Lesson One: Conceptualizing Entrepreneurship

1.1 Introduction

This introductory lesson provides you an opportunity to understand

the complex and evolving nature of entrepreneurship and its
importance to the entire world economy. This lesson mainly focuses
on definitions, historical development, nature and importance of
entrepreneurship.
Entrepreneurship is to be understood mainly as a process (Peterson,
1981) whereby people, money, markets, production facilities and
knowledge are brought to gather to create commercial enterprises
which

do

not

exist

before

and

it

involves

complex

human

interactions and embraces a range of artifacts and objective

realities. Despite this, the dominant ideology of entrepreneurship
development

thinking

entrepreneurship

is

materialistic.

researchers

observe

As

artifacts

result,
and

some

objective

realties in the physical world and view them as reality.

Entrepreneurship plays a central role in economic development as
the ability to disturb economic status quo through innovation
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(Haworth and Bearly 1991). For any venture to sustain in a

globalized economy it is increasingly important to change constantly
so that innovation has become the industrial religion of the 21st
century.
As a result, recently all business schools have at least one course in
entrepreneurship, and it is increasingly being realized that todays
managers need not only managerial skills but also entrepreneurial
skill. Both skills are essentially complementary for each other to
prosper and survive in the business. The performance of a business
relies much on the persons who start and manage it. Entrepreneurs
were the pioneers of todays business success. Individuals who
capitalize opportunities are entrepreneurs where others see them as
confusing and challenging. They are the active change agents in the
given environment. They are challenging themselves to break new
barriers who balance the different skills and sounds into a cohesive
whole. They face the unknown successfully and create future
continuously for public at large.
Entrepreneurship is more than a creation of new ventures. The way
they seek opportunities and capitalize them, taking risks for
furthering interest not only for private benefit but also for the social
perspective that permeate entrepreneurs.

So the entrepreneurial

perspective can be developed in individual but the benefits are not

limited to the individual concerned.
Finally

entrepreneurs

have

been

considered

as

the

critical

contributors to economic growth through their excellent contribution

for the field of leadership, management, innovation, organizational
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effectiveness, job creation, provision of new goods and service via

new industry.

1.2 Learning Outcomes

After successfully completing this lesson you will be able to;

Discuss the historical evolution of entrepreneurship from the social

science point of view
Examine the specific contribution of Schumpeter to the field of
entrepreneurship
Define

entrepreneurship

Explain the differences between

entrepreneurship and

management
Explain the rewards of entrepreneurship
Discuss the popular myths about entrepreneurship
Discuss the different schools of entrepreneurial thoughts
Explain the significance of entrepreneurship and discuss why study
entrepreneurship

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1.3

Evolution

of

entrepreneurship

from

the

social

science perspective
The social sciences have contributed not only to
the theoretical development of entrepreneurship
but

also

to

entrepreneurship

as

practical

enterprise.
It should be emphasized that quite a few of the insights that the
social sciences have already generated can be more or less
translated into what is known as entrepreneurship; however, it is
important to figure out how to extract practical knowledge about
entrepreneurship from existing social science literature which would
represent a useful exercise for

you in entrepreneurship. This

section deals with how various social science disciplines built a

foundation

to

establish

the

theoretical

foundation

to

study

entrepreneurship.

The Contribution of

Economics

As a mainstream factor in economy, entrepreneurship is derived

from the French word entreprendre, which refers to individual who
is active, who get things done, meaning those who undertook the
risks of new enterprise(Holt, 2008). Scholars from the field of
economics such as Richard Cantillon, Adam Smith, J S Say, J S Mill,
Carl Menger and Josepe Schumpeter are the central in this regard.
Their view on the fried of entrepreneurship are given below.

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A French economist Richard Cantillon (1755) described an

entrepreneur as a person who pays a certain price for a product to
resell it at an uncertain price, thereby making decisions about
obtaining and using resources while consequently assuming the risk
of enterprise.
Adam Smith spoke of the enterpriser, as an individual who
undertook

the

formation

of

an

organization

for

commercial

purposes. He further described an entrepreneur as a person with

unusual foresight who could recognize potential demand for goods
and services. In his view entrepreneurs reacted to economic
change, thereby becoming the economic agents who transformed
demand into supply.
French economist J B Say (1803), described an entrepreneur as
one who possessed certain arts and skills of creating new economic
enterprises, yet a person who had exceptional insight into societys
needs and was able to fulfill them. He combined the economic risk
taker of Cantillion and the industrial manager of Smith into an
unusual character.

