Entrepreneurship, the act of starting and managing a business venture, has been a driving force behind economic growth, innovation, and societal progress for centuries. It plays a pivotal role in shaping economies, creating jobs, and fostering technological advancements. Throughout history, several theories have emerged to understand and explain the phenomenon of entrepreneurship.
These theories delve into the motivations, characteristics, and outcomes of entrepreneurs and their ventures, providing valuable insights into the complex and dynamic world of entrepreneurship.
Theories of entrepreneurship provide valuable insights into the complex and multifaceted world of entrepreneurship.
From understanding the role of innovation in economic development to the importance of social networks and institutional contexts, these theories offer diverse perspectives on what drives successful entrepreneurship.
What are the Theories of Entrepreneurship with examples?
The following are the different theories of entrepreneurship:
1. Innovation Theory
Austrian economist Joseph Schumpeter introduced the theory of innovation as a key driver of entrepreneurship.
He argued that entrepreneurs are innovators who disrupt the existing economic equilibrium through their introduction of new products, processes, or market approaches.
Schumpeter identified five types of innovation: the introduction of new products, the introduction of new production methods, the opening of new markets, the establishment of new sources of supply, and the creation of new industry structures.
This theory emphasizes the importance of creative destruction, where entrepreneurial activities lead to the replacement of old technologies and practices with new and more efficient ones.
However, the main objective behind the arms is to earn profits, by way of searching for new raw materials, new sources, new machinery, production of new products, new methods of production, new workers, and providing consumer satisfaction.
2. Theory of Need for Achievement
The need for achievement theory was propounded by McClelland. His assumption is that the Desire for high achievements obtaining specific achievements, making the best performance, and touching the heights of excellence, developed Entrepreneurial tendencies in individuals.
But, for that, the entrepreneur should have an adequate capacity for imagination, thinking, and developing new combinations.
For that, the feelings for achievement are inculcated in him, from the very beginning, and thereafter it is especially attempted that he may become a successful entrepreneur.
McClelland has recognized the desire to achieve the major factor in entrepreneurship development.
He has suggested conducting motivational training programs for the development of entrepreneurs.
3. Theory of Entrepreneurial Alertness
Israel Kirzner, another prominent economist, proposed the theory of entrepreneurial alertness.
He argued that entrepreneurs are not just innovators but individuals who possess the ability to spot and exploit opportunities that others might overlook.
This ability to be alert to market discrepancies and imperfections allows entrepreneurs to find profitable niches and initiate ventures to capitalize on them.
Kirzner’s theory highlights the importance of information asymmetry and the role of the entrepreneur as an agent who aligns resources to exploit these opportunities.
4. Theory of Recover The Withdrawal of Status
This theory was propounded by Everet Hegen. His assumption is that the creativity of any suffering minority group in society is the main source of entrepreneurship.
In this regard, he is of the opinion that if any community has to lose its reputation, due to some reasons, that group becomes quite active and strong to regain it.
As a result, many entrepreneurs are born. Hence it may be said that the withdrawal of the status of any social group is the root cause of its personality development and Entrepreneurial development also.
According to Hagen, withdrawal of status or reputation is caused by the following conditions:
- When a reputed group is forcefully displaced by another group.
- When a better group changes its views about its subordinate group.
- When a group starts living in some new society. The persons or the group tend to do creative behavior to regain their status and reputation, after withdrawal of status, etc. Which will result in entrepreneurship development?
5. Theory of Entrepreneurial Management
Management expert Peter Drucker offered a unique perspective on entrepreneurship by focusing on the managerial aspects of entrepreneurial ventures.
Drucker believed that entrepreneurship is a discipline that can be learned and practiced systematically.
According to his theory, entrepreneurs should apply management principles to optimize their resources and achieve success.
He emphasized the importance of innovation, risk-taking, and a customer-centric approach as fundamental components of entrepreneurial management.
6. Behavior Theory
This theory was propounded by John Kunkel. He assumes that the entrepreneurial development of any society depends upon its past and existing economic and social aspirations.
He feels that the following four types of compositions are essential for entrepreneurial development:
- The behavior of the individuals may be made entrepreneurial by influencing the major factors of demand composition.
- The behavior of the individual may be made Entrepreneurial by influencing the major factors of demand composition.
- Opportunity competition is decided by various factors, like labor and labor market, production methods, training opportunities, skills, etc.
- Labor composition is operated by various factors, like sources of livelihood, traditional approaches, aspirations of life, etc.
Hence, it may be said that the supply and development of Entrepreneurs depend upon aforesaid composition methods, assumptions, and their scope.
Hence, Entrepreneurship depends upon a particular combination of circumstances, whose creation is difficult, but their destruction is easy.
