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  1. 1. THE SEARCH FOR A THEORY OF ENTREPRENEURSHIP Larry Short, The University of Louisiana at Monroe Paul Dunn, The University of Louisiana at Monroe ABSTRACT A brief review of the entrepreneurship literature suggests that economists do not have an economic theory that explains the role of entrepreneurship in economic development and many of the past studies of entrepreneurs have concentrated on entrepreneurial traits and entrepreneurial personality patterns. The authors speculate that entrepreneurial success may be a function of specific entrepreneurial behaviors - not traits or personality patterns - and different types of entrepreneurial behaviors may be more effective in different economic environments. Thus, the development of a theoretical model of entrepreneurship should include the conceptualization of an economic model that shows the role of entrepreneurship in the economic process and an intensive study to identify the critical entrepreneurial behaviors that contribute to success in various economic situations. INTRODUCTION McClelland (196 1) suggests that entrepreneurship accounts for the rise in civilization. Not external resources (that is, markets, materials, trade routes, or factories), but the entrepreneurial spirit that exploits those resources. If this is true, then the nurturing of entrepreneurship in a society becomes critical to its economic development In the early 1960s, McClelland postulated that a causal relationship exists between a strong desire for achievement and business activity. In plotting data for a 300- year time span in England, McClelland (1961) found two waves of economic growth, a small one around 1600 and a larger one around 1800. Each wave was preceded by a wave of concern for achievement as reflected in popular literature. McClelland (1965) concluded that the need for achievement was an essential ingredient for entrepreneurial success and that the need for achievement could be taught to stimulate economic growth. The belief that economic activity could be increased through training of business people was supported in programs in Hyderabad, Bombay, and Kakinada, India and Barcelona, Spain (McClelland, 1987). Thus, the study of developing business people as tools to aid economic development began in earnest in the last half of the 20th Century. In the United States the belief that new ventures make significant contributions to the economy has resulted in a number of local, state, and federal government sponsored programs to facilitate the survival and growth of small start-up businesses (Sherman, 1999). The National Governor's Association has even announced a proposal to discuss actions that governors can take to encourage entrepreneurship on a state-by-state basis (Leibowitz, 2000). And following decades of experimentation with various systems of state ownership and control, many nations have adopted privatization strategies as a centerpiece of national policies. Privatization strategies are being promoted for economic development in emerging, developed and developing countries (Shaker, Ireland, Gutierrez & Hitt, 2000). Thus, as we enter the 21st Century, entrepreneurship is fully recognized as a critical element in economic development around the world.
  2. 2. WHAT IS AN ENTREPRENEUR? One of the first problems in the study of entrepreneurship has been definition of terms. What is an entrepreneur? Richard Cantillon (1697-1734) appears to have introduced the term as meaning someone who specializes in organizing business activities and assuming the risks of business in return for profits. John Stuart Mill popularized the term in his 1884 book, Principles of Political Economy. Joseph Schumpeter (1883-1950) redefined the term to mean someone who uses innovation to destroy the existing economic order by introducing new products and services, by creating new forms of organization, and by exploiting new raw materials. More recently, scholars have played with a number of definitions that portray the entrepreneur in less economic oriented terms. Bygrave (1997) provides a simple but profound definition of an entrepreneur as someone who perceives an opportunity and creates an organization to pursue it. Stevenson and Gumpert (1985) believe that the entrepreneur may occupy one extreme end of a continuum of managerial behavior - at one end is the entrepreneur and the other end is the administrator. In a Harvard Business School colloquium in 1983, participants agreed on the following definition: Entrepreneurship is the attempt to create value by an individual or individuals (a) through the recognition of significant (generally innovative) business opportunity, (b) through the drive to manage risk-taking appropriate to that project, and (c) through the exercise of communication and management skills necessary to mobilize rapidly the human, material, and financial resources that will bring the project to fruition (Kao & Stevenson, 1984). Kao (1989) has modified the colloquium's definition and suggests that the entrepreneur can be defined in terms of tasks: to see an opportunity; marshal human and other resources necessary to pursue it; and transform the opportunity into a tangible result. According to Kao (1989), an entrepreneur's job description would include creative, operational/managerial, interpersonal, and leadership tasks. Without agreeing to a precise, common definition of an entrepreneur, numerous studies have been conducted to help better understand the entrepreneur. Many of the current studies begin with the assumption that entrepreneurs are born - or at least conditioned in early childhood. Thus, these studies try to identify the essential characteristics of entrepreneurs through the identification of entrepreneurial traits or critical ingredients in an entrepreneur's personality. Study of Entrepreneurial Traits A journalist for a national business magazine conducted an interesting study that predates most academic research on entrepreneurship. Hill (1952), during the first half of the 20th Century, spent over 25 years in studying more than 500 successful men of that period. Hill's philosophy of individual achievement attributed to be Andrew Carnegie's formula of personal achievement - was organized into a number of principles that can be condensed into two major ideas: an entrepreneur's internal characteristics and an entrepreneur's managerial proclivity. In the area of internal characteristics, Hill believed the power of the mind was the driving force to personal achievement and that this could be accomplished through desire, faith, imagination, and persistence. Hill also felt that the entrepreneur's proclivity toward management impacted upon success and identified the following as critical: specialized knowledge, decision-making,
  3. 3. organized planning, and the use of support groups. Not surprisingly, academic researchers later identified many of the same traits recognized as important characteristics of Hill's sample of 500 successful people. Timmons (1985), in a review of 50 academic research studies, summarized the most commonly identified entrepreneurial traits as: commitment, drive, goal orientation, initiative, problem solving, realism, seeking and using feedback, internal locus of control, risk-taking, low need for status and power, and integrity and reliability. Personality Characteristics of Entrepreneurs In a review of 11 empirical studies of the entrepreneurial personality, Kets de Vries (1977) concluded that the psychological picture of an entrepreneur's personality is sometimes conflicting and confusing. Kets de Vries concludes that entrepreneurs have a particularly high need for achievement, but autonomy, independence, and moderate risk taking are also important. They appear to be inner directed, present themselves as self-reliant, and tend to de-emphasize or neglect interpersonal relations. Entrepreneurs are also anxious individuals, nonconformists, poorly organized, and not a stranger to self- destructive behavior. Finally some entrepreneurs possess a higher than average aesthetic sense, which may contribute to innovativeness Miner (1966) makes an interesting argument that there are four basic types of entrepreneurial personality patterns (i.e., personal achiever, super salesperson, real manager, and expert idea generator) and success comes only when an individual with the right personality pattern is in the right situation. WHAT WE CAN LEARN FROM OTHERS After a century of studying entrepreneurs, we apparently still don't know exactly what are the important traits and/or personality patterns of a successful entrepreneur. The authors suggest that a more appropriate approach to the study of "What is an entrepreneur?" may be found in a perusal of leadership studies. Early leadership studies also followed the general pattern of entrepreneurial studies, concentrating on identifying the traits that differentiated leaders from non-leaders. For example, a review of 20 studies by Geier (1967) identified almost 80 leadership traits, but only five traits were common to four or more studies. After a review of 50 years of the study of leadership traits, Yukl and Van Fleet (1992) concluded that although some specific leadership traits may increase the likelihood of success of a leader, none of the traits guarantee success. The study of leadership shifted from a trait approach to a behavioral approach. Robbins (1996) suggests this shift may have been for very practical reasons. If trait research had been successful, it could only serve as a basis for selecting the right leader. If behavioral studies were successful, the critical behavioral determinants of leadership could be taught to people. Thus, if the trait theory to leadership was valid, then leadership was basically inborn or developed in early childhood. If, however, the behavioral theory of leadership was valid, then the specific behaviors that identified effective leaders could be developed. The Ohio State Studies began with the study of over 1000 leadership dimensions and eventually narrowed leadership behavior down to two major dimensions, initiating structure and consideration (Stogdill & Coons, 195 1).
