Entrepreneurship

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For the magazine, see Entrepreneur (magazine).
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Left to right, Eric Schmidt, Sergey Brin and Larry Page of Google, which is sometimes cited as an example of entrepreneurship and disruptive innovation.

Entrepreneurship is the process of starting a business or other organization. The entrepreneur chooses/develops a business model, acquires the human and other required resources and is fully responsible for its success or failure. Entrepreneurship operates within an entrepreneurship ecosystem.

Background[edit]

In 2012, Ambassador-at-Large for Global Women's Issues Melanne Verveer greeted participants in an African Women's Entrepreneurship Program at the State Department in Washington, D.C.

In recent years, "entrepreneurship" has been extended from its origins in business to include social and political activity.[according to whom?] Entrepreneurship within an existing firm or large organization has been referred to as intrapreneurship and may include corporate ventures where large entities spin off subsidiary organizations.[1] Entrepreneurs are leaders willing to take risk and exercise initiative, taking advantage of market opportunities by planning, organizing, and employing resources,[2] often by innovating new or improving existing products.[3] More recently, the term entrepreneurship has been extended to include a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives, e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship.

According to Paul Reynolds, founder of the Global Entrepreneurship Monitor, "by the time they reach their retirement years, half of all working men in the United States probably have a period of self-employment of one or more years; one in four may have engaged in self-employment for six or more years. Participating in a new business creation is a common activity among U.S. workers over the course of their careers."[4] In recent years, entrepreneurship has been claimed as a major driver of economic growth in both the United States and Western Europe.

Entrepreneurial activities differ substantially depending on the type of organization and creativity involved. Entrepreneurship ranges in scale from solo, part-time projects to large-scale undertakings that create many jobs. Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in order to raise capital for building the business.[5] Many organizations exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs.

Beginning in 2008, an annual "Global Entrepreneurship Week" event aimed at "exposing people to the benefits of entrepreneurship" and getting them to "participate in entrepreneurial-related activities".[who?]

History[edit]

Etymology and historical usage[edit]

First used in 1723, today the term entrepreneur implies qualities of leadership, initiative and innovation in business. Economist Robert Reich has called team-building, leadership, and management ability essential qualities for the entrepreneur.[6][7]

A entrepreneur is a factor in microeconomics, and the study of entrepreneurship reaches back to the work in the late 17th and early 18th centuries of Richard Cantillon and Adam Smith, which was foundational to classical economics.

In the 20th century, entrepreneurship was studied by Joseph Schumpeter in the 1930s and other Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. The term "entrepreneurship" was coined around the 1920s, while the loan from French of the word entrepreneur dates to the 1850s.

Initially, economists made the first attempt to study the entrepreneurship concept in depth[8] Richard Cantillon (1680-1734) considered the entrepreneur to be a risk taker who deliberately allocates resources to exploit opportunities in order to maximize the financial return.[9][10] Cantillon emphasized the willingness of the entrepreneur to assume risk and to deal with uncertainty. Thus, he draws attention to the function of the entrepreneur, and distinguishes clearly between the function of the entrepreneur and the owner who provides the money.[9][11] Alfred Marshall viewed the entrepreneur as a multi-tasking capitalist. He observed that in the equilibrium of a completely competitive market, there was no spot for “entrepreneurs” as an economic activity creator.[12]

Historical barriers to entrepreneurship[edit]

Rooting back to the times of the medieval Guild, in Germany craftsmanship a special permission to operate as an entrepreneur was the small proof of competence (Kleiner Befähi-gungsnachweis), which restricted training of apprentices to craftsmen who held a Meister certificate. This institution was introduced in 1908 after a period of so-called freedom of trade (Gewerbefreiheit, introduced in 1871) in the German Reich. However, the small proof of competence was not required to start a business. In 1935 and in 1953, the greater proof of competence was reintroduced (Großer Befähigungsnachweis) and required that craftsmen obtain a Meister certificate to train apprentices and before being permitted to set up a new business.[13]

What is an entrepreneur[edit]

Entrepreneur (Listeni/ˌɒntrəprəˈnɜr/), is a loanword from French.[14] It is defined as an individual who organizes or operates a business or businesses. Credit for coining the term entrepreneur generally goes to the French economist Jean-Baptiste Say, but in fact the Irish-French economist Richard Cantillon defined it first[15] in his Essai sur la Nature du Commerce en Général, or Essay on theNature of Trade in General, a book William Stanley Jevons considered the "cradle of political economy"[16] Cantillon used the term differently. Biographer Anthony Breer noted that Cantillon saw the entrepreneur as a risk-taker while Say considered the entrepreneur a "planner".

