This document summarizes Joseph Schumpeter and Mark Casson's theories of the entrepreneur. Schumpeter viewed entrepreneurs as innovators who introduce new combinations of factors of production, such as new goods, production methods, markets, materials, or industries. Casson defined entrepreneurs as specialists who take judgmental decisions to coordinate scarce resources. Specifically, entrepreneurs overcome obstacles to trade by connecting buyers and sellers and establishing markets. Both scholars saw entrepreneurship as an ongoing function rather than a single act, and emphasized that entrepreneurial skills and behaviors are unevenly distributed.

1. Ch.3
Part2/2

2. 4. Schumpeter on the entrepreneur as
innovator
• Entrepreneurs are primary agents of economic development and
change---scarce resources to new uses.
• Introducing new goods or a new quality of good.
• Introducing new ways of producing goods.
• Opening up new markets (usually overseas).
• Discovering new sources of supply of raw materials or partly
manufactured goods.
• Reorganizing the structure of an industry (for example, by creating a
monopoly or breaking up a monopoly situation).
• Innovation

3. • Distinguish between invention and imitation.
• Innovation -----creation of scientific knowledge than business.
• Innovation, refers to the very first commercial application of what up
to that point has remained non- commercialized knowledge, and the
first person to do this is called the entrepreneur.
• Schumpeter points out that ‘to produce means to combine materials
and forces within our reach’ and that the same materials may well be
used in different ways.

4. • He describes these potential alternatives as new combinations and
identifies the entrepreneur’s role as the discovery and
commercialization of new combinations.
• Schumpeter----second person in the market is not innovator---
imitators.
• Schumpeter’s, particular people should only be described as
entrepreneurs at the point when they first introduce their innovation-
---subsequent activity is more routine job of business administration.

5. • Schumpeter, entrepreneur does not have to be proprietor---MNC’s ---
entrepreneurially inclined executives------Intrapreneurship.
• Schumpeter draws a clear distinction between entrepreneurs and
capitalists.
• Capitalists are the providers of finance; they lend money to
entrepreneurs and as such Schumpeter is inflexible that
entrepreneurs do not bear the financial risks associated with their
novel actions.

6. • This is a point of contention------Schumpeter’s view is that by
definition the outcome of innovative activity is uncertain and it may
be very difficult to persuade third parties to invest in unproven
activities.
• Schumpeter’s---- to analyse the existence of entrepreneurship in
economic systems other than capitalism.
• Mark Casson----theory of the entrepreneur (1982).
Analyses the role played by the entrepreneur in the co-ordination of
scarce resources in a world where information and knowledge are
imperfect.

7. 5. The entrepreneur as a specialist in co-
ordination
• Casson
• ‘An entrepreneur is someone who specializes in taking judgmental
decisions about the co-ordination of scarce resources.’
• Three key points
a. The first point is that entrepreneurs are specialists at what they do---
-comparative advantage .
b. Second, judgemental nature of the decisions
c. Third, an entrepreneur co-ordinates scarce resources

8. • comparative advantage implies that relative capabilities are fixed.
• However---- Casson argues that the core capabilities of
entrepreneurs (which are the source of their comparative advantage)
are very difficult or impossible to learn – in fact he argues that some
of these capabilities are more or less innate.
• He suggests that these innate capabilities are unevenly distributed
throughout the population and that they are scarce

9. a. Entrepreneurs are specialists
• How decisions are made generally?
• Table 3.1 summarizes the typical stages in decision making and the
correspondent qualities (capabilities) that are required by the decision maker.
• Casson identifies two as essential for the successful entrepreneur, namely,
imagination and foresight.
i. Imagination---required---alternative ways of using resources---Vision.
ii. Foresight is a complement to imagination

11. • Casson argues that the nature of the other qualities means that they
are perhaps less difficult to hire in than the two essential ones.
• It may therefore be possible to employ other people who possess the
requisite ‘missing’ qualities. (Richard Branson example)
• Furthermore, if the ‘hiring in’ route is followed, the successful
entrepreneur will need to possess two extra qualities that do not
appear in Table 3.1. These are delegation skills and organizational
skills.

12. b. Judgmental nature of the decisions
• The second important point highlighted by Casson’s definition is the
judgemental nature of the decisions that the entrepreneur makes.
• Judgmental decisions are those for which there are no objective
criteria to guide the decision maker’s choice.
• Example
• If two different people were asked to make a decision to recommend
a particular course of action-----no objective data-----different
recommendation ---------10+10

13. • judgmental decisions--- different perceptions of problems and issues,
different interpretations and possibly access to different information.
• an entrepreneur----who judges situations and opportunities
differently from the majority.
• In essence, it is this difference of opinion that allows the
entrepreneur to act when others will not do so.

