The document discusses several theories of entrepreneurship including: 1) Economic theories like those proposed by Cantillon and Schumpeter that see entrepreneurs as risk-takers and innovators. 2) Sociological theories that view entrepreneurship as influenced by cultural values and social support. 3) Psychological theories like McClelland's need for achievement theory that identify personality traits like motivation and drive as important for entrepreneurs. 4) Anthropological theories proposed by Barth that see entrepreneurs connecting different social spheres. The document also discusses innovation theories of Schumpeter, Knight's risk-bearing theory, and Hagen's theory of social change and status withdrawal in relation to entrepreneurial development.

1. Theories of
Entrepreneurship
Dr. Shriram S. Dawkhar.,
Associate Professor.
Sinhgad Institute of Business Administration &
Research, Kondhwa, Pune. ssdawkhar@gmail.com
©Shriram.Dawkhar, 2019

2. THE THEORIES OF
ENTREPRENEURSHIP:--

3. THEORIES OF ENTREPRENEURSHIP
Theories of
Entrepreneurship
Economic
Theories
Psychological
Theories
Anthropological /
Cultural Theories
Sociological
Theories

4. 1.ECONOMIC THEORY:-
Many economists give their views about entrepreneurship but
Richard Cantillon was the first person who recognise the role of
entrepreneurship.
He said that farmer is an entrepreneur who promise to pay
landlord for his land without any assurance of profits he can
drive from his enterprise i.e. land. He said that there is always a
risk factor of fluctuation of prices in market for an entrepreneur.
With this Schumpeter added the concept of innovation. He said
that an entrepreneur can be helpful in economic development
by introducing new innovative ideas. Lack of innovation can
reduce the enthusiasm, physical and mental energy of
entrepreneur.

5. 2.SOCIOLOGICAL THEORY:-
Sociologists suggests that entrepreneurship can be social
movement. Economists of this theory believes that cultural values
deeply affect the entrepreneurship and economic development. If
strong family support is with entrepreneur then this will be fruitful
but if family does not care about businessman that can cause
adverse affect. According to Hoselitz the persons who introduces
innovative ideas reject the traditional ways of doing the things.
Economists believes that special attention given to society can
improve the relations between the enterprise and its surroundings.

6. 3.PSYCHOLOGICAL THEORY:-
Economists of this theory said that entrepreneurship is most likely
to emerge when a society has sufficient psychological
characteristics.
Joseph Schumpeter states that entrepreneur is motivated & driven
by 3 things:-
(a) ‘The dream and the will to found a private kingdom’ that
means the desire for power & independence.
(b) ‘The will to conquer’ that means the will to succeed.
(c) ‘The joy of creating’ that means satisfaction of getting things
done.
He asserts that matter is beheviour not the actor.

7. 4.ANTHROPOLOGICAL THEORY:-
FREDRIK BARTEH develop this theory. According to berth
entrepreneurship has two connecting spheres in the society
between which there exits a difference in values. These
spheres are as follows:-
 Something which is cheap and
 Something which is expensive.
Barth states that entrepreneurial beheviour means to
connect 2 different spheres in the society, between there is a
huge discrepancy in the value.

8. Innovation Theory of Schumpeter

9. According to Joseph Schumpeter, a 20th century Austrian
Economist –
• An entrepreneur is a person who is willing and able to
convert a new idea or invention into a successful innovation.
• Entrepreneurship resulted in new industries, even though it
entailed combining the existing inputs in a new way.
©Shriram.Dawkhar, 2019

10. Innovation theory of Schumpeter(1949)
Entrepreneur is a man who sees opportunity for :
 introducing new techniques or commodity
 Improving organization.
 Development resources.
 Entrepreneur embarks upon new combination of factors of
production resulting in new product--termed as innovator.
 Entrepreneur is Dynamic

