Module I

Introduction to Entrepreneurship

Intended Learning Outcomes

At the end of the module, the student will be able to:

 Understand the meaning of entrepreneurship
 Identify various people and their definition of entrepreneurship
 Compare and contrast various views of people regarding entrepreneurship

Entrepreneurship Definitions

Economists have never had a consistent definition of "entrepreneur" or

"entrepreneurship" (the word "entrepreneur" comes from the French verb entreprendre, meaning
"to undertake"). Though the concept of an entrepreneur existed and was known for centuries, the
classical and neoclassical economists left entrepreneurs out of their formal models: They
assumed that perfect information would be known to fully rational actors, leaving no room for
risk-taking or discovery. It wasn't until the middle of the 20th century that economists seriously
attempted to incorporate entrepreneurship into their models.

Entrepreneurship is the art of starting a business, basically a startup company offering

creative product, process or service. We can say that it is an activity full of creativity. An
entrepreneur perceives everything as a chance and displays bias in taking decision to exploit the
chance. An entrepreneur is a creator or a designer who designs new ideas and business processes
according to the market requirements and his/her own passion. To be a successful entrepreneur,
it is very important to have managerial skill and strong team building abilities. Leadership
attributes are a sign of successful entrepreneurs. Some political economists regard leadership,
management ability, and team building skills to be the essential qualities of an entrepreneur. An
entrepreneur is an innovator or a creator who introduces something new to the firm or economy.
It can be a new method of production, a new product, a new source of material, a new market or
any other similar innovation. Thus, an entrepreneur is an innovator, creator, borrower, purchaser,
etc
VIEWS OF PEOPLE REGARDING ENTREPRENEURSHIP

Richard Cantillon defines ‘entrepreneur’

The first proper and formal definition of entrepreneur was provided by Richard Cantillon in
1755. Cantillon describes an entrepreneur as an ‘adventurer’, who invests in the purchase of
goods and materials with the incentive of selling these in the future. The inclusion of the term
adventurer in the definition of entrepreneur by Richard Cantillon is the result of the uncertainty
the surrounds the price at which an entrepreneur will resell the bought goods and materials. This
unique feature also served as the distinctive factor between entrepreneurs and other businessmen.
This early definition of the term entrepreneur is indicative of their pro-active involvement in
trade and travel while exercising their ability to take risks and identify and avail fruitful business
opportunities.

The term entrepreneur, which most people recognize as meaning someone who organizes and
assumes the risk of a business in return for the profits, appears to have been introduced
by Richard Cantillon (1697-1734), an Irish economist of French descent. The term came into
much wider use after John Stuart Mill popularized it in his 1848 classic, Principles of Political
Economy, but then all but disappeared from the economics literature by the end of the nineteenth
century.

The reason is simple. In their mathematical models of economic activity and behavior,
economists began to use the simplifying assumption that all people in an economy have perfect
information . That leaves no role for the entrepreneur. Although different economists have
emphasized different facets of entrepreneurship, all economists who have written about it agree
that at its core entrepreneurship involves judgment. But if people have perfect information, there
is no need for judgment. Fortunately, economists have increasingly dropped the assumption of
perfect information in recent years. As this trend continues, economists are likely to allow in
their models for the role of the entrepreneur. When they do, they can learn from past economists,
who took entrepreneurship more seriously.
According to Cantillon's original formulation, the entrepreneur is a specialist in taking on risk.
He "insures" workers by buying their products (or their labor services) for resale before
consumers have indicated how much they are willing to pay for them. The workers receives an
assured income (in the short run, at least), while the entrepreneur bears the risk caused by price
fluctuations in consumer markets.

He illustrated farmer, as an entrepreneur, who pays out contractual incomes to the

landlords and labourers, which are certain, which sells his crops at a price, which is uncertain.

Entrepreneurship is defined as self-employment of any sort. Entrepreneurs buy at certain

prices in the present and sell at uncertain prices in the future. The entrepreneur is a
bearer of uncertainty.

Entrepreneurship According to Frank H. Knight

The idea was refined by the U.S. economist Frank H. Knight (1885-1972), who distinguished
between risk, which is insurable, and uncertainty, which is not. Risk relates to recurring events
whose relative frequency is known from past experience, while uncertainty relates to unique
events whose probability can only be subjectively estimated. Changes affecting the marketing of
consumer products generally fall in the uncertainty category. Individual tastes, for example, are
affected by group culture, which, in turn, depends on fashion trends that are essentially unique.
Insurance companies exploit the law of large numbers to reduce the overall burden of risks by
"pooling" them. For instance, no one knows whether any individual forty-year-old will die in the
next year. But insurance companies do know with relative certainty how many forty-year-olds in
a large group will die within a year. Armed with this knowledge, they know what price to charge
for life insurance, but they cannot do the same when it comes to uncertainties. Knight observed
that while the entrepreneur can "lay off" risks much like insurance companies do, he is left to
bear the uncertainties himself. He is content to do this because his profit compensates him for the
psychological cost involved.