  4. 4. The University of Michigan studies attempting to locate behavioral characteristics of effective leaders identified two dimensions of leadership behavior, employee oriented and production oriented (Kahn & Katz, 1960). It soon became clear to those studying the behavioral dimensions of leadership that attempting to predict effective leaders was more complex than merely identifying leader behaviors. Studies began to shift to determine the influence that situations had upon effective leadership. Fiedler's (1967) contingency model was the first comprehensive model that attempted to prove that leadership was related to situations in the environment. In a study of over 1200 groups of leaders in 8 categories of situations, Fielder, Chemers & Mahar (1977) concluded that relations oriented leaders performed better in 3 of the categories and task oriented leaders performed better in 5 of the categories. Thus, a number of models were conceptualized and studies conducted to attempt to discover the appropriate relationship between leader behaviors and situational influences. Hersey and Blanchard's (1988) Situational Theory, House's (1971) Path Goal Theory, and Vroom and Jago's (1988) Leader- Participation Model are among the more popular such leadership models. A major breakthrough in understanding leadership occurred when researchers recognized the importance of the situation upon leader behaviors. Thus, Miner's (1996) suggestion, that entrepreneurial success may be a function of a particular personality pattern and a specific work environment, appears to be a move in the right direction in entrepreneurship studies. UNDERSTANDING THE ENTREPRENEURSHIEP ECONOMIC ENVIRONMENT Classical Economic Theory Economic theory attempts to explain two basic societal issues. How does society create wealth and how does society distribute wealth among, its members? Adam Smith developed classical capitalism as an economic system in his book The Wealth of Nations in 1776. Smith perceived capitalists as owner-managers who combined the basic resources of land, labor, and capital into successful enterprises. The classical capitalistic economic system, based on the concept of private ownership of property, assumed the creation and distribution of wealth through the exchange of goods and services through open, uncontrolled markets open to all buyers and sellers. Classical capitalism as an economic theory, however, lacked the rigorous logical framework and foundation for mathematical description that would provide a predictive characteristic to the model. Neoclassical Economic Theory In the late 19th Century Leon Walras (1874) and Alfred Marshall (1890), separately, developed similar models of capitalist economics that incorporated a logical framework capable of mathematical analysis (Kirchhoff, 1997). The key concept of the new models was that markets consist of many buyers and many sellers who interact so as to insure that supply equals demand. Neoclassical theory was designed to show that capitalism characterized by perfect markets and unfettered by outside interference - distributes wealth among buyers and sellers and creates wealth in the process. One of the central concepts of neoclassical theory is economics of scale,
  5. 5. which assumes that as the size of the firm increases, the cost of production per unit decreases. Thus, neoclassical theory suggests that large firms are more profitable than small firms, Neoclassical economics has been the mainstream economic theory in the United States for a century. Kirchhoff suggests that America's adoption of neoclassical theory and the domination of large firms after World War 11 led many Americans to believe that large corporations were the source of wealth creation and distribution. William Whyte's 1956 book, The Organization Man, postulated that the depression and military training in WW 11 created a behavioral norm of accepting employment within and obedience to large bureaucracies. This belief in large corporations had become so predominant that John Kenneth Galbraith, in his 1967 book The New Industrial State, expressed the hypothesis that large corporations working in coordination with big governments and large labor unions would run nations (Kirchhoff, 1997). Problems with Traditional Economic Theory Although the equilibrium concept of neoclassical economics provided a solid foundation for predictability, it achieved this capability by eliminating the unpredictable behavior of the entrepreneurial owner- managers who assumed the risks of uncertainty and thrived on upsetting market activities by introducing innovative product and services. Thus, a major problem with neoclassical theory is its lack of recognition of the role the entrepreneur plays in the economic process of creating and distributing wealth and producing new demand in the economic system. In the early part of 20th Century, some economist began to question neoclassical theory because it eliminated entrepreneurship from the economic process. Joseph Schumpeter (1934), one of its early critics, saw innovation as the key for creating new demand for goods and services and entrepreneurs as owner- managers who started new, independent businesses to exploit innovation. To Schumpeter, an entrepreneur was a person who destroyed existing economic order by introducing new products and services, by creating new forms of organization, or by exploiting new raw materials. Thus entrepreneurs, through exploiting innovations, destroyed the structure of existing markets and caused established firms with older products or services to decline. An important aspect of Schumpeter's theory was that innovations create new demand and entrepreneurs bring these innovations to the market. Thus, entrepreneurs, Schumpeter would argue, are major mechanisms of wealth creation and distribution in capitalism. The dynamic concept of creative destruction of markets and companies by entrepreneurs developing new products and services is in sharp contrast to neoclassical theory that relies on passive buyers and sellers responding to price fluctuations to adjust supply and demand and, thus, reach equilibrium. Although neoclassical theory had no explanation for the role entrepreneurs played in the creation and distribution of wealth, it had become the dominant theory of 20th Century American economic thought because of its logical framework and predictive power. By the end of the 20th Century, however, neoclassical theory - with its strong belief in market equilibrium and economies of scale and its lack of recognition of the impact of entrepreneurship on economic development - had come under greater scrutiny. In a study of all US firms from 1969 through 1976,
