Entrepreneurship theories

A number of different perspectives on entrepreneurship have been developed and discussed over the last centuries, beginning with the classical contributions of Richard Cantillon, Max Weber and Jean-Baptiste Say. Later Joseph A. Schumpeter, Frank Knight and Israel A. Kirzner introduced new concepts and theories regard-ing entrepreneurship and later still authors such as Peter Drucker, Marc Casson and David B. Audretsch further elaborated and developed different theories (for an overview, see e.g. Rickett 2006). In these series of theories and discussions of entrepreneurs, several definitions were posited. Some economists came to view

entrepreneurs as risk takers or uncertainty bearers (Cantillon 1755; Knight 1921), while others argued that entrepreneurs are innovators and equilibrium destroyers (Schumpeter 1912; Audretsch and Thurik 2000), and still others argued that they are equilibrium-creating profit seekers (Hayek 1937; Kirzner 1973) or were simply anyone who is self-employed. No common consensus has emerged with respect to a series of basic questions about who might be an entrepreneur, what the char-acteristics and functions of an entrepreneur are, what the role of the entrepreneur is in the economic system and what the main factors and drivers of entrepreneur-ship are. The heterogeneity and complexity of human nature and socioeconomic systems, as well as capitalist progress and evolutionary transformation, makes it virtually impossible to develop a universally valid and consistent theory of entre-preneurship. Nevertheless, despite the impossibility of finding a ‘one-size-fits-all approach’ to entrepreneurship, there are some principles common to most entre-preneurship theories, such as a focus on the entrepreneur as the central figure and driver of business creation and development. Most entrepreneurship researchers also agree that business development is a main driver of economic development, meaning that entrepreneurs are central agents of development. In the following paragraphs, the main differences between the dominant schools and approaches on entrepreneurship with regards to their definition of roles, characteristics and the functions of entrepreneurs are presented.

6.1.1 The uncertainty bearer, the innovator and the arbitrageur

The term ‘entrepreneur’ was introduced to economic theory by Richard Cantillon (1755). He viewed the entrepreneur as a risk taker who buys the output of the worker before the consumers have indicated how much they are willing to pay, and hence bears the risk caused by price fluctuations in the consumer markets (Casson et al. 2006, p. 3). Frank Knight (1921) refined and expanded this con-cept by distinguishing between risk and uncertainty. He regarded the entrepreneur as an uncertainty bearer (Casson et al. 2006). The heroic perspective of entre-preneurship was promoted by Joseph Alois Schumpeter’s (1912) consideration of entrepreneurs as key agents of economic development: he considered real entrepreneurs as the equilibrium-destroying innovators who are able to intro-duce new combinations into the system, generating new surges of investment, growth and employment, the creation of new sectors and the destruction of old patterns (Schumpeter 1912; Freeman 1982; Grebel et al. 2003). Schumpeter identified (radical) innovations introduced to the marketplace by the entrepre-neur as being the main driver of structural change and corresponding business cycles (Schumpeter 1939). Entrepreneurs are able to recognize and exploit market opportunities before others and reap the profits from their acts of creative destruc-tion (Gruber 2007). Schumpeterian entrepreneurs can be found in the emergence of the cotton industry, the creation of railways, the chemical and electro indus-tries, the automobile industry and more recently in ICT (e.g. Schumpeter 1939;

Perez 2002; Acs and Audretsch 2003; Hanusch and Pyka 2007b). In his book Capitalism, Socialism and Democracy Schumpeter (1943) argued that corporate

capitalism, driven by entrepreneurial action, cannot survive, but has to make space for a trustified type of capitalism in which innovation becomes a routine behaviour within large organizations. History has shown, especially with the upsurge of new technologies in the late twentieth century, that entrepreneurship has been thriving and that entrepreneurial capitalism still exists (Audretsch and Thurik 2000).

Whilst the concept of the Schumpeterian entrepreneur contributes to a better understanding of innovation, it does not help to understand the role of arbitrage entrepreneurs who do not really innovate, but rather use price differences between different regions. In contrast to Schumpeter’s innovator-entrepreneur, Israel Kirzner highlighted the existence of the arbitrageur-entrepreneur. Kirzner consid-ered that a common feature among entrepreneurs was an awareness of unexploited opportunities for arbitrage (Casson et al. 2006), meaning the mere exploitation of price differentials in different regions and social strata. From the perspective of the Austrian School, entrepreneurship is a natural process which brings the market back towards equilibrium. Kirzner recognized the fact that many entrepreneurs are neither uncertainty bearers nor innovators, but simply make use of the infor-mation they possess about price differences, and use the consequent opportunities to buy cheap and sell dear (Casson et al. 2006). Thus, in a similar vein to Hayek and Casson, the main function of the Kirznerian entrepreneur is the coordination and a more efficient reallocation of resources (Findeis 2007). Kirzner’s theory of equilibrium-creating arbitrageur entrepreneurs, grounded in the thinking of Hayek, is considered especially relevant when it comes to explaining low-level entrepreneurship, such as textile trading at the local level (Grebel et al. 2003;

Casson et al. 2006; Hernandez and Dewick 2011).

6.1.2 The network perspective on entrepreneurship

While entrepreneurs have often been viewed as individual heroes, modern approaches increasingly take into account that entrepreneurs rely on social net-works. An entrepreneur’s capacity to benefit from market opportunities depends on a range of factors, such as access to information flows, financial resources, well qualified and motivated employees and workers, technological capability and the presence of a socioeconomic environment which supports entrepreneurial action.