J S Mill (1848) elaborated the necessity of entrepreneurs in

private enterprise. The term entrepreneur became common as a
description of business founder, and the fourth factor of economic
endeavor.
Carl Menger (1871) stated that economic change does not arise
from circumstances but arise from an individuals awareness and
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understanding of those circumstances and entrepreneur becomes

change agent who transforms resources into useful goods and
services, often creating circumstances that lead to economic
growth. Among those economists who have tried to develop an
economic theory centered around the entrepreneurship, Joseph
Schumpeter is the main figure in the literature on entrepreneurship.
Joseph Schumpeter (1883-1950) tried to
build

new

complement

theory

Walras

of

theory

economics
of

to

static

economy; so that Schumpeters ideas about

how to best study entrepreneurship changed
considerably over time; and that his approach

Joseph Schumpeter

is interdisciplinary in nature.
Despite his multidisciplinary approach, he never produced concrete
guidelines for how an entrepreneur should behave. However he
pointed out that while ordinary economic behavior is more or less
automatic in nature, the entrepreneur always has to think very
carefully about what action to take since he or she is involved in
doing some thing that is fundamentally new. According to him
whenever you do something new, you do not know how to proceedand are in extra need of practical guidelines.
He described entrepreneurship as a force of creative destruction
whereby, established ways of doing things are destroyed by the
creation of new and better ways to get things done. In his view,
Entrepreneurship

is

process

and

entrepreneurs

are

innovators.
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 Doing things that are not generally done in the ordinary

course of business
The entrepreneurs gather and use resources to produce
results, which must be allocated to opportunity rather than
problems
Schumpeter in his book The theory of economic development
(1911) explains the main types of entrepreneurial behaviors. These
are the following five:
i.

The introduction of a new good- that is one with which

consumers are not yet familiar with or of a new quality of a
good;

ii.

The introduction of a new method of production, that is

one

not tested by experience in the branch of manufacturing

concerned, which need by no means

be founded upon a

discovery scientifically new, and can also exist in a new way of

handling commercially ;
iii.

The opening of new market; that is a market into which the

particular branch of manufacture of the country in question
has not previously entered

iv.

The conquest of a new source of supply of raw material, again

irrespective of whether this source already exists or whether it
has first to be created; and

v.

The creation of a new organization of an industry, like the

creation of a monopoly position or breaking up of a monopoly
position. In his argument he explained new combinations of
productive means, which refers to combinations of materials

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and forces differently, which may help grow continuously in

small steps.
Much of the emphasis has been here on technological innovation
rather than organizational innovation. Also he explains what
drives the entrepreneur, which are primarily three things such
as:
the

desire

for

power

and

independence; the will to succeed;

the satisfaction of getting things
done.
It should be noted that money is
not

what

ultimately

entrepreneur

motivates

according

to

Schumpeter.
It should also finally be mentioned that a large number of
contemporary

research

on

innovation

has

been

inspired

by

Schumpeters ideas. Scholars from a variety of fields have pickedup one or more ideas of Schumpeters works and incorporated them
into their own analysis.
Contribution of Social Scientists other than Economists
Many scholarly works on entrepreneurship can be found over the
years by social scientists other than economists, which include
those from sociology, anthropology and psychology.

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Contribution of Sociology and Anthropology

There are several scholars have been contributed to the field of
entrepreneurship. Max Weber is a well-known sociologist and his
view on entrepreneurship identified with his theory of Charisma;
and, according to this interpretation, his main contribution is to be
found in his analysis of that special type of human being-the
charismatic person-who makes other people want to follow him or
her, by virtue of his or her extraordinary personality.
According to Weber, the entrepreneur can be found in an exchange
economy and entrepreneurship has much more the direction of
economic action in the form of enterprises than with the economic
operations of single individuals. He defined entrepreneurship as the
taking over and organization of some part of an economy, in which
peoples needs are satisfied through exchange, for the sake of
making a profit and at ones own economic risk. While Webers
theory

of

charisma

may

not

be

identical

to

his

theory

of

entrepreneurship, the concept of charisma can nonetheless be used

to elucidate certain aspects of entrepreneurship.
Robert K. Mertons idea that many discoveries are made by accident
is also evocative in this context. In cultures where there is a very
strong emphasis on what people should strive for, for example,
economic success, but where there also exist a few means through
which the average person can research this goal, the result is often
an attempt to find a new way to succeed. Therefore some
sociologists have also suggested that entrepreneurship can be
conceptualized as a social movement.

