THEORIES OF

ENTERPRENURSHIP
 THEORIES OF ENTERPRENURSHIP

1. An economic theory
2. Risk bearing theory of Knight
3. Innovation theory of Schumpeter
4. Leibenstein X-efficiency theory
5. Hagen's theory( Emphasis on Withdrawal of Status
Respect)
6. Max Webbers theory of entrepreneurship
7. Hoselitz’s Theory (Emphasis on Marginal Groups)
8. ECO Model Theory of Entrepreneurship
9. Stage Theory of Enterprenurship
 1. INNOVATION THEORY
Joseph A. Schumpeter is the propounder of innovation theory.
Schumpeter defines entrepreneurship as “a creative activity”and regards
innovation as a tool of entrepreneur
The entrepreneur is viewed as the ‘engine of growth’,- An innovator
who brings new products or services into economy is given the status of
an entrepreneur,
The assumptions are:
 The entrepreneur is born with the desire to establish his own industry,
also
 He desires to do something new.
 Takes pleasure of creativity and earning experiences of skills for doing
varioustasks.
The main objective behind the arms is to earn profits, by seeing
opportunity into way of search of new raw materials, new sources, new
machinery, production of new products, new methods of production, new
workers and providing consumer satisfaction.
CONT…
Schumpeter makes a distinction between an innovator and an inventor.
 An inventor discovers new methods and new materials. On the contrary, an
innovator is one who utilises or applies inventions and discoveries in order to
make new combinations.An inventor is concerned with his technical work of
invention whereas an entrepreneur converts the technical work into economic
performance.
 An innovator is more than an inventor because he does not only originate as the
inventor does but goes much farther in exploiting the invention commercially.
Positive side :
 It can be noted that this theory’s main figure, the “innovating entrepreneur” has
played an important role in the rise of modem capitalism.
 The entrepreneur has been the prime mover - for economic development process
 theory supports the “enterprising spirit” of entrepreneur to innovate.
On the criticism side,
 this theory seems one-sided as it puts too much emphasis on innovative
functions.
 It ignores the risk taking and organizing aspects of entrepreneurship. An
entrepreneur has not only to innovate but also assemble the resources and put
them to optimum use. While stressing upon the innovative function of the
entrepreneur, Schumpeter ignored the risk-taking function, which is equally
important. When an entrepreneur develops a new combination of factors of
production, there is enough risk involved.
Despite of all the above criticisms Schumpeter’s theory is considered as a landmark in the expansion of
entrepreneurship theories
2. MAX WEBER’S THEORY OF SOCIAL CHANGE (EMPHASIS ON IMPACT OF RELIGION):
 Max Weber advocated a sociological explanation for the growth of
entrepreneurship in his theory of social change.
 He felt that religion had a profound influence on the growth of
entrepreneurship.
 The religious belief and ethical value associated with the society
plays a vital role in determining the entrepreneurial culture.
 In his theory spirit of capitalism is a fundamental concept.
Capitalism refers to the economic system where market forces of
demand and supply are allowed to play freely. As economic freedom
and private enterprises are promoted in capitalism, the
entrepreneurism is eulogized and entrepreneurial pursuits are
encouraged. Spirit of capitalism promotes the entrepreneurs to
engage in entrepreneurial pursuits and earn more and more
profits.The urge to acquire money and profits drives the individuals
to become entrepreneurs. The spirit of capitalism will be widespread
in the society that favors capitalism.
 Another associated concept was that of adventurous spirit which
refers to the impulsive force that influences and promotes
entrepreneurism.
 Weber felt that the belief systems of Hinduism didn’t encourage
entrepreneurship.
 Weber was of the opinion that the Protestant ethic provided the
CRITICISM OF MAX WEBBER THEORY
Max Weber had tried and made a commendable contribution in explaining the
growth of entrepreneurship. But, his theory has been challenged and
criticized by many researchers and scholars on the following grounds:
1. The theory is based on unrealistic and invalid assumptions.
2. The theory has been found empirically invalid.
3. Max Weber has been criticized by many sociologists on his view on
Hinduism and entrepreneurship. The rapid expansion of entrepreneurship
in India in the post-independence period disproves that Hinduism is averse
to the spirit of capitalism and to adventurous spirit.
4. The views on Protestant ethic were also not completely correct. Capitalism
has flourished in regions where Protestant ethic is not present.
3. THE UNCERTAINTY-BEARING THEORY OF
KNIGHT:
 By Frank H. Knight (1957)
 one of the most sophisticated theories to explain supply of
entrepreneurship based on profit