Cantillon defined the term as a person who pays a certain price for a product and resells it at an uncertain price: "making decisions about obtaining and using the resources while consequently admitting the risk of enterprise." The word first appeared in the French dictionary entitled "Dictionnaire Universel de Commerce" compiled by Jacques des Bruslons and published in 1723.[17]

Successful entrepreneurs have the ability to lead a business in a positive direction by proper planning, to adapt to changing environments and understand their own strengths and weakness.[18]

Chronologically[edit]

  • 1734: Richard Cantillon—Non-fixed income earners who pay known costs of production but earn uncertain incomes,[19]
  • 1803: Jean-Baptiste Say—An economic agent who unites all means of production- land, labour and capital to produce a product or service. Product sales pay rent, wages, interest and what remains is profit. He shifts economic resources from an area of lower to an area of higher productivity.[citation needed]
  • 1934: Joseph Schumpeter—Innovators who change the status quo to set up new products and new services.[citation needed]
  • 1961: David McClelland—A person with a high need for achievement [N-Ach] who is energetic and a moderate risk taker.[citation needed]
  • 1964: Peter Drucker—One who searches for change, responds to it and exploits opportunities. Innovation is a specific tool of an entrepreneur hence an effective entrepreneur converts a source into a resource.[citation needed]
  • 1971: Peter Kilby—Imitative entrepreneurs do not innovate, but bring technologies innovated by others into another context.[20]
  • 1975: Howard H. Stevenson—The pursuit of opportunity without regard to resources currently controlled.[21]
  • 1975: Albert Shapero—Those who take initiative, accept risk of failure and have an internal locus of control.[citation needed]
  • 2013: Ronald May—Someone who commercializes his or her innovation.

Skill set[edit]

British entrepreneur Karren Brady has an estimated net worth of £82 million[22]

The entrepreneur is commonly seen as an innovator — a generator of new ideas and business processes.[23] Management skill and strong team building abilities are often perceived as essential leadership attributes for successful entrepreneurs.[24] Political economist Robert Reich considers leadership, management ability, and team-building to be essential qualities of an entrepreneur.[25][26]

Joseph Schumpeter[edit]

According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention into a successful innovation.[27] Entrepreneurship employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part inferior offerings across markets and industries, simultaneously creating new products and new business models. Thus, creative destruction is largely responsible for long-term economic growth. The idea that entrepreneurship leads to economic growth is an interpretation of the residual in endogenous growth theory[clarification needed] and as such continues to be debated in academic economics. An alternate description by Israel Kirzner suggests that the majority of innovations may be incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw that require no special qualities.

For Schumpeter, entrepreneurship resulted in new industries and in new combinations of currently existing inputs. Schumpeter's initial example of this was the combination of a steam engine and then current wagon making technologies to produce the horseless carriage. In this case the innovation, the car, was transformational, but did not require the development of dramatic new technology. It did not immediately replace the horse-drawn carriage, but in time, incremental improvements reduced the cost and improved the technology, leading to the modern auto industry.

Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources would find each other through a price system). In this treatment the entrepreneur was an implied but unspecified actor, consistent with the concept of the entrepreneur being the agent of x-efficiency.

