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Entrepreneur

 

Entrepreneur

For the magazine, see Entrepreneur (magazine).


In political economics, entrepreneurship is the quality of being an entrepreneur, i.e. one who "undertakes an enterprise".[1] The term puts emphasis on the risk and effort of individuals who own and manage a business, and on the innovations that result from their pursuit of economic success.

Background


"Entrepreneurship" may result in new organizations or revitalize mature organizations in response to a perceived business opportunity. A new business started by an entrepreneur is 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 a firm or large organization has been referred to as intra-preneurship and may include corporate ventures where large entities spin off subsidiary organizations.[2]

According to Paul Reynolds, an entrepreneurship scholar who created 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."[3] 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. "As well, entrepreneurship may be defined as the pursuit of opportunity without regard to resources currently controlled (Stevenson,1983)"[4]

Entrepreneurial activities differ substantially depending on the type of organization and creativity involved. Entrepreneurship ranges in scale from solo projects, and even just part-time projects, to major undertakings that create many job opportunities. 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% and 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. 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.

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".

History of entrepreneurship

Etymology and historical usage

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]

The 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.

What is an entrepreneur

Entrepreneur (

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.[11]

A Chronological List of the Definition of 'Entrepreneur'
  • 1734: Richard Cantillon: Entrepreneurs are non-fixed income earners who pay known costs of production but earn uncertain incomes,[12]
  • 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.
  • 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.
  • 1961: David McClelland: An entrepreneur is a person with a high need for achievement [N-Ach]. He is energetic and a moderate risk taker.
  • 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.
  • 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.
  • 1975: Albert Shapero: Entrepreneurs take initiative, accept risk of failure and have an internal focus of control.
  • 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.

Entrepreneur types

Differences in entrepreneurial organizations and the heterogeneity in their founders' behaviors can be traced back to the founder's identity. Fauchart and Gruber have utilized social identity theory to illustrate that individual entrepreneurs can be identified as one of three main types: Darwinians, Communitarians and Missionaries. These types of entrepreneurs not only diverge in fundamental ways in terms of their self-views and their social motivations in entrepreneurship, but also engage fairly differently in new firm creation.[13]

Influences and entrepreneurial behavior

The entrepreneur is commonly seen as an innovator — a generator of new ideas and business processes.[15] Management skill and strong team building abilities are often perceived as essential leadership attributes for successful entrepreneurs.[16] Political economist Robert Reich considers leadership, management ability, and team-building to be essential qualities of an entrepreneur.[17][18]

Schumpeter on Entrepreneurship

According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention into a successful innovation.[19] 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 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 horsedrawn 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.

Knight and Drucker

For Frank H. Knight[20] (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.[21]

Psychological make-up of the entrepreneur

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.

Jesper Sørensen 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.[22] 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.”[23]

Innate ability vs. public perception

The ability of entrepreneurs to innovate relates to innate traits, including extroversion and a proclivity for risk-taking. 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. Also, many scholars maintain that entrepreneurship is a matter of genes, and that it is not everyone who can be an entrepreneur. [24]

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". [25][26]

Financial Bootstrapping

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”.[27] 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:

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

External financing

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

Economics portal

References

Further reading

  • Acs, Z. and Audretsch, D. B. (2010). Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction. New York: Springer.
  • Deakins, D.; Freel, M. (2009). Entrepreneurship and Small Firms, 5th Edition. McGraw Hill.
  • Minniti, M. and Moren, L. (2010). "Entrepreneurial types and economic growth", Journal of Business Venturing, 25 (3): 305-314.
  • Shane, S. and Venkataraman, S. (2000). "The Promise of Entrepreneurship as A Field of Research", Academy of Management Review, 25(1), 217-226.
  • Shane, S. and Nicolaou, N. (2013). The genetics of entrepreneurial performance. International Small Business Journal, 31(5): 473-495.
  • Ucbasaran, D., Westhead, P., and Wright, M., (2001). "The Focus of Entrepreneurial Research: Contextual and Process Issues", Entrepreneurship Theory and Practice, 25(4): 57-80.
  • Gedajlovic, Neubaum and Shulman (2009). "A typology of social entrepreneurs: Motives, search processes and ethical challenges", Journal of Business Venturing, 24 (5): 519-532.

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