  6. 6. Birch (1987) discovered that small firms, (firms with 100 or fewer employees) created 8 1 % of the net new jobs in the United States. Since economists generally view net new job creation as a measure of economic growth, Birch's findings suggested that small rather than large firms caused most economic growth. The US Small Business Administration (SBA) was so impressed with Birch's findings that it established a database that shows the creation of net new jobs by small and large firms in the US. Analysis of SBA data from 1969 through 1990 clearly shows that firms with 100 or fewer employees are the primary job creators in the United States. Recognition that small firms create most of the economic growth in the US over the long run brings serious doubt to the completeness of neoclassical theory. If small firms through innovation rather than large firms through economies of scale cause economic growth, then Schumpeter's theory of creative destruction offers a better description of overall economic theory in a capitalistic society than neoclassical theory. Developing a Theory of Entrepreneurship Economics Many economists now recognize that entrepreneurship is an important part of the US economy. Therefore, the neoclassical view of economic in the United States leaves the understanding of the economic process in theoretical confusion. The neoclassical view of the economic process in a capitalist society does not incorporate entrepreneurs in its model of economics. Yet it is widely recognized that entrepreneurship plays a significant role in the creation and distribution of wealth. A new theory of capitalism is needed that can provide the predictive characteristics of neoclassical theory and that can accommodate the creative market destruction of entrepreneurship. Kirchhoff (1994) suggests that typology development is often an early step toward the development of a new theory, Typologies organize existing knowledge into categories that help explain relationships and guide the development of theoretical models. Kirchhoff has developed a "dynamic capitalism typology" that shows the complex relationship between the rate of innovation and the rate of firm growth. The relationship between innovation and growth is complex. High rates of innovation do not necessarily lead all firms to high growth rates, since not all innovations are successful. Some innovations are far more successful than others, which cause some firms to grow faster than others. Kirchhoff s recognizes that his typology matrix represents a simplification of the real world, because it deals only with extreme cases registering either high or low on each scale. Although most businesses are in the middle ground, between the extremes, Kirchhoff s typology matrix describes categories that help us better understand entrepreneurship's contribution to economic growth. Kirchhofrs typology allows the identification of the actual behaviors of firms that can indicate the true ambitions and goals of the owners and define their contribute to economic growth. Dirchhofrs matrix develops four major classes of entrepreneurial firms based on rates of innovation and growth. See Exhibit 1.
  7. 7. Economic Core Firms Economic core firms are the most common form of entrepreneurship. These are I low- innovation and low-growth firms. These firms primarily satisfy the owner- managers desire for independence while fulfilling a specific need in a small market and without obtaining significant growth. Economic core firms achieve a degree of growth initially, but once the firms reach a size than can satisfy the owner-manager's needs, growth stops. Constrained Growth Firms The growth of these firms is constrained by the lack of resources. These firms have high rates of innovation, but lacking adequate resources, fail to grow. Finns with high innovation but low growth are easy prey to better financed competitors. They find their products copied and markets devoured by other entrepreneurs with adequate resources. Constrained growth firms fall into two classes: firms who internally make decisions to constrain growth and firms who are unable to acquire the needed resources. The owner-managers of internally constrained firms make decisions not to acquire the resources needed to support high growth. Although these owner-managers often blame others for the lack of key resources, in reality they place such high demands on the suppliers of resources that they are unable to acquire the necessary resources. The owner-managers of resource-constrained firms are willing to pay the costs of resources, but are actually unable to attract the capital needed to sustain high growth. Ambitious Firms Some firms can achieve high growth with only a limited number of innovations. A single successful product or service can sustain high growth for many years in a large market like the United States. Since markets do not remain stable, however, an ambitious firms growth rate will eventually decline if new products or services are not introduced. Glamorous Firms High growth rates can only be sustained over time with high rates of innovation. In today's market, most firms in this category are technology-based firms