 Profit of the entrepreneur as the reward of bearing non-insurable risks
and uncertainties. Entrepreneurship is genuinely associated with risk
bearing.
 Knight had distinguished risk into insurable risks and non-
insurable risks.
1. insurable risks : There are certain risks that are measurable and the
probability of such risk can be statistically estimated and hence such
risks can be insured. Example of insurable risks include theft of
commodities, fire in the enterprise, accidental death etc. On the other
hand, there are certain risks which cannot be calculated.
2. non-insurable risks: The probability of their occurrence cannot be
statistically ascertained. Such risks include risks associated to
changes in prices, demand and supply. These risks are non-insurable.
Prof. Knight opined that the profit is the reward for bearing the non-
insurable risks and uncertainties.
 Uncertainty-bearing is one of the most vital functions in a
dynamic economy. The entrepreneur bears the uncertainty involved
in the enterprise. The expectation of profit is the supply price of the
entrepreneurial uncertainty bearing exercise. In a state of economy
(competitive) where there is no risk, every entrepreneur will have a
minimum supply price.
CONT…
The salient points of Knight’s theory include:
 According to the theory, the entrepreneur earns pure profits for bearing the
uncertainty.
 The probability of uncertainty or non-insurable risks cannot be statistically
estimated.
 Entrepreneurs undertake risks of varying degrees according to their ability ad
inclination. The theory suggests that the more risky the nature of enterprise, the
higher level of profit earned by the entrepreneurs.
 Profit is the reward of the entrepreneur for bearing uncertainties and risks.
Hence, it should be a part of the normal cost.
 The reward of the entrepreneur is uncertain. Entrepreneur guarantees interest to
lender of capital, wages to workers and rent to the landlord.
 The level of uncertainty in business can be reduced by applying the technique of
consolidation. The total level of uncertainty can be reduced by pooling individual
instances.
CRITICISMS OF KNIGHTS THEORY :
1. The role of an entrepreneur has not been elaborately provided by the
theory. The entrepreneur’s activity has been restricted to uncertainty
bearing. Modern business activities are different. Often, there is a
dichotomy between ownership and management. These factors have
not been taken into consideration.
2. The uncertainty-bearing theory discussed the concept of profit in a
vague way. The exact estimation of profit for the entrepreneur has not
been provided in the theory.
3. Profit as a residual income of the entrepreneur has been criticized.
4. Critics feel that uncertainty-bearing should not be treated like other
factors of production like land, labor and capital. It is a psychological
concept and should be treated in a different manner.
 4. ECONOMIC THEORY OF ENTERPRENURSHIP
BY Mark Casson - in his book ‘The entrepreneur- An Economic Theory’, published in
1982, talks about the entrepreneur.
Demand for entrepreneurship arise from the need to change and the supply of
entrepreneurship is limited.
According to the theory,
• Entrepreneurship and economic development are interdependent and
Entrepreneurship greatly contributes to economic development
• Economic development takes place when a country' real national income increases
over a period of time wherein entrepreneurship is key.
• Entrepreneurial functions are directed towards the materialistic objective of profit
maximization although its foundations may be social, psychological, ethical or
patriotic
• Economic incentives are the main motivators for entrepreneurial activities. The
person’s inner drive is always associated with economic gains and hence the incentives
and gains are regarded as sufficient conditions for the emergence of industrial
entrepreneurship
• Entrepreneurship and economic growth take place when the economic conditions
are favourable
• Economic scholars argue that entrepreneurship flourishes in countries where
particular economic and noneconomic conditions are most favourable. In these
countries, people are motivated to maximize various rewards such as profits.
Therefore, entrepreneurship emerges, and economic growth and development results.
On the other hand, if economic and noneconomic conditions are not favourable,
entrepreneurship dries up and the country's economy stagnates
• Entrepreneurship development in a particular country largely depends upon economic
policy, programmes and economic environment of that country.
Economic factors include-
• Financial Resources
• Finance is the lifeline of businesses- accessibility,
• cost affects the growth of entrepreneurship,
• good banking, -availability of credit facilities
• Infrastructural facilities
• Entrepreneurship development requires certain
infrastructure like power, communication, transportation,
• technical information.
• Availability of infrastructure,

