Chapter 1 theory of entrepreneurship

All Rights ReservedFundamentals of Entrepreneurship
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1

CHAPTER 1
THEORY OF
ENTREPRENEURSHIP

Objectives
The objectives of this chapter are:
 To introduce students to the theory of entrepreneurship
 To introduce students on the key dimensions of
entrepreneurship namely the need for achievement, locus of
control, risk taking propensity and entrepreneurial
characteristics and trait

Learning Outcomes
At the end of this chapter, students should be able to:
 understand the principles and theory of entrepreneurship
 adapt and adopt entrepreneurial culture in their life
 gain a better understanding of the concept of the need for
achievement, locus of control and risk taking propensity as
key dimensions of entrepreneurship in managing a business
organization

Who is an entrepreneur?
 There is no consistent definition of the term “entrepreneur”
and what entrepreneurship is all about (Kuratko & Hodgetts,
2001).
 Entrepreneur can be defined from a functional approach
based on what an entrepreneur does or an indicative
approach based on his characteristics and attributes.
 Depending on how an entrepreneur is defined, he can be
different persons wearing different hats.

Entrepreneurs: Definition from
Research Literatures
 Richard Cantillon introduced the word ‘entreprende’ in his
essay ‘Essai sur la nature du commerce’ in 1755. It is a
French word which means ‘to do something’ (Swedberg,
2000) or ‘to undertake the risk of new ventures’ (Kuratko &
Hodgetts, 2001).
 Entrepreneur is the middleman who buys at a lower price and
sells higher (Blaug, 2000).

Entrepreneur/Entrepreneurship:
Definition from Research Literatures
 Adam Smith (1776) widened the scope of entrepreneurship
to include the task of forming an organization for commercial
purposes.
 He described the dynamism of the personality of an
‘enterpriser’ such as the ability to foresee potential through
changes in the economy and to take advantage of the
opportunities thereby created.

(cont.)
 Jean Babtiste Say (1803) saw entrepreneurs as individuals
with certain competencies who can influence society by
forming enterprises and likewise were influenced by society
to recognize needs and fulfil them through skilful
management of resources.

 Joseph Schumpeter believed entrepreneurship plays a
crucial role in triggering economic development.
 Schumpeter (1934) defined development as the exercising of
new combinations of productive factors.
 Such efforts may result in the introduction of a new product
or a new method of production, the opening of a new market
or the finding of a new source of the inputs supply or the
establishment of a new organization.
(cont.)

Definition from Research
Literatures (cont.)
 Schumpeter argues that a person is an entrepreneur only
when he/she actually carries out new combinations but loses
that character as soon as he/she has built up his/her
business and settles down to run it.
 An entrepreneur is a sociologically distinct individual who is a
creative and resourceful innovator as well as an agent of
change.

Literatures (cont.)
 According to Frank Knight (1921), entrepreneurs are
distinguishable from non-entrepreneurs based on their
willingness to bear the cost of uncertainty.
 In return for this willingness, the entrepreneur will be
rewarded with profit—the residual income left after all
necessary payments have been made.

Literatures (cont.)
 Von Mises defined entrepreneurship as human action ‘seen
from the aspect of the uncertainty inherent in every action’
(Mises, 1949). The entrepreneur is seen as an active
individual whose action is always speculative.
 For Mises (2000), entrepreneurship mainly consists of
decision-making activities particularly pertaining to
production.

(cont.)
 Mises also made a distinction between entrepreneurship and
management.
 He believes that entrepreneurship involves greater
responsibility, with the entrepreneur performing a more
crucial role than the manager. In performing his/her role the
entrepreneur is motivated by the desire to make profits and
acquire wealth.

(cont.)
 For Kirzner, (1973) an entrepreneur is an alert individual who
responds to the opportunities that already exist but which are
yet to be organized as a business.
 Kirzner’s entrepreneurs are described as being passive in
comparison with Schumpeter’s entrepreneur who is a source
of innovative ideas for triggering economic development
(Herbert & Link, 1982).

Literatures (cont.)
 Kirzner (1973) asserts that entrepreneurship activity is
always competitive and that competition is always
entrepreneurial. A competitive market process is crucial for
the entrepreneurial activity to develop.
 Kirzner (1973) acknowledges that entrepreneurship does
involve a risk-taking propensity.

Individual Characteristics of an
Entrepreneur
 While some scholars focus their research on the economic
function of entrepreneurship, others have concentrated their
works on the personal characteristics of entrepreneurs.
 Brockhaus (1982) identifies three attributes that are
consistently associated with entrepreneurial behaviour: the
need for achievement, the internal locus of control and a risk-
taking propensity.

Entrepreneur (cont.)
 The need for achievement is a personal attribute
associated with the expectation of doing something better
over others and/or the individual’s earlier accomplishment
(Hansemark, 2003).
 It is believed that the individuals who score highly on the
need for achievement would have a strong desire for
success and are consequently more likely to behave
entrepreneurially (Othman, Ghazali & Ong, 2005).
 This argument is supported in a study by Beugelsdijk and
Noorderhaven (2004) which shows that entrepreneurs
generally have higher needs for achievement.

 ‘Locus of control’ is a belief or disbelief that one can control
or influence the environment in which one is found. Rotter
(1966) hypothesizes that individuals with internal locus of
control are more likely to strive for achievement than those
with external locus of control.

 This is because individuals with internal locus of control
believe that they can make things happen as they are able to
control and influence the environment around them. In
contrast, individuals with external locus of control do not
believe they can do this.
 People with internal locus of control are more likely to be
entrepreneurial than those with external locus of control
(Beugelsdijk & Noorderhaven, 2005).

 Individuals with higher propensities for risk-taking are
believed to be more likely to be involved in entrepreneurial
activities. This is not surprising as entrepreneurship has long
been associated with risk-taking (Cantillon, 1755; Knight,
1921).
 Empirical evidence also supports the view that risk-taking
propensity serves as one of the attributes which influences
entrepreneurial success and performance (Beugelsdijk &
Noorderhaven, 2005).

 Personal entrepreneurial competencies (PEC)
– In 1985, McClelland with McBer & Co, had developed a
measuring instrument to measure the personal
entrepreneurial competencies (PEC) or inclinations among
successful entrepreneurs in Malawi, India and Ecuador.

These personal
entrepreneurial
competencies can
shed some light on
the personality and
character of the
successful
entrepreneurs.
However, it is not
exhaustive and the
instrument is not a
‘one size fits all’
tool.

Chapter 1 theory of entrepreneurship

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