Chapter 2: The evolution of entrepreneurship theory
2.1 Introduction
The common contemporary view is that entrepreneurship is synonymous with ‘venture creation’ or ‘fast-
growing companies’. In historical thinking the way in which entrepreneurship has been defined has
varied with different theories and thinkers.
2.3 Economic perspectives
In most cases when economists seek to understand entrepreneurship they are interested in the function
that entrepreneurship plays in the economic system. The economic perspectives can be classified in
several ways:
-Chronologically.
-In schools of thought.
-By the function the economists has given to the entrepreneur within the economic system.
This chapter will present different economic thinkers in schools of thought:
-French classical school.
-British classical school.
-Microeconomics and the neoclassical school.
-Austrian and neo-Austrian school.
-Schumpeterian school.
2.3.1 French classical school
Cantillon is recognized as the first to use the term entrepreneurship in an economic context. He
introduced an economic system based on classes of actors, entrepreneurs being one of these. There are
landowners, who are financially independent aristocracy, while ‘hirelings’ and ‘entrepreneurs’ were
viewed to be financially dependent on others. Hirelings earned fixed incomes, but entrepreneurs were
‘set up with a capital to conduct their enterprise, or are undertakers of their own labor without capital,
and they may be regarded as living off uncertainty’. For Cantillon, individuals who purchased a good at a
certain price, used that good to produce a product and then sold the product at an uncertain price could
be considered entrepreneurs. Risk and uncertainty play central parts in his theory.
Quesnay took a step away from Cantillon’s ideas about uncertainty and risk by offering up the first
mathematical general equilibrium system. Turgot made an additional distinction by identifying that the
ownership of capital and the act of entrepreneurship could be two separate functions of entrepreneurial
endeavor. Say further enhanced and built on Cantillon’s ideas. Say’s theory of production and
distribution was constructed on three major agents of production: (1)human industry, (2)capital, both
physical and money, and (3)land. Say then proceeded to make a tri=partite division of human industry
into ‘effort, knowledge, and the applications of the entrepreneur’. The entrepreneur was viewed as the
coordinator of the system, acting as an intermediary between al of the other agents of production and
taking on the uncertainty and risk. Successful entrepreneurs needed significant qualities, the most
important one was judgment or the ability to assess the needs of the market and understand how these
needs could be met.
,2.3.4 Austrian and neo-Austrian school
The theorists in this category regard uncertainty and risk as important features of economic systems that
allow entrepreneurs the opportunity to make profit. They began to revive the entrepreneurship concept.
The first work that makes substantive contributions to understanding entrepreneurship is Knight’s risk,
uncertainty and profit. Knight tried to explain the real market system as it actually operates. Much of the
Austrian school’s ideas can be traced back to the work of von Mangoldt. Knight argued that supply and
demand can’t be in equilibrium because, in reality, other forces change the conditions of the market. In
disequilibrium a market must be in a constant state of uncertainty and entrepreneurship becomes the
skillful interpretation of market changes and the bearing of responsibility for the successful or otherwise
interpretation of market change. He argues that entrepreneurship is in fact a type of decision that
requires action in the face of unknown future events. If change is predictable it is risk, if it’s not
predictable it is uncertainty.
The other (neo)- Austrian economists see uncertainty as important, as does disequilibrium, and they
focus more on the entrepreneurial opportunities created from uncertainties in the market. Most widely
cited is Kirzner, whose entrepreneurs, or more precisely, entrepreneurial decisions, are considered the
driving force behind the market. He argues that there is a crucial element in all human action that can be
described as ‘entrepreneurial’; individuals in the market do not always make logical decisions and these
are often based on irrationality or subjective preferences. Personal judgment is important, as is
uncertainty and risk, but it is not only guided by logical choices and decisions but also the individual’s
propensity to be alert to opportunity.
Entrepreneurship is not only the propensity to pursue goals efficiently, when the ends and means of
those goals have been identified, but also the drive and alertness required to identify which goals to
pursue in the first place. It is the acquisition of market information and knowledge, from market
participation, that helps provide this alertness to opportunity, but also an individual capacity to
‘envisage’ future opportunities as it makes correct perception of the market possible. Entrepreneurial
ability is dependent on perceiving future market conditions and setting about a course of action that
results in a sequence of decisions directed at achieving the outcome anticipated.
Casson focuses on information asymmetries and explores the role that information, information
exchange, and information markets have on an entrepreneur’s alertness to opportunity.
2.3.5 Schumpeterian school
Schumpeter’s theory is focused on economic development and the role of the entrepreneur in the
development process. He argues that the important question in capitalism is how to create and destroy
existing structures and markets(creative destruction). The function of the entrepreneur is that of
innovating or making new combinations of production possible. This concept covers five potential cases:
-The introduction of a new good or a new quality of a good.