If new companies are free to enter an industry and existing companies are free to exit, then in the
long run entrepreneurs and capital will exit from industries where profits are low and enter ones
where they are high. If uncertainties were equal between industries, this shift of entrepreneurs
and of capital would occur until profits were equal in each industry. Any long-run differences in
industry profit rates, therefore, can be explained by the different magnitudes of the uncertainties
involved.
Entrepreneurship according to Frank H. Knight

This idea was refined by the U.S. economist Frank H. Knight (1885-1972), who distinguished
between risk, which is insurable, and uncertainty, which is not. Risk relates to recurring events
whose relative frequency is known from past experience, while uncertainty relates to unique
events whose probability can only be subjectively estimated. Changes affecting the marketing of
consumer products generally fall in the uncertainty category. Individual tastes, for example, are
affected by group culture, which, in turn, depends on fashion trends that are essentially unique.
Insurance companies exploit the law of large numbers to reduce the overall burden of risks by
"pooling" them. For instance, no one knows whether any individual forty-year-old will die in the
next year. But insurance companies do know with relative certainty how many forty-year-olds in
a large group will die within a year. Armed with this knowledge, they know what price to charge
for life insurance, but they cannot do the same when it comes to uncertainties. Knight observed
that while the entrepreneur can "lay off" risks much like insurance companies do, he is left to
bear the uncertainties himself. He is content to do this because his profit compensates him for the
psychological cost involved.

If new companies are free to enter an industry and existing companies are free to exit, then in the
long run entrepreneurs and capital will exit from industries where profits are low and enter ones
where they are high. If uncertainties were equal between industries, this shift of entrepreneurs
and of capital would occur until profits were equal in each industry. Any long-run differences in
industry profit rates, therefore, can be explained by the different magnitudes of the uncertainties
involved.

Frank Knight delved the concept that entailed the term entrepreneur and modified
Cantillon’s definition, elaborating on the concepts of related risk and profit factors.

Entrepreneur attempts to predict and act upon change within markets.

According to Knight, profit—earned by the entrepreneur who makes decisions in an

uncertain environment—is the entrepreneur’s reward for bearing uninsurable risk.

." Entrepreneurship according to Joseph A. Schumpeter

(1883-1950) took a different approach, emphasizing the role of innovation. According to

Schumpeter, the entrepreneur is someone who carries out "new combinations" by such things as
introducing new products or processes, identifying new export markets or sources of supply, or
creating new types of organization. Schumpeter presented a heroic vision of the entrepreneur as
someone motivated by the "dream and the will to found a private kingdom"; the "will to conquer:
the impulse to fight, to prove oneself superior to others"; and the "joy of creating

In Schumpeter's view the entrepreneur leads the way in creating new industries, which, in turn,
precipitate major structural changes in the economy. Old industries are rendered obsolete by a
process of "creative destruction." As the new industries compete with established ones for labor,
materials, and investment goods, they drive up the price of these resources. The old industries
cannot pass on their higher costs because demand is switching to new products. As the old
industries decline, the new ones expand because imitators, with optimistic profit expectations
based on the innovator's initial success, continue to invest. Eventually, overcapacity depresses
profits and halts investment. The economy goes into depression, and innovation stops. Invention
continues, however, and eventually there is a sufficient stock of unexploited inventions to
encourage courageous entrepreneurs to begin innovation again. In this way Schumpeter used
entrepreneurship to explain structural change, economic growth, and business cycles, using a
combination of economic and psychological ideas.

Schumpeter was concerned with the "high-level" kind of entrepreneurship that, historically, has
led to the creation of railroads, the birth of the chemical industry, the commercial exploitation of
colonies, and the emergence of the multidivisional multinational firm. His analysis left little
room for the much more common, but no less important, "low-level" entrepreneurship carried on
by small firms.

It was in 1930 that entrepreneurs’ popularity was restored when Joseph Schumpeter described

entrepreneurs are innovative heroes. He described entrepreneurs as the elementary source of
induction of innovation into business cycles, without which businesses may suffer from
stagnancy and monotony.
He explained the phenomenon of ‘creative destruction’ which was a consequence of
entrepreneurial efforts that disturbed the economic and corporate equilibrium, eventually leading
to the emergence of new industries and the redundancy of the older ones.

The innovative theory is one of the most famous theories of entrepreneurship used all around the
world.  The theory was advanced by one famous scholar, Schumpeter, in 1991.

Schumpeter believes that creativity or innovation is the key factor in any entrepreneur’s field of
specialization.  He argued that knowledge can only go a long way in helping an entrepreneur to
become successful. He believed development as consisting of a process which involved
reformation on various equipment’s of productions, outputs, marketing and industrial
organizations.
However, Schumpeter viewed innovation along with knowledge as the main catalysts of
successful entrepreneurship. He believed that creativity was necessary if an entrepreneur was to
accumulate a lot of profits in a heavily competitive market.