Economic theories of entrepreneurship tend to receive

significant criticism for :
failing to recognize the dynamic, open nature of market
systems, ignoring the unique nature of entrepreneurial activity
and downplaying the diverse contexts in which
entrepreneurship occurs.
5. HOSELITZ’S THEORY (EMPHASIS ON MARGINAL GROUPS):

 Hoselitz’s theory emphasized that the cultural factors and the

role of culturally marginal groups in entrepreneurial
development.
 In his theory, Hoselitz had highlighted the importance of the
culturally marginal groups in development of entrepreneurship
and their contribution to economic development of the economy.
The marginal groups are the minorities in the society and they
yearn to elevate their conditions and in the process promote
economic development.
 In several countries the entrepreneurial aptitude are associated
to persons of particular socio-economic classes.
 The importance and contribution of the culturally marginal
groups like Lebanese in West Africa; Jews in Europe towards
the economic development of those regions reflect the gist of the
theory.
 Hoselitz opined that the
1. marginal men placed in an ambiguous position and
therefore they are best suited to make creative
adjustments in situations of change.
2. They bring about genuine adaptations in their behaviours.
3. They become entrepreneurs and promote economic
development
The basis of Hoselitz is derived from the following
viewpoint:
1. Marginal men hypothesis- Hoselitz explained that the
marginal men are the pools of the development of
entrepreneurs. These marginal men have the potentiality to
adjust in variable situations in spite of their ambiguous
social and cultural position. In the process of adjustment,
they innovate their social behavior.
2. The importance of the managerial and leadership
skills-Entrepreneurs must possess extraordinary leadership
and managerial skills which would drive them to yield
profits. Hoselitz emphasizes on the fact that the managerial
and the leadership skills are both necessary for the company
as it would not only help to manage the company well but
would also motivate the entrepreneurs to lead (Lounsbury &
Glynn, 2001).
3. Involvement of specific social classes- The
entrepreneurial talents are prevalent in every country but
the persons having socio-economic backgrounds are the ones
 6. ECO MODEL THEORY OF ENTERPRENURSHIP

o J.J. Kao’s conceptual model forms the basis of the ECO Model.
o The ECO analysis is derived from three key points which are :
 Entrepreneurship,
 Creativity and
 Organization.
o Kao had stated that entrepreneurship and creativity are derived
from the interrelationship between three components which are
the person, the task and the organizational context
o The person is regarded as the most important element of
this model where new ideas are implemented by efficient
persons. The entrepreneurial talents of a person include skills,
motivation, experience and psychological factors
o The task emphasizes acquiring opportunities, management of
resources and implementing leadership qualities which are
necessary for the entrepreneurial growth.
o The organizational context is the concatenation of the creative
and entrepreneurial work. For example, the organizational
structure affects the entrepreneurial environment.
E. E. HAGEN’S THEORY (EMPHASIS ON WITHDRAWAL OF STATUS
RESPECT):
 Hagen had ascribed the genesis of entrepreneurship to withdrawal of
status respect of a group.
 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
withdrawal of status of any social group is the root cause of its
personality development and Entrepreneurial development also.
 The social group that experiences the withdrawal of status respect
engulfs itself into aggressive entrepreneurism. In such a situation the
status loosing group and the members of status loosing group
endeavor to regain their status by undertaking rigorous
entrepreneurial drive.
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 creativity behaviour to regain the status and
reputation, after withdrawal of status, etc. Which will result in
entrepreneurship development?
CONT…
There four possible reactions to the withdrawal of status respect
which relates to four different personality types:
(i) The retreatist – An individual who works in the society but is
indifferent to the work and position.
(ii) The ritualist – An individual who works in the manner accepted and
approved by the society but has no hopes of improving his/her position.
(iii) The reformist – An individual who fights against the injustice and
tries to rebels against the established society in order to form a new
society.
(iv) The innovator – An individual who endeavors to bring about new
changes and utilizes all opportunities. This personality reflects the
personality of an entrepreneur.
Criticisms:
I. The theory lacks general application. It is not always true that all the
social groups have behaved in the manner as advocated in the theory.
II. The theory ignores the various other factors accountable for
development of entrepreneurship.
 7. LEIBENSTEIN’S THEORY (EMPHASIS ON X-EFFICIENCY):
 In general X-inefficiency refers to the difference between the optimal
efficient behaviour of business in theory and the observed behaviour is
practice which occurs owing to different factors.
 X-efficiency refers to the effectiveness with which a given set of inputs are used
to produce outputs. If a particular firm is producing the maximum output it can,
given the resources it employs with the best available technology, it is said to be
technical-efficient.
 X-inefficiency occurs when technical-efficiency is not achieved. Whenever 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.
 Harvey Leibenstein had mentioned that for allocative efficiency the whole
economy was considered whereas in case of X-efficiency just specific companies
and industries are to be considered.
 X-efficiency arises either because the firm’s resources are used in the wrong way
or because they are wasted, that is, not used at all.
 The entrepreneur has been entrusted two roles;
 first the role of a gap filler : The production function usually has certain
deficiencies. These deficiencies and gap arise because all the factors of
production function cannot be marketed. The entrepreneur has been entrusted
the job to fill the gaps in the market.
 second an input completer : The second role of the entrepreneur is input
completion. The entrepreneur has to mobilize all the available inputs in order to
improve the efficiency of existing production methods.
Leibenstein advocated two types of entrepreneurship.
 First type is the ‘Routine entrepreneurship’ which involves
the important functions of management of business.
 Second type is that of the ‘New entrepreneurship’ which
involves innovative entrepreneurship.