-The introduction of a new method of production.
-The opening of a new market.
-The development of a new source of supply or raw materials or half-manufactured goods.
-The carrying out of a new organisation of any industry.
The combinations typically occur in new firms that begin producing beside older firms. Individuals and
businesses are only entrepreneurial when they carry out new combinations. If there are individual
differences in a people’s ability to cope with ambiguity, uncertainty, change and risk, what drives these
differences? Understanding this could explain why some people may be more entrepreneurial.
,2.4 Early psychological and sociological perspectives
Schumpeter doesn’t describe specific characteristics that might occur in entrepreneurial ability,
while Kirzner focuses on cognitive skills. From the beginnings of the 1960s entrepreneurship theories
focus shifts away from economics to psychological, social psychological and sociological explanations.
2.4.1 Personality theory
It is considered to have started with the work of McClelland, who used the concept of the ‘achievement
motive’ to describe the behaviour of entrepreneurs. Most early personality theory is described as single-
trait theory because theorists sought to identify a single-trait and like it to a greater propensity to be a
successful entrepreneur. Partly as a consequence of the lack of predictive success, the focus shifted to
multi-trait approaches that presented profiles of entrepreneurial characteristics they felt could help
predict a person’s entrepreneurial potential.
2.4.2 Psycho-sociological theory
Includes two different forms of displacement theory(Shapero/De Vries) and a social marginality(Scase
and Goffee) theory. The basic premise of these approaches is that entrepreneurs are displaced people or
socially marginal people who have been supplanted from their familiar way of life and have somehow
been forced into an entrepreneurial way of life due to their circumstances. In Shapero’s approach,
displacement came about through both positive and negative forces, although the majority were
perceived to derive from negative forces. The forces were typically external and societal, which were
beyond the power of the individual to influence. Kets de Vries used Freudian psychology and sought out
a psychological explanation for why entrepreneurs feel displaced. He viewed displacement as both
psychological and sociological, with a rebellion against existing norms and structures being one of a few
reasons for psychological displacement. He linked much of his thinking on entrepreneurial behaviour
back to a person’s family life and their early family relationships.
2.4.3 Sociological perspectives
Two notable sociological works on organisations that applied a population ecology perspective to the
birth and death of firms(Aldrich/Zimmer/Carroll) and Greiner’s paper that laid the foundations for
research on the growth stages of entrepreneurial businesses. In the former, Aldrich and Carroll explored
how the sociological characteristics of particular markets could help explain business success and failure
and, in the latter, Greiner put forward a theory that helped explain how entrepreneurial firms might
need to evolve and change as they develop and grow.
2.5 Contemporary thought
There are many causes of the growing interest in entrepreneurship:
-Many developed economies shifted sway from an industrial landscape based on a few large
organisations towards an economy based on smaller businesses since the 1970s. This had led to a point
today there the majority of new jobs are created by entrepreneurial businesses.
-A policy shift in government began to recognize, support, and promote entrepreneurship. In the UK this
began with the 1971 Bolton Report.
-Particularly from 2000-2010, the number of positive media portrayals of entrepreneurs grew.
-In the USA, we must acknowledge the role and growth of philanthropy: successful entrepreneurs often
giving back to their colleges and creating endowed professorships.
,2.5.1 Small business or entrepreneurship?
The distinction between the two in unclear, but there are definitely differences in the research focus:
-Small business researchers typically explore routine business experience, while entrepreneurship focus
more on contexts where innovative effort is required. Entrepreneurship tends to be applied to ‘new
venture creation’, ‘high-growth ventures’ or ‘corporate ventures’, while small business focuses on
established small firms that may be in none of those categories.
-Europeans are more likely to focus on generic issues, such as small business and ‘enterprise’, while
North Americans tend towards a greater focus on entrepreneurship.
-Small business researchers tend to focus on the firm as their unit of analysis(as opposed to the
individual) or on the policy context supporting small firms.
In more recent years, further diversification has occurred within the small business research field, to
cover particular forms of small businesses and their particular needs. This was first illustrated by a move
towards typologies, the ways in which researchers have categorized small business owners. The best
example of this general shift has been a growing and separate focus on family businesses. Another clear
example is a growing emphasis on franchising.
2.5.2 Diversification and expansion
The second shift that appears to have created much diversity in entrepreneurship theory is a
dissatisfaction with the dominant personality approach at the end of 1970s and early 1980s. During this
period, the dissatisfaction manifested itself in a number of contexts, at slightly different times and ways.
