Theories of Entrepreneurship and Entrepreneurial Motivation

BY ANAND R.
DESHPANDE
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Theories of Entrepreneurship
and Entrepreneurial Motivation
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Theories of Entrepreneurship and
Entrepreneurial Motivation
 Economic, sociological and psychological

 Entrepreneurship Innovation theory
 Theory of Achievement Motivation
 Motivation theory by McClelland (Acquired Needs theory)
 The Kakinada Experiment
 Motivating factors for entrepreneur- Internal and external
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 Economic Theory
 •Entrepreneurship and economic growth take place when the
economic conditions are favorable
 •Economic incentives are the main motivators for
entrepreneurial activities
 •Economic incentives include taxation policy, industrial policy,
sources of finance and raw material, infrastructure availability,
investment and marketing opportunities, access to information
about market conditions, technology etc.
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 Sociological Theory
 •Entrepreneurship is likely to get a boost in a particular social
culture
 •Society’s values, religious beliefs, customs, taboos influence
the behavior of individuals in a society
 •The entrepreneur is a role performer according to the role
expectations by the society
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 Psychological Theory
 •Entrepreneurship gets a boost when society has sufficient
supply of individuals with necessary psychological
characteristics
 •The psychological characteristics include need for high
achievement, a vision or foresight, ability to face opposition
These characteristics are formed during the individual’s
upbringing which stress on standards of excellence, self reliance
and low father dominance
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 Entrepreneurship Innovation theory
 •Theory by Joseph Schumpeter who believes
that entrepreneur helps the process of
development in an economy
 • He says that an entrepreneur is the one who
is innovative, creative and has a foresight
 •According to him, innovation occurs when
the entrepreneur–Introduces a new product–
Introduces a new production method–Opens
up a new market–Finds out a new source of
raw material supply–Introduces new
organization in any industry
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Theories of Entrepreneurship and Entrepreneurial Motivation
Entrepreneurship Innovation theory
 he theory emphasizes on innovation, ignoring the risk taking and

organizing abilities of an entrepreneur
 •Schumpeter’s entrepreneur is a large scale businessman, who
is rarely found in developing countries, where entrepreneurs are
small scale businessmen who need to imitate rather than
innovate
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 Theory of High Achievement/Theory of Achievement Motivation
 •McClelland identified 2 characteristics of entrepreneurship–
1.Doing things in a new and better way.
 2.Decision making under uncertainty.
 •He stressed that people with high achievement orientation (need
to succeed) were more likely to become entrepreneurs
 •Such people are not influenced by money or external incentives
 •They consider profit to be a measure of success and competency
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 Motivation theory by McClelland (Acquired Needs theory)
 •According to McClelland, a person has three types of needs at
any given time, which are:
 –Need for achievement (get success with one’s own efforts)
 –Need for power (to dominate, influence others)
 –Need for affiliation (maintain friendly relations with others)
 •The need for achievement is the highest for entrepreneurs
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 The Kakinada Experiment
 •Conducted by McClelland in America, Mexico and Mumbai
 •Under this experiment, young adults were selected and put through a three month
training programme
 •The training aimed at inducing the achievement motivation
 •The course contents were
 –Trainees were asked to control their thinking and talk to themselves, positively
 –They imagined themselves in need of challenges and success for which they had to
set planned and achievable goals
 –They strived to get concrete and frequent feedback
 –They tried to imitate their role models/those who performed well
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 Conclusions of the experiment:
 –Traditional beliefs do not inhibit an entrepreneur
 –Suitable training can provide necessary motivation to an entrepreneur
 –The achievement motivation had a positive impact on the
performance of the participants
 •It was the Kakinada experiment that made people realize the
importance of EDP (Entrepreneurial Development Programme) to
induce motivation and competence in young, prospective
entrepreneurs
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Leibenstein theory of X efficiency.
 Harvey Leibenstein was a Ukrainian-born American

Jewish economist. One of his most important contributions to
economics was the concept of x-efficiency. The concept of x-
efficiency is also used in the theory of bureaucracy.
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Theories of entrepreneurship
andentrepreneurial motivation
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Leibenstein theory of X efficiency.Theories of
Entrepreneurship and Entrepreneurial Motivation
 Harvey Leibenstein proposed a theory for entrepreneur ship

popularly known as Leibenstein theory of X efficiency.
 These theories basically focus on development of X-efficiency
which means inability of a company to use the available
resources within the company itself.
 For example a company is throwing its waster product which
can be sold in the market than this waste product increase the X
efficiency of the company.
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Theories of Entrepreneurship and Entrepreneurial
Motivation
 In reference to entrepreneurship this theory tells us about three
types of entrepreneurships.
 1) Routine entrepreneurship
 deals with normal business functions like co-ordinating the
business activities.
 .For example the hoteling business the bar business if the
entrepreneur fined that the available market tis unable to fulfill the
demand of this old schools and find a business over there, than
such an entrepreneurship is known as Routine entrepreneurship.
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Motivation
 2) New 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.
 If an individual presumes over new concept its development and
enhancement than such kind of entrepreneurship is known as new
entrepreneurship.
 Facebook twitter emails are good examples of such entrepreneurship
they developed new style of Beninese but such a type soon becomes
the old style as many comes and follows them.
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Motivation
 3) Twin entrepreneurship
 Twin entrepreneurship deals with the combination of both
routine and new style entrepreneurship. It is mainly routine
entrepreneurship in major and new in minor.
 But in all it gives the new definition of entrepreneurship that it is
the capacity to find the X efficiency of the running system and
then using it as chance to make space.
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Motivation: Leibenstein theory of X efficiency.
 The theory concludes that an entrepreneur has to act as gap

