CHAPTER 1

THEORIES ON ENTREPRENUERSHIP
Prepared By Joerald A. Pepito

LESSON 3
LEARNING OBJECTIVES

At the end of this lesson, the learner should be able to

1. Identify theories on entrepreneurship

2. Explain the importance of theories on entrepreneurship
3. Discuss the role of entrepreneur in each theory

Introduction

 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.

 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.
A. INNOVATION THEORY

 The innovation theory on entrepreneurship was contributed by Joseph Schumpeter, an Austrian

Economist and political scientist.

 The innovation theory regards economic development as the product of structural change or
innovation. Schumpeter argued that the chances for economic development to take place would
be slim unless revolutionary changes in the circular flow of economy would happen. An
economy without any revolutionary change is deemed to be static and cannot expect any
economic development. Simply put, there will be no development in any economic equilibrium
or status quo will remain.

 Schumpeter strongly believed that innovation is the force that will propel the revolutionary
change. It will cause the creative destruction of the static mode of the economy, stir the
entrepreneurial activity, and encourage con1petition. Unless innovation takes place, economic
equilibrium or status quo will remain.

It becomes the primary role of the entrepreneur to introduce innovation in any of the
following forms:
1. new product
2. new production method
3. new market
4. new supplier
5. new industry structure

B. KEYNESIAN THEORY
 The Keynesian theory on entrepreneurship was developed by John Maynard Keynes, a British
economist.
 The 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 suggest 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 performs well in their entrepreneurial ventures only when the people have
enough money . However, during the period of economic depression, money becomes scarce
and the number of unemployed worker is high.
 It must be during this time that the government must take a strong intervention in the
entrepreneurial role played by the private sector by pouring more money to the economy and
creating more jobs and projects for communities.
C. ALFRED MARSHAL THEORY
 Marshal strongly asserted that there are four factors in the production (Land, labor, capital, and
organization) of goods and services in the economy.
 He considered organization as the coordinating element. Without the active participation of the
organization, the factors of production will remain inactive in their role for economic
development.
 Marshall regarded the entrepreneurs as the prime movers in the organization. They are
expected to create new commodities or improve the existing ones.
 He believed that the entrepreneurs could perform and meet expectations only if they had a
thorough understanding of the industry where they operated.

D. RISK AND UNCERTAINTY-BEARING THEORY

 Frank Hyneman Knight , an American economist , conceptualized the risk and uncertainty -
bearing theory of entrepreneurship.
 In this theory, knight viewed an entrepreneur as an agent of the production process where
he/she connects the producers and consumers.
 Knight also considered uncertainty as an important factor in the production of goods and
services.

E. WEBER’S SOCIOLOGICAL THEORY

 In sociological theory, Max Weber stressed that social cultures are the primary driving elements
of entrepreneurship.
 The entrepreneur is expected to perform the role of a good constituent by executing his/her
entrepreneurial activities in line with good customs and traditions, religious beliefs, and morals.

F. KALDOR’S TECHNOLOGICAL THEORY

 The technological theory was developed by Nicholas Kaldor who considered modern technology
as an essential factor in production.
 In the absence of modern technology application in entrepreneurship, economic development
would be slow and growth might not be expected.
 The entrepreneur is expected to keep abreast with modern technology and find ways to apply
the same in the entrepreneurial endeavor.
 Proper application of modern technology will promote efficiency in the production of goods and
services.

G. LEIBENSTEIN’S GAP-FILLING THEORY

 In this theory on entrepreneurship, Hem y Leibenstein proposed that the primary role of
entrepreneurship in any economic activity is to fill the existing gap. Entrepreneurship is
responsible for recognizing trends in the market.
 The entrepreneur is expected to possess abilities that will connect the different markets.
 He/She must extend assistance to entrepreneurial ventures experiencing failures and
deficiencies.
H. KIRZNER’S LEARNING-ALERTNESS THEORY
 Israel Kirzner was the main proponent of this theory.
 He pointed out spontaneous learning and alertness as the two major attributes of
entrepreneurship in any given economy.
 The entrepreneur must be alert in recognizing entrepreneurial opportunities and the
ignorance. of consumers as well. He/She must immediately find appropriate remedy to correct
the error or wrong perception.

1. INNOVATION THEORY
2. KEYNESIAN THEORY
3. ALFRED MARSHAL THEORY
4. RISK AND UNCERTAINTY-BEARING THEORY
5. WEBER’S SOCIOLOGICAL THEORY
6. KALDOR’S TECHNOLOGICAL THEORY
7. LEIBENSTEIN’S GAP-FILLING THEORY
8. KIRZNER’S LEARNING-ALERTNESS THEORY