It was best articulated in two papers by Gartner, in which he argued for research to stop exploring who
entrepreneurs were and explore what they did. Much of contemporary thought has since been driven by
a desire to explain what entrepreneurs do and how they do it. Theory in entrepreneurship has spun off
in several direction.
First, a focus on what entrepreneurs do and how they do it enabled researchers to begin to look more at
the context of entrepreneurial endeavor, the issues encountered, and the behaviours used. During the
1990s and 2000s, a plethora of other contexts for entrepreneurial action began to grow from this
behavioural stance. For example, it is not unusual for researchers to now consider specific
entrepreneurial contexts such as high-tech entrepreneurship. What these approaches hold in common is
an assumption that entrepreneurship is an innovative process or ‘the making of the road’ as opposed to
‘the travelling along it’. They do agree that the process can occur in different ways in different contexts.
Second, while there was a shift in theory that enable researchers to explore what entrepreneurs do and
how they do it, this behavioural focus opened up a criticism of entrepreneurial thought inherited from
the 1960s, which was its focus on the individual. When taking a behavioural stance, researchers
discovered there was a large variety of contextual factors and a host of other actors that have an impact
on entrepreneurial processes.
Third, while many researchers shifted towards a more behavioural, organizational or even sociological
explanation of entrepreneurial activity, not all researchers were willing to give up trying to understand
entrepreneurs and the contribution they make to the entrepreneurial process. These theorists split in
four ways:
-Group 1 continued to develop, expand, and build upon personality theory and tried to link the
entrepreneurial personality to the context and process in which it is applied.
-Group 2 began to explore the role of cognition and sought to understand the entrepreneur’s capacity to
, be ‘alert’ to new opportunities. They developed concepts to explain particular entrepreneurial decisions,
which helped to explain how decisions to start businesses might occur.
-Group 3 took a different philosophical stance to entrepreneurial personality and viewed personality as a
social construction. Entrepreneurial behaviour is an archetype created within society to describe how we
expect people acting in entrepreneurial ways to behave.
-Group 4 began to develop concept to understand how entrepreneurs learn and become more effective
as they engage in the entrepreneurial process. This group applies the thinking that ‘entrepreneurs
change as they learn and engage and businesses perform better as entrepreneurs learn’.
Finally, as researchers have begun to appreciate the behavioural nuances of entrepreneurship and as the
subject has grown, research has begun to focus on entrepreneurship education itself. The behavioural
focus that developed in the mid to late 1980s also led to greater recognition that entrepreneurial activity
could be learnt.
Chapter 3; Entrepreneurship and economic development
3.1 Introduction
In particular, entrepreneurship forms a part of endogenous modes of economic development, consisting
of activities, investment and systems arising and nurtured within a region or locality, as opposed to being
attracted from elsewhere. As part of these modes, the capability of entrepreneurs to influence economic
development is related to their capability to access and exploit knowledge and generate innovation.
Cultural traits of places, especially in terms of social capital, may influence entrepreneurial capacity, with
policymakers seeking to develop such traits in order to develop entrepreneurial potential. Policymakers
also sought to stimulate entrepreneurship through policies targeted at both the economic and social
barriers, plus opportunities mediating entrepreneurial activity.
3.3 Entrepreneurship and economic development
Levels of entrepreneurial activity are positively correlated with GDP and the rate of GDP growth. In the
past, large firms were seen as the key to economic development. Small firms were seen as a luxury
rather than necessity. The route to economic growth was seen as being a combination of large-scale
production and collectivist ideologies, and stability, continuity and homogeneity. However, the
domination of big-firm capitalism has gradually diminished. The role and importance of the entrepreneur
has witnesses a resurgence in both economic theory and public policy making. The contribution of
entrepreneurship to economic growth, however, have been interpreted in widely different ways.
Schumpeter(1942) describes economic development as being a process of creative destruction, whereby
new enterprises are introduced and expanded, and other enterprises exit or contract. Entrepreneurs
drive the course of creative destruction through innovation.
Kirzner(1973,2009) also emphasises a requirement for human action in entrepreneurship and finds that
boldness, imagination and creativity are important aspects. Kirzner states that entrepreneurship doesn’t
require innovation. The Kirznerian entrepreneur engages in arbitrage by being alert to profit
opportunities in existing circumstances.
Baumol(1990) states that the structure of pay-offs drives the allocation of entrepreneurial activity
between productive, unproductive, and destructive entrepreneurship.
Entrepreneurship has been used to define types of individuals(Say,1880), types of decisions
(Knight,1921), and forms of behaviour(Schumpeter,1934). Entrepreneurship has its origin in the work of