filler and an input completer if there are imperfections in
markets. For using their unusual skills, he gets profits as well as
a variety of non-peculiar advantages. According to him there are
two types of entrepreneurship.
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 Leibenstein’s X-efficiency theory
 The degree of efficiency maintained by individuals and firms under conditions of
imperfect competition. (the situation prevailing in a market in which elements of
monopoly allow individual producers or consumers to exercise some control over
market prices.)
 According to the neoclassical theory of economics, under perfect competition (the

situation prevailing in a market in which buyers and sellers are so numerous and well
informed that all elements of monopoly are absent and the market price of a
commodity is beyond the control of individual buyers and sellers.) individuals and firms
must maximize efficiency in order to succeed and make a profit; those who do not will
fail and be forced to exit the market. However, x-efficiency theory asserts that under
conditions of less-than-perfect competition, inefficiency may persist.
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 X-inefficiency is not the only type of inefficiency in economics. X-
inefficiency only looks at the outputs that are produced with
given inputs. It doesn’t take account of whether the inputs are
the best ones to be using, or whether the outputs are the best
ones to be producing, which is referred to as allocative
efficiency.
 For example, a firm that employs brain surgeons to dig ditches
might still be x-efficient, even though reallocating the brain
surgeons to curing the sick would be more efficient for society
overall.
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 Leibenstein regards entrepreneurship as a creative response to

X-efficiency. Other people’s lack of effort and the consequent
inefficiency of the organizations that employ them, create
opportunities for entrepreneurs. Entrepreneurial activities pose a
competitive threat to inefficient organizations.
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 Knight’s Theory of Profit

 Definition: The Knight’s Theory of Profit was proposed by
Frank. H. Knight, who believed profit as a reward for
uncertainty-bearing, not to risk bearing. Simply, profit is the
residual return to the entrepreneur for bearing the uncertainty in
business.
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KNIGHT’S THEORY OF PROFIT
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 Knight had made a clear distinction
between the risk and uncertainty.
 CALCULABLE RISKS
 The risk can be classified as a calculable
and non-calculable risk. The calculable
risks are those whose probability of
occurrence can be anticipated through a
statistical data. Such as risks due to the
fire, theft, or accident are calculable and
hence can be insured in exchange for a
premium. Such amount of premium can
be added to the total cost of production.
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 NON-CALCULABLE RISKS
 WHILE THE NON-CALCULABLE Risks
are those whose probability of
occurrence cannot be determined. Such
as the strategies of a competitor cannot
be accurately assessed as well as the
cost of eliminating the completion cannot
be precisely calculated. Thus, the risk
element of such events is not insurable.
This incalculable area of risk is the
uncertainty.
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 Thus incalculable area of risk is the
UNCERTAINTY.
 Due to the uncertainty of events, the decision-
making becomes a crucial function of an
entrepreneur or manager.
 If the decisions prove to be correct by the
subsequent events, an entrepreneur makes a
profit and vice-versa.
 Thus, the Knight’s theory of profit is based on
the premise that profit arises out of the decisions
made under the conditions of uncertainty.
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 Knight believes that profit might arise out of the decisions

made concerning the state of the market, such as
 decisions with respect to increasing the degree of monopoly in
the market,
 decisions regarding holding stocks that might result in the
windfall gains,
 decisions taken to introduce new product and technique, etc.
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 MAJOR CRITICISM
 The major criticism of the knight’s theory of profit is, the total
profit of an entrepreneur cannot be completely attributed to
uncertainty alone.
 There are several functions that also contribute to the total profit
such as innovation, bargaining, coordination of business
activities, etc.
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 Hagen’s Theory of Entrepreneurship
 One important theory of entrepreneurial behavior has been
propounded by Hagen which is referred to as the withdrawal of
status respect
 Hagen considers the withdrawal of status, of respect, as the
trigger mechanism for changes in personality formation Status
withdrawal occurs when members of some social group
perceive that their purposes and values in life are not respected
by the groups in the society they respect, and whose esteem
they value.
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 Hagen postulates four types of events which can produce status
withdrawal
  Displacement of a traditional elite group from its previous status
by another traditional supply physical force.
  Denigration of valued symbols through some change in the
attitude of the superior group.
  Inconsistency of status symbols with a changing’ distribution of
economic power.
  Non-acceptance of expected status on migration to a new society.
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 Hagen further postulates that withdrawal of status respect would

give to four possible reactions and create four different
personality types:
 (a) Retreatist : Entrepreneur who continues to work in society
but remains indifferent to his work or status.
 (b) Ritualist: One who works as per the norms in the society hut
with no hope of improvement in the working conditions or his
status.
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 (c) Reformist: One who is a rebellion and tries to bring in new

ways of working and new society.
 (d) Innovator: An entrepreneur who is creative and try to achieve
his goals set by himself.
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 According to Hagen (1962), the
creativity of a disadvantaged minority
group is the main source of
entrepreneurship.
 He developed this thesis from the case
of the samurai community of Japan.
Traditionally, this community had
enjoyed a high status of which it was
deprived later.
 To regain this lost prestige, it became
more active and vigorous and gave rise
to many entrepreneurs.
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 Thank you…the discussion continues…

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BY ANAND R.

 Economic, sociological and psychological

 he theory emphasizes on innovation, ignoring the risk taking and

 Harvey Leibenstein was a Ukrainian-born American

 Harvey Leibenstein proposed a theory for entrepreneur ship

 The theory concludes that an entrepreneur has to act as gap

 According to the neoclassical theory of economics, under perfect competition (the

 Leibenstein regards entrepreneurship as a creative response to

 Knight’s Theory of Profit

 Knight believes that profit might arise out of the decisions

 Hagen further postulates that withdrawal of status respect would

 (c) Reformist: One who is a rebellion and tries to bring in new

 Thank you…the discussion continues…

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