Chapter 1: Theory of Entrepreneurship PDF

CHAPTER 1 THEORY OF ENTREPRENEURSHIP Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1  Objectives The objectives of this chapter are: ❑ Discuss ent...

CHAPTER 1 THEORY OF ENTREPRENEURSHIP Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1  Objectives The objectives of this chapter are: ❑ Discuss entrepreneurship, entrepreneurial processes and activities. ❑ To introduce students to the theory of entrepreneurship ❑ To introduce students on the key dimensions of entrepreneurship namely the need for achievement, locus of control, risk taking propensity and entrepreneurial characteristics and trait Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 2  Learning Outcomes At the end of this chapter, students should be able to: ❑ understand the principles and theory of entrepreneurship ❑ adapt and adopt entrepreneurial culture in their life ❑ gain a better understanding of the concept of the need for achievement, locus of control and risk taking propensity as key dimensions of entrepreneurship in managing a business organization Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 3  Outline ❑ Introduction to Entrepreneurship ❑ Definitions of Entrepreneurship and Entrepreneur ❑ Entrepreneurial Process ❑ Theories of Entrepreneurship Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 4  Who is an entrepreneur? ❑ There is no consistent definition of the term “entrepreneur” and what entrepreneurship is all about (Kuratko & Hodgetts, 2001). ❑ Entrepreneur can be defined from a functional approach based on what an entrepreneur does or an indicative approach based on his characteristics and attributes. ❑ Depending on how an entrepreneur is defined, he can be different persons wearing different hats. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 5  Entrepreneurship ❑ In a free market economy, entrepreneurs are key players or providers that produce, transport or sell products and services to consumers. ❑ They seek business opportunities by identifying what is needed, wanted or desired by consumers. ❑ Entrepreneurs create new products, take risks in investing money and make the products available to customers. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 6  Entrepreneurship (cont.) ❑ Consequently, consumers get to choose the best products or services best suited to their needs and budget. ❑ New and improved products are continuously developed to replace older products, and these products have enhanced the standard and quality of life of the society. ❑ Thus, entrepreneurial activities are pillars of a nation’s economic progress, growth and prosperity. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 7  Entrepreneurship (cont.) ❑ A society that has a great entrepreneurial culture will be more productive, competitive and prosperous. ❑ By nature, entrepreneurs will always try to improve product quality, reduce cost of production, find better ways to serve their customers and thus serve customers’ needs more effectively. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 8  Entrepreneurship (cont.) ❑ Their ability to mobilize and allocate resources to where it is most needed based on business opportunities or market demand, make entrepreneurs the most efficient resource allocators in a free market economy. ❑ Many successful entrepreneurs have become very rich when their small businesses grow into big corporations. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 9  Entrepreneurship (cont.) Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 10  Definitions of Entrepreneurship and Entrepreneur ❑ Entrepreneurship can be defined as the activity of setting up a business or businesses, and taking on financial risks in the hope of making profit. ❑ The study of entrepreneurship includes the study of entrepreneurial behaviour, as well as the dynamics of business set-up, expansion and development. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 11  Definitions of Entrepreneurship and Entrepreneur (cont.) ❑ The term ‘entrepreneur’ was first used by a Frenchman named Richard Cantillon (1775) to mean ‘a person who undertakes to do a job’. ❑ Adam Smith (1776) defines an entrepreneur as a person who acts as an agent in transforming demand into supply. ❑ Jean-Baptiste Say (1803) considers an entrepreneur as a person who shifts resources from an area of low productivity to high productivity. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 12  Definitions of Entrepreneurship and Entrepreneur (cont.) ❑ John Stuart Mill (1848) states that an entrepreneur is a prime mover in private enterprise economic activities, where an entrepreneur is the fourth factor of production, after land, labour and capital. ❑ Carl Menger (1871) says that the entrepreneur acts as an economic agent who transforms resources into products and services and gives added value. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 13  Definitions of Entrepreneurship and Entrepreneur (cont.) ❑ Ibnu Khaldun (Abdul Rahman Mohamed Khaldun) describes an entrepreneur as a knowledgeable and skilled individual craftsman who is instrumental in the development of a city state where enterprises will emerge. ❑ In the early 1900s, Joseph Schumpeter termed ‘entrepreneur’ as an innovator who introduced new innovation to replace old products or old ways of doing things. He described the process as creative destruction’ to signify creativity of new products or services to replace or destruct old ones. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 14  Definitions of Entrepreneurship and Entrepreneur (cont.) ❑ In short, entrepreneurs are the prime movers of economic progress. ❑ They can be innovators, they mobilize resources to provide products and services needed, and in the process, they build businesses that provide jobs. ❑ Thereby improve the standard of living and quality of life of the people. They are the catalysts that contribute to the nation’s economic progress. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 15  The Importance of Entrepreneurship to Malaysian Economy Entrepreneurship is the symbol of business steadfastness and achievement. Entrepreneurial revolution is critical to economic growth. Entrepreneurship may affect our future in many ways: Innovative creation of opportunity Example: Portable phones linked to faxes and laptop will turns cars, train, and airport terminal into offices. Entrepreneurship not only affect our lives through innovation but represent the working future for many of us due to lays off by large organization and shrinking of job opportunities for graduates. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 16  The Importance of Entrepreneurship to Malaysian Economy (cont.) Entrepreneurship is synonymous to creation of new venture and small businesses. SMEs have been important contributors to local economic growth. The entrepreneurial SMEs provide services that the large corporation has neglected or lack of economy of scale for the large corporation to serve. Contribution of SMEs to Malaysian Economy. In Malaysia the SMEs employed 90% of the total labor force in manufacturing sector and contributed to about 26% of total value added in the sector. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 17  Entrepreneurial Process The Timmons Model of Entrepreneurial Process best describes the four major necessary components in venture creation: ❑ Founder ❑ Opportunity ❑ Team ❑ Resources Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 18  Entrepreneurial Process (cont.) ❑ An entrepreneurial process is led by an entrepreneur who is able to seize and act on an opportunity. ❑ Together with his team, the entrepreneur will package a viable offering to customers using available resources. He may use his own money or canvass others to invest with him. He may need to convince others with required skills to be part of his team to execute the project and produce products and services for customers. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 19  Entrepreneurial Process (cont.) Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 20  Theories of Entrepreneurship Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 21  1.ECONOMIC THEORY ❑ Many economists give their views about entrepreneurship but Richard Cantillon was the first person who recognize the role of entrepreneurship. ❑ He said that farmer is an entrepreneur who promise to pay landlord for his land without any assurance of profits he can drive from his enterprise i.e. land. He said that there is always a risk factor of fluctuation of prices in market for an entrepreneur. ❑ With this Schumpeter added the concept of innovation. He said that an entrepreneur can be helpful in economic development by introducing new innovative ideas. Lack of innovation can reduce the enthusiasm, physical and mental energy of entrepreneur. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 22  2.SOCIOLOGICAL THEORY ❑ Sociologists suggests that entrepreneurship can be social movement. Economists of this theory believes that cultural values deeply affect the entrepreneurship and economic development. ❑ If strong family support is with entrepreneur then this will be fruitful but if family does not care about businessman that can cause adverse affect. ❑ According to Hoselitz the persons who introduces innovative ideas reject the traditional ways of doing the things. Economists believes that special attention given to society can improve the relations between the enterprise and its surroundings. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 23  3.PSYCHOLOGICAL THEORY ❑ Economists of this theory said that entrepreneurship is most likely to emerge when a society has sufficient psychological characteristics. ❑ Joseph Schumpeter states that entrepreneur is motivated & driven by 3 things:- a. ‘The dream and the will to found a private kingdom’ that means the desire for power & independence. b. ‘The will to conquer’ that means the will to succeed. c. ‘The joy of creating’ that means satisfaction of getting things done. He asserts that matter is beheviour not the actor. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 24  4.ANTHROPOLOGICAL THEORY ❑ FREDRIK BARTEH develop this theory. According to berth entrepreneurship has two connecting spheres in the society between which there exits a difference in values. ❑ These spheres are as follows:- Something which is cheap and Something which is expensive. Barth states that entrepreneurial beheviour means to connect 2 different spheres in the society, between there is a huge discrepancy in the value. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 25  Innovation Theory of Schumpeter (1949) ▪ Joseph Schumpeter, a 20th century Austrian Economist Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 26  Innovation Theory of Schumpeter (1949) ❑ An entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. ❑ Entrepreneurship resulted in new industries, even though it entailed combining the existing inputs in a new way. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 27  Innovation Theory of Schumpeter (1949) Entrepreneur is a man who sees opportunity for : ❑ introducing new techniques or commodity ❑ Improving organization. ❑ Development resources. ❑ Entrepreneur embarks upon new combination of factors of production resulting in new product--termed as innovator. ❑ Entrepreneur is Dynamic Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 28  Innovation Theory of Schumpeter (1949) ❑ A dynamic theory of entrepreneurship was first advocated by Schumpeter (1949) who considered entrepreneurship as the catalyst that disrupts the stationary circular flow of the economy and thereby initiates and sustains the process of development. ❑ Embarking upon ‘new combinations’ of the factors of production - which he succinctly terms, innovation - the entrepreneur activates the economy to a new level of development. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 29  Innovation Theory of Schumpeter (1949) ❑ Schumpeter defines entrepreneurship as “a creative activity”. An innovator who brings new products or services into economy is given the status of an entrepreneur. He regards innovation as a tool of entrepreneur, The entrepreneur is viewed as the ‘engine of growth Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 30 Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 31  Need for Achievement Theory of McClelland Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 32  Need for Achievement Theory of McClelland ❑ According to McClelland the characteristics of entrepreneur has two features: – Doing things in a new and better way – Decision making under uncertainty McClelland emphasizes achievement orientation as most important factor for entrepreneurs. ❑ Individuals with high achievement orientation are not influenced by considerations of money or any other external incentives. People with high achievement (N-Ach) are not influenced by money rewards as compared to people with low achievement. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 33  Need for Achievement Theory of McClelland ❑ The latter types are prepared to work harder for money or such other external incentives. On the contrary, profit is merely a measure of success and competency for people with high achievement need. ❑ According to him a person acquires three types of needs as a result of one’s life experience. These three needs are: – Need for Achievement. A drive to excel, advance and grow. – Need for Power. A drive to dominate or influence others and situations. – Need for Affiliation. A drive for friendly and close inter-personal relationships. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 34  Need for Achievement Theory of McClelland ❑ Need for affiliation and need for power are driving force towards entrepreneurship. ❑ High level of achievement makes an entrepreneur. ❑ Dreams of entrepreneur appear to be not to ‘get rich’ but to ‘get big’. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 35  Need for Achievement Theory of McClelland The individual with high levels of need achievement is a potential entrepreneur. The specific characteristics of a high achiever (entrepreneur) can be summarized as follows: ❑ (i) They set moderate realistic and attainable goals for them. (ii) They take calculated risks. ❑ (iii)They prefer situations wherein they can take personal responsibility for solving problems. ❑ (iv) They need concrete feedback on how well they are doing. ❑ (v) Their need for achievement exist not merely for the sake of economic rewards or social recognition rather personal accomplishment is intrinsically more satisfying to them Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 36  Harvey Leibenstein’s X-Efficiency Theory ▪ born in the Ukraine, Harvey Leibenstein (1922 - 1994) ▪ was a professor at Harvard University) Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 37  Harvey Leibenstein’s 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 realize its productive potential. There are two types of entrepreneurship. 1. Routine entrepreneurship – deals with normal business functions like coordinating the business activities. 2. Innovative entrepreneurship – wherein an entrepreneur is innovative in his approach. It includes the activities necessary to create an enterprise where not all the markets are well established or clearly defined. Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 38  Harvey Leibenstein’s X-Efficiency Theory Leibenstein identifies two main roles for entrepreneurs 1. ‘input completion’ : involves making available inputs which improve efficiency of existing production methods or facilitates the introduction of new ones. The role of entrepreneur is to improve the flow of information in these markets. 2. gap filling’ : Thus it is clear that “if not all factors of production are marketed or if there are imperfections in markets, the entrepreneur has to fill the gaps in the market. To put the enterprise in motion, the entrepreneur should fill enough of gaps.” Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 39  Theory of Profit: Knight Frank Hyneman Knight Entrepreneur is an individual who is prepared to undertake risk and the reward - profit - is the return for bearing uncertainty and is an uninsurable risk. entrepreneur is a: ❑ calculated risk-taker ❑ opportunity for profit arises out of uncertainty surrounding change ❑ responsibility for one’s own actions Fundamentals of Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 40