All these factors heavily depend on the capacity of the entrepreneurs to access and manage social and physical networks. Chapter 5 of this book explored how social capital affects the capabilities of individuals to access different resources and to innovate. Whereas an individual’s characteristics, skills and ideas are certainly cru-cial, without a prolific network of social contact scarcely any entrepreneurial action would be successful. Casson and Della Giusta summarized the network-based entrepreneurship literature as follows (Casson and Della Giusta 2007, p. 222):

Although the popular perception of entrepreneurship is very much that of an individualist, there is ample evidence that entrepreneurship is, in fact, socially embedded in network structures (Aldrich and Zimmer 1986;

Aldrich et al. 1987; Johannison 1988) … modern theory affords a coherent view of the socially embedded entrepreneur advancing the coordination of activities in complex economic systems.

Hence, to become a successful entrepreneur requires not only individual convic-tion, motivation and ideas, but also more importantly the skill to make use of, develop and coordinate networks.

According to Hoang and Antoncic (2003), the content, governance and structure of networks are key factors influencing the success of entrepreneurs.

Entrepreneurs use, for instance, interpersonal and inter-organizational relations for access to business information, advice and problem-solving. The precise content of a social network changes according to the stage which the busi-ness is at. Whereas at the beginning of a venture access to new information on markets and business opportunities are crucial, later, for example, access to distribution networks and qualified personnel with the ability to solve techni-cal details becomes crucial. The structure of the networks (direct and indirect ties, density, cliquishness, structural holes) affects the speed of knowledge flow in the network and to what degree the entrepreneur has access to and power over the knowledge flow (see also Chapter 5). Additionally, entrepreneurs often have to rely on implicit and open-ended contracts that need to be supported by trust. This requires appropriate network government and coordination by the entrepreneur, who needs to create prolific social networks to successfully plan, found and establish a business. Creating networks of people trusting entrepre-neurs is crucial to being able to acquire external help and resources and in making the company successful.

Additionally, social networks have a deep impact on the perception of the desir-ability and feasibility of entrepreneurial action – for example Liñán and Santos (2007, p. 447):

Different contacts and experiences acquired by a person [e.g. through strong and weak ties, bonding and bridging social capital] can provide him/her with higher self-confidence so as to estimate whether becoming an entrepreneur is desirable and/or feasible.

The content, structure and beliefs of social networks are often also embedded within regions as well as in different social stratum. The institutions, norms and social networks of regions impact upon the entrepreneurial culture of social groups and regions. High quality entrepreneurship can often be found in regions with an established structure of large and small interacting enterprises that are deeply engaged both in cooperative behaviour and competition. Conversely, in regions where enterprises and institutions are weakly linked to each other and serve only the interests of external actors (e.g. as industrial satellites), low-level and sub-sistence entrepreneurship with little prospect for growth may be the dominant forms of entrepreneurship (Santos 2004). As the case studies in north-east Brazil

in Section 6.5 show, a fertile network of institutions supporting the entrepreneurs is crucial, allowing access to important information about business opportunities, information and skills and allowing them to experiment with businesses to find out which ones work in their region.

6.1.3 The human capability enhancer

While there are different arguments as to whether entrepreneurs are best viewed as innovators, as risk and uncertainty bearers, as arbitrageurs, or network man-agers, the question on what entrepreneurship means for the freedom of the entrepreneur as well as for the human development of others has not been a core issue in the traditional economics perspective on entrepreneurship. To answer this question, Section 6.2 analyses micro-entrepreneurship in developing coun-tries and Section 6.3 explores social entrepreneurship and business. This type of entrepreneurship focuses less on economic profit and more on expanding human capabilities and social innovation. The concept of ‘entrepreneurs as human capa-bility enhancer’ creates a bridge between the main entrepreneurship approaches in economics and the human development approach (see Figure 6.1). It analyses both economic and social entrepreneurship and is intrinsically in the tradition of the ‘Sen meets Schumpeter’ paradigm presented in this book. Furthermore it departs from the common perception of entrepreneurs as being a rare class of people, but considers that a large number of people have the potential for entrepreneurial action. We can find examples of entrepreneurial actions all over the world, from the women micro-entrepreneurs in Bangladesh, to strategic movements of multinational enterprises (MNEs), from small agro-businesses in poor regions of Peru, to the high-tech ventures in Silicon Valley or Route 128 (Bornstein 2004; Yunus 2007). Of course, it is impossible for everyone to become a global business leader and introduce systemic changes to the global economic system, but many people are able to introduce changes on a local level and in their close social network.

If efforts in promoting highly educated and high-tech entrepreneurs in the eco-nomic realm are limited, the many possibilities in terms of human capital and the entrepreneurial spirit may be neglected. For this reason, every individual should be given the basic opportunity and social choices needed to engage in entrepre-neurial action and be given active assistance in economic and social development processes. From a human development perspective it could be fruitful to under-stand entrepreneurial action as the active engagement of people changing the status quo of their lives, families, enterprises and socioeconomic environment, to achieve a higher level of social welfare for themselves and others. As Figure 6.1 illustrates, the concept of entrepreneurship as capability enhancement connects the main entrepreneurship approaches in economics with the human development approach. The value of entrepreneurial action is evaluated on the extent to which it upgrades the human capabilities of the entrepreneur and contributes to the wel-fare of the society.

The concept of ‘entrepreneurship as a capability enhancement’ can draw upon several of the dimensions and roles of the classical economic entrepreneur, such as risk taker, innovator or efficiency enhancer (see also the case study in Section 6.5). The concept, however, considers the degree to which entrepreneurial action contributes to human agency and welfare. This enables the evaluation of, for example, the extent to which micro-entrepreneurship is born out of necessity or is a sign of agency and human capabilities.