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Theories of Entrepreneurship

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1. Innovation Theory of Schumpeter (1949)

Main Concept: Entrepreneurs are innovators who introduce new products or processes, improve organizations, and drive economic development through novel combinations of resources.

Types of Innovations:

  • Introduction of new products or services.
  • New methods of production.
  • Opening of new markets.
  • Conquest of new sources of raw material supply.
  • Reorganization of any industry.

Features:

  • High risk and uncertainty.
  • Entrepreneurship involves motivated and talented individuals.
  • Profit is not the only objective; leadership is crucial over ownership.

Evaluation:

  • Central to the rise of modern capitalism.
  • Entrepreneurs are seen as the prime movers of economic development.

2. Harvard School Theory (Given by Cole, 1949)

Main Concept: Entrepreneurship is a purposeful activity aimed at initiating, maintaining, and developing a profit-oriented business.

Focus Areas:

  • Coordination activity.
  • Sensitivity to the business environment.

3. McClelland’s Achievement Motivation Theory

Main Concept: Entrepreneurial behavior is driven by three major motivational needs: achievement, affiliation, and power.

Needs Described:

  • Need for Achievement (nAch): Desire to excel in one's endeavors.
  • Need for Affiliation (nAff): Desire for interpersonal relationships and to be liked.
  • Need for Power (nPow): Desire to control and influence others.

Philosophy:

  • Economic development hinges on the activities of entrepreneurs motivated by a strong need for achievement.
  • Entrepreneurial motivation is less prevalent in poorer countries.

Evaluation:

  • Explains the economic disparities between countries.
  • Advocates for cultivating ambition among the youth to foster entrepreneurship.

4. Theory of Profits

4A. Hawley's Risk Bearing Theory of Profit:

  • Profits are the reward for taking risks in business, with higher risks necessitating higher rewards.

4B. Uncertainty Theory of Profit (Knight):

  • Profits arise from bearing uncertainties, not just insurable risks.

4C. Rent Theory of Profit (Francis A Walker):

  • Profits are akin to rent, where superior entrepreneurs, like superior grades of land, earn more due to their exceptional abilities or opportunities.

4D. Dynamic Theory of Profit:

  • Profits only arise in a dynamic economy that is subject to changes like population growth or changes in production methods.

5. Theory of Adjustment of Price by Kirzner

Main Concept: Entrepreneurs adjust prices in the market to capture profits, exploiting discrepancies in market prices through arbitrage.

Key Aspects:

  • Alertness to market disequilibrium is crucial.
  • Entrepreneurs with foresight can capitalize on opportunitiy by adjusting prices to optimize economic gains.

Theories of Entrepreneurship

Each entrepreneurship theory is detailed below in a structured tabular format for clarity and ease of understanding.

1. Innovation Theory of Schumpeter (1949)

Aspect Details
Main Concept Entrepreneurs disrupt the status quo by innovating new products, processes, and organizational improvements.
Key Characteristics - Dynamic nature
- Innovator
- New combination of production factors
Types of Innovations 1. New products
2. New production methods
3. Opening new markets
4. New sources of materials
5. Industry reorganization
Features - High risk and uncertainty
- Leadership over ownership
Evaluation Central to the rise of modern capitalism and economic progress.

2. Harvard School Theory (Given by Cole, 1949)

Aspect Details
Main Concept Entrepreneurship involves purposeful, profit-oriented business activities.
Core Principles - Purposeful activity
- Profit orientation
Focus Areas 1. Coordination
2. Sensitivity to the environment

3. McClelland’s Achievement Motivation Theory

Aspect Details
Main Concept Entrepreneurs are driven by three motivational needs: achievement, affiliation, and power.
Motivational Needs 1. Achievement (nAch)
2. Affiliation (nAff)
3. Power (nPow)
Philosophy Entrepreneurial activity is crucial for economic development, influenced by individual motivational drives.
Evaluation Highlights the need to cultivate entrepreneurial motivation, particularly in poorer countries, to spur economic development.

4. Theory of Profits

Aspect Details
4A. Hawley's Risk Bearing Theory of Profit Profits reward the risks taken in business. Higher risks demand higher profits.
4B. Uncertainty Theory of Profit (Knight) Profits are a reward for bearing non-insurable uncertainties rather than insurable risks.
4C. Rent Theory of Profit (Walker) Profits are akin to rent, where superior entrepreneurial skills yield higher returns, much like superior grades of land.
4D. Dynamic Theory of Profit Profits arise only in dynamic economies undergoing changes, like technological advancements or demographic shifts.

5. Theory of Adjustment of Price by Kirzner

Aspect Details
Main Concept Entrepreneurs adjust prices to correct market inefficiencies, capturing profits through these adjustments.
Entrepreneurial Functions - Alertness to market disequilibrium
- Price adjustment
Key Role Ensuring market efficiency and capitalizing on opportunities through strategic price changes.
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