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S.M Lipset argues in his article on Values and

entrepreneurship that cultural values deeply
affect

entrepreneurship

economic

development.

different

values

and
He

affect

the

level

enquires

of
how

entrepreneurial

behaviors. Recently the study of ethnicity and

entrepreneurship also become popular among
sociologists (Aldrich 1990).

Ethnic minorities

tend to favor family businesses and these are

often kept alive through self-exploitation.
Mark Granovettor, another sociologist, pointed out that extended
kin ties and family solidarity can constitute an obstacle for a
businessman if the latter is obliged to care for distant kin members.
He also discusses trust, which is another important element in many
entrepreneurial

ventures.

According

to

Burt,

entrepreneurial

opportunities exist in one persons network if it is structured in a

special way.
Compared to sociology, relatively few studies of entrepreneurship
are to be found in anthropology. F Barth made his first attempt to
develop an anthropological theory of entrepreneurship in his native
Norway in the1960s and later a study of a Central African village.
According to him, entrepreneurship has essentially to do with
connecting two spheres in society, between which there exists
different values. Something which is cheap in one sphere, in other
words, may be expensive in another sphere.

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Contribution of psychology
Most studies on entrepreneurship have
been carried out within the field of
psychology than in either sociology or
mainstream economics.
Psychological study on entrepreneurship
mainly

focuses

on

identifying

the

entrepreneurial personality.
It is possible to divide the psychological studies on entrepreneurship
into two groups: one where the main goal is to isolate the
entrepreneurial personality; and another which is more socialpsychological

in

nature

and

where

the

personality

of

the

entrepreneur is seen as decisively shaped by something from

outside such as the way that children socialized. There are in
particular two studies of this type that have become famous: David
McClellands The Achieving Society (1961) and Everett E. Hagens
on The theory of Social Change (1962) McClellands basic thesis is
that entrepreneurship has to do with an individuals so called need
for achievement; while Hagen argues that people who have grown
up in certain minorities develop a much stronger psychological
propensity for entrepreneurship that those who have not.
Finally, the fact is that successful entrepreneurship usually involves
many interdisciplinary approaches as discussed above and this
should be taken into account in the deeper analysis of the field.
Carlos Jarillo and Howard Stevenson (1994) argue that while
social sciences can help to explain the causes of entrepreneurship
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(why?) and its effects (what?), they have nothing to contribute to

the understanding of entrepreneurial behavior (How?). According
to them the business schools should focus on the last question.
They provide a definition of entrepreneurship which is tailored to
the how question: entrepreneurship is a process by which
individuals-either on their own or inside organizations-pursue
opportunities without regard to the resources they currently
control.

1.4 Defining Entrepreneurship

The concept of entrepreneurship is a complex and thus difficult to
define like many other social sciences. The evolution of the concept
has also generated many definitions. As stated by Schumpeter, The
entrepreneurs seeks to reform or revolutionize the pattern of
production by exploiting an invention or, more generally, an untried
technological

possibility

for

producing

new

commodity

or

producing a new commodity or producing an old one in a new way,

by opening up a new source of supply of materials or a new outlet
for products. Therefore, entrepreneurship is defined, essentially
consists in doing things that are not generally done in the ordinary
course of business routine. This view has also reflected by Peter
Druckers

perspective

entrepreneurship

on

emerges

entrepreneurship.
when

resources

According
are

to

redirected

him
to

progressive opportunities. This redirection of resource creates an

area from low productive to high productive and essentially
distinguishes the entrepreneurial role from that of the traditional
management role.

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However,

Ronstadt

recent

definition

captures

its

by

Robert
essence.

Entrepreneurship is a dynamic process of

creating incremental wealth. This wealth is
created

by

individuals

who

assume

the

major risks in terms of equity, time, and /or

career commitment of providing value for
some product or service.

Robert Ronstadt

The product or service itself may or may not be new or unique but value
must somehow be infused by the entrepreneur by securing and allocating
the necessary skills and resources.

Harvard Professor Stevenson (1990) defines entrepreneurship as a

process by which individuals- either on their own or inside
organizations- pursue opportunities without regard to the resources
they currently control
Main features of the above definitions are;

Entrepreneurship is individualistic but not limited to an

individual.

Entrepreneurship is a process of creative extraction of socioeconomic value from the environment

Capitalization of opportunities without regard to the resources

under ones control, in which creating and maintaining social
contracts

and

networks

plays

an

important

role

(Kodithuwakku, 1997).
Further reading:
The Promise of Entrepreneurship as a Field of Research by
Shane & Venkataraman
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Who is an entrepreneur?

