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Theories of

Entrepreneurship
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Theories
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RICHARD CANTILLON
MARK CASSONS ECONOMIC THEORY
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

Richard Cantillion
Richard Cantillion (1755) the first
person to recognise the role of an
entrepreneur in economic theory.
The farmer is an entrepreneur
who promises to pay the land
owner for his farm or land, a
fixed sum of money without
assurance for the profit he will
derive from his enterprise.
Hence entrepreneur is always at risk of
bearing losses if he is unable to sell the
goods at a higher price.
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Theories
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3)
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RICHARD CANTILLON
MARK CASSONS ECONOMIC THEORY
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

An Economic Theory
Mark Casson is a professor of Economics
The Entrepreneur An Economic Theory(1945)
Demand for entrepreneurship stems from:
Need to adjust to change
Supply of entrepreneurship is limited by:
Scarcity of the requisite personal qualities
Difficulty of identifying them when they are
available
Four major qualities which are crucial for
successful entrepreneur are:
Imagination (innate)
judgemental
Self confident
persuasive
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Economic factors that encourage or


discourage entrepreneurship include:
Taxation policy
Industrial policy
Easy availability of raw materials
Easy access to finance
Access to information on markets
Available technology and infrastructure
Market opportunities

Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

LEIBENSTEINS
X EFFECIENCY THEORY
Harvey Leibenstein (1922-1994)
propounded the theory of X-efficiency
which is popularly called Gap Filling
Theory.
According to Leibenstein,
entrepreneurial functions are
determined by the X-efficiency which
means the degree of inefficiency on the
use of resources within the firm.
He identifies two main roles for the
entrepreneur:
Input completion (improve efficiency of
existing production methods or
introduce new ones)
Gap filling (allocative efficiency)
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Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

HARVARD SCHOOL THEORY


Harvard School Contemplated that
entrepreneurship involves any
deliberate activity that initiates,
maintains and grows a profitoriented enterprise for production
or distribution of economic goods
or services, in interaction with
internal and external forces.
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Features of Harvard School Theory


Internal Forces: These forces refer to the internal qualities of the
individual such as intelligence, skill, knowledge experience,
intuition, exposure, etc.
These forces influence the entrepreneurial activities of an
individual to a great extent.
External Forces: These forces refer to the economic ,political, social,
cultural and legal factors which influence origin and growth of
entrepreneurship in an economy.
Emphasis on two types of Entrepreneurial activities
1. Organization or coordination activity:
Entrepreneurial functions like organization and combination of
resources for creating viable enterprises
2. Sensitivity to environmental factors that affect decision making
The responsiveness to the environmental condition that influences
decision making function

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Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

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HAGENS THEORY OF
SOCIAL CHANGE
Everett Hagen (1964)
Theory of Social Change: How economic growth
begins
Creative personality characterised by high
need of achievement, order and autonomy
Withdrawal of status triggers changes in
personality
Factors responsible for withdrawal of status:
Displacement of a traditional elite group
Changing distribution of economic power
Non-acceptance of expected status on migration

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Theories
1)
2)
3)
4)
5)
6)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF
PRICE
7) KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION
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THEORY OF
ADJUSTMENT OF PRICE
KIRZNER (2006)

Adjustment of Price:
The chief role of entrepreneur is based upon the
adjustment of price in the market.
The buyer may pay higher price or seller may accept a
lower price, which gives rise to opportunities for profit.
Further if different prices prevail in the same market,
there in an opportunity for profitable arbitrage
between two segments.