The concept of innovation and its corollary development embraces five functions:

1. Introduction of a new good

2. Introduction of a new method of production
3. Opening of a new market
4. Conquest of a new source of supply of raw materials and
5. Carrying out of a new organization of any industry

Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of

innovation included elements of risk taking, superintendence and co-ordination.

According to Schumpeter

 Development is not an automatic process, bur must be deliberately and actively promoted
by some agency within the system. Schumpeter called the agent who initiates the above as
entrepreneur
 He is the agent who provides economic leadership that changes the initial conditions of
the economy and causes discontinuous dynamic changes
 By nature he is neither technician, nor a financier but he is considered an innovator
 Entrepreneurship is not a profession or a permanent occupation and therefore, it cannot
formulate a social class like capitalist
 Psychological, entrepreneurs are not solely motivated by profit

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.

Many business people support this theory, and hence its popularity over other theories of
entrepreneurship.

Entrepreneurship according to Hayek and Kirzner

The essence of this low-level activity can be explained by the Austrian approach of Friedrich

A. Hayek and Israel M. Kirzner. In a market economy, price information is provided by
entrepreneurs. While bureaucrats in a socialist economy have no incentive to discover prices for
themselves, entrepreneurs in a market economy are motivated to do so by profit opportunities.
Entrepreneurs provide price quotations to others as an invitation to trade with them. They hope to
make a profit by buying cheap and selling dear. In the long run, competition between
entrepreneurs arbitrages away price differentials, but in the short run, such differentials, once
discovered, generate a profit for the arbitrageur.

The difficulty with the Austrian approach is that it isolates the entrepreneur from the firm. It fits
an individual dealer or speculator far better than it fits a small manufacturer or even a retailer. In
many cases (and in almost all large corporations), owners delegate decisions to salaried
managers, and the question then arises whether a salaried manager, too, can be an entrepreneur.
Frank Knight maintained that no owner would ever delegate a key decision to a salaried
subordinate, because he implicitly assumed that subordinates cannot be trusted. Uncertainty
bearing, therefore, is inextricably vested in the owners of the firm's equity, according to Knight.
But in practice subordinates can win a reputation for being good stewards, and even though
salaried, they have incentives to establish and maintain such reputations because their promotion
prospects depend upon it. In this sense, both owners and managers can be entrepreneurs.

The title of entrepreneur should, however, be confined to an owner or manager who exhibits the
key trait of entrepreneurship noted above: judgment in decision making. Judgment is a capacity
for making a successful decision when no obviously correct model or decision rule is available
or when relevant data is unreliable or incomplete. Cantillon's entrepreneur needs judgment to
speculate on future price movements, while Knight's entrepreneur requires judgment because he
deals in situations that are unprecedented and unique. Schumpeter's entrepreneur needs judgment
to deal with the novel situations connected with innovation.

The insights of previous economists can be synthesized. Entrepreneurs are specialists who use
judgment to deal with novel and complex problems. Sometimes they own the resources to which
the problems are related, and sometimes they are stewards employed by the owners. In times of
major political, social, and environmental change, the number of problems requiring judgment
increases and the demand for entrepreneurs rises as a result. For supply to match demand, more
people have to forgo other careers in order to become entrepreneurs. They are encouraged to do
so by the higher expected pecuniary rewards associated with entrepreneurship, and perhaps also
by increases in the social status of entrepreneurs, as happened in the eighties.

In identifying profitable opportunities the entrepreneur needs to synthesize information from

different sources. Thus, the Schumpeterian innovator may need to synthesize technical
information on an invention with information on customer needs and on the availability of
suitable raw materials. A good education combined with wide-ranging practical experience helps
the entrepreneur to interpret such varied kinds of information. Sociability also helps the
entrepreneur to make contact with people who can supply such information secondhand. For
low-level entrepreneurship, education and breadth of experience may be less important because
information is less technical and more localized. Good social contacts within the local
community are more important here. Key information is obtained by joining the local church,
town council, residents' association, and so on.

References
Osorno Rene D., Bajao Grayfield., (2020). Entrepreneurship in Tourism and
Hospitality,Wiseman’s Book Trading Inc.

Greene Cynthia., (2015) Entrepreneurship, Cengage Learning Asia Pte Ltd

https://entrepreneurhandbook.co.uk/define-entrepreneur/#:~:text=Richard%20Cantillon
%20defines%20'entrepreneur'&text=Cantillon%20describes%20an%20entrepreneur
%20as,selling%20these%20in%20the%20future.

https://www.britannica.com/biography/Frank-Hyneman-Knight

https://relivingmbadays.wordpress.com/2013/04/24/schumpeters-theory-on-entrepreneurship/

https://www.econlib.org/library/Enc1/Entrepreneurship.html

Discussion Questions

1. Define entrepreneurship.
2. Explain entrepreneurship according to Richard Cantillon.
3. Differentiate the perspective of entrepreneurship according Hayer and Kirzner.
4. Explain entrepreneurship according to Frank H. Knight.
5. Explain entrepreneurship according to Joseph A. Schumpeter.