For Schumpeter, the entrepreneur did not bear risk: the capitalist did. Schumpeter believed that the equilibrium ideal was imperfect Schumpeter (1934) demonstrated that changing environment continuously provides new information about the optimum allocation of resources to enhance profitability some individuals acquire the new information before others, recombine the resources to gain an entrepreneurial profit. Schumpeter was of the opinion that entrepreneurs shift the Production Possibility Curve to a higher level using innovations.[28]

Frank Knight and Peter Drucker[edit]

Dell Women's Entrepreneur Network event in New York City, May 2013

For Frank H. Knight[29] and Peter Drucker, entrepreneurship is about taking risk. The entrepreneur is willing to put his or her career and financial security on the line and take risks in the name of an idea, spending time as well as capital on an uncertain venture. Knight classified three types of uncertainty:

  • Risk, which is measurable statistically (such as the probability of drawing a red color ball from a jar containing 5 red balls and 5 white balls).
  • Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball from a jar containing 5 red balls but with an unknown number of white balls).
  • True Uncertainty or Knightian Uncertainty, which is impossible to estimate or predict statistically, such as the probability of drawing a red ball from a jar whose number of red balls is unknown as well as the number of other colored balls.

Entrepreneurship is often associated with true uncertainty, particularly when it involves something really novel, whose market did not already exist. However, even if a related market already exists, nothing guarantees that room exists for a particular new entry.

The place of the entrepreneur in traditional economic theory presents theoretic quandaries. William Baumol has added greatly to this area and was recently honored for this work at the 2006 annual meeting of the American Economic Association.[30]

Individual/opportunity nexus[edit]

According to Shane and Venkataraman, entrepreneurship comprises two "enterprising individuals" and "entrepreneurial opportunities", and researchers should study the nature of the individuals who respond to these opportunities when others do not, the opportunities themselves and the nexus between individuals and opportunities.[31]

Psychological make-up[edit]

Studies show that the psychological propensities for male and female entrepreneurs are more similar than different. Empirical studies suggest that male entrepreneurs possess strong negotiating skills and consensus-forming abilities.[citation needed]

Jesper Sørensen wrote that significant influences on the decision to become an entrepreneur are workplace peers and social composition. Sørensen discovered a correlation between working with former entrepreneurs and how often these individuals become entrepreneurs themselves, compared to those who did not work with entrepreneurs.[32] Social composition can influence entrepreneurialism in peers by demonstrating the possibility for success, stimulating a “He can do it, why can’t I?” attitude. As Sørensen stated, “When you meet others who have gone out on their own, it doesn’t seem that crazy.”[33]

Innovative entrepreneurs may be more likely to experience what psychologist, Mihaly Csikszentmihalyi calls flow. Flow occurs when an individual forgets about the outside world given a powerful insight. Csikszentmihalyi suggested that breakthrough innovations occur at the hands of individuals in that state.[34] Other research has concluded that a strong internal motivation is a vital ingredient for breakthrough innovation.[35] Flow can be compared to Maria Montessori's concept of normalization, a state that includes a child’s capacity for joyful and lengthy periods of intense concentration.[36] Csikszentmihalyi acknowledged that Montessori’s prepared environment offers children opportunities to achieve flow.[37] Thus quality and type of early education may influence entrepreneurial capability.

Innate ability vs. public perception[edit]

Individuals use what is described as "an innate ability" or quasi-statistical sense to gauge public opinion.[38] People assume they can sense and figure out what others are thinking.[39][page needed]

The Mass media play a large part in determining what the dominant opinion is, since our direct observation is limited to a small percentage of the population. The mass media have an enormous impact on how public opinion is portrayed, and can dramatically impact an individual's perception about where public opinion lies, whether or not that portrayal is factual.[40]

The ability of entrepreneurs to innovate relates to innate traits, including extroversion and a proclivity for risk-taking.[citation needed] According to Joseph Schumpeter, the capabilities of innovating, introducing new technologies, increasing efficiency and productivity, or generating new products or services, are characteristic qualities of entrepreneurs.[citation needed] Also, many scholars maintain that entrepreneurship is a matter of genes, and that it is not everyone who can be an entrepreneur.[41]

It has, however, been argued that entrepreneurs are not that distinctive; and that it is essentially poor conceptualizations of "non-entrepreneurs" that maintain laudatory portraits of "entrepreneurs." [42][43]