Alertness to disequilibrium as a distinguishing


characteristic:
Alertness to disequilibrium enables the entrepreneur to
intervene in the market by changing the price.
Other individuals simply respond by changing their
buying and selling plans in lieu of the new price
Thus, economy in purchase and profitable selling results
in economic gain
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Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

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THEORY OF ENTREPRENEURIAL
SUPPLY KUNKEL
BEHAVIOURIST MODEL JOHN KUNKEL(1965)
According to him, psychological and
sociological variables are the main determinants
for the emergence of entrepreneurs.
Individual activities are related to both past and
present and surrounding social structures
and physical conditions
Determinants of individual activities are both:
Deliberate
Accidental

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According to him, Entrepreneurship can be


dependent upon the following structures in
the economy:
Demand Structure
Limitation Structure (barriers)
Labour Structure
Opportunity structure
His model is based upon experimental
psychology, identifying sociological
variables as the determinants of
entrepreneurial supply.
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Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION
THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION
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Schumpeters
Innovation
Theory
Joseph Schumpeter (1949)
Dynamic Entrepreneurship
Innovation Theory
Entrepreneurship is a creative activity of
doing things that are generally not done in
the ordinary course of business

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Five Point Theory:-

Creates a new product/new quality of


product
Introduces a new method of production
Discovers a new market
Finds a new source of raw material
Finds new way of making things/
breaking up of monopoly

Inventor and innovator - difference


Entrepreneur change agent

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Criticisms:
The theory ignores organising skills
Innovations are routine
Large scale entrepreneur not possible
since beginning
Lack of Capital and skilled labour,
imperfect markets results in SSIs
Not applicable in LDCs

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Theories
1)
2)
3)
4)
5)
6)
7)

RICHARD CANTILLON
MARK CASSON
LEIBENSTIENS X-EFFICIENCY THEORY
HARVARD SCHOOL THEORY
HAGENS THEORY OF SOCIAL CHANGE
KIRZNERS THEORY OF ADJUSTMENT OF PRICE
KUNKELS THEORY OF ENTREPRENEURIAL
SUPPLY
8) JOSEPH SCHUMPETERS INNOVATION THEORY
9) DAVID McCLELLANDS THEORY OF
MOTIVATION

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Theory of High
Achievement (1953)

NEED FOR ACHIEVEMENT

Three types of motivational needs


Achievement Motivation (n-ach)
Seeks achievement, attainment of
realistic but challenging goals,
advancement in the job
Authority/power Motivation (n-pow)
need to be influential, effective
and make an impact. Strong need
to lead and ideas to prevail
Affiliation Motivation (n-affil)
need for friendly relationships,
motivated interactions with other
people. TEAM PLAYERS

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Mix and combination of all these qualities


Need for achievement is the most important need
which can be used effectively for economic
progress.
This is developed in the family itself.
McClellands views on entrepreneurship:
Entrepreneurs are made, not born

Through Entrepreneurship development


programmes
Two characteristics:-

Doing things in a new and better way


Decision making under uncertainty

Get a KICK out of winning or solving a difficult


problem than money

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Key points:
1) RICHARD CANTILLON
(Entrepreneur is the RISK BEARER and he
is not the supplier of capital)
2) MARK CASSON
(Entrepreneurship is a result of conducive
economic conditions.
4 qualities-imagination, judgemental,
confident, persuasive)

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3) LEIBENSTIENS X-EFFICIENCY
THEORY
(X-efficiency is the degree of inefficiency
in the use of resources within the firm: it
measures the extent to which the firm fails
to realise its productive potential)
4) HARVARD SCHOOL THEORY
(Purposeful activity which initiates,
maintains and grows an enterprise in
interaction with internal and external
environment)
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5) HAGENS THEORY OF SOCIAL


CHANGE
(An entrepreneur is a creative problemsolver interested in things in practical
and technological realm driven by duty
to achieve.
Withdrawal of status triggers changes
in personality)
6) KIRZNERS THEORY OF
ADJUSTMENT OF PRICE
(Entrepreneur is the ARBITRAGEUR
who makes profit due to differences in
the prices prevailing in the market)
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7) KUNKELS THEORY OF
ENTREPRENEURIAL SUPPLY
(Individuals exhibit Entrepreneurial
behavior on the basis of their
psychological and sociological
environment)
8) JOSEPH SCHUMPETERS
INNOVATION THEORY
(Innovation is the only key to economic
progress)
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9) DAVID McCLELLANDS THEORY OF


MOTIVATION
(Intense, prolonged and repeated efforts
to accomplish something difficult)

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