11. 1.Innovation Theory of Schumpeter
Adynamic theory of entrepreneurship was first advocated by
Schumpeter (1949) who considered entrepreneurship as the catalyst
that disrupts the stationary circular flow of the economy and thereby
initiates and sustains the process of development.
Embarking upon ‘new combinations’of the factors of production -
which he succinctly terms, innovation - the entrepreneur activates the
economy to a new level of development.
Schumpeter defines entrepreneurship as “a creative activity”.An
innovator who brings new products or services into economy is given
the status of an entrepreneur. He regards innovation as a tool of
entrepreneur, The entrepreneur is viewed as the ‘engine of growth’,

12. The concept of innovation and its corollary
development embraces five functions:
The introduction of a new product with which consumers are not yet
familiar or introduction of a new quality of an existingproduct.
E.g.: Virgin Galactic : World’s first commercial spaceline
The introduction of new method of production that is not yet tested by
experience in the branch of manufacture concerned, which need by no means
be founded upon a discovery scientifically new and can also exist in a new way
of handling a commodity commercially.
E.g. : Line production system in food by MacDonald’s
©Shriram.Dawkhar, 2019

13. The concept of innovation and its corollary
development embraces five functions:
The opening of new market that is a market on to which the particular
branch of manufacturer of the country in question has not previously
entered, whether or not this market has existed before.
E.g. : The Blue Ocean Strategy
Conquest of a new source of supply of raw material and
example: moving from coal to petroleum to nuclear energy sources
The carrying out of the new organization of any industry

14. Innovation theory of Entrepreneurship

15. Influencing factors of the enterpreneurship for the Innovation

16. Features of Schumpeter Theory
• High degree of risk and uncertainty in Schumpeterian World.
• Highly motivated and talented individual.
• Profit is merely an part of objectives of entrepreneurs.
• Progress under capitalism is much slower than actually it is.
• It is leadership rather than ownership which matters

17. Evaluation Schumpeter’s theory
• It lays that entrepreneur played central part in rise of
modern capitalism.
• Entrepreneur is prime mover of economic development.
Distinction between innovator and inventor.
• Entrepreneurs – economic development.
• Development requires basic changes – entrepreneurs do
the changes.

18. Limitations :
 Innovative functions required,
 ignores risk taking, organising aspect.
 most vigorous type of enterprise –
 excludes individuals operating established business –
 Assumes entrepreneurs as large scale business man who is rarely
found in developing countries, where entrepreneurs are small scale
businessmen who need to imitate rather than innovate.
 Ignores organizing abilities of an entrepreneur.

19. 2. Need for Achievement Theory of McClelland
( was an American psychologist)

20. Need for Achievement Theory of McClelland
• .According to McClelland the characteristics of entrepreneur has two features:
o Doing things in a new and better way
o Decision making under uncertainty
McClelland emphasizes achievement orientation as most important factor for
entrepreneurs. Individuals with high achievement orientation are not influenced
by considerations of money or any other external incentives. People with high
achievement (N-Ach) are not influenced by money rewards as compared to
people with low achievement. The latter types are prepared to work harder for
money or such other external incentives. On the contrary, profit is merely a
measure of success and competency for people with high achievement need.

21. Need for Achievement Theory of McClelland
According to him a person acquires three types of needs as a result of one’s life
experience. These three needs are:
• Need for Achievement.Adrive to excel, advance and grow.
• Need for Power.Adrive to dominate or influence others and situations.
• Need for Affiliation.Adrive for friendly and close inter-personal
relationships.

22. Need for Achievement Theory of McClelland
Implications of Motives
•Need for affiliation and need for power are driving force
towards entrepreneurship.
•High level of achievement makes an entrepreneur.
• Dreams of entrepreneur appear to be not to ‘get rich’ but
to ‘get big’.