Entrepreneurial styles[edit]

Differences in entrepreneurial organizations often partially reflect their founders' heterogenous identities. Fauchart and Gruber have classified entrepreneurs into three main types: Darwinians, Communitarians and Missionaries. These types of entrepreneurs diverge in fundamental ways in their self-views, social motivations, and patterns of new firm creation.[44]

Financing[edit]

Bootstrapping[edit]

Entrepreneurs may attempt to bootstrap their company rather than seeking external investors. Bootstrapping has been defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors”.[45] Incurring personal credit card debt is the most common form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves increased risk for entrepreneurs, the absence of any other stakeholder gives the entrepreneur more freedom to develop the company. Many successful companies including Dell Computers and Facebook were founded this way.

Types of bootstrapping include:[46]

  • Owner financing
  • Sweat equity
  • Minimization of accounts payable
  • Joint utilization
  • Delaying payment
  • Minimizing inventory
  • Subsidy finance
  • Personal Debt

External financing[edit]

Many businesses need more capital than can be provided by the owners themselves, and in this case, a range of options is available including:

Some of these sources provide not only funds, but also financial oversight, accountability for carrying out tasks and meeting milestones, and in some cases business contacts and experience – in many cases in return for an equity stake.

See also[edit]

References[edit]

  1. ^ Shane, Scott Andrew (2000). A General Theory of Entrepreneurship: The Individual-opportunity Nexus. Edward Elgar Publishing. ISBN 978-1-78100-799-0. 
  2. ^ Deakins & Freel 2012.
  3. ^ Johnson, D. P. M. (2005). A Glossary of Political Economy Terms, 2005. Auburn University. 
  4. ^ Paul D. Reynolds (30 September 2007). Entrepreneurship in the United States: The Future Is Now. Springer. ISBN 978-0-387-45671-3. 
  5. ^ Mark Van Osnabrugge, Robert J. Robinson (2000). Angel Investing. John Wiley & Sons. ISBN 0-7879-5202-8. 
  6. ^ Entrepreneurship. Paul Muljadi. 
  7. ^ Crainer, Stuart; Dearlove, Des (2000). Generation Entrepreneur. FT Press. p. 202. 
  8. ^ Landstrom, H. (31 December 2007). Pioneers in Entrepreneurship and Small Business Research. Springer. ISBN 978-0-387-23633-9. 
  9. ^ a b Cantillon, Richard (1755). Essai sur la nature du commerce en général. London: MacMillan. 
  10. ^ Stevenson, H.; Jarillo, J. (26 May 2007). "A Paradigm of Entrepreneurship: Entrepreneurial Management, in". Entrepreneurship: Concepts, Theory and Perspective (Springer Science Business Media). pp. 5–. ISBN 978-3-540-48543-8. 
  11. ^ • Landström, H. & SpringerLink 2005, Pioneers in entrepreneurship and small business research, Springer Science+Business Media, New York, N.Y.
  12. ^ Marshall, Alfred; Guillebaud, C. W. (1961). Principles of Economics. 9th (variorum) Ed. Macmillan. 
  13. ^ Rostam-Afschar, D. (2013) "Entry regulation and entrepreneurship: a natural experiment in German craftsmanship" (PDF; 495 kB)
  14. ^ "The word “entrepreneur” originates from a thirteenth-century French verb, entreprendre, meaning “to do something” or “to undertake.”", Russell S. Sobel, Concise Encyclopedia of Economics
  15. ^ Brewer, Anthony (1992). Richard Cantillon: Pioneer of Economic Theory. Routledge. ISBN 978-0-415-07577-0. 
  16. ^ William Stanley Jevons (January 1881). "Richard Cantillon and the Nationality of Political Economy". Contemporary Review (The Contemporary Review Company). pp. 333–360. 
