Theories of Entrepreneurship

Let us understand the meaning of ‘Theory’

A hypothesis proven true through research/testing becomes a theory

Similarly, different theories have been propounded to explain
various factors behind the emergence of entrepreneurship and
entrepreneurs
 Different Theories
• Max Weber’s theory of social change
• Hoselitz socio-cultural theory
• Trait theory of entrepreneurship
• Economic theory of entrepreneurship
• Schumpeter’s innovation theory
• McClelland’s psychological theory
• Theory of social behaviour
• X- Efficiency theory
 Max Weber’s theory of social change
• Entrepreneurial growth dependent upon ethical value system

• Spirit of capitalism central to entrepreneurial growth

• Spirit of rapid industrial growth depends upon rational use of

resources, which ultimately depends upon the value orientation
of individuals….the tendency of acquisition and rational economic
attitude towards action which are generated by ethical values

• Important to distinguish between ‘spirit of capitalism’ and

‘adventurous spirit’
 Max Weber’s theory of social change
• Necessary condition for spirit of capitalism: Favourable mental
attitude in society toward acquisition of wealth

• Critiques of Weber’s theory:

- There is a single system of Hindu Values ‘Paritha’
- Indian community internalised those values and translated
those into behaviour
- Immune to external pressures and change
 Hoselitz Sociological Theory
• Specific social culture leads to growth in entrepreneurship

• Social sanctions, cultural values and role expectations are

responsible for the emergence of entrepreneurship

• Three important factors on which his performance depends:

- His own attitude towards his own occupation
- Role expectations held by the sanctioning groups
- Occupational requirements of the job
 Hoselitz Sociological Theory
• Society’s values are most important determinant of the
attitudes and role expectations

• Grows in societies that permits variability in choice of paths of

life and non standard socialisation of individuals
 Trait Theory of Entrepreneurship
• F.A.Walker believed in the individual’s traits/capacities as the
main determinant for entrepreneurial growth

• An entrepreneur is one who is endowed with more than

average capacities in the task of organising and coordinating
the factors of production

• Eg of traits- Creativity, self confidence , risk taking ability etc

 Economic Theory of Entrepreneurship
• G.F.Papanek and J.R.Harris, chief proponents of this theory
attributed the main reason for entrepreneurial activities to
economic incentives

• Inner drive of individuals associated with economic gains

• Eg of economic factors: Market incentives, availability of

sufficient capital etc
 Shumpter’s Innovation Theory
• Entrepreneur is ‘one who seeks to reform or revolutionise the
pattern of production by exploiting an innovation’

• Assigns the role of an innovator to an entrepreneur

• Different from an Inventor who creates a new product

• Innovator utilises inventions and discoveries in order to make

new combinations
 Shumpeter’s Assumptions
• Existence of sufficient availability of capital

• Developed financial system

• Existence of high level developed technology

• Private initiative

Therefore, more applicable in developed economies

Limitations of Shumpeter’s Theory
• Entrepreneur ceases to exist when he is running a business

• Ignores risk taking and organising

• Focuses on large scale

 McClelland’s Theory
• Locates entrepreneurship in individuals possessing certain
psychological traits

• Dependent on certain learnt and socially acquired needs that

motivates/drive individuals towards entrepreneurial activities

• Type of needs
- Need for achievement
- Need for power
- Need for affiliation

Exercise
 Theory of Social Behaviour
• Behavioural model of entrepreneurship by Kunkel

• Activities of individuals are related to the previous and

present surroundings, social structures and physical
conditions

• Attributes entrepreneurial activity to rewards which act as

positive reinforcing stimulus
 Theory of Social Behaviour
• Four structures in society on which entrepreneurship
depends:
- Limitation structure
- Demand structure
- Opportunity structure
- Labour structure

Theory’s limitation evident from its neglect towards

situational factors and assumption of ideal structures which
ignores discrepancy between objectives, structures etc
 X-Efficiency Theory
• As per Liebenstein, gap filling is the most significant feature of
entrepreneurship

• Innovative entrepreneurs come forward/take the leap to

check inefficiencies in utilisation of resources through novel
ways