Entrepreneurship

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

In political economics, entrepreneurship is the process of identifying and starting a new business venture and sourcing and organizing the required resources while taking both the risks and rewards associated with the venture.

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.

"Entrepreneurship" describes the establishment of new organizations or the revitalization of mature organizations in response to a perceived business opportunity. A new business is sometimes referred to as a startup company. In recent years, the term has been extended to include social and political forms of entrepreneurial activity.[according to whom?] Entrepreneurship within an existing firm or large organization has been referred to as intra-preneurship 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 opportunities in the market by planning, organising and making use of resources,[2] often by innovating new or improving existing products (Johnson, 2005).[3] More recently, the term entrepreneurship has been extended to include conceptualizations of entrepreneurship as 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 documented by scholars such as David Audretsch 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. Angel investors generally seek annualized returns of 20–30% or more, as well as extensive involvement in the business.[5] Many organizations exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs.

Since 2008, an annual "Global Entrepreneurship Week" has been announced, with the aim of "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 manufacturing, delivery, and/or services. Economist Robert Reich has called team-building, leadership and management ability essential qualities for the entrepreneur.[6] The successful companies of the future, he has said, will be those that offer a new model for working relationships based on collaboration and mutual value.[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 itself dates to the 1850s. It became something of a buzzword beginning about 2010, in the context of disputes which have erupted surrounding the wake of the Great Recession.[clarification needed] Initially, economists made the first attempt to study the entrepreneurship concept in depth (Landström, 2005)[8] Richard Cantillon (1680-1734) considered the entrepreneur as a risk taker who deliberately allocates resources to exploit opportunities in order to maximize the financial return (Stevenson and Jarillo 2007, referring to Cantillon 1840).[9][10] Cantillon emphasizes 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 (Landström 2005, referring to Cantillon 1840).[8][9] Alfred Marshall (1961) viewed the entrepreneur as multi-tasks capitalist; and he realized that in the equilibrium of a completely competitive market, there was no spot for “entrepreneurs” as an economic activity creator.[11]

What is an entrepreneur[edit]

Entrepreneur (Listeni/ˌɒntrəprəˈnɜr/), is a loanword from French. 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[12] in his Essai sur la Nature du Commerce en Général, or Essay on the Nature of Trade in General, a book William Stanley Jevons considered the "cradle of political economy"[13] Cantillon used the term differently, however. Cantillon biographer Anthony Breer notes 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.[14]

An entrepreneur should have the ability and personality to lead a business in a positive direction by proper planning, be able to adapt to the changing environment, and understand one's own strengths and weakness.[15]

A Chronological List of Definitions of 'Entrepreneur'
  • 1734: Richard Cantillon: Entrepreneurs are non-fixed income earners who pay known costs of production but earn uncertain incomes,[16]
  • 1803: Jean-Baptiste Say: An entrepreneur is an economic agent who unites all means of production- land of one, the labour of another and the capital of yet another and thus produces a product. By selling the product in the market he pays rent of land, wages to labour, interest on capital and what remains is his profit. He shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.[citation needed]
  • 1934: Schumpeter: Entrepreneurs are innovators who use a process of shattering the status quo of the existing products and services, to set up new products, new services.[citation needed]
  • 1961: David McClelland: An entrepreneur is a person with a high need for achievement [N-Ach]. He is energetic and a moderate risk taker.[citation needed]
  • 1964: Peter Drucker: An entrepreneur 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: Kilby: Emphasizes the role of an imitator entrepreneur who does not innovate but imitates technologies innovated by others. Are very important in developing economies.[citation needed]
  • 1975: Howard H. Stevenson of Harvard Business School: entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.[17]
  • 1975: Albert Shapero: Entrepreneurs take initiative, accept risk of failure and have an internal locus of control.[citation needed]
  • 2013: Ronald May: An Entrepreneur is someone who commercializes his or her innovation.

The appellation today implies a bootstrap operation and some degree of both innovation and financial risk.

Influences and entrepreneurial behavior[edit]

British entrepreneur Karren Brady has an estimated net worth of £82 million[18]

The entrepreneur is commonly seen as an innovator — a generator of new ideas and business processes.[19] Management skill and strong team building abilities are often perceived as essential leadership attributes for successful entrepreneurs.[20] Political economist Robert Reich considers leadership, management ability, and team-building to be essential qualities of an entrepreneur.[21][22]

Schumpeter[edit]

According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention into a successful innovation.[23] 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 the dynamism of industry and 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 is hotly debated in academic economics. An alternate description posited by Israel Kirzner suggests that the majority of innovations may be much more incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw.