  17. ^ Navale,, Ashok Bhanudas (October 2013). "Developing Entrepreneur Skills for Corporate Work". Research Directions 1 (4). ISSN 2321-5488. 
  18. ^ Driessen, Martyn P.; Zwart, Peter S. (2010). "The role of the entrepreneur in small business success: the Entrepreneurship Scan". 
  19. ^ Tarascio, Vincent J. (Fall 1985). "Cantillon's Essai: A Current Perspective". Journal of Libertarian Studies (Ludwig von Mises Institute) 29 (2): 251. Retrieved 23 September 2010. 
  20. ^ Entrepreneurship and economic development. Free Press. 1971. 
  21. ^ [1]
  22. ^ http://www.therichest.com/celebnetworth/celebrity-business/women/karren-brady-net-worth/
  23. ^ Investopedia; Investopedia.com; access date.
  24. ^ Prive, Tanya (19 December 2012). "Top 10 Qualities That Make A Great Leader". Forbes. Retrieved 1 August 2013. 
  25. ^ Cantillon, Richard (1755). Essai sur la Nature du Commerce en Général. 
  26. ^ Drucker, Peter F. (1985). Innovation and Entrepreneurship.  attributes the coining and defining of “entrepreneur” to Jean-Baptiste Say in his A Treatise on Political Economy; (1834).
  27. ^ Schumpeter, Joseph Alois (1976). Capitalism, Socialism and Democracy. Routledge. ISBN 978-0-415-10762-4. 
  28. ^ Schumpeter, Joseph Alois (1934). The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishers. ISBN 978-0-87855-698-4. 
  29. ^ Knight, Frank Hyneman (2005). Risk, Uncertainty and Profit. Cosimo, Inc. ISBN 978-1-59605-242-0. 
  30. ^ "Searching for the invisible man". The Economist. Mar 9, 2006. p. 67. Retrieved 23 December 2012. 
  31. ^ doi:10.5465/AMR.2000.2791611
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  32. ^ Sørensen, J.; Nanda, R. (July 2010). "Workplace Peers and Entrepreneurship". Management Science 56 (7). Retrieved 30 June 2013. 
  33. ^ "Peers Influence Decision to Become an Entrepreneur". Stanford Graduate School of Business; News. 1 September 2009. Retrieved 30 June 2013. 
  34. ^ Csikszentmihalyi, Mihaly (13 October 2009). Flow. HarperCollins. ISBN 978-0-06-187672-1. 
  35. ^ Christensen, Clayton; Johnson, Curtis W.; Horn, Michael B. (14 May 2008). Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns. McGraw Hill Professional. ISBN 978-0-07-164174-6. 
  36. ^ Montessori, Maria (1967). The Absorbent Mind. New York: Holt, Rinehart and Winston. 
  37. ^ Rathunde, Kevin; Csikszentmihalyi, Mihaly (May 2005). "Middle School Students’ Motivation and Quality of Experience: A Comparison of Montessori and Traditional School Environments". American Journal of Education 111 (3): 341–371. doi:10.1086/428885. 
  38. ^ Miller 2005, p. 278.
  39. ^ Scheufele 2007.
  40. ^ Scheufele & Moy 1999[page needed].
  41. ^ Shane, S. (2013). "The genetics of entrepreneurial performance". International Small Business Journal 31 (5): 473–495. doi:10.1177/0266242613485767. 
  42. ^ Ramoglou, S. (2013). "Who is a 'non-entrepreneur'? Taking the 'others' of entrepreneurship seriously". International Small Business Journal 31 (4): 432–453. doi:10.1177/0266242611425838. 
  43. ^ Gartner, William B. (2001). "Is There an Elephant in Entrepreneurship? Blind Assumptions in Theory Development; Business research". Entrepreneurship Theory and Practice 25 (4): 27–39. 
  44. ^ Fauchart, E; Gruber, M. (2011). "Darwinians, Communitarians, and Missionaries: The Role of Founder Identify in Entrepreneurship". Academy of Management Journal 54 (5): 935–957. doi:10.5465/amj.2009.0211. 
  45. ^ doi:10.1016/j.jbusvent.2005.06.007
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  46. ^ Encyclopedia of Technology and Innovation Management. John Wiley & Sons. 15 March 2010. p. 60. ISBN 978-1-4051-6049-0. 

Further reading[edit]