In aforesaid physiological theories of entrepreneurship development, Thomes Beagle and David P. Bayad have stated five dimensions of entrepreneurial development:
- Need for high achievement.
- The Entrepreneur is controlled by self, rather than by luck.
- The entrepreneur always remains ready to take risks in anticipation of returns and assets.
- The entrepreneur also remains ready to take the uncertainties and ambiguities, because he knows that the work which is done for the first time involves some uncertainties and ambiguities.
- The behavior of the Entrepreneur may include making a hurry in almost all activities and feeling the pressure of time and sometimes getting hyperactive and aggressive.
7. Entrepreneurial Group Theory
This theory was propounded by Frank W. Young. The theory is based on the assumption that the expansion of entrepreneurial activities is possible only by entrepreneurial groups.
Because they have specialties in the groups, and the capacity to react.
However, this reactiveness is possible, when three conditions prevail simultaneously in society.
- When the group feels low status.
- When the group is not successful in reaching important social machinery.
- When the group has better institutional resources as compared to other groups.
Thus, it is evident that when any subgroup in a big society realizes low status and position, then its capacity to react gives birth to Entrepreneurial behavior.
8. Institutional Theory
The institutional theory of entrepreneurship focuses on the impact of formal and informal institutional factors on entrepreneurial behavior.
Institutions, including laws, regulations, norms, and cultural values, shape the opportunities and constraints that entrepreneurs face.
Entrepreneurial activity is influenced by the prevailing institutional environment, which can either foster or hinder entrepreneurship in a given society.
9. Theory of the Entrepreneurial Process
In their seminal work, “The Entrepreneurial Venture,” Howard Stevenson and David Gumpert proposed a process-oriented theory of entrepreneurship.
They identified four key stages in the entrepreneurial journey: discovery, evaluation, exploitation, and capture.
During the discovery stage, entrepreneurs identify opportunities or unmet needs. In the evaluation stage, they assess the feasibility and viability of their ideas.
The exploitation stage involves turning the idea into a business venture, while the capture stage involves the entrepreneur reaping the rewards of their efforts.
This theory offers a systematic approach to understanding the steps entrepreneurs take to bring their ideas to fruition.
10. Social Change Theory
This theory of entrepreneurship development has been propounded by Max Weber.
For the first time, he stated that the emergence and development of entrepreneurs depend upon the ethical values system of society.
He is of the view that religion in which a person survives and the religious values and faiths which he accepts, substantially affect his business life, occupation, Entrepreneurial enthusiasm, and energy.
He had linked entrepreneurship development with protein (that sect of Christianity that does not accept the total authority of the pope) and with various religious communities.
He observes that those religious communities which lay emphasis on capitalism, materialism, and currency rationalization have been successful in the emergence of entrepreneurs, wealth, technology, capital formation, and economic development.
It is evident that the Protestant society has been able to achieve rapid economic progress.
11. Trait Theory of Entrepreneurship
The trait theory of entrepreneurship focuses on the personal characteristics and attributes of entrepreneurs that contribute to their success.
It suggests that certain innate traits, such as risk-taking propensity, passion, determination, creativity, and resilience, distinguish entrepreneurs from non-entrepreneurs.
Advocates of this theory argue that these traits are crucial in driving individuals to take on the uncertainties and challenges associated with entrepreneurial ventures.
12. Cultural Theory
This theory of entrepreneurial development was propounded by B.F. Hauslin.
He is of the view that industrial entrepreneurial development is possible only that a society, where social procedures are unstable, alternatives of employment to persons are widely available, and a society that encourages the personality development of enterprising persons.
He explained that culturally marginal groups have special importance in encouraging the economic development of any Nation, the reason being that marginal individuals are more capable of Creative adjustments to the conditions of the circumstances, and during the process of this adjustment, they make efforts to bring about real innovation social behavior.
In addition, he also laid the stress of developing individual qualities for entrepreneurial development.
13. Theory of Entrepreneurship as Unproductive Activity
Economist William Baumol introduced a provocative theory suggesting that not all entrepreneurial activities contribute positively to economic growth.
Baumol identified productive and unproductive entrepreneurship. Productive entrepreneurs innovate and create value, driving economic development.
In contrast, unproductive entrepreneurs engage in rent-seeking activities or exploit existing market imperfections without generating new value.
Baumol’s theory highlights the need for policies and incentives that promote productive entrepreneurship while discouraging unproductive rent-seeking behavior.
14. Cultural Value Theory
Cultural value theory has been developed by Kroken. He emphasized cultural values, expected rules, and social approvals have specific importance in entrepreneur development.
So, the Entrepreneur is an ideal personality for society.