According to Holt (2008), there are no formal guidelines or licensing

procedures for classifying entrepreneurs and no evidence for
professional status. Psychologists tend to view that entrepreneur in
behavioral terms as an achievement oriented individual etc. A
number of traits or personality characteristics have been put
forward as important influences in successful entrepreneurship.
However,

John

Hornaday

developed

complete

list

of

entrepreneurial traits
Characteristics of Successful Entrepreneurs
1. Self- confident and has self determination
2. Optimistic
3. Energetic and hard-working
4. Able to take calculate risk
5. Creative, and need to achieve
6. Respond positively to challenges
7. Dynamic leader
8. Flexible and able to adapt
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9. Responsive to suggestions
10. Knowledgeable of markets
11. Take initiative
12. Able to get along well with others
13. Independent minded
14. Sensitive with foresight
15. All-around knowledge
16. Responsive to criticism
Terms entrepreneurs and owner-managers are often used to
describe some body who is engaged in the management of small
business, and they are sometimes interchanged; anyone who starts
up in business is labeled an entrepreneur, but these terms have
different

meanings.

'entrepreneurship'

Yet

are

the

terms

inextricably

linked

'entrepreneur'
to

small

and

business

management. This scope of entrepreneurship covers successful

organizational

development;

it

exhibits

inside

or

outside

organization, or profit or non-profit organizations.

Entrepreneurship and Management
The terms entrepreneurship and management are overlapped to a
certain

extent.

opportunity

Accordingly

driven

and

the

entrepreneurship

management

is

more

is

more

resource

and

conservation driven.
Entrepreneurial skill is defined as ability to perceive and creating
opportunities and extracting values through translating them into a
set of potential opportunities via mobilizing resources. Managerial
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skill is defined as ability to allocate the available each unit of

resources to its most highly valued use to avoid waste to achieve
stated objectives (Kodithuwakku, 1997).
Both skills are crucial to run the business successfully.

Activity 01:
In your own words, explain what an entrepreneurship is. Write
an article in about 300 words.

1.5 The Rewards of Entrepreneurship

What might

cause you to think about operating your own

businesses? Individuals are pulled towards entrepreneurship by a

numbers of powerful incentives. These rewards may be grouped
into three basic categories: profit, independence, and personal
fulfillment.
Make money (profit)
Like other jobs or career, entrepreneurship
provides for ones financial needs. Indeed, some
entrepreneurs earn a lot of money; literature
says that self- employed people are four times
more likely to be millionaires than are those who
work for others.
The financial return of any business must compensate its owner for
investing personal time and personal serving before any true profits
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are realized. Further entrepreneurs should expect reward for risk

taking and imitativeness.
Be your own boss (Independence)
Freedom to operate independently is another
reward of entrepreneurship. Thirty eight persons
of those who left jobs at the other company said
their main reason for leaving was that they
wanted to be their own boss.(Strokes 1992).
Many people have a strong desire to make their own decisions, and
take risks. Of course, independence does not grantee an easy life.
Most entrepreneurs work very hard for long hours.

Enjoy a Satisfying Life (Personal fulfillment)

Entrepreneurs often speak of the satisfaction
they experience in their own business; some
even refer to their work as fun. Part of their
enjoyment may derive from their independence
but some of it reflects an owners personal
fulfillment in working with firms, products and
services.
Entrepreneurs

enjoy

being

the

boss,

and

attending

various

meetings.

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1.6 Popular Myths of Entrepreneurship

There

are

number

of

myths

that

have

arisen

about

entrepreneurship due to lack of scientific research in the field of

entrepreneurship that can be grouped into following categories
Entrepreneurs are born, not made
The idea that entrepreneurial personality traits cannot be learned,
that they are inborn with, has been long prevalent. These traits
include analytical ability, a willingness to take risk etc; however, in
recent times the recognition of entrepreneurship as a discipline is
helping to chase away this myth.
All entrepreneurs need is luck
Being at the right places at the right time is
always an advantage. But luck happens when
preparation

meets

opportunity

is

an

equally

appropriate adage. Prepared entrepreneurs who

seize the opportunity when it arises often seem
lucky. Indeed, they are simply better prepared to
deal with situations and turn them into success.
Entrepreneurs are academic and social misfits
Entrepreneurs are not always among the best
students, and they tend to be restless in structured
jobs.