For Schumpeter, entrepreneurship resulted in new industries but also 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 a new technology, merely the application of existing technologies in a novel manner. It did not immediately replace the horse-drawn carriage, but in time, incremental improvements which reduced the cost and improved the technology led to the complete practical replacement of beast drawn vehicles in modern transportation. 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, but it is consistent with the concept of the entrepreneur being the agent of x-efficiency.

Different scholars have described entrepreneurs as, among other things, bearing risk. For Schumpeter, the entrepreneur did not bear risk: the capitalist did. Joseph A. Schumpeter (1934) believed that the equilibrium ideal was imperfect[24] Schumpeter (1934) demonstrated that changing environment continuously provides new information about the optimum allocation of resources to enhance profitability[25] some individuals acquire the new information before others, recombine the resources to gain an entrepreneurial profit (Schumpeter, 1934)[24] Schumpeter was of the opinion that entrepreneurs shift the Production Possibility Curve to a higher level using innovations (Schumpeter, 1934)[24]

Knight and Drucker[edit]

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

For Frank H. Knight[26] (1921) and Peter Drucker (1970), entrepreneurship is about taking risk. The behavior of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much 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.

The acts of entrepreneurship are often associated with true uncertainty, particularly when it involves bringing something really novel to the world, whose market never exists. However, even if a market already exists, there is no guarantee that a market exists for a particular new player in the cola category.

The place of the disharmony-creating and idiosyncratic entrepreneur in traditional economic theory (which describes many efficiency-based ratios assuming uniform outputs) presents theoretic quandaries. William Baumol has added greatly to this area of economic theory and was recently honored for it at the 2006 annual meeting of the American Economic Association.[27]

The individuals-opportunities nexus[edit]

The contemporary study of entrepreneurship is significantly defined by the agenda-setting article of Shane and Venkataraman in 2000 named The Promise of Entrepreneurship as a Field of Research. According to Shane and Venkataraman, entrepreneurship comprises two phenomena "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.

Psychological make-up of the entrepreneur[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,[28] Professor of Organizational Behavior at Stanford Graduate School of Business, wrote that significant influences on an individual's decision to become an entrepreneur are workplace peers and the social composition of the workplace. 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.[29] The social composition of the workplace can influence entrepreneurism in workplace peers by proving a possibility for success, causing 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.”[30]

Innovative entrepreneurs may be more likely to experience what psychologist, Mihaly Csikszentmihalyi calls flow. Flow occurs when the outside world disappears in the face of a vibrant inner motivation to do something. Csikszentmihalyi suggests that breakthrough innovations occur at the hands of individuals experiencing flow. They become so enthralled with the ideas in their heads that they cannot help but follow them.[31] Similarly, other research has concluded that a strong internal motivation is a vital ingredient for breakthrough innovation.[32] Flow may also be compared to Maria Montessori’s concept of normalization, a state which includes a child’s capacity for joyful and lengthy periods of intense concentration.[33] Csikszentmihalyi himself acknowledges that Montessori’s prepared environment offers children opportunities to achieve flow.[34] Thus quality and type of early education may have some influence on 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.[35] People assume they can sense and figure out what others are thinking.[36][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.[37]

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.[38]

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." [39][40]

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.[41]

Linking to economic development[edit]

Most of the scholars agree that entrepreneurs in small firms employ employees and generate employment and income places a vital link between entrepreneurship and economic development.[2] As earlier mentioned most of the small firms are very innovative and develop new technologies, products, and services which also benefits the economy. On the contrary some of the academic researchers, politicians and economists argue that it is just the opposite. According to them entrepreneurs come up because of economic growth as there was a survey conducted showing a higher rate of entrepreneurs in developed countries than in underdeveloped countries. Instead countries with an unbalanced economy had more demand for jobs other than being an entrepreneur.[2]

Financial bootstrapping[edit]

Financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors. Bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors”.[42] The use of private credit card debt is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers and Facebook were founded this way.

There are different types of bootstrapping:

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. ^ Scott Andrew Shane (2003). A General Theory of Entrepreneurship: the Individual-Opportunity Nexus. Edward Elgar Publishing. ISBN 1-84376-996-4. 
  2. ^ a b c Deakins, D. and Freel, M. S. (2012). "ENTREPRENEURIAL ACTIVITY, THE ECONOMY AND THE IMPORTANCE OF SMALL FIRMS". Entrepreneurship and small firms, 2012. McGraw-Hill Education. ISBN 0-07-713645-4. 
  3. ^ Johnson, D. P. M. (2005). A Glossary of Political Economy Terms, 2005. Auburn University. 
  4. ^ Paul D. Reynolds (2010). Entrepreneurship in the United States: The Future Is Now. Springer. ISBN 1-4419-4275-0. 
  5. ^ Mark Van Osnabrugge, Robert J. Robinson (2000). Angel Investing. John Wiley & Sons. ISBN 0-7879-5202-8. 
  6. ^ Paul Muljadi. Entrepreneurship. 
  7. ^ Crainer, Stuart; Dearlove, Des (2000). Generation Entrepreneur. FT Press. p. 202. 
  8. ^ a b • Landström, H. & SpringerLink 2005, Pioneers in entrepreneurship and small business research, Springer Science+Business Media, New York, N.Y.
  9. ^ a b • Cantillon, R., 1755/1931, Essai sur la nature du commerce en général, London: MacMillan.
  10. ^ • Stevenson H. and Jarillo J., 2007, A Paradigm of Entrepreneurship: Entrepreneurial Management, in Cuervo García, A., Ribeiro, D., Roig, S. & SpringerLink, Entrepreneurship, Springer, Berlin; New York.
  11. ^ • Marshall, A., Guillebaud, C.W. & Royal Economic Society 1961, Principles of economics, 9th (variorum) , edn, Macmillan for the Royal Economic Society, London; New York.
  12. ^ Anthony Brewer (1992). Richard Cantillon: Pioneer of Economic Theory. Routledge. p. 51. ISBN 978-1-61016-001-8. 
  13. ^ William Stanley Jevons (January 1881). "Richard Cantillon and the Nationality of Political Economy". Contemporary Review (The Contemporary Review Company). pp. 333–360. 
  14. ^ Ashok Bhanudas Navale, Associate Professor, Dept. of Commerce, Dada Patil Mahavidyalaya, Karjat, Ahmednagar (October 2013). "Developing Entrepreneur Skills for Corporate Work". Research Directions 1 (4). ISSN 2321-5488. 
  15. ^ Martyn P. Driessen, Peter S. Zwart (2010). "The role of the entrepreneur in small business success: the Entrepreneurship Scan". 
  16. ^ 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. 
  17. ^ http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html
  18. ^ http://www.therichest.com/celebnetworth/celebrity-business/women/karren-brady-net-worth/
  19. ^ Terms; Investopedia.com; access date.
  20. ^ Prive, Tanya (19 December 2012). "Top 10 Qualities That Make A Great Leader". Forbes. Retrieved 1 August 2013. 
  21. ^ Cantillon, Richard (1755). Essai sur la Nature du Commerce en Général. 
  22. ^ 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).
  23. ^ Joseph A. Schumpeter (2012). Capitalism, Socialism and Democracy. Routledge. ISBN 0-415-10762-8. 
  24. ^ a b c •Schumpeter, J.A., 1934, The Theory of Economic Development, Cambridge, MA: Harvard University Press.
  25. ^ • Schumpeter, J.A., 1934, The Theory of Economic Development, Cambridge, MA: Harvard University Press
  26. ^ Frank Hyneman Knight (2002). Risk, Uncertainty and Profit. Beard Books. ISBN 1-58798-126-2. [year needed][page needed]
  27. ^ "Searching for the invisible man". The Economist. Mar 9, 2006. p. 67. Retrieved 23 December 2012. 
  28. ^ Sorensen, Jesper. "sorensen | Stanford Graduate School of Business". Organizational Behavior. 
  29. ^ Sørensen, J.; Nanda, R. (July 2010). "Workplace Peers and Entrepreneurship". Management Science 56 (7). Retrieved 30 June 2013. 
  30. ^ "Peers Influence Decision to Become an Entrepreneur". Stanford Graduate School of Business; News. 1 September 2009. Retrieved 30 June 2013. 
  31. ^ Csikszentmihalyi, Mihaly (1990). Flow: The Psychology of Optimal Experience. New York: Harper & Row. 
  32. ^ Christensen, Clayton M. (2008). Disrupting class: how disruptive innovation will change the way the world learns. New York: McGraw-Hill. 
  33. ^ Montessori, Maria (1967). The Absorbent Mind. New York: Holt, Rinehart and Winston. 
  34. ^ Rathunde, Kevin; Mihaly Csikszentmihalyi (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. 
  35. ^ Miller 2005, p. 278.
  36. ^ Scheufele 2007.
  37. ^ Scheufele & Moy 1999[page needed].
  38. ^ Shane, S. (2013). "The genetics of entrepreneurial performance". International Small Business Journal 31 (5): 473–495. doi:10.1177/0266242613485767. 
  39. ^ 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. 
  40. ^ 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. 
  41. ^ 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. 
  42. ^ Ebbena, Jay; Johnson, Alec (November 2006). "Bootstrapping in small firms: An empirical analysis of change over time". Journal of Business Venturing 21 (6): 851–865. doi:10.1016/j.jbusvent.2005.06.007. Retrieved 23 December 2012. 

Further reading[edit]