Criticisms:
1. The exact influence which the X-efficiency has on output of
an organisation cannot be determined.
2. The theory is less predictable as compared to normal
theories.
 8. PROCESS OF STAGE THEORY ENTERPRENURSHIP
Within accepted theory, process or stage theory has been developed by Venkat Rao.
His assumption is that entrepreneurship development a process of five following
stages:
1. Simulation
2. Identification of Entrepreneurial Abilities and Capacities in the Society
3. Development and Expansion of Entrepreneurs
4. Promotion
5. Follow Up
(1). Simulation
• In this stage, the environment is built for development of entrepreneurs, by way of
providing them various simulation.
• Various policy announcements are made in the country, specific plans are prepared for
development, wide publicity is done, support institutions are established, entrepreneurial
development programmes are organized. All these help in stimulating entrepreneurship.
(2). Identification of Entrepreneurial Abilities and Capacities in the Society
• At this stage identification of entrepreneur 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
• At this stage, various programmes are organized for the development of
entrepreneurs, which include vocational guidance programmes,
management Training, and Technical training.
• In addition, various policies and programmes are organized for the
expansion of industrial activities.
(4). Promotion
• At this stage, various support organizations, like Central labour
organizations, state-level organizations, and Research, testing and
Standards organizations, etc. are established for the expansion of economic
activities and entrepreneurial promotion.
• These organizations provide various types of motivation, assistance,
facilities, and services to entrepreneurs.
(5). Follow Up
 At the last stage, follow-up of government programmes and policies
formulated for entrepreneurial development is undertaken. The system of
feedback is introduced for entrepreneurial expansion and development.
 9. THEORY OF NEED OF ACHIEVEMENT
 The need for achievement theory was propounded by McClelland.
 McClelland’s need-based theory on motivation, three motivators or
needs have been prioritized for:
a) affiliation,
b) achievement and,
c) power.
 According to McClelland, entrepreneurs do things in a new and better way
and make decisions under uncertainty.
 His assumption is that the Desire of high achievements obtaining specific
achievements, making the best performance, touching the heights of
excellence, developed Entrepreneurial tendencies in the individuals.
 But, for that, the entrepreneur should have adequate capacity of
imaginations, thinking and developing new combinations.
 For that, the feelings for achievements 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
development of the entrepreneurs.
 CRITICISM :
 Casrud and Johnson (1989) opined that it is poor in the application. As
newer measures of achievement motivation were developed,
 McClelland’s theory became less versatile in application. Moreover, the
authors state that McClelland’s opinion that achievement motivation
drives people to entrepreneurship is “naïve”.
 Furthermore, this theory focuses on “stable” characteristics of
entrepreneurs, whereas since the market conditions are dynamic, the
entrepreneurial behavior also keeps changing.