It

is

true

that

entrepreneurs

prefer

independence and can be rather rebellious; both

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conditions can affect their performance in school and at job. Today

an entrepreneur is considered a hero-socially, economically and
academically. No longer is he a misfit; the entrepreneur is now
viewed as a professional.

Entrepreneurs must fit the profile

Many

works

have

presented

checklists

of

characteristics of the successful entrepreneurs.

These lists neither validate nor are they complete;
those are merely based on certain contexts.
Now we realize that a standard entrepreneurial profile is hard to
compile.
The situation, the organization itself, and the entrepreneurs have
interactive effects, which result in many different types of profiles.

All entrepreneurs need money

It is truth that a venture needs capital to survive; it
is also true that a large number of businesses failed
because of a lack of adequate financing. Yet having
money is not the only bulwark against failure.
Many

entrepreneurs

established

acquire

networks

with

needed
other

capital

through

organizations.

their

Therefore,

entrepreneurs pursue opportunities without regard to the resources

they currently control.
Activity 02: Explain why some people are more successful in

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their career
toPeradeniya
others. Write an article in about
300 words.

1.7 Schools of Entrepreneurial thought

As stated by Kuratko et al. (2004), range of entrepreneurial
behavior divides entrepreneurship into specific activities. These
activities may be within a macro view and a micro view of
entrepreneurship. This further breaks down into six distinct schools
of thoughts. See the following figure 1.1

Figure 1.1 Entrepreneurial schools of thought

Macro
View

Micro
View

Environmental school of thought

Financial/Capital school of thought

Displacement School of thought

Entrepreneurial trait school of thought

Venture opportunity school of thought

Strategic Formulation school of thought

Source: D F Kuratko et al. 2005 Entrepreneurship, Thomson South Western.

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Macro View
The macro view of entrepreneurship presents a
broad array of factors that relate to performance of
entrepreneurial venture.
These factors are external, some time beyond the
control of the individual entrepreneurs for which
they exhibit a strong external locus of control.

The environmental school of thought: This school of thought

deals with the external factors that affect a potential entrepreneurs
life styles. The focus is on institution, values, group work, form a
sociopolitical environmental framework that strongly influences the
survival of the organization.
Financial/Capital school of thought: This thought deals with the
capital seeking process. The search for seed capital and growth
capital is the entire focus of this entrepreneurial emphasis.
Displacement School of thought: This thought focuses on group

phenomena. It holds that the group affects or eliminates certain

factors that project the individual into an entrepreneurial venture.
Individuals often become entrepreneurs by being thrown into
situations that force them to fashion their own means of economic
livelihood (Shapero and Sokol, 1985). For example economic
recession,

minority

experiences,

global

environment

etc.

Immigrants fit this model well (Holt, 2000). Circumstances afford

few options for these displaced persons who frequently establish
independent ventures. Shapero also found a high correlation
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between increases in new ventures and rising unemployment. Many

individuals become economically displaced or find themselves
disillusioned with faltering careers.

Micro View
Micro view of entrepreneurship examines the
factors that are specific to entrepreneurship and
are part of the internal locus of control.
The potential entrepreneur has the ability, control, to direct or
adjust the outcome of each major influence in this view.
Entrepreneurial trait school of thought: Many

works on

entrepreneurship

identify

successful

entrepreneurship.

For

the

common

example,

traits

for

achievement,

creativity,

determination, and technical knowledge are four factors that usually

are exhibited by successful entrepreneurs.
Venture opportunity school of thought: This thought focuses on
the opportunity aspect of venture development. The search for the
idea,

sources,

the

development

of

concepts,

and

the

implementation of venture opportunities are the important interest

areas for this school.
Strategic

Formulation

school

of

thought:

This

approach

emphasizes the planning process in a successful venture. Ranstadt

views strategic formulation as a leveraging of unique elements.
Unique

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people,

unique

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or

unique

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resources are unidentified, used, or constructed into effective

venture formation.

Try Self Assessment 01

1.1. Summary
Entrepreneurship like other social science subjects is difficult to define
as the field is continually evolving. Therefore, this introductory lesson
examined the multidisciplinary nature of entrepreneurship from the
views of social scientists, providing a foundation for further study of
this dynamic and evolving concept. It also discussed the definition,
rewards

for

entrepreneurship,

and

popular

myths

on

entrepreneurship. Finally the entrepreneurial schools of thought were

examined from two different perspectives: Micro and Macro. The next
lesson will deal with individual entrepreneurs and the main research
themes in entrepreneurship.

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