In addition, Kroken also explained that the success of the entrepreneur and his performance are influenced by the following 3 factors:
- Entrepreneur’s own inclination towards his work and profession.
- Expectations of acceptance groups regarding the role of the entrepreneur.
- Functional requirements of the work.
Thus, it may be said that Entrepreneurial development is significantly linked to the environment.
15. Socio-Cultural Value Theory
This theory of entrepreneurship development was propounded by Stokes.
He is of the view that during the period of economic transition, socio-cultural values play a very important role.
The physiological factors encourage economic development by stimulating entrepreneurship.
According to him, ‘Mental thinking’ do create the direction of entrepreneurial development, but group generated value Matrix has a significant contribution to attracting entrepreneurship.
16. Economic Theory
This theory has been propounded by Pepuek and Cassis.
Their assumption is that physiological motivation for economic gains or an increase in real income exists in every society.
In addition, he has also stated that economic motivations are sufficient conditions for individual industrial entrepreneurship.
But, if in spite of that, entrepreneurial response lacking in individuals, it is the result of various types of market imperfections and propositions of policy determination.
This theory is based on the assumption that entrepreneurial development is the result of various economic motivations.
Hence, individuals enter into the industrial field with the aim of maximum utilization of economic opportunities available within the economy and the market.
17. Social Capital Theory
The social capital theory highlights the significance of social networks and relationships in entrepreneurial activities.
According to this theory, entrepreneurs who are embedded in strong social networks have better access to resources, information, and support, which enhances their ability to start and grow ventures successfully.
Social capital can also provide entrepreneurs with legitimacy, credibility, and access to potential customers and investors.
18. Resource-Based Theory of Entrepreneurship
The resource-based theory of entrepreneurship posits that the availability and strategic utilization of resources is central to the success of entrepreneurial ventures.
Entrepreneurs who can access and leverage unique resources, such as technology, human capital, financial backing, and intellectual property, gain a competitive advantage in the market.
This theory emphasizes the role of resources in fostering innovation and sustainable competitive advantage.
19. Entrepreneurial Disposition Theory
The entrepreneurial disposition theory of entrepreneurship development has been propounded by T.V.S. Rao.
His assumption is courageous Entrepreneurial disposition is very important for entrepreneurial development.
Besides, for entrepreneurial establishments, individual, physical, and orienting factors are also essential.
According to Rao, Entrepreneurial disposition includes factors like dynamic motivation, long-term devotion, individual, social, and physical sources, and political system.
These factors influence Entrepreneurial development and also promote industrial activities.
20. Effectuation Theory
Saras Sarasvathy introduced the effectuation theory as an alternative to traditional causal reasoning used in decision-making.
Effectuation is the process through which entrepreneurs start with their means and resources and then iteratively create goals based on what they can accomplish.
This approach focuses on leveraging existing assets, building partnerships, and managing uncertainties rather than predicting future outcomes.
Effectuation is particularly relevant in situations of high ambiguity and limited information, where entrepreneurs must rely on their resourcefulness and adaptability.
21. Process of Stage Theory
Within the accepted theory, process or stage theory has been developed by Venkat Rao.
His assumption is that entrepreneurship development is a process of five following stages:
In this stage, the environment is built for the development of entrepreneurs, by way of providing them with various simulations.
Various policy announcements are made in the country, specific plans are prepared for development, wide publicity is done, support institutions are established, and entrepreneurial development programs are organized.
All of these help in stimulating entrepreneurship.
2. Identification of Entrepreneurial Abilities and Capacities in the Society
At this stage identification of entrepreneurs is carried out and advanced systems are adopted.
The entrepreneurs are directed toward constructive activities.
The prospective Entrepreneur in various fields is identified.
3. Development and Expansion of Entrepreneurs
In addition, various policies and programs are organized for the expansion of industrial activities.
At this stage, various support organizations, like Central labor organizations, state-level organizations, Research, testing, and Standards organizations, etc. are established for the expansion of economic activities and entrepreneurial promotion.
These organizations provide various types of employee motivation, assistance, facilities, and services to entrepreneurs.
5. Follow Up
In the last stage, follow-up of government programs and policies formulated for entrepreneurial development is undertaken.
The system of feedback is introduced for entrepreneurial expansion and development.
Entrepreneurship is a multidimensional and complex phenomenon, and these 15 theories provide valuable insights into the different aspects that contribute to its success and impact on society.
By understanding the foundations of entrepreneurship, aspiring entrepreneurs, policymakers, and researchers can make informed decisions to foster a conducive environment for innovation, growth, and economic development.
The continuous exploration and study of these theories will undoubtedly shape the future of entrepreneurship and its role in shaping the world.