Lesson 3: Theories on Entrepreneurship PDF

# Lesson 3: Theories on Entrepreneurship ## Learning Outcomes - Identify some theories on entrepreneurship. - Cite the importance of the theories. ## Nature and Concept A theory is a generalization that explains a set of facts or phenomena. It is not an absolute truth. It can be supported by a...

# Lesson 3: Theories on Entrepreneurship ## Learning Outcomes - Identify some theories on entrepreneurship. - Cite the importance of the theories. ## Nature and Concept A theory is a generalization that explains a set of facts or phenomena. It is not an absolute truth. It can be supported by another observation or proven otherwise. In the process of evaluating the soundness and logic of various entrepreneurship theories, remember that the scholars who developed or contributed them mostly anchored their concepts on the economic events which were happening at that time. Learn by heart the theories that you deem appropriate and applicable in your prospective business and will support your desire to become a successful entrepreneur. Evaluate them and choose the theory or theories that you will believe and accept. In other words, there is no right or wrong answer. ## Theories of Entrepreneurship There are several theories on entrepreneurship. Here are some of them: 1. **Innovation Theory** - Contributed by Joseph Schumpeter, an Austrian economist and political scientist. - It regards economic development as the product of structural change or innovation. He argued that changes in the circular flow of economy would happen if there were revolutionary changes. - Innovation is the force that will propel change. It will cause the creative destruction of the static mode of the economy, stir the entrepreneurial activity, and encourage competition. - It becomes the primary role of the entrepreneur to introduce innovation in any of the following forms: - New product - New production method - New Market - New supplier - New industry structure 2. **Keynesian Theory** - Developed by John Maynard Keynes, a British economist. - The key concepts of the theory were included in his book, *The General Theory of Employment, Interest and Money*. - Theory put so much emphasis on the role of the government in entrepreneurial and economic development, most especially when the economy was experiencing depression. - It suggests that entrepreneurial activities may not be favorable in the future unless the short-term problem of economic disequilibrium is finally resolved through the active participation of the government. - The private sector may perform well in their entrepreneurial ventures only when the people have enough money. However, during a period of economic depression, money becomes scarce and the number of unemployed workers is high. - the government must make a strong intervention in the entrepreneurial role played by the private sector by pouring more money into the economy and creating more jobs and projects for communities. 3. **Alfred Marshall Theory** - Introduced by Alfred Marshall, an English economist. - Considered organization as the coordinating element in the production of goods and services (land, labor, capital, and organization). - Marshall regarded the entrepreneurs as the prime movers in the organization. He believed they could perform and meet expectations only if they had a thorough understanding of the industry where they operated. Without the active participation of entrepreneurs in the economy, development will surely be slow and limited. 4. **Risk and Uncertainty-Bearing Theory** - Conceptualized by Frank Hyneman Knight, an American economist. - Knight viewed an entrepreneur as an agent of the production process where they connect the producers and the consumers. - Knight, however, added risk-taking as an important dimension that will differentiate an entrepreneur from a worker. - He believed that the entrepreneur must anticipate possible random events to happen while shouldering the risk at the same time. The entrepreneur would eventually be rewarded with high profits. 5. **Other Theories of Entrepreneurship** - These don't mean that they are inferior to the previously listed theories. - They include: - **Weber's sociological theory:** Weber asserted that culture has significant contributions to entrepreneurship. - **Kaldor's technological theory:** Kaldor gives importance to the advancement of technology as an element of production. - **Leibenstein's's gap-filling theory:** The gap-filling theory of Leibenstein advocates that entrepreneurship fills the gap in an economic activity. - **Kirzner's learning-alertness theory:** The learning-alertness theory of Kirtzner focuses on learning and alertness as the primary attributes of entrepreneurship. ## Lesson Summary 1. A theory is a generalization that explains a set of facts or phenomena. It is not an absolute truth. It can be supported by another observation or proven to be otherwise. 2. Some theories on entrepreneurship include the following: - **Innovation Theory:** Joseph Schumpeter considers innovation as the primary factor affecting development. - **Keynesian Theory:** The Keynesian theory of John Maynard Keynes attributes economic growth, especially during depression, to the government. - **Alfred Marshall Theory:** The Alfred Marshall theory generalizes that the organization plays the most significant role among the different factors of production. - **Risk and Uncertainty-Bearing Theory:** The risk-uncertainty bearing theory of Frank Hyneman Knight states that an entrepreneur faces the risk of uncertainty in the process of connecting the supplier and the buyer. - **Weber's sociological theory:** The sociological theory of Weber asserts that culture has significant contributions to entrepreneurship. - **Kaldor's technological theory:** The technological theory of Kaldor gives importance to the advancement of technology as an element of production. - **Leibenstein's gap-filling theory:** The gap-filling theory of Leibenstein advocates that entrepreneurship fills the gap in an economic activity. - **Kirzner's learning-alertness theory:** The learning-alertness theory of Kirtzner focuses on learning and alertness as the primary attributes of entrepreneurship.