14. c. an entrepreneur co-ordinates scarce
resources
• an entrepreneur co-ordinates scarce resources he or she essentially
reallocates them to alternative uses.
• Casson’s approach is consistent with the Austrian and Schumpeterian
notion that the entrepreneur is an agent of change.
• Unlike Schumpeter, however, Casson is very clear that
entrepreneurship is an ongoing function rather than a one-off act of
innovation.

15. • His argument in support of this contention is that entrepreneurs
essentially spend most of their time looking out for new information
that makes the current allocation of resources appear to be
inefficient.
• Execute a reallocation of scarce resources, that is to carry out the role
of co-ordination, the entrepreneur must have control over ---
resources.
• Taking on ownership of the relevant resources, in other words the
entrepreneur has to buy or hire them.
• starting up a new firm;
• taking over an inefficient established firm; and
• acting as an arbitrageur.

16. Victor Kiam and Remington Inc.
‘You can make big money buying trouble.’
(Alan Burak, President of Helena Rubinstein)
• management trainee with Lever Brothers
• after graduating from Harvard Business School in 1951

17. • 1968 he had made it to executive vice-president of International Latex
• Benrus Corp. (watches and jewellery)
• In 1976 Kiam learned from a colleague that the electric shaver
company Remington was up for sale, but he thought little of it
because he knew nothing about the shaver business.
• J.P. Lyet, the chairman of Sperry Corp. (of which Remington was one
division): ‘We’d rather sell one computer installation than 100,000
Remington shavers.’

18. • Norelco with a 70 per cent market share
• Kiam concluded that Remington management didn’t seem to know
how to sell their product: ‘I knew the product was a winner.
• right management and improved marketing

19. The problems he identified at Remington
were
• Overemphasis on creative product design leading to new lines of
shavers every six months. (5 to 1).
• Inefficient distribution policy
• Pricing followed a ‘me too’ strategy
• The company culture was too hierarchical
• The company did not focus its efforts on its best product (the shaver).

20. Kiam dealt with each of these issues
systematically:
• He pulled Remington out of all non-shaver-related business---
trimmed down management.
• Reduced cost $34.95—$19.95
• eradicating the gap between blue collar workers and white collar
managers---all labour
• improved the marketing of the shaver by emphasizing the superiority
of its functionality
• improved distribution.

21. • Casson augments his theory with an analysis of the crucial role played by
the entrepreneur in the setting up of markets.
• entrepreneurs are market makers
• an entrepreneur may need to develop or have access to qualities in
addition to those associated with decision making.
• Mainstream vs Casson Approach
• Markets are constructed by entrepreneurs.

22. There are six main obstacles to trade (Casson)
(i)The need for the potential buyer and seller to find each other.
(ii) The need for each party to communicate reciprocal wants.
(iii) The need to negotiate a price.
(iv) The need to exchange custody of the goods in return for payment.
(v) The need to screen for quality of the goods (in other words, are the goods
up to the promised specification?).
(vi) The need to be able to enforce compensation if the goods are revealed
not to be of the promised specification.

23. Sunk Costs
• Sunk costs are defined as opportunity costs that cannot be
recovered by selling the enterprise to someone else or by
liquidating its assets – either because they involve assets whose
market value is below their purchase price, or because they involve
committing resources to intangible activities.
• These sunk costs include resources devoted to product development
and copyrighting, highly specific tooling and other equipment, signs,
logos and other marketing expenses, and the foregone use of the
entrepreneur’s time from alternative activities.

24. • Profits that accrue to the entrepreneur are commonly defined in
economics as a residual income left over after the entrepreneur has
paid the costs of the other factors.
• Casson, however, does not see entrepreneurial profit as a residual
but instead as earned income since entrepreneurs have to perform
their function actively rather than sit back and let the other factors of
production do all of the work.

25. Empirical analysis of the entrepreneur
• Except mainstream----entrepreneurial raw material is a scarce
resource.
• SME’s ---no more than 9 people----increased in number from
1,597,000 in 1979 to 3,490,000 in 1999----proportion of entrepreneur
is just 6%.
• those firms that employ 10–19 people, numbers drop off dramatically
to 109 000 in 1999.

26. • only 2 per cent of the Swedish population aged between 18 and 70
were trying to start an independent business at the time of the survey
in 1998. This compares to a figure of 3.8 per cent in the USA in 1996.

27. A new departure – the entrepreneur as a
constructor of connections
• The perspective takes its cue from the work of the philosopher economist
George Shackle who proposed that most thoughts, including new ideas, are
based upon a limited set of elements that are capable of being combined in
new ways.
• Shackle’s proposition is that profit opportunities are constructed initially as
possibilities in the minds of entrepreneurs and this means recognizing
connections between hitherto unconnected elements.
• The fundamental insight of this perspective is that profit opportunities are
not things that lie around waiting to befound; the entrepreneur has to
construct them actively.