THEORIES OF ENTREPRENEURSHIP

1. Innovation Theory of Schumpeter:

A dynamic 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 introduced a concept of innovation as key factor in entrepreneurship in addition to
assuming risks and organising factor of production. 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’, He sees the opportunity for introducing new products, new markets, new sources
of supply, new forms of industrial organization or for the development of newly discovered resources.
Wilken had added the
concept of the changes that
an entrepreneur brings:
❖ Expansion of goods,
products.
❖ Productivity of factors of
production such as
finance, labour, material.
❖ Innovation in production
such as, technology,
process changes and
increase in human
resource productivity.
❖ Innovation in marketing
area such as the
composition of the
market, size of the
market and new market
2. Need for Achievement Theory of McClelland:
According to McClelland the characteristics of entrepreneur has two features - first doing things in a
new and better way and second decision making under uncertainty. McClelland emphasises 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.
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. A drive to excel, advance and grow.
● Need for Power. A drive to dominate or influence others and situations.
● Need for Affiliation. A drive for friendly and close inter-personal relationships.
McClelland found that certain societies tended to produce a large percentage of people with high
achievement. entrepreneurship.
Since entrepreneurial motivation and abilities are long run sociological issues; he opined it is better to
make political, Social and economic environments congenial for the growth of entrepreneurship in
underdeveloped and developing countries.
3. 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 realise its productive potential. According to Leibenstein, When an input is not
used effectively the difference between the actual output and the maximum output attributable to that
input is a measure of the degree of X-efficiency.
Leibenstein identifies two main roles for the entrepreneur:
(i) a gap­filler and (ii) an input completer.
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.” The second role is input completion, which involves making
available inputs that improve the efficiency of existing production methods or facilitate the introduction
of new ones.
According to him there are two types of entrepreneurship.
(i) Routine entrepreneurship – deals with normal business functions like co-ordinating the business activities.
(ii) 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.
4. Risk Bearing Theory of Knight:
Prof. Knight and John Staurt Mill saw risk-bearing as the important function of
entrepreneurs. Some important features of this theoryare as follows:
1. Risk creates Profit
2. More Risk More Gain
3. Profit as Reward and Cost
4. Entrepreneur’s Income is Uncertain
The elasticity of the supply of self confidence is the single most important determinant of
the level of profit and the number of entrepreneurs.
5. Max Weber’s Theory of Entrepreneurial Growth:

Max Weber in his theory says religion has a large

impact on entrepreneurial development.
According to Weber some religions have basic
beliefs to earn and acquire money and some have
less of it. He calls them a ‘spirit of capitalism’ and
‘adventurous spirit’.

His theory suggests the belief systems of

Hinduism, Buddhism ad Islam do not encourage
entrepreneurship.
Max Weber’s theory suited the colonial rulers who wanted to encourage European
entrepreneurship in
India. But it has been criticised by subsequent researchers. The theory is based on the invalid
assumptions,which are:
(a) There is a single system of Hindu value,
(b) The Indian community internalised those values and translated them to day-to-day behaviour,
and
(c) These values remained immune to and insulated against external pressures and change. The
rapid
growth of ­entrepreneurship in India since independence proves that Hinduism is not averse to the
spirit of capitalism and to adventurous spirit.
It can be concluded in the words of Carroll that “ethical values have some effect on
entrepreneurial growth but to consider them all in all would be unrealistic.”
6. Hagen’s Theory of Entrepreneurship:
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.
Hagen postulates four types of events which can produce status withdrawal:
● Displacement of a traditional elite group from its previous status by another
traditional supply physical force.
● Denigration of valued symbols through some change in the attitude of the superior
group.
● Inconsistency of status symbols with a changing’ distribution of economic power.
● Non-acceptance of expected status on migration to a new society.
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 hut 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.
7. Thomas Cochran’s Theory of Cultural Values

According to Thomas Cochran’s, the entrepreneur represents society’s model

personality. His performance is influenced by the factors of his own attitudes
towards his occupation, the role expectations held by sanctioning groups, and the
operational requirements of the job.
It can be noted that various communities and castes like samurai in Japan, family
pattern in France, Yoruba in Nigeria, Kikuya in Kenya, Christians in Lebanon,
Halai Memon industrialists in Pakistan, Parsees, Marwaries and Gujaratis in
India have been the sources of entrepreneurship.
8. Theory of Change in Group Level Pattern:

Young defines entrepreneurs as that the entrepreneur characteristics are found in small
groups wherein individuals develop as entrepreneurs. Young arrived at the group level
pattern behaviour entrepreneurs based on his studies known as Thematic Appreciation Test
(TAT) on groups of entrepreneurs.

A group becomes reactive when the following three conditions coincide:

● When denied of access to important social networks;
● When a group experiences low ‘status recognition; and
● When the group has better institutional resources than other groups in the society at
the same level.
9. Economic Theory of Entrepreneurship
Many economists revealed that entrepreneurship and economic growth will take place in those circumstances
where particular economic conditions are in favour of the business environment. The main advocates of this theory
were Papanek and Harris. According to them economic incentives are the main forces for entrepreneurial activities
in any country. There are a lot of economic factors which promote or demote entrepreneurship in a country. These
factors are:

(a) The availability of bank credit

(b) High capital formation with a good flow of savings and investments

(c) Supply for loanable funds with a lower rate of interest.

(d) Increased demand for consumer goods ad services

(e) Availability of productive resources.

(f) Efficient economic policies like fiscal ad monetary policies

(g) Communication and transportation facilities

10. Exposure Theory of Entrepreneurship:
Many studies have shown that it is the exposure to new
ideas and opportunities towards creativity ad innovation
which leads to create a new venture.‘Tripathi has
observed that exposure to new ideas and values were
the common factor between Parsi and Hindu
entrepreneurs, which led them to entrepreneurship.
Education have played very significant role in exposing
the Indian entrepreneurs to Western ideas leading them
to entrepreneurship.
11. Political System Theory of Entrepreneurial Growth:

Political system can crate adequate infrastructure, favourable laws, favourable taxation system and procedures, provide
incentives and subsides, security to entrepreneurs, create promoting policies and can encourage people towards
entrepreneurship.Thus, the commitment of political system can contribute significantly towards entrepreneurial
development.

According to Hoselitz, Japanese entrepreneurs could flourish because their political system was able to properly integrate
with various sectors such as the industrial and agricultural, large, small and handicraft industries, labour intensive and
capital intensive technology, traditional and modem social structure. Also, there was no colonial disruption.