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Microfinance and entrepreneurship theory

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  • 1. Microfinance andEntrepreneurship TheoryPontus Engstrom, University of AgderJune 10 2013
  • 2. Is it true that all people are entrepreneurs?2
  • 3. If entrepreneurship is the path out of poverty, how doesmicrofinance fit into entrepreneurship theory?3
  • 4. Why would microfinance eradicate poverty?• Empirical studies look at impact on poverty and other socialissues, but few look at entrepreneurship• Lacking research investigating the impact of microfinanceon entrepreneurship is the main motive behind this article• Back to the drawing board – placing microfinance withinentrepreneurship theory4How does microfinance facilitateentrepreneurship?
  • 5. Schumpeter (1934)The Theory of Economic Development• A dynamic framework where demand and supply interact ina circular flow, striving to a balance in equilibrium• At the center of this action is the entrepreneur who looksand seeks for changes to reach an improved economicstate.• Through innovation, the entrepreneur mixes the availableresources, such as markets, products, production methods,etc., into new combinations.• “entrepreneurs are a special type” (p. 84) whichmay explain why much research is concerned withthe description of who the entrepreneur is.5
  • 6. Shane & Venkataraman (2000)The Promise of Entrepreneurship as a Field of ResearchSeeking answer to why, when and how entrepreneurialopportunities:•come to exist•are discovered, and•are exploited.6
  • 7. What is entrepreneurship?• Entrepreneurship is not synonymous with managing a business• In studies of microfinance, it is sometimes assumed that all people running abusiness are entrepreneurs:o Yunus melon ladies in 1974 who, are they entrepreneurs?o What about street entrepreneurs in Bangalore?o Are all clients of a microfinance institution entrepreneurs?• Schumpeter (1934) distinguishes between two kinds of individuals: “meremanagers and entrepreneurs” (.83). Being entrepreneurial is “not a professionand as a rule not a lasting condition” (p. 78). A static non-evolving smallbusiness is not a form of entrepreneurship, but instead may be a betterexample of self-employment. Entrepreneurship involves the creation ofsomething new, through combinations of other things7Definition: New businesses, or the creation of newbusiness within existing firms.Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 8. Existence of entrepreneurial opportunitiesDefinition: “new goods, services, raw materials, andorganizing methods can be introduced and sold at greaterthan their cost of production” (p. 220). Schumpeter (1934)referred to this as the entrepreneurial profit, or “surplus overcosts” (p. 128).Proposition 1: Microfinance facilitates the creation ofentrepreneurial opportunities.8Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 9. The effect depend on the demand / supplycharacteristics where it is applied9Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 10. Discovery of entrepreneurial opportuniesDefinition: Although an opportunity for entrepreneurialprofitmight exist, an individual can earn this profit only if he or sherecognizes that the opportunity exists and has value. Ofimportance is 1) Experience and 2) Cognitive capabilitiesProposition 2: It takes experience and/or cognitive skills todiscover an entrepreneurial opportunity.10Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 11. Decision to exploit the entrepreneurialopportunityDefinition: A potential entrepreneur must decide to exploitthe opportunity. Depends on two factors:1)Nature of the entrepreneurial opportunity2)Nature of the individual11Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 12. Nature of the entrepreneurial opportunityDefinition: The expected value of the entrepreneurial profitis large enough to compensate for the opportunity cost ofother alternatives (including the loss of leisure), the lack ofliquidity of the investment of time and money, and apremium for bearing uncertainty.Proposition 3: If the opportunity cost of not exploiting anentrepreneurial opportunity is great, it may create situationswhere projects are undertaken despite a neutral or evennegative expected present value.12Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
  • 13. Nature of the individual• Definition: Schumpeter (1934) emphasized that entrepreneurs are a“special type” (p.81), suggesting that their conduct was not present inevery person. Yunus challenges this belief. Shane & Venkataraman(2000, p. 223) highlights characteristics of the individual, affecting thedecision to exploit an entrepreneurial opportunity:Proposition 4: Savings as part of a product offering in microfinance isimportant to promote entrepreneurship and risk taking.Proposition 5: Forming groups, such as formal and informal socialnetworks, increases the likelihood of successfully exploiting anentrepreneurial opportunity13Existence ofEntrepreneurialOpportunitiesDiscovery ofEntrepreneurialOpportunitiesDecision to ExploitEntrepreneurialOpportunitiesEntrepreneurship+ + +
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