23. Need for Achievement Theory of McClelland

24. s
Dominant
Motivator
Characteristics of This Person

25. Need for Achievement Theory of McClelland
The individual with high levels of need achievement is a potential entrepreneur.
The specific characteristics of a high achiever (entrepreneur) can be summarized as
follows:
(i) They set moderate realistic and attainable goals for them.
(ii) They take calculated risks.
(iii)They prefer situations wherein they can take personal responsibility for solving
problems.
(iv) They need concrete feedback on how well they are doing.
(v) Their need for achievement exist not merely for the sake of economic rewards or
social recognition rather personal accomplishment is intrinsically more satisfying to
them.

29. Evaluation of McClelland’s theory
It produced reason for difference in economic condition of
rich and poor countries or developed and underdeveloped
countries.
• It called the nations leaders to build up ambition into the
minds of the young people.
18

30. 3. Harvey Leibenstein’s X-Efficiency Theory
(Born in the Ukraine, Harvey Leibenstein (1922 - 1994) was a
professor at Harvard University)

31. Leibenstein’s X-Efficiency Theory
• X-efficiency is the degree of inefficiency in the use of resources within
the firm:
• it measures the extent to which the firm fails to realize its productive
potential.

32. Evaluation of McClelland’s theory Evaluation of McClelland’s theory

33. According to Leibenstein there are two types
of entrepreneurship.
1) Routine entrepreneurship – deals with normal business functions
like co-ordinating the business activities.
2) Innovative entrepreneurship – wherein an entrepreneur is
innovative in his approach. It includes the activities necessary to create
an enterprise where not all the markets are well established or clearly
defined.

34. Leibenstein identifies two main roles for entrepreneurs.
1) ‘input completion’ :
involves making available inputs which improve efficiency of existing
production methods or facilitates the introduction of new ones.
The role of entrepreneur is to improve the flow of information in these
markets.
2) gap filling’ : Thus it is clear that “if not all factors of production are
marketed or if there are imperfections in markets, the entrepreneur has to
fill the gaps in the market. To put the enterprise in motion, the
entrepreneur should fill enough of gaps.”

35. Leibenstein’s X-Efficiency Theory

37. Theory of Profit: Knight
Frank Hyneman Knight, an American economist at the University of Chicago,
developed the uncertainty-bearing / profit theory in the 1920s to explain the
phenomenon of entrepreneurship
entrepreneurship is
bearing. Prof. Knight
John Staurt
A key element of
risk
and
risk-
bearing as
Mill saw
the important
function of entrepreneurs.

38. According to Knight
The entrepreneur is an individual who is prepared to
undertake risk and the reward - profit - is the return for
bearing uncertainty and is an uninsurable risk.
entrepreneur is a:
• calculated risk-taker
• opportunity for profit arises out of uncertainty
surrounding change
• responsibility for one’s own actions

39. Features of Risk Bearing Theory of Knight
1. Risk creates Profit: According to the risk-bearing theory, the entrepreneur
earns profits because he undertakes risks.
2. More Risk More Gain: The degree of risk varies in different industries.
Entrepreneurs undertake different degrees of risk according to their ability
ad inclination. The risk theory proposes that the more risky the nature of
business, the greater must be the profit earned by it.
s Profit:

40. Features of Risk Bearing Theory of Knight
3. Profit as Reward and Cost: Profit is the reward of entrepreneur for
assuming risks. Hence, it is also treated as a part of the normal cost of
production.
4. Entrepreneur’s Income is Uncertain: This theory summarizes that profit is
the reward of an entrepreneur effort which arises for bearing non insurable
risks and uncertainties and the amount of profit earned depends upon the
degree of uncertaintybearing.

41. According to Prof. Knight the main function of the entrepreneur is
Uncertainty bearing and not risk taking.
He divides risks into two classes.
1 ) Foreseeable risks and,
2) Unforeseeable risks.
1. Foreseeable Risks : These risks can be foreseen and estimated in
advance. Example, fire , accidents, marine accidents, theft etc.
• All these risks can be ensured with an insurance company.
• If there is any loss that insurance company pays the total value of the
lost property.
• Thus, this kind of risks will be born by insurance companies and got
by the entrepreneur. The entrepreneur gets no profits on account of
these risks.

