finished
products. A new source of raw material refers to a source or a place which has not been
commercially exploited by the enterprises before.
e. New industry structure-The carrying out of the new organization of any industry.
Innovation in management refers to reorganization and reconciliation of the position of
the enterprise in the industry by building a monopoly like control or dismantling existing
monopoly of others in the industry
Keynes believed that
expenditure was the key to economic stimulation.
Keynes asserted that aggregate demand was the economy‘s most important driving
force. Aggregate demand consists of the sum of spending by businesses, households
and the government.
This theory suggests that for an economy to expand and be stable, the government
needs to intervene actively. This is especially during a [period of recession or
depression where money is scarce and there is a high rate of unemployment.
He suggests that governments must make a strong intervention in the entrepreneurial
role played by the private sector by pouring more money to the economy and creating
jobs and projects for communities.
KEYNESIAN THEORY
Alfred Marshal in his Principles of economics (1890) held that land, labor, capital and
organization as the four factors of production, and considered entrepreneurship as the
driving factor that brings these four factors together.
He regarded the entrepreneurs as the prime movers in the organization.
The characteristics of a successful entrepreneur include:
thorough understanding of the industry
good leadership skill
foresee possible demand and supply changes and
must possess the necessary skills to be an entrepreneur
ALFRED MARSHAL THEORY
Frank Hyneman Knight, an American economist at the University of Chicago, developed this theory According to the theory, bearing business uncertainty creates profit and the more
uncertainty taken on, the more profit can be gained. The relationship between
uncertainty and gain may be linear, or even exponential, where there are bigger payoffs
on the right-hand side of the chart.
RISK AND UNCERTAINTY BEARING THEORY
Frank Hyneman Knight, an American economist at the U
Weber’s sociological theory-
Weber advocated a
sociological explanation for the growth of entrepreneurship in his theory of social change.
He stressed that social cultures are the primary driving elements of entrepreneurship.
He also pointed out that 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.
This theory emphasizes religious belief and ethical value associated with the society
plays a vital role in determining the entrepreneurial culture.
The theory emphasizes modern technology as an essential factor in production.
Absence of modern technology application in entrepreneurship, economic development
will be slow and growth might not be expected.
Proper application of modern technology will promote efficiency in the production of
goods and service.
The entrepreneur is expected to keep abreast with modern technology and find ways to
apply same in the entrepreneurial endeavor
Kaldor’s technological theory- the theory was developed by Nicholas Kaldor
The theory emphasizes the primary role of entrepreneurship in any economic activity is
to fill the existing gap.
The entrepreneur is responsible for recognizing trends in the market. In other word the
entrepreneur needs to determine what the gap is / what is lacking.
Leibenstein’s gap-filling theory- the proponent of this theory was Henry Leibenstein
The theory pointed out spontaneous learning and alertness as the two major attributes of
entrepreneurship in any given economy.
The entrepreneur must be alert in recognizing entrepreneurial opportunities and the
ignorance of the consumers as well.
Kirzner’s learning-alertness theory- the main proponent of this theory was Israel Kirzner
-the proponent of this theorywasFrankKnight
He first introduced the dimension of risk-taking as a central characteristic of
entrepreneurship.
This theory considers uncertainty as a factor of production, and holds the main function
of the entrepreneur as acting in anticipation of future events.
The entrepreneur earns profit as a reward for taking such risks
Frank Knight’sRisk BearingTheory-t