  8. 8. producing products that lend themselves to constant development. Kirchhoff calls these firms "glamorous firms' because they often attract high media attention and receive local and national awards for their successes. FINDINGS AND CONCLUSIONS The study of entrepreneurship reminds one of the fables of two blind men describing an elephant. The first who is holding the elephant's front leg says the elephant is like a sturdy tree. The second who is holding the elephant's tail describes the elephant more like a snake. Like the fable of the elephant, conclusions drawn from the study of entrepreneurship depend to a great extent upon the point of view of the researcher. Three general findings, however, appear to emerge from these studies of entrepreneurship, which could be beneficial in the development of future research in entrepreneurship. First, we do not have a commonly accepted definition of an entrepreneur. To some an entrepreneur is a risk taker, to others an opportunist, to others a different form of management, while others believe an entrepreneur is a destroyer of the status quo. The lack of a clear definition of an entrepreneur can greatly complicate the study of entrepreneurship. The authors suggest that a definition that includes both Cantillon's and Schumpeter's concepts of an entrepreneur may provide a useful research approach. That is, if we consider the entrepreneur as both a risk taker and an innovator that destroys the existing economic order by introducing new products and services, by creating new forms of organization, and by exploiting new raw materials, we may be able to agree on entrepreneurial behavior that is more conducive to research. Second, we do not have a commonly accepted economic theory of the role of entrepreneurship in economic development. Although classical economic theory recognized the critical nature of the entrepreneur in the economic process, neoclassical economic theory is silent about this very important element. Since Schumpeter's definition of entrepreneurship is focused on changing economic activity, the use of his concept may also lead researchers to a better understanding of the theoretical nature of entrepreneurship in the economic process. Although we are a long way from defining a new model of economics that includes the entrepreneurship process, Kirchhoff s typology matrix may prove an interesting beginning. In Kirchhoff s matrix typology, he has accommodated Schumpeter's concept of product and service innovation and market growth. Third, most of our past studies of entrepreneurs have concentrated on the study of entrepreneurial traits and entrepreneurial personality patterns. Since traits and personalities are either inborn or developed early in childhood, their discovery leaves scholars with little useful information. If these studies were perfected and we could predict precisely who would become successful entrepreneurs, what important role would this play in society? The study of the critical behavioral characteristics of successful entrepreneurs does not appear to have attracted the research interest that the study of entrepreneurial traits and personality patterns has attracted. The authors suggest that if entrepreneurial behavior studies were pursued - as intensive as they were in the study of leadership - and specific behaviors of entrepreneurial success could be identified, then these behaviors could be taught to potential entrepreneurs.
  9. 9. DIRECTIONS FOR FUTURE RESEARCH In the study of entrepreneurs, many scholars have hypothesized that entrepreneurs are either born or conditioned toward entrepreneurship in their early childhood. If this hypothesis is correct, then universities have no role in the development of entrepreneurs. The authors take quite a different view and hypothesize that: (1) entrepreneurial success is a function of specific entrepreneurial behaviors, (2) a number of different economic environments can exist in modem society, and (3) in different economic environments, different types of entrepreneurial behaviors will be effective. That is, there are certain economic environments that occur and researchers may be able to identify the appropriate behavioral characteristics that would guide an entrepreneur toward success in those environments. If a causal relationship can be found between economic environments and successful entrepreneurship, then different styles of entrepreneurial behaviors may be taught to individuals seeking to compete in the different economic environments. In the search for a theory of entrepreneurship, two major avenues of future research are evident from a review of the current studies of entrepreneurship. First, it is becoming apparent that an economic model must be conceptualized that shows the role entrepreneurs play in economic development in modem society. The authors would suggest that a good beginning for a theoretical economic model, which accommodates entrepreneurship, might rest with Kirchhoff s typology matrix. Second, intensive studies of successful entrepreneurial behaviors are necessary to identify the critical behaviors needed for entrepreneurial success in particular economic environments. The authors would suggest a good start for this avenue of research may be to define the entrepreneur as a combination of Cantillon's concept as a risk taker under conditions of uncertainty - and Schumpeter's concept as an innovator - through the introduction of new products and services, by creating new forms of organization, and by exploiting new raw materials. Then the behaviors that are critical to entrepreneurial success in specific economic environments may be identified. REFERENCES Bygrave, W.D. (1997). The Portable MBA in Entrepreneurship, 2nd Ed. New York: John Willey & Sons. Birch, D. (1987). Job Creation in America. New York: The Free Press. Casson, M.(1993). Entrepreneurship. In DR. Henderson (ed.), The Fortune Encyclopedia of Economics. New York: Warner Books, Inc. Fielder, F.E. (1967). A Theory of Leadership Effectiveness. New York: McGraw Hill. Fielder, FE, Chemers, M.M. & Mahar, L. (1977). Improving Leadership Effectiveness: The Leader Match Concept. New York: Wiley. Geier, J.G. (1967). A Trait Approach to the Study of Leadership in Small Groups. Journal of Communication, (December), 316-23.
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