42. 2. Unforeseeable Risks: These risks cannot be foreseen and predicted
accurately.
According to Knight these unforeseen risks are known as uncertainties,
as they cannot be known and foreseen. Following are some of the
unforeseeable risks.
1) Changes in prices due to technological changes,
2) Decrease in the demand due to changes in tastes and fashions,
population, incomes etc.
3) Competition from new firms or new products,
4) Government may interfere into the affairs of the industry and fix
lower prices,
5) Cyclical economic depressions resulting in lack of demand, falling
prices etc.

43. Thus According to Prof. Knight
•There is a direct relationship between profit and uncertainty bearing.
Greater the uncertainty bearing, the higher will be the level of profits and
vice versa.
•Uncertainty bearing has become so important in business. So, uncertainty
bearing is regarded as a separate factor of production.
•The entrepreneur himself has to bear these uncertainties. But all persons
are not capable of undertaking uncertainties. So, uncertainties restrict the
supply of entrepreneurs.
• Profit is the reward for bearing these uncertainties.

44. Criticism
1) Uncertainty bearing is not sole determinant of profit.
2) It is business ability rather than atmosphere of uncertainty which
leads to high rewards of profit.
3) Theory does not suit to monopoly business phenomenon.
4) The uncertainty elements cant be quantified to impute profit.

45. Theory of social change by Everett E. Hagen
• Everett E. Hagen, in his theory of social change states how traditional
society transforms into technical advanced society.
• The theory states that the entrepreneur’s creativity as the key element of
social transformation and economic growth.
• Interrelationship among physical environment, social structure,
personality and culture plays an important part in transformation of
society
• Economic Growth is a product of social change and political change :
According to Hagen, most of the economic theories of underdevelopment
are inadequate.
• He rejected the idea that the solution to economic development lies in
imitating western technology.

46. • One important theory of entrepreneurial behaviour has been
propounded by Hagen, which is referred to as the withdrawal of
status respect.
• Hagen has attributed the withdrawal of status respect of a group to
genesis of entrepreneurship.
• Hagen considers the withdrawal of status, of respect, as the trigger
mechanism for changes in personality formation.
• Status withdrawal occurs when members of some social group
perceive that their purposes and values in life are not respected by
the groups in the society they respect, and whose esteem they
value.

47. Hagen postulates four types of events, which can
produce status withdrawal:
1. Displacement of a traditional elite group from its previous status
by another traditional supply physical force.
2. Denigration of valued symbols through some change in the
attitude of the superior group.
3. Inconsistency of status symbols with a changing’ distribution of
economic power.
4. Non-acceptance of expected status on migration to a new
society.

48. Hagen further postulates that withdrawal of status respect would give to
four possible reactions and create four different personality types:
(a)Retreatist: Entrepreneur who continues to work in society but
remains indifferent to his work or status.
(b)Ritualist: One who works as per the norms in the society but with no
hope of improvement in the working conditions or his status.
(c)Reformist: One who is a rebellion and tries to bring in new ways of
working and new society.
(d)Innovator: An entrepreneur who is creative and try to achieve his
goals set by himself.

49. References:
1) Dynamics of Entrepreneurship Development by Vasant Desai
2) Theories of Entrepreneurship, Dr. Renu Malra
3) Teaching Notes by Dr. Shriram S. Dawkhar.
4) https://shodhganga.inflibnet.ac.in/bitstream/10603/18374/9/09_chapter%202.pdf
5) Hagen, Everett E., How Economic Growth Begins: A Theory of Social Change (1963). Journal of Social
Issues, Vol. 19, Issue 1, p. 20-34 1963. Available at SSRN: https://ssrn.com/abstract=1505877